Operations Strategy in

a Global Environment 2

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 Outline
► A Global View of Operations and Supply Chains
► Developing Missions and Strategies
► Achieving Competitive Advantage Through
Operations
► Issues in Operations Strategy
► Strategy Development and Implementation
► Strategic Planning, Core Competencies, and
Outsourcing
► Global Operations Strategy Options

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 Learning Objectives
When you complete this chapter
you should be able to:
2.1 Define mission and strategy
2.2 Identify and explain three strategic approaches to
competitive advantage
2.3 Understand the significant key success factors
and core competencies
2.4 Use factor rating to evaluate both country and
provider outsources
2.5 Identify and explain four global operations
strategy options
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 Global Strategies
▶ Boeing – sales and supply chain are worldwide
▶ Benetton – moves inventory to stores around the world
faster than its competition by building flexibility into design,
production, and distribution
▶ Sony – purchases components from suppliers in Thailand,
Malaysia, and around the world
▶ Volvo – considered a Swedish company, purchased by a
Chinese company, Geely. The current Volvo S40 is
assembled in Belgium, South Africa, Malaysia and China
on a platform shared with the Mazda 3 (built in Japan) and
the Ford Focus (built in Europe).
▶ Haier – A Chinese company, produces compact
refrigerators (it has one-third of the U.S. market) and wine
cabinets
Copyright (it has
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Education, Inc. of the U.S. market) in South Carolina
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 Growth of World Trade
70 ..
World trade as a % of World GDP

60 –

50 –

40 –

30 –

20 –

10 –

| | | | | | | | |
0 .
1970 1980 1990 2000 2010 2020
Year Figure 2.1
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 Reasons to Globalize

1. Improve the supply chain

2. Reduce costs and exchange rate risks
3. Improve operations
4. Understand markets
5. Improve products
6. Attract and retain global talent

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 Improve the Supply Chain
▶ Locating facilities closer to unique resources
▶ Auto design to California
▶ Athletic shoe production to China
▶ Perfume manufacturing in France

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 Reduce Costs
▶ Risks associated with currency exchange rates
▶ Reduce direct and indirect costs
▶ Trade agreements can lower tariffs
▶ Maquiladoras
▶ World Trade Organization (WTO)
▶ North American Free Trade Agreement (NAFTA)
▶ APEC, SEATO, MERCOSUR, CAFTA
▶ European Union (EU)

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 Improve Operations
▶ Understand differences between how
business is handled in other countries
▶ Japanese – inventory management
▶ Germans – robots
▶ Scandinavians – ergonomics
▶ International operations can improve
response time and customer service

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 Understand Markets
▶ Interacting with foreign customers,
suppliers, competition can lead to
new opportunities
▶ Cell phone
design moved
from Europe
to Japan
▶ Extend the
product life
cycle

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 Improve Products
▶ Remain open to free flow of ideas
▶ Toyota and BMW manage joint research and
development
▶ Reduced risk, state-of-the-art design, lower costs
▶ Samsung and Bosch jointly produce batteries

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 Attract and Retain Global
Talent
▶ Offer better employment opportunities
▶ Better growth opportunities and
insulation against unemployment
▶ Relocate unneeded personnel to more
prosperous locations

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 Cultural and Ethical Issues
▶ Social and cultural behavior differs
▶ International laws, agreements, codes
of conduct for ethical behaviors
▶ Mobility of capital, information, goods,
and people

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 Companies Want To Consider
▶ National literacy rate ► Work ethic
▶ Rate of innovation ► Tax rates
▶ Rate of technology ► Inflation
change ► Availability of raw
▶ Number of skilled materials
workers ► Interest rates
▶ Political stability ► Population
▶ Product liability laws ► Transportation
▶ Export restrictions infrastructure
▶ Variations in language ► Communication
system
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 Developing Missions and
Strategies
Mission statements tell an
organization where it is going

The Strategy tells the

organization how to get there

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 Mission
► Mission - where is the organization going?
► Organization’s purpose for being
► Answers “What do we contribute to society?”
► Provides boundaries and focus

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 PespsiCo

Our mission is to be the world's premier consumer products company

focused on convenient foods and beverages. We seek to produce financial
rewards to investors as we provide opportunities for growth and enrichment
to our employees, our business partners and the communities in which we
operate. And in everything we do, we strive for honesty, fairness and integrity.

Arnold Palmer Hospital

Arnold Palmer Hospital for Children provides state of the art, family-centered
healthcare focused on restoring the joy of childhood in an environment of
compassion, healing, and hope.
Figure 2.2

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 Factors Affecting Mission
Philosophy
and Values

Profitability and
Environment Growth

Mission

Customers Public Image

Benefit to
Society

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 Strategic Process
Organization’s
Mission

Functional Area
Missions

Finance/
Marketing Operations Accounting

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 Sample Missions

Sample Company Mission

To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business
that exceeds our customers’ expectations.

Sample Operations Management Mission

To produce products consistent with the company’s mission

as the worldwide low-cost manufacturer.

Figure 2.3
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 Sample Missions
Sample OM Department Missions
Product design To design and produce products and
services with outstanding quality and
inherent customer value.
Quality management To attain the exceptional value that is
consistent with our company mission and
marketing objectives by close attention to
design, procurement, production, and field
service operations

Process design To determine, design, and produce the

production process and equipment that will
be compatible with low-cost product, high
quality, and good quality of work life at
economical cost.

Figure 2.3
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 Sample Missions
Sample OM Department Missions
Location To locate, design, and build efficient and
economical facilities that will yield high
value to the company, its employees, and the
community.
Layout design To achieve, through skill, imagination, and
resourcefulness in layout and work methods,
production effectiveness and efficiency
while supporting a high quality of work life.

Human resources To provide a good quality of work life, with

well-designed, safe, rewarding jobs, stable
employment, and equitable pay, in exchange
for outstanding individual contribution from
employees at all levels.

Figure 2.3
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 Sample Missions
Sample OM Department Missions
Supply-chain To collaborate with suppliers to develop
management innovative products from stable, effective,
and efficient sources of supply.
Inventory To achieve low investment in inventory
consistent with high customer service levels
and high facility utilization.
Scheduling To achieve high levels of throughput and
timely customer delivery through effective
scheduling.
Maintenance To achieve high utilization of facilities and
equipment by effective preventive
maintenance and prompt repair of facilities
and equipment.

Figure 2.3
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 Strategy
► Action plan to achieve mission
► Functional areas have strategies
► Strategies exploit opportunities and
strengths, neutralize threats, and avoid
weaknesses

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 Strategies for Competitive
Advantage

1. Differentiation – better, or at least different

2. Cost leadership – cheaper
3. Response – more responsive

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 Competing on Differentiation
Uniqueness can go beyond both the
physical characteristics and service
attributes to encompass everything that
impacts customer's perception of value
► Safeskin gloves – leading edge products
► Walt Disney Magic Kingdom –
experience differentiation
► Hard Rock Cafe – dining experience

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 Experience Differentiation
Engaging a customer with a product
through imaginative use of the five
senses, so the customer “experiences”
the product
► Theme parks use sight, sound, smell, and
participation
► Movie theatres use sight, sound, moving seats,
smells, and mists of rain
► Restaurants use music, smell, and open kitchens

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 Competing on Cost
Provide the maximum value as perceived
by customer. Does not imply low quality.

► Southwest Airlines – secondary airports, no

frills service, efficient utilization of equipment
► Walmart – small overhead, shrinkage, and
distribution costs
► Franz Colruyt – no bags, no bright lights, no
music, and doors on freezers

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 Competing on Response
▶ Flexibility is matching market changes in
design innovation and volumes
▶ A way of life at Hewlett-Packard
▶ Reliability is meeting schedules
▶ German machine industry
▶ Quickness in design,
production, and delivery
▶ Johnson Electric,
Pizza Hut

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 OM’s Contribution to Strategy
10 Operations Competitive
Decisions Strategy Example Advantage

Product DIFFERENTIATION:
Innovative design ………... Safeskin’s innovative gloves
Broad product line ……… Fidelity Security’s mutual
Quality funds
After-sales service …….. Caterpillar’s heavy equipment
Process service
Experience …………….. Hard Rock Café’s dining
Location experience

COST LEADERSHIP: Differentiation

Layout Low overhead ……… Franz-Colruyt’s warehouse-
type stores (better)
Human Effective capacity … Southwest Airline’s
resource use aircraft utilization
Response
Supply chain Inventory ……………. Walmart’s sophisticated (faster)
management distribution system
Cost
Inventory leadership
RESPONSE: (cheaper)
Scheduling Flexibility …………….. Hewlett-Packard’s response to
volatile world market
Maintenance Reliability ……………… FedEx’s “absolutely,
positively, on time”
Quickness ………………. Pizza Hut’s 5-minute guarantee
Figure 2.4
at lunchtime
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 Problem 2.5
▶ Within the food service industry (restaurants that
serve meals to customers, but not just fast food),
find examples of firms that have sustained
competitive advantage by competing on the
basis of 1) cost leadership, 2) response, and 3)
differentiation. Cite one example in each
category; provide a sentence or to in support of
each choice. Do not use fast-food chains for all
categories.

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 Issues In Operations Strategy

▶ Resources view
▶ Value-chain analysis
▶ Porter’s Five Forces model
▶ Operating in a system with many
external factors
▶ Constant change

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 Product Life Cycle
Introduction Growth Maturity Decline

Best period to Practical to change Poor time to Cost control

increase market price or quality change image, critical
share image price, or quality
Company Strategy/Issues

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position
Hybrid engine vehicles Laptop computers

Boeing 787 Xbox One

DVDs
3D printers

Life Cycle Curve

Electric
vehicles
Apple Video
SmartWatch 3-D game physical
players rentals

Figure 2.5
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 Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting critical Standardization Little product
and development Product and Fewer rapid differentiation
critical process reliability product changes, Cost
Frequent product Competitive more minor minimization
and process changes
Strategy/Issues

product Overcapacity in
OMStrategy/Issues

design changes improvements and Optimum capacity the industry

Short production options Increasing stability Prune line to
runs Increase capacity of process eliminate items
High production Shift toward not returning
costs product focus good margin
Limited models Enhance Reduce
Long production capacity
Attention to quality distribution runs
OM

Product
improvement and
cost cutting

Figure 2.5
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 SWOT Analysis

Mission

Internal External
Strengths Opportunities

Analysis

Internal External
Weaknesses Threats

Strategy

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 Problem 2.6
▶ Identify how changes within an organization
affect the OM strategy for a company. For
instance, discuss what impact the following
internal factors might have on OM strategy:
▶ a) Maturing of a product
▶ b) Technology innovation in the manufacturing
process
▶ c) Changes in laptop computer design that builds
in wireless technology

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 Strategy Development Process
Analyze the Environment
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.

Determine the Corporate Mission

State the reason for the firm’s existence and identify the value it
wishes to create.

Form a Strategy
Build a competitive advantage, such as low price, design, or volume
flexibility, quality, quick delivery, dependability, after-sale service,
broad product lines.

Figure 2.6
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 Strategy Development and
Implementation
▶ Identify key success factors
▶ Integrate OM with other activities
▶ Build and staff the organization

The operations manager’s job is to implement

an OM strategy, provide competitive
advantage, and increase productivity

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 Key Success Factors
Support a Core Competence and Implement Strategy by
Identifying and Executing the Key Success Factors in the Functional Areas

Marketing Finance/Accounting Production/Operations

Service Leverage
Distribution Cost of capital
Promotion Working capital
Channels of distribution Receivables
Product positioning Payables
(image, functions) Financial control
Lines of credit

10 OM Decisions Sample Options Chapter

Product Customized, or standardized; sustainability 5, S5

Quality Define customer quality expectations and 6, S6
how to achieve them
Process Facility size, capacity, how much automation 7, S7
Location Near supplier or near customer 8
Layout Work cells or assembly line 9
Human resource Specialized or enriched jobs 10
Supply chain Single or multiple suppliers 11, S11
Inventory When to reorder, how much to keep on hand 12, 14, 16
Schedule Stable or fluctuating production rate 13, 15
Maintenance Repair as required or preventive maintenance 17

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Implementing Strategic Decisions
TABLE 2.1 Operations Strategies of Two Drug Companies
BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
COMPETITIVE PRODUCT DIFFERENTIATION LOW COST STRATEGY
ADVANTAGE STRATEGY
Product Heavy R&D investment; extensive labs; Low R&D investment; focus on
selection and focus on development in a broad range development of generic drugs
design of drug categories
Quality Quality is major priority, standards Meets regulatory requirements on a
exceed regulatory requirements country-by-country basis, as necessary
Process Product and modular production Process focused; general production
process; tries to have long product runs processes; “job shop” approach, short-
in specialized facilities; builds capacity run production; focus on high utilization
ahead of demand
Location Still located in city where it was founded Recently moved to low-tax, low-labor-
cost environment

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Implementing Strategic Decisions
TABLE 2.1 Operations Strategies of Two Drug Companies
BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
COMPETITIVE PRODUCT DIFFERENTIATION LOW COST STRATEGY
ADVANTAGE STRATEGY
Layout Layout supports automated product- Layout supports process-focused “job
focused production shop” practices
Human Hire the best; nationwide searches Very experienced top executives
resources provide direction; other personnel paid
below industry average
Supply chain Long-term supplier relationships Tends to purchase competitively to find
bargains
Inventory Maintains high finished goods inventory Process focus drives up work-in-
primarily to ensure all demands are met process inventory; finished goods
inventory tends to be low
Scheduling Centralized production planning Many short-run products complicate
scheduling
Maintenance Highly trained staff; extensive parts Highly trained staff to meet changing
inventory demands

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 Problem 2.7
▶ Identify how changes in the external environment
affect the OM strategy for a company. For
instance, discuss what impact the following
external factors might have on OM strategy:
▶ a) Major increases in oil prices
▶ b) Water-and air-quality legislation
▶ c) Fewer young prospective employees entering
the labor market
▶ d) Inflation versus stable prices
▶ e) Legislation moving health insurance from a
pretax
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 Strategic Planning, Core
Competencies, and Outsourcing

▶ Outsourcing – transferring activities

that traditionally been internal to
external suppliers
▶ Accelerating due to
1) Increased technological expertise
2) More reliable and cheaper transportation
3) Rapid development and deployment of
advancements in telecommunications
and computers
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 Strategic Planning, Core
Competencies, and Outsourcing

▶ Subcontracting - contract manufacturing

▶ Outsourced activities
► Legal services ► Payroll
► IT services ► Production
► Travel services ► Surgery

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Theory of Comparative Advantage
▶ If an external provider can perform activities
more productively than the purchasing firm,
then the external provider should do the work
▶ Purchasing firm focuses on core competencies
▶ Drives outsourcing

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 Risks of Outsourcing
TABLE 2.2 Potential Advantages and Disadvantages of Outsourcing
ADVANTAGES DISADVANTAGES
Cost savings Increased logistics and inventory costs
Gaining outside expertise that comes Loss of control (quality, delivery, etc.)
with specialization
Improving operations and service Potential creation of future competition
Maintaining a focus on core Negative impact on employees
competencies
Accessing outside technology Risks may not manifest themselves for
years

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Rating Outsourcing Providers
▶ Insufficient analysis most common
reason for failure
▶ Factor-rating method
▶ Points and weights assigned for each
factor to each provider

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 Rating Provider Selection Criteria
TABLE 2.3 Factor Ratings Applied to National Architects’s Potential IT Outsourcing Providers
OUTSOURCING PROVIDERS
IMPORTANCE BIM S.P.C. TELCO
FACTOR (CRITERION) WEIGHTS (U.S.) (INDIA) (ISRAEL)
1. Can reduce operating costs .2 3 3 5
2. Can reduce capital investment .2 4 3 3
3. Skilled personnel .2 5 4 3
4. Can improve quality .1 4 5 2
5. Can gain access to technology not in
company .1 5 3 5
6. Can create additional capacity .1 4 2 4
7. Aligns with policy/philosophy/culture .1 2 3 5
Total Weighted Score 1.0 3.9 3.3 3.8

Score for BIM = (.2 * 3) + (.2 * 4) + (.2 * 5) + (.1 * 4) + (.1 * 5) + (.1 * 4) + (.1 * 2) = 3.9

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 Problem 2.8
▶ Claudia Pragram Technologies, Inc., has narrowed its choice of outsourcing
provider to two firms located in different countries. Pragram wants to decide
which one of the two countries is the better choice, based on risk-avoidance
criteria. She has polled her executes and established four criteria. The
resulting ratings for the two countries are presented in the table below, where
1 is a lower risk and 3 is a higher risk.

▶ The executives have determined four criteria weightings: Price, with a weight
of 0.1; Nearness, with 0.6; Technology, with 0.2; and History, with 0.1.
▶ a) Using the factor-rating method, which country would you select?
▶ b) Double each of the weights used in part a) (to 0.2, 1.2, 0.4, and 0.2,
respectively). What effect does this have on your answer? Why?
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 Problem 2.9
▶ Ranga Ramasesh is the operations manager for a firm
that is trying to decide which one of four countries it
should research for possible outsourcing providers. The
first step is to select a country based on cultural risk
factors, which are critical to eventual business success
with the provider. Ranga has reviewed outsourcing
provider directories and found that the four countries in
the table that follows have an ample number of providers
from which they can choose. To aid in the country
selection step, he has enlisted the aid of a cultural
expert, John Wang, who has provided ratings of the
various criteria in the table. The resulting ratings are on a
1 to 10 scale, where 1 is a low risk and 10 is a high risk.

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▶ John has also determined six criteria weightings: Trust,
with a weight of 0.4; Quality, with 0.2; Religious, with 0.1;
Individualism, with 0.1; Time, with 0.1; and Uncertainty,
with 0.1. Using the factor-rating method, which country
should Ranga select?

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 Global Operations Strategy
Options High
Global strategy
• Standardize product
Transnational
strategy Figure 2.9
• Economies of scale • Move material, people,
• Cross-cultural learning or ideas across
national boundaries
Examples: • Economies of scale
Texas Instruments • Cross-cultural learning
Caterpillar Examples:
Cost Reduction

Otis Elevator Coca-Cola, Nestlé

International Multidomestic
strategy
strategy
• Import/export or (eg, Heinz, McDonald’s
license existing The Body Shop
product Hard Rock Cafe)
• Use existing domestic
Examples: model globally
U.S. Steel • Franchise, joint
Harley-Davidson ventures,
subsidiaries
Low
Low High
Local Responsiveness
(Quick Response and/or Differentiation)
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