strategic formulation

CHAPTER SEVENSTRATEGY FORMULATION:

FUNCTIONAL STRATEGY AND STRATEGIC CHOICE

BS Accountancy 2-1

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Strategic Managem

ent and Business Policy (Ninth Edition) - T. W

heelen , J. Hunger

Functional Strategy Strategies to Avoid Strategic Choice – Selection of the Best

Strategy Development of Policies Impact of Internet on Functional

Strategy

TOPICS TO BE DISCUSSED:

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heelen , J. HungerFUNCTIONAL STRATEGY

Functional Strategy The approach a functional area takes

to achieve corporate business unit objectives and strategies by maximizing resource productivity.

Concerned with developing and nurturing a distinctive competence the company or business unit with a competitive advantage.

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Core Competency Something that a corporation can do

exceedingly well ----- key strength Also called core capabilities

Distinctive Competency Capability that are superior to those of

the competitors.

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Three Tests that a Competency must Meet to be Considered

Distinctive Customer Value Competitor Unique Extendibility

FUNCTIONAL STRATEGY

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Four Ways to Gain Access to a Distinctive Competency

It may be an asset endowment It may be acquired from someone else It may be shared with another

business unit or alliance partner It may be carefully built and

accumulated over time within the company

FUNCTIONAL STRATEGY

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Outsourcing Purchasing from someone else a

product or service that had been previously provided internally

FUNCTIONAL STRATEGY

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Activity’s Total Value-Added to Firm’s Products and Services

Activity’s

Potential for Competitive Advantage

Low High

High

Taper Vertical Integration:Produce Some Internally

Full Vertical Integration:Produce All Internally

Low

Outsource Completely:Buy on Open Market

Outsource Completely:Purchase with Long-Term

Contracts

Source: J.D. Hunger and T.L. Wheelen, “Proposed Outsourcing Matrix.” Copyright © 1996 by Wheelen and Hunger Associates. Reprinted by Permission

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Marketing Strategy Deals with pricing, selling, and

distributing a product.

FUNCTIONAL STRATEGY

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Marketing Strategy Market Development Strategy

Company or business unit can:1. capture larger share of an existing market for current products through market saturation and market penetration; or

2. develop new market for current products Product Development Strategy

The company or unit:1.develop new products for existing markets; or

2. develop new products for new markets

FUNCTIONAL STRATEGY

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Marketing Strategy(Advertising and Promotion)

Push StrategySpending large amount of money on trade

promotion in order to gain or hold shelf space in retail outlets

Designs to “push” products through distribution channels

Pull StrategySpending more money on consumer

advertising designed to build brand awarenessAdvertising “pulls” products through the

distribution system

FUNCTIONAL STRATEGY

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Marketing Strategy(Pricing New Products)

Skim PricingOffers the opportunity to “skim the milk”

from the top of the demand curve with a high price while the product is novel and competitors are few

Penetration PricingAttempts to hasten market development and

offers the pioneer the opportunity to use the experience curve to gain market share with a low price and dominate the industry

FUNCTIONAL STRATEGY

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Financial Strategy Examines the financial implications of

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

FUNCTIONAL STRATEGY

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Financial Strategy Leveraged Buy Out (LBO)

A company is acquired in a transaction financed largely by debt

Tracking Stock StrategyAllows established companies to highlight

a high-growth business unit without selling the business

FUNCTIONAL STRATEGY

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Research and Development (R&D) Strategy

Deals with product and process innovation and improvement

Also deals with the appropriate mix of different types of R&D and with the question of how new technology should be accessed

FUNCTIONAL STRATEGY

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Leader R&D Functional StrategyTechnological Leader

One who pioneers an innovation Follower R&D Functional Strategy

Technological FollowerOne who imitates the products of competitors

FUNCTIONAL STRATEGY

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FUNCTIONAL STRATEGY

Technological Leadership Technological Followership

Cost Advantage

Pioneer the lowest cost product design.Be the first to firm down the learning curve.Create low-cost ways of performing value activities.

Lower the cost of the product or value activities by learning from leader’s experience.

Differentiation Pioneer a unique product that increases buyer value.Innovate in other activities to increase buyer value.

Adapt the product or delivery system more closely to buyer needs by learning from leader’s experience.Source: Adapted/reprinted with the permission of The Free Press, an imprint of Simon & Schuster, from Competitive

Advantage: Creating and Sustaining Performance by Michael E. Porter, p. 181. Copyright © 1985 by Michael E. Porter

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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

Also deal with the optimum level of technology the firm should use in its operation processes

FUNCTIONAL STRATEGY

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Operations Strategy Advanced Manufacturing Technology

A revolutionizing operations worldwide and should continue to have a major impact as corporations strive to integrate diverse business activities using computer-integrated design and manufacturing (CAD/CAM).

FUNCTIONAL STRATEGY

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Operations StrategyFUNCTIONAL STRATEGY

Job ShopConnected Line Batch Flow

Flexible Manufac

turing Systems

Dedicated

Transfer Lines

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Operations Strategy Mass Production System

An excellent method of producing large number of low-cost, standard goods and services.

Continuous Improvement SystemA system developed by Japanese wherein

cross-functional teams are empowered to strive constantly in improving production process.

FUNCTIONAL STRATEGY

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Operations Strategy Modular Manufacturing

Applicable to automobile industryPreassembled subassemblies are delivered

as they are needed to a company’s line workers, who quickly piece the modules together into a finished product.

FUNCTIONAL STRATEGY

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Operations Strategy Mass Customization

Concept appropriate for the changing environment

Requires the people, processes, units, and technology reconfigure themselves to give costumers exactly what they want, when they want it.

FUNCTIONAL STRATEGY

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Purchasing Strategy Deals with obtaining the raw materials,

parts, and supplies needed to perform the operations function.

FUNCTIONAL STRATEGY

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Purchasing StrategyBasic Purchasing Choices:

Multiple Sourcing Traditionally considered superior to other purchasing approaches because:1. It forces suppliers to compete for the

business of an important buyers, thus reducing purchasing cost; and

2. If one buyer could not deliver, another usually could, thus guaranteeing that parts and supplies would always be on hand when needed.

FUNCTIONAL STRATEGY

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Sole SourcingMeans that more companies are going to have longer relationships with fewer suppliers.

Relies on only one supplier for a particular part.

Reduces transaction costs and builds quality by having purchaser and supplier work together as partners rather than adversaries.

FUNCTIONAL STRATEGY

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Parallel SourcingTwo suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other’s parts.

FUNCTIONAL STRATEGY

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Logistics Strategy Deals with the flow of products into

and out of the manufacturing process.

FUNCTIONAL STRATEGY

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Logistics StrategyThree tends are evident: Centralized Logistics

usually contains specialists with expertise in different transportation modes.

work to aggregate shipping volumes across the entire corporation to gain better contracts with shippers.

Outsourcing of LogisticsReduces costs and improves delivery time.

Use of InternetSo simplify their logistical system.

FUNCTIONAL STRATEGY

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Human Resource Management (HRM) Strategy

Addresses the issue of whether a company or business unit should hire a large number of low-skilled employees who receive low pay, perform repetitive jobs, and most likely quit after a short time, or hire skilled employees who receive relatively high pay and are cross-trained to participate in self-managing work teams.

FUNCTIONAL STRATEGY

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Information Systems Strategy Provides business units with

competitive advantage. To form closer relationships with both

their customers and suppliers through sophisticated extranets.

FUNCTIONAL STRATEGY

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Follow the Leader.Imitating a leader competitor’s strategy might seem to be a good idea, but it ignores a firm’s particular strengths and weaknesses and the possibility that the leader may be wrong.

STRATEGIES TO AVOID

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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.

Arms Race. Entering into a spirited battle with another firm for increased market share might increase sales revenue, but that increase will probably be more than offset by increases in advertising, promotion, R&D, and manufacturing costs.

STRATEGIES TO AVOID

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Do Everything. When faced with several interesting opportunities, management might tend to leap at all of them.

Losing Hand. A corporation might have invested so much in particular strategy that top management is unwilling to accept it’s failure.

STRATEGIES TO AVOID

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Constructing Corporate Scenario Corporate scenarios

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.

STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY

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Steps in Constructing Corporate Scenario

1. Use Industry Scenarios2. Developed Common-size Financial

Statements3. Construct detailed Pro Forma

Financial Statements


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FactorLast Year

Historical

AverageTrend

Analysis

Projections¹

200- 200- 200-

O P ML O P ML O P ML Comments

GDP

CPI

Other

Sales Units

Dollars

COGS Advertising and Marketing Interest Expense Plant Expansion

Dividends

Net Profits

EPS

ROI

ROE

Other Source: T.L. Wheelen and J.D. Hunger. Copyright © 1993 by Wheelen and Hunger Associates. Reprinted by permission.

Note:1. O = Optimistic, P = Pessimistic, ML = Most Likely

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Manager’s Attitude Toward RiskRisk

Probability of effectiveness of the strategyAmount of assetLength of time

Real-Option Theory“When the future is highly uncertain, it pays to

have a broad range of option open.”


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Pressure from StakeholdersStakeholders can be categorized in

terms of their:1. Interest in the corporation’s activities and2. Relative power to influence the

corporation’s activities


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Pressure from Stakeholders


Low Power Medium Power High Power

High Interest Medium Priority High Priority High priority

Medium Interest Low Priority Medium

Priority High priority

Low Interest Low Priority Low Priority Medium Priority

Source: Suggested by C. Anderson, “Value-Based Management,” Academy of Management Executive (November 1997), p. 31. reprinted by permission of Academy of Management Executive via the Copyright Clearance Center

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Pressure from the Corporate Culture

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.


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Needs and Desires of Key Managers

Personal Characteristics Experiences

Factors Affecting Strategic Choice Industry background Cultural background


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Process of Strategic ChoiceStrategic Choice

is the evaluation of alternative strategies and selection of the best alternative.


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Process of Strategic Choice Two techniques that help strategic

managers avoid consensus trap that Alfred Sloan found: Devil’s Advocate Dialectical Inquiry


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Process of Strategic ChoiceAlternative Criteria:

1. Mutual ExclusivityDoing any one would preclude doing any other.

2. SuccessIt must be doable and have a good probability of success.

3. CompletenessIt must take into account all the key strategic issues.

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


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Policies define the broad guidelines for

implementation. “The customer is always right” or “Research and development should get

first priority on all budget requests”

DEVELOPMENT OF POLICIES

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Electronic Customer Relationship Management(e-CRM) Software

1. Analytics Software2. E-Marketing Software3. Personalization Software

IMPACT OF THE INTERNET ON FUNCTIONAL STRATEGY

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Questions?

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Thank you