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CHAPTER EIGHT
STRATEGY FORMULATION: FUNCTIONAL STRATEGY AND STRATEGIC CHOICE
This chapter is the last of three dealing with the formulation of strategy. It reconnects with the resource-based view
of the firm presented in Chapter 5 by discussing the importance of core and distinctive competencies to competitive
advantage and corporate growth. The chapter discusses functional strategies in the areas of marketing, finance,
R&D, operations, purchasing, logistics, human resources, and information systems. The chapter also provides
criteria for deciding if specific functional activities should be provided internally or outsourced. It discusses strategy
selection in terms of corporate scenarios, attitudes toward risk, external and internal pressures, as well as the needs
and desires of key managers. After presenting ways to improve strategic choice, the chapter ends with the
development of policies to fit the strategy.
LEARNING OBJECTIVES
1. Discuss the impact that the various types of functional strategies have on the achievement of organizational
goals and objectives.
2. Explain which activities and functions are appropriate to outsource/offshore in order to gain or strengthen
TOPICS OUTLINE COVERED
1. Functional Strategy
a. Marketing Strategy
b. Financial Strategy
c. Research and Development (R&D) Strategy
d. Operations Strategy
2. The Sourcing Decision: Location of Functions
3. Strategies to Avoid
4. Strategic Choice: Constructing Scenarios
a. Constructing Corporate Scenarios
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
8-1. How can an operations strategy be used to understand and exploit a particular product offering?
The operations strategy determines how and where a product or service is to be manufactured, the level of vertical
8-2. How are corporate scenarios used in the development of an effective strategy?
Corporate scenarios are pro forma balance sheets and income statements that forecast the effect each alternative
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SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
8-3. Explain how functional strategies can support an organization’s corporate strategy.
Functional strategies are related to organizational functions such as marketing, finance, human resources,
8-4. What are the reasons for strategic planners to pay more attention to the importance of planning and
implementing an effective pricing strategy in a competitive market?
The setting of competitive pricing is a type of functional strategy that can have direct impact on profits, affect the
image of the brand, and determine the type of customer and competition the organization will attract. Pricing is very
8-5. How does mass customization support a business unit’s competitive strategy?
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,
8-6. Identify the common signs that indicate an outsourcing strategy is not executed effectively.
There are many common signs which indicate that an outsourcing strategy is not implemented effectively. First,
there are some outsourcing activities that should not be outsourced, especially those which belong to the core
8-7. What is the relationship of policies to strategies?
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
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ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A8-1. 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
A8-2. What are the advantages and disadvantages of the devil’s advocate, dialectical inquiry, and consensus
approaches to making strategic choices?
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
A8-3. Should functional strategies be categorized under strategy formulation or under strategy
implementation?
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 on one industry as its corporate
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SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
Analyze eBay’s situation as of 2016. What do you believe eBay’s core issues are? Which marketing strategy was
eBay following: market development or product development? Do you agree with it? What decision-making process
should the CEO utilize to make the decisions necessary to address the company’s product, customer approach, and
business model going forward?
What do you believe eBay’s core issues are? 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
Which marketing strategy was eBay following: market development or product development? Do you agree with it?
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
What decision-making process should the CEO utilize to make the decisions necessary to address the company’s
product, customer approach, and business model going forward? Because John Donahoe was hired by eBay’s board
to turn the company around, he may be tempted to act quickly and autocratically. The usual retrenchment tactics of