OM Strategy Chapter 2

Heizer, Render, Griffin
Operations Management
Second Canadian Edition
Slides adapted by Michael Zhang
Chapter 2
Operations Strategy
in a Global
Environment
Copyright © 2017 Pearson Canada Inc. 2-1

Outline
 Global Company Profile: Boeing
 A Global View of Operations and
Supply Chains
 Developing Missions and
Strategies
 Achieving Competitive Advantage
Through Operations
 Ten Strategic OM Decisions
Copyright © 2017 Pearson Canada Inc 2-2

Outline – Continued
 Issues in Operations Strategy
 Strategy Development and
Implementation
 Global Operations Strategy
Options

Learning Objectives
When you complete this chapter you
should be able to:
1. Define mission and strategy

2. Identify and explain three strategic
approaches to competitive
advantage
3. Identify and define the 10 decisions
of operations management

Learning Objectives
When you complete this chapter you
should be able to:
4. Understand the significance of key

success factors and core
competencies
5. Identify and explain four global
operations strategy options

Some Boeing Suppliers (787)
Firm Country Component
Latecoere France Passenger doors
Labinel France Wiring
Dassault France Design and
PLM software
Messier-Bugatti France Electric brakes
Thales France Electrical power
conversion system
and integrated
standby flight display
Messier-Dowty France Landing gear structure
Diehl Germany Interior lighting
Some Boeing Suppliers (787)
Firm Country Component
Rolls-Royce UK Engines
BAE SYSTEMS UK Electronics
Alenia Aeronautics Italy Upper centre
fuselage and
horizontal stabilizer
Kawasaki Heavy Japan Forward fuselage,
Industries fixed section of wing,
landing gear well
Toray Industries Japan Carbon fibre for
wing and tail units
Chengdu Aircraft China Rudder
Group
Global Strategies
 Boeing – sales and production are
worldwide
 Benetton – moves inventory to stores
around the world faster than its
competition by building flexibility into
design, production, and distribution
 Sony – purchases components from
suppliers in Thailand, Malaysia, and
around the world

Global Strategies
 Volvo – a Swedish company, it was
controlled by an American company,
Ford, and is now owned by Geely of
China. The current Volvo S40 is built in
Belgium and shares its platform with the
Mazda 3 built in Japan and the Ford
Focus built in Europe

Growth of World Trade
35 –
30 – Collapse of the
Berlin Wall
25 –
Percent
20 –
15 –
10 –
5–
0 –| | | | | | | | | | |
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 (est*)
Year
Figure 2.1
Copyright © 2017 Pearson Canada Inc 2 - 10
Reasons to Globalize
Reasons to Globalize
Tangible 1. Reduce costs (labour, taxes, tariffs, etc.)
Reasons 2. Improve the supply chain
3. Provide better goods and services
4. Understand markets
Intangible 5. Learn to improve operations
Reasons 6. Attract and retain global talent

Reduce Costs
 Foreign locations with lower wage
rates can lower direct and indirect
costs
 Maquiladoras
 World Trade Organization (WTO)
 North American Free Trade
Agreement (NAFTA)
 APEC, SEATO, MERCOSUR, CAFTA
 European Union (EU)
Improve the Supply Chain
 Locating facilities closer to
unique resources
 Metal companies to Northern
Ontario
 Auto design to California
 Athletic shoe production to China
 Perfume manufacturing in France

Provide Better Goods
and Services
 Objective and subjective
characteristics of goods and
services
 On-time deliveries
 Cultural variables
 Improved customer service

Understand Markets
 Interacting with foreign customers
and suppliers can lead to new
opportunities
 Cell phone design from Europe
 Cell phone fads from Japan
 Extend the product life cycle

Learn to Improve
Operations
 Remain open to the free flow of
ideas
 General Motors partnered with a
Japanese auto manufacturer to
learn new approaches to
production and inventory control
 quipment and layout have been
improved using Scandinavian
ergonomic competence

Attract and Retain Global
Talent
 Offer better employment
opportunities
 Better growth opportunities and
insulation against unemployment
 Relocate unneeded personnel to
more prosperous locations

Cultural and Ethical Issues
 Cultures can be quite different
 Attitudes can be quite different
towards
 Punctuality  Thievery
 Lunch breaks  Bribery
 Environment  Child labour
 Intellectual
property

Companies Want To Consider
 National literacy rate  Work ethic
 Rate of innovation  Tax rates
 Rate of technology  Inflation
change  Availability of raw
 Number of skilled materials
workers  Interest rates
 Political stability  Population
 Product liability laws  Number of miles of
 Export restrictions highway
 Variations in language  Phone system

Match Product and Parent
► Braun Household
Appliances 1. Volkswagen
► Firestone Tires 2. Bridgestone
► Godiva Chocolate 3. Campbell Soup
► Haagen-Dazs Ice 4. Tata Motors Limited
Cream
5. Proctor and Gamble
► Jaguar Autos
6. Nestlé
► MGM Movies
7. Pillsbury
► Lamborghini Autos
8. Sony
► Alpo Petfoods
2 - 20
Match Product and Country
► Braun Household
Appliances
► Firestone Tires 1. Great Britain
► Godiva Chocolate 2. Germany
► Haagen-Dazs Ice 3. Japan
Cream
4. United States
► Jaguar Autos
5. Switzerland
► MGM Movies
6. India
► Lamborghini Autos
► Alpo Petfoods
2 - 21
Developing Missions and
Strategies
Mission statements tell an
organization where it is going
The Strategy tells the

organization how to get there

Mission
 Mission - where are you going?

 Organization’s purpose for being
 Answers ‘What do we provide
society?’
 Provides boundaries and focus

Telfer School of
Management Vision
The Telfer School of Management at the
University of Ottawa aims to be
recognized as a leading institution for
management education and innovative
research. Through its academic programs,
offered in both English and French, the
Telfer School seeks to prepare its
students to assume leadership positions
in today’s global economy and to instill in
them the highest standards of integrity,
ethics and social consciousness.
© 2011 Pearson Education, Inc. publishing as Prentice Hall 2 - 24
Telfer School of
Management Mission
The Telfer School of Management
seeks to provide its students with:
 Strong analytical, communication and
leadership skills;
 The ability to perform in a culturally
diverse workplace;
 The capability to apply and integrate
knowledge from the core disciplines of
management.
Telfer School of
Management Mission
The Telfer School of Management seeks to add
value to external stakeholders by:
Leveraging the unique resources of the National
Capital Region to undertake and disseminate
basic and applied research in distinctive areas of
management of relevance to national and
international organizations.
Engaging in activities that build and strengthen
partnerships with its many constituents in the
technology, health, non-profit and governmental
sectors across Canada and internationally.

Royal Canadian Mounted
Police
The RCMP is Canada’s national police
service. Proud in our traditions and
confident in meeting future challenges,
we commit to preserve peace, uphold
the law and provide quality service in
partnership with our communities.
Figure 2.2
Hard Rock Cafe
Our Mission: To spread the spirit of

rock ’n’ roll by creating authentic
experiences that rock
Figure 2.2
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.
Figure 2.2
Factors Affecting Mission
Philosophy
and Values
Profitability
Environment
and Growth
Mission
Customers Public Image
Benefit to
Society

Strategic Process
Organization’s
Mission
Functional
Area Missions
Finance/
Marketing Operations
Accounting

Sample Missions
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, procurement, production, and field
service operations
Process design To determine, design, and produce the

production process and equipment that will
be compatible with low-cost product, high
quality, and good quality of work life at
economical cost.
Figure 2.3
Sample Missions
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.
Figure 2.3
Sample Missions
Supply-chain To collaborate with suppliers to develop
management 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.
Figure 2.3
Strategy
 Action plan to achieve mission
 Functional areas have strategies
 Strategies exploit opportunities and
strengths, neutralize threats, and
avoid weaknesses

STRATEGY PROCESS
Environmental Company
Analysis Mission
Business SWOT
Strategy Analysis
Functional Area
Strategies
Marketing Operations Fin./Acct.

Decisions Decisions Decisions
ADM 3301 ~ Rim Jaber

2 - 36
Strategies for Competitive
Advantage
 Differentiation – better, or at
least different
 Cost leadership – cheaper
 Response – rapid response

Competing on
Differentiation
Uniqueness can go beyond both the
physical characteristics and service
attributes to encompass everything that
impacts customers’ perception of value
 Safeskin gloves – leading edge
products
 Walt Disney Magic Kingdom –
experience differentiation
 Hard Rock Café – dining experience

Competing on Cost
Provide the maximum value as
perceived by customer. Does not
imply low quality.
 Porter Airlines – secondary

airports, few fare options, smaller
crews, no expensive ticket offices
 Walmart – small overhead,
shrinkage, distribution costs
 Franz Colruyt – no bags, low
light, no music, doors on freezers
Competing on Response
 Flexibility is matching market changes in
design innovation and volumes
 A way of life at Hewlett-Packard
 Reliability is meeting schedules
 German machine industry
 Timeliness is quickness in design,
production, and delivery
 Johnson Electric, Pizza Hut, Motorola

Achieving Competitive
Advantage Through Operations
Figure 2.4
Ten Strategic OM Decisions
1. Goods and 6. Human resources

service design and job design
2. Quality 7. Supply-chain
3. Process and management
capacity design
8. Inventory
4. Location
selection 9. Scheduling
5. Layout design 10. Maintenance

Goods and Services and
the 10 OM Decisions
Operations
Decisions Goods Services
Goods and Product is usually Product is not
service tangible tangible
design
Quality Many objective Many subjective
standards standards
Process Customer not Customer may be
and involved directly involved
capacity Capacity must
design match demand
Table 2.1
the 10 OM Decisions
Operations
Location Near raw Near customers
selection materials and
labour
Layout Production Enhances product
design efficiency and production
Human Technical skills, Interact with
resources consistent labour customers, labour
and job standards, output standards vary
design based wages
Table 2.1
the 10 OM Decisions
Operations
Supply Relationship Important, but
chain critical to final may not be
product critical
Inventory Raw materials, Cannot be stored
work-in-process,
and finished
goods may be
held
Scheduling Level schedules Meet immediate
possible customer demand
Table 2.1
the 10 OM Decisions
Operations
Maintenance Often preventive Often “repair” and
and takes place takes place at
at production site customer’s site
Table 2.1
Managing Global Service
Operations
Requires a different perspective on:
 Capacity planning
 Location planning
 Facilities design and layout
 Scheduling

Issues In Operations Strategy
 Resources view
 Value-chain analysis
 Porter’s five forces model
 Operating in a system with many
external factors
 Constant change

Product Life Cycle
Introduction Growth Maturity Decline
Best period to Practical to change Poor time to Cost control
Company Strategy/Issues
increase market price or quality change image, critical

share image price, or quality
R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position Drive-thru
Internet search engines restaurants
CD-ROMs
iPods LCD and
Xbox 360 plasma TVs
Sales
Avatars
Boeing 787 Analogue

TVs
Twitter
Figure 2.5
Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting Standardization Little product
and critical Fewer product differentiation
development Product and changes, more Cost
OM Strategy/Issues
critical process minor changes minimization

Frequent reliability Optimum Overcapacity
product and Competitive capacity in the
process design product industry
changes Increasing
improvements stability of Prune line to
Short production and options process eliminate
runs Increase capacity Long production items not
High production Shift toward runs returning
costs product focus good margin
Product
Limited models Enhance improvement Reduce
Attention to distribution and cost cutting capacity
quality
Figure 2.5
SWOT Analysis
Mission
Internal External
Strengths Opportunities
Analysis
Internal External
Weaknesses Threats
Strategy

Strategy Development Process
Analyze the Environment
Identify the 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 service, broad product lines.
Figure 2.6
Strategy Development and
Implementation
 Identify key success factors
 Build and staff the organization
 Integrate OM with other activities
The operations manager’s job is to implement

an OM strategy, provide competitive
advantage, and increase productivity

Key Success Factors
Support a Core Competence and Implement Strategy by
Identifying and Executing the Key Success Factors in the Functional Areas
Marketing Finance/Accounting Production/Operations
Service Leverage
Distribution Cost of capital
Promotion Working capital
Channels of distribution Receivables
Product positioning Payables
(image, functions) Financial control
Lines of credit
Decisions Sample Options Chapter
Product Customized or standardized 5

Quality Define customer expectations and how to achieve them 6, S6
Process Facility size, technology, capacity 7, S7
Location Near supplier or near customer 8
Layout Work cells or assembly line 9
Human resource Specialized or enriched jobs 10
Supply chain Single or multiple suppliers 11, S11
Inventory When to reorder, how much to keep on hand 12, 14, 16
Schedule Stable or fluctuating production rate 13, 15
Maintenance Repair as required or preventive maintenance 17
Copyright © 2017 Pearson Canada Inc Figure 2.7 2 - 54

THE PLANNING
CONTINUUM
Strategic planning Tactical Planning

long time horizon short time horizon
less certainty more certainty
less structured more structured
poorly defined information well-defined information
requirements requirements
irreversible impact reversible impact
focus on the whole focus on parts
ADM 3301 ~ Rim Jaber

2 - 55
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
Lean, Short Haul, Point-to-

Productive Point Routes, Often to
Employees Secondary Airports
Competitive Advantage:
Low Cost
High Frequent,
Aircraft Reliable
Utilization Standardized Schedules
Fleet of Boeing
737 Aircraft
Figure 2.8
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
Lean, Short Haul, Point-to-

Automated ticketing machines
No seat assignments
Low Cost
No baggage transfers
High Frequent,
Aircraft No meals (peanuts) Reliable
Fleet of Boeing
737 Aircraft
Figure 2.8
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
No meals (peanuts)
Lean,
Lower gate costs at Short Haul, Point-to-
secondary airports
High number of flights
reduces employee idleCost
Low time
between flights
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
Figure 2.8
Activity Mapping at
Southwest Airlines
Courteous,
High number but
of flights
Limited Passenger
reduces employee idle time
Service
between flights
Lean,
Saturate a city with flights, Short Haul, Point-to-
lowering administrative
costs (advertising, HR, etc.)
Competitive
per passenger Advantage:
for that city
Low Cost
Pilot training required on
Highonly one type of aircraft Frequent,
Aircraft Reliable
Reduced maintenance
Utilization Schedules
Standardized
inventory required because
Fleet of Boeing
of only one type737
ofAircraft
aircraft
Figure 2.8
Activity Mapping at
Southwest Airlines
Pilot training required on
Courteous,
onlyLimited
one type but
of aircraft
Passenger
Reduced Service
maintenance
Lean,
inventory required because Short Haul, Point-to-
Productive of only one type of aircraft
Point Routes, Often to
Excellent supplier relations
with Boeing
Competitive has aided
Advantage:
financing
Low Cost
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
Figure 2.8
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Reduced maintenance
Service
inventory required because
Lean, of only one type of aircraft
Short Haul, Point-to-
Flexible union
Employees Flexible employeesSecondary
and Airports
contracts standard planes aid
scheduling
Low Cost
Maintenance personnel
High trained only one type of
Frequent,
Aircraft aircraft Reliable
20-minute gate turnarounds
Fleet of Boeing
737 Aircraft
Figure 2.8
Activity Mapping at
Southwest Airlines
Automated ticketing
Courteous, but
machines
Limited Passenger
Service
Empowered employees
Lean, High employee
Short Haul, Point-to-
compensation
Hire for attitude, then train
LowHigh level of stock
Cost
ownership
High High number of flightsFrequent,
Aircraft Reliable
Utilization reduces employee idle time
Schedules
Standardized
Fleetbetween
of Boeing flights
737 Aircraft
Figure 2.8
Implementing Strategic
Decisions
TABLE 2.1 Operations Strategies of Two Drug Companies
BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
COMPETITIVE PRODUCT DIFFERENTIATION LOW COST STRATEGY
ADVANTAGE STRATEGY
Product Heavy R&D investment; extensive labs; Low R&D investment; focus on
selection and focus on development in a broad range development of generic drugs
design of drug categories
Quality Quality is major priority, standards Meets regulatory requirements on a
exceed regulatory requirements country-by-country basis, as necessary
Process Product and modular production Process focused; general production
process; tries to have long product runs processes; “job shop” approach, short-
in specialized facilities; builds capacity run production; focus on high utilization
ahead of demand
Location Still located in city where it was founded Recently moved to low-tax, low-labor-
cost environment
2 - 63
Implementing Strategic
Decisions
TABLE 2.1 Operations Strategies of Two Drug Companies
BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
COMPETITIVE PRODUCT DIFFERENTIATION LOW COST STRATEGY
ADVANTAGE STRATEGY
Layout Layout supports automated product- Layout supports process-focused “job
focused production shop” practices
Human Hire the best; nationwide searches Very experienced top executives
resources provide direction; other personnel paid
below industry average
Supply chain Long-term supplier relationships Tends to purchase competitively to find
bargains
Inventory Maintains high finished goods inventory Process focus drives up work-in-
primarily to ensure all demands are met process inventory; finished goods
inventory tends to be low
Scheduling Centralized production planning Many short-run products complicate
scheduling
Maintenance Highly trained staff; extensive parts Highly trained staff to meet changing
inventory demands
2 - 64
Strategic Planning, Core
Competencies, and
Outsourcing
▶ Outsourcing – transferring activities
that traditionally been internal to
external suppliers
▶ Accelerating due to
1) Increased technological expertise
2) More reliable and cheaper
transportation
3) Rapid development and deployment
of advancements in
telecommunications and computers
2 - 65
Strategic Planning, Core
Competencies, and
Outsourcing
▶ Subcontracting - contract
manufacturing
▶ Outsourced activities
► Legal services ► Payroll
► IT services ► Production
► Travel ► Surgery
services
2 - 66
Theory of Comparative
Advantage
▶ If an external provider can perform
activities more productively than
the purchasing firm, then the
external provider should do the
work
▶ Purchasing firm focuses on core
competencies
▶ Drives outsourcing
2 - 67
Risks of Outsourcing
TABLE 2.2 Potential Advantages and Disadvantages of Outsourcing
ADVANTAGES DISADVANTAGES
Cost savings Increased logistics and inventory
costs
Gaining outside expertise that Loss of control (quality, delivery,
comes with specialization etc.)
Improving operations and service Potential creation of future
competition
Maintaining a focus on core Negative impact on employees
competencies
Accessing outside technology Risks may not manifest themselves
for years
2 - 68
Rating Outsourcing
Providers
▶ Insufficient analysis most common
reason for failure
▶ Factor-rating method
▶ Points and weights assigned for
each factor to each
2 - 69
Rating Provider Selection
Criteria
TABLE 2.3 Factor Ratings Applied to National Architects’s Potential IT Outsourcing Providers
OUTSOURCING PROVIDERS
IMPORTANCE BIM S.P.C. TELCO
FACTOR (CRITERION) WEIGHTS (U.S.) (INDIA) (ISRAEL)
1. Can reduce operating costs .2 3 3 5
2. Can reduce capital investment .2 4 3 3
3. Skilled personnel .2 5 4 3
4. Can improve quality .1 4 5 2
5. Can gain access to technology not in
company .1 5 3 5
6. Can create additional capacity .1 4 2 4
7. Aligns with policy/philosophy/culture .1 2 3 5
Total Weighted Score 1.0 3.9 3.3 3.8
Score for BIM = (.2 * 3) + (.2 * 4) + (.2 * 5) + (.1 * 4) + (.1 * 5) + (.1 * 4) + (.1 * 2) = 3.9
2 - 70
Four International
Operations Strategies
High
Cost Reduction Considerations
International Strategy
Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low High
Local Responsiveness Considerations
(Quick Response and/or Differentiation)
Four International
High
Global Strategy
Standardized product
Economies of scale
Cross-cultural learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator
International Strategy
Import/export or
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low High
Four International
High
Global Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples:
Texas Instruments
Caterpillar
Otis Elevator
Multidomestic Strategy
International Strategy  Use existing
 Import/export or domestic model globally
license existing  Franchise, joint ventures,
product subsidiaries
Examples Examples
U.S. Steel Heinz The Body Shop
Harley Davidson McDonald’s Hard Rock Café
Low
Low High
Four International
High
Global Strategy Transnational Strategy
 Standardized product  Movement of material, people,

 Economies of scale ideas across national
 Cross-cultural learning boundaries
 Economies of scale
Examples:  Cross-cultural learning
Texas Instruments
Caterpillar Examples
Otis Elevator Coca-Cola
Nestlé
Multidomestic Strategy
International Strategy  Use existing
 Import/export or domestic model globally
license existing  Franchise, joint ventures,
product subsidiaries
Examples Examples
U.S. Steel Heinz The Body Shop
Harley Davidson McDonald’s Hard Rock Cafe
Low
Low High
Ranking Corruption
Rank Country 2015 CPI Score (out of 100)
1 Demark 91 Least
2 Finland 90 Corrupt
3 Sweden 89
4 New Zealand 88
5 Netherlands, Norway, 87
7 Switzerland 86
8 Singapore 85
9 Canada 83
10 Germany, UK 81
16 USA 76
18 Japan 75
17 USA 74
30 Taiwan 62 Most
37 South Korea 56 Corrupt
83 China 37
119 Russia 29
2 - 75
Summary
 Global operations provide challenges and
opportunities
 Organizations identify their strengths and
weaknesses
 Missions and strategies are then developed
 Competitive advantages can be achieved
from global operations
 OM managers have huge impact on the
decision making

OM Strategy Chapter 2

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1. Define mission and strategy

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4. Understand the significance of key

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The Strategy tells the

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 Mission - where are you going?

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© 2011 Pearson Education, Inc. publishing as Prentice Hall 2 - 26

Our Mission: To spread the spirit of

Arnold Palmer Hospital for

Customers Public Image

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Process design To determine, design, and produce the

Human resources To provide a good quality of work life, with

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Marketing Operations Fin./Acct.

ADM 3301 ~ Rim Jaber

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 Porter Airlines – secondary

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1. Goods and 6. Human resources

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increase market price or quality change image, critical

R&D engineering is Strengthen niche Competitive costs

Boeing 787 Analogue

critical process minor changes minimization

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Determine the Corporate Mission

The operations manager’s job is to implement

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Marketing Finance/Accounting Production/Operations

Decisions Sample Options Chapter

Product Customized or standardized 5

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Strategic planning Tactical Planning

ADM 3301 ~ Rim Jaber

Lean, Short Haul, Point-to-

Lean, Short Haul, Point-to-

 Standardized product  Movement of material, people,

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