Functional Strategy: Definition & Examples

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  • 0:02 Levels of Strategy
  • 1:02 Functional Strategies
  • 2:37 Operational v.…
  • 3:14 Developing Functional…
  • 5:44 Lesson Summary
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Lesson Transcript
Instructor: Ronald Price

Ron has held a variety of positions in higher ed and business, including 25+ years as an instructor and 20+ years as a corporate senior manager, and consultant.

This lesson explains functional strategy and its role in the strategic and operational management of a business. An example of how a business defines and applies functional strategy is provided to help you to understand this concept.

Levels of Strategy

In business, plans for the future are identified as goals and objectives, which collectively define its strategy. Strategies define the outcomes, achievements, or goals a business wishes to achieve over a specific time frame. Typically, a business' strategies are expressed as strategic plans. Planning is defined on three levels: strategic, tactical, and functional.

Strategic plans set priorities and common goals, focus the use of resources, and specify the expected results or achievements. For example, increasing its market share may be one of a business' strategies. Tactical plans define the assignments and actions required to achieve a strategic goal. The tactical strategies for increasing a business' market share may include increasing the marketing budget and goals for all other applicable functional areas, such as improving product quality, broadening product exposure on the Web, or offering sales promotions.

Functional Strategies

The third level of strategic planning is functional strategies, which are derived from the tactical strategies. Each functional area or department is assigned the specific goals and objectives it must achieve to support the higher-level strategies and planning. Functional strategies specify outcomes to be achieved from the daily operations of specific departments or functions. Functional strategies reflect that strategic and tactical objectives typically require the involvement of multiple functional areas, such as departments, divisions, and branches. Thus, the tactical plan is divided into the tasks and objectives of each functional area.

For example, the functional strategy for the marketing department in support of the business' goal to increase market share is likely to include identification of new market segments, brand identification programs, and others. Additionally, the production function may be assigned a reduced rejection rate for the product in question.

The functional areas of a business that are commonly assigned function-specific goals are human resources, production, research and development, marketing, and perhaps information technology. Of course, the functional areas that are assigned functional strategies depend on the plan itself and vary by industry, organization, or size. A functional strategy, for any business, large or small, focuses the achievement of a goal on the skills and abilities of individual departments and their employees. In other words, a functional strategy is a short-term plan for achieving one or more goals of a business by one or more functional areas.

Operational v. Functional Strategies

Functional strategies and operational strategies are often confused. While they typically share similar intentions, such as achieving strategic goals, they differ in application and scope. Operational strategies define how an entire business will allocate its resources to support operations and its strategic goals. Operational strategies, which address the operational areas of a business, focus on maximizing the efficiency and effectiveness of production while minimizing operating costs. Functional strategies can be derived from operational strategies, but can be assigned to any functional area or combination of areas.

Developing Functional Strategies

The primary functional areas in which functional strategies are developed are marketing, production, human resources, R&D, and IT. For each of these areas, a functional strategy with the achievement of a strategic business objective as its goal should be in line with the function, capacity, and resources of a functional area.

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