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 ScaleExperience

• 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