CHAPTER-FIVE

5.Strategy Formulation: Strategy Analysis and Choice

Strategy formulation, referred to as strategic planning or long-range
planning, is concerned with developing a corporation’s 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.
5.1 The nature of strategy 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.

The firm’s present strategies, objectives, vision, and mission, coupled

with the external and internal audit information, provide a basis for
generating and evaluating feasible alternative strategies.

Wa Dangila Anedent
 Cont,,,,
• Strategy formulation is not a task in which managers can get by with
opinions, rather than from solid analysis of a company's external
environment and internal situation.
 Issues to consider for strategic analyses

Strategies exist at different levels in an organization and are classified in

to tree major categories according to their scope of coverage i.e. they are
classified into:
A, Corporate,
B. Business and
C. Functional level strategies
A. Corporate Level Strategy
It is called Grand strategies, master strategies are intended to provide
basic direction for strategic actions.
 CONT…
• Grand strategies are basically about the choice of direction that a
firm adopts in order to achieve its objectives. Is about the basic
direction of the firm as a whole,
• The grand strategies (major Corporate Strategies) can be:
• a) Growth strategies - expand the company's activities.
• b) Stability strategy - make no change to the company’s current
activities.
• c) Defensive/decline strategy – reduce the company’s levels of
activities.
• d) Combination Strategy
A, Growth strategies - expand the company's activities.
• It is called expansion strategies: Growth is a way of life.
• The expansion grand strategy is followed when an organization aims
at high growth by substantially broadening its scope in order to
improve its overall performance
• Growth Strategies involve the attainment of specific
growth objectives by increasing the level of a firm’s
operations.
• Types of Growth Strategy
1,Expansion through Concentration.
2,Expansion through Diversification.
3,Expansion through Integration.
4,Expansion through Internationalization.
 1,Concentration Strategy (Concentric
Expansion)/intensive
• It is the most common grand growth strategy.
• It is also known as intensification. Requires intensive efforts to
improve a firm's competitive position with existing products.
• Concentration strategy will be appropriate when the company
concentrates on the current business.
• Concentration strategy Includes:
A. Market development
B. Market penetration, and/or
C, Product development
• A, Market Development
• It is Introducing present products or services into new geographic
areas.
 B’ Product Development
• A strategy that seeks increased sales by improving or modifying
present products or services.
• It usually entails large research and development expenditures
C, Market Penetration
It refers to Attempting to capture more market share in the existing
product market.
Expanding the current business at a rate higher than the industry
growth.
Directing resources to the profitable growth of a single product, in a
single market, with a single technology ,through
• Attracting competitors’ customers through price cuts.
• Attracting non-users through advertising, price incentives etc
 Rapid market penetration: based on two assumptions:
To lower the price and promotional activities can be increased.
• Slow market penetration: also based on two assumptions:
To lower the price but promotional activities are not changed.

2. Diversification Strategy
 It is the process of entry into a business which is new to an
organization either market-wise or product wise or both

 Types of diversification
Diversification growth strategy is classified into two categories such as
A. Concentric (Related) and
B, Conglomerate (Unrelated).
A..Concentric Diversification
It involves the addition of a business related, but not similar, to the firm
in terms of technology, markets or products.
It is seeking growth with new market & product having meaningful
synergy or fit with existing business
B. Conglomerate Diversification
 Adding new, unrelated products or services.
 Sell part of the firm on an expectation of profits from breaking
up acquired firms and selling divisions piecemeal.
• 3, Integration Strategy
• Integration strategy focuses on moving to different industry level,
different product & technology but the basic market remains the same.
There are two types of integrative growths:
• A. Vertical integration
• B. Horizontal integration
• A. Vertical Integration
• Vertical Integration involves extending an organization’s present
business in two possible directions.it has toe parts
• I) Forward integration: - Refers to moving the organization into
distributing its own products or services. Involvement in a business
that serve as a customer for the firm’s outputs
• II) Backward integration: - Refers to moving an organization into
supplying some or all of the products or services used in producing
its present products or services. Involvement in a businesses that
supply the firm with inputs;
• 2. Horizontal integration
• It refers to involvement in a business operating at the same stage of
the production-marketing chain.
• Horizontal integration occurs when an organization adds one or more
businesses that produce similar products that are operating at the
same stage in the product market chain.
• Almost all horizontal integration is accomplished by buying another
organization in the same business.
 Merger – is a strategy through which two or more firms agree to
integrate their operations on a relatively co-equal basis.
• merger, a single new company will be established with new name,
organizational structure, issuing new stock & other changes.
However, the shareholders of the former firms will become
shareholders of the new enlarged organization.
Acquisition – a strategy through which one firm buys a controlling of
100% interest in another firm with the intent of making the acquired firm a
subsidiary business within its portfolio. Therefore, an acquisition is
marriage of unequal partners with one organization buying the other
B. STABILITY STRATEGY
It is also called neutral strategy: occurs when an organization is satisfied
with its current situation & wants to maintain the status quo
c. Defensive Strategies
 Defensive Strategies most often used as a short-term solution to:
 Reverse a negative trend.
 Overcome a crisis or problem situation.
 It could be classified into decline & closure strategies.
Reasons:
 The company faced financial problems
• The company forecasts hard times ahead related to:
 Challenges from new competitors & products.
 Changes in government regulations
Owners are tired of the business or have to have an opportunity to
profit substantially by selling.
 Defensive Strategies includes:
I. Retrenchment,
II. Harvesting,
III. Divestiture
IV Liquidation
V Joint Venture
I. Retrenchment strategy
 Occurs when an organization regroups through cost and asset
reduction to reverse declining sales and profits.
 Sometimes called a turnaround or reorganization strategy
II Harvesting
• Occurs when future growth appears doubtful or not cost effective –
the main reason could be because of new competition or changes in
consumer preferences.
 In this case the firm limits additional investment & expenses
• III. Divestiture strategy
 Selling a division or part of an organization.
 Is used to raise capital for further strategic acquisitions or investments.
• Can be part of an overall retrenchment strategy to clear businesses that
are: Unprofitable , require too much capital and do not fit with the
firm's other activities.
IV Liquidation
• Selling all of a company’s assets, in parts, for their tangible worth.
• Is recognition of defeat and, consequently, can be an emotionally
difficult strategy
V Joint Venture
• Two or more companies form a temporary JOINT for purpose of
capitalizing on some opportunity.
• The two or more sponsoring firms form a separate organization and
have shared equity ownership in the new entity.
 B. Business level Strategy
 Are the goal directed actions managers take in their quest for competitive
advantage when competing in a single product market.
 It may involve a single product or a group of similar products that use the
same distribution channel.
 It concerns the broad question, ―How should we compete?‖ To formulate an
appropriate business-level strategy, managers must answer the ―who-what-
why-and-how‖ questions of competition:
▲ There are two fundamentally different business strategies—
1,differentiation and
2,cost leadership
1. A differentiation strategy seeks to create higher value for customers
than the value that competitors create, by delivering products or services with
unique features while keeping costs at the same or similar levels
2. A cost-leadership strategy, in contrast, seeks to create the same or
similar value for customers by delivering products or services at a lower cost
than competitors, enabling the firm to offer lower prices to its customers.
5.4 STRATEGY-FORMULATION FRAMEWORK
 Important strategy-formulation techniques can be integrated into a
three-stage decision-making framework, as shown below.
Stage-1 (The input stage)Formulation Framework
 Summarizes the basic input information needed to formulate
strategies.
1. External Factor Evaluation (EFE)
2. Competitive Profile Matrix (CPM)
3. Internal Factor Evaluation Matrix (IFE)
Stage-2 (Matching stage)
 Focuses upon generating feasible alternative strategies by aligning key
external and internal factors. its techniques includes
1. SWOT Matrix (Threats-Opportunities-Weaknesses-Strengths)
2. BCG Matrix (Boston Consulting Group)
3. IE Matrix (Internal and external matrix)
 Stage-3 (Decision stage)
• Involves a single technique, the Quantitative Strategic Planning
Matrix (QSPM).
• A QSPM uses input information from Stage 1 to objectively evaluate
feasible alternatives identified in Stage 2.
• It reveals the relative attractiveness of strategies and, thus, provides an
objective basis for selecting specific strategies.
1. The Strengths-Weaknesses-Threats-Opportunities
(SWOT) Matrix.
SWOT Analysis is a strategic planning tool used to evaluate the
Threats, Opportunities and Strengths, Weaknesses, in a business
venture requiring a decision,
SWOT are defined precisely as follows:
 Strengths are attributes of the organization that are helpful to the
achievement of the objective.
 Weaknesses are attributes of the organization that are harmful to
the achievement of the objective.
 Opportunities are external conditions that are helpful to the
achievement of the objective.
 Threats are external conditions that are harmful to the achievement
of the objective.
• SO Strategies: Every firm desires to obtain benefit from its
resources.
• WO Strategies: aim at improving internal weaknesses by taking
advantage of external opportunities.
• ST Strategies: use a firm’s strengths to avoid or reduce the impact of
external threats.
• WT Strategies: Are defensive tactics used to overcome firm’s
weakness and reduce threats
 2. Boston Consulting Group (BCG) Matrix
A separate strategy often must be developed when a firm’s divisions
compete in different industries. Autonomous divisions of an
organization make up what is called a business portfolio
 The BCG Matrix graphically portrays differences among divisions in
terms of relative market share position and industry growth rate.
BSG puts a category of four different types Divisions located in
Quadrant of businesses:
Quadrant I of the BCG Matrix are called ―Question Marks,‖
Quadrant II are called ―Stars,‖
Quadrant III are called ―Cash Cows,‖ and
Quadrant IV are called ―Dogs.‖
• A. Cash cows
• Units with high market share in a slow-growing industry.
• These units typically generate cash in excess of the amount of cash needed
to maintain the business.
• They are regarded as staid and boring, in a "mature" market, and every
corporation would be thrilled to own as many as possible.
• They are to be "milked" continuously with as little investment as possible,
since such investment would be wasted in an industry with low growth
B. Dogs
• More charitably called pets, units with low market share in a mature, slow-
growing industry.
• These units typically "break even", generating barely enough cash to
maintain the business's market share.
• Though owning a break-even unit provides the social benefit of providing
jobs and possible synergies that assist other business units, from an
accounting point of view such a unit is worthless, not generating cash for
the company.
• They depress a profitable company's return on assets ratio, used by many
investors to judge how well a company is being managed.
• Dogs, it is thought, should be sold off.
C. Question marks
• Units with low market share in a fast-growing industry. Such
business units require large amounts of cash to grow their
market share.
• The corporate goal must be to grow the business to become a
star. Otherwise, when the industry matures and growth slows,
the unit will fall down into the dog’s category.
D. Stars
• Units with a high market share in a fast-growing industry. The
hope is that stars become the next cash cows.
• Sustaining the business unit's market leadership may require
extra cash, but this is worthwhile if that's what it takes for the
unit to remain a leader.
• When growth slows, stars become cash cows if they have been
able to maintain their category leadership
3. The Internal-External (IE) Matrix
• It is related to internal (IFE) and external factor evaluation (EFE).
It contains nine cells. (Positions for divisions). It is developed
based on two key dimensions. Those are:-
• The IFE total weighted scores on the x-axis.
• The EFE total weighted scores on the y-axis.
• Divided into three major regions
1. Grow and build
2. Hold and maintain
3. Harvest or divest
• The total weighted scores of both matrices derived from the
divisions allow construction of the corporate-level IE Matrix.
• On the x-axis of the IE Matrix, an IFE total weighted score of 1.0
to 1.99 represents a weak internal position; a score of 2.0 to
2.99 is considered average; and a score of 3.0 to 4.0 is strong.
• Similarly, on the y-axis, an EFE total weighted score of 1.0 to
1.99 is considered low; a score of 2.0 to 2.99 is medium; and a
score of 3.0 to 4.0 is high.
• 4. MICHAEL PORTER'S GENERIC STRATEGIES
• According to Porter, strategies allow organizations to gain
competitive advantage from three different bases:
• cost leadership,
• differentiation, and
• focus.
• Cost leadership emphasizes producing standardized products
at very low per-unit cost for consumers who are price-sensitive.
• Differentiation is a strategy aimed at producing products and
services considered unique industry wide and directed at
consumers who are relatively price-insensitive.
• Focus means producing products and services that fulfil the
needs of small groups of consumers.