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© 2006 Prentice Hall, Inc. 2 – 1

Chapter 2Operations Strategy in a Global Environment

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Learning Objectives

MissionStrategyTen decisions of OMMultinational corporation

When you complete this chapter, you should be able to:Identify or Define:

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Learning Objectives

Specific approaches used by OM to achieve strategiesDifferentiation, Low cost, ResponseFour global operations strategiesWhy global issues are important

When you complete this chapter, you should be able to:Describe or Explain:

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Global Strategies

Boeing – sales and production are worldwideBenetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distributionSony – purchases components from suppliers in Thailand, Malaysia, and around the world

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Global Strategies

Volvo – considered a Swedish company but it is controlled by an American company, Ford. The current Volvo S40 is built in Belgium and shares its platform with the Mazda 3 built in Japan and the Ford Focus built in Europe.Haier – A Chinese company, produces compact refrigerators (it has one-third of the US market) and wine cabinets (it has half of the US market) in South Carolina

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Some Multinational Corporations

% Sales % AssetsOutside Outside

Home Home Home % ForeignCompany Country Country Country Workforce

ICI Britain 78 50 NANestle Switzerland 98 95 97Philips Netherlands 94 85 82ElectronicsSiemens Germany 51 NA 38Unilever Britain & 95 70 64

Netherlands

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Boeing Suppliers (787)Firm Country ComponentDassault France Design and

PLM softwareMessier-Bugatti France Landing gearThales France Electrical power

conversion system and integrated standby flight display

Diehl Germany Interior lightingFR-HiTemp UK Fuel pumps

and valvesSmiths Aerospace UK Central computer

system

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Boeing Suppliers (787)Firm Country ComponentBAE SYSTEMS UK ElectronicsAlenia Aeronautics Italy Upper center

fuselage & horizontal stabilizer

Toray Industries Japan Carbon fiber for wing and tail units

Fuji Heavy Japan Center wing boxIndustries

Kawasaki Heavy Japan Forward fuselage, Industries fixed section of wing,

landing gear well

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Boeing Suppliers (787)Firm Country ComponentTeijin Seiki Japan Hydraulic actuatorsMitsubishi Heavy Japan Wing boxIndustries

Chengdu Aircraft China RudderGroupHafei Aviation China Parts

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Reasons to Globalize

Reasons to Globalize

Reduce costs (labor, taxes, tariffs, etc.)Improve supply chainProvide better goods and servicesUnderstand marketsLearn to improve operationsAttract and retain global talent

Tangible Reasons

Intangible Reasons

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Reduce Costs

Foreign locations with lower wage rates can lower direct and indirect costs

MaquiladorasWorld Trade Organization (WTC)North American Free Trade Agreement (NAFTA)APEC, SEATO, MERCOSUR European Union (EU)

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Improve the Supply Chain

Locating facilities closer to unique resources

Auto design to CaliforniaAthletic shoe production to ChinaPerfume manufacturing in France

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Provide Better Goods and Services

Objective and subjective characteristics of goods and services

On-time deliveriesCultural variablesImproved customer service

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Understand Markets

Interacting with foreign customer and suppliers can lead to new opportunities

Cell phone design from EuropeCell phone fads from JapanExtend the product life cycle

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Learn to Improve Operations

Remain open to the free flow of ideas

General Motors partnered with a Japanese auto manufacturer to learnScandinavian design ideas have been used to improve equipment design and layout

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Attract and Retain Global Talent

Offer better employment opportunities

Better growth opportunities and insulation against unemploymentRelocate unneeded personnel to more prosperous locationsIncentives for people who like to travel

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Cultural and Ethical Issues

Cultures can be quite differentAttitudes can be quite different towards

PunctualityLunch breaksEnvironmentIntellectual property

ThieveryBriberyChild labor

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You May Wish To Consider

National literacy rateRate of innovationRate of technology changeNumber of skilled workersPolitical stabilityProduct liability lawsExport restrictionsVariations in language

Work ethicTax ratesInflationAvailability of raw materialsInterest ratesPopulationNumber of miles of highwayPhone system

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Developing Missions and Strategies

Mission statements tell an organization where it is going

The Strategy tells the organization how to get there

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Mission

Mission - where are you going?

Organization’s purpose for beingAnswers ‘What do we provide society?’Provides boundaries and focus

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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.

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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

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Hard Rock Café

Our Mission: 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.

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Arnold Palmer Hospital

Arnold Palmer Hospital is a healing environment providing family-centered

care with compassion, comfort and respect… when it matters the most.

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Benefit to Society

Mission

Factors Affecting Mission

Philosophy and Values

Profitability and GrowthEnvironment

Customers Public Image

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Strategic Process

Marketing Operations Finance/ Accounting

Functional Area Missions

Organization’s Mission

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Strategy

Action plan to achieve missionFunctional areas have strategiesStrategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

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Strategies for Competitive Advantage

Differentiation – better, or at least differentCost leadership – cheaperQuick response – more responsive

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Competing on Differentiation

Uniqueness can go beyond both the physical characteristics and service

attributes to encompass everything that impacts customer’s perception of value

Safeskin gloves – leading edge productsWalt Disney Magic Kingdom – experience differentiationHard Rock Cafe – theme experience

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Competing on Cost

Provide the maximum value as perceived by customer. Does not imply

low quality.Southwest Airlines – secondary airports, no frills service, efficient utilization of equipmentWal-Mart – small overheads, shrinkage, distribution costsFranz Colruyt – no bags, low light, no music, doors on freezers

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Competing on Response

Flexibility is matching market changes in design innovation and volumes

Institutionalization at Hewlett-PackardReliability is meeting schedules

German machine industryTimeliness is quickness in design, production, and delivery

Johnson Electric, Bennigan’s, Motorola

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OM’s Contribution to Strategy

Product

Quality

Process

Location

Layout

Human resource

Supply-chain

Inventory

Scheduling

Maintenance

FLEXIBILITYSony’s constant innovation of new products………………………………....Design

HP’s ability to follow the printer market………………………………Volume

Southwest Airlines No-frills service……..…..LOW COST

DELIVERYPizza Hut’s five-minute guarantee at lunchtime…………………..…..……..SpeedFederal Express’s “absolutely, positively on time”………………………..….Dependability

QUALITYMotorola’s automotive products ignition systems…………………………......ConformanceMotorola’s pagers………………………..….Performance

IBM’s after-sale service on mainframe computers……....AFTER-SALE SERVICE

Fidelity Security’s broad line of mutual funds………….BROAD PRODUCT LINE

Operations Specific CompetitiveDecisions Examples Strategy Used Advantage

Response(Faster)

Cost leadership(Cheaper)

Differentiation(Better)

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10 Strategic OM Decisions

Goods and service design Quality Process and capacity designLocation selectionLayout design

Human resource and job designSupply-chain managementInventorySchedulingMaintenance

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Goods and Services and the 10 OM Decisions

Customer may be directly involvedCapacity must match demand

Customers not involved

Process and capacity design

Many subjective standards

Many objective standards

Quality

Product is not tangible

Product is usually tangible

Goods and service design

ServicesGoodsOperationsDecisions

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Goods and Services and the 10 OM Decisions

Interact with customers, labor standards vary

Technical skills, constant labor standards, output based wages

Human resources and job design

Enhances product and production

Production efficiency

Layout design

Near customersNear raw materials and labor

Location selection

ServicesGoodsOperationsDecisions

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Goods and Services and the 10 OM Decisions

Meet immediate customer demand

Level schedules possible

Scheduling

Cannot be storedRaw materials, work-in-process, and finished goods may be held

Inventory

Important, but may not be critical

Relationship critical to final product

Supply-chain mgmt

ServicesGoodsOperationsDecisions

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Goods and Services and the 10 OM Decisions

Often “repair” and takes place at customer’s site

Often preventive and takes place at production site

MaintenanceServicesGoods

OperationsDecisions

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Process Design

Low Moderate HighVolume

High

Moderate

Low

Varie

ty o

f Pro

duct

s

Process-focusedJOB SHOPS

(Print shop, emergency room, machine shop,

fine dining Repetitive (modular) focus

ASSEMBLY LINE(Cars, appliances,

TVs, fast-food restaurants) Product focused

CONTINUOUS(steel, beer, paper, bread, institutional

kitchen)

Mass CustomizationCustomization at high

Volume(Dell Computer’s PC)

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Managing Global Service Operations

Capacity planningLocation planningFacilities design and layoutScheduling

Probably requires a different perspective on:

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Characteristics of High ROI Firms

High quality product High capacity utilizationHigh operating effectivenessLow investment intensityLow direct cost per unit

From the PIMS program of the Strategic Planning Institute

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Strategic Options to Gain a Competitive Advantage

28% - Operations Management18% - Marketing/distribution17% - Momentum/name recognition16% - Quality/service14% - Good management4% - Financial resources3% - Other

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Elements of Operations Management Strategy

Low-cost productProduct-line breadthTechnical superiorityProduct characteristics/differentiationContinuing product innovationLow-price/high-value offeringsEfficient, flexible operations adaptable to consumersEngineering research developmentLocationScheduling

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Preconditions

Strengths and weaknesses of competitors and possible new entrants into the marketCurrent and prospective environmental, technological, legal, and economic issuesThe product life cycleResources available within the firm and within the OM functionIntegration of OM strategy with company’s strategy and with other functional areas

One must understand:

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Dynamics of Strategic Change

Changes within the organizationPersonnelFinanceTechnologyProduct life

Changes in the environment

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Product Life Cycle

Best period to increase market share

R&D engineering is critical

Practical to change price or quality image

Strengthen niche

Poor time to change image, price, or quality

Competitive costs become criticalDefend market position

Cost control critical

Introduction Growth Maturity DeclineC

ompa

ny S

trat

egy/

Issu

es

Internet

Flat-screen monitors

Sales

DVD

CD-ROM

Drive-through restaurants

Fax machines

3 1/2”Floppy disks

Color printers

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Product Life Cycle

Product design and development criticalFrequent product and process design changesShort production runsHigh production costsLimited modelsAttention to quality

Introduction Growth Maturity Decline

OM

Str

ateg

y/Is

sues

Forecasting criticalProduct and process reliabilityCompetitive product improvements and optionsIncrease capacityShift toward product focusEnhance distribution

StandardizationLess rapid product changes – more minor changesOptimum capacityIncreasing stability of processLong production runsProduct improvement and cost cutting

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

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Strategy Development and Implementation

Identify critical success factorsBuild and staff the organizationIntegrate OM with other activities

The operations manager’s job is to implement an OM strategy, provide competitive advantage, and increase productivity

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Strategy Development Process

Determine Corporate MissionState the reason for the firm’s existence and identify the value it

wishes to create.

Form a StrategyBuild a competitive advantage, such as low price, design, or volume

flexibility, quality, quick delivery, dependability, after-sale service, broad product lines.

Environmental AnalysisIdentify the strengths, weaknesses, opportunities, and threats.

Understand the environment, customers, industry, and competitors.

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Strategy

Analysis

SWOT Analysis

Internal Strengths

Internal Weaknesses

External Opportunities

External Threats

Mission

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Critical Success Factors

Decisions Sample Options Chapter

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

Marketing

ServiceDistributionPromotionChannels of distributionProduct positioning(image, functions)

Finance/Accounting

LeverageCost of capitalWorking capitalReceivablesPayablesFinancial controlLines of credit

Production/Operations

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Activity Mapping

Courteous, but Limited Passenger

Service

Standardized Fleet of Boeing

737 Aircraft

Competitive Advantage:Low Cost

Lean, Productive Employees

Short Haul, Point-to-Point Routes, Often to

Secondary Airports

High Aircraft

Utilization

Frequent, Reliable

Schedules

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Four International Operations Strategies

Cos

t Red

uctio

n C

onsi

dera

tions

High

LowHighLow

Local Responsiveness Considerations(Quick Response and/or Differentiation)

Standardized productEconomies of scaleCross-cultural learning

ExamplesTexas InstrumentsCaterpillarOtis Elevator

Global Strategy Transnational StrategyMove material, people, ideas across national boundariesEconomies of scaleCross-cultural learning

ExamplesCoca-ColaNestlé

International Strategy

Import/export or license existing product

ExamplesU.S. SteelHarley Davidson

Multidomestic StrategyUse existing domestic model globallyFranchise, joint ventures, subsidiaries

ExamplesHeinz The Body ShopMcDonald’s Hard Rock Cafe

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Ranking CorruptionRank Country 2004 CPI Score (out of 10)1 Finland 9.72 New Zealand 9.65 Singapore 9.37 Switzerland 9.19 Australia 8.811 United Kingdom 8.612 Canada 8.515 Germany 8.216 Hong Kong 8.017 Ireland 7.517 USA 7.524 Japan 6.935 Taiwan 5.664 Mexico 3.671 China 3.4

Good

Not So Good