Strategic Operational Research

Author(s): P. C. Bell
Source: The Journal of the Operational Research Society , Apr., 1998, Vol. 49, No. 4, The
Foundation, Development and Current Practice of OR (Papers Presented at a Symposium
Held in Bowness, Cumbria, 20-22 May 1996) (Apr., 1998), pp. 381-391
Published by: Palgrave Macmillan Journals on behalf of the Operational Research
Society

Stable URL: https://www.jstor.org/stable/3010549

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Journal of the Operational Research Society (1998) 49, 381-391 (? 1998 Operational Research Society Ltd. All rights reserved. 0160-5682/98 $12.00

Strategic operational research

PC Bell
University of Western Ontario, Canada

Operational researchers have been slow to define and claim a strategic role for operational research (OR). This article
discusses the OR activities of a number of leading-edge organisations, and argues that in several instances these
activities have sustained a competitive advantage over a significant period of time, and are seen as a 'strategic asset' to
the parent corporation. Finally, it is argued that OR people should begin talking about OR as a strategic asset, and that
recognition of this strategic role provides a vision of a very exciting future for OR.

Keywords: OR groups; professional; practice of OR; history of OR; strategy

Introduction that see their operational research (OR) activities as a

valuable strategic asset. It is further argued that it is time
In 1985, Porter and Millar writing in the Harvard Business
for OR to start seeking senior management's attention as a
Review1 introduced the strategic significance of information
critical component of strategic IT.
technology (IT). They wrote

'Until recently, most managers treated information tech- Strategic operational research
nology as a support service and delegated it to EDP
departments. Now, however, every company must under-The primary impact of a successful strategy is that it creates
stand the broad effects and implications of the new a competitive advantage for the firm that is sustainable over
technology and how it can create substantial and sustain-a period of time. Once this occurs, the marketplace may be
able competitive advantage.... Information technology is further affected by changes in industrial structure which
changing the way companies operate.' change the 'rules of the game,' and by the appearance of
new businesses designed to exploit the particular advan-
In defining IT, Porter and Miller clearly included opera- tage. Often these new businesses are spawned from the
tional research (OR): 'Today IT must be conceived of original innovator.
broadly to encompass the information that businesses Strategic operational research is, therefore, defined as
create and use as well as a wide spectrum of.. . technologiesoperational research which achieves a sustainable compe-
that process the information' (emphasis added). titive advantage. Key people within OR think of OR in
The information systems (IS) community was quick to these terms: Tom Cook, President of American Airline
seize upon the idea of 'strategic information systems,' and Decision Technologies (now renamed Sabre Decision
has produced an extensive research literature on the use of Technologies) and a former President of The Institute for
infornation systems at the strategic level of the organisa- Management Sciences, talking about the OR activities of
tion. The strategic role of IS is recognised through the his group clearly thinks so: 'The things we are doing are
existence of senior appointments in IS in many major designed to create a competitive advantage.'3
corporations, including many vice presidential level 'chief Primary evidence of the existence of strategic OR is the
information officer' positions. There is also a journal existence of firms which are achieving a sustainable
devoted to the topic.2 Operational researchers, on the competitive advantage from their use of OR. Evidence
other hand, have been cautious in claiming a strategic role that strategic OR is well entrenched in some industries
for OR, and heads of OR groups remain well down the will include examples of industrial restructuring motivated
organisation structure in most corporations. by one firn's successful use of OR, and by the existence of
In this article, the idea of 'strategic operational research' new businesses serving OR intensive industries.
is introduced. It is argued that 'strategic operational
research' is not an oxymoron, and that there are firms
OR activities as the basis of a sustainable competitive
advantage
Correspondence: Dr PC Bell, Richard Ivey School of Business, University
of Western Ontario, London, N6A 3K7, Canada.
The OR literature was searched in an attempt to find
E-mail: PBell@Ivey.uwo.ca evidence that OR had been the basis of a sustainable

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382 Journal of the Operational Research Society Vol. 49, No. 4

competitive advantage. Since competitiveness is not modelled by OR several years in advance of the actual
directly observable, it was hypothesised that 'strategic' system change. This enabled the company to grow
OR activities will be accompanied by secondary evidence. smoothly ... By modelling various alternatives for
Firstly, there should be evidence that the Chief Executive future system design, FedEx has, in effect, made its
Officer (CEO) of the firm knows about the OR activities mistakes on paper. Computer modelling works, it
and of their importance; secondly, it should be possible to allows us to examine many different alternatives and it
identify work the OR group is doing which constitutes the forces the examination of the entire problem.'3
'strategic asset,' that is, the source of sustainable compe-
Citgo invested some $20-30 million in OR in 1984-85 and
titive advantage. Thirdly, a firm with an OR group that has
this was instrumental in turning a loss exceeding $50
achieved strategic success is expected to involve the OR
million annually in 1984 into a pre-tax profit exceeding
group on a regular basis on other major decisions, and
$70 million in 1985. John P. Thompson, Chairman of the
finally, the firm's competitors might know about, and
Board of The Southland Corporation which owned Citgo,
perhaps react to, successful strategic OR activities.
stated:

CEOs talking about OR activities 'We have been very gratified at the success that this
approach, with its heavy dependence on (OR) and co-
The literature contains many quotations from CEOs of operative effort, has achieved at Citgo. The numerous
major corporations confirming the importance of OR in systems that were developed.... have become an integral
their organisations. Some examples include: part of the Citgo operation, saving many millions of
dollars ... we look forward to further (OR) developments
'OR plays an important part of our ability to manage our
which might provide even greater advantages to South-
diverse businesses.... As we look to the future, OR will
land in what is becoming an increasingly competitive
continue to be a vital and necessary part of our organisa-
business climate.'7
tion and our goal to remain a world-class company,
capable of competing against all comers.' R. E. These examples suggest that McDermott International, San
Howson, Chairman of the Board and Chief Executive Miguel Corporation, ABB Electric, Federal Express, and
Officer, McDermott International, Inc.4 Southland Corporation are candidates to be the benefici-
aries of strategic OR, however, the CEOs knowledge of the
'OR plays a big role in the five-year ... approximately
value of OR work is a necessary, but not a sufficient
one billion dollar expansion and modernisation program
condition, for OR to be delivering a sustainable competitive
that we launched in 1987. Under the program we have
advantage.
built 22 manufacturing plants-we would not have dared
to undertake the expansion at all without OR.... San
Miguel's Senior Management appreciates the vital role of
OR work which represents a 'strategic asset'
OR in attaining our corporate goals, and in implementing
the strategies that enable us to achieve adequate growth There are many examples of OR work which has produced
and satisfactory returns for our various stakeholders.' handsome returns. Few can match the recently described
Francisco Eizmendi Jr., President, San Miguel Corpora- example,8 of KeyCorp (a bank holding company in Cleve-
tion.5 land with about 1200 branches and assets of US$66.8
billion and equity of US$4.7 billion) which spent 'less
Daniel Elwing, President and CEO of ABB Electric reacted
than US$500000' on an OR project beginning in 1991
to some OR work which enabled ABB to capture an
which was expected to reduce expenses by US$98 million
impressive market share gain in the industrial transformer
over five years. The payback period for this investment was
market (while causing General Electric and Westinghouse
less than 10 days, with an internal rate of return of about
to exit the business) by stating: 'management science is not
3500%! While a cost reduction, such as this, is impressive
a project or a set of techniques; it is a process, a way of
(although it might be argued that $98 million over five years
thinking and managing.'6
is 'peanuts' to a corporation with $66.8 billion in assets), it
Frederick W. Smith, Chairman, CEO, and founder of
cannot be considered to be 'strategic' unless it creates an
Federal Express Corporation (FedEx) is known for his close
advantage which is sustainable.
ties to the OR department:
While it is quite possible to achieve a competitive
'Employing OR techniques and modeling skills, the OR advantage, particularly a cost advantage, from OR activ-
department has played a role in the development of long- ities, it appears to be difficult to sustain this advantage.
range plans for the past 17 years and was instrumental in Much OR work is easily replicated. For example, a feed
determining the specific growth sequence that allowed formulator can introduce optimisation as a way of improv-
FedEx to become the world's largest and most reliable air ing the cost effectiveness of its formulations, but if this firm
express carrier. Every major system change... .(was) starts to prosper others can fairly quickly replicate the work

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and nullify any advantage. Firms which are the strongest
candidates to have strategic OR activities have developed
the ability to solve a particular type of problem. These
'strategic problems' are very large, complex, operational
problems which are theoretically 'optimisable' but for
reasons of size and complexity, the optimum solution is
not currently obtainable. Strategic OR groups address these
problems using a series of heuristics which constrain the
problems to a size which can be solved in real time 'at the
leading edge' of available technique and technology. Once
a constrained problem can be optimised, new heuristics are
developed which relax the constraints to produce a new
problem which, with further work, can be optimised to
produce an even lower cost solution, at which point the
heuristics are changed again and the process repeated. Such
problems yield increasingly lower cost solutions as the
solution procedures are developed over a substantial
period of time. The cost advantage is further sustainable
if management intervention is required to implement the
improved solutions as they are developed.
Sustainability of the competitive advantage, therefore,
arises from two sources. Firstly, the OR group has devel-
oped skills and knowledge (and perhaps hardware, data-
bases, and code) that a competitor starting work on the
same problem cannot easily replicate, and secondly,
management of the firm have adapted the firm's structute
and operations to take maximum advantage of the low cost
solutions that the OR group is producing. These structural
changes may involve contracts, labor relations, or facilities
design, consequently, even if a competitor had the same
solutions, it may not be able to implement them at all, or
may obtain a much smaller cost savings on implementation
than the established firm. Two problems which have these
characteristics are the airline flight crew scheduling
problem and the 'optimum dynamic pricing' problem.
The airline crew scheduling problem
Crew costs are the second largest cost item for a major
flight regulations. The airline that can successfully manage
airline (after fuel) and amount to more than a billion dollars
these changes will gain greater advantage, through lower
annually [$1.3 billion for American Airlines (1991)9]. The
problem of assigning flight crews to flights is solved as an
integer program which selects the low cost set of crew
'tours' which covers all scheduled flights. A critical input
for this assignment is a set of feasible crew 'tours', where
each tour starts at a crew base, works a feasible set of flights,
and returns to the crew base (see Reference 9 for a full
description of the problem). Developing feasible 'tours' to
input to the optimisation is time consuming but critical:
there are a huge number of possible tours. As new tours are
developed and tried over a period of time, the cost effective
tours are retained and the others replaced by newly devel-
oped tours.
An heuristic which makes this problem much more
manageable involves limiting the crew tour lengths consid-
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PC Bell-Strategic operational research 383
ered. The problem that has the fewest feasible crew tours is
the 'one day' problem, where each crew is constrained to
spend every night at its crew base. Over a period of time,
good solutions to the 'one-day problem' can be developed
(even if the flight schedule is variable) since the skill and
knowledge required to develop new tours can be developed
and the database of good 'one-day' tours can be extended.
At some point, however, switching to a 'two-day' tour
heuristic, where a crew is allowed to spend one night on
each tour away from the crew base, becomes possible.
The 'two-day' problem is much larger than the 'one-day'
problem, since there are more flights and many more
possible crew tours, but the 'two-day' problem must have
lower cost than the 'one-day' problem (since any feasible
solution to the 'one-day' problem is a feasible solution to
the 'two-day' problem). It is even possible that a crude
solution to the two-day problem may have lower cost than a
near-optimum solution to the one-day problem. In time,
with skill, an OR group can develop near optimal solutions
to the two-day problem, but now the even larger 'three-day'
problem looms, again with the promise of cost savings.
After the 'three-day' problem, there awaits the 'four-day'
problem, and so on. How far can this go? After several
years' work, American Airlines Decision Technologies/
Sabre Decision Technologies (AADT/SDT) can now
achieve good solutions to the 'three-day' problem.9
Figure 1 illustrates how this continuous improvement
process can reduce crew costs over a substantial period of
time. As the OR group develops improved solutions to the
n-day problem, management can adapt the organisation to
take advantage of the promise of lower crew costs. Some
fairly straightforward adaptations include changing the
numbers of crews available, opening new crew bases or
closing old ones. Others, such as moving flights around in
order to make them less costly to crew, may involve
complex tradeoffs and take considerable time to imple-
ment. Moving from n-day tours to (n + 1)-day tours
requires more management intervention, including, perhaps
renegotiated union contracts, and possibly even changes in
operating costs, as a result of the OR work. Over time, the
COST
of
CREWS
TWO DAY
PROBLEM
THREE DAY
PROBLEM
FOUR DAY PROBLEM
TIME/EFFORT
Figure 1 Airline crew scheduling problem cost trajectory.
384 Journal of the Operational Research Society Vol. 49, No. 4
operation of the airline becomes 'tuned' to the new assign-
ment algorithms, and the activities of the OR group.
Even if a competitor were to 'buy' some of the expertise
at solving this problem that the OR group possess, it would
still not be able to achieve the same crew efficiencies since
considerable management and structural change would be
required to implement the solutions at the same level of
effectiveness. Significantly, at the same time AADT/SDT
was developing advanced algorithms to solve this problem,
they were marketing software to their competitors that
'solved' the problem. Clearly, AADT/SDTs management
did not believe that the software alone was sufficient to
counter the cost advantage that American Airlines was
obtaining.
Optimum dynamic pricing
One of the most important 'strategic problem' that has
emerged from OR activities is the optimum dynamic
pricing problem, known as part of 'Yield Management' at
American Airlinesl and also as the 'Revenue Manage-
ment'11 problem. This problem can be stated in words:
For each of our products, and for each period between
now and the end of the sales horizon, find product prices to solve the large non-linear optimisations, and modelling
for each remaining period which maximize the revenue
from sales of product while selling out our inventory.
A formal formulation for each product is:
Let pi be the product price in period i,
qi be the quantity sold in period i,
qi = f (pi) be the demand curve for period i, and
I be the amount of product to be sold over N pricing
periods.
then:
For each period k, k = 1, 2, . . ., N
N short run component (given I units of product to sell over
max Z = 'piqi
i=k
subject to:
qi =f(pi)
N k-I
E = I-E qi + additional
i=k i=l
Prices obtained by solving this problem are 'optimum'
prices in that the problem is an optimisation with form
dependent on the form of the demand functions: if the
demand ftnctions are linear, then the optimisation has a
quadratic objective. The prices are 'dynamic' in that each
pricing period, a new set of prices is determined, thus the
price of a product may change within a given solution, and mum dynamic prices can be computed, but also that these
also from solution to solution. In general, if sales are strong prices can be delivered into the marketplace in a timely and
or demand is high, the optimum price will increase, while
in periods of weak demand, or when sales are lower than
expected, prices will decrease.
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The optimum dynamic pricing problem has a number of
features which match the description of a strategic OR
problem. Firstly, the problem is large and complex. A
single product problem with daily price changes and a
product life of 180 days requires solution of 180 non-linear
optimisation problems which will require the computation
of 16290 optimum prices. An organisation with a large
number of products (say 10000) has a significant non-
linear optimisation computing load.
A firm might start introducing dynamic pricing by
changing prices weekly. Once weekly prices can be
handled, the firm has the opportunity to move to more
frequent price changes. In general, the more pricing periods
that the sales horizon can be broken into, the higher the
revenues that can be obtained: a firm which can manage
daily price changes, will generally be able to obtain higher
revenue than one that can only implement weekly price
changes. Similarly, hourly price changes will generally pro-
duce higher revenues than daily price changes. However,
the more frequent the price changes, the greater the skill
and computation required to compute the optimum prices,
and bring them into the marketplace.
Solving the problem requires a blend of algorithmic skill
skill and experience to somehow find and estimate the
demand curves (or demand elasticities). Each time a price
is set generates a (p, q) pair which adds to the database
available to estimate future demand curves, and many
exogenous variables (competitor's prices, marketing
factors, seasonality, weather, etc.) also contribute to
demand curve estimation and may be added to the database.
Consequently there is a long learning curve for this
problem: the firm which has been dynamic pricing for
some time will develop skills and knowledge which the
new dynamic pricer will be unable to match.
A further complexity is the fact that the problem has a
some horizon, how do we set the price each period?), and
an important and difficult to solve long run issue in the
determination of the optimum value for I, the number of
units to inject into the market. Determining this optimum
quantity involves solving a second optimisation which in-
corporates product acquisitionconstraint
cost data. Note that this
problem reverses traditional business thinking or culture:
traditional firms set a product price and allow the market to
determine sales volume. In optimum dynamic pricing, the
firm determines how much they will sell, and the market
(and the firm's skill at revenue maximisation) determines
what revenue is received for these sales.
Managing optimum dynamic pricing requires that opti-
effective manner. The firm which has priced products
dynamically for some time will have developed the tech-
nology and skill to take full advantage of these prices, and
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 PC Bell-Strategic operational research 385

will be organised in a way that supports the pricing activity. not, of itself, OR. Two rather different examples of this are
Important among these activities is the development of a Innovis Interactive Technologies and AT&T.
marketing approach which promotes the benefits and Innovis developed a product called the DesignCenter12
impact of dynamic prices. which was a booth which provided a highly graphic and
The importance of the optimum dynamic pricing interactive environment for the design and specification of
problem has been reinforced by several senior executives, an outdoor, home-improvement, deck. A customer with no
most notably by Robert Crandall, Chairman, President and training, and using only a single mouse-button, could use
CEO of American Airlines, who has stated: the DesignCenter to design their own deck, cost out the
design, and finally print a picture of the chosen deck,
'I believe that yield management is the single most
together with construction instructions, and a bill of materi-
important technical development in transportation
als. DesignCenters were made available in late February,
management since we entered the era of airline deregula-
1989 and by June more than 100 wood retailers had taken
tion in 1979 ... (dynamic pricing) creates a pricing struc-
delivery and by September well over $150 000 000 worth of
ture which responds to demand on a flight-by-flight basis.
decks had been sold. 12
As a result, we can more effectively match our demand to
The DesignCenter was not directly an OR product but its
supply' I 0
developers were both operational researchers who had
National Car Rental was essentially bankrupt when it worked in the OR group at Weyerhaeuser Company, a
introduced optimal dynamic pricing as part of a new major international wood products supplier. The internal
revenue management system. The impact was dramatic: workings of the DesignCenter were a combination of OR
algorithms and interactive graphics, with many similarities
"(Operations Research) basically saved National Car
to other forms of visual interactive models which were
Rental. And you can go from the CEO of National on
emerging within OR at this time. The obvious success of
down, and they will all say: 'just applying these OR
the DesignCenter as a vehicle for selling wood and nails
models made the life or death difference for this
suggests that it was a strong candidate for being considered
company"' Kevin Geraghty, Aeronomics Inc."1
a strategic asset, but its history suggests that while the
Some idea of the management intervention that was potential was there, it really did not achieve this role. Part
required to successfully implement the OR work at of the problem appears to be the fact that the DesignCenter
National comes from Ernest Johnson, corporate Vice Presi- sold wood, not specifically Weyerhaeuser wood, and conse-
dent, National Car Rental who stated: quently Weyerhaeuser, which had no retail outlets, could
not capture the benefits of DesignCenter use and the
'We got (senior management) to commit to educating the
accompanying competitive advantage. Restructuring of
company. In fact, we got them to agree to conduct
the industry led to the sale of Innovis with the DesignCen-
seminars themselves once the system had been devised.
ter product, and the separation of its developers to form
We got them to tour the country and talk to rental agents
their own new company Lembersky/Chi Inc. A number of
at all locations, and talk to every reservation agent to
clones quickly appeared, including software to design
explain the differences that they would see in the way
decks for personal computers The first-mover advantage
pricing and inventory were now going to be handled....
dissipated quickly, and what looked like a good example of
We had to change the culture of the organization . . . ' I strategic OR now appears to have failed to live up to this
In order to replicate a dynamic pricing system like expectation.
National's, competitors will have to both develop the AT&T provides an example with a different outcome.
algorithms, and make the necessary organisational change Prior to deregulation of the North American telephone
to allow their successful implementation. This will take industry, AT&T made its profits by selling telephones
time, which will provide National with an opportunity to and telephone calls. After deregulation, telephones
further develop the system and/or the organisation in an became low-margin items and new carriers moved in to
cream off profitable sectors of the telephone call business.
effort to sustain the competitive advantage that has appar-
ently been created. AT&T faced the problem of developing new revenue
A discussion of OR work which represents a strategic producing products, and it found an opportunity in market-
asset would be incomplete without a mention of OR work ing packages of services. One such package product is a
which is sold as an end-product. Major providers of OR telemarketing system. A telemarketing system consists of
include many specialised consultancies (for example one or more telemarketing centres, each containing a mass
AADT/SDT, Hoskyns, Giro) where the product is 'OR of telephone equipment and many lines to the network,
where groups of people answer incoming telephone calls or
work', and this work is clearly a strategic asset for these
originate new calls. These telemarketing centers are used to
firms (perhaps their only strategic asset). Another interest-
ing group of companies are those which sell a product coordinate customer service, perform order processing for
which includes a significant OR component, but which is catalogue or direct response television sales, provide field

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386 Journal of the Operational Research Society Vol. 49, No. 4
sales staff support, or account management, and conduct
direct telephone sales and opinion polling. It is estimated
that eight million people will be employed in telemarketing
in North America by the year 2000.13
The telemarketing product offered by AT&T is rich in
OR.13 The key to a cost-effective system is to design the
documented firms (such as American Hospital Supply,
system so as to minimise the costs of labour, real estate, and
BankAmerica) where information systems provided a stra-
communications while providing a given level of service.
tegic advantage,16 they conclude that:
AT&T uses a mixed integer optimisation to select minimum
cost sites for the centers from the list of politically accep-
table sites, and to assign originating calls to sites so as to
minimise the total cost of the system. In 1988, AT&T used
this optimisation to help 46 customers who committed $375
million in annual AT&T long distance network services and
$31 million in equipment sales from AT&T. Some consult-
ing firms also offer a site selection service, but AT&T
competes aggressively since it sees the product as the
package, not just the site-selection problem: it is reported
that DHL, an express package delivery service, would have
had to pay US$240 000 to a consultant for advice on site
selection for its call centres but AT&T provided the same
advice for free in just 10 days.14
AT&T has marketed 'Cell Center Solutions' for almost a
decade and has developed minimum cost systems for
hundreds of customers. In doing so, AT&T has developed
the algorithms and software to solve this complex problem,
and also has accumulated a massive date base of location
data, including available office space, building costs, labour
market data, and local taxes, and wage rates. The combina-
tion of developed skills and experience together with
algorithms, software and databases provides AT&T with
a competitive advantage in the 'call center' business. Since
this advantage appears to have been sustained for a consid-
erable time, this OR work appears to be a 'strategic asset'
for AT&T.
Evidence of broad OR group involvement in corporate
decision making
An OR group that scores a strategic success may be
expected to have gained significant credibility within its
parent organisation. As such, it is to be expected that the
opinions of the group should be regularly sought on
important decision issues. The literature includes a
number of examples of groups which appear to have
gained this level of respect.
Federal Express (FedEx) has had a successful OR group
for many years, and this group has historically been
involved on major decisions. Joe Hinson, General Manager
of Operations Research at Federal Express, chairs the
corporate strategic planning committee. Hinson reports
directly and regularly to CEO Fred Smith, and suggests:
'When you know that you'll be listened to, the weight of
your work becomes a little bit heavier and more satisfy-
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ing. It's nice to know that the answer that you come up
with will not be muddled by the time it reaches the top.'3
A recent article produced by the Harvard Business School
MIS History Project15 provides much interesting commen-
tary on OR at FedEx. Although this group has generally
'FedEx is an archetype of a company that has succeeded
by applying the scientific methods to its operations.
Models and analysis have informed many of (FedEx's)
crucial, business-shaping decisions. In cases in which OR
was not used ... the company performed poorly.'15
Five reasons for the success of OR at FedEx are provided.
Firstly, the air cargo industry is a 'whole system' business,
not easily managed separately; secondly, Fred Smith, the
founder and CEO is 'devoted to the use of scientific inquiry
in his business. OR is a voice to be heard at FedEx'; thirdly,
OR has focused on crucial issues and has not been side-
tracked in 'the esoteric or bogged down in minutia';
fourthly, FedEx OR results and models were considered
to be 'living things, not imperial edifices cast in concre-
te.... By means of continual dialogues between the OR
team and executive management, they jointly arrived at a
shared understanding as to the problems they faced, the
pros and cons of the models, and the strengths and weak-
nesses of what the model results were telling them'; and
finally, 'the OR team conducted itself as a learning orga-
nisation, a center of knowledge and inquiry about the most
important dimensions of the business. Captured in their
models and databases are literally millions of items ... that
characterise all of the most important activities of the
business... ,15
Hinson discusses how deeply his OR group is ingrained
in the activities of FedEx.
'An OR department's effectiveness does not necessarily
have to be measured by the one big home run that saves
the company millions of dollars, but rather by giving out
lots of good results, providing answers to lots of ques-
tions every day and every week of the year, year after
year.'3
Elise del Rosario, Head of Operational Research at San
Miguel Corporation, is a corporate Senior Assistant Vice
President, and has established her group as an integral part
of corporate strategic decision making. Francisco Eizmendi
Jr., President, San Miguel Corporation suggests the opinion
of this group is broadly sought:
'In our strategic planning meetings every year, whenever
a division or business unit manager presents a project, we
always make sure that Operations Research has gone
through the proposal.'5
 PC Bell-Strategic operational research 387

The extent of OR involvement in activities at San Miguel is 2. To be the best provider of air transportation;
extraordinary: the OR group tackled 65 projects during 3. To provide the highest quality of leadership;
1985-86, and in 1992, ten OR projects produced a bottom 4. To serve as a role model for others;
line impact of US$35 million. Further, San Miguel had 5. Simplicity; and
'OR-type people throughout the organisation: Senior vice- 6. Maximisation of profits.' 18
presidents, plant managers, production schedulers, eco-
PE was very 'people oriented' and stressed 'customer
nomic analysts and so on. Many of these individuals at
service'. Founded in the summer of 1980, the strategy
one time in their career worked in the OR department.'5
seemed to work as PE grew to annual revenues of almost
OR at Babcock and Wilcox (B&W) (now part of
$1 billion in 1985. Contemporary writings from the mid-
McDermott International) achieved a significant success
1980s suggested that PE had some problems but none
in the late 1960s when B&Ws Nuclear Equipment Division
anticipated that PE would be facing bankruptcy by the
was experiencing rapid growth and the resulting scheduling
end of 1986. The rapid development of the OR group at
problems which were leading to losses of about $15 million
AADT/SDT, and its development of optimal dynamic
annually. In November, 1969, Fortune magazine wrote that
pricing and yield management was not seen as a significant
the future of B&W was at stake. The OR staff produced a
competitive threat at the time. After the fact, it is generally
simulation model to aid scheduling and this was imple-
agreed that innovative OR at AADT/SDT drove this
mented at a cost of about $8 million. By the time imple-
successful air carrier out of business in just a few short
mentation was complete, the $15 million annual loss had
months. Donald Burr, Founder and CEO of PE:
turned into a $17 million annual profit. As McDermott
International CEO Howson states:
'believes that major carrier's use of sophisticated compu-
ter programs to immediately match or undercut his prices
'When we acquired B&W (in 1978), one of the buried
ultimately killed People Express'19
treasures we discovered was a well-established, well-
respected OR group.... Over the years, our OR staff The teaching note, which provides a guide to use of the
have used their quantitative, analytical methods to solve Harvard PE cases, provides an independent assessment:
many other complicated problems around our company.'4
'The major carriers met People Express' pricing struc-
In common with San Miguel Corporation, OR group input
ture... and used their reservations systems to achieve
at McDermott is now institutionalised.
optimal pricing and yield management. PEs performance,

'Currently, our OR staff is helping evaluate projects with in essentially all dimensions, immediately decli-

a total value of over $1 billion. We are convinced that the
application of quantitative methods to estimating and
contract management increases our company's chances
of success. Recently we issued a corporate policy which
requires the use of these methods on major proposals and
contracts.4
Competitive reaction to successful OR
Successful strategic OR provides a competitive advantage
over a period of time to the instigator. Competitive
corporations would be expected to notice this advantage
through declining market shares, or profits, and react. This
reaction should be noticeable. One extreme reaction would
be to declare bankruptcy or sell off the business. The
clearest evidence that this has occurred is the case of
People Express Airlines (PE). The history of PE, which is
well documented in a series of Harvard case studies,17 is
that of a highly successful airline which grew rapidly by
paying particular attention to six precepts which closely
matched some of the common management fads of the day.
These precepts were:
'1. Service: commitment to the growth and development
of our people;
ned.... The end was swift.'20
Many other airlines (including Branniff, TWA, Continen-
tal, Eastern, Pan American) incurred large losses at this
same time leading to bankruptcies and 'Chapter 11' reor-
ganisations. It is tempting to conclude that OR work at
AADT/SDT was the driver of these changes, however,
these were established airlines which faced new and vigor-
ous competition in this period from new carriers, such as
PE, which appeared at the onset of US airline deregulation
in December 1981. Established air carriers faced a number
of competitive pressures at this time. AMR, the parent
company of American Airlines and AADT/SDT, reacted to
this pressure by investing heavily in OR and this proved to
be a successful strategy. Others which followed different
strategies were less successful and did not survive or
survived only in greatly trimmed down form.
Competitive air carriers would be expected to respond to
strategic OR successes by AADT/SDT by attempting an
accelerated OR program. There is some evidence that this
was the case as United, Delta, and US Air have all invested
significantly in OR. In the spring of 1995, USAir was
running an advertisement attempting to add 40 profes-
sionals to its OR department: 'Based upon its past contri-
bution, USAir's OR Department is growing by 40
professionals.'21 The advertisement stated that:

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388 Journal of the Operational Research Society Vol. 49, No. 4

'Our existing OR Department of 37 professionals pro- formed the company and its markets. Noteworthy was
vides management consulting and decision technology to OR work which, following the introduction of the indus-
all divisions of the airline. Grow with us as we find try's first five year product warranty, enabled ABB to
solutions to some of the most complex real-world develop a manufacturing system to produce extremely
problems in: ... Transportation Scheduling & Routing, high quality transformers while at the same time becoming
Revenue Management, Operations & Maintenance Plan- the low cost producer in the industry. In addition, a series of
ning. market choice models enabled ABB to develop products
which met customers needs, and to target their marketing
By 1995, AADT had grown to more than 400 professionals,
efforts towards those customers which promised the great-
and so it is apparent that USAir with only 37 professionals
est returns.
(expanding to 77) was some way behind. Further evidence
While many factors contributed to ABB's success, presi-
of 'catch up' behaviour is the fact that the problem areas
dent Daniel Elwing observed in a statement at the 1988
listed are all areas where AADT/SDT has published highly
board of directors meeting at which time ABB sales had
profitable OR applications.
grown to exceed $100 million:
British Airways (BA) has prospered over the last 15
years alongside American, and BA has a large (reportedly 'Without the insights from our marketing models, it is
120 people in 1996)22 and well respected OR team. OR at unlikely we would have current sales of $25 million; in
BA has had a number of important successes, although the fact, without the use of these models, it is unlikely we
published evidence is insufficient to enable one to conclude would be here at all.'6
that OR is a driver of BAs prosperity and conforms to the
definition of 'strategic OR' advanced in this article. Another form of market restructuring is the 'turnaround':
reviving a failing corporation or revitalised a lethargic one.
The cases of Citgo7 and National Car Rental11 (described
above) both represent turnarounds largely attributable to OR
Industrial restructuring as a result of strategic OR activities. The National Car Rental case appears particularly
compelling: the OR work was a direct order from the CEO,
The North American airline industry has gone through
and the company was apparently told that it faced liquida-
major restructuring during the period following deregula- tion by its parent company (General Motors) if profits were
tion in December 1981. During this time, OR groups have not significantly increased. 'The main thing that we intro-
been spawned and some have flourished. There is broad duced and which is probably unique in most of the car
recognition that OR work is now a critical part of airline
history, is demand-based pricing. Stop following the compe-
operations:
titors around.' 1
Harris Corporation's Semiconductor division is another
'It is worth emphasizing that a reservations system, with
good example of an OR induced turnaround. Harris Semi-
its yield management capacity, is arguably the single
conductor invested US$3.8 million starting in 1992 in an
most important strategic asset of an airline.'18
OR project which led to the installation of IMPReSS, a
system which used state-of-the-art linear programming to
While causality is difficult to establish, there does appear to
be a view that OR has contributed to the observed restruc- set all production, delivery, and inventory levels in 22
turing, particularly the demise of People Express (described manufacturing plants worldwide.23 In announcing the OR
above), and the growth of American into the largest carrier. effort on company television, Jon Cornell, divisional Presi-
OR work at ABB Electric has been credited6 with dent emphasised how close to the brink the semiconductor
significant change in the North American market for indus- division was: '(The division) will not survive unless we
trial transformers. ABB entered the electrical transformer solve our delivery problem. If IMPReSS succeeds, we can
market in 1970 and had about reached a break-even state succeed. If it fails, we will surely fail'. After installation of
(with a 6% market share) by 1974. The total market for IMPReSS, Phil Farmer, President and CEO talked about the
transformers was about 3300 units in 1974 but fell to less dramatic nature of the turnaround: 'Our on-time delivery
was running about 75%, which was not acceptable.
than 1000 units in 1975 as a result of events which included
the formation of OPEC and the end of the era of cheap IMPReSS raised our on-time delivery to 95%...'. Signifi-
energy. Industrial giants Westinghouse, General Electric, cantly 75% represented the worst performance in the indus-
McGraw-Edison, and the fledgling ABB were left to fight try, while 95% represented about the best. The financial
for a share of a market which remained in the 800-1500 consequences were that a loss of US$100 million annually
units annually range through 1988. By 1988, ABB had 40% during 1989-91 was turned into profits of US$20 million in
of this shrunken market and Westinghouse and General 1993, US$30 million in 1994, and US$42 million in 1995.
Electric no longer made industrial transformers. An example of what can be done at modest cost to
Between 1974 and 1988, ABB undertook a series of revitalise a lethargic (or failing?) company is the case of
innovative and sophisticated OR projects which trans- Merit Brass.24 Merit Brass was a traditional firm in the pipe,

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 PC Bell-Strategic operational research 389

valve, and fittings industry which recognised that its custo- The road transportation industry has long recognised that
mer service had slipped and needed improvement. 'The appropriate vehicle routing and scheduling can make a
company had outgrown its people-intensive systems and significant difference to firm profitability (or public trans-
needed to implement (OR) methodologies to elevate it to the portation costs). Giro has grown from its fon-nation in 1981
next level of performance.' Merit invested just US$78 090 to an employer of some 100 OR professionals (1994)
(this included the purchase of two personal computers) plus serving this specialised OR market.27 Specialising in
US$19500 in continuing annual costs in some OR work. solving mass transit crew scheduling problems, and various
The result was an increase in their service level on Class A types of vehicle routing problems, Giro has grown from its
items from 74 to 98% in less than one year, while simulta- base in Montreal to the point where it derives 60% of its
neously reducing inventories to obtain a cost savings of revenue from outside Canada. HASTUS, its major software
$201 000 annually. Not surprisingly, the 'entire top manage- product for bus crew scheduling is used by 80 transit
ment team at Merit Brass supported these efforts whole- companies in 17 countries. Giro's GeoRoute and GeoBus
heartedly.' software provides interactive solutions to routing/scheduling
Finally, new corporate startups can catalyse structural of transit buses, school buses, meter readers, postal services,
change with industries. There are many examples of OR snow removal, street cleaning and milk collection, and its
induced startups in firms selling OR services, but it is more fleet management software is used by utilities, government
difficult to find examples where OR was clearly instru- agencies, and business.
mental in the formation of a major non-OR corporation. Another area of obvious growth supporting OR activities
The story of the startup of Federal Express, however, is the growth in the number of companies supplying soft-
provides compelling evidence of the strategic value ware to OR practitioners. The number of companies offer-
of OR. ing optimisation packages and simulation software for
On March 12, 1973, FedEx began its inaugural air- personal computers has increased dramatically, as has,
package service serving eleven major cities. After three presumably, the income these companies receive.
days of operations, service was suspended because of a lack Finally, a number of new specialised consultancies have
of business: the first day produced just six packages. appeared which have 'spun-out' from established organisa-
Founder Fred Smith, however would not give up. He tions in order to concentrate on particular OR innovations.
formed an ad hoc 'OR team' to address the problem and Among these are Insight Logistics which initially spun-out
this group worked 18-20 hours a day for 15 days straight from British Leyland to concentrate on the development
analysing the problem. The group concluded that FedEx and marketing of visual interactive simulation software,
had opened serving the wrong cities, and analysed 112 and Aeronomics which specialises in 'revenue manage-
cities to determine which were the best candidates for the ment' and includes several consultants who formerly
new air-package service. Using an origin/destination flow worked at Delta airlines and AADT/SDT.
model, the OR team developed indicators of each city's
market potential which took into account the outbound
Characteristics of firms having strategic OR activities
parcel volume, types of businesses, and availability of air
cargo service. A new network of 26 cities was defined The firms which are the strongest candidates for having
which was quite different to the original 11 city network. strategic OR activities appear to have several commonal-
On April 17, 1973, FedEx began serving its new 26 city ties, particularly in the path that OR has followed as it grew
network, and the rest, as they say, 'is history'. FedEx is to a position of strategic significance. First, there has to be a
now the world's largest express transportation company corporate need that initiates the development of an OR
capability within the firm in the first place. This 'need' has
delivering more than two million items to over 200 coun-
often appeared alongside an increasing level of competition
tries each business day, employing 110000 people, and
operating 500 aircraft and more than 35 000 vehicles.15
with its accompanying uncertainty about the future. Dereg-
ulation of previously regulated industries has triggered an
expansion of OR, particularly in the North American
Airline and banking industries, and more recently within
New businesses serving OR intensive industries
the electric power industry. Actual or impending business
There is a rich documentation of the formation of new failure, or the appearance of new and intense competition
businesses serving OR intensive industries. AADT/SDT have catalysed many OR group startups. Regulated or
has developed major external consultancy to the point government-owned organisations are poor candidates to
where it derives about 35% of its revenues from external have 'strategic OR' activities.
customers.3 Fildes and Ranyard25 document the growth of Once established, the OR group has to capture CEO
OR consultancies in the UK. Examples of strong OR attention. Those that have done this have successfully
consultancies abound, including Hoskyns,26 and perhaps addressed one or more very large and significant problems
less well known Giro Enterprises. facing the firm, and in doing so have changed the culture of

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390 Journal of the Operational Research Society Vol. 49, No. 4

the firm. This cultural changes has required senior manage- Other corporations may well have, or have had, strategic
ment commitment and attention, and a host of management OR activities but the literature on these firms is less
changes within the organisation. Once implemented, this extensive. San Miguel Corporation has had an effective
cultural change is difficult to reverse, and provides the OR OR function since 1971, and has produced significant cost
group with a position of 'power' within the firm: the OR savings year after year to the point where the OR group is
group is looked to for solutions to the existing problem, and involved in decision making throughout the corporation.
also for help when new problems are recognised. While it is possible to infer from the very supportive
Eventually, the OR group has become institutionalised in statements of senior management, that San Miguel's OR
corporate policy, either through the head of OR reporting activities are a strategic asset, there is not quite enough
directly and often to the corporate CEO, or though OR documentation in the public domain to be fully comfortable
appointments to key committees, or by written policy with this conclusion.
which states that the OR group must be involved in certain ABB Electric during the period 1974 through about 1988
activities. Consequently, strategic OR groups are functional appears to have achieved a sustained competitive advantage
areas of the business and are as much involved in 'opera- through the use of OR, although this conclusion is based on
tions' as they are in 'research'. only a single published work. Documentation of strategic
OR at McDermott Corporation is again quite sketchy,
although the limited material available supports the impor-
Conclusions
tance of OR in the competitive strategy of McDermott.
There are a number of examples of firms which have AT&T has a substantial history of successful OR activity,
activities which appear to meet a definition of strategic but this is such a huge corporation, and there has been so
OR based on the provision of a competitive advantage much change in the North American telephone market that
sustained over a period of time. Clearly there are many the benefits attributable to OR have been dwarfed by other
smaller firms, including Giro, Hosykins, Insight Logistics, exogenous change. Citgo, Harris Semiconductor, and Merit
where OR work is a major product and represents a Brass, have all achieved a competitive advantage from their
strategic asset: such firms will not survive if their OR OR work but the lack of evidence on the sustainability of
work does not provide them with a sustainable competitive this advantage prevents the drawing of a strong conclusion.
advantage. More interesting, and more 'marketable' for In these, and other promising examples, it is apparent
OR, are major corporations where investment in OR has that OR people have not been particularly effective at
been part of a successful competitive strategy. documenting and reporting the activities of many success-
Among major corporations, the strongest claim is that of ful OR groups over a substantial period of time. Without
AADT/SDT over the period from about 1985 to the present. documentation of additional important corporations which
There is good evidence that this 'OR group' has catalysed have succeeded through investing in OR, (such as that
massive change in both its parent company and the industry provided for the IS profession by the Harvard MIS History
in which it operates (and in other service industries where it Project16), the case that OR can be a strategic asset rests on
has sold its services). This massive change is broadly just a few companies. Nonetheless, the case remains a strong
attributed, both internally and externally to AADT/SDT. one.
When futurist Joseph P. Coates recently opined that '(OR) Recognising and documenting a strategic role for OR is
has wrecked the airline industry',28 he was commenting on very important to the future of OR. In the North American
certain aspects of AADT/SDTs impact which he found air carrier industry, OR is close to becoming a dominant
personally unappealing (such as full aircraft). The success technology: major carriers which do not have a significant
of AADT/SDT has been credited with competitor bank- investment in OR are finding it very difficult to compete
outside niche market areas. Once established as a dominant
ruptcies, industrial restructuring, and a competitive advan-
tage of hundreds of millions annually to it parent company,technology, OR activities and employment in that industry,
sustained over a significant period of time. and in related industries will dramatically increase.
An equally strong candidate for having strategic OR OR will prosper if we can establish that OR is a critical
activities is Federal Express Corporation. Although the strategic resource in globally competitive businesses, and if
FedEx OR group is much smaller than AADT/SDT we can communicate this fact to senior management in
(partly because it does no outside business), OR has been these industries.
thoroughly ingrained in FedEx activities since start-up in
1973. The FedEx multi-hub distribution system was
Acknowledgements The author thanks the organisers of 'The Founda-
designed by the OR group, and its operation and expansion
tions, Development and Success of OR Groups: A Symposium', held at
over the years has been managed with the extensive use of
Bowness-on-Windermere, 20-22 May, 1996 for the opportunity to present
OR. OR at FedEx appears to be involved in almost every these ideas, and gratefully acknowledges financial support from the
major decision the corporation takes-and it has been in Natural Sciences and Engineering Research Council of Canada, and the
this position since the very beginnings in 1973. Richard Ivey School of Business.

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Received September 1996;
accepted July 1997 after one revision