Copyright 2013 John Wiley & Sons, Inc.

Chapter 1

Competitive Operations for the Global Arena

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Overview

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Apple’s ComebackApple’s Comeback• Since 2007, Apple’s share price has risen

500 percent• Apple’s market capitalization is almost a

trillion dollars– Largest company in the US

• Shows how important operations capabilities are to an organization’s global competitiveness

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Coke vs. Pepsi

• Coke and Pepsi compete in the same industry• From January 2007 – January 2012…

– Pepsi’s stock price was down

– Coke’s stock price was up 51 percent

• In terms of market capitalization…– Pepsi remained flat at $101 billion

– Coke increased $153.5 billion

• What accounts for these different outcomes?

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General Motors

• Market share of GM declined from 45 percent in 1980 to 20 percent in 2008

• In 2008, extreme gas prices killed the truck and SUV markets

• Sudden credit crisis and recession killed the rest of the market

• High cost caused it to ask government for a bailout– GM got $50 billion

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GM Results

• In 2011, GM had the largest annual profit in its history– $7.6 billion– Up 62 percent from 2010

• Revenues were up 13 percent• Sold 1.37 million cars• Hired 100,000 workers a month for five

months straight

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Toyota in Trouble

• Toyota has been plagued with problems for several years– Multiple quality complaints– Global recalls

• Japanese earthquake and tsunami in 2011 plus flooding in Thailand crippled production capacity

• Yen going from 120 yen to the dollar to 80• Had a 6 percent decrease in sales in 2011

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Flat Panel TVs

• Large profit margins ($8 billion 2004)• Asian manufacturers spent $35 billion

adding capacity in 2004 and 2005• North America’s Dell attempted to

leverage its supply chain to lower cost• By 2007, flat screens overtake CRT sets• Market jumped from $11 billion in 1998

to $102 billion in 2007

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Two Central Themes

1. Customer satisfaction2. Competitiveness• Apple obtained a competitive advantage with

innovation, their production process, and supply chain

• Pepsi example showed that organizations that focus on a few things outperform those that lack focus

• Toyota showed how losing your focus on your strengths can damage competitiveness

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International Marketplace

• Consumers purchase their products from the providers that offers them the most value for their money

• Many of our products are produced overseas

• Most of our services are provided domestically

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Operations

• Heart of every organization

• Organizations exist to create value

• Operations are the tasks that create value

• Operational innovation can provide organizations with long-term strategic advantages

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The Production System

Figure 1.1

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Operations Defined

• Production system: the conversion process• System: a purposeful collection of people,

objects, and procedures for operating within an environment

• Operations: concerned with transforming inputs into useful outputs according to an agreed-upon strategy and thereby adding value to some entity

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Systems Perspective

• Inputs• Transformation System

– Alter– Transport– Store– Inspect

• Outputs• Environment

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Inputs

• Inputs include facilities, labor, capital, equipment, raw materials, and supplies.

• A less obvious input is knowledge of how to transform the inputs into outputs.

• The operations function quite frequently fails in its task because it cannot complete the transformation activities within the required time limit.

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Transformation System Transformation System

• The part of the system that adds value to the inputs.

• Four major ways 1. Alter: changed structurally

2. Transport: located somewhere else

3. Store: kept in a protected environment

4. Inspect: understand its properties

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Outputs

• Two types of outputs commonly result from a production system– Services (physical goods) – Products (abstract or nonphysical)

• Any physical entity accompanying a service that adds value is a facilitating good

• Pure service: if there is no facilitating good• Services are bundles of benefits

– Some are tangible and others intangible– May be accompanies by a facilitating goods

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Characteristics of Products and Services

Table 1.1

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The Range From Services to Products

Figure 1.2

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Examples of Production System Components

Table 1.2

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Major Subject Areas in Operations

Table 1.3

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Major Subject Areas in Operations Continued

Table 1.3 Continued

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Customer Value

• Value = perceived benefits / costs• Perceived benefits can take a wide

variety of forms• Costs…

– Upfront monetary investment– Life cycle costs, such as maintenance– Hassles involved in obtaining the product or

service

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Customer Value (Continued)

• Efficiency = output / input• Productivity: output per worker-hour

– This is a partial factor measure of productivity

– Only includes one productive factor

• Multifactor productivity: uses more than a single factor

• Total factor productivity: uses all the factors of production

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Research

• Pure research: working with basic technology to develop new knowledge

• Applied research: attempting to develop new knowledge along particular lines

• Development: attempting to utilize the findings of research and expand the possible applications

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The Development Effort

Figure 1.3

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Mortality Curve of Chemical Product Ideas

Figure 1.4

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Two Alternatives to Research

1. Imitation of a proven idea– Second-to-market strategy

2. Outright purchase of someone else’s invention

– Eliminates risk

– Popular when bringing a new product to market has high costs

– Also popular when technology advances rapidly

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Quality Dimensions

1. Conformance to specification– Extent to which the product matches the

design

2. Performance– Customers equate quality with

performance

3. Features– Options that a product or service offers

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Quality Dimensions Continued

4. Quick response– Time required to react to customers’

demands

5. Reliability– Probability that a product or service will

perform as intended for a period of time

6. Durability– How tough a product is

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Quality Dimensions (Continued)

7. Serviceability– Ease with which maintenance can be

performed

8. Aesthetics– Factors that appeal to human senses

9. Humanity– How the customer is treated

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Quality’s Benefits

• Customers are more pleased with a high-quality product or service

• More likely to encourage friends to patronize the firm

• Gives firm a good reputation• Allows firm to charge a premium price• Increases market share• Makes follow-up products more attractive

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Quality’s Costs

1. Prevention costs– Including planning, training, design, maintenance

2. Appraisal costs– Measuring, testing, test equipment, inspectors,

reports3. Internal costs of defects

– Extra labor and material, scrap, rework, interruptions, expediting

4. External costs of defects– Ill-will, complaints, correction, warranties,

insurance, recalls, lawsuits

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Evolution of Quality: Japan vs. America

• Japanese techniques developed in the US• After WWII Japan had reputation for poor

quality• W. Edwards Deming helped Japan improve

quality• Deming says major cause of poor quality is

variation• Deming stressed improving quality was the

responsibility of top management

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Evolution of Quality: Japan vs. America (Continued)

• Japan followed Deming’s advice• Japan’s reputation for producing shoddy

goods was totally reversed• A more recent concept that the Japanese

have embraced is called total quality management (TQM)– Quality at the source– Statistical process control (SPC)

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Customization

• Customization: offering a product or service exactly suited to a customer’s desires– Low customization is called standardization

• Customization demands flexibility• Flexibility: the ability to change or react

with little penalty in time, effort, cost, or performance

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Continuum of Customization

Figure 1.5

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Competitive Advantages of Flexibility

• Faster matches to customers’ needs• Closer matches to customers’ needs• Ability to supply needed items as markets

develop• Faster design-to-market time• Lower cost of changing production• Ability to offer a full line without large

inventories• Ability to meet market demand even with

production delays

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Mass CustomizationMass Customization

• Seek to produce low-cost, high-quality outputs in high variety

• Not all products lend themselves to being customized– Sugar, gas, electricity, and flour

• Is applicable to products characterized by short life cycles, rapidly advancing technology, or changing customer requirements

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Four Mass Customization Strategies

1. Collaborative customizers– Help customers articulate their needs

2. Adaptive customizers– Offer a standard product that customers can

modify themselves3. Cosmetic customizers

– Produce a standard product but present it differently to different customers

4. Transparent customizers– Provide custom products without customers

knowing they are customized

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Benefits of Modular Design

1. Components that differentiate can be added during the later stages of production

– Called postponement

2. Production time can be significantly reduced– Simultaneously producing the required modules

3. Facilitates the identification of production and quality problems

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Dependability and Speed

• The competitive advantages of faster, dependable response to new markets or to the individual customer's needs have only recently been noted in the business media

• Americans spend more time and money on marketing, whereas the Japanese spend five times more than the Americans on developing more efficient production methods

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Prerequisites for and Advantages of Rapid Response

Table 1.4

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Prerequisites for and Advantages of Rapid Response (Continued)

Table 1.4 Continued

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Cost Reduction with Decreases in Response Time

Figure 1.6

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Strategy and Competitiveness

• Competitiveness…– Long-term viability of a firm– Market share or profitability

• Can also talk about competitiveness of a nation– The degree to which it can, under free and fair

market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining and expanding the real incomes of its citizens

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Global Trends

• US imports have grown for more than 30 years

• Exports have increased, but not as fast as imports

• Resulted in exploding trade deficient• US now largest debtor nation in the

world• Cumulative deficit is about ½ GDP

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Global Firms

• Global firms

• Joint ventures

• Partial ownerships

• Foreign subsidiaries

• Other types of international producers

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Strategy

• Business strategy: set of objectives, plans, and policies for the organization to compete

• Specifies competitive advantage– How achieved and sustained

• Key is defining core competencies and focus

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Strategy Formulation

Figure 1.7

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Vision and Mission Statements

• Vision statements used to express organization’s values and aspirations

• Mission statements express organization’s purpose or reason for existence

• Some organizations may choose to combine the vision and mission statements into a single statement

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The Life-Cycle Curve

Figure 1.9

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The Life Cycle

• Strategies often tied to product life cycle

• Length of life cycles shrinking

• Business strategy should match life cycles stages

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Categories of Business Strategies

1. First-to-market

2. Second-to-market

3. Cost minimization (late-to-market)

4. Market segmentation

Slide on each of these

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First-to-Market Strategy

• Products available before competition

• Strong applied research capability needed

• Can set high price to skim market or set lower price to gain market share

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Second-to-Market Strategy

• Quick imitation of first-to-market companies

• Less emphasis on applied research and more emphasis on development

• Learn from first-to-market’s mistakes

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Cost Minimization or Late-to-Market Strategy

• Wait until market becomes standardized and large volumes demanded

• Compete on basis of costs instead of product features

• Research efforts focus on process development versus product development

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Market Segmentation

• Serving niche markets

• Applied engineering skills and flexible manufacturing processes needed

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Common Areas of Organizational Focus

Table 1.5

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Order Qualifiers and Winners

• Order qualifier: a characteristic of a product or service that is required to be considered– Prerequisite for entering the market

• Order winner: a characteristic that will win the purchase

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Product Life Cycle Stages and Emphasis

Figure 1.12

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The Sand Cone Model

Figure 1.13

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Reasons to Produce OffshoreReasons to Produce Offshore

• Circumvent governmental regulations

• Avoid effects of currency fluctuations

• Avoid fees and quotas

• Placate local customers

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Core Capabilities

• Core competencies: the collective knowledge and skills an organization has that distinguish it from competition

• Core capabilities: organizational practices and business processes

• Should be used to gain access to a variety of markets

• Should be strongly related to key benefits provides by products or services

• Should be difficult to imitate

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Outsourcing

• Subcontracting out production of parts or performance of activities

• Activities and parts fall on a continuum ranging from strategically unimportant to strategically important

• Activities not strategically important are candidates to be outsourced

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Hollowed Out

• The extent that most of a firm’s complex parts and production are outsourced

• Often when complex parts outsourced, engineering talent follows

• Supplier may become competitor