Building Competitive Advantage through Functional Level Strategy Chapter 4

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

The Roots of Competitive Advantage

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

Economies and Diseconomies of Scale

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

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

The Experience Curve

The Impact of Learning and Scale Economies on Unit Costs

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.

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

Unit Production Costs in an Integrated Mill and Mini-Mill

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

Tradeoff Between Costs and Product Variety

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.

Achieving Superior Efficiency (cont’d) Marketing Marketing strategy: pricing, promotion, advertising, product design, distribution Reducing customer defection rates and building customer loyalty

The Relationship Between Customer Loyalty and Profit per Customer

Achieving Superior Efficiency (cont’d) Materials management Getting inputs and components to a production facility, through the production process, and out through a distribution system to the end user Just-in-time (JIT) inventory system Supply chain management

Achieving Superior Efficiency (cont’d) R&D strategy Designing products that are easy to manufacture Process innovations

Achieving Superior Efficiency (cont’d) Human resource strategy: employee productivity Hiring Training Self-Managing Teams Pay for Performance

Achieving Superior Efficiency (cont’d) Information systems and the Internet Automating interactions between Company and customers Company and suppliers Infrastructure Company structure, culture, style of strategic leadership, and control system determine context of all value creation activities

Primary Roles of Value Creation Functions in Achieving Superior Efficiency

Achieving Superior Quality Attaining superior reliability Total quality management (TQM) Improved quality means that costs decrease As a result, productivity improves Better quality leads to higher market share and allows increased prices This increases profitability More jobs are created

Steps in a TQM Program Have a clear business model Mistakes and defects should be unacceptable Supervision should be improved Employees should not be fearful of reporting problem or making suggestions Work standards should include quality Employees should be trained in new skills Better quality requires company-wide commitment

The Role Played by Different Functions in Implementing TQM

Implementing Reliability Improvement Methodologies Build organizational commitment to quality Focus on the customer Find ways to measure quality Set goals and create incentives Solicit input from employees Identify defects and trace them to source Work with suppliers Design for ease of manufacture Break down barriers among functions

Attributes Associated with a Product Offering

Achieving Superior Quality (cont’d) Developing Superior Attributes Learn which attributes are most important to customers Design products and associate services to embody the important attributes Decide which attributes to promote and how best to position them in consumers’ minds Monitor competition for improvement in attributes and development of new attributes

Achieving Superior Innovation Innovation can Result in new products that better satisfy customer needs Improve the 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

The High Failure Rate of Innovation Uncertainty Quantum innovation vs. incremental innovation Poor commercialization Poor positioning strategy Technological Myopia Slow to Market

Achieving Superior Innovation (cont’d) Building Competencies in Innovation Building skills in basic and applied research Project selection and management

The Development Funnel

Achieving Superior Innovation (cont’d) Building Competencies in Innovation (cont’d) Cross-functional integration Product development teams Partly parallel development processes

Sequential and Partly Parallel Development Processes

Function Roles for Achieving Superior Innovation

Achieving Superior Responsiveness to Customers Customer focus Leadership Employee attitudes Bringing customers into the company Satisfying customer needs Customization Response time

The Primary Role of Different Functions in Achieving Superior Responsiveness to Customers