Operations
Management
Chapter 2 –
Operations Strategy in
a Global Environment
Delivered by:
Eng.Mosab I. Tabash
© 2008 Prentice Hall, Inc.
2–1
Outline
 Global Company Profile: Boeing
 A Global View of Operations
 Cultural and Ethical Issues
 Developing Missions And Strategies
 Mission
 Strategy
© 2008 Prentice Hall, Inc.
2–2
Outline – Continued
 Achieving Competitive Advantage
Through Operations
 Competing On Differentiation
 Competing On Cost
 Competing On Response
 Ten Strategic OM Decisions
© 2008 Prentice Hall, Inc.
2–3
Outline – Continued
 Issues In Operations Strategy
 Research
 Preconditions
 Dynamics
© 2008 Prentice Hall, Inc.
2–4
Outline – Continued
 Strategy Development and
Implementation
 Critical Success Factors and Core
Competencies
 Build and Staff the Organization
 Integrate OM with Other Activities
© 2008 Prentice Hall, Inc.
2–5
 Global Operations Strategy
Options
 International Strategy
 Multidomestic Strategy
 Global Strategy
 Transnational Strategy
© 2008 Prentice Hall, Inc.
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Global Strategies
 Boeing – sales and production are
worldwide
 Sony – purchases components from
suppliers in Thailand, Malaysia, and
around the world
© 2008 Prentice Hall, Inc.
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Global Strategies
 Volvo – considered a Swedish
company but it is controlled by an
American company, Ford. The
current Volvo S40 is built in Belgium
and shares its products with the
Mazda 3 built in Japan and the Ford
Focus built in Europe.
 Haier – A Chinese company,
produces compact refrigerators (it
has one-third of the US market)
© 2008 Prentice Hall, Inc.
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Some Multinational
Corporations
Home
Country
% Sales
Outside
Home
Country
% Assets
Outside
Home
Country
% Foreign
Workforce
Citicorp
USA
34
46
NA
ColgatePalmolive
USA
72
63
NA
Dow
Chemical
USA
60
50
NA
Gillette
USA
62
53
NA
Honda
Japan
63
36
NA
USA
57
47
51
Company
IBM
© 2008 Prentice Hall, Inc.
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Defining Global Operations
• International business - engages in cross-border
transactions
• Multinational Corporation - has extensive
involvement in international business, owning or
controlling facilities in more than one country
• Global company - integrates operations from
different countries, and views world as a single
marketplace
• Transnational company - seeks to combine the
benefits of global-scale efficiencies with the
benefits of local responsiveness
© 2008 Prentice Hall, Inc.
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Reasons to Globalize
Reasons to Globalize
Tangible 1. Reduce costs (labor, taxes, tariffs, etc.)
Reasons 2. Improve supply chain
3. Provide better goods and services
4. Understand markets
Intangible 5. Learn to improve operations
Reasons 6. Attract and retain global talent
© 2008 Prentice Hall, Inc.
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Reduce Costs
 Foreign locations with lower wage
rates can lower direct and indirect
costs
 World Trade Organization (WTO)
 North American Free Trade
Agreement (NAFTA)
 APEC, SEATO, MERCOSUR
 European Union (EU)
© 2008 Prentice Hall, Inc.
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Improve the Supply Chain
 Locating facilities closer to
unique resources
 Auto design to California
 Athletic shoe production to China
 Perfume manufacturing in France
© 2008 Prentice Hall, Inc.
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Provide Better Goods
and Services
 Objective and subjective
characteristics of goods and
services
 On-time deliveries
 Cultural variables
 Improved customer service
© 2008 Prentice Hall, Inc.
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Understand Markets
 Interacting with foreign customers
and suppliers can lead to new
opportunities
 Cell phone
design from
Europe
 Cell phone
fads from
Japan
 Extend the product life cycle
© 2008 Prentice Hall, Inc.
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Learn to Improve Operations
 Remain open to the free flow of
ideas
 General Motors partnered with a
Japanese auto manufacturer to
learn
 Equipment and layout have been
improved using ergonomic
competence
© 2008 Prentice Hall, Inc.
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Attract and Retain Global
Talent
 Offer better employment
opportunities
 Better growth opportunities and
insulation against unemployment
 Relocate unneeded personnel to
more prosperous locations
 Incentives for people who like to
travel
© 2008 Prentice Hall, Inc.
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Cultural and Ethical Issues
 Cultures can be quite different
 Attitudes can be quite different
towards
 Punctuality
 Environment
© 2008 Prentice Hall, Inc.
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Developing Missions and
Strategies
Mission statements tell an
organization where it is going
The Strategy tells the
organization how to get there
© 2008 Prentice Hall, Inc.
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Mission
 Mission - where are
you going?
 Organization’s
purpose for being
 Answers ‘What do
we provide society?’
 Provides boundaries
and focus
© 2008 Prentice Hall, Inc.
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Factors Affecting Mission
Philosophy
and Values
Profitability
and Growth
Environment
Mission
Customers
Public Image
Benefit to
Society
© 2008 Prentice Hall, Inc.
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Sample Missions
Sample Company Mission
To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business
that exceeds our customers’ expectations.
Sample Operations Management Mission
To produce products consistent with the company’s mission
as the worldwide low-cost manufacturer.
Figure 2.3
© 2008 Prentice Hall, Inc.
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Islamic university mission
Figure 2.3
© 2008 Prentice Hall, Inc.
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Strategic Process
Organization’s
Mission
Functional
Area Missions
Marketing
© 2008 Prentice Hall, Inc.
Operations
Finance/
Accounting
2 – 24
Strategy
 Action plan to
achieve mission
 Functional areas
have strategies
 Strategies exploit
opportunities and
strengths, neutralize
threats, and avoid
weaknesses
© 2008 Prentice Hall, Inc.
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Strategies for Competitive
Advantage
 Differentiation – better, or at least
different
 Cost leadership – cheaper
 Response – rapid response
© 2008 Prentice Hall, Inc.
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Competing on
Differentiation
Uniqueness can go beyond both the
physical characteristics and service
attributes to encompass everything
that impacts customer’s perception of
value
 Safeskin gloves – leading edge products
 Walt Disney Magic Kingdom –
experience differentiation
 Hard Rock Cafe – dining experience
© 2008 Prentice Hall, Inc.
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Competing on Cost
Provide the maximum value as
perceived by customer. Does not
imply low quality.
 Southwest Airlines – secondary
airports, no frills service, efficient
utilization of equipment
 Wal-Mart – small overheads,,
distribution costs
 Franz Colruyt – no bags, low light, no
music, doors on freezers
© 2008 Prentice Hall, Inc.
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Competing on Response
 Flexibility is matching market changes in
design innovation and volumes
 Reliability is meeting schedules
 German machine industry
 Timeliness is quickness
in design, production,
and delivery
 Johnson Electric,
Bennigan’s, Motorola
© 2008 Prentice Hall, Inc.
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10 Strategic OM Decisions
1. Goods and
service design
2. Quality
3. Process and
capacity design
4. Location
selection
5. Layout design
© 2008 Prentice Hall, Inc.
6. Human resources
and job design
7. Supply chain
management
8. Inventory
9. Scheduling
10. Maintenance
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Goods and Services and
the 10 OM Decisions
Operations
Decisions
Goods and
service
design
Goods
Services
Product is usually Product is not
tangible
tangible
Quality
Many objective
standards
Many subjective
standards
Process
and
capacity
design
Customers not
involved
Customer may be
directly involved
Capacity must
match demand
Table 2.1
© 2008 Prentice Hall, Inc.
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Goods and Services and
the 10 OM Decisions
Operations
Decisions
Location
selection
Goods
Near raw
materials and
labor
Services
Near customers
Layout
design
Production
efficiency
Enhances product
and production
Human
resources
and job
design
Technical skills,
Interact with
consistent labor
customers, labor
standards, output standards vary
based wages
Table 2.1
© 2008 Prentice Hall, Inc.
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Goods and Services and
the 10 OM Decisions
Operations
Decisions
Supply
chain
Goods
Relationship
critical to final
product
Services
Important, but
may not be
critical
Inventory
Raw materials,
work-in-process,
and finished
goods may be
held
Cannot be stored
Scheduling
Level schedules
possible
Meet immediate
customer demand
Table 2.1
© 2008 Prentice Hall, Inc.
2 – 33
Goods and Services and
the 10 OM Decisions
Operations
Decisions
Goods
Services
Maintenance Often preventive Often “repair” and
and takes place
takes place at
at production site customer’s site
Table 2.1
© 2008 Prentice Hall, Inc.
2 – 34
Managing Global Service
Operations
Requires a different perspective on:
 Capacity planning
 Location planning
 Facilities design and layout
 Scheduling
© 2008 Prentice Hall, Inc.
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Capacity planning
Capacity is the highest reasonable output rate
which can be achieved with the current product
specifications, workforce, plant and equipment.
Two distinct ways to view capacity.
•
Design capacity
•
Effective capacity
What is the difference ?
© 2008 Prentice Hall, Inc.
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Capacity planning
• Design capacity is the maximum possible rate
of output that can be achieved .
• Effective capacity is the rate of output that a
firm is capable of achieving. Given process
limitation such as preventive maintenance
,downtime, setup time .
• Actual output rate will be less than effective
capacity when production losses ,like what
losses?
© 2008 Prentice Hall, Inc.
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How to calculate design, effective
capacity ,efficiency and utilization
• Suppose that a small machine shop, designed to
operate one shift per day, five days per week, can
produce 500 units per shift with its current equipment
and workforce.
What is design capacity?
What is effective capacity if 10 percent of productive
time used for preventive maintenance and setup
time?
If actual output 2000 units/week. Calculate efficiency
and utilization ?
© 2008 Prentice Hall, Inc.
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Calculations
Design capacity:
(500 units/shift)*(1 shift/day)(5 days/week)=2500
units/week
Effective capacity = 0.9*2500= 2250 units/week
Efficiency=actual output/effective capacity
= 2000/2250= 88.9%
Utilization =actual output/design capacity
= 2000/2500=80%
Which we can improve design or effective capacity?
© 2008 Prentice Hall, Inc.
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Process Design
Variety of Products
High
Process-focused
JOB SHOPS
(Print shop, emergency
room, machine shop,)
Mass Customization
Customization at high
Volume
(Dell Computer’s PC,
Repetitive (modular)
focus
ASSEMBLY LINE
(Cars, appliances,
TVs,
Moderate
Product focused
CONTINUOUS
(steel, beer, paper,
bread,
Low
Low
© 2008 Prentice Hall, Inc.
Moderate
Volume
High
2 – 40
Issues In Operations Strategy
 Research about effective
operations management
strategies
 Preconditions for developing
effective OM strategies
 The dynamics of OM strategy
development
© 2008 Prentice Hall, Inc.
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Characteristics of
High ROI Firms
 High product quality
 High capacity utilization
 High operating efficiency
 Low investment intensity
 Low direct cost per unit
From the PIMS program of the Strategic Planning Institute
© 2008 Prentice Hall, Inc.
2 – 42
Strategic Options to Gain a
Competitive Advantage
28% - Operations Management
18% - Marketing/distribution
17% - Momentum/name recognition
16% - Quality/service
14% - Good management
4% - Financial resources
3% - Other
© 2008 Prentice Hall, Inc.
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Preconditions
One must understand:
 Strengths and weaknesses of competitors and
possible new entrants into the market
 Current and prospective environmental,
technological, legal, and economic issues
 The product life cycle
 Resources available within the firm and within
the OM function
 Integration of OM strategy with company’s
strategy and with other functional areas
© 2008 Prentice Hall, Inc.
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Environmental Scanning
is the monitoring, evaluating and
disseminating of information from the
external and internal environments to
key people within corporation.
45
The Components of a Company’s
Macro-Environment
MACROENVIRONMENT
The Economy
at Large
Suppliers
Rival
Firms
Substitutes
COMPANY
Buyer
s
New
Entrants

IMMEDIATE INDUSTRY
AND COMPETITIVE
ENVIRONMENT
46
PEST analysis
•What environmental
factors are effecting
organization?
•Which of these are
the most important at
the present time?
•Whish of these can
become important in
the next few years?
47
The Five-Forces Model of Competition (Porter’s
approach)
Potential development
of substitute products
Bargaining power
of suppliers
Rivalry among
competing firms
Bargaining power
of consumers
Potential entry of new
competitors
48
Dynamics of
Strategic Change
 Changes within the organization




Personnel
Finance
Technology
Product life
 Changes in the environment
© 2008 Prentice Hall, Inc.
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Product Life Cycle
Company Strategy/Issues
Introduction
Growth
Maturity
Best period to
increase market
share
Practical to change
price or quality
image
Poor time to
change image,
price, or quality
R&D engineering is
critical
Strengthen niche
Competitive costs
become critical
Defend market
position
Internet search engines
LCD & plasma TVs
Sales
Drive-through
restaurants
Decline
Cost control
critical
CD-ROMs
Analog TVs
iPods
Xbox 360
3 1/2”
Floppy
disks
Figure 2.5
© 2008 Prentice Hall, Inc.
2 – 50
Product Life Cycle
OM Strategy/Issues
Introduction
Product design
and
development
critical
Frequent
product and
process design
changes
Growth
Forecasting
critical
Product and
process
reliability
Maturity
Standardization
Less rapid
product changes
– more minor
changes
Competitive
product
improvements
and options
Optimum
capacity
High production
costs
Shift toward
product focus
Long production
runs
Limited models
Enhance
distribution
Product
improvement
and cost cutting
Short production
runs
Attention to
quality
Increasing
stability of
Increase capacity process
Decline
Little product
differentiation
Cost
minimization
Overcapacity
in the
industry
Prune line to
eliminate
items not
returning
good margin
Reduce
capacity
Figure 2.5
© 2008 Prentice Hall, Inc.
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SWOT Analysis
Mission
Internal
Strengths
External
Opportunities
Analysis
Internal
Weaknesses
External
Threats
Strategy
© 2008 Prentice Hall, Inc.
2 – 52
Strategy Development Process
Environmental Analysis
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
Determine Corporate Mission
State the reason for the firm’s existence and identify the
value it wishes to create.
Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, aftersale service, broad product lines.
© 2008 Prentice Hall, Inc.
Figure 2.6
2 – 53
Strategy Development and
Implementation
 Identify critical success factors
 Build and staff the organization
 Integrate OM with other activities
The operations manager’s job is to implement
an OM strategy, provide competitive
advantage, and increase productivity
© 2008 Prentice Hall, Inc.
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High
Four International
Operations
Strategies
International
Strategy
Cost Reduction Considerations
 Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
2 – 55
Four International
Operations Strategies
Cost Reduction Considerations
High
International Strategy
 Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
2 – 56
Four International
Global
Operations
Strategies
Strategy
High
Cost Reduction Considerations
 Standardized
product
 Economies of scale
 Cross-cultural
learning
Examples
 Import/export or
license existing
Texas Instruments
product
Examples Caterpillar
U.S. Steel
Otis Elevator
Harley Davidson
International Strategy
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
2 – 57
Four International
Operations Strategies
High
Global Strategy
Cost Reduction Considerations
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Caterpillar
Otis Elevator
International Strategy
 Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
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Four International
Multidomestic
Operations
Strategies
Strategy
High
 Use existing
 Standardizeddomestic
product
model
 Economies of scale
 Cross-cultural learning
globally
Examples
Franchise, joint
Texas 
Instruments
Caterpillar
Otis Elevatorventures,
subsidiaries
Cost Reduction Considerations
Global Strategy
International Strategy
Examples
Heinz
Examples McDonald’s
U.S. Steel
Harley Davidson
The Body Shop
Hard Rock Cafe
 Import/export or
license existing
product
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
2 – 59
Four International
Operations Strategies
High
Global Strategy
Cost Reduction Considerations
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Caterpillar
Otis Elevator
International Strategy
 Import/export or
license existing
product
Multidomestic Strategy
 Use existing
domestic model globally
 Franchise, joint ventures,
subsidiaries
Examples
U.S. Steel
Harley Davidson
Examples
Heinz
The Body Shop
McDonald’s Hard Rock Cafe
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
2 – 60
Four International
Transnational
Operations
Strategies
Strategy
High
 Move material,
people, ideas
Examples
across national
Texas Instruments
Caterpillar boundaries
Otis Elevator
 Economies of scale
 Cross-cultural
International Strategy
Multidomestic Strategy
 Use existing
learning
 Import/export
or
domestic model globally
Global Strategy
Cost Reduction Considerations
 Standardized product
 Economies of scale
 Cross-cultural learning
license existing
product
Examples
Coca-Cola
Nestlé
Examples
U.S. Steel
Harley Davidson
Low
 Franchise, joint ventures,
subsidiaries
Examples
Heinz
The Body Shop
McDonald’s Hard Rock Cafe
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
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Four International
Operations Strategies
Cost Reduction Considerations
High
Global Strategy
Transnational Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning
 Move material, people, ideas
across national boundaries
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Caterpillar
Otis Elevator
Examples
Coca-Cola
Nestlé
International Strategy
 Import/export or
license existing
product
Multidomestic Strategy
 Use existing
domestic model globally
 Franchise, joint ventures,
subsidiaries
Examples
U.S. Steel
Harley Davidson
Examples
Heinz
The Body Shop
McDonald’s Hard Rock Cafe
Low
Low
High
Local Responsiveness Considerations
© 2008 Prentice Hall, Inc.
(Quick Response and/or Differentiation)
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