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Chapter 04

Business administration (Shahjalal University of Science and Technology)

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Chapter-04
“Building Competitive Advantage through Functional-Level Strategy”
It is important to keep in mind the relationships between functional strategies, distinctive
competencies, differentiation, low cost, value creation, and profitability. Distinctive competencies
shape the functional level strategies that a company can pursue. Managers, through their choices
related to functional-level strategies, can build resources and capabilities that enhance a company’s
distinctive competencies. Also, note that a company’s ability to attain superior efficiency, quality,
innovation, and customer responsiveness will determine if its product offering is differentiated
from that of rivals, and if it has a low-cost structure.

Figure: The Roots of Competitive Advantage

Achieving Superior Efficiency

A company is a device for transforming inputs (labor, land, capital, management, and
technological know-how) into outputs (the goods and services produced). The simplest measure
of efficiency is the quantity of inputs that it takes to produce a given output; that is, efficiency 5
outputs/inputs. The more efficient a company, the fewer the inputs required to produce a given
output, and therefore, the lower its cost structure. Put another way, an efficient company has higher
productivity, and therefore lower costs, than its rivals. Here we review the steps that companies
can take at the functional level to increase their efficiency and thereby lower cost structure.
 Efficiency and Economies of Scale: One source of economies of scale is the ability to spread
fixed costs over a large production volume. Fixed costs are costs that must be incurred to
produce a product regardless of the level of output; examples are the costs of purchasing
machinery, setting up machinery for individual production runs, building facilities, advertising,

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and R&D. For example, Microsoft spent approximately $5 billion to develop the latest version
of its Windows operating system, Windows 7.
Another source of scale economies is the ability of companies producing in large volumes to
achieve a greater division of labor and specialization. Specialization is said to have a favorable
impact on productivity, primarily because it enables employees to become very skilled at
performing a particular task. The classic example of such economies is Ford’s Model T car.
The Model T Ford was introduced in 1923, and was the world’s first mass-produced car. Until
1923, Ford had made cars using an expensive hand-built craft production method. Introducing
mass production techniques allowed the company to achieve greater division of labor (it split
assembly into small, repeatable tasks) and specialization, which boosted employee
productivity.

Figure: Economies of Scale

The concept of scale economies is illustrated in Figure, which illustrates that as a company
increases its output, unit costs decrease. This process comes to an end at an output of Q1, where
all scale economies are exhausted. Indeed, at outputs of greater than Q1, the company may
encounter diseconomies of scale, which are the unit cost increases associated with a large scale of
output. Diseconomies of scale occur primarily because of increased bureaucracy associated with
large-scale enterprises and the managerial inefficiencies that can result.
 Efficiency and Learning Effects: Learning effects are cost savings that come from learning
by doing. Labor, for example, learns by repetition how to best carry out a task. Therefore, labor
productivity increases over time, and unit costs decrease as individuals learn the most efficient
way to perform a particular task. Equally important, management in new manufacturing
facilities typically learns over time how best to run the new operation. Hence, production costs
decline because of increasing labor productivity and management efficiency. Japanese

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companies such as Toyota are noted for making learning a central part of their operating
philosophy.
Learning effects tend to be more significant when a technologically complex task is repeated
because there is more to learn. Thus, learning effects will be more significant in an assembly
process that has 1,000 complex steps than in a process with 100 simple steps. Although
learning effects are normally associated with the manufacturing process, there is every reason
to believe that they are just as important in service industries. For example, one famous study
of learning in the health care industry discovered that more experienced medical providers
posted significantly lower mortality rates for a number of common surgical procedures,
suggesting that learning effects are at work in surgery.

Figure: The Impact of Learning and Scale Economies on Unit Costs

In terms of the unit cost curve of a company, economies of scale imply a movement along the
curve (say, from A to B in Figure). The realization of learning effects implies a downward shift of
the entire curve (B to C in Figure) as both labor and management become more efficient over time
at performing their tasks at every level of output. In accounting terms, learning effects in a
production setting will reduce the cost of goods sold as a percentage of revenues, enabling the
company to earn a higher return on sales, and return on invested capital.
 Efficiency and The Experience Curve: The experience curve refers to the systematic
lowering of the cost structure, and consequent unit cost reductions, that have been observed to
occur over the life of a product. According to the experience-curve concept, per-unit
manufacturing costs for a product typically decline by some characteristic amount each time
accumulated output of the product is doubled (accumulated output is the total output of a
product since its introduction). Economies of scale and learning effects underlie the
experience-curve phenomenon. Put simply, as a company increases the accumulated volume
of its output over time, it is able to realize both economies of scale (as volume increases) and

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learning effects. Consequently, unit costs and cost structure fall with increases in accumulated
output. A company is likely to have a significant cost advantage over its competitors because
of its superior efficiency once it is down the experience curve. For example, it has been argued
that Intel uses such tactics to ride down the experience curve and gain a competitive advantage
over its rivals in the market for microprocessors.
 Efficiency, Flexible Manufacturing and Mass Production: Central to the concept of
economies of scale is the idea that a lower cost structure, through the mass production of a
standardized output, is the best way to achieve high efficiency. The tradeoff implicit in this
idea is between unit costs and product variety. Producing greater product variety from a factory
implies shorter production runs, which implies an inability to realize economies of scale and
higher costs. That is, a wide product variety makes it difficult for a company to increase its
production efficiency and thus reduce its unit costs. According to this logic, the way to increase
efficiency and achieve a lower cost structure is to limit product variety and produce a
standardized product in large volumes. This view of production efficiency has been challenged
by the rise of flexible production technologies. The term flexible production technology—or
lean production, as it is sometimes called—covers a range of technologies designed to reduce
setup times for complex equipment, increase the use of individual machines through better
scheduling, and improve quality control at all stages of the manufacturing process. The term
mass customization has been coined to describe the company’s ability to use flexible
manufacturing technology to reconcile two goals that were once thought to be incompatible:
low cost, and differentiation through product customization.
 Marketing and Efficiency: The marketing strategy that a company adopts can have a major
impact on efficiency and cost structure. Marketing strategy refers to the position that a
company takes with regard to pricing, promotion, advertising, product design, and distribution.
Some of the steps leading to greater efficiency are fairly obvious. For example, moving down
the experience curve to achieve a lower cost structure can be facilitated by aggressive pricing,
promotions, and advertising—all of which are the task of the marketing function. Other aspects
of marketing strategy have a less obvious—but no less important impact—on efficiency. One
important aspect is the relationship of customer defection rates, cost structure and unit costs.
Customer defection rates (or “churn rates”) are the percentage of a company’s customers
who defect every year to competitors. Defection rates are determined by customer loyalty,
which in turn is a function of the ability of a company to satisfy its customers. Because
acquiring a new customer entails one-time fixed costs for advertising, promotions, and related
tasks, there is a direct relationship between defection rates and costs. The longer a company
retains a customer, the greater the volume of customer-generated unit sales that can be set
against these fixed costs, and the lower the average unit cost of each sale. Thus, lowering
customer defection rates allows a company to achieve a lower cost structure.
 Materials Management, Just-in-time and Efficiency: The contribution of materials
management (logistics) to boosting the efficiency of a company can be just as dramatic as the
contribution of production and marketing. Materials management encompasses the activities
necessary to get inputs and components to a production facility (including the costs of
purchasing inputs), through the production process, and out through a distribution system to
the end user. Because there are so many sources of cost in this process, the potential for

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reducing costs through more efficient materials-management strategies is enormous. For a

typical manufacturing company, materials and transportation costs account for 50% to 70% of
its revenues, so even a small reduction in these costs can have a substantial impact on
profitability.
Improving the efficiency of the materials-management function typically requires the adoption
of a just-in-time (JIT) inventory system, which is designed to economize on inventory holding
costs by scheduling components to arrive at a manufacturing plant just in time to enter the
production process, or to have goods arrive at a retail store only when stock is almost depleted.
The major cost saving comes from increasing inventory turnover, which reduces inventory
holding costs, such as warehousing and storage costs, and the company’s need for working
capital. For example, through efficient logistics, Walmart can replenish the stock in its stores
at least twice a week; many stores receive daily deliveries if they are needed.
Recently, the efficient management of materials and inventory has been recast in terms of
supply-chain management: the task of managing the flow of inputs and components from
suppliers into the company’s production processes to minimize inventory holding and
maximize inventory turnover. Dell, whose goal is to streamline its supply chain to such an
extent that it “replaces inventory with information,” is exemplary in terms of supply-chain
management.
 R & D Strategy and Efficiency: The role of superior research and development (R&D) in
helping a company achieve a greater efficiency and a lower cost structure is twofold. First, the
R&D function can boost efficiency by designing products that are easy to manufacture. By
cutting down on the number of parts that make up a product, R&D can dramatically decrease
the required assembly time, which results in higher employee productivity, lower costs, and
higher profitability. For example, after Texas Instruments redesigned an infrared sighting
mechanism that it supplies to the Pentagon, it found that it had reduced the number of parts
from 47 to 12, the number of assembly steps from 56 to 13, the time spent fabricating metal
from 757 minutes per unit to 219 minutes per unit, and unit assembly time from 129 minutes
to 20 minutes. The result was a substantial decline in production costs. Design for
manufacturing requires close coordination between the production and R&D functions of the
company. Cross-functional teams that contain production and R&D personnel who work
jointly can best achieve this.
 Human Resource Strategy and Efficiency: Employee productivity is one of the key
determinants of an enterprise’s efficiency, cost structure, and profitability.20 Productive
manufacturing employees can lower the cost of goods sold as a percentage of revenues, a
productive sales force can increase sales revenues for a given level of expenses, and productive
employees in the company’s R&D function can boost the percentage of revenues generated
from new products for a given level of R&D expenses. Thus, productive employees lower the
costs of generating revenues, increase the return on sales, and, by extension, boost the
company’s return on invested capital. The challenge for a company’s human resource function
is to devise ways to increase employee productivity. Among its choices are: using certain hiring
strategies; training employees; organizing the work force into self-managing teams; and
linking pay to performance.

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 Hiring Strategy: Many companies that are well known for their productive employees
devote considerable attention to hiring. Southwest Airlines hires people who have a
positive attitude and who work well in teams because it believes that people who have a
positive attitude will work hard and interact well with customers, therefore helping to
create customer loyalty. Nucor hires people who are self-reliant and goal-oriented, because
its employees, who work in self-managing teams, require these skills to perform well. As
these examples suggest, it is important to be sure that the hiring strategy of the company is
consistent with its own internal organization, culture, and strategic priorities. The people a
company hires should have attributes that match the strategic objectives of the company.
 Employee Training: Employees are a major input into the production process. Those who
are highly skilled can perform tasks faster and more accurately, and are more likely to learn
the complex tasks associated with many modern production methods than individuals with
lesser skills. Training upgrades employee skill levels, bringing the company productivity-
related efficiency gains from learning and experimentation.
 Self-Managing Teams: The use of self-managing teams, whose members coordinate their
own activities and make their own hiring, training, work, and reward decisions, has been
spreading rapidly. The typical team comprises 5–15 employees who produce an entire
product or undertake an entire task. Team members learn all team tasks and rotate from job
to job. Because a more flexible work force is one result, team members can fill in for absent
coworkers and take over managerial duties such as scheduling work and vacation, ordering
materials, and hiring new members. The greater responsibility thrust on team members and
the empowerment it implies are seen as motivators. (Empowerment is the process of giving
lower-level employees decision-making power.) People often respond well to being given
greater autonomy and responsibility. Performance bonuses linked to team production and
quality targets work as an additional motivator.
 Pay for Performance: It is hardly surprising that linking pay to performance can help
increase employee productivity, but the issue is not quite so simple as just introducing
incentive pay systems. It is also important to define what kind of job performance is to be
rewarded and how. Some of the most efficient companies in the world, mindful that
cooperation among employees is necessary to realize productivity gains, link pay to group
or team (rather than individual) performance. Nucor Steel divides its work force into teams
of about 30, with bonus pay, which can amount to 30% of base pay, linked to the ability of
the team to meet productivity and quality goals. This link creates a strong incentive for
individuals to cooperate with each other in pursuit of team goals; that is, it facilitates
teamwork.
 Information Systems and Efficiency: With the rapid spread of computer use, the explosive
growth of the Internet and corporate intranets (internal corporate computer networks based on
Internet standards), and the spread of high-bandwidth fiber optics and digital wireless
technology, the information systems function is moving to center stage in the quest for
operating efficiencies and a lower cost structure. The impact of information systems on
productivity is wide ranging and potentially affects all other activities of a company. For
example, Cisco Systems has been able to realize significant cost savings by moving its ordering
and customer service functions online. The company has just 300 service agents handling all

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of its customer accounts, compared to the 900 it would need if sales were not handled online.
The difference represents an annual saving of $20 million a year. Moreover, without automated
customer service functions, Cisco calculates that it would need at least 1,000 additional service
engineers, which would cost around $75 million.
 Infrastructure and Efficiency: A company’s infrastructure—that is, its structure, culture,
style of strategic leadership, and control system—determines the context within which all other
value creation activities take place. It follows that improving infrastructure can help a company
increase efficiency and lower its cost structure. Above all, an appropriate infrastructure can
help foster a companywide commitment to efficiency, and promote cooperation among
different functions in pursuit of efficiency goals. These issues are addressed at length in later
chapters.
Achieving Superior Quality
High-quality products are reliable, do well the job for which they were designed, and are
perceived by consumers to have superior attributes. We also noted that superior quality
provides a company with two advantages. First, a strong reputation for quality allows a
company to differentiate its products from those offered by rivals, thereby creating more utility
in the eyes of customers, and giving the company the option of charging a premium price for
its products. Second, eliminating defects or errors from the production process reduces waste,
increases efficiency, lowers the cost structure of the company, and increases its profitability.
For example, reducing the number of defects in a company’s manufacturing process will lower
the cost of goods sold as a percentage of revenues, thereby raising the company’s return on
sales and return on invested capital. In this section, we look in more depth at what managers
can do to enhance the reliability and other attributes of the company’s product offering.
The principal tool that most managers now use to increase the reliability of their product
offering is the Six Sigma quality improvement methodology. The Six Sigma methodology is a
direct descendant of the total quality management (TQM) philosophy that was widely adopted,
first by Japanese companies and then by American companies, during the 1980s and early
1990s.27 The TQM concept was developed by a number of American management
consultants, including W. Edwards Deming, Joseph Juran, and A. V. Feigenbaum.
W. Edwards Deming- Five Step Chain Reaction
Originally, these consultants won few converts in the United States. However, managers in
Japan embraced their ideas enthusiastically, and even named their premier annual prize for
manufacturing excellence after Deming. The philosophy underlying TQM, as articulated by
Deming, is based on the following five-step chain reaction:
1. Improved quality means that costs decrease because of less rework, fewer mistakes, fewer
delays, and better use of time and materials.
2. As a result, productivity improves.
3. Better quality leads to higher market share and allows the company to raise prices.
4. Higher prices increase the company’s profitability and allow it to stay in business.
5. Thus, the company creates more jobs.

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Quality Improvement Program

Deming identified a number of steps that should be part of any quality improvement program: A
company should have a clear plan to specify its goal and how it is going to get there.
1. Management should embrace the philosophy that mistakes, defects, and poor quality
materials are not acceptable and should be eliminated.
2. Quality of supervision should be improved by allowing more time for supervisors to work
with employees, and giving employees appropriate skills for the job.
3. Management should create an environment in which employees will not fear reporting
problems or recommending improvements.
4. Work standards should not only be defined as numbers or quotas, but should also include
some notion of quality to promote the production of defect-free output.
5. Management is responsible for training employees in new skills to keep pace with changes in
the workplace.
6. Achieving better quality requires the commitment of everyone in the company.

Implementing Reliability Improvement Methodologies

Among companies that have successfully adopted quality improvement methodologies, certain
imperatives stand out. These are discussed below in the order in which they are usually tackled in
companies implementing quality improvement programs. What needs to be stressed first, however,
is that improvement in product reliability is a cross-functional process. Its implementation requires
close cooperation among all functions in the pursuit of the common goal of improving quality; it
is a process that works across functions.
1. Build Organizational Commitment to Quality: It is important that senior managers agree to
a quality improvement program and communicate its importance to the organization.
2. Create Quality Leaders: If a quality improvement program is to be successful, individuals
must be identified to lead the program. Under the Six Sigma methodology, exceptional
employees are identified and put through a “black belt” training course on the Six Sigma
methodology. The black belts are taken out of their normal job roles, and assigned to work
solely on Six Sigma projects for the next 2 years. In effect, the black belts become internal
consultants and project leaders. Because they are dedicated to Six Sigma programs, the black
belts are not distracted from the task at hand by day-to-day operating responsibilities.
3. Focus on the Customers: Being customer focused puts you in a better position to help
your customers, in an honest way. Your customer will sense and see that you are making an
extra effort to understand the situation at which they are and to really understand them to be
better able to help them get where they want to be.
4. Identify Processes and The Sources of Defects: Quality improvement methodologies preach
the need to identify defects that arise from processes, trace them to their source, find out what
caused the defects, and make corrections so that they do not recur. Production and materials
management are primarily responsible for this task. To uncover defects, quality improvement
methodologies rely upon the use of statistical procedures to pinpoint variations in the quality

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of goods or services. Once variations have been identified, they must be traced to their
respective sources and eliminated.
5. Find Ways to Measure Quality: Another key to any quality improvement program is to create
a metric that can be used to measure quality. In manufacturing companies, quality can be
measured by criteria such as defects per million parts. In service companies, suitable metrics
can be devised with a little creativity. For example, one of the metrics Florida Power & Light
uses to measure quality is meter-reading errors per month.
6. Set Goals and Create Incentive: Once a metric has been devised, the next step is to set a
challenging quality goal and create incentives for reaching it. Under Six Sigma programs, the
goal is 3.4 defects per million units. One way of creating incentives to attain such a goal is to
link rewards, such as bonus pay and promotional opportunities, to the goal.
7. Solicit Inputs from Employees: Solicit employment means to communicate in person or by
telephone with a prospective client or a member of the prospective client's family concerning
professional employment within the scope of a professional's license, registration, or
certification arising out of a particular occurrence or event, or series of actions.
8. Identify Defects and Trace them to Source: A major source of poor-quality finished goods
is poor-quality component parts. To decrease product defects, a company must work with its
suppliers to improve the quality of the parts they supply.
9. Build Long-Term Relationship with Suppliers: To implementing reliability improvement
Methodologies Company have to create a long-term relationship with the customers.
10. Design for Ease of Manufacture: The more assembly steps a product requires, the more
opportunities there are for mistakes. Thus, designing products with fewer parts is often a major
component of any quality improvement program.
11. Break down Barriers among Functions: implementing quality improvement methodologies
requires organization wide commitment and substantial cooperation among functions. R&D
must cooperate with production to design products that are easy to manufacture; marketing
must cooperate with production and R&D so that customer problems identified by marketing
can be acted on; and human resource management must cooperate with all the other functions
of the company in order to devise suitable quality-training programs.

Attributes Associated with the Product Offerings

To be regarded as being high in the excellence dimension, a company’s product offering must be
seen as superior to that of rivals. Achieving a perception of high quality on any of these attributes
requires specific actions by managers.
First, it is important for managers to collect marketing intelligence indicating which attributes are
most important to customers. For example, consumers of personal computers (PCs) may place a
low weight on durability because they expect their PCs to be made obsolete by technological
advances within 3 years, but they may place a high weight on features and performance. Similarly,
ease of ordering and timely delivery may be very important attributes for customers of online
booksellers (as indeed they are for customers of Amazon.com), whereas customer training and
consulting may be very important attributes for customers who purchase complex, business-to-
business software to manage their relationships with suppliers.

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Second, once the company has identified the attributes that are important to customers, it needs to
design its products (and the associated services) in such a way that those attributes are embodied
in the product. It also needs to train personnel in the company so that the appropriate attributes are
emphasized during design creation. This requires close coordination between marketing and
product development (the topic of the next section) and the involvement of the human resource
management function in employee selection and training.
Third, the company must decide which significant attributes to promote and how best to position
them in the minds of consumers; that is, how to tailor the marketing message so that it creates a
consistent image in the minds of customers.27 At this point, it is important to recognize that
although a product might be differentiated on the basis of six attributes, covering all of those
attributes in the company’s communications may lead to an unfocused message. Many marketing
experts advocate promoting only one or two central attributes. For example, Volvo consistently
emphasizes the safety and durability of its vehicles in all marketing messages, creating the
perception in the minds of consumers (backed by product design) that Volvos are safe and durable.
Volvos are also very reliable and have high performance, but the company does not emphasize
these attributes in its marketing messages. In contrast, Porsche emphasizes performance and
styling in all of its marketing messages; thus, a Porsche is positioned differently in the minds of
consumers than Volvo. Both are regarded as high-quality products because both have superior
attributes, but each company differentiates its models from the average car by promoting
distinctive attributes.
Finally, it must be recognized that competition is not stationary, but instead continually produces
improvement in product attributes, and often the development of new-product attributes. This is
obvious in fast-moving high-tech industries where product features that were considered leading
edge just a few years ago are now obsolete—but the same process is also at work in more stable
industries. For example, the rapid diffusion of microwave ovens during the 1980s required food
companies to build new attributes into their frozen-food products: they had to maintain their
texture and consistency while being cooked in the microwave; a product could not be considered
high quality unless it could do that. This speaks to the importance of a strong R&D function within
the company that can work with marketing and manufacturing to continually upgrade the quality
of the attributes that are designed into the company’s product offerings. Exactly how to achieve
this is covered in the next section.

Achieving Superior Innovation

In many ways, innovation is the most important source of competitive advantage. This is
because innovation can result in new products that better satisfy customer needs, can improve the
quality (attributes) of existing products, or can reduce the costs of making products that
customers want. The ability to develop innovative new products or processes gives a company a
major competitive advantage that allows it to:
(1) Differentiate its products and charge a premium price, and/or

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(2) Lower its cost structure below that of its rivals. Competitors, however, attempt to imitate
successful innovations and often succeed. Therefore, maintaining a competitive advantage
requires a continuing commitment to innovation.

High Failure Rate of Innovation

Although promoting innovation can be a source of competitive advantage, the failure rate of
innovative products is high. Research evidence suggests that only 10 to 20% of major R&D
projects give rise to commercial products. Well-publicized product failures include Apple’s
Newton, an early, handheld computer that flopped in the marketplace; Sony’s Betamax format in
the videocassette recorder segment; Sega’s Dreamcast videogame console; and Windows Mobile,
an early smartphone operating system created by Microsoft that was made obsolete in the eyes of
consumers by the arrival of Apple’s iPhone. Although many reasons have been advanced to
explain why so many new products fail to generate an economic return, five explanations for
failure repeatedly appear.
1. Uncertainty: Many new products fail because the demand for innovation is inherently
uncertain. It is impossible to know prior to market introduction whether the new product has
tapped an unmet customer need, and if there is sufficient market demand to justify
manufacturing the product. Although good market research can reduce the uncertainty about
likely future demand for a new technology, that uncertainty cannot be fully eradicated; a certain
failure rate is to be expected.
2. Poor Commercialization: New products often fail because the technology is poorly
commercialized. This occurs when there is definite customer demand for a new product, but
the product is not well adapted to customer needs because of factors such as poor design and
poor quality. For instance, the failure of Microsoft to establish an enduring, dominant position
in the market for smartphones, despite the fact that phones using the Windows Mobile
operating system were introduced in 2003—4 years before Apple’s iPhone hit the market—
can be traced to its poor design. Windows Mobile phones had a physical keyboard, and a small,
cluttered screen that was difficult to navigate, which made the product unattractive to many
consumers. In contrast, the iPhone’s large touchscreen and associated keyboard appealed to
many consumers, who rushed out to buy it in droves.
3. Poor Positioning Strategy: new products may fail because of poor positioning strategy.
Positioning strategy is the specific set of options a company adopts for a product based upon
four main dimensions of marketing: price, distribution, promotion and advertising, and product
features. Apart from poor design, another reason for the failure of Windows Mobile phones
was poor positioning strategy. They were targeted at business users, whereas Apple developed
a mass market by targeting the iPhone at retail consumers.
4. Technological Myopia: Many new-product introductions fail because companies make the
mistake of marketing a technology for which there is not enough demand. A company can
become blinded by the wizardry of a new technology and fail to determine whether there is
sufficient customer demand for it. A classic example is the Segway two-wheeled personal
transporter. Despite the fact that its gyroscopic controls were highly sophisticated, and that the

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product introduction was accompanied by massive media hype, sales fell well below
expectations when it transpired that most consumers had no need for such a conveyance.
5. Being Slow to Market: Companies fail when products are slowly marketed. The more time
that elapses between initial development and final marketing—the slower the “cycle time”—
the more likely it is that a competitor will beat the company to market and gain a first-mover
advantage.

Building Competencies in Innovation

One of the best ways to achieve cross-functional integration is to establish cross functional product
development teams composed of representatives from R&D, marketing, and production. The
objective of a team should be to oversee a product development project from initial concept
development to market introduction. A number of attributes appear to be important in order for a
product development team to function effectively and meet all its development milestones.
1. Building skills in basic and applied research: A heavyweight project manager—one who
has high status within the organization and the power and authority required to secure the
financial and human resources that the team needs to succeed—should lead the team and be
dedicated primarily, if not entirely, to the project. The leader should believe in the project (a
champion) and be skilled at integrating the perspectives of different functions and helping
personnel from different functions work together for a common goal. The leader should also
be able to act as an advocate of the team to senior management.
2. Project Selection and Management: The team should be composed of at least one member
from each key function or position. Individual team members should have a number of
attributes, including an ability to contribute functional expertise, high standing within their
function, a willingness to share responsibility for team results, and an ability to put functional
advocacy aside. It is generally preferable if core team members are 100% dedicated to the
project for its duration. This ensures that their focus is upon the project, not upon their ongoing
individual work.
3. Cross Functional Integration: The team members should be physically co-located to create
a sense of camaraderie and facilitate communication.
4. Product Development Teams: The team should have a clear plan and clear goals, particularly
with regard to critical development milestones and development budgets. The team should
have incentives to attain those goals; for example, pay bonuses when major development
milestones are attained. Fifth, each team needs to develop its own processes for
communication, as well as conflict resolution. For example, one product development team at
Quantum Corporation, a California based manufacturer of disk drives for personal computers,
mandated that all major decisions would be made and conflicts resolved during meetings that
were held every Monday afternoon. This simple rule helped the team to meet its development
goals.
5. Partly parallel development process: There is sufficient evidence that developing
competencies in innovation requires managers to proactively learn from their experience with
product development, and to incorporate the lessons from past successes and failures into
future new product development processes.

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Just-In-Time (JIT)
The supplier delivers the components and parts to the production line only when needed and “just-
in-time” to be assembled.

Outsourcing
The contracting of production and operations to outside vendors that have expertise in specific
areas.

TQM (Total Quality Management)

It is a long term commitment to continuous quality improvement, throughout the organization and
with the active participation of all members at all levels, to meet and exceed customer expectations.

QC (Quality Circle)
A group of people from the same organizational areas who meet regularly to solve problems they
experience at work.

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