Building Competitve Strategy Through Functional Level Strategy-revised (1)

8/3/2019 Building Competitve Strategy Through Functional Level Strategy-revised (1)

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Copyright Houghton Mifflin Company. All rights reserved. 4 | 1

Functional-Level Strategies

Functional-level strategies are strategies aimedat improving the effectiveness of a companysoperations.

Functional-level strategies aim to give a firmsuperior:

Efficiency

Quality

Innovation

Customer responsiveness

This leads to a competitive advantageand superior profitability and profit growth.


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Achieving Superior Efficiency

Economies of scaleUnit costreductionsassociated with a large scale of output

Ability to spread fixed costs over a large productionvolume

Ability of companies producing in large volumes toachieve a greater division of labor and specialization

Specialization has favorable impact on productivity byenabling employees to become very skilled at performinga particular task

Diseconomies of scaleUnit costincreasesassociated with a large scale of output Increased bureaucracy associated with large-scale

enterprises

Resulting managerial inefficiencies


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Economies and Diseconomiesof Scale

Figure 4.2


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Learning Effects

Learning Effects are cost savings that comefrom learning by doing.

Labor productivityLearn by repetition how to best carry out the task

Management efficiencyLearn over time how to best run the operation

Realization of learning effects implies adownward shift of the entire unit cost

curveAs labor and management become more efficientover time at every level of output


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The Impact of Learning andScale Economies on Unit Costs

Figure 4.3


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The Experience Curve

The Experience Curve is the systematic loweringof the cost structure and consequent unit costreductions that occur over the life of a product

Strategic significance of the experience curve:Increasing a companys product volume and

market share will lower its cost structure

relative to its rivals.


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The Experience Curve

Figure 4.4



Flexible Manufacturingand Mass Customization

Flexible Manufacturing TechnologyLean Production technology that:

Reduces setup times for complexequipment

Improves scheduling to increaseuse of individual machines Improves quality control at all

stages of the manufacturing process Increases efficiency and lowers unit costs

Mass CustomizationAbility to use flexible manufacturing technology toreconcile two goals that were once thought incompatible:

Low cost and

Differentiation through product customization



Tradeoff Between Costsand Product Variety

Figure 4.5



Marketing

Marketing strategy refers to the position that acompany takes regarding: Pricing

Promotion

Advertising

Product Design

Distribution

Marketing strategy can reduce costs by loweringcustomer defection rates and increasing loyalty



The Relationship Between CustomerLoyalty and Profit per Customer

The longer a company holds on to a customer the greaterthe volume of customer-generated unit sales that offset fixed

marketing costs and lowers the average cost of each sale.

Figure 4.6



Materials Management encompasses the activitiesnecessary to get inputs and components to a productionfacility, through the production process, and through thedistribution system to the end-user Many sources of cost in this process

Significant opportunities for cost reduction through moreefficient materials management

Just-in-Time (JIT) Inventory System to economize holding costs:

Have components arrive to manufacturing just prior to need inproduction process

Have finished goods arrive at retail just prior to stock out Supply Chain Management is the task of managing the

flow of inputs to a companys processes to minimizeinventory holding and maximize inventory turnover

Materials Management andSupply Chain



Research and Development (R&D)Roles of R&D in helping a company achieve greaterefficiency and lower cost structure:

1. Boost efficiency by designing products that

are easy to manufacture Reduce the number of parts that make up a productreduces assembly time

Design for manufacturingrequires close coordinationwith production and R&D

2. Help a company have a lower cost structure bypioneering process innovations Reduce process setup times

Flexible manufacturing

An important source of competitive advantage

R&D Strategy



Human Resource Strategy

Hiring strategyAssures that the people a company hires have the attributesthat match the strategic objectives of the company

Employee trainingUpgrades employee skills to perform tasks faster and moreaccurately

Self-managing teams

Members coordinate their own activities and make their ownhiring, training, work, and reward decisions

Pay for performanceLinking pay to individual and team performance can help toincrease employee productivity

Goal: to improve employee productivity.



Information Systems

Information systemsimpact on productivity iswide-ranging:

Web-based informationsystems can automate manyactivities

Automates interactions

between Company and customers

Company and suppliers



A companys structure, culture, style ofstrategic leadership, and control system: Determines the context within which all other value

creation activities take place

Is especially important in building a companywidecommitment to efficiency

Articulates a vision for all functions and coordinateacross functions

Achieving superior performance requires anorganization-wide commitment.

Top management plays a major role in this process.

Infrastructure



Achieving Superior Quality

1. Quality as reliabilityThey do the jobs they were designed for and do it well

2. Quality as excellencePerceived by customers to have superior attributes

A strong reputation for quality allows acompany to differentiateits products.

Eliminating defects or errors reduces waste,increases efficiency, and lowers the coststructure increasing profitability.

Quality can be thought of in terms of twodimensions:



Improving Quality as Reliability

TQM is based on the following five-step chain

reaction:1. Improved quality means that costs

decrease.2. As a result, productivity also improves.

3. Better quality leads to higher marketshare and allows increased prices.4. This increases a companys profitability.5. Thus the company creates more jobs.

Six Sigma methodology: the principal toolnow used to increase reliability, which is a directdescendant of Total Quality Management (TQM)


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Implementing Reliability ImprovementMethodologies

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

Imperatives that stand outamong companies that havesuccessfully adopted quality improvement methods:


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Improving Quality as Excellence

Developing Superior Attributes:

Learn which attributes are most important tocustomers

Design products and associate services toembody the important attributes

Decide which attributes to promote and howbest to position them in consumers minds

Continual improvement in attributes and

development of new-product attributes

A product is a bundle of attributes and can bedifferentiated by attributes that collectively defineproduct excellence.


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Attributes Associated with aProduct Offering

Table 4.3


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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

Building distinctive competencies that result ininnovation is the most important source ofcompetitive advantage.

Successful new product launches aremajor drivers of superior profitability.


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The High Failure Rateof Innovation

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

Being slow to market

Failure rate of innovative new products is highwithevidence suggesting that only 10 to 20% of major R&Dprojects give rise to a commercially viable product.


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Building Competencies inInnovation

1. Building skills in basic and applied research

2. Project selection and management

Using the product development funnelIdea generation Project refinement Project execution

3. Achieving cross-functional integration1. Driven by customer needs 2. Design for manufacturing

3. Track development costs 4. Minimize time-to-market5. Close integration between R&D and marketing

4. Using product development teams5. Partly-parallel development process

To compress development time & time-to-market

Companies can take a number of steps to buildcompetencies in innovation and reduce failures:


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The Development Funnel

Figure 4.7


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Sequential and Partly ParallelDevelopment Processes

Figure 4.8

Reduceddevelopment time& time-to-market


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Achieving SuperiorResponsiveness to Customers

Focusing on the customer Satisfying customer needs Customization (Tailor to

unique needs of groups

of customers) Response time (increasedspeed; premium pricing)

Customer responsiveness:giving customers whatthey want, when they want it, and at a price they are willingto pay -as long as the companys long-term profitability isnot compromised.

Building Competitve Strategy Through Functional Level Strategy-revised (1)

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