Strategy Formulation: Functional Strategy and Strategic Choice

MPRBA-302 20th February 2013 Adapted from: Thomas L Wheelen & J. David Hunger

BPSM-Functional Strat

Leben Johnson

Functional Strategy

Functional Strategy:
The approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity.

BPSM-Functional Strat

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

BPSM-Functional Strat

Functional Strategy

Distinctive competencies:
When core competencies or core capabilities are superior to those of the competition.

BPSM-Functional Strat

Functional Strategy
Distinctive competencies:
Must meet 3 tests: Customer value Competitor unique Extendibility

BPSM-Functional Strat

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

BPSM-Functional Strat

Functional Strategy
Sourcing Decision:
Outsourcing
Purchasing from someone else a product or service that had been previously provided internally.

BPSM-Functional Strat

Functional Strategy
Determining Functional Strategy:
Identify business units core competencies Ensure that competencies are continually strengthened Manage competencies so that competitive advantage is preserved

BPSM-Functional Strat

Proposed Outsourcing Matrix

BPSM-Functional Strat

Marketing Strategy
Marketing strategy

Involved with pricing, selling, and distributing a product.

BPSM-Functional Strat

Marketing Strategy
Market development strategy
Capture a larger share of existing market through market saturation and market penetration Develop new markets for current products

BPSM-Functional Strat

Marketing Strategy
Product development strategy
Develop new products for existing markets Develop new products for new markets

BPSM-Functional Strat

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

BPSM-Functional Strat

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

BPSM-Functional Strat

Financial Strategy
Leveraged buy out (LBO)
Company is acquired financed largely by debt (from a third party).
Debt paid by acquired companys operations or sale of assets

BPSM-Functional Strat

Financial Strategy
Tracking stock
Highlighting a high-growth business unit in a popular sector of the stock market.
Keeping subsidiarys common stock separately identified

BPSM-Functional Strat

R&D Strategy
R&D Strategy Deals with product and process innovation and improvement
Choice:
Technological leader Technological follower
BPSM-Functional Strat

Research and Development Strategy and Competitive Advantage

Technological Leadership Technological Followership Lower the cost of the product or value activities by learning from the leaders experience. Avoid R&D costs through imitation.

Cost Advantage

Pioneer the lowest cost product design. Be the first firm down the learning curve. Create low-cost ways of performing value activities.

Differentiation Pioneer a unique product that increases buyer value. Innovate in other activities to increase buyer value. Adapt the product or delivery system more closely to buyer needs by learning from the leaders experience.

BPSM-Functional Strat

Operations Strategy
Operations strategy
Determines:
How and where product is manufactured Level of vertical integration in process Deployment of physical resources Relationships with suppliers

BPSM-Functional Strat

Operations Strategy
Manufacturing strategy
Affected by product life cycle
Job shop Connected line batch flow Flexible manufacturing system Dedicated transfer lines

BPSM-Functional Strat

Operations Strategy
Manufacturing strategy
Movement from mass production to:
Continuous improvement Modular manufacturing Mass customization

BPSM-Functional Strat

Purchasing Strategy
Purchasing strategy
Obtaining raw materials, parts and supplies
Basic Purchasing Choices:
Multiple sourcing Sole sourcing Parallel sourcing

BPSM-Functional Strat

Logistics Strategy
Logistics strategy
Flow of products into and out of the process
Three current trends:
Centralization Outsourcing Use of the Internet

BPSM-Functional Strat

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
BPSM-Functional Strat

Information Systems Strategy

Information systems strategy

Technology to provide business units with competitive advantage

BPSM-Functional Strat

Strategies to Avoid
Corporate, Business or Functional Levels Avoid the following:
Follow the Leader Hit Another Home Run Arms Race Do Everything Losing Hand
BPSM-Functional Strat

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

BPSM-Functional Strat

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

BPSM-Functional Strat

Scenario Box to Generate Pro Forma Statements

1 Pr objections Last Factor GDP CPI Other Sales units Dollars COGS Adver tising and marketing Inter est expense Plant expansion Dividends Net pr ofits EPS ROI ROE Other Year Historical Average Tr end Analysis O 19 P ML O 19 P ML O 19 P ML Comments

BPSM-Functional Strat

Strategic Choice
Attitude Toward Risk:
Risk is composed of:
Probability of effective strategy Amount of assets committed Length of time of asset commitment

BPSM-Functional Strat

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

BPSM-Functional Strat

Strategic Choice

Process of Strategic Choice:

Devils Advocate
Identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation.

BPSM-Functional Strat

Strategic Choice

Process of Strategic Choice:

Dialectical Inquiry
Two proposals are generated using different assumptions for each alternative strategy

BPSM-Functional Strat

Strategic Choice
Evaluating strategic alternatives:
Ability to meet four criteria:
Mutual exclusivity Success Completeness Internal consistency

BPSM-Functional Strat