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House of Strategy (HOS): from strategic objectives to competitve prioritiesS. Drora; M. Baradba Department of Industrial Engineering and Management, Ort Braude College, Karmiel 21982, Israel b

Department of Industrial Engineering, Tel Aviv University, ramat aviv 69978, aviv, Israel

To cite this Article Dror, S. and Barad, M.(2006) 'House of Strategy (HOS): from strategic objectives to competitvepriorities', International Journal of Production Research, 44: 18, 3879 3895To link to this Article: DOI: 10.1080/00207540600575779URL:http://dx.doi.org/10.1080/00207540600575779

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International Journal of Production Research ,Vol. 44, Nos. 1819, 15 September1 October 2006, 38793895

House of Strategy (HOS): from strategic objectivesto competitve priorities

S. DROR* y and M. BARAD z

yDepartment of Industrial Engineering and Management,Ort Braude College, Karmiel 21982, Israel

zDepartment of Industrial Engineering, Tel Aviv University,Ramat Aviv 69978, Tel Aviv, Israel

A challenge to management is creating superior values for its customers andimproving financial performances. This paper expresses the customer-orientedperspective of a company in terms of its competitive priorities. It builds on theHouse of Quality (a customer requirements planning matrix) by developing aHouse of Strategy for translating the improvement needs of a companys businessobjectives into relative importance of its competitive priorities. A mean squareerror (MSE) criterion, supporting the selection of vital competitive priorities to beimproved, is suggested. This divides a group of items (here a set of competitivepriorities) into two groups: vital few and trivial many. The partition minimizes theoverall MSE and by so doing delineates two homogeneous groups. The method isimplemented in companies from three industry types. It reveals their different

HOS structures and thus provides useful information on the vital competitivepriorities to be improved as dictated by their respective business objectives andinternal capabilities.

Keywords : Strategy; Competitive priorities; HOQ

1. Introduction

Improving its competitive priorities enables a firm to create superior value forits customer while achieving its business financial objectives. The value that a firm

transfers to its customers is expressed by a unique combination of product, price,service, and image, as defined in the customer perspective of the balanced scorecard(Kaplan and Norton 2001). In every market in which a firm acts, it should identifycriteria such as price, delivery, product quality, and product variety, for gainingopportunities against its competitors (Hill 1993). Similar criteria called competitivepriorities were suggested by Porter (1985). The Malcolm Baldrige National QualityAward (MBNQA 2005), also suggests to an organization defining its competitivepriorities as an element of its unique environmental competition. Barad andGien (2001) investigated competitive advantages related to price (low), delivery(fast, reliable), product quality (high, stable), product variety and new products

*Corresponding author. Email: [email protected]

International Journal of Production ResearchISSN 00207543 print/ISSN 1366588X online 2006 Taylor & Francis

http://www.tandf.co.uk/journalsDOI: 10.1080/00207540600575779


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to which they added an additional advantage, the human advantage, expressedin terms of employees involvement. A justification of the importance of this internalstrategic priority can be found in the European Foundation for Quality Management(EFQM 2005). As far as the potential to influence business performance is

concerned, the European model considers employees satisfaction at the samehierarchical level as customer satisfaction.

In most cases, competitive analysis helps to determine strengths and weaknessesof the competitors within a market (e.g. Bensoussan and Fleisher 2002) but pays littleattention to its influences on financial performances. To be effective, the competitivepriorities of an enterprise have to be considered in the light of its business objectives.A typical objective of a profit-seeking enterprise is increasing its shareholder values.Three typical financial measures are utilized for building the business objectives:market share, marginal profitability, and return on investment (see William andBruns 1999, Kaplan and Norton 2001).

The Balance Scorecard introduced by Kaplan and Norton (1996, 2001) is astrategic frame with four perspectives: financial, customer, internal processes, andlearning and growth. It develops strategic cause-and-effect relationships by linkingmeasures of financial performances to measures on their drivers. According toHudson et al . (2001), the balanced scorecard has good coverage of the dimensions of the performance measures but provides no mechanism for building and maintainingthe relevance of defined measures. Goulian and Mersereau (2000), who presentedan implementation of the balance scorecard in a Canadian company, indicate thatbasic guidelines for selecting performance measures of an enterprise to fit in abalanced scorecard are needed.

For connecting the above-mentioned four perspectives of an individualorganization, namely, its financial perspective, its customer-oriented perspective,its internal processes, and its learning and growth perspective, Kaplan and Norton(2004) introduced the balanced scorecard map .

However, the map has some limitations, e.g. (1) the customer perspective isloosely defined; and (2) the map does not provide a mechanism for selecting thecompetitive priorities to be improved.

Here, we deal with both limitations. First, we express the customer perspectiveof a firm in terms of its competitive priorities. By doing so, the map may become ameans for linking them to the business objectives. To overcome the secondlimitation, i.e. providing a linking mechanism, we suggest applying the QFD

principles.

1.1 Quality function deployment

Quality function deployment (QFD) has been originally developed as a productquality design methodology whose essence was to extract customers needs ordesires and to translate them into technical product characteristics, engineeringparameters, and ultimately production-system parameters (e.g. Hauser andClausing 1988, Akao 1990, Wasserman 1993). Chan and Wu (2002) present aliterature review on QFD. The QFD technique was developed in 1972 at

Mitsubishi and, during the 1980s and the 1990s, has been gradually andsuccessfully adopted by US and Japanese firms (e.g. Bossert 1991, King 1995).Typically, the approach is described in terms of a Four-Phase Model, made up of

3880 S. Dror and M. Barad


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four successive stages or matrices: overall customer requirement planning matrix(also called the House of Quality ), final product characteristic deployment matrix,process plan and quality control charts, and finally operating instructions. TheHouse of Quality (HOQ) maps the WHATs representing the customer desired

product attributes (the customer voice) into the HOWs technical characteristicsas viewed by the R&D staff.

In recent years, the application domains of the QFD methodology have beenexpanded. Barad and Gien (2001) utilized QFD to deploy manufacturing strategiesinto improvement activities. They developed a structured two phased model forconnecting the improvement actions of a company with its strategic and operatingimprovement needs. Olhager and West (2002) used QFD for linking manufacturingflexibility to marketing requirements. Dror and Barad (2002) utilized five QFDmatrices to construct a performance measurement system based on the balancedscorecard map.

The paper here builds on the HOQ methodology to develop a House of Strategy(HOS) which translates the desired improvement in the business objectives into therelative importance of its competitive priorities. This work also proposes a genericapproach for differentiating between the vital few (here competitive priorities to beimproved) and the trivial many.

The remainder of the paper proceeds as follows. Section 2 presents the House of Quality (HOQ). Section 3 describes the HOS and methodically compares HOS withHOQ. Section 4 suggests a mean square error (MSE) criterion for quantitativelydifferentiating between the vital few and the insignificant ones. Section 5 introducessome implementation cases, and section 6 concludes the paper.

2. House of Quality

The House of Quality matrix is the most fundamental matrix of QFD, and its shapematches its name. It contains walls, a ceiling, a roof, and a floor.

The foundation of the HOQ is the belief that a product should be designed so asto reflect the customers desires and taste. A multidisciplinary team translates a set of customer desires, using market research and benchmarking data, into prioritizedtechnical characteristics to be met by a new product design.

The general building sequence of the House of Quality comprises the followingsix major steps:1. Characterization of customer desires (WHATs) : listen to the Voice of the

Customer and classify their desires (the walls).2. Importance and competitive evaluation of these desires : assign customer

perceptions observed from market surveys. Include relative importance of thecustomer requirements and compare competitors with respect to their meetingof the requirements.

3. Technical requirements (HOWs) : select a structured set of relevant andmeasurable product characteristics (the ceiling).

4. Interrelationship matrix : evaluate the impact of each technical characteristicon each customer requirement (the house main contents). An appropriatescale is applied, illustrated by symbols.

House of Strategy 3881


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5. Correlation between the technical characteristics (the roof) : identify whichtechnical characteristics support or impede one with the other in the productdesign. These correlations can highlight innovation opportunities.

6. Technical priorities , benchmarks , and targets : calculate the priorities of

the technical requirements, measure the technical performance achieved bycompetitive products and the degree of difficulty involved in developing eachrequirement, and set the target values for each technical requirement to bemet by the new design (the floor).

3. House of Strategy

The core of any strategy is expressed in assumptions about the values a firm transfersto its customers. According to the balanced scorecard map introduced by Kaplan and

Norton, these assumptions differentiate the firm through a unique combinationof product, price, service, and image, as defined in the customer perspective.As mentioned in section 1, to improve the rather vaguely defined customer perspectiveof a firm we express it here in terms of its competitive priorities . The competitivepriorities or competitive advantages are related to price (low), delivery (fast, reliable),product quality (high, stable), product variety, and new products. Barad andGien (2001) extended these competitive priorities by adding an internal priorityrepresenting an additional advantage, the human advantage , and expressed it in termsof employees involvement. The employees involvement aspect is also emphasized inthe European excellence model (EFQM). The EFQM model presents the workerssatisfaction at the same hierarchical level as that of the customer satisfaction, i.e. ithas the potential of influencing the business performances.

Hence, we first adopt here this extended model of competitive (strategic) prioritiesfor expressing the customer perspective of a firm. Then, we utilize the QFD principlesas a linking mechanism to connect the competitive priorities with the businessobjectives (which in this work represent Kaplan and Nortons financial perspective).As mentioned above, such a linking mechanism is missing in the balance scorecardmap. A QFD matrix is built to extract the desired improvement in the businessobjective measures as viewed by managers and to translate them into competitivepriority measures. The role of the QFD matrix becomes determining the relativeimportance of the strategic priorities to be improved, and therefore its name is HOS.

Specifically, the HOS as suggested here translates the improvement needs of a companys objectives (market share, marginal profitability, and return oninvestment) into the relative importance of its competitive priority measures(fast supply, reliable supply, low price, high product quality, stable product quality,high product variety, new products, and involvement of workers).

Slack (1994) proposed an importance-performance matrix to help in settingpriorities to improvement of competitive factors. The procedure proved to be a veryvaluable tool in identifying a prioritized set of such factors. Following the concept of importance performance mentioned above, Barad and Gien (2001) measured thestrategic improvement needs of a company in terms of the importance attributed

by interviewees to a strategic factor multiplied by the gravity they attributed to itsrespective concerns. The higher the importance of a strategic factor and the higherthe severity of its concerns, the higher is its improvement need. This measure is a



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vector version of the importance-performance matrix as a determinant of improvement priority developed by Slack.

Here, we adopt Barad and Giens approach for measuring the improvement needsof a companys business objectives . To assess the respective importance and

performance level of each business objective, we define an indicator which is amultiple of two parameters. The first parameter expresses the importance attributedby the interviewees to each business objectives in the given set. The second parameterexpresses their evaluation of the capability gap existing between the desired stateof a business objective and its realization.

The principle conveyed by the calculated numerical values of the indicator hereis that the higher the importance attributed by the interviewees to a certainbusiness objective and the higher its capability gap, the higher is its improvementneed.

3.1 Matrix development

Building the HOS involves the following major steps (see explanation and detailsin section 5):

1. Selecting a group of interviewees: in order to obtain a balanced picture,the interviewees have to be selected from among managers representingvarious relevant functions of the company, such as CEO, R&D manager,Operation manger and marketing manager.

2. Extracting data from the interviewed managers on:2.1. The importance they attribute to each business objective (measured on

a Likert scale)2.2. The respective capability gap they attribute to each business objectives

(measured on a Likert scale)2.3. Strength of relationships between the WHATs and the HOWs (three

levels; see 4 below)3. Calculating the improvement needs of the business objectives (the WHATs):

to calculate the improvement need of each business objective, its importancelevel is multiplied by its respective capability gap level, and then it isstandardized.

4. Calculating the relative importance of the HOWs: the technical calculations

follow the standard QFD procedures. These involve multiplying theimprovement needs of the WHATs with the HOS matrix represented by theR i , j , the relationship strengths between each HOW ( j ) and each WHAT ( i ).These relationship strengths are the core of every QFD matrix and are usuallydescribed symbolically as ( ) weak, ( ) medium, and ( ) strong relation-ships. The symbols are then replaced by numbers, typically expressing anonlinear scale such as (1, 3, 9) for highlighting the strong relationships.

3.2 Comparison between HOQ and HOS

The comparison in table 1 summarizes the similarities and the differences betweenthe HOQ and the HOS in the order dictated by the recommended steps forconstructing the HOQ.



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T a b l e 1 . C o m p a r i s o n b e t w e e n H O Q a n d H O S .

C o n s t r u c t i o n s t e p

H o u s e o f Q u a l i t y ( H O Q )

H o u s e o f S t r a t e g y ( H O S )

O b j e c t i v e

T r a n s l a t e s t h e c u s t o m e r s p r i o r i t i z e d d e s i r e s i n t o

p r i o r i t i z e d p r o d u c t t e c h n i c a l c h a r a c t e r i s t i c s .

T r a n s l a t e s t h e p r i o r i t i z e d i m p r o v e m e n t n e e d s o f

a c o m p a n y s b u s i n e s s o b j e c t i v e s i n t o t h e

r e l a t i v e i m p o r t a n c e o f i t s c o m p e t i t i v e p r i o r i t y

m e a s u r e s .

1 . R o w s d e f i n i t i o n ( t h e W H A T s )

T h e c u s t o m e r

d e f i n e s t h e i r d e s i r e s

( p r o d u c t

a t t r i b u t e s ) i n a f r e e w a y .

A g r o u p o f a c c e p t e d b u s i n e s s o

b j e c t i v e m e a s u r e s

e x i s t s .

2 . I m p o r t a n c e r a t i n g o f t h e W H A T s

T h e c u s t o m e r d e f i n e s t h e i m p o r t a n c e o f e a c h

d e s i r e .

T h e c u s t o m e r d e f i n e s t h e i m p o r t a n c e o f e a c h

b u s i n e s s o b j e c t i v e .

T h e c u s t o m e r c o m p a r e s t h e r e s p o n s e s o f t h e f i r m

p r o d u c t s a n d t h o s e o f t h e c o m p e t i t o r s

p r o d u c t s t o e a c h d e s i r e .

T h e c u s t o m e r d e f i n e s t h e c a p a b i l i t y g a p o f e a c h

b u s i n e s s o b j e c t i v e .

A s a r e s u l t o f t h i s c o m p a r i s o n , t

h e p r o d u c t

d e v e l o p e r s d e t e r m i n e t h e i m p o r t a n c e r a t i n g o f

s p e c i f i c a t t r i b u t e s b y m u l t i p l y i n g t h e o r i g i n a l

i m p o r t a n c e s c o r e b y a s t a n d a r d f a c t o r ( 1

. 2 o r

1 . 5 ) s a l e s p o i n t s

.

T h e r e q u i r e d i m p r o v e m e n t l e v e l o f e a c h W H A T i s

d e t e r m i n e d b y m u l t i p l y i n g i t s i m p o r t a n c e w i t h

i t s r e s p e c t i v e c a p a b i l i t y g a p f o l l o w e d b y

a s t a n d a r d i z a t i o n o f t h i s v a l u e

.

3 . C o l u m n s d e f i n i t i o n ( t h e H O W s )

T h e p r o d u c t d e v e l o p e r s d e f i n e t e c h n i c a l s p e c i f i -

c a t i o n s r e s p o n d i n g t o t h e c u s t o m e r d e s i r e s .

A g r o u p o f a c c e p t e d c o m p e t i t i v e p r i o r i t y m e a s u r e s

e x i s t s .

4 . R e l a t i o n s h i p s t r e n g t h b e t w e e n t h e H O W s

a n d t h e W H A T s

T h e p r o

d u c t

d e v e

l o p e r s

d e f i n e t h e s t r e n g t h o f t h e

r e l a t i o n s h i p s b e t w e e n t h e t e c h n i c a l a t t r i b u t e s

a n d t h e c u s t o m e r d e s i r e s .

T h e c u s t o m e r

( m a n a g e r s ) d e f i n e s t h e i m p a c t o f

e a c h c o m p e t i t i v e p r i o r i t y i m p r o v e m e n t o n t h e

r e a l i z a t i o n o f e a c h b u s i n e s s o b j e c t i v e s .

5 . R e l a t i o n s h i p s a m o n g t h e H O W s ( m a t r i x r o o f )

T h e p r o

d u c t

d e v e

l o p e r s

d e f i n e t h e r e l a t i o n s h i p s

( p o s i t i v e o r n e g a t i v e ) b e t w e e n e a c h p a i r o f

t e c h n i c a l a t t r i b u t e s .

E v e n t u a

l r e l a t i o n s

h i p s

b e t w e e n p a i r o f c o m p e t i t i v e

p r i o r i t i e s a r e d i s r e g a r d e d .

6 . R e q u i r e d i m p r o v e m e n t l e v e l o f t h e H O W s

T h e p r i o r i t i e s o f t h e H O W s a r e d e t e r m i n e d b y

m u l t i p l y i n g t h e i m p o r t a n c e r a t i n g s o f t h e

W H A T s w i t h t h e r e l a t i o n s h i p s t r e n g t h

b e t w e e n e a c h H O W a n d e a c h W H A T .

T e c h n i c a l l y t h e s a m e a s i n H O Q .

7 . T a r g e t v a l u e s o f t h e H O W s

T h e p r o

d u c t

d e v e

l o p e r s c o m p a r e t h e n u m e r i c a l

v a l u e s o f t h e p r o d u c t t e c h n i c a l a t t r i b u t e s w i t h

t h e n u m e r i c a l v a l u e s o f t h e c o m p e t i t o r

p r o d u c t s w h i l e c o n s i d e r i n g p o i n t ( 5 ) a n d t h e

t e c h n i c a l c a p a b i l i t i e s o f t h e f i r m .

I t i s d e s i r a b l e t h a t a s t r a t e g i c t e a m

( m a n a g e r s /

e n g i n e e r s ) m a k e s s u c h c o m p a r i s o n s w i t h

r e s p e c t t o t h e c o m p e t i t i v e p r i o r i t i e s o f t h e

c o m p e t i t o r p r o d u c t s w h i l e c o n s i d e r i n g t h e

t e c h n i c a l c a p a b i l i t i e s o f t h e f i r m

.



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Summary of the main differences:1. In the HOQ, the customer is external to the company and not knowledgeable

about technical attributes and firms capabilities. In the House of Strategythe customer (interviewed managers/engineers) is internal to the company and

knowledgeable.2. In the HOQ the customer defines in a free way the WHATs and the product

developers define the HOWs (open matrices). In the House of Strategy theWHATs and the HOWs are given in advance (close matrices).

3. In the HOQ the original importance of specific product attributes(the WHATs) are multiplied by a standard factor (1.2 or 1.5) called salespoints. These values are selected by the product developers after a competitiveevaluation of the company product is carried out by its customers. In theHouse of Strategy the required improvement levels of the WHATs aredetermined by multiplying the importance of a WHAT with its respective

capability gap as evaluated by the (knowledgeable) customer.4. In the HOQ the relationship strengths are defined by the product developers

while in the House of Strategy they are evaluated by the (knowledgeable)customer.

5. In the HOQ the construction of the roof is an important step that assistsin determining target values of the final product characteristics. In the Houseof Strategy mutual influences between the competitive priorities may existbut at this early stage we choose to ignore them.

4. MSE criterion for selecting the vital few competitive priorities to be improved

Taylor (2000) utilized the MSE criterion to detect the change point in a processcontrolled through a CUSUM control chart. The procedure used by the authorfor performing a change-point analysis comprises: cumulative sum chart (CUSUM)to detect the change and a mean square error (MSE) estimator to detect when thechange occurs.

The analysis begins with a construction of the CUSUM chart. CUSUM chartsare constructed by calculating and plotting a cumulative sum of differences between

the values and the average. These differences sum to zero, so the cumulative sumalways ends at zero.To identify when the change occurs, an MSE estimator is presented. The MSE

error estimator is based on the idea of splitting the data into two segments(respectively representing before and after the change data), estimating the averageof each segment, and then seeing how well the data fit the two estimated averages.The splitting that minimizes the MSE is the best estimator of the change point.

It is suggested here that the above model be applied and a similarly defined MSEcriterion used as a generic method for dividing a group of items (here a set of competitive priorities) into two groups, respectively representing the vital few andthe trivial many . The partition objective is to minimize the overall MSE (the sum of the internal variances of each of the two groups) and by doing so to divide theoriginal group into two homogeneous groups.



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The algorithm is detailed as follows: first, arrange the normalized requiredimprovement levels of the k components in descending order, where p1 representsthe highest improvement level needed and pk the lowest improvement level needed,0 p j 1, j 1, . . . , k.

Second, while keeping this order, divide the k components into two groups,A and B. Group A consists of the first m components, while group B comprisesthe remaining k m components. Assuming that each group includes at least onecomponent, there are k 1 possibilities to select an m value for splitting the itemsinto two groups.

Third, calculate MSE( m), m 1, . . . , k 1 using the following equation:

MSE m Xm

j 1

p j pA 2 X

k

j m 1

p j pB 2( ), 1

where pA and pB are the average improvement levels in vital group A and in trivialgroup B, respectively.

Fourth, find

MSE m Min1 m k1

MSE m : 2

This partitioning method can be looked upon as a quantitative tool for implementingthe Pareto principle (Pareto 1897), by building two internally homogenous clustersof items out of an ordered set of (eventually) non-homogenous items. The order of the original set is dictated by the Pareto principle, i.e. in decreasing order of the itemvalues.

5. Implementation examples

This section describes the implementation of the above methodology in threecompanies pertaining to different industry types: pharmaceuticals, plastics, andprinting.

In order to obtain the necessary qualitative data for building the HOS matrices,the decision was made to interview three representative managers from eachinvestigated company.

A Likert scale was used to express the level of the Importance and the Capabilitygap of the business objectives. Interviewees were asked to assign the level of thesetwo factors on a five-point scale, from one to five: 1 very low, 2 low, 3 medium,4 high, and 5 very high.

Typically, for unifying observations obtained from several interviewees, a meanvalue is calculated. Here, the unification was done by means of a median value.The median is less sensitive to extreme scores than is the mean, and this makes it

a better measure than the mean for highly skewed distributions, in particular whenthe sample is small. The vital competitive priorities were selected by applying theMSE method.



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5.1 Pharmaceuticals firm

The firm develops, manufactures, and markets high-quality generic and brandedpharmaceuticals, which are used by patients in many countries around the world.

5.1.1 HOS construction results. The production manager, the R&D manager, andthe purchasing manager were the interviewed managers who supplied the qualitativeinputs detailed in table 2.

These qualitative inputs are the business objectives, their respective importanceand respective capability gap. The possible values of the inputs were based on aLikert scale from 1 to 5. The values in table 2 represent the median values amongthose assigned by the three interviewees.

It can be seen that marginal profitability is the business most importantobjective (5), followed by market share (4) and return on investment (3). The same

order is retained with respect to the capability gap. The capability gap related toreturn on investment is (0), i.e. out of the Likert scale, expressing the fact thatimproving this objective is considered not relevant by management.

The improvement need of each objective is calculated as the multiple of the firsttwo columns. The final column, representing the normalized improvement need isthe input to the HOS matrix. It emphasizes the firms need to improve its marginalprofitability (0.62).

The core of the HOS matrix (table 3) presents the strength of the relationshipbetween each business objective and each competitive priority enabling thenormalized improvement needs of the business objectives (HOS input) to betranslated into the required improvement levels of the competitive priorities (HOSoutput). The symbolic relationships as assigned by the interviewees ( , , ) wererespectively replaced by the typical numerical values (1, 3, 9). The values appearingin the HOS matrix express the median of the interviewees opinions.

The interviewees pointed out that launching new products may have a stronginfluence both on the market share and on the marginal profitability. From thecompetition point of view, it is very important to be first in the market with newgeneric pharmaceuticals. The required preparations for entering the market includenot only product development but also obtaining the appropriate approvals. Thelatter may last one to two years. A company with a successful timing for entering

Table 2. Building the required improvement level of the business objectives (HOS inputof the pharmaceuticals firm).

Businessobjectives Importance Capability gap

Improvementneed

Improvementneed (normalized)

HOS input

Marketshare 4 3 12 0.38Marginalprofitability 5 4 20 0.62Return on

investments3 0 0 0

All objectives 32 1



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T a b l e 3 . H O S o f t h e p h a r m a c e u t i c a l s f i r m .

H O S i n p u t

C o m p e t i t i v e

p r i o r i t i e s

R e q u i r e d

i m p r o v e m e n t

l e v e l o f t h e

b u s i n e s s

o b j e c t i v e s

F a s t

d e l i v e r y

R e l i a b l e

d e l i v e r y

L o w

c o s t

H i g h

p r o d u c t s

q u a l i t y

S t a b l e

p r o d u c t s

q u a l i t y

P r o d u c t

r a n g e

N e w

p r o d u c t s

E m p l o y e e

i n v o l v e m e n t

( i n t e r n a l

p r i o r i t y )

B u s i n e s s o b j e c t i v e s M a r k e t s h a r e

0 . 3 8

3

9

3

3

3

3

9

3

M a r g i n a l p r o f i t a b i l i t y

0 . 6 2

3

3

3

3

3

1

9

1

R e t u r n o n i n v e s t m e n t s

0 . 0 0

H O S o u t p u t

R e q u i r e d i m p r o v e m e n t

l e v e l o f t h e c o m p e t i t i v e

p r i o r i t i e s

3 . 0 0

5 . 2 5

3 . 0 0

3 . 0 0

3 . 0 0

1 . 7 5

9 . 0 0

1 . 7 5

N o r m a l i z e d

0 . 1 0

0 . 1 8

0 . 1 0

0 . 1 0

0 . 1 0

0 . 0 6

0 . 3 0

0 . 0 6



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the market, just after the pharmaceutical becomes generic, creates a competitiveadvantage as the pharmaceutical becomes familiar to doctors. Another competitivepriority whose improvement was expected to have a strong influence on the marketshare was found to be reliable delivery. Meeting schedules and quantities to be

delivered influence the number and stability of future orders.

5.1.2 MSE for selecting the vital competitive priorities to be improved. There areeight competitive priorities that have to be divided into two groups. The group of vital competitive priorities (to be improved) was identified by means of the MSEmethod suggested. P j , j 1,2, . . . , 8, are the required improvement levels of thecompetitive priorities arranged in descending order, as shown in table 4.

The calculation of MSE( m), j 1,2, . . . , 7 was carried out using equation (1).It should be recalled that MSE( m) is calculated as the sum of the internal variancesof the two groups, with the first m components in group A and the remaining 8 mcomponents in group B. The results are shown in table 5.

It can be seen that the lowest MSE( m) is obtained for MSE(2) 0.0093.Therefore, the vital few competitive priorities to be improved are the first two onthe list: new products and reliable delivery. MSE(1) 0.0096, which selects onlynew products, is very close to the optimal value but not so the next alternativeMSE(3) according to which a third competitive priority has to be added to theselected set.

The required improvement levels of the business objectives were: marginal profitability (0.62) and market share (0.38). This emphasizes the firms desire forimproving the marginal profitability. Summing the results obtained from the HOS

matrix and the MSE tools, it can be seen that the vital competitive priorities,new products and reliable delivery , were the drivers of market share whereasnew products was the driver of marginal profit (figure 1). The significant competitivepriorities ( new pr oducts0.30, reliable delivery 0.18) were selected by means of the MSE criterion.

5.2 Plastics firm

The firm is a leading manufacturer of plastic consumer products and a globaltrendsetter in the DIY household and garden furniture market. Its attractive and

Table 4. The required improvement levels of the competitive prioritiesarranged in descending order.

P1 P 2 P 3 P4 P 5 P 6 P 7 P 8

0.30 0.18 0.10 0.10 0.10 0.10 0.06 0.06

Table 5. MSE (m) results.

MSE(1) MSE(2) MSE(3) MSE(4) MSE(5) MSE(6) MSE(7)

0.0096 0.0093 0.0221 0.0284 0.0317 0.0333 0.0397



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functional lines include resin garden furniture and sheds, shelving systems and

utility cabinets, tool boxes and storage products for the DIY market, householdproducts, bathroom accessories, sanitary fittings, and baby and toddler products.In this firm, the market manager, operation manager, and quality and productivitymanager were interviewed.

Table 6 describes the HOS matrix of the plastics firm. The selection of thevital competitive priorities was done according to equations (1) and (2). Thenormalized improvement needs of the business objectives are: marginal profit-ability (0.54), market share (0.24), and return on investments (0.22). Thisemphasizes the firms need to improve its marginal profitability. The significantcompetitive priorities (new products: 0.30; low cost: 0.23) were selected by means

of the MSE criterion.The interviewees pointed out the strong relationship between new products and

marginal profitability and between low cost and market share. One of theinterviewers indicated that a strong relationship existed between the employeesinvolvement and marginal profitability. According to his opinion, employeesinvolvement stems from the business understanding of the market people.

5.3 Printing firm

The firm is a manufacturer of printing products such as packing material, catalogues,and books. It started as an institute of light copies and became a local supplier of prepared packages utilizing advanced printing technologies. The three interviewedmanagers were the firm president and founder, the vice president, and theinformation manager, who is also the quality manager. Table 7 describes the HOSmatrix of the printing firm.

The normalized improvement needs of the business objectives are: marketshare (0.42), marginal profitability (0.29), and return on investments (0.29). Thisemphasizes the firms need to improve the market share.

The vital competitive priorities (stable products quality: 0.25; fast delivery: 0.20;

reliable delivery: 0.15; and high product quality: 0.14), were selected using the MSEcriterion. The three interviewees indicated strong relationships between each of thesecompetitive priorities and market share.

Marginal profitability0.62

Market share0.38

Reliable delivery0.18

New products0.30

Business objectives

Competitive priorities

Figure 1. Improvement map of the pharmaceuticals firm.



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T a b l e 6 . H O S o f a p l a s t i c p r o d u c t s f i r m .

H O S i n p u t


p r i o r i t i e s

R e q u i r e d


l e v e l o f t h e

b u s i n e s s

o b j e c t i v e s

F a s t

d e l i v e r y

R e l i a b l e

d e l i v e r y

L o w

c o s t

H i g h

p r o d u c t

q u a l i t y

S t a b l e

p r o d u c t s

q u a l i t y

P r o d u c t

r a n g e

N e w

p r o d u c t s

E m p l o y e e s


( i n t e r n a l

p r i o r i t y )


0 . 2 4

3

1

9

3

3

3

1

0


0 . 5 4

1

0

3

1

1

1

9

3


0 . 2 2

0

1

1

3

0

1

1

1

H O S o u t p u t


l e v e l o f t h e c o m p e t i t i v e

p r i o r i t i e s

1 . 2 7

0 . 4 6

4 . 0 3

1 . 9 2

1 . 2 7

1 . 4 9

5 . 3 2

1 . 8 4

N o r m a l i z e d

0 . 0 7

0 . 0 3

0 . 2 3

0 . 1 1

0 . 0 7

0 . 0 8

0 . 3 0

0 . 1 0



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T a b l e 7 . H O

S o f a p r i n t i n g f i r m .

H O S i n p u t


p r i o r i t i e s

R e q u i r e d


l e v e l o f t h e

b u s i n e s s

o b j e c t i v e s

F a s t

d e l i v e r y

R e l i a b l e

d e l i v e r y

L o w

c o s t

H i g h

p r o d u c t s

q u a l i t y

S t a b l e

p r o d u c t s

q u a l i t y

P r o d u c t

r a n g e

N e w

p r o d u c t s

E m p l o y e e s


( i n t e r n a l

p r i o r i t y )


0 . 4 2

9

9

3

9

9

9

3

0


0 . 2 9

3

3

0

3

9

0

0

9


0 . 2 9

9

3

0

1

9

0

0

1

H O S o u t p u t


l e v e l o f t h e

c o m p e t i t i v e p r i o r i t i e s

7 . 2 1

5 . 4 9

1 . 2 6

4 . 9 2

8 . 9 2

3 . 7 8

1 . 2 6

2 . 8 6

N o r m a l i z e d

0 . 2 0

0 . 1 5

0 . 0 4

0 . 1 4

0 . 2 5

0 . 1 1

0 . 0 4

0 . 0 8



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6. Summary and conclusions

Quality Function Deployment (QFD), a product-oriented quality techniquesupported by MSE, a statistical technique, have been applied in an innovative

way to reveal the uniqueness of the strategy to be adopted by an individualorganization. The method provides useful information and understandingregarding the relative importance the management of an enterprise should attributeto improve its selective competitive priorities as dictated by its business objectivesas well as by its internal capabilities. The QFD provides a mechanism for buildingthe customers perspective of the balanced scorecard. The House of Strategy (HOS)extracts the improvement needs of the organizational objective measures as viewedby managers and translates them into the relative importance of its competitivepriority measures.

The HOS input (normalized improvement needs of a companys objectives) are

calculated from qualitative data extracted from interviewees in the investigatedorganizations through a half-open questionnaire constructed for this purpose.The HOS output is expressed by a set of competitive priorities and their relativeimportance. Since the competitive priorities are measurable variables, they can belooked upon as an improved (quantitative) definition of the customer perspectivein the balanced scorecard.

The MSE criterion supports the selection of vital competitive priorities to beimproved. It divides a group of items (here a set of competitive priorities) into twogroups: vital few and trivial many. The partition minimizes the overall MSE andby so doing provides two homogeneous groups.

This paper describes the implementation of the above methodology in threecompanies pertaining to different industry types, namely pharmaceuticals, plastics,and printing, revealing their different HOS structures. In the pharmaceuticalscompany, the vital competitive priorities, new products and reliable delivery,were the drivers of marginal profit and market share, the business objectivesto be improved, while in the plastics enterprise, new products and low price werefound to be the best competitive priorities for improving the same businessobjectives. In the printing firm, high quality, stable quality, and product varietywere the most important competitive priorities for improving its market sharerecord.

As can be seen from the results, in the investigated companies different HOS

structures were obtained. The QFD method enables unique weights to be obtainedfor the relative importance of the competitive priorities to respond to the desiredimprovement in the business objectives. The method ensures that every businessobjective defined by the enterprise strategy is linked to a set of competitive prioritiesthat may eventually influence its future results. QFD proves again to be an effective,multipurpose technique.

In this work, the MSE partitioning method can be looked upon as aquantitative tool for implementing the Pareto principle, by building two internallyhomogenous clusters of items out of a set of items whose order is dictated by thePareto principle.

Our results have two limitations. First, mutual influences between thecompetitive priorities may exist, but we assume for the purpose of simplificationthat the roof of the HOS does not exist. In practice, strengthening the improvement



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efforts of a specific competitive priority may reduce the improvement effortsfrom other competitive priorities. Second, we did not suggest here a validationprocedure, based on true numerical data for examining the strength of therelationships used in the HOS matrix. As recalled, for implementing the HOS,

only qualitative data (obtained from interviewees) were collected in each investigatedcompany.

Future research may focus on these limitations and examine a possibleenhancement of the method. It is suggested that the presented QFD methodologybe extended by adding supplementary matrices for translating the relativeimportance of the competitive priorities into improvement needs of internalprocesses and further on to determine the required improvement level of thecompany infrastructures. This direction may prove useful for enhancing the balancedscorecard methodology.

References

Akao, Y., Quality Function Deployment: Integrating Customer Requirements into ProductDesign , 1990 (Productivity Press: Cambridge, MA).

Barad, M. and Gien, D., Linking improvement models to manufacturingstrategiesa methodology for SME and other enterprises. Int. J. Prod. Res. , 2001,39 , 26752695.

Bensoussan, B. and Fleisher, C.S., Strategic and Competitive Analysis: Methods and Techniques for Analyzing Business Competition , 1st ed., 2002 (Prentice-Hall: UpperSaddle River, NJ).

Bossert, J., Quality Function DeploymentA Practitioners Approach , 1991 (ASQC Quality

Press: Milwaukee, WI).Chan, L.K. and Wu, M.L., Quality Function Deployment: a literature review. Eur. J. Oper.Res. , 2002, 143 , 463497.

Dror, S. and Barad, M., Utilizing quality function deployment to construct a balancedscorecard map, in Proceedings of the Performance Measurement and ManagementConference , Boston, MA, 2002, pp. 165172.

European Foundation for Quality Management (EFQM). The Fundamental Concepts of Excellence , 2005 (Brussels Representative Office: Brussels).

Goulian, C. and Mersereau, A., Performance measurement. Ivey Bus. J. , 2000, 65 , 4853.Hauser, J.R. and Clausing, D., The House of Quality. Harv. Bus. Rev. , 1988, 66 , 6373.Hill, T.J., Manufacturing Strategy , 2nd ed., 1993 (Macmillan: London).Hudson, M., Smart, A. and Bourne, M., Theory and practice in SME performance

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performance measurement to strategic management: Part I. Account. Horiz. , 2001, 15 ,87103.

Kaplan, R.S. and Norton, D.P., Strategy Maps: Converting Intangible Assets into TangibleOutcomes , 2004 (Harvard Business School Press: Boston, MA).

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Malcolm Baldrige National Quality Award (MBNQA). Criteria for Performance Excellence ,2005 (NIST, Department of Commerce: Gaithersburg, MD).

Olhager, J. and West, B.M., The House of Flexibility: using the QFD approach to deploymanufacturing flexibility. Int. J. Oper. Prod. Manage. , 2002, 22 , 5079.

Pareto, V., Le Cours d Economie Politique , 1897 (Macmillan: London).Porter, M.E., Competitive Advantage , 1985 (McGraw-Hill: New York).



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Slack, N., The importance performance matrix as a determinant of improvement priority.Int. J. Oper. Prod. Manage. , 1994, 14 , 5975.

Taylor, W., Change-Point Analyzer 2.0 Shareware Program , 2000 (Taylor Enterprises:Libertyville, IL). Available online at: http://www.variation.com/cpa/tech/changepoint.html (accessed November 2005).

Wasserman, G.S., On how to prioritize design requirements during the QFD planning process.IIE Trans. , 1993, 25 , 5965.William, J. and Bruns, J., Accounting for Managers: Text and Cases , 2nd ed., 1999 (South-

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