STRATEGY FORMULATION

Strategic formulation is the process to develop a strategy for a

business or an organization.

The resulting strategy should be in line with the vision of the

business and will be adopted for the long term.

Strategy formulation is the development of long-range plans

for the effective management of environment opportunities
and threats in light of corporate strength and weakness.
 Process of strategy formulation:
1. Review of strategic elements: Review of strategic elements
such as mission, objectives, strategies and policies is the
starting point of strategy formulation.
-Mission is the basic reasons for the organization's existence. It
provides the basic philosophy of what the organization is all about.
- Objectives are the end results of planned activities. They state
what is to be accomplished by the organization.
- Strategies are the comprehensive master plan stating how the
organization will achieve its mission and objectives.
- Policies are the broad guidelines for actions and decisions that
links formulation of strategies with their implementation.
- Before formulating strategies, above stated strategic elements
should be reviewed. They should be restated or redefined, if
necessary.
2. SWOT Analysis
3. Identification of strategic options
4. Evaluation of strategic options
5. Selection of Strategy
 The Industry life cycle:
As organizations compete with one another, the
competitive dynamics change. There is a change in the
number of competitors, the competitive thrust,
profitability, intensity of rivalry, and the emphasis on
innovation.
These changes have been shown in the industry life
cycle, which is an S-shaped curve similar to the
product life cycle curve. The main life stages are –
embryonic (Introduction), growth, shakeout, maturity,
and decline.
a. Introduction/Embryonic Firms :
In the introduction stage are busy creating awareness about the
product/service and educating the customers.
At the introduction stage, where the firm’s competition is none or
very low, innovation is at maximum, and investment in distribution
channels and marketing is very high. If a firm can develop proper
distribution channels, increase consumer awareness, and provide a
better quality product or service, then the rest of the competition
will see sales numbers grow.
So at the introduction/embryonic stage;
innovation is the highest,
high focus on distribution channels,
large investment in marketing to establish consumer awareness
b. Growth:
At this stage, a strong firm’s growth rate of sales and market
share accelerates. A standard for the product is imposed or
agreed upon by the government and other standard-setting
agencies. The innovation process is looking for ways to
improve the existing product by creating a better
manufacturing process, delivery method, and more. Firms try
to optimize their marketing, distribution channel, and product
to maximize the market share and reduce competition.
So at the growth stage;
sales rate increases for strong firms,
 market share grows,
industry standards are set,
innovation is for making existing products better.
C. Shakeout:
During the shakeout stage of the cycle, the percentage growth rate
declines. Firms face competition for market share from other firms.
Firms that are weak in their innovation, marketing, customer
support, product quality, and after-sales support; start to lose
market share and eventually are forced out of the industry. On the
other hand, strong firms start to gain more market share. At this
stage, competitors have a fierce battle based on price wars; capacity
within the industry grows, but the demand does not keep pace.
Unviable organizations lose out in this phase.
So at the shakeout stage;
 strong firms start to gain more market share,
 and strong innovation, marketing, customer support, product
quality, and after-sales support are needed to increase sales,
 Competition increases and companies use marketing and pricing
techniques to grow among the competition.
d. Maturity:
At this stage, the market reached the maximum size where
industry growth is likely zero or negative. Companies that are
strong in policy and sales numbers survive and totally
dominate the marketplace. The market situation basically
becomes an oligopoly where only a few large firms exist.
Sales numbers are due to replacement, repeat purchases, there
is no other alternative, or people looking to buy older
generation products to save a few bucks.
In the maturity stage;
 Consumer awareness is maximum,
The firm enjoys an oligopoly market,
 Alternatives of the product are little or no,
Industry growth is flat.
e. Decline:
At this stage, the sales number drops to very low. This drop-in
sale could be because of the internal and external
environments such as;
A new alternative product has immersed, Rules and
regulations changes,
Issues with the supply of raw materials,
Increased level of competition from other firms and more.
In the decline stage; a firm has four strategic options; Exit,
Harvest, Maintain, and Consolidate.
 Business Strategy:

Corporate-level strategy: This strategy is implemented at

the highest level of the company. Company executives look
at ways to improve and expand the company. They might
identify additional markets they can enter.
Business-level strategy: This strategy focuses on how
corporate aspirations will be implemented within individual
company settings.
Functional-level strategy: This strategy focuses on the
individual tasks of departments and employees in working
toward corporate goals.
 Types of corporate level strategy:
A. Stability strategy:
 The stability strategy is a strategy that tries to keep an
organization’s existing activities going without making any
significant changes in direction. Maintaining existing products,
markets, and operations is a priority.
 A stability strategy can be beneficial in the short term, but it can be
harmful if used for an extended period of time.

B. Expansion/Growth Strategy
 The growth strategy aims to increase sales, assets, profits, or a
combination of the three. It allows businesses to take advantage of
the growth curve and lower the per-unit cost of products sold,
resulting in higher profitability.
 Due to the increased availability of financial resources,
organizational procedures, and external links, larger organizations
Following are the strategic alternative under growth strategy;
1.Concentration Strategy:
A concentration strategy is when a business focuses on a specific
group of clients, a specific product, or a specific geographic
market. As the name implies, the primary purpose is to allow the
business to concentrate (rather than diversify) their efforts. The
idea is that this concentrated effort is more likely to yield
expertise, innovation, and efficiencies within the area of
concentration.
The two basic concentration strategy are vertical and horizontal
growth.
Vertical growth: It can be achieved by taking over a function
previously provided by a supplier or by a distributors.
Horizontal growth: It can be achieved by expanding the
organizational operation into geographic locations or by increasing
the range of products.
2. Diversification: It is a decision to enter into new business.
The basic two diversification strategy are; concentric and
conglomerate diversification.
Concentric diversification:
Concentric diversification is when your business starts producing
products that are similar in the type of technology or expertise it
requires to produce them.
Coca-Cola company develops the soft drinks and the company
produce the chocolate of same flavor.
Conglomerate Diversification:
Conglomerate diversification is when your business develops
products that are completely unrelated to its current product
offering.
If pizza outlet owner decides to open a car showroom or decides to
build residential houses than this is an example of conglomerate
diversification as pizza outlet owner is moving to a completely
 Implementing Growth Strategies:
1.Internal development:
 Internal growth strategy seeks to optimize internal business
processes to increase revenue. Similar to organic growth, this
strategy relies on companies using their own internal resources.
 Internal growth strategy is all about using existing resources in
the most purposeful way possible.
 An example of internal growth could be cutting wasteful
spending and running a leaner operation by automating some of
its functions instead of hiring more employees.
 Internal growth can be more challenging because it forces
companies to look at how their processes can be improved and
made more efficient rather than focusing on external factors like
entering new markets to facilitate growth.
2. Acquisition and Merger:

Merger and Acquisition is a strategy that is applied by businesses

when they see the benefits of merging or acquiring firms. In the
process, the bigger companies in the market hunt for smaller
companies for the acquisition process.
Companies have different policies for mergers & acquisitions like
expanding an existing business, research, development, etc. Failure
to implement proper planning, study, and lack of strategies, also
fails the merger & acquisition strategy. The resulting company
cannot survive in the long run.
Merger can be horizontal, vertical or congolmerate
a. Vertical Strategy
This is the strategy where one company chooses to merge with
or acquire another firm that is part of the same supply chain but
operates at a different stage. These two entities merge and
integrate the items they offer to consumers. For example, a car
manufacturing company A merges with the same car distributor
company B which becomes operational at a later stage.
b. Horizontal Strategy
This strategy is evident when one company merges with or
acquires another firm that operates in the same domain. It is
normally a measure adopted to reduce competition in the market.
c. Conglomerate Strategy
This strategy is observed to be adopted when two companies
operating in two completely different niches collaborate.

Reasons for acquisition and Merger:

 Increased market power
 Overcoming entry business
 Increased speed to market
 Low risk
 Increased diversification
 Reshaping the firms competitive scope
 Learning and developing new capabilities
 Strategic Alliance:
 Strategic alliances refer to cooperative agreements between two
or more organizations to pursue common goals while
maintaining their individual identities.

 A strategic alliance is a partnership between two businesses to

achieve mutual goals and growth, while still retaining
independence.
 The success from strategic alliance is more likely when partners
behave cooperatively to solve mutual problems.
 Strategic alliance may be Joint venture, Equity alliance, Non-
equity alliance.
 Reasons for strategic alliance:
 To obtain or learn new capabilities
 To obtain access to specific markets
 To reduce financial risk
 To reduce political risk
 Co-specialization
Components for the success of strategic alliance
 Trust
 Top management support
 Performance expectation
 Clear goal and organizational arrangement
 Compatibility
 Evolve and change
C. Retrenchment Strategy
 A retrenchment strategy is a business approach that tries to
diminish a company’s size or diversity.
 Retrench strategy is adopted when the company not doing well,
when an organization’s survival is threatened and it is not
competing well. It involves contraction of the scope or level of
business or function.
 It is also called defensive strategy.
 At very first, retrenchment entails selling of fixed properties to
raise needed fund, cutting weaker product line or marginal
business, reduce the number of employees and adaptation of
expense control systems.
Turnaround Strategy:
 Turnaround strategy can be referred as converting a loss making
unit into a profitability one.
D. Combination/Mixed strategy
 When an organization operates in a variety of environments,
separate strategic business units and products follow a
combination strategy.
 In other words, a firm is said to be implementing a combination
strategy if it uses stability, expansion, and retrenchment strategies
in its many strategic business units at the same time.
 It is primarily used to solve a variety of environmental issues.
Business level strategies/Generic competitive strategies:
1. Porters Competitive Strategy:
Michael Porter defines three strategy types that can attain a
competitive advantage. These strategies are cost leadership,
differentiation, and market segmentation (or focus).
a. Cost leadership strategy:
The Cost Leadership Strategy is a key concept in business
strategy, focusing on achieving a competitive advantage by
becoming the low-cost producer in a particular industry or market.
This approach involves producing goods or delivering services at a
lower cost compared to competitors while maintaining acceptable
quality levels.
Porter’s Cost Leadership Strategy aims to achieve a
competitive advantage by offering products or services at a lower
cost than competitors while maintaining a reasonable level of
quality to offer products at a price that is attractive to customers
and allows the business to capture a significant market share.
Advantages of Cost Leadership Disadvantages of Cost Leadership
Strategy Strategy

Competitive Pricing: Attract price- Quality Trade-offs: Possible

sensitive customers. compromises in product quality or
customer service.

Higher Market Share: Capture a larger Dependence on Scale: Requires high

portion of the market. production volume, disadvantaging
smaller businesses.

Barriers to New Entrants: Deter Imitation by Competitors: Successful

competitors from matching low prices. strategies can be replicated by rivals.

Economies of Scale: Benefit from lower Limited Price Flexibility: Difficulty in

per-unit costs as production scales up. raising prices when necessary.

Operational Efficiency: Streamline Risk of Stagnation: Focus on cost-cutting

processes and enhance overall efficiency. may hinder innovation and adaptation.
 Ways of cost reduction:
 Economies of scale
 Capacity utilization
 Experience
 Resource sharing
 Low cost materials
 Direct marketing
 Simple product design and process
Condition of success of cost leadership strategy
 High price competition
 Standardized products
 Price sensitive customer
 Similar products
 Low switching cost
 High buyer power
2- Differentiation Strategy
The Differentiation Strategy is a fundamental concept within
business strategy, focusing on gaining a competitive edge by
offering unparalleled and distinct products or services that
capture attention in the market.
 Porter’s Differentiation Strategy seeks to create a competitive
advantage by offering unique and distinct products or services
customers view as superior in quality or features compared to
competitors.
This strategy revolves around presenting customers with
something extraordinary or appealing that distinguishes a
business from its competitors. Through innovation, quality,
branding, or enhancing the customer experience, companies can
establish premium value and cultivate enduring customer loyalty.
 Bases for Differentiation
 Unique product performance
 Unique product features
 Unique services
 Detailed information
Conditions for success of Differentiation strategy
 Diversification of product use
 Few rivals
 Dynamic technological environment
 Quality sensitive buyer
 Extensive research
Advantages of Differentiation Strategy Disadvantages of Differentiation
Strategy
Brand Loyalty: Unique features and High Costs: Investments in innovation,
experiences foster strong customer loyalty. quality, and branding can lead to elevated
production and operational costs.
Premium Pricing: Differentiation allows Imitation Risk: Competitors may try to
companies to charge premium prices. replicate successful differentiating
features, potentially diluting uniqueness
over time.
Reduced Price Sensitivity: Customers Niche Market Focus: Targeting a
valuing distinct attributes are less price- specialized market may limit the potential
sensitive. customer base.
Market Resilience: Unique offerings Continuous Innovation
provide stability during economic Pressure: Sustaining differentiation
downturns. demands ongoing innovation efforts and
resource allocation.
Barriers to Entry: Substantial investment Educating Customers: Unconventional
deters new entrants from replicating the offerings may require customer education
differentiation. about their unique value proposition.
Enhanced Brand Image: Differentiation Price Pressure: Intense competition may
often leads to an elevated brand reputation. compel companies to reduce prices,
3- Focus Strategy
The Focus Strategy, a pivotal concept in business strategy,
encompasses two distinct sub-strategies: Cost Focus and
Differentiation Focus.
This strategy involves concentrating efforts on a specific market
segment or niche to gain a competitive advantage. By tailoring
products or services to serve the unique needs of this targeted
group exceptionally well, companies can achieve heightened
success within their chosen market.
Cost Focus: The Cost Focus sub-strategy within the Focus
Strategy centers on serving a particular market niche with a
primary focus on cost efficiency. Companies adopting this
approach seek to offer products or services at lower costs than
competitors, catering to the specific cost-conscious preferences of
the targeted customer segment.
Differentiation Focus: The Differentiation Focus sub-strategy
revolves around standing out within a specific market niche by
offering distinctive and unique products or services. Companies
following this approach invest in research, development, branding,
and customer experience to create offerings that resonate
exclusively with their target audience.
2. Strategic Clock Oriented Market based Strategies:

Bowman's Strategy Clock analyzes the competitive position of

a company in comparison to the offerings of competitors. It
was developed by Cliff Bowman and David Faulkner as an
elaboration of the three Porter generic strategies.

It is important to understand how companies compete in the

market place. It is a diagrammatic representation which shows
the relationship between customer value and prices.
 Position 1: Low Price & Low Value Added
This strategy is about quantity selling. The products or services
are low in value and the price point is the lowest possible. The
combination makes it the least competitive area on the Strategy
Clock.
Position 2: Low Price
Low Price, as the name suggests, is a strategy about becoming
the lowest cost option for buyers in the marketplace. It’s a
strategy that can have low margins, so process efficiency and
cost reduction is key for it to be successful. With this strategy,
you’re aiming for high quantity levels, otherwise you can end up
with low sales, low price – a fatal combination.
 Position 3: Hybrid
The Hybrid position sits between low price and differentiation.
It’s around ensuring the price is competitive, ideally with a low
perceived price from buyers, while promoting the added value
aspects of the product.
The success of the hybrid strategy comes down to the balance
between cost and differentiation, attempting to maximise each
while maintaining good margins.
Position 4: Differentiation
The Differentiation strategy is where a business focuses on
differentiating their products or services from competitors by
adding high perceived value. This strategy has a wide spectrum
from full product diversity through to unique features within a
core product.
 Position 5: Focused Differentiation
Focused Differentiation is about providing high value at a high
price (not to be confused with Porter’s Generic Strategy of the
same name, which talks about going to a niche market). When
successfully done, this strategy provides high profits but can be
difficult to maintain – the iPhone launch and subsequent early
growth is an example of this strategy.
Position 6: Risky High Margins
Any strategy that has the name Risky in it should mean you
completely understand your options before you embark on it, of
course! The main thrust of this strategy is to go in with a high
price point without any perceived added value.
 Position 7: Monopoly Pricing
In monopoly markets a single company controls the product and
pricing, so other factors such as price points, value or
competitors play less of a factor. Of course, all monopolies can
come to an end – so these companies still need to keep an eye on
their external factors.
Position 8: Loss of Market Share
This is generally the worst position to be in and suggests that the
company is exiting the market or is in decline. It may be that they
have chosen this strategy as part of a move to newer markets, or
it may be forced upon them due to getting their price or market
fit incorrect.
Portfolio Analysis for Strategic Choice:
Portfolio analysis is a set of techniques that helps the managers in
taking strategic decisions with regard to individual products or
businesses in a firm's portfolio.
Portfolio analysis examines the balance of an organization's SBUs.
It is a key aspect of strategic capability to ensure that the portfolio
is strong. Portfolio analysis can be used to describe the current
range of SBUs and to assess the ‘strength’ of the mix both
historically and against future scenarios.
Since mid 1960s, various tools have been developed for portfolio
analysis. Out of them, following are the important and most used
tools for portfolio analysis;
⦁ BCG Matrix
⦁ GE Nine-cell Matrix
⦁ Hofer's Matrix
BCG Matrix:
Boston Consulting Group (BCG) Matrix is a four celled
matrix (a 2 * 2 matrix) developed by BCG, USA. It is the most
renowned corporate portfolio analysis tool.
It provides a graphic representation for an organization to
examine different businesses in it's portfolio on the basis of
their related market share and industry growth rates. It is a two
dimensional analysis on management of SBU's (Strategic
Business Units).
In other words, it is a comparative analysis of business
potential and the evaluation of environment. According to this
matrix, business could be classified as high or low according
to their industry growth rate and relative market share
Relative Market Share = SBU Sales this year leading
competitors sales this year.
Market Growth Rate = Industry sales this year - Industry
Sales last year.
BCG matrix has four cells, with the horizontal axis
representing relative market share and the vertical axis
denoting market growth rate. Resources are allocated to the
business units according to their situation on the grid.
The four cells of this matrix have been called as stars, cash
cows, question marks and dogs. Each of these cells
represents a particular type of business.
Stars: Stars represent business units having large market share in
a fast growing industry. They may generate cash but because of
fast growing market, stars require huge investments to maintain
their lead. Net cash flow is usually modest. SBU's located in this
cell are attractive as they are located in a robust industry and
these business units are highly competitive in the industry. If
successful, a star will become a cash cow when the industry
matures.
Cash Cows: Cash Cows represents business units having a large
market share in a mature, slow growing industry. Cash cows
require little investment and generate cash that can be utilized for
investment in other business units. These SBU's are the
corporation's key source of cash, and are specifically the core
business. They are the base of an organization. These businesses
usually follow stability strategies. When cash cows loose their
appeal and move towards deterioration, then a retrenchment
policy may be pursued
Question Marks: Question marks represent business units having
low relative market share and located in a high growth industry.
They require huge amount of cash to maintain or gain market
share. They require attention to determine if the venture can be
viable.
Question marks are generally new goods and services which have
a good commercial prospective. There is no specific strategy which
can be adopted. If the firm thinks it has dominant market share,
then it can adopt expansion strategy, else retrenchment strategy can
be adopted.
Most businesses start as question marks as the company tries to
enter a high growth market in which there is already a market-
share. If ignored, then question marks may become dogs, while if
huge investment is made, then they have potential of becoming
stars.
Dogs: Dogs represent businesses having weak market shares in
low-growth markets. They neither generate cash nor require huge
amount of cash. Due to low market share, these business units face
cost disadvantages.
Generally retrenchment strategies are adopted because these firms
can gain market share only at the expense of competitor's/rival
firms. These business firms have weak market share because of
high costs, poor quality, ineffective marketing, etc.
Unless a dog has some other strategic aim, it should be liquidated if
there is fewer prospects for it to gain market share. Number of dogs
should be avoided and minimized in an organization.
 Generic Electric Matrix:
In 1970, General Electric (GE) commissioned Mc Kinsey and
company to develop a portfolio analysis matrix for screening its
business units.
GE Nine cell matrix is a strategy tool that offers a systematic
approach for the multi business enterprises to prioritize their
investment among the various business units. It is a framework that
evaluates business portfolio and provides further strategic
implications.
This matrix has also many points in common with the MABA
analysis. MABA is an acronym that stands Market, Attractiveness,
Business Position and Assessment.
Industry attractiveness indicates how hard or easy it will be for a
company to compete in the market and earn profits. The more
profitable the industry is the more attractive it becomes. When
evaluating the industry attractiveness, analysts should look how an
industry will change in the long run rather than in the near future,
because the investment need for the product usually require long
lasting commitment.

Each business is appraised in terms of two major dimensions ;

Market attractiveness and Business strength. If one of these factors
is missing, then the business will not produce desired results.
Neither a strong company operating in an unattractive market nor a
weak company operating in an attractive market will do vey well.
 Green Zone Invest/grow:
Suggest you to ‘go ahead’ to grow and build punishing you through
expansion strategies. Business in the green zone attract major
investment.
Yellow Zone/ hold:
Cautions you to ‘wait and see’ indicating hold and maintain types
of strategies aimed a stability.
Red Zone Harvest/ sell:
Indicates that you have to adopt turnover strategies of divestment
and liquidation or rebuilding approach.
 Advantage of GE Matrix:
 It provides a clear and simple framework for analyzing a
company's portfolio of products or business units.
 It helps companies identify which business units or products are
strong and which are weak, so they can allocate resources
accordingly.
 It helps companies identify growth opportunities and potential
problem areas.
 It can be used to assess the impact of strategic changes, such as
mergers and acquisitions, on a company's portfolio.
 It is useful for both large and small companies.
 It's easy to understand for non-expert stakeholders.
 It helps to prioritize resources allocation and investment on
business units or products.
 Disadvantages of BCG Matrices
 It only considers market growth and market share, ignoring other
important factors such as profitability, competition, and industry
trends.
 It is based on the assumption that market growth and market share are
the only drivers of a business unit's success, which may not be
accurate in all cases.
 It does not take into account the potential for future growth, which can
lead to the company investing in a business unit that has limited
potential for growth.
 It may lead to a company investing too much in one area and
neglecting other areas of the business.
 It may be too simplistic to accurately reflect the complex realities of a
business.
 It may lead to a company neglecting or divesting from a business unit
that could be turned around with the right investments.
 It does not account for the company's unique strengths, weaknesses,
BCG Matrix GE Matrix

Focuses on market share and Focuses on market attractiveness

market growth and business strength

Uses a 2x2 matrix with quadrants Uses a multi-factor matrix with 9

for "Stars," "Cash Cows," "Dogs," cells, each representing a different
and "Question Marks" strategic position

Useful for evaluating the portfolio Useful for evaluating potential new
of a company's existing businesses businesses or product lines

Typically used in mature industries Can be used in both mature and

emerging industries

Developed by the Boston Developed by General Electric in

Consulting Group in the 1970s the 1960s
Evaluation of strategy Alternatives:
The criteria used for evaluation of strategic alternatives are:
1. Suitability
It is concerned with environmental fit of the strategic
alternative. It also provides the rationale to a strategy. It
indicate whether the strategic alternative make sense in
relation to environmental circumstances. It is also a basic of
qualitative assessment concerned with testing out the
rational of strategy and is useful for screening options. The
assessment of suitability consists of two stages.
Screening Options for suitability: The methods used for
understanding suitability are ranking, decision tree and
scenarios.
2. Acceptability
It is concerned with the expected performance outcomes of a strategic
alternative. It is strongly related to people expectations and therefore
the issues of require careful analysis. The criteria for acceptability of
strategic alternative are
i. Return
Expected return from specific strategic options is assessed. The various
approaches to analyze return are
Profitability analysis: It assesses financial return to investment. The
tools used for this analysis are return on capital employed, payback
period, and discounted cash flow.
Cost benefit analysis: It assesses the overall economic impact of
strategic options. This analysis attempts to put a money value of all the
costs and benefits of strategic options.
Shareholder value analysis: It assesses the impact of strategic options
in generating shareholders value. The shareholder value is the total
ii. Risks
It involves probably estimate about robustness of strategic The
level of risk is important for acceptability of strategic options.
New product development carries high level of risks. The
approaches for analyzing risks are.
Financial ratio
Sensitivity analysis

iii. Stakeholder expectation

It provides political dimensions to the organizations acceptability
of a strategic alternative. The approaches of stakeholder are
Stakeholder mapping
Game theory.
3. Feasibility
It is concerned with availability of resources and competencies to deliver
strategic alternatives. It determines an option implement ability and
work ability in practice. It assesses the organizations capability to make
the strategic alternatives succeed. The approaches for available to
understand feasibility are;
Funds flow analysis: It assesses financial feasibility. It forecasts the
funds required and the likely resources of funds for strategic
alternatives.
Break even analysis: It studies costs volume profit relationships to
assess financial feasibility. This analysis identifies BEP when revenue
equal costs.
Resource deployment analysis: It identifies need for resources and
competencies for specific strategic alternatives. It is used to judge the
Sufficiency of current resources and competencies to pursue
strategic options.
Need for unique resources and competencies to sustain strategic