Business Processes
Business Processes - Book Summary
Chapter 1: Introduction to Operations Management
- Economic theory suggests that you make choices based on where you expect to obtain
the highest utility. Utility is a measure of the strength of customer preferences for a given
product or service. Customers buy the product or service that maximises their utility.
- Utility is composed of three components:
• Consumption utility: a measure of how much you like a product or service, ignoring
the effects of price and of the inconvenience of obtaining the product or service.
• Price: the total cost of owning the product or receiving the service.
• Inconvenience: the reduction in utility that results from the effort of obtaining the
product or service.
- Consumption utility can be divided into two subcomponents:
1. Performance - measure how much an average consumer desires a product of service.
2. Fit - measures how well the product or service matches with the unique characteristics
of a given customer. Customers have heterogeneous preferences meaning that not all
consumers have the same utility function.
- Inconvenience is often referred to as transaction costs. The following are
subcomponents of inconvenience:
1. Location - the place where a consumer can obtain a product or service.
2. Timing - the amount fo time that passes between the consumer ordering a product or
service and the consumer obtaining the product or service.
- To illustrate consumer utility:
- Understanding how customers derive utility fro products or services is the heart of
marketing.
!1
, Business Processes
- Companies have capabilities that allow them to do well on some but not all of the
subcomponents making up the customer utility function. As such, these capabilities are
the dimensions of the customer's utility function that a firm is able to satisfy.
- Firm's can't be good at everything → they face trade-offs in their business. Trade-offs are
include the need to sacrifice one capability in order to increase another one. Strategic
trade-offs include things such as responsiveness versus costs.
- Market segment is a set of customers who have similar utility functions.
- Pareto dominated means that a firm's product or service is inferior to one or multiple
competitors on all dimensions of the customer utility function. They perform equally or
better on all attributes of the customer's utility function - they are better.
- The efficient frontier is the set of firms in an industry that are not Pareto dominated.
Hence, firms that are on the efficient frontier have no firms in the industry to their upper
right:
- Inefficient on the efficient frontier can be visualised as the gap between a firm's current
position and the efficient frontier.
- There are three ways in which operations management can improve a business as it seeks
to match supply with demand:
1. Make trade-offs among the dimensions of performance.
2. Reduce inefficiencies so that the business does not have to sacrifice one performance
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, Business Processes
dimension versus another, thereby moving toward the efficient frontier.
3. Innovate and improve the operations, corresponding to a shift in the efficient frontier.
- A company can only be successful if its customers are willing to pay a sufficiently high
price to cover the cost of the product or service it offers. The difference between the
revenue it earns and the costs it incurs is its profit. There are two types of costs:
• Costs for inputs: inputs are the things that a business purchases.
• Costs for resources: resources are the things in a business that help transform input
into output and thereby help provide supply for what customers demand.
- As a firm reduces inefficiencies (and movies toward the efficient frontier), it increases the
customer's utility or it decreases the cost of serving the customer. Sometimes, reducing
inefficiencies allows a firm to simultaneously increase price and decrease costs. Either
way, reducing inefficiencies will increase the firm's profitability.
- Inefficiencies are a combination of three forces known as three system inhibitors:
1. Waste is the consumption of inputs and resources that do not add value to the
customer. Because hate consumes inputs and resources it is costly - and because it does
not add value the customer is not willing to pay for this.
2. Variability corresponds to changes in either demand or supply over time. There are
several forms of demand variability: customer arrivals (customers come at very different
times of the day), customer requests (what a customers wants differs), and customer
behaviour. There is also supply variability: time to serve customer, disruptions (one worker
works faster than the other), and defects (things go wrong).
3. Inflexibility is the inability to adjust to either changes in the supply process or changes
in customer demand.
- Examples of the three system inhibitors:
- Operations comes from the Latin word opus, which means "work". Operations
management is about helping people do their work. But it is also about helping people
to improve the way that they work by overcoming the inefficiencies that they face.
!3
Business Processes - Book Summary
Chapter 1: Introduction to Operations Management
- Economic theory suggests that you make choices based on where you expect to obtain
the highest utility. Utility is a measure of the strength of customer preferences for a given
product or service. Customers buy the product or service that maximises their utility.
- Utility is composed of three components:
• Consumption utility: a measure of how much you like a product or service, ignoring
the effects of price and of the inconvenience of obtaining the product or service.
• Price: the total cost of owning the product or receiving the service.
• Inconvenience: the reduction in utility that results from the effort of obtaining the
product or service.
- Consumption utility can be divided into two subcomponents:
1. Performance - measure how much an average consumer desires a product of service.
2. Fit - measures how well the product or service matches with the unique characteristics
of a given customer. Customers have heterogeneous preferences meaning that not all
consumers have the same utility function.
- Inconvenience is often referred to as transaction costs. The following are
subcomponents of inconvenience:
1. Location - the place where a consumer can obtain a product or service.
2. Timing - the amount fo time that passes between the consumer ordering a product or
service and the consumer obtaining the product or service.
- To illustrate consumer utility:
- Understanding how customers derive utility fro products or services is the heart of
marketing.
!1
, Business Processes
- Companies have capabilities that allow them to do well on some but not all of the
subcomponents making up the customer utility function. As such, these capabilities are
the dimensions of the customer's utility function that a firm is able to satisfy.
- Firm's can't be good at everything → they face trade-offs in their business. Trade-offs are
include the need to sacrifice one capability in order to increase another one. Strategic
trade-offs include things such as responsiveness versus costs.
- Market segment is a set of customers who have similar utility functions.
- Pareto dominated means that a firm's product or service is inferior to one or multiple
competitors on all dimensions of the customer utility function. They perform equally or
better on all attributes of the customer's utility function - they are better.
- The efficient frontier is the set of firms in an industry that are not Pareto dominated.
Hence, firms that are on the efficient frontier have no firms in the industry to their upper
right:
- Inefficient on the efficient frontier can be visualised as the gap between a firm's current
position and the efficient frontier.
- There are three ways in which operations management can improve a business as it seeks
to match supply with demand:
1. Make trade-offs among the dimensions of performance.
2. Reduce inefficiencies so that the business does not have to sacrifice one performance
!2
, Business Processes
dimension versus another, thereby moving toward the efficient frontier.
3. Innovate and improve the operations, corresponding to a shift in the efficient frontier.
- A company can only be successful if its customers are willing to pay a sufficiently high
price to cover the cost of the product or service it offers. The difference between the
revenue it earns and the costs it incurs is its profit. There are two types of costs:
• Costs for inputs: inputs are the things that a business purchases.
• Costs for resources: resources are the things in a business that help transform input
into output and thereby help provide supply for what customers demand.
- As a firm reduces inefficiencies (and movies toward the efficient frontier), it increases the
customer's utility or it decreases the cost of serving the customer. Sometimes, reducing
inefficiencies allows a firm to simultaneously increase price and decrease costs. Either
way, reducing inefficiencies will increase the firm's profitability.
- Inefficiencies are a combination of three forces known as three system inhibitors:
1. Waste is the consumption of inputs and resources that do not add value to the
customer. Because hate consumes inputs and resources it is costly - and because it does
not add value the customer is not willing to pay for this.
2. Variability corresponds to changes in either demand or supply over time. There are
several forms of demand variability: customer arrivals (customers come at very different
times of the day), customer requests (what a customers wants differs), and customer
behaviour. There is also supply variability: time to serve customer, disruptions (one worker
works faster than the other), and defects (things go wrong).
3. Inflexibility is the inability to adjust to either changes in the supply process or changes
in customer demand.
- Examples of the three system inhibitors:
- Operations comes from the Latin word opus, which means "work". Operations
management is about helping people do their work. But it is also about helping people
to improve the way that they work by overcoming the inefficiencies that they face.
!3
