UNIT -2

STRATEGY FORMULATION

Concept of Stretch, Leverage and Fit

Stretch: Definition & Meaning

Stretch is exactly opposite to the idea of fit and deals with positioning the firm by matching its
organizational resources to its environment.

Simple meaning of Stretch is a misfit between resources and aspirations. In simple words we
can say, this is a gap between available resources and aspirations or expectations.

Leverage: Definition & Meaning

Leverage can be defined as the process or act of concentrating, accumulating, complimenting,

conserving, and recovering resources in such a manner that meagre (less or insufficient in
amount) resource base is stretched to meet the aspirations that an organization dares to have.

Strategic Fit: Definition & Meaning

The strategic fit is central to the strategy school of the positioning where techniques like SWOT
analysis can be used to analyze and assess the organizational capabilities and environmental
opportunities.

Stretch Leverage And Fit In Strategic Management

The Concept of Stretch, Leverage and Fit in Strategic Management was added by Hamel and
Prahalad to the strategic intent.

Subsequent to the idea of strategic intent, Hamel and Prahalad added the concept of ‘stretch’ and
‘leverage’.

So ultimate goal is strategic intent.

To achieve Strategic Intent, we need to Stretch.

1. Understanding stretch: Now we need to understand the gap between aspirations and
available resource (i.e. stretch).

2. Leveraging: In this, instead of focusing on scarcity we should focus on optimization of

resources through innovation. This is called resourcefulness.
PS: You can read the definition of leverage again to understand this clearly.

3. Strategic Fit: Here we can use techniques like SWOT analysis to assess and manage
organisational capabilities and environmental opportunities.

Under fit, the strategic intent would be seen to be more realistic, under stretch and leverage it
could be idealistic.

Example: Tata Steel’s Strategic Intent where we can consider Vision, Mission, Objectives etc.
 BALANCED SCORECARD

A balanced scorecard is a strategic planning and performance management concept developed by

Dr. Robert Kaplan and Dr. David Norton, published in a Harvard Business Review article titled
“The Balanced Scorecard—Measures That Drive Performance”. What differentiates the
balanced scorecard concept is the inclusion of non-financial operational data in addition to the
customary financial metrics. In introducing their balanced scorecard concept, Kaplan and Norton
sought to identify measures that give managers a “fast but comprehensive” view of the business.
As they put it: “The balanced scorecard includes financial measures that tell the results of actions
already taken. And it complements the financial measures with operational measures on
customer satisfaction, internal processes, and the organization’s innovation and improvement
activities—operational measures that are the drivers of future financial performance.” The
authors suggest thinking of the balanced scorecard as the dials and indicators in an airplane
cockpit, noting that in business, as in flying, reliance on only one instrument can be fatal.

Bain & Company, a global consulting firm, ranks the balanced scorecard fifth of the top 10
management tools used around the world. The Gartner Group has found that more than 50
percent of large US firms use a balanced scorecard (BSC). Moreover, many large firms all over
the world use the balanced scorecard in business operations.

Balanced Scorecard Components

The balanced scorecard analyzes a business from four perspectives—customer, internal business
processes, innovation and learning and financial. To develop these perspectives, management
asks four key questions:

1. Customer Perspective: How do customers see us?

2. Internal Business Perspective: What must we excel at?
3. Innovation and Learning Perspective: [How] can we continue to improve and create
value?
4. Financial Perspective: How do we look to shareholders?
To implement a balanced scorecard, organizations articulate goals for each perspective and
translate them into specific measures. Note, however, that this is not done in the abstract.
Adoption of a balanced scorecard approach to strategic and performance management starts with
an analysis of an organization’s current internal and external environments. This analysis is
conducted with reference to the organization’s mission, vision and values and other strategic
planning elements. Thus, a BSC is the plan at the executional level that supports achievement of
an organization’s mission. Let’s drill down into the four perspectives.

Customer Perspective

In order to remain viable businesses, organizations need to deliver value to their customers.
Indeed, a recent Knowledge@Wharton article noted that “customer experience is now Job #1 for
CEOs.” To elaborate: “Job No. 1 for CEOs today is ensuring the company delivers a compelling
customer experience.”

To develop the customer perspective component of a BSC, managers must translate their general
statement of commitment—i.e., Ford’s Quality is Job 1—into specific measures that reflect what
matters to their customers. According to Kaplan and Norton “customers’ concerns tend to fall
into four categories: time, quality, performance and service, and cost.” Measures of time might
be the elapsed time between placing and delivery of an order. For new products, time might be
the number of weeks or months it takes to go from concept to market availability. Measures of
quality include the number of defects as judged by the customer.

To develop this view, Kaplan and Norton recommend a combination of internal and external
research. For example, a company would have the data required to measure a goal of reducing
delivery time. However, to evaluate competitive standing or market perception of quality or
performance requires a company to survey customers. It’s worth noting that customers often
define factors such as “on time delivery” differently. Compiling the data for major customers
will allow the organization to make a determination on what the target should be.

Internal Business Perspective

As stated above, the prompt to identify a company’s internal business goals is “what must we
excel at?” That is, what does the company need to do in order to meet customer and stakeholder
(financial) expectations? This view focuses on internal processes, human resource capabilities
and productivity and product and service quality. In detailing this component, Kaplan and
Norton advise managers to identify and leverage the company’s core competencies and to focus
on processes and competencies that differentiate the company from its competitors.

Examples of internal business measures include product, service or functional efficiency or

expertise. Think Nordstrom’s for service, Apple for design capabilities and Proctor & Gamble’s
marketing and distribution expertise.

To achieve internal business measures, managers must ensure that the goals are clearly
communicated and understood by the employees who are responsible for the processes, projects
or initiatives. The importance of communication—of employees internalizing and focusing on
specific goals—is the point that the CEO’s Dr. Kaplan spoke to emphasize in the video above.
Effective operational information systems—collecting and reporting relevant data—are critical
to be able to identify and trouble-shoot variances from target in this view. The best case scenario
is for scorecard information to be reported in a timely manner (based on organizational
dynamics) and for the measure to be linked to relevant manager and employee evaluations.

Innovation and Learning Perspective

The Customer and Internal Processes perspectives discussed above identify what an organization
needs to accomplish from a competitive standpoint based on the current situation. However, the
larger operating environment is dynamic and businesses need to continuously adapt or risk
obsolescence.

The innovation and learning perspective (also referred to as learning and growth or
organizational capacity) is the future view, seeking to answer the question “How can we
continue to improve and create value?” According to Kaplan and Norton, “A company’s ability
to innovate, improve, and learn ties directly to the company’s value. That is, only through the
ability to launch new products, create more value for customers, and improve operating
efficiencies continually can a company penetrate new markets and increase revenues and
margins—in short, grow and thereby increase shareholder value.”

Measures for this category include the percent of sales from new products (innovation) and
continuous improvement of internal business processes. An example of the latter is industrial
manufacturing company Milliken & Co.’s “ten-four” continuous improvement program, a
challenge to reduce quality issues—process issues, product defects, late deliveries and
waste—by a factor of ten over the next four years.

Financial Perspective

The financial perspective is the classic numbers—some would say the “bottom line” view.
Ultimately, this view shows whether the company’s strategy and execution are successful.
Typical financial goals include profit, operating costs, target market revenue and sales growth.
Kaplan and Norton cite a company that stated its financial goals in terms we can all understand:
to survive, measured by cash flow, to succeed, measured by quarterly sales growth, and to
prosper, measured by an increase in market share and return on equity. The authors note that
although there is significant criticism of financial measures due to their focus on past
performance and inability to account for value-creating initiatives, “the hard truth is that if
improved performance fails to be reflected in the bottom line, executives should reexamine the
basic assumptions of their strategy and mission.”

To quote: “An excellent set of balanced scorecard measures does not guarantee a winning
strategy. The balanced scorecard can only translate a company’s strategy into specific
measurable objectives. A failure to convert improved operational performance, as measured in
the scorecard, into improved financial performance should send executives back to their drawing
boards to rethink the company’s strategy or its implementation.”
 STRATEGIC FACTORS ANALYSIS SUMMARY (SFAS) MATRIX

SFAS framework analysis, developed by Wheelen & Hunger, on each of Europe's Top 5
Aerospace & Defense companies based on an analysis of each company's strategic positioning
and its degree of responsiveness to its internal & external environment respectively. The
objective of the analysis is to assess how favorably each company is positioned and how
responsive it is to the nature, degree & pace of changes taking place within its internal and
external environment respectively. The framework generates an insightful snapshot of the
prevailing, holistic strategic equation for each company by identifying, weighing, prioritizing &
ranking significant strategic factors present in the internal & external environment through an
Internal Factor Analysis Summary (IFAS) matrix & External Factor Analysis Summary (EFAS)
matrix respectively.

These strategic factors are then ranked based on the strategic significance & potential degree of
impact along-with each respective company's corresponding degree of responsiveness to these
factors. The final Strategic Factor Analysis Summary (SFAS) matrix amalgamates the IFAS &
EFAS matrices into a single matrix followed by a reevaluation & second level ranking &
responsiveness rating which leads to the generation of an overall score, thus, providing a holistic,
overarching strategic view on each market player. SFAS Matrix summarizes an organization’s
strategic factors. SFAS is the combination of the external factors from External Factor Analysis
Summary (EFAS) and internal factors from Internal Factor Analysis Summary (IFAS). SFAS
overcomes all the prior mentioned criticism of SWOT analysis.

1. Table of Internal Factor Analysis Summary (IFAS) with Example

2. Table of External Factor Analysis Summary (EFAS) with Example
Strategic Factors Analysis Summary (SFAS) Matrix
 Analysing Companies Resource in Competitive Position
SWOT Analysis
What Is SWOT Analysis?
SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to
evaluate a company's competitive position and to develop strategic planning. SWOT analysis
assesses internal and external factors, as well as current and future potential.

A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the

strengths and weaknesses of an organization, initiatives, or within its industry. The organization
needs to keep the analysis accurate by avoiding pre-conceived beliefs or gray areas and instead
focusing on real-life contexts. Companies should use it as a guide and not necessarily as a
prescription.

How to Do a SWOT Analysis

SWOT analysis is a technique for assessing the performance, competition, risk, and potential of
a business, as well as part of a business such as a product line or division, an industry, or other
entity.

Using internal and external data, the technique can guide businesses toward strategies more
likely to be successful, and away from those in which they have been, or are likely to be, less
successful. Independent SWOT analysts, investors, or competitors can also guide them on
whether a company, product line, or industry might be strong or weak and why.

Strengths

Strengths describe what an organization excels at and what separates it from the competition: a
strong brand, loyal customer base, a strong balance sheet, unique technology, and so on. For
example, a hedge fund may have developed a proprietary trading strategy that returns market-
beating results. It must then decide how to use those results to attract new investors.

Weaknesses

Weaknesses stop an organization from performing at its optimum level. They are areas where
the business needs to improve to remain competitive: a weak brand, higher-than-average
turnover, high levels of debt, an inadequate supply chain, or lack of capital.

Opportunities

Opportunities refer to favorable external factors that could give an organization a competitive
advantage. For example, if a country cuts tariffs, a car manufacturer can export its cars into a
new market, increasing sales and market share.

Threats
Threats refer to factors that have the potential to harm an organization. For example, a drought
is a threat to a wheat-producing company, as it may destroy or reduce the crop yield. Other
common threats include things like rising costs for materials, increasing competition, tight labor
supply and so on.

How to Use a SWOT Analysis

Internal

What occurs within the company serves as a great source of information for the strengths and
weaknesses categories of the SWOT analysis. Examples of internal factors include financial and
human resources, tangible and intangible (brand name) assets, and operational efficiencies.

Potential questions to list internal factors are:

 (Strength) What are we doing well?

 (Strength) What is our strongest asset?
 (Weakness) What are our detractors?
 (Weakness) What are our lowest-performing product lines?

External

What happens outside of the company is equally as important to the success of a company as
internal factors. External influences, such as monetary policies, market changes, and access to
suppliers, are categories to pull from to create a list of opportunities and weaknesses.1 
Potential questions to list external factors are:

 (Opportunity) What trends are evident in the marketplace?

 (Opportunity) What demographics are we not targeting?
 (Threat) How many competitors exist, and what is their market share?
 (Threat) Are there new regulations that potentially could harm our operations or
products?

TOWS Matrix
TOWS matrix can be defined as a framework to create, compare, decide and access business
strategies. It stands for Threats, Opportunities, Weaknesses and Strengths. It examines a business
from an approach that references marketing and administration. Most people wrongly assume
that the difference between SWOT and TOWS matrix is just a rearrangement of the letters of the
two acronyms. Although not huge, the difference between SWOT and TOWS from a practical
standpoint comes down to the fact that SWOT emphasizes the internal environment (strengths
and weaknesses) while a TOWS matrix analysis focuses on the external environment
(opportunities and threats).

It starts by analysing external opportunities and threats. Up next are the internal strengths and
weaknesses, which will subsequently be linked to the external analysis. And this is where it goes
a step beyond the traditional SWOT Analysis; strategic tactics emerge by opposing S-
O (Strengths-Opportunities), W-O (Weaknesses-Opportunities), S-T (Strengths-Threats) and W-
T (Weaknesses-Threats).
A next step in the analysis helps when thinking about the option they want to pursue. Here the
external opportunities and threats are compared to the internal strengths and weaknesses to help
identify strategic options:

1. Internal Strengths and External Opportunities (S-O) – how can they use the strengths to
benefit from existing external opportunities?
2. Internal Strengths and External Threats (S-T) – how can they benefit from their strengths to
avoid or lessen (potential) external threats?
3. Internal Weaknesses and External Opportunities (W-O) – how can they use opportunities to
overcome the organisation’s internal weaknesses?
4. Internal Weaknesses and External Threats (W-T) – how can they minimise weaknesses and
thus avoid potential threats?
 Grand Strategies
CORPORATE LEVEL STRATEGIES/ MULTI-BUSINESS STRATEGIES

Corporate level strategy addresses the entire strategic scope of the firm. It is a “big picture”
view of the organisation and includes deciding in which, product or service markets to compete
and in which, geographic regions to operate. For a multi-business firm, the resource allocation
process-how cash, staffing, equipment and other resources are distributed – is established at the
corporate level.
Corporate strategy is about strategic decisions about determining overall scope and direction of
a corporation and the way in which its various business units work together to attain particular
goals. Corporate-level strategy is an action taken to gain a competitive advantage through the
selection and management of combination of businesses competing in several industries or
product markets. Corporate strategies are normally expected to help the firm earn above-
average profits and create value for the shareholders. Corporate strategy addresses the issues of
a multi-business firm as a whole.

Types of corporate-level strategy

When you're constructing your company's corporate-level strategy, you're seeking the best ways
to evenly distribute resources to serve the needs of the company to complete planned objectives.
It can also help you come up with a contingency plan, you remain prepared to work under
unforeseen circumstances.
Let's review the different types of corporate-level strategies that you can employ:

 Stability strategy: The stability strategy is when you proceed in working with clients in
your industry. This strategy also assumes that your company is doing well under this
current business model. Since the pathway to growth is uncertain, you should employ a
stability strategy to ensure incremental progress that still brings in revenue, which includes
practices such as research and development and product innovation. An example can be
offering free trials of your existing products to your target audience to increase its
engagement.
 Expansion strategy: The expansion strategy is great for you if your company is planning
on creating new products and reaching new audiences. It can also be used if you're
upgrading the level of activity within your business like taking on new clients and hiring
more employees. You can apply this strategy if the region you're operating in has a strong
economy or if your focus is to enhance your performance. Overall, this strategy has large
earnings potential for executives, which can lead to raises and expansion to employee
benefits packages as well.
 Retrenchment strategy: A retrenchment strategy requires you to strongly consider
switching your business model. This may involve stopping the manufacturing of a product
or reducing its functionality. You may need to allocate more energy to accounts receivable
to ensure you're still getting payments of services you provided to maintain your
organization's cash flow. This strategy is only used when the company is looking to take
protective measures in keeping the solvency of the business. You should compile
 a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis to see which
marketing you can successfully operate in.
 Combination strategy: A combination strategy is a hybrid of the previous three strategies
to create your business model. Its main purpose is to increase the company's performance
and find out which areas of your company can grow and retract based on market
conditions. This approach makes it easier for you to make adjustments to your strategy
because you can be more flexible with your time and how much should be allocated to
each function of your strategy.

When you're considering the corporate-level strategies you should undertake, keep these
characteristic examples in mind:

 Diversification
 Forward or backward integration
 Horizontal integration
 Profit
 Turnaround
 Divestment
 Market penetration
 Liquidation
 Concentration
 Investigation
 No change

Diversification

Diversification is when you notice that you need to change the market you're operating in.
Moving into new markets allows you to create new business opportunities with clients. It can
give you the chance to build a long-lasting relationship linked to the execution and satisfaction of
the products and services you render. If you have enough capital, you can try rebranding on
shifting your services to a new target audience eager to try a new product.

Forward or backward integration

Forward integration is when you take the position of a company that served a previous role in
your supply chain. Your business becoming a distributor changes the scope of your operations
and you'll need to move resources to help move and store products for companies in your area.
Backward integration means that you start in the supply chain business and you move to be a
supplier of goods and services. You may have to produce more products to adapt to the change in
your business.

Horizontal integration

Horizontal integration happens when a business merges with another in the same vertical. If you
merge with another company, you'll need to make sure you have the operational capacity to
handle the merger and work with new employees eager to learn your process and how they differ
from the company you acquired.

Profit

This strategy is only dedicated to having more capital to spend once you take out your expenses.
You may need to reduce costs or expenses, selling investments like stocks and bonds, increase
the price of services you sell to your customer based and cutting back on non-essential services.

Turnaround

Turnaround refers to increasing the effectiveness of existing products, so you can sell more of
them. This may require you to boost your testing processes and raise your quality assurance
standards to generate more profit.

Divestment

Divestment is a retrenchment strategy that is aimed to resolve problems and enhance your
business results. You start by selling high-performing stock and paying off debts to raise money
and report favorable financial information to internal and external stakeholders.

Liquidation

Liquidation is the final option you can take if you own a company. You'll make this move after
you exhausted all options to increase the profits of your business. This results in the selling of
your company to another entity and the conclusion of production for all product lines.

Concentration

Concentration is an expansion strategy approach that adds more market shares to the industry
you're operating in. It's viewed as a high-reward strategy because of the market demand for the
industry you're getting involved in.

Investigation

The investigation is the process of testing expansion and retrenchment strategies. You'll know
which strategy to move forward with after you decide to prioritize your performance or
readjusting the scope of your business.

No change

Lastly, no change is often correlated with your stability strategy. It's important to highlight where
you need to upgrade your product to ensure usage and brand loyalty from consumers.
Types of Corporate Level Strategy – Stability Strategies, Expansion Strategies,
Retrenchment Strategies and Combination Strategies

Type # 1. Stability Strategies:

Stability strategies mean efforts of a company directed at incremental improvement of functional

performance. This strategy is more appropriate for a firm operating in a stable environment.
Generally, small and medium-sized firms that are content with their present performance follow
stability strategies.

Hunger and Wheelen visualize three types of stability strategies:

1. Pause/Proceed with caution strategy

2. No change strategy

3. Profit strategy

A pause/proceed with caution strategy is, in effect, a timeout—an opportunity rest before
continuing a growth or retrenchment strategy. Firms that wish to test the ground before
launching a complete generic strategy, follow this approach.

This approach is necessary where an intervening period of consolidation is thought essential

before embarking on major expansion spree. The objective is to ensure that the strategic changes
flow down the organizational levels, necessary structural changes take place and the
organizational systems adapt to new strategies.

Thus pause/proceed with caution strategy is also a short-run deliberate and conscious effort to
postpone major strategic changes to a more appropriate time. Bata India and Liberty Shoes in the
Indian shoe market follow this strategy.

A no change strategy is a decision to do nothing new-a choice to continue current operations and
policies for the foreseeable future. Rarely articulated as a definite strategy, a no change strategy’s
success depends on a lack of significant change in a corporation’s situation.

The relative stability created by the firm’s modest competitive position in an industry facing little
or no growth encourages the company to continue on its current course, making only small
adjustments for inflation in its sales and profit objectives.

There are no obvious opportunities or threats nor much in the way of significant strengths or
weaknesses. Few aggressive new competitors are likely to enter such an industry. The
corporation has probably found a reasonable profitable and stable niche for its products.

Unless the industry is undergoing consolidation, the relative comfort a company in this situation
experiences is likely to encourage the company to follow a no change strategy in which the
future is expected to continue as an extension of the present. Most small-town businesses
probably follow this strategy before Wal-Mart moves into their areas.

The business environment is not as stable as may be presumed by a firm. A firm may not
continue with no-change strategy but has to do something. When a firm finds its profitability
drifting, the stability strategy can be designed to increase profits through such approach as
improving efficiency in current operations with such measures as to reduce investment, cut costs,
increase productivity and raise price to overcome temporary difficulties. This may be a short run
approach to lie low and sustain profitability by currently available means.

Type # 2. Expansion Strategies:

Expansion strategies are the most popular corporate strategies. Almost all organizations plan to
expand.

A company can adopt expansion strategy in the following five ways:

1. Concentration

2. Integration

3. Diversification

4. Cooperation

5. Internationalization

1. Concentration:
Concentration involves converging resources in one or more of a firm’s businesses in terms of
products, markets or functions in such a manner that it results in expansion. Concentration
strategies are variously known as intensification, focus or specialization.

Peters and Waterman advocated a parameter to successful firm that they called as “stick to the
knitting”. Concentration strategies, in other words, are the ‘stick to the knitting’ strategies.
Excellent firms tend to rely on doing what they know they are best at doing.

Concentration strategies involve investment of resources in a product line for an identified

market with the help of proven technology.

This may be done following through the below strategies:

(i) Market penetration

(ii) Market development

(iii) Product development

(i) Market Penetration:

Market penetration as a deliberate strategy involves gaining market share through improving
quality or productivity, and increasing marketing activity. This is true for the long-term
desirability of obtaining a dominant market share. However, the nature of the market and the
position of competitors determine the ease with which a business can pursue a strategy of market
penetration.

In a growing market, it may be comparatively easy for companies with a small share, or new
competitors, to gain market share because the absolute level of sales of the established
companies may still be increasing; and in some cases, those companies may be unable or
unwilling to meet the new demand.

In static markets, market penetration can be much more difficult to achieve. In mature markets
the market penetration is still more difficult due to the advantageous cost structure of market
leader that prevent the sudden entry of competitors with lower market share. However, the
complacency of market leaders may allow smaller- share competitors to gain share or may build
a reputation in a market segment of little interest to the market leader, from which it penetrates
the wider market.

Sometimes market penetration, particularly of mature markets, can be achieved through

collaboration with others. In declining markets, the market penetration is possible to the extent
other firms exit from the market. If they do, it may be relatively easy for a company to increase
its share of that market.

(ii) Market Development:

Market development refers to the attempts of an organization to maintain the security of its
present products while venturing into new market areas. It includes- (a) entering new market
segments, (b) exploiting new uses for the product and (c) spreading into new geographical areas.

In capital-intensive industries a company with specific assets may have its distinctive
competence with the product and not the market, and hence the continued exploitation of the
product by market development would be a preferred strategy. Most capital goods companies
have developed this way by opening up more overseas markets as old markets have become
saturated.

Exporting is a method of market development. However, there are several reasons why
organizations might want to develop beyond exporting and internationalize by locating some of
their manufacturing, distribution or marketing operations overseas.

(iii) Product Development:

Product development is the creation of new or improved products to replace existing ones. The
company maintains the security of its present markets while changing products or developing
new ones.

The wet shaving industry is an example that depends on product development to create
successive waves of consumer demand. For instance, in 1989 Gillette came out with its new
Sensor shaving system that significantly increased its market share. In turn, Wilkinson Sword
responded with its version of the product.

2. Integration:
Integration refers to combining activities related to the present activities of a firm, on the basis of
the value chain. Recall that a value chain is a set of interrelated activities an organization
performs right from the procurement of basic raw materials to the marketing of finished products
to the ultimate consumers.

Integration as an expansion strategy results in a widening of the scope of the business definition
of a firm.

3. Diversification:
Diversification is a much-used and talked about strategy. Diversification means identifying
directions of development that take the organization away from both its current products and
markets at the same time.

In reality, it is not a single strategy but a set of strategies that involve all the dimensions of
strategic alternatives such as internal or external, related or unrelated, horizontal or vertical and
active or passive diversification.

4. Cooperative Expansion:
Corporate strategies could consider the possibility of competition co-existing with cooperation.
The term ‘co-opetition’ explains the idea of simultaneous competition with cooperation among
rival firms for mutual benefit.

The strategic alternatives based on cooperation among firms could take the following
forms:
1. Mergers

2. Takeover or Acquisitions

3. Joint Ventures

4. Strategic Alliances

5. Internationalization:
International strategies are a kind of expansion strategies that need firms to market their products
or services beyond the domestic market. For this purpose, a firm would have to assess the
international environment, evaluate its own capabilities, and devise strategies to enter foreign
markets.

Some firms, when they face slower growth rates at home or a restricted domestic market, open
up new markets in other countries. This has been a major reason for Japanese expansion. Before
exploring the international markets further, firms must identify and consider a critical mass of
GNP, population growth, competitor activity in the market, ability to produce domestically or in
the foreign market.

Sometimes firms can introduce new products sooner in a foreign market than at home. For
instance, U.S.-based pharmaceutical firms do so.

Sometimes firms may find that producing in that location can be more beneficial than exporting
to a given country. For example, a host government may restrict imports to the country if there is
a given level of ‘domestic-content’ production in existence.

Such protective policies serve as a trade barrier, accordingly, companies tend to establish
manufacturing and marketing facilities in each major country in which they do business.
However, some countries provide incentives to locate production facilities there.

For the same reason, supplier will often locate new facilities in countries where their customers
are located. Japanese car companies established manufacturing plants in US

Supply of raw materials or technology may also be a reason for choosing to locate production
facilities in another country. For example Canadian firms have invested in developing nations
where new deposits of important ores or other resources have been found.

It should be noted that movement toward international markets is frequently incremental. Most
firms begin by exporting that involves relatively low investment and risk. Then a firm may
engage in a joint marketing venture with a foreign local who will act as its agent. Once a foreign
presence is obtained, the firm may decide to expand its activities. Expansion at this stage may
take place in the development of specialized products, new investments in local manufacturing
facilities or direct investment in the foreign market.

Type # 3. Retrenchment Strategies:

The retrenchment generic strategy is adopted when an organization intends substantially to

reduce the scope of its activity. For this purpose, the problem areas are identified and the causes
of the problems are diagnosed. Then, steps are taken to solve the problems that result in different
types of retrenchment strategies.

Various external and internal developments threaten the prospects of industries and markets. In
declining industries companies face such risks as falling demand, emergence of more attractive
substitutes, adverse govt., policies, and customer needs and preferences are undergoing changes.
In addition to external developments, there are company specific developments such as poor
management, poor quality of functional management and wrong strategies that cause company
failures.

In such circumstances the industries, markets and companies encounter the danger of decline.
Several products such as black & white TV, VCRs, jute and jute products, calculators and
wooden toys have either disappeared or are facing decline, and the companies in these industries
and markets were forced to eliminate operations or shut down.
The decline manifests in several symptoms reflected in the performance indicators of companies
such as diminishing profitability, dwindling cash flow, reducing sales, shrinking market share
and increasing debt.

A vigilant management can establish an effective monitoring and control system to timely
receive the signal of impending danger and check the malaise. In this situation recovery becomes
a possible strategic option.

Slatter has postulated four types of recovery situations:

1. Realistically non-recoverable situation with little chance of survival as the company is not
competitive, the potential for improvement is low, there is a cost disadvantage, and the demand
for basic products or services is in a terminal decline.

2. Temporary recovery situation where there could be initially successful retrenchment but no
sustained turnaround. This could happen when the repositioning of the product is possible, now
forms of competitive advantages can be found, or cost reduction and revenue generation are
possible.

3. Sustained survival situation where a turnaround is achievable but little potential for future
growth exists. The industry may be in a process of slow decline. A company facing such a
situation could either divest or go in for a turnaround, if it foresees a comfortable niche in the
industry where it perceives chances of being the industry leader.

4. Sustained recovery situation where a genuine and successful turnaround is possible owing to
new product development and/or market repositioning and if the industry is still attractive
enough. Possibly the decline was caused more by internal factors than external conditions.

A retrenchment strategy can take any of the following forms:

1. Turnaround strategy

2. Divestment or divestiture strategy

3. Liquidation strategy

When business is in decline but is worth saving, the organization adopts a turnaround strategy.
While adopting a divestiture strategy, an organization cuts off the loss-making units, divisions, or
SBUs, curtails its product line, or reduces the functions performed. If none of these remedies
work, then it may opt to eliminate the activity totally, resulting in liquidation strategy.

Type # 4. Combination Strategies:

An introduction to combination strategies is made, Combination strategies are a mix of

expansion, stability or retrenchment strategies applied either at the same time in different
businesses or at different times in the same business. No organization has grown and survived by
following a single strategy.
The complex nature of businesses requires that different strategies be adopted to suit the
situation. For instance, as companies divest businesses, they also need to formulate expansion
plans focused on strengthening remaining businesses, starting new ones or making acquisitions.

An organization following a stability strategy for quite some time has to consider expansion and
one that has been on expansion path for long has to pause to consolidate its businesses. Multi-
business firms have to adopt multiple strategies either simultaneously or sequentially.
 Porters Diamond Model
Michael Porter’s Diamond Model (also known as the Theory of National Competitive Advantage
of Industries) is a diamond-shaped framework that focuses on explaining why certain industries
within a particular nation are competitive internationally, whereas others might not. And
why is it that certain companies in certain countries are capable of consistent innovation,
whereas others might not? Porter argues that any company’s ability to compete in the
international arena is based mainly on an interrelated set of location advantages that certain
industries in different nations posses, namely: Firm Strategy, Structure and Rivalry; Factor
Conditions; Demand Conditions; and Related and Supporting Industries. If these conditions
are favorable, it forces domestic companies to continiously innovate and upgrade. The
competitiveness that will result from this, is helpful and even necessary when going
internationally and battling the world’s largest competitors. This article will explain the four
main components and include two components that are often included in this model: the role of
the Government and Chance. Together they form the national environment in which companies
are born and learn how to compete.

Firm Strategy, Structure and Rivalry

The national context in which companies operate largely determines how companies are created,
organized and managed: it affects their strategy and how they structure
themselves. Moreover, domestic rivalry is instrumental to international competitiveness,
since it forces companies to develop unique and sustainable strenghts and capabilities. The
more intense domestic rivalry is, the more companies are being pushed to innovate and improve
in order to maintain their competitive advantage. In the end, this will only help companies when
entering the international arena. A good example for this is the Japanese automobile industry
with intense rivalry between players such as Nissan, Honda, Toyota, Suzuki, Mitsubishi and
Subaru. Because of their own fierce domestic competition, they have become able to more easily
compete in foreign markets as well.
Factor Conditions
Factor conditions in a certain country refer to the natural, capital and human resources available.
Some countries are for example very rich in natural resources such as oil for example (Saudi
Arabia). This explains why Saudi Arabia is one of the largest exporters of oil worldwide. With
human resources, we mean created factor conditions such as a skilled labor force, good
infrastructure and a scientific knowlegde base. Porter argues that especially these ‘created’ factor
conditions are important opposed to ‘natural’ factor conditions that are already present. It is
important that these created factor conditions are continiously upgraded through the
development of skills and the creation of new knowledge. Competitive advantage results from
the presence of world-class institutions that first create specialized factors and then
continually work to upgrade them. Nations thus succeed in industries where they are
particularly good at factor creation.
Demand Conditions
The home demand largely affects how favorable industries within a certain nation are. A larger
market means more challenges, but also creates opportunities to grow and become better as a
company. The presence of sophisticated demand conditions from local customers also
pushes companies to grow, innovate and improve quality. Striving to satisfy a demanding
domestic market propels companies to scale new heights and possibly gain early insights into the
future needs of customers across borders. Nations thus gain competitive advantage in industries
where the local customers give companies a clearer or earlier picture of emerging buyer needs,
and where demanding customers pressure companies to innovate faster and achieve more
sustainable competitive advantages than their foreign rivals.
Related and Supporting Industries
The presence of related and supporting industries provides the foundation on which the focal
industry can excel. As we have seen with the Value Net, companies are often dependent on
alliances and partnerships with other companies in order to create additional value for customers
and become more competitive. Especially suppliers are crucial to enhancing innovation
through more efficient and higher-quality inputs, timely feedback and short lines of
communication. A nation’s companies benefit most when these suppliers themselves are, in
fact, global competitors. It can often take years (or even decades) of hard work and investments
to create strong related and supporting industries that assist domestic companies to become
globally competitive. However, once these factors are in place, the entire region or nation can
often benefit from its presence. We can for example see this in Silicon Valley, where all kinds of
tech-giants and tech-start-ups are clustered in order to share ideas and stimulate innovation.
Government
The role of the government in Porter’s Diamond Model is described as both ‘a catalyst and
challenger‘. Porter doesn’t believe in a free market where the government leaves everything in
the economy up to ‘the invisible hand’. However, Porter doesn’t see the government as
an essential helper and supporter of industries either. Governments cannot create competitive
industries; only companies can do that. Rather, governments should encourage and push
companies to raise their aspirations and move to even higher levels of competitiveness. This
can be done by stimulating early demand for advanced products (demand factors); focusing on
specialized factor creations such as infrastructure, the education system and the health sector
(factor conditions); promoting domestic rivalry by enforcing anti-trust laws; and encouraging
change. The government can thus assist the development of the four aforementioned factors in
the way that should benefit the industries in a certain country.
Chance
Even though Porter originally didn’t write anything about chance or luck in his papers, the role
of chance is often included in the Diamond Model as the likelihood that external events such as
war and natural disasters can negatively affect or benefit a country or industry. However, it also
includes random events such as where and when fundamental scientific breakthroughs occur.
These events are beyond the control of the government or individual companies. For instance,
the heightened border security, resulting from the September 11 terrorist attacks on the US
undermined import traffic volumes from Mexico, which has had a large impact on Mexican
exporters. The discontinuities created by chance may lead to advantages for some and
disadvantages for other companies. Some firms may gain competitive positions, while others
may lose. While these factors cannot be changed, they should at least be monitored so you can
make decisions as necessary to adapt to changing market conditions.

Porter’s Generic Strategies

 BUSINESS-LEVEL STRATEGIES

According to the Business-Level Strategies theory, there are two types of competitive advantage
that an organization must choose between:
1. Cost Leadership: ensuring you cost less than your competitors.
2. Differentiation: ensuring you are different from your competitors.
There are also two types of competitive scope than an organization must choose between:
1. Broad market: serving a diverse market.
2. Narrow market: focusing on a niche market.
Plotting all of the above factors on to a matrix gives us five generic business-level strategies.

Note that no one generic strategy is better than another. An organization can be successful using
any strategy. You need to choose the right strategy for your organization. Choosing the right
generic strategy will depend on both what your competitors are doing (the external environment)
and also where your strengths lie (your core competencies).

Business-Level Strategy vs. Corporate-Level Strategy

You can think of Corporate-Level Strategies as happening at a higher level than Business-Level
Strategies.
Business-Level Strategies concern how an organization should compete, whereas Corporate-
Level Strategies concern in what businesses an organization should compete.
Another way to say this is that business-level strategy looks at how to win within a market, and
corporate level strategy looks at what markets you should be in. For example, you might be in
the vitamin niche. Your corporate-level strategies will determine what niches within the vitamin
market you’ll compete in, for example, cod liver oil, muscle growth, etc. Your business-level
strategy will determine how you intend to win in each of these markets.

Strategic Analysis and Choice

Strategic Analysis and Choice – Nature of Strategy Analysis and Choice
Strategy analysis and choice focuses on generating and evaluating alternative strategies, as well
as on selecting strategies to pursue. Strategy analysis and choice seeks to determine alternative
courses of action that could best enable the firm to achieve its mission and objectives.
The firm’s present strategies, objectives, and mission together with the external and internal
audit information, provide a basis for generating and evaluating feasible alternative strategies.
The alternative strategies represent incremental steps that move the firm from its current position
to a desired future state.
Alternative strategies are derived from the firm’s vision, mission, objectives, external audit, and
internal audit and are consistent with past strategies that have worked well. The strategic analysis
discusses the analytical techniques in two stages i.e. techniques applicable at corporate level and
then techniques used for business-level strategies.
The techniques that have been discussed for the corporate level include BCG matrix, GE nine-
cell planning grid, Hofer’s matrix and Shell Directional Policy Matrix and the techniques for
business- level include SWOT analysis, experience curve analysis, grand strategy selection
matrix, grand strategy clusters.
The judgmental factors constitute the other aspect on the basis of which strategic choice is made.
We discuss the several factors that guide the strategists in strategic choice. The selection of
strategies in three ways i.e. selection against objectives, referral to a higher authority and by
partial implementation has been discussed.
Contingency strategies in order to face various situations that may arise in the course of strategy
implementation have been discussed. Finally, we discuss the nature and contents of a strategic
plan document.
Strategic Analysis and Choice – Strategic Analysis at the Corporate Level: Techniques
Strategic analysis at the corporate level treats a corporate body constituting a portfolio of
businesses in a corporate vase. The analysis considers the various issues regarding the several
businesses in the corporate portfolio.
The strategic options are the generic strategies of stability, expansion, retrenchment, and
combination. The corporate level strategic analysis is relevant to a multi-business corporation.
For single business entities, business-level strategic analysis would suffice.
We begin with an explanation of the corporate level analysis techniques that form a major part of
the analysis performed at the corporate level.

Corporate Portfolio Analysis:

During the 1960s and 1970s a number of management consulting companies developed a series
of conceptual techniques aimed to help the top officers of diversified corporations better manage
their portfolio of businesses. A fundamental method of corporate strategic analysis in diversified,
multi-industry companies is the business portfolio analysis approach.
Corporate portfolio analysis can be defined as a group of techniques that assist strategists in
making strategic decisions regarding individual products or businesses in a firm’s portfolio.
Corporate portfolio analysis may be employed for competitive analysis and strategic planning in
multi-business corporations as well as for less diversified firms.
The main benefit of using a portfolio approach in a multi-business corporation lies in allocating
resources at the corporate level to the businesses with highest potential. For instance, a well -
diversified company may consider diverting resources from cash-rich businesses to the
businesses with faster-growth potential to achieve corporate objectives in an optimal way.
A number of techniques considered suitable for corporate portfolio analysis are discussed
below:
Technique # 1. BCG Matrix:
The BCG matrix is a tool that can be used to determine what priorities should be given in the
product portfolio of a business unit. It has 2 dimensions; market share and market growth. The
basic idea behind it is that the bigger the market share a product has or the faster the product’s
market grows the better it is for the company. Placing products in the BCG matrix results in 4
categories in a portfolio of a company.
Boston Consulting Group’s growth/share matrix has become one of the most widely used
approaches that facilitate corporate strategic analysis of likely “generators” and optimum “users”
of corporate resources. Each of the company’s businesses is positioned in the matrix in
accordance with its market growth rate and relative competitive position.
Market growth rate refers to the projected rate of sales growth for the market that a particular
business caters to. It is usually measured as the percentage increase in sales in a market or unit
volume over the two most recent years. Market growth rate indicates relative attractiveness of
the markets each of the businesses serves in a portfolio of businesses.
Relative competitive position means the ratio of a business’s market share divided by the market
share of the largest competitor in that market and provides a basis for comparing the relative
strengths of different businesses in the portfolio.
Stars:
Stars are businesses that have high market share in a high growth environment. They are growing
rapidly and are the best long-run opportunities in terms of growth and profitability in the firm’s
portfolio. They are leaders in their business and generate large amount of cash. They require
substantial investment to maintain and expand their dominant position in a growing market.
The investment requirement often exceeds the internal cash generation. These businesses,
therefore, are short-tern, priority consumers of corporate resources. Because of their high share,
they are expected to enjoy a lower cost structure than their lower share competitors because of
the experience effects. In brief,
Stars (=high growth, high market share)
i. Use large amounts of cash and are leaders in the business so they should also generate large
amounts of cash.
ii. Frequently roughly in balance on net cash flow. However if needed any attempt should be
made to hold share, because the rewards will be a cash cow if market share is kept.
Cash Cows:
Cash cows are low-growth, high market-share products or divisions. Because of their high
market share, they have low costs and generate cash. Since growth is slow, reinvestment costs
are low. Cash cows provide funds for overhead, dividends, and investment for the rest of the firm
and are in excess of their needs.
Therefore, these businesses serve as a source of corporate resources for deployment elsewhere
(to stars and question marks) and are managed to maintain their strong market share while
efficiently generating excess They are the foundation of the firm, and stability is the appropriate
strategy for them.
Cash Cows (=low growth, high market share)
i. profits and cash generation should be high , and because of the low growth, investments
needed should be low. Keep profits high
ii. Foundation of a company
Dogs:
Such businesses are defined as those in which the growth rate is slow and the relative market
share is low compared to the leading competitors. Because of their low market share these
businesses are often expected to have a higher cost structure than industry leaders.
It is difficult and extremely expensive for them to gain share in a mature market. Divestment or
rapid harvesting is the recommended strategies for such weak businesses. Often these low capital
intensity businesses can be fruitful cash generators.
Dogs (=low growth, low market share)
i. Avoid and minimize the number of dogs in a company.
ii. Beware of expensive ‘turn around plans’.
iii. Deliver cash, otherwise liquidate
Question Marks (= high growth, low market share)

a. Have the worst cash characteristics of all, because high demands and low returns due to low
market share.
b. If nothing is done to change the market share, question marks will simply absorb great
amounts of cash and later, as the growth stops, a dog.
c. Either invest heavily or sell off or invest nothing and generate whatever cash it can. Increase
market share or deliver cash.
Question marks are high-growth, low-market-share products or divisions. Their conditions are
the worst, for their cash needs are high, but cash generation is low. Such businesses are seen to
indicate opportunity. They need to gain share by generating additional market share and hence
lower cost via experience gains, while the growth rate in the industry is high.
The primary objective of such businesses should be to gain share rather than maximize short-
term profitability. So question marks should be converted into stars, then later into cash cows.
This strategy will lead to a cash drain in the short run but positive flow in the long run. The other
option is divestment.
This technique usually applies to multiple-SBU firms making decisions about the expansion,
maintenance and retrenchment of different SBUs. Its’ goal is to determine the corporate strategy
that best provides a balanced portfolio of business units. Glueck observes, ‘The goal of all this is
to have a balanced portfolio of product or divisions’.
BCG matrix makes two major contributions to corporate strategic choice:
1. The assignment of a specific role or mission for each business unit.
2. The integration of multiple business units into a total corporate strategy.
Limitations of BCG Matrix:
BCG matrix suffers from a number of limitations:
1. Since it is difficult to define a market clearly, measuring market share and market growth rate
becomes more difficult.
2. Dividing the matrix into four cells based on a high/low classification scheme is too simplistic.
It does not recognize the markets with average growth rates or the businesses with average
market shares.
3. The relationship between market share and profitability varies across industries and market
segments. In some industries a large market share creates major advantages in unit costs; in
others it does not. Some companies, for instance Mercedes Benz and Polaroid, with low market
share can generate superior profitability and cash flow with careful strategies based on
differentiation, innovation or market segmentation.
4. The matrix is not helpful particularly in comparing relative investment opportunities across
different business units in the corporate portfolio. For example, is every star better than a cash
cow? How should one question mark be compared to another in terms of whether it should be
built into a star or divested?
5. Strategic evaluation of a set of businesses requires examination of more than relative market
shares and market growth. The attractiveness of an industry may increase based on
technological, seasonal, competitive, or other considerations as much as on growth rate.
Likewise, the value of a business within a corporate portfolio is often linked to considerations
other than market share.
6. The four colorful classification in the BCG matrix somewhat oversimplify the types of
businesses in a corporate portfolio. Likewise, the simple strategic missions recommended by the
BCG matrix often don’t reflect the diversity of options available.
7. Executives dislike the use of terminology such as dog, question mark cash-cow in BCG
matrix. These terms are seen as negative, stable and unnecessarily graphic.

Technique # 2. Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix:

The TOWS matrix is an important tool that helps managers develop four types of
strategies:
(a) SO Strategies
(b) WO Strategies
(c) ST Strategies
(d) WT Strategies
Matching key external and internal factors is the most tedious part of developing a TOWS
Matrix. It requires good judgment. However, there is no one best set of matches.
(a) SO Strategies:
SO strategies use a firm’s internal strengths to take advantage of external opportunities. All
managers would like their organization to be in a position in which internal strengths can be used
to take advantage of external trends and events. Organizations generally will pursue WO, ST, or
WT strategies in order to get into a situation in which they can apply SO Strategies.
When a firm has major weaknesses, it will strive to overcome them and convert them into
strengths. When an organization confronts major threats, it will attempt to avoid them in order to
focus on opportunities.
(b) WO Strategies:
WO strategies focus at improving internal weaknesses by taking advantage of external
opportunities. Sometimes a firm may have key external opportunities but it may have internal
weaknesses that can prevent it from exploiting them.
For example, there may be a huge demand for electronic devices to control the amount and
timing of fuel injection in automobile engines (opportunity), but a certain auto parts
manufacturer may not possess the technology required for producing these devices (weakness).
The firm may consider one possible WO strategy to acquire this technology by forming a joint
venture with a firm having competency in this area. Another WO strategy may be to hire and
train internal people with the required technical capabilities.
(c) ST Strategies:
ST strategies make use of firm’s strengths to minimize the impact of external threats.
(d) WT Strategies:
WT strategies are defensive tactics directed at reducing internal weakness and avoiding external
threats. An organization faced with numerous external threats and internal weaknesses may
indeed be in a precarious position. In fact, such a firm may have to battle for its survival, merge,
retrench, declare bankruptcy, or choose liquidation.
The TOWS matrix involves eight steps:
1. List the firm’s key external opportunities.
2. List the firm’s key external threats.
3. List the firm’s key internal strengths.
4. List the firm’s key internal weaknesses.
5. Match internal strengths with external opportunities, and record the resultant SO Strategies in
the appropriate cell.
6. Match internal weaknesses with external opportunities, and record the resultant WO
Strategies.
7. Match internal strengths with external threats, and record the resultant ST Strategies.
8. Match internal weaknesses with external threats, and record the resultant WT Strategies.
Technique # 3. GE Nine-Cell Planning Grid:
GE nine cell planning grid, tries to overcome some of the limitations of BCG matrix in two
ways:
1. It uses multiple factors to assess industry attractiveness and business strength in place of the
single measure employed in the BCG matrix.
2. It expanded the matrix from four cells to nine cells. It replaced the high/low axes with
high/medium/low making a finer distinction between business portfolio positions.
The grid then does rating of each of the company’s business units on multiple sets of strategic
factor within each axis of the grid.
In order to assess the industry attractiveness factors such as market growth, size of market,
industry profitability, competition, seasonality and cyclical qualities, economies of scale,
technology, and social/environmental/ legal/human factors are included.
For assessing business strength factors such as market share, profit margin, ability to compete,
customer and market knowledge, competitive position, technology, and management caliber are
identified.
The strategists then calculate “subjectively” a business’s position within the planning grid by
quantifying the two dimensions of the grid.
The strategist first selects industry attractiveness factors to measure industry attractiveness and
then assign each industry attractiveness factor a weight that reflects its perceived importance as
compared to other attractiveness factors. Favorable to unfavorable future conditions for those
factors are forecast and rated based on some scale (0 to 1 scale is illustrative).
Then a weighted composite scope is obtained for a business’s overall industry attractiveness. In
order to assess business, a similar procedure is followed in selecting factors, assigning weights to
them, and then rating the business on these dimensions.
Thus the GE planning grid might prove to be a useful tool for assessing a business within a
corporate portfolio. Usually several managers are involved during the planning process. The
inclusion and exclusion of factors and their rating and weighting are primarily matters of
managerial judgment. This classifies businesses in terms of both the projected strength of the
business and the projected attractiveness of the industry.
The decisions concerning the resource allocation remain quite similar to those in the BCG
approach. Business classified as invest to grow would be treated like the stars in the BCG matrix.
These businesses would be provided resources to pursue growth-oriented strategies.
Businesses classified in the harvest/divest category would be managed like the dogs in the BCG
matrix. Businesses classified, as selectivity/ earnings would either be managed as cash cows or
as question marks.
While the strategic recommendations generated by the GE planning grid are similar to those
from the BCG matrix, the GE nine-cell grid improves on the BCG matrix in three fundamental
ways.
i. The terminology associated with GE grid is preferable because it is less offensive and more
universally understood.
ii. The multiple measures associated with each dimension of the GE grid include more factors
relevant to business strength and market attractiveness than simply market share and market
growth.
iii. The nine-cell format allows finer distinction between portfolio positions than does the four-
cell BCG format.

Technique # 4. Hofer’s Matrix:

Hofer criticizes the BCG matrix because it inadequately represents new businesses in new
industries that are just starting to grow. Hofer offers an extension of BCG analysis that remedies
that inadequacy. Hofer analyzed businesses in terms of their competitive position and stage of
product-market evolution.
Circles represent the size of the industries involved. The pie wedges within the circles represent
the market shares of the firm. Hofer suggests that these be plotted for present and future
businesses.

Strategic choices based upon such a scheme might follow the logic below:
Business A seems to be an emerging star, and thus a target for excess resource allocation-
especially to strengthen its competitive position in light of its strong market share.
i. Business B might follow much the same scenario as business A, but corporate resource
allocation would probably be contingent on determining why B has been unable to obtain a
higher market share, given its strong competitive position, and on the presentation of sound plans
to rectify that deficiency.
ii. Business C and D are question marks, though C is a strong candidate for retrenchment.
iii. Business F and, to a lesser extent, business E represent cash cows within the corporate
portfolio and would be key targets for corporate resource generation.
iv. Business G appears to be an emerging dog, managed to generate short-term cash flow and
targeted for eventual divestiture or liquidation.
Hofer’s approach can be a useful tool to aid the thinking of strategists in multiple- SBU firms
who are considering alternative strategies for their various SBUs. Even within a single SBU with
multiple products and/or markets, the approach can aid the thinking about the desired portfolio.

Technique # 5. Shell Directional Policy Matrix:

The Shell Oil Company developed the Directional Policy Matrix in the nineteen seventies
following the widespread implementation of the Boston Matrix. General Electric and the
McKinsey Company also contributed to the development of this technique, which resulted in
what is now known as the GE-McKinsey, or Directional Policy Matrix.

In the Directional Policy Matrix, the vertical axis is defined as ‘Market Attractiveness’ and the
horizontal axes as ‘Competitive Strength’. The individual factors that comprise market
attractiveness may be referred to as external variables, i.e. factors outside the control of the
company.
The individual factors that comprise ‘Competitive Strength’ may be referred to as internal
variables, i.e. factors within the control of the company. Selecting the factors is not a trivial
matter and should involve collective effort from key managers and senior executives.
As the process is largely unscientific it is important that as many parties are involved as possible.
When done properly the result will be a consensus view that reflects organizational values.
Unlike the Boston Matrix in which one is looking for a balance of business opportunities spread
amongst growth and maturing markets, in the Directional Policy Matrix the concentration of
business opportunities should be focused around the ‘Leader’ domain, i.e. the top left hand area
of the matrix.
Under such circumstances, one is looking at a strong portfolio where the company is focusing on
markets that are attractive and where it is acknowledged as being competitive. Note that metrics
relating to market size and growth may not feature in the ‘Segment Attractiveness’ axis; it is
quite possible for segments labeled as ‘Cash Cows’ (bottom right hand comer in the Boston
Matrix) to appear in this domain.
The closer and opportunity is towards the bottom and the right hand corner of the matrix, the
weaker the company is in relation to market requirements, and the less attractive the market. If
the company finds significant elements of the portfolio in the ‘Divest’ domain it needs to think
quickly about what actions to take, e.g. to what extent should they be ‘milked’ and how quickly
should they be disposed of. Despite its potential, an opportunity labeled as a ‘Question Mark’
product in the Boston Matrix could fall into this domain if it is not strategically aligned with the
holding group.
Areas in between are more problematic. The company will need to make a strategic decision on
whether or not to keep the segment in the portfolio, the amount to invest in it, whether it can ever
hope to achieve market leadership, the extent to which it should generate cash and so on.
Generally speaking the further towards the top and right, the more likely one is to invest, as one
is approaching markets that the company would deem as attractive, despite the fact that the
company is not yet competitive. Conversely those opportunities towards the bottom and left are
in areas that the company would find less attractive, and should be managed diligently for cash.
Leader Domain:
The strategy should be to maintain this position. At certain stages this may imply a need for
resources which cannot be met entirely from funds generated by the product, (e.g. resources to
expand capacity), although earnings should be above average.
Try Harder Domain:
The implication is that the product can be moved towards the leadership box by judicious
application of resource. In these circumstances the company should certainly consider making
available resources in excess of what the product can generate.
Growth Domain:
Investment should be made to allow the product to grow with the market. Generally, the product
will generate sufficient cash to be self-financing and should not be making demands on other
corporate cash resources.
Double or Quit Domain:
Tomorrow’s breadwinners among today’s R and D projects may come from this area. Putting the
strategy simply, those with the best prospects should be selected for full backing and
development; the rest should be abandoned.
Proceed with Care Domain:
In this position, some investments may be justified but major investments should be made with
extreme caution.
Cash Generator Domain:
A typical situation in this matrix area is when the company has a product that is moving towards
the end of its life cycle and is being replaced in the market by other products. No finance should
be allowed for expansion, and so long as it is profitable, the opportunity should be used as a
source of cash for other areas. Every effort should be made to maximize profits since this
particular activity has no long-term future.
Phased Withdrawal Domain:
A product with an average to weak position with unattractive market prospects or a weak
position with average market prospects is unlikely to be earning any significant amounts of cash.
The indicated strategy is to realize the value of the assets on a controlled basis to make the
resources available for redeployment elsewhere.
Divestment Domain:
Products falling in this area will probably be losing money, not necessarily every year, but the
losses in bad years will outweigh the gains in good years. It is unlikely that management will be
surprised by specific activities falling into this area since poor performance should already be
known.

Technique # 6. Strategic Position and Action Evaluation (SPACE) Matrix:

The Strategic Position and Action Evaluation (SPACE) matrix is another important matching
tool. Its four-quadrant framework indicates whether aggressive, conservative, defensive, or
competitive strategies are most appropriate for a given organization.
The axes of the matrix represent two internal dimensions (financial strength (FS)) and
competitive advantage (CA) and two external dimensions (environmental stability (ES)) and
industry strength (IS). These four factors are the most important determinants of an
organization’s overall strategic position.
Depending upon the type of organization, several variables could make up each of the
dimensions represented on the axes of the SPACE matrix.

The PIMS Model

The Profit Impact of Market Strategies (PIMS) is a comprehensive, long-term study of the
performance of strategic business units (SBUs) in thousands of companies in all major industries.
The PIMS project began at General Electric in the mid-1960s. It was continued at Harvard
University in the early 1970s, then was taken over by the Strategic Planning Institute (SPI) in
1975. Since then, SPI researchers and consultants have continued working on the development
and application of PIMS data.

According to the SPI, the PIMS database is "a collection of statistically documented experiences
drawn from thousands of businesses, designed to help understand what kinds of strategies (e.g.
quality, pricing, vertical integration, innovation, advertising) work best in what kinds of business
environments. The data constitute a key resource for such critical management tasks as
evaluating business performance, analyzing new business opportunities, evaluating and reality
testing new strategies, and screening business portfolios."

The main function of PIMS is to highlight the relationship between a business's key strategic
decisions and its results. Analyzed correctly, the data can help managers gain a better
understanding of their business environment, identify critical factors in improving the position of
their company, and develop strategies that will enable them to create a sustainable advantage.
PIMS principles are taught in business schools, and the data are widely used in academic
research. As a result, PIMS has influenced business strategy in companies around the world.

THE PIMS DATABASE

The information comprising the PIMS database is drawn from member companies of SPI. These
companies contribute profiles of their SBUs that include financial data as well as information on
customers, markets, competitors, and operations. The SBUs in the database are separated into
eight classifications: producers of consumer durables, consumer non-durables, capital goods, raw
materials, components, or supplies; wholesale and retail distributors; and providers of services.
Specific companies and industries are not identified. Each SBU profile includes financial data
from the income statement and balance sheet, as well as information about quality, price, new
products, market share, and competitive tactics. "It tracks the standard financial measures, plus
many of the marketing and strategy variables thought to drive financial performance," Hiram and
Schewe explained in The Portable MBA in Marketing.
From this database of SBU experiences and results, SPI researchers developed a set of strategic
principles and a methodology for examining business problems and opportunities. Users of the
data can look for statistical relationships and compare the experiences of similar businesses, but
cannot access the individual SBU data files. For small business owners, PIMS provides an
opportunity to obtain information about competitors, markets, market shares, prices, and
financial performance. This information enables small business owners to see how their
strategies might play out in the market by comparing the experiences of similar businesses
profiled in the PIMS database.

For example, the owner of a business that is a high-quality producer in a declining market might
analyze the PIMS data to find out how various strategic initiatives affected the performance of
other high-quality producers in declining markets. However, the PIMS data cannot provide
information about specific companies—such as levels of debt and equity—or about overall
industries. "The way to use PIMS effectively is not to simply run with the general findings,"
according to the SPI website. "Rather, analyze the experience of comparables by 1) profiling the
specific business situation and identifying the key issues, and then 2) accessing and analyzing the
experience of a sample of PIMS businesses situationally comparable to this business."

Arthur, D’Little Company’s Matrix

The ADL Matrix or Arthur D Little Strategic Condition Matrix is a Portfolio Management
technique that is based on the Product Life Cycle (PLC). It is developed in the 1980’s by Arthur
D. Little, Inc. (ADL), one of the best-known consulting firms, intended to help a company
manage its collection of product businesses as a portfolio. Like other portfolio planning matrices,
the ADL matrix represents a company’s various businesses in a 2-dimensional matrix. It is a
structured methodology for consideration of strategies, which are dependent on the life cycle of
the industry. The ADL approach uses the dimensions of environment assessment and business –
strength assessment ie. Competitive Position and Industry Maturity.

The environment assessment is an identification of the industry’s life cycle and the business
strength assessment is a categorization of the company’s SBU’s into one of five competitive
positions, these five competitive positions by four life cycle stages. The combination between
 the dimensions yields 5 (competitive positions) by 4 (life cycle stages) matrix. The positioning in
the matrix identifies a general strategy.

The ADL Matrix is often associated with strategic planning at business unit level. However it
works equally well when applied to product lines, or at the level of an individual product.

The Competitive Position

Company’s competitive position is determined by strategic actions and competitor’s strategies.

Quality and strength of competitive position are indicators of company’s strength. The ADL
matrix categorizes every segment of company according to its position which can be
dominant,strong, favorable, tenable or weak.

1. Dominant: This is a comparatively rare and typically short-lived. In many cases is either to a
monopoly or a strong and protected technology leadership.
2. Strong: Market share is strong and stable, regardless of competitors. The firm has a considerable
degree of freedom over its choice of strategies and is often able to act without its market position
being unduly threatened by its competitors.
3. Favorable: Business line enjoys competitive advantages in certain segments of market. However
there are many rivals, and no clear leader among stronger rivals. Results in the market leaders a
reasonable degree of freedom.
4. Tenable: Position in overall market is small or niche, either geographical or defined by product.
Competitors are getting stronger.
5. Weak: Continuous loss of market share. Business line is too small to maintain profitability.

Industry Maturity

Industry maturity could almost be renamed into “Industry life cycle”. Of course not only
industries should be considered here but also segments. There are four categories of industry
maturity: embryonic, growth, mature and aging.

1. Embryonic: The introduction stage, characterized by rapid market growth, very little
competition, new technology, high investment and high prices.
2. Growth: The market continues to strengthen, sales increase, few (if any) competitors exist, and
company reaps rewards for bringing a new product to market.
3. Mature: The market is stable, there is a well-established customer base, market share is stable,
there are lots of competitors, and energy is put toward differentiating from competitors.
4. Aging: Demand decreases, companies start abandoning the market, the fight for market share
among remaining competitors gets too expensive, and companies begin leaving or consolidating
until the market is demise.
 Positioning into one of the four categories is a very sophisticated procedure and depends on
many factors.

Four steps in creating ADL Matrix:

1. Determining the SBU’s of the company (strategic segmentation done by clearly defined
procedures)
2. Identifying phases of industrial maturity for each SBU (this should be done for each business in
all SBU’s)
3. Determine SBU’s competitive position (company’s competitiveness in specific, narrow defined
industry)
4. Plotting sizes and positions of SBU’s on ADL Matrix

The distribution and trajectory of the businesses across the ADL matrix helps indicate whether
the firm’s product mix is well balanced now and in the future. For example, the company will
 need to maintain a continuing set of mature businesses in order to generate cash to support new
embryonic and growth operations.
ADL matrix has several limitations. The main limitations are;

1. The life cycle has no standard length,

2. Determining the current position of an industry in its life cycle is awkward,
3. The length of life cycle may be influenced by competitors.

Parenting Fit Matrix

Normally multibusiness companies comprise two elements: business units, which could
theoretically be independent companies, relating directly to the capital markets; and one or more
layers of other line and staff managers above or outside the businesses, which we refer to
collectively as “the parent”. The businesses are directly involved in value creation: they produce
goods and services and attempt to sell them for more than their cost. But the parent is involved
much less directly. Its ability to create value depends largely on its influence on the businesses
and the way it supports them.

The parent acts as an intermediary between the businesses and outside investors. It clearly incurs
costs, both direct and indirect. It is therefore justified only if, through its influence, it creates
more value than these costs. If it does not, businesses and shareholders would be better off
without it. This bottom-up view challenges the very existence of the parent: the parent has no
automatic right to exist. To justify its existence, the parent should be able to demonstrate that its
businesses perform better in aggregate than they would as a series of individual, stand-alone
entities.

The essence of successful parenting is therefore to create a fit between the way the parent
operates — the parent’s characteristics — and significant improvement opportunities that exist in
its particular businesses. Parenting Fit Matrix summarizes the various judgements regarding
corporate/business unit fit for the corporation as a whole. This matrix emphasizes their fit with
the corporate parent Fit.

Parenting Fit Matrix composes of 2 dimensions: Positive contributions that the parent can
make and the negative effects the parent can make. The combination of these two dimensions
create 5 different positions:

1. Heartland Businesses
2. Edge-of-Heartland Businesses
3. Ballast Businesses
4. Alien Territory Businesses
5. Value Trap Businesses
 Heartland Businesses: Heartland Businesses should be at the heart of the corporation’s future.
These Heartland Businesses have opportunities for improvement by the parent, and the parent
understands their critical success factors well. These businesses should have priority for all
corporate activities.
 Edge-of-Heartland Businesses: In these businesses some parenting characteristics fit the
business, but other do not. The parent may not have all the characteristics needed by a unit, or
the parent may not really understand all of the units strategic factors. E.g.: a unit in this area may
be very strong in creating its own image through advertising — a critical success factor in its
industry. The corporate may however not have this strength and tends to leave this to its
advertising agency. If the parent forced the unit to abandon its own creative efforts in favor of
using the corporation’s favorite ad agency, the unit may struggle. Such business units are likely
to consume much of the parent’s attention, as the parent tries to understand them better and
transform them into Heartland Businesses.
 Ballast Businesses: Ballast Businesses fit very comfortably with the parent corporation but
contain very few opportunities to be improved by the parent. Like cash cows may be important
sources of stability and earnings. But if environmental changes, ballast could move to alien
territory. Therefore corporate decision makers should consider divesting this unit as soon as they
can get a price that exceeds the expected value of future cash flows. E.g.: IBM’s mainframe
business.
 Alien Territory Businesses: Alien Territory Businesses have little opportunities to be improved
by the corporate parent, and a misfit exists between the parenting characteristics and the units
 strategic factors. There is little potential for value creation but high potential for value
destruction on the part of the parent. The corporation must divest this unit while it still has value.
 Value Trap Businesses: Value Trap Businesses fit well with parenting opportunities, but they
are a misfit with the parent’s understanding of the units. This is where the corporate headquarters
can make its biggest error. It mistakes what it sees as opportunities for ways to improve the
business units profitability or competitive position. E.g.: To make the unit a world-class
manufacturer (because the parent has world-class manufacturing skills) it may not notice that the
unit is primarily successful because of its unique product development and niche marketing
expertise.

Value Chain analysis

UNDERSTANDING THE VALUE CHAIN

The term value chain refers to the various business activities and processes involved in creating a
product or performing a service. A value chain can consist of multiple stages of a product or
service’s lifecycle, including research and development, sales, and everything in between. The
concept was conceived by Harvard Business School Professor Michael Porter in his book The
Competitive Advantage: Creating and Sustaining Superior Performance.

Taking stock of the processes that comprise your company’s value chain can help you gain
insight into what goes into each of its transactions. By maximizing the value created at each
point in the chain, your company can be better positioned to share more value with customers
while capturing a greater share for itself. Similarly, knowing how your firm creates value can
enable you to develop a greater understanding of its competitive advantage.

COMPONENTS OF A VALUE CHAIN

According to Porter’s definition, all of the activities that make up a firm's value chain can be
split into two categories that contribute to its margin: primary activities and support activities.
Primary activities are those that go directly into the creation of a product or the execution of a
service, including:

 Inbound logistics: Activities related to receiving, warehousing, and inventory management of

source materials and components
 Operations: Activities related to turning raw materials and components into a finished product
 Outbound logistics: Activities related to distribution, including packaging, sorting, and
shipping
 Marketing and sales: Activities related to the marketing and sale of a product or service,
including promotion, advertising, and pricing strategy
 After-sales services: Activities that take place after a sale has been finalized, including
installation, training, quality assurance, repair, and customer service
Secondary activities help primary activities become more efficient—effectively creating a
competitive advantage—and are broken down into:
 Procurement: Activities related to the sourcing of raw materials, components, equipment, and
services
 Technological development: Activities related to research and development, including
product design, market research, and process development
 Human resources management: Activities related to the recruitment, hiring, training,
development, retention, and compensation of employees
 Infrastructure: Activities related to the company’s overhead and management, including
financing and planning

WHAT IS VALUE CHAIN ANALYSIS?

Value chain analysis is a means of evaluating each of the activities in a company’s value chain to
understand where opportunities for improvement lie.

Conducting a value chain analysis prompts you to consider how each step adds or subtracts value
from your final product or service. This, in turn, can help you realize some form of competitive
advantage, such as:

 Cost reduction, by making each activity in the value chain more efficient and, therefore, less
expensive
 Product differentiation, by investing more time and resources into activities like research and
development, design, or marketing that can help your product stand out
Typically, increasing the performance of one of the four secondary activities can benefit at least
one of the primary activities.

HOW TO CONDUCT A VALUE CHAIN ANALYSIS

1. Identify Value Chain Activities

The first step in conducting a value chain analysis is to understand all of the primary and
secondary activities that go into your product or service’s creation. If your company sells
multiple products or services, it’s important to perform this process for each one.

2. Determine the Cost and Value of Activities

Once the primary and secondary activities have been identified, the next step is to determine the
value that each activity adds to the process, along with the costs involved. When thinking about
the value created by activities, ask yourself: How does each increase the end user’s satisfaction
or enjoyment? How does it create value for my firm? For example, does constructing the product
out of certain materials make it more durable or luxurious for the user? Does including a certain
feature make it more likely your firm will benefit from network effects and increased business?

Similarly, it’s important to understand the costs associated with each step in the process.
Depending on your situation, you may find that lowering expenses is an easy way to improve the
value each transaction provides.

3. Identify Opportunities for Competitive Advantage

Once you’ve compiled your value chain and understand the cost and value associated with each
step, you can analyze it through the lens of whatever competitive advantage you’re trying to
achieve. For example, if your primary goal is to reduce your firm’s costs, you should evaluate
each piece of your value chain through the lens of reducing expenses. Which steps could be more
efficient? Are there any that don’t create significant value and could be outsourced or eliminated
to substantially reduce costs?

Similarly, if your primary goal is to achieve product differentiation, which parts of your value
chain offer the best opportunity to realize that goal? Would the value created justify the
investment of additional resources?

Using value chain analysis, you can uncover several opportunities for your firm, which can prove
difficult to prioritize. It’s typically best to begin with improvements that take the least effort but
offer the greatest return on investment.
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1. https://sba.thehartford.com/business-management/what-is-strategic-
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%20them.
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