Module 1
Strategy and Competitiveness
a. Operations
Why do we argue that operations be considered the heart of every
organization? Fundamentally, organizations exist to create value, and operations is the
part of the organization that creates value for the customer. Hammer (2004) maintains
that operational innovation can provide organizations with long‐term strategic
advantages over their competitors. Regardless of whether the organization is for profit
or not for profit, primarily service or manufacturer, or public or private, it exists to
create value. Thus, even nonprofit organizations like the Red Cross strive to create
value for the recipients of their services in excess of their costs. Moreover, this has
always been true, from the earliest days of bartering to modern‐day corporations.
Consider McDonald’s as an example. This firm uses a number of inputs, including
ingredients, labor, equipment, and facilities; transforms them in a way that adds value
to them (e.g., by frying); and obtains an output, such as a chicken sandwich, that can
be sold at a profit.
Note the word purposeful; systems are not merely arbitrary groupings but
goal‐directed or purposeful collections. Managing and running a production system
efficiently and effectively are at the heart of the operations activities that will be
discussed in this text. Since we will be using this term throughout the text, let us
formally define it. Operations is concerned with transforming inputs into useful
outputs according to an agreed‐upon strategy and thereby adding value to some entity;
this constitutes the primary activity of virtually every organization. Not only is
operations central to organizations, it is also central to people’s personal and
professional activities, regardless of their position. People, too, must operate
productively, adding value to inputs and producing quality outputs, whether those
outputs are information, reports, services, products, or even personal
accomplishments. Thus, operations should be of major interest to every reader, not
just professionally but also personally.
The strategy includes determining such elements as what customers value
(often referred to as the value proposition), the vision and mission of the organization,
an appropriate framework to execute this vision, and the core capabilities of the
organization. We discuss the strategy in detail a bit later. The environment includes
those things that are outside the actual production system but that influence it in some
way. Because of its influence, we need to consider the environment, even though it is
beyond the control of decision makers within the system. For example, a large portion
of the inputs to a production system are acquired from the environment. Also,
government regulations related to pollution control and workplace safety affect the
transformation system. Think about how changes in customers’ needs, a competitor’s
new product, or a new advance in technology can influence the level of satisfaction
with a production system’s current outputs. As these examples show, the environment
exerts a great deal of influence on the production system.
Because the world around us is constantly changing, it is necessary to monitor
the production system and take action when the system is not meeting its strategic
goals. Of course, it may be that the current strategy is no longer appropriate,
indicating a need to revise the strategy. On the other hand, it may be found that the
strategy is fine but that the inputs or transformation processes, or both, should be
modified in some way. In either case, it is important to continuously collect data from
the environment, the transformation processes, and the outputs; compare that data to
the strategic plan; and, if substantial deviations exist, design and implement
improvements to the system, or perhaps the strategy, so that results agree with the
strategic goals.
Thinking in terms of systems provides decision makers with numerous
advantages. To begin with, the systems perspective focuses on how the individual
components that make up a system interact. Thus, the systems perspective provides
decision makers with a broad and complete picture of an entire situation. Furthermore,
the systems perspective emphasizes the relationships between the various system
components. Without considering these relationships, decision makers are prone to a
problem called suboptimization. Suboptimization occurs when one part of the system
is improved to the detriment of other parts of the system and, perhaps, the
organization as a whole. For example, if a retailer decides to broaden its product line
in an effort to increase sales, this could actually end up hurting the retailer as a whole
if it does not have sufficient shelf space or service personnel available to
accommodate the broader product line. Thus, decisions need to be evaluated in terms
of their effect on the entire system, not simply in terms of how they will affect one
component of the system. In the remainder of this section, we elaborate on inputs, the
transformation processes, and outputs.
The set of inputs used in a production system is more complex than might be
supposed and typically involves many other areas such as marketing, finance,
engineering, and human resource management. Obvious inputs include facilities,
labor, capital, equipment, raw materials, and supplies. Supplies are distinguished from
raw materials by the fact that they are not usually a part of the final output. Oil, paper
clips, pens, tape, and other such items are commonly classified as supplies because
they only aid in producing the output. Another very important but perhaps less
obvious input is knowledge of how to transform the inputs into outputs. The
employees of the organization hold this knowledge. Finally, having sufficient time to
accomplish the operations is always critical. Indeed, the operations function quite
frequently fails in its task because it cannot complete the transformation activities
within the required time limit.
Two types of outputs commonly result from a production process: services and
products. Generally, products are physical goods, such as a personal computer, and
services are abstract or nonphysical. However, this classification may be more
confusing than helpful. For example, consider a pizza delivery chain. Does this
organization produce a product or provide a service? If you answered “a service,”
suppose that instead of delivering its pizzas to the actual consumer, it made the pizzas
in a factory and sold them in the frozen food section of grocery stores. Clearly, the
actual process of making pizzas for immediate consumption or to be frozen involves
basically the same tasks, although one may be done on a larger scale and use more
automated equipment. The point is, however, that both organizations produce a pizza,
and defining one organization as a service and the other as a manufacturer seems to be
a little arbitrary. In addition, both products and services can be produced as
commodities or individually customized.
We avoid this ambiguity by adopting the point of view that any physical entity
accompanying a transformation that adds value is a facilitating good (e.g., the pizza).
In many cases, of course, there may be no facilitating good; we refer to these cases as
pure services. The advantage of this interpretation is that every transformation that
adds value is simply a service, either with or without facilitating goods! If you buy a
piece of lumber, you have not purchased a product. Rather, you have purchased a
bundle of services, many of them embodied in a facilitating good: a tree‐cutting
service, a sawmill service, a transportation service, a storage service, and perhaps
even an advertising service that told you where lumber was on sale. We refer to these
services as a bundle of “benefits,” of which some are tangible (the sawed length of
lumber, the type of tree) and others are intangible (courteous salesclerks, a convenient
location, and payment by charge card). Some services may, of course, even be
negative, such as an audit of your tax return. In summary, services are bundles of
benefits, some of which may be tangible and others intangible, and they may be
accompanied by a facilitating good or goods.
Firms often run into major difficulties when they ignore this aspect of their
operations. They may think of, and even market themselves as, a “lumberyard” and
not as providing a bundle of services. They may recognize that they have to include
certain tangible services (such as cutting lumber to the length desired by the
customer) but ignore the intangible services (charge sales, having a sufficient number
of clerks). Another reason for not making a distinction between manufacturing and
services is that when a company thinks of itself as a manufacturer, it tends to focus on
measures of internal performance such as efficiency and utilization. But when
companies consider themselves as providing services, they tend to focus externally
and ask questions such as “How can we serve our customers better?” This is not to
imply that improving internal performance measures is not desirable. Rather, it
suggests that improved customer service should be the primary impetus for all
improvement efforts. It is generally not advisable to seek internal improvements if
these improvements do not ultimately lead to corresponding improvements in
customer service and customer satisfaction.
For example, the Plush restaurant appears to be about 75 percent service and
25 percent product. Although we work with “products” as extensively as with services
throughout, bear in mind that in these cases we are working with only a portion of the
total service, the facilitating good. In general, we will use the nonspecific term outputs
to mean either products or services. One particular type of output that is substantially
different from products and many other types of services is that of knowledge or
information. These outputs often have the characteristic that the more they are used,
the more valuable they become. For example, in a network, the more entities that
belong to the network, the more useful it may be. If you are on Facebook® or use e‐
mail, the more other people that are also there, the more valuable it is to you. And
when you share this output, you don’t lose anything, you gain. Some other
characteristics of information or knowledge that differ from normal goods and
services are as follows.
Suppose that in our production system, we make a mistake. We must be able
to observe this through, for example, accounting records (measurement data),
compare it to a standard to see how serious the error is, and then, if needed, plan and
implement (usually via a project) some improvements. If the changes are not
significantly affecting the outputs, then no control actions are needed. But if they are,
management must intercede and apply corrective control to alter the inputs or the
transformation processes and, thereby, the outputs. One example of the components of
the production system for a school would be as follows: A strategy of providing a
safe, trustworthy, friendly environment for passing knowledge on to the students. The
inputs would be, among others, the teachers, facility, books, and students that are
exposed to a transformation system of learning, counseling, motivating, and so on to
produce outputs of educated, skilled students. Control is exercised through
examinations, demographics, grievance procedures, and constant oversight. This all
occurs in a physical and structural environment that includes state and county school
boards to provide oversight policies and tax systems to provide the resources.
Operations include not only those activities associated specifically with the
production system but also a variety of other activities. For example, purchasing or
procurement activities are concerned with obtaining many of the inputs needed in the
production system. Similarly, shipping and distribution are sometimes considered
marketing activities and sometimes considered operations activities. Because of the
important interdependencies of these activities, many organizations are attempting to
manage these activities as one process commonly referred to as supply chain
management. As organizations begin to adopt new organizational structures based on
business processes and abandon the traditional functional organization, it is becoming
less important to classify activities as operations or nonoperations (e.g., sales,
marketing, and accounting). However, to understand the tasks more easily, we
commonly divide the field of operations into a series of subject areas such as
scheduling, process design, inventory management, maintenance, and quality control.
These areas are quite interdependent, but to make their workings more
understandable, we discuss them as though they were easily separable from each
other. In some areas, a full‐fledged department may be responsible for the activities,
such as quality control or scheduling, but in other areas, the activities (such as facility
location) may be infrequent and simply assigned to a particular group or project team.
Moreover, some of the areas such as supply chain management are critically
important because they are a part of a larger business process or because other areas
depend on them. Finally, since we consider all operations to be services, these subject
areas are equally applicable to organizations that have traditionally been classified as
manufacturers and services.
As has been previously discussed in this and will be further emphasized in the
remaining, an organization’s operations play a critical role in its overall
competitiveness and long‐ term success. Given the critical role played by operations,
it is important to stay abreast of the significant trends in the operations area as well as
general business trends that may impact the operations function. As in other
disciplines, technology is having a significant impact on the practice of operations.
For example, communication technologies such as the Internet and cloud computing
are greatly facilitating the ability of organizations to share real‐time information with
their suppliers and customers. Having more timely information enhances the
opportunities for supply chain partners to coordinate and integrate their operations,
which ultimately leads to a more effective and efficient supply chain that benefits both
the end customer and the trading partners in the supply chain. One exciting
technology that promises to greatly enhance the ability of organizations to have real‐
time information on their inventory and other assets is radio‐frequency identification
(RFID); RFID tags are attached to individual inventory items, and these tags transmit
identification and location information. For example, by attaching an RFID tag to a
part, its progress through the production process can be monitored and, when finished,
its location in the warehouse tracked.
RFID tags are classified as passive or active. Passive RFID tags contain no
power source and therefore rely on the power source of an RFID reader to transmit
their information. Active RFID tags contain a power source such as a battery and use
this power source to periodically transmit a signal that provides identification
information. Perhaps the greatest challenge to greater adoption of RFID tags is the
cost of the tags themselves. As with other technologies, the cost of RFID has
decreased dramatically and is expected to continue on this trajectory. The cost of basic
passive RFID tags ranges from $0.10 to $1.50, depending on the volume of tags
purchased and the environmental factors they are designed to withstand. The cost of
active RFID tags starts from $15 to $20 and again increases depending on the features
desired. Thus, at present, the costs of active RFID tags are mainly justified for
tracking expensive assets such as a rail car or delivery truck. Beyond technology,
another important trend in business is the increasing emphasis organizations are
placing on effectively managing their supply chains. Indeed, to remain competitive,
organizations are discovering the importance of leveraging the volumes of customer
data that are a natural by‐product of our computerized society, developing stronger
relationships with their supply chain partners, and proactively managing the risks
associated with disruptions to their supply chain many organizations are finding ways
to combine the volumes of data they accumulate with advanced analytical techniques
to manage and improve their supply chains in ways that were unthinkable in the past.
Managing the risk of disruptions to the supply chain is yet another area
gaining increasing attention. For example, consider the impact of the earthquake and
the tsunami that hit Japan in 2011 on the availability of product components and
finished goods. Disruptions to the supply chain are generally either the result of nature
(natural disasters such as earthquakes, blizzards, floods, and hurricanes) or human
behavior (terrorist strikes, glitches in technology, and workers going on strike).
Managing such disruptions is especially challenging because they are often difficult to
predict. The best approach for dealing with these types of disruptions to the supply
chain is to brainstorm potential disruptions, assess the impact of the identified
disruptions, and develop contingency plans to mitigate the risk of the disruption. A
final important trend impacting the practice of operations management is the
increasing levels of concern for the environment which in turn have led many
organizations to place greater emphasis on issues related to sustainability. Addressing
environmental concerns impacts virtually all aspects of operations management from
the design of the organization’s output to the sourcing of parts, the distribution of the
product, and even the disposal or recycling of the product or its components once it
reaches the end of its useful life. Green sourcing, for example, seeks to identify
suppliers in such a way that the organization’s carbon footprint and overall impact on
the environment are minimized.
As a result of the increasing importance organizations are placing on
sustainability, some organizations are adopting the triple bottom line approach for
assessing their performance. In addition to assessing profits, organizations that
employ the triple bottom line approach also assess themselves on social responsibility
(people) and their environmental responsibility (planet). Reducing the waste
associated with products is another top sustainability priority of organizations that
seek to minimize the negative impact they have on the environment. In this case,
organizations can deploy a strategy often referred to as the three Rs: reduce, reuse,
and recycle. As its name suggests, the reduce strategy seeks to decrease the amount of
waste associated with a product. One way to accomplish this is to minimize the
amount of product packaging used. In services, switching to electronic copies of
documents helps reduce waste, such as when a bank switches to electronic statements.
Reuse is a second strategy for minimizing waste. The idea underlying reuse is to
identify alternative uses for an item after its initial use. For example, there are kits
available for converting old computer monitors into fish aquariums. Finally, recycling
involves using the materials from old products to create new products. For example,
many greeting cards are made from recycled paper.
b. Customer Value
The cost to the customer is, of course, the price paid, but this is usually highly
correlated with the cost of producing the service or product, which is itself largely
based on the “efficiency” of the production process. Efficiency is always measured as
output/input; for example, a standard automobile engine that uses gasoline is usually
about 15 to 20 percent efficient (that is, the energy put into the engine in terms of
gasoline vs. the energy put out in terms of automobile motion). However, electric and
jet engines are more efficient, and rocket engines can reach almost 70Cpercent
efficiency. The primary method of attaining efficiency in production is through high
productivity, which is normally defined as output per worker hour. This definition of
productivity is actually what is known as a partial factor measure of productivity, in
the sense that it considers only worker hours as the productive factor. Although in the
past, labor often constituted as much as 50Cpercent of the cost of a product—or even
more for a service—it is now frequently as little as 5 percent, so labor productivity is
no longer a good measure of efficiency. Clearly, labor productivity could easily be
increased by substituting machinery for labor, but that doesn’t mean that this is a wise,
or even cost‐saving, decision. A multifactor productivity measure uses more than a
single factor, such as both labor and capital. Obviously, the different factors must be
measured in the same units, such as dollars. An even broader gauge of productivity,
called total factor productivity, is measured by including all the factors of production
—labor, capital, materials, and energy—in the denominator. This measure is to be
preferred in making any comparisons of productivity for efficiency or cost purposes.
Many people (called “early adopters” in marketing) will buy products and
services simply because they are so innovative, or major improvements over what has
been available formerly. It is the field of research and development (known as R&D)
that is primarily responsible for developing innovative new product and service ideas.
R&D activities focus on creating and developing (but not producing) the
organization’s outputs. On occasion, R&D also creates new production methods by
which outputs, either new or old, may be produced. Research itself is typically
divided into two types: pure and applied. Pure research is simply working with basic
technology to develop new knowledge. Applied research is attempting to develop new
knowledge along particular lines. For example, pure research might focus on
developing a material that conducts electricity with zero resistance, whereas applied
research could focus on further developing this material to be used in products for
customers. Development is the attempt to utilize the findings of research and expand
the possible applications, often consisting of modifications or extensions to existing
outputs to meet customers’ interests. In the early years of a new output, development
is oriented toward removing “bugs,” increasing performance, improving quality, and
so on. In the middle years, options and variants of the output are developed. In the
later years, development is oriented toward extensions of the output that will prolong
its life.
Two alternatives to research frequently used by organizations are imitation of
a proven new idea (i.e., employing a second‐to‐market strategy) or outright purchase
of someone else’s invention. The outright purchase strategy is becoming extremely
popular in those industries where bringing a new product to market can cost huge
sums, such as pharmaceuticals and high technology. It is also employed in those
industries where technology advances so rapidly that there isn’t enough time to
employ a second‐to‐market strategy. Although imitation does not put the organization
first in the market with the new product or service, it does provide an opportunity to
study any possible defects in the original product or service and rapidly develop a
better design, frequently at a better price. The second approach—purchasing an
invention or the inventing company itself—eliminates the risks inherent in research,
but it still requires the company to develop and market the product or service before
knowing whether it will be successful. Either route spares the organization the risk
and tremendous cost of conducting the actual research leading up to a new invention
or improvement. In addition to product research (as it is generally known), there is
also process research, which involves the generation of new knowledge concerning
how to produce outputs. Currently, the production of many familiar products out of
plastic (toys, pipe, furniture, etc.) is an outstanding example of successful process
research. Motorola, to take another example, extensively uses project teams that
conduct process development at the same time as product development.
Many people confuse functionality with quality (discussed next). But
functionality involves the activities the product or service is intended to perform,
thereby providing the benefits to the customer. A contemporary example is the
ubiquitous cell phone. These days, it is probably rare to find a cell phone that is only a
phone; many phones include a camera and a way to send its picture to another person
or provide access to the Internet, as well as a myriad of other functions. However,
many products, especially electronics, but also some services, may be advertised to
provide purchasers with a new, unique function and they may do so, but it may not
work well or for long. The former involves performance and the latter has to do with
reliability. Clearly, these are different attributes of the output, and one can be well
addressed while others disappoint. Our discussion of quality, next, elaborates a bit
more on the distinction between these attributes.
. However, in addition to vast improvements in operating efficiency, an
unexpected by‐product of the continuous improvement programs of the 1980s was
substantial improvement in flexibility. Indeed, prior to this, efficiency and flexibility
were thought to be trade‐offs. Increasing efficiency meant that flexibility had to be
sacrificed, and vice versa. Thus, with the emphasis on continuous improvement came
the realization that increasing operating efficiency could also enhance flexibility. For
example, many manufacturers initiated efforts to reduce the amount of time required
to set up (or change over) equipment when switching from the production of one
product to another. Obviously, all time spent setting up equipment is wasteful, since
the equipment is not being used during this time to produce outputs that ultimately
create revenues for the organization. Consequently, improving the amount of time a
resource is used productively directly translates into improved efficiency.
Interestingly, these same reductions in equipment times also resulted in improved
flexibility. Specifically, with shorter equipment setup times, manufacturers could
produce economically in smaller‐size batches, making it easier to switch from the
production of one product to another.
In response to the discovery that efficiency and flexibility can be improved
simultaneously and may not have to be traded off, the strategy of mass customization
emerged (see Pine 1993; Gilmore and Pine 1997). Organizations pursuing mass
customization seek to produce low‐cost, high‐quality outputs in great variety. Of
course, not all products and services lend themselves to being customized. This is
particularly true of commodities, such as sugar, gas, electricity, and flour. On the other
hand, mass customization is often quite applicable to products characterized by short
life cycles, rapidly advancing technology, or changing customer requirements.
However, recent research suggests that successfully employing mass customization
requires an organization to first develop a transformation process that can consistently
deliver high‐quality outputs at a low cost. With this foundation in place, the
organization can then seek ways to increase the variety of its offerings while at the
same time ensuring that quality and cost are not compromised.
HP has discovered that modular design provides three primary benefits. First,
components that differentiate the product can be added during the later stages of
production. This method of mass customization, generally called postponement, is
one form of the assemble‐to‐order production process. For example, the company
designed its printers so that country‐specific power supplies are combined with the
printers at local distribution centers and actually plugged in by the customer when the
printer is set up. Second, production time can be significantly reduced by
simultaneously producing the required modules. Third, producing in modules
facilitates the identification of production and quality problems.
The competitive advantages of faster, dependable response to new markets or
to the individual customer’s needs have occasionally been noted in the business media
(Eisenhardt and Brown 1998; Stalk 1988; Vessey 1991). For example, in a study of
the US and Japanese robotics industry, the National Science Foundation found that the
Japanese tend to be about 25 percent faster than Americans, and to spend 10 percent
less, in developing and marketing new robots. The major difference is that the
Americans spend more time and money on marketing, whereas the Japanese spend
five times more than the Americans on developing more efficient production methods.
Faster response to a customer also can, up to a point, reduce the unit costs of
the product or service, sometimes significantly. On the basis of empirical studies
reported by Meredith et al. (1994), it seems that there is about a 2:1 (i.e., 0.50)
relationship between response time and unit cost. That is, starting from typical values,
an 80 percent reduction in response time results in a corresponding 40 percent
reduction in unit cost. The actual empirical data indicated a range between about 0.60
and 0.20, so for an 80 percent reduction in response time, there could be a cost
reduction from a high of 0.60 × 80 percent = 48 percent to a low of 16 percent. This is
an overwhelming benefit because if corresponding price reductions are made, it
improves the value delivered to the customer through both higher responsiveness and
lower price. The result for the producer is a much higher market share. If the producer
chooses not to reduce the price, then the result is both higher margins and higher
sales, for significantly increased profitability.
c. Strategy and Competitiveness
The United States provides a graphic example of global trade trends. The trend
in merchandise trade for the United States is startling. Although some might think that
foreign competition has been taking markets away from US producers only in the past
decade, US merchandise imports have grown considerably for over 30 years.
Although exports have increased over this period as well, they have not increased as
fast as imports; the result is an exploding trade deficit with foreign countries. Partly as
a result of this deficit, the United States is now the biggest debtor nation in the world,
with a cumulative deficit of about $5 trillion, nearly half of the US annual gross
domestic product (GDP), and an annual deficit running about 6 percent of GDP.
However, these values hold only for the period up to mid‐2008, when the global
financial/credit/recession crisis started. It now appears that all these figures will
become much worse—not for just the United States, but globally.
Another important issue relating to the financial crisis involves the exchange
rate between currencies. Let’s consider in more detail what it means when a country’s
currency declines in value relative to foreign currencies. A weaker currency means
that citizens in that country will have to pay more for products imported from foreign
countries. Meanwhile, the prices for products produced in that country and exported
to foreign countries will decline, making them more desirable. Thus, a decline in the
value of a country’s currency is a double‐edged sword. Such a decline makes
imported goods more expensive for citizens to purchase but at the same time makes
exports less expensive for foreign consumers, increasing the demand for domestic
products.
As an example, let’s consider the American dollar. In the financial crisis of
2008, the dollar grew stronger as Americans sold foreign assets and foreigners rushed
to hold assets in the dollar, the world’s strongest currency, as well as a “reserve”
(commodities are priced in dollars) currency. However, given the massive amount of
dollars, the US government borrowed and created to overcome the financial crisis,
there is widespread concern that the dollar may weaken or even collapse in the future.
According to economic theory, a stronger dollar should make American products less
desirable (or competitive) in foreign markets and imports more desirable in American
markets. However, some market actions that governments and businesses often take to
keep from losing customers can alter this perfect economic relationship. For instance,
in the 1990s, when the price of Japanese products in the United States started
increasing in terms of dollars, Japanese firms initiated huge cost‐cutting drives to
reduce the cost (and thereby the dollar price) of their products, to keep from losing
American customers, which was largely successful. Similarly, China controls the
exchange rate of its currency, the renminbi, to stay at about 7 to the dollar (though
they have been letting it strengthen recently), so it always sells its goods at a
competitive price.
In the last decade, particularly with the economic rise of China and India,
global markets, manufacturers, and service producers have evolved in a dramatic
manner. With the changes occurring in the World Trade Organization (WTO),
international competition has grown very complex in the last two decades. Previously,
firms were domestic, exporters, or international. A domestic firm produced and sold in
the same country. An exporter sold goods, often someone else’s, abroad. An
international firm sold domestically produced as well as foreign‐produced goods both
domestically and in foreign countries. However, domestic sales were usually
produced domestically, and foreign sales were made either in the home country or in a
plant in the foreign country, typically altered to suit national regulations, needs, and
tastes. Now, however, there are global firms, joint ventures, partial ownerships,
foreign subsidiaries, and other types of international producers. For example, Canon is
a global producer that sells a standard “world‐class” camera with options and add‐ons
available through local dealers. And automobile producers frequently own stock in
foreign automobile companies. Mazak, a fast‐ growing machine tool company, is the
US subsidiary of Yamazaki Machinery Company of Japan. Part of the reason for
cross‐ownerships and cross‐endeavors is the spiraling cost of bringing out new
products. New drugs and memory chips run in the hundreds of millions to billions of
dollars to bring to market. By using joint ventures and other such approaches to share
costs (and thereby lower risks), firms can remain competitive.
Whether to build offshore, assemble offshore, use foreign parts, employ a joint
venture, and so on is a complex decision for any firm and depends on a multitude of
factors. For example, the Japanese have many of their automobile manufacturing
plants in foreign countries. The reasons are many and include to circumvent foreign
governmental regulation of importers, to avoid the high yen cost of Japanese‐
produced products, to avoid import fees and quotas, and to placate foreign consumers.
Of course, other considerations are involved in producing in foreign countries: culture
(e.g., whether women are part of the labor force), political stability, laws, taxes,
regulations, and image. Other complex arrangements of suppliers can result in hidden
international competition. For example, many products that bear an American
nameplate have been totally produced and assembled in a foreign country and are
simply imported under a US manufacturer’s or retailer’s nameplate, such as Nike
shoes. Even more confusing, many products contain a significant proportion of
foreign parts or may be composed entirely of foreign parts and only assembled in the
United States (e.g., toasters, mixers, and hand tools).
The organization’s business strategy is a set of objectives, plans, and policies
for the organization to compete successfully in its markets. In effect, the business
strategy specifies what an organization’s competitive advantage will be and how this
advantage will be achieved and sustained through the decisions the organization’s
business units make in the future. A key element of the business strategy is
determining the window of opportunity for executing this strategy before competitors
do the same. The strategic plan that details this business strategy is typically
formulated at the executive committee level (CEO, president, vice presidents) and is
usually long range, at least three to five years. In fact, however, the actual decisions
that are made over time become the long‐range strategy. In too many firms, these
decisions show no pattern at all, reflecting the truth that they have no active business
strategy, even if they have gone through a process of strategic planning. In other
cases, these decisions bear little or no relationship to the organization’s stated or
official business strategy. The point is that an organization’s actions tell more about its
true business strategy, or the lack thereof, than its public statements.
But devising a winning strategy is only the first step in being competitive. The
organization and its various business units still need to successfully implement this
strategy, and that is where so many fail. It is now clear that more organizational
strategies fail not so much for being a poor strategy but instead for poor execution. As
Morgan, Levitt, and Malek note in their widely heralded book, “Executing your
Strategy; How to Break it Down and Get it Done” (Morgan et al. 2007, p. 1),
“Corporations spend about $100 billion a year on management consulting and
training, most of it aimed at creating brilliant strategy. Yet studies have found that .C.C.
something like 90 percent of companies consistently fail to execute strategies
effectively.” They confirm that thousands of such strategies fail every year because of
poor execution.
Executing a winning strategy is a major project that must be implemented
within a limited time, taking substantial resources and experienced talent, the
province of project management (Meredith et al. 2015). Unfortunately, as Morgan et
al. point out, top managers consider the tedious work of project management as “too
‘tactical’ to take up their precious timeC.C.C. leaving the grunt work of execution to the
lower echelons. Nothing could be further from the truthC.C.C.Cthat is precisely where
strategy goes awry.” (p. 2, 4). Morgan et al. suggest that a simple test of this failure in
perspective of top executives is to examine the set of projects—the project portfolio—
to see whether it is aligned with the organization’s stated strategy or not.
We now move to a discussion of the business unit strategies organizations
employ to support the overall strategy of the organization. Clearly, the business unit
strategies are also projects—there will be a marketing strategy, a financial strategy, an
R&D strategy, and so on. Here, of course, we are interested in the operations and
supply chain strategy. As it happens, there are a number of fairly well‐defined such
strategies. One that is common to many of the functional areas is related to the life
cycle of the organization’s products or services.
A number of functional strategies are tied to the stages in the standard life
cycle of products and services, shown in FigureC1.7. Studies of the introduction of
new products indicate that the life cycle (or stretched S growth curve, as it is also
known) provides a good pattern for the growth of demand for a new output. The curve
can be divided into three major segments: (1) introduction and early adoption, (2)
acceptance and growth of the market, and (3) maturity with market saturation. After
market saturation, demand may remain high or decline, or the output may be
improved and possibly start on a new growth curve. The length of product and service
life cycles has been shrinking significantly in the last decade or so. In the past, a life
cycle might have been five years, but it is now six months. This places a tremendous
burden on the firm to constantly monitor its strategy and quickly change a strategy
that becomes inappropriate to the market.
The life cycle begins with an innovation—a new output or process for the
market, as discussed earlier. The innovation may be a patented product or process, a
new combination of existing elements that has created a unique product or process, or
some service that was previously unavailable. Initial versions of the product or service
may change relatively frequently; production volumes are small, since the output has
not caught on yet; and margins are high. As volume increases, the design of the output
stabilizes and more competitors enter the market, frequently with more capital‐
intensive equipment. In the mature phase, the now high‐volume output is a virtual
commodity, and the firm that can produce an acceptable version at the lowest cost
usually controls the market. Clearly, a firm’s business strategy should match the life‐
cycle stages of its products and services. If a firm such as HP is good at innovation, it
may choose to focus only on the introduction and acceptance phases of the product’s
life cycle and then sell or license production to others as the product moves beyond
the introduction stage. If its strength is in high‐volume, low‐cost production, the
company should stick with proven products that are in the maturity stage. Most
common, perhaps, are firms that attempt to stick with products throughout their life
cycle, changing their strategy with each stage. One approach to categorizing an
organization’s business strategy is based on its timing of introductions of new outputs.
Be aware that a number of implicit trade‐offs are involved in developing a
strategy. Let us use the first‐to‐market strategy to demonstrate. A first‐to‐market
strategy requires large investments in product development in an effort to stay ahead
of the competition. Typically, organizations that pursue this strategy expect to achieve
relatively higher profit margins, larger market shares, or both as a result of initially
having the market to themselves. The strategy is somewhat risky because a competitor
may end up beating them to the market. Also, even if a company succeeds in getting
to the market first, it may end up simply creating an opportunity for the competition to
learn from its mistakes and overtake it in the market. To illustrate, although Sony
introduced its Betamax format for VCRs in 1975, JVC’s VHS format—introduced the
following year—is the standard that ultimately gained widespread market acceptance.
Such trade‐offs are basic to the concept of selecting a business strategy. Although
specific tasks must be done well to execute the selected strategy, not everything needs
to be particularly outstanding—only a few things. And, of course, strategies based on
anything else—acquisitions, mergers, tax loss carry‐forwards, even streams of high‐
technology products—will not be successful if the customer is ignored in the process.
As we know from the earlier “Customer Value” section, there are a wide range
of benefits and costs that organizations can compete on and various groups of
customers value. If, say, n of these factors are important for an organization to
consider, we might then conceive of a graph or space with n dimensions on it showing
the organization’s measures on each of the n factors as well as their competitors’
measures. The curve connecting all these measures would then be called the
organization’s performance frontier (Clark 1996).
In effect, this curve represents the level of performance that organizations in
an industry can achieve across two dimensions given the technology available at a
given point in time. According to the figure, company A is apparently pursuing more
of a customization strategy than the two other competitors shown, offering a wider
variety of outputs but incurring greater cost. We might think of a high end furniture
store as perhaps fitting point A. Company C, perhaps Costco, seems to be pursuing a
standardization strategy, offering a smaller range of furniture but incurring lower unit
costs. An interesting use of this framework is to investigate and evaluate the impact of
a change in technology or operational innovation, assume a new innovation such as
“cross‐docking” has been developed by company B, perhaps represented by Wal‐
Mart, shifting its performance frontier to curve 2. In this case, company B could hold
its unit price constant and offer higher output variety than company A and at lower
unit cost (position B1 ). Alternatively, company B could maintain its current level of
output variety and lower its unit cost to levels below company C’s (position B2 ) or
perhaps choose a position somewhere between points B1 and B2 .
Suppose you were employed at company A and company B chose to operate at
point B1 . In effect, company B can now offer a wider variety of outputs and at lower
unit costs. What are your options? As it turns out, there are two generic options or
improvement trajectories company A could try to follow. One improvement trajectory
would be for company A to streamline its operations and make cost‐variety trade‐offs,
moving down curve 1 toward company C. Upon streamlining its operations, company
A could then attempt to adopt the new technology and choose a position on the new
frontier. A second improvement trajectory would be for company A to attempt to
directly adopt the new technology and move to the new frontier without streamlining
its current operations.
There are advantages and disadvantages associated with both trajectories. An
advantage of streamlining operations first is that this might provide a better
understanding of current processes. In turn, this better understanding might increase
company A’s options in choosing a location on the new frontier and might even better
position it to adopt the new technology. One drawback of streamlining its current
operations first is that the knowledge gained might be irrelevant when the new
technology is eventually adopted and delaying the adoption of the new technology
might mean reduced market share and profits. Another important factor is the amount
of time required to execute the improvement trajectory and get to the new position on
the new performance frontier. However, although it might appear that streamlining the
current operation first before adopting the new technology should take more time than
immediately adopting the technology, when ease of implementation is considered, the
former approach might in fact be more expedient. On a more practical note, Kmart
some years ago tried to challenge Wal‐Mart on low prices but was unsuccessful. Then,
Sears and Kmart merged instead, but that didn’t seem to work well either; now, both
seem to be in trouble.
When an organization chooses to stress one or two key areas of strength, it is
referred to as a focused organization. For example, IBM is known for its customer
service, General Electric for its technology, and Procter & Gamble for its consumer
marketing. In general, most but not all areas of focus relate to operations. Some firms,
such as those in the insurance industry, focus on financial strength and others focus on
marketing strengths. For example, Harley‐Davidson considers its strength to be in
building relationships with its dealers and motorcycle owners. And many health care
organizations are achieving significant operational efficiencies by focusing on a
narrow range of ailments. For example, by treating only long‐term acute cases,
Intensiva HealthCare has been able to reduce its costs to 50 percent of those of a
traditional intensive‐care ward. Clearly, adopting a focus strategy means knowing not
only what customers to concentrate on but also knowing what customers you do not
want.
For many organizations that relied on the focus framework of strategy, the
traditional view was that competing on one competitive dimension required trading
off performance on one or more other dimensions (e.g., higher quality results in
higher costs). However, research suggests that, at least in some cases, building
strengths along alternative competitive dimensions may in fact be cumulative and that
building a strength on one dimension may facilitate building strengths on other
dimensions (Ferdows and De Meyer 1990). Furthermore, according to this research,
there is a preferred order in developing strengths on various competitive dimensions.
According to the sand cone model organizations should first develop the capability to
produce quality outputs. Once an organization has developed this proficiency, it is
next appropriate to address the issue of delivery dependability. Next, according to the
model, the competitive dimensions of speed and cost should be addressed,
respectively.
In addition to providing guidance to organizations regarding the order in
which to focus their attention and initiatives, the model has intuitive appeal. For
example, it makes little sense to focus on improving delivery dependability before an
organization can provide a consistent level of quality. In today’s competitive
marketplace, providing defective outputs in a timely fashion is not a recipe for long‐
term success. Likewise, organizations should achieve consistent quality levels and
delivery dependability before attempting to reduce lead times. Of course, the model is
not set in stone (remember that it is called the sand cone) and organizations facing
different circumstances may choose to address the competitive dimensions in a
different order.
One important result of developing a business strategy is identifying the
organization’s core competencies and capabilities that provide those product/service
dimensions important to customers and hence are the source of customer value. Core
competencies (Prahalad and Hamel 1990) are the collective knowledge and skills an
organization has that distinguish it from the competition. In effect, these core
competencies become the building blocks for organizational practices and business
processes, referred to as core capabilities (Stalk et al. 1992). (Hereafter, we will refer
to both of these simply as “core capabilities.”) The importance of these core
capabilities derives from their strong relationship to an organization’s ability to
integrate a variety of technologies and skills in the development of new products and
services. Clearly, then, one of the top management’s most important activities is the
identification and development of the core capabilities the organization will need to
successfully execute the business strategy. In effect, core capabilities provide the basis
for developing new products and services and are a primary factor in determining an
organization’s long‐term competitiveness. Hammer (2004) points out the importance
of “operational innovation” in the organization as one basis for sustained competitive
advantage, the clear result of a core capability. Therefore, two important parts of
strategic planning are identifying and predicting the core capabilities that will be
critical to sustaining and enhancing the organization’s competitive position. On this
basis, an organization can also assess its suppliers’ and competitors’ capabilities. If the
organization finds that it is not the leader, it must determine the cost and risks of
catching up with the best versus the cost and risks of losing that core capability.
Hayes and Pisano (1994) stress the importance of a firm not looking for “the”
solution to a current competitive problem but rather the “paths” to building one or two
core capabilities to provide the source of customer value for the indefinite future.
Moreover, the firm should not think in terms of “trade‐offs” between core capabilities
(e.g., moving from flexibility as a strength to low cost), but rather of “building” one
capability on top of others and determining which set will provide the most customer
value. Often, it is more useful to think of an organization in terms of its portfolio of
core capabilities, rather than its portfolio of businesses or products. For instance, Sony
is known for its expertise in miniaturization; 3M for its knowledge of substrates,
coatings, and adhesives; Black and Decker for small electrical motors and industrial
design; Boeing for its ability to integrate large‐ scale complex systems; and Honda for
engines and power trains. Had Sony initially viewed itself as primarily a manufacturer
of Walkmans, rather than as a company with expertise in miniaturization, it might
have overlooked several profitable opportunities, such as entering the camcorder
business. As another example, Boeing has successfully leveraged its core capability
related to integrating large‐scale systems in its production of commercial jetliners,
space stations, fighter‐ bombers, and missiles.
As these examples illustrate, core capabilities are often used to gain access to a
wide variety of markets. Canon used its core capabilities in optics, imaging, and
electronic controls to enter the markets for copiers, laser printers, cameras, and image
scanners. In a similar fashion, Honda’s core capabilities in engines and power trains
comprise the basis for its entry into other businesses: automobiles, motorcycles, lawn
mowers, and generators. In addition to providing access to a variety of markets, a core
capability should be strongly related to the benefits provided by the product or service
that customers value. In Sony’s case, its expertise in miniaturization translates directly
into important product features such as portability and aesthetic designs. Alternatively,
suppose Sony developed a core competence in writing understandable user manuals.
Since people who purchase an HD TV or a camcorder rarely base their purchase
decision on the quality of the user manual (when was the last time you read a user
manual?), this core capability would provide little of any competitive advantage.
Activities that are not strategic or core are candidates for outsourcing. These
parts or activities are not strongly linked to key product characteristics, do not require
highly specialized knowledge, and do not need special physical assets, and the
organization does not have the technological lead in this area. Thus, if it is beneficial
to outsource these parts or activities—perhaps because of lower cost or higher quality
—no loss in competitiveness should result. On the other hand, when a firm’s strategic
parts and activities have been outsourced, particularly to a foreign supplier, called
offshoring, the firm has become hollow (Jonas 1986). As we have stated, the wise
firm will outsource only nonstrategic, simple, relatively standard parts and processes
such as screws or types of processes that are not worth the time for the firm to
produce itself; the complex, proprietary parts and processes that give their products an
edge in the marketplace are produced internally. If the firm outsources these parts and
processes as well, it soon finds that the engineering design talent follows the
production of the part outside the firm, too, and its core capabilities have been lost.
Then, the firm has been hollowed out, becoming merely a distributor of its supplier’s
products. Given the huge potential effects of outsourcing, both positive and negative,
a firm should consider such a move very carefully. Management needs to think about
both the long‐term and short‐term effects. They also need to consider the impact of
this decision on their core capabilities and everything else they do within the
company. Such a major decision as outsourcing will affect other decisions as well,
such as sourcing materials, hiring/releasing labor and management, marketing,
finance, and a wide range of other areas.
So what is the problem? If a supplier can deliver the parts at lower cost and
better quality when they are needed, why not use the supplier? The problem is that the
supplier gains the expertise (and core capabilities) to produce the critical parts you
need, and as Hayes and Pisano (1994), among others, note, organizations quickly
forget how they produced those critical parts. After a while, when the supplier has
improved on the process and you have forgotten how to make the parts, it is likely to
start competing with you, producing the products you have been selling and dropping
you as a customer. This is even more dangerous if, as already noted, the product and
transformation system has also been hollowed out, following the production activities
to the supplier. This happened extensively in the television industry, where the
Japanese learned first how to produce and then how to engineer black‐and‐white and,
later, color television sets. They then started tentatively introducing their own brands,
to see if US customers would buy them. Their products were inexpensive, of high
quality, and caught on quickly in the free‐enterprise American markets. The Japanese
and Koreans now virtually control this industry.
d. Planning the Project
In this section, we delve deeply into the intricacies of project planning,
examining its critical role and exploring its various facets in detail. Project
management planning stands out as one of the most crucial elements contributing to
the overall success of a project. This area has garnered substantial research attention
due to its importance, and the strategies and methodologies employed in effective
project planning can significantly impact project outcomes.
To begin, we will explore the role of the organization’s portfolio of projects in
achieving its strategic goals. This portfolio comprises the collection of projects
undertaken by an organization, each contributing in its own way towards the
organization’s broader strategic objectives. It is essential to understand that this
portfolio is dynamic and evolves over time. Projects are inherently transient, each
having a finite lifecycle, which means they come with specific start and end dates, as
well as distinct phases that dictate their progression.
The lifecycle of a project typically involves several key stages: initiation,
planning, execution, monitoring and controlling, and closing. Each of these stages
requires careful management and strategic planning to ensure that the project meets its
goals, stays within scope, adheres to timelines, and remains within budget. The
planning phase, in particular, is where much of the groundwork for project success is
laid. This phase involves defining objectives, setting goals, determining resource
needs, establishing timelines, and developing a comprehensive plan that outlines how
the project will be executed and controlled.
Next, we will discuss the project team and its relationship with the parent
organization. The project team is a vital component of the project management
process. The effectiveness of the team can greatly influence the project’s success.
Understanding how the team interacts with and is supported by the parent
organization is crucial. This includes examining how the team’s roles and
responsibilities are defined, how they are aligned with the organization’s strategic
objectives, and how communication and coordination are managed.
Additionally, we will describe the various project planning tools that are used
to facilitate effective project management. These tools include project management
software, scheduling tools, budgeting tools, and risk management frameworks. Each
tool plays a specific role in aiding project managers and teams in planning, executing,
and monitoring the project. We will explore how these tools help in creating detailed
project plans, managing resources, tracking progress, and making informed decisions
throughout the project lifecycle.
By understanding the complexities of project planning, the role of the project
portfolio, and the relationship between the project team and the organization, we can
gain valuable insights into how to manage projects more effectively. This
comprehensive approach to project management planning ensures that all aspects are
considered and addressed, ultimately leading to more successful project outcomes.
The long-term purpose of undertaking projects within an organization is
ultimately to achieve the organization’s overarching goals. This is accomplished
through the strategic management of the project portfolio, also known as the
organization's project portfolio. The project portfolio encompasses all the projects an
organization is undertaking, each contributing towards its strategic objectives.
Effective portfolio management is crucial as it ensures that all projects align with the
organization's goals and that resources are allocated efficiently.
When making decisions about which projects to select and prioritize, it is
essential to consider the interactions and dependencies among various projects.
Managing projects as a cohesive portfolio, rather than as isolated entities, allows for a
more integrated approach. This approach facilitates the optimization of resources, the
identification of potential conflicts, and the balancing of project timelines. It also
ensures that the collective impact of the projects contributes positively to the
organization’s strategic goals.
This integrated management approach contrasts sharply with the more
common practice of setting a project budget and specifying a return on investment
(ROI) hurdle rate. In such practices, projects are often funded based on whether they
meet the budget constraints and ROI criteria, without adequate consideration of how
they interact with other ongoing projects. This method can lead to suboptimal project
selection, as it does not account for the strategic fit of the projects within the broader
portfolio.
Organizations that adopt a more holistic approach to project management
carefully evaluate how each project fits into the overall portfolio. They assess how
projects interact with one another, how they support or compete for resources, and
how their outcomes contribute to the organization’s long-term objectives. This
approach helps prevent the scenario where an organization ends up with a higher
number of ongoing projects than it can competently manage. Such situations often
result from the practice of funding all projects that meet the specified criteria, without
regard for their strategic alignment or resource demands.
Consequently, organizations that do not manage their project portfolios
effectively may find that their resources are stretched thin, leading to difficulties in
achieving project objectives and potentially compromising the organization’s long-
term goals. The cumulative effect of poorly managed projects can diminish their
overall contribution to the organization's strategic aims. Therefore, it is imperative for
organizations to adopt a comprehensive project management strategy that emphasizes
portfolio management, aligns projects with strategic goals, and ensures efficient
resource utilization.
In summary, achieving an organization's long-term goals through projects
requires careful planning and management of the project portfolio. By considering the
interactions among projects and managing them as a unified portfolio, organizations
can better align their projects with strategic objectives, optimize resource allocation,
and ultimately enhance their chances of long-term success. This strategic approach
ensures that the organization remains focused on its goals and effectively manages its
project-related activities, avoiding the pitfalls of an overextended project portfolio and
ensuring that each project contributes meaningfully to the organization's overall
mission.
In an effort to more effectively align a firm's product development projects
with its strategic objectives, Professors Steven Wheelwright and Kim B. Clark of the
Harvard Business School developed a comprehensive framework known as the
"Aggregate Project Plan." This framework is designed to categorize and evaluate a
firm's product development projects across various dimensions of importance,
providing a structured approach to project management and strategic alignment.
The primary goal of the Aggregate Project Plan is to illustrate the relationships
and strategic fit of all the organization's product and service design projects. The
framework focuses on several key measures of importance to the firm, including
resource demands, innovativeness, product lines, project timelines, and project types.
By mapping out these dimensions, the framework helps organizations understand how
each project contributes to their overall strategic objectives and how they fit within
the broader portfolio of ongoing and planned initiatives.
A crucial aspect of the Aggregate Project Plan is its emphasis on visualizing
the entire project portfolio. Having a visual map of the projects within an
organization's portfolio is an invaluable tool for senior management. It aids in making
informed and strategic project selection decisions by providing a clear overview of
how various projects align with the firm's strategic goals and resource constraints.
This visual representation allows management to identify which projects are critical to
the organization's success, how they interrelate, and where adjustments might be
necessary to optimize the portfolio.
However, it is essential to recognize that the success of an organization is not
typically determined by a single project. Rather, it is the cumulative impact of the
various research and development projects pursued within the project portfolio that
drives long-term success. The Aggregate Project Plan underscores the importance of
considering not just individual projects but the interactions among various projects
when making selection and prioritization decisions.
Managing projects as a cohesive portfolio rather than in isolation allows
organizations to better understand and leverage the synergies and potential conflicts
among different projects. This holistic approach helps ensure that resources are
allocated efficiently, project timelines are coordinated, and strategic objectives are
met more effectively. By analyzing the interactions and interdependencies among
projects, organizations can make more informed decisions about which projects to
pursue, how to balance competing demands, and how to achieve the desired strategic
outcomes.
The visual map of the project portfolio is especially useful in facilitating the
analysis of these factors. It provides a comprehensive view of the entire project
landscape, allowing managers to assess how well the projects align with strategic
priorities, identify potential resource constraints, and make adjustments as needed to
optimize the portfolio. This approach helps organizations avoid the pitfalls of
managing projects in isolation and ensures that the overall portfolio contributes
meaningfully to the firm's long-term goals.
In summary, the Aggregate Project Plan framework developed by Professors
Wheelwright and Clark offers a valuable tool for organizations seeking to align their
product development projects with their strategic objectives. By providing a
structured approach to categorizing and evaluating projects, the framework enables
organizations to better understand the strategic fit of their initiatives, make informed
project selection decisions, and manage their project portfolios more effectively. The
visual map of the project portfolio plays a crucial role in this process, facilitating the
analysis of project interactions and ensuring that resources are used efficiently to
achieve long-term success.
