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How’s Your Return on People?

by Laurie Bassi and  Daniel McMurrer

Managers are always claiming, “People are our most important asset.” But deep down, they can’t shake the feeling that employees are costs. Big costs. And they treat them that way. Quarterly earnings off? Cut the perks, rein in training, and downsize. This strategy may increase earnings in the short term, but it’s myopic. Recent studies suggest that layoffs actually destroy shareholder value. And our research shows that treating employees like the assets they are—by investing in their development—boosts returns over the long term.

For years now, our research has measured the effect of spending on employee education and training—a “cost” that is buried in general and administrative expenses—on the stock prices of 575 publicly traded firms. We created four hypothetical portfolios (one each for years 1997 through 2000) consisting of between 20 and 40 companies that invested at roughly twice the industry norm in employee development in each of the previous years (1996 through 1999). We followed the performance of these portfolios through 2001. Their returns were robust and in line with a growing body of empirical research showing that organizations that make extraordinary investments in people often enjoy extraordinary performance on a variety of indicators, including shareholder return.

In December 2001, we decided to put our money where our research was and created a live portfolio of companies that spend aggressively on employee development. In its first 25 months since inception, that portfolio has outperformed the S&P 500 index by 4.6 percentage points (2.2% versus a decline of 2.4% for the index). In January 2003, we expanded our investment strategy by launching two additional live equity portfolios made up of similar development-oriented companies. The results speak for themselves. While past performance is never a guarantee of future results, and while it is always possible to lose money, each of these three portfolios outperformed the S&P 500 by 17% to 35% in 2003. (See the exhibit “The People Payoff.”)

 

The People Payoff

How are you investing in your most important asset?

 

The Hidden Cost of a Product Recall

by Danielle Kost

Product failures create managerial challenges for companies but market opportunities for competitors, says Ariel Dora Stern. The stakes have only grown higher.

Drivers on Interstate 25 in Colorado have been speculating about the fate of hundreds of Volkswagen cars sitting in a lot near Pikes Peak International Raceway. It’s one of 37 sites in the United States where the automaker is storing 300,000 diesel cars it recalled after admitting to cheating American emissions tests.

Volkswagen estimated that fines, repairs, and legal costs would total more than $30 billion. And worse, the company ceded its command of America’s diesel car market—producing more than one-third (pdf) of the models available in 2015—to companies such as General Motors, Ford and Mazda, which expanded their diesel lineups (pdf).

Large recalls are the ultimate nightmare for senior executives at companies with considerable research and development (R&D) operations. Beyond the staggering remediation and legal expenses that recalling companies incur, there are also costs to rework manufacturing processes and stem reputational damage. In one of the costliest recalls in history, Johnson & Johnson spent more than $100 million in 1982 (more than $260 million in today’s dollars) to recall 31 million bottles of Tylenol capsules and re-establish the brand.

“Product recalls slow many types of innovation for the firms that experience them.”

There’s also a second, less studied wave of damage, as competitors ramp up product development efforts to snap up displaced customers and solidify market share gains. This double whammy makes recall prevention and effective remediation more important than previously thought, says Ariel D. Stern, an assistant professor of business administration at Harvard Business School, where she is the Hellman Faculty Fellow in the Technology and Operations Management Unit.

“Product recalls slow many types of innovation for the firms that experience them,” Stern says. “At the same time, we see that competitors are likely to accelerate their own innovation activities to take advantage of these weaknesses.”

Stern, along with Indiana University Assistant Professor George P. Ball and Georgetown University Professor Jeffrey T. Macher, set out to quantify the innovation risks and opportunities that recalls pose in one of the most R&D-intensive industries, medical technology. Product failures in medtech, where the cost to bring a device to the market can top $90 million, can not only hobble a firm, but cause catastrophic harm to patients.

“The extremely high profit margins in medical devices offers a setting in which the risks are often overwhelmed by the potential rewards to innovate, especially when competitors face their own product failures,” according to the team’s working paper, Recalls, Innovation, and Competitor Firms: Evidence from Medical Device Firms, released in January.

Bigger recalls, bigger reactions

Using 13 years of US Food and Drug Administration data and a novel set of competitor classification algorithms, the team created a detailed history of product development submissions and recalls in the medical device industry. That allowed the researchers to evaluate how a recall’s severity and proximity—the degree of product market overlap between recalled and competing products—may stall or speed innovation in a product market. Among their findings:

A recall can delay a company’s incremental innovations by six months. Medtech product development teams typically focus on a single product category or line, allowing them to apply their expertise more efficiently. However, recalls force these teams to shift their attention from making meaningful improvements to addressing flaws. The revenue impact can be significant, the researchers say.

Competitors ramp up major innovation efforts in response to rival recalls. Large-scale new product development projects cost more, take longer to complete, and require specialized teams to manage complex processes, such as clinical trials in patients. However, if a medtech firm can bring a new product to the market even one month earlier following a rival’s recall, it could bring in an additional $10 million in revenue.

The more severe a recall, the faster competitors speed up innovation. Major product failures, such as ones that can lead to serious injuries or even patient fatalities, provide the biggest opportunities for a competitor to grab market share. A well-timed incremental or major innovation can provide the toehold a company needs in a competitive market.

“Low-risk mistakes, like a typo on a label, constitute reasons to recall a product, but those aren’t driving the big responses that we see by firms and their competitors,” Stern says. “It’s the really severe recalls, where perhaps the materials turned out to be unsafe or there’s a major malfunction that are leading to competitor responses.”

Prevention is key, but preparation also matters

The team’s research suggests that recall prevention is even more valuable than previously thought, given the higher stakes of product failures. Companies would also be wise to develop more internal expertise to not only manage their own recalls but react quickly to those of rivals. Two specific steps could help most R&D-centric companies:

  • Create recall recovery teams. A specialized group of managers with deep knowledge about a company’s products and the recall process might keep a company from diverting time and resources from product development efforts, thereby undermining the roll-out of future innovations.
  • Develop competitor recall intelligence tools. Companies that develop the capabilities and tools to react quickly to other companies’ recalls stand to gain more when market opportunities present themselves.

 

While Stern’s past research has focused primarily on innovation in health care, these new findings could apply broadly to any company that invests heavily in R&D, even those in industries that lack a formal recall process.

“Whether your firm is making phones or drones or self-driving cars, recalls can divert efforts from subsequent innovations and spur your competitors to take advantage of the market opportunity,” she says.

 

How Companies Can Make Up with (Very) Unhappy Customers

JetBlue’s Valentine’s Day Crisis

by Julia Hanna

It was the Valentine’s Day from hell for JetBlue employees and more than 130,000 customers. Under bad weather, JetBlue fliers were trapped on the runway at JFK for hours, many ultimately delayed by days. How did the airline make it right with customers and learn from its mistakes? A discussion with Harvard Business School professor Robert S. Huckman. Key concepts include:

  • JetBlue’s dependence on a reservations system that relied on a dispersed workforce and the Web broke down when thousands of passengers needed to rebook at once.
  • A crisis forces an organization to evaluate its operating processes rapidly and decide where it needs to create greater formalization or structure.

You don’t need to be a frequent flier to know that the friendly skies aren’t so friendly anymore.

Cramped, overloaded planes, flight delays, and bare-bones amenities are the norm on most of the legacy carriers. But low-cost airlines like Southwest and JetBlue have found opportunity in the misery, and captured more of the market, with competitive fares, friendly service, and in the case of JetBlue, leather seats with television.

Founded in 1999, JetBlue has seen rapid growth and frequently tops annual customer surveys of their favorite airlines. But on a Valentine’s Day to remember (or forget) all that changed.

HBS associate professor Robert Huckman, professor Gary Pisano, and research associate Virginia Fuller tell that story in “JetBlue Airways: Valentine’s Day 2007,” a case taught in the MBA course Operations Strategy that examines the confluence of issues leading to what JetBlue founder, chairman, and then-CEO David Neeleman would later call “the worst operational week in JetBlue’s seven-year history.”

A Storm Brews

It started with a winter ice storm forecasted to change to rain. With that prediction in mind, JetBlue staff at New York’s John F. Kennedy airport continued to load flights and allow them to taxi to the runway. But conditions didn’t clear as expected, and some passengers waited for as long as six hours to return to an open gate. (Planes continued to land in the poor weather; but FAA regulations regarding icy conditions prevented flights from taking off.)

That day, only seventeen of JetBlue’s 156 scheduled departures left JFK, a fact that caused ripple effects throughout the system and displaced crew and aircraft. In subsequent days, JetBlue management canceled more and more flights, angering thousands of passengers, until finally, on February 20, normal operations resumed.

“It’s hard not to think there’s more than just an accident happening here.”

“When Gary and I teach this case we have several pedagogical objectives,” says Huckman. “The first is to ask students to evaluate JetBlue’s operating system as of February 13, independent of this event. Do they think the elements of the structure and systems within the JetBlue operation are internally consistent with one another and externally consistent with the organization’s overall business strategy?”

A few vulnerabilities that come to light in the case are JetBlue’s dependence on a reservations system that relies on a dispersed workforce (many agents worked flexible hours from home) and the Web—a low-cost solution that works well until thousands of passengers need to rebook at once (JetBlue’s kiosks at JFK did not offer self-serve rebooking). JFK, which frequently experiences weather delays, is also a significant hub for JetBlue.

Evaluating The Response

In the second part of the class, Huckman and the students assess JetBlue’s response to the situation.

“This was such a dramatic operating event for the airline that it’s hard not to think there’s more than just an accident happening here,” Huckman remarks. “Now that you suspect this, how do you react as a manager? How do you restore confidence among your customers?”

Neeleman apologized publicly to over 131,000 customers affected by the cancellations, delays, and diversions, offering varying levels of compensation. Passengers who were stuck on a plane for more than three hours, for example, received a full refund and a voucher for a free roundtrip flight.

On February 21, JetBlue also issued a Customer Bill of Rights—a move that was almost as widely reported in the media as the airline’s problems. The policy offers explicit compensation for a variety of departure delays and onboard ground delays. It even promises $1,000 if, through overbooking, a customer is involuntarily bumped from a flight.

“Given JetBlue’s strong reputation as a service-oriented airline, one of the issues students wrestle with is whether or not the airline needed to be this specific in how the penalties and compensation would work,” says Huckman. The students seem to come down evenly on both sides, he adds, with some feeling that JetBlue could have traded on its good reputation and simply apologized without creating such a specific document.

Flight Plan For The Future

Finally, students discuss the longer-term changes they would recommend for JetBlue’s operating strategy while analyzing new systems being implemented in human resource management and information systems.

“We had so many people in the company who wanted to help but who weren’t trained to help,” Neeleman told the New York Times. “We had an emergency control center full of people who didn’t know what to do. I had flight attendants sitting in hotel rooms for three days who couldn’t get a hold of us. I had pilots e-mailing me say, ‘I’m available, what do I do?'”

During the crisis, Charles Mees, JetBlue’s CIO, created a database to track crew locations and contact information, later adding new functions that would allow pilots and crew to type in their locations via mobile Internet devices.

Mees also set the goal of doubling the number of agents who could simultaneously use the company’s reservations system and of getting a Web-based rebooking system up and running so that customers could reschedule a flight at the airport.

For his part, Neeleman focused on employee cross-training so that all 900 of the corporate employees in JetBlue’s Forest Hills office could assist at nearby JFK during any future operational crisis.

“JetBlue is ultimately better for having gone through this.”

In class, some students suggest maintaining JetBlue’s flexible approach to reservations staffing while imposing contract terms that would call for all hands in the event of demand. “You can’t be an organization that simultaneously and completely fulfills the wishes of employees, customers, and all other constituents,” Huckman says. “You need to decide what implicit and explicit tradeoffs will be built into your operating model.”

JetBlue COO and airline industry veteran Russ Chew offered some firsthand insight when he visited the classroom when the case was taught.

“I was impressed by how open he was about the nature of the issues that the airline faces,” Huckman remarks. “He helped the class understand that every organization of this size, particularly one going through this kind of growth, needs to learn from its experience—and that includes successes as well as events that don’t work out as you planned.”

Some students in the class were affected by the JetBlue crisis, adds Huckman. “Russ seemed to view his visit as an opportunity to educate students who may be in similar roles in the not-too-distant future; he also saw it as a way to get feedback and let his customers know that continuous improvement is something the airline takes very seriously.”

Beyond The Core

The JetBlue case fits well with the overall course focus of growing and refining an operating model, Huckman says.

“After you spend time perfecting your operation, you then need to think of ways to unwind some of that focus to take on a new growth opportunity that may differ substantially from yourarea of expertise,” he notes. For example, another case in the course, “BYD Company, Ltd.,” examines the largest Chinese manufacturer of lithium ion batteries and its movement into the auto industry, a potentially significant future consumer of its product.

JetBlue’s strategic shift isn’t quite that radical, but since last year’s crisis the airline has begun to take on new aircraft, open new routes, and deliver on IT improvements.

“The general consensus is that JetBlue is ultimately better for having gone through this,” Huckman says. “There are many ways for a growing company to improve; going through a crisis is not necessarily the easiest path to take, but it does force an organization to evaluate its operating processes rapidly and decide where it needs to create greater formalization or structure.”

Hard Work Isn’t Enough: How to Find Your Edge

27 Jan 2020|by Dina Gerdeman

Life isn’t fair, especially in the workplace. In Edge: Turning Adversity into Advantage, Laura Huang offers a new strategy for uncovering and showcasing your unique value in the face of obstacles.

We’re told that the secret to success is hard work. But the truth is, hard work alone doesn’t always pay off.

After all, career advancement isn’t always neatly tied to your skills, effort, or even the quality of your work. Some people gain easier access than others to the critical ingredients of money, time, and connections that part the workplace waters—even when they don’t have the best ideas or the most talent.

“It’s a myth that hard work is enough. We’ve all had experiences where we worked hard and still ended up losing out on a new job or a key promotion,” says Harvard Business School Associate Professor Laura Huang, who studies early entrepreneurship, where failure is common. “You can take two people who work equally hard, and one person will naturally have an advantage and achieve success, while the other can’t climb the corporate ladder.”

What often gets in the way: stereotypes about gender and race or perceptions about age and class. Indeed, vast research shows that certain groups, such as women and African Americans, have a tougher time getting ahead.

Yet Huang argues that we can’t let other people’s stereotypes or their views of our faults or limitations, right or wrong, hold us back. Instead, we have to focus on finding our “edge”—the unique qualities that set us apart—and take strategic steps to make other people see our value and open the doors that will take us where we want to go.

Video: Laura Huang says that cultivating an “EDGE” can help others see and understand your unique value.

“Life isn’t fair. We can’t just wait around for people to make the right decisions for us,” says Huang, who witnesses plenty of wheel-spinning among the hundreds of entrepreneurs she has researched, including some who can’t get funding for ingenious business ideas. “So how do we take all the disadvantages stacked against us and flip them in our favor to succeed within an imperfect system?”

huang-edge-book-cover.jpg

It all starts with confronting potential barriers or shortcomings and molding them into assets, Huang says in her new book Edge: Turning Adversity into Advantage.

The five tips below, based on advice in the book, are intended to help further your career, whether you’re hunting for a first job or find yourself at a key inflection point: frustrated with your current standing in the workforce and grappling with how exactly to position yourself for success.

1. Identify the “basic goods” you have to offer that will enrich others

It’s what cofounders Arch “Beaver” Aplin III and Don Wasek did when they opened their first Buc-ee’s gas station in Lake Worth, Texas, in 1982. They focused on the things they figured travelers needed most: gas, cheap ice, and clean restrooms.

Today Buc-ee’s is a road trip destination, with more than 30 sprawling stores offering Texas-themed gifts, Buc-ee’s brand beef jerky, plenty of gas (as many as 120 pumps at one store), mountains of ice to refill coolers, and giant spotless restrooms (with up to 33 urinals in a single men’s room).

natural advantage

In evaluating your own career goals, Huang recommends taking a page from Buc-ee’s and asking yourself:

  • What are the strengths that set you apart from the pack and provide value?
  • When people are interacting with you, what is the most basic thing they expect you to deliver?

To zero in on your basic goods, trust your gut in figuring out what skills you bring to the table—and what you don’t. If your brilliant business idea relies on software programming and you’re not a programmer, switch gears.

“Pinpoint your basic goods and define your circle of competence, then operate inside that perimeter,” Huang advises.

2. Own your constraints and encourage others to see past them

In Huang’s freshman year of college, she was shocked to fail a writing assignment. When she asked the professor where she went wrong, he said, “Don’t worry. Since English is not your native language, it will take you some time to get the hang of writing.”

Suspecting the instructor had judged her work unfairly based on her last name, she decided to own the constraint and write her next essay on the challenges of growing up as a nonnative English speaker. Evidently the professor detected none of her sarcasm and gave her a B-minus.

Huang avoided the mistake many people make: counting themselves out of the running based on the constraints other people place on them—or ones they place on themselves. In fact, research shows that men are more likely to apply for jobs even when they don’t fit most of the criteria in a job ad, whereas women are quicker to dismiss themselves and shy away from applying at all.

“We can all become too focused on the things we think we can’t do or the things people say we can’t do,” Huang says. “We have to embrace our constraints, rather than dodge them, but we also can’t let them define us.”

When applying for a job, it’s good to be aware of the stumbling blocks that might thwart an offer, but it’s even more important to emphasize the talents that do match the job criteria, so you can shine to the point of making any shortcomings seem meaningless.

“Every diamond has certain flaws, but someone else might not see those flaws unless you let them show,” Huang says. “If you focus on the angles that make you sparkle brightly, that’s what people will see.”

3. Focus on ways to delight others

The best way to pacify skepticism others may feel about you is to surprise and delight them, Huang says.

In a meeting with a buyer for Neiman Marcus, clothing designer Sara Blakely was talking up the benefits of her product, Spanx, but sensed she was losing the buyer’s attention. So Blakely asked the woman to follow her to the bathroom and showed her what she looked like without wearing Spanx, followed by the slimming effect after slipping the undergarments on. The buyer was delighted not only with the product, but with the brilliance of the pitch, and the deal was sealed.

“Find those points of connection to surprise people in a memorable, engaging way that gives them a pleasant feeling,” Huang says. “You can’t be boring because people won’t hear you.”

The most delightful interactions are improvisational, so it’s OK to develop high-level plans for making a good impression prior to an important meeting, but strike a balance between preparing and staying spontaneous in the moment.

“If you over-prepare, it can immobilize you and prevent you from bobbing and weaving,” Huang says. “You don’t want to be tethered to a script that feels forced. You want to stay alert and light on your feet.”

Yet delighting others isn’t necessarily about being charming, entertaining, or charismatic. It’s about entering high-stakes situations with ideas for wowing others with the unexpected.

Years ago, Huang’s colleague at an engineering firm did just that when she found herself among a group of laid-off employees who were told they could decide whether to continue working or take personal time during a two-month severance period. While most workers took the two months off to find a new job or take a break, the woman kept showing up to the office, and when new assignments were floated, she offered to take them on.

At the end of the two months, the woman was involved in so many critical business operations, she received multiple offers from senior leaders to stay—and she went on to work for the company for 40 years.

4. Guide how others perceive your work and worth

The levers that enable success are often outside our control, and the people pulling them tend to make decisions based on their view of our competence and character. Huang says you need to be aware of how others see you and guide their perceptions, redirecting them when necessary to influence whether they appreciate your value.

Huang recalls setting up slides before teaching a new MBA course at HBS when a student entering the room mistook her for an IT support specialist. “Easy mistake, right?” Huang says. “Asian woman equals tech support, not professor.”

When people make snap judgments about us, we can empower ourselves to shift forces in our favor. Knowing she might not fit the typical image of a professor—because she’s “too young and too female,” as she puts it—Huang opened her class by saying, “I know it may look like I’m here to sell you Girl Scout cookies,” then redirected her students’ judgments about her age, race, and femininity by outlining her professional credentials.

“Some people think this is gross and too strategic,” Huang says. “But when people form perceptions about us, they need to be guided in how they think about us, rather than relying on assumptions about who we are.”

That’s what Cyrus Habib, who lost his eyesight at age 8 to retinoblastoma, has done. When he ran for lieutenant governor of Washington in 2016, well-meaning friends expressed concern about whether the blind man could handle door-to-door canvassing.

Habib responded by telling them he had gone “from Braille to Yale,” had found his way through the Port Authority Bus Terminal, plus had navigated the thousand-year-old dorms and cobblestone streets at Oxford. By confronting what others saw as a deficit head on, Habib turned his obstacle into a way to connect with voters, and ultimately, he won the election. “I guide [people] away from who they think I should be, to who I am,” he says in Huang’s book.

5. Be the proverbial “prom queen”

When Huang was in the last year of her doctoral program and was nervously seeking her first academic appointment at a college, her advisor encouraged her to “be the prom queen.” Because, she said, “everyone wants to date the prom queen.”

Huang felt far from the academic equivalent of the prom queen. Her alma mater, University of California, Irvine, was not considered a “high-caliber school” among the top 50 research institutions. And unlike many of her peers, she lacked a single published research paper, the main currency for academics vying for plum positions.

natural advantage 1.0

Her advisor argued that none of that should matter. Rather than trying to contort our own experiences into what we think is the standard trajectory toward success, being the prom queen means capturing your special aura by explaining where you have come from and where you are going to guide other people to understand your value. And that value doesn’t have to be the same as everyone else’s.

In meetings with job search committees, Huang showed college officials her potential by focusing on what made her stand out: her research into the previously unanswered question of how gut feelings figure into entrepreneurial investment decisions. Much to her surprise, the Wharton School at the University of Pennsylvania hired her as an assistant professor.

“Being the prom queen means you shouldn’t care if you haven’t taken the typical path like everyone else,” Huang says. “You should focus on the qualities you do have that make people sit up and pay attention.”

People who put in the most effort often feel jaded when their work doesn’t speak for itself, Huang says. It’s important to set bitterness aside and find the right way to influence the outside perceptions that drive so many decisions about our careers.

When it comes to achieving success in any field, hard work is a given, Huang says. Gaining an edge requires what she calls “hard work, plus”—and that “plus” amounts to enriching, delighting, and guiding other people so they can see your value.

“Hard work will work harder for you if you tie it together with other strategies to give it headwinds and tailwinds,” she says. “That’s when you’re unstoppable.”

About the Author

Dina Gerdeman is senior writer at Harvard Business School Working Knowledge. HBS Digital Media Producer Amelia Kunhardt produced the video interview. 
[Image: metamorworks]

VOC Advances: New Paths to Understanding Customers

By Kimberly Watson-Hemphill and Anthony E. Curtis

Voice of the Customer Strategy

Most companies today say they are using voice of the customer (VOC) data to make decisions. But what exactly does that mean? In a 2002 survey by the Confederation of British Industry, with responses from more than 400 companies, the VOC methods mentioned included:

  • Surveys, 65 percent
  • Ideas meetings, 53 percent
  • Service/product testing, 50 percent
  • Formal observation, 18 percent

If a company’s goal is to stay ahead of its competition, there are two fatal flaws with this state of affairs:

  1. These traditional forms of VOC collection are unreliable even when the purpose is simply to improve what is already offered to customers. Odds of them helping the company push its market boundaries through innovations in products or services are virtually nil.
  2. Most companies are not even making good use of these traditional methods. Pushed for details, most managers will describe doing a survey once or twice a year, or say they get customer input only when testing a completely developed prototype. That is far too late in the design process to have a significant impact.

Beyond the Traditional Forms of VOC

There are some hard truths that businesses today are only just starting to grapple with. Most competitors in a particular field have access to the same customers and the same market information. The company that best understands those customers will end up with the biggest business advantage.

Developing this level of understanding demands skills well beyond traditional VOC techniques. Customers usually cannot explain their needs or wishes that would lead to innovative or transformational products and services because:

  • They do not know a supplier’s capabilities as well as that supplier does – so it does not occur to them that a supplier may be able to help them solve a problem.
  • Customers’ creativity is more likely to be focused on their jobs than on the products or services they use.
  • People are better at reacting to specific ideas than coming up with insights on their own.
  • When customers are asked if they like a new offering, they may lie. They may not want to hurt anyone’s feelings; or they may just want to avoid an argument.

Simply asking customers what they like or do not like about current products or services will not work. Microsoft fell afoul of this by asking customers to attend a focus group, use their software for a few hours, and answer questions interactively. It went something like this:

Question: Did you like the product?
Answer: Yup!
Question: Any features you do not like or want to add?
Answer: Nope!

Based on these answers, it might appear that Microsoft had a winner right out of the gate. But when Microsoft developers began recording keystrokes and videotaping customers’ experience, they discovered a wide range of negative customer reactions – grimaces, hesitations, etc.

Ethnography: The New Science for Understanding Customers

If simply asking customers what they like will not work, what will? The answer is incorporating close, detailed observation of customer behavior into design work. The epitome of this trend is the emerging field of customer ethnography, where a company finds ways to “live with” selected customers to get an in-depth understanding of their needs and how they use a product or service in real life. Ethnography is a discipline built on the principles of social anthropology, studying people in their native habitat. (Of course, in a business context, that habitat is more likely to be an office, school or home than the jungles of New Guinea.)

At its simplest level, ethnography includes any direct observation of customers with an eye towards identifying things that could make their lives easier. For example, Scott Cook noticed how much time it took his wife to pay the monthly bills and how repetitive it was. This was the birth of his idea for Quicken, the personal finance software, which grew into a billion dollar company. The practice of observing customer behavior has continued, now alive in Intuit’s “Follow Me Home” research program which is designed to gather what is being called ethnographic customer data. Because of that continued emphasis on understanding customers’ lives, Quicken and other Intuit products are consistently rated at the top of easy-to-use software.

The purpose of ethnography is to generate the kind of deep and intuitive understanding of customer needs and frustrations that cannot help but inspire creative insights. A company will select a few customers or potential customers to observe, typically about 10. (While other VOC methods are concerned with information quantity, ethnography focuses on quality.) A team of trained observers is sent to watch the customers. Their goals are to:

  • Develop a holistic view of customer needs – look at all the behaviors associated with a particular need, not just a single task, including all the activities that surround a product or service a supplier offers.
  • Expose and record “tribal knowledge” – the things that people do automatically, that they do not consciously think about.
  • Identify customer frustrations and areas of less-than-optimal efficiency, whether or not it is related to the product or service a supplier offers.

A Case Study in Ethnography

Other than Intuit’s approach, no financial services businesses have made available reports on their use of ethnography, though Bank of America has set up an experimental branch where it can test any number of customer services. But the experience of a retail chain which wanted to improve customer experiences at its stores provides an example that could easily be adapted to banks with branch locations. This case study shows how ethnography complements more traditional forms of VOC.

The retail company team’s goal was to understand how it could redesign its stores to give shoppers a more pleasant experience (one that would correlate into sales, of course). To get started, the team:

  • Looked at the current state of store layout and design and asked how that matched up with what the customer “wanted” – as much as they knew at that point, at least.
  • Reviewed existing quantitative data. Like most good companies, this retail chain had an abundance of market and consumer segmentation studies, market share studies and business results on hand.

The team used this historical data as a starting point. (Many companies will stop here and not go any further, assuming that this data is true and basing all their decisions on it. In fact, such an assumption is seldom true.) Based on what was learned, the team began working on two different fronts:

1. What Other Companies Were Doing (Benchmarking)

  • The team made many trips to competitors’ stores, did subjective evaluations of whether those designs seemed to be working, and looked for design features they could incorporate into their redesign effort.
  • Team members traveled far and wide searching for the newest, hottest store design examples and concepts. For example, they found that European retail stores were much more cutting-edge in their fixturing designs.
  • The team also looked at designs for other types of stores, hoping to find inspiration.

2. What Customers Wanted (VOC Collection)

  • The team recognized that focus groups, surveys and simple interviews would not supply the information it needed. The team went to customers, on their turf, visiting them in their own homes to hear about their issues and concerns.
  • The team also conducted “shop-alongs,” going to various retailers with consumers to observe their actions, asking for clarification on why they did what they did and capturing detailed notes on consumer reactions.
  • The team turned some staff into “mystery shoppers,” who went to stores to shop for certain things and interact with the sales associates to see how customers are treated and what is offered to them.

Based on the information collected, the team moved into the next design phase – prototyping. Though often used only for new product development, prototyping is critical for all development efforts. This team took its research and ideas and incorporated them into miniature store layouts and designs. For example, to test a completely new design of the music section, they constructed (in open warehouse space) a scaled version of the new fixtures and layout. Then they brought in customers to test out the shopability of the new design. The feedback was immediately implemented into improving the design and establishing a second prototype, which also was tested. The same process was used for each department until the store design was complete.

Conclusion: Getting New Insights

A growing body of case studies shows how ethnography leads to insights that companies simply cannot get any other way. A book about this new discipline, The Art of Innovation by Tom Kelley, profiles IDEO, a firm in Palo Alto, California (USA). The firm has used ethnography to design everything from medical equipment to an office furniture showroom.

One downside of ethnography is that it is time- and labor-intensive. Also, a company needs to guard against designing a product or service based on a just a few customers. The experiences of the few people a business chooses to observe in-depth can be a great source of inspiration and provide the starting point for next-generation products and services. But the more traditional forms of VOC – focus groups, phone interviews, etc. – are still needed to validate findings from an ethnographic study.

Defining Critical to Quality Characteristics: A Key Step in the Design Process

By J. DeLayne Stroud

After starting a project and gathering the voice of the customer (VOC), it is time to define the critical-to-quality outputs (CTQs).

CTQs are the key measurable characteristics of a product or process whose performance standards or specification limits must be met in order to satisfy the customer. These outputs represent the product or service characteristics defined by the customer (internal or external). They may include the upper and lower specification limits or any other factors related to the product or service. Typically, a CTQ must be interpreted from a qualitative customer statement to an actionable, quantitative business specification. Establishing CTQs is vital for a company to meet customer needs and keep up with the competition.

VOC Becomes CTQs

The flowchart in Figure 1 provides an overview of the requirements necessary to translate the VOC into usable CTQs.

Operational definitions of the flowchart steps are:

  • Characteristics of product or service: A word or phrase that describes some aspect of the product or service. Example: dry cleaning process time.
  • Measures and operational definitions: A definition of how the product or service’s characteristic is to be quantified. There may be several ways of quantifying a given characteristic. Example: the unit used to measure time between when the cleaner receives clothes and when the clothes are ready for pickup (hours).
  • Target value(s): The aim for a product or service. If there were no variation in the product or service, this is the value that would always be achieved; it is the desired level of performance. Example: clothes ready for pickup in 24 hours.
  • Specification limits: How much variation is the customer willing to tolerate in the delivery of the product or service? Specification limits are performance limits that are acceptable to the customer. Example: Upper specification limit for dry cleaning process time is 28 hours.
  • Defect rate(s): This is how often the producer is willing to produce a product or service outside the specification limits. Example: 3.4 defects per million opportunities.

Figure 1: Flowchart for VOC to CTQ

Data Quality and CTQs

Although it is often overlooked, data quality is an important consideration in the design effort. The impact of poor data quality can be very serious. From an organizational perspective, it may create extra costs, rework, low productivity; drive the “wrong” decisions (because of outdated data); and prompt a sense of frustration or lack of trust. From a project perspective, it could result in project delays and impairment of testing. Project teams need to assure that data associated with their designs is both accurate and complete. This may be accomplished by defining CTQs for data quality.

Possible data quality CTQs include:

  • Access restriction
  • Age
  • Availability
  • Completeness
  • Definition and format
  • Encryption
  • Timeliness

Types of Data

Data can be discrete or continuous. When possible, practitioners should collect continuous data because it can be recorded at many different points. Examples include length, size, time, temperature and cost. Continuous data can be broken down into smaller parts, meaning practitioners can get more information about what they are measuring than from attribute data.

Setting Measurements

The design of a product or service starts with quantified requirements. Practitioners need to develop measures for which targets and limits can be established. There may be several ways to quantify a given characteristic. Practitioners should try to pick measures that can be used as inputs to design and avoid measures that are only relevant after the product or service is being produced or offered (i.e., customer satisfaction, complaints). Also, it is important to consider how the characteristic will be measured. Practitioners must avoid measurement systems that, in themselves, introduce variation into the process.

Choosing the Right Metrics

Practitioners can save a lot of frustration by choosing the right metrics up front. This will not eliminate the need to evaluate the metrics during the design process, but it will cut down on the overall project duration. The selected metrics need to be solution independent and support the product or service as an indicator of customer needs. But keep in mind that all customers are not created equal – the project may require more than one measure per customer need. Again, also choose continuous metrics if possible.

Developing Targets and Establishing Specification Limits

Unfortunately, there is no specific recipe for setting targets and specifications. This is a function of business know-how and technical expertise, so practitioners should use the business or subject-matter experts to assist them with brainstorming and developing these requirements. There are many variables to consider, as shown in Figure 2. (Note: Current or projected capability to achieve a performance level should not be the primary basis for establishing targets. To ensure success in the market, the customer and competitive information should be the primary drivers.)

Figure 2: Considerations and Drivers Used to Identify CTQs

 

Figure 2: Considerations and Drivers Used to Identify CTQs

Elements of the House of Quality

One of the most powerful tools used in defining CTQs is the quality function deployment (QFD), also known as the house of quality. This is a structured methodology and mathematical tool used to identify and quantify customers’ requirements and translate them into key critical parameters. QFD helps practitioners to prioritize actions to improve their process or product to meet customers’ expectations.

As Don Clausing and John Hauser write in their article The House of Quality about QFD: “None of this is simple. An elegant idea ultimately decays into process, and processes will be confounding as long as human beings are involved. But that is no excuse to hold back. If a technique like the house of quality can help break down functional barriers and encourage teamwork, serious efforts to implement it will be many times rewarded.”

The QFD was originally developed by Yoji Akao in 1966 when he combined his work in quality assurance and quality control points with function deployment used in value engineering. Akao described QFD as a “method to transform user demands into design quality, to deploy the functions forming quality, and to deploy methods for achieving the design quality into subsystems and component parts, and ultimately to specific elements of the manufacturing process.”

Figure 3 shows the design of the house of quality.

Figure 3: House of Quality

QFD is designed to help planners focus on characteristics of a new or existing product or service from the viewpoints of market segments, company or technology-development needs. The technique yields graphs and matrices.

Basic steps in the creation of the QFD include:

  1. Identify customer needs and wants (collect VOC).
  2. Identify the engineering characteristics of products or services that meet VOC.
  3. Set development targets and test methods for the products or services.

Once again, the QFD helps transform VOC into engineering characteristics (and appropriate test methods) for a product or service, prioritizing each product or service characteristic while simultaneously setting development targets for the product or service, all of which are necessary in defining CTQs.

One of the biggest advantages of QFD is that the process requires groups of cross-functional representatives to work together to understand customer expectations in a way that focuses on customer requirements by using and strengthening functional teamwork. It provides flexible and easy-to-assimilate documentation and uses competitive positioning and marketing potential to prioritize design goals. Finally, it translates soft customer requirements into measurable goals.

Benefits experienced when using the QFD include a reduction in design, a reduction in design changes and a reduction in start-up costs.

Lessons Learned When Using a QFD

QFD is more of an art than a science. The big benefit comes from the discussion the process generates. Practitioners might be surprised to find that even with the simplest process, a QFD requires a lot of effort. Many entries may look obvious, even after they are written down; however, if there are no “tough spots,” it probably is not being done right. Practitioners must always focus on the end customer and remember that “charts” are not the objective. Most importantly, QFD is a valuable decision support tool; it is not a decision maker.

QFD is an organizing tool – the bulk of the effort lies in gathering the inputs to the house of quality. The QFD should be performed via a cross-functional team and communicated to all involved in the design. Although QFD takes time, it will ultimately save time spent reworking “defective” designs and assist in balancing time commitment with benefits.

Mitigating Potential Impacts

How does the inability to meet major CTQs in the design – or of not considering a CTQ – impact the customer or a company? Potential customer impacts include an increase in product or service variability, non-functional products or services, delays in delivery time and cost of the product or service, as well as a decrease in value to the customer.

Potential internal impacts include increased rework and costs, and loss of profit margin, customers (or return customers), and growth opportunities for not keeping up with its competition, which can lead to barriers to entry in other markets. Therefore, defining CTQ requirements should be at the top of a project’s priorities.

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