4 Building Competitive Advantage Through Functional-Level Strategy.

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Building Competitive Advantage Through

Functional-Level Strategy

Functional-Level Strategies

• Strategies aimed at improving the effectiveness of a company’s operations

• Improving a company’s ability to attain superior efficiency, quality, innovation, and customer responsiveness

The Roots of Competitive Advantage

Achieving Superior Efficiency

• 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

• Diseconomies of scale– Unit cost increases associated with a large scale of

output

Economies and Diseconomies of Scale

Achieving Superior Efficiency (cont’d)

• Learning effects– Cost savings that come from learning by doing

• Labor productivity

• Management efficiency

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

The Impact of Learning and Scale Economies on Unit Costs

• The 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

The Experience Curve

• Dangers of complacency with the experience curve– It will bottom out– New technologies can make experience effects

obsolete– Some technologies may not produce lower costs

with higher volumes of output– Flexible manufacturing technologies may allow

small manufacturers to product at low unit costs

Unit Production Costs in an Integrated Mill and Mini-Mill

• Flexible manufacturing (lean production)– Technology that reduces setup times for complex

equipment, improves scheduling to increase use of individual machines, and improves quality control

– Increases efficiency and lowers unit costs– Mass customization reconciles two goals: low cost and differentiation through product customization

Tradeoff Between Costs and Product Variety

• Marketing– Marketing strategy: pricing, promotion,

advertising, product design, distribution– Reducing customer defection rates and building

customer loyalty

The Relationship Between Customer Loyalty and Profit per Customer

• Materials management– Getting inputs and components to a production

facility, through the production process, and out through a distribution system to the end user

– Just-in-time (JIT) inventory system– Supply chain management

• R&D strategy– Designing products that are easy to manufacture– Process innovations

• Human resource strategy: employee productivity– Hiring– Training– Self-Managing Teams– Pay for Performance

• Information systems and the Internet– Automating interactions between

• Company and customers

• Company and suppliers

• Infrastructure– Company structure, culture, style of strategic

leadership, and control system determine context of all value creation activities

Primary Roles of Value Creation Functions in Achieving Superior Efficiency

Achieving Superior Quality

• Attaining superior reliability– Total quality management (TQM)

• Improved quality means that costs decrease

• As a result, productivity improves

• Better quality leads to higher market share and allows increased prices

• This increases profitability

• More jobs are created

Implementing Reliability Improvement Methodologies

• Build organizational commitment to quality• Focus on the customer• Find ways to measure quality• Set goals and create incentives• Solicit input from employees• Identify defects and trace them to source• Work with suppliers• Design for ease of manufacture• Break down barriers among functions

Attributes Associated with a Product Offering

Achieving Superior Quality (cont’d)

• 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– Monitor competition for improvement in attributes

and development of new attributes

Achieving Superior Innovation

• Innovation can– Result in new products that better satisfy customer

needs– Improve the quality of existing products– Reduce costs

• Innovation can be imitated so it must be continuous

• Successful new product launches are major drivers of superior profitability

The High Failure Rate of Innovation

• Uncertainty– Quantum innovation vs. incremental innovation

• Poor commercialization

• Poor positioning strategy

• Technological Myopia

• Slow to Market

Achieving Superior Innovation (cont’d)

• Building Competencies in Innovation– Building skills in basic and applied research– Project selection and management

The Development Funnel

Achieving Superior Innovation (cont’d)

• Building Competencies in Innovation (cont’d)– Cross-functional integration– Product development teams– Partly parallel development processes

Sequential and Partly Parallel Development Processes

Function Roles for Achieving Superior Innovation

Achieving Superior Responsiveness to Customers

• Customer focus– Leadership– Employee attitudes– Bringing customers into the company

• Satisfying customer needs– Customization– Response time

The Primary Role of Different Functions in Achieving Superior Responsiveness to Customers

4 Building Competitive Advantage Through Functional-Level Strategy.

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