OPERATIONS STRATEGY

CHAPTER 4

DAVID A. COLLIER AND JAMES R. EVANS

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 CHAPTER 4 OPERATIONS STRATEGY

4-1 Explain how organizations seek to gain

competitive advantage.
4-2 Explain approaches for understanding customer
requirements.
4-3 Describe how customers evaluate goods and
services.
4-4 Explain the five key competitive priorities.
4-5 Explain the role of OM, sustainabililty, and
operations in strategic planning.
4-6 Describe Hills framework for operations strategy.

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 CHAPTER 4 OPERATIONS STRATEGY

m any durable products, such as cell phones, televisions,

and refrigerators contain hazardous materials and cannot
be easily reused or recycled. As a result, organizations
have found the need to rethink strategically the
environmental challenges that result from obsolete durable
goods. Cell phones, for example, become obsolete quickly
as a result of manufacturers making rapid improvements in
design and service providers offering new incentives. The
value chain is complex, and includes original equipment
manufacturers (OEMs), retailers, service providers,
remanufacturers, recyclers, and waste management
companies.

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 CHAPTER 4 OPERATIONS STRATEGY

Some new strategies that have been suggested include:

Creating better designs that focus on ease of disassembly and
lower costs for refurbishing and recycling. This might include
modular designs that make it easier to reuse parts rather than
have to recycle them, or recover valuable materials more easily.
Incorporating refurbishing and recycling activities into
manufacturers value chains. As many as 130 million phones are
retired each year, having significant waste and environmental
implications.
Creating more secondary markets for refurbished phones. This
can increase profits by enticing users of voice-only phones to
upgrade to data plans if the prices of the phones can be
reduced.
Developing new processes to collect and refurbish old phones.
For example, ReCellular Inc. has partnered with Verizon,
Motorola, Walmart and others. But it only captures 5% of
retired phones, suggesting that the cell phone value chain has
not matured.
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 CHAPTER 4 OPERATIONS STRATEGY

What do you think?

What strategy do you think is best for major cell
phone providers among the following:

Refurbish all phones and sell in developing

countries.
Disassemble and recycle domestically 100
percent of all metals and plastics.
Let other firms and third party organizations, but
not major cell phone providers, recycle phones.

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 CHAPTER 4 OPERATIONS STRATEGY

Gaining Competitive Advantage

Competitive advantage denotes a firms ability to
achieve market and financial superiority over its
competitors.

Creating competitive advantage requires:

1. Understanding customer needs and expectations and
how the value chain can best meet these through
designing and delivering customer benefit packages.
2. Building and leveraging operational capabilities to
support desired competitive priorities.

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 CHAPTER 4 OPERATIONS STRATEGY

Understanding Customer Wants and Needs

Order qualifiers are basic customer
expectations, generally considered the
minimum performance level required to stay
in business.

Order winners are goods and service

features and performance characteristics that
differentiate one customer benefit package
from another and win the customers
business.

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 CHAPTER 4 OPERATIONS STRATEGY

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 CHAPTER 4 OPERATIONS STRATEGY

Evaluating Goods and Services

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.

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 CHAPTER 4 OPERATIONS STRATEGY

Evaluating Goods and Services

Experience attributes are those that can be
discerned only after purchase or during
consumption or use.

Examples are friendliness, taste, wearability,

safety, fun, and customer satisfaction.

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 CHAPTER 4 OPERATIONS STRATEGY

Evaluating Goods and Services

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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 CHAPTER 4 OPERATIONS STRATEGY

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. Reprinted with permission from the American Marketing Association.

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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. Operations must
ensure that accurate information is available.
Customers perceive greater risks when buying services
than when buying goods. Because services are intangible,
customers cannot look at or touch them prior to the
purchase decision.
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 priorities represent the strategic
emphasis that a firm places on certain performance
measures and operational capabilities within a value
chain.

Key competitive priorities are:

Cost
Quality
Time
Flexibility
Innovation
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 CHAPTER 4 OPERATIONS STRATEGY

Competitive Priority Cost

Almost every industry has a low price market
segment. Examples include Honda Motor Co.,
Marriott's Fairfield Inns, Merck-Medco On-line
Pharmacy, Southwest Airlines, and Walmart.
Low cost results from high productivity, high
capacity utilization, and economies of scale.
Continuous improvement is essential to achieve a
low-cost competitive advantage.

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 CHAPTER 4 OPERATIONS STRATEGY

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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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 CHAPTER 4 OPERATIONS STRATEGY

Exhibit 4.2 Interlinking Quality and Profitability Performance

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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, CNN, Dell, and FedEx.

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 CHAPTER 4 OPERATIONS STRATEGY

Competitive Priority Time

Note: since this edition was written, Apple has introduced

its new Passbook app with the iPhone5 and IOS 6.

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 CHAPTER 4 OPERATIONS STRATEGY

Competitive Priority Time

Speeding up work processes improves customer
response. Deliveries can be made faster, and
more often on-time.

Time reductions can be accomplished only by

streamlining and simplifying processes and value
chains to eliminate non-value-added steps such
as rework and waiting time.

Time reductions also drive improvements in

quality, cost, and productivity.
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 CHAPTER 4 OPERATIONS STRATEGY

Competitive Priority Flexibility

Success in global markets requires both design
and demand flexibility. Flexibility is manifest in
mass customization strategies.

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:
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
Motorola pagers 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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 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.
Innovative companies focus on outstanding
product research, design, and development;
high product quality; and the ability to
modify production facilities to produce new
products frequently.

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 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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 CHAPTER 4 OPERATIONS STRATEGY

Example Solution Child

Food

Care Exercise
Mission: The mission of our health Healthy
Classes

club is to offer many pathways to a Personal

Trainer
Mind and
Body
healthy living style and body.
Diet and
Nutrition
Swim
Lessons Massage
Services

Strategy: We strive to provide our customers with superior:

Ways to improve and maintain your body and minds health
and well-being.
Friendly professional staff that care about you.
Clean facilities, equipment, uniforms, parking lot, food
service, and the like.
Customer convenience (location, food, communication,
schedules, etc.).

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 CHAPTER 4 OPERATIONS STRATEGY

Example Solution (continued)

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)

How to win customers? Providing a full service health

club with superior service, staff, and facilities.

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 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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 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

Three Levels of Strategy

1. A 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.
2. 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.
3. 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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 CHAPTER 4 OPERATIONS STRATEGY

Operations Strategy
The 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

Pals Sudden Service

VisionTo 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 product, service, and systems
execution
Clean, organized, sanitary facilities
Exceptional value
What kind of an operations strategy might Pals have? How
can operations help achieve this vision?

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 CHAPTER 4 OPERATIONS STRATEGY

Sustainability and Operations Strategy

Sustainability is an organizational strategy in many
firms and requires major changes in the culture of
an organization.

Many companies pursue sustainability through

their operations.
Example: Dell, Inc. Design for Environment initiative to
control raw material acquisition, manufacturing
processes, and distribution programs while linking
green policies with consumer use and disposal.

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 CHAPTER 4 OPERATIONS STRATEGY

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 CHAPTER 4 OPERATIONS STRATEGY

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 CHAPTER 4 OPERATIONS STRATEGY

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A Framework for Operations Strategy

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.
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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 CHAPTER 4 OPERATIONS STRATEGY

A Framework for Operations Strategy

Infrastructure focuses on the nonprocess
features and capabilities of the organization 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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 CHAPTER 4 OPERATIONS STRATEGY

Exhibit 4.3 Hills Strategy Development Framework

Source: T. Hill, Manufacturing Strategy: Text and Cases, 3nd ed., Burr Ridge, IL: McGraw Hill, 2000, p. 32; T. Hill, Operations Management: Strategic Context
and Managerial Analysis, 2nd ed. Prigrame MacMillan, 2005, p. 50. Reprinted with permission from the McGraw-Hill Companies.

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 CHAPTER 4 OPERATIONS STRATEGY

Exhibit 4.4 Four Key Decision Loops in Terry Hills Generic Strategy Framework

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 CHAPTER 4 OPERATIONS STRATEGY

Operations Strategy at 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

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 CHAPTER 4 OPERATIONS STRATEGY

Operations Strategy at McDonalds

Four sustainability initiatives:
Build a sustainable McDonalds that involves all facets
of our business.
Commit to a three-pronged approachreduce, reuse,
and recycle.
Strive to provide eco-friendly workplaces and
restaurants.
Work with suppliers and outside experts to
continuously improve purchasing decisions and
evaluation of supplier performance regarding animal
welfare.

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Exhibit 4.5 McDonalds Customer Benefit Package

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 CHAPTER 4 OPERATIONS STRATEGY

Exhibit 4.6 Applying Hills Strategy Development Framework to McDonalds (slide 1)

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 CHAPTER 4 OPERATIONS STRATEGY

Exhibit 4.6 Applying Hills Strategy Development Framework to McDonalds (slide 2)

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 CHAPTER 4 OPERATIONS STRATEGY

Sustainable Lawn Care 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? Draw the major
stages of the value chain with and without an application
service.
2. What problems, if any, do you see with Lawn Cares current
strategy, vision, customer benefit package and value chain
design, and pre- and postservices?
3. Redo questions (1) and (2) and provide a new or revised
strategy and associated customer benefit package and value
chain that is more appropriate for todays marketplace. What
does operations have to be good at to successfully execute
your revised strategy?
4. What are your final recommendations?
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 CHAPTER 4 OPERATIONS STRATEGY

Extra Slide

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