Competitiveness Strategy and Productivity Chapter 2 Learning Objectives

Competitiveness, Strategy, and Productivity Chapter 2

Learning Objectives • List the several ways that business organizations compete • Explain several reasons that business organizations fail • Define the term mission and strategy and explain why they are important • 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 countries • Provide some reasons for poor productivity and some ways of improving it

Overview • Three separate, but related concepts that are vitally important to business organizations: – Competitiveness – Strategy – Productivity

Competitiveness • Competitiveness: – How effectively an organization meets the needs of customers relative to others that offer similar goods or services • Organizations compete through some combination of their marketing and operations functions – What do customers want? – How can these customer needs best be satisfied?

Marketing’s Influence • Identifying consumer wants and/or needs • Pricing • Advertising and promotion

Operations’ Influence • • • Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management Service Managers and workers

Exercise • Discuss in pairs to name 5 ways that grocery stores compete for customers. • Hint: consider operations’ influence on competitiveness – – – – – Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management Service Managers and workers

Why Some Organizations Fail • Neglecting operations strategy. • Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats. • Putting too much emphasis on short-term financial performance at the expense of research and development. • Placing too much emphasis on product and service design and not enough on process design and improvement. • Neglecting investments in capital and human resources. • Failing to establish good internal communications and cooperation among different functional areas. • Failing to consider customer needs.

Hierarchical Planning and Decision Making Mission Goals Organizational Strategies Functional Goals Finance Strategies Tactics Operating procedures Marketing Strategies Tactics Operating procedures Operations Strategies Tactics Operating procedures

Wal-Mart Delivery Service Says to Amazon: 'Bring It‘ wsj. com 10/19/2012 • In its latest bid to take on … Amazon. com this holiday season, Wal. Mart is promising same-day delivery in some cities for orders placed online. Called Wal-Mart To Go, the service costs $10 regardless of the size of the order. • The products will be shipped from the company's stores, not from a warehouse or distribution center. … Wal-Mart is betting that its network of thousands of stores, combined with an improved online presence … can help it compete head to head with Amazon, which has increasingly stressed fast, free or low-cost deliveries. • UPS will pick up the goods and deliver them to customers • Nearly half of Wal-Mart's online sales now come from purchases customers make online and pick up at a store, … "We have a unique advantage because we have the national footprint of stores combined with our online site that enable programs like site to store, pay with cash or pick up today, …"

Hierarchical Planning and Decision Making Mission Goals Organizational Strategies “Wal-Mart To Go” Functional Goals Finance Strategies Tactics Operating procedures Marketing Strategies Tactics Operating procedures Operations Strategies Tactics Operating procedures

Mission • The reason for an organization’s existence – Mission statement • States the purpose of the organization • The mission statement should answer the question of “What business are we in? ” • The mission statement serves as the basis for organizational goals

Hierarchical Planning and Decision Making Mission “We save people money so they can live better” Goals Organizational Strategies Functional Goals Finance Strategies Tactics Operating procedures Marketing Strategies Tactics Operating procedures Operations Strategies Tactics Operating procedures

Goals • Provide detail and the scope of the mission – Goals can be viewed as organizational destinations • Goals serve as the basis for organizational strategies

The Eller Example • Mission Statement – The Eller College of Management's Undergraduate Program is committed to building and maintaining working relationships with our students, faculty, recruiters, alumni, and volunteers predicated on mutual respect and responsibility. We strive to nurture student success through innovation and value-added personalized programs. The following core competencies are emphasized within our program: knowledge, skills, ethical behavior, positive attitude, and creativity. • Goals – http: //ugrad. eller. arizona. edu/about/mission. asp

Hierarchical Planning and Decision Making • Reinvesting big in American manufacturing - buying an additional U. S. made products • helping suppliers to bring “onshore “U. S. production • “support good jobs” - at Wal. Mart, “entry level jobs lead to bigger jobs” - employing thousands of veterans – and more workers in general 1/17/2013 “We save people money so they can live better” Mission Goals Organizational Strategies Finance Strategies Tactics Operating procedures • consumer low prices • customer service • convenience • efficient, productive and sustainable solutions Functional Goals Marketing Strategies Tactics Operating procedures Operations Strategies Tactics Operating procedures

Organizational Strategy • A plan for achieving organizational goals – Serves as a roadmap for reaching the organizational destinations • Organizations have – Organizational strategies • Overall strategies that relate to the entire organization • Support the achievement of organizational goals and mission – Functional level strategies • Strategies that relate to each of the functional areas and that support achievement of the organizational strategy

Tactics and Operations • Tactics – The methods and actions taken to accomplish strategies – The “how to” part of the process • Operations – The actual “doing” part of the process

Examples of Strategies • Low Price – – • outsource operations to countries with low labor cost use capital-intensive methods to achieve high output volume and low unit cost Specialization – Focus on narrow product lines or limited services to achieve higher quality • Variety – • Newness – • Focus on environmentally friendly and energy efficient operations Quality – • Focus on various aspects of service (e. g. , helpful, reliable, etc) Sustainability – • Focus on innovation to create new products or services Service – • Focus on customization focus on quality in all phases of an organization in order to achieve higher quality than competitors Responsiveness (time-based strategies) – Strategies that focus on the reduction of time needed to accomplish tasks

Hierarchical Planning and Decision Making Mission Goals Organizational Strategies Functional Goals Finance Strategies Tactics Operating procedures Marketing Strategies Tactics Operating procedures Operations Strategies Tactics Operating procedures

Operations strategy • The organizational strategy provides the overall direction for the organization. It is broad in scope, covering the entire organization. • Operations strategy is narrower in scope, dealing primarily with the operations aspect of the organization. Operations strategy relates to products, processes, methods, operating resources, quality, costs, lead times, and scheduling. – In order for operations strategy to be truly effective, it is important to link it to organization strategy

Examples of Strategies Organizational Strategy Low Price Responsiveness Differentiation: High Quality Differentiation: Newness Differentiation: Variety Differentiation: Service Differentiation: Location Operations Strategy Low Cost Short processing times On-time delivery High performance design and/or high quality processing Consistent Quality Innovation Flexibility Volume Superior customer service Convenience Examples of Companies or Services Wal-Mart Southwest Airlines Mc. Donald’s restaurants Fed. Ex BMW Coca-Cola 3 M Apple Burger King (“Have it your way”) Mc. Donald’s (“Buses Welcome”) Disneyland IBM Supermarkets Banks, ATMs

3 M • • Founded in 1902, 3 M started out in the mining business as the Minnesota Mining and Manufacturing Company. 3 M launched the 15 percent program in 1948. – a program at 3 M that allows employees to use a portion of their paid time to chase rainbows and hatch their own ideas. • • • Thirty Percent Rule, 30% of each division’s revenues must come from products introduced in the last four years. Over a 20 -year period, 3 M’s gross margin averaged 51% and the company’s return on assets averaged 29%. Mission – 3 M is a science and technology company that creates. For decades, 3 M scientists and engineers have developed products that solve problems. 3 M is also a company that cares – improving lives each day. The mission of 3 Mgives: To Improve Every Life through Innovative Giving in Education, Community and the Environment – mirroring our corporate vision: • 3 M Technology Advancing Every Company • 3 M Products Enhancing Every Home • 3 M Innovation Improving Every Life

Exercise • Name three companies that are not in the examples I gave, and describe their core organizational strategies in terms of the following options: – – – – Low Price Specialization Responsiveness Differentiation: Quality Differentiation: Newness Differentiation: Variety Differentiation: Service • Go online and find the mission statements of the three companies. Are their strategies aligned with their mission statements?

Strategy Formulation • Approaches – Michael Porter's five forces model – Environmental scanning (SWOT) – Balanced Scorecard – Core competencies – Order qualifiers – Order winners

Porter’s Five Forces Model SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry THREAT OF NEW ENTRANTS DEGREE OF RIVALRY THREAT OF SUBSTITUTES Barriers to Entry Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Exit barriers Industry concentration Fixed costs/Value added Industry growth Intermittent overcapacity Product differences Switching costs Brand identity Diversity of rivals Corporate stakes Switching costs Buyer inclination to substitute Price-performance trade-off of substitutes BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Product differentiation Substitutes available Buyers' incentives

Porter on his five forces model

SWOT • Environmental scanning (SWOT) – Internal Factors • Strengths and Weaknesses – External Factors • Opportunities and Threats

SWOT: Key Internal Factors 1. 2. 3. 4. 5. 6. 7. 8. Human Resources – Skills of workforce, expertise, experience, loyalty to the organization Facilities and equipment – Capacities, locations, age, maintenance costs Financial resources – Cash flow, access to additional funding, debt, cost of capital Customers – Loyalty, wants and needs Products and services – Existing, potential for new ones Technology – Existing, ability to integrate new and its impact on current and future operations Suppliers – Relationships, dependency, quality, flexibility, service Other – Labor relations, company image, distribution channels etc.

SWOT: Key External Factors 1. Economic conditions – Health and directions of the economy, inflation, deflation, interest rates, taxes, tariffs. 2. Political conditions – Attitude towards business, political stability, wars 3. Legal environment – Antitrust laws, regulations, trade restrictions, minimum wages laws, liability laws, labor laws, patents 4. Technology – Innovations rate, future process technology, design technology 5. Competition – Number and strength of competitors, basis of competitions (price, quality etc. ) 6. Markets – Size, location, brand loyalty, ease of entry, growth potential, long term stability, demographics.

Balanced Scorecard • The idea of Balanced Scorecard (BSC) is to move away from a purely financial perspective of the organization and integrate other perspectives such as customers, internal business processes, and learning and growth. Balanced • Financial • How should we appear to our shareholders? • Consumer • How should we appear to our customers? • Internal Business Process Lag measure Scorecard Objective Measure Target Improve consumer satisfaction and loyalty by 20% Survey score Up 20% Delivery time < 4 days • What business process must we excel at? • Learning & Growth • How will we sustain our ability to change/improve? Leading measure

Balanced Scorecard

Steps in strategy formulation 1. Link strategy directly to the organization's mission or vision statement. 2. Assess strengths, weaknesses, threats and opportunities, and identify core competencies. – Core competencies: The special attributes or abilities that give an organization a competitive edge 3. Identify order winners and order qualifiers. – Order winners: Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition – Order qualifiers: Characteristics that customers perceive as minimum standards of acceptability for a product or service to be considered as a potential for purchase 4. Select one or two strategies (e. g. , low cost, speed, customer service) to focus on.

Productivity • Productivity – A measure of the effective use of resources – usually expressed as the ratio of output to input • Productivity measures are useful for – Tracking an operating unit’s performance over time • Planning workforce requirements • Scheduling equipment • Financial analysis

“The Factory Floor Has a Ceiling on Job Creation ” wsj. com 1/12/2012 • Factories have been producing more with fewer workers. • Output for each hour of work, or productivity, is up an extraordinary 40% as factories have adopted new technologies and production processes.

Discussion • Why maintaining a high level of productivity is important? • Hints: – How does it affect the economy? – How does it influence the organization? – How does it change our lives?

Why Productivity Matters? • High productivity is linked to higher standards of living • Higher productivity relative to the competition leads to competitive advantage in the marketplace. – Pricing and profit effects • Manufacturing incorporates R&D -> competitive edge. • Manufacturing has beneficial side effect –> service jobs.

Why Productivity Matters? • Brynjolfsson, E. , and Hitt, L. M. 1998. Beyond the productivity paradox. Communications of the ACM 41(8) 49– 55. – “Productivity growth determines our living standards and the wealth of nations. This is because the amount a nation can consume is ultimately closely tied to what it produces. “ – “By the same token, the success of a business generally depends on its ability to deliver more real value for consumers without using more labor, capital, or other inputs. ”

Measure of Productivity

Examples of Partial Productivity Measures Examples 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

Exercise • • • Hint: The key of this calculation is to convert all the elements to their dollar values. Units produced: 5, 000 Standard price: $30/unit Labor input: 500 hours What’s the dollar value of Cost of labor: $25/hour the output / labor / material / overhead? Cost of materials: $5, 000 Cost of overhead: 2 x labor cost • What is the multifactor productivity? • Hint:

Solution • What does this number mean?

Productivity Growth • Example: Labor productivity on the ABC assembly line was 25 units per hour in 2009. In 2010, labor productivity was 23 units per hour. What was the productivity growth from 2009 to 2010?

Service Sector Productivity • Service sector productivity is difficult to measure and manage because – It involves intellectual activities – It has a high degree of variability – Measurement Difficulties • Retailors – Quality Versus Quantity • Nurses

Productivity of Healthcare • Kocher, Robert, and Nikhil R. Sahni. "Rethinking health care labor. " New England Journal of Medicine 365. 15 (2011): 1370 -1372. – Of the $2. 6 trillion spent in 2010 on health care in the United States, 56% consisted of wages for health care workers. – the “output” is the volume of activity — including all encounters, tests, treatments, and surgeries — per unit of cost

IBM Healthcare Industry: 2020 Vision

Factors Affecting Productivity Methods Capital INCREASE: Calculators, Computers, Faxes, copiers, Internet search engines, Voice mail, cell phones, email Quality Technology REDUCE: inflexibility, high costs, mismatched operations, non-work activities Management

Productivity and Technology • NPR 4/30/13 “When It Comes To Productivity, Technology Can Hurt And Help” – With instant messages buzzing, emails pinging and texts ringing, how can employers increase productivity in the workplace? Software companies are tackling the problem, tracking employees' computer time to find ways to improve their efficiency. – Desk workers, creative workers, …

Productivity Paradox • IT investment does not appear to have a strong impact on productivity. • Explanations for the Paradox – Mismeasurement of outputs and inputs, • ATMs reduce the number of checks banks process so, by some measures, banking output and productivity decrease. • The increases in convenience ATMs have created go uncounted in conventional productivity metrics, while their costs are counted. – Lags due to learning and adjustment Brynjolfsson, E. , and Hitt, L. M. 1998. Beyond the productivity paradox. Communications of the ACM 41(8) 49– 55.

Improving Productivity 1. 2. 3. 4. 5. Develop productivity measures for all operations Determine critical (bottleneck) operations Develop methods for productivity improvements Establish (reasonable) goals Make it clear that management supports and encourages productivity improvement 6. Measure and publicize improvements 7. Don’t confuse productivity with efficiency – Efficiency = getting the most out of a fixed set of resources – Productivity = effective use of overall resources (e. g. , upgrading equipment)

Discussion • How do events affect productivity? • How does the World Cup impact productivity? – World Cup Taking a Bite Out of Worker Productivity – Watching The World Cup Will Increase Office Productivity

Key Points • Competitive pressure often means that business organizations must frequently assess their competitors' strengths and weaknesses, as well as their own, to remain competitive. • Strategy formulation is critical because strategies provide direction for the organization, so they can play a role in the success or failure of a business organization. • Functional strategies and supply chain strategies need to be aligned with the goals and strategies of the overall organization. • The three primary business strategies are low cost, responsiveness, and differentiation. • Productivity is a key factor in the cost of goods and services. Increases in productivity can become a competitive advantage.