Chapter 2

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Chapter 2

Operations Strategiesin a Global Economy

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Overview

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

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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.

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Factors Affecting Today’s 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

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Reality of Global Competition

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

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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.

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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

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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

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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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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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 auto-makers. 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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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 manufac-turing 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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Environmental Impact Product-Safety Impact Employee Impact

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Environmental ImpactConcerns about the global environment include:

Landfill waste reduction Recycling Energy conservation Chemical spills Acid rain Radioactive waste disposal … and more

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Environmental Impact There is a need for standardizing government

regulations of the environment. Otherwise, companies will gravitate to the less-

regulated countries. The International Organization for Standardization

has developed a set of environmental guidelines called ISO 14000.

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Product-Safety ImpactHarm to people or animals that results from poor product design can:

Damage a company’s reputation Require a large expense to remedy Cause governments to impose more regulations

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Employee ImpactEmployee 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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Employee ImpactEmployee benefits and policies impact long-term profitability due to their effect on:

Employee morale and productivity Recruitment and retention of employees Demand for a company’s products Cost of defending against lawsuits and boycotts

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Developing Operations Strategy

Corporate Mission

Business Strategy

Product/Service Plans

Competitive Priorities

Operations Strategy

Assessmentof GlobalBusiness

Conditions

DistinctiveCompetencies

orWeaknesses

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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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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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Delivery Performance Definition

a) Fast delivery b) On-time delivery Some Ways of Creating

a) larger finished-goods inventorya) faster production ratesa) quicker shipping methodsb) more-realistic promisesb) better control of production of ordersb) better information systems

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High-Quality Products/Services Definition

Customers’ perception of degree of excellence exhibited by products/services

Some Ways of CreatingImprove product/service’s Appearance Performance and function Wear, endurance ability After-sales service

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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 company’s products/services, and provides a road map for the production function in helping to achieve the business strategy.

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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 detailedcharacteristics 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 Product’s 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 Product’s Life Cycle

Introduction Growth Maturity Decline

B&W TV

Automobile

Video Recorder

CD PlayerColor Copier

Cell Phone

Internet Radio

Fax MachineDot-Matrix Printer

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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 out-

sourcing 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 firm’s 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 firm’s 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 Servicesand Manufactured Products

Services ProductsOutput Intangible TangibleOutput Inventoried Yes NoCustomer Contact Extensive LittleLead Time Short LongIntensity Labor CapitalQuality Subjective Objective

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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

Volume VeryLow Low High Very

High

Focus Process Process Product Product

Fin.Gds. To-Order To-Order To-Stock To-StockBatchSize

VerySmall Small Large Very

Large

Product Custom SlightlyStandard Standard Highly

Standard

LifeStage Intro. Early

GrowthLate

Growth Maturity

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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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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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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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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 ManufacturersUsually prefer positioning strategies with: Custom products Process-focused production Produce-to-order policiesThese systems are more flexible and require lesscapital.

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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

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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