1. Building Competitive Advantage Through Functional-Level Strategy 4 Chapter Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Prepared by C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2013 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. Student Version Theory of Strategic Management 10th ed. GARETH R. JONES /CHARLES W. L. HILL

2. SEATTLE’S VIRGINA MASON HOSPITAL AND TOYOTA’S LEAN PRODUCTION SYSTEM © 2013 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.  Gary Kaplan, CEO of the hospital, was concerned about the hospital’s financial returns, subpar patient satisfaction, and errors in patient treatment.  He met Ian Black of Boeing who told him about how Boeing implemented Toyota’s lean production system.  After Kaplan and some executives made several observation trips to Japan, the hospital implemented some of the Toyota’s lean system. (continued)

3. 4-3  The delay between a doctor’s referral to a specialist and the patient’s first consultant with the specialist was reduced by 68%.  Time spent by patients in the radiation oncology department fell from 45 minutes to 15 minutes.  The hospital’s back clinic cut treatment time from an average of 66 days to just 12 days.  Annual inventory cost was reduced by $1 million and medial errors were reduced. © 2013 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. SEATTLE’S VIRGINA MASON HOSPITAL AND TOYOTA’S LEAN PRODUCTION SYSTEM

4. Learning Objective:After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its efficiency. Learning Objective: After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its efficiency. © 2013 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  Functional-level strategies are aimed at improving the effectiveness of a company’s operations and its ability to attain superior efficiency, quality, innovation, and customer responsiveness.  Distinctive competencies shape the functional-level strategies that a company can pursue.

5. 4-5 ACHIEVING SUPERIOR EFFICIENCY  The simplest measure of efficiency is the quantity of inputs that it takes to produce a given output (efficiency = outputs/inputs). © 2013 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. EFFICIENCY AND ECONOMIES OF SCALE  One source of economies of scale is the ability to spread fixed costs over a large production volume.  Another source is the ability of a company to produce in large volumes to achieve a greater division of labor and specialization.

6. 4-6 © 2013 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. Diseconomies of Scale  A company may encounter diseconomies of scale, which are the unit cost increases associated with a large scale of output. Diseconomies of scale occur primarily because of increased bureaucracy associated with large-scale enterprises and the managerial inefficiencies that can result. Managers must know when the extent of diseconomies of scale begin to occur. EFFICIENCY AND ECONOMIES OF SCALE

7. 4-7 Efficiency and Learning Effects  Learning effects are cost savings that come from learning by doing.  Equally important, management in new manufacturing facilities typically learns over time how best to run the new operation.  Learning effects tend to be more significant when a technologically complex task is repeated because there is more to learn. © 2013 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. EFFICIENCY AND ECONOMIES OF SCALE

8. 4-8 EFFICIENCY AND ECONOMIES OF SCALE The Experience Curve © 2013 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 refers to the systematic lowering of the cost structure, and consequent unit costs reductions observed over the life of the product.  A company is likely to have a significant cost advantage over its competitors because of its superior efficiency once it is down the experience cost curve.

9. 4-9 EFFICIENCY AND ECONOMIES OF SCALE  Three reasons managers should not become complacent about efficiency-based cost advantages derived from experience effects: 1)Neither learning effects nor economics of scale are sustained forever. 2)Cost advantages gained from experience effects can be made obsolete by development of new technology. 3)Producing a high volume of output does not necessarily give a company a lower cost structure. © 2013 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.

10. Learning Objective:After reading this chapter you should be able to explain how an enterprise can use functional level strategies to improve its quality. Learning Objective: After reading this chapter you should be able to explain how an enterprise can use functional level strategies to improve its quality. © 2013 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 AND EFFICIENCY  Marketing strategy refers to the position that a company takes with regard to pricing, promotion, advertising, product design, and distribution.  Customer defection rate is the percentage of a company’s customers who defect each year.

11. 4-11 © 2013 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 AND EFFICIENCY  The longer a customer stays with the company, the more the fixed costs of acquiring the customer can be distributed over repeat purchases, boosting the profit per customer.  Another economic benefit of long-term customer loyalty is the free advertising that customers provide for the company.  A central component of developing a strategy to reduce defection rates is to identify and determine why the customer defected and act on that information.

12. 4-12 Learning Objective:After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its innovation. Learning Objective: After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its innovation. © 2013 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. MATERIALS MANAGEMENT, JUST-IN- TIME, AND EFFICIENCY  Because there are so many sources of cost in the production process, the potential for reducing costs through more efficient materials- management strategies is enormous.  The Just-in-time (JIT) inventory system is designed to economize on inventory holding costs.

13. 4-13 MATERIALS MANAGEMENT, JUST-IN- TIME, AND EFFICIENCY © 2013 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.  Hiring strategy: Many companies that are well known for their productive employment devote considerable time to hiring people who have a positive attitude about working hard and interacting with customers.  Employee training: Employees who are highly skilled can perform tasks faster and more accurately, and are more likely to learn complex tasks.

14. 4-14 MATERIALS MANAGEMENT, JUST-IN- TIME, AND EFFICIENCY © 2013 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.  Self management teams: A typical self- management team is comprised of 5-15 employees who produce an entire product or undertake an entire task.  Pay for performance: Some of the most efficient companies, mindful that cooperation among employees is necessary to realize productive gains, link pay to group or team performance.

15. 4-15 MATERIALS MANAGEMENT, JUST-IN- TIME, AND EFFICIENCY © 2013 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. Infrastructure and Efficiency  A company’s infrastructure (culture, style of strategic, etc.) determines the context within which all other value creation activities take place.  Achieving superior efficiency requires an organization-wide commitment and an ability to ensure close cooperation among functions.  Top management, by exercising leadership and influencing the infrastructure, plays a significant role in this process.

16. 4-16 ACHIEVING SUPERIOR QUALITY  Superior quality provides a company with two advantages: 1)A strong reputation for quality allows a company to differentiate its products from those offered by rivals, thereby creating more utility in the eyes of the customers. 2)Eliminating defects or errors from the production process reduces waste, increases efficiency, lowers the cost structure of the company, and increases profitability.

17. 4-17 ACHIEVING SUPERIOR QUALITY Implementing Reliability Improving Methodologies 1)Senior managers must agree to a quality improvement program and communicate its importance to the organization. 2)Individuals must be identified to lead the program. 3)Leaders must preach the need to identify defects that arise from processes, trace them to their source, find out what caused the defects, and make corrections so they do not recur. 4)Create a metric that can measure quality. © 2013 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. (continued)

18. 4-18 ACHIEVING SUPERIOR QUALITY Implementing Reliability Improving Methodologies 5)Set a challenging quality goal and create incentives for reaching it. 6)Include shop floor employees as a source of ideas for improving a product’s quality. 7)Work with major suppliers to have them improve the quality of the parts they supply. 8)Design products with fewer parts. 9)Require organization-wide commitment and substantial cooperation among functions. © 2013 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.

19. Learning Objective:After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its innovation. Learning Objective: After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its innovation. ACHIEVING SUPERIOR INNOVATION © 2013 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.  Only 10% to 20% of major R&D projects give rise to commercial products. Why only 10% to 20%? Demand is uncertain Technology is poorly commercialized Poor position strategy Marketing technology when there is no demand Products are slowly marketed

20. 4-20 ACHIEVING SUPERIOR INNOVATION © 2013 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.  To reduce the high failure rate associated with innovation is to make sure there is a tight integration between R&D, production, and marketing. This ensures that: 1)Product development projects are driven by customer needs. 2)New products are designed for ease of manufacture. 3)Development costs are reduced. 4)The time it takes to develop a product and bring it to market is minimized. 5)Close integration between R&D and marketing is achieved.

21. 4-21 ACHIEVING SUPERIOR INNOVATION  A number of attributes appear to be important in order for a product development team to function effectively and meet all development milestones: 1)Have a heavyweight project manager. 2)The team should be composed of at least one member from each key function or position. 3)The team members should be physically co-located to create a sense of camaraderie and facilitate communication. 4)Managers should proactively learn from their experiences with product development (learn from past successes and failures). © 2013 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.

22. 4-22 Learning Objective:After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its customer responsiveness. Learning Objective: After reading this chapter you should be able to explain how an enterprise can use functional level strategies to increase its customer responsiveness. ACHIEVING SUPERIOR RESPONSIVENESS TO CUSTOMERS © 2013 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.  To achieve superior responsiveness to customers, a company must give customers: What they want, when they want it, and at a price they are willing to pay, so long as the company’s long-term profitability is not compromised.

23. 4-23 ACHIEVING SUPERIOR RESPONSIVENESS TO CUSTOMERS  Customer responsiveness is an important differentiating attribute that can help to build brand loyalty.  Strong product differentiation and brand loyalty give a company more pricing options.  A company must listen to its customers to determine their needs.  Then it must find better ways to satisfy those needs. © 2013 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.

24. 4-24 ACHIEVING SUPERIOR RESPONSIVENESS TO CUSTOMERS  The entire company needs to be motivated to focus on the customer.  The means to this end are: Customer focus must begin at the top of the organization with strong leadership that is customer responsive. All employees must see the customer as the focus of their activity. Reward employees for satisfying customers. Listen to the customers; solicit their feedback. © 2013 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.

25. 4-25 ACHIEVING SUPERIOR RESPONSIVENESS TO CUSTOMERS  Once customer focus is an integral part of the company, the next requirement is to satisfy the customer needs that have been identified: Differentiate the product by customizing it, where possible, to the requirements of the individual customer. Reducing the time it takes to respond to or satisfy customer needs. © 2013 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. Satisfying Customer Needs