Strategy Formulation: Functional Strategy and Strategic Choice Chapter 7 Strategy Formulation: Functional Strategy and Strategic Choice Dr.Vijaya Kumar Skyline College Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Functional Strategy: The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity. Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Core competency: Something that a corporation can do exceedingly well – a key strength Can be a core capability Includes a number of constituent skills Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Distinctive competencies: When core competencies or core capabilities are superior to those of the competition. Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Distinctive competencies: Must meet 3 tests: Customer value Competitor unique Extendibility Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Distinctive competencies: Firm can gain access to distinctive competencies in 4 ways: Asset endowment Acquired Shared with another business unit Built and accumulated Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Sourcing Decision: Outsourcing – Purchasing from someone else a product or service that had been previously provided internally. Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Functional Strategy Determining Functional Strategy: Identify business unit’s core competencies Ensure that competencies are continually strengthened Manage competencies so that competitive advantage is preserved Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Proposed Outsourcing Matrix Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Marketing Strategy Marketing strategy – Involved with pricing, selling, and distributing a product. Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Marketing Strategy Market development strategy – Capture a larger share of existing market through market saturation and market penetration Develop new markets for current products Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Marketing Strategy Product development strategy – Develop new products for existing markets Develop new products for new markets Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Marketing Strategy 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 Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Financial Strategy 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 Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Financial Strategy Leveraged buy out (LBO) – Company is acquired financed largely by debt (from a third party). Debt paid by acquired company’s operations or sale of assets Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Financial Strategy Tracking stock – Highlighting a high-growth business unit in a popular sector of the stock market. Keeping subsidiary’s common stock separately identified Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

R&D Strategy R&D Strategy – Deals with product and process innovation and improvement Choice: Technological leader Technological follower Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Research and Development Strategy and Competitive Advantage Technological Leadership Technological Followership Cost Advantage Differentiation Pioneer the lowest cost product design. Be the first firm down the learning curve. Create low-cost ways of performing value activities. 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. Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Operations Strategy Operations strategy – Determines: How and where product is manufactured Level of vertical integration in process Deployment of physical resources Relationships with suppliers Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Operations Strategy Manufacturing strategy – Affected by product life cycle Job shop Connected line batch flow Flexible manufacturing system Dedicated transfer lines Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Operations Strategy Manufacturing strategy – Movement from mass production to: Continuous improvement Modular manufacturing Mass customization Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Purchasing Strategy Purchasing strategy – Obtaining raw materials, parts and supplies Basic Purchasing Choices: Multiple sourcing Sole sourcing Parallel sourcing Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Logistics Strategy Logistics strategy – Flow of products into and out of the process Three current trends: Centralization Outsourcing Use of the Internet Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

HRM Strategy HRM strategy – Addresses issues of: Low-skilled employees Low pay Repetitive tasks High turnover Skilled employees High pay Cross trained Self-managing teams Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Information Systems Strategy Technology to provide business units with competitive advantage Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Strategies to Avoid Corporate, Business or Functional Levels – Avoid the following: Follow the Leader Hit Another Home Run Arms Race Do Everything Losing Hand Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

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 Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

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 Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Scenario Box to Generate Pro Forma Statements objections 1 Last Historical T r end 19— Factor Y ear A verage Analysis O P ML Comments GDP CPI Other Sales units Dollars COGS Adver tising and marketing Inter est expense Plant expansion Dividends Net pr ofits EPS ROI ROE Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Strategic Choice Attitude Toward Risk: Risk is composed of: Probability of effective strategy Amount of assets committed Length of time of asset commitment Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

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 Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Strategic Choice Process of Strategic Choice: Devil’s Advocate Identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation. Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Strategic Choice Process of Strategic Choice: Dialectical Inquiry Two proposals are generated using different assumptions for each alternative strategy Prentice Hall, 2002 Chapter 7 Wheelen/Hunger

Strategic Choice Evaluating strategic alternatives: Ability to meet four criteria: Mutual exclusivity Success Completeness Internal consistency Prentice Hall, 2002 Chapter 7 Wheelen/Hunger