OPERATIONS
MANAGEMENT
Goods, Services and Value Chains
CHAPTER 4
Operations Strategy
DAVID A. COLLIER
AND
JAMES R. EVANS
Operations Management, 2e/Ch. 4 Operations Strategy
©2007 Thomson South-Western
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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.
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©2007 Thomson South-Western
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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, 2e/Ch. 4 Operations Strategy
©2007 Thomson South-Western
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Chapter 4 Learning Objectives
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?
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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?
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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.
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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.
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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, 2e/Ch. 4 Operations Strategy
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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, 2e/Ch. 4 Operations Strategy
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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. 186–199.
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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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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, 2e/Ch. 4 Operations Strategy
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Chapter 4 Operations Strategy
Competitive Priorities
• Cost
• Quality
• Time
• Flexibility
• Innovation
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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.
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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 2001-2005
period. A low cost strategy can reshape industry
structure such as in the airline industry (see OM
Spotlight: Southwest Airlines).
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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.
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Exhibit 4.2 Interlinking Quality and Probability Performance
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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 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.
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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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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.
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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).
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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.
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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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©2007 Thomson South-Western
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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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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, and
 modular furniture that customers can configure to
their unique needs and tastes.
Operations Management, 2e/Ch. 4 Operations Strategy
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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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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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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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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.
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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.
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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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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, 2e/Ch. 4 Operations Strategy
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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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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.
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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.
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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.
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Chapter 4 Operations Strategy
Pal’s Strategic Planning Process
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
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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.
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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
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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.
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Chapter 4 Operations Strategy
Pal’s Strategic Values are
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Chapter 4 Operations Strategy
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.
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Chapter 4 Operations Strategy
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.
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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.
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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
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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
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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.
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Exhibit 4.5 Four Key Decision Loops in Terry Hill’s
Generic Strategy Framework
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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.
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Exhibit 4.6 Examples of Support Process
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Chapter 4 Operations Strategy
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)
(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 McDonald’s (see Exhibit 4.8)
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Exhibit 4.7 McDonald’s Customer Benefit Package
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Exhibit 4.8 Applying the Hill’s Strategy Development
Framework to McDonald’s (slide 1)
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Exhibit 4.8 Applying the Hill’s Strategy Development
Framework to McDonald’s (slide 2)
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Solved Problem #1 – Health Club CBP & Strategy
Mission: The mission of our
Food
Child
Care
Personal
Trainer
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.
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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).
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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.
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