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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.


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.


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


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.


InfrastructureStructureCultureStyle of strategic leadership, and Control system


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, productivity improves. Better quality leads to higher market share and allows the company to raise process.Higher prices increases the companys profitability and allow it to stay in business.Thus, the company creates more jobs.

Attaining superior reliability

Management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable and should be limited.Quality of supervision should be improved by allowing more time for supervisor to work with employees, and giving employees appropriate skills for the job.Management should create an environment in which employees will not fear reporting problems or recommending improvements.

Steps that should be part of any quality improvement program

Work standards should not only be defined as number or quota, but should also include some notion of quality to promote the production of detect-free output.Management is responsible for training employees in new skills to keep pace with changes in the workplace.Achieving better quality requires the commitment of everyone in the company.

Steps that should be part of any quality improvement program

Key to any quality Improvement programSenior managers agree to a quality improvement program and communicate its importance to the organizationIf a quality improvement program is to be successful, individuals must be identified to lead the program.Quality improvement methodologies preach the need to identify defects, that arise from processes, trace them to their sources, find out what caused the defects, and make corrections so that they do not recur.

Implementing Reliability Improvement methodologies

Key to any quality Improvement programTo create a metric that can be used to measure qualityTo set a challenging quality goal an create incentives for reaching itShop floor employees can be a major source for improving product quality

Key to any quality Improvement programA major source of poor-quality finished goods is poor quality component parts.The more assembly steps a product requires, the more opportunities there are for mistakesImplementation requires organization wide commitment and substantial cooperation among functions.

Roles played by different functions in implementing reliability improvement methodologies

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Collect marketing intelligence indicating which of these attributes are most important to customers.Design its products in such a way that those attributes are embodied in the product.Decide which of the significant attributes to promote and how best to position them in the minds of consumersRecognized that competition is not stationary, but instead continually produces improvements

Improving quality as excellence

For a product to be regarded as high in the excellence dimension, a companys product offering must be seen superior of that of rivals. Achieving a perception of high quality on any of these attributes requires specific actions by managersIt I important for managers to collect marketing intelligence indicating which of these attributes are most important to customers.It needs to design its products in such a way that those attributes are embodied in the product.The company must decide which of the significant attributes to promote and how best to position them in the minds of consumers, that is, how to tailor the marketing message so that it creates a consistent image in the minds of the customers.It must be recognized that competition is not stationary, but instead continually produces improvements in product attributes, and often the development of new product attributes.

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Differentiate its product and charge a premium priceLower its cost structure

*** Research evidence suggest s that 10% to 20% of major R&D projects give rise to commercial products

Achieving Superior Innovation

The ability to develop innovative new products or processes gives a company a major competitive advantage that allows it to:Differentiate its product and charge a premium priceLower its cost structure

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The demand for innovations is inherently uncertain.The technology is poorly commercialized.Poor positioning strategy.Companies make the mistake of marketing a technology for which there is not enough demand.Products are slowly marketed.

Five explanations for failure repeatedly appear

Integrating R&D and marketing is crucial if a new product is to be properly commercializedIntegration between R&D and production can help a company to ensure that products are designed with manufacturing requirements in mindCross functional integration( composed of R&D, marketing and production.)Reducing Innovation Failures

Integrating R&D and marketing is crucial if a new product is to be properly commercializedIntegration between R&D and production can help a company to ensure that products are designed with manufacturing requirements in mindCross functional integration( composed of R&D, marketing and production. To oversee thee product development project from initial concepct to market introduction

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Functional roles for achieving superior innovation

Focusing on the CustomerDemonstrating LeadershipShaping Employee AttitudeKnowing Customer Needs

Satisfying CustomerCustomizationResponse TimeAchieving Superior responsiveness to Customer

To achieve superior responsiveness to customers, a company must give customers what they want, when they want it, and at what price they are willing to pay. It means giving customers value for money, and steps taken to improve the efficiency of a companys production process and the quality of its products should be consistent with this aim.Focusing on the CustomerDemonstrating Leadership. A commitment to superior responsiveness to customers bring attitudinal changes thoughout the company that can only be built through strong leadershipShaping Employee Attitudes. All employees must see the customer as the focus of their activity and be trained to focus on the customerKnowing customer needs. Requires that the employees think like customers themselves, also demands that they listen to what customer has to say.Satisfying Customer NeedsCustomization. Varying the features of a good or serviceResponse time. Supplying the customer with what they want, when they want it requires speed of response to customer demands.37

Business-level strategy

A company must define its business, which entails decision about

Customers needs or what is to be satisfiedCustomer groups or who is to be satisfiedDistinctive competencies or how customer needs are to be satisfiedCompetitive positioning and the business model

Product differentiationThe process of designing products to satisfy customers needs.Differentiated Product- to differentiate a product by innovation, excellent quality or responsiveness to customersLow prices Product- finding ways to increase efficiency and reliability to reduce cost

Formulating Business Model: customer needs and product differentiation

Differentiation has another important aspect.companies that invest their resources to create something distinct or different about their products can often charge a higher or premium price 40

Market SegmentationThe way a company decides to classify its customersAccording to how much customers are willing to payAccording to the specific needs

Formulating the business model:customer groups and market segmentation

The second important choice involved in formulating a sucessful business model is to decide wwhich kind of products to offer to which customer groups. A company searching for a successful business model must classify customers according to the similarities of differences in their needs in order to decide what kinds of products to develop for different kinds of customer 41

Three approaches to market segmentation

A company might choose not to recognize that different market segments exist and make a product targeted at the average or typical customerChoose to recognize the differences betweeen customer groups and create a product targeted toward most or all of the different market segmentsChoose to target only 1 or 2 market segments and devote its resources to developing product for customers42

To develop a successful business model, strategic managers must device a set of strategies that determine:How to differentiate and price their productsHow much to segment a market and how wide a range of products to developImplementing the business model: building distinctive competencies

Make a consistent and compatible set of choices concerning:How to differentiate and price the productWhen and how much to segment the market to maximize demandWhere and how to invest capital in order to create value while keeping cost structures viable (for competitive pricing)

competitive positioning and business-level strategy

competitive positioning and business-level strategy

Generic strategiesAll businesses can pursue them regardless of whether they are manufacturing, service, or nonprofitCan be pursued in different kinds of industry environmentsResults from a companys consistent choices on product, market, and distinctive competencies

Competitive Positioning: generic Business-level Strategies

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Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

Establish a cost structure that allows the company to provide goods and services at lower unit costs than competitorsAdvantagesIf rivals charge similar prices, the cost leader achieves superior profitabilityThe cost leader is able to charge a lower price than competitors

Cost Leadership

The cost leader does not try to be the industry innovatorThe cost leader positions its products to appeal to the average customerThe overriding goal of the cost leader is to increase efficiency and lower its costs relative to its rivals

Cost Leadership Strategic Choices

Protected from industry competitors by cost advantageLess affected by increased prices of inputs if there are powerful suppliersLess affected by a fall in price of inputs if there are powerful buyersPurchases in large quantities increase bargaining power over suppliersAbility to reduce price to compete with substitute productsLow costs and prices are a barrier to entry

Advantages of cost leadership

Competitors may lower their cost structuresCompetitors may imitate the cost leaders methodsCost reductions may affect demand

Disadvantages of cost leadership

Create a product that customers perceive as different or distinct in an important wayAdvantagesPremium priceIncreased revenues = superior profitability

differentiation

Quality, innovation, responsiveness to customer needsA differentiator strives to differentiate itself along as many dimensions as possibleA differentiator segments its market into many nichesA differentiated company concentrates on the organizational functions that provide the source of differentiation advantage

Differentiation Strategic Choices

Customers develop brand loyaltyPowerful suppliers are not a problem because the company is geared more toward the price it can charge than its costsDifferentiators can pass price increases on to customersPowerful buyers are not a problem because the product is distinctDifferentiation and brand loyalty are barriers to entryThe threat of substitute products depends on competitors ability to meet customer needs

Advantages of Differentiation

Difficulty in maintaining long-term distinctness in customers eyesAgile competitors can quickly imitatePatents and first-mover advantage are limitedDifficulty of maintaining premium price

Disadvantages of Differentiation

Serving the needs of a specific market segmentGeographicType of customerSegment of the product lineAfter choosing a market segment, a focused company positions itself using eitherLow-cost OR differentiation

focus

Why Focus Strategies Are Different

The focuser is protected from rivals to the extent it can provide a product or service they cannotThe focuser has power over buyers because they cannot get the same thing from anyone elseThe threat of new entrants is limited by customer loyalty to the focuserCustomer loyalty lessens the threat from substitutesThe focuser stays close to its customers and their changing needs

Advantages of Focus

The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers)Because of low volume, a focuser may have higher costs than a low-cost companyThe focusers niche may disappear because of technological change or changes in customers tastesDifferentiators will compete for a focusers niche

Disadvantages of Focus

Identifying the strategies that a companys rivals are pursuingStrategic groups: companies in an industry that are pursuing a similar generic strategy

Competitive positioning and strategic groups

Companies lost their position on the value frontier, either because they have lost the source of their competitive advantage or their rivals have found ways to push out the value creation frontier and leave them behindIcarus paradoxFailures in competitive postioning

Thank you.

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