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UNIT II STRATEGY FORMULATION AND ANALYSIS
CORPORATE LEVEL STRATEGIC ALTERNATIVES
Strategy Formulation Strategy formulation is referred as strategic planning or long range planning. Strategy formulation is concerned with developing a corporate’s mission, objectives, strategy and policy. Process involves scanning external and internal environmental factors, analysis of the strategic factors and generation, evaluation and selection of the best alternative strategy appropriate to the analysis.
weaknesses. opportunities and threats. This analysis will help the company to position itself to take the advantage of the opportunities provided by the environment and to minimize the threats by the environment.SWOT Analysis § § Management should identify and analyze various factors to identify strengths. Matching environmental information with the knowledge of the organization’s capabilities enables management to formulate efficient and realistic strategies for attaining organizational goals. § .
(ii) the firm can compete in several related businesses or industries. (iii) the firm can compete in several unrelated businesses or industries. § § . § Three types of corporate profiles: (i) the firm can compete in one business or industry .Corporate Profiles SWOT analysis helps management in determining in which business or businesses the company should be operating.
.ETOP Analysis : ( Environmental threat and Opportunity Profile ) : suggested by Glueck. This analysis divides the environment into different sectors and then analyzing their affect of each sector on the organisation.
(+) Licenses for imported raw material (+) Impart of machinery under open available. impact.a. for (+) Export potential is high. (+) Industry growth rate is 8% p. (+) Growing affluence among urban customers. . (+) Mostly ancillaries and associated (+) Largely Unsaturated demand. sports cycles. companies supply parts and (-) Technological up gradation of components. general license is possible. industry progress.Environmental Threat Opportunity Profile Environmental Sectors Impact of each sector Social Political Economic Market Supplier Technological (+)Customer preference for sports cycles which are fashionable . easy to No significant ride and durable.
Strategic Alternatives: KINDS OF GRAND STRATEGIES STABILITY STRATEGIES Maintenance of Status Quo Sustainable Growth GROWTH STRATEGIES RETRENCHMENT SRATEGIES Turn around Captive Company Transformation Divestment Liquidation COMBINATION SRATEGIES Portfolio Restructuring Internal Growth Concentration Strategies Mergers Takeover / Acquisition Horizontal Integration Conglomerate Diversification Vertical Integration Joint Ventures .
Michael Porter: Strategy and Competitive Advantage • Value chain oPorter’s work can be summarized as ‘Strong Domestic Rivalry’ .
Resource Audit : Strategic capability can be better understood through resource audit. human resources. financial resources and intangibles. Resource audit helps to understand the strengths or weaknesses of the resource base. Resource base includes physical resources. .
.Value – Chain Analysis : Value chain analysis deals with utilization of resources. control of resources and linking the resources and strategy.
v. assembling . Service : Pre-sales and post sales service . packaging and delivering. i.Primary activities : i . Outbound logistics: storing and distribution i i i . machining . delivering the product. Inbound Logistics: Material handling . testing. stock control and transportation i i Operations: . sales v administration. Marketing and sales: promotional programmes .
Procurement: activities are related to the entire value chain and supports every activity. HRM activities: employment . development . Infrastructure: v . employee empowerment. i i rewarding. i . training . i i Technology Development: . industrial and human relations.Supporting activities : i . i.
Value Chain and – Internal Analysis Analysis of Cost Efficiency Comparative Analysis Assessing the Balance of Resources .
ability to develop new products. An organization’s strategy should be well-fitted to company’s strengths weaknesses and competitive advantages. Distinctive / Core Competencies Distinctive or core competencies empower a company to build competitive advantage. latest technology utilization. high credit worthiness. lowest production cost. Management has to develop competencies quickly.Competitive Advantage of a Firm Identifying Strengths and Weaknesses Strengths are like assets and weaknesses are like competitive liabilities. ability to provide required service. Core competencies include excellent quality maintenance. These competencies can be the basis for building competitive advantages. .
Entry Barriers Entry Barriers created by environment competitors include: Low cost leadership Differentiation strategy Focus Strategy Government Regulations Appropriate Quality as well as .
Companies which become part of culture of the nation find it difficult to exit.Exit Barriers Exit Barriers created by environment as well as competitors include: Mergers or Joint ventures find it difficult to exit Lack of opportunities in other markets works as an exit barrier. .
Competitive Advantage Sources of competitive advantage: Producing top quality products Rendering superior quality services Offering the best quality service Producing at minimum cost Selecting a more convenient location Superior product design Most committed for Human Resources offering more value for money .
9. 3. 6. 8. 2. Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Combination Strategy . 5. 7. 4.Types of Strategies 1.
Integrated Strategies With this Strategies a company can obtain control over distribution. .
Types of Strategies 1 . Integration Strategies Forward Integration i. Intensive Strategies Diversification Strategies Defensive Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Combination Strategy i . 5. 7. 8. 6. . Backward Integration i ii Horizontal Integration i. 4. 3. 9. 2.
. Backward Integration and Horizontal Integration are collectively called as Vertical Integration. Backward Integration integration I Vertical II Horizontal Integration I. Forward Integration I. Forward Integration. Integration Strategies I .1 .
Forward Integration Forward Integration moves an organization close to its customers. This enables an organization to obtain ownership or increased control over its distributors or retailers. (or) Gaining ownership or increased control over distributors or retailers. Example: Coca-Cola franchised bottler. Company purchased its largest
Ø Ø Ø Ø Ø Ø
Forward Integration Distributors are costly, unreliable or are not able to meet the distribution requirements. Organisation is not able to avail the advantage of competition due to limited no. of quality distributors. When an organisation competes in an industry that is growing and is expected to continue to grow markedly. When an organisation has both economic and human resources to handle the new business requirements. When an organisation is earning high profit because of stable production. When an organisation is earning high profit from the current distributors or retailers.
Backward Integration Both manufacturers and retailers purchase needed material from suppliers. Backward integration helps an organisation in obtaining ownership or increased control over its suppliers. Seeking ownership suppliers. or increased control of a firm’s
When an organisation is obtaining the required resources quickly. unreliable or are not able to meet the distribution requirements. of competitors and less no. When an organisation is earning high profit margin from its present suppliers.Ø Ø Ø Ø Ø Ø Backward Integration Distributors are costly. . When an organisation wants to stabilize the cost of its raw materials and the associated price of its products. When an organisation has both economic and human resources to handle the new business requirements. of suppliers. Organisation has a large no.
Horizontal Integration In Horizontal Integration an organization takes over the same type of products at the same level of production or marketing process. . Mergers between direct competitors are more likely to create efficiencies than mergers between unrelated businesses. because there is a greater potential for eliminating duplicate facilities and because the management of the acquiring firm is more like to understand the business. to obtain ownership or increase control over its competitors.
Ø When an organization is getting great competitive advantage because of increased economies of scale. .Horizontal Integration Ø When an organization can obtain monopolistic features in a particular area. Ø When an organisation has both economic and human resources to handle the new business requirements.
9. Intensive Strategies 3. Integration Strategies Market Penetration I. Diversification Strategies Defensive Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Combination Strategy I . 5. Market Development I II Product Development I.Types of Strategies 1. 4. . 6. 7. 8. 2 .
The above 3 strategies are called as Intensive Strategies as they required intensive efforts for the improvement of a firm’s competitive position with existing products. . Market Development I II Product Development I. Market Penetration I.Intensive Strategies I .
of salespersons. Market penetration increases the no.Market Penetration Market Penetration strategy helps in enhancing the market share for current products or services. publicity efforts and the advertising expenditures of an organisation. .
. When the market shares of the competitors have been falling down and the total industry sales have been rising.Ø Ø Ø Ø Ø Market Penetration When current markets are not flooded with a particular product. When a company is earning high profit due to increase in economies of scale. When the relationship between sales and expenditure is high. When the rate of using products by the customers can be enhanced significantly.
Climate is an important factor for market development. .Market Development With this strategy a company can launch its current products or services into new geographic areas.
When operations of an organisation are profit. . inexpensive and of good quality.Ø Ø Ø Ø Ø Ø Market Development When an organization is having new sources of distribution that are reliable. When the basic industry of an organisation is rapidly growing. When an organisation is having enough of economic and human resources required to manage the expanded operations of the company. When the market is not flooded with the product manufactured by a company. When an organisation has surplus production capacity.
.Product Development In product development. a company can improve the product sales by improving its present products or services. Product development involves excessive research and development expenditures.
When an organization has strong research and development capabilities.Ø Ø Ø Ø Ø Product Development When an organization has successful products that are in the maturity stage of the PLC and wants to attract the customers to improved products. . When an organization competes in a highly growing industry. which is rapidly developing. When chief competitors of an organisation bring better quality products in the market at comparable prices. When an organization competes in an industry.
1. 2. Types of Strategies Integration Strategies Intensive Strategies Concentric Diversification I. Defensive Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Combination Strategy I . 7. 5. 8. . 3 . 6. Horizontal Diversification I II Conglomerate Diversification I. Diversification Strategies 4. 9.
Why Diversification ? Fast Organizational Growth Effective Risk Management Maximum utilization of resources To Reduce Weaknesses Technology .
. Conglomerate Diversification V Diverse Business Activities. Concentric Diversification I II Horizontal Diversification I.Diversification Strategies I . I . I.
Example: TV company follows a diversification strategy producing DVD player. Coco-cola followed concentric diversification producing ‘Kinley’ purified water.Concentric Diversification Concentric diversification strategies include producing new products that are useful to the same customer group. of of .
When an organisation has a powerful management team. When the addition of new products significantly increases the sales of the current products.Ø Ø Ø Ø Ø Concentric Diversification When an organisation competes in a no-growth or a slow growth industry. When the products have seasonal sales levels that counterbalance an organization's existing peaks and valleys. When the product of an organisation is in the diminishing stage of the PLC. .
Horizontal Diversification Companies expand by creating other firms in their same line of business. .
To reduce the cost of operations per unit of business through large scale of economies. To promote the products and services more efficiently. To take the advantage of the benefits of synergy. .Horizontal Diversification To increase market share.
Gujarat Finance Company Ltd. § Example: Gujarat Gas Ltd..e. . created another business unit i.Conglomerate Diversification § § When the existing firm creates another business unit that are unrelated to its original business.
§ When an organisation has the capital and managerial talent needed to compete successfully in new industry § When an organisation has the opportunity to purchase an unrelated business that looks like an attractive investment.Conglomerate Diversification § When the basic industry of an organisation is facing a downfall in annual sales and profits. . § When there exists. § When existing markets are saturated by the organization's present products. financial synergy between the acquired and acquiring organisation.
8. Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Combination Strategy 4 . 5.1. 2. 3. 6. 7. Defensive Strategies . 9.
I.Defensive Strategies I Divestiture . Liquidation I .
.Divestiture Divestiture is the selling of a division or a part of an organisation to raise capital for future strategic acquisitions or investments.
§ When a division is a misfit with the rest of an organisation.Divestiture § § When an organisation has followed a retrenchment strategy and it has failed to accomplish necessary improvements. § When a division needs more resources to be competitive than an organisation can provide. § . antitrust action threatens an organisation. § When a large amount of cash is needed quickly and cannot be obtained reasonably from other sources. § When an single division is responsible for poor performance of the organisation. § When govt.
Liquidation Liquidation involves closing down the organisation and selling of its assets. .
Liquidation When an organisation has followed both a retrenchment strategy and a divestiture strategy and neither has been successful. An organisation legally declares bankruptcy first and then liquidates various divisions to raise the needed capital. . When an organization's only alternative is bankruptcy.
7. 3. 8. 9. 2.1. 6. 4. Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Combination Strategy 5 . Joint Venture .
contribution to the total equity capital and establish a new organisation.Joint venture Joint venture is a strategy developed by two or more organizations that mutually participate in a business venture. .
Joint venture organizations of different countries fined it beneficial to enter into joint venture due to following reasons: To reduce the amount of capital outlays to be made by respective parties. . do not favour the entry of foreign companies. since in developing countries govt. To make the entry of MNC’s easier by joint venture. To reduce the production and marketing cost with the help of increased sales due to joint venture.
9. 3. Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Joint Venture Growth/Expansion Strategy Retrenchment Strategy Combination Strategy 6 . Stability Strategy .1. 4. 8. 2. 5. 7.
Stability Strategy Stability strategy focuses on improvement of functional performance and maintenance of same level of success as in the immediate past. .
When an organization's internal resource prevents further growth or change.Stability Strategy When an organisation has achieved its desired objectives and level of performance. When an organisation does not see any threat or opportunity in the environment. When an organization's key person resists introduction of new products and entry in new markets. .
1. 9. 6. 8. Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Joint Venture Stability Strategy Retrenchment Strategy Combination Strategy 7 . 2. Growth / Expansion Strategy . 5. 3. 4.
.Growth / Expansion Strategy Growth strategy aims to achieve higher level of objectives in terms of market share or sales revenue than what the organisation achieved in the immediate past.
§ It helps an organisation to face frequent changes in technology and other external conditions. § It helps an organisation to achieve important performance rewards like size expansion and experience over time. § It helps to get hold of market share of the competitor and encourages the organisation to enter new challenging fields. . § It results in to higher compensation for the executives.Growth / Expansion Strategy § It indicates the effectiveness of the organisation. § It provides strength and motivates the represent employees. therefore attracts efficient management.
Types of Mergers : Horizontal Mergers : combinations of firms engaged in the same business. Growth / Expansion Strategy Internal Growth : Internal growth is achieved through increasing the firm’s production capacity. Takeovers 4.1. Merger Strategies : combination of two or more firms is known as merger. employees and sales. Conglomerate Mergers : combination of firms unrelated to each other in terms of customer groups. such combinations are called mergers. 4. Vertical Mergers : combination of different firms engaged in activities complimentary to each other. alternate technologies and products. customer functions. or Acquisition Strategy : When the firms of . 5. 6. 3. Concentration Strategies : Concentration Strategies efforts of the firm are concentrated on a limited combination of customer groups. 2. When the firms of similar objectives and similar strategies combine into one firm. Concentric Mergers : combination of firms related to each other in terms of customer groups or customer functions or alternative technologies.
1. Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Combination Strategy 8 . 4. 5. 6. 3. 9. 2. 7. Retrenchment Strategy .
. § Retrenchment can entail selling off of the land and buildings to raise needed cash.Retrenchment Strategy § § Retrenchment arises when an organisation regroups through reduction in cost and assets. reverse declination in sales and profits. closing obsolete factories. automating processes. of employees and instituting expense control systems. reducing the no. closing marginal businesses.
poor employee morale. § When an organisation has failed to capitalise external opportunities. . minimise external threats.Retrenchment Strategy § § When an organisation has a clearly distinctive competence. a major internal reorganizations is needed. low profitability. § When an organisation is plagued by inefficiency. § When an organization has suddenly grown so large and therefore. but has failed to meet its objectives and goals consistently over time. § When an organisation is one of the weaker competitors in a given industry.
Insufficiency of resources : To survive and develop reasonable earning position in product-market huge capital investment is required. Redistribution of resources: When higher returns are expected from and investment opportunity.Retrenchment Strategy Reasons for using retrenchment strategy: Poor Performance: An organisation suffers from poor performance when it is earning low profits and income. . Threat to survival: When unanticipated problems threaten the survival of the organisation and the management is under pressure from the shareholders and employees to improve the performance. it may lead to closing down of present business units or activities. To secure better management and improved efficiency: To simplify the present activities of an organisation few operations are cancelled.
Retrenchment Strategy Variants of Retrenchment Strategy: Turnaround Strategy Divestment Strategy Liquidation Strategy .
Divestment Strategy: involves selling off of the business units or product divisions of a business. Liquidation Strategy: involves selling off of the assets or closing down of an organisation. This strategy focuses on halting the present declining trend in performance and improving the long-run efficiency of operations. Turnaround Strategy: This strategy is necessary during the recession conditions of industry. .
Combination Strategy . 8. 5. 7. 6. 2.1. 4. 3. Types of Strategies Integration Strategies Intensive Strategies Diversification Strategies Defensive Strategies Joint Venture Stability Strategy Growth/Expansion Strategy Retrenchment Strategy Portfolio Restructuring 9 .
..Combination Strategy Combination strategy involves deliberate use of different strategies for different units or divisions ate the same time or chronological use of different strategies over the period of time.
It helps large sized organisation to follow different strategies according to the requirements of the various business activities. .Combination Strategy It helps optimise profitability and limit losses of an organisation. It helps multiproduct organizations where products are into different stages of product cycles. It helps multi market organizations to cater needs.
INTEGRATIOVE MODEL OF STRATEGIC ALTERNATIVES Opportunities Ideal Firm: Threats posed Threatened Firm: Firm’s Internal Analysis Concentration StrongVertical Integration Horizontal Integration Limited Growth Concentric Diversification Conglomerate Diversification Transformation Joint Ventures Opportune Firm: Turn around Concentration Captive company Limited Growth Mergers Joint Ventures Divestment Liquidation Troubled Firm: Turnaround Divestment Liquidation Weak Firm’s Environmental Analysis .