Chapter 7
Strategy Formulation:
Functional Strategy and
Strategic Choice
PowerPoint Slides
Anthony F. Chelte
Western New England College
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Functional Strategy
Functional Strategy:
– The approach a functional area takes
to achieve corporate and business
unit objectives and strategies by
maximizing resource productivity.
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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
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Functional Strategy
Distinctive competencies:
– When core competencies or core
capabilities are superior to those of
the competition.
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Functional Strategy
Distinctive competencies:
Must meet 3 tests:
– Customer value
– Competitor unique
– Extendibility
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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
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Functional Strategy
Sourcing Decision:
Outsourcing –
– Purchasing from someone else a
product or service that had been
previously provided internally.
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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
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Proposed Outsourcing Matrix
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Marketing Strategy
Marketing strategy –
Involved with pricing, selling, and
distributing a product.
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Marketing Strategy
Market development strategy –
– Capture a larger share of existing
market through market saturation and
market penetration
– Develop new markets for current
products
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Marketing Strategy
Product development strategy –
– Develop new products for existing
markets
– Develop new products for new
markets
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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
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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
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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
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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
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R&D Strategy
R&D Strategy –
Deals with product and process
innovation and improvement
Choice:
– Technological leader
– Technological follower
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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.
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Adapt the product or delivery
system more closely to buyer
needs by learning from the
leader’s experience.
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Operations Strategy
Operations strategy –
– Determines:
•
•
•
•
How and where product is manufactured
Level of vertical integration in process
Deployment of physical resources
Relationships with suppliers
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Operations Strategy
Manufacturing strategy –
– Affected by product life cycle
•
•
•
•
Job shop
Connected line batch flow
Flexible manufacturing system
Dedicated transfer lines
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Operations Strategy
Manufacturing strategy –
– Movement from mass production to:
• Continuous improvement
• Modular manufacturing
• Mass customization
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Purchasing Strategy
Purchasing strategy –
– Obtaining raw materials, parts and
supplies
• Basic Purchasing Choices:
– Multiple sourcing
– Sole sourcing
– Parallel sourcing
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Logistics Strategy
Logistics strategy –
– Flow of products into and out of the
process
• Three current trends:
– Centralization
– Outsourcing
– Use of the Internet
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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
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Information Systems Strategy
Information systems strategy –
– Technology to provide business units
with competitive advantage
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Strategies to Avoid
Corporate, Business or Functional
Levels – Avoid the following:
– Follow the Leader
– Hit Another Home Run
– Arms Race
– Do Everything
– Losing Hand
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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
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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
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Scenario Box to Generate Pro Forma Statements
Probjections1
Factor
Last
Historical
Tr end
19—
Year
Average
Analysis
O
P
19—
ML
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
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Strategic Choice
Attitude Toward Risk:
– Risk is composed of:
• Probability of effective strategy
• Amount of assets committed
• Length of time of asset commitment
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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
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Strategic Choice
Process of Strategic Choice:
– Devil’s Advocate
• Identify potential pitfalls and problems
with a proposed alternative strategy in a
formal presentation.
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Strategic Choice
Process of Strategic Choice:
– Dialectical Inquiry
• Two proposals are generated using
different assumptions for each alternative
strategy
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Strategic Choice
Evaluating strategic alternatives:
Ability to meet four criteria:
–
–
–
–
Mutual exclusivity
Success
Completeness
Internal consistency
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