the story so far… ► why is a firm making money? it’s the industry (porter 5 forces external...

Increasing profitability – value and priceIncreasing profitability – value and price

Efficiency

Customer responsiveness

Quality Innovation

Higher prices

Lower costs

New productsImproved

Product

PC

V

Profit

Greater value…Greater value…

►QualityQuality• Closer to customer needsCloser to customer needs• Customer focusCustomer focus• Cross functional integrationCross functional integration

• Greater valueGreater value

• Higher prices (absent head-to-head Higher prices (absent head-to-head competition)competition)

• Supplier relationshipsSupplier relationships

……Higher pricesHigher prices

Lower costs

PROFIT

Efficiency

Innovation

Quality

Customer responsiveness

V P C

Higher customer value and prices

Improving the product/service Improving the product/service ( => greater customer responsiveness)( => greater customer responsiveness)

► Manufacturing/Production Manufacturing/Production • Raise quality -> increase in Raise quality -> increase in

valuevalue► Sales and MarketingSales and Marketing

• Market segmentationMarket segmentation• Tailor product to segments’ Tailor product to segments’

needsneeds► Customer ServiceCustomer Service

• The product’s success The product’s success (and the company (and the company reputation) depend on reputation) depend on quality of the service as quality of the service as well as that of the productwell as that of the product

► HRHR• Training Training

► E.g. Call centre staffE.g. Call centre staff

► ITIT• CAD/CAM CAD/CAM

► Increase product Increase product varietyvariety

► Better able to meet Better able to meet segment needssegment needs

• Customer support Customer support ► Customer relationship Customer relationship

management softwaremanagement software

Increasing profitability – lower costsIncreasing profitability – lower costs

Efficiency

Customer responsiveness

Quality Innovation

Higher prices

Profit

Newprocesses

Fewer defects

Lower costs

New products

ImprovedProduct

V

PC

Reducing costs ( = greater efficiency)Reducing costs ( = greater efficiency)

► Manufacturing/Production Manufacturing/Production • Economies of scaleEconomies of scale

► Spreading of fixed costsSpreading of fixed costs► SpecializationSpecialization

• Learning effectsLearning effects► More applicable to complex More applicable to complex

operationsoperations► PurchasingPurchasing

• JIT (less inventory)JIT (less inventory)• Supplier relationshipsSupplier relationships

► MarketingMarketing• Reputation, word of mouthReputation, word of mouth• PenetrationPenetration• Defection ratesDefection rates

► HRHR• TrainingTraining• Self managing teamsSelf managing teams• IncentivesIncentives

► ITIT• EDI EDI

► JIT, data entryJIT, data entry

• Customer support Customer support ► (e.g. FAQs, expert (e.g. FAQs, expert

systems for problem systems for problem diagnosticsdiagnostics

► Call centre management Call centre management

Manufacturing variabilityManufacturing variability

Too wide,reject.

Perfect,pass.

Too thin,pass. But…

Reliability problems,weak and failure

Question: Does higher quality cost money?

Scrap – or rework

Six Six quality quality

Part too small Part too large

~ four quality

~ one quality

Inside the Oreck (1)Inside the Oreck (1)

Inside the Oreck (2)Inside the Oreck (2)

Lowering costsLowering costs

Lower costs

PROFIT

Efficiency

Innovation

Quality

Customer responsiveness

V P C

Higher customer value and prices

The Experience CurveThe Experience Curve

► Studies during WWII uncovered a relationship between Studies during WWII uncovered a relationship between the number of ships produced and the cost of the number of ships produced and the cost of productionproduction

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Months

Cos

t (r

elat

ive

to s

tart

ing

cost

)

The Experience CurveThe Experience Curve

► The relationship between the number of The relationship between the number of ships produced and the cost of production ships produced and the cost of production became known as “the experience curve”became known as “the experience curve”

► This can be subdivided into two distinct This can be subdivided into two distinct effects with different causes -effects with different causes -• ScaleScale

• LearningLearning

Why does this matter?Why does this matter?

► Scale anyone can achieveScale anyone can achieve► Competitors will seldom if ever be able to Competitors will seldom if ever be able to

match your match your cumulative volume cumulative volume even if they even if they can get the same market sharecan get the same market share

► Learning is one source of first mover Learning is one source of first mover advantageadvantage

► Knowledge is often ‘sticky’ and leaning is Knowledge is often ‘sticky’ and leaning is hard to replicatehard to replicate