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Prof. Rushen's Notes for MBA and BBA students

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									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
 Financial health––acquiring financial capital and earning
 positive returns.
 Cost efficiency––using resources well to operate at low
 Product quality––producing high-quality goods or
 Innovation––developing new products and/or processes.
 Social responsibility––making a positive contribution to
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
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
     Competitive Advantage

                                  Taper vertical   Full Vertical
     Activity’s Potential for

                                   Integration:     Integration:
                                   Produce some       Produce all
                                   internally          internally

                                   Outsource       Outsource

                                   Completely:     Completely:
                                    Buy on open     Long-term
                                      market          contracts
Make or Buy

          Make             Proprietary
Lower costs Facilitating
 Improved                                                costs
 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

•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
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
 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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