Module- III

Strategy Formulation
 Strategic Analysis
It refers to the process of conducting research on a
company and its operating environment to formulate a
strategy.

• Identifying and evaluating data relevant to the

company’s strategy
• Defining the internal and external environments to be
analyzed
• A range of analytical methods that can be employed
in the analysis.
 Strategy Formulation
• Strategy formulation is the process of determining
appropriate courses of action for achieving
organisational objectives and thereby accomplishing
organisational purpose.

• Strategy formulation is vital to the well-being of a

company or organisation. It produces a clearset of
recommendations, with supporting justification, that
revise as necessary the mission and objectives of the
organisation, and supply the strategies for
accomplishing them.
 Environmental Scanning
• Environmental analysis or scanning is the process
of monitoring the events and evaluating trends in
the external environment, to identify both
present and future opportunities and threats that
may influence the firm’s ability to reach its goals.
• Strategists need to analyse a variety of different
components of the external environment, identify
“Key Players” within those domains, and be very
cognizant of both threats and opportunities
within the environment.
Features of Environmental Scanning
• Holistic Exercise
Environmental analysis is a holistic exercise in the sense that it must
comprise a total view of the environment rather than a piecemeal view of
trends. It is a process of looking at the forest, rather than the trees.
• Continuous Activity
The analysis of environment must be a continuous process rather than a
one – shot deal. Strategists must keep on tracking shifts in the overall
pattern of trends and carry out detailed studies to keep a close watch on
major trends.
• Exploratory Process
Environmental analysis is an exploratory process. A large part of the
process seeks to explore the unknown terrain and the dimensions of
possible future. The emphasis must be on speculating systematically about
alternative outcomes, assessing probabilities, questioning assumptions and
drawing rational conclusions.
Techniques of Environmental Scanning

• SWOT analysis
• PESTEL analysis
• Porter’s Five Forces analysis
• ETOP- Environmental Threats and Opportunities
Profile
• QUEST- Quick Environment Scanning Technique
• EFE Matrix- External Factor Evaluation Matrix
• CPM- Competitive Profile Matrix
 SWOT Analysis

The framework is credited to Albert Humphrey, who tested the

approach in the 1960s.

SWOT analysis a framework for identifying and analyzing the

internal and external factors that can have an impact on the
viability of a project, product, place or person.
 Need of SWOT analysis

• A part of a strategic planning exercise

• A powerful support for decision-making
• To uncover opportunities for success that
were previously unarticulated
• To highlight threats before they become
overly burdensome.
For example, this exercise can identify a market
niche in which a business has a competitive
advantage
 Elements of SWOT analysis
• Strengths: Internal attributes and resources
that support a successful outcome.
• Weaknesses: Internal attributes and resources
that work against a successful outcome.
• Opportunities: External factors that the entity
can capitalize on or use to its advantage.
• Threats: External factors that could jeopardize
the entity's success.
SWOT Analysis Diagram
 PEST Analysis
• PEST analysis is a scan of the external macro-environment in
which an organisation exists.

• It is a useful tool for understanding the political, economic,

socio-cultural and technological environment.

• It can be used for evaluating market growth or decline, and as

such the position, potential and direction for a business.

PEST factors can be classified as opportunities or threats in a

SWOT analysis.
It is often useful to complete a PEST analysis before
completing a SWOT analysis.
 PESTEL Analysis
• Political factors- These include government regulations such as
Employment laws,
Environmental regulations
Tax policy
Trade restrictions and political stability.

• Economic factors - These affect the cost of capital and

purchasing power of an organisation.
Economic growth,
Interest rates
Inflation
Currency Exchange Rates.
 PESTEL Analysis

• Social factors- These impact on the consumer’s need and the

potential market size for an organisation’s goods and services.
Include
population growth,
age demographics
attitudes towards health

• Technological factors- These influence barriers to entry, make

or buy decisions and investment in innovation, such as
automation,
investment incentives
rate of technological change.
 PESTEL Analysis

• Environmental Factors
‘Green’ issues that affect the environment
Level and type of energy consumed – renewable energy?
Rubbish, waste and its disposal

• Legal Factors
Competition law and government policy
Employment and safety law
Product safety issues.
 Porter’s Five Forces
• Porter's five forces of competitive position analysis was
developed in 1979 by Michael E. Porter of Harvard Business
School.

• A framework for assessing and evaluating the competitive

strength and position of a business organization.

• To determine the competitive intensity and attractiveness of a

market.

• Helps to identify where power lies in a business situation.

 Porter’s five forces
• Useful both in understanding the strength of an organisation’s
current competitive position, and the strength of a position that
an organisation may look to move into.

• Strategic analysts used to understand whether new products or

services are potentially profitable.

• By understanding where power lies, the theory can also be

used to identify areas of strength, to improve weaknesses and
to avoid mistakes.
Porter’s Five forces Model
 Bargaining Power of Supplier
An assessment of how easy it is for suppliers to drive up
prices. This is driven by:

• There are few suppliers but many buyers;

• Suppliers are large and threaten to forward integrate;
• Few substitute raw materials exist;
• Suppliers hold scarce resources;
• Cost of switching raw materials is especially high.
 Bargaining Power of Buyer
An assessment of how easy it is for buyers to drive prices
down. This is driven by:

• Buying in large quantities or control many access points

to the final customer;
• Only few buyers exist;
• Switching costs to other supplier are low;
• They threaten to backward integrate;
• There are many substitutes;
• Buyers are price sensitive.
If a business has just a few powerful buyers, they are often
able to dictate terms.
 Threat of substitution
This force is especially threatening when buyers
can easily find
• substitute products with attractive prices or
better quality
• when buyers can switch from one product or
service to another with little cost.
• For example, to switch from coffee to tea
doesn’t cost anything, unlike switching from
car to bicycle.
 Rivalry among existing competitors
Rivalry among competitors is intense when:
• There are many competitors;
• Exit barriers are high;
• Industry of growth is slow or negative;
• Products are not differentiated and can be
easily substituted;
• Competitors are of equal size;
• Low customer loyalty.
One player loose at the expenses of the other.
 Threat of new entrants

Threat of new entrants is high when:

• Low amount of capital is required to enter a
market;
• Existing companies can do little to retaliate;
• Existing firms do not possess patents, trademarks
or do not have established brand reputation;
• There is no government regulation;
• Customer switching costs are low
• Access to distribution channel;
• Economies of scale can be easily achieved.
• Competitive rivalry. The key driver is the number
and capability of competitors in the market. Many
competitors, offering undifferentiated products and
services, will reduce market attractiveness.

• Threat of substitution. Where close substitute

products exist in a market, it increases the likelihood
of customers switching to alternatives in response to
price increases. This reduces both the power of
suppliers and the attractiveness of the market.
 Using the Tool

• Step 1. Gather the information on each of

the five forces
• Step 2. Analyze the results and display
them on a diagram
• Step 3. Formulate strategies based on the
conclusions
The McKinsey 7S Framework
 McKinsey 7S Framework
• Developed in the early 1980s by Tom Peters
and Robert Waterman

• The basic premise of the model is that there

are seven internal aspects of an organization
that need to be aligned together if it wants to
be successful.
 Where 7S model can be used?
• To improve the performance of a company,
• To examine the likely effects of future changes
within a company,
• To align departments and processes,
• To determine what is the best way to
implement a proposed strategy.
 The Seven Elements
Hard elements Soft elements
Strategy Shared values
Structure Skills
Systems Style
Staff

"Hard" elements are easier to define or identify and management can directly
influence them: These are strategy statements; organization charts and reporting
lines; and formal processes and IT systems.

"Soft" elements, on the other hand, can be more difficult to describe, and are less
tangible and more influenced by culture. However, these soft elements are as
important as the hard elements if the organization is going to be successful.
McKinsey 7S Framework
• The key point of the
model is that all the
seven areas are
interconnected and a
change in one area
requires change in the
rest of them for it to
function effectively.
 McKinsey 7S Framework

• Strategy: the plan devised to maintain and

build competitive advantage over the
competition.
• Structure: the way the organization is
structured and who reports to whom.
• Systems: the daily activities, resources and
procedures that staff members engage in to
get the job done.
• Shared Values: these are the core values of the
company that are evidenced in the corporate
culture and the general work ethic.
• Style: the style of leadership adopted.
• Staff: the employees and their general capabilities.
• Skills: the actual skills and competencies of the
employees working for the company.

During organizational change, the question often

arises of what skills the company will really need to
reinforce its new strategy or new structure.
 Apple Inc 7S

• Strategy - focus on a small number of products

and to make them innovative and excellent –
enabling the business to capture a huge market
share relative to its size, and build a loyal
customer following.
• Systems - supply chain with built capacity for
launching and supplying huge new
market-dominating products
 Apple Inc 7S

• Staff - offers their employees huge benefits

• Skills - highly qualified and creative
employees
• Style - people are free to innovate – as long
as they met Jobs’ high standards
• Shared Values - business is aligned around
the values of design and user experience
 How to use the tool?

• Step 1. Identify the areas that are not

effectively aligned
• Step 2. Determine the optimal organization
design
• Step 3. Decide where and what changes
should be made
• Step 4. Make the necessary changes
• Step 5. Continuously review the 7s
 Benefits of the Model

• To facilitate organizational change.

• To help implement new strategy.

• To identify how each area may change in a future.

• To facilitate the merger of organizations.

Value Chain Analysis
 Value Chain Analysis

• Value chain analysis is a strategy tool used to analyze internal firm

activities.

• Its goal is to recognize, which activities are the most valuable (i.e. are the
source of cost or differentiation advantage) to the firm and which ones
could be improved to provide competitive advantage.

• When a company is capable of producing goods at lower costs than the

market price or to provide superior products, it earns profits.
• M. Porter introduced the generic value chain model in 1985.
• Value chain represents all the internal activities a firm engages in to
produce goods and services.
• VC is formed of primary activities that add value to the final product
directly and support activities that add value indirectly.
 Primary activities
• Inbound logistics are the receiving, storing and distributing of raw
materials used in the production process.

• Operations These are the transformation activities that change inputs

into outputs that are sold to customers. Here, your operational systems
create value.

• Outbound logistics are the distribution of the final product to

consumers. These are things like collection, storage, and distribution
systems, and they may be internal or external to your organization.

• Marketing and sales involve advertising, promotions, sales-force

organization, distribution channels, pricing and managing the final
product to ensure it is targeted to the appropriate consumer groups.

• Service refers to the activities needed to maintain the product's

performance after it has been produced, including installation, training,
maintenance, repair, warranty and after-sale services.
 Support Activities
• Procurement (purchasing) – This is what the organization
does to get the resources it needs to operate. This includes
finding vendors and negotiating best prices.
• Human resource management – This is how well a
company recruits, hires, trains, motivates, rewards, and
retains its workers.
• Technology development can be used in the research and
development stage, in how new products are developed and
designed, and in process automation.
• Firm infrastructure- These are a company's support
systems. It refers to an organization's structure and its
management, planning, accounting, Legal, finance,
administrative and quality-control mechanisms.
 Analysis to Value Chain Analysis
I. Cost advantage:
This approach is used when organizations try to compete on costs and want to
understand the sources of their cost advantage or disadvantage and what
factors drive those costs.
(good examples: Amazon.com, Wal-Mart, McDonald's, Ford, Toyota)

Businesses should identify the cost drivers for each activity:

• It includes how fast work is completed, work hours, wage rates, etc.
• Businesses should identify links between activities, knowing that if costs are
reduced in one area, they can be reduced in another.
Advtg :- Businesses can then identify opportunities to reduce costs.

• Step 1. Identify the firm’s primary and support activities.

• Step 2. Establish the relative importance of each activity in the total cost of
the product.
• Step 3. Identify cost drivers for each activity.
• Step 4. Identify links between activities.
• Step 5. Identify opportunities for reducing costs.
 Analysis to Value Chain Analysis
II. Differentiation advantage:
The firms that strive to create superior products or services use differentiation
advantage approach.
(good examples: Apple, Google, Samsung Electronics, Starbucks)

a) Identifying the activities that create the most value to customers is the
priority.
• It includes marketing strategies knowing about products and systems,
answering phones faster, and meeting customer expectations.
b) The next step is evaluating these strategies to improve the value by:-
• Focusing on customer service, increasing options to customize products or
services, offering incentives, and adding product features are some of the
ways to improve activity value.
Advtg: Businesses should identify differentiation that can be maintained and
adds the most value.
• Step 1. Identify the customers’ value-creating activities.
• Step 2. Evaluate the differentiation strategies for improving customer
value.
• Step 3. Identify the best sustainable differentiation.
 Goals and Outcomes

• The primary goal is creating or strengthening

business's competitive advantage.

• To identify areas that can be optimized for

maximum efficiency and profitability.

• The mechanism of it all keeps customer

feeling confident and secure enough to
remain loyal to your business.
BCG MATRIX
 BCG MATRIX
Boston consulting group (BCG) matrix is developed by
Bruce Henderson of the Boston consulting group in the
early 1970’s

It provides a graphic representation for an organization

to examine different businesses in it’s portfolio on the
basis of their related market share and industry growth
rates.

According to this matrix, business could be classified as

high or low according to their industry growth rate and
relative market share.
 Relative Market Share &
Market Growth Rate

To understand the Boston Matrix you need to understand how market share
and market growth interrelate.
 MARKET SHARE
Market share is the percentage of the total market that is being
serviced by your company, measured either in revenue terms or
unit volume terms.

Relative market share =

100 X Sales this year of your company
Sales this year of market of your largest competitor

The higher your market share, the higher proportion of the market
you control.
 MARKET GROWTH RATE

Market growth is used as a measure

of a market’s attractiveness.

MGR = Individual sales - Individual sales

this year last year
Individual sales last year
 THE BCG GROWTH-SHARE MATRIX

It is a portfolio planning model which is based

on the observation that a company’s business
units can be classified in to four categories:
▪ Stars
▪ Question marks
▪ Cash cows
▪ Dogs
It is based on the combination of market
growth and market share relative to the next
best competitor.
 Star Question Mark
20%

|
18% 4

|
16% 1

|
High 14% 3
Market Growth Rate

|
5 2
(Annual/ Currency)

12%

|
10%
Cash Cow Dog (Cash
8% Traps)
|

6%
|

Low
4% 7
|

2% 6 8
|

0
| | | | | | | | | | | | | | | |
10 4 2 1. 5 1 0.5 0.4 0.3 0.2 0.1

High Low
Relative Market Share
 STARS High growth, High market share Stars

Leaders in business.

They also require heavy investment, to

maintain its large market share.

It leads to large amount of cash

consumption and cash generation.

Attempts should be made to hold the

market share otherwise the star will
become a CASH COW.
CASH COWS Low growth , High market
share
They are foundation of the company
and often the stars of yesterday.

They generate more cash than

required.

They extract the profits by investing

as little cash as possible.

They are located in an industry that is

mature, not growing or declining.
 DOGS Low growth, Low market share
Dogs are the cash traps.

Dogs do not have potential to bring in

much cash.

Number of dogs in the company should

be minimized.

Business is situated at a declining

stage.
QUESTION MARKS High growth , Low market

Most businesses start of as question marks.

They will absorb great amounts of cash if the

market share remains unchanged, (low).

Why question marks?

Question marks have potential to become star

and eventually cash cow but can also become
a dog. Investments should be high for question
marks.
BCG Matrix of Samsung
BCG Matrix of Apple
BCG Matrix of Nestle
BCG Matrix of MacDonalds
BCG MATRIX WITH CASH FLOW
 WHY BCG MATRIX ?
To assess :

Profiles of products/businesses.

The cash demands of products .

The development cycles of

products.

Resource allocation and

divestment decisions
 BENEFITS BCG MATRIX
It is simple and easy to
understand.

It helps you to quickly and

simply screen the opportunities
open to you, and helps you think
about how you can make the
most of them.

It is used to identify how

corporate cash resources can best
be used to maximize a
company’s future growth and
profitability.
 LIMITATIONS BCG
MATRIX
It uses only two dimensions.

Relative market share and

market growth rate. Problems
of getting data on market share
and market growth.

High market share does not

mean profits all the time.

Business with low market

share can be profitable too.
 MAIN STEPS OF BCG MATRIX
Identifying and dividing a company into SBU.

Assessing and comparing the prospects of each

SBU according to two criteria :
1. SBU’S relative market share.
2. Growth rate OF SBU’S industry.

Classifying the SBU’S on the basis of BCG

matrix.

Developing strategic objectives for each SBU.

GE (General Electric) 9 Cell Matrix
 GE (General Electric) 9 Cell
Matrix
❑ Developed by McKinsey & Company in 1970’s.

❑ GE is a model to perform business portfolio

analysis on the SBU’s.

❑ GE is rated in terms of ‘Market Attractiveness &

Business Strength’

❑ It is an Enlarged & Sophisticated version of BCG.

MARKET ATTRACTIVENESS

Annual market growth rate

Overall market size
Historical profit margin
Current size of market
Market structure
Market rivalry
Demand variability
Global opportunities
 BUSINESS STRENGTH

Current market share

Brand image
Production capacity
Corporate image
Profit margins relative to
competitors
R & D performance
Promotional effectiveness
 GE 9 CELL MATRIX
• THE 9 CELL OF THE MATRIX ARE GROUPED ON THE BASIS OF
LOW TO HIGH INDUSTRY ATTRACTIVENESS AND WEAK TO
STRONG BUSINESS STRENGTH.

• THREE ZONES , THREE CELLS EACH DENOTES DIFFERENT

COMBINATIONS REPRESENTS GREEN , YELLOW AND RED
COLOUR.
• GREEN ZONE - GROW AND BUILD , INDICATING EXPANSION
TYPE OF STRATEGIES.
• YELLOW ZONE – INDICATES HOLD AND MAINTAIN TYPE OF
STRATEGY , AIMED AT STABILITY AND CONSIDERATION.
• RED ZONE – INDICATES RETRENCHMENT STRATEGY OF
DIVESTMENT AND LIQUIDATION.

71
 GE Nine Cell Matrix
❑ Grow – Business units that fall under grow attract high
investment. Firms may go for product differentiation or Cost
leadership. Huge cash is generated in this phase. Market leaders
exist in this phase.

❑ Hold – Business units that fall under hold phase attract moderate
investment. Market segmentation, Market penetration, imitation
strategies are adopted in this phase. Followers exist in this phase.

❑ Harvest - Business units that fall under this phase are

unattractive. Low priority is given in these business units.
Strategies like divestment, Diversification, mergers are adopted in
this phase.
 ADVANTAGES
• Decision of invest on different SBUs.
• Knowledge for innovation
• Decide which product to be discontinued .
• Better than Boston Consulting Group Matrix.

• WHY BETTER ?
Broad Field of Study that point the reason for such
Status of SBU .
Specialized than BCG 3 X 3 is more detailed than 2
X 2.