BUILDING

COMPETITIVE
ADVANTAGE

FUNCTIONAL LEVEL
STRATEGY

FUNCTIONAL LEVEL STRATEGY

Those aimed at improving the
effectiveness of a companys
operations and ability to attain
superior effi ciency, quality,
innovation and customer
responsiveness.

THE ROOTS OF COMPETITIVE

ADVANTAGE

ACHIEVING SUPERIOR EFFICIENCY

Economies of Scale
cost reduction gained through mass
producing a standardized output
discount on bulk purchases of raw material
inputs and component parts
spreading the fixed production cost over a
large production volume
cost savings associated with distributing
marketing and advertising costs over a
large volume of output

ECONOMIES AND DISECONOMIES

OF SCALE

DISECONOMIES OF SCALE
Occur because of increased bureaucracy
associated with large-scale enterprises and
the managerial ineffi ciency that can result.
Information about operating matters can
accidentally and deliberately be distorted
by the number of managerial layers through
which the information must travel to reach
top decision maker. The result is poor
decision making.

ACHIEVING SUPERIOR EFFICIENCY

Learning Effects
cost savings that come from learning by
doing.

THE IMPACT OF LEARNING AND

SCALE ECONOMIES ON UNIT COST

ACHIEVING SUPERIOR EFFICIENCY

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.

THE EXPERIENCE CURVE

WHY MANAGERS SHOULD NOT BECOME

COMPLACENT ABOUT EFFICIENCY-BASED
COST ADVANTAGES DERIVED FROM
EXPERIENCE CURVE?
1. Because neither learning eff ect nor
economies of scale are sustained forever.
2. Changes that are always taking place in the
external environment disrupt a companys
business model, so cost advantages gained
from experience eff ect can be made
obsolete by the development of new
technologies.
3. Producing a high volume of output does not
necessarily give a company a lower cost
structure.

ACHIEVING SUPERIOR EFFICIENCY

Flexible Production Systems, and
Mass Customization
Flexible Production Technology- lean
production,
Mass Customization- the companys
ability to use flexible manufacturing
technology to reconcile two goals that were
once thought to be incompatible: low cost
and differentiation through product
customization.

ACHIEVING SUPERIOR EFFICIENCY

Marketing
Marketing Strategy- refers to the position that
a company takes with regards to pricing,
promotion, advertising, product design and
distribution.
**Customer defection rate(churn rate)- the
percentage of a companys customers who defect
every year to competitors.

THE RELATIONSHIP BETWEEN

CUSTOMER LOYALTY AND PROFIT
PER CUSTOMER

ACHIEVING SUPERIOR EFFICIENCY

Materials Management
encompasses the activities necessary
to get inputs and components to a
production facility(including the cost of
purchasing inputs), through the
production process, and out through a
distribution system to the end user.

JUST-IN-TIME(JIT)
The major cost saving comes from
increasing inventory turnover, which
reduces inventory holding cost, such as
warehousing and storage cost, and the
companys need for working capital.
The drawback of JIT system is that they
leave a company without a buffer stock
of inventory.

ACHIEVING SUPERIOR EFFICIENCY

R&D Strategy
Can boost effi ciency by designing products
that are easy to manufacture.
Pioneering process innovation

ACHIEVING SUPERIOR EFFICIENCY

Human Resources Strategy
Hiring Strategy
Employee training
Self Managing Teams
Pay per Performance

ACHIEVING SUPERIOR EFFICIENCY

Information Systems
By using Web-based programs to
automate customers and supplier
interactions, they can substantially
reduce the number of people required
to manage these interfaces, thereby
reducing costs.

ACHIEVING SUPERIOR EFFICIENCY

Infrastructure
Structure
Culture
Style of strategic leadership, and
Control system

PRIMARY ROLES OF VALUE CREATION

FUNCTION IN ACHIEVING SUPERIOR
EFFICIENCY

ACHIEVING SUPERIOR QUALITY

Quality as Reliability
Quality as Excellence

TWO ADVANTAGES THAT SUPERIOR

QUALITY PROVIDES
1. A strong reputation
2. Eliminating defects

ATTAINING SUPERIOR RELIABILITY

The Philosophy underlying Total Quality
Management:
1. Improved quality means that costs decrease because
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 process.
4. Higher prices increases the companys profi tability
and allow it to stay in business.
5. Thus, the company creates more jobs.

STEPS THAT SHOULD BE PART OF ANY

QUALITY IMPROVEMENT PROGRAM
1. Management should embrace the
philosophy that mistakes, defects, and
poor quality materials are not acceptable
and should be limited.
2. Quality of supervision should be improved
by allowing more time for supervisor 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.

STEPS THAT SHOULD BE PART OF

ANY QUALITY IMPROVEMENT
PROGRAM
4. Work standards should not only be defi ned
as number or quota, but should also
include some notion of quality to promote
the production of detect-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
Key to any quality Improvement program
1. Senior managers agree to a quality
improvement program and communicate its
importance to the organization
2. If a quality improvement program is to be
successful, individuals must be identifi ed to
lead the program.
3. Quality improvement methodologies preach the
need to identify defects, that arise from
processes, trace them to their sources, fi nd out
what caused the defects, and make corrections
so that they do not recur.

Key to any quality Improvement

program
4. To create a metric that can be used to
measure quality
5. To set a challenging quality goal an create
incentives for reaching it
6. Shop floor employees can be a major
source for improving product quality

Key to any quality Improvement

program
7. A major source of poor-quality finished
goods is poor quality component parts.
8. The more assembly steps a product
requires, the more opportunities there are
for mistakes
9. Implementation requires organization wide
commitment and substantial cooperation
among functions.

ROLES PLAYED BY DIFFERENT

FUNCTIONS IN IMPLEMENTING
RELIABILITY IMPROVEMENT
METHODOLOGIES

IMPROVING QUALITY AS
EXCELLENCE
Collect marketing intelligence indicating
which of these attributes are most
important to customers.
Design its products in such a way that those
attributes are embodied in the product.
Decide which of the signifi cant attributes to
promote and how best to position them in
the minds of consumers
Recognized that competition is not
stationary, but instead continually produces
improvements

ACHIEVING SUPERIOR INNOVATION

Diff erentiate its product and charge a
premium price
Lower its cost structure

*** Research evidence suggest s that

10% to 20% of major R&D projects give

rise to commercial products

FIVE EXPLANATIONS FOR FAILURE

REPEATEDLY APPEAR
1. The demand for innovations is inherently
uncertain.
2. The technology is poorly commercialized.
3. Poor positioning strategy.
4. Companies make the mistake of marketing
a technology for which there is not enough
demand.
5. Products are slowly marketed.

REDUCING INNOVATION FAILURES

Integrating R&D and marketing is crucial if
a new product is to be properly
commercialized
Integration between R&D and production
can help a company to ensure that products
are designed with manufacturing
requirements in mind
Cross functional integration( composed of
R&D, marketing and production.)

FUNCTIONAL ROLES FOR

ACHIEVING SUPERIOR INNOVATION

ACHIEVING SUPERIOR
RESPONSIVENESS TO CUSTOMER
Focusing on the Customer
Demonstrating Leadership
Shaping Employee Attitude
Knowing Customer Needs

Satisfying Customer
Customization
Response Time

BUSINESS-LEVEL
STRATEGY

COMPETITIVE POSITIONING AND

THE BUSINESS MODEL
A company must define its business,
which entails decision about
1. Customers needs or what is to be satisfi ed
2. Customer groups or who is to be satisfi ed
3. Distinctive competencies or how customer
needs are to be satisfi ed

FORMULATING BUSINESS MODEL:

CUSTOMER NEEDS AND PRODUCT
DIFFERENTIATION
Product differentiation
The process of designing products to
satisfy customers needs.
Differentiated Product- to differentiate a
product by innovation, excellent quality
or responsiveness to customers
Low prices Product- finding ways to
increase effi ciency and reliability to
reduce cost

FORMULATING THE BUSINESS

MODEL:CUSTOMER GROUPS AND
MARKET SEGMENTATION

Market Segmentation
The way a company decides to classify its
customers
According to how much customers are willing to
pay
According to the specific needs

THREE APPROACHES TO MARKET

SEGMENTATION

IMPLEMENTING THE BUSINESS

MODEL: BUILDING DISTINCTIVE
COMPETENCIES
To develop a successful business model,
strategic managers must device a set of
strategies that determine:
How to differentiate and price their products
How much to segment a market and how
wide a range of products to develop

COMPETITIVE POSITIONING AND

BUSINESS-LEVEL STRATEGY
Make a consistent and compatible set of
choices concerning:
How to differentiate and price the product
When and how much to segment the market
to maximize demand
Where and how to invest capital in order to
create value while keeping cost structures
viable (for competitive pricing)

COMPETITIVE POSITIONING AND

BUSINESS-LEVEL STRATEGY

COMPETITIVE POSITIONING:
GENERIC BUSINESS-LEVEL
STRATEGIES
Generic strategies
All businesses can pursue them regardless
of whether they are manufacturing, service,
or nonprofit
Can be pursued in different kinds of industry
environments
Results from a companys consistent choices
on product, market, and distinctive
competencies

PRODUCT/MARKET/DISTINCTIVECOMPETENCY CHOICES AND GENERIC

COMPETITIVE STRATEGIES

COST LEADERSHIP
Establish a cost structure that allows the
company to provide goods and services at
lower unit costs than competitors
Advantages
If rivals charge similar prices, the cost
leader achieves superior profitability
The cost leader is able to charge a lower
price than competitors

COST LEADERSHIP STRATEGIC

CHOICES
The cost leader does not try to be the
industry innovator
The cost leader positions its products to
appeal to the average customer
The overriding goal of the cost leader is to
increase effi ciency and lower its costs
relative to its rivals

ADVANTAGES OF COST LEADERSHIP

Protected from industry competitors by cost
advantage
Less aff ected by increased prices of inputs if
there are powerful suppliers
Less aff ected by a fall in price of inputs if
there are powerful buyers
Purchases in large quantities increase
bargaining power over suppliers
Ability to reduce price to compete with
substitute products
Low costs and prices are a barrier to entry

DISADVANTAGES OF COST
LEADERSHIP
Competitors may lower their cost structures
Competitors may imitate the cost leaders
methods
Cost reductions may aff ect demand

DIFFERENTIATION
Create a product that customers perceive as
diff erent or distinct in an important way
Advantages
Premium price
Increased revenues = superior profitability

DIFFERENTIATION STRATEGIC
CHOICES
Quality, innovation, responsiveness to
customer needs
A diff erentiator strives to diff erentiate itself
along as many dimensions as possible
A diff erentiator segments its market into
many niches
A diff erentiated company concentrates on
the organizational functions that provide
the source of diff erentiation advantage

ADVANTAGES OF DIFFERENTIATION
Customers develop brand loyalty
Powerful suppliers are not a problem
because the company is geared more
toward the price it can charge than its costs
Diff erentiators can pass price increases on
to customers
Powerful buyers are not a problem because
the product is distinct
Diff erentiation and brand loyalty are
barriers to entry
The threat of substitute products depends
on competitors ability to meet customer

DISADVANTAGES OF
DIFFERENTIATION
Diffi culty in maintaining long-term
distinctness in customers eyes
Agile competitors can quickly imitate
Patents and first-mover advantage are
limited
Diffi culty of maintaining premium price

FOCUS
Serving the needs of a specifi c market
segment
Geographic
Type of customer
Segment of the product line
After choosing a market segment, a focused
company positions itself using either
Low-cost OR differentiation

WHY FOCUS STRATEGIES ARE

DIFFERENT

ADVANTAGES OF FOCUS
The focuser is protected from rivals to the extent
it can provide a product or service they cannot
The focuser has power over buyers because they
cannot get the same thing from anyone else
The threat of new entrants is limited by
customer loyalty to the focuser
Customer loyalty lessens the threat from
substitutes
The focuser stays close to its customers and
their changing needs

DISADVANTAGES OF FOCUS
The focuser is at a disadvantage with regard
to powerful suppliers because it buys in
small volume (but it may be able to pass
costs along to loyal customers)
Because of low volume, a focuser may have
higher costs than a low-cost company
The focusers niche may disappear because
of technological change or changes in
customers tastes
Diff erentiators will compete for a focusers
niche

COMPETITIVE POSITIONING AND

STRATEGIC GROUPS
Identifying the strategies that a companys
rivals are pursuing
Strategic groups: companies in an industry
that are pursuing a similar generic strategy

FAILURES IN COMPETITIVE
POSTIONING
Companies lost their position on the value
frontier, either because they have lost the
source of their competitive advantage or
their rivals have found ways to push out the
value creation frontier and leave them
behind
Icarus paradox

THANK YOU.