Faculty of Business Administration

BMGT302- Operations Management

Competitiveness, Strategy, and Productivity

Outline
1. Primary ways that business organizations compete

2. Reasons for the poor competitiveness of some companies

3. What is strategy and why strategy is important

4. Organization strategy and operations strategy

5. Quality and Time-based strategies

6. Productivity and its importance to organizations and countries

7. Reasons for poor productivity and ways of improving it

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 A Cold Hard Fact
Global Competition: those who understand how to play the
game will succeed.
Better quality, higher productivity, lower costs, and the ability to
respond quickly to customer needs are more important than
ever and…
the bar is getting higher

Competitiveness
• Companies must be competitive to sell their goods
and services in the marketplace.
• Competitiveness:
– How effectively an organization meets the wants and needs
of customers relative to others that offer similar products or
services
– Organizations compete through some combination of their
marketing and operations functions
• What do customers want?
• How can these customer needs best be satisfied?

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 Marketing’s Influence
1. Identifying consumer wants and/or needs -central to
competitiveness (the ideal is to achieve a perfect match between those wants
and needs and the organization’s goods and/or services).
2. Pricing and quality- (important to understand the trade-off decision consumers
make between price and quality).
3. Advertising and promotion

Businesses Compete Using Operations

1. Product and service design (Special characteristics or features of a product or service
can be a key factor in consumer buying decisions. Other key factors include innovation and the
time-to-market for new products and services).
2. Cost (Organizations with higher productivity rates than their competitors have a competitive
cost advantage. A company may outsource a portion of its operation to achieve lower costs,
higher productivity, or better quality).
3. Location (cost and convenience for customers. Location near inputs can result in lower input
costs. Location near markets can result in lower transportation costs and quicker delivery
times)
4. Quality (materials, workmanship, design, and service. Customers are generally willing to pay
more for higher quality)
5. Quick response (bringing new or improved products, quickly deliver and handling
customer complaints)

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 Businesses Compete Using Operations
6. Flexibility (alterations in design features of a product or service, or to the volume
demanded by customers, or the mix of products or services offered by an organization.)
7. Inventory management (competitive advantage by effectively matching supplies of
goods with demand)
8. Supply chain management (coordinating internal and external operations to achieve
timely and cost-effective delivery of goods throughout the system)
9. Service (after sale activities, service quality)
10. Managers and workers (competent and motivated employees can provide a distinct
competitive advantage by their skills and the ideas they create)

Why Some Organizations Fail

1. Neglecting operations strategy
2. Failing to take advantage of strengths and opportunities
3. Failing to recognize competitive threats
4. Too much emphasis in product and service design and not
enough on improvement
5. Neglecting investments in capital and human resources
6. Failing to establish good internal communications and
cooperation
7. Failing to consider customer wants and needs

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 Hierarchical Planning
Mission

Goals

Organizational Strategies

Functional Strategies

Tactics

Examples of Different Strategies

• Low cost. Outsource operations to third-world countries that have
low labor costs.
• Scale-based strategies. Use capital-intensive methods to achieve
high output volume and low unit costs.
• Specialization. Focus on narrow product lines or limited service to
achieve higher quality.
• Newness. Focus on innovation to create new products or services.
• Flexible operations. Focus on quick response and/or customization.
• High quality. Focus on achieving higher quality than competitors.
• Service. Focus on various aspects of service (e.g., helpful,
courteous, reliable, etc.).
• Sustainability. Focus on environmental-friendly and energy-efficient
operations.

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 Operations Strategy
• Organization strategy provides
– the overall direction for the organization.
– broad in scope, covering the entire organization.
• Operations strategy
– narrower in scope,
– dealing primarily with the operations aspect of the organization.
• Operations strategy
– The approach, consistent with organization strategy, that is used to
guide the operations function.
– Relates to products, processes, methods, operating resources,
quality, costs, lead times, and scheduling.

Strategic OM Decision Areas

Decision Area What the Decisions Affect

Product and service design Costs, quality, liability, and environmental issues
Capacity Cost, structure, flexibility
Process selection and layout Costs, flexibility, skill level needed, 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

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 Quality-Based Strategies
• Quality-based strategy
– Strategy that focuses on quality in all phases of an
organization
• Pursuit of such a strategy is rooted in a number of
factors:
– Trying to overcome a poor quality reputation
– Desire to maintain a quality image
– A desire to catch up with the competition
– can be part of another strategy such as cost reduction,
increased productivity, or time, all of which benefit from
higher quality

Time-Based Strategies
• Time-based strategies
– Strategies that focus on the reduction of time
needed to accomplish tasks
• e.g., develop new products or services and market
them, respond to a change in customer demand, or
deliver a product or perform a service.
• It is believed that by reducing time, costs are lower,
quality is higher, productivity is higher, time-to-market
is faster, and customer service is improved

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 Time-Based Strategies
 Areas where organizations have achieved time
reductions:
• Planning time
• Product/service design time
• Processing time
• Changeover time (The time needed to change from producing one
type of product or service to another)
• Delivery time
• Response time for complaints

Agile Operations
 Agile operations
• A strategic approach for competitive advantage that
emphasizes the use of flexibility to adapt and prosper in an
environment of change
• Involves the blending of several core competencies:
– Cost
– Quality
– Reliability
– Flexibility

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 Productivity
• Productivity
 A measure of the effective use of resources, usually
expressed as the ratio of output (goods and services)
to input (labor, materials, management, energy, and
other resources) used to produce it.
 is a basic measure of performance for economies,
industries, firms, and processes.
 is particularly important for organizations that use a
strategy of low cost, because the higher the
productivity, the lower the cost of the output.

Why Productivity Matters

• High productivity is linked to higher standards of living enjoyed by
people in industrial nations.
• Higher productivity relative to the competition leads to
competitive advantage in the marketplace
– Pricing and profit effects
• For an industry, high relative productivity makes it less likely it will
be supplanted by foreign industry
• Productivity measures can be used to track performance over
time. This allows managers to judge performance and to decide
where improvements are needed.
• Improving productivity is a major trend in operations
management because all firms face pressures to improve their
processes and supply chain so as to compete with their domestic
and foreign competitors.

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 Productivity Measures
Output
Productivity =
Input

Output Ouput Output

Partial Measures ; ;
Single Input Labor Capital

Output Ouput Output
Multifactor Measures ; ;
Multiple Inputs Labor +Machine Labor +Capital +Energy

Goods or services produced
Total Measure
All inputs used to produce them

• When solving productivity problems, make sure that the value of outputs and
inputs is computed over the same time period, such as day, week, month, or
 year.
• Also, when evaluating a change in productivity, compute the productivity before
and after the expected change and calculate the percentage difference.

Productivity Calculation Example

Determine the productivity for these cases:
a. Four workers installed 720 square yards of carpeting in
eight hours.
b. A machine produced 70 pieces in two hours. However,
two pieces were unusable.

What is the
productivity?

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 Solution

Productivity Calculation Example-2

Units produced: 5,000
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2x labor cost

What is the
multifactor
productivity?

Note: The unit of measure must be the same for all factors in the denominator.

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 Solution

Output
Multifactor Productivity=
Labor +Material+Overhead

5,000 units  $30/unit

=
 (500 hours  $25/hour) + $5,000 + (2(500 hours  $25/hour))

$150,000
=
$42,500
= 3.5294

Productivity Growth

Current productivity- Previous productivity

Productivity Growth = 100%
Previous productivity

Example: Labor productivity on the ABC assembly line was 25 units per hour in
 2006. In 2007, labor productivity was 23 units per hour. What was the
productivity growth from 2006 to 2007?

23 - 25
Productivity Growth = 100%  8%
25



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 Service Sector Productivity
 Service sector productivity is difficult to measure and
manage because
 It involves intellectual activities
 It has a high degree of variability
 A useful measure closely related to productivity is process
yield
 Where products are involved
 ratio of output of good product to the quantity of raw material input.
 Where services are involved, process yield measurement is
often dependent on the particular process:
 ratio of cars rented to cars available for a given day
 ratio of student acceptances to the total number of students approved
for admission.

Factors Affecting Productivity

Methods

Capital Quality

Technology Management

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 Improving Productivity
1. Develop productivity measures for all operations. Measurement is the first
step in managing and controlling an operation.
2. Determine critical (bottleneck) operations
3. Develop methods for productivity improvements such as soliciting ideas
from workers, studying how other firms have increased productivity, and
reexamining the way work is done.
4. Establish reasonable goals for improvement
5. Make it clear that management supports and encourages productivity
improvement. Consider incentives to reward workers for contributions.
6. Measure and publicize improvements
Don’t confuse productivity with efficiency. Efficiency is a narrower concept
that pertains to getting the most out of a fixed set of resources; productivity
is a broader concept that pertains to effective use of overall resources.

Problems
1. A company that processes fruits and vegetables is able to produce 400 cases
of canned peaches in one-half hour with four workers. What is labor
productivity?
2. A wrapping-paper company produced 2,000 rolls of paper one day. Labor cost
was $160, material cost was $50, and overhead was $320. Determine the
multifactor productivity.
3. Compute the multifactor productivity measure for an eight-hour day in which
the usable output was 300 units, produced by three workers who used 600
pounds of materials. Workers have an hourly wage of $20, and material cost
is $1 per pound. Overhead is 1.5 times labor cost.
4. A health club has two employees who work on lead generation. Each
employee works 40 hours a week, and is paid $20 an hour. Each employee
identifies an average of 400 possible leads a week from a list of 8,000 names.
Approximately 10 percent of the leads become members and pay a onetime
fee of $100. Material costs are $130 per week, and overhead costs are $1,000
per week. Calculate the multifactor productivity for this operation in fees
generated per dollar of input.

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 Problems
Suds and Duds Laundry washed and pressed the following number
of dress shirts per week.

Week Work Crew Total hours Shirts

1 Sud and Dud 24 68
2 Sud and Jud 46 130
3 Sud, Dud, and Jud 62 152
4 Sud, Dud, and Jud 51 125
5 Dud and Jud 45 131

a. Calculate the Labor Productivity ration for each week

b. Explain the labor productivity pattern exhibited by the data.

Problems
Collins Title Insurance Ltd. wants to evaluate its labor and
multifactor productivity with a new computerized title-search
system. The company has a staff of four, each working 8 hours per
day (for a payroll cost of $640/day) and overhead expenses of $400
per day. Collins processes and closes on 8 titles each day. The new
computerized title-search system will allow the processing of 14
titles per day. Although the staff, their work hours, and pay are the
same, the overhead expenses are now $800 per day.

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