Chapter 5
Processes and Capabilities
Chapter Overview
Capabilities and processes define what a business can do, and specifically how it can add value to inputs such as raw materials, employee skills, etc. The customer, whether it is a consumer or another business, is most interested in capabilities. If it's a product they're purchasing, they wish to purchase it because they don't have the capability to make it themselves, or don't want to make the capital investment required to have that capability. If they seek to purchase a service, the same holds true. They wish to buy the capability rather than develop it themselves. Processes are the fundamental components of capabilities. In many cases, unique capabilities are formed by combining several processes in a way that enables the firm to do something better than anyone else. Sometimes capabilities that are far superior to those of the competition are derived from processes that are secret or patented.
Processes are made possible by precisely defining the tasks accomplished by workers and equipment. Quite often the capabilities created by workers and equipment are limited by the way workers and equipment are arranged in the facility. Some arrangements facilitate flexibility and customization, while other arrangements facilitate standardized, high volume, treatment of products or customers that results in low cost per unit. The arrangement of equipment and workers is frequently referred to as the layout. In addition to implicationsfor flexibility and cost per unit, layout also has implications for the volume of products or customers that can be processed.
Many process considerations create serious limitations for capabilities, and are also long-term commitments because of the cost implications of making changes. In many environments, capabilities that may be desired in the future must be considered early as a part of the strategic planning process. Failure to do so may increase the cost of gaining that capability in the future. In addition to flexibility, cost, and volume considerations, the products produced or the service rendered must meet the customer's expectations. Quality function deployment (QFD) is a structured system for tying process design considerations to customer expectations. Using it do design processes helps ensure that process outputs match customer expectations.
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Chapter Resources |
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Esources |
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| Esource 5.1 | Priceline.com utilizes a demand collection system as a means of letting their customers name their own price, and then Priceline.com seeks a seller that will meet it. Checkout Priceline.com: Our Company for a description of this patented process. |
| Esource 5.2 | Recently, Dominos' "HeatWave Bag” provided a new component to their delivery process and enhanced their delivery capabilities. The “HeatWave Bag” heated a pizza in transport to 170 degrees to ensure that an even hotter pizza is delivered. Throughout Domino's history, it has periodically implemented new apporaches to differentiate itself. Check out the Dominos timeline to see what it is doing now. |
| Esource 5.3 | APTA, an electronics packaging company, provides customized high volume packaging services to customers. They handle customer needs from package prototype to high volume production. The process-oriented APTA layout is a typical example of this approach used to gain flexibility. |
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Reel Operations Video Clips |
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| Reel Operations 5.1 |
McDonalds
Completes Kitchen Makeover to Meet Changing Customer Expectations Chapter 5 points out how changing customer expectations often result in the need to change processes used in the creation of products and services. Reel Operations 5.1 examines McDonald's complete change to a "produce to order" environment as an example of this important concept. |
| Reel Operations 5.2 | Process-Oriented
Manufacturing
at Washburn Guitars A process-oriented design enables a manufacturer or service to be flexible in meeting the needs of individual customers. This approach to manufacturing is frequently used to customize products. Reel Operations 5.2 examines Washburn Guitar's manufacturing operation as an example of process-oriented production. |
| Reel Operations 5.3 | TriState
Turns Effective Process Design into High Quality Products Tristate, a manufacturer of industrial carts and trailers, finds that a customer is dissatisfied and must make process changes to keep the customer. As discussed in Chapter 5, changes in value perceptions require changes in processes. |
| Reel Operations 5.4 | McDonald's:
Re-engineering the Process to Meet Customer Needs Making broad company-wide changes in an organization as large as McDonald's can be a daunting task. Reel Operations 5.4 provides a glimpse of the complexity of that undertaking. |
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Supplementary Readings |
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| Supplementary Reading 5.1 | 1. For text page 4. There can be no doubt that the process and capabilities of firms have been and will continue to be significantly changed by the Internet. There is huge doubt, however, about what these processes and capabilities might evolve into. In some cases, use of the Internet has become an order qualifier. In other environments it has the potential to be an order winner. Management by Web (Business Week, August 28, 2000) provides an extensive overview of anticipated changes. One anticipated impact is that smaller companies will use the Internet to make themselves "bigger" by gaining economies of scales, while big companies will use the Internet to make themselves "smaller" by reducing complexity. |
| Supplementary Reading 5.2 |
For text pages 14 & 15. For service-oriented businesses, processes are not only critical from a "capability" standpoint, but also critical from the standpoint of quality, because customers are so directly involved in many of the processes. For a retailer, even processes that seem far removed from the customer can result in customer satisfaction. In A Kmart Special: Better Service (Business Week, September 4, 2000), the aftermath of Kmart's attempt at a turnaround is discussed. Numerous problems exist, including -Poor inventory management that leads to chronic empty shelves; |
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Links to Operations On Site Companies |
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| Operations On Site 5.1 | Amazon's One-Click Ordering process. |
| Operations On Site 5.2 | Steel Dynamics succeeds in mini-mill profitability. |
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OM Exploration |
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Check it out: Internet Reference Sites |
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| Check it out resources for this chapter include specific resource sites for process improvement. | |
| Workflow and Reengineering International Association (WARIA) | QFD Institute |
| @BRINT: Business Process Reengineering | John Grout's Poka-Yoke Page |
| BPR Online Learning Center | Society of Concurrent Product Development |
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OM in Action |
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| OM in Action 5 .1 | As more businesses identify innovative and even unique approaches to
business management, the issue of "business method" patents has become
highly debated. One can imagine how firms that develop capabilities based on
these innovations want to protect them. On the other hand, some seem
incredibly simplistic to protect. The insert in the text describes how the U.S.
Patent Office has reduced issuing these patents. Clearly, specific methods are the fundamental components of
processes, and processes lead to capabilities. Amazon.com, for example, patented its "1-click" ordering process. Priceline.com patented its
demand collection system. Visit Amazon.com and explore its
"1-click" capability.
a. What resources are required in order for the '1-click"
process to work? |
| OM in Action 5.2 | Many business processes that do not
differentiate a company, including accounting functions, information
technology functions, human resource activities, and logistics, have become
common to outsource. The BPO
Outsourcing Center is a resource center for these activities. a. Is it true that the types of business process outsourcing provided by the BPO outsourcing center are not usually important to the strategic objectives of the company? Why or why not? b. What are the dangers of outsourcing the functions that are far removed from most customers' perceptions of value? |
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Online Business Tours |
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| Online Business Tour 5.1 | Most successful businesses have found a means of
differentiating themselves from competitors. Arizona
Pacific Spas is no exception. Quite often the characteristics that
differentiate one product from another can be traced back to the processes used
to create them. Take the tour of
the Arizona Spa production process. a. What aspects of the Arizona Pacific Spa are claimed to make the product better than those of competitors? b. How does the manufacturing process used by Arizona Pacific Spas result in the finished product being superior to competitor's? |
| Online Business Tour 5.2 | Quite often two companies with
essentially they same resources (equipment, technical expertise, facilities) utilize
those resources to make entirely different products. This often results from knowledge that is central to the products and customers. Two
companies, Arizona
Pacific Spas and Maverick Boats, exemplify this phenomenon. Take the Arizona
Pacific Spa tour and the Maverick
Boats tour. a. How do these companies compare in terms of equipment and process capabilities? b. From the standpoint of worker expertise, how do the companies compare? c. What capabilities would each need to obtain in order to produce the other's product? |
| Online Business Tour 5.3 | Kick scooters have been popular in recent years. Brands like
Xootr, Micro,
Razor, and others compete, but each
has their own claims of superiority. A quick look at each shows that from
the standpoint of basic appearance, folding capability, etc., they're quite
similar. The Xootr is produced by Vera
Cruz Products. Read about Xootr's
advantages over its competitors. Take the Xootr
factory tour. a. What differentiates Vera Cruz Products from competitors? What resources are necessary to gain that differentiation? b. The Xootr has one feature that stands out-- its wheels. From a customer perspective, what value is added by the Xootr wheels? c. Is a different wheel design sufficient to differentiate the Xootr from it competitors? Why or why not? |
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Letters from the Top |
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| Letter from the Top 5.1 | In his 1999
letter to shareholders, (page 3 of the annual report) Johnson & Johnson Chairman and CEO Ralph S.
Larson described innovation, process excellence, the Internet, and execution as four
imperatives or priorities for the next decade. a. How should each of these priorities relate to future J&J processes and capabilities? In the 2000 letter to shareholders (page 3 of the annual report) the theme was "Imperatives for Growth" and Chairman and CEO Larson devotes Part 1 (pages 3-13) to a review of how each imperative has been met. b. Summarize the techniques and resources required to
accomplish each imperative. |
| Letter from the Top 5.2 | In the letter to shareholders (page 4) of the
2000
Bank of America Summary Annual Report, President and CEO Kenneth D.
Lewis distinguishes between growth by merger and aquisition and growth
from within. A major part of his effort to grow Bank of America from
within includes increasing customer-perceived value. a. How does reengineering fit into Lewis's plan? b. What is the link between reengineering and customer value for Bank of America? |
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Putting It All Together: A Virtual Case Study |
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| Putting It all Together 5.1 |
Target, Walmart, Kmart
have gone head-to-head for years in an incredibly heated battle, but each seeks
to mark out its own niche in the discount retailing world. Each has also sought
to match capabilities with strategic goals it has for competing in that
market. Current directions for Walmart are described in Up
Against the Walmart (Business Week, March 13, 2000). a. From an examination of their websites, how do you differentiate between the three retailers? b. How do you rate the differentiating capabilities of each? Are the special capabilities each claims of sufficient value to attract customers from the others? Read
the l999
letter to Target Shareholders, the first two articles in the 1999
Walmart Annual Report, and the 1999
letter to Kmart shareholders. |
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Additional Reading |
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| Additional Reading 5.1 |
P&G Has Something to Smile About, Business Week, August 2001. |