KMBN 301

Strategic Management
Unit-3
Strategy Formulation

Definition: Strategy Formulation is an analytical process of selection of the best suitable

course of action to meet the organizational objectives and vision. It is one of the steps of
the strategic management process. The strategic plan allows an organization to examine its
resources, provides a financial plan and establishes the most appropriate action plan for
increasing profits.

It is examined through SWOT analysis. SWOT is an acronym for strength, weakness,

opportunity and threat. The strategic plan should be informed to all the employees so that they
know the company’s objectives, mission and vision. It provides direction and focus to the
employees.

SWOT Analysis

SWOT Analysis is a useful technique for understanding your Strengths and Weaknesses, and for
identifying both the Opportunities open to you and the Threats you face.
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Steps of Strategy Formulation

The steps of strategy formulation include the following: https://businessjargons.com/wp-

content/uploads/2018/07/process-of-strategy-formulation1.jpg

1. Establishing Organizational Objectives: This involves establishing long-term goals of

an organization. Strategic decisions can be taken once the organizational objectives are
determined.

2. Analysis of Organizational Environment: This involves SWOT analysis, meaning

identifying the company’s strengths and weaknesses and keeping vigilance over
competitors’ actions to understand opportunities and threats.

Strengths and weaknesses are internal factors which the company has control over. Opportunities
and threats, on the other hand, are external factors over which the company has no control. A
successful organization builds on its strengths, overcomes its weakness, identifies new
opportunities and protects against external threats.

3. Forming quantitative goals: Defining targets so as to meet the company’s short-term

and long-term objectives. Example, 30% increase in revenue this year of a company.
 4. Objectives in context with divisional plans: This involves setting up targets for every
department so that they work in coherence with the organization as a whole.

5. Performance Analysis: This is done to estimate the degree of variation between the
actual and the standard performance of an organization.

6. Selection of Strategy: This is the final step of strategy formulation. It involves

evaluation of the alternatives and selection of the best strategy amongst them to be the
strategy of the organization.

Strategy formulation process is an integral part of strategic management, as it helps in framing

effective strategies for the organization, to survive and grow in the dynamic business
environment.

Levels of strategy formulation

There are three levels of strategy formulation used in an organization:

• Corporate level strategy: This level outlines what you want to achieve: growth,
stability, acquisition or retrenchment. It focuses on what business you are going to enter
the market.

• Business level strategy: This level answers the question of how you are going to
compete. It plays a role in those organization which have smaller units of business and
each is considered as the strategic business unit (SBU).

• Functional level strategy: This level concentrates on how an organization is going to

grow. It defines daily actions including allocation of resources to deliver corporate and
business level strategies.
 Business Strategy
Definition: Business strategy can be understood as the course of action or set of decisions which
assist the entrepreneurs in achieving specific business objectives.

It is nothing but a master plan that the management of a company implements to secure a
competitive position in the market, carry on its operations, please customers and achieve the
desired ends of the business.

In business, it is the long-range sketch of the desired image, direction and destination of the
organisation. It is a scheme of corporate intent and action, which is carefully planned and
flexibly designed with the purpose of:

✓ Achieving effectiveness,
✓ Perceiving and utilising opportunities,
✓ Mobilising resources,
✓ Securing an advantageous position,
✓ Meeting challenges and threats,
✓ Directing efforts and behaviour and
✓ Gaining command over the situation.

A business strategy is a set of competitive moves and actions that a business uses to attract
customers, compete successfully, strengthening performance, and achieve organisational goals. It
outlines how business should be carried out to reach the desired ends.

Competitive Strategy
Competitive Strategy is defined as the long term plan of a particular company in order to gain
competitive advantage over its competitors in the industry. It is aimed at creating defensive
position in an industry and generating a superior ROI (Return on Investment). Such type of
strategies play a very important role when industry is very competitive and consumers are
provided with almost similar products. One can take example of mobile phone market.

Before devising a competitive strategy, one needs to evaluate all strengths, weaknesses,
opportunities, threats in the industry and then go ahead which would give one a competitive
advantage. Understanding competition, studying customer needs, evaluating their strengths &
weakness etc. are all an important aspect of marketing strategy. Companies can study & evaluate
on the basis of their market share, SWOT analysis etc., which would eventually help them drive
business & sales revenue.
Types of competitive strategies by Porter

According to Michael Porter, competitive strategy is devised into 4 types:

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1. Cost Leadership

Here, the objective of the firm is to become the lowest cost producer in the industry and is
achieved by producing in large scale which enables the firm to attain economies of scale. High
capacity utilization, good bargaining power, high technology implementation are some of factors
necessary to achieve cost leadership. e.g Micromax phones

2. Differentiation leadership

Under this strategy, firm maintains unique features of its products in the market thus creating a
differentiating factor. With this differentiation leadership, firms target to achieve market
leadership. And firms charge a premium price for the products (due to high value added
features). Superior brand and quality, major distribution channels, consistent promotional
support etc. are the attributes of such products. E.g. BMW, Apple

3. Cost focus

Under this strategy, firm concentrates on specific market segments and keeps its products low
priced in those segments. Such strategy helps firm to satisfy sufficient consumers and gain
popularity. E.g. Sonata watches
4. Differentiation focus

Under this strategy, firm aims to differentiate itself from one or two competitors, again in
specific segments only. This type of differentiation is made to meet demands of border
customers who refrain from purchasing competitors’ products only due to missing of small
features. It is a clear niche marketing strategy. E.g. Titan watches

Without following anyone of above mentioned competitive strategies, it becomes very difficult
for firms to sustain in competitive industry.

Examples of competitive strategy

There can be several examples based on the four parameters given by Michael Porter. Some
examples are given below:

1. Cost leadership: Micromax smart phones and mobile phones are giving good quality products
at an affordable price which contain all the features which a premium phone like Apple or
Samsung offers

2. Differentiation leadership: BMW offers cars which are different from other car brands. BMW
cars are more technologically advanced, have better features and have got personalized services

3. Cost focus: Sonata watches are focused towards giving wrist watches at a low cost as
compared to competitors like Rolex, Titan, Omega etc.

4. Differentiation focus: Titan watches concentrates on premium segment which includes jewels
in its watches.

Cooperative Strategy
Cooperative Strategy refers to a planning strategy in which two or more firms work together in
order to achieve a common objective. Several companies apply cooperative strategies to increase
their profits through cooperation with other companies that stop being competitors.

A cooperative strategy gives a company advantages, specially to companies that have a lack of
competitiveness, know how or resources. This strategy gives to the company the possibility to
fulfill the lack of competitiveness.

Cooperative strategy also offers access to new and wider market to companies and the possibility
of learning through cooperation. Cooperative strategy has been recently applied by companies
that want to open their markets and have a liberalist vision of negotiation through cooperation.
 Collusion Strategy
Collusion strategy is a deceitful agreement or secret cooperation between two or more parties to
limit open competition by deceiving, misleading or defrauding others of their legal right.
Collusion is not always considered illegal. It can be used to attain objectives forbidden by law;
for example, by defrauding or gaining an unfair market advantage. It is an agreement among
firms or individuals to divide a market, set prices, limit production or limit opportunities.

STRATEGIC ALLIENCES
A Strategic Alliance is a formal relationship between two or more parties to pursue a set of
agreed upon goals or to meet a critical business need while remaining independent organizations.
Strategic alliances are a way to work together with others towards a common goal while not
losing their individuality.

The advantages of strategic alliance include:

1. Allowing each partner to concentrate on activities that best match their capabilities.

2. Learning from partners & developing competences that may be more widely exploited
elsewhere

3. Adequacy a suitability of the resources & competencies of an organization for it to

survive.

Types of strategic alliances:

There are four types of strategic alliances

• Joint venture

It is a strategic alliance in which two or more firms create a legally independent company to
share some of their resources and capabilities to develop a competitive advantage.

• Equity strategic alliance

It is an alliance in which two or more firms own different percentages of the company they have
formed by combining some of their resources and capabilities to create a competitive advantage.

• Non equity strategic alliance

It is an alliance in which two or more firms develop a contractual-relationship to share some of

their unique resources and capabilities to create a competitive advantage.

• Global Strategic Alliances

It working partnerships between companies (often more than 2) across national boundaries and
increasingly across industries. Sometimes formed between company and a foreign government,
or among companies and governments.

CORPORATE STRATEGIES
Corporate strategies, also known as grand or root strategies are fundamentally concerned with
the selection of business in which an organization should be in and with the development and
coordination of the portfolio of businesses. Corporate strategy is primarily about the choice of
direction for a firm as a whole and a management of its business or product portfolio (managing
various product lines and business units for maximum benefits. Thus, they are concerned with:

1. Reach: defining the issues that are corporate responsibilities, these might include the type
of business in which the organization should be involved and the way in which business
will be integrated and managed , and

2. Managing activities and business relationships: developing synergies by sharing and

coordinating human and other resources across business.

Functions of Corporate strategy

Corporate strategy performs the following functions:

i) It provides a dual approach to problem solving. Firstly, it exploits the most effective means to
overcome difficulties and face competition. Secondly, it assists in the deployment of scarce
resources among critical activities.

ii) It focuses attention upon changes in the organizational set up, administration of
organizational process affecting behavior and the development of effective leadership.

iii) It offers a technique to manage changes. The management is totally prepared to anticipate,
respond and influence to look at changes. It also offers a different way of thinking.

iv) It furnishes the management with a perspective whereby, the latter gives equal importance to
present and future opportunities.

v) It provides the management with a mechanism to cope with highly complex environment
characterized by diversity of cultural, social, political and competitive forces.
Corporate strategy deals with three key issues facing the corporation as a whole:

➢ The firm’s overall orientation towards growth, stability , or retrenchment ( Directional

strategy)

➢ The industries or markets in which the firm compete through its products and business
units

(Portfolio analysis)

➢ The manner in which management coordinates activities and transfers resources and
cultivates capabilities among product lines and business units ( Parenting strategy )

Directional Strategy-
Corporate directional strategy is composed of three general orientations:

▪ Growth strategies expand the company’s activities.

▪ Stability strategies make no change to the company’s current activities.

▪ Retrenchment strategies reduce the company’s level of activities.

Growth Stability Retrenchment

Concentration Pause/Proceed with caution Turnaround

Vertical growth No change Captive Company
Horizontal growth
Profit Sell-out/Divestment
Diversification
1.Concentric Bankruptcy/Liquidation
2.Conglomerate
Growth Strategy

A strategy based on investing in companies and sectors which are growing faster than their peers.
Consulting have been developing successful growth strategies for profit making organizations
and nonprofit organizations. There are a number of ways of growing or expanding a business.
Whatever choices there may be, business owners who are in the hot seat to make a judgment,
should consider the best possible option that is in line with their main objectives.

“A growth strategy is one that an enterprise pursues when it increase its level of objectives
upward in significant increment, much higher than an exploration of its past achievement level.
The most frequent increase indicating a growth strategy is to raise the market share and or sale
objectives upwards significantly.”

Internal : External:
Concentric Expansion
Merger
1. Market penetration Acquisition or Takeover
2. Market development Joint Venture
3. Product development
Strategic alliances
Vertical Integration
1. Backward integration
2. Forward integration
Diversification
Concentric diversification
1.Technology related
2. Market related
Conglomerate diversification
Concentric Expansion

The first route of growth is to expand the present line of business, also known as growth through
intensification, which can be aimed at market penetration, market development and product
development. In each case, the objective is to extend organization’s present business. There are
various issues which added capacity to increase the objective of the organization of improving
the competitive position and market share-

Determine organizational options for capacity expansion

Assess probable future demands and costs of inputs

Assess probable technological changes

Predict capacity addition by competitors

Assess demand supply balance in the industry

Determine expected cash flow from expansion

Test the analysis for consistency

Vertical Integration

Vertical integration is the combination of technologically distinct production, distribution and

other economic processes within the confine of a single organization. Vertical integration can be
achieved in two ways:

Forward- In forward integration, the organization develops outlets for the use/sale of its
products.

Backward- In backward integration, additional processing is undertaken in reverse direction.

Another growth strategy is diversification which is the process of entry into a business which is
new to an organization either market-wise, technology-wise, or both. Thus, if the organization
offers products which is different from the previous one, the attempt will be known as
diversification. Thus, an organization may either enter a new market with same type of
technology or a new technology with same marketing channel, or it may enter totally unrelated
field. Thus, in diversification organization, various types of businesses can be classified into
following categories:

Concentric Diversification

Growth through concentric diversification into a related industry may be a very appropriate
corporate strategy when a firm has s strong competitive position but industry attractiveness is
low.

Conglomerate Diversification

When management realizes that the current industry is unattractive and that the firm lacks
outstanding abilities or skills that it could easily transfer to related products or services in other
industries, the most likely strategy is conglomerate diversification l-diversifying into an industry
unrelated to its current one.

Stability Strategy
Stability strategy or stable growth strategy is most frequently used by most of the organization.
A corporation may choose stability over growth by continuing its current activities without any
significant change in direction. Some of the popular of these strategies are the pause/proceed –
with –caution, no-change and profit strategies-

Pause/ Proceed with caution

It is typically conceived as a temporary strategy to be used. It is very deliberate attempt to make

only incremental improvements until a particular environmental situation changes.

No-change strategy

A no-change strategy is a decision to do nothing new a choice to continue current operations and
policies for the foreseeable future.

Profit strategy

A profit strategy is a decision to help a company get through a temporary difficulty. It may also
be a way to boost the value of a company in preparation for going public through initial public
offering.
 Retrenchment Strategy
A company may pursue retrenchment strategies when it has a weak competitive position in some
or its entire product lines resulting in poor performance---sales are down and profits are
becoming losses. These strategies impose a great deal of pressure to improve performance.

Turnaround strategy

It emphasizes the improvement of operational efficiency and is probably most appropriate when
a corporation’s problem is pervasive but not yet critical.

Captive company strategy

It involves giving up independence in exchange for security. A company with a weak

competitive position may not be able to engage in a full-down turnaround strategy.

Sell-out/Divestment strategy

If the corporation has multiple business lines and it chooses to sell off a division with low growth
potential, this is called divestment.

Bankrupt /Liquidation strategy

Bankruptcy involves giving up management of the firm to the court in return for some settlement
of the corporation obligation.

Liquidation is the termination of the firm. When the industry is unattractive and the company too
weak to be sold as a going concern, management may choose to convert as many saleable assets
as possible to cash.

Corporate Parenting Strategy

Through the parenting strategy resources and capabilities that can be used to build business units
value as well as generate synergies across business units. Corporate parenting generates
corporate strategy by focusing on the core competencies of the parent corporation and the value
created from the relationship between the parent and its business.

Process of developing corporate parenting strategy-

Corporate strategy involved three analytical steps:

➢ Examine each business unit (or target firm in the case of acquisition ) in term of its
strategic factors

➢ Examine each business unit (or target firm ) in term of area in which performance can be
improved
 ➢ Analyze how well the parent corporation fits with the business unit (or target firm)

Examine each business unit (or target firm in the case of acquisition) in term of its strategic
factors:

People in the business probably identify the strategic factors when they were generating business
strategies for their units. One popular approach is to establish centers of excellence throughout
the corporation.

Examine each business unit (or target firm) in term of area in which performance can be
improved:

These are considered to be parenting opportunities. A parent company having world-class

expertise in these areas could improve that unit’s performance.

Analyses how well the parent corporation fits with the business unit (or target firm):

Corporate headquarters must be aware of its own strength and weakness in term of resources,
skills and capabilities. The corporate parent must ask whether it has the characteristics that fit the
parenting opportunities in each business units.

FUNCTIONAL STRATEGIES
Functional strategies are the approach taken by a functional area to achieve corporate and
business unit’s objectives and strategies by maximizing resources productivity. It is concerned
with developing and nurturing a distinctive competence to provide a company or business unit
with a competitive advantage. These functional strategies are:

➢ Marketing strategies

➢ Finance strategies

➢ Research & Development strategies

➢ Operations strategies

➢ Logistics strategies

➢ Human resource management strategies

➢ Information technology strategies

 Corporate strategies
Overall direction of company &
Management of its business

Business Strategies
Competitive & cooperative
strategies

Functional strategies
Maximize resources
productivity

1) Marketing Strategy: Marketing involves all the activities concerned with the identification
of customer needs and making efforts to satisfy those needs with the product and services
they require, in return for consideration. The most important part of a marketing strategy is
the marketing mix, which covers all the steps a firm can take to increase the demand for its
product. It includes product, price, place, promotion, people, process and physical evidence.

2) Financial Strategy: All the areas of financial management, i.e. planning, acquiring, utilizing
and controlling the financial resources of the company are covered under a financial
strategy. This includes raising capital, creating budgets, sources and application of funds,
investments to be made, assets to be acquired, working capital management, dividend
payment, calculating the net worth of the business and so forth.

3) Human Resource Strategy: Human resource strategy covers how an organization works for
the development of employees and provides them with the opportunities and working
conditions so that they will contribute to the organization as well. This also means to select
the best employee for performing a particular task or job. It strategizes all the HR activities
like recruitment, development, motivation, retention of employees, and industrial relations.
4) Production Strategy: A firm’s production strategy focuses on the overall manufacturing
system, operational planning and control, logistics and supply chain management. The
primary objective of the production strategy is to enhance the quality, increase the quantity
and reduce the overall cost of production.

5) Research and Development Strategy: The research and development strategy focuses on
innovating and developing new products and improving the old one, so as to implement an
effective strategy and lead the market. Product development, concentric diversification and
market penetration are such business strategies which require the introduction of new
products and significant changes in the old one.