STRATEGY FORMULATION:FUNCTIONAL STRATEGYAND STRATEGIC CHOICE

STRATEGY FORMULATION:FUNCTIONAL STRATEGYAND STRATEGIC CHOICE

Hesham Abd ElkhalekAhmed MagdyTamer Essawy

By:

Presented To:Dr. Adel Zaied

Environmental Scanning

External

Internal

Social Environment:

General Forces

Task Environment:

Industry Analysis

Structure: Chain of command

Culture: Beliefs, Expectations,

Values

Resources: Assets, Skills,

Competencies, Knowledge

Strategy Formulation

Mission

Reason for

existence

Objectives

What results to accomplish

by when

Strategies

PoliciesPlan to

achieve the mission & objectives

Broad guidelines

for decision making

Strategy Implementation

Programs

Budgets

Procedures

Activities needed to

accomplish a plan

Cost of the programs

Sequence of steps needed to do the job

Feedback / Learning

Evaluation & Control

Performance

Actual Results

FUNCTIONALFUNCTIONAL

STRATEGYSTRATEGY

Core CompetenciesDistinctive

Competencies The Sourcing Decision Marketing Strategy Financial Strategy R&D Strategy Operation Strategy Purchasing Strategy Logistic Strategy HR management Strategy Information System Strategy

Core CompetenciesDistinctive

Competencies The Sourcing Decision Marketing Strategy Financial Strategy R&D Strategy Operation Strategy Purchasing Strategy Logistic Strategy HR management Strategy Information System Strategy

Functional StrategyFunctional Strategy

It is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity.

Ex. competitive strategy of Differentiation; emphasizes expensive, quality assurance process over cheaper, high-volume production;

HR func. Strtgy; emph. Hiring/training High skilled workforce

Marketing func. Strtgy; emph. “Pull” using ads to increase demand, over “Push” using promotional allowances

Ex. House of Donuts varies its Functional strategy in different regions (US [breakfast] vs Japan [evening])

It is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity.

Ex. competitive strategy of Differentiation; emphasizes expensive, quality assurance process over cheaper, high-volume production;

HR func. Strtgy; emph. Hiring/training High skilled workforce

Marketing func. Strtgy; emph. “Pull” using ads to increase demand, over “Push” using promotional allowances

Ex. House of Donuts varies its Functional strategy in different regions (US [breakfast] vs Japan [evening])

Functional StrategyFunctional Strategy

Core Competencies

a core competency is something that a corporation can do exceedingly well. It is a key strength.

For example, a core competency of Avon Products is its expertise in door-to-door selling. FedEx has a core competency in information technology. A company must continually reinvest in its core competencies or risk losing them.

Distinctive Competencies

When these competencies or capabilities are superior to those of the competition, they are called distinctive competencies.

To be considered a distinctive competency, the competency must meet three tests:

• Customer Value: It must make a disproportionate contribution to customer-perceived value.

• Competitor Unique: It must be unique and superior to competitor capabilities.

• Extendibility: It must be something that can be used to develop new products/services or enter new markets.

Distinctive Competencies

A corporation can gain access to a distinctive competency in four Ways:

• An asset endowment, such as a key patent, ex. Xerox original copying patent.

• Acquired from someone else, ex. Whirlpool bought a worldwide distribution system when it purchased Philips's appliance division.

• Shared with another business unit or alliance partner, ex. Apple Computer worked with a design firm to create the special appeal of its Apple II and Mac computers.

• Carefully built and accumulated over time within the company, ex. Honda extended its expertise in small motor manufacturing from motorcycles to autos and lawn-mowers.

The Sourcing Decision

Outsourcing is purchasing from someone else a product or service that had been previously provided internally.

• ex, AT&T outsourced its credit card processing to Total System Services;

Outsourcing is becoming an increasingly important part of strategic decision making and an important way to increase efficiency and often quality.

The Sourcing Decision

The key to outsourcing is to purchase from outside only those activities that are not key to the company's distinctive competencies. Therefore, in determining functional strategy, the strategist must:

• Identify the company's or business unit's core competencies.

• Ensure that the competencies are continually being strengthened.

• Manage the competencies in such a way that best preserves the competitive advantage they create.

The Sourcing Decision

Outsourcing experience revealed that unsuccessful outsourcing efforts had three common characteristics:

• The firms' finance and legal departments dominated the decision process.

• Vendors were not prequalified based on total capabilities.

• Short-term benefits dominated decision making..

Proposed Outsourcing Matrix

Activities Today Value-Added to Firm’s Products & Services

Taper Vertical Integration:

Produce Some Internally

Low High

Lo

wH

igh

Full Vertical Integration:

Produce All Internally

Outsource Completely:

Buy on Open Market

Outsource Completely:

Purchase with Long-Term ContractsA

ctiv

ity’

s P

ote

nti

al f

or

Co

mp

etit

ive

Ad

van

tag

e

Marketing Strategy

Marketing strategy deals with pricing, selling, and distributing a product.

Using a market development strategy, a company or business unit can (1) capture a larger share of an existing market for current products through market saturation and market penetration or (2) develop new markets for current products.

Consumer product giants such as Procter & Gamble, Colgate-Palmolive, and Unilever are experts at using advertising and promotion to implement a market saturation/penetration strategy to gain the dominant market share in a product category.

Marketing Strategy

product development strategy, a company or unit can (1) develop new products for existing markets or (2) develop new products for new markets.

Church & Dwight developed new products

to sell to its current customers. The

company then generated new uses for its

sodium bicarbonate (Arm & Hammer brand

baking soda) by reformulating it as

toothpaste, deodorant, and detergent.

Marketing Strategy

Advertising and promotion; choose between a "push" or a "pull" marketing strategy.

push strategy (food and consumer products companies) by spending a large amount of money on trade promotion in order to gain or hold shelf space in retail outlets. Trade promotion includes discounts, in-store special offers, and advertising allowances designed to "push" products through the distribution system.

Marketing Strategy

pull strategy, in which advertising "pulls" the products through the distribution channels. The company now spends more money on consumer advertising designed to build brand awareness so that shoppers will ask for the products. Research has indicated that a high level of advertising (a key part of a pull strategy) is most beneficial to leading brands in a market.

Marketing Strategy

Distribution Strategies; Should a company use distributors and dealers to sell its products or should it sell directly to mass merchandisers?

Using both channels simultaneously can lead to problems. In order to increase the sales of its lawn tractors and mowers,

Ex. John Deere’s Lawn Mowers are sold through its current dealer network, and also through mass merchandisers like Home Depot. The dealers considered Home Depot to be a key competitor (Home Depot's ability to under price).

Marketing Strategy

Pricing Strategies

For new-product pioneers, skim pricing offers the opportunity to "skim the cream" from the top of the demand curve with a high price while the product is novel and competitors are few.

Penetration pricing, the opportunity to gain market share with a low price and dominate the industry.

Penetration pricing is more likely than skim pricing to raise a unit's operating profit in the long term.

Financial Strategy

It examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action.

The tradeoff between achieving the desired debt-to-equity ratio and relying on internal long-term financing via cash flow is a key issue in financial strategy.

Small- to medium sized companies try to avoid all external sources of funds in order to avoid outside entanglements and to keep control of the company within.

Financial Strategy

A corporation can use financial leverage (long-term debt) to boost earnings per share, thus raising stock price and the overall value of the company.

Research indicates that higher debt levels not only deter takeover by other firms (by making the company less attractive), but also leads to improved productivity and improved cash flows by forcing management to focus on core businesses.

Financial Strategy

Research reveals that a firm's financial strategy is influenced by its corporate diversification strategy. Equity financing, for example, is preferred for related diversification while debt financing is preferred for unrelated diversification.

Leveraged buy out (LBO); a company is acquired in a transaction financed largely by debt—usually obtained from a third party, such as an insurance company or an investment banker. Ultimately the debt is paid with money generated from the acquired company's operations or by sales of its assets. The acquired company, in effect, pays for its own acquisition! Management of the LBO is then under tremendous pressure to keep the highly leveraged company profitable.

Financial Strategy

A recent financial strategy is to establish a tracking stock. A tracking stock is a type of common stock tied to one portion of a corporation's business. This strategy allows established companies to highlight a high-growth business unit without selling the business. It goes public as an IPO and pays dividends based on the unit's performance. AT&T (AT&T Wireless), Sprint (Sprint PCS).

Research & Development Strategy

R&D strategy deals with product and process

innovation and improvement. It also deals

with the appropriate mix of different types of

R&D (basic, product, or process) and with the

question of how new technology should be

accessed—internal development, external

acquisition, or through strategic alliances.

Research & Development Strategy

Be either a technological leader in which one pioneers an innovation or a technological follower in which one imitates the products of competitors. Porter suggests that deciding to become a technological leader or follower can be a way of achieving either overall low cost or differentiation. • Ex. of a leader R&D functional strategy to achieve a

differentiation competitive advantage is Nike, Inc.

• Ex. of a follower R&D functional strategy to achieve a low-cost competitive advantage is Dean Foods Company.

Research & Development Strategy

Strategic technology alliances are one way

to combine the R&D capabilities of two

companies.

• Ex. Maytag Company alliance with worked with

one of its suppliers to apply fuzzy logic

technology to its new IntelliSense™ dishwasher.

Operation Strategy

Operations strategy determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, and the deployment of physical resources. It should also deal with the optimum level of technology the firm should use in its operations processes.

Advanced Manufacturing Technology (AMT) is revolutionizing operations worldwide using (CAD/CAM) principles.

Operation Strategy

Under the continuous improvement system developed by Japanese firms, empowered cross-functional teams strive constantly to improve production processes. dedicated transfer lines (highly automated assembly lines making one mass-produced product using little human labor). The automobile industry is currently experimenting with the strategy of modular manufacturing in which preassembled subassemblies are delivered as they are needed (Just-in-Time) to a company's assembly line workers, who quickly piece the modules together into a finished product. For example, General Motors

Operation Strategy

mass customization requires that people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it.

• Ex. of mass customization is the "Personal Pair" system Levi Strauss introduced to combat the growing competition from private label jeans.

Purchasing Strategy

Purchasing strategy deals with obtaining the raw materials, parts, and supplies needed to per form the operations function.

Under multiple sourcing, the purchasing company orders a particular part from several vendors.

Deming strongly recommended sole sourcing as the only manageable way to obtain high supplier quality.

Parallel sourcing, whereby two suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other's parts.

Logistic Strategy

Logistics strategy deals with the flow of products into and out of the manufacturing process. Three trends are evident: centralization, outsourcing, and the use of the Internet. Companies like Amoco Chemical, and Union Carbide view the logistics function as an important way to differentiate themselves from the competition, to add value, and to reduce costs. Many companies have found that outsourcing of logistics reduces costs and improves delivery time. For example, Hewlett-Packard (HP) contracted with Roadway Logistics to manage its inbound raw materials warehousing in Vancouver, Canada

Human Resource Management Strategy

HRM strategy, addresses the issue of whether a company should hire a large number of low-skilled employees who receive low pay, (the McDonald's restaurant strategy) or hire skilled employees who receive relatively high pay.

Multinational corporations are increasingly using self-managing work teams in their foreign affiliates as well as in home country operations.

Many companies are not only using an increasing amount of part-time employees, they are also leasing temporary employees from employee leasing companies.

Human Resource Management Strategy

A diverse workforce can be a competitive advantage.

Ex. Avon Company was able to turn around its unprofitable inner-city markets by putting African American and Hispanic managers in charge of marketing to these markets.

Diversity in terms of age and national origin also offers benefits. DuPont's use of multinational teams has helped the company develop and market products internationally. McDonald's has discovered that older workers perform as well as, if not better than, younger employees.

Information System Strategy

Corporations are increasingly adopting information systems strategies to provide business units with competitive advantage.

When FedEx first provided its customers with PowerShip computer software to store addresses, print shipping labels, and track package location, its sales jumped significantly. UPS soon followed with its own MaxiShips software. Viewing its information system as a distinctive competency, FedEx continued to push for further advantage against UPS by using its Web site to enable customers to track their packages. Multinational corporations use of a sophisticated intranet for its employees allows them to practice follow-the-sun management

STRATEGIESSTRATEGIES

TO AVOIDTO AVOID

Follow the Leader Hit Another Home Run Arms Race Do Everything Losing Hand

Follow the Leader Hit Another Home Run Arms Race Do Everything Losing Hand

STRATEGIES TO AVOIDSTRATEGIES TO AVOID

Follow the Leader

Imitating a leading competitor’s strategy ignores a firm’s particular strengths and weaknesses and the possibility that the leader may be wrong.

Example: Fujitsu Ltd., and IBM

Like IBM, Fujitsu competed primarily as a mainframe computer maker. So devoted was it to catching IBM, however, that it failed to notice that the mainframe business had reached maturity by 1990 and was no longer growing.

Hit Another Home Run

If a company is successful because it pioneered an extremely successful product, it tends to search for another super product that will ensure growth and prosperity.However, the probability of finding a second winner is slight.

Example: Polaroid spent a lot of money developing an "instant" movie camera, but the public ignored it in favor of the camcorder.

Arms Race

Entering into a spirited battle with another firm to increase market share might increase sales revenue.

However, that increase will probably be more than offset by increases in advertising, promotion, R&D, and manufacturing costs.

Example: Since the deregulation of airlines, price wars and rate "specials" have contributed to the low profit margins or bankruptcy of many major airlines such as Eastern and Continental.

Do Everything

When faced with several interesting opportunities, management might tend to leap at all of them. Money, time, and energy are soon exhausted as the many projects demand large infusions of resources.Example: The Walt Disney Company's expertise in the entertainment industry led it to acquire the ABC network. As the company churned out new motion pictures and television programs like Who Wants To Be a Millionaire, it spent $750 million to build new theme parks and buy a cruise line (as well as a hockey team). By 2000, even though corporate sales continued to increase, net income was falling.

Losing Hand

A corporation might have invested so much in a particular strategy that top management is unwilling to accept its failure.

Example: Pan American Airlines, chose to sell its Pan Am Building and Intercontinental Hotels, the most profitable parts of the corporation, to keep its money-losing airline flying.

Continuing to suffer losses, the company followed this strategy of shedding assets for cash, until it had sold off everything and went bankrupt.

STRATEGICSTRATEGIC

CHOICE : CHOICE : Selection of the Selection of the Best Strategy Best Strategy

After the pros and cons of the potential strategic alternatives have been identified and evaluated, one must be selected for implementation.

* How could the best * How could the best Strategy be Strategy be determined?determined?

The most important criterion is the ability of the proposed strategy to deal with the specific strategic factors in the SWOT analysis.

Another important consideration is the ability of each alternative to satisfy agreed-on objectives with the least resources and the fewest negative side effects.

Therefore, it is important to develop a tentative implementation plan so that the difficulties that management is likely to face are addressed.

This is should be done by the construction of scenarios.

Constructing Corporate Constructing Corporate ScenariosScenarios

Management Attitude Management Attitude Towards RiskTowards Risk

Pressures from Pressures from StakeholdersStakeholders

Pressures from the Pressures from the Corporate CultureCorporate Culture

Need and Desires of Key Need and Desires of Key ManagersManagers

Process of Strategic choiceProcess of Strategic choice

Constructing Corporate Constructing Corporate ScenariosScenarios

Management Attitude Management Attitude Towards RiskTowards Risk

Pressures from Pressures from StakeholdersStakeholders

Pressures from the Pressures from the Corporate CultureCorporate Culture

Need and Desires of Key Need and Desires of Key ManagersManagers

Process of Strategic choiceProcess of Strategic choice

STRATEGIC CHOICESTRATEGIC CHOICE

Constructing Corporate Scenarios

Corporate scenarios are pro forma balance sheets and income statements that forecast the effect each alternative strategy and its various programs will likely have on division and corporate return on investment.

To construct a scenario, follow these steps:

• First, use industry scenarios to develop a set of assumptions about the task environment

• List optimistic, pessimistic, and most likely assumptionsfor key economic factors such as the GDP, CPI, and prime interest rate, and for other key external strategic factors such as governmental regulation and industry trends.

Constructing Corporate Scenarios

• Second, develop common-size financial statements for the company's or business unit's previous years, to serve as the basis for the trend analysis projections of pro forma financial statements.

• Third, construct detailed pro forma financial statements for each strategic alternative.– The result of this work should provide sufficient

information on which forecasts of the likely feasibility and probable profitability of each of the strategic alternatives could be based.

Management Attitude Towards Risk

The attractiveness of a particular strategic alternative is partially a function of the amount of risk it entails. Risk is composed not only of the probability that the strategy will be effective, but also of the amount of assets the corporation must allocate to that strategy and the length of time the assets will be unavailable for other uses.

The greater the assets involved and the longer they are committed, the more likely top management is to demand a high probability of success.

Risk might be one reason that significant innovations occur more often in small firms than in large.

Management Attitude Towards Risk

The real options approach deals with these issues by breaking the investment into stages. Management allocates a small amount of funding to initiate multiple projects, monitors their development, and then cancels the projects that aren't successful and funds those that are doing well.

• Ex. Chevron for bidding on petroleum reserves, Airbus for calculating the costs of airlines changing their orders at the last minute.

In contrast, The Net Present Value approach

Pressures from Stakeholders

The attractiveness of a strategic alternative is affected by its perceived compatibility with the key stakeholders in a corporation's task environment. Creditors want to be paid on time. Unions exert pressure for comparable wage and employment security. Governments and interest groups demand social responsibility. Shareholders want dividends. All of these pres sures must be given some consideration in the selection of the best alternative.

Strategy makers should be better able to choose strategic alternatives that minimize external pressures and maximize the probability of gaining stakeholder support.

Pressures from the Corporate Culture

If a strategy is incompatible with the corporate culture, the likelihood of its success is very low. Foot-dragging and even sabotage will result as employees fight to resist a radical change in corporate philosophy.

If there is little fit, management must decide if it should:

• Take a chance on ignoring the culture.

• Manage around the culture and change the implementation plan.

• Try to change the culture to fit the strategy.

• Change the strategy to fit the culture.

Need and Desires of Key Managers

Even the most attractive alternative might not be selected if it is contrary to the needs and desires of important top managers.

Industry and cultural backgrounds affect strategic choice. Executives who have come to the firm from another industry and have strong ties outside the industry tend to choose different strategies from what is being currently used in their industry.

• Ex. Korean executives emphasize industry attractiveness, sales, and market share in their decisions; whereas, U.S. executives emphasize projected demand, discounted cash flow, and ROI.

Need and Desires of Key Managers

There is a tendency to maintain the status quo. It may take a crisis or an unlikely event to cause strategic decision makers to seriously consider an alternative they had previously ignored or discounted.

• For example, it wasn't until the CEO of ConAgra, a multinational food products company, had a heart attack that ConAgra started producing the Healthy Choice line of low-fat, low-cholesterol, low-sodium frozen-food entrees.

Process of Strategic choice

Strategic choice is the evaluation of alternative strategies and selection of the best alternative. There is mounting evidence that when an organization is facing a dynamic environment, the best strategic decisions are not arrived at through consensus.

Process of Strategic choice

Two techniques help strategic managers avoid the consensus trap that Alfred Sloan found:

1. Devil's Advocate: When applied to strategic decision making, the devil's advocate is assigned to identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation.

Process of Strategic choice

2. Dialectical Inquiry: it involves combining two conflicting views—the thesis and the antithesis—into a synthesis. When applied to strategic decision making, dialectical inquiry requires that two proposals using different assumptions be generated for each alternative strategy under consideration.

Process of Strategic choice

Research generally supports the conclusion that both the devil's advocate and dialectical inquiry are equally superior to consensus in decision making,

Another approach to generating a series of diverse and creative strategic alternatives is to use a strategy shadow committee.

Regardless of the process used to generate strategic alternatives, each resulting alternative must be rigorously evaluated in terms of its ability to meet four criteria:

Mutual Exclusivity: Doing any one would preclude doing any other.

Success: It must be doable and have a good probability of success.

Completeness: It must take into account all the key strategic issues.

Internal Consistency: It must make sense on its own as a strategic decision for the entire firm and not contradict key goals, policies, and strategies currently being pursued by the firm or its units.

DEVELOPMENT DEVELOPMENT

OF POLICIESOF POLICIES

Development Of Policies

The selection of the best strategic alternative is not the end of strategy formulation. The organization must now engage in developing policies. Flowing from the selected strategy, policies provide guidance for decision making and actions throughout the organization. • At General Electric, for example, Chairman

Jack Welch initiated the policy that any GE business unit be number one or number two wherever it competes. This policy gives clear guidance to managers throughout the organization.

Policies tend to be rather long lived and can even outlast the particular strategy that cre ated them. Interestingly these general policies—such as "The customer is always right" can become, in time, part of a corporation's culture. A change in strategy should be followed quickly by a change in policies. Managing policy is one way to manage the corporate culture.

Marketing Strategies

Per Miles and Snow,ProspectorDefenderAnalyzerReactor

Positioning strategiesCost leadershipDifferentiationFocused niche

Strategies for New Markets

PioneerMass market penetration

Niche penetration

Skimming: early withdrawal

Follower

Late entrant

Strategies for Growth Markets

Share maintenanceFortress

Flanker

Confrontation

Market expansion

Contraction or strategic withdrawal

Share growthFrontal attack

Leapfrog

Flank attack

Encirclement

Guerilla attack

Strategies for Mature Markets

Shakeout

Strategic traps

Maintain current market share

Growth extension strategies

Increased penetration

Extended use

Market expansion

Strategies for Declining Markets

Market attractiveness affected by

Conditions of demand

Exit barriers

Future competitive rivalry

Generic strategies

Harvesting

Maintenance

Profitable survivor

Niche

Marketing at Different Structural Levels

Corporate Business Unit Product Market

Strategies

Evaluation of mergers, acquisitions, and strategic alliances in terms of synergy to meet customer needs

Strategic plans for target markets and industries

How to aggregate tactics into a coherent approach to the market

Tactics

Specific tactics for guiding, developing, and motivating key members of the organization

Specific tactics for developing important technological or manufacturing resources

Tactics for product, price, promotion, and distribution

Directional Policy

High Medium Low

HighInvest for Aggressive

GrowthInvest for Aggressive

GrowthSelective Investment to

Hold Position

MediumInvest for Aggressive

GrowthSelective Investment to

Hold PositionHarvest or Divest

LowSelective Investment to

Hold PositionHarvest or Divest Harvest or Divest

Business Strengths

Market Attractiveness