Chapter 2: Competitiveness, Strategy, and Productivity

Chapter 2: Competitiveness, Strategy, and Productivity

BBA 6th semesterInstitute of Management Studies,

University of Peshawar

INTRODUCTION

Outline: What You Will Learn List and briefly discuss the primary ways that business organizations

compete. List five reasons for the poor competitiveness of some companies. Define the term strategy and explain why strategy is important for

competitiveness. Contrast strategy and tactics. Discuss and compare organization strategy and operations strategy,

and explain why it is important to link the two. Describe and give examples of time-based strategies. Define the term productivity and explain why it is important to

organizations and to countries. List some of the reasons for poor productivity and some ways of

improving it.

The three topics. . . Competitiveness, Strategy, and Productivity are three

separete but related topics that are vitally important to business organizations.

Competitiveness relates to the effectiveness of an organization in the marketplace relatively to other organizations that offer similar products or services.

Strategy relates to the plans that determine how an organization pursues its goals.

Productivity relates to the effective use of resources and it has a direct impact on competitiveness.

CompetitivenessCompetitiveness Competitiveness:Competitiveness: Companies must be competitive to sell their goods and

provide services in the market It is an important factor in determining whether a

company succeeds or fails Marketing influences competitiveness in several ways

How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

CompetitivenessCompetitivenessIdentifying consumer wants and needs is a basic input organization’s decision making process and central to competitiveness

Pricing is a key factor in consumer buying decision

Advertising and promotion is a key element that informs potential consumers and attracts buyers

CompetitivenessCompetitiveness-Important factors-Important factors Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management Service and service quality Managers and workers

Competitiveness Competitiveness -Important factors-Important factorsproduct and service -special characteristics of product and service design is a key factor in consumer buying decisions. innovation and the time to market are also key factors for new products and services.

cost of organization’s output is a key variable that influences pricing decisions and profit policies. location is an important factor in term of transportation cost and convenience for customers. quality is another key element that refers to materials, workmanship, design and service. quick response is a key factor that can be a competitive advantage- quickly bring the new product or service into market. flexibility is the ability to respond to changes for the market

Competitiveness Competitiveness -Important factors-Important factors Inventory management can be a competitive

advantage by effectively matching supplies of goods with demand.

Supply chain management involves coordinating internal and external operations to achieve timely and cost-effectively delivery of goods throughout the system.

service is a key differentiator- after sale activities customers perceive as value-added such as delivery, warranty work and technical support

managers and workers are the people at the heart and soul of an organization (i.e. Skills and ideas).

Why Some Organizations Fail? Organizations fail or perform poorly for a variety of resons. Being

aware of such resons may help managers avoid making similar mistake. Some of the reasons are following:

Too much emphasis on short-term financial performance at the expense of research and development.

Failing to take advantage of strengths and opportunities Failing to recognize competitive threats Neglecting operations strategy Failing to recognize competitive threats Too much emphasis in product and service design and not enough on

improvement Neglecting investments in capital and human resources Failing to establish good internal communications Failing to consider customer wants and needs

Two important questions?Two important questions?

What do the customers want? What is the best way to satify those wants?

Operations must work with marketing to obtain information on the relative importance of the various items to each major customer or target market. Understanding competitive issues can help managers develop successful strategiesstrategies

StrategyStrategy Plans for achieving organizational goals The importance of strategies should not be overstated Strategies can be Long-term Intermediate-term Short-term Strategies can be effective if they are designed well to

support the organization’s mission and its goals:

Mission and GoalsMission and Goals Mission

The reason for existence for an organization Mission Statement

States the purpose of an organization Goals

Provide detail and scope of mission Strategies

Plans for achieving organizational goals Tactics

The methods and actions taken to accomplish strategies

Mission/Strategy/Tactics

StrategyStrategy TacticsTacticsMissionMission

How does mission, strategies and tactics relate to

decision making and distinctive competencies?

Planning and Decision Making

15

Mission

Goals

Organizational StrategiesFunctional Goals

Finance Strategies

MarketingStrategies

OperationsStrategies

Tactics Tactics Tactics

Operatingprocedures

Operatingprocedures

Operatingprocedures

Figure The overall relationship fromMission to Operation is hierarchical

Strategy Example ASAD is a high school student. HE would like to have a

career in business, have a good job, and earn enough income to live comfortably

Mission: Live a good life Goal: Successful career, good income Strategy: Obtain a college education Tactics: Select a college and a major

how to finance college Operations: Register, buy books, take

courses, study, graduate, get job

Examples of Strategies Low costLow cost:: outsource operations to the third world

countries that have low labor costs. Scale-based strategiesScale-based strategies: : use the capital intensive methods

to achieve high output volume and low unit cost. SpecializationSpecialization: : focus on norrow product lines or limited

services to achieve higher quality. Flexible operationsFlexible operations: : focus on quick response. High qualityHigh quality: : focus on achieving higher quality than

competitors. ServiceService:: focus on various aspects of service (e.g., helpful,

courteous, reliable, etc.).

Strategy and Tactics Distinctive Competencies

The special attributes or abilities that give an organization a competitive edge. The most effective organizations use an approach that develops

distinctive competencies based on customer needs and wants. Strategy Factors

Price Quality Time Flexibility Service Location

Examples of Operations Strategies

Banks, ATMsConvenienceLocationLocation

DisneylandNordstroms

Superior customer service

ServiceService

Burger KingSupermarkets

VarietyVolume

FlexibilityFlexibility

Express Mail, Fedex,One-hour photo, UPS

Rapid deliveryOn-time delivery

TimeTime

Sony TVLexus, CadillacPepsi, Kodak, Motorola

High-performance design or high quality Consistent quality

QualityQuality

U.S. first-class postageMotel-6, Red Roof Inns

Low CostPricePrice

Global Strategy Many companies realized that strategic decisions must be

made with respect to globalization as it has increased. What works in one country may not work in another Strategies must be changed to account for these

differences Other issues

Political, social, cultural, and economic differences

Key External Factors Economic conditions: the general health, direction of the economy,

inflation, deflation, interest rates, tax laws and tariffs. Political conditions:favorable or unfavoable attitudes toward

business, political stability or instability and wars. Legal environment:government regulations, trade restriction,

minimum wage law, labor law and patent. Technology:product innovations and new design. Competition: price, quality, special features and the ease of market

entry. Markets: size, location, brand loyalties, potential for growth, long-

term stability, and demographics.

Key Internal FactorsKey Internal Factors Human Resources: the skills and abilities of managers and workers,

special talent, loyalty, dedication and experience. Facilities and equipment: capacities, location, age, cost and replace. Financial resources: funding, debt burden, cost of capital and cash

flow. Customers: loyalty and understanding of wants and needs. Products and services: quality, design and potential for new

products and services. Technology:the ability to integrate new technology. Suppliers: quality, flexibility, reliable and trustworthy in service.

Strategy Formulation To formulate an effective strategy, senior managers must take into

account the followings: Distinctive competencies

The special attributes or abilities that give an organization a competitive edge.

Environmental scanning The considering of events and trends that present threats or

opportunities for a company SWOT-link between organizational and operations strategies The is an approach shows strengths and weaknesses have an

internal focus and evaluated by operation people. The threats and opportunities have external focus and evaluated by marketing people.

Strategy Formulation Order qualifiers Characteristics that customers perceive as minimum

standards of acceptability to be considered as a potential purchase

Order qualifiers are key criteria that make the product or service eligible by the customers as a source of purchase.

Order winners Characteristics of an organization’s goods or services that

cause it to be perceived as better than the competition

Example of Order Winners and Qualifiers

Buyers of industrial chemicals expect a certain level of purity. Once the purity requirement has been satisfied, how-ever,

other performance dimensions such as cost, delivery speed, and flexibility – will be used to determine the best source.

From the supplier’s perspective product quality is the order qualifier and delivery speed, and flexibility are order winners.

Operations Strategy Operations strategy

The approach, consistent with organization strategy, that is used to guide the operations function.

Quality-based strategies Focuses on maintaining or improving the quality of an

organization’s products or services Time-based strategies

Focuses on reduction of time needed to accomplish tasks

Time-based Strategies

JAN FEB MAR APR MAY JUN

Planning

Processing

Changeover On time!

Designing

Delivery

Strategic OM Decisions Decision Area Affects

Product and service design Costs, quality liability and environmental

Capacity Cost structure, flexibility

Process selection and layout Costs, flexibility, skill level, capacity

Work design Quality of work life, employee safety, productivity

Location Costs, visibility

Quality Ability to meet or exceed customer expectations

Inventory Costs, shortages

Maintenance Costs, equipment reliability, productivity

Scheduling Flexibility, efficiency

Supply chains Costs, quality, agility, shortages, vendor relations

Projects Costs, new products, services, or operating systems

ProductivityProductivity Productivity

A measure of the effective use of resources, usually expressed as the ratio of output to input

Productivity ratios are used for Planning workforce requirements Scheduling equipment Financial analysis

Partial measures output/(single input)

Multi-factor measures output/(multiple inputs)

Total measure output/(total inputs)

Productivity =Outputs

Inputs

Factors Affecting Productivity

Other Factors Affecting Productivity Standardization Quality Use of Internet Computer viruses Searching for lost or misplaced items Scrap rates New workers Safety Shortage of IT workers Layoffs Labor turnover Design of the workspace Incentive plans that reward productivity

Key Steps In Productivity Develop productivity measures Develop methods for productivity improvements Establish reasonable goals Get management support Measure and publicize improvements Don’t confuse productivity with efficiency

Productivity GrowthProductivity Growth

Current Period Productivity – Previous Period ProductivityPrevious Period Productivity

Measures of ProductivityMeasures of Productivity Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced measure All inputs used to produce them

Partial Productivity MeasuresPartial Productivity Measures

Units of output per kilowatt-hourDollar value of output per kilowatt-hour

Energy Productivity

Units of output per dollar inputDollar value of output per dollar input

Capital Productivity

Units of output per machine hourmachine hour

Machine Productivity

Units of output per labor hourUnits of output per shiftValue-added per labor hour

Labor Productivity

Example-Example-ProductivityProductivity A company makes 7040 Units Produced and the costs are reported

as follows: Cost of labor of $1,000, Cost of materials is $520 and Cost of overhead is $2000.

What is the multifactor productivity?

MFP = OutputLabor + Materials + Overhead

MFP =(7040 units)$1000 + $520 + $2000

MFP = 2.0 units per dollar of input

Example-Example-ProductivityProductivity Growht Growht If productivity increased from 80 to 84.What is the productivity growth rate?

PGR = 84-80 80

PGR = 5%

X 100

Example-Example-ProductivityProductivity Determine the productivity for the following case.(a) Four workers installed 720 sq yards of carpeting in eight hours(b) A machine produced 68 usable pieces in two hours

(a) Productivity= Yards of carpet installed Labor hours worked

P = 7204 x 8

P = 22.5 yards/ hours

Example-Example-ProductivityProductivity

(b) Productivity= Useable pieces Production time

P = 68 2

P = 34 pieces/ hours

Example- Labor Example- Labor ProductivityProductivity A company that processes fruits and vegetables is able to

produce 400 cases of canned peaches in half an hour with four workers.

What is labor productivity

Labor Productivity = Quantity produced Labor hours

LP = 4004 x (1/2)

LP = 200 cases/ labor hours

Example- Labor Example- Labor ProductivityProductivity A ceramics company spent $ 3000 on a new kiln (oven) last

year. It was planned that it would cut energy usage 25% over the old kiln. The manager of the company wants to check the energy savings of the new oven and to look other measures of their productivity whether the change really was beneficial. The company’s data are the following:

Explain whether the modification were beneficial or not

3000 (Last Year) 2600 (This Year)Energy (kWh)

15000 (Last Year) 18000 (This Year)

Capital ($)

350 (Last Year) 375 (This Year) Labor (hour)

4000 (Last Year) 4000 (This Year)Production

Example- Labor Example- Labor ProductivityProductivity Labour 4000/350=11.42 (last year) 4000/375=10.66 (this

year) Capital 4000/15000=0.266 4000/18000=0.222 Energy 4000/3000=1.33 4000/2600=1.54 Labour change = 10.66-11.42=-0.76 Labour Growth = (10.66-11.42)/11.42= -6.66 Capital change = 0.222-0.266= - 0.044 Capital Growth = (0.222-0.266)/0.266= - 16.54 Energy change = 1.54-1.33=0.21 Energy Growth = (1.54-1.33)/ 1.33=15.78 The energy modifications did not generate the expected savings

because energy growth increased whereas labour and capital productivity decreased. Energy productivity growth is 15.78% so it is still lower than the target one (i.e. 25%).

Example- MFPExample- MFP Compute the MFP for an eight hour day where the usable

output was 300 units, produced by three workers who used 600 pounds of materials. Workers have an hourly wage of $ 20, and materials cost is $ 1 per pound. Overhead is 1.5 times labor cost.

MFP = Output Labor cost + Materials cost + Overhead cost

MFP = (300 units)3x8x20 + 600x1 + 3x8x20x1.5

MFP =0.167 units of output per dollar of input