Building Competitive Advantage Through Functional Level Strategies

a. OPENING CASE: XEROX CORP

Xerox learned firsthand how far it had fallen behind when it began to produce and market
a copier in the United States that had been designed by its Japanese affiliate, Fuji-Xerox. Xerox
found that the reject rate for Fuji-Xerox parts was only a fraction of the reject rate for
American-produced parts. Visits, to Fuji-Xerox revealed another important truth quality in
manutacturing does not increase costsit decreases costs by reducing the number of defective
products and service costs.

These developments forced Xerox to rethink the way it did business. In 1982 the company
launched the first of a series of initiatives that over the next decade transformed the way it ran
its operations. In 1981 Xerox had morë than 5,000 individual suppli ers worldwide. The Xerox
management realized that by consolidating the company's worldwide supply base it could
achieve three goals:

1. By simplifying the purchasing process, it could cut overhead in the purchasing area.
2. By having a single supplier produce a single part for all of Xerox's worldwide
operations, it would enable the supplicr to achieve economies of scale in production;
thesc cost savings could be passed on to Xerox in the form of lower prices.
3. By cutting down the number of suppliers, Xerox would find it easier to work with its
suppliers to improve the quality of component parts.

Toward this end, in 1982 Xerox created "com modity teams," which included buyers,
engineers, costing experts, and quality control personnel. Their first task was to decrease
Xerox's supplier base from over 5,000 to under 500; they reduced it to 325 suppliers. Becausc
the consolidation of suppliers simplified the purchasing process, overhead rates fell from 9
percent of total costs for materials in 1982 to about 3 percent. by 1992.
 Next, Xerox launched a quality training effort with its supplicrs. lts goal was to reduce the
number of defective parts coming from suppliers to under 1,000 per million. At that time some
suppliers had defect rates as high as 25,000 per million parts. The company soon mct its quality
goal of 1,000 defects per million parts. Indeed, by 1992 the defect rate for parts was under 300
per million.

In 1983 Xerox introduced its Leadership Through Uality program. Groups were formed
throughour ne company, from top management down to the factory floor. Each group received
training in qualit : cment programs. Emphasis was placed on aentifyng qualiry shortfalls,
determining the root causes of poor quality, developing solutions, and implementing them. The'
training program began ne top-ticr groups and then cascaded down throughout the organization,
sprcad1ng worldwide to Some 100,000 employees.

In 1985 and 1986 Xerox began to focus on its newprodu development process. On goal was
to design products that, while customized to market conditions in different countries, also
contained a large number of globally standardized parts. Another goal was to reduce the time
it took to design new products and bring them to market. To achieve these goals, Xerox
established multifunctional, multinational new-product development teams. Each team
managed the design, component sources, manufacturing, distribution, and follow-up customer
service on a worldwide basis. The use of design teams cut as much as one year from the overall
product development cycle and saved millions of dollars.

One consequence of the new approach to product development was the 5100 copier. This
was the first product designed jointly by Xerox and Fuji-Xerox for the worldwide market. The
5100 is manufactured in U.S. plants. It was launched in Japan in November 1990 and in the
United States the following February. The 5100's global design reportedly reduced the overa
dme-to-market and saved the company more than $10 million in development costs.

In 1989 Xerox calculated that it could eliminate billion in inventory and $200 million in
inventory-related costs by linking worldwide customer orders nore closely with production. It
formed a multinational organization called Central Logistics and Asets Management, whose
aim is to achievve tight integration berween individual customer orders and plant production
levels, thereby reducing the need to hold excessive inventory to serve demand.

As a result of all these steps, Xerox's position improved markedly during the 1980s. Thanks
to its improved quality, lower costs and shorter product development time, Xerox was able to
regain market share from its Japanese competitors and to boost its profits and revenues. Xerox's
share of the U.S. copier market increased from a low of 10 percent in 1985 to 18 percent in
1991.

Discussion Questions:

1. ldentify how the changes that Xerox undertook after 1980 helped the company to
improve its etticiency, qual1ty, innovation, and customer responsiveness.
2. To what extent were the changes undertaken by Xerox after 1980 the result of functions
working together to achieve a common goal?

OVERVIEW

In Chapter 4, we discuss the central role played by efficiency, quality, innovation, and
customer responsiveness in building and maintaining a competitive advantage. In this chapter,
we examine the role of functional-level strategies in achieving efficiency, quality, innovation,
and customer responsivencss. Func onal-ievel strategies are strategies directed at improving
the effectiveness ot functional operations within a company, such as manufacturing, marketing.
materials management, research and development, and human resources. Even though these
strategies may be focused on a given function, as often as not they embrace two or more
functions and require close cooperation amnong functions to attain company-wide efficiency,
quality, innovation, and customer responsiveness goals.

For example, the Opening Case describes how Xerox utilized functional-level strategies
to capture market share back trom Canon and Ricoh. Xerox increased its efficiency by
rationalizing its supply base and implementing materials management strategies that reduced
inventory holding costs. It raised product qualitry by working closely with suppliers to
improving quality and by utilizing its human resource management function to launch its
company-wide 1983 Leadership Through Quality program. Moreover, Xerox increased both
its customer responsiveness and innovative ability by reorganizing its new-product
development