Chapter 2

Competitiveness,
Strategy, and
Productivity

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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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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:
 Companies must be competitive to sell their goods and
services in the marketplace.
 Competitiveness is an important factor in determining
whether a company prospers, hardly grows by, or fails.
 It refers 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 (i)
marketing and (ii) operations functions
• What do customers want?
• How can these customer needs best be satisfied?

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 (i) Marketing influences competitiveness in several ways, including
identifying consumer wants and needs, pricing, and advertising and
promotion.
 1. Identifying consumer wants and/or needs is a basic input in an
organization’s decision making process, and 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 promotion are ways organizations can inform potential
customers about features of their products or services, and attract buyers.

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(ii) Operation has a major influence on
competitiveness through
1. Product and service design
2. Cost
3. Location
4. Quality
5. Quick response
6. Flexibility (is the ability to respond to
changes.)
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
 Mission statement
 States the purpose of the organization
 The mission statement should answer the question of “What
business are we in?”
 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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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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McDonald’s Mission Statement
 McDonald's brand mission is to "be our customers' favorite place
and way to eat." Our worldwide operations have been aligned
around a global strategy called the Plan to Win centering on the
five basics of an exceptional customer experience -- People,
Products, Place, Price and Promotion. We are committed to
improving our operations and enhancing our customers'
experience.
 http://www.mcdonalds.com/corp/about/mcd_faq/student_research.html

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IBM’s Mission Statement
 We create, develop, and manufacture the industry’s
most advanced information technologies, including
computer systems, software, networking systems,
storage devices, and microelectronics.
 We have two fundamental missions:
 We strive to lead in the creation, development, and
manufacture of the most advanced information
technologies.
 We translate advanced technologies into value for our
customers as the world’s largest information services
company. Our professionals worldwide provide
expertise within specific industries, consulting
services, systems integration, and solution
development and technical support.
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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 (e.g.,how to
reach the destination, following the strategy
roadmap)
Operations
 The actual “doing” part of the process

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 Planning and Decision Making
Figure 2.1

Mission

Goals

Organizational Strategies

Functional Goals

Finance Marketing Operations

Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
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An Example
 Rita is a high school student in Southern California. She
would like to have a career in business, have a good job, and
earn enough income to live comfortably.
 A possible scenario for achieving her goals might look
something like this:
 Mission: Live a good life.
 Goal: Successful career, good income.
 Strategy: Obtain a college education.
 Tactics: Select a college and a major; decide how to finance
college.
 Operations: Register, buy books, take courses, study.

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Some examples of different strategies an organization might choose from:

 Low cost. Outsource operations to third-world 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 or 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.

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

Note: Table in the next slide shows a list examples of

strategies and companies that have successfully
employed those strategies.

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Table: 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

Characteristics such as price, delivery reliability,

delivery speed, and quality can be order qualifiers or
order winners.
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Environmental Scanning
Environmental Scanning is the monitoring of events
and trends that present threats or opportunities for a
company.
Generally these include competitors’ activities; changing
consumer needs; legal, economic, political, and
environmental issues; the potential for new markets; and
the like.
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. These include the general health and direction of the
economy, inflation and deflation, interest rates, tax laws, and tariffs.
 2. Political conditions. These include favorable or unfavorable attitudes
toward business, political stability or instability, and wars.
 3. Legal environment. This includes antitrust laws, government regulations,
trade restrictions, minimum wage laws, product liability laws and recent court
experience, labor laws, and patents.
 4. Technology. This can include the rate at which product innovations are
occurring, current and future process technology (equipment, materials
handling), and design technology.
 5. Competition. This includes the number and strength of competitors, the
basis of competition (price, quality, special features), and the ease of market
entry.
 6. Markets. This includes size, location, brand loyalties, ease of entry, potential
for growth, long-term stability, and demographics.

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Key Internal Factors
 1. Human resources. These include the skills and abilities
of managers and workers; special talents (creativity,
designing, problem solving); loyalty to the organization;
expertise; dedication; and experience.
 2. Facilities and equipment. Capacities, location, age,
and cost to maintain or replace can have a significant
impact on operations.
 3. Financial resources. Cash flow, access to additional
funding, existing debt burden, and cost of capital are
important considerations.
 4. Customers. Loyalty, existing relationships, and
understanding of wants and needs are important.
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 5. Products and services. These include existing products
and services, and the potential for new products and
services.
 6. Technology. This includes existing technology, the
ability to integrate new technology, and the probable
impact of technology on current and future operations.
 7. Suppliers. Supplier relationships, dependability of
suppliers, quality, flexibility, and service are typical
considerations.
 8. Other. Other factors include patents, labor relations,
company or product image, distribution channels,
relationships with distributors, maintenance of facilities
and equipment, access to resources, and access to markets.

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STRATEGY FORMULATION (Summary)

The key steps in strategy formulation are:
1. Link strategy directly to the organization’s mission
or vision statement.
2.Assess strengths, weaknesses, threats and
opportunities, and identify core competencies.
3. Identify order winners and order qualifiers.
4. Select one or two strategies (e.g., low cost, speed,
customer service) to focus on.

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 Operations Strategy
 Operations strategy
 The approach, consistent with organization strategy, that is used to guide
the operations function.
 The following table highlights some key decision areas.
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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TRANSFORMING STRATEGY INTO
ACTION: THE BALANCED SCORECARD
 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 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:

 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 replaced by foreign industry

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Productivity Measure
Productivity measures can be based on a single input
(partial productivity), on more than one input
(multifactor productivity), or on all inputs (total
productivity).
The choice of productivity measure depends primarily
on the purpose of the measurement. If the purpose is
to track improvements in labor productivity, then
labor becomes the obvious input measure.
Partial measures are often of greatest use in operations
management.

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Productivity Measures
Output
Productivity =
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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Example 2

7040 Units Produced

Cost of labor of $1,000

Cost of materials: $520

Cost of overhead: $2000

What is the multifactor productivity?

Ans. 2.0 units per dollar of input 2-42
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Example 2 Solution

MFP = Output
Labor + Materials + Overhead

MFP = (7040 units)

$1000 + $520 + $2000

MFP = 2.0 units per dollar of input

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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?

23- 25
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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END OF
CHAPTER 2
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