Strategy formulations: Functional strategy & Strategic
functional strategy is the approach a functional area takes to achieve
corporate and business unit objectives and strategies by maximizing resource
productivity. For example the difference between McDonalds and Domino Pizza.
While McDonalds expect you to visit its outlet and have Pizza, Domino Pizza
designed its supply chain in such a way that whenever you are hungry you can
have Pizza. It is functional strategy based on supply chain.
Competence is a term coined by, C.K. Prahalad and Gary Hamel and it may be
defined as collective learning and coordination skills behind the firm's product lines. They made the case
that core competencies are the source
competitive advantage and enable the firm to introduce an array of new products
to Prahalad and Hamel, core competencies lead to the development of core
products. Core products are not directly sold to end users; rather, they are used
to build a larger number of end-user products. For example, motors are a core
product that can be used in wide array of end products. The business units of
the corporation each tap into
the relatively few core products to develop a larger number of end user
products based on the core product technology. The intersection of market
opportunities with core competencies forms the basis for launching new
businesses. By combining a set of core competencies in different ways and
matching them to market opportunities, a corporation can launch a vast array of
core competencies, a large corporation is just a collection of different businesses. Core competencies
serve as the glue that bonds the business units together into a coherent
portfolio. For Reliance Group size, scale and project management skills form
the basis of core competence.
competencies arise from the integration of multiple technologies and the coordination of diverse production
skills. Some examples include Philip's expertise in optical media, Sony's
ability to miniaturize electronics and Airtel‘s ability to provide cheapest
services in telecom with maximum customer satisfaction.
A core competence should:
to a wide variety of markets, and
contribute significantly to the end-product
benefits, and be difficult for competitors to imitate.
developed by the organization
Core competencies tend to be rooted
in the ability to integrate and coordinate various groups in the organization. While a
company may be able to hire a team of brilliant scientists in a particular technology, in doing so it
does not automatically gain a core competence in that technology. It is the effective
coordination among all the groups involved in bringing a product to market that results in a core
It is not
necessarily an expensive undertaking to develop core competencies. The missing
pieces of a core competency often can be acquired at a low cost through
alliances and licensing
agreements. In many cases an organizational design that facilitates sharing of
competencies can result in much more effective utilization of those
competencies for little or no additional cost.
What core competence is not;
to overtake others by R&D
2.Sharing costs among business units
These strategies with no objective
of getting the four aspects elaborated cannot be called core competence. They may help to
build but by themselves they do not lend to any competencies.
Failure to recognize core competencies
may lead to decisions that result in their loss. During 1970's many U.S.
manufacturers closed down television manufacturing businesses arguing that
industry was mature and that high quality, low cost models were available from
Japanese manufacturers. In the process, they lost their core competence in
video, and this loss resulted in a handicap in the newer digital television
industry. Similarly American hardware manufacturers started outsourcing
, the cheaper option and lost totally to Foxconn; Foxconn manufactures 170 billion $ worth of hardware and
America is left with very less number of workers and people with the socio eco
system of manufacturing competencies.
Core competencies manifest themselves in
core products that serve as a link between the competencies and end products.
Core products enable value creation in the end products. Examples of firms and
some of their core products include:
substrates, coatings, and adhesives
UAE motors in any grinding machine in India
Canon - laser printer subsystems
Honda - gasoline powered engines
products are used to launch a variety of end products. For example, Honda uses
its engines in automobiles, motorcycles, lawn mowers, and portable generators.
Because firms may sell their core
products to other firms that use them as the basis for end user products,
traditional measures of market share are insufficient for evaluating the
success of core competencies. Prahalad and Hamel suggest that core product
share is the appropriate measure. While a company may have a low brand share,
it may have high core product share and it is this share that is important from
a core competency standpoint. Once a firm has successful core products, it can
expand the number of uses in order to gain a cost advantage via economies of
scale and economies of scope.
Implications for Corporate Management
and Hamel suggest that a corporation should be organized into a portfolio of
core competencies rather than a portfolio of independent business units. Business unit managers tend to
focus on getting immediate end-products to market rapidly and usually do not
feel responsible for developing company-wide core competencies. Consequently,
without the incentive and direction from corporate management to do otherwise,
strategic business units are inclined to under invest in the building of core
business unit does manage to develop its own core competencies over time, due
to its autonomy it may not share them with other business units. As a solution
to this problem, Prahalad and Hamel suggest that corporate managers should have
the ability to allocate not only cash but also core competencies among business
units. Business units that lose key employees for the sake of a corporate core
competency should be recognized
for their contribution.
competency is something that a corporation can do exceedingly well. It is a key
strength. It should have the following characteristics;
1. It should
have been developed by the organization
2. It cannot
be easily copied by others
3. It should
give access to the wider market.
4. If all the conditions are satisfied then it is
known as core competency.
Selection of strategy:
pros and cons of the potential strategies alternatives have been identified any
one must be selected from implementation. The most important criteria is the
identity of the propose strategy to deal with the specific strategic factors
developed earlier in SWOT analysis.
corporation may choose stability over growth by continuing its current
activities without any significant change in direction. The stability family of
corporate strategies can be appropriate for a successful corporation operating
in a reasonably predictable environment. Stability strategies can be very
useful in short run but can be dangerous if followed for too long.
the strategies are;
and proceed with caution strategy
parenting views corporation in terms of resources and capabilities that can be
used to build business value as well as generates synergies across business
corporate parenting strategies can be developed in following ways.
each business unit in terms of its critical success factors.
each business unit in terms of areas in which performance can be
scenario are pro forma balance sheet and income statement that forecast the
effects that each alternative strategy and its various programs will likely
have on division and corporate return on investment. Corporate scenario is
extension of industry scenario.
Development of policies:
selection of the best strategic alternative is not the end of the strategy
formulation. Management now must established policies that define the ground
rule for implementation. Flowing from the selected strategy, policies provide
the guidance for decision making an action throughout the organization.
Policies tend to be rather long lived and can even outlast the particular
strategy that created them.