Operations, Strategy, and Technology Pursuing the Competitive Edge
Robert Hayes, Gary Pisano, David Upton and Steven Wheelwright
Harvard University
WILEY
www.wiley.com/college/hayes
Contents
1. Operations Management Confronts a New Millennium
1.1 Introduction
1.1.1 The World Business Context
1.1.2 The Evolving Bases of Competition
1.2 Growing Disillusionment with the New Approaches to Operations
Throughout the 1980s and 1990s, Western manufacturers had pursued world-class manufacturing status through a shotgun blast of three-letter acronyms: TQM, JIT, DFM, QFD, QPD and CIM.
The conclusion of most large studies on the successes of these programs has been that only about a third of the companies that attempted to implement the most popular NAOs achieved the results expected-by the companies' own admissions.
1.2.1 The Limits of the NAOs II
1.2.2 The Limits of Process Reengineering 12
1.2.3 The Limits of Emulating "Best Practice" 13
1.3 Managing in the New World Economy 14
1.3.1 Globalization 14
1.3.2 Information Technology and Information-Intensive Operations 15
1.3.3 What's Different in Information-Intensive Operations? 17
1.3.4 Summarizing the Differences: O.M. in the Old and
New Economies 23
1.3.5 Redefining the Boundaries of Organizations and
Operations Management: 23
1.4 The Information Economy's Challenges for
Operations Management 26
1.5 An Outline of This Book 27
1.5.1 Operations Strategy 27
1.5.2 Operations Technology 29
1.5.3 Operating Improvement 30
Notes 31 2. Operations Strategy: Origins and New Directions 33
2.1 Introduction 33
2.2 The Concept of Strategy 34
2.2.1 Company Values—The Foundation for Strategy 36
2.3 The Operations Edge:
Creating a Competitive Advantage through Operations 36
2.3.1 The "American System": Mass Production for Mass Markets 37
2.3.2 The Japanese System: "Lean Production" 38
2.3.3 A Contingency Theory of Operations Strategy: Fit and Focus 38
2.3.4 Key Decisions Involved in Operations Strategy Implementation 41
2.3.5 Responding to Evolving Strategies, Markets, and Technologies 47
2.3.6 Strategy as an Art Form 49
2.4 Challenges to the Operations Strategy Framework 49
2.4.1 Challenging the Necessity for Trade Offs 50
2.4.2 Challenging the Importance of Focus 51
2.5 Dynamic Organizational Capabilities 52
2.5.1 Path Dependencies: '
Reexamining Focus and Tradeoffs from a New Perspective 54
2.5.2 Strategic Choice in Operations 55
2.6 Attacking and Defending through Operations 56
2.6.1 Attacking through Operations 59
2.6.2 Sustaining an Operations Edge 64
2.6.3 Defending through Operations 65
2.6.4 Lessons in Attacking and Defending through Operations 66
2.7 Conclusion 68
Notes 68
Appendix . .
2A.I Evaluating an Operations Strategy 71
2A.2 The Concept of a Corporate Operations Strategy 72
2A.2.1 The Corporation's Dominant Orientation 74
2A.2.2 The Pattern of Diversification 74
2A.2.3 The Altitude toward Growth 74 3. Capacity Strategy 76
3.1 Overview 76
3.2 How Capacity and Operations Management Interact 78
3.2.1 The Impact of Variability on Capacity 80
3.2.2 Alternative Approaches for Expanding Capacity 82
3.2.3 The Consequences of a Capacity Squeeze 83
3.3 The Timing of Capacity Increments—The Capacity Cushion 85
3.3.1 Policy A: Lead Demand with Capacity 86
3.3.2 Policy B: Build to the Forecast 86
3.3.3 Policy C: Add Capacity Only after Demand Exceeds It 87
3.3.4 Alternative Types of Capacity Cushion 87
3.3.5 Determining the Appropriate Capacity Cushion 89
3.4 The Sizing of Capacity Increments—Scale Considerations 92
3.4.1 Economies of Scale 92
3.4.2 Diseconomies of Scale 98
3.4.3 Increasing Economies of Scale 100
3.4.4 Optimal Economic Size 101
3.5 Developing a Capacity Strategy 103
3.6 Four Philosophies of Capacity Expansion 105
3.7 Integrating a Firm's Capacity Strategy with
Its Business Strategy 107
Notes 109
Appendix
3A.1 Justifying the Simple Formula (3-2) for Estimating the Amount of
Capacity Cushion Warranted by a Given Cost Structure and
Demand Distribution 111
3A.2 Models for Evaluating Simple Capacity Expansion Strategies 1 11
3A.2A The Discounted Present Value of Simple Capacity Strategies in a
Growing Market, Assuming No Shortfalls in Capacity
Are Permitted 112 A Numerical Example 113
3A.23 A Minimum Cost Capacity Strategy When Shortfalls
Are Permitted 114
Notes 115 4. Determining Organizational Boundaries:
Vertical Integration and Outsourcing 116
4.1 Introduction 116
4.2 Trends and Evidence 116
4.3 Framing Vertical Integration and Sourcing Decisions 119
4.3.1 What Are the Choices? 120
4.4 Factors Influencing Vertical Integration Decisions 123
4.4.1 Capabilities/Resources 123
4.4.2 Coordination Requirements 125
4.4.3 Strategic Control and Risks 128
4.4.4 Protecting Intellectual Property 134
4.5 Summary 136
Notes 138 5. Designing and Managing Operating Networks 139
5.1 Introduction 139
5.2 The Rationale for Multifacility Networks 140
5.3 Designing the MuUifacility Network: Structure 142
5.3.1 Number and Size 142
5.3.2 Location 142
5.3.3 Specialization 143
5.3.4 Mixed Networks 145
5.3.5 Selecting between Horizontal and Vertical Network Structures 147
5.4 Managing the Network: Infrastructure 150
5.5 Managing Different Network Structures 152
5.5.1 Horizontal Networks 152 ' 5.5.2 Vertical Networks 153
5.5.3 Centralization versus Decentralization 154
5.5.4 Implementing and Maintaining Focus 157
5.6 The Dynamics ol Horizontal Networks 158
5.7 The Dynamics of Vertical Networks 160
5.7.1 Vertical Supply Chain Dynamics: The Bullwhip Effect 161
5.7.2 Dealing with the Coordination Problem 164
5.7.3 An Example: Managing the Bullwhip 165
5.7.4 Some Concluding Thoughts on Supply Chain Management 166
Notes 167 6. Information Technology and Operations 169
6.1 Introduction 169
6.2 The Expanding Role of IT 169
6.2.1 IT in Operations 169
6.2.2 Expansion of IT to Business and Network Operations 172
6.2.3 Enterprise Resource Planning 172
6.2.4 The Impact of the Internet 174
6.3 The Challenges of Integration, Standards, and Fit 175
6.3.1 Making IT Decisions that '"Fit" 175
6.3.2 How Did We Get into This Mess? 176
6.3.3 Selecting Standards 178
6.3.4 Principles and Decisions in IT Design 180
6.4 Strategic Hazards 180
6.4.1 Hazards to Disiinctiveness:
The Rebirth of the "One Best Way" 180
6.4.2 Hazards to Strategic Flexibility: IT as "Liquid Concrete" 181
6.5 Implementing IT Systems: Two Approaches 183
6.6 Making IT "Matter" 188
Notes 189
Appendix
6A.I Standards and Integration Outside the Firm 191 An Example of the Application of
New Communication Standards 191
6A.2 Open Source Software 193
Notes 194 7. Creating an Edge through New Process Development 195
7.1 Introduction 195
7.2 How Process Development and Operations Interact to Facilitate New
Product Development 196
7.2.1 The Product Life Cycle Concept Revisited 197
7.2.2 Mapping the Context 198
7.3 Leveraging Process Development Capabilities for
Competitive Advantage 199
7.3.1 Accelerated Time to Market 199
7.3.2 Rapid Ramp-Up 201
7.3.3 Enhanced Customer Acceptance 202
7.3.4 Stronger Proprietary Position 203
7.4 Achieving Speed, Efficiency, and Quality in the Development of New Processes
At a highly simplistic level, a process technology is akin to a recipe. It encompasses input specifications, the sequence of tasks that must be performed, the equipment that must be utilized, the parameters at which equipment must be operated, the expected intermediate outputs, means for controlling the process, and ways of checking quality throughout.
7.4.1 Integrating Product and Process Development 204
7.4.2 Timing the Transfer of New Process
Technologies into Operations 208
7.4.3 Centralized versus Decentralized Process Development and
Technology Choices 213
7.5 Process Development in Perspective 217
Notes 217 8. Creating an Edge through Superior Project Management 219
8.1 Introduction 219
8.2 Two Historical Approaches to Project Management 220
8.2.1 Critical Path Analysis 220
8.2.2 Stage-Gate Approaches 224
8.3 Creating, Selecting, and Managing Project Portfolios 227
8.3.1 Seeding: Encouraging a Rich Mix of Alternative Project Ideas 228
8.3.2 Weeding and Feeding:
Winnowing Project Ideas and Providing Resources 229
8.3.3 Cultivating the Project Portfolio 232
8.3.4 Plowing Under 234
8.4 Maintaining Discipline and Focus in the Project Portfolio 234
8.5 Designing a Strategy for Project Execution 236
8.5.1 Project Definition 237
8.5.2 Project Teams 237 .
8.5.3 Structuring the Flow of Project Tasks and Activities 239
8.5.4 Methodologies for Design, Prototyping, and Testing 241
8.5.5 Senior Management Review and Control 242
8.5.6 A Contingent Model of Project Management 242
8.6 Learning from Project Experience 242
Notes 246 9. Evaluating and Justifying Capital Investments 247
9.1 Introduction 247
9.2 Managing the Investment Planning Process 249
9.2.1 Evaluate Existing Operations 250
9.2.2 Forecast Capacity and Competitive Requirements 250
9.2.3 Define Alternatives for Meeting Requirements 252 ' 9.2.4 Perform Financial Analyses of Each Alternative 253
9.2.5 Assess Key Qualitative Issues for Each Alternative 253
9.2.6 Select and Defend the Alternative to Be Pursued 254
9.2.7 Implement the Chosen Alternative 254
9.2.8 Audit Actual Results 255
9.3 Financial Analysis of Proposed Investments 255
9.3.1 A Framework for Assessing the Financial Attractiveness of Proposed Investments
9.3.2 Measures of Security 257
9.3.3 Measures of Recompense 259 '
9.3.4 Recompense—The Accumulated Cash Balance 260
9.3.5 Recompense—The Net Present Value 261
9.3.6 Recompense—The Internal Rate of Return 264
9.3.7 Measures of Predictability 266
9.3.8 Assessing a Proposed Investment's Option Value 270
9.3.9 Caveat Calculator! 273
9.4 Integrating Investment Proposals into Long-Term Strategies 275
Notes 111
10. Sharpening the Edge: Driving Operations Improvement 279
10.1 Introduction 279
10.2 A Framework for Analyzing Organizational Improvement 280
10.2.1 A Macro Perspective: Learning and Experience Curves 280
10.2.2 Different Mechanisms for Driving
Organizational Improvement 281
10.3 "Within" vs. "Across" Group Improvement 282
10.3.1 Enablers of, and Constraints on,
"Within" Group Improvement 282
10.3.2 Transferring Improvement Across Groups 287
10.4 Learning by Doing vs. Learning before Doing 288
10.5 Transferring Learning In from Outside the Organization 289
10.6 Breakthrough vs. Incremental Improvement 291
10.6.1 Implementing Strategic Leaps 292
10.6.2 Implementing Incremental Improvement 293
10.7 A Framework for Improvement Activities, with Two Examples 297
10.7.1 Example A: Business Process Reengineering 298
10.7.2 Example B: Total Quality Management (TQM) 301
10.7.3 Comparing Business Process Reengineering and TQM 304
10.8 Organizational Implications of Different Approaches 304
10.8.1. Quadrants I & IV:
Incremental improvement/Learning By Doing 305
10.8.2 Quadrant II:
Transferring Incremental Improvement Across Organizations 305
10.8.3 Quadrant III:
Breakthrough Improvement through Strategic Leaps 306
10.8.4 Quadrant IV: Breakthrough Improvement through Sustained
Incremental Efforts 307
10.8.5 The Risks of Different Approaches 309
Notes 311
Appendix
I0A.1 Calculating Learning Curves 313
10A.2 Using Experience Curves in Developing a Competitive Strategy 314
11. Guiding the Pursuit of an Operations Edge 316
11.1 Introduction 316
11.2 Why Do Companies Lose Their Competitive Advantage? 317
11.2.1 The False Promise of Simplistic Solutions 318
11.2.2 The Dynamics of Organizational Stagnation 321
11.3 Creating an Improvement Strategy 323
11.3.1 Tightly Focused, Top Management-Driven
Improvement Programs 325
11.3.2 Broadly Based, Diffused Improvement Programs 330
11.3.3 Top Management Directed, Staged Improvement Programs 333 I 1.4 Stepping Back: The Concept of "Improvement Pathways" 334
11.5 Operations Role: From Reactive to Proactive 339
Implications of Moving from a Reactive to a Proactive Role 340
11.6 Management: The Ultimate Source of Sustainable Advantage 341
Notes 343
Bibliography 345
Index 357
