BUSINESS POLICY &
STRATEGIC MANAGEMENT
Lecture (6): Strategy Formulation: Functional Strategy
By: Dr. Ola Elgeuoshy Abdrabou
Functional strategy
Functional strategy- the approach a
functional area takes to achieve corporate
and business unit objectives and strategies
by maximizing resource productivity
(1) Marketing strategy deals with pricing,
selling and distributing a product
Market development strategy- provides the
ability to:
• Capture a larger market share
• Market saturation
• Market penetration
• Develop new uses and/or markets for current products
Market development Market dviersification
New
Market
Penetration Product development
existing
existing New
Product
Product development strategy- provides the
ability to:
• Develop new products for existing markets
• Develop new products for new markets
• Line extension- using a successful brand name to
market other products
Promotion Strategy
• Push strategy- promotions to gain or hold shelf
space in retail outlets
• Pull strategy- advertising to “pull” products through
the distribution channels
Pricing Strategy:
• 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
(2) Financial Strategy- examines the financial
implications of corporate and business-level strategic
options and identifies the best financial course of action
Financial strategy includes the management of:
• Dividends
• Stock price
• Sales of company patents
Leveraged buyout- company is acquired in a transaction
financed largely by debt usually obtained from a third party
Reverse stock split- investor’s shares are split in half for
the same total amount of money
3) Research and Development Strategy- deals
with product and process innovation and improvement
• Technological leader- pioneers innovation
• Technological follower- imitates the products of
competitors
Open innovation- use of alliances and connections with
corporate, government, academic labs and consumers to
develop new products and processes
(4) 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
Manufacturing Types include
•Mass production systems
• Job shops
•Continuous improvement
• Connected line batch flow
•Modular manufacturing
• Flexible manufacturing systems •Mass customization
• Dedicated transfer lines
(5) Purchasing Strategy- deals with obtaining raw
materials, parts and supplies needed to perform the
operations function
Options include:
• Sole suppliers (Deming)
• Just-in-time
• Parallel sourcing
(6) Logistics Strategy- deals with the flow of
products into and out of the manufacturing process
Trends include:
• Centralization
• Outsourcing
• Internet
(7) Human Resource Strategy
Trends include:
• Self-managed teams
• 360-degree appraisal
• Diverse workforce
(8) Information Technology Strategy
Trends include:
• Follow the sun management
• Internet
• Extranet
• Intranet
Outsourcing- purchasing from someone else a product or service
that had been previously provided internally
• Avoid outsourcing distinctive competencies
Offshoring- the outsourcing of an activity or a function to a wholly-
owned company or an independent provider in another country
Errors in Outsourcing Efforts
• Outsourcing the wrong activities
• Selecting the wrong vendor
• Poor contracts
• Personnel issues
• Lack of control
• Hidden costs
• Lack of an exit strategy
Prentice Hall, Inc. ©2009 8-15
Prentice Hall, Inc. ©2009 8-20
Functional Strategies
Marketing Financial R&D Operations Purchasing Logistics HR IT
Market Dividends Technological • Job shops Sole suppliers Centralization Self- Internet
development leader • Connected line (Deming) managed
strategy: batch flow teams
New, existing,
development
or
diversification
Pricing Stock price Technological Flexible manufacturing Just-in-time Outsourcing 360-degree Extranet
Strategy: follower systems appraisal
Skimming or
penetration
Promotion Sales of Open Dedicated transfer lines Parallel Internet Diverse Intranet
strategy: push company innovation sourcing workforce
or pull patents
Distribution Leveraged Mass production systems
Strategy: buyout
direct or
indirect
Reverse Continuous improvement
stock split
Modular manufacturing
Mass customization
Outsourcing Strategy
Offshoring Strategy
Prentice Hall, Inc. ©2009 8-21
1. Are the functional strategies interdependent, or can they
be formulated independently of other functions?
2. Why is penetration pricing more likely than skim pricing
to raise a company’s or a business unit’s operating
profit in the long run?
3. How does mass customization support a business unit’s
competitive strategy?
4. When should a corporation or business unit outsource a
function or an activity?
Module (3): Strategy Formulation:
Functional Strategy
(1) Identify the functional strategy for each
functional department
