Operations Management, 2e/Ch. 4 Operations Strategy ©2007 Thomson South-Western 1 Operations...

Operations Management, 2e/Ch. 4 Operations Strategy©2007 Thomson South-Western 1

Operations StrategyCHAPTER 4

DAVID A. COLLIERAND

JAMES R. EVANS

OPERATIONS MANAGEMENTGoods, Services and Value Chains

2Operations Management, 2e/Ch. 4 Operations Strategy©2007 Thomson South-Western

Chapter 4 Learning Objectives

1. To understand how customer wants and needs drive strategic thinking in a firm, and their consequences in designing and managing operations within the value chain.

2. To learn the five major competitive priorities important to business success, and what they mean for operations.

3. To understand the process of strategic planning at the organizational level and its relationship to operations strategy.



4. To understand how operations strategy can support and drive the achievement of organizational objectives, and to learn the key elements of an operations strategy.

5. To understand the operations design choices and infrastructure decisions from the perspective of defining an operations strategy, and tradeoffs that need to be made in developing a viable operations strategy.

6. To be able to identify and understand the seven decisions areas in Hill’s operations strategy framework.

7. To be able to analyze a real organization's operations strategy and apply the strategy development framework.



Given the chapter’s three lead in discussions:

• What differences would the different strategies chosen by Callaway and TaylorMade – sticking to core product designs versus continual innovation – have for key operations management decisions (consider the decision areas discussed in Chapter 2 for designing value chains)?

• Should organizations create strategies in response to customer wants and needs, or should they create strategies and then try to influence customer behavior to meet the strategic goals?


Chapter 4 Operations StrategyUnderstanding Customer Wants and Needs

A Japanese professor, Noriaki Kano, suggested three classes of customer requirements:

Dissatisfiers: requirements that are expected in a good or service. If these features are not present, the customer is dissatisfied, sometimes very dissatisfied.

Satisfiers: requirements that customers say they want.

Exciters/delighters: new or innovative good or service features that customers do not expect.

Examples?


Understanding Customer Wants and Needs

• Basic customer expectations - dissatisfiers and satisfiers – are generally considered the minimum performance level required to stay in business and are often called order qualifier.

• Order winners are goods and service features and performance characteristics that differentiate one customer benefit package from another, and win the customer's business.

Chapter 4 Operations Strategy



• Search attributes are those that a customer can determine prior to purchasing the goods and/or services. These attributes include things like color, price, freshness, style, fit, feel, hardness, and smell.

• Goods such as supermarket food, furniture, clothing, automobiles, and houses are high in search attributes.




• Experience attributes are those that can only be discerned after purchase or during consumption or use.

• Examples of these attributes are friendliness, taste, wearability, safety, fun, and customer satisfaction.




• Credence attributes are any aspects of a good or service that the customer must believe in, but cannot personally evaluate even after purchase and consumption.

• Examples would include the expertise of a surgeon or mechanic, the knowledge of a tax advisor, or the accuracy of tax preparation software.



Exhibit 4.1

How Customers Evaluate Goods and Services

Source: Adapted from V. A. Zeithamel, “How Consumer Evaluation Processes Differ Between Goods and Services,” in J. H. Donnelly and W. R. George, eds., Marketing in Services, published by the American Marketing Association, Chicago, 1981, pp. 186–199.


Customers evaluate services in ways that are often different

From goods such as:

• Customers seek and rely more on information from personal sources than from non-personal sources when evaluating services prior to purchase.

• Customers use a variety of perceptual features in evaluating services. Customers normally adopt innovations in services more slowly than they adopt innovation in goods.

• Customers perceive greater risks when buying services than when buying goods.

• Dissatisfaction with services is often the result of customers’ inability to properly perform or co-produce their part of the service.

These insights help to explain why it is more difficult to design

servicesand service processes than goods and manufacturing

operations.



Competitive Priorities

• Competitive advantage denotes a firm’s ability to achieve market and financial superiority over its competitors.

• Competitive priorities represent the strategic emphasis that a firm places on certain performance measures and operational capabilities within a value chain.



• Cost

• Quality

• Time

• Flexibility

• Innovation





• Every organization is concerned with building and sustaining a competitive advantage in its markets.

• A strong competitive advantage is driven by customer needs and aligns the organization's resources with its business opportunities.

• A strong competitive advantage is difficult to copy, often because of a firm’s culture, habits, or sunk costs.



Competitive Priority -- Cost

• Almost every industry has a low price market segment.

• Low-cost strategy firms: Honda Motor Co., Marriott's Fairfield Inns, Merck-Medco On-line Pharmacy, Southwest Airlines, and Wal-Mart's Sam's Club.

• Southwest Airlines is one of the few airlines that have been profitable during the 2001-2005 period. A low cost strategy can reshape industry structure such as in the airline industry (see OM Spotlight: Southwest Airlines).



Competitive Priority – Quality PIMS Associates, Inc., a subsidiary of the Strategic

PlanningInstitute, for example, found that

• Businesses offering premium quality goods usually have large market shares and were early entrants into their markets.

• Quality is positively and significantly related to a higher return on investment for almost all kinds of market situations.

• A strategy of quality improvement usually leads to increased market share, but at a cost in terms of reduced short-run profitability.

• High goods quality producers can usually charge premium prices.



Exhibit 4.2

Interlinking Quality and Probability Performance


Competitive Priority – Quality

Competitive strategies often led to tradeoffs between quality and

cost; some company strategies are willing to sacrifice quality in order

to develop a low cost advantage. Consider the story of Schlitz Brewing

Company below.

• In the early 1970s, Schlitz Brewing Company, the second largest brewer in the United States, began a cost-cutting campaign. It included reducing the quality of ingredients in their beers by switching to corn syrup and hop pellets and shortening the brewing cycle by 50 percent.

• In the short term, it achieved higher returns on sales and assets than Anheuser-Bush (and the acclaim of Wall Street analysts).

• But customers do recognize inferior products. Soon after, market share and profits fell rapidly.

• By 1980 Schlitz's sales had declined 40 percent, the stock price fell from $69 to $5, and the company was eventually sold.




Competitive Priority -- Time

• Time is perhaps the most important source of competitive advantage.

• Customers demand quick response, short waiting times, and consistency in performance.

• Many firms use time as a competitive weapon to create and deliver superior goods and services such as Charles Schwab, Clarke American Checks, CNN, Dell, FedEx, and Wal-Mart.




• Reductions in processing (flow) time serve two purposes.

• First, they speed up work processes so that

customer response is improved. Deliveries can be made faster, and more often on-time.

• Second, reductions in processing time can only be accomplished by streamlining and simplifying processes and value chains to eliminate non-value-added steps such as rework and waiting time.




• Processing (flow) time reductions often drive simultaneous improvements in quality, cost, and productivity (see OM Spotlights on Hyundai Motor Co. and Procter & Gamble).



Competitive Priority -- Flexibility

• Mass customization requires companies to align their activities around differentiated customer segments and design goods, services, and operations around flexibility.

• High-levels of flexibility might require special strategies such as modular designs, interchangeable components, and postponement strategies.




• Flexible operations require sharing manufacturing lines and specialized training for employees.

• Flexible operations may also require

attention to outsourcing decisions, agreements with key suppliers, and innovative partnering arrangements, because delayed shipments and a complex supply chain can hinder flexibility.




• Mass customization is being able to make whatever goods and services the customer wants, at any volume, at any time for anybody, and for a global organization, from any place in the world.




• Examples include Sign-tic company signs that are uniquely

designed for each customer from a standard base sign structure,

business consulting, Levi’s jeans that are cut to exact

measurements, personal Web pages, estate planning, Harley-Davidson bikes, cell phones customized in different colors,

sizes, and shapes, personal weight training programs, and modular furniture that customers can

configure to their unique needs and tastes.



Competitive Priority -- Innovation

• Innovation is the discovery and practical application or commercialization of a device, method, or idea that differs from existing norms.

• Innovations in all forms

encapsulate human knowledge.




• Innovations take many forms such as

Physical goods such as telephones, automobiles, refrigerators, computers, optical fiber, satellites, and cell phones.

Services such as self-service, all-suite hotels, health maintenance organizations, and Internet banking.




Innovations take many forms such as

Manufacturing such as computer-aided design, robotic automation, and smart tags.

Management practices such as customer satisfaction surveys, quantitative decision models, and Six Sigma).



Strategic Planning

• Strategy is a pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole.

• Effective strategies develop around a few key competitive priorities - such as low cost or fast service time - which provide a focus for the entire organization, and exploit an organization’s core competencies - the strengths unique to that organization.



Strategic Planning

• Strategic planning is the process of determining long-term goals, policies, and plans for an organization.

• The businesses in which the firm will participate are often called strategic business units (SBUs), and are usually defined as families of goods or services having similar characteristics or methods of creation.

• Strategy is the result of a series of hierarchical decisions about goals, directions, and resources.



Strategic Planning

Most large organizations have three levels of

strategy:

• Corporate strategy is necessary to define the businesses in which the corporation will participate and develop plans for the acquisition and allocation of resources among those businesses.



Strategic Planning

Most large organizations have three levels

of strategy:

• A business strategy defines the focus for SBUs. The major decisions involve which markets to pursue and how best to compete in those markets; that is, what competitive priorities the firm should pursue.



Strategic Planning

Most large organizations have three levels

of strategy:

• A functional strategy is the set of decisions that each functional area - marketing, finance, operations, research and development, engineering, and so on - develops to support its particular business strategy.



Strategic Planning

• The operations strategy is how an organization’s processes are designed and organized to produce the type of goods and services to support the corporate and business strategies.



Strategic Planning

• Managers recognize that the value (supply) chain can be leveraged to provide a distinct competitive advantage, and that operations is a core competency for the organization.

• Whoever has superior operational capability over the long term is the odds-on-favorite to win the industry shakeout.



Strategic Planning Process

• Strategy development refers to a company's approach, formal or informal, for making key long-term business decisions.

• The process typically takes into account customer and market requirements, the competitive environment, industry structure and non-industry competitors, financial and societal risks, human resource capabilities and needs, technological capabilities, and supplier capabilities.



Pal’s Strategic Planning Process

Pal’s Strategic Planning Process,which is performed annually, focuses on

atwo-year planning horizon. The major

stepsare as follows:

Step 1 - Gather and Analyze Strategic Performance Data

Step 2 - Review/Analyze Existing Strategic Directions and Documents

Step 3 - Revise/Develop Strategy




Step 4 - Deploy Objectives and Action Plans

Step 5 - Review Progress and Results Step 6 - Continually Evaluate and

Improve Strategic Planning Process

The next step is to translate businessstrategy into operations strategy,

policies,and resource allocation plans.




• The strategic mission of a firm defines its reason for existence.

• The strategic vision describes where the organization is headed and what it intends to be.

Pal’s strategic vision is




• Values are attitudes and policies for all employees to follow that direct the journey to achieving the organization’s vision.

• Values are reinforced through

conscious and subconscious behavior at all levels of the organization.



Pal’s Strategic Values are



Operations Strategy

• An operations strategy defines how an organization will execute its chosen business strategies.

• Developing an operations strategy involves translating competitive priorities into operational capabilities by making a variety of choices and trade-offs for design and operating decisions.



Operations Strategy

• An operations strategy defines how an organization will execute its chosen business strategies.

• Operating decisions must be aligned with achieving the desired competitive priorities.

• For example, if corporate objectives are

to be the low cost and mass market producer of a good then adopting an assembly line type of process is how operations can help achieve this corporate objective.



Pal’s Operations Strategy

What kind of an operations strategy might a company like

Pal’s Sudden Service have? What are the OM implications?

• The quickest, friendliest, most accurate service available.

• A focused menu that delights customers.

• Daily excellence in product, service, and systems execution.

• Clean, organized, sanitary facilities. • Exceptional value.



Professor Terry Hill’s Strategy Development Framework

Operations design choices are the decisionsmanagement must make as to what type of

processstructure is best suited to produce goods or

createservices. (See Exhibits 4.4 and 4.5)

Types of processes and alternative designs Supply chain integration and outsourcing Technology Capacity and Facilities (size, timing, location) Inventory Trade-off Analysis


Exhibit 4.4

Hill’s Strategy Development Framework

Source: T. Hill, Manufacturing Strategy: Text and Cases, 2nd ed., Burr Ridge, IL: Irwin Publishers, 1994, p. 28



Professor Terry Hill’s Strategy Development Framework

Infrastructure focuses on the non-processfeatures and capabilities of the

organization (seeExhibits 4.4 and 4.5) and includes the

workforce, operating plans and control

systems, quality control, organizational structure, compensation systems, learning and innovation systems,

and support services.


Exhibit 4.5

Four Key Decision Loops in Terry Hill’s Generic Strategy Framework



Support Services

• Support services often represent 30 to 70 percent of the cost of being in business (see Exhibit 4.6).

• Each support service requires at least one process to create and deliver its output or outcome.

• Support service processes cost money, influence customer satisfaction, and consume time.

• Lack of management attention to support service processes occurs both in goods-producing and service-providing organizations.

• Support services offer a significant opportunity for improvement in organizational effectiveness that translates to bottom line savings.


Exhibit 4.6

Examples of Support Process



Prof. Hill’s Strategy Framework Applied to McDonald’s

• McDonald's vision is to be the world's best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness and value, so that we make every customer in every restaurant smile. To achieve our vision, we focus on three worldwide strategies:

(1) Be The Best Employer(2) Deliver Operational Excellence(3) Achieve Enduring Profitable Growth

• Customer Benefit Package Design and Strategy (see Exh. 4.7)

• Strategy Development for McDonald’s (see Exhibit 4.8)


Exhibit 4.7

McDonald’s Customer Benefit Package


Exhibit 4.8

Applying the Hill’s Strategy Development Framework to McDonald’s (slide 1)


Exhibit 4.8

Applying the Hill’s Strategy Development Framework to McDonald’s (slide 2)


Solved Problem #1 – Health Club CBP & Strategy

HealthyMind and

Body

Food

Personal Trainer

Massage Services

Diet and Nutrition

Exercise Classes

Child Care

SwimLessons

Strategy: We strive to provide our customers with superior: customer convenience (location, food, communication, schedules, etc.) clean facilities, equipment, uniforms, parking lot, and the like friendly professional staff that care about you ways to improve and maintain your body and mind's health and well being.

Mission: The mission of our health club is to offer many pathways to a healthy living style and body.



HealthyMind and

Body

Food

Personal Trainer

Massage Services

Diet and Nutrition

Exercise Classes

Child Care

SwimLessons

Competitive Priorities: #1 Priority – many pathways to healthy living and a healthy body (design flexibility), #2 – friendly professional staff and service

encounters (service quality), #3 everything is super clean (goods and environmental quality), #4 – customer convenience in all respects (time), #5 – price (cost).

How to win customers? Providing a full service health club with superior service, staff, and facilities.



Example Health Club Processes

• The food ordering and supply, preparation, delivery, and clean up processes define the food service value chain.

• The childcare process includes rigorous procedures for checking children in and out of the childcare area.

• The swimming lesson process includes a sign-up phase, potential participant medical examination phase, and a series of classes taught by certified swimming instructors who are trained in emergency services such as CPR.

• The personal trainer process requires high design flexibility since each exercise and training program is customized to the individual.

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