Chapter 7
Strategy Formulation:
Functional Strategy and
Strategic Choice
1
Functional Strategy
Functional Strategy:
– The approach a functional area takes
to achieve corporate and business
unit objectives and strategies by
maximizing resource productivity.
2
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
3
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 4
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
5
Functional Strategy
Marketing
Finance
R&D
Operations
Purchasing
Logistics
HRM
Information Systems
6
Marketing Strategy
Involved with pricing, selling, and
distributing a product.
7
Marketing Strategy
Market development strategy –
– Capture a larger share of existing
market through market saturation and
market penetration
– Develop new markets for current
products
8
Marketing Strategy
Product development strategy –
– Develop new products for existing
markets
– Develop new products for new
markets
9
Marketing Strategy
• Promotional Strategy
– Push strategy
– Pull strategy
• Pricing Strategy
– Skim pricing
– Penetration pricing
10
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
11
R&D Strategy
Deals with product and process
innovation and improvement
Choice:
– Technological leader
– Technological follower
12
Research and Development Strategy
and Competitive Advantage
Technological Leadership Technological Followership
Cost Advantage Pioneer the lowest cost product Lower the cost of the product or
design. value activities by learning from
the leader’s experience.
Be the first firm down the
learning curve. Avoid R&D costs through
imitation.
Create low-cost ways of
performing value activities.
Differentiation
Pioneer a unique product that Adapt the product or delivery
increases buyer value. system more closely to buyer
needs by learning from the
Innovate in other activities to
leader’s experience.
increase buyer value.
13
Operations Strategy
Determines:
• How and where product is manufactured
• Level of vertical integration in process
• Deployment of physical resources
• Relationships with suppliers
14
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
15
Purchasing Strategy
– Obtaining raw materials, parts and
supplies
• Basic Purchasing Choices:
– Multiple sourcing
– Sole sourcing
– Parallel sourcing
16
Logistics Strategy
– Flow of products into and out of the
process
• Three current trends:
– Centralization
– Outsourcing
– Use of the Internet
17
HRM Strategy
– Addresses issues of:
• Low-skilled employees
– Low pay
– Repetitive tasks
– High turnover
• Skilled employees
– High pay
– Cross trained
– Self-managing teams
18
Information Systems Strategy
– Technology to provide business units
with competitive advantage
19
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
21
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
22
Strategic Choice
Evaluating strategic alternatives:
Ability to meet four criteria:
– Mutual exclusivity
– Success
– Completeness
– Internal consistency
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