Strategy Formulation

Prof P.P.Sengupta
Strategy Formulation Defined
• Strategy can be defined as a comprehensive plan or a set of actions
designed to achieve specific goals or objectives. It involves making
choices about where to allocate resources and how to deploy them
effectively to attain desired outcomes.
• Strategy is about determining the direction of an organization or an
individual, identifying the necessary steps to reach a desired future
state, and adapting to changes in the environment along the way.
• Strategy Formulation is the process of determining appropriate
courses of action for achieving the goals and objectives of the
organisation.
Formulating Competitive Strategy
• Four factors
• Company’s Strength and weaknesses
• Value of key personnel
• Industry Opportunities and threats
• Societal Expectations
Overview of the Steps Involved

• Environmental Analysis
• Setting Objectives
• Strategic Choice
• Implementation Planning
• Monitoring and Evaluation
Environmental Analysis
• PESTLE Analysis
• Political
• Economic
• Socio-Cultural
• Technological
• Legal
• Environmental
Setting Objectives

• SMART Objectives
• Specific
• Measurable
• Achievable
• Relevant
• Time-Bound
• Long-Term vs. Short-Term Objectives
Strategic Choice

• Various Strategic Options

• Differentiation
• Cost Leadership
• Focus Strategy
Differentiation Strategy
• A differentiation strategy is a marketing strategy that seeks to
distinguish a company's products or services from competitors'
offerings by emphasizing unique features, benefits, or attributes that
are perceived as valuable by customers.
Examples of Differentiation Strategy
1. Apple Inc.:
1. Apple is known for its innovative and premium products that stand out in the market. Its differentiation strategy
focuses on design, user experience, and cutting-edge technology.
2. Examples include the iPhone with its sleek design, intuitive interface, and ecosystem of apps and services; the
MacBook with its premium build quality and seamless integration with other Apple devices; and the Apple Watch
with its health and fitness tracking features.
2. Nike Inc.:
1. Nike differentiates itself in the athletic footwear and apparel industry through product innovation, performance
technology, and strong branding.
2. Examples include Nike's Air Max line of shoes with visible air cushioning technology, its Dri-FIT fabric for moisture-
wicking performance in apparel, and collaborations with athletes and celebrities to create limited edition products.
3. Tesla Inc.:
1. Tesla differentiates itself in the automotive industry by focusing on electric vehicles with cutting-edge technology,
long-range capabilities, and autonomous driving features.
2. Examples include the Tesla Model S with its all-electric drivetrain and over-the-air software updates, the Model X
with its falcon-wing doors and advanced safety features, and the Model 3 with its more affordable price point and
mass-market appeal.
Cost Leadership Strategy
• A cost leadership strategy is a business strategy in which a company
aims to become the lowest-cost producer in its industry or market
segment. By minimizing costs throughout the value chain, a company
can offer its products or services at lower prices than competitors
while still maintaining acceptable levels of quality.
Examples of Cost Leadership Strategy
• Walmart is a global retail giant known for its cost leadership strategy,
offering a wide range of products at consistently low prices.
• McDonald's is a global fast-food chain known for its cost leadership
strategy, offering affordable and convenient food options.
• Southwest Airlines is a low-cost carrier that has built its business model
around cost leadership in the airline industry.
• Amazon is a global e-commerce and technology company that has
embraced a cost leadership strategy in various segments of its business.
• Dell is a multinational technology company known for its cost
leadership strategy in the personal computer market.
Focus Strategy
• Focus Strategy also known as a niche strategy, is a business strategy
that targets a specific market segment or niche with specialized
products or services. Companies that employ a focus strategy
concentrate their efforts on serving the needs of a particular group of
customers more effectively than competitors who target a broader
market. Here are some examples of companies that have successfully
implemented focus strategies
Examples of Focus Strategy
• Rolls-Royce Motor Cars is a luxury automobile manufacturer known
for its focus strategy in the high-end luxury car market. Rolls-Royce
targets ultra-high-net-worth individuals who seek exclusivity, prestige,
and bespoke customization in their automobiles.
• Harley-Davidson, Inc. is an iconic motorcycle manufacturer with
focus on heavyweight brand, heritage, craftsmanship, and lifestyle.
• Whole Foods Market is a specialty grocer that has embraced a focus
strategy in the organic and natural foods market.It targets health-
conscious consumers who seek high-quality, ethically sourced, and
environmentally sustainable food products.
Societal expectations
• Societal expectations in strategy formulation require organizations to go
beyond purely profit-driven objectives and consider their broader social and
environmental responsibilities.
• By integrating societal considerations into their strategies, businesses can
build trust, enhance reputation, and create long-term sustainable value for all
stakeholders.
• Corporate Social Responsibility (CSR)
• Ethical Conduct
• Environmental Sustainability
• Diversity and Inclusion
• Community Engagement
• Transparency and Accountability
Strategy Formulation Questions
• What’s our current strategy
• What is happening in the industry, with our competitors?
• What are our growth, size and profitability goals?
• What products and services will we offer?
• To what customers or users?
• What technology will we employ?
• What capabilities and capacity we require?
• On what basis will we compete?
• Which ones are our core?
Diversification and Integration
• Diversification is expanding number of different businesses a
company is engaged in.
• The extent to which these businesses are related with one another is
also important.
• Expansion of a company's business activities into new markets,
industries, or products that are different from its current operations.
Examples of Diversification
• The Tata Group is one of India's largest conglomerates, known for its diversified
business portfolio across various industries such as automotive, steel, IT services,
consumer goods, and hospitality.
• Reliance Industries Limited (RIL) is India's largest private sector conglomerate, with
interests in petrochemicals, refining, oil and gas exploration, retail, and
telecommunications.
• ITC Limited is a diversified conglomerate in India with businesses spanning FMCG
(Fast-Moving Consumer Goods), hotels, agribusiness, paperboards, and packaging.
• The Aditya Birla Group is another prominent conglomerate in India with businesses
in sectors such as metals, cement, textiles, financial services, and telecommunications.
• Mahindra Group is a diversified conglomerate in India with businesses in automotive,
aerospace, agribusiness, finance, IT services, and hospitality.
Why Diversify?
• When objectives are not met by expansion within existing product-
market.
• Greater profit opportunities elsewhere.
• Avoid dependence on one product line
• Avoid danger of over specialization
• Spread the risk
Vertical and horizontal diversification
• Vertical and horizontal diversification are two distinct strategies that
companies use to expand their business operations. Here's a breakdown of
the key differences between the two:
1.Definition:
1. Vertical Diversification: Vertical diversification involves expanding into different
stages of the production or distribution process related to a company's current
operations. This can include either backward integration (moving towards raw
materials or sources of supply) or forward integration (moving towards end
customers or distribution channels).
2. Horizontal Diversification: Horizontal diversification involves expanding into
new industries or markets that are unrelated to a company's existing operations.
This strategy typically involves entering completely different industries or sectors.
Vertical Diversification
• Vertical Diversification: Vertical diversification involves expanding into different stages
of the production or distribution process related to a company's current operations. This
can include either backward or forward integration along the value chain. The goal of
vertical diversification is to increase control over the supply chain, reduce dependency on
external suppliers or distributors, and capture more value within the industry.
• Example:
• Reliance Industries Limited (RIL): RIL, an Indian conglomerate, is a notable example
of vertical diversification. Initially, RIL was primarily focused on petrochemicals and
refining. However, over the years, RIL diversified vertically by expanding into other
stages of the energy value chain. It ventured into exploration and production (E&P) of oil
and gas through its subsidiary Reliance Industries Limited (RIL). This backward
integration allowed RIL to secure access to key inputs (crude oil) and gain more control
over its supply chain.
Horizontal Diversification
• Horizontal Diversification: Horizontal diversification involves expanding into new industries
or markets that are unrelated to a company's existing operations. Unlike vertical diversification,
which focuses on related businesses along the value chain, horizontal diversification involves
entering completely different industries or sectors. The goal of horizontal diversification is to
spread risk, leverage existing capabilities, and capitalize on new growth opportunities outside
the company's core business.
• Example:
• Aditya Birla Group: The Aditya Birla Group, a multinational conglomerate based in India, has
pursued horizontal diversification by expanding into various unrelated industries. While the
group's core businesses include sectors such as metals, cement, textiles, and financial services, it
has also diversified horizontally into telecommunications, retail, and e-commerce. For example,
Aditya Birla Retail Limited operates supermarket chains under the brand "More," while Aditya
Birla Fashion and Retail Limited owns popular clothing brands like Pantaloons and Allen Solly.
These diversifications allow the group to explore new markets and revenue streams beyond its
traditional sectors.
Forward Diversification
• Forward Diversification: Forward diversification occurs when a company expands its
business activities into stages of the production or distribution process that are closer
to the end consumer. This often involves moving "forward" in the value chain towards
the final customer. Forward diversification allows companies to capture a larger share
of the value created in the supply chain and gain more control over the distribution of
their products or services.
• Example
• Hindustan Unilever Limited (HUL): HUL is a leading consumer goods company in
India with a diverse portfolio of products, including personal care, home care, foods,
and refreshments. In the early 2000s, HUL diversified forward by entering the retail
sector with the launch of its retail chain called "Health & Glow." Health & Glow stores
offer a wide range of HUL's products, providing the company with a direct channel to
reach consumers and capture a larger portion of the value chain.
Backward Diversification
• Backward Diversification: Backward diversification occurs when a company expands its
business activities into stages of the production or distribution process that are closer to the
source of supply or raw materials. This often involves moving "backward" in the value
chain towards the beginning of the production process. Backward diversification allows
companies to gain more control over their supply chain, reduce dependency on suppliers,
and secure access to critical inputs or resources.
• Example:
• Tata Steel Limited: Tata Steel is one of India's largest steel producers and part of the Tata
Group conglomerate. In 2007, Tata Steel diversified backward by acquiring Corus Group, a
leading European steel producer. This acquisition provided Tata Steel with access to high-
quality raw materials, advanced manufacturing technologies, and a global distribution
network. By integrating vertically backward into upstream steel production, Tata Steel
strengthened its position in the steel industry and enhanced its competitiveness in the
global market.
Concentric Diversification

• A concentric diversification strategy lets a firm to add similar

products to an already established business. For example,
when a computer company producing personal computers
using towers starts to produce laptops, it uses concentric
strategies. The technical knowledge for new venture comes
from its current field of skilled employees.
• Concentric diversification strategies are rampant in the food
production industry. For example, a ketchup manufacturer starts
producing salsa, using its current production facilities.
Conglomerate Diversification

• In conglomerate diversification strategies, companies will look

to enter a previously untapped market. This is often done using
mergers and acquisitions.

• For example, a company into automotive repair parts may enter

the toy production industry. Each company allows for a broader
base of customers. There is an opportunity of income when one
industry's sales falter.
Vertical Integration
• Increase scope of operation within the same industry
• Forward – later stage of production process
• Backward- Earlier stage of production process
• Reliance started with textiles. Backward integretaion to manufacture PFY and
PSF.
• Apple manufactures chipsets for phones
• Apple opening its retail stores popularly known as Apple Stores
• Mcdonald own manufacturing plants to procure the raw materials which are
used for the preparation of its eatables.
• Also, the company raises its own agricultural products to maintain the quality
and ensure the same products are being offered to its customers
Horizontal Integration
• Horizontal integration is the acquisition of a business
operating at the same level of the value chain in the same
industry.
• Examples are Volkswagen’s 2012 acquisition of Porsche
(automobiles), Facebook's 2012 acquisition of Instagram
(social media), Disney's 2006 acquisition of Pixar
(entertainment media) and Mittal Steel’s 2006 acquisition of
Arcelor (steel).
Mergers and Acquisitions
• Mergers and acquisitions (M&A) is a general term used to describe
the consolidation of companies or assets through various types of
financial transactions, including mergers, acquisitions,
consolidations, tender offers, purchase of assets, and management
acquisitions.
• In an acquisition, one company purchases the other outright.
• A merger is the combination of two firms, which subsequently form
a new legal entity under the banner of one corporate name.
Types of Merger and Acquisitions
• Horizontal merger: Two companies that are in direct competition and share the
same product lines and markets.
• Vertical merger: A customer and company or a supplier and company. Think of
an ice cream maker merging with a cone supplier.
• Congeneric mergers: Two businesses that serve the same consumer base in
different ways, such as a TV manufacturer and a cable company.
• Market-extension merger: Two companies that sell the same products in
different markets.
• Product-extension merger: Two companies selling different but related
products in the same market.
• Conglomeration: Two companies that have no common business areas.
Turnaround
• When a company that has experienced a period of poor
performance moves into a period of a financial recovery, it's called a
turnaround. A turnaround may also refer to the recovery of a nation
or region's economy after a period of recession or stagnation.
Similarly, it can refer to the recovery of an individual whose personal
financial situation improves after some time.