1. Building Competitive Advantage Through Functional-Level Strategy
Chapter Four
Building Competitive Advantage Through Functional-Level Strategy

2. Functional-Level Strategies
Functional-level strategies are strategies aimed at improving the effectiveness of a company’s operations.
Improves company’s ability to attain superior:
Efficiency Quality
Innovation Customer responsiveness
Increases the utility that customers receive:
Through differentiation  Creating more value
Lower cost structure than rivals
This leads to a competitive advantage and superior profitability and profit growth.
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3. Achieving Superior Efficiency
Functional steps to increasing efficiency:
Economies of Scale
Learning Effects
Experience Curve
Flexible Manufacturing and Mass Customization
Marketing
Materials Management and Supply Chain
R&D Strategy
Human Resource Strategy
Information Systems
Infrastructure
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4. Dangers of Complacency Derived from Experience Effects
Managers should not become complacent about efficiency-based cost advantages derived from experience effects:
The experience curve is likely to bottom out
So further unit cost reductions may be hard to come by
New technologies can make experience effects obsolete
From changes always taking place in the external environment
Flexible manufacturing technologies may allow small manufacturers to produce at low unit costs
Achieving both low cost and differentiation through customization
Some technologies may not produce lower costs with higher volumes of output
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5.  Flexible Manufacturing and Mass Customization
Flexible Manufacturing Technology
A range of manufacturing technologies that:
Reduce setup times for complex equipment
Improves scheduling to increase use of individual machines
Improves quality control at all stages of the manufacturing process
Increases efficiency and lowers unit costs
Mass Customization
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
Low cost and
Differentiation through product customization
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6. Copyright © Houghton Mifflin Company. All rights reserved.
 Marketing
Marketing
Marketing strategy
Refers to the position that a company takes regarding
Pricing  Promotion  Advertising
Distribution  Product design
Customer defection rates
Percentage of customers who defect every year
Defection rates are determined by customer loyalty
Loyalty is a function of the ability to satisfy customers
Reducing customer defection rates and building customer loyalty can be major sources of a lower cost structure.
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7.  Materials Management and Supply Chain
The activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user
Many sources of cost in this process
Significant opportunities for cost reduction through more efficient materials management
Just-in-Time (JIT) Inventory System
System designed to economize on inventory holding costs:
Have components arrive to manufacturing just prior to need in production process
Have finished goods arrive at retail just prior to stock out
Supply Chain Management
Task of managing the flow of inputs to a company’s processes to minimize inventory holding and maximize inventory turnover
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8. Copyright © Houghton Mifflin Company. All rights reserved.
 R&D Strategy
Research and Development (R&D)
Roles of R&D in helping a company achieve greater efficiency and lower cost structure:
Boost efficiency by designing products that are easy to manufacture
Reduce the number of parts that make up a product –reduces assembly time
Design for manufacturing – requires close coordination with production and R&D
Help a company have a lower cost structure by pioneering process innovations
Reduce process setup times
Flexible manufacturing
An important source of competitive advantage
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9.  Human Resource Strategy
The key challenge of the Human Resource function: improve employee productivity.
Hiring strategy
Assures that the people a company hires have the attributes that match the strategic objectives of the company
Employee training
Upgrades employee skills to perform tasks faster and more accurately
Self-managing teams
Members coordinate their own activities and make their own hiring, training, work, and reward decisions.
Pay for performance
Linking pay to individual and team performance can help to increase employee productivity
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10. Copyright © Houghton Mifflin Company. All rights reserved.
 Information Systems
Information systems’ impact on productivity is wide-ranging:
Web-based information systems can automate many of the company activities
Potentially affects all the activities of a company
Automates interactions between
Company and customers
Company and suppliers
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11. Copyright © Houghton Mifflin Company. All rights reserved.
 Infrastructure
A Company’s Infrastructure:
The company’s structure, culture, style of strategic leadership, and control system:
Determines the context within which all other value creation activities take place
Strategic leadership is especially important in building a companywide commitment to efficiency
The leadership task is to articulate a vision for all functions and coordinate across functions
Achieving superior performance requires an organization-wide commitment Top management plays a major role in this process.
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12. Achieving Superior Quality
Quality can be thought of in terms of two dimensions and gives a company two advantages:
Quality as reliability
They do the jobs they were designed for and do it well
Quality as excellence
Perceived by customers to have superior attributes
A strong reputation for quality allows a company to differentiate its products.
Eliminating defects or errors reduces waste, increases efficiency, and lowers the cost structure – increasing profitability.
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13. Improving Quality as Reliability
Six Sigma methodology: the principal tool now used to increase reliability and is a direct descendant of Total Quality Management (TQM)
TQM is based on the following five-step chain reaction:
Improved quality means that costs decrease.
As a result, productivity also improves.
Better quality leads to higher market share and allows increased prices.
This increases a company’s profitability.
Thus the company creates more jobs.
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14. Deming’s Steps in a Quality Improvement Program
A company should have a clear business model.
Management should embrace philosophy that mistakes, defects, and poor quality are not acceptable.
Quality of supervision should be improved.
Management should create an environment in which employees will not be fearful of reporting problem or making suggestions.
Work standards should include some notion of quality to promote defect-free output.
Employees should be trained in new skills.
Better quality requires the commitment of everyone in the workplace.
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15. Implementing Reliability Improvement Methodologies
Imperatives that stand out among companies that have successfully adopted quality improvement methods:
Build organizational commitment to quality
Create quality leaders
Focus on the customer
Identify processes and the source of defects
Find ways to measure quality
Set goals and create incentives
Solicit input from employees
Build long-term relationships with suppliers
Design for ease of manufacture
Break down barriers among functions
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16. Improving Quality as Excellence
A product is a bundle of attributes and can be differentiated by attributes that collectively define product excellence.
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
Continual improvement in attributes and development of new-product attributes
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17. Attributes Associated with a Product Offering
Table 4.3
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18. Achieving Superior Innovation
Building distinctive competencies that result in innovation is the most important source of competitive advantage.
Innovation can:
Result in new products that satisfy customer needs better
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.
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19. The High Failure Rate of Innovation
Failure rate of innovative new products is high with evidence suggesting that only 10 to 20% of major R&D projects give rise to a commercially viable product.
Most common explanations for failure:
Uncertainty
Quantum innovation – radical departure with higher risk
Incremental innovation – extension of existing technology
Poor commercialization
Definite demand for product
Product not well adapted to customer needs
Poor positioning strategy
Good product but poorly positioned in the marketplace
Technological myopia
Technological “wizardry” vs. meeting market requirements
Slow to market
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20. Building Competencies in Innovation
Companies can take a number of steps to build competencies in innovation and reduce failures:
Building skills in basic and applied research
Project selection and management
Using the product development funnel
» Idea generation » Project refinement » Project execution
Achieving cross-functional integration
Driven by customer needs Design for manufacturing
Track development costs Minimize time-to-market
Close integration between R&D & marketing
Using product development teams
Partly-parallel development process
 To compress development time & time-to-market
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21. Achieving Superior Responsiveness to Customers
Customer responsiveness: giving customers what they want, when they want it, and at a price they are willing to pay - as long as the company’s long-term profitability is not compromised.
Focusing on the customer
Demonstrating leadership
Shaping employee attitudes
Bringing customers into the company
Satisfying customer needs
Customization
Tailor to unique needs of groups of customers
Response time
Increase speed » Premium pricing
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