Operations Management

Chapter 2 –
Competitiveness,
Operations Strategy and
productivity
© 2006
© 2006 Prentice
Prentice Hall, Inc. Hall, Inc. 2–1
 Outline

• Competitiveness,
• mission and strategy,
• operations strategy,
• implication of organizations strategy for
operations management,
• transforming strategy into action (balanced
score card),
• productivity,
• productivity measurement,
• productivity variables,
• productivity and the service sectot
© 2006 Prentice Hall, Inc. 2–2
 Competitiveness

 Competitiveness How effectively an

organization meets the wants and needs of
customers relative to others that offer similar
goods or services.

© 2006 Prentice Hall, Inc. 2–3

 Competitive priorities and capabilities

• Competitive priorities are the critical operational dimensions a process

or supply chain must possess to satisfy internal or external customers,
both now and in the future.

• They must be present to maintain or build market share or to allow other

internal processes to be successful. Not all competitive priorities are
critical for a given process; management selects those that are most
important.

• Competitive capabilities are the cost, quality, time, and flexibility

dimensions that a process or supply chain actually possess.

© 2006 Prentice Hall, Inc. 2–4

 How to actualize Competitive priorities
and capabilities in operations
process?

© 2006 Prentice Hall, Inc. 2–5

 Dimension Definition Process consideration
Cost
1 low cost Delivering a service or a Efficient, using rigorous
operation product at the lowest process analysis that
possible cost to the addresses workforce,
satisfaction of external or methods, scrap or rework,
internal customers of the overhead, and other
process or supply chain factors, such as
investments in new
automated facilities or
technologies to lower the
cost per unit of the service
or product

© 2006 Prentice Hall, Inc. 2–6

 Contd..
Quality
Top Delivering an • To deliver top quality, a service
quality outstanding service process may require a high level
or product of customer contact, and high
levels of helpfulness, courtesy,
and availability of servers.
• It may require superior product
features, close tolerances, and
greater durability from a
manufacturing process.
Consist Producing services Processes must be designed and
ent or products that monitored to reduce errors, prevent
quality meet design defects, and achieve similar
specifications on a outcomes over time, regardless of
© 2006 Prentice Hall, Inc.
consistent basis the “level” of quality. 2–7
 Time
Delivery Quickly filling Design processes to reduce lead time (elapsed time between
speed a customer’s the receipt of a customer order and filling it) through keeping
order backup capacity cushions, storing inventory, and using
premier transportation options.

On time Meeting Along with processes that reduce lead time, planning
delivery delivery-time processes (forecasting, appointments, order promising,
promises scheduling, and capacity planning) are used to increase
percent of customer orders shipped when promised (95% is
often a typical goal).

Develop Quickly Processes aim to achieve cross-functional integration and

ment introducing a involvement of critical external suppliers in the service or
speed new service or product development process.
a product

© 2006 Prentice Hall, Inc. 2–8

 Contd…
Flexibility
Customizatio Satisfying the unique Processes with a customization strategy
n needs of each customer typically have low volume, close customer
by changing service or contact, and an ability to reconfigure
product designs processes to meet diverse types of customer
needs.
Variety Handling a wide Processes supporting variety must be capable
assortment of services or of larger volumes than processes supporting
products efficiently customization. Services or products are not
necessarily unique to specific customers and
may have repetitive demands.

Volume Accelerating or Processes must be designed for excess

flexibility decelerating the rate of capacity and excess inventory to handle
production of services or demand fluctuations that can vary in cycles
products quickly to from days to months. This priority could also
handle large fluctuations be met with a strategy that adjusts capacity
in demand without accumulation of inventory or excess
capacity.
© 2006 Prentice Hall, Inc. 2–9
 Defining Missions and
Strategies

© 2006 Prentice Hall, Inc. 2 – 10

 Mission
 Mission - where are
you going?
 Organization’s
purpose for being
 Answers ‘What do
we provide society?’
 Provides boundaries
and focus

© 2006 Prentice Hall, Inc. 2 – 11

 Contd…
• Once an organization’s mission has been
decided, each functional area within the firm
determines its supporting mission. By
functional area we mean the major
disciplines required by the firm, such as
marketing, finance/accounting, and
production/operations.

© 2006 Prentice Hall, Inc. 2 – 12

 Factors Affecting Mission
Philosophy
and Values

Profitability
Environment
and Growth
Mission

Customers Public Image

Benefit to
Society
© 2006 Prentice Hall, Inc. 2 – 13
 Mission of Mission
X University
of diredawa university

• To produce competent graduates demand driven

innovative research and technology output and community
service through providing quality education, training and
consultancy, conducting research by promoting effective
entrepreneurship, democratic attitude to foster socio-
cultural, economic and political transformation of the
nation

© 2006 Prentice Hall, Inc. 2 – 14

 Company X
X is committed to our People-Service-Profit
philosophy. We will produce outstanding financial
returns by providing total reliable, competitively
superior, global air-ground transportation of high
priority goods and documents that require rapid,
time-certain delivery. Equally important, positive
control of each package will be maintained using
real time electronic tracking and tracing systems. A
complete record of each shipment and delivery will
be presented with our request for payment. We will
be helpful, courteous, and professional to each other
and the public. We will strive to have a completely
satisfied customer at the end of each transaction.
Figure 2.2
© 2006 Prentice Hall, Inc. 2 – 15
 Company Y
The mission of Merck is to provide
society with superior products and
services - innovations and solutions
that improve the quality of life and
satisfy customer needs - to provide
employees with meaningful work and
advancement opportunities and
investors with a superior rate of return

© 2006 Prentice Hall, Inc. 2 – 16

 Hard Rock Café

Our Mission: To spread the spirit of Rock ‘n’

Roll by delivering an exceptional
entertainment and dining experience. We
are committed to being an important,
contributing member of our community and
offering the Hard Rock family a fun, healthy,
and nurturing work environment while
ensuring our long-term success.

Figure 2.2
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 Strategic Process
Organization’s
Mission

Functional
Area Missions

Finance/
Marketing Operations
Accounting

© 2006 Prentice Hall, Inc. 2 – 18

 THE NATURE OF STRATEGY

• strategy
The direction and scope of an organization over the long-term, which
achieves advantage in a changing environment through its
configuration of resources with the aim of fulfilling stakeholder
expectations

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 OPERATIONS STRATEGY
• an ‘operations strategy concerns the pattern of strategic decisions and
actions which set the role, objectives and activities of operations’ in order
to produce groods and services.

• The use of the term ‘pattern’ implies a consistency in strategic decisions

and actions over time.

© 2006 Prentice Hall, Inc. 2 – 22

© 2006 Prentice Hall, Inc. 2 – 23
 OPERATIONS STRATEGY – PROCESS
• operations strategy has a vertical relationship in the
corporate hierarchy with business and corporate
strategies, and horizontally with the other functional
strategies, most notably with marketing strategy.

Top down

Operation Operation Market

s led s strategy led

Bottom
up

© 2006 Prentice Hall, Inc. 2 – 24

 1. Top-down
• the operations strategy is derived from, and is
supportive of the organization’s business strategy;

• For example, if the organization’s business strategy is

one of offering low prices, then the operation’s task
should be one of achieving low costs in operations. If
the business strategy is based on offering customers
fast delivery, the operations task should be one of
achieving speed in operations, and so on.
© 2006 Prentice Hall, Inc. 2 – 25
 Bottom-up
• The bottom-up perspective is one which sees operations strategy

emerging through a series of actions and decisions taken over time

within operations. These actions and decisions might at first sight appear

somewhat haphazard, as operations managers respond to customer

demands, seek to solve specific problems, copy good practices in other

organizations, etc.

• Operations strategy should learn from day-to-day experience

© 2006 Prentice Hall, Inc. 2 – 26

 Market-led
• the operations strategy is developed in response to the
market environment in which the organization operates.
• Operations function is supposed to execute with marketing
two types of competitive criteria in any market.

Order qualifying criteria is Order winning criteria is the competitive

a characteristic of a advantages such as quality, delivery
product or service that is
speed, reliability, product design,
required in order for the
flexibility, and image that cause a firm's
product/service to even be
customers to select that company's
considered by a customer.
products or services. It is the main reason
why customers purchase a company's
product.
© 2006 Prentice Hall, Inc. 2 – 27
 Operations-led
• The operations-led perspective is one in which its
excellence in operations is used to drive the organization’s
strategy. This is in line with the resource-based view
(RBV) of strategy.

• the process of strategy development should be based on a

sound understanding of current operational capabilities and
an analysis of how these could be developed in the future.

© 2006 Prentice Hall, Inc. 2 – 28

 Dynamics of Strategic Change

 Changes within the organization

 Personnel
 Finance
 Technology
 Product life
 Changes in the environment

© 2006 Prentice Hall, Inc. 2 – 29

 Strategy Development and
Implementation

 Identify critical success factors

 Build and staff the organization
 Integrate OM with other activities

© 2006 Prentice Hall, Inc. 2 – 30

 Strategy Development steps

Environmental Analysis
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.

Determine Corporate Mission

State the reason for the firm’s existence and identify the
value it wishes to create.

Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, after-
sale service, broad product lines.

© 2006 Prentice Hall, Inc. Figure 2.6 2 – 31

 SWOT Analysis

Mission

Internal External
Strengths Opportunities
Analysis

Internal External
Weaknesses Threats
Strategy

© 2006 Prentice Hall, Inc. 2 – 32

 Critical Success Factors
 Because no firm does everything exceptionally well, a successful
strategy requires determining the firm’s key success factors and core
competencies.

 Key success factors (KSFs) are those activities that are necessary for a
firm to achieve its goals. A KSF for McDonald’s, for example, is layout.
Without an effective drive-through and an efficient kitchen, McDonald’s
cannot be successful.

 core competencies are the set of unique skills, talents, and capabilities
that a firm does at best manner. They allow a firm to set itself apart and
develop a competitive advantage.

McDonald’s KSFs may include layout, its core competency may be

consistency and quality.
 The idea is to build KSFs and core competencies that provide a
competitive advantage and support a successful strategy and mission.
© 2006 Prentice Hall, Inc. 2 – 33
 Critical Success Factors fro 10 decision areas

Marketing Finance/Accounting Production/Operations

Service Leverage
Distribution Cost of capital
Promotion Working capital
Channels of distribution Receivables
Product positioning Payables
(image, functions) Financial control
Lines of credit

Decisions Sample Options

Product Customized, or standardized
Quality Define customer expectations and how to achieve them
Process Facility size, technology, capacity
Location Near supplier or near customer
Layout Work cells or assembly line
Human resource Specialized or enriched jobs
Supply chain Single or multiple suppliers
Inventory When to reorder, how much to keep on hand
Schedule Stable or fluctuating production rate
Maintenance Repair as required or preventive maintenance

© 2006 Prentice Hall, Inc. 2 – 34

 TRANSFORMING STRATEGY INTOACTION:
THE BALANCED SCORECARD
The Balanced Scorecard provides a framework to look at the
strategy used for value creation from four different
perspectives:
– Financial. The strategy for growth, profitability, and risk
viewed from the perspective of the shareholder.
– Customer. The strategy for creating value and
differentiation from the perspective of the customer.
– Internal business process. The strategic priorities for
various business processes, which create customer and
shareholder satisfaction.
– Learning and growth. The priorities to create a climate that
supports organizational change, innovation and growth.

© 2006 Prentice Hall, Inc. 2 – 35

 • The operations manager’s job is to implement
an OM strategy, provide competitive
advantage, and increase productivity

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 Productivity

Productivity is the ratio of outputs (goods

and services) divided by the inputs
(resources such as labour and capital)

The objective is to improve this

measure of efficiency

© 2006 Prentice Hall, Inc. 2 – 37

 The Economic System
Inputs Processes Outputs

Labor, The economic system Goods

capital, transforms inputs to outputs and
management at about an annual % services
increase in productivity per
year. The productivity
increase is the result of a
mix of capital, labor, and
management

Feedback loop

Figure 1.7

© 2006 Prentice Hall, Inc. 2 – 38

 Productivity

Units produced
Productivity =
Input used

 Measure of process improvement

 Represents output relative to input
 Only through productivity increases
can our standard of living improve

© 2006 Prentice Hall, Inc. 2 – 39

 Productivity Calculations

Labor Productivity

Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

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 Multi-Factor Productivity

Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous

 Also known as total factor productivity

 Output and inputs are often expressed
in dollars

© 2006 Prentice Hall, Inc. 2 – 41

 Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day

Old labor 8 titles/day

productivity = 32 labor-hrs = .25 titles/labor-hr

© 2006 Prentice Hall, Inc. 2 – 42

 Measurement Problems

 Quality may change while the

quantity of inputs and outputs
remains constant
 External elements may cause an
increase or decrease in productivity
 Precise units of measure may be
lacking

© 2006 Prentice Hall, Inc. 2 – 43

 Key Variables for Improved
Labor Productivity

 Basic education appropriate for the

labor force
 Life style of the labor force
 Social overhead that makes labor
available
 Maintaining and enhancing skills in the
midst of rapidly changing technology
and knowledge

© 2006 Prentice Hall, Inc. 2 – 44

 Other Measures Affecting
Productivity

• Efficiency

• Effectiveness

• Quality

• Quality of Work Life

• Innovation
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 Application of Productivity Measures

• Individual level

• Group level

• Department level

• Corporate level

• National level

• Global level
© 2006 Prentice Hall, Inc. 2 – 46
 Service Productivity

 Typically labor intensive

 Frequently focused on unique
individual attributes or desires
 Often an intellectual task performed by
professionals
 Often difficult to mechanize
 Often difficult to evaluate for quality

© 2006 Prentice Hall, Inc. 2 – 47

 End of chapter two
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