Operations Management Operations Strategy in a Global Environment Chapter 2.

Operations Operations ManagementManagement

Operations Strategy in a Global Operations Strategy in a Global EnvironmentEnvironment

Chapter 2Chapter 2

OutlineOutline GLOBAL COMPANY PROFILE: BOEING DEVELOPING MISSIONS AND STRATEGIES

Mission Strategy

ACHIEVING COMPETITIVE ADVANTAGE THROUGH OPERATIONS Competing on Differentiation Competing on Cost Competing on Response

TEN STRATEGIC OM DECISIONS

Outline - ContinuedOutline - Continued ISSUES IN OPERATIONS STRATEGY

Research Preconditions Dynamics

STRATEGY DEVELOPMENT AND IMPLEMENTATION Identify Critical Success Factors A Global view of Operations Cultural and Ethical

Issues Build and Staff the Organization Integrate OM with Other Activities

Outline - ContinuedOutline - Continued GLOBAL OPERATIONS STRATEGY OPTIONS

International Strategy Multidomestic Strategy Global Strategy Transnational Strategy

Learning ObjectivesLearning ObjectivesWhen you complete this chapter, you should

be able to : Identify or Define:

Mission Strategy Ten Decisions of OM Multinational Corporations

Learning Objectives - ContinuedLearning Objectives - ContinuedDescribe or Explain:

Specific approaches used by OM to achieve strategies Differentiation Low Cost Response

Four Global Operations Strategies Why Global Issues are Important

Examples of Global StrategiesExamples of Global Strategies

Boeing – both sales and production are worldwide. Benetton – moves inventory to stores around the

world faster than its competitor by building flexibility into design, production, and distribution

Sony – purchases components from suppliers in Thailand, Malaysia, and around the world

GM is building four similar plants in Argentina, Poland, China, and Thailand

Boeing Suppliers (777)Boeing Suppliers (777)

Firm Country PartsAlenia Italy Wing flaps

AeroSpaceTechnologies

Australia Rudder

CASA Spain Ailerons

doors, wing sectionFuji Japan Landing gear

GEC Avionics United Kingdom Flight computers

Korean Air Korea Flap supports

Menasco Aerospace Canada Landing gears

Short Brothers Ireland Landing gear doors

SingaporeAerospace

Singapore Landing gear doors

The Role ofThe Role of

Maquiladoras World Trade Organization (WTC) North American Free Trade Agreement (NAFTA) European Union (EU)

Management Issues inManagement Issues in Global Operations Global Operations

Global Strategic Context Differentiation Cost leadership Response

Logistics Management

Location DecisionsSupply Chain Management

Supply-Chain ManagementSupply-Chain Management

Sourcing Vertical integration Make-or-buy decisions Partnering

Location DecisionsLocation Decisions

Country-related issues Product-related issues Government policy/political risk Organizational issues

Materials ManagementMaterials Management

Flow of materials Transportation options and speed Inventory levels Packaging Storage

Defining Global OperationsDefining Global Operations

International business - engages in cross-border transactions

Multinational Corporation - has extensive involvement in international business, owning or controlling facilities in more than one country

Global company - integrates operations from different countries, and views world as a single marketplace

Transnational company - seeks to combine the benefits of global-scale efficiencies with the benefits of local responsiveness

Some Multinational CorporationsSome Multinational Corporations

WorkforceCompany Home

Country% SalesOutsideHomeCountry

% AssetsOutsideHomeCountry

% Foreign

Colgate-Palmolive

USA 72 63 NA

DowChemical

USA 60 50 NA

Gillette USA 62 53 NA

Honda Japan 63 36 NA

IBM USA 57 47 51

Citicorp USA 34 46 NA

Some Multinational CorporationsSome Multinational Corporations

WorkforceCompany Home

Country% SalesOutsideHomeCountry

% AssetsOutsideHomeCountry

% Foreign

ICI Britain 78 50 NA

Nestlé Switzerland 98 95 97

Philips Netherlands 94 85 82

Siemens Germany 51 NA 38Electronics

Unilever Britain & Netherlands

95 70 64

Pontiac - the LeMans Included Pontiac - the LeMans Included the Followingthe Following

About $6,000 heads to South Korea for auto’s assembly $3,500 goes to Japan for engines, axles, and electronics $1,500 goes to Germany for design $800 goes to Taiwan, Singapore, and Japan for smaller parts $500 heads to England for marketing $100 goes to Ireland for information technology the rest $7,600, goes to GM and its US bankers, insurance

agents, and attorneys.

Reasons to Globalize OperationsReasons to Globalize Operations

Reduce costs (labor, taxes, tariffs, etc.) Improve the supply chain Provide better goods and services Attract new markets Learn to improve operations Attract and retain global talent

Tangible

Intangible

Trade and TariffTrade and Tariff

Maquiladoras - Mexican factories located along the U.S.-Mexico border that receive preferential tariff treatment

GATT - an international treaty that helps promote world trade by lowering barriers to the free flow of goods across borders

NAFTA - a free trade agreement between Canada, Mexico, and the United States

Trade PaysTrade PaysGDP (PPP*) per PersonGDP (PPP*) per Person 1990 Growth Rates, % 1990 Growth Rates, %

-1

0

1

2

3

4

5

More globalized poor countries

Rich countries

Less globalized poor countries

*PPP – Purchasing Power Parity

Free trade may take us into the era of the floating factory - a six

person crew will take a factory from port to port in order to obtain the best market, material, labor

and tax advantages

Achieving Global OperationsAchieving Global Operations-Four Considerations--Four Considerations-

Global product design Global process design and technology Global factory location analysis Impact of Culture and Ethics

GlobalGlobal Product Design Product Design

Remember social and cultural differences packaging and marketing can help make product seem

“domestic” but - “liter” versus “quart” “sweetness” and “taste”

GlobalGlobal Process Design and Technology Process Design and Technology

Information technology enables management of integrated, globally dispersed operation

Texas Instruments: 50 plants in 19 countries Hewlett-Packard - product development teams in

U.S., Japan, Great Britain, and Germany Reduces time-to-market

GlobalGlobal Facility Location Analysis Facility Location Analysis

Select CSFs based on parent organization;’s strategic or operations objectives

Obtain country-specific information on the CSFs Evaluate each country’s CSFs using a 1 (bad) to

5 (good) rating scale Sum the ratings

Using CSFs for Country Selection

You May Wish To ConsiderYou May Wish To Consider

national literacy rate rate of innovation rate of technology change number of skilled workers stability of government product liability laws export restrictions similarity in language

work ethic tax rates inflation availability of raw materials interest rates population number of miles of highway

GlobalGlobalImpact of Culture and EthicsImpact of Culture and Ethics

Cultures differ! Some accept/expect: variations in punctuality long lunch hours expectation of thievery bribery little protection of intellectual property

Ranking CorruptionRanking Corruption1. Finland 9.72. Denmark & New Zealand (Tie) 9.5

…

7. Canada 9.0

…

10. United Kingdom 8.7

…

16. United States 7.7

…

18. Germany & Israel (Tie) 7.3

…

20. Japan 7.1

…

31. Italy 5.2

…

59. China 3.5

…

62. Egypt 3.4…71. India & Russia (Tie) 2.7…101.Nigeria 1.6102.Bangladesh 1.2

To Establish Global ServicesTo Establish Global Services

Determine if sufficient people or facilities exist to support the service

Identify foreign markets that are open - not controlled by governments

Determine what services are of most interest to foreign customers

Determine how to reach global customers

Managing Global Service Managing Global Service OperationsOperations

Must take a different perspective on Capacity planning Location Planning Facilities design and layout Scheduling

Some DefinitionsSome Definitions

International business A firm that engages in cross-border

transactions. Multinational Corporation (MNC)

A firm that has extensive involvement in international business, owning or controlling facilities in more than one country

Some Global StrategiesSome Global Strategies International Strategy: uses exports and licenses to

penetrate the global area Multidomestic Strategy: uses decentralized authority with

substantial autonomy at each business Global Strategy: Uses a high degree of centralization, with

headquarters coordinating to seek standardization and learning between plants

Transnational Strategy: Exploits economies of scale and learning, as well as pressure for responsiveness, by recognizing that core competencies reside everywhere in the organization

Match Product & ParentMatch Product & Parent Arrow shirts Braun Household Appliances Burger King Firestone Tires Godiva Chocolate Haagen_dazs Ice Cream Jaguar Autos MGM Movies Lamborghini Autos Goodrich Tires Alpo Petfoods

1. Volkswagen2. Bidermann International3. Bridgestone4. Campbell Soup5. Credit Lyonnais6. Ford Motor Company7. Gillette8. Grand Metropolitan9. Michelin10. Nestlé

Match Product & CountryMatch Product & Country Arrow shirts Braun Household Appliances Burger King Firestone Tires Godiva Chocolate Haagen_Dazs Ice Cream Jaguar Autos MGM Movies Lamborghini Autos Goodrich Tires Alpo Petfoods

1. France2. Great Britain3. Germany4. Japan5. United States6. Switzerland

Developing Missions and Developing Missions and StrategiesStrategies

55

Mission - where are you going? Organization’s purpose for being Provides boundaries & focus Answers ‘What do we provide

society?’

© 1995 Corel Corp.

MissionMission

Mission of FedExMission of FedExFedEx is committed to our People-Service-Profit philosophy.

We will produce outstanding financial returns by providing total reliable, competitively superior, global air-ground

transportation of high priority goods and documents that require rapid, time-certain delivery. Equally important,

positive control of each package will be maintained using real time electronic tracking and tracing systems. A

complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional to each other and the public.

We will strive to have a completely satisfied customer at the end of each transaction.

Sample Mission - MerckSample Mission - Merck

The mission of Merck is to provide society with superior products and services - innovations and solutions that

improve the quality of life and satisfy customer needs - to provide employees with meaningful work and

advancement opportunities and investors with a superior rate of return

Mission of the Hard Rock CaféMission of the Hard Rock Café

To spread the spirit of Rock ‘n’ Roll by delivering an exceptional entertainment and dining experience. We are committed to being an important, contributing member of our community and offering the Hard Rock family a fun, healthy, and nurturing work environment while ensuring

our long-term success.

Factors Affecting MissionFactors Affecting Mission

Mission

Philosophy &Values

Profitability& Growth

Environment

Customers Public Image

Benefit toSociety

Mission/StrategyMission/Strategy

Mission - where you are going

Strategy - how you are going to get there; an action plan

StrategyStrategy

Action plan to achieve mission

Shows how mission will be achieved

Company has a business strategy

Functional areas have strategies © 1995 Corel Corp.

Strategy ProcessStrategy Process

MarketingDecisions

OperationsDecisions

Fin./Acct.Decisions

CompanyMission

BusinessStrategy

Functional AreaFunctional AreaStrategies

Strategies for Competitive Strategies for Competitive AdvantageAdvantage

Differentiation

Cost leadership

Quick response

Competing on DifferentiationCompeting on Differentiation

Uniqueness can go beyond both the physical characteristics and service attributes to

encompass everything that impacts customer’s perception of value

Competing on CostCompeting on Cost

Provide the maximum value as perceived by customer

Does not imply low value or low quality

Competing on ResponseCompeting on Response

Flexibility Reliability Timeliness

Requires institutionalization within the firm of the ability to respond

Competing, Regardless of the Basis,Competing, Regardless of the Basis,

Requires the institutionalization within the firm of the ability to change, and to adapt

OM’s Contribution to StrategyOM’s Contribution to Strategy

Response(Faster)

Quality

Product

Process

Location

Layout

Human Resource

Supply Chain

Inventory

Scheduling

Maintenance

HP’s ability to follow the printer market

Differentiation(Better)

Cost leadership(Cheaper)

Southwest Airlines No-frills service

Sony’s constant innovation of new products

Pizza Hut’s five-minute guarantee at lunchtimeFederal Express’s “absolutely, positively on time”

Motorola’s automotive products ignition systemsMotorola’s pagers

IBM’s after-sale service on mainframe computers

Fidelity Security’s broad line of mutual funds

FLEXIBILITY

DesignVolume

LOW COST

DELIVERY

SpeedDependability

QUALITY

ConformancePerformance

AFTER-SALE SERVICE

BROAD PRODUCT LINE

Operations Decisions Examples Specific

Strategy UsedCompetitive Advantage

10 Strategic OM Decisions10 Strategic OM Decisions

Goods & service design Quality Process & capacity design Location selection Layout design Human resource and job design Supply-chain management Inventory Scheduling Maintenance

Operations Decisions

Goods Services

Goods & services decisions

Product is usually tangible

Product is usually intangible

Quality Objective quality standards

Subjective quality standards

Process and capacity design

Customer not involved in most of process

Customer may be directly involved in process. Capacity must match demand to avoid lost sales

Goods & Services and the 10 OM Goods & Services and the 10 OM DecisionsDecisions


Goods Services

Location Selection

May need to be near raw materials or labor force

Product is usually intangible

Layout Design

Layout can enhance production efficiency

Subjective quality standards

Human Resources and Job Design

Workforce focused on technical skills. Labor standards consistent. Output-based wage system.

Customer may be directly involved in process. Capacity matches demand to avoid lost sales

Goods & Services and the 10 OM Goods & Services and the 10 OM Decisions – ContinuedDecisions – Continued


Goods Services

Supply chain management

Supply-chain relationships critical to final product

Supply-chain relationships important, not necessarily critical

Inventory Raw materials, work-in-process, and finished goods

Most services cannot be stored

Scheduling Ability to convert inventory may allow leveling of production rates

Primarily concerned with meeting the customer's immediate schedule




Goods Services

Maintenance Maintenance is often preventive and takes place at the production site

Maintenance is often "repair" and takes place at the customer's site

Process DesignProcess Design

Low Moderate HighVolume

High

Moderate

Low

Varie

ty o

f Pro

duct

s

Process-focusedJob Shops

(Print shop, emergencyroom , machine shop,

fine diningRepetitive (modular)

focusAssembly line

(Cars, appliances, TVs, fast-food restaurants) Product-focused

Continuous(steel, beer, paper, bread, institutional

kitchen)

Mass Customization

Customization at high Volume

(Dell Computer’s PC)

Operations Strategies for Two Operations Strategies for Two Drug CompaniesDrug Companies

Brand Name Drugs, Inc.

Generic Drug Corp.

Product Selection and Design

Heavy R & D; Extensive labs; focus on development in broad range of \drug categories

Low R & D investment; focus on development of generic drugs

Quality Quality is a major priority; Standards exceed regulatory requirements

Meets regulatory requirements on a country-by-country basis as necessary

Operations Strategies for Two Operations Strategies for Two Drug Companies - ContinuedDrug Companies - Continued


Generic Drug Corp.

Process Product & modular production processes Long product runs in specialized facilities Build capacity ahead of demand

Process focused General production processes; “Job Shop” approach, short run; Focus on high utilization

Location Still located in city in which it was founded

Recently moved to low tax, low labor cost environment

Scheduling Central production planning

Many short run products complicate scheduling



Generic Drug Corp.

Human Resources

Hires the best; nation-wide searches

Very experienced top executives provide direction; other personnel paid below average

Supply Chain

Long term supplier relationship

Tends to purchase competitively to find bargains

Inventory Maintains high finished goods inventory, primarily to ensure all demands are met

Process focus drives up WIP inventory. Finished goods inventory tends to be low



Generic Drug Corp.

Maintenance Highly trained staff; Extensive parts inventory

Highly trained staff to meet challenging demands

Characteristics of High ROI FirmsCharacteristics of High ROI Firms

High quality product High capacity utilization High operating effectiveness Low investment intensity Low direct cost per unit

From the PIMS study of the Strategic Planning Institute

Strategic Options Managers Use Strategic Options Managers Use to Gain Competitive Advantageto Gain Competitive Advantage

28% - Operations Management 18% - Marketing/distribution 17% - Momentum/name recognition 16% - Quality/service 14% - Good management 4% - Financial resources 3% - Other

Strategic Options Managers Use Strategic Options Managers Use to Gain Competitive Advantageto Gain Competitive Advantage

28% Operations Management Low- cost product Product-line breadth Technical superiority Product characteristics/differentiation Continuing product innovation Low-price/high-value offerings Efficient, flexible operations adaptable to consumers Engineering research development Location Scheduling

Preconditions -Preconditions -To Implement a StrategyTo Implement a Strategy

One must understand: Strengths & weaknesses of competitors and new

entrants into the market Current and prospective environmental, legal, and

economic issues The notion of product life cycle Resources available with the firm and within the OM

function Integration of OM strategy with company strategy and

with other functions.

Impetus for Strategy ChangeImpetus for Strategy Change

Changes in the organization Stages in the product life cycle Changes in the environment

Stages in the Product Life CycleStages in the Product Life Cycle

Introduction

Growth

Maturity

Decline

Gro

wth

rate

Best period to increase market shareR&D engineering are critical

Product design and development are criticalFrequent product and process design changesOver-capacityShort production runsHigh skilled-labor contentHigh production costsLimited number of modelsUtmost attentions to qualityQuick elimination of market-revealed design defects

Introduction

Strategy & Issues During Product LifeStrategy & Issues During Product Life

Company Strategy & Issues

OM Strategy & Issues


Practical to change prices or quality imageMarketing is criticalStrengthen niche

Forecasting is criticalProduct and process reliabilityCompetitive product improvements and optionsShift toward product orientedEnhance distribution

Company Strategy

& Issues


Growth


Poor time to increase market shareCompetitive costs become criticalPoor time to change price, image, or qualityDefend position via fresh promotional and distribution

approaches

StandardizationLess rapid product changes and more minor annual model

changesOptimum capacityIncreasing stability of manufacturing processLower labor skillsLong production runsAttention to product improvement and cost cuttingRe-examination of necessity of design compromises

Company Strategy

& Issues


Maturity


Cost control critical to market share

Little product differentiationCost minimizationOvercapacity in the industryPrune line to eliminate items not returningGood marginReduce capacity

Company Strategy & Issues


Decline

Strategy and Issues During a Strategy and Issues During a Product’s LifeProduct’s Life

Strategy Development and Strategy Development and ImplementationImplementation

Identify critical success factors Build and staff the organization

SWOT Analysis ProcessSWOT Analysis Process

Environmental Analysis

Determine Corporate Mission

Form a Strategy

SWOT Analysis to Strategy SWOT Analysis to Strategy FormulationFormulation

Strategy

Mission

ExternalOpportunities

InternalStrengths

InternalWeaknesses

ExternalThreats

CompetitiveAdvantage

Identifying Identifying Critical Success FactorsCritical Success Factors

Decisions Sample Option ChapterProduct Customized, or standardized 5Quality Define customer expectations and how to achieve them 6, S6Process Facility size, technology, capacity 7, S7Location Near supplier or customer 8Layout Work cells or assembly line 9Human resource Specialized or enriched jobs 10, S10Supply chain Single or multiple source suppliers 11, S11Inventory When to reorder, how much to keep on hand 12, 14,16Schedule Stable or fluctuating productions rate 13, 15Maintenance Repair as required or preventive maintenance 17

MarketingServiceDistributionPromotionChannels of distributionProduct positioning (image, functions)

Finance/AccountingLeverageCost of capitalWorking capitalReceivablesPayablesFinancial controlLines of credit

Production/Operations

Activity Mapping: Southwest Airline’s Activity Mapping: Southwest Airline’s Low Cost Competitive AdvantageLow Cost Competitive Advantage

Courteous, but limited passenger service

Lean, productive employees

Short haul, point-to-point routes, often to secondary

airports

High aircraft utilization

Standardized fleet of Boeing 737 aircraft

Frequent, reliable schedules

Competitive Advantage:Low Cost



No seat assignmentsNo baggage transfersAutomated ticketing machinesNo meals



airports

Lower gate costs at secondary airports

High number of flights, reduces employee idle time between flights



High number of flights reduces employee idle time between flightsSaturate a city with flights lowering administrative costs per passenger for that city



Pilot training on only one type of aircraftReduced maintenance inventory required because of only one type of aircraftExcellent supplier relations with Boeing has aided financing



Flexible employees and standard planes aids schedulingFlexible union contractsMaintenance personnel trained on only one type of aircraft20 minute gate turnarounds



High level of stock ownershipHire for attitude, then trainHigh employee compensationEmpowered employeesAutomated ticket machines





airports




Competitive Advantage:Low Cost

Southwest Airline’s Low Cost Southwest Airline’s Low Cost Competitive AdvantageCompetitive Advantage

Vanguard’s Activity SystemVanguard’s Activity System

A broad array of mutual funds excluding some fund

categories

Efficient investment management approach offering good consistent

performance

Straightforward client communication and

education

Strict cost control

Direct distributions

Very low expenses

passed on to client

How It WorksHow It Works

CompanyMission

BusinessStrategy

Functional AreaStrategies

MarketingDecisions

OperationsDecisions

Fin./Acct.Decisions

If competitive advantage, leads to achieving

Distinctive competencies affect

Four International Operations Four International Operations StrategiesStrategies

Multidomestic StrategyMultidomestic Strategy

Operating decisions are decentralized to each country to enhance local responsiveness

Global StrategyGlobal Strategy

Operating decisions are centralized and headquarters coordinates the standardization

and learning between facilities

Transnational StrategiesTransnational Strategies

Combines the benefits of global-scale efficiencies with the benefits of local responsiveness

International StrategyInternational Strategy

Global markets are penetrated using exports and licenses

Operations Management Operations Strategy in a Global Environment Chapter 2.

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