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Session 2

 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?

LO 2.1 2-2
 Identifying consumer wants and/or needs
 Pricing and quality
 Advertising and promotion

LO 2.1 2-3
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

LO 2.1 2-4


Organizational Strategies

Functional Strategies


LO 2.3 2-5
 Tactics
 The methods and actions taken to accomplish strategies
 The “how to” part of the process
 Operations
 The actual “doing” part of the process

LO 2.3 2-6
 Core Competencies
The special attributes or abilities that give an
organization a competitive edge
 To be effective core competencies and strategies need to be

LO 2.3 2-7
Strategy Operations Strategy Examples of Companies or Services
Low Price Low Cost U.S. first-class postage
Responsiveness Short processing times McDonald’s restaurants
On-time delivery FedEx
Differentiation: High performance design Sony TV
High Quality and/or high quality processing
Consistent Quality Coca-Cola
Differentiation: Innovation 3M, Apple
Differentiation: Flexibility Burger King (Have it your way”)
Variety Volume McDonald’s (“Buses Welcome”)
Differentiation: Superior customer service Disneyland
Service IBM
Differentiation: Convenience Supermarkets; Mall Stores

LO 2.4 2-8
 Effective strategy formulation requires taking into
 Core competencies
 Environmental scanning
 Successful strategy formulation also requires taking
into account:
 Order qualifiers
 Order winners

LO 2.4 2-9
 Order qualifiers
 Characteristics that customers perceive as minimum
standards of acceptability for a product or service to be
considered as a potential for purchase
 Order winners
 Characteristics of an organization’s goods or services that
cause it to be perceived as better than the competition

LO 2.4 2-10
 Environmental Scanning is necessary to identify
 Internal Factors
 Strengths and Weaknesses
 External Factors
 Opportunities and Threats

LO 2.4 2-11
1. Economic conditions
2. Political conditions
3. Legal environment
4. Technology
5. Competition
6. Markets

LO 2.4 2-12
1. Human Resources
2. Facilities and equipment
3. Financial resources
4. Customers
5. Products and services
6. Technology
7. Suppliers
8. Other

LO 2.4 2-13
 Operations strategy
 The approach, consistent with organization strategy,
that is used to guide the operations function.

LO 2.4 2-14
Decision Area What the Decisions Affect
Product and service design Costs, quality, liability, and environmental issues
Capacity Cost, structure, flexibility
Process selection and Costs, flexibility, skill level needed, capacity
Work design Quality of work life, employee safety, productivity
Location Costs, visibility
Quality Ability to meet or exceed customer expectations
Inventory Costs, shortages
Maintenance Costs, equipment reliability, productivity
Scheduling Flexibility, efficiency
Supply chains Costs, quality, agility, shortages, vendor relations
Projects Costs, new products, services, or operating systems

LO 2.4 2-15
 Quality-based strategy
 Strategy that focuses on quality in all phases of an
 Pursuit of such a strategy is rooted in a number of factors:
 Trying to overcome a poor quality reputation
 Desire to maintain a quality image
 A desire to catch up with the competition
 A part of a cost reduction strategy

 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

LO 2.5 2-17
 Areas where organizations have achieved time
 Planning time
 Product/service design time
 Processing time
 Changeover time
 Delivery time
 Response time for complaints

LO 2.5 2-18
 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

 A top-down management system that organizations can use to
clarify their vision and strategy and transform them into action
 Develop objectives
 Develop metrics and targets for each objective
 Develop initiatives to achieve objectives
 Identify links among the various perspectives
 Finance
 Customer
 Internal business processes
 Learning and growth
 Monitor results

 Productivity
 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
 Judging the performance of an entire industry or

LO 2.6 2-22
 High productivity is linked to higher standards of living
 As an economy replaces manufacturing jobs with lower productivity
service jobs, it is more difficult to maintain high standards of living
 Higher productivity relative to the competition leads to
competitive advantage in the marketplace
 Pricing and profit effects
 For an industry, high relative productivity makes it less
likely it will be supplanted by foreign industry

LO 2.6 2-23
Productivi ty =

Output Ouput Output

Partial Measures ; ;
Single Input Labor Capital

Output Ouput Output

Multifactor Measures ; ;
Multiple Inputs Labor +Machine Labor +Capital +Energy

Goods or services produced

Total Measure
All inputs used to produce them

LO 2.6 2-24
Units produced: 5,000
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost

What is the

LO 2.6 2-25
Multifactor Productivity =
Labor +Material +Overhead
5,000 units  $30/unit
(500 hours  $25/hour) + $5,000 + (2(500 hours  $25/hour))

= 3.5294
What is the implication of an unitless measure of productivity?

LO 2.6 2-26
Current productivity - Previous productivity
Productivity Growth = 100%
Previous productivity

Example: Labor productivity on the ABC assembly line was 25 units per hour in
2014. In 2015, labor productivity was 23 units per hour. What was the
productivity growth from 2014 to 2015?

23 - 25
Productivity Growth = 100%  8%

LO 2.6 2-27
 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
 Where products are involved
 ratio of output of good product to the quantity of raw material
 Where services are involved, process yield measurement is
often dependent on the particular process:
 ratio of cars rented to cars available for a given day
 ratio of student acceptances to the total number of students
approved for admission.

LO 2.6 2-28

Capital Quality

Technology Management

LO 2.7 2-29
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
6. Measure and publicize improvements
Don’t confuse productivity with efficiency

LO 2.7 2-30
Company Background:
 Gardening business
 Established 5 years ago
 Substantially business growth
 Each year 10 new clients and a new employee
 Currently 8 seasonal employees

Company Background:
 Assign crew to do tasks
 Crew size range from 2 to 4 workers
 Largest job took longer time
 Take a investigation

Question 1
Which crew size had the highest productivity?
Which crew size had the lowest productivity?
What are some possible explanations for these
Crew Average Productivity per Crew
2 4,234 square feet per day
3 5,352 square feet per day
4 7,860 square feet per day

𝑂𝑢𝑡𝑝𝑢𝑡 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑝𝑒𝑟 𝐶𝑟𝑒𝑤
 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 = =
𝐼𝑛𝑝𝑢𝑡 𝐶𝑟𝑒𝑤 𝑆𝑖𝑧𝑒

 Productivity ratios
Crew Size Average Productivity per Crew Productivity Ratio
2 4,234 square feet per day 2,117 ↑
3 5,352 square feet per day 1,784 ↓
4 7,860 square feet per day 1,965 →

Productivity Paradox
1. New workers
(Grouping of employees with different experience level)
2. Quality of tools

Question 2
After a recent storm, a customer called in a panic,
saying that she had planned a garden party for
the upcoming weekend and her garden was
shambles. The owner decided to send a crew of
four workers, even though a two-worker crew
would have a higher productivity. Explain the
rationale for this decision.

Critical activity
with high
importance and

• Time pressure
Crew Size Average Productivity per Crew Productivity Ratio
2 4,234 square feet per day ↓ 2,117 ↑
3 5,352 square feet per day → 1,784 ↓
4 7,860 square feet per day ↑ 1,965 →

• 4 people have the highest total output per

• 4 workers should complete the work asap

• Assumption: Garden size 20,000 square feet

Case 1 Case 2
Crew size 2 Crew size 4
4,234 ft²/day 7,860 ft²/day
Duration: 4.7 Duration: 2.5 days

Question 3
What is a possible qualitative issue that may very
well influence productivity levels that the
productivity ratios fail to take into account?

1. New company:
• Founded only 5 years ago
• Low employee loyalty

 Offer long-term contracts
 Provide a career path
 Develop relationships

2. Seasonal work: (weather conditions, location)
 6 month operating time
 No continuous work flow through the whole year
 Employees may look for permanent jobs → drop

3. Standardization:
 Standardized processes increase the productivity
level of employees
Solution: Introduction of standard operation

 In long term, employees may feel less motivated

and reduce productivity level
Solution: Assign different tasks from time to time

4. Incentive plans that reward productivity can
increase productivity
 Productivity level influenced by structural
division between management and labor
 Goal: Willingness that workers give their best

Solution: Performance related wages

5. Experience of workers
 Employees with longer experience have
usually a higher productivity level than less
experienced workers

6. Quality of tools
 Has an impact of the productivity level

 SaveMart needs 1000 coffee makers per year. The
cost of each coffee maker is $78. Ordering cost is
$100 per order. Carrying cost is 40% of per unit
cost. Lead time is 5 days. SaveMart is open 365

 Operations Management by William J. Stevenson (11th Edition).