Competitive Advantage Through Functional-Level Strategies

Ch4- Competitive Advantage through functional-level strategies

Functional-level strategies

1. Actions that managers take to improve the efficiency and effectiveness of one or more value creation activities.

Achieving Superior Efficiency

• Efficiency and Economies of Scale- Reductions in unit costs attributed to larger output.

1. Ability to spread fixed costs over large production volume.
2. Achieve a greater division of labour and specialization.
3. Diseconomies of scale, the unit cost increase as output increases. Managers must be aware of when dos occurs, better option build 2 plants 300 people rather than one with 600.

• Efficiency and Learning Effects- Cost savings that come from learning by doing.

1. Learning Process of employees, usually found at start up or introduction of new system change.
2. Learn by reputation, effects are more significant in an assembly process that has 1000 complex steps than one with 100 simple steps.

• Efficiency and the Experience Curve- The systematic lowering of the cost structure and consequent unit cost reductions that have been observed to occur over the life of a product.

1. Relationships between unit manufacturing costs and accumulated output
2. As a company increases the accumulated volume of its output over time, it is able to realize both economies of scale (as volume increases) and learning effects. Consequently, unit costs and cost structure fall with increases in accumulated output.
3. Increasing a company’s product volume and market share will lower its cost structure relative to its rivals.
4. Note for managers: Rival companies can match your EOS and LE overtime. New technology aspect, change the industry and bases of competition.

• Efficiency, Flexible Production Systems, and Mass Customization – 

1. Flexible production technology- a range of technologies designed to reduce setup times for complex equipment, increase the use of machinery through better scheduling, and improve quality control at all stages of the manufacturing process.
2. Allow company to produce a wider variety of end products at a unit cost that at one time could only be achieved through mass production of a standardized output.
3. Mass Customization- The use of flexible manufacturing technology to reconcile two goals that were once thought to be incompatible: low cost and differentiation through product customization.

• Marketing and Efficiency

1. Marketing Strategy- pricing, promotion, advertising, product design, and distribution
2. Customer defection (Churn rate) - loss of clients or customers to rivals. (Want to decrease the churn rate)
3. High costs to acquire new customer, serve customers who stay short = loss on investment. The longer a customer stays with the company, the more the fixed costs of getting customer can be spread of repeat purchases.
4. Positive relationship with customers who are loyal and profit per customer.
5. Loyal customers = referrals (free advertising)

Materials Management, Just in time systems, and efficiency

• JIT inventory system- System of economizing on inventory holding costs by scheduling components to arrive just in time to enter the production process or only as stock is depleted.

1. Reduces need for working capital and fixed capital, which reduces capital needs, increases capital turn over, and, by extension, boosts ROIC. Drawback is no buffer stock of inventory (respond quick to demand increase)

• Supply chain management – The task of managing the flow of input and components from suppliers into the company’s production processes to minimize inventory holding and maximize inventory turnover.
• Research and Development Strategy and Efficiency

1. Design products that are easy to manufacture, cut down on number of parts required (increase eff in assembly line),
2. Pioneering process innovations

• Human Resource Strategy and Efficiency

1. Productive employees lower the costs of generating revenues, increase the return on sales, and, by extension, boost the ROIC.
2. Hiring strategies, training employees, organizing the workforce into self-managing teams, and linking pay to performance.

• Information Systems and Efficiency

1. Use of Web-based info systems to reduce costs between company and customers
2. Use of online stores versus real stores etc.

• Infrastructure and Efficiency

1. Org structure, culture, style of strategic leadership, and control system- affect value creation activities.
2. Strategic leadership – articulate a vision that all functions need to focus on improving efficiency. Facilitate cross-functional co-ordination between all departments.

Achieving Superior Quality

• Attaining Superior Reliability

1. Total quality management- increasing product reliability so that it consistently performs as it was designed to and rarely breakdown.

• Implementing Reliability Improvement Methodologies

1. Cross-functional process, must be communicated with clear instructions by management.
2. Six Sigma methodology
3. Identify defects that arise, trace to source, find out problem and deal with it. (statistical procedures)
4. Create metric to measure quality (measure defect errors)
5. Set a challenging quality goal and create incentives to reach it
6. Employees on floor, incorporate into a quality improvement programme.
7. Work with suppliers to improve parts they supply
8. Decrease assembly line by requiring less parts (less room for error)
9. Requires organization commitment and cooperation among functions.

• Improving Quality as Excellence

1. Products can be differentiated by attributes that collectively define product excellence. Form, features, performance, durability, styling of a product and Service provided.
2. Collect marketing intel, design products with attributes, promote and position chosen attributes (2 recommended), company/product must continually improve and develop

Achieving Superior Innovation

• High failure rate of innovation

1. Demand is uncertain
2. Technology is poorly commercialized (poor quality/design)
3. Poor positioning strategy
4. Not enough demand
5. Slowly marketed “cycle time”

• Reducing Innovation Failures

1. Tight Functional integration teams- oversee the life of a product from start to finish
2. Project manager who is a leader and veteran
3. One member from each key department
4. Work closesly to create a sense of camaraderie and facilitate communication.
5. Clear plan, clear goals, budget
6. Develop process for communication and conflict resolutions.
7. Develop competencies

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Achieving Superior Customer Responsiveness

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