CHAPTER 4:

BUILDING COMPETITIVE ADVANTAGE THROUGH

FUNCTIONAL LEVEL STRATEGIES
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LEARNING OBJECTIVES
▪ Explain how an enterprise can use functional
level strategies to increase its
▪ efficiency.
▪ quality.
▪ innovation.
▪ customer responsiveness.

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FUNCTIONAL-LEVEL STRATEGIES
▪ Aimed at improving the effectiveness of a
company’s operations and its ability to attain
superior:
▪ efficiency.
▪ quality.
▪ innovation.
▪ customer responsiveness.

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EFFICIENCY AND ECONOMIES OF
SCALE
▪ 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. 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.

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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.
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

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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.
▪ Useful in industries that mass-produce a
standardized output.
Strategic significance of the experience curve: Increasing a company’s product
volume and market share will lower its cost structure relative to its rivals.

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EFFICIENCY AND ECONOMIES OF
SCALE
▪ 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
▪ 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
▪ Use of flexible manufacturing technology to
reconcile two goals that were once thought
incompatible :
▪ low cost.
▪ differentiation through product customization.

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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 - Rate percentage of a firm’s
customers who defect every year to competitors.
▪ Lowering customer defection helps achieve a lower cost
structure.
▪ Marketing strategy can reduce costs by lowering
customer defection rates and increasing loyalty

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THE RELATIONSHIP BETWEEN CUSTOMER
LOYALTY AND PROFIT PER CUSTOMER
Figure 4.6

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.
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JUST-IN-TIME SYSTEMS, 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.

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JUST-IN-TIME SYSTEMS, AND
EFFICIENCY
▪ 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
▪ 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.

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 R&D STRATEGY
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

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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

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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

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 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.

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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.

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TOTAL QUALITY MANAGEMENT
▪ Increasing product reliability to perform
consistently as designed and rarely break down.
▪ TQM is based on Five-step chain reaction (Deming):
1. Improved quality means that costs decrease
2. As a result, productivity improves
3. Better quality leads to higher market share, allowing
the company to raise prices
4. Higher prices increase profitability, allowing the
company to stay in business
5. Enables the company to create more jobs

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 DEMING’S STEPS IN A QUALITY IMPROVEMENT
PROGRAM
1. Management should embrace philosophy that
mistakes, defects, and poor quality are not acceptable.
2. Quality of supervision should be improved.
3. Management should create an environment in which
employees will not be fearful of reporting problems or
making suggestions.
4. Work standards should include some notion of quality
to promote defect-free output.
5. Employees should be trained in new skills.
6. Better quality requires the commitment of everyone in
the workplace.

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 IMPLEMENTING RELIABILITY IMPROVEMENT METHODOLOGIES

Imperatives among companies that have successfully

adopted quality improvement methods:

1. Senior Management communicate significance of quality

improvement to the organization
2. Create quality leaders
3. Identify processes and the source of defects
4. Find ways to measure quality
5. Set goals and create incentives
6. Solicit input from employees
7. Build long-term relationships with suppliers
8. Design for ease of manufacture
9. Build organizational commitment to quality. Break down
barriers among functions
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IMPROVING QUALITY AS EXCELLENCE
▪ 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 in such a way 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.
▪ Innovation can be imitated - So it must be continuous
▪ Successful new-product launches are catalysts of
superior profitability.
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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.

▪ Demand for innovations is essentially uncertain.

▪ Technology is poorly commercialized.
▪ Poor positioning strategy
▪ Positioning strategy - Specific set of options adopts
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 reduced.
▪ 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
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)

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