MMG 301 Final March18

Yashwantrao MMG 301
Chavan
Maharashtra
Open University
MBA : SECOND YEAR

SEMESTER III
MANUFACTURING MANAGEMENT GROUP
MANUFACTURING STRATEGY
Unit 1 Manufacturing Strategy 9
Unit 2 Business And Manufacturing Strategy 16
Unit 3 Strategy Framework 24
Unit 4 Stratergic Choice 32
Unit 5 Manufacturing Focus 40
Unit 6 Manufacturing Systems 48
Unit 7 Manufacturing Strategy And Systems 57
Unit 8 Advance Manufacturing Systems 66
Unit 9 Competing Through Manufacturing 75
Unit 10 Strategic Fit 83
Unit 11 Trade Offs In Manufacturing Strategy 91
Unit 12 Capabilities 99
Unit 13 Strategic Intent 106
Unit 14 Core Competence 115
Unit 15 Global Manufacturing Strategy 123
Unit 16 Risk In Globalization 133
YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
VICE-CHANCELLOR : Prof. E. Vayunandan
DIRECTOR, SCHOOL OF COMMERCE & MANAGEMENT : Dr. Pandit Palande
NATIONAL ADVISORY BOARD
Dr. Pandit Palande Prof. Devanath Tirupati, Dr. Surendra Patole
Former Vice Chancellor Dean Academics, Assistant Professor,
Director, School of Commerce Indian Institute of Management (IIM) School of Commerce &
& Management, Bangalore. Management,
Yashwantrao Chavan Maharashtra Yashwantrao Chavan Maharashtra
Open University, Nashik Open University, Nashik
Prof. Sudhir. K. Jain Prof. Karuna Jain, Dr. Latika Ajitkumar Ajbani
Former Vice Chancellor Director, Assistant Professor,
Professor & Former Head N I T I E, Vihar Lake, School of Commerce &
Dept. of Management Studies Mumbai Management,
Indian Institute of Technology (IIT) Yashwantrao Chavan Maharashtra
Delhi Open University, Nashik
Prof. Vinay. K. Nangia

Professor & Former Head
Department of Business Studies,
Indian Institute of Technology (IIT)
Roorkee
Author Editor
Dr. Gunjan Soni Dr. Umang Soni
Assistant Professor Assistant Professor
Department of Mechanical Engineering Netaji Subhash Institute of Technology
MNIT Jaipur New Delhi
Rajasthan, India
Instructional Technology Editing & Programme Co-ordinator

Dr. Latika Ajitkumar Ajbani
Assistant Professor
School of Commerce & Management
Yashwantrao Chavan Maharashtra
Open University, Nashik
Production
Shri. Anand Yadav
Manager, Print Production Centre, Y. C. M. Open University, Nashik- 422 222
Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEB development grant)
q First Publication : October 2017 q Publication No. : 2239
q Cover Design : Shri. Avinash Bharne
q Printed by : Shri. Ajit Modak, M/s. Printlines, A-Road, NICE, Satpur, Nashik - 422 007
q Publisher : Dr. Dinesh Bhonde, Registrar, Y. C. M. Open University, Nashik- 422 222
ISBN : 978-81-8055-423-0
MMG 301
Introduction
I am very pleased in placing the first edition of this study material on

'Manufacturing Strategy' to the students and practitioners of this subject. This book is designed
as per the revised syllabus prescribed by the YCMOU Nashik from August 2015. It gives
equal importance to the theoretical aspects as well as to the practical case studies. Hence
this edition will be an ideal companion not only to the scholars but also to the average
students. I am sure that this work would subserve the genuine interest of all the students
concerned in enriching their knowledge of this ever-growing Manufacturing Strategy
discipline.
I have made a sincere attempt to make the subject easy to understand. For this
purpose the theory on each topic is written in a simple and lucid language to enable the
students to grasp the essence of subject.
Any suggestions will be appreciated.
I am confident, that students will welcome new edition of this book.
With knowledge, hard work, marvelous success is just around the corner.
All The Best!
- Dr. Gunjan Soni

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.
All rights reserved. No part of this publication which is material protected by this copyright notice may be
reproduced or transmitted or utilized or stored in any form or by any means now known or hereinafter invented,
electronic, digital or mechanical, including photocopying, scanning, recording or by any information storage or
retrieval system, without prior written permission from the Publisher.
The information contained in this book has been obtained by authors from sources believed to be reliable and are
correct to the best of their knowledge. However, the publisher and its authors shall in no event be liable for any
errors, omissions or damage arising out of use of this information and specially disclaim any implied warranties or
merchantability or fitness for any particular use.
Message from the Vice-Chancellor
Dear Students,
Greetings!!!
I offer cordial welcome to all of you for the Master’s degree programme of Yashwantrao Chavan
Maharashtra Open University.
As a post graduate student, you must have autonomy to learn, have information and knowledge
regarding different dimensions in the field of Commerce & Management and at the same time intellectual
development is necessary for application of knowledge wisely. The process of learning includes
appropriate thinking, understanding important points, describing these points on the basis of experience
and observation, explaining them to others by speaking or writing about them. The science of Education
today accepts the principle that it is possible to achieve excellence and knowledge in this regard.
The syllabus of this course has been structured in this book in such a way, to give you autonomy
to study easily without stirring from home. During the counseling sessions, scheduled at your respective
study centre, all your doubts will be clarified about the course and you will get guidance from some
experienced and expert professors. This guidance will not only be based on lectures, but it will also
include various techniques such as question-answers, doubt clarification. We expect your active
participation in the contact sessions at the study centre. Our emphasis is on ‘self study’. If a student
learns how to study, he will become independent in learning throughout life. This course book has
been written with the objective of helping in self-study and giving you autonomy to learn at your
convenience.
During this academic year, you have to give assignments and complete the Project work wherever
required. You have to opt for specialization as per programme structure. You will get experience and
joy in personally doing above activities. This will enable you to assess your own progress and thereby
achieve a larger educational objective.
We wish that you will enjoy the courses of Yashwantrao Chavan Maharashtra Open University,
emerge successful and very soon become a knowledgeable and honorable Master’s degree holder of
this university.
Best Wishes!
Vice-Chancellor
MANUFACTURING STRATEGY (MMG 301)
SYLLABUS
UNIT 1 : Business strategy, government strategy or industrial strategy, corporate strategy, business strategy,
functional strategy, facilities Strategy.
UNIT 2 : Business strategy and functional Strategies, role and limitations of manufacturing in Business
strategy formulation, Porter’s 5 forces of competition.
UNIT 3 : Threat of substitute products, bargaining power of buyers and suppliers, structural analysis and
competitive strategy, possible approaches and strategy framework.
UNIT 4 : Strategic choice, discussion of the generic strategies, risks of overall cost leadership, choice of
strategy.
UNIT 5 : Competitive advantage, creating value, overall value system, understanding manufacturing outputs,
competing on the Basis of Outputs, need for manufacturing focus.
UNIT 6 : Manufacturing systems, variables affecting manufacturing output, product variety and volumes,
layout types, material flow.
UNIT 7 : Manufacturing levers, job shop system, manufacturing levers in batch production and line production,
volume/variety vs. Layout/flow matrix and product life cycles.
UNIT 8 : Advance manufacturing system, product life cycles, BCG matrix, competing through
manufacturing.
UNIT 9 : Competing through manufacturing, transitioning through the stages 1-3, jump to stage 4.
UNIT 10 : Strategic Fit, First, second and third Order Fit, Example of Strategic Fit.
UNIT 11 : Strategic fit concept, focus and trade-offs, Ikea, competitive edge.
UNIT 12 : Capabilities, revisiting NUMMI, process, system and organization based capabilities, using
operational capability to launch an attack.
UNIT 13 : Strategic intent cocept, strategic fit vs. Strategic intent, competitive innovation.
UNIT 14 : Core competence, core products and end products, core competence and SBUs.
UNIT 15 : Global companies, global strategy, domestic or multi-domestic, international or multi-national

companies.
UNIT 16 : Risk in globalization, political risk, legal risk, financial risk, social and cultural risk, the competitive
advantage of nations.
MANUFACTURING
STRATEGY
NOTES
(8) MANUFACTURING
STRATEGY
Manufacturing Strategy
UNIT 1
MANUFACTURING STRATEGY
Structure NOTES
1.0 Introduction
1.0.1 Need for Business Strategy
1.1 Unit Objectives
1.2 Business Strategy and Other Strategies
1.2.1 Government strategy or industrial strategy
1.2.2 Corporate strategy
1.2.3 Business strategy
1.2.4 Functional strategy
1.2.5 Facilities Strategy
1.3 Summary
1.4 Key concepts
1.5 Exercise & Questions
1.6 Further Readings and References
1.0 Introduction
Strategy is “A careful plan or method for achieving a particular goal usually over a
long period of time”. Synonyms of strategy is game plan, master plan, grand design,
overall approach. In military strtegy is “The art of planning and directing overall
military operations and movements in a war or battle.”
The term probably is of Greek origin and dates back to the 6th century
B.C. The origins are from the military where strategy was the approach to win
wars. Generals needed to understand how to deploy their armies and weaponry
for maximum impact. Sun Tzu, famous Chinese strategist wrote “The Art of War,”
the earliest text on strategy written around 500 BC. Sun Tzu Quotes “That general
is skillful in attack whose opponent does not know what to defend; and he is skilful
in defense whose opponent does not know what to attack.” “All warfare is based
on deception. Hence, when we are able to attack, we must seem unable; when
using our forces, we must appear inactive; when we are near, we must make the
enemy believe we are far away; when far away, we must make him believe we
are near.”
Modern English translation took place around the 18th century The term
came to be used in the context of business strategy around1960 when Alfred
Chandler defined it as “The determination of the basic long-term goals of an
MANUFACTURING STRATEGY (9)

MANUFACTURING enterprise, and the adoption of courses of action and the allocation of resources
STRATEGY
necessary for carrying out these goals.”
Business Strategy Definitions- In 1980 Michael Porter defined strategy

NOTES as “...broad formula for how a business is going to compete, what its goals should
be, and what policies will be needed to carry out those goals” and the “...combination
of the ends (goals) for which the firm is striving and the means (policies) by which
it is seeking to get there.”
• Examples of Strategy
- Henry Ford had a strategy of providing low cost automobiles for

the common man. His approach was not to offer variety. The
Model T was produced and sold in one color – black.
- General Motors provided a variety of automobiles including high-

end, low-end, to suit the needs of different customers
• Other Examples
- McDonald’s focus is on the busy businessman, college student

etc. who only has time for a quick bite. The system is designed
for quick turnover, low prices, minimum service (self service)
- A fine dining restaurant focuses on the ambience, service, and

quality and taste of the food. This comes at a price which its
patrons are prepared to pay.
- Apple comes up with new products every one to two years. The
focus is on excitement, innovation, and features. Price is not the
selling point.
- Nokia, Motorola, etc. focus on low prices. The target population

is people who do not care for the latest features, but those with a
limited budget.
1.0.1 Need for Business Strategy

• Why do businesses need strategy?
- To articulate an approach to the business
- To specify how to prioritize alternatives and options
- To determine a way to allocate scarce business resources

including capital
- To help in making decisions that have a long term impact
- To help deal with competition
• Articulate Business Approach
(10) MANUFACTURING
STRATEGY
- Companies need to develop an image of who they are and what Manufacturing Strategy
business they are in
- Customers identify with the company image

NOTES
- Banks and lending institutions feel more comfortable with
companies whose approach is clearly stated.
• Prioritization of Alternatives
- Employees and managers need to make decisions on a daily basis
- Some guiding principle or policy helps people determine what is in

the best interest of the organization
- People also get a sense of stability and purpose
• Allocate Business Resources
- Most business resources are scarce, including land, capital, people,

etc.
- There has to be a rule/method of how scarce resources should be

allocated
• Decisions with Long Term Impact
- Certain decisions taken by a company have long term implications
- Examples are where to locate plants
- Other examples could be the kind of markets to serve
- Such decisions cannot be easily changed. There is a significant

uncertainty underlying such decisions
• Deal With Competition
- A company’s position vis a vis the competition depends on its overall

approach to the business
- It has a lot to do with the kind of things that are important to the
company, such as quality, speed, etc.
- This does not include short term plans such as promotion campaigns
• Decisions Regarding Strategy
- Tend to be long term in nature – typically 10 years and more in the

future
- Tend to have risk and uncertainty, due to the time frame and the
size of investment
- Usually reflect the overall vision of top management who have to

take ownership
- Plans, policies, goals, tactics, etc. are dependent on the strategy

MANUFACTURING
STRATEGY 1.1 Unit objectives
After studying this unit, you should be able to:
NOTES • Know the needs of Business strategy
• Understand type of Business strategy
1.2 Business Strategy and Other Strategies

1.2.1 Government Strategy
• Typically governments tend to form policies that are designed to
CHECK YOUR prioritize the national efforts
PROGRESS:
• These may take the form of licensing, taxation, interest rates,
1. What are the type of
strategies? investment incentives, etc.
• Certain industry sectors may be preferred at different points in

time based on perceived need.
1.2.2 Corporate Strategy

• This refers to the overall strategy of the corporation as a whole
with regard to focus on markets, investments, and industry sectors
that the corporation chooses
• Typical corporations may be in several different businesses and

they may allocate different amounts of capital based on
opportunities perceived.
1.2.3 Business Strategy

• Each of the individual businesses of a corporation develops
its own business strategy to define its own markets, products,
competition, etc.
• Generally the strategies are developed independently by the

businesses constrained by the level of capital funding
specified by the corporate.
• The business strategy defines the overall approach to conducting

business. It may include decisions such as what customers and
markets to serve, how these customers and markets will be
served, and also what will be the main strengths of the company
while doing so over the long term.
1.2.4 Functional Strategy

• The various functional areas within a company are also tasked
with deriving their own strategies.
(12) MANUFACTURING
STRATEGY
• These strategies typically cover the ways in which the functional Manufacturing Strategy
areas expect to achieve growth in the long term.
• Typical functional strategies are developed independently by the

functions NOTES
• Common functional areas are Marketing, Manufacturing,

Engineering, etc.
• Ideally each of these strategies must support the business strategy

and each other
• The business strategy, in turn, must be based on a realistic

assessment of these strategies
• However, in practice, the functional strategies are developed

independently. There is little mutual dependence and support.
• Also, the business strategy is often just a sum of the individual

functional strategies.
• When business strategy, and each of the functional strategies fail

to support each other, the company performance falters
• For example, marketing may have a strategy to provide a large

variety of products while manufacturing may be geared toward
producing large quantities of a small variety of products.
Examples
- A Marketing Strategy can include decisions regarding
- When to introduce new products
- When and if to exit markets/products CHECK YOUR

PROGRESS
- Pricing strategy. e.g. Estee Lauder
1. Compare between
- Distribution strategy
functional and facility
- Promotion strategy strategies?
1.2.5 Facilities Strategy

• Often part of manufacturing strategy
• May include decisions such as
- When and how to expand
- Dedicated vs. mixed use facilities
- Facility size and location
- Technology
• Manufacturing Strategy can include decisions including:

MANUFACTURING - Centralized vs. decentralized manufacturing
STRATEGY
- External collaboration
- Mass production vs. batch production vs. job shop

NOTES
- Level and type of automation
- Vertical integration
• Strategies Plans, Policies and Philosophies
- Strategies are general, high level approaches to help marshal the

resources of an organization to help achieve its long term goals
- Plans tend to be more specific, more shorter term and therefore

should not be confused with strategy
- Policies tend to be rules to conduct day to day operations and are

not designed to specifically affect company goals directly
- Philosophies tend to be too broad and are designed more to shape

behavior than decisions.
- Policies tend to be rules to conduct day to day operations and are

not designed to specifically affect company goals directly
- Philosophies tend to be too broad and are designed more to shape

behavior than decisions.
1.3 Summary
• Strategy has its origin in the military where the focus was to
develop a high level approach to overcome the enemy with
minimum loss to one’s troops
• In business, strategy has been defined as an approach to help

achieve business ends, i.e., long term growth
• Business strategy becomes important due to the need to provide

a uniform direction to employees and managers
• Development of strategy is generally the responsibility of top man

agement
• Ideally, corporate strategy, business strategy and functional

straegies should be mutually supportive. But, in practice they tend
to not always be so.
1.4 Key Concepts

• Strategy: A plan to action designed to achieve a long term or
overall aim.
(14) MANUFACTURING
STRATEGY
• Business Strategy: The art and science of planning and marshal Manufacturing Strategy
ling resources for their most efficient and effective uses.
• Government Strategy: The exercise of political authority over the

actions, affairs, etc. of a political unit, people etc. as well as the NOTES
performance of certain functions for this unit or body, the action
of governing, political rule and administration.
1.5 Exercises & Questions

Q1. Define strategy and its importance in any organization.
Q2. Explain the different type of strategies.
Q3. Compare between corporate and government strategy.
1.6 Further reading and References

• Reid Hastle “Wiser getting Beyond Groupthink to Make Groups
Smarter” Carlson Publication.
• Neil Ritson” Strategic Management” Edition 2015 Pearson

Pulication.

MANUFACTURING
STRATEGY UNIT 2
BUSINESS AND MANUFACTURING STRATEGY
NOTES Structure
2.0 Introduction
2.0.1 Examples
2.1 Unit Objectives
2.2 Role and Limitations of Manufacturing in Business Strategy

Formulation
2.2.1 Business Strategy and Functional Strategy
2.2.2 Role of Manufacturing in Business Strategy
2.2.3 Role of Manufacturing
2.2.4 Impact of Manufacturing
2.3 Porter’s 5 Forces of Competition
2.3.1 Threat of New Entrants High barriers to entry come from

major sources
2.3.2 Barriers to Entry
2.3.3 Rivalry among Existing Competitors Intense rivalry results
2.4 Key concepts
2.5 Summary
2.0 Introduction
Functional strategy is the approach; a functional area takes to achieve corporate
and business unit objectives and strategies by maximizing resources productivity.
It is an area of operational management based on a specific department or disci-
CHECK YOUR
pline within an organization, such as human resources, finance or marketing. To
PROGRESS
say that a business has a functional level strategy for product development, for
1.Give some examples of instance, means that the company has developed a strategy for selling its goods
functional strategies?
and services to customers. Functional business strategy is part of an organization’s
wider strategic plan.
The various functional areas within a company are also tasked with deriving their
own strategies. These strategies typically cover the ways in which the functional
areas expect to achieve growth in the long term. Typical functional strategies are
(16) MANUFACTURING
STRATEGY
developed independently by the functions. Common functional areas are Marketing, Buisness and
Manufacturing strategy
Manufacturing, Engineering, etc.
Ideally each of these strategies must support the business strategy and
each other. The business strategy, in turn, must be based on a realistic assessment NOTES
of these strategies, However, in practice, the functional strategies are developed
independently. There is little mutual dependence and support. Also, the business
strategy is often just a sum of the individual functional strategies.
• When Strategies Don’t Support Each Other
− When business strategy and each of the functional strategies

fail to support each other, the company performance falters
− For example, marketing may have a strategy to provide a large

variety of products while manufacturing may be geared toward
producing large quantities of a small variety of products.
2.0.1 Examples
• A Marketing Strategy can include decisions regarding
− When to introduce new products
− When and if to exit markets/products
− Pricing strategy. e.g. Estee Lauder
− Distribution strategy
− Promotion strategy etc.
• Facilities Strategy
− Often part of manufacturing strategy
− May include decisions such as
− When and how to expand
− Dedicated vs. mixed use facilities
− Facility size and location
• Technology
• Manufacturing Strategy can include decisions including
− Centralized vs. decentralized manufacturing
− External collaboration
− Mass production vs. batch production vs. job shop
− Level and type of automation
− Vertical integration

MANUFACTURING
STRATEGY 2.1 Unit Objectives
NOTES • Understand Business Strategy and Functional Strategies
• Understand Role of Manufacturing in Business Strategy
• Know about Porter’s 5 Forces of Competition
2.2 Role and Limitations of Manufacturing in

Business Strategy Formulation
2.2.1 Business Strategy and Functional Strategy
• Business strategy sets the overall direction for the business in
terms of customers, markets, range of products, pricing, etc.
• Business strategy is typically evaluated on how effective it is, i.e.,

whether the company is involved in the right activities, markets,
etc., and not necessarily in terms of how well the activities are
performed, i.e., on the efficiency
• Business Strategy and Functional Strategy
• Individual functional areas tend to be evaluated on the basis of

well they are run, i.e., on their efficiency. They tend to be less
focused on doing the right things, i.e., on their effectiveness
CHECKYOUR • This causes a schism between the business strategy goals and the
PROGRESS functional strategy goals
What are the Limitations 2.2.2 Role of Manufacturing in Business Strategy

of Manufacturing in
Business Strategy • Typically manufacturing tends to not lead the organization when it
Formulation? comes to developing strategic goals. The role of manufacturing
tends to be more meeting the requirements set by other areas
including marketing, sales and finance
• So generally manufacturing’s role in business strategy is not well

understood or recognized
2.2.3 Role of Manufacturing

• Manufacturing had a more important role in setting the direction
for organization in the older days when manufacturing capacity
and capability determined the profitability of the organization
• With increased global manufacturing capacity, the focus turned

towards the ability to sell what had been produced. This meant
greater emphasis on marketing, advertising, and pricing issues
(18) MANUFACTURING
STRATEGY
• Manufacturing executives and managers often were busy trying Buisness and
to meet their schedules as opposed to be concerned about looking
at long range issues
• The perspective of manufacturing turned more inward especially NOTES

after the 1960s and 1970s
• Even today, the focus of people in charge of manufacturing is

more on efficiency and conformance to requirements than on the
setting of long term plans
• The kind of training that manufacturing personnel tended to receive

was more focused on technology than on broader issues
• Promotions and financial rewards were also tied to how well the
people performed the tasks they were assigned. There was less
incentive to think beyond short term goals.
• The result was that manufacturing was not closely involved during
strategy formulation
• The manufacturing people started to feel that their role was not
strategic
• This is a serious drawback of several organizations
2.2.4 Impact of Manufacturing

• Wickham Skinner did early research to indicate that manufacturing
had incorrectly slid into a secondary role in the organization
• Among all the functional areas, the one that contributes most
directly to creating value for the customer is manufacturing. All
other functions play a supporting role CHECK YOUR
• Manufacturing has the biggest impact on cost, quality and speed PROGRESS
of delivery as compared to other functions. Cost, quality and speed 1. Explain the types of
of delivery are determinants of a company’s market position organization culture?
2. Why organizational
• Manufacturing represents the biggest investment in terms of plant cultures are linked with
and equipment. If incorrect decisions are made, they will impact Greek civilization?
the organization’s competitive ability.
2.3 Porter’s 5 Forces of Competition

2.3.1 Threat of New Entrants High barriers to entry come
from major sources
• Large economies of scale
• Significant product differentiation
• Large capital requirements

MANUFACTURING • High switching costs
STRATEGY
• Ready access to distribution channels
• Cost disadvantages independent of scale

NOTES
• Restrictive government policies
2.3.2 Barriers to Entry

• Large economies of scale
− Certain industries are viable at large volumes
− Scale advantages can occur in any function including

manufacturing, purchasing, marketing, R&D, etc.
− Multi-business organizations can share costs of certain functions,

CHECK YOUR
PROGRESS reducing costs
1. What is an organization? − New entrants face higher risk as a result

2.What is organizational
• Significant product differentiation brands
culture?
− New entrants have to spend significantly to overcome customer
loyalty
• Large capital requirements
− Certain industries require significant capital outlays. E.g.,

Aluminum, Computer chips, etc.
− Some of the capital outlay may be due to R and D, advertising, or

production equipment
− Xerox created a barrier to entry by leasing equipment
• High switching costs
− Could include employee retraining, technical help, ancillary

equipment, supplies
− Customizing supplies can make switching difficult
− Employees get comfortable with existing systems and resist change
• Access to distribution channels
− Existing distribution channels may be reluctant to provide outlets

to new entrant
− Prime example is shelf space in food stores
• Cost disadvantage independent of scale
− Proprietary technology
− Access to raw materials

(20) MANUFACTURING
STRATEGY
− Government subsidies
− Favorable location Buisness and
− Experience curves
• Government Policy
NOTES
− Licensing requirements
− Restricted access to raw materials, e.g., coal mines
− Environmental regulations
− Product testing requirements
2.3.3 Rivalry among Existing Competitors Intense rivalry

results from interacting factors
• Numerous or equally balanced competitors
• Slow industry growth
• High fixed costs
• Lack of product differentiation or low switching costs
• Capacity augmented in large increments
• Diverse competitors
• High strategic stakes
• High exit barriers.
• Numerous or equally balanced competitors
• When the number of existing competitors is large and the industry

is not dominated by a few companies, there is a greater tendency
for instability due to individual moves by companies
• When the industry is dominated by a few players, they impose

more discipline
• Often foreign competitors tend to disrupt local markets
• Slow industry growth
• If growth in the industry is slow, firms seeking growth fight for

market share
• Fight for market share makes the situation more volatile as

competitors have to outguess each other
• High fixed costs
• If fixed costs are high, there is a greater pressure for higher

capacity utilization
• This can often lead to aggressive price cutting to sell excess stocks

MANUFACTURING • The same can be true if storage costs are high
STRATEGY
• Lack of product differentiation or low switching costs
• When there is little product differentiation, the product is viewed

NOTES
as a commodity
• The main competitive factor then becomes price and service
• In such cases, competition tends to become intense and can lead

to price wars
• Capacity augmented in large increments
• Certain chemical and process industries are limited by large

quantum of capacity increases
• When capacity has to be increased in large amounts, it can lead

to overcapacity and price cutting
• Diverse competitors
• Competitors from different backgrounds tend to follow different

competitive approaches
• Others find it difficult to read the moves of such competitors
• Foreign competitors tend to add to diversity
• High strategic stakes
• Certain companies place a high premium on success in a market

for strategic reasons, e.g., foreign competitors trying to get a
foothold in a market
• Such companies will be willing to forego profitability for a while

and may destabilize the market
• High exit barriers
• When exit barriers are high, due to low liquidation value of assets,
or regulatory constraints, companies may be forced to operate
even when not profitable.
• They tend to drive down prices to keep their sales up
2.4 Summary
• The manufacturing function has the largest stake in the success
of the organization
• However, typically the manufacturing function tends to be reactive

rather than proactive in strategy development
(22) MANUFACTURING
STRATEGY
• Manufacturing managers and executives are rewarded more for Buisness and
short term performance than for setting strategic objectives and
achieving them
• Michael Porter has defined a structural description of the forces NOTES

that affect the competitive position of an organization
• The five forces of Porter that define the competitive position

include barriers to entry, existing competitors, substitute products,
bargaining power of buyers and the bargaining power of
suppliers.
2.5 Key Concepts

• Functional Strategy: It is usually a part of overall corporate strategy
prepared for various functional areas of its application.
• Manufacturing: Manufacturing is the value added production of

merchandise for use or sale using labor and machines, tools,
chemicals etc.
• Impact of strategy on manufacturing: Strategy defines the

working of an organization and also its efficiency so
manufacturing suffers greatly if the strategy is not devised
according to our product plan.
2.6 Excercise & Questions

Q1. What is functional Strategy? Discuss its importance in Manufacturing?
Q2. What is the difference between functional strategy and corporate

strategy?
Q3. Discuss Porter’s five forces of competition?
2.7 Further Reading & References

• Olaf Passenheim “Project Management” McGraw hill Publication
• Manmohan Joshi” Human Resource Management” Laxmi

Publications.

MANUFACTURING
STRATEGY UNIT 3
STRATEGY FRAMEWORK
NOTES
Structure
3.0 Introduction
3.1 Unit Objectives
3.2 Bargaining Power of Buyers
3.3 Bargaining Power of Suppliers
3.4 Structural Analysis and Competitive Strategy
3.4.1 Structural Analysis
3.4.2 Possible Approaches
3.4.3 Strategy Framework
3.5 Case Study
3.6 Summary
3.7 Key concepts
3.0 Introduction
The Strategic Framework is a comprehensive picture of the organization’s
strategy. It clarifies how individual efforts and team projects can be connected to
achieve the best outcome. It includes meaningful target measures and a sequence
of activities that help focus on the key efforts that implement the strategy.
Threat of Substitute Products Substitutes limit potential returns through

pricing. Threat from products with trends improving price performance tradeoff
versus the industry’s product . Threat from products produced by industries earning
high profits. Collective industry response may improve position. there are functionally
equivalent products but certain products may be considered different, but could
perform a similar function, e.g., sugar vs. high fructose corn syrup, fiberglass vs
Styrofoam for insulation. With functionally equivalent products, people are concerned
about the cost vs. difference in performance. Similar examples exist in services,
e.g., rail vs. road vs. air transport. Products with trends improving price performance
tradeoffs like electronics industry has a long term trend toward improving price
performance ratios and replacement of tapes with CDs, with DVDs with memory
sticks.
Products produced by industries earning high profits. these Substitutes

(24) MANUFACTURING come into play when some technical development leads to price reduction or per-
STRATEGY
formance improvement. Companies can analyze such trends to see whether they Strategy Framework
can take actions to ward off the threat or use it as part of their own strategy.
Example can be the use of electronic surveillance systems replacing security
guards. Companies can opt to offer packages combining the two with the security NOTES
guards assuming a more skilled role
Collective industry response may improve position. When an industry is

faced with a threat of a substitute product, advertising is sometimes used to point
out the strength of existing products or weaknesses of the substitutes . If the
industry takes a collective step in advertising, it has a bigger impact as opposed to
the efforts of a single company
3.1 Unit objectives

• Know about Bargaining Power of Buyers
• Know about Bargaining Power of Suppliers
• Understand Competitive Strategy
3.2 Bargaining Power of Buyers

3.2.1 Bargaining Power of Buyers is powerful from the fol-
lowing factors CHECK YOUR
PROGRESS
• Purchases represent a significant amount of buyer’s costs
What are the Bargaining
• Purchases are undifferentiated or standard
Power of Buyers?
• Low switching costs
• Low profitability
• Threat of backward integration
• Industry’s product is unimportant to the quality of the buyer’s

products or services
• Full information about markets, prices and costs
• Few customers
− When few, large customers exist, they can exert significant

pressure for more favorable terms
− If the buyer represents a large fraction of the sales, losing the

customer can be a large loss
• Purchases represent a significant amount of buyer’s costs
− If the purchase represents a large amount of the buyer’s costs,

he will attempt to shop for a favorable price as the reduction will
MANUFACTURING have a significant impact on his total cost, i.e., he is more price
STRATEGY
sensitive.
• Purchases are undifferentiated or standard

NOTES
− With fewer differences among competing products, the buyer has
more options and is less inclined to pay a higher price
• Low switching costs
− High switching costs tie a buyer to a particular seller. Conversely,

low switching costs free up the buyer to look at alternatives
• Low profitability
− When the buyer’s company is not very profitable, there is greater

pressure to reduce costs of purchased parts. Hence more intense
bargaining/negotiations.
− A more profitable company tends to be fewer prices sensitive
• Threat of backward integration
− When the buyer’s company can integrate backward, it is a threat

to loss of business and can force a company to negotiate
− Some companies decide to make some of the parts in-house to

keep the threat of backward integration credible
− Industry’s product is unimportant to the quality of the buyer’s

products or services
− When the quality of the buyer’s product is affected by the product,

the buyer will be less price sensitive
− This happens when the part is a critical part, e.g., oil-field equip-
ment or medical equipment
• Full information about markets, prices and costs
− When the buyer has information about demand, market prices,

and the supplier costs, he is in a better position to negotiate.
3.3 Bargaining Power of Suppliers

• Few Suppliers
• Little threat from substitutes
• Industry is not an important customer of the supplier
• Supplier’s product is an important input to buyer’s business
• High product differentiation or switching costs
• Threat of forward integration

(26) MANUFACTURING
STRATEGY
• Few suppliers Strategy Framework
− When there are few, powerful suppliers, they exert a great

influence on prices and purchase terms
NOTES
− Also when the buyers are fragmented and small
• Little threat from substitutes
− Even large suppliers have to be careful if there are substitute

products in the market
− However, if the threat of substitutes is low, the supplier can exert

more pricing power
• Industry is not an important customer of the supplier CHECK YOUR

PROGRESS
− If a particular industry/company does not represent a large
percentage of the sales of a company, the seller is not too concerned What are the Bargain-
ing Power of Suppliers?
about the loss of business
− However, if the buyer is an important buyer, the seller will be

more flexible in negotiation
• Supplier’s product is an important input to buyer’s business
− If the supplier’s product is critical to the buyer’s business this

raises the bargaining power of the seller
− This also happens when the product is not easily stored
• High product differentiation or switching costs
− High differentiation or switching costs work in favor of the seller.
− Low differentiation or switching costs work in favor of the buyer
• Threat of forward integration
− When the supplier shows a credible threat of forward integration,

it can give him greater bargaining power
3.4 Structural Analysis and Competitive Strategy

3.4.1 Structural Analysis
• Structural analysis can be used to predict the eventual
profitability of an industry. In long-range planning the task is to
examine each competitive force, forecast the magnitude of each
underlying cause, and then construct a composite picture of the
probable profit potential of the industry.
• Structural analysis, by focusing broadly on competition well

beyond existing rivals, should reduce the need for debates on where
to draw industry boundaries. Any definition of an industry is es-

MANUFACTURING sentially a choice of where to draw the line between established
STRATEGY
competitors and substitute products, between existing firms and
potential entrants, and between existing firms and suppliers and
NOTES buyers. Drawing these lines is inherently a matter of degree that
has little to do with the choice of strategy.
• Once a company understands the forces that affect their

competitive position, it can identify its strengths and weaknesses
vis a vis the market and the competition
• The company is in a position to evaluate whether there is a cred-

ible threat of substitute products, whether they have a significant
barrier to entry by a new competitor, what is their position vis a
vis existing competitors, etc.
3.4.2 Possible Approaches

As a result of assessing the current competitive threats, a company can decide to
either take an offensive or a defensive approach relative to its own position.
Specific actions can include-
• Positioning the firm to provide the best defense against existing

CHECK YOUR competitive forces
PROGRESS
• Influencing the balance of forces through strategic moves
Discuss the role of
• Anticipating shifts in factors and responding to them
competitive advantage
in manufacturing? • Positioning the firm
− The company takes the structure of the competition and matches

its own strengths and weaknesses to it.
− The company tries to build defense in their weak areas and tries
to exploit the points of weakness in the competition
− There could be certain area where the company should confront

the competition, and where they should avoid confrontation
− Example could be a low cost producer selling to buyers that are

not subject to competition from substitutes
• Influencing the balance
− This is a more aggressive approach
− Here the company does not merely try to take into account the
current competitive scenario, but also tries to change it to its own
advantage
− Examples could be aggressive marketing to create differentiation

for the product or service or large capital investments to create
(28) MANUFACTURING barriers to entry for newcomers
STRATEGY
• Anticipating shifts Strategy Framework
− Industry tends to evolve. Some patterns of evolution are

predictable, e.g., as an industry grows mature, the growth rates
slow down, and advertising declines NOTES
− Companies need to evaluate whether these trends affect the struc-

ture of competition. For example in mature industries, differentia-
tion is reduced. This increases the power of buyers and lowers
barriers to entry. So competition would increase.
3.4.3 Strategy Framework

• Where are we now? Where are we taking the business?
• How are we going to position our business?
• How are we going to get there?
• What are our options? What are our competitors’ options?
• What are the five or six most critical assumptions?
• What acquisition candidates will be tracked and or acquired to

implement the strategy? What joint ventures or major licensing
arrangements will be pursued?
• What internal actions are needed to support Strategy?
3.5 Case Study

Situation
• A manufacturing company wanted increment in sales and profit-

ability. A strategic planning firm was given the responsibility to
make out the projects necessary to attain these goals. The projects
consisted of: improving the product line, development of new chan-
nels of marketing, generation of additional sales and, advancing
manufacturing capabilities.
• The board of directors was ready to take loan or reserve saved

earnings to accomplish these projects. However, they wanted to
be assured that an adequate return on investment would be ob-
tained. But the strategic planning company had proficiency in de-
velopment of strategy, not in execution of it.
PM Alliance Solution
• PM Alliance was hired for following: (A) Creating detailed, real-

istic plans to accomplish the strategic projects, (B) implementing
resource planning to facilitate contemporaneous completion of

MANUFACTURING everyday work and strategic projects, and (C) providing major
STRATEGY
stakeholders with metrics and dashboard reporting.
• We co-operated strategic teams to build up project plans for each

NOTES initiative. Dashboard reporting was also provided to the manage-
ment for monitoring the activities’ status. In this way, stakehold-
ers could have top information of project and access of detailed
information when required.
• The Board of Directors were provided regular feedback to con-

firm that significant headway is being made by project teams and
that funds were being invested suitably.
Outcome
• The firm has finished all strategic projects and stock price has
risen by more than 280%.
• Firm directors and executives attribute much of this raised share

price to the accomplishment of strategic initiatives. In its recent
address to the investment community, firm’s promising future was
discussed regarding the astonishing accomplishment of these ini-
tiatives.
3.5 Summary
• In this unit we completed the discussion on Porter’s Structure of
5 Competitive Forces.
• Specifically we discussed the Threat of Substitute Products, The

Bargaining Power of Buyers and the Bargaining Power of
Suppliers.
• The Threat of Substitute Products can put pressure on a company

to be more flexible in negotiations. The threat is greater or less
depending on different structural elements.
• The Bargaining Power of powerful Buyers tends to bring down

the prices of products when the seller has less clout in the market
• The Bargaining Power of Sellers tends to drive up prices of

purchased parts and raw materials when the sellers have a strong
presence.
• Companies need to determine what is the best way in which, they

ought to address the threats from all 5 forces after careful evalu
ation of their situation.
3.6 Key Concepts

(30) MANUFACTURING
STRATEGY
• Bargaining Power of Buyer: This term is basically used to leverage Strategy Framework
of the buyers. There are various factors which influences this
power like number of competitors in the market, their respective
strategies etc. NOTES
• Structural analysis: It is the determination of the effects of nu
merous factors which influences the working of an organization
in a systematic manner.

Q1. Discuss bargaining power of buyers.
Q2. Discuss bargaining power of supplier.
Q3. What are the effects of structural analysis on competitive strategy?


Publications.

MANUFACTURING
STRATEGY UNIT 4
STRATEGIC CHOICE
NOTES Structure
4.0 Introduction
4.1 Unit Objectives
4.2 Discussion of the Generic Strategies
4.2.1 Cost Leadership Strategy
4.2.2 Differentiation Strategy
4.2.3 Focus Strategy
4.2.4 Risks of Overall Cost Leadership
4.3 Choice of Strategy
4.4 Summary
4.5 Key concepts
4.0 Introduction
Strategic choice is a systemic theory of strategy. This theory is built on a
notion of interaction in which organizations adapt to their environment in a self-
regulating, negative-feedback (cybernetic) manner so as to achieve their goals.
Strategic choice is therefore, the decision to select from among the grand strate-
gies considered, the strategy which will best meet the enterprise objectives. The
decision involves the following four steps- focusing few alternatives, considering
the selection factors, evaluating the alternatives against these criteria and making
the actual choice.
Overall Cost Leadership

− Overall cost leadership requires a tight control on all costs
− Companies tend to have large scale facilities for low per unit
costs
− Companies pursue low cost of purchased parts
− Companies may look to eliminate marginal customer accounts
− Companies reduce unnecessary overhead costs
− Companies exploit experience curves to drive down the cost of

(32) MANUFACTURING
STRATEGY
operations
− Management focus is on eliminating all sources of avoidable costs Strategic Choice
− At the same time care has to be taken to ensure quality and service
so that market share is not reduced
NOTES
− With cost leadership
ü You can earn a good return even after the existing

competitors have brought down prices
ü You create a barrier to entry for new entrants
ü You can ward off the threat of substitute products and

services
ü The bargaining power of buyers is limited up to the price

of the next most efficient competitor
ü The power of sellers is mitigated by greater flexibility in

absorbing increases in input costs
− Overall cost leadership could require
ü Large market share to gain scale advantages
ü Favorable access to raw materials, tax benefits, location
ü Design of products for ease of manufacturing
ü Higher up front capital investment in more efficient

equipment
ü Aggressive pricing and higher start-up losses to build

market share
Differentiation
− Differentiation is the creation of something unique about the
product or service
− Differentiation may be achieved by:
ü Brand image
ü Design
ü Technology
ü Features
ü Dealer network
ü After sales service
− With differentiation you can
ü Insulate against existing competitors by creating a brand

loyalty

MANUFACTURING ü Create barriers to entry by providing uniqueness of product
STRATEGY
or service
ü Guard against substitute products by being not easily

NOTES substituted
ü Fight buyers’ bargaining power as their choices are limited

and due to high switching costs
ü Provide safety against sellers’ power due to inability of

the sellers to forward integrate
ü generally have higher margins as customers may be

willing to pay a premium price for the uniqueness.
However, although your product may be recognized as
unique, not all customers will be willing to pay a premium
price for it
ü Trade off uniqueness against higher market share. A highly

differentiated product will have the image of exclusivity.
ü May have to trade-off with cost leadership position as

you incur costs to differentiate the product or service
ü You trade off uniqueness against higher market share. A

highly differentiated product will have the image of
exclusivity.
ü Often the trade-off is with cost leadership position as you

incur costs to differentiate the product or service
ü Although your product may be recognized as unique, not

all customers will be willing to pay a premium price for it
Focus
− With a focus strategy, a company targets a segment of the market
for dominance
− The limited segment could be a buyer group or industry, or a

geographic region, or for a particular product line
− The focus strategy allows a company to serve the needs of the

focus group better than the competition
− Typically the focus could be either cost leadership in the segment

or differentiation in the segment
− It is also possible to achieve both cost leadership and

differentiation, but only in the limited segment
(34) MANUFACTURING
STRATEGY
− Although the company may not have the dominant position in the Strategic Choice
entire industry, it will enjoy leadership position in the specific market
segment
− As in the case of overall cost leadership and differentiation NOTES

strategies, the focus strategy provides strategic benefits against
the 5 competitive forces
− The focus strategy allows the company to have higher margins in

the focused segment
− The company may use this approach to target weak areas of the
competition or to create a position of strength for itself
4.1 Unit objectives

• Understand Generic Strategies
• Understand Types of Generic Strategies
• Know about Risk Involved in Generic strategies
4.2 Discussion of the Generic Strategies

4.2.1 Cost Leadership Strategy
Skills and Resources
− Substantial capital investment
− Superior process engineering skills
− Higher supervision capabilities
− Design for manufacture and assembly
− Low cost distribution
Organizational Requirements
− Tight cost control
− Structured organizational responsibilities
− Incentives for meeting targets
4.2.2 Differentiation Strategy

− Superior marketing skills
− Strong product engineering skills
− Strength in basic research

MANUFACTURING − Creative flair
STRATEGY
− Reputation for quality and technology leadership
NOTES
− Coordination among marketing, R&D, and product development
− Incentives for creativity (more qualitative based)
− Ability to attract creative talent from other organizations
4.2.3 Focus Strategy

− Combination of skills required for the other two strategies
− Combination of requirements for the other two strategies
4.2.4 Risks of Overall Cost Leadership

• This strategy has risks associated with reliance on scale and
experience as barriers
• New technology can nullify past experience or investment in capital

equipment
• Newcomers may be able to learn either by hiring people away

from the company, or by investing in facilities
• Inability to see changes in the market
• Inflation can eat into the cost advantage
Risks of Differentiation
− When the price differential between the company and its

competitors becomes too large, buyers begin to sacrifice features,
quality, etc.
− As buyers become more educated they can more realistically

assess the benefits of the differentiated product or service
− As the industry matures, imitators are able to narrow the gap in

differentiation making the company lose its advantage
Risks of Focus
− When the cost differential between the broad range competitors

and the focused company becomes too large, buyers see little
advantage in the focused company
− The differentiation between the focused company product and

(36) MANUFACTURING the generically available product is reduced or eliminated
STRATEGY
− Competitors find niches within the focus area and create sub- Strategic Choice
focus areas driving out the focused company
4.3 Choice of Strategy NOTES

• Each generic strategy has its advantages, requirements and risks
• No single strategy is appropriate for all companies
• The choice of strategy depends on the competitive structure of

the market, the company’s own strengths and weaknesses and
the management approach
• Not having a strategy is not an option
• Generally speaking, a company stands to earn above average

profits if it is able to execute a generic strategy well
• However, a company doing well may falter over a period of time

due to any of the risks associated with the particular strategy
• A company that is “stuck in the middle” usually earns below

average profits in the industry and is in danger of going out of
business
• A classic example of companies with clear cut generic strategies

was Ford and General Motors nearly 80-90 years ago.
• Ford had built its reputation on being a low cost producer. This
had been achieved at the cost of having no variety.
• GM, on the other hand, changed the game by having a larger

variety of products that appealed to the customers. Ford had failed
to anticipate this and lost ground as a result.
Stuck in the Middle
− Chrysler, on the other hand, was not recognized for low cost or
for its styling, etc. It did revolutionize the minivan industry and
that sustained it for a while. But other companies caught up and
Chrysler ultimately was taken over first by Benz, and then by Fiat
− American Motors was a similar casualty in the 1980s
− A company stuck in the middle loses market share to the low cost
leader as it cannot offer the low prices of the market leader
− By the same token, the company also misses out on higher margins
of a company that adopts a differentiation strategy as it cannot
command a premium price for its product or service
− As a result, the company flounders around with little growth

prospect and limited profitability

MANUFACTURING U Shaped ROI Curve
STRATEGY
− The U shaped ROI curve is seen in some industries where the
most profitable companies are either the largest, or the most
NOTES specialized.
− Examples would be in the retail sector where Wal-Mart is a low

cost leader in the US. Many specialized high end retailers do
make profits such as Nordstrom’s, Saks Fifth Avenue, etc.
− Retailers like K-Mart, JC Penney are neither large nor specialized

and have been on the verge of going out of business
− However, in some industries, the U shaped curve is not applicable
− This is true in cases where differentiation is not an option, e.g.,

bulk commodities
− In other cases, low cost is not as important as the product needs

to be customized to a customer’s requirement
− In both of the above cases, profitability and market share have an

inverse relationship
− Companies stuck in the middle often have a confused management

that is not committed to pursuing a single strategy
− They flip flop between the generic strategies and have a tough
time surviving
4.4 Summary
• In this unit generic strategies, as defined by Porter, were discussed
• There are three generic strategies, overall cost leadership,

differentiation, and focus
• Most successful companies attempt to excel in any one of the

three areas as pursuing each strategy requires the total
concentrated effort of the management as well as a specific
allocation of resources
• Each of the generic strategies requires a different set of skills

and organizational effort
• Each of the generic skills provides an edge to the company in

regard to the 5 competitive forces
• Companies that are stuck in the middle typically earn below average
returns and may be at risk of going out of business or being taken
over.
(38) MANUFACTURING
STRATEGY
Strategic Choice
4.5 Key Concepts
• Porter’s Generic Strategy: It describe how a company pursues
competitive advantage across its chosen market scope.
NOTES
• Different Generic Strategy: Cost Leadership Strategy
,Differentiation Strategy, Focus Strategy

Q1. Discuss various generic strategy.
Q2. Compare Cost leadership Strategy with differential Strategy.
Q3. What are the factors which influences the choice of strategy?

• Ian Powell “Effective Management Decision Making”
bookboon.com
• Graeme Knowles “Quality Management” bookboon.com

MANUFACTURING
STRATEGY UNIT 5
MANUFACTURING FOCUS
NOTES Structure
5.0 Introduction
5.0.1 Relative Price
5.1 Unit Objectives
5.2 Creating Value
5.2.1 Overall Value System
5.2.2 Understanding Manufacturing Outputs
5.2.3 Outputs
5.2.4 Competing on the Basis of Outputs
5.3 Manufacturing Outputs
5.4 Need for Manufacturing Focus
5.5 Summary
5.6 Key Concepts
5.0 Introduction
Focused manufacturing link manufacturing facilities to the competitive factors of
the business. It enables a company to gain greater control of its competitive position
and centralizes focus on its relative competitive advantage.
Among the most difficult of manufacturing tasks is responding to many disparate

market demands. Manufacturing system complexity often exaggerates the difficulty.
Rather than blaming manufacturing for its problems, the company should recognize
that manufacturing is complex and has profound influence on corporate strategy.
There are ways to reduce this complexity with subsequent benefits for doing so.
Focused manufacturing is one such way.
A simplistic view of focus is ‘variety reduction’ and market sector reduction. This
option may not be a wise one. A narrow product or process range alone is not
necessarily focus. The key is to concentrate the entire plant on the fundamental
tasks demanded by the plant’s overall strategy and marketing objective.
Focused manufacturing limits activity in an organization to a manageable and con-

sistent set of tasks. These tasks directly support the firm’s marketing strategy.
(40) MANUFACTURING
STRATEGY
Doing this concentrates expertise and promotes superior performance albeit in a Manufacturing Focus
narrow range.
All companies are, in their own words, trying to beat the competition.
How the company measures its competitive advantage affects the focus of the NOTES
management. Some common incorrect measures used by management to measure
competitive performance are:
− Return on sales
− Growth rate
− Shareholder Value measured by stock price
Return on sales:
• A lot of companies report the % profit earned on the total value

of the sales. This, however, ignores the amount of capital invested
to achieve the sales and therefore does not indicate how well the
resources have been utilized
Growth:
• Companies often focus on high growth rates and market share.

However, these measures also fail to take into account the
profitability of the company. Often, companies with high inventories
drastically cut prices to sell the excess inventory. A good example
is when General Motors and Toyota were in the battle to be the
largest seller of automobiles in the world. General Motors declared
bankruptcy in 2008. Toyota lost its quality focus and had a huge
product recall in the early to mid-2000s.
Shareholder Value:
• Company leadership focuses on the value of the stock price as

the executive promotions and pay is quite often dependent on it.
Stock price movement in the short term may not reflect the actual
correct decisions by management. However, over the long term,
stock price appreciation could indicate appropriate strategy adopted
by the company management
• So what measure appropriately defines superior competitive

performance of a company?
• Porter suggests profitability, as measured by the Return on Invested

Capital (ROIC)
• ROIC reflects the effective utilization of a company’s resources

in creating economic value

MANUFACTURING • A company with a competitive advantage over its industry rivals
STRATEGY
should have a sustainably higher profitability than the industry
average
NOTES • One way for a company to achieve this is by commanding a higher
relative price for its product/service using a differentiation strategy
• Another way is for the company to operate at a lower relative

cost with a cost leadership strategy
5.0.1 Relative Price

• A company is typically able to command a premium price for its
product or service by providing something unique to a customer
which makes the customer willing to pay extra. Luxury cars such
as Mercedes, Apple products are examples
• The extra chargeable price is based on the value perceived by

the customer
• Typically an industrial customer is able to quantify the benefit of a

unique design or feature.
• A consumer, on the other hand, rarely has a quantitative measure.

A consumer typically makes the decision on intangible dimensions
or on the emotional appeal of the product.
• In the food industry, consumers are willing to pay premium prices

for organic foods in the expectation that it is good for them. In the
US, consumers pay premium prices for certain types of eggs
because the chickens are more ethically treated. Or the consumer
may find the taste better. Example of tap water vs. bottled water.
• To achieve lower relative cost a company must be able to find

more efficient ways to design, produce, distribute, sell and service
the product or service as compared to other companies
• Low relative cost is often interpreted as low cost of production.

Often low relative cost can be achieved by looking at all the
activities performed and finding a better way of reducing the cost
by considering a key contributor to cost. E.g., Southwest Airlines
focuses on faster aircraft turnaround times. Nucor Steel operated
out of a small corporate office with the “executive dining room” a
small deli across the street.
• Dell does not design or make components. It offered custom

products in a short lead time. By doing so it was able to reduce
the inventory of purchased parts as Dell only bought components
for which there was actual demand. The short lead time allowed
(42) MANUFACTURING
STRATEGY
Dell to reduce in-process inventory and producing to order left no Manufacturing Focus
finished inventory.
• By getting paid for its products before they had to pay their
suppliers, Dell had negative working capital, a major cost advantage NOTES
compared to its rivals.
5.1 Unit objectives

• Understand Creating Value
• Understanding Manufacturing Outputs
• Know about Competing on the Basis of Outputs
5.2 Creating Value

5.2.1 Overall Value System
• The overall value system consists of all activities that are
performed, irrespective of who performs them. A company’s value
chain is a subset of the overall value system.
• The question to be considered by a manufacturer is to what extent

they should vertically integrate. Also, is it better to be directly
involved in the distribution and the service network, or should it be CHECK YOUR
outsourced? PROGRESS
• Sometimes it may make sense to do backward integration due to How competing is done
cost advantages. However, in certain industries, it has proven to on the basis of output?
result in higher cost and ineffective management, e.g. the auto
industry in the US and their component division. Sometimes
proprietary technology might make backward integration a
necessity.
• Also, companies have often been involved in downstream functions

such as dealerships, or financing. This provides a window to directly
interface with the customers and understand market trends early.
5.2.2 Understanding Manufacturing Outputs

• In order to make a decision about value system activities that
ought to be included in a company’s value chain, we need to
understand exactly what the outputs from a company are.
• The textbook defines 6 such outputs
− Cost
− Quality
MANUFACTURING − Performance
STRATEGY
− Delivery
− Flexibility
NOTES
− Innovativeness
5.2.3 Outputs
• Cost – A product accumulates cost at various stages of operations.
A lower cost affords the option to either lower the price (and gain
market share) or to increase margins.
• Quality – Traditionally quality refers to all aspects of a product as

perceived by the customer. The book defines quality as the
conformance to specifications. Quality, as defined, would be the
result of process control.
• Performance – The book ascribes unique design features including

durability, speed, capacity, etc. as performance output. Typically
performance is designed into the product.
• Delivery – The lead time required to produce and deliver a product

is part of the delivery output. In addition, the reliability of the
promised delivery date is also a key output regarding delivery
• Flexibility – Flexibility refers to the ability of producing different

products on the same equipment on line. This enables a company
to provide for a variety of product mix and volumes while still
maintaining good resource utilization
• Innovativeness – This is the ability of a company to design, and/

or produce new products at a regular interval.
5.2.4 Competing on the Basis of Outputs

• Cost – Typically in industries where little differentiation is possible,
customers buy primarily on price. Here companies must focus on
reducing the cost of operations, e.g., bulk commodities.
• Quality – Consistency in taste is what drives people to their favorite

restaurants, e.g., McDonald’s, Udipi restaurants in Mumbai. This
requires companies to focus on process control
• Performance – Customers of luxury cars are looking for special

features. Customers of home appliances are looking for durability
and specific performance characteristics. Companies need to
ensure their products meet these needs.
• Delivery – Delivery speed in the on-line shopping business of

(44) MANUFACTURING utmost importance. This requires ability to store, transport and
STRATEGY
deliver with consistency. Also, manufacturers may keep Manufacturing Focus
inventories of finished goods or modular components to reduce
delivery time. Airline on-time arrivals are another example.
• Flexibility – A restaurant that has a large menu, but where half NOTES
the dishes are not available, will not be liked by customers. A
CHECK YOUR
manufacturer with a wide range of options that can be delivered PROGRESS
in a reasonable time will outperform its competitors.
Name the different catego-
• Innovativeness – Innovativeness requires both the ability to create ries based on flow matrix
what the customer will like (e.g., Apple) and the frequency with
which new products are designed and made available. Example
would be the time to design and produce new models of cars.
5.3 Manufacturing Outputs

• We saw earlier that there are a number of different requirements
placed on a manufacturing system based on which manufacturing
responds by providing a certain set of outputs
• For example one requirement may be that a variety of different CHECK YOUR
products be produced within the same time frame on a common PROGRESS
set of plant and equipment
Name the different catego-
• Another one could be to keep the delivery time low ries based on Product Vol-
ume
• A third could be to have a very low cost of production
Trade-Offs in Manufacturing Output
• While some of the different requirements could be met with a

common plant and equipment, the same plant may not be able to
meet all competing requirements equally well
• So if we try to provide all the requirements with the help of the

same equipment, people and operating policies, the chances are
that one or more of the requirements will suffer
Example
• Consider a company that was producing small to medium volumes

of a custom made product in a plant which had simple equipment,
varied sequence of processes for the different products, and a
reasonable variety of products.
• The company accepted a large order (20,000 pieces) from one

customer who was willing to pay a fraction of the price the typical
customer paid. Wanting to get into higher volume business, the
company accepted the order

MANUFACTURING • In this particular example, the results were disastrous. The
STRATEGY
operators as well as the supervisors were not clear what parts
were to be prioritized. The care with which each operation was
NOTES typically performed for the older parts needed to be replaced by
speed to finish the large order. If the focus was placed on the
large order, the more profitable products got delayed. If setups
were broken, the cost of producing the large quantity went up
dramatically
• The end result was all customers, including the new one were
dissatisfied. Delivery deadlines were missed, costs were
significantly higher, people were confused and frustrated.
Analysis
• Why did the situation in the example arise?
• Because each manufacturing system has certain strengths,

capabilities and requirements in terms of operating policies, type
of equipment, and management focus
• When we try to mix together the requirements from a number

customers and products and try to do everything on a common
set of equipment, using common operators and supervisors, and
with common policies, confusion reigns.
Another Example
• In the airline industry, there are two broad category of carriers,

full service, and budget.
• The type of services and operating systems for a full service

carrier differs significantly from a budget carrier. A company that
tries to offer both options with the same set of people managing
the show, have a tough time satisfying any customer
• Examples were Jet Airways (Jet lite) and Continental Airlines

(Continental Lite). In both cases, costs and prices for the budget
segment went up, and the service in the other segment went down.
5.4 Need for Manufacturing Focus

• As seen in the previous examples, trying to do too many different
tasks with a common set of equipment, people and policies does
not work well for any of the tasks.
• In order to be able to do justice to the tasks, we need to understand

the specific demand placed on manufacturing by a certain set of
requirements and choose an appropriate manufacturing solution
(46) MANUFACTURING that best meets the needs of that demand
STRATEGY
5.5 Summary Manufacturing Focus
• In this unit we have discussed the way to measure competitive

advantage and performance
NOTES
• It was shown that ROIC is the best measure for relative
competitive strength as it measures how well we are using our
resources
• Higher ROIC can be achieved either by higher relative price, or

by lower relative cost. Each of these requires a different strategy
• The company needs to decide whether to do all activities in-house,

or is it better to outsource some activities
• There are 6 basic manufacturing outputs that a company provides.

The requirements of each output may be different and may require
a different manufacturing configuration
• If we impose several competing requirements on a common

production system, none of the requirements may be met
effectively.
5.6 Key Concepts

• Competitive Advantage: It is a business concept that describes
the attribute of allowing an organization to outperform its
competitors.
• Relative Price: A relative price of a commodity such as a good or

service in terms of another, i.e, the ratio of two prices.

Q1. Discuss competitive advantage and its effect in strategy building?
Q2. What are the factors which determine competition on output basis?
Q3. Discuss Value Chain?

Publication.


MANUFACTURING
STRATEGY UNIT 6
MANUFACTURING SYSTEMS
NOTES Structure
6.0 Introduction
6.1 Unit Objectives
6.2 Product Volume/Variety vs Layout/Flow Matrix
6.2.1 Variables Affecting Manufacturing Output
6.2.2 Product Variety and Volumes
6.2.3 Layout Types
6.2.4 Material Flow
6.3 Manufacturing Systems
CHECK YOUR 6.3.1 Job Shop

PROGRESS
6.3.2 Batch Production
What are the essential
features of job shop and 6.3.3 Line or Continuous Production
batch type production? 6.4 Summary
6.5 Key Concepts
6.7 References and Further Readings
6.0 Introduction
Value Proposition
• Which customers?
− It is necessary to clearly define what segment of the market you

want to serve actively. Trying to serve everybody may leave the
people and systems in disarray.
• Which needs?
− Within each customer segment, there will be a variety of needs.

You cannot meet all the needs effectively.
• What relative price?
− At what price will there be value for the customers and an

acceptable profitability for the company?
• Once the three key questions are answered, the basic business of
the company is defined
(48) MANUFACTURING
STRATEGY
• Now the job is to design the system to effectively meet the needs Manufacturing Systems
we have chosen to satisfy
• Here the design of the manufacturing system is critical

NOTES
• Any attempt to use an inappropriate manufacturing system for
the task will result in poor customer satisfaction and sub-optimal
profits
Focused Factory
• The concept of Focused Factory was advocated by Wickham

Skinner in the 1970s
• The whole premise of the Focused Factory was that each

manufacturing system had certain characteristics which made it
suitable for a particular task as well as unsuitable for other tasks
• Understanding this relationship can help companies design the

right manufacturing system for the required task at hand
• A manufacturing system consists of production equipment, the

manner in which it is organized, the policies or methods we use to
move materials through the system and the people we use to
operate and supervise the operations
• It is important to understand the relationship among these factors

and the resulting output from the system
• We need to match these outputs to the desired outputs
• According to Skinner, a large number of companies try to use the

same equipment, with a common layout and set of operating
policies and operators to achieve a variety of manufacturing tasks
• This results in none of the tasks being performed well
• Skinner suggested that we consider forming “Focused Factories”

or factories within factories which did one or a few manufacturing
tasks well
• Skinner proposed to rethink the manufacturing problem by

changing the mindset using the following 4 points:
• The problem is “How to compete” not “How to increase

productivity”
• The problem encompasses the efficiency of the entire

manufacturing organization, not just of the direct labor
• Focus each plant on a limited, concise, manageable set of products,

technologies, volumes, and markets

MANUFACTURING • Structure manufacturing policies for one manufacturing task
STRATEGY
instead of several inconsistent, conflicting, implicit tasks
Basic Concepts
NOTES
• There are more ways to compete than on low cost. Mature
products and commodities rely more on cost for competitive
advantage. But products at earlier stages in their life cycle offer
other advantages to customers
• Each factory has a different set of goals to achieve. These could

be short delivery cycles, dependable delivery dates, high quality,
flexibility to accommodate changes at short notice, ability to
introduce new products, cost, etc. These goals require trade-offs
to be made. Making the right trade-off gives a company a
competitive edge over its rivals
• Simplicity and repetition improves performance. This has been

shown by experience curves. So if the operators in a focused
factory strive to meet narrow goals repetitively, their ability to
meet those goals will improve over time. Also, the supervisors
and managers managing the focused factory will get better at
managing the requirements of the focused factory.
Characteristics of a Focused Factory
• Process Technologies – Should be limited to what managers can

handle effectively
• Market Demands – Requirements from the customers, e.g., quality,

delivery speed, etc.
• Product volumes – High volumes vs. one of a kind
• Quality levels – There should be common approach and mindset

to quality. Neither over-specification, nor under-specification
• Manufacturing Tasks – The main focus of manufacturing should

be limited to one or two tasks that the company must excel at to
be competitive
Plant within a Plant PWP
• When a plant has multiple requirements which must be satisfied,

it may become necessary to create sub-factories or plants within
a plant.
• Each sub-factory would be designed and run as a focused factory,

each focused on its own unique set of manufacturing tasks.
(50) MANUFACTURING
STRATEGY
• This may require some duplication of certain functions and jobs. Manufacturing Systems
But the company should resist the temptation to save costs by
using a centralized staff group or manufacturing operation.
• Having a dedicated plant for each manufacturing task helps a NOTES

company better serve its customers.
6.1 Unit objectives

• Understand Variables Affecting Manufacturing Output
• Understand Product Variety and Volumes
• Understand Line or Continuous Production
6.2 Product Volume/Variety vs. Layout/Flow Matrix

• As discussed earlier, each set of demands provides a different
set of requirements for the manufacturing system
• The principal manufacturing variables that we need to start with

are:
− The variety of products
− The demand volumes for the products
• Based on these variables we can design the 2 main parts of the

manufacturing system
− Layout
− Material Flow
6.2.2 Product Variety and Volumes

• Companies tend to produce either a large number of products,
each in small volumes (in the extreme one of a kind), or a few
products produced in large volumes
• When the product variety is large, typically the production steps

and sequences required for their production vary considerably
• In this case it is difficult to define an overall material flow pattern

for the entire range of products produced
• When the product variety is small, it becomes easier to take one

or two of the main products to define the overall material flow for
them

MANUFACTURING • This allows us to choose an appropriate layout for the products,
STRATEGY
based on product variety and volume
6.2.3 Layout Types

NOTES
• There are 3 basic types of layouts commonly found in plants
− Process or Functional Layouts – usually best suited for low volume

and one of a kind products
− Product or Line Layouts – best suited for high volume production
− Cellular layouts – best suited for mid-range volume products
• There is a fourth layout called the fixed position layout which will
not be discussed here
• Functional or Process Layouts – All machines performing a similar

function are placed in one department. Parts arrive in the
department and are loaded on any available machine. High
flexibility to accommodate different products and volumes. Long
lead times as production across different departments is not
coordinated. Machines are more general purpose. Workers more
skilled. Work in Process inventories high, but raw material and
finished goods inventories low as production is to order. Scheduling
is complex. Quality is the responsibility of the operator and
supervisor of the department.
• Line or Product Layouts – All machines required for a particular

product is are placed in the sequence required, often in a line.
Machines tend to be dedicated and special purpose, and hence
more efficient. Low flexibility to accommodate different products
and volumes. Lead times short as the product moves directly from
one machine to the next. Workers may be less skilled. Work in
Process inventories low, but raw material and finished goods
inventories could be high as production may be to stock. Scheduling
is simple. Quality is the responsibility of the operator and supervisor
of the department.
• Cellular Layouts – Machines required for a family of parts are

placed in a cell. Usually the sequence of operations for the family
of parts is the same. There is flexibility to accommodate different
product mix and volumes within the family. Short lead times as
products move directly from one machine to another. Machines
are more general purpose. Workers more skilled. Work in Process
inventories low, but raw material and finished goods inventories
could be high or low as production could be to stock. Scheduling
(52) MANUFACTURING
STRATEGY
is simple. Quality is the responsibility of the operator and supervisor Manufacturing Systems
of the department.
6.2.4 Material Flow

NOTES
• Material flow defines the way in which products move through
the plant
• The material flow through the plant varies with the product variety
and volume, and also on the layout being used
• When the product variety is large and volumes low, the layout
used is the process layout and the material flow is very irregular
and not smooth due to the variety of flow paths
• When the product variety is low and volumes high, the product
layout is typically used and the material flow is typically smooth
6.3 Production Systems

• There are basically 3 types of production systems
• The book discusses 7 types. But several of these are subsets of

the above 3
• The 3 basic production systems are:
− Job Shop
− Batch Production
− Line or Continuous Production
6.3.1 Job Shop Production Systems

• Job shop production systems are used for very low volume
production. Several of the products may not be repeated again.
These products will be designed for a customer and will be
produced in very small quantities to a specific customer order.
• Generally, because of the larger variety, there are frequent set-

CHECK YOUR
ups PROGRESS
• Equipment tends to be general purpose and the layout by process What are the
• Material handling is awkward and over longer distances manufacturing levers?
• Expediting is commonly used to ensure products are on time.

Predicting completion dates is difficult
6.3.2 Batch Production Systems

MANUFACTURING • Batch production systems are used when individual customers
STRATEGY
place orders in batch quantities. The system may also be used to
combine orders for similar products into batches
NOTES • A batch of a product moves together through the shop floor
• The layout used is generally either the process type or the cellular
type, depending on the commonality among the products lending
itself to the formation of part families
• The machines tend to be more general purpose
• If a process layout is used, the WIP inventory is high and the lead
times are longer. The material handling is typically over longer
distances. Expediting may be required.
• If a cell layout is used, the WIP is low and the lead times shorter.
Material handling within the cell tends to be directly between
machines. But material handling among cells may be required.
• Products may be produced to stock and production may be based

on a forecast.
• The book refers to Flexible Manufacturing Systems and Just In

Time in the context of batch production systems. This issue will
be covered later.
6.3.3 Line Production Systems

• In line production systems we tend to have higher volumes of
few products that are regularly demanded by one or several
CHECK YOUR customers
PROGRESS
• Due to the higher volume of products line layouts with dedicated
Differentiate between equipment are commonly found in line production systems
batch production and line
• Equipment tends to be specialized and customized for the
production system?
product(s) assigned to those machines
• Material flow tends to be smoother than the other production

systems. Material handling is generally directly from one machine
to another
• Work in Process inventories are low but finished goods and raw
material inventories could be high as line producers tend to produce
to stock based on forecasts
• The system is not very flexible to permit changes in product mix

or volume
• Little expediting is typically needed and scheduling is simple

(54) MANUFACTURING
STRATEGY
• An extreme form of the line production system is the continuous Manufacturing Systems
production system in which the processes are all connected to
one another and the product is made in continuously in large
automated plants NOTES
6.4 Summary
• We discussed the reasons why we need to have different methods
for satisfying varying customer requirements.
• It was shown that Focused Factories allow companies to cater to

specific customer needs by focusing on one or two critical
characteristics.
• By having a plant within a plant, a company can satisfy multiple

needs without losing its competitive edge.
• The product volume/variety vs layout/flow matrix suggests the

type of manufacturing configuration suitable for specific types of
production needs.
• The 3 basic layout types are each suitable for 3 production systems,
i.e., job shop, batch type or line production.
• The choice of the right layout and production system is necessary

to match the manufacturing solution to the manufacturing task.
6.5 Key Concepts

• Focused Factory: A Focused Factory strives for a narrow range
of products, customers and processes. The result is a factory
that is smaller, simpler and totally focused on one or two Key
Manufacturing Tasks.
CHECK YOUR
• Job Shop Production System: Job shop production systems are PROGRESS
used for very low volume production. Several of the products
What are the output of
may not be repeated again. These products will be designed for a
manufacturing?
customer and will be produced in very small quantities to a specific
customer order.
• Batch Production System: Batch production systems are used

when individual customers place orders in batch quantities. The
system may also be used to combine orders for similar products
into batches.
• Line Production System: In line production systems we tend to

have higher volumes of few products that are regularly demanded
by one or several customers.

MANUFACTURING
STRATEGY 6.6 Excercise & Questions
Q1. What is value proposition?
NOTES Q2. What are the objective of Focused factory?
Q3. What are the different type of production system?

• Shigeo Shingo “A study of Toyota production system”.

Publication.
(56) MANUFACTURING
STRATEGY
UNIT 7 and Systems
MANUFACTURING STRATEGY AND SYSTEMS
Structure NOTES
7.0 Introduction
7.0.1 Manufacturing Levers
7.0.2 Job Shop System
7.1 Unit Objectives
7.2 Manufacturing Levers in Batch Production and Line Production
7.2.1 Batch Production System
7.2.2 Line Production System
7.3 Volume/Variety vs. Layout/Flow Matrix and Product Life Cycles
7.3.2 Extension to Product and Process Life Cycles
7.3.3 Process Matching
7.3.4 Off the Diagonal Points
7.4 Summary
7.5 Key Concepts
7.7 Further Readings & References
7.0 Introduction
7.0.1 Manufacturing Levers
The chapter defines 6 manufacturing levers which would need to be adjusted as
one moves from one production system to another. These are:
− Human Resources
− Organizational Structure
− Sourcing
− Production Planning and Control
− Process Technology
− Facilities
Human Resources
− The type of workers

MANUFACTURING − The skills required
STRATEGY
− The amount and type of training required
− Job classifications
NOTES
− Level of supervision
Organizational Structure
− Centralization vs decentralization of control
− Whether the production system is a cost center or a profit center
− Type of managerial skills needed
Sourcing
− The degree of vertical integration
− Type of relationship with the vendors
− Capabilities of vendors
Production Planning and Control
− Whether centralized or decentralized
− Whether push or pull
− Use of raw material inventories and finished goods inventories
− Use of forecasts for planning production
− Ability to introduce changes
Process Technologies
− Whether the machines are general purpose or special purpose
− The degree of automation and integration
− The amount of standardization
Facilities
− The size of the facilities/capacity
− Whether centralized or decentralized
− The layout
− Location
• It becomes necessary to ensure that as we choose and design

different production systems for different products, we also choose
the appropriate manufacturing levers that match the characteristics
of the production system
• The levers also need to match with each other

(58) MANUFACTURING
STRATEGY
7.0.2 Job Shop System Manufacturing Strategy
and Systems
Human resources:
− High degree of skills required as the variety of products to be NOTES

produced is large and the equipment is not specialized
− Operators are expected to be trained before they are hired. So

the amount of training to be provided is minimal
− Incentives to retain the workers may be required as they could be

high demand in the industry
Organization Structure
− Organized by function or process/decentralized
− Higher supervisory skills needed
Sourcing:
− Because of the variety produced the number of suppliers could

be large
− The company may not have much influence over the suppliers
− The suppliers would need to be capable of providing the range of

products required
− Centralized planning usually with some form of ERP/MRP
− Production based on orders. Low raw and finished inventories
− Frequent need for expediting. Changes accommodated
Production Technology:
− General purpose machines capable of handling a variety of

products.
− Require low capital investment
− Older equipment with long setups and run times
− Low level of automation and integration
− Less focus on preventive maintenance
Facilities
− Generally small to medium sized facilities
− Layout by function or process
− Generally appear cluttered due to high level of WIP
− Imbalance in capacities

MANUFACTURING
NOTES • Understand Manufacturing Levers
• Understand Job Shop System
• Understand Batch Production System
• Understand Line Production System
• Understand Product life cycle
7.2 Manufacturing Levers for Batch Production and

Line Production
CHECK YOUR
PROGRESS
7.2.1 Batch Production System
Differentiate between
Human resources:
FMS and JIT system? − Multi-skilled operators tend to be found where cellular production
is used
− In the case of functional layouts, worker skill levels are high but
narrow
− Training in teamwork may be needed in cells
− Organization is decentralized
− Less supervision needed in the case of cells
Sourcing:
− Because of the variety produced the number of suppliers could

be large
− In the case of some suppliers the company may have some

influence due to larger volumes
− The suppliers would need to be capable of providing the range of

products required
− Centralized planning usually with some form of ERP/MRP
− Production based on orders. Low raw and finished inventories.

WIP low in cells, but high in process layouts
− Changes easily accommodated
Production Technology:
(60) MANUFACTURING
STRATEGY
− General purpose machines capable of handling a variety of Manufacturing Strategy
and Systems
products. Require low capital investment
− Cells are run with low setup times and low frequency of
breakdowns, i.e., well maintained equipment NOTES
− Low level of automation but manual integration in cells
Facilities
− Generally small to medium sized facilities
− Layout by process or cellular
− Cells will have better balanced capacity compared to functional

layouts
7.2.2 Line Production System

Human resources:
− Low degree of skills required as the equipment is specialized, and

possibly automated
− Operators are expected to perform to standards that are stringent.

They are trained to improve processes as the focus is on reducing
cost
− In some cases teamwork may be required and worker involvement

programs used for problem solving
− Often decentralized
− Lower supervisory skills needed
Sourcing:
− Because of the larger volumes the number of suppliers could be

smaller. But this depends on the product structure
− The company may have influence over the suppliers and may
develop longer term partnerships
− The suppliers could be involved in design activities
− Backward integration could be considered
− Often the production is based on a forecast and is to stock
− Raw material and finished goods inventories could be high but

WIP is usually low
− Either an ERP system or pull scheduling may be used

MANUFACTURING Production Technology:
STRATEGY
− Specialized machines that are better integrated. Require high
capital investment
NOTES
− Equipment with shorter setups and run time. Focus is on preventive
maintenance.
− High level of automation
Facilities
− Large facilities
− Layout by product often in long lines
− Capacities are balanced
7.3 Volume/Variety vs. Layout/Flow Matrix and

Product Life Cycles
• As discussed earlier, each set of demands provides a different
set of requirements for the manufacturing system
• The principal manufacturing variables that we need to start with

are:
− The variety of products
− The demand volumes for the products
• Based on these variables we can design the 2 main parts of the

manufacturing system
− Layout
− Material Flow
7.3.2 Extension to Product and Process Life Cycles

• The product volume/layout matrix shown earlier can be
extrapolated to denote the stages in the life cycle of a product
from introduction to decline and phase out
• At the time of product introduction in the market volumes tend to

be low. The focus is not on low cost, but rather on the ability to
provide a new product on the market
• During this phase, the product generally behaves as a low volume

high variety product
(62) MANUFACTURING
STRATEGY
• As the product gains acceptance in the market and matures, the Manufacturing Strategy
and Systems
focus changes to cost control as there could be several other
competitors in the market
• Generally during this phase the main focus is to standardize the NOTES
product offering and the processes used so that low cost per unit
may be obtained
• During this phase, the product generally moves through the next
two stages of volume
7.3.3 Process Matching

• As a product moves through the phases in its life cycle, it becomes
necessary to also adjust the processes required to meet the
requirements
• If we do not adjust the process part of the product/process matrix

to match the evolving phases of growth, we will find that we are
off the diagonal, usually above it
• In this case, if all the other competitors are also in a similar situation,
no one stands to gain. But if one competitor chooses to move
down in the process dimension, he will gain in terms of lower cost
of production
7.3.4 Off the Diagonal Points

• The points above the diagonal all represent higher flexibility but
also higher cost of production as compared to points on the diagonal
or below it
• Certain companies in certain industries may choose to operate

above the diagonal if they feel it provides them with a competitive
advantage, e.g., Rolls Royce provides custom made cars by hand
in an industry dominated by automated assembly lines and can
charge for the service
• When a company moves off the diagonal, it tends to become

dissimilar compared to its competitors
• Unless this is a deliberate attempt to create a special niche, it

results in the company becoming vulnerable to attack
• The marketing and manufacturing functions tend to be looking at

different priorities which clash with each other, e.g., for points
below the diagonal, the manufacturing function may be
concentrating on lower cost at the expense of flexibility, while
marketing may be needing more variety and less volume.

MANUFACTURING • When a company finds itself drifting off the diagonal inadvertently,
STRATEGY
it needs to take corrective action to align itself closer to the
diagonal, or it needs to try and see if it can create and exploit a
NOTES niche by remaining off the diagonal
• An example A TV manufacturer had an initial strategy of high

flexibility during the early stages of color TVs. At this stage it
could be characterized to be at the medium volume of production
using batch production.
• As the demand appeared to be growing rapidly and it considered

adding capacity it chose to expand by moving down in the process
dimension so that it remained closer to the diagonal. It did so by
constructing two large plants for all color TV production.
7.5 Summary
• We discussed manufacturing levers which are characteristics of
the type of production system used
• It is necessary to adjust these levers depending on which production

system is being implemented
• We also discussed the extension of the product volume/layout

matrix to the product life cycle curve and saw how these are
correlated
• As a product moves through the stages of introduction, acceptance

and maturity, it is important to consider changing the production
system used for managing the plant
• Ideally it is best for a company to operate on the principal diagonal

but some companies may choose to work in niche areas and go
off the diagonal
7.4 Key Concepts

• Manufacturing Levers: Human Resources, Organizational
Structure, Sourcing Production, Planning and Control Process,
Technology, Facilities.
• Process Matching: As a product moves through the phases in its

life cycle, it becomes necessary to also adjust the processes
required to meet the requirements. If we do not adjust the process
part of the product/process matrix to match the evolving phases
of growth, we will find that we are off the diagonal, usually above
it.
(64) MANUFACTURING
STRATEGY
7.6 Excercise & Questions and Systems
Q1. What are the manufacturing levers?
Q2. Discuss the influence of manufacturing levers on job shop production NOTES
system.
Q3. What is process matching?
Q4. What is product and process life cycle?

• Ian Powell “Effective Management Decision Making”
bookboon.com

MANUFACTURING
STRATEGY UNIT 8
ADVANCE MANUFACTURING SYSTEMS
NOTES Structure
8.0 Introduction
8.0.1 FMS
8.0.2 Just In Time (JIT) Systems
8.1 Unit Objectives
8.2 Product Life Cycles
8.3 BCG Matrix
8.4 Competing Through Manufacturing
8.5 Case Study
8.6 Summary
8.7 Key Concepts
8.0 Introduction
Advanced manufacturing involves the use of Technology to improve products
and/or processes, with the relevant technology being described as “advanced,”
“innovative,” or “cutting edge.” For example, one organization defines advanced
manufacturing as industries that “increasingly integrate new innovative
technologies in both products and processes. The rate of Technology adoption and
the ability to use that technology to remain competitive and add value define the
advanced manufacturing sector.” Another author defined World Class Foundry
(read manufacturing) as: “A World Class Manufacturing (WCM) is one which
integrates the latest-gen machinery with (process/ work) systems to facilitate
‘manufacturing’- based business development governed around manufactured
products only, duly based over a high accent on Product Substitution or New
Product Development.”
8.0.1 Flexible Manufacturing Systems

• Flexible Manufacturing Systems (FMS) are systems that use
automated, integrated equipment that can be used to produce parts
in small batches
• The main advantages these systems provide over traditional batch

production systems is the degree of automation and real time
(66) MANUFACTURING control that permits ease of real time scheduling.
STRATEGY
• In addition, the machines used are typically CNC machines with Advance Manufacturing
Systems
very low setup or changeover times making FMS suitable for
producing in small lot sizes
• The machines are typically connected by a handling system which NOTES

can include Automatic Guided Vehicles (AGVs), conveyors, and
robots. This allows the production of a variety of products on the
same system.
• Sophisticated software and programming is required not only for

the processes (CNCs) but also for the material handling as it
tends to be integrated.
• Any new product introduced in production would need to be

programmed in. The geometry, cutting path of the tools, the
sequence of operations, the tooling, etc. will typically need to be
developed. This takes time and requires expertise.
• The capital required for an FMS is very high. Perhaps that may
be a reason why such systems are not found very commonly in
practice.
• In addition to the cost of capital, the people required to program

and maintain the equipment are very highly skilled and would need
to be paid more highly compared to typical operators in a traditional
batch production shop.
• Due to the sophisticated equipment, the level of process control

can be very high and therefore conformance to specifications
may be very good.
8.0.2 Just In Time (JIT) Systems

• Although the book tries to treat JIT in the same way as a job shop
or a batch production system, I don’t think the comparison is very
valid.
• As compared to job shops, etc. which are characterized by layouts

and the broad material flow, a JIT system is not just a type of
layout and flow.
• In fact there is no common understanding about what constitutes

JIT.
• Also, the number of successful JIT systems is very few for us to

draw inferences about them.
• So to compare a JIT system to some of these traditional production

systems may not be appropriate.

MANUFACTURING • In the course on lean, we had covered aspects of lean which
STRATEGY
include a very different management approach.
• As discussed in the lean course, some aspects of the JIT approach

NOTES tend towards a different mind-set and are almost philosophical in
their scope and impact.
• Specifically, the emphasis on waste elimination, continuous

improvement, employee involvement, supplier partnerships,
problem solving in the gemba, mentoring, planning systems etc.
are specific elements of JIT which do not have parallels in other
production systems we have discussed.
• There are a few aspects of JIT that we can use to put in the
context of the other production systems. These are:
− The layouts usually tend to be cellular with general purpose

machines and multi-skilled workers that work as a team
− Significant attention is paid to training of all employees and

employee involvement
− Scheduling tends to be easier within a cell. Some co-ordination is

required for scheduling across multiple cells
− Flexibility is generally very high
− The machines are extremely well maintained and have very low
set-up times.
− Inventory levels are low
− Lead times are typically very short
8.1 Unit objectives

• Know flexible manufacturing system
• Understand Just in time
• Understand Product life cycle
• Understand BCG matrix
8.2 Product Life Cycles

• During the development stage, there is only cash outflow, no inflow
of revenues
• During the introduction stage, there is a heavy cash outflow for

advertising, promotions, etc., and very low revenues
(68) MANUFACTURING
STRATEGY
• During the growth phase, the revenues pick up and the company Advance Manufacturing
Systems
generally starts to break even somewhere in this range
• Costs may be needed as you want to capitalize on the market’s

acceptance of the product or service. Costs for manufacturing in NOTES
volumes is required
• During the maturity phase, the sales of the product have generally
peaked. Competition has entered the market and growth potential
is limited
• The product or service does not require too much support during
this phase.
• During the saturation phase, some companies try to offer minor

differentiating features which do not require much time and cost
to develop and market to keep the product going. This could include
new packaging, colors, new uses of the product, etc.
• This may give some additional sales for a short time period. May
require some promotions for the additional features
• The addition of some new features may give some additional sales
for a short time period. May require some promotions to make
the people aware of the new developments
• During the decline and withdrawal phase, the product has outlived
its useful marketable life. Some new fashion or technology has
made the product obsolete or less popular. The cost of propping
up the product with features is greater than any gain in revenues
• The company has to determine when is a good time to withdraw

the product based on the availability of a new product.
CHECK YOUR
8.3 BCG Matrix PROGRESS
Stars What do you understand

by transition stage?
− Products in markets experiencing high growth rates with a high
or increasing share of the market
− Potential for high revenue growth
− Need to be nurtured and funded
Cash Cows
− High market share
− Low growth markets
– maturity stage of PLC
− Low cost support

MANUFACTURING
STRATEGY − High cash revenue
– positive cash flows
NOTES Dogs
− Products in a low growth market
− Have low or declining market share (decline stage of PLC)
− Associated with negative cash flow
− May require large sums of money to support
Wildcats
− Products having a low market share in a high growth market
− Need money spent to develop them
− May produce negative cash flow
− Potential for the future?
8.4 Competing Through Manufacturing

• Steven C. Wheelwright and Robert H. Hayes in their HBR article
titled “Competing through Manufacturing” have defined four stages
of development that a company can pass through. Each of these
stages denotes a particular role that manufacturing plays in the
company’s competitive success.
• The Stages in Manufacturing’s Strategic Role are:
− Stage 1 in which we minimize manufacturing’s negative potential,

i.e. “Internally Neutral”
− Stage 2 in which we achieve parity with competitors, i.e.,

“Externally Neutral”
− Stage 3 in which manufacturing provides credible support to the

business strategy, i.e., “Internally Supportive”
− Stage 4 in which we pursue a manufacturing-based competitive

advantage, i.e., “Externally Supportive”
Stage 1 - Internally Neutral
− Top managers regard manufacturing incapable of influencing

competitive success and seek to minimize its negative impact
− Manufacturing capability is viewed as a result of decisions about

capacity, facilities, technology and vertical integration
− No strategic importance to workforce policies, planning and

(70) MANUFACTURING measurement systems, and incremental process improvements
STRATEGY
− Reliance is on outside experts to help on issues related to Advance Manufacturing
Systems
manufacturing
− Top management insists that all decisions with regard to facilities,

equipment, etc. be flexible so that they do not get locked into an NOTES
incorrect decision.
− All equipment is sourced from outside vendors and reliance on

vendors for all technology information
− Internal detailed management control systems oriented toward

near-term performance
− Little to no involvement of top management in manufacturing
− Found in consumer products and some high technology companies

where they feel the company’s edge is due to the product and not
the process.
Stage 2 - Externally Neutral
− Top management looks at manufacturing to have parity with major

competitors
− They will follow common industry practices in equipment

purchases, and capacity additions as well as workforce practices
(such as bargaining with unions)
− Management tends to view capital investment in new equipment

and facilities as the most effective means for gaining temporary
− Economies of scale through production rate seen as the best way

to get manufacturing efficiency
− This type of approach is found in industries where the competitors

are well established and everyone is following the same approach
to maintain the status quo.
− Found in the auto industry in the US and pharmaceuticals
Stage 3 - Internally Supportive
− Manufacturing is expected to actively support and strengthen a

company’s competitive position.
− Decisions regarding manufacturing are screened to ensure that

they are consistent with the organization’s competitive strategy
− A manufacturing strategy is formulated and pursued actively
− Management is on the lookout for long term trends that could

have an effect on manufacturing’s ability to respond to the needs
of the organization.
MANUFACTURING − The manufacturing managers in such companies take a broad
STRATEGY
view of their role by seeking to understand the business strategy
and the competitive advantage the company is pursuing.
NOTES − However top management only wants manufacturing to support
its business strategy not become involved in formulating it.
− Examples of this are the beer industry in the US
Stage 4-Externally Supportive
− The most progressive stage of manufacturing development.
− The company’s competitive strategy rests significantly on its

manufacturing capability. Manufacturing does not dictate strategy
to the rest of the company, but is a significant part of the strategy
formulation.
− Management anticipates the potential of new manufacturing

practices and technologies and seek to acquire expertise in them
ahead of time.
− Equal emphasis is placed on plant and equipment decisions as

well as on management policies in manufacturing
− Manufacturing is involved up-front in major marketing and

engineering decisions and does not just play a reactive role.
− Companies, rather than industries can be cited in this category.

Toyota, Texas Instruments, Mars Candy
8.5 Case Study

• Eric Scott Limited, a manufacturer of leather-goods, has belief in
improvement of supply chain operations through partnership with
suppliers and customers. In 1999, it switched from a home-made
IT system to Made2Manage System. Now, it can improve com-
munications with its partners both up- and down-stream. Ex-
ecution of the system needed solving suppliers’ issues prior to the
advantages could be garnered.
• Protection of customers’ information and data was one key con-

cern. “Hybrid hosting” was practiced by the two firms to make
sure the privacy of customer. Made2Manage hosted the collabo-
ration servers and the Scott’s firewall kept the customer data
behind it. This approach allows for a higher degree of association
between the two companies.
• Made2Manage offered Scott to communicate through EDI with

suppliers and buyers. Orders come through EDI and
(72) MANUFACTURING Made2Manage system creates the manufacturing and ship-
STRATEGY
ment schedules and then notification is sent to the customer. Advance Manufacturing
Systems
Real time data is also made available on the site for the custom-
ers to check the status of orders and online payment.
• VIP software allows suppliers to know the inventory status of NOTES

company and proactive setting of reorder-points for shipments.
The portal also permits customers to Exchange and store of docu-
ments of virtual design are also permitted by portal, and hence it
results in reduction of prototypes and the total time from the con-
ception to delivery of product.
• Management of collaborative relationships by Made2Manage

Systems’ software and technology enabled a small firm like Eric
Scott Ltd. to add big value in supply relationship.
8.6 Summary
• We discussed two of the production systems from the book that
don’t seem to fall neatly into the other categories, i.e., FMS and
the JIT system
• Certain points were made with regard to what makes these

systems a little unique as compared to others
• I pointed out where I differed from the book in the case of the
FMS
• There is similarity in the BCG matrix and the stages in the product
life cycle
• We can use the BCG matrix to decide which products need to be

supported and funded, and which ones should be weeded out.
• Wheelwright and Hayes have developed a four level scale for

assessing the role of manufacturing in achieving competitive
advantage. These levels were discussed.
8.7 Key Concepts

• FMS: Flexible Manufacturing Systems (FMS) are systems that
use automated, integrated equipment that can be used to produce
parts in small batches.
• Product Life Cycle: This cycle shows the different phases through
which a product goes from its introductory phase to decline phase.
8.8 Exercise and Questions

Q1. Discuss just in time (JIT) and FMS techniques.
Q2. What is product life cycle? Explain its different phases.

MANUFACTURING Q3. Explain the stages in manufacturing strategic role.
STRATEGY

NOTES • Reid Hastle “Wiser getting Beyond Groupthink to Make Groups

Publications.
(74) MANUFACTURING
STRATEGY
Competing through
UNIT 9 Manufacturing
COMPETING THROUGH MANUFACTURING
Structure NOTES
9.0 Introduction
9.1 Unit Objectives
9.2 Transitioning Through the Stages 1-3
9.2.1 Transition Stage 1-2
9.2.2 Transition to Stage 3
9.3 Jump to Stage 4
9.4 Case GE’s Dishwasher SBU
9.5 Summary
9.6 Exercise & Question
9.0 Introduction
The article by Steven C. Wheelwright and Robert H. Hayes titled
“Competing through Manufacturing” discusses four different phases a company
may pass through, each representing a different level of engagement of the
manufacturing function in the generation of the strategy. It provides a way to
understand the steps in truly bringing manufacturing in line with other functions
when developing the business strategy.
• The Stages in Manufacturing’s Strategic Role are:
− Stage 1 in which we minimize manufacturing’s negative potential,

i.e. “Internally Neutral”
− Stage 2 in which we achieve parity with competitors, i.e.,

“Externally Neutral”
− Stage 3 in which manufacturing provides credible support to the

business strategy, i.e., “Internally Supportive”
− Stage 4 in which we pursue a manufacturing-based competitive

advantage, i.e., “Externally Supportive”
Traditional Static
• Command and control
• Management of effort
• Coordinating

MANUFACTURING • Direct, supervisory control
STRATEGY
• Process stability
Broad Potential Dynamic

NOTES
• Learning
• Management of attention
• Problem solving
• Indirect (systems and values) control
• Process evolution
Difference between the Stages
• Although there are significant differences between each of the

stages 1-3, primarily it requires improving what managers have
been doing, without necessarily bringing about a radical change in
their thinking or philosophy
• Stage 4, on the other hand, requires more than traditional

management thinking. It is a major overhaul of the way in which
the company looks at manufacturing and also how manufacturing
views itself.
• Companies in Stages 1-3 typically tend to use the command and

control method to run the organization.
• People are not expected to think and question management

policies.
• The expected contribution of the workforce towards the success

of the company is only in meeting the targets set for them.
• Companies in Stage 4 actually engage all employees, especially

the manufacturing personnel and workers in an effort to leverage
the combined knowledge and ability of the organization.
• This requires management to take a very different stance with

regard to their own role. They no longer are expected to have all
the answers. They need to lead the effort toward creative
experimentation and learning by all.
• Managers in companies in Stages 1-3 typically are concerned

with ensuring that the costs are kept low.
• Their focus is on physical efforts required and they try to ensure

that efforts are not wasted
• Managers in Stage 4 companies definitely are concerned with

costs. But their focus is not limited to physical efforts, but also on
(76) MANUFACTURING
STRATEGY the creativity of the individuals of the organization.
• In Stages 1-3, most of the effort of people, including management Competing through
Manufacturing
is one of coordination, i.e., ensuring that information is correctly
communicated and that efforts on the shop floor match what
marketing wants NOTES
• No effort is required to explore new horizons by considering the
possibility of new ways of doing the tasks better or one of problem
solving.
• In Stage 4, the effort is to learn how to work in teams and to be

able to come up with new methods and solve problems with
creativity.
• In Stages 1-3, there is direct supervisory control to ensure that

the activities of the different functional areas are as per plan.
• This requires more time and effort on the part of managers/

supervisors with less value added
• In Stage 4, the control is more indirect, i.e., managers try to work

on the systems and the values of the organization.
• With systems in place, and workers understanding the values of

management, less time and effort is required of management.
More value added.
• In Stages 1-3, the primary concern of management is the

maintenance of stability of the system.
• Processes are expected to maintain output and capability. There

is little focus to improve the processes.
• In Stage 4, processes are dynamic. Management is constantly

asking for improvements in the processes in order to improve the
competitive position of the organization.
• This is typically done with the help of the entire workforce.
9.1 Unit objectives

• Understand Competing through manufacturing
• Know what are the Stages in Manufacturing’s Strategic Role are
• Know what is the difference between these Stages
9.2 Transitioning Through the Stages 1-3

Typically where do new companies start?
• Most of the time, new companies tend to start in stage 1 or 2

MANUFACTURING • The reason for this because the main reason why a new company
STRATEGY
starts operations is because they feel they have a winning product
or service.
NOTES • Because of this the focus of the company is on R & D and on
marketing.
• Also, senior managers have little knowledge about manufacturing,

unless they come from a manufacturing background.
• The main role seen for manufacturing is to deliver what has been
designed and planned.
• Senior managers do not make much effort to understand or pay

close attention to manufacturing, as long as it delivers what is
expected of it.
CHECK YOUR 9.2.1 Transition Stage 1-2
PROGRESS
• Companies starting in Stage 1 or 2 will tend to be comfortable as
Define strategic fit in your long as their product novelty protects them from strong competition.
own terms?
• In the US, this was one major reason why in the post WWII era,
most manufacturers developed a tendency to rest on their laurels
and did not see the potential threat from overseas competitors,
until it was too late.
• The growth in consumer demand through the 1960s only reinforced

their beliefs and caused them to become oblivious to potential
threats from competition, especially from overseas.
• By the time the US manufacturers woke up to the threat after the

oil shock of the 1970s, the foreign competitors had developed
quality products that the customers wanted as well as a
manufacturing edge,
• The transition from Stage 1 to Stage 2 takes place by solving

production problems by using proven practices. No new solutions
are sought.
• Sometimes the inducement to make a change may come from

the observation that some of the leading companies have created
an advantage for themselves by using some aspect of
manufacturing.
• However, the transition is not seen as a major step. In fact the

management may not be aware that a change in their approach
has even occurred.
9.2.2 Transition to Stage 3

(78) MANUFACTURING
STRATEGY
• However, the transition from Stage 2 to Stage 3 requires that the Competing through
Manufacturing
management begin to question the applicability of their traditional
approaches and solutions.
• Also management may become aware of new developments in NOTES

technologies and the benefits they may provide.
• It is clear to the management that competition has intensified and

will require some new approach to gain/regain an edge in the
competitive environment.
• In the early 1980s US auto industry was in a state of panic.
• Dr. Deming, who had been ignored for nearly 50 years by major
U.S. industries became in high demand.
• The initial denial by the U.S. auto industry that the Japanese
competition was due to cultural differences gave way to the
realization that there was a significant change that had taken place
in manufacturing which they had ignored.
• Although companies have a real threat that drives them to look at

the transition to Stage 3, not many companies are able to make
the transition, or to sustain it.
• The reason for this is that once the threat of the competition abates,
the companies will have a tendency to revert back to Stage 2.
• Early success in the transition can lull the management of a

company into complacency.
• Also, successful managers get promoted leaving a vacuum behind.
9.3 Jump to Stage 4

• The transitions from Stage 1 to Stage 2 and from Stage 2 to Stage
3 are not easy.
• However the changes were restricted largely to the manufacturing

function.
• It was seen as a way to solve problems of lack of competitiveness

in manufacturing.
• There was no reason seen for large scale organizational changes.
• The chances are that senior management did not necessarily see
their role in the changes up to Stage 3
• The move to from Stage 3 to Stage 4 requires a complete rethink

with regard to the role of manufacturing and that of all the other
functions.
• Such radical change in thinking does not come easily.

MANUFACTURING • Relatively very few understand the need for the change and can
STRATEGY
make it.
• Up to Stage 3 the role of manufacturing was reactive, not

NOTES participative
• Any changes in technology were seen narrowly as a way to

improve manufacturing efficiency or capability
• Stage 4 requires the manufacturing system and abilities as strengths

to be leveraged
• A new self-image and that in relation to the rest of the organization
Requirements of Stage 4
• Senior management must
− Understand the manufacturing function
− Be able to see how manufacturing capability translates into

− Understand the interrelationships among manufacturing and other

functions
− See manufacturing as more than a way to reduce cost, e.g.,

automation for manpower reduction vs. quality
Stage 4
• Few managers are willing to take the risk
• Few managers understand manufacturing or its relationships
• Few managers see the need to go beyond Stage 3 – 90% benefits

achieved
• Time and effort taken may deter managers looking for a quick
promotion
• GM tinkered with Stage 2 and Stage 3 during the 1990s and early
2000s leading to Unit11.
• Indicators of movement to Stage 4
− The amount of ongoing in-house innovation
− The extent to which a company develops its own manufacturing

equipment
− The attention paid to manufacturing infrastructure
− The link between product design and manufacturing process design
(80) MANUFACTURING
STRATEGY
9.4 Case GE’s Dishwasher SBU Competing through
Manufacturing
• During the 1970s, GE’s Dishwasher SBU
− 20 year old product design NOTES

− 10 to 20 year old manufacturing process
− Aging workforce (avg. seniority 15-16 yrs)
− Strong union
− 14,000 workers (including from other GE appliance divisions)

located in one place
− Relations with unions neutral
− Successful business – leading dishwasher company in the US
− In 1977 SBU proposed $18 million for incremental improvements

in product and manufacturing process
− Initially SBU roughly at Stage 2
− People thought will move to Stage 3 and revert to Stage 2 when

design and equipment aged
− Senior management asked tough questions about the long term

impacts of changes proposed - Saw potential for fundamental
change
− Solid transition to Stage 3
− Part way into transition, management could see potential benefits

from going to Stage 4
• Reasons for potential benefits of Stage 4
− GE product was top of the line. More expensive and costly to

produce
− Better product design could result in more component

standardization
− Considerable growth potential in the dishwasher market in the

US (55% penetration up to that time)
• Management reasoning that the right product at right price and

quality could result in significant growth
• They commissioned $38 million for a complete change
• Changes included:
− Better communication with workers and involvement in redesign

of the manufacturing system – took 2 years

MANUFACTURING − Complete redesign of the product
STRATEGY
− Stringent specifications and tight quality control
− Process design in tandem with product design

NOTES
− Automation not to reduce cost but improve quality and consistency,
and short manufacturing cycle times
− Integration of product testing with manufacturing
9.5 Summary
• We discussed the article on “Competing Through Manufacturing”
• The four stages of integrating manufacturing into the business

strategy were introduced in the last unit
• The particular differences in management approach and thinking

in the four stages was discussed bringing out the difference
between Stage 4 and the other 3 stages
• The transition from each of the stages to the next stages was
covered with some examples
• A case involving the transition of GE’s dishwashing SBU from

Stage 2 through Stage 3 toward Stage 4 was presented

Q1. What are the different stages in competing through manufacturing?
Q2. Discuss the transition stages in competing through manufacturing.
Q3. What is the goal of competing through manufacturing?

• Ian Powell “ Effective Management Decision Making”
bookboon.com
(82) MANUFACTURING
STRATEGY
Strategic Fit
UNIT 10
STRATEGIC FIT
Structure NOTES
10.0 Introduction
10.1 Unit Objectives
10.2 Strategic Fit
10.2.1 First Order Fit
10.2.2 Second Order Fit
10.2.3 Third Order Fit
10.3 Example of Strategic Fit
10.4 Summary
10.5 Key concepts
10.0 Introduction
During the 1970s, GE’s Dishwasher SBU a 20 year old product design
with 10 to 20 year old manufacturing process, aging workforce (avg. seniority 15-
16 yrs), Strong union of 14,000 workers (including from other GE appliance
divisions) located in one place, having relations with unions neutral is a successful
business – leading dishwasher company in the US.
In 1977 SBU proposed $18 million for incremental improvements in product and
manufacturing process. Initially SBU roughly at Stage 2. People thought will move
to Stage 3 and revert to Stage 2 when design and equipment aged. Senior
management asked tough questions about the long term impacts of changes
proposed - Saw potential for fundamental change. Solid transition to Stage 3 and
Part way into transition, management could see potential benefits from going to
Stage 4.
• Reasons for potential benefits of Stage 4
− GE product was top of the line. More expensive and costly to

produce
− Better product design could result in more component

standardization
− Considerable growth potential in the dishwasher market in the

US (55% penetration up to that time)

MANUFACTURING • Management reasoning that the right product at right price and
STRATEGY
quality could result in significant growth
• They commissioned $38 million for a complete change

NOTES
• Changes included:
− Better communication with workers and involvement in redesign

of the manufacturing system – took 2 years
− Complete redesign of the product
− Stringent specifications and tight quality control
− Process design in tandem with product design
− Automation not to reduce cost but improve quality and consistency,

and short manufacturing cycle times
− Integration of product testing with manufacturing
10.1 Unit objectives

• Understand Strategic fit
• Understand orders of Strategic fit
10.2 Strategic Fit

• Ref: “What is Strategy” by Michael Porter, Harvard Business
Review, Nov-Dec1996
• Strategic fit deals with how the activities that a company chooses
to do relate to one another
• It goes beyond doing individual activities to their optimum
• It is the way the activities in combination with each other in the

same way that members of a team need to work together
• It is clear that if we tend to do several activities in the best possible

way individually, the end result from the system may not improve,
but may actually get worse
• In order for a company to be able to gain competitive advantage,

senior managers have to design the activities in a way that results
in a better output
• Most companies, when they do benchmarking, tend to focus on

one or two activities of a successful company which they would
like to imitate.
• A company in which there is a strong strategic fit among its

(84) MANUFACTURING
STRATEGY activities is very difficult to emulate. This is because it is possible
to borrow one or two ideas, but very difficult to understand and Strategic Fit
replicate an entire system
• This is perhaps the reason why GM was unsuccessful in learning

from Toyota, in spite of having a joint venture in Fremont California NOTES
for nearly 24 years.
Types of Fit
• First order fit or simple consistency
• Second order fit with reinforcing activities
• Third order fit with optimization of effort
10.2.1 First Order Fit

• First order fit or simple consistency
− All activities should be consistent with regard to the overall

strategic goals of the organization
− If the focus of the organization is to be an Overall Cost Leader, it

is essential that the design of all activities help the organization
achieve this goal
− Consistency ensures that the gains in one activity are not cancelled
out by another activity
− It is also easier to communicate what is important to the employees
− Vanguard is a group of mutual funds in the US that focuses on the

small investor who is looking for a low cost way to invest.
− Vanguard offers stock, bond, and money market funds with

reasonable performance at rock bottom expenses.
− The investment approach is one where the trading levels are low,
so transaction costs are low and no high cost fund managers are
required
− The fund does not use brokers and avoids paying commissions
− The fund limits advertising, relying on word of mouth and public

relations
10.2.2 Second Order Fit

• Second order fit with reinforcing activities
− In the second order fit, it is not sufficient to ensure that all activities
are consistent with the strategic goal of the organization
− The activities need to mutually reinforce each other.

MANUFACTURING − This means that when the individual activities are done together,
STRATEGY
the effect is to increase the total effect. It is the synergy in the
activities
NOTES − In the second order fit, it is not sufficient to ensure that all activities
are consistent with the strategic goal of the organization
− The activities need to mutually reinforce each other.
− This means that when the individual activities are done together,
the effect is to increase the total effect. It is the synergy in the
activities
10.2.3 Third Order Fit

• Third order fit with optimization of effort
− In the third order fit, the activities go beyond just reinforcing each
other.
− The activities are able to coordinate information in a way that the

system performance is “optimized.”
− This takes much more effort in the design of the activities than
the first or the second order fit
− Gap is a retail clothing store chain in the US that deals in casual

and business clothes
− Product availability in stores is a critical element of its strategy
− Holding inventory in retail stores is expensive due to the cost of

space
− So Gap restocks basic clothing from 3 warehouses almost on a

daily basis
− The merchandizing strategy is to keep few, popular colors. So

restocking is not a problem
− While competing retail chains have inventory turns of three to

four per year, Gap manages to have seven and a half inventory
turns. This is a major cost advantage for Gap.
− Also, frequent restocking allows Gap to have short model cycles

of about 6-8 weeks in length
− This also helps bring new fashions more frequently into the stores,
attracting customers
10.3 Example of Strategic Fit

• Consider the case of Southwest Airlines
(86) MANUFACTURING
STRATEGY
• It is one of the few airlines that managed to earn money while the Strategic Fit
others were losing money.
• It is also the only domestic airline in the US that does not charge
extra for checked in bags. NOTES
• Moreover, it is known for its low fares, on time performance and

a cheery attitude of its staff and crew.
• What is the secret recipe of Southwest Airlines
• The first thing that Southwest did was target a particular type of
customer. It was not the typical business traveler who looked for
comforts such as First Class sections, reserved seats, connections
to other flights, etc.
• They targeted the traveler who wanted fly at a lower fare, did not
mind some relatively minor inconveniences, and was flying
primarily point to point.
• Southwest did a careful analysis of what are the major cost

components as well as the leading causes for flight delays.
• Based on the analysis, the major findings were that a major cause
of loss of revenue for an airline was the time a plane was on the
ground and not flying. In addition, the time to load meals and to
transfer bags to and from connecting flights caused delays and
missed bags
• Southwest also found that most airlines operate with a hub and
spoke system, which lengthened the travel distance and time for
travelers
• A cause for flight delays was the heavy traffic at busy airports
• Southwest also found that most airlines operate with a hub and
spoke system, which lengthened the travel distance and time for
travelers
• A cause for flight delays was the heavy traffic at busy airports
• So Southwest designed its system with the following components
− Point to point flights between airports. No hub and spoke system
− Due to the above, there was no need to transfer bags as is required

in a hub and spoke system
− Fly from nearby smaller airports when one exists. Example would
be Toledo near Detroit or Baltimore near Washington. This
avoided the high fees of busy airports as well as the delays due to
heavy air traffic

MANUFACTURING − All seats of one class. No separate business or first class. This
STRATEGY
allowed southwest to eliminate prior seat selection – First Come
First Served
NOTES − Southwest pays its staff and crew very well. So there are flexible
work rules, including with the union. This allows Southwest to
have very short aircraft turnaround times at airports (less than 20
minutes)
− Efficient boarding procedure that eliminates the time and confusion

in typical boarding processes. All Southwest boarding is extremely
smooth and quick.
− Southwest restricts the route length in most cases so that it can

use standardized Boeing 737s. This helps in improving the time
and cost of maintenance, including the number of spares that need
to be in inventory.
− Having well paid crews that are treated well by the CEO, the
attitude of the crew on the flight is remarkable. I can attest to this
personally
• By taking a number of steps to ensure that the entire set of

activities undertaken by Southwest work in sync with each other,
the output from the system is significantly better than of any
domestic airline.
• Obviously, Southwest is not trying to attract everyone. But for

the traveling population targeted by Southwest, it is doing a great
job.
• Also, for a competitor to try an imitate Southwest would be very

difficult, since it is not one activity that is done differently, but all
the activities are done in a unique manner as compared to the
industry. Also the competitor may not understand the
interrelationships among the activities without which, success is
not possible
• Several companies, including continental have tried to imitate

southwest, but with little success
• Continental tried to match Southwest on point-to-point routes.

They called it Continental Lite
• It eliminated meals and first class service, increased departure

frequency, lowered fares and reduced turnaround times on the
ground
• But Continental also maintained its full service on other routes

(88) MANUFACTURING
STRATEGY
• Its planes were often delayed, leaving congested airports, or slowed Strategic Fit
at the gate by baggage transfers
• Late flights and cancellations got travelers upset, especially those

who were paying the higher fares NOTES
• Continental tried to cut commissions to travel agents which angered

the agents, resulting in loss of business
• Also, the airline tried to cut the rewards of its frequent fliers. This
again got the travelers up in arms
• The company lost hundreds of millions of dollars and the CEO

lost his job
10.4 Summary
• In this unit we discussed a case involving the transition of GE’s
dishwashing SBU from Stage 2 through Stage 3 toward Stage 4
• We introduced the concept of strategic fit among the activities
• Strategic fit involves the way in which the activities undertaken

by an organization interact with each other and are oriented toward
the organization’s strategic goals
• We discussed the three types of strategic fit, first order, second

order, and third order
• Fits of higher order takes more time and effort than lower order
fits, but result in more benefits to the organization
• An example involving Southwest Airlines was presented

exemplifying fit of its activities
10.5 Key Concepts

• Strategic Fit: A situation that occurs when a specific project, target
company or product is seen as appropriate with respect to an
organization’s overall objectives.
• Types of Strategic Fit: First order fit or simple consistency, second

order fit with reinforcing activities, third order fit with optimization
of effort.

Q1. What is strategic fit? Discuss its types and applications according to
the categories.
Q2. What are the principles of First order strategic fit?
Q3 Differentiate between second order and third order strategic fit.

MANUFACTURING Q4 Give some examples of strategic fit.
STRATEGY

NOTES • Shigeo Shingo “A study of Toyota production system”.

Publication.
(90) MANUFACTURING
STRATEGY
Trade offs in
UNIT 11 Manufacturing Strategy
TRADE OFFs IN MANUFACTURING
STRATEGY NOTES
Structure
11.0 Introduction
11.0.1 Strategic Fit
11.0.2 Focus and Trade-offs
11.1 Objectives
11.2 Ikea Furniture
11.3 Competitive Edge
11.4 Summary
11.5 Key Concepts
11.0 Introduction
11.0.1 Strategic Fit
Strategic fit deals with how the activities of a company work in combination with
each other. By getting the activities enmeshed, the company is best able to deliver
value to the customer. We can see this with the help of the Southwest Airlines
example.
Strategic Fit Example
• Southwest designed its system with the following components
− Point to point flights between airports. No hub and spoke system
− Fly from nearby smaller airports when one exists
− All seats of one class
− Staff and crew well paid
− Short aircraft turnaround time
− Efficient boarding procedure
− Restricted the route length and the use of standardized Boeing

737s
11.0.2 Focus and Trade-offs

MANUFACTURING • According to Porter, in addition to fit, there are two other elements
STRATEGY
to Southwest’s strategy
− Focus
NOTES
− Trade-offs
Focus
• Before designing the strategic fit, Southwest had to decide what

business it wanted to be in – it needed to develop a focus
• The way in which Southwest developed its focus was by defining

the type of customer it wanted to serve and by understanding his
needs and limitations
• Then it designed its activities focused on those needs
• The typical traveler targeted by Southwest was one who was

conscious about ticket prices and was looking for direct travel,
point to point.
• This was in contrast to the full-service airline that was designed

to meet the needs of the general traveling population
• A typical full-service airline
− Serves a much broader market using a hub and spoke system
− Used to offer meals (they have eliminated meals on domestic

flights in the US)
− Has baggage transfer facilities for connecting flights
− Has business and first class sections for people who want it
− Offers assigned seats and frequent flier benefits
− Works with travel agents to get business
• Southwest Airlines
− Services limited routes and flies point to point
− Offer a restricted snack and soft drink
− Has no baggage transfer facilities for connecting flights
− Has a single class of seats and no assigned seats
− Offers no frequent flier benefits
− Does not work with travel agents to get business
Trade-offs
(92) MANUFACTURING
STRATEGY
• Porter argues that in order to have a strategy, a business has to Trade offs in
make trade-offs, i.e., it chooses to do something’s and, by definition,
that choice prevents it from choosing other things
• For example, Southwest chose to only serve a limited set of NOTES

traveling customers, and not the general flying public
• It chose airports, routes, aircraft types, services and procedures

that met the needs of the limited population it chose to serve
• We also saw the example of what Continental tried to do to imitate

southwest.
• Continental tried to maintain its full-service operation while trying

to copy some of the things that Southwest was doing.
• The reason why Continental was unsuccessful in challenging

southwest is because it attempted to avoid making a choice or
trade-off
• By trying to be a full-service airline for some passengers and a

limited service airline for others, using common equipment and
systems, ended up not meeting the expectations of anyone
• Porter argues that trade-offs become necessary in strategy

formulation because of three reasons
− Inconsistency in image or reputation
− Different activities require different configuration
− Limits of organizational priorities and control

• Discuss Tradeoffs in manufacturing strategy
• Discuss Ikea case
• Understand Competitive edge
11.2 Ikea Furniture

• Ikea is a well-known furniture store, originating in Sweden, but
with sores in several countries, including the US
• Ikea also illustrates the three aspects of strategy as stated by

Porter in his article “What is Strategy?” i.e., Fit, Focus, and Trade-
offs
Typical Furniture Store
• A typical furniture store in the US has:

MANUFACTURING − A small sample of the range of furniture
STRATEGY
− A catalog of fabrics, styles, woods, finishes, etc. that can be
ordered to customize needs
NOTES
− A big salesforce eager to help (sell) the customer make a choice
− Order placement with outside manufacturer and delivery within

4-6 weeks
− Higher prices
Ikea
• Ikea focuses on the customer with a “thin wallet” who is willing

to away with some of the features of a traditional furniture store.
• They figured that young customers, who are looking for relatively
inexpensive, but stylish furniture, do not necessarily care for
customized fabrics and styles, and are unwilling to wait 4-6 weeks
for delivery.
• Therefore in Ikea’s stores:
− Furniture designed by Ikea, modular, ready to assemble, is all

displayed in a huge store
− The furniture is arranged as it would be in a typical home, so

people can visualize how it would look
− There are no sales people chasing after people. The store operates
in a self-service mode with people available to help, when needed
− Adjacent warehouse has the products in boxes on pallets.

Customers pick up their products. There is no delivery.
• Therefore in Ikea’s stores:
− The entire range of the furniture is displayed. No customization is

available
− There are additional services such as in-store child care. This is

targeting the needs of the young couples who form the largest
single segment of Ikea’s customer base
− You find economical, functional, stylish furniture
• The previous slides showed how Ikea is able to provide a unique

value proposition to its customers by focusing its offerings, product
designs, store design, services which makes it unique compared
to other furniture sellers
• Let us see how it attains fit and trade-offs
(94) MANUFACTURING Trade-offs

STRATEGY
• In choosing its approach Ikea obviously had to make several trade- Trade offs in
offs
− By focusing on the needs of young working professionals and

students, Ikea had to select a limited range of products that was NOTES
easily put together
− The young people do not typically use decorators to help them

match furniture pieces. Therefore they need to see the furniture
in typical room settings. Therefore the store design had to be one
with such a layout.
− Ikea wanted to focus on the product and its sales. They did not
want to get involved in complex delivery services that would have
added cost and caused frustration to the customers when the
deliveries were delayed, wrong furniture delivered, or furniture
was damaged. So people do their own pickup and delivery. The
modular furniture is boxed for ease of handling. Also, Ikea rents
car roof racks in case people need them.
− By not having salespeople, Ikea not only saves on cost, but also
does not have customers feel overwhelmed by aggressive selling
− By not having salespeople, Ikea not only saves on cost, but also
does not have customers feel overwhelmed by aggressive selling.
Even if a salesperson is subtle and knowledgeable, not all
customers like one to trail them in the store. In this case the talents
of the salesperson will be underutilized.
− By choosing to have a limited range of products, self-service by

customers, etc., Ikea has deliberately chosen to not serve the
high-end customers. This is a conscious trade-off
Fit
• In the case of Ikea, all their activities are geared to ensure low
cost, high quality furniture that meets the needs of their target
customer base
• This would be an example of a first order fit
11.3 Competitive Advantage

• We will revisit the whole idea of competitive advantage by briefly
reviewing some of the topics we have discussed
• We started with Porter’s 5 Competitive Forces and 3 Generic

Strategies.
• The conclusion of the 5 Competitive Forces and the Generic

Strategies was that if you position yourself correctly with regard
to the rest of the market and develop a focused strategy, you MANUFACTURING STRATEGY (95)
MANUFACTURING should be able to earn above average returns on your invested
STRATEGY
capital.
• Next we saw Wickham Skinner’s work and his recommendation

NOTES of a Focused Factory which was tailored toward the needs of a
limited number of products.
• His argument was that if we tried to accomplish many varied

tasks using the same equipment and operating policies, we will
not do any of the tasks well
• The traditional approach tried to add products in an effort to spread

overhead costs across a larger number of products
• Next we considered the manufacturing outputs such as cost,

quality, delivery, flexibility, performance, innovation
• It was stated that to be successful, a company needs to focus on

one or two outputs.
• This called for trade-offs
• Next we discussed the product-process matrix which indicated

that for a particular combination of product variety and volume, a
particular configuration of manufacturing system was suitable.
• Using a different configuration would prove to be a disadvantage

for the company
• So what does all of this tell us?
• It appears that the entire activity of developing a manufacturing

strategy revolves around understanding a somewhat static
competitive structure, choosing a particular approach, choose an
appropriate configuration of our resources based on our product
(or service), i.e., the strategy is a static decision.
• This information, the equipment, the people who work in these

factories, can all be employed by any rival
• Then what is the source of a company’s competitive advantage?
• Earlier Japanese companies used to be known for low end

products
• Initially, US auto manufacturers did not choose to consider the

Japanese manufacturers as serious competition
• In the late 1970s, and thereafter, when US car manufacturers

found that the Japanese car companies were becoming a serious
threat, they blamed it on low wages, subsidies by the Japanese
government, and dumping practices
(96) MANUFACTURING
STRATEGY
• With the passage of time, Japanese companies became known Trade offs in
not just for low cost, but also for consistent quality, new and
innovative products, performance, fast and flexible, dependable
delivery. NOTES
• Whatever happened to the need for focus?
• How were the Japanese able to achieve high levels of multiple

outputs with common factories?
• Finally, the equipment in the Japanese factories was no different

than that in any US or European factories.
• The product range produced and sold by the Japanese was not
new, patented technology that provided any product-based
advantage
• The techniques such as Kanban, Kaizen, quick set-ups, Jidoka,

Poka Yoke, etc. were all known to the Americans and Europeans
during the 1980s
• Why then were the Big 3 auto manufacturers of Detroit not able
to defend their once dominant position in the US domestic market?
• Why did GM have to file for Unit 11 bankruptcy in 2008 in spite

of having a joint venture with Toyota since 1984 in an effort to
learn the Toyota method of production?
11.4 Summary
• In this unit we added two more requirements to a strategy beyond
Strategic Fit, i.e., focus and trade-offs
• We saw how we can focus on a narrow set of objectives and

ensure that all activities are configured to achieve these objectives
• We also saw that in making several choices related to strategy,

we are faced with trade-offs
• Trade-offs are choices we need to make to have a clear,

unambiguous strategy
• We demonstrated how fit, focus and trade-offs were evident in

two cases, one involving Southwest Airlines and the other Ikea
Furniture stores
• Finally we presented a divergent view which seems to challenge

several of the topics discussed so far in the course.
• The answer to the final questions will be developed in the next

several lectures

MANUFACTURING
STRATEGY 11.5 Key Concepts
• Focus: Defining the type of customer it wanted to serve and by
understanding his needs and limitations then it designed its activities
NOTES
focused on those needs.
• Trade-off: A tradeoff is a situation that involves losing one quality

or aspects of something in return for gaining another quality or
aspects.
• Competitive Advantage: It is a business concept that describes

the attribute of allowing an organization to outperform its
competitors.
11.6 Excrcise & Questions for practice

Q1. Discuss Focus in Strategic fit.
Q2 Differentiate between trade off and strategic fit techniques.
Q3.What is the role of strategic fit in competitive advantage?


Publication
(98) MANUFACTURING
STRATEGY
Capabilities
UNIT 12
CAPABILITIES
Structure NOTES
12.0 Introduction
12.2 Revisiting NUMMI
12.3 Capabilities
12.3.1 Process Based Capabilities
12.3.2 Systems Based Capabilities
12.3.3 Organization Based Capabilities
12.4 Using Operational Capability to Launch an Attack - Case
12.5 Summary
12.6 Key Concepts
12.0 Introduction
In the last unit we raised some questions with regard to how a company
who seemingly follows the path of developing a strategy using the work of Michael
Porter, Wickham Skinner, etc., can keep an edge against its competitors. Specifically
the questions raised were:
− Is it sufficient for a company to position itself relative to the market

and use one of the generic strategies using appropriate trade-
offs?
− Is it necessary to have focus?
− Is it necessary for a company to choose from among various

product attributes or manufacturing outputs such as quality, cost,
etc.?
− Is it sufficient to have the right configuration of the right technology

based on the product characteristics?
− What really separates the world’s best companies from the rest
of the pack? Why can others imitate the activities, but not replicate
the results?
• The answers to the questions are not necessarily straight forward

and require some explanation.

MANUFACTURING • One of the shortcomings of traditional theories of strategy is that
STRATEGY
it assumes that the main task for a company is to make choices
that are available at specific points in time
NOTES • In actual fact the process of decision making is a continuous and
evolving. The decisions need to be made in an ever changing
business environment
• Another shortcoming of traditional theories is that the focus is

either on specific resources, such as plant and equipment, or well
defined policies such as a particular type of physical layout, or
method of scheduling production
• Most of the above is part of explicit information that is available

in books
• But two companies with similar products and roughly similar

facilities, technologies, and policies may have very different levels
of performance
• Consider any sport, say cricket. Most cricket equipment used by

the professionals in the game can be purchased by people. Can a
regular person perform at the level of the professionals?
• Some airlines tried to imitate Southwest in terms of the routes,

type of aircraft, services, etc. but were unable to challenge the
dominance of Southwest
• “No knowledge without theory. Schools teach information, not

knowledge. Information is not knowledge. People go to Japan (to
copy what they are doing there) and don’t learn anything because
they don’t understand the theories. I hope they enjoyed the ride!”

• Know what are Mnufacturing Capabilities

• Understand Revisiting NUMMI
• Understand use of operational capability to launch an attack
12.2 Revisiting NUMMI

• As mentioned earlier, NUMMI was a joint venture between
General Motors and Toyota producing cars in Fremont, California
in an old GM plant that had been shut down due to labor problems
and poor quality and low productivity
• In NUMMI, the plant was operated using more than 70% of the
(100) MANUFACTURING original workers (former GM employees). Management was all
STRATEGY
Toyota. The plant met or beat the productivity and quality at most Capabilities
GM plants in a short time
• Over 20 years, General Motors was unable to learn how to take

the lessons from NUMMI and upgrade their own plants NOTES
• NUMMI demonstrates a few facts:
− What you see is only the tip of the iceberg
− A system is much more than the sum of its parts
− Systems need to evolve
− Softer stuff has a much bigger impact and is more difficult than
the harder stuff
• Some reasons why General Motors could not learn:
− It perceived what was on the surface
− It was looking for fixes for its problems
− It believed in the cultural differences with Japan
− It was the largest automaker in the world
− It lacked the capability to learn as an organization
12.3 Capabilities
• What makes capabilities difficult to replicate and imitate?
− Capabilities take years to develop and hone
− Capabilities rarely appear on the surface
− There is a difference between the capability of an individual and

the capability of an organization. Therefore hiring individuals cannot
give the same results
− Capabilities include tacit knowledge
− Capabilities lead to discovering and acquiring new capabilities
− Capabilities take years to develop and hone
− Most professional sportspeople and entertainers undergo years

of training and practice
− 10,000 hours
− Toyota began the development of Toyota Production System in

the 1960s. Most competitors want to implement it in a matter of
years
− It took Toyota nearly 10 years to implement Kanban in all its

plants
MANUFACTURING − Most companies have difficulty in managing change
STRATEGY
• Capabilities rarely appear on the surface
− When you visit a company you see the equipment, the layout and
NOTES
the procedures used
− The mind-set of the people is not visible
− General Motors did not understand what could not be seen explicitly
− Capabilities of individual’s vs organizational capabilities
− Companies have hired stars from other companies with little

change in results
− Output depends on joint efforts
− Even when a large number of people are hired from a company,

they cannot replicate the results
• Capabilities include tacit knowledge
− Knowledge can be explicit and tacit
− Tacit knowledge is gained through experience, learning by doing
− Tacit knowledge takes years to develop and cannot be learned in

any one way
− Individuals and companies may not be aware of the tacit

knowledge they possess, e.g. Toyota
− People cannot express tacit knowledge
− Capabilities can lead to discovering and acquiring new capabilities
− Capabilities are not static
− The ability to learn is a capability
− As business scenarios change, the ability to foresee and acquire

new capabilities is a very powerful weapon in the hands of a
company
Types of Capabilities
• There are three types of capabilities
− Process based capabilities
− Systems based capabilities
− Organizational capabilities
12.3.1 Process Based Capabilities

• These capabilities are the simplest
(102) MANUFACTURING
STRATEGY • They relate to the physical processes
• Companies may have specific expertize that may be developed Capabilities
in-house and not available for purchase, e.g. a machine tool or
process developed by the company R & D
• E.g., IBM and Toshiba had a joint venture to make large liquid NOTES
crystal displays. They had a special ability to ramp up quickly to
produce displays with high yields which gave them an edge against
competitors
12.3.2 Systems Based Capabilities

• Systems based operating capabilities involve the ability to co-
ordinate a set of activities to generate superior end results
• Examples could be faster product development process, ability to

customize on demand, etc.
• The Allegheny Ludlum Steel Corporation had the capability to

coordinate the complex steps required in the production of
customized steel. This made it a very profitable steel manufacturer
12.3.3 Organization Based Capabilities

• Broadest category of capabilities
• Involve the ability to manage a variety of complex processes better

than any of one’s competitors
• The most difficult to imitate
• Example would be the ability of Boise Cascade to bring new plants

on the line quickly. Such abilities can give a major advantage in
being the first to market
12.4 Using Operational Capability to Launch an Attack

- Case
Attacking Incumbent Industry Leaders - Walmart
• Walmart became a public company in 1972
• Initially it ran small discount stores in rural Arkansas, Missouri

and Oklahoma in Southern US
• It needed to sell stock to build its first warehouse
• In 10 years it had 650 stores and almost $4.5 billion in sales
• Up until the early 1980s, the retail giants Sears and Kmart either
ignored Walmart or could not respond to the threat
• By 1987 Walmart had 1200 stores half the number of stores that
Kmart had

MANUFACTURING • Walmart had developed a long term strategy which included
STRATEGY
developing processes, systems and relationships with
manufacturers such as Proctor and Gamble
NOTES • It had taken the lead in applying computer technology to track
sales at the point of sale using bar codes and restocking its stores
to ensure that stock-outs were minimized
• Initially Walmart focused more on smaller towns while Kmart

was more visible in larger cities
• Once Walmart had honed its abilities, it attacked Kmart on its

home turf
• By 1993 Walmart had total sales of $67 billion and 50% more
stores than Kmart
• By 2002, Kmart filed for bankruptcy
Analysis
• On the face of it, Walmart followed the standard generic strategy

of Overall Cost Leadership
• Why was Kmart unable to see the threat and/or react it when it
became aware of the threat?
• Walmart operated most of its stores in rural southern US where it

got the chance to develop and perfect its operating skills including
its logistics capabilities and its relationships with manufacturers
• Being in small towns, Walmart managed to evade the attention of

a large company like Kmart until it was too late
• The superior logistics skills and technology-based replenishment

systems were developed in-house at Walmart
• When Kmart recognized the threat and tried to take defensive

action, it realized it did not have the requisite abilities in the use of
technology and the relationships with suppliers
• When Kmart tried to implement computer systems, there were

significant errors in the data which made the systems ineffective
• Providing the training and ensuring the discipline among all

employees is not something that can be achieved overnight
• Walmart had taken years to train its people and perfect its
operating abilities. Kmart’s attempts at looking for shortcuts failed
miserably
(104) MANUFACTURING
STRATEGY
Capabilities
12.5 Summary
• In this unit we tried to answer the questions that were raised
during the last lecture regarding how companies ought to develop
NOTES
their operational strategies
• We discussed that in addition to hard equipment and policies,

companies need to develop strong capabilities as powerful
competitive weapons
• We discussed the various attributes of capabilities which make

them difficult to imitate and replicate by competitors
• We discussed the three types of capabilities, i.e., process based,

systems based and organization based
• Finally we discussed a case involving Walmart and saw how

Walmart used superior operational abilities, developed over a long
time, to overcome a huge company such as Kmart
12.6 Key Concepts

• Capabilities: A capability is the ability to perform or achieve certain
actions or outcomes. As it applies to human capital, capability
represents the intersection of capacity and ability.
• Types of Capabilities: Process based capabilities, Systems based

capabilities Organizational capabilities
12.7 Excrcise & Questions

Q1.What are the different factors which decides the capabilities of an
organizations?
Q2.Discuss the various types of capabilities.
Q3 Compare the different capabilities.

bookboon.com

MANUFACTURING
STRATEGY UNIT 13
STRATEGIC INTENT
NOTES Structure
13.0 Introduction
13.2 Strategic Fit vs. Strategic Intent
13.3 Strategic Intent
13.4 What Should a Company Do To Engage the Organization?
13.5 Competitive Innovation
13.6 Summary
13.7 Key Concepts
13.0 Introduction
Traditional approach to strategy are to evaluate current competition based
on current resources and capabilities, no future view, snapshot of a moving projectile,
cause of lack of long term strategic outlook, cause of failure to detect competitor’s
movements
Other Myopic Reactions to Competition
• Keep a lookout for the current visible moves of current competitors
• Imitate what the competition is doing, e.g., off-shoring, outsourcing.
• Sun-Tsu – “All men can see the tactics whereby I conquer, but
what none can see is the strategy out of which great victory is
evolved.”
Examples
• Japanese automakers were not perceived to be threats by Detroit

through the 60s and 70s when they were building their capability
• Komatsu was under the radar to Caterpillar during the 1970s
• Canon was considered too small to be considered competition by

Xerox
• Walmart was not considered a real threat to K-Mart when it grew

in the rural south
(106) MANUFACTURING
STRATEGY
Strategic Intent
• Understand Strategic Fit vs. Strategic Intent NOTES

• Understand Strategic Intent
• Understand Competitive Innovation
13.2 Strategic Fit vs. Strategic Intent

• Some companies view strategic fit as a static stance taken at one
point in time
• Strategic intent is a long term plan to overtake the competition by

slowly building up capability in the entire organization.
• Strategic intent starts with a desire to attain a leadership position
• Management focus must follow toward that goal by motivating,

communicating, mentoring, and sustaining momentum while
allowing for creativity and course correction, when required.
• Strategic fit looks at the current capability and resources of the

organization and trims goals to make them feasible
• Strategic intent considers avenues for leveraging resources

towards stretch goals that are considered currently infeasible
• In strategic fit current advantages are considered vis a vis

competitors
• In strategic intent the focus is on building advantages and

capabilities in the future as required
• A company pursuing strategic fit will look for a niche to specialize

in, or avoid taking on a larger competitor
• A company pursuing strategic intent will look to change the rules

of the game to gain an advantage over a larger competitor
• Using strategic fit a company achieves consistency by following

operational standards (SOPs) and industry practices
• Companies following strategic intent achieve consistency from

allegiance to a long term goal with flexibility in how those goals
may be achieved
• Companies that pursue strategic fit disaggregate businesses based

on products and markets (SBUs). Each business is expected to
possess all skill needed for its operational purposes

MANUFACTURING • Companies following strategic intent invest in the development of
STRATEGY
core competencies in addition to skills needed based on the
products or markets served. Core competencies are not restricted
NOTES to any one business or unit but can be exploited by the organization
as its sees fit.
• Most companies develop strategic plans which are very detailed

and specific. Each activity is and how it is to be achieved is well
defined
• Strategic intent, being focused on what seems currently infeasible

from a resource or capability viewpoint, cannot be specifically
planned
• Strategic planning is concerned with eliminating current problems

and limited by current resources
• Companies with strategic intent are realistic about current

limitations but look for ways to overcome them in pursuit of their
goal.
• Most senior managers engaging in strategic planning consider

goals such as shareholder value, and return on investment. But
the planning horizon tends to be short.
• A company engaged in strategic intent will also look for gains in

shareholder value and returns on investment, but the realization is
over a long period of time.
13.3 Strategic Intent

• Strategic Intent starts with a long term goal of capturing a leadership
position
• Strategic Intent remains stable over time
• Strategic intent requires personal effort and commitment
Long Term Leadership
• Most companies pursuing strategic intent will target a leadership

position in a market.
• Examples are the US intent to beat the Soviets in landing a man

on the moon, Canon looking to become a leader in copiers, etc.
• Having a long term goal provides for clarity to the employees, the
customers and the shareholders with regard to the direction of
the company.
• Sometimes a company may not pick a specific competitor to

(108) MANUFACTURING overtake, but define an area or technology to be a leader in.
STRATEGY
Stable Over Time Strategic Intent
• In a broad sense the long term goal of leadership does not change
• However, the means to achieve the goal can change depending

NOTES
on the market conditions and circumstances
• Stability in the long term intent gives confidence to employees to

explore different ways to achieve the long term goal
• Developing capabilities takes years and if there is stability, the

organization can develop appropriate advantages
Personal Effort and Commitment
• Achieving stretch goals requires more than resources, it requires

full commitment to a purpose. This takes motivation.
• A lofty target helps motivate people and energizes them as

compared to a target of maximizing shareholder value
• Being a market leader will also yield wealth to the company
• Top management needs to provide personal commitment that can

be infectious.
13.4 What Should a Company Do To Engage the

Organization?
• Create a sense of urgency
• Develop a competitor focus throughout the organization
• Ensure that all employees have the necessary knowledge, skills

and tools to achieve their best toward the long term goal
• Set a practical, sustainable pace of movement toward the end

goal
• Establish clear metrics and review processes to measure progress
Create a Sense of Urgency
• One of the biggest motivators for an organization is a crisis or an

urgency.
• A sense of urgency tends to bring the attention of all employees

to a common goal.
• Sometimes management may need to create a feeling of a crisis

to bring a sense of urgency, e.g. Komatsu budgeted on a very
pessimistic estimate of Yen/Dollar exchange rate.
• A sense of urgency can result in proactive steps and could prevent

a real crisis from occurring
MANUFACTURING Create a Competitor Focus
STRATEGY
• Each employee in the organization must understand his/her role
in overtaking the competition
NOTES
• Benchmarks should be set so each person can evaluate his current
standing and what he needs to do to move toward the goal
• The challenge has to be perceived as personal
• It is essential to energize the entire organization to achieve market

leadership
Knowledge Skills and Tools
• If management only waves the flags and employees do not have

the tools, the organization is not going to move.
• Training and the opportunity to apply it is very essential
• Training must cover hard and soft skills, including equipment usage,
statistical analysis, teamwork, problem solving, etc.
Practical Sustainable Pace
• Companies often overwhelm the employees by attempting to do

everything all at once.
• When the pace of progress lags, management starts to juggle

priorities, confusing middle management and shop floor workers
• A clear path with priorities well defined is essential for focus and
achievement of results
How Komatsu Built Competitive Advantage
• In the early 1960s, Komatsu did not have the products, the
technology, or the quality to be internationally competitive
• Step 1 was to engage in licensing deals to gain technology from

Cummins, International Harvester, etc.
• By the mid-1960s, Komatsu began its focus on cost control by

instituting a Cost Down program companywide
• At the same time it began to test its products in the Eastern

European countries
• By the late 1960s, it had established its European marketing

subsidiary
• By 1970 it established Komatsu America
• Through the 1970s it began to expand its product offerings to

meet international market needs
(110) MANUFACTURING
STRATEGY
• During this period parallel efforts to improve reliability and reduce Strategic Intent
costs further to be competitive
• During the oil crisis, efforts in quality and cost reduction were
stepped up NOTES
• By late 1970s, further push to expand line and improve production

efficiencies
Metrics and Review
• Without regular reviews, employees do not know if progress is

being made
• Recognition and rewards can go a long way in sustaining the

motivation and enthusiasm of the organization
• With clear, transparent, metrics, there is reduced possibility of

disappointment and frustration
13.5 Competitive Innovation

• Any competitive advantage is temporary
• Companies need to work on developing new advantages as

competitors close in on them
• Developing new advantages requires innovation and creativity
• Mere imitation will only get a company parity with the competition
• Innovation is necessary to conserve resources
• Companies must change the rules of the game to their advantage
Four Approaches to Competitive Innovation
• Building Layers of Advantage
• Attacking Loose Bricks
• Changing the Terms of Engagement
• Competing through Collaboration
Building Layers of Advantage
• A simple advantage such as low cost may be easy to emulate, but

a collection of advantages can be a formidable obstacle
• For example, any company can cut labor costs by offshoring, or

outsourcing. However, brand equity requires effort and time to
build as well as to overcome

MANUFACTURING • As a competitor zeroes in on one advantage, a company with
STRATEGY
several areas of leadership can leverage another and still maintain
market leadership
NOTES • The Japanese TV industry began by being the largest black and
white TV manufacturers
• They then began to move into color TVs by capitalizing on low

labor costs.
• They built world scale plants and focused on quality and reliability
– another layer of advantage
• They made process improvements to further reduce costs to

increase market share
• In the 1970s they invested heavily in building channels and brands

followed by regional manufacturing to meet local requirements
Attacking Loose Bricks
• This approach involves the new competitor to attack the incumbent

by staying below the radar.
• The attacker works in territories or product ranges that are not of

interest to the market leader, hence goes unnoticed.
• The competitor chooses an area that could be a “loose brick” of

the market leader.
• In the case of global operations, there may be different “loose

bricks” in each region
• Loos bricks may be different markets, regions, etc.
• As an example, Honda started by producing and selling 50 cc

bikes in the US while it was selling larger bikes in Europe
• The experience in the “loose brick” area gives the opportunity to

develop the skills required for a full assault on the entire product
range
• Honda developed excellence in engine design, which went

unnoticed by competitors in industries like automobiles, diesel
generators, lawn equipment, as well as motorcycles, until it was
too late
Changing the Terms of Engagement
• Innovation can be translated into restatement of the way in which

traditional industry is defined
• Companies often make the mistake of fighting a market leader on

(112) MANUFACTURING
STRATEGY the leader’s terms and turf
• An example is in the copier business. Xerox was the leader in Strategic Intent
copiers and sold its products directly through a large and aggressive
sales force
• IBM tried to enter the market by taking on Xerox head-on, but NOTES
had to exit because Xerox could read IBM’s moves clearly
• Canon, however, chose not to compete on Xerox’s terms
• While Xerox had a wide range of products, Canon chose to

standardize its products to a few models
• Canon chose to distribute through office product dealers to reduce

costs
• It also built reliability into its products and delegated the service
function to the dealerships
• Canon sold rather than leased its copiers, freeing up capital
• Xerox was unable to retaliate quickly and lost market share
Collaborating
• Companies often find alliances by way of licensing, outsourcing

agreements, and joint ventures
• Fujitsu formed alliances with Siemens and STC in Europe and

Amdahl in the US to gain access to markets and volumes
• Collaborating with the rivals of the market leader is another way

to disrupt the leadership
• Matsushita had joint ventures with Telefunken in Germany, and

Thomson in France to develop its strength against Philips
• Collaboration can also involve hijacking the development efforts

of potential rivals
• Japanese electronics firms offered to make VCRs, camcorders

and CD players for Western companies hoping that the Western
companies would stop their own development efforts
• Once a competitor drops its development plans for one set of

products, it usually finds it difficult to reenter the race for the next
generation of products, e.g., HDTVs
13.6 Summary
• In this unit we discussed the topic of Strategic Intent
• Strategic Intent sets a long term strategic goal of market leadership

that helps guide a company and its employees

MANUFACTURING • Companies pursuing Strategic Intent do not limit themselves by
STRATEGY
current resources and capabilities, but have a goal of attaining
these in the pursuit of the long term goal
NOTES • Strategic Intent differs markedly from Strategic Fit and Strategic
Planning
• Various attributes of Strategic Intent were discussed highlighting

the need for long term vision and commitment
• Different methods of competitive innovation were discussed

including building layers of advantage, attacking loose bricks,
changing terms of engagement and collaborating
13.7 Key Concepts

• Strategic Intent: The focus that allows individuals within an
organization to marshal.
• Competitive Innovation: The advancement in the technology and

process which is motivated and inspired by the competition in the
market.

Q1.Compare strategic fit against strategic intent?
Q2 What are the principles of strategic intent?
Q3 Discuss approaches of competitive innovation?

bookboon.com
(114) MANUFACTURING
STRATEGY
Core Competence
UNIT 14
CORE COMPETENCE
Structure NOTES
14.0 Introduction
14.1 Objectives
14.2 Why Strategic Intent Works
14.3 Core Competence
14.4 Core Products and End Products
14.5 Core Competence and SBUs
14.6 Summary
14.7 Key Concepts
14.0 Introduction
As discussed in the last lecture, Strategic Intent is a long term goal setting
with the purpose of gaining market leadership, or leadership in a particular
technology or area. Although there are cases where the target of Strategic Intent
is not an incumbent market leader, often a company that follows the process of
Strategic Intent looks to dislodge a current market leader.
In most cases, the incumbent is a large organization with significant resources.

The challenger is resource constrained and small as compared to the incumbent.
The challenger has to determine how to dislodge the leader with the few resources
at its disposal. This requires innovative use of its advantages and resources, and a
meticulously executed strategy of developing the capabilities required. While the
challenger is preparing for battle, it needs to remain out of sight of the incumbent
to prevent any preemptive action on the part of the latter
Once it has developed a number of advantages which take time to develop, and
tested its products in markets not served by the leader, it attacks the leader on its
turf, but often not on the leader’s terms and rules. When the leader senses the
threat posed by the challenger, it tries to retaliate. But the efforts of the leader are
based on its own strengths, while the challenger has managed to change the rules
of the game. The leader’s strengths become its weakness and what worked to its
advantage up to that point in time is now a disadvantage. The challenger usually
manages to upset the leader and the leader is forced to retreat and exit.

MANUFACTURING
NOTES • Know why Strategic Intent Works
• Understand Core Competence
• Understand Core Products and End Products
• Understand Core Competence and SBUs
14.2 Why Strategic Intent Works

• The key to the success of Strategic Intent is the element of
surprise.
• How is the challenger able to remain hidden from view?
− The challenger is typically very small in relation to the leader
− The Strategic Intent of the challenger is not visible
− The leader can see the limited resources of the challenger, but
not its resourcefulness
• How is the challenger able to remain hidden from view?
− The challenger uses unconventional means of entry, usually testing

its products in smaller markets, or with a different product ranges
− The success and the size of the leader usually is its biggest enemy
− The initial attack is on the periphery of the market, e.g., Honda

with small bikes, Yamaha with keyboards, and Toshiba with black
and white TVs. The leader is not interested in those markets and
typically does not see the threat
• The leader has typically focused on leadership in products and

markets, but does not have the Strategic Intent of the challenger
and has not invested in developing the capabilities of the challenger
• The capabilities of the challenger cannot be hired in and take a

long time for the organization to develop.
• The fast track pursued by senior executives does not give them
sufficient time to invest for long term capability development
14.3 Core Competence

• Earlier we discussed capabilities that play a major role in obtaining
the leadership position in the market, and also in sustaining that
position.
(116) MANUFACTURING
STRATEGY
• So what are these capabilities? Core Competence
• What is so unique about them?
• We can call them core competencies

NOTES
• A core competence is “a harmonized combination of multiple
resources and skills that distinguish a firm in the marketplace.”
• Core competencies must fulfill three criteria:
− Provides potential access to a wide variety of markets.
− Should make a significant contribution to the perceived customer

benefits of the end product.
− Difficult to imitate by competitors.
Provide Access to a Wide Variety of Markets
• Unlike leadership in specific end products, leadership in core

competencies enables a company to develop a variety of end
products in several markets
• Examples are H.P.’s core competence in measurement, computing

and communications, 3 M’s core competence in adhesives,
substrates and advanced materials, Sharp and Toshiba’s core
competence in flat screen displays
• Core competence in displays can allow a company access to

markets as diverse as TVs, computer monitors, and automotive
dashboards
• The core competence may be exploited by several SBUs of the

corporation depending on opportunities perceived
• Often the core competencies cut across organizational boundaries

that constrain innovative cross fertilization across different SBUs
• The development of fax machines had to combine technologies

that were required in telecommunications as well as copying/
scanning
A Significant Contribution to the Perceived Customer Benefits
• Ultimately, a core competence and the products it gives birth to,

must provide a particular benefit to the customer in a significant
way.
• For example, the core competence of Wal-Mart is logistics

capability. Using this, it is able to provide the benefit of product
availability, value for money, and choice of product. Similarly Fed
Ex also has logistics as a core competence and it provides the
benefit of on time deliveries of packages
MANUFACTURING Difficult to Imitate by Competitors
STRATEGY
• Core competence typically requires the complex harmonization
of individual technologies and production skills
NOTES
• Competence building is an additive process that is achieved
through refinement and continuous learning
• It may be possible for a rival to acquire one or more skills, but it is

very difficult to duplicate the pattern of co-ordination and learning
that accompanies the acquisition of the competencies
Example
• In 1980, NEC was a small company (sales of $3.8 billion)

compared to the American GTE ($9.98 billion)
• GTE was into several businesses including telephones, switching

and transmission systems, semiconductors, TVs, satellites, defense
systems and lighting products
• NEC was into computers but did not have any experience as a
telecommunications company
• By 1988, GTE had sales of $16.46 billion while NEC sales were
$21.89 billion.
• GTE had become a telecom company with a position in defense

and lighting products
• GTE had sold its TV business, closed down semiconductors and

put the transmission and switching business into a joint venture
• GTE had lost a lot of its international position while NEC had
emerged as a major international company
• NEC had emerged as a world leader in semiconductors and a

force in telecommunication products and computers
• NEC had entered the markets for products like mobile phones,
fax machines, and laptop computers
• How did this happen?
• In the 1970s NEC had declared the Strategic Intent to exploit the
future coming together of computing and communications
technologies (C&C). It was significantly visionary on the part of
NEC as in the 1970s there were few signs of a future market for
this marriage of technologies
• NEC management decided that it would be essential to acquire

competencies in semiconductors
(118) MANUFACTURING
STRATEGY
• Using collaborative arrangements NEC was able to leverage its Core Competence
internal resources and accumulate different competencies toward
its Strategic Intent
• NEC management understood that it was faster and cheaper to NOTES

get technology by collaboration than to develop it in house
• There was a strong push to internalize the skills of the collaborating

partners
• There was no long term Strategic Intent at GTE. They viewed

the technologies they were dealing with in terms of independent
businesses rather than competencies that needed to be enlarged
and deepened.
• As a result the individual businesses became dependent on

outsiders and the company used collaboration to get out of specific
areas
14.4 Core Products and End Products

Traditional Approach to Competitiveness
• Traditional approach to competitiveness is to consider the business

(es) that a company is in and to evaluate other companies that
make the same/similar product
• Companies typically identify with specific end-items or products

that they sell. The success of the business is judged by the success
of the end product and its profitability
Core Products
• Prahlad and Hamel introduce the concept of core products as

those assemblies or sub-assemblies that contribute to the value of
the end products.
• Honda’s engines are there core products
• The same capability to design and produce engines can be used

in a variety of end products such as bikes, cars, lawn equipment,
etc.
• Another example of a core product could be compressors
• By looking at core products allows a company to “control” the

market for the end product(s) in which the core product is used.
• For example Canon had a very small share of the laser printer
market while it was reputed to have an 84% world manufacturing
share of key components that went into desktop laser printers

MANUFACTURING • Matsushita had a 40% share in compressors while its market
STRATEGY
share in the refrigerator and air-conditioning businesses were very
small
NOTES • Having a leadership position in core products gives a company an
advantage by allowing them an opportunity to develop their core
competence in technologies that will afford them future dominance
• The company uses core products to enter into OEM-supply

contracts in an effort to stall the investment by the OEMs
themselves, “hollowing” their abilities”
• Economies of scale are provided due to the ability to supply multiple

OEMs. This allows the company to drive down costs
• The company builds a reputation for excellence and can exploit

the reputation by charging higher prices
• Also the producers of the core products have the option to enter
the end product market at the opportune time
• By focusing on key core products the company can control the

pace and direction of the development of the end products that
use these core products
• By having the ability to influence the development of end products

the company enjoys the economies of scope as well as scale
14.5 Core Competence and SBUs

• Several large companies that are into a variety of businesses are
typically organized into Strategic Business Units (SBUs)
• Each SBU is considered as a separate profit center and is expected

to run as an independent business
• The line managers in one SBU do not share much with other
SBUs but compete with other SBUs for corporate budgets
• SBUs help decentralize the company so that localized decisions

can be made by line managers that are familiar with the product
and the market
• Since each SBU tends to operate as an independent entity, any

technology that is developed or any capability that is seen as
necessary is based on the needs of that particular business
• Core competencies often cut across business boundaries and can

necessitate collaboration among different businesses
(120) MANUFACTURING
STRATEGY
• However under the SBU format, such collaboration is rare and Core Competence
individual businesses may not see the value to investment in
technologies and capabilities that they cannot exploit alone
• So, the SBU structure, as practiced, tends to discourage NOTES

investment in core competencies and core products
• Different SBUs tend to do independent research and development

based on their needs. Capabilities are built within an SBU which
is not available to other SBUs.
• So the other SBU that could need the same capability may have
to separately invest in developing it on its own.
• If the two SBUs collaborated, or if the process of capability

building was led by the corporate office, there could be significant
benefits in the form of synergies among the SBUs. This does not
happen often.
• Typical efforts at innovation within an SBU is generally guided by

its current products or those of its competitors
• There is little opportunity to explore the possibilities of marrying

multiple technologies from diverse businesses that could lead to
revolutionary products like faxes, etc.
• It is the responsibility of the corporate management to formulate

policies for collaboration among SBUs, including sharing of
personnel and the identification of core competencies and products
for long term success
14.6 Summary
• In this unit we discussed how Strategic Intent works. We saw
how a challenger with Strategic Intent works stealthily to build its
ability and tests its products in peripheral markets before attacking
the incumbent leader
• We saw how the market leader is unable to react appropriately

when it realizes it is under threat
• We introduced the concept of core competence which was

proposed by C.K. Prahlad and Gary Hamel
• We discussed that core competencies must allow access to

multiple products and markets, provide significant benefits to the
customer, and must be difficult to imitate
• We saw an example of how NEC used its core competence to

overtake GTE

MANUFACTURING • The concept of core products was introduced and it was stated
STRATEGY
that core products allow a company to develop core competence
as well as have a control on the end products
NOTES • We discussed how the SBU structure prevented large diversified
companies from investing in core competencies
• In the case of diversified companies, it is the responsibility of

corporate management to identify areas of core competence and
to provide avenues for collaboration among the SBUs
14.7 Key Concepts

• Core Competence: It can be defined as “a harmonized combination
of multiple resources and skills that distinguish a firm in the
marketplace.”
• Strategic Business Unit: It is profit center which focuses on product

offering and market segment.
• Traditional Approach to Competitiveness: Traditional approach to

competitiveness is to consider the business (es) that a company is
in and to evaluate other companies that make the same/similar
product.

Q1. Explain working of strategy intents?
Q2. What is core Competence?
Q3. State the difference between Core products and End products?

Publication.

(122) MANUFACTURING
STRATEGY
Global Manufacturing
UNIT 15 Strategy
GLOBAL MANUFACTURING STRATEGY
Structure NOTES
15.0 Introduction
15.2 Why Companies Go Global?
15.3 Global Companies
15.4 Global Strategy
15.4.1 Domestic or Multi-Domestic
15.4.2 International or Multi-National Companies
15.4.3 Global Companies
15.5 Summary
15.6 Key Concepts
15.0 Introduction
Global Manufacturing Strategies having a strong domestic manufacturing
base is vital to any region’s economic growth. This is because manufacturing
provides an important institutional foundation for learning and developing process
skills and capabilities that are increasingly intertwined with core R&D in some of
the industries, most important to the region’s economic future.
That being said, global manufacturers are under constant pressure to better align
their entire engineering and manufacturing value-chains; helping them reduce de-
sign cycle times and gain productivity, efficiency and cost savings, driving in-
creased ROI from product concept to the shop floor, with a strong emphasis on
operational excellence and continuous improvement.
Global Manufacturing Strategies is a global community, serving senior manufac-

turing and operations executives from major worldwide corporations, providing
independent manufacturing intelligence, cutting edge innovations, and peer-to-peer
benchmarking and networking. These services enable members to add more value
to their business by delivering operational excellence, continuous improvement,
and transforming functional performance, by providing them with the support,
connections, insight and inspiration from around the world to continually progress
the manufacturing discipline.

MANUFACTURING One of the buzzwords today is global, or globalization. It stands for several things
STRATEGY
and activities undertaken by a company. The underlying fact is that it has to do
with business with the rest of the world as opposed to domestic business alone.
NOTES India has experienced globalization more fully over the last 23-24 years or so.
Globalization used to be thought of as the import and/or export of goods and services.
Today, it has taken on a more sophisticated form and needs to be clearly understood
Globalization has allowed us to avail of the same, or similar goods across the globe
and at the same time brought benefits to companies in terms of larger markets and
economies of scale. Some people had predicted the disappearance of international
borders as far as trade is concerned. This has not quite happened. In spite of
growing trade among countries and the location of “home” bases of different
businesses in different countries, and global ownership of businesses, international
trade is still regionally divided.
Kenichi Ohmae had predicted the emergence of three major trading markets or
regions in his book “The Triad Power”, i.e., the Americas, a combined Europe,
and Asia. This was before the formation of the European Union. It is pretty much
how trade is largely focused. It is interesting to note that the vast majority of all
phone calls, web traffic and investment in the world remains local. While trade
among countries is growing, the ratio of domestic to international trade is still high.
It is expected that this ratio will remain high at least for the foreseeable future.
Also, once you go beyond the country, trade in the region seems to predominate,
e.g., NAFTA, European Common Market, ASEAN, etc.
When companies have gone global, they have tended to have similar strategies in
a particular region. Or they may tend to enter, or delay entry into a region, due to
similar opportunities or obstacles. An example is Wal-Mart. It has been more
successful in the US, Canada Mexico, and the UK than elsewhere. This is due to
geographic, or cultural, and economic similarities among these countries
• We need to understand several issues regarding globalization:
− Why do companies go global?
− What are the forms of global operations?
− What are the issues in globalization?
− What are the risks of globalization?
• These, and other issues related to globalization, will be covered in

this and the next unit

• Know why Companies Go Global?

(124) MANUFACTURING • Know what are Global Companies?
STRATEGY
• Know what is Global Strategy? Global Manufacturing
Strategy
15.2 Why Companies Go Global
• To grow NOTES
• To become more efficient
• To gain knowledge
• To understand and serve customers better
• Because of competition
• To build a brand
• To grow
− Domestic markets can be limiting after a certain point
− Once a product has penetrated the majority of a country’s

population, further sales come either from replacements, or cutting
into someone else’s share
− A country with less penetration may represent greater potential

for growth
• To become more efficient
− With growth comes scale
− A company can spread fixed costs over a larger base
− Experience curves
− Greater potential to reduce cost of purchased goods
− Economies of scope in addition to economies of scale
• To gain knowledge
− Different countries and regions have different knowledge bases

and expertize
− Collaborating across borders can yield superior products and

technology, e.g., Proctor and Gamble’s Tide was a combined effort
of US, Japanese and Belgian efforts
− Cultural, political and geographical distances can inhibit learning
− Information and communication technology has facilitated

collaboration
• To understand and serve customers better
− Proximity to customers is important to understand customer needs

better

MANUFACTURING − Global customers insist on standard products and services when
STRATEGY
they travel. E.g., McDonalds, Wal-Mart, etc.
− Some global manufacturers require their suppliers to set up

NOTES operations in countries where they have operations.
• Because of competition
− When a competitor goes global, there is pressure for other

companies to go global as well
− A first mover may be able to get advantages of scale, brand

recognition, and local acceptance in a new market
− Scale advantages can be leveraged back home as well
• To build a brand
− Companies gain a reputation from a global presence
− A company that has a global presence and acceptance is

considered a more stable and established company with quality
products
− Global acceptance helps in the home markets as well as in other

countries
15.3 Global Companies

• There was a time when companies in the developed world
dominated the world markets
• Today, there are several companies from developing countries

that have gained a significant share of the global markets
• At one time, the majority of the Fortune 500 companies were

from western economies. In 2003, 31 companies were from
emerging markets. In 2010 the number had grown to 62 and
growing fast.
• Even the concept of a global company has changed.
• Earlier a company was considered global if it had a global

marketing presence, i.e., its products were sold internationally.
• Today there are companies which:
− Manufacture globally
− Source globally
− Have a global financial base
− Have a global mindset
(126) MANUFACTURING • Manufacture globally

STRATEGY
− Companies do not just produce in one country and sell globally, Global Manufacturing
they set up manufacturing in different countries for different Strategy
reasons
− Sometimes the location of a plant in a particular country is to be NOTES

closer to supplies or major customers
− Others locate in a country because of the presence of certain

technologies or specialists
− Others will locate manufacturing in a country because of local

governmental requirements, e.g., Japanese car makers in the US
in the 1980s
• Source globally
− Companies source from the countries which have the products of

high quality at low prices
− The opening of global sourcing allows global companies to provide

better products at lower costs than before
− Obviously transportation costs and longer lead times have to be

factored in when considering suppliers from a distance
• Have a global financial base
− Companies can have their stocks listed on various international

exchanges
− A company may declare a country as home base for taxation

purposes
− Companies derive their financing and operating capital from

various international sources
− The access of global funding is a great asset to companies when

the local borrowing rates are high, e.g., India.
• Have a global mindset
− Companies hire the best talent from across the globe
− This brings a mixture of different cultures and thinking to the

company
− By integrating the knowledge and cultures from different countries,

companies develop a broader perspective and a better
understanding of global markets and customers
15.4 Global Strategies

Types of Global Companies
• Domestic or multi-domestic
MANUFACTURING • International or multi-national
STRATEGY
• Global
NOTES
15.4.1 Domestic or Multi-Domestic
• Domestic companies exist in one country
• The companies compete with other domestic companies in the

home country or with some international companies as well
• Multi-domestic companies are companies in the same industry

that are located in different countries
• A firm using a multi-domestic strategy sacrifices efficiency in

favor of emphasizing responsiveness to local requirements within
each of its markets. Rather than trying to force all of its American-
made shows on viewers around the globe, MTV customizes the
programming that is shown on its channels within dozens of
countries, including New Zealand, Portugal, Pakistan, and India.
Similarly, food company H. J. Heinz adapts its products to match
local preferences. Because some Indians will not eat garlic and
onion, for example, Heinz offers them a version of its signature
ketchup that does not include these two ingredients.
• Multi-domestic companies tend to be autonomous and not much

co-ordination and exchange of information across countries takes
place
• Examples are retailing, construction, fabrication, etc.
15.4.2 International or Multi-National Companies

• A firm that has operations in more than one country is known as
a multinational corporation (MNC). The largest MNCs are major
players within the international arena. Wal-Mart’s annual
worldwide sales, for example, are larger than the dollar value of
the entire economies of Austria, Norway, and Saudi Arabia.
Although Wal-Mart tends to be viewed as an American retailer,
the firm earns more than one-quarter of its revenues outside the
United States.
• In International strategy, the organization’s objectives relate

primarily to the home market. However, we have some objectives
with regard to overseas activity and therefore need an international
strategy. Importantly, the competitive advantage – important in
strategy development – is developed mainly for the home market.
• In Multinational strategy, the organization is involved in a number

of markets beyond its home country. But it needs distinctive strat-
(128) MANUFACTURING
STRATEGY egies for each of these markets because customer demand and,
perhaps competition, are different in each country. Importantly,
Global Manufacturing
competitive advantage is determined separately for each coun- Strategy
try.
• There is co-ordination between the home office and the companies NOTES
in different countries and some sharing of information is possible
15.4.3 Global Companies

• Global companies tend to be present in practically all countries in
which demand for their product exists
• They tend to have different parts of the value chain located in

different countries, therefore co-ordination becomes much more
complex than the other types of companies
• Often global companies have a common product to be made and

sold globally, with some customization for local tastes and
regulations
• Examples are automobiles, consumer electronics, etc.
• Global strategy has issues similar to local or domestic strategy
• The main difference is in the fact that in global or international

companies, there are issues of locating certain activities in different
countries or regions, and of coordinating these activities
• In the case of domestic or multi-domestic companies, there is no

need for a global strategy. The strategy is one of several individual
domestic strategies, one for each country
• International companies must create strategies that require

coordination and integration among the different locations and
the operations located there.
• There are two main functions when it comes to a global or

international company
− Configuration of the different activities
− Coordination among the activities
Configuration of Activities
• Configuration deals with the determination of where the various

activities in the value chain of an organization are located
• The activities in the value chain include the primary activities and
support activities
• Primary activities include inbound logistics, operations, outbound

logistics, marketing and sales, and after sales service
MANUFACTURING • Support activities include product design, human resource
STRATEGY
management and financial and administrative functions
Coordination of Activities
NOTES
• Coordination of activities deals with how the dispersed activities
are coordinated or remain autonomous in their operations
• Depending on the type of configuration, and the degree of

dispersion of activities, including distances separating them,
coordination may be easy or difficult
15.5 Case Study

Problems:
A global manufacturing firm was facing incompetency in its inventory

management processes. Suppliers from various regions of the world were supply-
ing parts for the firm’s products. Several buyers within the firm are involved in
tracking the parts required for each product from the phase of manufacturing to
delivery. The firm needed to keep a list of all inventory with complete information
of parts’ delivery statuses and other related information pertinent to the firm.
Approach:
Aciron started the project by making extensive interviews with client

employees to identify the firm’s challenges and needs. Aciron followed an itera-
tive, agile, approach to the development of application. Permitting client to often
appraise and make adjustments to the application, and to effortlessly integrate
evolving requirements of the clients. Aciron kept focus on open communication
with regular meetings and status reports throughout the project. Always engaging
major client people and making sure project landmarks were met within budget
and on time.
Solution:
Aciron developed an inventory management application driven by custom

database. Application facilitates the firm’s numerous buyers, without considering
their locations, to easily track, generate, and manage reports related to firm’s
deliveries and inventory. The user boundary of the application was developed to
be user-friendly and clean, helping users for easy navigation and utilization of the
system. Any inventory delays and shortages were identified clearly, along with
extensive communication tools. The system does not need to depend on traditional
communication means, such as email and phone, etc., to manage any delays.
Benefits:
With direct access to up-dated detailed data on the firm’s inventory, the
(130) MANUFACTURING customer can make more informed decisions. The system gets rid of the incompe-
STRATEGY
tency innate in using many spreadsheets and manual processes involved in man- Global Manufacturing
Strategy
aging and tracking inventory by generating one stable, central solution. Since
completion, the system has emerged as a critical business application for its client,
increasing margins and driving productivity, while reducing costs. NOTES
15.6 Summary
• In this unit we began the discussion on globalization and global
strategies.
• We began by discussing what the nature of globalization in today’s

world is. In spite of significant increase in world trade, the majority
of the trade and investment still tends to be domestic or regional.
• There are several reasons why companies go global, including

growth, efficiency, customer requirement, knowledge, competition
and brand building
• Earlier, global companies only had a marketing presence in other

countries. Today this has extended to manufacturing, sourcing,
financing and hiring.
• There are different types of companies differing in the amount

and type of global presence including multi-domestic, multinational
and global.
• Configuring and coordinating activities in a global environment

are some key challenges for a global corporation
15.6 Key Concepts

• Domestic Companies: Domestic companies exist in one country.
The companies compete with other domestic companies in the
home country.
• International Companies: International or multi-national companies

have a presence in more than one country. They tend to be focused
on the local markets by having more custom products for the
markets served. There is co-ordination between the home office
and the companies in different countries and some sharing of
information is possible.
• Global Companies: Global companies tend to be present in

practically all countries in which demand for their product exists.
They tend to have different parts of the value chain located in
different countries, therefore co-ordination becomes much more
complex than the other types of companies

MANUFACTURING
STRATEGY 15.7 Exercise & Questions
Q1. Why companies are going global?
NOTES Q2. What are the different global strategies?
Q3. What are the obstacles which a company needs to overcome to become
a global competitors?

bookboon.com
(132) MANUFACTURING
STRATEGY
UNIT 16 Risk in Globalization
RISK IN GLOBALIZATION
Structure NOTES
16.0 Introduction
16.2 Risks of Globalization
16.2.1 Political Risk
16.2.2 Legal Risk
16.2.3 Financial Risk
16.2.4 Social and Cultural Risk
16.3 The Competitive Advantage of Nations
16.4 Summary
16.5 Key Concepts
16.0 Introduction
Configuration of Activities
• The issue in configuration is where to locate the activities, and

whether the activities should be concentrated or dispersed
• The motivation for locating an activity in a certain country or

region may to gain a comparative advantage or a competitive
advantage
• Comparative advantage comes from access to factors such as

low cost labor and raw materials
• Competitive advantage comes from environments for innovation

and productivity growth
• Configuration also involves the determination of the number of

sites, i.e., whether to concentrate activities or to disperse them
widely
• Concentration of activities may permit a company economies of

scale as well as benefits of the learning curve
• Concentrating linked activities in one country or region also makes

the coordination of these activities easier

MANUFACTURING • On the other hand activities may be dispersed for various reasons
STRATEGY
− To gain advantages of different benefits in different regions
− To minimize transportation costs

NOTES
− To hedge against risks of locating in one region or country.
• Example of Thailand floods and Japanese tsunami.
− To be able to customize for local preferences and regulations
− To facilitate learning about a certain country or regional market

condition
• The general trend in the global world is to have a greater

concentration of activities as opposed to their dispersion
• A company should ideally disperse a specific activity to obtain a

particular benefit, but not disperse other activities, e.g., the sales
and service function needs to be dispersed in all regions where
the product is sold
• Concentration of activities allow for efficiency and ease of

innovation
Coordination of Activities
• Coordination deals with sharing information across dispersed

activities and assigning responsibilities and finding synergies across
different locations
• Coordination can provide benefits such as
− Ability to respond to shifts in global conditions, e.g., exchange

rates, raw material prices
− Shared learning
− Building corporate brand and image
− Better ability to negotiate with local governments
− Ability to effectively deal with competitive threats
• Coordination benefits must be compared to the advantages of

autonomous businesses in each geographical region or country.
• Autonomy can provide benefits of allowing a company or business

to customize its activities or products based on local preferences
and regulations.
• Autonomy may be preferred when local conditions in each region

vary considerably, when the potential for scale is small, or where
not much is to be gained by information sharing
(134) MANUFACTURING
STRATEGY
• In practice corporations may choose a mix of coordination and Risk in Globalization
autonomy for various dispersed businesses depending on the
circumstances.
• The way in which coordination may be achieved are: NOTES
− Information sharing
− Using common standards
− Dividing responsibilities across regions
• One major issue in coordination is the collection and dissemination

of the information from the different locations to other locations
• It is usually the responsibility of the central office to bring about

the coordination
• Some of the factors complicating coordination are:
− Cultural and language differences
− Alignment of motivations in different regions with the overall

business

• Understand political and legal risk
• Understand social and cultural risk
• Understand the Competitive Advantage of Nations
16.2 Risks of Globalization

• While there are several benefits to globalization, as discussed,
there are also a number of risks
• Increasingly global companies are working in environments which

they do not have much detailed knowledge of, in terms of market
conditions or local politics. This adds to the uncertainty of doing
business
• Companies need to understand the risks involved, and adopt

strategies to minimize their exposure to, and negative impacts of,
these risks
• Apart from risks, a company encounters complexity when doing

business in multiple countries
• The risks a global company faces can be categorized as:
− Political risks

MANUFACTURING − Legal risks
STRATEGY
− Financial risks
− Social and Cultural risks

NOTES
16.2.1 Political Risk:
• Political risk is the threat of loss of assets, earnings potential or
managerial control as a result of political actions by the host country.
In general, the more stable a country’s government, the less po-
litical risk involved. There are three main types of political risk
impacting global businesses: ownership risk, operating risk and
transfer risk.
• Ownership political risk is the inherent risk in maintaining corpo-

rate property and the lives of host country employees. Operating
political risk is the threat of interference in day-to-day operational
tasks. Transfer political risk addresses the danger of a corpora-
tion losing the ability to transfer profits and money from the host
country back to the home country.
• Political risk begins with political stability in the country or region

in which the business is located.
• War between countries in a region or civil strife can totally change

the working environment
• As companies become larger and established, they may become

targets for attack by political factions, e.g., IBM, Coca Cola in
India in the 1970s, Nestle in 2015
• Political risks may be global or country specific
• Policy changes by local governments can take the form of

nationalization, bans, direct or indirect control of prices, etc.
16.2.2 Legal Risk:

• Companies are subject to the laws of the country in which they
operate. These laws may be changed, sometimes with retroactive
effect
• Legal risk is closely tied to political risk. If a new government

comes to power in an unstable country, old laws may be totally
changed causing a major upheaval
• Part of the legal risk comes from the loose enforcement or

interpretation of the laws existing on the books
• Corruption in the judicial system can also play a role in increasing

(136) MANUFACTURING risk
STRATEGY
16.2.3 Financial Risk: Risk in Globalization
• Financial risk is the chance that a host country will impose eco-
nomic regulations on international corporations to restrict or con-
NOTES
trol their activities. Exchange controls, tax policies and price con-
trols are all sources of financial risk in global business.
• Exchange controls are those placed on the movement of money

in and out of the country, and they are often imposed when a host
country is confronted by a deficiency of foreign currency. Tax
policies are a method by which host countries try to control inter-
national corporations by imposing a hefty tax on their business
profits. This often results in increased revenue for the host coun-
try, while having a detrimental effect on the firm. Price controls
consist of the host country’s regulation of the price of a business’
goods and services, and they may be established by setting a
maximum or minimum price, or by fixing a price range.
• A company operating a particular country or region is subject to

the regional economic swings in addition to global economic swings
• The fluctuations in the currency of the country in which the

company operates can have a significant impact on the costs and
profitability of the company
• Tax rates in different countries are subject to change which can

affect the tax obligations
• The financial situation in a particular country will depend on the

ability of the local government to manage the economy
16.2.4 Social and Cultural Risk:

• Cultural risk is just as real a threat to global business as is political
and economic risk. Cultural risk is the threat that an international
corporation will commit a business blunder, engage in poor cus-
tomer relations or fail at negotiations because of a lack of under-
standing and adaptation to the differences in culture between the
home country and the host country. Cultural risk can take the
form of national, business and corporate risk.
• National cultural risk is the threat of not doing things appropri-

ately within the socio-cultural environment of the host country.
Business cultural risk is the risk of acting inappropriately within
the business cultural environment of the host country, and corpo-
rate cultural risk is the threat of making mistakes in dealing with a
specific firm.

MANUFACTURING • In addition to political and legal uncertainties, social norms can
STRATEGY
pose problems for a company’s operations in a particular country
• Companies need to understand the local religious and ethnic

NOTES concerns
• Some of the social movements may result in political upheavals

which has other consequences
16.3 Competitive Advantages of Nations

Comparative vs. Competitive Advantages of Nations
• Comparative advantage of a nation arises from the availability of

low cost labor, abundant and cheap raw materials, land, and other
production factors or favorable exchange rates
• Competitive advantage comes from an environment that fosters

better productivity and innovation
• Comparative advantages can be matched by other companies,

and are temporary at best
• Global companies certainly need to look for low costs of inputs in

their operations, including labor, materials, etc.
• The lack of such low cost inputs can result in a disadvantage for
a global company. However, the low cost inputs themselves do
not confer a specific, long term advantage to the company
• Low cost labor, for example can be equalized by a competitor

either by locating operations in the same region, or with the use of
superior production technologies and methods
• One of the best examples of a country overcoming its inherent

disadvantages of lack of land, and practically no raw materials, is
Japan.
• Japanese companies worked the way through what would be

considered impossible conditions to challenge and overthrow world
leaders in automobiles and consumer electronics
• The use of cellular manufacturing and single piece flow was in

part influenced by the lack of space and the lack of excess capital
for storing inventory
• The use of cheaper, simpler, and general purpose machines was

also a result of lack of capital to invest in the large, special purpose
machines used by US companies at that time
• The use of general purpose machines did not necessitate a strong

need for keeping the machines utilized, which also resulted in less
(138) MANUFACTURING
STRATEGY unnecessary production and inventory.
• The competitive advantage of a nation comes from four areas Risk in Globalization
− Factor (Input) Conditions
− Context for Strategy and Rivalry

NOTES
− Demand Conditions
− Related and Supporting Industries
Factor (Input) Conditions
• We have discussed that the availability of low cost basic inputs is

a comparative advantage and not a competitive advantage
• This refers to general, non-specialized inputs
• However, the availability of specialized skills, innovative

governance and legal systems, availability of specific technology,
etc. can help improve the productivity of a company
• Usually companies tend to be concentrated in areas where such

specialized inputs are available
• Examples of such specialized inputs can be the US where there

are highly trained computer science and programming
professionals, exceptional research programs, transparent and
clear laws concerning software licensing and the availability of
venture capital for funding new ventures. This is the reason for
the development of Silicon Valley
• Specialized factors as mentioned above are not inherited by a

country, but rather, need to be developed
Context for Strategy and Rivalry
• Companies can focus on the productivity of their operations if

there is stability in the overall operating environment
• This includes tax laws, the overall political system, macroeconomic

factors, intellectual property laws, etc.
• The presence of these factors encourages a company to invest in

the country as the degree of uncertainty and risk is reduced
• The presence of strong local rivals fosters a climate for continuous

improvement in performance for a company
• A company that has competed with a strong rival in its home

country develops the capability to take on the competition when it
ventures overseas
• Japanese automakers in Japan had intense rivalry, which forced

them to develop strong systems and innovative designs and
methods which they have used to their advantage globally
MANUFACTURING Demand Conditions
STRATEGY
• The presence of sophisticated and demanding local customers in
a country or a region forces a company to meet high standards of
NOTES products and services
• Demanding customers may have specific requirements which

necessitates the development of new and innovative products.
This helps the company develop products that may be sold in
other parts of the world as well
• Local customers can also provide useful feedback which can be

used to fine-tune products
• In addition to the presence of demanding customers, the

governmental policies in the areas of safety, environment etc.
also affect the development of products and processes
• For example, California has stricter emission standards for vehicles

which has been an incentive for the development of electrical
vehicles. Also the fuel mileage requirements set by the US
government has helped significantly raise the fuel efficiency of
cars and vehicles
Related and Supporting Industries
• The presence of specialized suppliers is a major asset to a

company that is located in a particular region
• Although access to these suppliers can be from anywhere in the

world, however, proximity helps drive efficiency, knowledge, and
innovation
• It is much easier dealing with local suppliers than with those in

another country due to distance, lack of cultural and language
barriers, and the lack of uncertainty of exchange rate fluctuations
• Proximity to a capable supplier facilitates joint problem solving
• Such suppliers may also be involved in the development of new

products. Specialized knowledge by the supplier in a particular
technology can be leveraged to great advantage by a company
16.4 Summary
• In this unit we discussed Configuration and Coordination of
activities for international and global companies.
• Configuration requires the determination of how many sites will

be needed and where they will be located. Concentration of the
sites is another issue to be determined.
(140) MANUFACTURING
STRATEGY
• Coordination deals with the exchange of information across Risk in Globalization
dispersed locations and can assist a company’s learning.
• Decision regarding the amount of coordination or autonomy

depends on how different are the requirements in each region or NOTES
zone.
• We also discussed the various risks that global companies face

including political risk, legal risk, financial risk, and social and
cultural risk. Companies need to consider the risks before they
invest in a region.
• We discussed the comparative and competitive advantage of

nations
• Comparative advantages include cheap and abundant availability

of general labor, raw materials, land, etc. Lack of comparative
advantages is a disadvantage, but they are no advantages of
themselves.
• Competitive advantage comes from the availability of specialized

skills or suppliers that help improve the productivity and speed up
innovation.
16.5 Key Concepts

• Configuration of Activities: The issue in configuration is where to
locate the activities, and whether the activities should be
concentrated or dispersed. The motivation for locating an activity
in a certain country or region may to gain a comparative advantage
or a competitive advantage Risks of a Global Company: Political
risks ,Legal risks ,Financial risks ,Social and Cultural risks
16.6 Excersice & Questions

Q1. Discuss configuration and Coordination of activities.
Q2.What are the risks involved with a global company?
Q3.What are the financial and cultural risks involved in global

company?

Publication.


MANUFACTURING
STRATEGY
NOTES
(142) MANUFACTURING
STRATEGY
NOTES

MMG 301 Final March18

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MMG 301 Final March18

Uploaded by

Copyright:

Available Formats

Yashwantrao MMG 301

MBA : SECOND YEAR

Prof. Vinay. K. Nangia

Instructional Technology Editing & Programme Co-ordinator

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

I am very pleased in placing the first edition of this study material on

- Dr. Gunjan Soni

UNIT 15 : Global companies, global strategy, domestic or multi-domestic, international or multi-national

1.0.1 Need for Business Strategy

1.1 Unit Objectives

1.2 Business Strategy and Other Strategies

1.2.1 Government strategy or industrial strategy

1.2.2 Corporate strategy

1.2.3 Business strategy

1.2.4 Functional strategy

1.2.5 Facilities Strategy

1.4 Key concepts

1.5 Exercise & Questions

1.6 Further Readings and References

MANUFACTURING STRATEGY (9)

Business Strategy Definitions- In 1980 Michael Porter defined strategy

- Henry Ford had a strategy of providing low cost automobiles for

- General Motors provided a variety of automobiles including high-

- McDonald’s focus is on the busy businessman, college student

- A fine dining restaurant focuses on the ambience, service, and

- Nokia, Motorola, etc. focus on low prices. The target population

1.0.1 Need for Business Strategy

- To articulate an approach to the business

- To specify how to prioritize alternatives and options

- To determine a way to allocate scarce business resources

- To help in making decisions that have a long term impact

- To help deal with competition

• Articulate Business Approach

- Customers identify with the company image

- Employees and managers need to make decisions on a daily basis

- Some guiding principle or policy helps people determine what is in

- People also get a sense of stability and purpose

• Allocate Business Resources

- Most business resources are scarce, including land, capital, people,

- There has to be a rule/method of how scarce resources should be

• Decisions with Long Term Impact

- Certain decisions taken by a company have long term implications

- Examples are where to locate plants

- Other examples could be the kind of markets to serve

- Such decisions cannot be easily changed. There is a significant

• Deal With Competition

- A company’s position vis a vis the competition depends on its overall

• Decisions Regarding Strategy

- Tend to be long term in nature – typically 10 years and more in the

- Usually reflect the overall vision of top management who have to

- Plans, policies, goals, tactics, etc. are dependent on the strategy

NOTES • Know the needs of Business strategy

• Understand type of Business strategy

1.2 Business Strategy and Other Strategies

• Certain industry sectors may be preferred at different points in

1.2.2 Corporate Strategy

• Typical corporations may be in several different businesses and

1.2.3 Business Strategy

• Generally the strategies are developed independently by the

• The business strategy defines the overall approach to conducting

1.2.4 Functional Strategy

• Typical functional strategies are developed independently by the

• Common functional areas are Marketing, Manufacturing,