Functional Strategy and Strategic Choice

Chapter Outline Functional Strategies that can be used to achieve organisational objectives Strategies to avoid Constructing corporate scenarios Stakeholder priority mix Considering different Industries- Strategic choice 10 commandments for crafting business strategies.

Functional Strategy Approach a functional area takes to achieve corporate and business unit objectives Orientation of functional strategy dictated by parent unit strategy Competitive strategy of differentiation thru high quality Manufacturing functional strategy : Expansive quality assurance processes over cheap high volume production Human resource functional strategy : hiring and training of highly skilled but costly workforce

Marketing functional strategy : emphasize distribution channel “pull” using advertising to increase consumer demand over “push” using promotional allowances to retailers If using low-cost competitive strategy, different set of functional strategies to support the business strategy Competitive and functional strategies may need to vary from region to region

Marketing Strategy Marketing strategy – deals with pricing, selling and distribution Using market development strategy, firm can 1. Capture a larger share of an existing market of current products (market saturation and market penetration) 2. Develop new markets for current products Using product development strategy, company can 1. Develop new products for existing markets 2. Develop new products for new markets (line extension)

For promotion and advertising, a co For promotion and advertising, a co. can choose between “push” and “pull” marketing strategies Push strategy – spending large amount of money on trade promotion in order to gain or hold shelf space Pull strategy - advertising pulls the products thru the distribution channel Other marketing strategies: Should co. use distributors or dealers to sell the product/ multiple channels or should sell straight to customers via the internet? Pricing strategies: Skim pricing – high price for product pioneers when product is novel and competitors few Penetration pricing – gain market share with low price and dominate the industry Dynamic pricing – prices vary frequently depending upon demand, customer segment and product availability

R&D Strategy R&D strategy deals with product and process innovation and improvement Also deals with how new technology should be accessed – thru internal development, external acquisition or strategic alliances One R&D choice either be technological leader (pioneering an innovation) or technological follower ( imitating the products of competitors)

Operations Strategy Operations strategy determines how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources and relationships with suppliers Also deals with optimum level of technology the firm should use in its operations processes Increasingly the use of computer assisted design and manufacturing (CAD/CAM) principles Mass production system to produce large number of low cost, standard goods and services Continuous improvement system – significantly higher level of quality

Purchasing Strategy Purchasing strategy deals with obtaining raw materials, parts and supplies to perform the operations function Multiple sourcing – purchasing company orders a particular part from several vendors 1. it makes suppliers compete for business thus reducing purchasing costs 2. if one supplier cannot deliver, another usually can thus guaranteeing that parts and supplies are always on hand when needed Sole sourcing – recommended by Deming as only manageable way to obtain higher quality supplier Simplify purchasing concept by using Just-In-Time (JIT)

Parallel sourcing – two suppliers are the sole suppliers of two different parts but they are also backup suppliers for each other’s parts Internet increasingly used both to find new sources of supply and to keep inventories replenished.

Logistics Strategy Logistics strategy deals with the flow of products into and out of the manufacturing process 3 trends related to this strategy are evident : Centralisation : to gain logistical synergies, cos began to centralise logistics to gain better contracts with shippers etc Outsourcing : reduces costs and improves delivery time Use of the internet: simplifies logistical system

Human Resource Management Strategy HRM strategy among other things addresses the issue of whether a company or business unit should hire a large number of low skilled employees who receive low pay, perform repetitive jobs or hire skilled employees who receive relatively higher pay and are cross trained to participate in self managing work teams Cos are finding that having a diverse workforce can be a competitive advantage

Strategies to Avoid Follow the leader – Ignores the possibility that the leader may be wrong Arms race - Entering a battle for market share may reduce profitability Do everything – When faced with several interesting opportunities, management might want to have a go at all of them Losing Hand – A co. may have invested so much in a particular strategy that top management is unwilling to accept its failure

Selecting the Best Strategy Strategy that takes advantage of environmental opportunities and corporate strengths/competencies and defends against environmental threats and corporate weaknesses Ability of each alternative to satisfy agreed on objectives with the least resources and the fewest negative side effects

Constructing Corporate Scenarios –Another approach to choice By using 3 sets of estimated figures e.g sales (Optimistic, Pessimistic and Most Likely) for the new products over the next 5 years, two alternatives can be evaluated in terms of their effect on future company performances as reflected in the company’s probable future financial statements

Management’s Attitude toward Risk Risk is composed not only of the probability that the strategy will be effective but also of the amount of assets the corporation must allocate to that strategy and the length of time the assets will be unavailable Ownership - A small firm managed by an entrepreneur is often willing to accept greater risk than a large of diversified ownership run by professional managers

Pressures from Stakeholders The attractiveness of a strategic alternative is affected by its perceived compatibility with the key stakeholders Stakeholders can be categorised in terms of 1. How will this decision affect each stakeholder? 2. How much of what each stakeholder wants is he likely to get under this alternative? 3. What are the stakeholders likely to do if they don’t get what they want? 4. What is the probability they will do it?

Pressures from the Corporate Culture If strategy incompatible with corporate culture, likelihood of success is very low – foot-dragging and even sabotage If there is little fit between strategy and corporate culture, management must decide if it should: Take a chance on ignoring the culture Manage around the culture and change the implementation plan Try to change the culture to fit the strategy Change the strategy to fit the culture Restricting to only those strategies that are completely compatible with its culture might eliminate the most profitable alternatives

Needs and Desires of Key Managers Even most attractive alternative might not be selected if it is contrary to the needs and desires of important top managers Personal characteristics and experience affect a person’s assessment Ego may be tied to a particular proposal A key executive may influence other people in top management to favour a particular project Industry and cultural background affect strategic choice Tendency to maintain status quo

Process of Strategic Choice Strategic choice is the evaluation of strategic alternatives and the selection of the best alternative Best strategic decisions are not arrived at through consensus when everyone agrees on one alternative

Each resulting alternative must be rigorously evaluated in terms of its ability to meet 4 criteria: 1. Mutual exclusivity - Doing any one alternative would preclude doing any other 2. Success – It must be doable and have a good probability of success 3. Completeness – It must take into account all the key strategic issues 4. Internal consistency – Must make sense on its own as a strategic decision for the entire firm and not contradict key goals, policies and strategies currently being pursued by the firm or its units

Strategic Choice “Competing in the marketplace is like war. You have injuries and casualties, and the best strategy wins.”

Strategic Choice Strategies for Emerging Industries Strategies for Turbulent, High Velocity Markets Strategies for Maturing Industries Strategies for Declining Industries Strategies for Industry Leaders Strategies for Weak Businesses Ten Commandments for Crafting Strategies

Features of an Emerging Industry New and unproven market Buyers are first-time users Marketing involves inducing initial purchase and overcoming customer concerns Firms struggle to fund R&D, operations and build resource capabilities for rapid growth

Strategy Options for competing in Emerging Industries Win early race for industry leadership by employing a bold, creative strategy Push hard to perfect technology, improve product quality, and develop attractive performance features Form strategic alliances with Key suppliers Companies having related technological expertise Capture potential first-mover advantages Pursue New customers Entry into new geographical areas Focus advertising emphasis on Increasing frequency of use Creating brand loyalty Use price cuts to attract price-sensitive buyers

Features of High Velocity Markets Rapid-fire technological change Short product life-cycles Rapidly evolving customer expectations Frequent launches of new competitive moves Entry of important new rivals

Strategy Options for Competing in High Velocity Markets Invest aggressively in R&D Develop quick response capabilities Shift resources Adapt competencies Create new competitive capabilities Speed new products to market Use strategic partnerships to develop specialized expertise and capabilities Initiate fresh actions every few months Keep products/services fresh and exciting

Characteristics of Industry Maturity Slowing demand Greater emphasis on cost and service Product innovation International competition increases Industry profitability falls Mergers and acquisitions reduce the number of industry rivals

Strategy Options for Competing in a Mature Industry Prune marginal products and models Emphasize innovation in the value chain Strong focus on cost reduction Increase sales to present customers Expand internationally Build new, more flexible competitive capabilities

Stagnant or Declining Industries:The Standout features Demand grows more slowly than economy as whole (or even declines) Competitive pressures intensify--rivals battle for market share To grow and prosper, firm must take market share from rivals Industry consolidates to a smaller number of key players via mergers and acquisitions

Strategy Options for Competing in a Stagnant or Declining Industry Pursue focus strategy aimed at fastest growing market segments Stress differentiation based on quality improvement or product innovation Work diligently to drive costs down Cut marginal activities from value chain Use outsourcing Redesign internal processes to exploit e-commerce Consolidate under-utilized production facilities Add more distribution channels Close low-volume, high-cost distribution outlets Prune marginal products

Strategies Based on a Company’s Market Position Industry leaders Runner-up firms Weak or crisis-ridden firms

10 Commandments for Crafting Successful Business Strategies 1. Always put top priority on crafting and executing strategic moves that enhance a firm’s competitive position for the long-term and that serve to establish it as an industry leader. Be prompt in adapting and responding to changing market conditions, unmet customer needs and buyer wishes for something better, emerging technological alternatives, and new initiatives of rivals. Responding late or with too little often puts a firm in the precarious position of playing catch-up 3. Invest in creating a sustainable competitive advantage, for it is a most dependable contributor to above-average profitability. 4. Avoid strategies capable of succeeding only in the best of circumstances. 5. Don’t underestimate the reactions and the commitment of rival firms.

10 Commandments for Crafting Successful Business Strategies 6. Consider that attacking competitive weakness is usually more profitable than attacking competitive strength. 7. Be judicious in cutting prices without an established cost advantage. Employ bold strategic moves in pursuing differentiation strategies so as to open up very meaningful gaps in quality or service or advertising or other product attributes Endeavor not to get “stuck back in the pack” with no coherent long-term strategy or distinctive competitive position, and little prospect of climbing into the ranks of the industry leaders.