Chapter Four

Building Competitive
Advantage Through
Functional-Level
Strategy
Dr. Jashim U. Ahmed

External
Factors:
Competitive
changes
Environmental
changes

Overview of Corporate Strategic Planning

to Functional Strategic Planning
Corporate
Strategic Plan

Marketing
Manufacturing

Finance

Logistics
Functional Strategic Plans
Source: William Copacino and Donald B. Rosenfield, Analytic Tools for Strategic Planning, International
Journal of Physical Distribution and Materials Management 15 (3), (1985): 48. [modified content].

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
Lower cost structure

Creating more value

than rivals

This leads to a competitive advantage

and superior profitability and profit growth.

Achieving Superior Efficiency

Functional steps to increasing efficiency:

Economies of Scale
Learning Effects
Experience Curve
Flexible Manufacturing and Mass Customization
Marketing
Materials Management and Supply Chain
R&D Strategy
Human Resource Strategy
Information Systems
Infrastructure

 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

 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.

 The Experience Curve

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.

 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

 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.

 Materials Management and

Supply Chain

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

 R&D Strategy

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

2.

Reduce the number of parts that make up a product

reduces assembly time
Design for manufacturing requires close coordination
with production and R&D

Help a company have a lower cost structure by

pioneering process innovations

Reduce process setup times

Flexible manufacturing
An important source of competitive advantage

 Human Resource Strategy

The key challenge of the Human Resource
function: improve employee productivity.

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

 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

 Infrastructure
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 company-wide 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.

Achieving Superior Quality

Quality can be thought of in terms
of two dimensions and gives a
company two advantages:

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

A strong reputation for quality allows a

company to differentiate its products.
Eliminating defects or errors reduces waste,
increases efficiency, and lowers the cost
structure increasing profitability.

Improving Quality as
Reliability
Six Sigma methodology: the principal tool now
used to increase reliability and is a direct
descendant of Total Quality Management (TQM)

TQM is based on the following five-step chain

reaction:

Improved quality means that costs decrease.

As a result, productivity also improves.
Better quality leads to higher market share and
allows increased prices.
This increases a companys profitability.
Thus the company creates more jobs.

Demings Steps in a
Quality Improvement Program
1.
2.

3.
4.

5.
6.
7.

A company should have a clear business model.

Management should embrace philosophy that
mistakes, defects, and poor quality are not
acceptable.
Quality of supervision should be improved.
Management should create an environment in
which employees will not be fearful of reporting
problem or making suggestions.
Work standards should include some notion of
quality to promote defect-free output.
Employees should be trained in new skills.
Better quality requires the commitment of
everyone in the workplace.

Implementing Reliability
Improvement Methodologies
Imperatives that stand out among companies that
have successfully adopted quality improvement
methods:

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

Improving Quality as Excellence

A product is a bundle of attributes

and
can be differentiated by attributes that collectively
define product 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

Achieving Superior Innovation

Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.

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

Successful new product launches are major

drivers of superior profitability.

The High Failure Rate of Innovation

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.
Most common explanations for failure:

Uncertainty

Poor commercialization

Good product but poorly positioned in the marketplace

Technological myopia

Definite demand for product

Product not well adapted to customer needs

Poor positioning strategy

Quantum innovation radical departure with higher risk

Incremental innovation extension of existing technology

Technological wizardry vs. meeting market requirements

Slow to market

Building Competencies in Innovation

Companies can take a number of steps to build
competencies in innovation and reduce failures:
1.
2.

Building skills in basic and applied research

Project selection and management
Using the product development funnel

Idea generation
3.

Achieving cross-functional integration

1.
3.
5.

4.
5.

Project refinement Project execution

Driven by customer needs 2. Design for manufacturing

Track development costs
4. Minimize time-to-market
Close integration between R&D & marketing

Using product development teams

Partly-parallel development process
To compress development time & time-to-market

Achieving Superior
Responsiveness to Customers
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.

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

Functional-Level Strategy
The

core undertaking which looks

after the main flow activities.

The

essential function that delivers

goods and services to customers and
matches the use of internal resources
to their demands.

Functional-Level Strategy
Balance the major corporate aim of satisfying
customer needs against the requirement of
efficient and economical systems performance.
Ensure their function adds value to the
organization.
Achieving the match between corporate strategic
aspirations and operational capabilities.
Concerned with continuous improvement.
Transforming resources into finished products or
services.
Balance customer service needs against the
economic use of resources.

Customer-Supplier Model

Your
Your
Suppliers
Suppliers

Inputs

Requirements
and feedback

Your
Your
Process
Process

Your
Your
Outputs Customers
Customers

Requirements
and feedback

Source: Evans J. R. & Lindsay, W. M. (2005). The Management and

Control of Quality. p.160, Thomson.

Bangladesh Standards & Testing

Institution (BSTI) Quality Certification
BDS 1107, Finlay Tea, James Finlay Limited.
BDS 1123, Sprite, The Coca-Cola Company.
BDS 1240, MUM drinking water, Partex Group.
BDS 818, Rangs Ceiling Fan, Rangs
Electronics Ltd.

The International Organization for

Standardization (ISO)

ISO operates on the concept that

standardising certain minimum
characteristics of a quality
management system will give mutual
benefits to suppliers and customers.

ISO Quality Certification

The International Organization for
Standardization (ISO) has issued the
ISO 9000 series of quality
certifications. These ISO 9000 series
of quality assurance standards
comprise:
ISO 9000, ISO 9001,
ISO 9002, ISO 9003 and
ISO 9004

The Types of ISO Quality Certification

ISO 9001 covers all activities in all stages of an
organisation's operations, starting from the
design and development to servicing customers
(ACI earn the ISO 9001 certification of QMS in
1995).
ISO 9002 suitable for organisations engaged in
production and installation only.
ISO 9003 organisations engaged only in final
inspection and testing.
These standards are now replaced by a single
quality management system requirements
standard, ISO 9001: 2000.

The ISO 9001: 2000 Quality Certification

Companies in Bangladesh

Orion Infusion Ltd.

Gaco Pharmaceuticals.
Square Pharmaceutics Ltd.
Alco Pharma Ltd.
Jayson Pharmaceuticals
Ltd.
Navana Pharmaceuticals
Ltd.
Novus Pharmaceuticals Ltd.
ACI Limited.
Renata Limited.
Amico Laboratories
Limited.
The ACME Laboratories
Limited.

Anwar Landmark Ltd.

building technology &
ideas Ltd.
Sheltech (Pvt.) Ltd.
Star Particle Board Mills Ltd.
B R B Cable Industries
Limited.
Bogra Motors (PVT) Limited.
Computer Source Ltd.
Saif Powertec Limited.
Stamford University.
Otobi.
R.S. Associate (Electric) Ltd.
Kai Aluminium.

ISO 9001:2000 Quality Mgt. Principles

Principle 1: Customer Focus
Principle 2: Leadership
Principle 3: Involvement of People
Principle 4: Process Approach
Principle 5: Systems Approach to Mgt.
Principle 6: Continual Improvement
Principle 7: Factual Approach to Decision
Making
Principle 8: Mutually Beneficial Supplier
Relationships

Six Sigma
Six Sigma is based on a statistical
measure that equates to 3.4 or fewer
errors or defects per million
opportunities. An ultimate stretch
goal of all organizations that adopt a
Six Sigma philosophy is to have all
critical processes, regardless of
functional area, at a Six Sigma level
of capability.
Source: Evans J. R. & Lindsay, W. M. (2005).
The Management and Control of Quality. p.132, Thomson.

Business Excellence Model

The Business Excellence Model is a
nine-box model, originally developed
by the European Foundation for
Quality Management (EFQM). Its
purpose is to "support the
management of Western European
organizations in accelerating the
process of making quality a decisive
influence for achieving global
competitive advantage" (EFQM
publication).

Business Excellence Model

Summary of Core
Concepts of TQM
Working

with Customers
Continuous Staff Analysis of Work
Processes
Working with Suppliers
Source: Vinzant, J. C. and Vinzant, D. H. (1991).
Strategic management spin-offs of the Deming
approach, Journal of Management History, Vol. 5, No.
8, pp. 516-531.

Thank you