Operations

When it comes to thinking about scale, the assumption of corporate leaders since Henry Ford’s day has been that bigger is better. And in many situations, such thinking is inarguably correct because of the cost efficiencies that size provides. But sometimes efficiencies can mask opportunities. In their research, the authors found that small-scale operations provide significant advantages in four areas. They allow companies to locate hot spots and tap into local knowledge networks; they make it possible to respond more rapidly to customer needs and to trends in regional demand; they enable companies to monitor potentially disruptive technologies; and they help hold down labor costs while developing managerial talent. Using case studies, the authors illustrate how companies in a wide variety of industries have found the hidden benefits of small-scale approaches to corporate needs. They conclude that executives who develop a deeper understanding of scale and learn when it is better to think small can have a potentially huge impact on their companies’ long-term success.

A framework for gaining a clearer understanding of customer preferences.

Why do your customers choose to buy from you rather than from your competition? For the past three years, marketing professors Mark Vandenbosch and Niraj Dawar have posed that question to more than 1,500 senior executives in interviews and group discussions. And despite the vast range of industries represented by the executives they probed, the responses they got were remarkably similar. The executives agreed almost universally that offering great products, technologies or services is merely the entry stake into the competitive arena. Most spoke of the need to maintain an edge in the way their companies interact with customers; that is, they recognized that customers often value how they interact with their suppliers as much or more than what they actually buy. As the main drivers of customer choice, the executives cited cost-oriented factors such as convenience, ease of doing business, product support and risk-oriented factors such as trust, confidence and the strength of relationships. Strategies built around reducing customers’ interaction costs and risk are strategies that offer a systematic way to tap into new sources of customer value while avoiding the often futile attempt to compete on product innovation. The authors illustrate five different strategies that some companies are using to build a sustainable advantage through their approach to customers. These strategies are not easy to devise or implement; they require creativity, imagination, hard work and a willingness to take risks. But as the examples in this article demonstrate, the rewards are more than worth the effort.

When companies first plunged into e-commerce, they thought success meant cutting out middlemen. That approach didn’t work, in part because e-businesses misunderstood the role of intermediaries. Middlemen are not costly, necessary evils. They solve problems for customers and, in so doing, they enable sales and create value for producers. INSEAD’s Philip Anderson and Erin Anderson show how intermediaries are helping smart companies realize the promise of the Web. They explain intermediaries’ nine ways of adding value, suggesting that three will change, three will survive in a new form, and three (reducing uncertainty about quality, preserving customer anonymity and tailoring offerings to customer needs) present growth opportunities. Middlemen can co-opt the Internet by offering services that would be too difficult for individual producers to provide. However, the authors caution, intermediaries must be open to new ways of doing business with suppliers and vice versa. The Web transforms but does not eliminate the advantages of the middleman’s central lookout position. But what was once thought of as a straight distribution channel from supplier through middleman to customer is now more accurately described as a service hub. The player that takes the customer order & #8212; possibly a Web site & #8212; occupies the center and interacts with many partners. The authors specify appropriate, fair incentives (for example, because Ethan Allen has quasi-independent furniture stores that customers browse before buying directly from the manufacturer’s Web site, the company automatically gives the nearest retailer a 10% tip). And they describe service-hub management that will generate enough trust to permit producers to get closer to customers & #8212; indirectly.

Offering products or services alone is no longer enough: Organizations must provide their customers with satisfactory experiences. Competing on this dimension means orchestrating all the clues “that people detect in the buying process.”Customers always have an experience & #8212; good, bad or indifferent & #8212; whenever they purchase a product or service from a company. The quality of the experience lies in how effectively the company manages it, in all its facets and from beginning to end. Organizations that simply tweak design elements or focus on improving isolated pockets of the customer experience & #8212; by providing a quick hit of entertainment, for example & #8212; will be disappointed in the results. An organization’s first step toward managing the total customer experience is recognizing what the authors call clues: the signals or messages given off by everything that touches on the buying process. Clues can include the product itself (does it work as advertised?), the layout of a retail outlet (are the signs easy to follow?), the tone of voice of the salesperson (did he really mean it when he said, “Have a nice day”?), and so on. Organizations that orchestrate the sum total of all the clues can create an optimal experience for their patrons. Addressing the clues that speak to emotions is especially important. Emotional bonds between companies and customers are difficult for competitors to sever. The internalized meaning and value that the clues assume can create a deep-seated preference for a particular experience & #8212; and thus for one company’s product or service over another’s. The authors explain the tools that are available to help organizations rethink the signals they are sending to customers. They also show how the tools work in practice by presenting two case studies in which organizations dramatically improved their customers’ experiences.

Project managers can't predict the future, but accurately gauging the degree of uncertainty inherent in their projects can help them quickly adapt to it.

The quality initiative Six Sigma is sweeping the United States. Is it good for whatever ails your company? Consultant Michael Hammer thinks not. He warns that many business leaders, in their quest for operations-performance improvement, fail to distinguish its strengths from its weaknesses. Hammer presents a strategic, holistic approach & #8212; business-process management & #8212; in which Six Sigma is only one of many useful initiatives. If a business process, such as billing customers, is fundamentally defective, why use Six Sigma to improve the performance of it? Companies that Hammer calls process enterprises (Caterpillar, Johnson & ; Johnson, Merck, Progressive Casualty Insurance, Bombardier and IBM) have found more success redesigning whole processes. Certainly, Six Sigma’s ability to unearth root causes of problems is outstanding for narrow cost-saving improvements. But it deploys statistical analytic tools to uncover flaws in the execution of an existing process without asking whether the process itself is flawed. Six Sigma assumes that the existing design is fundamentally sound & #8212; a dangerous assumption. For peak performance, companies should position Six Sigma in the context of process management and assign process owners. When a problem is amenable to a Six-Sigma solution, the process owner convenes a project team. If deeper change is needed, then a process-redesign team is organized. Process owners ensure that all performance initiatives (Six Sigma, enterprise resource planning, balanced scorecard, customer-relationship management and so on) are integrated to support strategic goals. Fitting Six Sigma into the process-management framework allows organizations to enjoy Six Sigma’s benefits while keeping it away from areas where it doesn’t belong. Process enterprises already are reaping cost savings, accelerated new-product introduction, improvements in customer satisfaction and increases in profitability.

Regardless of industry, all companies are operating on ever faster evolutionary tracks and at ever greater risk. A company’s real core capability & #8212; perhaps its only sustainable one, say authors Fine, Vardan, Pethick and El-Hout & #8212; is its ability to continually redesign its value chain, reshuffling structural, technological, financial and human assets in order to find maximum, albeit temporary, competitive advantage. The ultimate goal of strategic value-chain analysis, say the authors, is building an organizational capability for fast response to rapidly evolving industry dynamics. To execute such an analysis, the authors developed a value-chain-strategy framework during a yearlong strategic assessment at the General Motors Powertrain organization. The framework seeks to answer four key questions: Where is value being created and what activities are not adding to overall enterprise value? What areas of the business should remain in-house versus being outsourced? Where should investments be made and how should they be leveraged? How can the value chain be organized to optimize existing and emerging alliances? To answer those questions, the authors employ not only traditional economic-value-added (EVA) analysis, but also their own strategic value assessment (SVA), which considers factors such as customer preferences, the rate of change of underlying technology, competitive position in the marketplace, depth of the supply base and the integral or modular nature of the asset. The wide applicability of the framework is illustrated in the authors’ discussion of IBM’s decision to outsource its first PC microprocessor to Intel, a consumer-products company’s decision to outsource the manufacture of a branded product, and the Recording Industry Association of America’s decision to quell rather than acquire Napster’s file-sharing capability.

During the 1980s, everybody marveled at Benetton, the Italian casual-wear company with a penchant for provocative advertising. The archetypal network organization, it used subcontractors and independent agents for production processes, distribution and retail. But recognizing that times change, Benetton decided on a new approach & #8212; in advance of external pressures. Without giving up the strongest aspects of its networked model, it is integrating and centralizing, instituting direct control over key processes throughout the supply chain. The company also is diversifying into sportswear, sports equipment and communications. Vertical integration has meant establishing state-of-the-art production poles in Benetton’s foreign locations. The Castrette pole, near its headquarters, decides what each of the foreign poles should produce (on the basis of the skills and experience of the local population), and the foreign poles contract out production tasks. Benetton also has increased its upstream vertical integration to exercise greater control over its supply of textiles and thread. At the retail end, the company is supplementing its network of small, independently owned shops with large, directly controlled megastores. To stay ahead of fashion’s ever-changing whims, Benetton is streamlining its brands and collections, supplementing two basic collections with smaller, flash collections. In its recently acquired sports businesses, Benetton has invested in high-tech systems for designing sports equipment and has brought together designers from around the world for creative cross-fertilization. It has also reorganized its production processes and improved its retail network by establishing Benetton “corners” in the large sports shops of major distribution chains. In the field of communications, Benetton’s Fabrica workshop has produced award-winning films, and its new company, United Web, hopes to take advantage of the possibilities of e-commerce. Benetton knows that innovative businesses must pay attention to how knowledge is divided among producers, suppliers and retailers. Its new directions represent a major discontinuity from its past and divergence from industry practices.