The competitive priorities operationalise the organisation’s competitive strategy. The two generic competitive advantages — cost and differentiation — are operationalised in terms of cost, quality, flexibility and speed. By assigning priorities to these dimensions, the organisation operationalises its strategy. The priorities can then be used to generate supply objectives related to quality and innovation, availability and lead-time, supplier service and responsiveness and cost reduction that are consistent with the organisation’s competitive strategy.
Let us now look at organisations that have positioned themselves to compete on cost, quality, flexibility and speed.
1. Competing on cost
Organisations that compete on cost relentlessly pursue the elimination of all waste. In the past, organisations in this category produced standardised products for large markets. They improved yield by stabilising the production process, tightening productivity standards and investing in automation. Today, the entire cost structure is examined for reduction potential, not just direct labour costs. High-volume production and automation may or may not provide the most cost-effective alternative.
Take the example of Southwest Airlines’ strategy of low-cost, no-frills air transportation that forever changed the public’s attitude towards flying. The strategy is supported by carefully designed service, efficient operations and committed personnel. Southwest uses only one type of airplane, the Boeing 737, to facilitate crew changes and to streamline training, record-keeping, maintenance and inventory costs. Turnaround time between flights is 15 minutes. Since its flights are limited to short routes, all flights are direct. That means no baggage transfers and no meals to be served. There are no assigned seats and no printed boarding passes for flights. Boarding priority is
a function of arrival time at any Southwest check-in facility. Southwest saves tens of millions annually in travel agent commissions by requiring customers to contact the airline directly to book flights. The airline carefully selects employees and reinforces its commitment with a model profit-sharing plan. The result is Southwest flies more domestic passengers than any other airline in the US and earns more money than all other US airlines combined. Its on-time performance, baggage handling and customer satisfaction are always among the best in the industry. The discount airline in Malaysia, AirAsia, is making similar choices on competitive strategic positions, and has beaten the odds to find the ‘blue ocean’ in a very competitive industry.
Organisations that compete successfully on cost realise that low cost cannot be sustained as a competitive advantage if increases in productivity are obtained solely by short-term cost reductions. A long-term productivity ‘portfolio’ is required that trades off current expenditures for future reductions in operating cost. The portfolio consists of investments in updated facilities and infrastructure; equipment, programs, and systems to streamline operations; and training and development that enhances the skills and capabilities of people.
2. Competing on quality
Most organisations approach quality in a defensive or reactive mode. Quality is confined to minimising defect rates or conforming to design specifications. To compete on quality, organisations must view it as an opportunity to please the customer, not just a way to avoid problems or reduce rework costs.
To please the customer, one must first understand customer attitudes towards and expectations of quality. The Ritz-Carlton Hotel Company is a Malcolm Baldrige National Quality Award winner and a recognised symbol of quality. A host attempting to impress party guests is often said to be ‘putting on the Ritz’, whereas someone trying to downplay a less-than-glamorous spread may offer the excuse, “It is not the Ritz, but it is the best I could do.” In both cases, the comments are a way of comparing current standards to those exemplified by one of the world’s most respected and benchmarked organisations.
The entire service system in Ritz-Carlton is designed to understand the individual expectations of more than half a million customers worldwide and to ‘move heaven and earth’ to satisfy them. Every employee is empowered to take immediate action to satisfy a guest’s wish or resolve a problem. Processes are uniform and well defined. Teams of workers at all levels set objectives and devise quality action plans. Each hotel has a quality leader who serves as a resource and advocate of the development and implementation of those plans. Daily quality reports submitted from close to a thousand work systems track such measures as guest room preventive maintenance cycles, percentage of check-ins with no waiting and the time spent to achieve industry-best clean room appearance. Guest Incident Action Reports completed by every employee help identify patterns of problems so that they can be resolved permanently. Guest Preference Reports are recorded in a sophisticated customer database for service delivery throughout the organisation. For example, if a guest in Atlanta likes fresh fruits and five different newspapers each morning, that wish is stored in the database and automatically fulfilled whether the guest’s next stay occurs at a Ritz in Naples or Hong Kong. Ritz-Carlton provides exceptional service quality — one customer at a time.
3. Competing on flexibility
We have discussed in the first part of this unit how marketing functions always want more variety to offer to its customers. Production will generally resist this trend because variety upsets the stability (and efficiency) of a production system and increases costs.
The ability of Production to respond to variation has opened up a new level of competition. Flexibility has become a competitive weapon. It includes the ability to produce a wide variety of products, to introduce new products and modify existing ones quickly, as well as to respond to customer needs. Examples of organisations that compete on flexibility include Andersen Windows, Custom Foot Shoe Store and National Bicycle.
Andersen Windows, like most manufacturers, used to produce a limited range of standard products in large volumes. As customers demanded
uniqueness, Andersen introduced more and more options to their standard windows — so many, in fact, that the number of products offered grew from 28,000 to 86,000. Thick catalogues allowed customers to combine thousands of options into truly unique windows. However, pricing became quite complex, and the rate of error in the finished product was high. Then, Andersen introduced an electronic version of its catalogue that can be used to add, change or strip away features until the customer is pleased with the design. Special computer-aided design (CAD) programs are used by architects and builders to incorporate Andersen windows directly into their design. The computer then checks the window specs for structural soundness, generates a price quote and transmits the order to an Andersen factory. At the factory, standard parts from inventory are used to assemble custom products and the bar codes keep track of the customer order as it moves through assembly. In five years, demand for Andersen windows has tripled, the number of different products offered has topped 188,000 and the errors are down to 1 per 200 truckloads.
Shoe stores carry lots of inventory and yet customers are still turned away because a particular size or style of shoe is not in stock. Other styles are sold only with deep discounts. Customer Foot Shoe Store has an alternative business model for selling shoes. Handmade shoes begin with customsculpted models, called ‘lasts’ that can cost hundreds of dollars and take 10 to 20 hours to construct. The entire shoemaking process takes about eight months and is very expensive. At Customer Foot Shoe Store, a customer’s feet are scanned electronically to capture 12 different three-dimensional measurements. The measurements are sent to a factory in Italy, where a library of over 3000 computerised lasts can be modified digitally instead of manually and then milled by a machine out of plastic. Custom shoes are mailed to the customer’s home in weeks, and since the shoe store carries no inventory, the prices are comparable to off-the-shelf shoes.
National Bicycle Industrial Company fits bicycles to exact customer measurements. Bicycle manufacturers typically offer customers a choice
among 20 or 30 different models. National offers over 11 million variations and delivers within two weeks at a cost of only 10% above standard models. Computerised design and computer-controlled machinery allow customised products to be essentially mass-produced. The popular term for this phenomenon is mass customisation, which takes advantage of both flexibility and speed at comparable costs.
4. Competing on speed
More than ever before, speed has become a source of competitive advantage. The internet has conditioned customers to expect immediate response and rapid product shipment. Service organisations such as McDonalds’ and Poslaju have always competed on speed. Citicorp advertises a 15-minute mortgage approval and LL Discount Store ships orders the day they are received. Now, manufacturers are also discovering the advantages of time-based competition, with build-to-order production and efficient supply chains.
In the fashion industry where trends are temporary, Gap’s nine-month time-to-market can no longer compete with the two-month design-to-rack lead-time of H&M, the Swedish retailer, or the two-week lead-time of Zara of Spain. The Gap only introduces less than 50 new fashion lines a year compared to hundreds for H&M and Zara.
Saks Fifth Avenue sends suit measurements via the Internet to France, where a laser cuts the cloth and tailors begin their work. The suit is completed and shipped back to New York within four days. That is about the same amount of time required for alterations in most clothing stores. The standard for custom-made suits is 10 weeks.
Competing on speed requires an organisation characterised by fast moves, fast adaptations and tight linkages. Decision-making is pushed down the organisation as levels of management are collapsed and work is performed in cross-functional teams. Change is embraced and risk-taking encouraged. Close contact is maintained with both suppliers and customers. Performance metrics reflect time, speed and rate, in addition to cost and profit. Strategy is time-paced to create a predictable rhythm for change. Intel’s time-paced strategy involves doubling the capacity of computer chips every 18 months and adding a new fabrication facility every nine months. Dell computer sets the pace for the entire industry.
Forming alliances is one of the most effective avenues for competing on speed. The best example is the textile industry’s quick response (QR) initiative, designed to improve the flow of information, standardise recording systems and reduce turnaround time along the entire supply chain from fibre to textiles to apparel to retailing. Automotive, electronics and equipment manufacturers encourage similar alliances within their respective industries with an initiative called ‘agile manufacturing’. E-marketplaces and companysponsored B2B sites are dramatically speeding up the time required to locate suppliers, negotiate contracts and communicate procurement needs.