Chapter

Four
Building Competitive
Advantage Through
Functional-Level Strategy

Functional-Level Strategies
Functional-level strategies

are

strategies aimed at improving the

effectiveness of a companys operations.

Improves companys ability to attain superior:

1.

Efficiency

3.

Innovation

2. Quality
4. Customer responsiveness

Increases the utility that customers

receive:
.

Through differentiation Creating more

value
This leads to a competitive advantage
. Lower cost structure
rivals
and superior profitability and than
profit
growth.
Copyright Houghton Mifflin Company. All rights
reserved.

1|2

Achieving Superior Efficiency

Functional 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
Copyright Houghton Mifflin Company. All rights
reserved.

1|3

 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 scale
Unit cost increases associated with a large scale of
output
Increased bureaucracy associated with large-scale
enterprises
Copyright Houghton Mifflin Company. All rights
1|4
Resulting managerial
inefficiencies
reserved.

Economies and Diseconomies

Scale

Copyright Houghton Mifflin Company. All rights

reserved.

of
Figure 4.2

1|5

 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 companys

production system,
learning has to begin again.
Copyright Houghton Mifflin Company. All rights
reserved.

1|6

The Impact of Learning and Scale

Economies on Unit Costs

Figure 4.3

Copyright Houghton Mifflin Company. All rights

reserved.

1|7

 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 companys product volume and
market share will lower its cost structure
relative to its rivals.
Copyright Houghton Mifflin Company. All rights
reserved.

1|8

The Experience Curve

Figure 4.4

Copyright Houghton Mifflin Company. All rights

reserved.

1|9

Dangers of Complacency Derived

from Experience Effects
Managers should not become complacent about
efficiency-based cost advantages derived from
experience effects:
1.

The experience curve is likely to bottom out

So further unit cost reductions may be hard to come by

2.

New technologies can make experience effects

obsolete
From changes always taking place in the external
environment

3.

Flexible manufacturing technologies may allow

small manufacturers to produce at low unit costs
Achieving both low cost and differentiation through
customization

4.

Copyright Houghton Mifflin Company. All rights

reserved.

Some technologies may not produce lower costs

1 | 10

 Flexible Manufacturing

and Mass Customization

Flexible Manufacturing Technology

A 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

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 11

Tradeoff Between Costs

Product Variety

Copyright Houghton Mifflin Company. All rights

reserved.

and
Figure 4.5

1 | 12

 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 customer defection rates and
Reducing

building customer loyalty can be major

sources of a lower cost structure.
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 13

Relationship between Customer

Loyalty and Profit per Customer

Figure 4.6

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.
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 14

 Materials Management and

Supply Chain

Materials Management
The 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 Management

Task of managing the flow of inputs to a companys processes

to minimize inventory holding and maximize inventory
turnover
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 15

 R&D Strategy

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

2.

Reduce the number of parts that make up a product reduces assembly time
Design for manufacturing requires close coordination with production and
R&D

Help a company have a lower cost structure by pioneering process

innovations

Reduce process setup times

Flexible manufacturing
An important source of competitive advantage

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 16

 Human Resource Strategy

The key challenge of the Human Resource
function: improve employee productivity.
Hiring strategy
Assures that the people a company hires have the
attributes that match the strategic objectives of the
company

Employee training
Upgrades employee skills to perform tasks faster and
more accurately

Self-managing teams
Members coordinate their own activities and make their
own hiring, training, work, and reward decisions.

Pay for performance

Linking pay to individual
andMifflin
team
performance
can help
Copyright Houghton
Company. All
rights
1 | 17
reserved.
to increase employee productivity

 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
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 18

 Infrastructure
A Companys Infrastructure:

The companys 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.

Copyright Houghton Mifflin Company. All rights
reserved.

1 | 19

Primary Roles of
Value-Creation Functions

Copyright Houghton Mifflin Company. All rights

reserved.

Table 4.1

1 | 20

Achieving Superior Quality

Quality can be thought of in terms
of two dimensions and gives a
company two advantages:
Quality as reliability

They do the jobs they were designed for and

do it well

Quality as excellence

Perceived by customers to have superior

attributes

A strong reputation for quality allows a

company to differentiate its products.
1. Eliminating defects or errors reduces
waste, increases efficiency, and lowers
the cost structure increasing
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 21

Improving Quality as Reliability

Six Sigma methodology: the principal tool

now used to increase reliability and is a direct

descendant of Total Quality Management (TQM)

TQM is based on the following five-step

chain reaction:
1.
2.
3.
4.
5.

Improved quality means that

costs decrease.
As a result, productivity also
improves.
Better quality leads to higher market share and allows
increased prices.
This increases a companys profitability.
Thus the company creates more jobs.

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 22

Demings 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.
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 23

Roles Played in Implementing

Reliability Improvement Methods

Copyright Houghton Mifflin Company. All rights

reserved.

Table 4.2

1 | 24

Implementing Reliability
Improvement 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
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 25

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 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
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 26

Attributes Associated with a Product

Offering

Table 4.3

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 27

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 satisfy
customer needs better
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.
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 28

The High Failure Rate of Innovation

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.
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

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 29

Building Competencies in Innovation

Companies can take a number of steps to build
competencies in innovation and reduce failures:

1. Building skills in basic and applied research

2. Project selection and management
Using the product development funnel
Idea generation Project refinement
execution

Project

3. Achieving cross-functional integration

1. Driven by customer needs 2. Design for manufacturing
3. Track development costs
4. Minimize time-to-market
5. Close integration between R&D & marketing

4. Using product development teams

5. Partly-parallel development process
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 30

The Development Funnel

Figure 4.7

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 31

Sequential and Partly Parallel

Development Processes

Figure 4.8

Reduced
Reduced
development
development time
time
&
time-to-market
& time-to-market
Copyright Houghton Mifflin Company. All rights
reserved.

1 | 32

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 companys long-term profitability is
not compromised.

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

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 33

Primary Roles of Functions in

Achieving Superior Responsiveness
to Customers
Table 4.5

Copyright Houghton Mifflin Company. All rights

reserved.

1 | 34