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

Functional-Level Strategies Functional-level strategies are strategies aimed at improving the effectiveness of a company’s operations. Improves company’s ability to attain superior: Efficiency 2. Quality Innovation 4. Customer responsiveness Increases the utility that customers receive: Through differentiation  Creating more value Lower cost structure than rivals This leads to a competitive advantage and superior profitability and profit growth. Copyright © Houghton Mifflin Company. All rights reserved.

Achieving Superior Efficiency Functional steps to increasing efficiency: Economies of Scale Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Strategy Human Resource Strategy Information Systems Infrastructure Copyright © Houghton Mifflin Company. All rights reserved.

Dangers of Complacency Derived from Experience Effects Managers should not become complacent about efficiency-based cost advantages derived from experience effects: The experience curve is likely to bottom out So further unit cost reductions may be hard to come by New technologies can make experience effects obsolete From changes always taking place in the external environment Flexible manufacturing technologies may allow small manufacturers to produce at low unit costs Achieving both low cost and differentiation through customization Some technologies may not produce lower costs with higher volumes of output Copyright © Houghton Mifflin Company. All rights reserved.

 Flexible Manufacturing and Mass Customization Flexible Manufacturing Technology A range of manufacturing technologies that: Reduce setup times for complex equipment Improves scheduling to increase use of individual machines Improves quality control at all stages of the manufacturing process Increases efficiency and lowers unit costs Mass Customization Ability to use flexible manufacturing technology to reconcile two goals that were once thought incompatible: Low cost and Differentiation through product customization Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved.  Marketing Marketing Marketing strategy Refers to the position that a company takes regarding Pricing  Promotion  Advertising Distribution  Product design Customer defection rates Percentage of customers who defect every year Defection rates are determined by customer loyalty Loyalty is a function of the ability to satisfy customers Reducing customer defection rates and building customer loyalty can be major sources of a lower cost structure. Copyright © Houghton Mifflin Company. All rights reserved.

 Materials Management and Supply Chain The activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user Many sources of cost in this process Significant opportunities for cost reduction through more efficient materials management Just-in-Time (JIT) Inventory System System designed to economize on inventory holding costs: Have components arrive to manufacturing just prior to need in production process Have finished goods arrive at retail just prior to stock out Supply Chain Management Task of managing the flow of inputs to a company’s processes to minimize inventory holding and maximize inventory turnover Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved.  R&D Strategy Research and Development (R&D) Roles of R&D in helping a company achieve greater efficiency and lower cost structure: Boost efficiency by designing products that are easy to manufacture Reduce the number of parts that make up a product –reduces assembly time Design for manufacturing – requires close coordination with production and R&D Help a company have a lower cost structure by pioneering process innovations Reduce process setup times Flexible manufacturing An important source of competitive advantage Copyright © Houghton Mifflin Company. All rights reserved.

 Human Resource Strategy The key challenge of the Human Resource function: improve employee productivity. Hiring strategy Assures that the people a company hires have the attributes that match the strategic objectives of the company Employee training Upgrades employee skills to perform tasks faster and more accurately Self-managing teams Members coordinate their own activities and make their own hiring, training, work, and reward decisions. Pay for performance Linking pay to individual and team performance can help to increase employee productivity Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved.  Information Systems Information systems’ impact on productivity is wide-ranging: Web-based information systems can automate many of the company activities Potentially affects all the activities of a company Automates interactions between Company and customers Company and suppliers Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved.  Infrastructure A Company’s Infrastructure: The company’s structure, culture, style of strategic leadership, and control system: Determines the context within which all other value creation activities take place Strategic leadership is especially important in building a companywide commitment to efficiency The leadership task is to articulate 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. Copyright © Houghton Mifflin Company. All rights reserved.

Achieving Superior Quality Quality can be thought of in terms of two dimensions and gives a company two advantages: Quality as reliability They do the jobs they were designed for and do it well Quality as excellence Perceived by customers to have superior attributes 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. Copyright © Houghton Mifflin Company. All rights reserved.

Improving Quality as Reliability Six Sigma methodology: the principal tool now used to increase reliability and is a direct descendant of Total Quality Management (TQM) TQM is based on the following five-step chain reaction: Improved quality means that costs decrease. As a result, productivity also improves. Better quality leads to higher market share and allows increased prices. This increases a company’s profitability. Thus the company creates more jobs. Copyright © Houghton Mifflin Company. All rights reserved.

Deming’s Steps in a Quality Improvement Program A company should have a clear business model. Management should embrace philosophy that mistakes, defects, and poor quality are not acceptable. Quality of supervision should be improved. Management should create an environment in which employees will not be fearful of reporting problem or making suggestions. Work standards should include some notion of quality to promote defect-free output. Employees should be trained in new skills. Better quality requires the commitment of everyone in the workplace. Copyright © Houghton Mifflin Company. All rights reserved.

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 Copyright © Houghton Mifflin Company. All rights reserved.

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 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 Copyright © Houghton Mifflin Company. All rights reserved.

Attributes Associated with a Product Offering Table 4.3 Copyright © Houghton Mifflin Company. All rights reserved.

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 satisfy customer needs better 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. Copyright © Houghton Mifflin Company. All rights reserved.

The High Failure Rate of Innovation Failure rate of innovative new products is high with evidence suggesting that only 10 to 20% of major R&D projects give rise to a commercially viable product. Most common explanations for failure: Uncertainty Quantum innovation – radical departure with higher risk Incremental innovation – extension of existing technology 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 Slow to market Copyright © Houghton Mifflin Company. All rights reserved.

Building Competencies in Innovation Companies can take a number of steps to build competencies in innovation and reduce failures: Building skills in basic and applied research Project selection and management Using the product development funnel » Idea generation » Project refinement » Project execution Achieving cross-functional integration Driven by customer needs 2. Design for manufacturing Track development costs 4. Minimize time-to-market Close integration between R&D & marketing Using product development teams Partly-parallel development process  To compress development time & time-to-market Copyright © Houghton Mifflin Company. All rights reserved.

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. Focusing on the customer Demonstrating leadership Shaping employee attitudes Bringing customers into the company Satisfying customer needs Customization Tailor to unique needs of groups of customers Response time Increase speed » Premium pricing Copyright © Houghton Mifflin Company. All rights reserved.