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Functional Strategies
Functional strategies are devised by specialist in each functional area of business. They spell out the spell out the specific tasks that must be performed to implement business strategy.
Companies may vary in organizational responsibilities and also devise varieties of functional strategies.
Marketing specialists focus on determining the appropriate markets for business offerings and on developing effective marketing mixes. The marketing mix includes four strategic elements: price, product, promotion, and channels of distribution.
Financial specialists are responsible for forecasting and financial planning evaluating investment proposals, securing financing for various investments, and controlling financial resources. Financial specialists contribute to strategy formulation by assessing the potential profit impact of various strategic alternatives and evaluating the financial condition of the business.
MARKETING STRATEGIES—COMPETITION BASED Marketers have to evolve strategies to fight competition, to gain and retain market shares. The right tool for analyzing market situation is SWOT analysis. Based on the SWOT analysis competitors can be classified as follows:
- Based on the ability to engage and sustain warfare—strong and weak
- Based on the percentage of market share—close and distant held by a competitor
These competitors can, in turn, be assigned following competitive positions. F 0B 7 Market leader—the firm with largest market share and strong in designing and implementation plans.
F 0B 7 Market challenger—close and strong competitors to market leader, who aggressively or mildly challenge him F 0B 7 Market follower—the distant and weak competitor who is content in following leaders and challenger. F 0B 7 Market Nicher—the independent, non-fighter, who carves his niche for peaceful and profitable specialized operations.
Market shares of the competitive firms are:
40% 30% 20% 10% Leader challenger Follower Nicher What are the moves of the competitors? Are they preemptive or predatory? Are they defensive or offensive? Companies in different competitive positions work different strategies. T he possible moves of a leader, challenger, follower and nicher are:
F 0B 7 Grow strong—become invincible F 0B 7 Defend—develop protection against attack
F 0B 7 Offend—weaken or destroy competitor F 0B 7 Play safe—select less competitive areas and cultivate.
Lead er
Expansion strategy
F 0B 7 Market penetration strategy
- Increase use of the product
- Find new uses for the product F 0B 7 Market development strategy
F 0B 7 Following closely—imitate immediately F 0B 7 Following at a distance—slow imitation F 0B 7 Following selectively—imitation in select areas
The companies are generally small in size. Some companies in the unorganized sector may follow ‘fakes’ strategy.
Market—Nicher:
F 0B 7 The niche is sufficient size in size and purchasing power to be profitable. F 0B 7 The niche has growth potential F 0B 7 The niche is of negligible interest to major competitors F 0B 7 The firm has the required skills and resources to serve the niche effectively F 0B 7 The firm can defend itself against and attacking major competitor through the customer good will it has built up.
Computer companies are among the newest converts to the “end user” type of niche marketing, but they call it vertical marketing. For years, computer fought to sell general hardware and software systems horizontally across many markets, and the price battles got
rougher. Smaller companies started to specialize by vertical slices—law firms, medical practices, banks, etc,--studying the specific hardware and software needs of their target group and designing high-value added products that had a competitive advantage over more general products. Their sales forces were trained to understand and service the particular vertical market. Computer companies also worked with independent value-added resellers (VARS), who customized the computer hardware and software for individual clients or customer segments and earned a price premium in the process.
Designing a promotion strategy
There are many successful companies which proved professional with faster growth due to high power promotion. A good example is reliance group in India. It has built brand loyalty with a different mix of a media.
Reliance has a high budget promotion for all its textile brands. It has specific promotion strategies for suitings, dress materials and saris. “ONLY VIMAL” ‘ONLY’ concept in the promotion made Reliance a super success. Effective media selection and 80% budget for press and after 1978 more focus on TV ads made their promotion No.1. Miss Universe Contest’ ‘Oscar awards nite’ etc were sponsored including the ‘Reliance cup’
Choosing Pull or Push Strategy for sales promotion:
(a) Push strategy – A promotion strategy mainly aimed at channels of distribution is called a push strategy. Marketers promote their products heavily among distributors wholesalers
(iii) Free Samples: Free samples are generally used to introduce a new product and as a sales tool to attract the attention of prospects, not only much time is saved, but it also eliminates the need for inspection or testing of goods by the buyer. (iv) Correspondence: Sending letters or brochures. A specialized correspondence section can communicate very effectively with prospects as well as potential customers. (v) Catalogues: Catalogues are largely used when a firm manufactures different types of products which are distinguished by size, shape and other features. The following purpose can be served by catalogues:
— To get orders — To make the customers aware about the specifications — To provide detailed information — To solicit product sales
(vi) Advertising Novelties: Small, interesting, or personally useful items, etc., can be used for sales promotion. To be effective an advertising novelty should meet the following requirements:
(a) It should not be a high cost item (b) The novelty item should be usually eye-catching (c) The item should be useful.
(vii) Entertainment of Customers: Entertainment of customers acts as a primary promotional device. But when the product is sold on a routine basis, customer entertainment is neither necessary nor justified.
(viii) Sales Contests: The main aim of sales contests is to motivate the sales personnel and increase sales, and bring more profit to the company. Under this scheme special incentives in the form of prizes or awards are offered.
(ix) Price—off: A price-off is simply a reduction in the price of the product to increase sales and is very often used in introducing a new product. Price-offs should generally be considered:
— For introducing new brands or existing brands with new uses — For products/brands which are already doing better than the competing brands — In conjunction with sales activities aimed at increasing retail distribution
Henkel, the German toiletries major, gave Rs. 10 off on a Rs. 40 pack when it introduced Pril scouring concentrate
(x) Refunds: It is an offer made by a manufacturer to give back a certain amount of money to a consumer.
— Sales rallies — Best salesman award
(ii) Trade promotion
— Discounts — Displays — Force good — Best dealer awards
(iii) Consumer promotion — Point of purchase promotion — Free samples — Cash discounts — Free trials — Demonstrations — Prizes — Contests Promotion Strategy for Industrial Products:
Industrial products require different promotion strategies due to varied price range (a) Documentation: Documentation is essential for improving the marketing effectiveness of a company. Documentation may include;
— Product literature — Selection and performance charts — Technical manuals — Operation manuals
— Installation manuals — Price lists
(b) Working models: Many firms supply the working or cutout models of their products to the dealers for display. This helps the customer understand the product easily. In addition, the companies also supply photographs and other display material. (c) Exhibitions: Participation in a technical exhibition gives a higher visibility to a company. It is a meeting place for sellers and the buyers. Participation in India Machine Tools Exhibition (IMTEX). Hanover (Germany) Engineering Trade Fair and many other such exhibitions has proved beneficial to many engineering units.
Financial Strategy
May types of financial analyses are used in strategic decision making these include ration analysis, break –even analysis and not present value analysis. Financial strategies are needed to
- To raise capital with short-term debt, long-term debt, preferred stock, or common stock.
- To lease or buy fixed assets.
- To determine an appropriate dividend payout ration.
- To use LIFO (Last –in, First –out), FIFO (First-in, First – out), or a market-value accounting approach.
- To extend the time of accounts receivable.
Ratios may be classified under four broad heads:
- Liquidity
- Activity
- Profitability
- Capital structure / Leverage Ratio.
(ii) Liquidity Ratios
Liquidity ratios seek to confirm the ability of the firm to fulfil its short term obligations. If the firm has greater liquidity than the commitments due for payment, it means the firm has unutilized surplus which may be invested or used in such a manner that the rate of return is optimal. The firm may also put the funds in the expansion of business or diversification of its activities to increase rate of return on investment.
The ratios which indicate the liquidity of the firm are: (i) Net working capital (current assets – current liabilities) (ii) Current ratio (current assets ÷ current liabilities (iii) Acid Test Ratio/ quick Ratio (iv) Super quick ratios (v) Turnover Ratios.
(iii) Acid test ratio / quick ratio
= Current assets – (Inventories + Repayments) Current liabilities
(iv) Turnover Ratios /Activity Ratios
Another way to ascertain the liquidity is how quickly a certain current asset could be converted into cash. Ratios measuring its ability is known as turnover ratios. These
ratios may be classified under three heads: (1) Total Assets Turnover Ratio (2) Accounts Receivable Turnover Ratio (3) Inventory Turnover Ratio.
Inventory / Turnover Ratio Inventory / Turnover Ratio may be worked out in the following manner. Cost of goods sold
(Inventory I year + Inventory II year) ÷ 2
Profitability Ratios
Profit is the end result of all business activities including the use of capital. Profit is an objective index of judging the efficiency of the business enterprise.
Profitability ratios may be of two kinds: (i) Return on sales (ROS) and (ii) Return on Assets (ROA)
Return on Investment (ROI) is not different from Return on Assets (ROA). In a multi- product organization, a Return on Investment (ROI) is not different from Return on Assets (RoA). In a multi-product organization, a lower Return on Assets indicates a weak product or sub-optimal product or a few strong and more weaker products which lower down ROA or even ROI.
Capital Structure / Leverage Ratios
D/E Ratio =
Earnings per Share (EPS)
Long –term Debt Shareholders Equity
Another way of computing the profitability of a company from share holder’s view point is the Earnings per share. It measures the profit available to equity holders. Profit available to equity holders are represented by the net profits after taxes and preference divided divided by the number of ordinary shares.
EPS =
Net Profit – (Interest + Tax + Preference
dividend)
(No. of ordinary Shares I year + Ordinary Shares II Year ) ÷ 2
Price Earning Ratio It may be worked out as follows: Market Price of the Share Price Earning Ratio = EPS
- **Break – Even analysis – Case
- Net Present Value (NPV) analysis.**
This method involves calculation of the present value of estimated cash inflows using the cost of capital as the discounting rae and subtracting from the aggregate present value of inflows the present value of cash outflows using the same discounting rate. IF NPV is positive or equal to zero, the investment project is accepted as economically viable. If it is negative the proposal is rejected. Using this, strategic investment proposals may be ranked in the descending order of the net present values. The market value of shares may increase with projects with positive NPVs are accepted.
HR Strategies The HR strategy of many multinational companies to take part time temporary employees or leasing temporary employees from learing companies. Employees specially working in IT firms in India are working on one to five year projects and re experiencing ‘Pink – slip syndrome’ as to what to do after the project is completed. The
cosmetic firms like Avon could turnaround unprofitable inner city markets by taking local persons to manage local markets. Information systems strategy
Corporations are increasingly adopting information system strategies in that they are
turning to information systems technology to provide business units with competitive advantage.
In 1989, Wal-Mart started building a huge database of customer information in its data warehouse systems located at its headquarters at Bentonville, Arkansas. The company collected sales and customer related information for each store and fed that information into the warehouse systems. In the early 1990s, Wal-Mart continued to employ new technologies to facilitate better analysis of customer data as they became available. Wal- mart’s IT experts used 3-D visualization tools to make accurate estimates of products most likely to be bought by customers on the basis of parameters such as ethnicity, geographic location, weather patterns, local sports affiliations, and around 10,000 other varied parameters. Wal-Mart made around 90% of its stock replenishments every month, based on the analysis of customer data generated through the data warehouse. To make shopping at Wal-Mart a pleasant experience, Wal-Mart installed customer information kiosks in its stores in 1996. The kiosks helped customers find out the price of any product and get a brief description of it. In 1996, Wal-Mart launched its website – www.walmart.com - to provide information to its customers on all the products it stocked and to enable online sales. IT played an important role in improving the efficiency of operations at Wal-Mart. The benefits which accrued were passed on to customers, as per Wal-Mart’s policy. Wal-Mart’s annual report 1999 said, “The first and the most important thing about Wal-Mart’s information systems is precisely that the customer’s needs come first. By using technology to reduce inventory, expenses and shrinkage, we can create lower prices for our customers and better returns for our shareholders”. At the dawn of the new millennium, Wal-Mart was one of the world’s largest companies, with revenues of $165 bn in fiscal 2000. Wal-Mart’s ‘store of the community’ program made effective use of bar code technology and advanced data mining techniques. The ‘store of the community’ program was a very successful initiative by Wal-Mart, which contributed to increased customer loyalty. By 2003, Wal-Mart was the world’s largest company, with revenues in fiscal 2002 amounting to $244.5 bn.
Multinational corporations are finding that the use of a sophisticated intranet for the use of its employees allows them to practice follow – the –sun management, in which project team members living in 1 country can pass their work to team members in another country in which the work day is just beginning. Thus, night shifts are no longer needed. The development of instant translation software is also enabling workers to have online communication with coworkers in other countries who use a different language. Lotus Translation Services for Sametime is a Java –based application that can deliver translated text during a chart session or an instant F 02 A in 17 languages.^ Software, e-lingo (www.e-lingo.com) offers a multilingual search function and Web surfing as well as text and e-mail translation.
Logistics Strategy
Logistics strategy deals with the flow of products into and out of the manufacturing process. Three trends are evident: centralization, outsourcing, and the use of the Internet. To gain logistical synergies a cross business unit, corporations began centralizing logistics in the head- quarters group. This centralized logistics group usually contains specialists with expertise in different transportation modes such as rail or trucking. They work to aggregate shipping
