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
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