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Formulation of Functional Strategies


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Marketing Strategy, Financial Strategy, Production Strategy, HR Strategy, Technology Strategy

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Formulation of Functional Strategies

  1. 1. Formulation of Functional Strategy Prof. Prashant Mehta National Law University, Jodhpur
  2. 2. Formulation of Functional Strategy Introduction Marketing Strategy Formulation Financial Strategy Formulation Production Strategy Formulation Logistics Strategy Formulation Research and Development Strategy Formulation Human Resource Strategy Formulation
  3. 3. Financial Strategy • Financial Strategy involves: • Acquiring Needed Capital / Source of Funds • Developing Projected Financial Statements / Budgets • Management / Usage of Funds • Evaluating the Worth of Business • Some examples of decisions that may require finance / accounting policies are: • To raise capital with short term debt, long term debt, preferred stock, common stock etc. • To lease or to buy fixed assets. • To determine appropriate dividend payout ratio. • To determine the amount of cash that must be kept in hand etc.
  4. 4. Sourcesof Funds • Business requires additional capital, besides net profit from operations, and the sale of assets the other sources of funds are Debt and Equity (Capital structure of Firm). • Determining optimal mix of debt and equity in firms capital structure is vital. • Firm should have enough debt in its capital structure to boost ROI (earning more than cost of debt). • In adverse situation high debt can lead to poor stockholders return and jeopardize companies survival. • Fix debt obligations must be met regardless the circumstances. • Issuance of stock can have issues like ownership, control of enterprise which can lead to hostile takeovers, mergers, and acquisitions.
  5. 5. Sourcesof Funds • The major factors for which strategies are to made are: • Capital Structure • Procurement of Capital • Working Capital Borrowings • Reserves and Surplus as source of Funds • Relationships with Lenders, Bank, and Financial Institutions • Source of Funds (External Borrowings or Internal Financing)
  6. 6. Projected Financial Statements / Budgets • Budgets allows an organization to examine the expected results of various actions (implementation decisions) and approaches. Eg. Increase in promotion expenditure by 50% (market development strategy), Salary increase by 25% (market penetration Strategy), R&D expenditure increase by 70% (Product Development) or to sell common stock to raise capital for diversification. • A pro forma income statement and balance sheet allow organization to compute projected financial ratios, compare them with prior years and industry averages under various strategy implementation scenarios. • Companies prepare projected financial statements to project future expenses and earnings more reasonably.
  7. 7. Projected Financial Statements / Budgets • A financial budget is the document that details how funds will be obtained and spent for a specified period of time. (annual budgets are more common). • Financial budgets are viewed as the planned allocation of firm’s resources based on forecasts of the future. The different types of budgets include cash budgets, operating budgets, sales budget, profit budget, factory budget, capital budget, expense budget, divisional budget, variable budget, flexible budget, fixed budget etc. These are important in guiding strategy implementation. • Financial budgets limitations are: Cumbersome to make, expensive, Over budgeting / under budgeting can cause problems, they can become substitute for objectives, budgets hides inefficiencies if based solely on precedence rather than periodic evaluation of circumstances. • Budgets are sometimes used as instruments of tyranny – frustration / resentment.
  8. 8. Managementand Usage of Funds • It deals with investments and Asset mix decisions. It involves decisions like capital investment, fixed asset acquisition, current assets, loans, advances, dividend decisions, and relationship with share holders. • Usage of funds is important since it relates to the efficiency and effectiveness of resource utilization in the process of strategy implementation. • Management of fund is important area of financial strategy and strategic decisions are made for the system of finance, accounting, budgeting, management control system, cash, credit, and risk management, cost control and reduction, tax planning and advantages. All this leads to optimum utilization of funds. • Organizations that implements strategies of stability, growth, and retrenchment cannot escape rigors of proper management of funds. • Financial plans and policies however present dilemma before management. The priorities of management may often conflict with those of share holders.
  9. 9. Evaluating the Worth of Business • Integrative, Intensive, Diversification strategies are implemented by acquiring other firms, and retrenchment may result in sale of division of organization. Here it is strategically important to establish financial worth / cash value of business. • There are three approaches to determination of business worth; • The first approach is to determine net worth or stock holder’s equity. Net worth is sum of common stock, additional paid in capital, and retained earnings. After this we add or subtract additional amount of goodwill, overvalued, and undervalued assets. The total obtained provides a reasonable estimate of firms monetary value. • I the firm has goodwill it will be listed in balance sheet as intangibles.
  10. 10. Evaluating the Worth of Business • The second approach is measuring the value of firms growth based largely on future benefits its owners may derive through net profits. Establish business worth as five times the firm’s current annual profit. Note: Firms suppress earnings in financial statement to minimize taxes. • The third approach is letting market determine a business worth. • Base the firm’s worth on selling price of similar company and make a comparison. • Use price earning ration where we divide the market price of common stock by annual earnings per share and multiply this number by the firm’s average net income for the past five years. • Outstanding shares method where we multiply number of shares outstanding by the market price per share and add a premium. The premium is simply a per share amount that a person or firm is willing to pay to control or acquire the company.
  11. 11. FinancialManagementStrategies Capital Acquisitions • Debt Leverage, Stock Sales, & Gains From Operations • Equity Financing Is Preferred For Related Diversification • Debt Financing Is Preferred For Unrelated Diversification • Leveraged Buyouts (Lbos) Make The Acquired Firm Pay Off The Debt Can We Grow By Relying On Only Internal Cash Flows? Do Stock Sales Dilute Ownership Control? Does A Large Debt Ratio Cripple Future Growth? Does Strong Leverage Boost Earnings Per Share? Does High Debt Deter Takeover Attempts? Resource Allocations • Dividends, Stock Price, & Reinvestment • Reinvest Earnings In Fast-growing Companies • Keeping The Stockholders Contented With Consistent Dividends • Use Of Stock Splits ( Or Reverses) To Maintain High Stock Prices • Tracking Stock Keeps Interest In Company, But Doesn’t Allow Takeover
  12. 12. Formulation of Functional Strategy Introduction Marketing Strategy Formulation Financial Strategy Formulation Production Strategy Formulation Logistics Strategy Formulation Research and Development Strategy Formulation Human Resource Strategy Formulation
  13. 13. Human ResourceStrategy Formulation • Assessing the Staffing Needs • Motivating the employees and Managers • Developing Performance Incentives (Link Performance to Pay) • Empowering the managers and employees • Linking company and Personal benefits is responsibility of HR manager. • Establishing and Administering Employee Stock Option Plan, Effective Childcare policy, providing leadership to balance work life and family etc. • Failure of HR strategies is attributed to three causes: • Disruption of Social and Political Structures • Failure to match individual’s aptitude with implementation tasks • Inadequate top management support for implementation activities.
  14. 14. Human ResourceStrategy Formulation • Strategy implementation poses threats to many employees in the organization. • New Power and Status relationships are anticipated and realized. • New formal and informal group values, beliefs, and priorities may be largely unknown. • Resistance behaviour by employees as their roles, prerogatives, and power in the firm change. • Disruption of social and political structures must be managed during strategy implementation. • Commonly used methods that match managers with strategies to be implemented include transferring mangers, developing leadership workshops, offering career development activities, promotions, job enlargement, and job enrichment. • Managers can built support-implementation efforts by giving few orders, announcing few decisions, depending heavily on informal questioning, and seeking to probe and clarify until the consensus emerges. Reward generously and Visibly.
  15. 15. Human ResourceStrategy • HR strategy implementation is critical and best method of preventing and overcoming HR problems is to actively involve managers and employees in the whole process. This approach builds understanding, trust, commitment, and ownership, and reduces resentment and hostility making organizations more competitive. • Align external treats with internal strengths. • Managing HR is key to success. • An organizations recruitment, selection, training, performance appraisal, and compensation practices have a strong influence on employee competence.
  16. 16. Human ResourceStrategy • Recruitment and Selection • Identify, attract, and select most competent applicants. • Training • Employees will be more competent if employees are well trained to perform their jobs properly. • Appraisal of Performance • Deficiency once identified can be solved through Counseling, Coaching, and Training. • Compensation • Attractive compensation more than competitors increase the competency of work force. Helps attract and Retain more capable people.
  17. 17. Strategy and Human ResourceManagement • HR strategy should reflect and Support the Corporate Strategy. • Good HR strategy involves selecting best talent, retaining, motivating, and empowering employees to perform well in direction of corporate objectives. • Strategic HR helps in improving business performance, develops organizational culture, fosters innovation, and flexibility. • HR strategic focus should be given on following points: • Pre selection practice including HR Planning and Job Analysis • Recruitment and Selection based on mission and purpose of the organization. • Post Selection Practice to maintain and improve job performance levels, Training and development, performance appraisal, compensation, and motivation should be based on corporate strategy of the organization.
  18. 18. StrategicRole of Human ResourceManagement • Providing Purposeful Direction to people within the organization right from the beginning. Actions of each person must be consistent with objectives defined. • Creating Competitive Atmosphere through COST LEADERSHIP which means the firms aims to become low cost leader in the industry. • Creating Competitive Atmosphere through DIFFERENTIATION which means the firms aims to become unique in the industry in terms of dimension that are highly valued by the customers. • Facilitation of Change– HR is more concerned with substance rather than form, accomplishments rather than activities, and practice rather than theory. Hr has to devote more time to promote changes than to maintain the status quo.
  19. 19. StrategicRole of Human ResourceManagement • Diversion of Workforce – Workforce diversity is challenge and is observed in terms of male – female workers, young – old workers, educated – uneducated workers, unskilled – unprofessional workers etc. Besides this caste, religion, and nationalities also play a key role where sometimes money is no longer a motivating factor rather it is high degree of participation and non financial incentives. • Empowerment of HR – It involves giving more power to those who at present have little control what they do and little ability to influence the decisions being made around them.
  20. 20. StrategicRole of Human ResourceManagement • Building Core Competency – Core competency is USP of firm and it can be in form of HR, Marketing capability or technology capability. Core competency generates competitive advantage and most business which do not have competitive character are divested thus leveraging the limited resources of the firm. It needs creative, courageous, and dynamic leadership having faith in organization’s HR. • Development of Works Ethics and Culture – Greater effort is needed to achieve cohesiveness because workers will have transient commitment to groups. Flexi time, Intrinsic Motivation, Vibrant work culture, developing atmosphere of trust among people, creative ideas etc will go a long way in sustaining work ethics and culture.
  21. 21. Human ResourcesStrategies • TALENT ACQUISITION • Recruit from Outside v. Internal Development • Require experienced, highly-skilled workers v. “we will train you” • Offer “top dollar” wages & benefits v. mentoring and a career • WORK ARRANGEMENTS • Individual Jobs v. Team Positions • Narrowly-defined jobs v. Positions with discretion and autonomy • On-premises Work v. Telecommuting Options • MOTIVATION & APPRAISAL • Extrinsic v. Intrinsic Reward Systems • Assessment for development v. assessment for rewards • Incentives for ideas & originality v. incentives for conformity?
  22. 22. StrategiesTo Avoid: Dumb Strategies FOLLOW THE LEADER - We can do that too…but maybe it’s not worth copying HIT ANOTHER HOME RUN - A pioneer company looking to get lucky again ARMS RACE - Battles which increase costs and decrease revenues DO EVERYTHING - Offering something for everyone…trying to please everyone LOSING HAND - Pouring $$ down the knothole…investment because of prior commitments NONE OF THESE STRATEGIES WILL CREATE A SUSTAINABLE COMPETITIVE ADVANTAGE FOR THE FIRM
  23. 23. Formulation of Functional Strategy Introduction Marketing Strategy Formulation Financial Strategy Formulation Production Strategy Formulation Logistics Strategy Formulation Research and Development Strategy Formulation Human Resource Strategy Formulation
  24. 24. Introduction • Every business unit develops functional strategies for each major departments which governs as to how each key activities of the business will be managed. • Functional strategy provide support to overall business strategy and ensure better performance in each functional area. • Functional strategy operates below the SBU or Business level strategy. • Within functional strategy there are many sub functional strategies. • Functional strategies are needed because: • They facilitate flow of strategic decisions to the different parts of an organization. • They act as basis for controlling activities in different areas of business. • They help bring harmony and coordination as they remain part of major strategies. • Time spent by functional managers in decision making is reduced, as plan lays down clearly what is to be done and policies provide framework in which decisions are made. • Similar situations occurring in different areas are handled in consistent manner.
  25. 25. Marketing Strategy Formulation • Marketing creates and sustains exchange relationships (buy / sell product or service) ……. NEED, WANT, and DEMAND • It involves different processes, functions, exchange, and activities. • It is an immediate cause and effect of rapid economic growth, globalization, technological upgradation and many other factors. • The marketing variables requiring that affect the success and failure of strategy implementation are: • Distribution Network to be use – Exclusive dealership or multiple channels • Amount and extent of Advertising, Media Planning – Newspaper, Radio, TV etc. • Price leader or Price follower • Offer Complete Warranty or Limited Warranty • Reward Salesman on Straight Salary / Straight Commission / Combination of Both • Deal with single Customer / Multiple Customers
  26. 26. Delivering Value to Customer • The partnering of Marketing with other departments in the organization besides chain of its suppliers, distributors, and ultimately customers will produce a value delivery network . • To succeed in today’s competitive market place, companies must be customer oriented where by they are able to deliver great value to customers. • Market segmentation is important in this as companies cannot satisfy all customers. They choose the best market segment (Market Targeting), and then develop and design strategies to serve the target market better than competition (Market Positioning) Companies Chain of Activities Supplier Customer Distributor
  27. 27. The Marketing Process– Marketing Mix Issues • Product Strategy: Specifying the exact product or service to be offered • New or existing product? …for new or existing customers? • Promotion Strategy How the product or service is to be communicated to customers • “Push” - spend $$$ on promotions and discounts to push products • “Pull” - spend $ to build brand awareness so consumers will ask for it by name • Channel or “Place” Strategy Selecting the method for distributing the product or service • Distribute through dealer networks or through mass merchandisers? • Sell directly to consumers through own stores or through internet? • Price Strategy Establishing a price for the product or service • “Skim pricing” (high) when you are a pioneer • “Penetration pricing” (low) builds market shares • “Dynamic pricing” (prices vary frequently) based on demand/availability
  28. 28. Marketing Mix Issues
  29. 29. Product • Product is also the first variable in the marketing mix. Instruments that aim at satisfaction of the prospective exchange party’s needs • A product can be divided into three parts. The core product, the augmented product and the tertiary product. • Before deciding on the product component there are some questions which you need to ask yourself. • What product are you selling? • What would be the quality of your product? • Which features are different from the market (Size, Shape, Colour)? • What is the USP of the product? • Whether the product will be branded as sub brand or completely new? • What are the secondary products which can be sold along with primary (Warranty, services). • What is brand and how is product different from others?
  30. 30. Price • The price is the amount a customer pays for the product. • Pricing of a product depends on a lot of different variables and hence it is constantly updated. It is determined by a number of factors including market share, competition, material costs, product identity and the customer's perceived value of the product. • Along with the above factors, there are also other things which have to be taken in consideration when deciding on a pricing strategy. Competition can be the best example. • Thus based on these factors there are several pricing strategies, one of which is implemented for the marketing mix. List Price, Discounts, Allowances, Payment Period, Credit Terms, Skimming Pricing (High price at introduction), Penetration Pricing (Low price at introduction)
  31. 31. Place • Place or distribution channel represents the location where a product can be purchased. It can include any physical store as well as virtual stores on the Internet. • Distribution has a huge affect on the profitability of a product. • Channels of distribution are the routes through which the ownership of goods flow on its way from the producer to the customer: • Mode of Transport • Warehousing and Storage • Order Processing • Inventory Control • Channel Partners: Distributor, Super-stockist, Wholesalers, Retailers
  32. 32. Promotion • Promotion activities are meant to communicate and persuade the target market to buy the company’s products. Promotion represents all of the communications that a marketer may use in the marketplace. • Promotion has five distinct elements – advertising, personal selling, public relations, word of mouth and point of sale. • Promotions are dependent a lot on the product and pricing decision. What is the budget for marketing and advertising? What stage is the product in? If the product is completely new in the market, it needs brand / product awareness promotions, whereas if the product is already existing then it will need brand recall promotions. • Promotions also decide the segmentation targeting and positioning of the product. • A certain amount of crossover occurs when promotion uses the five principal elements together
  33. 33. Promotion • Advertising : Advertising is non personal, flexible, dynamic method which covers any communication that is paid for, from and cinema commercials, radio and Internet adverts through print media and billboards. • Personal Selling: Involves face to face interaction / oral communication of sales force with the customer. Relationship management is key. In person selling, Telemarketing • Publicity: Communicating with an audience by personal or non-personal media that are not paid for delivering the message. Eg. Print media news, broadcast media news- UTI,PTI, Reuters, annual reports, speeches by employees. • Sales Promotion: Activities like discounts, contest, money refunds, installments, fairs, exhibitions etc. Done periodically to get larger share of the market. • Public relations are where the communication is not directly paid for and includes press releases, sponsorship deals, exhibitions, conferences, seminars or trade fairs and events. • Word of mouth is any apparently informal communication about the product by ordinary individuals, satisfied customers or people specifically engaged to create word of mouth momentum.
  34. 34. Expanded Marketing Mix • Physical Evidence: The environment in which the service is delivered, and where the firm and customer interact, and any tangible components. Eg. buildings, equipment, signs and logos, annual accounts and business reports, brochures, your website, and even your business cards. • Process: The actual procedures, mechanisms, and flow of activities by which the service is delivered – this service delivery and operating systems. • People: All human actors who play a part in service delivery and thus influence the buyers' perceptions; namely, the firm's personnel, the customer, and other customers in the service environment. Services tend to be produced and consumed at the same moment, and aspects of the customer experience are altered to meet the individual needs of the person consuming it.
  35. 35. WHO IS OUR PRIMARY CUSTOMER? WHAT KIND OF PRODUCT DO WE INTEND TO OFFER? CUSTOMERS EXISTING NEW EXISTING - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - MARKET MARKET PENETRATION DEVELOPMENT PRODUCTS OR - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SERVICES PRODUCT DIVERSIFICATION DEVELOPMENT INNOVATION NEW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - BASIC MARKET-PRODUCTSTRATEGIES THE CUSTOMER-PRODUCT DECISION
  37. 37. Marketing Planning • Marketing has a key role to play in strategic planning, because it is the job of marketing management to understand and manage the links between the business and the “environment”. • Marketing planning is essential because Businesses operate in hostile and increasingly complex environment. The ability of a business to achieve profitable sales is impacted by dozens of environmental factors, many of which are inter- connected. • A marketing plan is useful to many people in a business. It can help to: • Identify sources of competitive advantage • Gain commitment to a strategy • Get resources needed to invest in and build the business • Inform stakeholders in the business • Set objectives and strategies • Measure performance
  38. 38. Marketing Analysis Dealing with Marketing Environment • Deal with all P’s and Deal with all PESTL factors and their relationship
  39. 39. Marketing Strategy Techniques • Social Marketing – Public campaign for prohibition of smoking. • Augmented Marketing – Additional customer service and benefits • Direct Marketing – Catalogue selling, Telecomputing, TV shopping • Relationship Marketing – Maintaining strong value laden relationship with customers. • Service Marketing – Banking, Retailing, Educational, Utilities etc. • Person Marketing – Politicians, Film stars, Sports Persons etc. • Organization Marketing – Change of peoples attitude towards organizations. • Place Marketing – Business sites marketing, Tourism marketing etc. • Enlightened Marketing – Customer oriented, innovative, value, sense of mission, and societal marketing. • Differential Marketing - Target several market segment with different offer. • Synchro Marketing – Ideal/Over capacity due to irregular demand • Concentrate Marketing – Approach one market segment for large share • Demarketing – Strategy to reduce demand temporarily. Buses crowded in morning / evening
  40. 40. Formulation of Functional Strategy Introduction Marketing Strategy Formulation Financial Strategy Formulation Production Strategy Formulation Logistics Strategy Formulation Purchase Strategy Formulation Research and Development Strategy Formulation Human Resource Strategy Formulation
  41. 41. ProductionSystem • Production is related to the production system, operational planning, control, and research & development. • The operations system structure is concerned with manufacturing / service, supply / delivery system, and operations system objectives, which are related to customer service and effective resource utilization, both of which determine how operation plan and policies are set. • Production system and strategy formulation is concerned with capacity location, layout, product, service design, work systems, degree of automation, extent of vertical integration etc. • Production strategy implementation is concerned with decisions which are long term in nature and affects operations capability of the organization. • Absorption of technology, indigenization, and adaption to customer needs is key.
  42. 42. • MANUFACTURING LOCATION • Internal Production v. Outsourcing • Domestic Plants v. International Locations • SYSTEM LAYOUT • Product v. Process Layouts • Job Shops v. Mass Production • Job shop/small batch production fits well with a differentiation strategy • Continuous production / dedicated transfer lines helps achieve cost leadership • Use of robots and CAD/CAM v. Labor intense manufacturing • Modular Manufacturing and just-in-time delivery of sub-assemblies • Continuous improvement systems lower costs and increase quality OperationsStrategies
  43. 43. OperationsPlanning and Control • Operations planning and control strategies are related with aggregate production planning, materials supply, inventory, cost, quality management, and maintenance of plant and equipment. The aim is to have effective resource utilization and meeting long term objectives of the firm. • OPC is aimed at translating the objectives in to reality. • Quality of output is treated as strategic tool. It is not only looked in at inspection stage but also built into the design itself.
  44. 44. Logistics Strategy • Logistics management involves integration of flow of supplies in, through, and out of organization to achieve level of service which ensures that the right material are available at right place, at right cost, in right time, and in right quantity. • Safe and Reliable delivery of materials at lowest possible transportation cost. Effective logistics strategy is key to success.
  45. 45. Logistics Strategy • The questions needs to be addressed are: • Which source of raw materials and components are available? • How many manufacturing locations are there and what products are being made at each location? • What mode of transportation should be used for various products? • What is nature of distribution facility, material handling equipment possessed. Is it ideal? • Method fro deploying inventory in logistics network? • Should business organization use own transport vehicles? • Improvement in logistics can result in saving cost and doing business (profits for company). Eg: Cost Savings, Reduced inventory, Improved delivery time, Customer satisfaction, Competitive advantage.
  46. 46. Logistics Strategies Do we have goods that must be transported or delivered? • Type of materials transported (bulky or compact?) • Raw materials, supplies, & components, finished goods • Best mode of transportation • Air / rail / truck / barge Do we want dependability, low cost, or high quality service? • Outsource transportation or do it yourself? • Contract with others • Use multiple shippers v. Just one (UPS)? • Consider batch deliveries v. Just-in-time arrangements? • Ownership in distribution chain • Quasi / tapered / full
  47. 47. Supply Chain Management • Changes in business environment have contributed to development of supply chain networks and technology had made a great impact on all business activities. • Improved Organizations systems, infrastructure, reduction in information communication costs have resulted in effective coordination among supply chain members. • Creation of innovative products with shorter product life cycles is key today. • Traditional systems have been replaced by more efficient systems delivering customized products made according to need, at low costs, and delivers value to customer are in vogue. • Marketing and branding have become essential for success.
  48. 48. What is Supply Chain Management • SCM is linkage between Supplier, Manufacturer, and Customer and involves process of planning, implementing, and controlling of supply chain operations.. • SCM involves activities like sourcing and procurement of materials, conversion, and logistics. • Management of Supply Chains includes closely working with channel partners like suppliers, intermediaries, other service providers and customers. • SCM involves movement and storage of raw materials, work I progress inventory, and finished goods from point of origin to point of consumption. • Modern organizations are outsourcing SCM activities to organizations that specialize in this activity thus reducing cost. Just in time concept of inventory has helped in reduction of cost for all organizations.
  49. 49. Is Logistics Mgmt. Same As Supply Chain Mgmt. • SCM is extension of Logistics Management. • Logistic activity typically include management of inbound and outbound goods, transportation, warehousing, handling of materials, fulfillment of orders, inventory management, and supply / demand planning. Thus logistics is one part related to planning, implementation, and controlling the movement and storage of goods, services and related information between point of origin and point of consumption. • SCM is a tool of business transformation and involves delivering of right product at the right time to the right place at the right prices. • SCM reduces the cost to organizations and enhances customer service.
  50. 50. Implementing SCM Systems • Successful SCM implementation involves integrating key activities in SCM process. • It involves collaborative work between buyers and suppliers, joint product development, common systems and shared information (through electronic data interchange) among network members and its management in time. • Implementing and Running SCM involves: • Product Development • Procurement • Manufacturing • Physical Distribution • Outsourcing • Customer Service • Performance Measurement
  51. 51. Implementing SCM Systems • Product Development • Customers and Suppliers must work together in product development process. Partners should work towards shortening Product Life Cycles and product launched in shorter time helps organization to remain competitive. • Procurement • It requires careful resource planning, quality issues, identifying sources, negotiation, order placement, inbound transportation and storage. Suppliers are involved in planning and manufacturing process. • Manufacturing • Flexible manufacturing processes which are adaptive to accommodate customization, just in time inventory and minimum lot size is key. Changes in manufacturing process be made to reduce manufacturing cycle.
  52. 52. Implementing SCM Systems • Performance Measurement • There is strong relationship between the supplier, customer and organization. Suppliers capability, and customers relationship can be correlated with a firms performance. • Performance is measured in different parameters such as cost, customer service, productivity, and quality.
  53. 53. Which Functions Can We Outsource? • GLOBAL OUTSOURCING – INCREASES EFFICIENCY & QUALITY • Averages 9% reduction in costs and 15% increase in capacity and quality • Up to 70% of Boeing planes are outsourced..built in just 4 months v. 1 year • AMA SURVEY -- 94% OUTSOURCE AT LEAST ONE ACTIVITY • 78% General & Administrative activities • 77% Human Resources • 66% Transportation & Distribution • 63% Information Systems • 56% Manufacturing • 51% Marketing • 18% Finance & Accounting 25% were disappointed in their outsourcing results 51% brought the outsourced activity back “in-house” • MOST LIKELY ACTIVITIES TO OUTSOURCE • Customer Service • Bookkeeping/Financial/Clerical • Sales/Telemarketing • Software Programming
  54. 54. Successful Outsourcing KEY TO SUCCESS: Only outsource activities that are not related to the firm’s distinctive competencies TOTAL VALUE-ADDED to Firm’s PRODUCTS & SERVICES LOW HIGH HIGH - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - TAPERED FULL VERTICAL INTEGRATION INTEGRATION ACTIVITY’S Produce Some Produce All POTENTIAL FOR Internally Internally COMPETITIVE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ADVANTAGE OUTSOURCE OUTSOURCE COMPLETELY COMPLETELY LOW Buy on Open Market Use Long-Term Contracts - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
  55. 55. Outsourcing Disadvantages • Customer Complaints & Unexpected Delays • Locked Into Long-term Contracts That Aren’t Competitive • The Firm Doesn’t Learn New Skills & Develop Core Competencies A Survey Of 129 Outsourcing Firms Half Of The Projects Undertaken Failed To Achieve The Anticipated Savings Software Produced In India Had 10% More Bugs Than Comparable US Projects Seven Major Outsourcing Errors • Outsourcing Activities That Shouldn’t Be Outsourced • Failed To Keep Core Activities “In-house” • Selecting The Wrong Vendor • Picked A Vendor That Wasn’t Trustworthy, Or Who Lacks State-of-the Art Processes • Writing A Poor Contract • Balance Of Power Favors The Vendor…locked In Over A Long Period Of Time • Overlooking Personnel Issues…my Area Of Expertise Was Outsourced! • Losing Control Over The Outsourced Activity…we’re At Their Mercy! • Overlooking The Hidden Costs Of Outsourcing…transaction Fees? • Failing To Plan An Exit Strategy…how Can We Reverse Out Of This Deal?
  56. 56. Purchasing Strategies • Sourcing Components And Supplies Where Can The Highest Quality Components Be Found? • Outsourcing (Our Firm Buys Everything) • Buying On The Open Market (Spot) (Prices Fluctuate) • Long-term Contracts With Multiple Suppliers (Low Bid) • Sole Sourcing (Only One Supplier) Improves Quality • Parallel Sourcing (Two Suppliers) Provides Protection • Backward Integration (Our Firm Has An Ownership Stake In The Suppliers We Use) • Quasi-integration (Minority Ownership Position In A Supplier) • Tapered (Produce Some Of What We Need, But Not All) • Full (Produce All Of Our Own Needs) • Use Of Component Inventories V. Just-in-time Supply Delivery
  57. 57. Formulation of Functional Strategy Introduction Marketing Strategy Formulation Financial Strategy Formulation Production Strategy Formulation Logistics Strategy Formulation Research and Development Strategy Formulation Information Technology Strategy Formulation Human Resource Strategy Formulation
  58. 58. Research& Development Strategy • R&D people perform task that includes transferring complex technology, adjusting processes to local raw materials, adapting processes to local markets, and altering products to particular tastes and specifications. • New product development and improvement in old products requires significant resource availability which is always a constraint. • Technological improvements that affect consumer and industrial products and services shorten product life cycle. • R&D strategy ties external opportunity to internal strengths and is linked with objectives. • R&D policies can enhance strategy implementation efforts of the organization.
  59. 59. Research& Development Strategy • R&D Strategy Emphasize • Product and Process Improvements • Stress Basic or Applied Research • Be a Leader or Follower in R&D • Develop Robotics or Manual-type Processes • Spend High, Average, or Low Amount of Money on R&D • Perform R&D within the firm or Contract it Outside the firm • Use University Researchers or Private Sector Researchers • There must be an effective integration between R&D departments and other functional departments in implementing different types of generic business strategies.
  60. 60. R & D Strategy (Externalvs Internal) • If the rate of technological progress is slow, the rate of market growth is moderate, and there is significant barriers to possible new entrants, then in house R&D is preferred. The reason is that R&D, if successful, will result in a temporary product or process monopoly that the company can exploit. • If the rate of technological progress is rapid, the rate of market growth is slow, then the major effort in R&D may be very risky because it may lead to development of obsolete technology or one for which there is no market. • If the technology is changing slowly but the market is growing quickly, there generally is not enough time for in-house development. The prescribed approach is to obtain R&D expertise on an exclusive or non exclusive basis from an outside firm. • If both technological progress and market growth are fast, R&D expertise should be obtained through acquisition of well established firm in the industry?
  61. 61. R & D Strategy: Implementation • The first strategy is to be first firm to market new technological products. (Exiting and Dangerous Strategy). • The second strategy is to be innovative imitator of successful products, thus minimizing the risk and cost of startup. This strategy involves pioneer firms to develop first version of the new product and to demonstrate that the market exists. Then laggard firms develop similar products. Need excellent R&D personnel and excellent marketing department. • The third R&D strategy is to be low cost producer by mass producing products similar to but less expensive than products recently introduced. Price consideration is important in buying decision. Mass marketing replaces personnel selling. This strategy requires more investment in plant and equipment.
  62. 62. Research& Development Strategies • LEVEL OF INNOVATION • Pioneer (Leader) v. Copy Cat (Follower) • Technological leadership fits well with differentiation • A “follower” strategy makes sense with cost-leader strategies • Are we better at finding applications and customer adaptations than actually inventing something really new? • Different types of R & D (basic, product, process) • Where is the firm’s historic expertise / advantage? • How competent are the R & D Personnel? • ACQUISITION OF TECHNOLOGY • Internally developed v. acquired from outside • Technology “Scouts” • Strategic Technology Alliances • Acquire minority stake in promising high-tech ventures
  63. 63. Information Systems Strategies WORKER PRODUCTIVITY & CONNECTIVITY • Employees can be networked together across the globe • Instant translation software for global firms • “Follow the Sun Management”…pass projects on to the next team SALES & INVENTORY MANAGEMENT • Internet sales and development of customer databases • Instant sales reports allow immediate inventory reorders SHIPPING & TRACKING GOODS • FEDEX Powership software…stores addresses, prints labels, etc. • Tracking the progress of package shipment…FEDEX & UPS