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Copyright © 2001 Houghton Mifflin Company. All rights reserved.

Chapter 5Chapter 5

Building Competitive Advantage Building Competitive Advantage Through Functional-Level StrategyThrough Functional-Level Strategy

StrategicStrategic Charles W. L. HillCharles W. L. Hill

ManagementManagement Gareth R. JonesGareth R. Jones

Fifth EditionFifth Edition

PowerPoint Presentation PowerPoint Presentation by Charlie Cookby Charlie Cook

An Integrated ApproachAn Integrated Approach

Copyright © 2001 Houghton Mifflin Company. All rights reserved. 5-2

Production and EfficiencyProduction and Efficiency

Economies of scaleEconomies of scale Lower unit costs due to large Lower unit costs due to large

scale production volumes.scale production volumes.

Learning effectsLearning effects Cost reductions due to Cost reductions due to

learning by doing.learning by doing.

The experience curveThe experience curve Systematic unit-cost reductions that are the result of Systematic unit-cost reductions that are the result of

accumulated output.accumulated output.


FIGURE 5.1

Production and Efficiency: Production and Efficiency: Economies of ScaleEconomies of Scale

A typical long-run A typical long-run unit-cost curve:unit-cost curve:


FIGURE 5.2

Production and Efficiency: Production and Efficiency: Learning EffectsLearning Effects

Economies of scaleEconomies of scaleand learning effects:and learning effects:


FIGURE 5.3

Production and Efficiency: Production and Efficiency: The Experience CurveThe Experience Curve

A typical experience curve:A typical experience curve:


FIGURE 5.4

Production and Efficiency:Production and Efficiency: The Experience The Experience CurveCurve

Unit production costs in an Unit production costs in an integrated steel mill and a minimill.integrated steel mill and a minimill.


Production and Efficiency: Production and Efficiency: Manufacturing and Mass Manufacturing and Mass CustomizationCustomizationFlexible manufacturing technology (lean production)Flexible manufacturing technology (lean production)

Reduced setup timesReduced setup times Increased machine utilizationIncreased machine utilization Improved quality controlImproved quality control Lower inventory levelsLower inventory levels

Mass customizationMass customization Low cost and product customizationLow cost and product customization

Flexible machine cellsFlexible machine cells Increased variety of operationsIncreased variety of operations


FIGURE 5.5

Production and Efficiency: Flexible Production and Efficiency: Flexible ManufacturingManufacturing

The tradeoff betweenThe tradeoff betweencosts and product varietycosts and product variety


Marketing and EfficiencyMarketing and Efficiency

Marketing strategy:Marketing strategy: Product designProduct design AdvertisingAdvertising PromotionPromotion PricingPricing DistributionDistribution


FIGURE 5.6

The Relationship Between The Relationship Between Average Unit Costs and Average Unit Costs and CustomerCustomerDefection RatesDefection Rates


FIGURE 5.7

The Relationship Between The Relationship Between Customer Customer Loyalty and ProfitLoyalty and Profitper Customerper Customer


Materials Management, JIT, and Materials Management, JIT, and EfficiencyEfficiency

Materials managementMaterials management Getting materials into and through Getting materials into and through

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

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

arrive JIT to enter the production process.arrive JIT to enter the production process. JIT risk: There are no buffer stocks for nondelivery or JIT risk: There are no buffer stocks for nondelivery or

unanticipated increases in demand.unanticipated increases in demand.


R&D Strategy and EfficiencyR&D Strategy and Efficiency

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

and production activities.and production activities.

Pioneer process innovationsPioneer process innovations Innovations create competitive Innovations create competitive

advantage through gains in process efficiencies.advantage through gains in process efficiencies.


Human Resource Strategy and Human Resource Strategy and EfficiencyEfficiencyWays to increase employee productivity and Ways to increase employee productivity and lower unit costs:lower unit costs:

Provide training that upgrades employee skills.Provide training that upgrades employee skills. Establish self-managing teams Establish self-managing teams

to gain a more flexible work forceto gain a more flexible work forceand increased productivity.and increased productivity.

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


Information Systems, the Internet, Information Systems, the Internet, and Efficiencyand Efficiency

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


Infrastructure and EfficiencyInfrastructure and Efficiency

Achieving superior efficiency requires a Achieving superior efficiency requires a company-wide commitment built through top company-wide commitment built through top management leadership in:management leadership in:

Articulating the vision.Articulating the vision. Facilitating cross-Facilitating cross-

functional cooperation.functional cooperation.


The Primary Roles of Different Value The Primary Roles of Different Value Creation Functions in Achieving Superior Creation Functions in Achieving Superior EfficiencyEfficiencyValue Creation FunctionValue Creation Function Primary RolesPrimary Roles

Infrastructure Infrastructure (Leadership)(Leadership)

1.1. Provide company-wide commitment to efficiency.Provide company-wide commitment to efficiency.2.2. Facilitate cooperation among functions.Facilitate cooperation among functions.

ProductionProduction 1.1. Where appropriate, pursue economies of scale and learning Where appropriate, pursue economies of scale and learning economies.economies.

2.2. Implement flexible manufacturing systems.Implement flexible manufacturing systems.

MarketingMarketing 1.1. Where appropriate, adopt aggressive marketing to ride down the Where appropriate, adopt aggressive marketing to ride down the experience curve.experience curve.

2.2. Limit customer defection rates by building brand loyalty.Limit customer defection rates by building brand loyalty.

Materials ManagementMaterials Management 1.1. Implement JIT systems.Implement JIT systems.

R&DR&D 1.1. Design products for ease of manufacture.Design products for ease of manufacture.2.2. Seek process innovations.Seek process innovations.

Information SystemsInformation Systems 1.1. Use information systems to automate systems.Use information systems to automate systems.2.2. Use information systems to reduce the costs of coordination.Use information systems to reduce the costs of coordination.

Human ResourcesHuman Resources 1.1. Institute training programs to build skills.Institute training programs to build skills.2.2. Implement self-managing teams.Implement self-managing teams.3.3. Implement pay for performance.Implement pay for performance.

TABLE 5.1


Achieving Superior QualityAchieving Superior Quality

Total Quality Management (TQM):Total Quality Management (TQM): All company operations focused on improving All company operations focused on improving

product and service quality. product and service quality.

Deming’s Five-Step “Chain Reaction”:Deming’s Five-Step “Chain Reaction”:1.1. Improved quality reduces costs.Improved quality reduces costs.2.2. Improved productivity.Improved productivity.3.3. Higher market share.Higher market share.4.4. Increased profitability.Increased profitability.5.5. More jobs created.More jobs created.


Deming’s Fourteen Points to QualityDeming’s Fourteen Points to Quality

1.1. Create constancy of purpose toward improvement of product and service, with Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.the aim to become competitive and to stay in business, and to provide jobs.

2.2. Adopt the new philosophy. We are in a new economic age. Western Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.and take on leadership for change.

3.3. Cease dependence on inspection to achieve quality. Eliminate the need for 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.inspection on a mass basis by building quality into the product in the first place.

4.4. End the practice of of awarding business on the basis of price tag. Instead, End the practice of of awarding business on the basis of price tag. Instead, minimize total cost.minimize total cost.

5.5. Improve constantly and forever the system of production and service, to Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly reduce costs.improve quality and productivity, and thus constantly reduce costs.

TABLE 5.2Source: “Deming’s 14 points to Quality,” from Gabor, Andrea, The Man Who Discovered Quality: Howard W. Edwards Deming Brought the Quality Revolution to America–The Stories of Ford, Xerox, & GM (New York: Random House, 1990).



6.6. Institute training on the job.Institute training on the job.

7.7. Institute leadership. The aim of leadership should be to help people and Institute leadership. The aim of leadership should be to help people and machines and gadgets do a better job. Leadership of management is in machines and gadgets do a better job. Leadership of management is in need of an overhaul, as well as leadership of production workers.need of an overhaul, as well as leadership of production workers.

8.8. Drive out fear, so that everyone may work effectively for the company.Drive out fear, so that everyone may work effectively for the company.

9.9. Break down barriers between departments. People in research, design, Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.production and in use that may be encountered with the product or service.

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

TABLE 5.2 (cont’d) Source: “Deming’s 14 points to Quality,” from Gabor, Andrea, The Man Who Discovered Quality: Howard W. Edwards Deming Brought the Quality Revolution to America–The Stories of Ford, Xerox, & GM (New York: Random House, 1990).



11.11. (a) Eliminate work standards on the factory floor. Substitute leadership. (b) (a) Eliminate work standards on the factory floor. Substitute leadership. (b) Eliminate management by objective. Eliminate management by numbers, Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.numerical goals. Substitute leadership.

12.12. (a) Remove barriers that rob hourly workers of their right to pride of (a) Remove barriers that rob hourly workers of their right to pride of workmanship. The responsibility of supervisors must be changed from workmanship. The responsibility of supervisors must be changed from sheer numbers to quality. (b) Remove barriers that rob people in sheer numbers to quality. (b) Remove barriers that rob people in management and in engineering of their right to pride of workmanship.management and in engineering of their right to pride of workmanship.

13.13. Institute a vigorous program of education and self-improvement.Institute a vigorous program of education and self-improvement.

14.14. Put everybody in the company to work to accomplish the transformation. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.The transformation is everybody’s job.

TABLE 5.2 (cont’d) Source: “Deming’s 14 points to Quality,” from Gabor, Andrea, The Man Who Discovered Quality: Howard W. Edwards Deming Brought the Quality Revolution to America–The Stories of Ford, Xerox, & GM (New York: Random House, 1990).


The Role Played by Different Functions in The Role Played by Different Functions in Implementing TQMImplementing TQM

Value Creation FunctionValue Creation Function Primary RolesPrimary Roles


1.1. Provide leadership and commitment to quality.Provide leadership and commitment to quality.2.2. Find ways to measure quality.Find ways to measure quality.3.3. Set goals and create incentivesSet goals and create incentives4.4. Solicit input from employees.Solicit input from employees.5.5. Encourage cooperation.Encourage cooperation.

ProductionProduction 1.1. Shorten production runs.Shorten production runs.2.2. Trace defects back to source.Trace defects back to source.

MarketingMarketing 1.1. Focus on the customer.Focus on the customer.2.2. Provide customer feedback on quality.Provide customer feedback on quality.

Materials ManagementMaterials Management 1.1. Rationalize suppliers.Rationalize suppliers.2.2. Help suppliers implement TQM.Help suppliers implement TQM.3.3. Trace defects back to suppliers.Trace defects back to suppliers.

R&DR&D 1.1. Design products that are easy to manufacture.Design products that are easy to manufacture.

Information SystemsInformation Systems 1.1. Use information systems to monitor defect rates.Use information systems to monitor defect rates.

Human ResourcesHuman Resources 1.1. Institute TQM training programs.Institute TQM training programs.2.2. Organize employees into quality teams.Organize employees into quality teams.

TABLE 5.3


Implementing TQMImplementing TQM

Build organizational commitment to qualityBuild organizational commitment to qualityFocus on the customerFocus on the customerFind ways to measure qualityFind ways to measure qualitySet goals and create incentivesSet goals and create incentivesSolicit input from employeesSolicit input from employeesIdentify defects and trace them to sourceIdentify defects and trace them to sourceImprove supplier relationsImprove supplier relationsDesign for ease of manufactureDesign for ease of manufactureBreak down barriers between functionsBreak down barriers between functions


Achieving Superior InnovationAchieving Superior Innovation

Causes of the high failure rate of innovation:Causes of the high failure rate of innovation: UncertaintyUncertainty

Quantum innovationQuantum innovation Incremental innovationIncremental innovation

Poor commercializationPoor commercialization Poor positioning strategyPoor positioning strategy Technological myopiaTechnological myopia Slowness in marketingSlowness in marketing


FIGURE 5.8

The Development FunnelThe Development Funnel

Gate 1 Gate 2


Achieving Superior InnovationAchieving Superior Innovation

Building competencies in innovation:Building competencies in innovation: Building skills in basic and applied researchBuilding skills in basic and applied research Project selection and managementProject selection and management Cross-functional integrationCross-functional integration Product development teamsProduct development teams Partly parallel development Partly parallel development

processprocess


FIGURE 5.9

Sequential Sequential and and Partly Parallel Partly Parallel Development Development ProcessesProcesses


The Role Played by Various Functions in The Role Played by Various Functions in Achieving Superior InnovationAchieving Superior Innovation



1.1. Manage overall project (I.e., manage the development function).Manage overall project (I.e., manage the development function).2.2. Facilitate cross-functional cooperation.Facilitate cross-functional cooperation.

ProductionProduction 1.1. Cooperate with R&D on designing products that are easy to Cooperate with R&D on designing products that are easy to manufacture.manufacture.

2.2. Work with R&D to develop process innovations.Work with R&D to develop process innovations.

MarketingMarketing 1.1. Provide market information to R&D.Provide market information to R&D.2.2. Work with R&D to develop new products.Work with R&D to develop new products.

Materials ManagementMaterials Management No primary responsibility.No primary responsibility.

R&DR&D 1.1. Develop new products and processes.Develop new products and processes.2.2. Cooperate with other functions, particularly marketing and Cooperate with other functions, particularly marketing and

manufacturing, in the development process.manufacturing, in the development process.

Information SystemsInformation Systems 1.1. Use information systems to coordinate cross-functional and cross-Use information systems to coordinate cross-functional and cross-company product development work.company product development work.

Human ResourcesHuman Resources 1.1. Hire talented scientists and engineers.Hire talented scientists and engineers.

TABLE 5.4


Achieving Superior Customer Achieving Superior Customer ResponsivenessResponsiveness

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

Satisfying customer needs:Satisfying customer needs: Customization of the features of products and services to meet Customization of the features of products and services to meet

the unique need of groups and individual customers.the unique need of groups and individual customers. Reducing customer response times:Reducing customer response times:

Marketing that communicates with production.Marketing that communicates with production. Flexible production and materials management.Flexible production and materials management. Information systems that support the process.Information systems that support the process.


The Primary Role of Different Functions in The Primary Role of Different Functions in Achieving Superior Customer Achieving Superior Customer ResponsivenessResponsiveness



1.1. Through leadership by example, build a company-wide commitment Through leadership by example, build a company-wide commitment to customer responsiveness.to customer responsiveness.

ProductionProduction 1.1. Achieve customization by implementing flexible manufacturing.Achieve customization by implementing flexible manufacturing.2.2. Achieve rapid response through flexible manufacturing.Achieve rapid response through flexible manufacturing.

MarketingMarketing 1.1. Know the customer.Know the customer.2.2. Communicate customer feedback to appropriate functions.Communicate customer feedback to appropriate functions.

Materials ManagementMaterials Management 1.1. Develop logistics systems capable of responding quickly to Develop logistics systems capable of responding quickly to unanticipated customer demands.unanticipated customer demands.

R&DR&D 1.1. Bring customers into the product development process.Bring customers into the product development process.

Information SystemsInformation Systems 1.1. Use Web-based information systems to increase customer Use Web-based information systems to increase customer responsiveness.responsiveness.

Human ResourcesHuman Resources 1.1. Develop programs to get employees to think like customers.Develop programs to get employees to think like customers.

TABLE 5.5

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