Module 6 Formulating long term and Grand

Strategies
Strategy formulation at 4 different levels
Corporate level
Business level
Functional level
Global level
 Corporate level(June, 10)
Provides overall direction for the firm
irrespective of its size,
Can be decided with 3 basic questions
Should we continue with the same business with
similar effort?
Should we expand into new business by adding
new functions, products & markets
Should we get out of this business or a part of a
business?
1. Stability strategy
a. pause/ proceed with caution strategy
b. No change strategy
c. The profit strategy
a. pause/ proceed with caution strategy:
companies adopt this strategy after a prolong
period of rapid growth in order to
consolidate resources & results.
Is a conscious attempt to make incremental
improvement till the environment changes
Eg., HLL
b. NO CHANGE STRATEGY: is persuade by small
business when the future is predicted to be
the same and continuation of the present
c. PROFIT STRATEGY:
Assumes that the difficulties faced by the firm
are temporary when the company sales are
declining the profit strategy tries to project a
picture of a profit making organization
By reducing investment
Blaming the company’s problems
Government policy change
2. GROWTH STRATEGY
designed to achieve increase in sales, assets and
profits
Concentration
Diversification
Concentration:2 basic strategies
Vertical growth
Horizontal growth
Vertical growth occurs when one function
previously carried over by a supplier or a
distributor is being taken over by he company
in order to reduce costs, to maintain quality of
inputs and to gain control over scarce
resources, vertical growth results in vertical
integration
 Forward integration means performing a
function previously provided by a retailer or
distributor
Involves acquisition of one or more of its
buyers
Eg., AT&T, -transmission equipment, switching
equipment, wireless product
 Backward integration: refers to performing a
function previously provided by supplier
Moving into intermediate manufacturing &
raw material production
Eg., Reliance- petrochemicals ,Asian Paints
acquired Pentasa chemicals
 Diversification strategy
Diversification strategy

Related diversification Unrelated diversification

Vertical
integration
Concentric Conglomerate
diversification diversification
diversification
Diversification
Considered to be a complex one
Involves a simultaneous departure from current
business, familiar markets & familiar products
Firms choose diversification when the growth
objectives are very high & it could not be
achieved within the existing product/ market
scope
Attraction for diversification arises from new &
fresh opportunities which promises high
profitability
Related diversification: firm enters into a new
diversification business activity which is linked
to the company’ existing business
Eg., IBM,INFOSYS,CELLO,
Unrelated diversification/conglomerate: firm
enters into a new business that has no obvious
connection with any of the existing business
Eg., Ponds India, Rexona, BPL, Godrej, Titan ,ITC
 Concentric diversification
Similar to related diversification, only that the
new product does not fall with in the current
product process chain
Eg., Philips, Eureka Forbes Usha International
 3. Retrenchment
Strategies involve reducing the level of company
activities
BUSINESS LEVEL STRATEGIES
Focuses on improving the competitive position
of a company’s products/ service with in a
specific industry
Cost leadership: large business produces at the
lowest cost possible
Eg., Nirma, Timex, tata nano, Ghari Detergent,
Anchor toothpaste
Differentiation: larger business produces & markets
to the entire industry products that can be readily
distinguished from those of competitors
Eg., Mercedes Benz car, Rolex Watches,
P&G,IBM,Dell,SONY,Modixerox, Ureka Forbes,
Caterpillar,Nissan, Toyota, HLL, Apple computers
Focus strategies: to serve the needs of limited
customer group or segment
EG., Fadel Engineering built machine tools aimed
at manufacturer without any frills
Shantha & Sowbhagya wet grinder, Anjali
kitchen ware
Being Stuck in the Middle
Perfect fit among the 3 components
 3. Functional strategies
Deals with developing & nurturing a distinctive
competence in a functional area in order to
maximize resource productivity
Outsourcing
Marketing strategy
Product promotion strategy
advertising & distribution
Financial strategy
Operations strategy
Human resource strategy
MIS
 Leveraged By Outs

A company is acquired in a transaction which is

mainly financed by funds arranged from a
third party such as bank or financial institution
GAP ANALYSIS
In Gap analysis, the strategists examines about
what the organization wants to achieve and
what it has really achieved
 Global strategies
4 strategies for international competition
Global: centralized production of standardized
product
Transnational: centralized production of
customized products
International: decentralized production of
standardized product
Multi domestic: decentralized production of
customized products
 Strategic choice process
Focusing Evaluating
strategic strategic
analysis analysis

Considering
decision
factors

Objective & Choice of

subjective
factors strategy
 Portfolio analysis
Is one such tool where SWOT analysis
information is used as a basis for portfolio
analysis in a two dimensional technique
GE nine cell grid planning
BCG matrix(Boston Consultation Group)
BCG growth matrix has two dimensions
Market growth rate
Relative market share
The main objective of BCG matrix is to help top
management to identify the cash flow
requirements of different business in their
portfolio
Has 3 steps
Dividing the company into SBU’S
Comparing the SBU’s against each other by
means of a matrix that indicates the relative
prospects of each
Developing strategic objectives with respect to
each SBU’s
B
STARS CASH
u
s
i COWS
n
e Premise control
s Implementation control
s Strategic survivalance
g
QUESTION
Special alert control

DOGS
r
o
w
t
MARKS
h

Relative competitive position

Stars: the leading SBU’s in the firms portfolio are
stars. They have high growth rate, high relative
market share, competitive advantage &
growth opportunities
Have long term profit & opportunities for
expansion
Are market leaders & they are at the peak of
product life cycle stage
Question Mark: have high industry growth low
relative market share
Competitive position is weak but they work for
long term profit & growth
May become a star, if it has a potential for
growth & it is nurtured properly
Cash cows: are SBU’s that generate a lot of cash
but growth potential is negligible.
have high market share in low growth
industries & a strong competitive position in
mature industries.
are cost leaders in the industry
lack opportunities for future expansion
But generate cash to the company
Dogs:
are in low growth industries & have a low
market share.
Have weak competitive position in an
attractive industry
Low potential for growth
Are in the declining stage of product
BCG makes 4 recommendations
The company portfolio should be made attractive
by considering the position of stars and turning
potential question marks into stars
Question marks with questionable prospects
should be divested and dropped
If cash cows star & question marks are not in
sufficient numbers the firm should go for
acquisition in order to build a more balanced
portfolio
The company should exit from SBU’s that are dogs
 Limitations
Considered only two dimensions
The relationship between market share and
cost savings is not straight forward as GE
nine cell grid matrix suggest
A high market share in a low growth industry
does not necessarily result in the cash flow
from cash cows
 GE nine cell grid (McKinsey & General Electric)
In
d WINNERS(B) QUESTION
u H WINNERS(A) MARK(C)
st
ry
at
AVERAGE
tr
a M WINNERS(E) BUSINESS(F) LOOSERS(D)
ct
iv
e L PROFIT LOOSERS(G) LOOSERS(H)
n
e
PRODUCERS(I)
ss
medium average
strong

Business strength/competitive position

 GO AHEAD(A,E)
WAIT & SEE(B)
STOP(C)
EXPAND(I)
STABILITY(F)
RETENCHMENT(G,D,H)
(VTU, June 10,Dec 10,10 marks)
 Industry attractiveness is studied in terms of

Market growth rate Cyclicality

Industry profitability Economies of scale
Market size Technology
Pricing practices Social
Competitive intensity Environment
seasonality Legal
Human impacts
 Business strength
Relative market share Knowledge of customer
Profit margin &market
Ability to compete on Competitive strength &
price and quality weaknesses
Technological
capabilities
Steps in developing GE nine cell grid
For each product line, overall industry
attractiveness is assessed & rated on a five
point scale(very attractive to very unattractive)
Each product line is assessed and measured
on a five point scale(very weak & very strong)
Plot each products lines current position on
the matrix
Calculate the gap between projected &
desired portfolio
 Retrenchment
The firm reduces certain activities in order to
improve overall performance
The retrenchment is accomplished in 2 forms
Cost reduction
Eg., leasing rather than purchasing the
equipment, decreasing promotional activities
Asset reduction
Eg., sale of land, building, equipment not
essential to the basic activities
 Turnaround(VTU,Jan 10,Dec 10, 3 marks)
Overcoming the situation of retrenchment
Liquidation
 The business is typically sold in parts and only
occasionally as a whole
 In selecting a liquidation, owners and
managers of business are admitting failure and
recognize that this action is likely to result in
hardship to themselves & their employees
 As a long term strategy it minimizes the loss to
all stakeholders of the firm
Tailoring strategy to fit specific industry and company situation

• The choices of strategy to a company’s

circumstances
Companies competing in
emerging industries
Rapidly growing markets
Maturing industries
Stagnant or declining industries
Turbulent, high velocity markets
Fragmented industries
 Companies striving to sustain rapid growth
Companies in industry leadership positions
Companies in runner-up position
Companies in competitively weak positions
(crisis condition)
Refer Crafting and Executing strategy text book,
page no. 237-257)