Lecture 2

Operations Strategy and Technology

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Customer Value and Operations Strategy
 The Concept of Value

• Underlying purpose of every organization is to provide

value to its customer and stakeholders
• Value: Perception of the benefits associated with
goods and services in relation to what buyers are
willing to pay for them

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 A Cold Hard Fact

Better quality, higher productivity, lower costs, and the ability to respond quickly to customer
needs are more important than ever, and…
the bar is getting higher

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 Competitive Advantage

• Firm’s ability to achieve market and financial superiority over its competitors
– Requires:
• Understanding customer needs and expectations
• Building and leveraging operational capabilities to support desired
competitive priorities
• In a long run, sustainable competitive advantage is essential for survival

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 Competitive Advantage

• Strategy should be driven by the most important customer needs and

expectations

• Operations must support the strategic direction

•  Changes in the CBP, target markets, strategic directions typically have

significant consequences

• Operations manager need considerable freedom; i.e. selecting technology and

processes
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 Understanding Customer Wants and
Needs
• Customers are categorized into various segments based on their needs and
wants
– By understanding the unique needs of each segment, a company can
design:
• Appropriate customer benefit packages
• Competitive strategies
• Processes to create goods and services

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Understanding Customer Wants and
Needs
– Order qualifiers: Basic customer expectations for the
minimum performance level required to stay in business

– Order winners: Goods and service features and

performance characteristics that differentiate one customer
benefit package from another and win the customer’s
business

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 Evaluating Goods and Services
Search attributes

• Aspects of a good or service that a customer can determine prior to purchase

• These attributes include things like color, price, freshness, style, fit, feel, hardness, and smell

Experience attributes

• Aspects of a good or service that can be discerned only after purchase or during
consumption or use
• Examples are friendliness, taste, wearability, safety, fun, and customer satisfaction

Credence attributes

• Aspects of a good or service that the customer believes in and cannot be discerned
even after purchase and consumption
• Examples: the expertise of a surgeon or mechanic, the knowledge of a tax advisor, or the
accuracy of tax preparation software 9
 Exhibit 4.1 How Customers Evaluate Goods and Services

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 Customer Evaluation

• Customers seek and rely more on information from personal sources than
from non-personal sources when evaluating services prior to purchase.
 Operations must ensure that accurate information is available

• Customers perceive greater risks when buying services than when buying
goods. Because services are intangible, customers cannot look at or touch
them prior to the purchase decision.

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 Competitive Priorities
• Strategic emphasis that a firm places on certain
performance measures and operational capabilities within
a value chain
– Types
• Cost
• Quality
• Time
• Flexibility
• Innovation

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 Cost
• Each industry has a low price market segment
• Low cost results from:
– High productivity
– High capacity utilization
– Economies of scale
• Continuous improvement is essential to achieve a low-cost competitive
advantage

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 Quality

• Businesses offering premium quality goods have large market shares and were early entrants into the
markets

• Positively and significantly related to a higher return on investment for all kinds of market situations

• Strategy of quality improvement leads to increased market share

• High goods quality producers can charge premium prices

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 Exhibit 4.2 Interlinking Quality and Profitability Performance

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 Time

• Important source of competitive advantage

• Customers demand quick response, short waiting times, and
consistency in performance
• Speeding up work processes improves customer response
• Deliveries can be made faster and on-time

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 Time
• Reductions:
– Accomplished only by streamlining and simplifying processes
and value chains
• To eliminate non-value-added steps such as rework and waiting time
– Drive improvements in quality, cost, and productivity

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 Flexibility

• Success in global markets requires design and demand flexibility

• Visible in mass customization strategies
– Mass customization: Ability to make goods and services that the customer
requires at any:
• Volume
• Time for anybody, and for a global organization
• Place in the world

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 Innovation

• Discovery and practical application or commercialization of a device, method, or idea

that differs from existing norms
– Innovative companies focus on:
• Outstanding product research, design, and development
• High product quality
• Ability to modify production facilities to produce new products frequently

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 Companies should know their Order Winners (and
Order Qualifiers)

Competive factors: Performance objectives:

If customeres value these Theb we need to excel at these
Low price Cost
High quality Quality
Fast delivery Speed
Reliable delivery Dependability
Innovative products and services Flexibility (product/service)
Wide range of products and services Flexibility (mix)
The ability to change the timing or quantity of
products and services Flexibility (volume and/or delivery)

• An order winner is a characteristic that will win the bid or customer's purchase. To provide order winners,
firms must be better than their competitors.
• An order qualifier is a characteristic that is required for a product or service to be considered by a customer.
Firms must provide the qualifiers to get into or stay in a market. To provide qualifiers, they need only to be
as good as their competitors.
Source: Hill, 2000 20
Relationship of Order Qualifiers to Competitive
Priorities

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Relationship of Order Winners to Competitive
Priorities

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Can a firm fulfill all five key competitive priorities?

1) customisation, 2) quality, 3) time, 4) cost

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Solved Problem
Define the customer benefit package for a health club or
recreation center and use this to describe the organization’s
strategic mission, strategy, competitive priorities, and how it
wins customers.

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 Solved Problem
Food
Child Care
Exercise Classes

The mission of our health club is to offer many

Mission: Healthy
Mind and
Personal Trainer
pathways to a healthy living style and body. Body Diet and Nutrition

Swim
Lessons Massage
Services

Strategy:We strive to provide our customers with superior:

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

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 Solved Problem

Competitive Priorities:
• Many pathways to healthy living and a healthy body (design flexibility)
• Friendly professional staff and service encounters (service quality)
• Everything is super-clean (goods and environmental quality)
• Customer convenience in all respects (time)
• Price (cost)
How to win customers? Providing a full service health club
with superior service, staff, and facilities

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 OM and Strategic Planning
• Strategy: Pattern or plan that integrates an organization’s major goals,
policies, and action sequences into a cohesive whole
– Direction an organization takes and the competitive priorities it chooses
are driven by its strategy
• Effective strategies to develop key competitive priorities
– Low cost or fast service time
– Exploit an organization’s core competencies

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 Strategic Planning
• Process of determining long-term goals, policies, and
plans for an organization
– Objective - Build a strong position for the organization to
achieve its goals despite unforeseen external forces

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 Levels of Strategy
• Corporate strategy - Businesses in which the
corporation will participate and develop plans for the
acquisition and allocation of resources among those
businesses
– These businesses in which the firm participates are called
strategic business units (SBUs)

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 Levels of Strategy
• Business strategy - Defines the focus for SBUs
– Major decisions involves:
• Pursuing the target markets
• Best way to compete in target markets
• Functional strategy - Set of decisions that each
functional area develops to support its particular business
strategy

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 Operations Strategy
• Organization will decide on the execution of its chosen
business strategies
– Development - Translating competitive priorities into operational
capabilities
• By making variety of choices and trade-offs for design and operating
decisions

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 Sustainability
• Organizational strategy in many firms
• Dimensions
– Environmental
– Social
– Economic
• Requires major changes in the culture of an organization

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 A Framework for Operations Strategy

• Operations design choices: Management decisions taken for the

appropriate type of process structure to be adopted while producing
goods or creating services
– Key areas it addresses
• Types of processes
• Value chain integration and outsourcing
• Technology, capacity and facilities
• Inventory and service capacity
• Trade-offs

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 A Framework for Operations Strategy
• Infrastructure: Focuses on the non-process
features and capabilities of the organization
– Workforce
– Operating plans and control systems
– Quality control
– Organizational structure
– Compensation systems
– Learning and innovation systems
– Support services
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 Exhibit 4.3 Hill’s Strategy Development Framework

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 Exhibit 4.4 Four Key Decision Loops in Terry Hill’s Generic Strategy
Framework

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 Operations Strategy at McDonald’s
• Vision - World's best quick service restaurant experience
– Worldwide strategies
• Be the best employer
• Deliver operational excellence
• Achieve enduring profitable growth

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 Operations Strategy at McDonald’s
• Sustainability initiatives
– Build a sustainable McDonald’s that involves all facets of
business
– Commit to a three-pronged approach
• Reduce
• Reuse
• Recycle
– Strive to provide eco-friendly workplaces and restaurants

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 Operations Strategy at McDonald’s
• Sustainability initiatives
– Work with suppliers and outside experts to continuously
improve:
• Purchasing decisions
• Evaluation of supplier performance regarding animal welfare

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 Exhibit 4.5 McDonald’s Customer Benefit Package

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Applying Hill’s Strategy Development Framework to McDonald’s (slide 1)

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Applying Hill’s Strategy Development Framework to McDonald’s (slide 2)

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 Technology
• Enabler that makes today’s service and manufacturing
systems operate productively and meet customer’s needs
• Technological innovation in goods, services,
manufacturing, and service delivery is a competitive
necessity

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 Understanding Technology in Operations
• Hard technology: Equipment and devices that perform a variety of tasks in
the creation and delivery of goods and services

• Soft technology: Application of Internet, computer software, and information

systems to:
– Provide data, information, and analysis
– Facilitate the accomplishment of creating and delivering goods and
services

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