Slides prepared

by John Loucks

2002 South-Western/Thomson Learning TM

11

Chapter 2

Operations Strategies
in a Global Economy

Overview

Introduction
Todays Global Business Conditions
Operations Strategy
Forming Operations Strategies
Wrap-Up: What World-Class Producers Do

Introduction

Need for Better Business Strategy

Foreign competitors focus on long-range strategy
Operations Role in U.S. Business Strategy
Equal footing with Marketing and Finance

Introduction

Operational effectiveness is the ability to perform

similar operations activities better than competitors
It is very difficult for a company to compete
successfully in the long run based just on operational
effectiveness
A firm must also determine how operational
effectiveness can be used to achieve a sustainable
competitive advantage
An effective competitive strategy is critical

Factors Affecting Todays

Global Business Conditions

Reality of global competition

Quality, customer service, and cost challenges
Rapid expansion of advanced technologies
Continued growth of the service sector
Scarcity of operations resources
Social responsibility issues

Reality of Global Competition

Changing nature of world business

International companies
Strategic alliances and production sharing
Fluctuation of international financial conditions

Changing Nature of World Business

The US gross domestic product (GDP) is, at $10

trillion, the largest in the world.
Companies all over the globe are aggressively
exporting their products/services to the US
Many US companies are targeting foreign markets to
shore up profits.
The global economy that interconnects the economies
of all nations has been termed the global village.
One of the most important new markets is China.
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International Companies

International companies are those whose scope of

operations spans the globe as they buy, produce, and
sell.
International firms search out opportunities for profits
relatively unencumbered by national boundaries.
Operations managers must coordinate geographically
dispersed operations.

International Companies

Worlds Largest Corporations

1. General Motors
US
2. Wal-Mart Stores
US
3. Exxon Mobil
US
4. Ford Motor
US
5. DaimlerChrysler
Germany
6. Mitsui
Japan
7. Mitsubishi
Japan
8. Toyota
Japan
9. General Electric
US
10. Itochu
Japan
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Home Country of Parent Corporation?

Braun household appliances:

a. Switzerland
b. Germany
c. US
Gillette Company - US
d. Japan

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Home Country of Parent Corporation?

Bic pens:
a. Japan
b. The Czech Republic
c. U.S.
Bic S.A. - France
d. France

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Home Country of Parent Corporation?

Haagen-Dazs ice cream:

a. France
b. Sweden
Grand Metropolitan PLC.
c. Great Britain
Great Britain
d. U.S

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Home Country of Parent Corporation?

RCA television:
a. Japan
b. U.S .
c. France
d. Korea

Thomson S.A. France

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Home Country of Parent Corporation?

Arrow shirts:
a. Thailand
b. Italy
c. U.S .
d. France

Bidermann International
France

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Home Country of Parent Corporation?

Godiva chocolate:
a. France
b. Belgium
c. Switzerland
d. U.S.

Campbell Soup Company

US

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Home Country of Parent Corporation?

Vaseline Intensive Care:

a. U.S.
b. France
c. Britain/Netherlands
d. Germany

Unilever PLC.
Great Britain/Netherlands

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Home Country of Parent Corporation?

Firestone tires:
a. Japan
b. U.S.
c. Germany
d. France

Bridgestone Japan

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Home Country of Parent Corporation?

Daimler-Chrysler automobiles:
a. Japan
b. U.S.
Daimler-Benz Germany
c. Germany
d. France

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Strategic Alliances

Strategic alliances are joint ventures among

international companies to exploit global business
opportunities.
Alliances are often motivated by
Product or production technology
Market access
Production capability
Pooling of capital

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Strategic Alliances
General Motors (US) &
Kia Motor Corp. (S.K.)

Kia might help sell

and market GM cars
in South Korea

Renault (France) &

City of Moscow

Manufacture 100,000
vehicles annually
near Moscow

Sino Aerospace Investment Corp. (Taiwan) &

Swearingen Aircraft (US)

Forming Texas-based
Sino Swearingen
Aircraft Co.
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Strategic Alliances

Japanese companies have long practiced keiretsu, the

linking of companies into industrial groups.
A financial keiretsu links companies together with
cross-holding of shares, sales and purchases within
the group, and consultation.
A production keiretsu is a web of interlocking
relationships between a big manufacturer (Toyota)
and its suppliers.

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Production Sharing

Production sharing means that a product might be

designed and financed in one country, its materials
produced in other countries, assembled in another
country, and sold in yet other countries.
The country that is the highest-quality, lowest-cost
producer for a particular activity would perform that
portion of the production of the product.

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Production Sharing

Production sharing means that a product might be

designed and financed in one country, its materials
produced in other countries, assembled in another
country, and sold in yet other countries
The Mercury Capri automobile is an example:
designed by Ghia and Italdesign in Italy
most of its components made in Japan
assembled in Australia
sold in the U.S

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Pros and Cons of Globalization

Pros (Pluses)
Productivity grows more quickly (living standards
can go up faster)
Global competition and cheap imports keep a lid
on prices (inflation less likely to derail economic
growth)
Open economy spurs innovation (with fresh ideas
from abroad)
Export jobs often pay more than other jobs
US has more access to foreign investment (keeps
interest rates low)

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Pros and Cons of Globalization

Cons (Minuses)
Millions of Americans have lost jobs due to
imports or production shifts abroad
Most displaced workers find new jobs that pay less
Workers face pay-cuts demands from employers
Service and white-collar jobs are increasingly
vulnerable
US employees lose their comparative advantage
when companies build advanced factories abroad

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International Financial Conditions

International financial conditions are complex due to:

inflation
fluctuating currency exchange rates
turbulent interest rates
volatility of international stock markets
huge national debts of some countries
enormous trade imbalances between countries

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International Financial Conditions

The Dollar Versus the Yen and the Mark

Year
1975
1980
1985
1990
1995
2000

Yen per Dollar

305
215
210
135
85
108

Mark per Dollar

2.7
2.0
2.4
1.6
1.4
2.2

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International Financial Conditions

Example of Currency Exchange Rate Changes

A product produced and sold in the US for $1
would have sold in Japan for 135 yen in 1990 and
85 yen in 1995, a price decrease of 37%.
A product produced and sold in Japan for 135 yen
in 1990 and sold for $1 in the US would have sold
in the US for $1.57 in 1995, a 57% price increase.

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International Financial Conditions

Due, in part, to the fall in the value of the dollar

between 1975 and 1995, the following occurred:
Prices of US products/services abroad fell and
demand increased
Japan and other countries built factories in US
Japanese manufacturers moved upscale toward
higher priced products

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International Financial Conditions

Companies must be ready to move quickly to shift

strategies as world financial conditions change.
Opportunities are usually available to reduce risk
Building smaller, more flexible factories
Using foreign suppliers for materials, parts, or
products
Carefully planning and forecasting so that
changing conditions can be anticipated

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Quality, Service, and Cost Challenges

Quality
The goal of adequate quality must be replaced with
the objective of perfect product and service quality.
The entire corporate culture must be redirected and
committed to the ideal of perfect quality.
All employees must be empowered to act.
A commitment to continuous improvement has to
be organization-wide.

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Quality, Service, and Cost Challenges

Customer Service
Companies must quickly develop innovative
products and respond quickly to customers needs.
Organizational structures must be made more
horizontal to quickly accommodate change.
Multidisciplined teams must have decision-making
authority, responding better to the marketplace.
Large, unwieldy companies are spinning off whole
business units making them autonomous
businesses that can compete with small, aggressive
competitors.

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Quality, Service, and Cost Challenges

Cost
There is continuing pressure to reduce direct costs
(of producing and selling) and overhead costs.
It cost the US automakers $1,500 more per auto
for labor in 1980 than it cost the Japanese automakers. By the 1990s the difference was almost
zero.
Giant retailers (like Wal-Mart) squeezed weaker
competitors out of the market, giving the retailers
the leverage to force their suppliers to streamline
operations and reduce costs/prices.

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Quality, Service, and Cost Challenges

Cost
Cost-cutting measures being used include:
Moving production to low-labor-cost countries
Negotiating lower labor rates with unions and
workers
Automating processes to reduce the amount of
labor needed, particularly processes that are
labor intensive.

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Advanced Technologies

The use of automation is one of the most far-reaching

developments to affect manufacturing and services in
the past century.
The initial cost of these assets is high.
The benefits go far beyond a reduction in labor costs.
Increased product/service quality
Reduced scrap and material costs
Faster responses to customer needs
Faster introduction of new products and services

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Advanced Technologies

US companies cannot use automated production

technology as a long-term competitive advantage.
Automation systems are available to any company in
the world today, although the price is prohibitive for
some companies.
Not investing, or delaying investing in this
technology could be disastrous for a company.

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Advanced Production Technology

Computer-aided design (CAD) - allows engineers to

design products directly on computer terminals
Computer-aided manufacturing (CAM) - translates
CAD information into machinery instructions
Flexible manufacturing systems (FMS) - clusters of
automated machinery produce a variety of products
Automated storage & retrieval systems (ASRS) computer-controlled warehouses
Automatic identification systems (AIS) - data is
read into computers using bar coding and the like
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Continued Growth of Service Sector

A robust service sector helps support the

manufacturing sector.
There is much opportunity for quality improvement
in US service firms.
Many operations managers are being employed in
services.
Planning, analyzing, and controlling approaches from
manufacturing are being adapted to service systems.
The US service sector, like the manufacturing sector,
must streamline and improve operations if it is to
survive.
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Scarcity of Operations Resources

Raw materials like titanium, nickel, coal, natural gas,

water, and petroleum products are periodically
unavailable or in short supply.
A shortage of any necessary input to a conversion
subsystem, including skilled personnel, can be a
challenge for an operations manager.
An important issue in the formation of business
strategy is how to allocate scarce resources among
business opportunities.
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Social-Responsibility Issues

Corporate attitudes are evolving from doing what

companies have a legal right to do, to doing what is
right.
Factors influencing this evolution include:
Consumer attitude -- Consumers are expressing
their likes/dislikes by such means as stockholder
meetings, liability suits, and buying preferences.
Regulation The EPA, OSHA, Clean Air Act, and
Family Leave Act place constraints on businesses.
Self-interests -- Companies realize that profits will
be greater if they act responsibly.

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Social-Responsibility Issues

Environmental Impact
Product-Safety Impact
Employee Impact

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Social-Responsibility Issues

Environmental Impact
Concerns about the global environment include:
Landfill waste reduction
Recycling
Energy conservation
Chemical spills
Acid rain
Radioactive waste disposal
and more

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Social-Responsibility Issues

Environmental Impact
There is a need for standardizing government
regulations of the environment.
Otherwise, companies will gravitate to the lessregulated countries.
The International Organization for Standardization
has developed a set of environmental guidelines
called ISO 14000.

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Social-Responsibility Issues

Product-Safety Impact
Harm to people or animals that results from poor
product design can:
Damage a companys reputation
Require a large expense to remedy
Cause governments to impose more regulations

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Social-Responsibility Issues

Employee Impact
Employee benefits and policies include:
Safety and health programs
Fair hiring and promotion practices
Day-care
Family leave
Health care
Retirement benefits
Educational assistance
and more

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Social-Responsibility Issues

Employee Impact
Employee benefits and policies impact long-term
profitability due to their effect on:
Employee morale and productivity
Recruitment and retention of employees
Demand for a companys products
Cost of defending against lawsuits and boycotts

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Developing Operations Strategy

Assessment
of Global
Business
Conditions

Corporate Mission
Business Strategy
Product/Service Plans

Distinctive
Competencies
or
Weaknesses

Competitive Priorities
Operations Strategy
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The Role of the Market

Adding Value

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Corporate Mission

A corporate mission is a set of long-range goals and

including statements about:
the kind of business the company wants to be in
who its customers are
its basic beliefs about business
its goals of survival, growth, and profitability

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Business Strategy

Business strategy is a long-range game plan of an

organization and provides a road map of how to
achieve the corporate mission.
Inputs to the business strategy are
Assessment of global business conditions - social,
economic, political, technological, competitive
Distinctive competencies or weaknesses - workers,
sales force, R&D, technology, management

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Competitive Priorities

Low Production Costs

Definition
Unit cost (labor, material, and overhead) of each
product/service
Some Ways of Creating
Redesign of product/service
New technology
Increase in production rates
Reduction of scrap/waste
Reduction of inventory

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Competitive Priorities

Delivery Performance
Definition
a) Fast delivery
b) On-time delivery
Some Ways of Creating
a) larger finished-goods inventory
a) faster production rates
a) quicker shipping methods
b) more-realistic promises
b) better control of production of orders
b) better information systems

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Competitive Priorities

High-Quality Products/Services
Definition
Customers perception of degree of excellence
exhibited by products/services
Some Ways of Creating
Improve product/services
Appearance
Performance and function
Wear, endurance ability
After-sales service

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Competitive Priorities

Customer Service and Flexibility

Definition
Ability to quickly change production to other
products/services. Customer responsiveness.
Some Ways of Creating
Change in type of processes used
Use of advanced technologies
Reduction in WIP through lean manufacturing
Increase in capacity

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Operations Strategy

Operations strategy is a long-range game plan for the

production of a companys products/services, and
provides a road map for the production function in
helping to achieve the business strategy.

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Elements of Operations Strategy

Procurement
Quality
Management
Schedule
Reliability &
Maintenance

Product
Design

OM
Mission and
Strategy

Inventory

Location

Layout
Process
Design
Human
Resources &
Job Design
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Elements of Operations Strategy

Positioning the production system

Product/service plans (Chapter 4)
Outsourcing plans (Chapter 11)
Process and technology plans (Chapters 4 & 6)
Strategic allocation of resources (Chapter 8)
Facility plans: capacity, location, and layout
(Chapter 5)

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Positioning the Production System

Select the type of product design

Standard
Custom
Select the type of production processing system
Product focused
Process focused
Select the type of finished-goods inventory policy
Produce-to-stock
Produce-to-order

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Strategy Development Procedure

COMPETITIVE SITUATION
ANALYSIS

Environment

Expectations

Economic

Critical factor

Competitor threats

Competitive position

Industry opportunities

Future moves

DEVELOP A MISSION
Identify Strategy Alternatives
strength & opportunities match?
can weaknesses be overcome?
anticipate competitor moves?
Secure a competitive advantage? COMPANY
SITUATION
Form a Strategy

Present
steps to competitive advantage
performance
steps to build market share

TOWS Analysis
steps to become world class

Relative strengths
critical strategic decisions

Strategic issues
ease of implementation

Weaknesses
Make & Implement a Strategy

make necessary decisions

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Product/Service Plans
As a product is designed, all the detailed
characteristics of the product are established.
Each product characteristic directly
affects how the product can be made.
How the product is made determines
the design of the production system.
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Stages in a Products Life Cycle

Introduction- Sales begin, production and marketing

are developing, profits are negative.
Growth - sales grow dramatically, marketing efforts
intensify, capacity is expanded, profits begin.
Maturity - production focuses on high-volume,
efficiency, low costs; marketing focuses on
competitive sales promotion; profits are at peak.
Decline - declining sales and profit; product might be
dropped or replaced.
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Stages of a Products Life Cycle

Automobile

Dot-Matrix
Fax Machine
Printer
Cell Phone
Video Recorder
Internet Radio

Color Copier

Introduction

Growth

CD Player

Maturity

B&W TV

Decline

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Outsourcing Plans

Outsourcing refers to hiring out or subcontracting

some of the work that a company needs to do.
This strategy is being used more and more as
companies strive to operate more efficiently.
Outsourcing has many advantages and disadvantages.
Companies try to determine the best level of outsourcing to achieve their operations & business goals.
More outsourcing requires a company to have less
equipment, fewer employees, and a smaller facility.
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Outsourcing Plans

A company might outsource any of the following

manufacturing related functions:
Designing the product
Purchasing the basic raw materials
Processing the subcomponents, subassemblies,
major assemblies, and finished product
Distributing the product

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Outsourcing Plans

Many companies even outsource some service

functions such as:
Payroll
Billing
Order processing
Developing/maintaining a website
Employee recruitment
Facility maintenance

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Process and Technology Plans

An essential part of operations strategy is the

determination of how products/services will be
produced.
The range of technologies available to produce
products/services is great and is continually changing.

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Strategic Allocation of Resources

For most companies, the vast majority of the firms

resources are used in production/operations.
Some or all of these resources are limited.
The resources must be allocated to products, services,
projects, or profit opportunities in ways that
maximize the achievement of the operations
objectives.

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Facility Plans

How to provide the long-range capacity to produce

the firms products/services is a critical strategic
decision.
The location of a new facility may need to be
decided.
The internal arrangement (layout) of workers,
equipment, and functional areas within a facility
affects the ability to provide the desired volume,
quality, and cost of products/services.
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Characteristics of Services
and Manufactured Products
Output
Output Inventoried
Customer Contact
Lead Time
Intensity
Quality

Services
Intangible
No
Extensive
Short
Labor
Subjective

Products
Tangible
Yes
Little
Long
Capital
Objective

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Services in the U.S. Economy

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Competitive Priorities for Services

The competitive priorities listed earlier for

manufacturers apply to service firms as well
Low production costs
Fast and on-time delivery
High-quality products/services
Customer service and flexibility
Providing all the priorities simultaneously to
customers is seldom possible.

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Positioning Strategies for Services

Type of Service Design

Standard or custom products
Amount of customer contact
Mix of physical goods and intangible services
Type of Production Process
Quasi manufacturing
Customer-as-participant
Customer-as-product

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Positioning Strategies for Services

Example: McDonalds
Highly standardized service design
Low amount of customer contact
Physical goods dominating intangible services
Quasi-manufacturing approach to back-room
production process

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Forming Operations Strategies

Support the product plans and competitive priorities

defined in the business strategy.
Adjust to the evolving positioning strategies.
Link to the marketing strategies.
Look at alternative operations strategies.

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Evolution of Positioning Strategies

The characteristics of production systems tend to

evolve as products move through their product life
cycles.
Operations strategies must include plan for modifying
production systems to a changing set of competitive
priorities as products mature.
The capital and production technology required to
support these changes must be provided.

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Evolution of Positioning Strategies

Life
Stage

Intro.

Early
Growth
Slightly
Standard

Late
Growth

Product

Custom

Standard

Volume

Very
Low

Low

High

Focus

Process

Process

Product

Maturity
Highly
Standard
Very
High
Product

Fin.Gds. To-Order To-Order To-Stock To-Stock

Batch
Size

Very
Small

Small

Large

Very
Large
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Linking Operations and Marketing Strategies

Operations Strategy
Product-focused
Make-to-stock
Standardized products
High volume
Marketing Strategy
Low production cost
Fast delivery of products
Quality
Example: TV sets

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Linking Operations and Marketing Strategies

Operations Strategy
Product-focused
Make-to-order
Standardized products
Low volume
Marketing Strategy
Low production cost
Keeping delivery promises
Quality
Example: School buses

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Linking Operations and Marketing Strategies

Operations Strategy
Process-focused
Make-to-stock
Custom products
High volume
Marketing Strategy
Flexibility
Quality
Fast delivery of products
Example: Medical instruments

80

Linking Operations and Marketing Strategies

Operations Strategy
Process-focused
Make-to-order
Custom products
Low volume
Marketing Strategy
Keeping delivery promises
Quality
Flexibility
Example: Large supercomputers

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No Single Best Strategy

Start-up and Small Manufacturers

Usually prefer positioning strategies with:
Custom products
Process-focused production
Produce-to-order policies
These systems are more flexible and require less
capital.

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No Single Best Strategy

Start-up and Small Services

Successfully compete with large corporations by:
Carving out a specialty niche
Emphasizing close, personal customer service
Developing a loyal customer base

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No Single Best Strategy

Technology-Intensive Business
Production systems must be capable of producing
new products and services in high volume soon
after introduction
Such companies must have two key strengths:
Highly capable technical people
Sufficient capital

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Wrap-Up: World-Class Practice

Put customers first

Get new products/services to market faster
Are high quality producers
Have high labor productivity & low production costs
Carry little excess inventory
. . . more

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Wrap-Up: World-Class Practice

Think more globally in purchasing and selling

Quickly adopt and develop new technologies
Trim organizations to be lean and flexible
Are less resistant to strategic alliances/joint ventures
Consider relevant social issues when setting strategies

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End of Chapter 2

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