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

Learning Objectives Explain how an enterprise can use functional-level strategies to increase efficiency Explain how an enterprise can use functional-level strategies to increase quality Explain how an enterprise can use functional-level strategies to increase innovation Explain how an enterprise can use functional-level strategies to increase customer responsiveness

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.

Roots of Competitive Advantage Distinctive competencies shape the functional-level strategies that a company can pursue. Figure 4.1 Function-level strategies can build resources and capabilities to enhance a company’s distinctive competencies.

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

Impact of Learning & Scale on Unit Costs Figure 4.3

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.

The Experience Curve Figure 4.4

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

Tradeoff Between Costs and Product Variety Figure 4.5

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

Infrastructure “... structure, culture, style of strategic leadership, and control system...” Determines context within which other value creation activities take place Especially important in building companywide commitment to efficiency Articulates vision for all functions & coordinate across functions Achieving superior performance requires an organization-wide commitment. Top management plays a major role in this process.

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.

Business Model for Quality Improvement Philosophy Supervision Environment Standards Training Commitment

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 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

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

“Preparation is everything “Preparation is everything. Noah did not start building the ark when it was raining.” - Warren Buffett