Chapter

Four
Building
Competitive
Advantage
Through
Functional-Level
Strategy
 Functional-Level Strategies
Functional-level strategies are
strategies aimed at improving the
effectiveness of a companys operations.

Improves companys ability to attain superior:

1. Efficiency 2. Quality
2. Innovation 4. Customer responsiveness
Increases the utility that customers receive:
Through differentiation Creating more value
Lower cost structure than rivals

This leads to a competitive advantage and

superior profitability and profit growth.
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 The Roots of Competitive
Advantage
Distinctive competencies shape Figure 4.1
the functional-level strategies that
a company can pursue.

Function-level strategies can build

resources and capabilities to
enhance a companys distinctive
competencies.
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 Achieving Superior Efficiency
Functional steps to increasing efficiency:
Economies of Scale
Learning Effects
Experience Curve
Flexible Manufacturing and Mass Customization
Marketing
Materials Management and Supply Chain
R&D Strategy
Human Resource Strategy
Information Systems
Infrastructure
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 Economies of Scale
v 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
v Diseconomies of scale
Unit cost increases associated with a large scale of output
Increased bureaucracy associated with large-scale enterprises
Resulting managerial inefficiencies

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 Economies and Diseconomies of
Scale
Figure 4.2

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 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

When changes occur in a companys

production system,
learning has to begin again.
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 The Impact of Learning and Scale
Economies on Unit Costs
Figure 4.3

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 The Experience Curve
The Experience Curve
The systematic lowering of the cost structure and consequent
unit cost reductions that occur over the life of a product
Economies of scale and learning effects underlie the
experience curve phenomenon
Once down the experience curve, the company is
likely to have a significant cost advantage over its
competitors

Strategic significance of the experience curve:

Increasing a companys product volume and
market share will lower its cost structure relative to
its rivals.
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 The Experience Curve
Figure 4.4

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 Flexible Manufacturing
and Mass Customization
v Flexible Manufacturing Technology
A range of manufacturing technologies that:
Reduce 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
v Mass Customization
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
Low cost and
Differentiation through product customization

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 Tradeoff Between Costs and
Product Variety
Figure 4.5

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 Marketing
Marketing
Marketing strategy
Refers to the position that a company takes regarding
Pricing Promotion Advertising
Distribution Product design
Customer defection rates
Percentage of customers who defect every year
Defection rates are determined by customer loyalty
Loyalty is a function of the ability to satisfy customers

Reducing customer defection rates and

building customer loyalty can be major
sources of a lower cost structure.
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 Materials Management and
Supply Chain
v Materials Management

Many sources of cost in this process

Significant opportunities for cost reduction through more
efficient materials management
Just-in-Time (JIT) Inventory System
System designed to economize on inventory 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
v Supply Chain Management

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 R&D Strategy
v Research and Development (R&D)

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

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 Human Resource Strategy
The key challenge of the Human Resource
function: improve employee productivity.
v Hiring strategy

v Employee training

v Self-managing teams

v Pay for performance

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 Information Systems
Information systems impact on
productivity is wide-ranging:
v Web-based information systems
can automate many of the
company activities
v Potentially affects all the activities
of a company
v Automates interactions between
Company and customers
Company and suppliers

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 Infrastructure
A Companys Infrastructure:
The companys structure, culture, style of strategic
leadership, and control system:
Determines the context within which all other value
creation activities take place
Strategic leadership is especially important in building
a companywide commitment to efficiency
The leadership task is to articulate 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.
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 Achieving Superior Quality
Quality can be thought of in terms of
two dimensions and gives a company
two advantages:
Quality as reliability
They do the jobs they were designed for and
do it well
Quality as excellence
Perceived by customers to have superior attributes
1. A strong reputation for quality allows a company to
differentiate its products.
2. Eliminating defects or errors reduces waste,
increases efficiency, and lowers the cost structure
increasing profitability.
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 Achieving Superior Innovation
Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.
v Innovation can:
Result in new products that satisfy customer
needs better
Improve the quality of existing products
Reduce costs
v Innovation can be imitated -

So it must be continuous
Successful new product launches are
major drivers of superior profitability.
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 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 companys long-term profitability is not
compromised.
v Focusing on the customer
Demonstrating leadership
Shaping employee attitudes
Bringing customers into the company
v Satisfying customer needs
Customization
Tailor to unique needs of groups of customers
Response time
Increase speed Premium pricing

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