18 Economics of Operations Management

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E L S E V I E R Journal of Operations Management 12 (1995) 423-435

JOURNAL OF

OPERATIONS

MANAGEMENT

E con om ics of operat ions man agement: A research perspect ive

R a j i v D . B a n k e r , I n d e r S . K h o s l a *

Department of Operations and Management Science, Curtis L. Carlson School of Management, University of Minnesota,

Minneapolis, MN 55455, USA

Abstrac t

In response to intense competition from overseas in the last two decades, U.S. companies have instituted a variety of

management practices in their quest to impro ve their competitiveness. Am ong the m any practices that have been adopted by

a large n um ber of firms are just-in-time, total quality managem ent, w orker empowerment, and design for m anufacturability.

However, there has been little systematic analysis of the organizational factors that drive the adoption of these practices as

well as their successful im plementation. This pap er posits that the theories and m ethods from economics can provide a useful

aid in such an analysis. U sing the basic tenets of economics, a structural fram ew ork is proposed to highlight critical issues in

operations management that deserve attention. Exam ples from industry are used to illustrate ho w the fram ewo rk m ay provide

answers to questions that have received little attention in the research literature.

1 . I n t r o d u c t i o n

I n t h e 1 9 7 0 s a n d 1 9 8 0 s , ma n y ma n u f a c tu r i n g

o r g a n i z a t i o n s i n th e U .S . f o u n d t h e ms e lv e s f a c in g

i n te n s e p r e s s u re f r o m o v e r s e a s c o m p e t i t o r s w h o c o u l d

s u p p ly p r o d u c t s o f e q u a l o r h ig h e r q u a l i t y a t a l o w e r

c o s t . A s a r e s u l t , ma n y n e w ma n u f a c tu r i n g a n d

m a n a g e m e n t p r a c t i c e s h a v e b e e n i m p l e m e n t e d b y

th e s e U .S . ma n u f a c tu r i n g o r g a n i z a t i o n s i n t h e i r q u e s t

f o r m a j o r i m p r o v e m e n t s i n p r o d u c t i v it y a n d q u a li ty .

E x p e r i m e n t a t i o n w i t h n e w p r a c ti c e s t o m a n a g e o p e r -

a t i o n s i s e v id e n t a l s o i n s e r v i c e o r g a n i z a t i o n s a s t h e ys e e k t o i n c r e a s e t h e i r c u s to me r o r i e n t a t i o n . T h e p r o -

l i f e r a t i o n o f a w id e r a n g e o f n e w p r a c t i c e s p r e s e n t s a

n e w c h a l l e n g e f o r r e s e a r c h i n o p e r a t i o n s ma n a g e -

me n t (O M ) . H i s to r i c a l l y , th e f o c u s o f O M r e s e a r c h

h a s b e e n d e v e l o p i n g r i ch , n o r m a t i v e m o d e l s o f m a n -

* Corresponding author.

u f a c tu r i n g o r s e r v i c e a c t i v i t i e s a n d e mp lo y in g t h e s e

m o d e l s t o p r e s c r i b e i m p r o v e d m e t h o d s a n d a l g o -

r i t h m s t o s o l v e s p e c i f i e d p r o b l e m s . H o w e v e r , w e

h a v e v e r y l i t t l e s y s t e ma t i c e v id e n c e a b o u t w h a t c h a r -

a c t e r i z e s th e o r g a n i z a t i o n s t h a t a d o p t p a r t i c u l a r t y p e s

o f o p e r a t i o n s m a n a g e m e n t p r a c t i c e s a n d w h a t c h a r -

a c t e r i z e s t h e c o n d i t i o n s u n d e r w h ic h p a r t i c u l a r p r a c -

t i c e s a r e mo r e e f f e c t i v e . T h e r e i s a l s o a n e e d f o r

t h e o r i e s t o e x p l a in a n d p r e d i c t t h e a d o p t i o n o f d i f f e r -

e n t O M p r a c t i c e s a n d t h e s u c c e s s o f t h e s e p r a c t i c e s .

T h e o b j e c t i v e o f t h i s p a p e r i s t o a r g u e t h a t t h e

t h e o r i e s a n d m e t h o d s f r o m t h e f i e l d o f e c o n o m i c sc a n p r o v id e a u s e f u l a i d i n a n s w e r in g t h e a b o v e

q u e s t i o n s . I t s h o u ld b e m a d e c l e a r , h o w e v e r , t h a t

e c o n o mic s i s n o t t h e o n ly f i e l d t h a t c a n p r o v id e u s

w i th t h e o r i e s a n d me th o d s t o a n a ly z e t h e s e i s s u e s .

I n d e e d , i t is imp o r t a n t t h a t a s r e s e a r c h in O M e v o lv e s ,

w e a l s o s e e k i n s ig h t s f r o m o th e r d i s c ip l i n e s s u c h a s

p s y c h o l o g y , s o c i o l o g y a n d o r g a n i z a t i o n a l b e h a v i o r

w h i c h c a n b e u s e d s y n e r g i s t ic a l ly w i t h e c o n o m i c

0272-6963/95/$09.50 © 1995 Elsevier Science B.V. All rights reserved

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424 R.D. Banker, LS. Khosla Journal of Operations Management 12 (1995) 423-435

an a l y si s . O u r fo cu s h e r e i s o n t h e p o t en t i a l co n t ri b u -

t i o n s f ro m u s i n g t h e t o o l s an d me t h o d s o f eco -

n o mi cs . I n co n t r a s t , F i n e (1 9 9 2 ) d i s cu s s e s eco n o mi c

i s s u es i n t h e s p ec i f i c co n t ex t o f t e ch n o l o g y ev a l u a -

t i o n . U s i n g t h e b as i c t en e t s o f eco n o mi cs , w e p ro -

p o s e h e re a s t ru c t u r a l f r amew o rk t h a t h ig h l i g h ts s o m eb ro ad c r i t i c a l i s s u es i n o p e ra t i o n s man ag emen t t h a t

d es e rv e a t t en t i o n . W e cau t i o n t h e r ead e r t h a t t h i s

p ap e r i s n o t an a t t emp t a t an ex h au s t i v e c l a s si f i ca ti o n

o f r e s ea r ch q u es t i o n s t h a t can b e ad d re s s ed i n t h e

co n t ex t o f o u r f r am ew o rk . I t i s a ls o n o t a t u t o r i a l o n

eco n o mi c t o o l s an d t h e i r ap p l i ca t i o n t o r e s ea r ch o n

o p e ra t i o n s man ag emen t i s s u es . Ra t h e r , u s i n g ex am-

p l e s f ro m i n d u s t ry , w e i d en t i fy a v a r i e t y o f i s s u es

t h a t a r e i mp o r t an t t o O M p rac t i ce an d can b e ad -

d r e s se d w i t h in a n e c o n o m i c f r a m e w o r k .

M a n y o f t h e n e w O M p r a c t i c e s h a v e s o u g h t t o

d i r ec t t h e a t t en t i o n o f t h e o rg an i za t i o n t o ad d i n g

g rea t e r v a l u e f ro m t h e p e r s p ec t i v e o f t h e cu s t o mer .

V a l u e i s s o u g h t t o b e ad d ed t h ro u g h t h es e p r ac t i ce s

b y r ed u c i n g co s t s , i mp ro v i n g q u a l i t y , r ed u c i n g l ead

t i mes an d i n c r eas i n g f l ex i b i l i t y t o r eac t q u i ck l y t o

ch an g i n g cu s t o mer n eed s . T h es e p r ac t i ce s i n c l u d e

j u s t - i n - t i me p ro d u c t i o n , t o t a l q u a l i t y man ag emen t ,

w o r k e r e m p o w e r m e n t a n d d e s i g n f o r m a n u f a c t u ra b i l-

i ty .

Be fo re w e can b e p r e s c r i p t i v e ab o u t w h a t o rg an i -

za t i o n s s h o u l d ad o p t w h i ch p r ac t i ce s , w e n eed t o

h av e a c l ea r u n d e r s t an d i n g o f w h y f i rms ad o p t t h e s ep rac t i ce s an d w h e t h e r t h e s e p r ac t i ce s c r ea t e th e v a l u e

t h a t t h ey a r e ex p ec t ed t o c r ea t e . Fo r t h i s p u rp o s e , w e

n eed t h eo r i e s t o r i g o ro u s l y co n cep t u a l i ze t h e s e i s s u es

an d p red i c t p r ac t i ca l o u t co mes , a s w e l l a s emp i r i ca l

analyses tha t t es t these concep tual i za t ions .

A l o t h a s b een w r i t t en i n t h e p o p u l a r b u s i n es s

p re s s ab o u t t h e ch an g es t ak i n g p l ace i n t h e o p e ra -

t i o n s man ag emen t p r ac t i ce s o f U . S . o rg an i za t i o n s .

Man y o f t h e s e b o o k s an d a r t i c l e s co n t en d t h a t t h e

ad o p t i o n o f s u ch p r ac t i ce s en ab l e a f i rm t o o b t a i n a

co mp e t i t i v e ad v an t ag e o r t h a t t h ey en ab l e t h em t oo f f s e t t h e ad v an t ag e en j o y ed b y a co mp e t i t o r . Co m-

p e t i t i v e p r e s s u re i s b e l i ev ed t o b e a k ey f ac t o r d r i v -

i n g t h e i mp l emen t a t i o n o f n ew p rac t i ce s . H o w ev e r ,

mu ch o f t h e ex t an t l i t e r a t u r e h as v i ew ed o p e ra t i o n s

m a n a g e m e n t p r o b l e m s f r o m t h e p e r s p e c t i v e o f a

s i n g l e f i rm o p t i mi z i n g u n d e r u n ce r t a i n t y ; i mp l i c i t l y ,

a l l indus t ry - l evel in terac t ions are t rea ted as those

w i t h p as s i v e co mp e t i t o r s an d s u b s u med w i t h i n a

var iab le model ing uncer ta in ty . I t i s es sen t i a l , there-

fo r e , t h a t i n u n d e r s t an d i n g t h e p a t t e rn o f ch o i ces o f

d i f f e r en t p r ac t i ce s b y d i f f e r en t f i rms i n d i f f e r en t

i n d u s t r i e s , w e ex p l i c i t l y emp l o y mo d e l s o f f i rms i n

co m p e t i t i o n w i t h each o t h e r an d ev a l u a t e h o w co m -

p e t i t i v e i n t e r ac t i o n s i n f l u en ce a f i rm ' s o p t i ma l d ec i -s ions .

Sev e ra l mo d e l s o f co mp e t i t i o n ex i s t i n t h e eco -

n o mi cs l i t e r a t u r e t h a t can b e l ev e rag ed t o ad d re s s

t h es e i mp o r t an t p ro b l ems i n o p e ra t i o n s man ag emen t .

T h e s e e c o n o m i c m o d e l s r a n g e f r o m t h at o f a c o m p e t -

i t iv e eq u i li b r i u m i n an eco n o m y w i t h a l a rg e n u m b er

o f f i rms an d co s t l e s s t r an s mi s s i o n o f i n fo rma t i o n

(A r ro w an d H ah n , 1 9 7 0 ; D eb reu , 1 9 5 9 ) t o t h a t o f a

co m p e t i t i v e eq u il i b r iu m i n an o l i g o p o l y w i t h a s m a l l

n u m b er o f f i rms w i t h s i g n i f ican t ma rk e t p o w er (N as h ,

1950; Harsany i , 1967) . And , o f course , these c lass i -

ca l mo d e l s h av e b een ex t en d ed t o ad d re s s a r i ch e r

a r r ay o f eco n o mi c co n ce rn s ( s ee (T i ro l e , 1 9 8 8 ; Fu -

d en b e rg an d T i ro l e , 1 9 9 1 ) fo r a r ev i ew ) . T h e ch a l -

l en g e b e fo re r e s ea r ch e r s i n o p e ra t i o n s man ag emen t

i s t o fu r t h e r en r i ch t h e s t r u c t u r e o f t h e s e mo d e l s t o

fo cu s n o t o n l y o n co s t , b u t a l s o o n q u a l i ty , f l ex i b i li t y

an d l ead t i me t h a t a r e o f co n ce rn f ro m an o p e ra t i o n s

p e r s p ec t i v e . Fu r t h e rmo re , s u ch a d ev e l o p men t o f a

t h eo re t i ca l f r amew o rk t o an a l y ze O M p ro b l ems r e -

q u i r e s t h a t w e v i ew t h es e i s s u es f ro m t h e p e r s p ec t i v e

o f cu s t o mer s w h o d eman d t h e v a r i o u s a t t r i b u t e s i n a

p ro d u c t o r s e rv i ce i n ad d i t i o n t o t h e p e r s p ec t i v e o ft h e p ro d u ce r s w h o s u p p l y i t a s i s co mmo n l y d o n e i n

mos t ex tan t OM analys i s . Th i s i s es sen t i a l to evalu -

a t e t h e fu l l co mp e t i t i v e r ami f i ca t i o n s o f o p e ra t i o n s

s t ra tegy deci s ions .

A s eco n d d i s t i n c t i v e a s p ec t emp h as i zed b y t h e

n ew man u fac t u r i n g p r ac t i ce s s u ch a s t o t a l q u a l i t y

man ag emen t , j u s t - i n - t i me p ro d u c t i o n , an d w o rk e r

e m p o w e r m e n t i s t h e n e e d f o r c o o r d i n a t i o n b e t w e e n

d i f f e r en t i n d i v i d u a l s t h a t co mp r i s e an o rg an i za t i o n .

T h e re i s i n c r eas i n g r eco g n i t i o n o f t h e f ac t t h a t t h e

en v i ro n m en t s i n w h i ch o p e ra t i o n a l ac t iv i t ie s a r e p e r -fo rmed a r e ch a rac t e r i zed b y u n ce r t a i n t y an d t h e p o -

t en t i a l ex i s t s t o i mp ro v e p e r fo rman ce b y l ea rn i n g

ab o u t t h e en v i ro n men t t o h e l p r e s o l v e s o me o f t h e

ex i s t ing uncer ta in ty . Effo r t s to fac i l i t a t e coord inat ion

an d l ea rn i n g a r e co n fo u n d ed b y t h e f ac t t h a t t h e

in format ion avai l ab le to d i f feren t ind iv idual s in d i f -

f e r en t p a r ts o f an o rg an i za t i o n can v a ry , an d fu r t h e r ,

t h e o b j ec t i v e s an d i n cen t i v es fo r each i n d i v id u a l m ay



R.D. Banker, L S. Khosla Journal of Operations Management 12 (1995) 423-435 425

a l s o d i f f e r f r o m t h o s e o f o t h e r s t ak eh o l d e r s i n t h e

o rg an i za t i o n . A s a r e s u l t , i mp l emen t a t i o n o f an y

o p e ra t i o n s s t r a t eg y r eq u i r e s a ca r e fu l co n s i d e ra t i o n

o f t h e i n fo rma t i o n av a i l ab l e an d i n cen t i v es p ro v i d ed

t o d i f f e r en t i n d i v i d u a l s co mp r i s i n g t h e o rg an i za t i o n .

T h u s , t h e s i mu l t an eo u s co n s i d e ra t i o n o f t h e p ro b l emso f s ev e ra l d ec i s i o n mak e r s can co n s i d e rab l y co mp l i -

ca t e t h e an a l y s i s o f mo s t co mmo n o p e ra t i o n s man -

a g e m e n t p r o b l e m s r a n g i n g f r o m n e w p r o d u c t d e v el -

o p m en t t o p ro d u c t i o n p l an n i n g an d co n t ro l d ec is i o n s .

M a n y e c o n o m i c m o d e l s a n a l y z e t h e i n te r p la y b e -

t w een i n fo rma t i o n , i n cen t i v es an d d ec i s i o n -mak i n g .

T h e s e r a n g e f r o m t h e e a r l y w o r k o n t e a m b e h a v i o r

(Mar s ch ak an d Rad n e r , 1 9 7 2 ) t o mo re r ecen t ag en cy

t h eo ry ( J en s en an d Meck l i n g , 1 9 7 6 ) . W h i l e s o me o f

t h e a s s u mp t i o n s o f t h e s e mo d e l s may n o t b e ap p ro -

p r i a t e i n t h e O M co n t ex t , t h e an a l y t i ca l me t h o d s o f

t h es e mo d e l s can b e d ep l o y ed t o co n s t ru c t an d an a -

l y z e n e w m o d e l s t o r e p r e s e n t O M p r o b l e m s . S u c h

new model s wi l l a l so , in tu rn , serve to advance the

f i e l d o f eco n o mi cs ( s ee , f o r ex amp l e , (Mi l g ro m an d

Rober t s , 1990)) .

So f a r , w e h a v e o n l y d i s cu s s ed t h eo re t i ca l mo d e l s

t h a t h av e t h e p o t en t i a l t o b e r e l ev an t t o O M p ro b -

l ems . H o w ev e r , emp i r i ca l an a l y s i s i s eq u a l l y i mp o r -

t an t a s w e s eek t o d ev e l o p a b e t t e r u n d e r s t an d i n g o f

t h e ch o i ce an d e f f i cacy o f O M p rac t ice s , b e fo re w e

p res c r i b e w h a t p r ac t i ce s o rg an i za t i o n s s h o u l d ad o p t

(Sw am i d as s , 1 9 9 1 ). Ca re fu l an d s y s t ema t i c emp i r i ca ld o c u m e n t a t i o n o f a d o p t i o n a n d i m p l e m e n t a t i o n o f

O M p rac t i ce s, a s w e l l a s t h e i r e f f ec t s o n k e y p e r fo r -

man ce d i men s i o n s , i s i mp o r t an t b ecau s e i t p ro v i d es

t h e b as i s f o r d ev e l o p i n g t h eo re t i ca l mo d e l s t o ex -

p l ai n t h e d o c u m e n t e d p h e n o m e n a . E v e n a f t e r w e

h av e a b as e o f a l t e rn a t i v e t h eo r i e s , an d p r ed i c t i o n s

t h a t d e r i v e f ro m t h em, emp i r i ca l r e s ea r ch i s n eces -

sary to t es t these p red ic t ions . To the ex ten t the

emp i r i ca l ev i d en ce c o n t r ad i c ts t h e t h eo re t i ca l p r ed i c -

t i o n s , n ew ch a l l en g es a r e p r e s en t ed fo r an a l y t i ca l

r e s ea r ch t o au g men t o r mo d i fy ex i s t i n g t h eo re t i ca lmo d e l s o r d ev e l o p a l t e rn a t i v e mo d e l s b a s ed o n d i f -

f e r en t a s s u mp t i o n s . W e b e l i ev e t h a t a co h e ren t st r eam

o f r e s ea r ch can d ev e l o p i n t h i s man n e r f ro m an

eco n o mi c (o r p s y ch o l o g i ca l o r s o c i o l o g i ca l ) t h eo ry

b a s i s t o c o m p l e m e n t t h e e x t a n t a l g o r i t h m i c

re s ea rch -b as ed o p e ra t i o n s r e s ea r ch mo d e l s .

Mu ch o f t h e emp i r i ca l r e s ea r ch w i l l n eed t o d r aw

o n ac t u a l o p e ra t i n g d a t a co l l ec t ed f ro m t h e f i e l d .

T h u s , emp i r i ca l r e s ea r ch e r s i n O M w i l l n eed t o

r eco g n i ze ex p l i c i tl y t h a t t h e d a t a t h ey u s e m ay r e s u l t

f r o m s o m e d e l i b e r a t e c h o i c e s b y m a n a g e r s a n d

workers a t the i r research s i t e (s ) . In add i t ion , un l ike

l ab o ra t o ry ex p e r i men t s , o b s e rv ed d a t a a r e o f t en i n -

f l u en ced b y s ev e ra l f ac t o r s n o t cen t r a l t o t h e t h eo ryb e i n g t e s t ed , an d t h e r e fo re w e n eed t o co n t ro l f o r

s u ch f ac t o r s . Fu r t h e rmo re , r e s ea r ch e r s u s i n g p an e l s

o f d a t a o v e r s e v e r a l p e r i o d s o f t i m e a n d / o r a c r o s s

s ev e ra l p l an t s o r o rg an i za t i o n s an d s i mu l t an eo u s l y

co n s i d e r i n g mu l t i p l e d i men s i o n s o f p e r fo rman ce t h a t

i n f l u en ce each o t h e r n eed t o r eco g n i ze t h e p o s s i b il i ty

o f s i mu l t an e i t y an d s e r i a l an d co n t emp o ran eo u s co r -

r e l a t io n s i n co n s t ru c t i n g t h e i r e s t ima t i o n m o d e l s . A s

a r e s u lt , e co n o m et r i c me t h o d s d ev e l o p ed t o t e s t e co -

n o m i c m o d e l s u s i n g f i e l d d a t a a r e l i k e l y t o b e p a r t i c -

u l a r l y u s e fu l t o emp i r i ca l r e s ea r ch e r s i n O M. E co -

n o mi c t h eo r i e s can a l s o i n fo rm an d ad v an ce emp i r i -

ca l an a l y s e s i n O M. Fo r ex am p l e , t h eo r i e s r e l a ti n g t o

p ro d u c t i o n fu n c t i o n s can b e u s ed t o fo rma l i ze t h e

n o t i o n s o f b e s t p r ac t i ce s an d b en ch mark i n g i n w o r l d

c l a s s man u fac t u r i n g an d t h e n o t i o n s o f t e ch n i ca l

e f f i c i en cy can b e u s ed t o fo rma l i ze th e n o t i o n s o f

co n t i n u o u s i mp ro v em en t i n o p e ra t io n s (Co o p e r e t a l. ,

1 9 9 5 ). I n ad d i t i o n , eco n o m et r i c me t h o d s o f f ro n t i e r

e s t i ma t i o n s u ch a s d a t a en v e l o p men t an a l y s i s (D E A )

(Charnes e t a l . , 1981 ; Banker , 1993) can be used to

emp i r i ca l l y i d en t i fy b es t o p e ra t i o n s p r ac t i ce s (S i n h a ,

1995) .The p lan fo r the res t o f th i s paper i s as fo l lows . In

t h e n ex t s ec t i o n , w e co n s i d e r t h e t w o a s p ec t s o f

deci s ions we have d i scussed in th i s sec t ion in g rea ter

deta i l . Sect ion 3 then descr ibes a c lass i f i ca t ion o f

O M d ec i s i o n a r ea s an d w e p ro ceed t o co n s i d e r each

of these deci s ion areas in g rea ter de ta i l . For each

deci s ion area , we descr ibe research i s sues tha t a re

amen ab l e t o t h eo r i e s an d me t h o d s i n eco n o mi cs an d

a re mo t i v a t ed b y an ecd o t a l i n d u s t ry ev i d en ce an d b y

our c lass i f i ca t ion o f d i f feren t deci s ion perspect ives .

F i n a l ly , Se c t i o n 4 co n c l u d es t h e p ap e r .

2 . Class i f icat ion o f dec is ion perspect ives

In t h e p r ev i o u s s ec t i o n , w e a rg u ed t h a t t h e r e a r e

t w o d i s t i n c t i v e a s p ec t s t o an y an a l y s i s o f n ew O M

pract i ces : ( i ) an external perspective, tha t exp l i c i t ly

co n s i d e r s t h e n a t u r e o f co mp e t i t i o n i n an a l y z i n g t h e



426 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435

ad o p t i o n o f t h es e p rac t i ce s ; an d ( i i ) an internal

perspective, t h a t f o cu s es o n t h e i s s u es o f co o rd i n a -

t i o n an d m o t i v a t i o n o f em p l o y ees w i t h i n t h e o rg an i -

za t ion . In th i s sec t ion , we fur ther e laborate on these

t w o p e r s p ec t i v es .

2.1. E xternal perspective

Wh en co n s i d e r i n g t h e n a t u re o f co m p e t i t i o n an d

h o w i t d r i v es d i f f e r en t O M p rac t i ce s , w e can d i v i d e

t h e i s su es t o b e co n s i d e red i n t o t w o b ro ad ca t eg o r i e s :

( i ) t h e i m p ac t o f i n d u s t ry s t ru c t u re o n h o w t h es e

p rac t i ce s a r e ad o p t ed ; an d ( i i ) t h e s co p e o f co m p e t i -

t i v e ad v an t ag e p ro v i d ed b y s u ch p rac t i ce s . We p ro -

ceed t o d i s cu s s each o f t h es e ca t eg o r i e s i n g r ea t e r

detai l .

2.1.1. Impact o f industry structure

T h e m a i n q u es t i o n o f i n t e r e s t h e re i s h o w t h e

i n d u s t ry s t ru c t u re i m p ac t s d i f f e r en t o p e ra t i o n s m an -

ag em en t d ec i s i o n s . B ro ad l y s p eak i n g , w e a r e co n -

ce rn ed w i t h h o w b as i c i n d u s t ry ch a rac t e r i s t i c s a f f ec t

t h e ad o p t i o n an d s u cces s fu l i m p l em en t a t i o n o f t h e

n ew O M p rac t i ce s . So m e o f t h e i n d u s t ry ch a rac t e r i s -

t i c s o f i n t e r e s t i n c l u d e t h e n u m b er o f co m p e t i t o r s

an d t h e i r r e l a ti v e s i ze s, t h e d eg ree o f d i f f e r en t i a t io n

i n t h e p ro d u c t s o f r i v a l f i rm s , t h e i n d u s t ry g ro w t h

ra t e an d t h e p ace o f t ech n o l o g i ca l ch an g e i n t h e

i n d u s t ry . Po r t e r (1 9 7 9 ) i d en t i f i e s f i v e k ey co m p e t i -t i v e fo rces : r iv a l ry am o n g c o m p e t i n g s e l l er s , f i rm s i n

o ther indus t r i es o f fer ing subs t i tu te p roduct s , po ten t ia l

n ew en t r an ts , s u p p l i e r s o f k ey i n p u t s an d b u y e r s .

A s w e d i s cu s s ed i n t h e In t ro d u c t i o n , t h e ad o p t i o n

o f m an y o f t h e i n n o v a t i v e p rac t i ce s in O M i n t h e

U . S . h as b een a t t r i b u t ed t o co m p e t i t i v e p re s s u re s ,

e s p ec i a l l y f ro m o v e r s eas . I n t h e m i d - s ix t i e s , o n l y 7 %

o f t h e U . S . eco n o m y w as ex p o s ed t o i n t e rn a ti o n a l

co m p e t i ti o n ; b y t h e 1 9 8 0 s , t h is f i g u re ex ceed e d 7 0 %

(G w y n n e , 1 9 9 2 ) . T h u s , w h i l e i t i s t r u e t h a t s u ch

co m p e t i t i v e p re s s u re s h av e i n c reas ed s i g n i f i can t l yover the l as t decade, i t i s l ess c lear tha t the bes t

s t r a t eg y fo r a f i rm f aced w i t h i n t en s e co m p e t i t i v e

p r e s s u r e s i s t o " f o l l o w t h e l e a d e r " . F o r e x a m p l e ,

w h i l e j u s t - i n - t i m e p rac t i ce s h av e b een v i ew ed a s a

c r i ti ca l e l em en t o f s u cces s fo r J ap an es e f i rm s , In m an

an d M eh ra (1 9 9 0 ) fo u n d t h a t m an y s m a l l f i rm s

s i m p l y can n o t a f fo rd t o co n v e r t t o t h es e p rac t i ce s ,

g i v en t h e h i g h co s t s o f t r a in i n g , p r ev en t a t i v e m a i n t e -

n an ce an d o t h e r ac t i v i t i e s r eq u i r ed t o i m p l em en t

t h em .

2.1.2. Scope of competitive advantage

T h e p r i m ary q u es t i o n o f i n t e r e s t h e re i s t o w h a t

ex t en t d o d i f f e r en t O M d ec i s i o n s p ro v i d e a co m p e t i -t i v e ad v an t ag e t o a f i rm . T h i s co m p e t i t i v e ad v an t ag e

m ay m an i f e s t i t s e lf as a p r i ce ad v an t ag e o r an ad v an -

t ag e a l o n g s o m e o t h e r d i m en s i o n o f v a l u e t o t h e

cu s t o m e r s u ch a s d e l i v e ry t i m e , f l ex i b i li t y t o ch an g -

i n g cu s t o m e r n eed s o r p ro d u c t q u a l i ty . A l s o a t i s s u e

h e re i s w h e t h e r t h e ad v an t ag e i s s u st a in ab l e: D o an y

o f t h e s e n e w m a n a g e m e n t p r a c t i c e s p r o v i d e a c o m -

pet i t ive advantage that i s sus ta inab le over t ime, and

i f so , in what way? Or , do these pract i ces resu l t in

quick adopt ion by a l l f i rms in the indus t ry? In the

la t t er event , a re a l l f i rms bet t er o f f than before the

i n t ro d u c t io n o f t h es e p rac t ice s , o r d o t h e b en e f i t s g e t

p as s ed o n t o t h e cu s t o m er s ?

2.2. Internal perspective

T h e i n t e rn a l p e r s p ec t i v e co n s i d e r s t h e i n t e rn a l

ac t i v it i e s o f a f i rm an d v i ew s i t a s an o rg an i za t i o n o f

ag en t s w i t h u n ce r t a i n an d d i s p e r s ed i n fo rm a t i o n an d

p o s s i b l y d i f f e r en t o b j ec ti v es . B ro ad l y s p eak i n g , t h e re

a re t w o k ey , i n t e r - r e l a ted i s s u es t o b e co n s i d e red : ( i )

t h e i s s u e o f co o rd i n a t i o n o f d ec i s i o n s w i t h i n t h e

o rg an i za t i o n s o a s t o m ak e t h e b es t u s e o f av a i l ab l ei n fo rm a t i o n ; an d ( i i ) t h e i s s u e o f m o t i v a t i o n an d

p ro v i s i o n o f i n cen t i v es s o t h a t i n d i v id u a l an d o rg an i -

za t i o n a l o b j ec t i v es a r e co r r ec t l y a l i g n ed . T h e f i r s t

i s s u e can b e v i ew ed a s an i s s u e o f o rg an i za t i o n a l

d es i g n , w h i l e t h e s eco n d can b e v i ew ed a s an i s s u e

o f h u m an r e s o u rce m an ag em en t . We d i s cu s s t h es e i n

fur ther deta i l.

2.2.1. Impact o f organizational design

We a re co n ce rn ed h e re w i t h t h e q u es t i o n o f h o w

o rg an i za t i o n a l d es i g n i n f l u en ces t h e ad o p t i o n an ds u cces s fu l i m p l em en t a t i o n o f i n n o v a t i v e O M p rac -

t i ces . Among the i s sues that ar i se are the deci s ions

t h a t n eed t o b e co o rd i n a t ed an d t h e o rg an i za t i o n a l

m ech an i s m s t h a t can b e u s ed t o ach i ev e t h i s co o rd i -

n a t i on . E co n o m i c f r am e w o rk s l i k e ag en cy t h eo ry an d

t r an s ac t i o n s co s t an a l y s i s ( J en s en an d M eck l i n g ,

1 9 7 6 ) can b e u s e fu l l y ap p l i ed t o an a l y ze m an y o f

these i s sues .



R.D. Banker, I .S. K hosla Jou rnal of Operations Management 12 (1995) 423-435 427

T h e p o p u l a r b u s i n es s p r e s s s u g g es t s t h a t mo s t o f

t h e n ew O M p rac t i ce s r eq u i r e s i g n i f i can t ch an g es i n

the o rgan iza t ional des ign to fac i l i t a t e the i r success fu l

i mp l emen t a t i o n . Fo r ex amp l e , Sch o n b e rg e r ( 1 9 8 6 )

a rg u es t h a t i mp l emen t i n g w o r l d c l a s s man u fac t u r i n g

p rac t i ce s r eq u i r e s " o rg an i z i n g fo r q u i ck p ro d u c t f l o wan d t i g h t p ro ces s - t o -p ro ces s an d p e r s o n - t o -p e r s o n

l i n k a g e s " . H o w e v e r , t h e e c o n o m i c i m p l i c a t i o n s o f

s u ch t i g h t l i n k ag es h av e n o t b een t h eo re t i ca l ly a r t icu -

lated.

T h e a d o p t i o n o f " m a s s c u s t o m i z a t i o n " , t h e a b i l -

i t y t o p ro v i d e i n d i v i d u a l l y cu s t o mi zed p ro d u c t s a t

t h e s ame co s t a s s t an d a rd i zed , mas s -p ro d u ced p ro d -

u c t s , i s an o t h e r ex amp l e o f h o w o rg an i za t i o n a l d e -

s ign p lays a cr i t i ca l ro le in the success fu l implemen-

t a t i o n o f an i n n o v a t i v e O M p rac t i ce . P i n e e t a l .

( 1 9 9 3 ) d es c r i b e h o w mas s cu s t o mi za t i o n r eq u i r e s a

" d y n a m i c n e t w o r k o f r e l a ti v e ly a u t o n o m o u s o p e r a t-

i n g u n i t s " i n t h e man u fac t u r i n g p l an t ' s o rg an i za -

t i o n a l s t r u c t u r e , w h e re each u n i t o r mo d u l e i n v o l v es

a s p ec i f i c p ro ces s o r t a s k , an d d i f f e r en t mo d u l e s

i n t e rac t i n d i f f e r en t w ay s fo r ea ch cu s t o m i zed p ro d -

uct .

2 .2 .2 . H u m a n r e s o u r c e m a n a g e m e n t

W e a re co n ce rn ed h e re w i t h t h e i s s u es o f s e l ec -

t i o n an d mo t i v a t i o n o f emp l o y ees t h a t an o rg an i za -

t i o n mu s t c o n s i d e r i n o rd e r t o s eek g r ea t e r i n i ti a ti v e

an d p ro d u c t i v i t y f ro m t h e em p l o y ee s in t h e i r t as k s . Ac o m m o n t h e m e i n m a n y o f th e n e w O M p r a c ti c e s i s

t o u s e g r o u p s o r t e a m s a n d e n c o u r a g e " w o r k e r

e m p o w e r m e n t " w h e r e w o r k e r s a r e n o t o n l y g i v e n

o w n er s h i p o f t h e i r t a s k s b u t a r e a l s o h e l d acco u n t -

ab l e fo r t h e i r s u cces s fu l co mp l e t i o n (Sch l e s i n g e r an d

H es k e t t , 1 9 9 1 ) . T h i s emp h as i s o n p a r t i c i p a t o ry man -

ag emen t h as b een mo t i v a t ed t o a g r ea t d eg ree b y t h e

s u cces s o f J ap an es e f i rms i n ap p l y i n g t h i s ap p ro ach

to a l l l evel s o f the i r o rgan iza t ion .

What are the fac to rs tha t l ead to the success fu l

i mp l em en t a t i o n o f th e s e p r ac t i ce s ? W h y i s th e s y s -t em n o t u n d e rm i n ed b y i n d i v i d u a l s seek i n g t o fu r t h e r

t h e i r o w n o b j ec t i v e s ? Mi l g ro m an d Ro b e r t s ( 1 9 9 2 )

a rg u e t h a t i n t h e ca s e o f J ap an es e f i rms , f ac t o r s s u ch

as l i f e t ime em p l o y m en t , f r eq u en t j o b ro t a t io n , l i m-

i t ed o u t s i d e o p p o r t u n i t i e s , n a r ro w p ay d i f f e r en t i a l s

an d r e l a t i v e l y h o mo g en eo u s b ack g ro u n d s a l l co n -

t r i b u t e t o s u cces s fu l p a r t i c i p a t o ry man ag emen t . I s i t

n eces s a ry t h e r e fo re fo r U . S . f i rms t o ad o p t s i mi l a r

p r ac t i ce s w i t h i n t h e i r o rg an i za ti o n ? O r can s u ch em-

p l o y ee i n v o l v e men t b e s u s t a i n ed i n a mo re t r ad i -

t ional U.S. o rgan iza t ional se t t ing?

3 . M a jo r dec i s i o n a rea s i n o pera t i o ns

So f a r , o u r d i s cu s s i o n h as fo cu s ed p r i mar i l y o n

the d i f feren t i s sues tha t mus t be cons idered in ana-

l y z i n g an y O M p rac t i ce . H o w ev e r , t h e r e a r e a n u m-

b e r o f d i s t i n c t d ec i s i o n a r ea s w i t h i n O M, an d man y

o f t h e n ew p rac t i ce s t h a t h av e b een o b s e rv ed i n

i n d u s t ry h av e fo c u s ed o n a n a r ro w r an g e o f ac t i v it ie s

wi th in opera t ions . Therefore , i t i s impor tan t fo r us to

d ev e l o p a c l a s s if i ca t io n o f m a j o r d ec i s i o n a r ea s w i t h in

o p e ra t i o n s th a t can p ro v i d e a f r ame w o rk w i th i n w h i ch

t o v i ew t h e i m p ac t o f t h e s e n ew p rac t ice s .

Man y c l a s s i f i ca t i o n s o f O M d ec i s i o n s can b e

fo u n d i n i n tro d u c t o ry t ex t s o n O M . W e co n s i d e red

such c lass i f i ca t ions f rom f ive t ex t s : (Chase and

A q u i l an o , 1 9 9 5 ; D i lw o r t h , 1 9 9 2 ; H e i ze r an d Ren d e r ,

1993; Schroeder , 1993 ; Stevenson , 1986) . Cons i s t en t

w i t h t h e s e t ex t b o o k s , w e c l a s s i fy t h e k ey d ec i s i o n

a reas w i t h i n O M i n t o t h e fo l l o w i n g fo u r b ro ad ca t e -

gor ies :

( i ) p roduct des ign ;

( i i ) p roc ess se lec t ion ;

( i ii ) p ro d u c t i o n p l an n i n g an d co n t ro l ;

( i v ) q u a l i ty man ag em en t .W h i l e o u r c l a s s i fi ca t io n s eem i n g l y emp h as i ze s t h e

k e y t a c t i c a l d ec i s i o n s w i t h i n o p e ra t i o n s , s t r a t e g i c

deci s ions are a l so re la ted to th i s ca tegor iza t ion . S ince

o p e ra t i o n s s t r a teg y i s a s t a t emen t o f w h a t t h e p ro d u c -

t i o n s y s t em m u s t acco m p l i s h (Sk i n n e r , 1 9 7 8 ) , i t w i l l

emp h as i ze t h e k ey cap ab i li t ie s t h a t n eed t o b e d ev e l -

oped by the o rgan iza t ion and these capab i l i t i es wi l l

n eces s a r i l y a f f ec t a ll f o u r o f o u r d ec i s i o n a r ea s.

In t h e r ema i n d e r o f t h i s s ec t i o n , w e p ro ceed t o

e l ab o ra t e o n each o f t h e fo u r d ec i s i o n a r ea s an d

d i s cu ss s o m e m a j o r r e s ea r ch i ss u es t h a t ar e amen a b l et o t h eo r i e s an d me t h o d o l o g i e s i n eco n o mi cs .

3 .1 . N e w p r o d u c t d e s i g n

D ec i s i o n s i n v o l v i n g n ew p ro d u c t d e s i g n an d d e -

v e l o p m en t , w h i l e n o t co m p l e t e l y i n th e d o ma i n o f

t h e o p e ra t i o n s fu n c t i o n , i n f lu en ce an d a r e i n f l u en ced

b y o p e ra t i o n s d ec i s i o n s co n ce rn i n g p ro ces s t ech n o l -



428 R.D. Banker, LS. Khosla Journal of Operations Management 12 (1995) 423-435

ogy , raw mater ia ls acquis i t ion , and product ion con-

t ro l . His to r ica l ly , in many f i rms in the U.S. , the

in t e r ac t io n b e tween p r o d u c t d es ig n an d m an u f ac tu r -

in g h as b een m in im a l . P r o d u c t d es ig n an d m an u f ac -

tu r ing have been v iewe d as sequent ia l ac t iv i t ies , wi th

the resu l t tha t the design process has tended toignore po ten t ia l manu factur ing prob lems tha t a r ise as

a resu l t o f the design decis ions . As a resu l t , changes

are o f ten requ ired af ter manufactur ing rece ives the

design , thus increasing the t ime to market . In add i-

t i o n, su b o p t im a l d ec i s io n s t en d to b e m a d e a s m an u -

f ac tu r in g an d d es ig n a t t em p t to m ak e e i th e r d es ig n

ch an g es o r p r o cess in g ch an g es o n a p a t ch wo r k b as i s

to so lve the p rob lems. Both cost and qual i ty tend to

suf fer as a resu l t (Dean and Susman, 1989) .

As th e b as i s f o r co m p e t i t i o n in m an y in d u s t r i e s

h as ev o lv ed to em p h as i ze t im e- b ased co m p e t i t i o n

an d h ig h p r o d u c t q u a l i t y , f i r m s h av e f o cu sed o n

m an a g em en t p r ac ti ce s su ch a s " d e s ig n f o r m an u f ac -

tu rab i l i ty" (e .g . (Dean and Susman, 1989)) to reduce

d ev e lo p m en t l ead t im es an d ach iev e h ig h p r o d u c t

q u a l i ty i n t h e m an u f ac tu r in g p r o cess . As W h ee l -

wr igh t and Clark (1992) po in t ou t , a f i rm tha t devel -

ops h igh-qual i ty p roducts rap id ly increases i t s com-

pet i t ive op t ions . I t can in t roduce a p roduct in to the

market fas ter than i t s compet i to rs o r i t can delay i t s

n ew p r o d u c t d ev e lo p m en t p r o cess t o acq u i r e b e t t e r

m ar k e t an d t ech n o lo g y in f o r m a t io n an d in t r o d u ce a

new product a t the same t ime as i t s compet i to rs , bu tbr ing to market a p roduct tha t i s much bet ter su i ted

to cu s to m er n eed s . Ac t iv i t i e s t h a t h av e b eco m e a

wel l -accep ted par t o f such prac t ices inc lude reducing

th e p a r t co u n t an d u s in g m o d u la r d es ig n s to s im p l i f y

th e m an u f ac tu r in g p r o cess an d u s in g co m p u te r - a id ed

d es ig n /co m p u te r - a id ed en g in ee r in g t ech n o lo g ie s

to reduce lead t imes (Schonberger , 1986) . In add i-

t ion , c ross- funct ional market ing-design-manufactur -

in g t eam s a r e f o r m ed to en su r e th a t d e s ig n d ec i s io n s

a r e ad d r e ss in g cu s to m er n eed s an d a t t h e sam e t im e

are congruen t wi th manufactur ing capabi l i t ies . Th ist eam ap p r o ach h as b een r e f e r r ed to a s " co n cu r r en t

d e s i g n " o r " s i m u l t a n e o u s e n g i n e e r i n g " ( W h i t ne y ,

1988) . Chrysler , fo r example , has used cross- func-

t io n a l " p l a t f o r m " t e am s , e a c h t ea m f o c u s i n g o n

develop ing one l ine o f cars o r t rucks . These p la t fo rm

team s h av e b een v e r y su ccess f u l , r ed u c in g th e t im e

to market f rom 60 months in the 1980s to 31 months

f o r t h e Neo n , l au n ch ed in Jan u a r y 1 9 9 4 ( W o m ack

and Jones , 1994) . The emphasis on design for manu-

fac turab i l i ty has reduced the t im e to pa in t , weld and

assemble a p roduct f rom 35 to 22 hours .

Impac t of industry structure. W h at a r e t h e k ey

indust ry- re la ted fac tors d r iv ing a f i rm to adopt these

n ew R & D p r ac t i ce s? W h a t i n d u s t r y co n d i t io n s a f -fec t the ef fec t iveness o f these p rac t ices? Econom ic

me thods can help to ga in ins igh ts in to such quest ions

both f rom a theore t ica l perspect ive , by develop ing

f o r m a l m o d e l s o f co m p e t i t io n , a s we l l a s b y em p i r i-

ca l analysis o f observed f i rm behavior in d i f feren t

indust r ies .

An o th e r q u es t io n th a t a r i se s i s h o w f i r m s sh o u ld

a l lo ca t e t h e i r r e so u r ces b e tween R & D an d cap i t a l

investment . What are the indust ry fac tors tha t a f fec t

su ch a l lo ca t io n d ec i s io n s? I n m an y Jap an ese m an u -

f ac tu r in g co m p an ie s , f o r ex am p le , R & D in v es tm en t

i s m u ch g r ea t e r t h an cap i t a l i n v es tm en t ( Ko d am a ,

1992).

Scope of competitive advantage. H o w c a n R & D

act iv i t ies p rov ide a susta inab le compet i t ive advan-

tage fo r a f i rm? As ind ica ted above, the popular

b u s in ess p r e ss i s r ep le te w i th r eco m m en d a t io n s to

pursue approaches such as design for manufactura-

b i l i ty and s imul taneou s eng ineer ing tha t speed up the

p r o d u c t d ev e lo p m en t p r o cess an d m ak e i t m o r e e f -

fec t ive in ach iev ing cost and qual i ty goals . What i s

less c lear i s whether these approaches are ac tual ly

ab le to p rov ide any long- term susta inab le benef i t s toa f i rm. Sta lk and Webber (1993) , fo r example , de-

sc r ib e a " d a r k s id e to t im e- b ased co m p e t i t i o n " in

Japan in the ear ly 1990s, w here f i rm s began to invest

an in c r eas in g am o u n t o f r e so u r ces to b r in g o u t m o r e

an d m o r e v a r i e t ie s o f p r o d u c t s w i th o u t ach iev in g an y

compet i t ive advantage , h igher marg ins o r p rof i t s .

Th ey p o in t o u t t h a t m an y f i r m s in Jap an h av e n o w

begun to cu t back on the var ie ty o f the i r p roducts .

Jap an ese au to m ak e r s , f o r ex am p le , h av e an n o u n ced

that they wi l l be s t re tch ing the i r new product cycle

f r o m f o u r t o f iv e y ea r s an d a r e r ed u c in g th e n u m b ero f m o d e l s t h ey o f f e r t o cu s to m er s ( S ta lk an d W eb -

ber , 1993) . Toyota has announced tha t i t wi l l reduce

th e n u m b er o f C o r o l l a m o d e l s f r o m 1 1 to 6 . N i ssan

h as an n o u n ced th a t i t w i l l r ed u ce th e n u m b er o f

engines i t o f fers by 40% over the nex t f ive years .

Another quest ion of in teres t i s whether f i rms face

a t r ad e - o f f wh en th ey seek b o th h ig h e r d es ig n q u a l i t y

and qu ick product designs . In some indust r ies ,



R.D. Banker, LS. K hosla Jou rna l o f Operations Management 12 (1995) 423-4 35 429

ch an g es in t ech n o lo g y h av e l ed to a c l ea r em p h as i s

o n o n e d im en s io n o v e r t h e o th e r. Fo r ex am p le , Gr o ss

and Coy (1995) po in t ou t tha t design eng ineers o f

cu s to m lo g ic ch ip s to d ay h av e b eg u n to em p h as i ze

quick designs over ef f ic ien t designs s ince ch ips have

b eco m e so sm a l l t h a t co m p ac tn ess o f d es ig n o n as i l icon wafer i s no longer a cr i t ica l success fac tor ,

b u t sp eed to m ar k e t h as b eco m e a k ey co m p e t i t i v e

weapon . How do d i f feren t indust r ies address th is

t r ad e - o f f ? Fu r th e r m o r e , wh a t m an ag em en t p r ac t i ce s

a r e a s so c ia ted wi th m in im iz in g su ch t r ad e - o ff s?

Impact o f organizat ional des ign. On e o f t h e k ey

quest ions tha t a r ises in the area o f p roduct design

f rom an organ iza t ional design perspect ive i s how

in ter - funct ional design teams wi th design , market ing

an d m an u f ac tu r in g s t a f f sh o u ld b e s t r u c tu r ed an d

rewarded . Whi le the popular p ress has been near ly

u n an im o u s in p r o m o t in g th e u se o f su ch in t e r - f u n c -

t ional teams, the po ten t ia l o rgan iza t ional p rob lems

have rece ived much less a t ten t ion . Chrysler , fo r ex-

am p le , h a s d i sco v e r ed th a t m an y m em b er s o f i t s

p l a t f o r m t eam s h av e b eco m e an x io u s ab o u t t h e i r

career pa th in the o rgan iza t ion , g iven tha t these

t e am s h a v e v e r y f e w l a y e r s o f m a n a g e m e n t ( W o m a c k

and Jones , 1994) . They are a lso worr ied about the

d i lu t ion of the i r sk i l l s due to a lack of communica-

t ion wi th funct ional co l leagues e lsew here in the f i rm.

W h a t i s r eq u i r ed i s a f o r m a l s tu d y o f t h e k ey o r g an i -

za t io n a l ch an g es th a t sh o u ld acco m p an y th e su ccess -f u l d ep lo y m en t o f su ch in t e rf u n c t io n a l team s .

H um an re sourc e m anage m e n t . W h at sh o u ld b e

the incen t ive s t ruc ture fo r in ter - funct ional design

team s? Ho w can th ese in cen t iv es b e s t r u c tu r ed to

ensure tha t the p roduct design ach ieves the desi red

goals o f cost , qual i ty , lead t ime and meet ing cus-

to m er n eed s . Ho w sh o u ld m em b er s o f t eam s r e sp on -

sib le fo r these ac t iv i t ies be se lec ted? These are some

quest ions tha t need to be analyzed using the theor ies

an d m e th o d s o f eco n o m ics .

3.2 . Process se lec t ion

Process se lec t ion decis ions are concerned wi th

determin ing the speci f ics o f the t ransformat ion sys-

tem to be used by the f i rm to conver t i t s inpu ts in to

outpu ts . Broad ly speak ing , there are th ree in ter - re-

la ted decis ions tha t a re a par t o f p rocess se lec t ion .

( i ) Determin ing the o rgan iza t ion of mater ia l f low.

Hay es an d W h ee lwr ig h t ( 19 8 4 ) id en t i f y f o u r

major p rocess f low s t ruc tures: job shop , ba tch

f lo w, a s sem b ly l i n e an d co n t in u o u s f lo w.

( i i) Dete rmin ing the appropr ia te p rocess techno logy

m ix .( i i i ) Determin ing the locat ion , design and layout o f

product ion fac i l it ies .

Th e r e a r e m an y n ew OM p r ac t i ce s t h a t ad d r e ss

issues re la ted to p rocess se lec t ion . Computer - in -

t eg r a ted m an u f ac tu r in g ( C I M) an d f l ex ib l e m an u f ac -

tu r in g sy s t em s ( FMS) h av e b eco m e s ig n i f i can t a s -

pects in the technolo gy determina t ion process . The

ad v en t o f su ch " so f t au to m a t io n ' " o f f e rs t h e p o ten -

t ia l o f p roducing large var ie t ies o f p roducts in smal l

lo t - s izes a t costs comparab le to the t rad i t ional h igh-

vo lume ded ica ted product ion l ines .

Impact o f indus try s t ruc ture . W h at a r e t h e k ey

indust ry fac tors af fec t ing decis ions regard ing process

se lec t ion? In par t icu lar , what i s the impact o f the

indust ry s t ruc ture on decis ions about investment in

new technolog ies? Fo r ins tance , RiSller and To mb ak

(1993) s tudy the impact o f indust ry s t ruc ture on

in v es tm en t i n FMS. Th ey d ev e lo p a two s t ag e

o l igopoly model o f technology adopt ion tha t p red ic ts

marke t s ize and product d i f feren t ia t ion as the key

factors d r iv ing a f i rm to invest in FMS. They a lso

presen t em pir ica l suppor t fo r the i r p red ic tions .

Scope of compet i t ive advantage . To wh a t d eg r eei s i n v es tm en t in n ew t ech n o lo g ie s a k ey d e t e r m in an t

o f co m p e t i ti v e ad v an tag e? An ecd o ta l ev id en ce in d i -

ca tes tha t many f i rms are ab le to ach ieve indust ry

leadersh ip by invest ing in appropr ia te technolog ies

ra ther than by invest ing in the la tes t technolog ies

(Grant et al . , 1991). For example, in the early eight-

ies , the most e f f ic ien t au tomobi le eng ine p lan t in the

wo r ld was To y o ta ' s No . 9 Kam ig o en g in e p l an t i n

Japan (McElroy , 1984) , a p lan t equ ipped wi th

twen ty - y ea r - o ld m ach in es wh ich h ad b een m e t i cu -

lously re t ro f i tted and main ta ine d to ach ieve the h igh-est levels o f e f f ic ienc y in the indust ry . In fac t , Ha yes

and Wheelwr igh t (1984) po in t ou t tha t in 1980 , the

m a jo r i ty o f Jap an ese eq u ip m en t sp en d in g was o n

upgrad ing the capabi l i t ies o f ex is t ing equ ipment ,

whi le in the U.S. , manufacturers spen t an average of

75% of the i r cap i ta l investment on add i t ional capac-

i ty an d r ep lacem en t o f o ld m ach in es . R ig o r o u s em -

pir ica l analysis i s necessary to unders tand the key



430 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435

i n d u s t ry f ac to r s t h a t d r iv e t h e u s e o f n ew t ech n o l o g y

t o g a i n co mp e t i t i v e ad v an t ag e . A t t h e s ame t i me

d y n a m i c m o d e l s o f c o m p e t i t i o n c a n h e l p u s t o p r e -

d i c t f i rm b eh av i o r i n mak i n g n ew t ech n o l o g y d ec i -

s i o n s an d s eek i n g co mp e t i t i v e ad v an t ag e .

H o w s h o u l d n ew t ech n o l o g i e s b e j u s ti f i ed ? A f i rmn eed s t o d e t e rmi n e t h e eco n o m i c v a l u e o f i n v es t i n g

i n n ew t ech n o l o g y t o d ec i d e w h e t h e r t h e i n v es t men t

i s wor thwhi le (Kaplan , 1986; Fine , 1993) . Es t imat -

i n g t h is e co n o m i c v a l u e r eq u i r e s ad d re s s i n g n o t o n l y

t h e o b v i o u s man u fac t u r i n g co s t i s s u e , b u t a l s o t h e

s t r a t eg i c i mp ac t o f t h e n ew t ech n o l o g i e s . Fo r ex am-

p l e , H aas (1 9 8 7 ) d e s c r i b e s a co mp u t e r co mp o n en t s

man u fac t u r e r w h i ch i n v es t ed $ 2 0 mi l l i o n i n a f l ex i -

b l e a s s emb l y s y s t em. T h e co mp an y fo u n d t h a t t h e

n ew s y s t em r ed u ced man u fac t u r i n g co s t s t o s u ch an

ex ten t tha t i t pa id fo r i t se l f in a year . S t ra teg ica l ly ,

h o w ev e r , t h e i n v es t men t w as ev en mo re a t t r ac t i v e ,

s i n ce p ro d u c t i o n t i mes w e re cu t b y 8 0 % an d p ro d u c t

q u a l i ty w as i n c r ea s ed t en - fo ld , mo v i n g t h e f i rm f ro m

b e i n g an u n d i s t i n g u i s h ed t o an o u t s t an d i n g man u fac -

t u r e r in i t s i n d u st ry . Fo rma l e co n o mi c m o d e l s w i l l b e

u s e fu l i n d ev e l o p i n g n ew me t h o d s fo r t h e j u s t i f i c a -

t i o n o f n ew t ech n o l o g y t h a t c ap t u r e b o t h co s t an d

s t r a teg i c i s su es (L e d e re r an d S i n g h a l , 1 9 8 8 ). E m p i r i -

ca l s tud ies tha t cons id er d i f feren t jus t i f i ca t ion ap-

proaches in d i f feren t indus t r i es , and the degree to

w h i ch s u ch ap p ro ach es p ro v i d e a co mp e t i t i v e ad v an -

t ag e w i l l a l s o h e l p t o en r i ch o u r u n d e r s t an d i n g o nthis issue.

Imp act o f organizational design. W h at a r e t h e k ey

o rg an i za t i o n a l f ac t o r s a f f ec t i n g t h e ad o p t i o n o f n ew

t ech n o l o g i e s ? A n ecd o t a l ev i d en ce s u g g es t s t h a t ev en

l ead i n g f i n n s can i g n o re emerg i n g t ech n o l o g i e s , o f -

t en w i t h d i s a s t ro u s r e s u lt s . Fo r ex am p l e , i n t h e co m-

p u t e r i n d u s try , IBM mi s i n t e rp r e t ed th e i mp o r t an ce o f

t h e mi c ro co mp u t e r , an d d e l ay ed i t s en t ry i n t o w h a t

b ecame a l u c r a t i v e mark e t . F ro m an o p e ra t i o n s p e r -

s p ec t i v e , i t i s i mp o r t an t t o u n d e r s t an d w h a t a s p ec t s

o f o rg an i za t i o n a l d e s i g n a r e k ey e l emen t s i n mak i n ga f i rm r e s p o n d q u i ck l y t o ch an g i n g p ro d u c t an d

p ro ces s t e ch n o l o g i e s .

Human resource management. H o w c a n m a n -

ag e r s b e mo t i v a t ed t o co n s i d e r l o n g - t e rm b en e f i t s

f ro m n ew t ech n o l o g i e s v e r s u s s h o r t - t e rm a s s o c i a t ed

co s t s an d r i s k s ? In man y ca s e s , i t i s e a s y fo r man -

ag e r s t o b eco me co mp l acen t an d i g n o re t e ch n o l o g i -

ca l changes , especia l ly i f the f i rm i s a l eader in i t s

i n d u s t ry . A s Bo w er an d Ch r i s t en s en (1 9 9 5 ) p o i n t

o u t , t he p ro b l em i s e s p ec i a ll y acu te w h e n t h e em erg -

i n g t ech n o l o g y i s " d i s ru p t i v e" , t h a t i s , t h e n ew

t ech n o l o g y ad d re s s e s cu s t o mer n eed s t h a t a r e q u i t e

d i f f e r en t f r o m t h o s e ad d re s s ed b y t h e ex i s t i n g t e ch -

n o l o g y . S i n ce t h e n ew t ech n o l o g y i s o f l i t tl e v a l u e t oex i s t i n g cu s t o mer s , man ag e r s p e r ce i v e t h e n ew mar -

ket s as hav ing very l i t t l e po ten t i a l and choose to

i g n o re it. H o w ev e r , t h e n ew t ech n o l o g y o p en s n ew

mark e t s an d q u i ck l y b eco mes l u c r a t i v e , t h u s r e s u l t -

i n g i n t h e f i rm m i s s in g a p ro f i t ab l e o p p o r tu n i t y . H o w

i s t he i n cen t i v e s t r u c t u re fo r man ag e r s a f f ec t ed b y an

en v i ro n men t ch a rac t e r i zed b y s u ch r ap i d l y ch an g i n g

t ech n o l o g i e s ?

3.3. Production planning and control

Pro d u c t i o n p l an n i n g an d co n t ro l d ec i s i o n s r e f e r to

med i u m- t e rm ag g reg a t e p l an n i n g an d s h o r t - t e rm

s ch ed u l i n g d ec i s i o n s in o p e ra t i o n s. M an y o f th e n ew

p rac t i ce s i n O M h av e b een d i r ec t ed a t mak i n g p l an -

n i n g an d co n t ro l d ec i s i o n s mo re e f f i c i en t an d mar -

k e t -d r i v en . P r ac t i c e s s u ch a s j u s t - i n - t i me p ro d u c t i o n

t y p i ca l l y i n v o l v e i mp l emen t i n g a r a t e -b as ed mas t e r

p ro d u c t i o n s ch ed u l e t h a t i s u s ed t o d r i v e a p u l l - b a s ed

p ro d u c t i o n s y s t em. In o rd e r t o i mp l emen t an e f f ec -

t ive pu l l -based sys tem, i t i s necessary to reduce se tup

t imes and lo t -s i zes , as wel l as to ensure tha t ma-

c h i n e - b r e a k d o w n s a r e m i n i m i z e d b y e m p h a s i z i n gp rev en t i v e ma i n t en an ce . A c t i v i t i e s s u ch a s s e t u p r e -

d u c t i o n an d p ro ces s i mp ro v emen t a r e d r i v en b y c r e -

a t i n g w o rk e r t e ams (w i t h man ag emen t s u p p o r t ) an d ,

t h e r e fo r e , j u s t - i n - t i me p r ac t i c e s emp h as i ze w o rk e r

invo lvement . F ina l ly , c loser supp l ier re la t ions are

encouraged , s ince th i s a l lows the f i rm and i t s supp l i -

e r s t o w o rk t o g e t h e r t o d e s i g n co mp o n en t p a r t s

t o g e t h e r an d e n s u re h i g h q u a l i ty i n t h e i r p ro d u c t i o n .

O n e man i f e s t a t i o n o f t h i s e f fo r t i s t h a t man y f i rms

h av e mo v ed t o w ard s h av i n g a s i n g l e s u p p l i e r f o r

ma n y o f t h e ir r aw m a t e r ia l s an d p a r ts . E ach s u p p l i e ri s g i v en a l o n g - t e rm co n t r ac t an d p ro v i d ed t ech n i ca l

an d man ag e r i a l s u p p o r t t o i mp ro v e i t s p ro d u c t i o n

p ro ces s . Co n s i d e r Ch ry s l e r a s an ex amp l e . A cco rd -

i n g t o W o mack an d J o n es (1 9 9 4 ) , i t h a s r ed u ced i t s

s u p p l i e r b a s e f ro m 2 5 0 0 i n t h e l a t e 1 9 8 0 s t o 3 0 0 .

T h e s u p p l i e r s a r e i n c l u d ed i n p ro d u c t d ev e l o p men t

d i s cu s s i o n s an d t h ey p ro v i d e i n p u t o n d e s i g n i m-

p ro v emen t s an d co s t r ed u c t i o n s . Ra t h e r t h an s e l ec t -



R.D. Banker, LS. K hosla J ou rna l of O perationsManagement12 (1995)423-435 431

i n g s u p p l i e r s t h ro u g h a b i d d i n g p ro ces s , Ch ry s l e r

se lec t s i t s supp l i ers based on a b road se t o f c r i t e r i a

an d u s es t a rg e t p r ic i n g fo r t h e f i n a l p ro d u c t t o d e t e r -

mi n e co mp o n en t p r i ce s an d t h en w o rk s w i t h t h e

s u p p l i e r o n w ay s t o ach i ev e t h em. Mo s t co mp o n en t s

a r e s i n g l e - s o u rced fo r t h e l i f e o f t h e p ro d u c t .Th i s wide range o f ac t iv i t i es ra i ses in teres t ing

re s ea rch q u es t i o n s . W e d i s cu s s s o me o f t h e s e b e l o w .

Impact of indus t ry s t ruc ture . H o w a r e a f i r m ' s

d ec i s i o n s r eg a rd i n g i n v en t o ry an d s ch ed u l i n g p o l i -

c i e s i mp ac t ed b y co mp e t i t o r s ' d ec i s i o n s ? H o w a re a

f i rm ' s d ec i s i o n s co n ce rn i n g s u p p l y ch a i n man ag e -

men t i mp ac t ed b y c o m p e t i t o r s ' d ec i s i o n s ? In p a r t icu -

l a r , h o w d o es co mp e t i t i o n a f f ec t t h e n u mb er o f

supp l iers to a f i rm, the degree to which i t seeks so le

s u p p l ie r s an d t h e d eg ree o f v e r t i ca l i n t eg ra ti o n ?

T h e re h as b een s o me r e s ea rch t o d a t e i n t h e

o p e ra t i o n s man ag emen t l i t e r a t u r e o n t h e u s e o f f o r -

m a l e c o n o m i c m o d e l s t o p r e d i c t f i r m b e h a v i o r o n

p ro d u c t i o n p l an n i n g d ec i s io n s . E l i a s h b e rg an d S t e i n -

b e rg (1 9 9 1 ) s t u d y p ro d u c t i o n an d p r i c i n g s t r a t eg i e s

fo r t w o f i rms w i t h a s y mmet r i c co s t s t r u c t u r e s . L i

(1 9 9 2 ) co n s i d e r s t h e ro l e o f i n v en t o ry i n d e l i v e ry

t i me co mp e t i t i o n , u s i n g an n - f i rm mark e t g ame . L i

an d L ee (1 9 9 4 ) d ev e l o p a d u o p o l y mo d e l t h a t f o -

cu s es o n a f i rm ' s d ec i s i o n s o n p r i ce an d d e l i v e ry

t im e p e r f o r m a n c e .

Sco pe o f competi tive advantage. T o w h a t e x t e n t

d o j u s t- i n - t ime O M p rac t i ce s r e s u lt i n a r ed u c t i o n o ft r ad e -o f f s b e t w een t h e d i v e r s e o b j ec t i v e s o f mi n i mi z -

i n g co s t , i mp ro v i n g q u a l i t y , r ed u c i n g l ead t i mes an d

c rea t i n g f l ex i b il i t y t o r e s p o n d t o cu s t o m er n eed s ?

D o j u s t - i n - t i me p rac t i ce s p ro v i d e a s u s t a i n ab l e

co mp e t i t i v e ad v an t ag e fo r a f i rm, o r a r e t h e s e i n n o -

v a t i o n s q u i ck l y co p i ed b y o t h e r f i rms i n t h e i n d u s -

t ry? In the l a t t e r s i tua t ion , do these p rac t i ces s imply

resu l t in a change in the bas i s o f compet i t ion in the

i n d u s t ry w i t h o u t a f f ec t i n g t h e r e l a t i v e p o s i t i o n s o f

the f i rms in the indus t ry?

T o w h a t e x t e n t c a n s u p p l y c h a i n m a n a g e m e n tp ro v i d e co mp e t i t i v e ad v an t ag e fo r a f i rm? W h a t

p rac t i ce s w i t h i n s u p p l y ch a i n man ag emen t a r e a s s o -

c i a t ed w i t h p ro v i d i n g a co m p e t i t i v e ad v an t ag e? D y e r

an d O u ch i ( 1 9 9 3 ) d i s cu s s s o me k ey d i f f e r en ces i n

t h e w ay J ap an es e au t o mo b i l e f i rms man ag e t h e i r

s u p p l i e r s v e r s u s t h e i r U . S . co u n t e rp a r t s . Fo r ex am-

p l e , th ey p o i n t o u t t h a t A me r i can au t o m an u fac t u r e r s

a r e mo re v e r t i ca l l y in t eg ra t ed t h an t h e J ap an es e f i rms

w i t h ap p ro x i ma t e l y 4 8 % o f p a r t s man u fac t u r ed i n t e r -

n a l l y , co mp ared t o 2 5 % fo r J ap an es e f i rms . H o w -

ev e r , d e s p i t e t h e i r g r ea t e r d eg ree o f v e r t i ca l i n t eg ra -

t i o n , U . S . f i rms w i l l co n t r ac t w i t h a g r ea t e r n u mb er

o f s u p p l i e r s t h an t h e J ap an es e , w h o t en d t o b u y

mo re , p e rh ap s ev en en t i r e s u b s y s t ems , f r o m a s i n g l esuppl ier .

Impact of organizat ional des ign. A c o m m o n r e c -

o mmen d a t i o n i n t h e p o p u l a r b u s i n es s p r e s s f o r i m-

p l emen t i n g j u s t - in - t i me t ech n i q u es i s t o u s e i n t e r -

fu n c t i o n a l t e ams o n t h e p ro d u c t i o n f l o o r t o ad d re s s

p ro b l ems an d s eek co n t i n u o u s i mp ro v emen t . T h e

i mp l i ca t io n o f t h is r eco m me n d a t i o n i s t h a t o rg an i za -

t i o n s mo v e t o w ard s a f l a t te r o rg an i za t i o n a l s tr u c t u r e

i n o rd e r t o s u cces s fu l l y i mp l emen t s u ch p r ac t i ce s .

H o w ev e r , i t i s n o t c l ea r t h a t s u ch f l a t o rg an i za t i o n s

a re a l w ay s a p r e r eq u i s i t e . H ay es an d P i s an o (1 9 9 4 )

d i s cu ss t h e ca s e o f A l l eg h en y L u d l u m, a s p ec i a l ty

s t ee l man u fac t u r i n g f i rm t h a t h a s ad o p t ed man y o f

t h e n ew O M p rac t i ce s b u t co n t i n u es t o ma i n t a i n a

p r i mar i l y fu n c t i o n a l s tr u c t u r e an d i n v o l v es t o p m an -

ag emen t d i r ec t l y o n d ay - t o -d ay i s s u es , r a t h e r t h an

s eek i n g t o s o l v e p ro b l ems a t l o w er l ev e l s o f t h e

o rg an i za t i o n . Su ch an ecd o t a l ev i d en ce s u g g es t s t h a t

an i mp o r t an t a r ea o f r e s ea r ch i s t h e l i n k b e t w een

o rg an i za t io n a l d e s i g n an d t h e i m p l emen t a t i o n o f l e an

man u fac t u r i n g t ech n i q u es . A n o t h e r i n t e r e s t i n g q u es -

t ion i s to what ex ten t do specia l i za t ion and job

c l a s s i f i ca t i o n s y s t ems amo n g w o rk e r s i mp ed e t h eab i l i t y o f t h e f i rm t o i mp l emen t t h e n ew O M p rac -

t ices .

Human resource management . H o w can a f i rm

prov ide incen t ives to i t s supp l i ers to reduce cos t s ,

i mp ro v e q u a l i t y an d ad o p t i n n o v a t i v e O M p rac t i ce s

tha t can be benef ic ia l to bo th the f i rm and i t s sup-

p l i e r ? U . S . au t o mak e r s , f o r ex amp l e , h av e n o t b een

as success fu l as the i r Japanese coun terpar t s in ge t -

t ing supp l iers to adop t l ean manufactu r ing t ech-

n i q u es (W o mack an d J o n es , 1 9 9 4 ) .

H o w s h o u l d w o rk e r s o n t h e p ro d u c t i o n f l o o r b emo t i v a t ed t o en s u re t h a t t h e i r d ec i s i o n s a r e co n g ru -

en t w i t h t h e o v e ra l l o b j ec t i v e s o f t h e f i rm? In p a r t ic -

u l a r , w o rk e r t eams i mp l emen t ed a s a p a r t o f t h e s e

n ew O M p rac t i ce s mu s t ad d re s s a v a r i e t y o f i s s u es

s u ch a s s e t u p t i me r ed u c t io n , d e t ec t i n g t h e s o u rce o f

q u a l i t y p ro b l ems , r ed u c i n g mach i n e d o w n t i me an d

w o rk e r c ro s s- t r a in i n g . H o w s h o u l d w o rk e r i n cen t i v es

b e d es i g n ed s o t h a t t h e s e co n t i n u o u s i mp ro v emen t



432 R.D. Banker, I.S. Khosla Journal of Operations Management 12 (1995) 423-435

e f f o r ts a r e ad eq u a te ly ad d r e ssed wh i l e m ee t in g o v e r -

a l l p roduct ion goals?

On e a sp ec t o f t h e se in n o v a t iv e OM p r ac t i ce s i s

th a t m an ag e r s m u s t i n c r ea s in g ly p l ay a su p p o r t in g

ro le tha t a l lows workers to address p roduct ion prob-

l em s d i r ec t ly . Ho w sh o u ld th e in cen t iv e s o f m an -ag e r s b e a l ig n ed wi th th o se o f t h e wo r k e r s t o en su r e

tha t th is suppor t i s in fac t o f fered? This i s par t icu-

lar ly per t inen t g iven tha t managers in such ins tances

u su a l ly h av e sh o r t - t e r m g o a l s o f m ee t in g cu s to m er

d em an d a s we l l a s l o n g - t e r m g o a l s o f im p r o v in g

p r o d u c t iv ity o n w h ich th ey a r e ev a lu a ted .

3.4. Quality management

T h e a r ea o f q u a l it y m an ag em en t i s an o th e r a r ea o f

opera t ions decis ions tha t has been dramat ica l ly af -

fec ted by the renaissance in OM prac t ices . The

n o t io n o f " b u i ld in g q u a l i t y in to th e p r o d u c t " a s

o p p o sed to " in sp ec t in g q u a l i t y in to th e p r o d u c t " i s

o n e k ey e l em en t o f t h i s n ew th r u s t . An o th e r k ey

element i s tha t qual i ty refers no t on ly to ex ternal o r

customer-dr iven qual i ty , bu t a lso to in ternal qual i ty

in the ac t iv i t ies wi th in the o rgan iza t ion . As wi th

m an y o f t h e o th e r n ew OM p r ac t i ce s , t h i s n ew

emphasis on qual i ty has been dr iven to a s ign i f ican t

ex ten t b y th e co m p e t i t i o n f r o m Jap an ese f i r m s in

indust r ies such as au tomobi les and consumer e lec-

t ron ics . By reducing scrap and rework as wel l as byim p r o v in g p r o d u c t d e s ig n q u a l i t y , t h e se f i r m s wer e

ab le to compe te ef fec t ive ly in the U.S. ma rket by

of fer ing h igher qual i ty p roducts a t lower costs than

thei r compet i to rs . Thus, in the 1980s, many f i rms

b eg an to v i ew q u a l i t y a s a s t r a t eg ic weap o n an d

b eg an to im p lem en t q u a l i t y p r ac ti ce s th r o u g h o u t t h e ir

o rgan iza t ions , us ing approaches p roposed by qual i ty

g u r u s su ch a s Dem in g , Ju r an , C r o sb y , T ag u ch i an d

Feigenbaum. Formal too ls such as s ta t i s t ica l p rocess

co n t r o l ( SPC ) , p io n ee r ed b y Sh ewh ar t h av e b eco m e

s tan d a r d m ech an i sm s u sed b y a f i r m in i t s d r iv e toimprove qual i ty . Indeed , to emphasize i t s endorse-

m en t o f q u a l i t y a s an in t eg ra l e l em en t o f su ccess in

business , the U.S. government ins t i tu ted the Mal-

co lm Baldr ige Nat ional Award in 1987 . Motoro la

won th is award in the f i r s t year o f i t s incep t ion ,

1988 , and is es t imated to have saved $6 .5 b i l l ion in

m an u f ac tu r in g co st s s in ce 1 9 8 7 ( T h e E co n o m is t ,

1995).

T h e p h i lo so p h y o f seek in g co n t in u o u s im p r o v e -

ment i s ano ther in tegra l par t o f the new qual i ty

m an ag em en t p r ac t i ce s . T h i s p e r sp ec t iv e em p h as ize s

th a t m an ag em en t sh o u ld co n t in u a l ly ch a l l en g e th e

f i rm to ach ieve increasing ly h igher levels o f per for -

mance in a l l aspects o f the business . Moreover ,con t inuous improvement wi l l be d r iven by par t ic ipa-

t iv e m an ag em en t so th a t a l l l ev e l s o f t h e wo r k f o r ce

are invo lved in th is e f fo r t and decis ion- re levan t in -

fo rmat ion is p rov ided to f ron t l ine workers (Melcher

e t a l . , 1990) . In o rder to mot iva te the need fo r th is

iml~rovement , f i rms can compare the i r per formance

on d i f feren t d imen sions wi th the best in the business .

T h i s b en ch m ar k in g p r o cess h a s b eco m e a k ey co m -

p o n en t o f t h e co n t in u o u s im p r o v em en t p r ocess .

The emphasis on qual i ty i s no t l imi ted to the

manufactur ing sec tor . As serv ice opera t ions con t inue

to g r o w in im p o r t an ce , a v a r i e ty o f n ew OM p r ac -

t ices per ta in ing speci f ica l ly to qual i ty management

in serv ice f i rms have become inst i tu t ional ized . Pre-

d o m in an t am o n g th ese n ew p r ac t i ce s i s t h e r en ewed

f o cu s o n th e cu s to m er . Ju s t a s " ze r o d e f ec t s " b e -

cam e a k ey d r ive r f o r q u a l i ty im p r o v em en t i n m an u -

f ac tu r in g fi r m s , " z e r o d e f ec t io n s" , i .e . k eep in g th e

customer has become a p ivo ta l d r iver o f qual i ty

improvement in the serv ice sec tor (Reichheld and

Sasser , 1990). As Heskett et al . (1994) point out, the

l i f e tim e v a lu e o f a l o y a l cu s to m er can b e a s t ro n o m i -

ca l , especia l ly when refer ra ls and repeat purchases o fre la ted p roducts a re considered . Reichheld and Sasser

(1990) es t imate tha t a 5% increase in the customer

re ten t ion ra te can produce prof i t increases f rom 25%

to 85%. I t i s no t su rpr is ing , therefore , tha t many

serv ice f i rms are re-design ing the i r serv ice de l ivery

sy s t em s to a l lo w m an ag e r s an d wo r k e r s t o p ay m o r e

at ten t ion to customer needs .

Impact of industry structure. W h at i s t h e im p ac t

of the indust ry s t ruc ture on the qual i ty o f a f i rm 's

p r o d u c t? T o wh a t d eg r ee d o es co m p e t i t iv e in t en s i ty

d r iv e q u a l i t y im p r o v em en t w i th in an in d u s t r y ?B an k e r an d K h o s la ( 19 9 4 ) d ev e lo p f o r m a l m o d e l s o f

o l igopol is t ic compet i t ion to s tudy the ef fec t o f com-

pet i t ive in tensi ty on decis ions about qual i ty levels .

Their analysis shows tha t equ i l ib r ium qual i ty and

com pet i t ive in tensi ty depends no t on ly on the p rec ise

ma nifes ta t ion of increased com pet i t ion , bu t a lso on

the cost and demand charac ter is t ics in the indust ry .

An im p o r t an t e lem en t o f t h e q u a l i t y m o v em e n t is



R.D. Banker, LS. Khosla Journal of Operations Management 12 (1995) 423-435 433

c o m p e t i t iv e b e n c h m a r k i n g . W h y s h o u ld f i r m s v o l u n -

t a r i l y s h a re p e r fo rman ce i n fo rma t i o n w i t h t h e i r co m-

pet i to rs? Are t rade associa t ions o r s imi lar ins t i tu t ions

v a l u ab l e i n t e rmed i a r i e s f o r t h i s p u rp o s e? K i rb y

(1 9 8 8 ) p r e s en t s s o me an s w er s t o t h e s e q u es t i o n s

u s i n g an o l i g o p o l i s t i c mo d e l o f co mp e t i t i o n an d i n -fo rma t i o n t r an s mi s s i o n . E l n a t h an an d K i m (1 9 9 5 )

fu r t h e r ex t en d t h i s an a l y s i s t o p ro v i d e p r ed i c t i o n s

ab o u t t h e t y p e an d s i ze o f f irms t h a t w i l l f o rm i n t o a

co o p e ra t i v e g ro u p t o s h a re b en ch ma rk i n g i n fo rma-

t ion.

Scope of competitive advantage. W h at a s p ec t s o f

q u a l i t y i mp ro v emen t e f fo r t s p ro v i d e s u s t a i n ab l e

co m p e t i t i v e ad v an t ag e fo r a f i rm? I t h a s b een a rg u ed

t h a t ach i ev i n g h i g h q u a l i ty i s n o l o n g e r a m ech an i s m

t o s eek co m p e t i t i v e ad v an t ag e , b u t r a t h e r a p r ecu r s o r

t o b e i n g co mp e t i t i v e a t a l l (T h e E co n o mi s t , 1 9 9 5 ) .

T h e s h a rp d ec l i n e i n th e n u mb er o f ap p l i can t s f o r th e

Ba l d r i g e A w ard i n 1 9 9 4 h as b een v i ew ed a s a s i g n a l

o f t h e w ay i n w h i ch q u a l i t y is p e r ce i v ed a s a co m p e t -

i t ive weapon . Rigorous empi r i ca l s tud ies tha t a re

i n d u s t ry - s p ec i f i c can s h ed s o me l i g h t o n h o w q u a l i t y

i mp ro v emen t e f fo r t s h av e ev o l v ed i n t h e i r co mp e t i -

t ive scope .

Impact of organizational design. W h at a r e t h e k ey

o rg an i za t i o n a l f ac t o r s t h a t i n f l u en ce d e t a i l ed u n d e r -

s t an d i n g o f t h e p ro ces s , w h i ch i n t u rn i s a k ey d r i v e r

o f c o n t i n u o u s i m p r o v e m e n t ? S e m i c o n d u c t o r c o m p a -

n i e s , f o r ex amp l e , a r e ab l e t o d o u b l e t h e i r y i e l dev e ry t h r ee y ea r s o r s o . A s Bo h n (1 9 9 4 ) p o i n t s o u t ,

t h e i n c r emen t a l cap i t a l i n v es t men t i n s u ch ca s e s i s

u s u a l l y mi n i ma l . I n s t ead w h a t d r i v es t h e i mp ro v e -

men t a r e ch an g es i n t h e man u fac t u r i n g p ro ces s ,

b ro u g h t ab o u t a s t h e f i rm p ro g re s s e s fu r t h e r a l o n g i ts

ex p e r i en c e cu rv e . T h e re fo re , it i s i mp o r t an t t o u n d e r -

s t an d h o w o rg an i za t i o n d es i g n can a f f ec t a f i rm ' s

ab i l i ty to l earn and i t s resu l t an t ra te o f con t inuous

i m p r o v e m e n t .

Human resource management. H o w c a n e m p l o y -

ees b e mo t i v a t ed t o s t r i v e t o ach i ev e t h e q u a l i t y - r e -l a t ed o b j ec t i v e s o f t h e f i rm? Mo re s p ec i f i ca l l y , h o w

d o e s a " t o p - d o w n " m a n a g e m e n t a p p r o a c h i n q u a l i t y

i m p r o v e m e n t c o m p a r e i n p e r f o r m a n c e t o a m o r e

h o r iz o n t a l, w o r k e r - e m p o w e r m e n t a p p r o a c h ? I B M , f o r

ex amp l e , n o l o n g e r h as an y fo rm a l s t an d -a lo n e q u a l -

i t y m a n a g e m e n t p r o g r a m s ( T h e E c o n o m i s t , 1 9 9 5 ) .

Ins tead , the emphas i s i s tha t a l l co rpora te ac t iv i t i es

b e i n fu s ed w i t h t h e n o t i o n o f q u a l i t y .

4 . C o n c l u s i o n s

T h i s p a p e r h a s f o c u s e d o n t h e u s e o f e c o n o m i c

t h eo ry a s an i n c r eas i n g l y r e l ev an t to o l f o r t h e an a l y -

s i s o f o p e ra t i o n s man ag emen t i s s u es . T h e ev o l u t i o n

o f o p e ra t i o n s man ag emen t h as , o v e r t h e l a s t t w od ecad es , r e s u l t ed i n a n u mb er o f n ew an d i n n o v a t i v e

pract i ces be ing adopted by f i rms in the U.S. Thus , i t

i s appropr ia te tha t the research agenda in OM sh i f t

as wel l , d i rec t ing i t s a t t en t ion to which o f these

p rac t i ce s w o rk w e l l u n d e r w h a t co n d i t i o n s , s o t h a t

t h e f i n d i n g s o f t h i s t y p e o f r e s ea r ch can g u i d e f i rms

i n mak i n g i mp ro v e d d ec i s i o n s r eg a rd i n g t h e ad o p t i o n

an d s u cces s fu l i m p l emen t a t i o n o f t h e s e p r ac t i ce s .

In t h i s p ap e r w e h av e a rg u ed t h a t t h e r e a r e t w o

k ey p e r s p ec t i v es t h a t mu s t b e co n s i d e red i n t h e

an a l y s i s o f an y n ew O M p rac t i ce .

( i ) External perspective. T h i s p e r s p ec t i v e co n s i d e r s

t h e n a t u r e o f co m p e t i t i o n i n an a l y z i n g t h e ad o p -

t i o n o f n ew O M p rac t ice s . W e co n s i d e r t w o

broad ca tegor ies o f i s sues in th i s perspect ive .

Fi rs t , we cons ider the impact o f indus t ry s t ruc-

t u r e o n t h e ad o p t i o n an d i mp l em en t a t i o n o f t h e se

p rac t i ce s . Seco n d , w e co n s i d e r t h e s co p e o f

co mp e t i t i v e ad v an t ag e p ro v i d ed b y s u ch p r ac -

t ices .

( i i ) Internal perspective. T h i s p e r s p ec t i v e fo cu s es

o n t h e i s su e o f s e l ec t io n , co o rd i n a t i o n an d m o t i -

v a t i o n o f emp l o y ees w i t h i n t h e o rg an iza t i o n . W eal so cons ider two key in ter - re la ted i s sues here .

F i r s t , w e co n s i d e r t h e i s s u e o f co o rd i n a t i o n o f

d ec i s i o n s w i t h i n an o rg an i za t i o n an d t h e ap p ro -

p r i a t e o rg an i za t io n a l d e s i g n t o ach i ev e t h i s co o r -

d i n a ti o n . Seco n d , w e co n s i d e r t h e i s su e o f s e l ec -

t i o n , p ro v i d i n g o f i n cen t i v es an d mo t i v a t i o n t o

i n d i v id u a l emp l o y ees , w h i ch w e h av e r e f e r r ed t o

a s h u man r e s o u rce man ag emen t .

W e h av e co n s i d e red t h e i mp ac t o f t h e s e d ec i s i o n

p e r s p ec t i v es o n fo u r ma j o r d ec i s i o n a r ea s w i t h i n

opera t ions : p roduct des ign , p rocess se lec t ion , p ro-d u c t i o n p l an n i n g an d co n t ro l , an d q u a l i t y man ag e -

men t . Fo r each a r ea , w e h av e d i s cu s s ed s o me k ey

re s ea rch q u es t i o n s t h a t w e re h i g h l i g h t ed b y t h e d i f -

f e r en t d ec i s i o n p e r s p ec t i v es . A n ecd o t a l ev i d en ce

f ro m t h e p o p u l a r p r e s s w as u s ed t o mo t i v a t e th e n eed

for such inqu i r i es .

I n co n c l u s i o n , o u r co n t r i b u t i o n h e re h as b een t o

p o s i t t h a t r ecen t ad v an ces i n t h e f i e l d o f O M h as



43 4 R.D. Banker, LS. Khosla Journal of Operations Management 12 (1995) 423-435

r e in f o r c e d t he ne e d f o r ne w r e se a r c h pe r spe c t i ve s

tha t c a n e n r i c h t he or y de ve lopme nt . We be l i e ve t ha t

t he r e se a r c h a ge nda i n ope r a t i ons ma na ge me nt c a n

s ign i f ic a n t ly be ne f i t f r om ne w the or e t ic a l a nd

me thodo log i c a l pe r spe c t i ve s f r om the f i e ld o f e c o-

nomic s .

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18 Economics of Operations Management