He reorganized the technical service units, which had reported to manufacturing and sales, so they would report instead to the research organization. Several years later the second general manager was promoted and replaced by a third general manager who had been in the planning and financial organization for the previous ten years.
Finally, he again split the technical service function between the manufacturing and sales organizations. In this company, managers first treated technology as a secondary concern, then as a primary one, then as secondary again. The company might have been successful adopting either view, but only one manager would have successfully exploited technology. The companies whose top managers possess a strong technical orientation have had difficulty avoiding two pitfalls.
The first is emphasis on technology at the expense of other areas. It did not, however, fully appreciate the financial consequences of its strategy. Because of rapid product turnover, manufacturing costs for each product never traveled down the well-known learning curve and the company never received the full benefit of its technological innovations.
Another aspect of this problem is the tendency of companies with a strong technical orientation to produce what they can make technically, which is not necessarily what customers will buy. In forming such a business strategy the companies sacrifice a healthy balance among their functions. Company 8, the transportation equipment producer, exemplified the second pitfall when its one top manager who had a technological orientation spent most of an afternoon designing an apparatus that was not important in a technological, aesthetic, or even functional sense.
Companies that exploit technology well do not just continually funnel more resources into that area; they sort out the tasks and set priorities using detailed criteria. In company 2, the aerospace manufacturer, the scientists and engineers in the technical organization allocate the available dollars to projects based on their determination of what will help the company stay abreast of the technology relevant to its business. The scientists and engineers regularly visit colleagues in their field at other companies and universities to get current information that will help them determine their annual budgets.
Every two years, management reviews the budgets to ensure that dollars are well spent to maintain technological leadership. In contrast, company 7 determines its technology budgets on a customer-by-customer basis. Its scientists and engineers spend much of their time visiting customers.
They use this feedback when they return to their laboratories. Clearly, either strategy can be carried to an extreme. A company where scientists and engineers communicate only with other research organizations runs the risk of isolating its technical efforts from its business needs. The criteria managers use to select projects are the central factors in determining the extent to which they actively support the development of technological leadership.
While the criteria overlap each other, the focus and initiating factors are different. In companies where technology is exploited well, the technology unit selects projects that support business goals. For example, scientists in company 3 determined that to give a product the desirable performance characteristics for entering a new market, they needed a new chip configuration.
The technology unit undertook the project and the business manager funded it. Other criteria embodied in business plans that underlie project selection are reducing costs, developing new products, developing improved products, reducing the energy content of products, or creating process improvements to reduce dependence on scarce raw materials.
Essentially, the business strategy determines these criteria with a view to maintaining a desired market position. As the product matures, these criteria are likely to change. A product at the beginning of a life cycle is likely to require performance-improvement projects, whereas a mature product is more likely to need process-improvement and cost-reduction projects to support it.
Protecting and establishing technological leadership is an important project selection criterion. To keep its leadership in this field, the company undertakes projects that provide a continuous stream of information and experience in the handling of lithium catalysts. A customer is broadly defined as the user of the product or process.
It could be a manufacturing organization or a person who buys the product. Ten years ago, managers at company 6, a producer of computers and related equipment, decided that it was important to know how to work with nonsilver-based emulsions. Consequently, the company undertook a small research effort involving two people to develop a limited reservoir of experience with nonsilver-based emulsions, just in case the price of silver soared.
Several years ago, when the price of silver started to rise, this effort provided a base for an expanded program within the company.
The early building experience allowed the company to leap ahead in the field and to successfully exploit the new technology. The companies on the continuum provide evidence that managers still consider pursuit of a technological advance a good criterion for allocating money.
Companies on the right-hand side of the continuum not only put a greater proportion of their dollars on projects to maintain and develop technological leadership than companies at the left-hand side, they also publicize their technological competence.
Companies 1 through 5 make a practice of inviting esteemed professionals to company-sponsored national seminars on areas of technology in which they see themselves as leaders. On more than one occasion, the companies have presented awards to people—not all of them employees—who had made substantial technical contributions to their particular fields. First, they connect the technology decision-making process with business decisions.
Second, the decision-making systems and structure of the technology unit are compatible with those of the rest of the organization. Linking business to technology In organizations that are leaders in technology, the involvement of the top business and technical managers in decision making, planning systems, the timing of decisions, and structuring the company itself all strengthen the link between technology and business goals. Top management connection In companies that exploit technology effectively, the top business managers see themselves as responsible for making and approving technology decisions.
In company 3, a manufacturer of computers and related equipment, the president reviews the technical plans and budget at regular intervals and is informed of major progress or delays with respect to key technological undertakings. He prides himself on his technological expertise and is the author of several articles in respected technical journals. In company 8, in contrast, the top business managers communicate very little with heads of the technical unit.
In company 6, the two groups communicate somewhat, but the top business managers do not really get involved in making technical decisions. Rather than stating alternatives, costs, risks, and consistency with the business plan, the technical plan is a statement of past contributions and promises for the future.
Our management resigns itself to a leap of faith uncharacteristic of how it manages its other vital assets. Planning systems In the companies where technology is a high priority, the planning systems incorporate the technology plan as an integral part of the business plan. The business manager is responsible for developing the technology effort and effectively integrating it into his plan.
In company 3, although no formal planning system exists, who participates in the strategy development meetings is evidence that the business and technical plans mesh. Heads of the technology units as well as business and other functional heads work together in a several-day session to develop the company strategy. The business plans and strategy statements for both companies 2 and 3 include assertions regarding technological priorities and steps for carrying out those priorities.
At the other end of the continuum, the technical plan exists as a document separate from the business plan. In company 9, scientists and engineers gather the data for the formal technology plan, which the vice president of research coordinates. Senior research management reviews the results but never formally presents them to senior business management, and the business managers do not incorporate them into their planning process.
Timing When the technology plan is presented can also reflect how important it is to the business plan. In company 5, top management reviews the business plan two months before it reviews the technical plan. In company 2, management reviews the business and technology plans at the same time. In companies where the technology plan is presented first, management is likely to use it as an important factor in screening business ideas. Where the business plan is presented first, management might screen out promising technical ideas that seem inconsistent with it.
Of course, the two plans should be in balance. In companies 7, 8, and 9, the technical plan is presented after the business plan. In all three companies it has become something of a joke when, time after time, top management finds that it is either too late in the day or too close to some important deadline for them to spend much time going over the technical plan. Chief technical officer The fourth way companies have to tighten the connection between business and technology is to give the chief technical officer a major role in business and technological decision making.
While he has the same rank as other members of the executive staff, he is not included in the business strategy meetings and consequently is considered to have lower status. Because his connection with the business decision-making process is remote, the function he represents is considered rather unimportant. In company 2, on the other hand, the chief technical officer sits in on the important business and strategy meetings.
Others see him as having great influence—even more than the business heads—on strategic business decisions. Structural ties In the nine companies, the impact strategy has on the internal structure is clear. In companies that rely heavily on technology in their strategy, such as companies 1 and 2, the chief technical officers report directly to the president, connecting the central research effort to top management. In companies 8 and 9, the chief technical officers report to a level below the president.
Size alone cannot explain the difference in reporting relationships. Until recently, the management of company 7 had not given technology a high priority in its business plan.
But a new president, who wanted to raise that priority, appointed a chief technology officer who reported directly to him.
Support of other systems The pay, promotion, and hiring processes are also important communicators of the priority management attaches to technology.
For example, in the companies placing great emphasis on technology, recruiters go to the top technical schools and offer top salaries to attract the best talent available. These companies put a high priority on bringing in new technical blood regardless of the state of the business. The companies also operate a dual promotion ladder. In other words, the culture of the companies at the right side of the continuum supports the priority attached to technology.
In the companies where technology is an important competitive weapon, the degree of formality, the influence of business managers over functional managers, and the decision-making systems of the technical organization are more consistent with the rest of the organization than when technology is not a competitive weapon.
In company 1, business planning and decision making occur in frequent, one-on-one meetings between the president and his major officers. The chief technology officer and the president often meet in this way. In company 8, however, business unit decisions and planning are relayed through a system of paperwork. Managers take a tremendous amount of time preparing studies and reports for review in councils at the top.
It relies on informal meetings between the chief managers and the vice president for technology. People attending the meetings take few formal notes and form the final plan by briefly summarizing the presentations. In some companies, staff managers do little more than analysis; in others, staff managers in effect make the key decisions.
Companies that rely heavily on technology as a competitive weapon either focus much of the responsibility for decision making on both technical and business managers or leave a lot to staff members on both sides. In company 2, the staff rarely carries out major activities.
The business manager is responsible for all decisions, including many activities—such as economic analysis, forecasting, and manpower planning—that other organizations usually assign to staff. The business managers are even expected to handle special projects by drawing on their line people. Even though the technical chiefs recognize that their managers lack some of the skills and interest for carrying out these studies, they think it is prudent to spend time doing it rather than operate inconsistently with the rest of the company.
In company 6, the staff managers are much more involved in decision making. The top business managers have large and competent staffs that not only generate important reports but also are in positions to make recommendations on or approve or veto most decisions.
The staff that works for the chief technical management is equally strong and has similar responsibilities. In company 7, the mismatch is evident: the business planning staff is strong and makes important contributions to the business, but the technical staff is weak. Rather than develop a technical staff function capable of communicating with this group or influence the business planning staff himself, the chief technical officer tried to work directly with the president of the company, but with little success.
Now, because it has a new president, the company is changing and the technology planning capability of the business planning unit is becoming stronger. Company 4 has a strong bottom-up approach to decision making: line managers make decisions, which then bubble up to the higher levels for a final decision.
The technology planning occurs in the same way: the people below the technical chiefs review their own projects and make recommendations for resource allocations consistent with their goals. In company 1, the approach is top-down: top managers of the separate businesses get very involved in all levels of decision making and set the priorities of activities below them.
Alternatively, companies can use shared-services models to significantly reduce overhead costs. Service process management.
Service processes are rarely static; they change in response to the needs of the business and its customers. This being the case, they need continual monitoring and adjusting to keep costs in check and ensure their ongoing effectiveness.
Continuous improvement is a widely accepted idea, but in many companies, the culture does not easily support it. Further, service processes need gatekeepers who have decision rights for process changes and are accountable for their performance.
Meanwhile, companies can look to identify any process steps that can be standardized across customers and geographies. Process standardization and automation when possible can reduce labor requirements and enhance customer satisfaction.
For example, one regional hospital reduced the wait time for new admissions from four and a half hours to one and a half hours by standardizing the admissions approval process.
Workforce management. The productivity of employees is a major consideration in all service operations. To optimize employee productivity, decision makers need to first calculate the total labor hours they need in each location, either in a bottom-up manner — by identifying labor drivers and creating a model for determining task times and frequencies — or in a top-down manner, one based on comparisons of operational performance to labor hours. Either method works, but the bottom-up approach offers an additional benefit in that it allows labor hours to be more easily adjusted as input drivers change.
For example, one company created a detailed model, based on unique store demand patterns, to calculate the necessary staffing required to manage its truck tire service centers, generating a 12 percent savings in labor costs.
Once labor hours per location are determined, management can consider how the hours should be apportioned between full-time and part-time employees, and how these employees should be scheduled to meet customer demand and fulfill operational activities. For example, when one hotel studied its check-in process, it discovered that many guests were experiencing check-in waits of more than 20 minutes. A significant number of guests waited so long that they said they did not intend to stay at the hotel again.
Measurement and compensation. Unfortunately, few service operations and companies have sophisticated performance measurement and compensation structures. Nonexistent, inappropriate, or inconsistent measurements result in missed improvement opportunities, the inability to understand whether process changes are working, and ineffective decision making.
Meanwhile, most service organizations, especially in the retail sector, are drowning in data and collecting more every day, yet are still thirsty for insights. To overcome this problem, companies should identify the data that is most relevant to the performance of their service operations and ensure that it is properly collected and used.
It is important to collect nonfinancial data, such as customer profitability and customer satisfaction, as well as key financial and operational indicators. The next step is to align compensation and reward systems with desired employee behaviors. By clearly defining compensation and rewards, and communicating the metrics that determine them, service operations can stimulate employee motivation and provide the clarity that people need in order to change their behaviors.
Further, service operations managers should work with HR to take a more proactive role in establishing and managing compensation and reward systems. They should recognize that tenured workforces come at a higher cost that often cannot be justified in terms of performance; a lack of salary caps and compensation bands can create wide variations in cost among similarly skilled employees; and market-based salary reference points are often inflated and thus serve as a poor guide to compensation.
To address the problems that result from unsupported assumptions, companies can act with varying levels of aggressiveness to reduce labor costs.
Levels of reduction will depend on internal and external factors that include individual performance, salary benchmarks, the financial condition and goals of the company, and labor supply conditions. Service strategy success always comes down to execution.
As service operations leaders approach the quality and cost challenge, they should pay particular attention to the first two drivers: product and process design and service-level labor requirements.
Too often, these drivers are overlooked because they must be activated in the design stage of products and processes: a stage in which service managers traditionally have not participated. The remaining four drivers — service network structure, service process management, workforce management, and measurement and compensation — are the levers that service leaders can pull to improve the quality and cost of existing operations.
Savvy service leaders recognize the interconnected nature of these four drivers and approach them in an integrated and holistic manner. High-quality, cost-effective service is essential to corporate success, but it is particularly challenging to achieve. Defining unique customer segments and models to profitably serve them requires frequent analysis. Service workforces tend to be large and have high turnover rates; they are difficult to mobilize. Service processes are complex and often dependent on the consistent execution of many detailed steps.
And big, dramatic solutions to excessive costs are rare. Nevertheless, companies that take a measured and comprehensive approach to delivering service can improve their bottom line and gain a hard-to-match competitive advantage in the marketplace. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase. All rights reserved. Please see www. No reproduction is permitted in whole or part without written permission of PwC.
Six Principal Drivers of Service Quality and Cost Service operations leaders must be in a position to identify and capture opportunities for improvement.
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