4-1 Chapter Four Building Competitive Advantage Through Functional-Level Strategy

4-2 Building Blocks of Competitive Advantage Competitive Advantage: Low Cost Differentiation Efficiency Quality Innovation Customer Responsiveness

4-3 Functional-Level Strategies Strategies aimed at improving the effectiveness of a company’s operations Aim to give a firm superior: Efficiency Quality Innovation Customer responsiveness competitive advantage superior profitability profit growth

4-4 The Roots of Competitive Advantage Distinctive competencies shape the functional-level strategies that a company can pursue. Function-level strategies can build resources and capabilities to enhance a company’s distinctive competencies.

4-5 Building Blocks of Competitive Advantage Competitive Advantage: Low Cost Differentiation Efficiency Quality Innovation Customer Responsiveness

4-6 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-7 Achieving Superior Efficiency Economies of scale Unit cost reductions associated with a large scale of output Spread fixed costs over a large production volume Producing in large volumes to achieve a greater division of labor and specialization 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

4-8 Economies and Diseconomies of Scale

4-9 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-10 Learning Effects Learning Effects are cost savings that come from learning by doing. Labor productivity Management efficiency A downward shift of the entire unit cost curve

4-11 The Impact of Learning and Scale Economies on Unit Costs

4-12 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-13 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 Increasing a company’s product volume and market share will lower its cost structure relative to its rivals.

4-14 The Experience Curve

4-15 Unit Production Costs in an Integrated Steel Mill and a Mini-mill Integrated Mill Mini-mill Actual Output $ Average Costs $ Average Costs MES Output The Experience Curve (Continued)

4-16 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-17 Flexible Manufacturing and Mass Customization Flexible Manufacturing Technology –Reduces setup times for complex equipment –Improves scheduling to increase use of individual machines –Improves quality control –Increases efficiency and lowers unit costs

4-18 Flexible Manufacturing and Mass Customization Mass Customization Ability to use flexible manufacturing technology to reconcile two goals that were once thought incompatible: –Low cost –Differentiation through product customization

4-19 Tradeoff Between Costs and Product Variety

4-20 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-21 Marketing 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

4-22 Customer Loyalty and Profit per Customer A 5% reduction of the customer defection rate will result in an increase of profit of 25-85%

4-23 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-24 Activities necessary to get inputs and components to a production facility, through the production process and the distribution system to the end-user –Many sources of cost in this process –Significant opportunities for cost reduction –Just-in-Time (JIT) Inventory System Supply Chain Management is the task of managing the flow of inputs to a company’s processes to minimize inventory holding and maximize inventory turnover Materials Management and Supply Chain

4-25 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-26 Boost efficiency Reduce the number of parts that make up a product Design for manufacturing Lower cost structure by pioneering process innovations Reduce process setup times Flexible manufacturing An important source of competitive advantage R&D Strategy

4-27 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-28 Human Resource Strategy Hiring strategy Employee training Self-managing teams Pay for performance Goal: to improve employee productivity.

4-29 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-30 Information Systems Web-based information systems can automate many activities Cisco online support Automate interactions between –Company and customers Google’s blog –Company and suppliers

4-31 How to Achieve Superior Efficiency Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Human Resource Information Systems Economies of Scale Infrastructure

4-32 A company’s 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. Infrastructure

4-33 Primary Roles of Value Creation Functions

4-34 Building Blocks of Competitive Advantage Competitive Advantage: Low Cost Differentiation Efficiency Quality Innovation Customer Responsiveness

4-35 Achieving Superior Quality 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. Quality can be thought of in terms of two dimensions: Quality as reliability Quality as excellence

4-36 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) Cost decrease Productivity More jobs Higher market share and price Profitability

4-37 Deming’s Steps in a Quality Improvement Program 1.A clear business mode. 2.Philosophy that mistakes, defects, and poor quality are not acceptable 3.Quality of supervision 4.An environment in which employees will not be fearful of reporting problems or making suggestions. 5.Work standards 6.Employees training 7.Commitment of everyone

4-38 Roles in Implementing Reliability Improvement Methodologies

4-39 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:

4-40 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.

4-41 Attributes Associated with a Product Offering

4-42 Building Blocks of Competitive Advantage Competitive Advantage: Low Cost Differentiation Efficiency Quality Innovation Customer Responsiveness

4-43 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 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.

4-44 The High Failure Rate of Innovation Most common explanations for failure: Uncertainty Poor commercialization Poor positioning strategy Technological myopia Being slow to market Only 10 to 20% of major R&D projects give rise to a commercially viable product.

4-45 Steps to Build Competencies in Innovation Building skills 1 Project selection and management 2 Achieving cross-functional integration 3 Using product development teams 4 Partly-parallel development process 5

4-46 The Development Funnel Dell’s ideastorm Yahoo!’s suggestion board

4-47 Sequential and Partly Parallel Development Processes Reduced development time & time-to-market Reduced development time & time-to-market

4-48 Functional Roles for Achieving Superior Innovation 1.Top management must bear primary responsibility for overseeing the whole development process. 2.The effectiveness of R&D in developing new products and processes depends on its ability to cooperate with marketing and production.

4-49 Building Blocks of Competitive Advantage Competitive Advantage: Low Cost Differentiation Efficiency Quality Innovation Customer Responsiveness

4-50 Achieving Superior Responsiveness to Customers Focusing on the customer –Customization My AmazonMy Amazon iGoogleiGoogle –Response time Customer responsiveness: giving customers what they want, when they want it, and at a price they are willing to pay

4-51 Functions in Achieving Superior Responsiveness