Week 2 - Operational Excellence

Direct

Operations performance

The structure

and scope of operations

Operations strategy

Operations management

Product and service innovation

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Figure 3.1 This chapter examines operations strategy

INTRODUCTION No organization can plan in detail every aspect of its future actions; there is always some degree of uncertainty about what conditions will exist in the future. There will always have to be some adjustment to plans to accommodate circumstances. But simply always reacting to current, possibly short-term, issues can lead to constant changes in direction and the operation becoming volatile and unstable. That is why all organizations need the ‘backdrop’ of a well-understood strategic direction, so they know (at least, roughly) where they are heading and how they could get there. Once the operations function has understood its role in the business and after it has articulated its performance objectives, it needs to formulate a set of general principles which will guide its decision making. This is the operations strategy of the company. Yet the concept of ‘strategy ’ itself is not straightforward; neither is operations strategy. This chapter considers four perspectives, each of which goes partway to illustrating the forces that shape operations strategy. Figure 3.1 shows the position of the ideas described in this chapter in the general model of operations management.

Operations strategy

Key questions

❯ What is strategy and what is operations strategy?

❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of operations strategy?

❯ What is the difference between a ‘market requirements’ and ‘operations resources’ view of operations strategy?

❯ How can operations strategy form the basis for operations improvement?

❯ How can an operations strategy be formulated? The process of operations strategy

3

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CHAPTER 3 OPERATIONS STRATEGY 75

OPERATIONS IN ACTION

You do not think of space satellites as cheap items, and of course they are not. They can be expensive – very expensive. And in the early days of space missions, this meant that only superpowers could afford to develop and launch them. The conventional wisdom was that space was such a hostile environment that satellites would have to be constructed using only specially developed components that could endure the severe conditions encountered in space. Satellites therefore would always be expensive items. Yet in the late 1970s this assumption was challenged by Sir Martin Sweeting, who then was studying for his PhD at the University of Surrey in the UK. The aerospace research team in the Electrical Engineering Department at the University of Surrey had built its first satellite (called UoSAT-1) using commercial off-the-shelf components. It was about as big as two microwave ovens, weighing in at 72 kg. By contrast, some of the huge satellites being launched by government space agencies were as large as a London double-decker bus. UoSAT-1 was launched in 1981 with the help of NASA, who had been persuaded to provide a free launch, piggybacking on the back of a mission to put a large scientific satellite into orbit. The team fol- lowed this up with a second satellite (UoSAT-2) built in just six months and launched in 1984. A year later Surrey Satellite Technology Limited (SSTL) was formed as a spinout company from the University of Surrey to transfer the results of its research into a commercial enterprise. The firm’s vision was to open up the mar- ket for space exploration by pioneering the use of small and relatively cheap, but reliable, satellites built from readily available off-the-shelf components – then a rev- olutionary idea. Now SSTL is the world’s leading small- satellite company and has delivered space missions for a whole range of applications including Earth observa- tion, science, communications and in-orbit technol- ogy demonstration. The company is at the forefront of space innovation, exploiting advances in technologies and challenging conventions to bring affordable space exploration to international customers. The company, which has launched over 40 satellites, is based across four sites in South-East England, and employs more than 500 staff. Since 2014 SSTL has been an independent company within the Airbus defence and space group.

As the market for satellites developed, scientific and technological innovations have led to what has been called a ‘democratisation’ of space, with SSTL main- taining what it says is a 40 per cent share of the global export market for small affordable satellites. How has it achieved this success from such small beginnings? Well,

partly because it was an early player in the market having the vision to see that there would be a market for small satellites that could serve the ambitions of smaller coun- tries, companies, research groups and even schools. As the company says, the small-satellite revolution started with SSTL. But in addition, it has always been innovative in finding ways of keeping the cost of building the satel- lites down to a minimum. SSTL pioneered the low-cost, low-risk approach to delivering operational satellite missions within short development timescales and with the capability that potential customers wanted. In the early 1980s, as the first microcomputers became com- mercially available, Sir Martin Sweeting speculated that it may be possible to use programmable technology to build small satellites that were ‘intelligent’ when com- pared with conventional large and expensive hard-wired satellites. It also would allow the satellite to be repro- grammed from the ground. Particularly important was the company’s use of commercial off-the-shelf tech- nology. Combined with a determination to learn some- thing from each new project, a pragmatic approach to manufacture and low-cost operations, it enabled SSTL to keep costs as low as realistically possible. In effect, using industry-standard parts meant exploiting the (often enormous) investments by consumer electronics companies, auto part manufacturers and others who had developed complex components for their products. Even if this sometimes limited what a satellite could do, it provided the scale economies that would be impossi- ble if SSTL were designing and making customized com- ponents from scratch. ‘ We were being parasitic, if you like ’, admits Sir Martin.

However, not all commercially available compo- nents made for terrestrial use are up to coping with conditions in space, which is a hugely important issue. Reliability is essential in a satellite. (It is difficult to

Changing the economics of space exploration 1

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76 PART ONE DIRECTING THE OPERATION

repair them once in space.) And even though off-the- shelf components and systems have become increas- ing reliable, they must be rigorously tested to make sure that they are up to the severe conditions found in space. One of the key problems is how compo- nents react to the high levels of radiation in space. For example, different smartphone constituents (a regular source of components) react in different ways to radi- ation. Knowing which bits can be used and which can- not is an important piece of knowledge. Yet, although individual components and systems are often bought off the shelf, the company does most of its operations activities itself. This allows SSTL to provide a complete

in-house design, manufacture, launch and operation service as well as a range of advice, analysis and con- sultancy services. ‘ What distinguishes us is our vertically integrated capability, from design and research to man- ufacturing and operations ’, says Sir Martin. ‘ We don’t have to rely on suppliers, although of course we buy in components when that is advantageous. ’ And innova- tion? It is still as important as it was at the company’s start. Surrey University has retained a 1 per cent stake in the company because ‘ we wanted to cement the very close relationship between company and university ’, says Sir Martin. ‘ We work together on a number of research projects and staff flow back and forth between us. ’

WHAT IS STRATEGY AND WHAT IS OPERATIONS STRATEGY?

Surprisingly, ‘strategy’ is not particularly easy to define. Linguistically the word derives from the Greek word strategos , meaning ‘leading an army’. And although there is no direct histori- cal link between Greek military practice and modern ideas of strategy, the military metaphor is powerful. Both military and business strategy can be described in similar ways, and include some of the following:

● Setting broad objectives that direct an enterprise towards its overall goal. ● Planning the path (in general rather than specific terms) that will achieve these goals. ● Stressing long-term rather than short-term objectives. ● Dealing with the total picture rather than stressing individual activities. ● Being detached from, and above, the confusion and distractions of day-to-day activities.

Here, by strategic decisions, we mean those decisions which: are widespread in their effect on the organization to which the strategy refers; define the position of the organization rela- tive to its environment; and move the organization closer to its long-term goals. But ‘strategy’ is more than a single decision; it is the total pattern of the decisions and actions that influence the long-term direction of the business. Thinking about strategy in this way helps us to discuss an organization’s strategy even when it has not been explicitly stated. Observing the total pattern of decisions gives an indication of the actual strategic behaviour.

Operations strategy Operations strategy concerns the pattern of strategic decisions and actions that set the role, objectives and activities of the operation. The term ‘operations strategy’ sounds at first like a contradiction. How can ‘operations’, a subject that is generally concerned with the day-to- day creation and delivery of goods and services, be strategic? ‘Strategy’ is usually regarded as the opposite of those day-to-day routine activities. But ‘ operations’ is not the same as ‘ operational ’. ‘Operations’ are the resources that create products and services. ‘Operational’ is the opposite of strategic, meaning day-to-day and detailed. So, one can examine both the operational and the strategic aspects of operations. It is also conventional to distinguish

between the ‘content’ and the ‘process’ of operations strategy. The content of operations strategy is the specific decisions and actions that set the operations role, objectives and activities. The process of operations strategy is the method that is used to make the specific ‘content’ decisions.

✽ Operations principle ‘Operations’ is not the same as ‘operational’; it does have a strategic role.

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CHAPTER 3 OPERATIONS STRATEGY 77

From implementing to supporting to driving strategy Most businesses expect their operations strategy to improve operations performance over time. In doing this they should be progressing from a state contributing very little to the com- petitive success of the business through to the point where they are directly responsible for its competitive success. This means that they should be able to, in turn, master the skills first to ‘implement’, then ‘support’ and then ‘drive’ operations strategy.

Implementing business strategy The most basic role of operations is to implement strategy. You cannot, after all, touch a strat- egy; you cannot even see it; all you can see is how the operation behaves in practice. For example, if an insurance company has a strategy of moving to an entirely online service, its operations function will have to supervise the design of all the processes which allow custom- ers to access online information, issue quotations, request further information, check credit details, send out documentation, and so on. Without effective implementation even the most original and brilliant strategy will be rendered totally ineffective.

Supporting business strategy Support strategy goes beyond simply implementing strategy. It means developing the capa- bilities which allow the organization to improve and refine its strategic goals. For example, a mobile phone manufacturer wants to be the first in the market with new product innovations, so its operations need to be capable of coping with constant innovation. It must develop pro- cesses flexible enough to make novel components, organize its staff to understand the new technologies, develop relationships with its suppliers which help them to respond quickly when supplying new parts, and so on.

Driving business strategy The third, and most difficult, role of operations is to drive strategy by giving it a unique and long-term advantage. For example, a specialist food-service company supplies restaurants with frozen fish and fish products. Over the years it has built up close relationships with its custom- ers (chefs) as well as with its suppliers around the world (fishing com- panies and fish farms). In addition it has its own small factory which develops and produces a continual stream of exciting new products. In fact the whole company’s success is based largely on these unique operations capabilities. The operation drives the company’s strategy.

Hayes and Wheelwright’s four stages of operations contribution The ability of any operation to play these roles within the organization can be judged by con- sidering the organizational aims or aspirations of the operations function. Professors Hayes and Wheelwright of Harvard University 2 developed a four-stage model which can be used to evaluate the role and contribution of the operations function. The model traces the progres- sion of the operations function from what is the largely negative role of stage 1 operations to its becoming the central element of competitive strategy in excellent stage 4 operations. Figure 3.2 illustrates the four stages.

Stage 1: Internal neutrality This is the very poorest level of contribution by the operations function. It is holding the company back from competing effectively. It is inward looking and, at best, reactive with very little positive to contribute towards competitive success. Paradoxically, its goal is ‘to be ignored’ (or, ‘internally neutral’). At least then it is not holding the company back in any way. It attempts to improve by ‘avoiding making mistakes’.

✽ Operations principle Operations should try, progressively, to implement, support and drive strategy.

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78 PART ONE DIRECTING THE OPERATION

Stage 2: External neutrality The first step of breaking out of stage 1 is for the operations function to begin comparing itself with similar companies or organizations in the outside market (being ‘externally neutral’). This may not immediately take it to the ‘first division’ of companies in the market, but at least it is measuring itself against its competitors’ performance and trying to implement ‘best practice’.

Stage 3: Internally supportive Stage 3 operations are among the best in their market. Yet, stage 3 operations still aspire to be clearly and unambiguously the very best in the market. They achieve this by gaining a clear view of the company’s competitive or strategic goals and supporting it by developing appro- priate operations resources. The operation is trying to be ‘internally supportive’ by providing a credible operations strategy.

Stage 4: Externally supportive Yet Hayes and Wheelwright suggest a further stage – stage 4 – where the company views the oper- ations function as providing the foundation for its competitive success. Operations look to the long term. It forecasts likely changes in markets and supply, and it develops the operations-based capabilities which will be required to compete in future market conditions. Stage 4 operations are innovative, creative and proactive and are driving the company’s strategy by being ‘one step ahead’ of competitors – what Hayes and Wheelwright call being ‘externally supportive’.

Figure 3.2 The four-stage model of operations contribution

Redefining industry expectations

Clearly the best in the industry

As good as competitors

Holding the organization back Implementing

strategy

In cr

ea si

ng s

tr at

eg ic

im p

ac t

Increasing operations capabilities

Internally neutral

Externally neutral

Internally supportive

Externally supportive

Supporting strategy

Driving strategy

Stage 2 Adopt best

practice

Stage 1 Correct the

worst problems

Stage 4 Give an

operations advantage

Stage 3 Link strategy

with operations

Inc rea

sin g c

on trib

uti on

of op

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ns

Critical commentary

The idea that operations can have a leading role in determining a company’s strategic direction is not universally supported. Both Hayes and Wheelwright’s stage 4 of their four- stage model and the concept of operations ‘driving’ strategy not only imply that it is possible

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CHAPTER 3 OPERATIONS STRATEGY 79

Perspectives on operations strategy Different authors have slightly different views and definitions of operations strategy. Between them, four ‘perspectives’ emerge: 3

● Operations strategy is a top-down reflection of what the whole group or business wants to do. ● Operations strategy is a bottom-up activity where operations improvements cumulatively

build strategy. ● Operations strategy involves translating market requirements into operations decisions

(sometimes called the ‘outside-in’ perspective). ● Operations strategy involves exploiting the capabilities of operations resources in chosen

markets (sometimes called the ‘inside-out’ perspective).

None of these four perspectives alone gives the full picture of what operations strategy is. But together they provide some idea of the pressures that go to form the content of operations strategy. First we will treat the top-down and bottom-up perspectives together, then the mar- ket requirements and operations resource perspectives together ( see Fig. 3.3 ).

for operations to take such a leading role, but are also explicit in seeing it as a ‘good thing’. A more traditional stance taken by some authorities is that the needs of the market will always be pre-eminent in shaping a company’s strategy. Therefore, operations should devote all their time to understanding the requirements of the market (as defi ned by the marketing function within the organization) and devote themselves to their main job of ensuring that operations processes can actually deliver what the market requires. Companies can only be successful, they argue, by positioning themselves in the market (through a combination of price, promotion, product design and managing how products and services are delivered to customers) with operations very much in a ‘supporting’ role. In eff ect, they say, Hayes and Wheelwright’s four-stage model should stop at stage 3. The issue of an ‘operations resource’ perspective on operations strategy is discussed later in the chapter.

Figure 3.3 The four perspectives on operations strategy

Market requirement perspective

What the market position requires operations to do

Operations resources

perspective

What operations resources can do

Top-down perspective

What the business wants operations

to do

What day-to-day experience suggests operations should do

Bottom-up perspective

Operations strategy

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80 PART ONE DIRECTING THE OPERATION

WHAT IS THE DIFFERENCE BETWEEN A ‘TOP-DOWN’ AND ‘BOTTOM-UP’ VIEW OF OPERATIONS STRATEGY?

Top-down strategies A large corporation will need a strategy to position itself in its global, economic, political and social environment. This will consist of decisions about what types of business the group wants to be in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Decisions such as these form the corporate strategy of the corporation. Each business unit within the corporate group will also need to put together its own business strategy which sets out its individual mission and objectives. This business strat- egy guides the business in relation to its customers, markets and competitors, and also the strategy of the corporate group of which it is a part. Similarly, within the business, functional strategies need to consider what part each function should play in contributing to the strate- gic objectives of the business.

So, one perspective on operations strategy is that it should take its place in this hierarchy of strategies. Its main influence, therefore, will be whatever the business sees as its strategic direction. For example, a printing services group has a company that prints packaging for consumer products. The group’s management figure that, in the long-term, only companies with significant market share will achieve substantial profitability. Its corporate objectives therefore stress market dominance. The consumer packaging company decides to achieve volume growth, even above short-term profitability or return on investment. The implication for operations strategy is that it needs to expand rapidly, investing in extra capacity (fac- tories, equipment and labour) even if it means some excess capacity in some areas. It also needs to establish new factories in all parts of its market to offer relatively fast delivery. The

important point here is that different business objectives would prob- ably result in a very different operations strategy. The role of opera- tions is therefore largely one of implementing or ‘operationalizing’ business strategy. Figure 3.4 illustrates this strategic hierarchy, with some of the decisions at each level and the main influences on the strategic decisions.

‘Bottom-up’ strategies The ‘top-down’ perspective provides an orthodox view of how functional strategies should be put together. But in fact the relationship between the levels in the strategy hierarchy is more complex than this. When any group is reviewing its corporate strategy, it will also take into account the circumstances, experiences and capabilities of the various businesses that form the group. Similarly, businesses, when reviewing their strategies, will consult the individual functions within the business about their constraints and capabilities. They may also incor- porate the ideas which come from each function’s day-to-day experience. Therefore an alter- native view to the top-down perspective is that many strategic ideas emerge over time from operational experience. Sometimes companies move in a particular strategic direction because the ongoing experience of providing products and services to customers at an operational level convinces them that it is the right thing to do. There may be no high-level decisions examin- ing alternative strategic options and choosing the one which provides the best way forward. Instead, a general consensus emerges from the operational level of the organization.

Suppose the printing services company described previously suc- ceeds in its expansion plans. However, in doing so it finds that hav- ing surplus capacity and a distributed network of factories allows it to offer an exceptionally fast service to customers. It also finds that some customers are willing to pay considerably higher prices for such a responsive service. Its experiences lead the company to set up

✽ Operations principle Operations strategies should reflect top-down corporate and/or business objectives.

✽ Operations principle Operations strategy should reflect bottom-up experience of operational reality.

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CHAPTER 3 OPERATIONS STRATEGY 81

Figure 3.4 The top-down perspective of operations strategy and its application to the printing services group

Corporate strategy decisions • What businesses to be in? • Allocation of cash to businesses? • How to manage the relationships between different businesses?

Business strategy decisions • Defining the mission of the business e.g. – growth targets – return on investment – profitability targets – cash generation • Setting competitive objectives

Functional strategy decisions • The role of the function • Translating business objectives into functional objectives • Allocation of resources so as to achieve functional objectives • Performance improvement priorities

Printing services group corporate strategy • Specialize in packaging businesses • Become a major player in all its markets

Consumer packaging business strategy • Rapid volume growth • Fast service • Economies of scale

Operations strategy • Capacity expansion • Tolerate some over-capacity in the short term • New locations established

a separate division dedicated to providing fast, high-margin printing services to those cus- tomers willing to pay. The strategic objectives of this new division are not concerned with high-volume growth but high profitability.

This idea of strategy being shaped by operational-level experience over time is some- times called the concept of emergent strategies4 (see Fig. 3.5). This view of operations strategy is perhaps more descriptive of how things really happen, but at first glance it seems less useful in providing a guide for specific decision making. Yet while emergent strategies are less easy to categorize, the principle governing a bottom-up perspective is clear: shape the operation’s objectives and action, at least partly, by the knowledge it gains from its day-to-day activities. The key virtues required for shaping strategy from the bot- tom up are an ability to learn from experience and a philosophy of continual and incre- mental improvement.

Top-down and bottom-up perspectives on operations strategy can reinforce each other The top-down and bottom-up perspectives are often seen as being diametrically opposite ways of looking at operations strategy, but they are not. In fact the two perspectives can be mutually reinforcing. This is how it can work. The top-down perspective sets the overall direction and objectives for operations decisions and activities. In fact, in order to imple- ment top-down strategy, the day-to-day activities of the operation must be aligned with the strategy. So a way of judging operational day-to-day activities of an operation is to

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82 PART ONE DIRECTING THE OPERATION

Figure 3.5 The ‘bottom-up’ perspective of operations strategy

Surplus capacity allows fast service

Offers option of faster service at premium price

New ‘fast service’ division established

Operational experience

Emergent sense of what the strategy should be

Operations strategy

Figure 3.6 Top-down and bottom-up perspectives on operations strategy can reinforce each other

Top-down Strategic intention

Bottom-up Operational day-to-day

experience

Operations-based capabilities can be exploited strategically

Day-to-day experience can be built into operations-

based capability

Operations processes can capture day-to-day

experience

Strategy needs to be implemented

Implementation involves aligning day-to-day operations

activities with strategy

Day-to-day operations should be run to reflect

strategic intention

check that they fully reflect the overall top-down strategy of the organization. But as we indicated in the last paragraph, the experience gained from day-to-day activities can be accumulated and built into capabilities that an organization could possibly exploit stra- tegically. (We will expand this idea of ‘capabilities’ in the next section.) This idea of how top-down and bottom-up perspectives on operations strategy can reinforce each other is shown in Figure 3.6.

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CHAPTER 3 OPERATIONS STRATEGY 83

OPERATIONS IN PRACTICE

One of the principles of operations strategy is that what operations do ‘on the ground’ should be aligned with what a business is trying to achieve in its market. The way Apple designs and runs its retail operations is a good example of this. (Later in this chapter we will look at Apple’s sup- ply strategy.) However, Apple has not always had a retail operations strategy, because Apple has not always sold its products through its own shops. It was back in 1990 when the late Steve Jobs, then Apple’s boss, decided to build Apple Stores because conventional computer retail- ers were reluctant to stock his Mac computers. They said that the Apple brand was too weak (which, at the time, it was). The original Apple Stores were heavily influ- enced by Gap (the clothing retailer) and so many Gap employees moved to work for Apple that they joked about working for ‘Gapple’. Yet, even with the experienced Gap retailers, Apple wanted to develop its own ideas. Consequently it built a ‘prototype store’ near its Californian headquarters and tested its retail concepts for a year before opening the first Apple Stores. This early learning period was important. It allowed Apple to come to the conclusion that the two key issues for its retail operations strategy were store location and the experience that customers would have within the stores.

First, store location: Apple has stores in some of the highest profile locations on Earth. This is expensive, but the large number of customers it attracts together with the Apple range of products allow the company to pro- duce very high sales. In fact its sales productivity (sales per square metre) is above many luxury goods retailers such as Tiffany. Second, the customer experience: according to

Ron Johnson, who built up Apple’s shop network: ‘ People come to the Apple Store for the experience, and they’re will- ing to pay a premium for that. There are lots of components to that experience, but maybe the most important is that the staff isn’t focused on selling stuff, it’s focused on build- ing relationships and trying to make people’s lives better. The staff is exceptionally well trained, and they’re not on commission, so it makes no difference to them if they sell you an expensive new computer or help you make your old one run better so you’re happy with it. Their job is to figure out what you need and help you get it, even if it’s a prod- uct Apple doesn’t carry. Compare that with other retailers where the emphasis is on encouraging customers to buy more, even if they don’t want or need it. That doesn’t enrich their lives, and it doesn’t deepen the retailer’s relationship with them. It just makes their wallets lighter. ’ Yet creating the customer experience is not a matter of chance – it is carefully designed into Apple’s strategy. Employees are helped to cultivate their air of cool confidence through extensive training, and it is easier to be approacha- ble and calm when there is little pressure to push sales. Training emphasizes the importance of problem solving rather than selling and treating customers with courtesy. For example, staff have been told never to correct a cus- tomer’s mispronunciation of a product in case it is seen as patronizing. Of course, Apple’s products are attractive and Apple customers are famously passionate about the brand, but if Apple products were the only reason for the stores’ success, it is difficult to explain why customers flock to the stores to buy Apple products at full price when dis- count retailers sell them cheaper.

Apple’s retail operations strategy 5

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84 PART ONE DIRECTING THE OPERATION

WHAT IS THE DIFFERENCE BETWEEN A ‘MARKET REQUIREMENTS’ AND AN ‘OPERATIONS RESOURCES’ VIEW OF OPERATIONS STRATEGY?

Market-requirements-based strategies No operation that continually fails to serve its markets adequately is likely to survive in the long term. Without an understanding of what markets require, it is impossible to ensure that the operation is achieving the right priority between its performance objectives (quality, speed, dependability, flexibility and cost).

The market influence on performance objectives Operations seek to satisfy customers through developing their five performance objectives. For example, if customers particularly value low-priced products or services, the operation will place emphasis on its cost performance. Alternatively, a customer emphasis on fast deliv- ery will make speed important to the operation. When it is important that products or services are delivered exactly when they are promised, the performance objective of dependability

will be essential for the operation. When customers value products or services that have been adapted or designed specifically for them, flexibility will be vital, and so on. This list is not exhaustive; the key point is that whatever competitive factors are important to customers should influence the priority of each performance objective.

Order-winning and qualifying objectives A particularly useful way of determining the relative importance of competitive factors is to distinguish between ‘order-winning’ and ‘qualifying’ factors. 6 Order-winning factors are those things which directly and significantly contribute to winning business. They are regarded by customers as key reasons for purchasing the product or service. Raising performance in an order-winning factor will either result in more business or improve the chances of gaining more business. Qualifying factors may not be the major competitive determinants of success, but are important in another way. They are those aspects of competitiveness where the oper- ation’s performance has to be above a particular level just to be considered by the customer. Performance below this ‘qualifying’ level of performance will possibly disqualify the company from being considered by many customers. But any further improvement above the qualifying level is unlikely to gain the company much competitive benefit. To order-winning and qualify- ing factors can be added less important factors which are neither order winning nor qualifying. They do not influence customers in any significant way. They are worth mentioning here only because they may be of importance in other parts of the operation’s activities.

Figure 3.7 shows the difference between order-winning, qualifying and less important fac- tors in terms of their utility or worth to the competitiveness of the organization. The curves illustrate the relative amount of competitiveness (or attractiveness to customers) as the oper-

ation’s performance at the factor varies. Order-winning factors show a steady and significant increase in their contribution to competitive- ness as the operation gets better at providing them. Qualifying factors are ‘givens’; they are expected by customers and can severely disad- vantage the competitive position of the operation if it cannot raise its

performance above the qualifying level. Less important objectives have little impact on cus- tomers no matter how well the operation performs in them.

If, as is likely, an operation produces goods or services for more than one customer group, it will need to determine the order-winning, qualifying and less important competitive factors for each group. For example, Table 3.1 shows two ‘product’ groups in the banking industry. Here the distinction is drawn between the customers who are looking for banking services for their private and domestic needs (current accounts, overdraft facilities, savings accounts,

✽ Operations principle Operations strategy should reflect the requirements of the business’s markets.

✽ Operations principle Competitive factors can be classified as order winners or qualifiers.

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CHAPTER 3 OPERATIONS STRATEGY 85

Figure 3.7 Order-winning, qualifying and less important competitive factors. Different customer needs imply different objectives

Table 3.1 Different banking services require different performance objectives

Retail banking Corporate banking

Products Personal financial services such as loans and credit cards

Special services for corporate customers

Customers Individuals Businesses

Range of services offered Medium but standardized, little need for special terms

Very wide range, many need to be customized

Changes to service design Occasional Continual

Delivery Fast decisions Dependable service

Quality Means error-free transactions Means close relationships

Volume per service type Most services are high volume Most services are low volume

Profit margins Most are low to medium, some high Medium to high

Competitive factors

Order winners Price Customization

Accessibility Quality of service

Ease of transaction Reliability/trust

Qualifiers Quality Ease of transaction

Range Price

Less important Accessibility

Internal performance Cost Flexibility

objectives Speed Quality

Quality Dependability

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86 PART ONE DIRECTING THE OPERATION

mortgage loans, etc.) and those corporate customers who need banking services for their (often large) organizations. These latter services would include such things as letters of credit, cash transfer services and commercial loans.

Worked example

‘ It is about four years now since we specialized in the small to medium firms’ market. Before that we also used to provide legal services for anyone who walked in the door. So now we have built up our legal skills in many areas of corporate and business law. However, within the firm, I think we could focus our activities even more. There seem to be two types of assignment that we are given. About forty per cent of our work is relatively routine. Typically these assignments are to do with things like property purchase and debt collection. Both these activities involve a relatively standard set of steps which can be automated or carried out by staff without full legal qualifications. Of course, a fully qualified lawyer is needed to make some decisions, however most work is fairly rou- tine. Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they expect us to make simple errors in our documentation, in fact if we did this too often we would lose business. Fortunately our customers know that they are buying a standard service and don’t expect it to be customized in any way. The problem here is that specialist agencies have been emerging over the last few years and they are starting to undercut us on price. Yet I still feel that we can oper- ate profitably in this market and anyway, we still need these capabilities to serve our other clients. The other sixty per cent of our work is for clients who require far more specialist services, such as assignments involving company merger deals or major company restructuring. These assignments are complex, large, take longer, and require significant legal skill and judgement. It is vital that clients respect and trust the advice we give them across a wide range of legal specialisms. Of course they assume that we will not be slow or unreliable in preparing advice, but mainly it’s trust in our legal judgement which is important to the client. This is popular work with our lawyers. It is both interesting and very profitable. But should I create two separate parts to our business: one to deal with routine services and the other to deal with specialist services? And, what aspects of operations performance should each part be aiming to excel at? ” (Managing Partner, Branton Legal Services)

Analysis Table 3.2 has used the information supplied above to identify the order winners, qualifiers and less important competitive factors for the two categories of service. As the Managing Partner suspects, the two types of service are very different. Routine services must be relatively inex- pensive and fast, whereas the clients for specialist services must trust the quality of advice and range of legal skills available in the firm. The customers for routine services do not expect errors and those for specialist services assume a basic level of dependability and speed. These are the qualifiers for the two categories of service. Note that qualifiers are not ‘unimportant’. On the contrary, failure to be ‘up to standard’ at them can lose the firm business. However, it is the order winner which attracts new business. Most significantly, the performance objectives which each operations partner should stress are very different. Therefore there does seem to be a case for separating the sets of resources (for example, lawyers and other staff) and pro- cesses (information systems and procedures) that produce each type of service.

Table 3.2 Competitive factors and performance objectives for the legal firm

Service category Routine services Specialist services

Examples Property purchase Company merger deals

Debt collection Company restructuring

Order winner Price Quality of service

Speed Range of skills

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CHAPTER 3 OPERATIONS STRATEGY 87

The product/service life cycle influence on performance objectives One way of generalizing the behaviour of both customers and competitors is to link it to the life cycle of the products or services that the operation is producing. The exact form of product/service life cycles will vary, but generally they are shown as the sales volume passing through four stages: introduction, growth, maturity and decline. The implication of this for operations management is that products and services will require different operations strate- gies in each stage of their life cycle ( see Fig. 3.8 ).

Introduction stage When a product or service is first introduced, it is likely to be offering something new in terms of its design or performance, with few competitors offering the same product or service. The needs of customers are unlikely to be well understood, so operations management needs to develop the flexibility to cope with any changes and be able to give the quality to maintain product/service performance.

Service category Routine services Specialist services

Qualifi ers Quality (conformance) Dependability

Speed

Less important Customization Price

Operations partners Cost Quality of relationship

should stress Speed Legal skills

Quality Flexibility

Figure 3.8 The effects of the product/service life cycle on operations performance objectives

Dominant operations performance objectives

Likely qualifiers

Likely order winners

Competitors

Customers

Flexibility Quality

Quality Range

Product/service specification

Few/none

Innovators

Speed Dependability Quality

Price Range

Availability

Increasing numbers

Early adopters

Cost Dependability

Range Quality

Low price Dependable supply

Stable numbers

Bulk of market

Cost

Dependable supply

Low price

Declining number

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88 PART ONE DIRECTING THE OPERATION

Growth stage As volume grows, competitors may enter the growing market. Keeping up with demand could prove to be the main operations preoccupation. Rapid and dependable response to demand will help to keep demand buoyant, while quality levels must ensure that the company keeps its share of the market as competition starts to increase.

Maturity stage Demand starts to level off. Some early competitors may have left the market and the industry will probably be dominated by a few larger companies. So operations will be expected to get the costs down in order to maintain profits or to allow price cutting, or both. Because of this, cost and productivity issues, together with dependable supply, are likely to be the operation’s main concerns.

Decline stage After time, sales will decline with more competitors dropping out of the market. There might be a residual market, but unless a shortage of capacity develops, the market will continue to be dominated by price competition. Operations objectives continue to be dominated by cost.

The operations resources perspective The fourth and final perspective we will take on operations strategy is based on a particularly influential theory of business strategy – the resource-based view (RBV) of the firm. 7 Put sim- ply, the RBV holds that firms with an ‘above-average’ strategic performance are likely to have gained their sustainable competitive advantage because of the core competences (or capa- bilities) of their resources. This means that the way an organization inherits, or acquires, or develops its operations resources will, over the long term, have a significant impact on its stra- tegic success. Furthermore, the impact of its ‘operations resource’ capabilities will be at least as great, if not greater, than that which it gets from its market position. So understanding and developing the capabilities of operations resources, although often neglected, is a particularly important perspective on operations strategy.

Resource constraints and capabilities No organization can merely choose which part of the market it wants to be in without con- sidering its ability to produce services and products in a way that will satisfy that market. In other words, the constraints imposed by its operations must be taken into account. For example, a small translation company offers general translation services to a wide range of customers who wish documents such as sales brochures to be translated into another lan- guage. A small company, it operates an informal network of part-time translators who enable the company to offer translation into or from most of the major languages in the world. Some of the company’s largest customers want to purchase their sales brochures on a ‘one-stop shop’ basis and have asked the translation company whether it is willing to offer a full service, organizing the design and production, as well as the translation, of export brochures. This is a very profitable market opportunity, but the company does not have the resources, financial or physical, to take it up. From a market perspective, it is good business; from an operations resource perspective, it is not feasible.

However, the operations resource perspective is not always so negative. This perspective may identify constraints to satisfying some markets but it can also identify capabilities which can be exploited in other markets. For example, the same translation company has recently employed two new translators who have translation software skills, so now the company can offer a new ‘fast-response’ service which has been designed specifically to exploit the capabili- ties within the operations resources. Here the company has chosen to be driven by its resource capabilities rather than the obvious market opportunities.

✽ Operations principle Operations strategy objectives will change depending on the stage of the business’s services and products.

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CHAPTER 3 OPERATIONS STRATEGY 89

OPERATIONS IN ACTION

As a publicly stated ambitious target it takes some beat- ing: ‘ Amazon.com strives to be ’, it says, ‘ Earth’s most customer-centric company .’ Founded by Jeff Bezos in 1995, the Amazon.com website started as a place to buy books, giving its customers what at the time was a unique cus- tomer experience. Bezos believed that only the Internet could offer customers the convenience of browsing a selection of millions of book titles in a single sitting. During its first 30 days of business, Amazon.com fulfilled orders for customers in 45 countries – all shipped from Bezos’s Seattle-area garage. And that initial success has been fol- lowed by continued growth that is based on a clear strategy of technological innovation. Among its many technological innovations for customers, Amazon.com offers a personal- ized shopping experience for each customer, book discov- ery through ‘Search Inside The Book’, convenient checkout using ‘1-Click ® Shopping’, and community features like Listmania and Wish Lists that help customers discover new products and make informed buying decisions. In addition Amazon operates retail websites and offers programs that enable other retailers and individual sellers to sell products on their websites. It may not be glamorous, but Amazon has focused on what have been called ‘the dull-but-difficult tasks’ such as tracking products, managing suppliers, stor- ing inventory and delivering boxes. Fulfilment By Amazon allows other companies to use Amazon’s logistics capabil- ity including the handling of returned items, and access to Amazon’s ‘back-end’ technology.

Amazon Web Services, its cloud computing busi- ness, provides the computing power for small and larger high-profile customers such as Spotify’s digital music ser- vice, and Netflix’s video streaming service. But, why should any business want to allow Amazon to have such control over its activities? Mainly because it allows entrepreneurs to create start-ups and established companies to expand their activities without the huge investment they would need to build appropriate infrastructure themselves. Amazon’s large and efficient operations are also better value that smaller companies could achieve. Now, many prominent retailers work with Amazon Services to power their e-commerce offerings from end to end, including technology services, merchandizing, customer service, and order fulfilment. Offering business-to-business ser- vices is also good for Amazon. The problem with online retailing, said Bezos, is its seasonality. At peak times, such as Christmas, Amazon has far more computing capac- ity than it needs for the rest of the year. At low points it may be using as little as 10 per cent of its total capacity. Hiring out that spare capacity is an obvious way to bring in extra revenue. Its EC2 (Elastic Compute Cloud) service provides resizable computing capacity ‘in the cloud’. It is designed, says Amazon, to make web-scale computing easier for developers: ‘ Amazon EC2’s simple web service interface allows you to obtain and configure capacity with minimal friction. It provides you with complete control of your computing resources and lets you run on Amazon’s

Amazon

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90 PART ONE DIRECTING THE OPERATION

proven computing environment. Amazon EC2 reduces the time required to obtain and boot new server instances to minutes, allowing you to quickly scale capacity, both up and down, as your computing requirements change. Amazon EC2 changes the economics of computing by allowing you to pay only for capacity that you actually use. Amazon EC2 provides developers the tools to build failure resilient appli- cations and isolate themselves from common failure scenar- ios. ’ Do not worry if you cannot follow the technicalities of Amazon’s statement, it is aimed at IT professionals. The important point is that it is a business-to-business service

based on the company’s core competence of leveraging its processes and technology that can make retail operations ultra- efficient. However, some observers immediately crit- icized Amazon’s apparent redefinition of its strategy. ‘ Why not ’, they said, ‘ stick to what you know, focus on your core competence of internet retailing? ’ Bezos’s response was clear: ‘ We are sticking to our core competence. The only thing that’s changed is that we are exposing it for (the benefit of) others .’ At least for Jeff Bezos, Amazon is not so much an Internet retailer as a provider of Internet-based technol- ogy and logistics services.

Intangible resources An operations resource perspective must start with an understanding of the resource capabil- ities and constraints within the operation. It must answer the simple questions: what do we have, and what can we do? An obvious starting point here is to examine the transforming and transformed resource inputs to the operation. These, after all, are the ‘building blocks’ of the operation. However, merely listing the type of resources an operation has does not give a com- plete picture of what it can do. Trying to understand an operation by listing its resources alone is like trying to understand an automobile by listing its component parts. To describe it more fully, we need to describe how the component parts form the internal mechanisms of the motor car. Within the operation, the equivalent of these mechanisms is its processes . Yet, even for an automobile, a technical explanation of its mechanisms still does not convey everything about its style or ‘personality’. Something more is needed to describe these. In the same way, an operation is not just the sum of its processes. In addition, the operation has some intan- gible resources. An operation’s intangible resources include such things as its relationship with suppliers, the reputation it has with its customers, its knowledge of its process technol- ogies and the way its staff can work together in new product and service development. These intangible resources may not always be obvious within the operation, but they are important and have real value. It is these intangible resources, as well as its tangible resources, that an operation needs to deploy in order to satisfy its markets. The central issue for operations management, therefore, is to ensure that its pattern of strategic decisions really does develop appropriate capabilities within its resources and processes.

Strategic resources and sustainable competitive advantage The ‘resource-based’ explanation of why some companies manage to gain sustainable com- petitive advantage is that they have accumulated better or more appropriate resources. Put simply, ‘above-average’ competitive performance is more likely to be the result of the core capabilities (or competences) inherent in a firm’s resources than its competitive positioning in its industry. And resources can have a particularly influential impact on strategic success if they exhibit some or all of the following properties: 8

● They are scarce – Unequal access to resources so that not all competing firms have scarce resources such as an ideal location, experienced engineers, proprietary software, etc., can strengthen competitive advantage. So, for example, if a firm did not have the good fore- sight (or luck) to acquire a strategic resource (such as a supply contract with a specialist supplier) when it was inexpensive, it will have to try and acquire it after it has become expensive (because other firms are also now wanting it).

● They are not very mobile – Some resources are difficult to move out of a firm. For exam- ple, if a new process is developed in a company’s Stockholm site and is based on the knowl- edge and experience of the Stockholm staff, the process will be difficult (although not totally impossible) to sell to another company based elsewhere in Europe (or even Sweden

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CHAPTER 3 OPERATIONS STRATEGY 91

if the staff do not want to move). As a result, the advantages that derive from the processes resources are more likely to be retained over time.

● They are difficult to imitate or substitute for – These two factors help define how eas- ily a resource-based advantage can be sustained over time. It is not enough only to have resources which are unique and immobile. If a competitor can copy these resources or, less predictably, replace them with alternative resources, then their value will quickly deteriorate. However, the less tangible are the resources and the more connected with the tacit knowledge embedded within the organization, the more diffi- cult they are for competitors to understand and to copy.

Structural and infrastructural decisions A distinction is often drawn between the strategic decisions which determine an operation’s structure and those which determine its infrastructure. An operation’s structural decisions are those which we have classed as primarily influencing design activities, while infrastructural decisions are those which influence the workforce organization and the planning and control, and improvement activities. This distinction in operations strategy has been compared with that between ‘hardware’ and ‘software’ in computer systems. The hardware of a computer sets limits to what it can do. In a similar way, investing in advanced technology and building more or better facilities can raise the potential of any type of operation. Within the limits which are imposed by the hardware of a computer, the software governs how effective the computer actually is in practice. The most powerful computer can only work to its full potential if its software is capable of exploiting its potential. The same principle applies with operations. The best and most costly facilities and technology will only be effective if the operation also has an appropriate infrastructure which governs the way it will work on a day-to-day basis. Figure 3.9 illustrates some typical structural and infrastructural decisions.

✽ Operations principle The long-term objective of operations strategy is to build operations-based capabilities.

Figure 3.9 Some typical structural and infrastructural operations strategy decisions

Typical structural decisions… Typical infrastructural decisions…

Which products or services should be developed?

What activities should be done internally, and what should be outsourced?

How many suppliers should we have?

How many sites should we have?

Where should sites be located?

What types of process technology should the operation be using?

What should be the capacity of each site?

How should the operations function be organized?

What skills should be developed in the operation’s sta�?

How should demand be forecast and monitored?

How should the operation adjust its activity levels in response to demand?

How should it develop supplier relationships?

How should the improvement process be managed?

How should performance be measured?

How should the operation allocate resources?

‘Structure’ – the ‘hardware’ of the operation

‘Infrastructure’ – the ‘software’ of the operation

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92 PART ONE DIRECTING THE OPERATION

OPERATIONS IN PRACTICE

Earlier in this chapter we looked at Apple’s retail opera- tions strategy. Here we move on to how Apple supplies those, and other, retail outlets.

Behind the impressive corporate facade of Apple’s Silicon Valley headquarters there are no factories churn- ing out the millions of products that Apple sells every year. Apple, like most of its competitors, outsources its production to supplier operations around the world, mainly in the manufacturing powerhouses of South-East Asia. So does this mean that Apple’s operations strategy is also outsourced along with its manufacturing? Not at all. What it does mean is that operations strategy for Apple is concerned with ‘supply’. In other words, making sure that current products are always supplied fast enough to meet demand and new products always meet their launch dates. Over the years Apple has put together a remarkable supply network that is recognized as one of the most efficient in the world and, what is more impor- tant, gives them significant competitive advantage. The company’s (outsourced) manufacturing, purchasing and supply logistics give it the ability to accomplish substan- tial new product launches without having to build up huge and expensive pre-launch stocks. In the words of Tim Cook, who developed Apple’s operations strategy, ‘ nobody wants to buy sour milk .

The way that Apple beats its competitors is to use its cash to secure exclusive deals on new component tech- nologies (touchscreens, chips, LED displays, etc.). When

a new component first comes out, it is usually very expensive to produce, and constructing a factory that can produce it in high volume is even more expensive. Combine this with the relatively small profit margin of many components and it becomes difficult for suppliers to make enough profit to guarantee that they can make an acceptable return on their investment. But, thanks to its successful stream of products, Apple can afford to pay for some or all of a supplier’s construction cost of the new factory. In exchange the supplier gives exclusive rights to Apple for the new component over an agreed period. This has two advantages for Apple. First, it gives Apple access to new component technology months (or even years) before its rivals, allowing it to launch radi- cal new products that are literally impossible for com- petitors to duplicate. Second, even when the exclusive agreement expires, Apple will often have negotiated a discounted price. So it can source the component at a lower cost from the supplier that is now the most expe- rienced and skilled provider of those parts.

In summary, according to Marty Lariviere of Stanford University, ‘[Apple’s operations strategy is to] bet big on technology that lets them have distinctive products. With their limited product line and high volume, they can make commitments that other tech firms may shy away from. It also means that (if they are right) other firms are going to be hard pressed to catch up if Apple has locked up a large amount of supplier capacity. ’

Apple’s supply operations strategy 9

HOW CAN OPERATIONS STRATEGY FORM THE BASIS FOR OPERATIONS IMPROVEMENT?

An operations strategy is not just about checking that a business’s resources and processes are consistent with its overall strategy. As our earlier discussion of operations capabilities implied, it also can provide the foundation for improvement. And the objective of improvement is obvi- ous – it tries to make things better! But how much better does better mean? And does this mean better in every way or better in some specific manner? This is why, in this section, we look at two models that use the market requirements and operations capabilities perspectives that we discussed earlier, to help answer these questions. First we examine the concept of the ‘line of fit’, then the ‘importance–performance matrix’.

The ‘line of fit’ between market requirements and operations capabilities At a strategic level, the whole purpose of operations improvement is to make operations per- formance better at serving its markets. In other words, there should be a fit between what an operation is trying to achieve in its markets (market requirements) and what it is good at doing (operations capabilities). Figure 3.10 (a) illustrates this idea by showing diagrammatically

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CHAPTER 3 OPERATIONS STRATEGY 93

the approximate alignment or ‘fit’ between an operation’s performance and the requirements of its markets. The vertical dimension represents the level of market requirements that reflect the intrinsic needs of customers or their expectations. Moving along this dimension indicates a broadly enhanced level of market performance. The horizontal scale represents the level of the organization’s operations capabilities. This includes such things as its ability to achieve its competitive objectives and the effectiveness with which it uses its resources. Moving along the dimension indicates a broadly enhanced level of operations capabilities and therefore operations performance. Be careful, however, in using this diagrammatic representation. It is a conceptual model rather than a practical tool. It is intended merely to illustrate some ideas around the concept of strategic improvement. In terms of the framework illustrated in Figure 3.10 (a), improvement means three things:

1 Achieving ‘alignment’ – This means achieving an approximate balance between ‘required market performance’ and ‘actual operations performance’. The diagonal line in Figure 3.10 (a) therefore represents a line of fit with market requirements and operations capabilities in balance.

2 Achieving ‘sustainable’ alignment – It is not enough to achieve some degree of align- ment to a single point in time. Equally important is whether operations processes could adapt to the new market conditions.

3 Improving overall performance – If the requirements placed on the organization by its mar- kets are relatively undemanding, then the corresponding level of operations capabilities will not need to be particularly high. The more demanding the level of market requirements, the greater will have to be the level of operations capabilities. But most firms would see their over- all strategic objectives as achieving alignment at a level that implies some degree of long-term competitive success. In Figure 3.10 (a) point A represents alignment at a low level, while point B represents alignment at a higher level. The assumption in most firms’ operations strategies is that point B is a more desirable position than point A because it is more likely to represent a financially successful position. High levels of market performance, achieved as a result of high levels of operations performance, being generally more difficult for competitors to match.

Figure 3.10 An operations improvement should achieve ‘fit’ between market requirements and operations performance, but deviation from the line of ‘fit’ between market requirements and operations performance can expose the operation to risk

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✽ Operations principle Operations strategy should aim for alignment or ‘fit’ between an operation’s performance and the requirements of its markets.

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94 PART ONE DIRECTING THE OPERATION

Deviating from the line of fit During the improvement path (red dashed arrow) from A to B in Figure 3.10 (a) it may not be possible to maintain the balance between market requirements and operations perfor- mance. Sometimes the market may expect something that the operation cannot (temporarily) deliver. Sometimes operations may have capabilities that cannot be exploited in the market. At a strategic level, there are risks deriving from any deviation from the ‘line of fit’. For exam- ple, delays in the improvement to a new website could mean that customers do not receive the level of service they were promised. This is shown as position X in Figure 3.10 (b). Under these circumstances, the risk to the organization is that its reputation (or brand) will suffer because market expectations exceed the operation’s capability to perform at the appropriate level. At other times, the operation may make improvements before they can be fully exploited in the market. For example, the same online retailer may have improved its website so that it can offer extra services, such as the ability to customize products, before those products have been stocked in its distribution centre. This means that, although an improvement to its ordering processes has been made, problems elsewhere in the company prevent the improve- ment from giving value to the company. This is represented by point Y in Figure 3.10 (b). In both instances, improvement activity needs to move the operation back to the line of fit.

A strategic view of operations improvement priorities The idea of the line of fit is conceptually useful, but, as we mentioned earlier, not a practical tool. Yet one can use the idea of comparing market and operations perspectives to provide more direct guidance to operations managers. To do this we need to think about both market requirements and operations capabilities at a more focused and disaggregated level. So, rather than ask generally, ‘what are the market requirements for our products and/or ser- vices?’ one asks, ‘how important are the competitive factors that characterise a product or service?’ The intention is to gain an understanding of the relative importance to customers of the various competitive factors. For example, do customers for a particular product or service prefer low prices to a wide range? The needs and preferences of customers shape the impor- tance of operations objectives within the operation. Similarly, rather than ask generally, ‘what are our operations capabilities?’ one asks, ‘how good is our operation at providing the required level of performance in each of the competitive objectives?’ But how good is our performance against what criteria? Strategically the most revealing point of comparison is with competi- tors. Competitors are the points of comparison against which the operation can judge its per- formance. From a competitive viewpoint, as operations improve their performance, the improvement which matters most is that which takes the operation past the performance lev- els achieved by its competitors. The role of competitors then is in determining achieved per- formance . (In a not-for-profit context, ‘other similar operations’ can be substituted for ‘competitors’.)

Both importance and performance have to be brought together before any judgement can be made as to the relative priorities for improvement. Just because something is particularly

important to its customers does not mean that an operation should necessarily give it immediate priority for improvement. It may be that the operation is already considerably better than its competitors at serving customers in this respect. Similarly, just because an operation is not very good at something when compared with its competitors’ performance, it does not necessarily mean that it should be immedi- ately improved. Customers may not particularly value this aspect of

performance. Both importance and performance need to be viewed together to judge the pri- oritization of objectives:

● Judging importance to customers – Earlier we introduced the idea of order-winning, qualifying and less important competitive factors, and one could take these three catego- ries as an indication of the relative importance of each performance factor. But usually one

✽ Operations principle Improvement priorities are determined by importance for customers and performance against competitors or similar operations.

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CHAPTER 3 OPERATIONS STRATEGY 95

needs to use a slightly more discriminating scale. One way to do this is to take our three broad categories of competitive factors – order winning, qualifying and less important – and divide each category into three further points representing strong, medium and weak positions. Figure 3.11(a) illustrates such a scale.

● Judging performance against competitors – At its simplest, a competitive performance standard would consist merely of judging whether the achieved performance of an oper- ation is better than, the same or worse than that of its competitors. However, in much the same way as the nine-point importance scale was derived, we can derive a more discrimi- nating nine-point performance scale, as shown in Figure 3.11(b).

The priority for improvement that each competitive factor should be given can be assessed from a comparison of their importance and performance. This can be shown on an importance– performance matrix that, as its name implies, positions each competitive factor according to its scores or ratings on these criteria. Figure 3.12 shows an importance–performance matrix divided into zones of improvement priority. The first zone boundary is the ‘lower bound of acceptability’ shown as line AB in the figure. This is the boundary between acceptable and unacceptable performance. When a competitive factor is rated as relatively unimportant (8 or 9 on the importance scale), this boundary will in practice be low. Most operations are prepared to tolerate performance levels which are ‘in the same ball-park’ as their competitors (even at the bottom end of the rating) for unimportant competitive factors. They only become concerned when performance levels are clearly below those of their competitors. Conversely, when judging competitive factors that are rated highly (1 or 2 on the importance scale) they will be markedly less sanguine at poor or mediocre levels of performance. Minimum levels of acceptability for these competitive factors will usually be at the lower end of the ‘better than competitors’ class. Below this minimum bound of acceptability (AB) there is clearly a need for improvement; above this line there is no immediate urgency for any improvement. However, not all competitive factors falling below the minimum line will be seen as having

Figure 3.11 Nine-point scales for judging importance and performance; the importance–performance matrix

(a) Importance scale for competitive factors

Rating Description

1 Provides a crucial advantage tocustomers High

Low

2 Provides an important advantage tocustomers

3 Provides a useful advantage tocustomers

4 Needs to be up to good industrystandard

5 Needs to be up to median industrystandard

6 Needs to be within close range ofrest of industry

7 Not usually important but couldbecome so

8 Very rarely considered by customers

9 Never considered by customers

(b) Performance scale for competitive factors

Rating Description

1 Considerably better than similarorganizations Good

Poor

2 Clearly better than similarorganizations

3 Marginally better than similarorganizations

4 Sometimes marginally better thansimilar organizations

5 About the same as similarorganizations

6 Slightly worse than the average ofsimilar organizations

7 Usually marginally worse than similarorganizations

8 Generally worse than most similarorganizations

9 Consistently worse than most similarorganizations

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96 PART ONE DIRECTING THE OPERATION

the same degree of improvement priority. A boundary approximately represented by line CD represents a distinction between an urgent priority zone and a less urgent improvement zone. Similarly, above the line AB, not all competitive factors are regarded as having the same prior- ity. The line EF can be seen as the approximate boundary between performance levels which are regarded as ‘good’ or ‘appropriate’ on the one hand and those regarded as ‘too good’ or ‘excess’ on the other. Segregating the matrix in this way results in four zones which imply very different priorities:

● The ‘appropriate’ zone – Competitive factors in this area lie above the lower bound of acceptability and so should be considered satisfactory.

● The ‘improve’ zone – Lying below the lower bound of acceptability, any factors in this zone must be candidates for improvement.

● The ‘urgent-action’ zone – These factors are important to customers but performance is below that of competitors. The factors must be considered as candidates for immediate improvement.

● The ‘excess?’ zone – Factors in this area are ‘high performing’, but not important to cus- tomers. The question must be asked, therefore, whether the resources devoted to achiev- ing such a performance could be used better elsewhere.

Figure 3.12 Priority zones in the importance–performance matrix

Worked example

EXL Laboratories is a subsidiary of an electronics company. It carries out research and devel- opment as well as technical problem-solving work for a wide range of companies, includ- ing companies in its own group. It is particularly keen to improve the level of service which it gives to its customers. However, it needs to decide which aspect of its performance to improve first. It has devised a list of the most important aspects of its service:

● The quality of its technical solutions – the perceived appropriateness by customers. ● The quality of its communications with customers – the frequency and usefulness of

information.

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CHAPTER 3 OPERATIONS STRATEGY 97

● The quality of post-project documentation – the usefulness of the documentation which goes with the final report.

● Delivery speed – the time between customer request and the delivery of the final report. ● Delivery dependability – the ability to deliver on the promised date. ● Delivery flexibility – the ability to deliver the report on a revised date. ● Specification flexibility – the ability to change the nature of the investigation. ● Price – the total charge to the customer.

EXL assigns a score to each of these factors using the 1–9 scale described in Figure 3.12 . After which EXL turned its attention to judging the laboratory’s performance against compet- itor organizations. Although EXL has benchmarked information for some aspects of perfor- mance, it has to make estimates for the others. Both these scores are shown in Figure 3.13 .

EXL Laboratories plotted the importance and performance ratings it had given to each of its competitive factors on an importance–performance matrix. This is shown in Figure 3.14 . It shows that the most important aspect of competitiveness – the ability to deliver sound tech- nical solutions to its customers – falls comfortably within the appropriate zone. Specification flexibility and delivery flexibility are also in the appropriate zone, although only just. Both delivery speed and delivery dependability seem to be in need of improvement as each is below the minimum level of acceptability for their respective importance positions. However, two competitive factors, communications and cost/price, are clearly in need of immediate improvement. These two factors should therefore be assigned the most urgent priority for

Figure 3.13 Rating ‘importance to customers’ and ‘performance against competitors’ on the nine-point scales for EXL Laboratories

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98 PART ONE DIRECTING THE OPERATION

improvement. The matrix also indicates that the company’s documentation could almost be regarded as ‘too good’.

The matrix may not reveal any total surprises. The competitive factors in the ‘urgent- action’ zone may be known to be in need of improvement already. However, the exercise is useful for two reasons:

● It helps to discriminate between many factors which may be in need of improvement. ● It gives purpose and structure to the debate on improvement priorities.

Figure 3.14 The importance–performance matrix for EXL Laboratories

HOW CAN AN OPERATIONS STRATEGY BE PUT TOGETHER? THE PROCESS OF OPERATIONS STRATEGY

What is called the ‘process’ of strategy is concerned with ‘how’ strategies are put together. So the ‘process of operations strategy’ means the method that is used to determine what an operations strategy should be. It is not a simple task. Putting an operations strategy together and making it happen in practice is a complex and difficult thing to achieve. Even the most

sophisticated organizations would probably admit that they do not always get it right. And although any simple step-by-step model of how to ‘do’ operations strategy will inevitably be a simplification of a messy reality, we will use a four-stage model to illustrate some of the elements of ‘process’. This stage model is shown in Figure 3.15 . It divides the process of operations strategy into formulation, imple-

mentation, monitoring and control. 10 These four stages are shown in Figure 3.15 as a cycle. This is because, in practice, strategies may be revisited depending on the experience gained from trying to make them happen.

✽ Operations principle The process of operations strategy involves formulation, implementation, monitoring and control.

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Operations strategy formulation The formulation of operations strategy is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. Unlike day-to-day oper- ations management, formulating an operations strategy is likely to be only an occasional activity. Some firms will have a regular (for example, annual) planning cycle and operations strategy consideration may form part of this, but the extent of any changes made in each annual cycle is likely to be limited. In other words, the ‘complete’ process of formulating an entirely new operations strategy will be a relatively infrequent event. There are many ‘formu- lation processes’ which are, or can be, used to formulate operations strategies. Most consul- tancy companies have developed their own frameworks, as have several academics.

What should the formulation process be trying to achieve? Before putting an operations strategy together, it is necessary to ask the question ‘what should it be trying to achieve?’ Clearly, it should provide a set of actions that, with hindsight, have provided the ‘best’ outcome for the organization. But that really does not help us. What do we mean by ‘the best’, and what good is a judgement that can only be applied in hindsight? Yet, even if we cannot assess the ‘goodness’ of a strategy for certain in advance, we can check it out for some attributes that could stop it being a success, as follows:

● Is operations strategy comprehensive? In other words, does it include all important issues? Business history is littered with companies that simply failed to notice the poten- tial impact of, for instance, new process technology, or emerging changes in their supply network.

● Is operations strategy coherent? As a strategy evolves over time, tensions can emerge that threaten to pull the overall strategy in different directions. This can result in a loss of coherence. Coherence is when the choices made in each decision area all direct the operation in the same strategic direction, with all strategic decisions complementing and reinforcing each other in the promotion of performance objectives. For example, if new Internet-based remote diagnostic technology for heating systems is introduced which allows service engineers to customize their service advice to individual clients’ needs, it would be ‘incoherent’ not to devise a new operating process which did not enable service staff to exploit the technology’s potential, for example by emailing customers with service options before the service engineer visits.

● Does operations strategy have correspondence? The decisions pursued in each part of the strategy should correspond to the true priority of each performance objective. So, for example, if cost reduction is the main objective for an operation then its process tech- nology investment decisions might err towards the purchase of ‘off-the-shelf’ (as opposed

Figure 3.15 The stages of the process of operations strategy

Operations strategy formulation

Operations strategy implementation

Operations strategy control

Operations strategy monitoring

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to customized) equipment which would reduce the capital cost of the technology and may also imply lower maintenance and running costs. However, it is unlikely to be as flexible. Implicitly the strategy is accepting that cost is more important than flexibility. So, we would expect all other decisions to correspond with the same prioritization of objectives, for example: capacity strategies that exploit natural economies of scale; supply network strategies that reduce purchasing

costs; performance measurement systems that stress efficiency and productivity; continu- ous improvement strategies that emphasize continual cost reduction; and so on.

● Does operations strategy identify critical issues? The more critical the decision, the more attention it deserves. Although no strategic decision is unimportant, in practical terms some decisions are more critical than others. The judgement over exactly what decisions are par- ticularly critical is very much a pragmatic one which must be based on the particular cir- cumstances of an individual firm’s operations strategy. But they must be identified.

✽ Operations principle Operations strategies should be comprehensive, coherent, correspond to stated objectives and identify the critical issues.

OPERATIONS IN PRACTICE

Only a few years ago Nokia was the king of the mobile phone business – and it was a good business to be in, with double-digit growth year on year. Nokia was omni- present and all-powerful, a pioneer that had supplied the first mass wave of the expanding mobile phone indus- try. Nokia dominated the market in many parts of the world and the easily recognizable Nokia ring-tone ech- oed everywhere from boardrooms to shopping malls. So why did this, once-dominant, company eventually sink to the point where it was forced to sell its mobile com- munications business to Microsoft in 2013? The former Nokia CEO, Jormal Ollila, admitted that Nokia made sev- eral mistakes, but the exact nature of those mistakes is a point of debate among business commentators. Julian Birkinshaw, a professor at London Business School, dis- misses some of the most commonly cited reasons. Did Nokia lose touch with its customers? Well, yes, but by definition that must hold for any company whose sales drop so drastically in the face of thriving competitors. Did it fail to develop the necessary technologies? No. Nokia had a prototype touchscreen before the iPhone was launched, and its smartphones were technologi- cally superior to anything Apple, Samsung or Google had to offer for many years. Did it not recognize that the basis of competition was shifting from the hardware to the ecosystem? (A technology ecosystem in this case is a term used to describe the complex system of inter- dependent components that work together to enable mobile technology to operate successfully.) Not really. The ‘ecosystem’ battle began in the early 2000s, with Nokia joining forces with Ericsson, Motorola and Psion to create Symbian as a platform technology that would keep Microsoft at bay.

Where Nokia struggled was in relying on an opera- tions strategy that failed to allocate resources appro- priately and could not implement the changes that were necessary. As far as resource allocation was concerned, Nokia saw itself primarily as a hardware company rather than a software company. Its engi- neers were great at designing and producing hard- ware, but not the programs that drive the devices. They underestimated the importance of software (including, crucially, the apps that run on smart- phones). Largely it was hardware rather than software experts who controlled its development process. By contrast, Apple had always emphasized that hardware and software were equally important. Yet while it was losing its dominance, Nokia was well aware of most of the changes occurring in the mobile communica- tions market and the technology developments being actively pursued by competitors. Arguably, Nokia was

Nokia, a failure to change 11

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Operations strategy implementation Operations strategy implementation is the way that strategies are operationalized or exe- cuted. It means attempting to make sure that intended strategies are actually achieved. It is important because no matter how sophisticated the intellectual and analytical underpinnings of a strategy, it remains only a document until it has been implemented. But the way one implements any strategy will very much depend on the specific nature of the changes implied by that strategy and the organizational and environmental conditions that apply during its implementation. However, three issues are often mentioned by strategy practitioners as being important in achieving successful implementation:

● Clarity of strategic decisions – There is a strong relationship between the formulation stage and the implementation stage of operations strategy. The crucial attribute of the for- mulation stage is clarity. If a strategy is ambiguous it is difficult to translate strategic intent into specific actions. With clarity, however, it should be easier to define the intent behind the strategy, the few important issues that need to be developed to deliver the intent, the way that projects be led and resourced, who will be responsible for each task, and so on.

● Motivational leadership – Leadership that motivates, encourages and provides support is a huge advantage in dealing with the complexity of implementation. Leadership is needed to bring sense and meaning to strategic aspirations, maintain a sense of purpose over the implementation period, and, when necessary, modify the implementation plan in the light of experience.

● Project management – Implementation means breaking up a complex plan into a set of relatively distinct activities. Fortunately there is a well-understood collection of ideas of how to do this. It is called ‘project management’ and a whole chapter is devoted to this subject ( Chapter 19 ).

Operations strategy monitoring Especially in times when things are changing rapidly, as during strategic change, organiza- tions often want to track ongoing performance to make sure that the changes are proceeding as planned. Monitoring should be capable of providing early indications (or a ‘warning bell’ as some call it) by diagnosing data and triggering appropriate changes in how the operations strategy is being implemented. Having created a plan for the implementation, each part of it has to be monitored to ensure that planned activities are indeed happening. Any deviation from what should be happening (that is, its planned activities) can then be rectified through some kind of intervention in the operation.

Operations strategy control Strategic control involves the evaluation of the results from monitoring the implementation. Activities, plans and performance are assessed with the intention of correcting future action if that is required. In some ways this strategic view of control is similar to how it works opera- tionally (which is discussed in Chapter 10 ), but there are differences. At a strategic level, con- trol can be difficult because strategic objectives are not always clear and unambiguous. Ask

not short of awareness, but it did lack the capacity to convert awareness into action. ‘ The failure of big companies to adapt to changing circumstances is one of the fundamental puzzles in the world of business ’, says Professor Birkinshaw. Occasionally, a genuinely ‘ disruptive’ technology can wipe out an entire indus-

try. But usually the sources of failure are less dramatic. Often it is a failure to implement strategies or technol- ogies that have already been developed, an arrogant disregard for changing customer demands, or a com- placent attitude towards new competitors.

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any experienced managers; they will acknowledge that it is not always possible to articulate every aspect of a strategic decision in detail. Many strategies are just too complex for that. So, rather than adhering dogmatically to a predetermined plan, it may be better to adapt as cir- cumstances change. And the more uncertain the environment, the more an operation needs to emphasize this form of strategic flexibility and develop its ability to learn from events.

OPERATIONS IN PRACTICE

There is a famous story that illustrates the importance of having some kind of plan, even if hindsight proves it to be the wrong plan. During manoeuvres in the Alps, a detachment of Hungarian soldiers got lost. The weather was severe and the snow was deep. In these freezing conditions, after two days of wandering, the soldiers gave up hope and became reconciled to a frozen death on the mountains. Then, to their delight, one of the sol- diers discovered a map in his pocket. Much cheered by

this discovery, the soldiers were able to escape from the mountains. When they were safe back at their head- quarters, they discovered that the map was not of the Alps at all, but of the Pyrenees. What is the moral of the story? It is that a plan (or a map) may not be perfect but it gives a sense of purpose and a sense of direction. If the soldiers had waited for the right map they would have frozen to death. Yet their renewed confidence motivated them to get up and create opportunities.

Sometimes any plan is better than no plan 12

Critical commentary

The argument has been put forward that strategy does not lend itself to a simple ‘stage model’ analysis that guides managers in a step-by-step manner through to the eventual ‘answer’ that is a fi nal strategy. Therefore, the models put forward by consultants and academics are of very limited value. In reality, strategies (even those that are made deliberately, as opposed to those that simply ‘emerge’) are the result of very complex organizational forces. Even descriptive models such as the four-stage model described above in Figure 3.9 can do little more than sensitize managers to some of the key issues that they should be taking into account when devising strategies. In fact, they argue, it is the articulation of the ‘content’ of operation strategy that is more useful than adhering to some over-simplistic description of a strategy process.

● Strategy is the total pattern of decisions and actions that position the organization in its environment and that are intended to achieve its long-term goals.

● Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of the operation.

● Operations strategy has content and process. The content concerns the specifi c decisions which are taken to achieve specifi c objectives. The process is the procedure which is used within a business to formulate its strategy.

❯ What is strategy and what is operations strategy?

SUMMARY ANSWERS TO KEY QUESTIONS

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❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of opera- tions strategy?

● The ‘top-down’ perspective views strategic decisions at a number of levels. Corporate strat- egy sets the objectives for the different businesses which make up a group of businesses. Business strategy sets the objectives for each individual business and how it positions itself in its marketplace. Functional strategies set the objectives for each function’s contribution to its business strategy.

● The ‘bottom-up’ view of operations strategy sees overall strategy as emerging from day-to- day operational experience.

❯ How can an operations strategy be formulated? The process of operations strategy

● Putting an operations strategy together is called ‘the process’ of operations strategy.

● There are four stages in the process of operations strategy, which can be viewed as a cycle:

● Formulation – which is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. This should produce strategies that are comprehensive, coherent, provide correspondence and prioritize the most critical activities or decisions.

❯ How can operations strategy form the basis for operations improvement?

● An operations strategy can provide the foundation for improvement by achieving a fit between an operation’s market requirements and its operations capabilities.

● A ‘line of fit’ diagram can illustrate this. It is a conceptual model intended to illustrate some ideas around the concept of strategic improvement.

● During improvement it may not be possible to maintain a balance between market require- ments and operations performance. When markets expect something that the operation cannot deliver, or when operations have capabilities that cannot be exploited in the mar- ket, there are strategic risks deriving from the deviation from the ‘line of fit’.

● The importance–performance matrix positions competitive factors according to their importance and the operation’s success at achieving them to determine relative improve- ment priorities.

❯ What is the difference between a ‘market requirements’ and an ‘operations resources’ view of operations strategy?

● A ‘market requirements’ perspective of operations strategy sees the main role of operations as satisfying markets. Operations performance objectives and operations decisions should be primarily influenced by a combination of customers’ needs and competitors’ actions. Both of these may be summarized in terms of the product/service life cycle.

● The ‘operations resources’ perspective of operations strategy is based on the resource-based view (RBV) of the firm and sees the operation’s core competences (or capabilities) as being the main influence on operations strategy. Operations capabilities are developed partly through the strategic decisions taken by the operation. Strategic decision areas in operations are usually divided into structural and infrastructural decisions. Structural decisions are those which define an operation’s shape and form. Infrastructural decisions are those which influ- ence the systems and procedures that determine how the operation will work in practice.

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● Implementation – the way that strategy is operationalized or executed. Three issues are often mentioned by strategy practitioners as being important in achieving successful implementation: the clarity of the strategy, the nature of the leadership provided by top management, and effective project management.

● Monitoring – involves tracking ongoing performance and diagnosing data to make sure that the changes are proceeding as planned and providing early indications of any devi- ation from the plan.

● Control – involves the evaluation of the results from monitoring the implementation so that activities, plans and performance can be assessed with the intention of correcting future action if that is required.

CASE STUDY McDonald’s: half a century of growth 13

It is loved and it is hated. It is a shining example of how good-value food can be brought to a mass market. It is a symbol of everything that is wrong with ‘industrialized’, cap- italist, bland, high-calorie and environmentally unfriendly commercialism. It is the best-known and most loved fast food brand in the world with more than 36,000 restau- rants in 117 countries, providing jobs for 1.7 million staff and feeding 69 million customers per day (yes, per day!). It is part of the homogenization of individual national cul- tures, filling the world with bland, identical, ‘cookie cutter’, Americanized and soulless operations that dehumanize its staff by forcing them to follow ridged and over-defined procedures. But whether you see it as friend, foe, or a bit of both, McDonald’s has revolutionized the food industry, affecting the lives of both the people who produce food and the people who eat it. It has also had its ups (mainly) and downs (occasionally) as markets, customers and economic circumstances change. Yet, even in the toughest times it has always displayed remarkable resilience. What follows is a brief (for such a large corporation) summary of its history.

Starting small Central to the development of McDonald’s is Ray Kroc, who by 1954 and at the age of 52 had been variously a piano player, a paper cup salesman and a multi-mixer salesman. He was surprised by a big order for eight multi-mixers from a restaurant in San Bernardino, California. When he visited the customer he found a small but successful restaurant run by two brothers Dick and Mac McDonald. They had opened their ‘Bar-B-Que’ restaurant 14 years earlier, and by the time Ray Kroc visited the brothers’ oper- ation it had a self-service drive-in format with a limited

menu of nine items. He was amazed by the effectiveness of their operation. Focusing on a limited menu including burgers, fries and beverages had allowed them to analyse every step of the process of producing and serving their food. Ray Kroc was so impressed that he persuaded the brothers to adopt his vision of creating McDonald’s res- taurants all over the USA, the first of which opened in Des Plaines, Illinois, in June 1955. However, later, Kroc and the McDonald brothers quarrelled, and Kroc bought them out. Now with exclusive rights to the McDonald’s name, the restaurants spread, and in five years there were 200 restaurants through the USA. Yet through this, and later, expansions, Ray Kroc insisted on maintaining the same principles that he had seen in the original operation: ‘ If I had a brick for every time I’ve repeated the phrase Quality, Service, Cleanliness and Value, I think I’d probably be able to bridge the Atlantic Ocean with them .’

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Priority to the process Ray Kroc had been attracted by the cleanliness, simplic- ity, efficiency and profitability of the McDonald brothers’ operation. They had stripped fast food delivery down to its essence and eliminated needless effort to make a swift assembly line for a meal at reasonable prices. Kroc wanted to build a process that would become famous for food of consistently high quality using uniform meth- ods of preparation. His burgers, buns, fries and bever- ages should taste just the same in Alaska as they did in Alabama. The answer was the ‘Speedee Service System’, a standardised process that prescribed exact preparation methods, specially designed equipment and strict prod- uct specifications. The emphasis on process standardiza- tion meant that customers could be assured of identical levels of food and service quality every time they visited any store, anywhere. Operating procedures were specified in minute detail. The first operations manual prescribed rigorous cooking instructions such as temperatures, cook- ing times and portions. Similarly, operating procedures were defined to ensure the required customer experience, for example no food items were to be held more than 10 minutes in the transfer bin between being cooked and being served. Technology was also automated. Specially designed equipment helped to guarantee consistency using ‘fool-proof ’ devices. For example, the ketchup was dispensed through a metered pump. Specially designed ‘clam shell’ grills cooked both sides of each meat patty simultaneously for a pre-set time. And when it became clear that the metal tongs used by staff to fill French-fry containers were awkward to use efficiently, McDonald’s engineers devised a simple aluminium scoop that made the job faster and easier.

For Kroc, the operating process was both his passion and the company ’s central philosophy. It was also the foundation of learning and improvement. The company’s almost compulsive focus on process detail was not an end in itself. Rather it was to learn what contributed to con- sistent high-quality service in practice and what did not. McDonald’s always saw learning as important. It founded ‘Hamburger University ’, initially in the basement of a res- taurant in Elk Grove Village, Illinois. It had a research and development laboratory to develop new cooking, freez- ing, storing and serving methods. Also franchisees and operators were trained in the analytical techniques nec- essary to run a successful McDonald’s. It awarded degrees in ‘Hamburgerology ’. But learning was not just for head- quarters. The company also formed a ‘field service’ unit to appraise and help its restaurants by sending field service consultants to review their performance on a number of ‘dimensions’ including cleanliness, queuing, food quality and customer service. As Ray Kroc said, ‘We take the ham- burger business more seriously than anyone else. What sets McDonald’s apart is the passion that we and our suppliers share around producing and delivering the highest-qual- ity beef patties. Rigorous food safety and quality standards

and practices are in place and executed at the highest levels every day.’

No story illustrates the company’s philosophy of learn- ing and improvement better than its adoption of frozen fries. French-fried potatoes had always been important for McDonald’s. Initially, the company tried observing the tem- perature levels and cooking methods that produced the best fries. The problem was that the temperature during the cooking process was very much influenced by the temper- ature of the potatoes when they were placed in the cook- ing vat. So, unless the temperature of the potatoes before they were cooked was also controlled (not very practical) it was difficult to specify the exact time and temperature that would produce perfect fries. But McDonald’s researchers discovered that, irrespective of the temperature of the raw potatoes, fries were always at their best when the oil tem- perature in the cooking vat increased by 3 degrees above the low-temperature point after they were put in the vat. So by monitoring the temperature of the vat, perfect fries could be produced every time. But that was not the end of the story. The ideal potato for fries was the Idaho Russet, which was seasonal and not available in the summer months. At other times an alternative (inferior) potato was used. One grower, who, at the time, supplied a fifth of McDonald’s potatoes, suggested that he could put Idaho Russets into cold storage for supplying during the summer period. Unfortunately, all the stored potatoes rotted. Not to be beaten, he offered another suggestion. Why doesn’t McDonald’s consider switching to frozen potatoes? But the company was initially cautious about meddling with such an important menu item. However, there were other advantages in using frozen potatoes. Supplying fresh potatoes in perfect condition to McDonald’s rapidly expanding chain was increasingly dif- ficult. Frozen potatoes could actually increase the quality of the company’s fries if a method of satisfactorily cooking them could be found. Once again McDonald’s developers came to the rescue. They developed a method of air- drying the raw fries, quick frying, and then freezing them. The sup- plier, who was a relatively small and local suppler when he first suggested storing Idaho Russets, grew his business to supply around half of McDonald’s US business.

Throughout its rapid expansion McDonald’s focused on four areas: improving the product; establishing strong supplier relationships; creating (largely customized) equip- ment; and developing franchise holders. But also it was its strict control of the menu that provided a platform of stabil- ity. Although its competitors offered a relatively wide vari- ety of menu items, McDonald’s limited its to 10 items. As one of McDonald’s senior managers at the time stressed, ‘It wasn’t because we were smarter. The fact that we were selling just ten items [and] had a facility that was small, and used a limited number of suppliers created an ideal environment.’ Capacity growth (through additional stores) was also man- aged carefully. Well-utilized stores were important to fran- chise holders, so franchise opportunities were located only where they would not seriously undercut existing stores.

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of tartar sauce, a fish fillet, and cheese on the bottom bun. But Kroc wanted to push his own meatless sandwich, called the hula burge – a cold bun with a piece of pineap- ple and cheese. Groen and Kroc competed on a Lenten Friday to see whose sandwich would sell more. Kroc’s hula burger failed, selling only six sandwiches all day while Groen sold 350 Filet-o-Fish. Similarly, the Egg McMuffin was introduced by franchisee Herb Peterson, who wanted to attract customers into his McDonald’s stores all through the day, not just at lunch and dinner. He came up with the idea for the signature McDonald’s breakfast item because he was reputedly ‘very partial to eggs Benedict and wanted to create something similar’.

Other innovations came from the company itself. When poultry became popular, Fred Turner, then the Chairman of McDonald’s, had an idea for a new meal: a chicken finger-food without bones, about the size of a thumb. After six months of research, the food technicians and scientists managed to reconstitute shreds of white chicken meat into small portions that could be breaded, fried, frozen and then reheated. Test marketing of the new product was pos- itive, and in 1983 they were launched under the name of Chicken McNuggets. These were so successful that within a month McDonald’s became the second largest purchaser of chicken in the USA. Some innovations came as a reac- tion to market conditions. Criticized by nutritionists who worried about calorie-rich burgers and shareholders who were alarmed by flattening sales, McDonald’s launched its biggest menu revolution in 30 years in 2003 when it entered the prepared salad market. McDonald’s offered a choice of dressings for its grilled chicken salad with Caesar dressing (and croutons) or the lighter option of a drizzle of balsamic dressing. Likewise, moves towards coffee sales were prompted by the ever-growing trend set by big coffee shops like Starbucks.

Problematic periods Food, like almost everything else, is subject to swings in fashion. Its is not surprising then that there have been periods when McDonald’s has had to adapt. The period from the early 1990s to the mid-2000s was difficult for parts of the McDonald’s Empire. Growth in some parts of the world stalled. Partly this was due to changes in food fashion, nutritional concerns and demographic changes. Partly it was because competitors were learning either to emulate McDonald’s operating system, or to focus on one aspect of the traditional ‘quick service’ offering, such as speed of service, range of menu items, (perceived) quality of food, or price. Burger King promoted itself on its ‘flame- grilled’ quality. Wendy’s offered a fuller service level. Taco Bell undercut McDonald’s prices with its ‘value-pricing ’ promotions. Drive-through specialists speeded up service times. Also, ‘fast food’ was developing a poor reputation in some quarters, and as its iconic brand, McDonald’s was taking much of the heat. Similarly the company became a lightning rod for other questionable aspects of modern

Securing supply McDonald’s says that it has been the strength of the align- ment between the company, its franchisees and its suppli- ers (collectively referred to as the System) that has been the explanation for its success. But during the company’s early years suppliers proved problematic. McDonald’s approached the major food suppliers, such as Kraft and Heinz, but without much success. Large and established suppliers were reluctant to conform to McDonald’s requirements, preferring to focus on retail sales. It was the relatively small companies who were willing to risk supplying what seemed then to be a risky venture. And as McDonald’s grew, so did its suppliers, who also valued the company’s less adversarial relationship. One supplier is quoted as saying, ‘Other chains would walk away from you for half a cent. McDonald’s was more concerned with getting quality. McDonald’s always treated me with respect even when they became much bigger and didn’t have to.’ Furthermore, suppliers were always seen as a source if innovation. For example, one of McDonald’s meat sup- pliers, Keystone Foods, developed a novel quick- freezing process that captured the fresh taste and texture of beef patties. This meant that every patty could retain its con- sistent quality until it hit the grill. Keystone shared its technology with other McDonald’s meat suppliers for McDonald’s, and today the process is an industry standard. Yet, supplier relationships were also rigorously controlled. McDonald’s routinely analysed its suppliers’ products.

Fostering franchisees McDonald’s revenues consisted of sales by company- operated restaurants and fees from restaurants operated by franchisees. McDonald’s views itself primarily as a fran- chisor and believe franchising is ‘important to delivering great, locally-relevant customer experiences and driving profitability’. However, it also believes that directly operat- ing restaurants is essential to providing the company with real operations experience. Of the 36,000 restaurants in 117 countries, approximately 80 per cent were operated by franchisees. But where some restaurant chains concen- trated on recruiting franchisees that were then left to them- selves, McDonald’s expected its franchisees to contribute their experiences for the benefit of all. Ray Kroc’s original concept was that franchisees would make money before the company did, so he made sure that the revenues that went to McDonald’s came from the success of the restau- rants themselves rather from initial franchise fees.

Initiating innovation Ideas for new menu items have often come from fran- chisees. For example, Lou Groen, a Cincinnati franchise holder, had noticed that in Lent (a 40-day period when some Christians give up eating red meat on Fridays and instead eat only fish or no meat at all) some customers avoided the traditional hamburger. He went to Ray Kroc with his idea for a ‘Filet-o-Fish’, a steamed bun with a shot

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1 Explain how the four perspectives of operations strategy would apply to SSTL (see the ‘Operations in action’ case at the start of this chapter).

2 Compare the operations strategies of a low-cost airline, such as Ryanair, and a full-service airline such as British Airways or KLM.

3 What do you think are the qualifying and order-winning factors for (a) a top of the range Ferrari, and (b) a Renault Clio?

4 What do you think are the qualifying or order-winning factors for Pret A Manger described in Chapter 1 ?

5 Search the Internet site of Intel, the best-known microchip manufacturer, and identify what appear to be its main structural and infrastructural decisions in its operations strategy.

6 (Advanced) A gliding club has a current membership of over 100 pilots, many of whom have their own gliders. In addition the club has a fleet of six gliders available to its members. The club also offers trial flights to members of the public – ‘casual flyers’ who can book flights in advance or just turn up and fly on a first-come, first-served basis. The club sells trial flight gift vouchers that are popular as birthday and Christmas presents. If the conditions are right the customer may get a longer flight, although at busy times the instructors feel under pressure to return to the ground to give another lesson. If the weather is poor the instructors still do their best to get people airborne, but they are restricted to a short two-minute flight. Club members are expected to stay all day to help each other and any casual flyers get airborne

PROBLEMS AND APPLICATIONS

McDonald’s Chief Executive Officer, Steve Easterbrook, when he was head of the company’s UK operation, where he redesigned the outlets to make them more modern, introduced coffee and cappuccinos, worked with farmers to raise standards and increased transparency about its supply chain. At the same time he participated fully and forcefully with the company ’s critics in the debate over fast food health concerns. But some analysts believe that the ‘burger and fries’ market is in terminal decline, and the McDonalds’s brand is so closely associated with that mar- ket that further growth will be difficult.

QUESTIONS 1 How has competition to McDonald’s changed over its

existence?

2 What are the main operations performance objectives for McDonald’s?

3 What are the most important structural and infrastructural decisions in McDonald’s operations strategy, and how do they influence its main performance objectives?

life that it was held to promote, from cultural imperialism, low-skilled jobs (called ‘McJobs’ by some critics), abuse of animals and the use of hormone-enhanced beef, to an attack on traditional (French) values (in France). A French farmer called Jose Bové (who was briefly imprisoned) got other farmers to drive their tractors through, and wreck, a half-built McDonald’s.

Similarly, in 2015 McDonald’s closed more stores in its US home market than it opened – for the first time in its 60-year history. Partly this was a result of the increase in so-called ‘fast casual’ dining, a trend that combined the convenience of traditional McDonald’s-style service with food that was seen as more healthy, even if it was more expensive. Smaller rivals, such as Chipotle and Shake Shack, had started to take domestic market share.

Surviving strategies Over recent years the company ’s strategy has been to become ‘ better, not just bigger ’, focusing on ‘ restaurant execution ’, with the goal of ‘ improving the overall experi- ence for our customers ’. In particular it has, according to some analysts, ‘gone back to basics’, a strategy used by

CHAPTER 3 OPERATIONS STRATEGY 107

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while they wait their turn to fly. Casual flyers might have to stand and wait for some time until a club member has time to find out what they want. Even when a flight has been pre-booked casual flyers may then be kept waiting, on the exposed and often windy airfield, for up to two hours before their flight, depending on how many club members are present. Income from the casual flyers is small compared with membership income, but the club views casual flying as a ‘loss leader’ to generate club memberships. There is also some pressure from members to end trial flights because they reduce the number of flights members can have in a day. Some members have complained that they sometimes spend most of their day working to get casual flyers into the air and miss out on flying themselves. (a) Evaluate the service to club members and casual flyers by completing a table similar to

Table 3.1. (b) Chart the five performance objectives to show the differing expectations of club mem-

bers and casual flyers and compare these with the actual service delivered. (c) What advice would you give to the club?

SELECTED FURTHER READING

Boyer, K.K., Swink, M. and Rosenzweig, E.D. (2006) Operations strategy research in the POMS journal, Production and Operations Management, vol. 14, issue 4, 442–449.

A survey of recent research in the area.

Braithwaite, A. and Christopher, M. (2015) Business Operations Models: Becoming a Disruptive Competitor, Kogan Page, London.

Aimed at practitioners, but authoritative and interesting.

Hayes, R.H., Pisano, G.P., Upton, D.M. and Wheelwright, S.C. (2005) Pursuing the Competitive Edge, Wiley, Hoboken, NJ.

The gospel according to the Harvard school of operations strategy. Articulate, interesting and informative.

Hill, A. and Hill, T. (2009) Manufacturing Operations Strategy: Texts and Cases, Palgrave Macmillan, Basingstoke.

Biased towards manufacturing, but well structured and readable.

Slack, N. and Lewis, M. (2015) Operations Strategy, 4th edn, Pearson, Harlow.

What can we say – just brilliant, it will change your life!

108 PART ONE DIRECTING THE OPERATION

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IntrODUCtIOn new product and service innovation is concerned with putting new ideas into practice by embedding them in services and products. innovation is the act of introducing new ideas, design is about making those ideas practical. this is why the activity of product and service innovation and the activity of design are so closely linked. Both are important because products and services are often the first thing that customers see of a company. so they should have an impact. and although operations managers may not always have full responsibility for service and product innovation, they always have some kind of responsibility, if only to provide the information and advice upon which successful product or service development depends. But increasingly operations mangers are expected to take a greater and more active part in product and service innovation. unless a service, however well conceived, can be implemented, and unless a product, however well designed, can be produced to a high standard, they can never bring their full benefits. Figure 4.1 shows where this chapter fits into the overall operations model.

product and service innovation 4

Direct

Operations performance

The structure

and scope of operations

Operations strategy

Operations management

Product and service innovation

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Figure 4.1 this chapter examines product and service innovation

❯ What is product and service innovation?

❯ What is the strategic role of product and service innovation?

❯ What are the stages of product and service innovation?

❯ What are the benefits of interactive product and service innovation?

Key questions

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110 PART ONE DIRECTING THE OPERATION

WHAT IS PRODUCT AND SERVICE INNOVATION?

There are a number of terms that we will use in this chapter that have similar meanings, and are defined by different authorities in different ways, or overlap to some extent, and yet are related to each other. For example, what is ‘innovation’? Is it the same as ‘creativity’? How does ‘design’ relate to both terms? So a sensible first step might be to establish how we will be using these terms.

Innovation, design and creativity Given that this chapter is about product and service innovation, we will start with what exactly we mean by ‘innovation’. In fact there are many definitions. The term is notoriously ambiguous and lacks either a single definition or measure. It is ‘ a new method, idea, product, etc. ’ ( Oxford English Dictionary ), ‘ change that creates a new dimension of performance ’ (Peter Drucker, a well-known management writer), ‘ the act of introducing something new ’ ( American Heritage Dictionary ), ‘ a new idea, method or device ’ (Webster Online Dictionary), ‘ new knowledge incor- porated in products, processes and services ’. 1 What runs through all these definitions is the idea of novelty and change. Innovation is simply about doing something new. But it is worth noting that the idea of innovation is both broader and more complete than that of ‘invention’. An ‘invention’ is also something that is novel or unique (usually applied to a device or method), but it does not necessarily imply that the novel device or method has the potential to be practical, economic or capable of being developed commercially. Innovation goes further than ‘invention’. It implies not just the novel idea, but also the process of transforming the idea into something that provides a return for an organization’s customers, owners, or both. The study of innovation, what influ- ences it, and how to manage it, is a huge subject and beyond the scope of this book. However, there is one particular attribute that is central to innovation – creativity. ‘Creativity’ is the ability to move beyond conventional ideas, rules or assumptions, in order to generate significant new ideas. It is a vital ingredient in innovation. It is seen as essential not just in product and ser- vice innovation, but also in the design and management of operations processes more generally.

Partly because of the fast-changing nature of many industries, a lack of creativity (and consequently of innovation) is seen as a major risk.

So, if creativity is an essential ingredient of innovation, and innova- tion implies making novel ideas into practical, commercial form, what is the process that transforms innovative ideas into something more concrete? It is ‘design’. Innovation creates the novel idea; design makes

it work in practice. Design is to ‘ conceive the looks, arrangement, and workings of something. A design must deliver a solution that will work in practice. ’ Design is also an activity that can be approached at different levels of detail. One may envisage the general shape and intention of something before getting down to defining its details (we will observe this later in this chapter when we examine the process of product and service design, and when we look at process design in Chapter 6 ). Figure 4.2 illustrates the relationship between creativity, innovation and design as we use the terms here. These concepts are intimately related, which is why we treat them in the same chapter. First we will look at some of the basic ideas that help to understand innovation.

✽ ✽ ✽ Operations principle Operations principle Operations principle

Is an essential ingredient of…

That defines the characteristics of…

That is transformed into a practical proposition by…

The use of imagination or original ideas

Doing something

new

Defining the looks, arrangement and

workings of something

The nature and characteristics of the

organization’s o�erings

Creativity Innovation Design Products and services

Figure 4.2 The relationship between creativity, innovation, and design

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 111

OPERATIONS IN PRACTICE

When Apple introduced the original iPhone, the world of smartphones was changed for ever. It was arguably one of the most influential products ever to be launched in the consumer technology market and set the bench- mark for the (many) smartphones that came after it. It sold millions worldwide and helped to make Apple into the world’s most valuable company. Yet how Apple and its visionary then leader, Steve Jobs, managed the inno- vation process remained something of a secret for years after the product’s launch. Originally visualized as a tab- let computer, work on the iPhone was initiated partly because of the success of the firm’s earlier product, the iPod music player. It was the profound effect that the iPod had on the music industry that encouraged Apple to consider what other markets it could challenge. Yet, it was a technological breakthrough, the multi-touch dis- play , which allowed the company to change course. As Steve Jobs said later, ‘ I had this idea about having a glass display, a multi-touch display you could type on. I asked our people about it. And six months later they came back with this amazing display. [When] we got inertial scroll- ing working and some other things, I thought, “my God, we can build a phone with this” and we put the tablet aside, and we went to work on the phone. ’ But making the multi-touch display a working proposition was challeng- ing for Apple’s engineering team. The team had to create an entirely new way in which users could interact with their phones. There were many novel unsolved prob- lems to overcome. Every single part of the design had to be rethought to adapt to touch. For example, engi- neers had to make scrolling work on the iPhone not only when a user’s finger moved up and down, but also when a user’s thumb moved in an arc across the screen. And there were many other obstacles to overcome, some which seemed almost insurmountable. Sir Jonathan Ive, Senior Vice-President of Design at Apple, has admitted that issues with the touchscreen were so difficult that it brought the project to the brink of being aborted. ‘ There were multiple times when we nearly shelved it because there were fundamental problems that we couldn't solve ’, said Sir Jonathan. ‘ I would put the phone to my ear and my ear dialled a number. The challenge is that you have to then detect all sorts of ear shapes, chin shapes, skin col- our and hairdos. We had to develop technology, basically a number of sensors, to inform the phone that “this is now going up to an ear, please deactivate the touchscreen”. ’

Security during development was obsessively tight. For example, the senior Apple executive in charge of developing what would later become known as the iOS operating system was told that he could choose anyone

he wanted from within Apple to join the embryonic iPhone team, but he was not allowed to hire anybody from outside the company. He could not even convey to potential team members exactly what they would be working on, just that it was a new and exciting project and that they would have to ‘ work hard, give up nights, and work weekends for years ’. When the development team formed, it was located on a separate and secured floor on Apple’s campus. The development area was ‘locked down’ with extensive use of badge readers and cameras. Team members might have to show their badges five or six times to gain access. Within Apple, the code name for the iPhone project was ‘Project Purple’ with the devel- opment area itself called the ‘purple dorm’ because the team worked continuously and so closely together that it felt ‘like a college dorm’. It smelled like pizza.

The aesthetics of the iPhone were treated as being just as important as the iPhone technology. This was the responsibility of Apple’s secretive industrial design group. Apple designer Christopher Stringer said that their objective was to create a ‘ new, original, and beau- tiful object [that was] so wonderful that you couldn't imagine how you'd follow it ’ . The design group, Stringer explained, was composed of 16 ‘maniacal’ individuals who shared one singular purpose – to ‘ imagine prod- ucts that don't exist and guide them to life ’. Team mem- bers worked closely together, often gathering around a ‘kitchen table’ where they exchanged ideas, often in a ‘brutally honest’ way. To the designers, even the tiniest

How the iPhone disrupted the smartphone market 2

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112 PART ONE DIRECTING THE OPERATION

The innovation S-curve When new ideas are introduced in services, products or processes, they rarely have an impact that increases uniformly over time. Usually performance follows an S-shaped progression. So, in the early stages of the introduction of new ideas, although (often large) amounts of resources, time and effort are needed to introduce the idea, relatively small performance improvements are experienced. However, with time, as experience and knowledge about the new idea grow, performance increases. But as the idea becomes established, extending its performance further becomes increasingly difficult, see Figure 4.3 (a). But when one idea reaches its mature, ‘levelling-off’ period, it is vulnerable to a further new idea being intro- duced which, in turn, moves through its own S-shaped progression. This is how innovation works, the limits of one idea being reached which prompts a newer, better idea, with each new S-curve requiring some degree of redesign, see Figure 4.3 (b).

Incremental or radical innovation An obvious difference between how the pattern of new ideas emerges in different operations or industries is the rate and scale of innovation. Some industries, such as telecommunica- tions, enjoy frequent and often significant innovations. Others, such as house building, do have innovations, but they are usually less dramatic. So some innovation is radical, result- ing in discontinuous, ‘breakthrough’ change, while other innovations are more incremental leading to smaller, continuous changes. Radical innovation often includes large technolog- ical advancements which may require completely new knowledge and/or resources making existing services and products obsolete and therefore non-competitive. Incremental innova- tion, by contrast, is more likely to involve relatively modest technological changes, built upon existing knowledge and/or resources so existing products and services are not fundamentally

of details were important. They often would create up to 50 designs of a single component before moving on to computer-aided design modelling and the creation of physical mock-ups.

The fact that the Apple designers overcame several technology and production bugs during its development is partly a testament to the design team’s belief, both in their technological skills and in their understanding of what people will buy. Yet Apple avoids conducting

market research when designing its products, a policy introduced by Steve Jobs, its late chief executive. ‘ We absolutely don't do focus groups ’, said Ive. ‘ That’s designers and leaders abdicating responsibility. That’s them looking for an insurance policy, so if something goes wrong, they can say, well this focus group says that only 30 per cent of people are offended by this and, look, 40 per cent think it’s OK. What a focus group does is that it will guarantee mediocrity. ’

P er

fo rm

an ce

Time

Slow introduction Obstacles to

further development

overcome

Idea approaches its natural limits

P er

fo rm

an ce

Time

Progressive introduction

of new innovative

ideas

(a) The basic S-shaped improvement in performance (b) Innovation following multiple S-shaped curves

Figure 4.3 The S-shaped curve of innovation

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 113

changed. This is why established companies may favour incremental innovation because they have the experience of building up a significant pool of knowledge (on which incremental innovation is based). In addition, established companies are more likely to have a mindset that emphasizes continuity, perhaps not even recognizing potential innovative opportunities (see the ‘Operations in practice’ case on Kodak). New entrants to markets, however, have no established position to lose, nor do they have a vast pool of experience. They may be more likely to try for more radical innovation.

The Henderson–Clark model Although distinguishing between incremental and radical innovation is useful, it does not fully make clear why some companies succeed or fail at innovation. Two researchers, Henderson and Clark,3 looked at the question of why some established companies sometimes fail to exploit seemingly obvious incremental innovations. They answered this question by dividing the technological knowledge required to develop new products and services into ‘knowledge of the components of knowledge’ and ‘knowledge of how the components of knowledge link together’. They called this latter knowledge ‘architectural knowledge’. Figure 4.4 shows what has become known as the Henderson–Clark model. It refines the simpler idea of the split between incremental and radical innovation. In this model incremental innovation is built upon existing component and architectural knowledge, whereas radical innovation changes both component and architectural knowledge. Modular innovation is built on exist- ing architectural knowledge, but requires new knowledge for one or more components. By contrast, architectural innovation will have a great impact upon the linkage of components (or the architecture), but the knowledge of single components is unchanged.

So, for example, in healthcare services, simple (but useful and possibly novel at the time) innovations in a primary-care (general practitioner) doctors’ clinic, such as online appoint- ment websites, would be classed as incremental innovation because neither any elements nor the relationship between them are changed. If the practice invests in a new diagnostic heart scanner, that element of their diagnosis task has been changed and will probably need new knowledge, but the overall architecture of the service has not been changed. This innovation

High impact on architectural knowledge

Low impact on architectural knowledge

High impact on component knowledge

Low impact on component knowledge

Radical innovation

Architectural innovation

Modular innovation

Incremental innovation

New scanner Walk-in service

Primary healthcare example

Direct call-up service Telemedicine

Figure 4.4 The Henderson–Clark model

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114 PART ONE DIRECTING THE OPERATION

would be classed as ‘modular’. An example of architectural innovation would be the practice providing ‘walk-in’ facilities in the local city cen- tre. It would provide more or less the same service as the regular sur- gery (no new components), but the relationship between the service and patients has changed. Finally, if the practice adopted some of the ‘telemedicine’ technology that monitors patient signs and can react to significant changes in patient condition, then this would be radi- cal innovation. The components are novel (monitors) as is the overall architecture of the service (distance diagnosis).

WHAT IS THE STRATEGIC ROLE OF PRODUCT AND SERVICE INNOVATION?

Innovation is a risky business. Not every idea is transformed, or is capable of being incorpo- rated into the design of a successful product or service. Sometimes this is because an inno- vative idea is just too challenging, at least with realistically available technology, or under prevailing market conditions. Sometimes the development cost is out of the reach of the busi- ness that had the original idea. Ideas may be abundant, but resources are limited. Yet despite the obstacles to successful innovation, almost all firms strive to be innovative. The reason is that there is overwhelming evidence that innovation can generate significant payback for the organizations that manage the incorporation of innovative ideas in the design of their prod- ucts and services. What matters is the ability to identify the innovations and manage their transformation into effective designs so that they can sustain competitive advantage and/or generate social payback.

Design makes innovative ideas useful It is worth repeating why design is so important. Good design takes innovative ideas and makes them practical. Good design also communicates the purpose of the product or ser- vice to its market, and brings financial rewards to the business. Product and service design, therefore, can be seen as starting and ending with the customer. So the design activity has one overriding objective: to provide products, services and processes which will satisfy the operation’s customers. Product designers try to achieve aesthetically pleasing designs which meet or exceed customers’ expectations. They also try to design a product which performs well and is reliable during its lifetime. Further, they should design the product so that it can be manufactured easily and quickly. Similarly, service designers try to put together a service which meets, or even exceeds, customer expectations. Yet at the same time the service must be within the capabilities of the operation and be delivered at reasonable cost.

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

Critical commentary

Remember that not all new services and products are created in response to a clear and articulated customer need. While this is usually the case, especially for products and services that are similar to (but presumably better than) their predecessors, more radical innovations are often brought about by the innovation itself creating demand. Customers do not usually know that they need something radical. For example, in the late 1970s people were not asking for microprocessors – they did not even know what they were. They were improvised by an engineer in the USA for a Japanese customer who made calculators. Only later did they become the enabling technology for the PC and after that the innumerable devices that now dominate our lives.

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 115

Design pays for itself 4 There is an increasingly common acceptance that design can add very significant value to all types of organization. A growing number of books, articles, reports and blogs have looked at companies and the benefits that they have gained by taking the design process seriously. This interest in design is partly because of the success of companies like Apple (see the ‘Operations in practice’ case earlier in this chapter), which are regarded as excellent at design. Numerous authors have confirmed the impact of design on performance. One report from the Design Council in the UK has shown that, on average, for every £1 businesses invest in design, they gain over £4 net operating profit, over £20 net turnover and over £5 net exports. 5

Design can add value to any organization. In particular, good design practice can:

● drive and operationalize innovation, increasing market share and opening up new markets; ● differentiate products and services, making them more attractive to customers, while

increasing consistency in the company’s range, and helping to ensure successful product launches;

● strengthen branding, so that products and services embody a company’s values; ● reduce the overall costs associated with innovation, through more efficient use of

resources, reduced project failure rate and faster time to market.

All of these benefits are strategic in that they very significantly affect the future of a busi- ness. As one company boss said, ‘ design is everything, because without it we have no business… There is intense competition, and anybody can design a decent product. They can't all design out- standing products. So, design is the differentiator .’

OPERATIONS IN PRACTICE

The once mighty Eastman Kodak Company dominated the pho- tographic and film markets for decades. But no longer: 30 years ago it employed over 140,000 people and made substantial profits; by 2010 it had shrunk to around 19,000, with regular quar- terly losses. This dramatic fall from grace is usually put down to the company ’s failure to see the approach of digital photography or fully appreciate how it would totally undermine Kodak’s traditional products. Yet, ironically, Kodak was more than ahead of its com- petitors than most people outside the company realized. It actually invented the digital camera. Sadly, though, it lacked the foresight to make the most of it. For years the company had, as one insider put it, ‘ too much technology in its labs rather than in the market ’.

It was back in 1975 when a newly hired scientist at Kodak, Steve Sasson, was given the task of research- ing how to build a camera using a comparatively new type of electronic sensor – the charged-coupled device (CCD). He found little previous research so he used the lens from a Kodak motion-picture camera, an ana-

logue-to-digital converter, some CCD chips and some digital cir- cuitry that he made himself. By December 1975 he had an oper- ational prototype. Yet the advance was largely, although not com- pletely, ignored inside the com- pany. ‘ Some people talked about reasons it would never happen, while others looked at it and real- ized it was important ’, he says. He

also decided not to use the word ‘digital’ to describe his trial product. ‘ I proposed it as filmless photography, an electronic stills camera. Calling it “digital” would not have been an advantage. Back then “digital” was not a good term. It meant new, esoteric technology. ’ Some resistance came from genuine, if mistaken, technical reservations. But others feared the magnitude of the changes that digital photography could bring. Objections ‘ were com- ing from the gut: a realization that [digital] would change everything – and threaten the company’s entire film-based business model ’ . Some see Kodak’s reluctance to aban- don its traditional product range as understandable. It was making vast profits and as late as 1999 it was making over $3 billion from film sales. Todd Gustavson, Curator

The sad tale of Kodak and its digital camera 6

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The design activity is itself a process Producing design innovations for products and services is itself a process that conforms to the input–transformation–output model described in Chapter 1 . Although organizations will have their own particular ways of managing innovation and design, the design process itself is essen-

tially very similar across a whole range of industries. It therefore has to be designed and managed like any other process. Broadly, the better the design process is managed, the better the products and service offering. Figure 4.5 illustrates the design activity as an input–transformation– output diagram. The transformed resource inputs will consist mainly of information in the form of market forecasts, market preferences, techni- cal data, potential design ideas, and so on. It is these ideas and informa-

tion that will be transformed in the design process into the final design. Transforming resource inputs includes the operations and design managers who manage the process, together with specialist technical staff with the specific knowledge necessary to solve design problems. They also may include suppliers, other collaborators, and even especially interested customer groups (sometimes called ‘lead users’) who are brought in to provide their expertise. Transforming resources may also include computer-aided design (CAD) equipment and software.

Design process objectives The performance of the design process can be assessed in much the same way as we would consider the products and services that result from it, namely in terms of quality, speed, dependability, flexibility and cost. Here we also include ‘sustainability’ as a design objective. It is, of course, included as part of the ‘triple bottom line’ objectives, as explained in Chapter 2 , but because product and service design has

such an influence on sustainability, we include it alongside our normal operational-level objectives. These performance objectives have just as much relevance for innovation as they do for the ongoing delivery of offerings once they are introduced to the market.

of Technology at the George Eastman House Museum, says that ‘ Kodak was almost recession-proof until the rise of digital. A film-coating machine was like a device

that printed money. ’ So Kodak’s first digital camera, the Quicktake, was licensed to and sold by Apple in 1994.

In 2012 Kodak filed for bankruptcy protection.

OutputsInputs

Transformed resources, e.g. • Technical information • Market information • Time information • Design ideas

Transforming resources, e.g. • Test and design equipment • Design and technical sta� • Lead user (customer) feedback • Supplier advice • Collaborators

Designs produced to appropriate standards of… • Quality • Speed • Dependability • Flexibility • Cost • Sustainability

The product/service design innovation

process

Figure 4.5 The design activity is itself a process

✽ ✽ ✽ Operations principle Operations principle Operations principle

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 117

What does quality mean for the design process? Design quality is not always easy to define precisely, especially if customers are relatively sat- isfied with existing product and service offerings. Many software companies talk about the ‘I don't know what I want, but I'll know when I see it’ syndrome, meaning that only when customers use the software are they in a position to articulate what they do or do not require. Nevertheless, it is possible to distinguish high- and low-quality designs (although this is easier to do in hindsight) by judging them in terms of their ability to meet market requirements. In doing this, the distinction between the specification quality and the conformance quality of designs is important. No business would want a design process that was indifferent to ‘errors’ in its designs, yet some are more tolerant than others. For example, in pharmaceutical devel- opment the potential for harm is particularly high because drugs directly affect our health. This is why the authorities insist on such a prolonged and thorough ‘design’ process (more usually called ‘development’ in that industry). Although withdrawing a drug from the market is unusual, it does occasionally occur. Far more frequent are the ‘product recalls’ that are rela- tively common in, for example, the automotive industry. Many of these are design related and the result of ‘conformance’ failures in the design process. The ‘specification’ quality of design is different. It means the degree of functionality, or experience, or aesthetics, or whatever the product or service is primarily competing on. Some businesses require product or service designs that are relatively basic (although free from errors), while others require designs that are clearly special in terms of the customer response they hope to elicit.

What does speed mean for the design process? The speed of design matters more to some industries than others. For example, design inno- vation in construction and aerospace happens at a much slower pace than in clothing or microelectronics. However, rapid design innovation or ‘time-based competition’ has become the norm for an increasing number of industries. Sometimes this is the result of fast- changing consumer fashion. Sometimes a rapidly changing technology base forces it. Telecoms, for example, are updated frequently because their underlying technology is constantly improv- ing. Yet, no matter what the motivation, fast design brings a number of advantages:

● Early market launch – an ability to innovate speedily is that product and service offerings can be introduced to the market earlier and thus earn revenue for longer, and may com- mand price premiums.

● Starting design late – alternatively, starting the design process later may have advantages, especially where either the nature of customer demand or the availability of technology is uncertain and dynamic, so fast design allows design decisions to be made closer to the time when product and service offerings are introduced to the market.

● Frequent market stimulation – rapid innovations allow frequent new or updated offerings to be introduced into the market.

What does dependability mean for the design process? Rapid design processes that cannot be relied on to deliver dependably are, in reality, not fast at all. Design schedule slippage can extend design times, but, worse, a lack of dependability adds to the uncertainty surrounding the innovation process. Conversely, processes that are dependable minimize design uncertainty. Unexpected technical difficulties, such as suppliers who themselves do not deliver solutions on time, customers or markets that change during the innovation process itself, and so on, all contribute to an uncertain and ambiguous design environment. Professional project management (see Chapter 19) of the innovation process can help to reduce uncertainty and prevent (or give early warning of) missed deadlines, pro- cess bottlenecks and resource shortages. However, external disturbances to the innovation process will remain. These may be minimized through close liaison with suppliers as well as market or environmental monitoring. Nevertheless, unexpected disruptions will always occur and the more innovative the design, the more likely they are to occur. This is why flexibility

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within the innovation process is one of the most important ways in which dependable deliv- ery of new product and service offerings can be ensured.

What does flexibility mean for the design process? Flexibility in the innovation process is the ability to cope with external or internal change. The most common reason for external change is because markets, or specific customers, change their requirements. Although flexibility may not be needed in relatively predictable markets, it is clearly valuable in more fast-moving and volatile markets, where one’s own cus- tomers and markets change, or where the designs of competitors’ offerings dictate a matching or leapfrogging move. Internal changes include the emergence of superior technical solu- tions. In addition, the increasing complexity and interconnectedness of product and service components in an offering may require flexibility. A bank, for example, may bundle together a number of separate services for one particular segment of its market. Privileged account hold- ers may obtain special deposit rates, premium credit cards, insurance offers, travel facilities, and so on, together in the same package. Changing one aspect of this package may require changes to be made in other elements. So extending the credit card benefits to include extra travel insurance may also mean the redesign of the separate insurance element of the pack- age. One way of measuring innovation flexibility is to compare the cost of modifying a design in response to such changes against the consequences to profitability if no changes are made. The lower the cost of modifying an offering in response to a given change, the higher is the level of flexibility.

What does cost mean for the design process? The cost of innovation is usually analysed in a similar way to the ongoing cost of delivering offerings to customers. These cost factors are split up into three categories: the cost of buying the inputs to the process, the cost of providing the labour in the process, and the other general overhead costs of running the process. In most in-house innovation processes the latter two costs outweigh the former.

One way of thinking about the effect of the other innovation performance objectives on cost is shown in Figure 4.6. Whether caused by quality errors, an intrinsically slow innovation process, a lack of project dependability, or delays caused through inflexibility, the end result is that the design is late. Delayed completion of the design results in both more expenditure on the design and delayed (and probably reduced) revenue. The combination of these effects usually means that the financial break-even point for a new offering is delayed far more than the original delay in its launch.

What does sustainability mean for the design process? The sustainability of a design innovation is the extent to which it benefits the ‘triple bot- tom line’ – people, planet and profit. When organizations carry out their design innova- tion activities, they should consider their objectives in relation to this triple bottom line. The design innovation process is particularly important in ultimately impacting the ethical, environmental and economic well-being of stakeholders. And incorporating sustainability criteria in the design process is increasingly common. Sometimes this is because of exter- nal pressures, such as new legislation, sometimes because of changing customer attitudes. For example, some innovation activity is particularly focused on the ethical dimension of sustainability. Banks have moved to offer customers ethical investments that seek to maxi- mize social benefit as well as financial returns. Such investments tend to avoid businesses involved in weaponry, gambling, alcohol and tobacco, for example, and favour those pro- moting worker education, environmental stewardship and consumer protection. Other examples of ethically focused innovations include the development of ‘fair-trade’ products. Similarly, garment manufacturers may establish ethical trading initiatives with suppliers; supermarkets may ensure animal welfare for meat and dairy products; online companies may institute customer complaint charters.

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Design innovation may also focus on the environmental dimension of sustainability. Critically examining the components of products towards a change of materials in the design could significantly reduce the environmental burden. Examples include the use of organic cotton or bamboo in clothing; wood or paper from managed forests used in garden furniture, stationery and flooring; recycled materials for carrier bags; and natural dyes in clothing, curtains and upholstery. Other innovations may be more focused on the use stage of an offering. The MacBook Air, for example, introduced an advanced power management system that reduced its power requirements. In the detergent industry, Unilever and Proctor & Gamble have developed products that allow clothes to be washed at much lower temperatures. Architecture firms are increasingly designing houses that can operate with minimal energy or use sustainable sources of energy such as solar pan- els. Some innovations focus on making product components within an offering easier to recycle or remanufacture once they have reached the end of their life. For example, some food packaging has been designed to break down easily when disposed of, allowing its conversion into high-quality compost. Mobile phones are often designed to be taken apart at the end of their life, so valuable raw materials can be reused. In the automotive indus- try, over 75 per cent of materials are recycled.

WHAT ARE THE STAGES OF PRODUCT AND SERVICE INNOVATION?

Fully specified designs rarely spring, fully formed, from a designer’s imagination. The design activity will generally pass through several key stages. These form the sequence shown in Figure 4.7 , although in practice designers will often recycle or backtrack through the stages. Nor is this sequence of stages descriptive of the stages used by all

Delay in time to market

Cash

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break-even

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Delayed sales revenue

Delayed cash flow

Development costs

Development costs of delayed project

Time

Figure 4.6 Delay in time to market of new innovations not only reduces and delays revenues, but also increases the costs of development. The combination of both of these effects usually delays the financial break-even point far more than the delay in the launch

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companies, yet most will use some stage model similar to this one. It moves from the concept generation stage to a screening stage, a preliminary design stage that produces a design to be evaluated and prototyped before reaching the final design.

Concept generation This is where innovative ideas become the inspiration for new service or product concepts. And innovation can come from many different sources:

● Ideas from customers – Marketing, the function generally responsible for identifying new service or product opportunities, may use market research tools for gathering data from customers in a structured way to test out ideas or check services or products against prede- termined criteria.

● Listening to customers – Ideas may come from customers on a day-to-day basis; from complaints, or from everyday transactions. Although some organizations may not see gathering this information as important (and may not even have mechanisms in place to facilitate it), it is an important potential source of ideas.

● Ideas from competitor activity – Most organizations follow the activities of their compet- itors. A new idea from a competitor may be worth imitating or, better still, improved upon. Taking apart a competitor’s product or service to explore potential new ideas is called ‘reverse engineering’. Some aspects of services may be difficult to reverse-engineer (espe- cially ‘back-office’ services) as they are less transparent to competitors.

● Ideas from staff – The contact staff in a service organization or the salesperson in a product-oriented organization could meet customers every day. These staff may have good ideas about what customers like and do not like. They may have gathered suggestions from customers or have ideas of their own. One well-known example – which may be urban myth – is that an employee at Swan Vestas, the matchmaker, suggested having one instead of two sandpaper strips on the matchbox. It saved a fortune!

● Ideas from research and development – Many organizations have a formal research and development (R&D) function. As its name implies, its role is twofold. Research devel- ops new knowledge and ideas in order to solve a particular problem or to grasp an oppor- tunity. Development utilizes and operationalizes the ideas that come from research. And although ‘development’ may not sound as exciting as ‘research’, it often requires as much creativity and even more persistence. One product has commemorated the persistence of its development engineers in its company name. Back in 1953 the Rocket Chemical Company set out to create a rust-prevention solvent and degreaser to be used in the aero- space industry. It took them 40 attempts to get the water-displacing formula worked out. So that is what they called the product. WD-40 literally stands for Water Displacement, 40th attempt.

Open sourcing – using a ‘development community’7

Not all ‘products’ or services are created by professional, employed designers for com- mercial purposes. Many of the software applications that we all use, for example, are developed by an open community, including the people who use the products. If you use Google, the Internet search facility, or use Wikipedia, the online encyclopaedia, or shop at

Concept generation

Concept screening

Preliminary design

Evaluation and

improvement

Prototyping and final design

Figure 4.7 The stages of product/service design innovation

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Amazon, you are using open-source software. The basic concept of open-source software is extremely simple. Large communities of people around the world, who have the abil- ity to write software code, come together and produce a software product. The finished product is not only available to be used by anyone or any organization for free, but also regularly updated to ensure it keeps pace with the necessary improvements. The produc- tion of open-source software is very well organized and, like its commercial equivalent, is continuously supported and maintained. However, unlike its commercial equivalent, it is absolutely free to use. Over the last few years the growth of open source has been phenomenal, with many organizations transitioning over to using this stable, robust and secure software. With the maturity that open-source software now has to offer, organ- izations have seen the true benefits of using free software to drive down costs and to establish themselves on a secure and stable platform. Open source has been the biggest change in software development for decades and is setting new open standards in the way software is used. The open nature of this type of development also encourages com- patibility between products. BMW, for example, was reported to be developing an open- source platform for vehicle electronics. Using an open-source approach, rather than using proprietary software, BMW can allow providers of ‘infotainment’ services to develop com- patible, plug-and-play applications.

Crowdsourcing8

Closely related to the open sourcing idea is that of ‘crowdsourcing’. Crowdsourcing is the process of getting work or funding, or ideas (usually online), from a crowd of people. Although in essence it is not a totally new idea, it has become a valuable source of ideas largely through the use of the Internet and social networking. For example, Procter & Gamble, the consumer products company, asked amateur scientists to explore ideas for a detergent dye whose colour changes when enough has been added to dishwater. Other uses of the idea involve government agencies asking citizens to prioritize spending (or cutting spending) projects.

Parallel-path approach Because the likelihood of successful innovation coming from a single source of ideas is highly uncertain, it has been argued that firms could improve the odds of innovation success by using what is sometimes termed a ‘parallel-path strategy’. This simply means utilizing a vari- ety of different sources and approaches to generating ideas.

Traditionally, it was assumed that there was a trade-off between the depth and breadth of the usefulness of the ideas that can come from various sources. One could pursue a few sources of ideas in depth or a wide range of sources in a relatively shallow manner. In addition, the marginal cost of exploring a new source may increase as the number of sources examined increases. So, the breadth of knowledge sources also may be subject to diminishing marginal returns. However, more recent research9 suggests that firms also may improve their odds of successful innovation by accessing a large number of knowl- edge sources.

Ideas management Obtaining new product or service ideas (or indeed any innovative ideas) from employ- ees was traditionally done through the use of paper-based ‘suggestion schemes’ where employees placed their ideas in a ‘suggestion box’. Such schemes were often only partly effective, yielding few, low-quality ideas. Unless the running of the scheme was well resourced it could be difficult to guarantee that all ideas were evaluated consistently and quickly. Also, the scheme could lose credibility unless employees could track their ideas to confirm that they ‘didn't just disappear’. However, the advent of ‘idea management’ soft- ware tools has overcome some of these difficulties. Ideas management systems are a type of enterprise software (often web-based) that can help operations to collect ideas from

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employees, assess them and, if appropriate, implement them quickly and efficiently. Such systems can track ideas all the way though from inception to implementation, making it much easier to understand important performance measures such as where ideas are being generated, how many ideas submitted are actually implemented, the estimated cost savings from submitted ideas and any new revenues generated by implemented ideas. Often ideas management systems are used to focus ideas on specific organizational tar- gets and objectives, which it is claimed improved both the quality and quantity of ideas, when compared with ‘open’ suggestion schemes.

Concept screening Not all concepts which are generated will necessarily be capable of further development into products and services. Designers need to be selective as to which concepts they progress to the next design stage. The purpose of the concept-screening stage is to evaluate concepts by assessing the worth or value of design options. This involves assessing each concept or option against a number of design criteria. While the criteria used in any particular design exercise will depend on the nature and circumstances of the exercise, it is useful to think in terms of three broad categories of design criteria:

● The feasibility of the design option – can we do it? ● Do we have the skills (quality of resources)? ● Do we have the organizational capacity (quantity of resources)? ● Do we have the financial resources to cope with this option?

OPERATIONS IN PRACTICE

It sounds like a joke, but it is a genuine product innovation motivated by a market need. It is green, square and comes originally from Japan. It is a square watermelon! Why square? Because Japanese grocery stores are not large and space cannot be wasted. Similarly a round water- melon does not fit into a refrigerator very conveniently. There is also the problem of trying to cut the fruit when it keeps rolling around. So an innovative farmer from Japan’s south-western island of Shikoku solved the problem with the idea of making a cube-shaped watermelon which could easily be packed and stored. But there is no genetic modification or clever science involved in growing water- melons. It simply involves placing the young fruit into wooden boxes with clear sides. During its growth, the fruit naturally swells to fill the surrounding shape. Now the idea has spread from Japan. ‘ Melons are among the most delicious and refreshing fruit around but some people find them a problem to store in their fridge or to cut because they roll around ’, said Damien Sutherland, the exotic fruit buyer from Tesco, the UK supermarket. ‘ We've seen sam- ples of these watermelons and they literally stop you in their tracks because they are so eye-catching. These square mel- ons will make it easier than ever to eat because they can be served in long strips rather than in the crescent shape .’ But

Square watermelons! 10

not everyone liked the idea. Comments on news websites included: ‘ where will engineering every day things for our own unreasonable convenience stop? I prefer melons to be the shape of melons! ’; ‘ they are probably working on straight bananas next! ’; and ‘ I would like to buy square sausages then they would be easier to turn over in the frying pan. Round sausages are hard to keep cooked all over .’

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 123

● The acceptability of the design option – do we want to do it? ● Does the option satisfy the performance criteria which the design is trying to achieve?

(These will differ for different designs.) ● Will our customers want it? ● Does the option give a satisfactory financial return?

● The vulnerability of each design option – do we want to take the risk? That is: ● Do we understand the full consequences of adopting the option? ● Being pessimistic, what could go wrong if we adopt the option?

What would be the consequences of everything going wrong? (This is called the ‘downside risk’ of an option.)

The design ‘funnel’ Applying these evaluation criteria progressively reduces the number of options which will be available further along in the design activity. For example, deciding to make the outside casing of a camera case from aluminium rather than plastic limits later decisions, such as the overall size and shape of the case. This means that the uncertainty surrounding the design reduces as the number of alternative designs being considered decreases. Figure 4.8 shows what is sometimes called ‘the design funnel’, depicting the progressive reduction of design options from many to one. But reducing design uncertainty also impacts the cost of chang- ing one’s mind on some detail of the design. In most stages of design the cost of changing a decision is bound to incur some sort of rethinking and recalculation of costs. Early on in the design activity, before too many fundamental decisions have been made, the costs of change are relatively low. However, as the design progresses the interrelated and cumulative deci- sions already made become increasingly expensive to change.

Preliminary design Having generated an acceptable, feasible and viable product or service concept the next stage is to create a preliminary design. The objective of this stage is to have a first attempt at specify- ing the individual components or elements of the products and services, and the relationship between them, which will constitute the final offering.

✽ ✽ ✽ Operations principle Operations principle Operations principle

Figure 4.8 The design funnel – progressively reducing the number of possibilities until the final design is reached

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124 PART ONE DIRECTING THE OPERATION

Specifying the components of the design The first task in this stage of design is to define exactly what will go into the product or service. This will require the collection of information about such things as the constituent component parts which make up the product or service package and the component (or product) structure, the order in which the component parts of the package have to be put together. For example, the components for a remote ‘presentation’ mouse may include the presentation mouse itself, a receiver unit and packaging. All these three items are made up of components, which are, in turn, made up of other components, and so on. A ‘component structure’ is the diagram that shows how these components all fit together to make the final product ( see Fig. 4.9 ).

Reducing design complexity Simplicity is usually seen as a virtue among designers of products and services. The most elegant design solutions are often the simplest. However, when an operation produces a variety of products or services (as most do) the range of products and services consid- ered as a whole can become complex, which, in turn, increases costs. Designers adopt a number of approaches to reducing the inherent complexity in the design of their prod-

ucts or service range. Here we describe three common approaches to complexity reduction: standardization, commonality and modularization.

Standardization Operations sometimes attempt to overcome the cost penalties of high variety by standardizing their products, services or processes. This allows them to restrict variety to that which has real value for

the end customer. Often it is the operation’s outputs which are standardized. Examples of this are fast food restaurants, discount supermarkets or telephone-based insurance companies. Perhaps the most common example of standardization is the clothes which most us of buy. Although everybody’s body shape is different, garment manufacturers produce clothes in only a limited number of sizes. The range of sizes is chosen to give a reasonable fit for most body shapes. To suit all their potential customers and/or to ensure a perfect fit, garment manufacturers would have to provide an unfeasibly large range of sizes. Alternatively, they would need to provide a customized service. Both solutions

Critical commentary

Not everyone agrees with the concept of the design funnel. For some it is just too neat and ordered an idea to reflect accurately the creativity, arguments and chaos that sometimes characterize the design activity. First, they argue, managers do not start out with an infinite number of options. No one could process that amount of information – and, anyway, designers often have some set solutions in mind, looking for an opportunity to be used. Second, the number of options being considered often increases as time goes by. This may actually be a good thing, especially if the activity was unimaginatively specified in the first place. Third, the real process of design often involves cycling back, often many times, as potential design solutions raise fresh questions or become dead ends. In summary, the idea of the design funnel does not describe what actually happens in the design activity. Neither does it necessarily even describe what should happen.

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 125

would have a significant impact on cost. This control of variety is an important issue with most companies. A danger facing established operations is that they allow variety to grow excessively. They are then faced with the task of variety reduction, often by assessing the real profit or contribution of each service or product. Many organizations have signif- icantly improved their profitability by careful variety reduction. In order to overcome loss of business, customers may be offered alternative products or services which provide similar value.

Commonality Using common elements within a product or service product can also simplify design com- plexity. Using the same components across a range of automobiles is a common practice. Likewise, standardizing the format of information inputs to a process can be achieved by using appropriately designed forms or screen formats. The more different product and services can be based on common components, the less complex it is to produce them. For example, the European aircraft maker, Airbus, has designed its aircraft with a high degree of commonality. This meant that 10 aircraft models ranging from the 100-seat A318 through to the world’s largest aircraft, the A380 with over 500 seats, feature vir- tually identical flight decks, common systems and similar handling characteristics. In some cases, such as the entire A320 family, the aircraft even share the same ‘pilot-type rating’, which enables pilots with a single licence to fly any of them. The advantages of commonality for the airline operators include a much shorter training time for pilots and engineers when they move from one aircraft to another. This offers pilots the possibility of flying a wide range of routes from short haul to ultra-long haul and leads to greater efficiencies because common maintenance procedures can be designed with maintenance teams capable of servicing any aircraft in the same family. Also, when up to 90 per cent of all parts are common within a range of aircraft, there is a reduced need to carry a wide range of spare parts.

Level 3

Level 4

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Level 1

Remote presentation mouse

Receiver unit Packing

R/C unit

USB connector LeafletOuter

LogoMoulding Control unitMoulding

TransmitterButton

Upper cover Main

assembly

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Level 0

Figure 4.9 The component structure of a remote mouse

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126 PART ONE DIRECTING THE OPERATION

Modularization The use of modular design principles involves designing standardized ‘sub-components’ of a product or service which can be put together in different ways. It is possible to create wide choice through the fully interchangeable assembly of various combinations of a smaller number of standard sub-assemblies; computers are designed in this way, for example. These standardized modules, or sub-assemblies, can be produced in higher volume, thereby reduc- ing their cost. Similarly, the package holiday industry can assemble holidays to meet a specific customer requirement, from pre-designed and purchased air travel, accommodation, insur- ance, and so on. In education also there is an increasing use of modular courses which allow ‘customers’ choice but permit each module to have economical volumes of students.

OPERATIONS IN PRACTICE

In 1907 a janitor called Murray Spangler put together a pillowcase, a fan, an old biscuit tin, and a broom han- dle. It was a great innovation – the world’s first vacuum cleaner – but not one that he ever capitalized on. One year later he had sold his patented idea to William Hoover whose company went on to dominate the vac- uum cleaner market for decades, especially in its US homeland. Yet when Hoover’s market share dropped significantly, it was because a futuristic looking and com- paratively expensive rival product, the Dyson vacuum cleaner, had jumped from nothing to a position where it dominated the market. The product may have been new, but the company was not. The Dyson product dates back to 1978 when James (now Sir James) Dyson noticed how the air filter in the spray-finishing room of a com- pany where he had been working was constantly clog- ging with power particles ( just like a vacuum cleaner bag clogs with dust). So he designed and built an industrial cyclone tower, which removed the powder particles by exerting centrifugal forces. The question intriguing him was: ‘ Could the same principle work in a domestic vacuum cleaner? ’ Five years and five thousand prototypes later he had a working design, since praised for its ‘uniqueness and functionality ’. However, existing vacuum cleaner manufacturers were not as impressed – two rejected the design outright. So Dyson started making his new design himself. Within a few years Dyson cleaners were, in the UK, outselling the rivals who had once rejected them. The aesthetics and functionality of the design help to keep sales growing in spite of a higher retail price. To Dyson, good ‘ is about looking at everyday things with new eyes and working out how they can be made bet- ter. It’s about challenging existing technology. ’ Then the Dyson engineers took the technology one stage further and developed core separator technology to capture even more microscopic dirt. Dirt now goes through three stages of separation. First, dirt is drawn into a pow- erful outer cyclone. Centrifugal forces fling larger debris

such as pet hair and dust particles into the clear bin at 500 g (the maximum g -force the human body can take is 8 g ). Second, a further cyclonic stage, the core separa- tor, removes dust particles as small as 0.5 microns from the airflow – particles so small you could fit 200 of them on this full stop. Finally, a cluster of smaller, even faster cyclones generates centrifugal forces of up to 150,000 g , extracting particles as small as mould and bacteria.

Other innovations followed. The Dyson Airblade is an electric hand dryer that dries hands quicker (around 10 seconds) and uses less electricity than conventional hand

Innovative design from Dyson 11

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Design evaluation and improvement The purpose of this stage in the design innovation activity is to take the preliminary design and subject it to a series of evaluations to see if it can be improved before the service or prod- uct is tested in the market. There are a number of techniques that can be employed at this stage to evaluate and improve the preliminary design. Perhaps the best known is quality func- tion deployment (QFD).

Quality function deployment The key purpose of QFD is to try to ensure that the eventual innovation actually meets the needs of its customers. It is a technique that was developed in Japan at Mitsubishi’s Kobe shipyard and used extensively by Toyota, the motor vehicle manufacturer, and its suppliers. It is also known as the ‘house of quality’ (because of its shape) and the ‘voice of the customer’ (because of its purpose). The technique tries to capture what the customer needs and how it might be achieved. Figure 4.10 shows a simple QFD matrix used in the design of a promo- tional USB data storage pen. The QFD matrix is a formal articulation of how the company sees the relationship between the requirements of the customer (the whats ) and the design characteristics of the new product (the hows ):

● The whats , or ‘customer requirements’, are the list of competitive factors which customers find significant. Their relative importance is scored, in this case on a 10-point scale, with price scoring the highest.

● The competitive scores indicate the relative performance of the product, in this case on a 1 to 5 scale. Also indicated are the performances of two competitor products.

● The hows , or ‘design characteristics’ of the product, are the various ‘dimensions’ of the design, which will operationalize customer requirements within the product or service.

● The central matrix (sometimes called the relationship matrix) represents a view of the inter- relationship between the whats and the hows . This is often based on value judgements made by the design team. The symbols indicate the strength of the relationship. All the relation- ships are studied, but in many cases, where the cell of the matrix is blank, there is none.

● The bottom box of the matrix is a technical assessment of the product. This contains the absolute importance of each design characteristic.

● The triangular ‘roof’ of the ‘house’ captures any information the team has about the corre- lations (positive or negative) between the various design characteristics

Prototyping and final design At around this stage in the design activity it is necessary to turn the improved design into a prototype so that it can be tested. It may be too risky to launch a product or service before testing it out, so it is usually more appropriate to create a ‘prototype’ (in the case of a product) or ‘trial’ (in the case of a service). Product prototypes include everything from clay models to computer simulations. Service trials may also include computer simulations but also the actual implementation of the service on a pilot basis. Many retailing organizations pilot new products and services in a small number of stores in order to test customers’ reaction to them.

dryers. Then came the Dyson Air Multiplier™: fans and fan heaters that work very differently to conventional fans and electric heaters. They do not have fast- spinning blades that chop the air and cause uncomfortable buf- feting. Instead, they use Air Multiplier™ technology to draw in air and amplify it up to 18 times, producing an uninterrupted stream of smooth air. Sir James, who remains chief engineer and sole shareholder in Dyson,

said the heater was part of the company’s effort to turn itself into a ‘ broad-line technology company ’ rather than being seen as only an appliance maker. ‘ I would not limit the company to particular areas of technology or markets. We are developing a range of technologies to improve both industrial and consumer products so that the people using them get a better experience than with the compa- rable items that currently exist. ’

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Virtual reality-based simulations allow businesses to test new products and services as well as visualize and plan the processes that will produce them. Individual component parts can be positioned together virtually and tested for fit or interference. Even virtual workers can be introduced into the prototyping system to check for ease of assembly or operation.

Computer-aided design (CAD) CAD systems provide the computer-aided ability to create and modify product drawings. These systems allow conventionally used shapes such as points, lines, arcs, circles and text to be added to a computer-based representation of the product. Once incorporated into the design, these entities can be copied, moved about, rotated through angles, magnified or deleted. The designs thus created can be saved in the memory of the system and retrieved for later use. This enables a library of standardized drawings of parts and components to be built up. The most obvious advantage of CAD systems is that their ability to store and retrieve design data quickly, as well as their ability to manipulate design details, can considerably increase the productivity of the design activity. In addition to this, however, because changes can be made rapidly to designs, CAD systems can considerably enhance the flexibility of the design activity, enabling modifications to be made much more rapidly. Further, the use of standardized libraries of shapes and entities can reduce the possibility of errors in the design.

Alpha and beta testing A distinction that originated in the software development industry, but has spread into other areas, is that between the alpha and beta testing of a product or service. Most software prod- ucts include both alpha and beta test phases, both of which are intended to uncover ‘bugs’

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Figure 4.10 QFD matrix for a promotional USB data storage stick

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(errors) in the product. Not surprisingly alpha testing comes before beta testing. Alpha testing is essentially an internal process where the developers or manufacturers (or sometimes an outside agency that they have commissioned) examine the product for errors. Generally, it is also a private process, not open to the market or potential customers. Although it is intended to look for errors that otherwise would emerge when the product is in use, it is in effect per- formed in a virtual or simulated environment, rather than in ‘the real world’. After alpha test- ing, the product is released for beta testing. Beta testing is when the product is released for testing by selected customers. It is an external ‘pilot test’ that takes place in the ‘real world’ (or near real world, because it is still a relatively small, and short, sample) before commercial production. By the time a product gets to the beta stage most of the worst defects should have been removed, but the product may still have some minor problems that may only become evident with user participation. This is why beta testing is almost always performed at the user’s premises without any of the development team present. Beta testing is also sometimes called ‘field testing’, pre-release testing, customer validation, customer acceptance testing, or user acceptance testing.

OPERATIONS IN PRACTICE

Design innovation is not just confined to the initial conception of a product; it also applies to the end of its life. This idea is often called ‘designing for the circu- lar economy’. The ‘circular economy’ is proposed as an alternative to the traditional linear economy (or make– use–dispose as it is termed). The idea is to keep products in use for as long as possible, extract the maximum value from them while in use, and then recover and regener- ate products and materials at the end of their service life. But the circular economy is much more than a concern for recycling as opposed to disposal. The circular econ- omy examines what can be done right along the supply and use chain so that as few resources as possible are used, then (and this is the important bit) recover and regenerate products at the end of their conventional life. This means designing products for longevity, reparability, ease of dismantling and recycling.

Typical of the companies that have either adopted this idea, or been set up specially to promote it, is Newlife Paints, based on the south coast of England. It ‘remanufactures’ waste water-based paint back into a premium-grade emulsion. All products in the com- pany’s paint range guarantee a minimum 50 per cent recycled content, made up from waste paint diverted from landfill or incineration. The idea for the company began to take root in the mind of an industrial chemist, Keith Harrison. His garage was becoming a little unruly, after many years of do-it-yourself projects. Encouraged by his wife to clear out the mess, he realized that the stacked-up tins of paint represented a shocking waste. It was then that his search began for a sensible and envi- ronmentally responsible solution to waste paint. ‘ I kept

thinking I could do something with it, the paint had an intrinsic value. It would have been a huge waste just to throw it away ’, said the former industrial chemist. Keith thought somebody must be recycling it, but no one was, and he set about finding a way to reprocess waste paint back to a superior-grade emulsion. After two years of research, he successfully developed his technology, which involves removing leftover paint from tins that have been diverted from landfill, and blending and fil- tering them to produce colour-matched new paints. The company has also launched a premium brand, aimed at affluent customers with a green conscience, called Reborn Paints, the development of which was partly funded by Akzo Nobel, maker of Dulux Paints. Although Keith started small (in his garage) he now licenses his technology to companies such as the giant waste com- pany Veolia. ‘ By licensing we can have more impact and spread internationally ’, he says. He also points out that manufacturers could plan more imaginatively for the

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WHAT ARE THE BENEFITS OF INTERACTIVE PRODUCT AND SERVICE INNOVATION?

Treating each stage of design innovation as totally separate and sequential activities (as we have just done) is a little misleading. As we said earlier, it is common for companies to cycle back through stages, sometimes several times. Also it is increasingly common to break down the once ridged boundaries between each stage in the design innovation process. This applies especially to the boundary between the design of the product or service and the design of the process that will produce it.

It is generally considered a mistake to separate product and service design from process design. Operations managers should have some involvement from the initial evaluation of the concept right through to the production of the product or service and its introduction to the market. Merging the stages of the design innovation process is sometimes called ‘interactive design’. The main benefit of merging stages is seen to be a reduction in the elapsed time for the whole design innovation activity, from concept through to market introduction. This is often called the time to market (TTM). The argument in favour of reducing time to market is that doing so gives increased competitive advantage. For example, if it takes a company five years to develop a product from concept to market, with a given set of resources, it can intro- duce a new product only once every five years. If its rival can develop products in three years, it can introduce its new product, together with its (presumably) improved performance, once every three years. This means that the rival company does not have to make such radical improvements in performance each time it introduces a new product, because it is introduc- ing its new products more frequently. In other words, shorter TTM means that companies get more opportunities to improve the performance of their services or products.

Three factors in particular have been suggested which can significantly reduce time to market for a service or product:

● Simultaneous development of the various stages in the overall process. ● An early resolution of design conflict and uncertainty. ● An organizational structure which reflects the development project.

Simultaneous development We described the design innovation process as essentially a set of individual, predetermined stages, each with a clear starting and an ending point. The implicit assumption is that one stage is completed before the next one commences. Indeed, this step-by-step, or sequential, approach has traditionally been the typical form of product/service development. It has some advantages. The process is easy to manage and control because each stage is clearly defined. In addition, each stage is completed before the next stage is begun, so each stage can focus its skills and expertise on a limited set of tasks. However, the main problem of the sequential approach is that it is both time consuming and costly. When each stage is separate, with a clearly defined set of tasks, any difficulties encountered during the design at one stage might necessitate the design being halted while responsibility moves back to the previous stage. This sequential approach is shown in Figure 4.11 (a).

Yet often there is really little need to wait until the absolute finalization of one stage before starting the next. For example, perhaps while generating the concept, the evaluation activity

afterlife of their products. For example, simply adding more symbols to packs to assist sorting waste paints into types would help. ‘ At the moment we're fighting fires,

because the paints we pull out of the waste stream today were manufactured five or so years ago, when the circular economy was barely on the horizon ’, he says.

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of screening and selection could be started. It is likely that some con- cepts could be judged as ‘non-starters’ relatively early on in the pro- cess of idea generation. Similarly, during the screening stage, it is likely that some aspects of the design will become obvious before the phase is finally complete. Therefore, the preliminary work on these parts of the design could be commenced at that point. This principle can be taken right through all the stages, one stage commencing before the previous one has finished, so there is simultaneous or concurrent work on the stages ( see Fig. 4.11 (b)). (Note that simultaneous development is often called simultaneous (or concurrent) engineering in manufacturing operations.)

First stage in the innovation activity

Second stage in the innovation activity

Third stage in the innovation activity

(b) Simultaneous arrangement of the stages in the innovation activity

(a) Sequential arrangement of the stages in the innovation activity

etc.

etc.

= Communication between stages

First stage in the innovation activity

Second stage in the innovation activity

Third stage in the innovation activity

Figure 4.11 (a) Sequential arrangement of the stages in the design activity; (b) simultaneous arrangement of the stages in the design activity

✽ ✽ ✽ Operations principle Operations principle Operations principle

OPERATIONS IN PRACTICE

Most companies are obsessed with reducing the time to market (TTM) of their design process. Short TTM means lower development costs and more opportunities to hit the market with new designs. Some automobile com- panies have reduced the design time for their products to less than three years, while a new smartphone (a far

more dynamic market) can be developed in as little as six months. So why does IKEA, the most successful homeware retailer ever, take five years to design its kitchens? Because, with the huge volumes that IKEA sells, development costs are small compared with the savings that can result from product designs that bring down the final price in its stores.

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132 PART ONE DIRECTING THE OPERATION

Early conflict resolution Characterizing the design innovation activity as a whole series of decisions is a useful way of thinking about design. However, a decision, once made, need not totally and utterly com- mit the organization. For example, if a design team is designing a new vacuum cleaner, the decision to adopt a particular style and type of electric motor might have seemed sensible at the time the decision was made but might have to be changed later, in the light of new information. It could be that a new electric motor becomes available which is clearly superior to the one initially selected. Under those circumstances the designers might very well want to change their decision.

There are other, more avoidable, reasons for designers changing their minds during the design activity, however. Perhaps one of the initial design decisions was made without suf- ficient discussion among those in the organization who have a valid contribution to make. It may even be that when the decision was made there was insufficient agreement to for- malize it, and the design team decided to carry on without formally making the decision. Yet subsequent decisions might be made as though the decision had been formalized. For

example, suppose the company could not agree on the correct size of electric motor to put into its vacuum cleaner. It might well carry on with the rest of the design work while further discussions and inves- tigations take place on what kind of electric motor to incorporate in the design. Yet much of the rest of the product’s design is likely to depend on the choice of the electric motor. The plastic housings, the bearings, the sizes of various apertures, and so on, could all be affected by this decision. Failure to resolve these conflicts and/or

decisions early on in the process can prolong the degree of uncertainty in the total design activity. In addition, if a decision is made (even implicitly) and then changed later on in the process, the costs of that change can be very large. However, if the design team manages to resolve conflict early in the design activity, this will reduce the degree of uncertainty within the project and reduce the extra cost and, most significantly, time associated with either managing this uncertainty or changing decisions already made. Figure 4.12 illustrates two patterns of design changes through the life of the total design, which imply different time- to-market performances.

‘I t’s five years of work into finding ways to engineer cost out of the system, to improve the functionality ’, IKEA’s new Chief Executive, Peter Agnefjäll, said of the company ’s ‘Metod’ kitchen (which means ‘Method’ in English). Metod is a complex product. It has over a thousand different components. The kitchen is a product of IKEA’s ‘democratic design’ process that ensures designs that will work in homes anywhere in the world – an important consideration when you sell about 1 million kitchens a year. Also, unlike some big- ticket purchases, consumer taste in home furnishing does not shift rapidly. ‘ We still hang paintings above the sofa and tend to have a TV in the corner ’, says IKEA Creative Director Mia Lundström. But even if trends do not materialize overnight, it is still important to spot emerging consumer preferences. A research team vis- its thousands of homes annually and compiles reports that look as far as a decade into the future. So with- out the imperative to change the product designs too

frequently, product cost becomes a key driver. Rather than buy prefabricated components from outside sources, IKEA will develop its own if it keep costs down. For example, IKEA’s designers created its own LED light- ing system to light one of the kitchen drawers.

✽ ✽ ✽ Operations principle Operations principle Operations principle

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Project-based organizational structures The total process of developing concepts through to market will almost certainly involve personnel from several different areas of the organization. To continue the vacuum cleaner example, it is likely that the vacuum cleaner company would involve staff from its research and development department, engineering, production management, marketing and finance. All these different functions will have some part to play in making the decisions which will shape the final design. Yet any design project will also have an existence of its own. It will have a project name, an individual manager or group of staff who are championing the pro- ject, a budget and, hopefully, a clear strategic purpose in the organization. The organizational question is which of these two ideas – the various organizational functions which contribute to the design or the design project itself – should dominate the way in which the design activ- ity is managed?

Before answering this, it is useful to look at the range of organizational structures which are available – from pure functional to pure project forms. In a pure functional organization, all staff associated with the design project are based unambiguously in their functional groups. There is no project-based group at all. They may be working full-time on the project but all communications and liaisons are carried out through their functional manager. The project exists because of agreement between these functional managers. At the other extreme, all the individual members of staff from each function who are involved in the project could be moved out of their functions and perhaps even physically relocated to a task force dedicated solely to the project. The task force could be led by a project manager who might hold the entire budget allocated to the design project. Not all members of the task force necessarily have to stay in the team throughout the development period, but a substantial core might see the project through from start to finish. Some members of a design team may even be from other companies. In between these two extremes there are various types of matrix organiza- tion with varying emphasis on these two aspects of the organization (see Fig. 4.13). Although the ‘task force’ type of organization, especially for small projects, can sometimes be a little cumbersome, it seems to be generally agreed that, for substantial projects at least, it is more effective at reducing overall time to market.

Skunkworks14 Encouraging creativity in design, while at the same time recognizing the constraints of everyday business life, has always been one of the great challenges of indus- trial design. One well-known organizational structure that is claimed to release the design and development creativity of a group has been called ‘a Skunkworks’. It is usually taken to mean a small team who are taken out of their normal work environment and granted freedom

Figure 4.12 Sorting out problems early saves greater disruption later in the design activity

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134 PART ONE DIRECTING THE OPERATION

from their normal management activities and constraints – what we have called here a pure ‘project-based’ structure. It was an idea that originated in the Lockheed Aircraft Company in the 1940s, where designers were set up outside the normal organizational structure and given the task of designing a high-speed fighter. The experiment was so successful that the company continued with it to develop other innovative products. Since that time many other companies have used a similar approach, although ‘Skunk Works’ is a registered trademark of Lockheed Martin Corporation.

PM

PM

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Pure functional organization

Pure project organization

Lightweight project managers

FM FM FM

PM

PM

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FM FM FM

Heavyweight project managers

Balanced matrix organization

FM FM FMFM FM FM

PM

PM

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PM PM

PM

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FM FM FM

PM

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Increasing project orientation

FM FM FM

FM = Functional manager PM = Project manager

Figure 4.13 Organizational structures for the design innovation process

● Innovation is the act of introducing something new. Design is to ‘conceive the looks, arrangement, and workings of something’. Creativity is the ability to move beyond conven- tional ideas, rules or assumptions, in order to generate signifi cant new ideas. These three concepts are intimately related.

● The innovation S-curve describes the impact of an innovation over time, slow at fi rst, increasing in impact, then slowing down before levelling off .

❯ What is product and service innovation?

SUMMARY ANSWERS TO KEY QUESTIONS

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● Incremental and radical innovations differ in how they use knowledge. Radical innova- tion often requires completely new knowledge and/or resources making existing products and services obsolete. Incremental innovation builds upon existing knowledge and/or resources.

● The Henderson–Clark model goes further by distinguishing between ‘knowledge of the components of innovation’ and ‘knowledge of how the components of innovation link together’ (called architectural knowledge).

❯ What is the strategic role of product and service innovation?

❯ What are the stages of product and service innovation?

● Good design takes innovative ideas and makes them practical.

● There is an increasingly common acceptance that design can add very significant value to all types of organization.

● Producing design innovations for products and services is itself a process that conforms to the input–transformation–output model described in Chapter 1.

● The performance of the design process can be assessed in the same way as any process, namely in terms of quality, speed, dependability, flexibility, cost and ‘sustainability ’.

● Concept generation transforms an idea for a product or service into a concept which cap- tures the nature of the product or service and provides an overall specification for its design.

● Screening the concept involves examining its feasibility, acceptability and vulnerability in broad terms to ensure that it is a sensible addition to the company’s service or product portfolio.

● Preliminary design involves the identification of all the component parts of the product or service and the way they fit together. Typical tools used during this phase include compo- nent structures and flow charts.

● Design evaluation and improvement involve re-examining the design to see if it can be done in a better way, more cheaply or more easily. A typical technique used here is quality func- tion deployment.

● Prototyping and final design involve providing the final details which allow the product or service to be produced. The outcome of this stage is a fully developed specification for the package of products and services, as well as a specification for the processes that will make and deliver them to customers.

❯ What are the benefits of interactive product and service innovation?

● Looking at the stages of design together can improve the quality of both product and ser- vice design and process design. It helps a design ‘break even’ on its investment earlier than would otherwise have been the case. It is particularly effective if managers:

● Employ simultaneous development where design decisions are taken as early as they can be, without necessarily waiting for a whole design phase to be completed.

● Ensure early conflict resolution which allows contentious decisions to be resolved early in the design process, thereby not allowing them to cause far more delay and confusion if they emerge later in the process.

● Use a project-based organizational structure which can ensure that a focused and coher- ent team of designers is dedicated to a single design or group of design projects.

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136 PART ONE DIRECTING THE OPERATION

‘ Most people see the snack market as dynamic and innova- tive, but actually it is surprisingly conservative. Most of what passes for innovation is in fact tinkering with our marketing approach, things like special offers, promotion tie-ins and so on. We occasionally put new packs round our existing prod- ucts and even more occasionally we introduce new flavors in existing ranges. Rarely though does anyone in this industry introduce something radically different. That is why “Project Orlando” is both exciting and scary. ’

Monica Allen, the Technical Vice-President of PJT’s Snack Division, was commenting on a new product to be mar- keted under PJT’s best-known brand ‘Dreddo Dan’s Surfer Snacks’. The Dreddo Dan’s brand made use of surfing and outdoor ‘action-oriented youth’ imagery, but in fact was aimed at a slightly older generation who, although aspir- ing to such a lifestyle, had more discretionary spend for the premium snacks in which the brand specialized. Current products marketed under the brand included both fried and baked snacks in a range of exotic flavours. The project, internally known as Project Orlando, was a baked product that had been ‘in development’ for almost three years but had hitherto been seen very much as a long-term devel- opment, with no guarantee of it ever making it through to market launch. PJT had several of these long-term projects running at any time. They were allocated a development budget, but usually no dedicated resources were associated with the project. Less than half of these long-term projects ever even reached the stage of being test marketed. Around 20 per cent never got past the concept stage, and less than 20 per cent ever went into production. However, the com- pany viewed the development effort put into these ‘failed’ products as being worthwhile because it often led to ‘spin- off ’ developments and ideas that could be used elsewhere. Up to this point ‘Orlando’ had been seen as unlikely ever to reach the test marketing stage, but that had now changed dramatically.

‘Orlando’ was a concept for a range of snack foods, described within the company as ‘savory potato cookies’. Essentially they were 1½ inch discs of crisp, fried potato with a soft dairy-cheese-like filling. The idea of incorpo- rating dairy fillings in snacks had been discussed within the industry for some time, but the problems of manufactur- ing such a product were formidable. Keeping the product crisp on the outside yet soft in the middle, while at the same time ensuring microbiological safety, would not be easy. Moreover, such a product would have to be capable of being stored at ambient temperatures, maintain its physical robustness and have a shelf life of at least three months.

Bringing Orlando products to market involved over- coming three types of technical problem. First, the formu-

lation and ingredient mix for the product had to maintain the required texture yet be capable of being baked on the company’s existing baking lines. The risk of developing an entirely new production technology for the offering was considered too great. Second, extruding the mixture into baking moulds while maintaining microbiological integrity (dairy products are difficult to handle) would require new extrusion technology. Third, the product would need to be packaged in a material that both reflected its brand image and kept the product fresh through its shelf life. Existing packaging materials were unlikely to provide sufficient shelf life. The first of these problems had, more or less, been solved in PJT’s development laboratories. The second two problems now seemed less formidable because of a num- ber of recent technological breakthroughs made by equip- ment suppliers and packaging manufacturers. This had convinced the company that Orlando was worth significant investment and it had been given priority development sta- tus by the company’s board. Even so, it was not expected to come to the market for another two years and was seen by some as potentially the most important new product devel- opment in the company’s history.

The project team Immediately after the board’s decision, Monica had accepted responsibility to move the development forward. She decided to put together a dedicated project team to oversee the development. ‘ It is important to have represent- atives from all relevant parts of the company. Although the team will carry out much of the work themselves, they will still need the cooperation and the resources of their own depart- ments. So, as well as being part of the team, they are also gateways to expertise around the company. ’ The team con- sisted of representatives from marketing, the development

CASE STUDY Developing ‘Savory Rosti-crisps’ at Dreddo Dan's

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kitchens (laboratories), PGT’s technology centre (a develop- ment facility that served the whole group, not just the snack division), packaging engineers, and representative from the division’s two manufacturing plants. All but the manufactur- ing representatives were allocated to the project team on a full-time basis. Unfortunately, manufacturing had no one who had sufficient process knowledge and who could be spared from their day-to-day activities.

Development objectives Monica had tried to set the objectives for the project in her opening remarks to the project team members when they had first come together. ‘We have a real chance here to develop an offering that not only will have major mar- ket impact, but will also give us a sustainable competitive advantage. We need to make this project work in such a way that competitors will find it difficult to copy what we do. The formulation is a real success for our development people, and as long as we figure out how to use the new extrusion method and packaging material, we should be difficult to beat. The success of Orlando in the marketplace will depend on our ability to operationalize and integrate the various technical solutions that we now have access to. The main problem with this type of offering is that it will be expensive to develop and yet, once our competitors realize what we are doing, they will come in fast to try and out-innovate us. Whatever else we do we must ensure that there is sufficient flexibility in the project to allow us to respond quickly when competitors follow us into the mar- ket with their own ‘me-too’ products. We are not racing against the clock to get this to market, but once we do make a decision to launch we will have to move fast and hit the launch date reliably. Perhaps most important, we must ensure that the crisps are 200 per cent safe. We have no experience in dealing with the microbiological testing which dairy-based food manufacture requires. Other divi- sions of PJT do have this experience and I guess we will be relying heavily on them.’

Monica, who had been tasked with managing the (now much expanded) development process, had already drawn up a list of key decisions she would have to take:

● How to resource the innovation project – The division had a small development staff, some of whom had been working on Project Orlando, but a project of this size would require extra staff amounting to about twice the current number of people dedicated to the innovation process.

● Whether to invest in a pilot plant – The process technology required for the new project would be unlike any of the division’s current technology. Similar technology was used by some companies in the frozen food industry and one option would be to carry out trials at these (non-competitor) companies’ sites. Alternatively, the Orlando team could build its own pilot plant which would enable it to experiment in-house. As well as the significant expense involve,

this would raise the problem of whether any process innovations would work when scaled up to full size. However, it would be far more convenient for the project team and allow its members to ‘make their mistakes’ in private.

● How much development to outsource – Because of the size of the project, Monica had considered outsourcing some of the innovation activities. Other divisions within the company might be able to under- take some of the development work and there were also specialist consultancies that operated in the food processing industries. The division had never used any of these consultancies before but other divisions had occasionally done so.

● How to organize the innovation activities – Current- ly the small development function had been organized around loose functional specialisms. Monica wondered whether this project warranted the creation of a sepa- rate department independent of the current structure. This might signal the importance of this innovation project to the whole division.

Fixing the budget The budget to develop Project Orlando through to launch had been set at $30 million. This made provision to increase the size of the existing innovation team by 70 per cent over a 20-month period (for launch two years later). It also included enough funding to build a pilot plant which would allow the team the flexibility to develop responses to potential competitor reaction after the launch. So, of the $30m, around $18m was for extra staff and contracted- out innovation work, $7.5m for the pilot plant and $4.5m for one-off costs (such as the purchase of test equipment etc.). Monica was unsure whether the budget would be big enough. ‘I know everyone in my position wants more money, but it is important not to under fund a project like this. Increasing our development staff by 70% is not really enough. In my opinion we need an increase of at least 90% to make sure that we can launch when we want. This would need another $5m, spread over the next 20 months. We could get this by not building the pilot plant I suppose, but I am reluc- tant to give that up. It would mean begging for test capacity on other companies’ plants, which is never satisfactory from a knowledge-building viewpoint. Also it would compromise security. Knowledge of what we were doing could easily leak to competitors. Alternatively we could subcontract more of the research which may be less expensive, especially in the long run, but I doubt if it would save the full $5m we need. More important, I am not sure that we should subcontract anything which would compromise safety, and increasing the amount of work we send out may do that. No, it’s got to be the extra cash or the project could overrun. The profit projections for the Orlando products look great [see Table 4.1], but delay or our inability to respond to competitor pressures would depress those figures significantly. Our competitors could get into the market only a little after us. Word has is that Marketing’s

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138 PART ONE DIRECTING THE OPERATION

calculations indicate a delay of only six months could not only delay the profit stream by the six months but also cut it by up to 30%. '

Monica was keen to explain two issues to the man- agement committee when it met to consider her request for extra funding. First, that there was a coherent and well-thought-out strategy for the innovation project over the next two years. Second, that saving $5m on Project Orlando’s budget would be a false economy.

QUESTIONS 1 How would you rank the innovation objectives for the

project?

2 What are the key issues in resourcing this innovation process?

3 What are the main factors influencing the resourcing decisions?

4 What advice would you give Monica?

Table 4.1 Preliminary ‘profit stream’ projections for the Project Orlando offering, assuming launch in 24 months’ time

Time period * 1 2 3 4 5 6 7

Profi t fl ow ($m) 10 20 50 90 120 130 135

*Six-month periods.

PROBLEMS AND APPLICATIONS

1 How would you go about evaluating the design of this book?

2 A company is developing a new app that will allow customers to track the progress of their orders. The website developers charge €10,000 for every development week and it is esti- mated that the design will take 10 weeks from the start of the design project to the launch of the website. Once launched, it is estimated that the new site will attract extra business that will generate profits of €5,000 per week. However, if the website is delayed by more than five weeks, the extra profit generated would reduce to €2,000 per week. How will a delay of five weeks affect the time when the design will break even in terms of cash flow?

3 How can the concept of modularization be applied to package holidays sold through an online travel agent?

4 One product where a very wide range of product types is valued by customers is that of domestic paint. Most people like to express their creativity in the choice of paints and other home decorating products that they use in their homes. Clearly, offering a wide range of paint must have serious cost implications for the companies which manufacture, distribute and sell the product. Visit a store which sells paint and get an idea of the range of products available on the market. How do you think paint manufacturers and retailers manage to design their services and products so as to maintain high variety but keep costs under control?

5 Some firms specialize in helping clients to innovate and design their products and services. One of the best known of these is IDEO ( ideo.com ). Look at the website and: (a) Identify the stages of design innovation that the firm goes through with its clients. (b) Assess its approach to design innovation. What does the firm believe are the most impor-

tant aspects of successful new product and service development? (c) Why do you think IDEO is so willing to tell everyone how to go about the design innova-

tion process? Isn’t that giving away the firm’s expertise for free?

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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 139

SELECTED FURTHER READING

Bangle, C. (2001) The ultimate creativity machine: how BMW turns art into profit, Harvard Business Review, January, 47–55.

A good description of how good aesthetic design translates into business success.

Bruce, M. and Bessant, J. (2002) Design In Business: Strategic innovation through design, Financial Times Prentice Hall and The Design Council, Harlow.

Probably one of the best overviews of design in a business context available today.

Christensen, C. (1997) The Innovator’s Dilemma, Harvard Business School Press, Boston, MA, 1997; Harper Business, New York, 2000.

A major influence on innovation theory.

Dyson, J. (1997) Against the Odds: An autobiography, Orion Business Books, London.

One of Europe’s most famous designers gives his philosophy.

Kelly, T. (2002) The Art Of Innovation: Success Through Innovation the IDEO Way, Profile Books, London.

Ideas from IDEO, the best-known design and innovation consultancy.

Nambison, S. and Sawhney, M. (2007) A buyer’s guide to the innovation bazaar, Harvard Business Review, June.

Provocative innovation ideas.

Rose, D. (2015) Enchanted Objects: Innovation, Design, and the Future of Technology, Scribner, New York.

An interesting look at how technology is (and will) impact on design.

Tidd, J. and Bessant, J. (2013) Managing Innovation: Integrating Technological, Market and Organizational Change, 5th edn, Wiley, Chichester.

The definitive textbook in the area.

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