Zcks6uEmEeiTKQ5ajE7PqA Module-1-Transcript

Module 1 Operations Strategy & Disruptive Innovation 11/2/18, 2'52 PM
Module 1 Operations Strategy & Disruptive

Innovation
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Content
About the Course and Your Classmates
Welcome to Operations Management: Strategy and Quality for the Digital Age
Meet Professor Udatta Palekar
Lesson 1-1 Operations Strategy

Lesson 1-1.1 Operations Strategy (part 1)
Lesson 1-2 Designing Operations Strategy

Lesson 1-2.1 Designing Operations Strategy (part 1)
Lesson 1-2.4 Operations Strategy - Amazon Example [sidebar] (Optional)
Lesson 1-3 Strategic Trade-offs

Lesson 1-3.1 Strategic Trade-offs (part 1)
Lesson 1-4 Disruptive Innovation

Lesson 1-4.1 Disruptive Innovation (part 1)
Lesson 1-4.3 Disruptive Innovation [sidebar] (Optional)
About the Course and Your Classmates

Welcome to Operations Management: Strategy and Quality for the Digital Age
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Welcome to Operations Management - Slide 1
Transcript
Hello and welcome to Operations Management Strategy and Quality for the Digital Age. I'm Udatta Palekar,
I'm a professor in the Gies College of Business at the University of Illinois. This course aims to provide
learners with a broad understanding of the changing landscape of operations management in the digital age.
We will learn about both traditional strategic issues in manufacturing and service operations, and the effect of
new disruptive technologies and business models. We discussed the importance of strategic focus and the
trade-off associated with achieving such focus. But we will also learn about the theory of disruptive
innovation and how it explains disruptions that we are seeing in operations and the new businesses that are
arising that this disrupted operations. We will consider service operations and discuss how they differ from
manufacturing operations. We will look at traditional measures of how quality is measured in service
operations and then also figure out how the new technologies are changing both the delivery and management
of service operations. We will look at quality management as well, and we will look at the techniques of
process control, discuss how this methods are used, what are the statistical underpinnings behind this
methods? How these methods are now finding more application in the age of big data analytics. With the
advent of the internet of things, more and more information is available dynamically and this allows quality
control ideas to be used real-time and on a much larger scale. Finally, we will look at some ways that
operation management is being affected by the digital age. We will look at our digital platforms and learn
what they are and understand how they are changing both manufacturing operations and service delivery. We
will look at digital factories and see how they are changing manufacturing operations and what is involved in
digital factories and how old ideas from operation management are now being applied more rigorously
because of digital libraries. So, the objective of this course is to try and give you and understanding of the
role of strategy and the rule of quality in operations management. But do it in a way so that you will
understand how with all the changes that we are observing, how some of these things continue to apply and
how some of them will have to be modified.
Meet Professor Udatta Palekar
Meet Professor Udatta Palekar - Slide 2
Transcript
I'm Udatta Palekar, I'm an Associate Professor in the Department of Business Administration in the Gies
College of Business at the University of Illinois, and I'm the Executive Director of the Supply Chain
Management program. My name's a little difficult to say, most people have trouble saying it, so if you really
have trouble addressing me, professor works just as well. So, I was born in Mumbai India, shores of Slumdog
Millionaire and did my early schooling and undergraduate education there. It's still hard for me to recognize
the city when I go back now, many of my old horns, many of the landmarks, they're all gone and there are
shiny new buildings and malls. Lot of progress, but I miss the places I used to frequent. As the famous Joni
Mitchell song goes, they build paradise and put up a parking lot. So, I grew up in the hot weather of Mumbai
and growing up I didn't even own a sweater. So, of course when it came time to find a place for graduate
studies, what do I do? I moved to Buffalo, New York. For those of you who don't know Buffalo, it's a cold
and snowy place. So, I started out in this metropolis with about 20 million people and go to Buffalo with
350,000 people. Now, it's even shrunk down to about 250,000 people. Then my next step from Buffalo was to
come to Champagne-Urbana with a population of 100,000. Now, of course, if you look at a graph of
population versus the places that I've lived, it shows a clear case of exponential decay. If I follow this trend,
the next place I live will be approximately 4,000 people. Of course you realize that you wouldn't do a
regression in this fashion and you wouldn't extrapolate the way I'm doing, but that's a different discussion.
Nonetheless, I'm headed towards tinier and tinier places. So, during this downward spiral in population, I
managed to get a Bachelors Degree in Engineering from Bombay University, and a Masters and PhD after
that from the State University of New York at Buffalo in operations research. After getting my doctorate, I
joined the University of Illinois in the College of Engineering. I was a faculty there for many years, until I
was recruited to start the Supply Chain Management program in the College of Business. So, as I tell my
students, I started going to school when I was three years old in pre-kindergarten and I haven't left school
until now, a matter of some five decades. Some people just need a little more time to learn and I'm one of
them. My research journey has taken me quite far as well. I started working out on Mathematical
Optimization Theory, and moved on to applying some of the optimization techniques to manufacturing
planning and then onto supply chain management. The problems I've worked on have gotten progressively
more complex and more practical. I used to work in a world of stylized mathematical problems, and now I
work in the world of dirty and entangled real-world problems. My interests are in operational design and
optimization of supply chains. I do network designs, transportation optimization, inventory optimization,
scheduling methods and lately I've started looking at risks in supply chain management. Through the years,
I've worked with many large and small companies helping them with their supply chain, and operational
planning and optimization problems. I've done research, I've done consulting with many of this
manufacturing and retail companies and I have developed software solutions for several fortune 500
companies. I've also worked with the US Air Force, and I have done research through the National Science
Foundation and the US Army. Now, outside of my professional life as time permits, I love music and I love to
listen to music. Listen, by the way, not perform although am known to be a champion bathroom singer and if
you ever stand outside my house when I am taking a shower, you can hear me destroy both the tune and the
lyrics to many a popular song. Other than that, I love to read. I'm a political junkie, I like to read completely
random things and I often am the possessor of completely random facts and knowledge. So, sometimes
people will ask me why I know certain things, and I myself don't know why I know some things. Other than
that, I love most things that are musical. I love dark humor and I love dark movies. Hopefully, we'll get a
chance to interact sometime, if not we'll interact through our course. Thank you very much for listening to me
and thank you for taking the course.
Lesson 1-1 Operations Strategy

Introduction - Slide 3
In this lesson, we will study
the role of operations management in the industry

the importance of a well-defined operations strategy, and
trade-offs associated with maintaining strategic focus.
Transcript
In this lesson, we are going to study the rule of operations management in industry, the importance that
operations has in the success of specific companies and the importance of well defined operation strategies.
We are also going to look at some of the trade-offs that are associated with maintaining strategic focus.
Definition - Slide 4
Operations transform inputs (raw materials or resources) into desired goods or services to create value.
Operations management is the active planning, management, and execution of transformative value-creating
operations.
Transcript
Now before we get started, we ought to define what operations are. So essentially, when we talk about
operations, we are talking about activities that transform inputs, which may be raw materials or other
resources, human resources for example, into desired goods or services to create certain value. Once you
define operations as this transformation activities, then operations management simply becomes the active
planning and management and the execution of this transformative value creating operations. So the idea here
is that we have a set of activities that we are performing that take something in a raw form and convert it into
a desirable good or service for our customers. And we'd like to manage this process, we'd like to make sure
that we plan it for the outcomes that we want and that we execute it in a fashion that we can get effective
creation of value.
Innovators: Dell Computers - Slide 5
Strategy
Customized PCs
Short delivery time
Low cost
Transcript
Let's think of a few examples, and I'm calling some of these companies innovators because they have
changed the way we do business. So let's start with Dell Computers, which in the early 80s was a small
manufacturer of computers and going head to head against giants like IBM and Compaq. Dell had a very
interesting strategy and what Dell did was they would allow customers to configure computers depending on
what it was that the customer could afford and needed. And so you could specify how much RAM, what kind
of hard drive, what kind of graphics and so on. And Dell would would then build the customized personal
computer for the customer. Now, that all seems fine because there were a lot of other companies also which
were doing the same thing. But what Dell did exceptionally well was Dell made sure that they would give
you that customized PC in a relatively short amount of time and at a low cost, often lower than the cost of
standard computers that you could buy at retail stores.
Dell Computers: Innovation (1 of 3) - Slide 6
Innovative Ideas
Supplier partnerships
Co-located suppliers (as low as 15-minute delivery times)
Suppliers' own inventory until delivery
Demand forecasting and management
Information instead of inventory
Transcript
Now, how did Dell achieve this? So there had to be some amount of innovative ideas that Dell brought into
the business that changed the way the business was done. So one of the first things that Dell did was instead
of trying to own a lot of manufacturing, Dell decided that all it was going to do was assemble components.
Michael Dell famously said that if there are 20 people who are competing like crazy to create a certain good,
there's no point in the 21st person trying to do that. It's better to sort of be the person who sits and picks the
winner out of those 20 people trying to develop new technologies. And so, his idea was that he would work
with suppliers and create partnerships with them. Now to be able to do this, what Dell did was they reduced
the number of suppliers that they had so that they could actively partner with those suppliers. And had those
suppliers locate their distribution facilities in close proximity to the assembly facilities of Dell Computers.
Now having the suppliers close by, meant that Dell could send an order out for parts and sometimes in as
little time as 15 minutes, have the component delivered to it. The usual time was about an hour because even
from the warehouses of the suppliers they have to pick it from the warehouse, pack it and then transport it.
But supply times in terms of hours was practically unheard of at that time. Now, the other thing that Dell did
was because the warehouses were now owned by the suppliers, Dell would not order parts until it needed
them for use so the inventory for parts was owned by the supplier and not by Dell. Now, clearly this reduced
Dell's cost dramatically because they no longer had to worry about having working capital for all those parts.
So this was sort of on the supply side. On the demand side, what Dell did was something even cleverer. So
Dell spent a lot of effort in trying to predict the demand for different kinds of components that go into the
parts. But then, they also did some very clever things. So when customers would call to customize their PC,
Dell would try and get the customer or convince the customer to change perhaps to a part that was more in
supply and that Dell did not have to go out and get, or a part that was in short supply. Usually, when
customers come with a request for making something like a personal computer, there's a certain amount of
flexibility that the customer has, and Dell exploited this flexibility that the customers had to shape the demand
for their parts. So this was an early effort at shaping demand. Now, in addition to doing their own forecasting
and managing demand, Dell also will share this information with their suppliers so their suppliers could plan
accordingly and that lowered the cost for the suppliers as well. So in a sense, Dell was trying to use
information instead of having inventory. The better the information the less the uncertainty associated with
demand, and the less the uncertainty, the less the inventory that you need to carry. So those were some of the
innovations that Dell had.
Traditional process of making personal computer:
Supplier (push from the supplier), manufacturer, distributor, (pull from the customer) the customer
Transcript
So if you look at how Dell changed the process of making personal computers, if you look at what was the
traditional model for personal computer supply chains, we had supplier or suppliers who would supply the
manufacturer who would then supply a distributor. And the distributor, right, would supply either directly to
customers or to retailers. Now, the suppliers would make whatever part that they need and they would push it
to the manufacturers, the manufacturers would make their pieces and push them to the distributors. And then
the distributors would either push it to the retailers or they would work directly with the customers. And so
the only place where there was a pull that was based on the demand from the customer was when the
customer bought either from the distributor or the retailer. So most of the operation was a push and then there
was a pull at the very end.
Innovative process of making personal computer:
Supplier (push from the supplier), Dell (pull from Dell), the customer (pull from Dell)
Transcript
What Dell did was firstly, to cut out the middle people the distributors and the retailers, and then it had the
suppliers supplying Dell and occasionally sending components directly to the customer. So for example, if
the monitor was something that the customer ordered, there was no need for it to go from the supplier to Dell
and then to the customer. It could be shipped directly from the supplier to the customer, but now because the
suppliers were co-located with Dell, Dell could pull inventory from the supplier. The customer would pull
personal computers from Dell, and the customer could pull some of the components from the supplier. So
now there was an extensive amount of pull in the supply chain and the only push was whatever push was
occurring in the supplier's part of the supply chain. So by changing the way computers were made, by
changing the boundary between where push stopped and pull started, Dell was able to create a much more
just-in-time manufacturing operations. And this led to Dell basically becoming at one point the largest
personal computer manufacturer. Later on, when portable computers and laptop computers started becoming
big, some of the innovation that Dell had created was not quite appropriate for personal computers. Because
consumers often wanted to go and feel the product before buying, and that meant that Dell's direct to
customer model had to be changed. But until then, this was a radical new way of making personal computers
which meant that Dell became the big manufacturer of personal computers. And it pretty much drove out
companies like IBM and Compaq out of business in terms of the personal computers.
Innovators: Southwest Airlines - Slide 9
Strategy
No frills
Low cost
Dependable and frequent flights
Great customer service
Transcript
Let's look at different innovator. Let's look at Southwest Airlines. Now, when Southwest Airlines was started,
they started in Dallas and they choose to use a small field called Love Field, which was a smaller airport.
They used to fly to two or three different states from that particular location. As they decided to grow, they
realized that there was a need for airline travel that was a no frills or travel. By making it no-frills travel, they
could lower the cost of the tickets for customers and there was a huge market of customers, which used to
basically have to take either a train or a bus or have to drive by themselves, which got converted to flying
because of the lower costs. So, the strategy here, was to provide a no frills service at a low cost. But to make
this strategy work so that people would actually want to use it, they wanted to make sure that they had very
dependable service. In the markets that they served, wanted to make sure they had frequent flights, just as
there are frequent bus service between different locations or there may be frequent trains between certain
locations. They wanted to make sure that there were frequent flights that went between those locations.
Finally, they realized that even if this were low-cost customers, it was important to provide good customer
service. So, their strategy was to provide a no frills product, which was low-cost, dependable, and where they
had great customer service. Now, this all seems fairly contradictory. It's all seems like these are great
ambitions to have, but how do you make it work? So, that's where Southwest Airlines came up with some
fairly innovative ideas.
Southwest Airlines: Innovations - Slide 10
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Innovative Ideas
Point-to-point vs. hub-and-spoke

One aircraft type instead of multiple
Fast turnaround of aircraft
High utilization of crew
Dependable—on time
Transcript
Most large airlines at that point used to use what's called, and even now use what's called a Hub and Spoke
network, where they bring in a number of regional roots into a hub, and the hub might be Chicago or Dallas
or it might be Atlanta. Then they bring in a bunch of different people, and they sought out the people at the
hub. Those people get onto different flights depending on destinations, and then they go. What Southwest
Airlines said is they realized that this was a fairly complex system because you had to manage the inbound
flights and the outbound flights. It often meant the planes had to sit at the hub for an extended period of time.
For an airline, the only time you make money is when the aircraft is in the air. So, what they decided to do
was to have a point-to-point network, which means that there was none of this hub and spoke, so aircraft
would go from point A to point B and then back to point A and keep making this cycle repeatedly. This
allowed them to have frequent service between the points that they serviced. But moreover, because they
didn't have to wait for another connecting flight to come for this particular aircraft, they could turn the aircraft
around very quickly. So on average, they could have an extra hour of flying in a day, which is a significant
amount of extra capacity without adding any extra assets in the form of planes. The other thing that they
realized is that if they are going to make sure that these planes are turned around quickly, the best way to do it
would be if they could focus on only one airplane. So, instead of having different sizes and different types of
airplanes, from different manufacturers, they standardized on one particular type of aircraft. This had other
benefits to them. Now they had people who could be trained exclusively on this one aircraft. They could have
crews, who were trained on this aircraft, maintenance people, who were trained on this aircraft. It was
possible to swap crews from one aircraft to another because it was the same basic type of aircraft. In a larger
airline, crews are specialized by aircraft, and so if the aircraft is changed, then the crew may not be qualified
to fly the other aircraft. So, there were a lot of benefits of having this one kind of aircraft. They were able to
get fast turnaround of aircraft and they were able to get high utilization of crew. Now, one of the things to
realize is just because Southwest Airlines offers low-cost airfares, does not mean that they pay their crew any
less. In fact, the average salary for pilots is highest at Southwest Airlines. But the reason why the high salary
is still workable for Southwest Airlines is because the crew gets utilized a lot more than it gets utilized at
other airlines. Lastly, because they had only one aircraft pipe, so if something went wrong with that aircraft
could quickly swap in another airplane at short notice. They were able to get very high amount of on-time
performance. So that you could count on Southwest Airlines flights starting and ending their flights at their
designated times. Moreover, because there was none of this hub and spoke business, they didn't have to worry
about transferring luggage between planes. Most luggage gets lost during the transfer. Almost nothing gets
lost while the aircraft in the air. So, since it's a point-to-point network, luggage will get loaded onto the plane
and it will be taken off at the other end, and so Southwest Airlines almost never lost your luggage. So, these
are all little things which make it valuable to the customer to use your service. So, by changing the
operation's strategy that was being used, Southwest Airlines was able to become the largest airline in the
United States.
Innovators: Walmart (1 of 2) - Slide 11
Strategy
Low prices
Low inventory
Large buying power
Transcript
No discussion about innovators in operation's strategy would be complete without talking about Walmart.
Now, note that there are lots of other companies we can talk about and some of them we'll talk about as we go
further in the lesson, but Walmart is one of those amazing stories. Walmart's strategy was simple. They
wanted to have low prices for their customers. They wanted to have stores with low amount of inventory, and
they wanted to become large, so they had large buying power. So, they could keep their costs low and thereby
offer customers lower prices.
Innovators: Walmart (2 of 2) - Slide 12
Innovative Ideas
Everyday low pricing

Under-served markets
Supplier relationships
Vendor-managed inventory
Information technology
Cross docking
Transcript
So, what did Walmart do in this case? So, the first thing Walmart did was they introduced the notion of
everyday low pricing. Until then, most retailers would offer sales at various times. The advantage of having
sales is that it bumps up demand during that particular sale period. The disadvantage is that most of the sales
lift that you get during a sale period is cannibalized demand from other parts because customers know there's
likely to be a sale and they wait you out till the sale occurs unless they absolutely need the product. So, the
amount of increase in sales that one would one expected from the sale is never fully realized. By having
everyday low pricing, what Walmart did was took out the seesaw effect of having high demand when there is
sale and then dropping demands when there wasn't a sale, and they could focus on having a process whereby
they had a steady amount of demand. Any fluctuations in demand were then, because of the external
environment, and not because of what Walmart was doing. The second thing they did was, in their expansion,
they realized that apart from large urban areas, most rural and semi-rural areas did not have a lot of retailers.
They had retailers who are basically local stores, and the local stores got their supplies through a complex
chain of distributors. So, the intermediaries will mark up the costs and so by the time it came to the local
store, the cost was very high. So, Walmart strategy of expansion was to go and look at these underserved
markets. They'd often locate themselves near small towns, but not in the town itself, to avoid A, paying high
amount of cost for the store itself, and B, so that they could avoid the high taxation in many of those
locations. They then built supplier relationships, and they looked for suppliers who could provide them the
volume that they needed, but would also commit to process improvements so that the cost of the goods being
supplied to Walmart would be reduced year after year. So, doing this helped Walmart because obviously they
get goods at lower costs, but the supplier also knowing that they had a buyer like Walmart at the other end,
who was willing to agree to a long-term relationship, could invest in making their processes better. Walmart
came up with other innovations. So, for example, Walmart came up with the idea of vendor managed
inventory. The idea of vendor managed inventory is that instead of Walmart figuring out when to order things
and how much to keep on the shelf etc, they allowed the vendor to do it. Now, this had a benefit for Walmart
because Walmart could step away from doing one of the normal functions of a retailer, but the second benefit
it had, was the retailers' information, which is the information about sale, was now available to the supplier
and the supplier could see how fast the product was moving on the retailer's shelf, and then do their planning
accordingly, which helped reduce inventories in the suppliers' network as well. Walmart also invested heavily
in information technology. It came up with innovations in the transportation of material from its suppliers to
its distribution centers and its retail stores. It came up with this notion of cross-docking, whereby it will bring
in full truck loads into a location, break up the full truck load and then sort it out and send full truckloads
onto the stores. By doing this, instead of paying less than truckload cost, Walmart was able to pay full truck
load cost. These are all significantly different things. None of them individually sounds like it was a big
thing, but put together, it created a supply chain network for Walmart, which was quite radically new than
anything else that any of the other retailers were doing. So, as you can see, from these three examples, the
way we conduct our operations can be significant because it allows us to dominate the market, to be able to
provide value at low cost, and thereby become a competitive force.
Strategy Hierarchy - Slide 13
Corporate strategy: What business should we be in? How do we synergize?
Business strategy: How can we compete? Increase profitability or market share? Differentiation?
Functional strategy: Set functional objectives? Measure effectiveness?
Corporate strategy → Business strategy → Functional strategy
Transcript
How does a company typically think about what their operation strategy should be? Typically, there's a
strategy hierarchy. Because if you think of many companies, they tend not to be companies that focus only on
one product, they may have many different products. So, we need slightly different concepts that we ought to
consider as we think about the company as a whole. So, at the highest level, there might be a corporate
strategy. So, if I'm General Electric, for example, and General Electric is now changing its corporate strategy.
But until now, General Electric had many different businesses. General Electric at one point had a large bank,
General Electric made locomotives, it was in light bulbs, it was in aircraft engine. So, anything you could
think of G was there. In fact, G became one of the largest companies in the world by adding businesses in this
form. So, that was its corporate strategy to be in many different businesses. So, as part of corporate strategy,
what one has to decide is, what businesses should we be in? If you have multiple businesses, how do we use
then synergistically? Now, obviously one simple thing where one can think about is we could do co-branding
when we have multiple businesses that might have similar products or we might find that there are logistics
efficiencies that we can have. So, at a high level one thing of corporate strategy, we are trying to figure out
what businesses should we be in. Should we buy one of our suppliers out so that we can ensure that our
supply chain is not affected by problems at this particular supplier? So it's a critical supplier. So, those are the
high level things that we think about in corporate strategy. Now, within the larger corporation, we may have
different businesses.
Now, each of those businesses now has to figure out how it can succeed in the particular niche in which the
business competes. So, how do we compete? How do we create value for our stakeholders? How do we
increase market share? What differentiates us from our competitors? This is part of the business strategy that
is developed and business strategy has to make sure that whatever the corporate strategy is, is kept in mind as
we develop the business strategy. So, for example, if logistics efficiencies are required between companies
within the same corporation, then the business strategy for each of the units has to make sure that their
logistics operations can work together. Now, once a business has a business strategy, then that business
strategy has to roll down into the different functional areas. So, one would need a finance strategy, one would
need a marketing strategy and similarly, we will need an operation strategy.
So, at this stage, we are now looking at, we have a competitive strategy that we set up in the form of our
business strategy. How do we execute that competitive strategy in our particular function? What does
operations have to do to meet the needs of the business's strategy, and similarly the corporate strategy? How
do we go about setting the right objectives so people who work in the business do the right thing? How do we
measure that we are actually being effective? So, we have this three-level strategy hierarchy and operation
strategies at the lowest of those three levels but as you will see that there is lots of interesting issues that one
has to look at when we talk about operations strategy.
Strategy Alignment - Slide 14
Functional strategies may conflict: Marketing promotions may lead to more sales but cause supply chain
shortages, lost sales, and unhappy customers.
Functional strategies must support and be aligned with corporate/business strategy.
Transcript
So, given the hierarchy of strategy that we talked about, we know that there are many different functional
areas and each of those functional areas creates its own strategy. Now, it's quite possible that we may have
strategies that conflict. For example, the marketing strategy may conflict with the operation strategy, or the
marketing strategy and operations strategy might conflict with the finance strategy. One example of this is
that marketing may run promotions because marketing wants to increase sales which is part of the business
strategy that we have and operations has been given the task of keeping costs low. But when marketing runs
promotions, promotions are meant to increase sales but oftentimes, the amount of increase is unpredictable.
What this does is it may either cause the supply chain to overreact and produce a lot and end up with a lot of
excess inventory that may eventually have to be discarded or it may not react sufficiently and thereby cause
shortages of the product. Shortages means lost sales. We've already spent the money on the promotion but we
are not able to capture the sale and it also means unhappy customers. Unhappy customers means that they
make not repeat buy from us. Which means the marketing promotion that we just did had actually a negative
effect on the overall customer base that we had. So, it's quite possible for strategies to conflict even when we
are trying to align it with strategies at the higher level. So, it becomes important for there to be alignment
between different strategies. For those of you who work for large companies, you already know about the
sales and operations planning process that often takes place in companies, whereby the marketing and sales
initiatives and operations activities are aligned or attempts are made to align those at least during that process.
So, functional strategies must not only be aligned with each other but they must also be aligned with the
business strategy or the corporate strategy eventually. So, for example, if part of the corporate strategy is to
be environmentally friendly, then we cannot have a operation strategy which involves sending half-filled
trucks across the country and thereby creating more pollution. So, there are various ways that strategies may
conflict and we need to make sure that those strategies are aligned, otherwise we end up working at cross
purposes within our corporation.
Alignment Questions - Slide 15
Does your strategy support your corporate mission?
Does your organization structure support your strategy?
Alignment on both heightens the chance of success.
Alignment - slide 15
Organization to strategy Organization to strategy (Not
(Aligned) Aligned)
Strategy to mission (Aligned) Winning Incapable
Strategy to mission (Not
Going Nowhere Failure
Aligned)
Source: Trevor & Varcoe, 2016
Transcript
So now, whenever one thinks in terms of strategic alignment, there are two types of alignment we should
think about. One is corporate strategy is often created so that it supports a corporate mission. So, the first
alignment that we are interested in is, does the corporate strategy or for that matter any of the derived
strategies, the business strategy and the functional strategies, do they align with the corporate mission? The
second question we ask is that given the strategy that we've selected, does our organizational structure
support this particular strategy? Now, so basically we have two axes and we could have our corporate
strategy that's either aligned or not aligned with our corporate mission, and we could have an organization
that is either aligned or not aligned with the strategy that we have selected. So, if you look at the two axes
that we have of alignment, we find that there are four possibilities that we could either be aligned on both
questions or we could be aligned on one and not on the other. Ideally, for success, we want to have a strategy
that aligns to the mission and an organization that supports the strategy that we have selected. Companies that
do this effectively generally end up winning in the marketplace and surviving over time. If, for example, we
have strategy that is not aligned to the mission of the company but then we create an organization that is
aligned with the strategy that we've selected so that our organization can effectively implement the strategy.
But our strategy is not aligned to the mission. This basically means that even though we might be performing,
we are not getting to the goal that we have set as a long-term goal for our company. So, that's the kind of
problem that we have when if you don't know where you're going, then any path can take you there. So, that's
not a recipe for success. If we have both lack of alignment and strategy and mission and the organization to
structure, then clearly this is not an enterprise that can achieve either its strategy, fulfill its strategy nor fulfill
its mission, and so very likely organizations like that are likely to fail. Lastly, we might have a good strategy
to mission alignment but we've not developed an organization that matches the strategy. In this case, our
organization is incapable of actually executing the strategy and executing the mission of the company. So, we
will typically end up not being able to compete in the marketplace. A classic example of this is what
happened to Yahoo when Marissa Mayer took over Yahoo. She came up with a great strategy but her
organization was not designed to take care of that strategy, to implement that strategy. Because of that, Yahoo
could not execute the strategy. Eventually, the strategy had to be changed and the way the strategy was
changed was for the organization to basically shrink and then sell itself off. So, a $145 billion company was
sold eventually for five billion dollars. So, alignment of strategy and organization is extremely important to
be able to drive any kind of mission that the company has.
Lesson Conclusion - Slide 16
In this lesson, we learned about
the role of operations strategy in the success of disruptive companies,

the hierarchy of strategy, and
the importance of strategic alignment.
Transcript
So, in short, what we've learned then is that operations strategy plays a very important role in the success of
companies, and disruptive companies are able to disrupt their particular industries because they often come
up with new and interesting operation strategies. We learned about the hierarchy of strategy that there is a
corporate strategy, that there is a business strategy and then there are functional strategies. We talked about
how important it is to align the different strategies, to align the strategy with the mission and to align the
organization with the strategy so that we can be successful.
Lesson 1-2 Designing Operations Strategy

What Is Operations Strategy? - Slide 17
The pattern of decisions which shape the long-term capabilities of an organization, consistent with the
corporate strategy, through the reconciliation of market requirements with the deployment of resources
Source: Slack & Lewis, 2011
Transcript
In this lesson, we will look at what constitutes an operations strategy, we will look at how one goes about
formulating an operating strategy, what are the elements of an operating strategy. We'll talk about what are
known as order qualifiers and order winners, and would look at the elements of competence that help us
differentiate our enterprise from other enterprises. So to start out, let's recap what is operations strategy? As
we have discussed, the operation strategy is the decisions that we make, which allow us to shape the long-
term capabilities of the organization. We want this to be consistent with our corporate strategy or business
strategy, whichever might be the next higher level up our hierarchy. The pattern of decisions that we make
allow us to reconcile what the market wants. What are the market requirements? How do we then deploy
resources to take care of the market requirements? So essentially, the operation strategy looks at the set of
actions that we're going to take, to take what the customer wants, and provide that to the customer using a set
of resources that are available to us. Doing this, we have to be careful that we maintain consistency with our
corporate strategy and that we generate value at the lowest possible cost.
Operations Strategy Formulation - Slide 18
Hill's five-step process:
1. Define corporate objectives.

2. Determine marketing strategies to meet objectives.
3. Assess how different products win orders against competitors' products.
4. Establish the most appropriate mode to deliver this set of products.
5. Provide the infrastructure to support operations.
Source: Hill, 2005
Transcript
Now, Berry Hill came up with a five-step process, which defines how one goes about formulating an
operation strategy. So, the first step obviously is to define what our corporate objectives are. Without knowing
what those corporate objectives are, the rest of it doesn't matter. So, we need to know what our overall
overarching goal is before we decide anything else. Once we decide the overarching goals, then we decide
what's our marketing strategy to meet this corporate objective. Once we've decided that this marketing
strategy, we have to decide what about the product helps us win against our competitors? So, far our niche
business, what is the attribute of the product or service that we're offering that will help us win customers?
Then, we will have to establish the most appropriate way to deliver these products, which have this winning
attributes. Then finally, we have to be able to provide the infrastructure to support these operations.
Hill's Framework - Slide 19
Hill's Framework - Slide 19

Corporate Order Operations strategy Operations strategy
Marketing strategy
objectives qualifiers/winners (Design choices) (Infrastructure)
Growth Target Safety Process type Workforce

Survival markets/segments Price Supply chain Operating plans
Profit Range Range integration Quality control
ROI Mix Flexibility Sourcing Org. structure
Financial Volumes Demand Technology Compensation
measures Standardization Product Capacity system
Social vs. customization design Inventory Learning and
welfare Innovation Quality innovation
Leader vs. Service Support
follower Environment services
Brand image
Delivery
Variability
Service
Source: Hill, 2005
Transcript
So, if you look at this more extensively, what might our corporate objectives be? Our corporate objectives
might be growth, might be survival in a highly competitive market, it might be profitability, it could be return
on investment, could be a bunch of other financial measures, our corporate objectives might be social
welfare. So, we are for example, concerned about the environment or we are concerned about fair trade, so
that we are providing a good livelihood to the people who actually produce some other things that our
corporation sells. So, there can be a number of such corporate objectives. Now based on those objectives, we
have to have a marketing strategy. How do we go to market with whatever product or service we are hoping
to provide? So, we may need to figure out what our target market is or what the market segment is that we
want to address. We may have to decide what's the range of products that we want to have, what's the mix,
product mix that we are willing to provide? We may have to decide in what volumes are we going to be a
large volume low cost provider or are we going to be a very niche provider with smaller volumes at very high
brand quality and a great brand recognition? We may have to decide on whether we are going to have a
standardized product or are we going to allow customization in our product? You might have to decide what
level of innovation are we going to have in our product? Are we going to have innovative products, so that
we constantly keep introducing new products? Or are we going to be a follower, where we decide that we
want to have a stable product that we produce repeatedly? So, for example, I might be providing denim jeans,
and I could be very innovative in denim jeans by coming up with various different designs of denim jeans, or
I could provide basic denim jeans, which can be used and which has a stable market for many years. Do I
want to be a leader in technology? Do I want to be a leader in introducing new products? Or am I content in
being a follower? Both of them have value and we had to make that decision in this stage of the framework.
Having done that, we have to look at what are called order qualifiers and order winners. For example, when
we think of our products is safety important? Is price an important consideration for our customers? Is the
range of products that we offer an important consideration? Is the flexibility with which the product can be
changed or substituted, is that important? So, there are a number of different attributes that we can look at,
which allow us to decide what we are hoping will get us customers for the product or service that we're
designing. Then that leads us to the operation strategy. Because now, we have to make some choices, we have
to figure out what is the design of both the product and process that we're going to have? How are our
operations when we design? What are the processes that we're going to use? Are we going to use a job shop
kind of process, are we going to have an assembly line process? We have to think in terms of supply chain
integration. We have to think in terms of, do I own certain component manufacturing? What level of vertical
integration should I have? I have to think in terms of sourcing. Where do I obtain my material? If for example
my business is supplying coffee, I may want to think about where I source the coffee to make sure that I meet
some ethical standards because that might be one of my corporate objectives. I have to think in terms of what
technology am I going to use to produce this product? Because it's often possible to have various
technologies and some are very expensive. The type of technology I select may depend for example, on
whether a large product range is important or whether I'm going to have a narrow range, which is very
standard. I will make decisions about the amount of capacity I should have, how much inventory I should
carry. Then, to make all these resources and technologies work, I need to think of the infrastructure that I'm
going to create. I have to think in terms of the workforce I'm going to have. Some of you may have heard that
Amazon is looking for a place to locate a new, a second headquarter. Now, Amazon looks to locate a new
headquarters because of the size of Amazon. They want to make sure that there is a trained workforce nearby,
which means that, you're often restricted to large cities, and so, in terms of planning operations, I have to
make sure that the workforce is available, so, I have to locate in a place where that workforce is available.
How to come up with operating plans? How do we go about operating things? How do we schedule things?
What kind of quality control are we going to have? What's our organization structure going to be? Is it going
to be a flat structure or are we going to have many layers in the hierarchy of our organization? How are
people going to be compensated? How are they going to be rewarded? Because that often drives behavior of
people and it often affects whether strategy can be properly implemented. How is our organization going to
learn? What are we going to do to support innovation? Many companies have found that in large companies
when you do R&D, there is not as much innovation because there tends to be group-think. So, many of these
companies are starting to farm out some of the research and development to smaller more nimble outwards,
which can take more risks and which can often come up with ideas that seem far out, but can actually make a
huge difference if they succeed. So, I have to figure out how this infrastructure is going to be created. Am I
going to be working with partners or am I going to be doing everything in-house? I have to think about what
kind of support services I would need to provide. What kind of information technology I will need to
provide? Do I need to provide support services for my customers? So that the product when it's in the field,
can be properly supported. So, I can work my way from the corporate objectives down to the operation
strategy to try and figure out what it is that I want to do to be able to effectively compete in the market that
I've selected.
Elements of Operations Strategy - Slide 20
Different elements of Operations Strategy are shown in a flow chart. The chart is multi-directional with many
two-directional relationships. At each step, arrows point forward to one or more boxes and may be back to
the previous box. Please find below the elements and their link with other elements.
1. Corporate/Business Strategy
Drives Target Markets
Affect Operations Strategy (Order Winners/Qualifiers, Distinctive Competence, Objectives,
Policies, Resource Decisions)
2. Target Markets
Impacted by and impacted to Corporate/Business Strategy
Drives Operations Strategy (Order Winners/Qualifiers, Distinctive Competence, Objectives,
Results in Forward to Functional Strategies
3. Functional Strategies
Impacted by and impacted the Target Markets simultaneously
Forward to Operations Strategy (Order Winners/Qualifiers, Distinctive Competence, Objectives,
4. Internal Analysis
5. External Analysis
6. Operations Strategy (Order Winners/Qualifiers, Distinctive Competence, Objectives, Policies,
Resource Decisions)
Backward to Corporate/Business Strategy

Backward to Target Markets
Backward to Functional Strategies
Transcript
So, if you look at the operation strategy, it has different elements. There's the whole corporate and business
strategy, which is going to drive everything that we're going to try and do. The corporate and business
strategy allows us to think in terms of what target markets we are going to consider? What is the customer
segment that we are trying to service? What are the things that are important to that customer segment? So,
both the corporate strategy and the target market that we've selected will now inform our operation strategy.
We will look at the market and our business strategy and figure out what products do we want to offer? When
we say what products, what are the attributes of this products? What will help us have a presence in the
market, so that customers will at least consider our product? What will allow us then to convince the
customer to buy our product? We have to think in terms of what kind of distinctive ability do we have? What
are we really good at? What do we need to be really good at? So that we stand out from other people who are
trying to do the same thing as we are. We have to set out what are the objectives? What are our policies? We
have to make a lot of resource decisions. Now since operation strategy is one of the functional strategies, we
have to make sure that our strategy aligns with other functional strategies. At this stage, we may also want to
do what we call internal analysis and external analysis. So, for example, we may do what is called SWOT
analysis. SWOT is strengths, weaknesses, opportunities, and threats. So, S-W-O-T. So, by doing SWOT
analysis, we might be able to say what are our distinctive competencies, that's what are our strengths? Where
are our weaknesses? Where are we vulnerable? What are the opportunities that are available to us? So that we
can expand market share or increase our competitiveness. Then, what are the threats? Is there something on
the horizon that's going to upend everything that we do? The technology cycle right now is moving so
quickly, and there is so many new ideas being generated because of the ubiquity of the Internet and the ability
to instrument everything, so that we can get measured things and use that information to drive both our
policies and our competitive posture. So, how is all of this going to be taken together, so that we can
construct an operation strategy?
Order Qualifiers and Winners - Slide 21
What does the customer want?
Order qualifiers—product or service attributes that must be present to even be considered by the customer.
Order winners—attributes that differentiate the product or service and win the customer.
Transcript
We have mentioned order qualifiers and winners several times. So what are they? Basically, it's a way to
understand what is it that the customer wants. So to know what the customer wants we need to know what is
the minimum that must be provided so that the customer is willing to even consider our product. And that's
what we call an order qualifier. These are product or service attributes that must be present to even be
considered by the customer. So for example, if I have a car, the minimum that the car must be able to do is it
must be able to seat a driver. It must be able to transport the driver from one location to another, and it must
do it through the safety. If that's not available, then a customer is not able to consider this as a mode of
transportation. Now once we are part of the customer's consideration set, the set of product that they're
willing to consider, what will make them pick our product? And this is where we look at order winners.
These are the attributes that differentiate our product or differentiate our service so that the customer chooses
us over other competing alternatives. So for example, with the car example that I provided, it might be that
the customer is cost conscious and low price might be what might win the customer. Or the customer might
be status conscious, and if the customer is status conscious then brand image might be the order winner. It
might be that the customer is into technology, so providing fancy new technology might be the way that we
actually win the customer. If you think of Tesla, Tesla is winning customers because it provides a fancy new
technology, and it appeals to customers who want all the speed that a fast car offers without all the pollution
that a gasoline car creates. So the order winner for Tesla is the technology that it provides in its car.
Examples - Slide 22
Examples - Slide 22
Company Qualifier Winner
Domino's Pizza Tasty, safe pizza Ease of ordering
Uber Safe, reliable, low cost Ease of use, information/tracking
Caterpillar Reliable, good quality After-market service
Southwest Safe, convenient Flexibility, low cost, frequency
Singapore Airlines (first class) Safe, flexible Exceptional service and amenities
Amazon Low cost, good quality Fast delivery, variety, ease
Transcript
Now let's look at a few examples to see what might be the qualifiers and winners. Domino's Pizza had a large
share of the market, but eventually it started losing market share, partly because nobody wanted to eat its
pizza. The pizza didn't taste very well, and even though there was delivery, the basic product wasn't good
enough for people to want to eat it. So what Domino's did was it redid its whole pizza recipe, and it came up
with a tasty pizza that was made in a hygienic environment. Now that alone means that now customers are
willing to think about Domino's pizza. But remember, there are many alternatives where you can have tasty
pizza and it's made in a safe and hygienic environment. And the costs are roughly about the same. So why
should anyone want Domino's Pizza? So the order winner for Domino's Pizza, which has allowed it to have
double digit growth in recent years, is that it created apps which allow you to order easy. And by using
technology, people were able to order Domino's Pizza easily and it could be delivered to you quickly. And
that turned out to be the order winner for Domino's Pizza. Let's take another example, Uber. Customers want
safe, reliable transportation at a reasonable cost so that they can go from location to location. In the past it
was taxi services. Now the problem with taxis is that there aren't usually as many, they are often late, they
tend to be sometimes quite expensive. And more than that, whether you get a taxi or not often depends on
whether the taxi driver is willing to drive you. And this is not just in terms of whether the taxi driver doesn't
like you for whatever type of person you are. But it might be simply for things like if it's raining on a
particular day. It's very hard to get a taxi on a rainy day. And the reason why it was hard to get a taxi on a
rainy day was, a, there was more demand for taxis because people didn't want to walk and were worried
getting wet. But b, taxi drivers often didn't want to drive in the rain. And so they would just park and turn off
their taxi meters because they didn't want to be in situations where they were in an accident. So the supply
will go down, the demand go up. So what Uber came up with was Uber came up with a way to easily use the
service to be able to access a taxi service relatively easily. Because you are doing it from an app on the
phone, you sit in your office or home and see if you can get a taxi without actually having to go out. So if it's
raining, you're not out in the rain trying to get the taxi. The second thing that Uber provided was an ability to
track your transportation. So you could sit and watch the car that is going to come and pick you so you knew
exactly when you are to go out. You could also track where your taxi driver was taking you. Because on the
app, you could follow as you are being driven. So you knew that you are being transported in a proper
fashion. So this technological change is what helped Uber win customers, and we'll talk about Uber later in
this volume. Let's look at Caterpillar. Caterpillar provides a reliable and quality product of moving
equipment, for example. But what wins customers for Caterpillar is it's aftermarket service. Caterpillar will
provide parts and service for any of their equipment no matter how old it is. And having that confidence that
the expensive equipment that you are going to buy will be serviced helps win customers for Caterpillar.
Southwest Airline, we've talked about them already. Again the goal here is safe and convenient
transportation, and that allows Southwest to qualify as an alternative. But then they provide low cost, they
provide frequency of service, and then they provide a flexibility in the way they deliver the service. So that if
you have to cancel your flight, you don't have to worry about losing your investment in the ticket. They allow
you to reschedule your ticket without any extra booking fees, etc. And so by providing this kind of flexibility
at low cost and a service that is frequent, Southwest was able to win customers. Contrast that with to a
different airline, like Singapore Airlines, and let's look at the first class of Singapore Airlines. Again, it's you
want safe travel, so the standard things that would apply for any air travel apply as qualifiers. But because the
people who travel in first class are often people who travel for business, flexibility is very important, the
ability to do change schedules without paying too many booking fees, etc. But all first class travel typically
has those things available, so what makes Singapore Airlines so popular for first class travel? Singapore
Airlines offers exceptional service and amenities in its first class. And because of that for the segments that
they fly, Singapore Airlines is often the preferred airline for a lot of first class travelers. And then let's talk
about Amazon, which is another juggernaut, which has changed the way business is conducted. So when we
think of Amazon, Amazon provides products at a low cost. These are quality products. But what's the winner
for Amazon was that they provide things fast. In some towns now and some cities now Amazon will provide
delivery within a few hours. They provide a wide variety of products. There is an estimate that of all the
items available on the Internet, Amazon has more than 50% of all those items available on Amazon. And then
the ease of use of Amazon. The ease with which you can interact with their website, and the ease with which
you can order and get delivery from them is another order winner for Amazon.
Distinctive Competence - Slide 23
Something the organization does better than anyone else.
Match distinctive competence with order winners.
Critical Success Factors (CSF)
Transcript
Now to be able to do any of this we have to provide some kind of distinctive competence. So this is
something that allows the organization to differentiate itself from other organizations. That allows customers
to see that the product or service that's being offered is better than what is being offered by competitors. Now
what this competences will depend on your organization. Is it that you are able to deliver things at the lowest
possible cost? Is it that your competence is in creating a product which is of a consistently high quality? Is it
your competence that you are able to deliver items on time, in a short amount of time? What is it that makes
you different from others in the same space? Now your competence, obviously, has to match with what the
customer is looking for. So if the customer isn't looking for the highest call quality being delivered
consistently, then you could have competence in doing that, but then there's that mismatch between the two
and that's not going to be very useful for you. So the competence that we exhibit, the distinction that is
differentiating aspect of our operation strategy, has to be matched with the order winners that the customer is
looking for. And we often have to define what we'll call critical success factors. What was it that made the
operation strategy, the organizational structure, work? What was it that made this organization successful?
Check Out the Sidebar - Slide 24
Check out the Sidebar "Lecture 1- 2.4 Operations Strategy - Amazon Example" for an example with Amazon.
Operations Objectives (1 of 2) - Slide 25
Cost
Quality
Product variety/customization
Flexibility
Schedule
Product change
Transcript
Now once we start talking about operation strategy, operation strategy requires us to specify what our
objectives are. And there are a number of different objectives that one can have as we think in terms of
operations strategy. For example, one of our objectives might be low cost, it's a fairly common objective. In
fact, unless you are a status conscious brand where you may want to price yourself high to signify status.
Usually, the goal is to have low prices, to offer the customer value at a lower price. So cost is often the main
consideration. And even if you don't lower price, if you can lower cost, that improves your margin. We have
to think in terms of what are our quality objectives? Is it important that as we lower cost we still maintain
high quality? And so we have to look at what do we mean by quality? We have to think in terms of what
variety of products we are going to provide. Do we provide a narrow range of products? Do we provide
standardized products? Or do we provide mass customization in terms of our product range so that customers
can specify things the way they want? If you go to a Subway sandwich shop what you will notice is that they
have a small set of ingredients, but they allow the customer to pick and choose from those ingredients so that
the sandwich that gets created is customized to that particular customer. We may want to have an operations
objective in terms of our flexibility. Do we have scheduled flexibility? Are we able to provide the customer
that product and service when the customer wants and be able to change if the customer is not able to come?
So for example, if I was a physician and I am providing a service to my patients. Will I schedule myself at a
time that's convenient to me so that I make it nine to five which is where most physicians do their scheduling
nowadays. Or do I do it so that my hours are convenient to my customer, so that I have office hours or clinic
hours in the morning and in the evening, which is when most people aren't actually working. And so then
they can come to the clinic during the off hours and they don't have to take time off from work. I might look
at flexibility in terms of a product change. When customers come to buy a product, if they don't like it, do I
allow them to change the product that they want to buy? Can I give them something that's different and is
more satisfactory? One of the things a lot of retailers allow you to do, which is common in this country but
uncommon, common in the United States, when I say this country I mean the United States, but not so
common in other countries. Which is, you can buy the product, take it home, and if you don't like it, you can
bring it back and exchange it or get a refund. In many other countries, once you buy, that's it, you are not able
to return the product.
Operations Objectives (2 of 2) - Slide 26
Delivery
Timeliness
Speed
Reliability
After-sales service
Transcript
So what kind of flexibility am I providing? I might want to look at objectives centered around delivery. So for
example, in terms of delivery, I might want to make sure that I can provide timeliness. So if I'm providing a
service where I come to repair equipment in the customer's house, I might want to make sure that I give them
a tight time window. I might say, I'm going to be here within these two hours, and not make the customer
have to wait for me the entire day. The speed at which I deliver my product or service may be something that
differentiates me. My objective might be to provide the product or service extremely quickly to the customer.
It might also be that my main goal might be reliability. That whatever service or product I deliver, I deliver it
reliably so that the customer is always is satisfied once I'm done with what I promised her I would do or once
I've given them the product. My objectives might be centered around after sale service. So not only do I
provide a product, but what I'm really providing is this service that's required to keep the product running. So
for example, I could sell you a printer, but what I really want to do is to make sure that you can continue
printing. So I provide you a service whereby I provide you the consumables for that printer so that you never
run out of those consumables. And that you never have to stop whatever work you're doing, printing work
you're doing, just because the consumables are not available. So I have to think in terms of what my
objectives are as I think in terms of my operation strategy.
Typical Operations Decisions (1 of 2) - Slide 27
Product: Quality
Process
Location
Layout
Transcript
Now based on the choice of objectives, the order qualifiers, etc., I have to start making some decisions. I have
to make decisions about the product, the product range, the quality of the product. I have to make decisions
about the process. Where is the process going take place? Am why won't you locate the process close to
where the raw material is available? Am I going to make the product close to where the consumer is located?
What strategies have value? It just depends on what it is that I'm trying to do. So the location is important.
How do I lay out my process? Do I have a job shop layout? Do I have an assembly line layout? I have to
make decisions about that process. I have to make decisions about my supply chain.
Typical Operations Decisions (2 of 2) - Slide 28
Supply chain
Sourcing
Inventory
Scheduling
Maintenance
Human resources
Transcript
For example, in my supply chain, I would want to know what level of vertical integration I have. I may want
to look at where do I source my product. How much inventory do I carry in my supply chain? How do I go
about scheduling my supply chain? I may have to make decisions about maintenance. I have resources and
equipment and processes. How do I manage the maintenance of those? And lastly, I'll help you make
decisions about human resources. What kind of people do I need? Do I need people or human resources
where the people are innovative? Do I need resources where I have fairly standardized work, and I do not
need to train people a lot? Now, how I look at human resources affects the overall strategy I'm going to take.
A company like Aldi, for example, pays their store workers a very high salary. But all the people that work at
an Aldi store are required to do everything that has to be done in the store. This means that you have to be
able to use all the systems, you have to be stocking shelves, you may have to clean the store. Everything
that's required has to be done. So there's a team of workers at the store, all of who have to do multiple things
and they get paid very well for that. This is a very different model than the model where there are specific
tasks that are assigned to specific workers. And so how I structure my Human Resources is a very important
consideration.
Uber - Slide 29
Customers—urban, connected, affluent
Order qualifier—reliable, safe transportation at reasonable cost
Order winner—convenience, trace/track
Distinctive competence—two-sided market, easy-to-use app, frictionless payment, dynamic pricing,

predictive analytics, the rating system for quality
Resources—nearly asset-free; sharing economy
Transcript
So let's look at a company that has made major changes to the industry that it's part of. And we're going to
talk about Uber. Now let's see what Uber is facing. Now, Uber has customers who are basically and usually in
urban and large metropolitan areas. They are affluent customers typically. They are middle class or better.
And they typically tend to be very connected customers. They have smartphones and they have data plans
that allow them to connect no matter where they are. Now, for these kind of customers, what they are looking
for is basically safe transportation and reliable transportation, and that's an order qualifier. But that's provided
by many other organizations like bus services and taxi services, etc. But what is a winner for Uber is the
convenience that it provides, the ability to trace and track the transportation that have been provided for them
and that has been an order winner. Now, when Uber first started, you would have to e-mail the CEO, Jack
Kelanic, to get access to the app. But once you get access to the app, you could ask for a ride from your
phone, and at that time, it used to be a black car, which is sort of a fancy car that would come and pick you.
And so now black cars, and things of that nature were usually things that you are to book way in advance,
and so you couldn't do that on a vim. But now, somebody could do it the minute they decided they wanted to
go somewhere. And so this was quite a thrill for many of the initial customers of Uber. But as Uber grew,
instead of having black cars, you could have any car. As long as it was a reasonably clean car, people were
happy with having that car. It was like having a friend drive you from one location to another. And so the
whole thing that Uber there was it realized that there was a need for transportation on one side, and then there
was a whole untapped resource on another side. And so it is working in this two-sided market where it has
the people who need rides, the riders, and the drivers. Now, in a typical service, the company has to invest in
equipment, so cars. And they're going to invest in human resources, so they have to have drivers and staff to
be able to now match the need for riders that the transportation that you're going to provide. But Uber there,
which is interesting, is basically it realized that there was the sharing economy that was coming up. That
people looked at cars sitting around idly, and said I could be using that car if only the person who owns the
car would let me use the car. In this case, instead of allowing you to use the car and sharing the car, they had
the driver provide you rides whenever you needed. So they created this two sided market. And then they
created applications for the customer as well as for the driver that allowed them both to be able to find each
other easily. They created a frictionless payment system so that you don't actually have to handle cash. The
amount that needs to be paid for your ride gets automatically transferred from you credit card to the driver's
account and no cashes is handled. This has huge advantage because now it is safe for the drivers as well. So
the driver does not have to worry about being robbed by a customer. Now, when we talk in terms about
providing service, setting price is very important. And Uber realized that creating a dynamic pricing structure
was a most effective way, to make sure that there were enough drivers available and the demand was high. So
using basic economic principles, what Uber does is that it says when there's high demand, you charge more.
That brings in more drivers because now you can make more money for the same ride, and customers are
willing to pay more because it's a peak time. And so they are able to match whatever extra demand is there
given that peak time with extra supply of dry walls. Now, there are other things that Uber is very correct.
Uber, because it knows where typically people ask for rides, knows at what time and in which area there are
likely to be customers. So it provides heat maps of those customers to it's drivers. So the drivers can locate
them selves in areas that they're most likely to be able to pick up a customer. So be able to predict the
analytics, being able to identify where demand is going to occur and at what time allows drivers to station
themselves and drivers are there for more willing to be part of the system. And finally, Uber allows drivers to
decide if they want to service a particular customer and a customer to decide whether they are going to take a
ride from a particular driver. Because there's a rating system that the drivers rate the customers, and the
customers rate the drivers, and you get to see that the person who's looking to pick up your ride, what kind of
rating do they have. If they have a poor rating, then you can simply decline that particular driver and look for
a different driver. And similarly, the driver can decide to pick you or not pick you. If you are an abusive
customer, the driver can choose not to do this. These are all innovations. This is what makes Uber so much
more convenient for customers as well as for their drivers. And that has led to success of Uber. So in terms of
resources, Uber now does not have to have the assets that a typical transportation company has. It does not
have its own fleet of cars. It doesn't have buses. The assets are owned by the drivers who work as contractors.
And so Uber is making use of what it's called the sharing economy. In fact, Uber is one of the main driver of
the sharing economy. Other drivers of sharing economy are companies like Airbnb, which allows you to rent
your house. So if look at an Uber versus a typical taxi company, what you'll notice is that their operation
strategies are very different because they made significantly different decisions about what their objectives
were, what they consider to be winners, and what they consider to be qualifiers. And so creating the right
operations strategy allows a company to be successful and to even disrupt an industry as Uber has done. So
we can talk not only in terms of operations strategy, but we can talk in terms of operations innovation. So
what we have seen in this lesson so far is how we can construct an operation strategy using a five step
approach, and we've looked at the different elements of an operation strategy. We've also looked at examples
of several companies and how they have been able to effectively leverage their operation strategy to become
successfull in the marketplace.
Lesson 1-2.4 Operations Strategy - Amazon Example [sidebar] (Optional)
Amazon's Success - Slide 30
Order fulfillment
Warehousing
Cloud computing
Data analytics
Transcript
So, let's look at Amazon in a little more detail. Now, there are many many possible things that one can point
out that Amazon does extremely well. But one of the first things that allowed Amazon to succeed, was its
excellence in what's called order fulfillment. So, from the time that you order something till the time that you
get, all the processes that are involved, this might be the processes involved with warehousing, transportation,
delivery, all of those Amazon does very well or it partners with organizations that do it very well. So, the
Order Fulfillment process with Amazon is one of its critical success factors. Now, to be able to do this well,
Amazon initially started out it didn't have any warehouses. When it was a bookseller, it prided itself as being
a business without warehouses. But as it grew, it realized that to be able to fulfill orders effectively, it had to
be good at warehousing. At storing products that could be retrieved quickly and shipped out quickly, and so
Amazon invested in over 100 warehouses. In this warehouses, you can see the most modern robotics being
used. Amazon has created automation and information technology for warehousing. Why? Because getting
the product out of the warehouse is critical to Amazon success. Product sitting in the warehouse does not
actually do anything for you. A product has to be shipped out to the customers. Now, as Amazon started
becoming bigger, it started getting a lot of information. What did customers want? What kinds of abilities that
customers have to pay in personal information about preferences of their customers, financial information of
the customers, all of that had to be stored securely, and as the number of products increased, all the
information about the different products where the product characteristics, reviews for those products, where
those products were stored, how quickly could they be delivered? All of that had to be stored. So, Amazon
had to get very good at computing. It got so good at computing in fact that that became part one part and a
large part of Amazon's business. So, cloud computing was something that Amazon did very well and that was
critical to its success. Then all the information it collected, converting all that information into actionable
intelligence, was critical to Amazon, and so data analytics was critical. So, when you decide that you want to
buy something from Amazon, Amazon has to quickly decide where it's going to ship that product to you from
which warehouse, because that allows it to know whether it's going to make a profit on that item or not.
Amazon has to try and predict where demand is going to come from. Because if it has to deliver in a matter
of hours, the product has to be located close to the customer that's going to order. So, one of the successes of
Amazon is being able to do predictive analysis very well. So, even though there is a lot of logistical
excellence that's built into Amazon's order fulfillment process, one of the key things is its ability to stage the
product at the right location so that when customers order, it is available in a close-by location so that the cost
of getting it to the customer is small. It doesn't have to be shipped from a faraway location at a high cost. So,
data analytics was part of Amazon's critical success factors.
Lesson 1-3 Strategic Trade-offs

Strategic Trade-Offs - Slide 31
"Companies have to choose between competitive priorities." —Skinner (1969)
Example: Offering meals on flights to improve service quality results in increased cost and turnaround time.
Choose service quality or low cost/timeliness.
Source: Skinner, 1969
Transcript
In this lesson, we are going to discuss the need for strategic focus, and that trade-offs are commonly
associated when you are dealing with several competitive priorities. So what are these strategic trade-offs,
and what are these competitive priorities? Now, Skinner in 1969, in one of the early papers on this subject,
talked about the need for companies to have to choose between different areas in which they can compete,
and he called this competitive priorities. So let's think about an airline, for example. Like Southwest, which
does not offer meals on it's flights. Now clearly offering food or a meal on a flight would improve service
quality. Customers would be happier if they could get a meal. But what Southwest notes is that if they were to
offer meals then that would increase their turnaround time at the airport which means that the cost will
increase because they will get less utilization out of their aircraft. And so there's a trade-off providing higher
service quality or providing more service features is diametrically opposite then to providing a low cost fare
and a on time turnaround for the airplane. In fact, Southwest CU is reported to have said that if they were to
provide meals, they would become very much like their competitors, like United. And United does a good job
serving meals. And if Southwest had larger turnarounds and higher costs, there would not be any difference
between Southwest and United. And so Southwest would not have a competitive advantage in the niche that
it's trying to serve. The choice here, then, was to provide either better service quality or to provide low cost
and timeliness. And, so, this is the trade-off that Skinner is talking about. So it's commonly accepted that
when companies are deciding to create operation strategies. There is a set of priorities that they have to
consider, and creating an operating strategy typically involves figuring out what weight we are going to put
on each of these priorities.
Competitive Priorities - Slide 32
Operations strategy involves the relative weighting of competitive priorities.
Competitive priorities: Cost, quality, flexibility, and delivery. The effectiveness depends on structure
(capacity, facility, and technology) and infrastructure (workforce, quality control, and production planning).
Source: Boyer & Lewis, 2002
Transcript
And so what are those competitive priorities? One is cost. Do we provide a low cost of product? The other
one is quality. Do we provide a high quality product, or a barely adequate quality product? Next is the
flexibility. How flexible is our product? What kind of variety do we allow? Customization, those kinds of
issues. Then, finally, we have delivery. Are we able to provide things quickly, and on time reliably. So these
are the four areas in which companies have to make some decisions about what level of each of these
priorities they're going to provide. Now, obviously, if you create a strategy, as we have talked before, how
effective that strategy is depends on two other things. You know, what is the structure that you provide. And
by structure we mean what kind of capacity is provided, what kind of facilities are provided, or technology is
used. And there is also the infrastructure, which is the sort of rules, and orders and policies that go on. How
the set of resources that have been provided are used? And so what then this might be what kind of workforce
to you? What kind of quality control to you? How do you do production planning? And so these are the
things that sort of govern the use of the resources. And so the effectiveness of your operation strategy. Which
is basically the selection of what level each of those priorities is being provided is then dependent on the
structure as well as the infrastructure.
Why Do Trade-Offs Arise? - Slide 33
Porter suggests three possibilities:
Product features may be incompatible.

There may be incompatibility between activities.
There may be incompatibility between image or reputation.
Transcript
Now the question is, why do these trade-offs arise? And Porter suggests three possibilities. Porter says, well,
product features may be incompatible. So for example, if I decide that I want to have a smartphone where the
body is made out of glass to make it look attractive and to give an image of high quality. And Sophistication,
then I may not be able to have the same phone, may not be as reliable because if I were to drop it, it's likely to
shutter more easily. And so even with the best possible glass, I will have a phone that is a little bit more
fragile. So I now have an incompatibility between have an aesthetically beautiful phone versus a phone that is
rugged. This is why, very often, when you go and look for products which are rugged, they are sometimes not
to be as attractive as products that are meant for normal use. There may be incompatibility between activities.
So for example, if I were to try and design facilities, to provide one kind of feature that may not be the best
way to provide a different kind of feature. So the kind of the human resources that I have might affect the
kind of products that I can produce. For example, if I have a bunch of very creative individuals who are put
together because of their creativity. That group may not necessarily be best for a typical assembly line job
because they would be unsatisfied with the kind of work they are doing and the qualities likely to suffer. On
the other hand having a group of focus who are basically good at producing items on the regular reputable
pieces may not be ideal to take that group of people and put them in areas where a lot of creativity is
required. Because they may not have the right set of attributes to be able to be creative in that space. And
lastly, trade-offs may arise because of the image that has been portrayed. If I am a supplier of locusts products
then its unlikely that people are going to buy starters or a brand from me, a classic example of this is what
happens with Hyundai? Hyundai's an automaker known for making very good, low cost and middle cost cars.
But Hyundai would also like to compete in the prestigious segment. And so they have certain cars. One
particular model is called the Genesis. Which they use to compete with other brands like Mercedes, and
BMW, and Jaguar, etc. However, because Hyundai is known as a low cost car manufacturer, creating this car,
even though the car may be wonderful and may actually be a better car than some of the other brands.
Hyundai doesn't have that brand reputation. And so now there's an incompatibility in providing these two
kinds of cars. So one has to be careful about which competing priority or competitive priority one wants to
emphasize as one clears an operation strategy.
Performance Frontier - Slide 34
There is a trade-off between competing priorities.
The best a company can hope for is to be on the performance frontier.
Innovations and new technology can move the frontier.
Decision-makers must make a strategic choice.
Performance frontier for airlines is shown as a graph. Service quality is on x-axis and timeliness is on y-axis.
Southwest is represented by a red dot with high timeliness and low service quality. United is represented by
another red dot with high service quality and low timeliness. Other airlines with average service quality and
timeliness are shown as blue dots between Southwest and United. Performance frontier is drawn as a concave
curve which passed through both red dots (Southwest and United) but didn’t touch blue dots – passed above
the blue dots.
Transcript
Along with the competitive priorities, we realize that there is a trade-off, so that if you are good at one thing
than we cannot be good at something else as well. So basically what that tells us is that we have to trade-off
one priority against another. So for example, if you look at the Southwest example that we talked about
earlier we had service quality, which was being traded-off against time limits. If we were to put these two on
the x and y axis, so that if service quality was on the x axis and timeliness was on the y axis. And if we tried
to map all the airlines, what we may find is that there are some airlines which provide low service quality but
have very high timeliness. Now note that when we talk about service quality right now, we're talking only
about one particular attribute, which was a serving of needs. So an airline, like Southwest, might provide a
very low service quality, in that particular attribute, but that allows it to be very timely. An airline like United
might provide a high service quality, but that means that it's timeliness is not as good as Southwest. So these
are the extremes which are shown by red dots in this particular graph. But it's also possible that there are
other red lines which have made a conscious decision that they will still provide service quality so they might
provide light snacks. But they which might affect their turnaround time a little bit. So they are providing a
light snack, but not a full meal, and because of that, their timeliness is going to suffer a little and they might
be the blue dots that we show. Now there is this concept of what's called a performance frontier which says
that given the state of current technology, there's a certain level of which you can provide either service or a
service quality, or timeliness. And so if for example, you find that you are on the service frontier, then if you
want to provide a higher service quality, then your timeliness will suffer, and if you want to provide more
timeliness, your quality will suffer. However, if you are not on the performance frontier then it might be
possible for you to improve on both things. And that just says that you're not using your technology
effectively. Now that may be possible that as technological innovations occur, that performance frontier
actually can be moved. And because that performance frontier is moved. UND companies that were on the
performance frontiers will find that they can actually improve on one or both of this priorities that we are
looking at. But in general, companies are required to make a strategic choice. Given the set of current
technologies if the company is already on the frontier it has to make a strategic choice. Do I want to be best at
timeliness? Or do I want to be best at providing service quality? And this repeats for all the different
competitive priorities that we've mentioned before.
Strategic Focus - Slide 35
Companies must have strategic focus.
How can companies distinguish themselves?
Cost leadership
Differentiation
Focus on niche player
Source: Porter, 1980
Transcript
Now, along with having to make this strategic choice, there has to be a discipline that one has to maintain,
and this is sometimes known as strategic focus. So, for example, how can the company distinguish itself? So,
as we talked about earlier, Southwest distinguishes itself by being low cost and being timely, and allows itself
to not be as good on all attributes of service quality. Typically, there are three ways that companies can
distinguish themselves: one, they can be cost leaders, and that's the easiest one to understand. This is a
strategy where you provide the lowest possible cost for an acceptable product, and this is what Walmart did,
this is what Dell did. The idea is to drive down costs and be a cost leader. The second way that a company
can distinguish itself is differentiation. It's by providing a distinguishing characteristic about your service.
Now, this is a little harder to understand. So, for example, even though Southwest can be looked at as being
low cost, Southwest distinguishes itself by having a very timely schedule, so that you know at what time the
flights are going to leave and you know when the flight is going to reach. So, by providing this timeliness,
you can differentiate. So, you decide one of the priorities and you distinguish yourself by creating something
that is very different than what anyone else provides. Lastly, you can have what's called a focus strategy, and
the idea here is that you pick out a niche of the market and you try and distinguish yourself by providing what
is right for that particular niche. So, for example, if you're in healthcare, you could choose to be a concierge
doctor, which is basically somebody who provides services to the very wealthy, and in that case you can
charge a lot but you have to be available 24/7 to your clients and you have to be extremely good at providing
service. So, that's where you decide that there's a niche that you can cater to. So, essentially, there are three
ways that we can do this. Now, there is a certain controversy about saying that you have to make these trade
offs, and the controversy arises because people say, "Well, it's not that one should only be a costlier." So, if I
look at something like Southwest, they are a cost leader but they're also timely. So, they are doing more than
two things. So, they are focusing on delivery as well as cost, and so this is where people say, "Well, that's
more like a mixed strategy." Oftentimes, people say, "Well, doing a mixed strategy can sometimes cause you
problems because then you're neither good at one thing or the other, and that could actually mean that you
don't compete very well in the market." So, to sort of get around this issue, a different approaches sometimes
recommended, and so there is this theory of what's called value disciplines.
Value Disciplines - Slide 36
1. Customer intimacy
2. Product leadership
3. Operational excellence
Successful businesses
maintain "acceptable" levels in each area and

place a market leader in one of them
Source: Treacy & Wiersema, 1995
Transcript
Essentially, this theory, which was popularized by two consultants, Treacy and Wiersema, basically says that
companies have to look at three values. The values are customer intimacy. So, you compete because of your
knowledge about the customer. Two, you can have product leadership, in which case you are outstanding at
certain attributes of making the product or you can have operational excellence, and operational excellence is
where you are able to execute very well so that you can get low costs. What they say is that most companies
have to have acceptable levels of all three disciplines. So, all three values that we are looking at, the company
should be able to do at least a reasonably good job on all three things. Then, once that is satisfied, then you
try to be a market leader on one or the other of those three things, which is basically sort of a modification of
the original idea where you had to do trade offs across multiple different things. We can relate this back to the
notion of order qualifiers and order winners. So, to be able to even be considered in the market, you need to
have a minimum level of competence in a variety of different things and that becomes your order qualifier,
and then what you choose to excel in then becomes your order winner. So, a lot of these ideas are sort of
similar and they try to work one against the other. They emphasize one idea or another idea. Now, there's a
whole radically different way of thinking about strategic trade-offs, and some academic thought leaders
believe that this notions of trade-offs is probably a little overblown, and they point out to the fact that there
are companies which excel in all the different priorities, and part of it comes from being in what is called
operational excellence, being very good at doing many things. The reason this alternate your thought comes
about is because once in the 80s, people started looking at Japanese companies, which seem to be doing
everything very well, and the fact that they were doing very well they were able to succeed in the market, and
so there was this notion of what's called cumulative capabilities. So, instead of thinking of the different
priorities as being exclusionary so that you have to pick one and be good at it and then not look at the other
ones, the thought process here is that you build competence in each of these one at a time.
Cumulative Capabilities - Slide 37
Also called the sand cone model
complementary capabilities
Hierarchy among capabilities
Manufactring focused
There is a pyramid that has four levels: quality, dependability, speed, and cost (from the bottom to top)
Source: Ferdows & De Meyer, 1990
Transcript
So, the cumulative capabilities model is also sometimes called the Sand Cone model because the idea here is
that at the lowest level you pick one of the priorities and you start building on that priority. When you get a
certain level of competence in that, that's when you switch over to working on the next priority and so on and
so forth. The authors believe that the people who came up with this idea of cumulative capabilities, believe
that quality is the most important and the first priority that you should have. So, you have to build a minimum
level of quality, and building minimum level of quality then allows you to be dependable. So for example, if I
can make a high-quality product consistently, then I should be able to deliver that high-quality product
consistently as well and so now I have dependability that I'm able to provide. As I want to improve my
dependability, to do that, I would have to improve my quality further and so I need to have a bigger base of
quality to get more dependability. If I have quality which allows me to have dependability, then now I can
focus on doing the repetitive tasks involved faster so that I can now look at being able to deliver the product
faster so speed is the next one that I get. Once I can do that, then I can try and make the process effective to
try and lower the costs. So, I get this pyramid, or sand cone, where I have four different priorities which I
work on in turn, and I am able to focus on all four of them at one time so that it is not a trade off between one
or the other. This particular model is somewhat manufacturing focused and there have been efforts by people
to extend this. So, what it seems is that we now have two very separate models. In one, we have cumulative
capabilities where we say that many of these priorities are complimentary. In the other, we have trade-offs
where we say, well, they're competing, and so you have to be able to do one versus the other. One way we can
reconcile is going back and looking at the performance frontier.
Reconciling the alternative viewpoints - Slide 38
Operating on the performance frontier requires making a choice.
Inside the frontier, a cumulative capability model works: it is possible to improve on multiple priorities.
Technology improvements move the frontier.
Performance frontier for airlines is shown as a graph. Service quality is on x-axis and timeliness is on y-axis.
A company with high timeliness and low service quality is represented by a red dot. A company with high
service quality and low timeliness is represented by another red dot. Other companies with average service
quality and timeliness are shown as blue dots between two red dots. Performance frontier is drawn as a
concave curve which passed through both red dots but didn’t touch blue dots – passed above the blue dots. A
company not on performance frontier can innovate to be on performance frontier. Innovation/Technology

shifts the performance frontier further away from origin and new performance frontier is shown as a dotted
line.
Transcript
So, if a company is operating on the performance frontier, then because technology level at a particular point
is such that you cannot improve one without losing on the other, you ended up with a trade-off. So,
companies that are already very effective and are able to be on the frontier, find that they now have to make
trade-offs. However, companies that are not on the frontier can make improvements on multiple of the
priorities because they first have to get to the frontier before they have to worry about trade-off and the
interesting thing that happens though is that if I have a company on the frontier, if I have someone who is
very good at timeliness, then for them trying to create a new technology that helps them be even more timely
requires them to come up with some innovative ideas and those innovative ideas then tend to push the
technological frontier, the performance frontier that we are looking at. So, because these companies are very
good at one or the other priority, they tend to sort of work on more innovative ideas to try and push the
envelope further, which means that the technological envelope gets moved forward, and that means that there
is room for other people now to build their cumulative capabilities so that they can try and get to the frontier.
So, this is how the two ideas can be reconciled. Amongst scholars of strategy, there is a debate between
which of these two ideas are more important but each idea allows us to think more broadly about these
priorities. In a practical sense, we are not really bound by one idea or the other. It makes perfect sense to
realize that we cannot be the best at everything and so trade offs are required. It also makes sense to realize
that there is a certain importance to different priorities and depending on how we are positioned currently, we
might be able to sort of add on to this capabilities by getting better at one of the priorities, which then allows
us to focus on the next priority and so on. So, from a practical sense, both of these ideas allow us to think
about how best we should compete in the market. More importantly, depending on where we are positioned,
we know which of these two sets of ideas makes the most sense for our particular situation.
Conclusion - Slide 39
competitive priorities and trade-offs,

the performance frontier,
the need for strategic focus and value disciplines, and
cumulative capabilities.
Transcript
So, in conclusion, what we learned is that there are different competitive priorities that a business has to look
at and there may be trade offs involved in those priorities. Based on a technological level or the current
technology that's available, there is a performance frontier which prevents us from then being able to be good
or improve on multiple priorities. Because of this, there is a need for strategic focus and we have to decide
which of the different priorities we want to emphasize. It's also important that we talked about the cumulative
capabilities which tell us that if we are not on the frontier, perhaps we can build on all of them and there's a
way that one can improve by creating a hierarchy of what those priorities are and allowing ourselves to
improve so that we can get to that frontier.
Lesson 1-4 Disruptive Innovation

Introduction - Slide 40
In this lesson, we will discuss
disruptive innovation theory and

how operations innovations fuel disruption.
Transcript
No discussion of operation strategy would be complete without looking at the disruptions that have been
occurring because of new technologies and new business models. So, let's talk briefly in this lesson about
disruptions. In particular, I'd like to talk about what's called disruptive innovation theory and let's talk about
how operations innovations can fuel disruption.
Disruptive Innovation Theory - Slide 41
Introduced by Joseph Bower and Clayton Christensen (1995)
Popularized in two books:
The Innovator's Dilemma

The Innovator's Solution
Source: Bower & Christensen, 1995
Transcript
So, disruption or disruptive innovation theory was introduced by Joseph Bower and Clayton Christensen.
Christensen has been the person who is sort of carried the flag for the disruptive innovation theory. This
theory was first introduced in 1995 in an article by Bower and Christensen and later on, popularized in two
books, "The Innovator's Dilemma" and "The Innovators Solution." The first one which talks about what the
issues are in disruption, the other one, hold on, that one actually tackle disruption. So, as we think about
disruption, what is it that we are looking at? Now, Christensen has been very clear about the fact that not all
innovations can be thought of as being disruptive innovations.
Types of Innovation - Slide 42
Sustainable innovations: Incumbents: Focus on improving products or features for most lucrative/demanding
customers.
Disruptive innovations: Entrants: Focus on overlooked segments with lower-priced and often lower-quality
products.
Transcript
So, there are two types of innovations that Christensen talks about. The first one is what's called sustainable
innovations. Sustainable innovations are innovations done by companies who might be considered
incumbents, these are companies that are leaders in a particular area or leaders in a particular type of product
or service. What these companies do, is they focus on improving their products and improving their features,
the features that they offer. Now, much of what one talks about in continuous improvements, is what good
companies do as sustainable innovations. Sometimes, these are small improvements, other times, these are
major improvements. Usually, these innovations are as a result of trying to satisfy high-end customers or
demanding customers. Usually, the high-end customers are the most lucrative customers and they're also
often the most demanding customers. So, what companies tend to do correctly is to try and make sure that
their most profitable customers are happy and so you start adding features and you start improving your
processes and your products so that your most demanding customers are happy. The result of this, is that the
product quality and the product feature set keeps increasing or improving as time goes by. So, the longer a
product has been in the market or a company has been a leader for a particular product or service, the more
that particular product will be mature and we'll have more features and will be of better quality. As opposed
to that are disruptive innovations. Disruptive innovations are typically where entrants come in. Now,
remember, incumbents have been creating sustainable innovations driving up the quality and along with the
quality, goes cost, so the cost keeps going up for those innovations. Now, an entrant comes in, a new entrant
comes into the market and realizes that there might be an overlooked segment which can no longer afford the
price that is being charged for this high-quality product. So, they come in often with a lower price product,
often with lower-quality or maybe a slightly different feature set that's not as expensive to enter the market
for this overlooked segments. This is what Christensen calls disruptive innovation. Now, one can argue that
simply coming in and trying to satisfy a lower-end of the market is not necessarily innovation and quite
correctly that is the case. However, many new companies when they tried to appeal to that market, they end
up with products that might be somewhat new, somewhat more innovative, albeit that they are lower-quality
and lower price, so that a foothold can be established for that lower segment of the market.
How Disruptors Win - Slide 43
Sustainers focus on the most profitable customers, creating increasingly high-performance, expensive
products.
Disruptors target the lower end with lower costs or different features but then move upmarket.
Disruptive innovation theory is shown as a graph with time on x-axis and product performance is shown on
y-axis. Low-end, mainstream and high-end customers are shown as dotted lines. These dotted lines are
parallel to each other and makes an angle of around 30 degrees with x-axis (all classes expect that
performance will improve as time passes). A solid line labelled as Sustainer starts from between low-end and
mainstream and then increase rapidly to meet high-end customer line. Another solid line labelled as Disruptor
starts from low-end and then increase rapidly to cross mainstream as time passes.
Source: Christensen, Raynor & McDonald, 2015
Transcript
So, how do disruptors then actually disrupt? What does it mean to disrupt? Remember what we said,
sustainers are incumbents, focus on the most profitable customers. This makes sense because it makes sense
from our return on investment point of view to invest in things that give you the most return and the most
return usually comes from your most profitable customers. So, sustainers focus on improving the product, and
as they improve the product, the product starts getting more expensive. So, if you look at the graph that we
have over here, on the x-axis, we have time. So, as time evolves what happens? On the y-axis, we have
product performance. Now, we have three segments of the market, there's a low-end of the market, there's a
main stream of the market and there's a high-end of the market. Now, all three segments of the market expect
product performance to improve as time goes by. Initially, the sustainer who is the incumbent has a product
that is somewhere maybe in between what the low-end and the mainstream requires. But, to satisfy the
mainstream and eventually the high-end, the sustainer starts improving their product thereby driving up the
cost of that particular product. So, as we get to higher and higher-ends, the price that the customers are
willing to pay and goes up and the product that is being provided starts meeting the price that the high-end
customer is willing to pay and often the mainstream and the low-end customers are left out. Now, the
disruptor comes in at the low-end. When they initially come in, the sustainer doesn't care, that's a part of the
market that they don't essentially care to cater to because it's not profitable enough. So, disruptor comes in
with a lower quality product which is lower price and therefore affordable to the lower end of the market. But
over time, the disruptor starts improving their product as well. As the disruptor improves their product, that
product becomes acceptable to the mainstream. In the meantime, the sustainer has improved their product and
priced it out of the reach of the mainstream, and so the disruptor now moves up market into the mainstream
starting to capture a larger and larger share of the market. This is how disruption works according to the
disruptive innovation theory. Now, it's possible of course that one can think of examples where the theory
doesn't quite work, but we'll talk about some cases where the theory makes sense and we will look at some
cases where people challenge this particular theory. However, it helps explain why it is that disruptors are
often ignored by the incumbent and then at a later point, the disruptor starts encroaching into the main line of
the incumbent's business.
Barriers Against Disruption - Slide 44
Momentum—customers' inertia or status quo
Tech implementation—cost or expertise required for existing technology
Ecosystem—business environment or infrastructure advantages
New technologies—change requires new technology
Business model—disruptor has to use your cost model
Source: Wessel & Christensen, 2012
Transcript
So, if one has disruptive innovators, what stops this disruptive innovators from coming in and disrupting all
industries? Why doesn't this happen everywhere? Now, obviously, one of the things that you may have
noticed if you are working for any company is that every company now, if it's an established company
worries about somebody coming and disrupting them. But disruptions do not happen as often as we think
they do. So, let's see why that is the case, and how one can think about these barriers as we think about when
disruptions are likely and what can be done. So, the first barrier against disruption is what's called
momentum. By momentum, we mean that there's customer inertia. Customers do not want to change. So for
example if I'm used to being in a horse-drawn carriage, I'm not going to easily change to this new fangled
thing called an automobile. If I am a Blackberry phone user, I don't want to change to an iPhone or a
Samsung phone, I love my Blackberry and I don't want to change. So the fact that customers are reluctant to
change means that there is this barrier against an entrant coming in with a new product. A second barrier
might be the fact that there are barriers associated with implementing the technology. So for example, if I
make semiconductors, it's hard to imagine that some upstart company would challenge me because it's hard to
make semiconductors. I need to have large fabrication facilities and so, the fact that the technology requires a
lot of expertise putting up a semiconductor fabrication facility, it requires a lot of cost, means that it's difficult
for a new entrant to come in. The third barrier to disruption is what's called an ecosystem barrier and this is a
barrier which might be because of the business environment, maybe the infrastructure, maybe legal issues. So
for example, when we talked about Uber and we looked at the taxi service, taxi services did not fear a new
entrant mainly because of the regulatory environment. Taxis required you to get permissions from the cities
in which taxis operated, there had to be taxi medallions et cetera and this is the kind of problem that is faced
in many countries. So for example, it's difficult for many of the retail chains from around the world to get a
foothold in India because of all the regulatory restrictions that India has. So, the business environment or the
regulatory infrastructure provides an advantage very often to the incumbent which prevents a new entrants
from disrupting the business. A fourth barrier that we can think of is what we call new technologies or what
Christians and actually calls new technologies. In this case, an entrant would have to have some new
technology to be able to actually disrupt the business and because this requires new technology, this
technology may not exist. So for example, if we look at the drugs that are given for the treatment of diabetes.
Now, the only way that somebody can disrupt this market is to come up with a whole new type of drug or
they could come up with a whole new type of treating diabetes but this requires a whole new technology to be
developed and that's often difficult. Then lastly, there are the business model barriers and what does that
mean? So for example, when we talked about Southwest Airlines, we said Southwest was able to disrupt
because they created a low-cost service based on the many operational changes that did. However, as you can
realize Southwest does not compete in the business class or first class market. The reason why they don't do
that is that business class and first-class customers expect certain amenities. They expect that they will have
meals served to them and they expect certain kinds of treatment and that's difficult to provide because the
minute Southwest tries to do that, it has to now cater meals which means it's turn-around times are going to
be slower et cetera. And then it's going to have to deal with the same issues that the other main line airlines
have to do which means that you now have to compete on the cost model of those other airlines which is
something that Southwest does not want to do, they want to compete on their cost model. So, the business
model can itself be a barrier to disruption.
Operations Innovation Advantage - Slide 45
Innovations in operations can overcome many barriers: Toyota and just-in-time manufacturing.
Operations innovations can radically change the cost model: Southwest Airlines, Progressive Insurance,
Walmart, Dell.
Unrelated technologies can cause operations innovations: Progressive Insurance, Airbnb, Uber.
Transcript
So, let's think in terms of operations, our courses about operations and so let's think in terms of how
operations can provide an advantage. We've already talked of several cases where changes in operations have
actually allowed companies to be disruptors. So why is that? Why do disruptions in the way operations are
done, innovations in the way operations are done, why is that an advantage? One of the things we realize is
that operations can benefit from technology but often do not require new technology, it often change in the
way one does operation often requires a new way of thinking. So, a classic example is Toyota and just-in-
time manufacturing. Although there are some enabling things that Toyota did in terms of technology, most of
Toyota's just-in-time success had to do with the way they read part of the process. They realized that the
process is critical and designing the right process, simplifying that process, making sure everybody was
trained in the process and making sure that any deviation from the process would immediately result in
stoppage of the entire manufacturing operation. These were the things that allowed Toyota to be so successful
and change the way in which cars were manufactured worldwide. So, oftentimes the changes that are required
are in the way of thinking. Progressive change for example did not require them to have a lot of new
technologies. What progress you did which claims processing is they allowed their front-line responders, the
people who take the calls, the claims adjusters et cetera, gave them the more responsibility and allowed them
to make decisions instead of having the decisions go through multiple levels of management. So, in that sense
operations are easy to innovate and operations provide a big chance for disruption. Operations innovations
can also radically change the cost model that one's using. We talked about Southwest Airlines of how they
were able to change the cost model by having point-to-point service and having the same kind of aircraft and
speeding up the turnaround time so the aircraft were being utilized more than other airlines. We looked at
Progressive Insurance, where progress you make changes in operations which allowed them to have lower
cost. In fact, most insurance companies lose money in the underwriting part of their business and make up for
that by investing the premiums that they get. Progressive was one the first companies which actually made a
profit on the underwriting part of that business. We can look at Walmart and see how Walmart changed the
cost structure by focusing on less Serb segments of the market, Walmart became big which allowed it to have
buying power. And that buying power allowed them to lower the cost of procurement which then they were
able to pass and thereby having that lower-cost model created this virtuous cycle for Walmart. Dell was able
to do the same thing by creating a just-in-time process and charging the customers up front for orders. Dell
was able to completely change the way financing is done in computer manufacturing. Now, there's another
thing that operations benefits from and that is that operations innovations can occur because of changes in
technology in unrelated areas. For example, Progressive Insurance was able to take into account credit scores
as credit rating agencies became better at evaluating the credit worthiness of customers. Progressive was able
to then latch on to that change that innovation in credit worthiness ratings to be able to evaluate drivers for
the driving habits. So, a completely unrelated change helped Progressive lower its cost. Companies like
Airbnb benefited from the fact that everyone now has connectivity. The fact that everyone is now connected,
they were able to connect people who had spare capacity in terms of residential housing with people who
wanted temporary housing. But that would not have been possible without the kind of innovations that have
been caused by the Internet. Uber similarly is using the same kind of asset less operations wherein they have
on the one side people who have spare capacity for transportation and other side people who need
transportation and they provide a platform which allows them to work together. So, operations give you a
number of different advantages at often low costs and that's why operations innovations are a big part of what
disruptive innovators do. It is more common to see disruptive innovations come about because of changes in
the way operations are performed or the changes in the way the business model is constructed, then it is to
see disruption occurring because of a new completely unheralded product, something that has been devised
that's going to change everything. So, it's important to understand the importance of operations in disruption.
Conclusion - Slide 46
sustaining and disruptive innovations,

some barriers to disruption, and
examples of disruptive operations innovation.
Transcript
So to conclude, what we have learned in this lesson is that there are two kinds of innovations, sustaining and
disruptive innovations and there is a theory called the disruptive innovation theory that distinguishes between
these two kinds of innovations. Disruptors are often companies that enter the market by looking at a lower
end of the market or a new segment of the market and by providing products that are possibly of inferior
quality and at a lower price. But innovations are not easy and disruptions are even harder because there are
barriers to disruption. So, we've looked at some barriers to destruction and then we'll look at some examples
of disruptive operations innovations and why it is possible to disrupt by making innovations in the way
operations are performed.
Lesson 1-4.3 Disruptive Innovation [sidebar] (Optional)
Disruptive Operations Innovations - Slide 47
Progressive Insurance (Auto insurance): Innovations: Claims processing, comparison shopping, and risk
assessment.
Southwest Airlines (Air travel): Innovations: Point-to-point routing, rapid turnaround, single aircraft fleet.
Walmart (Retail): Innovations: Store location, logistics, RFID, store operations.
Source: Hammer, 2004
Transcript
Now, it's easy to talk in abstract about disruptive innovations and it might actually help to look at a few
examples to see what is meant by disruptive innovations. Because our course is about operations, let's focus
on disruptive innovations that involve changes to operations. Possibly, one of the arch typical examples of
disruptive operations innovations is the company Progressive.com. Now, Progressive was a provider of auto
insurance for high-risk customers. This high-risk customers were generally neglected by other insurance
companies because, essentially, they're high risk and therefore the chances of them causing accidents was
high and so the payouts would be high. So, that's the area that Progressive was working in, but Progressive
started feeling that there was a threat to their market because of the mainline insurance companies wanting to
encroach on the high-risk auto insurance. So, the thing that they decided to do is to change how they did their
operations. So the main innovation that Progressive did, was it changed the way it handled claims processing.
Now, claims processing is where the customer perhaps has had an accident and wants to now place a claim
against the company so that they can be reimbursed for repairs that the automobile now requires. Now,
usually, this is a process that used to take several weeks, and it's a fairly expensive process or it used to be a
fairly expensive process for most auto insurance companies. Because it took several weeks, customers would
often be unhappy. So, what Progressive did was it changed the whole claims processing, so that claims were
now handled in a matter of a few days, thereby reducing costs to Progressive and increasing satisfaction for
customers. This allowed it to beat back the competition from mainline companies, which we are trying to
encroach into its market. However, because it was able to lower the cost, it was slowly able to encroach into
the mainstream auto insurance market. One of the ways it did that, was it created comparison shopping
website so that people could come in and with very little information, look at what Progressive would charge
them versus what any of the other competitors would charge them, and see how much progressive would save
them. There are also innovations in the risk assessment. So, when the customer comes in, how do you
evaluate the risk of this particular customer? And what progress you found, for example, is that a person's
credit score was a very good proxy for what kind of dry whatever. People who were good with their credit
cards, paid things on time, did not default, et cetera, tended to be careful people and they were also similarly
careful in other parts of their life and so, it became a proxy and so it was easy for progressive to figure out
whether the applicant for insurance was a good risk or not and that helped them spear that processor. So, a
number of different innovations, which were all operations related, or trying to manage claims, trying to get
customers the process of acquiring customers and the process of evaluating new applicants. All of those
processes were improved at Progressive and Progressive is now a fairly large auto insurance company. Let's
look at a different example, Southwest Airlines. Southwest Airlines was a company that started out by
realizing that there was a market for lower cost air travel. But the way to get that lower costs, they realized,
was to change how they did their operations. So, unlike most major airlines, which have a hub and spoke
network, wherein people are brought into hubs and then transferred into other planes, so every journey for
most people would end up being requiring a changeover of plane. So, you start from wherever your home
location is, go to a hub, switch a plane, and then go to your destination. As opposed to that, Southwest
Airlines decided to do point-to-point routing. So, if you're going from A to B, you didn't have to go through
hub, you flew directly from point A to point B. Now, because of that, they were able to turn around their
aircraft rapidly because you weren't waiting for a bunch of different spoke routes to come into the hub, so you
could sort out people and then they will then go to their destinations. Because of rapid turnaround of their
aircraft, what they were able to do is keep the aircraft flying off longer in the air, and thereby get more
utilization out of those aircraft. Now, these are all operations improvement. Now, a further thing that
Southwest Airlines did was it standardize on one type of aircraft. Because they only had one one of aircraft, it
became easy for them to swap aircraft. If there was a technical problem with an aircraft, they could easily
swap an aircraft because all their planes where the same type. This also meant that they could train more
easily all their maintenance crew. They could get very good at maintaining those aircraft and their flight
crews were also interchangeable across aircraft. So, this again, were operations improvements that helped
Southwest Airlines become a low-cost airlines and a dominant airline eventually. A third example that we can
talk about is Walmart in the retail sector. Now, there are other people, we could talk about Amazon, we could
talk about Dell, et cetera, but let's talk about Walmart. When Walmart started, Walmart started serving a
relatively overlooked segment of the market, the rural and semi-rural customers. So, they started locating and
store location is an operations decision. So, they started locating their stores in rural and semi-rural areas. If
they wanted to be close to an urban area, they would often be on the outskirts of the urban area, so that they
could target some of the outer suburbs of this urban areas. So, store location was a big thing. Walmart came
up with numerous improvements in their logistics process. For Walmart, if a supplier sends in things,
Walmart would be able to have the truck drive through a portal, whereby they would be able to figure out
what was in the shipment based on information that they had been pre-provided. Walmart requires their
suppliers to make sure that the shipments are packaged in the form that it becomes easy for Walmart to be
able to store it in the warehouses or unpack it and send it out to its stores. Walmart was a pioneer in the radio-
frequency identification technology, so RFID, requiring many of its large suppliers to tag their shipments with
RFID so that Walmart could receive product from their suppliers without physically touching the product.
Walmart also made many improvements in the way store operations were done. Walmart was a pioneer in
reducing energy use by having sensors in the store so that the temperature of the store could be controlled
depending on how many people were in the store, the lighting in the stores will be controlled by that.
Walmart, to the extreme step of having the roofs of their stores being translucent so that external light could
come in and that they will not require to light up the store as much. So, many, many small improvements in
operations which allow Walmart to become a large retailer by staying out of the way of other retailers who
are focused on denser urban areas. Eventually, Walmart was able to drive out many other stores because they
were able to expand closer and closer to the urban areas and so people are often willing to then travel out to
the Walmart instead of going to the stores that they used to frequent. So, these are some examples of what
disruptors are. We've come up with innovations in terms of their operations.
Is Uber a Disruptor - Slide 48
It radically changed the taxi market with operational improvements.
Low-end or new-market entrant?
Product is not inferior (perhaps superior!) and only marginally cheaper.
From the perspective of disruptive innovation theory, it is not a disruptor of the taxi market.
Source: Christensen, Raynor & McDonald, 2015
Transcript
A classic question that is often asked because of how radically different this company is, is Uber a disruptive
innovator? Now, when people talk about Uber, we all realize that Uber has dramatically changed the taxi
market. And it has done so with a lot of operational improvements. Now, we can think in terms of the fact
that there lots of technology that drives all of this, there's a business model that drives all of this. But the
whole operational strategy for a company like Uber is different than a typical taxi market. So, the question is,
is Uber a disruptor according to the disruptive innovation theory? The way to think about this, is that in the
disruptive innovation theory, a disruptor generally comes into the market, either by capturing the low-end or
by looking at a market segment that nobody else has been looking at, so it's a new market. In the case of
Uber, did Uber actually do that? Did they come into the low-end or did they create a new market? Disruptive
innovators often start out by creating a product that is perhaps inferior. In the case of Uber, Uber service is
not inferior. In fact, it is superior to the traditional taxi service that one can get. In terms of cost, Uber's
products are occasionally cheaper but not very much so. So, they are only marginally cheaper. So, what we
have is Uber does not seem to be like other disruptors which create a low-cost, possibly inferior product and
then try and capture the lower end of the market and then climb into the mainstream. So, in that sense, we
cannot think of Uber as being a disruptor of the taxi market or at least not a disruptor according to the
disruptive innovation theory.

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Module 1 Operations Strategy & Disruptive Innovation 11/2/18, 2'52 PM

Module 1 Operations Strategy & Disruptive

Lesson 1-1 Operations Strategy

Lesson 1-2 Designing Operations Strategy

Lesson 1-3 Strategic Trade-offs

Lesson 1-4 Disruptive Innovation

About the Course and Your Classmates

Welcome to Operations Management - Slide 1

Meet Professor Udatta Palekar

Meet Professor Udatta Palekar - Slide 2

Lesson 1-1 Operations Strategy

In this lesson, we will study

the role of operations management in the industry

Innovators: Dell Computers - Slide 5

Dell Computers: Innovation (1 of 3) - Slide 6

Dell Computers: Innovation (2 of 3) - Slide 7

Traditional process of making personal computer:

Dell Computers: Innovation (3 of 3) - Slide 8

Innovative process of making personal computer:

Lesson 1-1.2 Operations Strategy (part 2)

Innovators: Southwest Airlines - Slide 9

Southwest Airlines: Innovations - Slide 10

Point-to-point vs. hub-and-spoke

Innovators: Walmart (1 of 2) - Slide 11

Innovators: Walmart (2 of 2) - Slide 12

Everyday low pricing

Lesson 1-1.3 Operations Strategy (part 3)

Strategy Hierarchy - Slide 13

Corporate strategy: What business should we be in? How do we synergize?

Functional strategy: Set functional objectives? Measure effectiveness?

Corporate strategy → Business strategy → Functional strategy

Strategy Alignment - Slide 14

Functional strategies must support and be aligned with corporate/business strategy.

Alignment Questions - Slide 15

Does your strategy support your corporate mission?

Does your organization structure support your strategy?

Alignment on both heightens the chance of success.

Source: Trevor & Varcoe, 2016

Lesson Conclusion - Slide 16

In this lesson, we learned about

the role of operations strategy in the success of disruptive companies,

Lesson 1-2 Designing Operations Strategy

What Is Operations Strategy? - Slide 17

Source: Slack & Lewis, 2011

Operations Strategy Formulation - Slide 18

Hill's five-step process:

1. Define corporate objectives.

Source: Hill, 2005

Hill's Framework - Slide 19

Hill's Framework - Slide 19

Growth Target Safety Process type Workforce

Source: Hill, 2005

Elements of Operations Strategy - Slide 20

Backward to Corporate/Business Strategy

Lesson 1-2.2 Designing Operations Strategy (part 2)

Order Qualifiers and Winners - Slide 21

What does the customer want?

Distinctive Competence - Slide 23

Something the organization does better than anyone else.

Match distinctive competence with order winners.

Critical Success Factors (CSF)

Check Out the Sidebar - Slide 24