Building Competitive Advantage through Functional Level Strategy Chapter 4

Functional-Level Strategies Should flow from Business-Level Strategy 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

The Roots of Competitive Advantage

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

Economies and Diseconomies of Scale

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

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

The Experience Curve

The Impact of Learning and Scale Economies on Unit Costs

Economies of Scale Experience Old rule of thumb: Unit cost of production goes down 20% as volume doubles. Companies have set price to achieve a level of volume and desired unit cost of production; some with success.

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

Unit Production Costs in an Integrated Mill and Mini-Mill

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

Tradeoff Between Costs and Product Variety

Exercise Strategy in Action 4.1: Explain what went wrong in Texas Instrument and its reliance on the experience curve. Strategy in Action 4.2: Explain how Toyota’s lean production system illustrates Figure 4.6.