COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
Subject COMMERCE
Paper No and Title 12 STRATEGIC MANAGEMENT Module No and Title 7 FUNCTIONAL LEVEL STRATEGIES
Module Tag COM_P12_M7
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
TABLE OF CONTENTS
1. Learning Outcomes 2. Introduction
3. Functional Strategies
3.1 Types of Functional Strategies
3.2 Strategic Choice: Selection of best strategy 4. Functional plans & Policies
4.1 Functional plans 4.2 Policies
4.3 Integration of Functional plans & policies
5. Summary
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
1. Learning Outcomes
After studying this module, you shall be able to:
Know about the nature and significance of functional plans and policies
Understand the role of functional policies
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
2. Introduction
FUNCTIONAL STRATEGIES, PLANS & POLICIES
“Functional strategy is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity1.” Each business unit has its own set of departments, each with its own functional strategy.
In other words, a functional strategy is an organizational plan for various functional areas including human resources, marketing, research & development among others. The functional strategy of a company is customized to a specific industry and is used to back up other corporate and business strategies. Functional strategies operate below the Strategic Business unit (SBU) or business level strategies. Functional strategies or functional plans and policies are made within the guidelines set at higher levels.
The strategies should give direction to the managers who will use and implement the plans and policies and provide them with the best and appropriate method to adopt it. The selection of the best strategy alternative is not the end of strategy formulation. It is followed by policy formation.
Functional strategies are primarily concerned with:
Efficiently deploying specialists within the functional area
Integrating activities within the functional area
Making sure that functional strategies link effectively and efficiently with business strategies and the overall corporate-level strategy
Policies set the basis for implementation. A policy defines the area in which decisions are to be made, but it does not give the decision. It specifies the general direction and areas to be followed.
Plans are made to select a course of action while policies are required to act as guidelines to action.
1 (Wheelen, Hunger, & Rangarajan, 2009)
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
3. Functional Strategies
3.1 Types of Functional Strategies
Functional areas are traditionally divided into finance, marketing, production and personnel.
Strategies can be divided as basic, general, departmental. Another way to classify policy is Human Resource Strategies, Marketing Strategies, Financial Strategies and Operational
Strategies. Environmental factors relevant to each function area have an impact on the choice of plans and policies.
3.1.1 Financial Strategies
A financial strategy examines the financial implications of corporate and business-level strategic alternatives and identifies the best financial course of action. It shall aim to provide the
competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy. It should attempt to maximize the financial value of the firm. The financial strategies aim to achieve the following functions in the management of finance of an organization:
Raising adequate funds at lowest cost
Considering the allocation of capital funds through sound management
Using the capital to earn sufficient profits
Ensuring regular return to investors
Paying reasonable & regular remuneration to employees and protecting their financial interests such as Provident Fund, Pension etc.
Ensuring timely payments to creditors
Exercising budgetary controls and making optimum use of available financial resources
Preventing misuse of money
3.1.2 Purchasing Strategies
Purchasing strategy deals with obtaining the raw materials, parts and supplies needed to perform the operations functions. The basic purchasing choices are multiple, sole and parallel sourcing.
Under multiple sourcing, the purchasing company orders a particular part from several vendors whereas under sole sourcing, the purchaser relies on only one supplier for one part. While sole sourcing has the advantage of managing desired quality and reducing the cost and time spent on product design; multiple sourcing provides the flexibility and ensures timely supplies of parts. In parallel sourcing, two suppliers are the sole suppliers of two different parts but they are also back- up suppliers for each other’s parts.
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
3.1.3 Marketing Strategies
Marketing Strategy deals with pricing, selling and distributing a product. Marketing is an important aspect of an organization since it establishes the link between the company and its market or customers. The success of the organization is largely attributed to the performance of the marketing. Marketing plans and policies are, therefore of great significance in implementing business plans and strategies of a company. Marketing plans and policies are expressed through the four Ps: product, price, place and promotion. Each of these Ps has a number of elements associated with it (Table 7.1):
Table no 7.1: 4 Ps of Marketing Mix: Elements2
Product Price Place (distribution) Promotion
Quality List Price Customer Location Advertising
Brand MRP Outlet Location Sales Promotion
Features Discounts Channels Personal Selling
Packaging Trade Margin Warehousing Test Selling
Warranties Commission Stocks Publicity
Services Installment Delivery Communications
Credit Terms
3.1.4 Operations Strategies
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. It includes several other issues including determining the optimum level of technology to be
employed, determining optimum production lot size, among others.
These strategies need to lay down the guidelines with respect to the production capacity of the plant, raw material to be needed, stock, quality management, maintenance of the plant and machinery. Here, the aim of the strategists is to ensure that the day to day activities conform to the long term objectives of the company and take them closer towards the goal of the
organization.
Various manufacturing strategy available to a firm includes mass production, continuous improvement, modular manufacturing and mass customization. Mass production system is an excellent way of producing a large amount of low-cost standard quality goods and services.
However, as the customers became more quality conscious, continuous improvement systems were developed by Japanese firms, wherein cross functional teams strive continuously to improve production process producing large quantity of standard goods and services of high quality.
Modular manufacturing strategy in which pre-assembled subassemblies are delivered as they are needed to a company’s assembly line workers, who quickly piece the modules together into a finished product, is more often used in automobile industry. For example, General Motors employed this strategy to make its subcompact car Celta. Finally to address the needs of an ever
2 (Nag)
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
changing environment, the idea of mass production was challenged by the concept of mass customization. Mass
customization requires that people, processes, units and technology reconfigure themselves to give customers exactly what they want, when they want it.
3.1.5 Logistics Strategies
Logistics strategy deals with the flow of products into and out of the manufacturing process.
There are three trends that are evident in the area of logistics: centralization, outsourcing and the use of the internet. Corporations across the world started centralizing logistics in the headquarters group so as to gain logistical synergies. The centralized logistics group contains specialists with expertise in different transportation modes such as rail or trucking. They work to aggregate shipping volumes across the entire corporation to gain better contracts with shippers. Outsourcing logistics function reduces costs and improves delivery time. For example, Hewlett-Packard (HP) contracted with Roadway Logistics to manage its inbound raw materials warehousing in
Vancouver, Canada. Nowadays, many companies have started using the Internet also to simplify their logistics system.
3.1.6 Human Resource Strategies
Human resource strategies of the organization provide the strategies for the Human resource department to follow. This includes the personnel selection, their training and development, compensation, promotion, appraisal. These plans and policies are important for the proper functioning of the company.
HRM strategy deals with various issues including whether a company or business unit should hire a large number of low-skilled employees who receive low pay, perform repet
itive jobs and most likely quit after a short time or hire skilled employees who receive relatively high pay and are cross-trained to participate in self-managing work teams. HR Strategies are important because of the following reasons:
o
Corporate goals must factor in individual career growth
oCompany profits must be linked to personal rewards
oOrganizational learning must involve employee training
oBusiness strategies must consider human resource issues
3.1.7 Research & Development (R&D) Strategies
Nowadays, every organization budgets and plans for research and development activities. R&D strategy deals with the product and process innovation and improvement. It also deals with the appropriate mix of different types of R&D (basic, product or process) and with the question of how new technology be accessed-internal development, external acquisition or through strategic alliances. Every organization has primarily two R&D choices- to be a technological leader in which one pioneers an innovation or to be a technological follower in which one imitates the products of competitors.
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
3.2 Strategic Choice: Selection of best strategy
After carefully identifying and evaluating the pros and cons of the various potential strategic alternatives, a suitable strategy must be selected for implementation. There are several considerations to be taken care of while determining the best strategy. The proposed strategy must be capable of taking advantage of various environmental opportunities and corporate strengths, and lead away from environmental threats and corporate weaknesses. The selected strategy must satisfy agreed-on objectives with the minimum use of resources. Other
considerations while making a strategic choice are:
Management’s Attitude towards Risk: Attractiveness of a particular strategic alternative is a function of the amount of risk it involves. Risk indicates the probability that the strategy will be effective and also the amount of assets the corporation must allocate to that strategy and the length of time assets will be unavailable for other uses. Generally, small firms managed by entrepreneurs are willing to accept greater risk than larger firms of diversified ownership managed by professional managers.
Pressures from stakeholders: Another factor affecting the desirability of a strategic alternative is its perceived compatibility with the key stakeholders in a corporation’s task environment. Different stakeholders have different
expectations, for example creditors want to be paid on time, trade unions want comparable wages and employment security, governments and interest groups demand social responsibility and shareholders want dividends. The selected strategic alternative must give due consideration to all these pressures. Strategic managers should prioritize the various stakeholder concerns on the basis of their relative power to influence the corporation’s activities and then select most optimum strategic alternative which maximizes the probability of gaining stakeholder support.
Pressures from Corporate Culture: A strategic alternative must be compatible with the corporate culture to be successful. Any strategy that attempts to bring a radical change in corporate philosophy will result in employee resistance and even sabotage. A strategy maker must consider the various corporate culture pressures while assessing the various alternatives and evaluate their compatibility with the corporate culture.
Needs & Desires of Key Managers: Personal characteristics and experience do affect a person’s assessment of a strategic alternative. A strategic alternative despite of its attractiveness might not be selected if it fails to satisfy the needs and desires of important top managers. A key executive might influence other people in top management to favor a particular alternative so that the objections to it are ignored. More often, industry and cultural backgrounds affect strategic choice. For example, executives with strong ties within an industry tend to choose strategies commonly used in that industry.
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
4. Functional Plans & Policies
The effectiveness of strategic management depends on the manner in which strategies are implemented. And for effective implementation, strategists have to provide directions to functional managers regarding the plans and policies to be adopted.
4.1 Nature of Functional Plans & Policies
We know that functional strategies operate below the business strategies. Within functional strategies, there might be several sub-functional areas. For example, the functional area of marketing may have sub-functions such as new product development, product testing, promotion, advertising, sales promotion, marketing research and others.
Functional strategies defined in terms of functional plans and policies- plans or tactics to
implement business strategies- are made within the guidelines set at higher levels. Plans are made to select a course of action while policies are guidelines to action, Functional plans and policies are therefore in the nature of tactics to make a strategy work. A tactic is a sub strategy, a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action. Thus, functional tactics are short-term activities each functional area within the firm undertakes to implement the overall business strategies.
In order to take decisions, functional mangers need guidance of corporate and business strategists.
Functional plans tell the functional managers what has to be done while functional policies state how the plans are to be implemented.
4.1.1Need for Functional plans and policies
Development of functional plans and policies serves a number of useful purposes. Jauch, Gupta and Glueck (2004) have given five reasons why functional plans and policies are necessary:
1. To ensure that all constituents (functional areas) in the organization are actively involved in the implementation of strategic decisions
2. To provide a basis y for controlling activities in different functional areas of the organization
3. To reduce the time taken by mangers (in different functional areas in decision making)
4. To ensure consistency in handling of similar situations in different functional areas
5. To facilitate coordination among different functions wherever necessary
4.2 Development of Functional Plans & Policies
Strategies formulated at the top management level are made practically workable at the functional level by developing functional plans and policies. Business strategies need to be converted into viable and mutually compatible functional plans and policies. Policies, defining the broad guidelines for implementation, flow from the selected strategy and provide guidance for decision
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
strategy that created them and in time can in fact become a part of company’s culture.
The process of developing functional plans and policies may range from formal to informal.
Larger and more complex organizations may have several policies related to every major aspect.
Many of these policies could have been formulated through formal ways and laid down in company manuals and documents. On the other hand, smaller organizations operate with fewer policies, most of which are developed in informal ways and are not articulated rather understood only.
Environmental factors relevant to each functional area have an impact on the choice of plans and policies. Additionally, organizational plans & policies also affect the choice of functional plans and policies. Resource allocation decisions are impacted by and affect functional plans and decisions.
4.3 Integration of Functional plans & policies
We saw that each key functional area of the organization has its separate plan and policy.
However in real-life organizations, it is often difficult to distinguish between which activities exclusively belong to which functional area. Different functional areas overlap with each other.
All these segregated key areas are brought together through the process of integration so that as a whole they can achieve the overall objective of the organization. There must be horizontal and vertical fit among strategies and functions for effective strategy implementation. Vertical fit is alignment between a higher-level strategy and lower-level strategy say between a business strategy and a functional strategy. Horizontal fit is alignment between strategies or activities at the same level say between finance and personnel strategies. This implies the need for alignment, compatibility, and coordination among various plans and policies. Different functional areas must be assessed carefully for their relative strengths and weaknesses and certain trade-off decisions be made.
4.3.1 Considerations in Integration
Jauch &Glueck (1984) have mentioned five important issues which are pertinent to integration of functional and policies:
a) Need for internal consistency
b) Relevance to development of organizational capability c) Making trade-off decisions
d) Balancing of intensity of functional linkages e) Timing of implementation of policies and plans The above considerations are described as below:
4.3.1.1 Need for internal consistency
Strategic implementation involves several functional areas. Different functional areas
should not work independently or at cross purposes. Hence, it is necessary to ensure that
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
there is internal consistency in respect of functional policies. For instance, the marketing department cannot
frame its policies without considering the impact of its policies on other department such as finance, production and personnel. Whenever marketing department frames any strategy, it should consider the financial resources of the firm, the production capacity and skills and abilities of the organizational staff. Absence of internal consistency may lead to the under optimum implementation of the strategy.
4.3.1.2 Relevance to development of organizational capability
Integration produces synergistic effects which increases efficiency and capability. So, integration of various functional plans and policies can produce the necessary synergy for enhancing organizational efficiency and capability. Integration of functional strategies should aim at developing capabilities relevant to the firm’s objectives as defined through strategy formulation. Resources should be used in those areas in which the firm intends to build up its strategic advantage. For example, there are some companies that aim at market leadership through quality products and heavy promotional efforts, such companies should allocate the resources in technological development and marketing efforts.
4.3.1.3 Making trade-off decisions
Some trade-offs are inherent in functional areas, policies and functions. For instance, the marketing department may like to go for aggressive advertising and sales-promotion to increase the market share, which requires high level of expenditure, but finance
department may have a conservative policy. In such trade-off situations, interest of organization should be given more importance. Functional plans and policies should be made more coherent for successful implementation of strategies. Integration of functional plans and policies helps in minimizing inter-functional conflicts and optimizes strategy implementation. Strategist should realize that some sacrifice in one or more functional area is required and essential if emphasis is to be given to another functional area.
4.3.1.4 Balancing of intensity of functional linkages
The functions of an organization are interdependent and interlinked. Some functions are directly interlinked and others are indirectly. The degree of linkage determines the level of integration of various functions. For example, a strategy which depends on high- quality products with superior technology requires close linkages between R&D, product development and manufacturing, while a strategy based on low-cost, mass-market products necessitates high inter-linkages between marketing and logistics. This however does not mean that other functional inter-linkages are not important. Integration of
functional plans and policies helps in determining the relative intensities of inter-linkages
and ensuring the required balance between high-linkage and low-linkage functions.
COMMERCE PAPER No. 12 : STRATEGIC MANAGEMENT
MODULE NO. 7 : FUNCTIONAL LEVEL STRATEGIES
Integration facilitates timing of implementation of functional plans and policies. Right plans and policies but implemented at wrong time are as bad as implementing wrong plans and policies at the right time. For example, if availability of trained professionals is a key factor in strategy implementation, then a timely introduction of a development-focused HR policy is inevitable.
There should be proper integration in respect of timing of implementation of policies. Proper timing would lead to better implementation of the overall strategy of the firm.
5. Summary
Functional level strategies support both corporate level and business level strategies
Functional strategies involve coordinating between various functions and operations needed to design, manufacture, deliver and support the product and service of each business within the corporate portfolio.
For effective implementation, different business strategies require different functional plans and policies
Alternative business strategies require alternative functional plans and policies. For example: expansion or diversification requires one set of functional plans & policies and stability strategies require another set of functional plans & policies. Therefore,
functional plans & policies should be strategy driven, flexible and adaptable.
For achieving organizational objectives, different functional plans and policies should be mutually aligned, should be compatible and work in coordination with one another.
Companies should take care of matching or aligning strategies in terms of vertical and horizontal fit.
