STRATEGY FORMULATION

Formulating Strategies; involves determining appropriate course of action

for achieving objectives. It includes such activities as analysis, planning
and selecting strategies that increase the chances that an organizations
objectives will be achieved.
Environmental Analysis; strategy formulation cannot begin until the
managers responsible for shaping strategy understand the context in
which the strategies will unfold. Environmental analysis is the foundation
for designing successful strategies. All this information is useful in strategy
formulation at different levels.
Environmental Analysis Techniques to Determine Corporate Level
Strategies
Critical Question Analysis
SWOT Analysis

STRATEGY FORMULATION

Corporate / Organizational Strategy. A comprehensive plan aimed at helping the

organization to achieve its goals. Ability of an organization to achieve its mission
and objectives includes the determination and evaluation of alternative paths.
Components of Corporate Strategy
Grand Strategies serves as Master Plan to decide the overall direction of the
organization. A grand strategy involves expanding the organization along one
or more directions. These are of four types; stability, growth, defensive &
concentration.
Portfolio Strategy determines the types of organizational activities, the
relationship among SBUs, and will establish how resources will be allocated
among the businesses. An approach to corporate level strategy that involves
analyzing the relationship & position the organization SBUs to create a mix
that support the organizations goal

ENVIRONMENTAL ANALYSIS TECHNIQUES

Critical Question Analysis
Critical question analysis provides a general framework for analyzing organizations
current information & formulating appropriate strategies, by evaluating four areas:

Purpose & Objective of the Organization: Managers must identify where an

organization wants to go, during strategy formulation managers must identify
the inconsistencies between organizational mission, objectives & strategies.
Appropriate strategies reflect the organizations mission and objectives.
Where Organization Presently Going: Managers must identify weather an
organization is achieving its goals or at least making satisfactory progress. The
first question focuses where organization wants to go & this one focuses on
where organization is going.
Critical Environmental Factors Organization is Facing: It addresses internal &
external environments factors and identify the critical strategic concerns, for
example; a poorly trained middle management team (internal environment) &
an increase in competitive pressure (external environment).
Future Actions to Achieve Organizational Objectives: Actual response is
formulation of a strategy for the organization. It goes beyond environmental
analysis and includes the stages of planning and selection.

SWOT Analysis

Definition
A strategic management tool evaluate the firm, which accomplished by identifying
its strengths and weak nesses and identifying its opportunities and threats.
Conducting A SWOT Analysis
Step 1; Identify internal environment by identifying its strengths & weaknesses.
Step 2; Identify external environment by identifying its opportunities & threats
Step 3; Cross match strengths with opportunities, weaknesses with threats,
strengths with threats & weaknesses with opportunities.
Developing Alternate Strategies
SO Strategies: Generate strategies here that use strengths to take advantage
of opportunities
ST Strategies: Generate strategies here that use strengths to avoid threats
WO Strategies: Generate strategies here that take advantage of opportunities
by overcoming weaknesses
WT Strategies: Generate strategies here that minimize weaknesses and avoid
threats

SWOT (TOWS) MATRIX

INTERNAL FACTORS

Strengths (S)
List 5-10 internal strengths

Weaknesses (W)
List 5-10 internal
weaknesses

Opportunities (O)
List 5-10 external
opportunities

SO Strategies
Generate strategies here
that use strengths to take
advantage of opportunities

WO Strategies
Generate strategies here
that take advantage of
opportunities by
overcoming weaknesses

Threats (T)
List 5-10 external threats

ST Strategies
Generate strategies here
that use strengths to avoid
threats

WT Strategies
Generate strategies here
that minimize weaknesses
and avoid threats

EXTERNAL FACTORS

Case Study; Maytag Corporation

Maytag Corporation is a British Firm involved in manufacturing of home appliances
and was well placed in US niche market, lately it had acquired Hoover (known
cleaner brand) with an international orientation and with worldwide distribution
channels. Firm in the decade of 1980s was facing a tough global competition and
was challenged by Japanese (numerous home appliances companies), American
(Hoover, Raytheon) and other European firms (Electrolux, Whirlpool) as their global
positioning was threatening. Maytag senior management, although very experienced
was not happy with the companys position as its global positioning was week, facing
an intensive competition from contemporary companies. Moreover, its financial
position was not healthy as certain portfolios were sustaining regular losses specially
the Dixie-Narco Division (which was under debt) and there was a dire need to
achieve cost reduction and to reduce break-even point. Although company had its
own factories and production line but could not introduce new products due to nonavailability of processed R & D, on the other hand Japanese companies were
introducing new products. Another imbalance was unorganized distribution and
company failed to make its products visible in super stores an emerging trend.
However, the opportunity existed to make a turnaround due to global emerging
markets in Asia and Eastern Europe which was opening up gradually and presented
a huge market. The cutting edge of Maytag was its quality which could have made its
mark in USA as well as in Europe where demographics favored quality.
REQUIRMENT
Develop a proper SWOT Analysis.

Strengths

Opportunities

Quality is Maytag culture

Experienced top management
Vertical integration, as company
owns dedicated factories
Good employee relations
Hoovers international
orientation

Economic integration of
European Community
Demographics of Europe and
America favor quality appliance
Economic development of Asia
Opening of Eastern Europe
Trend to Super Stores

Weaknesses

Threats

Not process-oriented R&D

Distribution channels are weak
Finance position weak
Global positioning not favorable

Increasing government
regulations
Strong US competition
Whirlpool and Electrolux strong
Globally
New product advances
Japanese appliance companies

GENERATING A SWOT (TOWS) MATRIX FOR MAYTAG CORPORATION

INTERNAL FACTORS
EXTERNAL FACTORS

Strengths (S)
Quality Maytag culture
Experienced top management
Vertical integration
Employee relations
Hoovers international
orientation

Weaknesses (W)
Process oriented R&D
Distribution channels
Financial position
Global positioning
Manufacturing facilities

Opportunities (O)
SO Strategies
Economic integration of
Use worldwide Hoover
European Community
distribution channels to sell
Demographics favor quality
both Hoover and Maytag
Economic development of Asia
major appliances.
Opening of Eastern Europe
Find joint venture partners in
Trend toward super stores
Eastern Europe and Asia

WO Strategies
Expand Hoovers presence in
continental Europe by
improving Hoover quality and
reducing manufacturing and
distribution costs.
Emphasize superstore channel
for all non-Maytag brands.

Threats (T)
Increasing government
regulation
Strong US competition
Whirlpool and Electrolux
positioned for global economy
New product advance
Japanese appliance companies

WT Strategies
Sell off Dixie-Narco Division to
reduce debt.
Emphasize cost reduction to
reduce break-even point.
Sell out to Raytheon or a
Japanese firm

ST Strategies
Acquire Raytheons appliance
business to increase US market
share
Merge with a Japanese major
home appliance company
Sell off all non-Maytag brands
and strongly defend Maytags
US share .

FORMULATING ORGANIZATIONAL STRATEGIES

LEVEL OF STRATEGIES
Corporate Level Strategies
The corporations overall plan concerning the number of businesses the
corporation holds, the variety of industries it serves, and distribution of
resources among those businesses.

Business Level Strategies

This strategy involves decisions about how the firm will compete in each
business area and industry.

Functional Level Strategies

The level of strategy that determines how activities in each of the
organizations functional areas will support business level strategy.

Corporate Level Strategies

Corporate Level Strategies

The corporations overall plan concerning the number of businesses the
corporation holds, the variety of industries it serves, and distribution of resources
among those businesses.
Corporate Level Decisions
Grand Strategies serves as Master Plan to decide the overall direction of the
organization.
Decide about the portfolio strategy that will determine the organizational
activities.
Strategy Facilitate
Guides overall direction.
Define the Businesses in which company competes
Determine the resource allocation

CORPORATE LEVEL STRATEGIES

Stability Strategy; Focuses on existing line or line of business & attempt

to maintain them. This strategy is useful in following situations;
An organization in no growth or low growth industry.
An organization that is of large size & dominates its markets.
Once further growth is costly, with detrimental effects on profitability.

Growth Strategy; A growth strategy that involves the acquisition of

organizations in existing line of business (competitors), as well as in other
industries or other line of businesses with a view to seek growth in sales,
profit and market share. Organization pursue growth by means of
Integrative and Diversification strategies.
Defensive Strategy; A grand strategy that involves reducing organizations
operations retrenchment & joint venture are the two defensive strategies.
Concentration Strategy; An organization focuses on single line of business.
This strategy is used by firms seeking to gain competitive advantage
through specialized knowledge & avoid managing too many businesses.

Growth Strategies

Integrative Strategies
Vertical Integration; involves growth by acquiring supplier (backward
integration) or distributor (forward integration).
Horizontal Integration; involves growth by acquiring competing firms.
Intensive Strategies
Market Development; developing new market segments for current products.
Market Penetration; increasing sales of current products to current markets.
Product Development; offering new products to current market segments.
Diversification; a growth strategy by offering new products to new markets.
Diversification: A growth strategy that involves the acquisition of organizations in
other industries or other line of businesses.
Concentric Diversification; once acquired firm has similar marketing,
products, distribution channel and markets similar to those of purchaser firm.
Conglomerate Diversification; when acquired firm is in a completely different
line of business.

Defensive Strategies

Retrenchment Strategies
Turnaround Strategy; strategy is employed when organization is performing
poorly but has not reached a critical stage. Entails getting rid of non-profitable
products, pruning workforce, reducing distribution outlets & selling assets.
Divestment Strategies: Involve in selling a particular business to improve its
financial position.
Harvest; a retrenchment strategy that involves minimizing investment and
maximizing short term profits while planning to sell or liquidate in long
term.
Liquidation Strategy; Business terminated assets sold off.
Bankrupted; organization seeks court protection to gain time and
opportunity to attempt a turnaround.
Mergers & Joint Ventures
Joint Venture; It occurs when two or more companies form a temporary
partnership for the purpose of capitalizing some opportunity.
Merger; A merger occurs when 2 or more organizations form an enterprise.
Once acquisition of merger in not desired by both parties, it is called a
takeover or hostile takeover.

BUSINESS LEVEL STRATEGIES

Porters Generic Competitive Strategies

The level of strategy that determines how a company will compete in each of
its business units. Business level strategy is concerned with the way each
business approaches its market place.
Porters Generic Competitive business level strategies that organization can
adopt to achieve competitive advantage within their industries. These
strategies are considered generic because they can be applied in variety of
situations. Each require particular skills, resources and organizational
characteristics.
Three broad business level strategies are;
Cost leadership strategy. A generic competitive strategy that keeps cost
as low as possible to attract a broad market and to yield high profits.
Differentiation Strategy. A generic competitive strategy in which an
organization crafts a product that customers perceive to be distinctly
different from the competition.
Focus Strategy. In this strategy on organization concentrates on a limited
part of the market a limited product line or a confined geographic area.

COST LEADRERSHIP STRATEGY; Keep cost as low as

possible to attract broad market and yield profit.
EFFECTIVENESS

REQUIREMENTS

RISKS

Buyers are sensitive to

To keep the price low high
price and always prefer low efficiency and low
price products.
overhead is mandatory.

War price is waged

resulting in less
profitability.

Normally buyers cant

differentiate between
brand and value.

Firm to undertake cost

control.

Competitors can imitate

strategy.

Underpriced competitors
can gain market share.

Reward link to cost

containment.

Firm must use technology

to achieve low production
cost.

DIFFERENTATION STRATEGY; Customer perceive

product to be distinctively different
EFFECTIVENESS

REQUIREMENTS

Develop product by
carefully checking the
preferences and buyers
need.

Competitors should not

copy the uniqueness
quickly and cheaply.

Higher price can be

charged.

Production of a unique
product requires close
coordination between R &
D and Marketing Functions.

Can also be achieved

through superior service,
warranty & after sales
service.

RISKS

Uniqueness can at times be

quickly and cheaply
imitated.

FOCUS STRATEGY; Concentrate on limited part of market,

product or geographic area.
EFFECTIVENESS

REQUIREMENTS

RISKS

Once competitors are not

specialized in that area.

Customers may change

preferences.

Customers have distinctive

preferences

Competitors may copy.

Functional Level Strategies

Operations Strategy. Focuses on plant capacity, plant layout,
manufacturing / production processes. Important aspects are controlling
cost & improving efficiency.
Marketing Strategy. Focuses on developing determining markets for line
of business & developing effective marketing mix.
Financial Strategy. Focuses on forecasting, financial planning, evaluating
financial proposal & controlling financial resources. It contributes to
strategy formulation by assessing potential profits on various strategy
alternatives.
HR Strategy. Concerned with attracting, assessing, motivating & retaining
numbers & type of employees required to run business.
R&D Strategy. This strategy involves concept generation, planning &
development which are expensive and risky.

Analyzing Business Portfolio

Business Portfolio; The collection of businesses & products that make-up of a

company.
Portfolio Strategy; An approach to corporate level strategy that involves analyzing
the relationship & positions of an organization SBUs to create a mix that will best
support achievement of organizational goals.
Business Portfolio Planning
Company must analyze current businesses & decide which business should
receive more attention
Develop future portfolios by developing strategies for growth & downsizing.
Purpose of Business Portfolio Model; are the tools for analyzing;
The relative position of each organizational business in the industry.
The relationships among all organizational business.
Approaches For Developing Portfolios
BCG Growth Share Matrix
GEs Multifactor Portfolio Matrix

Businesses in Growth- Share Market

CELL

POSITION

CHARACTERISTIC /
REQUIREMENT

STRATEGY

QUESTION
MARK

New business in a
high growth, to
compete with
contemporaries.

Infusion of lot of funds &

this cell consume lot of
resources.

Management has to
decide about future.
Build Market Share /
Divest

STAR

A market leader in Organization has to spend Keeping up with market

high growth market money, thus cash using not growth rate & combat
cash generating
with competitors.
Build Market Share

CASH COW

Annual growth rate Cash is produced due to

is less than 10%
economy of scale & higher
profit & utilized to support
other businesses.

Hold Market Share

DOGS

Business with weak Generate low profits &

market share & low consume more
market growth.
management time than
worth.

Divest, or at times
management has a reason
to hold on dogs.

Business Portfolio Model/Evaluation of Growth-Share Matrix

Merits of Growth-Share Matrix ; Its main contributions are; It encourages managers to view the formulation of organizational strategies in
terms of joint relationships among businesses and to take a long-range view.
The growth-share matrix acknowledges that businesses in different stages
have different cash requirements and make different contributions to
achieving organizational objectives.
The growth-share matrix is also a simple approach that provides an appealing
visual overview of an organizations business portfolio.
De-merits of Growth-Share Matrix; Variety of problems arises using this approach;
it should be used cautiously in strategy formulation. Salient problems are: The growth-share matrix focuses on balancing cash flows, whereas
organizations are more interested in the ROI that various businesses yield.
It is not always clear what share of what market is relevant in the analysis.
Many other factors besides market share and growth rate are critical in
strategy formulation.
The growth-share matrix does not provide direct assistance in comparing
different businesses in terms of investment opportunities.

MARKET ATTRACTIVENESS & BUSINESS STRENGTH FACTORS

FACTORS
Industry
Attractiveness

Business
Strength

Overall market size

Annual market growth rate
Historical profit margin
Competitive intensity
Technological requirements
Inflationary vulnerability
Energy requirements
Environmental impact
Social / political / legal

Market share
Share growth
Product quality
Brand reputation
Distribution network
Promotional effectiveness
Productive capacity
Productive efficiency
Unit costs
Material supplies
R&D performance
Managerial personnel

RATING
(1-5)

WEIGHT
0.20
0.20
0.15
0.15
0.15
0.05
0.05
0.05
Must
acceptable
0.10
0.15
0.10
0.10
0.05
0.05
0.05
0.05
0.15
0.05
0.10
0.05
1.00

VALUE

4
5
4
2
4
3
2
3

0.80
1.00
0.60
0.30
0.60
0.15
0.10
0.15

4
2
4
5
4
3
3
2
3
5
3
4

0.40
0.30
0.40
0.50
0.20
0.15
0.15
0.10
0.45
0.25
0.30
0.20
3.40

be

RECOMMENDED STRATEGIES

Protect Position

Invest to grow at maximum

digestible rate
Concentrate of effort on
maintaining strength

Build Selectively

Challenge for leadership

Build selectively on strengths
Reinforce vulnerable areas

Selectivity / Manage

Invest heavily in most attractive

segments

Build ability to combat competition

Profitability through productivity

Protect & Refocus

Build Selectively

Invest To Build

Protect existing program

Concentrate
investments
in
segments where profitability is
good and risks are relatively low

Manage for Earnings

Manage for current earnings

Concentrate an attractive segments

Defend strengths

Protect position in most profitable

segments
Upgrade product line

Minimize investment

Specialize around limited strengths

Seek ways to overcome
weaknesses
Withdraw if indications of growth
lacking

Harvest
Look for ways to expand without
high risks otherwise minimize
investment
and
rationalize
operations

Divest
Sell at time that will maximize cash
value
Cut fixed costs and avoid
investment meanwhile

GES Multifactor Portfolio Matrix

Merits; This approach has several advantages over growth-share matrix;

It provides a mechanism for including a host of relevant variables in the
process of formulating strategies.
The two dimensions of industry attractiveness and business strength are
excellent criteria for rating potential business success.
The approach forces managers to be specific about their evaluations of the
impact of particular variables on overall business success.
Demerits; it also suffers with some of the limitations;
It does not solve the problem of determining the appropriate market.
It does not offer anything more than general strategy recommendations.

STRATEGY FORMULATION CONSTRAINTS & SELECTION CRITERIA

Strategy Formulation Constraints

Availability of Financial Resources; even when a particular strategy appears
optimal for an organization, serious consideration must be given to where the
money to finance the strategy is going to come from.
Attitude towards Risk; some firms are willing to accept minimal level of risk,
regardless the level of potential return. In such cases acceptable strategy be
limited and those expose the firm to little risk.
Organization Capabilities; at times excellent strategies require capabilities
beyond those an organization currently possesses.
Channel Relationship; strategy that call for development of new channel of
distribution or that involves new suppliers requires careful consideration.
Competitive Retaliation; some strategists may have the unintended effect of
dramatically increasing competitors efforts in the marketplace.
Strategy Selection Criteria
They are responsive to external environment
They provide adequate flexibility for the business and organization.
They control firms to organization mission and long term objectives.
They are organizationally feasible.