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Chapter 2 Strategy, Operations, and Global Competitiveness Chapter 2: Strategy, Operations, and Global Competivevess Chapter 2 Strategy, Operations, and Global Competitiveness Chapter 2: Strategy, Operations, and Global Competivevess 1

Introduction Chapter 2: Strategy, Operations, and Global Competivevess 2 Introduction Chapter 2: Strategy, Operations, and Global Competivevess 2

General Motors n n n Highly competitive automobile Industry Market share eroding Rebate strategy General Motors n n n Highly competitive automobile Industry Market share eroding Rebate strategy Weakness in product offerings (8 brands) Toyota (2 brands) Long lead time to redesign What is a sustainable market share? Chapter 2: Strategy, Operations, and Global Competivevess 3

Flat Panel TVs n n n Large profit margins ($8 billion 2004) Asian manufacturers Flat Panel TVs n n n Large profit margins ($8 billion 2004) Asian manufacturers (LG Electronics and Royal Philips, Sony and Samsung, and Matsushita) North America’s Dell Chapter 2: Strategy, Operations, and Global Competivevess 4

American Steel Industry (Nucor) n n Only domestic steelmaker to remain profitable. Nucor pursued American Steel Industry (Nucor) n n Only domestic steelmaker to remain profitable. Nucor pursued unique strategies relative to other major players. ¡ ¡ Minimills used electric arc furnaces. Implementing strip casting, new production process that should require little additional processing. Chapter 2: Strategy, Operations, and Global Competivevess 5

Examples Illustrate n n n Shortage of employees often necessitates need to improve productivity. Examples Illustrate n n n Shortage of employees often necessitates need to improve productivity. Increased competition (especially foreign competition) another reason why companies seek to improve their productivity. Improving productivity is often dependent on new technologies. Chapter 2: Strategy, Operations, and Global Competivevess 6

Top Management n n n Responsible for making and keeping organization competitive. Develops business Top Management n n n Responsible for making and keeping organization competitive. Develops business strategy ¡ provides direction and vision ¡ guides short- and long-term decisions ¡ must consider international competition All functional areas and business processes must support the business strategy. Chapter 2: Strategy, Operations, and Global Competivevess 7

Business Strategy A set of well defined objectives, plans, and policies for the organization Business Strategy A set of well defined objectives, plans, and policies for the organization to successfully compete in its markets, domestic and global. The business strategy needs to be divided into functional strategies, throughout the organization, that are aligned and support the overall business strategy. Chapter 2: Strategy, Operations, and Global Competivevess 8

Global Competitiveness n n Long-term viability of a firm Short-term success in terms of Global Competitiveness n n Long-term viability of a firm Short-term success in terms of market share or profitability Since 1970 s, imports to the US have grown faster than exports from the US US is biggest debtor nation in world Chapter 2: Strategy, Operations, and Global Competivevess 9

The United States’ Merchandise Trade Chapter 2: Strategy, Operations, and Global Competivevess 10 The United States’ Merchandise Trade Chapter 2: Strategy, Operations, and Global Competivevess 10

Exchange Rates n n n US competitiveness reflected in value of dollar relative to Exchange Rates n n n US competitiveness reflected in value of dollar relative to other currencies As US increases its imports relative to its exports, a surplus of US dollars accumulates abroad reducing the desirability of holding US dollars Price adjusted broad dollar index Chapter 2: Strategy, Operations, and Global Competivevess 11

Purchasing Power of the Dollar Chapter 2: Strategy, Operations, and Global Competivevess 12 Purchasing Power of the Dollar Chapter 2: Strategy, Operations, and Global Competivevess 12

Implications of Exchange Rate n n n A large value of the price adjusted Implications of Exchange Rate n n n A large value of the price adjusted broad dollar index indicates a strong dollar making it easier for Americans to afford imports. A weaker value of the price adjusted broad dollar index makes American products more competitive in foreign markets. Economic relationship can be mediated by government actions. Chapter 2: Strategy, Operations, and Global Competivevess 13

International Markets and Producers n Three Major Trading Regions ¡ ¡ ¡ n n International Markets and Producers n Three Major Trading Regions ¡ ¡ ¡ n n Europe North America Pacific Rim Previously firms classified as domestic, exporters, or international Now have global firms, joint ventures, foreign subsidiaries Chapter 2: Strategy, Operations, and Global Competivevess 14

Three Major Trading Regions Chapter 2: Strategy, Operations, and Global Competivevess 15 Three Major Trading Regions Chapter 2: Strategy, Operations, and Global Competivevess 15

Reasons to Produce Offshore n n Circumvent governmental regulations Avoid effects of currency fluctuations Reasons to Produce Offshore n n Circumvent governmental regulations Avoid effects of currency fluctuations Avoid fees and quotas Placate local customers Chapter 2: Strategy, Operations, and Global Competivevess 16

Generating New Product Ideas n n Research and Development (R & D) primarily responsible Generating New Product Ideas n n Research and Development (R & D) primarily responsible for developing new product ideas. Research is divided into two types: pure and applied. Pure research is working with basic technology to develop new knowledge. Applied research is attempting to develop new knowledge along particular lines. Chapter 2: Strategy, Operations, and Global Competivevess 17

R & D Con’t n n n Development is the attempt to utilize the R & D Con’t n n n Development is the attempt to utilize the findings of research. The development end of R & D is more on the application side and often consists of modifications or extensions to existing outputs. Currently the development effort is much larger than the research effort. Chapter 2: Strategy, Operations, and Global Competivevess 18

Alternatives to Research n n Imitation of a proven idea (second-tomarket strategy). Purchase of Alternatives to Research n n Imitation of a proven idea (second-tomarket strategy). Purchase of someone else’s idea. ¡ n Outright purchase is becoming extremely popular where bring a new product to market can cost huge sums. In addition to product research there is also process research (i. e. how to produce research). Chapter 2: Strategy, Operations, and Global Competivevess 19

Disruptive Technologies n n An example of a disruptive technology currently playing out is Disruptive Technologies n n An example of a disruptive technology currently playing out is the impact that the Web is having on graduate business education. e-mail Computers in the classroom Using the Web at work to shop Chapter 2: Strategy, Operations, and Global Competivevess 20

Commercialization n n Refers to the process of moving an idea from concept to Commercialization n n Refers to the process of moving an idea from concept to market. Shorter life cycles. Increasingly competitive marketplace. Globalization. Chapter 2: Strategy, Operations, and Global Competivevess 21

Measures of Commercialization Capabilities n n Time to market Range of markets Number of Measures of Commercialization Capabilities n n Time to market Range of markets Number of markets Breadth of technologies Chapter 2: Strategy, Operations, and Global Competivevess 22

Measures of Commercialization Capabilities n Once appropriate measures for assessing commercialization have been established, Measures of Commercialization Capabilities n Once appropriate measures for assessing commercialization have been established, organizations can begin working toward improving them. ¡ ¡ Make commercialization a top priority Set goals and benchmarks Build cross-functional teams Promote hands-on management Chapter 2: Strategy, Operations, and Global Competivevess 23

Transformation Process Characteristics n Six primary characteristics of the transformation system: ¡ ¡ ¡ Transformation Process Characteristics n Six primary characteristics of the transformation system: ¡ ¡ ¡ Efficiency Effectiveness Capacity Quality Response time Flexibility Chapter 2: Strategy, Operations, and Global Competivevess 24

Supply Chain Management n n Cost of labor decreasing Cost of logistics becoming more Supply Chain Management n n Cost of labor decreasing Cost of logistics becoming more significant Total value chain of global production Coordination ¡ ¡ ¡ Information flows Finding efficient suppliers Identifying and evaluating transportation options Chapter 2: Strategy, Operations, and Global Competivevess 25

New Technologies n n ERP EDI Bar coding Internet Chapter 2: Strategy, Operations, and New Technologies n n ERP EDI Bar coding Internet Chapter 2: Strategy, Operations, and Global Competivevess 26

Formulating the Business Strategy Chapter 2: Strategy, Operations, and Global Competivevess 27 Formulating the Business Strategy Chapter 2: Strategy, Operations, and Global Competivevess 27

Strategy Formulation Chapter 2: Strategy, Operations, and Global Competivevess 28 Strategy Formulation Chapter 2: Strategy, Operations, and Global Competivevess 28

Strategy Map for Department Store Chapter 2: Strategy, Operations, and Global Competivevess 29 Strategy Map for Department Store Chapter 2: Strategy, Operations, and Global Competivevess 29

Vision and Mission Statements n n Vision statements used to express organization’s values and Vision and Mission Statements n n Vision statements used to express organization’s values and aspirations. Mission statements express organization’s purpose or reason for existence. Chapter 2: Strategy, Operations, and Global Competivevess 30

Core Competencies n n n Collective knowledge and skills an organization has that distinguish Core Competencies n n n Collective knowledge and skills an organization has that distinguish it from the competition. Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services. Building blocks of core capabilities. Chapter 2: Strategy, Operations, and Global Competivevess 31

Core Competencies continued n n Are basis on which new outputs are developed. Better Core Competencies continued n n Are basis on which new outputs are developed. Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products. Identifying and developing core competencies is one of top management’s most important roles. Organization practices and business processes Chapter 2: Strategy, Operations, and Global Competivevess 32

Examples of Core Competencies n n Sony - miniaturization 3 M- knowledge of substrates, Examples of Core Competencies n n Sony - miniaturization 3 M- knowledge of substrates, coatings and adhesives Black and Decker - small electrical motors and industrial design Honda - engines and power trains Chapter 2: Strategy, Operations, and Global Competivevess 33

Core Competencies Used to Gain Access to Variety of Markets n Cannon ¡ ¡ Core Competencies Used to Gain Access to Variety of Markets n Cannon ¡ ¡ n core competencies in optics, imaging, and electronic controls Products include copiers, laser printers, cameras, and image scanners. Boeing ¡ ¡ integrating large scale systems commercial jetliners, space stations, missiles Chapter 2: Strategy, Operations, and Global Competivevess 34

Key Characteristics of Core Competencies/Capabilities n n n Should be used to gain access Key Characteristics of Core Competencies/Capabilities n n n 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 Chapter 2: Strategy, Operations, and Global Competivevess 35

Outsourcing n n n Subcontracting out production of parts or performance of activities Activities Outsourcing n n n 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 Chapter 2: Strategy, Operations, and Global Competivevess 36

Strategically Important Parts or Activities n n Strongly related to what customers perceive to Strategically Important Parts or Activities n n Strongly related to what customers perceive to be key product characteristics. Require highly specialized skill and knowledge. Require highly specialized physical assets The organization has the technological lead or is likely to obtain it. Chapter 2: Strategy, Operations, and Global Competivevess 37

Hollowed Out n n n The extent that most of a firm’s complex parts Hollowed Out n n n 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 Chapter 2: Strategy, Operations, and Global Competivevess 38

Creeping Breakeven Phenomenon n Vicious cycle where products appear to become more expensive to Creeping Breakeven Phenomenon n Vicious cycle where products appear to become more expensive to produce inhouse as others are outsourced. ¡ n Result from way overhead is allocated Logical conclusion is organization ends up producing no outputs. Chapter 2: Strategy, Operations, and Global Competivevess 39

Business Strategy and the Product Life Cycle Chapter 2: Strategy, Operations, and Global Competivevess Business Strategy and the Product Life Cycle Chapter 2: Strategy, Operations, and Global Competivevess 40

The Life-Cycle Curve Chapter 2: Strategy, Operations, and Global Competivevess 41 The Life-Cycle Curve Chapter 2: Strategy, Operations, and Global Competivevess 41

Product Life Cycle n n n Strategies often tied to product life cycle Length Product Life Cycle n n n Strategies often tied to product life cycle Length of life cycles shrinking Business strategy should match life cycles stages Chapter 2: Strategy, Operations, and Global Competivevess 42

Categories of Business Strategies Chapter 2: Strategy, Operations, and Global Competivevess 43 Categories of Business Strategies Chapter 2: Strategy, Operations, and Global Competivevess 43

First-to-Market Strategy n n n Products available before competition Strong applied research capability needed First-to-Market Strategy n n n Products available before competition Strong applied research capability needed Can set high price to skim market or set lower price to gain market share Chapter 2: Strategy, Operations, and Global Competivevess 44

Second-to-Market Strategy n n n Quick imitation of first-to-market companies Less emphasis on applied Second-to-Market Strategy n n n Quick imitation of first-to-market companies Less emphasis on applied research and more emphasis on development Learn from first-to-market’s mistakes Chapter 2: Strategy, Operations, and Global Competivevess 45

Cost Minimization or Late-to-Market Strategy n n n Wait until market becomes standardized and Cost Minimization or Late-to-Market Strategy n n n 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 Chapter 2: Strategy, Operations, and Global Competivevess 46

Market Segmentation n n Serving niche markets Applied engineering skills and flexible manufacturing processes Market Segmentation n n Serving niche markets Applied engineering skills and flexible manufacturing processes needed Chapter 2: Strategy, Operations, and Global Competivevess 47

The Balanced Scorecard n n Helps translate mission and strategy into appropriate performance measures. The Balanced Scorecard n n Helps translate mission and strategy into appropriate performance measures. Traditionally organizations relied primarily on financial measures. No single set of measures can provide information needed in all critical areas of the business. Purpose of balanced scorecard the development of a set of measures that provides a comprehensive view of the organization. Chapter 2: Strategy, Operations, and Global Competivevess 48

Benefits of Using Balanced Scorecard n n n Clarify and gain consensus of strategy Benefits of Using Balanced Scorecard n n n Clarify and gain consensus of strategy Mechanism for communicating strategy Mechanism for aligning departmental and personal goals to the strategy Help ensure strategic objectives are linked to annual budget Timely feedback related to improving the strategy Chapter 2: Strategy, Operations, and Global Competivevess 49

Performance Measured in Four Areas n n Financial Performance Customer Performance Internal Business Process Performance Measured in Four Areas n n Financial Performance Customer Performance Internal Business Process Performance Organizational Learning and Growth Chapter 2: Strategy, Operations, and Global Competivevess 50

Developing a Balanced Scorecard n n n Top management translates mission and strategy into Developing a Balanced Scorecard n n n Top management translates mission and strategy into specific customer and financial objectives. Measures for internal business processes developed on basis of customer and financial objectives. Investments in employee training and information technology linked to customer, financial, and internal business process objectives. Chapter 2: Strategy, Operations, and Global Competivevess 51

Focus n n Goal of business strategy is to establish and maintain a unique Focus n n Goal of business strategy is to establish and maintain a unique strength, or focus that leads to a sustainable competitive advantage. Two successful competitive positions ¡ ¡ lowest cost outstanding strength Chapter 2: Strategy, Operations, and Global Competivevess 52

Common Areas of Focus n n n Innovation Customization Product/service flexibility Volume flexibility Performance Common Areas of Focus n n n Innovation Customization Product/service flexibility Volume flexibility Performance Quality n n n Product/service reliability Delivery reliability Response After-sale service Price Chapter 2: Strategy, Operations, and Global Competivevess 53

Order Qualifiers and Winners n n Order qualifiers are characteristics that are the ante Order Qualifiers and Winners n n Order qualifiers are characteristics that are the ante to enter the market Order winners are characteristics that win the customer’s purchase Chapter 2: Strategy, Operations, and Global Competivevess 54

Loss of Focus n n n New outputs New attributes New tasks Departmental professionalism Loss of Focus n n n New outputs New attributes New tasks Departmental professionalism Ignorance and noncommunication Life cycle changes Chapter 2: Strategy, Operations, and Global Competivevess 55

Product Life Cycle Stages and Emphasis Chapter 2: Strategy, Operations, and Global Competivevess 56 Product Life Cycle Stages and Emphasis Chapter 2: Strategy, Operations, and Global Competivevess 56

Strategic Frameworks Chapter 2: Strategy, Operations, and Global Competivevess 57 Strategic Frameworks Chapter 2: Strategy, Operations, and Global Competivevess 57

The Sand Cone Model Chapter 2: Strategy, Operations, and Global Competivevess 58 The Sand Cone Model Chapter 2: Strategy, Operations, and Global Competivevess 58

Example Performance Frontier Chapter 2: Strategy, Operations, and Global Competivevess 59 Example Performance Frontier Chapter 2: Strategy, Operations, and Global Competivevess 59

New Technology Results in Shift of Performance Frontier Chapter 2: Strategy, Operations, and Global New Technology Results in Shift of Performance Frontier Chapter 2: Strategy, Operations, and Global Competivevess 60

Stages of Operational Effectiveness n n Internally Neutral Externally Neutral Internally Supportive Externally Supportive Stages of Operational Effectiveness n n Internally Neutral Externally Neutral Internally Supportive Externally Supportive Chapter 2: Strategy, Operations, and Global Competivevess 61

Critical Value Factors n Quality – affects a business unit’s competitive ability ¡ ¡ Critical Value Factors n Quality – affects a business unit’s competitive ability ¡ ¡ Customers are more pleased with high quality product or service Refer friends Repeat business Protect firm from competition Chapter 2: Strategy, Operations, and Global Competivevess 62

Critical Value Factors con’t n n Customization – refers to offering a product or Critical Value Factors con’t n n Customization – refers to offering a product or service suited to a customer’s desires or needs. Flexibility ¡ ¡ ¡ Faster matches to customers’ needs Closer match to customers’ needs Ability to supple items when needed Faster design to market Lower costs of changing production Ability to offer full product line Chapter 2: Strategy, Operations, and Global Competivevess 63

Mass Customization n Seek to produce low-cost, high-quality outputs in high variety. Not all Mass Customization n Seek to produce low-cost, high-quality outputs in high variety. Not all products lend themselves to being customized (Ex. Sugar, gas, electricity, and flour). Is applicable to products characterized by short life cycles, rapidly advancing technology, or changing customer requirements. Chapter 2: Strategy, Operations, and Global Competivevess 64

Chapter 2: Strategy, Operations, and Global Competivevess 65 Chapter 2: Strategy, Operations, and Global Competivevess 65

Four Mass Customization Strategies n n Collaborative customizers Adaptive customizers Cosmetic customizers Transparent customizers Four Mass Customization Strategies n n Collaborative customizers Adaptive customizers Cosmetic customizers Transparent customizers Chapter 2: Strategy, Operations, and Global Competivevess 66

Collaborative Customizers n These organizations establish a dialogue to help customers articulate their needs Collaborative Customizers n These organizations establish a dialogue to help customers articulate their needs and then develop customized outputs to meet these needs. For example, one Japanese eyewear retailer developed a computerized system to help customers select eyewear. The system combines a digital image of the customer's face and then various styles of eyeware displayed on the digital image. Once the customer is satisfied, the customized glasses are produced at the retail store within an hour. Chapter 2: Strategy, Operations, and Global Competivevess 67

Adaptive Customizers n These organizations offer a standard product that customers can modify themselves Adaptive Customizers n These organizations offer a standard product that customers can modify themselves such as closet organizers. Each closet-organizer package is the same, but includes instructions and tools to cut the shelving and clothes rods so that the unit can fit a wide variety of closet sizes. Chapter 2: Strategy, Operations, and Global Competivevess 68

Cosmetic Customizers n These organizations produce a standard product but present it differently to Cosmetic Customizers n These organizations produce a standard product but present it differently to different customers. For example, Planters packages its peanuts and mixed nuts in a variety of containers on the basis of specific needs of its retailing customers such as Wal-Mart, 7 -Eleven, and Safeway. Chapter 2: Strategy, Operations, and Global Competivevess 69

Transparent Customizers n These organizations provide custom products without the customers’ knowing that a Transparent Customizers n These organizations provide custom products without the customers’ knowing that a product has been customized for them. For example, Amazon. com provides book recommendations based on information about past purchases. Chapter 2: Strategy, Operations, and Global Competivevess 70

Dependability and Speed n n The competitive advantages of faster, dependable response to new Dependability and Speed n n 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. Chapter 2: Strategy, Operations, and Global Competivevess 71

Relationship Between Response Time and Unit Cost Chapter 2: Strategy, Operations, and Global Competivevess Relationship Between Response Time and Unit Cost Chapter 2: Strategy, Operations, and Global Competivevess 72

Cost and Productivity n n n Operational activities play a major role in determining Cost and Productivity n n n Operational activities play a major role in determining the cost of a product or service, particularly during the up-front design for the output. It is worth noting that cost to the producer and price to the customer are two very different factors. It is always to the producers’ advantage to keep their absolute costs as low as possible. Chapter 2: Strategy, Operations, and Global Competivevess 73

Productivity n n A special measure of efficiency defined as output per worker-hour. This Productivity n n A special measure of efficiency defined as output per worker-hour. This definition of productivity is actually what is known as a partial factor measure of productivity, in the sense that it considers only worker-hours as the productive factor. For a society to increase its standard of living, it must first increase its productivity. Be careful, however, not to focus solely on productivity as the problem, but rather, to consider overall competitive ability. Chapter 2: Strategy, Operations, and Global Competivevess 74