Masters program

operations management

Lecture 2 competitiveness,
strategy & productivity

Year 2023
 Lecture 2 Objectives

After this lecture you should:

 List several ways that business organizations compete
 Name several reasons that business organizations fail
 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.
 Describe several factors that affect productivity.
2.1 competitiveness

Competitiveness relates to the effectiveness of an

organization in the marketplace relative to other
organizations that offer similar products or services.
Competitiveness is an important factor in determining
whether a company prospers, barely gets by, or fails.
Business organizations compete through some combination
of price, delivery time, and product or service
differentiation.
Marketing influences competitiveness in several ways,
including identifying consumer wants and needs, pricing,
and advertising and promotion.

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Operations has a major influence on competitiveness through

product and service design, cost, location, quality, response
time, flexibility, inventory and supply chain management, and
service. Many of these are interrelated.
1. Product and service design should reflect joint efforts of
many areas of the firm to achieve a match between
financial resources, operations capabilities, supply chain
capabilities, and consumer wants and needs.
2. Cost of an organization’s output is a key variable that
affects pricing decisions and profits. Cost-reduction efforts
are generally ongoing in business organizations.

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3. Location can be important in terms of 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 refers to materials, workmanship, design, and service.
Consumers judge quality in terms of how well they think a
product or service will satisfy its intended purpose.
5. Quick response One way is quickly bringing new or improved
products or services to the market. Another is being able to
quickly deliver existing products and services to a customer
after they are ordered, and still another is quickly handling
customer complaints.
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6. Flexibility is the ability to respond to changes. Changes might

relate to alterations in design features of a product or service.
7. Inventory management can be a competitive advantage by
effectively matching supplies of goods with demand.
8. SCM coordinating internal and external operations to achieve
timely and cost-effective delivery of goods
9. Service might involve after-sale activities such as delivery,
warranty work, and technical support.
10. Managers and workers provide a distinct competitive edge
by their skills and the ideas they create. E.g. How complaint
calls are handled can be a positive or a negative

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2.1.1 Why Some Organizations Fail

Organizations fail, or perform poorly, for a variety of

reasons. Being aware of those reasons can help managers
avoid making similar mistakes. Among the chief reasons are
the following:
1. Neglecting operations strategy.
2. Failing to take advantage of strengths and opportunities,
and/or failing to recognize competitive threats.
3. Putting too much emphasis on short-term financial
performance at the expense of research and development.

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4. Placing too much emphasis on product and service design

and not enough on process design and improvement.
5. Neglecting investments in capital and human resources.
6. Failing to establish good internal communications and
cooperation among different functional areas.
7. Failing to consider customer wants and needs.

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2.2. Organizational Strategies

Organizational strategy is important because it guides the

organization by providing direction for, and alignment of,
the goals and strategies of the functional units.
Moreover, strategies can be the main reason for the success
or failure of an organization.
There are three basic business strategies:
1. Low cost.
2. Responsiveness.
3. Differentiation from competitors.

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 Responsiveness relates to ability to respond to changing

demands. Differentiation can relate to product or service
features, quality, reputation, or customer service.
 Some organizations focus on a single strategy while
others employ a combination of strategies.
 One company that has multiple strategies is Amazon.com.
Not only does it offer low cost and quick, reliable
deliveries, it also excels in customer service.

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Some of different strategies an organization might choose from are:

Low cost. Outsource operations to 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, reliable, etc..
Sustainability. Focus on eco-friendly and energy-efficient operations.

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Cont…
 The most effective organizations use an approach that develops core
competencies based on customer needs as well as on what the
competition is doing.
 Marketing and operations work closely to match customer needs
with operations capabilities. Competitor competencies are important
for several reasons.
 For example, if a competitor is able to supply high quality products,
it may be necessary to meet that high quality as a baseline. However,
merely matching a competitor is usually not sufficient to gain
market share. It may be necessary to exceed the quality level of the
competitor or gain an edge by excelling in one or more other
dimensions, such as rapid delivery or service after the sale.
 E.g. Walmart has been very successful in managing its supply
chain, which has contributed to its competitive advantage.

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 Examples of operations strategies

Organization Strategy Operation Strategy Examples of Companies or Services

Low price Low Cost Walmart

Responsiveness Short processing time McDonald’s restaurants

On-time delivery FedEx

Differentiation: High-performance design and/or Sony TV

High quality high-quality Disneyland
processing Coca-Cola, PepsiCo
Consistent quality
Differentiation Innovation Apple, Google
Newness
Differentiation Flexibility Burger King (“Have it your way”)
Variety Volume TOYOTA

Differentiation: Superior customer service Amazon

Service
Differentiation: Convenience Banks, ATMs
Location

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2.2.1 OPERATIONS STRATEGY

 The organization strategy provides the overall direction for the

organization. It is broad in scope, covering the entire
organization. Operations strategy is narrower in scope,
dealing primarily with the operations aspect of the
organization.
 Operations strategy relates to products, processes, methods,
operating resources, quality, costs, lead times, and scheduling.
 Table 2.3 provides a comparison of an organization’s mission,
its overall strategy, and its operations strategy, tactics, and
operations.

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TABLE 2.3 Comparison of mission, organization strategy, and
operations strategy

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TABLE 2.4 Strategic operations management decisions

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Question 1

1. Which of the following is LEAST likely to be a low-

cost leadership competitive advantage?
A. Low overhead
B. Effective capacity use
C. Inventory management
D. Broad product line
E. Mass production

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2.3 productivity

 One of the primary responsibilities of a manager is to achieve

productive use of an organization’s resources. The term
productivity is used to describe this.
 Productivity is an index that measures output (goods and
services) relative to the input (labor, materials, energy, and
other resources) used to produce it. It is usually expressed as
the ratio of output to input:

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 Although productivity is important for all business

organizations, it is particularly important for organizations that
use a strategy of low cost, because the higher the productivity,
the lower the cost of the output.
 In business organizations, productivity ratios are used for
planning workforce requirements, scheduling equipment,
financial analysis, and other important tasks.
 Productivity has important implications for business
organizations and for entire nations. For nonprofit
organizations, higher productivity means lower costs; for
profit-based organizations, productivity is an important factor
in determining how competitive a company is.

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 For a nation, the rate of productivity growth is of great

importance. Productivity growth is the increase in productivity
from one period to the next relative to the productivity in the
preceding period. Thus,

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Computing Productivity

 Productivity measures can be based on a single input (partial

productivity), on more than one input (multifactor
productivity), or on all inputs (total productivity).
 The choice of productivity measure depends primarily on the
purpose of the measurement. If the purpose is to track
improvements in labor productivity, then labor becomes the
obvious input measure.
 Partial measures are often of greatest use in operations
management. The units of output used in productivity
measures depend on the type of job performed. The following
are examples of labor productivity:

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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.

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 Determine the multifactor productivity for the combined

input of labor and machine time using the following data:
Output: 7,040 units
Input:
 Labor: $1,000
 Materials: $520
 Overhead: $2,000

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Cont…

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 Productivity measures are useful on a number of levels. For

an individual department or organization, productivity
measures can be used to track performance over time.
 This allows managers to judge performance and to decide
where improvements are needed.
 For example, if productivity has slipped in a certain area,
operations staff can examine the factors used to compute
productivity to determine what has changed and then devise
a means of improving productivity in subsequent periods.

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Cont…

 Productivity measures also can be used to judge the

performance of an entire industry or the productivity of a
country as a whole. These productivity measures are
aggregate measures.
 In essence, productivity measurements serve as scorecards of
the effective use of resources. Business leaders are concerned
with productivity as it relates to competitiveness:
 If two firms both have the same level of output but one
requires less input because of higher productivity, that one will
be able to charge a lower price and consequently increase its
share of the market. Or that firm might elect to charge the
same price, thereby reaping a greater profit.

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Cont…

Productivity in the Service Sector

 Service productivity is more problematic than manufacturing
productivity. In many situations, it is more difficult to
measure, and thus to manage, because it involves intellectual
activities and a high degree of variability.
 Think about medical diagnoses, surgery, consulting, legal
services, customer service, and computer repair work. This
makes productivity improvements more difficult to achieve.
Nonetheless, because service is becoming an increasingly
large portion of our economy, the issues related to service
productivity will have to be dealt with.

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Cont…

 A useful measure closely related to productivity is process

yield. Where products are involved, process yield is defined as
the ratio of output of good product (i.e., defective product is
not included) to the quantity of raw material input.
 Where services are involved, process yield measurement is
often dependent on the particular process. For example, in a
car rental agency, a measure of yield is the ratio of cars rented
to cars available for a given day.
 In education, a measure for college and university admission
yield is the ratio of student acceptances to the total number of
students approved for admission.

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Factors That Affect Productivity

Numerous factors affect productivity. Generally, they are
methods, capital, quality, technology, and management.
A commonly held misconception is that workers are the main
determinant of productivity.
According to that theory, the route to productivity gains involves
getting employees to work harder.
 However, the fact is that many productivity gains in the past
have come from technological improvements. Familiar
examples include Fax machines, Copiers, Smart phones, the
Internet, search engines, computers Apps, etc.

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 However, technology alone won’t guarantee productivity

gains; it must be used wisely and attentively. Without
careful planning, technology can actually reduce
productivity, especially if it leads to inflexibility, high
costs, or mismatched operations.
 Another current productivity pitfall results from
employees’ use of computers or smart phones for non
work-related activities (playing games or sports scores on
the Internet or smart phones, and texting friends and
relatives).

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Other factors that affect productivity

 Standardizing processes and procedures wherever possible

to reduce variability can have a significant benefit for both
productivity and quality.
 Use of the Internet can lower costs of a wide range of
transactions, thereby increasing productivity. It is likely that
this effect will continue to increase productivity in the
predictable future.
 Computer viruses can have an immense negative impact on
productivity.
 Searching for lost or misplaced items wastes time, hence
negatively affecting productivity.

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 Scrap rates have an adverse effect on productivity,

signaling inefficient use of resources.
 New workers tend to have lower productivity than seasoned
workers. Thus, growing companies may experience a
productivity lag.
 Safety should be addressed. Accidents can take a toll on
productivity.
A shortage of technology-savvy workers hampers the ability
of companies to update computing resources, generate and
sustain growth, and take advantage of new opportunities.

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o Layoffs. The effect can be positive and negative. Initially,

productivity may increase after a layoff, because the workload
remains the same but fewer workers do the work. However, as
time goes by, the remaining workers may experience an
increased risk of stress, and they may fear additional job cuts.
The most capable workers may decide to leave.
 Labor turnover has a negative effect on productivity;
replacements need time to get up to speed.
 Design of the workspace For e.g., having tools and other
work items within easy reach can positively impact
productivity.
 Incentive plans that reward productivity increases

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Cont…

 And there are still other factors that affect productivity, such
as equipment breakdowns and shortages of parts or materials.
The education level and training of workers and their health
can greatly affect productivity.
 The opportunity to obtain lower costs due to higher
productivity elsewhere is a key reason many organizations
turn to outsourcing. Hence, an alternative to outsourcing can
be improved productivity.
 Moreover, as a part of their strategy for quality, the best
organizations strive for continuous improvement. Productivity
improvements can be an important aspect of that approach.

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Improving Productivity

A company or a department can take a number of key steps

toward improving productivity:
1. Develop productivity measures for all operations is the 1st
step in managing and controlling an operation.
2. Look at the system as a whole in deciding which operations
are most critical. It is overall productivity that is important.
Managers need to reflect on the value of potential
productivity improvements before okaying improvement
efforts. The issue is effectiveness. There are several aspects
of this. One is to make sure the result will be something
customers want.

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For example, if a company is able to increase its output through

productivity improvements, but then is unable to sell the
increased output, the increase in productivity isn’t effective.
Second, it is important to adopt a systems viewpoint: A
productivity increase in one part of an operation that doesn’t
increase the productivity of the system would not be effective.
For e.g., a system consists of a sequence of two operations,
where the output of the first operation is the input to the second
operation, and each operation can complete its part of the process
at a rate of 20units/hour. If the productivity of the first operation
is increased, but the productivity of the second operation is not,
the output of the system will still be 20units per hour.

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3. Develop methods for achieving productivity

improvements, such as soliciting ideas from workers
(perhaps organizing teams of workers, engineers, and
managers), 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 improvements and publicize them.

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 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.
 For example, an efficiency perspective on mowing a
lawn given a hand mower would focus on the best way to
use the hand mower; a productivity perspective would
include the possibility of using a power mower.

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End of Lecure 2

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