Chapter 4. Building Competitive Advantage through FunctionalLevel Strategy Learning Objectives • Explain how an enterprise can use functional-level strategies to increase efficiency • Explain how an enterprise can use functional-level strategies to increase quality • Explain how an enterprise can use functional-level strategies to increase innovation • Explain how an enterprise can use functional-level strategies to increase customer responsiveness © Cengage Learning Functional-Level Strategies “...aimed at improving the effectiveness of a company’s operations...” Aim to give a firm superior: • • • • Efficiency Quality Innovation Customer responsiveness This leads to a competitive advantage and superior profitability and profit growth. © Cengage Learning Roots of Competitive Advantage Distinctive competencies shape the functional-level strategies that a company can pursue. Figure 4.1 Function-level strategies can build resources and capabilities to enhance a company’s distinctive competencies. © Cengage Learning Achieving Superior Efficiency • Economies of scale- Unit cost reductions associated with large scale output • Spread fixed costs over large volume • Achieve greater division of labor/specialization • Specialization enables employees to become skilled at particular task • Diseconomies of scale- Unit cost increases associated with large scale output • Increased bureaucracy with large-scale enterprises • Resulting managerial inefficiencies © Cengage Learning Economies/Diseconomies of Scale Figure 4.2 © Cengage Learning Learning Effects Cost savings from learning by doing. • Labor productivity- Learn by repetition • Management efficiency- Learn over time • Learning effects implies downward shift entire unit cost curve- Become more efficient over time at every level of output © Cengage Learning Impact of Learning & Scale on Unit Costs Figure 4.3 4 -8 © Cengage Learning Flexible Production • Flexible Production Technology • Reduces setup times for complex equipment • Improves scheduling to increase use of individual machines • Improves quality control at all stages of manufacturing process • Increases efficiency = lowers unit costs © Cengage Learning Marketing Marketing strategy- position company takes regarding: • Pricing • Promotion • Advertising • Product Design • Distribution © Cengage Learning Relationship Between Customer Loyalty and Profit per Customer © Cengage Learning Materials Management and Supply Chain • Materials Management- activities to get inputs and components to production, through production process, and through distribution to end-user – Many sources of cost – Opportunities for cost reduction by efficient materials management – Just-in-Time (JIT)- minimize holding costs: • Components arrive just prior to need in production • Finished goods arrive just prior to stock out • Supply Chain Management- managing the flow of inputs to minimize inventory holding & maximize inventory turnover © Cengage Learning R&D Strategy Research and Development (R&D) 1. Boost efficiency by designing products easy to manufacture • Reduce number of parts– reduces assembly time • Design for manufacturing – requires close coordination with production and R&D 2. A lower cost structure by process innovations • Reduce process setup times • Flexible manufacturing • An important source of competitive advantage © Cengage Learning Human Resource Strategy Goal: to improve employee productivity. • Hiring strategy- people a company hires have the attributes that match strategic objectives • Employee training- Upgrades employee skills to perform tasks faster/more accurately • Self-managing teams- Members coordinate own activities and make their own hiring, training, work, and reward decisions • Pay for performance- Linking pay to individual and team performance to increase employee productivity © Cengage Learning Information Systems Wide-ranging Impact: • Web-based information systems automate many activities • Automates interactions between – Company customers – Company suppliers © Cengage Learning Infrastructure “... structure, culture, style of strategic leadership, and control system...” • Determines context within which other value creation activities take place • Especially important in building companywide commitment to efficiency • Articulates vision for all functions & coordinate across functions Achieving superior performance requires an organization-wide commitment. Top management plays a major role in this process. © Cengage Learning Achieving Superior Quality Quality is two dimensional: 1) Reliability- do the jobs designed for and well 2) Excellence- perceived by customers to have superior attributes • Strong reputation for quality allows a company to differentiate its products • Eliminating defects/errors reduces waste, increases efficiency, lowers cost structure– increasing profitability. © Cengage Learning Business Model for Quality Improvement Philosophy Supervision Environment Standards Training Commitment © Cengage Learning Implementing Reliability Improvement Methodologies • • • • • • • • • Build organizational commitment to quality 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 © Cengage Learning 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. Focus on the customer ➢ Demonstrating Leadership ➢ Shaping Employee Attitudes ➢ Bringing Customers to Company Satisfying customer ➢ Customization ➢ Response Time © Cengage Learning Achieving Superior Responsiveness to Customers © Cengage Learning 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 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. © Cengage Learning High Failure Rate of Innovation “...evidence suggesting... only 10 to 20% of major R&D projects give rise to commercially viable product. Most common explanations for failure: • Uncertainty • Poor commercialization – Definite demand for product – Product not well adapted to customer needs • Poor positioning strategy – Good product but poorly positioned in the marketplace • Technological myopia – Technological “wizardry” vs. meeting market requirements • Being slow to market © Cengage Learning Reducing Innovation Failures ✓ Project development projects driven by customer needs ✓ New projects designed for ease of manufacture ✓Development costs kept in check ✓Time to market minimized ✓Close integration of R & D and marketing © Cengage Learning Functional Roles for Achieving Superior Innovation Table 4.4 Top management must bear primary responsibility for overseeing the whole development process. © Cengage Learning Q1 When a company initiates a new project and examines it’s capabilities, it is found that the capabilities do not exist within the company. What are 2 common solutions to this? Provide some benefits for each solution Q2 When setting a price for a specific product what are 2 of the possible ways to do this? How can Information Systems help do this better (list at least 1 IS benefit for each pricing method) Q3 Regarding Barriers to Entry (Porter’s 5 Forces): how can a new business use Information Systems to help overcome Barriers to Entry? Please list and explain at least 2 examples. Q4 Regarding Rivalry among Existing Competitors (Porter’s 5 Forces): how can a mature business use Information Systems to minimize or curb Rivalry and make it more difficult for a new entrant to a market?
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