Chapter 2: Competitiveness, Strategy, and Productivity BBA 6 th semester Institute of Management Studies, University of Peshawar
Outline: What You Will Learn ü ü ü ü List and briefly discuss the primary ways that business organizations compete. List five reasons for the poor competitiveness of some companies. Define the term strategy and explain why strategy is important for competitiveness. Contrast strategy and tactics. Discuss and compare organization strategy and operations strategy, and explain why it is important to link the two. Describe and give examples of time-based strategies. Define the term productivity and explain why it is important to organizations and to countries. List some of the reasons for poor productivity and some ways of improving it.
The three topics. . . ü Competitiveness, Strategy, and Productivity are three separete but related topics that are vitally important to business organizations. ü ü ü Competitiveness relates to the effectiveness of an organization in the marketplace relatively to other organizations that offer similar products or services. Strategy relates to the plans that determine how an organization pursues its goals. Productivity relates to the effective use of resources and it has a direct impact on competitiveness.
Competitiveness v Competitiveness: ü Companies must be competitive to sell their goods and provide services in the market ü It is an important factor in determining whether a company succeeds or fails ü Marketing influences competitiveness in several ways • How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services
Competitiveness v. Identifying consumer wants and needs ü is a basic input organization’s decision making process and central to competitiveness Pricing ü is a key factor in consumer buying decision v Advertising and promotion ü is a key element that informs potential consumers and attracts buyers v
Competitiveness-Important factors ü Product and service design ü Cost ü Location ü Quality ü Quick response ü Flexibility ü Inventory management ü Supply chain management ü Service and service quality ü Managers and workers
Competitiveness -Important factors vproduct and service -special characteristics of product and service design is a key factor in consumer buying decisions. v innovation and the time to market are also key factors for new products and services. cost of organization’s output is a key variable that influences pricing decisions and profit policies. v location is an important factor in term of transportation cost and convenience for customers. v quality is another key element that refers to materials, workmanship, design and service. v quick response is a key factor that can be a competitive advantagequickly bring the new product or service into market. v flexibility is the ability to respond to changes for the market v
Competitiveness -Important factors v Inventory management can be a competitive advantage by effectively matching supplies of goods with demand. v Supply chain management involves coordinating internal and external operations to achieve timely and cost-effectively delivery of goods throughout the system. v service is a key differentiator- after sale activities customers perceive as value-added such as delivery, warranty work and technical support v managers and workers are the people at the heart and soul of an organization (i. e. Skills and ideas).
Why Some Organizations Fail? v ü ü ü ü ü Organizations fail or perform poorly for a variety of resons. Being aware of such resons may help managers avoid making similar mistake. Some of the reasons are following: Too much emphasis on short-term financial performance at the expense of research and development. Failing to take advantage of strengths and opportunities Failing to recognize competitive threats Neglecting operations strategy Failing to recognize competitive threats Too much emphasis in product and service design and not enough on improvement Neglecting investments in capital and human resources Failing to establish good internal communications Failing to consider customer wants and needs
Two important questions? Ø Ø v v What do the customers want? What is the best way to satify those wants? Operations must work with marketing to obtain information on the relative importance of the various items to each major customer or target market. Understanding competitive issues can help managers develop successful strategies
Strategy ü Plans for achieving organizational goals ü The importance of strategies should not be overstated ü Strategies can be v Long-term v Intermediate-term v Short-term ü Strategies can be effective if they are designed well to support the organization’s mission and its goals:
Mission and Goals ü Mission Ø ü Mission Statement Ø ü Provide detail and scope of mission Strategies Ø ü States the purpose of an organization Goals Ø ü The reason for existence for an organization Plans for achieving organizational goals Tactics Ø The methods and actions taken to accomplish strategies
Mission/Strategy/Tactics Mission Strategy Tactics How does mission, strategies and tactics relate to decision making and distinctive competencies?
Planning and Decision Making Figure The overall relationship from Mission to Operation is hierarchical Mission Goals Organizational Strategies Functional Goals Finance Strategies Tactics • Operating procedures Marketing Strategies Tactics Operating procedures Operations Strategies Tactics Operating procedures 15
Strategy Example v ASAD is a high school student. HE would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: ü Goal: ü Strategy: ü Tactics: Live a good life Successful career, good income Obtain a college education Select a college and a major how to finance college ü Operations: Register, buy books, take courses, study, graduate, get job
Examples of Strategies ü Low cost: outsource operations to the third world countries that have low labor costs. ü Scale-based strategies: use the capital intensive methods to achieve high output volume and low unit cost. ü Specialization: focus on norrow product lines or limited services to achieve higher quality. ü Flexible operations: focus on quick response. ü High quality: focus on achieving higher quality than competitors. ü Service: focus on various aspects of service (e. g. , helpful, courteous, reliable, etc. ).
Strategy and Tactics ü Distinctive Competencies Ø Ø ü The special attributes or abilities that give an organization a competitive edge. The most effective organizations use an approach that develops distinctive competencies based on customer needs and wants. Strategy Factors Ø Ø Ø Price Quality Time Flexibility Service Location
Examples of Operations Strategies • Price Low Cost U. S. first-class postage Motel-6, Red Roof Inns Quality High-performance design Sony TV or high quality Consistent Lexus, Cadillac quality Pepsi, Kodak, Motorola Time Rapid delivery On-time delivery Express Mail, Fedex, One-hour photo, UPS Flexibility Variety Volume Burger King Supermarkets Service Superior customer service Disneyland Nordstroms Location Convenience Banks, ATMs
Global Strategy ü Many companies realized that strategic decisions must be made with respect to globalization as it has increased. ü What works in one country may not work in another ü Strategies must be changed to account for these differences ü Other issues Ø Political, social, cultural, and economic differences
Key External Factors ü ü ü Economic conditions: the general health, direction of the economy, inflation, deflation, interest rates, tax laws and tariffs. Political conditions: favorable or unfavoable attitudes toward business, political stability or instability and wars. Legal environment: government regulations, trade restriction, minimum wage law, labor law and patent. Technology: product innovations and new design. Competition: price, quality, special features and the ease of market entry. Markets: size, location, brand loyalties, potential for growth, longterm stability, and demographics.
Key Internal Factors ü ü ü ü Human Resources: the skills and abilities of managers and workers, special talent, loyalty, dedication and experience. Facilities and equipment: capacities, location, age, cost and replace. Financial resources: funding, debt burden, cost of capital and cash flow. Customers: loyalty and understanding of wants and needs. Products and services: quality, design and potential for new products and services. Technology: the ability to integrate new technology. Suppliers: quality, flexibility, reliable and trustworthy in service.
Strategy Formulation v ü ü ü Ø To formulate an effective strategy, senior managers must take into account the followings: Distinctive competencies Ø The special attributes or abilities that give an organization a competitive edge. Environmental scanning Ø The considering of events and trends that present threats or opportunities for a company SWOT-link between organizational and operations strategies The is an approach shows strengths and weaknesses have an internal focus and evaluated by operation people. The threats and opportunities have external focus and evaluated by marketing people.
Strategy Formulation ü Order qualifiers v Characteristics that customers perceive as minimum standards of acceptability to be considered as a potential purchase v Order qualifiers are key criteria that make the product or service eligible by the customers as a source of purchase. ü Order winners v Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition
Example of Order Winners and Qualifiers q q q Buyers of industrial chemicals expect a certain level of purity. Once the purity requirement has been satisfied, how-ever, other performance dimensions such as cost, delivery speed, and flexibility – will be used to determine the best source. From the supplier’s perspective product quality is the order qualifier and delivery speed, and flexibility are order winners.
Operations Strategy ü Operations strategy Ø ü Quality-based strategies Ø ü The approach, consistent with organization strategy, that is used to guide the operations function. Focuses on maintaining or improving the quality of an organization’s products or services Time-based strategies Ø Focuses on reduction of time needed to accomplish tasks
Time-based Strategies • JAN FEB MAR APR MAY JUN Planning Designing Processing Changeover Delivery On time!
Strategic OM Decisions • Decision Area Affects Product and service design Costs, quality liability and environmental Capacity Cost structure, flexibility Process selection and layout Costs, flexibility, skill level, capacity Work design Quality of work life, employee safety, productivity Location Costs, visibility Quality Ability to meet or exceed customer expectations Inventory Costs, shortages Maintenance Costs, equipment reliability, productivity Scheduling Flexibility, efficiency Supply chains Costs, quality, agility, shortages, vendor relations Projects Costs, new products, services, or operating systems
Productivity ü ü ü Productivity Ø A measure of the effective use of resources, usually expressed as the ratio of output to input Productivity ratios are used for Ø Planning workforce requirements Ø Scheduling equipment Ø Financial analysis Outputs Partial measures Productivity = Ø output/(single input) Inputs Multi-factor measures Ø output/(multiple inputs) Total measure Ø output/(total inputs)
Factors Affecting Productivity Capital Quality Management Technology
Other Factors Affecting Productivity ü ü ü ü Standardization Quality Use of Internet Computer viruses Searching for lost or misplaced items Scrap rates New workers Safety Shortage of IT workers Layoffs Labor turnover Design of the workspace Incentive plans that reward productivity
Key Steps In Productivity ü Develop productivity measures ü Develop methods for productivity improvements ü Establish reasonable goals ü Get management support ü Measure and publicize improvements ü Don’t confuse productivity with efficiency
Productivity Growth • Current Period Productivity – Previous Period Productivity
Measures of Productivity ü Partial measures ü Multifactor measures ü Total measure Output Labor Machine Capital Energy Output Labor + Machine Output Labor + Capital + Energy Goods or Services Produced All inputs used to produce them
Partial Productivity Measures • Labor Productivity Units of output per labor hour Units of output per shift Value-added per labor hour Machine Productivity Units of output per machine hour Capital Productivity Units of output per dollar input Dollar value of output per dollar input Energy Productivity Units of output per kilowatt-hour Dollar value of output per kilowatt-hour
Example-Productivity A company makes 7040 Units Produced and the costs are reported as follows: Cost of labor of $1, 000, Cost of materials is $520 and Cost of overhead is $2000. What is the multifactor productivity? v MFP = Output Labor + Materials + Overhead MFP =(7040 units) $1000 + $520 + $2000 MFP = 2. 0 units per dollar of input
Example-Productivity Growht If productivity increased from 80 to 84. What is the productivity growth rate? v PGR = 84 -80 80 5% X 100
Example-Productivity v Determine the productivity for the following case. (a) (b) Four workers installed 720 sq yards of carpeting in eight hours A machine produced 68 usable pieces in two hours (a) Productivity= Yards of carpet installed Labor hours worked P = 720 4 x 8 P= 22. 5 yards/ hours
Example-Productivity • (b) Productivity= Useable pieces Production time P= 68 2 P = 34 pieces/ hours
Example- Labor Productivity v ü A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in half an hour with four workers. What is labor productivity Labor Productivity = Quantity produced Labor hours LP = 400 4 x (1/2) LP = 200 cases/ labor hours
Example- Labor Productivity v ü A ceramics company spent $ 3000 on a new kiln (oven) last year. It was planned that it would cut energy usage 25% over the old kiln. The manager of the company wants to check the energy savings of the new oven and to look other measures of their productivity whether the change really was beneficial. The company’s data are the following: Explain whether the modification were beneficial or not Production 4000 (Last Year) 4000 (This Year) Labor (hour) 350 (Last Year) 375 (This Year) Capital ($) 15000 (Last Year) 3000 (Last Year) Energy (k. Wh) 18000 (This 2600 (This Year)
Example- Labor Productivity v v v v v ü Labour 4000/350=11. 42 (last year) 4000/375=10. 66 (this year) Capital 4000/15000=0. 266 4000/18000=0. 222 Energy 4000/3000=1. 33 4000/2600=1. 54 Labour change = 10. 66 -11. 42=-0. 76 Labour Growth = (10. 66 -11. 42)/11. 42= -6. 66 Capital change = 0. 222 -0. 266= - 0. 044 Capital Growth = (0. 222 -0. 266)/0. 266= - 16. 54 Energy change = 1. 54 -1. 33=0. 21 Energy Growth = (1. 54 -1. 33)/ 1. 33=15. 78 The energy modifications did not generate the expected savings because energy growth increased whereas labour and capital productivity decreased. Energy productivity growth is 15. 78% so it is still lower than the target one (i. e. 25%).
Example- MFP v Compute the MFP for an eight hour day where the usable output was 300 units, produced by three workers who used 600 pounds of materials. Workers have an hourly wage of $ 20, and materials cost is $ 1 per pound. Overhead is 1. 5 times labor cost. MFP = Output Labor cost + Materials cost + Overhead cost MFP = (300 units) 3 x 8 x 20 + 600 x 1 + 3 x 8 x 20 x 1. 5 MFP =0. 167 units of output per dollar of input