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  1. 1. CHAPTER 4Building Competitive Advantage ThroughFunctional-Level Strategy0SYNOPSIS OF CHAPTERThis chapter explains how functional-level strategies can help a company achieve superior efficiency, quality,innovation, and customer responsiveness, leading to competitive advantage.Functional strategies consistent with attaining superior efficiency are considered first. This section reviews thecontributions that each of the different functional areas of a company can make toward increasing efficiency.Among the topics discussed with regard to their impact on efficiency are economies of scale, learning effects, theexperience curve, flexible manufacturing technologies, marketing strategy, and materials management. Thecontributions of the R&D function, the human resource function, the information systems function, and companyinfrastructure are then examined.Next, the chapter addresses how functional strategies can improve quality of a company’s goods and services.One aspect of quality is reliability, and total quality management (TQM) is proposed as a methodology forimproving reliability. Other aspects of quality, such as form, features, durability and styling are also discussed.The third section focuses on the means of achieving superior innovation through functional strategies. Adiscussion of the reasons for the high failure rate of innovations is followed by a detailed examination of the waysin which a company can build a distinctive competency in innovation.The final section of the chapter concentrates on the contribution of functional strategies to improvedresponsiveness to customers. Achieving superior customer responsiveness requires superior efficiency, quality,and innovation. Also, the chapter describes steps that companies can take to better understand the needs of theircustomers, better satisfy those needs, and satisfy those needs more quickly.0TEACHING OBJECTIVES010. Discuss how a company can build and maintain a competitive advantage through its choice of functional strategies.20. Identify the different steps that can be taken at the functional level to improve a company’s efficiency.30. Identify the different steps that can be taken at the functional level to improve the quality of the company’s product.40. Identify the different steps that can be taken at the functional level to improve a company’s ability to innovate.50. Identify the different steps that can be taken at the functional level to improve a company’s responsiveness to its customers.0OPENING CASE: CSX—GETTING THE TRAINS TO RUN ON TIMECSX Corporation, a freight transporter, merged with Conrail in 1996, creating one of the largest railroad firms inthe U.S. The expected costs savings due to economies of scale did not result, due to a host of problems in mergingthe two firms. Among the post-merger difficulties were poor quality, unsafe tracks, low employee morale, andpoor customer service. In 2000, an efficiency campaign was launched, focused around the use of 14 criticaloperating efficiency metrics. CSX made tremendous improvement over the next year in those 14 areas,empowering local employees to make decisions, fixing defective tracks, and building a web-based customer Copyright © Houghton Mifflin Company. All rights reserved.
  2. 2. 43 Chapter 4: Building Competitive Advantage Through Functional-Level Strategyinterface for service. These actions led to better quality, higher customer satisfaction, greater efficiency, andultimately, higher profits.Teaching Note: This case provides a vivid demonstration of how a company suffering from poor performance andnumerous internal problems could achieve successful outcomes, through the use of improvements at thefunctional level. The details of the case clearly relate to many of the topics introduced in this chapter, focusing onways to improve efficiency, quality, and responsiveness to customers. This case provides an excellent introductionto an idea that may at first be difficult for students to grasp. That is, that the basis of competitive advantage isalways found at the lowest levels of the organization (the functions). Students may erroneously assume that large,diversified companies should be turned around primarily by the actions of top managers. You can use this case asan opportunity to demonstrate that real, lasting, important changes are in fact, most often due to many smallimprovements at the functional level. Thus, functional level managers play a key role in organizational success.LECTURE OUTLINE0I0. Overview0 A0. This chapter addresses the role that functional-level strategies play in improving the effectiveness of functional operations within a company, such as manufacturing, marketing, materials management, research and development, and human resources. Functional strategies may also cut across two or more functions to attain a common goal. B0. Functional-level strategies can improve effectiveness by helping an organization to achieve efficiency, quality, innovation, and customer responsiveness. C0. Functional strategies are responsible for building the resources and capabilities that lead to distinctive competencies, allowing a firm to pursue a differentiation and/or low cost strategy. Show Transparency 22 Figure 4.1: The Roots of Competitive AdvantageII0. Achieving Superior Efficiency A0. Efficiency is measured by the cost of inputs (labor, capital, equipment, know-how, and so on) required to produce a given output (the good or service produced by the company). The more efficient a company, the lower the cost of inputs is required to produce a given output. An efficient company has higher productivity than its rivals, and, therefore, lower costs. B0. Economies of scale are unit-cost reductions associated with a large scale of output. Both manufacturing and service companies can benefit from economies of scale. 10. One source of economies of scale is the ability to spread fixed costs over a large production volume. 20. Another source is the ability of companies producing in large volumes to achieve a greater division of labor and specialization. Specialization improves employee productivity because it enables individuals to become very skilled at performing a particular task. 30. Economies of scale raise ROIC in two ways. They reduce spending on COGS, SG&A, and R&D as a percentage of sales, improving return on sales. They also make more intensive use of existing PPE, increasing capital turnover. 40. Economies of scale do not continue indefinitely. Typically, diseconomies of scale are reached at very high volumes, due to increased bureaucracy and the resulting inefficiencies. Show Transparency 23 Figure 4.2: Economies and Diseconomies of Scale C0. Learning effects refer to cost savings that come from learning by doing. Labor productivity increases as individuals learn the most efficient way to perform a particular task and managers learn how best to run the operation. 10. Learning effects are most important in a technologically complex task that is repeated, and are really important only during the start-up period of a new process. The importance of learning effects tends to cease after two or three years. Copyright © Houghton Mifflin Company. All rights reserved.
  3. 3. Chapter 4: Building Competitive Advantage Through Functional-Level Strategy 44 20. Although economies of scale move a firm downward along the unit cost curve, learning effects shift the entire curve downwards. Show Transparency 24 Figure 4.3: The Impact of Learning and Scale Economies on Unit Cost D0. The experience curve refers to systematic unit-cost reductions that have been observed to occur over the life of a product. According to the experience-curve concept, unit manufacturing costs for a product typically decline by some characteristic amount each time accumulated output of the product is doubled. Show Transparency 25 Figure 4.4: The Experience Curve 10. Economies of scale and learning effects underlie the experience-curve phenomenon. 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 learning effects. As a consequence, unit costs fall with increases in accumulated output. 20. The experience curve suggests that increasing a company’s product volume and market share will bring cost advantages over the competition. The concept is perhaps most important in those industries where the production process involves the mass production of a standardized output (for instance, the manufacture of semiconductor chips). 30. If a company wishes to attain a low-cost position, it must ride down the experience curve as quickly as possible. This involves building an efficient scale plant ahead of demand and aggressively pursuing learning effects. It also involves aggressive price cutting and marketing in order to expand sales and get down the experience curve ahead of competitors.STRATEGY IN ACTION 4.1: TOO MUCH EXPERIENCE AT TEXAS INSTRUMENTSTexas Instruments (TI) was one of the first companies to exploit the experience curve concept. When TI firstproduced a new product, it would slash the price to stimulate demand, driving up the accumulated volume ofproduction and driving down costs. As a result, during the 1960s and 1970s TI hammered its competitors intransistors, semiconductors, hand-held calculators, and digital watches. Ultimately, however, TI’s single-mindedfocus on cost reductions left the company with a poor understanding of consumer needs and market trends.Competitors such as Casio, Hewlett-Packard, Motorola, and Intel made major inroads into TI’s markets byfocusing on additional features that consumers demanded, rather than on cost and price. TI was slow to react tothis trend and lost substantial market share as a result.Teaching Note: The case shows students how increasing experience and expertise can be both an advantage and adisadvantage. The case demonstrates an example of a firm that rode down the experience curve, benefiting fromthe efficiency and know-how improvements, but then became over-reliant on further improvements in efficiency,ignoring changing conditions. Students can use this case to understand how organizations must balance their questfor efficiency with an equally important search for innovations. Some have called this need for balance, “learningvs. efficiency.” You can use this case for classroom discussion by asking students to suggest actions that TI couldhave taken to avoid the loss of market share. Students will realize that TI needed to innovate, making changes andrisking the possibility of error. That is not efficient, but it would have allowed TI to stay in touch with customersand improve their products’ functionality. 40. However, the company furthest down the experience curve must not become complacent about its position for three reasons. a0. The experience curve bottoms out at some point, which implies that other companies can catch up. b0. Cost advantages gained from experience effects can be made obsolete by the development of new technologies that require new methods of production. c0. The experience curve suggests that high volume leads to a cost advantage, but this does not always happen. In some industries, there are two or more different production technologies, one of which is cost-efficient at high volumes, and the other at lowCopyright © Houghton Mifflin Company. All rights reserved.
  4. 4. 45 Chapter 4: Building Competitive Advantage Through Functional-Level Strategy volumes. A company using low-volume technology may be able to operate with a cost structure similar to that of companies using a high-volume technology. E0. It seems then, that the best way to reduce costs is to produce high volumes of a standard product. However, this view has been challenged by the rise of flexible manufacturing technologies, also called lean production. 10. Flexible manufacturing technologies allow firms to produce a wider variety of product while still achieving the efficiencies of high volume production. Cost efficiencies are achieved by reducing setup times for complex equipment, increasing the utilization of individual machines through better scheduling, and improving quality control at all stages of the manufacturing process. 20. Mass customization refers to the use of flexible manufacturing technologies to achieve low cost and differentiation through product customization. Show Transparency 26 Figure 4.6: Tradeoff Between Costs and Product VarietySTRATEGY IN ACTION 4.2: TOYOTA’S LEAN PRODUCTION SYSTEMToyota is the most efficient auto company in the global industry, thanks to its lean production system, developedin response to problems Toyota’s engineers saw with the long production runs of a mass production system. Theproblems included the creation of large and expensive inventories, the production of a large number of defectiveproducts if the initial machine settings were wrong, and the system’s inability to accommodate diverse consumerpreferences. Toyota then developed a number of techniques designed to reduce equipment setup times—a majorsource of fixed costs. This made small production runs economical, which eliminated large inventories, fewerdefective products, and better responsiveness to consumer demands for product diversity. Process innovationsenabled Toyota to produce a more diverse product range at a lower unit cost than was possible with conventionalmass production.Teaching Note: This case describes Toyota’s disenchantment with mass production, and their subsequentdevelopment of a flexible manufacturing system, to overcome mass production’s disadvantages. The case alsofocuses attention on the interrelatedness of efficiency, quality, innovation, and responsiveness to customers, asToyota’s new system improved all four at the same time. You can point out to students that virtually everymanufacturing industry has adopted flexible manufacturing to some extent, and that the explosion in technologiessuch as CAD/CAM software, robotics, and artificial intelligence has enabled lean production techniques. 30. One type of flexible manufacturing technology is flexible machine cells, which are groupings of four to six various machines, a materials handler, and a central computer. The machines are computer controlled, allowing each cell to switch quickly between the production of different products. a0. Flexible machine cells allow for improved capacity utilization due to a reduction in setup times and better coordination of production flow between machines. b0. Flexible machine cells reduce work in progress and waste because of the tight coordination between machines and the ability of computer-controlled machinery to identify how to transform inputs into outputs while producing a minimum of unusable waste material. F0. Marketing strategy refers to the position that a company takes with regard to pricing, promotion, advertising, product design, and distribution. 10. Marketing strategy can increase efficiency by using aggressive pricing, promotions, and advertising to improve sales and help the organization ride down the experience curve. 20. Another aspect of marketing strategy that can improve efficiency is the creation of customer loyalty, through high customer satisfaction. Loyalty reduces customer defection rates, or the percentage of a company’s customers that defect every year to competitors. a0. There is a direct relationship between defection rates and costs. Acquiring a new customer entails one-time fixed costs for advertising, promotions, and the like. Copyright © Houghton Mifflin Company. All rights reserved.
  5. 5. Chapter 4: Building Competitive Advantage Through Functional-Level Strategy 46 b0. The longer a company retains a customer, the greater is the volume of customer- generated unit sales that can be set against these fixed costs and the lower is the average unit cost of each sale. Show Transparency 27 Figure 4.7: The Relationship Between Customer Loyalty and Profit per Customer G0. Efficiency can also be improved through the use of materials management, which encompasses the activities necessary to get materials to a production facility, through the production process, and through a distribution system to the end user. Materials management is also called supply chain management. 10. Materials management typically accounts for 50 to 70 percent of a manufacturer’s costs—thus, even a small reduction can have a great impact. 20. Improving the efficiency of the materials management function typically requires the adoption of just-in-time (JIT) inventory systems. JIT reduces inventory-holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before. 30. The drawback of JIT systems is that they leave a firm without a buffer stock of inventory. Although buffer stocks of inventory are expensive to store, they can help tide a firm over shortages on inputs brought about by disruption among suppliers.STRATEGY IN ACTION 4.3: SUPPLY CHAIN MANAGEMENT AT OFFICESUPERSTORESThree companies, Office Depot, Staples, and Office Max are the major competitors in the competitive officesuperstore industry, which retails office supplies, earning thin profit margins. All are examining their supply chainmanagement, looking for ways to cut costs. Office Depot succeeds by having a high inventory turn rate, and thefirm also has reduced the number of items it stocks, with a focus on carrying only items that turn over rapidly orearn a high profit margin. This allows Office Depot to use stores that are one-sixth smaller than its competitors’stores, which further reduces costs. Staples is concentrating on developing closer, cooperative relationships withsuppliers, which has led to lower inventory held at the stores. Staples has also eliminated in-store displays ofcomputers, freeing up floor space, and now sells PCs through a web-based ordering system offering customizeddesign to customers. Office Max too is reducing the number of items and scaling down the size of stores.Teaching Note: This case provides students with examples of a number of possible improvements in materialsmanagement, including reduction in the number of items stocked, focus on high-margin items, cooperation withsuppliers, JIT inventory, and use of the Internet for product display. The case also demonstrates the benefits thatsuperior materials management can provide. This case could be used as the basis for class discussion, by askingstudents to describe how the materials management practices listed in the case could be used by other retailers.For example, ask students, “Which of the practices in the case could be successfully employed at a retail clothingstore? At a bookstore? At a grocery store? Which could not, and why?” H0. The R&D function can boost efficiency by designing products that are easy to manufacture, cutting down on the number of parts and reducing assembly time. R&D can also pioneer process innovations to improve efficiency. I0. The human resource function can aid in improving efficiency by raising employee productivity. 10. Recruiting is one area where human resources can help. Carefully hiring individuals with the right attitudes and values can raise employee productivity. Skilled employees can also interact with customers in ways that improve customer loyalty. 20. Another way to raise employee productivity is through training. Skilled individuals perform tasks more quickly and accurately, and are better able to learn complex tasks. A company can upgrade the skill level of its employees through training. 30. Self-managing teams, where members are responsible for coordinating their own activities, are another source of efficiency gain. Team members learn all team tasks and rotate from job to job, creating a more flexible workforce in which members can fill in for absent coworkers. Teams also take over managerial duties, and the resulting empowerment is a motivator.Copyright © Houghton Mifflin Company. All rights reserved.
  6. 6. 47 Chapter 4: Building Competitive Advantage Through Functional-Level Strategy 40. Another boost to productivity comes from linking pay to performance. Successful companies are careful to specify the quality, as well as the quantity, of production. Successful firms also tend to reward group, rather than individual, performance, in order to improve cooperation among employees. J0. With the rapid growth of computers, the Internet, corporate intranets, and high bandwidth communications, the information systems function contributes to operational efficiencies. 10. Information systems can improve labor efficiency by automating tasks that were previously performed manually.0RUNNING CASE: DELL’S UTILIZATION OF THE INTERNETDell began selling PCs by phone, and was one of the first companies to implement online selling of computers.Founder and CEO Michael Dell says that the Internet gives more information to customers, permits them tocustomize their computers, and provides timely and easy-to-use customer support, leading to differentiation. Atthe same time, Dell’s use of the Internet allows them to reduce their sales and customer support personnel, andeliminate physical stores, which reduces the company’s costs. In addition, Dell uses the Internet to manage itssupply chain, using the web to communicate with suppliers and call for components on a just-in-time basis. Thisreduces inventory costs to very low levels, and also synchronizes demand and supply of components. Thus,customers get the latest-and-greatest products, and obsolete inventory write-offs are virtually eliminated.Teaching Note: This case describes Dell’s success in utilizing the Internet to improve efficiency, and how the firmrealized all three benefits: lower labor costs, easier coordination of the supply chain, and less reliance on physicalfacilities. To spark discussion, ask students why Dell’s competitors, such as Gateway, Apple, or Hewlett-Packard(owner of Compaq) have not imitated Dell’s strategy yet. Is it because they are unable to imitate the strategy, or isit because they have chosen a different strategy? Whichever answer students give, ask them to explain why—whythe strategy cannot be imitated, or why they chose a different strategy, that is, what benefits did they expect toreceive from a different strategy? You can also ask students whether Dell’s competitors could use some of theactions that Dell is using. In other words, ask students whether this strategy can be adopted a piece at a time. Whyor why not? 10.Web-based information systems can reduce the costs of supply chain coordination, including the relationships between the company and its customers, and the company and its suppliers. 20. On-line sellers can replace their capital-intensive physical locations with a much less costly web site. K0. Infrastructure can also improve efficiency, as a companywide commitment to low costs can be built through top management leadership. Leaders can also facilitate cooperation among functions in the pursuit of efficiency goals.III0. Achieving Superior Quality0 A0. Achieving superior quality gives a company two advantages. First, the enhanced reputation for quality allows the company to differentiate and thus charge a premium price for its products. Second, by eliminating defects or errors from the production process, superior quality can result in greater efficiency and hence lower costs. B0. One aspect of quality is reliability. Total Quality Management (TQM) is a technique to improve reliability. TQM stresses that quality should be a main concern of the company, and that all of a company’s operations should be oriented toward this end. 10. The TQM philosophy, as articulated by Deming and others, is based on a 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) This increases the company’s profitability and enables it to stay in business. (5) Thus the company creates more jobs. 20. American firms are increasing their focus on quality, but still do not give it the same attention as overseas competitors. Many firms do not fully understand or have not yet fully embraced TQM, and therefore are not realizing the full benefits of it. Copyright © Houghton Mifflin Company. All rights reserved.
  7. 7. Chapter 4: Building Competitive Advantage Through Functional-Level Strategy 48STRATEGY IN ACTION 4.4: GENERAL ELECTRIC’S SIX-SIGMA QUALITYIMPROVEMENT PROCESSSix Sigma is a quality and efficiency program that aims to reduce defects, boost productivity, eliminate waste, andcut costs throughout a company. (The term comes from the Greek letter, sigma, which is used to represent astandard deviation. Thus, six-sigma quality is six standard deviations above the mean or average, which translatesinto about 3.4 defects per million units produced.) GE is perhaps the most fervent adopter of six-sigma programs,which are can be used as part of Total Quality Management. The company uses six-sigma analysis to improve thereliability of each component of their products, which translates to lower manufacturing costs. The attention todetail worked—GE’s products are known for their reliability. Although improvements led to a higher cost forcustomers, improved performance and decreased down time far outweigh the increased price.Teaching Note: This case can be used to provide a specific example of a quality improvement process, as it wasapplied to the production of one product. The case also outlines the benefits that derived from the qualityimprovement, including better product performance, reliability, and durability; lower costs of rework; the abilityto charge higher prices; and higher profits. The case also emphasizes two important points about qualityimprovement. First, the process is often timely, detailed, and painstaking—although it can also yield significantbenefits. Second, customers are paying for value, and companies can charge more for a product that better servescustomers’ needs. 30. Table 4.2 summarizes the contribution that each functional area can make to a TQM program. a0. Infrastructure (firm leadership) can build an organizational commitment to quality. TQM must be embraced by all, and top managers serve as role models. Also, the human resource function must take on responsibility for companywide training in TQM techniques. b0. A focus on the customer is the starting point of the whole quality philosophy. The marketing function, because it provides the primary point of contact with the customer, should play a major role here. The role of marketing is to identify customer needs, to identify how the company meets those needs, to identify the quality gap that exists between what customers want and what they actually get; and, in conjunction with other functional areas, to formulate a plan for closing the quality gap. c0. TQM requires objective measures of quality, including identification of the customer’s perspective on quality, and development of a metric to capture this. Top management, with input from other functional areas, should formulate various metrics to measure quality. d0. Top management and human resources should set goals and create performance incentives, to motivate workers to reach quality targets. e0. Employees can be an important source of information regarding the sources of poor quality. Therefore, some framework must be established for soliciting employee suggestions as to the improvements that can be made (for example, quality circles). Top managers should establish a communication mechanism. f0. A major source of product defects is the production process. TQM preaches the need to identify defects in the work process, trace them to the source, find out why they occurred, and make appropriate corrections. Manufacturing and materials management typically have primary responsibility for this task. g0. Poor-quality raw materials and components are a major source of poor-quality finished goods. Personnel in the materials management function can improve quality by reducing the number of suppliers and then building cooperative relationships with those that remain. h0. R&D and manufacturing need to be involved in designing products that are easy to manufacture, in order to reduce mistakes and defects. i0. Top management must ensure that there is close cooperation among functions.Copyright © Houghton Mifflin Company. All rights reserved.
  8. 8. 49 Chapter 4: Building Competitive Advantage Through Functional-Level StrategySTRATEGY IN ACTION 4.5: IMPROVING QUALITY IN HEALTH CAREHealth care organizations are adopting the six-sigma approach to improve quality. Mount Carmel Health, an Ohioprovider, discovered that profits were low, due to large write-offs of uncollectible Medicare reimbursements. Acareful investigation showed that the problem began with incorrect coding of procedures on patients’ records.When coders were trained to ensure that correct codes were used, the firm’s net income increased dramatically.Another example is Intermountain Health Care, which operates 24 Western hospitals. Administrators thereidentified variations in practice across physicians, particularly with regard to the cost and success rate oftreatments. These data were then shared among physicians, who used the data to eliminate poor practices andupgrade quality. The results have been a sharp drop in the rate of postoperative infections to 0.4 percent,compared with the current national average of 2 percent. Because the average postoperative infection adds$14,000 to a hospital bill, this constitutes a big cost saving.Teaching Note: This case is interesting to consider as a comparison to the Strategy in Action 4.4 case aboutGeneral Electric. Students often mistakenly believe that quality improvement applies primarily to manufacturingfirms, and this case points out the importance of quality for service firms also. Ask students to compare thesimilarities and differences between this case and the preceding case about General Electric. Students will findmany similarities, such as the painstaking nature of the process of uncovering the roots of poor quality. Also, thiscase, like the GE case, shows that the result of improved quality is not just higher profits; higher quality createsvalue for customers too. C0. In addition to reliability, superior quality depends upon the development of other attributes, such as form, features, performance, durability, and styling, which contribute to differentiation. 10. Table 4.3 summarizes attributes of products, services, and personnel that may be valued by customers. 20. A company’s products and services must be superior to competitors’ offerings in order to be regarded as high quality. a0. To accomplish this, marketing intelligence is used to identify the attributes that customers value. b0. Then, products must be designed and personnel trained to deliver that attribute. c0. Next, the company’s marketers must decide which attributes to promote and how to position them for consumers. Usually, firms focus on just one or two critical attributes. d0. Finally, a strong R&D function can help the firm continual improve its offerings to stay ahead of competitors.IV0. Achieving Superior Innovation A0. In many ways, innovation is the single most important building block of competitive advantage. 10. Innovation is what gives a company something unique. Uniqueness allows a company to charge a premium price or to lower its cost structure below that of its rivals. 20. Studies in several industries have shown that innovation is a major driver of superior profitability. B0. However, the failure rate of innovations is high, due to a variety of causes. Only about 12 percent of R&D projects result in a product for which the profits exceed the company’s cost of capital. 10. Investment in R&D is a high-risk, high-return strategy. The high risk comes from the high failure rate of most new-product innovations. The high return comes from the quasi-monopoly revenues that a successful innovation can earn for a company. 20. Uncertainty about the future is one reason for the high failure rate of innovation. New-product development requires asking a question whose answer is impossible to know prior to market introduction; namely, is there sufficient market demand? Although good market research can minimize uncertainty about demand, the uncertainty cannot be eradicated altogether. a. Quantum innovations represent a radical departure from current technology, whereas incremental innovations represent an extension of existing technology. b. Quantum innovations are accompanied by higher uncertainty, and thus are more likely to fail than are incremental innovations. 30. Another reason for the high failure rate of new-product introductions is poor commercialization, which occurs when there is demand for a new product, but the company’s offering is not well adapted to consumer needs because of poor design or poor quality. Copyright © Houghton Mifflin Company. All rights reserved.
  9. 9. Chapter 4: Building Competitive Advantage Through Functional-Level Strategy 50 40. Another cause of innovation failure is the poor positioning strategy that arises when an attractive new product garners low sales because it is poorly positioned in the marketplace. Positioning strategy is the position a company adopts for a product on four main dimensions of marketing—price, distribution, promotion and advertising, and product features. 50. Another reason why many new product introductions fail is that companies often make the mistake of marketing product based on a technology for which there is not enough consumer demand. Technological myopia occurs when a company gets blinded by the wizardry of a new technology and fails to examine whether there is consumer demand for the product. 60. New products fail when companies are slow to get their products to market. The longer the time between initial development and final marketing, the more likely that someone will beat the firm to market. Also, slow innovators tend to update their products less frequently than fast innovators and therefore, can be perceived as technical laggards relative to the fast innovators. C0. There are a number of actions that firms can take to build competencies in innovation and reduce the chances of failure. 10. Building skills in basic and applied research requires the employment of research scientists and engineers and the establishment of a work environment that fosters creativity. A number of top companies try to achieve this by setting up university-style research facilities, where scientists and engineers are given time to work on their own research projects, in addition to projects that are linked directly to ongoing company research. 20. Project management is the overall management of the innovation process, and it requires three important skills: the ability to encourage idea generation, the ability to select the most promising projects at an early stage of development, and the ability to minimize time to market. Show Transparency 28 Figure 4.8: The Development Funnel a. Effective project management can be facilitated by using a three-phase development funnel. The objective in Phase I of the development funnel is to widen the mouth of the funnel to encourage as much idea generation as possible. To do so, a company should solicit input from all functions of the company, as well as from customers, competitors, and suppliers. b. At Gate 1, the funnel is narrowed. Here ideas are reviewed by a cross-functional team of managers that were not involved in the original concept development. The concepts that are ready to proceed then move on to Phase II of the funnel, which is where the details of the project proposal are worked out. c. Gate 2 is a go, no-go evaluation point. Senior managers are brought in to review the various projects and to select those that seem likely winners. Any project selected to go forward at this stage will be funded and staffed with the expectation that it will be carried through to market introduction. d. In Phase III, the project development proposal is executed by a cross-functional team in order to ensure that time to market is minimized. 30. Tight cross-functional integration between R&D, production, and marketing can help a company to ensure that (1) product development projects are driven by customer needs, (2) new products are designed for ease of manufacture, (3) development costs are kept in check, and (4) time to market is minimized. a. Close integration between R&D and marketing is required to ensure that product development projects are driven by the unmet needs of customers. b. Integration between R&D and production can help a company to ensure that new products are designed with existing manufacturing capabilities in mind. 40. One of the best ways to achieve cross-functional integration is to establish cross-functional product-development teams. These are teams composed of representatives from R&D, marketing, and production. The objective of a team should be to take a product development project through from the initial concept development to market introduction.Copyright © Houghton Mifflin Company. All rights reserved.
  10. 10. 51 Chapter 4: Building Competitive Advantage Through Functional-Level Strategy a. The team should be led by a “heavyweight” project manager who has high status within the organization and who has the power and authority required to get the financial and human resources that the team needs to succeed. b. The team should be composed of at least one member from each key function. c. The team members should be physically co-located to create a sense of camaraderie and to facilitate communication. d. The team should have a clear plan and clear goals, particularly with regard to critical development milestones and development budgets. e. Each team needs to develop its own processes for communication and conflict resolution. 50. One way in which a product development team can speed time to market is to use a partly parallel development process. Traditionally, product development processes are sequential. In a partly parallel development process, stages overlap so that work can be done in more than one stage simultaneously, shortening time to market. Show Transparency 29 Figure 4.9: Sequential and Partly Parallel Development Processes 60. Table 4.4 summaries the roles that various functional areas play in achieving superior innovation.V0. Achieving Superior Customer Responsiveness0 A0. Achieving superior customer responsiveness requires that a company give customers what they want when they want it and at a price they are willing to pay—so long as the company’s long-term profitability is not compromised in the process. 10. The more responsive a company is to the needs of its customers, the greater the brand loyalty that the company can command. In turn, strong brand loyalty may enable a company to charge a premium price for its products or sell more goods and services to customers. 20. Achieving superior efficiency, quality, and innovation are all part of achieving superior customer responsiveness. B0. A company must know its customers’ needs in order to respond to them. Thus the first step in building superior customer responsiveness is to get the whole company to focus on the customer. 10. Customer focus must start at the top of the organization with leadership. A commitment to superior customer responsiveness involves attitudinal changes throughout a company that can only be affected through strong leadership. 20. Achieving a superior customer focus requires the right employee attitudes—leadership alone is not enough. Employees need to be trained to put themselves in the customers’ shoes, to identify ways of improving the quality of a customer’s experience with the company. To reinforce this mindset, incentive systems should reward employees for satisfying customers. 30. Another aspect of knowing the customer is listening to what customers say and bringing them into the company. This may mean soliciting feedback from customers and building information systems that communicate the feedback to the relevant people. C0. The next task is to satisfy customer needs, with efficiency, quality, and innovation all playing a part. 10. In addition to efficiency, quality, and innovation, companies can satisfy customer needs through customization. This involves varying the features of a good or service to tailor it to the unique needs of groups of customers, or in the extreme case, individual customers. Traditionally, customization raises costs, however, flexible manufacturing allows a company to produce a greater variety of products without raising costs. 20. Customization has fragmented many markets into ever-smaller niches, allowing firms to cater to the particular needs of a small segment of customers. D0. Giving customers what they want when they want it requires speed of response to customer demands. To gain a competitive advantage, a company often needs to be fast at responding to consumer demands. Increased speed allows a company to charge a significant premium. 10. Reducing response time requires a marketing function that can quickly communicate customer requests to manufacturing. Copyright © Houghton Mifflin Company. All rights reserved.
  11. 11. Chapter 4: Building Competitive Advantage Through Functional-Level Strategy 52 20. The manufacturing and materials management functions that can quickly adjust production schedules in response to unanticipated customer demands also enable the firm to respond more rapidly. 30. Rapid responses also relies on information systems that can help manufacturing and marketing in this process. 40. Table 4.5 summarizes the roles that various functional areas play in achieving superior responsiveness to customers.Copyright © Houghton Mifflin Company. All rights reserved.