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SECTION 1INTRODUCTION TO OPERATIONS STRATEGY
Departamento de Organización de Empresas y Marketing
Área de Organización de Empresas
Operations Management I
Dirección de Operaciones I- English teaching
3º GADI- 5º DG-ADI-DER
Slide presentation Chapter 2
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CHAPTER 2OPERATIONS STRATEGY AND COMPETITIVENESS
2.1. Global Strategies2.2. A Global View of Operations2.3. Developing Missions and Strategies2.4. Achieving Competitive Advantage Through
Operations2.5. Ten Strategic OM Decisions2.6. Dynamics of Operations Strategy2.7. Strategy Development and Implementation2.8 Global Operations Strategy Options
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2.1 Global Strategies
Boeing – sales and production are worldwide Benetton – moves inventory to stores around the world faster than
its competition by building flexibility into design, production, and distribution
Sony – purchases components from suppliers in Thailand, Malaysia, and around the world
Volvo – considered a Swedish company but it is controlled by an American company, Ford. The current Volvo S40 is built in Belgium and shares its platform with the Mazda 3 built in Japan and the Ford Focus built in Europe.
Haier – A Chinese company, produces compact refrigerators (it has one-third of the US market) and wine cabinets (it has half of the US market) in South Carolina
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2.2 A Global View of Operations
Reasons to globalize operations:
Reduce costs (labor, taxes, tariffs, etc.) Improve supply chain Provide better goods and services Understand markets Learn to improve operations Attract and retain global talent
TangibleReasons
IntangibleReasons
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2.2 A Global View of Operations Reduce Costs (ex. U.S. Cartoon Production at Home in Manila):
Foreign locations with lower wages can help lower both direct and indirect costs.
Less stringent government regulations on a wide variety of operations practices reduce costs.
Opportunities to cut the cost of taxes and tariffs also encourage foreign operations.
Trade agreements have also helped reduce tariffs: World Trade Organization (WTO) North American Free Trade Agreement (NAFTA) APEC (Pacific rim countries) SEATO (Australia, New Zealand, Japan, Hong Kong, South Korea,
New Guinea and Chile) MERCOSUR (Argentina, Brazil, Paraguay, Uruguay) European Union (EU) (25 members in 2006)
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2.2 A Global View of Operations Improve the Supply Chain:
The supply chain can be improved by locating facilities in countries where unique resources are available: expertise, labor, or raw material.
Examples: Auto-styling studios moving to southern California to ensure
expertise in contemporary auto design. World athlelic shoe production migrating from South Korea to
Guangzhou, China: advantage of the low-cost labor and production competence.
Perfume essence manufacturer wants a presence in Grasse, France: perfume essences from flowers of the Mediterranean.
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2.2 A Global View of Operations Provide Better Goods and Services:
We need a better understanding of differences in culture and the way business is handled in different countries: permits firms to customize products and services to meet unique cultural needs in foreign markets.
Reduce response time to meet customers’ changing product and service requirements.
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2.2 A Global View of Operations Understand Markets:
International Operations require interaction with foreign customers, suppliers, and other competitive businesses, international firms inevitably learn about opportunities for new products and services.
Knowledge of these markets not only helps firms understand where the market is going but also helps firms diversify their customer base, add production flexibility, and smooth the business cycle.
Opportunity to expand the life cycle of an existing product.
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2.2 A Global View of Operations Learn to Improve Operations:
Learning does not take place in isolation: firms serve themselves and their customers well when they remain open to the free flow of ideas.
Attract and Retain Global Talent: Global organizations can attract and retain better
employees by offering more employment opportunities: they provide both greater growth opportunities and insulation against unemployment during times of economic downturn.
Global organizations also provide incentives for people who like to travel or take vacations in foreign countries.
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2.3 Developing Missions and Strategies Organization’s Mission:
Its purpose What it will contribute to society The purpose or rationale for an organization’s existence Provide boundaries and focus for organizations and the
concept around which the firm can rally
Once an organization’s mission has been decide, each functional area within the firm determines its supporting mission.
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2.3 Developing Missions and Strategies
Marketing Operations Finance/ Accounting
Functional Area Missions
Organization’s Mission
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2.3 Developing Missions and Strategies FedEx:
FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing total reliable, competitively superior, global air-ground transportation of high priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained using real time electronic tracking and tracing systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional to each other and the public. We will strive to have a completely satisfied customer at the end of each transaction.
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2.3 Developing Missions and Strategies
Merck:The mission of Merck is to provide society with superior products and services - innovations and solutions that improve the quality of life and satisfy customer needs - to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return
Hard Rock Cafe:Our Mission: To spread the spirit of Rock ‘n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and offering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring our long-term success.
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2.3 Developing Missions and Strategies Strategy:
How an organization expects to achieve its missions and goals Organization’s action plan to achieve the mission Exploits opportunities and strengths, neutralize threats, and
avoid weaknesses
Strategies for competitive advantage: Differentiation – better, or at least different Cost leadership - cheaper Response –more responsive
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2.4 Achieving Competitive Advantage Through Operations Competitive advantage:
The creation of a unique advantage over competitors. To create customer value in an efficient and sustainable way. Pure forms of these strategies (achieved via differentiation, low
cost, and response) may exist, but operations managers will more likely implement some combination of them.
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2.4 Achieving Competitive Advantage Through Operations Competing on Differentiation:
To distinguish the offerings of the organization in any way that the customer perceives as adding value.
Differentiation is concerned with providing uniqueness. Going beyond both physical characteristics and service
attributes to encompass everything about the product or service that influences the value that the customers derive from it.
Experience differentiation: engages the customer with the product through imaginative use of the five senses, so the customer “experiences” the product.
Examples: Safeskin gloves – leading edge products Hard Rock Cafe – theme experience
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2.4 Achieving Competitive Advantage Through Operations Competing on Cost:
Achieving maximum value as perceived by the customer It requires examining each of the 10 OM decisions in a relentless
effort to drive down costs while meeting customer expectations of value
Low-cost strategy does not imply low value or low quality Examples:
Southwest Airlines - secondary airports, no frills service, efficient utilization of equipment
Wal-Mart – small overheads, shrinkage, distribution costs
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2.4 Achieving Competitive Advantage Through Operations Competing on Response:
That set of values related to rapid, flexible, and reliable performance.
Flexible response: ability to match changes in a marketplace where design innovations and volumes fluctuate substantially.
Example: Hewlett-Packard – sustainable competitive advantage Reliability of scheduling
Example: German machine industry Quickness
Example: Johnson Electric – competes on speed in design, production and delivery
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2.5 Ten Strategic OM Decisions
Goods and service design
Quality Process and
capacity design Location selection Layout design
Human resource and job design
Supply-chain management
Inventory Scheduling Maintenance
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2.5 Ten Strategic OM Decisions
OperationsDecisions Goods Services
Goods and service design
Product is usually tangible
Product is not tangible
Quality Many objective standards
Many subjective standards
Process and capacity design
Customers not involved
Customer may be directly involved
Capacity must match demand
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2.5 Ten Strategic OM Decisions
OperationsDecisions Goods Services
Location selection
Near raw materials and labor
Near customers
Layout design Production efficiency Enhances product and production
Human resources and job design
Technical skills, constant labor standards, output based wages
Interact with customers, labor standards vary
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2.5 Ten Strategic OM Decisions
OperationsDecisions Goods Services
Supply-chain mgmt
Relationship critical to final product
Important, but may not be critical
Inventory Raw materials, work-in-process, and finished goods may be held
Cannot be stored
Scheduling Level schedules possible
Meet immediate customer demand
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2.5 Ten Strategic OM Decisions
OperationsDecisions Goods Services
Maintenance Often preventive and takes place at production site
Often “repair” and takes place at customer’s site
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Process Design
LowLow ModerateModerate HighHighVolumeVolume
HighHigh
ModerateModerate
LowLow
Var
iety
of
Pro
du
cts
Var
iety
of
Pro
du
cts
Process-focusedJOB SHOPS
(Print shop, emergency room, machine shop,
fine dining Repetitive (modular) focus
ASSEMBLY LINE(Cars, appliances,
TVs, fast-food restaurants) Product focused
CONTINUOUS(steel, beer, paper, bread, institutional
kitchen)
Mass CustomizationCustomization at high
Volume(Dell Computer’s PC,
cafeteria)
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Operations Strategies for Two Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive Advantage
Product Differentiation Low Cost
Product Selection and Design
Heavy R&D; labs; focus on development in a broad range of drug categories
Low R&D; focus on development of generic drugs
Quality Major priority, exceed regulatory requirements
Meets regulatory requirements on a country by country basis
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Operations Strategies for Two Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive Advantage
Product Differentiation Low Cost
Process Product and modular process; long production runs in specialized facilities; build capacity ahead of demand
Process focused; general processes; job shop approach, short production runs; focus on high utilization
Location Still located in the city where it was founded
Recently moved to low-tax, low-labor-cost environment
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Operations Strategies for Two Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive Advantage
Product Differentiation Low Cost
Scheduling Centralized production planning
Many short-run products complicate scheduling
Layout Layout supports automated product-focused production
Layout supports process-focused job shop practices
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Operations Strategies for Two Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive Advantage
Product Differentiation Low Cost
Human Resources
Hire the best; nationwide searches
Very experienced top executives; other personnel paid below industry average
Supply Chain Long-term supplier relationships
Tends to purchase competitively to find bargains
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Operations Strategies for Two Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive Advantage
Product Differentiation Low Cost
Inventory High finished goods inventory to ensure all demands are met
Process focus drives up work-in-process inventory; finished goods inventory tends to be low
Maintenance Highly trained staff; extensive parts inventory
Highly trained staff to meet changing demand
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2.6. Dynamics of Operations Strategy Strategies change for two reasons:
Changes within the organization: Personnel Finance Technology Product life
Changes in the environment
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Product Life Cycle
Best period to Best period to increase market increase market shareshare
R&D engineering is R&D engineering is criticalcritical
Practical to change Practical to change price or quality price or quality imageimage
Strengthen nicheStrengthen niche
Poor time to Poor time to change image, change image, price, or qualityprice, or quality
Competitive costs Competitive costs become criticalbecome criticalDefend market Defend market positionposition
Cost control Cost control criticalcritical
Introduction Growth Maturity Decline
Co
mp
an
y S
tra
teg
y/Is
sue
sC
om
pa
ny
Str
ate
gy/
Issu
es
InternetInternet
Flat-screen Flat-screen monitorsmonitors
SalesSales
DVDDVD
CD-ROMCD-ROM
Drive-through Drive-through restaurantsrestaurants
Fax machinesFax machines
3 1/2” 3 1/2” Floppy Floppy disksdisks
Color printersColor printers
Figure 2.5Figure 2.5
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Product Life Cycle
Product design Product design and and development development criticalcritical
Frequent Frequent product and product and process design process design changeschanges
Short production Short production runsruns
High production High production costscosts
Limited modelsLimited models
Attention to Attention to qualityquality
Introduction Growth Maturity Decline
OM
Str
ate
gy
/Issu
es
OM
Str
ate
gy
/Issu
es
Forecasting Forecasting criticalcritical
Product and Product and process process reliabilityreliability
Competitive Competitive product product improvements improvements and optionsand options
Increase capacityIncrease capacity
Shift toward Shift toward product focusproduct focus
Enhance Enhance distributiondistribution
StandardizationStandardization
Less rapid Less rapid product changes product changes – more minor – more minor changeschanges
Optimum Optimum capacitycapacity
Increasing Increasing stability of stability of processprocess
Long production Long production runsruns
Product Product improvement and improvement and cost cuttingcost cutting
Little product Little product differentiationdifferentiation
Cost Cost minimizationminimization
Overcapacity Overcapacity in the in the industryindustry
Prune line to Prune line to eliminate eliminate items not items not returning returning good margingood margin
Reduce Reduce capacitycapacity
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2.7. Strategy Development and Implementation
Determine Corporate MissionState the reason for the firm’s existence and identify the
value it wishes to create.
Form a StrategyBuild a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, after-sale service, broad product lines.
Environmental AnalysisIdentify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
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2.8 Global Operations Strategy Options Multinational Corporation (MNC):
Firm with extensive international business involvement. Buy resources, create goods or services, and sell goods or
services in a variety of countries. Applies to most of the world’s large, well-known businesses. Example: IBM – imports electronics components from over 50
countries, exports computers to over 130 countries, has facilities in 45 countries, earns more than half its sales and profits abroad.
Four strategies: International Multidomestic Global Transnational
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2.8 Global Operations Strategy Options International Strategy:
Uses exports and licenses to penetrate the global arena.
Is the least advantageous: Little local responsiveness – we are exporting or licensing a
good from the home country Little cost advantage – we are using existing production
process at some distance from the new market
Is the easiest to implement: exports can require little change in existing operations licensing agreements often leave much of the risk to the
licensee.
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2.8 Global Operations Strategy Options Multidomestic Strategy:
Operating decisions are decentralized to each country to enhance local responsiveness.
Organizationally: subsidiaries, franchises, or joint ventures with substantial independence.
Advantage: maximizing a competitive response for the local market.
The strategy has little or no cost advantage.
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2.8 Global Operations Strategy Options Global Strategy:
Operating decisions are centralized and headquarters coordinates the standardization and learning between facilities, thus generating economies of scale.
Appropriate when the strategic focus is cost reduction but has little to recommend it when the demand for local responsiveness is high.
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2.8 Global Operations Strategy Options Transnational Strategy:
Combines the benefits of global-scale efficiencies (such as economies of scale and learning) with the benefits of local responsiveness (by recognizing that core competence does not reside in just “home” country but can exist anywhere in the organization).
Transnational describes a condition in which material, people, and ideas cross national boundaries.
Have the potential to pursue all three operations strategies (i.e., differentiation, low cost, and response).
The resources and activities are dispersed, but specialized, so as to be both efficient and flexible in an interdependent network.
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2.8 Global Operations Strategy Options Global
strategy•Standardized
product•Economies of scale
•Cross-cultural learning
Examples:Texas Instruments
CaterpillarOtis Elevator
Transnational strategy
•Move material, people, ideas acrossnational boundaries•Economies of scale
•Cross-cultural learning
Examples:Coca-Cola
Nestlé
Internationalstrategy
•Import/export,or license existing
product
Examples:U.S. Stell
Harley Davidson
Multidomesticstrategy
•Use existingdomestic model globally
•Franchise, joint ventures, subsidiaries
Examples:Heinz
McDonald’sThe Body ShopHard Rock Cafe
Low HighLocal Responsiveness Considerations(Quick Response and/or Differentiation)
High
CostReduction
Considerations
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