Strategy Formulation: Functional Strategy & Strategic Choice

Strategy Formulation: Functional Strategy & Strategic ChoiceDevelopment of long-range plans for the effective management with the help of SWOT analysis. It is composed ofMission. Objectives. Strategies. Policy.Strategy Formulation

Hierarchy of StrategyCorporate Strategy - the business you should be inBusiness Strategy tactics needed to beat the competitionFunctional Strategy operational methods to beat the tactics

3The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity

The orientation of a functional strategy is dictated by its parent business units strategy.

Functional Strategy varies from region to region. Functional StrategyIt is concerned with developing and nurturing a distinctive competence to provide a company or business unit with acompetitive advantage. Just as a multidivisional corporation has several business units, each with its own business strategy, each business unit has its own set of departments, each with its own functional strategy.

A business unit following a competitive strategy of differentiation through highquality needs a manufacturing functional strategy that emphasizes expensive quality assuranceprocesses over cheaper, high-volume production; a human resource functional strategy thatemphasizes the hiring and training of a highly skilled, but costly, workforce. If a business unitwere to follow a low-cost competitive strategy, however, a different set of functional strategieswould be needed to support the business strategy.

When Mr. Donut expanded into Japan, marketed donuts not as breakfast, but as snack food. Because theJapanese had no breakfast coffee-and-donut custom, they preferred to eat the donuts in the afternoonor evening. Mr. Donut restaurants were thus located near railroad stations and supermarkets.

4Marketing Strategy Financial Strategy R&D Strategy Operations Strategy Purchasing Strategy Logistics Strategy HRM StrategyInformation Management StrategyTypes of Functional StrategyDeals with productPricingSellingDistribution

Market Development Strategy Capture large share of an existing market for current products through market saturation/penetration.Develop new uses and/or markets for current products.

Marketing StrategyConsumer product giants such as P&G, Colgate-Palmolive, and Unilever are experts at using advertising and promotion to implement a marketsaturation/penetration strategy to gain the dominant market share in a product category. As seeming masters of the product life cycle, these companies are able to extend product life almost indefinitely through new and improved variations of product and packaging that appeal to most market niches.

A company, such as Arm & Hammer, follows the second market development strategy by finding new uses for its successful current product, baking soda.6Product Development StrategyDevelop new products for existing marketsDevelop new products for new markets

Advertising and promotionPush strategy Trade promotions to hold shelf spacePull strategy Emphasize consumer advertising to build brand awareness. Marketing Strategy1. Acknowledging the widespread appeal of its Arm & Hammer brand baking soda, the company has generated new uses for itssodium bicarbonate by reformulating it as toothpaste, deodorant, and detergent. Using a successful brand name to market other products is called brand extension, and it is a good way to appeal to a companys current customers.2. Arm & Hammer developed new pollution-reduction products (using sodium bicarbonate compounds) for saleto coal-fired electric utility plantsa very different market from grocery stores. (new product for new market)

food and consumer products companies in US and Canada follow a push strategy 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.

Make Customers request for your products - advertising pulls the products through the distribution channels

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Pricing StrategySkim pricing High price when product is new and there are few competitorsPenetration pricingLow price to hasten market development and use experience curve to dominate the marketDynamic pricingVariable pricing based on supply and demandMarketing Strategyoffers 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.

attempts to hasten market development and offers the pioneer the opportunity to use the experience curve to gain market share with a low price and then dominate the industry.

Penetration pricing is, however, more likely than skim pricing to raise a units operating profit in the long term.

The use of the Internet to market goods directly to consumers allows a company to use dynamic pricing, a practice in which prices vary frequently based upon demand, market segment, and product availability.9Financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of actionForecasting, Planning and Budgeting Credit & Liquidity Strategies Capital Investment Methods/Systems Financial Mix Capital Budget & Working Capital Stock / Dividend Cash Flow, Loans or LeasesFinancial Strategy It can also provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy.

Financial strategy usually attempts to maximize the financial value of a firm.10Types of Financial Strategy Strong Balance Sheet Strong credit rating. Greater discipline and flexibility in Investment approach. Help to build a robust business. Healthier Economic Cycle. Leveraged buyout (LBO) Strategy Financial buyers or sponsors Focus on ROE rather than ROA.

Financial Strategy Types of Financial StrategyDividends and Stock Price Management Some companys often dont declare dividend.Several support the value of their stock by offering dividends. Selling of Companys Patent For products a company no longer wish to commercialize or are not a part of its core business.

Financial Strategy Leveraged buyoutCompany acquires itself through long term debt (take a company private)Reversed stock splitIncrease stock price for the short runTracking stockSubsidiary has a separate stock issue(T, ATT, ATTL, SBTCL)Value or Growth Pay dividend in a slow growth marketFinancial Strategy In a leveraged buyout, a company is acquired in a transaction financed largely by debt, usuallyobtained from a third party, such as an insurance company or an investment banker. Ultimatelythe debt is paid with money generated from the acquired companys operations or by sales of itsassets. The acquired company, in effect, pays for its own acquisition. Management of the LBO isthen under tremendous pressure to keep the highly leveraged company profitable. Unfortunately,the huge amount of debt on the acquired companys books may actually cause its eventual declineby focusing managements attention on short-term matters.

A number of firms have been supporting the price of their stock by using reverse stock splits. Contrasted with a typical forward 2-for-1 stock split in which an investor receives anadditional share for every share owned (with each share being worth only half as much), in areverse 1-for-2 stock split, an investors shares are split in half for the same total amount ofmoney (with each share now being worth twice as much). Thus, 100 shares of stock worth $10each are exchanged for 50 shares worth $20 each. Areverse stock split may successfully raisea companys stock price, but it does not solve underlying problems. A study by Credit SuisseFirst Boston revealed that almost all 800 companies that had reverse stock splits in a five-yearperiod underperformed their peers over the long term.

Equity financing is preferred for related diversification, whereas debt financing is preferred for unrelated diversification13R&D Strategy New products and improvement of existing products that allow for effective strategy implementationR&D strategy deals withProduct InnovationProcess ImprovementOpen Innovation (Hybrid)14R&D Strategy Technology LeaderTechnology FollowerOpen InnovationCost Advantage Pioneer in low cost productionFirst down the learning curveLow-cost ways of performing value activitiesLower cost by learning from the leaders experienceAvoid R&D through imitationAlliances with outside agenciesDifferentiationPioneer unique product that increases buyer valueInnovate value add activitiesAdapt product or delivery system to buyer needs by learning from leader experienceAlliances with outside agencies

15Job shop vs. Connected line batch flow

Flexible manufacturing systems vs. Dedicated transfer lines

Mass production vs. Continuous improvement system (TQM)

Modular manufacturingPreassembled subassemblies Just-In-Time (JIT)

Mass CustomizationUnique product for each customerOperations Strategy Multiple sourcingSuppliers compete to reduce costSecurity of backup suppliersSole sourcingOne supplier responsible for qualityParallel sourcingTwo sole source suppliers that backup or share responsibilityJust-in-time (JIT)Raw material provided as needed (Pull)

Purchasing Strategy Collaborative planning, forecasting, and replenishment (CPFR)

Logistics Strategy Flow of materials into and out of the manufacturing processCentralizationOutsourcing

HRM Strategy Self managed work teams360 degree appraisalWorkforce diversity

OutsourcingPurchase a product or service from someone else that was previously provided internallyAMA Survey of members (94% outsource at least one activity)

Activity%General and Admin.78Human Resources77Transportation/Dist.66Info Systems63Manufacturing56Marketing51Finance/Accounting18Outsourcing errors

Activities that should not be outsourcedWrong vendor selectionWriting poor contractLosing control over the activityOverlooking personnel issuesHidden costs of outsourcingFailing to plan exit strategy

Strategies to Avoid

Follow the leader they could be wrongHit another home run R&D longshotArms race price warsDo everything nothing wellLosing hand know when to fold them

Corporate Scenario DevelopmentPro forma (estimated) balance sheet and income statements that identify key measures and the optimistic, pessimistic and most likely outcomes of alternative strategies.

Subjective Factors Affecting Decisions --

Needs and desires of key managersManagements attitude toward riskPressures from stakeholdersPressures from corporate culture

RiskProbability of successAmount of assets allocated to the strategyTime the assets are committed

Real-Options ApproachStaged funding of multiple alternatives based on periodic evaluation of performance

Assessing the Importance of StakeholdersHow will this decision affect each stakeholder, especially those in the high/medium priority?How much of what they want are they likely to get?What are the stakeholders likely to do if they dont get what they want?What is the probability that they will do it?

Political StrategiesConstituency buildingPAC ContributionsAdvocacy AdvertisingLobbyingCoalition Building

Corporate CultureIf strategy is a poor fit with the Corporate Culture you have choices:Ignore the CultureManage around the CultureChange the CultureChange the Strategy

Avoiding the Consensus Trap --

Devils Advocateprove the proposal wrong

Dialectical InquiryAlternative assumptions are made for the strategy (Optimistic/Pessimistic). The expected results are debated to reach a decision or compromise.

As a manager, if you have some one in your department that ALWAYS agrees with you, One of you is redundantAnon

Evaluation of Strategic Alternatives --

Mutual exclusivity preclude othersSuccess good probability of successCompleteness account for key strategic issuesInternal consistency be consistent with mission/visionDeveloping PoliciesImplementation guidelines

Forces trade-offs between competing resource allocationsTests strategic soundness of decisionsSets clear boundaries within which employees must operate while granting freedom to experiment

Levi Case at the end of the chapter

Constituent Matrix Smoking Ban in Erie County

Exercise