Chapter

Four
Building
Competitive
Advantage
Through
Functional-
Level Strategy
 Functional-Level Strategies
Functional-level strategies are strategies aimed
at improving the effectiveness of a company’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.
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 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 to become very skilled at performing
a particular task
 Diseconomies of scale
Unit cost increases associated with a large scale of output
• Increased bureaucracy associated with large-scale
enterprises
• Resulting managerial inefficiencies

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 Economies and Diseconomies
of Scale
Figure 4.2

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 Learning Effects
Learning Effects are cost savings that come
from learning by 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 and management become more efficient
over time at every level of output

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 The Impact of Learning and
Scale Economies on Unit Costs
Figure 4.3

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 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

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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 The Experience Curve
Figure 4.4

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 Flexible Manufacturing
and Mass Customization
 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
reconcile two goals that were once thought incompatible:
• Low cost and
• Differentiation through product customization
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 Tradeoff Between Costs
and Product Variety
Figure 4.5

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 Marketing
• Marketing strategy refers to the position that a
company takes regarding:
• Pricing
• Promotion
• Advertising
• Product Design
• Distribution
• Marketing strategy can reduce costs by lowering
customer defection rates and increasing loyalty

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 The Relationship Between Customer
Loyalty and Profit per Customer
Figure 4.6

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.
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 Materials Management and
Supply Chain
 Materials Management encompasses the activities
necessary to get inputs and components to a production
facility, through 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
production process
» Have finished goods arrive at retail just prior to stock out
 Supply Chain Management is the task of managing the
flow of inputs to a company’s processes to minimize
inventory holding and maximize inventory turnover

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 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 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

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 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
 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

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 Information Systems
Information systems’
impact on productivity is
wide-ranging:
 Web-based information
systems can automate many
activities
 Automates interactions
between
• Company and customers
• Company and suppliers

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 Infrastructure
A company’s structure, culture, style of
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
• Articulates a vision for all functions and
coordinate across functions

Achieving superior performance requires an

organization-wide commitment.
Top management plays a major role in this process.

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 Primary Roles of
Value Creation Functions
Table 4.1

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 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
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.

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 Improving Quality as Reliability
Six Sigma methodology: the principal tool
now used to increase reliability, which is a direct
descendant (successor) of Total Quality
Management (TQM)
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’s profitability.
5. Thus the company creates more jobs.

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 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. Quality of supervision should be improved.
4. Management should create an environment in
which employees will not be fearful of reporting
problems or making suggestions.
5. Work standards should include some notion of
quality to promote defect-free output.
6. Employees should be trained in new skills.
7. Better quality requires the commitment of
everyone in the workplace.
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 Implementing Reliability Improvement
Methodologies
Imperatives that stand out among companies that have
successfully adopted quality improvement methods:
 Build organizational commitment to quality
 Create quality leaders
 Focus on the customer
 Identify processes and the source of defects
 Find ways to measure quality
 Set goals and create incentives
 Solicit input from employees
 Build long-term relationships with suppliers
 Design for ease of manufacture
 Break down barriers among functions
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 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
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 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 better satisfy customer
needs
• Improve the quality of existing products
• Reduce costs
 Innovation can be imitated -

 So it must be continuous

Successful new product launches are

major drivers of superior profitability.
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 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.

 Focusing on the customer

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

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