Ch 04

• Functional-level strategies


  Strategy aimed at improving the effectiveness of a company's operations and its ability to attain superior efficiency, quality, innovation, and customer responsiveness
• Functional-level strategies


  • Improve efficiency
  • Improve quality
  • Increase innovation
  • Increase customer responsiveness
• Managers, through their choices related to functional-level strategies, can build resources and capabilities that enhance a company's distinctive competencies
• 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
• Companies that increase the value (utility) consumers get from their products through differentiation, while simultaneously lowering their cost structure, create more value than their rivals—and this leads to a competitive advantage, superior profitability, and profit growth
• Efficiency


  Measured by the quantity of inputs that it takes to produce a given output
• Economies of scale


  Reductions in unit costs attributed to a larger output
• Economies of scale


  • Ability to spread fixed costs over a large production volume and produce in large volumes
  • Achieve greater division of labor and specialization
• Diseconomies of scale


  Unit cost increases associated with a large scale of output
• Learning effect


  Cost savings that come from learning by doing
• Learning effects are more significant when a technologically complex task is repeated, as there is more to learn
• Learning effects diminish in importance after a period of time
• Learning effects are triggered by changes in a company's production system
• Experience curve


  Systematic lowering of the cost structure, and consequent unit cost reductions that occur over the life of a product
• A product's per-unit production costs decline each time its accumulated output doubles
• Accumulated output refers to the total output of a product since its introduction
• The experience curve is useful in industries that mass-produce a standardized output
• Economies of scale and learning effects underlie the experience-curve phenomenon
• Managers should avoid being complacent about efficiency-based cost advantages derived from experience effects as neither learning effects nor economics of scale are sustained forever, and cost advantages gained from experience effects can be made obsolete by new technologies
• Flexible production technology


  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
• Flexible production technology


  • Reduces setup times for complex equipment
  • Increases the use of individual machines through better scheduling
  • Improves quality control at all stages of the manufacturing process
  • Increases efficiency and lower unit costs
  • Enables better customization of product offerings
• Mass customization


  The use of flexible manufacturing technology to reconcile two goals that were once thought to be incompatible: low cost, and differentiation through product customization
• Over the last decade, the Ford Motor Company has been introducing flexible production technologies into its automotive plants around the world, enabling it to produce multiple models from the same line and switch production from one model to another much more quickly than in the past
• Ford took $2 billion out of its cost structure between 2006 and 2010 through flexible manufacturing, and is striving to take out more
• Marketing strategy


  The position of a company with regard to pricing, promotion, advertising, product design, and distribution
• Marketing strategy impacts efficiency and cost structure
• Customer defection


  The rate percentage of a firm's customers who defect every year to competitors, also known as churn rates
• Lowering customer defection helps achieve a lower cost structure
• Materials management involves the activities necessary to get inputs and components to a production facility, through the production process, and out through a distribution system to the end-user
• Just-in-time (JIT) inventory system


  An inventory system that economizes on inventory holding costs by scheduling components to arrive just in time to enter the production process as stock is depleted
• Cost savings from JIT come from increasing inventory turnover and reducing the need for working and fixed capital
• The drawback of JIT is that it leaves a company without a buffer stock of inventory
• Supply chain management


  Managing the flow of inputs and components from suppliers into the company's production processes to minimize inventory holding and maximize inventory turnover
• The primary roles of value creation functions in achieving superior efficiency are to improve quality, increase innovation, and enhance customer responsiveness
• Total quality management (TQM)


  A management approach aimed at increasing product reliability to perform consistently as designed and rarely break down
• Five-step chain reaction of TQM

  1. Improved quality means that costs decrease

  2. As a result, productivity improves

  3. Better quality leads to higher market share, allowing the company to raise prices

  4. Higher prices increase profitability, allowing the company to stay in business

  5. Enables the company to create more jobs
• Steps in a quality improvement program

  1. Management should strive to eliminate mistakes, defects, and poor-quality

  2. Improve quality of supervision

  3. Work standard to stress on quality of work

  4. Train employees in new skills to remain informed in workplace changes

  5. Commitment from every individual in the company to achieve better quality
• The most important source of competitive advantage is innovation
• Innovative products or processes give a company a competitive advantage that allows it to differentiate its products and charge a premium price, or lower its cost structure below that of its rivals
• Successful new-product launches are catalysts of superior profitability