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What Is a Functional Strategy?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 20 July 2014
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A functional strategy is one that dictates the task and activities of a certain business area. Owners and managers make up certain rules and guidelines for employees to follow. Each department operates by these guidelines, with all departments working together to achieve the overarching company goals. Common areas where a company may implement a functional strategy include the production, finance, or the research and development departments. An organizational strategy may also be functional.

Production department strategies often fall under the “make versus buy” analysis. Each product or product line is reviewed by owners and managers, who use specific rules to make this decision. The functional strategy helps dictate how to decide the best alternative for new or existing products. For example, the strategy may involve reviewing available materials, looking at the labor skill in the current market, and reviewing the costs for outsourcing the product for production purposes. The result leads to an informed decision on how a company will proceed with product production.

A company’s finance department typically makes decisions on capital structure. The capital structure includes a mix of debt and equity funds to finance large business operations. A functional strategy provides guidance on how to review operational income and decide what portion should be reinvested into the company. From here, finance employees then look to different funding options to fund the shortfall in cash from operations. Selecting the lowest cost of capital from the mix of funding options is typically the goal of a functional strategy.

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Other departments can also work under a functional strategy. The strategy best describes any set of rules that provide specific guidance for moving the company forward. The research and development department, for example, can have guidelines on how to increase the company’s product pipeline. Human resource departments have a focus on hiring and retaining skilled workers. The accounting department has a schedule for processing information and closing the books each month, meeting the company’s goals.

Through each of these individual functional strategy divisions, a company can meet its overarching business goals. Executives can set a company’s focus through its organizational mission statement or other goal-setting statements. This provides guidance for each department on how to proceed with developing their own strategies. An organizational strategy typically has the overarching goals of building the company’s structure, training staff to complete tasks, and setting competitive wages in the market. Outside legal advice may be necessary to complete some of these items.

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Discuss this Article

David09
Post 4

@Mammmood - One aspect of strategic management that we used in our company is something called a SWOT analysis.

SWOT stands for Strengths, Weaknesses, Opportunities and Threats. We had this developed when the business first started, but really twice a year we revisit this statement as we see changing dynamics in the marketplace.

SWOT just gives us a chance to view where we’re at, anticipate any possible pitfalls, and of course determine where we can really make some money.

Mammmood
Post 3

@allenJo - I think that corporate strategy may differ a little from the strategies of a small to medium sized business.

All businesses are out to make a profit of course but I’m talking about some of the nuts and bolts of how they define their strategies.

Smaller companies may define their goals and then hit the ground running right away, whereas the bigger companies take a slower, more methodical approach. I don’t know if that’s always true but that’s been my impression.

allenJo
Post 2

@MrMoody - All business strategy works by the same principles in my opinion, whether you are talking about the functional strategies of individual departments or the business as a whole.

You have to define what your goals are, your unique selling proposition in the marketplace (what makes you different than everybody else) as well as your target market, how you will sell to them and a step by step plan for execution.

One thing I’ve noticed from my workplace is that strategies tend to be fluid. As the market forces change (a new company steps in and tries to step on our sales territories) we have to adapt, and adapt quickly.

It’s not uncommon to be in a meeting with the boss where he decides we need to try one approach, and then six months later we have to switch gears.

MrMoody
Post 1

This is a good article. While I don’t have firsthand knowledge of all the different business units and their goals, I can give a functional strategy example from my current job.

We sell software to utilities. We make money on the software, the support, the training and of course the renewal of the licenses for the software product every year.

However, it’s the sale of software that drives the business and keeps the company going. If we stopped selling software we wouldn’t stay in business much longer, because support and license renewals alone don’t bring in enough to keep the doors open.

Right now we are involved in developing new products to sell, because we’ve nearly saturated the current market. When we roll out these new products, we will then try to up sell them to existing clients as well as secure sales from new clients. I guess you would call that our functional product strategy.

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