Chapter 1.

Process and Strategy

Lecture I: Processes View & Strategy

Customers have certain expectations about products and services that

they buy. These expectations can be physical such as comfort, convenience,
and safety; psychological such as relaxation and peace of mind; and
social/spiritual such as feeding the poor. These expectations should be met
within customers’ budgets. Business processes create manufactured
products and deliver services. Some examples include the flow of cars in a
General Motors assembly plant, flow of customers in a Wells Fargo branch,
flow of patients at the UCLA Medical Center, flow of cash in Fidelity
Investments, and flow of students during their two-to-five year program at
CSUN. In all these systems, flow units (natural resources, semi-finished
goods, products, customers, patients, students, and cash) flow through a set
of processes (formed by a network of activities and buffers) using Human
resources and Capital resources (such as equipment, buildings, tools) and an
information infrastructure and value system to become a desired output. We
mainly focus on the systems with discrete flow units – such as the systems
stated above - as opposed to continuous flow, which is the domain of
chemical engineering.
Specific Features of the Course. One of the most binding constraints of
business school students – from the time they are admitted to college as
“raw material” from high school to the time they graduate and leave college
as “the final product” – is their low quantitative and analytical skills.
According to the CEO of American Express in his 2011 interview with Fareed
Zakaria on CNN, the low level of quantitative capabilities of our graduates
has kept us from excelling beyond the graduates of rising countries such as
China and India. Organization for Economic Cooperation and Development
(OECD) Skills Outlook (2013) compares the literacy, mathematics, and
computer skills of U.S. residents with people in other OECD countries. In
mathematics, U.S. trailed 18 countries and beat Italy and Spain.
Believing that managers cannot go far if their quantitative and
analytical capabilities are below a threshold, we have tried to improve these
qualifications through our Operations Management (OM) classroom. In a
typical traditional OM class, about 2/3 of the class time is spent on delivering
the content. The rest is mainly spent on problem solving and case studies,
term projects and simulation games. We have tried to improve these
capabilities through flipping our Operations Management classroom. By
delivering lectures using screen capture technology, students can learn the
material at a time and location of their choice, which allows them to pause,
rewind, or fast forward professor’s lectures when they need it. The class time
Chapter 1. Process and Strategy

is no longer spent on teaching basic concepts but rather on more value-

added activities such as problem solving, answering questions, creative-
thinking, systems-thinking, as well as real world applications and discussions,
potential collaborative exercises such as case studies, and virtual world
applications such as web-based simulation games. A flipped classroom
includes components of both an online and a traditional course. A flipped
classroom is an online course because its online components must compete
with the best of the online courses. A flipped classroom is also a traditional
course because not even a single class session is cancelled while all the
lectures are delivered online. This core concept is reinforced by a network of
resources and learning processes, ensuring a smooth, lean, and
synchronized course delivery system.
The specific features of the course and their relative importance are
depicted below.

Quantitative and Analytical. We use Operations Management as a tool to

improve the quantitative and analytical capabilities of our students. Students
will learn to develop a structured, data-driven, analytical, and quantitative
approach to discuss the core Operations Management concepts.
Systems Thinking. We try to improve systems thinking capabilities of our
students by teaching the basic concepts of operations management not as
isolated islands but as a total system designed towards improving process
flow. Students will learn to implement the process view as the unifying
paradigm to study the core concepts in the operations management
(retrieved from Anupindi, et al., 2012).
Visualization of Data and Information. Besides quantitative
representation (translating long writings into mathematical relationships),
Chapter 1. Process and Strategy

students will practice tabular representation (translating long writings into

tables), and schematic representation (translating several pages of writing
and tables into a graph, flow chart, or picture). Students also learn how to deal
with large, unorganized, or erroneous big data sets.
Information Technology. We try to enhance students’ knowledge in
spreadsheet modeling. We have learned that understanding the knowledge
behind these models and developing small pilot spreadsheets leads to a better
understanding of the course material. Through case studies, as well as web-
based games, the stage is set to motivate the students to develop
spreadsheet-based models.
Teamwork. We encourage collaborative learning and creative thinking. The
first day of class is not spent on the syllabus but rather on the importance of
teamwork. Students are encouraged to have weekly team meetings to go over
the already solved assignments and gain new insights in the web-based
games and case studies. Academic integrity and ethics are also implicitly
addressed in the course.
In this course we look at everything as a process. Process view: Input
 Process Output. Here: Inputs can be tangible or intangible, natural or
processed resources, parts and components, energy, data, customers, cash,
etc. Outputs can be tangible or intangible items such as products,
byproducts, energy, information, served customers, cash, relief, etc., that
flow from the system back into the environment.
Examples of Input  Process Output
Raw material  Manufacturing Process  Finished goods
Data Accounting Process  Financial Statements
Accounts Receivable  Billing Process  Cash
Unsatisfied customer demand  Transformation Process  Satisfied
customer demand

Five Components of Process View: (1) inputs, (2) outputs, (3) human
resources and capital resources, a (4) network of value added/non-value
added activities and buffers, and an (5) information structure and value
system.
Chapter 1. Process and Strategy

In process flow mapping (process blue printing), material flow is shown

by solid lines, and information flow is shown by dashed lines. When inputs
pass through the network, they are called flow units; when they leave the
system they are output. A flow unit could be an item of inputs, outputs, or a
combination of both-it depends on the reasons why we are looking at this
process. Values added activities – activities making an input one step closer
to its output form - are shown by rectangle; non-value added activities-
buffers, storages, waiting lines- are shown by triangle. Not all writings are
non-value added, for example, aging of cheese or hardening a concrete are
value added activities.
The following are examples of different processes and their
components. The fulfillment process starts from receipt of an order and ends
at delivery of a product. Flow units of this process are orders. In an outbound
logistics, process starts at the end of production and ends when the product
is delivered to the customer; flow units are products. In a supply cycle, flow
units are supplies; the system boundaries, the border limits of the system
starts from issuing a purchase order and ends at receipt of the supplies. In a
customer service process, customers are flow units. It starts from the point
when an unsatisfied customer shows up until the point when the satisfied
customer leaves the system. In a research and development process, flow
units are projects. System starts from recognition of the need and ends at
launching the project. In a cash cycle process, flow units are cash. The
system boundary limits of the system start from the point when expenditure
Chapter 1. Process and Strategy

is accrued until the point when revenue is collected, regarding the product or
services that this expenditure went through. So, this expenditure went to a
product or a service; it went through a transformation process: it was sent it
to a customer. Then, the revenue from the customer was collected, and that
is from point when the cash was put into the system until the point that the
cash was collected from the system.
Every component of a process is interconnected into a system. The
relationship among those components and the objective is the goal of
existence of this system. The battery limit of the system is the border
between the environment and the system. Environment is everything outside
the system. Usually, we do have control of variables and parameters inside
the boundaries of the system, but we don't have much control over variables
and parameters in the environment. Variables and parameters inside the
system are called endogenous and outside the system-exogenous. A system
is defined by its components, interrelationship between those components,
and the objective of the system.
Systems can grow by increasing the number of their components. The
second system in Figure 1 can be preferred to the first system because the
second one has one additional component. Systems can also grow by
increasing or enhancing their relationship between components. The third
system can be preferred to the second system because the third one may
have more integrated relationship between its components. Therefore, the
third system can perform much better in a complex environment; it can also
benefit from synergy between the components.
Figure 1.

However, the whole system performs better than its components. In a

system view, the whole is greater than sum of its parts; 2>1+1!
Chapter 1. Process and Strategy

Imagine desires of Sales, Purchasing, and Production departments in a

seasonal industry. Imagine a company with two branches. Process flow in
both branches is similar and contains two sequential operations. The first
operation takes 5 minutes, the second 10 minutes. The first branch has
produced an average of 11 units per hour in Operation 1 and 4 units per
hours in operation 2. The second branch has produced an average of 5 units
per hour in Operation 1 and 5 units per hours in operation 2. Who deserves
appreciation?
Principle: Performance measure of Sub-systems must be linked to the
performance measure of the total system. Performance of a sub-system
must be measured in terms of its impact on the performance of the total
system.
Customers assign four attributes to a product; cost, quality, time,
variety. These four attributes are often referred to as the four dimensional
space. Companies develop a customer value proposition to fulfill
customer expectations. Products have two classes of characteristics: order
qualifiers and order winners. Order qualifiers are characteristics of a
product that convince a customer to consider a product. Order winners are
characteristics that convince the customer to buy the product.
Different market segments define order qualifiers and order winners
differently. For example, order qualifiers in the eyes of a commercial airline
flyer are entirely different from order qualifiers of a wealthy businessman
who wants to buy a private jet.
Customers purchase products based on the value that they will derive
from a product. That value is the greatest amount that the customer is
willing to pay. Several companies might propose their products with
different prices. If customers view different values in these different products
then they will buy the product with the largest gap between the value they
derive compared to the product or process that the manufacturer or service
provider offers. We refer to the difference between that value in the eye of
the customer and the market price of a product/service as consumer
Chapter 1. Process and Strategy

surplus.

Process Competencies Cost

Customers are defined in four dimensional space: how much they are willing
to pay, the quality they expect to get, the time that it takes to get the
product and the variety of options they do have. Firms define their Customer
Value Proposition to meet and exceed those expectations.
In order to deliver the necessary customer value proposition, firms
create Process Competencies in four-dimensional space of cost, quality,
time and flexibility. Producers need to have process competencies in
these four dimensions to reflect a Customer Value Proposition in the product
that meets and exceed customer expectations. For example, companies
try to produce accurately priced products to satisfy the customer expectation
in the price dimension. The cost dimension is the total cost of producing and
delivering the products or outputs. Producers look at the process to discover
what parts of the production process are value-adding and what parts are
non-value adding. Non-value adding processes do not play a role in the
transformation process of producing a product or delivering a service.
Therefore, non-value adding processes are removed to lower production
cost.
To keep quality high and costs low, producers also need to allocate
appropriate resources to each activity. If resource cost is higher than
activity cost, activity cost goes up. If resource cost is lower than activity
cost, quality of process or product goes down. Therefore, producers need to
find out exactly the appropriate resource cost is.
Producers also need to have high standardization and low variations in
arrival time and processing time along with high utilization. Producers need
to fully utilize human and capital resources in order to breakdown costs on a
large number of products. This helps producers create products and
processes low in cost in a timely and flexible fashion.
For example, Zara is a well-known name in the apparel industry.
Zara's business is design/manufacture/distribution/retailing. Zara
differentiates itself from competitors by timely fashion for the masses. CVP
of Zara-timely yet limited variety at modest cost and quality. It looks for a
market segment that is willing to buy timely fashion and is not particularly
anxious about the variety. The price should be average and buyers will
expect average quality.
The production line is a common method for creating high utilization
in processes. The key concept in production cost is to allocate appropriate
Chapter 1. Process and Strategy

resources to each operation. An appropriate resource cost is one that is not

lower or higher than what is needed. If the resource cost is too high, that
increases the cost unnecessarily. If the resource used is lower than what is
needed, it will lower the quality.
Once the appropriate resource is
selected, producers need to reduce
variability to help lower production costs.
To do this, producers need to increase
utilization of all human and capital
resources to close to 100%. Reducing
variability helps increase utilization. With
high variability, it is impossible to reach
even close to 100% utilization. Standardization, A production
reduced line at Ford Motor Companies,
variability, high
Highland Park in 1913
utilization and appropriate
resources allocation are key components of cost reduction.
Process Quality and Quality at Source are both aspects of production
lines. Process quality is the ability to deliver and produce quality products.
Quality at source, is when products are produced and checked at the same
minute. If there is a problem, the production line is stopped.
An example of the production line is Shouldice hospital in Canada.
Shouldice focuses solely on hernia operations. They have created a
production line where the hernia operation is done at a very high quality and
very low price. They do this by performing standardized, repeatable
outpatient procedures. They also minimize variability by rejecting patients
with risk factors such as high blood pressure.
The second of the process competencies is flexibility. Flexibility is the
ability to produce and deliver a variety of products at both high and low
volumes. Key components for flexibility are cross-trained workers, short
setup time delayed differentiation.
In order to create flexibility inside a production system producers need
cross-trained workers. Cross-trained workers can shift from one operation to
another. In addition to that, producers also need general purpose
equipment. General purpose equipment is equipment that can produce
many different types of products. Theoretically, all machines are general
purpose but in order to transfer them from producing one product to another
producers may need to spend infinite financial resources. A flexible machine
has a short setup time.
Delayed differentiation is when producers postpone the differences
that they make in the product to the latest steps. An excellent example of
delayed differentiation is Home Depot's paint station. Home Depot offers
hundreds and hundreds of different colors. However, if Home Depot wanted
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to have all those colors on their shelves all of Home Depot would need to be
a painting department. Instead, they have a few base colors and mix them
to create the needed colors. Home Depot has delayed differentiation to the
last possible step.
For increased flexibility producers also need a small batch size. Small
batch size is when each time you produce a small number of products.
Producers do not generally produce a product for six months of demand.
After six months, customers might change their preferences and might not
want that product anymore. In addition to that, new technology may come
and if producers have already produced six months worth of products, they
will need at least six months to implement the new technology. Therefore,
flexible systems are more responsive both to changes in customer
preferences and also to changes in technology.
Flow Time. The fourth dimension of process competencies is process
flow time, which means the total time to transform a flow unit from input into
output and then delivery of the finished product or any services to the
customer. Two main components of a short flow time are effective layout
and smooth material. Other requirements of smooth flow time are including:
less variability in arrival rate, processing rate, and quality.
In smooth flow time the activities must not stop because of starving.
In starvation one station is waiting for the output of the previous station and
therefore the station remains idle. Also, there is no blocking, which occurs
when the activities have to stop due to the lack of space. Thus, in a smooth
flow time is neither starvation nor blockage. In other words, smooth flow
means no defect and no re-work.
Operation Management creates smooth flow. One aspect of the smooth
flow is low production cost because the flow units should come into the
process and leave quickly. Other characteristic of smooth flow is high quality
since as soon as a problem in quality appears the production line must stop
the production and a stop in production line doesn’t have smooth flow. High
quality product is one requirement of smooth flow. Another feature of
smooth flow is a flexible system as there is not too much inventory can
easily respond to technological advances and changes in customer
preferences and switch from one product to another. All of these
characteristics apply to production systems, service systems such as
distribution systems, healthcare systems, and entertainment systems and so
on. There are some examples for process competencies including: Corolla
that has flow shop, decentralized assembly plants close to market, shop flow
time and low cost. Ferrari has job shop that is only a single plant in Italy, long
flow time, and high cost. To recognize which of above companies is better,
we require sufficient information with regard to the fundamentals of these
Chapter 1. Process and Strategy

companies. However, it depends on the strategy and the market segment

that they have focused on. If they are synchronized with those elements they
would be successful otherwise they are not.
Another example is McMaster-Carr that is a material, repair, and
operations and what they usually call it MRO. It is a product distributor, a
process with high flexibility, high quality and short response time and at the
high price. Wal-Mart is another instance for process competencies.
Operational Strategy of Wal-Mart is short flow time and low inventory while
its Operations Structure is cross docking. Cross docking means when two
trucks that one has red products and another one carries blue products go
into a warehouse with a simply conveyor system and carts. Then there will
be two other trucks both carry red and blue products to the Wal-Mart stores.
Figure 3. Trucks carry products from warehouse to the store.

In summary, the process is done in the name of cross docking starts

with two trucks one with the red product and another with the blue product
reach suppliers in a place with a minimal storage using material handling
systems. Then, in supply place these products are put into two trucks, which
now carry both the blue and red products, and they go to the corresponding
Wal-Mart stores.
Figure 4. Blue and red products in Figure 5. Products are available to
warehouse. customers.
Chapter 1. Process and Strategy

Cross docking is one stage of operations structure. Operations

structure also have electronic data exchange, fast transportation system,
focus locations which has enough market, and communication between the
stores such that if inventorial product in one store is high and in another
store is low and they can transfer products between these two stores.
Compare inventory turns in Wal-Mart and in Target. Inventory turns at
retail stores: the times that inventory turns throughout the year in Wal-Mart
is almost one and half times of the Target and Sales per square foot in Wal-
Mart is more than $400 and in Target is less than at $300 per square feet.
Operation Management and process competencies. Operations
management makes a smooth flow. It operates in hospital, university, bank,
production system, assembly line, and in a distribution system as well.
Consequently, operating management structures the process competencies
in the direction of the customer value proposition. It develops measures to
evaluate the effectiveness and efficiency of the processes. Thus, operations
management develops process competencies to meet with customer value
proposition. It develops measures to evaluate the effectiveness of these
processes and efficiency of these processes. Operations management
applies methods and techniques to improve process performance.
Process competencies are controllable whereas product attribute that
are defined by customers are not controllable. Among the systems those
ones are controllable, (such as process competencies, the environment and
customer preferences) customer preferences that define the product
attribute, are required to have a preparation of a customer value proposition
which meets and exceeds product attribute. Then process competencies
require to develop due to be able to deliver customer value propositions and
that’s process competencies which are controllable and customers have
control on them. There is no control on product attribute. There are three
performance measures which help us to understand if the process
competencies are the best fit for the product attribute: Financial
performance measures, External performance, and internal performance
measure.
Competitive Space and Strategy. Second part of process view and
strategy is related to the competitive space and strategy. Customers define
the product attributes that they want in four-dimensional space of price,
quality, variety and response time whereas firms need to define process
competencies in four-dimensional space of cost, quality, flexibility, and flow
time. Therefore, to match these requirements, product attributes and
process competencies are both defined in the four dimensional space.
Chapter 1. Process and Strategy

Figure 6. Match of four dimensional Space for two Product Attribute and
Process Competency

It is not possible to visualize a four dimensional space. This means

there is no way to represent them graphically though they might be
corresponded to mathematically by using matrix notation or vector. Also with
regard to the three-dimensional space, even though the graphical
representation of three-dimensional space is possible, the conception of such
space is not as easy as that of a two-dimensional space. Therefore, the only
way to demonstrate four-dimensional is using representation of two-
dimensions.
The following is an example of the graphical illustration related to the
two-dimensional space of variety and quality when two dimensions for the
time are constant: For example, figure 7 represents two dimensional space
of variety and quality. It shows company A has low variety and low quality
whereas Company C has high variety and low quality. Thus, company C has a
better situation compared to the company A in term of variety dimension.
Company B has the same variety as Company A but quality of the product or
quality of the process of company B is better than of A’s. Hence, B dominates
A and D dominates all of them.
Figure 7. Products of companies in terms of two dimensions of variety and
quality
Chapter 1. Process and Strategy

Consequently, in this 2 dimensional space, when move is from A to point B or

from direction of A to C, a higher variety and higher quality will be created.
As figure 8 demonstrates, enhanced products or process require moving
outside of the origin.
Figure 8. Superior products require moving outside of origin

Figure 9 represents quality, the same as before, but in the horizontal

direction with the variable cost instead of variety. The graph shows as long
as quality is concerned, the company A and C are the same. Nevertheless,
the difference is a higher cost compared to A and A dominates C. Both
products of B and A have the same cost but quality of B is much higher than
A and B dominates A. Also, products of D and B have the same quality but
cost of B is very lower than D and then B dominates D.
In figure 9 that displays a quality-dimension, as moving is in direction
to outwards, it will bring a higher quality. However, in the horizontal
direction, direction towards origin (from right to the left) the situation would
be better because costs will be dropped. In order to make these graphs
Chapter 1. Process and Strategy

consistent, cost would be replaced with the cost efficiency, which is resulted
of the formula one divided by cost.
Figure 9. The formula for efficiency

Efficiency = 1/ cost
As a result, if product C or process C has a high cost, it will have a
low cost efficiency since 1/cost becomes small. In contrast, a low cost in
formula, creates a high cost efficiency which shows a good point for products
or process.
Figure 10. The formula for Cost efficiency.

Figure 10 evidently demonstrates company B is more cost efficient

compared to company C ; Product B has a higher cost efficient compared to
product C; Process B is more cost efficient compared to C. C and D both have
the same cost efficiencies, but D has higher quality. A and D both have the
same quality, but A is more cost efficient and its cost is lower than D.
Basically, direction of outward moving makes a superior situation for
the companies and products. This rule applies to the flow time variable.
Figure 11 shows two variables of quality and flow time.
Figure 11. Two quality and flow time dimensions
Chapter 1. Process and Strategy

For quality, direction toward up creates a high quality and moving in

horizontal direction from the left to the right side makes it worse. It means
process requires more time or customer will get the product in the longer
period of time, whereas moving from right to the left shows process takes
less time. For this reason, on this dimension, flow time is replaced by
responsiveness which is derived from 1/Flow Time.
Figure 12. The formula of Responsiveness

Figure 12 displays company C or product C or process C has a higher

responsiveness compared to company B or process B or product B. Product D
or process D has high responsiveness that means production or process
takes a short period of time in a high quality. In this figure, moving outward
makes an improved situation as well as the previous moving exhibited in
prior figures.
In summary, one significant point in all figures is noticeable that when
quality, variety, cost efficiency, and responsiveness move from the left to the
right side or a direction to outward, an enhanced position will be made.
In figure 13 product B has high variety, but it has high cost because its
cost efficiency is low.
Chapter 1. Process and Strategy

Figure 13. Compare of two firms with regard to the variety and cost

efficiency.
Product A has low variety, though at the high cost efficiency. One firm
has a low cost and standardized product with a small variability; another firm
has expensive product and customized product.
There is no possibility to determine which company would be more
successful. It depends on the strategy and the market segment that these
companies are looking at and the customer value proposition they have
prepared.
Company A might be Wal-Mart and Company B can be a jet
manufacturer which has a very wealthy customers. Nonetheless, both
company may make high profit and both may get broke in a couple of years.
Strategy positioning defines those positions that the firm wants to
occupy in the competitive product space such as the current position and the
direction. There are two firms in a two-dimensional space of responsiveness
and price or cost efficiency.
Figure 14. Price efficiency formula and responsiveness

Firm B has higher responsiveness compared to firm A, but its cost

efficiency or price efficiency is much lower. The direction of the firm A is
going to move toward the right side that causes higher price efficiency and
Chapter 1. Process and Strategy

increasing responsiveness at the same time. Now, Company A has low

responsiveness. It means it takes more time to produce and deliver product
or service to the customers, even though the price efficiency or cost
efficiency is quite high. As direction of moving in figure 14 shows, the
strategy of this firm is to make a lower price and increase its responsiveness.
Strategy should look like a sculpture. A firm must ensure that its
competitors are not capable to emulate its position. The strategy of a firm
should be designed as a unique sculpture not as a block which could easily
be copied or imitated. It is difficult for competitors to imitate an array of
interlocked activities, interlocks processes.
For instance, when Southwest Airline became successful, many companies
attempted to replicate it, but Southwest had created a resolute strategy
similar to a single sculpture.

Different Companies have Different Strategies:

Zara Its strategy is timely, yet limited variety at modest
cost and quality.
Aravind and Souldice The strategy is low-cost, high quality, minimal variety,
and average to long response time.
Corolla Flow shop, decentralized assembly plants close to
market, short flow time, low cost.
Ferrari Job shop, a single plant, longer flow time, high cost.
McMaster-Carr High flexibility, high quality, quick response time, and
high price.
Walmart Short flow time, low inventory, low cost, and average
quality.

Some internal Measures and their relationship with process

competencies.
Cost
 Resource-Activity match
 High Utilization (Low Safety Capacity)
 Division of Labor (Job-Simplification)
 High Standardization and Modularization
 Effective Facility Layout
 Clear Material Flow Pattern
Chapter 1. Process and Strategy

 Flow-Shop
 Value Analysis- Value Added and Non-Value Added
 Training
 Method Improvement
 Technology

Flexibility
 Cross-trained Workers
 Short Set-up Time
 Delayed Differentiation (postponement)
 Small Batch Size
 Job-Shop
 U-Shaped Layout
 Commonality
 Internal Uniformity vs. External Variability

Flow Time
 Small Batch Size –uniform operations – short flow time - low setup time
–
 Small number of suppliers
 Long term relationship with suppliers.
 Suppliers located in short distances
 Inventory Turnover
 Reliability in flow time
 No Starvation or Blockage
 Centralization
 Commonality
 Pooling
 Variance Reduction
 Not high utilization

Quality
 Conformance of Design and Manufacturing
 Quality at Source
 Reliability (quality over time)
 Service Level
 No Defect and Re-work
 Training
 Method Improvement
Efficient Frontier
Figure 15. Efficient Frontier.
Chapter 1. Process and Strategy

The small circles scattered around the graph are different products or
different processes or different firms. For example, these two processes,
highlighted in green, have almost the same responsiveness, but the left
process is an expensive process, and the right process is an inexpensive
process. Since the responsiveness’ are the same the one on the right is a
better company.
These two companies, highlighted in red, demonstrate differences in
responsiveness. The company on the right, along the efficient frontier, has
higher responsiveness compared with the other and yet has lower cost. This
process/product/company dominates this other process/product/company.
Efficient frontier is the minimal curve covering all the current positions
in the industry. So if we want to find the minimal curve, it is on the efficient
frontier. The processes/products/companies on the curve are world class
organizations that are trying to push the efficient frontier outward. The
organizations inside the curve are not world class organizations. However by
improving themselves in both dimensions, these organizations, such as the
one circled in blue, can push themselves onto the frontier and become world
class, without or with little trade-off. If world class organizations along the
frontier want to become more responsive, then there is a trade-off, and they
must increase their costs. Non-world class organizations inside the curve
may improve their standing by improving responsiveness and costs without
trade-off.
Focused Strategy
A focused process or a focused organization occupies a small
portion of the four-dimensional space of competitiveness. For example, in a
two-dimensional representation, the focused process highlighted in yellow
below, has small cost variations, and small responsiveness variations. Thus,
Chapter 1. Process and Strategy

it can produce products at a given cost or lower cost products at another

cost, fast operations in one area, and smaller operations in another.
Figure 16. Focused Strategy.

The yellow highlighted organization is a focused organization, yet not a

world class focused organization because it is not on the efficient frontier.
Every organization is focused because everyone occupies some portion of
the four dimensional space (or in this example two dimensional space), yet
some are world class while others are not. World class organizations will fall
on the efficient frontier. For example, as we move right along the graph we
are demonstrating low cost and low responsiveness. A non-emergency
hospital (highlighted in red) would be an example of a world class
organization falling on the efficient frontier, near the bottom right of the
curve, due to its low responsiveness. You can also have the opposite. An
emergency room or emergency hospital (highlighted in pink) is an example
of a world class organization that would fall on the upper left side of the
efficient frontier, due to its high cost and high responsiveness. Both of these
examples are focused, because as long as responsiveness is concerned they
fall on the upper left and bottom right of the efficient frontier, and as far as
cost is concerned they are also placed respectfully along the curve. They do
have operations, which do have small variations in cost and small variations
in responsiveness. A general, unfocused organization will fall within the
center of the graph. This is because it has some operations which are very
inexpensive and require a long waiting time, and some operations which are
very expensive that require fast responsiveness.
Figure 17. Cost Efficiency.
Chapter 1. Process and Strategy

Within a focused strategy, if the graph above reflects cost efficiency

and quality, the cost of operations will be in the mid level, far right range as
pictured. Quality will also be in a similar small range. A quality focused
organization will fall within a small range in the upper left portion of the
curve with high cost. An organization within the center area of the graph will
produce both high and low quality products. Companies that produce both
high and low quality products at a similar cost cannot compete. A focused
organization makes or has; all high, or average quality products; high cost,
average cost, or low cost products; high, average, or low responsiveness
products; high variety, low variety, or average variety in their products. It is
impossible however to have a company that produces 1000 items ranging
from high to low cost, or high to low quality all under the same management
and operations.
A focused strategy is committed to a limited, congruent set of
objectives, in terms of demand (product, market) and supply (inputs,
technologies, and volumes). When we look at demand, this does not mean
we produce 1000 types of products, for 100 different markets. We are
committed to a limited number of products for a limited market(s). In terms
of supply, we don’t use all types of input (low or high), all types of
technologies (manual, or automated).
A focused process is not limited to a few products, but all the
products should fall within a small region of the four dimensional product
space. If they don’t all fall within that space then we require Plant-Within-
Plant (PWP). This business strategy is diverse, but generally the entire
business is divided into several mini plants, each with focused processes.
One PWP may focus on low cost, while the other may focus on quick
response. High and low volume products should be separated into different
plants. High quality, high cost products should be produced in a separate
Chapter 1. Process and Strategy

plant than an average quality, low cost product. Different plants should also
be under different management.
In a two dimensional space, with functions of cost efficiency
horizontally and responsiveness vertically, unless world class organizations
can push the boundary of the efficient frontier there is no way to increase or
decrease cost without a trade off to responsiveness. Everything else within
the curve is not world class unless it is along the frontier, yet it can move
without a trade off by pushing simultaneously in multiple directions, on more
than one dimension. One way to push the boundary of the efficient frontier is
with new technologies.
Firms located on the same ray share strategic priorities. They all
have the same cost efficiency, responsiveness, or tradeoffs. A trade off is
simply the inability to increase one dimension or attribute, without
decreasing, or without consequence to another. Firms on the frontier must
trade off. Strategic positioning is the direction of the improvement from the
previous position, or where the company wants to occupy along the efficient
frontier. By not being able to move without tradeoffs, world class companies
try and push the boundaries of the efficient frontier. As technology and
management technologies advance, they help to push the frontier outward,
yet this is not the same across all industries.
Different companies intentionally choose different processes to
achieve the same goal, for instance, McDonald’s vs. In-N-Out. These different
processes lead to different advantages and disadvantages, so we are always
facing tradeoffs. Delivering books at a low cost can be easy. Delivering books
fast can be easy. Delivering books fast and at a low cost however is not easy.
You also cannot work and study for exams at the same time. The more you
work, the less time you will have to study, and therefore the worse you will
do on exams. The more you study, the better you will do on your exams, yet
you will have less money. There is therefore a trade off between doing work
and studying. We are always facing tradeoffs.
Operations management is a set of tools, techniques, and
philosophies to create smooth flow. Operations management is also the
knowledge necessary to understand tradeoffs, and come out with optimal
tradeoffs. To create smooth flow we are forced to have high quality products,
with little inventory, because products are made and quickly leave. In such a
system, if there is a change in customer preferences, or a change in
technology, or a change in inputs, and requires variation, the system can
immediately respond. Smooth flow means flexibility, short flow time, and
high responsiveness. As soon as someone desires our product, we can
Chapter 1. Process and Strategy

quickly get it to them. Smooth flow also means low cost, because products
have less time to absorb overhead costs. By creating smooth flow we can
determine the optimal tradeoffs. Operations management allows us to
produce efficiently and determine the optimal levels of trade off.
Operational Effectiveness
Operational effectiveness is developing an operations strategy
(encompassing the resources, processes values, and competencies within
the four dimensional space of cost, quality, flexibility, and time) that
supports the strategic positioning (customer value proposition), better than
competitors.
In management the general definition of effectiveness is doing the right
things. If the thing you are doing is right then you are effective. Efficiency is
doing things right. You can be efficient but not effective. You may be doing
something wrong very well or quickly, this does not make you effective. To
be both effective and efficient, you should do the right things while doing
things right.
In operations management however, we define efficiency as cost
efficiency. A process is efficient if we can produce output with minimal inputs
and resources: low cost operations. An effective process is a process that
supports the execution of a company’s strategy in the four dimensions of
cost, quality, flexibility, and time. A synchronized process does well in all four
dimensions, while supporting the customer value proposition. We are
efficient if we do well in the cost dimension. We are effective if we are doing
well in all four dimensions.