4.

PRODUCTION AND OPERATIONS MANAGEMENT

The economic cycle of the company

 The economic cycle of the company
• Industrial Management revolves around the company's operations, that is, "what
is being done" in the company, the content of its business and how value is
created.
• The company's operations create a financial system, a kind of economic cycle of
the company, in which revenue is generated through the value created, at the
same time as this value creation requires the use of resources.
• Furthermore, this value creation usually requires an organization of human
resources, raw materials, warehouses, different types of equipment, investments
in production facilities, etc., which means that the company has to have enough
financial strength for the operations to run at all.
• It is from this perspective that we need to understand the concepts and models
for production, marketing, product development, organization, project
management, costing, capital investment analysis, accounting, financing, etc
4.PRODUCTION AND OPERATIONS MANAGEMENT
• Strategic growth and competitiveness of organizations are depending
upon the effective utilization of the critical productive resources of
the organization
• Production/operations function is concerned with design and control
systems responsible for the productive use of raw materials, human
resources, equipment and facilities in the development of a product
or service
• The words production and operations are used synonymously
PRODUCTION AND OPERATIONS MANAGEMENT
• Production is a creation of utility
• The production function creates utility by providing form, time, and
place utilities for the produced goods
• Manufacturing provides form utility while physical distribution(a
service function) provides the time and place utilities
• Operations is often defined as a transformation process
• In operations management, we try to ensure that the transformation
process is transformed efficiently and that the output is of greater
value than the sum of the inputs
PRODUCTION AND OPERATIONS MANAGEMENT
• Thus, the role of operations is to create value
• The transformation process itself can be viewed as a series of activities
along the value chain extending from design to disposal/supplier to
customer
• Any activities that do not add value are wastes and should be eliminated
• The input transformation(process)-output process is a characteristic of a
wide variety of operation systems
• In an automobile factory, steel sheet is formed into different shapes,
painted and finished and then assembled with thousands of component
parts to produce a working automobile
PRODUCTION AND OPERATIONS MANAGEMENT

• Obviously, operations can take many different forms. The

transformation process can be
-Physical: as in manufacturing operations
-Locational: as in transportation or warehouse operations
-Exchange: as in retail operations
-Physiological: as in health care
-Psychological: as in entertainment
-Informational: as in communication
Production and Operations Management—
Some Cases
Production and Operations Management—
Some Cases
PRODUCTION AND OPERATIONS MANAGEMENT
Operations management: Operation management may be
defined as a process, which combines and transforms various
resources used in the production subsystem of the organization into
value added products/services in a controlled manner as per the
policies of the organizations
• Thus, production/operations function a part of an organization,
which is concerned, with the transformation of a range of inputs
into required (products and services) outputs having a requisite
quality level
PRODUCTION AND OPERATIONS MANAGEMENT
• A set of various activities, which are involved in manufacturing certain
products, is named as "Production Management". If the same concept is
extended to service management, then the set of various management
activities are called "Operations Management"
• In general, the concept of manufacturing products/offering services is
called production/operations management
• Activities in production/operations management include
-What to produce ?
-How many to produce?
-How to produce?
-Where to produce?
-Who will do the work?
 Production/Operations System: A Model
• As we saw in previous chapter, any organization can be viewed as a
system, a set of related and interacting subsystems that perform
functions directed as reaching a common goal
• These subsystems can, in turn, be viewed as separate systems
• As the below diagram shows, inputs include human labor,
capital(money needed to acquire land, equipment, and so on)
technology, and information. These are the resources that will be
transformed into outputs that reflect the organization's goals
Conceptual Model of an Operations System
4.1 Business operations as a point of departure
• The main focus of Industrial Management is the business operations
of a company or an organization, i.e., the way they develop, produce,
and market their goods and services.
• One important aspect is to understand the different conditions of
different companies, for instance with respect to their customers,
products, and production processes (i.e., how different companies
create value for their customers).
• What the company offers, how these offers are created, and how
revenue is generated from the company's operations constitute the
core of Industrial Management.
4.1.1 The value propositions of goods and services
• Industrial companies create value by developing, producing, and marketing
products.
• When speaking of products in a general sense, we are usually referring to
physical objects. However, if we take a closer look, a product can refer both
to a good (tangible product) and a service (intangible product).
• The academic field of Industrial Management has traditionally revolved
around the production of physical goods; however, with time, the
production of services has become increasingly important.
• Thus, to avoid the traditional notion that a product is restricted to a
tangible object, it is today more common to speak of the company's value
proposition.
• This concept refers to the value of what a company is offering to its
customers, both products and/or services.
4.1.1 The value propositions of goods and services
Various types of value propositions
• Business-to-consumer (B2C)-companies sell their products directly to
consumers
• Business-to-business(B2B)-companies sell their products to other
companies
• Some products are sold to both consumers and producers.
• The customer type is often of critical importance for the company's
strategy and operations
Various types of value propositions
Characteristics of Products and Services
4.1.2 The value creation and value capture
The value creation :The company's transformation of resources
• A classic model of value creation in industrial companies describes
industrial operations as the transformation of various resources
(inputs) to products (outputs).
• A company's value added is the difference between the economic
value of its output (sales price for finished products) and the
economic value of its input (cost of the resources that make up the
products).
 The value creation process
• The value creation process is different for different types of
operations
• In the pure manufacturing company, various inputs are transformed
to outputs; that is, the physical products (goods) sold to customers.
Inputs may be raw materials, semi-finished goods, and various other
components.
• The resource transformation process also requires production
plants, technical equipment, the knowledge and skills of personnel,
and (sometimes) external contractors.
The value creation process in Pure Manufacturing
The Value Creation Process in a Pure Service Business

• In a pure service business, the transformation and logic of the value

creation process are different.
• The customer is often directly involved in the service operations (e.g.,
as the passenger of an airplane).
• Sometimes the service includes changes in the customer's operations
or property (e.g., car repairs, installing a computer system or
transporting goods).
• Services can also involve knowledge development, for example
training and consulting in different areas, or collecting information,
for example by gathering data on behalf of different customers for
different types of statistical analyses
The Value Creation Process in a Pure Service
Business
 Logics of Resource Transformations
• There are many factors that influence the resource transformation,
and exactly how the system should be designed to be efficient differs
from company to company.
• There are, however, four factors that are of particular importance in
order to understand the logics of different resource transformations,
sometimes referred to as "the 4 Vs":
I. Volume - the size of the business operations
II. Variety - the variety of products produced
III. Variation - the variation in customer demand
IV. Visibility- the level of customer interaction.
The cost structure in value creation
 The cost structure in value creation
• The value creation of different companies consists of different
combinations of these three (Product development, production, and
marketing)processes, which means that they are of different
importance in a company's operations.
• One way to understand this is to analyze how the costs are divided
between different types of value creation.
• Above figure gives some examples of how the cost structure in value
creation can vary between different companies and industries.
• Company 1, to the left, represents a traditional manufacturing
company: most of the costs, and thus most of the operations, are in
production.
 The cost structure in value creation
• Company 2 has the largest share of its costs in the form of purchases,
such as raw materials and components. Today, many manufacturing
companies have this cost structure: instead of doing everything
themselves, the trend has for a long time been to purchase
increasingly more work from various types of suppliers
• Company 3 is a company dominated by (product) development and
research, something which is common in the pharmaceutical industry.
• Company 4, on the other hand, is dominated by various marketing
activities, such as advertising, promotion, and customer relations.
Fashion, perfume, and cosmetics are some examples of businesses
which often report this type of cost structure
 Value Capture
• To survive in the long term, a company must retain some of the value
it creates for its customers in the form of revenues to generate profit.
This is referred to as value capture.
• The way this is done, the so-called revenue model, is often closely
associated with the value proposition the company offers its
customers.
• Most of the traditional revenue models are built around unit sales -
that is, the company receives payment for each unit sold based on
the cost of producing the unit, plus a profit margin
 Value Capture
• cost-based pricing is easy for everyone to understand
• The price that customers are willing to pay for a product cannot be
objectively determined
• Market conditions set sales prices based on rather vague ideas
about the value of the product for the customer, the price
competitors set for an equivalent product, and the alternative
products the customer could have purchased at the same price.
 Value Capture
• There are a number of other ways to generate revenue and to
"capture" a share of the value created for the customers
• One way is through additional sales in what is often called the
aftermarket
• This means that the company sells additional equipment, spare parts,
maintenance, or other product-specific services to customers who
have bought the company's products and thus become somewhat
dependent on them
• Typical examples are car retailers that often provide original spare
parts and accessories, or car workshops dedicated to specific
automotive brands
 Value Capture
• A common version of this revenue model is sometimes called "Razors
and Blades“
• The name comes from the now famous strategy used by Gillette for
its brand of men's safety razors.
• The razors were cheap, but the replacement blades were relatively
costly.
• This strategy tempts consumers to buy an inexpensive product that
requires more expensive consumables
 Value Capture
• Another version of this revenue model, which is often associated with
luxury products, is to sell accessory products and add-on services
under the same brand even though these products/services have no
direct connection to the original products.
• For example, the luxury automobile manufacturers, Porsche and
Ferrari, also sell clothes collections under their brands.
• The idea is to strengthen customer loyalty through brand
identification as well as generating significant additional revenues
 Value Capture
• A third type of revenue model is to rent or lease out products instead of selling
them.
• Although the company retains ownership of the product, the customer pays for
the right to use the product.
• A fourth revenue model is licensing. In this model, the customer purchases the
right to manufacture or sell a product, to use a technology, or to use a company-
owned intangible asset (e.g., patents and trademarks).
• A prime example of this is the Danish brewery Carlsberg, which, among other
things, does business by licensing the production of its Sol beer to other
breweries all around the world.
• Other examples are famous fashion companies, such as Armani, Hugo Boss, and
Prada, which gain revenue by licensing their brands to cosmetics, perfumes, and
other beauty products manufactured and sold by L'Oreal, and others.
 The business operations in the value chain
• So far, we have addressed the business operations of an individual
company.
• The individual company usually only includes one or a few of the
production steps from raw materials to finished products.
• Thus, we can identify a number of links in a product's value chain.
• For example, the production of a loaf of bread can be traced from planting
and harvesting, to the flourmill, to the wholesaler, to the retailer, to the
baker, and to the consumer.
• Although the value really only appears when the consumer eats the bread
• Value is added at each step of the value chain value (for example, a loaf of
bread has more value than the wheat seeds, than the flour, than the yeast,
etc.).
 Position in the value chain
• A company's position in the value chain and the various steps in the chain
that are covered by its operations raise strategic questions that influence
the company's long term development and competitiveness.
• In some industries, individual companies control the entire value chain.
• An example is the oil and gas industry in which large companies control
exploration, extraction, refining, and local petrol stations. In other
industries, individual companies specialize in only one link in the value
chain.
• There are, for instance, carpenters that are specialized in the assembly of
ready-to-assemble furniture from companies like Ikea, for different
companies
Position in the value chain: The traditional value chain

• Above figure illustrates a simplified value chain in the clothing

industry. The figure shows the links in which an article of clothing
(e.g., a pair of jeans) originates with raw materials and moves through
the various production steps before reaching the retail store.
Position in the value chain: Structural changes
• A value chain may change when
a new company enters an industry
or when existing companies change
their position in the chain.
For example, a company might buy
another company that is located
somewhere along the chain, either "downstream" (in front of it) or
"upstream" (in back of it). This is known as vertical integration
Position in the value chain: Structural changes
• Horizontal integration occurs when a company buys a competitor
positioned in the same part of the value chain. This type of structural
change is relatively common
• Ownership changes, however, are not the only way in which the
value chain may change. In the past, large industrial companies often
controlled many of the links in the value chain; there was a high
degree of vertical integration. In this way, companies could control
the quality and delivery of their components by manufacturing them
in-house. A well-known example comes from the automotive
industry.
Position in the value chain: Structural changes
• However, in recent decades, the trend has moved towards vertical
disintegration.
• This means that companies are specializing more in their core business and
leaving earlier steps in the value chain, for example manufacturing, to
external suppliers and consultants.
❖Outsourcing: The purchase of products and services that a company has
previously produced itself, from another source (e.g., a subcontractor), is
called outsourcing.
❖In-sourcing: At the same time as many companies specialize in some
activities and outsource other activities, there is still a strong desire to take
control of the value chain by controlling what were traditionally regarded
as the customer's operations. This is called insourcing.
 Offshoring
• In recent decades, a strong trend has emerged of locating both manufacturing
and engineering activities in low cost countries
• The development in IT and telecommunications and the increased globalization
of trade have removed the spatial limitations of industrial operations.
• Geography is no longer the barrier it once was
• IT and telecommunication technology have, in many ways, made business
operations location-independent.
• Service operations such as call centers and telecommunication-based service
centers may be located thousands of miles from the customers who use them.
• Similarly, many labor-intensive production operations have moved from the old,
rich industrialized countries to countries in Asia, Africa.
• The physical movement of operations is called offshoring (not to be confused
with outsourcing, explained above).
 Re-shoring
• In recent years, a counter-trend has emerged in which companies return operations (that
were previously "off-shored") to their home countries.
• There are several reasons for such re-shoring.
• For example, the benefits of a low-cost country may have disappeared because the
country has grown wealthier.
• A second reason could be that a company may find the complexity of managing
operations and maintaining high-quality production in distant regions or countries too
difficult.
• Thirdly, technological development may have advanced to the point where the costs of
machinery and equipment have dropped low enough to restart production in the
company's home country.
• Consequently, off shoring and re-shoring will probably exist in parallel in the future:
global companies will choose production locations on the basis of efficiency and
economic considerations, wherever these locations are in the world.
 Efficiency, effectiveness, and productivity

• In a market economy, the fundamental assumption is that only

effective companies have a chance of long-term survival and
profitability.
• However, this does not mean that operations that are efficient and
effective automatically also are profitable.
 Profit and Profitability
• There are two additional concepts of importance that are often used in
performance measurement and financial control: profit and profitability.
• These are financial concepts and relate to efficiency, effectiveness, and
productivity only indirectly. In a market economy, the fundamental
assumption is that only effective companies have a chance of long-term
survival and profitability.
• However, this does not mean that operations that are efficient and
effective automatically also are profitable
 Profit and Profitability
• Profitability is about financial effectiveness.
• It is a measure of whether the company's profit satisfies the market's
or the owners' required return on their financial investments.
• Does a company produce a reasonable profit given the amount of
capital invested?
• How do we determine if a company is efficient, effective, and
productive enough to be profitable?
• The answer to this question requires continual control and follow-up
of the company's activities so that gradual changes are noted
 4.2 Production and Product Development
• Production involves creating value by efficiently transforming input
resources into various goods and services using equipment and staff.
• The term industrial production traditionally refers to manufacturing,
i.e., the physical transformation of raw materials and semi-finished
products into physical goods.
• However, the term has been given a wider meaning in line with
industrial evolution where an increasingly larger share of the
company offerings consists of various types of services.
 Production under different conditions
• The word production comes from the Latin word produco, which literally
means "bring forward", "put into motion", "generate", or "create". These
are the meanings when the word is used in expressions such as "to
produce goods", "to produce energy", "to produce a film", or "to create a
theatre production".
• A company's production system often extends beyond the company's legal
limits and can include a number of external actors, for example sub-
suppliers, contract manufacturers, and consultants
• The term operations management is often used to indicate this
diversification, to include all the parts of the company's operations that are
engaged to deliver a good, or perform a service, on behalf of a customer.
 Production under different conditions
• Production : Production comprises all activities that contribute to
producing and delivering the company's goods and services to the
company's customers.
Conflicting demands between marketing and production
• A production system must, of course, be designed for the products
that are to be produced, the markets on which they are to be sold,
and the dynamics of the market demand
• An efficient production system must be able to deliver the right
products in the right quality and be flexible so that it can be quickly
adjusted when demand changes or new products are to be launched
 Production under different conditions
Conflicting demands between marketing and production
• The problem is that several of these requirements are difficult to combine
with cost-efficient production
• There are several inherent conflicts between marketing and production on
which most companies need to compromise
• A production department is usually a cost center (it has a cost budget) and
has no responsibility for product design or pricing, while a marketing
department is usually a revenue center (it has a sales budget based on
revenue) and has no responsibility for costs that arise when the products
sold are produced.
• The design of a production system is, consequently, a compromise between
a number of different factors
 Production strategy
• Production strategy can be defined as a number of decisions
concerning investments in processes and infrastructure which are
expected, in the long term, to enhance the competitive factors which
are crucial for a company to win orders from its customers.

• Such strategic decisions often concern the company's position in the

value chain, the process design of the production system, capacity
dimensioning, location, supply-chain strategy, as well as competence
development and recruitment.
 Production strategy
• The requirements made on different production systems can be
described in terms of different production strategic competitive
factors.
• The following four competitive factors are usually considered to be of
the most important:
I. Price
II. Dependability
III. Quality
IV. Flexibility
 Production strategy
• Price : a company's ability to produce and deliver at a low cost to the
customer. This can be achieved by means of an even and high
resource utilization in production and low levels of capital tied up,
i.e., by having small inventories and short throughput times.

• Dependability : a company's ability to deliver fast and reliably. This

can be achieved by holding large inventories of finished products,
short throughput times in production, and swift deliveries with high
delivery precision.
 Production strategy
• Quality : a company's ability to meet customer needs and expectations.
This can be achieved by good control of production processes,
standardization of products and processes, and systematic knowledge
generation about customer needs.
• Flexibility : a company's ability to quickly and efficiently make necessary
adaptions of its production due to changes in the business environment.
This can be achieved by a production system design which enables swift
conversion and change.
• However, the challenge is that these competitive factors are conflicting
• Therefore, the final compromise has to be made with respect to the
company's value proposition and corporate business strategy
 Production strategy
The links between marketing strategy and production strategy
 Production strategy
Impact of production volume

The classic compromise between production volume and product variety

(based on Hayes & Wheelwright, 1984).
 Production strategy
Impact of production volume

Different process types in the production of goods (based on Hayes &

Wheelwright, 1984).
 Production strategy
Impact of production volume

Production volume product variety in service operations (from Silvestro,

1999)
 Production Strategy
The logic of the production flow
• The logic in (or the "profile" of) the production flow is usually linked
to the product's technical design and components.
• In simple terms, we can distinguish between four flow logics:
convergent flow (A profile), divergent flow (V profile), hourglass-
shaped flow (X profile), and T-shaped flow (T profile)
▪ In a convergent production flow (A profile), a large quantity of input is
converted into an output of a few products
- Convergent flows occur in jobbing, batch production, and mass
production. A typical example is the production of the Boeing , which
involves the assembly of more than five million components per
aircraft
 Production Strategy
The logic of the production flow
▪ In a divergent production flow (V profile), the situation is reversed. A
few inputs are converted into a large number of different end-
products.
-These operations are typically based entirely on continuous
production processes, high volume, and high level of specialization in
order to achieve economies of scale.
-One typical example is a steelworks, which can produce many
hundreds of different steel grades
- Oil refineries, which can convert crude oil into a large number of
products, from gas to asphalt
 Production Strategy
The logic of the production flow
▪ Hourglass-shaped (X profile). This type of flow is a combination of
convergent and divergent flows.
-One example is companies in which the products are modularized,
which means that the company uses a large volume of components to
produce standardized modules (high volume, produced for inventory),
which can be combined in many different ways, thus offering
customers a wide range of products (high variety, production to
customer order). One well-known example is the truck producing
company
 Production Strategy
The logic of the production flow
▪ T-shaped operational flows (T profile) in which variety is generated in the
value proposition by giving each product a specific design in the very last
stage of production, before delivery to the customer.
-One example is the manufacturing of aluminum cans in the brewing
industry.
-A packaging company essentially produces only one type of can, but at the
end of the production flow, the cans are printed in different ways, creating a
large number of variants. Equivalent logic exists in many other sectors.
- it is common for clothing companies to first produce a new collection of T-
shirts or sports tops, and then, as the last step in the process, dye the
garments in different colors according to current trends.
 Production Strategy
Capacity of the production system

The bottleneck determines the capacity for the entire process

 The strategic decisions

• Positioning the productive system(matching the productive system

design to market needs)
• Capacity/location decisions
• Product and process technology
• Work force and job design
• Strategic implications of operating decisions
• Suppliers and vertical integration
 Tactical production management
• Production management, at what we here refer to as the tactical
level, addresses the process design of the system and the system's
various sub-systems.
• Tactical production issues concern designing production flows and
layouts, creating robust production processes, and how to balance
flexibility and efficiency in the processes.
 Tactical production management
• Dependencies of various types occur in a production system.
• In the production of goods, these are often linked to the physical
layout of the production system, i.e., how the premises are arranged,
where different machines are placed
❖In projects and certain types of job type production , the production
often takes place at a specific location (fixed-position layout).
• An infrastructure project, building of a ship, or implementation of an
IT project
 Tactical production management
❖For small batch production (and also some job type) of products with
high product variety, production usually takes place in facilities with a
process layout, i.e., where equipment with similar function is grouped
together in different workshops

❖Mass production of standard products usually takes place in a flow

layout, some times also called product layout or product-oriented
layout
 Operational production management
• Operational production management primarily concerns planning
and control.
• Logistics and inventory planning are also important issues.
• The optimum inventory level in each case depends on many factors,
including the throughput time, which also affect the capital tied up in
the production system.
• Many companies try to reduce their tied-up capital in various ways,
for example by reducing setup times and using Jut in Time deliveries.
 Operational production management
• Process planning is applied to define how a product should be
produced.

• Job design (work studies) analyzes the tasks involved and how they
can be engineered to become as efficient as possible.

• By applying systematic quality management techniques, companies

also try to minimize the number of defects and reworked products in
production
 Operational production management
Production planning and control
• Planning is a way of trying to anticipate and deal with the
future, i.e., of trying to identify the situations that might
occur and decide how they should be managed.
• However, planning is also a way of trying to influence and
create a (shared) future, for example by coordinating the
actions of a team in a desirable manner.
• When planning, the current actions become influenced by
conceivable future situations in order to avoid problems
and be prepared for action
 Operational production management
Production planning and control
• Control is closely linked to planning. As no plan is perfect, measures
to control disruption and uncertainties are constantly required in
order to keep production running to Ian.
• In addition, plans usually require adjustment during production
according to the outcomes.
• The difference between production planning and production control
is therefore linked to the time horizon.
• Planning is more long-term and control is more short-term
 Operational production management
A planning procedure follows six steps:
1.What is to be achieved?
➢This is the objective of production, which is linked to the production
strategy and the overall conditions.
2. What is to be carried out?
➢This is determined by the products to be supplied and defines the
activities which consequently have to be performed.
3. In which order?
➢This involves sequencing the various activities.
Operational production management
4.When?
➢This involves scheduling, i.e., deciding when various activities are to
start and to finish.
5. How much, by whom, and with which equipment?
➢This is about the load for staff, departments, and machines.
6. How should it be monitored and controlled?
➢This mainly involves managing disruption and, where possible,
reducing uncertainties in the production process.
 Production Engineering
• Production engineering includes process planning and job design
(sometimes also called work studies) and is a key function in order to
achieve efficient production.

• Process planning can be understood as the link between product

development , production and revolves around defining in which
sequence of operations a component or product is to be produced
 Production engineering
In manufacturing operations, process planning usually includes a number of
activities:
• Assessing designs of new products from a manufacturing point of view .
• Determining accurate manufacturing techniques, i.e., defining in detail
how the production should take place .
• Engineering the production equipment, as well as the sequence, in which
processing and assembly should take place .
• Ordering necessary specialized production equipment and machine tools .
• Calculating the processing time for each stage of production
 Quality management
• Quality management is a generic term for the principles, methods,
and tools used to achieve a (sufficiently) high level of quality in a
company's products and processes.
• While product quality concerns the degree to which products meet
customer requirements and needs (effectiveness), process quality
concerns the degree to which production functions well, with little
reworking, repair, scrap, and disruptions.
• The costs for quality deficiencies may be extensive, particularly if the
deficiencies are discovered at late stages in the production process, or
if they result in complaints and dissatisfaction from customers.
 Quality management
• Quality management is partly about monitoring and discovering
faults.
• However, modern quality management usually emphasizes preventive
work, i.e., preventing quality problems from occurring at all.
• The aim is to do things in the right way from start.
• Inspired by role models, such as the Toyota production system, many
manufacturing companies apply a zero-defect philosophy, i.e., an
ambition to always get things right from the start.
4.2.4 Product development and the innovation
strategy of the company
• Product development includes all activities that contribute to the
development and improvements of company’s value propositions
• Companies often have a special department for "product
development", "design and engineering", "product innovation", or
"R&D" (Research and Development).
• The name differs between different industries.
• Usually, the product development process also includes a number of
other functions in the company, for example, marketing, production,
and customer services.
 Product Development
• Product development has different logics in different types of
business operations.
• Small batch and unit production companies, for example, are based
on efficient development and deliveries of customized products and
systems in accordance with the specific needs of each individual
customer.
• During product development, these companies usually work closely
with a customer based on an agreed requirement specification which
describes the product's functionalities, design, and price.
 Product Development
• In mass production companies, the product development process rarely
involves an external client.
• When, for example, companies like Volvo or Electrolux are going to develop
a new product, the technical specification is instead produced by the
company itself, often with an appointed product manager functioning as an
"internal customer“
• Companies in the process industry, for example, in the sectors of steel,
petroleum, and paper, usually have a small development department.
• In many cases, the development departments in these companies are more
like research laboratories than the large development departments of mass
production companies
 Product Development
• Service companies, for example, in trading or consulting, usually have
no formalized, technical product development in the same way as the
traditional industrial companies.
• Except for IT and telecommunication services, where the value
creation mainly follows a goods-dominant logic, product development
in most service companies are found under labels like "business
development".
 The innovation strategy of the company
• Companies that produce their own products have to constantly improve
and maintain their value propositions.
• This includes making technical updates, handling complaints and warranty
claims, offering maintenance and service, and being prepared to
investigate any reports about errors and technical problems.
• This type of regular product maintenance plays an important role in
enabling the company to maintain its status as a competent and reliable
supplier.
• The majority of the product development activities are about incremental
innovation, where the company develops new applications, models, and
improvements of already existing products for well-known customers
The innovation strategy of the company
The product lifecycle and the need for innovation
 The innovation strategy of the company
The need for the company to constantly develop and launch new
products.
 The innovation strategy of the company
Innovation-strategic positioning
• The amount of resources that a company chooses to invest in product
development depends, to a great extent, on the company's innovation
strategy, which affects not only the product development but the
marketing and production processes of the company.
• Many companies have an official strategy about being a "leading
technology company" and a "pioneer", which usually is much easier
• Moreover, being the first to introduce a new technology is not always the
best strategy: there are many examples of how pioneering companies that
established themselves early in a new technical field, over time, got pushed
aside and sometimes were driven out of the market by companies that
entered later.
 The innovation strategy of the company
• There are four typical innovation strategies among technologically
intensive companies:
1. Technological pioneer (offensive):
• The basic idea is to create a situation of technological monopoly by
launching new, technically advanced products that put the company ahead
of competition.
• This type of strategy requires significant investments in research and
development, usually in combination with large investments in marketing
to efficiently launch the new products.
• One example is how U.S. company Apple at the start of the 21st century
launched a number of innovations, among them iTunes, iPhone, and iPad,
which radically changed the rules on the market.
 The innovation strategy of the company
2. Fast follower (defensive):
• This strategy requires great technical expertise so that the company
quickly can adopt a new technology and launch its own improved
versions (cheaper, different design, extra features) of the competitor's
original product.
• The Korean company Samsung has, for example, never claimed to be
leading within mobile phone and tablet technology in the same way
as Apple, yet it has managed to achieve and maintain a competitive
and profitable position.
• The two strategies "technological pioneer" and "fast follower" are
often applied simultaneously by a company
 The innovation strategy of the company
3. Cost minimization (imitative):
• This strategy means intentionally following the technological pioneers
with the aim, as a low-cost producer, of launching cheaper versions of
the pioneers' products.
• The success lies in the company's capacity to cut production costs
through large-scale production.
• The technology behind the product is rarely developed by these
companies themselves, rather it is often licensed from other
companies
 The innovation strategy of the company
4. Traditionalist (conservative):
• This niche strategy is about meeting the exact needs of certain selected
market segments.
• The products should not be altered too much or too quickly, rather the
opposite.
• Mass production is not a necessity.
• Rather than innovation and change, the appeal of the products is that they
refer to traditional values, reliability, authenticity, and high quality.
• Rolls Royce cars is a typical example of this strategy.
• The strategy is also common in the food industry, for instance when it
comes to cheese, whiskey, and wine
 The tactical level of product development
• Traditionally, the organization of R&D has been seen as an internal matter.
• The classic discussion is usually about whether R&D should be centralized
to one corporate department or decentralized to the different business
units of the company
• However, with increasing costs for R&D and increasing specialization
between companies, more and more companies are also making use of
external technical expertise.
• It can involve cooperating with other companies in alliances and joint
ventures, contracting technological R&D from subcontractors and research
institutes, assigning engineering consultants, licensing or buying design
solutions which have been developed by other companies
 The tactical level of product development
• Today, there are also discussions about the opportunities to use open
innovation, for example, by engaging external product users to test
prototypes of new products (so-called beta-versions)

• At the tactical level of product development, questions mainly

address what management model to use for the product
development process and how the company should coordinate its
R&D portfolio
Operational level: methods and techniques
• Today, there are many methods and techniques to support the
development of new products.
• Some of the methods are aimed at facilitating the development
process and making it more efficient.
• Others are aimed at ensuring that the products are developed in line
with customer expectations.
• There are also methods that are used to identify potential error
sources in the product, ensure its functionality, or enable easy and
cheap production.
Operational level: methods and techniques
• A typical development process of a physical product starts with a planning
stage, which is followed by concept development, system design, detailed
design, and prototype development, after which testing is done and
production starts.
• Many development teams use visual planning, where the operational work
is coordinated with the help of frequent meetings in front of large project
boards in designated project rooms.
• Other common tools in the development process are different types of
digital models.
• In order to create a relevant visualization of the project goal, customer-
centered planning is often used, and with the aim of facilitating future
production, different techniques are used for design support and failure
mode effect analyses