Expansion Strategy

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Strategic Management Functional Implementation

Module: 23, Functional Implementation

Paper: 03, Strategic Management

Farah Choudhary

The Business School

University of Jammu, Jammu (J&K)

Dr. Anil Gupta

Senior Assistant Professor

University of Jammu, Jammu 180006.

Prof YoginderVerma

Pro–Vice Chancellor

Central University of Himachal Pradesh. Kangra. H.P.

Prof. S P Bansal

Vice Chancellor

Maharaja Agrasen University, Baddi

Content Writer

Co-Principal Investigator

Paper Coordinator Principal Investigator

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ITEM DESCRIPTION OF MODULE

Subject Name MANAGEMENT

Paper Name STRATEGIC MANAGEMENT

Module Name/ Title FUNCTIONAL IMPLEMENTATION

Module Id 23

Pre-requisites Understand the process of strategic management and strategic formulation in particular

Objectives Understand the concept of functional implementation, importance of functional strategies, comprehend various sub- functional plans and policies

Keywords Strategy, functional implementation, marketing, finance, operation, information technology, Human resource management

Module 1 : Functional Implementation 1. Learning Outcomes

2. Functional strategies

3. Importance of functional plans and policies 4. Nature of functional plans and policies 5. Integration of functional plans and policies 6. Summary

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Strategic Management Functional Implementation 1. LEARNING OUTCOMES

After studying this module, you shall be able to 1. Understand the concept of Functional strategies

2. Learn about the Importance of functional plans and policies 3. Understand various sub-functional plans and policies

4. Learn about mechanisms to integrate various sub-functional plans and policies

2. FUNCTIONAL STRATEGIES

Functional strategies are defined as those strategies that achieve goals and objectives in a specified functional area and allot different resources among various processes within that functional area so as to achieve the business and corporate objectives in whole. Functional strategies are a part of the business and corporate strategies. Let’s take an example to understand this in a better manner. Suppose a company opts for the cost leadership business strategy for one of its businesses. So now all actions and procedures should be focused on how to achieve a low-cost structure and decrease the overall cost. Now all the functional areas of marketing, finance, operations, human resource and information technology will contribute in achieving the objective of lowering the cost in their own specialized manner. This will make the overall cost leadership strategy successful for the company.

Exhibit 1: Relationship of Functional strategies, business and corporate strategies: FOR A DIVERSIFIED COMPANY

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(Source:https://www.slideshare.net/anicalena/strategic-management-businesspresentation- slides?related=1)

Exhibit 2: Relationship of Functional strategies, business and corporate strategies: FOR A SINGLE-BUSINESS COMPANY

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(Source:https://www.slideshare.net/anicalena/strategic-management-business-presentation- slides?related=1 )

3. IMPORTANCE OF FUNCTIONAL PLANS AND POLICIES

Glueck suggested that there are five reasons why a company needs functional plans and policies. The reason for developing functional plans and policies are:

1) The strategic decisions are implemented throughout the organisation uniformly.

2) All activities of the organisation can be controlled easily as strategies are sub divided in smaller plans and policies.

3) The time taken by the functional mangers in decision making is reduced as plans make everyone clear of what is to be done and in what manner.

4) Similar situations that occur in different functional areas are handled in a consistent manner.

5) Coordination within various functional areas can be achieved easily.

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4. NATURE OF FUNCTIONAL PLANS AND POLICIES

To achieve effectiveness, it is very important for the strategic management to choose the right way in which the strategies are implemented. As functional strategies are a part of corporate and business strategies, thus it is very critical for the company to design these strategies in a proper manner and within the framework of the strategies and plans set at the higher level.

Functional strategies constitute various sub-functional plans and policies which are equally important namely:

a) Marketing plan and policies b) Financial plan and policies c) Operations plan and policies

d) Human resource management plan and policies e) Information Technology plan and policies Exhibit 3: Configuration of Functional Plans And Policies

Further theses sub-functional plans and policies can be sub divided in various functions like, Human Resource Management consists of recruitment, training and development, performance appraisal, industrial relations etc.

Let us now discuss each one of these sub-functional plans and policies in detail:

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a) MARKETING PLAN AND POLICIES

Plans and policies of the marketing have to be created and put into practice on the basis of the Four P’s of marketing mix namely:

Exhibit 4: Marketing Mix

(Source: https://www.slideshare.net/JinalShah25/marketing-mix-4ps-4cs)

i. Product: Product for an organisation means that goods and services which it is offering in the market. Plan and policies related to product are based on the various characteristics the product poses such as its quality, quantity, features, packaging, brand name etc. A heavy consumer electrical goods company like Godrej needs to constantly introduce new variants of its products in the market so as to compete its competitors. In the year 2007, the Godrej Company introduced nearly 1000 new variant of its products. Also the growth strategy of the Honda has had the quality of the product and service it offers. As in the

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products, service sector too needs to focus on the characteristics of their offerings. Today banks have widened their product range. For example, SBI has aggressive marketing policy for their retail products, insurance, mutual funds etc. Thus, plans and policies of product and services characteristics help organisations in implementing its strategies.

Exhibit 5: Product Mix Strategies

ii. Price: Price is the money or consideration that the customers pay in exchange of goods or services. It is important to the seller as it represents the returns on investment the seller has made on developing the goods or services it offers.

The pricing policies can be best explained with the help of the aviation industry example. If one company in the aviation industry reduces its airfare the others also follow the trend. Also if we take the example when Tata Motor’s Nano car was launched, soon after its launched Maruti Suzuki also came up with its low-

•expand its present mix by increase the number of lines or the depth within the lines

Expansion Strategy

•narrow the product mix, to eliminate low-profit products and to get more profit from fewer products.

Contraction Strategy:

•developing a complete new product improve and establishes product that can be more profitable and less risky

Alteration of existing product:

•A product position is the image that the product projects in relation to competitive product and to other products marketed by the same company.

Positioning Strategy:

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price Maruti 800 model. On the other hand, the high prices also known as the premium pricing policy too have a purpose. This policy differentiates the company from its competitors and customers as this type of company are focused on class and not the mass. Luxury products such as high end cars, five- star hotels, cosmetics, apparels, bags etc. need premium pricing policy.

The pricing policy for their products is also used by the companies as a competitive tool. For example, Nirma has been following the low-price policy to compete with HCL, in return HCL through its comparative advertising showed that its product delivers better price-performance relationship. Also, sometimes price can be the determinant of market segmentation. For instance the market of perfumes is divided on the bases of price. As we have premium brands of price more than Rs.1000 for 100 ml, then middle segment ranging from 350-1000 and lower segment from Rs. 350-100. The plans and policies of this element have impact on all

other ingredients of marketing-mix.

Exhibit 6: Pricing Strategies

•businesses set costs higher than their competitors mostly in in the early days of a product’s life cycle,

Pricing at a Premium

•attract buyers by offering lower prices on goods and services.

Pricing for Market Penetration

•businesses minimize the costs associated with marketing and production in order to keep product prices down

Economy Pricing

•setting rates high during the introductory phase than lowers prices gradually as competitor goods appear on the market.

Price Skimming

•encourage customers to respond on emotional levels rather than logical ones.

setting the price of a watch at Rs.199 is proven to attract more consumers than setting it at Rs.200

Psychology Pricing

•businesses sell multiple products for a lower rate than consumers would face if they purchased each item individually.

Bundle Pricing

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iii. Place: Place or distribution is the process by which goods or services are made available to the end user. Distribution plans and policies include issues related to inventory, transportation, store management, selection of channel etc. In today’s competitive environment, the success of the company all depends upon the efficiency and effectiveness of the distribution system. Supply chain management and customer relationship management are the latest building blocks of the companies that help them to perform more competently. Coca- Cola is famous for its widest distribution network which differentiates the company from its competitors. Logistics is also an important factor in several industries like in case of courier companies. Deutsche Post or DHL is a German courier company and is the world largest courier company in the world. It lays its emphasis on creating the logistics infrastructure for safe and timely delivery across the globe. Hus, the distribution policy strengthens the company through procurement and supply chain management.

Exhi bit 7:

Place / Distri butio n Strate gies

•Indirect distribution is when the product reaches the end customer through numerous channels in between.

Indirect distribution

•Direct distribution is when the company either directly sends the product to end customer or when the channel length is very less.

Direct distribution

•Intensive distribution tries to cover as much of the market as it can.

Typical FMCG and consumer durable products are best example

Intensive distribution

•A company like Armani, Zara or any other such branded company will have selective distribution. These companies are likely to have only limited outlets.

Selective distribution

•If a company wants to give a big region to one single distributor then it is known as exclusive distribution strategy like Lamborghini have

Exclusive distribution

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iv. Promotion: Promotion deals with the entire set of communication activities that create awareness to the prospective buyer about the company and product or service. The promotion mix consists of four elements namely: Advertising, Personal Selling, Sales promotion and publicity. We can take an example of the promotion of ‘Clean India or Swach Bharat’. The ‘Swach Bharat’ promotion campaign is a mix of both print and media base. It encourages people to clean their surroundings and promote cleanliness so as to market internationally and nationally brand Clean India. In today’s world to going competition promotion can be adopted as an important strategic tool. Top bands like HCL, P&G, and Nestle have been sustaining the competitive environment on mostly its promotion activities. When Nestle Maggi was banned in India, it came back with the message of ‘welcome back’ to create its new image and regain its lost market. Today customers have so many options available with them that it becomes utmost important for the company to distinguish itself from its competitors and the only way left is effective promotion strategy. It is vital for the companies to decide right media of promotion for right customer at right time. It is always seen that the advertisements of AC or refrigerators are more shown in summer season and advertisements of heater in winters. Eureka Forbes has been successful from so many years due to its door-to-door selling and demonstrations at exhibition. So it is critical for all the companies to choose the right type and mix of promotional method to survive successfully in today’s aggressive competitive market.

Exhibit 8: Setting the Promotion Mix

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Strategic Management Functional Implementation Exhibit 9: Promotion Strategies

• Reach Many Buyers, Repeat Message Many Times, Impersonal, Expensive.

Advertising

• Personal Interaction, Relationship Building, Most Expensive Promo Tool Personal Selling

• Wide Assortment of Tools, Rewards Quick Response, Efforts Short-Lived Sales

Promotion

• Very Believable, Dramatize a Company or Product, Underutilized.

Public Relations

• Nonpublic, Immediate, Customized, Interactive

Direct Marketing

•It involves taking the product directly to the customer via whatever means, ensuring the customer is aware of your brand at the point of purchase.

•“Taking the product to the customer”

•Examples of push tactics

•Trade show promotions to encourage retailer demand

•Direct selling to customers in showrooms or face to face

Push Strategy

•A pull strategy involves motivating customers to seek out your brand in an active process.

•“Getting the customer to come to you”

• Examples of pull tactics

•Advertising and mass media promotion

•Word of mouth referral.

Pull Strategy

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Strategic Management Functional Implementation Exhibit 10: Push and pull marketing strategies

(Source: http://d24nkegzgh58k.cloudfront.net/wpcontent/uploads/sites/7/2017/04/push-pull- promotional-strategy.png?iv=107 )

b) FINANCIAL PLAN AND POLICIES

The financial plans and policies of the company are related to the availability, usage and management of resources and funds. For effective implementation of strategies it is critical to formulate plans and policies in these areas efficiently.

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Exhibit 11: FINANCIAL PLAN AND POLICIES

Each of these plans and policies are discussed below:

i. Sources of funds: Plan and policies that deal with sources of funds are related to financing decisions. The major decision includes capital structure, procurement of long term and short term funds and relationship of the company with banks, lenders, borrowers and financial institutions. Out of the entire most important factor is the procurement of long and short term fund. There are various financing needs of the company some are long term and some short term for which it has different sources of funds available. To meet its short

Financial Planning

Source of fund

• Capital structure

• Procurement of capital

• Working capital borrowing

• Relationship with lenders, banks

Usage of fund

• Capital investment

• Fixed and current asset acquisition

• Loans and advances

• Dividend decisions

• Relationship with shareholders

Management of fund

• Systems of finance

• Accounting and budgeting

• Management control system

• Tax planning

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term needs, the company can go for borrowing through commercial papers or can borrow money from its creditors and to fulfill its long term needs, it can take help of the loans and advances offered by various banks and financial institutions. As in the case of Larsen & Toubro (L&T), a construction company which mainly offers construction and engineering services related to commercial projects. L&T was in need of long term financing due to conversion of development financing institutions such as IDBI into banks, the choice of sources of funds was reduced. As a result, L&T started considering other long term financing sources such as external commercial borrowings and foreign currency loans. Family businesses and professionally managed businesses in India such as Bajaj, Ambani’s and Mallya’s group have witnessed an increase of owner’s in its businesses through conversion of warrants and transfer or conversion of shares. Thus, the source of fund is a significant plan and policy decision of financial strategy implementation.

ii. Usage of funds: The plan and policies under this category deals with the investment decisions. As investments are related to the future and future is always uncertain thus the investment decision should be taken very cautiously taking all the possible risk involved into consideration. The essential factors regarding with plan and policies are made are; capital investment, investment decisions related to fixed asset and current asset, dividend decision and relationship of the company to its shareholders. This policy is important as it is related to the efficiency and effectiveness of resource and funds employment in the process of strategy implementation. This can be better understandable by an example. West Coast Paper Mills Ltd. is a mid size company in the paper industry. The company is now planning to increase its capacity by double through an investment of Rs 1100 crores. It has spent also 75 percent of its

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project cost in acquiring fixed assets. Also it has increased its plantation yield and cut down its cost in power consumption, manufacturing and maintenance.

Dividend decision is also a key area of the company’s financial policy as it affects the cost of capital of the business. A dividend policy in the public sector is governed by the Government of India. All profit making companies are obligatory to declare the higher of a minimum dividend of 20 percent on equity or a minimum of 20 percent of post tax profit. The private sector is under no such obligations of declaring its dividend.

iii. Management of funds: The area deals with the decisions related to orderly implementation of financial management. The major factors that are under this decision are: management control system, cash credit and risk management, tax planning, budgeting and cost control and reduction. The management of funds is a vital aspect in strategy implementation as it relates the funds and objectives of the company and makes sure that there is an optimum utilization of resources. For example, the cost control policy of freezing the recruitment, voluntary retirement schemes, crew layover expenditure and drastic cut in overtime payment which Air India formulated in the year 2002 led the company save Rs. 102 crores in 2002-03, Rs. 190 crores in 2003-04 and Rs.

148 crores in 2004-05.

Earlier companies used to operate on internal control and audit systems to manage its risks.

But with the changing environment companies have various other risks also like technological risk and environmental risk. For instance, Osram that manufactures energy efficient bulbs is benefited by selling their carbon credits by the introduction of carbon tax in India. Cash management is another factor which has become so complex that the companies have now outsourced it to banks. Management control system of public sector is governed by Comptroller and Auditor General of India. Some companies also opt for internal control

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system like BHEL has internal control measures for its execution of budgeting, purchase, stores, inventory and works and finance.

b) OPERATIONS PLAN AND POLICIES

The plan and policies under this category are related to production system, operational planning and control and research and development (R&D). Let’s discuss each one of the components in detail:

Exhibit 12: OPERATIONS PLAN AND POLICIES

i. Pro

Operations Planning

Production system:

• capacity, location, layout, product or service design

• work systems

• degree of automation

• Extent of vertical integration

Operation Planning and control:

• Aggregate production planning

• Inventory management

• Quality management

• Maintenance of plant

&equipments R&D

• product development

• level of technology

• technological collaboration

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i. Production system: The production system is related to the capacity, location, layout, product or service design, work systems, degree of automation etc. the plans and policies of production system are critical as it affects the main objectives of the company. Strategy implementation have to include the production system as it directly affects both the decisions that are long term in nature and the day to day operational decisions. For instance, Reliance has been successful because of its vertical integration expansion strategies. It is not necessary that the production system affects the strategic implementation of only manufacturing concerns but even in service industries it plays a vital role.

As in case of Club Mahindra, which customized its vacations offers to attract the customers.

ii. Operation Planning and control: Plans and policies of Operation planning and control are related to Aggregate production planning. The objective is optimum utilization of resources and to see that the day-to-day operations are in line with the long term objectives of the company. As in case of Instrumentation Ltd., a public sector company engaged in business of process control and automation, operations planning and control was based on the policy of ancillarisation. There were about 259 ancillary units that supply sub- assemblies and components. The company has one centralized production at Kota that plans all the functions of its ancillary units. Service industry is also now a day’s concentrating on the effective planning for its operations. TCS Financial Solutions, a Strategic Business Unit of TCS has a separate unit that deals with the production management and engineering. The implementation methodology of TCS Financial Solutions is known as Global Network Delivery

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Model (GNDM) that designs its processes and specifies infrastructure. This helped the company to wider its product and service range.

iii. Research and Development (R&D): Plan and Policies for R&D deal with product development, personnel and facilities, level of technology, technological collaboration and support etc. R&D is an important area in Indian context as the companies have access to variety of sources of technology including foreign sources. Also as India has highly qualified and low cost engineering skills, India is creating a center of attention through its R&D for many foreign companies. R&D is also used as a foundation tool for strategy implementation especially in case of diversification. Furthermore, R&D can also be used as a competitive strategic instrument. For example, Chennai-based lead acid battery leader company Amara Raja Batteries merged with Johnson Controls, the world leader in automotive system for modern technology collaboration.

c) HUMAN RESOURCE MANAGEMENT PLAN AND POLICIES

Human resource management plans and policies deal with the personnel system, organizational and employee characteristics and industrial relations. Management of Human Resource has undergone major and drastic changes in post-liberlisation environment in India.

An example of how changing have affected the HRM within the organisation can be seen in case of AV Birla group. The company went for massive shift in its HRM policy with business strategy of takeover, expansion of capacity, value addition etc. in the year 2000. Along with this, the company also underwent for restructuring a system for the close coordination between various departments. This included the top management in HR, setting up training and self-development centre, redesigning performance appraisal, applying group management

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trainee schemes at entry level and developing managers for leadership roles. The key factors that affect the Human Resource Management are discussed below:

Exhibit 13: HUMAN RESOURCE MANAGEMENT PLAN AND POLICIES

i. Personnel system: Plans and policies related to personnel system deals with manpower planning, selection, development, compensation, communication and appraisal. Mostly companies depend upon the personnel system for implementing strategies like in case of Hindustan Petroleum Corporation Ltd.

(HPCL). When oil sector deregulation came, it found itself to be not fit for the competitive market. So, the company reformulated its HR system and came

HRM Planning

Personnel system:

• manpower planning

• selection

• development

• compensation

• communication

• appraisal.

Organizational and employee characteristics:

• corporate image

• quality of management

• staff and workers

• working conditions

Industrial relations:

• union-management relationship

• collective bargaining

• safety and welfare of employees,

• employee satisfaction

• morale

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up with a transparent appraisal system, reduction in transfers to facilitate specialization and developed an effective communication system. Also Maruti-Suzuki has also adapted many of the Japanese oriented functional systems like suggestion schemes and quality circles.

ii. Organizational and employee characteristics: This includes factors such as corporate image, quality of management, staff and workers, working conditions etc. The true value of the organisation’s strategy implementation lies in the creation of an appropriate and right environment. There are some companies that build strategic competence through an effective use of organizational and employee characteristics factors. Jindal Strips Ltd., a medium sized steel making company has focused on its R&D and improvement of its original technology. The company has done this by its personnel policy of making and sustaining a strong team of engineers who are expert in developing steel making technology at a much lower cost than its competitors. In the modern business environment in India where attracting and retaining good employees is becoming difficult for the companies, corporate image and reputation plays a vital role in pulling the employees.

iii. Industrial relations: The plans and policies under this deals with the issues related to union-management relationship, collective bargaining, safety and welfare of employees, employee satisfaction, morale, etc. Industrial relations holds immense importance as it deals with the rules and regulations set by government. But the industrial relations in Indian companies have changed a lot. It was seen by the data of labour Bureau that over the period of five years 2000-2005, the strikes and lockouts in Shimla have reduced to half due to the improved laws and regulations of Industrial relations. Tata Iron Steel

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Company Ltd. (TISCO) claims that it never had any type of Industrial relations problem. It claims this because of various employee friendly personnel policies like ‘no-retrenchment policy’, dislocation of workers due to up gradation of technology and consultative participation of workers in management decisions.

d) INFORMATION TECHNOLOGY PLAN AND POLICIES

Information capability factors related to design and management of the flow of information within and from outside into, an organisation. The improvement of information technology and growth of information management as a separate specialized function has facilitated many organisations complied and organise the vast data available with the company. By digitalizing the bulk communication and data, the company can now concentrate on other important aspects and work more efficiently and effectively. There are various factors that are related to the information management system which are described below:

Exhibit 14: INFORMATION TECHNOLOGY PLAN AND POLICIES

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i. Acquisition and retention of information: Plans and policies related to this deal with factors such as sources, quality, quantity, retention capacity and security of information. IT is being adopted by almost all organisations today. It has become the integral part of all the areas of an organisation. IT helps the companies to connect to the world and also simplifies the working. For instance, Colgate Pamolive developed an application for its stockists which help the salesmen to takes orders using PDA and upload all the data at distributor’s end.

Now a day’s companies are also spending heavily on the anti-virus solutions in order to protect its IT data and information.

ii. Processing and synthesis of information: This is related to factors like data base management, computer systems and software capability. Titan, for example has developed the Oracle-ERP for managing its orders, inventory and finance.

Today Banks ATMs are constantly upgraded to offer value-added services apart from usual dispensing of cash.

IT Planning

Acquisition and

retention of information

•sources

•quality

•quantity

•retention capacity

•security of information.

Processing and synthesis of information: :

•data base management

•computer systems

•software capability.

Retrieval and usage of information:

•availability and appropriateness of information formats

• the capacity of assimilate and use information

Transmission and Dissemination:

•speed

•scope

•width

•depth of coverage of information

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iii. Retrieval and usage of information: The retrieval and usage of information deal with factors such as the availability and appropriateness of information formats and the capacity of assimilate and use information. Information retrieval and usage of information through internet has become an indispensable tool for people worldwide. Organisations are also dependent on information management for implementing and developing all its strategies and policies.

iv. Transmission and Dissemination: The plans and policies under this are related to speed, scope, width and depth of coverage of information. Today most of the big player of IT company have come up with ‘work anywhere, work anytime’

policy for the convenience of its employees. Digitalisation in various government sectors has helped the citizens to connect better with the government and get better access to the information through various government portals more easily.

5. INTEGRATION OF FUNCTIONAL PLANS & POLICIES

In order to implement strategies more efficiently and effectively, the organisations have to integrate its functional plans and policies. It is very significant for the companies to integrate the functional plans and policies for better internal consistency and to develop organizational capabilities.

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Exhibit 15: Considerations for Integrating functional plans & policies

Source: Based on theoretical matter in W.F. Glueck & L.R. Jauch, Business Policy and Strategic Management, 4^th ed. (New York: McGraw Hill, 1984); 360-62

There are several ways to integrate these plans and policies. Some of the mechanisms are given below:

1) Information system: In large organisations, the departments are linked together to work effectively as one department depends upon the information of other departments to work smoothly. Thus it is important that the various departments are linked both horizontally and cross-functionally which can be achieved through different information systems. For instance, Max Healthcare uses a hospital information system to connect all geographically dispersed locations.

2) Direct contact: One to one interactions between employees of various departments working on a project can help the organisation to achieve coordination within the various departments.

During the development of the Spectra two-wheeler at TVS Suzuki, direct contract was

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established between employees from marketing. R&D, manufacturing, engineering, sourcing and finance.

3) Task forces: Task force is an organizational unit that is created to accomplish a particular function or to resolve a special problem. A task force consists of members from various departments that work for a particular project or task.

4) Full-time integrator: Some time in a matrix type structure a department or a position solely responsible for inter-department coordination is formed which is known as Full-time integrator. A full time integrator does not report to any functional departments but works to integrate the departments.

5) Teams: A team is the strongest horizontal linkage mechanism that is a permanent task force.

Teams help organisations to build high degree coordination over a long period of time between the departments.

6. SUMMARY

 Functional strategies are defined in terms of functional plans and policies which are developed to ensure strategic decisions are implemented in all the functional areas.

 There are various sub plans and policies of functional strategies like marketing plans and policies, finance plans and policies, operations plan and policies, human resource plan and policies and information management plans and policies.

 All these sub-functions have various areas that they deal with and that makes the larger functional strategies to implement smoothly.

 It is also important for organisations to integrate these areas to work effectively and efficiently.