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Chapter 7

Strategy Formulation: Functional Strategy and

Strategic Choice

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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

• 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

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

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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Functional Strategy

Marketing Finance R&D Operations Purchasing Logistics HRM Information Systems

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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

• Promotional Strategy– Push strategy

– Pull strategy

• Pricing Strategy– Skim pricing

– Penetration pricing

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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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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 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.

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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

– Affected by product life cycle• Job shop• Connected line batch flow• Flexible manufacturing system• Dedicated transfer lines

– Movement from mass production to:• Continuous improvement• Modular manufacturing• Mass customization

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Purchasing Strategy

– Obtaining raw materials, parts and supplies• Basic Purchasing Choices:

– Multiple sourcing– Sole sourcing– Parallel sourcing

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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

– 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

– Technology to provide business units with competitive advantage

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Strategic Choice

Constructing Corporate Scenarios:

– Corporate Scenarios • Pro forma balance sheets and income statements

that forecast effects of alternatives on return on investment

– 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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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.

– 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