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11 Operations and Productivity
Operations and Productivity
OPMG 310 – Spring 2012OPMG 310 – Spring 2012
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What Is Operations What Is Operations Management?Management?
ProductionProduction is the creation of goods and services
Operations management (OM)Operations management (OM) is the set of activities that create value in the form of
goods and services by transforming inputs into
outputs
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Organizational ChartsOrganizational Charts
OperationsGround support equipmentMaintenanceGround Operations Facility maintenance Catering Flight Operations Crew scheduling Flying Communications DispatchingManagement science
Finance/ accountingAccounting Payables Receivables General LedgerFinance Cash control International exchange
Airline
Figure 1.1(B)
MarketingTraffic administration Reservations Schedules Tariffs (pricing)SalesAdvertising
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MarketingSales promotionAdvertisingSalesMarket research
Organizational ChartsOrganizational Charts
OperationsFacilities Construction; maintenance
Production and inventory control Scheduling; materials control
Quality assurance and controlSupply-chain managementManufacturing Tooling; fabrication; assembly
Design Product development and design Detailed product specifications
Industrial engineering Efficient use of machines, space, and personnel
Process analysis Development and installation of production tools and equipment
Finance/ accountingDisbursements/ credits Receivables Payables General ledgerFunds Management Money market International exchangeCapital requirements Stock issue Bond issue and recall
Manufacturing
Figure 1.1(C)
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What Operations What Operations Managers DoManagers Do
Planning
Organizing
Staffing
Leading
Controlling
Basic Management FunctionsBasic Management Functions
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Ten Critical DecisionsTen Critical DecisionsTen Decision Areas Chapter(s)
1. Design of goods and services 52. Managing quality 6, Supplement 63. Process and capacity 7, Supplement 7
design 4. Location strategy 85. Layout strategy 96. Human resources and 10
job design 7. Supply-chain 11, Supplement 11
management8. Inventory, MRP, JIT 12, 14, 169. Scheduling 13, 1510. Maintenance 17 Table 1.2
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Where are the OM Jobs?Where are the OM Jobs? Technology/methods
Facilities/space utilization
Strategic issues
Response time
People/team development
Customer service
Quality
Cost reduction
Inventory reduction
Productivity improvement
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OpportunitiesOpportunities
Figure 1.2
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Significant Events in OMSignificant Events in OM
Figure 1.3
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New Challenges in OMNew Challenges in OM
Global focus
Just-in-time
Supply-chain partnering
Rapid product development, alliances
Mass customization
Empowered employees, teams
ToToFromFrom Local or national focus
Batch shipments
Low bid purchasing
Lengthy product development
Standard products
Job specialization
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Goods and ServicesGoods and ServicesAutomobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/investment management
Consulting service/teaching
Counseling
Percent of Product that is a Good Percent of Product that is a Service
100% 75 50 25 0 25 50 75 100%| | | | | | | | |
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Development of the Development of the Service EconomyService Economy
Figure 1.4 (C)
United States
Canada
France
Italy
Britain
Japan
W. Germany
1970 2010 (est)
| | | | |
40 50 60 70 80Percent
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Productivity ChallengeProductivity Challenge
Productivity is the ratio of outputs (goods and services) divided by the inputs
(resources such as labor and capital)
The objective is to improve productivity!The objective is to improve productivity!
Important Note!Production is a measure of output
only and not a measure of efficiency
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Improving Productivity at Improving Productivity at StarbucksStarbucks
A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:
Stop requiring signatures on credit card purchases under $25
Saved 8 seconds per transaction
Change the size of the ice scoop
Saved 14 seconds per drink
New espresso machines Saved 12 seconds per shot
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Improving Productivity at Improving Productivity at StarbucksStarbucks
A team of 10 analysts A team of 10 analysts continually look for ways continually look for ways to shave time. Some to shave time. Some improvements:improvements:
Stop requiring signatures on credit card purchases under $25
Saved 8 seconds per transaction
Change the size of the ice scoop
Saved 14 seconds per drink
New espresso machines Saved 12 seconds per shot
Operations improvements have helped Starbucks increase yearly revenue per outlet by $200,000 to $940,000 in six years.
Productivity has improved by 27%, or about 4.5% per year.
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Measure of process improvement
Represents output relative to input
Only through productivity increases can our standard of living improve
ProductivityProductivity
Productivity =Units produced
Input used
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Productivity CalculationsProductivity Calculations
Productivity =Units produced
Labor-hours used
= = 4 units/labor-hour1,000
250
Labor ProductivityLabor Productivity
One resource input single-factor productivity
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Multi-Factor Productivity Multi-Factor Productivity
OutputLabor + Material + Energy + Capital + Miscellaneous
Productivity =
Also known as total factor productivity
Output and inputs are often expressed in dollars
Multiple resource inputs multi-factor productivity
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Collins Title wants to evaluate its labor and multi-factor productivity with a new computerized title-search system. The company has a staff of four, each working 8 hours per day (for a payroll cost of $640/day) and overhead expenses of $400 per day. Collins processes and closes on 8 titles each day. The new computerized title-search system will allow the processing of 14 titles per day. Although the staff, their work hours, and pay are the same, the overhead expenses are now $800 per day.
Collins Title ProductivityCollins Title Productivity
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
=Old labor
productivity8 titles/day
32 labor-hrs
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
8 titles/day
32 labor-hrs=
Old labor productivity = .25 titles/labor-hr
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs=
Old labor productivity
=New labor
productivity
= .25 titles/labor-hr
14 titles/day14 titles/day
32 labor-hrs32 labor-hrs
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
32 labor-hrs=
Old labor productivity = .25 titles/labor-hr
14 titles/day
32 labor-hrs=
New labor productivity = .4375 titles/labor-hr
% change : increase 75%%10025.0
25.04375.0 %100
old
oldnew
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
=Old multifactor
productivity8 titles/day
$640 + 400
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400=
Old multifactor productivity = .0077 titles/dollar
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400=
Old multifactor productivity
=New multifactor
productivity
= .0077 titles/dollar
14 titles/day14 titles/day
$640 + 800$640 + 800
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Collins Title ProductivityCollins Title Productivity
Staff of 4 works 8 hrs/day 8 titles/dayPayroll cost = $640/day Overhead = $400/day
Old System:Old System:
14 titles/day Overhead = $800/day
New System:New System:
8 titles/day
$640 + 400
14 titles/day
$640 + 800
=Old multifactor
productivity
=New multifactor
productivity
= .0077 titles/dollar
= .0097 titles/dollar
% change : increase 26%%1000077.0
0077.00097.0 %100
old
oldnew
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Productivity VariablesProductivity Variables
1.1. LaborLabor - contributes about 10% of the annual increase
2.2. CapitalCapital - contributes about 38% of the annual increase
3.3. ManagementManagement - contributes about 52% of the annual increase
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Productivity at Taco BellProductivity at Taco Bell
Improvements:
Revised the menu
Designed meals for easy preparation
Shifted some preparation to suppliers
Efficient layout and automation
Training and employee empowerment
New water and energy saving grills
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Productivity at Taco BellProductivity at Taco Bell
Improvements: Revised the menu
Designed meals for easy preparation
Shifted some preparation to suppliers
Efficient layout and automation
Training and employee empowerment
New water and energy saving grills
Results: Preparation time cut to 8 seconds
Management span of control increased from 5 to 30
In-store labor cut by 15 hours/day
Stores handle twice the volume with half the labor
Conserve 300 million gallons of water and Conserve 300 million gallons of water and 200 million KwH of electricity each year 200 million KwH of electricity each year saving $17 million annuallysaving $17 million annually
Problem 1
A company that makes shopping carts for supermarkets and other stores recently purchased some new equipment that reduces the labor content of the jobs needed to produce the shopping carts. Prior to buying the new equipment, the company used five workers, who produced an average of 80 carts per hour. Workers receive $10 per hour, and machine cost was $40 per hour. With the new equipment, it was possible to transfer one of the workers to another department, and equipment cost increased by $10 per hour while output increased by four carts per hour.
a) Compute labor productivity of the system. Use carts per worker per hour as the measure of labor productivity.
b) Compute the multifactor productivity under each system. Use carts per dollar cost (labor plus equipment) as the measure.
c) Comment on the changes in productivity according to the two measures, and on which one you believe is the more pertinent for this situation.
Problem 2
A company offers ID theft protection using leads obtained from client banks. Three employees work 40 hours a week on the leads, at a pay rate of $25 per hour per employee. Each employee identifies an average of 3,000 potential leads a week from a list of 5,000. An average of 4 percent actually sign up for the service, paying a one-time fee of $70. Material costs are $1,000 per week, and overhead costs are $9,000 per week. Calculate the multifactor productivity for this operation in fees generated per dollar input.
Problem 3
An operation has a 10 percent scrap rate (i.e. 10% of the pieces produced are discarded because of defects). As a result, 72 pieces per hour are produced. What is the potential increase in labor productivity that could be achieved by eliminating the scrap (i.e. 0% scrap rate)?
Question: What are effective ways to motivate hourly employees vs. salaried managers?
If productivity of these workers is below expectation, what are good and poor ways to try to motivate them?
What methods might work well with blue collar employees but not white collar employees, and vice-versa?
What methods might work well in the short run but not in the long run, and vice-versa?
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22 Operations Strategy in a Global Environment
Operations Strategy in a Global Environment
OPMG 310 OPMG 310
Fall 2011Fall 2011
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OutlineOutline Developing Missions And
Strategies Mission
Strategy
Achieving Competitive Advantage Through Operations Competing On Differentiation
Competing On Cost
Competing On Response
Ten Strategic OM Decisions
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Global StrategiesGlobal Strategies
Boeing – sales and production are worldwide
Benetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution
Sony – purchases components from suppliers in Thailand, Malaysia, and around the world
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Reasons to GlobalizeReasons to Globalize
Reasons to GlobalizeReasons to Globalize
1. Reduce costs (labor, taxes, tariffs, etc.)2. Improve supply chain3. Provide better goods and services4. Understand markets5. Learn to improve operations6. Attract and retain global talent
Tangible Reasons
Intangible Reasons
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Cultural and Ethical IssuesCultural and Ethical Issues
Cultures can be quite different
Attitudes can be quite different towards Punctuality
Lunch breaks
Environment
Intellectual property
Thievery
Bribery
Child labor
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Companies Want To ConsiderCompanies Want To Consider
National literacy rate
Rate of innovation
Rate of technology change
Number of skilled workers
Political stability
Product liability laws
Export restrictions
Variations in language
Work ethic
Tax rates
Inflation
Availability of raw materials
Interest rates
Population
Number of miles of highway
Phone system
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Developing Missions and Developing Missions and StrategiesStrategies
MissionMission statements tell an organization where it is going
The StrategyStrategy tells the organization how to get there
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MissionMission
Mission - where are you going? Organization’s
purpose for being
Answers ‘What do we provide society?’
Provides boundaries and focus
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Mission: Mission: AUC School of BusinessAUC School of Business
The School of Business strives to create an environment that fosters the development of principled and innovative business leaders and entrepreneurs who can make a difference.
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Mission of the Management Department
Our mission is to develop business leaders who are dedicated to the betterment of society by providing a high quality business education to top caliber students from all segments of Egyptian society as well as from other countries while focusing on continuous improvement and a commitment to excellence in learning, intellectual contributions and service.
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Benefit to Society
Mission
Factors Affecting MissionFactors Affecting Mission
Philosophy and Values
Profitability and GrowthEnvironment
Customers Public Image
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Sample MissionsSample 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
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Sample MissionsSample Missions
Figure 2.3
Sample OM Department Missions
Product design To design and produce products and services with outstanding quality and inherent customer value.
Quality management To attain the exceptional value that is consistent with our company mission and marketing objectives by close attention to design, procurement, production, and field service operations
Process design To determine, design, and produce the production process and equipment that will be compatible with low-cost product, high quality, and good quality of work life at economical cost.
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Strategic ProcessStrategic Process
Marketing Operations Finance/ Accounting
Functional Area Missions
Organization’s Mission
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StrategyStrategy
Action plan to achieve mission
Functional areas have strategies
Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses
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Strategies for Competitive Strategies for Competitive AdvantageAdvantage
Differentiation – better, or at least different Hard Rock Cafe – dining experience
Cost leadership – cheaper Southwest Airlines – secondary airports, no frills
service, efficient utilization of equipment
Response – rapid response McDonald’s
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OM’s Contribution to StrategyOM’s Contribution to Strategy
Product
Quality
Process
Location
Layout
Human resource
Supply chain
Inventory
Scheduling
Maintenance
DIFFERENTIATIONInnovative design … Safeskin’s innovative gloves Broad product line … Fidelity Security’s mutual
funds After-sales service … Caterpillar’s heavy equipment
service Experience … Hard Rock Café’s dining
experience
COST LEADERSHIP Low overhead … Franz-Colruyt’s warehouse-
type stores Effective capacity use … Southwest Airline’s
aircraft utilization Inventory management … Wal Mart’s sophisticated
distribution system
RESPONSE Flexibility … Hewlett-Packard’s response to
volatile world market Reliability … FedEx’s “absolutely,
positively, on time” Quickness … Pizza Hut’s 5-minute guarantee
at lunchtime
Figure 2.4
10 Operations CompetitiveDecisions Approach Example Advantage
Response(faster)
Cost leadership(cheaper)
Differentiation(better)
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(AUC Management Department)In support of this mission the department:-Provides a high quality contemporary-style business education that blends a global perspective with national cultures and is relevant to the business needs of Egypt and the region.-Provides programs that encourage the development of an entrepreneurial spirit that emphasizes creativity, innovation, individual initiative and teamwork-Provides a learning environment that fosters faculty/student communication and promotes lifelong learning and career development -Encourages faculty development activities that improve teaching, maintain competence and that keep faculty current with ideas and concepts in their field. -Seeks to develop a portfolio of intellectual contributions to learning and pedagogy, to practice, and to the theory and knowledge base of the disciplines. -Encourages the establishment of close partnerships with the business community through consultancies and service that enhance the intellectual and economic quality of Egypt while enriching the learning process.
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Managing Global Service Managing Global Service OperationsOperations
Capacity planning
Location planning
Facilities design and layout
Scheduling
Requires a different perspective on:Requires a different perspective on:
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Process DesignProcess Design
Low Moderate HighVolume
High
Moderate
Low
Var
iety
of
Pro
du
cts
Process-focusedJOB SHOPS
(Print shop, emergency room, machine shop,
fine-diningrestaurant)
Repetitive (modular) focus
ASSEMBLY LINE(Cars, appliances,
TVs, fast-food restaurants) Product focused
CONTINUOUS(Steel, beer, paper, bread, institutional
kitchen)
Mass CustomizationCustomization at high
Volume(Dell Computer’s PC,
cafeteria)
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Issues In Operations StrategyIssues In Operations Strategy
Resources view
Value Chain analysis
Porter’s Five Forces model
Operating in a system with many external factors
Constant change
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Product Life CycleProduct Life Cycle
Best period to increase market share
R&D engineering is critical
Practical to change price or quality image
Strengthen niche
Poor time to change image, price, or quality
Competitive costs become criticalDefend market position
Cost control critical
Introduction Growth Maturity Decline
Co
mp
an
y S
tra
teg
y/Is
sue
s
Figure 2.5
Internet search engines
Sales
Drive-through restaurants
CD-ROMs
Analog TVs
iPods
Boeing 787
LCD & plasma TVs
Avatars
Xbox 360
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Product Life CycleProduct Life Cycle
Product design and development critical
Frequent product and process design changes
Short production runs
High production costs
Limited models
Attention to quality
Introduction Growth Maturity Decline
OM
Str
ate
gy
/Issu
es
Forecasting critical
Product and process reliability
Competitive product improvements and options
Increase capacity
Shift toward product focus
Enhance distribution
Standardization
Fewer product changes, more minor changes
Optimum capacity
Increasing stability of process
Long production runs
Product improvement and cost cutting
Little product differentiation
Cost minimization
Overcapacity in the industry
Prune line to eliminate items not returning good margin
Reduce capacity
Figure 2.5
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Strategy
Analysis
SWOT Analysis SWOT Analysis
Internal Strengths
Internal Weaknesses
External Opportunities
External Threats
Mission
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Strategy Development ProcessStrategy Development Process
Determine the 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, after-
sale service, broad product lines.
Analyze the EnvironmentIdentify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
Figure 2.6
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Key Success FactorsKey Success Factors
Production/Operations
Figure 2.7
Marketing
ServiceDistributionPromotionChannels of distributionProduct positioning (image, functions)
Finance/Accounting
LeverageCost of capitalWorking capitalReceivablesPayablesFinancial controlLines of credit
Decisions Sample Options Chapter
ProductQualityProcessLocationLayoutHuman resourceSupply chainInventoryScheduleMaintenance
Customized, or standardizedDefine customer expectations and how to achieve themFacility size, technology, capacityNear supplier or near customerWork cells or assembly lineSpecialized or enriched jobsSingle or multiple suppliersWhen to reorder, how much to keep on handStable or fluctuating production rateRepair as required or preventive maintenance
56, S67, S7
89
1011, S11
12, 14, 1613, 15
17
Support a Core Competence and Implement Strategy by Identifying and Executing the Key Success Factors in the Functional Areas