1. FUNCTIONAL TACTICS
Functional tactics are the key, routine activities that must be undertaken in each functional area that is human resource management, marketing, finance, production/operations and research and development to provide the business ‘s products and services. Hence functional tactics translate thought (grand strategy) into action designed to accomplish specific short- term objectives. Every value chain activity in a company executes functional tactics that support the business’s strategy and help accomplish strategic objectives.
1.1 Differences Between Business Strategies and Functional Tactics
Ø Functional tactics are different from business or corporate strategies in three fundamental ways:
i. Time horizon.
iii. Participants who develop them.
Ø Functional tactics identify activities to be undertaken “now” or in the immediate future. Business strategies focus on the firm’s posture three to five years out.
Ø The shorter time horizon of functional tactics is critical to the successful implementation of a business strategy for two reasons.
i. First, it focuses the attention of functional managers on what needs to be done now to make the business strategy work.
ii. Secondly, it allows functional managers to adjust to changing current conditions.
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Functional tactics are more specific than business strategies. Business strategies provide general direction. Functional tactics identify the specific activities that are to be undertaken in each functional area and thus allow operating managers to work out how their unit is expected to pursue short-term objectives.
Ø Helping ensure that functional managers know what needs to be done and can focus on accomplishing results.
Ø Clarifying for top management how functional managers intend to accomplish the business strategy, which increases top management’s confidence in and sense of control over the business strategy.
Ø Facilitating coordination among operating units within the firm by clarifying areas of interdependence and potential conflict.
Different people participate in strategy development at the functional and business levels. Business strategy is the responsibility of the general manager of a business unit. That manager typically delegates the development of functional tactics to subordinates charged with running the operating areas of the business. The manager of a business unit must establish long- term objectives and a strategy that corporate management feels contributes to corporate level goals. Similarly, key-operating managers must establish short- term objectives and operating strategies that contribute to business level goals. Just as business strategies and objectives are approved through negotiation between corporate managers and business managers, so too, are short-term objectives and functional tactics approved through negotiation between business managers and operating managers.
Involving operating managers in the development of functional tactics improves their understanding of what must be done to achieve long- term objectives and thus, contributes to successful implementation. It also helps ensure that functional tactics reflect the reality of the day-to-day operating situation. Most importantly it can increase the commitment of operating managers to the strategies developed.
1.2 Functional Tactics in Human Resource Management (HRM)
HRM tactics aid long term success in the development of managerial talent and competent employees; the creation of systems to manage compensation or regulatory concerns and guiding the effective utilization of human resources to achieve both the firm’s short term objectives and employees’ satisfaction and development.
After discussing the Business Level Strategy, a directional structure is already been made for Pran based on the corporate level strategy ‘Big Target Market’. In business level strategy an overall strategy is proposed which will only be achieved by dividing works between different departments’ ex. Finance, Marketing, Human Resource Management, Research & Development and Production. In ...
The recruitment, selection, and orientation should establish the basic parameters for bringing new people into a firm and adapting them to “the way things are done” in the firm. The career development and training component should guide the action that personnel takes to meet the future human resources needs of the overall business strategy. Current trends in HRM’s “paradigm shift” involve looking at people expense as an investment in human capital. This involves looking at the business’s value chain and the “value” of human resource components along the various links in that chain. One of the results of this shift in perspective has been the downsizing phenomenon of the late 1980s and 1990s. While this has been traumatic for millions of employees in companies worldwide, its underlying basis involves an effort to examine the use of human capital to create value in ways that maximize the human contribution.
1.3 Functional Tactics in Marketing
The role of marketing function is to achieve the firm’s objectives by bringing about the profitable sale of the business’s products/services in target markets. Marketing tactics should guide sales and marketing managers in determining who will sell what, where, to whom, in what quantity, and how. Marketing tactics at a minimum should address four fundamental areas: products, price, place and promotion. The figure below highlights typical questions marketing tactics should address.
Typical questions that the functional tactic should answer
Product (or service) Ø Which products do we emphasize?Ø Which products/services contribute most to profitability?Ø What products/service image do we seek to project?Ø What consumer needs does the product/service seek to meet?Ø What changes should be influencing our customer orientation?
Price Ø Are we competing primarily on price?Ø Can we offer discounts or other pricing modifications?Ø Are our pricing policy standards nationally, or is their regional control? Ø What price segments are we targeting (high, medium, low)Ø What is the gross profit margin?Ø Do we emphasis cost/demand or competition-oriented pricing?
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Place Ø What level of marketing coverage is necessary?Ø Are there priority geographic areas?Ø What are the key channels of distribution?Ø What are the channel objectives, structure and management?Ø Should the marketing managers change their degree of reliance on distributors, sales reps and direct selling?Ø Is the sales force organized around territory, market or product?
Promotion Ø What are the key promotion priorities and approaches?Ø Which advertising/ communication priorities and approaches are linked to different products, markets and territories?Ø Which media would be most consistent with the total marketing strategy?
In addition to the basic issues raised above marketing tactics today must guide managers addressing the impact of the communication revolution and the increased diversity among market niches worldwide. The Internet and the accelerating blend of computers and telecommunications has facilitated instantaneous access to several places around world. Diversity has accelerated because of communication technology, logistical capability worldwide and advancements in flexible manufacturing systems.
1.4 Functional Tactics in Accounting And Finance
Financial tactics with longer time perspective guide financial managers in long term capital investment, debt financing, dividend allocation and leveraging. Financial tactics designed to manage working capital and short-term assets have a more immediate focus. Managerial accounting, where managers are responsible for keeping records of costs and the use of funds within their company, has taken on increased strategic significance in the 1990s these change has involved two tactical areas:
1. How to account for costs of creating and providing their business’s products and services.
2. Valuing the business, particularly among publicly traded companies.
Another area of concern is value that is whether or not business strategies and management actions are creating real value for stockholders. The most prominent technique that has guided tactical decisions for many companies during the last five years is economic value added (EVA).
EVA is simply a way of measuring an operation’s real profitability. It takes into account the “true” cost of capital – after-tax operation profit minus the total annual cost of capital. Incredibly most corporate groups have looked at the cost of their borrowed capital, but the cost of equity capital that shareholders have contributed appears nowhere in their financial statements. Until managerial accounting this takes this into account so that managers know whether they are covering all their costs and adding value to the company, company managers won’t achieve the benefits that have accrued to several companies.
In today’s world, where market is unpredictable, strategies play crucial role in defending a firm’s product position. “The main reason why companies must continually develop new products is because products have life cycle”, (Bittel, 1980). Just as operation managers must be prepared to develop new products, they must also be prepared to develop strategies for both new and ...
1.5 Functional Tactics in Production/Operations Management (POM)
POM is the core function of every organization. That function converts inputs (raw materials, supplies, machines and people) into value enhanced output. The POM function is most easily associated with manufacturing firms, but it also applies to all other types of businesses. POM tactics must guide decisions regarding:
1. The basic nature of the firm’s POM system, seeking an optimum balance between investment input and production/operations output,
2. Location, facilities design, and process planning on a short-term basis.
Key Functional Strategies in POM
functional strategy – Typical questions that the functional strategy should answer
Facilities and Equipment Ø How centralized should the facilities be?Ø How integrated should the separate process be?Ø To what extend should further mechanization or automation be pursued? Ø Should size and capacity be oriented toward peak or normal operating levels?
Purchasing Ø How many sources are needed?Ø How should suppliers be selected, and how should relationships with suppliers be managed over time?Ø What level of forward buying (hedging) is appropriate?
Operations planning and Control Ø Should work be scheduled to order or to stock?Ø What level of inventory is appropriate?Ø How should inventory be used (FIFO/LIFO), controlled and replenished?Ø What are the key foci for control efforts (quality, labor cost, downtime, and product use)?Ø Should maintenance efforts be oriented to prevention or to breakdown?Ø What emphasis should be placed on job specialization? Plant safety? The use of standards?
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1.6 Functional Tactics in Research and Development (R & D)
With the increase rate of technological change in most competitive industries, R & D has assumed a key strategic role in many firms. In the technology intensive computer and pharmaceutical industries, for example, firms typically spend between 4 and 6 percent of their sales dollars on R & D. In other industries, such as the hotel/motel and construction industries, R & D spending is less than 1 percent of sales. Thus, functional R & D tactics may be more critical instruments of the business strategy in some industries than in others.
First R & D tactics should clarify whether basic research or product development research will be emphasized. Several major oil companies now have solar energy subsidiaries in which basic research is emphasized, while the smaller oil companies emphasize product development research. The choice of emphasis between basic research and product development also involves the time horizon for R & D efforts. Should these efforts be focused on the near term or the long term? The solar energy subsidiaries of the major oil companies have long- term perspectives, while the smaller oil companies focus on creating products now in order to establish a competitive niche in the growing solar industry.
R & D tactics also involve organization of the R & D function. For example, should R & D work be conducted solely within the firm, or should portions of that work be contracted out? What emphasis should be placed on process R & D versus product R & D? If a firm’s posture is offensive, as is true for small high-technology firms, the firm will emphasize technological innovation and new product development as the basis for its future success. This orientation entails high risks (and high payoffs) and demands considerable technological skill, forecasting expertise, and the ability to quickly transform innovations into commercial products. A defensive R & D posture emphasize product modification and the ability to copy or acquire new technology. A converse shoe is a good example of a firm with such an R & D posture. Faced with the massive R & D budgets of Nike and Reebok, converse placed R & D emphasis on bolstering the product life cycle of its prime products (particularly canvas shoes).
Discussion Question 6.1: What are some drawbacks and risks to a broad generic business strategy? To a focused strategy? The two generic business strategies are differentiation and cost-leadership strategies, and they are fundamentally different from one another, both with their own drawbacks and risks (Rothaermel, 2013). These strategies are referred to as “generic” because they may be used by any ...
Large companies with some degree of technological leadership often use a combination of offensive and defensive R & D strategy. General Electric in the electrical industry, IBM in the computer industry, and Du Pont in the chemical industry all have a defensive R & D posture for currently available products and an offensive R & D posture in basic, long term research.
2. IMPLEMENTING STRATEGY THROUGH ACTION PLANS, FUNCTIONAL TACTICS AND EMPLOYEE EMPOWERMENT
After strategies have been formulated, alternative strategies analyzed, and a particular option with its long-term objectives, generic and grand strategies selected, the next crucial stage is implementation.
The implementation phase is referred to as the action phase of the strategic management process, and involves three interrelated vital steps:
i. Setting up clear action plans and short-term objectives,
ii. Developing specific functional tactics that create competitive advantage, and
iii. Empowering operating personnel through policies to guide decisions.
2.1 Action Plans
Action plans are derived from long-term objectives, which are then translated into current, short-term actions and targets. In other words, the personnel in an organization that actually “do the work” must be guided precisely on what should be done in the short-term, today and tomorrow, to ensure that the long-term objectives are achieved. Action plans and short-term objectives provide more specific guidance for what is to be done, and offer a clear break down of actions to be taken. They differ from long term objectives in time frame, specificity, and measurement.
To be effective, the action plans must incorporate four elements:
Ø Identify functional tactics and actions to be done in the next week, month or quarter as part of a business’s effort in building competitive advantage
Ø Have a clear time frame for completion, when the action will begin and when it will be accomplished.
Ø Identify and assign individual responsibility for each action in the plan.
Ø Short-term objectives should be identified that “operationalise” long term objectives. For instance, if company A intends to increase its market share by 30% over the next 5 years, what progressive increase in market share must it attain on a monthly or annual basis? Short-term objectives are very vital to action plans.
Qualities of effective short-term objectives
STOs should state what is to be accomplished, when it will be accomplished and how the accomplishment will be measured. Measurable STOs reduce the possibility of misunderstanding among interdependent managers who must implement action plans.
Although all STOs are important, priority must be accorded to some either because of a timing consideration or because of their impact on a strategy’s success. Priorities should therefore be ranked to avoid assumptions regarding their relative importance.
There are various ways of setting priorities:
(i) A simple ranking may be based on discussion and negotiation during the planning process. Such terms as primary, top or secondary may be used to indicate priority.
(ii) Assigning percentage weights along a 0-100 continuum. Recognizing priorities is vital in implementing value of STOs.
c) Linked to Long Term Objectives
To be effective in strategy implementation, STOs should be integrated and coordinated—they should be linked to LTOs.
Short-term objectives can add breadth and specificity in identifying what must be done to achieve LTOs. As pointed out above, if a company aspires to obtain 30% market share is 5 years, that objective can be enhanced if specific short term objectives spell out what must be accomplished each year to achieve the long term objectives. The qualities of LTOs discussed in the previous presentation’ acceptable, flexible, suitable, motivating, understandable and achievable also apply to STOs.
Value Added Benefits of Action Plans and STOs
1. Operating personnel attain a better understanding of their role in a firm’s overall Mission.
2. Meetings to set action plans and STO provide a forum for raising and resolving conflicts between strategic intentions and operating realities thereby enhancing strategic effectiveness.
3. Provide a basis for strategic control. They provide guidelines for developing budgets, schedules and other mechanisms for controlling the implementation of strategy.
4. Act as a motivating factor in managerial performance especially when personal and group roles in achieving the objectives are linked to the firms reward structure.
Note: Action plans and short term objectives should be reduced into a few pages with minimal wording so that they can easily be reviewed, updated, and discussed at regular management meetings.
2.2 The Role of Policies in Empowering Operating Personnel
For strategy to be implemented effectively, personnel at the operating level should be empowered to make certain decisions or to act in order to fulfill client’s needs since they are the first points of contact between a firm and its customers.
Methods of Empowerment
Ø Instituting self-managed work groups
Ø Eliminating whole levels of management in organizations
Ø Aggressive use of automation
It must be noted, however, that employee empowerment—allowing considerable discretion to operating personnel—should be underpinned by the need to ensure that decision making is consistent with the mission, strategy, and tactics of the business. One way operating managers achieve this is through the use of policies.
Creating Policies That Empower
Ø Standardizing many routine decisions, and
Ø Clarifying the discretion managers and subordinates are allowed to exercise in implementing functional tactics.
Policies achieve this in a number of ways:
1. Policies establish indirect control over independent action by clearly specifying how action is to be taken now. In addition, by defining discretion, policies in effect control decisions while empowering employees to act without direct intervention from top management.
2. They promote uniform handling of similar activities hence facilitating the coordination of tasks. This reduces antagonism arising from favoritism, discrimination, and the diverse ways of handling common functions that often hampers operating personnel.
3. Ensure quicker decisions by standardizing answers to previously answered questions that would otherwise recur and waste a lot of top management’s time. The operating personnel can thus take decisions without constant recourse to their managers.
4. Policies institutionalize basic aspects of organization behavior thereby minimizing conflicting practices and establishing consistent patterns of action in implementing strategy. This empowers operating personnel to act.
5. Reducing uncertainty in repetitive and day-to-day decision making. Operating staffs are thus provided with the necessary foundation for coordinated and efficient efforts.
6. Policies check resistance to or rejection of chosen strategies by organization members. When a major strategic change is done, precise operating policies clarify what is accepted and facilitate acceptance, especially if the operating managers participate in policy development.
7. Offer predetermined answers to routine problems hence speeding up handling of both simple and complicated problems.
8. Availing to managers a mechanism for avoiding hasty and ill-conceived decisions in changing operations.
Prevailing policy can always be cited for not accepting emotion-based, expedient or seemingly valid arguments for altering laid down procedures and practices.
Forms of Policies
Ø Written and formal
Ø Unwritten and informal
The latter are usually associated with the strategic need for competitive secrecy. Managers and employees often like the exercise of discretion offered by informal policies. But unwritten policies may deviate from the long-term success of a strategy.
Advantages of Formal, Written Policies
1. Managers are required to think through the policy’s meaning, content, and intended use.
2. They reduce misunderstanding.
3. More likely to ensure equitable and consistent treatment of problems.
4. Ensure unalterable transmission of policies.
5. They communicate the authorization or sanction of policies more clearly.
6. They offer a convenient and authoritative reference.
7. Systematically enhance indirect control and organizational coordination of the key purposes of policies.
Policies vary in strategic importance and origin. Some are internal routine procedures such as staff Medicare refunds that are not linked to strategy implementation. Others are virtually functional strategies as in the case of a company requiring its branches to invest a given percentage of gross revenue to advertising. Policies can be internally derived or externally imposed. For instance, equal employment practices are often developed in compliance with government requirements. Policies regarding real estate management may be influenced by tax regulations.
It must be pointed out that policies need periodical reviewing to ensure that they guide and control operations in a manner consistent with current business and functional strategies.
3. IMPLEMENTING STRATEGY THROUGH STRUCTURE.
3.1 Why should we consider structure?
Ø Structure is basically the best way to organize a firm in order to accomplish its objectives.
Ø It acts as the medium that facilitates the accomplishments of the organizational goals.
Ø It also helps to identify the key activities of the organizational processes and how they are coordinated.
Ø Successful strategy implementation depends to a large extent on the firm’s primary organizational structure.
Ø A primary organizational structure comprises the firm’s major elements, components, or differentiated units.
Ø Other means of getting organized are through reward systems, coordination terms, planning procedures, alliances, information, and budgetary systems.
Ø However, it is through the primary structure that strategists attempt to position the firm to execute its strategy in a manner that balances internal efficiency and overall effectiveness.
3.2 Primary Organizational Structures and their Strategy-Related Pros And Cons.
Primary structures can be classified under the following categories:
Ø Functional Structure
Ø Geographic Structure
Ø Divisional Structure
Ø strategic business Units
Ø Matrix Organization
We will address each one of them.
3.2.1 Functional Structure:
Mainly occur in organizations with single or narrow product focus, require well-defined skills and areas of specialization to build competitive advantage in providing their products/services.
Dividing work into functional specialties enables personnel to concentrate on only one aspect of the necessary work. This allows use of latest technical skills and develops a high level of efficiency.
Functional areas can be divided into engineering, production, human resource, finance and accounting and marketing.
Another way of dividing could be: purchasing, receiving and inventory, order entry, wholesales, retail sales, accounting, billing and customer service.
Example of this structure can be found in East Africa Breweries Limited, Barclays Bank of Kenya.
1. Achieves efficiency through specialization
2. Helps in developing of functional expertise
3. It involves differentiation and delegation of daily operating decisions.
5. Retains centralized control of strategic decision
6. It tightly links structure to strategy by designating key activities as separate units
1. It promotes narrow specialization and functional rivalry or conflict
2. It creates difficulties in functional coordination and inter-functional decision making
3. Limits development of general managers
4. It has a strong potential for inter-functional conflicts arising from priorities being placed on functional areas and not the entire business
3.2.1. Geographical Structure
It is common in firms that have grown by expanding the sale of their products of services to new geographical areas.
In these areas, they frequently encounter differences that necessitate different approaches in producing, providing or selling services or products.
The key strategic advantage of this structure is responsiveness to local market conditions. E.g. Coca Cola, Africa Online, Total Kenya Limited.
1. Allows tailoring of strategy to needs of each geographic market.
2. It delegates profit or loss responsibility to lowest strategic level
3. It improves functional coordination within the target market
4. It takes advantage of economies of local operations
5. It provides excellent training grounds for higher level general managers
1. It poses problems of deciding whether head office should impose geographic uniformity or diversity should be allowed
2. It makes it more difficult to maintain consistent company image or reputation from area to area
3. Adds a layer of management with the responsibility of running geographic units
4. It can result in duplication of customer services at head office and local levels
3.2.2 Divisional Structure
This structure is used when a firm diversifies its product/service lines, utilizes unrelated market channels or begins to serve heterogeneous customer groups.
This is often as a result of the functional structure being unable to meet the increased coordination and decision-making requirements that result from increased diversity and size.
Examples of this structure can be seen in CMC Motors, Unga Limited and Nation Media Group.
1. Forces coordination and authority down to the appropriate level for rapid response
2. Places strategic development and implementation in close proximity to the unique environment of each division.
3. It frees the CEO to be involved in broader strategic decision-making.
4. Shortly focuses accountability for performance
5. It helps retain functional specialization within each division
6. It provides a good training ground for strategic managers
1. It fosters potentially dysfunctional competition for corporate level resources
2. It presents the problem of determining how much authority should be given down to divisional managers.
3. Creates a potential for policy inconsistencies among divisions
4. It presents the problem of determining how to distribute corporate overhead costs in a way acceptable to divisional managers.
3.2.5 Strategic Business Units
This structure arises in order to counter difficulties in evaluating and controlling the operations of the divisions and the diversity, size and number of units continues to increase.
To deal with this a firm may need to add another layer of management to improve strategy implementation, to promote synergy and to gain control over the firm’s diverse business interests.
This can be accomplished by creating groups that combine various divisions in terms of common strategic elements. These groups are known as Strategic Business Units and are usually based on the independent product-market segments served by the firm.
Examples of this can be seen in Unilever, Sameer Group, Matsu*censored*a Corporation and Lonhro East Africa.
1. It improves coordination among divisions with similar strategic concerns and market environments.
2. It tightens the strategic management and control of large and diverse business interests.
3. Facilitates distinct and in-depth business planning at the corporate and business levels.
4. It helps channel accountability to distinct business units.
1. It places another layer of management between the division and corporate management.
2. It may increase dysfunctional competition for corporate resources.
3. May present difficulties in defining the goal of the group Vice President.
4. It may present difficulties in defining how much autonomy should be given to the group Vice President and Divisional Managers.
3.2.5 Matrix Organization
As large companies increase diversity, the result is the upsurge of numerous product and project effort of major strategic importance.
This may need an organization form that provides skills and resources when and where they are most vital. The Matrix Organization meets this need by providing dual channels of authority, performance responsibility, evaluation and control.
Essentially, subordinates are assigned both to a basic functional area and to a project/product manager.
This structure increases the number of middle level managers who exercise general management responsibilities.
Although the Matrix structure is easy to design, it’s difficult to implement. The dual chains of command challenge fundamental organization orientations.
Examples of this structure can be seen in Citicorp and Shell Oil.
1. It accommodates a wide variety of project oriented business activities.
2. Provides good training ground for strategic managers.
3. It maximizes the efficient use of functional managers.
4. It helps foster creativity and provides multiple sources of diversity.
5. Gives middle management broader exposure to strategic issues.
1. It may result in confusion and contradictory policies.
2. It necessitates tremendous horizontal and vertical coordination.
3. Can cause information jams and result to excess reporting.
4. Can lead to loss of accountability.
3.3. Guidelines to match structure to strategy
Considerable research has shown that the structure of the organization is dependent upon the strategy it adopts.
The following are some guidelines that have a great significance in matching the two.
Ø Restructure to emphasize and enforce strategically critical activities.
Ø Reengineer strategic business processes
Ø Downsize, outsource and self manage
Ø Strategy and structure evolution
Restructure to emphasize and enforce strategically critical activities.
Restructuring has been very core to modern businesses. It arises from the fact that some activities within a business’s value chain are more critical to the success of a business than others.
Examples of this can be seen in Motorola and Coca Cola
Motorola has its organizational structure designed in such a manner as to protect and nurture its legendary R & D and new product development capabilities.
Coca Cola on the other hand emphasizes on the importance of distribution, advertising and written support to its bottlers.
Two critical considerations arise when restructuring organizations.
Ø First, managers need to make the strategically critical activities the central building blocks for designing the organization structure. Those activities should be identified and separated into self-contained parts.
Ø The second consideration is to design the organization structure so that it helps coordinate and integrate these activities to be able to maximize the support of strategy/critical primary activities in the firms value chain and does so in a way to minimize the const of supporting activities and the time spent on internal coordination.
Managerial efforts to do this in the 1990’s have placed reengineering, downsizing and outsourcing as prominent tools for strategists restructuring the organizations.
Reengineering will be looked at later on in details.
This is eliminating the number of employees particularly those in middle management.
This has been due to the arrival of a global market place, information technology and intense competition, which has caused companies to reevaluate middle management activities to determine just what value, is being added to the company’s products and services.
The result of this scrutiny along with continuous improvement in information processing technology has been a major cause of downsizing. Nowadays, job cuts or reductions are not an alarming phenomenon.
Most of companies in the Kenya corporate sector are undergoing through this scenario both those in the service as well as manufacturing industry. Mass retrenchments are the order of the day from banks in Nairobi Central Business Districts to manufacturing concerns in Industrial area and to rural agricultural industries.
3.3.2. Self Management
This has been a direct outcome of downsizing.
Cutbacks in the number left those that remained with more work to do. The result was that they had to give up a good measure of control to workers and they had to rely on the workers to help out.
Spans of control traditionally thought to maximize fewer than ten people, have become much larger due to information technology leading to a lot of delegation to lower levels.
This delegation includes empowerment through self-managed work groups. The result is that major decisions can be handled at operating levels. This is evident in American oriented service companies.
This one has also arisen from downsizing.
This simply means obtaining work previously done by employees inside the company from sources outside the company.
Managers have found that as they attempt to restructure the organization particularly if they do so from a business process orientation, numerous activities can often be found in their company that is not strategically critical activities. This has been particularly the case of numerous staff activities and administrative control processes, previously the domain of various middle level management. Further scrutiny has led managers to conclude that these activities not only add little value or no value to the product or services, but that they are either unnecessary or they can be done much more cost effectively by other businesses specializing in these activities.
Outsourcing then can be a source of competitive advantage where activities, which the company can out rightly eliminate, are excluded from the structure.
Example Unilever decided to eliminate its huge R & D department from its structure as a strategic decision. This department was later formed to be the current Research International firm, which is a world-renowned market research.
Another example could be the elimination of transport services from the USIU administration structure opting for an outside agent to offer the same service.
3.4 Strategy structure evolution
There is usually a general sequence that a firm adopts as it continues to grow and expand. The sequence may be in either of the two following ways.
Single dominant business
Related diversifies businesses
Unrelated diversifies businesses
In line with the above strategy evolutions, structure also follows suit in adapting to each stage of evolution.
The following structure-strategy fit is often maintained.
1. Functional structure is often used for strategies of single dominant business.
2. Divisional structure is applied where we have a strategy of several lines of business, which are somehow related.
3. The SBU structure is also applied where we have a strategy of several unrelated lines of business.
NB: Its also worth noting that the firm that achieves the first structure strategy fit will achieve the most of competitive advantage in its industry of operation.
3.5 Illustrations of potential strategic priority and critical activities
Potential strategy and priority critical activities can be classified as follows.
1. Compete as a low cost provider of goods and services.
2. Compete as a high quality provider.
3. Stress customer service.
4. Provide rapid and frequent new products.
3.5.1. Compete as low cost provider of goods and services
Ø Broadens Markets mainly due to the fact that more people will be able to afford the goods and services.
Ø Requires longer production runs and fewer product changes.
This is because of the benefits that arise from the economies of scale. The longer the production runs, the more units that are produced and the lower the cost of production per unit.
Fewer product changes would mean cost savings in terms of purchasing additional raw materials and those arising from process changeover costs e.g.
Japanese car makers (Toyota)
When Toyota mass production of its cars, it’s broadened as the cheaper vehicles were now affordable by a large market. This meant that they had to decentralize their operations and open up offices in many countries. Now we have many subsidiaries of the Toyota company e.g. Toyota Team Kenya, Toyota Team Europe.
Further in order to be allow cost provider of cars, Toyota had to produce cars en mass. This meant that they had to introduce automated production lines, which could run 24-7-365. This saw the laying off front hose personnel.
In order to save costs, Toyota makes very few changes to their vehicles. This saves on raw materials and process changeover costs.
3.5.2. Compete as a high quality provider
In the early 1990s Rolls Royce produced 6 hand-made vehicles. The revenues earned from the sale of these vehicles were enough to cover the company’s costs and earn them profits.
This is because the profits obtained per unit, and from tote
Ø Required more quality assurance effort and higher operating costs.
The quality assurance effort had to be stepped-up as the chances of fault became increasingly higher due to human error.
Operating costs increase since the salaries and wages paid to highly skilled
Personnel are higher and much more testing has to be done to ensure that the vehicles are of quality of the cars
Ø Requires more precise equipment, which is more expensive.
Going back to the Rolls Royce e.g. since the cars are hand made the possibilities of human error becomes greater. Thus the testing must have a high degree of precision. This obviously results in the costs of production being very high.
Requires highly skilled workers, necessitating high wages and greater training.
In order to ensure great quality of their cars, Rolls Royce had to acquire highly skilled workers, train them further and pay them well in order to retain and motivate them.
3.5.3 Stress customer service
Example: Steers free delivery of orders
Ø Requires broader development of service people and service parts and equipment.
When Steers started the free delivery of orders within Nairobi, it had to train its service personnel to ride motorbikes as well as acquiring enough motor bikes for this purpose.
Ø Requires rapid response to customer needs or changes in customer tastes, rapid and accurate information system as well as careful coordination.
At Steers this is done mainly through their customer hot lines and over the Internet where customers can call in to order, complain or complement their services. All these enable them to keep up with customer’s tastes as well as to coordinate smooth delivery of orders.
Ø Requires high inventory investment
Since most of their foods are made in orders, Steers has to have high inventory of ingredients required for most of the foods ordered. This reduces delays in preparation since they store the ingredients in their proximity. This is costly to maintain.
3.5.4 Provide rapid and frequent introduction of new products
Example SmithKline Beecham:
Ø Requires versatile equipment and people.
SmithKline Beecham, an international pharmaceutical with a Kenyan plant is reputed to have high caliber equipment and renowned professionals in the pharmaceutical fields no wonder they are able to release new products every now and then. E.g. Coldrex,
Ø Requires higher R & D costs example Motorola
Motorola spends twice the industry average in R & D each year. This translates into a capability of releasing new and frequent products in the market every now and then. Their products range from Radio equipment and mobile handsets.
This is an industry that requires the release of new products every now and then for the company to survive.
4. RE-ENGINEERING STRATEGIC BUSINESS PROCESSES
Ø Leading organizations throughout the world are being driven to rethink their businesses and orient towards processes. Doing this forces them to quantify the business’s efforts by the four new “value metrics’’: –
1. Improved product quality and or service
2. Reduced cycle times
3. Reduced cost to customer
4. Increasing the speed of innovation and new product development
Why BPR? (Drivers to BPR)
1. Customer demands
3. Demand for better cost
4. Technology shifts
Ø BPR was popularized by Michael Hammer and James Champy (1993) from a realization that continuous improvement cannot apply when a firm is lagging far behind the world standard. It needs a rapid, quantum leap improvement.
Ø It is one method for restructuring efforts to remain competitive that concentrates on core business processes to focus on external measures of success like improved market share.
Ø It challenges internal company rules and industry rules.
BPR has been defined as the means by which an organization can achieve radical change in performance as measured by cost, cycle time, service, and quality, by the application of a variety of tools and techniques that focus on the business as a set of related customer oriented core business processes rather than a set of organizational functions.
4.2 Characteristics of BPR
A core business process, as distinct from other processes is a set of linked activities that crosses functional boundaries and, when carried out in concert, addresses the needs and expectations of the marketplace and drives the organization’s capabilities.
Core business processes are usually limited and may not exceed more than half a dozen like reducing the Federal Drug Association’s approval of blockbuster drug for Pharmaceutical firms.
Examples of non-core business processes are monthly closing of books by the Finance Department.
It is intended to re-organize a company so that it can best create value for the customer by eliminating barriers that create distance between employees and customers.
It involves fundamental rethinking and radical re-design of a business process.
Radical – because it strives structure organizational efforts and activities around results and value creation by focussing on processes that are undertaken to meet customer needs (not specific tasks and functional areas such as marketing and sales)
It reduces fragmentation by crossing traditional departmental lines and reducing overhead to compress formerly separate steps and tasks that are strategically intertwined in process of meeting customer needs (Processes are managed not functions)
The process orientation rather than functional orientation becomes the perspective around which various activities and tasks are then grouped to create the building blocks of the organization’s structure.
A multi-dimensional, multi-level team identifies customer needs and how the customer wants to deal with the company.
Customer focus must permeate all phases.
4.3 BPR IMPLEMENTATION STEPS
1. Develop a flowchart of the total business process including its interfaces with other value chain activities
2. Try to simplify the process first, eliminating tasks and steps where possible and analyzing how to streamline the performance of what remains.
3. Determine which parts of the process can be automated (usually those that are repetitive, time consuming and requiring little thought or decision)
Ø Consider introducing advanced technologies that can be upgraded to achieve next generation capability and provide a basis for further productivity gains down the road
4. Evaluate each activity in the process to determine whether it is strategy-critical or not. Strategy-critical activities are candidates for benchmarking to achieve best in industry or best in world performance status
5. Weigh the pros and cons of outsourcing activities that are non-critical or that contribute little to organizational capabilities and core competencies
6. Design a structure for performing the activities that remain; re organize the personnel and groups who perform these activities into the new structure
4.4 Benefits of Implementing BPR
Ø 1. Gaining competitive advantage from increased sales resulting from satisfied customers e.g. Standard Chartered Bank Kenya Ltd.
Ø 2. Reduced cycle time and cost e.g. Accounts Payable Dept Smithkline Beecham Kenya 2000
Ø 3. Flat organizations – Microsoft and dotcom companies
Ø 4. Increased responsiveness to customers
NB. BPR requires maintenance of Key Performance Indicators on Quality, Lead time,
Cost and Service.
Ø As BPR efforts progress, one of the first phenomena is excess capacity. As processes are re-engineered, even more capacity is discovered. The most frequent response is downsizing.
Ø BPR suggests that old practices must be “obliterated” and new processes designed from scratch to fully leverage new technologies and business realities. In practice, few managers have the luxury of re-designing their processes or organizations from “clean sheet of paper” – people, equipment and business knowledge cannot be so easily scrapped. Furthermore, organizational change almost inevitability becomes a learning process in which unanticipated obstacles and opportunities emerge.
Ø Pearce & Robinson – Strategic Management
Ø Readings on bus 6020
Ø Henry J. Johansson – Business Processing Engineering