MODULE 3

STRATEGY FORMULATION
Strategy formulation is the process of
determining appropriate courses of
action for achieving organisational
objectives and thereby accomplishing
organisational purpose.
STEPS OF STRATEGY FORMULATION

The process of strategy formulation basically involves seven main steps.

Though these steps do not follow a rigid chronological order, however
they are very rational and can be easily followed in this order.

1. Establishing objectives: The key component of any strategy statement is

to set the long-term objectives of the organisation. But objectives should
be realistic in nature and achievable. E.g. if the firm’s aim is to expand the
business, firm has to pursue a growth strategy.
2. Analysis of External Environment
3. Analysis of Internal Environment
4. Fixing Quantitative Targets: In this state a firm may set
quantitative target for some of its objectives.
5. Relating Targets to Divisional Plans: This step of
strategy formulation identifies the contribution that can
be made by each division or product group within the
corporation and for this purpose, a provisional strategic
plan must be developed for each sub-unit
6. Gap Analysis: Gap Analysis is the identification and analysis of a gap
between planned or desired performance. Such an analysis helps to
reveal the extent of gap that exists between the present reality and
future aspirations of the organizations. The organization also tries to
estimate its likely future state if the present trends and activities
continue.

7. Choice of Strategy: This is the final stage in the formulation of

corporate strategy. The best course of action is actually chosen after
considering organizational goals, organizational strengths, potential
and limitations as well as the external opportunities. Different
strategies are evaluated from different angles and the appropriate
strategy is chosen.
STRATEGIC ALTERNATIVES

After successfully done with the external analysis and internal

analysis, the company is to think about alternative strategies
which match their resources and capacities with the external
threats and opportunities. Basically there are two types of
strategies,
1) Corporate Level Strategies (Grand Strategies)
2) Business Level Strategies (Generic Strategies)
CORPORATE LEVEL OR GRAND STRATEGY

“The comprehensive general plan of major actions through

which a firm intends to achieve its long-term objectives in a
dynamic environment is called the grand strategy.”

 basic purpose of a corporate strategy is to

add value to the individual businesses in
it
 corporate strategy involves decisions relating to the
choice of businesses, allocation of resources among
different businesses, transferring skills and
capabilities from one set of businesses to others,

 and managing and nurturing portfolio of businesses

in such a way as to obtain synergies among product
lines and business units, so that the corporate whole
is greater than the sum of its individual business units
TYPES OF CORPORATE STRATEGIES

Strategies at the corporate level may be

broadly classified into three. They are:

1. Growth/Expansion strategies
2. Stability strategies
3. Defensive / Retrenchment strategies
1. GROWTH OR EXPANSION STRATEGY
 A company can grow internally by expanding its operations
or it can grow externally through mergers, acquisitions, joint
ventures or strategic alliances

Growth strategy is adopted to accelerate the rate of growth of

sales, profits and market share faster by entering new markets,
acquiring new resources, developing new technologies and
creating new managerial capabilities. Growth offers economies of
scale and scope to an organization, which reduce operating costs
and improve earnings.
REASONS FOR PURSUING GROWTH STRATEGIES

Firms generally pursue growth strategies for the following reasons:

 To obtain economies of scale

 To attract merit: Talented people prefer to work in firms with growth.

 To increase profits

 To become a market leader: Growth allows firms to reach leadership

positions in the market. Companies such as Reliance Industries, TISCO

etc. reached commanding heights due to growth strategies.

 To fulfil natural urge: A healthy firm normally has a natural

urge for growth

 To ensure survival: Sometimes, growth is essential for

survival. In some cases, a firm may not be able to survive

unless it has critical minimum level of business. Further, if a

firm does not grow when competitors are growing, it may

undermine its competitiveness.

1. GROWTH OR EXPANSION STRATEGY
 A company can grow internally by expanding its operations
or it can grow externally through mergers, acquisitions, joint
ventures or strategic alliances

Growth strategy is adopted to accelerate the rate of growth of

sales, profits and market share faster by entering new markets,
acquiring new resources, developing new technologies and
creating new managerial capabilities. Growth offers economies of
scale and scope to an organization, which reduce operating costs
and improve earnings.
CATEGORIES OF GROWTH STRATEGIES

Growth strategies can be divided into three

broad categories:

 Intensive Strategies
 Integration Strategies
 Diversification Strategies
a. Intensive strategies

Without moving outside the organisation’s current range of

products or services, it may be possible to attract customers by
intensive advertising, and by re-aligning the product and market
options available to the organisation. These strategies are
generally referred to as intensification or concentration strategies.
By intensifying its efforts, the firm will be able to increase its sales
and market share of the current product- line faster.
Thus, there are three important intensive strategies:
 Market penetration or Concentration Strategy: Market
penetration seeks to increase market share for existing
products in the existing markets through greater marketing
efforts. This includes activities like increasing the sales force,
increasing promotional effort, giving incentives etc.
 Market development strategy- tries to achieve growth by
introducing existing products in new markets
 Product development - Expansion through product
development involves development of new or
improved products for its current markets
b. Integration Strategies

Integration basically means combining activities relating to the

present activity of a firm. Such a combination can be done on the
basis of the industry value chain. A company performs a number
of activities to transform an input to output. These activities
include right from the procurement of raw materials to the
production of finished goods and their marketing and distribution
to the ultimate consumers.
 Vertical integration refers to the
integration of firms involved in different
stages of the supply chain. Thus, a
vertically integrated firm has units
operating in different stages of supply
chain starting from raw material to
delivery of final product to the end
customer.
There are many forms of integration, but
the two major ones are:
1. Vertical integration
1. Backward integration

2. Forward integration

2. Horizontal integration
Backward integration: Backward integration involves gaining
ownership or increased control of a firm’s suppliers. For
example, a manufacturer of finished products may take over
the business of a supplier who manufactures raw materials,
component parts and other inputs. Brooke Bond’s acquisition
of tea plantations is an example of backward integration.
Forward integration: Forward integration involves gaining
ownership or increased control over distributors or retailers.
For example, textile firms like Reliance, Bombay Dyeing, JK
Mills (Raymond’s) etc. have resorted to forward integration by
opening their own showrooms.
The most famous vertical integration examples are Apple,
Mcdonald's and Amazon.
A good example of vertical integration is Apple, which keeps
controlling the whole manufacturing process. Having used to
outsource producing some parts before, the company now
manufactures basically everything: from chipsets to cases.
Merits of Vertical Integration
 A secure supply of raw materials or distribution
channels.

 Control over raw materials and other inputs required for

production or distribution channels.

 Access to new business opportunities and technologies.

 Elimination of need to deal with a wide variety of

suppliers and distributors.
• Increase entry barriers to potential
competitors, for example, if the firm can
gain sole access to scarce resource.

• Facilitate investment in highly specialized

assets in which upstream or downstream
players may be reluctant to invest
Demerits of Vertical Integration
 A secure supply of raw materials or distribution
channels.
 Control over raw materials and other inputs required
for production or distribution channels.
 Access to new business opportunities and
technologies.
 Elimination of need to deal with a wide variety of
suppliers and distributors.
Horizontal Integration
Horizontal integration is a strategy of
seeking ownership or increased control
over a firm’s competitors. Horizontal
growth can be achieved by internal
expansion or by external expansion
through mergers and acquisitions of firms
offering similar products and services.
One of the clearest examples of horizontal integration is
Facebook’s acquisition of Instagram in 2012. Both Facebook
and Instagram operated in the same Industry (social media)
and were in similar production stages in regard to their photo-
sharing services. Facebook, looking to strengthen its position
in the social sharing space, saw the acquisition of Instagram
as an opportunity to grow its market share, reduce
competition and access new audiences.
DIVERSIFICATION STRATEGIES
Diversification is the process of adding new
businesses to the existing businesses of the
company. In other words, diversification adds new
products or markets to the existing ones.

Types of Diversification
 Concentric diversification.

 Conglomerate diversification
1. Concentric or Related Diversification

Adding a new, but related business is called concentric

diversification. It involves acquisition of businesses that are
related to the acquiring firm in terms of technology, markets
or products.
Example: Nilkamal plastic is started with plastic
chairs It started manufacturing other plastic
furniture like table, wall mounted shelves etc. this is
a related diversification.
Concentric diversification may be of three types:

 Marketing-related Diversification

 Technology-related Diversification

 Marketing and Technology-related Diversification:

2) Conglomerate or Unrelated Diversification

Adding a new, but unrelated business is called

conglomerate diversification. The new business
will have no relationship to the company’s
technology, products or markets.
For example, ITC which is basically a cigarette
manufacturer has diversified into hotels, edible oils,
financial services etc. Similarly, Reliance Industries,
which is basically a textile manufacturer, has
diversified into petro chemicals, telecommunications,
B. STABILITY OR STATUS QUO STRATEGIES

A strategy wherein firm chooses to keep

its business definition unaltered is said to
be a stability strategy. It aims at
maintaining the existing business course
without any significant variations or
additions.
D. RETRENCHMENT/ DEFENSIVE STRATEGY

Retrenchment strategies, also known as defensive strategy,

are the last resort strategies. A company may pursue
retrenchment strategies when it has a weak competitive
position in some or its entire product lines resulting in poor
performance sales are down and profits are dwindling.
In an attempt to eliminate the weaknesses that are
dragging the company down, management may
follow one or more of the following retrenchment
strategies.

 Turnaround

 Divestment

 Bankruptcy

 Liquidation
COMBINATION STRATEGIES
A company can pursue a combination of two or more corporate
strategies simultaneously. But a combination strategy can be
exceptionally risky if carried too far.

In large diversified companies, a combination strategy is

commonly employed when different divisions pursue different
strategies. Also, organisations struggling to survive may employ
a combination of several defensive strategies.
BUSINESS LEVEL OR GENERIC STRATEGIES

Each business should have its own business strategy. A

business strategy is basically a competitive strategy and
is concerned more with how a business competes
successfully in the chosen market.

Business strategy is guided by the direction set by the

corporate strategy. It translates the direction and intent
generated at the corporate level into objectives and
Professor Porter argued that the three basic strategies
open to any business are:

▫ Cost leadership

▫ Differentiation

▫ Focus

These are called ‘generic’ because they can be used in a

variety of situations, across diverse industries at various
stages of development.
a) Cost Leadership Strategy: Cost leadership is a strategy
whereby a firm aims to deliver its product or service at a
price lower than that of its competitors

Customers prefer a lower cost product, particularly if it

offers the same utility to them as comparable products
available in the market. When all organizations offer
products at a comparable price, the cost leader organization
earns higher profits owing to the low cost of its products. A
firm can attain the status of a cost leadership by:
 Example of organization using cost leadership
business strategy: Gujarat Co-operative Milk
Marketing Federation, the country’s largest co-
operative, known better by its brand name Amul,
operates in the branded ice cream market on the
lower cost platform. It has the backing of a large
co-operative dairy net work, whose constituents
are located across the country and an efficient
supply-chain in place for procurement of high
quality milk.
 b) Differentiation Strategy
The differentiation strategy is an attempt to gain a competitive advantage
by producing a product or making available a service that gives additional
benefit to customers. Differentiation consists of offering a product or
service that is perceived as unique or distinctive by the customer.

This allows firms to command a premium price or to retain buyer loyalty because
customers will pay more for what they regard as a better product. A
differentiation strategy can be more profitable than a cost leadership strategy
because of the premium price.
Products can be differentiated in a number of ways
so that they stand apart from standardized products:
▫ Superior quality
▫ Special or unique features
▫ More responsive customer service
▫ New technologies
▫ Dealer network.
Gillette India differentiates its razor blades on the basis of
quality – unique three blades razor system that gives superior
shave. It has differentiated its shaving gel on the basis of
economy one drop is enough and one tube lasts for months.
As a result of such differentiation the firm has gained a large
market share.
c) Focus Strategy
The third business level strategy is focus. Focus is
different from other business strategies as it is
segment based and has narrow competitive scope.
Whenever a company plans to serve the needs of a
specific segment or a customer group based on
income, age, geographical area or a product line, it
follows focus strategy.
This strategy involves the selection of a market
segment, or group of segments, in the industry and
meeting the needs of that preferred segment (or
niche) better than the other market competitors.
This is also known as a niche strategy.
FUNCTIONAL LEVEL STRATEGY
Functional Strategy is the approach taken by a functional area to
achieve corporate and business unit objectives and strategies by
maximising resource productivity.

Functional strategies are essential to implement business

strategy. In fact, the effectiveness of a corporate or business
strategy execution depends critically on the manner in which
strategies are implemented at the functional level.
 The functional strategy clarifies the business strategy, giving specific short-term

guidance to operating managers in the areas of operations, marketing, finance, HR,

R&D etc., and increases the likelihood of their success.

Functional level strategy is associated with strategies in the areas of:

▫ Operations

▫ Marketing

▫ Finance

▫ Human resources

▫ Research and development.

OPERATIONS STRATEGY
An operations strategy is a set of decisions an
organization makes regarding the production
and delivery of its goods.

Operations management is the core function of

any organisation. This function converts inputs
(raw materials, supplies, machines and people)
into value added outputs.
The key to successful survival of an enterprise is
how efficiently the production activity is
managed.
Operations strategy plays a crucial role in shaping the ultimate

success of a firm. It enables an organisation to make optimal

decisions regarding product, production capacity, plant location,

choice of machinery and equipment, maintenance of existing

facilities and host of other aspects of production.

MARKETING STRATEGY

In marketing it is more important to do what is strategically

right than what is immediately profitable i.e. marketing
always look for long term profit and growth rather
immediate profit.

Plans and policies related to marketing have to be

formulated and implemented on the basis of the 4 P’s of
the marketing mix, i.e. product, price, place and
promotion. In case of services, the same is extended to 7
P's, ie, product price, place, promotion, people, physical
evidence and process
1. Product
 Product Mix

2. Price
 Price Mix - Price mix is an umbrella which is used to
cover all the factors associated with pricing such as unit
price, discount to be offered, pricing strategies, price
discrimination (different prices for different groups of
consumers for identical products offered by the firm)
and terms of credit to be allowed to customers.
3. Place
 Place Mix: Place mix refers to the combination of all decisions
related with the flow of goods from the place of manufactures
to the place of consumers. The major components of place mix
are:
➤ Distribution channel
➤ Transportation
➤ Warehousing
➤ Inventory management
➤ Order processing
4. Promotion: The fourth marketing mix tool, stands for the
various activities the company undertakes to communicate its
products’ merits and to persuade target customers to buy
them. It includes deciding on hire, train, and motivates
salespeople to promote its products to middlemen and
other buyers.
 Promotion Mix: The overall marketing communication
programmes of a firm are known as promotion mix.
The major elements of promotion mix are as follows:
➤Advertising: Advertising through television, newspaper etc.
➤ Personal selling: Canvassing customers personally or through
telephone and other electronic means, sales presentations
etc.
➤ Sales promotion: Providing incentives to customen such as
gifts, scratch cards, discount offers etc.
➤ Publicity: Giving favourable presentations and news about
the product and its features in the media.
In addition to the traditional four Ps the new marketing mix are:

People: All human actors who play a part in delivery of the market
offering and thus influence the buyer’s perception, namely the
firm’s personnel and the customer.

Physical evidence: The environment in which the market offering

is delivered and where the firm and customer interact

Process: The actual procedures, mechanisms and flow of activities

by which the product / service is delivered.
FINANCIAL STRATEGY
In the financial management area, the major concern of the
strategy relates to the acquisition and utilisation of funds.
Major issues involved are the sources from where the funds
will come, from equity or by borrowing.
 Financing decision
 Investment decision
 Dividend decision
 Working capital management
HUMAN RESOURCE STRATEGY

“A well-designed strategic-management

system can fail if insufficient attention is given

to the human resource dimension.”

 Strategic responsibilities of the human resource manager include
assessing the staffing needs and developing a staffing plan for
effectively implementing the other formulated strategies. This
plan must consider how best to manage employee costs and
also include how to motivate employees and managers.

The following points should be kept in mind:

 Recruitment and selection: The workforce will be more

competent if a firm can successfully identify, attracts, and select

the most competent applicants.

 Training: The workforce will be more competent if employees are well trained to

perform their jobs properly.

 Appraisal of Performance: The performance appraisal is to identify any

performance deficiencies experienced by employees due to lack of competence.

Such deficiencies, once identified, can often be solved through counselling,

coaching or training.

 Compensation: A firm can usually increase the competency of its workforce by

offering pay and benefit packages that are more attractive than those of their

competitors. This policy enables organizations to attract and retain the most

capable people.
RESEARCH AND DEVELOPMENT STRATEGY

Several past surveys suggest that the most successful

organizations use an effective R&D strategy to achieve its
objectives. Well formulated R&D policies match market
opportunities with internal capabilities.
Research and development (R&D) can play an integral part in
overall company’s strategy implementation. R&D employees
and managers perform tasks that include transferring complex
technology, adjusting processes to local raw materials, adapting
processes to local markets, and altering products to particular
tastes and specifications.

Strategies such as product development, market penetration,

and concentric diversification require that new products be
successfully developed and that old products be significantly
improved.
 STRATEGIC CHOICE

According to Glueck and Jauch, “strategic choice is the decision

to select from among the alternative grand strategies
considered, the strategy which will best meet the enterprise
objectives. The decision involves focussing on a few
alternatives, considering the selection factors, evaluating the
alternatives against these criteria and making the actual
choice”.
STEPS IN THE PROCESS OF STRATEGIC CHOICE

1. Focusing on Strategic Alternatives: First of all the various

alternative strategies from which choice will be made are
identified. It is neither possible nor worthwhile to consider all
possible alternatives. Therefore, in practice, strategists focus
on only those alternatives which are relevant and feasible.
2. Evaluating Strategic Alternatives: Once the few feasible
alternatives are identified, these are thoroughly analysed and
compared with one another.
 Strategic analysis helps to answer questions such as:
which industries to enter or exit? which
businesses to acquire or divest? which
products and markets to retain or grow
or divest?
3 . Considering Decision Factors: The criterion used in
the evaluation of strategic alternatives consists of
several objective and subjective factors. These
factors are known as decision factors.
4.Choosing from among the Strategic Alternatives: The
evaluation of strategic alternatives reveals the most suitable
alternative(s) under the present situations. Choice of strategy
is, therefore, the last step. The firm may choose one or more
alternatives foe implementation.
FACTORS INFLUENCING STRATEGIC CHOICE

Various factors that influence choice of strategy may be

classified into two broad categories – objective factors and
subjective factors.
Objective Factors: The strategic intent and SWOT
analysis of an organization are the main objective
factors in strategic choice. The strategic intent
defines what an organization should do and why.
Every organization attempts to choose strategies that
will help it in achieving its strategic intent.
Subjective Factors:

1. Role of past strategy (Research by Henry Mintzberg suggests

that the past strategy strongly influences current strategic
choice. The older and more successful a strategy has been, the
harder it is to replace.)
2. Degree of the firm’s external dependence: (Owners,
suppliers, customers, government, competitors, and unions
are a few of the elements in a firm’s external environment.
A major constraint on strategic choice is the power of
environmental elements in supporting this decision.
If a firm is highly dependent of one or more
environmental factors, its strategic alternatives and
ultimate choice must accommodate this dependence. The
greater a firms external dependence, the lower its range
and flexibility in strategic choice)
3. Attitudes toward risk: (When they are willing to take
risk, the range and diversity of strategies expand. Where
management is risk averse, the diversity of choices is
limited, and risky alternatives are eliminated before
strategic choice are made. )
4. Internal political considerations : -Power/political factors influence
strategic choice. A major source of power in most organizations is
the chief executive officer (CEO). When CEO begins to favour a
particular choice, it is often unanimously selected.
In large organizations, subunits and individuals (particularly key
managers) have reason to support some alternatives and oppose
others. Mutual interest often draws certain groups together in
coalitions to enhance their position on major strategic issues.
These coalitions, particularly the more powerful ones (often called
dominant coalitions), exert considerable influence in the strategic
choice process.
3. Timing: In case sufficient time is not available, the strategic
managers are unlikely to complete the necessary analysis
and in ahurry may take a decision which could be
disastrous. Another perspective is the timing of the
strategy. Right strategies adopted at wrong times, are likely
to lead disaster.
4. Competitive reaction:
5. Competitive Reaction: The strategic managers have to
consider the likely response of the competitor to the
proposed strategies. For example, if management chooses an
aggressive strategy that directly challenges a key competitor,
that competitor can be expected to form an aggressive
counterstrategy. Management of the initiating firm must
consider such reactions, the capacity, of the competitor to
react, and the probable impact on the chosen strategy’s
success.
CONTINGENCY STRATEGY
Contingency strategies are formulated in advance to deal with
uncertainties that are a natural part of the business.
Most changes occur in the company’s environment. Certain
components of the environment, such as the social environment, alter
gradually, and such can be anticipated well in advance. Then there are
other types of environment, for instance, the market, regulatory or
the international environment, where changes could be sudden and
leave little time for the strategists to readjust to the situation.