Operations Strategy in a Global Environment PDF

Operations Strategy in a Global 2 C H A P T E R Environment...

Operations Strategy in a Global 2 C H A P T E R Environment CHAPTER GLOBAL COMPANY PROFILE: Boeing OUTLINE ◆ ◆ A Global View of Operations and Supply Strategy Development and Chains 32 Implementation 41 ◆ ◆ Developing Missions and Strategies 35 Strategic Planning, Core ◆ Competencies, and Outsourcing 44 Achieving Competitive Advantage Through ◆ Operations 36 Global Operations Strategy ◆ Options 49 Issues in Operations Strategy 40 Alaska Airlines 29 M02_HEIZ0422_12_SE_C02.indd 29 03/11/15 5:32 PM  C H A P T E R 2 GLOBAL COMPANY PROFILE Boeing’s Global Supply-Chain Strategy Boeing Yields Competitive Advantage B oeing’s strategy for its 787 Dreamliner is unique for its technologically advanced product de- sign and vast global supply chain. The Dreamliner incorporates the latest in a wide range of aerospace technologies, from airframe and engine design to super-lightweight titanium-graphite laminate and carbon-fiber composites. The electronic monitoring system that allows the airplane to report maintenance Dan Lamont/Alamy Peter Carey/Alamy With the 787’s state-of-the-art design, more spacious interior, and global suppliers, Boeing has garneredd recordd sales l worldwide. ld id Some of the International Suppliers requirements in real time to ground-based of Boeing 787 Components computer systems is another product innova- SUPPLIER HQ COUNTRY COMPONENT tion. Boeing’s collaboration with General Electric Latecoere France Passenger doors and Rolls-Royce has resulted in the develop- Labinel France Wiring Dassault France Design and product life cycle ment of more efficient engines and an emis- management software sions reduction of 20%. The advances in engine Messier-Bugatti France Electric brakes Thales France Electrical power conversion system technology contribute as much as 8% of the Messier-Dowty France Landing gear structure increased fuel/payload efficiency of the new Diehl Germany Interior lighting Cobham UK Fuel pumps and valves airplane, representing a nearly two-generation Rolls-Royce UK Engines jump in technology. Smiths Aerospace UK Central computer system Boeing’s design group at its Everett, BAE Systems UK Electronics Alenia Aeronautica Italy Upper center fuselage Washington, facility led an international team of Toray Industries Japan Carbon fiber for wing and tail units aerospace companies in development of this Fuji Heavy Industries Japan Center wing box Kawasaki Heavy Ind. Japan Forward fuselage, fixed sections of wing state-of-the-art plane. Technologically advanced Teijin Seiki Japan Hydraulic actuators design, new manufacturing processes, and Mitsubishi Heavy Ind. Japan Wing box Chengdu Aircraft China Rudder a committed international supply chain have Hafei Aviation China Parts helped Boeing and its partners achieve unprec- Korean Airlines South Korea Wingtips edented levels of performance in design and Saab Sweden Cargo and access doors manufacture. 30 M02_HEIZ0422_12_SE_C02.indd 30 03/11/15 5:32 PM  Tim Kelly/Reuters Copyright Boeing State-of-the-art composite sections of the 787 are built around the world and Components from Boeing’s worldwide supply chain come together on assembly shipped to Boeing for final assembly. lines in Everett, Washington, and Charleston, South Carolina. Although components come from throughout the world, about 35% of the 787 structure comes from Japanese companies. The 787 is global not only because it has a range of of these suppliers developed technologies, design concepts, 8,300 miles, but also because it is built all over the world. and major systems for the 787. Some of them are shown With a huge financial commitment of over $5 billion, Boeing in the table. The partners brought commitment to the table. needed partners. The global nature of both the technology The expectation is that countries that have a stake in the and the aircraft market meant finding exceptional engineering Dreamliner are more likely to buy from Boeing than from its talent and suppliers, wherever they might be. It also meant European competitor, Airbus. developing a culture of collaboration and integration with Japanese companies are producing over 35% of the firms willing to step up to the risk associated with this revolu- project, and Italy’s Alenia Aeronautica is building an addi- tionary and very expensive new product. tional 10% of the plane. State-of-the-art technology, multinational aircraft certi- The innovative Dreamliner, with its global range and fications, the cross-culture nature of the communications, worldwide supply chain, is setting new levels of operational and logistical challenges all added to the supply chain risk. efficiency. As a result, it is the fastest-selling commercial jet In the end, Boeing accepted the challenge of teaming with in history with over 1,100 planes sold. Boeing’s Dreamliner more than 300 suppliers in over a dozen countries. Twenty reflects the global nature of business in the 21st century. Boeing’s collaborative technology enables a “virtual workspace” that allows Everett, Washington-based engineers, as well as partners in Australia, Japan, Italy, Canada, and across the United States, to make concurrent design changes to the airplane in real time. Copyright Boeing Digitally designing, building, and testing before production not only reduces design time and errors, but also improves efficiencies in component manufacturing and assembly. 31 M02_HEIZ0422_12_SE_C02.indd 31 03/11/15 5:32 PM  LO 2.1 Define mission and strategy 36 L E A RNING LO 2.2 Identify and explain three strategic approaches to competitive advantage 36 OBJECTIVES LO 2.3 LO 2.4 Understand the significance of key success factors and core competencies 42 Use factor rating to evaluate both country and outsource providers 47 LO 2.5 Identify and explain four global operations strategy options 49 A Global View of Operations and Supply Chains Today’s successful operations manager has a global view of operations strategy. Since the early 1990s, nearly 3 billion people in developing countries have overcome the cultural, reli- gious, ethnic, and political barriers that constrain productivity. And now they are all play- ers on the global economic stage. As these barriers disappear, simultaneous advances are being made in technology, reliable shipping, and inexpensive communication. These changes mean that, increasingly, firms find their customers and suppliers located around the world. The unsurprising result is the growth of world trade (see Figure 2.1), global capital markets, and the international movement of people. This means increasing economic integration and interdependence of countries—in a word, globalization. In response, organizations are hastily extending their distribution channels and supply chains globally. The result is innovative strat- egies where firms compete not just with their own expertise but with the talent in their entire global supply chain. For instance: ◆ Boeing is competitive because both its sales and supply chain are worldwide. ◆ Italy’s Benetton moves inventory to stores around the world faster than its competition with rapid communication and by building exceptional flexibility into design, production, and distribution. ◆ Sony purchases components from a supply chain that extends to Thailand, Malaysia, and elsewhere around the world for assembly of its electronic products, which in turn are dis- tributed around the world. ◆ Volvo, considered a Swedish company, was purchased by a Chinese company, Geely. But the current Volvo S40 is assembled in Belgium, South Africa, Malaysia, and China, on a platform shared with the Mazda 3 (built in Japan) and the Ford Focus (built in Europe). ◆ China’s Haier (pronounced “higher”) is now producing compact refrigerators (it has one- third of the U.S. market) and refrigerated wine cabinets (it has half of the U.S. market) in South Carolina. Figure 2.1 70 Growth of World Trade as World trade as a % of world GDP 60 a Percent of World GDP Sources: World Bank; World Trade Organization; and IMF. 50 40 30 20 10 0 1970 1980 1990 2000 2010 2020 Year 32 M02_HEIZ0422_12_SE_C02.indd 32 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 33 Globalization means customers, talent, and suppliers are worldwide. The new standards of global competitiveness impact quality, variety, customization, convenience, timeliness, and cost. Globalization strategies contribute efficiency, adding value to products and services, but they also complicate the operations manager’s job. Complexity, risk, and competition are in- tensified, forcing companies to adjust for a shrinking world. We have identified six reasons domestic business operations decide to change to some form of international operation. They are: 1. Improve the supply chain. 2. Reduce costs and exchange rate risk. 3. Improve operations. 4. Understand markets. 5. Improve products. 6. Attract and retain global talent. Let us examine, in turn, each of the six reasons. Improve the Supply Chain The supply chain can often be improved by locating facili- ties in countries where unique resources are available. These resources may be human resource expertise, low-cost labor, or raw material. For example, auto-styling studios from throughout the world have migrated to the auto mecca of southern California to ensure the necessary ex- pertise in contemporary auto design. Similarly, world athletic shoe production has migrated from South Korea to Guangzhou, China; this location takes advantage of the low-cost labor and production competence in a city where 40,000 people work making athletic shoes for the world. And a perfume manufacturer wants a presence in Grasse, France, where much of the world’s perfume essences are prepared from the flowers of the Mediterranean. Reduce Costs and Exchange Rate Risk Many international operations seek to reduce risks associated with changing currency values (exchange rates) as well as take advan- tage of the tangible opportunities to reduce their direct costs. (See the OM in Action box “U.S. Cartoon Production at Home in Manila.”) Less stringent government regulations on a wide variety of operations practices (e.g., environmental control, health and safety) can also reduce indirect costs. Shifting low-skilled jobs to another country has several potential advantages. First, and most obviously, the firm may reduce costs. Second, moving the lower-skilled jobs to a lower- cost location frees higher-cost workers for more valuable tasks. Third, reducing wage costs allows the savings to be invested in improved products and facilities (and the retraining of existing workers, if necessary) at the home location. Finally, having facilities in countries with different currencies can allow firms to finesse currency risk (and related costs) as economic conditions dictate. OM in Action U.S. Cartoon Production at Home in Manila Fred Flintstone is not from Bedrock. He is actually from Manila, capital of Artists there draw, paint, and film about the Philippines. So are Tom and Jerry, Aladdin, and Donald Duck. More 20,000 sketches for a 30-minute episode. than 90% of American television cartoons are produced in Asia and India, The cost of $130,000 to produce an episode with the Philippines leading the way. With their natural advantage of English in the Philippines compares with $160,000 in as an official language and a strong familiarity with U.S. culture, animation Korea and $500,000 in the United States. companies in Manila now employ more than 1,700 people. Filipinos under- stand Western culture, and “you need to have a group of artists that can Sources: Animation Insider (March understand the humor that goes with it,” says Bill Dennis, a Hanna-Barbera 30, 2011); The New York Times artisticco/Fotolia (February 26, 2004): and The Wall executive. Street Journal (August 9, 2005). Major studios like Disney, Marvel, Warner Brothers, and Hanna-Barbera send storyboards—cartoon action outlines—and voice tracks to the Philippines. M02_HEIZ0422_12_SE_C02.indd 33 03/11/15 5:32 PM  34 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT Maquiladoras The United States and Mexico have created maquiladoras (free trade zones) that allow manu- Mexican factories located along facturers to cut their costs by paying only for the value added by Mexican workers. If a U.S. the U.S.–Mexico border that re- manufacturer, such as Caterpillar, brings a $1,000 engine to a maquiladora operation for as- ceive preferential tariff treatment. sembly work costing $200, tariff duties will be charged only on the $200 of work performed in Mexico. Trade agreements also help reduce tariffs and thereby reduce the cost of operating facili- World Trade Organization ties in foreign countries. The World Trade Organization (WTO) has helped reduce tariffs from 40% (WTO) in 1940 to less than 3% today. Another important trade agreement is the North American Free An international organization that Trade Agreement (NAFTA). NAFTA seeks to phase out all trade and tariff barriers among Canada, promotes world trade by lowering Mexico, and the U.S. Other trade agreements that are accelerating global trade include APEC barriers to the free flow of goods across borders. (the Pacific Rim countries), SEATO (Australia, New Zealand, Japan, Hong Kong, South Ko- rea, New Guinea, and Chile), MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay), and North American Free Trade CAFTA (Central America, Dominican Republic, and United States). Agreement (NAFTA) Another trading group is the European Union (EU).1 The European Union has reduced trade A free trade agreement between barriers among the participating European nations through standardization and a common Canada, Mexico, and the United States. currency, the euro. However, this major U.S. trading partner, with over 500 million people, is also placing some of the world’s most restrictive conditions on products sold in the EU. Every- European Union (EU) thing from recycling standards to automobile bumpers to hormone-free farm products must A European trade group that has meet EU standards, complicating international trade. 28 member states. Improve Operations Operations learn from better understanding of management innovations in different countries. For instance, the Japanese have improved inventory man- agement, the Germans are aggressively using robots, and the Scandinavians have contributed to improved ergonomics throughout the world. Another reason to have international operations is to reduce response time to meet custom- ers’ changing product and service requirements. Customers who purchase goods and services from U.S. firms are increasingly located in foreign countries. Providing them with quick and adequate service is often improved by locating facilities in their home countries. Understand Markets Because international operations require interaction with for- eign customers, suppliers, and other competitive businesses, international firms inevitably learn about opportunities for new products and services. Europe led the way with cell phone innovations, and then the Japanese and Indians led with cell phone fads. Knowl- edge of markets not only helps firms understand where the market is going but also helps firms diversify their customer base, add production flexibility, and smooth the business cycle. Another reason to go into foreign markets is the opportunity to expand the life cycle (i.e., stages a product goes through; see Chapter 5) of an existing product. While some products in the U.S. are in a “mature” stage of their product life cycle, they may represent state-of-the-art products in less-developed countries. Improve Products Learning does not take place in isolation. Firms serve themselves and their customers well when they remain open to the free flow of ideas. For example, Toy- ota and BMW will manage joint research and share development costs on battery research for the next generation of green cars. Their relationship also provides Toyota with BMW’s highly regarded diesel engines for its European market, where diesel-powered vehicles make up more than half of the market. The payoff is reduced risk in battery development for both, a state-of-the-art diesel engine for Toyota in Europe, and lower per-unit diesel engine cost for BMW. Similarly, international learning in operations is taking place as South Korea’s Samsung and Germany’s Robert Bosch join to produce lithium-ion batteries to the benefit of both. Attract and Retain Global Talent Global organizations can attract and retain better employees by offering more employment opportunities. They need people in all functional areas and areas of expertise worldwide. Global firms can recruit and retain good employees because they provide both greater growth opportunities and insulation against M02_HEIZ0422_12_SE_C02.indd 34 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 35 A worldwide strategy places added burdens on operations management. Because of economic and lifestyle differences, designers must target products to each market. For instance, clothes washers sold in northern countries must spin-dry clothes much better than those in warmer climates, where consumers are likely to line-dry them. Similarly, as shown here, Whirlpool refrigerators sold in Bangkok are manufactured in bright colors because they are often put in living rooms. Kraipit Phanvut/Sipa Press unemployment during times of economic downturn. During economic downturns in one country or continent, a global firm has the means to relocate unneeded personnel to more prosperous locations. So, to recap, successfully achieving a competitive advantage in our shrinking world means maximizing all the possible opportunities, from tangible to intangible, that international opera- tions can offer. Cultural and Ethical Issues While there are great forces driving firms toward globalization, many challenges remain. One of these challenges is reconciling differences in social and cultural behavior. With issues rang- ing from bribery, to child labor, to the environment, managers sometimes do not know how to respond when operating in a different culture. What one country’s culture deems acceptable may be considered unacceptable or illegal in another. It is not by chance that there are fewer female managers in the Middle East than in India. In the last decade, changes in international laws, agreements, and codes of conduct have been applied to define ethical behavior among managers around the world. The WTO, for ex- ample, helps to make uniform the protection of both governments and industries from foreign firms that engage in unethical conduct. Even on issues where significant differences between cultures exist, as in the area of bribery or the protection of intellectual property, global unifor- mity is slowly being accepted by most nations. Despite cultural and ethical differences, we live in a period of extraordinary mobility of capital, information, goods, and even people. We can expect this to continue. The financial sector, the telecommunications sector, and the logistics infrastructure of the world are healthy institutions that foster efficient and effective use of capital, information, and goods. Globaliza- tion, with all its opportunities and risks, is here. It must be embraced as managers develop their missions and strategies. Developing Missions and Strategies STUDENT TIP Getting an education and managing An effective operations management effort must have a mission so it knows where it is going an organization both require a and a strategy so it knows how to get there. This is the case for a small domestic organization mission and strategy. as well as a large international organization. M02_HEIZ0422_12_SE_C02.indd 35 03/11/15 5:32 PM  36 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT Mission Economic success, indeed survival, is the result of identifying missions to satisfy a customer’s Mission needs and wants. We define the organization’s mission as its purpose—what it will contribute The purpose or rationale for an to society. Mission statements provide boundaries and focus for organizations and the con- organization’s existence. cept around which the firm can rally. The mission states the rationale for the organization’s existence. Developing a good strategy is difficult, but it is much easier if the mission has been LO 2.1 Define mission well defined. Figure 2.2 provides examples of mission statements. and strategy Once an organization’s mission has been decided, each functional area within the firm de- termines its supporting mission. By functional area we mean the major disciplines required by the firm, such as marketing, finance/accounting, and production/operations. Missions for each function are developed to support the firm’s overall mission. Then within that function lower-level supporting missions are established for the OM functions. Figure 2.3 provides such a hierarchy of sample missions. Strategy Strategy With the mission established, strategy and its implementation can begin. Strategy is an organi- How an organization expects to zation’s action plan to achieve the mission. Each functional area has a strategy for achieving achieve its missions and goals. its mission and for helping the organization reach the overall mission. These strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses. In the following sec- LO 2.2 Identify tions, we will describe how strategies are developed and implemented. and explain three Firms achieve missions in three conceptual ways: (1) differentiation, (2) cost leadership, strategic approaches to and (3) response. This means operations managers are called on to deliver goods and services competitive advantage that are (1) better, or at least different, (2) cheaper, and (3) more responsive. Operations manag- ers translate these strategic concepts into tangible tasks to be accomplished. Any one or com- VIDEO 2.1 bination of these three strategic concepts can generate a system that has a unique advantage Operations Strategy at Regal Marine over competitors. Achieving Competitive Advantage Through Operations Each of the three strategies provides an opportunity for operations managers to achieve com- Competitive advantage petitive advantage. Competitive advantage implies the creation of a system that has a unique The creation of a unique advan- advantage over competitors. The idea is to create customer value in an efficient and sustain- tage over competitors. able way. Pure forms of these strategies may exist, but operations managers will more likely Figure 2.2 Merck Mission Statements for Three Organizations Source: Mission statement from Merck. The mission of Merck is to provide society with superior products and services—innova- Copyright © by Merck & Co., Inc. tions 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 Reprinted with permission. superior rate of return. PepsiCo Our mission is to be the world's premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity. Arnold Palmer Hospital Arnold Palmer Hospital for Children provides state of the art, family-centered healthcare focused on restoring the joy of childhood in an environment of compassion, healing, and hope. M02_HEIZ0422_12_SE_C02.indd 36 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 37 Figure 2.3 Sample Company Mission Sample Missions for a Company, the Operations To manufacture and service an innovative, growing, and profitable worldwide microwave communications business that exceeds our customers’ expectations. Function, and Major OM Departments Sample Operations Management Mission To produce products consistent with the company’s mission as the worldwide low-cost manufacturer. Sample OM Department Missions Product design To design and produce products and services with outstanding quality and inherent customer value. Quality management To attain the exceptional value that is consistent with our company mission and marketing objectives by close attention to design, supply chain, production, and field service opportunities. Process design To determine, design, and develop the production process and equipment that will be compatible with low-cost product, high quality, and a good quality of work life. Location To locate, design, and build efficient and economical facilities that will yield high value to the company, its employees, and the community. Layout design To achieve, through skill, imagination, and resourcefulness in layout and work methods, production effectiveness and efficiency while supporting a high quality of work life. Human resources To provide a good quality of work life, with well-designed, safe, rewarding jobs, stable employment, and equitable pay, in exchange for outstanding individual contribution from employees at all levels. Supply-chain management To collaborate with suppliers to develop innovative products from stable, effective, and efficient sources of supply. Inventory To achieve low investment in inventory consistent with high customer service levels and high facility utilization. Scheduling To achieve high levels of throughput and timely customer delivery through effective scheduling. Maintenance To achieve high utilization of facilities and equipment by effective preventive maintenance and prompt repair of facilities and equipment. be called on to implement some combination of them. Let us briefly look at how managers achieve competitive advantage via differentiation, low cost, and response. Competing on Differentiation STUDENT TIP For many organizations, the Safeskin Corporation is number one in latex exam gloves because it has differentiated itself operations function provides the and its products. It did so by producing gloves that were designed to prevent allergic reac- competitive advantage. tions about which doctors were complaining. When other glove makers caught up, Safeskin developed hypoallergenic gloves. Then it added texture to its gloves. Then it developed a synthetic disposable glove for those allergic to latex—always staying ahead of the compe- tition. Safeskin’s strategy is to develop a reputation for designing and producing reliable state-of-the-art gloves, thereby differentiating itself. Differentiation is concerned with providing uniqueness. A firm’s opportunities for creating uniqueness are not located within a particular function or activity but can arise in virtually ev- erything the firm does. Moreover, because most products include some service, and most services M02_HEIZ0422_12_SE_C02.indd 37 03/11/15 5:32 PM  38 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT include some product, the opportunities for creating this uniqueness are limited only by imagina- Differentiation tion. Indeed, differentiation should be thought of as going beyond both physical characteristics Distinguishing the offerings of and service attributes to encompass everything about the product or service that influences the an organization in a way that the value that the customers derive from it. Therefore, effective operations managers assist in defin- customer perceives as adding ing everything about a product or service that will influence the potential value to the customer. value. This may be the convenience of a broad product line, product features, or a service related to the product. Such services can manifest themselves through convenience (location of distribution centers, stores, or branches), training, product delivery and installation, or repair and mainte- nance services. In the service sector, one option for extending product differentiation is through an expe- rience. Differentiation by experience in services is a manifestation of the growing “experience Experience differentiation economy.” The idea of experience differentiation is to engage the customer—to use people’s five Engaging a customer with a senses so they become immersed, or even an active participant, in the product. Disney does this product through imaginative use of with the Magic Kingdom. People no longer just go on a ride; they are immersed in the Magic the five senses, so the customer Kingdom—surrounded by dynamic visual and sound experiences that complement the physical “experiences” the product. ride. Some rides further engage the customer with changing air flow and smells, as well as having them steer the ride or shoot at targets or villains. Even movie theaters are moving in this direction with surround sound, moving seats, changing “smells,” and mists of “rain,” as well as multimedia inputs to story development. Theme restaurants, such as Hard Rock Cafe, likewise differentiate themselves by provid- VIDEO 2.2 ing an “experience.” Hard Rock engages the customer with classic rock music, big-screen Hard Rock’s Global Strategy rock videos, memorabilia, and staff who can tell stories. In many instances, a full-time guide is available to explain the displays, and there is always a convenient retail store so the guest can take home a tangible part of the experience. The result is a “dining experience” rather than just a meal. In a less dramatic way, both Starbucks and your local supermarket deliver an experience when they provide music and the aroma of fresh coffee or freshly baked bread. Competing on Cost Southwest Airlines has been a consistent moneymaker while other U.S. airlines have lost bil- lions. Southwest has done this by fulfilling a need for low-cost and short-hop flights. Its opera- tions strategy has included use of secondary airports and terminals, first-come, first-served seating, few fare options, smaller crews flying more hours, snacks-only or no-meal flights, and no downtown ticket offices. In addition, and less obviously, Southwest has very effectively matched capacity to demand and effectively utilized this capacity. It has done this by designing a route struc- ture that matches the capacity of its Boeing 737, the only plane in its fleet. Second, it achieves more air miles than other airlines through faster turnarounds—its planes are on the ground less. One driver of a low-cost strategy is a facility that is effectively utilized. Southwest and oth- ers with low-cost strategies understand this and use financial resources effectively. Identifying the optimum size (and investment) allows firms to spread overhead costs, providing a cost advantage. For instance, Walmart continues to pursue its low-cost strategy with superstores, open 24 hours a day. For 20 years, it has successfully grabbed market share. Walmart has driven down store overhead costs, shrinkage, and distribution costs. Its rapid transportation of goods, reduced warehousing costs, and direct shipment from manufacturers have resulted in high inventory turnover and made it a low-cost leader. Likewise, Franz Colruyt, a Belgian discount food retailer, is also an aggressive cost cutter. Colruyt cuts overhead by using converted factory warehouses, movie theaters, and garages as outlets. Customers find no background music, shopping bags, or bright lights: all have been eliminated to cut costs. Walmart and Colruyt are winning with a low-cost strategy. Low-cost leadership Low-cost leadership entails achieving maximum value as defined by your customer. It re- Achieving maximum value, as quires examining each of the 10 OM decisions in a relentless effort to drive down costs while perceived by the customer. meeting customer expectations of value. A low-cost strategy does not imply low value or low quality. M02_HEIZ0422_12_SE_C02.indd 38 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 39 Competing on Response The third strategy option is response. Response is often thought of as flexible response, but it also refers to reliable and quick response. Indeed, we define response as including the entire Response range of values related to timely product development and delivery, as well as reliable schedul- A set of values related to rapid, ing and flexible performance. flexible, and reliable performance. Flexible response may be thought of as the ability to match changes in a marketplace where design innovations and volumes fluctuate substantially. Hewlett-Packard is an exceptional example of a firm that has demonstrated flexibility in both design and volume changes in the volatile world of personal computers. HP’s products often have a life cycle of months, and volume and cost changes during that brief life cycle are dramatic. However, HP has been successful at institutionalizing the ability to change products and volume to respond to dramatic changes in product design and costs—thus building a sus- tainable competitive advantage. The second aspect of response is the reliability of scheduling. One way the German ma- chine industry has maintained its competitiveness despite having the world’s highest labor costs is through reliable response. This response manifests itself in reliable scheduling. German ma- chine firms have meaningful schedules—and they perform to these schedules. Moreover, the results of these schedules are communicated to the customer, and the customer can, in turn, rely on them. Consequently, the competitive advantage generated through reliable response has value to the end customer. The third aspect of response is quickness. Johnson Electric Holdings, Ltd., with headquar- ters in Hong Kong, makes 83 million tiny motors each month. The motors go in cordless tools, household appliances, and personal care items such as hair dryers; dozens are found in each automobile. Johnson’s major competitive advantage is speed: speed in product development, speed in production, and speed in delivery. Whether it is a production system at Johnson Electric or a pizza delivered in 5 minutes by Pizza Hut, the operations manager who develops systems that respond quickly can have a competitive advantage. In practice, differentiation, low cost, and response can increase productivity and generate a sustainable competitive advantage. Proper implementation of the ten decisions by operations managers (see Figure 2.4) will allow these advantages to be achieved. 10 Operations Competitive Decisions Strategy Example Advantage Product DIFFERENTIATION: Innovative design....................... Safeskin’s innovative gloves Quality Broad product line.....................Fidelity Security’s mutual funds After-sales service................ Caterpillar’s heavy equipment service Process Experience......................... Hard Rock Cafe’s dining experience Differentiation Location (better) Layout COST LEADERSHIP: Low overhead..................... Franz-Colruyt’s warehouse-type stores Response Human resources Effective capacity use............ Southwest Airlines' high aircraft utilization (faster) Inventory management.......... Walmart's sophisticated distribution system Cost Supply chain leadership Inventory (cheaper) RESPONSE: Scheduling Flexibility............. Hewlett-Packard’s response to volatile world market Reliability....................... FedEx’s “absolutely, positively on time” Maintenance Quickness............. Pizza Hut’s five-minute guarantee at lunchtime Figure 2.4 Achieving Competitive Advantage Through Operations M02_HEIZ0422_12_SE_C02.indd 39 03/11/15 5:32 PM  40 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT Response strategy wins orders at Super Fast Pizza. Using a wireless connection, orders are transmitted to $20,000 kitchens in vans. The driver, who works solo, receives a printed order, goes to the kitchen area, pulls premade pizzas from the cooler, and places them in the oven—it takes about 1 minute. The driver then delivers the pizza—sometimes even arriving before the pizza is ready. Darren Hauck/AP Images Issues in Operations Strategy Whether the OM strategy is differentiation, cost, or response (as shown in Figure 2.4), OM is a critical player. Therefore, prior to establishing and attempting to implement a strategy, Resources view some alternate perspectives may be helpful. One perspective is to take a resources view. This A method managers use to means thinking in terms of the financial, physical, human, and technological resources avail- evaluate the resources at their able and ensuring that the potential strategy is compatible with those resources. Another per- disposal and manage or alter them spective is Porter’s value-chain analysis.2 Value-chain analysis is used to identify activities that to achieve competitive advantage. represent strengths, or potential strengths, and may be opportunities for developing competi- Value-chain analysis tive advantage. These are areas where the firm adds its unique value through product research, A way to identify those elements design, human resources, supply-chain management, process innovation, or quality manage- in the product/service chain that ment. Porter also suggests analysis of competitors via what he calls his five forces model.3 These uniquely add value. potential competing forces are immediate rivals, potential entrants, customers, suppliers, and Five forces model substitute products. A method of analyzing the In addition to the competitive environment, the operations manager needs to understand five forces in the competitive that the firm is operating in a system with many other external factors. These factors range environment. from economic, to legal, to cultural. They influence strategy development and execution and require constant scanning of the environment. The firm itself is also undergoing constant change. Everything from resources, to tech- nology, to product life cycles is in flux. Consider the significant changes required within the firm as its products move from introduction, to growth, to maturity, and to decline (see Figure 2.5). These internal changes, combined with external changes, require strategies that are dynamic. In this chapter’s Global Company Profile, Boeing provides an example of how strategy must change as technology and the environment change. Boeing can now build planes from carbon fiber, using a global supply chain. Like many other OM strategies, Boeing’s strategy has changed with technology and globalization. Microsoft has also had to adapt quickly to a changing environment. Faster processors, new computer languages, changing customer pref- erences, increased security issues, the Internet, the cloud, and Google have all driven changes at Microsoft. These forces have moved Microsoft’s product strategy from operating systems to office products, to Internet service provider, and now to integrator of computers, cell phones, games, and television via the cloud. The more thorough the analysis and understanding of both the external and internal fac- tors, the more likely that a firm can find the optimum use of its resources. Once a firm under- stands itself and the environment, a SWOT analysis, which we discuss next, is in order. M02_HEIZ0422_12_SE_C02.indd 40 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 41 Introduction Growth Maturity Decline Best period to Practical to change Poor time to change Cost control increase market price or quality image, price, or quality critical share image Competitive costs R&D engineering Strengthen niche become critical Company Strategy / Issues is critical Defend market position Hybrid engine vehicles Laptop computers Boeing 787 Xbox One 3D printers DVDs Electric vehicles Video Life Cycle Curve physical 3-D game players rentals Apple SmartWatch Product design and Forecasting critical Standardization Little product development critical differentiation Product and Fewer rapid product Frequent product process reliability changes, more Cost minimization OM Strategy / Issues and process minor changes design changes Competitive product Overcapacity in improvements and Optimum capacity the industry Short production options runs Increasing stability Prune line to Increase capacity of process eliminate items High production not returning costs Shift toward product Long production good margin focus runs Limited models Reduce capacity Enhance distribution Product improvement Attention to quality and cost cutting Figure 2.5 Strategy and Issues During a Product’s Life Strategy Development and Implementation STUDENT TIP A SWOT analysis provides an A SWOT analysis is a formal review of internal strengths and weaknesses and external opportuni- excellent model for evaluating a ties and threats. Beginning with SWOT analyses, organizations position themselves, through strategy. their strategy, to have a competitive advantage. A firm may have excellent design skills or great talent at identifying outstanding locations. However, it may recognize limitations of its SWOT analysis manufacturing process or in finding good suppliers. The idea is to maximize opportunities and A method of determining internal strengths and weaknesses and minimize threats in the environment while maximizing the advantages of the organization’s external opportunities and threats. strengths and minimizing the weaknesses. Any preconceived ideas about mission are then reevaluated to ensure they are consistent with the SWOT analysis. Subsequently, a strategy for achieving the mission is developed. This strategy is continually evaluated against the value provided customers and competitive realities. The process is shown in Figure 2.6. From this process, key success factors are identified. Key Success Factors and Core Competencies Because no firm does everything exceptionally well, a successful strategy requires determining Key success factors (KSFs) the firm’s key success factors and core competencies. Key success factors (KSFs) are those activi- Activities or factors that are key to ties that are necessary for a firm to achieve its goals. Key success factors can be so significant achieving competitive advantage. M02_HEIZ0422_12_SE_C02.indd 41 03/11/15 5:32 PM  42 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT Figure 2.6 Analyze the Environment Strategy Development Process Identify strengths, weaknesses, opportunities, and threats. Understand the environment, customers, industry, and competitors. Determine the Corporate Mission State the reason for the firm’s existence and identify the value it wishes to create. Form a Strategy Build a competitive advantage, such as low price, design or volume flexibility, quality, quick delivery, dependability, after-sale services, or broad product lines. that a firm must get them right to survive. A KSF for McDonald’s, for example, is layout. Without an effective drive-through and an efficient kitchen, McDonald’s cannot be successful. Core competencies KSFs are often necessary, but not sufficient for competitive advantage. On the other hand, A set of skills, talents, and core competencies are the set of unique skills, talents, and capabilities that a firm does at a capabilities in which a firm is world-class standard. They allow a firm to set itself apart and develop a competitive advan- particularly strong. tage. Organizations that prosper identify their core competencies and nurture them. While McDonald’s KSFs may include layout, its core competency may be consistency and quality. Honda Motors’ core competence is gas-powered engines—engines for automobiles, motorcy- cles, lawn mowers, generators, snow blowers, and more. The idea is to build KSFs and core competencies that provide a competitive advantage and support a successful strategy and mis- sion. A core competency may be the ability to perform the KSFs or a combination of KSFs. The operations manager begins this inquiry by asking: LO 2.3 Understand ◆ “What tasks must be done particularly well for a given strategy to succeed?” the significance of key ◆ “Which activities provide a competitive advantage?” success factors and core competencies ◆ “Which elements contain the highest likelihood of failure, and which require additional commitment of managerial, monetary, technological, and human resources?” Only by identifying and strengthening key success factors and core competencies can an organization achieve sustainable competitive advantage. In this text we focus on the 10 strate- gic OM decisions that typically include the KSFs. These decisions, plus major decision areas for marketing and finance, are shown in Figure 2.7. Julie Lucht/Shutterstock Honda’s core competence Automobiles Generators Motorcycles Water Pumps is the design and American Honda Courtesy of www. American Honda HondaNews.com Motor Co., Inc. Motor Co., Inc. manufacture of gas- powered engines. This competence has allowed Honda to become a leader in the design and manufacture of a wide 4-Wheel Scooters Snow Blowers Race Cars range of gas-powered American Honda Marine Motors Motor Co., Inc. American Honda American Honda American Honda products. Tens of millions Motor Co., Inc. Motor Co., Inc. Motor Co., Inc. of these products are produced and shipped around the world. M02_HEIZ0422_12_SE_C02.indd 42 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 43 Support a Core Competency and Figure 2.7 Implement Strategy by Identifying and Executing Implement Strategy by the Key Success Factors in the Functional Areas Identifying and Executing Key Success Factors That Support Core Competencies Marketing Finance/Accounting Operations Service Leverage Distribution Cost of capital Promotion Working capital Price Receivables Channels of distribution Payables Product positioning Financial control (image, functions) Lines of credit 10 OM Sample Options Chapter Decisions Product Customized or standardized; sustainability 5,S5 Quality Define customer quality expectations and how to achieve them 6,S6 Process Facility design, capacity, how much automation 7,S7 Location Near supplier or near customer 8 Layout Work cells or assembly line 9 Human resources Specialized or enriched jobs 10 Supply chain Single or multiple suppliers 11, S11 STUDENT TIP Inventory When to reorder; how much to keep on hand 12,14,16 These 10 decisions are used to Schedule Stable or fluctuating production rate 13,15 Maintenance Repair as required or preventive maintenance 17 implement a specific strategy and yield a competitive advantage. Integrating OM with Other Activities Whatever the KSFs and core competencies, they must be supported by the related activities. One approach to identifying the activities is an activity map, which links competitive advan- Activity map tage, KSFs, and supporting activities. For example, Figure 2.8 shows how Southwest Airlines, A graphical link of competitive whose core competency is operations, built a set of integrated activities to support its low- advantage, KSFs, and supporting cost competitive advantage. Notice how the KSFs support operations and in turn are sup- activities. ported by other activities. The activities fit together and reinforce each other. In this way, all of the areas support the company’s objectives. For example, short-term scheduling in the airline industry is dominated by volatile customer travel patterns. Day-of-week preference, holidays, seasonality, college schedules, and so on all play roles in changing flight schedules. Consequently, airline scheduling, although an OM activity, is tied to marketing. Effective scheduling in the trucking industry is reflected in the amount of time trucks travel loaded. But maximizing the time trucks travel loaded requires the integration of information from deliver- ies completed, pickups pending, driver availability, truck maintenance, and customer priority. Success requires integration of all of these activities. The better the activities are integrated and reinforce each other, the more sustain- able the competitive advantage. By focusing on enhancing its core competence and KSFs with a supporting set of activities, firms such as Southwest Airlines have built successful strategies. Building and Staffing the Organization Once a strategy, KSFs, and the necessary integration have been identified, the second step is to group the necessary activities into an organizational structure. Then, managers must staff the organization with personnel who will get the job done. The manager works with subordinate managers to build plans, budgets, and programs that will successfully implement strategies that achieve missions. Firms tackle this organization of the operations function in a variety of M02_HEIZ0422_12_SE_C02.indd 43 03/11/15 5:32 PM  44 PA RT 1 | I N T R O D UC T I O N T O OP ERATI ONS MANAGEMENT No seat Automated assignments “Bags fly free” and ticketing machines no baggage transfers Empowered employees Courteous but Lower gate costs No meals High employee Limited Passenger at secondary airports compensation Service Short Haul, Point-to- Hire for attitude, Lean, Productive Point Routes, Often to then train Employees Secondary Airports High level of stock High number of Competitive Advantage: ownership flights reduces Low Cost employee idle time between flights 20-minute gate High Aircraft Frequent, Reliable turnarounds Utilization Schedules Saturate a city with Maintenance Standardized Fleet flights, lowering personnel trained of Boeing 737 administrative costs on only one type Aircraft per passenger of aircraft Pilot training for that city Flexible employees/unions required on only and standard planes one type of aircraft aid scheduling Excellent supplier Reduced maintenance relations with inventory required Boeing have aided because only one financing type of aircraft is used Figure 2.8 Activity Mapping of Southwest Airlines’ Low-Cost Competitive Advantage To achieve a low-cost competitive advantage, Southwest has identified a number of key success factors (connected by red arrows) and support activities (shown by blue arrows). As this figure indicates, Southwest’s low-cost strategy is highly dependent on a very well-run operations function. ways. The organization charts shown in Chapter 1 (Figure 1.1) indicate the way some firms have organized to perform the required activities. The operations manager’s job is to implement an OM strategy, provide competitive advantage, and increase productivity. Implementing the 10 Strategic OM Decisions As mentioned earlier, the implementation of the 10 strategic OM decisions is influenced by a variety of issues—from missions and strategy to key success factors and core competencies— while addressing such issues as product mix, product life cycle, and competitive environment. Because each product brings its own mix of attributes, the importance and method of imple- mentation of the 10 strategic OM decisions will vary. Throughout this text, we discuss how these decisions are implemented in ways that provide competitive advantage. How this might be done for two drug companies, one seeking competitive advantage via differentiation and the other via low cost, is shown in Table 2.1. Strategic Planning, Core Competencies, and Outsourcing As organizations develop missions, goals, and strategies, they identify their strengths—what they do as well as or better than their competitors—as their core competencies. By contrast, non-core activities, which can be a sizable portion of an organization’s total business, are good Outsourcing candidates for outsourcing. Outsourcing is transferring activities that have traditionally been Transferring a firm’s activities that internal to external suppliers. have traditionally been internal to Outsourcing is not a new concept, but it does add complexity and risk to the supply chain. external suppliers. Because of its potential, outsourcing continues to expand. The expansion is accelerating due to M02_HEIZ0422_12_SE_C02.indd 44 03/11/15 5:32 PM  CHAP T ER 2 | OP ERATI ONS STRATEGY I N A GLOBAL E NVIRONM E NT 45 TABLE 2.1 Operations Strategies of Two Drug Companies* COMPETITIVE BRAND NAME DRUGS, INC. GENERIC DRUG CORP. ADVANTAGE PRODUCT DIFFERENTIATION STRATEGY LOW-COST STRATEGY Product selection Heavy R&D investment; extensive labs; focus on Low R&D investment; focus on development of generic and design development in a broad range of drug categories drugs Quality Quality is major priority, standards exceed regulatory Meets regulatory requirements on a country-by-country requirements basis, as necessary Process Product and modular production process; tries to have Process focused; general production processes; “job long product runs in specialized facilities; builds capacity shop” approach, short-run production; focus on high ahead of demand utilization Location Still located in city where it was founded Recently moved to low-tax, low-labor-cost environment Layout Layout supports automated product-focused p