Building Competitive Advantage 

Through Functional‐Level Strategy

Building Competitive Advantage Through

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Functional-Level Strategy
 Functional‐Level
Functional Level Strategies
Strategies
Functional-level strategies are strategies aimed
at improving the effectiveness of a company
company’s
s
operations.

• Functional‐level strategies aim to give a firm superior:

– Efficiency
– Quality
– Innovation
– Customer responsiveness

This leads to a competitive advantage and superior

profitability and profit growth.
Building Competitive Advantage Through
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Functional-Level Strategy
 Achieving Superior Efficiency
Achieving Superior Efficiency

• 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
p y to become veryy skilled at p
performingg a p
particular task
• Diseconomies of scale
Unit cost increases associated with a large scale of output
• Increased
I d bureaucracy
b associated
i t d with
ith large‐scale
l l enterprises
t i
• Resulting managerial inefficiencies

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Functional-Level Strategy
Economies and Diseconomies    of 
Scale
l

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Functional-Level Strategy
 Learning Effects
Learning Effects
Learning Effects are cost savings that come from
learning by doing.
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
A l b and d managementt become
b more efficient
ffi i t over
time at every level of output

Building Competitive Advantage Through

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Functional-Level Strategy
The Impact of Learning and   Scale 
Economies on Unit Costs

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Functional-Level Strategy
 The Experience Curve
The Experience Curve
The Experience Curve is the systematic lowering of the
cost structure and consequent unit cost reductions
that occur over the life of a product.
p

Strategic significance of the experience curve:

Increasing a company’s product volume and market
share will lower its cost structure relative to its rivals.

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Functional-Level Strategy
The Experience Curve
The Experience Curve

Building Competitive Advantage Through

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Functional-Level Strategy
 Flexible Manufacturing
and Mass Customization
d
• Flexible Manufacturing Technology
“Lean Production” technology that:
• Reduces 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
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
• Low cost and
• Differentiation through product customization  
iff i i h h d i i
Building Competitive Advantage Through
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Functional-Level Strategy
Tradeoff Between Costs and Product 
Variety

Building Competitive Advantage Through

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Functional-Level Strategy
 Marketing
– Marketing strategy refers to the position that a 
g gy p
company takes regarding: 
• Pricing          
• Promotion  
• Advertising
• Product Design       
• Distribution
– Marketing strategy can reduce costs by lowering 
customer defection rates and increasing loyalty

Building Competitive Advantage Through

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Functional-Level Strategy
The Relationship Between Customer Loyalty 
and Profit per Customer
d P fi C

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.
Building Competitive Advantage Through
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Functional-Level Strategy
 Materials Management and 
Supply Chain
l h
• Materials Management encompasses the activities  necessary 
to get inputs and components to a production facility, through 
g p p p y, g
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 to economize holding costs:
• Have components arrive to manufacturing just prior to need in 
Ha e components arri e to man fact ring j st prior to need in
production process
• Have finished goods arrive at retail just prior to stock out 
• Supply
Supply Chain Management is the task of managing the flow of 
Chain Management is the task of managing the flow of
inputs to a company’s processes to minimize inventory holding 
and maximize inventory turnover

Building Competitive Advantage Through

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Functional-Level Strategy
 R&D Strategy
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 
1. Boost efficiency by designing products that are easy to
manufacture
• Reduce the number of parts that make up a product –reduces 
assembly time
assembly time
• Design for manufacturing – requires close coordination with 
production and R&D
2 Help
2. Help a company have a lower cost structure by 
a company have a lower cost structure by
pioneering process innovations
• Reduce process setup times
• Flexible manufacturing
Flexible manufacturing
• An important source of competitive advantage
Building Competitive Advantage Through
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Functional-Level Strategy
 Human Resource Strategy
Human Resource Strategy
Goal: to improve employee productivity.
• Hiring strategy
Assures that the people a company hires have the attributes that match 
the strategic objectives of the company
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
p y p y

Building Competitive Advantage Through

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Functional-Level Strategy
 Information Systems
Information Systems
Information systems
Information systems’ impact 
impact
on productivity is wide‐
ranging:
• Web‐based information    systems can 
automate many activities
automate many     activities
• Automates interactions   between
– Company and customers
C d t
– Company and suppliers

Building Competitive Advantage Through

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Functional-Level Strategy
 Infrastructure
A company’s structure, culture, style of               
p y , , y f
strategic leadership, and control system:
• Determines the context within which all other value 
creation activities take place
• Is especially important in building a companywide 
commitment to efficiency
commitment to efficiency
• Articulates a vision for all functions and coordinate across 
functions
Achieving superior performance requires an 
organization‐wide commitment.                       
T
Top management plays a major role in this process.
t l j l i thi
Building Competitive Advantage Through
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Functional-Level Strategy
Primary Roles of Value Creation 
Functions

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Functional-Level Strategy
 Achieving Superior Quality
Achieving Superior Quality
™ Quality can be thought of in terms of two
dimensions:
1. Quality as reliability
They do the jobs they were designed for and do it well
They do the jobs they were designed for and do it well
2. 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.
Building Competitive Advantage Through
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Functional-Level Strategy
 Improving Quality as Reliability
Improving Quality as Reliability
Six Sigma methodology: the principal tool
now used to increase reliability
reliability, which is a direct
descendant of Total Quality Management (TQM)
TQM is based on the following five‐step chain reaction:
TQM is based on the following five step chain reaction:
1. Improved quality means that costs decrease.
2. As a result, productivity also improves. 
3. Better quality leads to higher market share and 
allows increased prices.
4. This increases a company
This increases a company’ss profitability.
profitability.
5. Thus the company creates more jobs.

Building Competitive Advantage Through

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Functional-Level Strategy
 Deming’s 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. Q
Quality of supervision should be improved.
y p p
4. Management should create an environment in which 
employees will not be fearful of reporting problems or 
making suggestions.
g gg
5. Work standards should include some notion of quality 
to promote defect‐free output.
6.
6 Employees should be trained in new skills
Employees should be trained in new skills.
7. Better quality requires the commitment of everyone in 
the workplace.

Building Competitive Advantage Through

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Functional-Level Strategy
Roles Played in Implementing Reliability 
I
Improvement Methodologies
M h d l i

Building Competitive Advantage Through

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Functional-Level Strategy
 Implementing Reliability Improvement 
M h d l i
Methodologies
Imperatives that stand out among companies that have
successfully adopted quality improvement methods:
• Build organizational commitment to quality
• Create quality leaders
q y
• Focus on the customer
• Identify processes and the source of defects
• Find ways to measure quality
i d li
• Set goals and create incentives
• Solicit input from employees
Solicit input from employees
• Build long‐term relationships with suppliers
• Design for ease of manufacture
• Break down barriers among functions
Building Competitive Advantage Through
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Functional-Level Strategy
 Improving Quality as Excellence
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:
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 
Continual improvement in attributes and
development of new‐product attributes
Building Competitive Advantage Through
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Functional-Level Strategy
Attributes Associated with a Product Offering
Attributes Associated with a Product Offering

Building Competitive Advantage Through

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Functional-Level Strategy
 Achieving Superior Innovation
Achieving Superior Innovation
Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.
• Innovation can:
I ti
– Result in new products that better satisfy customer 
needs
– Improve the quality of existing products
Improve the quality of existing products
– Reduce costs
• Innovation can be imitated ‐
ª So it must be continuous
So it must be continuous

Successful new product launches are major 
p j
drivers of superior profitability.
Building Competitive Advantage Through
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Functional-Level Strategy
 The High Failure Rate of Innovation
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
U i
– Quantum innovation – radical departure with higher risk
– Incremental innovation – extension of existing technology
• Poor commercialization 
P i li ti
– Definite demand for product
– Product not well adapted to customer needs
• Poor positioning strategy
Poor positioning strategy
– Good product but poorly positioned in the marketplace
• Technological myopia
– Technological “wizardry” vs. meeting market requirements
Technological “wizardry” vs meeting market requirements
• Being slow to market
Building Competitive Advantage Through
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Functional-Level Strategy
 Building Competencies in Innovation
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
2. Project selection and management
Using the product development funnel
» Idea generation » Project refinement » Project execution
3. Achieving cross‐functional integration
1. Driven by customer needs    2.   Design for manufacturing
3. Track development costs      4.   Minimize time
Track development costs 4. Minimize time‐to‐market
to market
5. Close integration between R&D and marketing 
4. Using product development teams
5 Partly‐parallel development process
5. Partly parallel development process
To compress development time & time‐to‐market
Building Competitive Advantage Through
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Functional-Level Strategy
The Development Funnel
The Development Funnel

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Functional-Level Strategy
Sequential and Partly Parallel 
Development Processes
l

Reduced
development time
& time-to-market

Building Competitive Advantage Through

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Functional-Level Strategy
 Achieving Superior Responsiveness to 
Customers
Customer responsiveness: giving customers what
they want
want, when they want itit, and at a price they are willing
to pay - as long as the company’s long-term profitability is
not compromised.

• Focusing on the customer
– Satisfying customer needs
• Customization (Tailor to 
unique needs of groups
of customers)
of customers)
• Response time (increased 
speed; premium pricing)

Building Competitive Advantage Through

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Functional-Level Strategy
Primary Roles of Functions in Achieving Superior 
R
Responsiveness to Customers
i C

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Functional-Level Strategy