Cost leadership and differentiation
As they have half-life, QIP (tailored TQM) and PDCA cycle in place to reduce waste level, they are reducing cost per unit, which is targeting at lower its cost, therefore, they are practicing cost-leadership strategy. (see page 479) At the same time, they have goals for high quality product, having innovative new products and being a reliable and responsive supplier, it also make the firm different from its competitors. Therefore, I reckon they have differentiation strategy in place as well. Though, from their action, cost leadership is more of a focus.
Q2:
To define half life concept, it predicts that the rate of decline of defect level is constant over time. In the context of ADI, ist that given any defect level, subjected to legitimate QIP, decreases at a constant rate, so that when plotted on semi-log paper against time, it falls on a straight line. The theory basis for half-life dynamic is the interactive learnign loop at the heart of TQM, which is the PDCA cycle. The rate of decline for defects is not fixed. It depends on the complexity matrix of organisation structure and technical complexity.
As ADI targets on lowering its defect level, half-life method is very a very useful effective target setting tool as it is both measurable and reasonable. It is a visual tool reflecting a business's defect level. Based on different complexity level in different department, different half-life graphs can be drawn and management can compare the actual performance and the estimated goal. They can therefore find out the reason of the variation between them and hence redirect the production activity in time to better reduce the defect level.
However, half-life has its own limitations. First of all, this is a measurement soly on defect rate instead of cost. Therefore, there is a possibility that production department may be reducing defect rate at the expense of higher unit cost. For example, they may consume more time on each individual unit and lower the overall output level. Also, for those products with a long half-life, in-time correction of false-doing may be delayed or neglected and misunderstood as normal fluctuation during the cycle. In addition, as experience curve shows the result of purely empirical observation, it is not always likely that half-life be met and there can be many reasons for that. Therefore, some other supplimentary measurements would be helpful to eliminate the limitation of half-life measurement.
In light of experience curve, it states that for each doubling of cumulative experience (total units produced from the very beginning, not just this year), real unit cost drops by a constant percent, for example 20%. It is different to half-life in ways below:
1) experience curve is a purely empirical observation and is not based on any underlying theory. On the other hand, there is a theoretical basis for the half-life model, which is the interacting learning loop in the centre of TQM system.
2) experience curve deals with cost, while half-lilfe measurement uses defects as its axis. Of course, defects, defined as any gap between current and potential performance, are the principal driver of unit costs, so the two are clearly related. However, a low defect rate doesn't necessarily indicate a lower cost and the ultimate goal of the business for lowering the defect level is to lower cost. Therefore experience curve may be more directly relate to company's goal.
3)Half-life predicts a constant rate of decrease in defect rate, while the Experience curve estimate a dropping rate of decline of cost over time.
Q3:
The conflicts between the QIP measures and the measures reported by the financial system is the conflict between long term competitive capability and short term profit, and is the conflict between non-financial measurement and finantial measurement. Specifically, it lies in that:
QIP programs may need investment and other expenditure, such as R&D expense, which will reduce profit in the current period.
Improved quality standard means more defect products and this will further reduce the profit on income statement.
Performance measurement system in place were mainly based on financial measurements. Therefore, improvement in quality will not be reflected by these measurement. As staff and executives were paid by their performance measured, they would not put effort on QIP but only focus on short term profit, at the expense of long term compatity.
We should believe both numbers, which represent short term performance and long term growth potential. Neither of them can be overlooked as short term profit provides the firm with a chance to survive and to grow while long term profitability determines if the business could grow and compete in the future. Therefore, a solution has to be found to reconcile the two figures.
To combine the two figures, a balanced scorecard can be introduced, which was what ADI had done later in 1987. A balanced scorecard is an example of a performance measurement system which retains traditional financial measures while incorporate drivers of future performance -- non-financial measurements. (Norton, 1996) The balanced scorecard expands the set of business unit objectives beyond summary financial measures. While retaining an interest in short-term performance by viewing from financial perspective, it captures the critical value-creation acivities and reveals the value drivers for superior long-term financial and competitive performance (Norton, 1996)
Q4:
I reckon the scorecard in Exhibit 3 is an early phased scorecard, which, more appropriately put, is a list of financial and non-financial measurement.
To start with, it has its own positive implications. It is a start of using both financial and non-financial measurement for performance measurement, which indicates that senior managers have started to realise the importance of non-financial factors, or so-called critical success factors. Also, as it integrated new products (learning and groth factor) and QIP (which is internal business process factor), which are two important categories of non-financial measurement. In addition, the requirement that there should be six times as many non-financial measures as financial measures indicate the credit that management has given to non-financial measurements. Furthermore, it does have a blend of outcome measures and driver measures, though not balanced.
However, this scorecard is neither balanced, nor a system, and its implementation has certain problems as well.
First, it should be balanced between result measurement and driver measurement. Most of the items listed in Exhibit 3 are outcome measures (revenue, revenue growth, profit, ROA, NP breakeven, NP peak revenue, yield and cost) and only a few driver measures.
Secondly, it should be a balance between financial and non-financial measures. six times as much non-financial measurements make the scorecard unbalanced, though this is not to say that managers are putting too much emphasis on non-financial aspects as there is a difference between what they are saying and what they are really doing.
Thirdly, it is all internal measures but they ignored external factors, such as customer satisfaction. However, a purely internal view of the business is not enough as customer's needs and wants ultimately determine whether the products have a market or not.
Fourth, there lacks interlinks between the individual items. As it is condensed into an one-page report, it is unlikely that driver measures and outcome measures are matched by cause-and-effect relationships, nor is it likely that managers are expected to derive root causes of problems resulting inefficiency. It should from a laundry list of measures into a tool to translate strategy into action.
Fifth, in the implementation of the scorecard, their emphasis are not balanced. Lower-level management scorecards typically placed less emphasis on financial measures than on non-financial measures.
Lastly, they should be equally emphasized and they should be a tool to put mission and vision of the company into tangible objectives and measures, while I don't reckon the scorecard in place could achieve that.
Additional information that would be helpful for the scorecard would be:
indicators to reflect customer satisfaction:
Number of refund, reject or cancellation of orders
Complaints number
New customer number
Lost customer number
Learning and growth:
market share growth
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