Monday, April 5, 2010

Building Competitive Advantage Through Functional-Level Strategy

In preparation for my MBA finals and graduation on April 18, I'm reviewing Strategic Management by Charles Hill and Gareth Jones and trying to apply the lessons to my Web strategy business, Gunner Technology.

Chapter 4 covers Building Competitive Advantage Through Functional-Level Strategy.

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

Efficiency is equal to outputs over inputs. The more output you have for the smallest amount of inputs, the greater your efficiency.

Things like economies of scale, which are cost reductions associated with a large scale of output and small fixed costs hel increase efficiency. Learning effects, or the effect of learning through doing, also build efficiency, especially with technologically complex tasks. However, both of these will bottom out at some point, so managers must always examine the external environment and be aware that producing large quantities over and over does not necessarily build efficiencies.

Often, companies run in to the problem of producing a customized, differentiated product or an assembly-line, standard product. The former can command a higher price on the market but is generally more expensive to produce while the latter is commoditized but much cheaper to produce.

Flexible production technology or lean production, covers a range of technologies designed to reduce setup times and make achieving both of these possible, leading to mass customization.

Marketing can increase efficiency, too, by cutting down on customer retention and churn rates.

Self-managing teams, in which members coordinate their own activities and make their own hiring, training, work and reward decisions, have been shown to increase efficiency if the members are self motivated and trained properly.

The chapter also focuses on achieving superior quality with a strong emphasis on Six Sigma, which is based on the following 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 allows it to stay in business.
  5. Thus the company creates more jobs.

The interesting portions of the chapter on achieving superior innovation were technological myopia (NeXT was used as an example), where a company focuses more on the technology behind the product and not how the customers use the product, and project selection and management.

Project selection and management is simple. Generate ideas or leads. Refine the ideas or leads into projects. Finally, execute on the projects. This process looks like a funnel.

The problem is, most are straight pipes, where every idea or lead must be turned into a project and executed on.

Finally, achieving superior responsiveness to customers is attained by focusing on the customer, satisfying customer needs, offering customized products or services and increasing response time.

Wow, OK, so how do I apply that to Gunner Technology?

First, we benefit tremendously from the learning effect. We've been doing this stuff on a large scale on tight deadlines for a long time. This has built great efficiency for us.

Second, while we don't have Six Sigma in place, we place a high importance on quality. We sit down with our clients and carefully set goals and create incentives, focusing on the customer the entire time.

Third, we have a true funnel-shaped development plan. We do not work with clients where the situation is not mutually beneficial. Also, we won't do everything for a client. If a client wants something from us we don't specialize in, we'll help them find someone else to do it, but we won't go outside our competencies.

Finally, for responsiveness to customers, Gunner Technology offers customization throughout the entire process. We are not an assembly line. We work with the customer to meet their unique needs throughout the entire process.

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