‘Functional Strategy’ is the strategy or organisational plan adopted by each functional area, viz. marketing, production, finance, human resources and so on, in line with the overall business or corporate strategy, to achieve organisational level objectives. The functional strategy of a company is customized to a specific industry or strategic business unit (SBU) and is used to back up other corporate and business strategies.Each department develops certain objectives, which is to be enforced by employees, and aids in the achievement of final organisational goals.
For example, marketing strategy involves decisions related to pricing, selling, advertising and distributing a product. The aim could be to increase market share, venture into newer markets, penetrate existing markets, launch new products or deal with distributors/ competitors.
According to Thompson and Strickland, “The term functional strategy refers to the managerial game plan for a particular functional activity, business process, or key department within a business. A company’s marketing strategy, for example, represents the managerial game plan for running the marketing part of the business. A company’s new product development strategy represents the managerial game plan for keeping the company’s product lineup fresh and in tune with what buyers are looking for.”
Pearce and Robinson define “a functional strategy is the short-term game plan for a key functional area within a company. Such strategies clarify grand strategy by providing more specific details about how key functional areas are to be managed in the near future.”
According to Thomas Wheelen and David Hunder, “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. 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.”
Features of Functional Strategy
Some important features of functional strategy are as follows:
- The time span of a functional strategy, as compared to a business-level strategy, is short.
- It focuses attention on what needs to be done now to make the grand strategy work.
- It is more specific and action-oriented because it clearly outlines what should be done in each functional area so as to achieve the corporate objectives.
- Functional strategy pertains to the function, department, division of the enterprise.
- It has to be in pursuance of the overall corporate strategy.
- It acts to achieve corporate and business unit objectives by maximizing resource productivity.
- It is the game plan to manage a principal subordinate activity within a business.
- Functional strategy is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.
- The orientation of the functional strategy is dictated by its parent business unit’s strategy.
- Functional strategy is narrower in scope than business strategy. It contains relevant details of the overall business game plan by setting out the actions, approaches and practices which are to be employed in managing a particular function.
- It may differ from region to region.
- Functional strategies should be in sync rather than serving their own narrower purposes. They should be in coordination and consistency with long-term objectives and grand strategy.
- These functional strategies have to be related to each other and to the overall corporate strategy.
- Implementation of these strategies involves a wide range of policy decisions to be made relating to the functional areas.
- The focus of these functional strategies is often towards external environment.
- Functional strategies help in implementation of grand strategy. These translate grand strategy into action.
- There might be several sub-functional areas within functional strategies.
- Functional strategies are made within the guidelines that have been set at higher levels.
- These are detailed statements of the “means” or activities that will be used to achieve short-term objectives and establish competitive advantage.
- A functional strategy supports business-level strategy, which in turn supports corporate-level strategy.
Importance of Functional Strategy
Today, every firm faces challenges in optimizing resources such as finance, production facilities, technology, and marketing opportunities in functional areas. Functional managers need strategies to make the best of opportunities and to identify avenues for growth. They need strategic focus on their decisions in their fields.
The importance of functional strategies is pointed out under the following headings:
1. Help in Operation of Business Functions
Functional strategies provide operational help in the conduct of various functional activities. For example, a finance manager has to necessarily take decisions on funding opportunities, deploying projects, reducing capital costs, or acquiring another firm. In addition, he has to decide on strategic options to manage working capital, which may be used to decide the various aspects of receivables management, factoring, payables management, inventory strategy, and treasury management.
Similarly, to manage human resource function, a number of strategic initiatives can be deployed by a firm. Managers need strategic focus on various functions. The production and operations management function also involves a number of strategic issues.
2. Managerial Road Map
Thompson and Strickland write, “A company needs a functional strategy for every major business activity and organizational unit. Functional strategy, while narrower in scope than business strategy, adds relevant detail to the overall business game plan. It aims at establishing or strengthening specific competencies calculated to enhance the company’s market position. Like business strategy, functional strategy must support the company’s overall business strategy and competitive approach. A related role is to create a managerial road map for achieving the functional area’s objectives and mission.”
3. Help in Implementation of Grand Strategy
Pearce and Robinson state that “functional strategies must be developed in the key areas of marketing, finance, production, R&D, and personnel. Functional strategies help in implementation of grand strategy by organising and activating specific subunits of the company to pursue the business strategy in daily activities.”
4. Decisional Guides to Action
Functional strategies guide and translate thought into action designed to accomplish specific annual objectives. Thus, functional strategies may be regarded as decisional guides to action that make the strategies work. They clarify many conflicting issues and problems, giving specific short-term guidance to operating managers and employees.
5. Improves Effectiveness and Efficiency and Creates Super Profitability
It should be noted that functional strategies aim at improving the effectiveness of a company’s operations and thus its ability to attain superior efficiency, quality, innovation, and customer responsiveness. It is important to keep in mind the relationships of functional strategies, distinctive competencies, differentiation, low cost, value creation, and profitability.
We can note that functional-level strategies can build resources and capabilities of a firm that enhance superior efficiency, quality, innovation. These in turn, create low cost, value and superior profitability.
6. Builds Competitive Advantage
Functional strategies can improve the efficiency, reliability (quality), and consumer responsiveness of its service. Thus, they can be used to build a sustainable competitive advantage. Functional strategies can increase efficiency of activities and thereby lower their cost structure. In fact, functional strategy is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.