Chapter 8

Question 1

Functional Strategies

Answer 1

Functional strategies represent the lowest strategy tier.
The link between functional and business strategies is clear in many but not all cases. The business strategy usually dictates what must be done within the various functions.
The key is integration. All functional strategies must blend together to support the business strategy.

Question 2

Marketing (The 4 P’s)

Answer 2

Pricing: Low-cost businesses tend to emphasize low prices. Price is less of a concern to differentiated businesses.
Promotion: Low-cost businesses spend less on promotion and often emphasize price. Differentiated businesses highlight the uniqueness of their products or services.
Product/Service: Low-cost businesses emphasize basic, no-frills products. Differentiated businesses seek to distinguish their products from the competition. Developing and maintaining the quality of customer service can be more challenging than enhancing product quality because the consumer perceives service value primarily at the time the service is rendered. All functional areas must work together to provide the customer with product
and service value.
Place (Distribution): Low-cost businesses seek the most efficient means of distribution. Differentiated businesses may emphasize quality or speed of delivery.

Question 3

Finance

Answer 3

The financial strategy addresses factors related to managing cash, raising capital, and making investments.
Low-cost businesses tend to minimize financial costs and often defer expansion if the cost of capital is too high.
Differentiated businesses tend to fund initiatives associated with quality improvements and expansion even when the cost of capital is relatively high.
Financial ratio analysis is part of the financial strategy process: examining its financial ratios and comparing them to those of key competitors or industry averages. Comparing current ratios to those in the past is also relevant.

Question 4

Financial Ratio AnalysisLiquidity Ratios

Answer 4

Current Ratio: Indicates how much of the current liabilities the current assets can cover; ordinarily 2:1 or better is desirable.
Quick Ratio or Acid Test or Liquidity Test: Indicates how rapidly a business can come up with cash on short notice. Not relevant for firms where inventory is almost immediately convertible to cash (e.g., McDonald’s).

Question 5

Financial Ratio AnalysisActivity Ratios

Answer 5

Asset Turnover: Measures how efficiently the company’s total assets are being used to generate sales.
Inventory Turnover: Indicates how many times inventory of finished goods is sold per year.
Sales-to-Working Capital: Measures how efficiently net working capital (current assets – current liabilities) is used to generate sales.

Question 6

Financial Ratio AnalysisLeverage Ratios

Answer 6

Debt-to-Asset: Indicates the percentage that borrowed funds are utilized to finance the assets of the firm.
Debt-to-Equity: Indicates the percentage of funds provided by creditors as compared with owners.
Long-Term Debt-to-Equity: Indicates the percentage of funds provided by long- term creditors as compared with owners.

Question 7

Financial Ratio AnalysisPerformance Ratios

Answer 7

Gross Profit Margin: Measures company’s efficiency during the production process. Substantial variations over time could suggest financial difficulties or possibly fraud.
Return on Assets: Measures the return on total assets employed.
Return on Equity: Measures a firm’s profitability in comparison to the total amount of shareholder equity.
Return on Sales: Indicates ratio of return on net sales.

Question 8

Production

Answer 8

The production or operations strategy outlines how a business generates its goods and services.
Low-cost businesses emphasize cost reductions via the experience curve and often engage in business process reengineering in an effort to eliminate operations that are unnecessary or add little value to the final product. Differentiated businesses tend to develop systems that emphasize product and service quality and distinctiveness, even if production costs rise as a result.

Question 9

Experience Curve

Answer 9

the reduction in per-unit costs that occurs as an organization gains over time. Reductions can come through organizational learning, economies of scale, or capital-labor substitutions.

Question 10

(organizational) learning

Answer 10

occurs when employees become more efficient when they perform the same task many times.

Question 11

Capital-labor substitution

Answer 11

refers to an organization’s ability to substitute labor for capital, or vice versa as volume increases, depending on which combination minimizes costs and/or maximizes effectiveness.

Question 12

Quality Considerations (TQM)

Answer 12

Historically, quality was a control activity that occurred at the end of the production process.
In the 1980s, Total Quality Management (TQM) was introduced. TQM refers to the totality of features and characteristics of a product or service that bear on its ability to satisfy customer needs.
Today, quality is seen as an essential ingredient and a concern of all members of the organization.
From a production standpoint, producing a quality product lowers defects and minimizes rework time, thereby increasing productivity.
Making the operative employees responsible for quality eliminates the need for inspection.

Question 13

Six Sigma

Answer 13

Six Sigma seeks to increase profits by eliminating variability in production, defects, and waste that undermine customer loyalty. Six Sigma is a systematic process that utilizes information and sophisticated statistical tools to improve production efficiency and quality.

Question 14

Research and Development (2 types)

Answer 14

Product/service R&D refers to efforts directed towards improvements or innovations in the quality or uniqueness of a company’s outputs.
Process R&D seeks to reduce operational costs and make them more efficient. R&D is most important in rapidly changing industries where production modifications are most often required to remain competitive.
Differentiators usually invest more in product/service R&D, whereas cost leaders usually invest more in process R&D.

Question 15

Purchasing

Answer 15

Low-cost businesses procure supplies and raw materials at the lowest possible price consistent with a quality standard.
Differentiated businesses may be willing to pay more for raw materials if they help differentiate the final product or service.
Just-in-time (JIT) inventory management has grown in popularity during the past two decades: the purchasing manager asks suppliers to ship parts at the precise time they are needed in production to hold inventory, storage, and warehousing costs to a minimum

Question 16

Human Resources

Answer 16

Strategic HRM seeks to build a workforce that enables the organization to achieve its goals
Security is a key strategic concern
Valuable HR may enhance efficiency by lowering absenteeism and turnover and/or promote differentiation via their innovative ideas and excellence in job performance.
Low-cost businesses may attempt to minimize staffing expenses, training & development, and even salaries.
Problem: It is often necessary to pay “market wages” for quality people, so HR strategies may differ little if any between low-cost and differentiated businesses.

Question 17

Knowledge and Competitive Advantage

Answer 17

When employees are viewed as expenses, organizations tend to minimize their costs. When they are viewed as investments, organizations tend to maximize their value.
Human capital is the sum of the capabilities of individuals in an organization, and is a source of competitive advantage. According to the knowledge management perspective, people and their skills and abilities represent the only resource that cannot readily be reproduced by a firm’s competitors.

Question 18

Information Systems Management

Answer 18

An effective information systems (IS) strategy can benefit the entire organization. A computer-based decision support system can permit each functional area to access the information it needs and to improve coordination by communicating electronically across functional departments.
Effective information systems can support all of the other functional strategies. The information system is important for all businesses, regardless of strategy.

Question 19

Functional Strategies and Industry Life Cycle

Answer 19

Certain strategic capabilities tend to become more valuable in firms as their industries progress through different life cycle stages:
Introduction stage- emphasis on R&D
Growth stage- emphasis on marketing
Maturity stage- emphasis on production
Decline stage- emphasis on finance
The HR function is important but not dominant in all stages.

Question 20

10 factors that facilitate organizational learning

Answer 20

1. Scanning imperative: Interest in external happenings and in the nature of one’s environment
2. Performance Gap: Shared perception of a gap between actual and desired state of performance.
3. Concern for measurement: Spend considerable effort in defining and measuring key factors when venturing into new areas
4. Experimental Mindset: Support for trying new things
5. Climate of Openness: Accessibility of information, relatively open boundaries.
6. Continuous Education: Ongoing commitment to education at all levels
7. Operational Variety: Variety exists in response modes, procedures, systems
8. Multiple Advocates: Top-down and bottom-up initiatives are possible
9. Involved Leadership: Leadership at significant levels articulates vision and is very actively engaged in its actualization
10. Systems Perspective: Strong focus on how parts of the organization are interdependent

Question 21

What are the functional strategies

Answer 21

Marketing 
finance 
production 
purchasing
HR
R&D