1. BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY
Chapter 4
BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY

2. Functional-Level Strategies
“...aimed at improving the effectiveness of a company’s operations...”
Aim to give a firm superior:
Efficiency
Quality
Innovation
Customer responsiveness
This leads to a competitive advantage and superior profitability and profit growth.

3. Achieving Superior Efficiency
Economies of scale- Unit cost reductions associated with large scale output
Spread fixed costs over large volume
Achieve greater division of labor/specialization
Specialization enables employees to become skilled at particular task
Diseconomies of scale- Unit cost increases associated with large scale output
Increased bureaucracy with large-scale enterprises
Resulting managerial inefficiencies

4. Economies/Diseconomies of Scale
Figure 4.2

5. Learning Effects Cost savings from learning by doing.
Labor productivity- Learn by repetition
Management efficiency- Learn over time
Learning effects implies downward shift entire unit cost curve- Become more efficient over time at every level of output

6. 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.

7. Flexible Production and Mass Customization
Flexible Production Technology
Reduces setup times for complex equipment
Improves scheduling to increase use of individual machines
Improves quality control at all stages of manufacturing process
Increases efficiency = lowers unit costs
Mass Customization
Low cost
Differentiation through product customization

8. Marketing Marketing strategy- position company takes regarding:
Pricing
Promotion
Advertising
Product Design
Distribution
Marketing strategy can reduce costs by lowering customer defection rates and increasing loyalty

9. Relationship Between Customer Loyalty and Profit per Customer
Figure 4.6

10. Materials Management and Supply Chain
Materials Management- activities to get inputs and components to production, through production process, and through distribution to end-user
Many sources of cost
Opportunities for cost reduction by efficient materials management
Just-in-Time (JIT)- minimize holding costs:
Components arrive just prior to need in production
Finished goods arrive just prior to stock out
Supply Chain Management- managing the flow of inputs to minimize inventory holding & maximize inventory turnover

11. Research and Development (R&D)
R&D Strategy
Research and Development (R&D)
Boost efficiency by designing products easy to manufacture
Reduce number of parts– reduces assembly time
Design for manufacturing – requires close coordination with production and R&D
2. A lower cost structure by process innovations
Reduce process setup times
Flexible manufacturing
An important source of competitive advantage

12. Human Resource Strategy
Goal: to improve employee productivity.
Hiring strategy- people a company hires have the attributes that match strategic objectives
Employee training- Upgrades employee skills to perform tasks faster/more accurately
Self-managing teams- Members coordinate own activities and make their own hiring, training, work, and reward decisions
Pay for performance- Linking pay to individual and team performance to increase employee productivity

13. Information Systems Wide-ranging Impact:
Web-based information systems automate many activities
Automates interactions between
Company customers
Company suppliers

14. Primary Roles of Value Creation Functions
Table 4.1

15. Achieving Superior Quality
Quality is two dimensional:
Reliability- do the jobs designed for and well
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.

16. Improving Quality Through Reliability
Six Sigma methodology: principal tool now used to increase reliability, a direct descendant of Total Quality Management (TQM)
Based on five-step chain reaction:
Improved quality means costs decrease
Result = productivity also improves
Better quality leads to higher market share and allows increased prices
Increases profitability.
Company creates more jobs.

17. Roles Played in Implementing Reliability Improvement Methodologies
Table 4.2

18. Implementing Reliability Improvement Methodologies
Imperatives that stand out among companies that have successfully adopted quality improvement methods:
Build organizational commitment to quality
Focus on the customer/ task
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

19. 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 & associate services to embody important attributes
Decide which attributes to promote & how to position them
Continual improvement in attributes & development of new-product attributes

20. Attributes Associated with a Product Offering
Table 4.3

21. 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 better satisfy customer needs
Improve 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.

22. High Failure Rate of Innovation
“...evidence suggesting... only 10 to 20% of major R&D projects give rise to commercially viable product.
Most common explanations for failure:
Uncertainty
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
Being slow to market

23. Reducing Innovation Failures
Project development projects driven by customer needs
New projects designed for ease of manufacture
Development costs kept in check
Time to market minimized
Close integration of R & D and marketing

24. Functional Roles for Achieving Superior Innovation
Table 4.4
Top management must bear primary responsibility for overseeing the whole development process.
The effectiveness of R&D in developing new products and processes depends on its ability to cooperate with marketing and production.

25. 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.
Focus on the customer
Demonstrating Leadership
Shaping Employee Attitudes
Bringing Customers to Company
Satisfying customer
Customization
Response Time

26. Primary Roles of Functions in Achieving Superior Responsiveness to Customers
Table 4.5

27. BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY
Chapter 5
BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL STRATEGY

28. Business-Level Strategy
A successful business model results from business-level strategies that create a competitive advantage over its rivals.
Firms must decide/evaluate:
Customer needs–
WHAT is to be satisfied
Customer groups–
WHO is to be satisfied
Distinctive competencies–
HOW customers are to be satisfied
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29. Customer Needs and Product Differentiation
Customer needs- desires, wants, or cravings to be satisfied through product attributes
 Customers choose product based on:
Way product differentiated from others
Price of product
Product differentiation- designing products to satisfy customers’ needs in ways competing products cannot
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30. Customer Groups and Market Segmentation
Market Segmentation- customers grouped based on differences in needs or preferences
Main Approaches to Segmenting Markets
Ignore differences in segments– make product for typical/average customer
Recognize differences between segments– make products that meet needs of all/most segments
Target specific segments– focus on/serve one or two selected segments
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31. Identifying Customer Groups and Market Segments
Figure 5.1
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32. Three Approaches to Market Segmentation
Figure 5.2
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33. Implementing the Business Model
Strategic managers must devise strategies that determine how:
To DIFFERENTIATE & PRICE product
To SEGMENT market & how WIDE A RANGE of products to develop
A profitable business model depends on providing customer with most value while keeping cost structures viable.
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34. Walmart’s Business Model
Figure 5.3
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35. Competitive Positioning at the Business Level
Maximizing profitability of the business model is making the right choices on value creation through differentiation, costs, and pricing.
Figure 5.4
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36. Generic Business-Level Strategies
Cost Leadership- Lowest cost structure vis-à-vis competitors allowing price flexibility & higher profitability
Focused Cost Leadership- Cost leadership in selected market niches where it has a local or unique cost advantage
Differentiation - Features important to customers & distinct from competitors that allow premium pricing
Focused Differentiation- Distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators
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37. Cost Leadership Strategic Choices
Establishes a cost structure that allows them to provide goods/services at lower unit costs
Strategic Choices
Cost leader does not try to be industry innovator.
Cost leader positions products to appeal to “average” or typical customer.
Overriding goal of cost leader is to increase efficiency & lower costs relative to industry rivals.
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38. Advantages of Cost Leadership Strategies
Protected from competitors by cost advantage
Less affected by increased prices of inputs if there are powerful suppliers
Less affected by a fall in price of inputs if there are powerful buyers
Purchases in large quantities increase bargaining power over suppliers
Ability to reduce price to compete with substitute products
Low costs and prices are a barrier to entry
Cost leaders able to charge lower price or achieve superior profitability at same price.
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39. Disadvantages of Cost Leadership Strategies
Competitors may lower their cost structures.
Competitors may imitate cost leader’s methods.
 Cost reductions may affect demand.
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40. Strategic Choices- Differentiator
Differentiation
Companies with differentiation strategy create product different or distinct from competitors in important way.
Strategic Choices- Differentiator
Strives to differentiate itself on as many dimensions as possible.
Focuses on quality, innovation, and responsiveness to customer needs.
May segment market in many niches.
Concentrates on organizational functions that provide source of distinct advantages.
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41. Advantages of Differentiation Strategies
Customers develop brand loyalty.
Powerful suppliers not problem because company geared more toward price it can charge than costs.
Can pass price increases on to loyal customers.
Powerful buyers not problem because product distinct.
Differentiation & brand loyalty = barriers to entry.
Threat of substitute products depends on competitors’ ability to meet customer needs.
Differentiators create demand for their distinct products and charge a premium price, resulting in greater revenue and higher profitability.
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42. Disadvantages of Differentiation Strategies
Difficulty maintaining long-term distinctiveness in customers’ eyes.
Agile competitors can quickly imitate.
Patents and first-mover advantage are limited in duration.
Difficulty maintaining premium price.
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43. Strategic Choices- Focus
Focuser strives to serve need of targeted niche market segment where it has either low-cost or differentiated competitive advantage.
Strategic Choices- Focus
Focuser selects specific market based on:
Geography
Type of customer
Segment of product line
Focused company positions self as either:
Low-Cost or
Differentiator
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44. Advantages of Focus Strategies
Focuser protected from rivals to extent can provide a product /service they cannot.
Focuser has power over buyers because they cannot get same thing elsewhere
Threat of new entrants limited by customer loyalty to focuser.
Customer loyalty lessens threat from substitutes.
Focuser stays close to customers and changing needs.
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45. Disadvantages of Focus Strategies
Focuser at disadvantage to powerful suppliers because it buys in small volume (but may pass costs to loyal customers).
Because of low volume, focuser may have higher costs than low-cost company.
Focuser’s niche may disappear because of technological change or changes in customers’ tastes.
Differentiators will compete for focuser’s niche.
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46. Why Focus Strategies Are Different
Figure 5.7    
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47. Broad Differentiation: Cost Leadership and Differentiation
A broad differentiation business model may result when successful differentiator has pursued its strategy in a way that also allowed it to lower its cost structure:
Using robots/flexible manufacturing cells reduces costs while producing different products.
Standardizing component parts used in different end products can achieve economies of scale.
Limiting customer options reduces production/marketing costs.
JIT inventory can reduce costs/improve quality/reliability.
Using the Internet/e-commerce can provide information to customers and reduce costs.
Low-cost, differentiated products often produced in countries with low labor costs.
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.