Description
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 improve their competitiveness. Among the many practices that have been adopted by a large number of firms are just-in-time, total quality management, worker empowerment, and design for manufacturability.
E L S E VI E R Journal of Operations Management 12 (1995) 423-435
JOURNAL OF
OPERATIONS
MANAGEMENT
Economics of operations management: A research perspective
Rajiv D. Banker, Inder S. Khosla *
Department of Operations and Management Science, Curtis L. Carlson School of Management, University of Minnesota,
Minneapolis, MN 55455, USA
Abstract
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 improve their competitiveness. Among the many practices that have been adopted by
a large number of firms are just-in-time, total quality management, worker empowerment, and design for manufacturability.
However, there has been little systematic analysis of the organizational factors that drive the adoption of these practices as
well as their successful implementation. This paper posits that the theories and methods from economics can provide a useful
aid in such an analysis. Using the basic tenets of economics, a structural framework is proposed to highlight critical issues in
operations management that deserve attention. Examples from industry are used to illustrate how the framework may provide
answers to questions that have received little attention in the research literature.
1. Introducti on
In the 1970s and 1980s, many manufacturing
organizations in the U.S. found t hemsel ves facing
intense pressure from overseas competitors who could
supply products of equal or higher quality at a lower
cost. As a result, many new manufacturing and
management practices have been i mpl ement ed by
these U.S. manufacturing organizations in their quest
for maj or i mprovement s in productivity and quality.
Experimentation with new practices to manage oper-
ations is evident also in service organizations as they
seek to increase their cust omer orientation. The pro-
liferation of a wide range of new practices presents a
new challenge for research in operations manage-
ment (OM). Historically, the focus of OM research
has been developing rich, normat i ve model s of man-
* Corresponding author.
ufacturing or service activities and empl oyi ng these
model s to prescribe i mproved methods and algo-
rithms to solve specified problems. However, we
have very little systematic evidence about what char-
acterizes the organizations that adopt particular types
of operations management practices and what char-
acterizes the conditions under which particular prac-
tices are more effective. There is also a need for
theories to explain and predict the adoption of differ-
ent OM practices and the success of these practices.
The objective of this paper is to argue that the
theories and methods from the field of economi cs
can provide a useful aid in answering the above
questions. It should be made clear, however, that
economi cs is not the onl y field that can provide us
with theories and methods to analyze these issues.
Indeed, it is important that as research in OM evolves,
we also seek insights f r om other disciplines such as
psychol ogy, sociology and organizational behavi or
which can be used synergistically with economi 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
analysis. Our focus here is on the potential contribu-
tions from using the tools and methods of eco-
nomics. In contrast, Fine (1992) discusses economi c
issues in the specific context of technology evalua-
tion. Using the basic tenets of economics, we pro-
pose here a structural framework that highlights some
broad critical issues in operations management that
deserve attention. We caution the reader that this
paper is not an attempt at an exhaustive classification
of research questions that can be addressed in the
context of our framework. It is also not a tutorial on
economi c tools and their application to research on
operations management issues. Rather, using exam-
ples from industry, we identify a variety of issues
that are important to OM practice and can be ad-
dressed within an economi c framework.
Many of the new OM practices have sought to
direct the attention of the organization to adding
greater value from the perspective of the customer.
Value is sought to be added through these practices
by reducing costs, improving quality, reducing lead
times and increasing flexibility to react quickly to
changing customer needs. These practices include
just-in-time production, total quality management,
worker empowerment and design for manufacturabil-
ity.
Before we can be prescriptive about what organi-
zations should adopt which practices, we need to
have a clear understanding of why firms adopt these
practices and whether these practices create the value
that they are expected to create. For this purpose, we
need theories to rigorously conceptualize these issues
and predict practical outcomes, as well as empirical
analyses that test these conceptualizations.
A lot has been written in the popular business
press about the changes taking place in the opera-
tions management practices of U.S. organizations.
Many of these books and articles contend that the
adoption of such practices enable a firm to obtain a
competitive advantage or that they enable them to
offset the advantage enjoyed by a competitor. Com-
petitive pressure is believed to be a key factor driv-
ing the implementation of new practices. However,
much of the extant literature has viewed operations
management problems from the perspective of a
single firm optimizing under uncertainty; implicitly,
all industry-level interactions are treated as those
with passive competitors and subsumed within a
variable modeling uncertainty. It is essential, there-
fore, that in understanding the pattern of choices of
different practices by different firms in different
industries, we explicitly employ models of firms in
competition with each other and evaluate how com-
petitive interactions influence a fi rm' s optimal deci-
sions.
Several models of competition exist in the eco-
nomics literature that can be leveraged to address
these important problems in operations management.
These economic models range from that of a compet-
itive equilibrium in an economy with a large number
of firms and costless transmission of information
(Arrow and Hahn, 1970; Debreu, 1959) to that of a
competitive equilibrium in an oligopoly with a small
number of firms with significant market power (Nash,
1950; Harsanyi, 1967). And, of course, these classi-
cal models have been extended to address a richer
array of economi c concerns (see (Tirole, 1988; Fu-
denberg and Tirole, 1991) for a review). The chal-
lenge before researchers in operations management
is to further enrich the structure of these models to
focus not only on cost, but also on quality, flexibility
and lead time that are of concern from an operations
perspective. Furthermore, such a development of a
theoretical framework to analyze OM problems re-
quires that we view these issues from the perspective
of customers who demand the various attributes in a
product or service in addition to the perspective of
the producers who supply it as is commonly done in
most extant OM analysis. This is essential to evalu-
ate the full competitive ramifications of operations
strategy decisions.
A second distinctive aspect emphasized by the
new manufacturing practices such as total quality
management, just-in-time production, and worker
empowerment is the need for coordination between
different individuals that comprise an organization.
There is increasing recognition of the fact that the
environments in which operational activities are per-
formed are characterized by uncertainty and the po-
tential exists to improve performance by learning
about the environment to help resolve some of the
existing uncertainty. Efforts to facilitate coordination
and learning are confounded by the fact that the
information available to different individuals in dif-
ferent parts of an organization can vary, and further,
the objectives and incentives for each individual may
R.D. Banker, L S. Khosla /Journal of Operations Management 12 (1995) 423-435 425
also differ from those of other stakeholders in the
organization. As a result, implementation of any
operations strategy requires a careful consideration
of the information available and incentives provided
to different individuals comprising the organization.
Thus, the simultaneous consideration of the problems
of several decision makers can considerably compli-
cate the analysis of most common operations man-
agement problems ranging from new product devel-
opment to production planning and control decisions.
Many economi c models analyze the interplay be-
tween information, incentives and decision-making.
These range from the early work on team behavior
(Marschak and Radner, 1972) to more recent agency
theory (Jensen and Meckling, 1976). While some of
the assumptions of these models may not be appro-
priate in the OM context, the analytical methods of
these models can be deployed to construct and ana-
lyze new models to represent OM problems. Such
new models will also, in turn, serve to advance the
field of economics (see, for example, (Milgrom and
Roberts, 1990)).
So far, we have only discussed theoretical models
that have the potential to be relevant to OM prob-
lems. However, empirical analysis is equally impor-
tant as we seek to develop a better understanding of
the choice and efficacy of OM practices, before we
prescribe what practices organizations should adopt
(Swamidass, 1991). Careful and systematic empirical
documentation of adoption and implementation of
OM practices, as well as their effects on key perfor-
mance dimensions, is important because it provides
the basis for developing theoretical models to ex-
plain the documented phenomena. Even after we
have a base of alternative theories, and predictions
that derive from them, empirical research is neces-
sary to test these predictions. To the extent the
empirical evidence contradicts the theoretical predic-
tions, new challenges are presented for analytical
research to augment or modify existing theoretical
models or develop alternative models based on dif-
ferent assumptions. We believe that a coherent stream
of research can develop in this manner from an
economic (or psychological or sociological) theory
basis to compl ement the extant al gori t hmi c
research-based operations research models.
Much of the empirical research will need to draw
on actual operating data collected from the field.
Thus, empirical researchers in OM will need to
recognize explicitly that the data they use may result
from some deliberate choices by managers and
workers at their research site(s). In addition, unlike
laboratory experiments, observed data are often in-
fluenced by several factors not central to the theory
being tested, and therefore we need to control for
such factors. Furthermore, researchers using panels
of data over several periods of time a nd/ or across
several plants or organizations and simultaneously
considering multiple dimensions of performance that
influence each other need to recognize the possibility
of simultaneity and serial and contemporaneous cor-
relations in constructing their estimation models. As
a result, econometric methods developed to test eco-
nomic models using field data are likely to be partic-
ularly useful to empirical researchers in OM. Eco-
nomic theories can also inform and advance empiri-
cal analyses in OM. For example, theories relating to
production functions can be used to formalize the
notions of best practices and benchmarking in world
class manufacturing and the notions of technical
efficiency can be used to formalize the notions of
continuous improvement in operations (Cooper et al.,
1995). In addition, econometric methods of frontier
estimation such as data envelopment analysis (DEA)
(Charnes et al., 1981; Banker, 1993) can be used to
empirically identify best operations practices (Sinha,
1995).
The plan for the rest of this paper is as follows. In
the next section, we consider the two aspects of
decisions we have discussed in this section in greater
detail. Section 3 then describes a classification of
OM decision areas and we proceed to consider each
of these decision areas in greater detail. For each
decision area, we describe research issues that are
amenable to theories and methods in economics and
are motivated by anecdotal industry evidence and by
our classification of different decision perspectives.
Finally, Section 4 concludes the paper.
2. Classification of decision perspectives
In the previous section, we argued that there are
two distinctive aspects to any analysis of new OM
practices: (i) an external perspective, that explicitly
considers the nature of competition in analyzing the
426 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
adoption of these practices; and (ii) an internal
perspective, that focuses on the issues of coordina-
tion and motivation of employees within the organi-
zation. In this section, we further elaborate on these
two perspectives.
2.1. External perspective
When considering the nature of competition and
how it drives different OM practices, we can divide
the issues to be considered into two broad categories:
(i) the impact of industry structure on how these
practices are adopted; and (ii) the scope of competi-
tive advantage provided by such practices. We pro-
ceed to discuss each of these categories in greater
detail.
2.1.1. Impact of industry structure
The main question of interest here is how the
industry structure impacts different operations man-
agement decisions. Broadly speaking, we are con-
cerned with how basic industry characteristics affect
the adoption and successful implementation of the
new OM practices. Some of the industry characteris-
tics of interest include the number of competitors
and their relative sizes, the degree of differentiation
in the products of rival firms, the industry growth
rate and the pace of technological change in the
industry. Porter (1979) identifies five key competi-
tive forces: rivalry among competing sellers, firms in
other industries offering substitute products, potential
new entrants, suppliers of key inputs and buyers.
As we discussed in the Introduction, the adoption
of many of the innovative practices in OM in the
U.S. has been attributed to competitive pressures,
especially from overseas. In the mid-sixties, only 7%
of the U.S. economy was exposed to international
competition; by the 1980s, this figure exceeded 70%
(Gwynne, 1992). Thus, while it is true that such
competitive pressures have increased significantly
over the last decade, it is less clear that the best
strategy for a firm faced with intense competitive
pressures is to "f ol l ow the l eader". For example,
while just-in-time practices have been viewed as a
critical element of success for Japanese firms, Inman
and Mehra (1990) found that many small firms
simply cannot afford to convert to these practices,
given the high costs of training, preventative mainte-
nance and other activities required to implement
them.
2.1.2. Scope of competitive advantage
The primary question of interest here is to what
extent do different OM decisions provide a competi-
tive advantage to a firm. This competitive advantage
may manifest itself as a price advantage or an advan-
tage along some other dimension of value to the
customer such as delivery time, flexibility to chang-
ing customer needs or product quality. Also at issue
here is whether the advantage is sustainable: Do any
of these new management practices provide a com-
petitive advantage that is sustainable over time, and
if so, in what way? Or, do these practices result in
quick adoption by all firms in the industry? In the
latter event, are all firms better off than before the
introduction of these practices, or do the benefits get
passed on to the customers?
2.2. Internal perspective
The internal perspective considers the internal
activities of a firm and views it as an organization of
agents with uncertain and dispersed information and
possibly different objectives. Broadly speaking, there
are two key, inter-related issues to be considered: (i)
the issue of coordination of decisions within the
organization so as to make the best use of available
information; and (ii) the issue of motivation and
provision of incentives so that individual and organi-
zational objectives are correctly aligned. The first
issue can be viewed as an issue of organizational
design, while the second can be viewed as an issue
of human resource management. We discuss these in
further detail.
2.2.1. Impact of organizational design
We are concerned here with the question of how
organizational design influences the adoption and
successful implementation of innovative OM prac-
tices. Among the issues that arise are the decisions
that need to be coordinated and the organizational
mechanisms that can be used to achieve this coordi-
nation. Economic frameworks like agency theory and
transactions cost analysis (Jensen and Meckling,
1976) can be usefully applied to analyze many of
these issues.
R.D. Banker, I.S. Khosla /Journal of Operations Management 12 (1995) 423-435 427
The popular business press suggests that most of
the new OM practices require significant changes in
the organizational design to facilitate their successful
implementation. For example, Schonberger (1986)
argues that implementing world class manufacturing
practices requires "organi zi ng for quick product flow
and tight process-to-process and person-to-person
l i nkages". However, the economic implications of
such tight linkages have not been theoretically articu-
lated.
The adoption of "mas s cust omi zat i on", the abil-
ity to provide individually customized products at
the same cost as standardized, mass-produced prod-
ucts, is another example of how organizational de-
sign plays a critical role in the successful implemen-
tation of an innovative OM practice. Pine et al.
(1993) describe how mass customization requires a
"dynami c network of relatively autonomous operat-
ing uni t s" in the manufacturing plant' s organiza-
tional structure, where each unit or module involves
a specific process or task, and different modules
interact in different ways for each customized prod-
uct.
2.2.2. Human resource manage me nt
We are concerned here with the issues of selec-
tion and motivation of employees that an organiza-
tion must consider in order to seek greater initiative
and productivity from the employees in their tasks. A
common theme in many of the new OM practices is
to use groups or teams and encourage " wor ker
empower ment " where workers are not only given
ownership of their tasks but are also held account-
able for their successful completion (Schlesinger and
Heskett, 1991). This emphasis on participatory man-
agement has been motivated to a great degree by the
success of Japanese firms in applying this approach
to all levels of their organization.
What are the factors that lead to the successful
implementation of these practices? Why is the sys-
tem not undermined by individuals seeking to further
their own objectives? Milgrom and Roberts (1992)
argue that in the case of Japanese firms, factors such
as lifetime employment, frequent job rotation, lim-
ited outside opportunities, narrow pay differentials
and relatively homogeneous backgrounds all con-
tribute to successful participatory management. Is it
necessary therefore for U.S. firms to adopt similar
practices within their organization? Or can such em-
ployee involvement be sustained in a more tradi-
tional U.S. organizational setting?
3. Major decision areas in operations
So far, our discussion has focused primarily on
the different issues that must be considered in ana-
lyzing any OM practice. However, there are a num-
ber of distinct decision areas within OM, and many
of the new practices that have been observed in
industry have focused on a narrow range of activities
within operations. Therefore, it is important for us to
develop a classification of major decision areas within
operations that can provide a framework within which
to view the impact of these new practices.
Many classifications of OM decisions can be
found in introductory texts on OM. We considered
such classifications from five texts: (Chase and
Aquilano, 1995; Dilworth, 1992; Heizer and Render,
1993; Schroeder, 1993; Stevenson, 1986). Consistent
with these textbooks, we classify the key decision
areas within OM into the following four broad cate-
gories:
(i) product design;
(ii) process selection;
(iii) production planning and control;
(iv) quality management.
While our classification seemingly emphasizes the
key tactical decisions within operations, st rat egi c
decisions are also related to this categorization. Since
operations strategy is a statement of what the produc-
tion system must accomplish (Skinner, 1978), it will
emphasize the key capabilities that need to be devel-
oped by the organization and these capabilities will
necessarily affect all four of our decision areas.
In the remainder of this section, we proceed to
elaborate on each of the four decision areas and
discuss some major research issues that are amenable
to theories and methodologies in economics.
3.1. Ne w pr oduct desi gn
Decisions involving new product design and de-
velopment, while not completely in the domain of
the operations function, influence and are influenced
by operations decisions concerning process technol-
428 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
ogy, raw materials acquisition, and production con-
trol. Historically, in many firms in the U.S., the
interaction between product design and manufactur-
ing has been minimal. Product design and manufac-
turing have been viewed as sequential activities, with
the result that the design process has tended to
ignore potential manufacturing problems that arise as
a result of the design decisions. As a result, changes
are often required after manufacturing receives the
design, thus increasing the time to market. In addi-
tion, suboptimal decisions tend to be made as manu-
facturing and design attempt to make either design
changes or processing changes on a patchwork basis
to solve the problems. Both cost and quality tend to
suffer as a result (Dean and Susman, 1989).
As the basis for competition in many industries
has evolved to emphasize time-based competition
and high product quality, firms have focused on
management practices such as "desi gn for manufac-
turability" (e.g. (Dean and Susman, 1989)) to reduce
development lead times and achieve high product
quality in the manufacturing process. As Wheel-
wright and Clark (1992) point out, a firm that devel-
ops high-quality products rapidly increases its com-
petitive options. It can introduce a product into the
market faster than its competitors or it can delay its
new product development process to acquire better
market and technology information and introduce a
new product at the same time as its competitors, but
bring to market a product that is much better suited
to customer needs. Activities that have become a
well-accepted part of such practices include reducing
the part count and using modular designs to simplify
the manufacturing process and using computer-aided
design/computer-aided engineering technologies
to reduce lead times (Schonberger, 1986). In addi-
tion, cross-functional marketing-design-manufactur-
ing teams are formed to ensure that design decisions
are addressing customer needs and at the same time
are congruent with manufacturing capabilities. This
team approach has been referred to as "concurrent
desi gn" or "simultaneous engineering" (Whitney,
1988). Chrysler, for example, has used cross-func-
tional "pl at f or m" teams, each team focusing on
developing one line of cars or trucks. These platform
teams have been very successful, reducing the time
to market from 60 months in the 1980s to 31 months
for the Neon, launched in January 1994 (Womack
and Jones, 1994). The emphasis on design for manu-
facturability has reduced the time to paint, weld and
assemble a product from 35 to 22 hours.
Impact of industry structure. What are the key
industry-related factors driving a firm to adopt these
new R&D practices? What industry conditions af-
fect the effectiveness of these practices? Economic
methods can help to gain insights into such questions
both from a theoretical perspective, by developing
formal models of competition, as well as by empiri-
cal analysis of observed firm behavior in different
industries.
Another question that arises is how firms should
allocate their resources between R&D and capital
investment. What are the industry factors that affect
such allocation decisions? In many Japanese manu-
facturing companies, for example, R&D investment
is much greater than capital investment (Kodama,
1992).
Scope of competitive advantage. How can R& D
activities provide a sustainable competitive advan-
tage for a firm? As indicated above, the popular
business press is replete with recommendations to
pursue approaches such as design for manufactura-
bility and simultaneous engineering that speed up the
product development process and make it more ef-
fective in achieving cost and quality goals. What is
less clear is whether these approaches are actually
able to provide any long-term sustainable benefits to
a firm. Stalk and Webber (1993), for example, de-
scribe a "dar k side to time-based competition" in
Japan in the early 1990s, where firms began to invest
an increasing amount of resources to bring out more
and more varieties of products without achieving any
competitive advantage, higher margins or profits.
They point out that many firms in Japan have now
begun to cut back on the variety of their products.
Japanese automakers, for example, have announced
that they will be stretching their new product cycle
from four to five years and are reducing the number
of models they offer to customers (Stalk and Web-
ber, 1993). Toyota has announced that it will reduce
the number of Corolla models from 11 to 6. Nissan
has announced that it will reduce the number of
engines it offers by 40% over the next five years.
Another question of interest is whether firms face
a trade-off when they seek both higher design quality
and quick product designs. In some industries,
R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435 429
changes in technology have led to a clear emphasis
on one dimension over the other. For example, Gross
and Coy (1995) point out that design engineers of
custom logic chips today have begun to emphasize
quick designs over efficient designs since chips have
become so small that compactness of design on a
silicon wafer is no longer a critical success factor,
but speed to market has become a key competitive
weapon. How do different industries address this
trade-off? Furthermore, what management practices
are associated with minimizing such trade-offs?
Impact of organizational design. One of the key
questions that arises in the area of product design
from an organizational design perspective is how
inter-functional design teams with design, marketing
and manufacturing staff should be structured and
rewarded. While the popular press has been nearly
unanimous in promoting the use of such inter-func-
tional teams, the potential organizational problems
have received much less attention. Chrysler, for ex-
ample, has discovered that many members of its
platform teams have become anxious about their
career path in the organization, given that these
teams have very few layers of management (Womack
and Jones, 1994). They are also worried about the
dilution of their skills due to a lack of communica-
tion with functional colleagues elsewhere in the firm.
What is required is a formal study of the key organi-
zational changes that should accompany the success-
ful deployment of such interfunctional teams.
Human resource management. What should be
the incentive structure for inter-functional design
teams? How can these incentives be structured to
ensure that the product design achieves the desired
goals of cost, quality, lead time and meeting cus-
tomer needs. How should members of teams respon-
sible for these activities be selected? These are some
questions that need to be analyzed using the theories
and methods of economics.
3.2. Process selection
Process selection decisions are concerned with
determining the specifics of the transformation sys-
tem to be used by the firm to convert its inputs into
outputs. Broadly speaking, there are three inter-re-
lated decisions that are a part of process selection.
(i) Determining the organization of material flow.
Hayes and Wheelwright (1984) identify four
major process flow structures: job shop, batch
flow, assembly line and continuous flow.
(ii) Determining the appropriate process technology
mix.
(iii) Determining the location, design and layout of
production facilities.
There are many new OM practices that address
issues related to process selection. Computer-in-
tegrated manufacturing (CIM) and flexible manufac-
turing systems (FMS) have become significant as-
pects in the technology determination process. The
advent of such "sof t automation' " offers the poten-
tial of producing large varieties of products in small
lot-sizes at costs comparable to the traditional high-
volume dedicated production lines.
Impact of industry structure. What are the key
industry factors affecting decisions regarding process
selection? In particular, what is the impact of the
industry structure on decisions about investment in
new technologies? For instance, RiSller and Tombak
(1993) study the impact of industry structure on
investment in FMS. They develop a two stage
oligopoly model of technology adoption that predicts
market size and product differentiation as the key
factors driving a firm to invest in FMS. They also
present empirical support for their predictions.
Scope of competitive advantage. To what degree
is investment in new technologies a key determinant
of competitive advantage? Anecdotal evidence indi-
cates that many firms are able to achieve industry
leadership by investing in appropriate technologies
rather than by investing in the latest technologies
(Grant et al., 1991). For example, in the early eight-
ies, the most efficient automobile engine plant in the
world was Toyota' s No. 9 Kamigo engine plant in
Japan (McElroy, 1984), a plant equipped with
twenty-year-old machines which had been meticu-
lously retrofitted and maintained to achieve the high-
est levels of efficiency in the industry. In fact, Hayes
and Wheelwright (1984) point out that in 1980, the
majority of Japanese equipment spending was on
upgrading the capabilities of existing equipment,
while in the U.S., manufacturers spent an average of
75% of their capital investment on additional capac-
ity and replacement of old machines. Rigorous em-
pirical analysis is necessary to understand the key
430 R.D. Banker, LS. Khosla //Journal of Operations Management 12 (1995) 423-435
industry factors that drive the use of new technology
to gain competitive advantage. At the same time
dynamic models of competition can help us to pre-
dict firm behavior in making new technology deci-
sions and seeking competitive advantage.
How should new technologies be justified? A firm
needs to determine the economic value of investing
in new technology to decide whether the investment
is worthwhile (Kaplan, 1986; Fine, 1993). Estimat-
ing this economi c value requires addressing not only
the obvious manufacturing cost issue, but also the
strategic impact of the new technologies. For exam-
ple, Haas (1987) describes a computer components
manufacturer which invested $20 million in a flexi-
ble assembly system. The company found that the
new system reduced manufacturing costs to such an
extent that it paid for itself in a year. Strategically,
however, the investment was even more attractive,
since production times were cut by 80% and product
quality was increased ten-fold, moving the firm from
being an undistinguished to an outstanding manufac-
turer in its industry. Formal economi c models will be
useful in developing new methods for the justifica-
tion of new technology that capture both cost and
strategic issues (Lederer and Singhal, 1988). Empiri-
cal studies that consider different justification ap-
proaches in different industries, and the degree to
which such approaches provide a competitive advan-
tage will also help to enrich our understanding on
this issue.
Impact of organizational design. What are the key
organizational factors affecting the adoption of new
technologies? Anecdotal evidence suggests that even
leading fi nns can ignore emerging technologies, of-
ten with disastrous results. For example, in the com-
puter industry, IBM misinterpreted the importance of
the microcomputer, and delayed its entry into what
became a lucrative market. From an operations per-
spective, it is important to understand what aspects
of organizational design are key elements in making
a firm respond quickly to changing product and
process technologies.
Human resource management. How can man-
agers be motivated to consider long-term benefits
from new technologies versus short-term associated
costs and risks? In many cases, it is easy for man-
agers to become complacent and ignore technologi-
cal changes, especially if the firm is a leader in its
industry. As Bower and Christensen (1995) point
out, the problem is especially acute when the emerg-
ing technology is "di sr upt i ve", that is, the new
technology addresses customer needs that are quite
different from those addressed by the existing tech-
nology. Since the new technology is of little value to
existing customers, managers perceive the new mar-
kets as having very little potential and choose to
ignore it. However, the new technology opens new
markets and quickly becomes lucrative, thus result-
ing in the firm missing a profitable opportunity. How
is the incentive structure for managers affected by an
environment characterized by such rapidly changing
technologies?
3.3. Production planning and control
Production planning and control decisions refer to
medium-term aggregate planning and short-term
scheduling decisions in operations. Many of the new
practices in OM have been directed at making plan-
ning and control decisions more efficient and mar-
ket-driven. Practices such as just-in-time production
typically involve implementing a rate-based master
production schedule that is used to drive a pull-based
production system. In order to implement an effec-
tive pull-based system, it is necessary to reduce setup
times and lot-sizes, as well as to ensure that ma-
chine-breakdowns are minimized by emphasizing
preventive maintenance. Activities such as setup re-
duction and process improvement are driven by cre-
ating worker teams (with management support) and,
therefore, just-in-time practices emphasize worker
involvement. Finally, closer supplier relations are
encouraged, since this allows the firm and its suppli-
ers to work together to design component parts
together and ensure high quality in their production.
One manifestation of this effort is that many firms
have moved towards having a single supplier for
many of their raw materials and parts. Each supplier
is given a long-term contract and provided technical
and managerial support to improve its production
process. Consider Chrysler as an example. Accord-
ing to Womack and Jones (1994), it has reduced its
supplier base from 2500 in the late 1980s to 300.
The suppliers are included in product development
discussions and they provide input on design im-
provements and cost reductions. Rather than select-
R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435 431
ing suppliers through a bidding process, Chrysler
selects its suppliers based on a broad set of criteria
and uses target pricing for the final product to deter-
mine component prices and then works with the
supplier on ways to achieve them. Most components
are single-sourced for the life of the product.
This wide range of activities raises interesting
research questions. We discuss some of these below.
Impact of industry structure. How are a fi rm' s
decisions regarding inventory and scheduling poli-
cies impacted by competitors' decisions? How are a
fi rm' s decisions concerning supply chain manage-
ment impacted by competitors' decisions? In particu-
lar, how does competition affect the number of
suppliers to a firm, the degree to which it seeks sole
suppliers and the degree of vertical integration?
There has been some research to date in the
operations management literature on the use of for-
mal economic models to predict firm behavior on
production planning decisions. Eliashberg and Stein-
berg (1991) study production and pricing strategies
for two firms with asymmetric cost structures. Li
(1992) considers the role of inventory in delivery
time competition, using an n-firm market game. Li
and Lee (1994) develop a duopoly model that fo-
cuses on a fi rm' s decisions on price and delivery
time performance.
Scope of competitive advantage. To what extent
do just-in-time OM practices result in a reduction of
trade-offs between the diverse objectives of minimiz-
ing cost, improving quality, reducing lead times and
creating flexibility to respond to customer needs?
Do just-in-time practices provide a sustainable
competitive advantage for a firm, or are these inno-
vations quickly copied by other firms in the indus-
try? In the latter situation, do these practices simply
result in a change in the basis of competition in the
industry without affecting the relative positions of
the firms in the industry?
To what extent can supply chain management
provide competitive advantage for a firm? What
practices within supply chain management are asso-
ciated with providing a competitive advantage? Dyer
and Ouchi (1993) discuss some key differences in
the way Japanese automobile firms manage their
suppliers versus their U.S. counterparts. For exam-
ple, they point out that American auto manufacturers
are more vertically integrated than the Japanese firms
with approximately 48% of parts manufactured inter-
nally, compared to 25% for Japanese firms. How-
ever, despite their greater degree of vertical integra-
tion, U.S. firms will contract with a greater number
of suppliers than the Japanese, who tend to buy
more, perhaps even entire subsystems, from a single
supplier.
Impact of organizational design. A common rec-
ommendation in the popular business press for im-
plementing just-in-time techniques is to use inter-
functional teams on the production floor to address
problems and seek continuous improvement. The
implication of this recommendation is that organiza-
tions move towards a flatter organizational structure
in order to successfully implement such practices.
However, it is not clear that such flat organizations
are always a prerequisite. Hayes and Pisano (1994)
discuss the case of Allegheny Ludlum, a specialty
steel manufacturing firm that has adopted many of
the new OM practices but continues to maintain a
primarily functional structure and involves top man-
agement directly on day-to-day issues, rather than
seeking to solve problems at lower levels of the
organization. Such anecdotal evidence suggests that
an important area of research is the link between
organizational design and the implementation of lean
manufacturing techniques. Another interesting ques-
tion is to what extent do specialization and job
classification systems among workers impede the
ability of the firm to implement the new OM prac-
tices.
Human resource management. How can a firm
provide incentives to its suppliers to reduce costs,
improve quality and adopt innovative OM practices
that can be beneficial to both the firm and its sup-
plier? U.S. automakers, for example, have not been
as successful as their Japanese counterparts in get-
ting suppliers to adopt lean manufacturing tech-
niques (Womack and Jones, 1994).
How should workers on the production floor be
motivated to ensure that their decisions are congru-
ent with the overall objectives of the firm? In partic-
ular, worker teams implemented as a part of these
new OM practices must address a variety of issues
such as setup time reduction, detecting the source of
quality problems, reducing machine downtime and
worker cross-training. How should worker incentives
be designed so that these continuous improvement
432 R.D. Banker, I.S. Khosla /Journal of Operations Management 12 (1995) 423-435
efforts are adequately addressed while meeting over-
all production goals?
One aspect of these innovative OM practices is
that managers must increasingly play a supporting
role that allows workers to address production prob-
lems directly. How should the incentives of man-
agers be aligned with those of the workers to ensure
that this support is in fact offered? This is particu-
larly pertinent given that managers in such instances
usually have short-term goals of meeting customer
demand as well as long-term goals of improving
productivity on which they are evaluated.
3.4. Quality management
The area of quality management is another area of
operations decisions that has been dramatically af-
fected by the renaissance in OM practices. The
notion of "bui l di ng quality into the product " as
opposed to "i nspect i ng quality into the product " is
one key element of this new thrust. Another key
element is that quality refers not only to external or
customer-driven quality, but also to internal quality
in the activities within the organization. As with
many of the other new OM practices, this new
emphasis on quality has been driven to a significant
extent by the competition from Japanese firms in
industries such as automobiles and consumer elec-
tronics. By reducing scrap and rework as well as by
improving product design quality, these firms were
able to compete effectively in the U.S. market by
offering higher quality products at lower costs than
their competitors. Thus, in the 1980s, many firms
began to view quality as a strategic weapon and
began to implement quality practices throughout their
organizations, using approaches proposed by quality
gurus such as Deming, Juran, Crosby, Taguchi and
Feigenbaum. Formal tools such as statistical process
control (SPC), pioneered by Shewhart have become
standard mechanisms used by a firm in its drive to
improve quality. Indeed, to emphasize its endorse-
ment of quality as an integral element of success in
business, the U.S. government instituted the Mal-
colm Baldrige National Award in 1987. Motorola
won this award in the first year of its inception,
1988, and is estimated to have saved $6.5 billion in
manufacturing costs since 1987 (The Economist,
1995).
The philosophy of seeking continuous improve-
ment is another integral part of the new quality
management practices. This perspective emphasizes
that management should continually challenge the
firm to achieve increasingly higher levels of perfor-
mance in all aspects of the business. Moreover,
continuous improvement will be driven by participa-
tive management so that all levels of the workforce
are involved in this effort and decision-relevant in-
formation is provided to frontline workers (Melcher
et al., 1990). In order to motivate the need for this
iml~rovement, firms can compare their performance
on different dimensions with the best in the business.
This benchmarking process has become a key com-
ponent of the continuous improvement process.
The emphasis on quality is not limited to the
manufacturing sector. As service operations continue
to grow in importance, a variety of new OM prac-
tices pertaining specifically to quality management
in service firms have become institutionalized. Pre-
dominant among these new practices is the renewed
focus on the customer. Just as "zer o defect s" be-
came a key driver for quality improvement in manu-
facturing firms, "zer o defections", i.e. keeping the
customer has become a pivotal driver of quality
improvement in the service sector (Reichheld and
Sasser, 1990). As Heskett et al. (1994) point out, the
lifetime value of a loyal customer can be astronomi-
cal, especially when referrals and repeat purchases of
related products are considered. Reichheld and Sasser
(1990) estimate that a 5% increase in the customer
retention rate can produce profit increases from 25%
to 85%. It is not surprising, therefore, that many
service firms are re-designing their service delivery
systems to allow managers and workers to pay more
attention to customer needs.
Impact of industry structure. What is the impact
of the industry structure on the quality of a firm' s
product? To what degree does competitive intensity
drive quality improvement within an industry?
Banker and Khosla (1994) develop formal models of
oligopolistic competition to study the effect of com-
petitive intensity on decisions about quality levels.
Their analysis shows that equilibrium quality and
competitive intensity depends not only on the precise
manifestation of increased competition, but also on
the cost and demand characteristics in the industry.
An important element of the quality movement is
R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435 433
competitive benchmarking. Why should firms volun-
tarily share performance information with their com-
petitors? Are trade associations or similar institutions
valuable intermediaries for this purpose? Kirby
(1988) presents some answers to these questions
using an oligopolistic model of competition and in-
formation transmission. Elnathan and Kim (1995)
further extend this analysis to provide predictions
about the type and size of firms that will form into a
cooperative group to share benchmarking informa-
tion.
Scope of competitive advantage. What aspects of
quality improvement efforts provide sustainable
competitive advantage for a firm? It has been argued
that achieving high quality is no longer a mechanism
to seek competitive advantage, but rather a precursor
to being competitive at all (The Economist, 1995).
The sharp decline in the number of applicants for the
Baldrige Award in 1994 has been viewed as a signal
of the way in which quality is perceived as a compet-
itive weapon. Rigorous empirical studies that are
industry-specific can shed some light on how quality
improvement efforts have evolved in their competi-
tive scope.
Impact of organizational design. What are the key
organizational factors that influence detailed under-
standing of the process, which in turn is a key driver
of continuous improvement? Semiconductor compa-
nies, for example, are able to double their yield
every three years or so. As Bohn (1994) points out,
the incremental capital investment in such cases is
usually minimal. Instead what drives the improve-
ment are changes in the manufacturing process,
brought about as the firm progresses further along its
experience curve. Therefore, it is important to under-
stand how organization design can affect a fi rm' s
ability to learn and its resultant rate of continuous
improvement.
Human resource management. How can employ-
ees be motivated to strive to achieve the quality-re-
lated objectives of the firm? More specifically, how
does a " t op- down" management approach in quality
improvement compare in performance to a more
horizontal, worker-empowerment approach? IBM, for
example, no longer has any formal stand-alone qual-
ity management programs (The Economist, 1995).
Instead, the emphasis is that all corporate activities
be infused with the notion of quality.
4. Conclusions
This paper has focused on the use of economic
theory as an increasingly relevant tool for the analy-
sis of operations management issues. The evolution
of operations management has, over the last two
decades, resulted in a number of new and innovative
practices being adopted by firms in the U.S. Thus, it
is appropriate that the research agenda in OM shift
as well, directing its attention to which of these
practices work well under what conditions, so that
the findings of this type of research can guide firms
in making improved decisions regarding the adoption
and successful implementation of these practices.
In this paper we have argued that there are two
key perspectives that must be considered in the
analysis of any new OM practice.
(i) External perspective. This perspective considers
the nature of competition in analyzing the adop-
tion of new OM practices. We consider two
broad categories of issues in this perspective.
First, we consider the impact of industry struc-
ture on the adoption and implementation of these
practices. Second, we consider the scope of
competitive advantage provided by such prac-
tices.
(ii) Internal perspective. This perspective focuses
on the issue of selection, coordination and moti-
vation of employees within the organization. We
also consider two key inter-related issues here.
First, we consider the issue of coordination of
decisions within an organization and the appro-
priate organizational design to achieve this coor-
dination. Second, we consider the issue of selec-
tion, providing of incentives and motivation to
individual employees, which we have referred to
as human resource management.
We have considered the impact of these decision
perspectives on four major decision areas within
operations: product design, process selection, pro-
duction planning and control, and quality manage-
ment. For each area, we have discussed some key
research questions that were highlighted by the dif-
ferent decision perspectives. Anecdotal evidence
from the popular press was used to motivate the need
for such inquiries.
In conclusion, our contribution here has been to
posit that recent advances in the field of OM has
434 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
reinforced the need for new research perspectives
that can enrich theory development. We believe that
the research agenda in operations management can
significantly benefit from new theoretical and
methodological perspectives from the field of eco-
nomics.
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doc_281007553.pdf
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 improve their competitiveness. Among the many practices that have been adopted by a large number of firms are just-in-time, total quality management, worker empowerment, and design for manufacturability.
E L S E VI E R Journal of Operations Management 12 (1995) 423-435
JOURNAL OF
OPERATIONS
MANAGEMENT
Economics of operations management: A research perspective
Rajiv D. Banker, Inder S. Khosla *
Department of Operations and Management Science, Curtis L. Carlson School of Management, University of Minnesota,
Minneapolis, MN 55455, USA
Abstract
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 improve their competitiveness. Among the many practices that have been adopted by
a large number of firms are just-in-time, total quality management, worker empowerment, and design for manufacturability.
However, there has been little systematic analysis of the organizational factors that drive the adoption of these practices as
well as their successful implementation. This paper posits that the theories and methods from economics can provide a useful
aid in such an analysis. Using the basic tenets of economics, a structural framework is proposed to highlight critical issues in
operations management that deserve attention. Examples from industry are used to illustrate how the framework may provide
answers to questions that have received little attention in the research literature.
1. Introducti on
In the 1970s and 1980s, many manufacturing
organizations in the U.S. found t hemsel ves facing
intense pressure from overseas competitors who could
supply products of equal or higher quality at a lower
cost. As a result, many new manufacturing and
management practices have been i mpl ement ed by
these U.S. manufacturing organizations in their quest
for maj or i mprovement s in productivity and quality.
Experimentation with new practices to manage oper-
ations is evident also in service organizations as they
seek to increase their cust omer orientation. The pro-
liferation of a wide range of new practices presents a
new challenge for research in operations manage-
ment (OM). Historically, the focus of OM research
has been developing rich, normat i ve model s of man-
* Corresponding author.
ufacturing or service activities and empl oyi ng these
model s to prescribe i mproved methods and algo-
rithms to solve specified problems. However, we
have very little systematic evidence about what char-
acterizes the organizations that adopt particular types
of operations management practices and what char-
acterizes the conditions under which particular prac-
tices are more effective. There is also a need for
theories to explain and predict the adoption of differ-
ent OM practices and the success of these practices.
The objective of this paper is to argue that the
theories and methods from the field of economi cs
can provide a useful aid in answering the above
questions. It should be made clear, however, that
economi cs is not the onl y field that can provide us
with theories and methods to analyze these issues.
Indeed, it is important that as research in OM evolves,
we also seek insights f r om other disciplines such as
psychol ogy, sociology and organizational behavi or
which can be used synergistically with economi c
0272-6963/95/$09.50 © 1995 Elsevier Science B.V. All rights reserved
SSD1 0272- 6963( 95) 00022- 4
424 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
analysis. Our focus here is on the potential contribu-
tions from using the tools and methods of eco-
nomics. In contrast, Fine (1992) discusses economi c
issues in the specific context of technology evalua-
tion. Using the basic tenets of economics, we pro-
pose here a structural framework that highlights some
broad critical issues in operations management that
deserve attention. We caution the reader that this
paper is not an attempt at an exhaustive classification
of research questions that can be addressed in the
context of our framework. It is also not a tutorial on
economi c tools and their application to research on
operations management issues. Rather, using exam-
ples from industry, we identify a variety of issues
that are important to OM practice and can be ad-
dressed within an economi c framework.
Many of the new OM practices have sought to
direct the attention of the organization to adding
greater value from the perspective of the customer.
Value is sought to be added through these practices
by reducing costs, improving quality, reducing lead
times and increasing flexibility to react quickly to
changing customer needs. These practices include
just-in-time production, total quality management,
worker empowerment and design for manufacturabil-
ity.
Before we can be prescriptive about what organi-
zations should adopt which practices, we need to
have a clear understanding of why firms adopt these
practices and whether these practices create the value
that they are expected to create. For this purpose, we
need theories to rigorously conceptualize these issues
and predict practical outcomes, as well as empirical
analyses that test these conceptualizations.
A lot has been written in the popular business
press about the changes taking place in the opera-
tions management practices of U.S. organizations.
Many of these books and articles contend that the
adoption of such practices enable a firm to obtain a
competitive advantage or that they enable them to
offset the advantage enjoyed by a competitor. Com-
petitive pressure is believed to be a key factor driv-
ing the implementation of new practices. However,
much of the extant literature has viewed operations
management problems from the perspective of a
single firm optimizing under uncertainty; implicitly,
all industry-level interactions are treated as those
with passive competitors and subsumed within a
variable modeling uncertainty. It is essential, there-
fore, that in understanding the pattern of choices of
different practices by different firms in different
industries, we explicitly employ models of firms in
competition with each other and evaluate how com-
petitive interactions influence a fi rm' s optimal deci-
sions.
Several models of competition exist in the eco-
nomics literature that can be leveraged to address
these important problems in operations management.
These economic models range from that of a compet-
itive equilibrium in an economy with a large number
of firms and costless transmission of information
(Arrow and Hahn, 1970; Debreu, 1959) to that of a
competitive equilibrium in an oligopoly with a small
number of firms with significant market power (Nash,
1950; Harsanyi, 1967). And, of course, these classi-
cal models have been extended to address a richer
array of economi c concerns (see (Tirole, 1988; Fu-
denberg and Tirole, 1991) for a review). The chal-
lenge before researchers in operations management
is to further enrich the structure of these models to
focus not only on cost, but also on quality, flexibility
and lead time that are of concern from an operations
perspective. Furthermore, such a development of a
theoretical framework to analyze OM problems re-
quires that we view these issues from the perspective
of customers who demand the various attributes in a
product or service in addition to the perspective of
the producers who supply it as is commonly done in
most extant OM analysis. This is essential to evalu-
ate the full competitive ramifications of operations
strategy decisions.
A second distinctive aspect emphasized by the
new manufacturing practices such as total quality
management, just-in-time production, and worker
empowerment is the need for coordination between
different individuals that comprise an organization.
There is increasing recognition of the fact that the
environments in which operational activities are per-
formed are characterized by uncertainty and the po-
tential exists to improve performance by learning
about the environment to help resolve some of the
existing uncertainty. Efforts to facilitate coordination
and learning are confounded by the fact that the
information available to different individuals in dif-
ferent parts of an organization can vary, and further,
the objectives and incentives for each individual may
R.D. Banker, L S. Khosla /Journal of Operations Management 12 (1995) 423-435 425
also differ from those of other stakeholders in the
organization. As a result, implementation of any
operations strategy requires a careful consideration
of the information available and incentives provided
to different individuals comprising the organization.
Thus, the simultaneous consideration of the problems
of several decision makers can considerably compli-
cate the analysis of most common operations man-
agement problems ranging from new product devel-
opment to production planning and control decisions.
Many economi c models analyze the interplay be-
tween information, incentives and decision-making.
These range from the early work on team behavior
(Marschak and Radner, 1972) to more recent agency
theory (Jensen and Meckling, 1976). While some of
the assumptions of these models may not be appro-
priate in the OM context, the analytical methods of
these models can be deployed to construct and ana-
lyze new models to represent OM problems. Such
new models will also, in turn, serve to advance the
field of economics (see, for example, (Milgrom and
Roberts, 1990)).
So far, we have only discussed theoretical models
that have the potential to be relevant to OM prob-
lems. However, empirical analysis is equally impor-
tant as we seek to develop a better understanding of
the choice and efficacy of OM practices, before we
prescribe what practices organizations should adopt
(Swamidass, 1991). Careful and systematic empirical
documentation of adoption and implementation of
OM practices, as well as their effects on key perfor-
mance dimensions, is important because it provides
the basis for developing theoretical models to ex-
plain the documented phenomena. Even after we
have a base of alternative theories, and predictions
that derive from them, empirical research is neces-
sary to test these predictions. To the extent the
empirical evidence contradicts the theoretical predic-
tions, new challenges are presented for analytical
research to augment or modify existing theoretical
models or develop alternative models based on dif-
ferent assumptions. We believe that a coherent stream
of research can develop in this manner from an
economic (or psychological or sociological) theory
basis to compl ement the extant al gori t hmi c
research-based operations research models.
Much of the empirical research will need to draw
on actual operating data collected from the field.
Thus, empirical researchers in OM will need to
recognize explicitly that the data they use may result
from some deliberate choices by managers and
workers at their research site(s). In addition, unlike
laboratory experiments, observed data are often in-
fluenced by several factors not central to the theory
being tested, and therefore we need to control for
such factors. Furthermore, researchers using panels
of data over several periods of time a nd/ or across
several plants or organizations and simultaneously
considering multiple dimensions of performance that
influence each other need to recognize the possibility
of simultaneity and serial and contemporaneous cor-
relations in constructing their estimation models. As
a result, econometric methods developed to test eco-
nomic models using field data are likely to be partic-
ularly useful to empirical researchers in OM. Eco-
nomic theories can also inform and advance empiri-
cal analyses in OM. For example, theories relating to
production functions can be used to formalize the
notions of best practices and benchmarking in world
class manufacturing and the notions of technical
efficiency can be used to formalize the notions of
continuous improvement in operations (Cooper et al.,
1995). In addition, econometric methods of frontier
estimation such as data envelopment analysis (DEA)
(Charnes et al., 1981; Banker, 1993) can be used to
empirically identify best operations practices (Sinha,
1995).
The plan for the rest of this paper is as follows. In
the next section, we consider the two aspects of
decisions we have discussed in this section in greater
detail. Section 3 then describes a classification of
OM decision areas and we proceed to consider each
of these decision areas in greater detail. For each
decision area, we describe research issues that are
amenable to theories and methods in economics and
are motivated by anecdotal industry evidence and by
our classification of different decision perspectives.
Finally, Section 4 concludes the paper.
2. Classification of decision perspectives
In the previous section, we argued that there are
two distinctive aspects to any analysis of new OM
practices: (i) an external perspective, that explicitly
considers the nature of competition in analyzing the
426 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
adoption of these practices; and (ii) an internal
perspective, that focuses on the issues of coordina-
tion and motivation of employees within the organi-
zation. In this section, we further elaborate on these
two perspectives.
2.1. External perspective
When considering the nature of competition and
how it drives different OM practices, we can divide
the issues to be considered into two broad categories:
(i) the impact of industry structure on how these
practices are adopted; and (ii) the scope of competi-
tive advantage provided by such practices. We pro-
ceed to discuss each of these categories in greater
detail.
2.1.1. Impact of industry structure
The main question of interest here is how the
industry structure impacts different operations man-
agement decisions. Broadly speaking, we are con-
cerned with how basic industry characteristics affect
the adoption and successful implementation of the
new OM practices. Some of the industry characteris-
tics of interest include the number of competitors
and their relative sizes, the degree of differentiation
in the products of rival firms, the industry growth
rate and the pace of technological change in the
industry. Porter (1979) identifies five key competi-
tive forces: rivalry among competing sellers, firms in
other industries offering substitute products, potential
new entrants, suppliers of key inputs and buyers.
As we discussed in the Introduction, the adoption
of many of the innovative practices in OM in the
U.S. has been attributed to competitive pressures,
especially from overseas. In the mid-sixties, only 7%
of the U.S. economy was exposed to international
competition; by the 1980s, this figure exceeded 70%
(Gwynne, 1992). Thus, while it is true that such
competitive pressures have increased significantly
over the last decade, it is less clear that the best
strategy for a firm faced with intense competitive
pressures is to "f ol l ow the l eader". For example,
while just-in-time practices have been viewed as a
critical element of success for Japanese firms, Inman
and Mehra (1990) found that many small firms
simply cannot afford to convert to these practices,
given the high costs of training, preventative mainte-
nance and other activities required to implement
them.
2.1.2. Scope of competitive advantage
The primary question of interest here is to what
extent do different OM decisions provide a competi-
tive advantage to a firm. This competitive advantage
may manifest itself as a price advantage or an advan-
tage along some other dimension of value to the
customer such as delivery time, flexibility to chang-
ing customer needs or product quality. Also at issue
here is whether the advantage is sustainable: Do any
of these new management practices provide a com-
petitive advantage that is sustainable over time, and
if so, in what way? Or, do these practices result in
quick adoption by all firms in the industry? In the
latter event, are all firms better off than before the
introduction of these practices, or do the benefits get
passed on to the customers?
2.2. Internal perspective
The internal perspective considers the internal
activities of a firm and views it as an organization of
agents with uncertain and dispersed information and
possibly different objectives. Broadly speaking, there
are two key, inter-related issues to be considered: (i)
the issue of coordination of decisions within the
organization so as to make the best use of available
information; and (ii) the issue of motivation and
provision of incentives so that individual and organi-
zational objectives are correctly aligned. The first
issue can be viewed as an issue of organizational
design, while the second can be viewed as an issue
of human resource management. We discuss these in
further detail.
2.2.1. Impact of organizational design
We are concerned here with the question of how
organizational design influences the adoption and
successful implementation of innovative OM prac-
tices. Among the issues that arise are the decisions
that need to be coordinated and the organizational
mechanisms that can be used to achieve this coordi-
nation. Economic frameworks like agency theory and
transactions cost analysis (Jensen and Meckling,
1976) can be usefully applied to analyze many of
these issues.
R.D. Banker, I.S. Khosla /Journal of Operations Management 12 (1995) 423-435 427
The popular business press suggests that most of
the new OM practices require significant changes in
the organizational design to facilitate their successful
implementation. For example, Schonberger (1986)
argues that implementing world class manufacturing
practices requires "organi zi ng for quick product flow
and tight process-to-process and person-to-person
l i nkages". However, the economic implications of
such tight linkages have not been theoretically articu-
lated.
The adoption of "mas s cust omi zat i on", the abil-
ity to provide individually customized products at
the same cost as standardized, mass-produced prod-
ucts, is another example of how organizational de-
sign plays a critical role in the successful implemen-
tation of an innovative OM practice. Pine et al.
(1993) describe how mass customization requires a
"dynami c network of relatively autonomous operat-
ing uni t s" in the manufacturing plant' s organiza-
tional structure, where each unit or module involves
a specific process or task, and different modules
interact in different ways for each customized prod-
uct.
2.2.2. Human resource manage me nt
We are concerned here with the issues of selec-
tion and motivation of employees that an organiza-
tion must consider in order to seek greater initiative
and productivity from the employees in their tasks. A
common theme in many of the new OM practices is
to use groups or teams and encourage " wor ker
empower ment " where workers are not only given
ownership of their tasks but are also held account-
able for their successful completion (Schlesinger and
Heskett, 1991). This emphasis on participatory man-
agement has been motivated to a great degree by the
success of Japanese firms in applying this approach
to all levels of their organization.
What are the factors that lead to the successful
implementation of these practices? Why is the sys-
tem not undermined by individuals seeking to further
their own objectives? Milgrom and Roberts (1992)
argue that in the case of Japanese firms, factors such
as lifetime employment, frequent job rotation, lim-
ited outside opportunities, narrow pay differentials
and relatively homogeneous backgrounds all con-
tribute to successful participatory management. Is it
necessary therefore for U.S. firms to adopt similar
practices within their organization? Or can such em-
ployee involvement be sustained in a more tradi-
tional U.S. organizational setting?
3. Major decision areas in operations
So far, our discussion has focused primarily on
the different issues that must be considered in ana-
lyzing any OM practice. However, there are a num-
ber of distinct decision areas within OM, and many
of the new practices that have been observed in
industry have focused on a narrow range of activities
within operations. Therefore, it is important for us to
develop a classification of major decision areas within
operations that can provide a framework within which
to view the impact of these new practices.
Many classifications of OM decisions can be
found in introductory texts on OM. We considered
such classifications from five texts: (Chase and
Aquilano, 1995; Dilworth, 1992; Heizer and Render,
1993; Schroeder, 1993; Stevenson, 1986). Consistent
with these textbooks, we classify the key decision
areas within OM into the following four broad cate-
gories:
(i) product design;
(ii) process selection;
(iii) production planning and control;
(iv) quality management.
While our classification seemingly emphasizes the
key tactical decisions within operations, st rat egi c
decisions are also related to this categorization. Since
operations strategy is a statement of what the produc-
tion system must accomplish (Skinner, 1978), it will
emphasize the key capabilities that need to be devel-
oped by the organization and these capabilities will
necessarily affect all four of our decision areas.
In the remainder of this section, we proceed to
elaborate on each of the four decision areas and
discuss some major research issues that are amenable
to theories and methodologies in economics.
3.1. Ne w pr oduct desi gn
Decisions involving new product design and de-
velopment, while not completely in the domain of
the operations function, influence and are influenced
by operations decisions concerning process technol-
428 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
ogy, raw materials acquisition, and production con-
trol. Historically, in many firms in the U.S., the
interaction between product design and manufactur-
ing has been minimal. Product design and manufac-
turing have been viewed as sequential activities, with
the result that the design process has tended to
ignore potential manufacturing problems that arise as
a result of the design decisions. As a result, changes
are often required after manufacturing receives the
design, thus increasing the time to market. In addi-
tion, suboptimal decisions tend to be made as manu-
facturing and design attempt to make either design
changes or processing changes on a patchwork basis
to solve the problems. Both cost and quality tend to
suffer as a result (Dean and Susman, 1989).
As the basis for competition in many industries
has evolved to emphasize time-based competition
and high product quality, firms have focused on
management practices such as "desi gn for manufac-
turability" (e.g. (Dean and Susman, 1989)) to reduce
development lead times and achieve high product
quality in the manufacturing process. As Wheel-
wright and Clark (1992) point out, a firm that devel-
ops high-quality products rapidly increases its com-
petitive options. It can introduce a product into the
market faster than its competitors or it can delay its
new product development process to acquire better
market and technology information and introduce a
new product at the same time as its competitors, but
bring to market a product that is much better suited
to customer needs. Activities that have become a
well-accepted part of such practices include reducing
the part count and using modular designs to simplify
the manufacturing process and using computer-aided
design/computer-aided engineering technologies
to reduce lead times (Schonberger, 1986). In addi-
tion, cross-functional marketing-design-manufactur-
ing teams are formed to ensure that design decisions
are addressing customer needs and at the same time
are congruent with manufacturing capabilities. This
team approach has been referred to as "concurrent
desi gn" or "simultaneous engineering" (Whitney,
1988). Chrysler, for example, has used cross-func-
tional "pl at f or m" teams, each team focusing on
developing one line of cars or trucks. These platform
teams have been very successful, reducing the time
to market from 60 months in the 1980s to 31 months
for the Neon, launched in January 1994 (Womack
and Jones, 1994). The emphasis on design for manu-
facturability has reduced the time to paint, weld and
assemble a product from 35 to 22 hours.
Impact of industry structure. What are the key
industry-related factors driving a firm to adopt these
new R&D practices? What industry conditions af-
fect the effectiveness of these practices? Economic
methods can help to gain insights into such questions
both from a theoretical perspective, by developing
formal models of competition, as well as by empiri-
cal analysis of observed firm behavior in different
industries.
Another question that arises is how firms should
allocate their resources between R&D and capital
investment. What are the industry factors that affect
such allocation decisions? In many Japanese manu-
facturing companies, for example, R&D investment
is much greater than capital investment (Kodama,
1992).
Scope of competitive advantage. How can R& D
activities provide a sustainable competitive advan-
tage for a firm? As indicated above, the popular
business press is replete with recommendations to
pursue approaches such as design for manufactura-
bility and simultaneous engineering that speed up the
product development process and make it more ef-
fective in achieving cost and quality goals. What is
less clear is whether these approaches are actually
able to provide any long-term sustainable benefits to
a firm. Stalk and Webber (1993), for example, de-
scribe a "dar k side to time-based competition" in
Japan in the early 1990s, where firms began to invest
an increasing amount of resources to bring out more
and more varieties of products without achieving any
competitive advantage, higher margins or profits.
They point out that many firms in Japan have now
begun to cut back on the variety of their products.
Japanese automakers, for example, have announced
that they will be stretching their new product cycle
from four to five years and are reducing the number
of models they offer to customers (Stalk and Web-
ber, 1993). Toyota has announced that it will reduce
the number of Corolla models from 11 to 6. Nissan
has announced that it will reduce the number of
engines it offers by 40% over the next five years.
Another question of interest is whether firms face
a trade-off when they seek both higher design quality
and quick product designs. In some industries,
R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435 429
changes in technology have led to a clear emphasis
on one dimension over the other. For example, Gross
and Coy (1995) point out that design engineers of
custom logic chips today have begun to emphasize
quick designs over efficient designs since chips have
become so small that compactness of design on a
silicon wafer is no longer a critical success factor,
but speed to market has become a key competitive
weapon. How do different industries address this
trade-off? Furthermore, what management practices
are associated with minimizing such trade-offs?
Impact of organizational design. One of the key
questions that arises in the area of product design
from an organizational design perspective is how
inter-functional design teams with design, marketing
and manufacturing staff should be structured and
rewarded. While the popular press has been nearly
unanimous in promoting the use of such inter-func-
tional teams, the potential organizational problems
have received much less attention. Chrysler, for ex-
ample, has discovered that many members of its
platform teams have become anxious about their
career path in the organization, given that these
teams have very few layers of management (Womack
and Jones, 1994). They are also worried about the
dilution of their skills due to a lack of communica-
tion with functional colleagues elsewhere in the firm.
What is required is a formal study of the key organi-
zational changes that should accompany the success-
ful deployment of such interfunctional teams.
Human resource management. What should be
the incentive structure for inter-functional design
teams? How can these incentives be structured to
ensure that the product design achieves the desired
goals of cost, quality, lead time and meeting cus-
tomer needs. How should members of teams respon-
sible for these activities be selected? These are some
questions that need to be analyzed using the theories
and methods of economics.
3.2. Process selection
Process selection decisions are concerned with
determining the specifics of the transformation sys-
tem to be used by the firm to convert its inputs into
outputs. Broadly speaking, there are three inter-re-
lated decisions that are a part of process selection.
(i) Determining the organization of material flow.
Hayes and Wheelwright (1984) identify four
major process flow structures: job shop, batch
flow, assembly line and continuous flow.
(ii) Determining the appropriate process technology
mix.
(iii) Determining the location, design and layout of
production facilities.
There are many new OM practices that address
issues related to process selection. Computer-in-
tegrated manufacturing (CIM) and flexible manufac-
turing systems (FMS) have become significant as-
pects in the technology determination process. The
advent of such "sof t automation' " offers the poten-
tial of producing large varieties of products in small
lot-sizes at costs comparable to the traditional high-
volume dedicated production lines.
Impact of industry structure. What are the key
industry factors affecting decisions regarding process
selection? In particular, what is the impact of the
industry structure on decisions about investment in
new technologies? For instance, RiSller and Tombak
(1993) study the impact of industry structure on
investment in FMS. They develop a two stage
oligopoly model of technology adoption that predicts
market size and product differentiation as the key
factors driving a firm to invest in FMS. They also
present empirical support for their predictions.
Scope of competitive advantage. To what degree
is investment in new technologies a key determinant
of competitive advantage? Anecdotal evidence indi-
cates that many firms are able to achieve industry
leadership by investing in appropriate technologies
rather than by investing in the latest technologies
(Grant et al., 1991). For example, in the early eight-
ies, the most efficient automobile engine plant in the
world was Toyota' s No. 9 Kamigo engine plant in
Japan (McElroy, 1984), a plant equipped with
twenty-year-old machines which had been meticu-
lously retrofitted and maintained to achieve the high-
est levels of efficiency in the industry. In fact, Hayes
and Wheelwright (1984) point out that in 1980, the
majority of Japanese equipment spending was on
upgrading the capabilities of existing equipment,
while in the U.S., manufacturers spent an average of
75% of their capital investment on additional capac-
ity and replacement of old machines. Rigorous em-
pirical analysis is necessary to understand the key
430 R.D. Banker, LS. Khosla //Journal of Operations Management 12 (1995) 423-435
industry factors that drive the use of new technology
to gain competitive advantage. At the same time
dynamic models of competition can help us to pre-
dict firm behavior in making new technology deci-
sions and seeking competitive advantage.
How should new technologies be justified? A firm
needs to determine the economic value of investing
in new technology to decide whether the investment
is worthwhile (Kaplan, 1986; Fine, 1993). Estimat-
ing this economi c value requires addressing not only
the obvious manufacturing cost issue, but also the
strategic impact of the new technologies. For exam-
ple, Haas (1987) describes a computer components
manufacturer which invested $20 million in a flexi-
ble assembly system. The company found that the
new system reduced manufacturing costs to such an
extent that it paid for itself in a year. Strategically,
however, the investment was even more attractive,
since production times were cut by 80% and product
quality was increased ten-fold, moving the firm from
being an undistinguished to an outstanding manufac-
turer in its industry. Formal economi c models will be
useful in developing new methods for the justifica-
tion of new technology that capture both cost and
strategic issues (Lederer and Singhal, 1988). Empiri-
cal studies that consider different justification ap-
proaches in different industries, and the degree to
which such approaches provide a competitive advan-
tage will also help to enrich our understanding on
this issue.
Impact of organizational design. What are the key
organizational factors affecting the adoption of new
technologies? Anecdotal evidence suggests that even
leading fi nns can ignore emerging technologies, of-
ten with disastrous results. For example, in the com-
puter industry, IBM misinterpreted the importance of
the microcomputer, and delayed its entry into what
became a lucrative market. From an operations per-
spective, it is important to understand what aspects
of organizational design are key elements in making
a firm respond quickly to changing product and
process technologies.
Human resource management. How can man-
agers be motivated to consider long-term benefits
from new technologies versus short-term associated
costs and risks? In many cases, it is easy for man-
agers to become complacent and ignore technologi-
cal changes, especially if the firm is a leader in its
industry. As Bower and Christensen (1995) point
out, the problem is especially acute when the emerg-
ing technology is "di sr upt i ve", that is, the new
technology addresses customer needs that are quite
different from those addressed by the existing tech-
nology. Since the new technology is of little value to
existing customers, managers perceive the new mar-
kets as having very little potential and choose to
ignore it. However, the new technology opens new
markets and quickly becomes lucrative, thus result-
ing in the firm missing a profitable opportunity. How
is the incentive structure for managers affected by an
environment characterized by such rapidly changing
technologies?
3.3. Production planning and control
Production planning and control decisions refer to
medium-term aggregate planning and short-term
scheduling decisions in operations. Many of the new
practices in OM have been directed at making plan-
ning and control decisions more efficient and mar-
ket-driven. Practices such as just-in-time production
typically involve implementing a rate-based master
production schedule that is used to drive a pull-based
production system. In order to implement an effec-
tive pull-based system, it is necessary to reduce setup
times and lot-sizes, as well as to ensure that ma-
chine-breakdowns are minimized by emphasizing
preventive maintenance. Activities such as setup re-
duction and process improvement are driven by cre-
ating worker teams (with management support) and,
therefore, just-in-time practices emphasize worker
involvement. Finally, closer supplier relations are
encouraged, since this allows the firm and its suppli-
ers to work together to design component parts
together and ensure high quality in their production.
One manifestation of this effort is that many firms
have moved towards having a single supplier for
many of their raw materials and parts. Each supplier
is given a long-term contract and provided technical
and managerial support to improve its production
process. Consider Chrysler as an example. Accord-
ing to Womack and Jones (1994), it has reduced its
supplier base from 2500 in the late 1980s to 300.
The suppliers are included in product development
discussions and they provide input on design im-
provements and cost reductions. Rather than select-
R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435 431
ing suppliers through a bidding process, Chrysler
selects its suppliers based on a broad set of criteria
and uses target pricing for the final product to deter-
mine component prices and then works with the
supplier on ways to achieve them. Most components
are single-sourced for the life of the product.
This wide range of activities raises interesting
research questions. We discuss some of these below.
Impact of industry structure. How are a fi rm' s
decisions regarding inventory and scheduling poli-
cies impacted by competitors' decisions? How are a
fi rm' s decisions concerning supply chain manage-
ment impacted by competitors' decisions? In particu-
lar, how does competition affect the number of
suppliers to a firm, the degree to which it seeks sole
suppliers and the degree of vertical integration?
There has been some research to date in the
operations management literature on the use of for-
mal economic models to predict firm behavior on
production planning decisions. Eliashberg and Stein-
berg (1991) study production and pricing strategies
for two firms with asymmetric cost structures. Li
(1992) considers the role of inventory in delivery
time competition, using an n-firm market game. Li
and Lee (1994) develop a duopoly model that fo-
cuses on a fi rm' s decisions on price and delivery
time performance.
Scope of competitive advantage. To what extent
do just-in-time OM practices result in a reduction of
trade-offs between the diverse objectives of minimiz-
ing cost, improving quality, reducing lead times and
creating flexibility to respond to customer needs?
Do just-in-time practices provide a sustainable
competitive advantage for a firm, or are these inno-
vations quickly copied by other firms in the indus-
try? In the latter situation, do these practices simply
result in a change in the basis of competition in the
industry without affecting the relative positions of
the firms in the industry?
To what extent can supply chain management
provide competitive advantage for a firm? What
practices within supply chain management are asso-
ciated with providing a competitive advantage? Dyer
and Ouchi (1993) discuss some key differences in
the way Japanese automobile firms manage their
suppliers versus their U.S. counterparts. For exam-
ple, they point out that American auto manufacturers
are more vertically integrated than the Japanese firms
with approximately 48% of parts manufactured inter-
nally, compared to 25% for Japanese firms. How-
ever, despite their greater degree of vertical integra-
tion, U.S. firms will contract with a greater number
of suppliers than the Japanese, who tend to buy
more, perhaps even entire subsystems, from a single
supplier.
Impact of organizational design. A common rec-
ommendation in the popular business press for im-
plementing just-in-time techniques is to use inter-
functional teams on the production floor to address
problems and seek continuous improvement. The
implication of this recommendation is that organiza-
tions move towards a flatter organizational structure
in order to successfully implement such practices.
However, it is not clear that such flat organizations
are always a prerequisite. Hayes and Pisano (1994)
discuss the case of Allegheny Ludlum, a specialty
steel manufacturing firm that has adopted many of
the new OM practices but continues to maintain a
primarily functional structure and involves top man-
agement directly on day-to-day issues, rather than
seeking to solve problems at lower levels of the
organization. Such anecdotal evidence suggests that
an important area of research is the link between
organizational design and the implementation of lean
manufacturing techniques. Another interesting ques-
tion is to what extent do specialization and job
classification systems among workers impede the
ability of the firm to implement the new OM prac-
tices.
Human resource management. How can a firm
provide incentives to its suppliers to reduce costs,
improve quality and adopt innovative OM practices
that can be beneficial to both the firm and its sup-
plier? U.S. automakers, for example, have not been
as successful as their Japanese counterparts in get-
ting suppliers to adopt lean manufacturing tech-
niques (Womack and Jones, 1994).
How should workers on the production floor be
motivated to ensure that their decisions are congru-
ent with the overall objectives of the firm? In partic-
ular, worker teams implemented as a part of these
new OM practices must address a variety of issues
such as setup time reduction, detecting the source of
quality problems, reducing machine downtime and
worker cross-training. How should worker incentives
be designed so that these continuous improvement
432 R.D. Banker, I.S. Khosla /Journal of Operations Management 12 (1995) 423-435
efforts are adequately addressed while meeting over-
all production goals?
One aspect of these innovative OM practices is
that managers must increasingly play a supporting
role that allows workers to address production prob-
lems directly. How should the incentives of man-
agers be aligned with those of the workers to ensure
that this support is in fact offered? This is particu-
larly pertinent given that managers in such instances
usually have short-term goals of meeting customer
demand as well as long-term goals of improving
productivity on which they are evaluated.
3.4. Quality management
The area of quality management is another area of
operations decisions that has been dramatically af-
fected by the renaissance in OM practices. The
notion of "bui l di ng quality into the product " as
opposed to "i nspect i ng quality into the product " is
one key element of this new thrust. Another key
element is that quality refers not only to external or
customer-driven quality, but also to internal quality
in the activities within the organization. As with
many of the other new OM practices, this new
emphasis on quality has been driven to a significant
extent by the competition from Japanese firms in
industries such as automobiles and consumer elec-
tronics. By reducing scrap and rework as well as by
improving product design quality, these firms were
able to compete effectively in the U.S. market by
offering higher quality products at lower costs than
their competitors. Thus, in the 1980s, many firms
began to view quality as a strategic weapon and
began to implement quality practices throughout their
organizations, using approaches proposed by quality
gurus such as Deming, Juran, Crosby, Taguchi and
Feigenbaum. Formal tools such as statistical process
control (SPC), pioneered by Shewhart have become
standard mechanisms used by a firm in its drive to
improve quality. Indeed, to emphasize its endorse-
ment of quality as an integral element of success in
business, the U.S. government instituted the Mal-
colm Baldrige National Award in 1987. Motorola
won this award in the first year of its inception,
1988, and is estimated to have saved $6.5 billion in
manufacturing costs since 1987 (The Economist,
1995).
The philosophy of seeking continuous improve-
ment is another integral part of the new quality
management practices. This perspective emphasizes
that management should continually challenge the
firm to achieve increasingly higher levels of perfor-
mance in all aspects of the business. Moreover,
continuous improvement will be driven by participa-
tive management so that all levels of the workforce
are involved in this effort and decision-relevant in-
formation is provided to frontline workers (Melcher
et al., 1990). In order to motivate the need for this
iml~rovement, firms can compare their performance
on different dimensions with the best in the business.
This benchmarking process has become a key com-
ponent of the continuous improvement process.
The emphasis on quality is not limited to the
manufacturing sector. As service operations continue
to grow in importance, a variety of new OM prac-
tices pertaining specifically to quality management
in service firms have become institutionalized. Pre-
dominant among these new practices is the renewed
focus on the customer. Just as "zer o defect s" be-
came a key driver for quality improvement in manu-
facturing firms, "zer o defections", i.e. keeping the
customer has become a pivotal driver of quality
improvement in the service sector (Reichheld and
Sasser, 1990). As Heskett et al. (1994) point out, the
lifetime value of a loyal customer can be astronomi-
cal, especially when referrals and repeat purchases of
related products are considered. Reichheld and Sasser
(1990) estimate that a 5% increase in the customer
retention rate can produce profit increases from 25%
to 85%. It is not surprising, therefore, that many
service firms are re-designing their service delivery
systems to allow managers and workers to pay more
attention to customer needs.
Impact of industry structure. What is the impact
of the industry structure on the quality of a firm' s
product? To what degree does competitive intensity
drive quality improvement within an industry?
Banker and Khosla (1994) develop formal models of
oligopolistic competition to study the effect of com-
petitive intensity on decisions about quality levels.
Their analysis shows that equilibrium quality and
competitive intensity depends not only on the precise
manifestation of increased competition, but also on
the cost and demand characteristics in the industry.
An important element of the quality movement is
R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435 433
competitive benchmarking. Why should firms volun-
tarily share performance information with their com-
petitors? Are trade associations or similar institutions
valuable intermediaries for this purpose? Kirby
(1988) presents some answers to these questions
using an oligopolistic model of competition and in-
formation transmission. Elnathan and Kim (1995)
further extend this analysis to provide predictions
about the type and size of firms that will form into a
cooperative group to share benchmarking informa-
tion.
Scope of competitive advantage. What aspects of
quality improvement efforts provide sustainable
competitive advantage for a firm? It has been argued
that achieving high quality is no longer a mechanism
to seek competitive advantage, but rather a precursor
to being competitive at all (The Economist, 1995).
The sharp decline in the number of applicants for the
Baldrige Award in 1994 has been viewed as a signal
of the way in which quality is perceived as a compet-
itive weapon. Rigorous empirical studies that are
industry-specific can shed some light on how quality
improvement efforts have evolved in their competi-
tive scope.
Impact of organizational design. What are the key
organizational factors that influence detailed under-
standing of the process, which in turn is a key driver
of continuous improvement? Semiconductor compa-
nies, for example, are able to double their yield
every three years or so. As Bohn (1994) points out,
the incremental capital investment in such cases is
usually minimal. Instead what drives the improve-
ment are changes in the manufacturing process,
brought about as the firm progresses further along its
experience curve. Therefore, it is important to under-
stand how organization design can affect a fi rm' s
ability to learn and its resultant rate of continuous
improvement.
Human resource management. How can employ-
ees be motivated to strive to achieve the quality-re-
lated objectives of the firm? More specifically, how
does a " t op- down" management approach in quality
improvement compare in performance to a more
horizontal, worker-empowerment approach? IBM, for
example, no longer has any formal stand-alone qual-
ity management programs (The Economist, 1995).
Instead, the emphasis is that all corporate activities
be infused with the notion of quality.
4. Conclusions
This paper has focused on the use of economic
theory as an increasingly relevant tool for the analy-
sis of operations management issues. The evolution
of operations management has, over the last two
decades, resulted in a number of new and innovative
practices being adopted by firms in the U.S. Thus, it
is appropriate that the research agenda in OM shift
as well, directing its attention to which of these
practices work well under what conditions, so that
the findings of this type of research can guide firms
in making improved decisions regarding the adoption
and successful implementation of these practices.
In this paper we have argued that there are two
key perspectives that must be considered in the
analysis of any new OM practice.
(i) External perspective. This perspective considers
the nature of competition in analyzing the adop-
tion of new OM practices. We consider two
broad categories of issues in this perspective.
First, we consider the impact of industry struc-
ture on the adoption and implementation of these
practices. Second, we consider the scope of
competitive advantage provided by such prac-
tices.
(ii) Internal perspective. This perspective focuses
on the issue of selection, coordination and moti-
vation of employees within the organization. We
also consider two key inter-related issues here.
First, we consider the issue of coordination of
decisions within an organization and the appro-
priate organizational design to achieve this coor-
dination. Second, we consider the issue of selec-
tion, providing of incentives and motivation to
individual employees, which we have referred to
as human resource management.
We have considered the impact of these decision
perspectives on four major decision areas within
operations: product design, process selection, pro-
duction planning and control, and quality manage-
ment. For each area, we have discussed some key
research questions that were highlighted by the dif-
ferent decision perspectives. Anecdotal evidence
from the popular press was used to motivate the need
for such inquiries.
In conclusion, our contribution here has been to
posit that recent advances in the field of OM has
434 R.D. Banker, LS. Khosla /Journal of Operations Management 12 (1995) 423-435
reinforced the need for new research perspectives
that can enrich theory development. We believe that
the research agenda in operations management can
significantly benefit from new theoretical and
methodological perspectives from the field of eco-
nomics.
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