Strategy Formulation: Functional CHAPT

Strategy and Strategic Choice ER 8

STRATEGIC MANAGEMENT
SYSTEM

CHAPTER 2
Prentice Hall, 2004 2
WHEELEN/HUNGER
TOPICS COVERED
1. Functional Strategy
2. The Sourcing Decision
3. Strategies to Avoid
4. Strategic Choice
5. Developing Policies
 FUNCTIONAL STRATEGY
Hierarchy of Strategy
defined: Corporate Strategy
 The approach a
functional area takes to Business
achieve corporate and Strategy
business unit Functional
objectives and Strategy
strategies by
maximizing resource
productivity.
 MARKETING STRATEGY
Marketing strategy –
Involved with pricing,
selling, and
distributing a
product.

https://www.youtube.com/watch?v=oEpeVbUJU60
MARKET DEVELOPMENT
STRATEGY
 Capture a larger share of existing
market through market saturation
and market penetration

 Develop new markets for current

products
PRODUCT DEVELOPMENT
STRATEGY
 Develop new products for existing
markets

 Develop new products for new markets

 ADVERTISING OR
PROMOTION STRATEGY
 Push marketing strategy
Investing in trade promotion to gain
or hold share

 Pull marketing strategy

Investing in consumer advertising to
build brand awareness
PRICING (NEW PRODUCT)
Skim Pricing

Penetration Pricing

Dynamic Pricing
 FINANCIAL STRATEGY
• Examines the
financial implications
of corporate and
business-level
strategic options and
identifies the best
financial course of
action.

• Maximizes financial
value of the firm
 Choice:
R&D STRATEGY Technological leader

Definition

Deals with basic,

product and
process
innovation and
improvement
Technological follower
 RESEARCH AND DEVELOPMENT
STRATEGY
AND COMPETITIVE
Cost Advantage
Technological Leadership Technological Followership

Pioneer the lowest cost product
ADVANTAGEdesign.
Be the first firm down the
learning curve.
Create low-cost ways of
performing value activities.
Differentiation
Pioneer a unique product that
increases buyer value.
Innovate in other activities to
increase buyer value.
Lower the cost of the product or
value activities by learning from
the leader’s experience.
Avoid R&D costs through
imitation.
Adapt the product or delivery
system more closely to buyer
needs by learning from the
leader’s experience.
NEW APPROACH R&D
STRATEGY
Open innovation

Technology scout

Purchase minority stakes in new high-tech entrepreneurial venture

 OPERATIONS STRATEGY
 Determines:
 How and where product is
manufactured
 Level of vertical integration in
process
 Deployment of physical
resources
 Relationships with suppliers
OPERATIONS STRATEGY
Manufacturing strategy • Flexible manufacturing
Affected by product life system
cycle
 Job shop

• Dedicated transfer lines

1 2
 Connected line batch flow

4 3
OPERATIONS STRATEGY
Manufacturing • Modular
strategy – manufacturing
 Movement from
mass production to:
 Continuous
improvement

• Mass customization
PURCHASING STRATEGY
 Obtaining raw materials, parts and
supplies
 Basic Purchasing Choices:
 Multiple sourcing
 Sole sourcing
 Parallel sourcing
LOGISTICS STRATEGY
Flow of products into and out of the
process
 Three current trends:
 Centralization

 Outsourcing

 Use of the Internet

HRM STRATEGY
Addresses issues of:
 Variation of employees’ skill level
(low-skilled vs high skilled)
 Self managing work teams
 360-degree appraisal
 Workforce Diversity
INFORMATION SYSTEMS
STRATEGY
Technology to provide business units
with competitive advantage
SOURCING DECISION
Outsourcing
 Purchasing from someone else a product or
service that had been previously provided
internally.
Pro of outsourcing
https://www.youtube.com/watch?v=aqhjNJkvC9w
Cons of outsourcing
https://www.youtube.com/watch?v=V7fsEIp2r_8
SEVEN MAJOR ERRORS
1. Outsourcing activities that should not be sourced
2. Selecting the wrong vendor
3. Writing a poor contract
4. Overlooking personnel issues
5. Losing control over the outsourced activities
6. Overlooking the hidden cost of outsourcing
7. Falling to plan an exit strategy
PROPOSED OUTSOURCING
MATRIX
STRATEGIES TO AVOID
Corporate, Business or Functional Levels

1. Follow the Leader

2. Hit Another Home Run

3. Arms Race

4. Do Everything

5. Losing Hand
STRATEGIC CHOICE
Selecting the Best Strategy:
Constructing Corporate Scenarios:

 Corporate Scenarios –
 Pro forma balance sheets and income
statements that forecast effects of
alternatives on return on investment
STRATEGIC CHOICE
Selecting the Best Strategy:
Constructing Corporate
Scenarios:

 Steps in constructing scenarios –

 Use industry scenarios
 Develop common-size financial
statements
 Construct detailed pro forma
financial statements for each
alternative
Scenario Box to Generate Pro Forma Statements
Probjections1
Last Historical Tr end 20— 20— 20—
Factor Year Average Analysis 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 pr ofits
EPS
ROI
ROE
Other
 STRATEGIC CHOICE
Subjective Factors Affecting Decisions --
Management’s attitude toward risk
 Risk is composed of:
 Probability of effective strategy
 Amount of assets committed
 Length of time of asset commitment

Pressures from stakeholders

Pressures from corporate culture
Needs and desires of key managers
STRATEGIC CHOICE
Process of Strategic Choice:
 The evaluation of alternative strategies
and selection of the best alternative
 Not based on consensus
 Discussion, disagreement
 Programmed conflict
STRATEGIC CHOICE
(PLANNED CONFLICT)
 STRATEGIC CHOICE
Evaluating strategic alternatives

Ability to meet four criteria:

 Mutual exclusivity

 Success

 Completeness

 Internal consistency
DEVELOPING POLICIES

Policy : the broad guidelines for implementation

The objectives
 It forces trade-offs between competing resources
demands
 It tests the strategic soundness of a particular action
 It sets clear boundaries within which the employees
must operate while granting them freedom to
experiment within those constraint