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Please define and explain three different ways that a firm can utilize operations management as a competitive advantage Answer

Please define and explain three different ways that a firm can utilize operations management as a competitive advantage. Also, please describe how well your present organization — or a favorite one– practices this concept and please provide examples.

 

Ans:

Organizations can utilize operations management as a competitive advantage by doing the following:

  • Making things right – the quality advantage.
  • Making things fast – the speed advantage.
  • Making things on time – the dependability advantage.
  • Changing what is made – the flexibility advantage.
  • Making things cheap – the cost advantage.

Operations management can offer as an implementer, supporter and driver of the overall business strategy; to translate competitive market requirements into performance objectives (Slack et aL, 2001). A resource is a basic element that a firm controls in order to best organize its processes. A person, machine, raw material, knowledge, brand image, and a patent can all be viewed as examples. A resource, or set of resources, can be used to create competitive advantage.

Competencies refer to the fundamental knowledge owned by the firm (knowledge, know-how, experience, innovation, and unique information). To be distinctive they are not confined to functional domains but cut across the firm and its organizational boundaries. Competitive advantage can come from a focus upon key competencies. Capabilities reflect an organization’s ability to use its competencies. Capabilities refer to the dynamic routines acquired by the firm; the managerial capacity to improve continuously the effectiveness of the organization. The essence of the resource-based view is its focus on the individual resources, competencies and capabilities of the organization; rather than a market-based strategy that may have commonalities with others in the industry. Sustainable advantage comes from exploitation of the unique resources of the individual organization.

Organizations are bundles and clusters of resources and managers must develop these in individual ways. These can be managed and combined to create the difference that supports a strategic positioning. However, they cannot be easily re-shuffled to take account of market opportunities; organizations must define opportunities in terms of existing internal capabilities and focus on unique expertise; outsourcing anything that is not central to this. Sustainable competitive advantage can be built over time based upon unique combinations of resources and competencies. The activities and processes utilizing these components are hard to replicate by competitors. Products and technologies offer only a short-term strategic advantage, as they have a relatively limited life span and are easy to copy or improve upon.

The Aztec Retail Group is a UK-based clothing retailer, known internationally for its ‘social-occasion’ clothing. With seventeen divisions and twenty-six labels it reaches into four segments of the clothing market: ladies’ wear, menswear, children’s wear and textiles. Aztec has also expanded globally and almost half of its business is done outside the UK. In the early 1990s, Aztec went through many lean years until in 1995–96 it decided to restructure and deploy an operations strategy with its main suppliers. In order to first refocus it employed a ‘50–30–10’ strategy. The plan was to reduce the design to sales cycle by 50 per cent, the inventory by 30 per cent and costs by 10 per cent in the hope of growing profit margins. Execution of the ‘50–30–10’ strategy was largely accomplished by cutting back the size of the clothing lines offered as a method to prepare for future, sound diversification. This initial focus also enabled a clearer understanding to be gained of the basic operational systems needed. Aztec blended various operational management core competencies, technologies, resources and activities into what they called high level packages. For example, shared pipeline information systems, data interchange support, joint planning approaches, replenishment and re-estimation and reorder systems, and inventory management components, all of which contained a number of operational subsystems. These were then deployed by supply situation using different emphases dependent upon the unique product and/or customer behaviour needs.

 

References:

Slack, N., Chambers, S. and Johnston, R. (2001), Operations Management, Financial Times and Prentice-Hall, Harlow.

 

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Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year Answer

Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?

 Ans:

  

Dps $5.00
rps 10%
   
Vps $50.00

 

Stock’s required rate of return = Dps (the preferred dividend) / Vps (value of the preferred stock)

 Stock’s required rate of return = 5 /50 = 0.10 = 10 %

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Would you expect that a company’s WACC would increase as the firm took on more debt in its capital structure Answer

Yes a companies WACC would increase with increased debt. See examples below:

Base

T = 40%

wd = 30% rd = 6.0%

wps = 5% rps = 5.8%

ws = 65% rs = 12.0%

WACC = Weighted average cost of capital

= wd rd(1 – T) + wps rps + ws rs

WACC = 9.17%

increased debt

T = 40%

wd = 40% rd = 6.0%

wps = 5% rps = 5.8%

ws = 65% rs = 12.0%

 

WACC = Weighted average cost of capital

= wd rd(1 – T) + wps rps + ws rs

WACC = 9.53%

decreased debt

T = 40%

wd = 20% rd = 6.0%

wps = 5% rps = 5.8%

ws = 65% rs = 12.0%

 

WACC = Weighted average cost of capital

= wd rd(1 – T) + wps rps + ws rs

 

WACC = 8.81%

 

Weighted average cost of capital (WACC) is the average rate of return a company expects to compensate all its different investors. The weights are the fraction of each financing source in the company’s target capital structure Here is the basic formula for weighted average cost of capital:

WACC = ((E/V) * Re) + [((D/V) * Rd)*(1-T)]

 

E = Market value of the company’s equity

D = Market value of the company’s debt

V = Total Market Value of the company (E + D)

Re = Cost of Equity

Rd = Cost of Debt

T= Tax Rate

 

It’s important for a company to know its weighted average cost of capital as a way to gauge the expense of funding future projects. The lower a company’s WACC, the cheaper it is for a company to fund new projects.

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