FUNCTIONAL STRATEGIES

1. FUNCTIONAL STRATEGIES EVERY BUSINESS UNIT DEVELOPS FUNCTIONAL STRATEGIES FOR EACH MAJOR DEPARTMENT • MARKETING STRATEGY • FINANCIAL STRATEGY • RESEARCH & DEVELOPMENT STRATEGY • OPERATIONS STRATEGY • PURCHASING STRATEGY • LOGISTICS STRATEGY • HUMAN RESOURCES STRATEGY • INFORMATION TECHNOLOGY STRATEGY

2. BASIC MARKET-PRODUCT STRATEGIES THE CUSTOMER-PRODUCT DECISION WHO IS OUR PRIMARY CUSTOMER? WHAT KIND OF PRODUCT DO WE INTEND TO OFFER? CUSTOMERS EXISTING NEW EXISTING - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - MARKET MARKET PENETRATION DEVELOPMENT PRODUCTS OR - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SERVICES PRODUCT DIVERSIFICATION DEVELOPMENT INNOVATION NEW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

3. MARKETING STRATEGIES: THE CUSTOMER-PRODUCT DECISION MARKET PENETRATION STRATEGY (Stay in current markets with existing products) INCREASE RATE OF PURCHASE/CONSUMPTION ATTRACT RIVAL’S CUSTOMERS BUY OUT RIVALS CONVERT NON-USERS INTO CURRENT USERS MARKET DEVELOPMENT STRATEGY (Find new markets for current products) ENTER NEW GEOGRAPHICAL MARKETS FIND NEW USES FOR EXISTING PRODUCTS FIND NEW TARGET MARKETS PRODUCT DEVELOPMENT STRATEGY (Develop new products for existing markets) IMPROVE FEATURES IMPROVE QUALITY/RELIABILITY/DURABILITY ENHANCE AESTHETICS/STYLING ADD MODELS DIVERSIFICATION STRATEGY (Develop new products for new markets)

4. THE 4 “P’S” OF MARKETING • MARKETING MIX ISSUES • Product Strategy Specifying the exact product or service to be offered • New or existing product? …for new or existing customers? • Promotion Strategy How the product or service is to be communicated to customers • “Push” - spend $$$ on promotions and discounts to push products • “Pull” - spend $ to build brand awareness so consumers will ask for it by name • Channel or “Place” Strategy Selecting the method for distributing the product or service • Distribute through dealer networks or through mass merchandisers? • Sell directly to consumers through own stores or through internet? • Price Strategy Establishing a price for the product or service • “Skim pricing” (high) when you are a pioneer • “Penetration pricing” (low) builds market shares • “Dynamic pricing” (prices vary frequently) based on demand/availability

5. FINANCIAL MANAGEMENT STRATEGIES CAPITAL ACQUISITIONS • Debt Leverage, Stock Sales, & Gains from Operations • Equity financing is preferred for related diversification • Debt financing is preferred for unrelated diversification • Leveraged buyouts (LBOs) make the acquired firm pay off the debt CAN WE GROW BY RELYING ON ONLY INTERNAL CASH FLOWS? DO STOCK SALES DILUTE OWNERSHIP CONTROL? DOES A LARGE DEBT RATIO CRIPPLE FUTURE GROWTH? DOES STRONG LEVERAGE BOOST EARNINGS PER SHARE? DOES HIGH DEBT DETER TAKEOVER ATTEMPTS? DO MOST LBOs UNDERPERFORM 3-4 YEARS AFTER THE BUYOUT? RESOURCE ALLOCATIONS • Dividends, Stock Price, & Reinvestment • Reinvest earnings in fast-growing companies • Keeping the stockholders contented with consistent dividends • Use of stock splits ( or reverses) to maintain high stock prices • Tracking stock keeps interest in company, but doesn’t allow takeover

6. RESEARCH & DEVELOPMENT STRATEGIES • LEVEL OF INNOVATION • Pioneer (Leader) v. Copy Cat (Follower) • Technological leadership fits well with differentiation • A “follower” strategy makes sense with cost-leader strategies • Are we better at finding applications and customer adaptations than actually inventing something really new? • Different types of R & D (basic, product, process) • Where is the firm’s historic expertise / advantage? • How competent are the R & D Personnel? • ACQUISITION OF TECHNOLOGY • Internally developed v. acquired from outside • Technology “Scouts” • Strategic Technology Alliances • Acquire minority stake in promising high-tech ventures

7. OPERATIONS STRATEGIES • MANUFACTURING LOCATION • Internal Production v. Outsourcing • Domestic Plants v. International Locations • SYSTEM LAYOUT • Product v. Process Layouts • Job Shops v. Mass Production • Job shop/small batch production fits well with a differentiation strategy • Continuous production / dedicated transfer lines helps achieve cost leadership • Use of robots and CAD/CAM v. Labor intense manufacturing • Modular Manufacturing and just-in-time delivery of sub-assemblies • Continuous improvement systems lower costs and increase quality

8. PURCHASING STRATEGIES • SOURCING COMPONENTS AND SUPPLIES WHERE CAN THE HIGHEST QUALITY COMPONENTS BE FOUND? • Outsourcing (our firm buys everything) • Buying on the Open Market (Spot) (prices fluctuate) • Long-Term Contracts with Multiple Suppliers (low bid) • Sole Sourcing (only one supplier) improves quality • Parallel Sourcing (two suppliers) provides protection • Backward Integration (our firm has an ownership stake in the suppliers we use) • Quasi-integration (minority ownership position in a supplier) • Tapered (produce some of what we need, but not all) • Full (produce all of our own needs) • Use of Component Inventories v. Just-in-time supply delivery

9. LOGISTICS STRATEGIES DO WE HAVE GOODS THAT MUST BE TRANSPORTED OR DELIVERED? • TYPE OF MATERIALS TRANSPORTED (Bulky or Compact?) • Raw Materials, Supplies, & Components • Finished Goods • BEST MODE OF TRANSPORTATION • AIR • RAIL • TRUCK • BARGE DO WE WANT DEPENDABILITY, LOW COST, OR HIGH QUALITY SERVICE? • OUTSOURCE TRANSPORTATION OR DO IT YOURSELF? • CONTRACT WITH OTHERS • Use Multiple Shippers v. Just One (UPS)? • Consider batch deliveries v. Just-in-time arrangements? • OWNERSHIP IN DISTRIBUTION CHAIN • Quasi • Tapered • Full

10. HUMAN RESOURCES STRATEGIES • TALENT ACQUISITION • Recruit from Outside v. Internal Development • Require experienced, highly-skilled workers v. “we will train you” • Offer “top dollar” wages & benefits v. mentoring and a career • WORK ARRANGEMENTS • Individual Jobs v. Team Positions • Narrowly-defined jobs v. Positions with discretion and autonomy • On-premises Work v. Telecommuting Options • MOTIVATION & APPRAISAL • Extrinsic v. Intrinsic Reward Systems • Assessment for development v. assessment for rewards • Incentives for ideas & originality v. incentives for conformity?

11. INFORMATION SYSTEMS STRATEGIES WORKER PRODUCTIVITY & CONNECTIVITY • Employees can be networked together across the globe • Instant translation software for global firms • “Follow the Sun Management”…pass projects on to the next team SALES & INVENTORY MANAGEMENT • Internet sales and development of customer databases • Instant sales reports allow immediate inventory reorders SHIPPING & TRACKING GOODS • FEDEX PowerShip software…stores addresses, prints labels, etc. • Tracking the progress of package shipment…FEDEX & UPS

12. WHICH FUNCTIONS CAN WE OUTSOURCE? • GLOBAL OUTSOURCING – INCREASES EFFICIENCY & QUALITY • Averages 9% reduction in costs and 15% increase in capacity and quality • Up to 70% of Boeing planes are outsourced..built in just 4 mos v. 1 year • AMA SURVEY -- 94% OUTSOURCE AT LEAST ONE ACTIVITY • 78% General & Administrative activities • 77% Human Resources • 66% Transportation & Distribution • 63% Information Systems • 56% Manufacturing • 51% Marketing • 18% Finance & Accounting 25% were disappointed in their outsourcing results 51% brought the outsourced activity back “in-house” • MOST LIKELY ACTIVITIES TO OUTSOURCE • Customer Service • Bookkeeping/Financial/Clerical • Sales/Telemarketing • Software Programming • Mailroom

13. OUTSOURCING DISADVANTAGES • CUSTOMER COMPLAINTS & UNEXPECTED DELAYS • LOCKED INTO LONG-TERM CONTRACTS THAT AREN’T COMPETITIVE • THE FIRM DOESN’T LEARN NEW SKILLS & DEVELOP CORE COMPETENCIES A SURVEY OF 129 OUTSOURCING FIRMS Half of the projects undertaken failed to achieve the anticipated savings Software produced in India had 10% more bugs than comparable US projects SEVEN MAJOR OUTSOURCING ERRORS • Outsourcing activities that shouldn’t be outsourced • Failed to keep core activities “in-house” • Selecting the wrong vendor • Picked a vendor that wasn’t trustworthy, or who lacks state-of-the art processes • Writing a poor contract • Balance of power favors the vendor…locked in over a long period of time • Overlooking personnel issues…my area of expertise was outsourced! • Losing Control over the Outsourced Activity…We’re at their mercy! • Overlooking the hidden costs of outsourcing…Transaction fees? • Failing to plan an exit strategy…How can we reverse out of this deal?

14. SUCCESSFUL OUTSOURCING KEY TO SUCCESS: ONLY OUTSOURCE ACTIVITIES THAT ARE NOT RELATED TO THE FIRM’S DISTINCTIVE COMPETENCIES TOTAL VALUE-ADDED to Firm’s PRODUCTS & SERVICES LOW HIGH HIGH - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - TAPERED FULL VERTICAL INTEGRATION INTEGRATION ACTIVITY’SProduce Some Produce All POTENTIAL FOR Internally Internally COMPETITIVE - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ADVANTAGE OUTSOURCE OUTSOURCE COMPLETELY COMPLETELY Buy on Open Market Use Long-Term Contracts LOW - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

15. STRATEGIES TO AVOID DUMB STRATEGIES FOLLOW THE LEADER We can do that too…but maybe it’s not worth copying HIT ANOTHER HOME RUN A pioneer company looking to get lucky again ARMS RACE Battles which increase costs and decrease revenues DO EVERYTHING Offering something for everyone…trying to please everyone LOSING HAND Pouring $$ down the knothole…investment because of prior commitments NONE OF THESE STRATEGIES WILL CREATE A SUSTAINABLE COMPETITIVE ADVANTAGE FOR THE FIRM