Lessons 11-12: Strategy Formulation & Implementation PDF

LESSON 11 Strategy Formulation: Functional Strategy and Strategic Choice OBJECTIVES: 1. Identify a variety of functional strategies that can be used to achieve organizational goals and objectives; 2. Understand what activities and functions are appropriate to outsource in order to ga...

LESSON 11 Strategy Formulation: Functional Strategy and Strategic Choice OBJECTIVES: 1. Identify a variety of functional strategies that can be used to achieve organizational goals and objectives; 2. Understand what activities and functions are appropriate to outsource in order to gain or strengthen competitive advantage; and 3. Recognize strategies to avoid and understand why they are dangerous.  T 0 Functional Strategy Functional strategy is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage. 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 uses and/or markets for current products. MARKETING STRATEGY Using the product development strategy, a company or unit can (1) develop new products for existing markets or (2) develop new products for new markets. Using a successful brand name to market other products is called brand extension, and it is a good way to appeal to a company’s cur rent customers. There are numerous other marketing strategies. For advertising and promotion, for example, a company or business unit can choose between “push” and “pull” marketing strategies. Other marketing strategies deal with distribution and pricing. Should a company use distributors and dealers to sell its products, or should it sell directly to mass merchandisers or use the direct marketing model by selling straight to the consumers via the Internet?  MARKETING STRATEGY When pricing a new product, a company or business unit can follow one of two 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, in contrast, attempts to hasten market development and offers the pioneer the opportunity to use the experience curve to gain market share with a low price and then dominate the industry. The use of the Internet to market goods directly to consumers allows a company to use dynamic pricing, a practice in which prices vary frequently based upon demand, market segment, and product availability. FINANCIAL STRATEGY Financial strategy examines the financial implications of corporate and business-level strategic options and identifies the best financial course of action. It can also provide competitive advantage through a lower cost of funds and a flexible ability to raise capital to support a business strategy. Financial strategy usually attempts to maximize the financial value of a firm. RESEARCH AND DEVELOPMENT (R&D) 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—through internal development, external acquisition, or strategic alliances. One of the R&D choices is to be either a technological leader, pioneering an innovation, or a technological follower, imitating 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. Anew approach to R&D is open innovation, in which a firm uses alliances and connections with corporate, government, academic labs, and even consumers to develop new products and processes. 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. 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 and should continue to have a major impact as corporations strive to integrate diverse business activities by using computer assisted design and manufacturing (CAD/CAM) principles.  OPERATIONS STRATEGY A mass-production system was an excellent method to produce a large number of low-cost, standard goods and services. Continuous improvement system- developed by Japanese firms, empowered cross-functional teams strive constantly to improve production processes. Managers are more like coaches than like bosses. The result is a large quantity of low-cost, standard goods and services, but with high quality. The key to continuous improvement is the acknowledgment that workers’ experience and knowledge can help managers solve production problems and contribute to tightening variances and reducing errors. Modular manufacturing in which preassembled subassemblies are delivered as they are needed (i.e., Just in-Time) to a company’s assembly-line workers, who quickly piece the modules together into a finished product. Appropriate for an ever-changing environment, mass customization requires that people, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it.  PURCHASING STRATEGY Purchasing strategy deals with obtaining the raw materials, parts, and supplies needed to per form the operations function. The basic purchasing choices are multiple, sole, and parallel sourcing. Multiple sourcing- the purchasing company orders a particular part from several vendors. Multiple sourcing has traditionally been considered superior to other purchasing approaches because (1) it forces sup pliers to compete for the business of an important buyer, thus reducing purchasing costs, and (2) if one supplier cannot deliver, another usually can, thus guaranteeing that parts and sup plies are always on hand when needed. Sole sourcing relies on only one supplier for a particular part. W. Edward Deming, a well-known management consultant, strongly recommended sole sourcing as the only manageable way to obtain high supplier quality. This reduces both cost and time spent on product design and it also improves quality. It can also simplify the purchasing company’s production process by using the Just-In Time (JIT) concept of having the purchased parts arrive at the plant just when they are needed rather than keeping inventories.  LOGISTICS STRATEGY Logistics strategy deals with the flow of products into and out of the manufacturing. Three trends related to this strategy are evident: centralization, outsourcing, and the use of the Internet. Centralized logistics group usually contains specialists with expertise in different transportation modes such as rail or trucking. They work to aggregate shipping volumes across the entire corporation to gain better contracts with shippers. Many companies have found that outsourcing logistics reduces costs and improves delivery time. Many companies are using the Internet to simplify their logistical system.  HUMAN RESOURCE MANAGEMENT (HRM) STRATEGY HRM strategy, among other things, addresses the issue of whether a company or business unit should hire a large number of low-skilled employees who receive low pay, perform repetitive jobs, and are most likely quit after a short time (the McDonald’s restaurant strategy) or hire skilled employees who receive relatively high pay and are cross-trained to participate in self managing work teams. Research indicates that the use of work teams leads to increased quality and productivity as well as to higher employee satisfaction and commitment. Companies following a competitive strategy of differentiation through high quality use in put from subordinates and peers in performance appraisals to a greater extent than do firms following other business strategies Companies are finding that having a diverse workforce can be a competitive advantage.  INFORMATION TECHNOLOGY STRATEGY Corporations are increasingly using information technology strategy to provide business units with competitive advantage. Multinational corporations are finding that having a sophisticated intranet allows employees to practice follow-the-sun management, in which 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. Thus, night shifts are no longer needed. The Sourcing Decisions: Location of Functions Outsourcing is purchasing from someone else a product or service that had been previously provided internally. Offshoring is the outsourcing of an activity or a function to a wholly owned company or an independent provider in another country.  Strategies to Avoid Several strategies, that could be considered corporate, business, or functional are very dangerous. Managers who have made poor analyses or lack creativity may be trapped into considering some of the following strategies to avoid: Follow the leader: Imitating a leading competitor’s strategy might seem to be a good idea, but it ignores a firm’s particular strengths and weaknesses and the possibility that the leader may be wrong. 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. Arms race: Entering into a spirited battle with another firm for increased market share might increase sales revenue, but that increase will probably be more than offset by in creases in advertising, promotion, R&D, and manufacturing costs. Do everything: When faced with several interesting opportunities, management might tend to leap at all of them. Losing hand: A corporation might have invested so much in a particular strategy that top management is unwilling to accept its failure.  Strategic Choice: Selecting the Best Strategy After the pros and cons of the potential strategic alternatives have been identified and evaluated, one must be selected for implementation. By now, it is likely that many feasible alternatives will have emerged. How is the best strategy determined? Perhaps the most important criterion is the capability of the proposed strategy to deal with the specific strategic factors developed earlier, in the SWOT analysis. If the alternative doesn’t take advantage of environmental opportunities and corporate strengths/competencies, and lead away from environmental threats and corporate weaknesses, it will probably fail. Another important consideration in the selection of a strategy is the ability of each alternative to satisfy agreed-on objectives with the least resources and the fewest negative side effects.  LESSON 12 Strategy Implementation: Organizing for action OBJECTIVES: 1. Discuss the strategy implementation. 2. Develop programs, budgets, and procedures to implement strategic change; 3. Understand the importance of achieving synergy during strategy implementation.  Strategy Implementation Strategy implementation is the sum total of the activities and choices required for the execution of a strategic plan. It is the process by which objectives, strategies, and policies are put into action through the development of programs, budgets, and procedures. To begin the implementation process, strategy makers must consider these questions: Who are the people who will carry out the strategic plan? What must be done to align the company’s operations in the new intended direction? How is everyone going to work together to do what is needed?  DEVELOPING PROGRAMS, BUDGETS, AND PROCEDURES Strategy implementation involves establishing programs to create a series of new organizational activities, budgets to allocate funds to the new activities, and procedures to handle the day-to-day details. Programs The purpose of a program is to make a strategy action oriented. Lean Six Sigma. This program was developed to identify and improve a poorly performing process. One way to examine the likely impact new programs will have on an existing organization is to compare proposed programs and activities with current programs and activities.  PROGRAM Brynjolfsson, Renshaw, and Van Alstyne proposed a matrix of change to help managers decide how quickly change should proceed, in what order changes should take place, whether to start at a new site, and whether the proposed systems are stable and coherent. The matrix of change can be used to address the following types of questions: Feasibility: Do the proposed programs and activities constitute a coherent, stable system? Are the current activities coherent and stable? Is the transition likely to be difficult? Sequence of execution: Where should the change begin? How does the sequence affect success? Are there reasonable stopping points? Location: Are we better off instituting the new programs at a new site, or can we reorga nize the existing facilities at a reasonable cost? Pace and nature of change: Should the change be slow or fast, incremental or radical? Which blocks of current activities must be changed at the same time? Stakeholder evaluations: Have we overlooked any important activities or interactions? Should we get further input from interested stakeholders? Which new programs and cur rent activities offer the greatest sources of value? The matrix offers useful guidelines on where, when, and how fast to implement change.  Budgets After programs have been developed, the budget process begins. Planning a budget is the last real check a corporation has on the feasibility of its selected strategy. An ideal strategy might be found to be completely impractical only after specific implementation programs are costed in detail. Procedures After the program, divisional, and corporate budgets are approved, procedures must be developed. Often called Standard Operating Procedures (SOPs), they typically detail the various activities that must be carried out to complete a corporation’s programs. Also known as organizational routines, procedures are the primary means by which organizations accomplish much of what they do. Once in place, procedures must be updated to reflect any changes in technology as well as in strategy.  ACHIEVING SYNERGY One of the goals to be achieved in strategy implementation is synergy between and among functions and business units. According to Goold and Campbell, synergy can take place in one of six forms: Shared know-how: Combined units often benefit from sharing knowledge or skills. This is a leveraging of core competencies. One reason that Procter & Gamble purchased Gillette was to combine P&G’s knowledge of the female consumer with Gillette’s knowledge of the male consumer. Coordinated strategies: Aligning the business strategies of two or more business units may provide a corporation significant advantage by reducing inter-unit competition and developing a coordinated response to common competitors (horizontal strategy). The merger between Arcelor and Mittal Steel, for example, gave the combined company enhanced R&D capabilities and wider global coverage while presenting a common face to the market. Shared tangible resources: Combined units can sometimes save money by sharing re sources, such as a common manufacturing facility or R&D lab. The alliance between Renault and Nissan allowed it to build new factories that would build both Nissan and Renault vehicles.  ACHIEVING SYNERGY Economies of scale or scope: Coordinating the flow of products or services of one unit with that of another unit can reduce inventory, increase capacity utilization, and improve market access. This was a reason Delta Airlines bought Northwest Airlines. Pooled negotiating power: Combined units can combine their purchasing to gain bar gaining power over common suppliers to reduce costs and improve quality. The same can be done with common distributors. The acquisitions of Macy’s and the May Company en abled Federated Department Stores (which changed its name to Macy’s in 2007) to gain purchasing economies for all of its stores. New business creation: Exchanging knowledge and skills can facilitate new products or services by extracting discrete activities from various units and combining them in a new unit or by establishing joint ventures among internal business units. Oracle, for example, purchased a number of software companies in order to create a suite of software code named “Project Fusion” to help corporations run everything from accounting and sales to customer relations and supply-chain management.