4.
Building Competitive
Advantage Through
Functional-Level Strategy
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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
Diseconomies of scale
◼ Unit cost increases associated with a large scale
of output
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Production and Efficiency
A typical long-
run unit-cost
curve:
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Diseconomies
Why do diseconomies
of scale occur?
4
Experience Curve
Dangers of complacency with the
experience curve
◼ It will bottom out
◼ New technologies can make experience effects
obsolete
◼ Some technologies may not produce lower costs
with higher volumes of output
◼ Flexible manufacturing technologies may allow
small manufacturers to product at low unit costs
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Production and Efficiency: High
Volume≠ Cost Advantage
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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
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Marketing and Efficiency
Marketing strategy:
◼ Product design
◼ Advertising
◼ Promotion
◼ Pricing
◼ Distribution
Customer retention
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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.
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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.
10
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 force
and increase productivity.
◼ Use pay-for-performance
incentives for teams to encourage
meeting productivity and
quality goals.
11
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.
For example, Cisco and Dell
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Infrastructure (Leadership) and
Efficiency
Achieving superior efficiency requires a
company-wide commitment built through
top management leadership in:
◼ Articulating the vision.
◼ Facilitating cross-
functional cooperation.
13
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.
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Achieving Superior Innovation
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
15
Failure to Innovate
Uncertainty
◼ Quantum innovation
◼ Incremental innovation
Poor commercialization
Poor positioning strategy
Technological myopia
Slow to market
16
The Development Funnel
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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
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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.
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Responsiveness ctd.
20
Exercise
You are the management of a startup that
produces disk drives in an industry with
short life cycles, intense price competition,
high fixed costs, and substantial economies
of scale. OEMs put a lot of pressure on you
to deliver products on time
What functional competencies are the most
important to build?
How will you design your internal processes
that ensure those competencies are built?
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