1

Lecture 8

Implementing strategies: functional level issues

2

Objectives

• Explain the role of functional strategies and activities in support of the overall corporate strategic plan

3

• Failing to segment markets appropriately• Paying too much for a new acquisition• Falling behind competition in R&D• Not recognizing benefit of computers in managing

information

Nature of Strategy Implementation

Low Success Rate – Strategy Implementation

-- Less than 10% of strategies formulated are successfully implemented!

Source: David 2005.

4

• Market goods & services well (Marketing)• Raise needed working capital (Finance)• Produce technologically sound goods (R&D, Innovation)• Sound information systems• Operations

Nature of Strategy Implementation

Successful Strategy Implementation

5

Levels of Strategies

Corporate strategy

Business 1strategy

Business 2strategy

Business 3strategy

OperationsManagement

strategy

R&D strategy

Financial/Accounting

strategy

Marketing Strategy

HRMstrategy

Corporate level

Functional level

Businesslevel

6

Nature of Strategy Implementation

• Decision making at functional level is the implementation of corporate plans.

• Therefore, the operational plan for implementing corporate or business level strategies needs to select appropriate functional strategies.

7

Nature of Strategy Implementation

• Departments (divisions) in the functional level also have objectives, which should be subordinated to corporate objectives.

• Functional strategies are implemented to meet the objectives of individual division and corporation.

8

Nature of Strategy Implementation

For example, regarding marketing issue:• If the general objective of a port is to

minimise the cost of cargo passing through the port then the marketing objective may be attracting and obtaining more traffic to ensure full utilisation of the port facilities at a high level of productivity.

• Marketing strategies: for example, leasing of berths or terminals to operating companies or shipping line.

9

Main functional issues/strategies

• Marketing strategies

• Financial /accounting strategies

• R&D strategies

• MIS

• Operation

10

Functional strategies: Marketing Issues

• Marketing variables affect success/failure of strategy implementation

• Marketing strategy refers to the position that a company takes with regard to pricing, promotion, advertising, product design, and distribution.

11

1. Market segmentation

2. Product positioning

These two strategies can support business strategies such as differentiation strategy

Marketing Issues

Centrally important to Implementation

12

• Subdividing of a market into distinct subsets of customers according to needs and buying habits.

Marketing Issues

Market Segmentation

13

• Key to matching supply & demand• Support market development, product-

development, market penetration & diversification strategies

• Allows operating with limited resources• Enables small firms to compete

successfully

Marketing Issues

Market Segmentation

14

• Directly affect marketing mix variables:– Product– Place– Promotion– Price

Marketing Issues

Market Segmentation

15

Marketing Mix – Component Factors

Service level

Warranty

Transportation carriers

Product line

Inventory levels/locations

Packaging

PublicitySales territoriesBrand name

Payment termsSales promotionOutlet locationStyle

Discounts & allowances

Personal sellingDistribution coverage

Features

LevelAdvertisingDistribution channels

Quality

PricePromotionPlaceProduct

16

Example

• Market segmentation of the maritime industry?• Ex: bulk cargo segmentation: in terms of vessel

type or market

• Port?

17

Vessel type/market Vessel size Cargo type

Capesize 80,000+dwt Iron ore, Coal

Panamax 50,000-79,999dwt Coal, grain, bauxite and larger minor bulk parcels

Handymax 30,000-49,999dwt Minor bulks and smaller parcels of major bulks such as grain, coal and bauxite

Handy 10,000-29,999dwt Minor bulks and smaller parcels of major bulks such as grain, coal and bauxite

Dry bulk market segmentation by vessel size

Minor bulks: steel products, cement, sugar, gypsum, non ferrous metal ores, salt,Sulphur, forest products, wood chips and chemicals.

Source: Kavussanos, M. G. 2002, Handbook or Maritime transport, p665.

18

Marketing Issues

-- Schematic representations that reflect how products/services compare to competitors’ on dimensions most important to success in the industry

Product Positioning

19

Marketing Issues

ProductPositioning

Customer WantsCustomer Wants

Customer NeedsCustomer Needs

20

Positioning strategies

• Attribute positioning• Benefit positioning (based on providing certain benefits)• Use-application positioning (based on limit use or

application) • User positioning (on the basis of some customers

characteristics)• Competitor positioning (positioning against one or more

competitors)• Product category positioning (on the basis of some

product category)• Quality-price positioningEx: rental car market (position in terms of high (low)

convenience and high (low) customer loyalty)

Source: Coulter, M. 2005, Strategic management in Action, 3 rd edn, Pearson, New Jersey, pp.147-148.

21

Finance/Accounting Issues

-- Central to strategy implementation.

22

• Acquiring needed capital (source)• Developing projected financial statements• Preparing financial budgets• Evaluating worth of a business

Finance/Accounting Issues

Essential for implementation

23

• Raise capital – short-term, long-term, preferred, or common stock

• Lease or by fixed assets• Determine appropriate dividend payout ratio

Finance/Accounting Issues

Decisions based on Finance/Accounting

24

• Debt

• Equity

Finance/Accounting Issues

Capital acquisition to implement strategies

25

• EPS/EBIT analysis– Earnings per share/Earnings before interest and

taxes

Finance/Accounting Issues

Debt vs. Equity Decisions

26

• $Amount Needed: $500• Stock Price $40• EBIT Range $1000 to $2000• Tax Rate 26%• Interest Rate 5%• # Shares Outstanding 350

EPS-EBIT Analysis(in $millions)

Heinz Company – Year End 2001

27

EPS-EBIT Analysis (in $millions) – Heinz Company

100% Stock Financing

100% Debt Financing

Financing (60%stock, 40% debt)

High Low High Low High Low

EBIT ($982.4 in 2001) $2000 $1000 $2000 $1000 $2000 $1000

Interest (5%) 0 0 25 25 10 10

EBT 2000 1000 1975 975 1990 990

Taxes 26% 520 260 514 254 517 257

EAT 1480 740 1461 721 1473 733

# Shares outstanding 362.5 362.5 350 350 357.5 357.5

EPS 4.08 2.04 4.17 2.06 4.12 2.05

28

• Conclusion:

– Heinz should use debt to raise the $500 million

Finance/Accounting Issues

EPS-EBIT Analysis Heinz

29

• Allow an organization to examine the expected results of various actions and approaches

Finance/Accounting Issues

Projected Financial Statements

30

1. Prepare income statement before balance sheet (forecast sales)

2. Use percentage of sales method to project CoGS & expenses

3. Calculate projected net income

Finance/Accounting Issues

Steps in Preparing Projected Financial Statements

31

4. Subtract dividends to be paid from Net Income and add remaining to Retained Earnings

5. Project balance sheet times beginning with retained earnings

6. List comments (remarks) on projected statements

Finance/Accounting Issues

Steps in Preparing Projected Financial Statements (cont’d)

32

Projected Income Statement for Litten Company (in millions)

 Prior Year

2004Projected Year

2005 Remarks

Projected Income Statement  

Sales 100 150.00 50% increase

Cost of Goods Sold 70 105.00 70% of sales

Gross Margin 30 45.00  

Selling Expense 10 15.00 10% of sales

Administrative Expense 5 7.50 5% of sales

EBIT 15 22.50  

Interest 3 3.00  

EBT 12 19.50  

Taxes 6 9.75 50% rate

Net Income 6 9.75  

Dividends 2 5.00  

Retained Earnings 4 4.75  

33

-- Details how funds will be obtained and spent for a specified period of time.

Finance/Accounting Issues

Financial Budget

34

• Central to strategy implementation – integrative, intensive, & diversification strategies often implemented through acquisitions of other firms

Finance/Accounting Issues

Evaluating Worth of a Business

35

1. What a firm owns2. What a firm earns3. What a firm will bring in the market

Finance/Accounting Issues

Evaluating Worth of a Business:

3 Basic Approaches

36

Research & Development Issues

-- New products and improvement of existing products that allow for effective strategy implementation

37

• Level of support constrained by resource availability

• Technological improvements shorten product life cycles

Research & Development Issues

Constraints

38

1. 1st firm to market new technological products 2. Innovative imitator of successful products 3. Low-cost producer of similar but less

expensive products

Research & Development Issues

3 Major R&D approaches to implementing strategies

39

Research & Development Issues

R&D Timing

• First mover

• follower

40

Research & Development Issues

Who?• R&D department• Cross-functional team• Some combination

How?• Formal or informal process• Use prototypes, product tests, design reviews or test

markets• How to implement new design• How to evaluate success of new design

Source: Coulter, M. 2005, Strategic management in Action, 3 rd edn, Pearson, New Jersey, p.158.

41

Research & Development Issues

Current R&D strategies

• Employee suggestion systems

• Innovative culture

42

Importance of information system

• Information is basis for understanding the firm. One of the most important factors differentiating successful from unsuccessful firms.

• How an organisation collects, uses, and disseminates information ultimately will affect its ability to develop a sustainable competitive advantage. Ex: information technology such as EDI (Electronic Data Interchange) and RFID (radio frequency identification)

Ex: Walt- Mart required its top 100 suppliers to use RFID by 2005.

43

Functions of MIS• Information collection, retrieval, & storage• Keeping managers informed• Coordination of activities among divisions• Allow firm to reduce costs

Management Information Systems (MIS) Issues

MIS is one type of information systems

44

Activities

Case: Toyota Motor (Coulter 2005, pp.137-138)

1. What do you think are the keys to Toyota’s success?

2. Do you think production or marketing would be most important to Toyota? Support your choice.

3. Is strategy coordination important to Toyota?