STRATEGY
FORMULATION
MODULE 3
Process of determining appropriate course of action for
achieving organizational objectives
All organizations have objectives to be achieved
Strategy – plan of action
Direct business activities
Strategy Formulation – defining strategy in very clear and simple
words
Steps in Strategy Formulation
1 Establishing objectives – set the long term objective of the
organization
Objectives act as foundation or base of strategy
Realistic and achievable
2 Analysis of External Environment - - process of analyzing the
environment for assessing the opportunities and threats
Identify and analyse national and global environment
Understand the pressures and powers of all forces and find out
the impact on industry and firm
3 Analysis of internal environment – identifying business strength
and weakness by analyzing its competencies
Resources and capabilities
Resources- assets – tangible or intangible
Tangible – equipment, technology etc
Intangible – knowledge, expertise brand etc
4 Fixing quantitative Targets – targets for the firm as a whole so
as to assess the contribution that may be made by different
product areas or operating divisions
5 Relating Targets to divisional plans – contribution that can be
made by each division or product group within the corporation
Provisional strategic plan is formed for each sub unit
Corporate targets when related to divisional plans ensures
attainment
6 Gap Analysis – identification and analysis of gap between
planned or desired performance and actual performance
Previous, present and future conditions must be assessed
Reveal reality
Gap between present condition and desired future aspirations
7 Choice of Strategy – final stage
Best course of action is chosen after considering organizational
goals, strengths, potentials and limitations
Strategies are evaluated from different angles and the most
appropriate strategy is chosen
Strategic Alternatives
After internal and external analysis the company thinks about
alternative strategies which match their resources and
capabilities with external threats and opportunities
3 types
Corporate Level Strategies ( Grand Strategy)
Business Level( Generic Strategies)
Functional strategy
In a snapshot …
Growth or Expansion strategy
A company can grow acquiring new resources, internally by
expanding its operations or can grow externally through mergers,
joint ventures etc
To accelerate the rate of growth of sales, profit and market share
by entering into new markets, by acquiring new resources,
developing new technologies etc
Reasons for pursuing growth
strategy
To
obtain economies of scale – through large scale
operations – cost can be reduced
Toattract merit – talented people prefer to work
in firms with growth
To increase profits
To become a market leader
Tofulfil natural urge – a firm will have a b desire
to grow
To ensure success
Categories of Growth strategies
Intensive strategies
Integration strategies
Diversification strategies
CONCENTRATION STRATEGY
INTEGRATION STRATEGIES
Combining activities relating to the present activity of a firm
2 types
Vertical integration
Horizontal integration
Vertical integration – integration of firms involved in different
stages of the supply chain
2 types
Backward integration – Brook Bond acquired tea plantation
Forward integration – Reliance and Bombay Dyeing etc opened
its own showrooms
Merits
A secure supply of raw materials
Control over raw materials and other inputs and distribution
channels
Access to new business opportunities
Elimination of suppliers and distributors
Demerits
Difficulty of effectively integrating the firms
Overestimating the power of synergy
Creating a combination too large to control
Huge financial burden
Horizontal integration
Strategy of seeking ownership or increased control over a firms
competitors
Through mergers and acquisitions
Facebook and instagram - 2012
Merits
Economies of scale – by selling more of same product
Economies of scope – achieved by sharing resources common to
different products – synergies
Increased bargaining power over suppliers
Reduction in cost of global operations
Difference
Horizontal integration Vertical integration
A company adds up same type of Two or more business units engaged
product at same level of production in successive stages of production in
the same industry
It provides economies of scale Does not provide economies of scale
Eliminates competition Self sufficiency
Units operates at the same level of Firms operates at different or
operations in same industry successive stages
No specialization among member Every member specialized in one
units process or stage of production
Diversification strategies
Adding new business to the existing businesses of the company
Adding new products or markets to the existing ones
2 or more distinct business
Attempts to spread risks by diversifying into several products
Types
Concentric diversification
Conglomerate diversification
Concentric – 3 types
Marketing related diversification - - similar type
of product with unrelated technology
Technology driven diversification - - new product
with related technology
Marketing and technology related diversification
– similar type of product with related technology
Difference
Related diversification Unrelated diversification
Some commonality with existing No commonality
business
Managing is not difficult More difficult
Company offers a source of Does not offer any competitive
competitive advantage advantage
Rationale or reasons of
Diversification
Economies of scale and scope – pool resource and
attain lower costs
Widen market base and enhance market power –
Tata – IBM, Hindustan motors and General motors
– exploit market opportunities
Profit stability
Improve financial performance
Growth
Counter competitive threats
Retrenchment or Defensive
strategy
Adopted when the firm has a weak competitive
position resulting in poor performance – Sales
are down and profits are dwindling
Variants /Types
Turnaround
Divestment
Bankruptcy
Liquidation
Turnaround Strategy
Reversinga negative trend or converting an
unprofitable or sick business into profitable ones
Whena firm face a severe cash crunch or
downtrend in operations
Such firms become insolvent unless appropriate
actions are taken
The process of recovery is called Turn around
strategy
“making the company profitable again”
Divestment /Divestiture
Selling
a division or a part of an
organization
Get rid of business that are unprofitable
Reasons
Persistent negative cash flow from a unit that creates
financial pressure on the company as a whole
Inability to face increasing competition
Company is unable to carry out technological up
gradation
Project is unviable
The business acquired earlier proves to be a mismatch
and cannot be integrated to the company
Bankruptcy
It allows the organization to file a petition in court for legal
protection to the firm , in case the firm is not in a position to pay
its debts
Liquidation strategy
Occurs when an entire company is resolved and its assets are sold
Last resort strategy
When there are no buyers for a business which wants to be sold , the
company may be wound up and its assets may be sold to satisfy its
obligations
Inevitable when
Turnaround and Divestment strategy adopted failed
When a company’s only option is bankruptcy , a company can legally
declare bankruptcy first and then wind up the company to raise funds
needed to pay debts
When the shareholders of a company can minimize losses by selling
assets
Combination strategies
Pursue two or more of the corporate strategy simultaneously
In large diversified companies a combination strategy is
commonly employed when different divisions pursue different
strategies
Also organizations struggling to survive may employ a
combination of several strategies
BUSINESS /GENERIC STRATEGIES
COST LEADERSHIP STRATEGY
A firm can achieve cost leadership
by..
By managing projects scientifically that reduces time and cost
over run
Streamlining Research and Development function in process and
product improvement
Benefits
An organization is protected against the ill effects of competition
Cost advantage act as effective entry barrier for potential
entrants
The threat of cheaper substitutes can be offset to some extent
Differentiating – ways
Superior quality
Special or unique features
More responsive customer service
New technologies
Dealer network
In a snapshot…
FUNCTIONAL STRATEGIES
MARKETING STRATEGIES
Product – quality, design, features, Packaging, warranties etc
Product mix- group of products to be manufactured,
Price – deciding wholesale and retail price, discounts credit
terms , pricing strategies, etc
Place – various middlemen and facilitators to supply product to
target market Transportation, warehousing, inventory
management etc
Promotion – promotion mix ( 4 Ps + people, physical evidence
and process)
OPERATIONS STRATEGY
Function converts inputs( raw materials, supplies, machines and
peoples ) into value added outputs
All manufacturing processes
Includes…
Raw material sourcing , purchasing , production etc
Decisions regarding product, production capacity, plant location,
machinery selection and maintenance and other aspects of
production
FINANCIAL STRATEGY
Financing decision - Different sources of collecting funds like
issue of shares, debentures, loans etc , selection of a suitable
source of financing
Investment Decision – which assets are to be purchased,
adequate for fixed capital and working capital purpose
Long term investment decisions
Short term investment decisions
Dividend Decision - part of profit to be distributed and reserve
to be kept
Working Capital Management
IN A SNAPHOT…
CORPORATE STRATEGY – Long term direction of a firm
BUSINESS STRATEGY – Competitive position of the firm
FUNCTIONAL STRATEGY – Short term guidance to operating
managers
STRATEGIC CHOICE
Strategic choice involves the selection of one or more strategies
that an organization will use to achieve its objectives
Focusing on a few alternatives, considering the selection factors,
evaluating the alternatives and making choice
Steps in the process of Strategic
Choice
1 Focusing on Strategic Alternatives- various strategies are
identified
Relevant and feasible are considered
2 Evaluating Strategic Alternatives- thoroughly analyzed and
compared with each other
INCLUDES….
Which industries to enter or exit ?
Which products and markets to retain, grow ..?
Pros and cons of each alternatives are analyzed
3 Considering Decision factors – the criterion used in the
evaluation of strategic alternatives consist of several objective
and subjective factors
These are known as decision factors
4 Choosing from among the Strategic Alternatives , firm choose
one or more best strategy for implementation
Factors influencing Strategic
choice
OBJECTIVE FACTORS
Strategic Intent and SWOT Analysis are the main objective
factors
Strategic intrnt – what the organization should do and why
SWOT – Summary of relevant internal and external factors
SUBJECTIVE FACTORS
1 Role of past Strategy a review of past strategies
Most successful past strategy are difficult to replace
2 Degree of firms external Dependence – suppliers, customers,
govt, competitors unions etc
If a firm is highly dependent - lower its range and flexibility of
Strategic choice
3 Attitude towards risk –
Highly risk taking managers – range and diversity of strategic
choice expand
Risk averse managers – diversity of strategic choice is limited
4 Internal and political considerations – power or political factors
influence strategic choice
CEO – Favourable – unanimously selected
Coalitions influence Strategic choice
5 Timing Considerations – Sufficient time to analyze the strategy
and timing is important
6 Competitive Reactions – likely reactions of competitors are to
be considered
Contingency Strategy
Contingency Strategies are formulated in advance to deal with
uncertainities that are natural part of business
