CBMEC 413 Strategic Management Functional Strategy Notes PDF

SUPPLEMENTARY NOTES 4 CBMEC 413 – STRATEGIC MANAGEMENT STRATEGY FORMULATION: FUNCTIONAL STRATEGY LEARNING OBJECTIVES At the end of the module, the learners must be able to: discuss what functional strategy is; explain h...

SUPPLEMENTARY NOTES 4 CBMEC 413 – STRATEGIC MANAGEMENT STRATEGY FORMULATION: FUNCTIONAL STRATEGY LEARNING OBJECTIVES At the end of the module, the learners must be able to: discuss what functional strategy is; explain how firms use functional strategies for their competitive advantage; enumerate the different types of functional strategies; discuss the different types of functional strategies; and use the different types of functional strategies in order to provide competitive advantage for businesses. FUNCTIONAL STRATEGY Bamford, Hoffman, Hunger, and Wheelen (2018) stated that a functional strategy is an approach in achieving 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. Just as a multidivisional corporation has several business units, each with its own business strategy, each business unit has its own set of departments, each with its own functional strategy. The orientation of a functional strategy is dictated by its parent business unit’s strategy. For example, a business unit following a competitive strategy of differentiation through high quality might require a manufacturing functional strategy that emphasizes expensive quality assurance processes over cheaper, high- volume production; a human resource functional strategy that emphasizes the hiring and training of a highly skilled, but costly, workforce; and a marketing functional strategy that emphasizes distribution channel using advertising to increase consumer demand over using promotional allowances to retailers. Functional strategies also vary from region to region. For instance, when Mr. Donut expanded into Japan, the company had to market donuts not as breakfast, but as snack food. Because the Japanese had no breakfast coffee-and-donut custom, they preferred to eat the donuts in the afternoon or evening. Mr. Donut restaurants were thus located near railroad stations and supermarkets. All signs were in English to appeal to the Western interests of the Japanese. TYPES OF FUNCTIONAL STRATEGY Functional strategies are classified as marketing strategy, financial strategy, and operations strategy. 1. Marketing Strategy. It deals with pricing, selling, and distributing a product or service. The marketing strategy can be classified as follows: a. Market Development Strategy. A company or business unit can capture a larger share of an existing market for current products through market saturation or wide distribution of product to penetrate the market. In addition, a company may also develop new uses and/or markets for current products, using this classification of marketing strategy. EXAMPLE: Consumer product giants such as P&G, Colgate-Palmolive, and Unilever are experts at using advertising and promotion to implement a market saturation/penetration strategy to gain the dominant market share in a product category. 1  b. Product Development Strategy. A company or business unit can develop new products for existing markets or develop new products for new markets. EXAMPLE: Considering the growing environmental concerns among consumers, rising gasoline prices, and a desire for a reliable vehicle, Nissan embarked on becoming the first to develop an electric vehicle. The Nissan Leaf was rolled out for public purchase in 2008. Nissan has remained a leader in the electric vehicle market (Leonard,2019). c. Brand Extension. A company or business unit may use a successful brand name to market other products. EXAMPLE: Dove began as a brand solely known for its bars of soap. The company grew to become a superpower in the shampoo, deodorant, and body wash markets by adding these variants to its already existing and successful product line. d. Push Strategy. A company or business unit may engage in trade promotion to gain shelf space in retail outlets. Trade promotion includes discounts, in-store special offers, and advertising allowances designed to “push” products through the distribution system. EXAMPLE: Major handset manufacturers, such as Samsung, promote its products via retailers by offering subsidies on the handsets to encourage retailers to sell higher volumes. e. Pull Strategy. A company or business unit may engage in wide consumer advertising designed to build brand awareness so that shoppers will ask for the products and services being offered by the company. EXAMPLE: YouTube advertisements which include sales promotions, discounts, or two-for-one offers that build demand through social media and not on the actual retail store 2. Financial Strategy. It examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action. It also provides a competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy. This strategy can be classified as follows: a. Equity Financing. A corporation can raise capital by selling company stock to investors. In return for the investment, the shareholders receive ownership interests in the company. b. Debt Financing. A corporation can raise capital by borrowing money to acquire an asset. The sources of capital in debt financing includes financial institutions such as bank and insurance companies. 3. Operations Strategy. It determines how and where a product or service is to be manufactured or delivered, the level of vertical integration in the production process, deployment of physical resources, and relationships with suppliers. It also deals with the optimum level of technology the firm should use in its operations processes. A firm’s strategy is often affected by the popularity of the product or service. In the case of manufacturing firms, an increase in sales means an increase in production volume, which dictates the appropriate strategy that the firm must employ. Whereas for service-oriented firms, the level of service can be classified based on service quality, reasonable price, reliable delivery, and flexibility of the service design. a. Types of Operations Strategies for Manufacturing Firms Job Shop. In this strategy, small manufacturing system handles customized production using skilled labor. Connected Line Batch Flow. In this strategy, each machine functions like a job shop but is positioned in the same order as the parts are processed. It is used when product components are standardized. Flexible Manufacturing Systems. In this strategy, parts are grouped into manufacturing families to produce a wide variety of mass-produced items. 2  Dedicated Transfer Lines. In this strategy, highly automated assembly lines create a single mass-produced product using little human labor. Mass-Production System. In this strategy, a large number of low-cost, standardized goods and services can be produced. Mass Customization. In this strategy, people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it. b. Types of Operations Strategies for Service-Oriented Firms Quality. Service-oriented firms must ensure that they deliver error-free services that match customers’ needs based on standard requirements. It may also pertain to the quality of the delivery process which establishes a reliable image to the clients Flexibility. Service-oriented firms must ensure that their service design can handle the multiple demands of the clients. They must also anticipate unexpected circumstances based on changing consumer preferences, which may require them to adjust or completely modify their service design. Speed. Service-oriented firms must pay attention to their scheduling and capacity planning management to be able to deliver their services at an acceptable period of time. Dependability. Service-oriented firms must be consistent in the value which their service provides. They must forecast possible future problems and lay down preventive measures that will solve the identified problems. Cost. Service-oriented firms must maintain reasonable prices for their services by analyzing where their operations costs are incurred and cutting down on unnecessary expenses. 3