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Building Competitive Advantage through Functional Level Strategy. Chapter 4. Functional-Level Strategies. Should flow from Business-Level Strategy Strategies aimed at improving the effectiveness of a company’s operations
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Building Competitive Advantage through Functional Level Strategy Chapter 4
Functional-Level Strategies • Should flow from Business-Level Strategy • 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
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
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
Achieving Superior Efficiency (cont’d) • 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
Economies of ScaleExperience • Old rule of thumb: Unit cost of production goes down 20% as volume doubles. • Companies have set price to achieve a level of volume and desired unit cost of production; some with success.
Achieving Superior Efficiency (cont’d) • 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
Achieving Superior Efficiency (cont’d) • 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
Exercise • Strategy in Action 4.1: Explain what went wrong in Texas Instrument and its reliance on the experience curve. • Strategy in Action 4.2: Explain how Toyota’s lean production system illustrates Figure 4.6.
Achieving Superior Efficiency (cont’d) • 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
Achieving Superior Efficiency (cont’d) • 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
Achieving Superior Efficiency (cont’d) • R&D strategy • Designing products that are easy to manufacture • Process innovations
Achieving Superior Efficiency (cont’d) • Human resource strategy: employee productivity • Hiring • Training • Self-Managing Teams • Pay for Performance
Achieving Superior Efficiency (cont’d) • 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
Steps in a TQM Program • Have a clear business model • Mistakes and defects should be unacceptable • Supervision should be improved • Employees should not be fearful of reporting problem or making suggestions • Work standards should include quality • Employees should be trained in new skills • Better quality requires company-wide commitment
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
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
Achieving Superior Innovation (cont’d) • Building Competencies in Innovation (cont’d) • Cross-functional integration • Product development teams • Partly parallel development processes
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