NORMAN NANGLOY BSA2
MODULE 4 most efficient way to perform a particular task.
COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL-LEVEL
STRATEGY
Intended Learning Outcomes:
At the end of this module, the learners are expected to:
 Discuss how an enterprise can use functional-level strategies to
increase its efficiency, and quality
 Explain how an enterprise can use functional-level strategies to
increase its innovation and customer responsiveness
Introduction: This module will take a look on functional-level strategies which
aimed at improving the effectiveness of a company's operations and, thus, its
ability to attain superior efficiency, quality, innovation and customer
responsiveness.
What is Functional-Level Strategy?
Functional-level strategies are strategies aimed at improving the effectiveness
of a company's operations.
Improves company's ability to attain superior:
A. Efficiency. The simplest measure of efficiency is the quantity of inputs that
takes to produce a given outputs.
Functional steps to increasing efficiency
Economies of Scale. One source of economies of scale is the ability to spread
fixed costs over a large production volume.
Fixed Costs - are costs that must be incurred to produce a product whatever
the level of output; examples are the costs of purchasing machinery, setting up
machinery for individual production runs, building facilities, advertising and
Research and Development.
Learning Effects. These are cost savings that come from learning by doing.
Labor, for example, learns by repetition how best to carry out a task. Therefore,
labor productivity increases over time, and unit costs fall as individuals learn the
Experience Curve. It is refers to the dynamic lowering of the cost structure, and
consequent unit cost reductions, that have been observed to occur over the life
of a product. This means, increasing a company's product volume and market
share will lower its cost structure relative its rivals.
Marketing. May have a major impact on efficiency and cost structure.
Marketing strategy refers to the position that a company takes with regard to
pricing. Promotion, advertising, product design, and distribution.
Customer Defection Rate is the rate at which existing customers leave the
brand and switch over to a competitor. It is possible that the customer has
stopped using this type of product altogether. Or the more likely scenario is
that the customer has switched over to a competitor.
Materials Management and Supply Chain. Material management encompasses
the activities necessary to get inputs and components to a production facility
(including the costs of purchasing inputs), through the production process, and
out through a distribution system to the end user.
Just-in-Time (JIT) Inventory system, is designed to economize on inventory
holding costs by having components arrive at a manufacturing plant just in time
to enter the production process or to have the goods arrive at a retail store only
when stock is almost depleted.
Supply-chain Management the task of managing the flow of inputs and
components from supplier's into the company's production processes to
minimize inventory holding and maximize inventory turnover.
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
 Reduce the number of parts that make up a product-reduces assembly
time
 Design for manufacturing requires close coordination with production
and R&D
2. Help a company have a lower cost structure by pioneering process
innovations
 Reduce process setup times
 Flexible manufacturing
 An important source of competitive advantage
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 and team performance can help
to increase employee productivity
Information Systems. Information systems' impact on productivity is wide-
ranging and potentially affects all the activities of a company
Infrastructure. The company's 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
B. 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.
Eliminating defects or errors reduces waste, increases efficiency, and
lowers the cost structure - increasing profitability.
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:
 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 company's profitability.
 Thus the company creates more jobs.
Deming's Steps in a Quality Improvement Program
 A company should have a clear business model.
 Management should embrace philosophy that mistakes, defects, and
poor quality are not acceptable.
 Quality of supervision should be improved.
 Management should create an environment in which employees will
not be fearful of reporting problem or making suggestions.
 Work standards should include some notion of quality to promote
defect-free output.
 Employees should be trained in new skills.
 Better quality requires the commitment of everyone in the workplace.
Implementing Reliability Improvement Methodologies.
Imperatives that stand out among companies that have successfully adopted
quality improvement methods:
a. Build organizational commitment to quality
b. Create quality leaders
c. Focus on the customer
d. Identify processes and the source of defects
e. Find ways to measure quality
f. Set goals and create incentives
g. Solicit input from employees
h. Build long-term relationships with suppliers
i. Design for ease of manufacture
j. 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 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 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 satisfy customer needs better.
Improve the quality of existing products. Reduce costs.
Innovation can be imitated - So it must be continuous
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
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 » Project execution
3. Achieving cross-functional integration
 Driven by customer needs
 Track development costs
 Minimize time-to-market
 Design for manufacturing
 Close integration between R8&D & marketing
4. Using product development teams
5. Partly-parallel development process
To compress development time & time-to-market
Achieving Superior Responsiveness to Customers. Customer responsiveness:
giving customers what they want, when they want it, and at a price they are
wiling to pay- as long as the company's long-term profitability is not
compromised.
1. Focusing on the customer (Demonstrating leadership, Shaping
employee attitudes, Bringing customers into the company)
2. Satisfying customer needs. (Customization, Tailor to unique needs of
groups of customers, Response time)
MODULE5
 BUILDING COMPETITIVE ADVANTAGE THROUGH BUSINESS-LEVEL
STRATEGY
Intended Learning Outcomes:
At the end of this module, the learners are expected to:
 Define competitive positioning and explain the tradeoffs between
differentiation, cost, and pricing options
 Explain why each business model allows company to outperform its
rivals, reach the value creation frontier, and obtain above average
profitability
 Discuss why some companies can successfully make the competitive
positioning decisions that allow them to sustain their competitive
advantage over time while others cannot.
Introduction: This module will examine the competitive decisions involved in
creating a business model that will attract and retain customers and continue to
do so over time so that a company enjoys growing profitability. By the end of
this module students will be able to distinguish between the principal generic
business models and business-level strategies that a company uses to obtain a
competitive advantage over its rivals.
What is Business-Level Strategy Business-Level Strategy?
Developing a firm-specific business model that will allow a company to gain
competitive advantage over its rivals in a market or industry
Customers' needs. Desires, wants, or cravings that can be satisfied through
product attributes
Customer groups. A way of aggregating customers that are similar in some
ways.
Distinctive competencies. How customers' need will be satisfied.
Product differentiation. Designing products to satisfy customers' needs
considering the balance of differentiation with costs, ability to charge a higher
price, different ways to achieve distinctness.
Customer Groups and Market Segmentation
Market segmentation. The way a company decides to group customers, based
on their different needs or preferences as to price and/or kinds of needs
Strategies to market segmentation
 Choose not to recognize that different groups of customers have
different needs; serve the average customer
 Segment a market and develop a product to suit the needs of each
segment
 Recognize that the market is segments but concentrate on serving only
one segment
Choosing a Generic Business-Level Strategy
Generic strategies
 All businesses can pursue them regardless of whether they are
manufacturing, service, or nonprofit
 Can be pursued in different kinds of industry environments
 Results from a company's consistent choices on product,
market, and distinctive competencies
Cost Leadership. Establish a cost structure that allows the company to provide
goods and services at lower unit costs than competitors
Advantages:
a. If rivals charge similar prices, the cost leader achieves superior
profitability.
b. The cost leader is able to charge a lower price than competitors
Cost Leadership Strategic Choices
a. The cost leader does not try to be the industry innovator
b. The cost leader positions its products to appeal to the "average"
Customer
c. The overriding goal of the cost leader is to increase efficiency and lower
its costs relative to its rivals
Cost Leadership Advantages
a. Protected from industry competitors by cost advantage.
b. Less affected by increased prices of inputs if there are powerful
suppliers
 c. Less affected by a fall in price of inputs if there are powerful buyers
d. Purchases in large quantities increase bargaining power over suppliers
e. Ability to reduce price to compete with substitute products
f. Low costs and prices are a barrier to entry
Cost Leadership Disadvantages
a. Competitors may lower their cost structures
b. Competitors may imitate the cost leader's methods
c. Cost reductions may affect demand
Differentiation. Create a product that customers perceive as different or
distinct in an important way.
Advantages:
a. Premium price
b. Increased revenues = superior profitability
Differentiation Strategic Choices
a. Quality, innovation, responsiveness to customer needs
b. A differentiator strives to differentiate itself along as many dimensions
as possible
c. A differentiator segments its market into many niches
d. A differentiated company concentrates on the organizational functions
that provide the source of differentiation advantage
Differentiation Advantages
a. Customers develop brand loyalty
b. Powerful suppliers are not a problem because the company is geared
more toward the price it can charge than its costs
c. Differentiators can pass price increases on to customers
d. Powerful buyers are not a problem because the product is distinct
e. Differentiation and brand loyalty are barriers to entry.
f. The threat of substitute products depends on competitors' ability to
meet customer needs
Differentiation Disadvantages
a. Difficulty in maintaining long-term distinctness in customers' eyes.
Agile competitors can quickly imitate. Patents and first-mover
advantage are limited
b. Difficulty of maintaining premium price
Cost Leadership and Differentiation. Pursuing the business models of the cost
leader and differentiator simultaneously
Cost Leadership and Differentiation Strategic Choices
a. Using robots and flexible manufacturing cells reduces costs while
producing different products
b. Standardizing component parts used in different end products can
achieve economies of scale
c. Limiting customer options reduces production and marketing costs
d. JIT inventory can reduce costs and improve quality and reliability
e. Using the Internet and e-commerce can provide information to
customers and reduce costs
f. Low-cost and differentiated products are often both produced in
countries with low labor costs
Focus. Serving the needs of a specific market segment
Geographic is a common strategy when you serve customers in a particular
area, or when your broad target audience has different preferences based on
where they are located.
Type of customer. Classified as to age, gender, life style, preferences
Segment of the product line. Product line is a group of products that a company
creates under a single brand. Examples, Hair Care, Skin Care, Diet Beverages,
Health Care and Focus Advantages
a. The focuser is protected from rivals to the extent it can provide a
product or service they cannot
b. The focuser has power over buyers because they cannot get the same
thing from anyone else
c. The threat of new entrants is limited by customer loyalty to the focuser
d. Customer loyalty lessens the threat from substitutes
e. The focuser stays close to its customers and their changing needs
Focus Disadvantages
a. The focuser is at a disadvantage with regard to powerful suppliers
because it buys in small volume (but it may be able to pass costs along
to loyal customers)
 b. Because of low volume, a focuser may have higher costs than a low-
cost company.
c. The focuser's niche may disappear because of technological change or
changes in customers' tastes
d. Differentiators will compete for a focuser's niche
Stuck in the Middle. Companies that do not do the planning necessary for
success in their chosen strategy. Product and market choices that have not
been able to obtain or sustain competitive advantage
Successful generic competitive strategy
a. Product, market, and distinctive competency decisions must result in a
Business-level strategy that leads to competitive advantage and superior
profitability
b. The environment and competition must be monitored constantly in
order to stay in tune with changes
Competitive Positioning and Business-Level Strategy. In every market segment
or industry, several companies typically compete for the same customers. The
actions of one company have an impact on the others. Managers must position
their companies competitively with regard to customers and competitors
Strategic Group Analysis. Identifying the strategies that a company's rivals are
pursuing
Strategic groups: companies in an industry that are pursuing a similar generic
strategy
Choosing an Investment Strategy. The amount and type of resources that must
be invested to maximize a company's profitability over time (Human,
Functional, Financial)
MODULE6
INDUSTRY ENVIRONMENT AND BUSINESS-LEVEL STRATEGY
Intended Learning Outcomes:
At the end of this module, the learners are expected to:
 Explain why strategic managers need to tailor their business models to
the conditions that exist in different kinds of industry environment
 identify the strategies managers can develop to increase profitability in
fragmented industry
 Outline the different strategies companies in declining industries can
use to support their business models and profitability
Introduction: This module first examines how companies in fragmented
industries can develop new kinds of business-level strategies to strengthen their
business models. It then considers the challenges of developing and sustaining a
competitive advantage in embryonic, growth, mature, and declining industries.
By the end of this module students will understand how forces in the changing
industry environment require managers to pursue new kinds of strategies to
strengthen their company's business model and keep it at the value creation
frontier where the most profit is earned.
The Industry Environment
There is the need to continually formulate and implement business-level
strategies to sustain competitive advantage over time in different industry
environments. Different industry environments present different opportunities
and threats. A company's business model and strategies have to change to
meet the environment.
Companies must face the challenges of developing and maintaining a
competitive strategy in:
Fragmented Industries. A fragmented industry is one composed of a large
number of small and medium-sized companies. Examples: Book Publishing,
Restaurant Industry, Women Dresses, Furniture, Public Accounting
Reasons for fragmented industries
a. Low barriers to entry due to lack of economies of scale
b. Low entry barriers permit constant entry by new companies
c. Specialized customer needs require small job lots of products no room
for a Mass-production
d. Diseconomies of scale

Strategies
Chaining - networks of linked outlets to achieve cost leadership
Franchising - for rapid growth with proven business concepts, reputation,
management skills and economies of scale
Horizontal Merger. It occurs when two or more firms in the same market,
producing substitute products, join together to form a single firm. An example
of a horizontal merger is that of two soft drink companies. The firms are
competitors producing similar products.
IT and Internet-to develop new business models
Embryonic and Growth Industries. An embryonic industry is one that is just
beginning to develop when technological innovation creates new market or
product opportunities. A growth industry is one in which first-time demand is
expanding rapidly as many new customers enter the market. Companies must
understand the factors that affect a market's growth rate - in order to tailor the
business model to the changing industry environment.
Strategy is determined by market demand
 Innovators and early adopters have different needs from the early and
late majority
 Company must be prepared to cross the chasm between the early
adopters and the later majority
Reasons for slow growth in market demand
 Limited performance and poor quality of the first products
 Customer unfamiliarity with what the new product can do for them
 Poorly developed distribution channels
 Lack of complementary products
 High production costs
Mass markets typically start to develop when:
 Technological progress makes a product easier to use and increases its
value to the average customer.
 Key complementary products are developed that do the same.
 Companies find ways to reduce production costs allowing them to
lower prices.
Strategic Implications of Market Growth Rates
a. Different markets develop at different rates.
b. Growth rate measures the rate at which the industry's product spreads in the
marketplace.
c. Growth rates for new kinds of products seem to have accelerated over time:
(Use of mass media, Low-cost mass production)
d. Factors affecting market growth rates:
Relative advantage the degree to which a new product is perceived as better at
satisfying customer needs than the product it supersedes
Compatibility the degree to which a new product is perceived as being
consistent with the current needs or existing values of potential adopters.
Trialability the degree to which potential customers can experiment with a new
product on a hands-on trial basis.
Complexity the degree to which a new product is perceived as difficult to
understand in use
Observability the degree to which the results of using and enjoying a new
product can be seen and appreciated by other people
Navigating Through the Life Cycle to Maturity. The amount and type of
resources and capital needed to pursue a company's business model depends
on two crucial factors:
1. Competitive advantage of company's business model
2. Stage of the industry life cycle
Embryonic stages-share building strategies. The aim is to build market share by
developing a stable and distinct competitive advantage to attract customers
who have no knowledge of the company's product.
1. Development of distinctive competencies and competitive
advantage.
2. Requires capital to develop R&D and sales/service competencies.
Growth stages maintain relative competitive position. Strengthen business
model to prepare to survive industry shakeout. Requires investment to keep up
with rapid growth of the market.
Shakeout stage - increase share during fierce competition
1. Invest in share-increasing strategies at expense of weak competitors.
2. Weak companies should exit the industry during the harvest stage.
Maturity stage - hold-and-maintain to defend business model
1. Dominant companies want to reap the reward of prior investments.
2. A company's investment depends on the level of competition and
source of the company's competitive advantage.
Mature Industries. A mature industry is dominated by a small number of large
companies whose actions are so highly interdependent that success of one
company's strategy depends on the response of its rivals.
Evolution of mature industries
 Industry becomes consolidated as a result of the fierce competition
during the shakeout stage.
 Business level strategy is based on how established companies
collectively try to reduce strength of competition.
 Interdependent companies try to protect industry profitability.
Strategies
Product proliferation is to cater the needs of customers in all market segments
to discourage entry.
Price cutting. Is to cut prices every time a new company enters the industry or
even better, every time a potential entrant is contemplating entry, and then
raise prices once the new entry or potential entrant has withdrawn.
Manage industry rivalry
Price signaling. The practice, now declared illegal, in which competing
companies alert each other to proposed changes in their pricing structure, in
order to control pricing within an industry.
Capacity control. The process of monitoring production output, comparing it
with the capacity plan and taking corrective action when needed.
Price leadership. The pricing strategy in which the firms in an oligopolistic (only
few industry selling either standardized or differentiated products) industry
follow the price set by the leading firm.
Non price competition. Firms try to capture the market from rivals through
better advertising campaigns and produce high quality products instead of
reducing prices.
Declining Industries. A declining industry is one in which market demand has
leveled off or is falling and the size of total market starts to shrink. Competition
tends to intensify and industry profits tend to fall.
Reasons for and severity of the decline
Reasons- technological change, social trends, demographic shifts
o Intensity of competition is greater when:
o The decline is rapid versus slow and gradual
o The industry has high fixed costs.
o The exit barriers are high.
o The product is perceived as a commodity.
o Not all industry segments typically decline at the same rate.
Creating pockets of demand
Strategies
Leadership -seeks to become dominant player in declining industry
Niche focuses on pockets of demand that are declining more slowly
Harvest optimizes cash flow
Divestment- sells business to others