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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