Strategy formulation

Strategic management unit 2

Business strategies
● Focusses on improving the competitive position of a company’s or business unit’s products
or services within the specific industry or market segment that the company or business
segment serves
● It is essential because research shows that business units have double the impact on
overall performance than either corporate or industry effects
● Business strategy asks how the company or its units should compete or cooperate in each
industry

Porter’s competitive strategies

● Michael porter proposed 3 generic competitive strategies for outperforming other
organizations in a particular industry
● These 3 generic strategies are -
○ Cost leadership
■ It is a lower-cost competitive strategy that aims at a broad mass market
■ Because of the lower costs the cost leader is able to charge a lower price than
the competitors and still make a satisfactory profit
■ Lower costs allow the firm to make a profit even during high competition
■ Its high market share means that it will have a high bargaining power with
suppliers and will also serve as a barrier to entry
■ Examples - Walmart, Nirma, reliance
○ Differentiation
■ It is aimed at the broad mass market and involves the creation of a product or
service that is perceived throughout its industry as having passed through the
elements of VRIO
■ Enable the business to charge a premium
■ It is a viable strategy to earn above-average returns
■ It is more likely to give higher returns than cost leadership strategy
■ Examples - apple, Walt Disney
○ Cost focus
■ It is a low-cost competitive strategy that focuses on a particular buyer group
 ■ attempts to serve only the niche
■ Seeks a cost advantage in its target market
● These strategies are called generic because they can be pursued by any type or size of a
business firm, even by NGOs

Risks in competitive strategies

● No one competitive strategy is guaranteed to achieve success
● Some companies that have successfully implemented one of the strategies have found it
difficult to sustain in the long run
● Each of the generic strategies has risks
● For example - a company following differentiation should ensure that the higher price is
not too far above the price of the competition otherwise customers will not see the extra
quality as worth the extra cost.

Cooperative strategies
● A company can use cooperative strategies to gain a competitive advantage within an
industry by working with other firms
● The two general types of cooperative strategies are -
○ Collusion -
■ It is the cooperation of firms to reduce output and therefore increase prices
■ Explicit collusion (direct) is illegal in India
■ It is monitored by the CCI (Competition Commission of India)
○ Strategic alliances -
■ It is a long-term cooperative agreement between two or more independent
firms or business units that engage in business activities for mutual economic
gain
■ Some alliances are very short-term because of issues in the alliance or
between the parties
■ Research reveals that the more experience a firm has with strategic alliances
the more likely it is that its alliances will be successful
■ Leading firms are now making investments in building and developing their
partnership capabilities
■ They may form strategic alliances for multiple reasons -
● To obtain or learn new capabilities
● To obtain access to specific markets
● To reduce financial risks
● To reduce political risks
 ■ The type of alliances range from mutual service consortia to joint ventures and
licensing agreements to value chain partnerships

Corporate strategy
● The corporate strategy addresses three key issues facing the corporation as a whole
○ The firm's overall orientation towards growth, stability or retrenchment (directional
strategy
○ The industries or markets in which the firm competes (portfolio analysis)
○ the manner in which the organization coordinates the activities (parenting strategy)

Directional strategy
● Every company must decide its orientation towards growth by asking 3 questions -
○ Should we expand, cut back or continue our operations unchanged?
○ Should we concentrate our activities within our current industry or should we diversify
into other industries?
○ Should we grow and expand through internal development or through external
acquisitions, mergers or strategic alliances
● The directional strategy is composed of 3 options/ orientations -
○ Growth strategies expand the company’s activities
○ Stability strategies make no change to the company’s current activities
○ Retrenchment strategies reduce the level o the company’s activities
● Growth strategies -
○ It is the most widely pursued corporate directional strategy
○ It is a popular strategy because larger businesses tend to survive longer than smaller
businesses due to greater availability of resources, organisational routines and
external ties.
○ A corporation can grow internally by expanding its operations globally or
internationally or it can grow externally by way of mergers, acquisitions and strategic
alliances
○ There are 2 types of growth strategies -
■ Concentration - it means growing around the existing product lines
● Vertical growth - also known as forward and backward integration
○ Backward integration means moving one step backwards and
taking up the role of the supplier
■ Example - Nirma producing the chemical by itself instead of
buying it from a supplier
 ○ Forward integration means moving a step forward and taking up
the role of the distributor
● Horizontal growth - it means expanding the business into newer
geographic regions using options like joint ventures, acquisitions,
mergers, greenfield projects
■ Diversification - it means expanding the range of products and starting newer
lines
● Concentric - it means introducing products that are related to the core
product of the group. Basically, it is making related growth
○ Example - Nykaa introduces a clothing range
● Conglomerate - it means entering a product category completely
different from its core business
○ Example - Horlicks selling spices
● Stability strategies -
○ Although sometimes viewed as a lack of strategy, the stability family of corporate
strategy can be appropriate for a successful corporation operating in a reasonably
predictable environment
○ Stability strategies can be very useful in the short run but dangerous if followed for
too long
○ The popular stability strategies are -
■ Pause and proceed with caution -
● It is an opportunity to rest before continuing a growth or retrenchment
strategy
● It is a very deliberate attempt to make only incremental improvements
until a particular environmental situation changes
● Example - dell
■ No change strategy -
● It is a decision to do nothing new
● It is the choice to continue current operations and policies for a
foreseeable future
● It is adapted when there are no visible threats
● They make only small improvements for inflation in sales and profit
objectives
■ Profit strategy -
● It is an attempt to artificially support profits when a company’s sales are
declining by reducing the investment and short-term expenses
● Retrenchment strategies
○ A company pursues these strategies when it has a weak competitive position in
some or all of its product lines resulting in poor performance
○ These strategies impose a great deal of importance on performance improvement
■ Turnaround strategy -
● Also referred to as transformation
● It emphasizes on the improvement of operational efficiency
● Most appropriate when the company’s problems are pervasive but not
yet critical
● There are 3 stages -
○ Contraction -
■ The initial effort to stop the damage by cutting the size of
operations and costs
○ Consolidation -
■ Implementation of a program to stabilize the now leaner
(smaller/slimmer) corporation
○ Rebirth -
■ This happens if the company is successful with its efforts and
starts growing profitably again
■ Captive company strategy -
● It involves giving up independence in exchange for security
● Management searches for an angel by offering to be a captive company
to one of its larger customers or another player in the industry
● It is done in order to guarantee the company’s continued existence
■ Sell out / divestment -
● The sell-out strategy makes sense of the management can obtain a
good price for its shareholders and the employees can keep their jobs by
selling the entire company to another firm
● If the corporation has multiple business lines and it chooses to sell off a
Division with low growth potential it is called divestment
● Example - P&G
■ bankruptcy/ liquidation -
● no one is interested in buying a weak company in an unattractive
industry the firm must pursue a bankruptcy or liquidation strategy
● Bankruptcy involves giving up management of the firm to the courts in
return for some settlement of the corporation's obligation
● Liquidation is the termination of the firm
 ○ when the industrious and attractive and the company is to weak
to be sold the management may choose to convert as many
syllable assets has possible to cash which are then distributed to
the shareholders after all obligations are paid
https://gitmind.com/app/docs/m6ederi1 - link to view mind map

Portfolio analysis
● One of the most popular aids to developing corporate strategy in a multiple business
corporation is portfolio analysis
● Portfolio analysis puts corporate headquarters into the role of an internal banker and the
top management uses product lines and business units as a series of investments from
which it expects a profitable return
● Today portfolio analysis is also being used to evaluate the contribution of alliances to
corporate and business units objectives
● The two most popular techniques are the BCG growth Matrix and the McKinsey 9-cell
matrix

BCG Growth matrix

● The BCG growth matrix, also known as the Boston Consulting Group matrix, is a strategic
planning tool used to evaluate a company's product portfolio. The matrix is divided into
four quadrants based on two dimensions: market growth rate and relative market share.
● The four quadrants in the BCG growth matrix are:
○ Stars: products that have a high market share in a high-growth market. These
products generate a lot of revenue and profit and have the potential to become
cash cows.
○ Cash cows: products that have a high market share in a low-growth market. These
products generate a lot of revenue and profit but require little investment, making
them cash generators for the company.
○ Question marks: products that have a low market share in a high-growth market.
These products require significant investment to grow their market share and
become stars.
○ Dogs: products that have a low market share in a low-growth market. These
products generate little revenue or profit and are unlikely to become a significant
source of income for the company.
The BCG growth matrix can help companies decide how to allocate resources and prioritize their
product portfolio based on their market position and growth potential. However, the matrix has its
limitations, and companies should consider other factors, such as competition and industry
trends when making strategic decisions.

McKinsey 9-cell matrix

● The McKinsey 9-cell matrix is a strategic planning tool that helps businesses assess their
product portfolio and make decisions about resource allocation, growth, and divestment.
The matrix uses two dimensions to evaluate a company's products: industry attractiveness
and business unit strength.
● The nine cells in the McKinsey 9-cell matrix represent different categories of a company's
products, based on their position in the matrix. The cells are:
○ High industry attractiveness, high business unit strength: These products are
considered the company's stars and have the potential to generate significant
revenue and profits.
○ Medium industry attractiveness, high business unit strength: These products are in
the leadership position and can continue to generate revenue and profits, but may
require additional investment.
○ Low industry attractiveness, high business unit strength: These products are
considered cash cows and generate significant revenue and profits, but may not
have growth potential.
○ High industry attractiveness, medium business unit strength: These products require
additional investment to become stars and generate significant revenue and profits.
○ Medium industry attractiveness, medium business unit strength: These products are
considered in the holding position and require further evaluation before making any
strategic decisions.
○ Low industry attractiveness, medium business unit strength: These products are
considered pets and may not generate significant revenue or profits, but should be
maintained if they are strategic to the company.
○ High industry attractiveness, low business unit strength: These products require
significant investment to improve their position in the market.
○ Medium industry attractiveness, low business unit strength: These products are
considered question marks and require further evaluation before making any
strategic decisions.
○ Low industry attractiveness, low business unit strength: These products are
considered dogs and may not generate significant revenue or profits and should be
divested.
● The McKinsey 9-cell matrix provides a visual representation of a company's product
portfolio and helps identify which products to invest in and which products to divest.
 However, it has its limitations and should be used in conjunction with other strategic
planning tools and analyses.

Functional strategies
● Functional strategy is the approach a functional area takes to achieve corporate and
business unit objectives and strategies by maximizing resource productivity
● It is concerned with developing and nurturing a distinctive competence to provide a
company or business unit with a competitive advantage
● The orientation of a functional strategy is dictated by its parent business unit strategy
● Just as competitive strategies may need to vary from one region of the world to another
functional strategies may need to vary from region to region too

Marketing strategies
● Marketing strategy deals with pricing, selling, and distributing a product
● Using a market development strategy a company or business unit can-
○ capture the largest share of an existing market through market saturation and
penetration
○ develop new uses and Markets for current production
● Using the product development strategy a company can-
 ○ develop new products for existing markets
○ develop new products for new markets

● A company can also choose between push and pull marketing strategies for advertising
and promotion
● other marketing strategies deal with distribution and pricing
○ companies which use mighty distribution systems are able to attract new
customers generate additional revenues and improve the network sales productivity
since lead generation and management are more Taylor to value creating
relationships
○ However using multiple channel simultaneously can lead to problems. it can lead to
cannibalisation across distribution channels increasing competition and insufficient
sales
○ When pricing a new product a company can follow one of the two following
strategies- came pricing or penetration pricing
○ Depending on corporate and business unit objectives and strategies either of these
choices may be desirable

Financial strategy
● Financial strategy examines the financial implications of corporate and business level
strategic options and identifies the best financial course of action.
● The financial strategy usually attempts to maximize the financial value of a firm
● The trade of between achieving the desired debt to equity ratio and relying on internal
long-term financing is a key issue in financial strategy
○ Small and medium sized family-owned companies try to avoid all external sources
of funds
○ In contrast large publicly held forms have long term debt and keep a large amount
of money and cash and short term investments
● Research reveals that a firm’s financial strategy is influenced by its corporate
diversification strategy
○ For example equity finance is preferred for related diversification whereas debt
financing is preferred for unrelated diversity
● The management of dividends and prices and important part of a corporate financial
strategy
○ Corporations in fast-growing industries often do not declare dividends. They use the
money they might have spent on dividends to finance rapid growth
● A rather novel financial strategy is the selling of a company’s patents
 ○ Companies such as American Express and Kodak have been selling patents for
products that they no longer wish to commercialise or are not a part of their core
business

R&D Strategy
● Research and development strategy deals with product and process innovation and
improvement
● It also deals with the appropriate mix of different types of research and development
(basic product or process) and with the question of how new technology should be
accessed (through internal development external acquisition or strategic and answers)
● One of the research and development choices is to be either a technology leader or a
technological follower
● One new approach to research and development is open innovation in which a firm uses
alliance and collections with corporates, governments, academy boards and Consumers
to develop new products and processes
○ Open innovation has been widely accepted and applied to avoid variety of
companies in every industry including some state governments and the National
Football League
● A slightly different approach to technology development is for a large firm such as
Microsoft to purchase minority stakes in relatively new high tech entrepreneury ventures
that need capital to continue operations
○ Investing corporate venture capital is one way to gain access to promising
innovations at a lower cost then by developing them internally

Operations strategy
● The operation strategy determines how and where a product or service is to be
manufactured the level of vertical integration in the process the deployment of physical
resources and relationships with suppliers
○ It also deals with the optimum level of Technology the firms should use in its
operations processes
● Advance manufacturing technology is revolutionising operations worldwide and should
continue to have a major impact as Corporation strike to integrate diverse business
activities by using customer assistant design and manufacturing principles
● The manufacturing strategy is often affected by a products popularity
● Increasing competitive intensity in many industries has forced companies to switch from
traditional mass production using dedicated transfer lines to a continuous improvement
production strategy
 ● An efficient linkage system is crucial as the result of this is low cost high quality customise
goods and services appropriate for a large number of market niches

Purchasing strategy
● Purchasing strategy deals with obtaining the raw materials parts and supplies needed to
perform the operations function
● The basic purchasing choices are multiple Sourcing sole Sourcing and parallel Sourcing
● Under multiple Sourcing the purchasing company orders a particular parts from several
vendors
○ Multiple Sourcing has been one way for a purchasing form to control the relationship
with its suppliers
● Sole Sourcing reduces transaction cost and build quality by having the Purchase and
supplier work together as partners rather than as adverse series

Logistics strategy
● Logistics strategy deals with the flow of products into and out of the manufacturing
process
● 3 Trends related to this strategy are centralisation Outsourcing and use of internet
● To gain Logistic and synergies across business units corporations begins centralising
logistics in the headquarter group
● These centralised logistics group usually contains specialist with expectation different
transportation models such as rail or trucking

HRM Strategy
● The human resource strategy addresses issues that range from weather a company
should hire a large number of low skilled Employees with a low pay or few high skilled
Employees with a high pay
● Companies are finding that a diverse workforce is a compatitive advantage
● It is the work of the human resource team to ensure that all roles are filled with candidates
or employees who contribute to the company

Information technology strategy

● Corporations have always used and information technology strategy to provide their
business units with competitive advantage
● For example FedEx first provided its customers with powership computer software to store
addresses print shipping labels and track package location
● Multinational corporations use sophisticated intranet to allow employees to practice follow
the sun management in which project team members living in one country can pass their
work to team members in another country in which the work day is just beginning thus
night shifts are no longer needed