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

2. Learning Objectives
Explain how an enterprise can use functional-level strategies to increase efficiency
Explain how an enterprise can use functional-level strategies to increase quality
Explain how an enterprise can use functional-level strategies to increase innovation
Explain how an enterprise can use functional-level strategies to increase customer responsiveness

3. 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.

4. Roots of Competitive Advantage
Distinctive competencies shape the
functional-level strategies that a company can pursue.
Figure 4.1
Function-level strategies can build resources and capabilities to enhance a company’s distinctive competencies.

5. 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

6. Economies/Diseconomies of Scale
Figure 4.2

7. 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

8. Impact of Learning & Scale on Unit Costs
Figure 4.3

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.

10. The Experience Curve
Figure 4.4

11. 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

12. Tradeoff Between Costs and Product Variety
Figure 4.5

13. 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

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

15. 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

16. 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

17. 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

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

19. Infrastructure
“... structure, culture, style of strategic leadership, and control system...”
Determines context within which other value creation activities take place
Especially important in building companywide commitment to efficiency
Articulates vision for all functions & coordinate across functions
Achieving superior performance requires an organization-wide commitment. Top management plays a major role in this process.

20. Primary Roles of Value Creation Functions
Table 4.1

21. 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.

22. Business Model for Quality Improvement
Philosophy
Supervision
Environment
Standards
Training
Commitment

23. 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.

24. Roles Played in Implementing Reliability Improvement Methodologies
Table 4.2

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

26. 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

27. Attributes Associated with a Product Offering
Table 4.3

28. 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.

29. 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

30. 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

31. 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.

32. 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

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

34. “Preparation is everything
“Preparation is everything. Noah did not start building the ark when it was raining.”
- Warren Buffett