Building Competitive Advantage

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Building Competitive Advantage

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Building Competitive Advantage

Functional Level Strategy

Those aimed at improving the effectiveness of a companys operations and ability to attain superior efficiency, quality, innovation and customer responsiveness.Functional level strategy

The roots of competitive advantage

The figure illustrates the relationship of a companys strategies, distinctive competencies, and competitive advantage. Distinctive competencies shape the function level strategies that the company pursues, which lead to competitive advantage and superior profitability.however it is also very important to realize that the strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities of the company, thereby enhancing the distinctive competencies of the enterprise. Note that a companys ability to attain superior efficiency, quality, innovationa, and customer responsiveness will determine if its product offering is differentiated from that of rivals, and if it has a low cost structure.

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Economies of Scalecost reduction gained through mass producing a standardized output discount on bulk purchases of raw material inputs and component partsspreading the fixed production cost over a large production volumecost savings associated with distributing marketing and advertising costs over a large volume of output

Achieving Superior Efficiency

One sources of economies of scale is the ability to spread fixed cost over a large production volumeAnother source of scale is the ability of companies producing in large volumes to achieve a greater division of labor and specialization.Specialization is said to have a favorable impact on productivity, primarily because it enables employees to become very skilled at performing a particular task.

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Economies and diseconomies of scale

It illustrates that as accompany increases its output, unit cost decrease.This process comes to an end at an output Q1, where all scale of economies as exhausted. Indeed, at outputs of greater than Q1, the company may encounter diseconomies of scale.

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Occur because of increased bureaucracy associated with large-scale enterprises and the managerial inefficiency that can result.Information about operating matters can accidentally and deliberately be distorted by the number of managerial layers through which the information must travel to reach top decision maker. The result is poor decision making.

Diseconomies of scale

Learning Effectscost savings that come from learning by doing.Achieving Superior Efficiency

The impact of learning and scale economies on unit cost

Economies of scale imply a movement along the curve. The realization of learning effects implies a downward shift of the entire curve as both labor and management become more efficient over time at performing their task at every level of output. No matter how complex the task is, however, learning effects typically die out after a limited period of time. Indeed, it has been suggested that they are very important only during the start-up period of a new process, and cease after 2 or 3 years. When changes occur to a companys production systemas a result of merger or the use of new information technologythe learning process must begin again.

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Experience Curverefers to the systematic lowering of the cost structure, and consequent unit cost reductions, that have been observed to occur over the life of a product.Achieving Superior Efficiency

According to this concept, per-unit manufacturing costs for a product typically decline by some characteristic amount each time accumulated output of the product is doubled.

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The experience curve

Economies of Scale and learning effects underlie the experience-curve phenomenon. Put simply, as a company increases the accumulated volume of its output over time, it is able to realize both economies of scale and learning effects. The strategic significance of the experience curve is clear: increasing a companys volume and market share will lower its cost structure relative to its rivals.

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Because neither learning effect nor economies of scale are sustained forever.Changes that are always taking place in the external environment disrupt a companys business model, so cost advantages gained from experience effect can be made obsolete by the development of new technologies.Producing a high volume of output does not necessarily give a company a lower cost structure.

Why managers should not become complacent about efficiency-based cost advantages derived from experience curve?

Flexible Production Systems, and Mass CustomizationFlexible Production Technology- lean production,

Mass Customization- the companys ability to use flexible manufacturing technology to reconcile two goals that were once thought to be incompatible: low cost and differentiation through product customization.

Achieving Superior Efficiency

MarketingMarketing Strategy- refers to the position that a company takes with regards to pricing, promotion, advertising, product design and distribution.

**Customer defection rate(churn rate)- the percentage of a companys customers who defect every year to competitors.Achieving Superior Efficiency

Defection rates are determined by customer loyalty, which in turn is a function of the ability of a company to satisfy a customer. Because acquiring a new customer entails one time fixed cost for advertising, promotions, and related tasks, there is direct relationship between defection rate and cost.

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The Relationship between Customer Loyalty and Profit per Customer

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Materials Managementencompasses the activities necessary to get inputs and components to a production facility(including the cost of purchasing inputs), through the production process, and out through a distribution system to the end user.

Achieving Superior Efficiency

JUST-IN-TIME(JIT)The major cost saving comes from increasing inventory turnover, which reduces inventory holding cost, such as warehousing and storage cost, and the companys need for working capital.The drawback of JIT system is that they leave a company without a buffer stock of inventory.

Improving the efficiency of the materials management function typically require sthe adoption of a just-in-time(JIT) inventory system which is designed to economize on inventory holding costs by scheduling components to arrive at a manufacturing plant just in time to enter the production process, or to have goods arrive at a retail store only when the stock is almost depleted.The major cost saving comes from increasing inventory turnover, which reduces inventory holding cost, such as warehousing and storage cost, and the companys need for working capital.The drawback of JIT system is that they leave a company without a buffer stock of inventory. Although buffer stocks are expensive to store, thay can help a company prepare for storages on inputs brought about by disruption among suppliers, and can help a company respond quickly to increases in demand.

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R&D StrategyCan boost efficiency by designing products that are easy to manufacture.Pioneering process innovation

Achieving Superior Efficiency

Human Resources StrategyHiring StrategyEmployee trainingSelf Managing Teams Pay per PerformanceAchieving Superior Efficiency

Hiring Strategy. It is important to be sure that the hiring strategy of the company is consistent with its own internal organization, culture and strategic priorities. The people a company hires should have attributes that match the strategic objectives of the company.Employee Training.Those who are highly skilled can perform task faster and more accurately, and are more likely to learn the complex tasks associated with many modern production methods than individuals with lesser skills. Training upgrades employees skill levels, bringing the company productivity-related efficiency gains from learning and experimentations.Self-managing teams. Whose members coordinate their own activities and make their own hiring, training, work and reward decision.Pay for performance. Linking pay to performance. Define what kind of job performance is to be rewarded and how.

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Information SystemsBy using Web-based programs to automate customers and supplier interactions, they can substantially reduce the number of people required to manage these interfaces, thereby reducing costs.

Achieving Superior Efficiency

InfrastructureStructureCultureStyle of strategic leadership, and Control system

Achieving Superior Efficiency

A companys infrastructurethat is, its structure, culture, style of strategic leadership, and control systemdetermines the context within which all over value creation activities take place.

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Primary roles of value creation function in achieving superior efficiency

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Quality as Reliability

Quality as ExcellenceAchieving superior quality

A strong reputation

Eliminating defectsTwo advantages that superior quality provides

A strong reputation for quality allows a company to differentiate its products from those offered by rivals, thereby creating more utility in the eyes off customers, and giving the company the option of charging premium price for its products.Eliminating defects or errors from the production process reduces waste , increases efficiency, lowers the cost structure of the company and increases profitability.

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The Philosophy underlying Total Quality Management:Improved quality means that costs decrease because less rework, fewer mistakes, fewer delays, and better use of time and materials.As a result