Chapter 2: Competitiveness, Strategy, and Productivity

1. Chapter 2: Competitiveness,Strategy,andProductivity Department of Business Administration FALL 2013-2014

2. Outline: What You Will Learn . . . • List and briefly discuss the primary ways that business organizations compete. • List five reasons for the poor competitiveness of some companies. • Define the term strategy and explain why strategy is important for competitiveness. • Contrast strategy and tactics. • Discuss and compare organization strategy and operations strategy, and explain why it is important to link the two. • Describe and give examples of time-based strategies. • Define the term productivity and explain why it is important to organizations and to countries. • List some of the reasons for poor productivity and some ways of improving it.

3. The three topics. . . • Competitiveness,Strategy,andProductivity are three separete but related topics that are vitally important to business organizations. • Competitiveness relates to the effectiveness of an organization in the market place relatively to other organizations that offer similar products or services. • Strategyrelates to the plans that determine how an organization pursues its goals. • Productivity relates to the effective use of resources and it has a direct impact on competitiveness.

4. Competitiveness • Competitiveness: • Companies must be competitive to sell their goods and provide services in the market • It is an important factor in determining whether a company succeeds or fails • Marketing influences competitiveness in several ways How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

5. Competitiveness • Identifying consumer wants and needs • is a basic input organization’s decision making process and central to competitiveness • Pricing • is a key factor in consumer buying decision • Advertising and promotion • is a key element that informs potential consumers and attracts buyers

6. Competitiveness-Important factors • Product and service design • Cost • Location • Quality • Quick response • Flexibility • Inventory management • Supply chain management • Service and service quality • Managers and workers

7. Competitiveness -Important factors • product and service-special characteristics of product and service design is a key factor in consumer buying decisions. • innovation and the time to market are also key factors for new products and services. • cost of organization’s output is a key variable that influences pricing decisions and profit policies. • location is an important factor in term of transportation cost and convenience for customers. • qualityis another key element that refers to materials, workmanship, design and service. • quick response is a key factor that can be a competitive advantage- quickly bring the new product or service into market. • flexibility is the ability to respond to changes for the market

8. Competitiveness -Important factors • Inventory management can be a competitive advantage by effectively matching supplies of goods with demand. • Supply chain management involves coordinating internal and external operations to achieve timely and cost-effectively delivery of goods throughout the system. • service is a key differentiator- after sale activities customers perceive as value-added such as delivery, warranty work and technical support • managers and workers are the people at the heart and soul of an organization (i.e. Skills and ideas).

9. Why Some Organizations Fail? • Organizations fail or perform poorly for a variety of resons. Being aware of such resons may help managers avoid making similar mistake. Some of the reasons are following: • Too much emphasis on short-term financial performance at the expense of research and development. • Failing to take advantage of strengths and opportunities • Failing to recognize competitive threats • Neglecting operations strategy • Failing to recognize competitive threats • Too much emphasis in product and service design and not enough on improvement • Neglecting investments in capital and human resources • Failing to establish good internal communications • Failing to consider customer wants and needs

10. Two important questions? • The key questions are following: • What do the customers want? • What is the best way to satify those wants? • Operations must work with marketing to obtain information on the relative importance of the various items to each major customer or target market. • Understanding competitive issues can help managers develop successful strategies.

11. Strategy • Plans for achieving organizational goals • The importance of strategies should not be overstated • Strategies can be • Long-term • Intermediate-term • Short-term • Strategies can be effective if they are designed well to support the organization’s mission and its goals:

12. Mission and Goals • Mission • The reason for existence for an organization • Mission Statement • States the purpose of an organization • Goals • Provide detail and scope of mission • Strategies • Plans for achieving organizational goals • Tactics • The methods and actions taken to accomplish strategies

13. Mission Strategy Tactics Mission/Strategy/Tactics How does mission, strategies and tactics relate to decision making and distinctive competencies?

14. Planning and Decision Making Figure 2.1 The overall relationship from Mission to Operation is hierarchical • This slide is excluded from the exam Mission Goals OrganizationalStrategies Functional Goals Finance Strategies MarketingStrategies OperationsStrategies Tactics Tactics Tactics Operatingprocedures Operatingprocedures Operatingprocedures

15. Strategy Example • Rita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Live a good life • Goal: Successful career, good income • Strategy: Obtain a college education • Tactics: Select a college and a major how to finance college • Operations: Register, buy books, take courses, study, graduate, get job

16. Examples of Strategies • Low cost:outsource operations to the third world countries that have low labor costs. • Scale-based strategies: use the capital intensive methods to achieve high output volume and low unit cost. • Specialization: focus on norrow product lines or limited services to achieve higher quality. • Flexible operations: focus on quick response. • High quality: focus on achieving higher quality than competitors. • Service: focus on various aspects of service (e.g., helpful, courteous, reliable, etc.).

17. Strategy and Tactics • Distinctive Competencies • The special attributes or abilities that give an organization a competitive edge. • The most effective organizations use an approach that develops distinctivecompetencies based on customer needs and wants. • Strategy Factors • Price • Quality • Time • Flexibility • Service • Location

18. Price Low Cost U.S. first-class postage Motel-6, Red Roof Inns Quality High-performance design or high quality Consistent quality Sony TV Lexus, Cadillac Pepsi, Kodak, Motorola Time Express Mail, Fedex, One-hour photo, UPS Rapid deliveryOn-time delivery Flexibility Variety Volume Burger King Supermarkets Service Superior customer service Disneyland Nordstroms Location Convenience Banks, ATMs Examples of Operations Strategies

19. Global Strategy • Many companies realized that strategic decisions must be made with respect to globalization as it has increased. • What works in one country may not work in another • Strategies must be changed to account for these differences • Other issues • Political, social, cultural, and economic differences

20. Key External Factors • Economic conditions: the general health, direction of the economy, inflation, deflation, interest rates, tax laws and tariffs. • Political conditions:favorable or unfavoable attitudes toward business, political stability or instability and wars. • Legal environment:government regulations, trade restriction, minimum wage law, labor law and patent. • Technology:product innovations and new design. • Competition: price, quality, special features and the ease of market entry. • Markets: size, location, brand loyalties, potential for growth, long-term stability, and demographics.

21. Key Internal Factors • Human Resources:the skills and abilities of managers and workers, special talent, loyalty, dedication and experience. • Facilities and equipment:capacities, location, age, cost and replace. • Financial resources:funding, debt burden, cost of capital and cash flow. • Customers:loyalty and understanding of wants and needs. • Products and services:quality, design and potential for new products and services. • Technology:the ability to integrate new technology. • Suppliers: quality,flexibility, reliable and trustworthy in service.

22. Strategy Formulation • To formulate an effective strategy, senior managers must take into account the followings: • Distinctive competencies • The special attributes or abilities that give an organization a competitive edge. • Environmental scanning • The considering of events and trends that present threats or opportunities for a company • SWOT-link between organizational and operations strategies • The is an approach shows strengths and weaknesses have an internal focus and evaluated by operation people. The threats and opportunities have external focus and evaluated by marketing people.

23. 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 • This slide is excluded from the exam

24. Operations Strategy • Operations strategy • The approach, consistent with organization strategy, that is used to guide the operations function. • Quality-based strategies • Focuses on maintaining or improving the quality of an organization’s products or services • Time-based strategies • Focuses on reduction of time needed to accomplish tasks

25. JAN FEB MAR APR MAY JUN Planning Designing Processing Changeover On time! Delivery Time-based Strategies • This slide is excluded from the exam

26. Strategic OM Decisions • This slide is excluded from the exam

27. Efficiency • Economic Efficiency • It refers to the ratio of outputs to input. This means that economic efficency is getting the most output from the least amount of inputs. • Organizational Efficiency • It is a ratio of product or service outputs to land, capital or labor inputs. • Efficiency (%) = (Output/Input)*100% • or realized output/expected output • A coffee shop makes 150 coffees per hour. How efficent is the operation as labor input produces 200 coffees per hour? • Efficiency (%) = (Output/Input)*100% = (150/200)*100% = 75%

28. Outputs Productiv ity = Inputs Productivity • Productivity • A measure of the effective use of resources, usually expressed as the ratio of output to input • Productivity ratios are used for • Planning workforce requirements • Scheduling equipment • Financial analysis • Partial measures • output/(single input) • Multi-factor measures • output/(multiple inputs) • Total measure • output/(total inputs)

29. Capital Quality Technology Management Factors Affecting Productivity

30. Other Factors Affecting Productivity • Standardization • Quality • Use of Internet • Computer viruses • Searching for lost or misplaced items • Scrap rates • New workers • Safety • Shortage of IT workers • Layoffs • Labor turnover • Design of the workspace • Incentive plans that reward productivity • This slide is excluded from the exam

31. Key StepsIn Productivity • Develop productivity measures • Determine critical (bottleneck) operations • Develop methods for productivity improvements • Establish reasonable goals • Get management support • Measure and publicize improvements • Don’t confuse productivity with efficiency

32. The difference between Productivity and efficiency • Productivity is based on how much is produced in a certain amount of timeat the lowest possible cost. Or/ • Productivity refers to the quantity of accomplishment within a given timeframe. • Efficiency is based on time spent in production. Or/ • Efficiencyrefers to how many resources such as time, money, and energyare exerted for one unit of productivity.

33. Current Period Productivity – Previous Period Productivity Previous Period Productivity Productivity Growth

34. Measures of Productivity • Partial Output Output Output Outputmeasures Labor Machine Capital Energy • Multifactor Output Output • measures Labor + Machine Labor + Capital + Energy • Total Goods or Services Produced • measure All inputs used to produce them

35. Labor Productivity Units of output per labor hour Units of output per shift Value-added per labor hour Machine Productivity Units of output per machine hour machine hour Capital Productivity Units of output per dollar input Dollar value of output per dollar input Energy Productivity Units of output per kilowatt-hour Dollar value of output per kilowatt-hour Partial Productivity Measures

36. Example-Productivity • A company makes 7040 Units Produced and the costs are reported as follows: Cost of labor of $1,000, Cost of materials is $520 and Cost ofoverhead is $2000. What is the multifactor productivity? MFP = Output Labor + Materials + Overhead MFP =(7040 units) $1000 + $520 + $2000 MFP = 2.0 units per dollar of input

37. Example-Productivity Growht • If productivity increased from 80 to 84. What is theproductivity growth rate? PGR = 84-80 80 X 100 PGR = 5%

38. Example-Productivity • Determine the productivity for the following case. • Four workers installed 720 sq yards of carpeting in eight hours • A machine produced 68 usable pieces in two hours (a) Productivity= Yards of carpet installed Labor hours worked P =720 4 x 8 P = 22.5 yards/ hours

39. Example-Productivity (b) Productivity= Useable pieces Production time P =68 2 P = 34 pieces/ hours

40. Example- Labor Productivity • A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in half an hour with four workers. • What is labor productivity Labor Productivity = Quantity produced Labor hours LP =400 4 x (1/2) LP = 200 cases/ labor hours

41. Production 4000 (Last Year) 4000 (This Year) Labor (hour) 350 (Last Year) 375 (This Year) Capital ($) 15000 (Last Year) 18000 (This Year) Energy (kWh) 3000 (Last Year) 2600 (This Year) Example- Labor Productivity • A ceramics company spent $ 3000 on a new kiln (oven) last year. It was planned that it would cut energy usage 25% over the old kiln. The manager of the company wants to check the energy savings of the new oven and to look other measures of their productivity whether the change really was beneficial. The company’s data are the following: • Explain whether the modification were beneficial or not

42. Example- Labor Productivity • Labour 4000/350=11.42 (last year) 4000/375= 10.66 (this year) • Capital 4000/15000=0.266 4000/18000=0.222 • Energy 4000/3000=1.33 4000/2600=1.54 • Labour change = 10.66-11.42=-0.76 • Labour Growth = (10.66-11.42)/11.42= -6.66 • Capital change = 0.222-0.266= - 0.044 • Capital Growth = (0.222-0.266)/0.266= - 16.54 • Energy change = 1.54-1.33=0.21 • Energy Growth = (1.54-1.33)/ 1.33=15.78 • The energy modifications did not generate the expected savings because energy growth increased whereas labour and capital productivity decreased. Energy productivity growth is 15.78% so it is still lower than the target one (i.e. 25%).

43. Example- MFP • Compute the MFP for an eight hour day where the usable output was 300 units, produced by three workers who used 600 pounds of materials. Workers have an hourly wage of $ 20, and materials cost is $ 1 per pound. Overhead is 1.5 times labor cost. MFP = Output Labor cost + Materials cost + Overhead cost MFP =(300 units) 3x8x20 + 600x1 + 3x8x20x1.5 MFP = 0.167units of output per dollar of input

44. Thanks