OM2
CHAPTER 4
OPERATIONS STRATEGY
DAVID A. COLLIER
AND
JAMES R. EVANS
OM2, Ch. 4 Operations Strategy
2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
Chapter 4 Learning Outcomes
learning outcomes
LO1 Explain how organizations seek to gain
competitive advantage.
LO2 Explain approaches for understanding
customer
requirements.
LO3 Describe how customers evaluate goods and
services.
LO4 Explain the five key competitive priorities.
LO5 Explain the role of OM and operations
strategy in
strategic planning.
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LO6 Describe Hills framework for operations
22
Chapter 4 Operations Strategy
ival golf club equipment manufacturers TaylorMade and
Callaway are
both based in Carlsbad, California. Thats about where the
similarity
ends. Callaway made clubs for average golfers, while
TaylorMade took
the 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
What
do you
think? Whatwhile
implications
would
the different
PowerPoint
presentations,
TaylorMade
turned
them intostrategies
huge pep
chosen
Callaway and
TaylorMade
sticking
to core
designs
rallies. by
TaylorMades
strategy
seemsto
have paid
off; product
late in 2003
it
versus
continual
innovation
have for
operations management
overtook
Callaway
in market share
for key
metalwoods.
decisions such as outsourcing and designing flexibility into their
processes?
OM2, Ch. 4 Operations Strategy
2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
33
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?
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44
Chapter 4 Operations Strategy
Competitive Priorities
Competitive advantage denotes a
firms 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.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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55
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?
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Chapter 4 Operations Strategy
Understanding Customer Requirements
Basic customer expectationsdissatisfiers
and satisfiersare 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.
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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.
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88
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.
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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.
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1010
Exhibit 4.1
How Customers Evaluate Goods and Services
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1111
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
OM2, Ch. 4 Operations Strategy
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operations.
posted to a publicly accessible website, in whole or in part.
1212
Chapter 4 Operations Strategy
Competitive Priorities
Cost
Quality
Time
Flexibility
Innovation
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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1313
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 firms culture,
habits, or sunk costs.
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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 20012005 period. A low cost strategy can reshape
industry structure such as in the airline
industry (see Southwest Airlines).
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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1515
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
McDonalds 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
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1616
concentrated on growth.
posted to a publicly accessible website, in whole or in part.
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.
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1717
Exhibit 4.2
Interlinking Quality and Profitability Performance
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1818
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.
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1919
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.
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2020
Chapter 4 Operations Strategy
Competitive Priority Time
Flow time reductions often drive
simultaneous improvements in quality,
cost, and productivity (see Hyundai Motor
Co.).
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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.
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2222
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.
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2323
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.
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2424
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
Levis 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
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May not be scanned,
copied or duplicated,
toAlltheir
unique
needs
andortastes
2525
posted to a publicly accessible website, in whole or in part.
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.
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2626
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.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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2727
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.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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2828
Chapter 4 Operations Strategy
Solved Problem
Define the customer benefit package for a health
club or recreation center and use this to describe
the organizations strategic mission, strategy,
competitive priorities, and how it wins customers.
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2929
Chapter 4 Operations Strategy
Solution
Child
Care
Mission: The mission of our
Personal
Trainer
Food
Exercise
Classes
Healthy
Mind and
Diet and
Body
Nutrition
Swim
health club is to offer many
Massage
Lessons
Services
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
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3030
Chapter 4 Operations Strategy
Solution - continued
How to win customers? Providing a full
service health club with superior service,
staff, and facilities.
Competitive Priorities:
1. 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)
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3131
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
OM2, Ch. 4 Operations
Strategy
customized
to the individual.
2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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3232
Chapter 4 Operations Strategy
Strategic Planning
Strategy is a pattern or plan that
integrates an organizations 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
organizations core competencies (the
strengths unique to that organization).
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3333
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,
3434
and resources.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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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.
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3535
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.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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3636
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.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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3737
Chapter 4 Operations Strategy
Strategic Planning
The operations strategy defines
how an organization will execute its
chosen business strategies.
It is how an organizations processes
are designed and organized to produce
the type of goods and services to
support the corporate and business
strategies.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
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3838
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.
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3939
Chapter 4 Operations Strategy
Pals Strategic Planning Process
Values are attitudes and policies for all
employees to follow that direct the
journey to achieving the organizations
vision.
Values are reinforced through conscious
and subconscious behavior at all levels of
the organization.
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4040
Chapter 4 Operations Strategy
Pals 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
Vision Statement
intends to be.
To be the preferred quick service restaurant
in our market achieving the largest market
share by providing:
The quickest, friendliest, most accurate
service available
Pals strategic vision is
A focused menu that delights customers
Daily excellence in our product, service,
and systems execution
Clean, organized, sanitary facilities
Exceptional value
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4141
Chapter 4 Operations Strategy
Pals Operations Strategy
What kind of an operations strategy might a company
like Pals 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.
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2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
4242
Chapter 4 Operations Strategy
Professor Terry Hills 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
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4343
Exhibit 4.3
Hills Strategy Development Framework
Source: T. Hill, Manufacturing Strategy: Text and Cases, 2nd ed., Burr Ridge, IL: Irwin Publishers, 1994, p. 28
OM2, Ch. 4 Operations Strategy
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4444
Chapter 4 Operations Strategy
Professor Terry Hills Strategy Development Framework
Infrastructure focuses on the nonprocess
features 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
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4545
Exhibit 4.4
Four Key Decision Loops in Terry Hills Generic Strategy Framework
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4646
Chapter 4 Operations Strategy
Professor Hills Strategy Framework Applied to McDonalds
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 McDonalds (see Exhibit
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4747
Exhibit 4.5
McDonalds Customer Benefit Package
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4848
Exhibit 4.6
Applying Hills Strategy Development Framework to McDonalds
(slide 1)
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4949
Exhibit 4.6
Applying Hills Strategy Development Framework to McDonalds
(slide 2)
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5050
Chapter 4 Operations Strategy
The Lawn Care Company Case Study
1. Define Lawn Cares current strategic mission, strategy,
competitive priorities, value chain, and how it wins customers.
What are the order qualifiers and winners?
2. Draw the major stages of the value chain with and without an
application service and comment on the role of operations in
each.
3. What problems, if any, do you see with Lawn Cares current
strategy, vision, customer benefit package and value chain
design, and pre- and post-services?
4. What pre- and post-services could Lawn Care offer its
customers to complement the sale of its physical goods, such as
grass seed and fertilizer?
5. Redo questions (1) to (4) and provide a new or revised strategy
and associated customer benefit package and value chain where
services play a larger role.
6. What are your final recommendations?
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5151
