Chapter Four

Building Competitive Advantage Through FunctionalLevel Strategy

Functional-Level Strategies
Functional-level strategies are strategies aimed at improving the effectiveness of a companys operations. Functional-level strategies aim to give a firm superior:
Efficiency Quality Innovation Customer responsiveness

This leads to a competitive advantage and superior profitability and profit growth.
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Achieving Superior Efficiency

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

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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 Experience Curve is the systematic lowering of the cost structure and consequent unit cost reductions that occur over the life of a product

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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The Experience Curve

Figure 4.4

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Flexible Manufacturing and Mass Customization

Flexible Manufacturing Technology
Lean Production technology that:

Reduces 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 strategy refers to the position that a company takes regarding:
Pricing Promotion Advertising Product Design Distribution

Marketing strategy can reduce costs by lowering customer defection rates and increasing loyalty

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The Relationship Between Customer Loyalty and Profit per Customer

Figure 4.6

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.
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Materials Management and Supply Chain

Materials Management encompasses 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 to economize 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 is the task of managing the flow of inputs to a companys processes to minimize inventory holding and maximize inventory turnover
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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
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
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Human Resource Strategy

Goal: to 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
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Information Systems
Information systems impact on productivity is wide-ranging:
Web-based information systems can automate many activities Automates interactions between Company and customers Company and suppliers
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Infrastructure
A companys structure, culture, style of strategic leadership, and control system:
Determines the context within which all other value creation activities take place Is especially important in building a companywide commitment to efficiency Articulates 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.
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Primary Roles of Value Creation Functions

Table 4.1

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Achieving Superior Quality

Quality can be thought of in terms of two
dimensions: 1. Quality as reliability
They do the jobs they were designed for and do it well

2. 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.
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Improving Quality as Reliability

Six Sigma methodology: the principal tool
now used to increase reliability, which is a direct descendant of Total Quality Management (TQM)

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.
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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 problems 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.
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Roles Played in Implementing Reliability Improvement Methodologies

Table 4.2

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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
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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
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Attributes Associated with a Product Offering

Table 4.3

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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 better satisfy customer needs 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.

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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

Quantum innovation radical departure with higher risk Incremental innovation extension of existing technology Definite demand for product Product not well adapted to customer needs Good product but poorly positioned in the marketplace Technological wizardry vs. meeting market requirements
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Poor positioning strategy Technological myopia Being slow to market

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Building Competencies in Innovation

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

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 and marketing

4. Using product development teams 5. Partly-parallel development process

To compress development time & time-to-market
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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

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

Satisfying customer needs
Customization (Tailor to unique needs of groups of customers) Response time (increased speed; premium pricing)

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Primary Roles of Functions in Achieving Superior Responsiveness to Customers

Table 4.5

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