Because learning changes everything.

Chapter 2

Competitiveness, Strategy,
and Productivity
Operations Management
FOURTEENTH EDITION
William J. Stevenson

© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Chapter 2: Learning Objectives

You should be able to:

LO 2.1 List several ways that business organizations compete
LO 2.2 Name several reasons that business organizations fail
LO 2.3 Define the terms mission and strategy and explain why they are
important
LO 2.4 Discuss and compare organization strategy and operations
strategy and explain why it is important to link the two
LO 2.5 Describe and give examples of time-based strategies
LO 2.6 Define the term productivity and explain why it is important to
organizations and to countries
LO 2.7 Describe several factors that affect productivity

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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 ideas that

are vitally important to business organizations

1. Competitiveness

2. Strategy

3. 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?

LO 2.1
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 Marketing’s Influence

Identifying consumer wants and/or needs

Pricing and quality
Advertising and promotion

LO 2.1
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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

LO 2.1
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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 on 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
LO 2.2
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 Hierarchical Planning

Mission
Goals
Organizational strategies
Functional strategies
Tactics

FIGURE 2.1
Planning and decision making are
hierarchical in organizations

LO 2.3 Access the text alternative for slide images.

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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?”

LO 2.3
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 Mission Statement

TABLE 2.1 Selected portions of company mission statements

To help people and businesses throughout the world to

Microsoft
realize their full potential.
To help people and businesses communicate with each
Verizon
other.
To inspire and nurture the human spirit—one cup and one
Starbucks
neighborhood at a time.
To promote student achievement and preparation for global
U.S. Dept. of
competitiveness and fostering educational excellence and
Education
ensuring equal access.

LO 2.3
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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

LO 2.3
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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

LO 2.3
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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

LO 2.3
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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

LO 2.3
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 Sample Operations Strategies

Organizational Examples of Companies or

Strategy Operations Strategy 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 Disneyland
Service service IBM
Differentiation: Convenience Supermarkets; mall stores
Location
LO 2.4
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 Strategy Formulation

Effective strategy formulation requires taking into account:

• Core competencies
• Environmental scanning
• SWOT: Strengths, Weaknesses, Opportunities, and Threats

Successful strategy formulation also requires taking into

account:
• Order qualifiers
• Order winners

LO 2.4
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 Strategy Formulation (cont.)

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

LO 2.4
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 Environmental Scanning

Environmental scanning is necessary to identify

• Internal factors
• Strengths and weaknesses

• External factors
• Opportunities and threats

LO 2.4
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 Key External Factors

1. Economic conditions
2. Political conditions
3. Legal environment
4. Technology
5. Competition
6. Customers
7. Suppliers
8. Markets

LO 2.4
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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. Other

LO 2.4
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 Mission and Strategies

Supply Chain Strategy

• How the organization should work with suppliers and
policies relating to customer relationships and
sustainability
Sustainability Strategy
• Work with governmental regulations and interest groups to
achieve sustainability goals
Global Strategy
• Work with international suppliers/producers and also with
countries where the products and services are sold

LO 2.4
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 Operations Strategy

Operations strategy
• The approach, consistent with organization strategy, that is
used to guide the operations function

LO 2.4
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 Strategic OM 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

LO 2.4
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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

LO 2.4
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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

LO 2.5
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 Time-Based Strategies (cont.)

Areas where organizations have achieved time reductions:

• Planning time
• Product/service design time
• Processing time
• Changeover time
• Delivery time
• Response time for complaints

LO 2.5
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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

LO 2.5
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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

LO 2.5
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 The Balanced Scorecard

FIGURE 2.2
The Balanced Scorecard

Source: Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Scorecard as a Strategic Management
LO 2.5 System,” Harvard Business Review (January-February 1996): 76.

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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

LO 2.6
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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

LO 2.6
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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

LO 2.6
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 Table 2.8
Some examples of partial productivity measures

Labor Units of output per labor hour

productivity Units of output per shift
Value-added per labor hour
Dollar value of output per labor hour
Machine Units of output per machine hour
productivity Dollar value of output per machine hour
Capital Units of output per dollar input
productivity Dollar value of output per dollar input
Enter Units of output per kilowatt-hour
productivity Dollar value of output per kilowatt-hour

LO 2.6
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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: 2 × labor cost

What is the
multifactor
productivity?

LO 2.4
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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?

LO 2.6
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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
2014. In 2015, labor productivity was 23 units per hour. What was the productivity
growth from 2014 to 2015?

23 − 25
Productivity Growth = 100% = −8%
25

LO 2.6
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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

LO 2.6
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 Factors Affecting Productivity

LO 2.4
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 Recent Technological factors affecting productivity

Drones
GPS devices
Smartphones
3D printers
Radio frequency ID tags (RFID)
Medical imaging
Artificial intelligence

LO 2.7
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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
7. Don’t confuse productivity with efficiency

LO 2.7
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© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.