Operations - Week 3-Class Highlights: Service Operations, Case Studies, and Process Analysis
The Rise, Fall, and Strategic Lessons of Blockbuster
Blockbuster dominated the video rental market despite having a business model similar to thousands of competitors.
Two operational innovations drove their dominance:
Revenue Sharing Model: Instead of purchasing video cassettes at full price, Blockbuster entered into revenue-sharing agreements with studios. This minimized upfront costs because studios provided the videos, and revenue was split upon rental.
Point-of-Sale (POS) Inventory Tracking: Blockbuster was the first in the industry to use technology for real-time inventory tracking. This allowed them to see which movies were popular in specific regions and shift inventory between stores to meet demand.
The Fall of Blockbuster was not solely due to Netflix, but a combination of critical factors:
Debt of Parent Company: Blockbuster's parent company, Viacom, had significant debt in other business ventures and extracted cash flow from Blockbuster to pay down those debts, leaving the company with limited capital for innovation.
Elimination of Late Fees: Responding to customer complaints, Blockbuster removed late fees. This caused a loss of approximately to million dollars in annual revenue. Furthermore, without the penalty, customers kept videos longer, frustrating other customers.
Strategic Paradox: The principle that the factors making a company successful can ultimately lead to its failure. Blockbuster was afraid to cannibalize its brick-and-mortar business.
Blockbuster's Response to Netflix:
They launched "Blockbuster Total Access," a digital platform that allowed customers to receive movies by mail and exchange them in brick-and-mortar stores.
This program was gaining significant market share, and Netflix executives were reportedly worried it would put them out of business.
A new CEO canceled the program to refocus on the legacy brick-and-mortar business, which proved to be a fatal mistake.
Examples of Cannibalization and Failure to Adapt:
Netflix: Willing to cannibalize its own successful DVD-by-mail business (spinning it off as "Quickster") to focus entirely on streaming.
Kodak: Invented the first digital camera in but suppressed the technology for decades to protect its film business.
Xerox: Developed the first ability to transfer files electronically but declined to market it to protect its printer business.
The Last Blockbuster (Bend, Oregon):
Remains successful primarily due to nostalgia and the "experience" it provides customers.
Experience vs. Service: A service is a transaction; an experience creates a lasting memory and builds customer retention.
Case Study: McDonald’s and the Speedy Service System
The Founder: Based on the true story of the McDonald brothers and Ray Kroc.
Original Pre-System Conditions (1940s-1950s):
The menu featured unique items, including barbecue.
Customers ordered from and ate in their cars (no sit-down area).
Wait times were to minutes per order because everything was made-to-order.
High variability led to frequent order mistakes.
The Innovation—Product Rationalization:
The brothers realized that just a few items (burgers, fries, shakes) accounted for nearly of their sales.
They eliminated the other items to focus on what customers actually bought.
The Innovation—Process Improvement:
They used a tennis court and masking tape to simulate various kitchen layouts to find the most efficient workflow.
This became the "Speedy Service System," which reduced delivery time to under minutes.
This allowed them to offer lower costs while maintaining high profit through extreme efficiency and reduced mistakes.
Scaling and Franchising:
Ray Kroc wanted to scale nationally, while the brothers feared scaling would compromise product quality.
Pros of Franchising: Rapid scaling and low financial risk (franchisee provides capital).
Cons of Franchising: Loss of direct control, potential consistency issues, and complex logistics across wider geographies.
Comparison to The Cheesecake Factory:
Operates with massive menu complexity (high variability).
They offset these operational costs by charging higher prices compared to low-cost competitors like Chick-fil-A.
IKEA: Sustainability and the Circular Supply Chain
Strategic Goal: IKEA aims to be a circular business by .
Operational Efficiency via the Flat Pack:
This innovation reduced the need for large warehouses, as products take up minimal space.
Labor Customization: IKEA shifts labor costs to the customer (picking items up, transporting them, and self-assembly).
The Sell-Back Program:
Customers return eligible items for store credit.
The Process: The customer checks an eligibility list, submits pictures for approval, and delivers the fully assembled item to the store.
Restrictions: Clean, unmodified, fully functional, and only available to loyalty members.
Critical Analysis of the Program:
Ease of Use: While IKEA's strategy claims to "make it easy," the requirement for bringing fully assembled furniture back to the store is a high-effort barrier for many customers.
Incentive: Store credit is a "switching cost" that ensures the customer returns to shop at IKEA, driving more revenue.
Product Design: Low product quality (semi-disposable) reduces the lifespan of products, making frequent replacements necessary. This contrasts with high-tier furniture (e.g., Ethan Allen) designed to last generations.
Strict Definition of Circularity:
A strictly circular supply chain means all new products are made from recycled existing products. IKEA includes "renewable materials" in their goal, meaning if they use raw wood, they plant new trees to replace it.
Process Analysis and Service Operations Management
The Variability Challenge:
Operations management aims to identify, minimize, and ideally eliminate variability.
The Iceberg Metaphor for Hidden Variability:
On the surface, Key Performance Indicators (KPIs) and dashboards may look excellent while severe issues exist beneath.
Buffers (Inventory): Excess inventory can hide process failures. You may meet demand on time while machines break down or employees are absent.
Workarounds: Employees may fix problems locally without reporting them to corporate. Example: A firm reporting On-Time In-Full (OTIF) delivery because retailers were manually fixing errors with vendors before corporate noticed.
Service Operations Key Principles:
Match supply and demand in real-time (services cannot be inventoried).
Customer Retention: The ultimate goal; a small increase in retention results in a massive increase in profit.
Customer Expectations: Dissatisfaction usually stems from unmatched expectations. You should set the bar as high as you can consistently achieve, but avoid setting it too low (losing customers who wont wait) or too high (failing to deliver).
The Ritz Carlton Three-Step Business Model:
1. Show you are delighted the customer arrived.
2. Do what you say you are going to do (meet expectations).
3. Show appreciation upon their departure.
Service Profit Chain:
Many companies try to fix profit by focusing on customer satisfaction alone.
Successful companies start at the beginning: Internal Service Quality and Employee Satisfaction. Satisfied employees naturally lead to satisfied customers and higher profits.
Questions & Discussion
Student Observation: Nostalgia is likely why the last Blockbuster in Bend, Oregon, is successful.
Discussion on Pizza Hut: Similar to nostalgia trends, an investor is reopening older-style Pizza Huts with the original red glasses and buffets from the .
Advertising Perspective (IKEA): A student who worked on the IKEA North American account noted that IKEA has an image problem in the U.S. that it doesn't have in Europe. In the U.S., people view it as disposable. In reality, IKEA uses "Democratic Design," offering different tiers of quality. Their hardwood pieces are designed to last as long as Ethan Allen furniture, but marketing highlights the cheapest entry points.
Midterm Exam Details
Timeline: Opens tonight; due Sunday by midnight of Week 3.
Format: Timed ( minutes), Open Note.
Content: Covers material from Day 1 through today. Includes multiple choice and short answer.
Calculations: There are NO forecasting or inventory calculations on the midterm.
Success Tips: Do not overthink multiple-choice answers; if it wasn't mentioned in class or on the slides, it isn't the answer. Keep short answers brief; they are often designed for one-word responses.