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1. SECTION 1
INTRODUCTION TO OPERATIONS STRATEGY
Departamento de Organización de
Empresas y Marketing
Área de Organización de Empresas
Operations Management I
Dirección de Operaciones I- English teaching
3º GADI- 5º DG-ADI-DER
Slide presentation Chapter 2

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CHAPTER 2
OPERATIONS STRATEGY AND COMPETITIVENESS
2.1. Global Strategies
2.2. A Global View of Operations
2.3. Developing Missions and Strategies
2.4. Achieving Competitive Advantage Through Operations
2.5. Ten Strategic OM Decisions
2.6. Dynamics of Operations Strategy
2.7. Strategy Development and Implementation
2.8 Global Operations Strategy Options

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2.1 Global Strategies
 Boeing – sales and production are worldwide
 Benetton – moves inventory to stores around the world faster than
its competition by building flexibility into design, production, and
distribution
 Sony – purchases components from suppliers in Thailand, Malaysia,
and around the world
 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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2.2 A Global View of Operations
 Reasons to globalize operations:
 Reduce costs (labor, taxes, tariffs, etc.)
 Improve supply chain
 Provide better goods and services
 Understand markets
 Learn to improve operations
 Attract and retain global talent
Tangible
Reasons
Intangible
Reasons

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2.2 A Global View of Operations
 Reduce Costs (ex. U.S. Cartoon Production at Home in Manila):
 Foreign locations with lower wages can help lower both direct
and indirect costs.
 Less stringent government regulations on a wide variety of
operations practices reduce costs.
 Opportunities to cut the cost of taxes and tariffs also encourage
foreign operations.
 Trade agreements have also helped reduce tariffs:
 World Trade Organization (WTO)
 North American Free Trade Agreement (NAFTA)
 APEC (Pacific rim countries)
 SEATO (Australia, New Zealand, Japan, Hong Kong, South Korea,
New Guinea and Chile)
 MERCOSUR (Argentina, Brazil, Paraguay, Uruguay)
 European Union (EU) (25 members in 2006)

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2.2 A Global View of Operations
 Improve the Supply Chain:
 The supply chain can be improved by locating
facilities in countries where unique resources are
available: expertise, labor, or raw material.
 Examples:
 Auto-styling studios moving to southern California to ensure
expertise in contemporary auto design.
 World athlelic shoe production migrating from South Korea to
Guangzhou, China: advantage of the low-cost labor and
production competence.
 Perfume essence manufacturer wants a presence in Grasse,
France: perfume essences from flowers of the
Mediterranean.

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2.2 A Global View of Operations
 Provide Better Goods and Services:
 We need a better understanding of differences in
culture and the way business is handled in different
countries: permits firms to customize products and
services to meet unique cultural needs in foreign
markets.
 Reduce response time to meet customers’ changing
product and service requirements.

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2.2 A Global View of Operations
 Understand Markets:
 International Operations require interaction with
foreign customers, suppliers, and other competitive
businesses, international firms inevitably learn about
opportunities for new products and services.
 Knowledge of these markets not only helps firms
understand where the market is going but also helps
firms diversify their customer base, add production
flexibility, and smooth the business cycle.
 Opportunity to expand the life cycle of an existing
product.

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2.2 A Global View of Operations
 Learn to Improve Operations:
 Learning does not take place in isolation: firms serve
themselves and their customers well when they
remain open to the free flow of ideas.
 Attract and Retain Global Talent:
 Global organizations can attract and retain better
employees by offering more employment opportunities:
they provide both greater growth opportunities and
insulation against unemployment during times of economic
downturn.
 Global organizations also provide incentives for people
who like to travel or take vacations in foreign countries.

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2.3 Developing Missions and
Strategies
 Organization’s Mission:
 Its purpose
 What it will contribute to society
 The purpose or rationale for an organization’s existence
 Provide boundaries and focus for organizations and the
concept around which the firm can rally
 Once an organization’s mission has been decide,
each functional area within the firm determines its
supporting mission.

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2.3 Developing Missions and
Strategies
Marketing Operations
Finance/
Accounting
Functional
Area Missions
Organization’s
Mission

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2.3 Developing Missions and
Strategies
 FedEx:
FedEx 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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2.3 Developing Missions and
Strategies
 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
 Hard Rock Cafe:
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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2.3 Developing Missions and
Strategies
 Strategy:
 How an organization expects to achieve its missions and goals
 Organization’s action plan to achieve the mission
 Exploits opportunities and strengths, neutralize threats, and
avoid weaknesses
 Strategies for competitive advantage:
 Differentiation – better, or at least different
 Cost leadership - cheaper
 Response –more responsive

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2.4 Achieving Competitive
Advantage Through Operations
 Competitive advantage:
 The creation of a unique advantage over competitors.
 To create customer value in an efficient and sustainable way.
 Pure forms of these strategies (achieved via differentiation, low
cost, and response) may exist, but operations managers will
more likely implement some combination of them.

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2.4 Achieving Competitive
Advantage Through Operations
 Competing on Differentiation:
 To distinguish the offerings of the organization in any way that
the customer perceives as adding value.
 Differentiation is concerned with providing uniqueness.
 Going beyond both physical characteristics and service
attributes to encompass everything about the product or service
that influences the value that the customers derive from it.
 Experience differentiation: engages the customer with the
product through imaginative use of the five senses, so the
customer “experiences” the product.
 Examples:
 Safeskin gloves – leading edge products
 Hard Rock Cafe – theme experience

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2.4 Achieving Competitive
Advantage Through Operations
 Competing on Cost:
 Achieving maximum value as perceived by the customer
 It requires examining each of the 10 OM decisions in a relentless
effort to drive down costs while meeting customer expectations
of value
 Low-cost strategy does not imply low value or low quality
 Examples:
 Southwest Airlines - secondary airports, no frills service, efficient
utilization of equipment
 Wal-Mart – small overheads, shrinkage, distribution costs

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2.4 Achieving Competitive
Advantage Through Operations
 Competing on Response:
 That set of values related to rapid, flexible, and reliable
performance.
 Flexible response: ability to match changes in a marketplace
where design innovations and volumes fluctuate substantially.
 Example: Hewlett-Packard – sustainable competitive advantage
 Reliability of scheduling
 Example: German machine industry
 Quickness
 Example: Johnson Electric – competes on speed in design,
production and delivery

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2.5 Ten Strategic OM Decisions
 Goods and service
design
 Quality
 Process and
capacity design
 Location selection
 Layout design
 Human resource
and job design
 Supply-chain
management
 Inventory
 Scheduling
 Maintenance

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2.5 Ten Strategic OM Decisions
Operations
Decisions Goods Services
Goods and
service
design
Product is usually
tangible
Product is not
tangible
Quality Many objective
standards
Many subjective
standards
Process and
capacity
design
Customers not
involved
Customer may be
directly involved
Capacity must match
demand

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2.5 Ten Strategic OM Decisions
Operations
Decisions Goods Services
Location
selection
Near raw materials
and labor
Near customers
Layout design Production efficiency Enhances product
and production
Human
resources and
job design
Technical skills,
constant labor
standards, output
based wages
Interact with
customers, labor
standards vary

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2.5 Ten Strategic OM Decisions
Operations
Decisions Goods Services
Supply-chain
mgmt
Relationship critical
to final product
Important, but may
not be critical
Inventory Raw materials,
work-in-process, and
finished goods may
be held
Cannot be stored
Scheduling Level schedules
possible
Meet immediate
customer demand

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2.5 Ten Strategic OM Decisions
Operations
Decisions Goods Services
Maintenance Often preventive
and takes place at
production site
Often “repair” and
takes place at
customer’s site

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Process Design
Low Moderate High
Volume
High
Moderate
Low
Variety
of
Products
Process-focused
JOB 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 Customization
Customization at high
Volume
(Dell Computer’s PC,
cafeteria)

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Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage
Product Differentiation Low Cost
Product
Selection and
Design
Heavy R&D; labs; focus
on development in a
broad range of drug
categories
Low R&D; focus on
development of generic
drugs
Quality Major priority, exceed
regulatory requirements
Meets regulatory
requirements on a country
by country basis

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Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage
Product Differentiation Low Cost
Process Product and modular
process; long production
runs in specialized
facilities; build capacity
ahead of demand
Process focused; general
processes; job shop
approach, short
production runs; focus on
high utilization
Location Still located in the city
where it was founded
Recently moved to low-
tax, low-labor-cost
environment

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Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage
Product Differentiation Low Cost
Scheduling Centralized production
planning
Many short-run products
complicate scheduling
Layout Layout supports
automated product-
focused production
Layout supports process-
focused job shop
practices

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Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage
Product Differentiation Low Cost
Human
Resources
Hire the best; nationwide
searches
Very experienced top
executives; other
personnel paid below
industry average
Supply Chain Long-term supplier
relationships
Tends to purchase
competitively to find
bargains

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Operations Strategies for Two
Drug Companies
Brand Name Drugs, Inc. Generic Drug Corp.
Competitive
Advantage
Product Differentiation Low Cost
Inventory High finished goods
inventory to ensure all
demands are met
Process focus drives up
work-in-process
inventory; finished goods
inventory tends to be low
Maintenance Highly trained staff;
extensive parts inventory
Highly trained staff to
meet changing demand

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2.6. Dynamics of Operations
Strategy
 Strategies change for two reasons:
Changes within the organization:
 Personnel
 Finance
 Technology
 Product 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 critical
Defend market
position
Cost control
critical
Introduction Growth Maturity Decline
Company
Strategy/Issues
Internet
Flat-screen
monitors
Sales
DVD
CD-ROM
Drive-through
restaurants
Fax machines
3 1/2”
Floppy
disks
Color printers
Figure 2.5

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Product Life Cycle
Product design
and
development
critical
Frequent
product and
process design
changes
Short production
runs
High production
costs
Limited models
Attention to
quality
Introduction Growth Maturity Decline
OM
Strategy/Issues
Forecasting
critical
Product and
process
reliability
Competitive
product
improvements
and options
Increase capacity
Shift toward
product focus
Enhance
distribution
Standardization
Less rapid
product changes
– more minor
changes
Optimum
capacity
Increasing
stability of
process
Long production
runs
Product
improvement
and cost cutting
Little product
differentiation
Cost
minimization
Overcapacity
in the
industry
Prune line to
eliminate
items not
returning
good margin
Reduce
capacity

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2.7. Strategy Development and
Implementation
Determine Corporate Mission
State the reason for the firm’s existence and identify the
value it wishes to create.
Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, after-
sale service, broad product lines.
Environmental Analysis
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.

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2.8 Global Operations Strategy
Options
 Multinational Corporation (MNC):
 Firm with extensive international business involvement.
 Buy resources, create goods or services, and sell goods or
services in a variety of countries.
 Applies to most of the world’s large, well-known businesses.
 Example: IBM – imports electronics components from over 50
countries, exports computers to over 130 countries, has facilities
in 45 countries, earns more than half its sales and profits abroad.
 Four strategies:
 International
 Multidomestic
 Global
 Transnational

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2.8 Global Operations Strategy
Options
 International Strategy:
 Uses exports and licenses to penetrate the global
arena.
 Is the least advantageous:
 Little local responsiveness – we are exporting or licensing a
good from the home country
 Little cost advantage – we are using existing production
process at some distance from the new market
 Is the easiest to implement:
 exports can require little change in existing operations
 licensing agreements often leave much of the risk to the
licensee.

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2.8 Global Operations Strategy
Options
 Multidomestic Strategy:
Operating decisions are decentralized to each
country to enhance local responsiveness.
Organizationally: subsidiaries, franchises, or
joint ventures with substantial independence.
Advantage: maximizing a competitive
response for the local market.
The strategy has little or no cost advantage.

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2.8 Global Operations Strategy
Options
 Global Strategy:
Operating decisions are centralized and
headquarters coordinates the standardization
and learning between facilities, thus
generating economies of scale.
Appropriate when the strategic focus is cost
reduction but has little to recommend it when
the demand for local responsiveness is high.

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2.8 Global Operations Strategy
Options
 Transnational Strategy:
 Combines the benefits of global-scale efficiencies
(such as economies of scale and learning) with the
benefits of local responsiveness (by recognizing that
core competence does not reside in just “home”
country but can exist anywhere in the organization).
 Transnational describes a condition in which material,
people, and ideas cross national boundaries.
 Have the potential to pursue all three operations
strategies (i.e., differentiation, low cost, and
response).
 The resources and activities are dispersed, but
specialized, so as to be both efficient and flexible in
an interdependent network.

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2.8 Global Operations Strategy
Options Global
strategy
•Standardized
product
•Economies of scale
•Cross-cultural
learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator
Transnational
strategy
•Move material,
people, ideas across
national boundaries
•Economies of scale
•Cross-cultural
learning
Examples:
Coca-Cola
Nestlé
International
strategy
•Import/export,
or license existing
product
Examples:
U.S. Stell
Harley Davidson
Multidomestic
strategy
•Use existing
domestic model globally
•Franchise, joint
ventures, subsidiaries
Examples:
Heinz
McDonald’s
The Body Shop
Hard Rock Cafe
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
High
Cost
Reduction
Considerations