Page 244 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes 13.2 Functional Plans and Policies

The process of developing functional plans and policies is quite similar to that of strategy
formulation, with the difference that functional heads are responsible for their formulation and
implementation. Environmental factors relevant to each functional area will have an impact on
the choice of strategies. Finally, the actual process of choice involves a negotiation between
functional managers and business unit managers. Thus, functional strategies are generally
formulated in all key functional areas.

For each of the functional strategies, a set of policies will have to establish for appropriate areas
of the business. The policies will ensure that the strategies are carried out as intended and that
the different functional areas are working towards the same ends. Companies have plans and
policies that cover nearly every major aspect of the firm. The firm should have strategies in
every major aspect of business, at least in key functional areas. We will highlight some of the
more important issues for each functional area that need to be addressed in their respective
functional strategies.
The functional strategies should be comprehensive; but at the same time, they should not leave
so much choice to operating mangers that they work sub-optimally or at cross purposes. At the
same time, the functional strategies should be flexible enough to leave room to managers for
responding quickly to situations and make exceptions for good reasons. The functional strategies
required in key functional areas are outlined below:

Financial Strategy

In the financial management area, the major concern of the strategy relates to the acquisition
and utilisation of funds. Major issues involved are the sources from where the funds will come,
from equity or by borrowing. How much of the borrowing will be short-term and how much
long-term. In terms of usage of funds, the policy decisions would relate to whether and to what
extent funds have to be deployed in fixed assets and current assets. The long-term or capital
investment decisions relate to buying or leasing the fixed assets. A retrenchment strategy or
paucity of funds may compel the organisation to lease rather than buy. In case of an organisation
where capital investment decisions are decentralised, a “hurdle rate” may be fixed so as to avoid
investment in weaker projects by one division and non-investment by another division.

Cash Flow

Apart from capital budgeting, another consideration in financial strategy which influences
other functional areas is the cash flow. A company may frame bonus and dividend policies
based on availability of cash. In case a company proposes expansion through internally generated
funds, it may reduce bonus and dividend. This is particularly so when it has formulated ambitious
growth strategies which require large cash. Similarly, if the firm has high risk business, it
should have a conservative debt/equity ratio to guard against heavy interest burden.
The funds position and optimisation orientation of top management also determines the accounts
receivable and payable policies. Financial strategies and policies may even determine the
accounting policies as these affect the profitability, balance-sheet and hence cash flow through
taxes, dividend, bonus etc.

Marketing Strategy

Functional strategies in marketing area are required for marketing – mix decisions, i.e. the four
Ps of marketing, viz. Product design, Product distribution, Pricing and Promotion aspects of
marketing. In terms of specifics, the product decisions relate to such issues as the variety of

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