Building Competitive Advantage through Functional Level Strategy

1
Building Competitive Advantage through Functional
Level Strategy

• Chapter 4

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Functional-Level Strategies

• Should flow from Business-Level Strategy
• Strategies aimed at improving the effectiveness
  of a companys operations
• Improving a companys ability to attain superior
  efficiency, quality, innovation, and customer
  responsiveness

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The Roots of Competitive Advantage
4
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
• Diseconomies of scale
• Unit cost increases associated with a large scale
  of output

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Economies and Diseconomies of Scale
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Achieving Superior Efficiency (contd)

• Learning effects
• Cost savings that come from learning by doing
• Labor productivity
• Management efficiency
• 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
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Achieving Superior Efficiency (contd)

• 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

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The Experience Curve
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Economies of ScaleExperience

• Old rule of thumb Unit cost of production goes
  down 20 as volume doubles.
• Companies have set price to achieve a level of
  volume and desired unit cost of production some
  with success.

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Achieving Superior Efficiency (contd)

• Dangers of complacency with the experience curve
• It will bottom out
• New technologies can make experience effects
  obsolete
• Some technologies may not produce lower costs
  with higher volumes of output
• Flexible manufacturing technologies may allow
  small manufacturers to product at low unit costs

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Unit Production Costs in an Integrated Mill and
Mini-Mill
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Achieving Superior Efficiency (contd)

• Flexible manufacturing (lean production)
• Technology that reduces setup times for complex
  equipment, improves scheduling to increase use of
  individual machines, and improves quality control
• Increases efficiency and lowers unit costs
• Mass customization reconciles two goals low cost
  and differentiation through product customization

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Tradeoff Between Costs and Product Variety
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Achieving Superior Efficiency (contd)

• Marketing
• Marketing strategy pricing, promotion,
  advertising, product design, distribution
• Reducing customer defection rates and building
  customer loyalty

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The Relationship Between Customer Loyalty and
Profit per Customer
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Achieving Superior Efficiency (contd)

• Materials management
• Getting inputs and components to a production
  facility, through the production process, and out
  through a distribution system to the end user
• Just-in-time (JIT) inventory system
• Supply chain management

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Achieving Superior Efficiency (contd)

• RD strategy
• Designing products that are easy to manufacture
• Process innovations

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Achieving Superior Efficiency (contd)

• Human resource strategy employee productivity
• Hiring
• Training
• Self-Managing Teams
• Pay for Performance

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Achieving Superior Efficiency (contd)

• Information systems and the Internet
• Automating interactions between
• Company and customers
• Company and suppliers
• Infrastructure
• Company structure, culture, style of strategic
  leadership, and control system determine context
  of all value creation activities

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Primary Roles of Value Creation Functions in
Achieving Superior Efficiency
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Achieving Superior Quality

• Attaining superior reliability
• Total quality management (TQM)
• Improved quality means that costs decrease
• As a result, productivity improves
• Better quality leads to higher market share and
  allows increased prices
• This increases profitability
• More jobs are created

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Steps in a TQM Program

• Have a clear business model
• Mistakes and defects should be unacceptable
• Supervision should be improved
• Employees should not be fearful of reporting
  problem or making suggestions
• Work standards should include quality
• Employees should be trained in new skills
• Better quality requires company-wide commitment

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The Role Played by Different Functions in
Implementing TQM
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Implementing Reliability Improvement Methodologies

• Build organizational commitment to quality
• Focus on the customer
• Find ways to measure quality
• Set goals and create incentives
• Solicit input from employees
• Identify defects and trace them to source
• Work with suppliers
• Design for ease of manufacture
• Break down barriers among functions

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Attributes Associated with a Product Offering
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Achieving Superior Quality (contd)

• 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
• Monitor competition for improvement in attributes
  and development of new attributes

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Achieving Superior Innovation

• 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

• Uncertainty
• Quantum innovation vs. incremental innovation
• Poor commercialization
• Poor positioning strategy
• Technological Myopia
• Slow to Market

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Achieving Superior Innovation (contd)

• Building Competencies in Innovation
• Building skills in basic and applied research
• Project selection and management

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The Development Funnel
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Achieving Superior Innovation (contd)

• Building Competencies in Innovation (contd)
• Cross-functional integration
• Product development teams
• Partly parallel development processes

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Sequential and Partly Parallel Development
Processes
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Function Roles for Achieving Superior Innovation
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Achieving Superior Responsiveness to Customers

• Customer focus
• Leadership
• Employee attitudes
• Bringing customers into the company
• Satisfying customer needs
• Customization
• Response time

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The Primary Role of Different Functions in
Achieving Superior Responsiveness to Customers