Functional Strategy
and Strategic Choice
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Chapter Outline
• Functional Strategies that can be used to achieve
organisational objectives
• Strategies to avoid
• Constructing corporate scenarios
• Stakeholder priority mix
• Considering different Industries- Strategic
choice
• 10 commandments for crafting business
strategies.
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Functional Strategy
• Approach a functional area takes to achieve corporate and
business unit objectives
• Orientation of functional strategy dictated by parent unit
strategy
• Competitive strategy of differentiation thru high quality
Manufacturing functional strategy : Expansive quality
assurance processes over cheap high volume production
Human resource functional strategy : hiring and training of
highly skilled but costly workforce
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• Marketing functional strategy : emphasize distribution
channel “pull” using advertising to increase consumer
demand over “push” using promotional allowances to
retailers
• If using low-cost competitive strategy, different set of
functional strategies to support the business strategy
• Competitive and functional strategies may need to vary
from region to region
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Marketing Strategy
• Marketing strategy – deals with pricing, selling and
distribution
• Using market development strategy, firm can
– 1. Capture a larger share of an existing market of
current products (market saturation and market
penetration)
– 2. Develop new markets for current products
• Using product development strategy, company can
– 1. Develop new products for existing markets
– 2. Develop new products for new markets (line
extension)
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•
For promotion and advertising, a co. can choose between “push” and
“pull” marketing strategies
– Push strategy – spending large amount of money on trade
promotion in order to gain or hold shelf space
– Pull strategy - advertising pulls the products thru the
distribution channel
•
Other marketing strategies:
– Should co. use distributors or dealers to sell the product/
multiple channels or should sell straight to customers via the
internet?
•
Pricing strategies:
– Skim pricing – high price for product pioneers when product is
novel and competitors few
– Penetration pricing – gain market share with low price and
dominate the industry
– Dynamic pricing – prices vary frequently depending upon demand,
customer segment and product availability
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R&D Strategy
• R&D strategy deals with product and process innovation and
improvement
• Also deals with how new technology should be accessed –
thru internal development, external acquisition or strategic
alliances
• One R&D choice either be technological leader (pioneering
an innovation) or technological follower ( imitating the
products of competitors)
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Operations Strategy
•
Operations strategy determines how and where a product or
service is to be manufactured, the level of vertical integration in
the production process, the deployment of physical resources and
relationships with suppliers
•
Also deals with optimum level of technology the firm should use in
its operations processes
•
Increasingly the use of computer assisted design and
manufacturing (CAD/CAM) principles
•
Mass production system to produce large number of low cost,
standard goods and services
•
Continuous improvement system – significantly higher level of
quality
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Purchasing Strategy
• Purchasing strategy deals with obtaining raw materials,
parts and supplies to perform the operations function
• Multiple sourcing – purchasing company orders a particular
part from several vendors
– 1. it makes suppliers compete for business thus reducing
purchasing costs
– 2. if one supplier cannot deliver, another usually can thus
guaranteeing that parts and supplies are always on hand when
needed
• Sole sourcing – recommended by Deming as only manageable
way to obtain higher quality supplier
–
Simplify purchasing concept by using Just-In-Time (JIT)
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• Parallel sourcing – two suppliers are the sole suppliers of
two different parts but they are also backup suppliers for
each other’s parts
• Internet increasingly used both to find new sources of
supply and to keep inventories replenished.
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Logistics Strategy
• Logistics strategy deals with the flow of products into and
out of the manufacturing process
• 3 trends related to this strategy are evident :
– Centralisation : to gain logistical synergies, cos began to
centralise logistics to gain better contracts with shippers etc
– Outsourcing : reduces costs and improves delivery time
– Use of the internet: simplifies logistical system
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Human Resource Management
Strategy
• HRM strategy among other things 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 or hire skilled employees who
receive relatively higher pay and are cross trained to
participate in self managing work teams
• Cos are finding that having a diverse workforce can be a
competitive advantage
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Strategies to Avoid
•
Follow the leader – Ignores the possibility that the leader may be
wrong
•
Arms race - Entering a battle for market share may reduce
profitability
•
Do everything – When faced with several interesting opportunities,
management might want to have a go at all of them
•
Losing Hand – A co. may have invested so much in a particular
strategy that top management is unwilling to accept its failure
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Selecting the Best Strategy
• Strategy that takes advantage of environmental
opportunities and corporate
strengths/competencies and defends against
environmental threats and corporate weaknesses
• Ability of each alternative to satisfy agreed on
objectives with the least resources and the
fewest negative side effects
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Constructing Corporate Scenarios
–Another approach to choice
• By using 3 sets of estimated figures e.g sales
(Optimistic, Pessimistic and Most Likely) for the
new products over the next 5 years, two
alternatives can be evaluated in terms of their
effect on future company performances as
reflected in the company’s probable future
financial statements
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Management’s Attitude toward
Risk
• Risk is composed not only of the probability that
the strategy will be effective but also of the
amount of assets the corporation must allocate to
that strategy and the length of time the assets
will be unavailable
• Ownership - A small firm managed by an
entrepreneur is often willing to accept greater
risk than a large of diversified ownership run by
professional managers
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Pressures from Stakeholders
• The attractiveness of a strategic alternative is affected by
its perceived compatibility with the key stakeholders
• Stakeholders can be categorised in terms of
– 1. How will this decision affect each stakeholder?
– 2. How much of what each stakeholder wants is he likely to get
under this alternative?
– 3. What are the stakeholders likely to do if they don’t get
what they want?
– 4. What is the probability they will do it?
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Pressures from the Corporate
Culture
• If strategy incompatible with corporate culture,
likelihood of success is very low – foot-dragging and
even sabotage
• If there is little fit between strategy and corporate
culture, management must decide if it should:
– 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
• Restricting to only those strategies that are
completely compatible with its culture might eliminate
the most profitable alternatives
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Needs and Desires of Key
Managers
• Even most attractive alternative might not be
selected if it is contrary to the needs and desires
of important top managers
– Personal characteristics and experience affect a
person’s assessment
– Ego may be tied to a particular proposal
– A key executive may influence other people in top
management to favour a particular project
– Industry and cultural background affect strategic
choice
– Tendency to maintain status quo
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Process of Strategic Choice
• Strategic choice is the evaluation of strategic
alternatives and the selection of the best
alternative
• Best strategic decisions are not arrived at
through consensus when everyone agrees on one
alternative
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• Each resulting alternative must be rigorously
evaluated in terms of its ability to meet 4
criteria:
– 1. Mutual exclusivity - Doing any one alternative 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 – Must make sense on its own as
a strategic decision for the entire firm and not
contradict key goals, policies and strategies currently
being pursued by the firm or its units
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Strategic Choice
• “Competing in the marketplace is like
war. You have injuries and casualties,
and the best strategy wins.”
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Strategic Choice
•
•
•
•
•
•
•
Strategies for Emerging Industries
Strategies for Turbulent, High Velocity Markets
Strategies for Maturing Industries
Strategies for Declining Industries
Strategies for Industry Leaders
Strategies for Weak Businesses
Ten Commandments for Crafting Strategies
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Features of an Emerging
Industry
• New and unproven market
• Buyers are first-time users
• Marketing involves inducing initial purchase and overcoming
customer concerns
• Firms struggle to fund R&D, operations and build resource
capabilities for rapid growth
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Strategy Options for competing in
Emerging Industries
•
•
•
Win early race for industry leadership by employing a bold,
creative strategy
Push hard to perfect technology, improve product quality, and
develop attractive performance features
Form strategic alliances with
– Key suppliers
– Companies having related technological expertise
•
Capture potential first-mover advantages
•
Pursue
•
•
–
New customers
–
Entry into new geographical areas
Focus advertising emphasis on
–
Increasing frequency of use
–
Creating brand loyalty
Use price cuts to attract price-sensitive buyers
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Features of High Velocity Markets
• Rapid-fire technological change
• Short product life-cycles
• Rapidly evolving customer expectations
• Frequent launches of new competitive moves
• Entry of important new rivals
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Strategy Options for Competing in High
Velocity Markets
• Invest aggressively in R&D
• Develop quick response capabilities
– Shift resources
– Adapt competencies
– Create new competitive
capabilities
– Speed new products to market
• Use strategic partnerships to develop specialized
expertise and capabilities
• Initiate fresh actions every few months
• Keep products/services fresh and exciting
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Characteristics of Industry Maturity
•
•
•
•
•
•
Slowing demand
Greater emphasis on cost and service
Product innovation
International competition increases
Industry profitability falls
Mergers and acquisitions reduce the
number of industry rivals
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Strategy Options for Competing
in a Mature Industry
•
Prune marginal products and models
•
Emphasize innovation in the value chain
•
Strong focus on cost reduction
•
Increase sales to present customers
•
Expand internationally
•
Build new, more flexible
competitive capabilities
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Stagnant or Declining
Industries:The Standout features
• Demand grows more
slowly than economy
as whole (or even declines)
• Competitive pressures
intensify--rivals battle for
market share
• To grow and prosper, firm must take market share from
rivals
• Industry consolidates to a smaller number of key players via
mergers and acquisitions
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Strategy Options for Competing
in a Stagnant or Declining Industry
•
•
•
Pursue focus strategy aimed at fastest growing market segments
Stress differentiation based on quality improvement or product
innovation
Work diligently to drive costs down
– Cut marginal activities from value chain
– Use outsourcing
– Redesign internal processes to exploit e-commerce
– Consolidate under-utilized production facilities
– Add more distribution channels
– Close low-volume, high-cost distribution outlets
– Prune marginal products
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Strategies Based on a
Company’s Market Position
Industry leaders
Runner-up firms
Weak or crisis-ridden firms
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10 Commandments for Crafting
Successful Business Strategies
1.
Always put top priority on crafting and executing strategic
moves that enhance a firm’s competitive position for the longterm and that serve to establish it as an industry leader.
2.
Be prompt in adapting and responding to changing market
conditions, unmet customer needs and buyer wishes for
something better, emerging technological alternatives, and new
initiatives of rivals. Responding late or with too little often puts
a firm in the precarious position of playing catch-up
3.
Invest in creating a sustainable competitive advantage, for it is a
most dependable contributor to above-average profitability.
4. Avoid strategies capable of succeeding only in the best of
circumstances.
5. Don’t underestimate the reactions and the commitment of rival
firms.
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10 Commandments for Crafting
Successful Business Strategies
6.
Consider that attacking competitive weakness is usually more
profitable than attacking competitive strength.
7. Be judicious in cutting prices without an established cost
advantage.
8.
Employ bold strategic moves in pursuing differentiation
strategies so as to open up very meaningful gaps in quality or
service or advertising or other product attributes
9.
Endeavor not to get “stuck back in the pack” with no coherent
long-term strategy or distinctive competitive position, and little
prospect of climbing into the ranks of the industry leaders.
10.
Endeavor not to get “stuck back in the pack” with no coherent
long-term strategy or distinctive competitive position, and little
prospect of climbing into the ranks of the industry leaders.
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