Strategy formulation : functional strategy & Strategy Choice

8. STRATEGY FORMULATION:FUNCTIONAL STRATEGY ANDSTRATEGIC CHOICE

Presented by : Tayyab Hameed

Learning Objectives Identify a variety of functional strategies. Understand Outsourcing & Off-shoring. Recognize strategies to avoid. Construct corporate scenarios to evaluate

strategic options. Develop policies to implement strategies.

8.0 - What is Strategy? A strategy is a comprehensive master plan

stating HOW the organization will achieve its mission and objectives.

8.0 - Hierarchy of Strategy

8.0 - Strategic Management Model

8.0 - Strategy Formulation Development of long-range plans for the

effective management with the help of SWOT analysis.

It is composed of Mission. Objectives. Strategies. Policy.

8.1 - Functional Strategy

Function – the intended role or purpose of person or thing. Strategy – Generalship Functional Strategy is an approach, a functional area

takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity.

The orientation of a functional strategy is dictated by its parent business unit’s strategy.

Functional Strategy may need to vary from region to region. Suzuki Pickup, Pakistan Mr. Donut, Japan

8.1 – Objectives of Functional Strategy

Market share- Gain and sustain share of a product market.

Human talent- Recruit high- quality workforce. Cost efficiency- Use resources well to operate at low

cost. Product quality- Produce high-quality goods or

services. Innovation- Develop new products and /or processes. Profitability- Earn net profit in business.

8.1 – Types of Functional Strategy

Marketing Strategy Financial Strategy R&D Strategy Operations Strategy Purchasing Strategy Logistics Strategy HRM Strategy Information Management Strategy

8.1.1 – Marketing Strategy Marketing Strategy deals with Pricing, Selling

and Distributing a product. There are several types of Marketing Strategy:

Market & Product Development Push and Pull Strategy Distribution System Pricing

8.1.1.1 – Types of Marketing Strategy

8.1.1.1 Market & Product Development

8.1.1.2 – Push and Pull Strategy

8.1.1.2 – Types of Marketing Strategy

8.1.1.3 – Distribution System Should a company use distributors and dealers

to sell its products, or should it sell directly to mass merchandisers?

Or Should a company use the direct marketing

model by selling straight to the consumers via the Internet?

8.1.1.3 – Types of Marketing Strategy

8.1.1.4 – Pricing

8.1.1.4 – Types of Marketing Strategy

8.1.1 – Marketing Strategy

8.1.1 – 4Ps of Marketing

8.1.2 – Financial Strategy It focuses on the alignment of financial management

within an organization with its business and corporate strategies to gain strategic advantages. Forecasting, Planning and Budgeting Credit & Liquidity Strategies Capital Investment Methods/Systems Financial Mix

Capital Budget & Working Capital Stock / Dividend Cash Flow, Loans or Leases

8.1.2.1 - Types of Financial Strategy

Strong Balance Sheet Strong credit rating. Greater discipline and flexibility in Investment

approach. Help to build a robust business. Healthier Economic Cycle.

Leveraged buyout (LBO) Strategy Financial buyers or sponsors Focus on ROE rather than ROA.

8.1.2.1 - Types of Financial Strategy

Dividends and Stock Price Management Some company’s often don’t declare dividend. Several support the value of their stock by offering

dividends. Selling of Company’s Patent

For products a company no longer wish to commercialize or are not a part of its core business.

8.1.3 – Research & Development (R&D)

Development New products and improvement of existing

products that allow for effective strategy implementation.

R&D strategy deals with Product Innovation Process Improvement Open Innovation (Hybrid)

8.1.3.1 – Research & Development (R&D) Development

R & D also deals with the questions like How new technology should be accessed? Internal Development External Acquisitions

Either to be a Technological Leader. Or to be a Technological Follower.

8.1.3.2 – Research & Development (R&D) Development

8.1.3.2 – R & D Strategy and Competitive Advantage

8.1.4 – Operations Strategy Operations serves as a firm’s distinctive

competence in executing similar strategies better than competitors.

Its provides support for a differentiated strategy Operations strategy is to ensure all tasks

performed are the right tasks. It is a plan for the design and management of

operations functions

8.1.4.1 - Types of Operations Strategy Vertical Integration is where the supply

chain of a company is owned by that company.

Strategic Decisions How much work should be done outside the

firm? On what basis should particular items be made

in-house? When should items be outsourced? How should suppliers be selected?

8.1.4.1 - Types of Operations Strategy

Vertical Integration

8.1.4.1 - Types of Operations Strategy

CAD/CAM Principles Continuous Improvement Strategy Product Life Cycle

8.1.4.1 – Product Life Cycle

8.1.4.1 - Types of Operations Strategy

8.1.5 - Purchasing Strategy Companies implement Purchasing strategies in

order to make cost effective purchasing decisions from a group of efficient vendors who will deliver quality goods on time and at mutually agreeable terms. 

8.1.5.1 - Types of Purchasing Strategy

Purchasing Cycle Regular Vendors Outsourced Procurement

Multiple Sourcing Force suppliers to compete for the business. Reduce purchasing costs.

Sole Sourcing Reduce cost and time spent on product design. Improves quality. Just in Time

8.1.5.1 - Types of Purchasing Strategy

Just in Time – II Vendors have desks in purchasing company’s

factory floor. They attend production status meetings, visit

the R&D labs. Reduce cost and time. Improves quality. Lesser paper work. All time availability of Vendor at place.

8.1.6.1 - Logistics Strategy Logistics strategy deals with the flow of products

into and out of the manufacturing process. Types of Logistics

Centralized Logistics Outsourcing Logistics

8.1.7 - HUMAN RESOURCE MANAGEMENT (HRM) STRATEGY

The strategic & coherent approach to the most valued asset : The People

Deals with Right Employee for the Right Job Headcount Salary Structure Hiring / Separation

360-degree appraisal Employee Development Diversified Workforce

8.1.8 – Information Technology Strategy

If focuses on the alignment of information management system within an organization with its business and corporate strategies to gain strategic advantage.

8.2 - The Sourcing Decision: Location of Functions

Outsourcing is the contracting out of a business process to a third-party.

Outsourcing is Cost effective when used properly. Budget flexibility and control.

8.2.1 - The Sourcing Decision: Outsourced Activity

General and Administration

Human Resource

Transportation & Distribution

Information System

Manufacturing Marketing Finance & Accounting

0%

20%

40%

60%

80%

100%

78% 77%

66%63%

56%51%

18%

Outsourced Departments as per AMA

8.2.2 - The Sourcing Decision: Off-Shoring

Off-shoring is the outsourcing of an activity or a function to a wholly owned company or an independent provider in another country.

Major off-shored industries are: Customer Services Information Technologies

8.2.3 - The Sourcing Decision: Why Off-Shoring?

Low Cost Qualified Labor Educated Workforce Lower Regulatory Costs Tax Benefits Ability to Downsize at Will Improved Performance Freeing up Resources For Core Activities Quicker Turnaround Time

8.2.4 - The Sourcing Decision: Errors

Core Activities Wrong Vendor Poor Contract Personnel Issues Loosing Control Hidden Cost Exit Strategy

8.2.4 - The Sourcing Decision: How? 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.

8.2.5 - The Sourcing Decision: Proposed Outsourcing Matrix

8.3 – Strategies to Avoid Follow the Leader. Hit another home run. Arms race. Do everything. Losing hand.

8.4 – Strategic Choice?

Analysis

Objective

Options

8.4.1 – Strategic Choice: Selecting the Best Strategy

Use industry scenarios. Develop common-size financial statements

Historical common-size percentages Develop alternative set of Optimistic(O),

Pessimistic(P), and Most Likely(ML) assumptions.

Five year Sales and COGS forecast. Analyze historical data and make adjustments.

8.4.1 – Strategic Choice: Selecting the Best Strategy

8.4.1 – Strategic Choice: Selecting the Best Strategy

Construct detailed pro forma financial statements. List the actual figures List optimistic figures List the pessimistic figures for the next five years. Develop a similar set of optimistic (O), pessimistic (P),

and most likely (ML) pro-forma statements for the second strategic alternative.

Calculate FR and IS and create balance sheets. Compare assumptions with the FS and ratios to

determine feasibility.

8.4.2 - PROCESS OF STRATEGIC CHOICE

Strategies fails due to Actions of Decision Maker

Desire for speedy action Apply failure-prone decision Poor use of resources

Only 4% of the managers selected the right strategy.

8.4.2 - PROCESS OF STRATEGIC CHOICE

Two techniques to avoid CONSENSUS trap: Devil’s advocate Dialectical inquiry

Criteria to evaluate the strategy ability: Mutual Exclusivity Success Completeness Internal Consistency

8.5 – Developing Policies Policies define the broad guidelines for implementation,

decisions making and actions to be taken. It forces trade-offs between competing resource demands. It tests the strategic soundness of a particular action. It sets clear boundaries within which employees must

operate while granting them freedom to experiment within those constraints.

Restrict top management’s strategic options in the future.

Questions?

Conclusion! Functional Strategy : Should be built on a

distinctive competency residing within that functional area.

The Sourcing Decision Strategies to Avoid Strategic Choice Developing Policies