CHAPTER-FIVE

Strategy Formulation: Strategy Analysis and Choice

Strategy formulation, often referred to as strategic planning or long-range

planning, is concerned with developing a corporation’s mission, objectives,
strategies, and policies. It begins with situation analysis: the process of finding
a strategic fit between external opportunities and internal strengths while
working around external threats and internal weaknesses.
5.1 The nature of strategy analysis and choice
Strategy analysis and choice seek to determine alternative courses of action
that could best enable the firm to achieve its mission and objectives. The firm’s
present strategies, objectives, vision, and mission, coupled with the external
and internal audit information, provide a basis for generating and evaluating
feasible alternative strategies.
Alternative strategies do not come out of the wild blue yonder; they are derived
from the firm’s vision, mission, objectives, external audit, and internal audit;
they are consistent with, or build on, past strategies that have worked well.
Strategy formulation is not a task in which managers can get by with opinions,
good instincts, and creative thinking. Judgments about what strategy to
pursue need to flow directly from solid analysis of a company's external
environment and internal situation. The two most important situational
considerations are
 Industry and competitive conditions and
 A company's own competitive capabilities, resources, internal strengths
and weaknesses, and market position.

The analytical sequence is from strategic appraisal of the company's external

and internal situation, to evaluation of alternatives, to choice of strategy.
Accurate diagnosis of the company's situation is necessary managerial
preparation for deciding on a sound long-term direction, setting appropriate
objectives, and crafting a winning strategy. Without perceptive understanding
of the strategic aspects of a company's external and internal environments, the
chances are greatly increased that managers will concoct a strategic game plan
that doesn't fit the situation well, that holds little prospect for building
competitive advantage, and that is unlikely to boost company performance.
Issues to consider for strategic analyses

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Strategy evolves over a period of time: There are different forces that drive
and constrain strategy and that must be balanced in any strategic decision. An
important aspect of strategic analyses is to consider the possible implications
of routine decisions. Strategy of a business, at a particular point of time, is
result of a series of small decisions taken over an extended period of time. A
manager who makes an effort to increase the growth momentum of an
organization is materially changing strategy.
Balance: The process of strategy formulation is often described as one of the
matching the internal potential of the organization with the environmental
opportunities. In reality, as perfect match between the two may not be feasible,
strategic analyses involve a workable balance between diverse and conflicting
considerations. A manager working on a strategic decision has to balance
opportunities, influences and constraints. There are pressures that are driving
towards a particular choice such as entering a new market. Simultaneously
there are constraints that limit the choice such as existence of a big
competitor. These constraining forces will be producing an impact that will
vary in nature, degree, magnitude and importance. Some of these factors can
be managed to some extent, however, there will be several others that are
beyond the control of a manager.

Risk: In the strategic analyses the principle of maintaining balance is

important. However, the complexity and intermingling of variables in the
environment reduces the strategic balance in the organization. The lives that
we lead is uncertain and the business is no exception. Competitive markets,
liberalization, globalization, booms, recessions, technological advancements,
intercountry relationships all affect businesses and pose risk at varying degree.
An important aspect of strategic analysis is to identify potential imbalances or

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 risks and assess their consequences. A broad classification of the strategic risk
that requires consideration in strategic analyses is given below:

External risk is on account of inconsistencies between strategies and the forces

in the environment. Internal risk occurs on account of forces that are either
within the organization or are directly interacting with the organization on a
routine basis.

Management develops a strategy by evaluating options available to the

organization and choosing one or more of the options.
Strategies exist at different levels in an organization and are classified in to tree
major categories according to their scope of coverage i.e. they are classified
into:
 Corporate,
 Business and
 Functional level strategies
A.Corporate Level Strategy

Also called Grand strategies, master strategies are intended to provide basic
direction for strategic actions. It is a firm's theory of how to gain competitive
advantage by operating in several businesses simultaneously. Grand strategies
are basically about the choice of direction that a firm adopts in order to achieve
its objectives. Is about the basic direction of the firm as a whole.

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A corporate-level strategy is an action taken to gain a competitive advantage
through the selection & management of a mix of businesses competing in
several industries or product markets. It is concerned with two key questions:
What business should the firm be in?, How should the corporate office manage
its group of businesses?
These grand strategies (major Corporate Strategies) can be:
a) Growth strategies - expand the company's activities.
b) Stability strategy - make no change to the company’s current activities.
c) Defensive/decline strategy – reduce the company’s levels of activities.
d) Combination Strategy
a. Growth Strategies
Sometimes called expansion strategies: Growth is a way of life. Almost all
organizations plan to expand, hence it is the most popular strategy in
practical world. The expansion grand strategy is followed when an
organization aims at high growth by substantially broadening its scope in
order to improve its overall performance. A growth strategy is one that an
enterprise pursues when it increases its performance upward significantly
much higher than an exploration of its past achievement level. Growth
Strategies involve the attainment of specific growth objectives by increasing
the level of a firm’s operations. Typical growth objectives for businesses
include: Increase in sales revenues, Increase in earnings or profits and other
performance measures.
Types of Growth Strategy
The following section discuss the different forms of growth strategies.
 Expansion through Concentration.
 Expansion through Diversification.
 Expansion through Integration.
 Expansion through Internationalization.
 Concentration Strategy (Concentric Expansion)/intensive

It is the most common grand growth strategy. It is also known as

intensification. Requires intensive efforts to improve a firm's competitive
position with existing products.
Pursued when the company significantly grow by concentrating on the current
business/ business line.
Concentration strategy will be appropriate when the company concentrates on
the current business. The firm directs its resources to the profitable growth of
a single product, in a single market, with a single technology.

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 Advantages:
 Based on known competencies & same experience
 Lowest in risk & additional resources.

Disadvantages:
 Slow increases in growth & profitability.
 Narrow range of investment options.

In general, firms that use this strategy gain competitive advantage in

production skill, marketing know-how & reputation in the market place
 In fact, it refers to marketing present products with only cosmetic
modifications. Thus, concentration focuses on: Increasing present
customers’ rate of usage, attracting competitors’ customers through price
cuts, and attracting non-users through advertising, price incentives etc.
 When concentration will not provide the basis for achieving the company
mission there are two options that involve moderate cost & risk. They are:
market development & product development

It Includes:
 Market penetration
 Market development, and/or
 Product development
 Market Development
F Introducing present products or services into new geographic areas.
F The climate for international market development is becoming more
favorable.
F In many industries, such as airlines, it is going to be hard to maintain a
competitive edge by staying close to home.
Attracting other market segments through:
 Developing product versions to appeal to other segments.
 Entering other channels of distribution.
 Advertising in other media

Guidelines for Market Development

F New channels of distribution that are reliable, inexpensive, and good
quality
F Firm is very successful at what it does
F Untapped or unsaturated markets

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 F Capital and human resources necessary to manage expanded operations
F Excess production capacity
F Basic industry rapidly becoming global

 Product Development
 A strategy that seeks increased sales by improving or modifying present
products or services.
 It usually entails large research and development expenditures.

Guidelines for Product Development

 Products in maturity stage of life cycle
 Competes by rapid technological developments
 Major competitors offer better-quality products at comparable prices
 Compete in high-growth industry
 Strong research and development capabilities
 Examples of product development can be:
• A revised edition of a college textbook
• A new car style
 Market Penetration

Refers to Attempting to capture more market share in the existing product

market. Expanding the current business at a rate higher than the industry
growth. Directing resources to the profitable growth of a single product, in a
single market, with a single technology.
Simply put, therefore, market penetration strategy focuses on:
 Increasing present customers’ rate of usage.
 Attracting competitors’ customers through price cuts.
 Attracting non-users through advertising, price incentives etc.

Guidelines for Market Penetration

F Current markets not saturated
F Usage rate of present customers can be increased significantly
F Market shares of competitors declining while total industry sales
increasing
F Increased economies of scale provide major competitive advantage.
Two aspects of market penetration:

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 F Rapid market penetration: based on two assumptions:
o To lower the price and promotional activities can be increased.

F Slow market penetration: also based on two assumptions:

o To lower the price but promotional activities are not changed.

 Diversification Strategy

It is another growth strategy which is the process of entry into a business

which is new to an organization either market-wise or product wise or both. Is
much used and quite an old strategy. Involves substantial change in the
business definition in terms of customer functions, customer groups or
alternative technologies.
The entry of a firm or business unit into new lines of activity, either by
processes of internal business development or acquisition, which entail
changes in its administrative structure, systems and other management
processes.
Types of diversification
Diversification growth strategy is classified into two categories such as
Concentric (Related) and Conglomerate (Unrelated).
 Concentric Diversification:

It involves the addition of a business related, but not similar, to the firm in
terms of technology, markets or products. It is seeking growth with new market
& product having meaningful synergy or fit with existing business. There is
some commonality in markets, products, or technology.
F An example of this strategy is AT&T recently spending $120 billion
acquiring cable television companies in order to wire America with fast
Internet service over cable rather than telephone lines.

Guidelines for Concentric Diversification

F Competes in no- or slow-growth industry
F Adding new & related products increases sales of current products
 Conglomerate Diversification
F Adding new, unrelated products or services.
F Sell part of the firm on an expectation of profits from breaking up
acquired firms and selling divisions piecemeal.

Guidelines for Conglomerate Diversification

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 F Declining annual sales and profits
F Capital and managerial talent to compete successfully in a new industry
F Financial synergy between the acquired and acquiring firms
F Exiting markets for present products are saturated.

 Horizontal Diversification
F Adding new, unrelated products or services for present customers
F This strategy is not as risky as conglomerate diversification because a
firm already should be familiar with its present customers.
Guidelines for Horizontal Diversification
F Revenues would increase by adding new unrelated products
F Highly competitive and/or no-growth industry with low margins and
returns
F Present distribution channels can be used to market new products to
current customers
F New products have counter cyclical sales patterns compared to
existing products
 Major Reasons for Diversification
 Antitrust regulation.
 Tax laws
 Low performance
 Uncertain future cash flows
 Risk reduction for firm
 Tangible resources
 Intangible resources
 Managerial motives for diversification may lead to value reduction.
 Diversifying managerial employment risk.
 Increasing managerial compensation.

Means of Diversification.
 All the previously discussed growth strategies could be implemented
either through internal growth or through acquisition, merger, or joint
ventures.

Internal Growth
 Internal growth occurs when a company expands its current market
share, its markets, or its products through the use of internal resources.
 Internal growth is generally slower and less traumatic for the
organization. It usually takes place over an extended period, allowing
time to adjust to the change.

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  Although exceptions exist, internal growth is generally less risky than an
acquisition or a merger. This is because growth, through internal means,
is incremental and can be terminated at any time.
 Thus, if an organization determines that an expansion is not working
out, the project can be dropped.
 Generally speaking, internal growth strategies work well for companies
want to grow via product development or market development.
 Integration Strategy

Integration strategy focuses on moving to different industry level, different

product & technology but the basic market remains the same. There are two
types of integrative growths:
1. Vertical integration
2. Horizontal integration
1. Vertical Integration
Vertical Integration involves extending an organization’s present business in
two possible directions.it has toe parts. Those are
a) Forward integration: - Refers to moving the organization into
distributing its own products or services. Involvement in a business that
serve as a customer for the firm’s outputs (such as warehouses for
finished products) refers to forward integration.
b) Backward integration: - Refers to moving an organization into supplying
some or all of the products or services used in producing its present
products or services. Involvement in a businesses that supply the firm
with inputs (such as raw materials) refers to backward integration.
Example:
F When computer companies developed all their own software, they are
engaging in backward vertical integration.
F When companies staffed and operated their own call centers, they are
engaging in forward vertical integration.

2. Horizontal integration
Horizontal integration refers to involvement in a business operating at the
same stage of the production-marketing chain.
Horizontal integration occurs when an organization adds one or more
businesses that produce similar products or services and that are operating at
the same stage in the product market chain. Almost all horizontal integration is
accomplished by buying another organization in the same business.

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 Merger and Acquisition
 Merger – is a strategy through which two or more firms agree to integrate
their operations on a relatively co-equal basis.
 Therefore, in merger, a single new company will be established
with new name, organizational structure, issuing new stock &
other changes. However, the shareholders of the former firms will
become shareholders of the new enlarged organization.
 Acquisition – a strategy through which one firm buys a controlling of
100% interest in another firm with the intent of making the acquired firm
a subsidiary business within its portfolio. Therefore, an acquisition is
marriage of unequal partners with one organization buying the other.
The shareholders of the acquired firm cease to be owners of the acquiring
company – unless payment is effect in terms of shares.
o What are the main reasons of an acquisition or merger strategy?
 The main reasons why firms use these strategies is to achieve
strategic competitiveness & earn above average returns.
 These can be achieved through increasing the market value of the
stock – synergistic effect.
There could be other reasons:
 Securing or protecting sources of raw materials/components.
 To gain access to distribution channels.
 To make use of underutilized resources of the company.
 To increase market power – horizontal, vertical & related
acquisitions.
 To enter a new market, offer new products & avoiding cost of new
product development (Acquisition as substitute for innovation).
 To overcome entry barriers (Cross-border acquisitions) etc.
b. Stability Strategy

It is also called neutral strategy: occurs when an organization is satisfied with

its current situation & wants to maintain the status quo.
Reasons for using stability strategy:
 The Company is doing well “if it works, don’t fix it”.
 The management wants to avoid additional hassles associated with
growth.

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  Resources has been exhausted because of earlier growth strategies.
c. Defensive Strategies
 Defensive Strategies most often used as a short-term solution to:
 Reverse a negative trend.
 Overcome a crisis or problem situation.
 It could be classified into decline & closure strategies.

Reasons:
 The company faced financial problems – certain parts of the
organization are doing poorly.
 The company forecasts hard times ahead related to:
o Challenges from new competitors & products.
o Changes in government regulations
 Owners are tired of the business or have to have an opportunity to
profit substantially by selling.

It includes:
 Retrenchment,
 Harvesting,
 Divestiture
 Liquidation
a. Retrenchment strategy
F Occurs when an organization regroups through cost and asset reduction
to reverse declining sales and profits.
F Sometimes called a turnaround or reorganization strategy
F Is designed to fortify an organization's basic distinctive competence.

Guidelines for Retrenchment

F Firm has failed to meet its objectives but has distinctive competencies
F Firm is one of the weaker competitors
F Inefficiency, low profitability, poor employee morale
F When an organization’s strategic managers have failed
F Very quick growth to large organization where a major internal
reorganization is needed
b. Harvesting
F Occurs when future growth appears doubtful or not cost effective –
the main reason could be because of new competition or changes in
consumer preferences.

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 F In this case the firm limits additional investment & expenses but
maximizes short-term profit & cash flow through maintaining market
share over the short-run.

Conditions for harvesting strategy:

F The business is not a major contributor of sales, stability, or prestige to
the organization.
F The management may use the freed-up resources for other attractive
uses.
c. Divestiture strategy
F Selling a division or part of an organization.
F Is used to raise capital for further strategic acquisitions or investments.
F Can be part of an overall retrenchment strategy to clear businesses that
are:
o Unprofitable,
o require too much capital, or
o Do not fit well with the firm's other activities.

Guidelines for Divestiture

F When firm has pursued retrenchment but failed to attain needed
improvements
F When a division needs more resources than the firm can provide
F When a division is responsible for the firm’s overall poor performance
F When a division is a misfit with the organization
F When a large amount of cash is needed and cannot be obtained from
other sources.
d. Liquidation
F Selling all of a company’s assets, in parts, for their tangible worth.
F Is recognition of defeat and, consequently, can be an emotionally
difficult strategy.
Guidelines for Liquidation
F When both retrenchment and divestiture have been pursued
unsuccessfully
F If the only alternative is bankruptcy, liquidation is an orderly
alternative
F When stockholders can minimize their losses by selling the firm’s
assets

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 it occurs when an entire company is either sold or dissolved either by choice
or force.
o When by choice, it can be because the owners are tired of the
business or near retirement; the organization’s future prospect is
not good and sell at this time.
o When by force, the decision often occurs because of a deteriorated
financial condition.

e. Joint Venture
F Two or more companies form a temporary JOINT for purpose of
capitalizing on some opportunity.
F The two or more sponsoring firms form a separate organization and
have shared equity ownership in the new entity.

Other types of cooperative arrangements include:

F research and development partnerships,
F cross-distribution agreements,
F cross-licensing agreements,
F cross-manufacturing agreements, and
F Joint-bidding consortia.

Guidelines for Joint Ventures

F Combination of privately held and publicly held can be synergistically
combined
F Domestic firms joint venture with foreign firm, can obtain local
management to reduce certain risks
F Distinctive competencies of two or more firms are complementary
F Overwhelming resources and risks where project is potentially very
profitable
F Two or more smaller firms have trouble competing with larger firm
F A need exists to introduce a new technology quickly
B. Business level Strategy
Are the goal directed actions managers take in their quest for competitive
advantage when competing in a single product market. It may involve a single
product or a group of similar products that use the same distribution channel. It
concerns the broad question, “How should we compete?” To formulate an
appropriate business-level strategy, managers must answer the “who-what-why-
and-how” questions of competition:
F Who which customer segments—will we serve?

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 F What customer needs, wishes, and desires will we satisfy?
F Why do we want to satisfy them?
F How will we satisfy our customers’ needs?
Generic Business Strategies
▲ There are two fundamentally different generic business strategies—
differentiation and cost leadership.
1. A differentiation strategy seeks to create higher value for customers
than the value that competitors create, by delivering products or services
with unique features while keeping costs at the same or similar levels.
This strategy emphasizes on efficiency. By producing high volumes of
standardized products, the firm hopes to take advantage of economies of
scale. The product is a basic economic product produced at a relatively
low cost and made available to a very large customer base.
Maintaining this strategy requires:-
o A continuous search for cost reductions.
o Most extensive distribution possible.
o Promotional strategy shall cover low cost product features.
o A considerable market share advantage.
o Referential access to raw materials, components, labor, or some
other important input.
2. A cost-leadership strategy, in contrast, seeks to create the same or
similar value for customers by delivering products or services at a lower
cost than competitors, enabling the firm to offer lower prices to its
customers. It involves creating a product that is perceived as unique. The
unique features or benefits should provide superior value for the
customer if this strategy is to be successful. Because customers see the
product as unrivaled and unequaled, the price elasticity of demand tends
to be reduced and customers tend to be more brands loyal. May require a
premium pricing strategy. There must be a valid basis for differentiation
- and that existing competitor products are not meeting those needs and
wants.
3. Focus strategies
F In this strategy the firm concentrates on selected few target markets. It
is also called a niche strategy. Helps to better meet the needs of that
target market. The firm typically looks to gain a competitive advantage
through effectiveness rather than efficiency. It is most suitable for
relatively small firms but can be used by any company.
F Firms shall select targets that are less vulnerable to substitutes
 Industry segment of sufficient size

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  Good growth potential
 Not crucial to success of major competitors
 Consumers have distinctive preferences
 Rival firms not attempting to specialize in the same target segment.

Niche strategies
Here the organization focuses its effort on one particular segment and becomes
well known within the segment.
Competitive advantage for this niche market can be obtained by either being a
low cost producer or differentiator.
Criticisms of Generic Strategies
 lack specificity,
 lack flexibility, and
 Are limiting.

5.4 STRATEGY-FORMULATION FRAMEWORK

• Important strategy-formulation techniques can be integrated into

a three-stage decision-making framework, as shown below.
• Stage-1 (The input stage)Formulation Framework
1. External Factor Evaluation (EFE)
2. Competitive Profile Matrix (CPM)
3. Internal Factor Evaluation Matrix (IFE)

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 F Summarizes the basic input information needed to formulate strategies.
• Stage-2 (Matching stage)
 Focuses upon generating feasible alternative strategies by aligning key
external and internal factors. its techniques includes
1. TWOS Matrix (Threats-Opportunities-Weaknesses-Strengths)
2. BCG Matrix (Boston Consulting Group)
3. IE Matrix (Internal and external matrix)
• Stage-3 (Decision stage)
• Involves a single technique, the Quantitative Strategic Planning Matrix
(QSPM).
• A QSPM uses input information from Stage 1 to objectively evaluate
feasible alternatives identified in Stage 2.
• It reveals the relative attractiveness of strategies and, thus, provides an
objective basis for selecting specific strategies.

1. The Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix.

a TWOS (SWOT) Analysis is a strategic planning tool used to evaluate the

Threats, Opportunities and Strengths, Weaknesses, in a business venture
requiring a decision.
This Matrix is an important matching tool that helps managers develop four
types of strategies:
F SO Strategies (strength-opportunities),
F WO Strategies (weakness- opportunities),
F ST Strategies (strength-threats), and
F WT Strategies (weakness-threats).

TOWS are defined precisely as follows:

 Strengths are attributes of the organization that are helpful to the
achievement of the objective.
 Weaknesses are attributes of the organization that are harmful to the
achievement of the objective.
 Opportunities are external conditions that are helpful to the achievement
of the objective.
 Threats are external conditions that are harmful to the achievement of
the objective.

SO Strategies: Every firm desires to obtain benefit from its resources.

F Such benefit can only be obtained if it utilize its strength to take external
opportunity. For example: The strong financial position provides an
opportunity to expand the business.

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WO Strategies: aim at improving internal weaknesses by taking advantage of
external opportunities.
F For example: the firm is in the critical financial problems that is
weakness and firm is availing merger with Multinational Corporation.

ST Strategies: use a firm’s strengths to avoid or reduce the impact of external

threats.
F This strategy is adopted by various colleges by opening new branches in
order to overcome competitive threat.

WT Strategies: Are defensive tactics used to overcome firm’s weakness and

reduce threats.
F This type of strategy helpful when weaknesses are removed to overcome
external threats. It is difficult to target WT strategy.
F In fact, such a firm may have to fight for its survival, merge, divesture,
retrench, declare bankruptcy, or choose liquidation.

2. Boston Consulting Group (BCG) Matrix

The Boston Consulting Group (BCG) is a management consulting firm founded

by Harvard Business School in 1963. The growth-share matrix is a chart
created by group in 1970 to help corporation analyze their business units, and
decide where to allocate cash. A separate strategy often must be developed
when a firm’s divisions compete in different industries. Autonomous divisions
of an organization make up what is called a business portfolio.
F The BCG Matrix graphically portrays differences among divisions in
terms of relative market share position and industry growth rate.
F BSG puts a category of four different types of businesses:
 Divisions located in Quadrant I of the BCG Matrix are called
“Question Marks,” those located in Quadrant II are called “Stars,”
those located in Quadrant III are called “Cash Cows,” and those
divisions located in Quadrant IV are called “Dogs.”

BCG Growth-Share Matrix

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A. Cash cows
F Units with high market share in a slow-growing industry.
F These units typically generate cash in excess of the amount of cash
needed to maintain the business.
F They are regarded as staid and boring, in a "mature" market, and every
corporation would be thrilled to own as many as possible.
F They are to be "milked" continuously with as little investment as
possible, since such investment would be wasted in an industry with low
growth.
B. Dogs
F More charitably called pets, units with low market share in a mature,
slow-growing industry.
F These units typically "break even", generating barely enough cash to
maintain the business's market share.
F Though owning a break-even unit provides the social benefit of
providing jobs and possible synergies that assist other business units,
from an accounting point of view such a unit is worthless, not
generating cash for the company.
F They depress a profitable company's return on assets ratio, used by
many investors to judge how well a company is being managed.
F Dogs, it is thought, should be sold off.

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C. Question marks
F Units with low market share in a fast-growing industry. Such
business units require large amounts of cash to grow their market
share. The corporate goal must be to grow the business to become a
star. Otherwise, when the industry matures and growth slows, the
unit will fall down into the dog’s category.
D. Stars
F Units with a high market share in a fast-growing industry. The hope
is that stars become the next cash cows. Sustaining the business
unit's market leadership may require extra cash, but this is
worthwhile if that's what it takes for the unit to remain a leader.
When growth slows, stars become cash cows if they have been able to
maintain their category leadership
The BCG Matrix-Strategic Actions

As a particular industry matures and its growth slows, all business units
become either cash cows or dogs. The overall goal of this ranking was to
help corporate analysts decide which of their business units to fund, and
how much; and which units to sell. Managers use money generated by
the cash cows to fund the stars and, possibly, the question marks. As
the BCG stated in 1970: Only a diversified company with a balanced

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 portfolio can use its strengths to truly capitalize on its growth
opportunities.
The balanced portfolio has:
F Stars whose high share and high growth assure the future;
F Cash cows that supply funds for that future growth; and
F Question marks to be converted into stars with added fund.

Relative Market share

F One of the main indicators of cash generation is relative market share,
and one which pointed to cash usage is that of market growth rate.
F This indicates likely cash generation, because the higher the share the
more cash will be generated.
F As a result of 'economies of scale' (a basic assumption of the Boston
Matrix), it is assumed that these earnings will grow faster the higher the
share.
F The exact measure is the brand's share relative to its largest competitor.
F Thus, if the brand had a share of 20 per cent, and the largest competitor
had the same, the ratio would be 1:1. if 60% then 1:3 (weak position),
and if 5% its ratio would be 4:1(strong). If this scale is logarithmic, not
linear (if in practice).

The major benefit of the BCG Matrix is that:

F It draws attention to the cash flow, investment characteristics, and needs
of a firm’s various divisions.
F The divisions of many firms evolve over time:
o Dogs become Question Marks, Question Marks become
Stars, Stars become Cash Cows, and Cash Cows become Dogs in
an ongoing counterclockwise motion.
o Less frequently, Stars become Question Marks, Question Marks
become Dogs, Dogs become Cash Cows, and Cash Cows become
Stars (in a clockwise motion).
o In some organizations, no cyclical motion is apparent.
o Over time, organizations should strive to achieve a portfolio of
divisions that are Stars.

Limitations
Viewing every business as a star, cash cow, dog, or question mark is overly
simplistic. Many businesses fall right in the middle of the BCG matrix and
thus are not easily classified. The BCG matrix does not reflect whether or not

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various divisions or their industries are growing over time. That is, the matrix
has no temporal qualities, but rather it is a snapshot of an organization at a
given point in time. Other variables besides relative market share position and
industry growth rate in sales are overlooked.
3. The Internal-External (IE) Matrix
It is related to internal (IFE) and external factor evaluation (EFE). It contains
nine cells. (Positions for divisions). It is developed based on two key
dimensions. Those are:-
F The IFE total weighted scores on the x-axis.
F The EFE total weighted scores on the y-axis.

Divided into three major regions

F Grow and build
F Hold and maintain
F Harvest or divest

The total weighted scores of both matrices derived from the divisions allow
construction of the corporate-level IE Matrix.
On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99
represents a weak internal position; a score of 2.0 to 2.99 is considered
average; and a score of 3.0 to 4.0 is strong.
Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99 is
considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is
high.

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4. MICHAEL PORTER'S GENERIC STRATEGIES

According to Porter, strategies allow organizations to gain competitive

advantage from three different bases: cost leadership, differentiation, and
focus. Porter calls these bases generic strategies. Cost leadership emphasizes
producing standardized products at very low per-unit cost for consumers who
are price-sensitive. Differentiation is a strategy aimed at producing products
and services considered unique industry wide and directed at consumers who
are relatively price-insensitive. Focus means producing products and services
that fulfill the needs of small groups of consumers.
Porter's strategies imply different organizational arrangements, control
procedures, and incentive systems.
Larger firms with greater access to resources typically compete on a cost
leadership and/or differentiation basis, whereas smaller firms often compete
on a focus basis.
Sharing activities and resources enhances competitive advantage by lowering
costs or raising differentiation.
Depending upon factors such as type of industry, size of firm, and nature of
competition, various strategies could yield advantages in cost leadership,
differentiation, and focus.
1. Cost Leadership Strategies;

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 • This strategy emphasizes on efficiency.
• By producing high volumes of standardized products, the firm hopes to
take advantage of economies of scale.
• The product is a basic economic product produced at a relatively low cost
and made available to a very large customer base.
• Maintaining this strategy requires:-
– a continuous search for cost reductions
– Most extensive distribution possible.
– Promotional strategy shall cover low cost product features.
– a considerable market share advantage
– Referential access to raw materials, components, labor, or some
other important input.
2. Differentiation Strategies;
F It involves creating a product that is perceived as unique.
F The unique features or benefits should provide superior value for the
customer if this strategy is to be successful.
F Because customers see the product as unrivaled and unequaled, the
price elasticity of demand tends to be reduced and customers tend to be
more brands loyal.
F May require a premium pricing strategy.
F There must be a valid basis for differentiation - and that existing
competitor products are not meeting those needs and wants.

3. Focus Strategies
In this strategy the firm concentrates on selected few target markets. It is also
called a niche strategy.
Helps to better meet the needs of that target market.
The firm typically looks to gain a competitive advantage through effectiveness
rather than efficiency.
It is most suitable for relatively small firms but can be used by any company.
Firms shall select targets that are less vulnerable to substitutes
F Industry segment of sufficient size
F Good growth potential

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 F Not crucial to success of major competitors
F Consumers have distinctive preferences
F Rival firms not attempting to specialize in the same target segment

Niche strategies.
Here the organization focuses its effort on one particular segment and becomes
well known within the segment.
Competitive advantage for this niche market can be obtained by either being a
low cost producer or differentiator.
Criticisms of Generic Strategies
F lack specificity,
F lack flexibility, and
F Are limiting.

Balanced scorecard (BSC)

F An improved strategic planning process for focusing on the most
important things
F A framework for breaking strategy into actionable strategic objectives.
F In other words, BSC is an integrated strategic planning and management
system, not just a measurement system

Major pillars of BSC

The balanced scorecard is a comprehensive management control system that
balances traditional financial measures with operational measures relating to a
company‘s critical success factors
Financial performance perspective
Financial performance perspective
F It includes traditional measures such as net income and return on
investment.

Customer Perspective
F How customers view the organization, as well as customer retention and
satisfaction.

Business process perspective

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 F Focuses on production and operating statistics, internal operations and
core competencies.

Learning and growth Perspective

F Focusing on how well resources and human capital are being developed.

McKinsey 7S Model
F This model was developed in the 1980's by Robert Waterman, Tom Peters
and Julien Philips whilst working for McKinsey.
F Intellectually all managers and consultants know that much more goes
on in the process of organizing than the charts, boxes, dotted lines,
position descriptions, and matrices can possibly depict.
F Diagnosing and solving organizational problems means looking not
merely to structural reorganization but to a framework that includes
structure and related factors.
F The 7S Model which they developed is one of the cornerstones of
organizational analysis.

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Essentially the model says that any organization can be best described by the
seven interrelated elements shown above:
Strategy
Plans for the allocation of a firm's resources to reach goals. (Environment,
competition, customers).

Structure
The way the organization's units relate to each other: centralized, functional
divisions; matrix, decentralized (the trend in larger organizations); network,
holding.
Systems
The procedures, processes and routines that characterize how important work
is to be done: (financial systems; hiring, promotion, PA systems; information
systems).
Skills
Distinctive capabilities of personnel or of the organization as a whole.

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Staff
Numbers and types of personnel within the organization.
Style
Cultural style of the organization and how key managers behave in achieving
the organization’s goals.
Shared Value
The interconnecting center of McKinsey's model is: Shared Values. What the
organization stands for and what it believes in.

THE END

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