Chapter 7 Strategy Formulation Functional Strategy and Strategic

Chapter 7 Strategy Formulation: Functional Strategy and Strategic Choice Dr. Vijaya Kumar Skyline College 1

Functional Strategy: – The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity. 2

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 3

Functional Strategy Distinctive competencies: – When core competencies or core capabilities are superior to those of the competition. 4

Functional Strategy Distinctive competencies: Must meet 3 tests: – Customer value – Competitor unique – Extendibility 5

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 6

Functional Strategy Sourcing Decision: Outsourcing – – Purchasing from someone else a product or service that had been previously provided internally. 7

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 8

Proposed Outsourcing Matrix 9

Marketing Strategy Marketing strategy – Involved with pricing, selling, and distributing a product. 10

Marketing Strategy Market development strategy – – Capture a larger share of existing market through market saturation and market penetration – Develop new markets for current products 11

Marketing Strategy Product development strategy – – Develop new products for existing markets – Develop new products for new markets 12

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 13

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 14

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 15

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 16

R&D Strategy – Deals with product and process innovation and improvement Choice: – Technological leader – Technological follower 17

Research and Development Strategy and Competitive Advantage Technological Leadership Cost Advantage Pioneer the lowest cost product design. Be the first firm down the learning curve. Create low-cost ways of performing value activities. Technological Followership Lower the cost of the product or value activities by learning from the leader’s experience. Avoid R&D costs through imitation. 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 the leader’s experience. 18

Operations Strategy Operations strategy – – Determines: • • How and where product is manufactured Level of vertical integration in process Deployment of physical resources Relationships with suppliers 19

Operations Strategy Manufacturing strategy – – Affected by product life cycle • • Job shop Connected line batch flow Flexible manufacturing system Dedicated transfer lines 20

Operations Strategy Manufacturing strategy – – Movement from mass production to: • Continuous improvement • Modular manufacturing • Mass customization 21

Purchasing Strategy Purchasing strategy – – Obtaining raw materials, parts and supplies • Basic Purchasing Choices: – Multiple sourcing – Sole sourcing – Parallel sourcing 22

Logistics Strategy Logistics strategy – – Flow of products into and out of the process • Three current trends: – Centralization – Outsourcing – Use of the Internet 23

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 24

Information Systems Strategy Information systems strategy – – Technology to provide business units with competitive advantage 25

Strategies to Avoid Corporate, Business or Functional Levels – Avoid the following: – Follow the Leader – Hit Another Home Run – Arms Race – Do Everything – Losing Hand 26

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 27

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 28

Scenario Box to Generate Pro Forma Statements Probjections 1 Factor Last Historical Tr end Year Average Analysis 19— O P 19— 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 29

Strategic Choice Attitude Toward Risk: – Risk is composed of: • Probability of effective strategy • Amount of assets committed • Length of time of asset commitment 30

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 31

Strategic Choice Process of Strategic Choice: – Devil’s Advocate • Identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation. 32

Strategic Choice Process of Strategic Choice: – Dialectical Inquiry • Two proposals are generated using different assumptions for each alternative strategy 33

Strategic Choice Evaluating strategic alternatives: Ability to meet four criteria: – – Mutual exclusivity Success Completeness Internal consistency 34