OPERATIONS MANAGEMENT
for MBAs Fourth Edition
Meredith and Shafer
Prepared by:
Al Ansari
Seattle University
John Wiley and Sons, Inc.
Chapter 1: Operations Strategy
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Chapter 1
Operations Strategy
and
Global Competitiveness
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Introduction
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McDonald’s Corp
Facing Increased Competition
 Smarter and More Demanding Customers
 Less Brand Loyal
 Switched to hamburger bun that does not
require toasting.
 Customers prefer taste of new bun
 Saves time and money
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Olympic Flame
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10,000 runners
15,000 miles through 42
states in 84 days
Two years of planning
Must plan for no-show
runners and rush hour
traffic
Cost of this operation in
the neighborhood of $20
million
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Kmart Versus Wal-Mart
Both chains started in 1962
 In 1987, Kmart had 2,223 stores to WalMart’s 1,198.
 Kmart’s sales were $25.63 billion to WalMart’s $15.96 billion
 By 1991, Wal-Mart’s sales exceeded Kmarts
 Kmart still had more stores

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Kmart Versus Wal-Mart continue
In year ending January 1996, Wal-Mart’s
sales were $93.6 billion to Kmart’s $34.6
billion.
 During this time Kmart emphasized
marketing and merchandising (such as
national TV ad campaigns).
 Wal-Mart was investing millions in its
operations to lower cost.

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Kmart Versus Wal-Mart continue
Wal-Mart developed sophisticated distribution
system that integrated its computer system
with its distribution system.
 Kmart’s employees lacked skills needed to plan
and control inventory.
 Period from 1987 to 1995 Kmart's market
share declined from 34.5 percent to 22.7
percent.
 Wal-Mart's increased from 20.1 percent to 41.6
percent
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Kmart Versus Wal-Mart continue

Fast forward to 2004
◦ Kmart appears to have adopted a new
strategy
 Merge with Sears, Roebuck & Co.
◦ Potential synergies between Kmart’s
convenient locations and Sears’ strong brands
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General Motors
Highly competitive automobile Industry
 Market share eroding
 Rebate strategy
 Weakness in product offerings (8 brands)
Toyota (2 brands)
 Long lead time to redesign
 What is a sustainable market share?

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Flat Panel TVs
Large profit margins ($8 billion 2004)
 Asian manufacturers (LG Electronics and
Royal Philips, Sony and Samsung, and
Matsushita)
 North America’s Dell

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Operations
Heart of every organization
 Operations are the tasks that create value

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Diversity and Importance
of Operations
Improvements in operations can
simultaneously lower costs and improve
customer satisfaction.
 Improving operations often dependent on
advances in technology.
 Can obtain competitive advantage by
improving operations.
 Diversity of Operations

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The Production System
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Systems Perspective
Inputs
 Transformation System
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◦
◦
◦
◦
Alter
Transport
Store
Inspect
Outputs
 Environment

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Inputs
Inputs include facilities, labor, capital, equipment,
raw materials, and supplies.
 A less obvious input is knowledge of how to
transform the inputs into outputs.
 The operations function quite frequently fails in
its task because it cannot complete the
transformation activities within the required
time limit.
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Transformation System
The part of the system that adds value to
the inputs.
 Four major ways

◦
◦
◦
◦
Alter
Transport
Store
Inspect
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Outputs

Two types of outputs commonly result
from a production system
◦ Services (physical goods)
◦ Products (abstract or nonphysical)
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Facilitating Good Concept
Often confusion in trying to classify
organization as manufacturer or service
 Facilitating good concept avoids this
ambiguity
 All organizations defined as service
 The tangible part of the service is defined
as facilitating good
 Pure Services

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The Range From Services
to Products
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Operations Activities
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Strategy
Output Planning
Capacity Planning
Facility Location
Facility Layout
Aggregate Planning
Inventory
Management
 Materials
Requirements
Planning
 Scheduling
 Quality Control

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Defining and Measuring Quality
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Conformance to specifications
Performance
Quick response
Quick-change expertise
Features
Reliability
Durability
Serviceability
Aesthetics
Perceived quality
Humanity
Value
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Mass Customization
Seek to produce low-cost, high-quality
outputs in high variety.
 Not all products lend themselves to being
customized (Ex. Sugar, gas, electricity, and
flour).
 Is applicable to products characterized by
short life cycles, rapidly advancing
technology, or changing customer
requirements.

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Four Mass Customization Strategies
Collaborative customizers
 Adaptive customizers
 Cosmetic customizers
 Transparent customizers

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Collaborative Customizers

These organizations establish a dialogue to help
customers articulate their needs and then develop
customized outputs to meet these needs. For
example, one Japanese eyewear retailer developed a
computerized system to help customers select
eyewear. The system combines a digital image of the
customer's face and then various styles of eyeware
are displayed on the digital image. Once the
customer is satisfied, the customized glasses are
produced at the retail store within an hour.
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Adaptive Customizers

These organizations offer a standard
product that customers can modify
themselves such as closet organizers. Each
closet-organizer package is the same, but
includes instructions and tools to cut the
shelving and clothes rods so that the unit
can fit a wide variety of closet sizes.
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Cosmetic Customizers

These organizations produce a standard
product but present it differently to different
customers. For example, Planters packages
its peanuts and mixed nuts in a variety of
containers on the basis of specific needs of
its retailing customers such as Wal-Mart, 7Eleven, and Safeway.
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Transparent Customizers

These organizations provide custom
products without the customers’ knowing
that a product has been customized for
them. For example, Amazon.com provides
book recommendations based on
information about past purchases.
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Dependability and Speed
The competitive advantages of faster, dependable
response to new markets or to the individual
customer's needs have only recently been noted in
the business media.
 Americans spend more time and money on
marketing, whereas the Japanese spend five times
more than the Americans on developing more
efficient production methods.

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Relationship Between Response
Time and Unit Cost
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Strategy
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Core Competencies
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Collective knowledge and skills an organization
has that distinguish it from the competition.
Typically center on an organization’s ability to
integrate a variety of specific technologies and
skills in the development of new products and
services.
Building blocks of core capabilities.
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Core Competencies continue
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Are basis on which new outputs are
developed.
Better to think of organization in terms of its
portfolio of core competencies than as a
portfolio of products.
Identifying and developing core competencies
is one of top management’s most important
roles.
Organization practices and business processes
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Examples of Core Competencies
Sony - miniaturization
 3M- knowledge of substrates, coatings
and adhesives
 Black and Decker - small electrical
motors and industrial design
 Honda - engines and power trains
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Vision and Mission Statements
 Vision
statements used to
express organization’s values and
aspirations.
 Mission statements express
organization’s purpose or reason
for existence.
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Strategic Frameworks
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The Life-Cycle Curve
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Product Life Cycle
Strategies often tied to product life cycle
 Length of life cycles shrinking
 Business strategy should match life cycles
stages
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Categories of Business
Strategies
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First-to-Market Strategy
Products available before competition
 Strong applied research capability needed
 Can set high price to skim market or set
lower price to gain market share

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Second-to-Market Strategy
Quick imitation of first-to-market
companies
 Less emphasis on applied research and
more emphasis on development
 Learn from first-to-market’s mistakes

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Cost Minimization or Late-toMarket Strategy
Wait until market becomes standardized and
large volumes demanded
 Compete on basis of costs instead of
product features
 Research efforts focus on process
development versus product development
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Market Segmentation
Serving niche markets
 Applied engineering skills and flexible
manufacturing processes needed

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Example Performance Frontier
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New Technology Results in
Shift of Performance Frontier
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Focus

Stressing one key business value .
the key value at Hewlett-Packard is
developing new products

Sticking to what the know best. Define
core capabilities (strengths) and then
build on them.
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Key Characteristics of Core
Competencies/Capabilities
Should be used to gain access to a variety
of markets
 Should be strongly related to key benefits
provides by products or services
 Should be difficult to imitate
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Order Qualifiers and Winners
Order qualifiers are
characteristics that
are the ante to enter
the market
 Order winners are
characteristics that
win the customer’s
purchase

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Product Life Cycle Stages
and Emphasis
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The Sand Cone Model
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Reasons to Produce Offshore
Circumvent governmental regulations
 Avoid effects of currency fluctuations
 Avoid fees and quotas
 Placate local customers

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Outsourcing
Subcontracting out production of parts or
performance of activities
 Activities and parts fall on a continuum
ranging from strategically unimportant to
strategically important
 Activities not strategically important are
candidates to be outsourced
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Hollowed Out
The extent that most of a firm’s complex
parts and production are outsourced
 Often when complex parts outsourced,
engineering talent follows
 Supplier may become competitor

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