Part I: Foundations of Strategic Management and the Strategy Process

Part II: Mission, Vision and Goals of the Corporation

Part III: Internal Strategic Analysis
Part IV: External Strategic Analysis
Part V: Strategy Formulation
Part VI: Strategy Implementation
Part VII:, StrategyEvaluation
Part VIII : Corporate Social Responsibility

Part V: Strategy Formulation

Strategic Management Process

0 1 2

4 3
 Formulation of Strategy

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
 Corporate Level Strategy

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.

A corporate-level strategy is concerned with two key questions:

 What business should the firm be in?
 How should the corporate office manage its group of businesses?

4
Introduction to Directional Strategies and Growth Strategies

Dis

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Growth Strategies – Ansoff Matrix (1988)
products
existing new
existing
markets
new
 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
 Types of Strategies: vertical and horizontal ( Integration
Strategies)
Forward
Integration

Backward
Vertical and Horizontal Integration
Integration
Strategies

Horizontal
Integration
Vertical Integration Strategies

Forward Gaining ownership or increased

Integration control over distributors or retailers

Backward Seeking ownership or increased

Integration control of a firm’s suppliers

Horizontal Seeking ownership or increased

Integration control over competitors
 Integration Strategy Cont’d …

Vertical Integration
Vertical Integration involves extending an organization’s
present business in two possible directions.
 Forward integration moves the organization into
distributing its own products or services .
 Backward integration moves an organization into
supplying some or all of the products or services used
in producing its present products or services.
 Integration Strategy Cont’d …

Horizontal integration

 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.
 Horizontal Vs Vertical Integration
Purchasing of computing companies in the

 Purchasing of companies at all
same industries
levels of production
 Merging with/purchasing firms that supply
similar products
 Diversification

 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 Strategies- Diversification

Related
Diversification

Diversification
Strategies

Unrelated
Diversification
 DIVERSIFICATION STRATEGIES

Related Adding new but related products or

Diversification services

Unrelated
Adding new, unrelated products or
Diversification services
HOW CAN COMPANIES DIVERSIFY?

Goal? Goal?

Who? Who?
HOW CAN COMPANIES DIVERSIFY?

Goal? Goal?

Who? Who?
Reasons for Diversification

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CORE ISSUES IN DIVERSIFICATION DECISIONS

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 PORTER’S ESSENTIAL TESTS
If diversification is to create shareholder value, it must
meet three tests:

1. The attractiveness test: diversification must be directed towards

attractive industries (or have the potential to become attractive)

2. The cost of entry test: the cost of entry shall be lower than all future profits

3. The better-off test: either the new unit must gain competitive advantage
from its link with the company, or vice-versa (i.e. some form of “synergy” must be
present)
Transaction costs: Administrative costs:

e.g. locating, negotiating, and

enforcing a contract e.g. overhead and management

=> if: 
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 RELATED VS. UNRELATED DIVERSIFICATION
RELATED DIVERSIFICATION UNRELATED DIVERSIFICATION

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 Diversification and Profitability

 No consistent relationship
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ASSOCIATION VS. CAUSATION – WHAT DO YOU THINK?
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.

 Generally speaking, internal growth strategies work well for

companies want to grow via product development or market
development.
 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
 MERGER AND ACQUISITION CONT’D …

 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 a 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. 36
 MERGER AND ACQUISITION CONT’D …

What are the main reasons of an acquisition or merger

strategy?

 The main reasons why firms use these strategies is to

strategic competitiveness & earn above average returns

 These can be achieved through increasing the market

value of the stock – synergistic effect.
 MERGER AND ACQUISITION CONT’D …

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 acquisition )etc.

JOINT VENTURES

 A joint Venture occurs when two or more

organizations pool their resources for a give project or
a business product.
 A joint venture can be on either a temporary or
permanent basis
 Joint ventures are especially popular between firms
in different countries 53
 JOINT VENTURES CONT’D …

There are a number of reasons why a joint venture may be attractive

to respective participants:
 By pooling their resources, the organizations may be capable of doing
things that they could not do separately
 By joining with another firm or firms, the companies share the risk of
the venture.
 Certain gov.t sponsored aggressively encouraged joint ventures for the
purpose involving minority business.
 International companies are often encouraged by host countries to
enter into joint ventures with local companies
2. 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”

 Themanagement wants to avoid additional hassles

associated with growth
 Resources has been exhausted because of earlier
growth strategies
 3. 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

 DEFENSIVE STRATEGIES CONT’D …

Decline strategy includes:

 Retrenchment,

 Harvesting,

 Turn around

 Divestiture

Closure strategy Includes:

 Liquidation

 Filing of bankruptcy
DEFENSIVE STRATEGIES CONT’D …

Regrouping through cost and asset reduction to reverse

declining sales and profit. It focuses on economizing,
Retrenchment
saving cost, cutting back costs mostly through layoffs,
firing employees etc..

Divestiture
Selling a division or part of an organization

Selling all of a company’s assets, in parts, for their

Liquidation tangible worth
 PORTFOLIO ANALYSIS
How to Plan a Corporate Portfolio?

 The business portfolio is the collection of businesses (SBUs) &

products that make up the company.
 A SBU:
Is a unit of the company that has a separate mission & objectives

Can be a company division, a product line or even individual brands

Types of portfolio techniques / matrixes in use, the most well known of which
are:
 The Boston Consulting Group – BCG-Matrix (Hedley, 1977)
 The General Electric Screen – GE-Matrix (Hofer and Schendel, 1978)
The Boston Consulting Group (BCG) Matrix Cont’d …

 Stars: The leading SBUs in a company’s portfolio. They offer

attractive long-term profit & growth opportunities – still growing but
not generating high profit

 Question marks: can become a star if nurtured properly. To become

a market leader, a question mark requires substantial net
injections of cash – it is cash hungry

 Cash cows: are cost leaders in their industries. The capital

investment requirements of cash cows are not substantial – such
businesses generate a strong positive cash flow

 Dogs: are unlikely to generate a positive cash flow & may become
cash hogs. They may require substantial capital
investments just 74 to maintain their low market share.
BCG MATRIX: “NORM STRATEGIES”

„Question
„Stars“
marks“
 Cash Flow :
 Highest for Stars & Cash cows
 Lowest for Question marks
and Dogs
„Poor dogs“ „Cash cows“
 Investment needs:
 Highest for Question marks
and Stars
 Lowest for Cash cows and
Dogs
Business-level Strategy

The firm’s business – level strategy is a deliberate choice about

how it will perform the value chain’s primary and support
activities to create unique value

Purpose of business – level strategy is to create differences

between the firm’s position and those of its competitors
Business-level Strategic Issues
In selecting business-level strategy, the firm should
determine:

 Who will be served? Refers to types of customers

 What needs those target customers have that the firm

will satisfy? Refers to the benefits & features of
products

 How those needs will be satisfied? Refers to core

competencies
100
In Making A Business – Level Strategy …

The firm faces a choice between

Performing Activities Differently (Low Cost Leadership)

Or
Performing Different Activities (Differentiation)
Or
Some Combination Of Them !
Generic Strategies - Porter’s Five Generic Strategies

How to gain competitive advantage? 2 key dimensions:

Alternative Approaches

 stuck in the middle

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