Strategic formulation

CHAPTER SEVEN
STRATEGY FORMULATION:
FUNCTIONAL STRATEGY AND
STRATEGIC CHOICE
BS Accountancy 2-1

 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

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
(Ninth Edition) -
3

FUNCTIONAL STRATEGY
(Ninth Edition) -
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

Three Tests that a Competency must
Meet to be Considered Distinctive
 Customer Value
Competitor Unique
 Extendibility
September 1, 2014
(Ninth Edition) -
5
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
6
FUNCTIONAL STRATEGY

Outsourcing
 Purchasing from someone else a product or
service that had been previously provided
internally
September 1, 2014
(Ninth Edition) -
7
FUNCTIONAL STRATEGY

FUNCTIONAL STRATEGY
September 1, 2014
(Ninth Edition) -
8
Source: J.D. Hunger and T.L. Wheelen, “Proposed Outsourcing Matrix.” Copyright © 1996 by Wheelen and Hunger Associates.
Reprinted by Permission

Marketing Strategy
Deals with pricing, selling, and distributing a
product.
September 1, 2014
9
(Ninth Edition) -
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
10
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
11
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
12
FUNCTIONAL STRATEGY

Financial Strategy
 Examines the financial implications of
business and corporate-level strategic
options and identifies the best financial
course of action.
September 1, 2014
(Ninth Edition) -
13
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
14
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
15
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
16
FUNCTIONAL STRATEGY

Strategy
September 1, 2014
(Ninth Edition) -
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

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
(Ninth Edition) -
18
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
19
FUNCTIONAL STRATEGY

Operations Strategy
September 1, 2014
(Ninth Edition) -
20
FUNCTIONAL STRATEGY
Job
Shop
Connected
Line Batch
Flow
Flexible
Manufacturing
Systems
Dedicated
Transfer
Lines

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
(Ninth Edition) -
21
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
22
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
23
FUNCTIONAL STRATEGY

Purchasing Strategy
Deals with obtaining the raw materials,
parts, and supplies needed to perform the
operations function.
September 1, 2014
(Ninth Edition) -
24
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
25
FUNCTIONAL STRATEGY

Purchasing Strategy
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
(Ninth Edition) -
26
FUNCTIONAL STRATEGY

Purchasing Strategy
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
(Ninth Edition) -
27
FUNCTIONAL STRATEGY

Logistics Strategy
Deals with the flow of products into and out
of the manufacturing process.
September 1, 2014
(Ninth Edition) -
28
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
29
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
30
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
31
FUNCTIONAL STRATEGY

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
(Ninth Edition) -
32
STRATEGIES TO AVOID

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
(Ninth Edition) -
33
STRATEGIES TO AVOID

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
(Ninth Edition) -
34
STRATEGIES TO AVOID

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
(Ninth Edition) -
35
STRATEGIC CHOICE – SELECTION OF THE BEST
STRATEGY

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
(Ninth Edition) -
36
STRATEGY

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.

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
(Ninth Edition) -
38
STRATEGY

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
(Ninth Edition) -
39
STRATEGY

Pressure from Stakeholders
September 1, 2014
(Ninth Edition) -
40
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

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
(Ninth Edition) -
41
STRATEGY

Needs and Desires of Key Managers
 Personal Characteristics
 Experiences
Factors Affecting Strategic Choice
 Industry background
 Cultural background
September 1, 2014
(Ninth Edition) -
42
STRATEGY

Process of Strategic Choice
Strategic Choice
is the evaluation of alternative strategies and
selection of the best alternative.
September 1, 2014
(Ninth Edition) -
43
STRATEGY

Two techniques that help strategic
managers avoid consensus trap that Alfred
Sloan found:
Devil’s Advocate
Dialectical Inquiry
September 1, 2014
(Ninth Edition) -
44
STRATEGY

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
(Ninth Edition) -
45
STRATEGY

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
(Ninth Edition) -
46
DEVELOPMENT OF POLICIES

Electronic Customer Relationship
Management(e-CRM) Software
1. Analytics Software
2. E-Marketing Software
3. Personalization Software
September 1, 2014
(Ninth Edition) -
47
IMPACT OF THE INTERNET ON FUNCTIONAL
STRATEGY

September 1, 2014
48
(Ninth Edition) -

Strategic formulation

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Strategic formulation

Similar to Strategic formulation (20)

Recently uploaded

Recently uploaded (20)

Strategic formulation