College of Business Administration and Accountancy
Alabang–Zapote Road, Pamplona 3, Las Piñas City, 1740
SUBJECT: OPERATIONS MANAGEMENT
TOPIC/S: COMPETITIVENESS, STRATEGY, AND PRODUCTIVITY
NO. OF HOURS: 3 HOURS
REFERENCE: Operations Management 7th Ed., William Stevenson
LECTURE NOTES
Competitiveness - how effectively an organization meets the wants and needs of customers relative to others that
offer similar goods or services.
How marketing influences competitiveness:
o Identifying consumer wants and/or needs – the ideal is to achieve a perfect march between those
wants needs and the organization’s goods and/or services.
o Price and quality – it is important to understand the trade-off decision consumers make between
price and quality.
o Advertising and promotion – these are ways organizations can inform potential customers about
features of their products or services, and attract buyers.
Operations influences the following, of which are interrelated:
o Product and service design – it 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. It includes innovation and the time-to-market for new products and services.
o Cost - a key variable that affects pricing decisions and profits, in which cost-reduction efforts are
generally ongoing in business organizations. Productivity is an important determinant of cost.
Organizations with higher productivity rates than their competitors have a competitive cost
advantage.
o Location – location near inputs can result in lower input costs. Location near markets can result in
lower transportation costs and quicker delivery times.
o 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.
o Quick response – it can be a competitive advantage. One way is quickly bringing new or improved
products or services to the market, or to quickly deliver existing products and services to a
customer after they are ordered, or to quickly handle customer complaints.
o Flexibility - the ability to respond to changes. High flexibility can be a competitive advantage in a
changeable environment.
o Inventory management – this can be a competitive advantage by effectively matching supplies of
goods with demand.
o Supply chain management – it involves coordinating internal and external operations (buyers and
suppliers) to achieve timely and cost-effective delivery of goods throughout the system.
o Service – this might involve after-sale activities customers perceive as value-added, such as
delivery, setup, warranty work, and technical support.
o Managers and workers – these are the people at the heart and soul of an organization, and if they
are competent and motivated, they can provide a distinct competitive edge by their skills and the
ideas they create.
REASONS WHY ORGANIZATIONS FAIL
Neglecting operations strategy.
Failing to take advantage of strengths and opportunities, and/or failing to recognize competitive threats.
Putting too much emphasis on short-term financial performance at the expense of research and
development.
Placing too much emphasis on product and service design and not enough on process design and
improvement.
Neglecting investments in capital and human resources.
Failing to establish good internal communications and cooperation among different functional areas.
Failing to consider customer wants and needs.
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 strategies.
MISSION AND STRATEGIES
An organization’s mission is the reason for its existence. It is expressed in its mission statement.
Mission statement – it states the purpose of an organization. It is the basis for organizational goals. Goals
serve as a foundation for the development of organizational strategies.
Three basic business strategies:
o Low cost
o Responsiveness
o Differentiation from customers
Core Competencies – these are special attributes or abilities that give an organization a competitive edge.
The most effective organizations use an approach that develops core competencies based on customer
needs as well as on what the competition is doing. To be effective, core competencies and strategies need
to be aligned.
STRATEGY FORMULATION
It is almost always critical to the success of a strategy.
To formulate an effective strategy, the managers must take into consideration the core competencies of the
organization by scanning the environment.
This is referred to as the SWOT approach.
EXTERNAL
Opportunities Threats
1 1
2 2
3 3
4 4
5 5
Strength SO Strategies ST Strategies
1 1 1
2 2 2
3 3 3
4 4 4
IN
TE 5 5 5
RN
Weakness WO Strategies TW Strategies
AL
1 1 1
2 2 2
3 3 3
4 4 4
5 5 5
The alternative to SWOT analysis is Michael Porter’s FIVE FORCES MODEL. This model takes into
consideration the threat of new competition, the threat of substitute products or services, the bargaining
power of suppliers, and the intensity of competitions.
Threat of
new
entrants Bargaining
Competitive
power of
rivaly
customers
Threat of FIVE Bargaining
substitute FORCES power of
products MODEL suppliers
When formulating a successful strategy, the following should be considered:
o Order qualifiers - these are characteristics that potential customers perceive as minimum
standards of acceptability for a product to be considered for purchase. However, that may not be
sufficient to get a potential customer to purchase from the organization.
o Order winners – these are characteristics of an organization’s goods or services that cause them to
be perceived as better than the competition.
Key external factors:
o Economic conditions - the general health and direction of the economy, inflation and deflation,
interest rates, tax laws, and tariffs.
o Political conditions - favorable or unfavorable attitudes toward business, political stability or
instability, and wars.
o Legal environment - antitrust laws, government regulations, trade restrictions, minimum wage
laws, product liability laws and recent court experience, labor laws, and patents.
o Technology - rate at which product innovations are occurring, current and future process
technology (equipment, materials handling), and design technology.
o Competition - number and strength of competitors, the basis of competition (price, quality, special
features), and the ease of market entry.
o Markets - size, location, brand loyalties, ease of entry, potential for growth, long-term stability, and
demographics.
Key internal factors:
o Human resources - skills and abilities of managers and workers, special talents (creativity,
designing, problem solving), loyalty to the organization, expertise, dedication, and experience.
o Facilities and equipment - capacities, location, age, and cost to maintain or replace can have a
significant impact on operations.
o Financial resources - cash flow, access to additional funding, existing debt burden, and cost of
capital are important considerations.
o Customers - loyalty, existing relationships, and understanding of wants and needs are important.
o Products and services - existing products and services, and the potential for new products and
services.
o Technology - existing technology, the ability to integrate new technology, and the probable impact
of technology on current and future operations.
o Suppliers - supplier relationships, dependability of suppliers, quality, flexibility, and service are
typical considerations.
o Others - patents, labor relations, company or product image, distribution channels, relationships
with distributors, maintenance of facilities and equipment, access to resources, and access to
markets.
KEY STEPS IN STRATEGY FORMULATION
Link strategy directly to the organization's
mission and vision.
Assess strengths, weaknesses, threats and
opportunities, and identify core
competencies.
Identify order winners and order qualifiers.
Select one or two strategies (e.g., low cost,
speed, customer service) to focus on.
OPERATIONS STRATEGY
Operations strategy - relates to products, processes, methods, operating resources, quality, costs, lead times, and
scheduling.
In order for operations strategy to be truly effective, it is important to link it to organization strategy; that
is, the two should not be formulated independently. Rather, formulation of organization strategy should
take into account the realities of operations’ strengths and weaknesses, capitalizing on strengths and
dealing with weaknesses.
Quality and Time Strategies
Quality-based strategies - focus on maintaining or improving the quality of an organization’s products or
services. Quality is generally a factor in both attracting and retaining customers.
Time-based strategies - focus on reducing the time required to accomplish various activities (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).
Time reduction can be achieved through:
o Planning time
o Product/service design time
o Processing time
o Changeover time
o Delivery time
o Response time for complaints
THE BALANCED SCORECARD
It is a top-down management system that organizations can use to clarify their vision and strategy and
transform them into action.
The idea was to move away from a purely financial perspective of the organization and integrate other
perspectives such as customers, internal business processes, and learning and growth.
Using this approach, managers develop objectives, metrics, and targets for each objective and initiatives to
achieve objectives, and they identify links among the various perspectives.
This, however, has no role in strategy formulation.
PRODUCTIVITY
It is an index that measures output relative to the input used to produce it. It is expressed as a ratio of
OUTPUT to INPUT.
Productivity = Output / Input
Computing for productivity:
EXAMPLE PROBLEMS. Determine the productivity of the following:
1. A manager checked production records and found that a worker produced 160 units while working 40
hours. In the previous week, the same worker produced 138 units while working 36 hours. Did the
worker’s productivity increase, decrease, or remain the same? Explain.
2. A wrapping-paper company produced 2,000 rolls of paper one day. Labor cost was P160, material cost was
P50, and overhead was P320. 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 P20,
and material cost is P1 per pound. Overhead is 1.5 times labor cost.
FACTORS THAT AFFECT PRODUCTIVITY
Common misconception is that workers are the main determinant of productivity. However, many
productivity gains in the past have come from technological improvements. It does not however, guarantee
productivity gains. Productivity can be gained through careful planning.
Other factors that affect productivity include the following:
o Standardizing
o Quality differences
o Use of the internet
o Computer viruses
o Searching for lost or misplaced items
o Scrap rates
o New workers
o Safety
o Shortage of technology savvy workers
o Lay-offs
o Labor turnover
o Design of the workspace
o Incentive plans that reward productivity
How to improve productivity:
o Develop productivity measures for all operations
o Look at the system as a whole in deciding which operations are most critical
o Develop methods for achieving productivity improvements
o Establish reasonable goals for improvement
o Show that management supports and encourages productivity improvement
o Measure improvements and publicize them