Op Strat

The past two decades have been a period of ferment for both managers and students of operations. From the cauldron of steadily intensifying global competition have emerged aggressive and highly competent competitors, rapid technological changes, and increasingly demanding (and in some countries, environmentally conscious) consumers. Amidst these challenges, both practitioners and academics alike have come to appreciate the role that operations plays in the competitive advantage of manufacturing and service organizations. Yet, simply appreciating that "operations matters" is no longer enough. To transform operations into a strategic weapon requires integrating all the major elements of operations into a coherent system that provides the specific capabilities needed for a competitive advantage. Creating this integrated system, and ensuring that it aligns with the broader strategic goals of the enterprise, is the task of operations strategy.

This course provides students with a set of frameworks, analytical tools, and concepts needed to design and implement operating strategies. The basic premise of the course is that no universal approach to operations-not "lean production," not the famed Toyota Production System-works best under all competitive situations. Every operating system involves trade-offs, and operating strategies must be designed to fit with the particular requirements of the competitive environment and a company's specific competitive strategy. A primary goal of this course is to get students to understand the trade-offs inherent in different approaches to operations and to equip them with the capability to design and implement operating strategies that not only fit with a firm's competitive goals, but also proactively help create new opportunities in the marketplace. As a result, the course strongly emphasizes links between operations and competitive strategy.

The course covers a range of topics, including the design of multi-plant networks, vertical integration and supplier relations, systems for coordinating and improving operations across plant networks, and approaches to selecting, developing, and implementing new process technologies. Although each of these main topic areas receives separate treatment, the course also shows how the relationships among these choices influence the overall strategic impact of operations. In focusing on operating systems, the course also places strong emphasis on management issues and decisions which cut across functional boundaries and span multiple operating units (networks).

Evolution of Operations Strategy

The current version of the Operations Strategy course has many antecedents. During the late 1940s, Professor John McLean of the Harvard Business School developed a course called Advanced Production Problems. In that course, McLean introduced students to the idea that companies within the same industry often choose different competitive strategies and that these different strategies inevitably lead to different decisions and policies regarding such manufacturing issues as the size and location of facilities, the extent of vertical integration, production control methods, and the organizational structure of plants and plant networks.

During the 1960s, Wickham Skinner (who had been a student of McLean's) found himself teaching the same course (renamed Manufacturing Policy). It was during this period that Skinner developed three principles that have provided the conceptual foundations for research, teaching and practice in operation strategy for more than 25 years: 1) different companies within the same industry have different strengths and weaknesses and choose to compete in different ways (and thus adopt different "yardsticks of success"); 2) similarly, different production "systems" have different operating characteristics and each involves a different set of trade-offs; and 3) therefore, rather than adopting an industry-standard production system, the task for managers is to design a production system that, through a series of internally consistent choices, reflects the priorities and trade-offs inherent in its own competitive situation and strategy. Skinner's framework has proven to be remarkably robust. Despite a barrage of skepticism and questioning, and the emergence of a totally different world order for industrial competition, most researchers and an increasing number of practitioners adopted the framework implicitly, if not explicitly, during the 1970s and 1980s.*

1990s: The Emergence of "Lean Production": The End of Operations Strategy?

The basic premise of Skinner's framework and much of the work on operations strategy over the past 25 years is that no one operating system is universally superior under all competitive situations and for all companies. That is, every operating system embodies a set of trade-offs. Some will be particularly good at producing standardized products in high volume at low cost; others will excel at responding quickly to shifting demand for more customized products. This notion first began to be challenged in the 1980s in the wake of Japanese companies' success in automobiles, electronics, machine tools, and other industries. According to several observers of the industrial scene, Japanese companies were succeeding not because they carefully made the right set of trade-offs among different priorities in their operations, but because they were capable of surpassing their American counterparts across several dimensions at once. Because these organizations had mastered an operating system that allowed them to achieve lower cost, higher quality, faster product introductions, and greater flexibility-all at the same time-they could dominate any competitive situation. The highly influential 1990 book The Machine That Changed the World trumpeted the virtues of this new approach, which it termed "lean manufacturing" (Womack et al., 1990: p. 13).**

The lean producer (in contrast to the mass producer) combines the advantages of craft and mass production, while avoiding the high cost of the former and the rigidity of the latter-it requires keeping far less than half the needed inventory on site, resulting in fewer defects, and produces a greater and ever-growing variety of products."

The concept of lean production directly challenged the idea that one had to make choices in designing an operating system, and thus the fundamental necessity of having an operating strategy. Instead, under the model of lean production, the task of operating management becomes to implement a set of relatively well-defined principles. People should be broadly trained, rather than specialized. Staff is "overhead" and, with a high degree of work force "empowerment," not necessary. No amount of rejects or variance should be accepted (zero defects is the goal). Communication should take place informally and horizontally, among line workers rather than through hierarchies. Equipment should be general purpose and flexible. Production should be organized into "cells," rather than specialized by process stages. Continuous processes with as little work-in-process inventory as possible is preferable to batch processes (inventory, like rejects, is waste). Throughput time is more important than labor or equipment utilization rates. Product development should be organized through cross-functional teams which pursue activities in parallel rather than sequentially.

Over the past several years, U.S. companies have embarked on a wide range of programs (including Total Quality Management, Just-in-Time, Design for Manufacturability, work force empowerment, process re-engineerings, and simultaneous engineering) aimed at making their operations more "lean." Indeed, many of these programs have worked quite well and have enabled companies in some industries to regain parity with global competitors on costs and quality. Yet, there are clear indications that simply adopting a set of generic improvement programs is not enough. According to several estimates, only about one third of all the operations improvement programs that U.S. companies have undertaken were regarded-by their own managers-as successful. More illuminating, even in cases where these programs achieved their operational objectives (e.g., lower costs), companies often found that they did not contribute to their overall competitiveness. Indeed, in many cases, these programs reduce costs at the expense of other, more important, dimensions of operating performance such as customer service, responsiveness, or flexibility.

These experiences, and those illustrated in the cases, articles, and materials in this course suggest that strategic choices continue to play a central role in operations. Paradoxically, at a time when tools such as TQM, JIT, and other dimensions of "lean production" can so powerfully re-shape operating performance, the need for coherent approaches that utilize these tools effectively and in union with the broader strategies of the enterprise has become even more important than at the time Skinner wrote in the 1960s.

The challenge of operations strategy today, however, seems to be more difficult. Achieving a static fit between operating strategy and competitive strategy (Skinner's focus) is no longer enough. Competitive environments are more turbulent. Technological changes are more rapid. Competitors (from around the globe) are more able. And, as noted above, managers have at their disposal an arsenal of tools that can powerfully re-shape their operations. In this type of environment, operating strategies cannot be static. They must provide the capabilities that both support and drive rapidly evolving competitive strategies.

Course Objectives

The teaching objectives of this course are the following:

1. Develop students' understanding of the strategic impact of operating decisions and the trade-offs inherent in these choices.

2. Introduce students to the basic components of an operating strategy, including architecture, systems, and process technology.

3. Provide analytical tools and conceptual frameworks for both assessing and designing operating strategies that fit with broader competitive goals of the company.

4. Deepen students' understanding of senior managements' role in leading, shaping and implementing operating strategies over time.

5. Stimulate critical thinking about emerging concepts and ideas in the field of operations strategy.

Major Course Themes

Each section of the course (described below) goes into depth on a specific component of operations strategy and contains its own set of specific themes. However, a number of themes recur throughout the course and provide conceptual continuity across the individual modules. These themes are described briefly below.

1. Operations as a System

In practice, general managers often focus their attention on a very small number of seemingly "high impact" operating decisions and issues. Historically, for example, choices about total manufacturing capacity and the location of manufacturing plants occupied the lion's share of management attention regarding operations strategy. This is not surprising given that such physical or "structural" investments often involve committing large sums of capital. Yet, operating performance, and the contribution of operations to the strategic goals of a company hinge on more than the physical structure of operations. A company's operations is a system that includes the following elements: architecture, control and coordination systems, and process technology. Creating an effective operating strategy requires addressing decisions and policies with respect to all three of these components. Each of these are described briefly below.

Architecture: The architecture of an organization's operations consists of the capacity and structure of the plant network, as well as the extent of vertical integration. Under this category, issues of concern include: 1) the amount of aggregate capacity to keep and how aggressively to add it; 2) the size, number, location, and focus of individual plants in a network; 3) and choices among different sourcing arrangements, from vertical integration and joint ventures to supplier partnerships and outsourcing. The term "architecture" is used to convey the idea that many of the critical decisions in this category are related to making substantial investments in physical facilities.

Control and Coordination Systems: Once an organization has established the physical configuration of its plant network, it needs to make choices regarding the systems and internal processes used to control, measure, coordinate, and integrate flows of both materials and information within and across plants. These choices determine the difference between merely having a "bunch of plants" and an integrated plant network.

Process Technology: A third element of operations strategy concerns choices related to process technology. Under this category, critical issues include: 1) the amount and timing of investment in process R&D; 2) the location of process R&D activities; 3) approaches to designing and testing process technologies; and 4) choice among alternative process technologies.

2. No Universal Approaches

A central theme of operations strategy is that no single approach is always superior in every competitive environment and for all competitive strategies. This theme is central to the course and represents an important point of departure from much of the recent writings extolling the virtues of "lean production" and the "Toyota Production System." It also challenges the increasingly popular idea in practice that organizations should strive to create "world class" manufacturing operations. It is not that there is anything wrong with lean production or the idea of being "world class." But given that organizations face constraints on resources and management attention, the relevant practical question is: "world class" at what? In this course, students discover how different types of operating choices create trade-offs among different competitive priorities. Creating an effective operating strategy requires understanding these trade-offs and designing an operating system that provides the appropriate emphasison cost, quality, innovation, flexibility, and other competitive priorities.

3. The Need for Internal and External Coherence

Taking a systems perspective on operations immediately raises two critical issues for operations strategy. One is the need for the individual components of the operation-the architecture, systems, and process technology-to fit with one another. Throughout the course, students will be exposed to examples where a critical decision along one dimension (e.g., the location of a new plant) has a profound influence on the appropriate approach to another (e.g., the choice of process technology). One critical criteria for assessing an operations strategy is how well the components fit together into a coherent system. The second issue is the need for the system to fit with the external competitive needs of the enterprise. There is no strategic purpose in having an operating system finely honed to provide the absolute lowest cost possible when customers really value quick response and are willing to pay hefty price premiums for such service. Throughout the course, students will be required to deal with the question: does the whole operating system provide the type of capabilities this organization needs to pursue its chosen basis of competitive advantage (e.g., low cost, high quality, quick response, innovativeness, etc.)?

4. Creating Strategic Options in the Face of Uncertainty

Few managers in any environment have the luxury of making decisions in the absence of uncertainty. Customers needs evolve rapidly and unexpectedly. Technology shifts can be dramatic and difficult to predict. Competitors can change their strategies and new competitors with new capabilities can enter the game. In many environments, institutional conditions (such as government regulations) are difficult to predict and control. Uncertainty is a particularly critical issue in operations given the relatively long time horizons required to implement wholesale changes in an operating system. In many situations, high levels of uncertainty lead to paralysis and excessive procrastination.

This course takes uncertainty as a given. High levels of uncertainty about customers, markets, competitors, or technology pervade a large majority of the cases. In the face of such uncertainty, "option value" becomes a critical criteria for decision making. Students are introduced to the idea that operating choices today can have a profound influence on the strategic operating options open to the organization in the future. For example, when considering whether or not to vertically integrate into a specific activity, many managers will assess the costs and benefits in terms of differences in production cost as well as any "transaction" or governance costs involved in managing external suppliers. However, a decision today about whether to vertically integrate can also influence a company's options for vertical integration in the future. If by outsourcing a specific activity today, a company loses the capability to perform that activity competitively in the future, then a manager making the decision today must also consider the "option value" of having the capability for in-house production at some point in the future.

5. Capabilities as the Root of Competitive Advantage

Achieving and sustaining a competitive advantage requires an organization to have the capability to do things its customers value (e.g., low cost, high quality, quick response, etc.) better than its competitors. Regardless of how well a company identifies attractive markets, it cannot hope to sustain an advantage unless it has capabilities to execute its competitive strategy better than others. If the company lacks such capabilities, any rents from its superior choice of strategy will be quickly eroded. These capabilities also need to be imbedded in the organization in a way that is difficult for competitors to imitate. In this course, we look at operations as one of the potential sources of capabilities that can provide a basis for competitive advantage. Students are introduced to frameworks and analytical tools needed to appropriately select, develop, and exploit operating capabilities.

Throughout the course, students will need to understand how decisions about which markets to enter and how to compete in those markets (competitive strategy) influence subsequent decisions about which operating capabilities to build and how to build them (operations strategy). In addition, however, students will also be exposed to situations in which a company's unique and difficult-to-imitate operating capabilities create options for pursuing new competitive strategies. One of the critical tensions explored in the course concerns choices between developing new capabilities and exploiting existing ones in new ways.

6. Organizational Learning and Paths of Improvement

If capabilities are the root of competitive advantage, then it becomes critical to understand how organizations create new capabilities. This course takes the perspective that strategic operating capabilities must be built internally rather than purchased from outside. After all, if you can purchase a specific set of assets, then it is likely that your competitors can as well (and all rents will be capitalized in the purchase price and accrue to the original owner rather than the purchaser). Building capabilities is fundamentally a process of organizational learning.

In this course, students will come to understand how operating choices influence learning. Choices regarding such decisions as plant location, vertical integration, control systems, and process technology have two potential impacts. They can influence a company's competitive position in the short-term. However, because they also change how the organization operates, they also influence the types of experiences accumulated by people in the organization and the longer-term evolution of organizational capabilities. For example, in choosing to undertake certain process development projects, an organization can improve its competitive position by developing better process technology. But these same projects can also generate deeper technical and organizational knowledge which becomes available for future efforts. This perspective suggests that building lasting capabilities of value requires less of a focus on end points and more attention to paths consisting of a series of smaller-scale projects and experiences. A critical management issue in operations strategy concerns choices of long-term improvement paths.

Course Content and Structure

The course is organized into thirty sessions. A vast majority of the sessions are case discussions. The remainder are lectures used to review and integrate conceptual material across several sessions (e.g., "module wrap-ups") and are often used in conjunction with assigned articles. Although no specific section of the course is devoted to global operations, global operating strategy issues are pervasive. Approximately 30% of the cases involves decisions with ramifications across operations located in different countries. Approximately 50% of the cases focus on operations located outside the United States.

The course is divided into five modules.

Module 1 introduces the conceptual framework and several of the major themes of the course. The basic elements of an operating strategy-architecture, control and coordination systems, and process technology-are introduced and students are exposed to the idea that these must be aligned with each other and (together) with the external competitive goals of the firm.

The next three modules of the course go into depth in each of the three elements of operations strategy: architecture, systems, and process technology.

Module 2 focuses on the architectural elements of operations strategy. Decisions in this domain include capacity planning, the design of multi-plant networks, and vertical integration and supplier relations.

Module 3 analyzes the systems and operating processes used to control, measure, coordinate, and integrate flows of both materials and information within and across plants. These choices determine the difference between having a "bunch of plants" and an integrated plant network.

Module 4 concerns choices related to process technology. Under this category, critical issues include: 1) the amount and timing of investment in process R&D; 2) the location of process R&D activities; 3) approaches to designing and testing process technologies; and 4) selection of process technologies.

Module 5 turns to the issue of how to implement large-scale changes in an organization's operations strategy in the face of radical changes in the competitive, technological, or institutional environment. This module focuses heavily on the role of senior managers in leading these changes and introduces students to different approaches that can be used to facilitate the evolution of operating strategies over time.

The concepts developed in each of these modules and the description of cases in each are described in more detail below.

Module 1: The Concept of Operations Strategy

The first module of the course is designed to introduce students to the fundamental principles involved in designing an operations strategy. Students are exposed to a set of cases in which companies must make specific operating decisions (e.g., whether or not to expand an existing plant or open a new one). Students learn that each alternative involves specific trade-offs and thus such decisions cannot be made in isolation from the competitive goals of the company. The cases also expose students to all three major elements of operations strategy-architecture, control and coordination systems, and process technology-and the need to think about the fit among these as well as with the competitive strategy. The following diagram helps illustrate the basic framework introduced in this part of the course.

Description of the Cases

This introductory module uses three cases. A fourth session is devoted to a lecture on the basic framework and uses an assigned reading as a catalyst (see Appendix II, Assignment Questions, for more details).

Chandler Home Products (B) is a case about a European manufacturer of personal care products and its decision whether to meet its additional capacity needs by expanding an existing plant or by adding a second plant to its capacity network. Historically, the company's capacity and plant network strategies, along with other elements of operations strategy, have been geared toward achieving low cost manufacturing. This strategy has worked well, but increasingly the company's operations are exhibiting signs of strain (rising costs, bloating overhead, and complaints from the regional group marketing units it supplies). Closer analysis reveals that the company's marketing and competitive strategy have shifted to emphasize product innovation and responsiveness to customers, rather than low cost. Students must analyze the capacity addition question, along with other elements of the operations strategy (e.g., process technology, measurement systems, etc.) in light of these new strategic goals.

American Connector develops this theme further by comparing and contrasting the operating strategies of two electrical connector manufacturers: American Connector Corporation (ACC) and a Japanese company (DJC). Management at ACC is contemplating how to respond to the potential entry of DJC into the U.S. connector market. The case reveals that the Japanese company (DJC) has a far lower cost structure than ACC. Analysis shows that the two companies have adopted vastly different architectures, systems, and process technologies. However, each company has also pursued quite different competitive strategies; ACC has emphasized product innovation and quick response while DJC has competed as the low-cost supplier in the Japanese market. Thus, simply adopting DJC's operating strategy may not be the appropriate decision for ACC, unless it plans to fundamentally change its competitive strategy. The case illustrates how different competitive strategies require different choices about architectures, systems, and process technologies. However, the data in the case also enable students to identify opportunities for ACC to improve its operating performance in ways which are consistent with its existing competitive strategy.

The final case of the introductory module is McDonald's Corporation. This case enables students to see an example of a service company which has been extremely successful by very carefully designing its operating system to support a very focused set of competitive goals. Success, however, has created tensions. Within the U.S. market, growth has flattened, and focused competitors are taking share in selected segments. McDonald's operating management in the U.S. is considering various initiatives to regain historical growth rates (e.g., the company has gradually expanded its menu to include more and diverse items). However, the company finds itself in a difficult dilemma as each possible strategic move potentially adds complexity (and cost) to an operating system which has excelled due to its focus. The case forces students to grapple with an important and recurring dilemma in operations strategy: when is it time to abandon one's operating strategy in order to pursue a vastly new competitive strategy, and when should one stick with a given competitive strategy in order to more fully exploit unique and valuable attributes of a difficult-to-imitate operating strategy?

In a thirty-session course, the fourth class of the module can be devoted to a summary lecture on the operations strategy framework and to preview the rest of the course. A useful theme for the lecture is: "In a world of 'lean production,' why do companies need an operations strategy?" Two readings can be assigned to stimulate the discussion (Robert Hayes and Gary Pisano, "Manufacturing Strategy: At the Intersection of Two Paradigm Shifts," and Kim Clark, "Is Manufacturing Strategy Passé?" Both have been published as articles in a special addition of Production and Operations Management, 1996).

Module 2: Architecture

The second module focuses on architectural elements of operations strategy and is divided into two parts. The first part deals with aggregate capacity and the design of multi-plant networks while the second deals with vertical integration.

A. Capacity Planning and Plant Network Design

How much capacity should a manufacturing or service operation have? One (deceptively simple) answer would be: "just the right amount to meet demand." However, as is true of all other elements of operations strategy, there is no universal approach to capacity planning that is suitable for all operations. For instance, in the Trus Joist case of this module, we see a company that intentionally plans for 20% excess capacity above peak seasonal demand. It takes this approach because its competitive strategy emphasizes guaranteed three-week delivery over low costs. Trus Joist builds in a capacity buffer so that it can maintain its three-week delivery guarantee should demand be somewhat higher than expected. One of the challenges of planning capacity is the significant uncertainty surrounding long-term demand. As we see in the Medical Products case, without an explicit strategy about the amount of excess capacity to keep, and the type of cost-responsiveness trade-offs the company is willing to tolerate, uncertainty can paralyze companies' ability to plan capacity. Medical Products Company has been unable to rationalize capacity despite significant long-term excess capacity and stagnant demand.

A similar situation arises with designing multi-plant networks. When asked, what's the optimal number, size, and location of operating units (i.e., plants in a manufacturing organization), some managers will be tempted to respond: whichever gives the lowest combined production and transportation costs. Again, however, this module reminds us that different network structures may be appropriate for different strategic goals and in different types of competitive environments.

Three cases in the module (Trus Joist, Medical Products, and U.S. Robotics) illustrate the different challenges involved in designing and operating plant networks under different conditions and with different competitive strategies.

Trus Joist operates in a cyclical industry (building supplies). It has also chosen to differentiate itself on the basis of its quick response and on the development of new and customized products. To meet these twin goals in a cyclical environment, it has adopted a somewhat unusual network strategy. Rather than centralizing production to achieve scale economies (the usual practice in building supplies), Trus Joist has a number of relatively small, labor-intensive, regionally focused plants. The regional focus enables the company to respond quickly to customer needs. Keeping the plants small and labor-intensive helps to minimize fixed costs. In downturns, the company is able to preserve cash flows (needed to fund new product development) by temporarily closing plants and furloughing workers. Of course, in boom times, Trus Joist's costs are not as low as its more centralized and capital-intensive competitors, but the financial stability it gains through its network strategy fits with its broader competitive strategy emphasizing new product development.

Trus Joist is an excellent example of a company that has been able to design a plant network that fits with the company's broader competitive strategy and the competitive environment. A contrast is provided by Medical Products (a manufacturer of syringes and related medical products) which operates in a market that has been growing slowly. Over time, its European "network" has evolved in an ad hoc fashion. There appears to be no strategic rationale for the size, location, or scope of activity of individual plants. The company is also having problems dealing with a fundamental tension in global operations between the need to meet country-specific demands and the need to reap scale economies through centralized production. Through this case, students are able to see how a lack of explicit operating strategy has left the company with a "bunch of plants," rather than a network of plants whose missions are individually and collectively supportive of a specific set of competitive priorities.

U.S. Robotics illustrates the challenges of network design in a third type of market environment, one characterized by explosive growth. The company is grappling with whether to focus its manufacturing operations by product line (and splitting R&D accordingly) or whether to centralize all production in a new facility. Again, trade-offs are inevitable. Focusing by product line, the company will be able to more tightly integrate product R&D and manufacturing, but will lose scale economies in production. By centralizing all production in a new facility, it will achieve scale economies, but close physical proximity between R&D and production will be lost.

The overall theme that cuts through this module is the difference between having multiple plants and having a multi-plant network. A plant network strategy requires that each plant have a specific role or basis of focus (e.g., region served, type of product made, range of volume, stage of product life cycle). Moreover, these roles should complement one another to provide a coherent posture in the marketplace. For example, if one set of plants is focused on ramping-up production of new products, a second plant should focus on manufacturing products in their more mature phase. An important theme of the module is that no plant or plant network can be focused along all dimensions simultaneously. For example, choosing to focus plants by volume means giving up focus on some other dimension (e.g., geographic market served). As a result, developing a network strategy involves making explicit trade-offs, as each mode of focus solves one set of problems but creates others. To determine the appropriate network strategy, managers need to ask two related questions: 1) Given the company's overall strategy, what are the most critical problems to solve?; and 2) What problems can the operations live with, and are there actions that can be taken at the plant level to mitigate these problems (without compromising the particular strengths provided by the chosen basis of focus)?

B. Vertical Integration and Sourcing

This segment of the course explores a set of decisions regarding vertical integration, sourcing, and the management of supplier relations. It uses vertical integration and sourcing decisions as the window for examining the selection of strategic operating capabilities. When companies make sourcing decisions, they are doing more than deciding which products or services to "make" and which to buy. They are also deciding what capabilities they want the organization to develop and control internally and which ones to access through some alternative arrangement. Decisions about whether to outsource a particular part or whether to perform a particular operation in-house require managers to analyze the implications for the capabilities of the firm.

Selecting which capabilities to develop internally and deciding how to structure relationships with outside parties to access others raises three questions that run throughout this segment. First, what are the characteristics of capabilities that a company should develop internally? One often hears the advice that a company should focus on developing its "distinctive" or "core" capabilities. While this advice has a certain logical appeal, it is also frustrating. What is it exactly that makes a given capability "distinctive" or "core"? How do you know one when you see it? The cases in this module are designed to give students some practice dealing with this issue in a concrete context. The second major issue raised in the module concerns the distinction between different types of organizational arrangements. What exactly does it mean to develop a capability "in-house" or "internally" as opposed to using an "outside" supplier or partner? For instance, if a firm has a very close working relationship with an "outside" supplier, is this any different than if the firm had an equally close working relationship with an "internal" supplier? Do formal corporate boundaries matter? And if so, what are the implications for crafting particular arrangements for specific capabilities?

Finally, this segment also deals with the question of complementary capabilities. We see in a number of cases that a decision regarding one capability has implications for another. For instance, deciding to outsource a particular process may require the organization to develop new capabilities to manage a supplier. Deciding to outsource manufacturing may have implications for R&D capabilities.

The cases in this segment explore vertical integration and supplier relationships from various angles. In Whistler, we see a small, struggling electronics company trying to decide whether or not to shut down all U.S. manufacturing operations and to rely completely on outsourcing from a Korean supplier. The next case in the module, Crown Equipment Corporation, looks at an established manufacturer of materials handling equipment and its decision whether or not to bring industrial design, a critical source of its competitive advantage, in-house. Nucleon, Inc. portrays a fledgling biotechnology company and its decision whether or not to build in-house manufacturing capabilities. Finally, in the Intel (PED) case, we see a company grappling with how to structure relations with outside suppliers of process equipment, and the implications of this decision for its internal manufacturing capabilities.

Framework

Many debates about vertical integration have tended to focus on overall performance properties of vertical integration. Some, for example, argue that vertical integration no longer works and that networks of independent organizations will perform better than vertically integrated enterprises. In keeping with the general perspective of the course, this segment takes a more contingent approach. Vertical integration may or may not be the right operating strategy depending on the competitive goals of the enterprise and other factors. The basic framework used for the module derives from "transaction cost" theory. According to this framework, different supplier-buyer relationships can be aligned along a continuum of governance structures from "markets" to "hierarchies".

Continuum of Governing Choices

The cases in this segment focus on the factors that should influence choices along this continuum. The basic premise is that there are many advantages to outsourcing (i.e., using the market). Companies can focus and they can use market incentives to drive supplier performance. Outsourcing can also provide some degree of flexibility (through the ability to change suppliers). However, there are four factors that may mitigate these advantages and cause more vertically integrated approaches to work better.

1) Information Asymmetries: In dealing with complex technologies, for example, an organization may lack the information needed to assess the viability of a product or service offered by an "outside" supplier. Information asymmetries make it difficult to negotiate agreements and can create future risks of dispute. This issue is illustrated in the Nucleon case. One of the chief risks of relying on a contract manufacturer in biotechnology is that the buyer (in this case Nucleon) lacks the detailed information to assess the capabilities and quality control systems of the contractor. Likewise, given the complexity of biotechnology processes, the contractor would lack the information needed to assess the costs of manufacturing. Under such conditions, many future contingencies will need to be resolved through on-going re-negotiations after the relationship is operative.

2) Technology Transfer and Coordination Problems: For complex technologies, more vertically integrated structures may facilitate coordination and technology transfer by enabling the development of specialized transfer routines and the accumulation of shared transfer experiences (i.e., team learning effects). This issue arises in Nucleon, Whistler, and Crown. Students will learn that not every type of technology creates such problems. For example, in Crown, although the company has relied on an industrial design contractor, it has (until recently) been able to achieve a relatively high degree of coordination between industrial design and other engineering functions.

3) High Switching Costs and Specialized Assets: For certain kinds of activities, efficiency requires investments in relatively firm-specific assets (e.g., knowledge). By definition, these assets are difficult and costly to re-deploy to alternative uses. As a result, suppliers can be hesitant to invest in them (fearing that once they make the investment, they will be left vulnerable to "hold-up"). In the Crown case, the concept of firm-specific assets helps student to understand why Crown's long-time industrial design consultant has become hesitant to undertake more incremental design projects; these tend to have a more "Crown-specific" component and, unlike the major new design projects of the past, do not build the consultant's broader reputation in the market. Potential switching cost hazards can also be analyzed in Intel, Nucleon, and Whistler.

4) Contractual Uncertainty/Complexity: Some would argue that many of the problems discussed above can be mitigated by the use of appropriately and carefully structured contracts. This is true, but unfortunately, such contracts are not always possible to write or enforce. Where there is a high degree of uncertainty or complexity surrounding a project or set of activities, it becomes virtually impossible to specify all possible contingencies in a contract.

Module 3: Control and Coordination Systems

The architectural elements covered in Module 2 are analogous to the "hardware" of a computer system. Just as choices about the design of hardware have a profound influence on the performance characteristics of computer systems, they also influence the performance of manufacturing or service operations. However, as in the case of computers, hardware alone is not enough. "Software" is essential. In a manufacturing or service operation, there are various systems and business processes that control, measure, coordinate, and integrate flows of both materials and information within and across plants. These choices determine the difference between merely having multiple plants and an integrated plant network.

This module puts students in the position of a director of operations (or similar executive) responsible for managing a multi-plant (or a multi-operating unit) network. Such a manager faces two tasks. One is achieving static coordination and control of the plant network to optimize short-term performance. The capabilities of individual plants are taken as given, and the challenge of management is to decide how to most efficiently utilize those capabilities through allocation of products, production volumes, and capital.

A second task, and one that is all too often ignored, is to ensure dynamic improvement across the plant network. As illustrated in the Applichem (Abridged) case, there can be trade-offs between achieving static control and dynamic improvement. For example, the company's highest cost plant (in Japan) also happens to be the most efficient in some critical process areas. The high costs are due purely to exchange rates, high costs of certain raw materials, and specific Japanese regulations. To minimize total global plant network costs today, a strong case can be made for closing the Japanese plant. However, if this plant were closed, much of the learning and knowledge it has accumulated in the critical process area would be lost and thus not available to the remaining plants in the network. Although many managers will talk about the need to improve the operating performance of plants in their networks, very often they lack strategies that coherently link efforts across plants. Since the challenge of managing improvement across a network of plants is one that has received little attention in the traditional operations strategy literature, it is a focal point of this module.

The module illuminates three approaches to manage improvement across a plant network. Each approach is differentiated by the level of intervention in the operations of individual plants. Although the approaches are not strictly mutually exclusive, each one creates constraints for employing the others.

Level 1: Performance Measurement and Evaluation

Level 2: Standardization of Processes/Methods Across Plants

Level 3: Centralization of Key Support Activities

Level 1: Performance Measurement and Evaluation

The approach that involves the least direct intervention in the operations of individual plants is to use performance measurement and evaluation (tied to incentives) to influence the behavior of plant-level management. Under this approach, the director of operations sets clear goals and targets for each plant and for the plant network as a whole. Such goals and targets can be articulated in terms of financial metrics (e.g., return on assets, costs, profits, etc.), productivity (e.g., output per person), and service levels (e.g., delivery lead times). Targets can be set in a way that provides an incentive for plants to improve (these are often referred to in practice as "stretch goals"). Once the targets are set, however, individual plants are given autonomy on how to achieve them individually or through some cooperative efforts. With this approach, the director of operations' challenge is to determine the appropriate metrics and incentives to induce the most strategically appropriate improvement trajectory across the network.

As discussed in the Applichem and United Distillers cases, this approach is likely to be most effective when a network is composed of individual plants with vastly different missions, employing different technologies, and operating under significantly different constraints.

Level 2: Standardizing Processes Across Plants

A director of operations can begin to intervene more directly in the operations of individual plants by requiring that certain standard processes and methods be employed across all plants. In recent years, for example, many corporations have mandated that their plants receive ISO 9000 certification. Other examples would include requiring the use of statistical process control or specific training procedures. In some contexts, such standardization is driven by the requirement of the regulatory environment (e.g., pharmaceutical plants must conform to "good manufacturing practice" guidelines).

There may also be strategic reasons for standardizing processes and methods across plants. For example, if a company wants to be able to supply customers the same product from any plant in a global network, standardizing certain quality and manufacturing processes may be needed to ensure uniform quality across plants. (An example of standardizing processes to ensure uniform quality from an earlier case in the course would be McDonald's. An example from later in the course would be ITT Automotive). Standardization can also facilitate improvement across plants by giving plants a common base of experience and shared learning.

Standardization becomes feasible only where the individual plants have similar missions and operate under similar constraints. For example, it would be counterproductive (if not infeasible) to require a highly automated plant, employing highly-skilled workers, located in an advanced industrialized country and producing a complex product, to use the same process controls as a plant using a labor-intensive process, with low-skilled workers, located in a less developed country, producing a simpler design.

Under this approach, the critical decisions facing a director of operations concern which processes to standardize and which ones to allow individual plants to determine on their own. In addition, choosing the appropriate level of standardization is also critical. At one extreme, every plant may be required to adopt very specific quality control processes; at the other, they may only be required to follow some generally agreed-upon process principles. In the United Distillers case, for instance, we see a company that has developed a set of general guiding principles (e.g., "recognition of achievement as the basis for motivation and commitment") known as the "UD Way." The director of operations must decide whether the UD Way will create the coherence needed to coordinate the improvement efforts of his three plants, or whether more detailed process standardization is required.

As individual plants are required to adopt more standardized processes, and as these dictates become more specific, plant-level management discretion becomes more limited. With fewer process variables under the direct control of plant-level management, performance and evaluation systems need to be focused more narrowly, and must be used more carefully.

Level 3: Centralizing Key Support Activities

A third approach to improvement would be to centralize key support activities such as procurement, production planning and forecasting, training, and engineering support. In some ways this is the most interventionist approach, as it directly effects the scope of activities undertaken inside plants. One of the chief static benefits of centralization is that it allows the exploitation of scale economies in certain activities. Such benefits are often cited by managers in discussing the rationale for centralizing a particular activity. However, there can also be potential dynamic benefits. Centralization of certain support activities may also facilitate the aggregation and accumulation of experience across plants. For example, if each plant maintains its own process engineering group, knowledge about specific types of problems which arise in all network plants may not be as easily shared and transferred as when a single process engineering group supports all plants. Nevertheless, the decision to centralize any support activity creates trade-offs. While it may facilitate learning, centralization may also make support less responsive to specific plant needs. As with process standardization, managers need to use discretion in centralizing only those activities that offer the highest leverage for either static scale economies or improvement.

The issue of centralizing is a focal point of the Philips Taiwan case. In that case, Philips corporate management must decide whether the company's Taiwanese subsidiary, which has focused strictly on manufacturing and the later stages of product development, should be allowed to undertake concept planning and development for new products. To date, concept planning and development have been centralized on a global basis (for each product line) at the company's headquarters in Holland. One of the chief focal points of the case is how the decisions about centralization versus decentralization affect the capabilities of plants, and the implications of this for future improvements. Other cases in the course where the issue of centralization and its impact on the capability to improve across a network is also important include ITT Automotive and Intel (PED).

As in all aspects of operations strategy, the premise of this module is that no single approach (performance measurement, process standardization, or activity centralization) will be universally superior. Different competitive strategies and different choices about plant network architectures (e.g., the degree to which plants are similar) must be taken into account. In addition, managers need to recognize that differences in historical approaches may also constrain and influence their approaches. For example, in a company where plants have historically lacked the autonomy and capability to innovate, or the propensity to coordinate their efforts with other plants (e.g., Applichem and United Distillers), simply dictating that plants improve productivity by 10% or coordinate their efforts better will unlikely be enough. Corporate manufacturing management may need to play a much more interventionist role in helping the plants develop the capability to improve.

Level 4: Process Technology

The third major component of an organization's operations strategy is its approach to developing and implementing new process technology. This component of operations strategy is often viewed in practice as revolving around the selection of process technology (e.g., the choice between an automated or labor-intensive process). Although this is a critical issue, process technology strategy is multi-faceted. This module is designed to expose students to the various decision elements related to the development of process technology, to provide a framework for designing appropriate process technology strategies.

The module identifies four critical issues that must be addressed in the design of a process technology strategy.

1. The Amount and Timing of Process R&D Investment

2. Technology Choice and Selection

3. The Choice Among Alternative Prototyping Process Technologies

4. The Organizational Locus of Process R&D

A brief overview of each of these dimensions is discussed below, with references to cases from the module.

1. The Amount and Timing of Process R&D Investment

A critical component of an organization's process technology strategy concerns its pattern of investment in process R&D, including the total amount of resources invested (relative to the total R&D budget), the timing of that investment (early or late in the product life cycle), and the focus of the investment (radical new technologies versus incremental improvements of existing processes). There are various approaches to process R&D investment that can be taken, depending on the strategic goals and competitive circumstances of the company. For example, a producer of commodity chemicals faces a very different set of process development challenges than a small biotechnology company trying to get its first drug on the market. Note, process R&D plays an integral role in the success of both companies, but different strategies will be appropriate for each.

One misconception about process R&D is that it only matters in mature industry contexts where competition revolves around manufacturing standardized products at the lowest possible cost. This thinking often leads companies in more technologically dynamic settings to under-invest in process R&D or take a highly reactive approach. In this module, students are able to see that the benefits of process R&D capabilities extend well beyond the domain of mature industry contexts. Process R&D capabilities can play an integral role in the success of companies competing in "high technology" environments by influencing the timeliness and quality of new product introductions. Process R&D investment, therefore, needs to be proactively managed in high-technology as well as in more mature industries.

To help introduce students to the issues and concepts involved in creating an appropriate pattern of process R&D investment, the module begins with a case on Eli Lilly (Eli Lilly and Company: Manufacturing Process Technology Strategy-1991). Historically, the company has invested relatively little in process R&D (relative to product R&D) and has preferred to hold off investments as late as possible in the product life cycle. Amidst changes in the competitive environment, senior managers at the company are trying to decide among three different proposals for improving the company's manufacturing process technology capabilities. The proposals differ not only in the aggregate sums of investment in process R&D, but also in the timing of the investments. Through this case, students are able to see how earlier investments in process R&D can not only radically alter the cost structure and capital requirements for new drugs, but can also potentially influence the timing of new product introductions.

2. Technology Choice and Selection

A second dimension of process technology strategy concerns the choice among alternative types of process technologies. This is an issue that arises in a second Eli Lilly case (Eli Lilly and Company: Flexible Facilities Decision-1993) used in the module. In this case, the company is contemplating a change from its traditional process technology strategy. Instead of designing and building plants specifically for each new product, a proposal has been made to utilize plants with highly flexible process technology which would be capable of manufacturing almost any new product. The case exposes the kinds of trade-offs involved in such a decision. The chief advantage of the existing approach is that the process technology and plant configuration can be optimized specifically for each new product, leading to relatively low manufacturing cost. However, this approach is time consuming, since a new plant must be designed and constructed for each new product in the pipeline (it is also risky since not all late-stage product candidates make it to market). The flexible facilities approach essentially takes facilities off the critical path for launch and could thus accelerate future product launches by as much as one year. However, since the process and plant cannot be optimized for each new product, and flexible facilities are inherently more costly to build and operate, this approach leads to much higher manufacturing costs. Students need to assess this trade-off and to analyze which approach fits into the company's long-term strategic improvement path.

The issue of technology selection is also central to the ITT Automotive case. In that case, the company is trying to choose between a highly-automated and a less-automated process technology for a new generation of anti-lock brakes. The choice not only has implications for the cost structure of this particular product generation, but also fundamentally influences both the approach and locus of learning about new process technologies. It will thus have a long-term impact on the future trajectory of improvement. This issue is discussed in greater detail below.

3. Prototyping Processes

It is often forgotten that "manufacturing" occurs throughout the development of new products through the building of prototypes. In many situations, of course, the process used to make prototypes is quite different from the one eventually used to produce the product in commercial volumes. Nevertheless, prototyping is a (small-scale) production process and choices about prototyping processes involve trade-offs, and have strategic implications for both development and manufacturing.

This issue is brought to the fore in BMW 7-Series case which examines that company's decision to change its approach to prototyping new vehicles in development. Historically, the company hand-built its prototypes in order to provide the highest degree of flexibility in the design process. This approach was highly consistent with the company's design strategy of offering unparalleled performance and styling (i.e., "the ultimate driving machine"). However, by hand-building prototypes, the company learned very little about potential design problems related to the future manufacturing process. As a result, the conformance quality of newly launched products was relatively low. A proposal to build prototypes using a process more similar to the one that will eventually be used in high volume production has been made on the grounds of improving the conformance quality of newly launched models. This new approach, however, is less flexible and therefore may have implications for both the design process and the overall design quality of new products. Assessing this trade-off and understanding the long-term implications for how prototyping processes affect development capabilities are the focal points of the case discussion.

4. The Locus of Process R&D

The development and implementation of new process technologies span a range of venues from research laboratories and engineering departments to pilot plants and the floor of commercial scale factories. Process R&D inherently involves different organizational groups often residing in different locations. At each phase of the process development cycle, different kinds of problems are identified and resolved. For example, a process research laboratory may be the right venue to identify and select among broad technological alternatives, while the factory floor may be the most appropriate place to fine tune a process to the idiosyncracies of the production environment.

Nevertheless, organizations can adopt different mixes and balances of approaches with respect to the organizational locus of development. For example, one organization might use its R&D laboratories to thoroughly research, develop, test and optimize process technologies long before they are transferred to the factory floor. In contrast, another might spend little effort in the laboratory, but instead prefer to undertake more of its process development in the actual production environment. In many companies today, debate often erupts between those who advocate "designing it (the process) right the first time" and those who see the necessity of getting the factory involved early (when the process is still in development).

Underlying this debate are two fundamentally different models of learning. Those who advocate "designing it right" essentially believe that through extensive research, development, simulation, and laboratory testing, it is possible to almost fully "de-bug" a process before it ever reaches the factory floor. Since this approach attempts to fully develop the process before it is transferred to the factory floor, it is referred to as "learning-before-doing." Those advocating early factory involvement see this approach as futile. Given the complexities and subtle idiosyncracies of the actual production environment, it is impossible to fully identify and solve potential problems up front. Instead, only through "learning-by-doing" in the actual production environment can process problems be surfaced and resolved.

This debate is illustrated in the ITT Automotive case. Central engineering (in Germany) has proposed that a new-generation anti-lock brake be produced with the exact same highly-automated process technology across the company's global plant network. Plant managers in the U.S., however, fear that once installed the highly automated process will be too costly to change (and thus to improve). They advocate a less automated process that can be further developed and improved in the plants as they accumulate production experience.

Any development project is likely to require a mix of approaches. Some problems can be solved through laboratory experiments and simulations long before the process is transferred to the factory; other problems may require detailed knowledge of the idiosyncracies of the production environment and can only be identified and solved on the factory floor. The issue, then, becomes one of choosing the appropriate mix and balance, rather than picking one model over the other. The framework developed in this module suggests that there is no one best approach to process development that will work well under all circumstances. Learning-by-doing is an effective approach in some types of environments, but in others, an emphasis on learning-before-doing leads to much better performance. The critical determinant is the nature of the knowledge environment in which the firm operates. Where theoretical knowledge and practical experience are weak, and where many of the nuances of the manufacturing environment are only dimly understood, laboratory experiments and even pilot plant tests provide poor simulations of future performance in the actual production environment. Because the knowledge environment does not permit representative modeling of the process, learning-by-doing in the actual production environment is critical for high development performance. In contrast, in more mature and theoretically well-developed technologies, where there is a deep body of models and heuristics related to scale-up, laboratory experiments can be both effective and time-efficient ways of identifying and resolving manufacturing problems. In this environment, an orientation toward "learning-before-doing" can be a more effective development strategy than "learning-by-doing."

This framework is developed in more detail in the teaching note accompanying the ITT case.

Module 5: Leading Operational Innovation

The first four modules of the course focus heavily on the design of operating strategies through choices of architecture, control and coordination systems, and approaches to process development. The final module of the course shifts the emphasis toward implementation and helps students to understand the approaches senior management can use to bring about major changes in operating strategies. The organizations portrayed in the final module are all facing significant changes in their competitive, technological, or institutional environments and must undertake massive changes in their operating strategies to survive. In many of the cases, the required changes are not controversial. Almost everyone in the class may agree on what needs to be done in terms of re-designing the operations strategy. However, since operations cut through so many elements of how an organization functions, major adjustments in operating strategies usually require wrenching organizational changes. And therein lies the challenge. Deciding how to bring about such changes in the context of operations and which paths are most appropriate to change is the focal point of this final module.

The premise of the module is that implementing major new directions in operations itself requires a strategy. Through a series of six cases this module exposes students to the challenges of implementing major operating strategy changes and delineates three kinds of choices that senior managers must make in leading such changes. These choices are described briefly below.

1. Revolutionary vs. Incremental Operational Innovation

Open any popular business periodical and you will likely find a story about a major corporate "turnaround." A company, lead by a "hard-charging" "visionary" CEO has been brought back from the brink of bankruptcy. Some of these companies (such as Chrysler and Cummins Engine) and their leaders have become nearly legendary. Amidst these stories, it is easy to forget that many companies succeed and bring about large-scale changes in their operating capabilities through the accumulation of a series of more incremental improvements in their operations. Such incremental approaches to change, although less dramatic and less newsworthy, can be very effective. One of the critical choices senior managers face in bringing about significant changes in their operations strategy and in building new operating capabilities is whether to tackle the problem in one giant step or through a series of incremental projects and improvements.

This module attempts to counter the emphasis placed on more radical approaches by the popular press and major consulting firms by illustrating the power of more incremental approaches. An incremental approach is not necessarily slower. Although each step is smaller, the company can carry out a larger number of steps in rapid succession. Through a series of incremental projects and efforts, each building on the next, an organization may be able to successfully implement major changes in its operation strategy relatively quickly. This approach to operations strategic planning is articulated in the article "Strategic Planning-Forward in Reverse" by Robert Hayes (Harvard Business Review, 1985) which can be assigned as the basis for a lecture. The principles of this article played out in practice are illustrated in the Australian Paper Manufacturers case.

The potential power of a more incremental approach and the pitfalls of relying on "great leaps" can be fruitfully explored through cases on Hitachi Seiki and Ex-Cell-O, two companies operating in the same industry, at the same time, and confronted with the same technological challenge (Flexible Machining Systems). In the process of comparing their different approaches-and the vastly different outcomes they lead to-students are able to glean insights about how companies can systematically build-or destroy-their organizational capabilities.

The case on State Street Bank portrays a very different industry (financial services) facing a similar strategic dilemma. There are very strong parallels to the organizational issues faced by Hitachi-Seiki and Ex-Cell-O. For example, in all three of these cases, the central challenge facing the organization is how to build capabilities to integrate product development skills and knowledge across different divisions. The State Street case focuses on the actions the CEO can take to foster the development of these capabilities and avoid the fate that befell Ex-Cell-O.

In discussing these issues, the instructor can make a link with the previous module on process technology. In that module, a distinction was made between a "learning-by-doing" and "learning-before-doing" approach to the development and implementation of production process technology. In developing and implementing new operating and business processes (such as the product development process), a similar set of choices and issues arises. In many ways, re-engineering and other radical approaches to organizational change have strong analogies to the "learning-before-doing" approach to process development. More incremental approaches (such as Total Quality Management) which seek to improve existing processes based on performance feedback, are more akin to "learning-by-doing."

As in the case of manufacturing process technology development, neither approach is universally preferable and the appropriate balance will depend on the complexity of the environment and the extent to which the effects of the relevant business or operating process can be predicted.

2. System versus Component Innovation

As emphasized throughout the course, operations are complex systems. A change in one part may effect the other. When faced with the need to make wholesale changes in operating strategy, senior management can direct their efforts and attention in two directions. One approach would be to focus on improving specific components of the operation. An alternative would be to restructure the system itself (and thus, some components might not even be relevant).

This issue is explored at different levels in the case series on the Partners HealthCare System. The Partners (A) case looks at the decision whether the Brigham and Women's Hospital and the Massachusetts General Hospital should enter into an affiliation in order to survive wrenching changes in the health care environment. The affiliation issue really revolves around whether or not it starts the right process for bringing about the requisite future changes at the hospital level. The affiliation represents a change targeted at the system level. Indeed, to some extent, the affiliation is predicated on the idea that over the long term the very concept of "the hospital" and its role in the broader health care system is changing. An alternative approach would have been for each hospital to embark on their own specific operating improvement strategies (a "component-focused" approach).

The Partners (B) case illustrates that the issue of system- versus component-focused operational change is relevant at lower levels of analysis. That case looks at strategies for improving cardiac care processes within the Brigham and Women's Hospital (after the affiliation). At the time of the case, all of the previous effort and attention was on improving cardiac surgery and reducing lengths of hospitalization. Because cardiac surgery is a component of a larger care process involving cardiology and even primary care, the approach taken could clearly be classified as "component-focused." Through the case, students are able to see that although this approach has achieved some improvements to date, further improvements will almost certainly require integrating care processes across cardiology and cardiac surgery. Thus, senior management of the hospital and the department chiefs will need to shift their attention from components (e.g., cardiac surgery) to systems (cardiac care).

3. "Inside-Out" versus "Outside-In" Operational Innovation

Consider the situation faced by an organization whose existing operating capabilities are woefully unsuited to the existing competitive environment. There is a plethora of both theoretical and empirical evidence indicating that such an organization will have a great deal of difficulty developing and implementing the requisite new capabilities. Indeed, this is an important premise of this module (i.e., organizational change is hard).

One approach to dealing with this dilemma is to set up a new division, unit, or project team that is unencumbered by existing organizational habits, operational processes, and politics. The idea behind this approach is that the new autonomous unit will be free to develop new concepts and experiment with new methods without being influenced or blocked by the existing organization. Because change initially occurs outside the existing organizational structure, and the new unit may later become the impetus for changing the rest of the organization, this approach is dubbed "outside-in." The opposite approach is to tackle the existing organization's problems head-on. Since change starts from the inside, this approach is referred to as "inside-out." As noted above, changing existing organizations (the inside-out approach) can be a tough road. The "outside-in" approach, however, solves one problem (overcoming resistance to change), but creates another. The very organizational isolation of the project team or unit, which enabled it to learn freely, can hinder the transfer of learning back to the rest of the organization.

This dilemma is played out in the final case of the course on CIBA Vision and its decision how to organize the development of a new daily disposable contact lens. The case reveals that the company's existing R&D and manufacturing organizations lack the requisite organizational capabilities to successfully carry out this project in a timely fashion. Given the time pressures the company is under, one senior manager has proposed setting up an autonomous project team, both geographically and organizationally isolated from the existing operations, to carry out the project. This approach may be best for this particular project. The dilemma, however, is that it provides virtually no impetus for bringing about necessary changes in the existing organization. Some managers in the company are arguing that this project needs to be done within the existing organization because it is a critical vehicle for building new technical and organizational capabilities. The case provides an opportunity to discuss the general criteria for deciding which approach to take under different condition. These are summarized below.

The CIBA Vision case is an excellent capstone for the course because it reiterates a critical theme, that operating strategy choices affect both existing competitive positions and the longer-term evolution of capabilities.

APPENDIX I

Operations Strategy Course Syllabus

I. Introduction: The Concept of Operations Strategy

Class # 1 Chandler Home Products (B) (Abridged) (9-680-048)

Class # 2 American Connector Company (A) (9-693-035)

Class # 3 McDonald's Corporation 1992 (9-693-028)

Operations, Flexibility and the Environment

Class # 4 Lecture: Operations Strategy Framework

Readings: 1) Hayes and Wheelwright, "Competing Through Manufacturing" (HBR #85117); 2) Hayes and Pisano, "Manufacturing Strategy: At The Intersection of Two Paradigm Shifts" (Production and Operations Management)

II. Architecture

Class # 5 Trus Joist Corporation (9-675-207)

Class # 6 Medical Products Company (9-694-065)

Reading: Bartmess and Cerny, "Building a Competitive Advantage Through a Global Network of Capabilities" (California Management Review )

Class # 7 U.S. Robotics (9-692-061)

Class # 8 Whistler Corporation (A) (9-690-011)

Class # 9 Crown Equipment Corporation: Design Services Strategy (9-991-031)

Class # 10 Nucleon, Inc. (9-692-041)

Class # 11 IntelPED (9-693-056)

Class # 12 Lecture on Vertical Integration and Organizational Bounds

III. Systems and Processes

Class # 13 Applichem (A) (Abridged) (9-694-030)

Reading: Hayes and Clark, "Why Some Factories Are More Productive Than Others" (HBR #86508)

Class # 14 Philips Taiwan (9-692-037)

Class # 15 United Distillers (9-966-078)

IV. Technology

Class # 16 TJ International (A) (9-693-038)

Class # 17 Eli Lilly and Company: (9-692-056)

Manufacturing Process Technology Strategy (1991)

Class # 18 Eli Lilly and Company: (9-694-074)

The Flexible Facility Decision (1993)

Class # 19 BMW: The 7-Series Project (A) (9-692-083)

Class # 20 ITT Automotive: Global Manufacturing Strategy (1994) (9-695-002)

Class # 21 Lecture on Process Technology Strategy

Reading: Pisano and Wheelwright, "The New Logic of High Tech R&D" (HBR # 95506)

V. Leading Operational Innovation: Role of Senior Management

Class # 22 Hitachi-Seiki (Abridged) (9-690-067)

Class # 23 Ex-Cell-O Corporation (B) (9-387-142)

Class # 24 State Street Bank and Trust Company (9-696-087)

New Product Development

Class # 25 Lecture: Improvement Strategies

Reading: Hayes, "Strategic Planning-Forward in Reverse?" (HBR # 85607)

Class # 26 Australian Paper Manufacturers (A) (9-691-041)

Class # 27 Partners HealthCare System, Inc. (A) (9-696-062)

Class # 28 Partners HealthCare System, Inc. (B): (9-696-063)

Cardiac Care Improvement

Class # 29 CIBA Vision: The Daily Disposable Lens Project (9-696-100)

Class # 30 Wrap-Up

Reading: Hayes and Pisano, "Beyond World Class: The New Manufacturing Strategy" (HBR #94104)

APPENDIX II

Operations Strategy: Assignment Questions

Class # 1 Chandler Home Products (B) (Abridged) (9-680-048)

1. In retrospect, was Chandler's 196 2 decision to consolidate its (continental) European production into a single plant a wise one?

2. What is your evaluation of the Complant's performance over the most recent five year period?

3. What recommendations would you make to Mr. Genet, Chandler's Executive V.P. for European Consumer sales, about the capacity decision his organization is now facing?

Class # 2 American Connector Company (A) (9-693-035)

1. Compare the manufacturing structures and strategies of DJC's Kawasaki plant and ACC's Sunnyvale plant.

2. What impact does each plant's manufacturing strategy have on its ability to achieve different competitive objectives, such as low cost, high reliability, flexibility, and product innovation?

3. If DJC built a new plant in the U.S., what changes would you recommend in its manufacturing structure as compared with the Kawasaki plant? What, for example, would be the impact on the Sunnyvale plant if it doubled its average production run length? How serious a threat would ACC face if DJC opened a new plant in the U.S.?

4. What changes would you now recommend in the operations of ACC's Sunnyvale plant?

Class # 3 McDonald's Corporation 1992 (9-693-028)

Operations, Flexibility and the Environment

1. Which characteristics of McDonald's production system have been most important in building its record of success and growth in the industry?

2. What are the primary new challenges McDonald's faces?

3. How will you adapt the system to accommodate these changes in the U.S.?

4. How should McDonald's respond to the Burger King announcement?

Class # 4 Lecture: Operations Strategy Framework

Readings:

1) Hayes and Wheelwright, "Competing Through Manufacturing" (HBR # 85117)

2) Hayes and Pisano, "Manufacturing Strategy: At The Intersection of Two Paradigm Shifts" (Production and Operations Management)

Class # 5 Trus Joist Corporation (9-675-207)

1. What is your assessment and evaluation of the company's manufacturing strategy through late 1974?

2. What recommendations (with relevant supporting analysis) would you make to Johnson for the next two years? Be specific as to capacity requirements, the economics of the alternatives, details of the manufacturing actions to be taken, and the timing of those actions.

The following analyses, based on information in the Trus Joist case, may be helpful to you in deciding what action Peter Johnson should take.

Projected Requirements (1976)

Class # 6 Medical Products Company (9-694-065)

Reading: Bartmess and Cerny, "Building a Competitive Advantage Through a Global Network of Capabilities" (California Management Review)

1. What changes would you propose that MPC make in its European manufacturing network and associated managerial policies?

2. What are the primary problems that you would expect to encounter in implementing your recommendations, and how would you address them?

Class # 7 U.S. Robotics, Inc. (9-692-061)

1. Why does U.S. Robotics need "5 by 5"? Why have so many firms failed at $100M sales, and how should USR avoid such a fate? What kinds of strategic flexibility are important to USR and how should it maintain them?

2. Should U.S. Robotics have an explicit manufacturing strategy? What should it be?

3. What will be the most important types of short-term flexibility for U.S. Robotics? How will the manufacturing strategy you outlined support this?

4. How will you grow U.S. Robotics Operations? Will you break up the business as it becomes necessary to move to multiple sites?

Class # 8 Whistler Corporation (A) (9-690-011)

1. Describe Whistler's traditional manufacturing strategy. What have been its strengths and weaknesses?

2. What are the implications of each of the proposed options for manufacturing, with regard to: a) cost, b) quality, c) ability to introduce new products, and d) responsiveness to market fluctuations? What risks are associated with each option? How important is it that Whistler manufacture its own products? In the U.S.?

3. What problems is Charles Stott likely to face in the next five years, and how should Whistler's manufacturing operations be configured and managed to deal with them?

Class # 9 Crown Equipment Corporation: Design Services Strategy (9-991-031)

1. What has been Crown's competitive strategy, and what role has product design played in it? Have Crown's manufacturing structure and infrastructure been appropriate for that strategy?

2. Why has Crown's 30-year relationship with Richardson-Smith (RS) been so successful? How might the relationship between design and manufacturing change as a result of setting up an internal product design group?

3. What recommendation, as Tom Bidwell, would you make regarding bringing the design function in-house?

Class # 10 Nucleon, Inc. (9-692-041)

1. What are your recommendations regarding the manufacturing of CRP-1 for Phase I and Phase II clinical trials? What are your recommendations regarding manufacturing for Phase III clinical trials and commercialization?

2. How would you justify your recommendation to would-be investors in the company?

3. What is your recommendation regarding Nucleon's long-term manufacturing strategy? What should this company look like in ten years (e.g., an R&D boutique with pilot scale manufacturing capabilities, or an integral manufacturing enterprise)?

Class # 11 IntelPED (A) (9-693-056)

1. As Brian Davis, what recommendation would you make regarding the dual-supplier proposal for the new process tool? What problems is Intel likely to encounter in implementing your recommendation?

2. What other change in Intel's operations strategy, either in addition to or in place of that proposed in answer to the question above, would you recommend?

Class # 12 Lecture on Vertical Integration and Organizational Boundaries

Class # 13 Applichem (A) (Abridged) (9-694-030)

Reading: Clark and Hayes, "Why Some Factories are More Productive Than Others" (HBR #86508)

1. How do you explain the large differences in the performances of the four plants making Release-Ease? Why do some plants appear to be so much better than others? To what extent can these differences be attributed to such differences as the scale of operations, utilization rate, etc., and how much appears to be due simply to better management?

2. As Joe Spadaro, what would you do given the current overcapacity situation and the information provided by the recent productivity study? In particular, what would you do about the Gary facility?

Class # 14 Philips Taiwan (9-692-037)

1. How has Philips-Taiwan been able to prosper, up to now, in its very difficult competitive environment? Will it continue to succeed if it follows the same strategy in the future?

2. What recommendations for improving Philips-Taiwan's product development process would you make to Mr. Lo and Mr. Hsu? In particular, should the initial planning for a new product (and its Senior Product Manager) be moved from corporate headquarters in Holland to Taiwan? Should prototype development be moved up, from after to before the PRS meeting?

3. Should Philips-Taiwan attempt to implement the Quality Function Deployment process in developing the successor product to the CM9000? Are there any dangers associated with adopting it too quickly?

Class # 15 United Distillers (9-696-078)

1. Assess United Distillers' (UD) overall operations strategy given the realities of the Scotch Whisky market in the 1990s. What operations strategies are being pursued by each of the plants, and how well do these fit together? What are the broader competitive challenges of UD?

2. How are each of the plants approaching operations improvement? Think about whether the plants in the network should be following a consistent approach to improvement, or should they each be allowed the autonomy to choose their own improvement paths? What's to be gained (lost) by allowing autonomy? What's to be gained (lost) by creating more integration across plants?

3. As Ivor Lewis, what would you do? Be specific with regard to the actions you would take (or have others take) at both the network and plant level?

Class # 16 TJ International (A) (9-693-038)

1. What is your assessment of the Colbert operation? What are the opportunities and prospects for making the plant profitable?

2. Is the proposed joint venture a good idea? Why or why not?

3. If TJI proceeds with a joint venture with MB, as Pat Smith, what plan of action would you adopt?

Class # 17 Eli Lilly and Company: (9-692-056)

Manufacturing Process Technology Strategy (1991)

1. In the terms used in the reading, how would you characterize Eli Lilly's approach to manufacturing before 1987?

2. What impact, financial or otherwise, will each option have on Lilly's approach?

3. What recommendation would you make to Joe Cook regarding the three options for process development projects that have been developed? How would you build a compelling case for your recommendation to Lilly's top management?

Class # 18 Eli Lilly and Company (9-694-074)

The Flexible Facility Decision (1993)

1. How has the competitive environment in pharmaceuticals been changing over the past few years? What are the implications for the role of manufacturing within Eli Lilly?

2. How does each facilities option affect Lilly's cost structure and product development capabilities? For what type of products does the proposed flexible facility provide an efficient (i.e., low-cost) manufacturing capability?

Class # 19 BMW: The 7-Series Project (A) (9-692-083)

1. What are the causes and consequences of BMW's quality problems with new product launches? What should be done to improve "launch quality?" In particular, what recommendations would you make to Carl-Peter Forster concerning the R-Series prototypes?

2. What changes would you recommend in the way BMW develops new models? Which attributes of newly-launched products would you expect to improve as a result of these recommendations? Which attributes might deteriorate?

3. What recommendations would you make to Chairman von Kuenheim regarding BMW's strategy for competing against the new Japanese entrants into the luxury car market?

Class # 20 ITT-Automotive Global Manufacturing Strategy (1994) (9-695-002)

1. What are the implications for both cost and flexibility of automation? Do you agree with the assertion made by one of the managers in the case: "If you automate, you stagnate?"

2. What are your recommendations regarding the issue of standardizing process technology across all plants? Are there motives behind this proposal, other than those stated in the case?

3. As Juergen Geissinger, how would you go about implementing your recommendation? How would you overcome resistance from the plants? As Steve Dickerson, the plant manager at Asheville, North Carolina, what line of reasoning would you use to convince senior plant management that full automation is the less desirable alternative?

4. As Klaus Lederer, what option would you like to see pursued? How do various options fit into the broader corporate strategy of ITT Automotive?

Class # 21 Lecture on Process Technology Strategy

Reading: Pisano and Wheelwright, "The New Logic of High Tech R&D" (HBR # 95506)

Class # 22 Hitachi-Seiki (9-690-067)

1. Compare the Narshino, Abiko I and Abiko II FMS systems (see pages 5-9). What explains the success or failure of each?

2. Which of the three alternatives on pages 9-11 should Hitachi Seiki pursue? In answering this question, consider:

a) what each alternative provides (and requires) in terms of technological capabilities;

b) what Hitachi Seiki is good at; and

c) what future developments are likely to be.

Class # 23 Ex-Cell-O Corporation (B) (9-387-142)

1. What was Ex-Cell-O's plan for its machine tool sector in October 1983? What problems is it facing in January 1985? Why hasn't its plan been working?

2. What could Paul Casey have done to prevent, or reduce the impact of, these problems?

Class # 24 State Street Bank and Trust Company: New Product Development (9-696-087)

1. How is "product" development in services different from product development in manufacturing contexts? For example, what might a prototype look like for a new financial product? What are some of the unique challenges of developing new financial services?

2. Using the examples provided in the case, how would you characterize State Street's approach to product development? Recalling the concepts introduced in first-year TOM, what kind of approach to teams is State Street using ("heavyweight" vs. "lightweight")? Is this the right approach? What changes would you recommend?

3. Why does the "derivatives project" seem to be bogged down? Are there some deeper organizational problems that Carter needs to address?

4. In developing your recommendations, please think about some of the cultures that exist in different divisions of the bank and the type of barriers these differences might create. Many of you have worked in financial services and can draw from your own experiences in thinking about the likely differences in the cultures of the bank's three main divisions: Global Advisors (portfolio management), Capital Markets (trading and investment banking) and Financial Asset Services (custody, "back-office" processing).

Class # 25 Lecture

Reading: Hayes, "Strategic Planning-Forward in Reverse?" (HBR #85607)

Class # 26 Australian Paper Manufacturers (A) (9-691-041)

1. What opportunities and risks did Ken McRae face as he contemplated taking APM into the fine papers market? Be specific with respect to technological, operations, and capital investment (as well as other) considerations.

2. How has the environment fared in this battle?

3. As Ken McRae, what technology and operations strategy options are available? Which do you think he ought to pursue? Why?

Class # 27 Partners HealthCare System, Inc. (A) (9-696-023)

1. Analyze the changes in the competitive and institutional environment of the health care industry in general, and the forces influencing the Eastern Massachusetts market in particular. Here are some specific issues you should address:

a) What is "capitation" and how does it differ from traditional fee for service payment schemes? What is it critical for a hospital to do particularly well in a "capitated" environment?

b) Note, at the time of the case, Massachusetts has one of the highest usage rates of hospitals in the country. The average Massachusetts resident spends 1.2 days per year in a hospital bed (versus the average Californian, who only spends 0.3 days per year in a hospital). What drives these differences? What would happen to capacity utilization of hospital beds in Massachusetts (total "bed days" used versus "bed days" available) should it become more like the rest of the country in these usage patterns?

2. What are the implications of these changes for the Massachusetts General Hospital and the Brigham and Women's Hospital? If you are leading one of these institutions, what kind of pressures are you under? What are your goals (remember, these are non-profit institutions)? How do you balance the teaching and research missions of these institutions with the competitive pressures of the environment?

3. What is the concept of an "integrated delivery system" and how does it differ from the traditional structure of health care delivery? (Hint: As you think about the flow of a patient through the system, you might want to draw analogies to different types of generic production processes: job-shop, batch, continuous flow, etc.)

4. Do you recommend these two institutions affiliate at this time? If so, do you agree with the proposed structure? What are the specific implementation challenges you anticipate and how would you deal with these? What are the alternative strategies each might pursue?

Class # 28 Partners HealthCare System, Inc. (B): Cardiac Care Improvement (9-696-024)

1. What is PCHI's network strategy and what is your assessment of it? How does this strategy fit into the broader set of reasons underlying the affiliation between Mass General and the Brigham & Women's Hospital (BWH)?

2. Why is the BWH attempting to build its own physician network? Is this the right strategy for BWH? (Hint: analyze the revenue implications under the assumption that 10% of BWH admissions comes from PCHI referrals). Is this the right strategy with respect to the broader network?

3. Assess the cardiac care re-engineering efforts to date. How much have they saved? How much are they likely to save in the future? Do you think they are following the right approach?

4. What are the issues facing Jeff Otten? Does he need a different improvement strategy across his various departments? What are his options for getting enough operational improvements to survive in a capitated environment? Which one should he pursue?

Class # 29 CIBA Vision: The Daily Disposable Project (9-696-100)

1. What is your evaluation of CIBA Vision's competitive position and its development capabilities as of August of 1992? What are the root causes of some of its recent problems?

2. Should CIBA Vision be pursuing the daily disposable project? If so, which approach should they take to development? Should they do the project in the United States or in Germany? Should they use an autonomous project team or the existing development organization? What would the optimal manufacturing strategy be for a daily disposable contact lens?

3. Which of the proposed approaches gives this particular project the best chance of succeeding? Which approach do you think will lead to the most beneficial long-term change in the company's capabilities?

Class # 30 Wrap-Up

Reading: Hayes and Pisano, "Beyond World Class: The New Manufacturing Strategy" (HBR #94104)