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Suggested answers to discussion questions
2. Why is penetration pricing more likely than skim pricing to raise a company's or a business unit's operating profit in the lo
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?
5. What is the relationship of policies to strategies?
Additional discussion questions
A2. What are the advantages and disadvantages of the devil's advocate, dialectical inquiry, and consensus approaches to making s
A3. Should functional strategies be categorized under strategy formulation or under strategy implementation?
Suggestions for strategic practice exercise
What decision-making process should CEO Donahoe use to make strategic decisions?
Suggested answers to discussion questions
• Definition of functional strategy.
• Functional strategies in marketing, finance, R&D, operations, purchasing, logistics, human resources, and information systems.
• Outsourcing functional activities versus vertical integration.
• Strategies to avoid.
• Strategic choice: methods, including corporate scenarios, used in selecting the best strategy.
• Managing risk using real options.
• Categorizing stakeholders with the Stakeholder Priority Matrix.
• The use of consensus versus devil's advocate or dialectical inquiry.
• Developing appropriate policies to fit the selected strategy.
1. Are functional strategies interdependent, or can they be formulated independently of other functions?
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. Each company or business unit has its own set of functional departments, each with its own functional strategy. Because the orientation of each functional strategy is dictated by its parent unit’s business strategy, functional strategies must interrelate if they are to be successful. For example, a company’s business competitive strategy of differentiation through high quality means that each functional strategy must support high quality. Distribution (part of marketing strategy) will probably be through quality distributors and retailers that emphasize customer service and support. Operations will probably emphasize highly skilled employees and flexible manufacturing to adjust production to customer requests. Even though both of these functional strategies can be formulated independently, they will need to mesh with each other if the competitive strategy is to be properly supported. Although this has traditionally been a job of the general manager in charge of the parent SBU, it is increasingly being managed by cross-functional teams composed of managers from each of the functional areas.
When pricing a new product, a company or business unit can follow a marketing strategy of skim pricing or penetration pricing. For new product pioneers, skim pricing offers the opportunity to skim the cream from the top of the demand curve while the product is novel and competitors are few. Penetration pricing offers the pioneer the opportunity to utilize the experience curve to gain market share and dominate the industry. Skim pricing is purely a short-term phenomenon and is used to gain high profits quickly in order to pay for expensive R&D and marketing costs before new entrants engage in price competition. It therefore cannot be used to raise long term operating profits unless the firm follows a differentiation strategy of continually entering markets early through exceptional R&D and exiting before the heavy-hitting late movers like IBM or Procter & Gamble force margins down.
Mass customization is an operations functional strategy. According to the text, mass customization requires flexibility and quick responsiveness. 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. The result is low-cost, high quality, customized goods and services. Mass customization is one way to support a differentiation strategy in a hypercompetitive market in which customers are demanding a highly differentiated product at a reasonable price. The customer is primarily interested in purchasing a product designed to its own specifications and delivered where and when it needs them. Even though price may be secondary to specific product characteristics, it cannot be significantly higher than the price for a mass produced good.
Outsourcing is purchasing from someone else a product or service that had been previously provided internally. As such, it is an example of reverse vertical growth/integration. According to the text, the key to outsourcing is to purchase from outside only those activities that are not key to the company's distinctive competencies. Otherwise, the company may give up the very capabilities that made it successful in the first place - thus putting itself on the road to eventual decline. An outsourcing decision will depend upon the fraction of total value added that is represented by the activity under consideration and by the amount of potential competitive advantage in that activity for the company or business unit.
According to the proposed outsourcing matrix in Figure 8.1, a firm should consider outsourcing an activity or function whenever it has low potential for competitive advantage. If that activity comprises only a small part of the total value of the firm's products or services, it should be purchased on the open market (assuming that quality providers of the activity are plentiful). If, however, the activity contributes highly to the company's products or services, the firm should purchase it through long-term contracts with trusted suppliers or distributors. A firm should always produce at least some of the activity or function (taper vertical integration) if that activity has the potential for providing the company some competitive advantage. Full vertical integration should only be considered, however, when that activity or function adds significant value to the company's products or services in addition to providing competitive advantage.
Generally speaking, the text views policies as the link between strategy formulation and implementation. They are the broad guidelines to be used in the implementation of strategy. The text takes the position that the dividing line between formulation and implementation is the difference between the planning activities of formulation and the action-oriented activities of organizing, directing, and controlling. Since the development of policies primarily involves planning, not action, policies more properly belong within strategy formulation.
A1. What are the pros and cons of technological leader versus technological follower as a functional strategy?
This question is related to the earlier question about first versus late movers. The technological leader strategy is a functional strategy necessary for a company to be a first mover in an industry. R&D can help a company to pioneer an innovation and reap the first mover advantages. The leader strategy is normally expensive. In contrast, the technological follower strategy can be fairly cheap in comparison. This functional strategy is appropriate for those firms choosing to reap the benefits of late movers. Many of the advantages of the technological leader and follower strategies are listed in Table 8.1 of the text.
Research generally indicates that either the devil's advocate or dialectical inquiry methods are superior to consensus in decision making. The drive in consensus to get everyone to agree on an alternative can result in "groupthink" - a situation when all try to overcome their personal reservations in order to show unanimity and be a team player even if the alternative chosen is defective. On the positive side, however, consensus results in a positive team approach to implementation. Both devil's advocate and dialectical inquiry are conflict-oriented and can create problems in implementation. Nevertheless, both work to ensure that an alternative is critically evaluated before agreement is reached. Both need to be set up in advance of the discussion. In the case of the devil's advocate, one person or group is assigned the task of finding everything wrong with a particular alternative. The advocate must propose nothing - only criticize the alternative in question. In contrast, dialectical inquiry requires two separate proposals be developed. Both sides must defend their own alternative and attack the alternative presented by the other.
The limitations of the devil's advocate are: (a) Only one proposal is presented. It is either accepted or rejected. Thus, participants don't have an opportunity to compare the alternative under consideration with another possibility. (b) Since the devil's advocate defends nothing, the person(s) taking this position may be criticized for "taking cheap shots" at an alternative everyone likes and may hesitate to continue the attack in the face of group pressure. Thus, the devil's advocate must have the strong support of the leader of the group in order to be effective.
The limitations of dialectical inquiry are: (a) Two people or groups must spend much time preparing their position for debate in front of an audience. The emphasis may turn to presentation skills and "scoring points" over serious analysis. (b) The win-lose nature of this approach may create ill feelings and conflict among participants. Thus, people on the losing side may find difficulty joining the "winners" in implementing the alternative chosen.
The answer to this question depends upon one's position in the hierarchy of strategy. At the top management level of a corporation both divisional (business-level) and functional strategies could be viewed as ways of implementing corporate strategy. For example, suppose a corporation decides to concentrate in one industry as its corporate growth strategy. This strategy would need to be implemented by a business strategy oriented to improving the company's competitive position. The same can be said of functional strategy. Strategy formulation and implementation can be interchangeable terms based on one's location in a corporate hierarchy. This text categorizes all strategies under the heading of strategy formulation because of their common planning orientation. Implementation begins when one moves from planning into organizing and directing activities.
Analyze eBay’s situation as of 2008. What is its problem? What marketing strategy was eBay following? What decision-making process should CEO Donahoe use?
What is eBay’s problem? The previous CEO, Meg Whitman, had spent $6 billion to significantly expand the company through a series of acquisitions, such as Skype, PayPal, StubHub, Rent.com, Shopping.com, Stumbleupon, and 25% interest in Craigslist. She succeeded, but by 2008 eBay was in trouble. Its stock price had lost half its value. The core auction and retail businesses, which accounted for the majority of revenue, were showing signs of weakness. The number of active users had been flat for three quarters, at 83 million. The number of new products listed on the site had increased only 4% from the previous year. The number of stores selling goods at fixed prices on eBay declined from a year earlier to 532,000. Competition had increased as rival web sites, particularly Amazon, now provided similar web services and eroded eBay’s competitive advantage. All this information is presented in the case exercise. These are symptoms of an underlying problem. Encourage students to dig for the underlying problem. Was Whitman wrong to expand the range of eBay’s products through acquisition? Although PayPal was an example of vertical growth, the rest of the acquisitions were either horizontal growth or concentric diversification. A good argument can be made that although each of these acquisitions looked appealing, they were too many, too soon. Management appears to have been distracted by new business growth opportunities, took its eye off its core business, and was unable to integrate the new businesses with the old. Whitman and her team probably assumed that eBay’s lead in web auctions was sustainable without much reinvestment and thus wasted time and money on other ventures. This mistake has been made by many other companies, most notably by Sears, Roebuck when it acquired insurance and real estate businesses instead of investing in its retail stores.
Which marketing strategy was eBay following, market development or product development? 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. 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. Aside from PayPal, eBay appeared to follow a product development strategy by acquiring new businesses whose services it could sell to its existing web auction market. Since the company seemed to dominate the web auction market in 2007, market development probably did not make sense at the time as a way to increase sales or profits. There is a lesson here. Although product development seemed to make sense, it should have been done in a more careful and deliberate manner, always keeping an eye on the primary business to make sure competitors weren’t taking bites out the company’s market share.
^ Since John Donahoe was hired by eBay’s board to turnaround the company, he may be tempted to act quickly and autocratically. The usual retrenchment tactics of cutting expenses by laying off employees and divesting recently-acquired businesses may not be the smartest approaches. Following the information provided in the chapter, it would make sense for him to call together his top management team for a day-long meeting on identifying eBay’s underlying problems and generating alternative solutions. Once some alternatives are generated, he could use dialectical inquiry to form teams tasked to present the pros and cons of each alternative at a meeting one week in the future. Once all the alternatives are discussed, the top management team would be forced to decide the best alternative. This would be the best way to get all the managers to “buy into” the recommended solution and to work hard to accomplish it.
STRATEGY IMPLEMENTATION: ORGANIZING FOR ACTION
This is the first of two chapters dealing with the implementation of strategy. Evaluation and control, sometimes considered a part of implementation, is discussed in a Chapter Eleven. Following the basic management functions of planning, organizing, directing, staffing, and controlling, the text views strategy formulation as primarily composed of planning activities; strategy implementation as primarily composed of organizing, directing, and staffing activities; and evaluation and control as primarily composed of controlling activities. This chapter begins by specifying who implements strategy and what must be done: programs, budgets, and procedures. It proposes a Matrix of Change to assess the impact new programs will have on an organization’s current activities. It stresses the importance of finding synergy among organizational activities. The rest of the chapter emphasizes organizing activities by looking closely at the design of organizations and jobs. Chandler's proposition that structure follows strategy is explained in terms of stages of corporate development. The chapter also explains the organizational life cycle and what happens when corporations go into decline. Building on the discussion of basic organization structures in Chapter 5, this chapter presents three advanced designs of the matrix, the network (or cluster), and the cellular/modular structure. Reengineering, six sigma, and job design are explained as implementation methods. The chapter ends with a discussion of international issues in strategy implementation.
• Typical strategy implementation problems.
• The Matrix of Change and the importance of synergy.
• Changes in strategy tend to lead to changes in structure.
• Stages of corporate development.
• The organizational life cycle.
• Matrix, network, and cellular/modular structures.
• Reengineering as strategy implementation.
• Six sigma, a program to reduce costs and improve quality.
• Job design as strategy implementation.
• Centralization versus decentralization of international activities.
1. How should a corporation attempt to achieve synergy among functions and business units?
The text points out that one of the goals to be achieved in strategy implementation is synergy among functions and business units. This is one reason why corporations commonly reorganize after an acquisition. If some sort of synergy cannot be achieved, there is no real reason to acquire another firm - other than trying to exit one business and enter another. The extent to which synergy should be achieved depends upon the strategy being pursued. A lot of synergy is needed in vertical and horizontal growth as well as in concentric diversification. The corporation pursues these strategies in order to achieve the benefits of efficiency coming from marketing, operating, investment, or management synergy. The firm is looking for advantages of scale or scope. If, however, the corporation is pursuing conglomerate diversification as a strategy, top management may only wish financial synergy in which high cash flow from one unit makes up for low cash flow from another unit. In this case, there is no attempt to combine any activities across business units (in this case usually called subsidiaries) because of the holding company nature of the corporation. Management's philosophy is one of buying and selling companies without much attempt to gain the benefits of synergy.