Chapter

Four

Strategy at the
Functional
level
 Functional-Level Strategies
Functional-level strategies
are strategies aimed at improving the
effectiveness of a companys operations.

Improves companys ability to attain superior:

1. Efficiency 2. Quality
3. Innovation 4. Customer responsiveness
Increases the utility that customers receive:
Through differentiation Creating more value
Lower cost structure than rivals
This leads to a competitive advantage
and superior profitability and profit growth.
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 Achieving Superior Efficiency
Functional steps to increasing efficiency:
Economies of Scale
Learning Effects
Experience Curve
Flexible Manufacturing and Mass Customization
Marketing
Materials Management and Supply Chain
R&D Strategy
Human Resource Strategy
Information Systems
Infrastructure
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 Economies of Scale
Economies of scale
Unit cost reductions associated with a large scale of output
Ability to spread fixed costs over a large production
volume
Ability of companies producing in large volumes to
achieve a 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
Increased bureaucracy associated with large-scale
enterprises
Resulting managerial inefficiencies

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 Economies and Diseconomies
of Scale
Figure 4.2

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 Learning Effects
Learning Effects are:
Cost savings that come from learning by doing
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
When changes occur in a companys
production system,
learning has to begin again.
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 The Impact of Learning and
Scale Economies on Unit Costs
Figure 4.3

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 The Experience Curve
The Experience Curve
The systematic lowering of the cost structure and
consequent unit cost reductions that occur over
the life of a product
Economies of scale and learning effects underlie
the experience curve phenomenon
Once down the experience curve, the company
is likely to have a significant cost advantage
over its competitors

Strategic significance of the experience curve:

Increasing a companys product volume and
market share will lower its cost structure
relative to its rivals.
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 The Experience Curve
Figure 4.4

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Dangers of Complacency Derived
from Experience Effects
Managers should not become complacent about
efficiency-based cost advantages derived from
experience effects:
1. The experience curve is likely to bottom out
So further unit cost reductions may be hard to come by
2. New technologies can make experience effects
obsolete
From changes always taking place in the external environment
3. Flexible manufacturing technologies may allow
small manufacturers to produce at low unit costs
Achieving both low cost and differentiation through customization
Case study: Mass customization at Lands End (p.118)

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 Flexible Manufacturing
and Mass Customization
Flexible Manufacturing Technology
A range of manufacturing technologies that:
Reduce setup times for complex
equipment
Improves scheduling to increase
use of individual machines
Improves quality control at all
stages of the manufacturing process
Increases efficiency and lowers unit costs
Mass Customization
Ability to use flexible manufacturing technology to
reconcile two goals that were once thought incompatible:
Low cost and
Differentiation through product customization
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 Tradeoff Between Costs and Product Variety
Flexible manufacturing technology covers a range of technologies designed to
reduce setup times for complex equipment
Increase the use of individual machines through better scheduling
Improve quality control in all stages of manufacturing processes

Figure 4.5
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 Mass Customization at Lands End
Previously clothing was made to individual order
Twentieth century development: mass production, mass marketing
and mass selling resulted in:
Reduced cost
Four sizes are too few to suit all. It suits only one-third of
population.
Both manufacturer and retailer face problem of excess inventories
that either thrown away or put on fire sale.
Lands End went for customized cloths. Customers provide information
at its website by answering 15 question for pants and 12 for shirts. It
takes 20 minutes for first time but once the information is saved by
Lands, subsequent time taken is rather negligible. Computer makes
analysis of unique customization of size, and then the order to one of
the five contract manufacturer plants in USA and elsewhere. Which
cut, sew and ship the finished product directly to the customer
Today customization is available for most categories. 40% of Lands
online shoppers chose customized over standardized ones. Lands is
experiencing high growth sales of $500 million. Profit margin is same
like regular ones. Inventory reduction is a cost saving. Customization
creates loyalty as reordering is 34% higher than standard ones.
Despite that the price $20 higher and delivery takes 3-4 weeks time.
 Marketing
Marketing
Marketing strategy
Refers to the position that a company takes regarding
Pricing Promotion Advertising
Distribution Product design
Customer defection rates
Percentage of customers who defect every year
Defection rates are determined by customer loyalty
Loyalty is a function of the ability to satisfy customers

Reducing customer defection rates and

building customer loyalty can be major
sources of a lower cost structure.
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 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. Ex. The one time fixed cost of credit card is $50 per customers. This
business
Copyright loses $50
Houghton perCompany.
Mifflin customer in reserved.
All rights year 1, makes $44 in year 3 and $55 in year 6. 4 | 15
 Materials Management and
Supply Chain
Materials Management
The activities necessary to get inputs and components to a production
facility, through the production process, and through the distribution
system to the end-user
Many sources of cost in this process
Significant opportunities for cost reduction through more
efficient materials management
Just-in-Time (JIT) Inventory System
System designed to economize on inventory holding costs:
Have components arrive to manufacturing just prior to need in
production process
Have finished goods arrive at retail just prior to stock out
Supply Chain Management
Task of managing the flow of inputs to a companys processes to
minimize inventory holding and maximize inventory turnover. Dell
replace inventory by information

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 R&D Strategy
Research and Development (R&D)
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. Texas Instruments redesigned infrared
sighting instruments for Pentagon supplies in reducing the
number of assembly steps from 56 to 13 to contribute
substantially in cost reduction.
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
The key challenge of the Human Resource function is to
improve employee productivity. The common methods are:
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
Self-managing teams coordinate their own activities, make their own
hiring, training, work, and reward decisions. Use of this is spreading
rapidly where a typical team comprising five to fifteen employees who
produce the entire product or undertake an entire task.
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 of the company activities
Potentially affects all the activities of a
company
Automates interactions between
Company and customers
Company and suppliers

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 Infrastructure
A Companys Infrastructure:
The companys structure, culture, style of strategic
leadership, and control system:
Determines the context within which all other value
creation activities take place
Strategic leadership is especially important in
building a companywide commitment to efficiency
The leadership task is to articulate 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 and gives a company two advantages:
Quality as reliability
They do the jobs they were designed for and do it well
Quality as excellence
Perceived by customers to have superior attributes
1. A strong reputation for quality allows a company to
differentiate its products.
2. Eliminating defects or errors reduces waste,
increases efficiency, and lowers the cost structure
increasing profitability.

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Improving Quality as Reliability
Six Sigma methodology: the principal tool now used to
increase reliability and is a direct descendant of Total
Quality Management (TQM). Six Sigma seeks to
improve the quality of process outputs by identifying
and removing the causes of defects (errors) and
minimizing variability in manufacturing and business
processes. It reduced error to a challenging 3.4
against a million. It uses a set of quality management
methods, including statistical methods, and creates a
special infrastructure of people within the organization
("Black Belts", "Green Belts", etc.) who are experts in
these methods. Each Six Sigma project carried out
within an organization follows a defined sequence of
steps and has quantified financial targets (cost
reduction and/or profit increase).

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Six Sigma project as articulated by Deming is based
Five Phases
Define the system, the voice of the customer and their requirements,
and the project goals, specifically.
Measure key aspects of the current process and collect relevant data;
Analyze the data to investigate and verify cause-and-effect
relationships. Determine what the relationships are, and attempt to
ensure that all factors have been considered. Seek out root cause of
the defect under investigation.
Improve or optimize the current process based upon data analysis
using techniques such as design of experiments or mistake proofing,
and standard work to create a new, future state process. Set up pilot
runs to establish process capability.
Control the future state process to ensure that any deviations from the
target are corrected before they result in defects. Implement control
systems such as statistical process control, production boards, visual
workplaces, and continuously monitor the process.

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 Hallmarks for six sigma
Focus on customers perception and demand for the
product
Identify processes and source of defects
Find ways to measure quality
Set goals and create incentives
Solicit input from employees: (Information collection from
employees about weakness and addressing the problem)
Build long term relationship with suppliers
Design ease to manufacture
Break down barriers among functions by means of
coordination functions

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 Achieving Superior Innovation
Building distinctive competencies that result in
innovation is the most important source of
competitive advantage.

Innovation can:
Result in new products that satisfy customer needs better
Improve the quality of existing products
Reduce costs
Innovation can be imitated -
So it must be continuous

Successful new product launches are

major drivers of superior profitability.
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 The High Failure Rate of Innovation
Failure rate of innovative new products is high with evidence suggesting
that only 10 to 20 % of major R&D projects were commercially viable
product.
Most common explanations for failure:
Uncertainty
Quantum innovation is more risky radical departure from existing
line with higher risk
World Wide Web, Xerox photocopier, Intel Microprocessor in 1971
Incremental innovation is less risky extension of existing technology
Intels Pentium Pro is an extension of X86 series
Poor commercialization
Definite demand for product but product not well adapted to customer
needs
Early computer needed customers to know programming to utilize the same but Apple
came forward to make it user friendly
Poor positioning strategy
Good product but poorly positioned in the marketplace in terms of
price, distribution, promotion and advertising
Technological myopia (focusing products rather than customer)
The company gets blinded by the extraordinary capability of new
technology vs. meeting market requirements
Desktop computers introduced by NeXT in late 1980s by Steve Jobs was too advanced
Slow to market (GM is 5 years late than Toyota in new product)
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 Building Competencies in Innovation
Companies can take a number of steps to build competencies in innovation
and reduce failures:
1. Building skills in basic and applied research
Ex. Both HP and 3M allow give researcher a freedom to work in lab to explore new
ideas during working hour even if that results in failure.
2. Project selection and management
Using the product development funnel
Idea generation Project refinement Project execution
3. Achieving cross-functional integration
1. Product development are driven by customer needs
2. Products are designed to ease of manufacture
3. Product development costs are kept in check
4. Minimize time-to-market
5. Close integration between R&D & marketing
4. Using product development teams
1. Heavy weight project manager required to get financial and human
resources
2. The team must be composed of at least one member from each key
function
3. Perfect communication with the floor
4. Clear plan and goals, and incentives to develop
5. Processes for communication and conflict resolution

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 The Development Funnel
Figure 4.7

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 Sequential and Partly Parallel
Development Processes
Figure 4.8

Reduced
development time
& time-to-market

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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 companys long-term profitability is
not compromised.
Focusing on the customer
Leaders must demonstrate a priority to customers
Shaping employee attitudes: Think like customers
Bringing customers into the company: Know thy
customers
Satisfying customer needs
Customization
Tailor to unique needs of groups of customers
Response time
Increase speed Premium pricing
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