FUNCTIONAL LEVEL STRATEGIES - CHPT 4

1. FUNCTIONAL LEVEL STRATEGIES - CHPT 4 BUSINESS 189 Fall 2009 DR. MARK FRUIN

2. FUNCTIONAL-LEVEL STRATEGIES • PP 110-111, THE BOOK CONTINUES TO CONFUSE FUNCTIONAL STRATEGIES AND DISTINCTIVE COMPETENCIES • WELL DONE FUNCTIONAL STRATEGIES CAN RESULT IN DISTINCTIVE COMPETENCIES, the book says • BUT DISTINCTIVE COMPETENCIES DO NOT LEAD TO FUNCTIONAL STRATEGIES • ALTHOUGH THEY MAY CHANNE/DIRECT WHERE FURTHER INVESTMENT & EFFORT MAKE SENSE

3. FUNCTIONAL LEVEL STRATEGIES • SUPERIOR EFFICIENCY • ANYWHERE IN THE ORGANIZATION • NOT JUST THE PRODUCTION LINE • SUPERIOR QUALITY • ANYWHERE IN THE ORGANIZATION • QUALITY AS RELIABILITY; QUALITY AS EXCELLENCE • SUPERIOR CUSTOMER RESPONSIVENESS • ANYWHERE IN THE ORGANIZATION • CUSTOMERS ARE NOT JUST “OUT THERE” • SUPERIOR INNOVATION • ANYWHERE IN THE ORGANIZATION

4. EFFICIENCY • TWO FACTORS DETERMINE A FIRM’S PROFIT RATE • THE VALUE CUSTOMERS PLACE ON FIRM OFFERING • THE COSTS OF PRODUCING & DELIVERING THOSE OFFERINGS • DIFFERENCE BETWEEN COSTS OF INPUTS AND VALUE OF OUTPUT • PRODUCTIVITY MEASURES OUTPUT PER EMPLOYEE

5. SUPERIOR VALUE CREATION • EITHER ENJOY THE LOWEST COST STRUCTURE IN THE INDUSRY • 2Ss: SCALE & SCOPE • 2 MORE Ss: SPECIALIZATION & SPEED • OTHER COST ADVANTAGES? • OR CREATE THE MOST VALUABLE PRODUCT IN EYES OF CUSTOMERS • THE GAP BETWEEN PERCEIVED VALUE AND COSTS OF PRODUCTION • ALLOWING A HIGH PRICE = DIFFERENTIATION STRATEGY

6. SUPERIOR EFFICIENCY • TEXT DISCUSSES ECONOMIES & DISECONOMIES OF SCALE ON PP 111-12 • AT SOME POINT INCREASING SCALE MAY NOT YIELD LOWER COSTS PER UNIT • GENERALLY, SCALE RELATED INVESTMENTS ARE LUMPY; NOTION OF MES • MINIMUM EFFICIENT SCALE VARIES BY INDUSTRY • LEARNING EFFECTS ON PP 113-14 • BOOK: MORE COMPLEX TASKS HAVE POTENTIAL FOR GREATER LEARNING EFFECTS (MAYBE) • AT SOME TIME, LEARNING MAY DIMINISH • FLEXIBLE/LEAN PRODUCTION (BUT NOT ECONOMIES OF SCOPE ON PP 117-18) • REDUCE SETUP TIMES, BETTER SCHEDULING • U-SHAPED LINES; FLEXIBLE MACHINE CELLS

7. EFFICIENCY & PROFITABILITY • FLEXIBLE MANUFACTURING CAN SAVE ON MANPOWER, EQUIPMENT COSTS, CAPACITY UTILIZATION & AMOUNT OF REWORK = BIG SAVINGS = PROFITS • IN MARKETING TOO, MORE EFFICIENT PRICING, PROMOTION, DESIGN, ETC. = MORE PROFITS WITH HIGHER CUSTOMER RETENTION RATES • FEWER RECALLS • MORE RESALES • HIGHER CUSTOMER LOYALTY

8. MATERIALS MANAGEMENT • JIT PRODUCTION AND DISTRIBUTION REQUIRES MATERIALS MNGMNT • KANBAN = CHIT TO MANAGE MATERIALS FLOW • TYPICAL MFG FIRM • MATERIALS & TRANSPORT = 50-70% OF REVENUES • FOR FIRM WITH $1 MILLION IN REVENUES • INCREASING TOTAL PROFITS BY $15,000 WOULD TAKE EITHER 30% INCREASE IN SALES OR 3% REDUCTION IN MATERIAL COSTS • WHICH WOULD BE EASIER TO DO?

9. OTHER EXAMPLES OF EFFICIENCY • R&D (BETTER PROJECT CHOICE; BETTER PEOPLE CHOICE; BETTER MANAGEMENT CHOICES) • HR HIRING, TRAINING, COMPENSATION & MANAGEMENT (SELF-MANAGING TEAMS) • PAY FOR PERFORMANCE • INFRASTRUCTURE AND EFFICIENCY • STATE & COUNTRY INVESTMENT IN ROADS, BRIDGES, AIRPORTS, WATER CONTROL SYSTEMS, ETC. • HOW DO COMPANY STRUCTURE, SYSTEMS, STYLE, & CULTURE CONTRIB TO EFFICIENCY?

10. QUALITY • QUALITY = RELIABILITY = EXCELLENCE • QUALITY CAN MEAN EITHER AND/OR BOTH • QUALITY PRODUCTS ARE GOODS & SERVICES THAT ARE RELIABLE • DO WELL WHAT THEY’RE DESIGNED TO DO • QUALITY CAN RESULT IN GREATER EFFICIENCY & PRODUCTIVITY & BRAND-NAME VALUE & CUSTOMER LOYALTY • LESS REWORK • EASIER TO MAKE, EASIER TO USE

11. STRATEGY IN ACTION: SIX SIGMA PROGRAMS • SIX SIGMA: PRODUCTION PROCESSES THAT ARE 99.99966 % ACCURATE • WITH 3.4 DEFECTS PER ONE MILLION PARTS • ALMOST IMPOSSIBLE TO ACHIEVE, BUT GE, MOTOROLA & ALLIED SIGNAL HAVE DONE SO • ALMOST IMPOSSIBLE TO ACHIEVE? • STORY OF JAPANESE SUPPLIER AND OVERSEAS ORDER SPECIFYING PPM DEFECTS

12. BUILDING COMMITMENT TO QUALITY • ORGANIZATIONAL, NOT INDIVIDUAL, COMMITMENT TO QUALITY • LEADERS NEED TO PUSH QUALITY & EXEMPLIFY QUALITY IN THEIR ACTIONS • FOCUS ON CUSTOMER • IDENTIFY PROCESSES & SOURCES OF DEFECTS • PRECISE TOOLS & TECHNIQUES TO MAP SOURCES OF DEFECTS AND FIX THEM • WHO DOES INVESTIGATION & REMEDIATION OF DEFECTS? HAS POWERFUL EFFECT ON QUALITY • “EVERYONE A MANAGER”

13. COMMITMENT TO QUALITY II • FIND WAYS TO MEASURE QUALITY • SET GOALS AND INCENTIVES • SOLICIT EMPLOYEE INPUTS • LONG TERM RELATIONSHIPS WITH SUPPLIERS • QUALITY AS MORE THAN SIMPLE RELIABILITY; QUALITY AS EXCELLENCE • MOVE FROM CAPABILITIES-COMPETENCIES THAT EVERYONE HAS TO DISTINCTIVE COMPETENCIES BY FOCUSING ON QUALITY

14. SUPERIOR CUSTOMER RESPONSIVENESS • QUALITY OF FIRM OFFERINGS PLUS SUPERIOR CUSTOMER RESPONSE TIME • ABILITY TO DEVELOP NEW OFFERINGS QUICKLY • ABILITY TO CUSTOMIZE EXISTING OFFERINGS TO EVER SMALLER SEGMENTS (WHILE MAINTAINING EFFICIENCY & QUALITY) • CUSTOMIZATION • MAKE CUSTOMERS FEEL THAT YOU’RE FOCUSING ON ONLY THEM

15. TABLE 4.5 DIFF. FUNCTIONS IN CUSTOMER RESPONSIVENESS • INFRASTRUCTURE (LEADERSHIP) • PRODUCTION • MARKETING • MATERIALS MANAGEMENT • R&D • INFORMATION SYSTEMS • HUMAN RESOURCES

16. INNOVATION • ANYTHING NEW AND NOVEL IN THE WAY COMPANIES OPERATE • 3 TYPES (SEE NEXT SLIDE) • INCREMENTAL - THE BULK OF IT • RADICAL - AT CERTAIN TIMES & PLACES • DISRUPTIVE/DISCONTINUOUS - CURRENT BUZZ • PRODUCT VS. PROCESS INNOVATIONS • ADVANCES IN PRODUCT DESIGN, FORM FACTOR, MFG, DISTRIB & MKTG PROCESSES, MANAGEMENT SYSTEMS, ORGANIZATIONAL STRUCTURES

17. TYPES OF INNOVATION • PRODUCT INNOVATION VS PROCESS INNOVATION • INNOVATION MAY BE TECHNICALLY AND/OR MARKETING-RELATED • 2 X 2 X 3 MATRIX RESULTS • INCREMENTAL INNOVATION • RADICAL INNOVATION • DISRUPTIVE/DISCONTINUOUS INNOVATION

18. AREAS FOR IMPROVEMENT • PROJECT SELECTION & MANAGEMENT • BUILDING CROSS-FUNCTIONAL INTEGRATION (VIA TEAMS) • PRODUCT DEVELOPMENT STRATEGIES • SEQUENTIAL • PARTLY PARALLEL • FULLY PARALLEL - STRONG PRODUCT DEVELOPMENT TEAMS & MNGRS (SHUSA & HEAVYWEIGHT PRODUCT DEVELOPMENT TEAMS) • JAPANESE FIRMS DESIGN & DEVELOP NEW CARS IN 4 YEARS ON AVERAGE • AM & EUROPEAN FIRMS 5-6 YEARS ON AVERAGE

19. DURABILITY OF COMPETITIVE ADVANTAGES • EXTENT TO WHICH SUPERIOR EFFICIENCY, QUALITY, CUSTOMER SATISFACTION & INNOVATION MAY BE COPIED AND DUPLICATED • BARRIERS TO IMITATION • TACIT VS. EXPLICIT • EMBEDDED VS. EMBODIED IN FORMULA • OTHER BARRIERS? • CAPABILITY TO IMITATE • ABSORPTIVE CAPACITY • INDUSTRY DYNAMISM

20. FUNCTIONAL COMPETITIVE ADVANTAGES • THE FOUNDATION OF STRATEGIC SUCCESS • REMEMBER STRATEGY STACK • ARE ORGANIZATIONAL • ORGANIZED CAPABILITIES & COMPETENCIES • AND, THUS, MANAGED CAPABILITIES • BEGIN W/ CONTINUOUS IMPROVEMENT • COMPOUNDED BY OTHER SORTS OF INNOVATION • ORGANIZATIONAL FLEXIBILITY & ADAPTABILITY ARE KEY TO LONGTERM SUCCESS • BECAUSE OF ASSET SPECIFICITY, ORGANIZATIONAL INERTIA, PATH DEPENDENCY& COMPETENCY TRAPS • NOT ANY OLD CAPABILITIES, BUT DYNAMIC CAPABILITES