STRATEGIC MANAGEMENT, 13E
An Integrated Approach
Theory & Cases
Hill – Schilling - Jones
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or
part.
CHAPTER 4
Competitive Advantage Through
Functional-Level Strategies
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part.
LEARNING OBJECTIVES
Explain how an enterprise can use functional-
level strategies to increase its efficiency
Explain how an enterprise can use functional-
level strategies to increase its quality
Explain how an enterprise can use functional-
level strategies to increase its innovation
Explain how an enterprise can use functional-
level strategies to increase its customer
responsiveness
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 3
FUNCTIONAL-LEVEL STRATEGIES
(1 of 2)
Functional-level strategies - Actions that
improve the efficiency and effectiveness of
one or more value creation activities.
Used to build valuable resources to attain:
efficiency.
quality.
innovation.
customer responsiveness.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 4
FUNCTIONAL-LEVEL STRATEGIES
(2 of 2)
Figure 4.1 The Roots of Competitive Advantage
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EFFICIENCY AND ECONOMIES OF
SCALE (1 OF 2)
Efficiency - Measured by the quantity of
inputs that it takes to produce a given output.
Economies of scale - Reductions in unit costs
attributed to a larger output.
Ability to spread fixed costs over a large
production volume and produce in large volumes.
To achieve greater division of labor and specialization.
Diseconomies of scale - Unit cost increases
associated with a large scale of output.
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SCALE ECONOMIES
Figure 4.2 Economies and Diseconomies of Scale
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LEARNING EFFECTS (1 of 2)
Learning effects - Cost savings that come
from learning by doing.
More significant when a technologically
complex task is repeated, as there is more to
learn.
Diminish in importance after a period of time.
Triggered by changes in a company’s
production system.
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LEARNING EFFECTS (2 of 2)
Figure 4.3 The Impact of Learning and Scale Economies on Unit Costs
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EXPERIENCE CURVE (1 of 2)
Experience curve - Systematic lowering of
the cost structure and consequent unit cost
reductions.
Occur over the life of a product.
A product’s per-unit production costs decline
each time its accumulated output doubles.
Accumulated output - Total output of a product
since its introduction.
Is important in industries that mass-produce
a standardized output.
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EXPERIENCE CURVE (2 of 2)
Figure 4.4 The Experience Curve
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EFFICIENCY AND ECONOMIES OF
SCALE (2 OF 2)
Managers should avoid being complacent
about efficiency-based cost advantages
derived from experience effects as:
neither learning effects nor economics of scale are
sustained forever.
cost advantages gained from experience effects
can be made obsolete by new technologies.
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FLEXIBLE PRODUCTION
TECHNOLOGY
Flexible production technology
Reduces setup times for complex equipment.
Increases the use of individual machines through
better scheduling.
Improves quality control at all stages of the
manufacturing process.
Increases efficiency and lower unit costs.
Enables better customization of product offerings.
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MASS CUSTOMIZATION
Mass customization - Use of flexible
manufacturing technology to reconcile:
low cost.
differentiation through product customization.
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FLEXIBLE MANUFACTURING
Figure 4.5 Tradeoff Between Costs and Product Variety
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MARKETING AND EFFICIENCY
Marketing strategy - Position of a company
with regard to pricing, promotion, advertising,
product design, and distribution.
Impacts efficiency and cost structure.
Customer defection - Percentage of a firm’s
customers who defect every year to
competitors.
Lowering customer defection helps achieve a
lower cost structure.
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DEFLECTION–COST
RELATIONSHIP
Figure 4.6 The Relationship Between Customer Loyalty and Profit per
Customer
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MATERIALS MANAGEMENT AND
EFFICIENCY
Materials management - Activities necessary
to get inputs and components:
to a production facility.
through the production process.
out through a distribution system to the end-user.
Enormous potential for reducing costs.
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JUST-IN-TIME SYSTEMS AND
EFFICIENCY (1 of 2)
Just-in-time (JIT) inventory system
Economizes on inventory holding costs by
scheduling components to arrive:
just in time to enter the production process.
as stock is depleted.
Cost savings come from increasing inventory
turnover and reducing the need for working and
fixed capital.
Drawback of leaving a company without a buffer
stock of inventory.
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JUST-IN-TIME SYSTEMS AND
EFFICIENCY (2 of 2)
Supply chain management - Managing the flow
of inputs and components from suppliers into
the company’s production processes to:
minimize inventory holding.
maximize inventory turnover.
Research and development:
boots efficiency by designing products that are easy
to manufacture.
develops process innovation with a new way that the
production process can operate more efficiently.
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HUMAN RESOURCES AND
EFFICIENCY
Human resource strategy
Productive employees lower the costs of
generating revenues and increasing return of sales.
HR does this through:
hiring strategy.
employee training.
self-managing teams.
pay for performance.
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INFRASTRUCTURE AND
EFFICIENCY
Information systems
Impact on productivity affects all company activities.
Cost savings by:
moving customer service and ordering online.
automating customer and supplier interactions.
reducing staff.
reducing physical stores.
Infrastructure - Organizational structure, culture,
style of leadership, and control systems.
Strategic leadership is important in building
commitment to efficiency.
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VALUE CREATION FUNCTIONS
Table 4.1 Primary Roles of Value Creation Functions in Achieving Superior
Efficiency
Value Creation Function Primary Role
Infrastructure (leadership) 1. Provide companywide commitment to efficiency.
2. Facilitate cooperation among functions.
Production 1. Where appropriate, pursue economies of scale and learning
economics.
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.
2. Implement supply chain coordination.
R&D 1. Design products for ease of manufacture.
2. Seek process innovations.
Information systems 1. Use information systems to automate processes.
2. Use information systems to reduce costs of coordination.
Human resources 1. Institute training programs to build skills.
2. Implement self-managing teams.
3. Implement pay for performance.
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ACHIEVING SUPERIOR
RELIABILITY
(1 of 2)
Total quality management - Increasing
product reliability to perform consistently as
designed and rarely break down.
Five factors of TQM:
Improved quality means that costs decrease.
As a result, productivity improves.
Better quality leads to higher market share,
allowing the company to raise prices.
Higher prices increase profitability, allowing the
company to stay in business.
Enables the company to create more jobs.
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ACHIEVING SUPERIOR
RELIABILITY
(2 of 2)
Steps in quality improvement programs:
Management should strive to eliminate mistakes,
defects, and poor-quality.
Supervision quality should be improved.
Employees should not fear reporting problems or
suggesting improvements.
Work standards should stress quality of work.
Employees should be trained in new skills to remain
informed of workplace changes.
Everyone in the company should commit to
achieving better quality.
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IMPLEMENTING RELIABILITY
IMPROVEMENT METHODOLOGIES
Table 4.2 Roles Played by Different Functions in Implementing Reliability Improvement
Methodologies
Function Role
Infrastructure (leadership) 1. Provide leadership and commitment to quality.
2. Find ways to measure quality.
3. Set goals and create incentives.
4. Solicit input from employees.
5. Encourage cooperation among functions.
Production 1. Shorten production runs.
2. Trace defects back to the source.
Marketing 1. Focus on the customer.
2. Provide customer feedback on quality.
Materials management 1. Rationalize suppliers.
2. Help suppliers implement quality improvement
methodologies.
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 quality improvement training
programs.
2. Identify and train black belts.
3. Organize employees into quality teams
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IMPROVING QUALITY AS
EXCELLENCE
(1 of 2)
Table 4.3 Attributes Associated with a Product Offering
Product Attributes Service Attributes Associated Personnel
Attributes
Form Ordering ease Competence
Features Delivery Courtesy
Performance Installation Credibility
Durability Customer training Reliability
Reliability Customer consulting Responsiveness
Style Maintenance and repair Communication
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IMPROVING QUALITY AS
EXCELLENCE
(2 of 2)
To achieve a perception of high quality of
attributes the company should:
collect marketing information indicating which
attributes are most important to customers.
design products so that those attributes are
embodied in the product.
decide significant attributes to promote and how
best to position them in the minds of consumers.
recognize that competition is not stationary.
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ACHIEVING SUPERIOR
INNOVATION
Most important source of competitive
advantage.
Innovative products or processes gives a
company competitive advantage that allows
it to:
differentiate its products and charge a premium
price.
lower its cost structure below that of its rivals.
Successful new-product launches are
catalysts of superior profitability.
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REASONS FOR HIGH FAILURE
RATE OF INNOVATION
Demand for innovations is essentially uncertain.
Technology is poorly commercialized.
Poor positioning strategy
Positioning strategy - Specific set of options
adopted for a product based on price, distribution,
promotion and advertising, and product features.
Marketing a technology for which there is
inadequate demand.
Slow marketing of products.
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REDUCING INNOVATION FAILURES
Tight, cross-functional integration can help a
company ensure that:
product development projects are driven by
customer needs.
new products are designed for ease of
manufacture.
development costs are controlled.
the time it takes to develop a product and bring it
to market is minimized.
close integration between R&D and marketing is
achieved.
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ACHIEVING SUPERIOR
INNOVATION— SUMMARY
Table 4.4 Functional Roles for Achieving Superior Innovation
Value Creation Function Primary Role
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, cross-
company product development.
Human resources 1. Hire talented scientists and engineers.
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ACHIEVING SUPERIOR CUSTOMER
RESPONSIVENESS (1 of 2)
Give customers what they want, when they
want it, and at a price they are willing to
pay—within company profitability.
Focus on the customer.
Demonstrate leadership.
Shape employee attitudes.
Know customer needs.
Satisfy customer needs.
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ACHIEVING SUPERIOR CUSTOMER
RESPONSIVENESS (2 of 2)
Table 4.5 Primary Roles of Different Function in Achieving Superior Customer
Responsiveness
Value Creation Function Primary Role
Infrastructure (leadership) • Through leadership by example, build a companywide commitment
to responsiveness to customers
Production • Achieve customization through implementation of flexible
manufacturing
• Achieve rapid response through flexible manufacturing
Marketing • Know the customer
• Communicate customer feedback to appropriate functions
Materials management • Develop logistics systems capable of responding quickly to
unanticipated customer demands (JIT)
R&D • Bring customers into the product development process
Information systems • Use web-based information systems to increase responsiveness to
customers
Human resources • Develop training programs that get employees to think like
customers
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APPENDIX
NOTE TO INSTRUCTOR: Choose from the following questions (also found in the text at the end of the
chapter)
to conduct in-class discussions around key chapter concepts.
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 35
DISCUSSION:
How are the four building blocks of
competitive advantage related to each other?
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 36
DISCUSSION:
What role can top management play in
helping a company achieve superior
efficiency, quality, innovation, and
responsiveness to customers?
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 37
DISCUSSION:
Over time, will the adoption of Six Sigma
quality improvement processes give a
company a competitive advantage, or will it
be required only to achieve parity with
competitors?
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 38
DISCUSSION:
What is the relationship between innovation
and competitive advantage?
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scanned, copied or duplicated, or posted to a publicly accessible website, in whole or part. 39
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v=H2kUosgZmxU
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v=rzJA6iS39i8
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https://www.youtube.com/watch?
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v=RuKCNwsinq8
https://www.youtube.com/watch?v=u00S-
hCnmFY
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