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.

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

17. The Relationship Between Customer Loyalty and Profit per Customer

18. 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

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

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

21. 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

22. Primary Roles of Value Creation Functions in Achieving Superior Efficiency

23. 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

24. 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

25. The Role Played by Different Functions in Implementing TQM

26. 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

27. Attributes Associated with a Product Offering

28. 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

29. 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

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

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

32. The Development Funnel

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

34. Sequential and Partly Parallel Development Processes

35. Function Roles for Achieving Superior Innovation

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

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