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4. Building Competitive Advantage Through Functional-Level Strategy

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Value Chain Perspective

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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

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Production and Efficiency

A typical long-run unit-cost curve:

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Diseconomies

Why do diseconomiesof scale occur?

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Production and Efficiency: Learning Effects

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Production and Efficiency: The Experience Curve

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Experience Curve 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

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Production and Efficiency: High Volume≠ Cost Advantage

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Manufacturing and Mass Customization

Flexible manufacturing technology (lean production) Reduced setup times Increased machine utilization Improved quality control Lower inventory levels

Mass customization Low cost and product customization

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Production and Efficiency: Flexible Manufacturing

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Marketing and Efficiency

Marketing strategy: Product design Advertising Promotion Pricing Distribution

Customer retention

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The Relationship Between Average Unit Costs and Customer Defection Rates

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The Relationship Between Customer Loyalty and Profit per Customer

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Materials Management, JIT, and Efficiency

Materials management Getting materials into and through

the production process and out through the distribution system to the end user.

Just-In-Time (JIT) Reduce inventory holding costs by having

materials arrive JIT to enter the production process.

JIT risk: There are no buffer stocks for nondelivery or unanticipated increases in demand.

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R&D Strategy and Efficiency

Design easy-to-manufacture products Reduce numbers of parts per unit. Reduce assembly time. Closely coordinate R&D

and production activities. Pioneer process innovations

Innovations create competitive advantage through gains in process efficiencies.

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Human Resource Strategy and Efficiency

Ways to increase employee productivity and lower unit costs: Provide training that upgrades employee skills. Establish self-managing teams

to gain a more flexible work forceand increase productivity.

Use pay-for-performance incentives for teams to encourage meeting productivity and quality goals.

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Information Systems, the Internet, and Efficiency

Benefits of moving operations to the Internet: Cost savings in ordering and customer service. Reduced human resource requirements. Lowered internal and back-office costs. Increased employee productivity.

For example, Cisco and Dell

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Infrastructure (Leadership) and Efficiency

Achieving superior efficiency requires a company-wide commitment built through top management leadership in: Articulating the vision. Facilitating cross-

functional cooperation.

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Summary

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Achieving Superior Quality Total Quality Management (TQM):

All company operations focused on improving product and service quality.

Deming’s Five-Step “Chain Reaction”:1. Improved quality reduces costs.2. Improved productivity.3. Higher market share.4. Increased profitability.5. More jobs created.

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Deming’s Revolutionary Ideas on Quality

Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships. The bulk of the causes of low quality and productivity belong to the system and thus lie beyond the power of the work force.

Drive out fear, so that everyone may work effectively for the company Cease dependence on inspection to achieve quality. Eliminate the need for

inspection on a mass basis by building quality into the product in the first place. End the practice of of awarding business on the basis of price tag. Instead, minimize

total cost. Improve constantly and forever the system of production and service, to improve

quality and productivity, and thus constantly reduce costs. Break down barriers between departments. Put everybody in the company to work to accomplish the transformation. The

transformation is everybody’s job. Institute training on the job to provide tools. Six sigma – TQM without the philosophy?

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Textbook ideas on implementing TQM

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 Improve supplier relations Design for ease of manufacture Break down barriers between

functions

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Attributes Associated with a Product Offering

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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

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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

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Failure to Innovate

Uncertainty Quantum innovation Incremental innovation

Poor commercialization Poor positioning strategy Technological myopia Slow to market

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The Development Funnel

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Achieving Superior Innovation

Building competencies in innovation: Building skills in basic and applied

research Project selection and management Cross-functional integration Product development teams Partly parallel development

process

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Sequential and Partly Parallel Development Processes

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Achieving Superior Customer Responsiveness

Developing a customer focus: Top leadership commitment to customers. Employee attitudes toward customers. Bringing customers into the company.

Satisfying customer needs: Customization of the features of products

and services to meet the unique need of groups and individual customers.

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Responsiveness ctd.

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Exercise You are the management of a startup that

produces disk drives in an industry with short life cycles, intense price competition, high fixed costs, and substantial economies of scale. OEMs put a lot of pressure on you to deliver products on time

What functional competencies are the most important to build?

How will you design your internal processes that ensure those competencies are built?

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Closing Case

Reinventing Levi’s