CHAPTER FIVE

STRATEGY FORMULATION, ANALYSIS AND

CHOICE

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 Three Levels of Strategy in Organizations
Corporate-Level Strategy:
What Business are We In?
MIDROC ETHIOPIA

Business-Level Strategy:
How Do We Compete?

ELFORA UNITY KOSPI

Functional-Level Strategy:
How Do We Support the Business-Level
Strategy?

Finance R&D Manufacturing Marketing

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 Corporate Level Strategies

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 • Corporate Strategy
 The choice of direction of the firm as a
whole and the management of its business
or product portfolio and concerns.
• For example MIDROC Ethiopia as a
corporate and MGOLD, KOSPI,
ELFORA, UNITY as business units

05/24/2021 SM 4
05/24/2021 SM 5
 Corporate Strategy
Three key issues facing the corporation as a whole:
1) Directional Strategy
 The firm’s overall orientation toward Growth,
Stability or Retrenchment
2) Portfolio Analysis
 Industries or markets in which the firm competes
through its products and business units
3) Parenting Strategy
 The manner in which management coordinates
activities and transfers resources and cultivates
capabilities among product lines and business units

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 1. CORPORATE DIRECTIONAL STRATEGIES
• Every corporation must decide its
orientation toward growth by asking the
following three questions:
1. Should we expand, cut back, or continue our
operations unchanged?
2. Should we concentrate our activities within our
current industry, or should we diversify into other
industries?
3. If we want to grow and expand nationally and/or
globally, should we do so through internal development
or through external acquisitions, mergers, or
strategic alliances?
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 Corporate Directional Strategies

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 Directional Strategy
• 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

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 A. Growth Strategies
• A corporation can grow Internally by expanding
its operations both globally and domestically, or it
can grow Externally through mergers,
acquisitions, and strategic alliances.
• Merger
 a transaction involving two or more corporations in
which stock is exchanged but in which only one
corporation survives
• Acquisition
 100% purchase of another company
Discuss: the potential benefits of merger/acquisition?
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 Potential Benefits of Merging with or
Acquiring Another Firm
• To provide improved capacity utilization
• To make better use of the existing sales forces
• To reduce managerial staff
• To gain economies of scale
• To smooth out seasonal trends in sales
• To gain access to new suppliers, distributers,
customers, products, and creditors
• To gain new technology
• To reduce tax obligation

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 Growth Strategies
• The two basic growth strategies are
concentration on the current product line(s) in
one industry and diversification into other
product lines in other industries.
• If a company’s current product lines have real
growth potential, concentration of resources on
those product lines makes sense as a strategy
for growth.
• The two basic concentration strategies are
Vertical Growth and Horizontal Growth.

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 Concentration Strategies

 Vertical Growth
▫ achieved by taking over a function previously provided
by a supplier or distributor
▫ Vertical growth results in vertical integration.

• Vertical Integration
▫ the degree to which a firm operates vertically in
multiple locations on an industry’s value chain from
extracting raw materials to manufacturing to retailing

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 Vertical Integration

Backward Integration

Assuming a function previously

Provided by a Supplier

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 Concentration Strategies
 Horizontal Growth
– expansion of operations into other
geographic locations and/or increasing the
range of products and services offered to
current markets
• Horizontal integration
– the degree to which a firm operates in
multiple geographic locations at the same
point on an industry’s value chain

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 International Entry Options for
Horizontal Growth
Exportin Franchisi
Licensing
g ng

Joint Acquisiti Green-Field

Venture ons Development

Productio Turn-Key BOT

n Sharing Operations Concept
05/24/2021 SM 16
 Diversification Strategies
 Concentric (Related) Diversification
 Growth into a related industry when a firm has a
strong competitive position but attractiveness is low
 For example, Coke purchased several beverage
manufacturers to expand beyond the soft drink
industry to the beverage industry. Acquisitions of
Vitamin Water, Honest Tea, Fuze Beverage and Core
Power were concentric diversification moves
 Synergy
 The concept that two businesses will generate more
profits together than they could separately

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 Diversification Strategies
 Conglomerate (Unrelated) Diversification

 diversifying into an industry unrelated to its

current one
• Management realizes that the current industry is
unattractive.
• Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in other
industries.
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 Controversies in Directional Strategies

• Is vertical growth better than horizontal growth? In

what situations do you think each of them are best?
• Is concentration better than diversification?
• Is concentric diversification better than
conglomerate diversification?

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 B. Stability Strategies
A corporation may choose stability over growth by
continuing its current activities without any significant
change in direction.
Some of the popular strategies are:
 Pause/Proceed with Caution Strategy
• An opportunity to rest before continuing a
growth or retrenchment strategy

Example: During a U.S. financial crisis banks were

freezing their lending and awaiting a rescue package
from the federal government.

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 Stability Strategies Cont’d
 No-change Strategy
• Decision to do nothing new—a choice to continue
current operations and policies for the foreseeable
future
• There are no obvious opportunities or threats, nor is there
much in the way of significant strengths or weaknesses
 Profit Strategies
• Decision to do nothing new in a worsening situation
but instead to act as though the company’s
problems are only temporary.
• The profit strategy is typically top management’s passive,
short-term, and often self-serving response to a difficult
situation
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 C. Defensive (Retrenchment) Strategies
Used when the firm has a weak competitive position
in some or all of its product lines from poor
performance. Management may follow one of several
retrenchment strategies, ranging from Turnaround
or becoming a Captive Company to Selling-out,
Bankruptcy, or Liquidation.
• Strategists work with limited resources and face pressure
from shareholders, employees, and the media. It can entail
selling off land and buildings to raise needed cash, pruning
product lines, closing marginal businesses, closing obsolete
factories, automating processes, reducing the number of
employees, and instituting expense control systems.

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 Retrenchment Strategies
Turnaround Strategy
• Emphasizes the improvement of operational efficiency
when the corporation’s problems are pervasive but not
critical.
• The two basic phases of a turnaround strategy are
contraction and consolidation
 Contraction
 Effort to quickly “stop the bleeding” with a general, across-the-board
cutback in size and costs e.g. eliminating jobs, closing plants, divesting
unprofitable business etc.
 Consolidation
 stabilization of the now -leaner corporation by for example
reducing unnecessary overhead and making functional activities cost-
justified.
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 Retrenchment Strategies
 Captive Company Strategy
 company gives up independence in exchange for
security. This strategy is pursued when a firm
sells the majority of its products to one
customer which in turn performs some of the
functions normally done by an independent firm.
 Sell-out Strategy
 Management can still obtain a good price for its
shareholders and the employees can keep their
jobs by selling the company to another firm.
 Divestment
Sale of a division with low growth potential
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 Retrenchment Strategies
 Bankruptcy
• giving up management of the firm to the courts in return for some
settlement of the corporation’s obligations.

 Liquidation
 Management terminates 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
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 2. PORTFOLIO ANALYSIS
 Management views its product lines and business units
as a series of investments from which it expects a
profitable return
 One of the most popular aids to developing corporate
strategy in a multiple-business corporation is portfolio
analysis.
 The BCG (Boston Consulting Group) Growth-Share
Matrix depicted in the Figure below is the simplest
way to portray a corporation’s portfolio of investments.
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 BCG Growth—Share Matrix

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 BCG Matrix
 Question Marks
– Business units found in a highly growing
industry but having low market share.
 Stars
– market leaders that are typically at or
nearing the peak of their product life cycle
and are able to generate enough cash to
maintain their high share of the market and
usually contribute to the company’s profits

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 BCG Matrix
 Cash Cows
 Business units and products that bring in far more
money because of strong relative market share,
but which are found in a slowly growing industry.
 Dogs
 Business units and products with low market share
and do not have the potential to bring in much
cash

05/24/2021 SM 29
 BCG Matrix—Limitations
 Use of highs and lows to form categories is too
simplistic.
 Link between market share and profitability is
questionable.
 Growth rate is only one aspect of industry
attractiveness.
 Product lines or business units are considered only in
relation to one competitor.
 Market share is only one aspect of overall
competitive position.

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 Industry Attractiveness-Competitive Strength
Matrix (GE Matrix)
 The GE Nine-Cell Planning Grid is an adaptation of the
BCG

 The GE attempts to overcome some of the limitations of

BCG

 In the GE-Screen, the two main dimensions are

presented by:
– Industry Attractiveness.
– Business Unit Competitive Strength.
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 GE Industry Attractiveness-Competitive
Strength Matrix
Business Unit Competitive Strength
10.0 Strong 6.7 Average 3.3 Weak 1.0
Industry Attractiveness

High

6.7

Medium

3.3

Low

1.0
High priority for investment Medium priority for investment
Low priority for investment

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 GE Matrix cont’d …
• In GE matrix each of the company’s business units is
rated on multiple sets of strategic factors within
each axis of the grid:
• Factors identified as enhancing Industry
Attractiveness include:
• Sales/market growth
• Size & industry profitability
• Demand cyclicality
• Social, environmental, legal, etc.,
• Competition: Porter’s Five-force model

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 GE Matrix cont’d …

• Factors identified as enhancing business/competitive

strength:
 Market share
 Profit margin
 Customer & market knowledge
 Technological know-how & management caliber
 Brand image
 Cost structure & distinctive competencies etc.

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 Strategic Implication of the GE Matrix
Three basic strategic approaches are
suggested for any business depending on
its location within the grid:
1.Businesses in upper left corner
• Accorded top investment priority
• Strategic prescription – invest to grow & build

2.Businesses in three diagonal cells

• Given medium investment priority
• Invest selectively to maintain position &
manage for earnings
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 Strategic Implication cont’d …

3.Businesses in lower right corner

• Candidates for harvesting or divestiture
• May, on occasion, be candidates for an
overhaul & repositioning strategy

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 Strategic Implication cont’d …
• While the strategic recommendations of both
GE & BCG are similar, the GE-Matrix has three
fundamental improvements & advantages:
1. The terminology associated with the GE grid is
preferable because it is less offensive & more
universally understood – Build, Hold, Harvest,
Withdraw, etc.

05/24/2021 SM 37
 Strategic Implication cont’d …
2. Use of more multiple measures (incorporating
several factors) associated with each
dimensions (market attractiveness & business
strength) of the GE than simply market share &
market growth of BCG – broader assessment

3. The nine-cell format allows finer distinction b/n

portfolio positions than does the four-cell BCG
format
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 Differences Between BCG and GE Matrix
• Differences between the BCG-matrix & GE-screen

 Major difference: what measures are used

along the axes

 Other differences:
• Bubbles represent the company’s sales in a line of
business – in the BCG
• Bubbles reflect the total business size, indicating
the firm’s share of the business – in the GE
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 Overall Summary
• The portfolio approach is useful for examining alternative corporate
level strategies in multi-industry companies

• Portfolio planning offers three potential benefits:

1. It aids in generating good strategies by promoting
competitive & comparative analysis across the company’s
business units.
2. It promotes selective resource allocation trade-offs by
providing a visualization of the corporate-wide strategic issues
3. It helps in the implementation of corporate strategy because
increased focus & objectivity enhance commitment.
• However, portfolio analysis techniques should be
employed by incorporating managerial judgment,
intuition, heuristics, etc

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 3. CORPORATE PARENTING
• Corporate Parenting
 Views a corporation in terms of resources and
capabilities that can be used to build business
unit value as well as generate synergies across
business units
 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 businesses

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 Developing a Corporate Parenting Strategy

• The search for appropriate corporate

strategy involves three analytical steps:
1. Examine each business unit in terms of
its strategic factors
2. Examine each business unit in terms of
areas in which performance can be
improved
3. Analyze how well the parent corporation
fits with the business unit

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 BUSINESS STRATEGIES

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 Business Strategies
• Focuses on improving the competitive position of a
company’s or business unit’s products or services
within the specific industry or market segment that
the company or business unit serves.
• Business strategy can be competitive and/or
cooperative

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 Porter’s Competitive Strategies
Competitive strategy raises the following questions:
 Should we compete on the basis of lower cost (and
thus price), or should we differentiate our
products or services on some basis other than
cost, such as quality or service?
 Should we compete head to head with our major
competitors for the biggest but most sought-after
share of the market, or should we focus on a niche
in which we can satisfy a less sought-after but
also profitable segment of the market?

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 Porter’s Competitive Strategies
 Michael Porter proposes three “generic”
competitive strategies for outperforming other
corporations in a particular industry: lower cost,
differentiation and focus.
 Cost Leadership
 ability of a company or a business unit to design, produce
and market a comparable product more efficiently than
its competitors
 Differentiation
 ability of a company to provide unique and superior value
to the buyer in terms of product quality, special features
or after-sale service
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 Porter’s Competitive Strategies
• Focus
 ability of a company to provide unique and superior value
to a particular buyer group, segment of the market line
or geographic market
• When the lower-cost and differentiation strategies
have a broad mass-market target, they are simply
called cost leadership and differentiation.
• When the lower-cost and differentiation strategies
are focused on a market niche (narrow target),
however, they are called cost focus and
differentiation focus.

05/24/2021 SM 47
 Porter’s Competitive Strategies
 Porter proposed that a firm’s competitive
advantage in an industry is determined by its
competitive scope—that is, the range of the
company’s or business unit’s target market.
 Before using one of the two generic competitive
strategies (lower cost or differentiation), the
firm or unit must choose:
 Range of product varieties it will produce,
 Distribution channels it will employ,
 Types of buyers it will serve,
 Geographic areas in which it will sell, and
 Array of related industries in which it will also compete.
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 Porter’s Competitive Strategies
• Cost Leadership
 lower-cost competitive strategy that aims at
the broad mass market and requires
“aggressive construction of efficient-scale
facilities, vigorous pursuit of cost reductions
from experience, tight cost and overhead
control, avoidance of marginal customer
accounts, and cost minimization”
• Provides a defense against rivals
• Provides a barrier to entry
• Generates increased market share

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 Porter’s Competitive Strategies
• Differentiation
 Involves the creation of a product or
service that is perceived throughout the
industry as unique.
 Can be associated with design, brand
image, technology, features, dealer
network or customer service
 Lowers customers sensitivity to price
 Increases buyer loyalty
 Can generate higher profits
05/24/2021 SM 50
 Porter’s Competitive Strategies
 Cost Focus
 low-cost competitive strategy that focuses
on a particular buyer group or geographic
market and attempts to serve only this niche
to the exclusion of others
 Differentiation Focus
 concentrates on a particular buyer group,
product line segment or geographic market to
serve the needs of a narrow strategic market
more effectively than its competitors

05/24/2021 SM 51
 Risks in Competitive Strategies
• No one competitive strategy is guaranteed
to achieve success.
• For example, a company following a
differentiation strategy must ensure that
the higher price it charges for its higher
quality is not too far above the price of the
competition, otherwise customers will not
see the extra quality as worth the extra
cost.

05/24/2021 SM 52
 Issues in Competitive Strategies
 A company or business unit must achieve one
of the previously mentioned generic
competitive strategies.
 Otherwise, the company or business unit is
stuck in the middle.
 Stuck in the Middle
 When a company has no competitive
advantage and is doomed to below-average
performance.

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 Functional Strategy

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• Functional Strategy
 The approach a functional area takes to
achieve corporate and business unit objectives
and strategies by maximizing resource
productivity
• Marketing Strategy
 Deals with pricing, selling and distributing a
product

05/24/2021 SM 55
 Marketing Strategy
• Market development strategy
 a company or business unit can
1) Capture a larger share of an existing market
for current products through market
saturation and market penetration or

2) Develop new uses and/or markets for current

products.

05/24/2021 SM 56
 Marketing Strategy

• Product development strategy

 a company or unit can (1) develop new
products for existing markets or (2) develop
new products for new markets.

05/24/2021 SM 57
 Marketing Strategy
• Brand Extension
 Using a successful brand name to market other
products
• Push Strategy
 Trade promotions to gain or hold shelf space in
retail outlets
• Pull Strategy
 Advertising to “pull” products through the
distribution channels

05/24/2021 SM 58
 Marketing Strategy

• When pricing a new product, a company or

business unit can follow one of two
strategies.
• Skim Pricing
 Offers the opportunity to “skim the cream” from
the top of the demand curve with a high price while
the product is novel and competitors are few.

05/24/2021 SM 59
 Marketing Strategy

• Penetration Pricing
 Attempts to hasten market development and
offers the pioneer the opportunity to use the
experience curve to gain market share with low
price and then dominate the industry

05/24/2021 SM 60
 Financial Strategy
• Financial Strategy
 Examines the financial implications of corporate- and
business-level strategic options and identifies the
best financial course of action

• The management of dividends and stock price

is an important part of a corporation’s
financial strategy.

05/24/2021 SM 61
 Financial Strategy
• Leveraged Buyout
 A company is acquired in a transaction financed
largely by debt usually obtained from a third
party, such as an insurance company or an
investment banker.

05/24/2021 SM 62
 Research and Development Strategy

• Research and Development Strategy

 Deals with product and process innovation and
improvement
 Deals with the appropriate mix of different types of
R&D and question of how new technology should be
accessed—through internal development, external
acquisition or strategic alliances.

05/24/2021 SM 63
Research and Development Strategy
• The following are R & D choices:
• Technological Leader
 pioneering an innovation
• Technological Follower
 Imitating the products of competitors
• Open Innovation
 firm uses alliances and connections with
corporate, government, academic labs and
consumers to develop new products and
processes
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 Operations Strategy
• Operations Strategy
 Determines how and where a product or service is
to be manufactured, the level of vertical integration
in the production process, the deployment of
physical resources and relationships with suppliers

05/24/2021 SM 65
 Purchasing Strategy
• Purchasing Strategy
 Deals with obtaining raw materials, parts
and supplies needed to perform the
operations function
 The basic purchasing choices are multiple,
sole and parallel sourcing.

05/24/2021 SM 66
 Purchasing Strategy
• Multiple Sourcing
 The purchasing company orders a particular
part from several vendors
• Sole Sourcing
 Relies on only one supplier for a particular part
• Parallel Sourcing
 Two suppliers are the sole suppliers of two
different parts, but they are also backup
suppliers for each other’s parts

05/24/2021 SM 67
 Logistics Strategy
 Logistics Strategy
 Deals with the flow of products into and out of the
manufacturing process

 Three trends related to this strategy are evident:

 Centralization
 Outsourcing
 The use of Internet

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 HRM Strategy
• HRM Strategy
 addresses the issue of whether a company or business
unit should hire a large number of low-skilled employees
who receive low pay, perform repetitive jobs and will
most likely quit after a short time (the fast-food
restaurant strategy) or hire skilled employees who
receive relatively high pay and are cross-trained to
participate in self-managing work teams

05/24/2021 SM 69
 Generic Functional Level Strategies
• Superior efficiency.

• Superior innovativeness.

• Superior quality.
• Superior responsiveness.

Each of the above strategies will be aligned

with different business level strategies and
should be implemented in each functional areas.

05/24/2021 SM 70