1. Competitiveness, Strategy, and Productivity
Chapter 2
MIS 373: Basic Operations Management

2. Learning Objectives After this lecture, students will be able to
List several ways that business organizations compete.
Discuss and compare organization strategy and operations strategy and explain why it is important to link the two.
Define the term productivity and explain why it is important to organizations and to countries.
Describe several factors that affect productivity.
MIS 373: Basic Operations Management

3. Overview
Three separate, but related concepts that are vitally important to business organizations:
Competitiveness
Strategy
Productivity
MIS 373: Basic Operations Management

4. Competitiveness Competitiveness: Organizations compete over:
How effectively an organization meets the needs of customers relative to others that offer similar goods or services
Organizations compete over:
Price (Cost): WAL-MART
Quality: BMW
Response-time: UPS
Variety (Flexibility): DELL
MIS 373: Basic Operations Management

5. Operations’ Influence on Competitiveness
Product and service design
Cost
Location
Quality
Quick response
Flexibility
Inventory management
Supply chain management
Service
Managers and workers
Competitiveness
MIS 373: Basic Operations Management

6. Why Some Organizations Fail
Neglecting operations strategy.
Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats.
Putting too much emphasis on short-term financial performance at the expense of research and development.
Placing too much emphasis on product and service design and not enough on process design and improvement.
Neglecting investments in capital and human resources.
Failing to establish good internal communications and cooperation among different functional areas.
Failing to consider customer needs.
MIS 373: Basic Operations Management

7. Exercise Name 10 ways that banks compete for customers.
Hint: consider operations’ influence on competitiveness
Product and service design
Cost
Location
Quality
Quick response
Flexibility
Inventory management
Supply chain management
Service
Managers and workers

8. Hierarchical Planning and decision making
Mission
Goals
Organizational Strategies
Functional Goals
Finance Strategies
Marketing Strategies
Operations Strategies
Tactics
Tactics
Tactics
Operating procedures
Operating procedures
Operating procedures
MIS 373: Basic Operations Management

9. Wal-Mart Delivery Service Says to Amazon: 'Bring It'
wsj.com 10/19/2012
In its latest bid to take on … Amazon.com this holiday season, Wal-Mart is promising same-day delivery in some cities for orders placed online. Called Wal-Mart To Go, the service costs $10 regardless of the size of the order.
The products will be shipped from the company's stores, not from a warehouse or distribution center. … Wal-Mart is betting that its network of thousands of stores, combined with an improved online presence … can help it compete head to head with Amazon, which has increasingly stressed fast, free or low-cost deliveries.
UPS will pick up the goods and deliver them to customers
Nearly half of Wal-Mart's online sales now come from purchases customers make online and pick up at a store, … "We have a unique advantage because we have the national footprint of stores combined with our online site that enable programs like site to store, pay with cash or pick up today,…"
MIS 373: Basic Operations Management

10. Hierarchical Planning and decision making
Mission
Goals
Organizational Strategies
“Wal-Mart To Go”
Functional Goals
Finance Strategies
Marketing Strategies
Operations Strategies
Tactics
Tactics
Tactics
Operating procedures
Operating procedures
Operating procedures
MIS 373: Basic Operations Management

11. Mission and Goals Mission Goals
The reason for an organization’s existence
Mission statement
States the purpose of the organization
The mission statement should answer the question of “What business are we in?”
The mission statement serves as the basis for organizational goals
Goals
Provide detail and the scope of the mission
Goals can be viewed as organizational destinations
Goals serve as the basis for organizational strategies
MIS 373: Basic Operations Management

12. Example Mission Statements
FedEx Mission Statement
FedEx Corporation will produce superior financial returns for its shareowners by providing high value-added logistics, transportation and related business services through focused operating companies. Customer requirements will be met in the highest quality manner appropriate to each market segment served. FedEx will strive to develop mutually rewarding relationships with its employees, partners and suppliers. Safety will be the first consideration in all operations. Corporate activities will be conducted to the highest ethical and professional standards.
MIS 373: Basic Operations Management

13. Strategy Strategy A plan for achieving organizational goals
Serves as a roadmap for reaching the organizational destinations
Organizations have
Organizational strategies
Overall strategies that relate to the entire organization
Support the achievement of organizational goals and mission
Functional level strategies
Strategies that relate to each of the functional areas and that support achievement of the organizational strategy
MIS 373: Basic Operations Management

14. Tactics and Operations
The methods and actions taken to accomplish strategies
The “how to” part of the process
Operations
The actual “doing” part of the process
MIS 373: Basic Operations Management

15. Organizational Strategy
Low Price
Outsource operations to countries with low labor cost
Use capital-intensive methods to achieve high output volume and low unit cost
Specialization
Focus on narrow product lines or limited services to achieve higher quality
Responsiveness (time-based strategies)
Strategies that focus on the reduction of time needed to accomplish tasks
Differentiation: Variety
Focus on customization
Differentiation: Newness
Focus on innovation to create new products or services
Differentiation: Service
Focus on various aspects of service (e.g., helpful, reliable, etc)
Differentiation: Quality
focus on quality in all phases of an organization in order to achieve higher quality than competitors
MIS 373: Basic Operations Management

16. Operations strategy
The organizational strategy provides the overall direction for the organization. It is broad in scope, covering the entire organization.
Operations strategy is narrower in scope, dealing primarily with the operations aspect of the organization. Operations strategy relates to products, processes, methods, operating resources, quality, costs, lead times, and scheduling.
In order for operations strategy to be truly effective, it is important to link it to organization strategy
MIS 373: Basic Operations Management

17. Examples of Strategies
Organizational Strategy
Operations Strategy
Examples of Companies or Services
Low Price
Low Cost
Wal-Mart
Southwest Airlines
Responsiveness
Short processing times
On-time delivery
McDonald’s restaurants
FedEx
Differentiation:
High Quality
High performance design and/or high quality processing
Consistent Quality
BMW
Coca-Cola
Newness
Innovation 3M
Apple
Variety
Flexibility
Volume
Burger King (“Have it your way”)
McDonald’s (“Buses Welcome”)
Service
Superior customer service
Disneyland
IBM
Location
Convenience
Supermarkets
Banks, ATMs
MIS 373: Basic Operations Management

18. 3M
Founded in 1902, 3M started out in the mining business as the Minnesota Mining and Manufacturing Company.
3M launched the 15 percent program in 1948.
a program at 3M that allows employees to use a portion of their paid time to chase rainbows and hatch their own ideas.
Thirty Percent Rule, 30% of each division’s revenues must come from products introduced in the last four years.
Over a 20-year period, 3M’s gross margin averaged 51% and the company’s return on assets averaged 29%.
Mission
3M is a science and technology company that creates. For decades, 3M scientists and engineers have developed products that solve problems. 3M is also a company that cares – improving lives each day. The mission of 3Mgives: To Improve Every Life through Innovative Giving in Education, Community and the Environment – mirroring our corporate vision:
3M Technology Advancing Every Company
3M Products Enhancing Every Home
3M Innovation Improving Every Life

19. Exercise
Name three companies that are not in the examples I gave, and describe their core organizational strategies in terms of the following options:
Low Price
Specialization
Responsiveness
Differentiation: Quality
Differentiation: Newness
Differentiation: Variety
Differentiation: Service
Go online and find the mission statements of the three companies. Are their strategies aligned with their mission statements?
Wal-Mart
Southwest Airlines
McDonald’s
FedEx
BMW
Coca-Cola 3M
Apple
Burger King
Disneyland
IBM
Supermarkets
Banks, ATMs

20. Strategy Formulation Three common approaches
Michael Porter's five forces model
Environmental scanning (SWOT)
Balanced Scorecard
MIS 373: Basic Operations Management

21. Porter's five forces model
Source:
SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry
THREAT OF NEW ENTRANTS Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution
DEGREE OF RIVALRY Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes
THREAT OF SUBSTITUTES Switching costs Buyer inclination to substitute Price-performance  trade-off of substitutes
BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Product differentiation Substitutes available Buyers' incentives
MIS 373: Basic Operations Management

22. Porter on his five forces model

23. SWOT Environmental scanning (SWOT) Internal Factors External Factors
Strengths and Weaknesses
External Factors
Opportunities and Threats
MIS 373: Basic Operations Management

24. SWOT: Key Internal Factors
Human Resources
Skills of workforce, expertise, experience, loyalty to the organization
Facilities and equipment
Capacities, locations, age, maintenance costs
Financial resources
Cash flow, access to additional funding, debt, cost of capital
Customers
Loyalty, wants and needs
Products and services
Existing, potential for new ones
Technology
Existing, ability to integrate new and its impact on current and future operations
Suppliers
Relationships, dependency, quality, flexibility, service
Other
Labor relations, company image, distribution channels etc.
MIS 373: Basic Operations Management

25. SWOT: Key External Factors
Economic conditions
Health and directions of the economy, inflation, deflation, interest rates, taxes, tariffs.
Political conditions
Attitude towards business, political stability, wars
Legal environment
Antitrust laws, regulations, trade restrictions, minimum wages laws, liability laws, labor laws, patents
Technology
Innovations rate, future process technology, design technology
Competition
Number and strength of competitors, basis of competitions (price, quality etc.)
Markets
Size, location, brand loyalty, ease of entry, growth potential, long term stability, demographics.
MIS 373: Basic Operations Management

26. Balanced Scorecard
The idea of Balanced Scorecard (BSC) is to move away from a purely financial perspective of the organization and integrate other perspectives such as customers, internal business processes, and learning and growth.
Lag measure
Balanced
Financial
How should we appear to our shareholders?
Consumer
How should we appear to our customers?
Internal Business Process
What business process must we excel at?
Learning & Growth
How will we sustain our ability to change/improve?
Scorecard
Objective
Measure
Target
Improve consumer satisfaction and loyalty by 20%
Survey score
Up 20%
Delivery time
< 4 days
Leading measure
MIS 373: Basic Operations Management

27. Balanced Scorecard
MIS 373: Basic Operations Management

28. Steps in strategy formulation
Link strategy directly to the organization's mission or vision statement.
Assess strengths, weaknesses, threats and opportunities, and identify core competencies.
Core competencies: The special attributes or abilities that give an organization a competitive edge
Identify order winners and order qualifiers.
Order winners: Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition
Order qualifiers: Characteristics that customers perceive as minimum standards of acceptability for a product or service to be considered as a potential for purchase
Select one or two strategies (e.g., low cost, speed, customer service) to focus on.
MIS 373: Basic Operations Management

29. Productivity Productivity = Outputs Inputs Productivity
A measure of the effective use of resources, usually expressed as the ratio of output to input
Productivity measures are useful for
Tracking an operating unit’s performance over time
Judging the performance of an entire industry or country
Productivity =
Outputs
Inputs
MIS 373: Basic Operations Management

30. Factories have been producing more with fewer workers.
wsj.com 1/12/2012
“The Factory Floor Has a Ceiling on Job Creation ”
Factories have been producing more with fewer workers.
Output for each hour of work, or productivity, is up an extraordinary 40% as factories have adopted new technologies and production processes.

31. Why does Productivity Matters?
Brynjolfsson, E., and Hitt, L. M Beyond the productivity paradox. Communications of the ACM 41(8) 49–55.
Productivity growth determines our living standards and the wealth of nations. This is because the amount a nation can consume is ultimately closely tied to what it produces.
By the same token, the success of a business generally depends on its ability to deliver more real value for consumers without using more labor, capital, or other inputs.
MIS 373: Basic Operations Management

32. Measures of Productivity=
Outputs
Inputs
Partial Output Output Output Output measures Labor Machine Capital Energy
Multifactor Output Output
measures Labor + Machine Labor + Capital + Energy
Total Goods or Services Produced
measure All inputs used to produce them
MIS 373: Basic Operations Management

33. Examples of Partial Productivity Measures
Labor Productivity
Units of output per labor hour
Units of output per shift
Value-added per labor hour
Machine Productivity
Units of output per machine hour
Capital Productivity
Units of output per dollar input
Dollar value of output per dollar input
Energy Productivity
Units of output per kilowatt-hour
Dollar value of output per kilowatt-hour
MIS 373: Basic Operations Management

34. Exercise Units produced: 5,000 Standard price: $30/unit
Labor input: hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost
Hint:
The key of this calculation is to convert all the elements to their dollar values.
What’s the dollar value of the
output / labor / material / overhead?
What is the implication of an unitless measure of productivity?

35. Productivity Growth
Productivity Growth =
Current productivity − Pervious productivity
× 100%
Pervious productivity
Example: Labor productivity on the ABC assembly line was 25 units per hour in In 2010, labor productivity was 23 units per hour. What was the productivity growth from to 2010?
Productivity Growth =
23 − 25
× 100%
= −8% 25
MIS 373: Basic Operations Management

36. Service Sector Productivity
Service sector productivity is difficult to measure and manage because
It involves intellectual activities
It has a high degree of variability
Measurement Difficulties
Retailors
Quality Versus Quantity
Nurses
MIS 373: Basic Operations Management

37. Health care Productivity
Kocher, Robert, and Nikhil R. Sahni. "Rethinking health care labor." New England Journal of Medicine (2011):
Of the $2.6 trillion spent in 2010 on health care in the United States, 56% consisted of wages for health care workers.
the “output” is the volume of activity — including all encounters, tests, treatments, and surgeries — per unit of cost

38. Health care Productivity
IBM Healthcare Industry: 2020 Vision
adoption of new practices
drug effectiveness evaluation
risk prediction & prevention
reduce tests and costs
personalized medicine
patient education & empowerment

39. Factors Affecting Productivity
Methods
Capital
Quality
INCREASE: Calculators, Computers, Faxes, copiers, Internet search engines, Voice mail, cell phones,
Technology
Management
REDUCE:
inflexibility, high costs, mismatched operations, non-work activities
MIS 373: Basic Operations Management

40. Productivity & Technology
NPR 4/30/13 When It Comes To Productivity, Technology Can Hurt And Help
With instant messages buzzing, s pinging and texts ringing, how can employers increase productivity in the workplace? Software companies are tackling the problem, tracking employees' computer time to find ways to improve their efficiency.
Desk workers, creative workers, …

41. Productivity Paradox
Brynjolfsson, E., and Hitt, L. M Beyond the productivity paradox. Communications of the ACM 41(8) 49–55.
IT investment does not appear to have a strong impact on productivity.
Explanations for the Paradox
Mismeasurement of outputs and inputs,
ATMs reduce the number of checks banks process so, by some measures, banking output and productivity decrease.
The increases in convenience ATMs have created go uncounted in conventional productivity metrics, while their costs are counted.
Lags due to learning and adjustment
MIS 373: Basic Operations Management

42. Improving Productivity
Develop productivity measures for all operations
Determine critical (bottleneck) operations
Develop methods/technologies for productivity improvements
Establish reasonable goals
Make it clear that management supports and encourages productivity improvement
Measure and publicize improvements
Don’t confuse productivity with efficiency
MIS 373: Basic Operations Management

43. Key Points
Competitive pressure often means that business organizations must frequently assess their competitors' strengths and weaknesses, as well as their own, to remain competitive.
Strategy formulation is critical because strategies provide direction for the organization, so they can play a role in the success or failure of a business organization.
Functional strategies and supply chain strategies need to be aligned with the goals and strategies of the overall organization.
The three primary business strategies are low cost, responsiveness, and differentiation.
Productivity is a key factor in the cost of goods and services. Increases in productivity can become a competitive advantage.
MIS 373: Basic Operations Management