Strategic Management and

Business Policy 15e, Global Edition

Chapter 8
Strategy Formulation:
Functional Strategy
and Strategic Choice

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Learning Objectives
8-1 Discuss the impact that the various types of
functional strategies have on the achievement
of organizational goals and objectives
8-2 Explain which activities and functions are
appropriate to outsource/offshore in order to
gain or strengthen competitive advantage
8-3 List and explain the strategies to avoid
8-4 Construct corporate scenarios to evaluate
strategic options

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8-2
Functional Strategy
• Functional strategy
– the approach a functional area takes to
achieve corporate and business unit objectives
and strategies by maximizing resource
productivity

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8-3
Marketing Strategy (1 of 6)
• Marketing strategy
– deals with pricing, selling, and distributing a
product

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8-4
Marketing Strategy (2 of 6)
• Market development strategy
– a company or business unit can:
 capture a larger share of an existing market for
current products through market saturation and
market penetration
 develop new uses and/or markets for current
products

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8-5
Marketing Strategy (3 of 6)

• Product development strategy

– a company or unit can:
 develop new products for existing markets
 develop new products for new markets

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8-6
Marketing Strategy (4 of 6)
• Brand extension
– using a successful brand name to market other
products
• Push strategy
– spending a large amount of money on trade promotion
in order to gain or hold shelf space in retail outlets

• Pull strategy
– advertising to “pull” products through the distribution
channels

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8-7
Marketing Strategy (5 of 6)
• Skim pricing
– offers the opportunity to “skim the cream” from
the top of the demand curve with a high price
while the product is novel and competitors are
few

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8-8
Marketing Strategy (6 of 6)
• Penetration pricing
– attempts to hasten market development and
offers the pioneer the opportunity to use the
experience curve to gain market share with low
price and then dominate the industry

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8-9
Financial Strategy (1 of 2)
• Financial strategy
– examines the financial implications of corporate
and business-level strategic options and
identifies the best financial course of action
• The management of dividends and stock price is
an important part of a corporation’s financial
strategy.

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8-10
Financial Strategy (2 of 2)
• Leveraged buyout
– company is acquired in a transaction financed
largely by debt usually obtained from a third
party
• Reverse stock split
– investor’s shares are split in half for the same
total amount of money

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8-11
Research and Development Strategy
(1 of 2)
• Research and development (R&D)
strategy
– deals with product and process innovation and
improvement
– also deals with the appropriate mix of different
types of R&D and question of how new
technology should be accessed

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8-12
Research and Development Strategy
(2 of 2)
• Technological leader
– pioneering an innovation
• Technological follower
– imitating the products of competitors
• Open innovation
– firm uses alliances and connections with
corporate, government, academic labs, and
consumers to develop new products and
processes
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8-13
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

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8-14
Purchasing Strategy (1 of 2)
• Purchasing strategy
– deals with obtaining raw materials, parts and
supplies needed to perform the operations
function
– multiple, sole, and parallel sourcing

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8-15
Purchasing Strategy (2 of 2)
• Multiple sourcing
– the purchasing company orders a particular part
from several vendors
• Sole sourcing
– relies on only one supplier for a particular part
• Parallel sourcing
– two suppliers are the sole suppliers of two
different parts, but they are also backup
suppliers for each other’s parts

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8-16
Logistics Strategy
• Logistics strategy
– deals with the flow of products into and out of
the manufacturing process

• Trends include:
– centralization
– outsourcing
– Internet

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8-17
Human Resource Management (HRM)
Strategy
• HRM strategy
– 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, and will most likely quit
after a short time (the fast-food restaurant
strategy) or hire skilled employees who receive
relatively high pay and are cross-trained to
participate in self-managing work teams

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8-18
Information Technology Strategy
• Follow-the-sun management
– project team members living in one country can
pass their work to team members in another
country in which the work day is just beginning

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8-19
The Sourcing Decision:
Location of Functions
• Outsourcing
– purchasing from someone else a product or
service that had been previously provided
internally
– the reverse of vertical integration
• Offshoring
– the outsourcing of an activity or a function to a
wholly owned company or an independent
provider in another country

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8-20
Disadvantages of Outsourcing
• Customer complaints
• Locked in to long-term contracts
• Lack of ability to learn new skills and develop new
core competencies
• Lack of cost savings
• Poor product quality

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8-21
Seven Errors in Outsourcing to Avoid
1. Outsourcing the wrong activities
2. Selecting the wrong vendor
3. Writing poor contracts
4. Overlooking personnel issues
5. Lack of control
6. Overlooking hidden costs
7. Lack of an exit strategy

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8-22
Figure 8-1: Proposed Outsourcing Matrix

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8-23
Strategies to Avoid
• Follow the leader
• Hit another home run
• Arms race
• Do everything
• Losing hand

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8-24
Constructing Corporate Scenarios

• Corporate scenarios
– pro forma (estimated future) balance sheets
and income statements that forecast the effect
each alternative strategy and its various
programs will likely have on division and
corporate return on investment

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8-25
Corporate Scenario Steps
1. Use industry scenarios to develop assumptions
about the task environment.
2. Develop common size financial statements for
prior years.
3. Construct detailed pro forma financial
statements for each strategic alternative.

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8-26
Management’s Attitude Toward Risk
(1 of 2)
• Risk
– 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 for other uses

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8-27
Management’s Attitude Toward Risk
(2 of 2)
• Real-options approach
– when the future is highly uncertain, it pays to
have a broad range of options open
• Net present value (NPV)
– calculates the value of a project by predicting
its payouts, adjusting them for risk, and
subtracting the amount invested

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8-28
Figure 8-2: Stakeholder Priority Matrix

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8-29
Questions to Assess Stakeholder
Concerns
1. How will this decision affect each stakeholder?
2. How much of what stakeholders want are they
likely to get under the alternative?
3. What are the stakeholders likely to do if they
don’t get what they want?
4. What is the probability that they will do it?

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8-30
Pressures from Stakeholders

• Political strategy
– plan to bring stakeholders into agreement with
a corporation’s actions
– constituency building, political action committee
contributions, advocacy advertising, lobbying,
and coalition building

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8-31
Pressures from the Corporate Culture
If there is little fit, 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.

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8-32
Process of Strategic Choice (1 of 2)

• Strategic choice
– the evaluation of alternative strategies and
selection of the best alternative

• Failure almost always stems from the actions of

the decision maker, not from bad luck or
situational limitations.

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8-33
Process of Strategic Choice (2 of 2)
Four criteria for evaluating alternatives:
1. Mutual exclusivity
2. Success
3. Completeness
4. Internal consistency

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8-34
Avoiding the Consensus Trap
• Devil’s advocate
– assigned to identify potential pitfalls and
problems with a proposed alternative strategy
in a formal presentation
– may be an individual or a group
• Dialectical inquiry
– requires that two proposals using different
assumptions be generated for each alternative
strategy under consideration

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8-35
Using Policies to Guide
Strategic Choices
When crafted correctly, an effective policy
accomplishes three things:
1. It forces trade-offs between competing resource
demands.
2. It tests the strategic soundness of a particular
action.
3. It sets clear boundaries within which employees
must operate while granting them the freedom to
experiment within those constraints.

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8-36