Operations & Finance

Functional Strategies:
Support and Drivers of Corporate Change

Third O. Dacanay
MM 291.1 (Strategic Management I)
Institute of Management, UP Baguio
Objectives of the session

At the end of the lecture, students

should be able to:
¡ Recall and revisit the different
functional (OM & Finance)
strategies;
¡ Relate strategies across functions;

¡ Reconfigure functional strategies

either to support or drive corporate
or business strategies.
 Corporate Strategy Decisions:
•What business to be in, i.e. how diversified to be?
•What businesses to acquire and what to divest?
•How to allocate cash to different businesses?
•How to manage the relationships between different businesses?

Business (SBU or Division) Strategy Decisions:

Top-down perspective

•Defining the mission of the business

(strategy formulation)

•Defining the strategic objectives of the business such as:

growth targets; ROI; profitability targets; cash generation
•Setting the way that the SBU wishes to compete in its markets

Functional Strategy Decisions:

•What role to play in contributing to the strategic objectives of
the business?
•How to translate business and competitive objectives into
functional objectives?
How to manage the function’s resources so as to achieve
functional objectives?
•What performance improvement priorities to establish?
Bottom-up perspective
(strategy formation)

Consolidated
into a
formal
strategy

Emergent
sense
of what the
Day-to-day
strategy
experiences
should be
and learning
 Relationship between business
strategy and the functional strategies
Business Strategy
Defines the long range
plan for the company

Operations Strategy
Marketing Strategy Finance Strategy
Develops a plan for the
Defines marketing plans Develops financial plans
Operations function to
to support the business to support the business
support the business
strategy strategy
strategy

Functional Strategies can also drive Business Strategies

Developing an Operations Strategy

Operations strategy focuses on

specific capabilities of the operation
that give the firm a competitive
edge.
Operations strategy focuses on four
competitive priorities:
1. Cost 3. Time
2. Quality 4. Flexibility
Competitive Priorities of Operations
Strategy
1. Cost
¡ Companies that compete based on cost study
their operations system carefully to eliminate all
waste;
¡ Offer extra training to employees to maximize
their productivity and minimize scrap;
¡ Invest in automation in order to increase
productivity;
¡ Generally, companies that compete on cost offer
a narrow range of products and product
features, allow for little customization; and have
an operations process that is designed to be as
efficient as possible.
Competitive Priorities of Operations
Strategy

2. Quality
¡ High performance design focuses on
aspects of quality such a superior
features, close tolerances, high durability
and excellent customer service (product
design quality)
¡ Product and service consistency measures
how often the product or service meets
the exact design specifications (process
quality)
Competitive Priorities of Operations
Strategy
3. Time
¡ Rapid delivery refers to how quickly an
order is received
¡ On-time delivery refers to the number of
times deliveries are made on time
¡ Critically analyze the system and combine
or eliminate processes in order to save
time: use technology to speed up
processes; rely on flexible workforce to
meet peak demand periods; eliminate
unnecessary steps in the production
process.
Competitive Priorities of Operations
Strategy
4. Flexibility
¡ Ability to readily accommodate environmental
(including customer needs and expectations)
changes
¡ Ability to offer a wide variety of products or
services and customize them to the unique
needs of clients: quickly add new products that
may be important to customers or easily drop a
product that is not doing well (product
flexibility)
¡ Ability to rapidly increase or decrease the
amount produced in order to accommodate
changes in the demand (volume flexibility).
Competitive Priorities of Operations
Strategy

To decide which competitive priorities

to focus on:
¡ Order qualifiers—competitive
priorities that must be met for a
company to qualify as a competitor
in the marketplace
¡ Order winners—competitive
priorities that win orders in the
marketplace.
 Link to competitive advantage

RESOURCES Necessary Unique

resources resources

Threshold Core
COMPETENCES competences competences

Same as competitors Better than competitors

(Easy to imitate) and difficult to imitate
Translating Competitive Priorities of
Operations Strategy into P/O Requirements

Operations strategy will specify the design

and use of the organization’s resources
into two categories:

1. Structure—operations decisions related

to the design of the production process
such as characteristics of facilities used;
selection of appropriate technology, and
the flow of goods and services through
the facility.
Translating Competitive Priorities of
Operations Strategy into P/O Requirements

2. Infrastructure—operations decisions
related to the planning and control
systems of the operations, such as the
organization of the operations function,
the skills and pay of workers, and quality
control approaches

Together, the structure and infrastructure of

the production and operations process
determine the nature of the company’s
operations function.
Structural Decision Areas in
Operations Management
1. New product/service development strategy
¡ Should the operation be developing its own novel
product or service ideas or following the lead of
others?
¡ How should the operation decide which products
or services to develop and manage the
development process?

2. Supply Network
¡ Should the operation expand by acquiring its
suppliers or customers? What customers or
suppliers should it acquire?
¡ What balance of capabilities should it develop
along its network of operations?
Structural Decision Areas in
Operations Management
3. Facilities strategy
¡ What number of geographically separate sites
should the operation have?
¡ Where should the operations facilities be located?
¡ What activities and capability should be allocated
to each plant?
4. Technology strategy
¡ What broad type of technology should the
operation be using?
¡ Should it be at the leading edge of technology or
wait until the technology is established?
¡ What technology should the operation be
developing internally and what should it be buying
in?
Infrastructural Decision Areas in
Operations Management
1. Workforce and organization strategy
¡ What role should the people who staff the
operation play in its management?
¡ How should responsibility for the activities of the
operations function be allocated between
different groups in the operation?
¡ What skills should be developed in the staff of
the operation?
2. Capacity adjustment strategy
¡ How should the operation forecast and monitor
demand for its products and services?
¡ How should the operation adjust its activity
levels in response to demand fluctuations?
Infrastructural Decision Areas in
Operations Management
3. Supplier development strategy
¡ How should the operation choose its suppliers?
¡ How should it develop its relationship with its
suppliers?
¡ How should it monitor its suppliers’ performance?
4. Inventory strategy
¡ How should the operation decide how much
inventory to have and where it is to be located?
¡ How should the operation control the size and
composition of its inventories?
5. Planning and control systems strategy
¡ What system should the operation use to plan its
activities?
¡ How should the operation decide the resources to
be allocated to its various activities?
 Infrastructural Decision Areas in
Operations Management
6. Improvement strategy
¡ How should the operation’s performance be
measured?
¡ How should the operation decide whether its
performance is satisfactory?
¡ How should the operation ensure that its performance
is reflected in its improvement priorities?
¡ Who should be involved be involved in the
improvement process?
¡ How fast should the operation expect improvement in
performance to be?
¡ How should the improvement process be managed?
7. Failure prevention and recovery strategy
¡ How should the operation maintain its resources so as
to prevent failure?
¡ How should the operation plan to cope with a failure if
one occurs?
 Top-down
perspective:
What the
business
wants
operations
to do

Operations resource Market requirements

perspective: Operations perspective:
What operations Strategy What the market
resources can do position requires
operations to do

Bottom-up
perspective:
what day-
to-day
experience
suggests
operations
should do
 An illustration: banking services
Retail banking Corporate banking
Products Personal financial Special services for
services corporate customers
Customers Individuals Businesses
Product range Medium but Very wide range
standardized
Design changes Occasional Continual
Delivery Fast decisions Dependable service
Quality Error-free Close relationship
transactions
Volume High volume Low volume
Profit margins Low to medium Medium to high
 An illustration: banking services
Competitive Factors Retail banking Corporate banking
Order Winners ¡Price ¡Customization

¡Accessibility ¡Quality of service

¡Speed ¡Reliability

Qualifiers ¡Quality ¡Speed

¡Range ¡Price

Less important ¡Accessibility

Internal ¡Cost ¡Flexibility

performance ¡Speed ¡Quality
objectives
¡Quality ¡Dependability
 An illustration: banking services
Competitive Competitor’s Original Alternative Alternative Alternative
factors Strategy strategy strategy 1 strategy 2 strategy 3

Order Fast delivery Fast Fast Faster Price

winners Range delivery delivery delivery
Range

Qualifiers Price Range Price Range Fast

Price Price delivery
Range

Performance Speed and Speed Speed and Speed Cost

objectives flexibility flexibility
Financing Strategies
Capital expenditures are broken into four categories:
¡ Cost savings: reduce the costs of production,
distribution, and so on.
¡ Capacity expansion: support corporate growth
objectives and strategies through increasing
production capacity for existing products.
¡ New products: support corporate growth objective
and strategies through capital investment in new
products.
¡ Miscellaneous: provide necessary capital for
information technology, regulatory and safety,
administration, research and development, etc.
Financing Strategy and
Capital Structure

There are two general theories related to

capital structure:
1. Trade-off theory considers the tax
deductibility of interest from debt
financing a strong motivator for
increasing leverage. However, the
increasing present value of the cost of
financial distress (bankruptcy) motivates
the manager to limit the amount of debt
financing.
Financing Strategy and
Capital Structure

¡ Firms with high growth

opportunities use less debt because
financial distress could destroy the
realization of those potentials.
¡ Intangible assets are subject to
erosion in financial distress, and
therefore debt is avoided by firms
with a high ratio of intangible assets
to physical assets.
Financing Strategy and
Capital Structure

2. Pecking order theory says that

companies will first use sources of
internally generated funds to finance their
activities, then net debt financing, and
finally new equity financing.

The two theories help explain financial

structure decision processes.
Financing Strategy and
Capital Structure

Industry characteristics influence financial

structure:
¡ Durable goods industries are subject to
greater volatility than non durable
manufacturing industries, hence the latter
have higher debt ratios.
¡ Firms in utility industries have high debt
ratios because they sell necessities, and
as population and income grow, the
revenues of utilities can be forecasted
with a high level of accuracy.
Financing Strategy and
Capital Structure

Generalizations:
¡ Industries whose firms have large
investments in tangible assets can obtain
financing that can be secured by the
assets. If financial distress would occur,
tangible assets may have resale markets
that provide substantial recoveries.
¡ Firms with intangible assets are likely to
use less debt financing (e.g. pharma)
Financing sources through a firm’s
development

Start-up: Rapid Growth:

Personal savings Internal financing
Personal loans Bank credit
Government agencies Venture capital

Maturity:
Internal financing
Debt repayment
Share repurchases

Growth to Maturity:
Going public
Money market
Capital market