8.

STRATEGY
FORMULATION:
FUNCTIONAL STRATEGY AND
STRATEGIC CHOICE
Presented by : Tayyab Hameed
Learning Objectives
 Identify a variety of functional strategies.
 Understand Outsourcing & Off-shoring.
 Recognize strategies to avoid.
 Construct corporate scenarios to evaluate
strategic options.
 Develop policies to implement strategies.
8.0 - What is Strategy?
 A strategy is a comprehensive master plan
stating HOW the organization will achieve its
mission and objectives.
8.0 - Hierarchy of
Strategy
8.0 - Strategic
Management Model
8.0 - Strategy
Formulation
 Development of long-range plans for the
effective management with the help of SWOT
analysis.
 It is composed of
 Mission.
 Objectives.
 Strategies.
 Policy.
8.1 - Functional Strategy
 Function – the intended role or purpose of person or thing.
 Strategy – Generalship
 Functional Strategy is an approach, a functional area
takes to achieve corporate and business unit objectives and
strategies by maximizing resource productivity.
 The orientation of a functional strategy is dictated by its
parent business unit’s strategy.
 Functional Strategy may need to vary from region to region.
 Suzuki Pickup, Pakistan
 Mr. Donut, Japan
8.1 – Objectives of Functional
Strategy
 Market share- Gain and sustain share of a product
market.
 Human talent- Recruit high- quality workforce.
 Cost efficiency- Use resources well to operate at low
cost.
 Product quality- Produce high-quality goods or
services.
 Innovation- Develop new products and /or processes.
 Profitability- Earn net profit in business.
8.1 – Types of Functional Strategy
 Marketing Strategy
 Financial Strategy
 R&D Strategy
 Operations Strategy
 Purchasing Strategy
 Logistics Strategy
 HRM Strategy
 Information Management Strategy
8.1.1 – Marketing
Strategy
 Marketing Strategy deals with Pricing, Selling
and Distributing a product.
 There are several types of Marketing Strategy:
 Market & Product Development
 Push and Pull Strategy
 Distribution System
 Pricing
8.1.1.1 – Types of Marketing
Strategy

8.1.1.1 Market & Product

Development
8.1.1.2 – Types of Marketing
Strategy

8.1.1.2 – Push and Pull

Strategy
8.1.1.3 – Types of Marketing
Strategy
8.1.1.3 – Distribution
System
 Should a company use distributors and dealers

to sell its products, or should it sell directly to

mass merchandisers?
Or
 Should a company use the direct marketing

model by selling straight to the consumers via

the Internet?
8.1.1.4 – Types of Marketing
Strategy

8.1.1.4 – Pricing
8.1.1 – Marketing
Strategy

8.1.1 – 4Ps of Marketing

8.1.2 – Financial Strategy
 It focuses on the alignment of financial management
within an organization with its business and
corporate strategies to gain strategic advantages.
 Forecasting, Planning and Budgeting
 Credit & Liquidity Strategies
 Capital Investment Methods/Systems
 Financial Mix
 Capital Budget & Working Capital
 Stock / Dividend
 Cash Flow, Loans or Leases
8.1.2.1 - Types of Financial Strategy
 Strong Balance Sheet
 Strong credit rating.
 Greater discipline and flexibility in Investment
approach.
 Help to build a robust business.
 Healthier Economic Cycle.
 Leveraged buyout (LBO) Strategy
 Financial buyers or sponsors

 Focus on ROE rather than ROA.

8.1.2.1 - Types of Financial Strategy
 Dividends and Stock Price Management
 Some company’s often don’t declare dividend.
 Several support the value of their stock by offering
dividends.
 Selling of Company’s Patent
 For products a company no longer wish to
commercialize or are not a part of its core business.
8.1.3 – Research & Development (R&D)
Development

 New products and improvement of existing

products that allow for effective strategy
implementation.
 R&D strategy deals with
 Product Innovation
 Process Improvement
 Open Innovation (Hybrid)
8.1.3.1 – Research & Development (R&D)
Development

 R & D also deals with the questions like

 How new technology should be accessed?
 Internal Development
 External Acquisitions
 Either to be a Technological Leader.
 Or to be a Technological Follower.
8.1.3.2 – Research & Development (R&D)
Development

8.1.3.2 – R & D Strategy and Competitive Advantage

8.1.4 – Operations
Strategy
 Operations serves as a firm’s distinctive
competence in executing similar strategies
better than competitors.
 Its provides support for a differentiated strategy
 Operations strategy is to ensure all tasks
performed are the right tasks.
 It is a plan for the design and management of
operations functions
8.1.4.1 - Types of Operations
Strategy
 Vertical Integration is where the supply
chain of a company is owned by that company.

 Strategic Decisions
 How much work should be done outside the
firm?
 On what basis should particular items be made
in-house?
 When should items be outsourced?
 How should suppliers be selected?
8.1.4.1 - Types of Operations
Strategy

Vertical Integration
8.1.4.1 - Types of Operations
Strategy
 CAD/CAM Principles
 Continuous Improvement Strategy
 Product Life Cycle
8.1.4.1 - Types of Operations
Strategy

8.1.4.1 – Product Life Cycle

8.1.5 - Purchasing
Strategy
 Companies implement Purchasing strategies in
order to make cost effective purchasing
decisions from a group of efficient vendors who
will deliver quality goods on time and at
mutually agreeable terms. 
8.1.5.1 - Types of Purchasing
Strategy
 Purchasing Cycle
 Regular Vendors
 Outsourced Procurement
 Multiple Sourcing
 Force suppliers to compete for the business.
 Reduce purchasing costs.
 Sole Sourcing
 Reduce cost and time spent on product design.
 Improves quality.
 Just in Time
8.1.5.1 - Types of Purchasing
Strategy
 Just in Time – II
 Vendors have desks in purchasing company’s

factory floor.
 They attend production status meetings, visit the

R&D labs.
 Reduce cost and time.

 Improves quality.

 Lesser paper work.

 All time availability of Vendor at place.

8.1.6.1 - Logistics
Strategy
 Logistics strategy deals with the flow of products
into and out of the manufacturing process.
 Types of Logistics
 Centralized Logistics

 Outsourcing Logistics
8.1.7 - HUMAN RESOURCE MANAGEMENT
(HRM) STRATEGY
 The strategic & coherent approach to the most valued
asset : The People
 Deals with
 Right Employee for the Right Job
 Headcount
 Salary Structure
 Hiring / Separation
 360-degree appraisal
 Employee Development
 Diversified Workforce
8.1.8 – Information Technology
Strategy
 If focuses on the alignment of information
management system within an organization with
its business and corporate strategies to gain
strategic advantage.
8.2 - The Sourcing Decision: Location of
Functions
 Outsourcing is the contracting out of a business
process to a third-party.
 Outsourcing is
 Cost effective when used properly.
 Budget flexibility and control.
 8.2.1 - The Sourcing Decision:
Outsourced Activity
100%

80% 78% 77%

66%
63%
60% 56%
51%

40%

20% 18%

0%
General and Human Transportation Information Manufacturing Marketing Finance &
Administration Resource & Distribution System Accounting

Outsourced Departments as per AMA

8.2.2 - The Sourcing Decision: Off-
Shoring
 Off-shoring is the outsourcing of an activity
or a function to a wholly owned company or
an independent provider in another country.
 Major off-shored industries are:
 Customer Services
 Information Technologies
8.2.3 - The Sourcing Decision: Why
Off-Shoring?
 Low Cost Qualified Labor
 Educated Workforce
 Lower Regulatory Costs
 Tax Benefits
 Ability to Downsize at Will
 Improved Performance
 Freeing up Resources For Core Activities
 Quicker Turnaround Time
8.2.4 - The Sourcing Decision: Errors
 Core Activities
 Wrong Vendor
 Poor Contract
 Personnel Issues
 Loosing Control
 Hidden Cost
 Exit Strategy
8.2.4 - The Sourcing
Decision: How?
 Identify the company’s or business unit’s core
competencies.
 Ensure that the competencies are continually being
strengthened.
 Manage the competencies in such a way that best
preserves the competitive advantage, they create.
8.2.5 - The Sourcing Decision: Proposed
Outsourcing Matrix
8.3 – Strategies to Avoid
 Follow the Leader.
 Hit another home run.
 Arms race.
 Do everything.
 Losing hand.
8.4 – Strategic Choice?

Objecti
ve

Analysi Option
s s
8.4.1 – Strategic Choice: Selecting
the Best Strategy
 Use industry scenarios.
 Develop common-size financial statements
 Historical common-size percentages

 Develop alternative set of Optimistic(O),

Pessimistic(P), and Most Likely(ML)
assumptions.
 Five year Sales and COGS forecast.

 Analyze historical data and make adjustments.

8.4.1 – Strategic Choice: Selecting
the Best Strategy
8.4.1 – Strategic Choice: Selecting
the Best Strategy
 Construct detailed pro forma financial statements.
 List the actual figures
 List optimistic figures
 List the pessimistic figures for the next five years.
 Develop a similar set of optimistic (O), pessimistic (P),
and most likely (ML) pro-forma statements for the
second strategic alternative.
 Calculate FR and IS and create balance sheets.
 Compare assumptions with the FS and ratios to
determine feasibility.
8.4.2 - PROCESS OF STRATEGIC
CHOICE
 Strategies fails due to
 Actions of Decision Maker

 Desire for speedy action

 Apply failure-prone decision
 Poor use of resources
 Only 4% of the managers selected the right strategy.
8.4.2 - PROCESS OF STRATEGIC
CHOICE
 Two techniques to avoid CONSENSUS trap:
 Devil’s advocate
 Dialectical inquiry
 Criteria to evaluate the strategy ability:
 Mutual Exclusivity
 Success
 Completeness
 Internal Consistency
8.5 – Developing Policies
 Policies define the broad guidelines for implementation,
decisions making and actions to be taken.
 It forces trade-offs between competing resource demands.
 It tests the strategic soundness of a particular action.
 It sets clear boundaries within which employees must
operate while granting them freedom to experiment
within those constraints.
 Restrict top management’s strategic options in the
future.
Questions?
Conclusion!
 Functional Strategy : Should be built on a
distinctive competency residing within that
functional area.
 The Sourcing Decision
 Strategies to Avoid
 Strategic Choice
 Developing Policies