BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY Chapter 4 BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY

Functional-Level Strategies “...aimed at improving the effectiveness of a company’s operations...” Aim to give a firm superior: Efficiency Quality Innovation Customer responsiveness This leads to a competitive advantage and superior profitability and profit growth.

Achieving Superior Efficiency Economies of scale- Unit cost reductions associated with large scale output Spread fixed costs over large volume Achieve greater division of labor/specialization Specialization enables employees to become skilled at particular task Diseconomies of scale- Unit cost increases associated with large scale output Increased bureaucracy with large-scale enterprises Resulting managerial inefficiencies

Economies/Diseconomies of Scale Figure 4.2

Learning Effects Cost savings from learning by doing. Labor productivity- Learn by repetition Management efficiency- Learn over time Learning effects implies downward shift entire unit cost curve- Become more efficient over time at every level of output

The Experience Curve “...the systematic lowering of... cost structure and consequent unit cost reductions, that ...occur over the life of a product.” Strategic significance of the experience curve: Increasing company’s product volume & market share will lower cost structure relative to rivals.

Flexible Production and Mass Customization Flexible Production Technology Reduces setup times for complex equipment Improves scheduling to increase use of individual machines Improves quality control at all stages of manufacturing process Increases efficiency = lowers unit costs Mass Customization Low cost Differentiation through product customization

Marketing Marketing strategy- position company takes regarding: Pricing Promotion Advertising Product Design Distribution Marketing strategy can reduce costs by lowering customer defection rates and increasing loyalty

Relationship Between Customer Loyalty and Profit per Customer Figure 4.6

Materials Management and Supply Chain Materials Management- activities to get inputs and components to production, through production process, and through distribution to end-user Many sources of cost Opportunities for cost reduction by efficient materials management Just-in-Time (JIT)- minimize holding costs: Components arrive just prior to need in production Finished goods arrive just prior to stock out Supply Chain Management- managing the flow of inputs to minimize inventory holding & maximize inventory turnover

Research and Development (R&D) R&D Strategy Research and Development (R&D) Boost efficiency by designing products easy to manufacture Reduce number of parts– reduces assembly time Design for manufacturing – requires close coordination with production and R&D 2. A lower cost structure by process innovations Reduce process setup times Flexible manufacturing An important source of competitive advantage

Human Resource Strategy Goal: to improve employee productivity. Hiring strategy- people a company hires have the attributes that match strategic objectives Employee training- Upgrades employee skills to perform tasks faster/more accurately Self-managing teams- Members coordinate own activities and make their own hiring, training, work, and reward decisions Pay for performance- Linking pay to individual and team performance to increase employee productivity

Information Systems Wide-ranging Impact: Web-based information systems automate many activities Automates interactions between Company customers Company suppliers

Primary Roles of Value Creation Functions Table 4.1

Achieving Superior Quality Quality is two dimensional: Reliability- do the jobs designed for and well Excellence- perceived by customers to have superior attributes Strong reputation for quality allows a company to differentiate its products Eliminating defects/errors reduces waste, increases efficiency, lowers cost structure– increasing profitability.

Improving Quality Through Reliability Six Sigma methodology: principal tool now used to increase reliability, a direct descendant of Total Quality Management (TQM) Based on five-step chain reaction: Improved quality means costs decrease Result = productivity also improves Better quality leads to higher market share and allows increased prices Increases profitability. Company creates more jobs.

Roles Played in Implementing Reliability Improvement Methodologies Table 4.2

Implementing Reliability Improvement Methodologies Imperatives that stand out among companies that have successfully adopted quality improvement methods: Build organizational commitment to quality Focus on the customer/ task 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 & associate services to embody important attributes Decide which attributes to promote & how to position them Continual improvement in attributes & development of new-product attributes

Attributes Associated with a Product Offering Table 4.3

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 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.

High Failure Rate of Innovation “...evidence suggesting... only 10 to 20% of major R&D projects give rise to commercially viable product. Most common explanations for failure: Uncertainty Poor commercialization Definite demand for product Product not well adapted to customer needs Poor positioning strategy Good product but poorly positioned in the marketplace Technological myopia Technological “wizardry” vs. meeting market requirements Being slow to market

Reducing Innovation Failures Project development projects driven by customer needs New projects designed for ease of manufacture Development costs kept in check Time to market minimized Close integration of R & D and marketing

Functional Roles for Achieving Superior Innovation Table 4.4 Top management must bear primary responsibility for overseeing the whole development process. The effectiveness of R&D in developing new products and processes depends on its ability to cooperate with marketing and production.

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 company’s long-term profitability is not compromised. Focus on the customer Demonstrating Leadership Shaping Employee Attitudes Bringing Customers to Company Satisfying customer Customization Response Time

Primary Roles of Functions in Achieving Superior Responsiveness to Customers Table 4.5

BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY Chapter 5 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY

Business-Level Strategy A successful business model results from business-level strategies that create a competitive advantage over its rivals. Firms must decide/evaluate: Customer needs– WHAT is to be satisfied Customer groups– WHO is to be satisfied Distinctive competencies– HOW customers are to be satisfied 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Customer Needs and Product Differentiation Customer needs- desires, wants, or cravings to be satisfied through product attributes  Customers choose product based on: Way product differentiated from others Price of product Product differentiation- designing products to satisfy customers’ needs in ways competing products cannot 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Customer Groups and Market Segmentation Market Segmentation- customers grouped based on differences in needs or preferences Main Approaches to Segmenting Markets Ignore differences in segments– make product for typical/average customer Recognize differences between segments– make products that meet needs of all/most segments Target specific segments– focus on/serve one or two selected segments 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Identifying Customer Groups and Market Segments Figure 5.1 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Three Approaches to Market Segmentation Figure 5.2 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Implementing the Business Model Strategic managers must devise strategies that determine how: To DIFFERENTIATE & PRICE product To SEGMENT market & how WIDE A RANGE of products to develop A profitable business model depends on providing customer with most value while keeping cost structures viable. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Walmart’s Business Model Figure 5.3 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Competitive Positioning at the Business Level Maximizing profitability of the business model is making the right choices on value creation through differentiation, costs, and pricing. Figure 5.4 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Generic Business-Level Strategies Cost Leadership- Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability Focused Cost Leadership- Cost leadership in selected market niches where it has a local or unique cost advantage Differentiation - Features important to customers & distinct from competitors that allow premium pricing Focused Differentiation- Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Cost Leadership Strategic Choices Establishes a cost structure that allows them to provide goods/services at lower unit costs Strategic Choices Cost leader does not try to be industry innovator. Cost leader positions products to appeal to “average” or typical customer. Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Advantages of Cost Leadership Strategies Protected from competitors by cost advantage Less affected by increased prices of inputs if there are powerful suppliers Less affected by a fall in price of inputs if there are powerful buyers Purchases in large quantities increase bargaining power over suppliers Ability to reduce price to compete with substitute products Low costs and prices are a barrier to entry Cost leaders able to charge lower price or achieve superior profitability at same price. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Disadvantages of Cost Leadership Strategies Competitors may lower their cost structures. Competitors may imitate cost leader’s methods.  Cost reductions may affect demand. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Strategic Choices- Differentiator Differentiation Companies with differentiation strategy create product different or distinct from competitors in important way. Strategic Choices- Differentiator Strives to differentiate itself on as many dimensions as possible. Focuses on quality, innovation, and responsiveness to customer needs. May segment market in many niches. Concentrates on organizational functions that provide source of distinct advantages. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Advantages of Differentiation Strategies Customers develop brand loyalty. Powerful suppliers not problem because company geared more toward price it can charge than costs. Can pass price increases on to loyal customers. Powerful buyers not problem because product distinct. Differentiation & brand loyalty = barriers to entry. Threat of substitute products depends on competitors’ ability to meet customer needs. Differentiators create demand for their distinct products and charge a premium price, resulting in greater revenue and higher profitability. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Disadvantages of Differentiation Strategies Difficulty maintaining long-term distinctiveness in customers’ eyes. Agile competitors can quickly imitate. Patents and first-mover advantage are limited in duration. Difficulty maintaining premium price. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Strategic Choices- Focus Focuser strives to serve need of targeted niche market segment where it has either low-cost or differentiated competitive advantage. Strategic Choices- Focus Focuser selects specific market based on: Geography Type of customer Segment of product line Focused company positions self as either: Low-Cost or Differentiator 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Advantages of Focus Strategies Focuser protected from rivals to extent can provide a product /service they cannot. Focuser has power over buyers because they cannot get same thing elsewhere Threat of new entrants limited by customer loyalty to focuser. Customer loyalty lessens threat from substitutes. Focuser stays close to customers and changing needs. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Disadvantages of Focus Strategies Focuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers). Because of low volume, focuser may have higher costs than low-cost company. Focuser’s niche may disappear because of technological change or changes in customers’ tastes. Differentiators will compete for focuser’s niche. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Why Focus Strategies Are Different Figure 5.7     2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Broad Differentiation: Cost Leadership and Differentiation A broad differentiation business model may result when successful differentiator has pursued its strategy in a way that also allowed it to lower its cost structure: Using robots/flexible manufacturing cells reduces costs while producing different products. Standardizing component parts used in different end products can achieve economies of scale. Limiting customer options reduces production/marketing costs. JIT inventory can reduce costs/improve quality/reliability. Using the Internet/e-commerce can provide information to customers and reduce costs. Low-cost, differentiated products often produced in countries with low labor costs. 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.