Operations Strategy choices in designing and operating their domestic

and global value chains. These choices should be

Over the past two decades the transformation to a
driven by current and emerging customer needs and
digital society has caused many companies so
expectations. In particular, what happens in
redefine their strategy. Some have had to completely
operations on the front lines and on the factory
reinvent themselves. For example, the demise of film
floor-must support the strategic direction the firm
cameras chased Kodak so change to digital cameras
has chosen.
However, with stiff competition from Sony, Samsung
and others. Kodak ended up filing for bankruptcy Any change in a firm’s customer benefit package,
protection and has changed its strategy to focus on targeted markets, or strategic direction typically has
large Any electronics commercial inkjet printers, significant consequences for the entire value chain
digital printing presses workflow software, and and for operations.
package printing. Likewise, Xerox long known for its
Although it may be difficult to change the structure
paper copy machines, has reinvented itself and
of the value chain, operations managers have
branched out into new but risky Business services,
considerable freedom in determining what
including commercial information technology,
components of the value chain to emphasize, in
document outsourcing, finance, human resources
selecting technology and processes, in making
(HR), transportation, and health care.
human resource policy choices, and in making other
Changing a corporate strategy has many implications relevant decisions to support the firm’s strategic
for operations and the entire value chain Facilities emphasis.
may have to be reconfigured or new ones built sew
technology may have to be acquired: new processes
and jobs must be designed; and so on. Looking back 2-2 Understanding Customer Wants and Needs
at Exhibit 17, we also see that all aspects of
preproduction services production processes. Because the fundamental purpose of an organization
is to provide goods and services of value to
customers, it is important to first understand
customer desires and also to understand how
2-1 Gaining Competitive Advantage
customers evaluate goods and services. However, a
Competitive advantage denotes a firm’s ability to company usually cannot satisfy all customers with
achieve market and financial superiority over its the same goods and services. Often, customers must
competitors. In the long run, a sustainable be segmented into several natural groups, each with
competitive advantage provides above-average unique wants and needs. These segments might be
performance and is essential to the survival of the based on buying behavior, geography, demographics,
business. Creating a competitive advantage requires sales volume, profitability, or expected levels of
a fundamental understanding of two things. First, service. By understanding differences among such
management must under- stand customer needs and segments, a company can design the most
expectations and how the value chain can best meet appropriate customer benefit packages, competitive
these through the design and delivery of attractive strategies, and processes to create the goods and
customer benefit packages. Second, management services to meet the unique needs of each segment.
must build and leverage operational capabilities to
To correctly identify what customers expect requires
support desired competitive priorities.
being “close to the customer.” There are many ways
Every organization has a myriad of choices in to do this, such as having employees visit and talk to
deciding where to focus its efforts for example, on customers, having managers t talk to customers, and
low cost, high quality, quick response, or flexibility doing formal marketing research. Marriott
and customization-and in designing its operations to Corporation, for example, requires top managers to
support its chosen strategy. The opening scenario annually work a full day or more in the hotels as
suggests that organizations have many strategic bellhops, waiters, bartenders, front-desk service
providers, and so on, to gain a true understanding of Examples include the expertise of a surgeon or
designs of services must be sensitive to the need to mechanic, the knowledge of a tax advisor, or the
educate customers on their role in the service accuracy of tax preparation software.
process These insights help to explain why it is more
This classification has several important implications
difficult to design services and service processes than
for operations. For example, the most important
goods and manufacturing operations.
search and experience attributes should be
Basic customer expectations are generally evaluated during design, measured during
considered the minimum performance level required manufacturing, and drive key operational controls to
to stay in business and are often called order ensure that they are built into the good with high
qualifiers. For example, a radio and driver-side air quality. Credence attributes stem from the nature of
bag are generally expected by all customers for an services, the design of the service system, and the
automobile. In the highly competitive pizza business, training and expertise of the service providers. These
efficient delivery would be considered an order three evaluation criteria form an evaluation
qualifier. However, the unexpected features that continuum from easy to difficult, as
surpise, entertain, and delight customers by going
Shown in Exhibit 2.1. This model suggests that goods
beyond the expected often make the difference in
are easier to evaluate than services and that goods
closing a sale; these are called order winners. Order
are high in search qualities, whereas services are
winners are goods and service features and
high in experience and credence attributes. Of
performance characteristics that differentiate one
course, goods and services are usually combined and
customer benefit package from another and win the
configured in unique ways. Making for an even more
customer’s business. Collision avoidance systems or
complex customer evaluation process. Customers
a voice-activated music system in an automobile, for
evaluate services in ways that are often different
example, Papa John’s Pizza focused on “better
from goods. A few ways are summarized below along
ingredients, bet- tor pizza” as the order winner to
with significant issues that affect operations.
differentiate the business from the competitors.
Over time, however, order winners eventually
become order qualifiers as customers begin to
expect them. Thus, to stay competitive, companies
must continually innovate and improve their
customer benefit packages.

2-3 Evaluating Goods and Services

Research suggests that customers use three types of  Customers seek and rely more on
attributes in evaluating the quality of goods and information from personal sources than
services: search, experience, and credence. Search from non-personal sources when evaluating
attributes are those that a customer can determine services prior to purchase. Operations must
prior to purchasing the goods and/or services. These ensure that accurate information is
attributes include things like color, price, freshness, available and that experiences with prior
style, fit, feel, hardness, and smell. Experience services and service providers result in
attributes are those that can be discerned only after positive experiences and customer
purchase or during consumption or use. Examples of satisfaction.
these attributes are friendliness, taste, wearability,  Customers perceive greater risks when
safety, fun, and customer satisfaction. Credence buying services than when buying goods.
attributes are any aspects of a good or service that Because services are intangible, customers
the customer must believe in but cannot personally cannot look at or touch them prior to the
evaluate even after purchase and consumption. purchase decision. They experience the
 service only when they actually go through simply to reduce costs, or emphasize flexibility to the
the process. This is why many are hesitant extent that it would make its goods and services
to use online banking or bill paying. unaffordable. However, organizations generally make
Dissatisfaction with services is often the trade-offs among these competitive priorities and
result of customers inability to properly focus their efforts along one or two key dimensions.
perform or coproduce their part of the For example, Amazon competes primarily on time,
service. A wrong order placed on the cost, and flexibility. Apple, on the other hand,
Internet can be the result of customer error competes on quality and innovation.
despite all efforts on the part of the
company to provide clear instructions. The
designs of services must be sensitive to the 2-4a Cost
need to educate customers on their role in
the service process These insights help to Many firms, such as Walmart, gain competitive
explain why it is more difficult to design advantage by establishing themselves as the low-cost
services and service processes than goods leader in an industry. These firms achieve their
and manufacturing operations. competitive advantage through low prices. They do
this through high volumes and the efficient design
and operation of their supply chain. Although prices
are generally set outside the realm of operations,
2-4 Competitive Priorities
low prices cannot be achieved without strict
Every organization is concerned with building and attention to cost and the design and management of
sustaining a competitive advantage in its markets. A operations.
strong competitive advantage is driven by customer
General Electric, for example, discovered that design
needs and aligns the organization’s resources with its
determines 75 percent of its manufacturing costs.
business opportunities. A strong competitive
Costs accumulate through the value chain, and
advantage is difficult to copy, often because of a
include the costs of raw materials and purchased
firm’s culture, habits, or sunk costs. Competitive
parts, direct manufacturing cost, distribution, post-
advantage can be achieved in different ways such as
sale services, and all supporting processes. Through
outperforming competitors on price or quality,
good design and by chipping away at costs,
responding quickly to changing customer needs in
operations managers help to support a firm’s
designing goods and services, or providing rapid
strategy to be a low-price leader. They emphasize
design or delivery.
achieving economies of scale and finding cost
Competitive priorities represent the strategic advantages from all sources in the value chain.
emphasis that a firm places on certain performance
Low cost can result from high productivity and high-
measures and operational capabilities within a value
capacity utilization. More important improvements
chain. Understanding competitive priorities and their
in quality lead to improvements in productivity,
relationships with customer benefit packages
which in turn lead to improvement in productivity.
provides a basis for designing the value and supply
Thus, a strategy of continuous improvement is
chains that create and deliver goods and services. In
essential to achieve a low-cost competitive
general, organizations can compete on five key
advantage.
competitive priorities:
1. Cost.
2. Quality.
3. Time. 2-4b Quality
4. Flexibility.
The role of quality in achieving competitive
5. Innovation.
advantage was demonstrated by several researches;
All of these competitive priorities are vital to success.
For example, no firm today can sacrifice quality
  Business offering premium-quality goods
usually have large market shares and were
early entrants into their markets.
 Quality is positively and significantly related
to a higher return on investment for all
kinds of market situations.
 The strategy of quality improvement usually
leads to increased market share, but at a
cost short run profitability.
 Producers of high-quality goods can ally
charge premium prices.

2-4c Time

In today’s society, time is perhaps the most

important source of competitive advantage.
Customers demand quick response, short waiting
times, and consistency in performance. Many firms,
such as CNN, FedEx, and Walmart, know how to use
time as a competitive weapon to create and deliver
superior goods and services

Speeding up processes in supply chains improves

customer response.

2-4d Flexibility

Success in globally competitive markets requires

both design and demand flexibility. In the
automobile industry, for example, new models are
constantly being developed. Companies that can plot
lady by building several different vehicles on the
same assembly line at one time, enabling them to
switch output as demand shifts, will be able to sell
profitably at lower volumes.