CHAPTER 8 Strategy

Formulation: Functional
Strategy & Strategic
Choice

STRATEGIC MANAGEMENT & BUSINESS POLICY

10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

Prentice Hall, Inc. 2006 8-1

 Functional Strategy

Functional Strategy
The approach a functional area takes to
achieve corporate and business unit
objectives and strategies by maximizing
resource productivity
(Hierarchical Planning)

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 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

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 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)

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 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

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 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, ATT, ATTL, SBTCL)
Value or Growth
Pay dividend in a slow growth market

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 Functional Strategy

R&D Strategy
Technology Technology Open
Leader Follower Innovation
Cost Advantage Pioneer in low Lower cost by Alliances with
cost production learning from the outside agencies
First down the leaders
learning curve experience
Low-cost ways of Avoid R&D
performing value through imitation
activities

Differentiation Pioneer unique Adapt product or Alliances with

product that delivery system to outside agencies
increases buyer buyer needs by
value learning from
Innovate value leader experience
add activities

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 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

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 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)

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 Functional Strategy

Collaborative planning, forecasting, and

replenishment (CPFR)

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 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

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 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
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 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

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 Proposed Outsourcing Matrix

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 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

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 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.

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 Constructing Corporate Scenarios

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 Functional Strategy

Subjective Factors Affecting Decisions --

Needs and desires of key managers

Managements attitude toward risk
Pressures from stakeholders
Pressures from corporate culture

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 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

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 Stakeholder Priority Matrix

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 Stakeholder Priority Matrix

Assessing the Importance of Stakeholders

1. How will this decision affect each stakeholder, especially those
in the high/medium priority?
2. How much of what they want are they likely to get?
3. What are the stakeholders likely to do if they dont get what
they want?
4. What is the probability that they will do it?

Political Strategies
Constituency building
PAC Contributions
Advocacy Advertising
Lobbying
Coalition Building
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 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 Culture
Change the Strategy

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 Strategic Choice

Avoiding the Consensus Trap --

Devils 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

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 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

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 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

10TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

Prentice Hall, Inc. 2006 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