Chapter 3 Performance Excellence, Competitive Advantage, and Strategic Management

Competitive Advantage Competitive advantage: a firm’s ability to achieve market superiority over its competitors. Characteristics: Is driven by customer wants and needs Makes significant contribution to business success Matches organization’s unique resources with opportunities Is durable and lasting Provides basis for further improvement Provides direction and motivation

Product Quality and Business Performance - PIMS Studies Product quality is the most important determinant of business profitability. Businesses offering premium quality products and services usually have large market shares and were early entrants into their markets. Quality is positively and significantly related to a higher return on investment for almost all kinds of products and market situations. A strategy of quality improvement usually leads to increased market share but at a cost in terms of reduced short-run profitability. High-quality producers can usually charge premium prices.

Quality and Profitability Improved quality of design Improved quality of conformance Higher perceived value Higher prices Lower manufacturing and service costs Increased market share Increased revenues Higher profitability

Quality and Business Results Studies General Accounting Office study of Baldrige Award applicants Hendricks and Singhal study of quality award winners Performance results of Baldrige Award winners

GAO Study Model

Sources of Competitive Advantage Cost Leadership Differentiation People

Quality and Differentiation Strategies Superior product and service design Outstanding service High agility Continuous innovation Rapid response

Quality and Product Design Understanding customer needs and expectations Systematic processes for design and product improvement Tools and techniques Concurrent engineering Value analysis Design reviews Experimental design

Quality and Outstanding Service Key components of service quality: employees and information technology Dimensions of service quality Reliability – ability to provide what was promised Assurance – knowledge and courtesy of employees and ability to convey trust Tangibles – physical facilities and appearance of personnel Empathy – degree of caring and individual attention Responsiveness – willingness to help customers and provide prompt service

Quality and Agility Agility – capacity for flexibility and rapid change Continual monitoring and sensing of changing customer needs and expectations Fast design changes Rapid roll out of new products and processes Cross-functional cooperation and coordination Good supplier relations

Quality and Innovation Innovation is vital to competing in today’s world Innovation creates new customer needs and expectations and leads to higher levels of performance Creativity and breakthrough thinking are encouraged

Quality and Time Cycle time – the time it takes to accomplish one cycle of a process Success in today’s markets requires increasingly shorter cycle times Major improvements in response time often require work organizations, processes, and paths to be simplified and shortened. Simplified processes reduce opportunities for errors, leading to improved quality. Improvements in response time often result from increased understanding of internal customer-supplier relationships and teamwork.

Information and Knowledge for Competitive Advantage A supply of consistent, accurate, and timely data across all functional areas of business provides real-time information for the evaluation, control, and improvement of processes, products, and services to meet both business objectives and rapidly changing customer needs.

Need for Performance Measurement To lead the entire organization in a particular direction; that is, to drive strategies and organizational change; to manage the resources needed to travel in this direction by evaluating the effectiveness of action plans; and to operate the processes that make the organization work and continuously improve

Balanced Scorecard Financial perspective Internal perspective Customer perspective Innovation and learning perspective Leading measures Lagging measures

Baldrige Classification of Performance Measures Product and service outcomes Customer-focused outcomes Financial and market outcomes Human resource outcomes Organizational effectiveness outcomes Leadership and social responsibility outcomes

Strategic Planning Strategy – the pattern of decisions that determines and reveals a company’s goals, policies, and plans to meet the needs of its stakeholders Strategic planning – the process by which members of an organization envision its future and develop the necessary procedures and operations to carry out that vision

Goals of Strategic Planning Plan for the long term, and understand the key influences, risks, challenges, and other requirements that might affect the organization’s future opportunities and directions. Project the future competitive environment to help detect and reduce competitive threats, shorten reaction time, and identify opportunities. Develop action plans and deploy resources—particularly human resources—to achieve alignment and consistency, and provide a basis for setting and communicating priorities for ongoing improvement activities. Ensure that deployment will be effective—that a measurement system enables tracking of action plan achievement in all areas.

Strategic Planning Process

Mission Definition of products and services, markets, customer needs, and distinctive competencies Example - Procter & Gamble: “We will provide products of superior quality and value that improve the lives of world consumers.”

Vision Where the organization is headed and what it intends to be Brief and memorable - grab attention Inspiring and challenging - creates excitement Descriptive of an ideal state - provides guidance Appealing to all stakeholders - employees can identify with Example – Solectron: “Be the best and continuously improve”

Values (Guiding Principles) Define attitudes and policies for all employees, which are reinforced through conscious and subconscious behavior at all levels of the organization. Example – Federal express: “We will be helpful, courteous, and professional to each other an the public. We will strive to have a completely satisfied customer at the end of each transaction.”

Environmental Assessment Customer and market requirements, expectations, and opportunities Technological and other innovations Organizational strengths and weaknesses Financial, societal, ethical, regulatory and other potential risks Changes in global or national economy Factors unique to the organization, such as partner and supply chain needs

Strategies and Action Plans Strategies are broad statements that set the direction for the organization to take in realizing its mission and vision. Strategic objectives are what an organization must change or improve to remain or become competitive. Action plans are things that an organization must do to achieve its strategic objectives.

Strategy Implementation Developing detailed action plans, defining resource requirements and performance measures, and aligning work unit, supplier, or partner plans with overall strategic objectives.

Policy Deployment (Hoshin Kanri) Top management vision leading to long-term objectives Deployment through annual objectives and action plans Negotiation for short-term objectives and resources (catchball) Periodic reviews

Hoshin Planning

Linking Human Resource Plans and Business Strategy Changes in strategy often require changes in HR plans Examples Redesign of the work organization to increase empowerment or teamwork Changes in labor/management partnerships Directed training and education Improved processes for knowledge sharing

Illustrative Example

Requirements for Effective Strategic Planning A definable approach for developing company strategy. A clear company strategy with action plans derived from it, and human resource plans related to the action plans. An approach for implementing action plans. An approach for monitoring company performance relative to the strategic plan. Projections of strategy-related changes in key indicators of company performance.

Case Studies Bronson Methodist Hospital Branch-Smith Printing Division Solectron

TQ and Strategic Management Theory Classic strategy formulation addresses the market environment, competitive environment, and company capabilities Other TQ-related factors – financial and societal risk, human resource capabilities, and supplier/partner capabilities – are addressed only indirectly in the literature