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Reference for Business

Encyclopedia of Business, 2nd ed.


Reference for Business » Encyclopedia of Business, 2nd ed. » Ob-Or » Order-Winning and Order-
Qualifying Criteria

ORDER-WINNING AND
ORDER-QUALIFYING CRITERIA

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The terms "order winners" and "order qualifiers" were coined by Terry Hill, professor at
the London Business School, and refer to the process of how internal operational
capabilities are converted to criteria that may lead to competitive advantage and market
success. In his writings, Hill emphasized the interactions and cooperation between
operations and marketing. The operations people are responsible for providing the
order-winning and order-qualifying criteria—identified by marketing—that enable
products to win orders in the marketplace. This process starts with the corporate
strategy and ends with the criteria that either keeps the company in the running (i.e.,
order qualifiers) or wins the customer's business.

COMPETITIVE ADVANTAGE
AND COMPETITIVE PRIORITIES
Many factors shape and form the operations strategy of a corporation, for example, the
ever increasing need for globalizing products and operations and thus reducing the unit
cost, creating a technology leadership position, introducing new inventions, taking
advantage of mass customization, using supplier partnering, and looking for strategic
sourcing solutions. All of these factors require an external or market-based orientation;
these are the changes that take place in the external environment of the company.

Traditionally, strategic decisions were thought of as "big decisions" made by general


managers. However, big strategic decisions may not be the only source of competitive
advantage for the firm.

Jay Barney wrote, "Recent work on lean manufacturing suggests that it is the
simultaneous combination of several factors that enables a manufacturing facility to be
both very high quality and very low cost. This complicated system of numerous
interrelated, mutually supporting small decisions is difficult to describe, and even more
difficult to imitate, and thus a source of sustained competitive advantage." Barney
contrasted big and small decisions further, "Recognizing that small decisions may be
more important for understanding competitive advantages than big decisions suggests
that the study of strategy implementation—the process by which big decisions are
translated into operational reality—may be more important for understanding
competitive advantage than the study of strategy formulation."

The strategy expressed as a combination of a few big and hundreds of small decisions
leads to setting up competitive priorities for improving operational practices through
investments in various programs. These competitive priorities place different and
diverse demands on manufacturing. These demands, sometimes called manufacturing
tasks, can be organized into three distinctly different groups: product-related demands,
delivery-related demands, and cost demands.
The emphasis given to these priorities and the state of the organization determine the
nature and level of investments deemed necessary to implement the operations strategy.
These investments in operational practices are expected to lead to better operational
performance, as measured and evaluated internally using indicators like reject rates in
the manufacturing process, production schedule fulfillment, and others. Through
investments firms create and acquire resources that can isolate them from negative
market influences and can serve as a source of competitive advantage for them. These
investments can be made in tangible assets (e.g., machinery and capital equipment) and
intangible assets (e.g., brand names and the skills of individual employees).

A distinction has to be made between investments aimed at creating resources and those
aimed at creating capabilities. Few resources on their own are productive. Productive
activity requires the cooperation and coordination of teams of resources. An operational
capability is the capacity for a team of resources to perform some task or activity.

While resources are the source of a firm's capabilities, capabilities are the main source of
its competitive advantage. Capabilities are not evaluated in themselves, and they cannot
be thought of as absolute values. They have to be evaluated relative to the capabilities of
competitors. This is the reason for distinguishing between competitiveness dimensions
(like the 3 Ps from the marketing mix: price, place, and product) and capability-based
dimensions (like cost-time-quality measures). They show the two sides of the same coin:
the internal capabilities and their evaluation in the market.

ORDER QUALIFIERS
AND ORDER WINNERS
Terry Hill argues that the criteria required in the marketplace (and identified by
marketing) can be divided into two groups: order qualifiers and order winners.

An order qualifier is a characteristic of a product or service that is required in order for


the product/service to even be considered by a customer. An order winner is a
characteristic that will win the bid or customer's purchase. Therefore, firms must
provide the qualifiers in order to get into or stay in a market. To provide qualifiers, they
need only to be as good as their competitors. Failure to do so may result in lost sales.
However, to provide order winners, firms must be better than their competitors. It is
important to note that order qualifiers are not less important than order winners; they
are just different.

Firms must also exercise some caution when making decisions based on order winners
and qualifiers. Take, for example, a firm producing a high quality product (where high
quality is the order-winning criteria). If the cost of producing at such a high level of
quality forces the cost of the product to exceed a certain price level (which is an order-
qualifying criteria), the end result may be lost sales, thereby making "quality" an order-
losing attribute.

Order winners and qualifiers are both market-specific and time-specific.

They work in different combinations in different ways on different markets and with
different customers. While, some general trends exist across markets, these may not be
stable over time.

For example, in the late 1990s delivery speed and product customization were frequent
order winners, while product quality and price, which previously were frequent order
winners, tended to be order qualifiers.

Hence, firms need to develop different strategies to support different marketing needs,
and these strategies will change over time. Also, since customers' stated needs do not
always reflect their buying habits, Hill recommends that firms study how customers
behave, not what they say.

When a firm's perception of order winners and qualifiers matches the customer's
perception of the same, there exists a "fit" between the two perspectives. When a fit
exists one would expect a positive sales performance. Unfortunately, research by Sven
Horte and Hakan Ylinenpaa, published in the International Journal of Operations and
Production Management,found that for many firms a substantial gap existed between
managers' and customers' opinions on why they did business together. The researchers
found that favorable sales performance resulted when there was a good fit between a
firm's perception of the strengths of a product and customer perception of the product.
Conversely, when firms with high opinions about their competitive strengths had
customers who did not share this opinion, sales performance was negative.
PRODUCT LIFE CYCLE
Over time product sales follow a pattern called the product life cycle. The different
stages of the product life cycle also influence a product's set of order winners and order
qualifiers. The length of and the sales at each stage of the cycle, as well as the overall
length of the life cycle, vary from product to product and depend on such factors as the
rate of technological change, the amount of competition in the industry, and customer
preferences.

In the early portion of a product's life, product design is critical. A product's early users
are almost always more interested in product performance than in price. This stage is
characterized by a large number of product innovations. A considerable amount of
product design is undertaken to make the product more useful and desirable for its
users. Abernathy referred to this early phase of product technology as the search for
dominant design. Dominant designs are those that "make a market," such as Ford's
Model T car, the DC-3 airplane, and the IBM PC. At this stage, the production process is
most likely to be a job shop or close to a job shop.

As the dominant design gets more accepted, cost reduction becomes increasingly
important. Thus, process innovation—geared primarily toward lowering costs,
increasing yield, and improving throughput time—becomes more important. Changes
become less radical as the product, the process, and the organization become more
standardized. The production process moves closer to the continuous flow end of the
process spectrum. When this happens, both the product and the process become
increasingly vulnerable to the introduction of new offerings of similar function (i.e.,
substitute products) by other producers. Then, the company has to decide when and
how to abandon the product and process that they perfected and in which they invested
so much.

As the product moves through its life cycle, the requirements for the product and for the
production process change. During the early part of the life cycle a production facility
with high flexibility (i.e., a job shop) can generate order winners such as customization.
For a mature product a dedicated facility (i.e., a flow shop) can produce high quality and
low cost, which are the order winners for many, but not all, mature products.
Terry Hill noted that different product characteristics require different production
processes, and without communication between marketing, which identifies the order
winners and qualifiers, and operations, which develops the operational capabilities to
deliver these characteristics, market success cannot be achieved. Hill developed a tool—
product profiling—to ascertain a certain level of fit between process choices and the
order-winning criteria of the products. The purpose of profiling is to provide
comparison between product characteristics required in the market and the process
characteristics used to manufacture the products and make the necessary adjustments.

SEE ALSO: Competitive Advantage ; Operations Strategy ; Product Life Cycle and
Industry Life Cycle

Gyula Vastag

Revised by R. Anthony Inman

FURTHER READING:
Barney, Jay. "Organizational Culture: Can It Be a Source of Sustained Competitive
Advantage?" Academy of Management Review 11 (1986): 656–65.

Barney, Jay. "Firm Resources and Sustained Competitive Advantage." Journal of


Management 17 (1991): 99–120.

Hill, Terry. Manufacturing Strategy: Text and Cases. 3rd ed. Boston: Irwin McGraw-
Hill, 2000.

Horte, Sven Ake, and Hakan Ylinenpaa. "The Firm's and Its Customers' Views on Order-
Winning Criteria." International Journal of Operations and Production
Management 17, no. 10 (1997): 1006–1019.

Vastag, G., and Ram Narasimhan. "An Investigation of Causal Relationships Among
Manufacturing Strategic Intent, Practices and Performance." In Performance
Measurement. eds. A.D. Neely and D.B. Waggoner. Cambridge, UK: Centre for Business
Performance, 1998: 679–86.
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QuickMBA / Strategy / Competitive Advantage
Competitive Advantage

When a firm sustains profits that exceed the average for its industry, the firm is said to
possess a competitive advantage over its rivals. The goal of much of business
strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:
• cost advantage
• differentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits as
competitors but at a lower cost (cost advantage), or deliver benefits that exceed those
of competing products (differentiation advantage). Thus, a competitive advantage
enables the firm to create superior value for its customers and superior profits for itself.
Cost and differentiation advantages are known as positional advantages since they
describe the firm's position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources and capabilities to
create a competitive advantage that ultimately results in superior value creation. The
following diagram combines the resource-based and positioning views to illustrate the
concept of competitive advantage:

A Model of Competitive Advantage

Resourc
es

Cost Advantage Value


or Creati
Differentiation on
Distinctive Advantage
Competenc
ies

Capabiliti
es

Resources and Capabilities


According to the resource-based view, in order to develop a competitive advantage the
firm must have resources and capabilities that are superior to those of its competitors.
Without this superiority, the competitors simply could replicate what the firm was doing
and any advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation
advantage and that few competitors can acquire easily. The following are some
examples of such resources:
• Patents and trademarks
• Proprietary know-how
• Installed customer base
• Reputation of the firm
• Brand equity
Capabilities refer to the firm's ability to utilize its resources effectively. An example of a
capability is the ability to bring a product to market faster than competitors. Such
capabilities are embedded in the routines of the organization and are not easily
documented as procedures and thus are difficult for competitors to replicate.
The firm's resources and capabilities together form its distinctive competencies.
These competencies enable innovation, efficiency, quality, and customer
responsiveness, all of which can be leveraged to create a cost advantage or a
differentiation advantage.

Cost Advantage and Differentiation Advantage


Competitive advantage is created by using resources and capabilities to achieve either
a lower cost structure or a differentiated product. A firm positions itself in its industry
through its choice of low cost or differentiation. This decision is a central component of
the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target. Porter
formed a matrix using cost advantage, differentiation advantage, and a broad or narrow
focus to identify a set of generic strategies that the firm can pursue to create and
sustain a competitive advantage.

Value Creation
The firm creates value by performing a series of activities that Porter identified as
thevalue chain. In addition to the firm's own value-creating activities, the firm operates in
a value system of vertical activities including those of upstream suppliers and
downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating
activities in a way that creates more overall value than do competitors. Superior value is
created through lower costs or superior benefits to the consumer (differentiation).

Recommended Reading
Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance
In Competitive Advantage, Michael Porter analyzes the basis of competitive advantage and presents the
value chain as a framework for diagnosing and enhancing it. This landmark work covers:
• The 10 major drivers of the firm's cost position
• Differentiation with the buyer's value chain in mind
• Buyer perception of value and signals of value
• How to defend against substitute products
• The role of technology in competitive advantage
• Competitive scope and its impact on competitive advantage
• Implications for offensive and defensive competitive strategy
Competitive Advantage makes these concepts concrete and actionable. It rightfully has earned its place
in the business strategist's core collection of strategy books.

QuickMBA / Strategy / Competitive Advantage

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