Strategy Formulation

Functional Strategy

Prof. Rushen Chahal

Functional Strategy
Key Goals To achieve corporate and business unit objectives and strategies by maximizing resource productivity To develop & nurture a distinctive competence to provide a company (BU) competitive advantage

Functional Strategy
Functional strategies are primarily concerned with: Efficiently utilizing specialists within the functional area. Integrating activities within the functional area (e.g., coordinating advertising, promotion, and marketing research in marketing; or purchasing, inventory control, and shipping in production/operations). Assuring that functional strategies mesh with businesslevel strategies and the overall corporate-level strategy.

Functional Strategy Objectives

Profitabilityproducing at a net profit in business. Market sharegaining and holding a specific share of a product market. Human talentrecruiting and maintaining a high-quality workforce. Financial healthacquiring financial capital and earning positive returns. Cost efficiencyusing resources well to operate at low cost. Product qualityproducing high-quality goods or services. Innovationdeveloping new products and/or processes. Social responsibilitymaking a positive contribution to society.

Core Competence

is something that a corporation can do exceedingly well.

A company must continually reinvest in its core competences or risk losing them.

Core Competence
To be considered a distinctive competency (superior to those of the competition), the competence must meet three tests: Customer Valueit must make a disproportionate contribution to customer-perceived value. Competitor Uniqueit must be unique and superior to competitor capabilities. Extendibilityit must be something that can be used to develop new products/services or enter new markets

Distinctive Core Competence

A corporation can gain access to a distinctive competency in four ways:

Be an asset endowment such as key patent coming from the founding company (Xerox). Be acquired from someone elseWhirlpool bought a worldwide distribution system when it purchased Philips appliance division. Be shared with another business unit or alliance partner Apple Computer worked with a design firm to create the special appeal of its Apple II and Mac computers. Be carefully built and accumulated over time within the companyHonda carefully extended its expertise in small motor manufacturing from motorcycles to autos and lawnmowers.

The Sourcing Decision

If a corporation does not have a distinctive competency in a particular functional area, that functional area could be a candidate for outsourcing Outsourcing is purchasing from someone else a product or service that had been previously provided internally. According to an American Management Association survey 94% of the firms outsource at least one activity.

Outsourcing Matrix
Activitys Total Value-Added to Firms Products and Services

Low Activitys Potential for Competitive Advantage Low High

High

Taper vertical Integration:

Produce some internally

Full Vertical Integration:

Produce all internally

Outsource Completely:
Buy on open market

Outsource Completely:
Long-term contracts

Make or Buy

Make

Proprietary Product Technology Protection Strategic flexibility

Buy

Lower costs Facilitating specialized investments Improved scheduling Trade-offs

Lower costs

Offsets

Functional Strategy
Appropriate timing: advertising for a new product could be expected to begin sixty days prior to shipment of the first product. Production could then start thirty days before shipping begins. Functional strategies have a shorter time orientation than either business-level or corporate-level strategies Accountability is also easiest to establish with functional strategies because results of actions occur sooner and are more easily attributed to the function than is possible at other levels of strategy. Personnel: lower-level managers are most directly involved with the implementation of functional strategies.

Functional Strategy
Marketing strategy deals with pricing, selling, and distributing a product Financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action Operations strategy determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, and the deployment of physical resources.

Research and Development Strategy and Competitive Advantage

Technological Leadership Technological Followership Cost Advantage Pioneer the lowest cost product design. Be the first firm down the learning curve. Create low-cost ways of performing value activities. Differentiation Pioneer a unique product that increases buyer value. Innovate in other activities to increase buyer value. Lower the cost of the product or value activities by learning from the leaders experience. Avoid R&D costs through imitation. Adapt the product or delivery system more closely to buyer needs by learning from the leaders experience.

Functional Strategy
Purchasing strategy deals with obtaining the raw materials, parts, and suppliers needed to perform the operation function. Logistics strategy deals with the flow of products into and out of the manufacturing process.

Power of Just-in-Time: Economize on inventory holding costs. Drawback: no buffer inventory.

From lean to lasting (by David Fine, Maia A. Hansen, and

Stefan Roggenhofer)

overlook up to half of the potential savings when they implement or expand operational-improvement programs inspired by lean, Six Sigma, or both. The broader challenge underlying such problems is integrating the better-known hard operational tools and approachessuch as just-in-time productionwith the soft side, including the development of leaders who can help teams to continuously identify and make efficiency improvements, link and align the boardroom with the shop floor, and build the technical and interpersonal skills that make efficiency benefits real.

Organizations

From lean to lasting (by David Fine, Maia A. Hansen, and

Stefan Roggenhofer)

Functional Strategy
Corporations are increasingly adopting information systems strategies in that they are turning to information systems technology to provide business units with competitive advantage


Track component parts to assembly plant. Optimize production scheduling.  Ability to accelerate (or slow) production. Electronic data interchange coordinates flow through into/through manufacturing to customers. Suppliers, shippers, and purchasing firms can communicate with each other without delay.  Flexibility and responsiveness. Paperwork is decreased.

Functional Strategy
HRM strategy addresses the issue: should we hire a large number of low-skilled employees who receive low salary and most likely quit after a short time or hire skilled employees who receive relatively high salary and cross-trained to participate in self-managing work teams.

Strategies to Avoid
Follow the leader: imitating a leading competitors strategy Hit Another Home Run: if a company is successful because it pioneered an extremely successful product, it tends to search for another super product Arms Race: entering into a spirited battle with another firm for increased market share Do Everything: when faced with several interesting opportunities, management might tend to leap at all of them. Losing Hand: a corporation might invest so much in a particular strategy that top management is unwilling to accept its failure.