Strategy Formulation, Analysis and Choice

Strategy analysis and choice

 Seek to determine alternative courses of action

that could best enable the firm to achieve its
mission and objectives.
 Types of strategy
 Strategies can be divided in to three broad
categories
1. Corporate level strategy
2. Business level strategy
3. Functional Level Strategy
 Types of strategy….
1. Corporate level strategy

 Are basically about the choice of direction that a

firm adopts in order to achieve its objectives
 Corporate level strategy..
 Major corporate strategies are
1. Growth strategy - expand the company's
activities.
2. Stability strategy - make no change to the
company’s current activities
3. Retrenchment strategy – reduce the company’s
levels of activities
 Corporate level strategy..
1. Growth/Expansion strategies
 Typical growth objectives for businesses include:
 Increase in sales revenues
 Increase in earnings or profits
 Companies that do business in expanding industries
must grow to survive.
There are two basic growth strategies
[Link] &
[Link] growth strategies
 Growth/Expansion strategies
[Link] growth strategy
 If a company’s current product lines have real
growth potential, concentration of resources on
those product lines makes sense as a strategy for
growth.
 Firms that use this strategy gain competitive
advantage in production skill, marketing know-
how & reputation in the market place.
 Growth/Expansion strategies ….
There are two concentration strategy
. Vertical Growth
. Horizontal Growth
Vertical Growth.
 involves taking over a function previously
provided by a supplier or by a distributor.
 Vertical growth can be backward integration or
forward integration
 Backward integration is a strategy of seeking
ownership or increased control of a firm’s
suppliers.
 Growth/Expansion strategies ….
 Forward integration involves gaining
ownership or increased control over
distributors or retailers.
 When distributors are especially expensive
 Incapable of meeting the firm’s distribution
needs
 They have high profit margins etc
 Growth/Expansion strategies ….
Horizontal Growth
 Horizontal integration occurs when an
organization adds one or more businesses that
produce similar products or services.
 Almost all horizontal integration is accomplished
by buying another organization in the same
business.
 Mergers and acquisitions among competitors allow
for increased economies of scale .
 Growth/Expansion strategies ….
2. Diversification Strategies
 The entry of a firm or business unit into new lines of
activity
 opportunities for growth in the original business
have been exhausted
 Diversification growth strategy is classified into
two categories:
 Concentric (Related) Diversification
 Conglomerate (Unrelated) Diversification
 Growth/Expansion strategies ….
Concentric (Related) Diversification.
 is expansion into a related industry.
 appropriate corporate strategy when a firm has a
strong competitive position.
 The concept that two businesses will generate
more profits together than they could separately
 are cost savings attributed to transferring the
capabilities and competencies developed in one
business to a new business
E.g. Dashen brewery releases Balageru and Jano
beer
 Growth/Expansion strategies ….
Conglomerate (Unrelated) Diversification
 Diversifying into completely different industry
from the firm’s current operations
 Firm move into industries where there is
 No strategic fit to be exploited
 No meaningful value chain relationships
 No unifying strategic theme
 Approach is venture into any business with good
profitability prospects
 Growth/Expansion strategies ….
 A cash-rich company with few opportunities for
growth in its industry might move into another
industry.
E.g. Tiret corporate engage in different industries
. Tikur abay transport
. Dashen brewery
. Textile factories etc
 [Link] Strategy
 A corporation may 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.
 are very useful in the short run but can be
dangerous if followed for too long.
 [Link] Strategy …
 popular stability strategies are
1. Pause strategy,
2. No change strategy, and
3. Profit strategy.
1.A pause/proceed-with-caution strategy
 is an opportunity to rest before continuing a growth
or retrenchment strategy.
 is typically a temporary strategy to be used until the
environment becomes more hospitable.
 [Link] Strategy …
2. No change strategy
 is a decision to do nothing new, a choice to
continue current operations and policies for the
foreseeable future.
 a no-change strategy’s success depends on a
lack of significant change in an organization
situation.
 [Link] Strategy …
[Link] strategy
 decision to do nothing new in a worsening
situation
 is an attempt to artificially support profits
when a company’s sales are declining by
reducing investment and short term
discretionary (optional, flexible) expenditure.
 is a non-recommended strategy
 [Link] 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.
 Retrenchment strategies…
There are four types of defensive strategies:
1. Turnaround strategy

2. A captive company strategy

3. Sell-Out/Divestment Strategy

4. Bankruptcy/Liquidation Strategy
 [Link] strategies…
[Link] strategy
 reverses the negative trend
 Emphasizes the improvement of operational efficiency
 appropriate when a corporation’s problems are
pervasive but not yet critical.
Major actions should be taken are:
 Reducing the size of operations
 Eliminating low-margin products
 Selling machineries
 Laying off employees
 [Link] strategies…
 Cutting back employee compensation or benefits

 Replacing higher-paid employees with lower-paid

employees

 Leasing rather than buying equipment

 Cutting back marketing expenses

 [Link] strategies…
2.A captive company strategy
 involves giving up independence in exchange for some
security by becoming another company's sole supplier,
distributor, or a dependent subsidiary.

3. Sell-Out/Divestment Strategy

 If a company in a weak position (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.
 [Link] strategies…
[Link]/Liquidation Strategy
 Sometimes no one is interested in buying a weak
company in an unattractive industry.
 The firm must pursue a bankruptcy or
liquidation strategy.
 [Link] level strategy
 Now we turn to strategy formulation within the strategic business
unit, in which the concern is how to compete.
 Business strategy
 focuses in improving the competitive position of a company or a
business unit’s product or service within its industry.
 can be
 competitive
 battling with all the competitors for advantage or
 cooperative
 combining with one or two competitors to compete
with the other competitors.
 Business level strategy….
 The model for formulating business level strategy is
Porter’s competitive strategies
 which provides a framework for business unit
competitive action
 The two basic types of competitive advantages a firm
can posses are low cost or differentiation
 The two basic types of competitive advantage combined
with the competitive scope lead to three generic
strategies for achieving above-average performance.
(cost leadership, differentiation & focus)
 Business level strategy….
 The focus strategy has two variants: cost focus &
differentiation focus

 Thus, a focus strategy is an integrated set of

actions designed to produce & deliver
goods/services that serve the needs of a
particular competitive segment.
 Business level strategy….
The five B-L strategies are:
1. Cost leadership
2. Differentiation
3. Focused cost leadership
4. Focused differentiation
5. Integrated cost leadership & differentiation
 Business level strategy….
 None of the five business-level strategies is
inherently or universally superior to others

 The effectiveness of each strategy is contingent

both on the opportunities & threats in a firm’s
external environment & on the possibilities
provided by the firm’s unique resources &
capabilities (core competencies)
 1. Cost Leadership Strategy
 A cost leadership strategy is an integrated set of
actions designed to produce or deliver goods or
services at the lowest cost relative to
competitors, with features that are acceptable to
customers
 Lowest competitive price
 Features acceptable to many customers
 Relatively standardised products
 Cost Leadership Strategy….
Cost saving actions required by this strategy:
 Tightly controlling production costs
 Simplifying production processes and building efficient
manufacturing facilities
 Minimising costs of sales, R&D and service
 Making optimal outsourcing
 Vertical integration decisions etc
 Cost Leadership Strategy….
Economies of Scope

 Economies of scope occur through a firm’s ability to

spread costs associated with one element of the value
chain across multiple products, thereby reducing
costs.
 Cost Leadership Strategy….
Accumulated Experience
 As a person or a firm gains experience in
completing a task, they become more efficient
at doing it.
 This process can occur through:
 learning or experience
 technical progress
 Cost Leadership Strategy….
Potential entrants
 Firm can frighten off potential new entrants
due to:
 Their need to enter on a large scale in order to be
cost competitive
Advantages and disadvantages of cost leadership Strategy

Advantage Disadvantage
• Defend market
• competitors may imitate the strategy
share
•Build entry barriers •Cost leadership is obviously not a
•Increase market
market friendly approach
share
•Enter new markets •Technological shifts are a greater
•Reduce the cost of
threat to a cost leader as these may
capital
change the ground rules on which an
industry operates
 [Link] Business Strategy
 A firm is competing based on uniqueness rather than
price and is seeking to attract a broad market.
market
 Emphasis on innovation, design, research and
development, awareness of particular customer
needs and marketing.
 Differentiation Business Strategy…
Advantages
 lessening competitive rivalry
 Reduce bargaining power of buyers
 barrier to new entrants
 Reduce substitutability
Disadvantages
 customers will not be willing to pay extra to obtain the
unique features
 if it is not valued by the customers it will fail
 3. Focused cost leadership
 Is aimed at a segment of the market for a product rather
than at the whole market or many markets.
 A particular group of customers is identified on the
basis of age, income, life style, sex, geographic location,
some other distinguishing segmental characteristic or a
combination of these.
 A focused cost leadership strategy requires competing
based on price to target a narrow market.
 it charges low prices relative to other firms that compete
within the target market.
 4. Focused differentiation
strategy requires offering unique features that fulfill the
demands of a narrow market.
Conditions under which a focus strategies are used
 Target customer group which forms a distinct market
segment
 Identification of the specific needs of the group
 Establishing that the segment is sufficiently large to
sustain the business
 The focusing firm has the necessary skills and expertise
to serve the niche segment etc
AdvantageFocused Strategy…
•It allows specialization and greater
knowledge
•lower investment in resources
•It makes entry to a new market less
costly and simpler
Disadvantage
Serving niche markets requires the development of
distinctive competencies to serve those markets
commitment to a narrow marker segment
High cost
 5. Integrated Cost
Leadership/Differentiation Strategy
 most consumers want to pay a low price for products
with some what highly differentiated features.
Firms that successfully use the integrated cost
leadership/differentiation strategy usually adapt quickly
to new technologies and rapid changes in their external
environments.
 Integrated Cost Leadership/Differentiation
Strategy…
 This strategy is risky because firms find it difficult to

perform primary and support activities in ways that

allow them to produce relatively inexpensive products
with levels of differentiation that create value for the
target customer.
They may got the problem of “stuck in the middle’’
Functional Level Strategy (Assignment)
 The Boston Consulting Group (BCG) Matrix
 Designed specifically to enhance a multidivisional
firm’s efforts to formulate strategies
 Portfolio analysis
 is one of the most popular aids to developing
corporate strategy in Multi Business
Corporation
 is a tool that management uses to identify &
evaluate the various businesses that make up
the company.
 The BCG matrix organizes businesses along two
dimensions/ variables:
 business growth rate and
 market share.
 Business growth rate
 pertains to how rapidly the entire industry is increasing.
increasing
 an indication of industry attractiveness,
attractiveness
 Market share
 defines whether a business unit has a larger or smaller
share than competitors ( competitive strength)
strength
 The combinations of high and low market share and
high and low business growth provide four
categories for a corporate portfolio.
 The growth-share matrix (BCG matrix)
 defines four types of businesses (SBUs).
1. stars,
2. cash cow,
3. question marks, and
4. dogs.
 Portfolio Strategy

BCG Matrix

46
 The star
 has a large market share in a rapidly growing
industry.
 The star is visible and attractive and will generate
profits and a positive cash flow
 are market leaders typically of the peak of their
product life cycle and
 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.
 The dog
 Low growth a low share business or product
 The dog provides little profit for the corporation and
may be targeted for divestment or liquidation if
turnaround is not possible.
 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.
 The question mark
• High business growth and Low market share
 are new products with the potential for success that
need a lot of cash for development.
 exists in a new, rapidly growing industry but has only
a small market share.
 The question mark business is risky: it could become
a star, or it could fail.
 Require management to think hard to build to stars
 The cash cow
 Low-growth industry but is a dominant business in
the industry, with a large market share.
 Because heavy investments in advertising and plant
expansion are no longer required, the corporation
earns a positive cash flow.
 It can milk the cash cow to invest in other business
 STAR (MS H IG H) ? (MS L IG H)
• Market Penetration
Backward, Forward, or
• Market Development
Horizontal Integration
• Product Development
 Market Penetration
• Divestiture
 Market Development
 Product Development

Cash Cow (MS H IG L) DOG (MS L IG L)

 Product Development • Retrenchment
Diversification • Divestiture
 Retrenchment • Liquidation
 Divestiture
 k ‘ U ’
Th a n