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 business- level strategies and the overall corporate-level strategy. Functional Strategy Objectives Profitability––producing at a net profit in business. Market share––gaining and holding a specific share of a product market. Human talent––recruiting and maintaining a high-quality workforce. Financial health––acquiring financial capital and earning positive returns. Cost efficiency––using resources well to operate at low cost. Product quality––producing high-quality goods or services. Innovation––developing new products and/or processes. Social responsibility––making 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 Value––it must make a disproportionate contribution to customer-perceived value. Competitor Unique––it must be unique and superior to competitor capabilities. Extendibility––it 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 else––Whirlpool 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 company––Honda 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 Activity’s Total Value-Added to Firm’s Products and Services Low High High Competitive Advantage Taper vertical Full Vertical Activity’s Potential for Integration: Integration: Produce some Produce all internally internally Outsource Outsource Low Completely: Completely: Buy on open Long-term market contracts Make or Buy Make Proprietary Product Technology Protection Buy Lower costs Facilitating Strategic specialized flexibility investments Offsets Lower Improved costs scheduling Trade-offs 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 Lower the cost of the product design. Be the first product or value activities firm down the learning by learning from the curve. Create low-cost leader’s experience. ways of performing value Avoid R&D costs through activities. imitation. Differentiation Pioneer a unique product Adapt the product or that increases buyer value. delivery system more Innovate in other activities closely to buyer needs by to increase buyer value. learning from the leader’s 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) • Organizationsoverlook 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 approaches—such as just-in-time production—with 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. 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 competitor’s 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.
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