Chapter 1

Operations Strategy
and
Global Competitiveness

Copyright 2013 John Wiley & Sons, Inc.

Overview

1-2
 Apple’s Comeback
• Since 2007, Apple’s share price has
risen 500 percent
• Apple’s market capitalization is almost a
trillion dollars
– Largest company in the US
• Shows how important operations
capabilities are to an organization’s
global competitiveness

1-3
 Coke vs. Pepsi
• Coke and Pepsi compete in the same industry
• From January 2007 – January 2012…
– Pepsi’s stock price was down
– Coke’s stock price was up 51 percent
• In terms of market capitalization…
– Pepsi remained flat at $101 billion
– Coke increased $153.5 billion
• What accounts for these different outcomes?

1-4
 General Motors
• Market share of GM declined from 45 percent
in 1980 to 20 percent in 2008
• In 2008, extreme gas prices killed the truck
and SUV markets
• Sudden credit crisis and recession killed the
rest of the market
• High cost caused it to ask government for a
bailout
– GM got $50 billion

1-5
 GM Results
• In 2011, GM had the largest annual
profit in its history
– $7.6 billion
– Up 62 percent from 2010
• Revenues were up 13 percent
• Sold 1.37 million cars
• Hired 100,000 workers a month for five
months straight

1-6
 Toyota in Trouble
• Toyota has been plagued with problems for
several years
– Multiple quality complaints
– Global recalls
• Japanese earthquake and tsunami in 2011 plus
flooding in Thailand crippled production
capacity
• Yen going from 120 yen to the dollar to 80
• Had a 6 percent decrease in sales in 2011

1-7
 Flat Panel TVs
• Large profit margins ($8 billion 2004)
• Asian manufacturers spent $35 billion
adding capacity in 2004 and 2005
• North America’s Dell attempted to
leverage its supply chain to lower cost
• By 2007, flat screens overtake CRT sets
• Market jumped from $11 billion in 1998
to $102 billion in 2007

1-8
 Two Central Themes
1. Customer satisfaction
2. Competitiveness
• Apple obtained a competitive advantage with
innovation, their production process, and
supply chain
• Pepsi example showed that organizations
that focus on a few things outperform those
that lack focus
• Toyota showed how losing your focus on
your strengths can damage competitiveness

1-9
 International Marketplace
• Consumers purchase their products from
the providers that offers them the most
value for their money
• Many of our products are produced
overseas
• Most of our services are provided
domestically

1-10
 Operations
• Heart of every organization
• Organizations exist to create value
• Operations are the tasks that create value
• Operational innovation can provide
organizations with long-term strategic
advantages

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 The Production System

Figure 1.1 1-12

 Operations Defined
• Production system: the conversion process
• System: a purposeful collection of people,
objects, and procedures for operating within an
environment
• Operations: concerned with transforming
inputs into useful outputs according to an
agreed-upon strategy and thereby adding value
to some entity

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 Systems Perspective
• Inputs
• Transformation System
– Alter
– Transport
– Store
– Inspect
• Outputs
• Environment

1-14
 Inputs
• Inputs include facilities, labor, capital,
equipment, raw materials, and supplies.
• A less obvious input is knowledge of
how to transform the inputs into outputs.
• The operations function quite frequently
fails in its task because it cannot
complete the transformation activities
within the required time limit.

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 Transformation System

• The part of the system that adds value

to the inputs.
• Four major ways
1. Alter: changed structurally
2. Transport: located somewhere else
3. Store: kept in a protected environment
4. Inspect: understand its properties

1-16
 Outputs
• Two types of outputs commonly result from a
production system
– Services (physical goods)
– Products (abstract or nonphysical)
• Any physical entity accompanying a service
that adds value is a facilitating good
• Pure service: if there is no facilitating good
• Services are bundles of benefits
– Some are tangible and others intangible
– May be accompanies by a facilitating goods

1-17
 Characteristics of Products and
Services

Table 1.1 1-18

 The Range From Services
to Products

Figure 1.2 1-19

 Examples of Production System
Components

Table 1.2 1-20

 Major Subject Areas in
Operations

Table 1.3 1-21

 Major Subject Areas in
Operations Continued

Table 1.3 Continued 1-22

 Customer Value
• Value = perceived benefits / costs
• Perceived benefits can take a wide
variety of forms
• Costs…
– Upfront monetary investment
– Life cycle costs, such as maintenance
– Hassles involved in obtaining the product or
service

1-23
 Customer Value (Continued)
• Efficiency = output / input
• Productivity: output per worker-hour
– This is a partial factor measure of productivity
– Only includes one productive factor
• Multifactor productivity: uses more than a
single factor
• Total factor productivity: uses all the factors
of production

1-24
 Research
• Pure research: working with basic
technology to develop new knowledge
• Applied research: attempting to
develop new knowledge along particular
lines
• Development: attempting to utilize the
findings of research and expand the
possible applications

1-25
 The Development Effort

Figure 1.3 1-26

 Mortality Curve of Chemical
Product Ideas

Figure 1.4 1-27

 Two Alternatives to Research
1. Imitation of a proven idea
– Second-to-market strategy
2. Outright purchase of someone else’s
invention
– Eliminates risk
– Popular when bringing a new product to market
has high costs
– Also popular when technology advances rapidly

1-28
 Quality Dimensions
1. Conformance to specification
– Extent to which the product matches the
design
2. Performance
– Customers equate quality with
performance
3. Features
– Options that a product or service offers

1-29
 Quality Dimensions Continued
4. Quick response
– Time required to react to customers’
demands
5. Reliability
– Probability that a product or service will
perform as intended for a period of time
6. Durability
– How tough a product is
1-30
 Quality Dimensions (Continued)
7. Serviceability
– Ease with which maintenance can be
performed
8. Aesthetics
– Factors that appeal to human senses
9. Humanity
– How the customer is treated

1-31
 Quality’s Benefits
• Customers are more pleased with a high-
quality product or service
• More likely to encourage friends to patronize
the firm
• Gives firm a good reputation
• Allows firm to charge a premium price
• Increases market share
• Makes follow-up products more attractive

1-32
 Quality’s Costs
1. Prevention costs
– Including planning, training, design, maintenance
2. Appraisal costs
– Measuring, testing, test equipment, inspectors,
reports
3. Internal costs of defects
– Extra labor and material, scrap, rework,
interruptions, expediting
4. External costs of defects
– Ill-will, complaints, correction, warranties,
insurance, recalls, lawsuits

1-33
 Evolution of Quality: Japan vs.
America
• Japanese techniques developed in the US
• After WWII Japan had reputation for poor
quality
• W. Edwards Deming helped Japan improve
quality
• Deming says major cause of poor quality is
variation
• Deming stressed improving quality was the
responsibility of top management

1-34
 Evolution of Quality: Japan vs.
America (Continued)
• Japan followed Deming’s advice
• Japan’s reputation for producing shoddy
goods was totally reversed
• A more recent concept that the Japanese
have embraced is called total quality
management (TQM)
– Quality at the source
– Statistical process control (SPC)

1-35
 Customization
• Customization: offering a product or
service exactly suited to a customer’s
desires
– Low customization is called standardization
• Customization demands flexibility
• Flexibility: the ability to change or react
with little penalty in time, effort, cost, or
performance

1-36
 Continuum of Customization

Figure 1.5 1-37

 Competitive Advantages of
Flexibility
• Faster matches to customers’ needs
• Closer matches to customers’ needs
• Ability to supply needed items as markets
develop
• Faster design-to-market time
• Lower cost of changing production
• Ability to offer a full line without large
inventories
• Ability to meet market demand even with
production delays

1-38
 Mass Customization
• Seek to produce low-cost, high-quality outputs
in high variety
• Not all products lend themselves to being
customized
– Sugar, gas, electricity, and flour
• Is applicable to products characterized by short
life cycles, rapidly advancing technology, or
changing customer requirements

1-39
 Four Mass Customization
Strategies
1. Collaborative customizers
– Help customers articulate their needs
2. Adaptive customizers
– Offer a standard product that customers can
modify themselves
3. Cosmetic customizers
– Produce a standard product but present it
differently to different customers
4. Transparent customizers
– Provide custom products without customers
knowing they are customized

1-40
 Benefits of Modular Design
1. Components that differentiate can be added
during the later stages of production
– Called postponement
2. Production time can be significantly reduced
– Simultaneously producing the required modules
3. Facilitates the identification of production
and quality problems

1-41
 Dependability and Speed
• The competitive advantages of faster,
dependable response to new markets or to the
individual customer's needs have only recently
been noted in the business media
• Americans spend more time and money on
marketing, whereas the Japanese spend five
times more than the Americans on developing
more efficient production methods

1-42
 Prerequisites for and Advantages
of Rapid Response

Table 1.4 1-43

 Prerequisites for and Advantages
of Rapid Response (Continued)

Table 1.4 Continued 1-44

 Cost Reduction with Decreases in
Response Time

Figure 1.6 1-45

 Strategy and Competitiveness
• Competitiveness…
– Long-term viability of a firm
– Market share or profitability
• Can also talk about competitiveness of a
nation
– The degree to which it can, under free and fair
market conditions, produce goods and services that
meet the test of international markets while
simultaneously maintaining and expanding the real
incomes of its citizens

1-46
 Global Trends
• US imports have grown for more than 30
years
• Exports have increased, but not as fast as
imports
• Resulted in exploding trade deficient
• US now largest debtor nation in the
world
• Cumulative deficit is about ½ GDP

1-47
 Global Firms
• Global firms
• Joint ventures
• Partial ownerships
• Foreign subsidiaries
• Other types of international producers

1-48
 Strategy
• Business strategy: set of objectives,
plans, and policies for the organization
to compete
• Specifies competitive advantage
– How achieved and sustained
• Key is defining core competencies and
focus

1-49
 Strategy Formulation

Figure 1.7 1-50

Vision and Mission Statements
• Vision statements used to express
organization’s values and aspirations
• Mission statements express
organization’s purpose or reason for
existence
• Some organizations may choose to
combine the vision and mission
statements into a single statement

1-51
 The Life-Cycle Curve

Figure 1.9 1-52

 The Life Cycle
• Strategies often tied to product life cycle
• Length of life cycles shrinking
• Business strategy should match life
cycles stages

1-53
 Categories of Business
Strategies
1. First-to-market
2. Second-to-market
3. Cost minimization (late-to-market)
4. Market segmentation

Slide on each of these 1-54

 First-to-Market Strategy
• Products available before competition
• Strong applied research capability
needed
• Can set high price to skim market or set
lower price to gain market share

1-55
 Second-to-Market Strategy
• Quick imitation of first-to-market
companies
• Less emphasis on applied research and
more emphasis on development
• Learn from first-to-market’s mistakes

1-56
Cost Minimization or Late-to-
Market Strategy
• Wait until market becomes standardized
and large volumes demanded
• Compete on basis of costs instead of
product features
• Research efforts focus on process
development versus product
development

1-57
 Market Segmentation
• Serving niche markets
• Applied engineering skills and flexible
manufacturing processes needed

1-58
 Common Areas of Organizational
Focus

Table 1.5 1-59

 Order Qualifiers and Winners
• Order qualifier: a characteristic of a
product or service that is required to be
considered
– Prerequisite for entering the market
• Order winner: a characteristic that will
win the purchase

1-60
 Product Life Cycle Stages
and Emphasis

Figure 1.12 1-61

 The Sand Cone Model

Figure 1.13 1-62

Reasons to Produce Offshore

• Circumvent governmental regulations

• Avoid effects of currency fluctuations
• Avoid fees and quotas
• Placate local customers

1-63
 Core Capabilities
• Core competencies: the collective knowledge
and skills an organization has that distinguish
it from competition
• Core capabilities: organizational practices
and business processes
• Should be used to gain access to a variety of
markets
• Should be strongly related to key benefits
provides by products or services
• Should be difficult to imitate

1-64
 Outsourcing
• Subcontracting out production of parts
or performance of activities
• Activities and parts fall on a continuum
ranging from strategically unimportant
to strategically important
• Activities not strategically important are
candidates to be outsourced

1-65
 Hollowed Out
• The extent that most of a firm’s complex
parts and production are outsourced
• Often when complex parts outsourced,
engineering talent follows
• Supplier may become competitor

1-66