Chapter 2

Competitiveness, Strategy, and

Productivity

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction

2-1
or distribution without the prior written consent of McGraw-Hill Education
A Cold Hard Fact

Better quality, higher productivity,

lower costs, and the ability to
respond quickly to customer needs
are more important than ever, and…
the bar is getting higher

LO 2.1 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-3
without the prior written consent of McGraw-Hill Education
Chapter Focus
This chapter focuses on three separate, but
related ideas that are vitally important to
business organizations
Competitiveness
Strategy
Productivity

LO 2.1 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-4
without the prior written consent of McGraw-Hill Education
Competitiveness
Competitiveness:
 How effectively an organization meets the wants
and 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?

LO 2.1 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-5
without the prior written consent of McGraw-Hill Education
Marketing’s Influence
Identifying consumer wants and/or needs
Pricing and quality
Advertising and promotion

LO 2.1 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-6
without the prior written consent of McGraw-Hill Education
Businesses Compete Using Operations
1. Product and service design
2. Cost
3. Location
4. Quality
5. Quick response
6. Flexibility
7. Inventory management
8. Supply chain management
9. Service
10. Managers and workers

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-7
LO 2.1 the prior written consent of McGraw-Hill Education
Why Some Organizations Fail?

LO 2.2 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-8
without the prior written consent of McGraw-Hill Education
Why Some Organizations Fail?
1. Neglecting operations strategy
2. Failing to take advantage of strengths and
opportunities and/or failing to recognize
competitive threats
3. Too much emphasis on short-term
financial performance at the expense of
R&D

LO 2.2 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-9
without the prior written consent of McGraw-Hill Education
Why Some Organizations Fail?
4. Too much emphasis in product and service
design and not enough on process design
and improvement
5. Neglecting investments in capital and
human resources
6. Failing to establish good internal
communications and cooperation
7. Failing to consider customer wants and
needs

LO 2.2 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-10
without the prior written consent of McGraw-Hill Education
 Hierarchical Planning

Mission

Goals

Organizational strategies

Functional strategies

Tactics
LO 2.3 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
2-11
the prior written consent of McGraw-Hill Education
 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?”

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the
LO 2.3 prior written consent of McGraw-Hill Education 2-13
Goals
The mission statement serves as the basis for
organizational goals
Goals
 Provide detail and the scope of the mission
 Goals can be viewed as organizational destinations
 Goals serve as the basis for organizational strategies

LO 2.3 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-15
the prior written consent of McGraw-Hill Education
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

LO 2.3 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-16
without the prior written consent of McGraw-Hill Education
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

LO 2.3 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-17
without the prior written consent of McGraw-Hill Education
Core Competencies
Core competencies
The special attributes or abilities that give an
organization a competitive edge
 To be effective core competencies and strategies need
to be aligned

LO 2.3 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-18
the prior written consent of McGraw-Hill Education
Sample Operations Strategies
Organizational Strategy Operations Strategy Examples of Companies or Services
Low Price Low cost U.S. first-class postage
Wal-Mart

Responsiveness Short processing times McDonald’s restaurants

On-time delivery FedEx

Differentiation: High performance design and/or Sony TV

High Quality high quality processing
Consistent quality
Coca-Cola

Differentiation: Innovation 3M, Apple

Newness

Differentiation: Flexibility Burger King (Have it your way”)

Variety Volume McDonald’s (“Buses Welcome”)

Differentiation: Superior customer service Disneyland

Service IBM

Differentiation: Convenience Supermarkets; mall stores

Location

LO 2.4 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-19
the prior written consent of McGraw-Hill Education
Strategy Formulation
Effective strategy formulation requires
taking into account:
 Core competencies
 Environmental scanning
SWOT
Successful strategy formulation also
requires taking into account:
 Order qualifiers
 Order winners

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
LO 2.4 without the prior written consent of McGraw-Hill Education
2-20
Strategy Formulation (cont.)
Order qualifiers
 Characteristics that customers perceive as
minimum standards of acceptability for a
product or service to be considered as a
potential for purchase
Order winners
 Characteristics of an organization’s goods or
services that cause it to be perceived as better
than the competition

LO 2.4 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-21
without the prior written consent of McGraw-Hill Education
 Environmental scanning is
necessary to identify
 Internal factors
Strengths and weaknesses
 External factors
Opportunities and threats

LO 2.4 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-22
without the prior written consent of McGraw-Hill Education
 Key External Factors
1. Economic conditions
2. Political conditions
3. Legal environment
4. Technology
5. Competition
6. Markets
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
LO 2.4 without the prior written consent of McGraw-Hill Education 2-23
 Key Internal Factors
1. Human resources
2. Facilities and equipment
3. Financial resources
4. Customers
5. Products and services
6. Technology
7. Suppliers
8. Other
Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
LO 2.4 without the prior written consent of McGraw-Hill Education 2-24
Operations strategy
 The approach, consistent with
organization strategy, that is used to
guide the operations function

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
LO 2.4 the prior written consent of McGraw-Hill Education 2-25
 Strategic OM Decision Areas
Decision Area What the Decisions Affect

Product and service design Costs, quality, liability, and environmental issues

Capacity Cost, structure, flexibility

Process selection and layout Costs, flexibility, skill level needed, 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

LO 2.4 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-26
the prior written consent of McGraw-Hill Education
Quality-based strategy
Strategy that focuses on quality in all
phases of an organization
Pursuit of such a strategy is rooted in a
number of factors:
Trying to overcome a poor quality reputation
Desire to maintain a quality image
A desire to catch up with the competition
A part of a cost reduction strategy

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-27
the prior written consent of McGraw-Hill Education
 Time-based strategies
Strategies that focus on the reduction
of time needed to accomplish tasks
It is believed that by reducing time,
costs are lower, quality is higher,
productivity is higher, time-to-market is
faster, and customer service is improved

LO 2.5 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-28
without the prior written consent of McGraw-Hill Education
 Time-Based Strategies (cont.)
Areas where organizations have
achieved time reductions:
Planning time
Product/service design time
Processing time
Changeover time
Delivery time
Response time for complaints

LO 2.5 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-29
the prior written consent of McGraw-Hill Education
Agile (active) operations
A strategic approach for competitive
advantage that emphasizes the use of
flexibility to adapt and prosper in an
environment of change
Involves the blending of several core
competencies:
Cost
Quality
Reliability
Flexibility

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without the prior 2-30
written consent of McGraw-Hill Education
The Balanced Scorecard Approach
A top-down management system that
organizations can use to clarify their vision and
strategy and transform them into action
 Develop objectives
 Develop metrics (measures) and targets for each
objective
 Develop initiatives to achieve objectives
 Identify links among the various perspectives
 Finance
 Customer
 Internal business processes
 Learning and growth
 Monitor resultsHigher Education. All rights reserved. No reproduction or distribution without
Copyright ©2018 McGraw-Hill 2-31
the prior written consent of McGraw-Hill Education
The Balanced Scorecard

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-32
the prior written consent of McGraw-Hill Education
 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
Judging the performance of an entire industry or
country

LO 2.6 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-33
without the prior written consent of McGraw-Hill Education
 Why Productivity Matters
High productivity is linked to higher standards of
living
 As an economy replaces manufacturing jobs with lower
productivity service jobs, it is more difficult to maintain
high standards of living
Higher productivity relative to the competition
leads to competitive advantage in the marketplace
 Pricing and profit effects
For an industry, high relative productivity makes it
less likely it will be supplanted by foreign industry

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
LO 2.6 without the prior written consent of McGraw-Hill Education 2-34
Productivity Measures
Output
Productivi ty =
Input

Output Ouput Output

Partial Measures ; ;
Single Input Labor Capital
Output Ouput Output
Multifactor Measures ; ;
Multiple Inputs Labor + Machine Labor + Capital + Energy

Goods or services produced

Total Measure
All inputs used to produce them

LO 2.6 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-35
the prior written consent of McGraw-Hill Education
Productivity Calculation Example
Units produced: 5,000
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost

What is the multifactor productivity?

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without
LO 2.6 the prior written consent of McGraw-Hill Education 2-36
Solution
Output
Multifactor Productivity =
Labor + Material + Overhead
5,000 units  $30/unit
=
(500 hours  $25/hour) + $5,000 + (2(500 hours  $25/hour))

$150,000
=
$42,500
= 3.5294

What is the implication of an unitless measure of productivity?

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-37
LO 2.6 without the prior written consent of McGraw-Hill Education
Productivity Growth

Current productivity - Previous productivity

Productivity Growth = 100%
Previous productivity

Example: Labor productivity on the ABC assembly line was 25 units per hour in
2014. In 2015, labor productivity was 23 units per hour. What was the
productivity growth from 2014 to 2015?

23 - 25
Productivity Growth = 100%  8%
25


LO 2.6 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution without 2-38
the prior written consent of McGraw-Hill Education
 Service Sector Productivity
 Service sector productivity is difficult to measure and manage
because
 It involves intellectual activities
 It has a high degree of variability
 A useful measure related to productivity is process yield
 Where products are involved
 Ratio of output of good product to the quantity of raw material
input
 Where services are involved, process yield measurement is
often dependent on the particular process:
 Ratio of cars rented to cars available for a given day
 Ratio of student acceptances to the total number of students
approved for admission

LO 2.6 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-39
without the prior written consent of McGraw-Hill Education
Factors Affecting Productivity

Methods

Capital Quality

Technology Management

LO 2.7 Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution 2-40
without the prior written consent of McGraw-Hill Education
 Improving Productivity
1. Develop productivity measures for all operations
2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements
4. Establish reasonable goals
5. Make it clear that management supports and encourages
productivity improvement
6. Measure and publicize improvements

7. Don’t confuse productivity (output, yield, production) with

efficiency (competence, effectivity, proficiency)

Copyright ©2018 McGraw-Hill Higher Education. All rights reserved. No reproduction or distribution
LO 2.7 without the prior written consent of McGraw-Hill Education 2-41