Chapter Four

Building Competitive Advantage Through

Functional-Level Strategy

Dr. Jashim U. Ahmed

ExternalFactors:

•Competitive changes•Environmental changes

Corporate Strategic Plan

Marketing

FinanceManufacturing

Logistics

Functional Strategic Plans

Source: William Copacino and Donald B. Rosenfield, “Analytic Tools for Strategic Planning, “International Journal of Physical Distribution and Materials Management 15 (3), (1985): 48. [modified content].

Overview of Corporate Strategic Planning to Functional Strategic Planning

Functional-Level Strategies

Improves company’s ability to attain superior:1. Efficiency 2. Quality 3. Innovation 4. Customer responsiveness

Increases the utility that customers receive: Through differentiation Creating more value Lower cost structure than rivals

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

Functional-level strategies are strategies aimed at improving the

effectiveness of a company’s operations.

Achieving Superior EfficiencyFunctional steps to increasing efficiency: Economies of Scale Learning Effects Experience Curve Flexible Manufacturing and Mass Customization Marketing Materials Management and Supply Chain R&D Strategy Human Resource Strategy Information Systems Infrastructure

Economies of Scale 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• Specialization has favorable impact on productivity by

enabling employees to become very skilled at performing a particular task

Diseconomies of scaleUnit cost increases associated with a large scale of output

• Increased bureaucracy associated with large-scale enterprises

• Resulting managerial inefficiencies

Learning Effects Learning Effects are: Cost savings that come from learning by

doing• Labor productivity Learn by repetition how to best carry out the

task• Management efficiency Learn over time how to best run the operation• Realization of learning effects implies a

downward shift of the entire unit cost curve As labor and management become more

efficient over time at every level of output

When changes occur in a company’s production system, learning has to begin again.

The Experience CurveThe 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 phenomenon

• Once down the experience curve, the company is likely to have a significant cost advantage over its competitors

Strategic significance of the experience curve: Increasing a company’s product volume and

market share will lower its cost structure relative to its rivals.

Flexible Manufacturing and Mass Customization

Flexible Manufacturing TechnologyA range of manufacturing technologies that:

• Reduce setup times for complex equipment• Improves scheduling to increase use of

individual machines• Improves quality control at all stages of the

manufacturing process• Increases efficiency and lowers unit costs

Mass Customization Ability to use flexible manufacturing technology to reconcile two goals that were once thought incompatible:

• Low cost and• Differentiation through product customization

MarketingMarketing

Marketing strategy

Refers to the position that a company takes regarding • Pricing Promotion Advertising • Distribution Product design

Customer defection rates Percentage of customers who defect every year

• Defection rates are determined by customer loyalty• Loyalty is a function of the ability to satisfy

customers

Reducing customer defection rates and building customer loyalty can be major sources of a lower

cost structure.

Materials ManagementThe activities necessary to get inputs and components to a production facility, through the production process, and through the distribution system to the end-user

• Many sources of cost in this process• Significant opportunities for cost reduction through more

efficient materials management • Just-in-Time (JIT) Inventory System

System designed to economize on inventory holding costs:• Have components arrive to manufacturing just prior to

need in production process• Have finished goods arrive at retail just prior to stock out

Supply Chain ManagementTask of managing the flow of inputs to a company’s processes to minimize inventory holding and maximize inventory turnover

Materials Management and Supply Chain

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

1. Boost efficiency by designing products that are easy to manufacture• Reduce the number of parts that make up a product –

reduces assembly time• Design for manufacturing – requires close coordination

with production and R&D

2. Help a company have a lower cost structure by pioneering 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 attributes that match the strategic objectives of the company

Employee trainingUpgrades employee skills to perform tasks faster and more accurately

Self-managing teamsMembers coordinate their own activities and make their own hiring, training, work, and reward decisions.

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

The key challenge of the Human Resource function: improve employee productivity.

Information Systems

Information systems’ impact on productivity is wide-ranging:

Web-based information systems can automate many of the company activities

Potentially affects all the activities of a company

Automates interactions between Company and customers Company and suppliers

A Company’s Infrastructure: The company’s structure, culture, style of

strategic leadership, and control system:

• Determines the context within which all other value creation activities take place

• Strategic leadership is especially important in building a company-wide commitment to efficiency

• The leadership task is to articulate a vision for all functions and coordinate across functionsAchieving superior performance requires an

organization-wide commitment. Top management plays a major role in this process.

Infrastructure

Achieving Superior Quality

Quality as reliability They do the jobs they were designed for and do it

well

Quality as excellence Perceived by customers to have superior attributes

A strong reputation for quality allows a company to differentiate its products.

Eliminating defects or errors reduces waste, increases efficiency, and lowers the cost structure – increasing profitability.

Quality can be thought of in terms of two dimensions and gives a

company two advantages:

Improving Quality as Reliability

TQM is based on the following five-step chain reaction:

• Improved quality means that costs decrease.• As a result, productivity also improves.• Better quality leads to higher market share and

allows increased prices.• This increases a company’s profitability.• Thus the company creates more jobs.

Six Sigma methodology: the principal tool now used to increase reliability and is a direct

descendant of Total Quality Management (TQM)

Deming’s Steps in a Quality Improvement Program

1. A company should have a clear business model.2. Management should embrace philosophy that

mistakes, defects, and poor quality are not acceptable.

3. Quality of supervision should be improved.4. Management should create an environment in

which employees will not be fearful of reporting problem or making suggestions.

5. Work standards should include some notion of quality to promote defect-free output.

6. Employees should be trained in new skills.7. Better quality requires the commitment of

everyone in the workplace.

Implementing Reliability Improvement Methodologies

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 out among companies that have successfully adopted quality improvement

methods:

Improving Quality as Excellence

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 Continual improvement in attributes and

development of new-product attributes

A product is a bundle of attributes and can be differentiated by attributes that

collectively define product excellence.

Achieving Superior Innovation

Innovation can: Result in new products that satisfy customer needs

better Improve the quality of existing products Reduce costs

Innovation can be imitated - So it must be continuous

Building distinctive competencies that result in innovation is the most important source of

competitive advantage.

Successful new product launches are major drivers of superior profitability.

The High Failure Rate of 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

Slow to market

Failure rate of innovative new products is high with evidence suggesting that only 10 to 20% of major

R&D projects give rise to a commercially viable product.

Building Competencies in Innovation

1. Building skills in basic and applied research2. Project selection and management

Using the product development funnel

» Idea generation » Project refinement » Project execution

3. Achieving cross-functional integration1. Driven by customer needs 2. Design for manufacturing3. Track development costs 4. Minimize time-to-market5. Close integration between R&D & 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 build competencies in innovation and reduce failures:

Achieving Superior Responsiveness to Customers

Focusing on the customer Demonstrating leadership Shaping employee attitudes Bringing customers into the company

Satisfying customer needs Customization

Tailor to unique needs of groups of customers Response time

Increase speed » Premium pricing

Customer responsiveness: giving customers what they want, when they want it, and at a price they are willing to pay - as long as the company’s long-term

profitability is not compromised.

Functional-Level Strategy

The core undertaking which looks after the main flow activities.

The essential function that delivers goods and services to customers and matches the use of internal resources to their demands.

Functional-Level Strategy Balance the major corporate aim of satisfying

customer needs against the requirement of efficient and economical systems performance.

Ensure their function adds value to the organization.

Achieving the match between corporate strategic aspirations and operational capabilities.

Concerned with continuous improvement. Transforming resources into finished products or

services. Balance customer service needs against the

economic use of resources.

Source: Evans J. R. & Lindsay, W. M. (2005). The Management and Control of Quality. p.160, Thomson.

Customer-Supplier Model

Your Suppliers

Your Suppliers

Your Process

Your Process

YourCustomers

YourCustomers Inputs Outputs

Requirementsand feedback

Requirementsand feedback

Bangladesh Standards & Testing Institution (BSTI) Quality Certification

BDS 1107, Finlay Tea, James Finlay Limited.

BDS 1123, Sprite, The Coca-Cola Company.

BDS 1240, MUM drinking water, Partex Group.

BDS 818, Rangs Ceiling Fan, Rangs

Electronics Ltd.

The International Organization for Standardization (ISO)

ISO operates on the concept that standardising certain minimum

characteristics of a quality management system will give mutual benefits to suppliers and customers.

ISO Quality Certification

The International Organization for Standardization (ISO) has issued the

ISO 9000 series of quality certifications. These ISO 9000 series

of quality assurance standards comprise:

ISO 9000, ISO 9001,

ISO 9002, ISO 9003 and

ISO 9004

The Types of ISO Quality Certification

ISO 9001 covers all activities in all stages of anorganisation's operations, starting from thedesign and development to servicing customers(ACI earn the ISO 9001 certification of QMS in1995).

ISO 9002 suitable for organisations engaged inproduction and installation only.

ISO 9003 organisations engaged only in finalinspection and testing.

These standards are now replaced by a single quality management system requirements

standard, ISO 9001: 2000.

The ISO 9001: 2000 Quality Certification Companies in Bangladesh

Orion Infusion Ltd. Gaco Pharmaceuticals. Square Pharmaceutics

Ltd. Alco Pharma Ltd. Jayson Pharmaceuticals

Ltd. Navana Pharmaceuticals

Ltd. Novus Pharmaceuticals

Ltd. ACI Limited. Renata Limited. Amico Laboratories

Limited. The ACME Laboratories

Limited.

Anwar Landmark Ltd. building technology &

ideas Ltd. Sheltech (Pvt.) Ltd. Star Particle Board Mills

Ltd. B R B Cable Industries

Limited. Bogra Motors (PVT)

Limited. Computer Source Ltd. Saif Powertec Limited. Stamford University. Otobi. R.S. Associate (Electric)

Ltd. Kai Aluminium.

ISO 9001:2000 Quality Mgt. PrinciplesPrinciple 1: Customer FocusPrinciple 2: LeadershipPrinciple 3: Involvement of PeoplePrinciple 4: Process ApproachPrinciple 5: Systems Approach to Mgt.Principle 6: Continual ImprovementPrinciple 7: Factual Approach to Decision MakingPrinciple 8: Mutually Beneficial SupplierRelationships

Six SigmaSix Sigma is based on a statistical measure that equates to 3.4 or fewer

errors or defects per million opportunities. An ultimate “stretch” goal of all organizations that adopt a Six Sigma philosophy is to have all

critical processes, regardless of functional area, at a Six Sigma level

of capability.

Source: Evans J. R. & Lindsay, W. M. (2005).

The Management and Control of Quality. p.132, Thomson.

Business Excellence ModelThe Business Excellence Model is a nine-box model, originally developed

by the European Foundation for Quality Management (EFQM). Its

purpose is to "support the management of Western European organizations in accelerating the

process of making quality a decisive influence for achieving global

competitive advantage" (EFQM publication).

Business Excellence Model

Summary of Core Concepts of TQM

Working with CustomersContinuous Staff Analysis of Work

ProcessesWorking with Suppliers

Source: Vinzant, J. C. and Vinzant, D. H. (1991). “Strategic management spin-offs of the Deming

approach”, Journal of Management History, Vol. 5, No. 8, pp. 516-531.

Thank you