Republic of the Philippines

SORSOGON STATE COLLEGE

Sorsogon Campus
Sorsogon City
LEARNING MODULE
OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT

Chapter 2: Competitiveness, Strategy, and Productivity

I. OVERVIEW
The name of the game is competition. The playing field is global. Those who understand how to play the
game will succeed; those who don’t are doomed to failure. And don’t think the game is just companies competing
with each other. In companies that have multiple factories or divisions producing the same good or service,
factories or divisions sometimes find themselves competing with each other. When a competitor—another
company or a sister factory or division in the same company—can turn out products better, cheaper, and faster,
that spells real trouble for the factory or division that is performing at a lower level. The trouble can be layoffs or
even a shutdown if the managers can’t turn things around. The bottom line? Better quality, higher productivity,
lower costs, and the ability to quickly respond to customer needs are more important than ever, and the bar is
getting higher. Business organizations need to develop solid strategies for dealing with these issues.

II. LEARNING OUTCOMES

After reading and studying this chapter, you will 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. Define the term productivity and explain why it is important to organizations and to countries.
6. Provide some of the reasons for poor productivity and some ways of improving it.

III. LEARNING EXPERIENCE

This chapter discusses competitiveness, strategy, and productivity, three separate but related topics that
are vitally important to business organizations.

Competitiveness
 relates to the effectiveness of an organization in the marketplace relative to other organizations that offer
similar products or services. Operations and marketing have a major impact on competitiveness.

Businesses compete through some combination of their marketing & operations functions:
1. Identifying consumer wants and/or needs - is a basic input in an organization’s decision-making process,
and is central to competitiveness. The ideal is to achieve a perfect match between those wants and needs
and the organization’s goods and/or services.
2. Price and quality - are key factors in consumer buying decisions. It is important to understand the trade-
off decision consumers make between price and quality.
3. Advertising and promotions - are ways organizations can inform potential customers about features of
their products or services, and attract buyers.

Operations has a major influence on competitiveness through:

1. Product and service design – Special characteristics or features of a product or service can be a key factor in
consumer buying decision
 2. Cost of output - a key variable that affects pricing decisions and profits
3. Location - important in terms of cost and convenience to customers
4. Quality - Customers are willing to pay more for product of service they perceive has a higher quality than
that of a competitor
5. Quick response - being able to quickly deliver products or service, or able to bring new or improved
products or services to the market, or able to quickly handle customers complaints
6. Flexibility – ability to respond to changes
7. Inventory management - effectively matches supplies of goods with demand
8. Supply chain management - timely and cost-effective delivery of good throughout the system
9. Service - after-sales activities, courtesy to customers, attention to details
10. Managers and workers who are competent and motivated

Why Some Organizations Fail?

 Neglecting operations strategy.
 Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats.
 Putting too much emphasis on short-term financial performance at the expense of research and
development.
 Placing too much emphasis on product and service design and not enough on process design and
improvement.
 Neglecting investments in capital and human resources.
 Failing to establish good internal communications and cooperation among different functional areas.
 Failing to consider customer wants and needs.

Key Questions to Successfully Compete:

 What do the customers want?
 What is the best way to satisfy those wants?

Understanding competitive issues can help managers develop successful strategies.

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

Mission and Strategies

Mission - the reason for the existence of an organization
Mission Statement - expresses the mission; answers the question, “What business are we in?”
Goals - provide detail and scope of the mission
Strategies - plans for achieving the goals

Three Basic Business Strategies:

 Low cost
 Responsiveness - ability to respond to changing demands
 Differentiation from competitors – in terms of product/service features, quality, reputation, customer
service

Examples of Company Mission Statements:

Facebook: “To give people the power to share and make the world more open and connected.”
Coca Cola: “To refresh the world…To inspire moments of optimism and happiness…To create value and
make a difference.”
Proctor & Gamble: “We will provide branded products and services of superior quality and value that
improve the lives of the world’s consumers.”
Strategies and Tactics

Organizational Strategies - overall strategies of the organization

Functional Strategies - strategies of the functional areas of the organization
Tactics - are the methods and actions used to accomplish the strategies
Operations – actual “doing” part of the process

Planning and Decision-Making are hierarchical in organizations:

Mission

Goals

Organizational Strategies

Functional Goals

Finance Strategies Marketing Strategies Operations Strategies

Tactics Tactics Tactics

Operating Procedures Operating Procedures Operating Procedures

Example:
Rita 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: To live comfortably

Goal: Successful career, good income
Strategy: Obtain a good education
Tactics: Select a college and a major; decide how to finance college
Operations: Enroll, take courses, buy books, study

Different Strategies an organization might choose from:

 Low Cost. Outsource operations to other countries that have low labor costs
 Scale-based Strategies. Use capital-intensive methods to achieve high output volume and low unit costs
 Specialization. Focus on narrow product lines or limited service to achieve higher quality
 Newness. Focus on innovation to create new products and services
 Flexible Operations. Focus on quick response and/or customization
 High Quality. Focus on achieving higher quality than competitors
 Service. Focus on various aspects of service (e.g. helpful, courteous, reliable, etc.)
 Sustainability. Focus on environmental-friendly and energy-efficient operations
Operations Strategy - the approach , consistent with organization strategy, that is used to guide the operations
function.

Example of Operations Strategies:

Organization Strategy Operations Strategy Example of Companies or Services

Low price Low cost Walmart, Southwest Airlines
Responsiveness Short processing time McDonald’s, UPS, FedEx, One-hour
Photo
On-time delivery Domino’s Pizza
Differentiation: High-performance design and/or Sony TV, Lexus, Disneyland, Five-
High quality high-quality processing star Restaurants and Hotels
Consistent quality Coca-Cola, Pepsi Co.,
Differentiation: Innovation 3M, Apple
Newness Google
Differentiation: Flexibility Burger King
Variety Hospital emergency room
Volume Toyota, Supermarkets
Differentiation: Superior customer service Disneyland, Amazon, Hewlett-
Service Packard, IBM
Differentiation: Convenience 7-11 Stores, Banks, ATMs
Location

Core Competencies - the special attributes or abilities that give an organization a competitive advantage

The most effective organizations use an approach that develops core competencies based on customer
needs as well as on what the competition is doing. To be effective, strategies and competencies need to be aligned.

Strategy Formulation
To formulate an effective strategy, senior managers must take into account the core competencies of the
organization, and they must scan the environment. They must determine what competitors are doing, or planning
to do. They must critically examine other factors that could have either positive or negative effects.

Environmental Scanning - is the monitoring of events and trends that present either threats or opportunities for
the organization.

SWOT - Analysis of the strengths, weaknesses, opportunities, and threats. Strengths and weakness are internal
and are typically evaluated by operations people, while opportunities and threats are external and typically
evaluated by marketing people. SWOT is often regarded as the link between organizational strategy and
operations strategy.

Order Qualifiers - characteristics that potential customers perceive as minimum standards of acceptability for a
product to be considered for purchase.

Order Winners - characteristics of an organization’s goods or services that cause them to be perceived as better
than the competition.

External Factors that may Relate to Opportunities & Threats:

 Economic conditions. These include the general health and direction of the economy, inflation and
deflation, interest rates, tax laws, and tariffs
  Political conditions. These include favorable or unfavorable attitudes towards business, political stabity or
instability, and wars
 Legal environment. This includes anti-trust laws, government regulations, trade restrictions, minimum
wage laws, product liability laws, labor laws, and patents
 Technology. This includes the rate at which product innovations are occurring, current and future process
technology , and design technology
 Competition. This includes the number and strength of competitors, the basis of competition, and the ease
of market entry
 Markets. This includes size, location, brand loyalties, ease of entry, potential for growth, long-term
stability, and demographics

Internal Factors that may Relate to Strengths and Weaknesses:

 Human resources. These may include the skills and abilities of managers and workers; special talents;
loyalty to the organization; expertise; dedication; and experience.
 Facilities and equipment. Capacities, location, age, and cost to maintain or replace these.
 Financial resources. Cash flow, access to additional funding, existing debt burden, and cost of capital.
 Customers. Loyalty, existing relationships, and understanding the wants and needs.
 Products and services. These include existing products and services, and the potential for new products and
services.
 Technology. This includes existing technology, the ability to integrate new technology, and the probable
impact of technology on current and future operations.
 Suppliers. Supplier relationships, dependability of suppliers, quality, flexibility, and service.
 Others. These include patents, labor relations, company or product image, distribution channels,
relationship with distributors, maintenance of facilities and equipment, access to resources, and access to
markets.

Questions that may be raised in strategy formulation:

 What role, if any, will the internet play?
 Will the organization have a global presence?
 To what extent will outsourcing be used?
 What will the supply chain management strategy be?
 To what extent will new products and services be introduced?
 What rate of growth is desirable and sustainable?
 What emphasis, if any, should be placed on lean production?
 How will the organization differentiate its products and/or services from competitors?

Key Steps in Strategy Formulation:

1. Link strategy directly to the organization’s vision or mission statement.
2. Assess strengths, weaknesses, opportunities and threats, and identify core competencies.
3. Identify order winners and order qualifiers.
4. Select one or two strategies to focus on.

Strategic Operations Management Decision Areas:

Decision Area What the Decisions Affect
Product and service design Costs, quality, liability & environmental issues
Capacity Cost structure, flexibility
Process selection and layout Costs, flexibility, skill level needed, capacity
Work design Quality of work life, employees’ safety, productivity
Location Costs, visibility
Quality Ability to meet or exceed customers’ 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

Quality and Time Strategies:

Quality-based strategies - focus on maintaining or improving the quality of an organization’s products or services.
Time-based strategies - focus on reducing the time required to accomplish various activities in a process.

Agile Operations - a strategic approach that emphasizes the use of flexibility to adapt and prosper in an
environment of change. These involve a blending of several distinct competencies such as cost, quality, and
reliability along with flexibility.

Productivity
 relates to the effective use of resources, and it has a direct impact on competitiveness. Operations
management is chiefly responsible for productivity.
 It is an index that measures output (goods and services) relative to the input (labor, materials, energy, and
other resources) used to produce it.
 It is usually expressed as the ratio of output to input:
Output
Productivity =
Input
 the higher the productivity, the lower the cost of the output

In business organizations, productivity ratios are used for:

 planning workforce requirements;
 scheduling equipment;
 financial analysis; and
 other important tasks

Importance of Productivity
 For non-profit organizations, higher productivity means lower costs
 For profit-based organizations, it is an important factor in determining how competitive a company is
 For a nation, the rate of productivity growth is of great importance

 Productivity Growth is the increase in productivity from one period to the next relative to the productivity
in the preceding period. Thus –

Current Productivity −Previous Productivity

Productivity Growth = x 100
Previous Productivity

For example, if productivity increased from 80 to 84, the growth rate would be:
84−80
x 100=5 %
80
 Productivity growth is a key factor in a country’s rate of inflation and standard of living
 It adds value to the economy while keeping inflation in check

Computing Productivity:
 Partial measures (partial productivity) - based on a single input
 Multifactor measures (multifactor productivity) - based on more than one input
 Total measure (total productivity) - based on all inputs
Examples:
Output Output Output
Partial measures
Labor Machine Capital
Output
Energy

Output Output
Multifactor measures
Labor+ Machine Labor+ Machine+ Capital

Goods∨services produced
Total measure produce them ¿
All inputsused ¿

Partial measures are often of greatest use in operations management.

Examples of Partial Productivity Measures:

Labor productivity Units of output per labor hour
Units of output per shift
Value-added per labor hour
Peso value of output per labor hour

Machine productivity Units of output per machine hour

Peso value of output per machine hour

Capital productivity Units of output per peso input

Peso value of output per dollar input

Energy productivity Units of output per kilowatt-hour

Peso value of output per kilowatt-hour

Examples of Labor Productivity:

Yards of carpet installed
= Yards of carpet installed per labor hour
Labor hours

Number of hotel rooms cleaned

= Number of hotel rooms cleaned per worker
Number of workers

Sample Computations:
1. Determine the productivity for these cases:
a. Four workers installed 720 square yards of carpeting in eight hours.
b. A machine produced 70 pieces in two hours. However, two pieces were unusable.
Solution:
Yards of carpet installed
a. Productivity =
Labor hours
720 square yards
= 4 workers x 8 hours/ worker
720 yards
= 32 hours
= 22.5 yards/hour
 Usable pieces
b. Productivity =
Production time
70−2=68usable pieces
= 2hours
= 34 pieces/hour

2. Determine the multifactor productivity for the combined input of labor and machine time using the following
data:
Output: 7,040 units
Input:
Labor: $1,000
Materials: $520
Overhead: $2,000
Output
Multifactor productivity =
Labor+ Material+ Overhead
7,040 units
= $ 1,000+ $ 520+ $ 2,000
= 2 units per dollar input

Uses of Productivity Measures:

 Can be used to track performance over time which allows managers to judge performance and to
decide where improvements are needed
 Can be used to judge the performance of an entire industry or the productivity of a country as a whole
(aggregate measures)
 Serve as scorecards of the effective use of resources

Factors that Affect Productivity:

 Methods
 Capital
 Quality
 Technology
 Management

Other Factors that Affect Productivity:

 Standardizing processes
 Quality differences
 Use of the internet
 Computer viruses
 Searching for lost or misplaced items
 Scrap rates
 New workers
 Safety
 Shortage of IT workers and other technical workers
 Layoffs
 Labor turnover
 Design of the workplace
 Incentive plans

Improving Productivity
 Develop productivity measures for all operations.
  Look at the system as a whole in deciding which operations are most critical.
 Develop methods for achieving productivity improvements.
 Establish reasonable goals for improvement.
 Make it clear that management supports and encourages productivity improvement.
 Measure improvements and publicize them.

Efficiency vs. Productivity

 Efficiency is a narrower concept that pertains to getting the most out of a fixed set of resources
 Productivity is a broader concept that pertains to effective use of overall resources

IV. SUMMARY/KEY POINTS

Competition is the driving force in many organizations. It may involve price, quality, special features or
services, time, or other factors. To develop effective strategies for business, it is essential for organizations to
determine what combinations of factors are important to customers, which factors are order qualifiers, and which
are order winners. It is essential that goals and strategies be aligned with the organization’s mission. Strategies are
plans for achieving organizational goals. They provide focus for decision making. Strategies must take into account
present and future customer wants, as well as the organization’s strengths and weaknesses, threats and
opportunities. These can run the gamut from what competitors are doing, or are likely to do, to technology, supply
chain management, and e-business. Organizations generally have overall strategies that pertain to the entire
organization and strategies that pertain to each of the functional areas. Functional strategies are narrower in scope
and should be linked to overall strategies. Time-based strategies and quality-based strategies are among the most
widely used strategies business organizations employ to serve their customers and to become more productive.
Productivity is a measure of the use of resources. There is considerable interest in productivity both from
an organizational standpoint and from a national standpoint. Business organizations want higher productivity
because it yields lower costs and helps them to become more competitive. Nations want higher productivity
because it makes their goods and services more attractive, offsets inflationary pressures associated with higher
wages, and results in a higher standard of living for their people.

KEY POINTS
1. Competitive pressure often means that business organizations must frequently assess their competitors’
strengths and weaknesses, as well as their own, to remain competitive.
2. Strategy formulation is critical because strategies provide direction for the organization, so they can play a
role in the success or failure of a business organization.
3. Functional strategies and supply chain strategies need to be aligned with the overall goals and strategies of
the organization.
4. The three primary business strategies are low cost, responsiveness, and differentiation.
5. Productivity is a key factor in the cost of goods and services. Increase in productivity can become a
competitive advantage.
6. High productivity is particularly important for organizations that have strategy of low costs.

V. ASSESSMENT ACTIVITIES: (Posted in Google Classroom)

Prepared by:

MARIA LUISA P. MIRASOL

Assistant Professor II
[email protected]