The story so far… ► Why is a firm making money? It’s the industry (Porter 5 forces external analysis)It’s the industry (Porter 5 forces external analysis) ► Implications for managers Signaling strategies, tacit collusion, differentiation, brand, market segmentation, innovation, demand (re-)creationSignaling strategies, tacit collusion, differentiation, brand, market segmentation, innovation, demand (re-)creation It’s the firmIt’s the firm ► Implications for managers Create competencies that are valuable, rare, non- substitutable and inimitable…Create competencies that are valuable, rare, non- substitutable and inimitable…

Increasing profitability – value and price Efficiency Customer responsiveness Quality Innovation Higher prices Lower costs New products Improved Product P C V Profit

Greater value… ► Quality Closer to customer needsCloser to customer needs Customer focusCustomer focus Cross functional integrationCross functional integration Greater valueGreater value Higher prices (absent head-to-head competition)Higher prices (absent head-to-head competition) Supplier relationshipsSupplier relationships

…Higher prices Lower costs PROFIT Efficiency Innovation Quality Customer responsiveness V P C Higher customer value and prices

Improving the product/service ( => greater customer responsiveness) ► Manufacturing/Production Raise quality -> increase in valueRaise quality -> increase in value ► Sales and Marketing Market segmentationMarket segmentation Tailor product to segments’ needsTailor product to segments’ needs ► Customer Service The product’s success (and the company reputation) depend on quality of the service as well as that of the productThe product’s success (and the company reputation) depend on quality of the service as well as that of the product ► HR TrainingTraining ► E.g. Call centre staff ► IT CAD/CAMCAD/CAM ► Increase product variety ► Better able to meet segment needs Customer supportCustomer support ► Customer relationship management software

Increasing profitability – lower costs Efficiency Customer responsiveness Quality Innovation Higher prices Profit New processes Fewer defects Lower costs New products Improved Product V P C

Reducing costs ( = greater efficiency) ► Manufacturing/Production Economies of scaleEconomies of scale ► Spreading of fixed costs ► Specialization Learning effectsLearning effects ► More applicable to complex operations ► Purchasing JIT (less inventory)JIT (less inventory) Supplier relationshipsSupplier relationships ► Marketing Reputation, word of mouthReputation, word of mouth PenetrationPenetration Defection ratesDefection rates ► HR TrainingTraining Self managing teamsSelf managing teams IncentivesIncentives ► IT EDIEDI ► JIT, data entry Customer supportCustomer support ► (e.g. FAQs, expert systems for problem diagnostics ► Call centre management

Manufacturing variability Too wide, reject. Perfect, pass. Too thin, pass. But… Scrap – or reworkReliability problems, weak and failure Question: Does higher quality cost money?

Manufacturing variability Too wide, reject. Perfect, pass. Too thin, pass. But… Reliability problems, weak and failure Question: Does higher quality cost money? Scrap – or rework

Six  quality Part too small Part too large ~ four  quality ~ one  quality

Inside the Oreck (1)

Inside the Oreck (2)

Reducing costs through higher quality ► Quality TQM, Six sigmaTQM, Six sigma ► Less re-work ► Lower costs Careful MeasurementCareful Measurement IncentivesIncentives InvolvementInvolvement TeamsTeams Supplier relationships (get higher quality inputs)Supplier relationships (get higher quality inputs) Design for manufacturability (or service delivery)Design for manufacturability (or service delivery)

Lowering costs Lower costs PROFIT Efficiency Innovation Quality Customer responsiveness V P C Higher customer value and prices

The Experience Curve ► Studies during WWII uncovered a relationship between the number of ships produced and the cost of production

The Experience Curve ► The relationship between the number of ships produced and the cost of production became known as “the experience curve” ► This can be subdivided into two distinct effects with different causes - Scale Scale Learning Learning

Defraying fixed costs Greater specialization Unit cost Production volume c0c0 c1c1 v0v0 v1v1 Economies of Scale

Unit cost Production volume t1t1 t0t0 t2t2 c0c0 c2c2 c1c1 v 0, v 2 v1v1 Learning

Economies of scale vs. learning Economies of scale Learning Economies of scale Learning Utilization Total quantity produced Unit cost Unit cost Unit cost

Why does this matter? ► Scale anyone can achieve ► Competitors will seldom if ever be able to match your cumulative volume even if they can get the same market share ► Learning is one source of first mover advantage ► Knowledge is often ‘sticky’ and leaning is hard to replicate