Strategy Formulation: Functional Strategy & Strategic Choice

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)

Functional Strategy It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.

Functional Strategy Just as competitive strategies vary from region of the world to another, functional strategies may also need to vary from region to region or from one country to another.

Functional-level strategies are aimed at improving the effectiveness of a company’s operations and its ability to attain superior efficiency, quality, innovation, and customer responsiveness. Distinctive competencies shape the functional-level strategies that a company can pursue.

Marketing Strategy – Pricing Selling Distribution Market Development Functional Strategy Marketing Strategy – Pricing Selling Distribution Market Development Capture large share of an existing market for current products through market saturation and promotion. Develop new markets for current products. Product Development Develop new products for existing markets (line extension). Develop new products for new markets

Marketing Strategy – Advertising and promotion Push strategy 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)

Marketing Strategy – Pricing Skim pricing Penetration pricing 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

Financial Strategy – Leveraged buyout Functional Strategy Financial Strategy – Leveraged buyout Company acquires another company by using significant amount of borrowed money to meet cost of acquisition By the middle of 2013, Dell was a poorly performing stock. It decided to use a leveraged buyout to go private and regroup. Silver Lake acquired Dell using 85% leveraged funds. This move forced out most of Dell's BODs, allowing the company to go from a poorly performing company to a private company with billions of dollars in assets. At that time, financial experts predicted the "new" company would begin with an ROI of 11% on the leveraged funds. They were right. JAB Holding Co., a firm that invests in luxury goods, coffee and healthcare, initiated an LBO of Krispy Kreme Doughnuts in May 2016. The process was made difficult by the existing debts of Krispy Kreme but as of July 12, 2016, the deal went through.

Reversed stock split company reduces the total number of its outstanding shares which will result in an increase in the par value or EPS; shares of stocks are effectively merged to form a smaller number of proportionally more valuable shares. Priceline Group underwent a reverse split in 2003. Prior to that, stock price had fallen from above $100/share to just over $1/share. Priceline started to recover before the reverse split and in the first half of 2003, share price tripled. From its post-split level of around $22/share, Priceline share price is now $1,852.07 (July 3, 2017 data)

Research reveals that higher debt levels not only deter takeover by other firms, it also leads to productivity and improved cash flows by forcing management to focus on core businesses.

R&D Strategy – Functional Strategy Technology Leader Technology Follower Open Innovation Cost Advantage Pioneer in low cost production First down the learning curve Low-cost ways of performing value activities Lower cost by learning from the leader’s experience Avoid R&D through imitation Alliances with outside agencies Differentiation Pioneer unique product that increases buyer value Innovate value add activities Adapt product or delivery system to buyer needs by learning from leader experience

A new approach to R&D is open innovation A new approach to R&D is open innovation. Firm uses alliances and connections with corporate, government, academic labs, and even consumers to develop new products and processes.

Mattel and other toy manufacturers and retailers use idea brokers like Big Idea Group to scout for new toy ideas In the UK, 100% Open is an open innovation agency that provides service to companies like Virgin Atlantic, Discovery Channel, and Pfizer. P&G connects with the global community of experts through the platform of InnoCentive. Crowd-sourcing has also become a good strategy. Adidas, BMW, and Boeing leverage the potential of crowd-sourcing initiatives in their innovation processes to stimulate the generation of new ideas.

Operations Strategy – Functional 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

Purchasing Strategy – Multiple sourcing Sole sourcing 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)

Logistics Strategy – HRM Strategy – Centralization Outsourcing 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

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

Outsourcing errors – Activities that should not be outsourced 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

Proposed Outsourcing Matrix

Strategies to Avoid – Follow the leader – they could be wrong 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…

Subjective Factors Affecting Decisions -- Functional Strategy Subjective Factors Affecting Decisions -- Needs and desires of key managers Management’s attitude toward risk Pressures from stakeholders Pressures from corporate culture

Risk Real-Options Approach 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

Stakeholder Priority Matrix

Assessing the Importance of Stakeholders Stakeholder Priority Matrix Assessing the Importance of Stakeholders How will this decision affect each stakeholder, especially those in the high/medium priority? How much of what they want are they likely to get? What are the stakeholders likely to do if they don’t get what they want? What is the probability that they will do it? Political Strategies Constituency building Advocacy Advertising Lobbying Coalition Building

Corporate Culture Pressure 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

Avoiding the Consensus Trap -- Strategic Choice Avoiding the Consensus Trap -- Devil’s 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

Evaluation of Strategic Alternatives -- 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

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