Operations Management Operations Strategy in a Global Environment

Operations Management Operations Strategy in a Global Environment Chapter 2

Outline ¨ GLOBAL COMPANY PROFILE: BOEING ¨ DEVELOPING MISSIONS AND STRATEGIES ¨ Mission ¨ Strategy ¨ ACHIEVING COMPETITIVE ADVANTAGE THROUGH OPERATIONS ¨ Competing on Differentiation ¨ Competing on Cost ¨ Competing on Response ¨ TEN STRATEGIC OM DECISIONS

Outline - Continued ¨ ISSUES IN OPERATIONS STRATEGY ¨ Research ¨ Preconditions ¨ Dynamics ¨ STRATEGY DEVELOPMENT AND IMPLEMENTATION ¨ Identify Critical Success Factors ¨ A Global view of Operations Cultural and Ethical Issues ¨ Build and Staff the Organization ¨ Integrate OM with Other Activities

Outline - Continued ¨ GLOBAL OPERATIONS STRATEGY OPTIONS ¨ International Strategy ¨ Multidomestic Strategy ¨ Global Strategy ¨ Transnational Strategy

Learning Objectives When you complete this chapter, you should be able to : Identify or Define: ¨ Mission ¨ Strategy ¨ Ten Decisions of OM ¨ Multinational Corporations

Learning Objectives Continued Describe or Explain: ¨ Specific approaches used by OM to achieve strategies ¨ Differentiation ¨ Low Cost ¨ Response ¨ Four Global Operations Strategies ¨ Why Global Issues are Important

Examples of Global Strategies ¨ Boeing – both sales and production are worldwide. ¨ Benetton – moves inventory to stores around the world faster than its competitor by building flexibility into design, production, and distribution ¨ Sony – purchases components from suppliers in Thailand, Malaysia, and around the world ¨ GM is building four similar plants in Argentina, Poland, China, and Thailand

Boeing Suppliers (777) Firm Country Parts Alenia Italy Wing flaps Aero. Space Technologies CASA Fuji Australia Rudder Spain Japan Ailerons Landing gear doors, wing section GEC Avionics Korean Air Menasco Aerospace United Kingdom Korea Canada Flight computers Flap supports Landing gears Short Brothers Ireland Landing gear doors Singapore Aerospace Singapore Landing gear doors

The Role of ¨ Maquiladoras ¨ World Trade Organization (WTC) ¨ North American Free Trade Agreement (NAFTA) ¨ European Union (EU)

Management Issues in Global Operations Global Strategic Context Differentiation ¨ Cost leadership ¨ Response ¨ Supply Chain Managemen t Location Decisions Logistics Manageme nt

Supply-Chain Management ¨ Sourcing ¨ Vertical integration ¨ Make-or-buy decisions ¨ Partnering

Location Decisions ¨ Country-related issues ¨ Product-related issues ¨ Government policy/political risk ¨ Organizational issues

Materials Management ¨ Flow of materials ¨ Transportation options and speed ¨ Inventory levels ¨ Packaging ¨ Storage

Defining Global Operations ¨ International business - engages in cross-border transactions ¨ Multinational Corporation - has extensive involvement in international business, owning or controlling facilities in more than one country ¨ Global company - integrates operations from different countries, and views world as a single marketplace ¨ Transnational company - seeks to combine the benefits of global-scale efficiencies with the benefits of local responsiveness

Some Multinational Corporations Company Home Country % Sales % Assets % Foreign Workforce Outside Home Country Citicorp USA 34 46 NA Colgate. Palmolive USA 72 63 NA Dow Chemical Gillette USA 60 50 NA USA 62 53 NA Honda Japan 63 36 NA IBM USA 57 47 51

Some Multinational Corporations Company Home Country % Sales Outside Home Country % Assets % Foreign Outside Workforce Home Country ICI Britain 78 50 NA Nestlé Switzerland 98 95 97 Philips Netherlands 94 Electronics Siemens Germany 51 85 82 NA 38 Unilever 70 64 Britain & Netherlands 9 5

Pontiac - the Le. Mans Included the Following ¨ About $6, 000 heads to South Korea for auto’s assembly ¨ $3, 500 goes to Japan for engines, axles, and electronics ¨ $1, 500 goes to Germany for design ¨ $800 goes to Taiwan, Singapore, and Japan for smaller parts ¨ $500 heads to England for marketing ¨ $100 goes to Ireland for information technology ¨ the rest $7, 600, goes to GM and its US bankers, insurance agents, and attorneys.

Reasons to Globalize Operations Tangible ¨ Reduce costs (labor, taxes, tariffs, etc. ) ¨ Improve the supply chain ¨ Provide better goods and services ¨ Attract new markets ¨ Learn to improve operations Intangible ¨ Attract and retain global talent

Trade and Tariff ¨ Maquiladoras - Mexican factories located along the U. S. -Mexico border that receive preferential tariff treatment ¨ GATT - an international treaty that helps promote world trade by lowering barriers to the free flow of goods across borders ¨ NAFTA - a free trade agreement between Canada, Mexico, and the United States

Trade Pays GDP (PPP*) per Person 1990 Growth Rates, % *PPP – Purchasing Power Parity

Free trade may take us into the era of the floating factory - a six person crew will take a factory from port to port in order to obtain the best market, material, labor and tax advantages

Achieving Global Operations -Four Considerations¨ Global product design ¨ Global process design and technology ¨ Global factory location analysis ¨ Impact of Culture and Ethics

Global Product Design ¨ Remember social and cultural differences ¨ packaging and marketing can help make product seem “domestic” but ¨ “liter” versus “quart” ¨ “sweetness” and “taste”

Global Process Design and Technology ¨ Information technology enables management of integrated, globally dispersed operation ¨ Texas Instruments: 50 plants in 19 countries ¨ Hewlett-Packard - product development teams in U. S. , Japan, Great Britain, and Germany ¨ Reduces time-to-market

Global Facility Location Analysis Using CSFs for Country Selection ¨ Select CSFs based on parent organization; ’s strategic or operations objectives ¨ Obtain country-specific information on the CSFs ¨ Evaluate each country’s CSFs using a 1 (bad) to 5 (good) rating scale ¨ Sum the ratings

You May Wish To Consider ¨ national literacy rate ¨ rate of innovation ¨ rate of technology change ¨ number of skilled workers ¨ stability of government ¨ product liability laws ¨ export restrictions ¨ similarity in language ¨ work ethic ¨ tax rates ¨ inflation ¨ availability of raw materials ¨ interest rates ¨ population ¨ number of miles of highway

Global Impact of Culture and Ethics ¨ Cultures differ! Some accept/expect: ¨ variations in punctuality ¨ long lunch hours ¨ expectation of thievery ¨ bribery ¨ little protection of intellectual property

Ranking Corruption 1. Finland 2. Denmark & New Zealand (Tie) 9. 5 … 7. Canada … 10. United Kingdom 8. 7 … 16. United States 7. 7 … 18. Germany & Israel (Tie) 7. 3 … 20. Japan 7. 1 … 31. Italy 5. 2 … 59. China 3. 5 … 62. Egypt 3. 4 … 71. India & Russia (Tie) 9. 7 9. 0

To Establish Global Services ¨ Determine if sufficient people or facilities exist to support the service ¨ Identify foreign markets that are open not controlled by governments ¨ Determine what services are of most interest to foreign customers ¨ Determine how to reach global customers

Managing Global Service Operations Must take a different perspective on ¨ Capacity planning ¨ Location Planning ¨ Facilities design and layout ¨ Scheduling

Some Definitions ¨ International business ¨A firm that engages in cross-border transactions. ¨ Multinational Corporation (MNC) ¨A firm that has extensive involvement in international business, owning or controlling facilities in more than one country

Some Global Strategies ¨ International Strategy: uses exports and licenses to penetrate the global area ¨ Multidomestic Strategy: uses decentralized authority with substantial autonomy at each business ¨ Global Strategy: Uses a high degree of centralization, with headquarters coordinating to seek standardization and learning between plants ¨ Transnational Strategy: Exploits economies of scale and learning, as well as pressure for responsiveness, by recognizing that core competencies reside everywhere in the organization

Match Product & Parent ¨ ¨ ¨ Arrow shirts Braun Household Appliances Burger King Firestone Tires Godiva Chocolate Haagen_dazs Ice Cream Jaguar Autos MGM Movies Lamborghini Autos Goodrich Tires Alpo Petfoods 1. Volkswagen 2. Bidermann International 3. Bridgestone 4. Campbell Soup 5. Credit Lyonnais 6. Ford Motor Company 7. Gillette 8. Grand Metropolitan 9. Michelin 10. Nestlé

Match Product & Country ¨ ¨ ¨ Arrow shirts Braun Household Appliances Burger King Firestone Tires Godiva Chocolate Haagen_Dazs Ice Cream Jaguar Autos MGM Movies Lamborghini Autos Goodrich Tires Alpo Petfoods 1. France 2. Great Britain 3. Germany 4. Japan 5. United States 6. Switzerland

Developing Missions and Strategies

Mission

Mission of Fed. Ex 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.

Sample Mission - 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

Mission of the Hard Rock Café 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.

Factors Affecting Mission Philosophy & Values Profitability & Growth Environment Mission Customers Public Image Benefit to Society

Mission/Strategy ¨ Mission - where you are going ¨ Strategy - how you are going to get there; an action plan

Strategy ¨ Action plan to achieve mission ¨ Shows how mission will be achieved

Strategy Process Company Mission Business Strategy Functional Area Strategies Marketing Decisions Operations Decisions Fin. /Acct. Decisions

Strategies for Competitive Advantage ¨ Differentiation ¨ Cost leadership ¨ Quick response

Competing on Differentiation Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value

Competing on Cost Provide the maximum value as perceived by customer Does not imply low value or low quality

Competing on Response ¨ Flexibility ¨ Reliability ¨ Timeliness Requires institutionalization within the firm of the ability to respond

Competing, Regardless of the Basis, Requires the institutionalization within the firm of the ability to change, and to adapt

Operation s Decisions Quality Product Process OM’s Contribution to Strategy Example s FLEXIBILITY Southwest Airlines No-frills service LOW COST DELIVERY Pizza Hut’s five-minute guarantee at lunchtime. Speed Dependability Federal Express’s “absolutely, positively on time” Human Resource Supply Chain Maintenance Differentiation (Better) QUALITY Conformance Motorola’s automotive products ignition systems Motorola’s pagers Performance Inventory Scheduling Competiti ve Advantag e Sony’s constant innovation of new products Design HP’s ability to follow the printer market Volume Location Layout Specific Strategy Used IBM’s after-sale service on mainframe computers AFTER-SALE SERVICE BROAD PRODUCT LINE Fidelity Security’s broad line of mutual funds Cost leadership (Cheaper) Response (Faster)

10 Strategic OM Decisions ¨ Goods & service design ¨ Quality ¨ Process & capacity design ¨ Location selection ¨ Layout design ¨ Human resource and job design ¨ Supply-chain management ¨ Inventory ¨ Scheduling ¨ Maintenance

Goods & Services and the 10 OM Decisions

Goods & Services and the 10 OM Decisions – Continued

Process Design High Customization at high Volume Process-focused Variety of Products Job Shops (Print shop, emergency room , machine shop, Repetitive (modular) fine dining focus Mass Customization PC) (Dell Computer’s Assembly line (Cars, appliances, TVs, fast-food restaurants) Moderate Product-focused Continuous (steel, beer, paper, bread, institutional kitchen) Low Moderate Volume High

Operations Strategies for Two Drug Companies

Operations Strategies for Two Drug Companies Continued

Characteristics of High ROI Firms ¨ High quality product ¨ High capacity utilization ¨ High operating effectiveness ¨ Low investment intensity ¨ Low direct cost per unit From the PIMS study of the Strategic Planning Institute

Strategic Options Managers Use to Gain Competitive Advantage ¨ 28% - Operations Management ¨ 18% - Marketing/distribution ¨ 17% - Momentum/name recognition ¨ 16% - Quality/service ¨ 14% - Good management ¨ 4% - Financial resources ¨ 3% - Other

Strategic Options Managers Use to Gain Competitive Advantage ¨ 28% Operations Management ¨ Low- cost product ¨ Product-line breadth ¨ Technical superiority ¨ Product characteristics/differentiation ¨ Continuing product innovation ¨ Low-price/high-value offerings ¨ Efficient, flexible operations adaptable consumers ¨ Engineering research development ¨ Location ¨ Scheduling to

Preconditions To Implement a Strategy One must understand: ¨ Strengths & weaknesses of competitors and new entrants into the market ¨ Current and prospective environmental, legal, and economic issues ¨ The notion of product life cycle ¨ Resources available with the firm and within the OM function ¨ Integration of OM strategy with company strategy and with other functions.

Impetus for Strategy Change ¨ Changes in the organization ¨ Stages in the product life cycle ¨ Changes in the environment

Stages in the Product Life Cycle Growth rate Introduction Growth Maturity Decline

Strategy & Issues During Product Life Introduction ¨ Company Strategy & Issues ¨ OM Strategy & Issues Best period to increase market share R&D engineering are critical Product design and development are critical Frequent product and process design changes Over-capacity Short production runs High skilled-labor content High production costs Limited number of models Utmost attentions to quality Quick elimination of market-revealed design defects

Strategy & Issues During Product Life Growth Company Strategy & Issues OM Strategy & Issues Practical to change prices or quality image Marketing is critical Strengthen niche Forecasting is critical Product and process reliability Competitive product improvements and options Shift toward product oriented Enhance distribution

Strategy & Issues During Product Life Maturity Company Strategy & Issues OM Strategy & Issues Poor time to increase market share Competitive costs become critical Poor time to change price, image, or quality Defend position via fresh promotional and distribution approaches Standardization Less rapid product changes and more minor annual model changes Optimum capacity Increasing stability of manufacturing process Lower labor skills Long production runs Attention to product improvement and cost cutting Re-examination of necessity of design compromises

Strategy & Issues During Product Life Decline Company Strategy & Issues OM Strategy & Issues Cost control critical to market share Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning Good margin Reduce capacity

Strategy and Issues During a Product’s Life

Strategy Development and Implementation ¨ Identify critical success factors ¨ Build and staff the organization

SWOT Analysis Process ¨ Environmental Analysis ¨ Determine Corporate Mission ¨ Form a Strategy

SWOT Analysis to Strategy Formulation Mission Internal Strengths External Opportunities Strategy Internal Weaknesses Competitive Advantage External Threats

Identifying Critical Success Factors Marketing Service Distribution Promotion Channels of distribution Product positioning (image, functions) Decisions Chapter Product 5 Quality 6, S 6 Process 7, S 7 Location 8 Layout 9 Human resource 10, S 10 Finance/Accounti ng Production/Operatio ns Leverage Cost of capital Working capital Receivables Payables Financial control Lines of credit Sample Option Customized, or standardized Define customer expectations and how to achieve them Facility size, technology, capacity Near supplier or customer Work cells or assembly line Specialized or enriched jobs

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Courteous, but limited passenger service Lean, productive employees High aircraft utilization Competitive Advantage: Low Cost Standardized fleet of Boeing 737 aircraft Short haul, point-topoint routes, often to secondary airports Frequent, reliable schedules

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Courteous, but limited passenger service No seat assignments No baggage transfers Automated ticketing machines No meals

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Lower gate costs at secondary airports High number of flights, reduces employee idle time between flights Short haul, point-topoint routes, often to secondary airports

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage High number of flights reduces employee idle time between flights Saturate a city with flights lowering administrative costs per passenger for that city Frequent, reliable schedules

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Pilot training on only one type of aircraft Reduced maintenance inventory required because of only one type of aircraft Excellent supplier relations with Boeing has aided financing Standardized fleet of Boeing 737 aircraft

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage High aircraft utilization Flexible employees and standard planes aids scheduling Flexible union contracts Maintenance personnel trained on only one type of aircraft 20 minute gate turnarounds

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Lean, productive employees High level of stock ownership Hire for attitude, then train High employee compensation Empowered employees Automated ticket machines

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage Courteous, but limited passenger service Lean, productive employees High aircraft utilization Competitive Advantage: Low Cost Standardized fleet of Boeing 737 aircraft Short haul, point-topoint routes, often to secondary airports Frequent, reliable schedules

Southwest Airline’s Low Cost Competitive Advantage

Vanguard’s Activity System Very low expenses passed on to client A broad array of mutual funds excluding some fund categories Strict cost control Direct distributions Efficient investment management approach offering good consistent performance Straightforward client communication and education

How It Works If competitive advantage, leads to achieving Company Mission Business Strategy Distinctive competencies affect Functional Area Strategies Marketing Decisions Operations Decisions Fin. /Acct. Decisions

Four International Operations Strategies

Multidomestic Strategy Operating decisions are decentralized to each country to enhance local responsiveness

Global Strategy Operating decisions are centralized and headquarters coordinates the standardization and learning between facilities

Transnational Strategies Combines the benefits of global-scale efficiencies with the benefits of local responsiveness

International Strategy Global markets are penetrated using exports and licenses