Chapter 2

Competitiveness, Strategy, and

Productivity

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
A Cold Hard Fact
Better quality, higher productivity, lower costs,
and the ability to respond quickly to customer
needs are more important than ever and…
the bar is getting higher

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Chapter Focus
• Competitiveness
• Strategy
• Productivity

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Competitiveness

• 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?

2-4
 Keys that business use to
compete with one another
5

• Price: the amount a customer must pay for the

product or service.
• Quality: it relates to the buyers perception of how
well the product or service will serve its purpose.
• Product differentiation: refers to any special
features that cause a G or S to be perceived by the
buyer as more suitable than a competitors product
or service

Lecturer: Ahmed El Rawas 2-5

 Keys that business use to
compete with one6 another
• Flexibility: is the ability to respond to changes.
• Time: refers to a number of different aspects of an
org operation, one is how quickly a product or
service is delivered to a customer, another is how
quickly new product or service are developed and
brought to the market.

Lecturer: Ahmed El Rawas 2-6

Why Some Organizations Fail
• Neglecting operations strategy
• Failing to take advantage of strengths and opportunities
• Failing to recognize competitive threats and weaknesses
• Neglecting investments in capital and human resources
• Failing to establish good internal communications and cooperation
• Failing to consider customer wants and needs

2-7
Hierarchical Planning

Mission

Goals

Organizational Strategies

Functional Strategies

Tactics

2-8
Mission
• Mission
– The reason for an organization’s existence
• Mission statement
– States the purpose of the organization
– The mission statement should answer the question of
“What business are we in?”

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Goals
• The mission statement serves as the basis for
organizational goals
• Goals
– Provide detail and the scope of the mission
– Goals serve as the basis for organizational strategies

2-10
 Strategies
• Strategy
– A plan for achieving organizational goals
• Serves as a roadmap for reaching the organizational
objectives
– Organizations have
• Organizational strategies
– Overall strategies that relate to the entire organization
– Support the achievement of organizational goals and mission
• Functional level strategies
– Strategies that relate to each of the functional areas and that
support achievement of the organizational strategy

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Tactics and Operations
• Tactics
– The methods and actions taken to accomplish
strategies
– The “how to” part of the process
• Operations
– The actual “doing” part of the process

2-12
Core Competencies

• Core Competencies
The special attributes or abilities that give an
organization a competitive edge
• To be effective core competencies and
strategies need to be aligned

2-13
Sample Strategies
Organizational Examples of Companies or
Strategy Operations Strategy Services
High Quality High performance design Sony TV
and/or high quality Lexus
processing

Consistent Quality
Coca-Cola; electric power
Short Time Quick Response McDonald’s Restaurants
Express mail
On-time delivery FedEx;
Newness Innovation microsoft
Express mail
Variety Flexibility Burger King (Have it your way”)
Volume McDonald’s (“Buses Welcome”)
Service Superior customer service Disneyland
IBM
Location Convenience Supermarkets
Mall Stores

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Strategy Formulation
• Effective strategy formulation requires taking
into account:
– Core competencies
– Environmental scanning
• SWOT
• Successful strategy formulation also requires
taking into account:
– Order qualifiers
– Order winners

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Strategy Formulation
• Order qualifiers
– Characteristics that customers perceive as
minimum standards of acceptability to be
considered as a potential purchase
• Order winners
– Characteristics of an organization’s goods or
services that cause it to be perceived as better
than the competition

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Environmental Scanning
• Environmental Scanning is necessary to
identify
– Internal Factors
• Strengths and Weaknesses
– External Factors
• Opportunities and Threats

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Key External Factors
• Economic conditions
• Political conditions
• Legal environment
• Technology
• Competition
• Markets

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Key Internal Factors
• Human Resources
• Facilities and equipment
• Financial resources
• Customers
• Products and services
• Technology
• Suppliers

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Quality-Based Strategies
• Quality-based strategy
– Strategy that focuses on quality in all phases of an
organization
• Pursuit of such a strategy is rooted through
– Trying to overcome a poor quality reputation
– Desire to maintain a quality image

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Time-Based Strategies
• 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

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Time-Based Strategies
• Areas where organizations have achieved time
reductions:
– Planning time
– Product/service design time
– Processing time
– Delivery time
– Response time for complaints

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Productivity
• Productivity is a measure of the efficiency of
production. Productivity is a ratio of what is
produced to what is required to produce it.
Usually this ratio is in the form of an average,
expressing the total output divided by the total
input. Productivity is a measure of output from a
production process, per unit of input.

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Productivity

• 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
country

2-24
 Productivity Measures
Output
Productivity =
Input

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

2-25
Labor Productivity
• is the ratio of (the real value of) output to the input
of labor. Where possible, hours worked, rather than
the numbers of employees, is used as the measure
of labor input. Specifically, how many goods or
services are produced within one working hour.
With an increase in part-time employment, hours
worked provides the more accurate measure of
labor input. Labor productivity should be interpreted
very carefully if used as a measure of efficiency. In
particular, it reflects more than just the efficiency or
productivity of workers.

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Labor Productivity
• Labor productivity is the ratio of output to labor input;
and output is influenced by many factors that are outside
of workers' influence, including the nature and amount of
capital equipment which is used to produce other
commodities, introduction of new technologies,
agricultural resources and management practices. There
is an inverse relationship between the demand for labor
and the wage rate that a business needs to pay for each
additional worker employed. When the wages per
worker are less, then labor becomes relatively cheaper
than for example using capital equipment and it
becomes more profitable for the business to take on
more employees.

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Multifactor Productivity
• is the ratio of the real value of output to the combined
input of labor and capital. The Standard “neo-classical”
labor market theory assumes that businesses seek to
maximize profits. They will therefore search in the long
run for the mix of factors of production (labor and capital)
that produces the required level of output as efficiently
as possible for the lowest possible total cost. Sometimes
this measure is referred to as total factor productivity. In
principle, multifactor productivity is a better indicator of
efficiency. It measures how efficiently and effectively the
main factors of production - labor and capital - combine
to generate output

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Productivity Calculation Example
Units produced: 5,500
Standard price: $35/unit
Labor input: 500 hours
Cost of labor of $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost

What is the
multifactor
productivity?

2-29
 Solution

Output
Multifactor Productivity =
Labor + Material + Overhead
5,000 units  $30/unit
=
(500 hours $25/hour) + $5,000 + (2(500 hours $25/hour))
= 4.12


What
 is the implication of a unitless measure of productivity?

2-30
 Question (1)
31

• The following table contains productivity information for may

and June 2001 for a company of landscaping service.

• May June
• Output 800 1200
• Plants, flower 200 400
• Gasoline 100 150
• Wages 400 500
• Maintenance 50 60
• Measure the productivity and find the change in productivity
that occurred between may and June.

Lecturer: Ahmed El Rawas 2-31

 Answer Question no (1)
32

• Productivity for may = output / input

• 800 / (200+100+400+50) = 1.07
• Productivity for June= output / input
• 1200 / ( 400+150+ 500+60) = 1.08
• The change between may and June productivity
increases by 0.01

Lecturer: Ahmed El Rawas 2-32

 Question (2)
33

• The weekly output of a fabrication process is 400

units. The standard selling price is L.E 125 per
unit. Assume the number of workers are 15, each
work 40 hours a week and hourly wage of L.E 15.
material cost is L.E 50 per unit and overhead
charged at the rate of 2000 plus 10% of the labor
cost.
• Compute: 1- labor productivity.
• 2- multifactor productivity.

Lecturer: Ahmed El Rawas 2-33

 Answer for Question (2)
34

• Labor productivity= output / labor input.

• 400 x 125 / ( 15 x 40 x 15 )= 5.6
• Total productivity= total output / total input
• 400 x 125 / ( 15 x 40 x 15 ) + ( 50 x 400 ) + ( 2000
+ 10% x ( 15 x 40 x 15 )= 1.57

Lecturer: Ahmed El Rawas 2-34

productivity growth
• At the national level, productivity growth raises living
standards because more real income improves
people's ability to purchase goods and services,
enjoy leisure, improve housing and education and
contribute to social and environmental programs.
Productivity growth is important to the firm because
it means that the firm can meet its (perhaps
growing) obligations to customers, suppliers,
workers, shareholders, and governments (taxes and
regulation), and still remain competitive or even
improve its competitiveness in the market place

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Productivity Growth

Current productivity - Previous productivity

Productivity Growth = 100%
Previous productivity

Example: Labor productivity on the ABC assembly line was 23 units per hour in
2006. In 2007, labor productivity was 25 units per hour. What was the
productivity growth from 2006 to 2007?

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

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Growth - Non-Farm
Growth in the Private Non-Farm Business Sector

5
Average Annual Percent Change

3
1.9
2
1.1 1.3
1 0.4 0.6

0
1948-1973 1973-1990 1990-1995 1995-2000 2000-2007

2-37
Growth - Manufacturing

Growth in the Manufacturing Sector

3
2
2 1.6
1.2
1
0.2
0
1987-1990 1990-1995 1995-2000 2000-2006

2-38
Importance of national productivity
growth
• Productivity growth is a crucial source of growth in living
standards. Productivity growth means more value is added
in production and this means more income is available to be
distributed.
• At a firm or industry level, the benefits of productivity growth
can be distributed in a number of different ways:
1.to the workforce through better wages and conditions
2.to shareholders through increased profits and dividend
distributions
3.to customers through lower prices
4.to the environment through more environmental protection
5.to governments through increases in tax payments (which
can be used to fund social and environmental programs).

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Sources of productivity growth
• In the most immediate sense, productivity is determined
by:
1.the available technology or know-how for converting
resources into outputs desired in an economy; and
2.the way in which resources are organized in firms and
industries to produce goods and services.
• Average productivity can improve as firms move toward
the best available technology; plants and firms with poor
productivity performance cease operation; and as new
technologies become available. Firms can change
organizational structures (e.g. core functions and
supplier relationships), management systems and work
arrangements to take the best advantage of new
technologies and changing market opportunities. A
nation's average productivity level can also be affected
by the movement of resources from low-productivity to
high-productivity industries and activities.
2-40
Factors Affecting Productivity

Methods
Methods

Capital
Capital Quality
Quality

Technology
Technology Management
Management

2-41
Improving Productivity
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 improvement
6. Measure and publicize improvements

2-42
 Assignments (1)
Question (1)
a catering company prepared and served 300
meals at an anniversary celebration last week
using 8 workers, the week before 6 workers
prepared and served 240 meals at a wedding
reception.
a)For which event was the labor productivity
higher ? Explain
b)What are some possible reasons for the
productivity differences

2-43
Question (2)
A company that makes shopping carts for supermarkets and other
stores recently purchased some new equipment that reduces the
labor content of the jobs needed to produce the shopping carts.
Prior to buying the new equipment, the company uses 5 workers,
who produced an average of 80 carts per hour. Workers receive
$10per hour, and machine cost was $40 per hour. With the new
equipment, it was possible to transfer one of the workers to another
department and equipment cost increased by $10 per hour while
output increased by 4 carts per hour.
a)Compute the labor productivity under each system, use carts per
worker per hour as the measure of labor productivity
b)Compute the multifactor productivity under each system
c)Comment on the changes in productivity according to the two
measurements

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