Chapter 4 Building Competitive Advantage 93

Human Resources There are a number of ways in which the human resource
function can help an enterprise to create more value. This function ensures that the
company has the right mix of skilled people to perform its value-creation activities
effectively. It is also the job of the human resource function to ensure that people
are adequately trained, motivated, and compensated to perform their value-creation
tasks. If the human resources are functioning well, employee productivity rises
(which lowers costs) and customer service improves (which raises utility), thereby
enabling the company to create more value.

Information Systems Information systems refer largely to the electronic systems

for managing inventory, tracking sales, pricing products, selling products, dealing
with customer service inquiries, and so on. Information systems, when coupled with
the communications features of the Internet, are holding out the promise of being
able to improve the efficiency and effectiveness with which a company manages its
other value-creation activities. Walmart uses information systems to alter the way
it does business. By tracking the sale of individual items very closely, its materials
management function has enabled it to optimize its product mix and pricing strat-
egy. Walmart is rarely left with unwanted merchandise on its hands, which saves on
costs, and the company is able to provide the right mix of goods to customers, which
increases the utility that customers associate with Walmart.

Company Infrastructure Company infrastructure is the companywide context

within which all the other value creation activities take place: the organizational
structure, control systems, and company culture. Because top management can ex-
ert considerable influence in shaping these aspects of a company, top management
should also be viewed as part of the infrastructure of a company. Indeed, through
strong leadership, top management can shape the infrastructure of a company and,
through that, the performance of all other value-creation activities that take place
within it.

F S
 T G B
B  C A
Now that we have reviewed the generic building blocks of competitive advantage and
discussed how the different functions of a company fit together into the value chain,
we can look at some of the functional level strategies managers pursue improve the
efficiency, quality, innovation, and customer responsiveness of their organization.
Since this topic is a vast one worthy of a book in its own right, we not attempt an Company
exhaustive review of functional level strategies. Instead, we shall illustrate the role of Infrastructure
functional level strategies in building competitive advantage by focusing on a limited The companywide
number of important functional level strategies. context within which all
the other value creation
activities take place: the
Increasing Efficiency organizational structure,
Actions can be taken by functional managers at every step in the value chain to control systems, and
increase the efficiency of a company. company culture.
94 Part 2 The Nature of Competitive Advantage

R&D and Efficiency Managers in the R&D function might look for ways to sim-
plify the design of a product, reducing the number of parts it contains. By doing so,
R&D can dramatically decrease the required assembly time, which translates into
higher employee productivity, lower costs, and higher profitability. For example, af-
ter Texas Instruments redesigned an infrared sighting mechanism that it supplies
to the Pentagon, it found that it had reduced the number of parts from 47 to 12,
the number of assembly steps from 56 to 13, the time spent fabricating metal from
757 minutes per unit to 219 minutes per unit, and unit assembly time from 129 min-
utes to 20 minutes. The result was a substantial decline in production costs. Design
for manufacturing requires close coordination between the production and R&D
functions of the company, of course. Cross-functional teams that contain production
and R&D personnel who work jointly on the problem best achieve this.

Production and Efficiency Managers in the production function of a company

might look for ways to increase the productivity of capital and labor. One common
strategy is to pursue economies of scale—driving down unit costs by mass produc-
ing output. A major 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 pro-
duce a product whatever the level of output. For example, Microsoft spends perhaps
$5 billion to develop its latest Windows operating system. It can realize substantial
scale economies by spreading the fixed costs associated with developing the new op-
erating system over the enormous unit sales volume it expects for this system (over
90% of the world’s personal computers use a Microsoft operating system). These
scale economies are significant because of the trivial incremental (or marginal) cost
of producing additional copies of a Windows operating system: once the master
copy has been produced, additional CDs containing the operating system can be
produced for a few cents. The key to Microsoft’s efficiency and profitability (and that
of other companies with high fixed costs and trivial incremental or marginal costs) is
to increase sales rapidly enough that fixed costs can be spread out over a large unit
volume and substantial scale economies can be realized.
Another source of scale economies is the ability of companies producing in large
volumes to achieve a greater division of labor and specialization. Specialization is
said to have a favorable impact on productivity, mainly because it enables em-
ployees to become very skilled at performing a particular task. The classic ex-
ample of such economies is Ford’s Model T car. The world’s first mass-produced
car, the Model T Ford was introduced in 1923. Until then, Ford had made cars
using an expensive hand-built craft production method. By introducing mass-
production techniques, the company achieved greater division of labor (it split
assembly into small, repeatable tasks) and specialization, which boosted employee
productivity. Ford was also able to spread the fixed costs of developing a car and
setting up production machinery over a large volume of output. As a result of these
economies, the cost of manufacturing a car at Ford fell from $3,000 to less than
$900 (in 1958 dollars).
In addition to scale effects, production managers might seek to boost efficiency
by pursuing strategies that help to maximize learning effects. Learning effects are
cost savings that come from learning by doing. Labor, for example, learns by repeti-
tion how best to carry out a task. Therefore, labor productivity increases over time,
and unit costs fall as individuals learn the most efficient way to perform a particu-
Learning Effects lar task. Equally important, management in new manufacturing facilities typically
Cost savings that come learns over time how best to run the new operation. Hence, production costs decline
from learning by doing. because of increasing labor productivity and management efficiency.