use the environmental analysis you researched.Create a 10- to 12-slide presentation including detailed speaker notes in which you include the following:Examine the results of the internal environmental scan findings in the analysis.Examine the results of the external environmental scan findings in the analysis.Discuss the findings of the scans as they relate to relevant research.Recommend 3 strategic objectives based on the SWOT analysis.Translate each objective into a business goal.Create a related operational tactic for 3 distinct sectors of the organization such as marketing, finance, accounting, etc.Format your assignment consistent with APA guidelines.7/5/2016
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CHAPTER 9
Value Chain Management: Functional
Strategies for Competitive Advantage
Learning Objectives
After studying this chapter, you should be able to:
LO9 Explain the role of functional strategy and value chain management in achieving superior
quality, efficiency, innovation, and responsiveness to customers.
1
LO9 Describe what customers want, and explain why it is so important for managers to be
responsive to their needs.
2
LO9 Explain why achieving superior quality is so important, and understand the challenges
facing managers and organizations that seek to implement total quality management.
3
LO9 Explain why achieving superior efficiency is so important, and understand the different
kinds of techniques that need to be employed to increase efficiency.
4
LO9 Differentiate between two forms of innovation, and explain why innovation and product
development are crucial components of the search for competitive advantage.
5
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A MANAGER’S CHALLENGE
Ready for Takeoff? Increasing Airlines’ Boarding Efficiency
Why is efficiency important? Is it faster to board the back of the plane first? Or should airlines
file in passengers with window seats first, followed by those with middle seats, followed by those
with aisle seats? What about just assigning passengers to random groups and boarding that way? Or
how about not assigning seats and just allowing passengers to sit wherever they want?
These were the questions some major airlines were asking themselves recently in an effort to
improve their punctuality ratings. Late departures and arrivals cost airlines dearly in more ways than
reputation, so making sure boarding occurs in a timely manner is of great concern to the industry, as
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well as to passengers needing to make connecting flights.
Certainly the first two options sound like they would be faster than the freeforall of allowing
random groups to board at the same time or allowing passengers to sit wherever they like. Yet two
recent studies found that random boarding does work a little quicker than the other options, believe it
or not.
One study was conducted by American Airlines. It spent two years studying ways to speed up the
boarding process and landed on randomized group boarding for most passengers. The airline still
gives families, military personnel, and travelers with elite status priority boarding. It also allows
passengers the option of paying for early boarding if they choose.
Part of American’s study had observers watch thousands of boarding processes to see where things
bogged down. Carryon bags were a big problem. Passengers were bringing large bags on board to
avoid baggage fees. When the plane was boarded back to front, those waiting in the aisles to get to
their seats would put their bags in overhead bins at the front of the plane, leaving no space for the
bags of passengers who boarded later.
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Using computer simulations, American not only found that the backtofront boarding method was
slower than the windowmiddleaisle seat method, it surprisingly discovered that putting passengers
into random boarding groups allowed the plane to fill up faster. Using the random method, more
passengers got to their seats at the same time than the twoatatime rate of the backtofront method.
Also, passengers were more likely to stow their bags in overhead bins closer to their seats than at the
front of the plane. The new method even reduced the number of bags American checked at the gate
by 20 percent.1 More recently, American tweaked the system to add passengers without carryons to
the list of priority boarders.2
Another study was done by MythBusters, the Discovery Channel television show that applies
scientific methods to test various accepted ideas. In the episode on plane boarding, the MythBusters
team sought to confirm the myth that “when boarding an airplane, boarding backtofront is the
slowest method.”3 On the program, the hosts built a plane replica, complete with seats and overhead
bins. Volunteers tested the various boarding methods. To further simulate reality, 5 percent of the
volunteers were told to disrupt boarding by such actions as sitting in the wrong seat or standing in the
aisle for longer than needed. Professional flight attendants were hired to help with the process. The
program measured two outcomes of each method tested: how long it took to board the plane and how
satisfied the volunteer passengers were with each experience.
The method with the highest satisfaction rating was the “reverse pyramid” in which elite
passengers boarded first followed by a complex set of zones that began with the rear window seats.
That method allowed the plane to board in 15 minutes and 10 seconds. The method that allowed for
fastest boarding was the one with no assigned seats. When used, the plane was boarded in 14 minutes
and 7 seconds. Yet this method had the lowest satisfaction rating of all the methods attempted on the
show.
The second fastest method was boarding elite passengers first, followed by the windowmiddle
aisle seat method. This method received high marks for passenger satisfaction. This method is similar
to one called the “Steffen Method,” named for astrophysicist Jason Steffen who wrote a research
paper with a mathematical approach to efficient boarding. In that method, passengers board in the
windowmiddleaisle seat method, but in assigned zones that keep them in different parts of the plane
and allow simultaneous boarding.4
What slows down boarding? Many industry analysts and bloggers have listed the reasons. For one,
many passengers board outside their “zone” or whatever method the airline is using, which makes the
system less efficient. Some passengers may do this purposefully and count on gate agents to look the
other way.5 Second, other passengers pay for early boarding or are given early boarding as part of
their frequent flier reward program, which has the same effect as those who jumped the line. Both the
passengers who boarded with the wrong group on purpose and those who paid for the privilege may
be in the aisle as others try to board or may be strapped into middle or aisle seats and will need to
stand when the window seat passengers arrive.6 Third, sometimes after stowing a carryon bag in the
overhead bin, a passenger remembers something needed from the bag, stands
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up, and blocks the aisle while rummaging through the bag to find it.7
Probably the most mentioned culprit for slow boarding is baggage issues. Airlines started charging
for checked luggage in 2008 when fuel prices went up.8 To avoid the fees, more passengers began
using carryon luggage. The extra luggage slows the boarding process by leaving passengers in the
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aisle longer. The extra luggage also frequently fills up the bins, requiring extra time and effort for
airline personnel to gatecheck the bags.9
Why is the speed of boarding an airplane important? Airlines save $30 for every minute shaved off
boarding times.10 However, airlines appear to be making some of this money back in fees. In 2014
U.S.based airlines planned to increase their fees, despite making over $6 billion from fees in 2013.
United Continental, which collected almost $650 million in checked bags fees in 2013, increased its
fee charged to passengers flying with more than two bags by $25 per bag. Oversized bags cost $200
to check, and bags weighing more than 70 pounds cost $400 to check.11 Delta Airlines collected
about $1 billion in fees in 2013.12
Fees vary at different airlines, as do methods for boarding planes. Southwest Airlines uses the
unassigned seat method of boarding. The airline assigns passengers to boarding groups and gives
each passenger a boarding number within the group. Passengers line up in groups and in numerical
order. Since seats are not assigned, each passenger selects a seat when on the plane.13 Like American
Airlines, most airlines use assigned seating and some type of boarding group system to put
passengers on the planes.
Overview
As “A Manager’s Challenge” suggests, organizations don’t always agree on the best way to conduct
business. Even organizations in the same industry can vary widely on business practices. Some
organizations may adopt the latest research and methods, while others find different ways to stay
competitive. In this chapter we focus on the functionallevel strategies managers can use to achieve
superior efficiency, quality, innovation, and responsiveness to customers and so build competitive
advantage. We also examine the nature of an organization’s value chain and discuss how the combined
or cooperative efforts of managers across the value chain are required if an organization is to achieve its
mission and goal of maximizing the amount of value its products provide customers. By the end of this
chapter, you will understand the vital role value chain management plays in creating competitive
advantage and a highperforming organization.
Functional Strategies, the Value Chain,
and Competitive Advantage
As we noted in Chapter 8, managers can use two basic businesslevel strategies to add value to an
organization’s products and achieve a competitive advantage over industry rivals. First, managers can
pursue a lowcost strategy and lower the costs of creating value to attract customers by keeping product
prices as low as or lower than competitors’ prices. Second, managers can pursue a differentiation
strategy and add value to a product by finding ways to make it superior in some way to the products of
other companies. If they are successful and customers see greater value in the product, then like Apple
they can charge a premium or higher price for the product. The four specific ways in which managers
can lower costs and/or increase differentiation to obtain a competitive advantage were mentioned in
Chapter 1 and are reviewed here; how organizations seek to achieve them is the topic of this chapter.
(See Figure 9.1.)
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Figure 9.1 Four Ways to Create a Competitive Advantage
LO91
Explain the role of functional
strategy and value chain
management in achieving superior
quality, efficiency, innovation, and
responsiveness to customers.
1. Achieve superior efficiency. Efficiency is a measure of the amount of inputs required to produce a
given amount of outputs. The fewer the inputs required to produce a given output, the higher is
efficiency and the lower the cost of outputs. For example, in Gartner’s annual ranking of the
world’s supply chains, Apple was ranked number one for six years in a row. Part of Apple’s
strength has been its focus on simplicity. Yet the company has begun to expand its product
portfolio, which will increase the need for complexity management in its supply chain.14
2. Achieve superior quality. Quality means producing goods and services that have attributes—such
as design, styling, performance, and reliability—that customers perceive as being superior to those
found in competing products.15 Providing highquality products creates a brandname reputation
for an organization’s products, and this enhanced reputation allows it to charge higher prices. In the
car industry, for example, Toyota’s reputation for making reliable vehicles allowed it to outperform
rival carmakers and gives it a competitive advantage.
3. Achieve superior innovation, speed, and flexibility. Anything new or better about the way an
organization operates or the goods and services it produces is the result of innovation. Successful
innovation gives an organization something unique or different about its products that rivals lack—
more attractive, useful, sophisticated products or superior production processes that strengthen its
competitive advantage. Innovation adds value to products and allows the organization to further
differentiate itself from rivals and attract customers who are often willing to pay a premium price
for unique products. For example, Nintendo’s former competitive advantage in handheld video
game devices like the 3DS has been eroded as more games are available on smartphones and
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tablets.16
4. Attain superior responsiveness to customers. An organization that is responsive to customers tries
to satisfy their needs and give them exactly what they want. An organization that treats customers
better than its rivals do also provides a valuable service some customers may be willing to pay a
higher price for. Managers can increase responsiveness by providing excellent aftersales service
and support and by working to provide improved products or services to customers in the future.
Today smartphone companies such as Samsung, Apple, and Nokia are searching for ways to better
satisfy changing customer needs for higherquality video, sound, and Internet connection speed.
Functional Strategies and Value Chain Management
functionallevel strategy A plan
of action to improve the ability of
each of an organization’s functions
to perform its taskspecific
activities in ways that add value to
an organization’s goods and
services.
value chain The coordinated
series or sequence of functional
activities necessary to transform
inputs such as new product
concepts, raw materials,
component parts, or professional
skills into the finished goods or
services customers value and want
to buy.
Functionallevel strategy is a plan of action to improve the ability of each of an organization’s functions
or departments (such as manufacturing or marketing) to perform its taskspecific activities in ways that
add value to an organization’s goods and services. A company’s value chain is the coordinated series or
sequence of functional activities necessary to transform inputs such as new product concepts, raw
materials, component parts, or professional skills into the finished goods or services customers value and
want to buy (see Figure 9.2). Each functional activity along the chain adds value to the product when it
lowers costs or gives the product differentiated qualities that increase the price a company can charge for
it.
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value chain management The
development of a set of functional
level strategies that support a
company’s businesslevel strategy
and strengthen its competitive
advantage.
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Value chain management is the development of a set of functionallevel strategies that support a
company’s businesslevel strategy and strengthen its competitive advantage. Functional managers
develop the strategies that increase efficiency, quality, innovation, and/or responsiveness to customers
and thus strengthen an organization’s competitive advantage. So the better the fit between functional
and businesslevel strategies, the greater will be the organization’s competitive advantage, and the better
able the organization is to achieve its mission and goal of maximizing the amount of value it gives
customers. Each function along the value chain has an important role to play in value creation.
As Figure 9.2 suggests, the starting point of the value chain is often the search for new and improved
products that will better appeal to customers, so the activities of the product development and marketing
functions become important. Product development is the engineering and scientific research activities
involved in innovating new or improved products that add value to a product. For example, Apple has
been a leader in developing new kinds of mobile digital devices that have become so popular among
buyers that its products are rapidly imitated by its competitors. Once a new product has been developed,
the marketing function’s task is to persuade customers that the product meets their needs and convince
them to buy it. Marketing can help create value through brand positioning and advertising that increase
customer perceptions of the utility of a company’s product. For example, moviegoers appear willing to
pay more to watch a movie in 3D. In 2014, 28 films were slated to be released in 3D.17 Even filmmaker
Steven Spielberg doubted the value of paying extra for 3D. In an interview, he said he hoped 3D ticket
prices would get in line with 2D prices. However, he did indicate that IMAX movies would continue to
be worth extra for “a premium experience in a premium environment.”18
Even the bestdesigned product can fail if the marketing function hasn’t devised a careful plan to
persuade people to buy it and try it out—or to make sure customers really want it. For this reason,
marketing often conducts consumer research to discover unmet customer product needs and to find
better ways to tailor existing products to satisfy customer needs. Marketing then presents its suggestions
to product development, which performs its own research to discover how best to design and make the
new or improved products.
At the next stage of the value chain, the materials management function controls the movement of
physical materials from the procurement of inputs through production and to distribution and delivery to
the customer. The efficiency with which this is carried out can significantly lower costs and create more
value. Walmart has the most efficient materials management function in the retail industry. By tightly
controlling the flow of goods from its suppliers through its stores and into the hands of customers,
Walmart has eliminated the need to hold large inventories of goods. Lower inventories mean lower costs
and hence greater value creation.
Figure 9.2 Functional Activities and the Value Chain
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The production function is responsible for creating, assembling, or providing a good or Page
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252
production, we generally mean manufacturing and assembly. For services such as banking
or retailing, production takes place when the service is actually provided or delivered to the customer
(for example, when a bank originates a loan for a customer, it is engaged in “production” of the loan).
By performing its activities efficiently, the production function helps to lower costs. For example, the
efficient production operations of Honda and Toyota have made them more profitable than competitors
such as Renault, Volkswagen, and Chrysler. The production function can also perform its activities in a
way that is consistent with high product quality, which leads to differentiation (and higher value) and to
lower costs.
At the next stage in the value chain, the sales function plays a crucial role in locating customers and
then informing and persuading them to buy the company’s products. Personal selling—that is, direct
facetoface communication by salespeople with existing and potential customers to promote a
company’s products—is a crucial value chain activity. Which products retailers choose to stock, for
example, or which drugs doctors choose to prescribe often depends on the salesperson’s ability to inform
and persuade customers that his or her company’s product is superior and thus the best choice.
Finally, the role of the customer service function is to provide aftersales service and support. This
function can create a perception of superior value in the minds of customers by solving customer
problems and supporting customers after they have purchased the product. For example, FedEx can get
its customers’ parcels to any point in the world within 24 hours, creating value and support for
customers’ businesses. Customer service controls the electronic systems for tracking sales and inventory,
pricing products, selling products, dealing with customer inquiries, and so on, all of which can greatly
increase responsiveness to customers. Indeed, an important activity of sales and customer service is to
tell product development and marketing why a product is meeting or not meeting customers’ needs so
the product can be redesigned or improved. Hence a feedback loop links the end of the value chain to its
beginning (see Figure 9.2).
In the rest of this chapter, we examine the functional strategies used to manage the value chain to
improve quality, efficiency, innovation, and responsiveness to customers. Notice, however, that
achieving superior quality, efficiency, and innovation is part of attaining superior responsiveness to
customers. Customers want value for their money, and managers who develop functional strategies that
result in a value chain capable of creating innovative, highquality, lowcost products best deliver this
value to customers. For this reason, we begin by discussing how functional managers can increase
responsiveness to customers.
Improving Responsiveness to
Customers
All organizations produce outputs—goods or services—that are consumed by customers, who, in buying
these products, provide the monetary resources most organizations need to survive. Because customers
are vital to organizational survival, managers must correctly identify their customers and pursue
strategies that result in products that best meet their needs. This is why the marketing function plays such
an important part in the value chain, and good value chain management requires that marketing
managers focus on defining their company’s business in terms of the customer needs it is satisfying and
not by the type of products it makes—or the result can be disaster.19 For example, Kodak’s managers
said “no thanks” when the company was offered the rights to “instant photography,” which was later
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marketed by Polaroid. Why did they make this mistake? Because the managers adopted a product
oriented approach to their business that didn’t put the needs of customers first. Kodak’s managers
believed their job was to sell highquality glossy photographs to people. Why would they want to
become involved in instant photography, which results in inferiorquality photographs? In reality, Kodak
was not satisfying people’s needs for highquality photographs; it was satisfying the need customers
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had to capture and record the images of their lives—their birthday parties, weddings, graduations, and
so on. And people wanted those images quickly so they could share them right away with other people—
which is why today digital photography has taken off and Kodak filed for bankruptcy in 2012.
What Do Customers Want?
LO92
Describe what customers want,
and explain why it is so important
for managers to be responsive to
their needs.
Given that satisfying customer demand is central to the survival of an organization, an important
question is “What do customers want?” Although specifying exactly what customers want is not possible
because their needs vary from product to product, most customers prefer
1. A lower price to a higher price.
2. Highquality products to lowquality products.
3. Quick service and good aftersales service to slow service and poor aftersales support.
4. Products with many useful or valuable features to products with few features.
5. Products that are, as far as possible, customized or tailored to their unique needs.
Managers know that the more desired product attributes a company’s value chain builds into its
products, the higher the price that must be charged to cover the costs of developing and making the
product. So what do managers of a customerresponsive organization do? They try to develop functional
strategies that allow the organization’s value chain to deliver to customers either more desired product
attributes for the same price or the same product attributes for a lower price.20 For example, in 2014
Walmart announced that it had made a deal to be the only national retailer to sell the Wild Oats brand
organic foods and that it would do so at prices lower than those usually charged for organic products.
Wild Oats was a wellknown organic food brand in the late 1980s but has been struggling since the late
2000s. Walmart’s massive size allows it the organizational efficiencies to offer the organic brand at a
more affordable price for consumers.21
Managing the Value Chain to Increase Responsiveness
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to Customers
Because satisfying customers is so important, managers try to design and improve the way their value
chains operate so they can supply products that have the desired attributes—quality, cost, and features.
For example, the need to respond to customer demand for competitively priced, quality cars drove U.S.
carmakers like Ford and GM to imitate Japanese companies and copy how Toyota and Honda perform
their value chain activities. Today the imperative of satisfying customer needs shapes the activities of
U.S. carmakers’ materials management and manufacturing functions. As an example of the link between
responsiveness to customers and an organization’s value chain, consider how Southwest Airlines, the
most profitable U.S. airline, operates.22
A Southwest ticket agent may assist a customer and then turn around to load her or his baggage as part of the
organization’s emphasis on crosstraining workers for multiple tasks. Southwest’s operating system is geared toward
satisfying customer demand for lowpriced, reliable, and convenient air travel, making it one of the most
consistently successful airlines in recent years.
The major reason for Southwest’s success is that it has pursued functional strategies that improve how
its value chain operates to give customers what they want. Southwest commands high customer loyalty
precisely because it can deliver products, such as flights from Houston to Dallas, that have all the desired
attributes: reliability, convenience, and low price. In each of its functions, Southwest’s strategies revolve
around finding ways to lower costs. For example, Southwest offers a nofrills approach to inflight
customer service: no meals are served onboard, and there are no firstclass seats. Southwest does not
subscribe to the big reservation computers used by travel agents because the booking fees are too costly.
Also, the airline flies only one aircraft, the fuelefficient Boeing 737, which keeps training and
maintenance costs down. All this translates into low
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prices for customers. Additionally, Southwest is one of the few airlines that does not charge baggage
fees. Passengers can check two bags for free.23
Southwest’s reliability derives from the fact that it has the quickest aircraft turnaround time in the
industry. A Southwest ground crew needs only 15 minutes to turn around an incoming aircraft and
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prepare it for departure. This speedy operation helps keep flights on time. Southwest has such a quick
turnaround because it has a flexible workforce that has been crosstrained to perform multiple tasks.
Thus the person who checks tickets might also help with baggage loading if time is short.
Southwest’s convenience comes from its scheduling multiple flights every day between its popular
locations, such as Dallas and Houston, and its use of airports that are close to downtown areas (Hobby at
Houston and Love Field at Dallas) instead of using more distant major airports.24 In sum, Southwest’s
excellent value chain management has given it a competitive advantage in the airline industry. Another
company that has found a way to be responsive to customers by offering them faster service is Panera,
which is profiled in the accompanying “Management Insight” feature.
Management Insight
Bread in the eCommerce Fast Lane
Panera is a 1,777 bakery–café chain located in both the United States and Canada. The chain is made
up of three companies: Saint Louis Bread Co., Paradise Bakery & Café, and Panera Bread.25 Until
recent years, the bakeries had been operating successfully with a traditional bakery–café model of
offerings and service. That’s until the company’s CEO, Ron Shaich, had an epiphany. Always running
late when driving his son to school in the mornings, Shaich would arrange for breakfast and lunch for
his son by calling ahead to one of his stores and ordering. When he arrived at the store, his son would
run in with his credit card, skip the line, and pick up the food. While the system worked for the
Shaichs, it was not one that was available to everyone.
That’s what gave Shaich the idea for Panera 2.0. Now customers can place orders via computer or
mobile app. When the customer arrives at the restaurant, he or she can skip the line, pay for the
ordered food, and either eat in or carry out. There also are touchscreen kiosks at the restaurants for
customers who did not order ahead but who want to get through the line faster. And of course
customers can still go to the register and place an order.26
Until recently, Panera Bread had been operating its bakerycafés in a traditional manner. Now, after CEO Ron
Shaich got the idea for Panera 2.0, customers can place orders online, skip the store line, pay for the order, and
eat in or carry out. The new system allows Panera to increase their efficiency and customer service satisfaction.
One advantage of the new system is that it syncs with the MyPanera rewards program. The
program remembers all orders that the customer places. If a customer ordered a custom sandwich at
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one visit, the system remembers it and offers to place the same order at the next visit.
Panera began testing the system in 2011 and hopes to have it rolled out to all restaurants by 2016.
And it has already seen users of Panera 2.0 and kiosk users increase the frequency of their visits. At
one location, sales were up more than 50 percent.27
The new system also has improved the order accuracy rates. The industry average is one in seven
incorrectly fulfilled orders, many of the errors occurring during input at the register. “If we’re in the
togo business, we have to be 100 percent accurate,” Shaich says.28 In addition to depending on the
customer to enter the order correctly, employees doublecheck each order before it leaves the store.
Of course adding the system has meant changes for the employees at Panera. The information
technology team has doubled. Operations have been affected as well. When customers place orders
online or at a kiosk, it saves employees at the register from having to do so. Those employees can be
redeployed to the kitchen to help keep up with the demand of incoming orders. Once the system is in
place at every Panera location, Shaich believes Panera will be one of the 10 largest ecommerce
operators in the United States.
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Although managers must seek to improve their responsiveness to customers by improving how the
value chain operates, they should not offer a level of responsiveness to customers that results in costs
becoming too high—something that threatens an organization’s future performance and survival. For
example, a company that customizes every product to the unique demands of individual customers is
likely to see its costs grow out of control.
Customer Relationship Management
customer relationship
management (CRM) A
technique that uses IT to develop
an ongoing relationship with
customers to maximize the value
an organization can deliver to them
over time.
One functional strategy managers can use to get close to customers and understand their needs is
customer relationship management (CRM). CRM is a technique that uses IT to develop an ongoing
relationship with customers to maximize the value an organization can deliver to them over time. By the
2000s most large companies had installed sophisticated CRM IT to track customers’ changing demands
for a company’s products; this became a vital tool to maximize responsiveness to customers. CRM IT
monitors, controls, and links each of the functional activities involved in marketing, selling, and
delivering products to customers, such as monitoring the delivery of products through the distribution
channel, monitoring salespeople’s selling activities, setting product pricing, and coordinating aftersales
service. CRM systems have three interconnected components: sales and selling, aftersales service and
support, and marketing.
Suppose a sales manager has access only to sales data that show the total sales revenue each
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salesperson generated in the last 30 days. This information does not break down how much revenue
came from sales to existing customers versus sales to new customers. What important knowledge is
being lost? First, if most revenues are earned from sales to existing customers, this suggests that the
money being spent by a company to advertise and promote its products is not attracting new customers
and so is being wasted. Second, important dimensions involved in sales are pricing, financing, and order
processing. In many companies, to close a deal, a salesperson has to send the paperwork to a central
sales office that handles matters such as approving the customer for special financing and determining
specific shipping and delivery dates. In some companies, different departments handle these activities,
and it can take a long time to get a response from them; this keeps customers waiting—something that
often leads to lost sales. Until CRM systems were introduced, these kinds of problems were widespread
and resulted in missed sales and higher operating costs. Today the sales and selling CRM software
contains best sales practices that analyze this information and then recommend ways to improve how the
sales process operates.
One company that has improved its sales and aftersales practices by implementing CRM is Empire
HealthChoice Inc., the largest health insurance provider in New York, which sells its policies through
1,800 sales agents. For years these agents were responsible for collecting all the customerspecific
information needed to determine the price of each policy. Once they had collected the necessary
information, the agents called Empire to get price quotes. After waiting days for these quotes, the agents
relayed them back to customers, who often then modified their requests to reduce the cost of their
policies. When this occurred, the agents had to telephone Empire again to get revised price quotes.
Because this frequently happened several times with each transaction, it often took more than 20 days to
close a sale and another 10 days for customers to get their insurance cards.29
Recognizing that these delays were causing lost sales, Empire decided to examine how a CRM system
could improve the sales process. Its managers chose a webbased system so agents themselves could
calculate the insurance quotes online. Once an agent enters a customer’s data, a quote is generated in just
a few seconds. The agent can continually modify a policy while sitting facetoface with the customer
until the policy and price are agreed upon. As a result, the sales process can now be completed in a few
hours, and customers receive their insurance cards in 2 to 3 days rather than 10.30
When a company implements aftersales service and support CRM software, salespeople are required
to input detailed information about their followup visits to customers. Because the system tracks and
documents every customer’s case history, salespeople have instant access to a record of everything that
occurred during previous phone calls or visits. They are in a much better position to respond to
customers’ needs and build customer loyalty, so a company’s aftersales service improves. Cell phone
companies like TMobile and Sprint, for
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example, require that telephone sales reps collect information about all customers’ inquiries,
complaints, and requests, and this is recorded electronically in customer logs. The CRM module can
analyze the information in these logs to evaluate whether the customer service reps are meeting or
exceeding the company’s required service standards.
A CRM system can also identify the top 10 reasons for customer complaints. Sales managers can then
work to eliminate the sources of these problems and improve aftersales support procedures. The CRM
system also identifies the top 10 best service and support practices, which can then be taught to all sales
reps.
Finally, as a CRM system processes information about changing customer needs, this improves
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marketing in many ways. Marketing managers, for example, have access to detailed customer profiles,
including data about purchases and the reasons why individuals were or were not attracted to a
company’s products. Armed with this knowledge, marketing can better identify customers and the
specific product attributes they desire. Traditional CRM systems were organized by having salespeople
input customer information. Now social CRM systems can track customers on social media and put them
on a company’s radar. For example, if a Twitter user posts frequently about a topic relevant to the
company or about the company’s product, a CRM system can bring the user to the attention of the
company as an important connection or a potential customer.31 In sum, a CRM system is a
comprehensive method of gathering crucial information about how customers respond to a company’s
products. It is a powerful functional strategy used to align a company’s products with customer needs.
Improving Quality
LO93
Explain why achieving superior
quality is so important, and
understand the challenges facing
managers and organizations that
seek to implement total quality
management.
As noted earlier, highquality products possess attributes such as superior design, features, reliability,
and aftersales support; these products are designed to better meet customer requirements.32 Quality is a
concept that can be applied to the products of both manufacturing and service organizations—goods
such as an Apple computer or services such as Southwest Airlines flight service or customer service in a
Citibank branch. Why do managers seek to control and improve the quality of their organizations’
products?33 There are two reasons (see Figure 9.3).
First, customers usually prefer a higherquality product to a lowerquality product. So an organization
able to provide, for the same price, a product of higher quality than a competitor’s product is serving its
customers better—it is being more responsive to its customers. Often providing highquality products
creates a brandname reputation for an organization’s products. This enhanced reputation may allow the
organization to charge more for its products than its competitors can charge, and thus it makes greater
profits. For example, in 2014 Lexus was ranked number one on the J.D. Power list of the 10 most
reliable carmakers for the third year in a row.34 The high quality of Lexus vehicles enables the company
to charge higher prices for its cars than the prices charged by rival carmakers.
The second reason for trying to boost product quality is that higher product quality can increase
efficiency and thereby lower operating costs and boost profits. Achieving high product quality lowers
operating costs because of the effect of quality on employee productivity:
Figure 9.3 The Impact of Increased Quality on Organizational Performance
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Higher product quality means less employee time is wasted in making defective products that must be
discarded or in providing substandard services, and thus less time has to be spent fixing mistakes. This
translates into higher employee productivity, which also means lower costs. The way each manager can
have an impact on quality and cost is discussed in the accompanying “Management Insight” feature.
Management Insight
Vendor Relationships Key to TJX’s Store Offerings
The TJX Companies Inc. sell clothes, shoes, handbags, and other fashions along with home
decorating items at discounted prices. Its U.S. stores are T.J. Maxx, Marshalls, Sierra Trading Post,
and HomeGoods. The company was founded in 1919 as the New England Trading Company and
expanded into a chain of women’s clothing stores. The sons of the founders built the Zayre
department store in the 1950s; then came T.J. Maxx in 1976, which was created under the Zayre
name. In a major restructuring in the late 1980s, the Zayre stores were sold and the company changed
its name to TJX Companies. It later acquired Marshalls, HomeGoods, and Sierra Trading Post.
The company states its mission as delivering “a rapidly changing assortment of fashionable,
quality, brand name and designer merchandise at prices generally 20–60 percent below department
and specialty store regular prices, every day.”35 Aside from the savings, the main appeal of the stores
is the “treasurehunt shopping experience”36 in which the stores have different items and a different
look—often a somewhat opposite experience to perusing the more static seasonal product lines found
in traditional department stores.37
The company’s business model allows it to perform well in almost any economic environment. TJX
is able to sell highquality namebrand merchandise at a discount by purchasing overstocks and
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canceled orders from other retailers. TJX buys up excess inventory at a steep discount, which it then
passes on to the customer.38
TJX stores have no walls or physical dividers between departments. This allows the merchandise
categories to expand or contract according to supply and demand. Inventory turns rapidly, which
keeps stores fresh and allows the company to buy as it needs.39 “Our universe of over 16,000 vendors
affords us tremendous flexibility, and we continue to strengthen our vendor relationships and build
new ones to offer consumers even more exciting brands,” said TJX CEO Carol Meyrowitz. “While
we drive our top line, we expect to also drive our profitability through even better inventory
management and a further improved supply chain.”40
The supply chain is important to TJX’s ability to deliver value and to properly stock each store. The
retailer has more than 3,000 stores and plans to grow through new and remodeled stores, a new home
office and data center, new distribution centers, and systems and supply chain improvements.41 The
company recently opened a new distribution center in Arizona, its first in about 10 years despite a 40
percent increased store base. Meyrowitz said the company will continue to invest in its supply chain
in fiscal 2015.42
Total Quality Management
total quality management
(TQM) A management technique
that focuses on improving the
quality of an organization’s
products and services.
At the forefront of the drive to improve product quality is a functional strategy known as total quality
management.43 Total quality management (TQM) focuses on improving the quality of an
organization’s products and stresses that all of an organization’s value chain activities should be directed
toward this goal. TQM requires the cooperation of managers in every function of an organization and
across functions.44 To show how TQM works, we next describe the way that Citibank used the
technique. Then, using Citibank as an example, we look at the 10 steps that are necessary for managers
to implement a successful TQM program.
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In the 2000s Citibank’s top managers decided the bank could retain and expand its customer base only
if it could increase customer loyalty, so they decided to implement a TQM program to better satisfy
customer needs. As the first step in its TQM effort, Citibank identified the factors that dissatisfy its
customers. When analyzing the complaints, it found that most concerned the time it took to complete a
customer’s request, such as responding to an account problem or getting a loan. So Citibank’s managers
began to examine how they handled each kind of customer request. For each distinct request, they
formed a crossfunctional team that broke down the request into the steps required, between people and
departments, to complete the response. In analyzing the steps, teams found that many of them were
unnecessary and could be replaced by using the right information systems. They also found that delays
often occurred because employees did not know how to handle a request. They were not being given the
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right kind of training, and when they couldn’t handle a request, they simply put it aside until a supervisor
could deal with it.
Citibank’s second step to increase its responsiveness was to implement an organizationwide TQM
program. Managers and supervisors were charged with reducing the complexity of the work process and
finding the most effective way to process each particular request, such as a request for a loan. Managers
were also charged with training employees to answer each specific request. The results were remarkable.
For example, in the loan department the TQM program reduced by 75 percent the number of handoffs
necessary to process a request. The department’s average response time dropped from several hours to 30
minutes. What are the 10 steps in TQM that made this possible?
1. Build organizational commitment to quality. TQM will do little to improve the performance of an
organization unless all employees embrace it, and this often requires a change in an organization’s
culture.45 At Citibank the process of changing culture began at the top. First a group of top
managers, including the CEO, received training in TQM from consultants from Motorola, where
Six Sigma was founded (Six Sigma is trademarked by Motorola).46 Each member of the top
management group was then given the responsibility of training a group at the next level in the
hierarchy, and so on down through the organization until all 100,000 employees had received basic
TQM training.
2. Focus on the customer. TQM practitioners see a focus on the customer as the starting point.47
According to TQM philosophy, the customer, not managers in quality control or engineering,
defines what quality is. The challenge is fourfold: (1) to identify what customers want from the
good or service that the company provides; (2) to identify what the company actually provides to
customers; (3) to identify any gap between what customers want and what they actually get (the
quality gap); and (4) to formulate a plan for closing the quality gap. The efforts of Citibank
managers to increase responsiveness to customers illustrate this aspect of TQM well.
3. Find ways to measure quality. Another crucial element of TQM is the development of a measuring
system that managers can use to evaluate quality. Devising appropriate measures is relatively easy
in manufacturing companies, where quality can be measured by criteria such as defects per million
parts. It is more difficult in service companies, where outputs are less tangible. However, with a
little creativity, suitable quality measures can be devised as they were by managers at Citibank.
Citibank used customer satisfaction surveys as quality measures and defined a defect as any rating
below the two highest ratings.48
4. Set goals and create incentives. Once a measure has been devised, managers’ next step is to set a
challenging quality goal and to create incentives for reaching that goal. At Citibank the CEO set an
initial goal of reducing customer complaints by 50 percent. One way of creating incentives to
attain a goal is to link rewards, such as bonus pay and promotional opportunities, to the goal.
5. Solicit input from employees. Employees are a major source of information about the causes of
poor quality, so it is important that managers establish a system for soliciting employee
suggestions about improvements that can be made. At most companies, like Citibank, this is an
ongoing endeavor—the process never stops.
6. Identify defects and trace them to their source. A major source of product defects is the production
system; a major source of service defects is poor customer service procedures. TQM preaches the
need for managers to identify defects in the work process, trace those defects back to their source,
find out why they occurred, and make corrections so they do not occur again. Today IT makes
quality measurement much easier.
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prosecuted.
inventory
The stock of raw
materials, inputs, and
component parts that an
organization has on hand at a
particular time.
justintime (JIT) inventory
system A system in which
parts or supplies arrive at an
organization when they are
needed, not before.
7. Introduce justintime inventory systems. Inventory is the stock of raw materials, inputs, and
component parts that an organization has on hand at a particular time. When the materials
management function designs a justintime (JIT) inventory system, parts or supplies arrive at
the organization when they are needed, not before. Also, under a JIT inventory system, defective
parts enter an organization’s operating system immediately; they are not warehoused for months
before use. This means defective inputs can be quickly spotted. JIT is discussed more later in the
chapter.
8. Work closely with suppliers. A major cause of poorquality finished goods is poorquality
component parts. To decrease product defects, materials managers must work closely with
suppliers to improve the quality of the parts they supply. Managers at Xerox worked closely with
suppliers to get them to adopt TQM programs, and the result was a huge reduction in the defect
rate of component parts. Managers also need to work closely with suppliers to get them to adopt a
JIT inventory system, also required for high quality.
9. Design for ease of production. The more steps required to assemble a product or provide a service,
the more opportunities there are for making a mistake. It follows that designing products that have
fewer parts or finding ways to simplify providing a service should be linked to fewer defects or
customer complaints. For example, Apple continually redesigns the way it assembles its mobile
digital devices to reduce the number of assembly steps required, and it constantly searches for new
ways to reduce the number of components that have to be linked together. The consequence of
these redesign efforts was a continuous fall in assembly costs and marked improvement in product
quality during the 2000s. At Citibank, defect detection and resolution lead to better performance in
process time, cash management, and customer satisfaction.49
10. Break down barriers between functions. Successful implementation of TQM requires substantial
cooperation between the different value chain functions. Materials managers have to cooperate
with manufacturing managers to find highquality inputs that reduce manufacturing costs;
marketing managers have to cooperate with manufacturing so that customer problems identified by
marketing can be acted on; information systems have to cooperate with all other functions of the
company to devise suitable IT training programs; and so on. At Citibank, a crossfunctional
process mapping method was used to describe the functions involved in each step of a process
flow.50
In essence, to increase quality, all functional managers need to cooperate to develop goals and spell
out exactly how they will be achieved. Managers should embrace the philosophy that mistakes, defects,
and poorquality materials are not acceptable and should be eliminated. Functional managers should
spend more time working with employees and providing them with the tools they need to do the job.
Managers should create an environment in which employees will not be afraid to report problems or
recommend improvements. Output goals and targets need to include not only numbers or quotas but also
some indicators of quality to promote the production of defectfree output. Functional managers also
need to train employees in new skills to keep pace with changes in the workplace. Finally, achieving
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better quality requires that managers develop organizational values and norms centered on improving
quality.
Six Sigma A technique used to
improve quality by systematically
improving how value chain
activities are performed and then
using statistical methods to
measure the improvement.
SIX SIGMA One TQM technique called Six Sigma has gained increasing popularity in the last
decade, particularly because of the wellpublicized success GE enjoyed as a result of implementing it
across its operating divisions. The goal of Six Sigma is to improve a company’s quality to only three
defects per million by systematically altering the way all the processes involved in value chain activities
are performed, and then carefully measuring how much improvement has been made using statistical
methods. Six Sigma shares with TQM its focus on improving value chain processes to increase quality;
but it differs because TQM emphasizes topdown organization wide employee involvement, whereas the
Six Sigma approach is to create teams of expert change agents, known as “green belts and black belts,”
to take control of the problemfinding and problemsolving process and then to train other employees in
implementing solutions. The accompanying “Management Insight” feature shows how Six Sigma works
for the city of Tyler, Texas.
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Management Insight
Everything’s Coming up Roses in One Texas Town
Tyler is a city of more than 107,000 people in the northeast quadrant of Texas.51 It has the largest
rose garden in the United States and a large rosegrowing industry, earning it the nickname “Rose
Capital of America.”52 Tyler Rose Garden has more than 500 varieties of roses. Each year the city
hosts a rose festival when hundreds of thousands of roses are in bloom. Visitors can tour the Rose
Museum and attend the Rose Parade.
But lately the city has also been noted for a quality control initiative that has saved it from some
thorny issues. In 2009, facing reduced revenues from sales taxes and sluggish property values, the
city hired a Six Sigma Master Black Belt and began training city employees in Lean Six Sigma, a
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branch of Six Sigma that focuses on eliminating waste in manufacturing and other areas. By 2014,
when it was announced that Lean Six Sigma programs had saved more than $5 million for the city,
almost 27 percent of city employees had been trained in Lean Six Sigma and worked on Lean Six
Sigma projects as part of their regular workloads.
“In five short years, we’ve changed the culture of how we look at our jobs at city hall,” Mayor
Barbara Bass said. “For whichever department you’re in, you’re… looking with new eyes on how to
improve your departments, and your friends from other departments are stepping up and helping you
with that process.”53
The city has completed more than 90 Lean Six Sigma projects and still has 35 more in process,
according to City Manager Mark McDaniel. One project entailed developing and implementing
inventory control. Before the Lean Six Sigma project, Tyler Purchasing Manager Sherry Pettit said no
inventory was being done at the water utilities service center meter shop. “It was kind of a mess. We
really didn’t know what was in there or anything. So… we went in and cleaned it all up.”54
Another project involved cleaning up the filing protocols and systems in the city attorney’s office.
A legal assistant commented, “It was taking us on average about 25 minutes to find our documents
and everything, and after our project it saved about $10,000 in salary costs and got it down to four
minutes.”55
These and other projects led to reductions in overtime and improved waste collection. While the
city population has grown by 30 percent since the mid1980s, the Lean Six Sigma projects made it
possible for the city services to work with roughly the same number of employees it had in the mid
1980s.
The city posts a list of its Lean Six Sigma Green Belts and Black Belts on its web page. Green
Belts require 80 hours of training and are then assigned projects within the scope of the Green Belt’s
current job. Traditionally, a Green Belt would be trained in fullday, weeklong increments over two
months. However, Tyler changed the format to four weeks of halfday training over four months. To
be fully certified, a Green Belt must complete a Lean Six Sigma project within a year. Candidates for
Black Belts are selected from the pool of Green Belts and attend an additional 80 hours of training. In
Tyler, Black Belts participate in multiple projects across the city. As part of the certification, Black
Belts must complete two Lean Six Sigma projects within a year, mentor Green Belts, and work to
spread Lean Six Sigma throughout the organization.56
Barbara Bass, the mayor, said: “All of our Green Belts and Black Belts have completed projects
that are focused on improving a city process, saving either time or money. Many other city employees
have participated on project teams that put improvement into the hands of those most familiar with
the process—our frontline employees.”57
In Tyler style, the announcement of the savings accrued from Lean Six Sigma was made in the
city’s Rose Garden.
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Improving Efficiency
LO94
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Explain why achieving superior
efficiency is so important, and
understand the different kinds of
techniques that need to be
employed to increase efficiency.
The third goal of value chain management is to increase the efficiency of the various functional
activities. The fewer the input resources required to produce a given volume of output, the higher will be
the efficiency of the operating system. So efficiency is a useful measure of how well an organization
uses all its resources—such as labor, capital, materials, or energy—to produce its outputs, or goods and
services. Developing functional strategies to improve efficiency is an extremely important issue for
managers because increased efficiency lowers production costs, which lets an organization make a
greater profit or attract more customers by lowering its price. Several important functional strategies are
discussed here.
Facilities Layout, Flexible Manufacturing, and
Efficiency
facilities layout The strategy of
designing the machine–worker
interface to increase operating
system efficiency.
flexible manufacturing The set
of techniques that attempt to
reduce the costs associated with
the product assembly process or
the way services are delivered to
customers.
The strategies managers use to lay out or design an organization’s physical work facilities also determine
its efficiency. First, the way in which machines and workers are organized or grouped together into
workstations affects the efficiency of the operating system. Second, a major determinant of efficiency is
the cost associated with setting up the equipment needed to make a particular product. Facilities layout
is the strategy of designing the machine–worker interface to increase operating system efficiency.
Flexible manufacturing is a strategy based on the use of IT to reduce the costs associated with the
product assembly process or the way services are delivered to customers. For example, this might be
how computers are made on a production line or how patients are routed through a hospital.
FACILITIES LAYOUT The way in which machines, robots, and people are grouped together affects
how productive they can be. Figure 9.4 shows three basic ways of arranging workstations: product
layout, process layout, and fixedposition layout.
In a product layout, machines are organized so that each operation needed to manufacture a product or
process a patient is performed at workstations arranged in a fixed sequence. In manufacturing, workers
are stationary in this arrangement, and a moving conveyor belt takes the product being worked on to the
next workstation so that it is progressively assembled. Mass production is the familiar name for this
layout; car assembly lines are probably the bestknown example. It used to be that product layout was
efficient only when products were created in large quantities; however, the introduction of modular
assembly lines controlled by computers is making it efficient to make products in small batches.
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Figure 9.4 Three Facilities Layouts
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In a process layout, workstations are not organized in a fixed sequence. Rather, each workstation is
relatively selfcontained, and a product goes to whichever workstation is needed to perform the next
operation to complete the product. Process layout is often suited to manufacturing settings that produce a
variety of custommade products, each tailored to the needs of a different kind of customer. For
example, a custom furniture manufacturer might use a process layout so different teams of workers can
produce different styles of chairs or tables made from different kinds of woods and finishes. Such a
layout also describes how a patient might go through a hospital from emergency room to Xray room, to
operating room, and so on. A process layout provides the flexibility needed to change a product, whether
it is a PC or a patient’s treatment. Such flexibility, however, often reduces efficiency because it is
expensive.
In a fixedposition layout, the product stays in a fixed position. Its component parts are produced in
remote workstations and brought to the production area for final assembly. Increasingly, selfmanaged
teams are using fixedposition layouts. Different teams assemble each component part and then send the
parts to the final assembly team, which makes the final product. A fixedposition layout is commonly
used for products such as jet airliners, mainframe computers, and gas turbines—products that are
complex and difficult to assemble or so large that moving them from one workstation to another would
be difficult. Even companies that specialize in office architecture have rethought their workspaces, as the
accompanying “Management Insight” feature discusses.
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Management Insight
Workspace Company Redefines Its Own Workspace
Philosophy, Putting Its Money Where Its Mouth Is
Steelcase develops and manufactures office furniture, technology, and other office architecture. The
Michiganbased company was founded in 1912 as the Metal Office Furniture Company. Its first
patent was in 1914 on a metal wastebasket—an important item in an era when straw wastebaskets
were fire hazards. The company went on to develop and sell many office products. In 1954 the name
was changed to Steelcase.58
In the more than 100 years that the company has been around, workspace design has changed. As
CEO Jim Hackett explains it, workers used to jockey to be closer to the CEO. Like the organizational
chart, the closer a person was to the CEO, the more power the person had. Now information is power,
and the design of the workspace should reflect and promote that.
In 2014 Steelcase published a study suggesting that the design of offices affects the emotional well
being of employees, which can have an impact on business results. The study suggested that
workspaces can support positive emotions by encouraging a sense of belonging, helping workers see
their worth, and promoting mindfulness.59
Workspace should “celebrate the shift of what we call the ‘I’ space to the ‘we’ space,” Hackett
says. “Space has to enable and empower information in ways we only imagine … (across) a
continuum of I and we work … people need a range of settings to accommodate focused,
collaborative, and social work in both open and enclosed environments—in other words, a palette of
place.”60
Steelcase does not just sell the products that make new workspaces possible—it has changed its
own workspaces to allow for communication and an open culture. One of Hackett’s first acts as CEO
was to move all executive offices onto floors designed around important issues facing the company.
Instead of giving executives space, Hackett assigns space to “commandlevel projects.”61 This shifts
the focus of meetings back to business and products, and helps foster team building.
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“Innovation requires collective ‘we’ work,” Hackett says. “To this end, it’s critical to design spaces
that not only support collaboration, but augment it (with) spaces that promote eyetoeye contact,
provide everyone with equal access to information, and allow people to move around and participate
freely.”62
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FLEXIBLE MANUFACTURING In a manufacturing company, a major source of costs is setting up
the equipment needed to make a particular product. One of these costs is that of production forgone
because nothing is produced while the equipment is being set up. For example, components
manufacturers often need as much as half a day to set up automated production equipment when
switching from production of one component part (such as a washer ring for the steering column of a
car) to another (such as a washer ring for the steering column of a truck). During this halfday, a
manufacturing plant is not producing anything, but employees are paid for this “nonproductive” time.
It follows that if setup times for complex production equipment can be reduced, so can setup costs,
and efficiency will rise; that is, the time that plant and employees spend in actually producing something
will increase. This simple insight has been the driving force behind the development of flexible
manufacturing techniques.
Housing units move on the production line as employees of Toyota Motor Corporation work during the installation
process at the company’s Kasugai Housing Works, one of the plants of Toyota homebrand houses on Kasugai,
Aichi Prefecture, Japan. Toyota entered the housing industry 30 years ago applying the plant technology and
experience it gained through producing cars.
Flexible manufacturing aims to reduce the time required to set up production equipment.63 By
redesigning the manufacturing process so production equipment geared for manufacturing one product
can be quickly replaced with equipment geared to make another product, setup times and costs can be
reduced dramatically. Another favorable outcome from flexible manufacturing is that a company can
produce many more varieties of a product than before in the same amount of time. Thus flexible
manufacturing increases a company’s ability to be responsive to its customers.
To obtain the benefits from flexible manufacturing, General Motors built a plant in Lansing,
Michigan, in 2001 that can expand as the company sees fit. When it was first built, the company’s Grand
River Assembly plant was already more flexible than its other plants.64 It was modeled after GM’s
innovative overseas facilities. While some GM executives expressed concern that the site was too small
to work well, the plant has received praise for its capacity to manufacture a variety of car models, as well
as for the collaborative team management style it facilitates and its automation capabilities. And GM
plans to add on to the plant. In 2013 GM announced that it would build a $44.5 million Logistics
Optimization Center. The expansion will include a building in which parts will be sorted and delivered
for the assembly line. In 2014 GM announced that a $162 million stamping plant would be added to the
site. Stamping plants make parts for auto assembly lines.65
JustinTime Inventory and Efficiency
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As noted earlier, a justintime inventory system gets components to the assembly line just as they are
needed and thus drives down costs. In a JIT inventory system, component parts travel from suppliers to
the assembly line in a small wheeled container known as a kanban. Assemblyline workers empty the
kanbans, which are sent back to the suppliers as the signal to produce another small batch of component
parts, and so the process repeats itself. This system can be contrasted with a justincase view of
inventory, which leads an organization to stockpile excess inputs in a warehouse in case it needs them to
meet sudden upturns in demand.
JIT inventory systems have major implications for efficiency. Great cost savings can result from
increasing inventory turnover and reducing inventory holding costs, such as warehousing and storage
costs and the cost of capital tied up in inventory. Although companies that manufacture and assemble
products can obviously use JIT to great advantage, so can service
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organizations.66 Walmart, the biggest retailer in the United States, uses JIT systems to replenish the
stock in its stores at least twice a week. Many Walmart stores receive daily deliveries. As soon as goods
are purchased, new ones are ordered through Walmart’s sophisticated supply chain. However, while the
supply chain does a good job of getting the goods to stores, Walmart recently ran into some problems
with stores that were so leanly staffed, there were not enough people to move the goods from the storage
area to the shelves. To maintain its efficiencybased competitive advantage, Walmart will need to bring
staffing up to optimal levels as well.67
Even a small company can benefit from a kanban system, as the experience of United Electric
Controls, headquartered in Watertown, Massachusetts, suggests. United Electric is the market leader in
the manufacture of alarm and shutdown switches for industrial plant safety. At one time the company
simply stored all its inputs in a warehouse and dispensed them as needed. Then it decided to reduce costs
by storing the inputs closer to their point of use in the production system. This led to inaccurate part
counts and caused production stoppages due to a lack of inputs.
So managers decided to experiment with a supplier kanban system even though United Electric had
fewer than 40 suppliers and they were up to date with its input requirements. Managers decided to store
a threeweek supply of parts in a central storeroom—a supply large enough to avoid unexpected
shortages.68 They began by asking their casting supplier to deliver inputs in kanbans and bins. Once a
week, this supplier checks the bins to determine how much stock needs to be delivered the following
week. Other suppliers were then asked to participate in this system, and now more than 35 major
suppliers operate some form of the kanban system.
By all measures of performance, the kanban system has succeeded. Inventory holding costs have
fallen sharply. Products are delivered to all customers on time. And new products’ designtoproduction
cycles have dropped by 50 percent because suppliers are now involved much earlier in the design
process so they can supply new inputs as needed.
SelfManaged Work Teams and Efficiency
Another functional strategy to increase efficiency is the use of selfmanaged work teams.69 A typical
selfmanaged team consists of 5 to 15 employees who produce an entire product instead of just parts of
it.70 Team members learn all team tasks and move from job to job. The result is a flexible workforce
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because team members can fill in for absent coworkers. The members of each team also assume
responsibility for scheduling work and vacations, ordering materials, and hiring new members—
previously all responsibilities of firstline managers. Because people often respond well to greater
autonomy and responsibility, the use of empowered selfmanaged teams can increase productivity and
efficiency. Moreover, cost savings arise from eliminating supervisors and creating a flatter
organizational hierarchy, which further increase efficiency.
The effect of introducing selfmanaged teams is often an increase in efficiency of 30 percent or
sometimes much more. After the introduction of flexible manufacturing technology and selfmanaged
teams, a GE plant in Salisbury, North Carolina, increased efficiency by 250 percent compared with other
GE plants producing the same products.71
Process Reengineering and Efficiency
process reengineering The
fundamental rethinking and radical
redesign of business processes to
achieve dramatic improvement in
critical measures of performance
such as cost, quality, service, and
speed.
The value chain is a collection of functional activities or business processes that transforms one or more
kinds of inputs to create an output that is of value to the customer.72 Process reengineering involves the
fundamental rethinking and radical redesign of business processes (and thus the value chain) to achieve
dramatic improvements in critical measures of performance such as cost, quality, service, and speed.73
Order fulfillment, for example, can be thought of as a business process: When a customer’s order is
received (the input), many different functional tasks must be performed as necessary to process the
order, and then the ordered goods are delivered to the customer (the output). Process reengineering
boosts efficiency when it reduces the number of order fulfillment tasks that must be performed, or
reduces the time they take, and so reduces operating costs.
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For an example of process reengineering in practice, consider how Ford used it. One day a manager
from Ford was working at its Japanese partner Mazda and discovered that Mazda had only five people in
its accounts payable department. The Ford manager was shocked because Ford’s U.S. operation had 500
employees in accounts payable. He reported his discovery to Ford’s U.S. managers, who decided to form
a task force to study this difference.
Ford managers discovered that procurement began when the purchasing department sent a purchase
order to a supplier and sent a copy of the purchase order to Ford’s accounts payable department. When
the supplier shipped the goods and they arrived at Ford, a clerk at the receiving dock completed a form
describing the goods and sent the form to accounts payable. The supplier, meanwhile, sent accounts
payable an invoice. Thus accounts payable received three documents relating to these goods: a copy of
the original purchase order, the receiving document, and the invoice. If the information in all three was
in agreement (most of the time it was), a clerk in accounts payable issued payment. Occasionally,
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however, all three documents did not agree. And Ford discovered that accounts payable clerks spent
most of their time straightening out the 1 percent of instances in which the purchase order, receiving
document, and invoice contained conflicting information.74
Ford managers decided to reengineer the procurement process to simplify it. Now when a buyer in the
purchasing department issues a purchase order to a supplier, that buyer also enters the order into an
online database. As before, suppliers send goods to the receiving dock. When the goods arrive, the clerk
at the receiving dock checks a computer terminal to see whether the received shipment matches the
description on the purchase order. If it does, the clerk accepts the goods and pushes a button on the
terminal keyboard that tells the database the goods have arrived. Receipt of the goods is recorded in the
database, and a computer automatically issues and sends a check to the supplier. If the goods do not
correspond to the description on the purchase order in the database, the clerk at the dock refuses the
shipment and sends it back to the supplier.
Payment authorization, which used to be performed by accounts payable, is now accomplished at the
receiving dock. The new process has come close to eliminating the need for an accounts payable
department. In some parts of Ford, the size of the accounts payable department has been cut by 95
percent. By reducing the head count in accounts payable, the reengineering effort reduced the amount of
time wasted on unproductive activities, thereby increasing the efficiency of the total organization.
Information Systems, the Internet, and Efficiency
With the rapid spread of computers, the explosive growth of the Internet and corporate intranets, and
highspeed digital Internet technology, the information systems function is moving to center stage in the
quest for operating efficiencies and a lower cost structure. The impact of information systems on
productivity is wideranging and potentially affects all other activities of a company. For example, Cisco
Systems has been able to realize significant cost savings by moving its ordering and customer service
functions online. Cisco Systems designs, manufactures, and sells networking equipment. The company
has just 300 service agents handling all its customer accounts, compared to the 900 it would need if sales
were not handled online. The difference represents an annual savings of $30 million a year. Moreover,
without automated customer service functions, Cisco calculates that it wou…
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