8.

STRATEGY
FORMULATION:
FUNCTIONAL STRATEGY
AND
STRATEGIC 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 units 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 Types of Marketing
Strategy

8.1.1.2 Push and Pull

Strategy
8.1.1.3 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?

8.1.1.4 Types of Marketing
Strategy

8.1.1.4
Pricing
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 companys often dont declare dividend.
Several support the value of their stock by offering
dividends.
Selling of Companys 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 firms 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 - Types of Operations
Strategy

8.1.4.1 Product Life

Cycle
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 companys 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
100%

78% 77%
80%
66%
63%
60% 56%
51%

40%

18%
20%

0%
General and Human Resource Transportation & Information Manufacturing Marketing Finance &
Administration Distribution System Accounting

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 companys or business units 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?

Objective

Analysis 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:
Devils 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 managements 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