Building Competitive Advantage Through

Functional-Level Strategy

2

Production and Efficiency

• Economies of scale– Lower unit costs due to large

scale production volumes.

• Learning effects– Cost reductions due to

learning by doing.

• The experience curve– Systematic unit-cost reductions that are the

result of accumulated output.

3FIGURE 5.1

Production and Efficiency: Economies of Scale

• A typical long-run unit-cost curve:

4FIGURE 5.2

Production and Efficiency: Learning Effects

• Economies of scaleand learning

effects:

5FIGURE 5.3

Production and Efficiency: The Experience Curve

• A typical experience curve:

6FIGURE 5.4

Production and Efficiency: The Experience Curve

• Unit production costs in an integrated steel mill and a minimill.

7

Production and Efficiency: Manufacturing and Mass

Customization• Flexible manufacturing technology (lean production)

– Reduced setup times

– Increased machine utilization

– Improved quality control

– Lower inventory levels

• Mass customization– Low cost and product customization

• Flexible machine cells– Increased variety of operations

8FIGURE 5.5

Production and Efficiency: Flexible Manufacturing

• The tradeoff betweencosts and product variety

9

Marketing and Efficiency

• Marketing strategy:– Product design– Advertising– Promotion– Pricing– Distribution

10FIGURE 5.6

The Relationship Between Average Unit Costs and

CustomerDefection Rates

11FIGURE 5.7

The Relationship Between Customer

Loyalty and Profitper Customer

12

Materials Management, JIT, and Efficiency

• Materials management– Getting materials into and through

the production process and out through the distribution system to the end user.

• Just-In-Time (JIT)– Reduce inventory holding costs by having

materials arrive JIT to enter the production process.

– JIT risk: There are no buffer stocks for nondelivery or unanticipated increases in demand.

13

R&D Strategy and Efficiency

• Design easy-to-manufacture products– Reduce numbers of parts per unit.– Reduce assembly time.– Closely coordinate R&D

and production activities.

• Pioneer process innovations– Innovations create competitive

advantage through gains in process efficiencies.

14

Human Resource Strategy and Efficiency

• Ways to increase employee productivity and lower unit costs:– Provide training that upgrades employee

skills.– Establish self-managing teams

to gain a more flexible work forceand increased productivity.

– Use pay-for-performance incentives for teams to encourage meeting productivity and quality goals.

15

Information Systems, the Internet, and Efficiency

• Benefits of moving operations to the Internet:– Cost savings in ordering and customer service.– Reduced human resource requirements.– Lowered internal and back-office costs.– Increased employee productivity.

16

Infrastructure and Efficiency

• Achieving superior efficiency requires a company-wide commitment built through top management leadership in:– Articulating the vision.– Facilitating cross-

functional cooperation.

17

The Primary Roles of Different Value Creation Functions in Achieving

Superior EfficiencyValue Creation Function Primary Roles

Infrastructure (Leadership)

1. Provide company-wide commitment to efficiency.2. Facilitate cooperation among functions.

Production 1. Where appropriate, pursue economies of scale and learning economies.

2. Implement flexible manufacturing systems.

Marketing 1. Where appropriate, adopt aggressive marketing to ride down the experience curve.

2. Limit customer defection rates by building brand loyalty.

Materials Management 1. Implement JIT systems.

R&D 1. Design products for ease of manufacture.2. Seek process innovations.

Information Systems 1. Use information systems to automate systems.2. Use information systems to reduce the costs of coordination.

Human Resources 1. Institute training programs to build skills.2. Implement self-managing teams.3. Implement pay for performance.

TABLE 5.1

18

Achieving Superior Quality

• Total Quality Management (TQM):– All company operations focused on

improving product and service quality.

• Deming’s Five-Step “Chain Reaction”:1. Improved quality reduces costs.

2. Improved productivity.

3. Higher market share.

4. Increased profitability.

5. More jobs created.

19

Deming’s Fourteen Points to Quality

1. Create constancy of purpose toward improvement of product and service, with the aim to become competitive and to stay in business, and to provide jobs.

2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.

3. Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.

4. End the practice of of awarding business on the basis of price tag. Instead, minimize total cost.

5. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly reduce costs.

TABLE 5.2Source: “Deming’s 14 points to Quality,” from Gabor, Andrea, The Man Who Discovered Quality: Howard W. Edwards Deming Brought the Quality Revolution to America–The Stories of Ford, Xerox, & GM (New York: Random House, 1990).

20

Deming’s Fourteen Points to Quality6. Institute training on the job.

7. Institute leadership. The aim of leadership should be to help people and machines and gadgets do a better job. Leadership of management is in need of an overhaul, as well as leadership of production workers.

8. Drive out fear, so that everyone may work effectively for the company.

9. Break down barriers between departments. People in research, design, sales, and production must work as a team, to foresee problems of production and in use that may be encountered with the product or service.

10. Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships. The bulk of the causes of low quality and productivity belong to the system and thus lie beyond the power of the work force.

TABLE 5.2 (cont’d) Source: “Deming’s 14 points to Quality,” from Gabor, Andrea, The Man Who Discovered Quality: Howard W. Edwards Deming Brought the Quality Revolution to America–The Stories of Ford, Xerox, & GM (New York: Random House, 1990).

21

Deming’s Fourteen Points to Quality

11. (a) Eliminate work standards on the factory floor. Substitute leadership. (b) Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership.

12. (a) Remove barriers that rob hourly workers of their right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality. (b) Remove barriers that rob people in management and in engineering of their right to pride of workmanship.

13. Institute a vigorous program of education and self-improvement.

14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.

TABLE 5.2 (cont’d) Source: “Deming’s 14 points to Quality,” from Gabor, Andrea, The Man Who Discovered Quality: Howard W. Edwards Deming Brought the Quality Revolution to America–The Stories of Ford, Xerox, & GM (New York: Random House, 1990).

22

The Role Played by Different Functions in Implementing TQM

Value Creation Function Primary Roles

Infrastructure (Leadership)

1. Provide leadership and commitment to quality.2. Find ways to measure quality.3. Set goals and create incentives4. Solicit input from employees.5. Encourage cooperation.

Production 1. Shorten production runs.2. Trace defects back to source.

Marketing 1. Focus on the customer.2. Provide customer feedback on quality.

Materials Management 1. Rationalize suppliers.2. Help suppliers implement TQM.3. Trace defects back to suppliers.

R&D 1. Design products that are easy to manufacture.

Information Systems 1. Use information systems to monitor defect rates.

Human Resources 1. Institute TQM training programs.2. Organize employees into quality teams.

TABLE 5.3

23

Implementing TQM• Build organizational commitment to

quality• Focus on the customer• Find ways to measure quality• Set goals and create incentives• Solicit input from employees• Identify defects and trace them to source• Improve supplier relations• Design for ease of manufacture• Break down barriers between functions

24

Achieving Superior Innovation

• Causes of the high failure rate of innovation:– Uncertainty

• Quantum innovation• Incremental innovation

– Poor commercialization– Poor positioning strategy– Technological myopia– Slowness in marketing

25FIGURE 5.8

The Development FunnelGate 1 Gate 2

26

Achieving Superior Innovation

• Building competencies in innovation:– Building skills in basic and applied research– Project selection and management– Cross-functional integration– Product development teams– Partly parallel development

process

27FIGURE 5.9

Sequential and

Partly Parallel

Development Processes

28

The Role Played by Various Functions in Achieving Superior

InnovationValue Creation Function Primary Roles

Infrastructure (Leadership)

1. Manage overall project (I.e., manage the development function).2. Facilitate cross-functional cooperation.

Production 1. Cooperate with R&D on designing products that are easy to manufacture.

2. Work with R&D to develop process innovations.

Marketing 1. Provide market information to R&D.2. Work with R&D to develop new products.

Materials Management No primary responsibility.

R&D 1. Develop new products and processes.2. Cooperate with other functions, particularly marketing and

manufacturing, in the development process.

Information Systems 1. Use information systems to coordinate cross-functional and cross-company product development work.

Human Resources 1. Hire talented scientists and engineers.

TABLE 5.4

29

Achieving Superior Customer Responsiveness

• Developing a customer focus:– Top leadership commitment to customers.– Employee attitudes toward customers.– Bringing customers into the company.

• Satisfying customer needs:– Customization of the features of products and services to

meet the unique need of groups and individual customers.– Reducing customer response times:

• Marketing that communicates with production.• Flexible production and materials management.• Information systems that support the process.

30

The Primary Role of Different Functions in Achieving Superior

Customer ResponsivenessValue Creation Function Primary Roles

Infrastructure (Leadership)

1. Through leadership by example, build a company-wide commitment to customer responsiveness.

Production 1. Achieve customization by implementing flexible manufacturing.2. Achieve rapid response through flexible manufacturing.

Marketing 1. Know the customer.2. Communicate customer feedback to appropriate functions.

Materials Management 1. Develop logistics systems capable of responding quickly to unanticipated customer demands.

R&D 1. Bring customers into the product development process.

Information Systems 1. Use Web-based information systems to increase customer responsiveness.

Human Resources 1. Develop programs to get employees to think like customers.

TABLE 5.5