1. 1 OPERATIONS MANAGEMENT for MBAs Second Edition Prepared by Scott M. Shafer Wake Forest University Meredith and Shafer John Wiley and Sons, Inc.

2. Chapter 2: Business Strategy and Global Competivevess 2 Chapter 2 Business Strategy and Global Competitiveness

3. Chapter 2: Business Strategy and Global Competivevess 3 Introduction

4. Chapter 2: Business Strategy and Global Competivevess 4 Manor Care 4 Operates Sleep Inns 4 Labor Shortage 4 Designed rooms to minimize housekeeping staff needed –attached nightstands to walls –no doors on closets –rounded shower stalls –advanced security system

5. Chapter 2: Business Strategy and Global Competivevess 5 Manor Care Results 4 Rooms can be cleaned in 20 minutes versus 30 minute industry standard. 4 92-room hotel operated with equivalent of 11 full-time workers.

6. Chapter 2: Business Strategy and Global Competivevess 6 American Steel Industry 4 Foreign competition posed major threat to industry in early 1980s. 4 In 1982, US producers needed 10.59 labor hours to produce on metric ton compared with 10.01 hours in Japan. 4 US closed plants, modernized others, and reduced payrolls.

7. Chapter 2: Business Strategy and Global Competivevess 7 American Steel Industry continued 4 By middle of 1991, US steelmakers able to produce a metric ton with 5.4 hours compared to 5.6 hours for Japanese. 4 At the same time, quality also improved. 4 In early 80s, Ford rejected 8% of domestic steel shipments and 20% were late. 4 By early 1990s, steel rejects reduced to 1% and 99% of shipments were on time.

8. Chapter 2: Business Strategy and Global Competivevess 8 Technology Examples 4 Kansas City Power & Light using automatic meter readers which broadcasts data on electricity usage and eliminates $15/hour human meter readers. 4 Coca-Cola is installing similar technology in its vending machines. 4 This will allow Coke to better schedule deliveries and evaluate ad campaigns.

9. Chapter 2: Business Strategy and Global Competivevess 9 Examples Illustrate 4 Shortage of employees often necessitates need to improve productivity. 4 Increased competition (especially foreign competition) another reason why companies seek to improve their productivity. 4 Improving productivity is often dependent on new technologies.

10. Chapter 2: Business Strategy and Global Competivevess 10 Top Management 4 Responsible for making and keeping organization competitive. 4 Develops business strategy –provides direction and vision –guides short- and long-term decisions –must consider international competition 4 All functional areas and business processes must support the business strategy.

11. 11 Business Strategy A set of objectives, plans, and policies for the organization to successfully compete in its markets. 4 Long range (3 to 5 years) 4 It specifies what organization’s competitive advantage will be 4 Focuses on few key areas 4 The pattern of decisions made over time is in fact an organization’s business strategy.

12. Chapter 2: Business Strategy and Global Competivevess 12 Formulating the Business Strategy

13. 13 Strategy Formulation

14. Chapter 2: Business Strategy and Global Competivevess 14 Vision and Mission Statements 4 Vision statements used to express organization’s values and aspirations. 4 Mission statements express organization’s purpose or reason for existence.

15. Chapter 2: Business Strategy and Global Competivevess 15 Core Competencies 4 Collective knowledge and skills an organization has that distinguish it from the competition. 4 Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services. 4 Building blocks of core capabilities.

16. Chapter 2: Business Strategy and Global Competivevess 16 Core Competencies continued 4 Are basis on which new outputs are developed. 4 Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products. 4 Identifying and developing core competencies is one of top management’s most important roles.

17. Chapter 2: Business Strategy and Global Competivevess 17 Core Capabilities 4 Organization practices and business processes

18. Chapter 2: Business Strategy and Global Competivevess 18 Examples of Core Competencies 4 Sony - miniaturization 4 3M- knowledge of substrates, coatings and adhesives 4 Black and Decker - small electrical motors and industrial design 4 Honda - engines and power trains

19. Chapter 2: Business Strategy and Global Competivevess 19 Core Competencies Used to Gain Access to Variety of Markets 4 Cannon –core competencies in optics, imaging, and electronic controls –Products include copiers, laser printers, cameras, and image scanners. 4 Boeing –integrating large scale systems –commercial jetliners, space stations, missiles

20. Chapter 2: Business Strategy and Global Competivevess 20 Key Characteristics of Core Competencies/Capabilities 4 Should be used to gain access to a variety of markets 4 Should be strongly related to key benefits provides by products or services 4 Should be difficult to imitate

21. Chapter 2: Business Strategy and Global Competivevess 21 Outsourcing 4 Subcontracting out production of parts or performance of activities 4 Activities and parts fall on a continuum ranging from strategically unimportant to strategically important 4 Activities not strategically important are candidates to be outsourced

22. Chapter 2: Business Strategy and Global Competivevess 22 Strategically Important Parts or Activities 4 Strongly related to what customers perceive to be key product characteristics. 4 Require highly specialized skill and knowledge. 4 Require highly specialized physical assets 4 The organization has the technological lead or is likely to obtain it.

23. Chapter 2: Business Strategy and Global Competivevess 23 Hollowed Out 4 The extent that most of a firm’s complex parts and production are outsourced 4 Often when complex parts outsourced, engineering talent follows 4 Supplier may become competitor

24. Chapter 2: Business Strategy and Global Competivevess 24 Creeping Breakeven Phenomenon 4 Viscous cycle where products appear to become more expensive to produce in- house as others are outsourced. –Result from way overhead allocated 4 Logical conclusion is organization ends up producing no outputs.

25. Chapter 2: Business Strategy and Global Competivevess 25 Business Strategy and the Product Life Cycle

26. Chapter 2: Business Strategy and Global Competivevess 26 The Life-Cycle Curve

27. Chapter 2: Business Strategy and Global Competivevess 27 Product Life Cycle 4 Strategies often tied to product life cycle 4 Length of life cycles shrinking 4 Business strategy should match life cycles stages

28. Chapter 2: Business Strategy and Global Competivevess 28 Categories of Business Strategies

29. Chapter 2: Business Strategy and Global Competivevess 29 First-to-Market Strategy 4 Products available before competition 4 Strong applied research capability needed 4 Can set high price to skim market or set lower price to gain market share

30. Chapter 2: Business Strategy and Global Competivevess 30 Second-to-Market Strategy 4 Quick imitation of first-to-market companies 4 Less emphasis on applied research and more emphasis on development 4 Learn from first-to-market’s mistakes

31. Chapter 2: Business Strategy and Global Competivevess 31 Cost Minimization or Late-to- Market Strategy 4 Wait until market becomes standardized and large volumes demanded 4 Compete on basis of costs instead of product features 4 Research efforts focus on process development versus product development

32. Chapter 2: Business Strategy and Global Competivevess 32 Market Segmentation 4 Serving niche markets 4 Applied engineering skills and flexible manufacturing processes needed

33. Chapter 2: Business Strategy and Global Competivevess 33 The Balanced Scorecard 4 Helps translate mission and strategy into appropriate performance measures. 4 Traditionally organizations relied primarily on financial measures. 4 No single set of measures can provide information needed in all critical areas of the business. 4 Purpose of balanced scorecard the development of a set of measures that provides a comprehensive view of the organization.

34. Chapter 2: Business Strategy and Global Competivevess 34 Benefits of Using Balanced Scorecard 4 Clarify and gain consensus of strategy 4 Mechanism for communicating strategy 4 Mechanism for aligning departmental and personal goals to the strategy 4 Help ensure strategic objectives are linked to annual budget 4 Timely feedback related to improving the strategy

35. Chapter 2: Business Strategy and Global Competivevess 35 Performance Measured in Four Areas 4 Financial Performance 4 Customer Performance 4 Internal Business Process Performance 4 Organizational Learning and Growth

36. Chapter 2: Business Strategy and Global Competivevess 36 Developing a Balanced Scorecard 4 Top management translates mission and strategy into specific customer and financial objectives. 4 Measures for internal business processes developed on basis of customer and financial objectives. 4 Investments in employee training and information technology linked to customer, financial, and internal business process objectives.

37. Chapter 2: Business Strategy and Global Competivevess 37 Focus 4 Goal of business strategy is to establish and maintain a unique strength, or focus that leads to a sustainable competitive advantage. 4 Two successful competitive positions –lowest cost –outstanding strength

38. Chapter 2: Business Strategy and Global Competivevess 38 Common Areas of Focus 4 Innovation 4 Customization 4 Product/service flexibility 4 Volume flexibility 4 Performance 4 Quality 4 Product/service reliability 4 Delivery reliability 4 Response 4 After-sale service 4 Price

39. Chapter 2: Business Strategy and Global Competivevess 39 Order Qualifiers and Winners 4 Order qualifiers are characteristics that are the ante to enter the market 4 Order winners are characteristics that win the customer’s purchase

40. Chapter 2: Business Strategy and Global Competivevess 40 Loss of Focus 4 New outputs 4 New attributes 4 New tasks 4 Departmental professionalism 4 Ignorance and noncommunication 4 Life cycle changes

41. Chapter 2: Business Strategy and Global Competivevess 41 Product Life Cycle Stages and Emphasis

42. Chapter 2: Business Strategy and Global Competivevess 42 Strategic Frameworks

43. Chapter 2: Business Strategy and Global Competivevess 43 The Sand Cone Model

44. Chapter 2: Business Strategy and Global Competivevess 44 Example Performance Frontier

45. Chapter 2: Business Strategy and Global Competivevess 45 New Technology Results in Shift of Performance Frontier

46. Chapter 2: Business Strategy and Global Competivevess 46 Stages of Operational Effectiveness 4 Internally Neutral 4 Externally Neutral 4 Internally Supportive 4 Externally Supportive

47. Chapter 2: Business Strategy and Global Competivevess 47 Global Competitiveness 4 Long-term viability of a firm 4 Short-term success in terms of market share or profitability 4 Since 1970s, imports to the US have grown faster than exports from the US 4 US is biggest debtor nation in world

48. Chapter 2: Business Strategy and Global Competivevess 48 The United States’ Merchandise Trade

49. Chapter 2: Business Strategy and Global Competivevess 49 Exchange Rates 4 US competitiveness reflected in value of dollar relative to other currencies 4 As US increases its imports relative to its exports, a surplus of US dollars accumulates abroad reducing the desirability of holding US dollars 4 Price adjusted broad dollar index

50. Chapter 2: Business Strategy and Global Competivevess 50 Purchasing Power of the Dollar

51. Chapter 2: Business Strategy and Global Competivevess 51 Implications of Exchange Rate 4 A large value of the price adjusted broad dollar index indicates a strong dollar making it easier for Americans to afford imports. 4 A weaker value of the price adjusted broad dollar index makes American products more competitive in foreign markets. 4 Economic relationship can be mediated by government actions.

52. Chapter 2: Business Strategy and Global Competivevess 52 International Markets and Producers 4 Three Major Trading Regions –Europe –North America –Pacific Rim 4 Previously firms classified as domestic, exporters, or international 4 Now have global firms, joint ventures, foreign subsidiaries

53. Chapter 2: Business Strategy and Global Competivevess 53 Three Major Trading Regions

54. Chapter 2: Business Strategy and Global Competivevess 54 Reasons to Produce Offshore 4 Circumvent governmental regulations 4 Avoid effects of currency fluctuations 4 Avoid fees and quotas 4 Placate local customers

55. Chapter 2: Business Strategy and Global Competivevess 55 Supply Chain Management 4 Cost of labor decreasing 4 Cost of logistics becoming more significant 4 Total value chain of global production 4 Coordination –Information flows –Finding efficient suppliers –Identifying and evaluating transportation options

56. Chapter 2: Business Strategy and Global Competivevess 56 New Technologies 4 ERP 4 EDI 4 Bar coding 4 Internet

57. Chapter 2: Business Strategy and Global Competivevess 57 Six Primary Characteristics of Transformation Process 4 Efficiency 4 Effectiveness 4 Capacity 4 Quality 4 Response time 4 Flexibility

58. Chapter 2: Business Strategy and Global Competivevess 58 Productivity Definitions and Measures 4 Normally defined as output per worker hour 4 This is a partial measure of productivity 4 Total Factor Productivity includes all factors of production:

59. Chapter 2: Business Strategy and Global Competivevess 59 Improving Productivity Growth 4 Estimated that technology has been responsible for at least half the productivity gains in the U.S. 4 Mechanization 4 Automation

60. Chapter 2: Business Strategy and Global Competivevess 60 International Comparisons of Productivity

61. Chapter 2: Business Strategy and Global Competivevess 61 International Comparisons of Growth in Productivity

62. Chapter 2: Business Strategy and Global Competivevess 62 Why is Productivity Important? 4 For a society to increase its standard of living it must increase its productivity 4 How has the standard of living changed since 1970 in the US?

63. Chapter 2: Business Strategy and Global Competivevess 63 Living Standards in 1970 Compared to 1990 (Source: Reason, December 1995)

64. Chapter 2: Business Strategy and Global Competivevess 64 Living Standards in 1970 Compared to 1990 (Source: Reason, December 1995)

65. Chapter 2: Business Strategy and Global Competivevess 65 Living Standards in 1970 Compared to 1990 (Source: Reason, December 1995)

66. Chapter 2: Business Strategy and Global Competivevess 66 Living Standards in 1970 Compared to 1990 (Source: Reason, December 1995)

67. Chapter 2: Business Strategy and Global Competivevess 67 Living Standards in 1970 Compared to 1990 (Source: Reason, December 1995)

68. Chapter 2: Business Strategy and Global Competivevess 68 Responsiveness Customization, Response Time, and Quality

69. Chapter 2: Business Strategy and Global Competivevess 69 Customization 4 Ability to offer a product or service exactly suited to the customer’s desires or needs 4 Closer matches to customers needs 4 Ability of offer full product line with minimal inventory 4 Faster design-to-market time to meet new customer needs

70. Chapter 2: Business Strategy and Global Competivevess 70 Continuum of Customization

71. Chapter 2: Business Strategy and Global Competivevess 71 Mass Customization 4 Goal is to produce low cost, high quality outputs in high variety 4 Mass Customization Strategies –Collaborative customizers –Adaptive customizers –Cosmetic customizers –Transparent customizers

72. Chapter 2: Business Strategy and Global Competivevess 72 Prerequisites and Advantages of Rapid Response 4 Sharper focus on the customer 4 Better management 4 Efficient processing 4 Higher quality 4 Overhead elimination 4 Improved focus 4 Reduced charges 4 Faster revenue generation 4 Better communication 4 Improved morale

73. Chapter 2: Business Strategy and Global Competivevess 73 Cost Reductions with Decreases in Response Time

74. Chapter 2: Business Strategy and Global Competivevess 74 Defining and Measuring Quality 4 Conformance to specifications 4 Performance 4 Quick response 4 Quick-change expertise 4 Features 4 Reliability 4 Durability

75. Chapter 2: Business Strategy and Global Competivevess 75 Defining and Measuring Quality continued 4 Serviceability 4 Aesthetics 4 Perceived quality 4 Humanity 4 Value

76. Chapter 2: Business Strategy and Global Competivevess 76 Benefits of High Quality 4 More satisfied customers 4 Enhanced reputation 4 Increased profitability and higher market shares 4 Protection from competition 4 Minimizes safety risks and liability 4 Higher worker morale 4 Reduced production costs

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