SECTION 1 INTRODUCTION TO OPERATIONS STRATEGY Departamento de Organización de Empresas y Marketing Área de Organización de Empresas Operations Management

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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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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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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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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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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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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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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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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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

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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

Documents

SECTION 1 INTRODUCTION TO OPERATIONS STRATEGY Departamento de Organización de Empresas y Marketing Área de Organización de Empresas Operations Management