power point on business implementation

LO9-1 Explain the role of functional strategy and value chain management in achieving superior quality, efficiency, innovation, and responsiveness to customers.

LO9-2 Describe what customers want, and explain why it is so important for managers to be responsive to their needs.

LO9-3 Explain why achieving superior quality is so important, and understand the challenges facing managers and organizations that seek to implement total

quality management.

LO9-4 Explain why achieving superior efficiency is so important, and understand the different kinds of techniques that need to be employed to increase efficiency.

LO9-5 Differentiate between two forms of innovation, and explain why innovation and product development are crucial components of the search for competitive

advantage.

Value Chain Management: Functional

Strategies for Competitive Advantage

CHAPTER 9

Learning Objectives

After studying this chapter, you should be able to:

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Airlines are always looking for ways to board passengers faster and more efficiently. What slows down boarding and departures? Both passengers who jump the line and those who pay for early boarding may be in the aisles as others try to board.

Why is efficiency important? Is it faster to board the back of the plane first? Or

should airlines file in passengers with window

seats first, followed by those with middle

seats, followed by those with aisle seats?

What about just assigning passengers to ran-

dom groups and boarding that way? Or how

about not assigning seats and just allowing

passengers to sit wherever they want?

These were the questions some major

airlines were asking themselves recently in

an effort to improve their punctuality rat-

ings. Late departures and arrivals cost air-

lines dearly in more ways than reputation,

so making sure boarding occurs in a timely

manner is of great concern to the industry,

as well as to passengers needing to make

connecting flights.

Certainly the first two options sound like

they would be faster than the free-for-all of

allowing random groups to board at the same

time or allowing passengers to sit wherever

they like. Yet two recent studies found that

random boarding does work a little quicker

than the other options, believe it or not.

One study was conducted by American

Airlines. It spent two years studying ways to

speed up the boarding process and landed on

randomized group boarding for most passen-

gers. The airline still gives families, military per-

sonnel, and travelers with elite status priority

boarding. It also allows passengers the option

of paying for early boarding if they choose.

Part of American’s study had observers

watch thousands of boarding processes to

see where things bogged down. Carry-on

bags were a big problem. Passengers were

bringing large bags on board to avoid bag-

gage fees. When the plane was boarded back

to front, those waiting in the aisles to get to

their seats would put their bags in overhead

A MANAGER’S CHALLENGE

Ready for Takeoff? Increasing Airlines’ Boarding Efficiency

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bins at the front of the plane, leaving no space

for the bags of passengers who boarded later.

Using computer simulations, American not

only found that the back-to-front boarding

method was slower than the window-middle-

aisle seat method, it surprisingly discovered

that putting passengers into random board-

ing groups allowed the plane to fill up faster.

Using the random method, more passen-

gers got to their seats at the same time than

the two-at-a-time rate of the back-to-front

method. Also, passengers were more likely

to stow their bags in overhead bins closer

to their seats than at the front of the plane.

The new method even reduced the number

of bags American checked at the gate by

20 percent. 1 More recently, American tweaked

the system to add passengers without carry-

ons to the list of priority boarders. 2

Another study was done by MythBusters,

the Discovery Channel television show that

applies scientific methods to test various

accepted ideas. In the episode on plane

boarding, the MythBusters team sought to

confirm the myth that “when boarding an

airplane, boarding back-to-front is the slow-

est method.” 3 On the program, the hosts

built a plane replica, complete with seats and

overhead bins. Volunteers tested the vari-

ous boarding methods. To further simulate

reality, 5 percent of the volunteers were told

to disrupt boarding by such actions as sit-

ting in the wrong seat or standing in the aisle

for longer than needed. Professional flight

attendants were hired to help with the pro-

cess. The program measured two outcomes

of each method tested: how long it took to

board the plane and how satisfied the volun-

teer passengers were with each experience.

The method with the highest satisfaction

rating was the “reverse pyramid” in which

elite passengers boarded first followed by

a complex set of zones that began with the

rear window seats. That method allowed

the plane to board in 15 minutes and 10

seconds. The method that allowed for fast-

est boarding was the one with no assigned

seats. When used, the plane was boarded in

14 minutes and 7 seconds. Yet this method

had the lowest satisfaction rating of all the

methods attempted on the show.

The second fastest method was boarding

elite passengers first, followed by the window-

middle-aisle seat method. This method

received high marks for passenger satisfac-

tion. This method is similar to one called the

“Steffen Method,” named for astrophysicist

Jason Steffen who wrote a research paper

with a mathematical approach to efficient

boarding. In that method, passengers board in

the window-middle-aisle seat method, but in

assigned zones that keep them in different parts

of the plane and allow simultaneous boarding. 4

What slows down boarding? Many indus-

try analysts and bloggers have listed the

reasons. For one, many passengers board

outside their “zone” or whatever method

the airline is using, which makes the system

less efficient. Some passengers may do

this purposefully and count on gate agents

to look the other way. 5 Second, other pas-

sengers pay for early boarding or are given

early boarding as part of their frequent flier

reward program, which has the same effect

as those who jumped the line. Both the

passengers who boarded with the wrong

group on purpose and those who paid for

the privilege may be in the aisle as others

try to board or may be strapped into middle

or aisle seats and will need to stand when

the window seat passengers arrive. 6 Third,

sometimes after stowing a carry-on bag in

the overhead bin, a passenger remembers

something needed from the bag, stands

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As “A Manager’s Challenge” suggests, organizations don’t always agree

on the best way to conduct business. Even organizations in the same

industry can vary widely on business practices. Some organizations may

adopt the latest research and methods, while others find different ways to stay competitive.

In this chapter we focus on the functional-level strategies managers can use to achieve

superior efficiency, quality, innovation, and responsiveness to customers and so build com-

petitive advantage. We also examine the nature of an organization’s value chain and discuss

how the combined or cooperative efforts of managers across the value chain are required if an

organization is to achieve its mission and goal of maximizing the amount of value its products

provide customers. By the end of this chapter, you will understand the vital role value chain

management plays in creating competitive advantage and a high-performing organization.

As we noted in Chapter 8, managers can use two basic business-level

strategies to add value to an organization’s products and achieve a com-

petitive advantage over industry rivals. First, managers can pursue a low- cost strategy and lower the costs of creating value to attract customers by keeping product prices as low as or lower than competitors’ prices.

Second, managers can pursue a differentiation strategy and add value to a product by finding ways to make it superior in some way to the prod-

ucts of other companies. If they are successful and customers see greater

value in the product, then like Apple they can charge a premium or

higher price for the product. The four specific ways in which managers

can lower costs and/or increase differentiation to obtain a competitive

advantage were mentioned in Chapter 1 and are reviewed here; how organizations seek to

achieve them is the topic of this chapter. (See Figure 9.1 .)

Overview

Functional Strategies, the Value Chain,

and Competitive Advantage

up, and blocks the aisle while rummaging

through the bag to find it. 7

Probably the most mentioned culprit for

slow boarding is baggage issues. Airlines

started charging for checked luggage in 2008

when fuel prices went up. 8 To avoid the fees,

more passengers began using carry-on lug-

gage. The extra luggage slows the boarding

process by leaving passengers in the aisle

longer. The extra luggage also frequently fills

up the bins, requiring extra time and effort for

airline personnel to gate-check the bags. 9

Why is the speed of boarding an airplane

important? Airlines save $30 for every minute

shaved off boarding times. 10 However, airlines

appear to be making some of this money back

in fees. In 2014 U.S.-based airlines planned

to increase their fees, despite making over $6

billion from fees in 2013. United Continental,

which collected almost $650 million in checked

bags fees in 2013, increased its fee charged

to passengers flying with more than two bags

by $25 per bag. Oversized bags cost $200

to check, and bags weighing more than 70

pounds cost $400 to check. 11 Delta Airlines

collected about $1 billion in fees in 2013. 12

Fees vary at different airlines, as do

methods for boarding planes. Southwest

Airlines uses the unassigned seat method of

boarding. The airline assigns passengers to

boarding groups and gives each passenger

a boarding number within the group. Passen-

gers line up in groups and in numerical order.

Since seats are not assigned, each passen-

ger selects a seat when on the plane. 13 Like

American Airlines, most airlines use assigned

seating and some type of boarding group

system to put passengers on the planes.

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250 Chapter Nine

1. Achieve superior efficiency. Efficiency is a measure of the amount of inputs required to produce a given amount of outputs. The fewer the inputs required to produce a given out-

put, the higher is efficiency and the lower the cost of outputs. For example, in Gartner’s

annual ranking of the world’s supply chains, Apple was ranked number one for six years

in a row. Part of Apple’s strength has been its focus on simplicity. Yet the company has

begun to expand its product portfolio, which will increase the need for complexity man-

agement in its supply chain. 14

2. Achieve superior quality. Quality means producing goods and services that have attributes— such as design, styling, performance, and reliability—that customers perceive as being

superior to those found in competing products. 15

Providing high-quality products creates a

brand-name reputation for an organization’s products, and this enhanced reputation allows

it to charge higher prices. In the car industry, for example, Toyota’s reputation for mak-

ing reliable vehicles allowed it to outperform rival carmakers and gives it a competitive

advantage.

3. Achieve superior innovation, speed, and flexibility. Anything new or better about the way an organization operates or the goods and services it produces is the result of innova-

tion. Successful innovation gives an organization something unique or different about its products that rivals lack—more attractive, useful, sophisticated products or superior

production processes that strengthen its competitive advantage. Innovation adds value to

products and allows the organization to further differentiate itself from rivals and attract

customers who are often willing to pay a premium price for unique products. For exam-

ple, Nintendo’s former competitive advantage in handheld video game devices like the

3DS has been eroded as more games are available on smartphones and tablets. 16

4. Attain superior responsiveness to customers. An organization that is responsive to cus- tomers tries to satisfy their needs and give them exactly what they want. An organiza- tion that treats customers better than its rivals do also provides a valuable service some

customers may be willing to pay a higher price for. Managers can increase responsive-

ness by providing excellent after-sales service and support and by working to provide

improved products or services to customers in the future. Today smartphone companies

such as Samsung, Apple, and Nokia are searching for ways to better satisfy changing

customer needs for higher-quality video, sound, and Internet connection speed.

Functional Strategies and Value Chain Management Functional-level strategy is a plan of action to improve the ability of each of an orga- nization’s functions or departments (such as manufacturing or marketing) to perform its

task- specific activities in ways that add value to an organization’s goods and services.

functional-level strategy A plan of action to improve the ability of each of

an organization’s functions

to perform its task-specific

activities in ways that add

value to an organization’s

goods and services.

Figure 9.1 Four Ways to Create a Competitive Advantage

Improving quality Improving efficiency

Improving innovation

Improving responsiveness to customers

Low costs

Differentiation

Result in a competitive advantage from

LO9-1 Explain the role of

functional strategy and

value chain management in

achieving superior quality,

efficiency, innovation,

and responsiveness to

customers.

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Value Chain Management: Functional Strategies for Competitive Advantage 251

A company’s value chain is the coordinated series or sequence of functional activities nec- essary to transform inputs such as new product concepts, raw materials, component parts,

or professional skills into the finished goods or services customers value and want to buy

(see  Figure 9.2 ). Each functional activity along the chain adds value to the product when it lowers costs or gives the product differentiated qualities that increase the price a company

can charge for it.

Value chain management is the development of a set of functional-level strategies that support a company’s business-level strategy and strengthen its competitive advantage. Func-

tional managers develop the strategies that increase efficiency, quality, innovation, and/or

responsiveness to customers and thus strengthen an organization’s competitive advantage.

So the better the fit between functional- and business-level strategies, the greater will be the

organization’s competitive advantage, and the better able the organization is to achieve its

mission and goal of maximizing the amount of value it gives customers. Each function along

the value chain has an important role to play in value creation.

As Figure 9.2 suggests, the starting point of the value chain is often the search for new and

improved products that will better appeal to customers, so the activities of the product devel-

opment and marketing functions become important. Product development is the engineering and scientific research activities involved in innovating new or improved products that add

value to a product. For example, Apple has been a leader in developing new kinds of mobile

digital devices that have become so popular among buyers that its products are rapidly imi-

tated by its competitors. Once a new product has been developed, the marketing function’s task is to persuade customers that the product meets their needs and convince them to buy

it. Marketing can help create value through brand positioning and advertising that increase

customer perceptions of the utility of a company’s product. For example, moviegoers appear

willing to pay more to watch a movie in 3D. In 2014, 28 films were slated to be released in

3D. 17

Even filmmaker Steven Spielberg doubted the value of paying extra for 3D. In an inter-

view, he said he hoped 3D ticket prices would get in line with 2D prices. However, he did

indicate that IMAX movies would continue to be worth extra for “a premium experience in a

premium environment.” 18

Even the best-designed product can fail if the marketing function hasn’t devised a careful

plan to persuade people to buy it and try it out—or to make sure customers really want it. For

this reason, marketing often conducts consumer research to discover unmet customer product

needs and to find better ways to tailor existing products to satisfy customer needs. Market-

ing then presents its suggestions to product development, which performs its own research to

discover how best to design and make the new or improved products.

At the next stage of the value chain, the materials management function controls the movement of physical materials from the procurement of inputs through production and to

distribution and delivery to the customer. The efficiency with which this is carried out can

significantly lower costs and create more value. Walmart has the most efficient materials

management function in the retail industry. By tightly controlling the flow of goods from its

suppliers through its stores and into the hands of customers, Walmart has eliminated the need

value chain The coordi- nated series or sequence of

functional activities necessary

to transform inputs such as

new product concepts, raw

materials, component parts,

or professional skills into the

finished goods or services

customers value and want

to buy.

value chain management The development of a set of

functional-level strategies

that support a company’s

business-level strategy and

strengthen its competitive

advantage.

Figure 9.2 Functional Activities and the Value Chain

Product development function

INPUTS

New product ideas

Marketing research

Component parts

People’s abilities and knowledge Machines

Goods Services

Computers Functional skills

CHANGED INTO OUTPUTS

Marketing function

Materials management function

Feedback loop

Production function

Sales function

Customer service function

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252 Chapter Nine

to hold large inventories of goods. Lower inventories mean lower costs and hence greater

value creation.

The production function is responsible for creating, assembling, or providing a good or service—for transforming inputs into outputs. For physical products, when we talk about

production, we generally mean manufacturing and assembly. For services such as bank-

ing or retailing, production takes place when the service is actually provided or delivered

to the customer (for example, when a bank originates a loan for a customer, it is engaged

in “production” of the loan). By performing its activities efficiently, the production func-

tion helps to lower costs. For example, the efficient production operations of Honda and

Toyota have made them more profitable than competitors such as Renault, Volkswagen,

and Chrysler. The production function can also perform its activities in a way that is con-

sistent with high product quality, which leads to differentiation (and higher value) and to

lower costs.

At the next stage in the value chain, the sales function plays a crucial role in locating customers and then informing and persuading them to buy the company’s products. Personal

selling—that is, direct face-to-face communication by salespeople with existing and poten-

tial customers to promote a company’s products—is a crucial value chain activity. Which

products retailers choose to stock, for example, or which drugs doctors choose to prescribe

often depends on the salesperson’s ability to inform and persuade customers that his or her

company’s product is superior and thus the best choice.

Finally, the role of the customer service function is to provide after-sales service and sup- port. This function can create a perception of superior value in the minds of customers by

solving customer problems and supporting customers after they have purchased the product.

For example, FedEx can get its customers’ parcels to any point in the world within 24 hours,

creating value and support for customers’ businesses. Customer service controls the elec-

tronic systems for tracking sales and inventory, pricing products, selling products, dealing

with customer inquiries, and so on, all of which can greatly increase responsiveness to cus-

tomers. Indeed, an important activity of sales and customer service is to tell product develop-

ment and marketing why a product is meeting or not meeting customers’ needs so the product

can be redesigned or improved. Hence a feedback loop links the end of the value chain to its

beginning (see Figure 9.2 ).

In the rest of this chapter, we examine the functional strategies used to manage the value

chain to improve quality, efficiency, innovation, and responsiveness to customers. Notice,

however, that achieving superior quality, efficiency, and innovation is part of attaining supe- rior responsiveness to customers. Customers want value for their money, and managers who

develop functional strategies that result in a value chain capable of creating innovative, high-

quality, low-cost products best deliver this value to customers. For this reason, we begin by

discussing how functional managers can increase responsiveness to customers.

A ll organizations produce outputs—goods or services—that are con-

sumed by customers, who, in buying these products, provide the mone-

tary resources most organizations need to survive. Because customers

are vital to organizational survival, managers must correctly identify

their customers and pursue strategies that result in products that best

meet their needs. This is why the marketing function plays such an

important part in the value chain, and good value chain management

requires that marketing managers focus on defining their company’s business in terms of the

customer needs it is satisfying and not by the type of products it makes—or the result can be disaster.

19 For example, Kodak’s managers said “no thanks” when the company was offered

the rights to “instant photography,” which was later marketed by Polaroid. Why did they

make this mistake? Because the managers adopted a product-oriented approach to their busi-

ness that didn’t put the needs of customers first. Kodak’s managers believed their job was to

sell high-quality glossy photographs to people. Why would they want to become involved in

instant photography, which results in inferior-quality photographs? In reality, Kodak was not

satisfying people’s needs for high-quality photographs; it was satisfying the need customers

Improving Responsiveness

to Customers

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Value Chain Management: Functional Strategies for Competitive Advantage 253

had to capture and record the images of their lives —their birthday parties, weddings, gradu- ations, and so on. And people wanted those images quickly so they could share them right

away with other people—which is why today digital photography has taken off and Kodak

filed for bankruptcy in 2012.

What Do Customers Want? Given that satisfying customer demand is central to the survival of an organization, an impor-

tant question is “What do customers want?” Although specifying exactly what customers want is not possible because their needs vary from product to product, most customers prefer

1. A lower price to a higher price. 2. High-quality products to low-quality products. 3. Quick service and good after-sales service to slow service and poor after-sales support. 4. Products with many useful or valuable features to products with few features. 5. Products that are, as far as possible, customized or tailored to their unique needs.

Managers know that the more desired product attributes a company’s value chain builds

into its products, the higher the price that must be charged to cover the costs of developing

and making the product. So what do managers of a customer-responsive organization do?

They try to develop functional strategies that allow the organization’s value chain to deliver

to customers either more desired product attributes for the same price or the same product attributes for a lower price. 20 For example, in 2014 Walmart announced that it had made a deal to be the only national retailer to sell the Wild Oats brand organic foods and that it

would do so at prices lower than those usually charged for organic products. Wild Oats was a

well-known organic food brand in the late 1980s but has been struggling since the late 2000s.

Walmart’s massive size allows it the organizational efficiencies to offer the organic brand at

a more affordable price for consumers. 21

Managing the Value Chain to Increase Responsiveness to Customers Because satisfying customers is so important, managers try to design and improve the way

their value chains operate so they can supply products that have the desired attributes—

quality, cost, and features. For example, the need to respond to customer demand for com-

petitively priced, quality cars drove U.S. carmakers like Ford and GM to imitate Japanese

companies and copy how Toyota and Honda perform their value chain activities. Today the

imperative of satisfying customer needs shapes the activi-

ties of U.S. carmakers’ materials management and manu-

facturing functions. As an example of the link between

responsiveness to customers and an organization’s value

chain, consider how Southwest Airlines, the most profitable

U.S. airline, operates. 22

The major reason for Southwest’s success is that it has

pursued functional strategies that improve how its value

chain operates to give customers what they want. South-

west commands high customer loyalty precisely because it

can deliver products, such as flights from Houston to Dal-

las, that have all the desired attributes: reliability, conve-

nience, and low price. In each of its functions, Southwest’s

strategies revolve around finding ways to lower costs. For

example, Southwest offers a no-frills approach to in-flight

customer service: no meals are served onboard, and there

are no first-class seats. Southwest does not subscribe to the

big reservation computers used by travel agents because the

booking fees are too costly. Also, the airline flies only one

aircraft, the fuel-efficient Boeing 737, which keeps training

and maintenance costs down. All this translates into low

LO9-2 Describe what customers

want, and explain why it is

so important for managers

to be responsive to their

needs.

A Southwest ticket agent may assist a customer and then

turn around to load her or his baggage as part of the orga-

nization’s emphasis on cross-training workers for multiple

tasks. Southwest’s operating system is geared toward

satisfying customer demand for low-priced, reliable, and

convenient air travel, making it one of the most consistently

successful airlines in recent years.

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254 Chapter Nine

prices for customers. Additionally, Southwest is one of the few airlines that does not charge

baggage fees. Passengers can check two bags for free. 23

Southwest’s reliability derives from the fact that it has the quickest aircraft turnaround

time in the industry. A Southwest ground crew needs only 15 minutes to turn around an

incoming aircraft and prepare it for departure. This speedy operation helps keep flights on

time. Southwest has such a quick turnaround because it has a flexible workforce that has been

cross-trained to perform multiple tasks. Thus the person who checks tickets might also help

with baggage loading if time is short.

Southwest’s convenience comes from its scheduling multiple flights every day between its

popular locations, such as Dallas and Houston, and its use of airports that are close to down-

town areas (Hobby at Houston and Love Field at Dallas) instead of using more distant major

airports. 24

In sum, Southwest’s excellent value chain management has given it a competitive

advantage in the airline industry. Another company that has found a way to be responsive to

customers by offering them faster service is Panera, which is profiled in the accompanying

“Management Insight” feature.

Bread in the e-Commerce Fast Lane Panera is a 1,777 bakery–café chain located in both the United States and Canada. The

chain is made up of three companies: Saint Louis Bread Co., Paradise Bakery & Café,

and Panera Bread. 25

Until recent years, the bakeries had been operating successfully

with a traditional bakery–café model of offerings and service. That’s until the company’s

CEO, Ron Shaich, had an epiphany. Always running late when driving his son to school

in the mornings, Shaich would arrange for breakfast and lunch for his son by calling

ahead to one of his stores and ordering. When he arrived at the store, his son would run

in with his credit card, skip the line, and pick up the food. While the system worked for

the Shaichs, it was not one that was available to everyone.

That’s what gave Shaich the idea for Panera 2.0. Now customers can place orders via

computer or mobile app. When the customer arrives at the restaurant, he or she can skip

the line, pay for the ordered food, and either eat in or carry out. There also are touch-

screen kiosks at the restaurants for customers who did not order ahead but who want to

get through the line faster. And of course customers can still go to the register and place

an order. 26

One advantage of the new system is that it syncs with the MyPanera rewards pro-

gram. The program remembers all orders that the customer places. If a customer ordered

a custom sandwich at one visit, the system remembers it and offers to place the same

order at the next visit.

Panera began testing the system in 2011 and hopes to have it rolled out to all restau-

rants by 2016. And it has already seen users of Panera 2.0 and kiosk users increase the

frequency of their visits. At one location, sales were up more than 50 percent. 27

The new system also has improved the order accuracy rates. The industry average is

one in seven incorrectly fulfilled orders, many of the errors occurring during input at

the register. “If we’re in the to-go business, we have to be 100 percent accurate,” Shaich

says. 28

In addition to depending on the customer to enter the order correctly, employees

double-check each order before it leaves the store.

Of course adding the system has meant changes for the employees at Panera. The

information technology team has doubled. Operations have been affected as well.

When customers place orders online or at a kiosk, it saves employees at the register

from having to do so. Those employees can be redeployed to the kitchen to help keep

up with the demand of incoming orders. Once the system is in place at every Panera

location, Shaich believes Panera will be one of the 10 largest e-commerce operators in

the United States.

Management Insight

Until recently, Panera

Bread had been operat-

ing its bakery-cafés in

a traditional manner.

Now, after CEO Ron

Shaich got the idea for

Panera 2.0, customers

can place orders online,

skip the store line, pay

for the order, and eat in

or carry out. The new

system allows Panera to

increase their efficiency

and customer service

satisfaction.

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Value Chain Management: Functional Strategies for Competitive Advantage 255

Although managers must seek to improve their responsiveness to customers by improving

how the value chain operates, they should not offer a level of responsiveness to customers

that results in costs becoming too high —something that threatens an organization’s future performance and survival. For example, a company that customizes every product to the

unique demands of individual customers is likely to see its costs grow out of control.

Customer Relationship Management One functional strategy managers can use to get close to customers and understand their

needs is customer relationship management (CRM) . CRM is a technique that uses IT to develop an ongoing relationship with customers to maximize the value an organization can

deliver to them over time. By the 2000s most large companies had installed sophisticated

CRM IT to track customers’ changing demands for a company’s products; this became a vital

tool to maximize responsiveness to customers. CRM IT monitors, controls, and links each of

the functional activities involved in marketing, selling, and delivering products to custom-

ers, such as monitoring the delivery of products through the distribution channel, monitoring

salespeople’s selling activities, setting product pricing, and coordinating after-sales service.

CRM systems have three interconnected components: sales and selling, after-sales service

and support, and marketing.

Suppose a sales manager has access only to sales data that show the total sales revenue

each salesperson generated in the last 30 days. This information does not break down how

much revenue came from sales to existing customers versus sales to new customers. What

important knowledge is being lost? First, if most revenues are earned from sales to existing

customers, this suggests that the money being spent by a company to advertise and promote

its products is not attracting new customers and so is being wasted. Second, important dimen-

sions involved in sales are pricing, financing, and order processing. In many companies, to

close a deal, a salesperson has to send the paperwork to a central sales office that handles mat-

ters such as approving the customer for special financing and determining specific shipping

and delivery dates. In some companies, different departments handle these activities, and it

can take a long time to get a response from them; this keeps customers waiting—something

that often leads to lost sales. Until CRM systems were introduced, these kinds of problems

were widespread and resulted in missed sales and higher operating costs. Today the sales and

selling CRM software contains best sales practices that analyze this information and then recommend ways to improve how the sales process operates.

One company that has improved its sales and after-sales practices by implementing CRM

is Empire HealthChoice Inc., the largest health insurance provider in New York, which sells

its policies through 1,800 sales agents. For years these agents were responsible for collecting

all the customer-specific information needed to determine the price of each policy. Once they

had collected the necessary information, the agents called Empire to get price quotes. After

waiting days for these quotes, the agents relayed them back to customers, who often then

modified their requests to reduce the cost of their policies. When this occurred, the agents

had to telephone Empire again to get revised price quotes. Because this frequently happened

several times with each transaction, it often took more than 20 days to close a sale and another

10 days for customers to get their insurance cards. 29

Recognizing that these delays were causing lost sales, Empire decided to examine how

a CRM system could improve the sales process. Its managers chose a web-based system so

agents themselves could calculate the insurance quotes online. Once an agent enters a cus-

tomer’s data, a quote is generated in just a few seconds. The agent can continually modify a

policy while sitting face-to-face with the customer until the policy and price are agreed upon.

As a result, the sales process can now be completed in a few hours, and customers receive

their insurance cards in 2 to 3 days rather than 10. 30

When a company implements after-sales service and support CRM software, salespeople

are required to input detailed information about their follow-up visits to customers. Because

the system tracks and documents every customer’s case history, salespeople have instant

access to a record of everything that occurred during previous phone calls or visits. They

are in a much better position to respond to customers’ needs and build customer loyalty, so a

company’s after-sales service improves. Cell phone companies like T-Mobile and Sprint, for

customer relationship management (CRM) A technique that uses IT to

develop an ongoing rela-

tionship with customers to

maximize the value an orga-

nization can deliver to them

over time.

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256 Chapter Nine

example, require that telephone sales reps collect information about all customers’ inquiries,

complaints, and requests, and this is recorded electronically in customer logs. The CRM mod-

ule can analyze the information in these logs to evaluate whether the customer service reps

are meeting or exceeding the company’s required service standards.

A CRM system can also identify the top 10 reasons for customer complaints. Sales manag-

ers can then work to eliminate the sources of these problems and improve after-sales support

procedures. The CRM system also identifies the top 10 best service and support practices,

which can then be taught to all sales reps.

Finally, as a CRM system processes information about changing customer needs, this

improves marketing in many ways. Marketing managers, for example, have access to detailed

customer profiles, including data about purchases and the reasons why individuals were or

were not attracted to a company’s products. Armed with this knowledge, marketing can better

identify customers and the specific product attributes they desire. Traditional CRM systems

were organized by having salespeople input customer information. Now social CRM systems

can track customers on social media and put them on a company’s radar. For example, if a

Twitter user posts frequently about a topic relevant to the company or about the company’s

product, a CRM system can bring the user to the attention of the company as an important

connection or a potential customer. 31

In sum, a CRM system is a comprehensive method of

gathering crucial information about how customers respond to a company’s products. It is a

powerful functional strategy used to align a company’s products with customer needs.

As n oted earlier, high-quality products possess attributes such as supe-

rior design, features, reliability, and after-sales support; these products

are designed to better meet customer requirements. 32

Quality is a concept

that can be applied to the products of both manufacturing and service

organizations—goods such as an Apple computer or services such as

Southwest Airlines flight service or customer service in a Citibank branch. Why do managers

seek to control and improve the quality of their organizations’ products? 33

There are two rea-

sons (see Figure 9.3 ).

First, customers usually prefer a higher-quality product to a lower-quality product. So an

organization able to provide, for the same price, a product of higher quality than a com- petitor’s product is serving its customers better—it is being more responsive to its customers.

Often providing high-quality products creates a brand-name reputation for an organization’s

products. This enhanced reputation may allow the organization to charge more for its prod-

ucts than its competitors can charge, and thus it makes greater profits. For example, in 2014

Lexus was ranked number one on the J.D. Power list of the 10 most reliable carmakers for

the third year in a row. 34

The high quality of Lexus vehicles enables the company to charge

higher prices for its cars than the prices charged by rival carmakers.

The second reason for trying to boost product quality is that higher product quality can

increase efficiency and thereby lower operating costs and boost profits. Achieving high prod-

uct quality lowers operating costs because of the effect of quality on employee productivity:

Improving Quality LO9-3

Explain why achieving

superior quality is so

important, and understand

the challenges facing

managers and organizations

that seek to implement total

quality management.

Figure 9.3 The Impact of Increased Quality on Organizational Performance

Increased reliability

Higher prices

Higher profits

Increased quality

Increased productivity

Lower costs

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Value Chain Management: Functional Strategies for Competitive Advantage 257

Higher product quality means less employee time is wasted in making defective products

that must be discarded or in providing substandard services, and thus less time has to be

spent fixing mistakes. This translates into higher employee productivity, which also means

lower costs. The way each manager can have an impact on quality and cost is discussed in the

accompanying “Management Insight” feature.

Vendor Relationships Key to TJX’s Store Offerings The TJX Companies Inc. sell clothes, shoes, handbags, and other fashions along

with home decorating items at discounted prices. Its U.S. stores are T.J. Maxx, Mar-

shalls, Sierra Trading Post, and HomeGoods. The company was founded in 1919 as

the New  England Trading Company and expanded into a chain of women’s clothing

stores. The sons of the founders built the Zayre department store in the 1950s; then

came T.J. Maxx in 1976, which was created under the Zayre name. In a major restructur-

ing in the late 1980s, the Zayre stores were sold and the company changed its name to

TJX Companies. It later acquired Marshalls, HomeGoods, and Sierra Trading Post.

The company states its mission as delivering “a rapidly changing assortment of fash-

ionable, quality, brand name and designer merchandise at prices generally 20–60 percent

below department and specialty store regular prices, every day.” 35

Aside from the savings,

the main appeal of the stores is the “treasure-hunt shopping experience” 36

in which the

stores have different items and a different look—often a somewhat opposite experience to

perusing the more static seasonal product lines found in traditional department stores. 37

The company’s business model allows it to perform well in almost any economic

environment. TJX is able to sell high-quality name-brand merchandise at a discount

by purchasing overstocks and canceled orders from other retailers. TJX buys up excess

inventory at a steep discount, which it then passes on to the customer. 38

TJX stores have no walls or physical dividers between departments. This allows the

merchandise categories to expand or contract according to supply and demand. Inven-

tory turns rapidly, which keeps stores fresh and allows the company to buy as it needs. 39

“Our universe of over 16,000 vendors affords us tremendous flexibility, and we continue

to strengthen our vendor relationships and build new ones to offer consumers even more

exciting brands,” said TJX CEO Carol Meyrowitz. “While we drive our top line, we

expect to also drive our profitability through even better inventory management and a

further improved supply chain.” 40

The supply chain is important to TJX’s ability to deliver value and to properly stock

each store. The retailer has more than 3,000 stores and plans to grow through new and

remodeled stores, a new home office and data center, new distribution centers, and sys-

tems and supply chain improvements. 41

The company recently opened a new distribution

center in Arizona, its first in about 10 years despite a 40 percent increased store base.

Meyrowitz said the company will continue to invest in its supply chain in fiscal 2015. 42

Management Insight

Total Quality Management At the forefront of the drive to improve product quality is a functional strategy known as

total quality management. 43

Total quality management (TQM) focuses on improving the quality of an organization’s products and stresses that all of an organization’s value chain activities should be directed toward this goal. TQM requires the cooperation of managers in

every function of an organization and across functions. 44

To show how TQM works, we next

describe the way that Citibank used the technique. Then, using Citibank as an example, we

look at the 10 steps that are necessary for managers to implement a successful TQM program.

total quality management (TQM) A management technique that focuses on

improving the quality of an

organization’s products and

services.

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258 Chapter Nine

In the 2000s Citibank’s top managers decided the bank could retain and expand its cus-

tomer base only if it could increase customer loyalty, so they decided to implement a TQM

program to better satisfy customer needs. As the first step in its TQM effort, Citibank identi-

fied the factors that dissatisfy its customers. When analyzing the complaints, it found that

most concerned the time it took to complete a customer’s request, such as responding to an

account problem or getting a loan. So Citibank’s managers began to examine how they han-

dled each kind of customer request. For each distinct request, they formed a cross-functional

team that broke down the request into the steps required, between people and departments,

to complete the response. In analyzing the steps, teams found that many of them were unnec-

essary and could be replaced by using the right information systems. They also found that

delays often occurred because employees did not know how to handle a request. They were

not being given the right kind of training, and when they couldn’t handle a request, they sim-

ply put it aside until a supervisor could deal with it.

Citibank’s second step to increase its responsiveness was to implement an organization-

wide TQM program. Managers and supervisors were charged with reducing the complexity

of the work process and finding the most effective way to process each particular request,

such as a request for a loan. Managers were also charged with training employees to answer

each specific request. The results were remarkable. For example, in the loan department the

TQM program reduced by 75 percent the number of handoffs necessary to process a request.

The department’s average response time dropped from several hours to 30 minutes. What are

the 10 steps in TQM that made this possible?

1. Build organizational commitment to quality. TQM will do little to improve the per- formance of an organization unless all employees embrace it, and this often requires a

change in an organization’s culture. 45

At Citibank the process of changing culture began

at the top. First a group of top managers, including the CEO, received training in TQM

from consultants from Motorola, where Six Sigma was founded (Six Sigma is trade-

marked by Motorola). 46

Each member of the top management group was then given

the responsibility of training a group at the next level in the hierarchy, and so on down

through the organization until all 100,000 employees had received basic TQM training.

2. Focus on the customer. TQM practitioners see a focus on the customer as the starting point.

47 According to TQM philosophy, the customer, not managers in quality control or

engineering, defines what quality is. The challenge is fourfold: (1) to identify what cus-

tomers want from the good or service that the company provides; (2) to identify what the

company actually provides to customers; (3) to identify any gap between what customers

want and what they actually get (the quality gap); and (4) to formulate a plan for closing

the quality gap. The efforts of Citibank managers to increase responsiveness to custom-

ers illustrate this aspect of TQM well.

3. Find ways to measure quality. Another crucial element of TQM is the development of a measuring system that managers can use to evaluate quality. Devising appropriate mea-

sures is relatively easy in manufacturing companies, where quality can be measured by

criteria such as defects per million parts. It is more difficult in service companies, where

outputs are less tangible. However, with a little creativity, suitable quality measures can

be devised as they were by managers at Citibank. Citibank used customer satisfaction

surveys as quality measures and defined a defect as any rating below the two highest

ratings. 48

4. Set goals and create incentives. Once a measure has been devised, managers’ next step is to set a challenging quality goal and to create incentives for reaching that goal. At

Citibank the CEO set an initial goal of reducing customer complaints by 50 percent. One

way of creating incentives to attain a goal is to link rewards, such as bonus pay and pro-

motional opportunities, to the goal.

5. Solicit input from employees. Employees are a major source of information about the causes of poor quality, so it is important that managers establish a system for soliciting

employee suggestions about improvements that can be made. At most companies, like

Citibank, this is an ongoing endeavor—the process never stops.

6. Identify defects and trace them to their source. A major source of product defects is the production system; a major source of service defects is poor customer service proce-

dures. TQM preaches the need for managers to identify defects in the work process, trace

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Value Chain Management: Functional Strategies for Competitive Advantage 259

those defects back to their source, find out why they occurred, and make corrections so

they do not occur again. Today IT makes quality measurement much easier.

7. Introduce just-in-time inventory systems. Inventory is the stock of raw materials, inputs, and component parts that an organization has on hand at a particular time. When

the materials management function designs a just-in-time ( JIT) inventory system , parts or supplies arrive at the organization when they are needed, not before. Also,

under a JIT inventory system, defective parts enter an organization’s operating system

immediately; they are not warehoused for months before use. This means defective

inputs can be quickly spotted. JIT is discussed more later in the chapter.

8. Work closely with suppliers. A major cause of poor-quality finished goods is poor-quality component parts. To decrease product defects, materials managers must work closely

with suppliers to improve the quality of the parts they supply. Managers at Xerox worked

closely with suppliers to get them to adopt TQM programs, and the result was a huge

reduction in the defect rate of component parts. Managers also need to work closely with

suppliers to get them to adopt a JIT inventory system, also required for high quality.

9. Design for ease of production. The more steps required to assemble a product or pro- vide a service, the more opportunities there are for making a mistake. It follows that

designing products that have fewer parts or finding ways to simplify providing a service

should be linked to fewer defects or customer complaints. For example, Apple continu-

ally redesigns the way it assembles its mobile digital devices to reduce the number of

assembly steps required, and it constantly searches for new ways to reduce the num-

ber of components that have to be linked together. The consequence of these redesign

efforts was a continuous fall in assembly costs and marked improvement in product

quality during the 2000s. At Citibank, defect detection and resolution lead to better

performance in process time, cash management, and customer satisfaction. 49

10. Break down barriers between functions. Successful implementation of TQM requires substantial cooperation between the different value chain functions. Materials managers

have to cooperate with manufacturing managers to find high-quality inputs that reduce

manufacturing costs; marketing managers have to cooperate with manufacturing so that

customer problems identified by marketing can be acted on; information systems have

to cooperate with all other functions of the company to devise suitable IT training pro-

grams; and so on. At Citibank, a cross-functional process mapping method was used to

describe the functions involved in each step of a process flow. 50

In essence, to increase quality, all functional managers need to cooperate to develop goals

and spell out exactly how they will be achieved. Managers should embrace the philosophy

that mistakes, defects, and poor-quality materials are not acceptable and should be elimi-

nated. Functional managers should spend more time working with employees and provid-

ing them with the tools they need to do the job. Managers should create an environment in

which employees will not be afraid to report problems or recommend improvements. Output

goals and targets need to include not only numbers or quotas but also some indicators of

quality to promote the production of defect-free output. Functional managers also need to

train employees in new skills to keep pace with changes in the workplace. Finally, achieving

better quality requires that managers develop organizational values and norms centered on

improving quality.

SIX SIGMA One TQM technique called Six Sigma has gained increasing popularity in the last decade, particularly because of the well-publicized success GE enjoyed as a result

of implementing it across its operating divisions. The goal of Six Sigma is to improve a

company’s quality to only three defects per million by systematically altering the way all

the processes involved in value chain activities are performed, and then carefully measur-

ing how much improvement has been made using statistical methods. Six Sigma shares with

TQM its focus on improving value chain processes to increase quality; but it differs because

TQM emphasizes top-down organizationwide employee involvement, whereas the Six Sigma

approach is to create teams of expert change agents, known as “green belts and black belts,”

to take control of the problem-finding and problem-solving process and then to train other

employees in implementing solutions. The accompanying “Management Insight” feature

shows how Six Sigma works for the city of Tyler, Texas.

inventory The stock of raw materials, inputs, and

component parts that an

organization has on hand

at a particular time.

just-in-time (JIT) inventory system A system in which parts or supplies

arrive at an organization when

they are needed, not before.

Six Sigma A technique used to improve quality by system-

atically improving how value

chain activities are performed

and then using statistical

methods to measure the

improvement.

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260

Everything’s Coming up Roses in One Texas Town Tyler is a city of more than 107,000 people in the northeast quadrant of Texas.

51 It has

the largest rose garden in the United States and a large rose-growing industry,

earning it  the nickname “Rose Capital of America.” 52

Tyler Rose Garden has more

than 500 varieties of roses. Each year the city hosts a rose festival when hundreds of

thousands of roses are in bloom. Visitors can tour the Rose Museum and attend the

Rose Parade.

But lately the city has also been noted for a quality control initiative that has saved it

from some thorny issues. In 2009, facing reduced revenues from sales taxes and sluggish

property values, the city hired a Six Sigma Master Black Belt and began training city

employees in Lean Six Sigma, a branch of Six Sigma that focuses on eliminating waste

in manufacturing and other areas. By 2014, when it was announced that Lean Six Sigma

programs had saved more than $5 million for the city, almost 27 percent of city employ-

ees had been trained in Lean Six Sigma and worked on Lean Six Sigma projects as part

of their regular workloads.

“In five short years, we’ve changed the culture of how we look at our jobs at city

hall,” Mayor Barbara Bass said. “For whichever department you’re in, you’re . . .  look-

ing with new eyes on how to improve your departments, and your friends from other

departments are stepping up and helping you with that process.” 53

The city has completed more than 90 Lean Six Sigma projects and still has 35 more

in process, according to City Manager Mark McDaniel. One project entailed developing

and implementing inventory control. Before the Lean Six Sigma project, Tyler Purchas-

ing Manager Sherry Pettit said no inventory was being done at the water utilities service

center meter shop. “It was kind of a mess. We really didn’t know what was in there or

anything. So . . .  we went in and cleaned it all up.” 54

Another project involved cleaning up the filing protocols and systems in the city attor-

ney’s office. A legal assistant commented, “It was taking us on average about 25 minutes

to find our documents and everything, and after our project it saved about $10,000 in

salary costs and got it down to four minutes.” 55

These and other projects led to reductions in overtime and improved waste collec-

tion. While the city population has grown by 30 percent since the mid-1980s, the Lean

Six Sigma projects made it possible for the city services to work with roughly the same

number of employees it had in the mid-1980s.

The city posts a list of its Lean Six Sigma Green Belts and Black Belts on its

web page. Green Belts require 80 hours of training and are then assigned projects

within the scope of the Green Belt’s current job. Traditionally, a Green Belt would be

trained in full-day, weeklong increments over two months. However, Tyler changed

the format to four weeks of half-day training over four months. To be fully certified,

a Green Belt must complete a Lean Six Sigma project within a year. Candidates for

Black Belts are selected from the pool of Green Belts and attend an additional

80 hours of training. In Tyler, Black Belts participate in multiple projects across the

city. As part of the certification, Black Belts must complete two Lean Six Sigma proj-

ects within a year, mentor Green Belts, and work to spread Lean Six Sigma through-

out the organization. 56

Barbara Bass, the mayor, said: “All of our Green Belts and Black Belts have

completed projects that are focused on improving a city process, saving either time

or money. Many other city employees have participated on project teams that put

improvement into the hands of those most familiar with the process—our frontline

employees.” 57

In Tyler style, the announcement of the savings accrued from Lean Six Sigma was

made in the city’s Rose Garden.

Management Insight

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Value Chain Management: Functional Strategies for Competitive Advantage 261

T h e third goal of value chain management is to increase the efficiency

of the various functional activities. The fewer the input resources

required to produce a given volume of output, the higher will be the

efficiency of the operating system. So efficiency is a useful measure of

how well an organization uses all its resources—such as labor, capital,

materials, or energy—to produce its outputs, or goods and services. Developing functional

strategies to improve efficiency is an extremely important issue for managers because

increased efficiency lowers production costs, which lets an organization make a greater

profit or attract more customers by lowering its price. Several important functional strategies

are discussed here.

Facilities Layout, Flexible Manufacturing, and Efficiency The strategies managers use to lay out or design an organization’s physical work facilities

also determine its efficiency. First, the way in which machines and workers are organized or

grouped together into workstations affects the efficiency of the operating system. Second, a

major determinant of efficiency is the cost associated with setting up the equipment needed to

make a particular product. Facilities layout is the strategy of designing the machine–worker interface to increase operating system efficiency. Flexible manufacturing is a strategy based on the use of IT to reduce the costs associated with the product assembly process or the

way services are delivered to customers. For example, this might be how computers are made

on a production line or how patients are routed through a hospital.

FACILITIES LAYOUT The way in which machines, robots, and people are grouped together affects how productive they can be. Figure 9.4 shows three basic ways of arranging

workstations: product layout, process layout, and fixed-position layout.

In a product layout, machines are organized so that each operation needed to manufacture a product or process a patient is performed at workstations arranged in a fixed sequence. In

manufacturing, workers are stationary in this arrangement, and a moving conveyor belt takes

the product being worked on to the next workstation so that it is progressively assembled.

Mass production is the familiar name for this layout; car assembly lines are probably the

best-known example. It used to be that product layout was efficient only when products were

Improving Efficiency

facilities layout The strategy of designing the

machine–worker interface to

increase operating system

efficiency.

flexible manufacturing The set of techniques that attempt

to reduce the costs associated

with the product assembly

process or the way services

are delivered to customers.

LO9-4 Explain why achieving

superior efficiency is so

important, and understand

the different kinds of

techniques that need to

be employed to increase

efficiency.

Figure 9.4 Three Facilities Layouts

Final product

a. Product layout

Final product

b. Process layout

Final product

c. Fixed-position layout

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262 Chapter Nine

created in large quantities; however, the introduction of modular assembly lines controlled by

computers is making it efficient to make products in small batches.

In a process layout, workstations are not organized in a fixed sequence. Rather, each work- station is relatively self-contained, and a product goes to whichever workstation is needed to

perform the next operation to complete the product. Process layout is often suited to manu-

facturing settings that produce a variety of custom-made products, each tailored to the needs

of a different kind of customer. For example, a custom furniture manufacturer might use a

process layout so different teams of workers can produce different styles of chairs or tables

made from different kinds of woods and finishes. Such a layout also describes how a patient

might go through a hospital from emergency room to X-ray room, to operating room, and

so on. A process layout provides the flexibility needed to change a product, whether it is a

PC or a patient’s treatment. Such flexibility, however, often reduces efficiency because it is

expensive.

In a fixed-position layout, the product stays in a fixed position. Its component parts are produced in remote workstations and brought to the production area for final assembly.

Increasingly, self-managed teams are using fixed-position layouts. Different teams assemble

each component part and then send the parts to the final assembly team, which makes the final

product. A fixed-position layout is commonly used for products such as jet airliners, main-

frame computers, and gas turbines—products that are complex and difficult to assemble or so

large that moving them from one workstation to another would be difficult. Even companies

that specialize in office architecture have rethought their workspaces, as the accompanying

“Management Insight” feature discusses.

Workspace Company Redefines Its Own Workspace Philosophy, Putting Its Money Where Its Mouth Is Steelcase develops and manufactures office furniture, technology, and other office archi-

tecture. The Michigan-based company was founded in 1912 as the Metal Office Furni-

ture Company. Its first patent was in 1914 on a metal wastebasket—an important item in

an era when straw wastebaskets were fire hazards. The company went on to develop and

sell many office products. In 1954 the name was changed to Steelcase. 58

In the more than 100 years that the company has been around, workspace design has

changed. As CEO Jim Hackett explains it, workers used to jockey to be closer to the

CEO. Like the organizational chart, the closer a person was to the CEO, the more power

the person had. Now information is power, and the design of the workspace should

reflect and promote that.

In 2014 Steelcase published a study suggesting that the design of offices affects the

emotional well-being of employees, which can have an impact on business results. The

study suggested that workspaces can support positive emotions by encouraging a sense

of belonging, helping workers see their worth, and promoting mindfulness. 59

Workspace should “celebrate the shift of what we call the ‘I’ space to the ‘we’ space,”

Hackett says. “Space has to enable and empower information in ways we only imagine . . . 

(across) a continuum of I and we work . . .  people need a range of settings to accommo-

date focused, collaborative, and social work in both open and enclosed environments—in

other words, a palette of place.” 60

Steelcase does not just sell the products that make new workspaces possible—it has

changed its own workspaces to allow for communication and an open culture. One of

Hackett’s first acts as CEO was to move all executive offices onto floors designed around

important issues facing the company. Instead of giving executives space, Hackett assigns

space to “command-level projects.” 61

This shifts the focus of meetings back to business

and products, and helps foster team building.

Management Insight

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Value Chain Management: Functional Strategies for Competitive Advantage 263

“Innovation requires collective ‘we’ work,” Hackett says. “To this end, it’s critical to

design spaces that not only support collaboration, but augment it (with) spaces that pro-

mote eye-to-eye contact, provide everyone with equal access to information, and allow

people to move around and participate freely.” 62

FLEXIBLE MANUFACTURING In a manufacturing company, a major source of costs is setting up the equipment needed to make a particular product. One of these costs is that

of production forgone because nothing is produced while the equipment is being set up. For

example, components manufacturers often need as much as half a day to set up automated

production equipment when switching from production of one component part (such as a

washer ring for the steering column of a car) to another (such as a washer ring for the steering

column of a truck). During this half-day, a manufacturing plant is not producing anything, but

employees are paid for this “nonproductive” time.

It follows that if setup times for complex production equipment can be reduced, so can

setup costs, and efficiency will rise; that is, the time that plant and employees spend in actu-

ally producing something will increase. This simple insight has been the driving force behind

the development of flexible manufacturing techniques.

Flexible manufacturing aims to reduce the time required to set up production equipment. 63

By redesigning the manufacturing process so production equipment geared for manufactur-

ing one product can be quickly replaced with equipment

geared to make another product, setup times and costs can

be reduced dramatically. Another favorable outcome from

flexible manufacturing is that a company can produce many

more varieties of a product than before in the same amount

of time. Thus flexible manufacturing increases a company’s

ability to be responsive to its customers.

To obtain the benefits from flexible manufacturing, Gen-

eral Motors built a plant in Lansing, Michigan, in 2001 that

can expand as the company sees fit. When it was first built,

the company’s Grand River Assembly plant was already

more flexible than its other plants. 64

It was modeled after

GM’s innovative overseas facilities. While some GM execu-

tives expressed concern that the site was too small to work

well, the plant has received praise for its capacity to manu-

facture a variety of car models, as well as for the collabora-

tive team management style it facilitates and its automation

capabilities. And GM plans to add on to the plant. In 2013

GM announced that it would build a $44.5 million Logistics

Optimization Center. The expansion will include a building

in which parts will be sorted and delivered for the assembly

line. In 2014 GM announced that a $162 million stamping plant would be added to the site.

Stamping plants make parts for auto assembly lines. 65

Just-in-Time Inventory and Efficiency As noted earlier, a just-in-time inventory system gets components to the assembly line just

as they are needed and thus drives down costs. In a JIT inventory system, component parts

travel from suppliers to the assembly line in a small wheeled container known as a kanban. Assembly-line workers empty the kanbans, which are sent back to the suppliers as the signal to

produce another small batch of component parts, and so the process repeats itself. This system

can be contrasted with a just-in-case view of inventory, which leads an organization to stock-

pile excess inputs in a warehouse in case it needs them to meet sudden upturns in demand.

JIT inventory systems have major implications for efficiency. Great cost savings can result

from increasing inventory turnover and reducing inventory holding costs, such as warehous-

ing and storage costs and the cost of capital tied up in inventory. Although companies that

manufacture and assemble products can obviously use JIT to great advantage, so can service

Housing units move on the production line as employees

of Toyota Motor Corporation work during the installation

process at the company’s Kasugai Housing Works, one of

the plants of Toyota home-brand houses on Kasugai, Aichi

Prefecture, Japan. Toyota entered the housing industry

30 years ago applying the plant technology and experience it

gained through producing cars.

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264 Chapter Nine

organizations. 66

Walmart, the biggest retailer in the United States, uses JIT systems to replen-

ish the stock in its stores at least twice a week. Many Walmart stores receive daily deliveries.

As soon as goods are purchased, new ones are ordered through Walmart’s sophisticated sup-

ply chain. However, while the supply chain does a good job of getting the goods to stores,

Walmart recently ran into some problems with stores that were so leanly staffed, there were

not enough people to move the goods from the storage area to the shelves. To maintain its

efficiency-based competitive advantage, Walmart will need to bring staffing up to optimal

levels as well. 67

Even a small company can benefit from a kanban system, as the experience of United

Electric Controls, headquartered in Watertown, Massachusetts, suggests. United Electric is

the market leader in the manufacture of alarm and shutdown switches for industrial plant

safety. At one time the company simply stored all its inputs in a warehouse and dispensed

them as needed. Then it decided to reduce costs by storing the inputs closer to their point of

use in the production system. This led to inaccurate part counts and caused production stop-

pages due to a lack of inputs.

So managers decided to experiment with a supplier kanban system even though United

Electric had fewer than 40 suppliers and they were up to date with its input requirements.

Managers decided to store a three-week supply of parts in a central storeroom—a supply

large enough to avoid unexpected shortages. 68

They began by asking their casting supplier to

deliver inputs in kanbans and bins. Once a week, this supplier checks the bins to determine

how much stock needs to be delivered the following week. Other suppliers were then asked

to participate in this system, and now more than 35 major suppliers operate some form of the

kanban system.

By all measures of performance, the kanban system has succeeded. Inventory holding

costs have fallen sharply. Products are delivered to all customers on time. And new products’

design-to-production cycles have dropped by 50 percent because suppliers are now involved

much earlier in the design process so they can supply new inputs as needed.

Self-Managed Work Teams and Efficiency Another functional strategy to increase efficiency is the use of self-managed work teams.

69

A typical self-managed team consists of 5 to 15 employees who produce an entire product

instead of just parts of it. 70

Team members learn all team tasks and move from job to job. The

result is a flexible workforce because team members can fill in for absent coworkers. The

members of each team also assume responsibility for scheduling work and vacations, order-

ing materials, and hiring new members—previously all responsibilities of first-line managers.

Because people often respond well to greater autonomy and responsibility, the use of empow-

ered self-managed teams can increase productivity and efficiency. Moreover, cost savings

arise from eliminating supervisors and creating a flatter organizational hierarchy, which fur-

ther increase efficiency.

The effect of introducing self-managed teams is often an increase in efficiency of 30 percent

or sometimes much more. After the introduction of flexible manufacturing technology and

self-managed teams, a GE plant in Salisbury, North Carolina, increased efficiency by 250 per-

cent compared with other GE plants producing the same products. 71

Process Reengineering and Efficiency The value chain is a collection of functional activities or business processes that trans-

forms one or more kinds of inputs to create an output that is of value to the customer. 72

Process reengineering involves the fundamental rethinking and radical redesign of business processes (and thus the value chain ) to achieve dramatic improvements in critical measures of performance such as cost, quality, service, and speed.

73 Order fulfillment, for example,

can be thought of as a business process: When a customer’s order is received (the input),

many different functional tasks must be performed as necessary to process the order, and then

the ordered goods are delivered to the customer (the output). Process reengineering boosts

efficiency when it reduces the number of order fulfillment tasks that must be performed, or

reduces the time they take, and so reduces operating costs.

process reengineering The fundamental rethinking

and radical redesign of busi-

ness processes to achieve

dramatic improvement in criti-

cal measures of performance

such as cost, quality, service,

and speed.

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Value Chain Management: Functional Strategies for Competitive Advantage 265

For an example of process reengineering in practice, consider how Ford used it. One

day a manager from Ford was working at its Japanese partner Mazda and discovered

that Mazda had only five people in its accounts payable department. The Ford manager

was shocked because Ford’s U.S. operation had 500 employees in accounts payable. He

reported his discovery to Ford’s U.S. managers, who decided to form a task force to study

this difference.

Ford managers discovered that procurement began when the purchasing department sent

a purchase order to a supplier and sent a copy of the purchase order to Ford’s accounts pay-

able department. When the supplier shipped the goods and they arrived at Ford, a clerk at the

receiving dock completed a form describing the goods and sent the form to accounts payable.

The supplier, meanwhile, sent accounts payable an invoice. Thus accounts payable received

three documents relating to these goods: a copy of the original purchase order, the receiving

document, and the invoice. If the information in all three was in agreement (most of the time

it was), a clerk in accounts payable issued payment. Occasionally, however, all three docu-

ments did not agree. And Ford discovered that accounts payable clerks spent most of their

time straightening out the 1 percent of instances in which the purchase order, receiving docu-

ment, and invoice contained conflicting information. 74

Ford managers decided to reengineer the procurement process to simplify it. Now when

a buyer in the purchasing department issues a purchase order to a supplier, that buyer also

enters the order into an online database. As before, suppliers send goods to the receiving

dock. When the goods arrive, the clerk at the receiving dock checks a computer terminal to

see whether the received shipment matches the description on the purchase order. If it does,

the clerk accepts the goods and pushes a button on the terminal keyboard that tells the data-

base the goods have arrived. Receipt of the goods is recorded in the database, and a computer

automatically issues and sends a check to the supplier. If the goods do not correspond to the

description on the purchase order in the database, the clerk at the dock refuses the shipment

and sends it back to the supplier.

Payment authorization, which used to be performed by accounts payable, is now accom-

plished at the receiving dock. The new process has come close to eliminating the need for

an accounts payable department. In some parts of Ford, the size of the accounts payable

department has been cut by 95 percent. By reducing the head count in accounts payable, the

reengineering effort reduced the amount of time wasted on unproductive activities, thereby

increasing the efficiency of the total organization.

Information Systems, the Internet, and Efficiency With the rapid spread of computers, the explosive growth of the Internet and corporate

intranets, and high-speed digital Internet technology, the information systems function is

moving to center stage in the quest for operating efficiencies and a lower cost structure. The

impact of information systems on productivity is wide-ranging and potentially affects all

other activities of a company. For example, Cisco Systems has been able to realize significant

cost savings by moving its ordering and customer service functions online. Cisco Systems

designs, manufactures, and sells networking equipment. The company has just 300 service

agents handling all its customer accounts, compared to the 900 it would need if sales were not

handled online. The difference represents an annual savings of $30 million a year. Moreover,

without automated customer service functions, Cisco calculates that it would need at least

1,000 additional service engineers, which would cost around $100 million.

All large companies today use the Internet to manage the value chain, feeding real-time

information about order flow to suppliers, which use this information to schedule their own

production to provide components on a just-in-time basis. This approach reduces the costs of

coordination both between the company and its customers and between the company and its sup-

pliers. Using the Internet to automate customer and supplier interactions substantially reduces

the number of employees required to manage these interfaces, which significantly reduces costs.

This trend extends beyond high-tech companies. Banks and financial service companies are

finding that they can substantially reduce costs by moving customer accounts and support func-

tions online. Such a move reduces the need for customer service representatives, bank tellers,

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266 Chapter Nine

stockbrokers, insurance agents, and others. For example, it costs about $1 when a customer

executes a transaction at a bank, such as shifting money from one account to another; over the

Internet the same transaction costs about $0.01.

As discussed in Chapter 6, technology comprises the skills, know-how, experience, body of scientific knowledge, tools, machines, computers,

and equipment used in the design, production, and distribution of goods

and services. Technology is involved in all functional activities, and the

rapid advance of technology today is a significant factor in managers’

attempts to improve how their value chains innovate new kinds of goods and services or ways

to provide them.

Two Kinds of Innovation Two principal kinds of innovation can be identified based on the nature of the technological

change that brings them about. Quantum product innovation results in the development of new, often radically different, kinds of goods and services because of fundamental shifts in

technology brought about by pioneering discoveries. Examples are the creation of the Inter-

net and the World Wide Web that have revolutionized the computer, cell phone, and media/

music industries, and biotechnology, which has transformed the treatment of illness by creat-

ing new, genetically engineered medicines. Chipotle started a restaurant trend called “fast

casual” that offers rapidly prepared but high-quality food in an upscale dining environment.

Prices are higher than typical fast-food chains. 75

Incremental product innovation results in gradual improvements and refinements of products over time as existing technologies are perfected and functional managers, like

those at Apple, Toyota, and McDonald’s, learn how to perform value chain activities in bet-

ter ways—ways that add more value to products. For example, since their debut, Google’s

staffers have made thousands of incremental improvements to the company’s search engine,

Chrome Internet browser, and Android operating system—changes that have enhanced their

capabilities enormously such as giving them the ability to work on all kinds of mobile devices

and making them available in many different languages.

Quantum product innovations are relatively rare; most managers’ activities focus on incre-

mental product innovations that result from ongoing technological advances. For example, every

time Dell or HP puts a new, faster Intel or AMD chip into a PC, or Google improves its search

engine’s capability, the company is making incremental product innovations. Similarly, every

time car engineers redesign a car model, and every time McDonald’s managers work to improve

the flavor and texture of burgers, fries, and salads, their product development efforts are intended

to lead to incremental product innovations. Incremental innovation is frequently as important

as—or even more important than—quantum innovation in raising a company’s performance.

Indeed, as discussed next, it is often managers’ ability to successfully manage incremental prod-

uct development that results in success or failure in an industry—as Dell found out to its cost.

The need to speed innovation and quickly develop new and improved products becomes espe-

cially important when the technology behind the product is advancing rapidly. This is because the

first companies in an industry to adopt the new technology will be able to develop products that

better meet customer needs and gain a “first-mover” advantage over their rivals. Indeed, manag-

ers who do not quickly adopt and apply new technologies to innovate products may soon find

they have no customers for their products—and destroy their organizations. In sum, the greater

the rate of technological change in an industry, the more important it is for managers to innovate.

Strategies to Promote Innovation and Speed Product Development There are several ways in which managers can promote innovation and encourage the devel-

opment of new products. Product development is the management of the value chain

Improving Innovation

quantum product innovation The develop- ment of new, often radically

different, kinds of goods and

services because of funda-

mental shifts in technology

brought about by pioneering

discoveries.

incremental product innovation The gradual improvement and refinement

of existing products that

occur over time as existing

technologies are perfected.

product development The management of the value

chain activities involved in

bringing new or improved

goods and services to the

market.

LO9-5 Differentiate between two

forms of innovation, and

explain why innovation

and product development

are crucial components of

the search for competitive

advantage.

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Value Chain Management: Functional Strategies for Competitive Advantage 267

activities involved in bringing new or improved goods and services to the market. The steps

that Monte Peterson, former CEO of Thermos, took to develop a new barbecue grill show

how good product development should proceed. Peterson had no doubt about how to increase

Thermos’s sales of barbecue grills: motivate Thermos’s functional managers to create new

and improved models. So Peterson assembled a cross-functional product development team

of five functional managers (from marketing, engineering, manufacturing, sales, and finance)

and told them to develop a new barbecue grill within 18 months. To ensure that they were not

spread too thin, he assigned them to this team only. Peterson also arranged for leadership of

the team to rotate. Initially, to focus on what customers wanted, the marketing manager would

take the lead; then, when technical developments became the main consideration, leadership

would switch to engineering; and so on.

Team members christened the group the “lifestyle team.” To find out what people really

wanted in a grill, the marketing manager and nine subordinates spent a month on the road,

visiting customers. What they found surprised them. The stereotype of Dad slaving over a

smoky barbecue grill was wrong—more women were barbecuing. Many cooks were tired of

messy charcoal, and many homeowners did not like rusty grills that spoiled the appearance

of their decks. Moreover, environmental and safety issues were increasing in importance. In

California charcoal starter fluid is considered a pollutant and is banned; in New Jersey the

use of charcoal and gas grills on the balconies of condos and apartments has been prohibited

to avoid fires. Based on these findings, the team decided Thermos had to produce a barbecue

grill that not only made the food taste good but also looked attractive, used no pollutants, and

was safe for balcony use (which meant it had to be electric).

Within one year the basic attributes of the product were defined, and leadership of the team

moved to engineering. The critical task for engineering was to design a grill that gave food the

cookout taste that conventional electric grills could not provide because they did not get hot

enough. To raise the cooking temperature, Thermos’s engineers designed a domed vacuum

top that trapped heat inside the grill, and they built electric heat rods directly into the surface

of the grill. These features made the grill hot enough to sear meat and give it brown barbecue

lines and a barbecue taste.

Manufacturing had been active from the early days of the development process, mak-

ing sure any proposed design could be produced economically. Because manufacturing was

involved from the beginning, the team avoided some costly mistakes. At one critical team

meeting the engineers said they wanted tapered legs on the grill. Manufacturing explained

that tapered legs would have to be custom-made—and would raise manufacturing costs—and

persuaded the team to go with straight legs.

When the new grill was introduced on schedule, it was an immediate success. The study of

many product development successes, such as that of Thermos’s lifestyle team, suggests three

strategies managers can implement to increase the likelihood that their product development

efforts will result in innovative and successful new products.

INVOLVE BOTH CUSTOMERS AND SUPPLIERS Many new products fail when they reach the marketplace because they were designed with scant attention to customer

needs. Successful product development requires inputs from more than just an organization’s

members; also needed are inputs from customers and suppliers. Thermos team members

spent a month on the road, visiting customers to identify their needs. The revolutionary elec-

tric barbecue grill was a direct result of this process. In other cases companies have found

it worthwhile to include customer representatives as peripheral members of their product

development teams. Boeing, for example, has included its customers, the major airlines, in

the design of its most recent commercial jet aircraft, the 787 Dreamliner. Boeing builds a

mockup of the aircraft’s cabin and then, over a period of months, allows each airline’s repre-

sentatives to experiment with repositioning the galleys, seating, aisles, and bathrooms to best

meet the needs of their particular airline. Boeing has learned a great deal from this process.

ESTABLISH A STAGE–GATE DEVELOPMENT FUNNEL One of the most com- mon mistakes managers make in product development is trying to fund too many new projects

at any one time. This approach spreads the activities of the different value chain functions too

thinly over too many different projects. As a consequence, no single project is given the func-

tional resources and attention required.

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268 Chapter Nine

One strategy for solving this problem is for managers to develop a structured process for

evaluating product development proposals and deciding which to support and which to reject.

A common solution is to establish a stage–gate development funnel , a technique that forces managers to choose among competing projects so functional resources are not spread thinly

over too many projects. The funnel gives functional managers control over product devel-

opment and allows them to intervene and take corrective action quickly and appropriately

(see  Figure 9.5 ).

At stage 1 the development funnel has a wide mouth, so top managers initially can encour-

age employees to come up with as many new product ideas as possible. Managers can cre-

ate incentives for employees to come up with ideas. Many organizations run “bright-idea

programs” that reward employees whose ideas eventually make it through the development

process. Other organizations allow research scientists to devote a certain amount of work time

to their own projects. Top managers at 3M, for example, have a 15 percent rule: They expect a

research scientist to spend 15 percent of the workweek working on a project of his or her own

choosing. Ideas may be submitted by individuals or by groups. Brainstorming (see Chapter 7)

is a technique that managers frequently use to encourage new ideas.

New product ideas are written up as brief proposals. The proposals are submitted to a

cross-functional team of managers, who evaluate each proposal at gate 1. The cross-functional

team considers a proposal’s fit with the organization’s strategy and its technical feasibility.

Proposals that are consistent with the strategy of the organization and are judged technically

feasible pass through gate 1 and into stage 2. Other proposals are turned down (although the

door is often left open for reconsidering a proposal later).

The primary goal in stage 2 is to draft a detailed product development plan. The product development plan specifies all of the relevant information that managers need to decide whether to go ahead with a full-blown product development effort. The product develop-

ment plan should include strategic and financial objectives, an analysis of the product’s

market potential, a list of desired product features, a list of technological requirements,

a list of financial and human resource requirements, a detailed development budget, and a

time line that contains specific milestones (for example, dates for prototype completion and

final launch).

A cross-functional team of managers normally drafts this plan. Good planning requires a

good strategic analysis (see Chapter 8), and team members must be prepared to spend consid-

erable time in the field with customers, trying to understand their needs. Drafting a product

development plan generally takes about three months. Once completed, the plan is reviewed

by a senior management committee at gate 2 (see Figure 9.5 ). These managers focus on the

details of the plan to see whether the proposal is attractive (given its market potential) and

viable (given the technological, financial, and human resources that would be needed to

develop the product). Senior managers making this review keep in mind all other product

stage–gate development funnel A planning model that forces managers to

choose among competing

projects so organizational

resources are not spread

thinly over too many projects.

product development plan A plan that specifies all of the relevant information

that managers need in order

to decide whether to proceed

with a full-blown product

development effort.

Figure 9.5 A Stage–Gate Development Funnel

Gate 1 Gate 2

Ideas Ship

Stage 1 Stage 2 Stage 3

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Value Chain Management: Functional Strategies for Competitive Advantage 269

development efforts currently being undertaken by the organization. One goal at this point is

to ensure that limited organizational resources are used to their maximum effect.

At gate 2 projects are rejected, sent back for revision, or allowed to pass through to stage 3,

the development phase. Product development starts with the formation of a cross-functional

team that is given primary responsibility for developing the product. In some companies, at the

beginning of stage 3 top managers and cross-functional team members sign a contract book , a written agreement that details factors such as responsibilities, resource commitments, bud-

gets, time lines, and development milestones. Signing the contract book is viewed as the sym-

bolic launch of a product development effort. The contract book is also a document against

which actual development progress can be measured. At 3M, for example, team members and

top management negotiate a contract and sign a contract book at the launch of a development

effort, thereby signaling their commitment to the objectives contained in the contract.

The stage 3 development effort can last anywhere from six months to 10 years, depend-

ing on the industry and type of product. Some electronics products have development cycles

of six months, but it takes from three to five years to develop a new car, about five years to

develop a new jet aircraft, and as long as 10 years to develop a new medical drug.

ESTABLISH CROSS-FUNCTIONAL TEAMS A smooth-running cross-functional team also seems to be a critical component of successful product development, as the expe-

rience of Thermos suggests. Marketing, engineering, and manufacturing personnel are

core  members of a successful product development team—the people who have primary responsibility for the product development effort. Other people besides core members work

on the project when the need arises, but the core members (generally from three to six indi-

viduals) stay with the project from inception to completion of the development effort (see

Figure 9.6 ).

The reason for using a cross-functional team is to ensure a high level of coordination and

communication among managers in different functions. Input from both marketing and manu-

facturing members of Thermos’s lifestyle team determined the characteristics of the barbecue

that the engineers on the team ended up designing.

If a cross-functional team is to succeed, it must have the right kind of leadership and it must

be managed effectively. To be successful, a product development team needs a team leader

who can rise above a functional background and take a cross-functional view. In addition

contract book A written agreement that details prod-

uct development factors such

as responsibilities, resource

commitments, budgets,

time lines, and development

milestones.

core members The members of a team who bear

primary responsibility for

the success of a project and

who stay with a project from

inception to completion.

Figure 9.6 Members of a Cross-Functional Product Development Team

Team leader

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270 Chapter Nine

to having effective leadership, successful cross-functional product development teams have

several other key characteristics. Often core members of successful teams are located close to

one another, in the same office space, to foster a sense of shared mission and commitment to

a development program. Successful teams develop a clear sense of their objectives and how

they will be achieved, the purpose again being to create a sense of shared mission. Thermos

eventually sold its grill business to the Char-Broil Division of W.C. Bradley Co. But its story

demonstrates the three strategies that help ventures succeed: involving customers and suppli-

ers, establishing a stage-gate development funnel, and establishing cross-functional teams.

The way in which the Lego Group manages its product quality is discussed in the accompany-

ing “Management Insight” feature.

Legos Doesn’t Play Around When It Comes to Quality “Lego” is an abbreviation of two Danish words: “leg” meaning play and “godt” meaning

well. 76

The company, based in Denmark, was founded by Ole Kirk Kristiansen and has

been passed from father to son over the years. It is now owned by Kjeld Kirk Kristiansen,

a grandchild of the founder. 77

The company is known for high-quality manufacturing. The LEGO Group, founded

in 1932, 78

has made more than 560 billion of those colorful interlocking plastic parts

kids (and even adults) have been building with for decades. 79

While the company also has launched supporting movies, video

games, and themed amusement parks, its interlocking bricks

remain its flagship product.

On its web page, the company touts its position on quality:

“From a reputation for manufacturing excellence to becoming

trusted by all—we believe in quality that speaks for itself and

earns us the recommendation of all. For us quality means the

challenge of continuous improvement to be the best toy, the best

for children and their development and the best to our commu-

nity and partners.” 80

Anyone who has played with Legos knows that the pieces

(bricks, mostly) have to snap together. This leaves little room in

the Lego manufacturing process for error. If the manufacturing

process were to produce bricks that did not connect, the play sets

would get a big thumbs down from children.

The company has several plants around the world making

Lego bricks. Every plant must have the same specifications so

that bricks created in one plant will lock with bricks created in

another plant. Quality control is so high that only 18 out of 1

million pieces are found to be defective. The company’s molds

have a precision tolerance of 0.002 millimeters. 81

To keep quality and specifications identical around the world,

Lego provides the same training at different plants. Also, the

equipment at all plants is standardized, so quality workers in dif-

ferent plants can share knowledge with one another. Lego is also concerned with safety. John Hansen, senior vice

president for engineering and quality at Lego’s headquarters in

Denmark, defines “a safe element” as one “that won’t hurt any-

body. But also that works as we expect it, that the appearance of

the element and the dimensions are as expected.” 82

Every Lego

brick has its own numeric ID. The company also is considering

Management Insight

Lego is known for its interlocking brick pieces. To

maintain its high quality control standards, Lego stan-

dardizes its equipment and trains its employees in the

same way.

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Value Chain Management: Functional Strategies for Competitive Advantage 271

new materials for the bricks. The company is researching new material that is better for

the environment than polymers. Lego also has reduced the size of packaging by making

boxes smaller, which saves on cardboard and on shipping costs.

In 2014, Lego was No. 9 on the “Global RepTrak 100: The World’s Most Reputable

Companies” list. 83

“The reason for this honor comes down to this. Lego delivers what it promises in

its advertising,” Hansen said. “It stands by its toys with a deeply rooted corporate phi-

losophy of how the power of constructive play can drive the development of intellectual

competencies—spatial, mathematical, and scientific inquiry. And, significantly, children

(and adults, who are we kidding) develop and build on the habits of mind to develop and

promote STEM [science, technology, engineering, and math] learning.” 84

In reference to the Lego Group’s results, Henrik Strøier, managing partner of the

Reputation Institute, agreed with Hansen. “Support is driven by who you are as a com-

pany; how fair you are when doing business, how you support the community, how

sustainable your operation is, and how compelling your vision for the future is,” he said.

“What Lego does so well in these years is to engage with its customers, consumers,

suppliers, partners, and opinion leaders on issues that matter to them; workplace, gover-

nance, and citizenship while producing amazing products.” 85

Managing innovation is an increasingly important aspect of a manager’s job in an era of

dramatic changes in advanced IT. Promoting successful new product development is difficult

and challenging, and some product development efforts are much more successful than oth-

ers. In sum, managers need to recognize that successful innovation and product development

cut across roles and functions and require a high level of cooperation. They should recognize

the importance of common values and norms in promoting the high levels of cooperation and

cohesiveness necessary to build a culture for innovation. They also should reward successful

innovators and make heroes of the employees and teams who develop successful new prod-

ucts. Finally, managers should fully utilize the product development techniques just discussed

to guide the process.

V ALUE CHAIN MANAGEMENT AND COMPETITIVE ADVANTAGE To achieve high performance, managers try to improve their responsiveness

to customers, the quality of their products, and the efficiency of their orga-

nization. To achieve these goals, managers can use a number of value chain

management techniques to improve the way an organization operates.

IMPROVING RESPONSIVENESS TO CUSTOMERS To achieve high performance in a competitive environment, it is imperative that the organization’s value chain be managed

to produce outputs that have the attributes customers desire. A central task of value chain

management is to develop new and improved operating systems that enhance the ability of the

organization to economically deliver more of the product attributes that customers desire for

the same price. Techniques such as CRM and TQM, JIT, flexible manufacturing, and process

reengineering are popular because they promise to do this. As important as responsiveness to

customers is, however, managers need to recognize that there are limits to how responsive an

organization can be and still cover its costs.

IMPROVING QUALITY Managers seek to improve the quality of their organization’s out- put because doing so enables them to better serve customers, to raise prices, and to lower

production costs. Total quality management focuses on improving the quality of an orga-

nization’s products and services and stresses that all of an organization’s operations should

be directed toward this goal. Putting TQM into practice requires having an organization-

wide commitment to TQM, having a strong customer focus, finding ways to measure quality,

setting quality improvement goals, soliciting input from employees about how to improve

Summary and Review

LO9-1

LO9-2

LO9-3

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272 Chapter Nine

product quality, identifying defects and tracing them to their source, introducing just-in-time

inventory systems, getting suppliers to adopt TQM practices, designing products for ease of

manufacture, and breaking down barriers between functional departments.

IMPROVING EFFICIENCY Improving efficiency requires one or more of the following: the introduction of a TQM program, the adoption of flexible manufacturing technologies, the

introduction of just-in-time inventory systems, the establishment of self-managed work teams,

and the application of process reengineering. Top management is responsible for setting the

context within which efficiency improvements can take place by, for example, emphasizing

the need for continuous improvement. Functional-level managers bear prime responsibility

for identifying and implementing efficiency-enhancing improvements in operating systems.

IMPROVING PRODUCT INNOVATION When technology is changing, managers must quickly innovate new and improved products to protect their competitive advantage. Some

value chain strategies managers can use to achieve this are (1) involving both customers and

suppliers in the development process; (2) establishing a stage–gate development funnel for

evaluating and controlling different product development efforts; and (3) establishing cross-

functional teams composed of individuals from different functional departments, and giving

each team a leader who can rise above his or her functional background.

LO9-4

LO9-5

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273

Building Management Skills Managing the Value Chain [LO9-1, 9-2]

Choose an organization with which you are familiar—one

that you have worked in or patronized or one that has

received extensive coverage in the popular press. The orga-

nization should be involved in only one industry or business.

Answer these questions about the organization:

1. What is the output of the organization?

2. Describe the value chain activities that the organization uses to produce this output.

3. What product attributes do customers of the organization desire?

4. Try to identify improvements that might be made to the organization’s value chain to boost its

responsiveness to customers, quality, efficiency, and

innovation.

Management in Action Topics for Discussion and Action

Discussion

1. What is CRM, and how can it help improve responsiveness to customers? [LO9-2]

2. What are the main challenges in implementing a successful total quality management program? [LO9-3]

3. What is efficiency, and what are some strategies managers can use to increase it? [LO9-4]

4. Why is it important for managers to pay close attention to value chain management if they wish to

be responsive to their customers? [LO9-1, 9-2]

5. What is innovation, and what are some strategies managers can use to develop successful new

products? [LO9-5]

Action

6. Ask a manager how responsiveness to customers, quality, efficiency, and innovation are defined and

measured in his or her organization. [LO9-1, 9-2]

7. Go to a local store, restaurant, or supermarket; observe how customers are treated; and list the

ways in which you think the organization is being

responsive or unresponsive to the needs of its

customers. How could this business improve its

responsiveness to customers? [LO9-1, 9-2]

Managing Ethically [LO9-1, 9-4]

A fter implementing efficiency-improving techniques, many companies commonly lay off hundreds or thousands of employees whose services are no longer required. And

frequently remaining employees must perform more tasks

more quickly—a situation that can generate employee stress

and other work-related problems. Also, these employees

may experience guilt because they stayed while many of

their colleagues and friends were fired.

Questions

1. Either by yourself or in a group, think through the ethical implications of using a new

functionalstrategy to improve organizational

performance.

2. What criteria would you use to decide which kind of strategy is ethical to adopt and how far to push

employees to raise the level of their performance?

3. How big a layoff, if any, is acceptable? If layoffs are acceptable, what could be done to reduce their harm

to employees?

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