Strategic Management

Unit - III
Strategy Formulation
Learning Outcomes

After completing this lecture you should be able to:

• present the strategy formulation framework

• apply the tools of strategy formulation such as SWOT
matrix, Boston Consulting Group (BCG) matrix, GE matrix,
and Grand Strategy matrix
• realize the significance of the Blue ocean strategy
• explain the role of resource-based strategy formulation in
achieving a competitive advantage
Basic Model of Strategic Management
 Strategy Formulation Framework

Strategic Management Concepts and Cases Fred R David, 15th ed., (2014)
Strategy Formulation Framework

Stage 1 - Input Stage

• summarizes the basic input information needed to
formulate strategies
• this stage consists of the External Factor Evaluation (EFE)
Matrix, the Internal Factor Evaluation (IFE) Matrix, and the
Competitive Profile Matrix (CPM).

Strategic Management Concepts and Cases Fred R David, 15th ed., (2014)
Strategy Formulation Framework

Stage 2 - Matching Stage

• focuses on generating feasible alternative strategies by
aligning key external and internal factors
• techniques include the Strengths-Weaknesses-
Opportunities-Threats (SWOT) Matrix, the Strategic
Position and Action Evaluation (SPACE) Matrix, the Boston
Consulting Group (BCG) Matrix, the Internal-External
(IE/GE) Matrix, and the Grand Strategy Matrix.

Strategic Management Concepts and Cases Fred R David, 15th ed., (2014)
Strategy Formulation Framework

Stage 3 - Decision Stage

• involves the recognizing relative attractiveness of
alternative strategies developed in stage-2and thus
provides an objective basis for selecting specific strategies
• Quantitative Strategic Planning Matrix (QSPM) reveals the
relative attractiveness of alternative strategies and thus
provides an objective basis for selecting specific strategies.

Strategic Management Concepts and Cases Fred R David, 15th ed., (2014)
SWOT Matrix

• A Tool for Situational Analysis by Heinz Weirich in 1982.

• The goal of the matrix is to reinforce the business strategy
by assessing all the strengths and weaknesses of a firm, as
well as the potential opportunities and pitfalls within the
marketplace.
• SWOT Matrix is an important matching tool that helps
managers develop four types of strategies
SWOT Matrix
SWOT Matrix
SO Strategies
• internal strengths can be used to take advantage of
external trends and events
• external opportunities match well with internal strengths,
allowing for competitive advantage to be built and
maintained.
• For example, if a company has reasonably established a
brand name in the market and has won the hearts of the
consumers, there lies a golden opportunity to explore new
market locations or introduce a new line of products and
services for the same target market. Such a step can turn
out to be the best for the upliftment of the firm.
SWOT Matrix
ST Strategies
• a company should take advantage of its internal strengths
to avoid massive external threats.
• Internal strengths facilitate the neutralization of external
threats, which may lead to a temporary advantage if
competitors are impacted by environmental threats
• Example: Texas Instruments used an excellent legal
department (a strength) to collect nearly $700 million in
damages and royalties from nine Japanese and Korean
firms that infringed on patents for semiconductor memory
chips (threat). Rival firms that copy ideas, innovations, and
patented products are a major threat in many industries.
SWOT Matrix
WO Strategies
• aims at improving internal weaknesses by taking advantage
of external opportunities.
• a situation where strategies are formulated to acquire or
develop new resources/capabilities to take advantage of
external opportunities.
• Example: If the company doesn’t possess any expertise in
any of the business domains which is necessary for growth
and is gifted an opportunity to ally with another company
that has the needed expertise, it works as a fairly
convenient situation for both the companies.
 SWOT Matrix
WT Strategies
• defensive tactics directed at reducing internal weakness
and avoiding external threats
• Consolidation/Exit Strategies, if firms can’t find ways to
convert weaknesses to strengths via
acquisition/development, or exit from the market is
recommended.
• EXAMPLE: A company has lost its shine and glory and has lost the faith
of the stakeholders. Thus, there exists a threat of losing out on funding
and investment by investors. In this case. it might close down poor-
selling products, cut down underperforming employees and build a
unique technique of selling. If optimistic, the company might look to
merge with another suitable company to leverage its expertise and
resources for hanging on to funding.
SWOT of Apple
Strategic Options of Apple
SO
• Increase the focus on mobile devices, their manufacturing,
and marketing to profit from their increasing demand.
Focus on the portability of laptops; release models that
provide better portability.
• Use its financial clout and the strength of its brand image to
diversify into new product areas and generate sales and
profits. This will also help it benefit from its existing
customer base and customer loyalty.
• Partner with other brands to produce compatible products
and develop mutually beneficial relationships. This will help
hack into other brands’ customer base.
Strategic Options of Apple
WO

• Release a range of products priced competitively to attract

middle-class customers.
• Create a larger product range and enter into new product
areas and serve new customer segments.
Strategic Options of Apple
ST
• Develop a larger range of products to grow its customer
base and reduce competitive pressure.
• Control costs of manufacturing by focusing on supplier
relationships and establishing manufacturing plants in
nations with lower labor costs.
• Focus on cultural change to retain the competitive
advantage created by Jobs.
Strategic Options of Apple
WT
• Release a range of competitively priced products to
attract middle class customers and reduce the
pressure from competitors.
• Broaden the product range and exploit the existing
supply chain capabilities to reduce manufacturing
costs.
Boston Consulting Group (BCG) Matrix
BCG Matrix of Coca-Cola
Boston Consulting Group (BCG) Matrix
Boston Consulting Group (BCG) Matrix

After analyzing the product SBU situation employing the BCG

matrix, the organization is left with 4 strategic choices.
1. Build – Invest and expand in order to build a strong
future with a large market share.
2. Hold - Just do that bit to preserve the market share
3. Harvest - to increase short-term cash flows regardless of
long-term effects.
4. Divest - Sell or liquidate so that resources can be better
used elsewhere.
GE NINE CELL MATRIX
GE NINE CELL MATRIX
GE NINE CELL MATRIX

• If a product falls in the green section, the business is in an

advantageous position. The strategic decision can be to
expand, invest, and grow.
• If a product is in the amber or yellow zone, it needs
caution, and managerial discretion is called for making
strategic choices.
• If a product is in the red zone, it will eventually lead to
losses that would make things difficult for organizations. In
such cases, the appropriate strategy should be harvest,
divestment, or liquidation.
The Grand Strategy Matrix
Blue Ocean Strategy

“Blue ocean strategy is the simultaneous pursuit of

differentiation and low cost to open up a new market space and
create new demand. It is about creating and capturing
uncontested market space, thereby making the competition
irrelevant. It is based on the view that market boundaries and
industry structure are not a given and can be reconstructed by
the actions and beliefs of industry players.”
Red Ocean Strategy vs Blue Ocean Strategy
Blue Ocean: market-creating innovation

Kim & Mauborgne, Blue Ocean Shift: Beyond Competing

 Blue Ocean Tools: Value Innovation
• Blue ocean strategy is a new way of
solving users’ pains, which means
creating a solution no one expected
to exist, but that everyone needed.
This is called value innovation.
• Value Innovation is the simultaneous
pursuit of differentiation and low
cost, creating a leap in value for both
buyers and the company.
• Value Innovation is the simultaneous
pursuit of radically superior value for
buyers and lower company costs.
Blue Ocean Tools: Four Actions Framework

Chan Kim and Renée Mauborgne. Blue Ocean Strategy.

Example of Blue Ocean Strategy
Netflix: In this David versus Goliath story, Netflix came on the scene when
Blockbuster was at the top of the video rental game. Rather than trying to
compete with the popular giant solely on price or entertainment choices,
Netflix reinvented the market by creating an entirely new kind of online
DVD rental service. It utilized postal mail rather than brick-and-mortar
stores. And its flat-fee monthly payment model solved two major pain
points many Blockbuster customers experienced: return deadlines and
late fees. Netflix customers could keep a DVD for as long as they wanted
without incurring any late fees. Plus, they could browse and select a video
to rent without having to leave their house. Netflix has continued to
innovate since then by switching from DVDs to streaming and then by
creating its own shows and movies.

Result: using the Blue Ocean Strategy, Netflix has been able to move to
new, uncontested spaces to capture demand constantly.
Pros and cons of the blue ocean strategy

Pros
• Avoid saturated markets
• Growth potential
• Meet customers on their level
Cons
• Too ambitious
• Too risky
• Impermanent

Max Freedman, Blue Ocean Strategy: Creating Your Own Market, Business News Daily, Jun 29, 2022
 A Resource-Based Approach
to
Strategy Formulation

• Two fundamental reasons for making the resources and

capabilities of the firm the foundation for its strategy:

– First, internal resources and capabilities provide

the basic direction for a firm’s strategy

– Second, resources and capabilities are the

primary source of profit for the firm
A Resource-Based Approach
Grant (1991) distinguishes between resources and
Capabilities:

• Resources are inputs into the production process

• A capability is the capacity for a team of

resources to perform some task or activity

• Resources are the source of an organization’s capability

• Capabilities are the main source of an organization’s

competitive advantage
A Resource-Based Approach

• Grant (1991) argues that a focus solely upon the external

environment may not provide a sufficient foundation for a
long-term strategy…

• ‘When the external environment is in a state of flux, the firm’s

own resources and capabilities may be a much more stable
basis on which to define its identity. Hence, a definition of a
business in terms of what it is capable of doing may offer a
more durable basis for strategy…’
Grant (1991, p.116)
 Resource-Based View

• Emphasizes the internal capabilities of the organization in

formulating strategy

• a sustainable competitive advantage in its markets and

industries

• Resources and capabilities which can be configured (and

reconfigured) to provide competitive advantage
 For Grant…

• Profits that derive from a firm’s resources and capabilities

depend on 2 things:

1. The sustainability of the competitive advantage which

resources and capabilities confer

2. The ability of the firm to appropriate the profits earned

from its resources and capabilities
Resource-Based View
Grant (1991)

The characteristics of resources and capabilities that

provide for the sustainability of competitive advantage are:

• durability
• transparency
• transferability
• replicability
Resource-Based View
Sustaining competitive advantage

• Durability – the rate at which an organisation's

resources and capabilities depreciate or become
obsolete

• Resources such as plant and machinery may

be quickly depreciated by technological
changes

• Other resources, such as an organisation

brand tend to depreciate fast slow
Resource-Based View
Sustaining competitive advantage

• Transparency – the ease with which a competitor can

identify the capabilities which underpin your competitive
advantage, and therefore which resources it requires to
duplicate these capabilities

• the more complex and embedded the resources

and capabilities are, the more difficult it will be
for a competitor to duplicate them

• the more difficult the strategy is to imitate, more

sustainable the competitive advantage
Resource-Based View
Sustaining competitive advantage
• Transferability – how easily a competitor can access the
resources and capabilities necessary to duplicate an
incumbent strategy

• if an organisation can get resources and capabilities

on similar terms to their rival, then its competitive
advantage will be unsustainable

• however, a firm that is first to acquire such resources

and capabilities may acquire some advantage
through its experience with these resources e.g. first
mover advantages
Resource-Based View
Sustaining competitive advantage

• Replicability – the use of internal investments to copy

resources and capabilities of competitors

• Where the capabilities are based upon complex

organisation routines this will be far more
difficult

• Even where an organisation’s routine seems

relatively straightforward they may be difficult
for competitors to imitate successfully .e.g.
Ryanair, Dell
Grant’s 5 Stage Framework for Strategy Formulation

4 Strategy

3 Competitive Advantage
5

2 Capabilities

1 Resources
Business Level Strategy
A Resource-Based Approach to Strategy Formulation