1. SECTION 1 INTRODUCTION TO OPERATIONS STRATEGY Departamento de Organización de Empresas y Marketing Área de Organización de Empresas Operations Management I Dirección de Operaciones I- English teaching 3º GADI- 5º DG-ADI-DER Slide presentation Chapter 2

2. 2 CHAPTER 2 OPERATIONS STRATEGY AND COMPETITIVENESS 2.1. Global Strategies 2.2. A Global View of Operations 2.3. Developing Missions and Strategies 2.4. Achieving Competitive Advantage Through Operations 2.5. Ten Strategic OM Decisions 2.6. Dynamics of Operations Strategy 2.7. Strategy Development and Implementation 2.8 Global Operations Strategy Options

3. 3 2.1 Global Strategies  Boeing – sales and production are worldwide  Benetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution  Sony – purchases components from suppliers in Thailand, Malaysia, and around the world  Volvo – considered a Swedish company but it is controlled by an American company, Ford. The current Volvo S40 is built in Belgium and shares its platform with the Mazda 3 built in Japan and the Ford Focus built in Europe.  Haier – A Chinese company, produces compact refrigerators (it has one-third of the US market) and wine cabinets (it has half of the US market) in South Carolina

4. 4 2.2 A Global View of Operations Reasons to globalize operations:  Reduce costs (labor, taxes, tariffs, etc.)  Improve supply chain  Provide better goods and services  Understand markets  Learn to improve operations  Attract and retain global talent Tangible Reasons Intangible Reasons

5. 5 2.2 A Global View of Operations Reduce Costs (ex. U.S. Cartoon Production at Home in Manila) :  Foreign locations with lower wages can help lower both direct and indirect costs.  Less stringent government regulations on a wide variety of operations practices reduce costs.  Opportunities to cut the cost of taxes and tariffs also encourage foreign operations.  Trade agreements have also helped reduce tariffs: World Trade Organization (WTO) North American Free Trade Agreement (NAFTA) APEC (Pacific rim countries) SEATO (Australia, New Zealand, Japan, Hong Kong, South Korea, New Guinea and Chile) MERCOSUR (Argentina, Brazil, Paraguay, Uruguay) European Union (EU) (25 members in 2006)

6. 6 2.2 A Global View of Operations Improve the Supply Chain:  The supply chain can be improved by locating facilities in countries where unique resources are available: expertise, labor, or raw material.  Examples: Auto-styling studios moving to southern California to ensure expertise in contemporary auto design. World athlelic shoe production migrating from South Korea to Guangzhou, China: advantage of the low-cost labor and production competence. Perfume essence manufacturer wants a presence in Grasse, France: perfume essences from flowers of the Mediterranean.

7. 7 2.2 A Global View of Operations Provide Better Goods and Services:  We need a better understanding of differences in culture and the way business is handled in different countries: permits firms to customize products and services to meet unique cultural needs in foreign markets.  Reduce response time to meet customers’ changing product and service requirements.

8. 8 2.2 A Global View of Operations Understand Markets:  International Operations require interaction with foreign customers, suppliers, and other competitive businesses, international firms inevitably learn about opportunities for new products and services.  Knowledge of these markets not only helps firms understand where the market is going but also helps firms diversify their customer base, add production flexibility, and smooth the business cycle.  Opportunity to expand the life cycle of an existing product.

9. 9 2.2 A Global View of Operations Learn to Improve Operations:  Learning does not take place in isolation: firms serve themselves and their customers well when they remain open to the free flow of ideas. Attract and Retain Global Talent:  Global organizations can attract and retain better employees by offering more employment opportunities: they provide both greater growth opportunities and insulation against unemployment during times of economic downturn.  Global organizations also provide incentives for people who like to travel or take vacations in foreign countries.

10. 10 2.3 Developing Missions and Strategies Organization’s Mission:  Its purpose  What it will contribute to society  The purpose or rationale for an organization’s existence  Provide boundaries and focus for organizations and the concept around which the firm can rally Once an organization’s mission has been decide, each functional area within the firm determines its supporting mission.

11. 11 2.3 Developing Missions and Strategies MarketingOperations Finance/ Accounting Functional Area Missions Organization’s Mission

12. 12 2.3 Developing Missions and Strategies FedEx: FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing total reliable, competitively superior, global air-ground transportation of high priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained using real time electronic tracking and tracing systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional to each other and the public. We will strive to have a completely satisfied customer at the end of each transaction.

13. 13 2.3 Developing Missions and Strategies Merck: The mission of Merck is to provide society with superior products and services - innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return Hard Rock Cafe: Our Mission: To spread the spirit of Rock ‘n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and offering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring our long-term success.

14. 14 2.3 Developing Missions and Strategies Strategy:  How an organization expects to achieve its missions and goals  Organization’s action plan to achieve the mission  Exploits opportunities and strengths, neutralize threats, and avoid weaknesses Strategies for competitive advantage:  Differentiation – better, or at least different  Cost leadership - cheaper  Response –more responsive

15. 15 2.4 Achieving Competitive Advantage Through Operations Competitive advantage:  The creation of a unique advantage over competitors.  To create customer value in an efficient and sustainable way.  Pure forms of these strategies (achieved via differentiation, low cost, and response) may exist, but operations managers will more likely implement some combination of them.

16. 16 2.4 Achieving Competitive Advantage Through Operations Competing on Differentiation:  To distinguish the offerings of the organization in any way that the customer perceives as adding value.  Differentiation is concerned with providing uniqueness.  Going beyond both physical characteristics and service attributes to encompass everything about the product or service that influences the value that the customers derive from it.  Experience differentiation: engages the customer with the product through imaginative use of the five senses, so the customer “experiences” the product.  Examples: Safeskin gloves – leading edge products Hard Rock Cafe – theme experience

17. 17 2.4 Achieving Competitive Advantage Through Operations Competing on Cost:  Achieving maximum value as perceived by the customer  It requires examining each of the 10 OM decisions in a relentless effort to drive down costs while meeting customer expectations of value  Low-cost strategy does not imply low value or low quality  Examples: Southwest Airlines - secondary airports, no frills service, efficient utilization of equipment Wal-Mart – small overheads, shrinkage, distribution costs

18. 18 2.4 Achieving Competitive Advantage Through Operations Competing on Response:  That set of values related to rapid, flexible, and reliable performance.  Flexible response: ability to match changes in a marketplace where design innovations and volumes fluctuate substantially. Example: Hewlett-Packard – sustainable competitive advantage  Reliability of scheduling Example: German machine industry  Quickness Example: Johnson Electric – competes on speed in design, production and delivery

19. 19 2.5 Ten Strategic OM Decisions  Goods and service design  Quality  Process and capacity design  Location selection  Layout design  Human resource and job design  Supply-chain management  Inventory  Scheduling  Maintenance

20. 20 2.5 Ten Strategic OM Decisions Operations DecisionsGoodsServices Goods and service design Product is usually tangible Product is not tangible QualityMany objective standards Many subjective standards Process and capacity design Customers not involved Customer may be directly involved Capacity must match demand

21. 21 2.5 Ten Strategic OM Decisions Operations DecisionsGoodsServices Location selection Near raw materials and labor Near customers Layout designProduction efficiencyEnhances product and production Human resources and job design Technical skills, constant labor standards, output based wages Interact with customers, labor standards vary

22. 22 2.5 Ten Strategic OM Decisions Operations DecisionsGoodsServices Supply-chain mgmt Relationship critical to final product Important, but may not be critical InventoryRaw materials, work-in-process, and finished goods may be held Cannot be stored SchedulingLevel schedules possible Meet immediate customer demand

23. 23 2.5 Ten Strategic OM Decisions Operations DecisionsGoodsServices MaintenanceOften preventive and takes place at production site Often “repair” and takes place at customer’s site

24. 24 Process Design LowModerateHigh Volume HighModerateLow Variety of Products Process-focused JOB SHOPS (Print shop, emergency room, machine shop, fine dining Repetitive (modular) focus ASSEMBLY LINE (Cars, appliances, TVs, fast-food restaurants) Product focused CONTINUOUS (steel, beer, paper, bread, institutional kitchen) Mass Customization Customization at high Volume (Dell Computer’s PC, cafeteria)

25. 25 Operations Strategies for Two Drug Companies Brand Name Drugs, Inc.Generic Drug Corp. Competitive Advantage Product DifferentiationLow Cost Product Selection and Design Heavy R&D; labs; focus on development in a broad range of drug categories Low R&D; focus on development of generic drugs QualityMajor priority, exceed regulatory requirements Meets regulatory requirements on a country by country basis

26. 26 Operations Strategies for Two Drug Companies Brand Name Drugs, Inc.Generic Drug Corp. Competitive Advantage Product DifferentiationLow Cost ProcessProduct and modular process; long production runs in specialized facilities; build capacity ahead of demand Process focused; general processes; job shop approach, short production runs; focus on high utilization LocationStill located in the city where it was founded Recently moved to low- tax, low-labor-cost environment

27. 27 Operations Strategies for Two Drug Companies Brand Name Drugs, Inc.Generic Drug Corp. Competitive Advantage Product DifferentiationLow Cost SchedulingCentralized production planning Many short-run products complicate scheduling LayoutLayout supports automated product- focused production Layout supports process- focused job shop practices

28. 28 Operations Strategies for Two Drug Companies Brand Name Drugs, Inc.Generic Drug Corp. Competitive Advantage Product DifferentiationLow Cost Human Resources Hire the best; nationwide searches Very experienced top executives; other personnel paid below industry average Supply ChainLong-term supplier relationships Tends to purchase competitively to find bargains

29. 29 Operations Strategies for Two Drug Companies Brand Name Drugs, Inc.Generic Drug Corp. Competitive Advantage Product DifferentiationLow Cost InventoryHigh finished goods inventory to ensure all demands are met Process focus drives up work-in-process inventory; finished goods inventory tends to be low MaintenanceHighly trained staff; extensive parts inventory Highly trained staff to meet changing demand

30. 30 2.6. Dynamics of Operations Strategy Strategies change for two reasons:  Changes within the organization: Personnel Finance Technology Product life  Changes in the environment

31. 31 Product Life Cycle Best period to increase market share R&D engineering is critical Practical to change price or quality image Strengthen niche Poor time to change image, price, or quality Competitive costs become critical Defend market position Cost control critical IntroductionGrowthMaturityDecline Company Strategy/Issues Internet Flat-screen monitors Sales DVD CD-ROM Drive-through restaurants Fax machines 3 1/2” Floppy disks Color printers Figure 2.5

32. 32 Product Life Cycle Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality IntroductionGrowthMaturityDecline OM Strategy/Issues Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution Standardization Less rapid product changes – more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity

33. 33 2.7. Strategy Development and Implementation Determine Corporate Mission State the reason for the firm’s existence and identify the value it wishes to create. Form a Strategy Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, after- sale service, broad product lines. Environmental Analysis Identify the strengths, weaknesses, opportunities, and threats. Understand the environment, customers, industry, and competitors.

34. 34 2.8 Global Operations Strategy Options Multinational Corporation (MNC):  Firm with extensive international business involvement.  Buy resources, create goods or services, and sell goods or services in a variety of countries.  Applies to most of the world’s large, well-known businesses.  Example: IBM – imports electronics components from over 50 countries, exports computers to over 130 countries, has facilities in 45 countries, earns more than half its sales and profits abroad.  Four strategies: International Multidomestic Global Transnational

35. 35 2.8 Global Operations Strategy Options International Strategy:  Uses exports and licenses to penetrate the global arena.  Is the least advantageous: Little local responsiveness – we are exporting or licensing a good from the home country Little cost advantage – we are using existing production process at some distance from the new market  Is the easiest to implement: exports can require little change in existing operations licensing agreements often leave much of the risk to the licensee.

36. 36 2.8 Global Operations Strategy Options Multidomestic Strategy:  Operating decisions are decentralized to each country to enhance local responsiveness.  Organizationally: subsidiaries, franchises, or joint ventures with substantial independence.  Advantage: maximizing a competitive response for the local market.  The strategy has little or no cost advantage.

37. 37 2.8 Global Operations Strategy Options Global Strategy:  Operating decisions are centralized and headquarters coordinates the standardization and learning between facilities, thus generating economies of scale.  Appropriate when the strategic focus is cost reduction but has little to recommend it when the demand for local responsiveness is high.

38. 38 2.8 Global Operations Strategy Options Transnational Strategy:  Combines the benefits of global-scale efficiencies (such as economies of scale and learning) with the benefits of local responsiveness (by recognizing that core competence does not reside in just “home” country but can exist anywhere in the organization).  Transnational describes a condition in which material, people, and ideas cross national boundaries.  Have the potential to pursue all three operations strategies (i.e., differentiation, low cost, and response).  The resources and activities are dispersed, but specialized, so as to be both efficient and flexible in an interdependent network.

39. 39 2.8 Global Operations Strategy Options Global strategy Standardized product Economies of scale Cross-cultural learning Examples: Texas Instruments Caterpillar Otis Elevator Transnational strategy Move material, people, ideas across national boundaries Economies of scale Cross-cultural learning Examples: Coca-Cola Nestlé International strategy Import/export, or license existing product Examples: U.S. Stell Harley Davidson Multidomestic strategy Use existing domestic model globally Franchise, joint ventures, subsidiaries Examples: Heinz McDonald’s The Body Shop Hard Rock Cafe Low High Local Responsiveness Considerations (Quick Response and/or Differentiation) High Cost Reduction Considerations