University of New Hampshire Forces Driving Organizations to Outsource Discussion

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Identify the internal and external forces driving organizations to outsource some of their operations.

What are the typical operations being outsourced and what criteria are used to make the decisions?

List the overall organizational advantages as a result of outsourcing operations.

List the overall organizational disadvantages as a result of outsourcing operations.

What are the potential risks of not taking advantage of outsourcing as a key business strategy?

What are the positive results of outsourcing? Consider the positive impact on all key internal and external stakeholder groups.

What are the negative results of outsourcing? Consider the negative impact on all key internal and external stakeholder groups.

What are the long-term social, technical, political, industrial, and global implications?

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Chapter 8 Strategy Formulation: Functional Strategy and Strategic Choice Environmental Strategy Strategy Evaluation and Control: Gathering Developing Long-range Plans Putting Strategy into Action Monitoring Natural Resources and climate Societal Reason for existence What results to accomplish by when General forces Task Environment: Industry analysis Plan to achieve the mission & objectives Broad guidelines for decision making Internal Activities needed to accomplish a plan Cost of the programs Structure: Chain of command Culture: Sequence of steps Performance do the job Actual results Beliefs, expectations, values Resources: Assets, skills, knowledge Feedback/Learning: Make corrections as needed Pearson MyLab Management® Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems. 250 Learning Objectives After reading this chapter, you should be able to: 8-1. Discuss the impact that the various types of functional strategies have on the achievement of organizational goals and objectives 8-3. List and explain the strategies to avoid 8-4. Construct corporate scenarios to evaluate strategic options 8-2. Explain which activities and functions are appropriate to outsource/offshore in order to gain or strengthen competitive advantage Can Research in Motion (BlackBerry) Be Saved? Research in Motion (RIM) was founded in 1984 by Jim Balsillie and Mike Lazaridis as a business focused on providing the backbone for the twoway pager market. In 1999, they released the first BlackBerry device with an embedded full QWERTY keyboard. The “BlackBerry” set the bar for the connected business person. The term “crack berry” was even coined for those business people who could not put down their BlackBerry. The company focused almost exclusively on the integrity of the network on which their phones operated. They provided security measures that made RIM the choice of data managers. When developing a strategy, companies have to bring together all the elements in a manner that pro vides them with a unique position relative to their competitors. At the time of its release, most competitors provided cell phones that could make calls and little more. BlackBerry changed the nature and use of a portable device at the same time it provided a secure platform for IT managers wary of allowing remote devices to access their systems. BlackBerry sales peaked in 2008 about the same time that Apple released the iPhone. Despite that, the company still has tens of millions of users worldwide, a cash hoard in excess of US$2.7 billion and a reputation for being a best-in-class device for the business community. The company has made a number of missteps along the way, including a touchscreen BlackBerry that didn’t catch on, a tablet that lacked e-mail connectivity, and an approach to the market that made it clear that the company believed the backbone was of more value than the device used. The two founders stepped down in 2012 and the company continued to fumble with its strategy. New CEO Thorsten Heins asserted in January 2012 that RIM needed to focus on consumers rather than the enter prise. Then, in March 2012, he told analysts that RIM will focus on the enterprise instead of consumers. Heins was replaced less than a year later by John Chen. By late 2015, the company had seen a 46% drop in revenues from a year earlier and had sold less than 800,000 handsets in the previous quarter. A year earlier 251 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 252 in the same quarter RIM had sold 2.4 million units. How can RIM align the elements of its strategy? Can RIM be saved? SOURCES: “Blackberry: Sales continue to deteriorate, competition rife,” Zaks Equity Research, Yahoo! Finance, September 29, 2015 (finance.yahoo.com/news/blackberry-sales-continuedeteriorate-competition-162004893.html); us.blackberry.com/company/investors/documents .html; S. Jakab, “RIM Seeks to Avoid Its Own Waterloo,” The Wall Street Journal (September 27, 2012), (http://online.wsj.com/article/SB10000872396390444549204578020473252582296 .html?KEYWORDS=RIM+waterloo); D. Meyer, “How RIM Found Itself on the Wrong History,” ZDNet (July 1, 2012), (http://www.zdnet.com/how-rim-found-itself-on-the-wrong-side-of -history-3040155462/); http://www.rim.com/company/index.shtml; “Research in Motion Co-founders Step Down,” (New York) Daily News (January 23, 2012), (http://articles.nydailynews.com/2012-01-23 /news/30653912_1_balsillie-and-mike-lazaridis-rim-founders). 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 con8-1. Discuss the impact cerned with developing and nurturing a distinctive competence to provide a company that the various or business unit with a competitive advantage. Just as a multidivisional corporation has types of functional several business units, each with its own business strategy, each business unit has its own strategies have on set of departments, each with its own functional strategy. the achievement of The orientation of a functional strategy is dictated by its parent business unit’s organizational goals and objectives strategy.1 For example, a business unit following a competitive strategy of differentiation through high quality might require a manufacturing functional strategy that emphasizes expensive quality assurance processes over cheaper, high-volume production; a human resource functional strategy that emphasizes the hiring and training of a highly skilled, but costly, workforce; and a marketing functional strategy that emphasizes distribution channel “pull,” using advertising to increase consumer demand, over “push,” using promotional allowances to retailers. If a business unit were to follow a low-cost competitive strategy, however, a different set of functional strategies would be needed to support the business strategy. Just as competitive strategies may need to vary from one region of the world to another, functional strategies may need to vary from region to region. When Mr. Donut expanded into Japan, for example, it had to market donuts not as breakfast, but as snack food. Because the Japanese had no breakfast coffee-and-donut custom, they preferred to eat the donuts in the afternoon or evening. Mr. Donut restaurants were thus located near railroad stations and supermarkets. All signs were in English to appeal to the Western interests of the Japanese. 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. Consumer product giants such as P&G, Colgate-Palmolive, and Unilever are experts at using advertising and promotion to implement a market saturation/penetration strategy to gain the dominant market share in a product category. As seeming masters of the product life cycle, these companies are able to extend product life almost indefinitely through “new and improved” variations of product and packaging that appeal to most market niches. Side of CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 253 A company, such as Church & Dwight, follows the second market development strategy by finding new uses for its successful current product: Arm & Hammer brand baking soda. 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. Church & Dwight has had great success by following the first product development strategy developing new products to sell to its current customers in its existing markets. Acknowledging the widespread appeal of its Arm & Hammer brand baking soda, the company has generated new uses for its sodium bicarbonate by reformulating it as toothpaste, deodorant, and detergent. In another example, Ocean Spray developed Craisins, mock berries, more than 50 variations of juice, sauces, flavored snacks, and juice boxes in order to market its cranberries to current customers. 2 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 current customers. Smith & Wesson, famous for its handguns, has taken this approach by using licensing to put its name on men’s cologne and other products like the Smith & Wesson 357 Magnum Wood Pellet Smoker (for smoking meats). 3 Church & Dwight has also successfully followed the second product development strategy (new products for new markets) by developing new pollution-reduction products (using sodium bicarbonate compounds) for sale to coal-fired electric utility plants—a very different market from grocery stores. 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. Many large food and consumer products companies in the United States and Canada follow a push strategy by spending a large amount of money on trade promotion in order to gain or hold shelf space in retail outlets. Trade promotion includes discounts, in-store special offers, and advertising allowances designed to “push” products through the distribution system. The Kellogg Company decided a few years ago to change its emphasis from a push to a pull strategy, in which advertising “pulls” the products through the distribution channels. The company now spends more money on consumer advertising designed to build brand awareness so that shoppers will ask for the products. Research has found that a high level of advertising (a key part of a pull strategy) is beneficial to leading brands in a market.4 Strong brands provide a competitive advantage to a firm because they act as entry barriers and usually generate higher market share.5 Other marketing strategies deal with distribution and pricing. Should a company use distributors and dealers to sell its products, should it sell directly to mass merchandisers, or should it use the direct marketing model by selling straight to the consumers via the Internet? Using multiple channels simultaneously can lead to problems. In order to increase the sales of its lawn tractors and mowers, for example, John Deere decided to sell the products not only through its current dealer network but also through mass merchandisers such as Home Depot. Deere’s dealers, however, were furious. They considered Home Depot to be a key competitor. The dealers were concerned that Home Depot’s ability to underprice them would eventually lead to their becoming little more than repair facilities for their competition and be left with insufficient sales to stay in business. However, the bulk (US$23 billion) of John Deere’s US$32 billion in revenue comes from equipment sold to farmers. Home Depot sells the average lawn mower/ tractor that was never a big part of the dealer’s business.6 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 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 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. Depending on corporate and business unit objectives and strategies, either of these choices may be desirable to a particular company or unit. Penetration pricing is, however, more likely than skim pricing to raise a unit’s operating profit in the long term. 7 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.8 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 capi- tal to support a business strategy. Financial strategy usually attempts to maximize the financial value of a firm. The trade-off between achieving the desired debt-to-equity ratio and relying on internal long-term financing via cash flow is a key issue in financial strategy. Many small-and medium-sized family-owned companies try to avoid all external sources of funds in order to avoid outside entanglements and to keep control of the company within the family. Most large publicly held firms have long-term debt and keep a large amount of money in cash and short-term investments. One of these is Apple Inc., which had more than a US$215 billion cash hoard by early 2016. 9 Many financial analysts believe, however, that only by financing through long-term debt can a corporation use financial leverage to boost earnings per share—thus raising stock price and the overall value of the company. Research indicates that higher debt levels not only deter takeover by other firms (by making the company less attractive) but also lead to improved productivity and improved cash flows by forcing management to focus on core businesses.10 High debt can be a problem, however, when the economy or the company falters and a company’s cash flow drops. Research reveals that a firm’s financial strategy is influenced by its corporate diversification strategy. Equity financing, for example, is preferred for related diversification, whereas debt financing is preferred for unrelated diversification. 11 A very popular financial strategy that ebbs and flows with the economy is the leveraged buyout (LBO). Goldman Sachs Group is one of the largest financers of LBOs in the world. They raised over US$26 billion in the past 10 years and completed the largest single raise of funds in history with over US$8 billion in 2016.12 In a leveraged buyout, a company is acquired in a transaction financed largely by debt, usually obtained from a third party, such as an insurance company or an investment banker. Ultimately, the debt is paid with money generated from the acquired company’s operations or by sales of its assets. The acquired company, in effect, pays for its own acquisition. Management of the LBO is then under tremendous pressure to keep the highly leveraged company profitable. Unfortunately, the huge amount of debt on the acquired company’s books may actually cause its eventual decline by focusing management’s attention on shortterm matters. For example, one year after the buyout, the cash flow of eight of the largest LBOs made during 2006–2007 was barely enough to cover interest payments.13 One study of LBOs (also called MBOs—Management Buy Outs if they are led by a company’s current management) revealed that the financial performance of the typical LBO usually falls below the industry average in the fourth year after the buyout. The firm declines because of inflated expectations, utilization of all slack, management 254 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 255 burnout, and a lack of strategic management.14 Often, the only solutions are to sell the company or to again go public by selling stock to finance growth.15 The management of dividends and stock price is an important part of a corporation’s financial strategy. Corporations in fast-growing industries such as computers and computer software often do not declare dividends. They use the money they might have spent on dividends to finance rapid growth. If the company is successful, its growth in sales and profits is reflected in a higher stock price, eventually resulting in a hefty capital gain when shareholders sell their common stock. Other corporations, such as Diebold Inc., that do not face rapid growth, must support the value of their stock by offering consistent dividends. Instead of raising dividends when profits are high, a popular financial strategy is to use excess cash (or even use debt) to buy back a company’s own shares of stock. In 2015, U.S.-based publicly traded companies spent more than US$568 billion buying back stock. Because stock buybacks increase earnings per share, they typically increase a firm’s stock price and make unwanted takeover attempts more difficult. Such buybacks do send a signal to investors that management may not have been able to find any profitable investment opportunities for the company or that it is anticipating reduced future earnings.16 A number of firms have been supporting the price of their stock by using reverse stock splits. Contrasted with a typical forward 2-for-1 stock split in which an investor receives an additional share for every share owned (with each share being worth only half as much), in a reverse 1-for-2 stock split, the number of shares an investor owns is reduced by half for the same total amount of money (with each share now being worth twice as much). Thus, 100 shares of stock worth US$10 each are exchanged for 50 shares worth US$20 each. A reverse stock split may successfully raise a company’s stock price, but it does not solve underlying problems. A study by Credit Suisse First Boston revealed that almost all 800 companies that had reverse stock splits in a five-year period performed worse than their peers over the long term.17 A rather novel financial strategy is the selling of a company’s patents. Companies such as AT&T, Bellsouth, American Express, Kimberly Clark, and 3Com have been selling patents for products that they no longer wish to commercialize or are not a part of their core business. Kodak has been selling off virtually its entire portfolio of patents in a desperate attempt to raise enough money to survive while management tries to figure out what the company should do if it can emerge from bankruptcy. Companies like Apple, Microsoft, and Google have bought patents in order to protect their competitive positions. Patents are also bought by patent accumulators who seek to sell groups of patents to other companies. A more sinister version of these are known as Patent Trolls who collect patents in order to sue other companies, but not use the patents themselves.18 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. RIM has floundered by going back and forth among these approaches rather than choosing an approach and investing their resources. 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. Nike, Inc. has utilized a leader R&D functional strategy to achieve a differentiation competitive advantage. Nike spends more than most in the industry on R&D to differentiate the performance of its athletic shoes from that of its competitors. As a result, CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice its products have become the favorite of serious athletes. This happened despite the fact that Nike simultaneously pursues a low-cost manufacturing approach. An example of the use of the follower R&D functional strategy to achieve a low-cost competitive advantage is Dean Foods Company, maker of such brands as Dairy Pure, Land O’Lakes, and TruMoo. An increasing number of companies are working with their suppliers to help them keep up with changing technology. They are beginning to realize that a firm cannot be competitive technologically only through internal development. For example, Chrysler Corporation’s skillful use of parts suppliers to design everything from car seats to drive shafts has enabled it to spend consistently less money than its competitors to develop new car models. Using strategic technology alliances is one way to combine the R&D capabilities of two companies. One UK study found that 93% of UK auto assemblers and component manufacturers use their suppliers as technology suppliers.19 A newer approach to R&D is open innovation, in which a firm uses alliances and connections with corporate, government, academic labs, and consumers to develop new products and processes. Open innovation (OI) has been widely accepted and applied to a wide variety of companies in every industry including some state governments and the National Football League.20 Intel opened four small-scale research facilities adjacent to universities to promote the cross-pollination of ideas. Thirteen U.S. university labs engaging in nanotechnology research have formed the National Nanotechnology Infrastructure Network in order to offer their resources to businesses for a fee.21 Mattel, Wal-Mart, and other toy manufacturers and retailers use idea brokers to scout for new toy ideas. IBM adopted the open operating system Linux for some of its computer products and systems, drawing on a core code base that is continually improved and enhanced by a massive global community of software developers, of whom only a fraction work for IBM.22 To open its own labs to ideas being generated elsewhere, P&G’s CEO Art Lafley decreed that half of the company’s ideas must come from outside, up from 10% in 2000. P&G instituted the use of technology scouts to search beyond the company for promising innovations. By 2007, the objective was achieved: 50% of the company’s innovations originated outside P&G. Unfortunately, the unintended consequence was a sharp reduction in breakthrough products overall. Most of the innovations were relatively minor changes to existing products or products with very limited markets.23 A slightly different approach to technology development is for a large firm such as IBM or Microsoft to purchase minority stakes in relatively new high-tech entrepreneurial ventures that need capital to continue operation. Investing corporate venture capital is one way to gain access to promising innovations at a lower cost than by developing them internally.24 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. See the Global Issue feature to see how operational differences in national conditions can impact the global efforts of a worldwide brand. 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. The use of CAD/CAM, flexible manufacturing systems, computer 256 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 257 GLOBAL issue WHY IS STARBUCkS AFRAID OF ITALY? the concept of the Starbucks café (as it exists today) started in Milan, Italy, when howard Schultz, then the Marketing Director for a coffee roasting business called Starbucks, saw how people talked to the folks making their coffee at the many coffee houses there. he came back to the United States and unable to convince his bosses about the idea, started up his own café in Seattle. Within three years, he had grown his company to such a size that he bought out the original Starbucks roasting business. By early 2016 Starbucks had more than 21,000 cafés in 65 countries worldwide. Interestingly, it does not have one outlet in Italy even though rumors are swirling that they may open one in Milan in late 2016. Why are there no Starbucks in Italy? Italy is the home of coffee culture and their approach to coffee is quite different. Italians primarily drink espresso and do so in one quick gulp. Cappuccino is strictly a breakfast drink, and while coffee stands are a gathering point, people rarely hang out after they have received their coffee. that said, McDonald’s has had significant success with its McCafé offering of traditional american style coffee, as well as Italian espresso. It encourages customers to linger much like the Starbucks model. McDonald’s has more than 400 locations in Italy that serve coffee, including more than 100 that have a traditional Italian coffee bar. So, should Starbucks make the move into Italy? SOUrCeS: http://www.starbucks.com/business/international -stores; http://www.lifeinitaly.com/lifestyle/starbucks-in-italy; http://www.aboutmcdonalds.com/content/mcd/investors/news -events/financial-news.html; S. Faris, “Grounds Zero,” Bloomberg Businessweek (February 13, 2012), (http://www.businessweek .com/magazine/grounds-zero-a-starbucksfree-italy-02092012 .html); http://www.starbucks.com/about-us/our-heritage; “Starbucks Outlines Strategy for accelerating profitable Global Growth” (http://news.starbucks.com/article_display.cfm?article_id=342). numerically controlled systems, automatically guided vehicles, robotics, manufacturing resource planning (MRP II), optimized production technology, and just-in-time techniques contribute to increased flexibility, quick response time, and higher productivity. Such investments also act to increase the company’s fixed costs and could cause significant problems if the company is unable to achieve economies of scale or scope. A firm’s manufacturing strategy is often affected by a product’s popularity. As the sales of a product increase, there will be an increase in production volume ranging from lot sizes as low as one in a job shop (one-of-a-kind production using skilled labor) through connected line batch flow (components are standardized; each machine functions like a job shop but is positioned in the same order as the parts are processed), to lot sizes as high as 100,000 or more per year for flexible manufacturing systems (parts are grouped into manufacturing families to produce a wide variety of mass-produced items), and dedicated transfer lines (highly automated assembly lines making one massproduced product using little human labor). According to this concept, the product becomes standardized into a commodity over time in conjunction with increasing demand. Flexibility thus gives way to efficiency.25 Increasing competitive intensity in many industries has forced companies to switch from traditional mass production using dedicated transfer lines to a continuous improvement production strategy. A mass-production system was an excellent method to produce a large number of low-cost, standard goods and services. Employees worked on narrowly defined, repetitious tasks under close supervision in a bureaucratic and hierarchical structure. Quality, however, often tended to be fairly low. Learning how to do something better was the prerogative of management; workers were expected only to learn what was assigned to them. This system tended to dominate manufacturing until the 1970s. Under the continuous improvement system developed by W. Edwards Deming and perfected CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice by Japanese firms, companies empowered cross-functional teams to constantly strive to improve production processes. Managers are more like coaches than 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. Because continuous improvement enables firms to use the same low-cost competitive strategy as do mass-production firms but at a significantly higher level of quality, it is rapidly replacing mass production as an operations strategy. The automobile industry is aggressively moving forward with a strategy approach referred to as 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. General Motors is on a path to reduce their current approach of 22 different platforms down to just 4 by 2025. The move to modular tool kits attached to standard platforms is an approach that General Motors has no choice but to apply. Ford, Toyota, and VW are also working on this approach. The savings in the cost of development and the dramatic improvement in the speed of delivering new models is core to the investment. 26 The concept of a product’s life cycle eventually leading to one-size-fits-all mass production has been successfully challenged by the concept of mass customization. Appropriate for an ever-changing environment, mass customization requires that peo- ple, processes, units, and technology reconfigure themselves to give customers exactly what they want, when they want it. The advent of high-speed 3D printers, the success of small business websites like etsy.com and the increasing ability to have items deliv- ered quickly and directly to your door has changed the nature of the business model. In contrast to continuous improvement, mass customization requires flexibility and quick responsiveness. Managers coordinate independent, capable individuals. An efficient linkage system is crucial. The result is low-cost, high-quality, customized goods and services appropriate for a large number of market niches. PURCHASINg STRATEgY Purchasing strategy deals with obtaining the raw materials, parts, and supplies needed to perform the operations function. A contentious issue for manufacturing companies throughout the world is the availability of resources needed to operate a modern factory. The dramatic swings in the fundamental elements of business (oil, electricity, and rare earth materials among many others) has drastically boosted costs, only some of which can be passed on to the customers in a competitive environment. The likelihood that fresh water will become an equally scarce resource is causing many companies to rethink water-intensive manufacturing processes. To learn how companies are beginning to deal with global warming and increasing fresh water scarcity, see the Sustainability Issue feature. The basic purchasing choices are multiple, sole, and parallel sourcing. Under 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 suppliers 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 supplies are always on hand when needed. Multiple sourcing has been one way for a purchasing firm to control the relationship with its suppliers. So long as suppliers can provide evidence that they can meet the product specifications, they are kept on the purchaser’s list of acceptable vendors for 258 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 259 SUSTAINABILITY issue HOW HOT IS HOT? July 2015 was the hottest month in the recorded history of the earth and 2015 was the hottest year on record. eight of the world’s deadliest heat waves occurred since 1997. 10 have the impact on fresh water availability is more than significant not only to individuals, but also the operations of companies. the United Nations reported that by the mid1990s, some 40% of the world’s population was suffering water shortages. thirty-seven countries in the world already face “extremely high” levels of water stress with the 5 most stressed locations being Western Sahara, Uae, trinidad and tobago, Singapore, and San Marino. Nestlé, Unilever, Coca-Cola, aB Inbev, and Danone consume almost 575 billion liters of water a year, enough to satisfy the daily water needs of every person on the planet. It takes about 13 cubic meters of fresh water to produce a single 200-mm semiconductor wafer. as a result, chip making is believed to account for 25% of the water consumption in Silicon Valley. according to José Lopez, Nestlé’s COO, it takes four liters of water to make one liter of product in Nestlé’s factories, but 3000 liters of water are needed to grow the agricultural produce that supplies them. each year, around 40% of the fresh water withdrawn from lakes and aquifers in america is used to cool power plants. Separating one liter of oil from Canada’s tar sands requires up to five liters of water! “Water is the oil of the 21st century,” contends andrew Liveris, CeO of the chemical company Dow. Like oil, supplies of clean, easily accessible fresh water are under a growing strain because of the growing population and widespread improvements in living standards. Industrialization in developing nations is contaminating rivers and aquifers. Climate change is altering the patterns of fresh water availability so that droughts are more likely in many parts of the world. according to a survey by the Marsh Center for risk Insights, 40% of Fortune 1000 companies stated that the impact of a water shortage on their business would be “severe” or “catastrophic,” but only 17% said that they were prepared for such a crisis. Of Nestlé’s 481 factories worldwide, 49 are located in water-scarce regions. environmental activists have attacked pepsiCo and Coca-Cola for allegedly depleting groundwater in India to make bottled drinks. there are a number of companies that are taking action to protect their future supply of fresh water. Starbucks has reduced the water consumption in their stores by 23% in the past seven years and abbot Laboratories which has operations in over 130 countries has reduced fresh water consumption by 18% in the past four years. SOUrCeS: J. Gillis, “2015 Was hottest Year in historical record, Scientists Say,” The New York Times, January 20, 2016 (http:// www.nytimes.com/2016/01/21/science/earth/2015-hottest-year -global-warming.html?_r=0); M. Ferner, “these are the Most Water-Stressed Countries In the World,” The Huffington Post, December 13, 2013 (http://www.huffingtonpost.com/2013/12/13 /water-stressed-countries_n_4434115.html); http://www.starbucks .com/responsibility/environment/water-and-energy; http://www .edie.net/news/4/Water-reduction-efforts-keep-abbott-on-track -to-meet-2020-targets/27429/; “the Impact of Global Change on Water resources,” UNeSCO report, (http://unesdoc.unesco .org/images/0019/001922/192216e.pdf); K. Kube, “Into the Wild Brown Yonder,” Trains (November 2008), pp. 68–73; “running Dry,” The Economist (august 23, 2008), pp. 53–54. specific parts and supplies. Unfortunately, the common practice of accepting the lowest bid often compromises quality. W. Edwards Deming, a well-known management consultant, strongly recommended sole sourcing as the only manageable way to obtain high supplier quality. Sole sourcing relies on only one supplier for a particular part. Given his concern with designing quality into a product in its early stages of development, Deming argued that the buyer should work closely with the supplier at all stages. This reduces both cost and time spent on product design thus improving 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. The concept of sole sourcing is taken one step further in JIT II, in which vendor sales representatives actually have desks next to the purchasing company’s factory floor, attend production status meetings, visit the R&D lab, and analyze the purchasing company’s CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice sales forecasts. These in-house suppliers then write sales orders for which the purchasing company is billed. Developed by Lance Dixon at Bose Corporation, JIT II is used as a technique that provides a competitive advantage. Sole sourcing reduces transaction costs and builds quality by having the purchaser and supplier work together as partners rather than as adversaries. With sole sourcing, more companies will have longer relationships with fewer suppliers. Research has found that buyer- supplier collaboration and joint problem solving with both parties dependent upon the other results in the development of competitive capabilities, higher quality, lower costs, and better scheduling.27 Sole sourcing does, however, have limitations. If a supplier is unable to deliver a part, the purchaser has no alternative but to delay production. Multiple suppliers can provide the purchaser with better information about new technology and performance capabilities. The limitations of sole sourcing have led to the development of parallel sourcing. In parallel sourcing, two suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other’s parts. If one vendor cannot supply all of its parts on time, the other vendor is asked to make up the difference.28 The Internet has changed the ability of procurement managers to compare and source supplies for their organization. Research indicates that companies using Internet-based technologies are able to lower administrative costs and purchase prices. 29 Sometimes innovations tied to the use of the Internet for one strategy are adopted by other areas. See the Innovation Issue regarding the use and misuse of QR codes. INNOVATION issue WHEN AN INNOvATION FAILS TO LIvE UP TO EXPECTATIONS Sometimes a promising innovation has to find the right application for it to have an impact on strategy formulation. Such has been the fate of QR codes. QR codes, or quick response codes, are those dense, square, grids of black and white that seem to be everywhere. Invented in 1994 by Denso Wave (a subsidiary of toyota Group), the original intent of the little block was to improve the inventory tracking of auto parts. While the Qr code is patented, the company published complete specifications online and allowed anyone to use the codes for free. the codes were adopted by advertisers as a means to improve the connection between a company and its customers. In December 2011, more than 8% of magazine ads contained the codes, up from just over 3% at the beginning of the year. Unfortunately, most companies seem to have little idea how to use the codes to engage the consumer. Most direct the consumer’s cell phone to the corporate Web site, and therein lies much of the issue with using this as a part of a company’s strategy. the Qr code requires the consumer to download an app that reads the codes onto their cell phone and then hold the phone very steady as they take a picture of the code that they want to follow. the codes have found a real value in the movie theater and airline ticket businesses as more people buy their tickets online. the codes are downloaded to a consumer’s Smartphone and scanned as a ticket upon entering the theater or the tSa line. they could also be used to help prevent counterfeit goods, but some companies have put the codes on billboards (virtually impossible to scan), the inside of liquor bottles, and on subway posters (low light prevents the app from working). as of 2015 only 15% of Smart device users knew how to correctly scan a Qr code. In fact, there is no standard Qr scanner app included on smart devices. Not all innovations that businesses can adopt should be adopted. Finding the value and aligning the innovation with the competitive advantages of the business are crucial. Where do you believe Qr codes could be put to their best use? SOUrCeS: I. Nass, “Why did Qr code die despite the smartphone revolution” Dazeinfo, March 20, 2015 (dazeinfo.com/2015/03/20 /why-did-qr-code-die-despite-exploding-adoption-of-smartphone); “Qr Code Fatigue,” Bloomberg Businessweek (July 2, 2012), pp. 28–29; https://www.denso-wave.com/en/; http://www.qrcode .com/en/index.html 260 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 261 LOgISTICS STRATEgY Logistics strategy deals with the flow of products into and out of the manufacturing process. Three trends related to this strategy are evident: centralization, outsourcing, and the use of the Internet. To gain logistical synergies across business units, corporations began centralizing logistics in the headquarters group. This 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. Companies such as Georgia-Pacific, Marriott, and Union Carbide view the logistics function as an important way to differentiate themselves from the competition, to add value, and to reduce costs. In the past few years, a diverse set of firms from around the world have moved quickly on the logistics front pushed by Amazon’s ability to provide same-day service—a logistical feat in business. Most providers cannot match Amazon’s efficiency (a result of a massive investment in logistics) and have still had to create complex systems to match rising customer expectations. Amazon changed the whole game by introducing one-hour delivery in major American cities and even a series of Wi-Fi-connected buttons that allow consumers to simply push to re-order select products. 30 HUMAN RESOURCE MANAgEMENT (HRM) STRATEgY HRM strategy, among many other things, addresses issues that range from whether a company or business unit should hire a large number of low-skilled employees who receive low pay, perform repetitive jobs, and will most likely quit after a short time (the fast-food restaurant strategy) to whether they should hire skilled employees who receive relatively high pay and are cross-trained to participate in self-managing work teams. As work increases in complexity, it becomes more suited for teams, especially in the case of innovative product development efforts. These self-managed work teams are the hallmark of the Silicon Valley startup and have been successfully used in a wide range of industries. 31 Research on large, multinational established companies indicates that the use of work teams leads to increased quality and productivity as well as to higher employee satisfaction and commitment. 32 Companies following a competitive strategy of differentiation through high quality use input from subordinates and peers in performance appraisals to a greater extent than do firms following other business strategies.33 A complete 360-degree appraisal, in which performance input is gathered from multiple sources, is considered to be a standard expectation of good HR management practices.34 Companies are finding that having a diverse workforce is a competitive advantage. Research reveals that firms with a high degree of diversity following a growth strategy have higher productivity than do firms with less racial diversity.35 Avon Company, for example, was able to turn around its unprofitable inner-city markets by putting African-American and Hispanic managers in charge of marketing to these markets.36 Diversity in terms of age and national origin also offers benefits. DuPont’s use of multinational teams has helped the company develop and market products internationally. McDonald’s found that older workers performed as well as, if not better than, younger employees.37 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice INFORMATION TECHNOLOgY STRATEgY Corporations have always used an information technology strategy to provide their business units with competitive advantage. When FedEx first provided its customers with PowerShip computer software to store addresses, print shipping labels, and track package location, its sales jumped significantly. UPS soon followed with its own MaxiShips software. Viewing its information system as a distinctive competency, FedEx continued to push for further advantage over UPS by using its Web site to enable customers to track their packages. FedEx used this competency in its advertisements by showing how customers could track the progress of their shipments. Soon thereafter, UPS provided the same service. Although it can be argued that information technology has now become so pervasive that it no longer offers companies a competitive advantage, Gartner Worldwide reported that in 2015 corporations worldwide spent over US$3.5 trillion annually on information technology with that number forecasted to approach US$4 trillion by 2019.38 Multinational corporations use sophisticated intranets to allow 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.39 The development of instant translation software is also enabling workers to have online communication with co-workers in other countries who use a different language.40 The Sourcing Decision: Location of Functions 8-2. Explain which activities and functions are appropriate to outsource/offshore in order to gain or strengthen competitive advantage For a functional strategy to have the best chance of success, it should be built on a distinctive competency residing within that functional area. If a corporation does not have a distinctive competency in a particular functional area, that functional area could be a candidate for outsourcing. Outsourcing is purchasing a product or service externally that had been previously provided internally. Thus, it is the reverse of vertical integration. Outsourcing is becoming an increasingly important part of the strategic decision-making discussion. There are many pros and cons to outsourcing with managers increasingly focusing on nonstrategically critical parts of the business as categories for outsourcing. However, there are specific examples in which companies have outsourced as a means of increasing efficiency and in some cases quality. Boeing used outsourcing as a way to reduce the cost of designing and manufacturing its new 787 Dreamliner. Up to 70% of the plane was outsourced. In a break from past practice, suppliers make large parts of the fuse- lage, including plumbing, electrical, and computer systems, and ship them to Seattle for assembly by Boeing.41 According to the latest bi-annual survey by Deloitte Consulting, 53% of the companies surveyed outsourced some elements of their IT function. Interestingly, 16% outsource their HR function with 22% of those who do not currently outsource HR planning to do so in the near future. The top factors in a successful outsourc- ing relationship seemed to be a spirit of partnership, a well-designed agreement, joint governance, and consistent communication.42 Offshoring is the outsourcing of an activity or a function to a wholly owned company or an independent provider in another country. Offshoring is a simple reality of business operations that has been supported by advances in information and communication technologies, the development of stable, secure, and high-speed data transmission systems, and logistical advances like 262 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 263 containerized shipping. In 2016, 53% of U.S. manufacturing companies outsource with offshore operations. The leading countries are India, Indonesia, China, Bulgaria, and the Philippines.43 These countries have low-cost qualified labor and an educated workforce. The pay gap can be so dramatic that it overwhelms almost all other considerations. Consider that a Mexican assembly line worker earns an average of US$4.00 to US$5.00 an hour plus benefits compared to US$28 an hour plus benefits for the top paid Detroit worker and still substantially less than the lowest paid U.S. auto plant worker who earns US$15 to US$20 an hour plus benefits.44 Software programming and customer service, in particular, are being outsourced to India. For example, General Electric’s back-office services unit, GE Capital International Services which was spun off into a new company called Genpact, is one of the oldest and biggest of India’s outsourcing companies. From only US$26 million in 1999, its annual revenues grew to over US$2.5 billion by 2016.45 As part of this trend, IBM acquired Daksh eServices Ltd., one of India’s biggest suppliers of remote business services.46 Outsourcing, including offshoring, has significant disadvantages as well. For example, mounting complaints forced Dell Computer to stop routing corporate customers to a technical support call center in Bangalore, India.47 GE’s introduction of a new washing machine was delayed three weeks because of production problems at a supplier’s company to which it had contracted out key work. Some companies have found themselves locked into long-term contracts with outside suppliers that are no longer competitive. 48 Some authorities propose that the cumulative effects of continued outsourcing steadily reduces a firm’s ability to learn new skills and to develop new core competencies.49 One survey of 129 outsourcing firms revealed that half the outsourcing projects undertaken in one year failed to deliver anticipated savings. This is in agreement with a survey by Bain & Company in which 51% of large North American, European, and Asian firms stated that outsourcing (including offshoring) did not meet their expectations. 50 Another survey of software projects, by MIT, found that the median Indian project had 10% more software bugs than did comparable U.S. projects. 51 A study of 91 outsourcing efforts conducted by European and North American firms found seven major errors that should be avoided: 1. Outsourcing activities that should not be outsourced: Companies failed to keep core activities in-house. 2. Selecting the wrong vendor: Vendors were not trustworthy or lacked state-of-theart processes. 3. Writing a poor contract: Companies failed to establish a balance of power in the relationship. 4. Overlooking personnel issues: Employees lost commitment to the firm. 5. Losing control over the outsourced activity: Qualified managers failed to manage the outsourced activity.52 6. Overlooking the hidden costs of outsourcing: Transaction costs overwhelmed other savings. 7. Failing to plan an exit strategy: Companies failed to build reversibility clauses into the contract.53 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 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice the road to eventual decline. This is supported by research reporting that companies that have more experience with a particular manufacturing technology tend to keep manufacturing in-house.54 J. P. Morgan Chase & Company terminated a seven-year technology outsourcing agreement with IBM because the bank’s management realized that information technology (IT) was too important strategically to be outsourced.55 In determining functional strategy, the strategist must: ■ Identify the company’s or business unit’s core competencies. ■ Ensure that the competencies are continually being strengthened. ■ Manage the competencies in such a way that best preserves the competitive advantage they create. An outsourcing decision depends on the fraction of total value added that the activity under consideration represents and on the amount of potential competitive advantage in that activity for the company or business unit. See the outsourcing matrix in FIGURE 8–1. A firm should consider outsourcing any activity or function that has low potential for competitive advantage. If that activity constitutes only a small part of the total value of the firm’s products or services, it could 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 (i.e., taper vertical integration) if that activity has the potential for providing the company some competitive advantage. However, full vertical integration should be considered only when that activity or function adds significant value to the company’s products or services in addition to providing competitive advantage.56 FIGURE 8–1 Activity’s Total Value-Added to Firm’s Products and Services Proposed Outsourcing Matrix Activity’ s Potential for Competitive Advantage Low High Low High Taper Vertical Integration: Full Vertical Integration: Produce Some Internally Produce All Internally Outsource Completely: Buy on Open Market Outsource Completely: Purchase with Long-Term Contracts SOURCE: J. D. Hunger and T. L. Wheelen, “Proposed Outsourcing Matrix.” Copyright © 1996 and 2005 by Wheelen and Hunger Associates. Reprinted by permission. 264 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 265 Strategies To Avoid 8-3. List and explain the 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 that should be avoided: ■ Follow the leader: Imitating a leading competitor’s strategy might seem to be a good idea, but it ignores a firm’s particular competitive advantages and the possibility that the leader may be wrong. Fujitsu Ltd., the world’s second-largest computer maker, had been driven since the 1960s by the sole ambition of catching up to IBM. Like IBM at the time, Fujitsu competed primarily as a mainframe computer maker. So devoted was it to catching IBM, however, that it failed to notice that the mainframe business had reached maturity by 1990 and was no longer growing. ■ 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. As in betting on long shots in horse races, the probability of finding a second winner is slight. Polaroid spent a lot of money developing an “instant” movie camera, but the public ignored it in favor of the camcorder. ■ 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 increases in advertising, promotion, R&D, and manufacturing costs. Since the U.S. deregulation of airlines, price wars and rate specials have contributed to the bankruptcies of many major airlines, such as Eastern, Pan American, TWA, and the consolidation of virtually every major airline into just four major players. ■ Do everything: When faced with several interesting opportunities, management might tend to leap at all of them. At first, a corporation might have enough resources to develop each idea into a project, but money, time, and energy are soon exhausted as the many projects demand large infusions of resources. Yahoo! went on an acquisition spree for years under CEO Marissa Mayer spending more than US$1 billion for one acquisition alone. Searching for something that would provide growth for the company, the company invested in a wide swath of companies involved in mobile, search, and content. All failed to provide the company with any real growth.57 ■ Losing hand: A corporation might have invested so much in a particular strategy that top management is unwilling to accept its failure. Believing that it has too much invested to quit, management may continue to “throw good money after bad.” RIM’s BlackBerry phone was the undisputed leader in Smartphone technology and acceptance. They were so focused on their approach to how users needed to access information that they missed seeing how the new entrants in the industry had changed the industry. By the time they accepted that a change had really occurred, they were so far behind that catching up was virtually impossible. Strategic Choice: Constructing Scenarios 8-4. Construct corporate scenarios to evaluate strategic options 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? An important consideration in the selection of a strategy is the ability of each alternative to satisfy agreed-upon objectives with the least resources and the fewest negative CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice side effects. The competitive advantages developed earlier using the VRIO framework is an excellent place to start. It is, therefore, important to develop a tentative implementation plan in order to address the difficulties that management is likely to face. This should be done in light of societal trends, the industry, and the company’s situation based on the construction of scenarios. CONSTRUCTINg CORPORATE SCENARIOS Corporate scenarios are pro forma (estimated future) balance sheets and income statements that forecast the effect each alternative strategy and its various programs will likely have on division and corporate return on investment. (Pro forma financial statements are discussed in Chapter 12.) The recommended scenarios are simply extensions of the industry scenarios discussed in Chapter 4. If, for example, industry scenarios suggest the probable emergence of a strong market demand in a specific country for certain products, a series of alternative strategy scenarios can be developed. The alternative of acquiring another firm having these products in that country can be compared with the alternative of a green-field development (e.g., building new operations in that country). Using three sets of estimated sales figures (optimistic, pessimistic, and most likely) for the new products over the next five years, the two alternatives can be evaluated in terms of their effect on future company performance as reflected in the company’s probable future financial statements. Pro forma balance sheets and income statements can be generated with spreadsheet software, such as Excel, on a personal computer. Pro forma statements are based on financial and economic scenarios. To construct a corporate scenario, follow these steps: 1. Use industry scenarios (as discussed in Chapter 4) to develop a set of assumptions about the task environment (in the specific country under consideration). For example, 3M requires the general manager of each business unit to describe annually what his or her industry will look like in 15 years. List optimistic, pessimistic, and most likely assumptions for key economic factors such as the GDP (Gross Domestic Product), CPI (consumer price index), and prime interest rate and for other key external strategic factors such as governmental regulation and industry trends. This should be done for every country/region in which the corporation has significant operations that will be affected by each strategic alternative. These same underlying assumptions should be listed for each of the alternative scenarios to be developed. 2. Develop common-size financial statements (as discussed in Chapter 12) for the company’s or business unit’s previous years to serve as the basis for the trend analysis projections of pro forma financial statements. Use the Scenario Box form shown in TABLE 8–1: a. Use the historical common-size percentages to estimate the level of revenues, expenses, and other categories in estimated pro forma statements for future years. b. Develop for each strategic alternative a set of optimistic (O), pessimistic (P), and most likely (ML) assumptions about the impact of key variables on the company’s future financial statements. c. Forecast three sets of sales and cost of goods sold figures for at least five years into the future. d. Analyze historical data and make adjustments based on the environmental assumptions listed earlier. Do the same for other figures that can vary significantly. e. Assume for other figures that they will continue in their historical relationship to sales or some other key determining factor. Plug in expected inventory levels, 266 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 267 Scenario Box for Use in generating Financial Pro Forma Statements Projections1 Factor Last Year Historical Average Trend Analysis 200– O P 200– ML O P 200– ML O P ML Comments GDP CPI Other Sales units Dollars COGS Advertising and marketing Interest expense Plant expansion Dividends Net profits EPS ROI ROE Other NOTE 1: O = Optimistic; P = Pessimistic; ML = Most Likely. SOURCE: T. L. Wheelen and J. D. Hunger. Copyright © 1987, 1988, 1989, 1990, 1992, 2005, and 2009 by T. L. Wheelen. Copyright © 1993 and 2005 by Wheelen and Hunger Associates. Reprinted with permission. accounts receivable, accounts payable, R&D expenses, advertising and promotion expenses, capital expenditures, and debt payments (assuming that debt is used to finance the strategy), among others. f. Consider not only historical trends but also programs that might be needed to implement each alternative strategy (such as building a new manufacturing facility or expanding the sales force). 3. Construct detailed pro forma financial statements for each strategic alternative: a. List the actual figures from this year’s financial statements in the left column of the spreadsheet. b. List to the right of this column the optimistic figures for years 1 through 5. c. Go through this same process with the same strategic alternative, but now list the pessimistic figures for the next five years. d. Do the same with the most likely figures. e. Develop a similar set of optimistic (O), pessimistic (P), and most likely (ML) pro forma statements for the second strategic alternative. This process generates six different pro forma scenarios reflecting three different situations (O, P, and ML) for two strategic alternatives. f. Calculate financial ratios and common-size income statements and create balance sheets to accompany the pro forma statements. CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice g. Compare the assumptions underlying the scenarios with the financial statements and ratios to determine the feasibility of the scenarios. For example, if cost of goods sold drops from 70% to 50% of total sales revenue in the pro forma income statements, this drop should result from a change in the production process or a shift to cheaper raw materials or labor costs rather than from a failure to keep the cost of goods sold in its usual percentage relationship to sales revenue when the predicted statement was developed. The result of this detailed scenario construction should be anticipated net profits, cash flow, and net working capital for each of three versions of the two alternatives for five years into the future. A strategist might want to go further into the future if the strategy is expected to have a major impact on the company’s financial statements beyond five years. The result of this work should provide sufficient information on which forecasts of the likely feasibility and probable profitability of each of the strategic alternatives could be based. Obviously, these scenarios can quickly become very complicated, especially if three sets of acquisition prices and development costs are calculated. Nevertheless, this sort of detailed what-if analysis is needed to realistically compare the projected outcome of each reasonable alternative strategy and its attendant programs, budgets, and procedures. Regardless of the quantifiable pros and cons of each alternative, the actual decision will probably be influenced by several subjective factors such as those described in the following sections. Management’s Attitude Toward Risk The attractiveness of a particular strategic alternative is partially a function of the amount of risk it entails. Risk is composed not only of the probability that the strategy will be effective but also of the amount of assets the corporation must allocate to that strategy and the length of time the assets will be unavailable for other uses. Because of variation among countries in terms of customs, regulations, and resources, companies operating in global industries must deal with a greater amount of risk than firms operating only in one country.58 The greater the assets involved and the longer they are committed, the more likely top management is to demand a high probability of success. Managers with no ownership position in a company are unlikely to have much interest in putting their jobs in danger with risky decisions. Research indicates that managers who own a significant amount of stock in their firms are more likely to engage in risktaking actions than are managers with no stock.59 A high level of risk was why Intel’s board of directors found it difficult to vote for a proposal in the early 1990s to commit US$5 billion to making the Pentium microprocessor chip—five times the amount of money needed for its previous chip. In looking back on that board meeting, then-CEO Andy Grove remarked, “I remember people’s eyes looking at that chart and getting big. I wasn’t even sure I believed those numbers at the time.” The proposal committed the company to building new factories—something Intel had been reluctant to do. A wrong decision would mean that the company would end up with a killing amount of overcapacity. Based on Grove’s presentation, the board decided to take the gamble. Intel’s resulting manufacturing expansion eventually cost US$10 billion but resulted in Intel’s obtaining 75% of the microprocessor business and huge cash profits.60 Risk might be one reason that significant innovations occur more often in small firms than in large, established corporations. A small firm managed by an entrepreneur is often willing to accept greater risk than is a large firm of diversified ownership run by professional managers.61 It is one thing to take a chance if you are the primary shareholder and are not concerned with periodic changes in the value of the company’s common stock. It is something else if the corporation’s stock is widely held and acquisition-hungry 268 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 269 competitors or takeover artists surround the company like sharks every time the company’s stock price falls below some external assessment of the firm’s value. Another approach to evaluating alternatives under conditions of high environmental uncertainty is to use the real-options theory. According to the real-options approach, when the future is highly uncertain, it pays to have a broad range of options open. This is in contrast to using net present value (NPV) to calculate the value of a project by predicting its payouts, adjusting them for risk, and subtracting the amount invested. By boiling everything down to one scenario, NPV doesn’t provide any flexibility in case circumstances change. NPV is also difficult to apply to projects in which the potential payoffs are currently unknown. The real-options approach, however, deals with these issues by breaking the investment into stages. Management allocates a small amount of funding to initiate multiple projects, monitors their development, and then cancels the projects that aren’t successful and funds those that are doing well.62 This approach is very similar to the way venture capitalists fund an entrepreneurial venture in stages of funding based on the venture’s performance. Research indicates that the use of the real-options approach does improve organizational performance. 63 Some of the corporations using the real-options approach are Chevron for bidding on petroleum reserves, Airbus for calculating the costs of airlines changing their orders at the last minute, and the Tennessee Valley Authority for outsourcing electricity generation instead of building its own plant. There is an international conference on Real Options, but because of its complexity, the real-options approach is probably not worthwhile for minor decisions or for projects requiring a full commitment at the beginning.64 Pressures from Stakeholders The attractiveness of a strategic alternative is affected by its perceived compatibility with the key stakeholders in a corporation’s task environment. Creditors want to be paid on time. Unions exert pressure for comparable wage and employment security. Governments and interest groups demand social responsibility. Shareholders want dividends. All these pressures must be given some consideration in the selection of the best alternative. Stakeholders can be categorized in terms of their (1) interest in the corporation’s activities and (2) relative power to influence the corporation’s activities. As shown in Figure 8–2, each stakeholder group can be shown graphically based on its level of interest (from low to high) in a corporation’s activities and on its relative power (from low to high) to influence a corporation’s activities. Strategic managers should ask four questions to assess the importance of stakeholder concerns in a particular decision: 1. How will this decision affect each stakeholder, especially those given high and medium priority? 2. How much of what each stakeholder wants is he or she likely to get under this alternative? 3. What are the stakeholders likely to do if they don’t get what they want? 4. What is the probability that they will do it? Strategy makers should choose strategic alternatives that minimize external pressures and maximize the probability of gaining stakeholder support. Managers may, however, ignore or take some stakeholders for granted—leading to serious problems later. The Tata Group, for example, failed to consider the unwillingness of farmers in Singur, India, to accept the West Bengal government’s compensation for expropriating their land so that Tata could build its Nano auto plant. Farmers formed rallies against the plant, blocked roads, and even assaulted an employee of a Tata supplier.65 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice FIGURE 8–2 High Stakeholder Interest in Corporate Activities Stakeholder Priority Matrix Creditors Shareholders Local Customers Greenpeace Federal Low Low High Relative Power of Stakeholder SOURCE: Suggested by C. Anderson in “Values-Based Management,” Academy of Management Executive (November 1997), pp. 25–46. Top management can also propose a political strategy to influence its key stakeholders. A political strategy is a plan to bring stakeholders into agreement with a corporation’s actions. Some of the most commonly used political strategies are constituency building, political action committee contributions, advocacy advertising, lobbying, and coalition building. Research reveals that large firms, those operating in concentrated industries, and firms that are highly dependent upon government regulation are more politically active.66 Political support can be critical in entering a new international market, especially in transition economies where free market competition did not previously exist.67 Pressures from the Corporate Culture If a strategy is incompatible with a company’s corporate culture, the likelihood of its success is very low. Foot-dragging and even sabotage will result as employees fight to resist a radical change in corporate philosophy. Precedents from the past tend to restrict the kinds of objectives and strategies that are seriously considered.68 The “aura” of the founders of a corporation can linger long past their lifetimes because their values are imprinted on a corporation’s members. In evaluating a strategic alternative, strategy makers must consider pressures from the corporate culture and assess a strategy’s compatibility with that culture. If there is little fit, management must decide if it should: ■ Take a chance on ignoring the culture. ■ Manage around the culture and change the implementation plan. ■ Try to change the culture to fit the strategy. ■ Change the strategy to fit the culture. Further, a decision to proceed with a particular strategy without a commitment to change the culture or manage around the culture (both very tricky and time consuming) is dangerous. Nevertheless, restricting a corporation to only those strategies that are completely compatible with its culture might eliminate from consideration the most 270 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 271 profitable alternatives. (See Chapter 10 for more information on managing corporate culture.) Needs and Desires of Key Managers Even the most attractive alternative might not be selected if it is contrary to the needs and desires of important top managers. Personal characteristics and experience affect a person’s assessment of an alternative’s attractiveness.69 For example, one study found that narcissistic (self-absorbed and arrogant) CEOs favor bold actions that attract attention, like many large acquisitions—resulting in either big wins or big losses.70 A person’s ego may be tied to a particular proposal to the extent that all other alternatives are strongly lobbied against. As a result, the person may have unfavorable forecasts altered so that they are more in agreement with the desired alternative. 71 In a study by McKinsey & Company of over 2500 executives from around the world, 36% responded that managers hide, restrict, or misrepresent information at least “somewhat” frequently when submitting capital-investment proposals. In addition, an executive might influence other people in top management to favor a particular alternative so that objections to it are overruled. In the same McKinsey study of global executives, more than 60% of the managers reported that business unit and divisional heads form alliances with peers or lobby someone more senior in the organization at least “somewhat” frequently when resource allocation decisions are being made.72 Industry and cultural backgrounds affect strategic choice. For example, executives with strong ties within an industry tend to choose strategies commonly used in that industry. Other executives who have come to the firm from another industry and have strong ties outside the industry tend to choose different strategies from what is being currently used in their industry.73 Country of origin often affects preferences. For example, Japanese managers prefer a cost-leadership strategy more than do United States managers.74 Research reveals that executives from Korea, the United States, Japan, and Germany tend to make different strategic choices in similar situations because they use different decision criteria and weights. For example, Korean executives emphasize industry attractiveness, sales, and market share in their decisions, whereas U.S. executives emphasize projected demand, discounted cash flow, and ROI.75 There is a tendency to maintain the status quo, which means that decision makers continue with existing goals and plans beyond the point when an objective observer would recommend a change in course.76 Some executives show a self-serving tendency to attribute the firm’s problems not to their own poor decisions but to environmental events out of their control, such as government policies or a poor economic climate.77 For example, a CEO is more likely to divest a poorly performing unit when its poor performance does not incriminate that same CEO who had acquired it.78 Negative information about a particular course of action to which a person is committed may be ignored because of a desire to appear competent or because of strongly held values regarding consistency. It may take a crisis or an unlikely event to cause strategic decision makers to seriously consider an alternative they had previously ignored or discounted.79 It wasn’t until the CEO of ConAgra, a multinational food products company, had a heart attack that ConAgra started producing the Healthy Choice line of low-fat, low-cholesterol, low-sodium frozen-food entrees. THE PROCESS OF STRATEgIC CHOICE Strategic choice is the evaluation of alternative strategies and selection of the best alternative. According to Paul Nutt, an authority in decision making, half of the decisions made by managers are failures.80 After analyzing 400 decisions, Nutt found that failure CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice almost always stems from the actions of the decision maker, not from bad luck or situational limitations. In these instances, managers commit one or more key blunders: (1) their desire for speedy actions leads to a rush to judgment, (2) they apply failureprone decision-making practices such as adopting the claim of an influential stakeholder, and (3) they make poor use of resources by investigating only one or two options. These three blunders cause executives to limit their search for feasible alternatives and look for a quick consensus. Only 4% of the 400 managers set an objective and considered several alternatives. The search for innovative options was attempted in only 24% of the decisions studied.81 Another study of 68 divestiture decisions found a strong tendency for managers to rely heavily on past experience when developing strategic alternatives.82 There is mounting evidence that when an organization is facing a dynamic environment, the best strategic decisions are not arrived at through consensus when everyone agrees on one alternative. They actually involve a certain amount of heated disagreement, and even conflict.83 Many diverse opinions are presented, participants trust in one another’s abilities and competencies, and conflict is task-oriented, not personal.84 This is certainly the case for firms operating in global industries. Because unmanaged conflict often carries a high emotional cost, authorities in decision making propose that strategic managers use “programmed conflict” to raise different opinions, regardless of the personal feelings of the people involved.85 Two techniques help strategic managers avoid the consensus trap that Alfred Sloan found: 1. Devil’s advocate: The idea of the devil’s advocate originated in the medieval Roman Catholic Church as a way of ensuring that impostors were not canonized as saints. One trusted person was selected to find and present all the reasons why a person should not be canonized. When this process is applied to strategic decision making, a devil’s advocate (who may be an individual or a group) is assigned to identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation. 2. Dialectical inquiry: The dialectical philosophy, which can be traced back to Plato and Aristotle and more recently to Hegel, involves combining two conflicting views— the thesis and the antithesis—into a synthesis. When applied to strategic decision making, dialectical inquiry requires that two proposals using different assumptions be generated for each alternative strategy under consideration. After advocates of each position present and debate the merits of their arguments before key decision makers, either one of the alternatives or a new compromise alternative is selected as the strategy to be implemented. Research generally supports the conclusion that the devil’s advocate and dialectical inquiry methods are equally superior to consensus in decision making, especially when the firm’s environment is dynamic. The debate itself, rather than its particular format, appears to improve the quality of decisions by formalizing and legitimizing constructive conflict and by encouraging critical evaluation. Both lead to better assumptions and recommendations and to a higher level of critical thinking among the people involved.86 Regardless of the process used to generate strategic alternatives, each resulting alternative must be rigorously evaluated in terms of its ability to meet four criteria: 1. Mutual exclusivity: Doing any one alternative would preclude doing any other. 2. Success: It must be feasible and have a good probability of success. 3. Completeness: It must take into account all the key strategic issues. 4. Internal consistency: It must make sense on its own as a strategic decision for the entire firm and not contradict key goals, policies, and strategies currently being pursued by the firm or its units.87 272 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 273 USINg POLICIES TO gUIDE STRATEgIC CHOICES The selection of the best strategic alternative is not the end of strategy formulation. The organization must then engage in developing policies. Policies define the broad guidelines for implementation. Flowing from the selected strategy, policies provide guidance for decision making and actions throughout the organization. They are the principles under which the corporation operates on a day-to-day basis. At General Electric, for example, Chairman Jack Welch initiated the policy that any GE business unit must be number one or number two in whatever market it competes. This policy gave clear guidance to managers throughout the organization. When crafted correctly, an effective policy accomplishes three things: ■ It forces trade-offs between competing resource demands. ■ It tests the strategic soundness of a particular action. ■ It sets clear boundaries within which employees must operate, while granting them the freedom to experiment within those constraints.88 Policies tend to be rather long lived and can even outlast the particular strategy that created them. These general policies—such as “The customer is always right” (Nordstrom) or “Always Low Prices” (Wal-Mart)—can become, in time, part of a corporation’s culture. Such policies can make the implementation of specific strategies easier. They can also restrict top management’s strategic options in the future. Thus, a change in strategy should be followed quickly by a change in policies. Managing policy is one way to manage the corporate culture. End of Chapter SUMMarY This chapter completes the part of this book on strategy formulation and sets the stage for strategy implementation. Functional strategies must be formulated to support business and corporate strategies; otherwise, the company will move in multiple directions and eventually pull itself apart. For a functional strategy to have the best chance of success, it should be built on a distinctive competency residing within that functional area. If a corporation does not have a distinctive competency in a particular functional area, that functional area could be a candidate for outsourcing. When evaluating a strategic alternative, the most important criterion is the ability of the proposed strategy to deal with the competitive advantages of the organization. If the alternative doesn’t take advantage of environmental opportunities and corporate advantages, it will probably fail. Developing corporate scenarios and pro forma projections for each alternative are rational aids for strategic decision making. This logical approach fits Mintzberg’s planning mode of strategic decision making, as discussed earlier in Chapter 1. Nevertheless, some strategic decisions are inherently risky and are often resolved on the basis of one person’s “gut feel.” This is an aspect of the entrepreneurial mode and is seen in large established corporations as well as in new venture startups. Various management studies have found that executives routinely rely on their intuition to solve complex problems. The effective use of intuition has been found to differentiate successful top executives and board members from lower-level managers and dysfunctional boards.89 According to Ralph Larsen, former Chair and CEO of Johnson & Johnson, “Often there is absolutely no way that you could have the time to thoroughly analyze every one of the options or alternatives available to you. CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice So you have to rely on your business judgment.”90 For managerial intuition to be effective, however, it requires years of experience in problem solving and is founded upon a complete understanding of the details of the business.91 When Bob Lutz, then President of Chrysler Corporation, was enjoying a fast drive in his Cobra roadster one weekend in 1988, he wondered why Chrysler’s cars were so dull. “I felt guilty: there I was, the president of Chrysler, driving this great car that had such a strong Ford association,” said Lutz, referring to the original Cobra’s Ford V-8 engine. That Monday, Lutz enlisted allies at Chrysler to develop a muscular, outrageous sports car that would turn heads and stop traffic. Others in management argued that the US$80 million investment would be better spent elsewhere. The sales force warned that no U.S. auto maker had ever succeeded in selling a US$50,000 car. With only his gut instincts to support him, he pushed the project forward with unwavering commitment. The result was the Dodge Viper—a car that single-handedly changed the public’s perception of Chrysler. Years later, Lutz had trouble describing exactly how he had made this critical decision. “It was this subconscious, visceral feeling. And it just felt right,” explained Lutz.92 Pearson MyLab Management® Go to mymanagementlab.com to complete the problems marked with this icon . K e Y t e r MS consensus (p. 272) corporate scenarios (p. 266) devil’s advocate (p. 272) dialectical inquiry (p. 272) financial strategy (p. 254) functional strategy (p. 252) HRM strategy (p. 261) information technology strategy (p. 262) leveraged buyout (p. 254) logistics strategy (p. 261) market development (p. 252) marketing strategy (p. 252) offshoring (p. 262) operations strategy (p. 256) outsourcing (p. 262) political strategy (p. 270) product development (p. 253) purchasing strategy (p. 258) R&D strategy (p. 255) real options (p. 269) risk (p. 268) strategic choice (p. 271) technological follower (p. 255) technological leader (p. 255) Pearson MyLab Management® Go to mymanagmentlab.com for the following Assisted-graded writing questions: 8-1. How can an operations strategy be used to understand and exploit a particular product offering? 8-2. How are corporate scenarios used in the development of an effective strategy? DIS C US S ION Q UeStI O NS 8-3. Explain how functional strategies can support an organization’s corporate strategy. 8-5. Explain the new real-options approach used in conditions of high environmental uncertainty. 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? 8-6. Identify the common signs that indicate an outsourcing strategy is not executed effectively. 8-7. How does a business evaluate its strategic choices? 274 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 275 StrateGIC praCtICe eXerCISe The political situation in Lebanon always seems to be changing. At times, like the saying goes, political calm only precedes chaos. At others, this political calm truly stabilizes the economy and growth follows. Encouraging news about the potential formation of a new government, at one point, pushed the Beirut Stock Exchange (BSE) higher with Solidere A and B shares having gained 7.87 percent and 6.18 percent, respectively. Investors, whether local or foreign, seemed optimistic. The beneficial impact of this rise led to more sales: the trade of Solidere A was 86,111 while Solidere B was 24,060. The total number of shares traded that day was307,667 with a trading value of $4.47 million, meaning that the stock capitalization of the listed companies increased by 1.30 percent to reach $10.848 billion rather than the $10.707 billion for the previous session. Despite the increase in trades on the BSE following the news, the volume remained relatively low compared to historic levels. Trade was local; it was not foreign. Foreign investors who normally do not buy less than 50,000 shares are rarely found on the Beirut Stock Exchange. It is their capital that is acutely needed in Lebanon today! 1. What is the problem Solidere faces? 2. Should Solidere adopt a marketing strategy? Why? Why not? 3. 3. If you were part of the decision-making team in Solidere, which functional level strategy would you adopt to improve the position of Solidere? SOURCE: Dana Halawi, “Hope for cabinet lift Solidere Shares,” The Daily Star (January 15, 2014), p. 5. NOteS 1. S. F. Slater and E. M. Olson, “Market’s Contribution to the Implementation of Business Strategy: An Empirical Analysis,” Strategic Management Journal (November 2001), pp. 1055–1067; B. C. Skaggs and T. R. Huffman, “A Customer Interaction Approach to Strategy and Production Complexity Alignment in Service Firms,” Academy of Management Journal (December 2003), pp. 775–786. 2. A. Pressman, “Ocean Spray’s Creative Juices,” BusinessWeek (May 15, 2006), pp. 88–89; http://www.oceanspray .com/Products.aspx 3. A. Pressman, “Smith & Wesson: A Gunmaker Loaded with Offshoots,” BusinessWeek (June 4, 2007), p. 66. A line extension, in contrast to brand extension, is the introduction of additional items in the same category under the same brand name, such as new flavors, added ingredients, or package sizes. 4. S. M. Oster, Modern Competitive Analysis, 2nd ed. (New York: Oxford University Press, 1994), p. 93. 5. J. M. de Figueiredo and M. K. Kyle, “Surviving the Gales of Creative Destruction: The Determinants of Product Turnover,” Strategic Management Journal (March 2006), pp. 241–264. 6. J. Gruley and S. D. Singh, “Deere’s Big Green Profit Machine,” Bloomberg Businessweek (July 5, 2012), (http://www.businessweek.com/articles/2012 -07-05/ 7. 8. 9. 10. 11. 12. deeres-big-green-profit-machine); M. Springer, “Plowed Under,” Forbes (February 21, 2000), p. 56. W. Redmond, “The Strategic Pricing of Innovative Products,” Handbook of Business Strategy, 1992/1993 Yearbook, edited by H. E. Glass and M. A. Hovde (Boston: Warren, Gorham & Lamont, 1992), pp. 16.1–16.13; A. Hinterhuber, “Towards Value-Based Pricing—An Integrative Framework for Decision Making,” Industrial Marketing Management (Vol. 33, 2004), pp. 765–778. A. Kambil, H. J. Wilson III, and V. Agrawal, “Are You Leaving Money on the Table?” Journal of Business Strategy (January/February 2002), pp. 40–43. J.C. Owens, “Apple isn’t really sitting on $216 billion in cash,” MarketWatch, January 27, 2016 (http://www .marketwatch.com/story/apple-isnt-really-sitting-on-216 -billion-in-cash-2016-01-26). A. Safieddine and S. Titman in April 1999 Journal of Finance, as summarized by D. Champion, “The Joy of Leverage,” Harvard Business Review (July–August 1999), pp. 19–22. R. Kochhar and M. A. Hitt, “Linking Corporate Strategy to Capital Structure: Diversification Strategy, Type and Source of Financing,” Strategic Management Journal (June 1998), pp. 601–610. O. Oran, G. Roumeliotis, and K. Haunss, “Goldman fills vacuum in leveraged buyout market with $8 billion CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. fund), Reuters, January 8, 2016 (http://www.reuters.com / article/ us- goldmansachs- mezzaninefund- id USK BN0UM0G320160108). “Private Investigations,” The Economist (July 5, 2008), pp. 84–85. D. Angwin and I. Contardo, “Unleashing Cerberus: Don’t Let Your MBOs Turn on Themselves,” Long Range Planning (October 1999), pp. 494–504. For information on different types of LBOs, see M. Wright, R. E. Hoskisson, and L. W. Busenitz, “Firm Rebirth: Buyouts as Facilitators of Strategic Growth and Entrepreneurship,” Academy of Management Executive (February 2001), pp. 111–125. B. Nichols, “Why Stock Buybacks Will Be Stronger Than Ever in 2016 (SPY, AAPL, NKE),” InvestorPlace, January 6, 2016 (http://investorplace.com/2016/01/stock-buybacks -will-stronger-ever-2016-spy-aapl-nke/#.VtDIJ4-cGP8); D. N. Hurtt, J. G. Kreuze, and S. A. Langsam, “Stock Buybacks and Their Association with Stock Options Exercised in the IT Industry,” American Journal of Business (Spring 2008), pp. 13–21. B. Deener, “Back Up and Look at Reasons for Reverse Stock Split,” The (St. Petersburg, FL) Times (December 29, 2002), p. 3H. H. Wee, “Patent trolls target US businesses, consumers ultimately foot the bill,” CNBC, March 31, 2014 (http:// www.cnbc.com/2014/03/31/); T. Francis, “Can You Get a Patent on Being a Patent Troll?” NPR, August 2, 2012. (http://www.npr.org/blogs/money/2012/08/01/157743897 /can-you-get-a-patent-on-being-a-patent-troll); M. Orey, “A Sotheby’s for Investors,” BusinessWeek (February 13, 2006), p. 39. L-E. Gadde and H. Hakansson, “Teaching in Supplier Networks,” in M. Gibbert and T. Durand (Eds.), Strategic Networks: Learning to Compete (Malden, MA: Blackwell Publishing, 2007), pp. 40–57. D. Resnick, ”Transparency is Key to Open Innovation,” R&D Magazine, February 26, 2016 (http://www.rdmag .com/articles/2016/02/transparency-key-open-innovation). “Schools Rent Out Labs to Businesses,” St. Cloud (MN) Times (December 11, 2007), p. 3A. J. Bughin, M. Chui, and B. Johnson, “The Next Step in Open Innovation,” McKinsey Quarterly (June 2008), pp. 1–8. L. Coleman-Lochner and C. Hymowitz, “At P&G, the Innovation Well Runs Dry,” Bloomberg Businessweek (September 10, 2012), pp. 24–26; J. Greene, J. Carey, M. Arndt, and O. Port, “Reinventing Corporate R&D,” BusinessWeek (September 22, 2003), pp. 74–76; J. Birkinshaw, S. Crainer, and M. Mol, “From R&D to Connect + Develop at P&G,” Business Strategy Review (Spring 2007), pp. 66–69; L. Huston and N. Sakkab, “Connect and Develop: Inside Proctor & Gamble’s New Model for Innovation,” Harvard Business Review (March 2006), pp. 58–66. G. Dushnitsky and M. J. Lenox, “When Do Firms Undertake R&D by Investing in New Ventures?” Paper presented to the annual meeting of the Academy of Management, Seattle, WA (August 2003). J. R. Williams and R. S. Novak, “Aligning CIM Strategies to Different Markets,” Long Range Planning (February 1990), pp. 126–135. 26. B. Levisohn, “Morgan Stanley: General Motors Didn’t Warn So We’ll Do It For Them,” Barrons, October 7, 2014 (http://blogs.barrons.com/stockstowatchtoday/2014/10/07 /morgan-stanley-general-motors-didnt-warn-so-well-do-it -for-them/). 27. M. Hoegl and S. M. Wagner, “Buyer-Supplier Collaboration in Product Development Projects,” Journal of Management (August 2005), pp. 530–548; B. McEvily and A. Marcus, “Embedded Ties and the Acquisition of Competitive Capabilities,” Strategic Management Journal (November 2005), pp. 1033–1055; R. Gulati and M. Sytch, “Dependence Asymmetry and Joint Dependence in Interorganizational Relationships: Effects of Embeddedness on a Manufacturer’s Performance in Procurement Relationships,” Administrative Science Quarterly (March 2007), pp. 32–69. 28. J. Richardson, “Parallel Sourcing and Supplier Performance in the Japanese Automobile Industry,” Strategic Management Journal (July 1993), pp. 339–350. 29. D. H. Pearcy, D. B. Parker, and L. C. Giunipero, “Using Electronic Procurement to Facilitate Supply Chain Integration: An Exploratory Study of U.S.-Based Firms,” American Journal of Business (Spring 2008), pp. 23–35. 30. M. Lierow, “Amazon Is Using Logistics To Lead A Retail Revolution,” Forbes, February 18, 2016 (http://www.forbes .com/sites/oliverwyman/2016/02/18/amazon-is-using -logistics-to-lead-a-retail-revolution/#2e2624a51309). 31. B. L. Kirkman and Debra L. Shapiro, “The Impact of Cultural Values on Employee Resistance to Teams: Toward a Model of Globalized Self-Managing Work Team Effectiveness,” Academy of Management Review (July 1997), pp. 730–757. 32. R. D. Banker, J. M. Field, R. G. Schroeder, and K. K. Sinha, “Impact of Work Teams on Manufacturing Performance: A Longitudinal Field Study,” Academy of Management Journal (August 1996), pp. 867–890; B. L. Kirkman and B. Rosen, “Beyond Self-Management: Antecedents and Consequences of Team Empowerment,” Academy of Management Journal (February 1999), pp. 58–74. 33. V. Y. Haines III, S. St. Onge, and A. Marcoux, “Performance Management Design and Effectiveness in QualityDriven Organizations,” Canadian Journal of Administrative Sciences (June 2004), pp. 146–160. 34. “Talent Acquisition, biggest challenge and business aligned HR, top HR game changer in 2016,” The Economic Times, February 25, 2016 (http://economictimes.indiatimes.com /jobs/talent-acquisition-biggest-challenge-and-business -aligned-hr-top-hr-game-changer-in-2016-survey/article show/51137601.cms). 35. O. C. Richard, “Racial Diversity, Business Strategy, and Firm Performance: A Resource-Based View,” Academy of Management Journal (April 2000), pp. 164–177. 36. G. Robinson and K. Dechant, “Building a Business Case for Diversity,” Academy of Management Executive (August 1997), pp. 21–31. 37. K. Labich, “Making Diversity Pay,” Fortune (September 9, 1996), pp. 177–180. 38. “Gartner Worldwide IT Spending Forecast,” (gartner.com /technology/research/it-spending-forecast); N. G. Carr, “IT Doesn’t Matter,” Harvard Business Review (May 2003), pp. 41–50. 276 CHAPTER 8 Strategy Formulation: Functional Strategy and Strategic Choice 39. J. Greco, “Good Day Sunshine,” Journal of Business Strategy (July/August 1998), pp. 4–5. 40. W. Howard, “Translate Now,” PC Magazine (September 19, 2000), p. 81. 41. S. Holmes and M. Arndt, “A Plane that Could Change the Game,” BusinessWeek (August 9, 2004), p. 33. 42. “2014 Global Outsourcing and Insourcing Survey,” (February 2014), (www2.deloitte.com/us/en/pages/strategy /articles/2014-global-outsourcing-and-insourcing-survey .html). 43. http://www.statisticbrain.com/outsourcing-statistics-by -country/ 44. “Mexico’s auto boom is about wages,” Automotive News, February 1, 2012 (autonews.com/article/20120201/blog06 /120209989/mexico%E2%80%99s-auto-boom-is-about -wages). 45. “Genpact reports results for ...
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Running head: OUTSOURCING

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Outsourcing
Name
Course
Tutor
Date

OUTSOURCING

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Outsourcing

Outsourcing is a business strategy that entails purchasing a service or product that had
previously been provided internally from an external source. Outsourcing is essential for
organizations when it comes to the strategic making of decisions. It is a crucial aspect of every
organization that seeks to achieve profitability and competitive advantage because organizations
use outsourcing to acquire the best skills, often at a lower cost. The various aspects of
outsourcing are discussed below.
Forces driving organizations to outsource
Internal forces
The internal forces that drive organizations to outsource include the need to enhance
internal efficiency, especially when the company’s employees do not have sufficient skills and
knowledge to effectively work on a specific project. Another factor is associated with the
organization's financial position, especially when outsourcing the operations would be less
costly. Organizations use this to save costs by outsourcing cheaper labor. The need to improve
the internal organization pushes organizations to outsource.
External forces
The increase in market competition pushes organizations to outsource to enhance their
operations and achieve a competitive advantage. Another external force is the change in the
market demands, forcing the organization to explore other ways of effectively meeting the
market needs. The predictability of the market costs is another significant factor because
organizations would want to obtain the best skills to meet the predicted needs by saving costs.

OUTSOURCING

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Typical operations being outsourced.

Customer service and software programming are some of the operations that get
outsourced in most cases from India. ...


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