Operations Strategy in a Global Environment(Chapter 2)

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Operation Strategy in global environmentCompanies are responding to global environment with speed and strategies, unheard of in past. For Instance:1.Boeing is competitive because both its sales and production are worldwide.2.Italy’s Benetton moves inventory to stores around the world faster than its compitition,by building flexibility into its design, production and distribution.3.Sony purchases components from its suppliers in Thailand. Malaysia and around the world for assembly in its electronic products.4.Volvo,considered as Swedish company, is controlled by a U.S.company ,Ford. But the model Volvo S40 is built in Belgium, on a platform shared with Mazda 3(Built in Japan) and the Ford Focus(built and sold in Europe).REASONS TO GLOBALIZE:Many domestic business operations are deciding to change to some form of international operations. This can be viewed as a continuum, ranging from tangible reasons to intangible reasons. Let us examine the underlying six reasons, as under.1.Reduce cost: Many international operations seek to take the benefit of tangible opportunities to reduce their costs. Locations with lower wages, less stringent government regulations (on environmental control, health, Safety etc) and offering opportunities to cut the cost of taxes and tariffs, attract foreign investors.

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Operation Strategy in global environmentIn Mexico, the free trade zones allows the manufacturers to cut their costs of taxation by

levying tax only on value added operations.e.g. if a U.S.manufacturer IBM brings a $500

computer to Free trade zone, in Mexico, for carrying out assembly operation, which is

worth $25,then tariff duties will be charged only on $25 of work performed in Mexico.

Shifting low skilled jobs to other countries has many advantages.

a).Cost reduction.

b).Shifting low skilled jobs, frees the high skilled workforce for doing the more valuable tasks.

c).The revenue generated through cost reduction can be invested in improved products and facilities (and for retaining the skilled workforce in the home country).

2.Improve the supply chain: The supply chain can be improved by locating facilities in

the countries where unique resources are available. These resources may be expertise,

labor or raw material.e.g.,

- Auto styling studios ,from throughout the world are shifting to southern California, to

ensure the necessary expertise in their auto design.

-World athletic shoe production, has shifted from South Korea to

Guangzhou,China,where besides low cost, the advantage of production competence is

available. This is a place where 40000 people produce athletic shoes for the world.

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Operation Strategy in global environment-A perfume essence manufacturer wants his presence in Grasse, France ,where world’s

perfume essence is manufactured from the flowers of Mediterranean.

3.Provide better goods and services:

Although, the characteristics of goods and services can be objective and measurable(No

of on time deliveries),they can also be subjective and less measurable( e. g. sensitive to

culture). We need even better understanding the cultural differences and of the ways

business is handled in different countries. Improved understanding, as a result of local

presence, helps companies to produce customized goods and services, to meet the

unique cultural needs in the foreign markets. Besides, meeting the cultural needs,

response time becomes faster.

4.Understanding markets:

With the increased interaction with the foreign customers, firms learn about the various

opportunities for their goods and services.

e.g. Europe led the innovations of cell phones, whereas the Japanese lead with latest

cell phone fads. Besides knowing the trends in the foreign markets, it helps the firms

to diversify their customer base, add flexibility and smooth the business cycle.

Another reason to go for foreign markets is the opportunity to expand the life cycle of an

existing product.

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Operation Strategy in global environmente.g. Many products might be in their maturity stage(One of product development stages

Introduction,growth,maturity and decline)in developed countries, which might be state -of -the -art products in less developed countries.e.g.The Personal computers might be in mature stage in U.S.whereas in countries like Albania,Myanmar,China etc it might be in its introductory stage.

5.Learn to improve operations:

Learning does not take place in isolation. Firms serve themselves and their customers, better when they are open for free flow of ideas. e.g. General Motors found that it could improve by jointly building and running its operations with the Japanese, an auto assembly plant in San Jose, California. This strategy allow G.M.to contribute its capital and knowledge of U.S.labor &Environmental laws, whereas Japanese contribute for their production and inventory ideas.

6. Attract and retain global talent:

Global organizations can attract and recruit better employees by offering them more employment opportunities. They need employees in all the functional areas and areas of expertise worldwide.

They can attract and retain employees by providing them growth opportunities and also by insulating them against unemployment during economic downturns. During economic downturns, they can relocate employees, who are temporarily unneeded, from one location to relatively prosperous locations. Global organizations also provide incentives for people who like to travel or take vacations in foreign countries.

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Operation Strategy in global environment

Reasons to globalize Tangible ● Reduce cost(Labor,taxex,tarrifs etc.)

Reasons ● Improve supply chain.

● Provide better goods and services.

● Understand markets.

Intangible ● Improve operations.

Reasons ● Attract and retain global talent.

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Developing missions and strategies:

An effective operations management must have its mission to define where it is going and a strategy to define how it is going there. This is applicable for both domestic as well as international organizations.

Mission:

Mission is purpose of an organization,

-To satisfy customer’s needs and wants.

-What it will contribute to society.

Mission statement provides boundaries and focus for organizations and concepts around which organizations can rally.

It states rationale for organization’s existence.

Developing strategy is difficult without well defined mission.

Once an organization’s mission has been decided, each

functional area,i.e.marketing,finance/accounting, operations/production etc, within

the organization decides its supporting mission.

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Mission statements for two organizations, are as under.:1.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.2.Kirloskar Group:We Will…► Strengthen the cultural backbone to be a process centric organization and become an Industry leader in Innovation and Technology,Quality,cost and Delivery.► Become a ”Globally Dominant Player” for pumps and related systems. ”Globally Dominant Player” for the engines for the off highway and power generation market. ”Regional Player "in compression technology & a "National leader "in mechanical power

transmission.► Create a diverse global auto component business using our capability in machining and

castings.Strategy:Strategy is an organization’s action plan to achieve the mission. Once the mission is established, strategy and its implementation can begin.Stategies work on SWOT analysis,i.e.exploit opportunities and strengths and neutralize threats and avoid weaknesses.

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• Strategies– Plans for achieving organizational goals

• Mission– The reason for existence for an organization

• Mission Statement– Answers the question “What business are we in?”

• Goals– Provide detail and scope of mission

• Tactics– The methods and actions taken to accomplish strategies

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Example:Rita is a high school student. She would like to have a career in business, have a goodjob, and earn enough income to live comfortably.

Mission: Live a good life• Goal: Successful career, good income.

• Strategy: Obtain a college education.

• Tactics: Select a college and a major.

• Operations: Register, buy books, take courses, study, graduate, get job

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Operation Strategy in global environmentFirms achieve missions in three conceptual ways:1)Differentiation2)Cost leadership and 3)response. Operation managers are required to translate these strategic concepts into tangible tasks to be achieved. Any one or combination of the above concepts can generate a system that has unique advantage over competitors. e.g. Hunter fan has differentiated itself as a premier maker of quality ceiling fans that lower Heating and cooling costs for its customers. Nucor steel is producing lowest cost steel in the world. Dell is known for its rapid response, in building personal computers with each customer’s requested software in a matter of hours.ACHIEVING COMPETITIVE ADVANTAGE THROUGH OPERATIONS:Each of the three strategies provides an opportunity to the operations managers to achieve competitive advantage.Competing on Differentiation:Differentiation is concerned with providing uniqueness. The firm’s opportunities to create uniqueness are not located within a particular function or activity. But can arise in everything that the firm does. Differentiation should be thought of as going beyond both physical characteristics and service attributes to encompass everything of the product or the service that influences the value the customer derives from it.

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Operation Strategy in global environmentIn service industry the idea of experience differentiation is to engage the customer-to use people’s five senses so they become immersed and even participate in the product.e.g., In hard rock cafe, the customer is engaged with classic rock music, big videos, staff who can tell stories. The result is dining experience rather than just a meal. Competing on cost:Low cost leadership entails achieving maximum value as defined by your customer. A low cost strategy does not imply low value or low quality.e.g. Air Deccan-India’s first low cost airline has a basic strategy of making air travel accessible to practically every Indian by pricing their services 30 to 40 % of other regular airline services. This has been achieved by four features, namely, more flying hours, cutting out all frills (In flight food, business class and lounges at air ports etc),elimination of inter- airline arrangements for baggage and a new distribution model(Which eliminates travel agents and the associated costs, which has own computerized reservation system,CRS,which has a call centre that can book tickets 24 hours, makes use of local phone numbers as opposed to costly nationwide toll free numbers and uses multiple modes of cash collection and ticket delivery.Competing on response:Response is often thought of as flexible response but it also refers to reliable and quick response.

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Operation Strategy in global environmentFlexible response may be thought of as ability to respond to market place where design innovation and volumes fluctuate substantially.Hewlett-Packard is an exceptional example of flexibility in both design and volume changes in the volatile world of personal computers.HP has been successful at institutionalizing the ability to change the products and volumes to respond to dramatic changes in product design and cost-thus building a sustainable competitive advantage.The second aspect of response is the reliability of scheduling. The German machine industry has maintained its competitive advantage,inspite of highest labor cost in the world, through reliable response. The reliable response is manifestation of reliable scheduling. German machine manufacturers have schedules which they maintain and communicate to the customers, in advance and customer, in turn can rely on them.The third aspect of the response is quickness. The operations manager who develops system that can respond quickly can have a competitive advantage. The three concepts,differentiation,low cost and response are implemented via six specific strategies,i)Flexibility in design and volume,ii)Low price, iii)Delivery, iv)Quality, v)After-sale service and vi)Broad product line.

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Operation Strategy in global environmentOPERATIONS MANAGEMENT’S CONTRIBUTION TO STRATEGY:

Operations Example Specific Competitive advantage Decisions strategy used

Product Sony’s constant innovations of Flexibility : New products.HP’s leadership Design & Volume ResponseQuality (faster)

Process Air Deccan’s low cost service Low cost Cost leadership (cheaper)Location

Layout Pizza Hut's 5-minute guarantee Delivery: at lunch time Speed & DependabilityHuman Resource

Supply chain Motorola automotive products , Quality:Conformance Differentiation i.e. ignition systems performance (better)Inventory

Scheduling IBM after-sale service on After-sale service mainframe computers Fidelity security’s mutual funds Broad product line

Maintenance

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Issues in Operation strategy:

Once mission has been formed, the organization must look into development and implementation of its strategy for which the operations manager is required to consider certain issues.

1.Research:Strategic planning Institute, in its PIMS(Profit impact of market

strategy)programme,with high ROI(Return on Investment) as a measure of success,

has come out with characteristics, which affect the strategic OM decisions. These are

i)High product quality unit(Compared to competition). (.ii) High operating

efficiency.iii)High capacity utiliazation.iv) Low investment intensity(Capital required to

produce a dollar of sales).v)Low direct cost per unit(Compared to competition).

These five findings support high return on investment and hence should be considered

as an organization develops its strategy.

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Operation Strategy in global environment2.Preconditions: Before establishing and implementation of the strategy, the operations

manager must understand that the firm is operating in an open system, where there are multitude of factors. The more thorough the understanding and analysis of these factors, the more the likelihood of the success.

Few of these factors are,

i) Strengths and weaknesses of the competitors and possible new entrants in the

market, substitute products, commitments of suppliers and distributors.

ii) Current and prospective environmental,technological,legal and economic issues.

iii) Product life cycle, which may dictate limitations of operations strategy.

iv) Resources within the organization and within the OM function. Etc.

v)Integration of OM strategy with company’s strategy and other functional areas.

3.Dynamics:

Strategies change for two reasons.

First, strategy changes because of the changes in organization.

Secondly, strategy changes because of the changes in environment. e.g. Microsoft also

had to adapt quickly to market changes. Microsoft’s shift in strategy was in response to

change in the customer demands. They had to shift from operating systems to office

products to an Internet service provider.

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STRATEGY DEVELOPMENT AND IMPLEMENTATION:

Once the firm understands the various issues involved in effective strategy development,

SWOT(Strength ,weakness, opportunities and threat) analysis is carried out. Beginning with

SWOT analyses, firms position themselves, through their strategy, to have competitive

advantage. The firm may have excellent design skills or greater talent at identifying outstanding

locations. However, the firm may recognize the limitations of its manufacturing process or in

finding good suppliers. The idea is to maximize opportunities and minimize threats in the

environment while maximizing the advantages of the organization’s strengths and minimizing

the weaknesses. Any perceived ideas of the mission are then reevaluated to ensure that they

are consistent with the SWOT analysis.

Subsequently strategy for achieving the mission is developed. This strategy is continually

evaluated against the value provided customers and competitive realities. The strategy

development process is shown in the figure, on the next slide. From this strategy development

process , critical success factors are identified.

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Environmental Analysis

Identify the strength,weaknesses,opportunities and threats. Understand the environment,customers,industry and competitors

Define 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 Flexibility in design & volume,quality.low cost,

quick delivery, after-sale service, broad product lines.

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1.Identify Critical Success Factors(CSFs):Because no firm does everything exceptionally well, a successful strategy implementation

requires identifying those tasks that are critical to success.

The operations manager must ask

-What tasks must be done particularly well for a given operations strategy to succeed?

-Which elements contain the highest likelihood of failure, and which will require additional

commitment of managerial, monetary, technological and human resources? Which

activities will help the OM function provide a competitive advantage?

CSFs are selected in light of achieving the mission, as well as the organization’s internal

strengths. Critical success factors are those relatively few activities that make a

difference between having and not having a competitive advantage. Ultimately CSFs

make the difference between the organization’s success and failure. Successful

organizations identify and use CSFs to develop a unique and distinct competence that

allows them to achieve a competitive advantage.

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Operation Strategy in global environmentCritical success factors can overlap functional areas like finance, marketing, operations

or they can be within one functional area. Potential CSFs for marketing, finance, and

operations are shown on the slide on the next page. The 10 OM decisions provide

excellent check list for determining CSFs in operations function. For instance, the ten

decisions and related decisions can manifest themselves in to firms ability to differentiate.

The differentiation may be via innovation and the new products, where the CSF is

product design, as in case of 3M and Rubbermaid. Similarly, differentiation may be via

quality, where CSF is institutionalizing that quality, as at McDonald’s. Differentiation may

be via maintenance, CSF is providing reliability and after sales service as in case of IBM.

Whatever the CSFs ,they must be supported by related activities. One approach to

identifying the activities is an activity map, which links competitive advantage, CSFs and

supporting activities. For example, Southwest Airlines has built a set of integrated

activities to support its low-cost competitive advantage. By identifying a competitive

advantage and focusing on CSFs and supporting set of activities, Southwest Airlines has

become one of the great airline success stories. Refer the slide for activity mapping at

Southwest Airlines.

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2.Build and staff organization:

The operations manager’s job is a three-step process. Once the strategy and CSFs

have been identified, the second step is to group the necessary activities into an

organizational structure. The third step is to staff the personnel who will get the job done.

The managers work with their subordinate managers to build plans, budgets and

programmes, that will successfully implement strategies that achieve missions.

3.Integrate OM with other activities:

The organization of the operations function and its relationship to other parts of the

organization vary with the OM mission. Moreover, the operational function is more likely

to be successful when the operations strategy is integrated with the other functional

areas, such as marketing, finance, MIS, and human resources. In this way all of the

areas support the company’s objectives. For example, short time scheduling in the

airline industry, is dominated by volatile customer travel patterns, day of the week

preference, holidays, seasonality, college schedules, and so on, all play a role in

changing flight schedules.

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Consequently, airline scheduling, although an OM activity, can be a part of marketing.

The operations manager provides means of transforming inputs into outputs. The

transformation may be in terms of storage, transportation, manufacturing, dissemination

of information, and utility of product or service. The operations manager’s job is to

implement an OM strategy, provide competitive advantage, and increase productivity.

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GLOBAL OPERATIONS STRATEGY OPTIONS:

1.International Strategy:

International strategy uses export and licenses to penetrate the global arena. This

strategy is least advantageous, with little local responsiveness, as we are exporting the

product from home country and little cost advantage as we are using existing production

process at some distance from the new market.However,this strategy is always easiest,

as export requires little change in existing operations.

2.Multidomestic strategy:

This strategy has decentralized authority, with substantial autonomy at each business.

Organizationally, these are franchises, subsidiaries and joint ventures with substantial

independence. Advantage with this strategy is maximizing competitive response to the

local market.However,this strategy has little or no cost advantage.e.g.McDonald’s.

3.Global strategy:

Global strategy has high degree of centralization, with head quarters coordinating

organization to seek out standardization and learning between plants, thus generating

economies of scale.

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This strategy is appropriate for cost reduction but it has little to recommend to local

responsiveness.

Caterpillar, world leader in earth moving equipment uses this strategy. The advantage is

same end products are there throughout the world. This enables their local factories to

focus on limited lines of products, to be shipped worldwide. This results in economies of

scale and learning in each facility.

4.Transnational strategy:

A transnational strategy exploits the economies of scale and learning, as well as pressure

for local responsiveness, by recognizing that the core competence does not reside in

home country but can exist anywhere in the organization.

In transnational organizations, the material, people as well as ideas cross national

boundaries. These firms have the potential to pursue all the three operations

strategies,i.e.differentiation,low cost and response.e,g,Nesle `which is a Swiss

company,95% of its assets are held and 98%of its sales are made outside Switzerland.

Less than 10% of its workers are Swiss.

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Cost Reduction Vs Local responsiveness

High

Global Transnational

strategy strategy

Cost Reduction e.g. e.g.Coca-cola

Caterpillar Nestle

International Multidomestic

strategy strategy. e.g.

Low e.g.U.S.Steel McDonald’s

Low Local responsiveness High

(Quick response and /or differentiation)

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The Globe: Singapore Airlines’ Balancing Act

by Loizos Heracleous and Jochen Wirtz

There’s something about Singapore Airlines. Over the past four decades, it

has earned a stellar reputation competitive commercial aviation business by

providing customers with high-quality service and dominating segments. SIA

has won the World’s Best Airline award from Condé Nast Traveler 21 out of the

and Skytrax’s Airline of the Year award three times over the past decade.

What’s not so well known is that despite the quality of its services, SIA is also

one of the industry operators. From 2001 to 2009, its costs per available seat

kilometer (ASK) were just 4.58 cents. According International Air Transport

Association study, costs for full-service European airlines were 8 to 16 cents,

cents, and for Asian airlines 5 to 7 cents. In fact, SIA had lower costs than most

European and American ranged from 4 to 8 cents and 5 to 6 cents respectively.

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SIA: A Premium Service Provider and Cost Leader

It’s intriguing that SIA has combined the supposedly incompatible strategies of

Differentiation -excellence and continuous innovation—and cost leadership. Few

enterprises have executed a dual strategy management experts such as Michael Porter

argue that it’s impossible to do so for a sustained period since entail contradictory

investments and organizational processes. Yet pursuing dual strategies is becoming

demand for value-for-money products and services has shot up since the recent

recession, particularly so even producers of premium offerings have to figure out how to

grab opportunities in the middle and market. Moreover, multinational corporations face

competition from rivals—many of them from emerging new technologies and business

models to provide good-enough offerings at attractive prices. Incumbents cutting prices

or further differentiating products and services, but it’s often a losing battle. Price wars

typically than they do challengers, and relentless differentiation is tough to sustain.

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Adopting a dual strategy is often Our research suggests that dual strategies are

embraced more readily in Asian countries. Many Western that, for instance, cost

leadership and differentiation, globalization and localization, and size and agility

contradictory and can’t be reconciled.

But SIA and other companies such as Banyan Tree, Haier, Samsung, operate as though

the dualities are opposites that make up a whole; that is, they complement, instead of

other. This way of thinking is embedded in Eastern thought; the concept of yin and yang

in Taoist encapsulates the idea. To be sure, pursuing two strategies will result in

organizational paradoxes, but executives markets tend to realize that opposing insights

present the full picture and develop policies to manage both The Globe: Singapore

Airlines' Balancing Act - Harvard Business Review Page 1 of 2• http://hbr.org/2010/07/the-globe-singapore-airlines-balancing-act/ar/pr 7/18/2010

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OM IN ACTION:

U.S.Cartoon Production at Home in Manila:Fred Filmstone is not from Bedrock. He is actually from Manila, capital of Philippines. So

are Tom and Jerry, Aladdin , and Donald Duck. More than 90 % of American Television

cartoons are produced in Asia and India, with the Philippines, leading the way. With their

Natural advantage of English as an official language and a strong familiarity with

U.S.culture, animation companies in Manila employ more than 1700 people. Filipinos

think western, and “ you need to have a group of artists that can understand the humor

that goes with it,” says Bill Dennis, a Hanna-Barbera executive.

Major studios like Disney, Marvel, Warner Brothers, and Hanna-Barbera send

storyboards-cartoon action outlines-and voice tracks to the Philippines. Artists there,

draw, paint, and film about 20,000 sketches for a 30-minute episode. The cost of

$ 130,000 to produce an episode in the Philippines compares with $ 160,000 in Korea

and $ 500,000in the U.S.

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Response Strategy at Hong Kong’s Johnson Electric:

Patric Wang, Managing Director of Johnson Electric Holdings Ltd, walks through the

Hong Kong headquarters with a micromotor in his hand. This tiny motor, about twice the

Size of his thumb, powers a Dodge Viper power door lock. Although most people have

never heard of Johnson Electric, we all have several of its micromotors nearby. This is

because Johnson Electric is world’s leading producer of micromotors for cordless tools,

household appliances (Such as coffee grinders and food processors), personal care

items(such as hair dryers and electric shavers), and cars. A luxury Mercedes, with its

headlight wipers, power windows, power seat adjustments and power side mirrors, may

use 50 Johnson micromotors.

Like all truly global businesses, Johnson spends liberally on communications to tie

together its global network of factories, R & D facilities, and design centres.For example,

Johnson Electric installed $ 20 million Video conferencing system that allows engineers in

Cleveland, Ohio, and Stuttgart, Germany, to monitor trial production of their micromotors

in China.

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Johnson Electric’s first strength is speed in product development, speed in production,

speed in delivering-13 million motors a month, mostly assembled in China but delivered

throughout the world. Its second strength is ability to stay close to its customers. Johnson

has design and technical centers scattered across the U.S., Europe, and Japan. “ The

physical limitations of the past are gone” when it comes to deciding where to locate a

new center, says Patric Wang. Customers talk to us where they feel most comfortable,

but products are made where they are most competitive.

Source: Far Eastern Economic Review (May 16, 2002) and Just Auto (April,2004).

Operations Strategy in a Global Environment(Chapter 2)

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