Chapter 4 - Strategy Formulation

 

STRATEGY STRA TEGY FORMU FORMULA LATION TION  •

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appropriate course of action Formulating Strategies; involves determining appropriate for achieving objectives. It includes such activities as analysis, planning and selecting strategies that increase the chances that an organization’s objectives will be achieved. formulation cannot begin until the Environmental Analysis; strategy formulation managers responsible for shaping strate strategy gy understand the context context in which the strategies will unfold. Environmental Environmental analysis is the foundation for designing successful stra strategies. tegies. All this information information is useful in strategy formulation at different levels.

Environmental Analysis Technique Techniquess to Determine Corporate Level Strategies  Critical Question Analysis  SWOT Analysis

 

STRATEGY STRA TEGY FORMU FORMULA LATION TION  •

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Corporate / Organizational Strategy Strategy. . A comprehensive plantoaimed at its helping the organization to achieve its goals. Ability of an organization achieve mission and objectives includes the determination and evaluation of alternative paths.

Components of Corporate Strategy  Grand Strategies serves as Master Plan to decide the overall direction of the

organization. A grand strategy involves expanding the organization along one or more directions. These are of four types; stability, growth, defensive & concentration.  Portfolio Strategy determines the types of organizational activities, the

relationship among SBUs, and will establish how resources will be allocated among the businesses. An approach to corporate level strategy that involves analyzing the relationship & position the organization SBUs to create a mix that support the organization’s goal 

 

ENVIRONMENTAL ANALYSIS TECHNIQUES Critical Question Analysis  Critical question analysis provides a general framework for analyzing organizations current information & formulating appropriate strategies, by evaluating four areas:  Purpose & Objective of the Organization: Managers must identify where an organization wants to go, during strategy formulation managers must identify the inconsistencies between organizational mission, objectives & strategies. Appropriate strategies reflect the organization’s mission and objectives.    Where Organization Presently Going: Managers must identify weather an

organization is achieving its goals or at least making satisfactory progress. The first question focuses where organization wants to go & this one focuses on where organization is going.  Critical Environmental Factors Organization is Facing: It Facing:  It addresses internal &

external environments factors and identify the critical strategic concerns, for example; a poorly trained middle management team (internal environment) & an increase in competitive pressure (external environment). Organizational Objectives: Actual response is  Future Actions to Achieve Organizational formulation of a strategy for the organization. It goes beyond environmental analysis and includes the stages of planning and selection.  selection. 

 

  SWOT Analysis •

Definition A strategic management tool evaluate the firm, which accomplished by identifying its strengths and weak nesses and identifying its opportunities and threats. threats.  

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Conducting A SWOT Analysis Step 1; Identify internal environment by identifying its strengths & weaknesses. Step 2; Identify external environment by identifying its  its  opportunities & threats Step 3; Cross match strengths with opportunities, weaknesses with threats, strengths with threats & weaknesses with opportunities.  

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Developing Alternate Strategies St rategies: egies: Generate strategies here that use strengths to take advantage  SO Strat of opportunities  opportunities   ST Strategies: Generate strategies here that use strengths to avoid threats  WO Strategies: Generate strategies here that take advantage of opportunities

by overcoming weaknesses St rategies:: Generate strategies here that minimize weaknesses and avoid  WT Strategies threats

 

SWOT (TOWS) MATRIX INTERNAL FACTORS

Strengths (S) List 5-10 internal strengths

Weaknesses (W) List 5-10 internal weaknesses

Opportunities (O) List 5-10 external opportunities

SO Strategies S trategies Generate strategies here that use strengths to take advantage of opportunities

WO Strategies Generate strategies here that take advantage of opportunities by overcoming weaknesses

Threats (T) List 5-10 external threats

ST Strategies S trategies Generate strategies here that use strengths to avoid threats

WT Strategies Generate strategies here that minimize weaknesses and avoid threats

EXTERNAL FACTORS

 

  Case Study Study;; Maytag Corporation  Corporation  Maytag Corporation is a British  Firm involved in manufacturing of home appliances and was well placed in US niche marke market, t, lately it had acquir acquired ed Hoover (known cleaner brand) with an international orientation and with with worldwide distribution channels. Firm in the decade of 1980s was facing a tough global competition and was challenged by Japanese (numerous home appliances companies), American (Hoover, Raytheon) and other European firms (Electrolux, Whirlpool) as their global positioning was threatening. Maytag senior management, although very experienced was not happy with the company ’s position as its global positioning was week, facing an intensive competition contemporary companies. its specially financial position was not healthy asfrom certain portfolios were sustaining Moreover, regular losses the Dixie-Narco Division (which was under debt) and there was a dire need to achieve cost reduction and to reduce break-even point. Although company had its own factories and production line but could not introduce new products due to nonavailability of processed R & D, on the other hand Japanese companies were introducing new products. Another imbalance was unorganized distribution and company failed to make its products visible in super stores an emerging trend. However, the opportunity existed to make a turnaround due to global emerging markets in Asia and Eastern Europe which was opening up gradually and presented a huge market. The cutting edge of Maytag was its quality which could have made its mark in USA as well as in Europe where demographics favored quality.  quality.   REQUIRMENT   REQUIRMENT Develop a proper SWOT Analysis. Analysis.

 

Strengths

Opportunities



Quality is Maytag culture





Experienced top management



Vertical integration, as company

Economic integration of European Community



owns dedicated factories

Demographics of Europe and America favor quality appliance  appliance 



Good employee relations  relations 



Economic development of Asia



Hoover’s international



Opening of Eastern Europe

orientation   orientation



Trend to “Super Stores” 

Weaknesses

Threats



Not process-oriented R&D





Distribution channels are weak  weak 



Finance position weak  weak 



Strong US competition



Global positioning not favorable  favorable 



Whirlpool and Electrolux strong

Increasing government regulations

Globally 

New product advances



Japanese appliance companies

 

GENERATING A SWOT (TOWS) MATRIX FOR MAYTAG CORPORATION INTERNAL FA FACTORS CTORS EXTERNAL FACTORS

Strengths (S)  Quality Maytag culture  Experienced top management

Weaknesses (W)  Process – oriented R&D  Distribution channels

 Vertical integration  Employee relations

 Financial position  Global positioning

 Hoover’s international

 Manufacturing facilities

orientation

Opportunities (O) Opportunities  Economic integration of

SO Strategies  Use worldwide Hoover

WO Strategies  Expand Hoover’s presence in

European Community  Demographics favor quality  Economic development of Asia  Opening of Eastern Europe  Trend toward super stores

distribution channels to sell both Hoover and Maytag major appliances.  Find joint venture partners in Eastern Europe and Asia

continental Europe by continental improving Hoover quality and reducing manufacturing and distribution costs.  Emphasize superstore channel for all non-Maytag brands.  brands. 

Threats (T)  Increasing government regulation  Strong US competition  Whirlpool and Electrolux positioned for global economy

ST Strategies  Acquire Raytheon’s appliance business to increase US market share  Merge with a Japanese major home appliance company

WT Strategies  Sell off Dixie-Narco Division to reduce debt.  Emphasize cost reduction to reduce break-even point.  Sell out to Raytheon or a

 New product advance  Japanese appliance companies

brands  Sell off all non-Maytag brands and strongly defend Maytag’s US share .  . 

Japanese firm

 

FORMULATING ORGANIZATIONAL STRATEGIES LEVEL OF STRATEGIES •

Corporate Level Strat S trategies egies The corporation’s overall plan concerning the number of businesses the corporation holds, the variety of industries it serves, and a nd distribution of

resources among those businesses. •

Business Level Strategies

This strategy involves involves decisions about how the firm will compete in each business area and industry industry.. •

Functional Level Strategies

The level of strategy that determines determines how activities in each of the organization’s functional areas will support business level strategy.  

 

  Corporate Level Strategies •

Corporate Level Strategies The corporation’s overall plan concerning the number of businesses the corporation holds, the variety of industries it serves, and distribution of resources among those businesses.  businesses. 

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Corporate Level Decisions  Grand Strategies serves as Master Plan to decide the overall direction of the organization.  Decide about the portfolio strategy that will determine the organizational

activities. •

Strategy Facilitate  Guides overall direction.  Define the Businesses in which company competes  Determine the resource allocation

 

CORPORATE LEVEL STRATEGIES •

 Stability Strategy; Focuses on existing existing line or line of business & attemp attemptt to maintain them. This strategy is useful in following situations;  An organization in no growth or low growth industry.  An organization that is of large size & dominates its markets.  Once further growth is costly, with detrimental effects on profitability.

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involves the acquisition of Growth Strategy; A growth strategy that involves organizations organiz ations in existing line of business (competitors), (competitors), as well as in other industries or other line of businesses with a view to seek growth in sales, profit and market share. Organization Organization pursue growth by means of Integrative and Diversification strategies.

Defensive Strategy; A grand strategy that involves reducing organization’s operations retrenchment & joint venture are the two defensive strategies. Concentration Strategy; An organization focuses on single line of business. This strategy is used by firms seeking to gain competitive advantage through specialized knowledge & avoid managing too many businesses.

 

Growth Strategies  •

Integrative Strategies  Vertical Integration; involves Integration; involves growth by acquiring supplier ( backward

integration) or distributor (forward (forward integration).  Horizontal Integration; involves growth by acquiring competing firms. •

Intensive Strategi Strategies es 

Market Development; developing new market segments for current products.  Market Penetration; increasing Penetration; increasing sales of current products to current markets.  Product Development; offering Development; offering new products to current market segments.  Diversification; a growth strategy by offering new products to new markets. •

Diversification: A growth strategy that involves the acquisition of organizations in other industries industries or other line of businesses. Diversification;; once acquired firm has similar marketing,  Concentric Diversification products, distribution channel and markets similar to those of purchaser firm. Conglomerate e Diversification Diversification; when acquired firm is in a completely different  Conglomerat line of business.

 

Defensive Strategies  •

Retrenchment Strategies Strategy; strategy is employed when organization is performing  Turnaround Strategy; strategy

poorly but has not reached a critical stage. Entails getting rid of non-profitable products, pruning workforce, reducing distribution outlets & selling assets.

 Divestment Strategies: Involve in selling a particular business to improve its

financial position. 

Harvest;; a retrenchment Harvest strategy that involves investment maximizing short term profits while planning tominimizing sell or liquidate in longand term.

 Liquidation Strategy; Business terminated assets sold off.

Bankrupted;; organization seeks court protection to gain time and  Bankrupted opportunity to attempt a turnaround.  turnaround.  •

Mergers & Joint Ventures Venture; It occurs when two or more companies form a temporary  Joint Venture; partnership for the purpose of capitalizing some opportunity. Merger; A  Merger;  A merger occurs when 2 or more organizations form an enterprise. Once acquisition of takeover merger in takeover. .  not desired by both parties, it is called a takeover or hostile

 

BUSINESS LEVEL STRA STRATEGIES TEGIES  •

Porter’s Generic Competitive Strategies   The level of strategy that determines how a company will compete in each of its business units. Business level strategy is concerned with the way each business approaches its market place.  Porter’s Generic Competitive business level strategies that organization can

adopt to achieve competitive advantage theirbeindustries. strategies are considered generic becausewithin they can applied inThese variety of situations. Each require particular skills, resources and organizational characteristics.  Three broad business level strategies are;  –

 –

 –

Cost leadership strat strategy egy.. A generic competitive strategy that keeps cost as low as possible to attract a broad market and to yield high profits. Differentiation Strategy. Differentiation Strategy. A generic competitive strategy in which an organization crafts a product that customers perceive to be distinctly different from the competition. Focus Strategy. In this strategy on organization concentrates on a limited part of the market a limited product line or a confined geographic area.

 

COST LEADRERSHIP STRATEGY; Keep cost as low as possible to attract broad market and yield profit. EFFECTIVENESS

REQUIREMENTS

Buyers are sensitive to To keep the price low high price and always prefer low efficiency and low price products. overhead is mandatory.

RISKS

War price is waged resulting resultin g in less profitability.

Normally buyers can’t differentiate between brand and value.

Firm to undertake cost control.

Competitors can imitate strategy.

Underpriced competitors can gain market share.

Reward link to cost containment.

Firm must use technology to achieve low production cost.

 

DIFF DI FFER ERENT ENTA ATION TION STRA STRATEGY; TEGY; Customer perceive product to be distinctively different EFFECTIVENESS

REQUIREMENTS

Develop product by carefully checking the preferences and buyers need.

Competitors should not copy the uniqueness quickly and cheaply.

Higher price can be charged.

Production of a unique product requires close coordination between R & D and Marketing Functions.

Can also be achieved through superior service, warranty & after sales service.

RISKS

Uniqueness can at times be Uniqueness quickly and cheaply imitated.

 

FOCUS STRATEGY; Concentrate on limited part of market, product or geographic area. EFFECTIVENESS

REQUIREMENTS

RISKS

Once competitors are not specialized in that area.

Customers may change preferences.

Customers have distinctive preferences

Competitors may copy. copy.

 

Functional Level Strategies Strategies •

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capacity, plant layout, Operations Strategy. Focuses on plant capacity, manufacturing / production processes. Important aspects are controlling cost & improving efficiency.  Marketing Strategy. Focuses on developing determining determining markets for line of business & developing effective marketing mix.

Financial Strategy. Focuses on forecasting, financial planning, evaluating financial proposal & controlling financial resources. It contributes to strategy strat egy formulation by assessing po potential tential profits on various strategy strategy alternatives. HR Strategy. Concerned with attracting, assessing, motivating & retaining numbers & type of employees required to run business. strategy involves involves concept generation, generation, planning & R&D Strategy. This strategy development which are expensive and risky.

 

Analyzing Business Portf Portfolio olio •

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Business Portfolio Portfolio;; The collection of businesses & products that make-up of a company.   company. Portfolio Strategy; An Strategy; An approach to corporate level strategy that involves analyzing the relationship & positions of an organization SBUs to create a mix that will best support achievement of organizational goals. Business Portfolio Planning  Company must analyze current businesses & decide which business should receive more attention  Develop future portfolios by developing strategies for growth & downsizing.  downsizing.  

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Purpose of Business Busin ess Portfolio Model; are the tools for analyzing;  The relative position of each organizational business in the industry.  The relationships among all organizational business.

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Approaches For Developing Portfolios  BCG Growth Share Matrix  GE’s Multifactor Portfolio Matrix 

 

Businesses in Growth- Share Market CELL

POSITION

CHARACTERISTIC / REQUIREMENT

STRATEGY

QUESTION MARK

New business in a high growth, to compete with contemporaries.

Infusion of lot of funds & this cell consume lot of resources.

Management has to decide about future. Build Market Share / Divest

STAR ST AR

A market leader in Organization has to spend high growth market money, thus cash using not cash generating

Keeping up with market growth rate & combat with competitors. Build Market Share

CASH COW

Annual growth is less than 10%rate

Hold Market Share

DOGS

Business with weak Generate low profits & market share & low consume more market growth. management time than

Cash is produced to economy of scale due & higher profit & utilized to support other businesses.

Divest, or at times management has a reason to hold on dogs.

worth.

 

 

Business Portfolio Model/Evaluation of Growth-Share Matrix  •

Merits  of Growth-Share Matrix ; Its main contributions are;Merits  It encourages managers to view the formulation of organizational strategies in

terms of joint relationships among businesses and to take a long-range view.

 The growth-share matrix acknowledges that businesses in different stages

have different cash requirements and make different contributions to achieving organizational objectives.  The growth-share matrix is also a simple approach that provides an appealing

visual overview of an organization’s business portfolio. 

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De-merits of Growth-Share Matrix; Variety of problems arises using this approach; De-merits  it should be used cautiously in strategy formulation. Salient problems are: The growth-share matrix focuses on balancing cash flows, whereas

organizations are more interested in the ROI that various businesses yield.

 It is not always clear what share of what market is relevant in the analysis.  Many other factors besides market share and growth rate are critical in

strategy formulation.  The growth-share matrix does not provide direct assistance in comparing

different businesses in terms of investment opportunities.

 

MARKET ATTRACTIVENESS & BUSINESS STRENGTH FACTORS   FACTORS 

RATING

WEIGHT 

(1-5)   (1-5)

VALUE 

Industry



Overall market size

0.20

4

0.80

Attractiveness   Attractiveness



Annual market growth rate

0.20

5

1.00



Historical profit margin Competitive intensity

0.15 0.15

4 2

0.60 0.30



Technological requirements

0.15

4

0.60



Inflationary vulnerability

0.05

3

0.15



Energy requirement requirementss

0.05

2

0.10



Environmental Environmen tal impact

0.05

3

0.15



Social / political / legal

Must

Business



Market share

acceptable 0.10

4

0.40

Strength



Share growth

0.15

2

0.30



Product quality

0.10

4

0.40



Brand reputation

0.10

5

0.50



Distribution network

0.05

4

0.20



Promotional effectiveness effectiveness

0.05

3

0.15



Productive capacity

0.05

3

0.15



Productive efficiency

0.05

2

0.10



Unit costs

0.15

3

0.45



Material supplies

0.05

5

0.25



R&D performance

0.10

3

0.30



Managerial personnel

0.05

4

0.20



1.00

be

3.40

 

RECOMMENDED STRATEGIES 

Protect Position  Position  

Invest to grow at maximum



digestible rate Concentrate of effort on

Build Selectively  Selectively 

Invest To Build  Build    

Challenge for leadership

 

Build selectively on strengths Reinforce vulnerable areas

maintaining strength



Specialize around limited strengths Seek ways to overcome weaknesses Withdraw if indications of growth lacking

Build Selectively 

Selectivity / Manage  Manage 

Harvest   Harvest

Invest heavily in most attractive



Protect existing program

segments



Concentrate

investments



Look for ways to expand without high

in

risks



Build ability to combat competition

segments where profitability is

investment



Profitability through productivity

good and risks are relatively low

operations

Protect & Refocus  Refocus   

Manage for current earnings



Concentrate an attractive segments



Defend strengths

Protect position in most profitable



Upgrade product line



Minimize investment

and

rationalize

Sell at time that will maximize cash value

segments 

minimize

Divest  Divest 

Manage for Earnings 

otherwise



Cut

fixed

costs

investment meanwhile

and

avoid

 

GE’S Multifactor Portfolio Matrix 

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Merits; This approach has several advantages over growth-share matrix;  It provides a mechanism for including a host of relevant variables in the

process of formulating strategies.  The two dimensions of industry attractiveness attractiveness and business strength are

excellent criteria for rating potential business success.  The approach forces managers to be specific about their evaluations of the impact of particular variables on over overall all business success. •

Demerits; it also suffers with some of the limitations;  It does not solve the problem of determining the appropriate market.  It does not offer anything more than general strategy recommendations.

 

  STRATEGY FORMULATION CONSTRAINTS & SELECTION CRITERIA  •

Strategy Formulation Constraints  Constraints   –

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Availability of Financial Resources; Resources; even when a particular strategy appears optimal for an organization, serious consideration must be given to where the money to finance the strategy is going to come from.

Attitude towards Risk; some firms are willing to accept minimal level of risk, regardless the level of potential return. In such cases acceptable strategy be limited and those expose the firm to little risk. Organization Capabilities; at times excellent strategies require capabilities Organization beyond those an organization currently possesses.

Channel Relationship; strategy that call for development of new channel of distribution or that involves new suppliers requires careful consideration. Competitive Retaliation; some strategists may have the unintended effect of

dramatically increasing competitors efforts in the marketplace. Strategy Selection Criteria  –

They are responsive to external environment

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They provide adequate flexibility for the business and organization.

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They control firms to organization mission and long term objectives.

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They are organizationally feasible.