Functional Strategy

STRATEGIC BUSINESS UNIT

Strategy Formulation: Functional Strategy and Strategic Choice

Professor Robert R. Wiggins MGMT 7160

FINANCE R&D

PRODUCTION

INVENTORY

MARKETING /SALES

PURCHASING

How do we coordinate?
Functional Strategy Professor Robert R. Wiggins

Functional Strategy
Production Manager

Functional Strategy
STRATEGIC BUSINESS UNIT

Product Design Models Production Run Produce to:

FINANCE R&D

PRODUCTION

INVENTORY

MARKETING /SALES

PURCHASING

How do we coordinate?
MGMT 7160 Functional Strategy Professor Robert R. Wiggins MGMT 7160 Functional Strategy Professor Robert R. Wiggins

Functional Strategy
Marketing/Sales Manager

Levels of Strategy
Product Design Models Production Run Produce to:

1. 2. 3. 4. 5. 6.

Functional Strategy Business Unit Strategy Corporate Strategy Enterprise Strategy Cooperative Strategy Hypercompetitive Strategy

How do we coordinate?
MGMT 7160 Functional Strategy Professor Robert R. Wiggins MGMT 7160 Functional Strategy Professor Robert R. Wiggins

Sourcing

Generic Model of Core Processes and Systems

Activitys Total Value-Added
Low High

Your Organization Suppliers Organization Capital Information Human Resourcing Resourcing Resourcing Customers Organization

High

Taper Vertical Integration:

Produce Some Internally

Full Vertical Integration:

Produce All Internally

PRODUCT DEVELOPMENT PROCESS DEMAND MANAGEMENT PROCESS ORDER FULFILLMENT PROCESS

Activitys Potential for Competitive Advantage

Low

Outsource Completely:
Buy on Open Market

Outsource Completely:
Purchase with Long-Term Contracts
Professor Robert R. Wiggins MGMT 7160

Control Systems
Professor Robert R. Wiggins

MGMT 7160 Functional Strategy

The Full Model of Core Processes and Systems

Suppliers Organization Your Organization Capital Information Human Resourcing Resourcing Resourcing PRODUCT DEVELOPMENT PROCESS PURCHASING PROCESS DEMAND MANAGEMENT PROCESS PRODUCTION PROCESS ORDER FULFILLMENT PROCESS Control Systems
MGMT 7160 Professor Robert R. Wiggins

Three Levels of Strategy-Operations Fit

STRATEGY/COMPETITIVE ADVANTAGE First-Order Fit: Processes Consistent with Strategy

Customers Organization

P1

P2
Operating Processes

P3
Second-Order Fit: First Order + Processes Reinforce Each Other

STRATEGY/COMPETITIVE ADVANTAGE

P1

P2
Operating Processes

P3

STRATEGY/COMPETITIVE ADVANTAGE

P1
MGMT 7160

P2
Operating Processes

P3

Third-Order Fit: Second Order + Optimization of Effort

Professor Robert R. Wiggins

Mapping the Supply Chain

Organizational Supply Chain Chrysler Eaton Casting Supplier Casting Process Clay Supplier

Supply Chain Volatility vs. Product Life Cycle Volatility

Customer Retailer Distributor Factory Supplier Equipment

Technology Supply Chain Engines Valve Lifters Clay Chemistry

Chemical Process Control

Business Capability Chain

Plant Management Metal-Machining JIT Supply Chain Management Plant Management Delivery

Web Site Developer

MGMT 7160

PC Maker

Chip Maker

Equipment Maker
Professor Robert R. Wiggins

MGMT 7160

Professor Robert R. Wiggins

Principles of Reengineering
The mission of a business is to create value for its customers It is a companys processes that create value for its customers Business success comes from superior process performance Superior process performance is achieved by having a superior process design, the right people to perform it, and the right environment for them to work in
MGMT 7160 Professor Robert R. Wiggins

Reengineering Defined
The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed.
-- Hammer & Champy (1993), Reengineering the Corporation
MGMT 7160 Professor Robert R. Wiggins

TQM
Incremental Existing Process One-Time/Continuous Short Bottom Up Narrow, Within Functions Moderate Statistical Control Cultural

versus
Level of Change Starting Point Frequency of Change Time Required Participation Typical Scope Risk Primary Enabler Type of Change Goal

CPR
Radical Clean Slate One-Time Long Top Down Broad, Cross-Functional High Information Technology Cultural/Structural

TQM and CPR Emphasize Complementary Elements of Operations Improvement

Anticipation

Level of Improvement

Prevention

Improvement
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Innovation
MGMT 7160

Fix as Fail Steps Tasks Activities Subprocesses Core Processes Scope of Target Site Professor Robert R. Wiggins

Source: Davenport, Thomas (1993), Process Innovation, Harvard Business School Press Professor Robert R. Wiggins

Kaizen vs. Reengineering

Process Capabilities
TQM improves capabilities within each generation of design

Demings PDCA Cycle

Plan
Third-generation process design Develop structured approach to addressing issues

Act
Second-generation process design First-generation process design Respond to undesired outcomes by repeating cycle

Do
Carry out approach as planned

Check
CPR replaces one generation of process design with another

Evaluate outcomes: are they desirable?

MGMT 7160 Professor Robert R. Wiggins

Time
MGMT 7160 Professor Robert R. Wiggins

Typical Approach to Managing CPR

Strategy Formulation Identifies Competitive Advantage Sought Study Generic Process Improvement Principles for Possible Adoption Identification of Needed Process Execution Capability Redesign of Process Plan for Transition to New Generation of Process Designs Transition to New Generation of Process Use Benchmarking to Identify Best Practices for Possible Adoption

The Crazy Time in CPR

Process Capabilities Short-term loss in process capability associated with changing the system

Generation 2 Process Generation 1 Process

Time

MGMT 7160

Professor Robert R. Wiggins

MGMT 7160

The period in which the organization is developing a new system while maintaining the old one

Professor Robert R. Wiggins

Approaches to Innovation
Internal Corporate Venturing (Corporate Entrepreneurship) Contracting for Innovation
Strategic Alliances Joint Ventures

Innovation and Competitive Advantage

Difficult for competitors to imitate Provide significant value to customers Timely Capable of being exploited commercially Utilize the firms existing capabilities and core competencies to develop competitive advantage and achieve strategic competitiveness
Professor Robert R. Wiggins Functional Strategy

Investing Outside (Acquiring Innovation)

MGMT 7160 Functional Strategy

Professor Robert R. Wiggins

MGMT 7160

Types of Innovative Activity

Invention
Creating or developing a new product, service or process idea Creating a commercializable product from an invention The adoption of innovation by a group of similar firms, which typically results in standardization of the product or process idea
Professor Robert R. Wiggins Functional Strategy

Extracting Value from Innovation

Barriers to Integration

Innovation Imitation

Different functional time orientation (e.g., R&D and production) Different functional language and interpersonal orientation Different goal orientation Formality of structure

Time to Market Interfunctional Integration -Cross-Functional Design Teams Product Quality Creation of Customer Value Value Appropriation from Innovation

Facilitators of Integration
Shared values New product vision provided by leadership Budget allocation to foster integrated design

MGMT 7160

MGMT 7160 Functional Strategy

Professor Robert R. Wiggins

Strategic Alliances
Product-Link Alliances Knowledge-Link Alliances Advantages
Difficult for a single firm to keep up-to-date Knowledge is increasingly specialized International location advantages

R&D Expenditures and Patents Before and After Acquisitions

0.032

0.000

0.030

Firm minus Industry R&D Intenstity

Patent Intenstity
-4 -2 0 2 4

-0.002 -0.004 -0.006 -0.008 -0.010 -0.012

0.028 0.026 0.024 0.022 0.020 0.018 -4 -2 0 2 4

Disadvantages
Partners actions increase legal liability Partners diversification may distract them May become overly dependent on others
MGMT 7160 Functional Strategy Professor Robert R. Wiggins

Years Before and After Acquisition

MGMT 7160 Functional Strategy

Years Before and After Acquisition

Professor Robert R. Wiggins