1. FUNCTIONAL LEVEL STRATEGIES - CHPT 4 BUS 189 Feb. 16 & 18, 2015 DR. MARK FRUIN

2. FUNCTIONAL LEVEL STRATEGIES SUPERIOR EFFICIENCY –ANYWHERE IN THE ORGANIZATION –NOT JUST THE PRODUCTION LINE SUPERIOR QUALITY –ANYWHERE IN THE ORGANIZATION –QUALITY AS RELIABILITY; QUALITY AS EXCELLENCE SUPERIOR CUSTOMER RESPONSIVENESS –ANYWHERE IN THE ORGANIZATION –CUSTOMERS ARE NOT JUST “OUT THERE” SUPERIOR INNOVATION –ANYWHERE IN THE ORGANIZATION –4 INNOVATION TYPES BUT EMPHASIS IN CHPT 4 ON INCREMENTAL

3. EFFICIENCY TWO FACTORS DETERMINE A FIRM’S PROFIT RATE/PROFITABILITY –THE VALUE CUSTOMERS PLACE ON FIRM OFFERING; BACK TO CHPT 3 ON THIS POINT –THE COSTS OF PRODUCING & DELIVERING THOSE OFFERINGS DIFFERENCE BETWEEN COSTS OF INPUTS AND VALUE OF OUTPUT PRODUCTIVITY MEASURES OUTPUT PER EMPLOYEE PRODUCTIVITY IS INDIRECT MEASURE OF PROFITS ‘CAUSE OTHER FACTORS INTERVENE

4. SUPERIOR VALUE CREATION EITHER ENJOY THE LOWEST COST STRUCTURE IN THE INDUSRY (PORTER’S COST LEADERSHIP) –2Ss: SCALE & SCOPE –2 MORE Ss: SPECIALIZATION & SPEED –OTHER COST ADVANTAGES? OR CREATE THE MOST VALUABLE PRODUCT IN EYES OF CUSTOMERS (PORTER’S DIFFER- ENTIATION) –THE GAP BETWEEN PERCEIVED VALUE AND COSTS OF PRODUCTION –ALLOWS A HIGH PRICE = DIFFERENTIATION STRATEGY

5. SUPERIOR EFFICIENCY TEXT DISCUSSES ECONOMIES & DISECONOMIES OF SCALE ON PP 108- –AT SOME POINT INCREASING SCALE MAY NOT YIELD LOWER COSTS PER UNIT –GENERALLY, SCALE RELATED INVESTMENTS ARE LUMPY; NOTION OF MES MINIMUM EFFICIENT SCALE VARIES BY INDUSTRY LEARNING EFFECTS ON PP 111- –BOOK: MORE COMPLEX TASKS HAVE POTENTIAL FOR GREATER LEARNING EFFECTS (MAYBE); MORE COMPLEXITY = GREATER LIKELIHOOD OF ERROR –AT SOME TIME, LEARNING MAY DIMINISH FLEXIBLE/LEAN PRODUCTION ON PP 115- (BUT, NOT SAME AS ECONOMIES OF SCOPE) –REDUCE SETUP TIMES, BETTER SCHEDULING –U-SHAPED LINES; FLEXIBLE MACHINE CELLS

6. EFFICIENCY & PROFITABILITY FLEXIBLE MANUFACTURING SAVES ON MANPOWER, EQUIPMENT, CAPACITY USE & AM’T OF REWORK = BIG SAVINGS = PROFITS –MUCH MORE PROFIT BY SAVING ON PRODUCTION SIDE THAN TRYING TO SELL MORE ON MKTNG SIDE IN MARKETING TOO, MORE EFFICIENT PRICING, PROMOTION, DESIGN, ETC. = MORE PROFITS WITH HIGHER CUSTOMER RETENTION RATES –FEWER RECALLS –MORE RESALES –HIGHER CUSTOMER LOYALTY

7. MATERIALS MANAGEMENT JIT PRODUCTION AND DISTRIBUTION REQUIRES MATERIALS MNGMNT –KANBAN = CHIT TO MANAGE MATERIALS FLOW TYPICAL MFG FIRM –MATERIALS & TRANSPORT COSTS = 50-70% OF REVENUES –FOR FIRM WITH $1 MILLION IN REVENUES –INCREASING TOTAL PROFITS BY $150,000 WOULD TAKE EITHER 30% INCREASE IN SALES OR 3% REDUCTION IN MATERIAL COSTS –WHICH WOULD BE EASIER TO DO? PRETTY OBVIOUS –HOW RELATE TO STAPLES CASE?

8. QUALITY QUALITY = RELIABILITY = EXCELLENCE –QUALITY CAN MEAN EITHER AND/OR BOTH QUALITY PRODUCTS ARE GOODS & SERVICES THAT ARE RELIABLE DO WELL WHAT THEY’RE DESIGNED TO DO APPLES’ “COOLNESS” IS GOOD OR HIGH QUALITY DESIGN QUALITY CAN RESULT IN GREATER EFFICIENCY & PRODUCTIVITY & BRAND- NAME VALUE & CUSTOMER LOYALTY –LESS REWORK; EASIER TO MAKE & TO USE

9. STRATEGY IN ACTION: SIX SIGMA PROGRAMS SIX SIGMA: PRODUCTION PROCESSES THAT ARE 99.99966 % ACCURATE WITH 3.4 DEFECTS PER ONE MILLION PARTS ALMOST IMPOSSIBLE TO ACHIEVE, BUT GE, MOTOROLA & ALLIED SIGNAL HAVE DONE SO –ALMOST IMPOSSIBLE TO ACHIEVE? –STORY OF JAPANESE SUPPLIER AND OVERSEAS ORDER SPECIFYING PPM DEFECTS SPECIFIED 3-4 DEFECTIVE PARTS PER MILLION SUPPLIER COMPLIED

10. BUILDING COMMITMENT TO QUALITY ORGANIZATIONAL, NOT INDIVIDUAL, COMMITMENT TO QUALITY, BUT CARRIED OUT BY INDIVIDUALS LEADERS NEED TO PUSH QUALITY & EXEMPLIFY QUALITY IN THEIR ACTIONS –BOTTOM UP WON’T WORK W/O TOP DOWN PUSH FOCUS ON CUSTOMER NEEDS IDENTIFY PROCESSES & SOURCES OF DEFECTS –PRECISE TOOLS & TECHNIQUES TO MAP SOURCES OF DEFECTS AND FIX THEM –WHO DOES INVESTIGATION & REMEDIATION OF DEFECTS? HAS POWERFUL EFFECT ON QUALITY –“EVERYONE A MANAGER”; EDUCATED & MOTIVATED WRKRS

11. COMMITMENT TO QUALITY II FIND WAYS TO MEASURE QUALITY SET GOALS AND INCENTIVES SOLICIT EMPLOYEE INPUTS LONG TERM RELATIONSHIPS WITH SUPPLIERS QUALITY AS MORE THAN SIMPLE RELIABILITY; QUALITY AS EXCELLENCE MOVE FROM CAPABILITIES-COMPETENCIES THAT EVERYONE HAS TO DISTINCTIVE COMPETENCIES BY FOCUSING ON QUALITY

12. SUPERIOR CUSTOMER RESPONSIVENESS QUALITY OF FIRM OFFERINGS PLUS SUPERIOR CUSTOMER RESPONSE TIME ABILITY TO DEVELOP NEW OFFERINGS QUICKLY ABILITY TO CUSTOMIZE EXISTING OFFERINGS TO EVER SMALLER SEGMENTS (WHILE MAINTAINING EFFICIENCY & QUALITY) –CUSTOMIZATION –MAKE CUSTOMERS FEEL THAT YOU’RE FOCUSING ON ONLY THEM

13. TABLE 4.5 DIFF. FUNCTIONS IN CUSTOMER RESPONSIVENESS INFRASTRUCTURE (LEADERSHIP NEEDED; WHAT SYSTEMS REQUIRED TO RESPOND WELL?) –COMMUNICATIONS, IT, LOGISTICS PRODUCTION MARKETING MATERIALS MANAGEMENT R&D INFORMATION SYSTEMS HUMAN RESOURCES

14. TYPES OF INNOVATION PRODUCT VS PROCESS INNOVATION INNOVATION MAY BE TECHNICAL AND/OR MARKETING (HOW SOMETHING IS SOLD) –2 X 2 X 3 MATRIX RESULTS = SEGMENTS AS INNOVATION OPPORTUNITIES INCREMENTAL INNOVATION RADICAL INNOVATION DISRUPTIVE/DISCONTINUOUS INNOVATION OPPORTUNITIES FOR INNOVATION ARE ENDLESS BUT NOT ALL INNOVATIONS ARE EQUALLY VALUABLE –VRIND FOR INNOVATIONS; measures how important the innovation might be

15. AREAS FOR IMPROVING LIKELIHOOD OF INNOVATION PROJECT SELECTION & MANAGEMENT BUILDING CROSS-FUNCTIONAL INTEGRATION (VIA TEAMS) PRODUCT DEVELOPMENT STRATEGIES –SEQUENTIAL –PARTLY PARALLEL –FULLY PARALLEL - STRONG PRODUCT DEVELOPMENT TEAMS & MNGRS (SHUSA & HEAVYWEIGHT PRODUCT DEVELOPMENT TEAMS) JAPANESE FIRMS DESIGN & DEVELOP NEW CARS IN 4 YEARS ON AVERAGE AM & EUROPEAN FIRMS 5-6 YEARS ON AVERAGE FORD & GM MOTOR GETTING BETTER - WHY?

16. DURABILITY OF COMPETITIVE ADVANTAGES EXTENT TO WHICH SUPERIOR EFFICIENCY, QUALITY, CUSTOMER SATISFACTION & INNOVATION MAY BE COPIED & DUPLICATED BARRIERS TO IMITATION –TACIT VS. EXPLICIT –EMBEDDED VS. EMBODIED IN FORMULA –OTHER BARRIERS? CAPABILITY TO IMITATE –ABSORPTIVE CAPACITY INDUSTRY DYNAMISM

17. CAN ONE SUCCEED/WIN WITH F-L STRATEGIES ALONE? YES, A TRIED-AND-TRUE STRATEGY –JAPANESE CAR COMPANIES AT THE OUTSET OF NORTH AMERICA/EUROPEAN INVASION –KOREAN CAR COS. NOW (OR UP UNTIL NOW) –LET OTHERS DO THE PRODUCT/MARKET PLANNING, EXPLORATION & INNOVATION; OFFER BETTER PRODUCT AT CHEAPER PRICE NO, IMITATION DOES NOT EXIST WITHOUT INNOVATION –CATCH-UP STRATEGIES ALWAYS REQUIRE INNOVATION AND EVEN INVENTION AT TIMES

18. IN CLASS PRACTICE QUESTIONS: ANSWER 1 OF THE FOLLOWING USING M. PORTER’S GENERIC COMPETITIVE STRATEGY MODEL, CHARACTERIZE STAPLES’ INDUSTRY STRATEGY –DO A GCS CONTINUUM; LOCATE STAPLES ON THE CONTINUUM; WHAT ARE YOUR REASONS FOR LOCATING STAPLES WHERE YOU HAVE? USING THE 5 FORCES MODEL, DOES STAPLES HAVE STRUCTURAL/INDUSTRY SUSTAINABLE COMPETITIVE ADVANTAGES? –HOW MUCH DO THE OUTER FORCES AFFECT RIVALRY IN THE CENTER PART OF THE PORTER DIAMOND?