Chapter 2

COMPETITIVENESS, STRATEGY, AND PRODUCTIVITY

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

Gerhard Wackenhut, DAAD Lecturer 2023 Autumn/Winter Semester; Operations Management INDE412 2
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
LO 2.2
7. Failing to consider customer wants and needs
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 Hierarchical Planning
Mission
Goals
Organizational strategies
Functional strategies
Tactics

FIGURE 2.1
Planning and decision making
LO 2.3 are hierarchical in organizations

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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

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 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 and/or Sony TV
High Quality high quality processing
Consistent quality
Coca-Cola
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
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 System,” Harvard
LO 2.5 Business Review (January-Febrary 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

LO 2.6

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Table 2.8
Some examples of partial productivity measures

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

What is the implication of an unitless measure of productivity?

LO 2.6

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Productivity Growth

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?

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

Methods

Capital Quality

Technology Management

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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