Slides prepared

by John Loucks

 2002 South-Western/Thomson Learning TM 1 1

 Chapter
Chapter 22

Operations Strategies
in a Global Economy

2
 Overview

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

3
 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.

4
 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

5
 Reality of Global Competition

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

6
 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.

7
 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.

8
 International Companies


World’s Largest Corporations
1. General Motors US
2. Wal-Mart Stores US
3. Exxon Mobil US
4. Ford Motor US
5. DaimlerChrysler Germany
6. Mitsui Japan
7. Mitsubishi Japan
8. Toyota Japan
9. General Electric US
10. Itochu Japan
9
 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

10
 Strategic Alliances

Kia might help sell

General Motors (US) &
and market GM cars
Kia Motor Corp. (S.K.)
in South Korea
Manufacture 100,000
Renault (France) &
vehicles annually
City of Moscow
near Moscow

Sino Aerospace Invest- Forming Texas-based

ment Corp. (Taiwan) & Sino Swearingen
Swearingen Aircraft (US) Aircraft Co.

11
 Strategic Alliances


Japanese companies have long practiced keiretsu, the
linking of companies into industrial groups.

A financial keiretsu links companies together with
cross-holding of shares, sales and purchases within
the group, and consultation.

A production keiretsu is a web of interlocking
relationships between a big manufacturer (Toyota)
and its suppliers.

12
 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.

13
 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)
14
 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

15
 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

16
 International Financial Conditions


The Dollar Versus the Yen and the Mark
Year Yen per Dollar Mark per Dollar
1975 305 2.7
1980 215 2.0
1985 210 2.4
1990 135 1.6
1995 85 1.4
2000 108 2.2

17
 International Financial Conditions


Example of Currency Exchange Rate Changes

A product produced and sold in the US for $1
would have sold in Japan for 135 yen in 1990 and
85 yen in 1995, a price decrease of 37%.

A product produced and sold in Japan for 135 yen
in 1990 and sold for $1 in the US would have sold
in the US for $1.57 in 1995, a 57% price increase.

18
 International Financial Conditions


Due, in part, to the fall in the value of the dollar
between 1975 and 1995, the following occurred:

Prices of US products/services abroad fell and
demand increased

Japan and other countries built factories in US

Japanese manufacturers moved upscale toward
higher priced products

19
 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

20
 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.

21
 Quality, Service, and Cost Challenges


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.
22
 Quality, Service, and Cost Challenges


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.

23
 Quality, Service, and Cost Challenges


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.

24
 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

25
 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.

26
 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.
27
 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.

28
 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.
29
 Social-Responsibility Issues


Environmental Impact

Product-Safety Impact

Employee Impact

30
 Social-Responsibility Issues


Environmental Impact
Concerns about the global environment include:

Landfill waste reduction

Recycling

Energy conservation

Chemical spills

Acid rain

Radioactive waste disposal

… and more
31
 Social-Responsibility Issues


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.

32
 Social-Responsibility Issues


Product-Safety Impact
Harm 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

33
 Social-Responsibility Issues


Employee Impact
Employee 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
34
 Social-Responsibility Issues


Employee Impact
Employee 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

35
 Developing Operations Strategy

Corporate Mission
Assessment Distinctive
of Global Competencies
Business Business Strategy or
Conditions Weaknesses
Product/Service Plans

Competitive Priorities

Operations Strategy

36
 Corporate
Corporate Mission
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

37
 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

38
 Competitive Priorities


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
39
 Competitive Priorities


Delivery Performance

Definition
a) Fast delivery b) On-time delivery

Some Ways of Creating
a) larger finished-goods inventory
a) faster production rates
a) quicker shipping methods
b) more-realistic promises
b) better control of production of orders
b) better information systems
40
 Competitive Priorities


High-Quality Products/Services

Definition
Customers’ perception of degree of excellence
exhibited by products/services

Some Ways of Creating
Improve product/service’s

Appearance

Performance and function

Wear, endurance ability

After-sales service
41
 Competitive Priorities


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

42
 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.

43
 Elements of Operations Strategy


Positioning the production system

Product/service plans (Chapter 4)

Outsourcing plans (Chapter 11)

Process and technology plans (Chapters 4 & 6)

Strategic allocation of resources (Chapter 8)

Facility plans: capacity, location, and layout
(Chapter 5)

44
 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

45
 Product/Service Plans

As a product is designed, all the detailed

characteristics 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.

46
 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.

47
 Stages of a Product’s Life Cycle

Automobile
Dot-Matrix
Fax Machine
Printer
Cell Phone
Video Recorder
Internet Radio Color Copier CD Player B&W TV

Introduction Growth Maturity Decline

48
 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.

49
 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

50
 Outsourcing Plans


Many companies even outsource some service
functions such as:

Payroll

Billing

Order processing

Developing/maintaining a website

Employee recruitment

Facility maintenance

51
 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.

52
 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.

53
 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.

54
 Characteristics of Services
and Manufactured Products
Services Products
Output Intangible Tangible
Output Inventoried Yes No
Customer Contact Extensive Little
Lead Time Short Long
Intensity Labor Capital
Quality Subjective Objective

55
 Competitive Priorities for Services


The competitive priorities listed earlier for
manufacturers apply to service firms as well

Low production costs

Fast and on-time delivery

High-quality products/services

Customer service and flexibility

Providing all the priorities simultaneously to
customers is seldom possible.

56
 Positioning Strategies for Services


Type of Service Design

Standard or custom products

Amount of customer contact

Mix of physical goods and intangible services

Type of Production Process

Quasi manufacturing

Customer-as-participant

Customer-as-product

57
 Positioning Strategies for Services


Example: McDonald’s

Highly standardized service design

Low amount of customer contact

Physical goods dominating intangible services

Quasi-manufacturing approach to back-room
production process

58
 Forming
Forming Operations
Operations Strategies
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.

59
 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.

60
 Evolution of Positioning Strategies

Life Early Late

Intro. Maturity
Stage Growth Growth
Slightly Highly
Product Custom Standard
Standard Standard
Very Very
Volume Low High
Low High
Focus Process Process Product Product
Fin.Gds. To-Order To-Order To-Stock To-Stock
Batch Very Very
Small Large
Size Small Large
61
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

62
Linking Operations and Marketing Strategies


Operations Strategy

Product-focused

Make-to-order

Standardized products

Low volume

Marketing Strategy

Low production cost

Keeping delivery promises

Quality

Example: School buses

63
Linking Operations and Marketing Strategies


Operations Strategy

Process-focused

Make-to-stock

Custom products

High volume

Marketing Strategy

Flexibility

Quality

Fast delivery of products

Example: Medical instruments

64
Linking Operations and Marketing Strategies


Operations Strategy

Process-focused

Make-to-order

Custom products

Low volume

Marketing Strategy

Keeping delivery promises

Quality

Flexibility

Example: Large supercomputers

65
 No Single Best Strategy


Start-up and Small Manufacturers
Usually prefer positioning strategies with:

Custom products

Process-focused production

Produce-to-order policies
These systems are more flexible and require less
capital.

66
 No Single Best Strategy


Start-up and Small Services
Successfully compete with large corporations by:

Carving out a specialty niche

Emphasizing close, personal customer service

Developing a loyal customer base

67
 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

68
 Wrap-Up: World-Class Practice


Put customers first

Get new products/services to market faster

Are high quality producers

Have high labor productivity & low production costs

Carry little excess inventory

. . . more

69
 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

70
End
End of
of Chapter
Chapter 22

71