Unit-6 Business and Functional Strategies

This document has been prepared by Archana Shrivastava with data from various sources to aid classroom discussion . For private circulation only. Not for sale.

What is to be covered

What is Strategy? Different Levels Of Strategy Functional Strategy

Key Goals Objectives Types Of Functional Strategy

Marketing Strategy Human Resource Management Strategy Financial Strategy Research & Development Strategy Informational Management Strategy

Strategy Revisiting

What is Strategy? A strategy could be: A plan or course of action or set of decision rules making a pattern or creating a common thread. The pattern or common thread related to the organization's activities which are derived from the policies, objectives and goals

Strategy Revisiting

Related to pursuing those activities which move an organization from its current position to the desired future state. Concerned with the resources necessary for implementing a plan or following a course of action Connected to the Strategic positioning of a firm, making trade-offs between its different activities and creating a fit among these activities.

Strategy Revisiting

The planned or actual coordination of the firms major goals and actions, in time and space that continuously co-align the firm with its environment

DIFFERENT LEVELS OF STRATEGY

CORPORATE SBU A SBU B SBU C

FINANCE MARKETING OPERATIONS HRM INFORMATION

Business-Level Strategy
Business-level strategy: an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

Business-Level Strategy
The resources allocated and actions taken to achieve desired goals in serving a specific market with a highly interrelated set of goods and/or services Plans and strategies developed for
1. maintaining or gaining a competitive edge in serving its customers,

2. determining how each functional area can best contribute to its overall effectiveness, and
3. allocating resources for expansion and among its functions

Time Warner: America Online, HBO, Warner Brother Studios.

Business-Level Planning
Basic Questions
3. How will customers needs be satisfied? 2. What customer needs will be satisfied?

1. Who will be served?

The Central Role of Customers

In selecting a business-level strategy, the firm determines
1. who it will serve 2. what needs those target customers have that it will satisfy 3. how those needs will be satisfied

Managing Relationships With Customers

Customer relationships are strengthened by offering them superior value

help customers to develop a new competitive advantage enhance the value of existing competitive advantages

Five Generic Strategies

Competitive Advantage
Cost Uniqueness Differentiation Cost Leadership

Competitive Scope

Broad target

Integrated Cost Leadership/ Differentiation Narrow target

Focused Cost Leadership

Focused Differentiation

Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers relatively standardized products features acceptable to many customers lowest competitive price

Cost Leadership Strategy

Cost saving actions required by this strategy: building efficient scale facilities tightly controlling production costs and overhead minimizing costs of sales, R&D and service building efficient manufacturing facilities monitoring costs of activities provided by outsiders simplifying production processes

Differentiation Strategy
An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them

price for product can exceed what the firms target customers are willing to pay nonstandardized products customers value differentiated features more than they value low cost

Differentiation Strategy

Value provided by unique features and value characteristics Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation

Differentiation Strategy
Differentiation actions required by this strategy: developing new systems and processes shaping perceptions through advertising quality focus capability in R&D maximize human resource contributions through low turnover and high motivation

Focused Business-Level Strategies

A focus strategy must exploit a narrow targets differences from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market finding their niche

Advantages of Integrated Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: adapt quickly to environmental changes learn new skills and technologies more quickly effectively leverage its core competencies while competing against its rivals

Benefits of Integrated Strategy

Successful firms using this strategy have above-average returns Firm offers two types of values to customers some differentiated features (but less than a true differentiated firm) relatively low cost (but not as low as the cost leaders price)

Business-Level Strategic Planning Tasks and Process

Task 2: Diagnose Opportunities and Threats Industry/market competition Political forces Stakeholders expectations Values, culture Others Task 1: Develop Vision, Mission and Goal Who are we? What do we want to become? What are our goals? Task 3: Diagnose Strengths and Weaknesses Competitive position Human skills Technological capabilities Financial resources Organization and management

Evaluate against

Task 4: Develop Strategies

Evaluate against

(continued)

Business-Level Strategic Planning Tasks and Process (contd)

Task 5: Develop Strategic Plan Selected strategy or strategies (includes market segments and competitive methods) Required human skills and competencies Required technological capabilities Required financial resources Required organization and management Task 6: Prepare Tactical Plans Task 7: Control and Diagnose Results Task 8: Continue Planning

FUNCTIONAL STRATEGY

FUNCTIONAL STRATEGY Function the intended role or purpose of a person or thing Strategy : Strategy Greek word strategos generalship Definition : Functional strategy is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity .

It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. For eg: A multi- dimensional corporation has several business units. Each unit has its own business strategy Each unit has its own set of Departments And, each department has its own Functional Strategy

The orientation of the functional strategy is dictated by its Parent Business Units Strategy . For Eg: A Manufacturing Functional Strategy that emphasizes EXPENSIVE, QUALITY ASSURANCE process over CHEAPER, HIGH VOLUME PRODUCTION. A Human resource Functional Strategy that emphasizes the hiring and training of a highly skilled, but costly, WORKFORCE. A Marketing Functional Strategy that emphasizes DISTRIBUTION CHANNEL PULL using advertising to increase consumer demand over PUSH using promotional allowances to retailers.

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 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.

Types of Functional Strategies

Marketing Strategy R & D Strategy HRM Strategy Financial Strategy Information Management Strategy

Marketing Strategy

Marketing strategy deals with Pricing, selling and distributing a Product. Here the companies use 2 types of strategies: Market Development. And Product Development. In Market Development a Company or a Business Unit: Capture larger market share of an existing marketMarket saturation and Market Penetration Develop new markets for current products

CONTD

eg. Companies like UNILEVER, COLGATEPALMOLIVE, and PROCTER & GAMBLE Firstly, These companies are experts at using ADVERTISING AND PROMOTION to implement market saturation/penetration strategy Secondly, They extend PLC by introducing New and Improved variations of the products

Contd Now using the Product Development Strategy A

Company or A Business Unit can, 1) develop new products for existing markets 2) develop new products for new markets. For Eg: Gujarat Cooperative Milk Marketing Federation developed new products to sell to its existing customers Then through AMUL it introduced ICE-CREAMS and DESSERTS, HEALTH DRINKS AND SOUPS Line Extension- using a successful brand name to market other products

Contd..

PUSH STRATEGY Followed by large food Retailers-India Trade Promotions- discounts, in store special offers, and advertising allowances to push the product through the DISTRIBUTION SYSTEM Now this is done to Gain or Hold shelf space in Retail Outlets. PULL STRATEGY KELLOG Changed its strategy from push to pull Advertising pulls the products through the DISTRIBUTION CHANNELS Company spends huge money-CONSUMER ADVERTISING BUILDING BRAND AWARENESS

Other marketing strategies..

DISTRIBUTION SYSTEM: Should a company sell directly to mass merchandisers? Or should a company use distributors and dealers to sell its products?

Contd..

PRICING : Here the company can follow 2 strategies : Skim Pricing- for new products As it offers to skim the cream from the top the demand curve with HIGH PRICE while the product is novel and competitors are few Penetration Pricing- it offers the PIONEER the opportunity to use the EXPERIENCE CURVE - to gain the market share with LOW PRICE - therefore dominate the industry

Contd..

Depending on the Corporate and Business unit Objectives and strategies choices are made PENETRATION PRICING however is more likely to raise a units operating profit in the long term than SKIM PRICING.

4PS OF MARKETING

It is important that functional strategies be supportive of the overall business strategy and consistent between themselves. Price: What is included in the initial price Price level Discounts Terms Product Quality Features and options Styling Brand name Product line and related products Warranties and guarantees Service and after-sale items Promotion Advertising Personal selling Promotion Publicity Place Distribution channels Distribution coverage Inventory levels and locations Transportation methods

Human resource management (HRM) is the strategic and coherent approach to the management of an organization's most valued assets - the people Here it addresses whether a company should, Hire large no of LOW SKILLED employees( low pay), perform repetitive jobs and quit after a short time( Mc Donalds restaurant strategy) Or, Hire SKILLED EMPLOYEES who receive high pay and are trained to participate in self-managing work teams Research indicates that the use of work teams leads to increased quality and productivity as well as higher employee satisfaction and commitment.

HRM Strategy

Using PART-TIME employees- Many North American and European countries are using part time employees -Firm does not need to pay fringe benefits like health benefits and pension According to companies having a Diverse Workforce can be a competitive advantage Research reveals that with a higher degree of racial diversity following a growth strategy have higher productivity than firms with lower degree of racial diversity

Contd..

Contd..

AVON company was able to turn around its unprofitable inner-city markets by putting AfricanAmerican and Hispanic managers in charge of marketing to these markets. Human resources are the most important resources in any organization . It is the responsibility of the human resources department to ensure that the organization recruits the correct staff, and that staff receive appropriate training to ensure that the business meets its aims. Therefore, this function is central to the success of the business

FINANCIAL Strategy

It focuses on the alignment of financial management within an organization with its business and corporate strategies to gain strategic advantage.

Cont Evaluation

Forecasting, planning, budgeting Financial mix-how much capital is being raised by debt
and how much is being raised by equity.

Credit strategies Liquidity strategies Capital investment methods and systems. Other decisions Capital budget Stock dividend Cash flow Working capital Loans or leases

FINANCIAL MANAGEMENT STRATEGIES

CAPITAL ACQUISITIONS Debt Leverage, Stock Sales, & Gains from Operations

Equity financing is preferred for related diversification Debt financing is preferred for unrelated diversification Leveraged buyouts (LBOs) make the acquired firm pay off the debt

CAN WE GROW BY RELYING ON ONLY INTERNAL CASH FLOWS? DO STOCK SALES DILUTE OWNERSHIP CONTROL? DOES A LARGE DEBT RATIO CRIPPLE FUTURE GROWTH? DOES STRONG LEVERAGE BOOST EARNINGS PER SHARE? DOES HIGH DEBT DETER TAKEOVER ATTEMPTS? DO MOST LBOs UNDERPERFORM 3-4 YEARS AFTER THE BUYOUT?

RESOURCE ALLOCATIONS Dividends, Stock Price, & Reinvestment

Reinvest earnings in fast-growing companies Keeping the stockholders contented with consistent dividends Use of stock splits ( or reverses) to maintain high stock prices Tracking stock keeps interest in company, but doesnt allow

Operations Strategy: Products and Services

Make-to-Order

products and services are made to customer specifications after an order has been received products and services are made in anticipation of demand products and services add options according to customer specifications

Make-to-Stock

Assemble-to-Order

Production Strategy: Processes and technology

Project

one-at-a-time production of a product to customer order

systems process many different jobs at the same time in groups (or batches) large volumes of a standard product for a mass market used for very high volume commodity products

Batch Production

Mass Production

Continuous Production

Continuous Production
A paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels.

Mass Production
Here in a clean room a worker performs quality checks on a computer assembly line.

Batch Production
At Martin Guitars bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried.

Project
Construction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.

Operations Strategy: Capacity and Facility

Capacity strategic decisions include:

When, how much, and in what form to alter capacity Whether demand should be met with a few large facilities or with several smaller ones Whether facilities should focus on serving certain geographic regions, product lines, or customers Facility location can also be a strategic decision

Facility strategic decisions include:

Operations Strategy: Human Resources

What are the skill levels and degree of autonomy required to operate production system? What are the training requirements and selection criteria? What are the policies on performance evaluations, compensation, and incentives? Will workers be salaried, paid an hourly rate, or paid a piece rate? Will profit sharing be allowed, and if so, on what criteria?

Operations Strategy: Human Resources (cont.)

Will workers perform individual tasks or work in teams? Will they have supervisors or work in self-managed work groups? How many levels of management will be required? Will extensive worker training be necessary? Should workforce be cross-trained? What efforts will be made in terms of retention?

Operations Strategy: Quality

What is the target level of quality for our products and services? How will it be measured? How will employees be involved with quality? What will the responsibilities of the quality department be?

Operations Strategy: Quality (cont.)

What types of systems will be set up to ensure quality? How will quality awareness be maintained? How will quality efforts be evaluated? How will customer perceptions of quality be determined? How will decisions in other functional areas affect quality?

Operations Strategy: Sourcing

Vertical Integration

Strategic Decisions

degree to which a firm produces parts that go into its products

How much work should be done outside the firm? On what basis should particular items be made in-house? When should items be outsourced? How should suppliers be selected?

Operations Strategy: Sourcing (cont.)

What type of relationship should be maintained with suppliers? What is expected from suppliers? How many suppliers should be used? How can quality and dependability of suppliers be ensured? How can suppliers be encouraged to collaborate?

Operations Strategy: Operating Systems

How will operating systems execute strategic decisions? How does one align information technology and operations strategic goals? How does information technology support both customer and worker demands for rapid access, storage, and retrieval of information? How does information technology support decisions making process related to inventory levels, scheduling priorities, and reward systems?

Questions

Explain the importance of functional level Strategies. How HR strategies will be helpful in achieving the organizational objective? Is it possible for a firm to adopt a cost leadership strategy and differentiation strategy simultaneously? Critically examine. Explain what do you mean by business level Strategies.

RefrencesStrategic management and business policy- Azhar Kazmi. www.csuchico.edu ( california state university) www.andrews.edu http://learning.north.londonmet.ac. uk www.sbmt.bsu.by John Wiley & Sons, Inc.