Chapter 2

Competitiveness, Strategy, and

Productivity

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
 A Cold Hard Fact
Better quality, higher productivity, lower costs, and the
ability to respond quickly to customer needs are more
important than ever and…
the bar is getting higher

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 Competitiveness

• Competitiveness:
– How effectively an organization meets the wants and needs
of customers relative to others that offer similar goods or
services
– Organizations compete through some combination of their
marketing and operations functions
• What do customers want?
• How can these customer needs best be satisfied?

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Marketing and Competitiveness
• Identifying consumer wants and/or needs
• Pricing and quality
• Advertising and promotion

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 Operations and Competitiveness
1. Product and service design
2. Cost
3. Location
4. Quality
5. Quick response
6. Flexibility
7. Inventory management
8. Supply chain management
9. Service
10. Managers and workers
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 Why Some Organizations Fail
• Neglecting operations strategy
• Failing to take advantage of strengths and opportunities
• Failing to recognize competitive threats
• Too much emphasis in product and service design and not
enough on improvement
• Neglecting investments in capital and human resources
• Failing to establish good internal communications and
cooperation
• Failing to consider customer wants and needs

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Hierarchical Planning

Missio
n
Goals

Organizational
Strategies
Functional
Strategies
Tactics

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 Mission

• Mission
– The reason for an organization’s existence
• Mission statement
– States the purpose of the organization
– The mission statement should answer the question
of “What business are we in?”

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 McDonald’s Mission Statement
• McDonald's brand mission is to "be our customers' favorite
place and way to eat." Our worldwide operations have been
aligned around a global strategy called the Plan to Win
centering on the five basics of an exceptional customer
experience -- People, Products, Place, Price and Promotion.
We are committed to improving our operations and enhancing
our customers' experience.
– http://www.mcdonalds.com/corp/about/mcd_faq/student_research.html

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 Goals
• The mission statement serves as the basis for organizational
goals
• Goals
– Provide more detail and describe the scope of the mission
– Goals can be viewed as organizational destinations
– Goals serve as the basis for the development of
organizational strategies

The mission and goals often relate to how an organization wants

to be perceived by the general public, and by its employees,
suppliers, and customers

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 Strategies
• Strategy
– A plan for achieving organizational goals
• Serves as a roadmap for reaching the organizational
destinations
– Organizations have
• Organizational strategies
– Overall strategies that relate to the entire organization
– Support the achievement of organizational goals and
mission
• Functional level strategies
– Strategies that relate to each of the functional areas and
that support achievement of the organizational strategy

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 Tactics and Operations
• Tactics
– The methods and actions taken to accomplish
strategies.
– They are more specific than strategies and provide
guidance and direction for carrying out actual
operations.
– The “how to” part of the process, how to reach the
destination, following the strategy roadmap.
• Operations
– The actual “doing” part of the process

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 Hierarchical Planning
The reason for
existence of Mission
an
organization
Organizational goals

Organizational strategies

The methods Functional goals

and actions
taken to Finance
accomplish Marketing Operations
strategies strategies
strategies strategies

Tactics Tactics Tactics

Finance Marketing Operations

operations operations operations 2-13
 Different Strategies
Low Cost Outsource operation to third world countries
Use capital intensive methods to achieve high o/p with
Scale-based
low cost
Specialization Focus on narrow product lines to achieve higher quality
Newness Focus on innovation to create new products
Flexibility Focus on quick response to customer or customization
High quality Focus on achieving higher quality than competitors
Service Focus on various aspects of service
Focus on environmental-friendly and energy-efficient
Sustainability
operations

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 Strategy Formulation
• Effective strategy formulation requires taking into
account:
– Core competencies
– Environmental scanning
• SWOT
• Successful strategy formulation also requires taking
into account:
– Order qualifiers
– Order winners

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 Core Competencies
• Core Competencies
The special attributes or abilities that give an organization a
competitive edge.
- The most effective organizations use an approach that develops
core competencies based on both customer needs and what the
competition is doing.
- Marketing and Operations work closely to match customer
needs with operations capabilities.
- To be effective core competencies and strategies need to be
aligned.

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 Environmental Scanning
• Environmental Scanning is the monitoring of events and trends
that present threats or opportunities for a company and it is
necessary to identify:
– Internal Factors
• Typically evaluated by operations
• Strengths and Weaknesses
– External Factors
• Typically evaluated by marketing
• Opportunities and Threats
SWOT is the analysis of strengths, weaknesses, opportunities
and threats.
SWOT is often regarded as the link between
organization strategy and Operations Strategy 2-17
 Key External Factors
⮚Economic conditions: inflation and deflation, interest rate, tax laws and
tariff
⮚Political conditions: political stability or instability, and wars
⮚Legal environment: government regulations, trade restrictions, minimum
wage laws, labor laws, and patents.
⮚Technology: rate at which product innovations are occurring, current and
future process technology (equipment), and design technology.
⮚Competition: The number and strength of competitor, and the ease of market
entry.
⮚Markets: size, location, and brand loyalties, potential for growth, long-term
stability, and demographics.

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 Key Internal Factors
⮚Human Resources: skills and abilities of managers and workers, special
talents, loyalty to the organization, expertise, and dedication.
⮚Facilities and equipment: Capacity, location, and cost to maintain or
replace can have a significant impact on operations.
⮚Financial resources: cash flow, access to additional funding, and cost of
capital are important considerations.
⮚Customers: Loyalty, existing relationships and understanding of wants
and needs are important.
⮚Products and services: existing products and services, and the potential
for new products and services.
⮚Technology: existing technology, the ability to integrate new technology,
and the probable impact of technology on current and future operations.
⮚Suppliers: supplier relationships, dependability of suppliers, quality, and
flexibility.
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 Strategy Formulation
• Order qualifiers
– Characteristics that customers perceive as minimum
standards of acceptability to be considered as a potential
purchase.
– However, that may not be sufficient to get a potential
customer to purchase from the organization.
• Order winners
– Characteristics of an organization’s goods or services that
cause it to be perceived as better than the competition.

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 Order winners and Order qualifiers
⮚ Characteristics such as price, delivery reliability, delivery
speed, and quality can be order qualifiers or order winners.
⮚ Quality can be an order winner in some situations, but in
others only an order qualifier.
⮚ Over time, a characteristic that was once an order winner
may become an order qualifier.
⮚ It is important to decide on the relative importance of each
characteristic so that appropriate attention can be given to
the various characteristics .
⮚ Marketing must make the determination and communicate it
to operations.

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 Operations Strategy
• Operations strategy
– The approach, consistent with organization strategy, that is
used to guide the operations function.
– In order for operations strategy to be truly effective, it is
important to link it to organization strategy; that is, the two
should not be formulated independently.
– Operations strategy must be consistent with the overall
strategy of the organization, and with other functional units
of the organization.
– Operations strategy can have a major influence on the
competitiveness of an organization. If it is well designed
and well executed, there is a good chance that the
organization will be successful.
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 Quality-Based Strategies
• Quality-based strategy
– Strategy that focuses on maintaining or improving the quality of
an organization’s products or services.
– Quality is a factor in both attracting and retaining customers.
• Pursuit of such a strategy is rooted in a number of factors:
– Trying to overcome a poor quality reputation
– Desire to catch up with competition
– Desire to maintain an existing image of high quality

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 Time-Based Strategies
• Time-based strategies
– Strategies that focus on the reduction of time needed to
accomplish tasks
• It is believed that by reducing time, costs are lower, quality is
higher, productivity is higher, time-to-market is faster, and
customer service is improved

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 Time-Based Strategies
• Areas where organizations have achieved time reductions:
– Planning time: The time needed to react to a competitive threat, to
develop strategies and select tactics, to approve proposed changes to
facilities, to adopt new technologies.
– Product/service design time: The time needed to develop
strategies and market new or redesigned products or services.
– Processing time: the time needed to produce goods or provide
services.
– Changeover time: the time needed to change from producing one
type of product or service to another.
– Delivery time: the time needed to fill orders.
– Response time for complaints: These might be customer
complaints about quality, timing of deliveries. Also employee
complaints about working conditions.
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 Agile Operations
▪ A strategic approach for competitive advantage that
emphasizes the use of flexibility to adapt and prosper in an
environment of change.
▪ Involves the blending of several core competencies:
– Cost
– Quality
– Reliability
– Flexibility
▪ Successful agile operations require careful planning to
achieve a system that includes people, flexible equipment,
and information technology.

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 Implications of Organization Strategy
for Operations Management
• Organization strategy has a major impact on operations and
supply chain management strategies.
• Organizations that use a low-cost, high volume strategy limit the
amount of variety offered to customers. As a result, variations for
operations and the supply chain are minimal.
• Conversely, a strategy to offer a wide variety of products or
services, or to perform customized work, creates substantial
operational and supply chain variations and hence, more
challenges in achieving a smooth flow of goods and services
throughout the supply chain, thus making matching of supply to
demand more difficult.

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 Implications of Organization Strategy
for Operations Management
Organization Strategy Implications for Operations Management

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 Transforming Strategy into Action:
The Balanced Scorecard
• The balanced scorecard (BSC) is a top-down management
system that organizations can use to clarify their vision and
strategy and transform them into action.
• It was introduced in the early 1990s by Robert Kaplan and
David Norton and it has been revised and improved since
then.
• The idea was to move away from a purely financial
perspective of the organization and integrate other
perspectives such as customers, internal business processes,
and learning and growth.

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 The Balanced Scorecard
• Using this approach, managers develop objectives, metrics,
and targets for each objective and initiatives to achieve
objectives, and they identify links among the various
perspectives.
• Results are monitored and used to improve strategic
performance results.

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 The Balanced Scorecard
• Using this approach, managers develop objectives, metrics,
and targets for each objective and initiatives to achieve
objectives, and they identify links among the various
perspectives.
• Results are monitored and used to improve strategic
performance results.
• BSC helps focus managers’ attention on strategic issues and
the implementation of strategy.
• It has no role in strategy formulation.

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The Balanced Scorecard

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 Productivity
• Productivity
– A measure of the effective use of resources, usually
expressed as the ratio of output to input.

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 Why Productivity Matters
• Important for all organizations, particularly for organizations that
use a strategy of low-cost, because the higher the productivity,
the lower the cost of the output.
• In business organizations, productivity ratios are used for
planning workforce requirements, scheduling equipment, and
financial analysis.
• For non-profit organizations, higher productivity means lower
cost; for profit organization, productivity is an important factor in
determining how competitive a company is.
• For a nation, the rate of productivity growth is of great
importance.

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Computing Productivity

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 Partial Productivity Measures
Labor Productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour
Machine Productivity Units of output per machine hour
machine hour

Capital Productivity Units of output per dollar input

Dollar value of output per dollar input

Energy Productivity Units of output per kilowatt-hour

Dollar value of output per kilowatt-hour

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 Productivity Example

A company has asked you to evaluate the firm’s

productivity by comparing this year’s performance
with last year’s. The following data are available:

____________ _ Last Year This Year

OUTPUT 10 500 units 12 100 units
Labor Hours 12 000 13 200
Utilities 7 600 $ 8 250 $
Capital 83 000 $ 88 000 $

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 Partial Productivity Example

Resource Last Year This Year Growth Percent growth

Labor 10500 units/12000 hrs 12100 units/13200hrs 0.92 – 0.88 0.04 units/hr/0.88units/hr
= 0.88 units/hr = 0.92 units/hr = 0.04 units/hr = 0.048 = 4.8 %

Utilities 10500units/7600 $ 12100units/8250 $ 1.47-1.38 0.09units/MU/ 1.38units/ $

= 1.38 units/ $ = 1.47 units/ $ = 0.09 units/ $ = 0.06 = 6.2 %

Capital 10500units/83000 $ 12100units/88000 $ 0.14 – 0.01 0.01units/MU-0.13units/ $

= 0.13 units/ $ = 0.14 units/ $ = 0.01 units/ $ = 0.078 = 7.8%

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Partial Productivity Example 2

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 Partial Productivity Example 3

Bluegill Furniture has hired 2 new workers to paint chairs.

Together they have painted 10 chairs in 4 hours. What is
labor productivity for the pair?

Labor productivity = output/labor

= (10 chairs)/(2 x 4 hr)

= (10 chairs)/(8 hr) or 1.25 chairs/hr

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 Multifactor Productivity Example
Bluegill Furniture averages 35 chairs/day. Labor costs average
$480 per day, material costs are typically $200 per day, and
overhead cost is $250 per day. Bluegill sells the chairs to a
retailer for $70/unit. Find multifactor productivity.

Multifactor productivity =
(value of output)/(labor + material + overhead costs)
= ($70/chair x 35 chairs)/(480+200+250)
= ($2450)/($930) or 2.63

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Multifactor Productivity Example 2

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Multifactor Productivity Example 3

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Multifactor Productivity Example 4

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 Service Sector Productivity
• Service sector productivity is difficult to measure and manage
because
– It involves intellectual activities
– It has a high degree of variability
• A useful measure related to productivity is process yield
• In product: Process yield is defined as the ratio of output of
good products (defective products are not included) to the
quantity of raw material input.
• In Service: process yield measurement is often dependent on
the particular process.

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 Process Yield Examples
• In a car rental agency, a measure of yield is the ratio
of cars rented to cars available for a given day.

• In education, a measure for college admission yield

is the ratio of student acceptances to the total number
of students approved for admission.

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Factors Affecting Productivity

Methods

Capital Quality

Technology Management

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Other Factors Affecting Productivity
• Standardization
• Quality Differences
• Use of Internet
• Computer viruses
• Searching for lost or misplaced items
• Scrap rates
• New workers
• Safety
• Shortage of IT workers
• Layoffs
• Labor turnover
• Design of the workspace
• Incentive plans that reward productivity 2-48
 Improving Productivity
1. Develop productivity measures for all operations
2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements
4. Establish reasonable goals
5. Make it clear that management supports and encourages
productivity improvement
6. Measure and publicize improvements
Don’t confuse productivity with efficiency
• Efficiency is a narrower concept that pertains to getting the most out of a
fixed set of resources.
• Productivity is a broader concept that pertains to effective use of overall
resources.
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