Production/Operations
Production/operations capabilities, limitations, and policies can significantly enhance or inhibit the attainment of functional objectives.
Production decisions on plant size, plant location, product design, choice of equipment, kind of tooling, size of inventory, inventory control, quality control, cost control, use of standards, job specialization, employee training, equipment and resource utilization, shipping, and packaging, and technological innovation can have a dramatic impact on the success or failure of strategy implementation efforts.
As strategies shift over time, so must production policies covering the location and scale of manufacturing facilities, the choice of the manufacturing process, the degree of vertical integration of each manufacturing facility, the use of R&D units, the control of the production system, and the licensing of technology.
Factors that should be studied before locating production facilities include the availability of major resources, the prevailing wage rates in the area, transportation costs related to shipping and receiving, the location of major markets, political risks in the area or country, and the availability of trainable employees.
Companies are slowly realizing that a change in product strategy alters the tasks of a production system. These tasks, which can be stated in terms of requirements for cost, product flexibility, volume flexibility, product performance, and product consistency, determine which manufacturing policies are appropriate.
Just-in-time (JIT) production approaches have withstood the test of time in providing benefits for strategy implementation.
JIT significantly reduces the costs of implementing strategies. With JIT, parts and materials are delivered to a production site just as they are needed, rather than being stockpiled as a hedge against later deliveries.
A common management practice, cross-training of employees, can facilitate strategy implementation and can yield many benefits.
Employees gain a better understanding of the whole business and can contribute better ideas in planning sessions. Cross-training employees can, however, thrust managers into roles that emphasize counseling and coaching over directing and enforcing and can necessitate substantial investments in training and incentives.
For high-technology companies, production costs may not be as important as production flexibility because major product changes can be needed often.
Industries such as biogenetics and plastics rely on production systems that must be flexible enough to allow frequent changes and the rapid introduction of new products.
Human Resource
Commonly used methods that match managers with strategies to be implemented include transferring managers, developing leadership workshops, offering career development activities, promotions, job enlargement, and job enrichment.
It is surprising that so often during strategy formulation, individual values, skills, and abilities needed for successful strategy implementation are not considered. It is rare that a firm selecting new strategies or significantly altering existing strategies possesses the right line and staff personnel in the right positions for successful strategy implementation. The need to match individual aptitudes with strategy implementation tasks should be considered in strategy choice.
A well-designed strategic management system can fail if insufficient attention is given to the human resource dimension. Human resource problems that arise when businesses implement strategies can usually be traced to one of three causes: (1) disruption of social and political structures, (2) failure to match individuals’ aptitudes with implementation tasks, and (3) inadequate top management support for implementation activities.
Other new responsibilities for human resource managers may include establishing and administering an employee stock ownership plan (ESOP), instituting an effective child-care policy, and providing leadership for managers and employees in a way that allows them to balance work and family.
Strategy Impact to Human Resource
A concern in matching managers with strategy is that jobs have specific and relatively static responsibilities, although people are dynamic in their personal development.
Strategy implementation poses a threat to many managers and employees in an organization. New power and status relationships are anticipated and realized. New formal and informal groups’ values, beliefs, and priorities may be largely unknown.
Managers and employees may become engaged in resistance behavior as their roles, prerogatives, and power in the firm change.
Disruption of social and political structures that accompany strategy implementation must be anticipated and considered during strategy formulation and managed during strategy implementation.
Support to Strategy Implementation
A number of guidelines can help ensure that human relationships facilitate rather than disrupt strategy implementation efforts.
Managers can build support for strategy implementation efforts by giving few orders, announcing few decisions, depending heavily on informal questioning, and seeking to probe and clarify until a consensus emerges. Key thrusts that succeed should be rewarded generously and visibly.
The strategic responsibilities of the human resource manager include assessing the staffing needs and costs for alternative strategies proposed during strategy formulation and developing a staffing plan for effectively implementing strategies.
Chief executive officers, small business owners, and government agency heads must be personally committed to strategy implementation and express this commitment in highly visible ways. Formal statements about the importance of strategic management must be consistent with actual support and rewards are given for activities completed and objectives reached. Otherwise, the stress created by inconsistency can cause uncertainty among managers and employees at all levels. Inadequate support from management for implementation activities often undermines organizational success.
Perhaps the best method for preventing and overcoming human resource problems in strategic implementation is to actively involve as many managers and employees as possible in the process. Although time-consuming, this approach builds understanding, trust, commitment, and ownership and reduces resentment and hostility. The true potential of strategy formulation and implementation resides in people.
The human resource department must develop performance incentives that clearly link performance and pay to strategies. Linking company and personal benefits is a major new strategic responsibility of human resource managers.
The process of empowering managers and employees through their involvement in strategic management activities yields the greatest benefits when all organizational members understand clearly how they will benefit personally if the firm does well.
Employee Stock Ownership Plans (ESOPs)
An ESOP is a tax-qualified, defined-contribution, employee-benefit plan whereby employees purchase the stock of the company through borrowed money or cash contributions.
ESOPs empower employees to work as owners.
Besides reducing worker alienation and stimulating productivity, ESOPs allow firms other benefits, such as substantial tax savings. Principal, interest, and dividend payments on ESOP-funded debt are tax-deductible. Banks lend money to ESOPs at interest rates below prime.
Balancing Work Life and Home Life
Work/family strategies have become so popular that the strategies now represent a competitive advantage for those firms that offer such benefits as elder care assistance, flexible scheduling, job sharing, adoption benefits, an on-site summer camp, employee helplines, pet care, and even lawn service referrals.
A modern corporate objective to become leaner and meaner must include consideration for the fact that a good home life contributes immensely to a good work-life.
Some organizations have developed family days when family members are invited into the workplace, taken on plant or office tours, dined by management, and given a chance to see exactly what other family members do each day. Family days are inexpensive and increase the employee’s pride in working for the organization.
Flexible working hours during the week are another human resource response to the need for individuals to balance work life and home life. The work/family topic is being made part of the agenda at meetings and thus is being discussed in many organizations.
Benefits of a Diverse Workforce
An organization can perhaps be most effective when its workforce mirrors the diversity of its customers.
For global companies, this goal can be optimistic, but it is a worthwhile goal.
Corporate Wellness Programs
Wellness programs provide counseling to employees and seek lifestyle changes to achieve healthier living.
The wellness of employees has become a strategic issue for many firms. Some companies are implementing wellness programs, requiring employees to get healthier or pay higher insurance premiums.
Most firms require a health examination as a part of an employment application, and healthiness is more and more becoming a hiring factor.
Employees that do get healthier win bonuses, free trips, and pay lower premiums. Non-conforming employees pay higher premiums and receive no health benefits.
Marketing
Two variables are of central importance to strategy implementation: market segmentation and product positioning.
Market Segmentation
Market segmentation can be defined as the subdividing of a market into distinct subsets of customers according to needs and buying habits.
Market segmentation is widely used in implementing strategies, especially for small and specialized firms.
Segmentation is a key to matching supply and demand. Segmentation often reveals that large, random fluctuations in demand consist of several small, predictable, and manageable patterns.
Matching supply and demand allows factories to produce desirable levels without extra shifts, overtime, and subcontracting. Matching supply and demand also minimize the number and severity of stock-outs.
Evaluating potential market segments requires management to determine the characteristics and needs of consumers, analyze consumer similarities and differences, and develop consumer group profiles.
Segmenting consumer markets is generally much simpler and easier than segmenting industrial markets because industrial products have multiple applications and appeal to diverse customer groups.
Market segmentation is an important variable in strategy implementation for at least 3 major reasons.
First, strategies such as market development, product development, market penetration, and diversification require increased sales through new markets and products. To implement these strategies successfully, new, or improved market segmentation approaches are required.
Second, market segmentation allows a firm to operate with limited resources because mass production, mass distribution, and mass advertising are not required. Market segmentation enables a small firm to compete successfully with a large firm by maximizing per-unit profits and per-segment sales.
Finally, market segmentation decisions directly affect marketing mix variables: product, place, promotion, and price.
Product Positioning
Product positioning is widely used for the purpose of deciding how to meet the needs and wants of particular consumer groups.
Positioning entails developing schematic representations that reflect how your products or services compare to competitors on dimensions most important to success in the industry.
There are large differences between how customers define service and rank the importance of different service activities and how producers view services.
Many firms have become successful by filling the gap between what customers and producers see as good service. What the customer believes is good service is paramount, not what the producer believes service should be.
There are 3 rules applied for how to use product positioning as a strategy implementation tool.
They are: (1) look for the hole or vacant niche as the best strategic opportunity might be an unserved segment; (2) don’t serve two segments with the same strategy because usually a strategy successful with one segment cannot be directly transferred to another segment; (3) don’t position yourself in the middle of the map because the middle usually means a strategy that is not clearly perceived to have any distinguishing characteristics.
There are 2 criteria for an effective product positioning strategy.
They are: (1) it uniquely distinguishes a company from the competition, and (2) it leads customers to expect slightly less service than a company can deliver.
There are 5 steps required in executing product positioning.
They are (1) select key criteria that effectively differentiate products or services in the industry; (2) diagram a two-dimensional product-positioning map with specified criteria on each axis; (3) plot major competitors’ products or services in the resultant four-quadrant matrix; (4) identify areas in the positioning map where the company’s products or services could be most competitive in the given target market and look for vacant areas (niches); and (5) develop a marketing plan to position the company’s products or services appropriately.
Because just two criteria can be examined on a single product-positioning map, multiple
maps are often developed to assess various approaches to strategy implementation. Multidimensional scaling could be used to examine three or more criteria simultaneously, but this technique requires computer assistance.
Finance/Accounting
There are several finance/accounting concepts considered to be central to strategy implementation: (1) acquiring needed capital, (2) developing projected financial statements, (3) preparing financial budgets, and (4) evaluating the worth of a business.
Acquiring Capital to Implement Strategies
Successful strategy implementation often requires additional capital.
Besides net profit from operations and the sale of assets, two basic sources of capital for an organization are debt and equity. Determining an appropriate mix of debt and equity in a firm’s capital structure can be vital to successful strategy implementation.
An Earnings Per Share/Earnings Before Interest and Taxes (EPS/EBIT) analysis is the most widely used technique for determining whether debt, stock, or a combination of debt and stock is the best alternative for raising capital to implement strategies.
This technique involves an examination of the impact that debt versus stock financing has on earnings per share under various assumptions as to EBIT.
Theoretically, an enterprise should have enough debt in its capital structure to boost its return on investment by applying debt to products and projects earning more than the cost of the debt. In low earning periods, too much debt in the capital structure of an organization can endanger stockholders’ returns and jeopardize company survival. Fixed debt obligations generally must be met, regardless of circumstances. This does not mean that stock issuances are always better than debt for raising capital. Some special concerns with stock issuances are dilution of ownership, effect on stock price, and the need to share future earnings with all new shareholders.
Projected Financial Statements
Projected financial statement analysis is a central strategy implementation technique because it allows an organization to examine the expected results of various actions and approaches.
This type of analysis can be used to forecast the impact of various implementation decisions. Nearly all financial institutions require at least three years of projected financial statements whenever a business seeks capital.
A projected income statement and balance sheet allow an organization to compute projected financial ratios under various strategy implementation scenarios. When compared to prior years and to industry averages, financial ratios provide valuable insights into the feasibility of various strategy implementation approaches.
There are 6 steps in performing projected financial analysis.
They are: (1) prepare the projected income statement before the balance sheet; (2) use the percentage-of-sales method to project cost of goods sold (CGS) and the expense items in the income statement; (3) calculate the projected net income; (4) subtract from the net income any dividends to be paid for that year; (5) project the balance sheet items, beginning with retained earnings and then forecasting stockholders’ equity, long-term liabilities, current liabilities, total liabilities, total assets, fixed assets, and current assets; and (6) list comments (remarks) on the projected statements.
Financial Budgets
A financial budget is a document that details how funds will be obtained and spent for a specified period of time.
Annual budgets are most common, although the period of time for a budget can range from one day to more than 10 years. When an organization is experiencing financial difficulties, budgets are especially important in guiding strategy implementation.
Fundamentally, financial budgeting is a method for specifying what must be done to complete strategy implementation successfully. Financial budgeting should not be thought of as a tool for limiting expenditures but rather as a method for obtaining the most productive and profitable use of an organization’s resources.
Some common types of budgets include cash budgets, operating budgets, sales budgets, profit budgets, factory budgets, capital budgets, expense budgets, divisional budgets, variable budgets, flexible budgets, and fixed budgets.
Financial budgets have some limitations.
First, budgetary programs can become so detailed that they are cumbersome and overly expensive. Overbudgeting or underbudgeting can cause problems.
Second, financial budgets can become a substitute for objectives. A budget is a tool and not an end in itself. Third, budgets can hide inefficiencies if based solely on precedent rather than on a periodic evaluation of circumstances and standards.
Third, budgets are sometimes used as instruments of tyranny that result in frustration, resentment, absenteeism, and high turnover. To minimize the effect of this concern, managers should increase the participation of subordinates in preparing budgets.
Evaluating the Worth of a Business
Evaluating the worth of a business is central to strategy implementation because integrative, intensive, and diversification strategies are often implemented by acquiring other firms.
Other strategies, such as retrenchment and divestiture, may result in the sale of a division of an organization or of the firm itself.
Business evaluations are becoming routine in many situations. Businesses have many strategy implementation reasons for determining their worth in addition to preparing to be sold or to buy other companies. Employee plans, taxes, retirement packages, mergers, acquisitions, expansion plans, banking relationships, death of a principal, divorce, partnership agreements, and IRS audits are other reasons for a periodic valuation.
All the various methods for determining a business’s worth can be grouped into three main approaches: what a firm owns, what a firm earns, or what a firm will bring in the market. But it is important to realize that valuation is not an exact science. The valuation of a firm’s worth is based on financial facts, but common sense and intuitive judgment must enter into the process.
It is difficult to assign a monetary value to some factors—such as a loyal customer base, a history of growth, legal suits pending, dedicated employees, a favorable lease, a bad credit rating, or good patents—that may not be reflected in a firm’s financial statements.
Evaluating the worth of a business requires both qualitative and quantitative skills. Different approaches will yield different totals for a firm’s worth, and no prescribed approach is best for a certain situation. Here are the 4 most common approaches.
The first approach in evaluating the worth of a business is determining its net worth or stockholders’ equity. Net worth represents the sum of common stock, additional paid-in capital, and retained earnings. After calculating net worth, add or subtract an appropriate amount for goodwill, overvalued or undervalued assets, and intangibles.
The second approach to measuring the value of a firm grows out of the belief that the worth of any business should be based largely on the future benefits its owners may derive through net profits. A conservative rule of thumb is to establish a business’s worth as five times the firm’s current annual profit. A five-year average profit level could also be used. When using the approach, remember that firms normally suppress earnings in their financial statements to minimize taxes.
The third approach is called the price-earnings ratio method. To use this method, divide the market price of the firm’s common stock by the annual earnings per share and multiply this number by the firm’s average net income for the past five years.
The fourth approach can be called the outstanding shares method. To use this method, simply multiply the number of shares outstanding by the market price per share and add a premium. The premium is simply a per-share dollar amount that a person or firm is willing to pay to control (acquire) the other company.
Research and Development (R&D)
The research and development (R&D) function is generally charged with developing new products and improving old products in a way that will allow effective strategy implementation.
Strategies such as product development, market penetration, and related diversification require that new products be successfully developed and that old products be significantly improved. But the level of management support for R&D is often constrained by resource availability.
Technological improvements that affect consumer and industrial products and services shorten product life cycles. Companies in virtually every industry are relying on the development of new products and services to fuel profitability and growth.
R&D employees and managers perform tasks that include transferring complex technology, adjusting processes to local raw materials, adapting processes to local markets, and altering products to particular tastes and specifications.
Well-formulated R&D policies match market opportunities with internal capabilities.
R&D policies can enhance strategy implementation efforts to (1) emphasize a product or process improvements; (2) stress basic or applied research; (3) be leaders or followers in R&D; (4) spend a high, average, or low amount of money on R&D; (5) perform R&D within the firm or to contract R&D to outside firms; and (6) use university researchers or private-sector researchers.
Internal Communication and External Coordination in R&D
There must be effective interactions between R&D departments and other functional departments in implementing different types of generic business strategies.
Conflicts between marketing, finance/accounting, R&D, and information systems departments can be minimized with clear policies and objectives.
There needs to be expanded communication between R&D managers and management. Corporations are experimenting with various methods to achieve this improved communication climate, including different roles and reporting arrangements for managers and new methods to reduce the time it takes research ideas to become reality.
Perhaps the most current trend in R&D management has been lifting the veil of secrecy whereby firms, even major competitors, are joining forces to develop new products.
Collaboration is on the rise due to new competitive pressures, rising research costs, increasing regulatory issues, and accelerated product development schedules.
Companies not only are working more closely with each other on R&D, but they are also turning to consortia at universities for their R&D needs.
The lifting of R&D secrecy among many firms through collaboration has allowed the marketing of new technologies and products even before they are available for sale.
Internal vs. External R&D
Many firms wrestle with the decision to acquire R&D expertise from external firms or to develop R&D expertise internally.
If the rate of technical progress is slow, the rate of market growth is moderate, and there are significant barriers to possible new entrants, then in-house R&D is the preferred solution. The reason is that R&D, if successful, will result in a temporary product or process monopoly that the company can exploit.
If technology is changing rapidly and the market is growing slowly, then a major effort in R&D may be very risky, because it may lead to the development of ultimately obsolete technology or one for which there is no market.
If technology is changing slowly but the market is growing quickly, there generally is not enough time for in-house development. The prescribed approach is to obtain R&D expertise on an exclusive or nonexclusive basis from an outside firm.
If both technical progress and market growth are fast, R&D expertise should be obtained through the acquisition of a well-established firm in the industry.
R&D Approaches for Implementing Strategies
There are 3 major R&D approaches for implementing strategies.
The first approach is to be the first firm to market new technological products. This is a glamorous and exciting approach but also a dangerous one.
A second R&D approach is to be an innovative imitator of successful products, thus minimizing the risks and costs of a start-up.
This approach entails allowing a pioneer firm to develop the first version of the new product and to demonstrate that a market exists. Then, laggard firms develop a similar product. This strategy requires excellent R&D personnel and an excellent marketing department.
A third R&D approach is to be a low-cost producer by mass-producing products similar to but less expensive than products recently introduced.
As a new product is accepted by customers, price becomes increasingly important in the buying decision. Also, mass marketing replaces personal selling as the dominant selling strategy.
This R&D strategy requires substantial investment in plant and equipment but fewer expenditures in R&D than the two approaches described previously.
Management Information System (MIS)
Having an effective management information system (MIS) may be the most important factor in differentiating successful from unsuccessful firms. The process of strategic management is facilitated immensely in firms that have an effective information system.
Firms that gather, assimilate, and evaluate external and internal information most effectively are gaining competitive advantages over other firms.
Like inventory and human resources, information is now recognized as a valuable organizational asset that can be controlled and managed. Firms that implement strategies using the best information will reap competitive advantages.
Information collection, retrieval, and storage can be used to create competitive advantages in ways such as cross-selling to customers, monitoring suppliers, keeping managers and employees informed, coordinating activities among divisions, and managing funds.
A good information system can allow a firm to implement strategies that reduce costs. Improved quality and service often result from an improved information system. Information systems can facilitate direct communications between suppliers, manufacturers, marketers, and customers and link together these elements of the value chain as though they were one organization.
Resources
Further Reading
- Functional Strategy (businessmanagementideas.com)
- Functional strategy: What is it and why develop one? (thinkinsights.net)
- Developing Functional Strategies (strategy-implementation.24xls.com)
- Steps to Successful Functional Strategic Planning (gartner.com)
- Functional Business Strategy (smallbusiness.chron.com)
- Functional Strategy, game plan to reinforce all 3 levels of Corporate, Business and Operations Strategy Hierarchy (edglabs.com)
- Functional Level Strategy: What It Is Plus 18 Examples (getsling.com)
- Functional strategy (ceopedia.org)
- Aligning Functional Strategy with Corporate Strategy (cascade.app)
Even More Reading
- Functional Level Strategy (businessjargons.com)
- Functional Level Strategy (citeman.com)
- Functional Tactics & Implementation (onstrategyhq.com)
Related Concepts
References
- Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
- Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.
- Mastering Strategic Management. (2016, January 18). Open Textbooks for Hong Kong.
- Wheelen, T. L. (2021). Strategic Management and Business Policy: Toward Global Sustainability 13th (thirteenth) edition Text Only. Prentice Hall.