FUNCTIONAL LEVEL STRATEGIES - CHPT 4 BUSINESS 189 SPRING 2010 DR. MARK FRUIN

FUNCTIONAL-LEVEL STRATEGIES MUCH OF CHAPTER 4 REPEATS THEMES RAISED IN CHAPTER 3 PP 106 -, THE BOOK CONTINUES TO CONFUSE FUNCTIONAL STRATEGIES AND DISTINCTIVE COMPETENCIES –WELL DONE FUNCTIONAL STRATEGIES CAN RESULT IN DISTINCTIVE COMPETENCIES, the book says –IT’S JUST THE OPPOSITE –BUT DISTINCTIVE COMPETENCIES DO NOT LEAD TO FUNCTIONAL STRATEGIES ALTHOUGH THEY MAY CHANNEL/DIRECT WHERE FURTHER INVESTMENT & EFFORT & SPECIALIZATION MAKE SENSE

FUNCTIONAL LEVEL STRATEGIES SUPERIOR EFFICIENCY –ANYWHERE IN THE ORGANIZATION –NOT JUST THE PRODUCTION LINE SUPERIOR QUALITY –ANYWHERE IN THE ORGANIZATION –QUALITY AS RELIABILITY; QUALITY AS EXCELLENCE SUPERIOR CUSTOMER RESPONSIVENESS –ANYWHERE IN THE ORGANIZATION –CUSTOMERS ARE NOT JUST “OUT THERE” SUPERIOR INNOVATION –ANYWHERE IN THE ORGANIZATION

EFFICIENCY TWO FACTORS DETERMINE A FIRM’S PROFIT RATE –THE VALUE CUSTOMERS PLACE ON FIRM OFFERING –THE COSTS OF PRODUCING & DELIVERING THOSE OFFERINGS DIFFERENCE BETWEEN COSTS OF INPUTS AND VALUE OF OUTPUT PRODUCTIVITY MEASURES OUTPUT PER EMPLOYEE

SUPERIOR VALUE CREATION EITHER ENJOY THE LOWEST COST STRUCTURE IN THE INDUSRY –2Ss: SCALE & SCOPE –2 MORE Ss: SPECIALIZATION & SPEED –OTHER COST ADVANTAGES? OR CREATE THE MOST VALUABLE PRODUCT IN EYES OF CUSTOMERS –THE GAP BETWEEN PERCEIVED VALUE AND COSTS OF PRODUCTION –ALLOWING A HIGH PRICE = DIFFERENTIATION STRATEGY

SUPERIOR EFFICIENCY TEXT DISCUSSES ECONOMIES & DISECONOMIES OF SCALE ON PP 107- –AT SOME POINT INCREASING SCALE MAY NOT YIELD LOWER COSTS PER UNIT –GENERALLY, SCALE RELATED INVESTMENTS ARE LUMPY; NOTION OF MES MINIMUM EFFICIENT SCALE VARIES BY INDUSTRY LEARNING EFFECTS ON PP 110- –BOOK: MORE COMPLEX TASKS HAVE POTENTIAL FOR GREATER LEARNING EFFECTS (MAYBE) –AT SOME TIME, LEARNING MAY DIMINISH FLEXIBLE/LEAN PRODUCTION (BUT NOT ECONOMIES OF SCOPE ON PP 114- ) –REDUCE SETUP TIMES, BETTER SCHEDULING –U-SHAPED LINES; FLEXIBLE MACHINE CELLS

EFFICIENCY & PROFITABILITY FLEXIBLE MANUFACTURING CAN SAVE ON MANPOWER, EQUIPMENT COSTS, CAPACITY UTILIZATION & AMOUNT OF REWORK = BIG SAVINGS = PROFITS IN MARKETING TOO, MORE EFFICIENT PRICING, PROMOTION, DESIGN, ETC. = MORE PROFITS WITH HIGHER CUSTOMER RETENTION RATES –FEWER RECALLS –MORE RESALES –HIGHER CUSTOMER LOYALTY

MATERIALS MANAGEMENT JIT PRODUCTION AND DISTRIBUTION REQUIRES MATERIALS MNGMNT –KANBAN = CHIT TO MANAGE MATERIALS FLOW TYPICAL MFG FIRM –MATERIALS & TRANSPORT COSTS = 50-70% OF REVENUES –FOR FIRM WITH $1 MILLION IN REVENUES –INCREASING TOTAL PROFITS BY $150,000 WOULD TAKE EITHER 30% INCREASE IN SALES OR 3% REDUCTION IN MATERIAL COSTS –WHICH WOULD BE EASIER TO DO?

OTHER EXAMPLES OF EFFICIENCY R&D (BETTER PROJECT CHOICE; BETTER PEOPLE CHOICE; BETTER MANAGEMENT CHOICES) HR HIRING, TRAINING, COMPENSATION & MANAGEMENT (SELF-MANAGING TEAMS) PAY FOR PERFORMANCE INFRASTRUCTURE AND EFFICIENCY –STATE & COUNTRY INVESTMENT IN ROADS, BRIDGES, AIRPORTS, WATER CONTROL SYSTEMS, ETC. –HOW DO COMPANY STRUCTURE, SYSTEMS, STYLE, & CULTURE CONTRIB TO EFFICIENCY?

QUALITY QUALITY = RELIABILITY = EXCELLENCE –QUALITY CAN MEAN EITHER AND/OR BOTH QUALITY PRODUCTS ARE GOODS & SERVICES THAT ARE RELIABLE DO WELL WHAT THEY’RE DESIGNED TO DO QUALITY CAN RESULT IN GREATER EFFICIENCY & PRODUCTIVITY & BRAND- NAME VALUE & CUSTOMER LOYALTY –LESS REWORK –EASIER TO MAKE, EASIER TO USE

STRATEGY IN ACTION: SIX SIGMA PROGRAMS SIX SIGMA: PRODUCTION PROCESSES THAT ARE % ACCURATE WITH 3.4 DEFECTS PER ONE MILLION PARTS ALMOST IMPOSSIBLE TO ACHIEVE, BUT GE, MOTOROLA & ALLIED SIGNAL HAVE DONE SO –ALMOST IMPOSSIBLE TO ACHIEVE? –STORY OF JAPANESE SUPPLIER AND OVERSEAS ORDER SPECIFYING PPM DEFECTS

BUILDING COMMITMENT TO QUALITY ORGANIZATIONAL, NOT INDIVIDUAL, COMMITMENT TO QUALITY LEADERS NEED TO PUSH QUALITY & EXEMPLIFY QUALITY IN THEIR ACTIONS FOCUS ON CUSTOMER IDENTIFY PROCESSES & SOURCES OF DEFECTS –PRECISE TOOLS & TECHNIQUES TO MAP SOURCES OF DEFECTS AND FIX THEM –WHO DOES INVESTIGATION & REMEDIATION OF DEFECTS? HAS POWERFUL EFFECT ON QUALITY –“EVERYONE A MANAGER”

COMMITMENT TO QUALITY II FIND WAYS TO MEASURE QUALITY SET GOALS AND INCENTIVES SOLICIT EMPLOYEE INPUTS LONG TERM RELATIONSHIPS WITH SUPPLIERS QUALITY AS MORE THAN SIMPLE RELIABILITY; QUALITY AS EXCELLENCE MOVE FROM CAPABILITIES-COMPETENCIES THAT EVERYONE HAS TO DISTINCTIVE COMPETENCIES BY FOCUSING ON QUALITY

SUPERIOR CUSTOMER RESPONSIVENESS QUALITY OF FIRM OFFERINGS PLUS SUPERIOR CUSTOMER RESPONSE TIME ABILITY TO DEVELOP NEW OFFERINGS QUICKLY ABILITY TO CUSTOMIZE EXISTING OFFERINGS TO EVER SMALLER SEGMENTS (WHILE MAINTAINING EFFICIENCY & QUALITY) –CUSTOMIZATION –MAKE CUSTOMERS FEEL THAT YOU’RE FOCUSING ON ONLY THEM

TABLE 4.5 DIFF. FUNCTIONS IN CUSTOMER RESPONSIVENESS INFRASTRUCTURE (LEADERSHIP) –COMMUNICATIONS, IT, LOGISTICS PRODUCTION MARKETING MATERIALS MANAGEMENT R&D INFORMATION SYSTEMS HUMAN RESOURCES

INNOVATION ANYTHING NEW AND NOVEL IN THE WAY COMPANIES OPERATE 3 TYPES (SEE NEXT SLIDE) –INCREMENTAL - THE BULK OF IT –RADICAL - AT CERTAIN TIMES & PLACES –DISRUPTIVE/DISCONTINUOUS - CURRENT BUZZ PRODUCT VS. PROCESS INNOVATIONS ADVANCES IN PRODUCT DESIGN, FORM FACTOR, MFG, DISTRIB & MKTG PROCESSES, MANAGEMENT SYSTEMS, ORGANIZATIONAL STRUCTURES OPPORTUNITIES 4 INNOVATION ARE ENDLESS BUT NOT ALL INNOVATIONS EQUALLY VALUABLE

TYPES OF INNOVATION PRODUCT INNOVATION VS PROCESS INNOVATION INNOVATION MAY BE TECHNICALLY AND/OR MARKETING-RELATED –2 X 2 X 3 MATRIX RESULTS = SEGMENTS AS INNOVATION OPPORTUNITIES INCREMENTAL INNOVATION RADICAL INNOVATION DISRUPTIVE/DISCONTINUOUS INNOVATION

AREAS FOR IMPROVEMENT PROJECT SELECTION & MANAGEMENT BUILDING CROSS-FUNCTIONAL INTEGRATION (VIA TEAMS) PRODUCT DEVELOPMENT STRATEGIES –SEQUENTIAL –PARTLY PARALLEL –FULLY PARALLEL - STRONG PRODUCT DEVELOPMENT TEAMS & MNGRS (SHUSA & HEAVYWEIGHT PRODUCT DEVELOPMENT TEAMS) JAPANESE FIRMS DESIGN & DEVELOP NEW CARS IN 4 YEARS ON AVERAGE AM & EUROPEAN FIRMS 5-6 YEARS ON AVERAGE FORD & GM MOTOR GETTING BETTER - WHY?

DURABILITY OF COMPETITIVE ADVANTAGES EXTENT TO WHICH SUPERIOR EFFICIENCY, QUALITY, CUSTOMER SATISFACTION & INNOVATION MAY BE COPIED AND DUPLICATED BARRIERS TO IMITATION –TACIT VS. EXPLICIT –EMBEDDED VS. EMBODIED IN FORMULA –OTHER BARRIERS? CAPABILITY TO IMITATE –ABSORPTIVE CAPACITY INDUSTRY DYNAMISM

FUNCTIONAL COMPETITIVE ADVANTAGES THE FOUNDATION OF STRATEGIC SUCCESS –REMEMBER STRATEGY STACK ARE ORGANIZATIONAL –ORGANIZED CAPABILITIES & COMPETENCIES –AND, THUS, MANAGED CAPABILITIES BEGIN W/ CONTINUOUS IMPROVEMENT –COMPOUNDED BY OTHER SORTS OF INNOVATION ORGANIZATIONAL FLEXIBILITY & ADAPTABILITY ARE KEY TO LONGTERM SUCCESS –BECAUSE OF ASSET SPECIFICITY, ORGANIZATIONAL INERTIA, PATH DEPENDENCY& COMPETENCY TRAPS –NOT ANY OLD CAPABILITIES, BUT DYNAMIC CAPABILITES