1. Building Competitive Advantage through Functional Level Strategy
Chapter 4

2. Functional-Level Strategies
Should flow from Business-Level Strategy
Strategies aimed at improving the effectiveness of a company’s operations
Improving a company’s ability to attain superior efficiency, quality, innovation, and customer responsiveness

3. The Roots of Competitive Advantage

4. Achieving Superior Efficiency
Economies of scale
Unit cost reductions associated with a large scale of output
Ability to spread fixed costs over a large production volume
Ability of companies producing in large volumes to achieve a greater division of labor and specialization
Diseconomies of scale
Unit cost increases associated with a large scale of output

5. Economies and Diseconomies of Scale

6. Achieving Superior Efficiency (cont’d)
Learning effects
Cost savings that come from learning by doing
Labor productivity
Management efficiency
When changes occur in a company’s production system, learning has to begin again

7. Achieving Superior Efficiency (cont’d)
The experience curve
The systematic lowering of the cost structure and consequent unit cost reductions that occur over the life of a product
Economies of scale and learning effects underlie the experience curve

8. The Experience Curve

9. The Impact of Learning and Scale Economies on Unit Costs

10. Economies of Scale Experience
Old rule of thumb: Unit cost of production goes down 20% as volume doubles.
Companies have set price to achieve a level of volume and desired unit cost of production; some with success.

11. Achieving Superior Efficiency (cont’d)
Dangers of complacency with the experience curve
It will bottom out
New technologies can make experience effects obsolete
Some technologies may not produce lower costs with higher volumes of output
Flexible manufacturing technologies may allow small manufacturers to product at low unit costs

12. Unit Production Costs in an Integrated Mill and Mini-Mill

13. Achieving Superior Efficiency (cont’d)
Flexible manufacturing (lean production)
Technology that reduces setup times for complex equipment, improves scheduling to increase use of individual machines, and improves quality control
Increases efficiency and lowers unit costs
Mass customization reconciles two goals: low cost and differentiation through product customization

14. Tradeoff Between Costs and Product Variety

15. Exercise
Strategy in Action 4.1: Explain what went wrong in Texas Instrument and its reliance on the experience curve.
Strategy in Action 4.2: Explain how Toyota’s lean production system illustrates Figure 4.6.