 CHAPTER THREE

 STRATEGYFORMULATION: ALTERNATIVES &

CHOICE
 Strategic formulation is the process of using available

knowledge to document the intended direction of a business

and actionable steps to reach its goal.
Porter generic strategies
According to Micheal E. Porter strategies allow organizations
to gain competitive advantage from three different bases. (O-
D-F MODEL)
 Overall cost leadership
 Differentiation, and
 Focus.
 There are two basic types of competitive advantage a firm
can possess
 Low cost or
 Differentiation.

The two basic types of competitive advantage combined with

the scope of activities by which a firm seeks to achieve them,
lead to three internally consistent generic competitive
strategies that can be used by the organization to outperform
competition and defend its position in the industry. These
strategies are:
 Cost Leadership
 Differentiation, and
 Focus and Niche Strategies.
1. Overall cost leadership emphasizes producing
standardized products at a very low per-unit for consumers
who are price – sensitive.
2. Differentiation is a strategy aimed at producing products
and services considered unique industry wide and directed at
consumers who are relatively price-insensitive.
3. Focus means producing products and services that fulfill
the needs of small groups of consumers.
Overall cost leadership yields a firm above – average returns
in its industry despite the presence of strong competitive
forces.
 Growth strategies.
Organizations usually seek growth in sales, profits, market
share, or some other measure as a primary objective. The
different grand strategies in this category are: (CIDMJ)
 Concentration
 Integration
 Diversification
 Mergers and acquisitions
 Joint Ventures
 Concentration.
 The most common grand strategy is concentration on the

current business.
 A concentration strategy is one in which an organization

focuses on a single line of business.

 The firm directs its resources to the profitable growth of a

single product, in a single market, and with a single

technology.
 Some of America’s largest and most successful companies

have traditionally adopted the concentration approach. For

example, Mc Donald’s concentrates on the fast food
industry
 Succeed for so many businesses – including the vast
majority of smaller firms – because of the advantages of
business – level specialization.
 By concentrating on one product, in one market, and with

one technology, a firm can gain competitive advantages

over its more diversified competitors in production skill,
marketing know-how, customer sensitivity, and reputation
in the marketplace.
 The reasons for selecting a concentration grand strategy are

easy to understand. Concentration is typically lowest in

risk and in additional resources required.
Integration.
Integration may take two forms: vertical and horizontal
integration.
A.)Vertical Integration:- Vertical integration strategy
involves growth through acquisition of other organizations in
a channel of distribution. When an organization purchases
other companies that supply it, it engages in backward
integration.
B.)Horizontal Integration This strategy involves growth
through the acquisition of competing firms in the same line of
business. It is adopted in an effort to increase the size, sales,
profits, and potential market share of an organization.
 Diversification.
 This strategy involves growth through the acquisition of

firms in other industries or lines of business as explained

below.
1.Organizations in slow-growth industries may purchase
firms in faster-growing industries to increase their overall
growth rate.
2.Organizations with excess cash often find investment in
another industry (particularly a fast-growing one) a profitable
strategy.
3.The acquiring organization may have management talent,
financial and technical resources, or marketing skills that it
can apply to a weak firm in another industry in the hope of
making it highly profitable.
 Types of Diversification.
1.) Related or concentric diversification
 When the acquired firm has production technology,

products, channels of distribution, and /or markets similar

to those of the firm purchasing it, the strategy is called
concentric diversification.
 A case of related or concentric diversification is the tie-up

of McDonald with Coco-cola.

2.) Unrelated or conglomerate diversification
When the acquired firm is in a completely different line of
business, the strategy is called unrelated or conglomerate
diversification.
 Merge and Acquisition.
In a merger, a company joins with another company to form a
new organization.
A mergers is a voluntary and permanent combination of
business whereby one or more firms integrate their operations
and identities with those of another and henceforth work under
a common name and in the interests of the newly formed
amalgamations.
 Motives for acquisitions :

1. Removal of competitor
2. Reduction of the Co failure through spreading risk
 Joint Venture.
 Two or more firm join together to create a new business

entity that is legally separate and distinct from its parents. It

involves shared ownership.
 In a joint venture, an organization works with another

company on a project too large to handle by itself, such as

some elements of the space program. Similarly,
organizations in different countries may work together to
overcome trade barriers in the international market or to
share resources more efficiently.
 For example, GMF Robotics is a joint venture between

General Motors Corporation and Japan’s Fanuc Ltd. to

produce industrial robots.
 RETRENCHMENT STRATEGIES.
 When an organization’s survival is threatened and it is not

competing effectively, retrenchment strategies are often

needed. The three basic types of retrenchment are
 Turnaround,
 Divestment, and
 Liquidation.
 Turnaround.
 This strategy is used when an organization is performing

poorly but has not yet reached a critical stage.

 It usually involves getting rid of unprofitable products,

pruning the work force, trimming distribution outlets, and

seeking other methods of making the organization more
efficient.
 If the turnaround is successful, the organization may then

focus on growth strategies.

Divestment
 Strategy involves selling the business or setting it up as a

separate corporation.
 Divestment is used when a particular business doesn’t fit

well in the organization or consistently fails to reach the

objectives set for it.
 Divestment can also be used to improve the financial

position of the divesting organization.

Liquidation
 Strategy involves closure of the business, which is no

longer profitable.
 It may be technologically obsolete or out of times with

market trends.
Choices: How do firms choose strategies?
Stability strategy is adopted because
1.It is less risky, involves fewer changes and people feel comfortable
with things as they are
2.The environment faced is relatively stable
3.Expansion may be perceived as being threatening
4.Consolidation is sought through stabilizing after a period of rapid
expansion.
Expansion strategy is adopted because
5.It may become imperative when environment demands increase in
pace of activity
6.Psychologically, strategists may feel more satisfied with the
prospects of growth from expansion: chief executives may take pride
in presiding over organizations perceived to be growth-oriented.
7.Increasing size may lead to more control over the market vis-à-vis
competitors
Retrenchment strategy is adopted because:
9.The management no longer wishes to remain in business
either partly or wholly due to continuous losses and in
viability
10.The environment faced is threatening
11.Stability can be ensured by reallocation of resources from
unprofitable to profitable businesses.
Combination strategy is adopted because:
12.The organization is large and faces a complex environment
13.The organization is composed of different businesses, each
of which lies in a different industry requiring a different
response.
 Depending on the position of each business,
Four basic strategies can be formulated.
 1.Build market share This strategy is appropriate for question marks
that must increase their share in order to become stars. For some
businesses, short-term profits may have to be forgone to gain market
share and future long-term profits.
 2.Hold market share This strategy is appropriate for cash cows with
strong share positions. The cash generated by mature cash cows is critical
for supporting other businesses and financing innovations. However, the
cost of building share for cash cows is likely to be too high to be a
profitable strategy.
 3.Harvest Harvesting involves milking as much short-term cash from a
business as possible, even allowing market share to decline if necessary.
Weak cash cows that do not appear to have a promising future are
candidates for harvesting, as are question marks and dogs.
 4.Divest Divesting involves selling or liquidating a business because the
resources devoted to it can be invested more profitably in other
businesses. This strategy is appropriate for those dogs and question
marks that are not worth investing in to improve their positions.
Thank You