Chapter 2

Competitiveness,
Strategy, and
Productivity

McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter 2: Learning Objectives
 You should be able to:
1. List the three primary ways that business organizations compete
2. Explain five reasons for the poor competitiveness of some companies
3. Define the term strategy and explain why strategy is important
4. Discuss and compare organization strategy and operations strategy,
and explain why it is important to link the two
5. Describe and give examples of time-based strategies
6. Define the term productivity and explain why it is important to
organizations and countries
7. Provide some reasons for poor productivity and some ways of
improving it

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 A Cold Hard Fact
Better quality, higher productivity, lower costs, and the
ability to respond quickly to customer needs are more
important than ever and…
the bar is getting higher

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 Chapter Focus
This chapter focuses on three separate, but related
that are vitally important to business organizations
 Competitiveness
 Strategy
 Productivity

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Competitiveness
Competitiveness:
 How effectively an organization meets the wants and
needs of customers relative to others that offer similar
goods or services
 Organizations compete through some combination of
their marketing and operations functions
• What do customers want?
• How can these customer needs best be satisfied?

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Marketing’s Influence
Identifying consumer wants and/or needs
Pricing
Advertising and promotion

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 Businesses Compete Using
Operations
1. Product and service design
2. Cost
3. Location
4. Quality
5. Quick response
6. Flexibility
7. Inventory management
8. Supply chain management
9. Service
10. Managers and workers

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 Why Some Organizations Fail
1. Neglecting operations strategy
2. Failing to take advantage of strengths and opportunities
and/or failing to recognize competitive threats
3. Too much emphasis on short-term financial performance
at the expense of R&D
4. Too much emphasis in product and service design and not
enough on process design and improvement
5. Neglecting investments in capital and human resources
6. Failing to establish good internal communications and
cooperation
7. Failing to consider customer wants and needs

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Hierarchical Planning

Mission

Goals

Organizational Strategies

Functional Strategies

Tactics
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 Mission, Goals, and Strategy
 Mission
 The reason for an organization’s existence
 Goals
 Provide detail and the scope of the mission
 Goals can be viewed as organizational destinations
 Strategy
 A plan for achieving organizational goals
 Serves as a roadmap for reaching the organizational destinations

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Mission
Mission
 The reason for an organization’s existence
Mission statement
 States the purpose of the organization
 The mission statement should answer the question of
“What business are we in?”

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 Fed Ex Mission Statement
 FedEx Corporation will produce superior financial returns for its
shareowners by providing high value-added logistics, transportation
and related information services through focused operating
companies. Customer requirements will be met in the highest quality
manner appropriate to each market segment served. FedEx
Corporation will strive to develop mutually rewarding relationships
with its employees, partners and suppliers. Safety will be the first
consideration in all operations. Corporate activities will be conducted
to the highest ethical and professional standards.
http://ir.fedex.com/documentdisplay.cfm?DocumentID=125

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Goals
The mission statement serves as the basis for
organizational goals
Goals
 Provide detail and the scope of the mission
Goals can be viewed as organizational destinations
 Goals serve as the basis for organizational strategies

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 Strategies
 Strategy
 A plan for achieving organizational goals
 Serves as a roadmap for reaching the organizational destinations
 Organizations have
 Organizational strategies
 Overall strategies that relate to the entire organization
 Support the achievement of organizational goals and mission
 Functional level strategies
 Strategies that relate to each of the functional areas and that support
achievement of the organizational strategy

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Tactics and Operations
Tactics
 The methods and actions taken to accomplish strategies
 The “how to” part of the process
Operations
 The actual “doing” part of the process

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Core Competencies
Core Competencies
The special attributes or abilities that give an
organization a competitive edge
 Tobe effective core competencies and strategies need to be
aligned

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Sample Operations Strategies
Organizational
Strategy Operations Strategy Examples of Companies or Services
Low Price Low Cost U.S. first-class postage
Wal-Mart
Responsiveness Short processing times McDonald’s restaurants
On-time delivery FedEx
Differentiation: High performance design Sony TV
High Quality and/or high quality
processing
Coca-Cola
Consistent Quality
Differentiation: Innovation 3M, Apple
Newness
Differentiation: Flexibility Burger King (Have it your way”)
Variety Volume McDonald’s (“Buses Welcome”)
Differentiation: Superior customer service Disneyland
Service IBM
Differentiation: Convenience Supermarkets; Mall Stores
Location

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 Strategy Formulation
Effective strategy formulation requires taking into
account:
 Core competencies
 Environmental scanning
SWOT
Successful strategy formulation also requires taking
into account:
 Order qualifiers
 Order winners

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 Strategy Formulation
Order qualifiers
 Characteristics that customers perceive as minimum
standards of acceptability for a product or service to
be considered as a potential for 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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 Environmental Scanning
Environmental Scanning is necessary to
identify
 Internal Factors
Strengths and Weaknesses
 External Factors
Opportunities and Threats

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 Key External Factors
1. Economic conditions
2. Political conditions
3. Legal environment
4. Technology
5. Competition
6. Markets

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 Key Internal Factors
1. Human Resources
2. Facilities and equipment
3. Financial resources
4. Customers
5. Products and services
6. Technology
7. Suppliers
8. Other

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 Operations Strategy
 Operations strategy
 The approach, consistent with organization strategy, that is used to guide
the operations function.
Decision Area What the Decisions Affect
Product and service design Costs, quality, liability, and environmental issues
Capacity Cost, structure, flexibility
Process selection and Costs, flexibility, skill level needed, capacity
layout
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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Quality-Based Strategies
Quality-based strategy
 Strategy that focuses on quality in all phases of an
organization
Pursuit of such a strategy is rooted in a number of factors:
 Trying to overcome a poor quality reputation
 Desire to maintain a quality image
 A desire to catch up with the competition
 A part of a cost reduction strategy

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Time-Based Strategies
Time-based strategies
 Strategies that focus on the reduction of time needed
to accomplish tasks
It is believed that by reducing time, costs are lower, quality
is higher, productivity is higher, time-to-market is faster,
and customer service is improved

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Time-Based Strategies
Areas where organizations have achieved time
reductions:
 Planning time
 Product/service design time
 Processing time
 Changeover time
 Delivery time
 Response time for complaints

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Agile Operations
Agile operations
 A strategic approach for competitive advantage that
emphasizes the use of flexibility to adapt and prosper in
an environment of change
Involves the blending of several core competencies:
 Cost
 Quality
 Reliability
 Flexibility

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 The Balanced Scorecard Approach
 A top-down management system that organizations can use to
clarify their vision and strategy and transform them into action
 Develop objectives
 Develop metrics and targets for each objective
 Develop initiatives to achieve objectives
 Identify links among the various perspectives
 Finance
 Customer
 Internal business processes
 Learning and growth
 Monitor results

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The Balanced Scorecard

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Productivity
Productivity
 A measure of the effective use of resources, usually
expressed as the ratio of output to input
Productivity measures are useful for
 Tracking an operating unit’s performance over time
 Judging the performance of an entire industry or
country

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 Why Productivity Matters
 High productivity is linked to higher standards of living
 As an economy replaces manufacturing jobs with lower productivity
service jobs, it is more difficult to maintain high standards of living
 Higher productivity relative to the competition leads to
competitive advantage in the marketplace
 Pricing and profit effects
 For an industry, high relative productivity makes it less
likely it will be supplanted by foreign industry

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Productivity Measures
Output
Productivi ty =
Input

Output Ouput Output

Partial Measures ; ;
Single Input Labor Capital
Output Ouput Output
Multifactor Measures ; ;
Multiple Inputs Labor + Machine Labor + Capital + Energy

Goods or services produced

Total Measure
All inputs used to produce them

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 Productivity Calculation Example
Units produced: 5,000
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost

What is the
multifactor
productivity?

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Solution
Output
Multifactor Productivity =
Labor + Material + Overhead
5,000 units  $30/unit
=
(500 hours  $25/hour) + $5,000 + (2(500 hours  $25/hour))

$150,000
=
$42,500
= 3.5294

What is the implication of an unitless measure of productivity?

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 Productivity Growth

Current productivity - Previous productivity

Productivity Growth = 100%
Previous productivity

Example: Labor productivity on the ABC assembly line was 25 units per hour in
2009. In 2010, labor productivity was 23 units per hour. What was the
productivity growth from 2009 to 2010?

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Productivity Growth = 100%  8%
25


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 Service Sector Productivity
Service sector productivity is difficult to measure and
manage because
 It involves intellectual activities
 It has a high degree of variability
A useful measure related to productivity is process yield
 Where products are involved
ratio of output of good product to the quantity of raw material input.
 Where services are involved, process yield measurement is
often dependent on the particular process:
ratio of cars rented to cars available for a given day
ratio of student acceptances to the total number of students approved
for admission.

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Factors Affecting Productivity

Methods

Capital Quality

Technology Management

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 Improving Productivity
1. Develop productivity measures for all operations
2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements
4. Establish reasonable goals
5. Make it clear that management supports and encourages productivity
improvement
6. Measure and publicize improvements
Don’t confuse productivity with efficiency

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