Chapter 2

Operations Strategies in a Global Economy

Overview

Introduction Todays Global Business Conditions Operations Strategy Forming Operations Strategies Wrap-Up: What World-Class Producers Do

Introduction

Operational effectiveness is the ability to perform similar operations activities better than competitors. It is very difficult for a company to compete successfully in the long run based just on operational effectiveness. A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage. An effective competitive strategy is critical.

Factors Affecting Todays Global Business Conditions

Reality of global competition Quality, customer service, and cost challenges Rapid expansion of advanced technologies Continued growth of the service sector Scarcity of operations resources Social responsibility issues

Reality of Global Competition

Changing nature of world business International companies Strategic alliances and production sharing Fluctuation of international financial conditions

Changing Nature of World Business

The US gross domestic product (GDP) is, at $10 trillion, the largest in the world. Companies all over the globe are aggressively exporting their products/services to the US Many US companies are targeting foreign markets to shore up profits. The global economy that interconnects the economies of all nations has been termed the global village. One of the most important new markets is China.
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International Companies

International companies are those whose scope of operations spans the globe as they buy, produce, and sell. International firms search out opportunities for profits relatively unencumbered by national boundaries. Operations managers must coordinate geopraphically dispersed operations.

International Companies

Worlds Largest Corporations 1. General Motors US 2. Wal-Mart Stores US 3. Exxon Mobil US 4. Ford Motor US 5. DaimlerChrysler Germany 6. Mitsui Japan 7. Mitsubishi Japan 8. Toyota Japan 9. General Electric US 10. Itochu Japan
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Strategic Alliances

Strategic alliances are joint ventures among international companies to exploit global business opportunities. Alliances are often motivated by Product or production technology Market access Production capability Pooling of capital

Strategic Alliances
General Motors (US) & Kia Motor Corp. (S.K.) Renault (France) & City of Moscow Sino Aerospace Investment Corp. (Taiwan) & Swearingen Aircraft (US) Kia might help sell and market GM cars in South Korea Manufacture 100,000 vehicles annually near Moscow Forming Texas-based Sino Swearingen Aircraft Co.
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Strategic Alliances

Japanese companies have long practiced keiretsu, the linking of companies into industrial groups. A financial keiretsu links companies together with cross-holding of shares, sales and purchases within the group, and consultation. A production keiretsu is a web of interlocking relationships between a big manufacturer (Toyota) and its suppliers.

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Production Sharing

Production sharing means that a product might be designed and financed in one country, its materials produced in other countries, assembled in another country, and sold in yet other countries. The country that is the highest-quality, lowest-cost producer for a particular activity would perform that portion of the production of the product.

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Pros and Cons of Globalization

Pros (Pluses) Productivity grows more quickly (living standards can go up faster) Global competition and cheap imports keep a lid on prices (inflation less likely to derail economic growth) Open economy spurs innovation (with fresh ideas from abroad) Export jobs often pay more than other jobs US has more access to foreign investment (keeps interest rates low)

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Pros and Cons of Globalization

Cons (Minuses) Millions of Americans have lost jobs due to imports or production shifts abroad Most displaced workers find new jobs that pay less Workers face pay-cuts demands from employers Service and white-collar jobs are increasingly vulnerable US employees lose their comparative advantage when companies build advanced factories abroad

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International Financial Conditions

International financial conditions are complex due to: inflation fluctuating currency exchange rates turbulent interest rates volatility of international stock markets huge national debts of some countries enormous trade imbalances between countries

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International Financial Conditions

The Dollar Versus the Yen and the Mark Year 1975 1980 1985 1990 1995 2000 Yen per Dollar 305 215 210 135 85 108 Mark per Dollar 2.7 2.0 2.4 1.6 1.4 2.2

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International Financial Conditions

Example of Currency Exchange Rate Changes A product produced and sold in the US for $1 would have sold in Japan for 135 yen in 1990 and 85 yen in 1995, a price decrease of 37%. A product produced and sold in Japan for 135 yen in 1990 and sold for $1 in the US would have sold in the US for $1.57 in 1995, a 57% price increase.

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International Financial Conditions

Due, in part, to the fall in the value of the dollar between 1975 and 1995, the following occurred: Prices of US products/services abroad fell and demand increased Japan and other countries built factories in US Japanese manufacturers moved upscale toward higher priced products

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International Financial Conditions

Companies must be ready to move quickly to shift strategies as world financial conditions change. Opportunities are usually available to reduce risk Building smaller, more flexible factories Using foreign suppliers for materials, parts, or products Carefully planning and forecasting so that changing conditions can be anticipated

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Quality, Service, and Cost Challenges

Quality The goal of adequate quality must be replaced with the objective of perfect product and service quality. The entire corporate culture must be redirected and committed to the ideal of perfect quality. All employees must be empowered to act. A commitment to continuous improvement has to be organization-wide.

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Quality, Service, and Cost Challenges

Customer Service Companies must quickly develop innovative products and respond quickly to customers needs. Organizational structures must be made more horizontal to quickly accommodate change. Multidisciplined teams must have decision-making authority, responding better to the marketplace. Large, unwieldy companies are spinning off whole business units making them autonomous businesses that can compete with small, aggressive competitors.

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Quality, Service, and Cost Challenges

Cost There is continuing pressure to reduce direct costs (of producing and selling) and overhead costs. It cost the US automakers $1,500 more per auto for labor in 1980 than it cost the Japanese automakers. By the 1990s the difference was almost zero. Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market, giving the retailers the leverage to force their suppliers to streamline operations and reduce costs/prices.

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Quality, Service, and Cost Challenges

Cost Cost-cutting measures being used include: Moving production to low-labor-cost countries Negotiating lower labor rates with unions and workers Automating processes to reduce the amount of labor needed, particularly processes that are labor intensive.

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Advanced Technologies

The use of automation is one of the most far-reaching developments to affect manufacturing and services in the past century. The initial cost of these assets is high. The benefits go far beyond a reduction in labor costs. Increased product/service quality Reduced scrap and material costs Faster responses to customer needs Faster introduction of new products and services

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Advanced Technologies

US companies cannot use automated production technology as a long-term competitive advantage. Automation systems are available to any company in the world today, although the price is prohibitive for some companies. Not investing, or delaying investing in this technology could be disastrous for a company.

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Continued Growth of Service Sector

A robust service sector helps support the manufacturing sector. There is much opportunity for quality improvement in US service firms. Many operations managers are being employed in services. Planning, analyzing, and controlling approaches from manufacturing are being adapted to service systems. The US service sector, like the manufacturing sector, must streamline and improve operations if it is to survive.
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Scarcity of Operations Resources

Raw materials like titanium, nickel, coal, natural gas, water, and petroleum products are periodically unavailable or in short supply. A shortage of any necessary input to a conversion subsystem, including skilled personnel, can be a challenge for an operations manager. An important issue in the formation of business strategy is how to allocate scarce resources among business opportunities.

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Social-Responsibility Issues

Corporate attitudes are evolving from doing what companies have a legal right to do, to doing what is right. Factors influencing this evolution include: Consumer attitude -- Consumers are expressing their likes/dislikes by such means as stockholder meetings, liability suits, and buying preferences. Regulation The EPA, OSHA, Clean Air Act, and Family Leave Act place constraints on businesses. Self-interests -- Companies realize that profits will be greater if they act responsibly.

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Social-Responsibility Issues

Environmental Impact Product-Safety Impact Employee Impact

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Social-Responsibility Issues

Environmental Impact Concerns about the global environment include: Landfill waste reduction Recycling Energy conservation Chemical spills Acid rain Radioactive waste disposal and more

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Social-Responsibility Issues

Environmental Impact There is a need for standardizing government regulations of the environment. Otherwise, companies will gravitate to the lessregulated countries. The International Organization for Standardization has developed a set of environmental guidelines called ISO 14000.

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Social-Responsibility Issues

Product-Safety Impact Harm to people or animals that results from poor product design can: Damage a companys reputation Require a large expense to remedy Cause governments to impose more regulations

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Social-Responsibility Issues

Employee Impact Employee benefits and policies include: Safety and health programs Fair hiring and promotion practices Day-care Family leave Health care Retirement benefits Educational assistance and more

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Social-Responsibility Issues

Employee Impact Employee benefits and policies impact long-term profitability due to their effect on: Employee morale and productivity Recruitment and retention of employees Demand for a companys products Cost of defending against lawsuits and boycotts

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Developing Operations Strategy

Assessment of Global Business Conditions Corporate Mission Business Strategy Product/Service Plans Competitive Priorities Operations Strategy
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Distinctive Competencies or Weaknesses

Corporate Mission

A corporate mission is a set of long-range goals and including statements about: the kind of business the company wants to be in who its customers are its basic beliefs about business its goals of survival, growth, and profitability

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Business Strategy

Business strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission. Inputs to the business strategy are Assessment of global business conditions - social, economic, political, technological, competitive Distinctive competencies or weaknesses - workers, sales force, R&D, technology, management

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Competitive Priorities

Low Production Costs Definition Unit cost (labor, material, and overhead) of each product/service Some Ways of Creating Redesign of product/service New technology Increase in production rates Reduction of scrap/waste Reduction of inventory

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Competitive Priorities

Delivery Performance Definition a) Fast delivery b) On-time delivery Some Ways of Creating a) larger finished-goods inventory a) faster production rates a) quicker shipping methods b) more-realistic promises b) better control of production of orders b) better information systems

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Competitive Priorities

High-Quality Products/Services Definition Customers perception of degree of excellence exhibited by products/services Some Ways of Creating Improve product/services Appearance Performance and function Wear, endurance ability After-sales service

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Competitive Priorities

Customer Service and Flexibility Definition Ability to quickly change production to other products/services. Customer responsiveness. Some Ways of Creating Change in type of processes used Use of advanced technologies Reduction in WIP through lean manufacturing Increase in capacity

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Operations Strategy

Operations strategy is a long-range game plan for the production of a companys products/services, and provides a road map for the production function in helping to achieve the business strategy.

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Elements of Operations Strategy

Positioning the production system Product/service plans (Chapter 4) Outsourcing plans (Chapter 11) Process and technology plans (Chapters 4 & 6) Strategic allocation of resources (Chapter 8) Facility plans: capacity, location, and layout (Chapter 5)

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Positioning the Production System

Select the type of product design Standard Custom Select the type of production processing system Product focused Process focused Select the type of finished-goods inventory policy Produce-to-stock Produce-to-order

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Product/Service Plans
As a product is designed, all the detailed characteristics of the product are established.

Each product characteristic directly affects how the product can be made. How the product is made determines the design of the production system.
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Stages in a Products Life Cycle

Introduction- Sales begin, production and marketing are developing, profits are negative. Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin. Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak. Decline - declining sales and profit; product might be dropped or replaced.
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Stages of a Products Life Cycle

Automobile Dot-Matrix Fax Machine Printer Cell Phone Video Recorder Internet Radio

Color Copier

CD Player

B&W TV

Introduction

Growth

Maturity

Decline

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Outsourcing Plans

Outsourcing refers to hiring out or subcontracting some of the work that a company needs to do. This strategy is being used more and more as companies strive to operate more efficiently. Outsourcing has many advantages and disadvantages. Companies try to determine the best level of outsourcing to achieve their operations & business goals. More outsourcing requires a company to have less equipment, fewer employees, and a smaller facility.
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Outsourcing Plans

A company might outsource any of the following manufacturing related functions: Designing the product Purchasing the basic raw materials Processing the subcomponents, subassemblies, major assemblies, and finished product Distributing the product

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Outsourcing Plans

Many companies even outsource some service functions such as: Payroll Billing Order processing Developing/maintaining a website Employee recruitment Facility maintenance

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Process and Technology Plans

An essential part of operations strategy is the determination of how products/services will be produced. The range of technologies available to produce products/services is great and is continually changing.

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Strategic Allocation of Resources

For most companies, the vast majority of the firms resources are used in production/operations. Some or all of these resources are limited. The resources must be allocated to products, services, projects, or profit opportunities in ways that maximize the achievement of the operations objectives.

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Facility Plans

How to provide the long-range capacity to produce the firms products/services is a critical strategic decision. The location of a new facility may need to be decided. The internal arrangement (layout) of workers, equipment, and functional areas within a facility affects the ability to provide the desired volume, quality, and cost of products/services.

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Characteristics of Services and Manufactured Products

Output Output Inventoried Customer Contact Lead Time Intensity Quality Services Intangible Yes Extensive Short Labor Subjective Products Tangible No Little Long Capital Objective

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Competitive Priorities for Services

The competitive priorities listed earlier for manufacturers apply to service firms as well Low production costs Fast and on-time delivery High-quality products/services Customer service and flexibility Providing all the priorities simultaneously to customers is seldom possible.

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Positioning Strategies for Services

Type of Service Design Standard or custom products Amount of customer contact Mix of physical goods and intangible services Type of Production Process Quasi manufacturing Customer-as-participant Customer-as-product

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Positioning Strategies for Services

Example: McDonalds Highly standardized service design Low amount of customer contact Physical goods dominating intangible services Quasi-manufacturing approach to back-room production process

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Forming Operations Strategies

Support the product plans and competitive priorities defined in the business strategy. Adjust to the evolving positioning strategies. Link to the marketing strategies. Look at alternative operations strategies.

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Evolution of Positioning Strategies

The characteristics of production systems tend to evolve as products move through their product life cycles. Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature. The capital and production technology required to support these changes must be provided.

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Evolution of Positioning Strategies

Life Stage Product Volume Focus Fin.Gds. Batch Size Intro. Custom Very Low Process Early Growth Slightly Standard Low Process Late Growth Standard High Product Maturity Highly Standard Very High Product

To-Order To-Order To-Stock To-Stock Very Small Small Large Very Large
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Linking Operations and Marketing Strategies

Operations Strategy Product-focused Make-to-stock Standardized products High volume Marketing Strategy Low production cost Fast delivery of products Quality Example: TV sets

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Linking Operations and Marketing Strategies

Operations Strategy Product-focused Make-to-order Standardized products Low volume Marketing Strategy Low production cost Keeping delivery promises Quality Example: School buses

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Linking Operations and Marketing Strategies

Operations Strategy Process-focused Make-to-stock Custom products High volume Marketing Strategy Flexibility Quality Fast delivery of products Example: Medical instruments

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Linking Operations and Marketing Strategies

Operations Strategy Process-focused Make-to-order Custom products Low volume Marketing Strategy Keeping delivery promises Quality Flexibility Example: Large supercomputers

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No Single Best Strategy

Start-up and Small Manufacturers Usually prefer positioning strategies with: Custom products Process-focused production Produce-to-order policies These systems are more flexible and require less capital.

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No Single Best Strategy

Start-up and Small Services Successfully compete with large corporations by: Carving out a specialty niche Emphasizing close, personal customer service Developing a loyal customer base

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No Single Best Strategy

Technology-Intensive Business Production systems must be capable of producing new products and services in high volume soon after introduction Such companies must have two key strengths: Highly capable technical people Sufficient capital

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Wrap-Up: World-Class Practice

Put customers first Get new products/services to market faster Are high quality producers Have high labor productivity & low production costs Carry little excess inventory . . . more

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Wrap-Up: World-Class Practice

Think more globally in purchasing and selling Quickly adopt and develop new technologies Trim organizations to be lean and flexible Are less resistant to strategic alliances/joint ventures Consider relevant social issues when setting strategies

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