CHAPTER-TWO

COMPETITIVENESS, STRATEGIES, AND

PRODUCTIVITY IN OPERATIONS
 2.1. INTRODUCTION
 Under this chapter we will discuss competitiveness,
strategies, and productivity: three separated but
related topics that are vitally important to the business
organization.
1. Competitiveness relates to how effective an
organization is in the market place compared with
other organizations that offer similar products or
services.
2. Strategy relates to the plans that determine the
direction an organization takes in pursuing its goals.
3. Productivity relates to effective use of resources.
2.2.Competitiveness
 Companies must be competitive to sell their goods and
services in the market place.
 Competitiveness is an important factor in determining
whether a company prospers, barely gets by, or fails.
 Business organizations compete with one another in
variety of ways. These include:
1) PRICE: is the amount a customer must pay for the
product or service.
2) QUALITY: refers to materials and workpersonship as
well as design. It relates to buyer’s perceptions of how
well the product or service will serve its
intended purpose.
 Competitiveness... Con’td
3. PRODUCT OR SERVICE DIFFERENTIATION: refers to any
special features that differentiate the company’s product or
service from its competitors. For example: design, cost, quality,
ease of use, convenient location, warranty.
4. FLEXIBILITY is the ability to respond to changes.
The changes may related to increases or decreases in volume
demanded, or to changes in the design of goods or services.
5. TIME: refers to a number of different aspects of an
organization’s operations.
a. How quickly a product or service is delivered to a customer
b. How quickly new products or services are developed and
brought to the market.
c. The rate at which improvement in products or processes
are made
 Competitiveness... Con’td
6. SERVICE might involve after-sale activities that are
perceived by customers as value added, such as
a. delivery,
b. setup,
c. warranty work,
d. technical support,

Extra attention while work is in progress, such as

a. courtesy,
b. keeping the customer informed, and
c. attention to little details.
Competitiveness... Con’td
7. MANAGERS AND WORKERS are the people at the heart
and soul of an organization, and if they are competent and
motivated, they can provide a distinct competitive edge by
their skills and the ideas they create.

8. ETHICAL BEHAVIOUR is something that all managers

should adhere to and stress to their subordinates.

9. SUPPLY CHAINS recognizing that other organizations in

their supply chains also impact all or most of the items
listed above.
 SMART Company
High level of employee satisfaction

Higher effort and performance

Higher quality products and services

Higher customer satisfaction

More repeat business

Higher growth and profit

High stockholder satisfaction

More investment
 Competitive Priorities
Four Important Operations Questions: Will you compete on
–
1. Cost?

2. Quality?

3. Time?

4. Flexibility?

All of the above? Some? Tradeoffs?

 1. Competing on cost?
Offering product at a low price relative to competition
Typically high volume products
Often limit product range & offer little customization
May invest in automation to reduce unit costs
Can use lower skill labor
Probably use product focused layouts
Low cost does not mean low quality
 2. Competing on quality?
Quality is often subjective
Quality is defined differently depending on who is defining it
Two major quality dimensions include
1. High performance design:
Superior features, high durability, & excellent customer
service

2. Product & service consistency:

Meets design specifications
Close tolerances
Error free delivery
Quality needs to address
Product design quality – product/service meets
requirements
Process quality – error free products
 3. Competing on Time?
Time/speed one of most important competition priorities
First that can deliver often wins the race
Time related issues involve
1.Rapid delivery:
Focused on shorter time between order placement
and delivery/lead time
2. On-time delivery:
Deliver product exactly when needed every time
3. Competing on Flexibility?
Company environment changes rapidly
Company must accommodate change by being flexible
1.Product flexibility:
Easily switch production from one item to another
Easily customize product/service to meet specific
requirements of a customer

2. Volume flexibility:
Ability to ramp production up and down to match
market demands
4.The need for Trade-offs?
Decisions must emphasis priorities that support business
strategy
Decisions often required trade offs
Decisions must focus on order qualifiers and order
winners

1.Which priorities are “Order Qualifiers”?

Order qualifiers are characteristics that customers
perceive as minimum standards of acceptability to
be considered as a potential for purchase

Example: Must have excellent quality since

everyone expects it
The need for Trade-offs?.....Cont’d

2.Which priorities are “Order Winners”?

Order winners are characteristics of an organization’s
goods or services that cause it to be perceived as better
than the competition.
For example:
1. Southwest Airlines competes on cost
2. McDonald’s competes on consistency
3. FedEx competes on speed
4. Custom tailors compete on flexibility
 Discussion

• What are the reasons for Failurity of

Organizations for Competitive
Environment?
Reasons for failurity of organization in
competitive environment
Organizations fail, or perform poorly, for a variety of
reasons. Being aware of those reasons can help managers
avoid making similar mistakes. Among the chief reasons are
the following:
1. Putting too much emphasis on short-term financial
performance at the expense of R and D
2. Failing to take advantage of strengths and
opportunities, and/or failing to recognize competitive
threats.
3. Neglecting operations strategy
4. Placing too much emphasis on product and service
design and not enough on process design and
improvement.
Reasons for failurity of organization in
competitive environment.... Cont’d
5. Neglecting investments in capital and human
resources
6. Failing to establish good internal communications
and cooperation among different functional areas.
7. Failing to consider customer wants and needs
Continued ................
 The key to successfully competing is to determine what
customers need and want and then directing efforts towards
meeting (or even exceeding) customer expectations.
 There are two basic issues that must be addressed
1. What do the customers needs and wants?
2. What is the best way to satisfy those needs and 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 strategies.
 2.3. Operation Strategies
Strategies are plans for achieving goals
 Johnson et al. (2005), Strategies are the direction and
scope of an organization over the long-term, which achieves
advantage in a changing environment through its
configuration of resources with the aim of fulfilling
stakeholder expectations’.
 Provide a plan that makes best use of resources which;
Specifies the policies and plans for using
organizational resources, Supports Business Strategy.
 An organization’s strategy has a long term impact on the
nature and characteristics of the organization.
 Operation Strategies.......Cont’d
 Operations must help the firm achieve a competitive
position in the market place.
 Operations should not be only a place to make the
organizations’ products and services but should lend some
competitive strength to the business as well.
 Gaining a competitive advantage through improved
operations performance requires a strategic response on the
part of the operations function.
Competitive advantage implies a creation of system that
has unique advantages over competitors.
 Operation decisions must be consistent with business
strategy and be focused on primary task.
Operation Strategies.......Cont’d
For example: By designing and producing goods
with better quality, and low costs, the Japanese
have captured a large share of the world markets in
automobiles, electronics, and motorcycles.
The success of this strategy is due to their
determination to excel at operations.
 Operations strategy consists of four
components:
1. Mission 3. Distinctive competence
2. Objectives 4. Policies
 Importance of Operation Strategies
Companies often do not understand the
differences between operational efficiency and
strategy.

Operational efficiency is performing tasks

well, even better than competitors
Strategy is a plan for competing in the
marketplace

Operations strategy is to ensure all tasks

performed are the right tasks
 Developing Business Strategy
A business strategy is developed after taking
into many factors and following some strategic
decisions such as;

What business is the company in (mission)

Analyzing and understanding the market
(environmental scanning)
Identifying the companies strengths(core
competencies)
Three Inputs to Business Strategy
Examples from Strategies
Mission: Awash Bank
To provide innovative, competitive & diversified banking
services accessible to the society with qualified &
committed staff in a profitable & socially responsible
manner.
Dell Computer- “to be the most successful computer
company in the world”
Environmental Scanning: political trends, social trends,
economic trends, market place trends, global trends
Core Competencies: strength of workers, modern
facilities, market understanding, best technologies,
financial know-how, logistics.
Operations Strategy Model

Operation strategy is a functional strategy, and

should be guided by business strategy and should
result in a consistent pattern in decisions.
 The relation ship is shown in the next slide
 Operations Strategy Model....cont’d
Internal
analysis

Corporate and Distinctive Objectives Policies Res

business Mission competence ult
strategy

External
analysis
Operations Strategy Model....cont’d
1. Corporate and Business strategy
Corporate level strategy is the highest level of strategy. It sets
the long-term direction and scope for the whole organization.

 If the organization comprises more than one business unit,

corporate level strategy will be concerned with what those
businesses should be, how resources (e.g. cash) will be
allocated between them, and how relationships between the
various business units and between the corporate centre and
the business units should be managed.

 Organizations often express their strategy in the form of a

corporate mission or vision statement.
Operations Strategy Model....cont’d
Business level strategy: is primarily concerned with how a
particular business unit should compete within its industry,
and what its strategic aims and objectives should be.
In single business organizations, business level strategy is
synonymous with corporate level strategy.
 The business strategies are:

a. Low cost producer

b. Product differentiation
c. Market segmentation
Operations Strategy Model....cont’d
2. External and Internal Environmental Analysis
In formulating an operations strategy and a business strategy,
an analysis should be of the external and internal environment.
 The external environment usually include
1. Competition ( increased foreign competition, etc)
2. Customers (changing tastes and preferences, etc)
3. Economic situations (inflation, fluctuating currency rates,
changing price of oil, changing demand of labor, etc )
4. Technology ( ATMs, Internet, different soft wares, etc)
5. Social conditions ( Culture, language, living style)
6. Political and legal situations (amendments of policy, political
ideology followed, etc)
Operations Strategy Model....cont’d
 The internal environment can affect the
operations strategy via:
1. The availability of resources
2. The existing organizational culture
3. The skills and abilities of work force
4. The location and age of existing facilities
5. The type of control systems in the work place
 An analysis of the internal environment usually
leads to the identification of strength and
weaknesses of the existing operation.
Operations Strategy Model....cont’d
3. Operations Mission
The mission of operations defines the purpose
of the operations function in relation to the
business and corporate strategies.
 The mission should state the priority among the
operations objectives of cost, quality, delivery, and
flexibility.
For example: Provide superior service through
new product innovation at reasonable cost
Operations Strategy Model....cont’d
4. Distinctive Competences
 The distinctive competence of operations is what
operations must excel at relative to the
competition.
 It should match the mission of operations.
 For example: If the mission calls for operations to
excel at new product introduction, then operations
should develop a distinctive competence in this
particular area.
 Distinctive competence leads to competitive
advantages.
Distinctive Competences....Cont’d
Operation can be distinctive in terms of operations
objectives such as:
 Low cost
 Highest quality
 Best delivery
 Greatest flexibility
 Efficient utilization of resources
Distinctive competence requires operations to
concentrate on what it must do best.
Operations Strategy Model....cont’d
5. Operations Objectives
 Four general Operations objectives are possible:
1. Cost (cost of production, cost of inventory, etc)
2. Quality ( value of product, its prestige, its perceived
usefulness, etc)
3. Delivery (ability of operations to deliver product at the
time and place needed)
4. Flexibility ( ability to respond to changes)
 Objectives in operations should be stated in SMARTER
way.
Example: reducing manufacturing costs from 10% in the
coming three years of operations.
Operations Strategy Model....cont’d
6. Operations Policies
 Operations policies define how the objectives of
operations will be achieved.
 Operation policies should be developed for
each of five decision categories:
Policy Type Policy are
1. Process Span of process, automation, process flow
2. Capacity Facility size, location, investment
3. Inventory Amount, distribution, control systems
4. Work force Job specialization, supervision, wage system,
staffing
5. Quality Approach, training, supplies
Operations Strategy Model....cont’d
6. Results
 Operation results are measured in terms of
whether it achieved the objectives of operations or
not.
 If the results are not satisfactory, management
could change any of the strategies as may be
needed.
 The measurement of results closes the loop and
provides feed back on the usefulness of the
strategies selected.
Responses to external Factors

 Operations are sometimes internally focused and

as a result is non competitive.
 Operations strategy must develop a strategy which
is externally focused relative to the:
a. Competition
b. economy
c. social conditions
d. Customer’s need
In today’s worldwide competitive markets, external
factors need to be considered more than ever
before.
Responses to external Factors....cont’d
 The important external forces are:
1. Customer needs and wants
2. New technologies
3. Raw materials
4. Legal factor
5. Changing work forces
6. Competitions
Responses to external Factors....cont’d
1. Customer needs and wants: are reflected by demand level
and product type.
Operations manager not only plan for current customer needs
but future needs too since customer needs and wants
changed over night.
2. New technologies: among many strategic developments in
OM, the role of high technology is among the most
versatile.
Automation lies at the heart of OM.
As product and process technologies change, operations
technologies must change too.
The firm can chose to be a technological leader or follower or
it may pursue other technological strategies.
Responses to external Factors....cont’d
Examples
1. Automated guided vehicles (AGVS): driverless transports that
use computer control to guide them in moving materials from
one work location to another.
2. Computer Aided Design (CAD): uses computers to help create
engineering designs and to rapidly change them as needed.
3. Computer Aided Manufacturing (CAM): uses computers to
monitor the production process, link various machines and
operations to one another, and provides feed back for control
process.
4. Computer Aided Process Planning (CPP): uses computers to
plan operations and determine the best routings of parts
through a series of machines.
Responses to external Factors....cont’d
5. Computer Numerical Control (CNC): uses
computers to store instructions on various machine
operations, and control changes in machine settings
and movements.
6. Group Technology (GT): uses computers to help
code and classify parts into families that require
similar handling in respect to storage and
manufacturing utilization.
7. Robotics: Uses computers to guide multi
functional robots in the performance of work tasks
previously performed by human operators.
 Responses to external Factors....cont’d

3. The availability of raw materials should also be

considered in operations.
For example: the oil crisis caused major dislocations in
many operations
4. Legal factors such as deregulation, environmental
pollution standards, safety regulations, equal
opportunity legislation, etc
5. Work force: social changes and value affect the work
forces and managers in operations. The operations
strategy should recognize such changes in society and
develop responses in the form of work force policy.
Responses to external Factors....cont’d

6. Competition: may be reflected in new products,

more pressure to control costs, quality difference,
and changes in level of demand.

For example: the lower cost in operations was the

main reason for the lower automobiles cost in
Japan.
Focused Operations
 Operations decision helps focus operations to
achieve a coordinated set of policies.

 Focused operations can be developed as a part of

the process strategy. If it is determined that two or
more different missions are being served by the same
facility, this is the signal for the need to have separate
focused facilities or a plant within a plant.

 A single facility can only support one operation

mission.
 Focused Operations.... Cont’d
 Several types of focus dimensions need to be
considered. These include:
a. Product focus
b. Process type
c. Technology
d. Volume of sale
e. Make-to-stock
f. Make-to-order
g. New products and mature products
 2.4. Productivity

Your Reflections

 What is Productivity?
 How we measure productivity?
 What are the factors affecting
productivity?
 2.4. Productivity
Productivity is defined in terms of utilization of resources, like material
and labour.
 In simple terms, productivity is the ratio of output to input. For
example, productivity of labour can be measured as units produced per
labour hour worked.
Productivity is closely linked with quality, technology and profitability.
Hence, there is a strong stress on productivity improvement in
competitive business environment.
Productivity can be improved by
a) controlling inputs,
b) improving process so that the same input yields higher output, and
c) by improvement of technology.
Productivity can be measured at firm level, at industry level, at national
level and at international level.
 Productivity Measure

Productivity is a measure of how efficiently inputs are converted to

outputs
Productivity = output/input

1.Total Productivity Measure:

Total Productivity = (total output)/(total of all inputs) E.g. Goods or service
produced/all inputs used to produce them

2. Multifactor Productivity Measure:

Multi-factor Productivity = (total output)/(several inputs).
E.g. Output/labor+ machine, Output/labor+capital+Energy

3. Partial Productivity Measure:

Partial Productivity = (output)/(single input). E.g. Output/labor,
output/capital, output/energy
Total Productivity: example

XYZ Furniture makes kitchen chairs. The weekly

dollar value of its output, including finished goods
and work-in-progress, is $14,280. The value of
inputs (labor, materials, capital) is approximately
$16,528. What is the total productivity measure for
XYZ?
Total Productivity = output/input
= $14,280/$16,528 = .864 or 86.4%
Partial Productivity: example

XYZ Furniture has hired 2 new workers to paint

chairs. Together they have painted 10 chairs in 4
hours. What is labor productivity for the pair?
Labor productivity = output/labor
= (10 chairs)/(2 x 4 hr)
= (10 chairs)/(8 hr) or 1.25 chairs/hr
Multifactor Productivity: example
XYZ Furniture on averages produces 35 chairs/day.
Labor costs average $480, material costs are
typically $200, and overhead cost is $250. XYZ sells
the chairs to a retailer for $70/unit. Find multifactor
productivity.
 Answer
Multifactor productivity = (value of output)/(labor +
material + overhead costs)
= ($70/chair x 35 chairs)/(480+200+250)
= ($2450)/($930) or 2.63

Note that: factor productivity calculations are required

at firm level and industry level, whereas
total factor productivity calculations are made for
measuring productivity at national and international
level.
Factors Affecting Productivity
Economists site a variety of reasons for changes in
productivity. However some of the principal factors
influencing productivity rate are:
1. Capital/labour ratio: It is a measure of whether enough
investment is being made in plant, machinery, and tools to
make effective use of labour hours.
2. Scarcity of some resources: Resources such as energy,
water and number of metals will create productivity
problems.
3. Work-force changes: Change in work-force affect
productivity to a larger extent, because of the labour
turnover.
Factors Affecting Productivity....Cont’d
4. Innovations and technology: This is the major cause of
increasing productivity.
5. Regulatory effects: These impose substantial constraints
on some firms, which lead to change in productivity.
6. Bargaining power: Bargaining power of organized labour
to command wage increases excess of output increases has
had a detrimental effect on productivity.
7. Managerial factors: Managerial factors are the ways an
organization benefits from the unique planning and
managerial skills of its manager.
8. Quality of work life: It is a term that describes the
organizational culture, and the extent to which it motivates
and satisfies employees.
Improving Productivity
A company or a department can take a number of key
steps toward improving productivity:
1. Develop productivity measures for all operations;
measurement is the first step in managing and
controlling an operation.
2. Look at the system as a whole in deciding which
operations are most critical; it is over all productivity
that is important.
3. Developing methods for achieving improvements,
such as soliciting ideas from workers (perhaps
organizing teams of workers, engineers, and
managers), study in how other firms have increased
productivity, re-examining the way work is done.
Improving Productivity....Cont’d

4. Establish reasonable goals for improvement

5. Make it clear that management supports and
encourages productivity. Consider incentives to
reward workers for contributions
6. Measure improvement and publicize them.
7. Don’t confuse productivity with efficiency.
 Efficiency is a narrower concept that pertains
getting the most out of a fixed set of resources.
 Productivity is a broader concept that pertains
to effective use of overall resources.
 Individual Assignment (10%)
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. Labor cost was $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.
Required
a. Compute labor productivity under each 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.
 Individual Assignment…Continued
2. Adama Garment which is operating in Adama
currently has opened four new stores in Ethiopia.
Data on monthly sales volume and labor hours
are given below for each town. Which store
location has the highest labor productivity?

Stores Bale-Robe Hawassa Nekemte Bahirdar

Sales 12,000 birr 60,000 birr 40, 000birr 25,000 birr

Volume

Labor 60 500 250 200

Hours
 Individual Assignment…Continued
3. Adama Garment accountant (from Problem 2)
suggests that monthly rent and hourly wage rate also
be factored into the productivity calculations. Hawassa
pays the highest average wage at birr 6.75 an hour.
Bale-Robe pays birr 6.50 an hour, Nekemte birr 6, and
Bahirdar birr 5.50. The cost to rent store space is birr
2000 a month in Hawassa, birr 800 a month in
Nekemte, birr 1200 a month in Bale-Robe, and birr
1500 a month in Bahirdar.

a. Which store is most productive?

b. Adama garment general manager is not sure it can
keep all four stores open. Based on multifactor
productivity, which store would you close? What
other factors should be considered?
 Individual Assignment…Continued
4. Take a case of one company or the company in
which you are working, and then:
i) Identify the outputs and inputs of the company
ii) Estimate yearly outputs and inputs identified
either in value or volume
iii) Calculate single, multiple, and total factor
productivity
The End of the second
Chapter