PRODUCTIONS AND OPERATIONS MANAGEMENT

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Operations Strategy, Productivity and Competitiveness

Module 002 | Operations Strategy, Productivity

and Competitiveness

It is vital for any organization to have well defined objective. These well-
defined objective facilitates the development of strategies and policy that
creates value for customers. Strategy, Productivity and Competitiveness are
three vital components for a business to succeed in the business industry.

Objectives:
1. Understand the role of Strategy, Productivity and Competitiveness in any
business venture.
2. Identify factors that affect productivity.
3. Identify the reasons why a business fail.
4. Recognize strategies needed for a business to thrive.

Three Characteristics of a Business

Competitiveness, Strategy and Productivity

Competitiveness refers to how effective an organization meets the wants and
needs of customers in comparison to its competitors that produce the same
goods/services. Strategy denotes a plan for achieving organizational goals.
The two strategies discussed in this chapter are organizational and
functional level strategies. Productivity is a measure of the effective use of
resources, usually expressed as the ratio of output to input. Productivity
measures are useful for tracking an operating unit’s performance over time
and judging the performance of an entire industry or country.

Competitiveness
Competitiveness is how effectively an organization meets the wants and
needs of customers relative to others that offers similar goods and services.
Companies must be competitive to be able to sell their goods and services. It
is an important factor in determining whether a company prospers, barely
gets by, or fails. Business organizations compete through some combination
of price, delivery time, product or service differentiation and compete using
marketing, advertising and promotion;

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1. Identifying consumer wants and/or needs is a basic input in an
organization’s decision-making process, and central to competitiveness.
The idea is to achieve a perfect match between those wants and needs
and the organization’s goods and/or services.
2. Price and quality are key factors in consumer buying decisions. It is
important to understand the trade-off decision consumers make between
price and quality.
3. Advertising and promotion are ways organizations can inform potential
customers about features of their products or services, and attract
buyers.

Operations has a major influence on competitiveness through product and

service design, cost, location, quality, response time, flexibility, inventory and
supply chain management, and service. Many of these are interrelated;

1. Product and service design should reflect joint efforts of many areas of
the firm to achieve a match between financial resources, operations
capabilities, supply chain capabilities, and consumer wants and needs.
Special characteristics or features of a product or service can be a key
factor in consumer buying decisions. Other key factors include
innovation and the time-to-market for new products and services.
2. Cost of an organization’s output is a key variable that affects pricing
decisions and profits. Cost-reduction efforts are generally ongoing in
business organizations. Productivity is an important determinant of cost.
Organizations with higher productivity rates than their competitors have
a competitive cost advantage. A company may outsource a portion of its
operation to achieve lower costs, higher productivity, or better quality.
3. Location can be important in terms of cost and convenience for
customers. Location near inputs can result in lower input costs. Location
near markets can result in lower transportation costs and quicker
delivery times. Convenient location is particularly important in the retail
sector.
4. Quality refers to materials, workmanship, design, and service.
Consumers judge quality in terms of how well they think a product or
service will satisfy its intended purpose. Customers are generally willing
to pay more for a product or service if they perceive the product or
service has a higher quality than that of a competitor.
5. Quick response can be a competitive advantage. One way is quickly
bringing new or improved products or services to the market. Another is
being able to quickly deliver existing products and services to a customer
after they are ordered, and still another is quickly handling customer
complaints.
6. Flexibility is the ability to respond to changes. Changes might relate to
alterations in design features of a product or service, or to the volume
demanded by customers, or the mix of products or services offered by an
organization. High flexibility can be a competitive advantage in a
changeable environment.
7. Inventory management can be a competitive advantage by effectively
matching supplies of goods with demand.
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Operations Strategy, Productivity and Competitiveness

8. Supply chain management involves coordinating internal and external

operations (buyers and suppliers) to achieve timely and cost-effective
delivery of goods throughout the system.
9. Service might involve after-sale activities customers perceive as value-
added, such as delivery, setup, warranty work, and technical support. Or
it might involve extra attention while work is in progress, such as
courtesy, keeping the customer informed, and attention to details.
Service quality can be a key differentiator; and it is one that is often
sustainable. Moreover, businesses rated highly by their customers for
service quality tend to be more profitable, and grow faster, than
businesses that are not rated highly.
10. Managers and workers are the people at the heart and soul of an
organization, and if they are competent and motivated, they can provide a
distinct competitive edge by their skills and the ideas they create. One
often overlooked skill is answering the telephone. How complaint calls or
requests for information are handled can be a positive or a negative. If a
person answering is rude or not helpful, that can produce a negative
image. Conversely, if calls are handled promptly and cheerfully, that can
produce a positive image and, potentially, a competitive advantage.

Why Some Organizations Fail

Organizations fail, or perform poorly, for a different of reasons. It is
important to be aware of those reasons to help administrator avoid making
similar mistakes. Among the principal reasons are the following:
1. Neglecting operations strategy.
2. Failing to take advantage of strengths and opportunities, and/or failing to
recognize competitive threats.
3. Putting too much emphasis on short-term financial performance at the
expense of research and development.
4. Placing too much emphasis on product and service design and not enough
on process design and improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communications and cooperation
among different functional areas.
7. Failing to consider customer wants and needs.

The key to successfully competing is to determine what customers want and

then directing efforts toward meeting (or even exceeding) customer
expectations. Two basic issues must be addressed.
First: What do the customers want? (Which items on the preceding list of the
ways business organizations compete are important to customers?)

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 Second: What is the best way to satisfy those wants? Operations must work
with marketing to obtain information on the relative importance of the
various items to each major customer or target market. Understanding
competitive issues can help managers develop successful strategies.
Many organizations are driven by competition. To be successful in today’s
competitive business environment, companies must know what
combinations of factors are most important to satisfy all of their
shareholders while also helping to fulfill their mission. Each functional area
in the business should also have goals and strategies that coincide with
accomplishing the larger goals. Employees of the organization should also
focus on using all resources efficiently to maximize the productivity of the
organization. Productivity has implications not only for the organization at
stake, but society as a whole.

Mission, Strategy and Tactics:

Figure 5. Mission Strategy and Tactics

An accurate goal, mission, tactics, and strategies are the necessary things for
an organization’s success. These four terms are deeply related to each other:
MISSION is the reason for a business to exist. An organization needs to know
and define its mission in order to have a path to follow. Such as what kind of
business are they going to pursue. MISSION STATEMENT - This gives the
organization a purpose.
GOAL further explain this mission. They are like the marketing position, they
express how organization wants its self-image and position in people’s mind.
STRATEGY is when an organization start planning how to reach its goals. It
involves the formulation and implementation of the major goals based on
consideration of resources and an assessment of the internal and external
environments in which the organization competes.
TACTICS is how an organization approaches a strategy. It tells us how to
actually operate and process the organization and its strategies specifically.

Operational strategy is essential to achieve operational goals set by

organization in alignment with overall objective of the company. Operational
strategy is design to achieve business effectiveness or competitive advantage.

Operational strategy is planning process which aligns the following:

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Operations Strategy, Productivity and Competitiveness

Figure 6. Operational Strategy

In this global competitive age organization goal tend to change from time to
time therefore operations strategy as a consequence has also be dynamic in
nature. A regular SWOT analysis ensures that the organization is able to
maintain competitive advantage and business leadership.

Strategic Management Process for Production and Operation

For success of organizational strategic objective, strategic planning has to

trickle down to various function areas of the business. In order to build
strategy management process a sequential process as below is followed:

Competition Analysis: In this step company evaluates and studies current

competition in the market and practices that are followed in the industry for
operations and production vis-à-vis company policies

Goal Setting: Next step involves narrowing down the objective towards
which the organization wants to move towards.

Strategy Formulation: The next step is breaking down of organizational

goals into operations and production strategies.

Implementation: The final step is to convert operations and production

strategies into day to day activities like production schedule, product design,
quality management etc.

As organizations are always customer-centric, production and operation

strategy for organization are built around them

Example of a Strategy:
Shane, a 14-year-old high school student dreams of becoming big someday.
She aspires to have a career in business, have a decent and functional job
someday to earn enough to live a comfortable life.
What is her Strategy?
• MISSION Live a Good and Comfortable life someday
• GOAL To have a successful career which good income
• STRATEGY Obtain a College Degree Education
• TACTICS Select a College with a excellent Major
• OPERATIONS Register for college, buy books and school supplies,
study hard, graduate and get a decent job
Here is list of sample strategies applied in businesses and companies:
• Low Cost - Outsourcing to lower the cost of labor
• Scale-based strategies - Use capital-intensive methods to achieve high
output volume and low unit costs.
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• Specialization - Focus on narrow product lines or limited service to
achieve higher quality.
• Newness- Focus on innovation to create new products or services.
• Flexible Operations - Focus on quick response and/or customization.
• High Quality - Focus on achieving high quality than competitors.
• Service - Focus on various aspects of services like courteousness,
reliability
• Sustainability - Focus on environmental friendly and energy efficient
operations.
Some organizations combine two or three of these approaches intro their
strategies. however, unless they are careful, they risk losing focus and fails to
achieve any advantage in any category. it is important to focus on the
strengths and weaknesses of a particular organization in order to take
advantage of its core competencies as their edge.

Strategy Formulation

Formulation of strategy involves analyzing the environment in which the

organization operates, then making a series of strategic decisions about how
the organization will compete. Formulation ends with a series of goals or
objectives and measures for the organization to pursue.

Environmental analysis includes the:

• Remote external environment, including the political, economic, social,

technological, legal and environmental landscape (PESTLE);
• Industry environment, such as the competitive behavior of rival
organizations, the bargaining power of buyers/customers and suppliers,
threats from new entrants to the industry, and the ability of buyers to
substitute products (Porter's 5 forces); and
• Internal environment, regarding the strengths and weaknesses of the
organization's resources (i.e., its people, processes and IT systems).

STRATEGIC DECISIONS are based on insight from the environmental

assessment and are responses to strategic questions about how the
organization will compete, such as:

• What is the organization's business?

• Who is the target customer for the organization's products and services?
• Where are the customers and how do they buy? What is considered
"value" to the customer?
• Which businesses, products and services should be included or excluded
from the portfolio of offerings?
• What is the geographic scope of the business?
• What differentiates the company from its competitors in the eyes of
customers and other stakeholders?
• Which skills and capabilities should be developed within the firm?
• What are the important opportunities and risks for the organization?
• How can the firm grow, through both its base business and new business?
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Operations Strategy, Productivity and Competitiveness

• How can the firm generate more value for investors?

The answers to these and many other strategic questions result in the
organization's strategy and a series of specific short-term and long-term
goals or objectives and related measures.

Strategy Formulation:
Effective strategy formulation requires taking into account:

1. Distinctive Competencies - The special attributes or abilities that gives

an organization a competitive edge.

2. Environmental Scanning
a. SWOT Analysis

b. Figure 7. SWOT ANALYSIS

Successful strategy formulation also requires taking into account:

1. Order Qualifier - characteristics that customers perceive as minimum

standards of acceptability to be considered as a potential purchase
2. Order Winner - Characteristics of an organization's goods or services
that cause it to be perceived as better than the competition.

Strategic factors include price, quality, time, flexibility, and service location

See examples below:

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 Figure 8. Strategic Factor

Key External Factors

1. Economic conditions
2. Political conditions
3. Legal environment
4. Technology
5. Competition
6. Markets

Key Internal Factors

1. Human Resources
2. Facilities and equipment
3. Financial resources
4. Customers
5. Products and services
6. Technology
7. Suppliers
8. Other

Operations Strategy

The approach, consistent with organization strategy, that is used to guide the
operations function.
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Operations Strategy, Productivity and Competitiveness

Figure 9. Organizational Strategy

Quality and Time Strategies

Quality-based strategies - Focuses on maintaining or improving the quality of
an organization's products or services.
Time-based strategies - focuses on reduction of time needed to accomplish
tasks.

Figure 10. Time-Based Strategy

Productivity

Measurement of formulated operations and production strategy is important

to maintain alignment with the organization objectives. In simple terms
productivity is defined as sum of total output per employee or per day. It is
usually expressed as the ratio of output to input. Productivity of company is
dependent on industry and environmental conditions in which it is
operating.
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Productivity ratios are used for; Planning workforce requirements,
Scheduling equipment, and Financial Analysis.

Two essential part of productivity are labor and capital. In scenario of limited
resources, optimum and efficient utilization of labor and capital will generate
favorable productivity. Productivity measurement also enables company to
identify areas which require improvement or special focus. Also productivity
provides ready report card to measure status against company’s production
objective.

Productivity measurement can be classified in three categories based on the

inputs used for calculation:

1. Partial productivity ration of output is compared to one of resource

used for example, labor productivity where output is compared to the
labor wages. Formula: output/ (single input)
2. Total productivity measure takes into consideration sum of all input
factors which are used for the output. Formula: output / (total input)
productivity = Outputs
Inputs

3. Multi-factors measure: output/ (multiple input). In the modern age

technology plays an important part in productivity.

Factors that affect productivity

The following chart shows eight factors that affect

Figure 11. Factors Affecting productivity

The eight main factors that affect productivity are:

1. Technical factors
2. Production factors
3. Organizational factor
4. Personnel factors
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5. Finance factors
6. Management factors
7. Government factors
8. Location factors.

Now let's discuss briefly above listed important factors that affect
productivity.

1. Technical factors
Productivity largely depends on technology. Technical factors are the
most important ones. These include proper location, layout and size of
the plant and machinery, correct design of machines and equipment,
research and development, automation and computerization, etc. If the
organization uses the latest technology, then its productiveness will be
high.
2. Production factors
Productivity is related to the production-factors. The production of all
departments should be properly planned, coordinated and controlled.
The right quality of raw-materials should be used for production. The
production process should be simplified and standardized. If everything
is well it will increase the productiveness.
3. Organizational factor
Productivity is directly proportional to the organizational factors. A
simple type of organization should be used. Authority and Responsibility
of every individual and department should be defined properly. The line
and staff relationships should also be clearly defined. So, conflicts
between line and staff should be avoided. There should be a division of
labor and specialization as far as possible. This will increase
organization's productiveness.
4. Personnel factors
Productivity of organization is directly related to personnel factors. The
right individual should be selected for suitable posts. After selection, they
should be given proper training and development. They should be given
better working conditions and work-environment. They should be
properly motivated; financially, non-financially and with positive
incentives. Incentive wage policies should be introduced. Job security
should also be given. Opinion or suggestions of workers should be given
importance. There should be proper transfer, promotion and other
personnel policies. All this will increase the productiveness of the
organization.
5. Finance factors
Productivity relies on the finance factors. Finance is the life-blood of
modem business. There should be a better control over both fixed capital
and working capital. There should be proper Financial Planning. Capital
expenditure should be properly controlled. Both over and
underutilization of capital should be avoided. The management should
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 see that they get proper returns on the capital which is invested in the
business. If the finance is managed properly the productiveness of the
organization will increase.
6. Management factors
Productivity of organization rests on the management factors. The
management of organization should be scientific, professional, future-
oriented, sincere and competent. Managers should possess imagination,
judgement skills and willingness to take risks. They should make
optimum use of the available resources to get maximum output at the
lowest cost. They should use the recent techniques of production. They
should develop better relations with employees and trade unions. They
should encourage the employees to give suggestions. They should
provide a good working environment, and should motivate employees to
increase their output. Efficient management is the most significant factor
for increasing productiveness and decreasing cost.
7. Government factors
Productivity depends on government factors. The management should
have a proper knowledge about the government rules and regulations.
They should also maintain good relations with the government.
8. Location factors
Productivity also depends on location factors such as Law and order
situation, infrastructure facilities, nearness to market, nearness to
sources of raw-materials, skilled workforce, etc.

Benefits of High Productivity

Figure 12. Benefits of High Productivity

Now let's discuss briefly these important benefits of higher productivity.

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1. Higher profit
Higher productivity enables the company to produce more output. This results
in more profit to it. This profit can be used for expansion and other activities.
2. Employees welfare
Higher productivity brings more profit to the company. This profit can be
used to provide better facilities and working conditions to the employees. So,
it results in welfare of the employees.
3. Better return
The company gets better return on investment due to higher productivity. So,
they pay a better dividend (share of profit) to the shareholders. The market
price of the share will also increase.
4. Nice relations
Higher productivity results in nice relations between the management and the
employees. Good working conditions, facilities and incentives motivates
employees to give their best to the organization.
5. Customer satisfaction
Higher productivity results in better customer satisfaction. This is because
customers are provided with good-quality products at low prices. Satisfaction
of customers will result in their loyalty towards the company.
6. Good credit rating
Higher productivity results in a good credit rating by financial institutions.
This will enable the company to get cheap funds from the market to meet
working and fixed capital requirements.
7. Goodwill
Due to higher productivity, the company will have a good corporate image
(goodwill) in the minds of social entities. This includes: The shareholders,
government, suppliers, financial institutions, customers, etc.
8. Better credit terms
Higher productivity helps the company to get better terms from the suppliers.
The suppliers may give better credit terms due to its goodwill.
9. Low turnover
Higher productivity enables the company to provide better facilities and
working conditions to the employees. This will make the employees loyal.
Hence, employee turnover and absenteeism will reduce.

Wastivity

Another important factor is the case of production is wastivity. Not 100% of

input would be converted to output, there is going to waste during
production. Wastivity is reciprocal of productivity. Classic examples of
wastivity are defective products and services which either have to be re-cycle
or disposed of completely. Other example is idle capacity of material, man-
power equipment etc.

Key Ideas:

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 1. The operations manager makes both strategic broad-scope decisions,
and tactical moderate-scope decisions, as well as running the day-to-
day operations of the production system. Strategic planning includes
selecting products, choosing locations and technology, and overseeing
new construction. Tactical decisions include setting employment and
output levels, selecting equipment and controlling the flow of funds.
2. A key responsibility of the production manager is to achieve
productive use of an organization's resources. This is often measured
as the ratio of outputs to inputs, which is called a productivity ratio.
The closer the ratio is to 1.0, the higher the productivity; the closer
the ratio is to 0.0, the lower the productivity. U.S. productivity is high,
but many other nations are close behind, and gaining at a rapid pace.
Productivity is important because it relates to an organization's ability
to compete, and to the overall wealth and standard of living of a
nation. Productivity is affected by work methods, capital, quality,
technology, and management. A list of ways that productivity can be
improved is given in the textbook.
3. The postwar experience of Japanese industry has provided lessons in
management effectiveness, quality low-cost production, and employee
motivation; it has also enabled Japan to overcome a prewar
reputation for low quality, and to become a leading industrial power,
even though the country has limited natural resources.
4. Business organizations compete with each other in a variety of ways,
such as price, quality, product or service features, flexibility, and
delivery time. Operations and marketing functions must decide on an
approach to competition, and work together to achieve success by
capitalizing on strengths and exploiting the weaknesses of the
competition.
5. The most successful business organizations have carefully thought out
strategies for accomplishing the mission and the goals of the
organization. Corporate strategy is the overall strategy of the
organization. It is affected by both Internal and external factors. These
are listed and described in your textbook. Operations strategy should
support the corporate strategy. It has a narrower focus; it pertains to
the transformation aspect of the organization's activities. Operations
strategy often relates to cost, quality, flexibility, and availability of
products or services.

Glossary
Competitiveness: the possession of a strong desire to be more successful
than others.
Strategy: A plan of action or policy designed to achieve a major or overall
aim.
Wastivity: Defined as the ratio if waste to input.

References
Online Supplementary Reading Materials:
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Operations Strategy, Productivity and Competitiveness

1. Operations: Policy and Strategy;

http://www.managementstudyguide.com/operations-policy-and-
strategy.htm; April 10, 2017
2. Strategy and Productivity;
https://ids355.wikispaces.com/Ch.+2+Strategy+and+Productivity;
April 10, 2017
3. Strategic Management;
https://en.wikipedia.org/wiki/Strategic_management; April 10, 2017
4. Competitiveness, Strategy and Productivity;
http://www.slideshare.net/bilalnaimshaikh3/competitiveness-
strategy-and-productivity; April 10, 2017
5. Operations Strategy;
http://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20130712210
912003.pdf; April 10, 2017
6. Factors that Affect Productivity; http://kalyan-
city.blogspot.com/2013/03/factors-that-affect-productivity.html;
April 10, 2017
Online Instructional Video:
1. Competitiveness, Strategy and Productivity;
https://www.youtube.com/watch?v=7EXLPEtlUlg; September 11,
2017
Books and Journals:
1. Jay Heizer & Barry Render (2011); Operations Management (10th
Edition); New Jersey; Prentice Hall PTR

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