Strategic Management and

Business Policy 15e, Global Edition

Chapter 8
Strategy Formulation:
Functional Strategy
and Strategic Choice

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

Learning Objectives
8-1 Discuss the impact that the various types of
functional strategies have on the achievement
of organizational goals and objectives
8-2 Explain which activities and functions are
appropriate to outsource/offshore in order to
gain or strengthen competitive advantage
8-3 List and explain the strategies to avoid
8-4 Construct corporate scenarios to evaluate
strategic options

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-2
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..
3
 Functional Strategy
• Functional strategy
– Is the approach a functional area takes to
achieve corporate and business unit objectives
and strategies by maximizing resource
productivity

Functional area = operational department (marketing, HR,

sales, production, and so on….)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-4
 Functional Strategy
• Functional strategy
– Includes the strategies of different functional
areas (departments)
 Marketing Strategy
 Financial Strategy
 R&D Strategy
 Operations Strategy
 Purchasing Strategy
 Logistics Strategy
 Human Resources Management Strategy
 Information Technology Strategy

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-5
 Marketing Strategy (1 of 6)

• Marketing strategy (Marketing dept. strategy)

– deals with pricing, selling, and distributing a
product

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-6
 Marketing Strategy (2 of 6)
• Market development strategy
– a company or business unit can:
 capture a larger share of an existing market for
current products through market saturation and
market penetration
 develop new uses and/or markets for current
products

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-7
 Marketing Strategy (3 of 6)
• Product development strategy
– a company or unit can:
 develop new products for existing markets
 develop new products for new markets

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-8
 Marketing Strategy (4 of 6)
• Brand extension (brand stretching)
– A marketing strategy in which a firm uses a well-developed
image of its existing product to market a new product. (see
next slide for examples)

• Push strategy
– spending a large amount of money on promotions and
personal selling in order to gain or hold shelf space in
retail outlets

• Pull strategy
– Requires high spending on advertising and promotion to
build up demand for a product. It brings the customer to
the product – the customer becomes motivated to buy.
Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..
8-9
 Marketing Strategy (4 of 6)
• Brand extension (brand stretching)
– A marketing strategy in which a firm uses a well-
developed image of its existing product to market a
new product. (see next slide for examples)

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-10
 Marketing Strategy (5 of 6)

• Skim pricing
– Skim pricing, is a pricing strategy in which a firm
charges a high initial price and then gradually lowers
the price to attract more price-sensitive customers. The
pricing strategy is usually used by a first mover. The
first mover advantage who faces little to no
competition.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-11
 Marketing Strategy (6 of 6)

• Penetration pricing
– Is a marketing strategy used by businesses to
attract customers to a new product or service
by offering a lower price during its initial
offering. The lower price helps a new product
or service penetrate the market and attract
customers away from competitors.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-12
 Financial Strategy (1 of 2)

• Financial strategy
– examines the financial implications of corporate and
business-level strategic options and identifies the best
financial course of action
– Competitive advantage through lower cost of funds
• The management of dividends and stock price is an
important part of a corporation’s financial strategy.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-13
 Financial Strategy (2 of 2)
• Leveraged buyout (LBO)
– 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.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-14
Research and Development Strategy (1 of 2)
• Research and development (R&D) strategy
– deals with product and process innovation and
improvement
– also deals with how new technology should be
accessed

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-15
Research and Development Strategy (2 of 2)
• Technological leader
– pioneering an innovation
• Technological follower
– imitating the products of competitors
• Open innovation
– firm uses alliances and connections with corporate,
government, academic labs, and consumers to
develop new products and processes.
 Example: Intel opened 4 small-scale research facilities adjacent
to universities to promote new ideas.

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-16
 Operations Strategy

• Operations strategy
– determines how and where a product or
service is to be manufactured, the level of
vertical integration in the production process,
the deployment of physical resources, and
relationships with suppliers

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-17
 Purchasing Strategy (1 of 2)

• Purchasing strategy
– deals with obtaining raw materials, parts and
supplies needed to perform the operations
function
– multiple, sole, and parallel sourcing

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-18
 Purchasing Strategy (2 of 2)
• Multiple sourcing
– the purchasing company orders a particular part
from several vendors
• Sole sourcing
– relies on only one supplier for a particular part
• Parallel sourcing
– two suppliers are the sole suppliers of two
different parts, but they are also backup
suppliers for each other’s parts

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-19
 Logistics Strategy

• Logistics strategy
– deals with the flow of products into and out of
the manufacturing process

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-20
 Human Resource Management Strategy

• Human Resources Strategy (HRM)

– 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 will most likely quit
after a short time (the fast-food restaurant
strategy) or
– hire skilled employees who receive relatively
high pay and are cross-trained to participate in
self-managing work teams

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-21
The Sourcing Decision:
Location of Functions
• Outsourcing
– purchasing from someone else a product or
service that had been previously provided
internally
– the reverse of vertical integration
• Offshoring
– the outsourcing of an activity or a function to a
wholly owned company or an independent
provider in another country

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-22
Seven Errors in Outsourcing to Avoid

1. Outsourcing the wrong activities

2. Selecting the wrong vendor
3. Writing poor contracts
4. Overlooking personnel issues
5. Lack of control
6. Overlooking hidden costs
7. Lack of an exit strategy

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved..

8-23