Download - Chapter Four Building Competitive Advantage Through Functional- Level Strategy.

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Chapter Four

Building Competitive Advantage Through

Functional-Level Strategy

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Functional-Level Strategies

Functional-level strategies are strategies aimed at improving the effectiveness of a company’s operations.

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.

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Achieving Superior Efficiency

Functional 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

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Dangers of Complacency Derived from Experience Effects

1. The experience curve is likely to bottom outSo further unit cost reductions may be hard to come by

2. New technologies can make experience effects obsoleteFrom changes always taking place in the external environment

3. Flexible manufacturing technologies may allow small manufacturers to produce at low unit costsAchieving both low cost and differentiation through customization

4. Some technologies may not produce lower costs with higher volumes of output

Managers should not become complacent about efficiency-based cost advantages derived from experience effects:

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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

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Marketing

Marketing• 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.

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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

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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

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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.

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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

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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 companywide commitment to efficiency

• The leadership task is to articulate a vision for all functions and coordinate across functions

Achieving superior performance requires an organization-wide commitment. Top management plays a major role in this process.

Infrastructure

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Achieving Superior Quality

Quality as reliability They do the jobs they were designed

for and do it wellQuality as excellence Perceived by customers to have superior attributes

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

2. 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:

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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 market share and allows increased prices.

4. This increases a company’s profitability.5. 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)

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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.

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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:

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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.

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Attributes Associated with a Product Offering

Table 4.3

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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.

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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.

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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:

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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.