Functional Level Strategy

Chapter
Four
Building
Competitive
Advantage
Through
Functional-
Level Strategy
Copyright Houghton Mifflin Company. All rights reserved.
4 | 2
Functional-Level Strategies
Functional-level strategies
are strategies aimed at improving the
effectiveness of a companys operations.
Improves companys ability to attain superior:
1. Efficiency 2. Quality
3. Innovation 4. Customer responsiveness
+ Increases the utility that customers receive:
Through differentiation Creating more value
Lower cost structure than rivals
This leads to a competitive advantage
and superior profitability and profit growth.
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Achieving Superior Efficiency
Functional steps to increasing efficiency:
C Economies of Scale
C Learning Effects
C Experience Curve
C Flexible Manufacturing and Mass Customization
C Marketing
Materials Management and Supply Chain
C R&D Strategy
Human Resource Strategy
Information Systems
1 Infrastructure
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Economies of Scale
+ Economies of scale
Unit cost reductions associated with a large scale of output
Ability to spread fixed costs over a large production
volume
Ability of companies producing in large volumes to
achieve a greater division of labor and specialization
Specialization has favorable impact on productivity by
enabling employees to become very skilled at performing
a particular task
+ Diseconomies of scale
Unit cost increases associated with a large scale of output
Increased bureaucracy associated with large-scale
enterprises
Resulting managerial inefficiencies
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Economies and Diseconomies
of Scale
Figure 4.2
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Learning Effects
Learning Effects are:
Cost savings that come from learning by doing
Labor productivity
Learn by repetition how to best carry out the task
Management efficiency
Learn over time how to best run the operation
Realization of learning effects implies a
downward shift of the entire unit cost curve
As labor and management become more efficient over time
at every level of output

When changes occur in a companys
production system,
learning has to begin again.
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The Impact of Learning and
Scale Economies on Unit Costs
Figure 4.3
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The Experience Curve
The systematic lowering of the cost structure and
consequent unit cost reductions that occur over
the life of a product
Economies of scale and learning effects underlie
the experience curve phenomenon
Once down the experience curve, the company
is likely to have a significant cost advantage
over its competitors
Strategic significance of the experience curve:
Increasing a companys product volume and
market share will lower its cost structure
relative to its rivals.
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Figure 4.4
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Dangers of Complacency Derived
from Experience Effects
1. The experience curve is likely to bottom out
So further unit cost reductions may be hard to come by
2. New technologies can make experience effects
obsolete
From changes always taking place in the external environment
3. Flexible manufacturing technologies may allow
small manufacturers to produce at low unit costs
Achieving both low cost and differentiation through customization
4. Some technologies may not produce lower costs
with higher volumes of output
Managers should not become complacent about
efficiency-based cost advantages derived from
experience effects:
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C Flexible Manufacturing
and Mass Customization
+ Flexible Manufacturing Technology
A range of manufacturing technologies that:
Reduce setup times for complex
equipment
Improves scheduling to increase
use of individual machines
Improves quality control at all
stages of the manufacturing process
Increases efficiency and lowers unit costs
+ Mass Customization
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
Low cost and
Differentiation through product customization

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Tradeoff Between Costs
and Product Variety
Figure 4.5
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Marketing
Marketing
Marketing strategy
Refers to the position that a company takes regarding
Pricing Promotion Advertising
Distribution Product design
Customer defection rates
Percentage of customers who defect every year
Defection rates are determined by customer loyalty
Loyalty is a function of the ability to satisfy customers
Reducing customer defection rates and
building customer loyalty can be major
sources of a lower cost structure.
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Relationship between Customer
Loyalty and Profit per Customer
The longer a company holds on to a customer the greater
the volume of customer-generated unit sales that offset fixed
marketing costs and lowers the average cost of each sale.
Figure 4.6
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+ Materials Management
The activities necessary to get inputs and components to a
production facility, through the production process, and through
the distribution system to the end-user
Many sources of cost in this process
Significant opportunities for cost reduction through more
efficient materials management
Just-in-Time (JIT) Inventory System
System designed to economize on inventory holding costs:
Have components arrive to manufacturing just prior to
need in production process
Have finished goods arrive at retail just prior to stock out
+ Supply Chain Management
Task of managing the flow of inputs to a companys processes to
minimize inventory holding and maximize inventory turnover
Materials Management and
Supply Chain
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+Research and Development (R&D)
Roles of R&D in helping a company achieve greater
efficiency and lower cost structure:
1. Boost efficiency by designing products that
are easy to manufacture
Reduce the number of parts that make up a product
reduces assembly time
Design for manufacturing requires close coordination
with production and R&D
2. Help a company have a lower cost structure by
pioneering process innovations
Reduce process setup times
Flexible manufacturing
An important source of competitive advantage
R&D Strategy
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Human Resource Strategy
+Hiring strategy
Assures that the people a company hires have the attributes
that match the strategic objectives of the company
+Employee training
Upgrades employee skills to perform tasks faster and more
accurately
+Self-managing teams
Members coordinate their own activities and make their own
hiring, training, work, and reward decisions.
+Pay for performance
Linking pay to individual and team performance can help to
increase employee productivity
The key challenge of the Human Resource
function: improve employee productivity.
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Information Systems
Information systems impact on
productivity is wide-ranging:
+ Web-based information
systems can automate many
of the company activities
+ Potentially affects all the
activities of a company
+ Automates interactions
between
Company and customers
Company and suppliers
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A Companys Infrastructure:
The companys structure, culture, style of
strategic leadership, and control system:
Determines the context within which all other value
creation activities take place
Strategic leadership is especially important in
building a companywide commitment to efficiency
The leadership task is to articulate a vision for all
functions and coordinate across functions
Achieving superior performance requires an
organization-wide commitment.
Top management plays a major role in this process.
Infrastructure
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Primary Roles of
Value-Creation Functions
Table 4.1
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Achieving Superior Quality
Quality as reliability
They do the jobs they were designed
for and do it well
Quality as excellence
Perceived by customers to have superior attributes
1. A strong reputation for quality allows a
company to differentiate its products.
2. Eliminating defects or errors reduces waste,
increases efficiency, and lowers the cost
structure increasing profitability.
Quality can be thought of in terms
of two dimensions and gives a
company two advantages:
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Improving Quality as Reliability
TQM is based on the following five-step chain
reaction:
1. Improved quality means that
costs decrease.
2. As a result, productivity also
improves.
3. Better quality leads to higher market
share and allows increased prices.
4. This increases a companys profitability.
5. Thus the company creates more jobs.
Six Sigma methodology: the principal tool
now used to increase reliability and is a direct
descendant of Total Quality Management (TQM)
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Demings Steps in a
Quality Improvement Program
1. A company should have a clear business model.
2. Management should embrace philosophy that
mistakes, defects, and poor quality are not
acceptable.
3. Quality of supervision should be improved.
4. Management should create an environment in
which employees will not be fearful of reporting
problem or making suggestions.
5. Work standards should include some notion of
quality to promote defect-free output.
6. Employees should be trained in new skills.
7. Better quality requires the commitment of
everyone in the workplace.
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Roles Played in Implementing
Reliability Improvement Methods
Table 4.2
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Implementing Reliability
Improvement Methodologies
+ Build organizational commitment to quality
+ Create quality leaders
+ Focus on the customer
+ Identify processes and the source of defects
+ Find ways to measure quality
+ Set goals and create incentives
+ Solicit input from employees
+ Build long-term relationships with suppliers
+ Design for ease of manufacture
+ Break down barriers among functions
Imperatives that stand out among companies that have
successfully adopted quality improvement methods:
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Improving Quality as Excellence
Developing Superior Attributes:
Learn which attributes are most important
to customers
Design products and associate services to
embody the important attributes
Decide which attributes to promote and how
best to position them in consumers minds
Continual improvement in attributes and
development of new-product attributes
A product is a bundle of attributes
and can be differentiated by attributes that
collectively define product excellence.
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Attributes Associated with a
Product Offering
Table 4.3
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Achieving Superior Innovation
+ Innovation can:
Result in new products that satisfy
customer needs better
Improve the quality of existing products
Reduce costs
+ Innovation can be imitated -
+ So it must be continuous
Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.
Successful new product launches are
major drivers of superior profitability.
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The High Failure Rate
of Innovation
Most common explanations for failure:
+ Uncertainty
Quantum innovation radical departure with higher risk
Incremental innovation extension of existing technology
+ Poor commercialization
Definite demand for product
Product not well adapted to customer needs
+ Poor positioning strategy
Good product but poorly positioned in the marketplace
+ Technological myopia
Technological wizardry vs. meeting market requirements
+ Slow to market
Failure rate of innovative new products is high
with evidence suggesting that only 10 to 20% of major
R&D projects give rise to a commercially viable product.
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Building Competencies in
Innovation
1. Building skills in basic and applied research
2. Project selection and management
Using the product development funnel
Idea generation Project refinement Project execution
3. Achieving cross-functional integration
1. Driven by customer needs 2. Design for manufacturing
3. Track development costs 4. Minimize time-to-market
5. Close integration between R&D & marketing
4. Using product development teams
5. Partly-parallel development process
+ To compress development time & time-to-market
Companies can take a number of steps to build
competencies in innovation and reduce failures:
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The Development Funnel
Figure 4.7
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Sequential and Partly Parallel
Development Processes
Figure 4.8
Reduced
development time
& time-to-market
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Achieving Superior
Responsiveness to Customers
+ Focusing on the customer
Demonstrating leadership
Shaping employee attitudes
Bringing customers into the
company
+ Satisfying customer needs
Customization
Tailor to unique needs of groups of customers
Response time
Increase speed Premium pricing

Customer responsiveness: giving customers what
they want, when they want it, and at a price they are willing
to pay - as long as the companys long-term profitability is
not compromised.
4 | 34
Primary Roles of Functions in Achieving
Superior Responsiveness to Customers
Table 4.5

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