What is Functional Strategy? Definition, Theory and Example
Functional Strategy: this article provides a practical explanation of functional strategy. This article highlights the definition, the 3 levels, responsibility, core points, the divisions and a practical example. After reading, you’ll understand the basics of this powerful tool. Enjoy reading!
What is Functional Strategy? A type of definition
In business, plans for the future are defined with goals and objectives. Together these goals are the basis for the strategy that is drawn up to actually achieve them.
Strategies determine the results, performance, and goals that have to be achieved. Generally, strategies are developed on three levels: corporate, business, and functional.
What are the three strategy levels?
When the corporate strategies (strategy & tactics) have been defined by upper management, middle management will also have to define strategies and implement them for each functional area. Different functional areas of a company’s organisational structure include marketing, financial strategy, logistics strategy, production strategy, etc.
Functional strategies can be part of the overall business strategy, or serve as separate plans within one functional area.
The strategies on a functional level include the actions and goals that have been assigned to different departments within the organisation. These support the overall business strategies.
If the broad-level strategy is increasing market share, then examples of functional strategies are increasing the number of trained employees, improving brand recognition, or reducing production inefficiencies.
Who is responsible for functional strategies?
In hierarchical organisations, different people are responsible for the implementation of strategies on a functional level. Usually they are the senior experts such as a financial manager or engineering manager. On a corporate level, the CEO or president are responsible for the implementation of the most important strategies.
Some examples of common functional strategies are production strategy, debt financing, organisational strategies, marketing strategies, financial strategies, etc.
Functional strategies core points
Of the three levels of strategy, the functional strategy is the most detailed one. Each department has its own specific goals and tools or digital support solutions. These are also included in the functional strategy. All departments also keep track of statistics on performance and team successes.
Take into account the following matters when creating functional strategies.
1. Aligning functional and business strategy
Eventually the goal of the functional strategies is to support the overall business strategies. That’s why the strategies on a functional level always have to be aligned with the business-level strategy and the corporate-level strategy.
If the business strategy is to increase market share in country X, it makes sense for one of the functional strategies to be to develop the computer systems of a partner in country Y. These goals haven’t been aligned. Chances of success are greater when all strategy levels are aimed at the same result.
A threat to properly implementing a functional strategy is tracking too much data and information in order to measure progress. It’s essential to consider carefully what data must be tracked to determine if progress is being made toward supporting the business strategy.
Just aligning the functional strategy to the business strategy isn’t enough. Horizontally separate functional strategies have to be integrated as well. An example could be coordinating procurement/production, stocks, and logistics. That way you don’t create a bottleneck for items that go through different departments before they get to where they need to be.
4. Allocating resources
It is important that the different divisions and departments get the right resources to implement the functional strategy. In other words, a functional strategy can’t be implemented if the department doesn’t have the resources. This refers to both material resources – money – and personnel.
If the department in question doesn’t have those resources, this can have serious consequences for the extent to which the department can successfully contribute to the business strategy.
Below we explain a few business areas for which functional strategies are created.
Functional marketing strategy
Marketing consists of activities related to identifying consumer needs and working to meet those needs with a product or service. One of the most important components of a functional marketing strategy is the marketing mix. This consists of all steps a business can and must take to increase demand for products or services.
The traditional marketing mix consists of price, promotion, process, and people.
Prior to implementing the marketing mix, companies often conduct a SWOT analysis to thoroughly analyse the company’s circumstances.
There are a number of strategic marketing techniques, such as relationship marketing, hunger marketing, direct marketing, and brand leadership.
The Functional Strategy for the financial area relates to everything to do with financial management, such as planning, acquiring, using, and managing a company’s financial resources. It’s about raising capital, creating budgets for various departments, application of funds, investments, work capital management, dividend payments, calculating net values, etc.
Human resources strategy
The functional HR strategy consists of everything related to the development of employees and the opportunities and working conditions they are offered in order for them to be able to contribute to the organisation. The functional HR strategy consists of recruitment & selection, development, motivation, and retaining employees and other relations.
The functional production strategy of a business is focused on the overall production mechanism of the company, operational planning, inspections, logistics, and the entire supply chain management aspect. The primary goal of the product strategy is to improve the quality of production tasks, increasing efficiency, and lowering total production costs.
Research & development strategy
The Functional Strategy for research & development is about innovation and the development of new products as well as the improvement of existing products. Examples of functional strategies in this area: product development, diversification, and market penetration.
Functional Strategy step-by-step plan including an example
Business strategies determine the organisation’s overall course. Based on this, the strategies on the organisation’s functional level are determined. This step-by-step plan describes an approach for defining a strategy at a functional level. It answers the question of how to create a functional strategy that properly supports the business strategy.
1. Aligning business functions and business strategy
In many organisations, strategies aren’t properly aligned with the overall business strategy. This leads to inefficiencies such as wasting resources and activities, as well as activities and projects that don’t support the overall strategy. In the worst cases, a functional strategy can even impede the overall business strategy.
One way to counteract this is by actively involving the functional management when developing functional strategies. They can provide specific information about workflows and the ways different units work.
As familiar from the theory behind the MOST analysis, it is crucial that the most important stakeholders are involved with creating the strategy. These are shareholders, the board, workers, clients, and suppliers. Their input is important so that the strategies are fully aligned and meet their most important expectations.
2. From Business Strategy to Functional Strategy
Different sources of information are used to develop a functional strategy. In most cases, the overall business strategy is the most important element. Preferences and demands from other stakeholders, such as clients and the board, are also taken into account. In addition, benchmarking provides important input, or the results of SWOT analyses.
Take the example of an HR strategy at a large pharmaceutical company. The business strategy defines a number of strategic objectives. What can HR contribute to this in order to support the overall business strategy?
Goal 1: enter emerging markets
Goal 2: develop new products
Functional HR outcomes that serve as the basis for functional strategies in this area could be:
Outcome 1: flexibility to provide new start-ups with resources, talent, etc.
Outcome 2: support cross-functional teamwork
3. Collect input from stakeholders
Collecting information about different individual functions isn’t just necessary to define their expectations, but is also aimed at ensuring that the functional strategy is aligned with the present reality. It’s therefore important that organisations regularly use surveys to find out what’s working and what’s not.
In the example of the HR department of the pharmaceutical company, the HR owner must, for instance, initiate an employee satisfaction survey to determine to what extent the positions meet employee expectations.
4. Define crucial objectives
It was explained before that functional strategies are generally much more detailed than, for instance, business strategies. There’s often no shortage of ideas of what to do with functional strategies.
However, the capacity to implement these ideas is usually limited. Therefore focus on the objectives that are absolutely essential for supporting the business strategy. Align this based on the input provided by different stakeholders.
5. Prepare for implementation
When it comes to defining the various functional actions that together make up the functional strategy, ‘who’ is just as important as ‘what’. The best way to achieve this is to turn strategy development into a team activity.
This way every management team is involved in developing the strategy. That allows each manager take personal responsibility for implementing a particular initiative.
6. Define Key Performance Indicators (KPIs)
Key Performance Indicators (KPIs) are vitally important to monitor the progress of the functional strategy compared to the business strategy. You can read more about creating these progress statistics here.
7. Feedback & monitoring
Developing a functional strategy based on the business strategy is a good first step for a successful organisation. However, as the business develops, circumstances can change. That’s why it’s important that the alignment of the functional strategy to the business strategy remains an important focus.
In addition to a set of good KPIs, it’s important that a business steering group is appointed to collect feedback to maintain alignment.
Functional strategy summary
Strategies on a functional level consist of actions and objectives that support the overall business strategy. In hierarchical organisations, different people are responsible for the implementation of various functional strategies.
They are usually the department managers. Such as a general financial director. He or she is responsible for implementing the financial strategy. A marketing manager is responsible for implementing the marketing strategy.
The most important condition for properly functioning strategies is that they are aligned with the overall business strategy. One way to ensure this is to involve functional management with strategy development. They know about the workflows, available resources, and maximum capacity.
When developing a functional strategy, information from different sources is used. Think for instance of input from stakeholders such as clients, the board, and suppliers. Benchmarking and the results of strategic analyses, such as SWOT analyses, are also considered.
Because functional strategies tend to be much more detailed than the overall business strategy, it’s necessary to make a choice from the many possible objectives. Only actions and processes that demonstrably support the business strategies must be implemented to effectively use resources.
It’s important to develop KPIs to measure progress and effectiveness. Over time, the functional strategies can be adjusted based on these KPIs, so that they continue to support the business strategy.
Now it’s your turn
What do you think? Are you familiar with the explanation of functional strategies? Are the functional strategies in your work environment properly aligned to the overall business strategies? Is there room for you to offer input on strategy development? Would you like to see changes to how strategies are organised where you work? Do you have any tips or additional comments?
Share your experience and knowledge in the comments box below.
- Connor, T. (2001). Product levels as an aid to functional strategy development. Strategic Change, 10(4), 223.
- Dyer, L. (1983). Bringing human resources into the strategy formulation process. Human Resource Management (pre-1986), 22(3), 257.
- Gunnigle, P., & Moore, S. (1994). Linking business strategy and human resource management: issues and implications. Personnel Review, 23(1), 63-84.
- Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2010). Strategic management and business policy. Upper Saddle River, NJ: Prentice Hall.
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Janse, B. (2020). What is Functional Strategy? Definition, theory and example. Retrieved [insert date] from Toolshero: https://www.toolshero.com/strategy/functional-strategy/
Published on: 03/30/2020 | Last update: 01/03/2023
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