Operations Strategies
in a Global Economy
Country
Minimum Wage (per day)
Approx. Value in US$
Vietnam
US$ 2.40
India
US$ 2.24
Luxembourg
US$ 14.24 (with 20% premium for
skilled workers)
Mexico
US$ 4.88
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 TODAY’S
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 around $15
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.
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
 World’s Largest Corporations (2013 data)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Royal Dutch Shell
Wal-Mart
Exxon Mobil
China Petrochemical (Sinopec)
China National Petroleum
BP
State Grid Corporation of China
Toyota
Volkswagen
Total
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
SUCCESSFUL STRATEGIC ALLIANCES
 Starbucks partnered with Barnes and Nobles bookstores in
1993 to provide in-house coffee shops, benefiting both retailers.
 In 1996, Starbucks partnered with PepsiCo to bottle, distribute
and sell the popular coffee-based drink, Frappucino.
 A Starbucks-United Airlines alliance has resulted in their
coffee being offered on flights with the Starbucks logo on the
cups
 A partnership with Kraft foods has resulted in Starbucks coffee
being marketed in grocery stores.
 In 2006, Starbucks formed an alliance with the NAACP, the sole
purpose of which was to advance the company's and the
NAACP's goals of social and economic justice.
PRODUCTION SHARING
 An agreement to share the production or
extraction costs between two governments, a government
and a corporation, or a corporation and an individual. This can
be accomplished when two countries agree to allow
certain raw materials to be shipped tariff free from the first
country to the second country where the materials are
manufactured into a finished product. That product is then
shipped back, tariff free, to the original country. In oil or
mineral extraction, the company doing the extraction is paid
in oil or minerals as compensation for business costs as well
as a share of the profit.
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.
 The “Bang” mug has been
redesigned many times to
realize shipping cost savings.
Originally, 864 mugs would
fit into a pallet. After
redesign a pallet held 1,280
mugs, and with a further
redesign 2,024 mugs could
be squeezed into a pallet,
reducing shipping costs by
60%.
 Even better, the cost of
production at Ikea's
Romanian factory has also
fallen because the more
compact mugs require less
space in the kiln.
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.
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 auto-makers. 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.
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.
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
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.
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.
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.
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 Clean Air Act, etc.
 Self-interests -- Companies realize that profits will be greater if they
act responsibly.
SOCIAL-RESPONSIBILITY ISSUES
Environmental Impact
Product-Safety Impact
Employee Impact
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
SOCIAL-RESPONSIBILITY ISSUES
Environmental Impact
 There is a need for standardizing government
regulations of the environment.
 Otherwise, companies will gravitate to the less-regulated
countries.
 The International Organization for Standardization has
developed a set of environmental guidelines called ISO
14000.
SOCIAL-RESPONSIBILITY ISSUES
Product-Safety Impact
Harm to people or animals that results from
poor product design can:
 Damage a company’s reputation
 Require a large expense to remedy
 Cause governments to impose more regulations
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
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 company’s products
 Cost of defending against lawsuits and boycotts
DEVELOPING OPERATIONS STRATEGY
Assessment
of Global
Business
Conditions
Corporate Mission
Business Strategy
Product/Service Plans
Competitive Priorities
Operations Strategy
Distinctive
Competencies
or
Weaknesses
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
COCA-COLA COMPANY
Mission
Everything we do is inspired by our enduring mission:
 To Refresh the World... in body, mind, and spirit.
 To Inspire Moments of Optimism... through our
brands and our actions.
 To Create Value and Make a Difference...
everywhere we engage.
COCA-COLA COMPANY
Vision
To achieve sustainable growth, we have established a vision with clear
goals.
 Profit: Maximizing return to shareowners while being mindful of our
overall responsibilities.
 People: Being a great place to work where people are inspired to be
the best they can be.
 Portfolio: Bringing to the world a portfolio of beverage brands that
anticipate and satisfy peoples’ desires and needs.
 Partners: Nurturing a winning network of partners and building mutual
loyalty.
 Planet: Being a responsible global citizen that makes a difference.
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
FOUR STEPS FOR STRATEGY
FORMULATION
Defining a primary task
 What is the firm in the business of doing?
Assessing core competencies
 What does the firm do better than anyone else?
Determining order winners and order qualifiers
 What wins the order?
 What qualifies an item to be considered for purchase?
Positioning the firm
 How will the firm compete?
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
COMPETITIVE PRIORITIES: COST
Southwest Airlines
Lincoln Electric
reduced costs by $10
million a year for 10
years
skilled machine operators
save the company
millions that would have
been spent on automated
equipment
one type of airplane
facilitates crew changes,
record-keeping,
maintenance, and inventory
costs
direct flights mean no
baggage transfers
$30 million annual savings
in travel agent commissions
by requiring customers to
contact the airline directly
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
COMPETITIVE PRIORITIES: SPEED
General Electric
Citicorp
reduces time to
advertises a 15-minute
manufacture circuitmortgage approval
breaker boxes into three
L.L. Bean
days and dishwashers into
ships orders the day they
18 hours
are received
Dell
Wal-Mart
ships custom-built
replenishes its stock twice
computers in two days
a week
Motorola
Hewlett-Packard
needs less than 30
produces electronic
minutes to build to order
testing equipment in five
pagers
days
COMPETITIVE PRIORITIES
High-Quality Products/Services
 Definition
Customers’ perception of degree of excellence exhibited
by products/services
 Some Ways of Creating
Improve product/service’s
 Appearance
 Performance and function
 Wear, endurance ability
 After-sales service
COMPETITIVE PRIORITIES: QUALITY
 Ritz-Carlton - one customer at a time
 Every employee is empowered to satisfy a guest’s wish
 Teams at all levels set objectives and devise quality action
plans
 Each hotel has a quality leader
 Quality reports tracks
 guest room preventive maintenance cycles
 percentage of check-ins with no waiting
 time spent to achieve industry-best clean room
appearance
 Guest Preference Reports are recorded in a database
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
COMPETITIVE PRIORITIES: FLEXIBILITY
 Andersen Windows
 number of products offered grew from 28,000 to 86,000
 number of errors are down to 1 per 200 truckloads
 Custom Foot Shoe Store:
 customer’s feet are scanned electronically to capture
measurements
 custom shoes are mailed to the customer’s home in weeks
 prices are comparable to off-the-shelf shoes
 National Bicycle Industrial Company
 offers 11,231,862 variations
 delivers within two weeks at costs only 10% above standard
models
OPERATIONS STRATEGY
Operations strategy is a long-range game
plan for the production of a company’s
products/services, and provides a road map
for the production function in helping to
achieve the business strategy.
ELEMENTS OF OPERATIONS STRATEGY
Positioning the production system
Product/service plans
Outsourcing plans
Process and technology plans
Strategic allocation of resources
Facility plans: capacity, location, and layout
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
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.
STAGES IN A PRODUCT’S 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.
STAGES OF A PRODUCT’S 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
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 out-sourcing
to achieve their operations & business goals.
 More outsourcing requires a company to have less
equipment, fewer employees, and a smaller facility.
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
OUTSOURCING PLANS
Many companies even outsource some
service functions such as:
 Payroll
 Billing
 Order processing
 Developing/maintaining a website
 Employee recruitment
 Facility maintenance
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.
STRATEGIC ALLOCATION OF RESOURCES
For most companies, the vast majority of the
firm’s 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.
FACILITY PLANS
How to provide the long-range capacity to
produce the firm’s 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.
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.
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
POSITIONING STRATEGIES FOR SERVICES
Example: McDonald’s
 Highly standardized service design
 Low amount of customer contact
 Physical goods dominating intangible services
 Quasi-manufacturing approach to back-room production
process
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.
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.
EVOLUTION OF POSITIONING
STRATEGIES
Life
Stage
Intro.
Early
Growth
Slightly
Standard
Late
Growth
Product
Custom
Volume
Very
Low
Low
High
Focus
Process
Process
Product
Fin.Gds.
Batch
Size
Standard
Maturity
Highly
Standard
Very
High
Product
To-Order To-Order To-Stock To-Stock
Very
Small
Small
Large
Very
Large
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
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
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
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
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.
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
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