OPERATIONS MANAGEMENT Goods Services and Value Chains CHAPTER

OPERATIONS MANAGEMENT Goods, Services and Value Chains CHAPTER 4 Operations Strategy DAVID A. COLLIER AND JAMES R. EVANS Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 1

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

Chapter 4 Learning Objectives 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 3

Chapter 4 Learning Objectives Given the chapter’s three lead in discussions: • What differences would the different strategies chosen by Callaway and Taylor. Made – 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? Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 4

Chapter 4 Operations Strategy Understanding 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? Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 5

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 6

Chapter 4 Operations Strategy Understanding Customer Wants and Needs • 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 7

Chapter 4 Operations Strategy Understanding Customer Wants and Needs • 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 8

Chapter 4 Operations Strategy Understanding Customer Wants and Needs • 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 9

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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 10

Chapter 4 Operations Strategy 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 services and service processes than goods and manufacturing operations. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 11

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 12

Chapter 4 Operations Strategy Competitive Priorities • Cost • Quality • Time • Flexibility • Innovation Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 13

Chapter 4 Operations Strategy Competitive Priorities • 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 14

Chapter 4 Operations Strategy 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 Online 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). Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 15

Chapter 4 Operations Strategy Competitive Priority – Quality PIMS Associates, Inc. , a subsidiary of the Strategic Planning Institute, 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 16

Exhibit 4. 2 Interlinking Quality and Probability Performance Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 17

Chapter 4 Operations Strategy 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 1970 s, 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 18

Chapter 4 Operations Strategy 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, Fed. Ex, and Wal-Mart. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 19

Chapter 4 Operations Strategy Competitive Priority -- Time • 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-valueadded steps such as rework and waiting time. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 20

Chapter 4 Operations Strategy Competitive Priority -- Time • Processing (flow) time reductions often drive simultaneous improvements in quality, cost, and productivity (see OM Spotlights on Hyundai Motor Co. and Procter & Gamble). Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 21

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 22

Chapter 4 Operations Strategy Competitive Priority -- Flexibility • 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 23

Chapter 4 Operations Strategy Competitive Priority -- 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 24

Chapter 4 Operations Strategy Competitive Priority -- Flexibility • Examples include ü Sign-tic company signs that are uniquely designed for each customer from a standard base sign structure, ü business consulting, ü Levi’s jeans that are cut to exact measurements, ü personal Web pages, ü estate planning, ü Harley-Davidson bikes, ü cell phones customized in different colors, sizes, and shapes, ü personal weight training programs, and ü modular furniture that customers can configure to their unique needs and tastes. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 25

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 26

Chapter 4 Operations Strategy Competitive Priority -- Innovation • Innovations take many forms such as ü Physical goods such as telephones, automobiles, refrigerators, computers, optical fiber, satellites, and cell phones. ü Services such as self-service, all-suite hotels, health maintenance organizations, and Internet banking. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 27

Chapter 4 Operations Strategy Competitive Priority -- Innovations take many forms such as ü Manufacturing such as computer-aided design, robotic automation, and smart tags. ü Management practices such as customer satisfaction surveys, quantitative decision models, and Six Sigma). Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 28

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 29

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 30

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 31

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 32

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 33

Chapter 4 Operations 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 34

Chapter 4 Operations Strategy 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 oddson-favorite to win the industry shakeout. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 35

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 36

Chapter 4 Operations Strategy Pal’s Strategic Planning Process, which is performed annually, focuses on a two-year planning horizon. The major steps are as follows: Step 1 - Gather and Analyze Strategic Performance Data Step 2 - Review/Analyze Existing Strategic Directions and Documents Step 3 - Revise/Develop Strategy Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 37

Chapter 4 Operations Strategy Pal’s Strategic Planning Process 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 business strategy into operations strategy, policies, and resource allocation plans. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 38

Chapter 4 Operations Strategy Pal’s Strategic Planning Process • • 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 Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 39

Chapter 4 Operations Strategy Pal’s Strategic Planning Process • 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 40

Chapter 4 Operations Strategy Pal’s Strategic Values are Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 41

Chapter 4 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 Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 42

Chapter 4 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 43

Chapter 4 Operations Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 44

Chapter 4 Operations Strategy Professor Terry Hill’s Strategy Development Framework Operations design choices are the decisions management must make as to what type of process structure is best suited to produce goods or create services. (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 Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 45

Exhibit 4. 4 Hill’s Strategy Development Framework Source: T. Hill, Manufacturing Strategy: Text and Cases, 2 nd ed. , Burr Ridge, IL: Irwin Publishers, 1994, p. 28 Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 46

Chapter 4 Operations Strategy Professor Terry Hill’s Strategy Development Framework Infrastructure focuses on the non-process features and capabilities of the organization (see Exhibits 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 47

Exhibit 4. 5 Four Key Decision Loops in Terry Hill’s Generic Strategy Framework Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 48

Chapter 4 Operations Strategy 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 serviceproviding organizations. Support services offer a significant opportunity for improvement in organizational effectiveness that translates to bottom line savings. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 49

Exhibit 4. 6 Examples of Support Process Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 50

Chapter 4 Operations Strategy Prof. Hill’s Strategy Framework Applied to Mc. Donald’s • Mc. Donald'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) (2) (3) Be The Best Employer Deliver Operational Excellence Achieve Enduring Profitable Growth • Customer Benefit Package Design and Strategy (see Exh. 4. 7) • Strategy Development for Mc. Donald’s (see Exhibit 4. 8) Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 51

Exhibit 4. 7 Mc. Donald’s Customer Benefit Package Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 52

Exhibit 4. 8 Applying the Hill’s Strategy Development Framework to Mc. Donald’s (slide 1) Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 53

Exhibit 4. 8 Applying the Hill’s Strategy Development Framework to Mc. Donald’s (slide 2) Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 54

Solved Problem #1 – Health Club CBP & Strategy Personal Trainer Mission: The mission of our Food Child Care Exercise Classes Healthy Mind and Diet and Body Swim Lessons Nutrition Massage Services health club is to offer many pathways to a healthy living style and body. 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 55

Solved Problem #1 – Health Club CBP & Strategy Food Child Care Personal Trainer Exercise Classes Healthy Mind and Diet and Body Swim Lessons Nutrition Massage Services How to win customers? Providing a full service health club with superior service, staff, and facilities. 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). Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 56

Solved Problem #1 – Health Club CBP & Strategy 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. Operations Management, 2 e/Ch. 4 Operations Strategy © 2007 Thomson South-Western 57