OPERATIONS STRATEGY

1. OM2 CHAPTER 4 OPERATIONS STRATEGY DAVID A. COLLIER AND JAMES R. EVANS

2. Chapter 4 Learning Outcomes l e a r n i n g o u t c o m e s LO1Explain how organizations seek to gain competitive advantage. LO2Explain approaches for understanding customer requirements. LO3Describe how customers evaluate goods and services. LO4Explain the five key competitive priorities. LO5Explain the role of OM and operations strategy in strategic planning. LO6Describe Hill’s framework for operations strategy.

3. Chapter 4 Operations Strategy ival golf club equipment manufacturers TaylorMade and Callaway are both based in Carlsbad, California. That’s about where the similarity ends. Callaway made clubs for average golfers, while TaylorMade tookthe clubs pro golfers were using and adjusted them to suit amateurs. Callaway focused on management and production efficiency while sticking to core product designs, much the way Ford built cars around a basic chassis. TaylorMade, however, was constantly reinventing its products lines, and in an industry that expected product cycles to last 18 months or longer, began releasing new drivers and irons in rapid-fire succession. Even new product launches show the difference between these companies: Callaway typically launched products with lengthy PowerPoint presentations, while TaylorMade turned them into huge pep rallies. TaylorMade’s strategy seems to have paid off; late in 2003 it overtook Callaway in market share for metalwoods. What do you think?What implications would the different strategies chosen by Callaway and TaylorMade – sticking to core product designs versus continual innovation – have for key operations management decisions such as outsourcing  and designing flexibility into their processes?

4. Chapter 4 Operations Strategy • What implications would the different strategies chosen by Callaway and TaylorMade – sticking to core product designs versus continual innovation – have for key operations management decisions such as outsourcing and designing flexibility into their processes? (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?

5. 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.

6. Chapter 4 Operations Strategy Understanding Customer Requirements 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?

7. Chapter 4 Operations Strategy • Understanding Customer Requirements • Basic customer expectations—dissatisfiers and satisfiers—are generally considered the minimum performance level required to stay in business and are often called order qualifiers. • Order winners are goods and service features and performance characteristics that differentiate one customer benefit package from another, and win the customer's business.

8. Chapter 4 Operations Strategy • Understanding Customer Requirements • 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.

9. Chapter 4 Operations Strategy • Understanding Customer Requirements • Experience attributes are those that can be discerned only after purchase or during consumption or use. • Examples of these attributes are friendliness, taste, wearability, safety, fun, and customer satisfaction.

10. Chapter 4 Operations Strategy • Understanding Customer Requirements • 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.

11. Exhibit 4.1 How Customers Evaluate Goods and Services

12. 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.

13. Chapter 4 Operations Strategy Competitive Priorities • Cost • Quality • Time • Flexibility • Innovation

14. Chapter 4 Operations Strategy • Competitive Priorities • Every organization is concerned with building and sustaining a competitive advantage in its markets (see BMW). • 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.

15. 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 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 Southwest Airlines).

16. Chapter 4 Operations Strategy Coffee Wars Starbucks is facing growing competition from competitors like Dunkin Donuts and McDonalds for a good and inexpensive cup of coffee. McDonalds introduced “premium roast coffee” a few years ago, which was cited by Consumer Reports as the “cheapest and best.” More recently, it has also added separate coffee bars – “McCafes.” --- Now Starbucks is fighting back and playing the McDonald’s game: Starbucks is testing a $1 cup of coffee with free refills in the Seattle area. The CEO of Starbucks, Howard Schultz, says this is not a new strategy but that he believes that price is the number one competitive priority and that Starbucks lost its focus on customer service in recent years as it concentrated on growth.

17. Chapter 4 Operations Strategy • Competitive Priority – Quality • PIMS Associates, Inc., a subsidiary of the Strategic Planning • Institute, 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.

18. Exhibit 4.2 Interlinking Quality and Profitability Performance

19. 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, FedEx, and Wal-Mart.

20. Chapter 4 Operations Strategy • Competitive Priority – Time • Reductions in 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 flow time can be accomplished only by streamlining and simplifying processes and value chains to eliminate non-value-added steps such as rework and waiting time.

21. Chapter 4 Operations Strategy • Competitive Priority – Time • Flow time reductions often drive simultaneous improvements in quality, cost, and productivity (see Hyundai Motor Co.).

22. 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.

23. Chapter 4 Operations Strategy • Competitive Priority – Flexibility • Mass customization requires companies to align their activities around differentiated customer segments and to design goods, services, and operations around flexibility. • High-levels of flexibility might require special strategies such as modular designs, interchangeable components, and postponement strategies.

24. 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.

25. Chapter 4 Operations Strategy • Competitive Priority – Flexibility • 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 • modular furniture that customers can configure to their unique needs and tastes

26. Chapter 4 Operations Strategy • Competitive Priority – Innovation • Innovationis 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.

27. Chapter 4 Operations Strategy • Competitive Priority – Innovation • 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.

28. Chapter 4 Operations Strategy • Competitive Priority – Innovation • 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.

29. Chapter 4 Operations Strategy SolvedProblem Define the customer benefit package for a health club or recreation center and use this to describe the organization’s strategic mission, strategy, competitive priorities, and how it wins customers.

30. Food Child Care Exercise Classes Healthy Mind and Body Personal Trainer Diet and Nutrition Swim Lessons Massage Services Chapter 4 Operations Strategy Solution Mission:The mission of our 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

31. Chapter 4 Operations Strategy Solution - continued How to win customers? Providing a full service health club with superior service, staff, and facilities. • Competitive Priorities: • Many pathways to healthy living and a healthy body (design flexibility) • Friendly professional staff and service encounters (service quality) • Everything is super-clean (goods and environmental quality) • Customer convenience in all respects (time) • Price (cost)

32. Chapter 4 Operations Strategy Solution - continued • 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.

33. 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).

34. 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.

35. 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.

36. 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.

37. 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.

38. Chapter 4 Operations Strategy • Strategic Planning • Theoperations strategy defines how an organization will execute its chosen business strategies. • It 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.

39. 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 odds-on-favorite to win the industry shakeout.

40. 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.

41. 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 • Vision Statement • To be the preferred quick service restaurant in our market achieving the largest market share by providing: • The quickest, friendliest, most accurate service available • A focused menu that delights customers • Daily excellence in our product, service, and systems execution • Clean, organized, sanitary facilities • Exceptional value

42. 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.

43. 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 4.3 and 4.4) • Types of processes and alternative designs • Supply chain integration and outsourcing • Technology • Capacity and facilities (size, timing, location) • Inventory • Trade-off analysis

44. Exhibit 4.3 Hill’s Strategy Development Framework Source: T. Hill, Manufacturing Strategy: Text and Cases, 2nd ed., Burr Ridge, IL: Irwin Publishers, 1994, p. 28

45. Chapter 4 Operations Strategy • Professor Terry Hill’s Strategy Development Framework • Infrastructurefocuses on the nonprocessfeatures and capabilities of the organization (see Exhibits 4.3 and 4.4) and includes: • workforce • operating plans and control system(s) • quality control • organizational structure • compensation systems • learning and innovation systems • support services

46. Exhibit 4.4 Four Key Decision Loops in Terry Hill’s Generic Strategy Framework

47. Chapter 4 Operations Strategy • Professor 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 Ex. 4.5) • Strategy Development for McDonald’s (see Exhibit 4.6)

48. Exhibit 4.5 McDonald’s Customer Benefit Package

49. Applying Hill’s Strategy Development Framework to McDonald’s(slide 1) Exhibit 4.6

50. Applying Hill’s Strategy Development Framework to McDonald’s(slide 2) Exhibit 4.6