COMPETITIVENESS, STRATEGY, AND PRODUCTIVITY Chapter 2 MIS 373: Basic Operations Management

LEARNING OBJECTIVES After this lecture, students will be able to 1.List several ways that business organizations compete. 2.Discuss and compare organization strategy and operations strategy and explain why it is important to link the two. 3.Define the term productivity and explain why it is important to organizations and to countries. 4.Describe several factors that affect productivity. MIS 373: Basic Operations Management2

OVERVIEW Three separate, but related concepts that are vitally important to business organizations: Competitiveness Strategy Productivity MIS 373: Basic Operations Management3

COMPETITIVENESS Competitiveness: How effectively an organization meets the needs of customers relative to others that offer similar goods or services Organizations compete over: Price (Cost): WAL-MART Quality: BMW Response-time: UPS Variety (Flexibility): DELL MIS 373: Basic Operations Management4

OPERATIONS INFLUENCE ON COMPETITIVENESS Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management Service Managers and workers Competitiveness MIS 373: Basic Operations Management5

WHY SOME ORGANIZATIONS FAIL Neglecting operations strategy. Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats. Putting too much emphasis on short-term financial performance at the expense of research and development. Placing too much emphasis on product and service design and not enough on process design and improvement. Neglecting investments in capital and human resources. Failing to establish good internal communications and cooperation among different functional areas. Failing to consider customer needs. MIS 373: Basic Operations Management6

EXERCISE Name 10 ways that banks compete for customers. Hint: consider operations influence on competitiveness Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management Service Managers and workers

HIERARCHICAL PLANNING AND DECISION MAKING MIS 373: Basic Operations Management Mission Goals Organizational Strategies Functional Goals Finance Strategies Marketing Strategies Operations Strategies Tactics Operating procedures 8

WAL-MART DELIVERY SERVICE SAYS TO AMAZON: 'BRING IT' wsj.com 10/19/2012 In its latest bid to take on Amazon.com this holiday season, Wal-Mart is promising same-day delivery in some cities for orders placed online. Called Wal-Mart To Go, the service costs $10 regardless of the size of the order. The products will be shipped from the company's stores, not from a warehouse or distribution center. Wal-Mart is betting that its network of thousands of stores, combined with an improved online presence can help it compete head to head with Amazon, which has increasingly stressed fast, free or low-cost deliveries. UPS will pick up the goods and deliver them to customers Nearly half of Wal-Mart's online sales now come from purchases customers make online and pick up at a store, "We have a unique advantage because we have the national footprint of stores combined with our online site that enable programs like site to store, pay with cash or pick up today," MIS 373: Basic Operations Management9

HIERARCHICAL PLANNING AND DECISION MAKING MIS 373: Basic Operations Management Mission Goals Organizational Strategies Functional Goals Finance Strategies Marketing Strategies Operations Strategies Tactics Operating procedures Wal-Mart To Go 10

MISSION AND GOALS Mission The reason for an organizations existence Mission statement States the purpose of the organization The mission statement should answer the question of What business are we in? The mission statement serves as the basis for organizational goals Goals Provide detail and the scope of the mission Goals can be viewed as organizational destinations Goals serve as the basis for organizational strategies MIS 373: Basic Operations Management11

EXAMPLE MISSION STATEMENTS FedEx Mission Statement http://about.van.fedex.com/mission-strategy-values FedEx Corporation will produce superior financial returns for its shareowners by providing high value-added logistics, transportation and related business services through focused operating companies. Customer requirements will be met in the highest quality manner appropriate to each market segment served. FedEx will strive to develop mutually rewarding relationships with its employees, partners and suppliers. Safety will be the first consideration in all operations. Corporate activities will be conducted to the highest ethical and professional standards. MIS 373: Basic Operations Management12

STRATEGY Strategy A plan for achieving organizational goals Serves as a roadmap for reaching the organizational destinations 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 MIS 373: Basic Operations Management13

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 MIS 373: Basic Operations Management14

ORGANIZATIONAL STRATEGY Low Price Outsource operations to countries with low labor cost Use capital-intensive methods to achieve high output volume and low unit cost Specialization Focus on narrow product lines or limited services to achieve higher quality Responsiveness (time-based strategies) Strategies that focus on the reduction of time needed to accomplish tasks Differentiation: Variety Focus on customization Differentiation: Newness Focus on innovation to create new products or services Differentiation: Service Focus on various aspects of service (e.g., helpful, reliable, etc) Differentiation: Quality focus on quality in all phases of an organization in order to achieve higher quality than competitors MIS 373: Basic Operations Management15

OPERATIONS STRATEGY The organizational strategy provides the overall direction for the organization. It is broad in scope, covering the entire organization. Operations strategy is narrower in scope, dealing primarily with the operations aspect of the organization. Operations strategy relates to products, processes, methods, operating resources, quality, costs, lead times, and scheduling. In order for operations strategy to be truly effective, it is important to link it to organization strategy MIS 373: Basic Operations Management16

EXAMPLES OF STRATEGIES Organizational StrategyOperations Strategy Examples of Companies or Services Low PriceLow CostWal-Mart Southwest Airlines ResponsivenessShort processing times On-time delivery McDonalds restaurants FedEx Differentiation: High Quality High performance design and/or high quality processing Consistent Quality BMW Coca-Cola Differentiation: Newness Innovation3M Apple Differentiation: Variety Flexibility Volume Burger King (Have it your way) McDonalds (Buses Welcome) Differentiation: Service Superior customer serviceDisneyland IBM Differentiation: Location ConvenienceSupermarkets Banks, ATMs MIS 373: Basic Operations Management17

3M Founded in 1902, 3M started out in the mining business as the Minnesota Mining and Manufacturing Company. 3M launched the 15 percent program in 1948. a program at 3M that allows employees to use a portion of their paid time to chase rainbows and hatch their own ideas. Thirty Percent Rule, 30% of each divisions revenues must come from products introduced in the last four years.Thirty Percent Rule Over a 20-year period, 3Ms gross margin averaged 51% and the companys return on assets averaged 29%. Mission 3M is a science and technology company that creates. For decades, 3M scientists and engineers have developed products that solve problems. 3M is also a company that cares improving lives each day. The mission of 3Mgives: To Improve Every Life through Innovative Giving in Education, Community and the Environment mirroring our corporate vision: 3M Technology Advancing Every Company 3M Products Enhancing Every Home 3M Innovation Improving Every Life

EXERCISE Name three companies that are not in the examples I gave, and describe their core organizational strategies in terms of the following options: Low Price Specialization Responsiveness Differentiation: Quality Differentiation: Newness Differentiation: Variety Differentiation: Service Go online and find the mission statements of the three companies. Are their strategies aligned with their mission statements? Wal-Mart Southwest Airlines McDonalds FedEx BMW Coca-Cola 3M Apple Burger King Disneyland IBM Supermarkets Banks, ATMs

STRATEGY FORMULATION Three common approaches Michael Porter's five forces model Environmental scanning (SWOT) Balanced Scorecard MIS 373: Basic Operations Management20

PORTER'S FIVE FORCES MODEL MIS 373: Basic Operations Management21 SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry THREAT OF NEW ENTRANTS Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution DEGREE OF RIVALRY Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes THREAT OF SUBSTITUTES Switching costs Buyer inclination to substitute Price-performance trade-off of substitutes BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Product differentiation Substitutes available Buyers' incentives Source: http://www.quickmba.com/strategy/porter.shtml

PORTER ON HIS FIVE FORCES MODEL

SWOT Environmental scanning (SWOT) Internal Factors Strengths and Weaknesses External Factors Opportunities and Threats MIS 373: Basic Operations Management23

SWOT: KEY INTERNAL FACTORS 1.Human Resources Skills of workforce, expertise, experience, loyalty to the organization 2.Facilities and equipment Capacities, locations, age, maintenance costs 3.Financial resources Cash flow, access to additional funding, debt, cost of capital 4.Customers Loyalty, wants and needs 5.Products and services Existing, potential for new ones 6.Technology Existing, ability to integrate new and its impact on current and future operations 7.Suppliers Relationships, dependency, quality, flexibility, service 8.Other Labor relations, company image, distribution channels etc. MIS 373: Basic Operations Management24

SWOT: KEY EXTERNAL FACTORS 1.Economic conditions Health and directions of the economy, inflation, deflation, interest rates, taxes, tariffs. 2.Political conditions Attitude towards business, political stability, wars 3.Legal environment Antitrust laws, regulations, trade restrictions, minimum wages laws, liability laws, labor laws, patents 4.Technology Innovations rate, future process technology, design technology 5.Competition Number and strength of competitors, basis of competitions (price, quality etc.) 6.Markets Size, location, brand loyalty, ease of entry, growth potential, long term stability, demographics. MIS 373: Basic Operations Management25

BALANCED SCORECARD The idea of Balanced Scorecard (BSC) is to move away from a purely financial perspective of the organization and integrate other perspectives such as customers, internal business processes, and learning and growth. MIS 373: Basic Operations Management26 Scorecard ObjectiveMeasureTarget Improve consumer satisfaction and loyalty by 20% Survey score Up 20% Delivery time < 4 days Balanced Financial How should we appear to our shareholders? Consumer How should we appear to our customers? Internal Business Process What business process must we excel at? Learning & Growth How will we sustain our ability to change/improve? Lag measure Leading measure

BALANCED SCORECARD MIS 373: Basic Operations Management27

STEPS IN STRATEGY FORMULATION 1.Link strategy directly to the organization's mission or vision statement. 2.Assess strengths, weaknesses, threats and opportunities, and identify core competencies. Core competencies: The special attributes or abilities that give an organization a competitive edge 3.Identify order winners and order qualifiers. Order winners: Characteristics of an organizations goods or services that cause it to be perceived as better than the competition Order qualifiers: Characteristics that customers perceive as minimum standards of acceptability for a product or service to be considered as a potential for purchase 4.Select one or two strategies (e.g., low cost, speed, customer service) to focus on. MIS 373: Basic Operations Management28

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 units performance over time Judging the performance of an entire industry or country MIS 373: Basic Operations Management Productivity= Outputs Inputs 29

wsj.com 1/12/2012 The Factory Floor Has a Ceiling on Job Creation Factories have been producing more with fewer workers. Output for each hour of work, or productivity, is up an extraordinary 40% as factories have adopted new technologies and production processes.

WHY DOES PRODUCTIVITY MATTERS? Brynjolfsson, E., and Hitt, L. M. 1998. Beyond the productivity paradox. Communications of the ACM 41(8) 4955. Productivity growth determines our living standards and the wealth of nations. This is because the amount a nation can consume is ultimately closely tied to what it produces. By the same token, the success of a business generally depends on its ability to deliver more real value for consumers without using more labor, capital, or other inputs. MIS 373: Basic Operations Management31

MEASURES OF PRODUCTIVITY MIS 373: Basic Operations Management Productivity= Outputs Inputs 32

EXAMPLES OF PARTIAL PRODUCTIVITY MEASURES Partial Productivity Measures Examples Labor ProductivityUnits of output per labor hour Units of output per shift Value-added per labor hour Machine ProductivityUnits of output per machine hour Capital ProductivityUnits of output per dollar input Dollar value of output per dollar input Energy ProductivityUnits of output per kilowatt-hour Dollar value of output per kilowatt-hour MIS 373: Basic Operations Management33

EXERCISE Units produced: 5,000 Standard price:$30/unit Labor input: 500 hours Cost of labor: $25/hour Cost of materials: $5,000 Cost of overhead: 2x labor cost What is the implication of an unitless measure of productivity? Hint: The key of this calculation is to convert all the elements to their dollar values. Whats the dollar value of the output / labor / material / overhead?

PRODUCTIVITY GROWTH Example: Labor productivity on the ABC assembly line was 25 units per hour in 2009. In 2010, labor productivity was 23 units per hour. What was the productivity growth from 2009 to 2010? MIS 373: Basic Operations Management Productivity Growth = Current productivity Pervious productivity 100% Pervious productivity Productivity Growth = 23 25 100%= 8% 25 35

SERVICE SECTOR PRODUCTIVITY Service sector productivity is difficult to measure and manage because It involves intellectual activities It has a high degree of variability Measurement Difficulties Retailors Quality Versus Quantity Nurses MIS 373: Basic Operations Management36

HEALTH CARE PRODUCTIVITY Kocher, Robert, and Nikhil R. Sahni. "Rethinking health care labor." New England Journal of Medicine 365.15 (2011): 1370-1372. Of the $2.6 trillion spent in 2010 on health care in the United States, 56% consisted of wages for health care workers. the output is the volume of activity including all encounters, tests, treatments, and surgeries per unit of cost

HEALTH CARE PRODUCTIVITY IBM Healthcare Industry: 2020 Vision reduce tests and costs personalized medicine patient education & empowerment adoption of new practices drug effectiveness evaluation risk prediction & prevention

FACTORS AFFECTING PRODUCTIVITY MIS 373: Basic Operations Management Capital Methods TechnologyManagement Quality INCREASE: Calculators, Computers, Faxes, copiers, Internet search engines, Voice mail, cell phones, email REDUCE: inflexibility, high costs, mismatched operations, non-work activities 39

PRODUCTIVITY & TECHNOLOGY NPR 4/30/13 When It Comes To Productivity, Technology Can Hurt And HelpWhen It Comes To Productivity, Technology Can Hurt And Help With instant messages buzzing, emails pinging and texts ringing, how can employers increase productivity in the workplace? Software companies are tackling the problem, tracking employees' computer time to find ways to improve their efficiency. Desk workers, creative workers,

PRODUCTIVITY PARADOX Brynjolfsson, E., and Hitt, L. M. 1998. Beyond the productivity paradox. Communications of the ACM 41(8) 4955. MIS 373: Basic Operations Management41 IT investment does not appear to have a strong impact on productivity. Explanations for the Paradox 1.Mismeasurement of outputs and inputs, ATMs reduce the number of checks banks process so, by some measures, banking output and productivity decrease. The increases in convenience ATMs have created go uncounted in conventional productivity metrics, while their costs are counted. 2.Lags due to learning and adjustment

IMPROVING PRODUCTIVITY 1.Develop productivity measures for all operations 2.Determine critical (bottleneck) operations 3.Develop methods/technologies for productivity improvements 4.Establish reasonable goals 5.Make it clear that management supports and encourages productivity improvement 6.Measure and publicize improvements Dont confuse productivity with efficiency MIS 373: Basic Operations Management42

KEY POINTS Competitive pressure often means that business organizations must frequently assess their competitors' strengths and weaknesses, as well as their own, to remain competitive. Strategy formulation is critical because strategies provide direction for the organization, so they can play a role in the success or failure of a business organization. Functional strategies and supply chain strategies need to be aligned with the goals and strategies of the overall organization. The three primary business strategies are low cost, responsiveness, and differentiation. Productivity is a key factor in the cost of goods and services. Increases in productivity can become a competitive advantage. MIS 373: Basic Operations Management43

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COMPETITIVENESS, STRATEGY, AND PRODUCTIVITY Chapter 2 MIS 373: Basic Operations Management