Business Policy and Strategic Management (MGMT 432)

Chapter four
Strategy Formulation: Options and Choices
Developing a strategic vision and mission, establishing objectives, and deciding on a strategy are basic
direction setting tasks. They map out where the organization is moving. All the three together constitutes
strategic plan.
Strategy formulation is often referred to as strategic planning of long-range planning and it is concerned
with developing an organization mission, objectives, strategies, and policies.
It is useful to consider strategy formulation as part of a strategic management process that comprises
three phases:
 Diagnosis,
 formulation, and
 Implementation.

Diagnosis includes performing a situation analysis which is analyzing the organization's external
environment, including major opportunities and threats; and Identifying the major critical issues, which
are a small set, typically two to five, of major problems, threats, weaknesses, and/or opportunities that
require particularly high priority attention by management.
Analysis of the internal environment of the organization, including identification and evaluation of
current mission, strategic objectives, strategies, and results, plus major strengths and weaknesses;
Strategy formulation begins with situation analysis: the process of finding a strategic fit between
external opportunities and internal strengths while working around external threats and internal
weaknesses.
Formulation, the second phase in the strategic management process, produces a clear set of
recommendations, with supporting justification, that revise as necessary the mission and objectives of
the organization, and supply the strategies for accomplishing them.
There are four primary steps in this phase:
 Reviewing the current key objectives and strategies of the organization, which usually would
have been identified and evaluated as part of the diagnosis
 Identifying a rich range of strategic alternatives to address the three levels of strategy
formulation.
 Doing a balanced evaluation of advantages and disadvantages of the alternatives relative to their
feasibility plus expected effects on the issues and contributions to the success of the organization
 Deciding on the alternatives that should be implemented or recommended.
In organizations, and in the practice of strategic management, strategies must be implemented to achieve
the intended results. The most wonderful strategy in the history of the world is useless if not
implemented successfully.

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Implementation is third and final stage in the strategic management process involves developing an
implementation plan and then doing whatever it takes to make the new strategy operational and effective
in achieving the organization's objectives.

1.1. Levels of Strategy / The strategy hierarchy

In most (large) corporations there are several levels of management. Each level (of strategy) involves
different strategic decisions.
Strategic management is the conduct/ way of drafting, implementing and evaluating cross-functional
decisions that will enable an organization to achieve its long-term objectives.
Strategic management is the process of :
 specifying the organization's mission, vision and objectives,
 developing policies and plans, often in terms of projects and programs, which are designed to
achieve these objectives, and then
 Allocating resources to implement the policies and plans, projects and programs.
It provides overall direction to the enterprise. It gives direction to corporate values, corporate culture,
corporate goals, and corporate missions.

There is wide diversity in the strategic management literatures attached to the different levels of strategy
that may exist in a firm. Strategy can be formulated on different levels.
Thompson and Strickland propose four levels:
o corporate strategy,
o business strategy,
o functional area support strategy, and
o Operating-level strategy.
Each layer provides strategic guidance of the next level of subordinate managers.

Corporate Strategy

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A Diversified Company
1.1.1. Corporate-Level Strategy/ Corporate strategy
Corporate level strategy refers to the overarching strategy of the diversified firm. It answers the
questions of
 "which businesses should we be in?" and
 "How does being in these businesses create synergy and/ or add to the competitive advantage of
the corporation as a whole?"
Corporate level strategy fundamentally is concerned
 with the selection of businesses in which the company should compete and
 with the development and coordination of that portfolio of businesses.
Corporations are responsible for creating value through their businesses. They do so by
 managing their portfolio of businesses,
 ensuring that the businesses are successful over the long-term,
 developing business units, and
 sometimes ensuring that each business is compatible with others in the portfolio
Under this broad corporate strategy there are typically business-level competitive strategies and
functional unit strategies.

1.1.2. Business-Level Strategy/ Business Unit Level Strategy

Organizations must maintain a balance, ensuring that all business units are aligned with the overall
corporate strategy, while allowing individual business units to proactively act to address the challenges
and opportunities in their specific businesses.
A strategic business unit (SBU) is a semi-autonomous unit that is usually responsible for its own
budgeting, new product decisions, hiring decisions, and price setting. It may be a division, product line,
or other profit center that can be planned independently from the other business units of the firm. An
SBU is treated as an internal profit centre by corporate headquarters.
At the business unit level, the strategic issues are less about the coordination of operating units and more
about developing and sustaining a competitive advantage for the goods and services that are produced.
At the business level, the strategy formulation phase deals with:
 positioning the business against rivals
 anticipating changes in demand and technologies and adjusting the strategy to accommodate
them and
 influencing the nature of competition through strategic actions such as vertical integration and
through political actions such as lobbying.
Business strategy consists of action plans that relate to goals (at the business level). It focuses on
expected operational results of a business unit; and it refers to the aggregated strategies of single
business firm or a strategic business unit (SBU) in a diversified corporation.
Michael Porter identified three generic strategies such as cost leadership, differentiation, and focus that
can be implemented at the business unit level to create a competitive advantage and defend against the
adverse effects of the five forces
Business-level action specifications should be devolved so that collectively they define the following
elements:

 The strategic posture represented by the strategy.

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 The firm’s product market scope;

 Input-output transformations in which the firm is engaged;
 What synergies are sought in the operation of the firm?
When taken together, these elements of business-level strategy should combine uniquely to:
 define the business of the SBU or firm, and
 Describe its competitive edge.
Thus strategy aligns the strategic business unit or firm relative to its competitors, distinguishes it from
them, and hopefully propels it beyond them.

1.1.3. Functional-level Strategy / Functional strategies

The functional level of the organization is the level of the operating divisions and departments. The
strategic issues at the functional level are related to business processes and the value chain.
Functional units of an organization are involved in higher level strategies by providing input into the
business unit level and corporate level strategy, such as providing information on resources and
capabilities on which the higher level strategies can be based. Once the higher-level strategy is
developed, the functional units translate it into discrete action-plans that each department or division
must accomplish for the strategy to succeed.
In contrast with the other levels of strategy, functional strategies serve as guidelines for the employees
of each of the firm’s subdivisions.
Functional strategies are developed for each of the functional parts of the firm to guide the behavior of
people in a way that would put the other strategies into motion such as marketing strategies, new product
development strategies, human resource strategies, financial strategies, legal strategies, supply-chain
strategies, and information technology management strategies.

1.1.4. Operational level strategies

An additional level of strategy called operational strategy was encouraged by Peter Drucker in his
theory of management by objectives (MBO). It is very narrow in focus and deals with day-to-day
operational activities such as scheduling criteria.
Operational level strategies are informed by business level strategies which, in turn, are informed by
corporate level strategies.
1.1.5. Social Strategy/ societal level strategy
In addition to this four, one additional layer of strategy which is recently emerged called societal level
strategy is also mentioned by some other authors.
Social strategy consists of goals and action plans of which the overall purpose is to guide the ways in
which management intends the organization to respond to the major social demands placed on it. It is an
explicit definition of the organization’s social responsibilities: how it is expected to react to the demands
of particular groups of external constituents.
The idea of social responsibility in a separate (from corporate, business, and functional) strategy level
was introduced in 1979 by Ansoff and modified by Schendel and Hofer.
The development of societal legitimacy (or enterprise) strategy is Ansoff’s proposed solution to
increasing importance of … socio-political variables in the life of the firm. Included in these variables
are “new consumer attitudes new dimensions of social control and, above all, a questioning of the firm’s
role in society.”
1.2. Strategic Formulation (options and choices)
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Strategy formulation is often referred to as strategic planning of long-range planning and is concerned
with developing an organization mission, objectives, strategies, and policies. It begins with situation
analysis - the process of finding a strategic fit between external opportunities and internal strengths
while working around external threats and internal weaknesses.
1.2.1. Competitive Organizational Strategy
Competitive strategy is often called Business level strategy/ business unit level strategy. It involves
deciding how the company will compete within each line of business (LOB) or strategic business unit
(SBU). Competitive strategy creates a defendable position in an industry so that a firm can outperform
competitors. It raises the following questions:
 Should we compete on the basis of low cost (price), or
 Should we differentiate our products or services on some basis other than cost, such as quality or
service?
 Should we compete head-to-head with our competitors for the biggest but most sought after
share of the market? or
 Should we focus on a niche in which we can satisfy a less sought after but also profitable
segment of the market?
A company has competitive advantage whenever it can attract customers and defend against competitive
forces better than its rivals.
Successful competitive strategies usually involve building uniquely strong or distinctive competencies in
one or several areas crucial to success and using them to maintain a competitive edge over rivals.
Some examples of distinctive competencies are
 superior technology and/or product features,
 better manufacturing technology and skills,
 superior sales and distribution capabilities, and
 Better customer service and convenience.
The essence of strategy lies in creating tomorrow's competitive advantages faster than competitors
mimic the ones you possess today. (Gary Hamel & C. K. Prahalad)
Competitive strategy is about being different. It means deliberately choosing to perform activities
differently or to perform different activities than rivals to deliver a unique mix of value. (Michael E.
Porter)
According to Michael Porter, a firm must formulate a business strategy that incorporates three generic
strategies: cost leadership, differentiation, and focus that can be implemented at the business unit level
to create a competitive advantage and defend against the adverse effects of the five forces
Before using one of the two generic competitive strategies (lower cost or differentiation), the firm or
unit must choose
 the range of product varieties it will produce,
 the distribution channels it will employ,
 the types of buyers it will serve,
 the geographic areas in which it will sell, and
 the array of related industries in which it will also compete.
This should reflect an understanding of the firm’s unique resources.

Porter's Four Generic Competitive Strategies

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We will consider competitive strategy by using Porter's four generic strategies as the fundamental
choices, and then various competitive tactics.
The four generic competitive strategies which he argues cover the fundamental range of choices
depicted in the figure below.

Cost-
Differentiation
leadership

Differentiation
Cost focus
focus

Differentiati
on

Porter’s generic competitive strategies

When the lower cost and differentiation strategies
 have a broad mass-market target, they are called cost leadership and differentiation.
 are focused on a market niche (narrow target), they are called cost focus and differentiation
focus.
1. Cost leadership
Cost leadership is a lower cost strategy or overall Price Leadership. It is the ability of an organization
or business units to design, produce, and market a comparable product more efficiently than its
competitors.
Cost leadership is a low-cost competitive strategy that aims at the broad mass market and requires
 aggressive construction of efficient scale facilities,
 vigorous pursuit of cost reductions from experiences,
 tight cost and overhead control,
 avoidance of marginal customer accounts, and
 cost minimization in areas like R&D, service, sales force, advertising, and so on.
Because of its lower costs, the cost leader is able to charge a lower price for its products than its
competitors and still make a satisfactory profit.
Having a lower-cost position gives a company or business unit a defense against rivals.
Cost leadership is appealing to a broad cross-section of the market by providing products or services at
the lowest price. It requires being the overall low-cost provider of the products or services.
Implementing this strategy successfully requires continual, exceptional efforts to reduce costs without
excluding product features and services that buyers consider essential.
Some conditions that tend to make this strategy an attractive choice are:
 The industry's product is much the same from seller to seller
 The marketplace is dominated by price competition, with highly price-sensitive buyers
 There are few ways to achieve product differentiation that have much value to buyers
 Most buyers use product in the same ways
 Switching costs for buyers are low
 Buyers are large and have significant bargaining power
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2. Differentiation/ Differentiation strategy

Differentiation strategy is the ability to provide unique and superior value to the buyer; and it is
appealing to a broad cross-section of the market through offering differentiating features that
make customers willing to pay premium prices. This specialty can be associated with
 Product/service quality,  design or brand image,  superior technology,
 special features,  dealer network,  prestige, or
 after-sale service,  customer services,  convenience.
Sustainable differentiation usually comes from advantages in core competencies, unique company
resources or capabilities, and superior management of value chain activities.
3. Cost focus
In using cost focus, the company or business unit seeks a cost advantage in its target segment. The cost
focus strategy is Price focus strategy and a market niche strategy, concentrating on a narrow customer
segment and competing with lowest prices, requires/ having lower cost structure than competitors.
Cost focus strategy is a lower-cost competitive strategy that focuses on a particular buyer group or
geographic market and attempts to serve only this niche, to the exclusion of others. It focuses its efforts
better able to serve its narrow strategic target more efficiently than can its competitors as well as
requires a trade-off between profitability and overall market share.
4. Differentiation focus
Differentiation strategy is a second market niche strategy, concentrating on a narrow customer segment
and competing through differentiating features. It is that concentrates on a particular buyer group,
product line segment, or geographic market.
In using differentiation focus, the company or business unit seeks differentiation in a targeted market
segment. This strategy is valued by those who believe that a company or a unit that focuses its efforts is
better able to serve the special needs of a narrow strategic target more effectively than can its
competition.
Some conditions that tend to favor focus, i.e. price or differentiation focus are:
 The business is new and/or has modest resources
 The company lacks the capability to go after a wider part of the total market
 Buyers' needs or uses of the item are diverse; there are many different niches and segments in the
industry
 Buyer segments differ widely in size, growth rate, profitability, and intensity in the five
competitive forces, making some segments more attractive than others
 Industry leaders don't see the niche as crucial to their own success
 Few or no other rivals are attempting to specialize in the same target segment
 Best-cost Provider Strategy:
This strategy not one of Porter's basic four strategies, it is mentioned by a number of other writers; and it
is taken as a fifth strategy alternative.
The best-cost provider strategy is a mixture or hybrid of low-price and differentiation, and targets a
segment of value-conscious buyers that is usually larger than a market niche, but smaller than a broad
market. It is a strategy of trying to give customers the best cost/ value combination, by incorporating
key good-or-better product characteristics at a lower cost than competitors.
This strategy could be attractive in markets that have both variety in buyer needs that make
differentiation common and where large numbers of buyers are sensitive to both price and value.

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Porter argues that this strategy is often temporary, and that a business should choose and achieve one of
the four generic competitive strategies. Otherwise, the business is stuck in the middle of the competitive
marketplace and will be out-performed by competitors who choose and excel in one of the fundamental
strategies. His argument is analogous to the threats to a tennis player who is standing at the service line,
rather than near the baseline or getting to the net.
 Competitive Tactics
In general, tactics are shorter in time horizon and narrower in scope than strategies. Among the various
tactics that may be useful and dealt in this section are:
 competitive tactics, and
 Cooperative tactics.
Two categories of competitive tactics are those dealing with
 timing (when to enter a market) and
 Market location (where and how to enter and/or defend).
Timing Tactics:
When to make a strategic move is often as important as what move to make. We often speak of first-
movers - the first to provide a product or service; second-movers or rapid followers, and late movers -
wait-and-see
Market location tactics
These fall conveniently into offensive and defensive tactics. Offensive tactics are designed to take
market share from a competitor, while defensive tactics attempt to keep a competitor from taking away
some of our present market share, under the onslaught of offensive tactics by the competitor.
Some offensive tactics are:
 Frontal assault  Bypass attack
 Flanking maneuver  Guerrilla warfare
 Encirclement
Some defensive tactics are:
 Raise structural barriers:
 Increase expected retaliation:
 Reduce inducement for attacks:

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 Cooperative strategies
Another group of "competitive" tactics involve cooperation among companies. These could be
grouped under the heading of various types of strategic alliances. Strategic alliances/ cooperative
strategies involve an agreement or alliance between two or more businesses formed to achieve
strategically significant objectives that are mutually beneficial.
Some of the reasons for strategic alliances are to:
 obtain/ share technology,
 share manufacturing capabilities and facilities,
 share access to specific markets,
 reduce financial/political/market risks, and
 achieve other competitive advantages not otherwise available.
1.2.2. Corporate Strategy
In this aspect of strategy, we are concerned with broad decisions about the total organization's
scope and direction. Basically, we consider what changes should be made in our growth
objective and strategy for achieving it, the lines of business we are in, and how these lines of
business fit together.
Corporate level strategy is the grand strategy that comprises the overall strategy of elements for
the corporation as a whole. It is primarily about the choice of direction for the whole firm.
Corporate strategy involves four kinds of initiatives:
 Making the necessary moves to establish positions in different businesses and achieve an
appropriate amount and kind of diversification.
 Initiating actions to boost the combined performance of the businesses the company has
diversified into.
 Pursuing ways to capture valuable cross-business strategic fits and turn them into
competitive advantages
 Establishing investment priorities and moving more corporate resources into the most
attractive lines of business (LOB's).
Corporate strategy deals with three key issues facing the corporation as a whole.
 The firm’s overall orientation toward growth, stability, or retrenchment
o (directional strategy)
 The industries or markets in which the firm competes through its products and business
units
o (portfolio strategy)
 The manner in which management coordinates activities, transfers resources and
cultivates capabilities among product lines and business units
o (parenting strategy)
To deal with each of the issues, corporate level strategy is organized and examined based on
three main strategy components/ parts.
 directional strategy
o orientation toward growth,

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o what should be our growth objective, ranging from retrenchment through stability
to varying degrees of growth - and
o how do we accomplish this,
 portfolio strategy
o coordination of cash flow among units,
o what should be our portfolio of lines of business,
o which implicitly requires reconsidering
o how much concentration or diversification we should have, and
 parenting strategy
o Building organization synergies through resources sharing and development.
o how we allocate resources and manage capabilities and activities across the
portfolio –
o where do we put special emphasis, and
o How much do we integrate our various lines of business.
1. Directional strategy
Every product or business unit must follow a business strategy to improve its competitive
position.
Similarly every corporation must decide its orientation toward growth by asking the following
three questions:
 Should we expand, cut back, or continue our operations unchanged?
 Should we concentrate on our activities within our current industry or diversify into other
industries?
 If we want to grow and expand, should we do so through internal development or
external acquisitions, mergers or joint ventures?
Organization’s directional strategy is composed of three general orientations toward growth.
 Growth strategies
o expand the company’s activities, such as increasing sales or adding products.
 Stability strategies
o make no change to the company’s current activities.
 Retrenchment strategies
o reduce the organizations level of activities.
 Growth strategies
Growth objectives can range from drastic retrenchment through aggressive growth. By far the
most widely pursued organization strategies of business firms are those designed to achieve
growth in sales, assets, profits, or some combination of these.
All growth strategies can be classified into one of two fundamental categories
 Concentration within existing industries or
o concentration within one product line or industry, and
 Diversification into other lines of business or industries.

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o diversification into other products or industries

If a company’s or an organization’s current product lines
 have real growth potential,
o Concentration of resources on those product lines makes sense as a strategy for
growth.
 do not have much growth potential,
o Management may choose to diversify (diversification).
There are two basic concentration strategies,
 vertical integration and
 Horizontal growth.
Diversification strategies can be divided into
 related (or concentric) and
 Unrelated (conglomerate) diversification.
Each of the resulting four core categories of strategy alternatives can be achieved internally by
investing in new product development through investment and development, or externally
through mergers, acquisitions or strategic alliances. through mergers, acquisitions, and/or
strategic alliances (thus producing eight major growth strategy categories.)
Mergers, Acquisitions, and Strategic Alliances
Each of the four growth strategy categories just discussed can be carried out internally or
externally, through mergers, acquisitions, and strategic alliances. Various forms of strategic
alliances, mergers, and acquisitions have emerged and used extensively in many industries today.
They are used particularly to bridge resource and technology gaps, and obtain expertise and
market positions more quickly than could be done through internal development.
They are particularly necessary and potentially useful when a company wishes to enter a new
industry, new markets, and new parts of the world.
Acquisitions involve buying an existing business; internal new ventures involve starting a new
business from scratch; and joint ventures typically involve starting a new business from scratch
with the assistance of a partner.

 Stability Strategies
There are a number of circumstances in which the most appropriate growth stance for a company
is stability, rather than growth. An organization may choose stability over growth by continuing
its current activities without any significant change in direction.
The stability strategies can be appropriate for a successful corporation operating in a reasonably
predictable environment. They are very useful in the short run but can be dangerous if followed
for too long. They may be used for a relatively short period, after which further growth is
planned. And they usually involve with circumstances that either permit a period of comfortable
coasting or suggest a pause or caution.
Some of the more popular of these strategies are
 the pause strategy,

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 the no change strategy, and

 the profit strategy.
1. Pause strategy
A pause strategy also called pause and then proceed or a timeout. It is an opportunity to rest
before continuing a growth or retrenchment strategy. It is typically a temporary strategy to be
used until the environment becomes more hospitable or to enable an organization to consolidate
its resources after prolonged rapid growth.
2. No change strategy
A no change strategy is a decision to do nothing new, a choice to continue current operations and
policies for the foreseeable future. Rarely articulated as a definite strategy, a no-change
strategy’s success depends on a lack of significant change in an organization situation.
3. Profit strategy
A profit strategy is grab profits while you can. It is a decision to do nothing new in a worsening
situation, but instead to act as though the organization’s problems are only temporary. It is an
attempt to artificially support profits when a company’s sales are declining by reducing
investment and short term discretionary (optional, flexible) expenditure. It is a non-
recommended strategy
 Retrenchment strategies/ Exit strategy
Retrenchment Strategies
Management may pursue retrenchment strategies when the company has a weak competitive
position in some or all of its product lines resulting in poor performance, that is when sales are
down and profits are becoming losses. These strategies generate a great deal of pressure to
improve performance.
Restructuring
So far we have focused on strategies for expanding the scope of a company into new business
areas. We turn now to their opposite. i.e. strategies for reducing the scope of the company by
exiting from business areas.
In recent years reducing the scope of a company through restructuring has become an
increasingly popular strategy, particularly among the companies that diversified their activities.
In most cases, organizations that are engaged in restructuring are divesting themselves of
diversified activities in order to concentrate on their core businesses.
The first question that must be asked is
 Why are so many companies restructuring at this particular time?
Exit strategies
Organizations adopt/ employ different strategies for exiting from business areas and various
turnaround strategies to revitalize (refresh, revive) their core business area.
The three main strategies for exiting business areas are ;-
 divestment,
 harvest, and
 liquidation Divestment

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Exit strategy
Divestment
Of the three main strategies, divestment is usually the favored one. It represents the best way for
a company to recoup as much of its initial investment in business unit as possible. The idea is to
sell the business unit to the highest bidder.
Harvest and Liquidation:
A harvest or liquidation strategy is generally considered inferior to a divestment strategy since
the company can probably best recoup its investment in a business unit by divestment.
A harvest strategy involves halting investment in a unit in order to maximize short to medium-
term cash flow from that unit before liquidating it.
A liquidation strategy is the least attractive of all to pursue since it requires the organization to
write off its investment in a business unit, often at a considerable cost.
Turnaround:
This strategy, dealing with a company in serious trouble, attempts to resuscitate (save) or revive
the company through a combination of contraction (general, major cutbacks in size and costs)
and consolidation (creating and stabilizing a smaller, leaner company).
Although difficult, when done very effectively it can succeed in both retaining enough key
employees and revitalizing the company.
Captive company strategy
This strategy involves giving up independence in exchange for some security by becoming
another company's sole supplier, distributor, or a dependent subsidiary.
Sell out
If a company in a weak position is unable or unlikely to succeed with a turnaround or captive
company strategy, it has few choices other than to try to find a buyer and sell itself (or divest, if
part of a diversified corporation).
2. Portfolio Strategies
Strategic planning is the process of developing and maintaining a strategy fit between
organization’s goals & capabilities and its changing marketing opportunities. And the steps are
 Defining the company mission
 Setting company’s objectives and goals
 Designing the Business Portfolio
 Developing business unit strategy
 Designing functional plans (marketing, HR, Operations, Financial, MIS)
Designing the Business Portfolio
Based on the company’s mission statement and objectives, managers must plan its business
portfolio.

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Business portfolio is the collection of businesses and products that make up the company or the
company comprises. It is best if it fits the company’s strengths and weakness to opportunities in
the environment.
Companies must analyze their business portfolio & decide which business
should receive more, less, or no investment, and develop growth strategies
for adding new products or businesses to the portfolio.
One of the most popular aids to developing corporate strategy in Multi Business Corporation is
portfolio analysis. Portfolio analysis is a tool that management uses to identify & evaluate the
various businesses that make up the company.
In portfolio analysis, top management views its product lines and business units as a series of
investments from which it expects a profitable return; and the product lines/ business units form
a portfolio of investments that top management must constantly juggle (organize, manage, fit in)
to ensure the best return on the corporation’s invested money.
What should be our portfolio strategy?
This second component of corporate level strategy is concerned with making decisions about the
portfolio of lines of business (LOB's) or strategic business units (SBU's), not the company's
portfolio of individual products.
The best test of the business portfolio's overall attractiveness is whether the combined growth
and profitability of the businesses in the portfolio will allow the company to attain its
performance objectives.
Questions related to this overall criterion are such as:
 Does the portfolio contain enough businesses in attractive industries?
 Does it contain too many marginal businesses or question marks?
 Is the proportion of mature/ declining businesses so great that growth will be sluggish?
 Are there some businesses that are not really needed or should be divested?
 Does the company have its share of industry leaders, or is it burdened with too many
businesses in modest competitive positions?
 Is the portfolio of SBU's and its relative risk/ growth potential consistent with the
strategic goals?
 Do the core businesses generate dependable profits and/ or cash flow?
 Are there enough cash-producing businesses to finance those needing cash
 Is the portfolio overly vulnerable to seasonal or recessionary influences?
 Does the portfolio put the corporation in good position for the future?
It is important to consider diversification Vs concentration while working on portfolio strategy.
However, having a single business puts "all the eggs in one basket," which is dangerous when
the industry and/or technology may change.
Strategic management within multi-business companies has been closely associated with the
development and application of portfolio planning models, and more recently with the
application of shareholder value models to restructuring strategies.

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Portfolio Planning Models

Portfolio matrix models can be useful in reexamining a company's present portfolio. The
purpose of all portfolio matrix models is to help a company understand and consider changes in
its portfolio of businesses, and also to think about allocation of resources among the different
business elements.
The primary models are
 the BCG Growth-Share Matrix and
 the GE Business Screen (Porter, 1980)
These models consider and display on a two-dimensional graph each major SBU in terms of
some measure of its industry attractiveness and its relative competitive strength
Portfolio Planning Models: Boston Consulting Group (BCG) approach
To analyze business portfolio, the formal portfolio planning method used is Boston Consulting
Group (BCG) approach.
The BCG approach is called growth-share matrix. It the best known planning method and
developed by Boston Consulting Group a leading management consulting firm.
The BCG Growth-Share Matrix model considers two relatively simple variables:
 growth rate of the industry as an indication of industry attractiveness, and
 relative market share as an indication of its relative competitive strength.
high
Question Star
Market mark growth rate
Dog Cash cow
Low
High
Relative market share

Fig: Growth-share matrix

The growth-share matrix defines four types of businesses (SBUs). These are stars, cash cow,
question marks, and dogs.
Question Marks
 sometimes called “problem children” or “wild cats”
 are new products with the potential for success that need a lot of cash for development.
 Low share business unit in high growth market.
 Require a lot of cash to hold their share, and require management to think hard to build to
stars and which should be phased out.
Stars:
 are market leaders typically of the peak of their product life cycle and
 are usually able to generate enough cash to maintain their thigh share of the market.
 high growth, high share business or product
 Often need heavy investment to finance their rapid growth.
 Eventually their growth slow down and they will turn into cash cows.

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Cash Cows:
 Low growth, high share business or products
 need less investment to hold their market share
 Produce a lot of cash that the company uses to pay its bills & to support other investment.
 As these products move along the decline stage of their life cycle, they are “milked” for
cash that will be invested in new question mark products.
Dogs:
 are those products with low market share that do not have the potential (because they are
in an unattractive industry) to bring in much cash.
 Low growth a low share business or product
 may generate enough cash to maintain themselves but don’t promise to be large sources
of cash.
 According to the BCG growth-share matrix, dogs should be either sold off or managed
carefully for the small amount of cash they can generate.
Star Question mark Cash cow Dog
Earning growing Low, unstable, High, stable Low, unstable
growing
Cash flow Neutral Negative Positive Neutral or negative
strategy Invest for Invest or divest milk divest
growth

Portfolio Planning Models: The GE and McKinsey Matrix

The General Electric (GE} Business Screen also associated with McKinsey, and considers two
composite variables, which can be customized by the user, for
 industry attractiveness e.g. one could include industry size and growth rate, profitability,
pricing practices, favored treatment in government dealings, etc. and
 competitive strength e.g. market share, technological position, profitability, size, etc.
The key feature of GE’s success is its highly effective and constantly evolving system of
corporate management.
Strategy recommendations as shown by three regions of figure below:
Business Unit position

Low Mediu Hig

Lo Build
attractiven
Industry

Hold
ess

Mediu

High Harvest

The McKinsey – General Electric Portfolio analysis matrix.

Industry attractiveness is computed on the basis of the following factors:

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Market size:
 Market growth (real growth rate over 10 years)
 Industry profitability (3 year average return on sales of the business and its
competitors).
 Cyclicality (average annual percent trend deviation of sales).
 Inflation recovery (ability to cover cost increases by higher productivity and
increased prices).
 Importance of overseas markets (ratio of international to US. Market).
Business unit competitive position is computed on the basis of the following variables:
 Market position
o as indicated by share of the U.S. market, share of the world market, and
market share relative to that of leading competitors.
 Competitive position
o superior, equal, or inferior to competitors) with regard to quality, technology,
manufacturing, distribution, marketing, and cost.
 Return on sales relative to the leading competitors.
Business units
 that rank high on both dimensions have excellent profit potential and should be
growth (build).
 that rank low on both dimensions have poor prospects and should be harvested
(managed to maximize cash flow with little or no new investment).
 that in-between business are candidates for a hold strategy.
Developing growth strategies
Besides/ beyond evaluating current business, designing the business portfolio involves finding
business & products that the company should consider in the future.
Companies need growth if they are to compete more effectively, satisfy their stakeholders, and
attract top talent. Growth is pure oxygen for them. The company’s objective must be “profitable
growth”.
One of the most useful devices for identifying growth opportunities is product-market expansion
grid (matrix)

Existing market
Market
Penetration Product development
Market  consolidation
 liquidation New Market

Market Development Diversification Existing/

present Product
New Product
Product/ service

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The product expansion grid

Market penetration
 a strategy for company growth by increasing sales of current products to current market
segments with out changing the product in any way.
Product development
 a strategy for company growth by offering modified or new products to current market
segments.
Market development
 a strategy for company growth by identifying and developing new market segments for
current company products.
Diversification
 a strategy for company growth by starting up or acquiring business out side the
company’s current products and markets.
3. Parenting Strategies
This third component of corporate level strategy, relevant for a multi-business company (it is not
for a single-business company), parenting strategy. It is concerned with how to allocate resources
and manage capabilities and activities across the portfolio of businesses.
Corporate Parenting, in contrast to portfolio analysis, views the corporation in terms of resources
and capabilities that can be used to build business unit value as well as generate synergies cross
business units.
The best parent companies create more value than any of their rivals would if they owned the
same business. And have what we call “parenting advantage.”
Corporate parenting generates corporate strategy by focusing on the core competencies of the
parent corporation and on the value created from the relationship between the parent and its
business.

The Generic Building Blocks of Competitive Advantage

As noted earlier, the four factors which build competitive advantage are efficiency, quality,
innovation and customer responsiveness. They are the generic building blocks of competitive
advantage.
These factors are generic in the sense that they represent four basic ways of lowering costs and
achieving differentiation that any company can adopt, regardless of its industry or the products
or services it produces; and all highly interrelated. Thus, for example, superior quality can lead to
superior efficiency, while innovation can enhance efficiency, quality, and customer
responsiveness.
Choosing the best strategy alternatives
Decision making is a complex subject. This section can only offer a few suggestions. Among
the many sources for additional information, as to Harrison (1999), McCall & Kaplan (1990),
and Williams (2002), some factors to consider when

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 It is important to get as clear as possible about objectives and decision criteria (what
makes a decision a "good" one?)
 The primary answer to the previous question, and therefore a vital criterion, is that the
chosen strategies must be effective in addressing the "critical issues" the company faces
at this time
 They must be consistent with the mission and other strategies of the organization
 They need to be consistent with external environment factors, including realistic
assessments of the competitive environment and trends
 They fit the company's product life cycle position and market attractiveness/ competitive
strength situation
 They must be capable of being implemented effectively and efficiently, including being
realistic with respect to the company's resources
 The risks must be acceptable and in line with the potential rewards
 It is important to match strategy to the other aspects of the situation, including:
o size, stage, and growth rate of industry;
o industry characteristics,
 including fragmentation, importance of technology, commodity product
orientation, international features; and
o company position
 dominant leader, leader, aggressive challenger, follower, weak, "stuck in
the middle"
 Consider stakeholder analysis and other people-related factors
o e.g., internal and external pressures, risk propensity, and needs and desires of
important decision-makers
 Sometimes it is helpful to do scenario construction,
o e.g., cases with optimistic, most likely, and pessimistic assumptions.

Group Assignment 40%

1. Read carful in the above Chapter. And discuses briefly and use summarization?
2. Your assignment paper must be garter than 5 less than 4?
3. Summation date 12/09/2015.

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