Irm04

CHAPTER 4
Building Competitive Advantage Through
Functional-Level Strategy

0SYNOPSIS OF CHAPTER
This 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 the
contributions 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, the
experience curve, flexible manufacturing technologies, marketing strategy, and materials management. The
contributions of the R&D function, the human resource function, the information systems function, and company
infrastructure 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 for
improving 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. A
discussion of the reasons for the high failure rate of innovations is followed by a detailed examination of the ways
in which a company can build a distinctive competency in innovation.
The final section of the chapter concentrates on the contribution of functional strategies to improved
responsiveness 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 their
customers, better satisfy those needs, and satisfy those needs more quickly.

0TEACHING OBJECTIVES0
10. 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 TIME
CSX Corporation, a freight transporter, merged with Conrail in 1996, creating one of the largest railroad firms in
the U.S. The expected costs savings due to economies of scale did not result, due to a host of problems in merging
the two firms. Among the post-merger difficulties were poor quality, unsafe tracks, low employee morale, and
poor customer service. In 2000, an efficiency campaign was launched, focused around the use of 14 critical
operating 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.

43 Chapter 4: Building Competitive Advantage Through Functional-Level Strategy

interface for service. These actions led to better quality, higher customer satisfaction, greater efficiency, and
ultimately, higher profits.
Teaching Note: This case provides a vivid demonstration of how a company suffering from poor performance and
numerous internal problems could achieve successful outcomes, through the use of improvements at the
functional level. The details of the case clearly relate to many of the topics introduced in this chapter, focusing on
ways to improve efficiency, quality, and responsiveness to customers. This case provides an excellent introduction
to an idea that may at first be difficult for students to grasp. That is, that the basis of competitive advantage is
always 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 as
an opportunity to demonstrate that real, lasting, important changes are in fact, most often due to many small
improvements at the functional level. Thus, functional level managers play a key role in organizational success.

LECTURE OUTLINE0
I0. 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 Advantage
II0. 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.

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.


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.

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.
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 INSTRUMENTS
Texas Instruments (TI) was one of the first companies to exploit the experience curve concept. When TI first
produced a new product, it would slash the price to stimulate demand, driving up the accumulated volume of
production and driving down costs. As a result, during the 1960s and 1970s TI hammered its competitors in
transistors, semiconductors, hand-held calculators, and digital watches. Ultimately, however, TI’s single-minded
focus 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 by
focusing on additional features that consumers demanded, rather than on cost and price. TI was slow to react to
this 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 a
disadvantage. The case demonstrates an example of a firm that rode down the experience curve, benefiting from
the 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 quest
for efficiency with an equally important search for innovations. Some have called this need for balance, “learning
vs. efficiency.” You can use this case for classroom discussion by asking students to suggest actions that TI could
have taken to avoid the loss of market share. Students will realize that TI needed to innovate, making changes and
risking the possibility of error. That is not efficient, but it would have allowed TI to stay in touch with customers
and 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 low



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.

Figure 4.6: Tradeoff Between Costs and Product Variety

STRATEGY IN ACTION 4.2: TOYOTA’S LEAN PRODUCTION SYSTEM
Toyota is the most efficient auto company in the global industry, thanks to its lean production system, developed
in response to problems Toyota’s engineers saw with the long production runs of a mass production system. The
problems included the creation of large and expensive inventories, the production of a large number of defective
products if the initial machine settings were wrong, and the system’s inability to accommodate diverse consumer
preferences. Toyota then developed a number of techniques designed to reduce equipment setup times—a major
source of fixed costs. This made small production runs economical, which eliminated large inventories, fewer
defective products, and better responsiveness to consumer demands for product diversity. Process innovations
enabled Toyota to produce a more diverse product range at a lower unit cost than was possible with conventional
mass production.
Teaching Note: This case describes Toyota’s disenchantment with mass production, and their subsequent
development of a flexible manufacturing system, to overcome mass production’s disadvantages. The case also
focuses attention on the interrelatedness of efficiency, quality, innovation, and responsiveness to customers, as
Toyota’s new system improved all four at the same time. You can point out to students that virtually every
manufacturing industry has adopted flexible manufacturing to some extent, and that the explosion in technologies
such 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.



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.

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 OFFICE
SUPERSTORES
Three companies, Office Depot, Staples, and Office Max are the major competitors in the competitive office
superstore industry, which retails office supplies, earning thin profit margins. All are examining their supply chain
management, looking for ways to cut costs. Office Depot succeeds by having a high inventory turn rate, and the
firm also has reduced the number of items it stocks, with a focus on carrying only items that turn over rapidly or
earn 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 with
suppliers, which has led to lower inventory held at the stores. Staples has also eliminated in-store displays of
computers, freeing up floor space, and now sells PCs through a web-based ordering system offering customized
design 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 materials
management, including reduction in the number of items stocked, focus on high-margin items, cooperation with
suppliers, JIT inventory, and use of the Internet for product display. The case also demonstrates the benefits that
superior materials management can provide. This case could be used as the basis for class discussion, by asking
students 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 clothing
store? 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.



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 INTERNET
Dell 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 to
customize their computers, and provides timely and easy-to-use customer support, leading to differentiation. At
the same time, Dell’s use of the Internet allows them to reduce their sales and customer support personnel, and
eliminate physical stores, which reduces the company’s costs. In addition, Dell uses the Internet to manage its
supply chain, using the web to communicate with suppliers and call for components on a just-in-time basis. This
reduces 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 firm
realized all three benefits: lower labor costs, easier coordination of the supply chain, and less reliance on physical
facilities. 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 is
it because they have chosen a different strategy? Whichever answer students give, ask them to explain why—why
the strategy cannot be imitated, or why they chose a different strategy, that is, what benefits did they expect to
receive from a different strategy? You can also ask students whether Dell’s competitors could use some of the
actions that Dell is using. In other words, ask students whether this strategy can be adopted a piece at a time. Why
or 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.



STRATEGY IN ACTION 4.4: GENERAL ELECTRIC’S SIX-SIGMA QUALITY
IMPROVEMENT PROCESS
Six Sigma is a quality and efficiency program that aims to reduce defects, boost productivity, eliminate waste, and
cut costs throughout a company. (The term comes from the Greek letter, sigma, which is used to represent a
standard deviation. Thus, six-sigma quality is six standard deviations above the mean or average, which translates
into 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 the
reliability of each component of their products, which translates to lower manufacturing costs. The attention to
detail worked—GE’s products are known for their reliability. Although improvements led to a higher cost for
customers, 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 was
applied to the production of one product. The case also outlines the benefits that derived from the quality
improvement, including better product performance, reliability, and durability; lower costs of rework; the ability
to charge higher prices; and higher profits. The case also emphasizes two important points about quality
improvement. First, the process is often timely, detailed, and painstaking—although it can also yield significant
benefits. Second, customers are paying for value, and companies can charge more for a product that better serves
customers’ 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.



STRATEGY IN ACTION 4.5: IMPROVING QUALITY IN HEALTH CARE
Health care organizations are adopting the six-sigma approach to improve quality. Mount Carmel Health, an Ohio
provider, discovered that profits were low, due to large write-offs of uncollectible Medicare reimbursements. A
careful 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 there
identified variations in practice across physicians, particularly with regard to the cost and success rate of
treatments. These data were then shared among physicians, who used the data to eliminate poor practices and
upgrade 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 about
General Electric. Students often mistakenly believe that quality improvement applies primarily to manufacturing
firms, and this case points out the importance of quality for service firms also. Ask students to compare the
similarities and differences between this case and the preceding case about General Electric. Students will find
many similarities, such as the painstaking nature of the process of uncovering the roots of poor quality. Also, this
case, like the GE case, shows that the result of improved quality is not just higher profits; higher quality creates
value 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.



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.

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.



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.

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.



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.


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