Strategy Formulation

Strategy formulation is referred as strategic planning or long range planning.Strategy formulation is concerned with developing a corporate’s mission,

objectives, strategy and policy.Process involves scanning external and internal environmental factors,

analysis of the strategic factors and generation, evaluation and selection of the best alternative strategy appropriate to the analysis.

SWOT Analysis

Management should identify and analyze various factors to identify strengths, weaknesses, opportunities and threats.

This analysis will help the company to position itself to take the advantage of the opportunities provided by the environment and to minimize the threats by the environment.

Matching environmental information with the knowledge of the organization’s capabilities enables management to formulate efficient and realistic strategies for attaining organizational goals.

Corporate Profiles

SWOT analysis helps management in determining in which business or businesses the company should be operating.

Three types of corporate profiles:(i) the firm can compete in one business or industry.(ii) the firm can compete in several related businesses or industries.(iii) the firm can compete in several unrelated businesses or industries.

KINDS OF GRAND STRATEGIES

Strategic Alternatives:

STABILITY STRATEGIES

GROWTH STRATEGIES

RETRENCHMENTSRATEGIES

COMBINATIONSRATEGIES

• Maintenance of Status Quo•Sustainable Growth

• Internal Growth•Concentration Strategies•Mergers•Takeover / Acquisition•Horizontal Integration•Conglomerate Diversification•Vertical Integration•Joint Ventures

• Turn around•Captive Company•Transformation•Divestment•Liquidation

• Portfolio Restructuring

Michael Porter: Strategy and Competitive Advantage

• Value chain

Porter’s work can be summarized as ‘Strong Domestic Rivalry’

Resource Audit:

• Strategic capability can be better understood through resource audit.• Resource audit helps to understand the strengths or weaknesses of the

resource base.• Resource base includes physical resources, human resources, financial

resources and intangibles.

Value – Chain Analysis:

• Value chain analysis deals with utilization of resources, control of resources and linking the resources and strategy.

Primary activities:

i. Inbound Logistics: Material handling, stock control and transportationii. Operations: machining, assembling, testing, packaging and delivering.iii. Outbound logistics: storing and distributioniv. Marketing and sales: promotional programmes, sales administration,

delivering the product.v. Service : Pre-sales and post sales service

Supporting activities:

i. Procurement: activities are related to the entire value chain and supports every activity.

ii. Technology Development: iii. HRM activities: employment, training, development, rewarding, industrial

and human relations, employee empowerment.iv. Infrastructure:

•Value Chain and – Internal Analysis•Analysis of Cost Efficiency•Comparative Analysis•Assessing the Balance of Resources

Competitive Advantage of a Firm

•Identifying Strengths and Weaknesses•Strengths are like assets and weaknesses are like competitive liabilities.•Management has to develop competencies quickly. These competencies can be the basis for building competitive advantages.•An organization’s strategy should be well-fitted to company’s strengths weaknesses and competitive advantages.

•Distinctive / Core Competencies•Distinctive or core competencies empower a company to build competitive advantage.•Core competencies include excellent quality maintenance, lowest production cost, latest technology utilization, ability to provide required service, ability to develop new products, high credit worthiness.

Entry Barriers

•Entry Barriers created by environment as well as competitors include:•Low cost leadership•Differentiation strategy•Focus Strategy•Government Regulations•Appropriate Quality

Exit Barriers

•Exit Barriers created by environment as well as competitors include:•Mergers or Joint ventures find it difficult to exit•Lack of opportunities in other markets works as an exit barrier.•Companies which become part of culture of the nation find it difficult to exit.

Competitive Advantage

Sources of competitive advantage:•Producing top quality products•Rendering superior quality services•Offering the best quality service•Producing at minimum cost•Selecting a more convenient location•Superior product design•Most committed for Human Resources• offering more value for money

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Integrated Strategies

With this Strategies a company can obtain control over distribution.

Types of Strategies

1. Integration Strategies i. Forward Integration

ii. Backward Integration

iii. Horizontal Integration

2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

1.Integration Strategies I. Forward Integration

II. Backward Integration

III. Horizontal Integration

Forward Integration, Backward Integration and Horizontal Integration are collectively called as Vertical Integration.

Vertical integration

Forward Integration

Forward Integration moves an organization close to its customers. This enables an organization to obtain ownership or increased control over its distributors or retailers.

(or)Gaining ownership or increased control over distributors or retailers.

Example: Coca-Cola Company purchased its largest franchised bottler.

Forward IntegrationDistributors are costly, unreliable or are not able to meet the distribution requirements.Organisation is not able to avail the advantage of competition due to limited no. of quality distributors.When an organisation competes in an industry that is growing and is expected to continue to grow markedly.When an organisation has both economic and human resources to handle the new business requirements.When an organisation is earning high profit because of stable production.When an organisation is earning high profit from the current distributors or retailers.

Backward Integration

Both manufacturers and retailers purchase needed material from suppliers. Backward integration helps an organisation in obtaining ownership or increased control over its suppliers.

Seeking ownership or increased control of a firm’s suppliers.

Backward IntegrationDistributors are costly, unreliable or are not able to meet the distribution requirements.Organisation has a large no. of competitors and less no. of suppliers.When an organisation wants to stabilize the cost of its raw materials and the associated price of its products. When an organisation has both economic and human resources to handle the new business requirements.When an organisation is earning high profit margin from its present suppliers.When an organisation is obtaining the required resources quickly.

Horizontal Integration

In Horizontal Integration an organization takes over the same type of products at the same level of production or marketing process, to obtain ownership or increase control over its competitors.

Mergers between direct competitors are more likely to create efficiencies than mergers between unrelated businesses, because there is a greater potential for eliminating duplicate facilities and because the management of the acquiring firm is more like to understand the business.

Horizontal IntegrationWhen an organization can obtain monopolistic features in a particular area.When an organization is getting great competitive advantage because of increased economies of scale.When an organisation has both economic and human resources to handle the new business requirements.

Types of Strategies

1. Integration Strategies

2. Intensive StrategiesI. Market Penetration

II. Market Development

III. Product Development

3. Diversification Strategies4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Intensive Strategies

I. Market Penetration

II. Market Development

III. Product Development

The above 3 strategies are called as Intensive Strategies as they required intensive efforts for the improvement of a firm’s competitive position with existing products.

Market Penetration

Market Penetration strategy helps in enhancing the market share for current products or services. Market penetration increases the no. of salespersons, publicity efforts and the advertising expenditures of an organisation.

Market PenetrationWhen current markets are not flooded with a particular product.When the rate of using products by the customers can be enhanced significantly.When the market shares of the competitors have been falling down and the total industry sales have been rising.When the relationship between sales and expenditure is high.When a company is earning high profit due to increase in economies of scale.

Market Development

With this strategy a company can launch its current products or services into new geographic areas. Climate is an important factor for market development.

Market DevelopmentWhen an organization is having new sources of distribution that are reliable, inexpensive and of good quality.When operations of an organisation are profit.When the market is not flooded with the product manufactured by a company. When an organisation is having enough of economic and human resources required to manage the expanded operations of the company.When an organisation has surplus production capacity.When the basic industry of an organisation is rapidly growing.

Product Development

In product development, a company can improve the product sales by improving its present products or services.Product development involves excessive research and development expenditures.

Product DevelopmentWhen an organization has successful products that are in the maturity stage of the PLC and wants to attract the customers to improved products.When an organization competes in an industry, which is rapidly developing.When chief competitors of an organisation bring better quality products in the market at comparable prices.When an organization competes in a highly growing industry.When an organization has strong research and development capabilities.

Types of Strategies

1. Integration Strategies 2. Intensive Strategies

3. Diversification StrategiesI. Concentric Diversification

II. Horizontal Diversification

III. Conglomerate Diversification

4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Diversification Strategies

I. Concentric Diversification

II. Horizontal Diversification

III. Conglomerate Diversification

Diverse Business Activities.

Concentric Diversification

Concentric diversification strategies include producing new products that are useful to the same customer group.

Example: •TV company follows a diversification strategy of producing DVD player.•Coco-cola followed concentric diversification of producing ‘Kinley’ purified water.

Concentric DiversificationWhen an organisation competes in a no-growth or a slow growth industry.When the addition of new products significantly increases the sales of the current products.When the products have seasonal sales levels that counterbalance an organization's existing peaks and valleys.When the product of an organisation is in the diminishing stage of the PLC.When an organisation has a powerful management team.

Horizontal Diversification

Companies expand by creating other firms in their same line of business.

Horizontal Diversification

•To increase market share.•To reduce the cost of operations per unit of business through large scale of economies.•To promote the products and services more efficiently.•To take the advantage of the benefits of synergy.

Conglomerate Diversification

When the existing firm creates another business unit that are unrelated to its original business.Example: Gujarat Gas Ltd., created another business unit i.e. Gujarat Finance Company Ltd.

Conglomerate Diversification

When the basic industry of an organisation is facing a downfall in annual sales and profits.When an organisation has the capital and managerial talent needed to compete successfully in new industryWhen an organisation has the opportunity to purchase an unrelated business that looks like an attractive investment.When there exists, financial synergy between the acquired and acquiring organisation.When existing markets are saturated by the organization's present products.

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies

4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Defensive Strategies

I. Divestiture

II. Liquidation

Divestiture

•Divestiture is the selling of a division or a part of an organisation to raise capital for future strategic acquisitions or investments.

Divestiture

When an organisation has followed a retrenchment strategy and it has failed to accomplish necessary improvements.When a division needs more resources to be competitive than an organisation can provide.When an single division is responsible for poor performance of the organisation.When a division is a misfit with the rest of an organisation.When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources.When govt. antitrust action threatens an organisation.

Liquidation•Liquidation involves closing down the organisation and selling of its assets.

Liquidation•When an organisation has followed both a retrenchment strategy and a divestiture strategy and neither has been successful.•When an organization's only alternative is bankruptcy.•An organisation legally declares bankruptcy first and then liquidates various divisions to raise the needed capital.

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies

5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Joint venture•Joint venture is a strategy developed by two or more organizations that mutually participate in a business venture, contribution to the total equity capital and establish a new organisation.

Joint venture

•organizations of different countries fined it beneficial to enter into joint venture due to following reasons:•To reduce the amount of capital outlays to be made by respective parties.•To make the entry of MNC’s easier by joint venture, since in developing countries govt. do not favour the entry of foreign companies.•To reduce the production and marketing cost with the help of increased sales due to joint venture.

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies5. Joint Venture

6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Stability StrategyStability strategy focuses on improvement of functional performance and maintenance of same level of success as in the immediate past.

Stability Strategy

When an organisation has achieved its desired objectives and level of performance.When an organisation does not see any threat or opportunity in the environment.When an organization's key person resists introduction of new products and entry in new markets.When an organization's internal resource prevents further growth or change.

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies5. Joint Venture6. Stability Strategy

7. Growth/Expansion Strategy8. Retrenchment Strategy9. Combination Strategy

Growth / Expansion StrategyGrowth strategy aims to achieve higher level of objectives in terms of market share or sales revenue than what the organisation achieved in the immediate past.

Growth / Expansion StrategyIt indicates the effectiveness of the organisation, therefore attracts efficient management.It provides strength and motivates the represent employees.It helps an organisation to achieve important performance rewards like size expansion and experience over time.It helps an organisation to face frequent changes in technology and other external conditions.It results in to higher compensation for the executives. It helps to get hold of market share of the competitor and encourages the organisation to enter new challenging fields.

Growth / Expansion Strategy

1. Internal Growth: Internal growth is achieved through increasing the firm’s production capacity, employees and sales.

2. Concentration Strategies: Concentration Strategies efforts of the firm are concentrated on a limited combination of customer groups, customer functions, alternate technologies and products.

3. Merger Strategies: combination of two or more firms is known as merger. When the firms of similar objectives and similar strategies combine into one firm, such combinations are called mergers.Types of Mergers: • Horizontal Mergers: combinations of firms engaged in the same business.• Vertical Mergers: combination of different firms engaged in activities

complimentary to each other.• Concentric Mergers: combination of firms related to each other in terms of

customer groups or customer functions or alternative technologies.• Conglomerate Mergers: combination of firms unrelated to each other in terms of

customer groups.

4. Takeovers or Acquisition Strategy: When the firms of similar objectives and similar strategies combine into one firm,

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy

8. Retrenchment Strategy9. Combination Strategy

Retrenchment Strategy

Retrenchment arises when an organisation regroups through reduction in cost and assets, reverse declination in sales and profits.Retrenchment can entail selling off of the land and buildings to raise needed cash, closing marginal businesses, closing obsolete factories, automating processes, reducing the no. of employees and instituting expense control systems.

Retrenchment Strategy

When an organisation has a clearly distinctive competence, but has failed to meet its objectives and goals consistently over time.When an organisation is one of the weaker competitors in a given industry.When an organisation is plagued by inefficiency, low profitability, poor employee morale.When an organisation has failed to capitalise external opportunities, minimise external threats.When an organization has suddenly grown so large and therefore, a major internal reorganizations is needed.

Retrenchment Strategy

Reasons for using retrenchment strategy:•Poor Performance: An organisation suffers from poor performance when it is earning low profits and income.

•Threat to survival: When unanticipated problems threaten the survival of the organisation and the management is under pressure from the shareholders and employees to improve the performance.

•Redistribution of resources: When higher returns are expected from and investment opportunity, it may lead to closing down of present business units or activities.

•Insufficiency of resources : To survive and develop reasonable earning position in product-market huge capital investment is required.

•To secure better management and improved efficiency: To simplify the present activities of an organisation few operations are cancelled.

Retrenchment StrategyVariants of Retrenchment Strategy:

•Turnaround Strategy•Divestment Strategy•Liquidation Strategy

•Turnaround Strategy: This strategy is necessary during the recession conditions of industry. This strategy focuses on halting the present declining trend in performance and improving the long-run efficiency of operations.•Divestment Strategy: involves selling off of the business units or product divisions of a business.•Liquidation Strategy: involves selling off of the assets or closing down of an organisation.

Types of Strategies

1. Integration Strategies 2. Intensive Strategies3. Diversification Strategies4. Defensive Strategies5. Joint Venture6. Stability Strategy7. Growth/Expansion Strategy8. Retrenchment Strategy

9. Combination StrategyPortfolio Restructuring

Combination Strategy•Combination strategy involves deliberate use of different strategies for different units or divisions ate the same time or chronological use of different strategies over the period of time;.

Combination Strategy•It helps optimise profitability and limit losses of an organisation.•It helps multiproduct organizations where products are into different stages of product cycles.•It helps multi market organizations to cater needs.•It helps large sized organisation to follow different strategies according to the requirements of the various business activities.

INTEGRATIOVE MODEL OF STRATEGIC ALTERNATIVES

Threatened Firm:Limited GrowthConcentric DiversificationConglomerate DiversificationTransformationJoint Ventures

Ideal Firm:ConcentrationVertical IntegrationHorizontal Integration

Strong

Opportune Firm:Turn aroundConcentrationCaptive companyLimited GrowthMergersJoint VenturesDivestmentLiquidation

Troubled Firm:TurnaroundDivestmentLiquidationWeak

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Firm’s Environmental Analysis

Opportunities Threats posed

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