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Chapter 4. BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY. Learning Objectives. Explain how an enterprise can use functional-level strategies to increase efficiency Explain how an enterprise can use functional-level strategies to increase quality
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Chapter 4 BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL STRATEGY
Learning Objectives • Explain how an enterprise can use functional-level strategies to increase efficiency • Explain how an enterprise can use functional-level strategies to increase quality • Explain how an enterprise can use functional-level strategies to increase innovation • Explain how an enterprise can use functional-level strategies to increase customer responsiveness
Functional-Level Strategies “...aimed at improving the effectiveness of a company’s operations...” Aim to give a firm superior: • Efficiency • Quality • Innovation • Customer responsiveness This leads to a competitive advantage and superior profitability and profit growth.
Roots of Competitive Advantage Distinctive competencies shape the functional-level strategies that a company can pursue. Figure 4.1 Function-level strategies can build resources and capabilities to enhance a company’s distinctive competencies.
Achieving Superior Efficiency • Economies of scale- Unit cost reductions associated with large scale output • Spread fixed costs over large volume • Achieve greater division of labor/specialization • Specialization enables employees to become skilled at particular task • Diseconomies of scale- Unit cost increases associated with large scale output • Increased bureaucracy with large-scale enterprises • Resulting managerial inefficiencies
Economies/Diseconomies of Scale Figure 4.2
Learning Effects Cost savings from learning by doing. • Labor productivity- Learn by repetition • Management efficiency- Learn over time • Learning effects implies downward shift entire unit cost curve- Become more efficient over time at every level of output
Impact of Learning& Scale on Unit Costs Figure 4.3
The Experience Curve “...the systematic lowering of... cost structure and consequent unit cost reductions, that ...occur over the life of a product.” Strategic significance of the experience curve: Increasing company’s product volume & market share will lower cost structure relative to rivals.
The Experience Curve Figure 4.4
Flexible Production and Mass Customization • Flexible Production Technology • Reduces setup times for complex equipment • Improves scheduling to increase use of individual machines • Improves quality control at all stages of manufacturing process • Increases efficiency = lowers unit costs • Mass Customization • Low cost • Differentiation through product customization
Tradeoff BetweenCosts and Product Variety Figure 4.5
Marketing • Marketing strategy- position company takes regarding: • Pricing • Promotion • Advertising • Product Design • Distribution • Marketing strategy can reduce costs by lowering customer defection rates and increasing loyalty
Relationship Between Customer Loyalty and Profit per Customer Figure 4.6
MaterialsManagement and Supply Chain • Materials Management- activities to get inputs and components to production, through production process, and through distribution to end-user • Many sources of cost • Opportunities for cost reduction by efficient materials management • Just-in-Time (JIT)- minimize holding costs: • Components arrive just prior to need in production • Finished goods arrive just prior to stock out • Supply Chain Management- managing the flow of inputs to minimize inventory holding & maximize inventory turnover
R&D Strategy Research and Development (R&D) • Boost efficiency by designing products easy to manufacture • Reduce number of parts– reduces assembly time • Design for manufacturing – requires close coordination with production and R&D 2. A lower cost structure by process innovations • Reduce process setup times • Flexible manufacturing • An important source of competitive advantage
Human Resource Strategy Goal: to improve employee productivity. • Hiring strategy- people a company hires have the attributes that match strategic objectives • Employee training- Upgrades employee skills to perform tasks faster/more accurately • Self-managing teams- Members coordinate own activities and make their own hiring, training, work, and reward decisions • Pay for performance- Linking pay to individual and team performance to increase employee productivity
Information Systems Wide-ranging Impact: • Web-based information systems automate many activities • Automates interactions between • Company customers • Company suppliers
Infrastructure “... structure, culture, style of strategic leadership, and control system...” • Determines context within which other value creation activities take place • Especially important in building companywide commitment to efficiency • Articulates vision for all functions & coordinate across functions Achieving superior performance requires an organization-wide commitment. Top management plays a major role in this process.
Primary Roles of Value Creation Functions Table 4.1
Achieving Superior Quality Quality is two dimensional: • Reliability- do the jobs designed for and well • Excellence- perceived by customers to have superior attributes • Strong reputation for quality allows a company to differentiate its products • Eliminating defects/errors reduces waste, increases efficiency, lowers cost structure– increasing profitability.
Business Modelfor Quality Improvement Philosophy Supervision Environment Standards Training Commitment
Improving QualityThrough Reliability Six Sigma methodology: principal tool now used to increase reliability, a direct descendant of Total Quality Management (TQM) Based on five-step chain reaction: • Improved quality means costs decrease • Result = productivity also improves • Better quality leads to higher market share and allows increased prices • Increases profitability. • Company creates more jobs.
Roles Played in Implementing Reliability Improvement Methodologies Table 4.2
Implementing ReliabilityImprovement Methodologies Imperatives that stand out among companies that have successfully adopted quality improvement methods: • 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
Improving Quality as Excellence A product is a bundle of attributes and can be differentiated by attributes that collectively define product excellence. Developing Superior Attributes: • Learn which attributes are most important to customers • Design products & associate services to embody important attributes • Decide which attributes to promote & how to position them • Continual improvement in attributes & development of new-product attributes
Achieving Superior Innovation Building distinctive competencies that result in innovation is the most important source of competitive advantage. • Innovation can: • Result in new products that better satisfy customer needs • Improve 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.
High Failure Rate of Innovation “...evidence suggesting... only 10 to 20% of major R&D projects give rise to commercially viable product. Most common explanations for failure: • Uncertainty • 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 • Being slow to market
Reducing Innovation Failures • Project development projects driven by customer needs • New projects designed for ease of manufacture • Development costs kept in check • Time to market minimized • Close integration of R & D and marketing
Top management must bear primary responsibility for overseeing the whole development process. • The effectiveness of R&D in developing new products and processes depends on its ability to cooperate with marketing and production. Functional Roles forAchieving Superior Innovation Table 4.4
Achieving Superior Responsiveness to Customers 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. Focus on the customer • Demonstrating Leadership • Shaping Employee Attitudes • Bringing Customers to Company • Satisfying customer • Customization • Response Time
Primary Roles of Functions in Achieving Superior Responsiveness to Customers Table 4.5
“Preparation iseverything.Noah did notstart buildingthe ark when it was raining.” - Warren Buffett