Operations Management
1.15 The Stages of P/OM Development
The profit model operates differently according to the stage of development of the company’s input–output operating system. This strategic issue must be understood by the functional area managers and addressed in a coordinated fashion. The stage reflects the degree to which a company’s activities have been coordinated and car- ried out. Thus, stage determines company effectiveness (ability to do the right thing) and efficiency (ability to do the thing right). As a company improves its stage of operations, it is expected that its profitability will increase. However, it is necessary to relate the company’s stage of development to that of its competitors.
Each company’s input–output profit model indirectly and directly reflects the impact of the competitors’ input–output models. The cost structures, prices, vol- umes, and profit margins reflect the influence and extent of the competition. If the competitors all are at the same stage and one of them starts to move to a higher stage, the expected result is that the advancing company will gain market share, while the remaining companies experience a decrease in share and volume. This then gets translated into higher variable costs and lower profit margins. P/OMs must be involved in competitive analysis, which means that the company’s planning partici- pants fully understand the stages of development of all competing companies.
How a company manages its profit model provides insights into the role that P/OM can play in a company. Decisions concerning capacity and the resulting economies of scale capture only a portion of the story; the extent to which new technology is utilized to offset high variable labor costs also plays a part. The development stage relates as well to the management of the throughput rate, qual- ity attainment, and variety achievement.
Stage I companies operate on the premise that there is no competitive advantage to be gained by changing the production process. Therefore, the process usually is relatively unrefined and often rudimentary and out-of-date. Management, seeing no leverage in processes, pays minimal attention to production and operations.
Stage I firms squeak by on quality. Because the competitors are not much bet- ter, everyone appears indifferent. In such firms, management and its resources are insufficient to do more than keep up with demand. Survival occurs only when and if the competition is in the same boat. The indifference to quality also happens when the company believes that repeat business is not going to occur no matter how good the product they deliver. For example, how likely is it that a tourist to Antartica will return in the near future?
Internet-based communication, which is fast and available to everyone, also influences repeat business and evaluations. So the family that will not return to Antartica may write: although we will not return soon, we want others to know how terrible X’s service was and how indifferent all of X’s employees were to our needs.
Marginal firms do not survive long in a market that is dominated by higher- stage companies. Figure 1.8 provides a simple matrix for categorizing stages of a company’s P/OM development. This is applicable to manufacturing and service product lines.
At the other end of the spectrum, there are companies that use operations to gain unique basic advantages through the development of special capabilities. The concept of competing on capabilities is clearly formulated by Stalk et al. (1992). The advantages gained can vary from speeding up distribution to tactical superiority in managing inventories, or product preeminence obtained from effective product development and total quality management (TQM).
Stage IV companies practice continuous improvement (CI), which means that they persistently remove waste. They aggressively seek to innovate in their unswerv- ing pursuit of quality for competitive dominance. Stage IV companies have a high level of basic advantages that are unique to them, whereas Stage I companies have virtually none of these advantages. Stage II and III companies fall in-between on various scales of performance and degrees of advantage.
This approach is based on work done by Wheelwright and Hayes (1985), cited in their article in the Harvard Business Review. They have created a framework applicable to manufacturing firms. This approach also utilizes work by Chase and Hayes (1991) detailed in their article in the Sloan Management Review. Their frame- work is applicable to service firms. The discussion that follows puts together the concept of stages of development for both manufacturing and service firms.
1. A Stage I company is centered on meeting shipment quotas and providing service when requested. C&H call it “available for service” and cite, as an example, a government agency. A Stage I company has no planning horizon and is predisposed to be indifferent to P/OM goals. It is reactive to orders and has no quality agenda. Worker control is stressed. The company is not con- scious of special capabilities for itself or for its competitors. W&H describe
Internally Externally Stage I Stage II
Stage IV Neutral
Supportive Stage III
Figure 1.8 Stages of P/OM development.
such firms as being internally neutral, which connotes that top management does not consider P/OM as being able to promote competitive advantage and, therefore, P/OM is kept in neutral gear.
2. A Stage II company manages traditional P/OM processes and has a relatively short-term planning horizon. It makes efforts to secure orders and to meet customers’ service desires. The primary goal of Stage II companies is to control costs. Quality tends to be defined as products or services that are not worse than some standard. These companies consider the most important advantages to be derived from economies of scale, which means that as output volume increases, costs go down. W&H describe such firms as being externally neu- tral; they strive to have parity in P/OM matters with the competition.
3. A Stage III company installs and manages manufacturing and service pro- cesses that are equivalent to those used by the leading companies. C&H describe this as “distinctive service competence.” A Stage III company makes efforts to emulate the special capabilities of the best companies. Quality and productivity improvement programs are utilized in an effort to be as good as the best. Stage III firms have a relatively long-term planning horizon supported by a detailed P/OM strategy. W&H describe such firms as being internally supportive, meaning that P/OM activities support the Stage III company’s competitive position.
4. A Stage IV company is a P/OM innovator. It has short- and long-term plan- ning horizons that are integrated. Long-term P/OM planning requires excel- lence in project management to bring about changes needed to adapt to new circumstances, conditions, and environments. Short-term P/OM involves meeting standards by controlling the production process. Both short- and long-term considerations are crucial elements in the success of the firm. Both require that P/OM be a part of the top management strategy team because the production processes are held to be a source of unique advantage gained through special capabilities, as are product and service design.
Stage IV companies aggressively seek to innovate product design and develop- ment while assisting environmental improvements in pursuit of sustainability goals. For example, Wal-Mart, teamed with GE, announced (August 2006) that in the next 12 months the plan was to sell 100 million compact fluores- cent lamps (CFL). The idea is to replace incandescent bulbs on a broad basis.
In October 2013, Wal-Mart launched a new line of LEDs on a nationwide basis at competitive pricing. There is no doubt that LED lamps will replace CFLs in the next wave of innovation. Market replacements, on this scale, are a great deal of hard work for P/OM and others. Thomas Edison, inventor of the incandescent bulb, said that “Genius is 1 percent inspiration, 99 percent perspiration.” Stage IV companies do not shirk the hard work.
Project management is a P/OM responsibility that offers significant advan- tage to those in operations management who know how-to-use project manage- ment methods to innovate quickly and successfully for competitive advantage.
Wheelwright and Hayes (1985) describe such firms as externally supportive, which means that competitive strategy “rests to a significant degree on the firm’s manu- facturing capability.” Chase and Hayes (1991) conclude that Stage IV firms offer services that “raise customer expectations.” Stage IV firms use the systems approach to integrate service and manufacturing activities.
It takes a lot of work to progress through successive stages. It is unlikely that an existing P/OM organization can skip a stage. Only with total reorganization is it possible for a Stage I company to become a Stage III or IV company. Reengineering (REE), which is defined as starting from scratch to redesign a system, is an appeal- ing way to circumvent bureaucratic arthritis and jump stages. However, it is costly and, if not done right, has a high risk of failure. Mastery of this P/OM text will lower that risk.