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Strategic formulation

Chapter Seven : Strategy formulation: Functional Strategy and strategic Choice

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Strategic formulation

  1. 1. CHAPTER SEVEN STRATEGY FORMULATION: FUNCTIONAL STRATEGY AND STRATEGIC CHOICE BS Accountancy 2-1
  2. 2.  Functional Strategy  Strategies to Avoid  Strategic Choice – Selection of the Best Strategy  Development of Policies  Impact of Internet on Functional Strategy Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 2 TOPICS TO BE DISCUSSED: September 1, 2014
  3. 3. FUNCTIONAL 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 3
  4. 4. FUNCTIONAL STRATEGY Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 4 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. September 1, 2014
  5. 5. Three Tests that a Competency must Meet to be Considered Distinctive  Customer Value Competitor Unique  Extendibility September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 5 FUNCTIONAL STRATEGY
  6. 6. 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 September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 6 FUNCTIONAL STRATEGY
  7. 7. Outsourcing  Purchasing from someone else a product or service that had been previously provided internally September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 7 FUNCTIONAL STRATEGY
  8. 8. FUNCTIONAL STRATEGY September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 8 Source: J.D. Hunger and T.L. Wheelen, “Proposed Outsourcing Matrix.” Copyright © 1996 by Wheelen and Hunger Associates. Reprinted by Permission
  9. 9. Marketing Strategy Deals with pricing, selling, and distributing a product. September 1, 2014 9 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger FUNCTIONAL STRATEGY
  10. 10. 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 September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 10 FUNCTIONAL STRATEGY
  11. 11. Marketing Strategy (Advertising and Promotion)  Push Strategy Spending 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 Strategy Spending more money on consumer advertising designed to build brand awareness Advertising “pulls” products through the distribution system September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 11 FUNCTIONAL STRATEGY
  12. 12. Marketing Strategy (Pricing New Products)  Skim Pricing Offers 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 Pricing 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 dominate the industry September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 12 FUNCTIONAL STRATEGY
  13. 13. Financial Strategy  Examines the financial implications of business and corporate-level strategic options and identifies the best financial course of action. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 13 FUNCTIONAL STRATEGY
  14. 14. Financial Strategy  Leveraged Buy Out (LBO) A company is acquired in a transaction financed largely by debt Tracking Stock Strategy Allows established companies to highlight a high-growth business unit without selling the business September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 14 FUNCTIONAL STRATEGY
  15. 15. 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 September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 15 FUNCTIONAL STRATEGY
  16. 16. Research and Development (R&D) Strategy  Leader R&D Functional Strategy Technological Leader One who pioneers an innovation  Follower R&D Functional Strategy Technological Follower One who imitates the products of competitors September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 16 FUNCTIONAL STRATEGY
  17. 17. Research and Development (R&D) Strategy September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 17 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
  18. 18. 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 September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 18 FUNCTIONAL STRATEGY
  19. 19. 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). September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 19 FUNCTIONAL STRATEGY
  20. 20. Operations Strategy September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 20 FUNCTIONAL STRATEGY Job Shop Connected Line Batch Flow Flexible Manufacturing Systems Dedicated Transfer Lines
  21. 21. Operations Strategy Mass Production System An excellent method of producing large number of low-cost, standard goods and services. Continuous Improvement System A system developed by Japanese wherein cross-functional teams are empowered to strive constantly in improving production process. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 21 FUNCTIONAL STRATEGY
  22. 22. Operations Strategy Modular Manufacturing Applicable to automobile industry Preassembled subassemblies are delivered as they are needed to a company’s line workers, who quickly piece the modules together into a finished product. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 22 FUNCTIONAL STRATEGY
  23. 23. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 23 FUNCTIONAL STRATEGY
  24. 24. Purchasing Strategy Deals with obtaining the raw materials, parts, and supplies needed to perform the operations function. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 24 FUNCTIONAL STRATEGY
  25. 25. Purchasing Strategy Basic 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 25 FUNCTIONAL STRATEGY
  26. 26. Purchasing Strategy Basic Purchasing Choices: Sole Sourcing Means 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 26 FUNCTIONAL STRATEGY
  27. 27. Purchasing Strategy Basic Purchasing Choices: Parallel Sourcing Two suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other’s parts. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 27 FUNCTIONAL STRATEGY
  28. 28. Logistics Strategy Deals with the flow of products into and out of the manufacturing process. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 28 FUNCTIONAL STRATEGY
  29. 29. Logistics Strategy Three 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 Logistics Reduces costs and improves delivery time.  Use of Internet So simplify their logistical system. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 29 FUNCTIONAL STRATEGY
  30. 30. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 30 FUNCTIONAL STRATEGY
  31. 31. Information Systems Strategy  Provides business units with competitive advantage. To form closer relationships with both their customers and suppliers through sophisticated extranets. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 31 FUNCTIONAL STRATEGY
  32. 32. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 32 STRATEGIES TO AVOID
  33. 33. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 33 STRATEGIES TO AVOID
  34. 34. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 34 STRATEGIES TO AVOID
  35. 35. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 35 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  36. 36. Steps in Constructing Corporate Scenario 1. Use Industry Scenarios 2. Developed Common-size Financial Statements 3. Construct detailed Pro Forma Financial Statements September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 36 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  37. 37. Note: 1. O = Optimistic, P = Pessimistic, ML = Most Likely 37 Factor Last Year Historical Average Trend 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.
  38. 38. Manager’s Attitude Toward Risk Risk Probability of effectiveness of the strategy Amount of asset Length of time Real-Option Theory “When the future is highly uncertain, it pays to have a broad range of option open.” September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 38 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  39. 39. Pressure from Stakeholders Stakeholders can be categorized in terms of their: 1. Interest in the corporation’s activities and 2. Relative power to influence the corporation’s activities September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 39 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  40. 40. Pressure from Stakeholders September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 40 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY 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
  41. 41. 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 41 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  42. 42. Needs and Desires of Key Managers  Personal Characteristics  Experiences Factors Affecting Strategic Choice  Industry background  Cultural background September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 42 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  43. 43. Process of Strategic Choice Strategic Choice is the evaluation of alternative strategies and selection of the best alternative. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 43 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  44. 44. Process of Strategic Choice Two techniques that help strategic managers avoid consensus trap that Alfred Sloan found: Devil’s Advocate Dialectical Inquiry September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 44 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  45. 45. Process of Strategic Choice Alternative Criteria: 1. Mutual Exclusivity Doing any one would preclude doing any other. 2. Success It must be doable and have a good probability of success. 3. Completeness It must take into account all the key strategic issues. 4. Internal Consistency It 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. September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 45 STRATEGIC CHOICE – SELECTION OF THE BEST STRATEGY
  46. 46. Policies  define the broad guidelines for implementation. “The customer is always right” or “Research and development should get first priority on all budget requests” September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 46 DEVELOPMENT OF POLICIES
  47. 47. Electronic Customer Relationship Management(e-CRM) Software 1. Analytics Software 2. E-Marketing Software 3. Personalization Software September 1, 2014 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger 47 IMPACT OF THE INTERNET ON FUNCTIONAL STRATEGY
  48. 48. September 1, 2014 48 Strategic Management and Business Policy (Ninth Edition) - T. Wheelen , J. Hunger

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