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Chapter 2

Business Strategy and Global Competitiveness

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Manor Care

Operates Sleep Inns Labor Shortage Designed rooms to minimize housekeeping

staff needed– attached nightstands to walls– no doors on closets– rounded shower stalls– advanced security system

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Manor Care Results

Rooms can be cleaned in 20 minutes versus 30 minute industry standard.

92-room hotel operated with equivalent of 11 full-time workers.

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American Steel Industry

Foreign competition posed major threat to industry in early 1980s.

In 1982, US producers needed 10.59 labor hours to produce on metric ton compared with 10.01 hours in Japan.

US closed plants, modernized others, and reduced payrolls.

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American Steel Industry continued

By middle of 1991, US steelmakers able to produce a metric ton with 5.4 hours compared to 5.6 hours for Japanese.

At the same time, quality also improved. In early 80s, Ford rejected 8% of domestic

steel shipments and 20% were late. By early 1990s, steel rejects reduced to 1%

and 99% of shipments were on time.

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Technology Examples

Kansas City Power & Light using automatic meter readers which broadcasts data on electricity usage and eliminates $15/hour human meter readers.

Coca-Cola is installing similar technology in its vending machines.

This will allow Coke to better schedule deliveries and evaluate ad campaigns.

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Examples Illustrate

Shortage of employees often necessitates need to improve productivity.

Increased competition (especially foreign competition) another reason why companies seek to improve their productivity.

Improving productivity is often dependent on new technologies.

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Top Management

Responsible for making and keeping organization competitive.

Develops business strategy– provides direction and vision– guides short- and long-term decisions– must consider international competition

All functional areas and business processes must support the business strategy.

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Business or Corporate StrategyA set of objectives, plans, and policies for the

organization to successfully compete in its markets.

Long range (3 to 5 years) It specifies what organization’s competitive

advantage will be Focuses on few key areas The pattern of decisions made over time is in fact

an organization’s business strategy.

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Formulating the Corporate Strategy

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Corporate Strategy Formulation

COLLBORATORS& COOPERATORS

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Vision and Mission StatementsVision statements used to express

organization’s values and aspirations.

Mission statements express organization’s purpose or reason for existence.

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Core Competencies

Collective knowledge and skills an organization has that distinguish (or differentiate) it from the competition.

Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services.

Are aggregates of core capabilities.

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Core Competencies continued

Are basis on which new outputs are developed. Better to think of organization in terms of its

portfolio of core competencies than as a portfolio of products.

Identifying and developing core competencies is one of top management’s most important roles.

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Examples of Core Competencies

Sony - miniaturization 3M- knowledge of substrates, coatings and

adhesives; Knowledge management Black and Decker - small electrical motors

and industrial design Honda - engines and power trains Daimei-Benz - safety systems, quality and

luxury.

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Core Competencies Used to Gain Access to Variety of Markets Cannon

– core competencies in optics, imaging, and electronic controls

– Products include copiers, laser printers, cameras, and image scanners.

Boeing– integrating large scale systems– commercial jetliners, space stations, missiles

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Core Capabilities

Organization practices and business processes

Collection of capabilities lead to core competencies

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Key Characteristics of Core Competencies Should be used to gain access to a variety of

markets Should be strongly related to key benefits

provided by products or services Should be difficult to imitate (what about

benchmarking?)

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Operations Strategy - Definition

Operations Strategy - involves setting broad policies and plans on how to use “available” resources of a firm to support its long-term competitive strategy.

Corporate strategy leads to Operations strategy

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3

Operations Strategy

Customer Needs Corporate Strategy

Operations Strategy

Alignment

CoreCompetencies

Decisions

Processes, Infrastructure, and Capabilities

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10

How do we convert order winners into specific performance requirements?

Us(Core competencies)

Competition(Them) Differentiation

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8

A Framework for Operations/Manufacturing Strategy

Customer Needs

New and CurrentProducts

Performance Prioritiesand Requirements

Quality, Dependability,Speed, Flexibility, and Price

Operations & Supplier Capabilities

Technology PeopleSystems R&D CIM JIT TQM Distribution

Support Platforms

Financial Management Human Resource Management Information Management

Enterprise Capabilities

Strategic Vision

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Strategy Example:Outsourcing

Subcontracting out production of parts or performance of activities

Activities and parts fall on a continuum ranging from strategically unimportant to strategically important

Activities not strategically important are candidates to be outsourced

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Strategically Important Parts or Activities Strongly related to what customers perceive

to be key product characteristics. Require highly specialized skill and

knowledge. Require highly specialized physical assets The organization has the technological lead

or is likely to obtain it.

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Hollowed Out

The extent that most of a firm’s complex parts and production are outsourced

Often when complex parts are outsourced, engineering talent follows

Supplier may become competitor

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Creeping Breakeven Phenomenon Viscous cycle where products appear to

become more expensive to produce in-house as others are outsourced.– Result from way overhead is covered and

allocated

Logical conclusion is organization ends up producing no outputs.

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Business Strategy and the Product Life Cycle

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The Life-Cycle Curve

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Product Life Cycle

Strategies often tied to product life cycle Length of life cycles shrinking Business strategy should match life cycles

stages

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Product Life Cycle Stages and Emphasis

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Categories of Business Strategies

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A:First-to-Market Strategy

Products available before competition Strong applied research capability needed Can set high price to skim market or set

lower price to gain market share

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B:Second-to-Market Strategy

Quick imitation of first-to-market companies

Less emphasis on applied research and more emphasis on development

Learn from first-to-market’s mistakes

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C:Cost Minimization or Late-to-Market Strategy Wait until market becomes standardized

and large volumes demanded Compete on basis of costs instead of

product features Research efforts focus on process

development versus product development

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D:Market Segmentation

Serving niche markets Applied engineering skills and flexible

manufacturing processes needed

flexibility:ability to handle variations in

product volume and product mix.

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Implementation:The Balanced Scorecard Helps translate mission and strategy into

appropriate performance measures. Traditionally organizations relied primarily on

financial measures. No single set of measures can provide information

needed in all critical areas of the business. Purpose of balanced scorecard the development of

a set of measures that provides a comprehensive view of the organization.

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Benefits of Using Balanced Scorecard Clarify and gain consensus of strategy Mechanism for communicating strategy Mechanism for aligning departmental and

personal goals to the strategy Help ensure strategic objectives are linked to

annual budget Timely feedback related to improving the

strategy

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Performance Measured in Four Areas Financial Performance Customer Performance Internal Business Process Performance Organizational Learning and Growth

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Developing a Balanced Scorecard Top management translates mission and strategy

into specific customer and financial objectives. Measures for internal business processes

developed on basis of customer and financial objectives.

Investments in employee training and information technology linked to customer, financial, and internal business process objectives.

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Focus

Goal of business strategy is to establish and maintain a unique strength, or focus that leads to a sustainable competitive advantage.

Two successful competitive positions– lowest cost– outstanding strength

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Common Areas of Focus

Innovation Customization Product/service

flexibility Volume flexibility Performance Quality

Product/service reliability

Delivery reliability Response After-sale service Price

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Order Qualifiers and Winners

Order qualifiers are characteristics that are the ante to enter the market ( cost, quality, speed, flexibility, dependability)

Order winners are characteristics that win the customer’s purchase

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Dealing with Trade-offsCost

Quality

DeliveryFlexibility

FOCUS FOCUS

FOCUSFOCUS

Plant within a Plant (PWP)

TraditionalApproach

Advanced Approaches

World Class Manufacturing

Trade-offs

©The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

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6

World-Class ManufacturingWorld-class manufacturers no longer view cost, quality, speed of delivery, and even flexibility as tradeoffs.

They have become order qualifiers.

What are the order winners in today’s market?

©The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

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7

Service Breakthroughs Service can be an

“order winner”Warranty

RoadsideAssistance

TravelPlanning

LoanerVehicles

Leases

©The McGraw-Hill Companies, Inc., 1998

Irwin/McGraw-Hill

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Contributors to Loss of Corporate (Business) Focus New outputs New attributes New tasks Departmental

professionalism Ignorance and

noncommunication Life cycle changes

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Strategic Frameworks

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The Sand Cone Model

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Example Performance Frontier

Which company ispursuing a customization policy?

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New Technology Results in Shift of Performance Frontier

“Company Bdevelops new technology”

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Global Competitiveness

Long-term viability of a firm Short-term success in terms of market share

or profitability Since 1970s, imports to the US have grown

faster than exports from the US US is biggest debtor nation in world

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Exchange Rates

US competitiveness reflected in value of dollar relative to other currencies

As US increases its imports relative to its exports, a surplus of US dollars accumulates abroad reducing the desirability of holding US dollars

Price adjusted broad dollar index

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International Markets and Producers Three Major Trading Regions

– Europe– North America– Pacific Rim

Previously firms classified as domestic, exporters, or international

Now have global firms, joint ventures, foreign subsidiaries

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Reasons to Produce Offshore

Circumvent governmental regulations Avoid effects of currency fluctuations Avoid fees and quotas Placate local customers

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Supply Chain Management

Cost of labor decreasing Cost of logistics becoming more significant Total value chain of global production Coordination

– Information flows– Finding efficient suppliers– Identifying and evaluating transportation

options

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New Technologies that facilitate globalization environment ERP EDI Bar coding/Radio frequency identification Internet

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Six Primary Characteristics of Transformation Process Efficiency Effectiveness Capacity Quality Response time Flexibility

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Productivity Definitions and Measures Normally defined as output per worker hour This is a partial measure of productivity Total Factor Productivity includes all

factors of production:

output

labor + capital + materials + energy

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Improving Productivity Growth

Estimated that technology has been responsible for at least half the productivity gains in the U.S.

Mechanization Automation

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International Comparisons of Productivity

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Why is Productivity Important?

For a society to increase its standard of living it must increase its productivity

How has the standard of living changed since 1970 in the US?

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Responsiveness

Customization, Response Time, and Quality

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Customization

Ability to offer a product or service exactly suited to the customer’s desires or needs

Closer matches to customers needs Ability of offer full product line with

minimal inventory Faster design-to-market time to meet new

customer needs

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Continuum of Customization

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Mass Customization

Goal is to produce low cost, high quality outputs in high variety

Mass Customization Strategies– Collaborative customizers– Adaptive customizers– Cosmetic customizers– Transparent customizers

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Prerequisites and Advantages of Rapid Response Sharper focus on the

customer Better management Efficient processing Higher quality Overhead elimination

Improved focus Reduced charges Faster revenue

generation Better communication Improved morale

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Cost Reductions with Decreases in Response Time

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Defining and Measuring Quality

Conformance to specifications Performance Quick response Quick-change expertise Features Reliability Durability

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Defining and Measuring Quality continued

Serviceability Aesthetics Perceived quality Humanity Value

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Benefits of High Quality

More satisfied customers Enhanced reputation Increased profitability and higher market shares Protection from competition Minimizes safety risks and liability Higher worker morale Reduced production costs