4
Building
Competitive
Advantage
Through
Functional-Level
Strategy
Functional-Level Strategies
• Strategies aimed at improving the
effectiveness of a company’s operations
• Improving a company’s ability to attain
superior efficiency, quality, innovation, and
customer responsiveness
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4-2
The Roots of Competitive Advantage
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4-3
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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4-4
Economies and Diseconomies of Scale
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4-5
Achieving Superior Efficiency (cont’d)
• Learning effects
– Cost savings that come from learning by doing
• Labor productivity
• Management efficiency
• When changes occur in a company’s
production system, learning has to begin again
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4-6
The Impact of Learning and Scale
Economies on Unit Costs
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4-7
Achieving Superior Efficiency (cont’d)
• 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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4-8
The Experience Curve
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4-9
Achieving Superior Efficiency (cont’d)
• 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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4 - 10
Unit Production Costs in an Integrated
Mill and Mini-Mill
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4 - 11
Achieving Superior Efficiency (cont’d)
• 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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4 - 12
Tradeoff Between Costs and Product
Variety
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4 - 13
Achieving Superior Efficiency (cont’d)
• Marketing
– Marketing strategy: pricing, promotion,
advertising, product design, distribution
– Reducing customer defection rates and building
customer loyalty
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4 - 14
The Relationship Between Customer
Loyalty and Profit per Customer
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4 - 15
Achieving Superior Efficiency (cont’d)
• 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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4 - 16
Achieving Superior Efficiency (cont’d)
• R&D strategy
– Designing products that are easy to manufacture
– Process innovations
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4 - 17
Achieving Superior Efficiency (cont’d)
• Human resource strategy: employee
productivity
–
–
–
–
Hiring
Training
Self-Managing Teams
Pay for Performance
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4 - 18
Achieving Superior Efficiency (cont’d)
• 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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4 - 19
Primary Roles of Value Creation Functions in
Achieving Superior Efficiency
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4 - 20
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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4 - 21
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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4 - 22
The Role Played by Different Functions
in Implementing TQM
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4 - 23
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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4 - 24
Attributes Associated with a Product
Offering
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4 - 25
Achieving Superior Quality (cont’d)
• 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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4 - 26
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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4 - 27
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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4 - 28
Achieving Superior Innovation (cont’d)
• Building Competencies in Innovation
– Building skills in basic and applied research
– Project selection and management
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4 - 29
The Development Funnel
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4 - 30
Achieving Superior Innovation (cont’d)
• Building Competencies in Innovation (cont’d)
– Cross-functional integration
– Product development teams
– Partly parallel development processes
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4 - 31
Sequential and Partly Parallel
Development Processes
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4 - 32
Function Roles for Achieving Superior
Innovation
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4 - 33
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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4 - 34
The Primary Role of Different Functions in
Achieving Superior Responsiveness to Customers
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4 - 35