Module 05A: Strategy Formulation and Choices

Concepts Covered
➢ Strategy Formulation and Choices:
• Generating Strategic Alternatives
• Classifying Strategic Alternatives
• Managerial factors and Strategy
• Strategy-Formulation Framework
• TOWS matrix
• Porter’s Generic competitive strategy
• Grand strategy – stability, growth, retrenchment, combination
• Grand strategy selection matrix
• Grand strategy clusters
• SPACE matrix

2
 Comprehensive strategic management model

External
Analysis

Implement Implement
Vision Generate, Evaluate, Strategy: Strategy: Evaluate
Long-Term
& Strategic Select Resource Leadership Performance
Objectives
Alternatives Strategy Allocation Functional & feedback
Mission
&Structure Policies

Internal
Analysis

3
5.1 Strategic Formulation and choices

➢ Generating Strategic Alternatives

‒ How does an organization identify alternative courses of action?

➢ Classifying Strategic Alternatives

• Niche
• Vertical Integration
‒ Forward & Backward Integration
• Horizontal integration Risk
• Diversification
‒ Merger & Acquisition, Liquidation
5.1 Strategic Formulation and choices

➢ Managerial factors and Strategy

‒ Attitude towards risk
‒ Past experience and strategy
‒ External dependance on technology
‒ Strategic selection process
‒ Manager’s perception of ability to implement
‒ Credit policy, availability of borrowed fund

5
 5.1 Strategic Alternatives

➢ Selection of Strategy
Strategic Gap
Performance

Time

6
 5.1 Strategic Alternatives
➢ Selection of Strategy

Product Life Cycle Approach

Maturity
Sales

Time
 Comprehensive Strategy-Formulation Framework

Stage 1: Input Stage

Internal factor evaluation,
External factor evaluation,
Competitive profile metrics

Stage 2: Matching Stage

SWOT, SPACE, BCG, IE,
Stage 3: Decision Stage
Grand strategy metrics

8
 TOWS Matrix
Strengths – S Weaknesses – W
IFAS
List Strengths List Weaknesses
EFAS

Opportunities – O SO Strategies WO Strategies

List Opportunities Use strengths to take Overcoming weaknesses by

advantage of opportunities taking advantage of
opportunities

Threats – T ST Strategies WT Strategies

List Threats Use strengths to avoid Minimize weaknesses and

threats avoid threats

Source: H. Weihrich

9
 Matching Key Factors to Formulate Alternative Strategies

Key Internal Factor Key External Factor Resultant Strategy

Excess capacity + ↑ mkt = ?

Insufficient capacity + Exit of competitors = ?

Strong R&D + ↓young adults = ?

↓employee morale + Strong union activity = ?

 Strategic Alternatives
and Choices

Generic Strategies Grand Strategies

Growth Stability Retrenchment Portfolio

• Concentration • Restructuring
• Maintaining • Turnaround
• Integration • Combination
• Overall Status quo • Disinvestment
cost • Diversification Strategy
• Sustainability • Liquidation
leadership • Merger and
• Differentiation growth
acquisition
• Focus • Pause/proceed
• Joint Venture
• Focus cost Leadership with caution
• Internationalizat
• Focus differentiation ion

11
 Porter’s Generic Competitive Strategies (Business strategy)

Strategic Advantage
Industry
wide Differentiation Overall Cost Leadership

Strategic
Target Focused differentiation Focused low-cost
Focus
Particular
Segment
Uniqueness Perceived Low cost Position
By the Customer

12
 Organisational Requirement for Different Generic Strategies
(Source: Michael Porter)
Generic Commonly Required Skills and
Strategy Resources
Overall Cost • Sustained capital investment
Leadership and access to capital
• Process engineering skills
• Intense supervision of labor
• Products designed for ease in
manufacture
• Low-cost distribution system
• Strong marketing abilities
Differentiation
• Product engineering
• Creative flair
• Strong capability in basic
research
Common Organisational
Requirements
• Tight cost control
• Frequent, detailed control
reports
• Structured organization and
responsibilities
• Incentives based on meeting
strict quantitative targets
• Strong coordination among
functions in R&D, product
development and marketing
• Subjective measurement and
incentives instead of
quantitative measures
Organisational Requirement for Different Generic Strategies
(Source: Michael Porter)

Generic Commonly Required Skills and Common Organisational

Strategy Resources Requirements

Differentiation • Corporate reputation for • Amenities to attract highly

quality or technological skilled labor, scientists, or
leadership creative people
• Long tradition in the industry
or unique combination of
skills drawn from other
businesses
• Strong cooperation from
channels

Focus • Combination of the above • Combination of the above

policies directed at the
policies directed at the
particular strategic target
particular strategic target

14
 Grand Strategy Selection Matrix
Overcome Weakness

Quadrant I Quadrant II
1. Vertical Acquisition 1. Retrenchment or Turnaround
2. Conglomerate diversification 2. Divesture
3. Liquidation

External
(Acquisition or merger Internal
for resource capability) (redirected resources
within the firm)

Quadrant IV Quadrant III

1. Horizontal integration 1. Concentrated growth
2. Concentric diversification 2. Market development
3. Joint venture 3. Product development
4. Innovation

Maximize strength

Two variables are important in selection process, viz. 1. Principal purpose of grand strategy, and
2. Choice of Internal or external emphasis for growth (to overcome weakness or maximize strength)
15
 Model of Grand Strategy Clusters
RAPID MARKET GROWTH

Quadrant I Quadrant II
1. Concentrated growth* 1. Reformulation of concentrated
growth*
2. Vertical Acquisition
2. Horizontal Acquisition
3. Concentric diversification
3. Divesture
Strong 4. Liquidation Weak
Competitive Competitive
Position Position

Quadrant IV Quadrant III

1. Concentric diversification 1. Turnaround or retrenchment
2. Conglomerate diversification 2. Concentric diversification
3. Joint venture 3. Conglomerate diversification
4. Divesture
5. Liquidation

SLOW MARKET GROWTH

Business situation is defined in terms of growth rate of the general market, and firm’s competitive position
 SPACE Matrix (strategic position and action evaluation)
Financial Strength
Conservative +6 Return on investment Aggressive
Leverage
Competitive advantage +5 Liquidity Industry strength
Market share Working capital Growth potential
+4 Profit potential
Product quality Cash flow
(3.4,2.9)
Product life cycle +3 Financial stability
Customer loyalty Technological know-how
Competition’s capacity utilization +2 Resource utilization
Technological know-how Ease of entry into market
Control over suppliers & distributors +1 Productivity, capacity utilization
CA IS
-6 -5 -4 -3 -2 -1 -1 +1 +2 +3 +4 +5 +6
Environmental stability
-2 Technological changes
Rate of inflation
-3
Demand variability
Price range of competing
-4 products
Barriers to entry
-5 Competitive
Defensive Competitive pressure
Price elasticity of demand
-6 Ease of exit from market
Risk involved in business
ES
17
Conclusion
• This chapter discusses about generation, classification, and selection of various strategic alternatives
which may differ for a small- and large-sized firms. The selection of a strategy depends on various
factors such as firm’s objectives (growth, stability, retrenchment), risk-taking ability, technology,
resource availability, and so on. The ultimate choice of strategy is moderated by the managerial
factors that have been elaborated at length.
• It also elaborates various approaches and framework for strategy formulation, and dwells on various
strategic alternatives and choices such as Porter’s generic competitive strategies, grand strategy - its
components.
• Generic competitive strategies include overall cost leadership, differentiation, focus, focus-
differentiation, and focus-cost leadership. These are long term business strategies for gaining
competitive advantage.
• Grand strategy is the master business or corporate strategy of the organization which has long term
implications. It may be of different types viz., growth, stability, retrenchment and combinations, which
have been elaborated in detail.
• Grand strategy - its components and selection matrix, SPACE matrix, grand strategy selection matrix
and grand strategy cluster have also been elaborated for selection of strategic action.
18
References
1. Crafting and Executing Strategy – The Quest for Competitive Advantage, Concepts and Cases,
Thomson & Strickland, McGraw-Hill Education.
2. Strategic Management – Planning for Domestic and Global Competition, John Pearce,
R.Robinson and Amita Mital, McGraw-Hill Education, 14th edition.
3. Strategic Management – Text and Cases, Dess, McNamara and Eisener McGraw-Hill Education,
8th edition.

19