Chapter 4

OM
CHAPTER 4
OPERATIONS STRATEGY
DAVID A. COLLIER AND JAMES R. EVANS
OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning
Chapter 4 Learning Outcomes
learning outcomes
LO1 Explain how organizations seek to gain
competitive advantage. requirements. services.
LO2 Explain approaches for understanding customer LO3 Describe how customers evaluate goods and LO4 Explain the five key competitive priorities. LO5 Explain the role of OM and operations strategy in
strategic planning.
LO6 Describe Hills framework for operations strategy.

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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 PowerPoint presentations, while TaylorMade turned them into huge pep rallies. TaylorMades strategy seems to have paid off; late in 2003 it overtook Callaway in market share for metalwoods. 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?
What do you think?
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Given the chapters three lead-in discussions: 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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Competitive Priorities
Com petitive 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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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. Ex citers/ delighters: new or innovative good or service features that customers do not expect. Ex am ples?
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Basic customer expectationsdissatisfiers and
satisfiersare generally considered the minimum performance level required to stay in business and are often called order qualifiers. and performance characteristics that differentiate one customer benefit package from another, and win the customer's business.
Order w inners are goods and service features
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Search attributes are those that a customer like color, price, freshness, style, fit, feel, hardness, and smell.
can determine prior to purchasing the goods and/or services. These attributes include things
Goods such as supermarket food, furniture, clothing, automobiles, and houses are high in search attributes.
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Ex perience 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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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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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. 186199.
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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.
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Cost Quality Time Flexibility Innovation
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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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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).
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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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Exhibit 4.2
Interlinking Quality and Probability Performance
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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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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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Flow time reductions often drive simultaneous improvements in quality, cost, and productivity (see Hyundai Motor Co.).
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Competitive Priority Flexibility

M ass custom ization 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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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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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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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 to their unique needs and tastes
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Competitive Priority Innovation

I nnovation 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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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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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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Solved Problem Health Club CBP & Strategy
Food Child Care Personal Trainer Exercise Classes
Healthy Mind and Diet and Body

Nutrition Massage Services
club is to offer many pathways to a healthy living style and body.
M ission: The mission of our health
Swim Lessons
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
Strategy: We strive to provide our customers with
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Food Child Care Personal Trainer Exercise Classes
Healthy Mind and Diet and Body

Nutrition Massage Services
Swim Lessons
How to win customers? Providing a full service health club with superior service, staff, and facilities.
Com petitive P riorities:
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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Ex am ple Health Club P rocesses

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 sw im m ing 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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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 com petencies (the strengths unique to that organization).
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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.
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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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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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Strategic Planning
Most large organizations have three levels of strategy: A functional strategy is the set of decisions that each functional areamarketing, finance, operations, research and development, engineering, and so ondevelops to support its particular business strategy.
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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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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.
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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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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 A focused menu that delights customers Daily excellence in our product, service, and systems execution Clean, organized, sanitary facilities Exceptional value
Pals strategic vision is
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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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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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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
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Professor Terry Hills Strategy Development Framework

I nfrastructure 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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Exhibit 4.4
Four Key Decision Loops in Terry Hills Generic Strategy Framework
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Professor Hills Strategy Framework Applied to McDonalds

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
M cDonald's vision is to be the w orld's best quick service restaurant ex perience . Being the best means
Customer Benefit Package Design and Strategy (see Ex. 4.5) Strategy Development for McDonalds (see Exhibit 4.6)
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Exhibit 4.5
McDonalds Customer Benefit Package
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Exhibit 4.6
Applying Hills Strategy Development Framework to McDonalds (slide 1)
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Exhibit 4.6
Applying Hills Strategy Development Framework to McDonalds (slide 2)
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OM

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Learning Outcomes

LO6 Describe Hills framework for operations strategy.

Chapter 4 Operations Strategy

What do you think?

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

ability to achieve market and financial superiority over its competitors.

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Understanding Customer Requirements

Chapter 4 Operations Strategy

Understanding Customer Requirements

Order w inners are goods and service features

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Understanding Customer Requirements

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Understanding Customer Requirements

discerned only after purchase or during consumption or use.

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Understanding Customer Requirements

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

How Customers Evaluate Goods and Services

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Chapter 4 Operations Strategy

Chapter 4 Operations Strategy

Competitive Priority Cost

Chapter 4 Operations Strategy

Competitive Priority Quality

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Interlinking Quality and Probability Performance

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Competitive Priority Time

Chapter 4 Operations Strategy

Competitive Priority Time

Chapter 4 Operations Strategy

Competitive Priority Time

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Competitive Priority Flexibility

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Competitive Priority Flexibility

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Competitive Priority Flexibility

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Competitive Priority Flexibility

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy

Competitive Priority Innovation

Innovations in all forms encapsulate human knowledge.

OM, Ch. 4 Operations Strategy 2009 South-Western, a part of Cengage Learning

Chapter 4 Operations Strategy