chapter 2: competitiveness, strategy, and productivity

© Stevenson, McGraw Hill, 2010- Assoc. Prof. Sami Fethi, EMU, All Right Reserved.

Productivity; Chapter2

MGMT 405, POM, 2013/14. Lec Notes

Chapter 2: Competitiveness, Strategy, and Productivity

Department of Business Administration

FALL 2013-2014

MGMT 405, POM, 2013/14. Lec Notes © Stevenson, McGraw Hill, 2010- Assoc. Prof. Sami Fethi, EMU, All Right Reserved.


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Outline: What You Will Learn . . .

List and briefly discuss the primary ways that business organizations compete.

List five reasons for the poor competitiveness of some companies.

Define the term strategy and explain why strategy is important for competitiveness.

Contrast strategy and tactics. Discuss and compare organization strategy and operations

strategy, and explain why it is important to link the two. Describe and give examples of time-based strategies. Define the term productivity and explain why it is important to

organizations and to countries. List some of the reasons for poor productivity and some ways of

improving it.



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The three topics. . .

Competitiveness, Strategy, and Productivity are three separete but related topics that are vitally important to business organizations.

Competitiveness relates to the effectiveness of an organization in the market place relatively to other organizations that offer similar products or services.

Strategy relates to the plans that determine how an organization pursues its goals.

Productivity relates to the effective use of resources and it has a direct impact on competitiveness.



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Competitiveness:Competitiveness:Companies must be competitive to sell their goods and

provide services in the market It is an important factor in determining whether a

company succeeds or failsMarketing influences competitiveness in several ways

CompetitivenessCompetitiveness

How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services



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CompetitivenessCompetitiveness

Identifying consumer wants and needs is a basic input organization’s decision making process and central to competitiveness

Pricing is a key factor in consumer buying decision

Advertising and promotion is a key element that informs potential consumers and attracts buyers



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Product and service designCostLocationQualityQuick responseFlexibility Inventory managementSupply chain managementService and service qualityManagers and workers

CompetitivenessCompetitiveness-Important factors-Important factors



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Competitiveness Competitiveness -Important factors-Important factors

product and service -special characteristics of product and service design is a key factor in consumer buying decisions. innovation and the time to market are also key factors for new products and services. cost of organization’s output is a key variable that influences pricing decisions and profit policies. location is an important factor in term of transportation cost and convenience for customers. quality is another key element that refers to materials, workmanship, design and service. quick response is a key factor that can be a competitive advantage- quickly bring the new product or service into market. flexibility is the ability to respond to changes for the market



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Competitiveness Competitiveness -Important factors-Important factors Inventory management can be a competitive

advantage by effectively matching supplies of goods with demand.

Supply chain management involves coordinating internal and external operations to achieve timely and cost-effectively delivery of goods throughout the system.

service is a key differentiator- after sale activities customers perceive as value-added such as delivery, warranty work and technical support

managers and workers are the people at the heart and soul of an organization (i.e. Skills and ideas).



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Why Some Organizations Fail?

Organizations fail or perform poorly for a variety of resons. Being aware of such resons may help managers avoid making similar mistake. Some of the reasons are following:

Too much emphasis on short-term financial performance at the expense of research and development.

Failing to take advantage of strengths and opportunities Failing to recognize competitive threats Neglecting operations strategy Failing to recognize competitive threats Too much emphasis in product and service design and not

enough on improvement Neglecting investments in capital and human resources Failing to establish good internal communications Failing to consider customer wants and needs



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Two important questions?Two important questions?

The key questions are following: What do the customers want? What is the best way to satify those wants? Operations must work with marketing to obtain

information on the relative importance of the various items to each major customer or target market.

Understanding competitive issues can help managers develop successful strategiesstrategies.



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StrategyStrategy

Plans for achieving organizational goalsThe importance of strategies should not be overstatedStrategies can be Long-termIntermediate-term Short-termStrategies can be effective if they are designed well to

support the organization’s mission and its goals:



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Mission and GoalsMission and Goals

MissionThe reason for existence for an organization

Mission StatementStates the purpose of an organization

GoalsProvide detail and scope of mission

StrategiesPlans for achieving organizational goals

TacticsThe methods and actions taken to accomplish strategies



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Mission/Strategy/Tactics

StrategyStrategy TacticsTacticsMissionMission

How does mission, strategies and tactics relate todecision making and distinctive competencies?



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Planning and Decision Making

Mission

Goals

Organizational Strategies

Functional Goals

Finance Strategies

MarketingStrategies

OperationsStrategies

Tactics Tactics Tactics

Operatingprocedures

Operatingprocedures

Operatingprocedures

Figure 2.1The overall relationship fromMission to Operation is hierarchical

This slide is excluded from the exam



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Strategy ExampleRita is a high school student. She would like to

have a career in business, have a good job, and earn enough income to live comfortably

Mission: Live a good lifeGoal: Successful career, good income

Strategy: Obtain a college education

Tactics: Select a college and a major

how to finance college

Operations: Register, buy books, take courses, study, graduate, get job



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Examples of Strategies Low costLow cost:: outsource operations to the third world

countries that have low labor costs. Scale-based strategiesScale-based strategies: : use the capital intensive

methods to achieve high output volume and low unit cost.

SpecializationSpecialization: : focus on norrow product lines or limited services to achieve higher quality.

Flexible operationsFlexible operations: : focus on quick response. High qualityHigh quality: : focus on achieving higher quality

than competitors. ServiceService:: focus on various aspects of service (e.g.,

helpful, courteous, reliable, etc.).



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Strategy and TacticsDistinctive Competencies

The special attributes or abilities that give an

organization a competitive edge. The most effective organizations use an approach that

develops distinctive competencies based on customer needs and wants.

Strategy FactorsPriceQualityTimeFlexibilityServiceLocation



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Examples of Operations Strategies

Banks, ATMsConvenienceLocationLocation

DisneylandNordstroms

Superior customer service

ServiceService

Burger KingSupermarkets

VarietyVolume

FlexibilityFlexibility

Express Mail, Fedex,One-hour photo, UPS

Rapid deliveryOn-time delivery

TimeTime

Sony TVLexus, CadillacPepsi, Kodak, Motorola

High-performance design or high quality Consistent quality

QualityQuality

U.S. first-class postageMotel-6, Red Roof Inns

Low CostPricePrice



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Global Strategy

Many companies realized that strategic decisions must be made with respect to globalization as it has increased.

What works in one country may not work in another

Strategies must be changed to account for these differences

Other issuesPolitical, social, cultural, and economic

differences



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Key External Factors

Economic conditions: the general health, direction of the economy, inflation, deflation, interest rates, tax laws and tariffs.

Political conditions:favorable or unfavoable attitudes toward business, political stability or instability and wars.

Legal environment:government regulations, trade restriction, minimum wage law, labor law and patent.

Technology:product innovations and new design. Competition: price, quality, special features and the ease

of market entry. Markets: size, location, brand loyalties, potential for

growth, long-term stability, and demographics.



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Key Internal FactorsKey Internal Factors

Human Resources: the skills and abilities of managers and workers, special talent, loyalty, dedication and experience.

Facilities and equipment: capacities, location, age, cost and replace.

Financial resources: funding, debt burden, cost of capital and cash flow.

Customers: loyalty and understanding of wants and needs. Products and services: quality, design and potential for new

products and services. Technology:the ability to integrate new technology. Suppliers: quality, flexibility, reliable and trustworthy in

service.



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Strategy Formulation To formulate an effective strategy, senior managers must

take into account the followings: Distinctive competencies

The special attributes or abilities that give an

organization a competitive edge. Environmental scanning

The considering of events and trends that present threats or opportunities for a company

SWOT-link between organizational and operations strategies The is an approach shows strengths and weaknesses have an

internal focus and evaluated by operation people. The threats and opportunities have external focus and evaluated by marketing people.



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Strategy Formulation

Order qualifiersCharacteristics that customers perceive as

minimum standards of acceptability to be considered as a potential purchase

Order winners Characteristics of an organization’s goods

or services that cause it to be perceived as better than the competition




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Operations Strategy

Operations strategy The approach, consistent with organization strategy, that

is used to guide the operations function.

Quality-based strategies Focuses on maintaining or improving the quality of an

organization’s products or services

Time-based strategies Focuses on reduction of time needed to

accomplish tasks



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Time-based Strategies

JAN FEB MAR APR MAY JUN

Planning

Processing

Changeover On time!

Designing

Delivery




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Strategic OM Decisions

Decision Area Affects

Product and service design Costs, quality liability and environmental

Capacity Cost structure, flexibility

Process selection and layout Costs, flexibility, skill level, capacity

Work design Quality of work life, employee safety, productivity

Location Costs, visibility

Quality Ability to meet or exceed customer expectations

Inventory Costs, shortages

Maintenance Costs, equipment reliability, productivity

Scheduling Flexibility, efficiency

Supply chains Costs, quality, agility, shortages, vendor relations

Projects Costs, new products, services, or operating systems




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EfficiencyEfficiency Economic Efficiency

It refers to the ratio of outputs to input. This means that economic efficency is getting the most output from the least amount of inputs.

Organizational Efficiency It is a ratio of product or service outputs to land, capital or

labor inputs. Efficiency (%) = (Output/Input)*100% or realized output/expected output

A coffee shop makes 150 coffees per hour. How efficent is the operation as labor input produces 200 coffees per hour?

Efficiency (%) = (Output/Input)*100%

= (150/200)*100%

= 75%



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ProductivityProductivity Productivity

A measure of the effective use of resources, usually expressed as the ratio of output to input

Productivity ratios are used forPlanning workforce requirementsScheduling equipmentFinancial analysis

Partial measures output/(single input)

Multi-factor measures output/(multiple inputs)

Total measure output/(total inputs)

Productivity = Outputs

Inputs



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Factors Affecting Productivity

Capital Quality

Technology Management



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Standardization Quality Use of Internet Computer viruses Searching for lost or misplaced items Scrap rates New workers Safety Shortage of IT workers Layoffs Labor turnover Design of the workspace Incentive plans that reward productivity

Other Factors Affecting Productivity




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Develop productivity measures

Determine critical (bottleneck) operations

Develop methods for productivity improvements

Establish reasonable goals

Get management support

Measure and publicize improvements

Don’t confuse productivity with efficiency

Key Steps In Productivity



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Productivity is based on how much is produced in a certain amount of time at the lowest possible cost. Or/

Productivity refers to the quantity of accomplishment within a given timeframe.

Efficiency is based on time spent in production. Or/

Efficiency refers to how many resources such as time, money, and energy are exerted for one unit of productivity.

The difference between Productivity and efficiency



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Productivity GrowthProductivity Growth

Current Period Productivity – Previous Period ProductivityPrevious Period Productivity



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Measures of ProductivityMeasures of Productivity

Partial Output Output Output Outputmeasures Labor Machine Capital Energy

Multifactor Output Output measures Labor + Machine Labor + Capital + Energy Total Goods or Services Produced measure All inputs used to produce them



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Partial Productivity MeasuresPartial Productivity Measures

Units of output per kilowatt-hourDollar value of output per kilowatt-hour

Energy Productivity

Units of output per dollar inputDollar value of output per dollar input

Capital Productivity

Units of output per machine hourmachine hour

Machine Productivity

Units of output per labor hourUnits of output per shiftValue-added per labor hour

Labor Productivity



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Example-Example-ProductivityProductivity A company makes 7040 Units Produced and the

costs are reported as follows: Cost of labor of $1,000, Cost of materials is $520 and Cost of overhead is $2000.

What is the multifactor productivity?

MFP = OutputLabor + Materials + Overhead

MFP = (7040 units)$1000 + $520 + $2000

MFP =2.0 units per dollar of input



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Example-Example-ProductivityProductivity Growht Growht If productivity increased from 80 to 84.

What is the productivity growth rate?

PGR = 84-80 80

PGR = 5%

X 100



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Example-Example-ProductivityProductivity Determine the productivity for the following case.(a) Four workers installed 720 sq yards of carpeting in eight

hours

(b) A machine produced 68 usable pieces in two hours

(a) Productivity= Yards of carpet installed Labor hours worked

P = 7204 x 8

P = 22.5 yards/ hours



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(b) Productivity= Useable pieces Production time

Example-Example-ProductivityProductivity

P = 68 2

P = 34 pieces/ hours



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Example- Labor Example- Labor ProductivityProductivity

A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in half an hour with four workers.

What is labor productivity

Labor Productivity = Quantity produced Labor hours

LP = 4004 x (1/2)

LP = 200 cases/ labor hours



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Example- Labor Example- Labor ProductivityProductivity A ceramics company spent $ 3000 on a new kiln (oven) last

year. It was planned that it would cut energy usage 25% over the old kiln. The manager of the company wants to check the energy savings of the new oven and to look other measures of their productivity whether the change really was beneficial. The company’s data are the following:

Explain whether the modification were beneficial or not

3000 (Last Year) 2600 (This Year)Energy (kWh)

15000 (Last Year) 18000 (This Year)

Capital ($)

350 (Last Year) 375 (This Year) Labor (hour)

4000 (Last Year) 4000 (This Year)Production



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Example- Labor Example- Labor ProductivityProductivity

Labour 4000/350=11.42 (last year) 4000/375= 10.66 (this year)

Capital 4000/15000=0.266 4000/18000=0.222 Energy 4000/3000=1.33 4000/2600=1.54 Labour change = 10.66-11.42=-0.76 Labour Growth = (10.66-11.42)/11.42= -6.66 Capital change = 0.222-0.266= - 0.044 Capital Growth = (0.222-0.266)/0.266= - 16.54 Energy change = 1.54-1.33=0.21 Energy Growth = (1.54-1.33)/ 1.33=15.78 The energy modifications did not generate the expected savings because

energy growth increased whereas labour and capital productivity decreased. Energy productivity growth is 15.78% so it is still lower than the target one (i.e. 25%).



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Example- MFPExample- MFP Compute the MFP for an eight hour day where the usable

output was 300 units, produced by three workers who used 600 pounds of materials. Workers have an hourly wage of $ 20, and materials cost is $ 1 per pound. Overhead is 1.5 times labor cost.

MFP = Output Labor cost + Materials cost + Overhead cost

MFP = (300 units)3x8x20 + 600x1 + 3x8x20x1.5

MFP =0.167 units of output per dollar of input



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Thanks

chapter 2: competitiveness, strategy, and productivity

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