Case Summary Read the Discussion Assignment 2-1 on p.34 of the text Technology Adoption by Small Manufacturers. Consider yourself as a health care leader in a small not-for-profit hospital. You have been in charge to assess the technology in the laboratory. You discover the equipment is outdated and could be upgraded and automated; however, there is a major cost associated with these purchases. Apply the following questions to the scenario of being a health care leader in a small not for profit hospital: What challenges occur with purchasing modern technology in a hospital environment? As a healthcare leader, how can you justify the cost perspective of upgrading your equipment in a small hospital? What are the risks of not upgrading the equipment? What is the employee perception if you purchase the equipment or do no purchase the equipment? What risks are there to patients using outdated equipment? Assignment Guidelines In this section it is important to be correct. You are \"applying\" what you've learned from your weekly experience in the class. Your answers can add value to the reader when they show you have knowledge of the issue supported by research. The facts of the situation. Facts, research not opinions. It must also include your comprehension/understanding of the issues, i.e. the implications of the facts for healthcare. It should include \"application, e.g. a case study or example applying the concepts and who has a best practice using the concepts. An analysis, either root cause or comparative analysis should be offered. It should have your conclusions including any new ideas you have to improve the situation and why your idea might be better. Sources: Sources must be scholarly and published within the last 3-4 years. Preferably within the last year depending on the issue. By the time a healthcare research publication gets to print it can be over 1-2 years old. Healthcare changes daily. Be sure you use scholarly publications with reputable and reliable authors. Do not use opinion editorials from magazines, blogs, tweets, newsletters, TV or radio, cable news except to give you a sense of what's popular. These should lead you to ask better questions and seek, like Argos the dog, essence beyond the \"noise\". Your references must appear in the text box at the end of each answer, not all at the end in the last question. CHAPTER 2 QUALITY AND GLOBAL COMPETITIVENESS I'm surprised how many people think you can throw a hand grenade at a competitor and expect he'll stand there and enjoy it. Frank Lorenzo MAJOR TOPICS T . The Relationship Between Quality and Y Competitiveness . Cost of Poor Quality L . Competitiveness and the U.S. Economy E . Factors Inhibiting Competitiveness . Comparisons of International Competitors R . Human Resources and Competitiveness , . Characteristics of World-Class Organizations . Management-by-Accounting: Antithesis of Total Quality S . U.S. Companies: Global Strengths and Weaknesses E . Quality Management Practices in Asian Countries K One of the results of World War II combined with sub-O sequent technological advances was the creation of U the global marketplace. Following the war, industrialized countries began looking for markets outside their 2 own borders. Although the war gave the world a boost 0 in this regard, it was advances in technology that really made the global marketplace possible. Advances in 1 communications technology have made people from 2 all over the world electronic neighbors and electronic B customers. Advances in transportation technology allow raw U materials produced in one country to be used in the manufacture of products in a second country that are, in turn, sold to end users in a third country. For example, leather produced in Australia might be shipped as raw material to Italy, where it is used in the manufacture of shoes and purses that are sold in the United States, France, and Japan. At the same time, leather produced in South America is sent to shoe manufacturers in Indonesia. These manufacturers, like their Italian counterparts, sell their shoes in the United States, France, and Japan. This means the manufacturers in Italy compete with the manufacturers in Indonesia. This simple example demonstrates the kind of competition that takes place on a global scale every day. Such competition has become the norm, and it can be intense. It used to be only large corporations and multinational corporations that faced global competition; now even small companies are affected. Today no company is immune to the effects of global competition. THE RELATIONSHIP BETWEEN QUALITY AND COMPETITIVENESS The relationship between quality and competitiveness is best illustrated by an example from the world of athletics. Consider track star Juan Arballo. In high school, he was his track team's best sprinter. Competing at the district level, Juan easily topped the competition in such events as the 100-, 200-, and 400-meter runs and several relays in which he was the anchor. He did well-enough in high school to win a college scholarship. However, at the college level the competition was of a higher quality, and Juan found he had to train harder and run smarter to win. This he did, and although he no longer won every race, Juan did wellenough to pursue a spot on the U.S. Olympic team. In the Olympic Trials, the quality of the competition was yet again better than that to which Juan was accustomed. He made the Olympic team but only in two events: the 200-meter dash and the 4 100 relay. In the preliminary events at the Olympics, Juan Arballo found the quality of his competitors to be even better than he had imagined it would be. Some competitors had preliminary times better than the best times he had ever run in meets. Clearly, Juan faced the competitive challenge of his career. When his event was finally run, Juan, for the first time in his life, did not place high enough to win a medal. The quality of the global competition was simply beyond his reach. 21 22 CHAPTER TWO In this example, at each successive level of competition the quality of the competitors increased. A similar phenomenon happens to businesses in the marketplace. Companies that used to compete only on a local, regional, or national level now find themselves competing against companies from throughout the world. Like Juan Arballo, some of these companies find the competition to be more intense than any they have ever encountered. Only those who are able to produce world-class quality can compete at this level. In practical terms, it is extremely important for a country's businesses to be able to compete globally. When they can't, jobs are lost and the quality of life in that country declines correspondingly. COST OF POOR QUALITY Many business executives adopt the attitude that ensuring quality is good thing to do until hard times set in and cost cutting is necessary. During tough times, quality initiatives are often the first functions to go. Companies that take this approach are those that have never integrated continual quality improvement as a normal part of doing business. Rather, they see it as a stand-alone, separate issue. What executives in such companies fail to calculate or to even understand is the costs associated with poor quality. This ironic dilemma is best illustrated with an example of two companies. A Tale of Two Companies Two companies, ABC Inc. and XYZ Inc., both need to compete in the global marketplace in order to survive. As might be expected, over the years competition has become increasingly intense. In order to be more competitive, ABC's executives undertook a major company-wide cost-cutting initiative. They eliminated quality audits; changed from trusted, proven suppliers to low-bid suppliers; purchased new computer systems; cut back on research and development; and reduced customer service staff. These cost-cutting strategies did have the desired effect of decreasing the company's overhead, but they also had the unplanned consequences of disrupting the company's ability to satisfy customers and reducing the company's potential to develop new business in the future. The net outcome of all this was unhappy customers, disenchanted employees, and a decline in business. To make matters even worse, the company was still struggling with the poor performance record that caused its executives to want to cut costs in the first place. The executives of XYZ Inc. also needed to make some changes in order to stay competitive, but they decided to take a different approach. XYZ's management team set out to identify all of the costs that would disappear if their company improved its performance in key areas. The costs identified included those associated with the following: late deliveries to customers, billing errors, scrap and rework, and accounts payable errors. In other words, XYZ's executives decided to identify the costs associated with poor quality. Having done so, they were able to begin improvement projects in the areas identified without making cuts in functions essential to competitiveness (e.g., product quality, research and development, customer service). Cost of Poor Quality and Competitiveness Few things affect an organization's ability to compete in the global marketplace more than the costs associated with poor quality. When an organization does what is necessary to improve its performance by reducing deficiencies in key areas (cycle time, warranty costs, scrap and rework, on-time delivery, billing, etc.), it can reduce overall costs without eliminating essential services, functions, product features, and personnel. Reducing the costs associated with poor quality is mandatory for companies that hope to compete in the global marketplace. Reducing such costs is one of the principal drivers behind the T total quality concept of continual improvement. Y Figure 2-1 summarizes both the traditional and the hidden L costs of poor quality. The key principle to understand when examining the hidden costs shown in Figure 2-1 isE that if every activity in an organization is performed properly R every time, these costs simply disappear. , Interpreting the Costs of Poor Quality Once activities have been identified that exist only or primarily S because of poor quality, improvement projects can be undertaken to correct the situation. It is important at this E stage to select those projects that have the greatest potenKto yield the highest return. The following steps can be tial used O to measure the costs of poor quality so that selected improvement projects have the highest priority: U 1. Identify all activities that exist only or primarily because of poor quality. 2. 2 Decide how to estimate the costs of these activities. 0 1 2 B U Factors to Consider When Quantifying the Costs of Poor Quality FIGURE 2-1 Quality and Global Competitiveness 3. Collect data on these activities and make the cost estimates. 4. Analyze the results and take necessary corrective actions in the proper order of priority. Reducing the cost of poor quality reduces all other costs product costs, the cost of doing business, and so on. This, in turn, improves the superior value equation: quality, cost, and service. COMPETITIVENESS AND THE U.S. ECONOMY The United States came out of World War II as the only major industrialized nation with its manufacturing sector completely intact. A well-oiled manufacturing sector and the availability of abundant raw materials helped the United T States become the world leader in the production and export Y of durable goods. This resulted in a period of unparalleled prosperity and one of the highest standards of living ever L experienced by any country. E While the United States was enjoying its position as the world's preeminent economic superpower, the other R industrialized nations of the world, particularly Japan and , Germany, were busy rebuilding their manufacturing sectors. As Japanese and German manufacturers rebuilt, two things became apparent to them: S 1. To succeed, they would have to compete globally. E 2. To compete globally, they would have to produce goods K of world-class quality, which meant producing better goods but at reasonable, competitive prices. O Basking in their prosperity, U.S. manufacturers were slow to U catch on that the game had changed from mass production with acceptable levels of waste to quality production with things done right the first time every time to provide superior 2 value for customers. The old game was best cost. The new 0 game had become best cost and best quality. When foreign companiesthrough a combination of better training, bet1 ter technology, and better managementbegan to eat away 2 at markets, U.S. companies, mistakenly seeing cost rather than quality as the issue, began sending work offshore to B hold down labor costs. By the time U.S. companies learned U that quality and value were key to success in the global marketplace, Japan, Germany, Taiwan, and Korea had made major inroads into global markets previously dominated by U.S. manufacturers (i.e., steel, automobiles, computers, and consumer electronics). In a relatively short period of time, the United States went from the world's leading lender and exporter to the world's biggest debtor, with a huge balanceof-trade deficit. By 1980, the United States was consuming more than it produced and the trend continues to this day. Impact of Competitiveness on Quality of Life A nation's ability to compete in the global marketplace has a direct bearing on the quality of life of its citizens. Because 23 QUALITY TIP \u0002 The United States and the Global Marketplace Companies in the United States have had to learn the hard way that the key to winning in the global marketplace is consistently providing superior value for customers. Superior value consists of superior quality, cost, and service. By the time this realization set in, the U.S. companies in such sectors as automobiles and consumer electronics had lost substantial market share to their competitors in Japan, Korea, and such emerging industrial nations as China and Indonesia. The companies, regardless of their country of origin, that will survive and thrive in the global marketplace are those that can (1) achieve consistent peak performance from people, processes, suppliers, management systems, and all other factors that can effect their ability to deliver superior value and (2) continually improve what passes for peak performance. the ability to compete translates into the ability to do a better job of producing quality goods, it is critical that nations and individual organizations within them focus their policies, systems, and resources in a coordinated way on continually improving both quality and competitiveness. The United States began the first decade of the new century poised on the precipice of a growing gap between the haves and the have-nots. While Canada, France, Germany, Italy, Japan, Sweden, and Great Britain have taken steps to link economics, education, and labor market policy in ways that promote competitiveness, the United States is still debating the need for an industrial policy and struggling to reverse the decline of its public schools. During the 1980s, the United States improved productivity by putting more people to work. Other countries improved their productivity by making the individual worker more efficient. Most new entrants into the workforce during the 1970s and 1980s were people who had not worked previously, primarily women. This influx of new workers helped the United States maintain its traditionally high level of productivity. However, by the 1990s, the gains that could be made by increasing the number of people in the workforce had been made. From 2010 to the foreseeable future, the number of people in the prime working-years age groups in the United States will be on the decline.1 As the size of the workforce continues the downward trend that began in the early 1990s, the only way to improve productivity will be to do what other industrialized countries have doneconcentrate on improving the efficiency of individual workers. In other words, businesses in the United States will need to get more work out of fewer workers. As some businesses have already learned, the best way to do this is to adopt the total quality philosophy. Figure 2-2 contains several vignettes relating to the quality of life in the United States. This figure presents either a bleak picture of bad times to come or an unprecedented national challenge. To meet the challenge, companies in the CHAPTER TWO 24 Quality of Life Issues in the United States FIGURE 2-2 United States will have to produce world-class value, which will require a commitment to superior quality, cost, and service. FACTORS INHIBITING COMPETITIVENESS Improving competitiveness on a national scale is no simple matter. Much can be done at the level of the individual company, where the total quality approach can be applied to great advantage, but competitiveness on a national scale requires more than just total quality. Students of quality management must understand this point. Failure to understand the limits of total quality has caused some business leaders to expect too much too soon. This, as a result, has turned them into detractors. This section describes factors that can inhibit competitiveness but are beyond the scope of total quality. They are socioeconomic and sociopolitical in nature and are indigenous to the United States. In the age of global competition, managers should apply the principles of total quality to help make their individual organizations more competitive. Simultaneously, they should work through the political and social systems as private citizens and community leaders to help level the playing field among nations by correcting the inhibitors explained in this section. These inhibitors fall into the following categories: business- and governmentrelated factors, family-related factors, and educationrelated factors. Business- and Government-Related Factors Those U.S. companies trying to compete in the global marketplace are rowing upstream while dragging an anchor. Actually, they drag three anchors. This was pointed out many years ago by W. Edwards Deming when he first set forth his Seven Deadly Diseases. His second, sixth, and seventh deadly diseases are as follows:2 . . . Emphasis on short-term profits fed by fear of unfriendly takeover attempts and pressure from lenders or shareholders Excessive medical costs Excessive costs of liability inflated by lawyers working on contingency fees Each of these diseases adds cost to a company's products without adding value. Nothing could be worse when viewed from the perspective of competitiveness. A company T might equal all competitors point for point on all quality and productivity criteria and still lose in the marY because it is a victim of deadly diseases that drive ketplace upLthe cost of its product. Excessive medical costs and litigation, primarily related toE workers' compensation, have also slanted the playing field inRfavor of foreign competitors. The annual cost of workers' compensation to U.S. businesses is almost $30 billion. , is a non-value-added cost that increases the price these This businesses must charge for their products. Litigation and the associated legal costs have made tort reform an issue inSthe U.S. Congress and in the legislatures of most states. However, intense lobbying by trial lawyers has prevented E any significant tort reform. K Overcoming these business-related inhibitors will require O and government to work together in a positive, conbusiness structive partnership to enact policies that will reduce these U non-value-added costs to a minimum. To accomplish this goal, the United States will have to undertake major restructuring 2 of its financial, legal, and medical systems. 0 1 Human resources are a critical part of the competitiveness 2 equation. Just as one of the most important factors in fielding aB competitive athletic team is having the best possible players, one of the most important factors in fielding a competitive U company is having the best possible employees. Consequently, Family-Related Factors the quality of the labor pool is important. The more knowledgeable, skilled, motivated, and able to learn members of the labor pool are, the better. Well-educated, well-trained, motivated members of the labor pool quickly become productive employees when given jobs. Although providing ongoing training for employees is important in the age of global competitiveness, the type of training provided is important. Organizations that can offer training that has immediate and direct application spend less than those that have to begin by providing basic education for functionally illiterate employees. Since the 1970s, U.S. businesses have had to devote increasing amounts of money to basic education efforts, whereas foreign competitors have Quality and Global Competitiveness been able to provide advanced training that very quickly translates into better quality and productivity. Many factors account for this difference. Some of these can be traced directly to the family. If the family unit, regardless of how it is constituted, is the nation's most important human resource development agency, the labor pool from which U.S. companies must draw their employees cannot match that in competing countries. Single parents who must work full-time have little or no time to help their children excel in school. Children with parents who do not value education are unlikely to value it themselves. If the family has a strong influencepositive or negative, by design or by defaulton the attitudes of children toward learning and work, the United States faces deep-seated problems that must be solved if its companies are going to compete in the global marketplace. 25 FIGURE 2-3 Comparison of Per-pupil Funding in Selected Industrialized Countries Source: The Management Institute, Global Update (January 2011), 13. T Y The transition from classroom to workplace has never been L easy, but in the age of global competition it has only become E more difficult. The needs of employers have increased markedly. Unfortunately, the academic performance of stuR dents in the United States has not kept pace with changes , in the global marketplace. High school graduation rates in Education-Related Factors the United States rank near the bottom when compared with those in other leading industrialized nationsnations S America must compete with. In addition, the performance of those students who do graduate from high school is markE edly lower than that of their contemporaries in competing K industrialized countries. On international tests of academic performance in such O key areas as reading, mathematics, science, and problem U solving, American students lag well behind their contemporaries in other countries. This is bad news for employers in the United States that must compete in an increasingly 2 global environment. Human performance is one of the key 0 ingredients in quality, productivity, value, organizational excellence, and all of the other factors that affect global com1 petitiveness. Students who enter the workplace unable to 2 perform at competitive levels in reading, mathematics, science, and problem solving just handicap their employers. B Figure 2-3 compares annual expenditures per pupil for U leading industrialized countries. Of the top seven, the United States spends the most, whereas Korea spends the least. Figure 2-4 compares the number of school days required of students annually in the leading industrialized countries. With this criterion, the order is reversed when comparing the United States and Japan. Figures 2-5, 2-6, 2-7, and 2-8 show the actual rankings of student performance on international tests of reading, mathematics, science, and problem solving as tracked by the Organization for Economic Cooperation and Development (OECD). Figure 2-5 shows the relative performance rankings of students in mathematics literacy. The average score of students from the United States is well below the international average (474 versus 498). Figure 2-6 shows similar FIGURE 2-4 Comparison of School Days per Year in Selected Industrialized Countries Source: The Management Institute, Global Update (January 2011), 14. results in science literacy. Figure 2-7 shows that students from the United States scored an average of 495 on reading while the average international score was 500. Figure 2-8 shows that students from the United States scored an average of 477 while the international average was 500. These scores do not bode well for the United States or for its employers who must compete in the global arena. In fact, what the scores mean is that if global competition were a footrace, the United States would be starting 100 yards behind in a 200-yard race. U.S. Manufacturers and Global Competition The most important sectors in determining the quality of life in a country are manufacturing and agriculture. The United States has led the world in agricultural production for many years and still does. The United States also led the world in manufacturing productivity for many years. Beginning with the 1960s, however, this lead began to slip. The decline continued and accelerated through the 1980s to the point that the U.S. manufacturing sector entered the 1990s struggling uphill to regain ground. In the mid-1990s, however, the United States began to reemerge as a world-class competitor. No longer is the United States, or any other country, the clearcut leader in terms of manufacturing productivity. With the CHAPTER TWO 26 Mean Achievement in Math Literacy Country Hong Kong Finland Korea Netherlands Liechtenstein Japan Canada Belgium Macao Switzerland Australia New Zealand Czech Republic Iceland Denmark France Sweden Austria Germany Ireland Slovak Republic Norway Luxembourg Poland Hungary Spain Latvia United States FIGURE 2-5 Mean Achievement in Science Literacy Math Literacy 550 544 542 538 536 534 532 529 527 527 524 523 516 515 514 511 509 506 503 503 498 495 493 490 490 485 483 483 Mean Achievement Scores in Math Literacy Source: www.oced.org, January 2011. dawning of the new millennium, Japan, the United States, Germany, and Korea became increasingly competitive. Figure 2-9 compares the productivity of automobile manufacturers in Japan, the United States, and Europe. In this chapter, the term productivity is used several times. In this context, the term should be viewed as \"total factor productivity\" (ratio of outputs to inputs from labor, capital, materials, and energy). The graph compares the average hours required by the most productive plants to produce one automobile. Japanese plants located in Japan are able to produce an automobile in an average of 15 hours. European manufacturers require more than twice that much time. Such U.S. manufacturers as General Motors, Ford, and Chrysler require an average of 20 hours per automobile. Japanese manufacturers with assembly plants in the United States using U.S. workers, such as Mazda, average 19 hours per automobile. Because hourly wages in Europe tend to be higher than those in Japan Country T Y L E R , Science Literacy Finland Japan Hong Kong Korea Liechtenstein Australia Macao Netherlands Czech Republic New Zealand Canada Switzerland 548 548 539 538 525 525 525 524 523 521 519 513 France Belgium Sweden Ireland Hungary Germany Poland Slovak Republic Iceland United States 511 509 506 505 503 502 498 495 495 491 S E FIGURE 2-6 Mean Achievement Scores in Science Literacy K www.oced.org, January 2011. Source: O U and the United States, European firms operate at a double competitive disadvantage. European and U.S. firms are nibbling away at these productivity differences to the point 2 that the gap between the best and worst producers is slowly 0 steadily closing. but 1 Another area in which Japanese firms have gained a competitive advantage is product development. The product 2 development cyclethe time it takes to turn an idea into a finished B productis typically shorter in Japan than in the United States and Europe. This allows Japanese firms to Unew products to the market faster. Japanese automoget bile manufacturers take an average of 2 years to complete the product development cycle compared with more than 3 years for their competitors in the United States and Europe. Another basis for comparison among automobile manufacturers is quality. Productivity gained at the expense of quality yields no competitive advantage. Figure 2-10 compares the major automobile-producing nations in terms of the average number of defects per 100 vehicles manufactured. The quality comparisons follow the same trends found in the earlier productivity comparisons. Japanese manufacturers average the fewest defects; European manufacturers average the most. American manufacturers find it difficult to compete in the global marketplace when their productivity and quality are Quality and Global Competitiveness Hours per Automobile Mean Achievement in Reading Literacy Reading Literacy Country Finland Korea Canada Australia Liechtenstein New Zealand Ireland Sweden Netherlands Hong Kong Belgium Norway Switzerland Japan Macao Poland France United States FIGURE 2-7 543 534 528 525 525 522 515 514 513 510 507 500 499 498 498 497 496 495 27 60 50 40 30 20 10 T Y L E R , 0 Comparative Productivity of Automobile Manufacturers (Most Productive Plants) FIGURE 2-9 Source: Congress of the United States, Office of Technology Assessment, 2011. Mean Achievement Scores in Reading Literacy Source: www.oced.org, January 2011. Advanced Problem-Solving Skills Korea............................. 70% plus Japan............................ 70% plus S E K O U Defects per 100 Vehicles 110 90 60 70 Finland........................... 70% plus Germany......................... 58% Czech Republic................ 58% AVERAGE 52% Ireland........................... 51% Russia............................43% United States....................42% 2 0 1 2 B U Percent of Students with Advanced ProblemSolving Skills FIGURE 2-8 Source: www.oced.org, January 2011. not up to international standardsa situation that must be reversed if the United States is to regain the preeminent position it has historically enjoyed in the world community. Even a cursory examination of key economic indicators raises concerns. The ability of a country to compete in the manufacturing arena is a direct determinant of its quality of life. Manufacturing created the great American Comparative Defect Frequency among Automobile Manufacturers FIGURE 2-10 Source: Congress of the United States, Office of Technology Assessment, 2011. middle class. If the manufacturing sector dwindles because it cannot compete globally, the middle class dwindles correspondingly. Figure 2-11 contains a number of facts that indicate what has happened to the U.S. economy during the years since World War II. These are the years in which U.S. manufacturers have steadily lost ground to foreign competition. Do these comparisons mean that U.S. manufacturers cannot compete? The answer is no. American manufacturers were slow to respond to the international quality revolution. However, in the 1980s and into the new millennium, the realization that quality coupled with productivity 28 CHAPTER TWO Selected Economic Indicators FIGURE 2-11 Source: The Management Institute, Global Update (May 2011), 12-13. was the key to winning global competition caused many U.S. firms to begin adopting the approach set forth in this book while simultaneously pushing for change in areas beyond their control (i.e., cost of capital, industrial policy, etc.). As the total quality approach continues to gain acceptance, companies in the United States are closing the competitiveness gap. COMPARISONS OF INTERNATIONAL COMPETITORS According to a report published by the World Economic Forum, the United States has reclaimed its place as the most competitive country in the world community.3 This is good news, since the United States had slipped to fifth place during the 1990s. This means that in spite of the poor performance of students in the United States when compared with the performance of students in other industrialized nations, the United States has managed to improve in the areas of standard of living, manufacturing productivity, investment, and trade, which are critical indicators of national competitive status (Figure 2-12). Critical Indicators of National Competitive Status FIGURE 2-12 HUMAN RESOURCES AND COMPETITIVENESS T point is made continually throughout this book that the The most Y valuable resources for enhancing competitiveness are human resources. The truth of this point becomes apparLif one studies the approach taken by Germany and Japan ent toErebuild from the rubble of World War II. Both countries were devastated. Being left with only one real resource, the R resource, Germany and Japan were forced to adopt human an, approach that used this resource to the greatest possible advantage. The German and Japanese systems are not perfect, nor S they infallible. They are examples of approaches that are work as well as any other two systems can in a continuE ally changing and unsure global marketplace. Further, they K wise and effective use of human resources. make O Business, government, and labor leaders in the United States could learn a great deal from Germany and Japan. U often respond to suggestions that such study might People be helpful by claiming that the culture of the United States is so different that what works in these countries won't 2 0 1 2 B U Quality and Global Competitiveness 29 Strategies for Human Resource Competitiveness in Japan and Germany FIGURE 2-13 T Y L E R , S E work in the United States. Such thinking misses the point K entirely: few countries could be more different from one another than Japan and Germany, yet the approaches to O competitiveness adopted by these countries are strikingly U similar (see Figure 2-13). CHARACTERISTICS OF WORLD- 2 CLASS ORGANIZATIONS 0 It is often said that only \"world-class\" organizations can 1 compete in the global marketplace. But what is a world-class 2 organization? In an attempt to answer this question, the B American Management Association (AMA) conducted a global survey.4 According to this survey, the following are the top U 15 areas in which organizations are concerned about doing well as they attempt to compete in the global marketplace: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Customer service Quality control and assurance Research and development/new product development Acquiring new technologies Innovation Team-based approach (adopting and using effectively) Best practices (study and use of) Manpower planning Environmentally sound practices Business partnerships and alliances 11. 12. 13. 14. 15. Reengineering of processes Mergers and acquisitions Outsourcing and contracting Reliance on consulting services Political lobbying Of the 15 areas listed in the survey, several are directly associated with the larger issue of quality. Customer service, quality control and assurance, innovation, team-based approach to work, partnerships and alliances, and reengineering of processes are all topics that figure prominently in any discussion of total quality. In addition to these issues, the AMA survey found that respondents were concerned about a number of human resources topics. The 10 most important of these are as follows: 1. Worker productivity (improvement) 2. Employee training and development 3. Open communication between management and employees 4. Employee benefits and perquisites 5. Codes of workplace conduct 6. Conflict resolution 7. Employee satisfaction 8. Flextime arrangements 9. Management-employee-union relations 10. Child care 30 CHAPTER TWO Production and Supply Chain Strategies QUALITY TIP \u0002 Lesson from Toyota's Quality Problems Few companies are more closely associated with quality than Toyota. With the assistance of W. Edwards Deming, Toyota pioneered the quality revolution that helped transform Japan from a bombed out shell of a country following World War II into an economic superpower. However, as events have proven, even a quality giant such as Toyota can stumble. Following a serious damage to its image and also to its profit/loss statement caused by a succession of product recalls, Toyota began to tackle the difficult task of winning back its lost credibility with customers and the general public. Along the way, Toyota's leadership learned a valuable lesson about how to recover from a quality crisis. That lesson was this: when fixing the problems, focus on the needs of your customers. Toyota knew that just recalling cars and fixing the problems would not be sufficient. Consequently, the car maker offered a variety of incentives to entice Toyota owners to bring their cars in for the necessary repairs. Then the company paid for all repairs and parts. It also provided discounts and extended warranties as options available to customers. This was a responsible way to get past the crisis. However, the real issue is whether Toyota will identify and correct the root cause of the recall problems. Doing so will be the key in determining if the Japanese auto giant can fully and permanently recover from its problems. This is the most important lesson to learn from Toyota's recall crisis. Once again, the AMA survey identified numerous qualityrelated concerns and functions that organizations must do well if they hope to compete globally. Worker productivity, employee training and development, codes of workplace conduct, conflict resolution, employee satisfaction, and management-employee-union relations are all total quality- related topics that are addressed at various points in this text. World-Class Manufacturing: What It Takes Organizations in business sectors ranging from banking to commercial transportation attempt to compete on a global scale. The most prominent of these come from the manufacturing sector. World-class manufacturers are those that consistently provide superior value (quality, cost, and service) for customers. The methods of world-class manufacturers are summarized in the following subsections: Competitive Analysis Strategies In the area of competitive analysis, world-class manufacturers use the following methods to compare themselves with the competition for the purpose of improving their own performance: cost efficiencies in operations, speed to market, research and development supremacy, rapid delivery from suppliers, first-class delivery logistics, zero defects, real-time order management, seamless integration with sales and marketing, close to zero inventory, and networked or collaborative operations. By applying these criteria to themselves and their competitors, world-class manufacturers determine where their performance is and where it needs to be in order to compete globally. In the area of production and supply chain strategies, world-class manufacturers use the following methods to stay ahead of the competition: collaborative planning, forecasting, and replenishment; collaborative manufacturing and product design; direct delivery of materials to point of use; suppliermanaged inventory; and use of channel-assembly distributors. Other manufacturers also use these strategies to varying degrees. Ultimate manufacturers stay ahead of the competition by using them extensively. Customization Strategies In the area of customization strategies, world-class manufacturers use the following methods: building to order, mass production that is configured for individual customers, configuring to order (linking sales operations to production schedules), one-to-one customization for customers in real time, and global sourcing T and manufacturing. As with the other strategies, it is not just Y fact that ultimate manufacturers use these customizathe tion L methods that makes them world class; it is the extent to which they use them. E Electronic Commerce Strategies In the area of R electronic commerce strategies, world-class manufactur, use the following methods: supply management, buyers ing, auctioning, Internet ordering, status and availability tracking by Internet, and accepting Internet orders from S customers. World-class manufacturers use electronic commerce strategies almost twice as often as their comE petitors. In addition, these world-class organizations are onKtrack to increase their use of electronic commerce over the Onext 5 years at a rate well beyond the projected rates of competitors. U Compensation Systems In the area of compensation systems, world-class manufacturers use the following meth2 ods as benchmarks for rewarding and recognizing managers 0 and employees: product profitability, inventory levels, manufactured/delivered costs per unit, worker productivity, 1 level of customer satisfaction, manufacturing cycle time, cost 2 efficiencies in operations, employee retention rates, speed ofB response to market demands, percent of revenues from new products, total delivered cost per unit, zero defects, perU of costs saved from strategic outsourcing, integration cent of functions across the organization, economic value added, and percent of products from strategic alliances. Figure 2-14 contains a brief checklist of minimum performance benchmarks that manufacturers must be able to meet in order to compete in the global marketplace. MANAGEMENT-BYACCOUNTING: ANTITHESIS OF TOTAL QUALITY In too many businesses, accounting trumps quality. Often, managerial accounting becomes the tail that wags the doga questionable approach to doing business in a highly Quality and Global Competitiveness 31 To Compete in the Global Marketplace, Manufacturers Must Consistently Exceed These Benchmarks FIGURE 2-14 Source: International Finance Center, Washington, DC. competitive environment. When managerial accounting becomes management-by-accounting, quality inevitably suffers. Management-by-accounting amounts to focusing solely on an organization's financial performance rather than managing the factors that most affect financial performance (e.g., people, process, and product quality). T The most obvious problem with management-byY accounting is that it leads to short-term thinking and shortterm decision making. According to this approach, one of the L fastest ways to improve financial performance in the short E run is to ignore investing in continual improvement that are necessary to remain competitive in the long run. The pracR tices like (1) keeping people trained and well-equipped; (2) , employing best practices to keep processes operating at peak performance levels; and (3) maintaining world-class quality in all aspects of an organization's operations cost money in S the short run but pay off in the long run. In other words, E total quality is a long-term concept while management-byaccounting is a short-term concept. K One of the many reasons why companies fall into the O management-by-accounting trap is that many CEOs come from a finance-related background, the most common colU lege degree among the American CEOs being an MBAa degree with a strong finance orientation. To avoid such ideological pitfalls, all business-related degrees need to include 2 a more thorough study of quality. It is also why more qual0 ity professionals need to put themselves on the \"CEO track\" in their professions. Consider the following problems that 1 result from the application of management-by-accounting: 2 . . . Management-by-accounting leads to decision makB ing by analysis of financial spreadsheets rather than by U consideration of the factors that lead to organizational excellence and world-class quality. Management-by-accounting encourages short-term cost cutting instead of long-term improvements to quality, value, and competitiveness. Management-by-accounting leads to narrowlyfocused leadership of companies based solely on short-term financial considerations rather than broader thinking that encompasses all factors that contribute to organizational excellence and make a company competitive. The master's of business administration degree, or MBA, is an excellent credential. So are the various other under- graduate and graduate degrees available from colleges and universities in the United States. It is the concept of focusing excessively on the score rather than the game management-by-accountingthat is being questioned by quality advocates, not any specific degree. Management-byaccounting is an approach to management, not an academic credential. As anyone knows, both the game and the score are important. We advocate a blending of the principles of quality management with the curricula of business, engineering, technology, and management programs. Students pursuing a degree in any of these disciplines should learn the principles of quality management set forth in this book as well as their traditional curriculum content. This will ensure that they know how to continually improve both performance and the score. U.S. COMPANIES: GLOBAL STRENGTHS AND WEAKNESSES As business continues the current trend toward globalization, how are companies in the United States faring? A business trying to compete in the global marketplace is like an athlete trying to compete in the Olympics. Nowhere is the competition tougher. Correspondingly, no country in the world gives its businesses such a solid foundation from which to work. The following factors account for a country's ability to compete in the international marketplace: 1. An economy that is open to foreign investment and trade 2. A government that minimizes controls on business but does a good job of supervising financial institutions 3. A judicial system that works well and helps reduce corruption 4. Greater transparency and availability of economic information 5. High labor mobility 6. Ease of entry by new businesses In varying degrees, the United States meets all of these criteria. Of course, how well these criteria are fulfilled is a matter of debate between and among various interest groups and stakeholders. Nonetheless, when compared with other countries competing in the global marketplace, the United States fares well in all of these key areas. This being the case, 32 CHAPTER TWO a key advantage of American firms trying to compete in the global marketplace is these six factors working in their favor. Other advantages and disadvantages are summarized in the following sections. Global Advantages of U.S. Companies In the global marketplace, the United States is the world leader in the following industries: aerospace, airlines, beverages, chemicals, computer services, electrical products, entertainment, general merchandise, motor vehicles, office equipment, paper products, pharmaceuticals, photographic and scientific equipment, semiconductors, soap and cosmetics, and tobacco. Some of the reasons the United States is able to lead the world in these key industries include 1. Strong entrepreneurial spirit 2. Presence of a \"small capitalization\" stock market for small- and mid-sized companies 3. Rapidly advancing technologies 4. Comparatively low taxes 5. Low rate of unionization 6. World-class system of higher education (colleges and universities) The United States leads the world in new business start-ups. This is because the entrepreneurial spirit is an integral part of the American persona. The presence of a small capitalization stock market allows small- and mid-sized companies to start up and expand without having to use all of their own capital or to take out higher-interest loans from banks, as is often the case in other countries. The United States leads the world in the development, transfer, diffusion, and use of technology. This helps ensure a continual stream of new products on the one hand and improved productivity on the other. Americans complain constantly about taxes (as they are entitled to do in exercising their rights as free citizens). But when compared with other industrialized nations, the United States has a low tax burden. Tension between labor and management can harm productivity and, in turn, decrease a company's ability to compete in the global marketplace. The amount of tension that exists between labor and management can typically be demonstrated by the level of union activity: the more the tension, the more the union activity. Compared with other industrialized nations, union activity in the United States is low. The United States also provides the world's best higher education system. The number of top-notch colleges and universities in the United States is so much greater than those in other countries that comparisons are irrelevant. The cost of higher education in America, although viewed as high by U.S. citizens, is inexpensive when compared with that of other industrialized nations. In addition, financial aid is so readily available that almost any person with the necessary academic ability can pursue a college education in the United States. Global Disadvantages of U.S. Companies In spite of the many strengths companies in the United States can bring to the global marketplace, and in spite of this country's world-leading position in several key industries, there are still some disadvantages with which companies have to deal. The primary global disadvantages of U.S. companies are these: 1. 2. 3. 4. Expanding government regulation A growing \"underclass\" of have-nots A weak public school system (K-12) A poorly skilled labor force and poor training opportunities 5. An increasing protectionist sentiment (to restrict imports) 6. Growing public alienation with large institutions (public T and private) Y Regardless of which major political party has controlled Congress over the past 40 years, the general trend has L been toward increasing government regulation of business. E Regulating business is a difficult balancing act. On the one hand, businesses cannot be allowed to simply pursue profits, R disregarding the potential consequences to the environment , other national interests. On the other hand, too much and regulation or unnecessary regulation can make it impossible to compete globally. The growing divide between haves and S have-nots in the United States might lead to the establishment E and perpetuation of a permanent economic and social underclass. This is precisely what happened in Russia when K Czar Nicholas II was overthrown by the Communists in the early O 1900s. People who lose hope might very well respond in ways that threaten the peace, stability, and social fabric U of the United States. One of the key factors in the establishment of a social and economic underclass is the failure of America's public school system (K-12). Even with the best 2 system of higher education in the world, America cannot 0 overcome the shortcomings of its K-12 system. In fact, if drastic improvements are not made, over time those short1 comings will begin to erode the quality of our higher educa2 system. tion B The most fundamental problem with the public school system from the perspective of global competition is that U of the jobs in companies that need to compete glomost bally require less than a college education. These jobs must be performed by high school graduates who, if they cannot read, write, speak, listen, think, and calculate better than their counterparts in other countries, will be outperformed. Poorly skilled workers are an outgrowth of the failure of the nation's public school system, in which the overwhelming majority of Americans are educated. Ideally, every high school graduate should be fully prepared to either go to work or go on to college. When this is not the case, as it certainly is not, American companies must try to compete with a lessskilled labor force. This is like a baseball coach trying to win with a team of players who cannot pitch, catch, run, or hit. Quality and Global Competitiveness One of the factors that contributed to the Great Depression of the 1930s was global protectionism. Americans wanted their farmers and their manufacturers to be \"protected\" from their counterparts in other countries. Protectionism hurts everyone and never really protects anyone. But as other countries (principally Japan, Korea, and China) have entered U.S. markets, the jobs of American workers have been threatened. A natural but ill-informed response is to call for protectionist measures and to adopt slogans such as \"Buy American.\" Economists are quick to point out, however, that the only valid reason to \"buy American\" is that American products are the best made. If they are not, buying them makes little sense and is nothing more than misguided patriotism. The better approach is to ask why the American products are not the best and then to do what is necessary to make them the best. The final factor that gives U.S. companies a disadvantage T is the growing tendency of the public to see big organizations Y as the \"bad guys.\" This is displayed in many different ways. Disgruntled employees will sometimes pretend injuries and L file fraudulent workers' compensation claims. Employees E will cheat and steal from their employers. Of course, the most common way animosity toward big business is acted out is R by employees giving less than their best on the job. Another , expression is when the public at large supports antibusiness legislation and unnecessary regulations. S E QUALITY MANAGEMENT PRACTICES IN ASIAN K COUNTRIES O Companies in the United States compete for market share U every day with companies all over the world. Global competition has become a way of life for business and industry. Some of the most intense competition comes from Asia, 2 where companies have effectively adopted many of the 0 quality management practices set forth in this book. The most intense competition for companies in the United 1 States now comes from Japan, Korea, and China. Most 2 students of quality are familiar with the strides Japanese 33 companies have made since beginning to adopt quality management practices after World War II. But what is less known is that many other Asian companies are following Japan's lead as a way to compete effectively at the global level. These countries include Bangladesh, Brunei, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, and Thailand. Industrialization in these Asian countries began to gain a foothold in the 1960s and developed rapidly through the 1980s. In the 1980s, companies in these countries began to form quality control circles as a way to gain employee input for continually improving processes and products. By the 1990s, companies in these Asian countries were well along in the adoption and effective application of the principles of total quality management including ISO 9000 registration. By the late 1990s, many companies in these countries had refined their total quality techniques and had begun to emphasize not just the product quality but the service quality, too. The dawning of the new century saw Asian companies adopting ISO 14000 as a way to ensure effective environmental management. National quality awards similar to the Baldrige Award in the United States and the Deming Prize in Japan were adopted by several of these Asian countries. As of now, the leading companies throughout Asia are applying global best practices to maximize performance, value, and quality. The globalization of the marketplace has transformed doing business into an enterprise similar to competing in the Olympics. In the global arena, only the best of the best survive and thrive, the intensity of the competition only increases, what was considered outstanding performance yesterday won't even make the grade tomorrow, and even the smallest countries can produce world-class performers. Companies in the United States that used to compete only locally or regionally now find themselves battling daily against companies from not just Japan but also India, Brunei, Bangladesh, Thailand, Korea, Singapore, Malaysia, Indonesia, and the Philippines. What's more, companies from these countries have learned the value of effectively adopting and applying the principles set forth in this book. B U SUMMARY 1. The relationship between quality and competitiveness can be summarized as follows: In a modern global marketplace, quality is the key to competitiveness. 2. The costs of poor quality include the following: waste, rejects, testing, rework, customer returns, inspection, recalls, excessive overtime, pricing errors, billing errors, excessive turnover, premium freight costs, development cost of the failed product, field service costs, overdue receivables, handling complaints, expediting, system costs, planning delays, late paperwork, lack of followup, excess inventory, customer allowances, and unused capacity. 3. The United States came out of World War II as the only major industrialized nation with its manufacturing sector completely intact. Germany and Japan were devastated by damage during the war. They rebuilt their manufacturing bases on the assumption that to compete globally they would have to produce goods of 34 CHAPTER TWO world-class quality. That strategy helped them recover and become world leaders in manufacturing. 4. Several factors can inhibit competitiveness, including those related to business and government, family, and education. 5. When making comparisons among internationally competing countries, the following indicators are used: standard of living, trade and export growth, investment, and manufacturing productivity. 6. The most important key in maximizing competitiveness is the human resource. Following World War II, this was the only resource that Germany and Japan had to draw on. Consequently, they built economic systems that encourage private employers to make business decisions that emphasize improved productivity and quality rather than price. KEY TERMS AND CONCEPTS Competitive analysis strategies Competitiveness Cost of poor quality Customization strategies Education-related factors Export growth Family-related factors Global integration Investment Manufacturing productivity Product development cycle Quality of life Research and development FACTUAL REVIEW QUESTIONS 1. Explain the relationship between quality and competitiveness. 2. Explain how the costs of poor quality can affect competitiveness. 3. Describe the evolution of the rebuilding effort undertaken by Japan and Germany following World War II. 4. Explain the actions of U.S. manufacturers during the period in which Japan and Germany were rebuilding following World War II. 5. How does a nation's ability to compete affect its quality of life? 6. Explain how education-related factors can inhibit competitiveness. 7. Compare investment and manufacturing productivity in the United States with investment and manufacturing productivity in Japan. 8. List and briefly explain the basic philosophical constructs underlying the human resource aspects of the competitiveness of Japan and Germany. CRITICAL THINKING ACTIVITY Two quality managers meet for lunch every Friday to discuss common problems, compare notes, and make suggestions to each other. Today their discussion has turned into a debate. The topic is the impact of competitiveness on the quality of life in America. \"I think you are taking the issue of competitiveness too far. Sure it's important to my company and to yours, too. But I don't think it has that much of an effect on the overall quality of life in America,\" said the first quality manager. \"I could not disagree with you more,\" responded his colleague. \"The quality of life we enjoy in this country is tied T directly to the ability of U.S. companies to compete in the global marketplace.\" Take one side or the other in this Y debate and complete one of the following activities: L 1. Debate the issue in class with your fellow students. E Make a list of the ways competitiveness can affect the 2. R quality of life. 3. , Write a position paper explaining your opinions in this debate. DISCUSSION ASSIGNMENT 2-1 S E Technology Adoption by Small K Manufacturers O Office of Technology Assessment (OTA) reports that \"The only U 11 to 15 percent of all machine tools in the U.S. are automated; the majority of those automated are found in large companies.\" 2 \"A Census Bureau study found that half of the small manufacturers surveyed don't use any of 17 technologies 0 cited by experts as critical to competitiveness and didn't plan to1do so in the next five years. Among firms that used one of the technologies, 60 percent had no plans to adopt other 2 technologies.\" B DISCUSSION QUESTIONS U Discuss the following questions in class or outside of class with your fellow students: 1. Why don't more small companies in the United States adopt modern technologies? 2. How can modern technologies be justified from a cost perspective in a small company? DISCUSSION ASSIGNMENT 2-2 Pennsylvania's Industrial Resource Centers Pennsylvania's Department of Community and Economic Development maintains a network of industrial resource Quality and Global Competitiveness centers (IRCs) that are operated as nonprofit corporations managed by the private sector but with financial support from the state. These IRCs all have a similar mission: to help small and medium-sized manufacturers adopt world-class technologies and techniquestechnologies and techniques that will lead to organizational excellence. The principles of total quality are the heart of the IRCs' purpose. Typical of these IRCs is the Northwest Industrial Resource Center (NWIRC) which serves an area consisting of 13 primarily rural counties that encompass approximately 2,000 manufacturing enterprises. Services provided fall into two broad categories: (1) business growth services and (2) manufacturing excellence services. Business growth services include those that help small and medium-sized manufacturers grow their principle product line (e.g., strategic planning, sales and marketing, new product development, and succession planning). T Manufacturing excellence services, such as lean manufacY turing, value-stream mapping, ISO support, and continual quality improvement, include those that help improve L quality and productivity. E R , S E K O U 2 0 1 2 B U 35 DISCUSSION QUESTIONS Discuss the following questions in class or outside of class with your fellow students: 1. What kind of non-technology-oriented help might be needed by a small manufacturer? 2. How could the IRC model be applied to the service sector and other nonmanufacturing companies? ENDNOTES 1. U.S. Bureau of Labor Statistics. Retrieved from www. bls.gov on January 3, 2011. 2. Retrieved from www.managementwisdom.com, January 4, 2011. 3. World Economic Forum. Retrieved from www. weforum.org on January 3, 2011. 4. American Management Association. Retrieved from www.amanet.org, on January 3, 2011. CHAPTER 3 STRATEGIC MANAGEMENT: PLANNING AND EXECUTION FOR COMPETITIVE ADVANTAGE A mission statement is \"a long, awkward sentence that demonstrates management's inability to think clearly.\" Scott Adams (Author of Dilbert) MAJOR TOPICS . What Is Strategic Management? . Competitive Strategy . Core Competencies and Competitive Advantage . Components of Strategic Management . Strategic Planning Overview . Creative Thinking in Strategic Planning . Conducting the SWOT Analysis . Developing the Vision . Developing the Mission . Developing the Guiding Principles . Developing Broad Strategic Objectives . Developing Specific Tactics (Action Plan) . Executing the Strategic Plan . Strategic Planning in Action: A \"Real-World\" Case forth in a comprehensive document called the strate- T gic plan. Y Strategic management is management that bases all actions, L activities, and decisions on what is most likely within an ethical frameworkto ensure successful perE formance in the marketplace. From the strategic manager's R perspective, resources are wasted unless they contribute to success in the marketplace, and the more direct the contri, bution, the better. S COMPETITIVE STRATEGY ToEsurvive and thrive in a globally competitive marketplace, organizations must adopt a broad strategy that gives them K a sustainable competitive advantage. All such strategies fall O one or more of the following categories: into U Cost leadership strategies. . To understand strategic management, one must first understand the concept of organizational strategy. Strategies are defined as follows: Strategies in this category seek to improve efficiency and control costs throughout organization's activity-cost chain (supplier activity 2 an costs, in-house activity costs, and distribution activity 0 costs). . Differentiation strategies. Strategies in this category 1 seek to add value, as defined by customers, to the organ2 ization's products or services. Such strategies typically B involve gaining technological superiority over competicontinually outperforming competitors in the area U tors, of quality, providing more and better support services to customers, and providing customers more value for their money. . Market-niche strategies. Strategies in this category focus on a narrowly defined segment of the market (market niche) and attempt to make the organization in question the market leader in that niche. Leadership can be achieved by adopting cost leadership or