TOPIC 5

1. STRATEGY FORMULATION

With a good strategy in place, the resources of the entire organization can be focused on
achieving superior profitability or above-average returns. Whether one is talking about building e-
business strategies for the new economy or crafting strategies for more traditional operations.
Michael Porter points attention toward these opportunities for competitive advantage in the
strategy formulation process:
 Cost and quality – where strategy drives an emphasis on operating efficiency and/or
product or service quality.
 Knowledge and speed – where strategy drives an emphasis on innovation and speed of
delivery to market for new ideas.
 Barriers to entry – where strategy drives an emphasis on creating a market stronghold that
is protected from entry by others.
 Financing resources – where strategy drives an emphasis on investments and/or loss
sustainment that competitors can’t match.

A. Competitive Rivalry and Competitive Dynamics

Terms and meanings
Competitors – these are firms operating in the same market, offering similar products, and
targeting similar customers
Competitive rivalry – it is the ongoing set of competitive actions and competitive responses that
occur among firms as they maneuver for an advantageous market position.
Competitive behavior – it is the set of competitive action and competitive responses a firm
takes to build or defend its competitive advantages and to improve its market position
Multimarket competition – it occurs when firms compete against each other in several product
or geographic markets.
Competitive dynamics – it refers to all competitive behaviors, that is, the total set of actions
and responses taken by all firms competing within a market.

B. Porter’s Competitive Strategies

Within an industry, the strategic challenge becomes positioning one’s firm and products
relative to competitors. The strategy formulation question is “how can we best compete for
customers in this industry?” Porter advises managers to answer this question by using the
competitive strategies framework shown below:

Leadership strategy cost Differentiation strategy

Broad
Market
Scope
Focused low-cost Focused differentiation
Narrow strategy strategy

Low Price Unique Product

 Source of Competitive Advantage

Business-level strategic decisions are driven by two basic factors:

1. Market scope
2. Source of competitive advantage

Four strategies that organizations can pursue:

a) Differentiation - competitive advantage through uniqueness
b) Cost leadership - lower costs than competitors and achieve higher profits
c) Focused differentiation
d) Focused cost leadership
Focus strategies – Organizations pursuing this strategy concentrate on a special market
segment with the objective of serving its needs better than anyone else. The strategies
focus organizational resources and expertise on a particular customer group,
geographical region, or product or service line. They seek competitive advantage in that
market segment through product differentiation or cost-leadership
C. Portfolio Planning – this is used by multi-businesses in the strategy formulation to help allocate
scarce resources among competing uses.

BCG Matrix
- This is an approach to business portfolio planning developed by the Boston Consulting
Group. This framework analyzes business opportunities according to industry or market
growth rate and market share.

Question Marks Stars

Poor position; Growing industry Dominant position; Growing industry

Growth or
Growth
retrenchment
HIGH strategy
strategy

Dogs Cash Cows

Market Growth for Poor position; Low-growth industry Dominant position; Low-growth industry
Products/Services
Stability or
Retrenchment
modest growth
strategy
strategy
LOW

HIGH LOW

Market Share of Products/Services

As shown in the figure, this comparison results in four possible business

conditions, with each being associated with a strategic implication:
 1. Stars – These are high-market-share businesses in high growth markets. They produce
large profits through substantial penetration of expanding markets. The preferred
strategy is growth, and further resource investments in them are recommended.
2. Question Marks – These are low-market-share businesses in high-growth markets.
They do not produce much profit but compete in rapidly growing markets. They are the
source of difficult strategic decisions. The preferred strategy is growth, but the risk
exists that further investments will not result in improved market share. Only the most
promising question marks should be targeted for growth, others are candidates for
retrenchment by restructuring or divestiture.
3. Cash Cows – These are high-market-share businesses in low-growth markets. They
produce large profits and a strong cash flow. Because the markets offer little growth
opportunity, the preferred strategy is stability or modest growth.
4. Dogs are low-market-share businesses in low-growth-markets. They do not produce
much profit, and they show little potential for future improvement. The preferred
strategy for dogs is retrenchment by divestiture.

D. Incrementalism and Emergent Strategy

Incrementalism – the process whereby modest and gradual changes in strategy occur as
managers learn from experience and make adjustments. (James Brian Quinn)

With all the challenges of getting ahead and staying in the complexed world of organizations,
effective managers must have the capacity to stay focused on long-term objectives while still
remaining flexible enough to master short-run problems and opportunities as they occur. (the
managerial behavior according to Henry Mintzberg’s and John Kotter)

Emergent Strategies - These are strategies that develop progressively over time as “streams” of
decisions made by managers as they learn from and respond to work situations. (Mintzberg)

Incremental or emergent strategic planning allows managers and organizations to become

really good at implementing strategies, not just by formulating them. (Mintzberg)

Be sure you can:

 Explain the four competitive strategies in Porter’s model
 Illustrate how these strategies apply to products in a market familiar to you
 Describe the BCG matrix for portfolio planning and use it to analyze strategic
opportunities for a business
 Explain the concepts on incrementalism and emergent strategy