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BuildingCompetitiveAdvantage ThroughFunctionalLevelStrategy

Building Competitive Advantage Through Functional-Level Strategy

FunctionalLevelStrategies
Functional-level strategies are strategies aimed at improving the effectiveness of a company companys s operations.
Functionallevel 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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AchievingSuperiorEfficiency
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 very y skilled at p performing gap 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 l scale l enterprises t i Resulting managerial inefficiencies

Building Competitive Advantage Through Functional-Level Strategy

EconomiesandDiseconomiesof Scale l

Building Competitive Advantage Through Functional-Level Strategy

LearningEffects
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 downward shift of the entire unit cost curve

As labor A l b and d management t become b more efficient ffi i t over time at every level of output

Building Competitive Advantage Through Functional-Level Strategy

TheImpactofLearningandScale EconomiesonUnitCosts

Building Competitive Advantage Through Functional-Level Strategy

TheExperienceCurve
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 companys product volume and market share will lower its cost structure relative to its rivals.

Building Competitive Advantage Through Functional-Level Strategy

TheExperienceCurve

Building Competitive Advantage Through Functional-Level Strategy

FlexibleManufacturing and dMassCustomization


FlexibleManufacturingTechnology
LeanProductiontechnologythat:

Reducessetuptimesforcomplexequipment Improvesschedulingtoincreaseuseofindividual machines Improvesqualitycontrolatallstagesofthe manufacturingprocess Increasesefficiencyandlowersunitcosts

MassCustomization
Abilitytouseflexiblemanufacturingtechnologyto reconciletwogoalsthatwereoncethoughtincompatible:

Lowcostand Differentiation iff i i through h hproduct d customization i i


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TradeoffBetweenCostsandProduct Variety

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Marketing
Marketing gstrategy gyreferstothep positionthata companytakesregarding:
Pricing Promotion Advertising ProductDesign Distribution

Marketingstrategycanreducecostsbylowering customerdefectionratesandincreasingloyalty
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TheRelationshipBetweenCustomerLoyalty and dP Profit fi perC Customer

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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MaterialsManagementencompassestheactivitiesnecessary tog getinputs p andcomponents p toap productionfacility, y,through g theproductionprocess,andthroughthedistributionsystemto theenduser


Manysourcesofcostinthisprocess Significantopportunitiesforcostreductionthroughmore

MaterialsManagementand Supply l Chain h

efficientmaterialsmanagement

JustinTime(JIT)InventorySystemtoeconomizeholdingcosts: Have Ha ecomponentsarrive arri etomanufacturing man fact ringjust j stpriortoneedin productionprocess Havefinishedgoodsarriveatretailjustpriortostockout

SupplyChainManagementisthetaskofmanagingtheflowof inputstoacompanysprocessestominimizeinventoryholding andmaximizeinventoryturnover

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R&DStrategy
ResearchandDevelopment(R&D)
RolesofR&Dinhelpingacompanyachievegreaterefficiency andlowercoststructure: 1 Boostefficiencybydesigningproductsthatareeasyto 1. manufacture
Reducethenumberofpartsthatmakeupaproductreduces assemblytime Designformanufacturing requiresclosecoordinationwith productionandR&D

2 Helpacompanyhavealowercoststructureby 2. pioneeringprocessinnovations
Reduceprocesssetuptimes Flexiblemanufacturing Animportantsourceofcompetitiveadvantage
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HumanResourceStrategy
Goal: to improve employee productivity.
Hiringstrategy
Assuresthatthepeopleacompanyhireshavetheattributesthatmatch thestrategicobjectivesofthecompany

Employeetraining
Upgradesemployeeskillstoperformtasksfasterandmoreaccurately

Selfmanagingteams
Memberscoordinatetheirownactivitiesandmaketheirownhiring, training,work,andrewarddecisions

Payforperformance
Linkingpaytoindividualandteamperformancecanhelptoincrease employee p y p productivity y
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InformationSystems
Informationsystems systems impact onproductivityiswide ranging:
Webbasedinformationsystemscan automatemanyactivities Automatesinteractionsbetween Company C and dcustomers t Companyandsuppliers
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Infrastructure
Acompanys p y structure, ,culture, ,style y of f strategicleadership,andcontrolsystem:
Determinesthecontextwithinwhichallothervalue creationactivitiestakeplace Isespeciallyimportantinbuildingacompanywide commitmenttoefficiency Articulatesavisionforallfunctionsandcoordinateacross functions

Achievingsuperiorperformancerequiresan organizationwidecommitment.
T management Top tplays l amajor j role l in i this thi process.
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PrimaryRolesofValueCreation Functions

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AchievingSuperiorQuality
Quality can be thought of in terms of two
dimensions: 1.Qualityasreliability
Theydothejobstheyweredesignedforanddoitwell

2.Qualityasexcellence
Perceivedbycustomerstohavesuperiorattributes

Astrongreputationforqualityallowsacompanyto differentiate itsproducts. Eliminatingdefectsorerrorsreduceswaste, increasesefficiency,andlowersthecoststructure increasingprofitability.


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ImprovingQualityasReliability
Six Sigma methodology: the principal tool
now used to increase reliability reliability, which is a direct descendant of Total Quality Management (TQM)

TQMisbasedonthefollowingfivestepchainreaction: 1. Improvedqualitymeansthatcostsdecrease. 2. Asaresult,productivityalsoimproves. 3. Betterqualityleadstohighermarketshareand allowsincreasedprices. 4. Thisincreasesacompanys company sprofitability. 5. Thusthecompanycreatesmorejobs.

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DemingsStepsinaQuality ImprovementProgram
1. 2. 3. 4. 5. 6. 6 7. Acompanyshouldhaveaclearbusinessmodel. Managementshouldembracephilosophythat mistakes,defects,andpoorqualityarenotacceptable. Quality Q yofsupervision p shouldbeimproved. p Managementshouldcreateanenvironmentinwhich employeeswillnotbefearfulofreportingproblemsor making gsuggestions. gg Workstandardsshouldincludesomenotionofquality topromotedefectfreeoutput. Employeesshouldbetrainedinnewskills skills. Betterqualityrequiresthecommitmentofeveryonein theworkplace.
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RolesPlayedinImplementingReliability I Improvement Methodologies M h d l i

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ImplementingReliabilityImprovement M h d l i Methodologies
Imperatives that stand out among companies that have successfully adopted quality improvement methods:
Buildorganizationalcommitmenttoquality Createq quality yleaders Focusonthecustomer Identifyprocessesandthesourceofdefects Find i dwaystomeasurequality li Setgoalsandcreateincentives Solicitinputfromemployees Buildlongtermrelationshipswithsuppliers Designforeaseofmanufacture Breakdownbarriersamongfunctions
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ImprovingQualityasExcellence
A product is a bundle of attributes and can be differentiated by attributes that collectively define product excellence. DevelopingSuperiorAttributes: Learnwhichattributesaremostimportantto customers Designproductsandassociateservicestoembody theimportantattributes Decidewhichattributestopromoteandhowbest topositiontheminconsumersminds Continualimprovementinattributesand developmentof newproductattributes Building Competitive Advantage Through
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AttributesAssociatedwithaProductOffering

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AchievingSuperiorInnovation
Building distinctive competencies that result in innovation is the most important source of competitive advantage.
Innovation I ti can:
Resultinnewproductsthatbettersatisfycustomer needs Improvethequalityofexistingproducts Reducecosts

Innovationcanbeimitated
Soitmustbecontinuous

Successfulnewp productlaunchesaremajor j driversofsuperiorprofitability.


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TheHighFailureRateofInnovation
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.

Mostcommonexplanationsforfailure:

Uncertainty U i
Quantuminnovation radicaldeparturewithhigherrisk Incrementalinnovation extensionofexistingtechnology

Poor P commercialization i li ti
Definitedemandforproduct Productnotwelladaptedtocustomerneeds

Poorpositioningstrategy
Goodproductbutpoorlypositionedinthemarketplace

Technologicalmyopia
Technologicalwizardryvs. vs meetingmarketrequirements

Beingslowtomarket Building Competitive Advantage Through


Functional-Level Strategy

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BuildingCompetenciesinInnovation
Companies can take a number of steps to build competencies in innovation and reduce failures:

1. Buildingskillsinbasicandappliedresearch 2 Projectselectionandmanagement 2.
Usingtheproductdevelopmentfunnel

Ideageneration Projectrefinement Projectexecution

3. Achievingcrossfunctionalintegration
1. Drivenbycustomerneeds2.Designformanufacturing 3. Trackdevelopmentcosts4.Minimizetimetomarket 5. CloseintegrationbetweenR&Dandmarketing

4. Usingproductdevelopmentteams 5 Partlyparalleldevelopmentprocess 5.
Tocompressdevelopmenttime&timetomarket
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TheDevelopmentFunnel

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SequentialandPartlyParallel Development l Processes

Reduced development time & time-to-market


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AchievingSuperiorResponsivenessto Customers
Customer responsiveness: giving customers what
they want want, when they want it it, and at a price they are willing to pay - as long as the companys long-term profitability is not compromised.

Focusingonthecustomer
Satisfyingcustomerneeds
Customization(Tailorto uniqueneedsofgroups ofcustomers) Responsetime(increased speed;premiumpricing)
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PrimaryRolesofFunctionsinAchievingSuperior R Responsiveness i toC Customers

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