CHAPTER 8 Strategy Formulation Functional Strategy Strategic Choice

CHAPTER 8 Strategy Formulation: Functional Strategy & Strategic Choice STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION THOMAS L. WHEELEN Prentice Hall, Inc. © 2006 J. DAVID HUNGER 8 -1

Functional Strategy The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity (Hierarchical Planning) Prentice Hall, Inc. © 2006 8 -2

Functional Strategy Marketing Strategy – –Pricing –Selling –Distribution Market Development 1. Capture large share of an existing market for current products through market saturation and promotion. 2. Develop new markets for current products. Product Development 1. Develop new products for existing markets (line extension). 2. Develop new products for new markets Prentice Hall, Inc. © 2006 8 -3

Functional Strategy Marketing Strategy – –Advertising and promotion • Push strategy Trade promotions to hold shelf space (discounts, in store specials, special advertising allowances) • Pull strategy Emphasize consumer advertising to build brand awareness. (Customers request products) Prentice Hall, Inc. © 2006 8 -4

Functional Strategy Marketing Strategy – –Pricing • Skim pricing High price when product is new and there are few competitors • Penetration pricing Low price to hasten market development and use experience curve to dominate the market • Dynamic pricing Variable pricing based on supply and demand Prentice Hall, Inc. © 2006 8 -5

Functional Strategy Financial Strategy – –Leveraged buyout Company acquires itself through long term debt (“take a company private”) –Reversed stock split Increase stock price for the short run –Tracking stock Subsidiary has a separate stock issue (T, ATTL, SBTCL) –Value or Growth Pay dividend in a slow growth market Prentice Hall, Inc. © 2006 8 -6

Functional Strategy R&D Strategy – Technology Leader Technology Follower Open Innovation Cost Advantage • Pioneer in low cost production • First down the learning curve • Low-cost ways of performing value activities • Lower cost by learning from the leader’s experience • Avoid R&D through imitation • Alliances with outside agencies Differentiation • Pioneer unique product that increases buyer value • Innovate value add activities • Adapt product or delivery system to buyer needs by learning from leader experience • Alliances with outside agencies Prentice Hall, Inc. © 2006 8 -7

Functional Strategy Operations Strategy – –Job shop vs. Connected line batch flow –Flexible manufacturing systems vs. Dedicated transfer lines –Mass production vs. Continuous improvement system (TQM) –Modular manufacturing Preassembled subassemblies Just-In-Time (JIT) –Mass Customization Unique product for each customer Prentice Hall, Inc. © 2006 8 -8

Functional Strategy Purchasing Strategy – –Multiple sourcing Suppliers compete to reduce cost Security of backup suppliers –Sole sourcing One supplier responsible for quality –Parallel sourcing Two “sole source” suppliers that backup or share responsibility –Just-in-time (JIT) Raw material provided as needed (Pull) Prentice Hall, Inc. © 2006 8 -9

Functional Strategy Collaborative planning, forecasting, and replenishment (CPFR) Prentice Hall, Inc. © 2006 8 -10

Functional Strategy Logistics Strategy – Flow of materials into and out of the manufacturing process –Centralization –Outsourcing HRM Strategy – –Self managed work teams – 360 degree appraisal –Workforce diversity Prentice Hall, Inc. © 2006 8 -11

Functional Strategy Outsourcing Purchase a product or service from someone else that was previously provided internally –AMA Survey of members (94% outsource at least one activity) Activity % General and Admin. 78 Human Resources 77 Transportation/Dist. 66 Info Systems 63 Manufacturing 56 Marketing 51 Finance/Accounting 18 25% were disappointed in the results 51% brought activities back in house Prentice Hall, Inc. © 2006 8 -12

Functional Strategy Outsourcing errors – –Activities that should not be outsourced –Wrong vendor selection –Writing poor contract –Losing control over the activity –Overlooking personnel issues –Hidden costs of outsourcing –Failing to plan exit strategy Prentice Hall, Inc. © 2006 8 -13

Proposed Outsourcing Matrix Prentice Hall, Inc. © 2006 8 -14

Functional Strategy Strategies to Avoid – –Follow the leader – they could be wrong –Hit another home run – R&D longshot –Arms race – price wars –Do everything – nothing well –Losing hand – know when to fold them… Prentice Hall, Inc. © 2006 8 -15

Corporate Strategy Corporate Scenario Development Pro forma (estimated) balance sheet and income statements that identify key measures and the optimistic, pessimistic and most likely outcomes of alternative strategies. Prentice Hall, Inc. © 2006 8 -16

Constructing Corporate Scenarios Prentice Hall, Inc. © 2006 8 -17

Functional Strategy Subjective Factors Affecting Decisions -–Needs and desires of key managers –Management’s attitude toward risk –Pressures from stakeholders –Pressures from corporate culture Prentice Hall, Inc. © 2006 8 -18

Functional Strategy Risk – Probability of success – Amount of assets allocated to the strategy – Time the assets are committed Real-Options Approach Staged funding of multiple alternatives based on periodic evaluation of performance Prentice Hall, Inc. © 2006 8 -19

Stakeholder Priority Matrix Prentice Hall, Inc. © 2006 8 -20

Stakeholder Priority Matrix Assessing the Importance of Stakeholders 1. 2. 3. 4. How will this decision affect each stakeholder, especially those in the high/medium priority? How much of what they want are they likely to get? What are the stakeholders likely to do if they don’t get what they want? What is the probability that they will do it? Political Strategies – – – Constituency building PAC Contributions Advocacy Advertising Lobbying Coalition Building Prentice Hall, Inc. © 2006 8 -21

Corporate Culture Pressure Corporate Culture If strategy is a poor fit with the Corporate Culture you have choices: – – Ignore the Culture Manage around the Culture Change the Strategy Prentice Hall, Inc. © 2006 8 -22

Strategic Choice Avoiding the Consensus Trap -–Devil’s Advocate prove the proposal wrong –Dialectical Inquiry Alternative assumptions are made for the strategy (Optimistic/Pessimistic). The expected results are debated to reach a decision or compromise. As a manager, if you have some one in your department that ALWAYS agrees with you, One of you is redundant… Anon Prentice Hall, Inc. © 2006 8 -23

Strategic Choice Evaluation of Strategic Alternatives -–Mutual exclusivity – preclude others –Success – good probability of success –Completeness – account for key strategic issues –Internal consistency – be consistent with mission/vision Prentice Hall, Inc. © 2006 8 -24

Policies Developing Policies Implementation guidelines – Forces trade-offs between competing resource allocations – Tests strategic soundness of decisions – Sets clear boundaries within which employees must operate while granting freedom to experiment Prentice Hall, Inc. © 2006 8 -25

CHAPTER 8 Strategy Formulation: Functional Strategy & Strategic Choice STRATEGIC MANAGEMENT & BUSINESS POLICY 10 TH EDITION THOMAS L. WHEELEN Prentice Hall, Inc. © 2006 J. DAVID HUNGER 8 -26

Exercise options • Levi Case at the end of the chapter • Constituent Matrix – Smoking Ban in Erie County Prentice Hall, Inc. © 2006 8 -27