FUNCTIONAL LEVEL STRATEGIES - CHPT 4

1. FUNCTIONAL LEVEL STRATEGIES - CHPT 4 BUS 189 Feb. 12 & 13, 2013 DR. MARK FRUIN

2. 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

3. EFFICIENCY • TWO FACTORS DETERMINE A FIRM’S PROFIT RATE/PROFITABILITY • 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 • PRODUCTIVITY IS INDIRECT MEASURE OF PROFITS ‘CAUSE OTHER FACTORS INTERVENE

4. SUPERIOR VALUE CREATION • EITHER ENJOY THE LOWEST COST STRUCTURE IN THE INDUSRY (PORTER’S COST LEADERSHIP) • 2Ss: SCALE & SCOPE • 2 MORE Ss: SPECIALIZATION & SPEED • OTHER COST ADVANTAGES? • OR CREATE THE MOST VALUABLE PRODUCT IN EYES OF CUSTOMERS (PORTER’S DIFFER-ENTIATION) • THE GAP BETWEEN PERCEIVED VALUE AND COSTS OF PRODUCTION • ALLOWS A HIGH PRICE = DIFFERENTIATION STRATEGY

5. SUPERIOR EFFICIENCY • TEXT DISCUSSES ECONOMIES & DISECONOMIES OF SCALE ON PP 108- • 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 111- • BOOK: MORE COMPLEX TASKS HAVE POTENTIAL FOR GREATER LEARNING EFFECTS (MAYBE); MORE COMPLEXITY = GREATER LIKELIHOOD OF ERROR • AT SOME TIME, LEARNING MAY DIMINISH • FLEXIBLE/LEAN PRODUCTION ON PP 115- (BUT, NOT SAME AS ECONOMIES OF SCOPE) • REDUCE SETUP TIMES, BETTER SCHEDULING • U-SHAPED LINES; FLEXIBLE MACHINE CELLS

6. 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

7. MATERIALS MANAGEMENT • JIT PRODUCTION AND DISTRIBUTION REQUIRES MATERIALS MNGMNT • KANBAN = CHIT TO MANAGE MATERIALS FLOW • TYPICAL MFG FIRM • MATERIALS & TRANSPORT COSTS = 50-70% OF REVENUES • FOR FIRM WITH $1 MILLION IN REVENUES • INCREASING TOTAL PROFITS BY $150,000 WOULD TAKE EITHER 30% INCREASE IN SALES OR 3% REDUCTION IN MATERIAL COSTS • WHICH WOULD BE EASIER TO DO? PRETTY OBVIOUS

8. 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

9. 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 • SPECIFY 3-4 DEFECTIVE PARTS PER MILLION • SUPPLIER COMPLIED

10. BUILDING COMMITMENT TO QUALITY • ORGANIZATIONAL, NOT INDIVIDUAL, COMMITMENT TO QUALITY, BUT CARRIED OUT BY INDIVIDUALS • LEADERS NEED TO PUSH QUALITY & EXEMPLIFY QUALITY IN THEIR ACTIONS • BOTTOM UP WON’T WORK W/O TOP DOWN PUSH • FOCUS ON CUSTOMER NEEDS • 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”; EDUCATED & MOTIVATED WRKRS

11. 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

12. 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

13. TABLE 4.5 DIFF. FUNCTIONS IN CUSTOMER RESPONSIVENESS • INFRASTRUCTURE (LEADERSHIP NEEDED; WHAT SYSTEMS REQUIRED TO RESPOND WELL?) • COMMUNICATIONS, IT, LOGISTICS • PRODUCTION • MARKETING • MATERIALS MANAGEMENT • R&D • INFORMATION SYSTEMS • HUMAN RESOURCES

14. TYPES OF INNOVATION • PRODUCT VS PROCESS INNOVATION • INNOVATION MAY BE TECHNICAL AND/OR MARKETING (HOW SOMETHING IS SOLD) • 2 X 2 X 3 MATRIX RESULTS = SEGMENTS AS INNOVATION OPPORTUNITIES • INCREMENTAL INNOVATION • RADICAL INNOVATION • DISRUPTIVE/DISCONTINUOUS INNOVATION • OPPORTUNITIES FOR INNOVATION ARE ENDLESS BUT NOT ALL INNOVATIONS ARE EQUALLY VALUABLE • VRIND FOR INNOVATIONS; measures how important the innovation might be

15. AREAS FOR IMPROVING LIKELIHOOD OF INNOVATION • 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 • FORD & GM MOTOR GETTING BETTER - WHY?

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

17. CAN ONE SUCCEED ON F-L STRATEGIES ALONE? • YES, A TRIED-AND-TRUE STRATEGY • JAPANESE CAR COMPANIES AT THE OUTSET OF NORTH AMERICA/EUROPEAN INVASION • KOREAN CAR COS. NOW (OR UP UNTIL NOW) • LET OTHERS DO THE PRODUCT/MARKET PLANNING & EXPLORATION; OFFER A BETTER PRODUCT AT A CHEAPER PRICE • NO, IMITATION DOES NOT EXIST WITHOUT INNOVATION • CATCH-UP STRATEGIES ALWAYS REQUIRE INNOVATION AND EVEN INVENTION

18. IN CLASS PRACTICE EXAM QUESTIONS: ANSWER 1 OF THE FOLLOWING 2 • USING M. PORTER’S GENERIC COMPETITIVE STRATEGIES & FIVE FORCES MODELS, CHARACT-ERIZE STAPLES’ INDUSTRY STRATEGY • DO A GCS CONTINUUM; LOCATE STAPLES ON THE CONTINUUM; WHAT ARE YOUR REASONS FOR LOCATING STAPLES WHERE YOU DO? • DOES STAPLES HAVE DISTINCTIVE COMPETENCIES? IF SO, WHAT ARE THEY AND WHY ARE THEY DISTINCTIVE COMPETENCIES? • WHAT ARE DISTINCTIVE COMPETENCIES; HOW ARE THEY REALIZED; DOES STAPLES HAVE ANY OF THEM?