Arsi University

College of Business and Economics

Department of Management
MBA Program

Strategic Management (MBA 733)

1
By: Nuru Mohammed (Ph.D.)

2022/2023
Asella, Ehiopia
Nuru M. (Ph.D.)
2
Chapter 2
Strategy Formulation
 Chapter Objectives:
At the end of this chapter you should be able to;
 Describe the nature and role of vision and mission statements in SM
 Evaluate/write vision and mission statements of different organizations.
 Describe the nature and purpose of an external assessment in formulating strategies
 Describe the nature and role of an internal assessment in formulating strategies
 Set goals and objectives to achieve mission and vision.
 Understand different strategies to be used to achieve objectives
 Select and implement the most appropriate business strategy
 Describe the strategy analysis and choice process

Nuru M. (Ph.D.)
 “The world as we have created it is a process
of our thinking. It cannot be changed without
changing our thinking.”
― Albert Einstein

Albert Einstein: was a German-born theoretical physicist, widely acknowledged to

be one of the greatest physicists of all time. Einstein is best known for
developing the theory of relativity, but he also made important
contributions to the development of the theory of quantum mechanics

By: Nuru M. (Ph.D.)

 2.1 Introduction
4
 Strategy Formulation: is the development of long-range plans for the
effective management of O and T, in light of S and W.
 Stage of strategic management that involves planning and decision
making that lead to the organization’s goals and objective setting.

Strategy Formulation

Vision, Mission and values

External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies Figure 2.1. Stages of
strategy formulation
Nuru M. (Ph.D.)
Strategy Selection
 Continued…
5

 Reflection Questions
i. Would you Share Your respective organization Vision and Mission?
ii. What do you think is the importance?

Nuru M. (Ph.D.)
 2.2. Vision and Mission Analysis
6

 In the beginning, a new business is simply a collection of ideas.

 When the ideas put into writing, the resulting document mirrors the
same basic ideas that underlie vision and mission statements.
 As a business grows, it is necessary to revise vision and Mission.
 Vision and mission statements often found in the;
 Annual reports.
 A firm’s premises and
 Information sent to constituencies.
 Internal reports.

Nuru M. (Ph.D.)
 2.2.1 Vision Statement?
7
 Should answer the basic question, “What do we want to become?”
 It is a possible and desirable future state of an organization
 It provides the foundation for developing a comprehensive mission
statement.
 It should be established first and foremost.
 It should be short, preferably one sentence
 As many managers as possible should have input into development.
 At the minimum, a vision statement should reveal the type of business the
firm engages
 For many, if not most, corporations, profit rather than mission or vision is the primary
motivator
Nuru M. (Ph.D.)
 Features of a good Vision statement

 Easy to read and understand

 Compact and crisp to leave some things to people imagination
 Gives the destination and not the road map
 Excite people and make them get goose pumps.
 Provide a motivating forces even in a hard times.
 Is perceived as achievable and at the same time is challenging,
stretching, us beyond what is comfortable.

Strategic Management course, 2020/21 Set BY Dr. Habtamu Dadi

 Continued…
9

Nuru M. (Ph.D.)
 2.2.2 Mission Statement
10
 It reveals what an organization wants to be and whom it wants to serve
 It answers the question ‘What is our business?”
 is a declaration of an organization’s “reason for being.”
 It is statement of purpose that distinguishes one organization from other
similar enterprises.
 It is more associated with behavior and the present
 Also called, a statement of;
Creed (faith) or beliefs
Purpose
Philosophy
Business principles or
“Defining our business,”
 It is essential for establishing objectives and strategies
 The process of developing vision and Mission Statement
11

 It involves the engagement of all top level managers .

Ask them for

Late the managers independent Distribute it the Finalize the
have background Vision and Merge statements managers and ask Mission and
information Mission for comment Vision
Statement

Figure 2.2. process of

developing vision and mission

Nuru M. (Ph.D.)
 2.2.5. The Importance of Vision and Mission Statement
12
 There is a positive r/s b/n mission statements and measures of financial
performance.
 The benefits includes:
 To make sure all employees understand the firm’s purpose
 To provide a basis for prioritization of key internal and external factors
 To provide a basis for the allocation of resources.
 To provide a basis for organizing work
 Divergent views among managers can be revealed and resolved through the process
 Vehicles for communicating with important internal and external stakeholders.
 Characteristics of a Mission statement
13
A good mission statement;
Is usually broad in scope for at least two major reasons;
 Allows for a range of feasible alternative objectives and strategies to be considered
(enables managers to be creative).
 Reconcile differences among diverse stakeholders.
Need Not be too lengthy (<150 words)
Should Arouse positive feelings and emotions about an organization.
Should be enduring.
Should Reflects judgments about future growth directions
Should Indicate the firm’s social responsibility.

N.B: Stake holders; refers individuals/groups who have a special stake or claim on the company.

Nuru M. (Ph.D.)
 Continued…
14 Customer orientation;
A mission statement must reflect the anticipations (needs) of customers
 An effective mission statement describes an organization’s;
Purpose
 Customers
Products or services
 Markets
Philosophy
Basic technology
Survival, growth/profitability
Distinctive competence (self concept)
 Public image
Employees
Nuru M. (Ph.D.)
 Continued…
15
Example

Nuru M. (Ph.D.)
 2.2.3 A values statement
 Values are desirable qualities and beliefs that are shared among the
stakeholders of an organization.
 Values are broad beliefs about what is or is not appropriate.
 A values statement describes the principles and core beliefs that
guide the operations of the organization.
 Strong core values for an organization helps build institutional
identity, gives character to an organization, and it backs up the
mission statement.
 Organizational culture reflects the dominant value system of the
organization as a whole.
 Continued…

 To define your organization’s values, executives members should

answer the following questions:
 What are the principles, standards, and actions considered
worthwhile in the organization?
 Includes how people treat each other, how groups conduct business
and what is most important to the organization?
 2.2.4 Stakeholders Analysis

 Are individuals, groups, and organizations who have a stake in the

organization
 Who can affect the firm’s vision and mission?
 Are affected by the strategic outcomes achieved?
 Have enforceable claims on the firm’s performance?

 Firms effectively managing stakeholder relationships outperform

those that do not.
 Stakeholder Theory

 It states that all stakeholders must be considered in the decision

making process of the organization.

 The theory states that there are 3 reasons why this should happen:
1) It is the morally and ethically correct way to behave
2) Doing so actually also benefits the shareholders
3) It reflects what actually happens in organization
 Continued…

 Not every stake holders has the same level of influence.

 Two types of Stake holders
 Primary stakeholders: are those ultimately affected or affect the organization.
 Secondary stakeholders: are those who indirectly affected by or affect the
organization.
 The more critical and valued stakeholders participation, the greater the
firms dependence on it, which gives the stakeholders more potential
influence over the firms
 Managers must find ways to accommodate or insulate the organization
from the demand of the stakeholders controlling critical resource
 Continued…

 Stakeholder analysis is frequently used during the

preparation phase of a SM.
 It can be done once or on a regular basis to track changes in
stakeholder attitudes over time.
 In a stake holder analysis;
Identify the stakeholders
POWER Prioritize the stakeholders.
Identify the stakeholders expectations, interests and concerns.
URGENCY
Identify the claims stakeholders are likely to make on the
organization
IMPORTANCE
Identify the strategic challenge involved in managing the
stakeholder relationship
 2.3. External Environment Analysis
22
(I/O view)
 Sometimes called environmental scanning or industry analysis
 Focuses on identifying and evaluating trends and events beyond
the control of a single firm.
 Reveals key O and T confronting an organization
 Formulate strategies to take advantage of the O and avoid/reduce
the T.

Nuru M. (Ph.D.)
 2.3.1 Process of Conducting External Audit

 It must involve as many managers and employees as possible.

Collect competitive intelligence Assimilate and evaluate Prepare a list of Opportunities

about PESTLE information and threats (Prioritize)

Figure 2.3. process of

conducting external Audit

 The I/O view advocates that external (industry) factors are more important
than internal ones for gaining and sustaining competitive advantage
 2.3.2. Purpose and Nature of External Analysis
24
 Its purpose is to develop a finite list of:
 Opportunities that could benefit a firm as well as
 Threats that should be avoided.
A) Country Level Analysis
 A model called PESTLE is used
 Used to identify O and T at country level

Figure 2.4; Relationships

Between Key External
Forces and an Organization

Nuru M. (Ph.D.)
 Continued…
25

B) Industry Level Analysis

 It is used to identify O and T at the industry level (within the rival firms)
Competitive Forces
 An important part of an external audit is identifying rival firms and
understanding them.
 It is not always easy
 Information on competitors is essential for successful strategy
formulation.
 Competitive intelligence (CI) can be used
 It is a systematic and ethical process for gathering and analyzing
information about the competition’s activities and general business
trends.
 To get a general understanding of an industry.
 To identify competitors vulnerable areas
 To identify potential moves that a competitor might make
 Continued…
26
 Various legal and ethical ways to obtain CI include
 Hire top executives from rival firms
 Reverse engineer rival firms’ products
 Use surveys of customers, suppliers, and distributors
 Conduct drive-by and on-site visits to rival firm operations
 Search online databases
 Contact government agencies for public information about rival firms
 Monitor relevant trade publications.
 The more information obtain about competitors, the more likely the firm can
formulate and implement effective strategies.
 Major competitors’ weaknesses can represent opportunities; and their
strengths may represent key threats.

Nuru M. (Ph.D.)
 27 Continued…
 Seven characteristics of most competitive firms in an industry.
 Strive to continually increase market share
 Use the vision/mission as a guide for all decisions
 Continually strive to improve everything about the firm.
 Continually adapt, innovate, improve
 Strive to grow through acquisition whenever possible
 Hire and retain the best employees and managers possible
 Strive to stay cost-competitive on a global basis

Nuru M. (Ph.D.)
 Continued…
28
 For industry level analysis, the most widely used model is called Porter’s five-
force model of competitive analysis
 The intensity of competition among firms varies widely across industries.
 Competitiveness in an industry can be viewed as a composite of five forces:

Figure 2.5; Porter’s

Nuru M. (Ph.D.)
Five-Force model
 Continued…
29
1) Rivalry among competing firms:
 The most powerful of the five competitive forces.
The intensity of rivalry among competing firms tends to increase as;
The number of competitors increases
Competitors become more equal in size and capability
Demand for the industry’s products declines
Price cutting becomes common.
Consumers can switch brands easily.
Barriers to leaving the market are high
The product is perishable
products sold are commodities.

Industry profit will The Industry becomes

decline less attractive
 Continued…
30

2) Potential Entry of New Competitors

 If new firms can easily enter a particular industry, the intensity of
competitiveness among firms increases.
3) Potential Development of Substitute Products
 Firms might be in close competition with producers of substitute products in
other industries
examples: plastic container producers competing with glass, paperboard, and aluminum can
producers,

intense competition
Price Ceiling Profit Ceiling among rivals

Nuru M. (Ph.D.)
 Continued…
31
 The competitive pressure increase because of;
 Relative price of substitute product decreases.
 Consumers’ costs of switching decrease
4) Bargaining Power of Suppliers
 The bargaining power of suppliers affects the intensity of competition in an
industry, especially when:
 There are few suppliers
 There are few good substitute raw materials
 Firms may pursue a backward integration strategy to gain control or ownership
of suppliers.
 It is not usually a feasible strategy to apply, it is feasible if suppliers are costly, non-
reliable

Nuru M. (Ph.D.)
 Continued…
32
5) Bargaining Power of Consumers
 Most important force affecting competitive advantage.
 It is higher if;
 Customers are concentrated or large in number or buy in volume
 When the products are standard or undifferentiated
 The switching cost is low
 Customers are particularly important to the seller
 Consumer’s demand is falling
 Customers are informed about sellers’ products, prices, and costs

Nuru M. (Ph.D.)
 Forecasting
33

 Ones we understand the existing what is next?

 Forecasts are educated assumptions about future trends and events.
Forecasting is a complex activity because of uncertain environment.
Assumptions (forecast) must be made based on facts, figures, trends,
and research.
Managers often must relay on published forecasts, though most
organizations forecast.
Forecasting is so important in SM and because the ability to forecast (in
contrast to the ability to use a forecast) is essential.
No forecast is perfect.
Accurate forecasts can provide major competitive advantages.
Nuru M. (Ph.D.)
 2.4. The Internal Audit
34

 Also called Organizational Analysis.

. All organizations have S and W in the functional areas of business.
 Internal audit focuses on identifying and evaluating a firm’s S and W in
the functional areas.
 It is impossible in a SM text to review in depth all the functional areas
 However, it must include a detailed assessment of how the firm is doing in all
internal areas.
 A complete internal assessment is vital to formulate, implement, and
evaluate strategies to gain and sustainable competitive advantages.
 The Process of Gaining Competitive Advantage in a Firm

Nuru M. (Ph.D.)
 Continued…
35

 Strategies are designed in part to improve on a firm’s weaknesses,

turning them into strengths—and maybe even into distinctive
competencies.
 The process of performing an internal audit closely parallels the process
of performing an external audit.
 Managers and employees need to be involved in the process.
 Compared to the external audit, it provides more opportunity to
understand how their jobs, departments, and divisions fit into the whole
organization.
Improve communication and cooperation in an organization.

Nuru M. (Ph.D.)
 The Resource-Based View (RBV)
36

 Some researchers emphasize the importance of the internal-audit

than external audit for SM.
 Externally focused orientation does not provide a secure foundation for
formulating long-term strategy.
 Firm’s Resources and capabilities may give more stable basis on which to
define its identity.
Definition of a business in terms of what it is capable of doing may offer a
more durable basis for strategy

Nuru M. (Ph.D.)
 Continued…
37
 RBV internal resources are more important than external factors in
achieving and sustaining competitive advantage
 Contend that organizational performance will primarily be determined
by internal resources
 Physical resources: plant and equipment, location, technology, raw
materials, and machines;
 Human resources: employees, training, experience, intelligence,
knowledge, skills, and abilities
 Organizational resources: structure, planning processes, information
systems, patents, trademarks, copyrights, databases, and so on.
 Contrary to the Industrial Organization (I/O) theory.
Nuru M. (Ph.D.)
 Continued…
38

 A resource can improve firm’s effectiveness & efficiency, and create &
sustain competitive advantage if it is;
i. Valuable
ii. Rare
iii. Hard to imitate Also called empirical indicators (VIRO framework)
iv. Not easily substitutable
 Intangible resources are often more important for gaining and
sustaining competitive advantage.

Nuru M. (Ph.D.)
 Integrating Strategy and Culture
39
 Very business entity has a unique organizational culture that impacts
strategic-planning.
 Organizational culture: is a pattern of behavior that has been developed
by an organization.
 Considered as:
Valid and to be taught to new members
The correct way to perceive, think, and feel.
 It affects formulation, implementation, and evaluation Strategies

Figure 2.6; products or

dimension of culture
Nuru M. (Ph.D.)
 Continued…
40

 An organization’s culture compares to an individual’s personality;

 In the sense that no two organizations have the same culture and no
two individuals have the same personality.

Nuru M. (Ph.D.)
 Management functions
41
 Functions of management consist of; planning, organizing, motivating,
staffing, and controlling.
 These activities must be examined to continually capitalize on its strengths
and improve on its weaknesses.

Nuru M. (Ph.D.)
 Value Chain Analysis (VCA)
42

 The business of a firm can best be described as a value chain.

 All firms in a given industry have a similar value chain.
 Includes activities such as obtaining raw materials, designing products,
building facilities, developing cooperative agreements, and providing
customer service.
 A firm will be profitable so long as TR > TC of creating and delivering
the product.
 Firms should strive to understand not only their own value chain but also their
competitors, suppliers, and distributors.

Nuru M. (Ph.D.)
 Continued…
43
 VCA: process of determining the costs of activities from purchasing
raw materials to marketing those products.
 Aims to identify where low-cost advantages or disadvantages exists.
 Enable a firm to better identify S and W, as compared to;
Competitors’ value chain
Their past performance.
Substantial judgment may be required in performing a VCA
 Because different items along the value chain may impact other
items positively or negatively.

Nuru M. (Ph.D.)
 Continued…
44

 Step in implementing VCA;

1. Divide a firm’s operations into specific activities or business processes.
2. Attach a cost (Time And Money) to each discrete activity
3. Identify competitive cost strengths and weaknesses
 VCA is supportive of the research-based view’s.

Nuru M. (Ph.D.)
 Continued…
45
 Benchmarking:
 Analytical tool used to determine whether a firm’s value chain analysis is
competitive compared to those of rivals and thus conducive to winning in
the marketplace.

Figure 2.7: Transforming Value Chain Activities into Sustained Competitive Advantage
Nuru M. (Ph.D.)
 Roots of CA
46

Resources
Differe
Superior ntiation

Distinctive 
Efficiency
Quality Value
High
competences  Innovation creation Profit
 Customer Low
service cost
 Responsiveness

Capabilities

Nuru M. (Ph.D.)
 Environmental analysis summery

Scan External Identify Strategic

Environment – Factors –
National, Global Opportunities,
Threats Implement
Strategy via
Evaluate Current Formulate Changes in:
Mission, Goals, Define new Strategy – Leadership
SWOT Mission Goals, culture,
Strategies Corporate,
Grand Strategy Business, Structure, HR,
Functional Information &
control systems
Scan Internal
Identify Strategic
Environment – Core
Factors – Strengths,
Competence, Synergy,
Weaknesses
Value Creation
 2.5 Defining Strategic Goals and objectives

• Internal strengths/weaknesses, coupled with external opportunities/threats and a

clear statement of vision and mission, provide the basis for establishing objectives
and strategies.

Figure 1.1A
Comprehensive
SM Model
Strategic Management course, 2020/21 Set BY Dr. Habtamu Dadi
 Continued…

 Goals:
 Statements about general aim or purpose of activities that are broad,
long range.
 Results to be achieved which describe ideal state to be achieved at
some unidentified future time
 Used primarily in policy making and general program planning.
 Provide a direction towards the attainment of mission and vision.
 Strategic goals:
 Desired outcome of addressing strategic issues.
 Each strategic goal should be a direct outcome of a strategic issue, each
of which is directly related to the organization’s mission statement.
 Continued…

 Why it is important to set strategic goals for organization

1. Goals provide a sense of direction
2. Goals focus our efforts
3. Goals guide our action and decisions
4. Goals help us evaluate our progress
 Continued…

 Objectives
 Defined as ends which the organization seeks to achieve by its existence and
operation.
 They indicate the specific sphere of aims, activities and accomplishments.
Objectives are the end results of planned activity
 Are how you are going to get goals
 There might be a number of objectives for a single goal.
 Are the desired future positions that it wishes to reach
 Operationalize the mission statement
 It must be SMART
 Continued…

1. Specific: should be focused and detailed (clearly defined) (remove

confusion about target).
2. Measurable: should have inputs and outputs that can be identified
and measured.
 Should be stated in quantifiable and measurable terms.
3. Assignable: should be able to be broken into tasks that can be given
to specific people.
4. Realistic: should be achievable given resource and time constraints.
5. Time-bound: should have a time-frame associated with it.
 Continued…

A strategic objectives:
 Summarize the specific things to be achieved to realize a strategic
goal.
 Without long-term objectives, an organization would drift aimlessly
toward some unknown end.
It is needed at the corporate, divisional, and functional levels of
an organization.
 Where goals may be fairly general, objectives are often
quantifiable/specific.
 Goal Vs. Objective

•Goals are what you aim for, what you want to obtain, objectives are the move or
plan on how to achieve the goals
•Goals are broad while objectives are narrow
•Goals are general intentions; objectives are precise
•Goals are intangible; objectives are tangible
• Goals are abstract; objectives are concrete
•Goals are more influenced by external environment than objective
•Goals express intended outcome in general terms and objectives express them in
specific terms
 Continued…
55
 Example:
 Description: A community development organization identifies the low home-
ownership rate among area residents as a strategic issue preventing it from
achieving its vision of a vibrant, functioning and healthy community.
 Strategic goals: To increase the home-ownership rate among low- and moderate-
income residents in the neighbourhood
 Strategic Objectives:
1. Enrol 150 families in home-ownership preparation classes in the next 5Years.
2. Rehabilitate 50 vacant dwellings for sale to low- and moderate-income
households in the next 3years.
3. Construct 25 new homes and sell them to low- and moderate-income buyers
in the next 2 years.

Nuru M. (Ph.D.)
 The Benefits of Having Clear Objectives

 Provide specific direction by revealing expectations

 Allow synergy (interact/cooperation)
 Aid in evaluation by serving as standards
 Establish priorities
 Reduce uncertainty
 Minimize conflicts
 Stimulate exertion/effort
 Aid in allocation of resources
 Aid in design of jobs
 Provide basis for consistent decision making
 key areas to set goals and objectives in an organization

 Market standing: the position of an organization relative to its

competitors
 Innovation: any change made to improve methods of conducting
organizational business.
 Productivity: the level of goods or services produced by an
organization relative to the resources used in the production process.
 Resource levels: the relative amounts of various resources held by an
organization, such as inventory, equipment, and cash.
 Most organizations should set objectives indicating the relative amount
of each of these assets that should be held.
 Continued…

 Profitability: the ability of an organization to earn revenue dollars

beyond the expenses necessary to generate the revenue.
 Organizations commonly have objectives indicating the level of
profitability they seek.
 Manager performance and development: the quality of managerial
performance and the rate at which managers are developing
personally.
 Worker performance and attitude: the quality of non-management
performance and such employee’s feelings about their work.
 Social responsibility: the obligation of business to help improve the
welfare of society while it strives to reach organizational objectives.
 2.6 Strategies, Strategic analysis, and choice
59
2.6.1. Strategies
 Lots of companies embraced SM/SP in their quest for higher revenues
and profits.
 Strategies:
 Represent the actions to be taken to accomplish long-term objectives.
 The time frame for objectives and strategies should be consistent, usually
from 2 to 5 years.

Nuru M. (Ph.D.)
 Types of Strategies
60

 Alternative business strategies can be categorized into 11 actions:

forward integration, backward integration, horizontal integration,
market penetration, market development, product development,
related diversification, unrelated diversification, retrenchment,
divestiture, and liquidation.
 Firms spend resources and focus on a finite number of opportunities in
pursuing strategies to achieve an uncertain outcome in the future.

Nuru M. (Ph.D.)
 Continued…
61
A. Integration Strategies
i) vertical integration. Forward and backward integration are collectively
referred to as Allow a firm to gain control over distributors and suppliers.
An effective means of forward integration is franchising
Because costs and opportunities are spread among many individuals
Forward integration is effective strategy, when
i. present distributors are expensive and unreliable.
ii. it is a competitive advantage
iii. An organization competes in a growing industry
iv. An organization capital and human resources
v. Present distributors/retailers have high profit margins
Nuru M. (Ph.D.)
 Continued…
62

 Backward integration appropriate when;

 Firms’ current suppliers are unreliable and too costly.
 Small number of suppliers and large number of competitors.
 Organization competes in a rapidly growing In industry.
 Organization has both capital and human resources
 The advantages of stable prices are particularly important
 Present suppliers have high profit margins
 Quick acquisition of resource is important

Nuru M. (Ph.D.)
 Continued…
63
ii) Horizontal integration: seeking ownership and/or control over competitors.
 The most common growth strategy
 Aim for increased economies of scale and enhanced transfer of resources and
competencies.
 Horizontal integration is effective strategy when;
I. Organization can gain monopolistic characteristics.
II. Organizations competes in a growing industry.
III. Economies of scale provide competitive advantages
IV. Organizations has both the capital and human resource

Nuru M. (Ph.D.)
 Continued…
64
B. Intensive Strategies
 It includes Market penetration, market development, and product
development.
 They require intensive efforts to improve a firm’s competitive position with
existing products.
i) Market Penetration: seeks to increase market share for present products
in present markets through greater marketing efforts
 Includes;
Increasing the number of salespersons
Increasing advertising expenditures
Extensive sales promotion
Increasing publicity efforts.
Nuru M. (Ph.D.)
 Continued…
65
 Market penetration is Appropriate when;
 Current markets are not saturated with a particular product or service
 The usage rate of customers can be improved.
 Market share of major compotators decrees, while the industry is good.
 If sales and expenditure are highly correlated
 Economies of scale provide competitive advantages

Nuru M. (Ph.D.)
 Continued…
66
ii) Market development: introducing present products into new geographic
areas.
 It can be effective strategy when;
New channels of distribution are available
An organization is successful at what it does
Untapped markets exist.
An organization has both capital and human resources
Excess production capacity
An organization’s industry is rapidly becoming global in scope

Nuru M. (Ph.D.)
 Continued…
67
iii) Product development: seeks increased sales by improving or modifying
present products.
 Usually entails large R&D expenditures
It is effective strategy when;
The existing products are in the maturity stage
The industry is characterized by rapid technological developments.
Competitors offer quality at comparable prices.
High-growth industry
There is strong R&D capabilities.

Nuru M. (Ph.D.)
Continued…

Existing product New product

Existing Market penetration Product development

market - Increase sales to the - New product developed for
existing market existing markets
- Penetrate more deeply
into the existing market
New market Market development Diversification
Existing products sold to New products sold in new
new markets markets

Intensive Strategy Matrix

 Continued…
69
C. Diversification Strategies
 It is becoming less popular, as it is difficult to manage diverse organizational
activity.
 It can be related or unrelated diversification.
 Related: when their value chains possess competitively fits.
Commonality in markets, products, or technology between the acquired and
acquiring firm
It may be effective when;
 No-growth or a slow-growth industry
 New, but related products enhance the sales of current products
 New, but related, products offered at highly competitive prices.
 New, but related, products have seasonal sales levels
 Products are currently in the declining stage of the product’s life cycle
 Strong management team

Nuru M. (Ph.D.)
 Continued…
70
 Unrelated: when their value chains are so dissimilar.
It favors capitalizing on financial performance (profit), while related
diversification capitalize on value chain strategic fits.
Effective strategy when;
 It an organization is in no-growth industry
 present channels of distribution can be used to market the new products
 Organization has capital and managerial talent needed
 Financial synergy exists between the acquired and acquiring firm
 markets for an present products are saturated

Nuru M. (Ph.D.)
 Continued…
71
C. Defensive Strategies
 Includes retrenchment, divestiture, and liquidation.
i) Retrenchment/Turnaround: involve regrouping through cost and asset
reduction to reverse declining sales and profits.
involve selling off land and buildings, cutting product lines, closing marginal
businesses, closing obsolete factories, automating processes, and reducing
employees
Appropriate when;
An organization failed consistently to meet its objectives and goals.
An organization is weaker competitor in a given industry.

Nuru M. (Ph.D.)
 Continued…
72
ii) Divestiture: Selling a division or part of an organization.
 It is a strategy for firms to focus on their core businesses.
Appropriate when;
Retrenchment strategy and failed.
A division needs more resources than the company can provide.
A division is responsible for poor performance
A division misfit with the rest of the parts of an organization
large amount of cash is needed quickly and no other source

Nuru M. (Ph.D.)
 Continued…
73
iii) Liquidation: Selling all of a company’s assets, in parts, for their tangible worth.
 A recognition of defeat and consequently can be an emotionally difficult
strategy.
It may be better to cease operation than to continue losing large sums of
money.
Effective strategy, when;
Retrenchment and divestiture are not working
It is the last alternative.

Nuru M. (Ph.D.)
 Continued…
74

D. Michael Porter’s Five Generic Strategies

Competitive advantage can be gain from three different bases:
It imply different organizational arrangements, control procedures,
and incentive systems.
They are called basic generic strategy
Typea)
I Cost leadership: emphasizes producing standardized products
at a low per-unit cost for consumers who are price sensitive
Type II i. Low-cost strategy: offer products to a wide range of customers at
the lowest price available on the market.
ii. Best-value strategy: offers products to a wide range of customers at
the best price-value available on the market.
Nuru M. (Ph.D.)
 Continued…
75
Type III b) Differentiation: aimed at producing unique products in the industry
and directed at consumers who are relatively price insensitive.
It needs a careful study of buyers’ needs and preferences
Enable firm to charge a higher price and gain loyal customer
c) Focus: producing products that fulfill the needs of small groups of
consumers.
Type IV Low-cost focus strategy: products to a small range of customers at the lowest
price available on the market.
Type V Best-value focus/focused differentiation strategy: products or services to a
small range of customers at the best price-value available
on the market.
N.B: Larger firms typically compete on a cost leadership or differentiation basis, whereas
smaller firms often compete on a focus basis.
Nuru M. (Ph.D.)
 Continued…
76
 Depending on factors such as type of industry, size of firm, and nature of competition, various
strategies could yield advantages in cost leadership, differentiation, and focus.

Nuru M. (Ph.D.)
Figure 2.8: Porter’s Five Generic Strategies
 Continued…
77
 When employing a cost leadership strategy, a firm must be careful not
to use such aggressive price cuts.
 Cost leadership (Type I and II) strategy can be especially effective
under the following conditions;
 There is price computation
 Standard products
 Product differentiation is impossible/difficult
Customer low switching costs
Buyers have bargaining power

Nuru M. (Ph.D.)
 Continued…
78
 A risk of pursuing a differentiation strategy
 Product may not be valued enough by customers to justify the higher
price.
 Competitors may quickly develop ways to copy the differentiating
features.
 Differentiation strategy can be effective, when;
 There are many ways to differentiate
 buyer’s needs and uses are diverse
 Few rival firms are following a differentiation.

Nuru M. (Ph.D.)
 Continued…
79
 A successful focus strategy depends on an industry segment that has;
 Sufficient size
 Good growth potential
 Not crucial to the success of other major competitors.

Nuru M. (Ph.D.)
 Means for Achieving Strategies
80
 Firms may use the following means to achieve strategies
 Cooperation: Alliance
 Joint Venture and Partnering: companies form a temporary consortium
for the purpose of capitalizing on some opportunity
 Merger/Acquisition:
A merger: two organizations of about equal size unite to form one enterprise.
 It can be hostile or friendly
An acquisition: when an organization purchases (acquires) another.
 Private-Equity Acquisitions :

Nuru M. (Ph.D.)
 Continued…
81
 Why Most M&A failed?

Nuru M. (Ph.D.)
 Tactics to Facilitate Strategies
82

 First mover advantages: benefits a firm may achieve by entering prior

to rival firms.
 Fast follower or late mover: following the first mover to inter into the
market
 Outsourcing and Reshoring
 Outsourcing: hiring other companies to take over various parts of their
functional operations
 Reshoring: move some of their manufacturing back to their country.

Nuru M. (Ph.D.)
 2.6.2 Strategic analysis and choice
83

 Strategy analysis and choice involve;

 Making subjective decisions based on objective information.
 Determine alternative courses of action that could best enable the firm to
achieve its mission and objectives.
 Alternative strategies:
 Represent incremental steps that move the firm from its present position to a desired
future position.
 Do not come out of the wild blue yonder (rather they are from vision, mission,
objectives, and SWOT)
 Consistent with, or build on, past strategies that have worked well

Nuru M. (Ph.D.)
 The Process of Generating and Selecting Strategies
84
 Strategists never consider all feasible alternatives because;
 Infinite number of possible actions
 Infinite number of ways to implement those actions.
 A manageable set of attractive alternatives must be developed,
examined, prioritized, and selected, based on;
 Advantages, disadvantages, trade-offs, costs, and benefits

Nuru M. (Ph.D.)
 Continued…
85
Analytical Framework
 Three-stage decision-making framework
 Applicable to all sizes and types of organizations and can help strategists
identify, evaluate, and select strategies.

Figure 2.9:The
Strategy Formulation
Analytical
Framework

Nuru M. (Ph.D.)
 Continued…
86
I. Input Stage: provides basic input information for the matching and
decision stage
 Already discussed above.
II. Matching Stage: Match between key organization’s resources and skills
and the opportunities and risks (Threats).
 Consists of five techniques : SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix,
and Grand Strategy Matrix.
 Matching external and internal key factors is the essential for effectively
generating feasible alternative strategies.
III. Decision Stage: determine the relative attractiveness of alternative
strategies.

Nuru M. (Ph.D.)
 Continued…
Defensive tactic which
87 Stage 2: The Matching Stage aim to reduce W and T.
1) The SWOT Matrix:
 Help to develop four types of strategies: SO, WO, ST, and WT strategies

Figure 2.10:The SWOT Matrix

Nuru M. (Ph.D.)
 Continued…
88

 Although the SWOT Matrix is widely used, it have some limitations.

i. It does not show how to achieve a competitive advantage (it must not be
an end in itself).
ii. It is a static assessment (or snapshot) in time. A
iii. It may lead the firm to overemphasize a single internal or external factor
iv. No weights, ratings, or numbers in a SWOT analysis
v. The relative attractiveness of alternative strategies is not provided.

Nuru M. (Ph.D.)
 Continued…
89

2. Strategic Position and Action Evaluation (SPACE) Matrix

 Its four-quadrant framework
 It indicates whether aggressive, conservative, defensive, or competitive strategies
are most appropriate.
The axes of the SPACE Matrix represent
Two internal dimensions
Financial position [FP]
Competitive position [CP])
Two external dimensions
Stability position [SP]: volatility of profits and revenues for firms in a given industry
Industry position [IP].
Nuru M. (Ph.D.)
 Continued…
90
 Depending on the type of organization, numerous variables could make up each of
the dimensions.

Nuru M. (Ph.D.)

Figure 2.11: SPACE matrix

 Continued…
91
Steps to Prepare:
1. Select a set of variables to define FP, CP, SP, IP
2. Assign a numerical value:
• +1 (worst) to +7 (best) to each of the variables of FP and IP, comparing it to competitors
• –1 (best) to –7 (worst) to each of the variables of SP and CP, comparing it to other Industry
3. Compute an average score for FP, CP, IP, and SP
4. Plot the average scores for FP, IP, SP, and CP
5. Add the two scores on the x-axis and plot the resultant point on X. Add the two
scores on the y- axis and plot the resultant point on Y. Plot the intersection of the
new (x, y) coordinate.
6. Draw a directional vector from the origin of the SPACE Matrix (0,0) through the
new (x, y) coordinate
See the text for the examples
Nuru M. (Ph.D.)
 Continued…
92
 Result:
 If the vector is located in the Aggressive Quadrant;
An organization is in an excellent position to use its strengths to, take advantage
of external opportunities, overcome weaknesses, and avoid threats.
 If the vector appear in the Conservative Quadrant;
Staying close to the firm’s basic competencies and not taking excessive risks.
 If the vector is located in the Defensive Quadrant
Defensive strategies
 If the vector is located in the Competitive Quadrant;
Indicating competitive strategies.

Nuru M. (Ph.D.)
 Continued…
93
 SPACE Matrix has some limitations
1. It is a snapshot in time
2. There are more than four dimensions that firms could/should be rated on
3. The directional vector could fall directly on an axis, or could even go
nowhere if the coordinate is (0,0)
4. Implications of the exact angle of the vector within a quadrant are
unclear
5. The relative attractiveness of alternative strategies generated is unclear
6. Key underlying internal and external factors are not explicitly considered.

Nuru M. (Ph.D.)
 Continued…
94
3. The Boston Consulting Group (BCG) Matrix
 The BCG and IE Matrix are designed specifically to enhance a
multidivisional (Portfolio)firm’s efforts to formulate strategies.
 They both are called portfolio matrix
 Allocating resources across portfolio is arguably the most important strategic
decision.
 The BCG graphically portrays differences among portfolios based on;
𝐷𝑖𝑣𝑖𝑡𝑖𝑜𝑛′ 𝑠 𝑀𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒 𝑜𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
 Relative market share on the x-axis, =
𝑡ℎ𝑒 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 𝑚𝑎𝑟𝑘𝑒𝑡 𝑙𝑒𝑎𝑑𝑒𝑟 𝑀𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒 𝑜𝑟 𝑟𝑒𝑣𝑒𝑛𝑢𝑟
The midpoint is set at 0.50
 Industry growth rate on the y-axis, =average annual revenue increase for the industry
 Range b/n −20 to +20 percent, with 0.0 being the midpoint.

Nuru M. (Ph.D.)
 Continued…
95
 Question Marks:
 low relative market share and high-growth
industry.
 Firms’ needs high cash and low cash
generation.
 There must be strengthen them through an
intensive strategy or sold out.
 Stars:
 Represent organizations’ best long-run
opportunities for growth and profitability
 High market share and industry growth rate .
 Should receive substantial investment to
maintain or strengthen their dominant positions.
 Integration and Intensive strategies can be
used.
Nuru
Nuru M.
M. (Ph.D.)
(Ph.D.)
Figure 2.12a: BCG matrix
 Continued…
96 Circle=Revenue in the respective division
Slice=the proportion of Profit from the divition
 Cash Cows
 High market share but compete in a low-
growth industry.
.
 They generate cash in excess of their
needs (often milked).
 They are yesterday’s star
 Maintain their strong position for as long as
possible (Product dev’t or diversification)
 Dogs
 Low market share and compete in a slow-
or no-market-growth industry
 Weak internal and external position.
 Are often liquidated, divested, or trimmed
down through retrenchment. Figure 2.12b: BCG matrix
Nuru M. (Ph.D.)
 Continued…
97
 BCG Matrix draws attention to the cash flow, investment characteristics,
and needs of a portfolio.
 The divisions evolve over time;
More often, counterclockwise: dogsquestion marksStarsCash cowsdogs
Less frequently clockwise: dogsCash cowsStarsquestion marksdogs
 In some organizations, no cyclical motion is apparent.

Nuru M. (Ph.D.)
 Continued…
98
4) The Internal-External (IE) Matrix
 positions portfolios (segments) in a nine-cell display
 Differences between BCG and IE Matrices;
1. The x and y axes are different
2. The IE Matrix requires more information about the divisions than does the
BCG Matrix.
3. The strategic implications of each matrix are different.
4. The IE Matrix has nine quadrants versus four in a BCG Matrix.

Nuru M. (Ph.D.)
 Continued…
99
Region I
 .

Region II

Region I
Nuru M. (Ph.D.)

Figure 2.13: IE matrix

 Continued…
100
5. The Grand Strategy Matrix
 Is based on two evaluative dimensions;
i. Competitive position (x-axis).
ii.Market (industry) growth (y-axis).
 Growth rate > 5% is rapid growth

 Quadrant I:
 High Growth and competitive position
 Excellent strategic position
 Quadrant II:
 Evaluate their present approach to
the marketplace seriously
Nuru M. (Ph.D.) Figure 2.14: The Grand Strategy matrix
 Continued…
101
 Quadrant III:
 Compete in slow-growth industries and have weak competitive positions.
 Firms must make some drastic changes quickly to avoid further decline and
possible liquidation.

 Quadrant IV
 Strong competitive position but are in a slow-growth industry.
 Characteristically high cash-flow levels and limited internal growth

Nuru M. (Ph.D.)
 Continued…
102 Stage 3: Decision Stage
The Quantitative Strategic Planning Matrix (QSPM)
 Determine the relative attractiveness of feasible alternative actions.
 Used to objectively evaluate alternative strategies to select the best.
 Uses information from Stage 1 and 2
Requires assignment of ratings (attractiveness scores).
“small” rating decisions enables to make effective “big” decisions.

Nuru M. (Ph.D.)
 Continued…
103
Steps in QSPM
Steps 1: Make a list of key O, T and S, W in the left column of the QSPM.
Step 2: Assign weights to each key external (out of 100%) and internal factor (out of
100%).
Step 3: Examine the Stage 2 (matching) matrices, and identify alternative
considered for implementation.
Record these strategies in the top row of the QSPM.
Step 4: Determine the Attractiveness Scores (AS)
Examining each key external or internal factor, one at a time.
Asking the question, “Does this factor affect the choice of strategies being made?”
If the answer is yes, Compare strategies relative to that key factor.
AS range 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 =
highly attractive
Nuru M. (Ph.D.)
 Continued…
104
Step 5: Compute the Total Attractiveness Scores (TAS)
TAS=𝑊𝑖 ∗ 𝐴𝑆𝑖 (𝑤𝑒𝑖𝑔ℎ𝑡 𝑋 𝑐𝑟𝑜𝑠𝑝𝑜𝑛𝑑𝑖𝑛𝑔 𝐴𝑆)
Step 6: Compute the Sum Total Attractiveness Score (STAS)
STAS= 𝑇𝐴𝑆𝑖 (summation of TAS for every strategy)

Higher scores indicate more attractive strategies

N.B: refer the text for exercise (PP: 267-269)

Nuru M. (Ph.D.)
 Continued…
105
Table 2.1: The Quantitative Strategic planning Matrix (QSpM)

Nuru M. (Ph.D.)
 Continued…

Table 2.2: example of a QSPM for a Retail Computer Store

 Continued…
107

Nuru M. (Ph.D.)
 Continued…
108
Positive Features and Limitations of the QSPM

I- Positive Features
 Sets of strategies can be examined sequentially or simultaneously
No limit to the number and set of strategies that can be evaluated at once.
 It requires strategists to integrate pertinent external and internal factors into
the decision process.
 Can be used by small and large, for-profit and nonprofit organizations

Nuru M. (Ph.D.)
 Continued…
109
II- Limitations of the QSPM
 It always requires informed judgments regarding AS scores.
It can be only as good as the prerequisite information and matching
analyses on which it is based.

Nuru M. (Ph.D.)
 Continued…
110
 Strategic Analysis and Choice must be seen from:
 Cultural Aspect
 Political Aspect
 Board of Directors (Governance) Issue

Nuru M. (Ph.D.)
111

Any Question?
Nuru M. (Ph.D.)