BUILDING COMPETITIVE ADVANTAGE

THROUGH FUNCTIONAL LEVEL

STRATEGY
Chapter-4
FUNCTIONAL LEVEL STRATEGY
Strategy aimed at improving the effectiveness of a
companys operations and its ability to attain superior
efficiency, quality, innovation and customer
responsiveness.
Distinctive competencies shapes the functional level
strategies and managers with their choices to
functional level strategies can build resource and
capabilities.
 Build
Resources
Differentiatio
n

Shape
Functional Superior
Distinctive Value
Strategies Profitability
Competencies Creation

Low Cost

Capabilities
Build
ACHIEVING SUPERIOR EFFICIENCY

Efficiency and economics of scale

Efficiency and learning effects
Efficiency and experience curve
Efficiency, flexible production systems and mass
customization
Marketing and efficiency
Materials management, JIT and efficiency
R&D and efficiency
HR and efficiency
Information system and efficiency
Infrastructure and efficiency
EFFICIENCY AND ECONOMICS OF SCALE
Economics of scale are unit cost reductions associated
with a large scale of output.

One source of economics of scale is the ability to spread

fixed costs over a large production volume

Another source of scale economics is the ability of

companies producing in large volumes to achieve greater
division of labor and specialization.

Economics of scale boosts profitability measured by ROIC.

It exists in production, marketing, R&D.
Diseconomies of scale occurs primarily because of the
increasing bureaucracy associated with large scale
enterprises and the managerial inefficiencies.
Unit Costs

Economies of scale Diseconomies of scale

0
Q1
Output
EFFICIENCY AND LEARNING EFFECTS
Learning effects are cost savings that come
from learning by doing.

Labor productivity increase over time and unit

costs decreases as individuals learn the most
efficient way to perform a particular task.

It tends to be more significant when a

technologically complex task is repeated because
there is more to learn.
EFFICIENCY AND LEARNING EFFECTS

A
. Economies of
Unit Costs

scale
. B Time 1

C Learning effect
Time 2
0
Output
EFFICIENCY AND EXPERIENCE CURVE
The experience curve refers to the systematic lowering of
the cost structure and consequent unit cost reductions, that
have been observed to occur over the life of a product.

A
Unit Costs

B
.

0
Accumulated Output over time
EFFICIENCY, FLEXIBLE PRODUCTION SYSTEMS AND
MASS CUSTOMIZATION
MARKETING STRATEGY

Marketing strategy refers to the position that a

company takes with regard to market segmentation,
pricing, promotion, advertising, product design and
distribution.
Customer defection rate (Churn Rates)are the
percentage of a companys customers who defect every
year to competitors. It is determined by customer
loyalty.
MARKETING STRATEGY (CONT)
The longer the company retains a customer , the greater the volume
of customer generated unit sales that can be set against these fixed
costs and the lower the average unit cost of each sale. Thus lowering
customer defection rates allows a company to achieve a lower cost
structure.
Figure 4.6- The relationship between customer loyalty an profit per customer

( +) Profit per customer

Profit 0
Length of time customer stays with company

(-)
MATERIALS MANAGEMENT.
Materials management encompasses the activities
necessary to get inputs and components to a production
facility through production process and out through a
distribution system to the end user. Improving the
efficiency of the materials management function
typically requires JIT.

JIT- designed to economize on inventory holding costs

by scheduling components to arrive at a manufacturing
plant just in time to enter the production process or to
have goods arrive at a retail store only when stock is
almost depleted.

Efficient management of materials and inventory is also

called Supplychain management.
R&D STRATEGY

The role of superior research and development

in helping a company achieve a greater
efficiency and a lower cost structure is two
fold-

1. By designing product that are easy to manufacture.

2.By pioneer process of innovation.
 HUMAN RESOURCE, INFORMATION AND
INFRASTRUCTURE
HR strategy includes-
1. Hiring strategy
2. Employee Training
3. Self managing teams
4. Pay for performance.

The impact of information systems on productivity is wide

ranging and potentially affects all other activities of a
company.

A companys infrastructure- structure, culture, style of

strategic leadership and control system affects all other
value creation activities.
ACHIEVING SUPERIOR QUALITY
Quality can be thought in terms of two dimensions-
1. Quality as reliability
2. Quality as excellence

Strong quality provides a company with two advantages-

Create differentiation from competitors product
Eliminates defects increase profitability.
ATTAINING SUPERIOR RELIABILITY

The principal tool that most managers now use to increase reliability
of their product offering is the six sigma quality improvement
methodology. It relates to TQM. its a direct descendant of the total
quality management (TQM) philosophy invented by Japanese
Companies then by American companies.
Philosophy of TQM ,articulated by Deming is based on 5 step
chain reaction-

1. Improving quality means that cost decrease because of less rework,

fewer mistakes, fewer delays and better use of tome and materials.
2. As a result , productivity improves
3. Better quality Higher market share Raise price
4. Increases profitability and allows to stay in business
5. Thus , the Company creates more job.
DEMINGS STEPS
1. Management should embrace philosophy that mistakes, defects
and poor quality are not acceptable and eliminated.

2. Quality of supervision should be improved by allowing more

time and skills for the job

3. Management should crate an environment in which employees

will not fear reporting problems or recommending
improvements.

4. Work standards should not only defined by numbers but also

quality to promote defect free output

5. Management is responsible for training employees in new skills

to keep pace with changes in the workplace.

6. Achieving better quality requires the commitment of everyone.

IMPLEMENTING RELIABILITY
IMPROVEMENT METHODOLOGIES

1. Building organizational commitment to

quality
2. Create quality leaders
3. Identity processes and the source of defects
4. Find ways to measure quality
5. Set goals and create incentives
6. Solicit inputs from shop- floor employees
7. Quality full components parts
8. Design for ease manufacture
9. Break down barriers among functions.
IMPROVING QUALITY AS EXCELLENCE

Products can be differentiated by attributes that collectively define

product excellence. Attributes include form, features, performance,
durability and styling of a product. In case of service it includes-
ordering ease, prompt delivery, easy installation, customer
training, consulting and maintenance and repair.

For achieving superior quality some actions of managers are

needed-

1. Collect marketing intelligence indicating which of these

attributes are most important to customers.
2. Incorporate identified attributes to design product
3. Decide which significant attribute to promote
4. Continuous improvement
ACHIEVING SUPERIOR INNOVATION
Most important source of competitive advantage.
New products better satisfy customer needs.

Improve the quality of existing products or

reduce the costs of making products that
customers want.

Develop new product or process gives company

major competitive advantage-
1. Differentiate its products and charge a premium price.
2. Lower its cost structure below that of its rivals.
THE HIGH- FAILURE RATE OF INNOVATION
Only 10%-20% of major R&D projects give rise to
commercial products.
THE HIGH- FAILURE RATE OF INNOVATION

Reasons for high failure rate of innovation-

1. Uncertainty of demand for innovation
2. Poor commercialization of technology
3. Poor positioning strategy
4. Technological myopia
5. Being slow to market
REDUCING INNOVATION FAILURE
Companies can take a number of steps to build a
competency in innovation and avoid failure.

Product development team should follow this issue to

become more effective:
1. Project manager should secure the financial and
human resources.
2. Cross functional team.
3. Create a sense of camaraderie and facilitate
communication
4. Clear plan and goals.
5. Develop own process of communication.
6. Incorporate the lesson from past.
ACHIEVING SUPERIOR RESPONSIVENESS TO
CUSTOMERS'

1. Focusing on customer-

Demonstrating leadership
Shaping employee attitudes
Bringing customers into the
company

2. Satisfying customer needs-

Customization
Response time