2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 4 BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4-2 Learning Objectives Explain how an enterprise can use functional-level strategies to increase efficiencyExplain how an enterprise can use functional-level strategies to increase efficiency Explain how an enterprise can use functional-level strategies to increase qualityExplain how an enterprise can use functional-level strategies to increase quality Explain how an enterprise can use functional-level strategies to increase innovationExplain how an enterprise can use functional-level strategies to increase innovation Explain how an enterprise can use functional-level strategies to increase customer responsivenessExplain how an enterprise can use functional-level strategies to increase customer responsiveness

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Functional-Level Strategies “...aimed at improving the effectiveness of a company’s operations “...aimed at improving the effectiveness of a company’s operations...” Aim to give a firm superior: EfficiencyEfficiency QualityQuality InnovationInnovation Customer responsivenessCustomer responsiveness This leads to a competitive advantage and superior profitability and profit growth.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Roots of Competitive Advantage Distinctive competencies shape the functional-level strategies that a company can pursue. Function-level strategies can build resources and capabilities to enhance a company’s distinctive competencies. Figure 4.1

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Achieving Superior Efficiency o Economies of scale- Unit cost reductions associated with large scale output Spread fixed costs over large volumeSpread fixed costs over large volume Achieve greater division of labor/specializationAchieve greater division of labor/specialization Specialization enables employees to become skilled at particular taskSpecialization enables employees to become skilled at particular task o Diseconomies of scale- Unit cost increases associated with large scale output Increased bureaucracy with large-scale enterprisesIncreased bureaucracy with large-scale enterprises Resulting managerial inefficienciesResulting managerial inefficiencies

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4-6 Economies/Diseconomies of Scale Figure 4.2

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Effects Cost savings from learning by doing. Labor productivity- Learn by repetitionLabor productivity- Learn by repetition Management efficiency- Learn over timeManagement efficiency- Learn over time Learning effects implies downward shift entire unit cost curve- Become more efficient over time at every level of outputLearning effects implies downward shift entire unit cost curve- Become more efficient over time at every level of output

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Impact of Learning & Scale on Unit Costs Figure 4.3

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4-9 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.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use The Experience Curve Figure 4.4

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Flexible Production and Mass Customization o Flexible Production Technology Reduces setup times for complex equipmentReduces setup times for complex equipment Improves scheduling to increase use of individual machinesImproves scheduling to increase use of individual machines Improves quality control at all stages of manufacturing processImproves quality control at all stages of manufacturing process Increases efficiency = lowers unit costsIncreases efficiency = lowers unit costs o Mass Customization Low costLow cost Differentiation through product customizationDifferentiation through product customization

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Tradeoff Between Costs and Product Variety Figure 4.5

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Marketing Marketing strategy- position company takes regarding:Marketing strategy- position company takes regarding: PricingPricing PromotionPromotion AdvertisingAdvertising Product DesignProduct Design DistributionDistribution Marketing strategy can reduce costs by lowering customer defection rates and increasing loyaltyMarketing strategy can reduce costs by lowering customer defection rates and increasing loyalty

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Relationship Between Customer Loyalty and Profit per Customer Figure 4.6

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use oMaterials Management- activities to get inputs and components to production, through production process, and through distribution to end-user Many sources of costMany sources of cost Opportunities for cost reduction by efficient materials managementOpportunities for cost reduction by efficient materials management Just-in-Time (JIT)- minimize holding costs:Just-in-Time (JIT)- minimize holding costs:  Components arrive just prior to need in production  Finished goods arrive just prior to stock out oSupply Chain Management- managing the flow of inputs to minimize inventory holding & maximize inventory turnover Materials Management and Supply Chain Materials Management and Supply Chain

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Research and Development (R&D) 1. Boost efficiency by designing products easy to manufacture Reduce number of parts– reduces assembly timeReduce number of parts– reduces assembly time Design for manufacturing – requires close coordination with production and R&DDesign for manufacturing – requires close coordination with production and R&D 2. A lower cost structure by process innovations 2. A lower cost structure by process innovations Reduce process setup timesReduce process setup times Flexible manufacturingFlexible manufacturing An important source of competitive advantageAn important source of competitive advantage R&D Strategy R&D Strategy

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Human Resource Strategy oHiring strategy- people a company hires have the attributes that match strategic objectives oEmployee training- Upgrades employee skills to perform tasks faster/more accurately oSelf-managing teams- Members coordinate own activities and make their own hiring, training, work, and reward decisions oPay for performance- Linking pay to individual and team performance to increase employee productivity Goal: to improve employee productivity.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Information Systems Wide-ranging Impact: oWeb-based information systems automate many activities oAutomates interactions between Company customersCompany customers Company suppliersCompany suppliers

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use “... structure, culture, style of strategic leadership, and control system...” “... structure, culture, style of strategic leadership, and control system...” Determines context within which other value creation activities take placeDetermines context within which other value creation activities take place Especially important in building companywide commitment to efficiencyEspecially important in building companywide commitment to efficiency Articulates vision for all functions & coordinate across functionsArticulates vision for all functions & coordinate across functions Achieving superior performance requires an organization-wide commitment. Top management plays a major role in this process. Infrastructure Infrastructure

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 | 20 Primary Roles of Value Creation Functions Table 4.1

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Achieving Superior Quality 1)Reliability- do the jobs designed for and well 2)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. Quality is two dimensional: Quality is two dimensional:

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Business Model for Quality Improvement 4-22 Standards Training Commitment Philosophy Supervision Environment

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Improving Quality Through Reliability Based on five-step chain reaction: Based on five-step chain reaction: 1.Improved quality means costs decrease 2.Result = productivity also improves 3.Better quality leads to higher market share and allows increased prices 4.Increases profitability. 5.Company creates more jobs. Six Sigma methodology: principal tool now used to increase reliability, a direct descendant of Total Quality Management (TQM)

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 | 24 Roles Played in Implementing Reliability Improvement Methodologies Table 4.2

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 | 25 Implementing Reliability Improvement Methodologies o Build organizational commitment to quality o Create quality leaders o Focus on the customer o Identify processes and the source of defects o Find ways to measure quality o Set goals and create incentives o Solicit input from employees o Build long-term relationships with suppliers o Design for ease of manufacture o Break down barriers among functions Imperatives that stand out among companies that have successfully adopted quality improvement methods:

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Improving Quality as Excellence Developing Superior Attributes: Developing Superior Attributes: Learn which attributes are most important to customersLearn which attributes are most important to customers Design products & associate services to embody important attributesDesign products & associate services to embody important attributes Decide which attributes to promote & how to position themDecide which attributes to promote & how to position them Continual improvement in attributes & development of new-product attributesContinual improvement in attributes & development of new-product attributes A product is a bundle of attributes and can be differentiated by attributes that collectively define product excellence.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Attributes Associated with a Product Offering Table 4.3

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Achieving Superior Innovation oInnovation can: Result in new products that better satisfy customer needsResult in new products that better satisfy customer needs Improve quality of existing productsImprove quality of existing products Reduce costsReduce costs oInnovation can be imitated  So it must be continuous Building distinctive competencies that result in innovation is the most important source of competitive advantage. Successful new product launches are major drivers of superior profitability.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use High Failure Rate of Innovation Most common explanations for failure:  Uncertainty  Poor commercialization Definite demand for productDefinite demand for product Product not well adapted to customer needsProduct not well adapted to customer needs  Poor positioning strategy Good product but poorly positioned in the marketplaceGood product but poorly positioned in the marketplace  Technological myopia Technological “wizardry” vs. meeting market requirementsTechnological “wizardry” vs. meeting market requirements  Being slow to market “...evidence suggesting... only 10 to 20% of major R&D projects give rise to commercially viable product.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reducing Innovation Failures Project development projects driven by customer needs Project development projects driven by customer needs New projects designed for ease of manufacture New projects designed for ease of manufacture Development costs kept in check Development costs kept in check Time to market minimized Time to market minimized Close integration of R & D and marketing Close integration of R & D and marketing 4-30

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Functional Roles for Achieving Superior Innovation Table Top management must bear primary responsibility for overseeing the whole development process. 2.The effectiveness of R&D in developing new products and processes depends on its ability to cooperate with marketing and production.

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Achieving Superior Responsiveness to Customers Focus on the customer  Demonstrating Leadership  Shaping Employee Attitudes  Bringing Customers to Company 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 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. Satisfying customer  Customization  Response Time

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Primary Roles of Functions in Achieving Superior Responsiveness to Customers Table 4.5

2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 | 34 “Preparation is everything. Noah did not start building the ark when it was raining.” - Warren Buffett