Business Strategy – Shilpa chadichal

Building Competitive
Advantage Through
Functional-Level Strategy
 Business Strategy – Shilpa Chadichal

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.
 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

Economies and Diseconomies of Scale

 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

The Impact of Learning and Scale

Economies on Unit Costs
 Business Strategy – Shilpa Chadichal

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.
 Business Strategy – Shilpa Chadichal

The Experience Curve

 Business Strategy - Arunabhas Bose

http://www.investopedia.com/terms/e/eco
nomiesofscale.asp
• DEFINITION of 'Economies Of Scale'
• The cost advantage that arises with increased output of a
product. Economies of scale arise because of the inverse
relationship between the quantity produced and per-unit
fixed costs; i.e. the greater the quantity of a good
produced, the lower the per-unit fixed cost because these
costs are shared over a larger number of goods.
Economies of scale may also reduce variable costs per
unit because of operational efficiencies and synergies.
Economies of scale can be classified into two main types:
Internal – arising from within the company; and External –
arising from extraneous factors such as industry size.
 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

Tradeoff Between Costs and Product Variety

 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

The Relationship Between Customer Loyalty and

Profit per 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.
 Business Strategy – Shilpa Chadichal

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
opportunities for cost reduction through more
• Significant
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
 Business Strategy –Shilpa chadichal

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
 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

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.
 Business Strategy – Shilpa Chadichal

Primary Roles of Value Creation

Functions
 Business Strategy – Shilpa Chadichal

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.
 Business Strategy – Shilpa Chadichal

Improving Quality as Reliability

Six Sigma methodology: the principal tool
now used to increase reliability, which is a direct
descendant 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.
 Business Strategy – Shilpa Chadichal

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.
 Business Strategy – Shilpa Chadichal

Roles Played in Implementing Reliability Improvement

Methodologies
 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

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
 Business Strategy – Shilpa Chadichal

Attributes Associated with a Product Offering

 Business Strategy – Shilpa Chadichal

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.
 Business Strategy – Shilpa Chadichal

The High Failure Rate of Innovation

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.

Most common explanations for failure:

• Uncertainty
• Quantum innovation – radical departure with higher risk
• Incremental innovation – extension of existing technology
• 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
 Business Strategy – Shilpa Chadichal

Building Competencies in Innovation

Companies can take a number of steps to build
competencies in innovation and reduce failures:
1. Building skills in basic and applied research
2. Project selection and management
Using the product development funnel
» Idea generation » Project refinement » Project execution
3. Achieving cross-functional integration
1. Driven by customer needs 2. Design for manufacturing
3. Track development costs 4. Minimize time-to-market
5. Close integration between R&D and marketing

4. Using product development teams

5. Partly-parallel development process
To compress development time & time-to-market
 Business Strategy – Shilpa Chadichal

The Development Funnel

 Business Strategy – Shilpa Chadichal

Sequential and Partly Parallel Development Processes

Reduced
development time
& time-to-market
 Business Strategy – Shilpa Chadichal

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)
 Business Strategy – Shilpa Chadichal

Primary Roles of Functions in Achieving Superior

Responsiveness to Customers
 Business Strategy – Shilpa Chadichal

Thank You