Strategic Management and

Business Policy 15e, Global Edition

Chapter 8
Strategy Formulation:
Functional Strategy
and Strategic Choice

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Learning Objectives
• Discuss the impact that the various types of
functional strategies have on the achievement of
organizational goals and objective
• Explain which activities and functions are
appropriate to outsource/offshore in order to gain
or strengthen competitive advantage
• Recognize strategies to avoid and understand
why they are dangerous

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8-2
Functional Strategy
• Functional strategy
– Concerned with developing a distinctive
competence to provide the firm or business unit
with a competitive advantage
– The 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 strategy;
Alignment
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8-3
Marketing Strategy (1 of 5)
• Marketing strategy
– deals with pricing, selling, and distributing a
product
– Two main strategies

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8-4
Marketing Strategy (2 of 5)
• Market development strategy: a company or business
unit can:
• Capture a larger share of an existing market for current
products through market saturation/ penetration. E.g.
Proctor and Gamble, Colgate, Palmolive through
advertisements and promotions to prolong the live cycle
indefinitely through “new and improved” OR Nike, Adidas
going to new global markets
• Develop new uses and/or markets for current products.
E.g., Using hand sanitizers to remove stains or Creating
bars from cereal and using them in diets

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8-5
Marketing Strategy (3 of 5)

• Product development strategy: a

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

• Brand extension
– using a successful brand name to market other
products

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8-6
Marketing Strategy- Advertising and
Promotion (4 of 5)
• Pull strategy: refers to a marketing strategy that uses
advertising to build customers’ awareness about the
product; usually if the product is in early life stage
 Very high spending on advertising can create
barriers to entry

• Push strategy: refers to a marketing strategy that focuses

on trade promotions to gain or hold shelf space in retail
outlets (in-store offers, discounts…)

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8-7
Marketing Strategy (5 of 5)
When pricing a new product, a company can use:
• 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
– 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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8-8
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
– Provide competitive advantage through raising
capital and low cost of funds
– Attempts to maximize the financial value of a
firm

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8-9
Financial Strategy (2 of 2)
• The management of dividends and stock
price is an important part of a corporation’s
financial strategy
• Leveraged buyout
– company is acquired in a transaction financed
largely by debt usually obtained from a third
party

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8-10
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 (basic, product, or process)
– and the question of how new technology
should be accessed

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8-11
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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8-12
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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8-13
Purchasing Strategy
• Purchasing Strategy: deals with obtaining raw
materials, parts and supplies needed to perform the
operations function. The basic purchasing choices
are:
– 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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8-14
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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8-15
Human Resource Management (HRM)
Strategy
• HRM strategy
– 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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8-16
Human Resource Management (HRM)
Strategy
• 360 Degree Appraisal
• Diversity Workforce

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17
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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8-18
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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8-19
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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8-20
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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8-21
 Strategies to Avoid

Follow the Hit another

Arms race
leader home run

Do
Losing hand
everything

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