STRATEGY

FORMULATION:
FUNCTIONAL STRATEGY
AND STRATEGIC CHOICE

Presented To:
Dr. Adel Zaied

By: Hesham Abd Elkhalek

Ahmed Magdy
Tamer Essawy
Environmental
Strategy Formulation Strategy Implementation Evaluation
Scanning
& Control

Mission
External
Reason Objectives
Social for
Environment: existenc What results Strategies
General Forces e to
Plan to
accomplish Policies
achieve the
by when
mission & Broad
Task
objectives guidelines Programs
Environment:
Industry for
decision Activities Budgets
Analysis
making needed to
accomplish Cost of Procedures
a plan the
programs Sequence of Performance
Internal
steps
needed to do Actual Results
Structure: Chain the job
of command

Culture: Beliefs,
Expectations,
Values

Resources:
Assets, Skills,
Competencies,
Knowledge

Feedback / Learning
FUNCTIONAL
STRATEGY
 Functional Strategy
 Core Competencies
Distinctive Competencies
 The Sourcing Decision
 Marketing Strategy
 Financial Strategy
 R&D Strategy
 Operation Strategy
 Purchasing Strategy
 Logistic Strategy
 HR management Strategy
 Information System Strategy
Functional Strategy
It is the approach a functional area takes to achieve
corporate and business unit objectives and strategies
by maximizing resource productivity.
Ex. competitive strategy of Differentiation; emphasizes
expensive, quality assurance process over cheaper,
high-volume production;
HR func. Strtgy; emph. Hiring/training High skilled
workforce
Marketing func. Strtgy; emph. “Pull” using ads to
increase demand, over “Push” using promotional
allowances
Ex. House of Donuts varies its Functional strategy in
different regions (US [breakfast] vs Japan [evening])
Core Competencies
a core competency is something that a
corporation can do exceedingly well. It is a
key strength.

For example, a core competency of Avon

Products is its expertise in door-to-door
selling. FedEx has a core competency in
information technology. A company must
continually reinvest in its core
competencies or risk losing them.
Distinctive Competencies
When these competencies or capabilities are
superior to those of the competition, they are
called distinctive competencies.
To be considered a distinctive competency,
the competency must meet three tests:
• Customer Value: It must make a disproportionate
contribution to customer-perceived value.
• Competitor Unique: It must be unique and superior
to competitor capabilities.
• Extendibility: It must be something that can be used
to develop new products/services or enter new
markets.
Distinctive Competencies
A corporation can gain access to a distinctive
competency in four Ways:
• An asset endowment, such as a key patent, ex. Xerox
original copying patent.

• Acquired from someone else, ex. Whirlpool bought a

worldwide distribution system when it purchased Philips's
appliance division.

• Shared with another business unit or alliance partner, ex.

Apple Computer worked with a design firm to create the
special appeal of its Apple II and Mac computers.

• Carefully built and accumulated over time within the

company, ex. Honda extended its expertise in small motor
manufacturing from motorcycles to autos and lawn-
mowers.
The Sourcing Decision
Outsourcing is purchasing from someone else
a product or service that had been previously
provided internally.

• ex, AT&T outsourced its credit card processing to

Total System Services;

Outsourcing is becoming an increasingly

important part of strategic decision making and
an important way to increase efficiency and
often quality.
The Sourcing Decision
The key to outsourcing is to purchase
from outside only those activities that
are not key to the company's
distinctive competencies. Therefore,
in determining functional strategy, the
strategist must:

• 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.
The Sourcing Decision

Outsourcing experience revealed that

unsuccessful outsourcing efforts had
three common characteristics:

• The firms' finance and legal departments

dominated the decision process.

• Vendors were not prequalified based on total

capabilities.

• Short-term benefits dominated decision making..

Proposed Outsourcing Matrix
Activities Today Value-Added to Firm’s Products &
Services
Low High
Activity’s Potential for Competitive

Taper Vertical Full Vertical

Integration: Integration:
High

Produce Some Produce All

Internally Internally
Advantage

Outsource Outsource
Completely: Completely:
Low

Buy on Open Purchase with

Market Long-Term
Contracts
Marketing Strategy
Marketing strategy deals with pricing, selling,
and distributing a product.
Using a market development strategy, a
company or business unit can (1) capture a
larger share of an existing market for current
products through market saturation and market
penetration or (2) develop new markets for
current products.
Consumer product giants such as Procter &
Gamble, Colgate-Palmolive, and Unilever are
experts at using advertising and promotion to
implement a market saturation/penetration
strategy to gain the dominant market share in a
product category.
Marketing Strategy
product development strategy, a
company or unit can (1) develop new
products for existing markets or (2) develop
new products for new markets.

Church & Dwight developed new products

to sell to its current customers. The
company then generated new uses for its
sodium bicarbonate (Arm & Hammer brand
baking soda) by reformulating it as
toothpaste, deodorant, and detergent.
Marketing Strategy
Advertising and promotion; choose
between a "push" or a "pull" marketing
strategy.
push strategy (food and consumer
products companies) by spending a large
amount of money on trade promotion in
order to gain or hold shelf space in retail
outlets. Trade promotion includes
discounts, in-store special offers, and
advertising allowances designed to "push"
products through the distribution system.
Marketing Strategy

pull strategy, in which advertising "pulls" the

products through the distribution channels.
The company now spends more money on
consumer advertising designed to build
brand awareness so that shoppers will ask
for the products. Research has indicated that
a high level of advertising (a key part of a pull
strategy) is most beneficial to leading brands
in a market.
Marketing Strategy
Distribution Strategies; Should a company
use distributors and dealers to sell its products
or should it sell directly to mass
merchandisers?
Using both channels simultaneously can lead to
problems. In order to increase the sales of its
lawn tractors and mowers,
Ex. John Deere’s Lawn Mowers are sold
through its current dealer network, and also
through mass merchandisers like Home
Depot. The dealers considered Home Depot to
be a key competitor (Home Depot's ability to
under price).
 Marketing Strategy
Pricing Strategies

For new-product pioneers, 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.
Penetration pricing, the opportunity to gain
market share with a low price and dominate
the industry.
Penetration pricing is more likely than skim
pricing to raise a unit's operating profit in the
long term.
Financial Strategy
It examines the financial implications of
corporate and business-level strategic options
and identifies the best financial course of
action.
The tradeoff between achieving the desired
debt-to-equity ratio and relying on internal long-
term financing via cash flow is a key issue in
financial strategy.
Small- to medium sized companies try to avoid
all external sources of funds in order to avoid
outside entanglements and to keep control of
the company within.
Financial Strategy
A corporation can use financial leverage (long-
term debt) to boost earnings per share, thus
raising stock price and the overall value of the
company.
Research indicates that higher debt levels not
only deter takeover by other firms (by making the
company less attractive), but also leads to
improved productivity and improved cash flows
by forcing management to focus on core
businesses.
Financial Strategy
Research reveals that a firm's financial strategy is
influenced by its corporate diversification strategy.
Equity financing, for example, is preferred for related
diversification while debt financing is preferred for
unrelated diversification.
Leveraged buy out (LBO); a company is acquired in
a transaction financed largely by debt—usually
obtained from a third party, such as an insurance
company or an investment banker. Ultimately the
debt is paid with money generated from the acquired
company's operations or by sales of its assets. The
acquired company, in effect, pays for its own
acquisition! Management of the LBO is then under
tremendous pressure to keep the highly leveraged
company profitable.
Financial Strategy
A recent financial strategy is to establish a
tracking stock. A tracking stock is a type of
common stock tied to one portion of a
corporation's business. This strategy allows
established companies to highlight a high-
growth business unit without selling the
business. It goes public as an IPO and pays
dividends based on the unit's performance.
AT&T (AT&T Wireless), Sprint (Sprint PCS).
Research & Development Strategy

R&D strategy deals with product and process

innovation and improvement. It also deals
with the appropriate mix of different types of
R&D (basic, product, or process) and with the
question of how new technology should be
accessed—internal development, external
acquisition, or through strategic alliances.
Research & Development Strategy
Be either a technological leader in which one
pioneers an innovation or a technological
follower in which one imitates the products of
competitors. Porter suggests that deciding to
become a technological leader or follower can
be a way of achieving either overall low cost or
differentiation.
• Ex. of a leader R&D functional strategy to achieve a
differentiation competitive advantage is Nike, Inc.
• Ex. of a follower R&D functional strategy to achieve
a low-cost competitive advantage is Dean Foods
Company.
Research & Development Strategy

Strategic technology alliances are one way

to combine the R&D capabilities of two
companies.
• Ex. Maytag Company alliance with worked with
one of its suppliers to apply fuzzy logic
technology to its new IntelliSense™ dishwasher.
Operation Strategy
Operations strategy determines how and where
a product or service is to be manufactured, the
level of vertical integration in the production
process, and the deployment of physical
resources. It should also deal with the optimum
level of technology the firm should use in its
operations processes.
Advanced Manufacturing Technology (AMT) is
revolutionizing operations worldwide using
(CAD/CAM) principles.
Operation Strategy
Under the continuous improvement system
developed by Japanese firms, empowered
cross-functional teams strive constantly to
improve production processes.
dedicated transfer lines (highly automated
assembly lines making one mass-produced
product using little human labor).
The automobile industry is currently
experimenting with the strategy of modular
manufacturing in which preassembled
subassemblies are delivered as they are needed
(Just-in-Time) to a company's assembly line
workers, who quickly piece the modules
together into a finished product. For example,
General Motors
Operation Strategy
mass customization requires that people,
processes, units, and technology reconfigure
themselves to give customers exactly what
they want, when they want it.
• Ex. of mass customization is the "Personal Pair"
system Levi Strauss introduced to combat the
growing competition from private label jeans.
Purchasing Strategy
Purchasing strategy deals with obtaining the raw
materials, parts, and supplies needed to per-form
the operations function.
Under multiple sourcing, the purchasing company
orders a particular part from several vendors.
Deming strongly recommended sole sourcing as
the only manageable way to obtain high supplier
quality.
Parallel sourcing, whereby two suppliers are the
sole suppliers of two different parts, but they are
also backup suppliers for each other's parts.
Logistic Strategy
Logistics strategy deals with the flow of
products into and out of the manufacturing
process. Three trends are evident:
centralization, outsourcing, and the use of
the Internet.
Companies like Amoco Chemical, and Union
Carbide view the logistics function as an
important way to differentiate themselves
from the competition, to add value, and to
reduce costs.
Many companies have found that
outsourcing of logistics reduces costs and
improves delivery time. For example,
Hewlett-Packard (HP) contracted with
Roadway Logistics to manage its inbound
raw materials warehousing in Vancouver,
Canada
Human Resource Management
Strategy
HRM strategy, addresses the issue of whether a
company should hire a large number of low-skilled
employees who receive low pay, (the McDonald's
restaurant strategy) or hire skilled employees who
receive relatively high pay.
Multinational corporations are increasingly using
self-managing work teams in their foreign affiliates
as well as in home country operations.
Many companies are not only using an increasing
amount of part-time employees, they are also
leasing temporary employees from employee
leasing companies.
Human Resource Management
Strategy
A diverse workforce can be a competitive
advantage.
Ex. Avon Company was able to turn around its
unprofitable inner-city markets by putting African
American and Hispanic managers in charge of
marketing to these markets.
Diversity in terms of age and national origin also
offers benefits. DuPont's use of multinational teams
has helped the company develop and market
products internationally. McDonald's has
discovered that older workers perform as well as, if
not better than, younger employees.
Information System Strategy
Corporations are increasingly adopting information
systems strategies to provide business units with
competitive advantage.

When FedEx first provided its customers with

PowerShip computer software to store addresses,
print shipping labels, and track package location, its
sales jumped significantly. UPS soon followed with its
own MaxiShips software. Viewing its information
system as a distinctive competency, FedEx continued
to push for further advantage against UPS by using
its Web site to enable customers to track their
packages.
Multinational corporations use of a sophisticated
intranet for its employees allows them to practice
follow-the-sun management
STRATEGIES
TO AVOID
STRATEGIES TO AVOID

 Follow the Leader

 Hit Another Home Run
 Arms Race
 Do Everything
 Losing Hand
Follow the Leader
Imitating a leading competitor’s
strategy ignores a firm’s
particular strengths and
weaknesses and the possibility
that the leader may be wrong.

Example: Fujitsu Ltd., and IBM

Like IBM, Fujitsu competed
primarily as a mainframe
computer maker. So devoted
was it to catching IBM,
however, that it failed to notice
that the mainframe business
had reached maturity by 1990
and was no longer growing.
Hit Another Home Run

If a company is successful because it

pioneered an extremely successful
product, it tends to search for another
super product that will ensure growth
and prosperity.
However, the probability of finding a second
winner is slight.
Example: Polaroid spent a lot of money
developing an "instant" movie camera, but the
public ignored it in favor of the camcorder.
Arms Race

Entering into a spirited battle with another firm to

increase market share might increase sales revenue.

However, that increase will probably be more than

offset by increases in advertising, promotion, R&D, and
manufacturing costs.

Example: Since the deregulation of airlines, price wars

and rate "specials" have contributed to the low profit
margins or bankruptcy of many major airlines such as
Eastern and Continental.
Do Everything
When faced with several interesting opportunities,
management might tend to leap at all of them.
Money, time, and energy are soon exhausted as the
many projects demand large infusions of resources.
Example: The Walt Disney Company's expertise in the
entertainment industry led it to acquire the ABC
network. As the company churned out new motion
pictures and television programs like Who Wants To
Be a Millionaire, it spent $750 million to build new
theme parks and buy a cruise line (as well as a hockey
team).
By 2000, even though corporate sales continued to
increase, net income was falling.
Losing Hand

A corporation might have invested so much in a

particular strategy that top management is unwilling to
accept its failure.

Example: Pan American Airlines, chose to sell its Pan

Am Building and Intercontinental Hotels, the most
profitable parts of the corporation, to keep its money-
losing airline flying.

Continuing to suffer losses, the company followed this

strategy of shedding assets for cash, until it had sold
off everything and went bankrupt.
 STRATEGIC
CHOICE :
Selection of the
Best Strategy
After the pros and cons of the potential strategic
alternatives have been identified and evaluated, one
must be selected for implementation.

* How could the best

Strategy be
determined?
The most important criterion is the ability of the
proposed strategy to deal with the specific strategic
factors in the SWOT analysis.
Another important consideration is the ability of each
alternative to satisfy agreed-on objectives with the
least resources and the fewest negative side effects.
Therefore, it is important to develop a tentative
implementation plan so that the difficulties that
management is likely to face are addressed.
This is should be done by the construction of
scenarios.
 STRATEGIC CHOICE
 Constructing Corporate
Scenarios
 Management Attitude
Towards Risk
 Pressures from
Stakeholders
 Pressures from the
Corporate Culture
 Need and Desires of Key
Managers
 Process of Strategic choice
Constructing Corporate Scenarios

Corporate scenarios are pro forma 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.
To construct a scenario, follow these steps:
• First, use industry scenarios to develop a set of
assumptions about the task environment
• List optimistic, pessimistic, and most likely assumptions
for key economic factors such as the GDP, CPI, and prime
interest rate, and for other key external strategic factors
such as governmental regulation and industry trends.
Constructing Corporate Scenarios

• Second, develop common-size financial statements for

the company's or business unit's previous years, to
serve as the basis for the trend analysis projections of
pro forma financial statements.
• Third, construct detailed pro forma financial statements
for each strategic alternative.
– The result of this work should provide sufficient
information on which forecasts of the likely feasibility
and probable profitability of each of the strategic
alternatives could be based.
Management Attitude Towards Risk

The attractiveness of a particular strategic alternative is

partially a function of the amount of risk it entails. 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 for other uses.
The greater the assets involved and the longer they are
committed, the more likely top management is to demand
a high probability of success.
Risk might be one reason that significant innovations occur
more often in small firms than in large.
Management Attitude Towards Risk

The real options approach deals with these issues by

breaking the investment into stages. Management
allocates a small amount of funding to initiate multiple
projects, monitors their development, and then cancels the
projects that aren't successful and funds those that are
doing well.
• Ex. Chevron for bidding on petroleum reserves, Airbus
for calculating the costs of airlines changing their orders
at the last minute.
In contrast, The Net Present Value approach
Pressures from Stakeholders

The attractiveness of a strategic alternative is affected by

its perceived compatibility with the key stakeholders in a
corporation's task environment. Creditors want to be paid
on time. Unions exert pressure for comparable wage and
employment security. Governments and interest groups
demand social responsibility. Shareholders want dividends.
All of these pres-sures must be given some consideration
in the selection of the best alternative.
Strategy makers should be better able to choose strategic
alternatives that minimize external pressures and
maximize the probability of gaining stakeholder support.
Pressures from the Corporate Culture

If a strategy is incompatible with the corporate culture, the

likelihood of its success is very low. Foot-dragging and
even sabotage will result as employees fight to resist a
radical change in corporate philosophy.
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.
Need and Desires of Key Managers

Even the most attractive alternative might not be selected if

it is contrary to the needs and desires of important top
managers.
Industry and cultural backgrounds affect strategic choice.
Executives who have come to the firm from another
industry and have strong ties outside the industry tend to
choose different strategies from what is being currently
used in their industry.
• Ex. Korean executives emphasize industry
attractiveness, sales, and market share in their
decisions; whereas, U.S. executives emphasize
projected demand, discounted cash flow, and ROI.
Need and Desires of Key Managers

There is a tendency to maintain the status quo. It may take

a crisis or an unlikely event to cause strategic decision
makers to seriously consider an alternative they had
previously ignored or discounted.
• For example, it wasn't until the CEO of ConAgra, a
multinational food products company, had a heart attack
that ConAgra started producing the Healthy Choice line
of low-fat, low-cholesterol, low-sodium frozen-food
entrees.
Process of Strategic choice

Strategic choice is the evaluation of alternative strategies

and selection of the best alternative. There is mounting
evidence that when an organization is facing a dynamic
environment, the best strategic decisions are not arrived at
through consensus.
Process of Strategic choice

Two techniques help strategic managers avoid the

consensus trap that Alfred Sloan found:
1. Devil's Advocate: When applied to strategic decision
making, the devil's advocate is assigned to identify
potential pitfalls and problems with a proposed alternative
strategy in a formal presentation.
Process of Strategic choice

2. Dialectical Inquiry: it involves combining two conflicting

views—the thesis and the antithesis—into a synthesis.
When applied to strategic decision making, dialectical
inquiry requires that two proposals using different
assumptions be generated for each alternative strategy
under consideration.
Process of Strategic choice
Research generally supports the conclusion that both the
devil's advocate and dialectical inquiry are equally superior
to consensus in decision making,
Another approach to generating a series of diverse and
creative strategic alternatives is to use a strategy shadow
committee.
Regardless of the process used to generate strategic
alternatives, each resulting alternative must be rigorously
evaluated in terms of its ability to meet four criteria:
Mutual Exclusivity: Doing any one would preclude doing
any other.
Success: It must be doable and have a good
probability of success.
Completeness: It must take into account all the
key strategic issues.
Internal Consistency: It 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.
DEVELOPMENT
OF POLICIES
Development Of Policies

The selection of the best strategic alternative is

not the end of strategy formulation. The
organization must now engage in developing
policies. Flowing from the selected strategy,
policies provide guidance for decision making
and actions throughout the organization.
• At General Electric, for example, Chairman
Jack Welch initiated the policy that any GE
business unit be number one or number two
wherever it competes. This policy gives clear
guidance to managers throughout the
organization.
Policies tend to be rather long lived and can
even outlast the particular strategy that cre-
ated them. Interestingly these general
policies—such as "The customer is always
right" can become, in time, part of a
corporation's culture. A change in strategy
should be followed quickly by a change in
policies. Managing policy is one way to
manage the corporate culture.
Marketing Strategies
Per Miles and Snow,
Prospector
Defender
Analyzer
Reactor

Positioning strategies
Cost leadership
Differentiation
Focused niche
Strategies for New Markets
Pioneer
Mass market penetration
Niche penetration
Skimming: early
withdrawal
Follower
Late entrant
Strategies for Growth Markets

Share maintenance Share growth

Fortress Frontal attack
Flanker Leapfrog
Confrontation Flank attack
Market expansion Encirclement
Contraction or strategic Guerilla attack
withdrawal
Strategies for Mature Markets

Shakeout
Strategic traps
Maintain current market share
Growth extension strategies
Increased penetration
Extended use
Market expansion
Strategies for Declining Markets

Market attractiveness affected by

Conditions of demand
Exit barriers
Future competitive rivalry

Generic strategies
Harvesting
Maintenance
Profitable survivor
Niche
 Marketing at Different Structural Levels

Corporate Business Unit Product Market

Evaluation of mergers,
How to aggregate tactics into
acquisitions, and strategic Strategic plans for target
Strategies alliances in terms of synergy markets and industries
a coherent approach to the
market
to meet customer needs

Specific tactics for guiding, Specific tactics for

developing, and motivating developing important Tactics for product, price,
Tactics key members of the technological or promotion, and distribution
organization manufacturing resources
Directional Policy
M arket Attractiv eness
High M edium Low

Inves t for Aggressive Inves t for Aggres sive Selective Investment to

High
G rowth G rowth H old Position

Business Inves t for Aggressive Selective Investment to

M edium H arves t or D ives t
S trengths G rowth H old Position

Selec tive Inves tment to

Low H arves t or D ives t H arves t or D ives t
H old Position