Post on 17-May-2017
Chapter Four
Building Competitive Advantage Through
Functional-Level Strategy
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Functional-Level StrategiesFunctional-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 rivalsThis leads to a competitive advantage and superior profitability and profit growth.
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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
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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
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Economies and Diseconomies of Scale
Figure 4.2
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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.
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The Impact of Learning and Scale Economies on Unit Costs
Figure 4.3
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The Experience Curve
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 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.
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The Experience CurveFigure 4.4
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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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Tradeoff Between Costs and Product Variety
Figure 4.5
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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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Relationship between Customer Loyalty and Profit per Customer
The longer a company holds on to a customer the greater the volume of customer-generated unit sales that offset fixed marketing costs and lowers the average cost of each sale.
Figure 4.6
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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&D2. 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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Primary Roles of Value-Creation Functions
Table 4.1
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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 attributes1. 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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Roles Played in Implementing Reliability Improvement Methods
Table 4.2
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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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The Development FunnelFigure 4.7
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Sequential and Partly Parallel Development Processes
Figure 4.8
Reduced development time& time-to-market
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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.
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Primary Roles of Functions in Achieving Superior Responsiveness to Customers
Table 4.5