Building Competitive Advantage

Through Functional Level Strategy

Dr Nazrul Islam
East west University
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✔Achieving Superior Efficiency

✔Achieving Superior Quality
✔Achieving Superior Innovation
✔Achieving Superior Customer
Responsiveness
 Achieving Superior
Efficiency
✔ Production and Efficiency
– Economies of Scale
– Learning Effects
– The Experience Curve
– Flexible Manufacturing
✔ Marketing Efficiency
✔ Materials Management, JIT, and Efficiency
✔ R&D Strategy and Efficiency
✔ Human Resource Strategy and Efficiency
✔ Infrastructure and Efficiency
Production and Efficiency:
Economies of Scale
Economies of Scale are unit-cost reductions
associated with a large scale of output.
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 whatever the level of outputs.
 Production and Efficiency:
Economies of Scale
A Typical Long Run Unit Cost Curve

Unit Costs

Minimum Efficient
Scale

Volume
 Production and Efficiency: Learning
Effects

Learning effects are cost savings that come

from learning by doing
Labor, for example, learns by repetition how
best to carry out a task.
Labor productivity increases over time, and
unit costs fall as individuals learn the most
efficient way to perform a particular task.
Production and Efficiency: Learning
Effects
Economies of Scale and Learning Effects
Unit Costs

.A Economies
of Scale

.
B

. Learning Average Costs

Effects
Average Costs
C
Output
 Production and Efficiency: The
Experience Curve

The experience curve refers to systematic

unit-cost reductions that have been
observed to occur over the life of a
product.

Economies of scale and learning effects

underlie the experience curve phenomenon.
 Production and Efficiency: The
Experience Curve
A Typical Experience Curve
Unit Costs

. B

.A

Accumulated
Output
Production and Efficiency:
The Experience Curve
• Flexible Manufacturing
Technology (Lean Production)
• Mass Customization
• Flexible Machine Cells
 Production and Efficiency:
Lean Production
Lean Production technology covers a range of
manufacturing technologies designed to:

1. reduce setup times for complex equipment;

2. Increase the utilization of individual machines
through better scheduling; and
3. Improve quality control at all stages of the
manufacturing process.
 Production and Efficiency:
Mass Customization
Besides improving efficiency and lowering
costs, flexible manufacturing technologies let
companies customize products to the unique
demands of small consumer groups – at a cost
that at one time could only be achieved by
mass producing a standardized output.
Production and Efficiency:
Flexible Machine Cells
A flexible machine cell is a grouping of
various types of machinery, a common
materials handler, and a centralized cell
controller (Computer).
Each typical cell normally contains 4 to 6
machines capable of performing a variety of
operations.
The typical cell is dedicated to the
production of a family of parts or products.
 Marketing and Efficiency
✔ Marketing
Strategy
Advertising

Promotion Product
Design

Pricing Distribution
Marketing and Efficiency (Continued)
The Relationship Between Average Unit Costs and
Customer Defection Rates
High
Average Unit Costs

Customer
Low

Defection Rates
Low High
 Materials Management, JIT,
and Efficiency

• Materials Management
• Just-In-Time (JIT)
R&D Strategy and Efficiency
• Design Easy-to-Manufacture Products
• Pioneer Process
Innovations

Copyright  1998 by Houghton Mifflin Company. All rights reserved.

Human Resource Strategy
and Efficiency
• Employee Training
• Self-Managing Teams
• Pay for Performance
 Infrastructure and
Efficiency
• Built Through Top Management
Leadership
• Requires Company-Wide
Commitment
Primary Roles of Different Value Creation
Functions in Achieving Superior Efficiency
Value Creation Primary
PrimaryRoles
Roles
Function
•
InfrastructureProvide company wide commitment to efficiency.
•
Facilitate cooperation between functions
•
Where appropriate, pursue experience curve based
Production cost economies
•
Implement flexible manufacturing systems
•
Where appropriate, adopt aggressive marketing to
Marketing ride down the experience curve
•
Limit customer defections by building brand loyalty
Material •Implement JIT systems
Management
•
Design products for ease of manufacture
R&D
•Seek process innovations
Human •
Institute training programs to build skills
•
Implement self-managing teams
Relations
•
Implement pay for performance
Achieving Superior Quality
• Total Quality Management (TQM)
• Deming’s Five-Step “Chain Reaction”
1. Improved Quality
2. Productivity Improves
3. Higher Market Share
4. Increased Profitability
5. More Jobs Created
 Deming’s 14 Points to Quality
Create constancy of purpose towards improvement of product
1
and service, with the aim of becoming competitive, staying in
business, and providing jobs.
Adopt the new philosophy. We are in a new economic age.
2
Western management must awaken to the challenge, must learn
their responsibilities, and take on leadership for change.
Cease dependence on inspection to achieve quality. Eliminate
3
the need for inspection on a mass basis by building quality into
the product in the first place.
End the practice of awarding business on the basis of price tag.
4Instead, minimize total cost.
Improve constantly and forever the system of production and
5
service, to improve quality and productivity, and thus constantly
decrease costs.
Institute training on the job.
6
Institute leadership. The aim of leadership should be to help
people and machines and gadgets do a better job. Leadership
7
of management is in need of an overhaul, as well as leadership
of production workers.
Source: From The Man Who Discovered Quality by Andrea Gabor. Copyright 1990 by
Andrea Gabor. Reprinted by permission of Times Books, A division of Random House, Inc.
 Deming’s 14 Points to Quality (Continued)
Drive out fear, so that everyone may work effectively for the
8 company.
Drive down barriers between departments. People in research,
design, sales, and production must work as a team, to foresee
9
problems of production and in use that may be encountered with
the product or service.
Eliminate slogans, exhortations, and targets for the work force
asking for zero defects and new levels of productivity. Such
10
exhortations only create adversarial relationships. The bulk of the
causes of low quality and low productivity belong to the system and
thus lie beyond the power of the work force.
A. Eliminate work standards on the factory floor. Substitute
11
leadership. B. Eliminate management by objective, by numbers, or
by numerical goals. Substitute leadership.
A. Remove barriers that rob hourly workers of their right to pride
of workmanship. The responsibility of supervisors must be
12
changed from sheer numbers to quality. B. Remove barriers that
rob people in management and in engineering of their right to pride
of workmanship.
Institute a vigorous program of education and self-improvement.
13
Put everybody in the company to work to accomplish the
14
transformation. The transformation is everybody’s job.
Source: From The Man Who Discovered Quality by Andrea Gabor. Copyright 1990 by
Andrea Gabor. Reprinted by permission of Times Books, A division of Random House, Inc.
Achieving Superior Quality
(Continued)

• Implementing TQM
 The Role Played by Different Functions in
Achieving Superior Quality
Value Creation Primary Roles
Function
Provide
1. leadership and commitment to quality.
2.
Find ways to measure quality.
Infrastructure
3.
Set goals and create incentives.
(Leadership) 4. Solicit input from employees.
Encourage
5. cooperation between functions.
1.
Shorten production runs.
Production
2.
Trace defects back to source.
1.Focus on the customer.
Marketing Provide
2. customer feedback on quality.
1.Rationalize suppliers.
Material
2.
Help suppliers implement TQM.
Management 3. Trace defects back to suppliers.
Design
1. products so that they are easy to
R&D
manufacture.
Human 1.
Institute TQM training programs.
Relations Organize
2. employees into quality teams.
 Achieving Superior Quality
(Continued)

✔Implementing TQM (Continued)

– Build Organizational
Commitment to Quality

Copyright  1998 by Houghton Mifflin Company. All rights reserved.

Achieving Superior Quality
(Continued)

✔Implementing TQM
(Continued)
– Focus on the Customer
Achieving Superior Quality
(Continued)

✔Implementing TQM
(Continued)
– Find Ways to Measure
Quality
Achieving Superior Quality
(Continued)

✔Implementing TQM
(Continued)
– Set Goals and
Create Incentives
Achieving Superior Quality
(Continued)

✔Implementing TQM
(Continued)
– Solicit Input from
Employees
Achieving Superior Quality
(Continued)

✔Implementing TQM
(Continued)
– Identify Defects and
Trace Them to
Source
Achieving Superior Quality
(Continued)
✔Implementing TQM (Continued)
– Supplier Relations
Achieving Superior Quality
(Continued)

✔Implementing TQM
(Continued)
– Design for Ease of
Manufacture
Achieving Superior Quality
(Continued)
✔Implementing TQM (Continued)
– Break Down Barriers Between
Functions
 Achieving Superior
Innovation
✔The High Failure Rate of Innovation
– Uncertainty
– Poor Commercialization
– Poor Positioning Strategy
– Technological Myopia (Marketing
technology that has little demand)
– Slow to Market
 Achieving Superior
Innovation (Continued)
✔ Building Competencies in Innovation
– Building Skills in Basic and Applied
Research
– Achieving close integration between R & D
and Marketing
– Achieving close integration between R&D
and manufacturing
– An ability to minimize time to market, and
– Good project Selection and Management
The Development Funnel
Gate 1

Phase 1:
Idea Generation
The Development Funnel
Gate 1 Gate 2

Phase 2:
Phase 1: Project
Idea Generation Refinement
The Development Funnel
Gate 1 Gate 2

Market

Phase 2: Phase 3:
Phase 1: Project Project
Idea Generation Refinement Execution
 Achieving Superior
Innovation (Continued)
✔Building Competencies in
Innovation (Continued)
– Building Skills in Basic and Applied
Research
– Project Selection and Management

– Cross-Functional Integration
– Product Development Teams
– Partly Parallel Development Process
 Sequential Development
Process
Opportunity
Identification

R&D and Marketing

 Sequential Development
Process
Opportunity
Identification
Concept
Development

R&D and Marketing

 Sequential Development
Process
Opportunity
Identification R&D
Concept
Development
Product
Design

R&D and Marketing

 Sequential Development
Process
Opportunity
Identification R&D
Concept
Development
Product Manufacturing
Design

R&D and Marketing Process

Design
 Sequential Development
Process
Opportunity
Identification R&D
Concept
Development
Product Manufacturing
Design

R&D and Marketing Process

Design
Commercial
Production
 A Partly Parallel Process

Opportunity
Identification R&D and Manufacturing

Concept
Development

Product
Design

Process
Design
Commercial
Production
 The Role Played by Various Functions in
Achieving Superior Innovation
Value Creation Primary Roles
Function
Overall
1. project management (i.e. managing the
Infrastructure development function)
Facilitating
2. cross-functional cooperation
Cooperate
1. with R&D on designing products that are
Production easy to manufacture.
Work
2. with R&D on developing process innovations.
Provide
1. market information to R&D. Work with R&D
Marketing on developing new products.
Material No Primary
Management Responsibility
1.
Develop new products and processes
Cooperate
2. with other functions, particularly
R&D
marketing and manufacturing, in the development
process.
Human 1. Hire talented scientists and engineers.
Relations
Achieving Superior Customer
Responsiveness
• Customer Focus
– Leadership
– Employee Attitudes
– Bringing Customers into the
Company
• Satisfying Customer Needs
– Customization
– Response Time
 The Primary Role of Different Functions in
Achieving Superior Customer Responsiveness
Value Primary
Functio
Creation Roles
n 1. Through leadership by example, build a
Infrastructu
wide commitment to customer
company
re 1.responsiveness.
Achieve customization through
flexible
implementation of
Producti
2.manufacturing.
Achieve rapid response through
on manufacturi
flexible
1.ng.
Know the
Marketi 2. Communicate customer feedback to
customer.
ng appropriate
Materi functions.
1. Develop logistics systems capable of
Manageme
al quickly to unanticipated customer
responding
nt R& demands.
1. Bring customers into the product
development
D
Huma process.
1. Develop training programs that get
Relatio
n think of to
employees themselves as
ns customers.
 Ch a p t e r S u m m a r y

✔ACHIEVING SUPERIOR
EFFICIENCY
G S UP E RIO R Q U A LITY
✔ACHIEVIN
✔ACHIEVING SUPERIOR
INNOVATION
✔ACHIEVING SUPERIOR
E R R E S PO NS IVE N ES S
CUSTOM