1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
The House of Quality Within a Knowledge-Based View of the Firm
William E Youngdahl Russell W Wright
Arizona State University West Groupe ESSEC
Business Programs Avenue Bernard Hirsch B.P. 105
4701 West Thunderbird Road 95021 Cergy Pontoise Cedex
P.O. Box 37100 France
Phoenix, Arizona 85069-7100
USA
Lillian C Wright
University of Southern California
School of Business Administration
Los Angeles, California 90089
USA
Abstract
Most, if not all, descriptions of process reengineering rely on the notion of translating the voice or
satisfaction criteria of the customer into a d chain of val g business p
While customer satisfaction is critical to business success, the tactical process of designing processes
to satisfy current customers may still overlook long-term strategic considerations. If managers are
unable to see beyond current customer requirements, they will miss opportunities that require new
combinations of knowledge and skill.
We suggest that quality function deployment provides a framework for considering a variety of
strategic criteria and translating these criteria into well integrated business processes. The “House of
Quality" used in the QFD process maps customer quality criteria to design and functional activities
and includes b ing of and tech performance. We will
demonstrate that the house of quality can be used to match competitor best practices with a firm's
desired competencies and business process purposes. This model successfully integrates QFD and
Business Process R ineering with a knowledge-based view of the firm.
Change Management page 76
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
The House of Quality Within a Knowledge-Based View of the Firm
Introduction
The purpose of this research is to present a 1 k for i Process
Reengineering (BPR) that integrates strategic purpose with specific knowledge-based
competencies required to achieve effective and efficient processes. The key argument underlying
the framework development is that the value-added in most business processes comes from
knowledge-based services. ploy of ing must involve a critical
of the d ies required to support business strategy.
Business Process oe provides a new philosophy for improving the effectiveness
and efficiency of businesses. The growth of BPR ing signifies the wid d appeal and
application of the concept. This signal of appeal also represents a potential issue. Significant
inconsistency exits in both interpretation and application of BPR. Focusing on the reengineering
of core business processes without tightly integrating efforts with the strategic intent of the
organization can lead to suboptimized business redesigns and an overall lack of stability in process
designs over time. Development of a framework used to consider strategic purpose during the
reengineering process represents an attempt to these p 1 shor of BI
The next two sections present overview of process ineering and business gineering,
a recently proposed strategic reengineering process. These sections are followed by discussions of
the knowledge-based nature of business processes and Quality Function Deployment, a tool upon
which our framework is based. We then present a framework linking strategic purpose to
knowledge-based competencies followed by some concluding remarks.
While we present this from the perspective of 1 business model
development, we appreciate the opportunity to share the framework with those who have the
expertise to evaluate and extend our ideas from a system dynamics perspective. Our hope is to
stimulate interdisciplinary research interests.
B R
Process
Michael Hammer (1990) changed the way many think about quality improvement by
suggesting that it is time to stop paving the cow paths. Rather than automating outdated
he suggest oblit and starting from scratch. Reengineering begins with
the question, "Why do we perform this process?" rather than with the search for methods by
which existing pi can be ly and ii lly imp! d. This di
differentiate reengineering from the i imp i ployed as a key
component of most quality improvement initiatives.
Hammer (1990) argues that i were not designed to be inefficient. They
P
were created (some may have even just happened) based on Industrial Age principles of
specialization. Organizations typically adopt functional structures to take advantage of
specialization. However, when work is handed off from person to person and passed from
department to department, i and qual ity p t result.
ding to these inefficienci d with lization. i
involves analyzing the business from a process perspective. If the process is designed considering
only the objectives of one function performing a piece the process, the effects of the redesign | on
other functions may be overlooked. R ing involves mul I process red
teams. The team challenges every facet of the process to determine the true objective of the
process, identify what steps add value, and, if necessary, radically redesign the process.
Hammer (1990) developed seven principles that may be used to guide reengineering efforts.
An emphasis on information technology as a process enabler underlies his principles. Table 1
summarizes his reengineering principles.
Hammer and Champy (1993) identify common themes occurring in reengineered businesses.
To a great extent, these themes parallel the principles and emphasis on information and
information hnol P d in the p ding table. In addition to presenting themes
P 2 of i ing, Hammer and Champy also present some
idelines for imp| i ing
The widespread application of Hammer and Champy's business process reengineering
concepts does not reflect broad on d One of the authors of this
article interviewed seven consultants engaged i in BPR consultation. While some mention of
Change Management, page 77
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
linking strategy to BPR occurred during the interviews, the focus of most efforts was on
ing of core p without linkage to overall business strategy. Even with
respect to this limited focus, the consultants varied considerably in their interpretation of
ing and depl i This lack of i and und
the need for refined fre ‘ks to guide ‘ing efforts and align these efforts with
business strategy.
Table 1. Principle of Business Process Reengineering
Principle
Description/Purpose
Organize around
outcomes, not tasks.
Have those who use the
output of the process,
perform the process.
Subsume
informati
Avoid process handoffs. Pinpointing
responsibility to a single person who has the
knowledge of the process from inception to
outcome.
Shift the process to the customer. Customers
possess the knowledge of process needs.
Coordinati hani can be eli
Have those who produce information process
work into the real work
that produces the
information.
Treat geographically
dispersed resources as
though they were
centralized.
Link parallel activities
instead of integrating
their results.
Put the decision making
point where the work is
performed, and build
control into the
process.
Capture information
once and at the source.
it. F ialized report
organizations. Those who create the
information possess the greatest
ding of the 3
Use information technology to create
benefits of economies of scale while
maintaining flexibility and autonomy of
i Sharing of it
such as vendor performance increases
organizational knowledge.
Fores links between parallel process. —
ge sharing
anne
Information technology such as expert
systems can channel knowledge to front-line
employees.
Use integrated information systems to share
information captured at its point of, origin.
Adapted from Hammer, M. (1990) "R
Harvard Business Review, 68, July-August, 104-112.
Change Management page 78
ing Work: Don't Au Obli
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
Strategic Reengineering
Talwar (1993) presents a strategy-driven approach to business reengineering. His business
ea i Gara g foes of busi
2 ‘ing app a g and lini Pp and
supporting architecture. The addition of supporting archi distinguishes busi
ineering, a top-down approach to total business redesign, from process reengineering, or
radical rethinking and redesigning of core busi Talwar asserts that process
Pp
reengineering works best in the presence of clear process objectives. While identifying process
purpose may constitute one of process reengineering's radical departures from continuous
improvement practices, the purpose might be derived from short-term rather than strategic
objectives.
Talwar (1993) presents the following six-step approach to business ineering that links
business strategy to process purpose. The main steps include 1) building a vision of the
i d ization; 2) planning how the vision will be realized; 3) analyzing the current
I ing the ‘redesianed
and p 4) redesigning the business archi 5) i
organization and processes; and 6) measuring the benefits and sharing the learning.
While this app h rep a needed fi ‘k linking i P of
organizational effectiveness to business process i ing, further devel or i
of the framework with respect to ing strategy into ies should be of practical
use. Business reengineering may be viewed as the skeleton holding the vital organs of
organizati effecti in place. Und ding the nervous system linking these vital
organs might be viewed as a next step in refining our und ding of ineering p
based on desired knowledge-based competencies.
A Knowledge-Based Service View of Business Processes
Quinn (1992) suggests that most of the value added in business processes is created by
knowledge based services. This proposition holds for fe ing as well as service businesses.
The majority of manufacturing employees, 65-75 percent, perform service activities, or service
business processes, such as marketing, accounts receivable, and inventory management (U. S.
Trade Study 1983). These service, or business, processes either support internal customers
ployees), external (end users), or intermediary customers such as retailers and
distributors. The value-added is the k led, bodied in these services.
The key rationale for Quinn's (1992) Proposition lies in the fact that the competence in the
manufacturing process of converting raw material into finished goods has become a competitive
prerequisite rather than a differentiator. Value-added now comes from knowledge-based service
activities that provide styling features, perceived quality, subjective taste and other sources of
differentiation throughout the value chain of business processes.
Davidow and Malone (1992) echo the argument for the interd d of fe ing
and service in order to achieve value-added manufacturing goals. They describe virtual products
as those defined not only by form and function but also by services bundled with the product.
These services include customer involvement in the design of both services and products. Given
the i ing ditization of product technology, value-added services provide a key means
of binding to a particul pany's bundle of products and services.
The authors also support the proposition that the majority of a manufacturing employees'
work is of an information processing, or service, nature. The success of a corporation depends on
the ability to gather and integrate massive flows of information and intelligently act upon that
information. Davidow and Malone (1992) support Hammer's (1990) emphasis on getting the
mation to the right person to provide the k ledge required for emp d decision
ledge-based service activities now occupy the critical positions in a company's value
indeed, many production el and all producti 1 in an organization's
value chain at levels of administration can be redefined as | ledge-based activities or services .
This alternative view of the firm requires a re-examination of some of the tools we presently use
in industry and competitive analysis. In the past, competitive advantage has been seen as a
concept of product positioning. The crucial question has been how and were can we position our
products or services in order to create maximum value for our customers. Instead the question
should be what knowledge-base and set of skills will be critical to success given the capabilities we
are hoping to create.
Change Management, page 79
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
Gven the view that value-added comes from knowledge-based activies and services, some
fr for ing.of such services might benefit the overall business
reengineering process. Specifically, the framework must identify key knowledge-based
competencies required of the reengineered service, or business, processes. A modified version of
Quality Function Deployment (QFD) might serve as a reasonable starting point.
Service Quality Fonction Deployment
Quality Function Deployment (QFD) has been described as a system for translating customer
requirements into appropriate company requirements at every stage, from research through
d design and dev to and k sales
and service (ASL 1987). The structure of QFD. is based on a set of matrices used to translate
a} into qt The matrices also account for relationships
between and hnical tradeoffs among technical
requirements (and related functional areas), and competitive evaluation with respect to both
and (Kogure and Yoji, 1983). Collectively, the matrices form a
house of quality as depicted 4 in Figure 1.
Figure 1. The QFD House of Quality
‘orrelations
Fe
Technical
Requirements
Customer
Customer «}—» Relationships Requirements:
Requirements. Competitive
Benchmarks
Technical Target
Values
i
T Technical
Competitive
Benchmarks
QFD benefits both process and product development. Pros
increased functional integration, improved decision making ability.
ori i Product imp! include lower costs, improved al i
and decreased warranty claims (Burns, 1990).
Behara and Chase (1991) illustrate the appropriateness of to}
developing a house of quality using service quality criteria and servj
propose that such a framework for service design enables direct
services. We believe that the QFD house of quality can be further adapi
framework for strategic reengineering. :
provements include
Jncreased customer
creased reliability,
fon service design by
2h sn factors. They
etree design of
a knowledge-based
A Knowledge-Based Framework for Strategic Proce:
A key component of reengineering that differentiates the
improvement is the critical evaluation of Process purposes. _ This evalua igi helps organizations
avoid the trap of i and i ;which there are no
clear purposes. A strategic framework such as business rseiiginestin ih ‘froposed by Talwar
(1983) provides strategic direction with respect to process purpose. ‘Trans lating such strategic
purpose into effective and efficient p requires a of the specific
gineering
from continuous
Change Management page 80
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
knowledge-based competencies required to drive the newly designed, value-added business
processes. We present a framework, depicted in Figure 2, to assist in such translation of process
purpose into specific competencies.
Figure 2. A Knowledge-Based F ‘k for S ic Process R ineering
‘Correlations
a
Knowledge-Based
Competencies
Process Competitive
Purpose “+> Relationships Benchmarks
{Strategy-Driven]
Specific
Competency
I Target Values
y Competitive
Benchmarks
The process purpose is driven by the strategy developed during the early stages of business
reengineering. The process purpose is, in other words, the organizational level skills that the
firm needs to activate to remain competitive. Process purpose is often defined in terms of speed-
to-market, flexibility, response time, quality specifications, etc. For example, a hotel might
desire'to develop a customer recognition process by which return customers are recognized and
rewarded. The process purpose, driven by the business strategy, may be complete customer
satisfaction and retention. Additional purposes might include identifying revenue streams from
return customers, and identifying causes of customer defection, or failure to retum. Knowledge-
based competencies might include information processing systems that help a hotel 1) to know
when a guest is a return visitor, 2) to know the frequency of visits; 3) to know how much each
customer spends per visit;.4) to understand what types of rewards are valued by return customers;
5) to understand when to reward return customers; and 6) to know when a customer has defected.
__A fundamental strategic problem has to do with obsol of k
ies. Knowledge-based competencies evolve in life cycles or stages of maturity. the
mn of kriowledge-based competencies can be described as following an "s-shaped curve,"
beginning’ with the a new skill, eventual achi of full j per I ial, and ending
with af displacement of the skill by another ing k ‘based The five
of 1 are: d d, core, base, and declining. There is
ce in maturity among’ these five stages. Emerging competencies are new forms of
mr nal knowledge that are in the early stages of development. They tend to be tacit and
are ‘yet commercialized, but will become so within five years. Advanced competencies are
"state of art" forms of organizational knowledge which may be in use, but will evolve
eee A large amount of inty surrounds ad d Pp i Advanced
ipetencies are newer or less mature than core i Core ies are primary
2s of advantage of the firm (Prahalad and Hamel, 1990). Core competencies have been
‘veloped and drive the most critical processes of the firm. Base competencies have fully
d throughout the industry, are no longer a source of advantage, but are required for survival
ietheless, Declining competencies are those that are losing their competitive relevance.
Change Management, page 81
competencies. oe
*-1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
This process can last a few months, several years, or decades. All competencies do not
necessarily complete the entire cycle. Some competencies never reach their full performance
potential and are quickly replaced by new emerging ones.
- Several measures can be used to determine the maturity of a knowledge“based competence:
“* The k ledge for and having access to‘the knowledge.
+ Its transferability and imitability (degree of tacitness and intangibiling)’
« Amount of around the k ledge, which tends to te “highest for emerging
+ The level of interest around the competencies, internal and “eiteoal to the firm, which
tend to be highest at the advanced stage. wy
¢ The amount and focus of patent activity surrounding the patent.
« The number of possible new applications
* The amount of effort required to fully develop the competence.
* The potential return on investment
wo
_.Most processes have competencies in different stages of mat
firm'sbusiness processes is a function of the maturity its competenci
The center of the grid identifies the relationships between p
A particular purpose may be related to multiple competencies, Conversél ‘many purposes, or
goals, could positively relate to a single competence. This latter case-midybe'viewed as a high-
leverage competence. For example, understanding when to rewatd- return ‘customers might
positively relate to both customer retention and identification of-customer‘tevente streams.
The roof of the house represents correlations among the knowledgé-based competencies.
Strong positive correlations might indicate the need to embed.-sets.of knowledge-based
competencies at a particular point in the process. Strong negative correlations could indicate
some trade-offs. For example, possessing knowledge that a customer:is a return visitor and
possessing knowledge that the same customer has defected cannot occur atthe same instant. It is
the absence of a return after some d time ‘that ‘signals. defection.
Specific target values indicate 1 such as information
recovery and retention rates.. Once developed, attempts should be made to assess competitors’
performance along the same di ( petitive b king). This might be
accomplished through the use of mystery posing as at
competitors’ facilities. Likewise, some analysis of competitors! awareness of their process
purposes will indicate the extent to which the competition has strategically driven its sets of
business processes.
Conclusion
The | ‘ional for ping the ft k pi in this paper is that business processes
ing represent more than chains of activities. Busi i
ing P
goal- directed sets of knowledge-based service activities. The overall process design involving
employees. and their facilitating technology depends on a clear understanding of ‘the knowledge
needed to drive the process. We believe that identifying knowledge-based competencies is a
necessary step in the strategic deployment of business process reengineering.
Future efforts will include refinement and testing of this ‘k. “We humbly p
this work in hope that it will stimulate i ‘y research :i . Our app; i has
been one of conceptual model development from the business h
We appreciate the opportunity to share this work with those who. have:the. ‘expertise t to evaluate
and extend the framework from a system dynamics perspective.
Change Management page 82
1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
ay tier, References
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Change Management, page 83
