CHAPTER 11

STRATEGY FORMULATION

Strategy is a means to achieve long term objectives. It is a potential plan of actions that
include top management decisions with significant amount of resources.

Strategy formulation is the process of choosing the best possible strategic alternative out of the
available alternatives. Strategy formulation is one of the major functions of strategic
management..It involves choosing the best alternative out of a number of possible alternatives.
Strategy depends on organizational appraisal as well as analysis of external environment.

IMPORTANCE OF STRATEGY FORMULATION

To understand the competitive environment and compete successfully

To adopt a suitable business model
To acquire and utilize resources optimally
To expand the business
To full fill the stake holder expectations
To retain the customers by building longterm relationship with them

STRATEGY ELEMENTS

The strategic elements are given below

[Link]: A mission statement defines the business in term of the customers

,employees,suppliers and the [Link] reflects every of the business the range and nature of
the product the business offers,pricing,quality,service,marketposition,growth,relation ship with
customer [Link] helps clarify the scope and objectives of the business.

[Link]:Objectives are expected outcomes of an [Link] converts the strategic

visiin into specific performance [Link] and every organization is established to achieve
certain [Link] are end result of planned [Link] may be formulated for a
long term as well as short term.

[Link]:Strategy is a means to achieve long term [Link] is a potential plan of actions

that include top management decisions and significant amount of [Link] is future oriented.

[Link]: Policy is guidelines,rules,and [Link] is established to support efforts to achieve

stated [Link] clearly states the performance expections from employees and managers.
 PROCESS OF STRATEGY FORMULATION

Strategy formulation includes the following steps

[Link] of strategic elements: Review of strategic elements such as

vision,mission,objectives,strategies and polices is the starting point of strategy
[Link] is the designed future of an [Link] is the basic reason for the
[Link] are the end result of planned [Link] are the broad guidelines for
actions and decision.

[Link] Analysis: SWOT analysis is the process of finding a strategic fit between external
opportunities and internal strengths while working around external threats and internal
[Link] is conducted to understand the external and internal environment of the organization.

[Link] of strategic options: After SWOT analysis,different strategic alternatives are

[Link] the corporate level the strategic options would be stability,growth,retrenchment
and combinations.

[Link] of strategic options:Strategy formulation the strategic options are [Link]

are evaluated on the basis of three elements suitability,acceptability and [Link] is
concerned with environment fit of the strategic options,Acceptability is related to the
stakeholders expectations and deals with the expected performance outcome of a strategic
[Link] is concerned with the availability of resources.

[Link] of strategy: At the final stage of strategy formulation the best option of strategy is
[Link] choice is the decision to select the best strategy from the various alternatives to
meet organizations objectives.
 USING SWOT ANALYSIS FOR STRATEGIC CHOICE

SWOT Is for strength,weakness,opportunites and threats are the strategic factors for a company.
A SWOT analysis summarizes the key issues from the business environment and the strategic
capabilitry of an organization that are most likely to impact the strategy [Link] it is
also called the situation [Link] analysis is one of the fundamental parts in formulating
strategy .The information about external and internal environment is presented in a structured
way.

COMPONENTS OF SWOT ANALYSIS

The following components are analyzed under SWOT analysis

[Link] :Strength is the positive internal characteristics that the organization can exploit to
achieve its [Link] is the capability of an organization to perform better than the [Link]
organization can build necessary capabilityby developing resources [Link] organization
is said to be strong under the following conditions

 Strong strategy
 Strong financial condition
 Strong brand image
 Skill manpower
 High product promotion

[Link]:Weakness is internal characteristics that might or restrict the organizations

[Link] is the weaker capability of an organization compared to the
[Link] is also determined by the internal [Link] organization becomes
weak under the following conditions

 Unclear goal
 Lack of strong strategy
 Weak financial condition
 Lack of skilled manpower
 Weak promotion

[Link] :An opportunity is an favourable situation in the organizations [Link] is

usually trend or change of some kin or an overlooked need that increase demand for a product or
service permits the firm to enchance its position by supplying [Link] organization has opportunites
under the following condition

 Product development
 Entry into new business
 New Technology
  Strong economy

Threat: A threat is a condition in the general environment that may hinder a companys efforts to
achieve strategic [Link] following are some of the conditions that result in
business thretas

 Entry of new firm

 Low workers
 Unfavourable law and poltices

IMPORTANCE OF SWOT ANALYSIS

The importance of SWOT analysis can further be explained in the following way

[Link] Fit: SWOT analysis ensures strategic fit between external opportunities and internal
strength while working around external threats and internal [Link] fit provide
strategic advantage to the [Link] organization attempts to gain strategic fit through
effective strategy.

[Link] opportunities: Opportunities are the favourable condition in the [Link]

analysis help to analyse the opportunites that the organization is likely to [Link]
opportunites may be explained through proper plan and resources.

[Link] Threats: Threats refer to economic,social,cultural,political etc that could significantly

harm the organization in the [Link] number of competitors introduce of new regulation,low
growth of [Link] analysis helps to identify and analyze the effects of threats on business
and possible strategies meet them.

[Link] Strength: Strength are the capabilities of an organization to perform efficiently and
[Link] and evaluating organizational strengths in the functionl areas of a business
is an essential strategic management activity.

[Link] weakness: weaknesses may be defined as the poor capability of an organization

relative to the key [Link] of resources,plans and skills create [Link]
analysis helps to analyze and eliminate internal weaknesses.
 GENERATING STRATEGIC OPTIONS

Strategic options are the possible strategies that an organization can pursue .They are developed
at different levels.

[Link] LEVEL STRATEGY: Corporate strategy is primarily about the choice of

direction for an organization as a whole and the management of its business or product
portfolio.A corporate level strategy involves selecting and managing a group of different
business which are competing in different products markets to gain competitive advantage.

Corporate level strategies addresses the question as what business are we in ? It is related to the
acquisition of new business,additions or divestments of business units,plans or joint venture with
other companies in new areas.

Types of Corporate level strategy

The different types of corporate level strategy are as follows:

a. Stability strategy: Stability strategy that aims to continue the current operations of an
organization without any significant change in [Link] this strategy as firms see
to maintain their current position in the market place they donot bring any change in their
product,market,plans,policies and [Link] is also suitable for small firm which is
manageable in size.

[Link] /Growth strategy: Growth strategy or expansion is designed to achieve growth in

sales ,assets, profit or some combinations. Companies that aim to expand business pursue this
[Link] is a popular strategy because larger companies tend to survive longer than
smaller due to great availability of financial resources,organizational routines etc.

[Link] strategy :Retrenchment strategy aims to reduce the size of a company for a
financial [Link] also involves reduction in expenditure for financial feasibility.A company
may pursue retrenchment strategy when it has a weak competitive position in some or the entire
product lines resulting in poor performance.

Example: when sales are down and profit are becoming looses at that time this strategy is aopted.

[Link]/Mixed strategy: If an organization adopts stability,expansion and retrenchment

strategies in different business units it is said to follow combination [Link] an organization is
operating in diverse environmental conditions combination strategy is pursed for different
strategic business units and products.
[Link] level strategy: Business level strategy refyers to the strategy pursued by a firm to
gain a competitive advantage by exploiting in specific product [Link] indicated how a firm
competes successfully in an individual product market.A business level strategy follows the
corporate [Link] plan is what the management of a company develops and implements to
achieve their strategic goals .Essentially a business plan is a long term of the desired strategic
destination for a company.

Types of Business level Strategy

The different types of Business level strategy are as follows :

A. Cost leadership strategy: The cost leadership strategy is an attempt produce goods or service
with features that are acceptable to customer at the lower cost,relative to that of [Link] is
business model that focuses on reducing the cost of production and offering the lowest price
product to outperform competitors and gain market share.

[Link] strategy: Differentiation strategy involves providing goods or services which

are different that those of competitors at acceptable cost. Differentiation target customers for
whom value is created in such a way that the firms product differ the [Link] the firm
knows what its target customers value it can create necessary features on the product.

C. Focus strategy :Focus strategy involves targeting your product to a market or targeted
[Link] are two types of focus strategy

[Link] low cost

[Link] differentiation

STRATEGIC CLOCK ORIENTED MARKET BASED STRATEGIES

Strategic clock is important to understand how companies compete in the [Link] this an
organization can choose possible strategy based on the available [Link] is a powerful
way to establish and sustain a competitive position in a competitive [Link] following are the
strategic options under strategic clock

[Link] price/low value: It is the combination of low price with low perceived added [Link]
focuses to price sensitive [Link] products are inferior but the prices are attractive enough
to convince consumers to try them once.

[Link] price: It is the combination of low price with similar perceived added value as the
[Link] aims to maintain the quality with low [Link] competing in this category
are the low [Link] companies have large Sales volume or strong strategic reason for their
position they can sustain this approach.
[Link](Moderate price/Moderate differentiation)

It is the combination of low price with [Link] customers perceives high value with
low [Link] offer product at low cost but with a higher perceived value than those of
other low cost [Link] quality and value are good and the consumers is assured for
reasonable prices.

[Link]: It aims to offer products and services having unique characteristics .It can be
with or without price [Link] that differentiate offer high perceived va,ue to the
customers.

[Link] differentiation: It combines high price with high perceived value and focuses in a
particular [Link] product may not have any more real value but the perception of value is
enough to charge very high premiums.

[Link] price: It combines high price with standard perceived [Link] it is likely to
[Link] companies increase their price without any increase in the [Link] the price
increase is accepted they enjoy higher profitability.

3. Functional Level strategy: Functional level strategies aim to enhance effectiveness in

different functional areas of a business. These strategies are related to capability, efficiency,
customer services, product quality and marketing. Production strategy, marketing strategy,
human resource strategy, finance strategy, research and development strategy are the functional
strategies.

Types of Functional strategy

The Type of functional strategy are as follows:

a. Production Strategy: Production strategy determines how and where a product or

service is to be manufactured. It also deals with the level of vertical integration in the
production process, utilized the physical resources, relationship with suppliers and the
optimum level of technology the firm.

b. Marketing Strategy: Marketing strategy deals with pricing,selling and distributing a

[Link] involves a market development strategy in which the business attempts to
capture a larger share of an existing market for current [Link] business aim to
develop new products for existing or new market.

c. Finance strategy : Finance strategy deals the activities related to acquisition and
management of fund required for the [Link] mainly aims at the financial value of the
business.
 d. Human resource strategy: Human resource strategy deals with acquisition ,development
and facilities of human [Link] also addresses the skill,motivation and diversification
of human resource.
e. Research and development strategy: Research and development strategy has a become
an integral part pf modern [Link] are vital for the innovation and development pf
product and process.

DIRECTION FOR STRATEGY DEVELOPMENT

Direction for strategy development are the strategic decision options available to an organization
in terms of product and market [Link] are based on strategic capability of the
organization and stakeholders expectations.

The following are the directions for strategy development

[Link] and Build on current position : This is concerned with protecting and building in the
cureent position of an [Link] are a number of strategic options under this category
which are mentioned below:

[Link]: Consolidation is concerned with protecting and strengthening the organizations

position in existing market with existing product. The organization adopt and develop their
resources and competencies to maintain their competitive [Link] requires
attention that organizations resources and competenies fit the market needs and they are
developed to maintain the competitive position.

[Link] Penetration: Market penetration refers to increasing the market share of existing
product in existing markets to protect and build market [Link] is possible through aggressive
marketing like trade allowances,advertising, price reduction,and package [Link] is also
possible through sustaining or improving quality and innovations.

[Link] Development: An organization can achieve growth through product development

[Link] includes delivery of modified or new products to the existing [Link] new product
can be brought about by

Innovation :Product new to the world

Modification: Product new to the market
Imitation: Prodcut new to the organization
[Link] Development: Market development strategy involves entry into new market with
existing [Link] also increase sale of its existing product by market development
[Link] strategy can be adopted by the following ways

Extending into new market segments which are not currently served
Opening up additional geographical markets
Developing new uses of existing products

[Link]:Diversfication is a decision to enter in the new product or [Link] strategy

is pursued if the opportunites for growth in the orginal business have been [Link] two
basic diversification strategies re concentric and conglomerate

Concentric(Related ) diversification: It is diversifying into an industry related to the

cureent [Link] may be a very appropriate strategy when a firm has a strong competitive
position but industry attractivensess is low.

Conglomerate(unrelated) diversification:It is diversifying into an industry unrelated to

its current [Link] is pursued if the current industry is unattractive and that the firm lacks
outstanding abilities or skills that it could easily transfer to related product or services in
other industries.

METHODS OF STRATEGY DEVELOMENT

There are many methods of strategy [Link] are internal developmet,acquisition and
merger and joint developmet and strategic alliances

Methods of strategy Development

Internal Development Acquisition & Merger Joint Development

[Link] Development: Internal development is a managerial approach to develop strategies
by building and developing organization own [Link] is the primary method of strategy
[Link] ways of internal developmet are

Product Developmet
Market Developmet
It is is appropriate for small companies or many public services which may not have the
resources available for major investment.

[Link] and merger: An acquisition is a strategy in which one firms buysa

controlling or 100% interest in another [Link] aim is to make the acquired firm a
subsidiary business with inits [Link] existing organization takes over another
organization through purchase of shares or ownership.

A merger is a strategy through which two firms agree to intergrate their operations on a
relatively [Link] merger one organization merges with [Link] is the combination of
two or more organization into one single organization.

Reason of Acquisition and Merger

 Increased market power
 Overcoming entry barriers
 Increased speed to market
 Low risk
 Learning and Developing new capabilities

[Link] Developmet and Strategic alliance

A company use competitive strategies to gain competitive advantage with in an industry by

battling against other firms.A company can also use cooperative strategies to gain competitive
advantage with an industry by working with other firms. The main objective of joint
development and strategic alliances is to build and share competences for mutual benefits.

Reason for strategic alliances

To obtain or learn new capabilities

To obtain access to specific markets
To reduce financial risk
To reduce political risk
 Components for the success of strategic alliances
Trust
Top management support
Performance expectation
Clear goal and organizational arrangements
Change

PORTFOLIO ANALYSIS FOR STRATEGIC CHOICE

Portfolio is a range of investments held by an [Link] enables an organization to revise

and refresh the portfolio by closing down the unprofitable business units or product abd adding
new investment in profitable [Link] on this view organization with multiple product lines or
business units undertake portfolio analysis to formulate corporate strategy to find out possibility
of its future growth and [Link] top management views its product lines and business
units as a series of investments

ADVANTAGE OF PORTFOLIO ANALYSIS

 It encourages top management to evaluate each of the business units individually and to
set objective nd allocate resources for each.
 It raises the issue of cash flow availability for use in expansion and growth
 It helps to support the decision making.

A number of tools are developed for portfolio [Link] provide strategic options in strategy
[Link] are mentioned below

BOSTON CONSULTING GROUP(BCG)MATRIX

GENERL ELECTRIC MATRIX
HOFERS MATRIX
 1. BOSTON CONSULTING GROUP(BCG)MATRIX

The BCG Matrix is the simplest way to portray companys portfolio [Link] was developed
by BOSTON CONSULTING [Link] BCG matrix each of the company product lines or
business unit is plotted according to the growth rate of the industry in which it competes and its
relative market share
The four cells of BCG Matix are

[Link]: Stars are those business units which have rapidly growing markets with large market
[Link] represent the best long run opportunites i.e growth and profitablitly in the firms
[Link] are usually able to generate enough [Link] also use lage amount of cash to
maintain their high share of the [Link] organization has high priority to stars as they have a
potentially bright [Link] represent the organization best long run opportunites for growth
and [Link] strategic options for stars are forward,backward and horizontal
integration,market penetration,market [Link] their market growtn rate slows stars
become cash cow.

[Link] COWS : Cash cows are those business units which have high market share byt low
market growth [Link] are yesterday [Link] generate enough cash needed to maintain their
market [Link] have low cost relative to [Link] don’t require further investment
because of stable [Link] provide a foundation for the firm from which it can launch new
[Link] they become weak retrenchment becomes more appropriate strategies.

[Link]: Dogs are the business units with low market share and low growth [Link] need
more cash to [Link] pose very low competitive position because of high costs,low
quality,and low [Link] have no future because of low market growth and low market
[Link] is usually a situation firms sekek to avoid.

[Link] MARKS: Question marks are the business units with high market growth but
low market [Link] require a high investment for advertisement, product reformulation and
[Link] have uncertain future so they should develop or stop the business.

LIMITATION OF BCG MATRIX

 It is difficult to assess the high and low growth rate and market share
 This matrix is applicable for strategic business units only.
 Growth rate is only one aspect of industry attractiveness.
 Market share is only one aspect of overall competitive position.
GE BUSINESS SCREEN (GENERAL ELECTRIC)

GE matrix is based on industry attractiveness and competitive [Link] electric with the
assistance of the McKinsey and company consulting firm developed GE [Link] includes nine
cells based on long term industry attractiveness and business strength /competitive position.

As depicted in the figure ,the GE business screen includes nine [Link] successful strategic
business units in GE matrix have high market attractiveness and strong competitive [Link]
matrix can divided in three zones

Cell A,B,and E :The strategic business units in cell 1,2 and 4 are the [Link] should be
given priority in portfolio.

Cell C,F and I: Cell 3,5 and 7 indicate the medium or average situation of strategic business
[Link] should be included in the portfolio on a selective basis for investment.

Cell D,G, and H: Cell 6,8,and 9 are the looser business [Link] should be diverted or closed
down.
 Difference between BCG and GE Matrix

The difference between BCG and GE Matrix are given below

BCG Matrix GE MATRIX

[Link] matrix consists of 4 cells [Link] matrix consists of 9 cells
[Link] Business unit is rates against relative [Link] Business unit is rates against business
market share and industry growth rate. strength and industry attractiveness.
[Link] matrix uses two types of classification 3. The matrix uses three types of classification
i.e is high and low i.e high/medium and low
[Link] matrix uses a measures to assess growth [Link] matrix used multiple measure assess
and market share. business strength and industry attractiveness.

HOFERS MATRIX

Hofers matrix is a 15 cell matrix based on product life [Link] is also called the 15 cell
product/market evolution [Link] it products are plotted interms of their competitive
position and their stages of product/market evolution.

The stage of the product life cycle describes the market [Link] competitive position
shows the strong,medium and weak position in the competition.

On the basis of Hofers matrix strategic issues can be identified. `