STRATEGY FORMULATION

A. 4 LEVELS OF STRATEGY-MAKING / 4 TYPES OF STRATEGIC ALTERNATIVES:

Strategy-making involves identifying the ways an organization can undertake to achieve

performance targets, weaken competitors, achieve a competitive advantage, and ensure the
organization’s long-term survival.

In a diversified company with different lines of business under one umbrella, strategies are
initiated at four levels.

The strategies at each level of the organization are known by the name of the level.

4 levels of strategy are;

1. Corporate-level (Organizational) strategy

2. Business-level strategy
3. Functional strategy
4. Operating strategy
a. CORPORATE-LEVEL (ORGANIZATIONAL) STRATEGY:

Corporate strategy defines the markets and businesses in which a company will operate.

Corporate strategy is formulated at the top level by the top management of a diversified
company (in our country, a diversified company is popularly known, as a group of companies,
such as Alphabet Inc.). Such a strategy describes the company’s overall direction regarding its
various businesses and product lines.

Corporate strategy defines the long-term objectives and generally affects all the business units
under its umbrella.

Organizational Strategies are generally broken down into:

 Growth-Based Strategies,
 Stability Strategies,
 Retrenchment Strategies, or
 Mix of these Strategies

A corporate strategy, for example, of P&G may be acquiring the major tissue paper companies
in Canada to become the unquestionable market leader.

The corporate-level strategy is the set of strategic alternatives from which an organization
chooses as it manages its operations simultaneously across several industries and several
markets.

b. BUSINESS-LEVEL STRATEGY:

Business strategy defines the basis on which firm will compete.

It is a business-unit-level strategy formulated by the senior managers of the unit. This strategy
emphasizes strengthening a company’s competitive position in products or services.

Business strategies are composed of competitive and cooperative strategies.

The business strategy encompasses all the actions and approaches for competing against the
competitors and the ways management addresses various strategic issues.
As Hitt and Jones have remarked, the business strategy consists of plans of action that strategic
managers adopt to use a company’s resources and distinctive competencies to gain a
competitive advantage over its rivals in a market.

Business strategy is usually formulated in line with corporate strategy. The main focus of the
business strategy is on product development, innovation, integration (vertical, horizontal),
market development, diversification, and the like.

The competitive strategy aims at gaining a competitive advantage in the marketplace against
competitors.

And competitive advantage comes from strategies that lead to some uniqueness in the
marketplace. Winning competitive strategies are grounded in sustainable competitive
advantage.

Examples of competitive strategy include differentiation strategy, low-cost strategy, and focus
or market-niche strategy.

Business strategy is concerned with actions that managers undertake to improve the
market position of the company by satisfying the customers. Improving market position implies
undertaking actions against competitors in the industry.

Thus, the concept of competitive strategy (as opposed to cooperative strategy) has a
competitor orientation. The objective of competitive strategy is to win the customers’ hearts
by satisfying their needs and, finally, to outcompete the competitors (or rival companies)
and attain competitive advantages.

The success of a competitive strategy depends on the company’s capabilities, strengths, and
weaknesses in its competitors’ capabilities, strengths, and weaknesses.

In doing business, companies confront a lot of strategic issues. Management has to address all
these issues effectively to survive in the marketplace. Business strategy deals with these issues,
in addition to how to compete.

A business-level strategy is the set of strategic alternatives an organization chooses as it

conducts business in a particular industry or market.

Such alternatives help the organization focus on each industry or market in a targeted fashion.
c. FUNCTIONAL STRATEGY:

A functional strategy is, in reality, the departmental/division strategy designed for each
organizational function.

Thus, there may be a production strategy, marketing strategy, advertisement strategy, sales
strategy, human resource strategy, inventory strategy, financial strategy, training strategy, etc.

A functional strategy refers to a strategy that emphasizes a particular functional area of an

organization. It is formulated to achieve some objectives of a business unit by maximizing
resource productivity.

Sometimes functional strategy is called departmental strategy since each business function is
usually vested with a department.

For example, the production department of a manufacturing company develops a production

strategy’ as the departmental strategy, or the training department formulates ‘a training
strategy’ for providing training to the employees.

A functional strategy is concerned with developing a distinctive competence to provide a

business unit with a competitive advantage.

Each business unit or company has its own set of departments, and every department has a
functional strategy. Functional strategies are adopted to support a competitive strategy.

For example, a company following a low-cost competitive strategy needs a production

strategy that emphasizes reducing the cost of operations and a human resource strategy that
emphasizes retaining the lowest possible number of highly qualified employees.

Other functional strategies, such as marketing strategy, advertising strategy, and financial
strategy, are also to be formulated appropriately to support the business-level competitive
strategy.

d. OPERATING STRATEGY

Operating strategy is formulated at the operating units of an organization. A company may

develop an operating strategy for its factory, sales territory, or small sections within a
department.
Usually, the operating managers/field-level managers develop an operating strategy to achieve
immediate objectives. In large organizations, the operating managers normally take assistance
from the mid-level managers while developing the operating strategy.

In some companies, managers “develop an operating strategy for each set of annual objectives
in the departments or divisions.

CONCLUSION

Companies today compete in a variety of industries and markets.

So, as they develop business-level strategies for each industry or market, they also develop
an overall strategy that helps define the mix of industries and markets that are of interest to
the firm.

These levels provide businesses with a rich combination of strategic alternatives.

Business Growth Strategies:

There are many ways to grow a business. Which way you choose to expand largely
depends on your ambition, your reasons for growth, and the opportunities and
resources available. However, two crucial factors for choosing a growth strategy exist.
They are:

 products - what you currently offer, and what you'd like to offer in the future
 markets - where you currently sell, and where you'd like to sell in the future

Organic and Inorganic Growth

There are two main categories of growth: organic growth and inorganic growth. An
inorganic growth strategy means that an organization is not using its own products or
marketing to grow, it is going 'outside' of its business in order to grow. Examples include
mergers, acquisitions, and other types of business partnerships. An organic growth
strategy means that an organization is using its own products and marketing to grow, it
is going 'inside' of its business in order to grow. In other words, organic growth involves
growing by increasing a business's output and improving internal operations and
efficiency. The main difference between the two types of growth is that organic growth is
internally focused while inorganic growth is generally externally focused. Inorganic
growth is typically thought to be faster than organic growth, but it can also be more
expensive and riskier.

There are four core strategies that make up organic growth. These strategies are known
as market penetration, market development, product development, and diversification.

What are the four major growth strategies?

Four main strategies for growth, each with their own distinct benefits and risks, are:

 market penetration
 product development
 market development
 diversification
With a market penetration strategy, you try to sell more of the same things to the
same market. The risks are usually low as you focus on capturing a bigger share of your
current market with the products you already have.

With a product development strategy, you are introducing a new product into your
existing market. You're effectively selling something different to the same customer,
potentially encountering greater risks.

Another option is a market development strategy, where you try to sell an existing
product in a brand new market. For example, you may want to segment your existing
market or reposition your product in it, or target an entirely different geographical area.

Finally, with a diversification strategy, you are aiming to sell completely different
goods or services to completely different customers. This is typically the riskiest of
options - it requires both product and market development.

Other ways to grow your business

Every business is different. You may need to adapt some of the suggested strategies to
suit your circumstances. For example, you may want to explore:

 acquisitions
 franchising
 strategic partnerships
 improving efficiency in your business
You may also want to construct your own unique combination of strategies.

The best approach will usually be the one that suits your overall strategic plan. Focus
on finding an option that could yield the most results from the least amount of risk and
effort.
 Diversification Strategy

A. What is Diversification Strategy?

Business diversification is a strategy that involves expanding a company into new
products, services, or markets to reduce risk, create new revenue streams, and grow
the business.

B. Types of Diversification Strategy:

Though there are various ways in which the diversification strategy can be looked upon,
but at the initial level, we classify this at two levels. These include

a. Related Diversification

Related diversification occurs when a firm moves into a new industry that has important
similarities with the firm’s existing industry or industries. Because films and television
are both aspects of entertainment, Disney’s purchase of ABC is an example of related
diversification. Some firms that engage in related diversification aim to develop and
exploit a core competency to become more successful. A core competency is a skill set
that is difficult for competitors to imitate, can be leveraged in different businesses, and
contributes to the benefits enjoyed by customers within each business.

Honda Motor Company provides a good example of leveraging a core competency

through related diversification. Although Honda is best known for its cars and trucks, the
company actually started out in the motorcycle business. Through competing in this
business, Honda developed a unique ability to build small and reliable engines. When
executives decided to diversify into the automobile industry, Honda was successful in
part because it leveraged this ability within its new business. Honda also applied its
engine-building skills in the all-terrain vehicle, lawn mower, and boat motor industries.

b. Unrelated Diversification – This strategy is based on using the general

organizational competencies to increase profitability of each business unit. The new
business wherein the firm intends to diversify has no connection with the existing value
chain of the company. Infact the value chains are so dissimilar that no competitively
valuable cross-business relationship exists. This strategy involves diversifying into
business that has no strategic fit, no meaningful value chain relationships and no
unifying strategic theme. The firms which pursue unrelated diversifications are generally
known as conglomerates. Firms can build shareholder value through unrelated
diversification through astute corporate parenting by management, cross business
allocation of financial resources; and acquiring and restructuring undervalued
companies. The basic approach is to diversify into any industry where potential exists
and through diversification the firm can realize higher profits. For example Samsung
operates in electronic, shipbuilding, insurance etc. Similarly Tata Group is in multiple
business like airlines, telecom, steel etc.
C. The Motive for Diversification:

Goal Explanation

Spreading investments across different asset classes, industries, or

Risk reduction maturities can reduce the impact of market shocks on your
investments.

A successful diversification effort can increase business growth and

Profitability
profits.

New revenue
Diversification can create new sources of revenue for a business.
streams

Competitive Diversifying can help a company offer something its competitors

advantage can't.

Brand image Diversification can help boost a brand's image.

Diversification can help companies take advantage of new

Industry
technologies, avoid collapse, and find opportunities for cost-cutting
changes
and profit maximization.

Diversification can help a company optimize its resources, such as

Resource
putting excess cash flow to work or better using existing
optimization
infrastructure.
 Business Portfolio Analysis

Business portfolio analysis is a process that helps companies understand how well their
products and services are performing and where to invest more money or cut costs. It's
a strategy tool that helps companies make strategic decisions about their resources and
improve their overall business.

Here are some things that business portfolio analysis can help with:
 Categorizing products and services
Companies can categorize their products and services based on their performance
and competitiveness.
 Identifying areas for investment
Companies can use the analysis to determine where to invest more money.
 Identifying areas for improvement
Companies can use the analysis to identify areas where they can improve or divest.
 Allocating resources
Companies can use the analysis to allocate resources efficiently to the most promising
markets.
 Aligning with strategy
Companies can use the analysis to ensure that their products, services, and strategic
business units are moving in the right direction.