Building Competitive Advantage Through Functional-Level Strategy

Chapter 4
BUILDING COMPETITIVE
ADVANTAGE THROUGH
FUNCTIONAL-LEVEL
STRATEGY
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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.
4-2
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.
4 -3
Achieving Superior Efficiency
o 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
o Diseconomies of scale- Unit cost increases
associated with large scale output
Increased bureaucracy with large-scale
enterprises
Resulting managerial inefficiencies
4 -4
Economies/Diseconomies of Scale
Figure 4.2
4-5
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
4-6
Impact of Learning
& Scale on Unit Costs
Figure 4.3
4 -7
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.
4-8
The Experience Curve
Figure 4.4
4 -9
Flexible Production
and Mass Customization
o 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
o Mass Customization
Low cost
Differentiation through product
customization
4 -11
Tradeoff Between
Costs and Product Variety
Figure 4.5
4 -11
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
4 - 12
Relationship Between Customer
Loyalty and Profit per Customer
Figure 4.6
4 -13
Materials
Management and Supply Chain
o 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
o Supply Chain Management- managing the flow of
inputs to minimize inventory holding & maximize
inventory turnover
4- 14
R&D Strategy
Research and Development (R&D)
1. 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
4 - 15
R&D Strategy…
o Re-inventing the wheel?
o Choosing R&D personnel
o Entering into R&D tie-ups
o Funding of R&D
o R&D and overall strategy
o From the lab to the user
o Improvisation, innovation, re-
engineering, reverse engineering
4-16
Pharma R&D Architecture
4-17
Human Resource Strategy
Goal: to improve employee productivity.
o Hiring strategy- people a company hires have

the attributes that match strategic objectives
o Employee training- Upgrades employee skills
to perform tasks faster/more accurately
o Self-managing teams- Members coordinate own
activities and make their own hiring, training,
work, and reward decisions
o Pay for performance- Linking pay to individual
and team performance to increase employee
productivity
4-18
Information Systems
Wide-ranging Impact:
o Web-based information systems automate
many activities
o Automates interactions between
• Company customers
• Company suppliers
4 -19
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.
4 -20
Achieving Superior Quality
Quality is two dimensional:
1) Reliability- do the jobs designed for and well
2) 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.
4- 21
Business Model
for Quality Improvement
Philosophy Supervision
Environment Standards
Training Commitment
4-22
Improving Quality
Through 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:
1. Improved quality means costs
decrease
2. Result = productivity also improves
3. Better quality leads to higher market
share and allows increased prices
4. Increases profitability.
5. Company creates more jobs.
4-23
Implementing Reliability
Improvement Methodologies
Imperatives that stand out among companies that have
successfully adopted quality improvement methods:
o Build organizational commitment to quality
o Create quality leaders
o Focus on the customer
o Identify processes and the source of defects
o Find ways to measure quality
o Set goals and create incentives
o Solicit input from employees
o Build long-term relationships with suppliers
o Design for ease of manufacture
o Break down barriers among functions
4 | 24
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
4 -25
Achieving Superior Innovation
Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.
o Innovation can:
• Result in new products that better
satisfy customer needs
• Improve quality of existing products
• Reduce costs
o Innovation can be imitated
 So it must be continuous
Successful new product launches are
major drivers of superior profitability. 4-26
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
4-27
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
4-28
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 Satisfying customer
 Demonstrating  Customization
Leadership  Response Time
 Shaping Employee
Attitudes
 Bringing Customers to
Company
4-29
“Preparation is
everything.
Noah did not
start building
the ark when
it was raining.”
- Warren Buffett
4 | 30

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Chapter 4

Aim to give a firm superior:

Function-level strategies can build resources and capabilities to

Strategic significance of the experience curve:

o Hiring strategy- people a company hires have

Achieving superior performance requires an

 Strong reputation for quality allows a

Most common explanations for failure:

 Project development projects driven

Focus on the customer Satisfying customer

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