Functional Strategies

Copyright © Universidad San Ignacio de Loyola. Todos los derechos reservados.

Contents

Marketing Strategies

Purchasing Strategies

Logistics Strategies

R&D Strategies

Operations Strategies
 Functional Strategy
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.

Functional Strategy
 The Concept of Core Competency
Core competency is something that a corporation can do exceedingly
well.

It is a key strenght.

It may also be called a core capability because it includes a number of

constituent skills.

When these competencies or capabilities are superior to those of the

competition, they are called distinctive competencies.

Even though a distinctive competency is certainly considered a corporation´s

key strength, a key strength is not always considered to be a distinctive
competency.
 The Concept of Core Competency
To be considered a distinctive competency, the competency must
meet three tests:

1. Customer Value: it must make a disproportionate contribution to

customer perceived value.

2. Competitor Unique: it must be unique and superior to competitor

capabilities.

3. Extendibility: it must be something that can be used to develop new

products / services or enter new markets.
 Exercise: Amazon
Analize Amazón´s distinctive competencies and determine each one
of the following:

1. Customer Value:

2. Competitor Unique:

3. Extendibility:
 Exercise: Apple
Analize Apple´s distinctive competencies and determine each one of
the following:

1. Customer Value:

2. Competitor Unique:

3. Extendibility:
The Concept of Core Competency
A corporation can gain access to a distinctive competency in four
ways:

1. It may be an asset endowment, such as a key patent.

2. It may be acquired from someone else.

3. It may be shared with another business unit or alliance partner.

4. It may be carefully built and accumulated over time within the

company.
 Functional Strategy
For a functional strategy to have the best chance of success, it
should be built on a distinctive competency residing within that
functional area.
If a corporation does not have a distinctive competency in a particular
functional area, that functional area could be a candidate for
outsourcing.
The Concept of Outsourcing
Outsourcing is purchasing from someone else a product or
service that had been previously provided internally.
Outsourcing is becoming an increasingly important part of strategic
decision making and an important way to increase efficiency and often
quality.

The Concept of Outsourcing

 The Sourcing Decision
Where should a function be housed? Should it be integrated within the
organization or purchased from an outside contractor?

The key to outsourcing is to purchase from outside only those activities

that are not key to the company´s distinctive competencies.

A firm should consider outsourcing any activity or function that has low
potential for competitive advantage.
Examples of outsourcing?
Is it risky to outsource too many
activities?
 The Concept of Outsourcing
The Sourcing Decision:

Some authorities propose that the cumulative effects of continued

outsourcing steadly reduces a firm´s ability to learn new skills and to
develop new core competencies.
 Functional Strategies
In determining functional strategies, the strategist must:

• Identify the company´s or business unit´s core competencies.

• Ensure that the competencies are continually being strengthened.

• Manage the competencies in such a way that best preserves the

competitive advantage they create.
Functional Strategies
• Marketing Strategies. • Research and Development
Strategies.
• Financial Strategies.
• Human Resources Strategies.
• Operations Strategies.
• Information Technology Strategies.
• Logistics Strategies.

• Purchasing Strategies.
Marketing Strategies
Marketing Strategy
Marketing Strategy deals with developing new products, pricing,
selling.
Marketing Strategy
Developing New Products: Marketing Managers will follow two types
of strategies:

• Market Development Strategy.

• Product Development Strategy.

Market Development Strategy
Using a market development strategy, a company or business unit
can:

(1) Capture a larger share of an existing market for current products

through market penetration, or

(2) Develop new markets for current products.

Market Development Strategy
Product Development Strategy
Using a product development strategy, a company or business
can:

(1) Develop new products for existing markets, or

(2) Develop new products for new markets.

Product Development Strategy
Marketing Strategy
Selling: Marketing Managers will follow two types of strategies:

Push Strategy: spending a large amount of money on trade promotion in

order to gain or hold shelf space in retail outlets. Trade promotion includes
discounts, in-store special offers, and advertising allowances designed to
«push» products through the distribution system.

Pull Strategy: advertising «pulls» the products through the distribution

channels. The company now spends more money on consumer advertising
designed to build brand awareness so that shoppers will ask for the
products. Research has indicated that a high level of advertising (a key part
of a pull strategy) is most beneficial to leading brands in a market.
Push Strategy
Pull Strategy
Marketing Strategy
Pricing: Marketing Managers will follow two types of strategies:

Skim Pricing Strategy: for new-product pioneers, skim pricing offers the
opportunity to «skim the cream» from the top of the demand curve with a
high price while the product is novel and competitors are few.
Penetration Pricing Strategy: this strategy attempts to hasten market
development and offers the pioneer the opportunity to use the experience
curve to gain market share with a low price and dominate the industry.
Penetration pricing is more likely than skim pricing to raise a unit´s
operating profit in the long term.
Skim Pricing
Penetration Pricing
Purchasing Strategies
Purchasing Strategy
Purchasing Strategy deals with obtaining the raw materials, parts, and
supplies needed to perform the operations function.

Some purchasing choices are:

1. Multiple Sourcing.

2. Sole Sourcing.

3. Parallel Sourcing.
Multiple Sourcing
Multiple Sourcing: the purchasing company orders a particular product or
service from several suppliers.

Multiple sourcing has traditionally been considered superior to other

purchasing approaches because:

(1) It forces suppliers to compete for the business of an important buyer,

thus reducing purchasing costs; and

(2) If one supplier could not deliver, another usually could, thus
guaranteeing that parts and supplies would always be on hand when
needed.
Multiple Sourcing
Multiple Sourcing
Advantages:

• Low cost (suppliers compete for the offer).

• Low risk (of supply).

Disadvantages:

• Low quality (quality may suffer).

Sole Sourcing
Sole sourcing relies on only one supplier
for a particular product or service.

W. Edward Deming, a well-known

management consultant, strongly
recommended sole sourcing as the only
manageable way to obtain high supplier
quality.

Supplier and Buyer will become strategic

partners, working together to achieve the
highest quality possible.
Sole Sourcing
The supplier may have offices and desks inside the customer´s facilities,
attend production status meetings, visit the R&D lab, and analyze the
purchasing company´s sales forecasts.

Sole sourcing reduces transactions costs and builds quality by having

purchaser and supplier work together as partners rather than as
adversaries.

This type of strategy relates to Value Chain Partnership.

Sole Sourcing
Sole Sourcing
Advantages:

• High quality.

Disadvantages:

• Risk of supply (if a supplier is unable to deliver a part, the purchaser has
no alternative but to delay production).
Parallel Sourcing
Parallel sourcing: two suppliers are the sole suppliers of two different parts,
but they are also backup suppliers for each other´s parts.

In case one vendor cannot supply all of its parts on time, the other vendor
would be asked to make up the difference.

The limitations of sole sourcing have led to the development of parallel

sourcing.
Parallel Sourcing
Example: automobile industry
(General Motors)

Brake System

Brake Parts Inc.

Safety Brake Set Inc.

Logistics Strategies
Logistics Strategy
Logistics Strategy deals with the flow of products into and out of the
manufacturing process.

There are two types of strategies:

1. Centralization.

2. Outsourcing.
Centralization
Centralization: the company centralizes all logistics activities internally.

This means the company has integrated vertically.

The idea is to gain logistical synergies across business units and reduce
costs.

Big companies working by economies of scale and following the low cost
advantage will prefer this type of strategy.
Centralization
Centralization
Outsourcing
Outsourcing: many companies have found that outsourcing logistics
activities reduces costs and improves delivery time.

This trend arose in the second half of the 90’s where logistics operations
expanded from 12% (1995) to 30% (1999).

The outsourcing companies receive the name of Third-Party-Logistics

Providers (3PLs).

Logistics activities that may be outsourced: production planning,

warehousing, order management, picking, packing, transportation, etc.
Outsourcing
Research & Development Strategies
Research and Development (R&D) Strategy
R&D Strategy deals with product and process innovation and
improvement.

It also deals with appropriate mix of different types of R&D (basic, product, or
process) and with the question of how new technology should be accessed –
internal development, external acquisition, or through strategic alliances.

We can identify two types of strategies here:

(1) Technological leader in which one pioneers an innovation; or

(2) Technological follower in which one imitates the products of
competitors.
Research and Development (R&D) Strategy
Porter suggests that deciding to become a technological leader or follower
can be a way of achieving either overall low cost or differentiation.

An increasing number of companies are working with their suppliers to help

them keep up with changing technology.

Strategic technology alliances are one way to combine the R&D capabilities
of two companies.
R&D Strategies

Technological
Leader
Technological
Follower
Question
Match the following two R&D Strategies with Porter´s view of lower cost and
differentiation strategy:

A. Technological leader _________________________________

B. Technological follower _________________________________

Operations Strategies
Operations Strategy
Operations Strategy deals with:

• How and where a product or service is to be manufactured,

• The level of vertical integration in the production process,

• The deployment of physical resources, and relationships with suppliers,

• The optimum level of technology the firm should use in its operations
processes.

• Quality assurance.
Operations Strategy
The objective of a operations strategy is to build a production
process that meets customer requirements and product
specifications within cost and other managerial constraints
There are Four Operations Strategies:
 Process Focus.
 Repetitive Focus.
 Product Focus.
 Mass Customization Focus.
Process Focus
• Often referred as job shop.
• Facilities are organized around specific activities or processes.
• General purpose equipment and skilled personnel.
• High degree of product flexibility.
• Typically high costs and low equipment utilization.
• Product flows may vary considerably making planning and scheduling a
challenge.
• Low Volume.
• High Variety.
Process Focus
Repetitive Focus
 Facilities often organized as assembly lines.
 Characterized by modules with parts and assemblies made previously.
 Modules may be combined for many output options.
 Less flexibility than process-focused facilities but more efficient.
 Moderate Volume.
 Moderate Variety.
Repetitive Focus
Product Focus
 Facilities are organized by product.
 High volume but low variety of products.
 Long, continuous production runs enable efficient processes.
 Typically high fixed cost but low variable cost.
 Generally less skilled labor.
 High volume.
 Low variety.
Product Focus
D A Scrap
Nucor Steel Plant steel

Continuous caster
B
C Electric
Ladle of molten steel furnace

Continuous cast steel

sheared into 24-ton slabs
Hot tunnel furnace - 300 ft
E F

Hot mill for finishing, cooling, and coiling

H G
I
Mass Customization Focus
 The rapid, low-cost production of goods and service to satisfy
increasingly unique customer desires.
 Combines the flexibility of a process focus with the efficiency of a
product focus.
 Imaginative and fast product design.
 Rapid process design.
 Tightly controlled inventory management.
 Tight schedules.
 Responsive supply chain partners.
 High variety.
 High volume.
Mass Customization Focus
Number of Choices
Item 1970s 21st Century
Vehicle models 140 286
Vehicle types 18 1,212
Bicycle types 8 211,000
Software titles 0 400,000
Web sites 0 162,000,000
Movie releases per year 267 765
New book titles 40,530 300,000
Houston TV channels 5 185
Breakfast cereals 160 340
Items (SKUs) in 14,000 150,000
supermarkets
LCD TVs 0 102
Mass Customization Focus
Mass Customization Focus
Financial Strategies
Financial Strategy
Financial Strategy examines the financial implications of strategic options at
the corporate and business level and identifies the best financial course of
action.

It can also provide a competitive advantage through lower cost of funds and a
flexible ability to raise capital to support a business strategy.

The financial strategy generally tries to maximize the financial value of the
company.
Financial Strategy
There are basically two types of Financial Strategy:

Internal Financing: refers to the resources that the company reinvests from
the undistributed benefits.

External Financing: comes from sources outside the company:

• Issuance of Shares.
• Bank loans.
Human Resources Strategies
Human Resource Strategy
The Human Resources Strategy focuses on recruiting and assigning
workers to the different areas of the company.

Some of the strategies followed:

• Full-time workforce.
• Outsourced workforce.
• Full-time workforce with overtime.
Human Resource Strategy

Overtime
Information Technology Strategies
Information Technology Strategy
Information Technology Strategies are related to the use of computers
and communications equipment to effectively manage data and provide
support to a company's operations.

Information Technologies are today powerful tools that give companies a

significant competitive advantage.

Information Technologies take on special importance by establishing strong

and close relationships between the company and its customers and
suppliers.
Information Technology Strategy
There are two types of strategies:

• Centralization: centralizes all IT activities within the organization.

• Outsourcing: Outsource one or more of the IT functions in one or
different companies that provide technological outsourcing.
 Thanks!

Ronald Huerta-Mercado H. – [email protected]