S.

4
STRATEGY
FORMULATION
 COURSE CONTENT
• Concept of strategy formulation
• Business Level Strategy- Generic Competitive Strategies
• A Resource-based View to Strategy Formulation
• The Industry Life-cycle
• Corporate Level Strategies- Growth Strategies
• Related And Unrelated Diversification
• Implementing Growth Strategies
• Portfolio Analysis- Boston Consulting Group Matrix And The
General Electric-Mckinsey Matrix
• Strategy Evaluation
 STRATEGY FORMULATION
 Strategy formulation refers to the process of choosing the most appropriate course of
action for the realization of organizational goal and objective and thereby achieving the
organizational vision.
 Strategic formulation is an intellectual process of planning the work. Or it is a process
of decision making in order to define a firm’s strategy.
• Definition:

“Strategy formulation is designed to guide executives in defining the

business their company is in, the aims it seeks, and the means it will use to
accomplish these aims….Strategy formulation combines a future-oriented
perspective with concern for a firm’s internal and external environment in
developing it’s competitive plan of the action .” - Pearce and Robinson
It is concerned with setting long term goal and objectives, generating alternative strategies
to achieve that long term goal and choosing particular strategy to pursue.
 PROCESS OF STRATEGY FORMULATION

1. Review strategic elements - Formulation of an effective strategy is based on

review of strategic elements such as vision, mission, objectives and current
strategies.
2. Conduct SWOT analysis - Swot analysis is done to analyze external and
internal environment of the organization.
3. Identify strategic options - Different strategic options which are known as
strategic alternatives are carefully identified. The strategic options can be for
corporate level and business level.
4. Evaluate strategic options - Available strategic options are carefully
evaluated based on suitability,( environmental fit) acceptability
( performance outcome) and feasibility (made to work in practice).
5. Make strategic choice - The best course of action is actually chosen after
considering organizationall goals, organizational strengths, potentials and
limitations as well as external opportunities.
 BUSINESS LEVEL STRATEGY- POTER’S COMPETITIVE
STRATEGIES/ GENERIC COMPETITIVE STRATEGY

• Business level strategy is a comprehensive plan providing objectives

for SBUs, allocationn of resources among functional areas and
coordination between them for acheimenet of corporate level
objectives.
• Strategy at this level usually occurs at business unit or product level
emphasizing the improvement of competitive position of a firms
product or services in an industrt or market segment served by that
business unit.
• Michael e. Porter has contributed a lot in the area of business
strategy to gain competitive advantage and suggested the following
competitive strategies:
 A. LOW COST LEADERSHIP STRATEGY
• This strategy emphasizes efficiency and producing strandardized products at
very low per unit cost.
• It is appealing to a borad range of customer based on being the overall low cost
provider of a product or service.
• Maintaining this low cost leadership strategy requires a continious search for
cost recuction in all aspects of the business.
• Cost leadership emphasizes producing standardized products at a very low per
– unit cost for consumers who are price sensitive. A low cost leader’s basis for
competitive advantage is lower costs than competitors.
• It aims to offer standardized products to the customers at price lower than the
competitor. Aiming to be lowest cost producer. The firm can compete on the
price with every other industries and earn higher unit profits.
• Example: Walmart, Mcdonald's
• Ways to reduce costs:
1. Controlling the cost driver 2. Revamping value chain
1. Controlling the Cost Driver
• Costs can be drivenn down in each activity segment of value
chain through economies of scale, learning and experience
curve, the cost of key resource inputs, resource sharing,
outsourcing, first mover, percentage of capacity utilization.
2. Revamping Value chain
• Dramatic cost advantage can emerge from finding innovative
ways to restructure process by shifting to e-business
technologies, direct marketing, simplifying product design,
reallocating facilities, reengineering process.
• Benefits of low cost leadership strategy
Minimize competitive pressure
Powerful bargaining power
Low risk of substitution
Entry barrier for potential entrants.
Increase market size through penetration

• Risks of low cost leadership strategy

 Cost advantage is short lived.
Scope of product may reduced by low cost focus
Threat of technology shift
Perceptation of low quality.
 B. BROAD DIFFERENTIATION STRATEGY
• A different strategy calls for the development of a product or service that offers unique
attributes that are valued by customers. Customers perceive the product to be different and
better than that of rivals.
• Differentiation can be based on product image or durability, after-sales, quality, additional
features.
• A successful differentiation strategy allows a firm to charge a higher price for its product
and to gain customer loyalty because consumers may become strongly attached to the
differentiation features.
• A type 3 differentiation strategy can be especially effective under the following condition
when:
• There are many ways to differentiate the product or service and many buyers perceive these
differences as having value.
• Buyer needs and uses are diverse.
• Few rival are following a similar differentiation approach.
• Technological change is fast paced and competition revolves around rapidly evolving product
features.
• Benefits of broad differentiation strategy
• Organizations distinguish themselves successfully on the basis of
differentiation.
• Powerful buyer do not usually negotiate on price
• Differentiation is an expensive scheme and new entrants are not
normally in a position to entry.
• Risks of borad differentiation strategy
• Long term perceives uniqueness is difficult to sustain.
• Loss on the basis of distinctiveness
• Customer do not value the differentiation
• Price premiums too have a limit
• Communicating effectively the benefits of uniquness
• Examples of companies using differentiation strategy
• Multiple feature: MS windows, office - Prestige: Rolex - Quality: Honda,
Toyata - Superiror service: FEDEX
 C. BEST COST PROVIDER STRATEGY
• Best cost provider strategy aims at giving customer more value for the money.
• This strategy delivers superior value by meeting or exceeding buyer expectations
on product attributes and beating their price expectation.
• It is a hybrid concept of low cost and differentiation strategy which emphasize on
low cost with differentiation.
• Objective of best cost strategy
 Give customer more value for money
 Make a more upscale product at lower costs than the competitor.

• Benefits
 Better product at low cost
 Possibility to offer customized low cost products.

• Risks
 May be griped between cost and differentiation
 High end differentiators may be able to steal customer away with product attributes.
 D. FOCUSED STRATEGY
• This strategy concentrates attention on a narrow piece of the total market which is
known as niche market.
• Focused strategy aims to serve a market niche were buyer have distinctive
preferences, special requirements or unique needs.
• Focused low cost - low cost focus strategy that offers products or services to a
small range ( niche group ) of customers at the lowest price available on the
market.
• Focused differentiation- this strategy emphasizes the combination of a narrow
target market or a group of customers and differentiation products. This type of
strategy is used to keep the customer intact due to their loyalty towards specific
products.
Conditions for success of focused strategy
 WHEN THE TARGET MARKET NICHE IS LARGE, PROFITABLE AND GROWING.
 WHEN INDUSTRY LEADERS DO NOT CONSIDER THE NICHE TO BE CRUCIAL TO
THEIR OWN SUCCESS.
WHEN ITS TOO COSTLY OR DIFFICULT TO MEET THE SPECIALIZED NEEDS
 HAVE ENOUGH RESOURCES AND CAPABILITIES
• Benefits of focused strategy
• When the industry has many different niches and segments, thereby allowing a
focuser to pick a competitively attractive niche suited to its own resources.
• When few, if any, other rival are attempting to specialize in the same target
segments.
• Powerful buyers are less likely to shift loyalties.
• Specialization that organization able to achieve at niche market is hard to
substitute.
• No potential new entrants
• Risk of focused strategy
• Serving niche markets requires development of distinctive competencies to serve
those market.
• Focus on narrow market will make difficult to serve other segment.
• Focus on reducing costs, even sometimes at the expense of other vital factors.
• Successful differentiation strategy of a firm may attract competitors to enter the
company’s market segment and copy the differentiated product.
• The focus on costs can be difficult in industries where economies of scale play an
important role.
 RESOURCE BASED VIEW OF STRATEGY
FORMULATION
• Resource based view is a business management tool to define the strategic
resource availability in a company.
• It is a useful tool to identify essential organizational resource and its
capabilities that let managers to prioritize and maximize their efficiency as a
business strategy.
• According to resource based view, strategies are formulated based on available
resources and capabilities of the company. It views resource as a main source
of competitive advantage.
• The reason for this are:
• Internal resources and capabilities provide basis direction for the compan’s
direction
• Resource and capabilities are the primary source of competitive advantage t= and
to earn profit of the company.
• Hence, choice of stratgey wherether it can be cost leadership or differentiation,
is based on resources within the company.
 RESOURCE BASED VIEW OF STRATEGY
FORMULATION
• According to resource based vies to strategy formulation, there ae
following factors determining sustainability of a firm.
1. Organizational routine: Routine is required to ensure work activities and
should be regular, predictable and comprises sequential patterns of work
activities.
2. Durability:It refers to the rate at which organization’s resources and
capabilities depreciate or become obsolete.
3. Transparancy: It refers to the ease which competitor can identify the
capabilities. Non transperent resources and capabilities provide sustainable
competitive advantage.
4. Transferability: It refers to the situation how easily a competitor can assess
the resources and capabilities necessary to duplicate a present strategy.
5. Replicability: It refers to the use of internal investments to copy the resource
and capabilities of competitors.
 THE INDUSTRY LIFE CYCLE

• Industry life cycle suggests that industries go through four stages of

development which include; introduction, growth, maturity, and decline
• The industry life cycle helps an organization to see how it is positioned in
terms of the development of its markets.
• The different stages of industry life cycle will have an impact on upon
competitive conditions facing the organization.
• Therefore, an organization benefit from an understanding of the industry
life cycle and formulate its strategy to match the needs of each stage more
closely.
Figure: The Industry Life Cycle
 STAGES OF INDUSTRY LIFE CYCLE
INTRODUCTION STAGE:
• It is the startup stage of industry life cycle. This stage is characterized by
slow growth in sales and high costs as a result of limited production.
• Characteristics of introduction stage:
• Technological and strategic uncertainty
• High entry cost
• Customer demand is limited
• Distribution channels are still underdeveloped
• Low revenue.

• Strategies of introduction stage

• Invest in research and development
• Taking first mover advantage.
GROWTH STAGE:
 In this stage, the sales increase rapidly as the market grows, allowing firms
to reap the benefits of economies of scale.
 The increase in product sales brings greater profits which in turn attracts new
entrants to the market.
 Improvement in product features leads to easiness to use, increase value to
customers. A firm spends more on marketing activities i.e.(Promotion ).
 A goal for the firm is not merely to attract new customers but to ensure that
customers repeat their purchases.
 Strategies of Growth Stage
 Market Leader strategy: To be number one in the market
 Challenger strategy: A market challenger can achieve its goal by attracting the
market leader and other competitors.
MATURITY STAGE:
• At the maturity stage, majority of the companies in the industry are well
established and the industry reaches its saturation point.
• In this stage, a gradual decrease in sales growth and profits can be seen as
the market becomes saturated.
• Firms will begin to exit the industry and low cost competition based on
efficient production and technically proficient processes becomes more
important.
• Rivalry becomes more intense within the industry.
• The firm should find new ways like innovation and find new consumer
markets.
• Strategies of Maturity Stage
• Cost leadership strategy
• Differentiation strategy
•
DECLINE STAGE:
• This is the last stage of the industry life cycle where, firms experience a
fall in sales and profitability.
• Competition within an industry will be based on price.
• Firms will continue to exit the industry and consolidation may
occur as a strategy for firms to achieve acceptable products.
• Strategies on decline stage
• Harvesting strategy: it involves to reduce investment in the
business unit with the hope of reducing costs and/or
improving cash flow.
 CORPORATE LEVEL STRATEGY
• Corporate level strategy is the uppermost level of strategy. It is derived from
the vision and mission statement. It is related to the choice of direction for a
firm as a whole. It addresses the question as “what business are we in?”.

• Corporate level strategy is primarily about the choice of direction for the firm
as a whole. This strategy is also concerned with managing various product
lines and business units for maximum value.

• Corporate level strategy is an overall plan of action encompassing all the

activities and functions performed by the business firms. Where a corporate
parent adds greater value, the organization is said to achieve synergy. Synergy
occurs when the total output from combining businesses is greater than the
output of the businesses operating individually. It is often described
mathematically as 2+2=5.

• It is also known as Grand Generic Strategy.

 CORPORATE LEVEL STRATEGY

• Different strategic alternatives of corporate level (Grand Generic)

strategies are as:

Corporate
Strategies

Expansion/Growth Retrenchment Combination

Stability Strategy
Strategy Strategy Strategy
 A. STABILITY STRATEGY

Why do companies pursue stability strategy?

• Suppose, the firm is doing well or perceives itself as successful. Moreover,
management does not know what combination of decisions is responsible for
this. In such a situation, an organization may continue more or less the same
way as in the past.
• A stability strategy is less risky because it is tried and tested. Managers tend to
follow easy going approach except in extraordinary times.
• If the environment is perceived to be relatively stable, the firm generally wants
to pursue this strategy.
• Executives may perceive that too much expansion can lead to inefficiencies or
more challenges.
• Stability is not the kind of strategy that makes news. However, stability is
effective when the firm is in maturity stage of its product life cycle, doing well
and the environment is not excessively volatile.
 A. STABILITY STRATEGY
Types of stability strategy
1. Pause/proceed strategy with caution
• The pause/proceed with caution strategy is well understood by the name itself on which an
organization wait and look at the market conditions before launching the full-fledged grand
strategy.
• It is a temporary strategy. It provides an opportunity to rest before continuing growth or
retrenchment strategy.
2. No change strategy
• It is a conscious decision to do nothing new where the firm will continue with its present business
definition.
• When a firm has a stable internal and external environment the firm will continue with its present
strategy. This strategy is pursued if there is no obvious opportunity or threat, nor significant
strength or weakness and no possibility of entry of new competitors.
3. Profit strategy
• It is an attempt to artificially support profits when a company’s sales are declining by reducing
investment and short – term discretionary expenditures.
• Under this, management defers investments and/or cuts expenses to stabilize profits during
adverse time.
 A. STABILITY STRATEGY

Advantage of stability strategy

• Since, this strategy doesn’t change the organizational direction, it is less risky.
• The implementation of stability strategy is relatively simple, since, it does not
demand fundamental changes.
• This strategy is suitable if the growth of the business is risky.
• It aims at bringing efficiency by maintaining the current profit and growth.
• This strategy may be suitable if the competitive rivalry among organization is very
high.

Disadvantages of stability strategy

• The organization may lose opportunity created by changes in external environment.
• The market share and competitive position may decline due to expansion by the
competitors.
• It may not be able to address the expectation of the stakeholders.
 B. GROWTH STRATEGIES

• Growth strategy is designed to achieve growth in sales, assets,

profits or some combinations.
• Companies that aim to expand business pursue this strategy. It
enables company’s to take advantage of the experience curve and
reduce the per unit cost of products sold, thereby increasing
profits.
• This type of strategy is pursued in highly favorable environment.
• There are four strategies that an organization can follow:
-Market penetration
-Market development
-Product development
-Diversification
 B. GROWTH STRATEGIES

Why do companies pursue expansion strategies?

1) In volatile industries (E.G., Electronics), A stability strategy can mean
short-run success, long run death. So expansion may be necessary for
survival if environments are volatile.
2) Many executives equate expansion with effectiveness.
3) Some believe that society benefits from expansion.
4) Managerial motivation to achieve more.
5) Belief in the experience curve. It is widely believed that with the
increase in experience, expansion becomes comfortable.
6) Belief that growth will yield monopoly power.
7) External pressure from stockholders or securities analysts or other
environmental
factors.
 B. GROWTH STRATEGIES

• MARKET PENETRATION
• In this strategy an organization seeks to increase the market share in its existing
markets by utilizing its existing products.
• Its aim is to attract new customers, and to get existing consumers to increase their usage
of the product or service.
• It relies upon the organization’s existing resources and capabilities, and therefore is
relatively low risk.
• To achieve market penetration, the organization usually improve its product quality and
levels of service.

MARKET DEVELOPMENT
• Involves entering new markets with the firm’s existing products.
• This may be done by targeting new market segments and new geographical areas, or by
devising new uses for its products.
• The existing product may undergo some slight modification to ensure that it fits these
new markets better.
• Done through new geographic market, new demographic market, new product uses.
 B. GROWTH STRATEGY
PRODUCT DEVELOPMENT
• Involves developing new products for your existing markets.
• The ability to innovate is vital in developing products for rapidly changing consumer
markets.
• This strategy is necessary where organizations are faced with shorter product life cycles.
• For example, IBM has been introducing new office equipment's from time to time (such
as electronic typewriters, different types of computers, ATMs etc.) In order to meet the
changing needs of existing customers.
• Guidelines for product development
• An organization has successful products but are in maturity stage;
• An organization competes in an industry that is characterized by rapid
technological changes;
• Major competitors offer better quality products with comparable prices; and
• An organization has strong research and development capabilities.
 B. GROWTH STRATEGY

Diversification:
• It occurs when an organization seeks to broaden its scope of
activities by moving into new products and new markets.
• Although this will involve the greatest level of risk it may be
necessary where an organization’s existing products and markets
offer little opportunity for growth.
• However this risk can be mitigated by the organization by
diversifying into related businesses.
• Diversification strategy involves growth through the acquisition
of firms in other industries or lines of business.
• It Can be of two types:
• Related Diversification
• Unrelated Diversification
 RELATED DIVERSIFICATION

• Refers to entry into a related industry in which there is still some link with the
organization’s value chain.
• It is also known as concentric diversification. In this diversification, the new
business is linked to the existing businesses through process, technology or
marketing.
• The aim is to choose an industry in which it retains a close match with the
resources and capabilities which provide it with competitive advantage in its
current industry, and thereby creates synergy.
• Related diversification can be can be separated into:
a) Vertical integration
b) Horizontal integration.
• Examples of related diversification: Coke purchased several beverage manufacturers to
expand beyond the soft drink industry to the beverage industry. Coke’s acquisitions of
vitamin water, honest tea, fuze beverage and core power were concentric diversification
moves, providing it with brand recognition in new categories.
 Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer Shirt manufacturer

Clothing store Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integration

Acquisitions or mergers of competing businesses are horizontal integrations
Vertical Integration occurs when an organization goes upstream , i.e. Moves
towards its inputs, or down streams, i.e. Closer to its ultimate customers.
• It moves forward or backward in the chain and enters specific
product/process steps with the intention of making them into new business
for the firm.
• The more control, the organization has over the different stages of its value
chain, the more vertically integrated it is.
Horizontal integration occurs when an organization takes over a competitor
or offers complementary products at the same stage within its value chain.
• Horizontal integration can be achieved through internal development or
externally through acquisitions and strategic alliances.
• It refers to the growth through acquisition of one or more similar business
operating at the same stage of the production marketing chain that
complements or competes.
 UNRELATED DIVERSIFICATION
• Unrelated diversification refers to a situation where an organization
moves into a totally unrelated industry.
• Also called as conglomerate diversification as it involves managing a
portfolio of companies.
• For example, if the shoe producer enters the business of clothing
manufacturing. In this case there is no direct connection with the
company’s existing business – this diversification is classified as
unrelated.
• Though it’s a bit difficult to put first into action, risk can be diffused
especially when the future potential of existing line of business is
unpredictable.
• It is pursued if the current industry is unattractive and that the firm lacks
outstanding abilities or skills that it could easily transfer to related
products or services in other industries.
 UNRELATED DIVERSIFICATION
• Unrelated diversification is suitable especially when:
• Adding new unrelated product significantly increases organization’s revenues
and profits.
• Organization competes in highly competitive and/or no-growth industry.
• Organization has capital and managerial talent to compete successfully in a new
industry.
• Exiting markets for present products are saturated.
• Organization’s present channels of distribution can be used to market the new
products to current customers.
• Examples of unrelated diversification
• Chaudhary group (cg global) is a multi national conglomerate company
headquartered in Nepal. It has diversified business interests including financial
services, fast-moving consumer goods, education, hospitality, energy, consumer
electronics, realty and ayurveda.
 C. RETRENCHMENT STRATEGIES
• When a company reduces the scope of its business activities it is called retrenchment.

• Retrenchment strategy occurs when an organization attempts to cut costs associated with
different activities and pursues only positive cash flows to reverse declining profits.
• Retrenchment strategy can entail selling off land & buildings to raise needed cash,
pruning product lines, closing obsolete factories, automating processes, reduce the number
of employees, and instituting expense control systems.
A. Turnaround strategy
• The turnaround strategy is a retrenchment strategy followed by an organization when it
feels that the decision made earlier is wrong and needs to be undone before it damages the
profitability of the company.
• Turnaround strategy means to convert, change or transform a loss-making company into a
profit- making company.
• The main purpose of implementing a turnaround strategy is to turn the company from a
negative point to a Positive one. If a turnaround strategy is not applied to a sick company,
it will close down.
B. Divestiture strategy
• Selling a division or part of an organization is called divestiture. Divestiture often is used
to raise capital for further strategic acquisitions or investments.
• Divestiture can be part of an overall retrenchment strategy to rid an organization of
businesses that are unprofitable, that require too much capital, or that do not fit well with
the firm’s other activities.
• This strategy is suitable especially when:
• Failed to attain needed improvements, poor performance of a division.
• When a division needs more resources to be competitive than the firm can provide.
• When a division is a misfit with the rest of an organization
C. Liquidation
• Liquidation simply means end or termination of the business. The company moves to exit
the business either by liquidating its assets or by selling the whole business, thus ending
its existence in the current form.
• Liquidation may be voluntary or it may be forced upon an organization by the court when
its liabilities exceed its assets.
• Liquidation strategy is suitable especially when:
• Firm face severe loss for long time and there is difficult to cope such loss, Low
industry attractiveness, Low business strength and low liquidation.
 D. COMBINATION STRATEGY

• This strategy is also referred to as mixed or hybrid

strategy.
• It is mizture of stability, expansion/growth or
retrenchmnet strategy.Its a combination strategy and not a
new strategy.
• Combination strategy is applied either simultaneously( at
the same time in different business) or sequentially ( at
different times in the same business).
• This trategy is mostly useful for large organization with
multi business whereas its not easy to use.
IMPLEMENTING GROWTH STRATEGY

Internal Development

Merger and Acquisition

Joint Development & Strategic

Alliances
 1. INTERNAL DEVELOPMENT
 Internal development is a managerial approach to develop strategies by building
and developing organization’s own capabilities.
 It is the primary method of strategy development. Under this method, internal
strategic factors are developed for strategic success.
 It is also called organic development as it involves building up an organization’s
own resources and competencies. Internal development method can be adopted in
the following situations:
A. Developing New Products
 New products are introduced first time in the market. Generally , in high
performing organizations where products are highly technical in design or method
of manufacturing product is a complex one, internal development is made.

B. Developing New Markets

 New markets are developed through direct marketing. Middlemen or agents are
bypassed. This market knowledge may be a core competence creating competitive
advantage over other organizations that are more distant from their customers.
C. Build Competence through Learning
 Competence can be built through learning. Organizations gain competence
in knowledge creation and integration.

D. Environmental Issues
 There may also be issues relating to the business environment which would
create a preference for internal development.

E. Cost Spread
 Internal development helps spread costs to other activities of the
organization. This is a strong motive for internal development in small
companies or many public services that may not have the resources
available for major one-off investments.
 2. MERGER AND ACQUISITION
 A merger occurs when two or more firms are combined and the resulting firm
maintains the identity of one of the firms.
 The assets and liabilities are merged into those of the larger firm. Shareholders
from each organizations become shareholders in the new combined
organization.
 A merger implies that both organizations accept the logic of combining into a
single organization and willingly agree to do so.
 Merger can be horizontal, vertical, concentric or conglomerate .
 In acquisition, an existing organization takes over another organization
through purchase of shares or ownership.
 It is an act of acquiring effective control by one firm over assets or
management of another company without any combination of companies.
 The company which acquire the business of another company is known as
Purchasing Company and the acquired company is known as Vendor
Company.
 2. MERGER AND ACQUISITION
Advantages
Can be relatively fast
Cost savings from economies of scale
Extend to new geographic areas buy market size and share
May reduce competition from a rival

Disadvantages
Expensive
Not always easy to dispose unwanted parts
Human relations problems that can arise after
Problem of clash of national, and organizational culture
High risk if wrong company targeted
 3. JOINT DEVELOPMENT &
STRATEGIC ALLIANCES
Joint development is a method where two or more organizations
share resources and activities together to pursue common goals
and strategy.
Joint development is a cooperative way to strategy development
to gain competitive advantage within industry.
Joint development consisits of cooperative strategies such as
collusiona nd strategic allainces.
Collusion
Collusion is the active cooperation of firms within an industry to
reduce output and raise prices in order to get around the normal
economic law of supply and demand.
 3. JOINT DEVELOPMENT &
STRATEGIC ALLIANCES
Strategic Alliances
 Strategic alliances are popular methods of strategy development. They are
contractual alliances of the two or more than two companies for a certain
period.
 Strategic alliances are partnerships between firms whereby their resources,
capabilities and core competencies are combined to pursue mutual interests
in designing, manufacturing, or distributing goods or services.
 Strategic alliances may be formal or informal normally decided by
ownership or no shareholdings.
 Formal alliances are clearly defined and guided by the contractual
agreements between the firms. Whereas, informal alliances are defined by
loosely made contracts and networking by different firms to undertake
their business.
 3. JOINT DEVELOPMENT & STRATEGIC
ALLIANCES
Forms of Strategic Alliances
a. Joint Venture
A joint venture (JV) is a business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task which involves equity,
transfer of technology, management know how, production and marketing. Mostly done
with foreign companies.

b. Mutual Service Consortia

A mutual service consortium is a partnership of a similar companies in similar industries
that pool their resources to gain a benefit that is too expensive to develop alone. There is
very little interaction/communication among the partners.

c. Licensing Arrangement
The term licensing agreement refers to a legal, written contract between two parties wherein
the property owner gives permission to another party to use their brand, patent, trademark,
copyright and technology.. The agreement, contains details on the type of licensing
agreement, the terms of usage, and how the licensor is to be compensated. Example: Coca-
Cola
 3. JOINT DEVELOPMENT & STRATEGIC
ALLIANCES
d. Franchising
It is similar to licensing, but here what is licensed to the foreign enterprise is not the
right to produce physical goods but the right to offer a service in a particular format.
Franchisor gives the right to use its brand name and other related trade marks in
return of royalties. Example: Pizza hut, KFC.

e. Subcontracting
With subcontracting, a company choose to subcontract particular services or part of
the process. All arrangements are to be contractual nature and with no ownership. For
example: Increasingly public sector in waste removal.

f. Value Chain Partnership

A value chain partnership is a strong and close alliance in which one company or
units forms a long term arrangements with a key supplier or distributor for mutual
advantage.
REASONS FOR STRATEGIC ALLIANCES

• Resource Utilization
• Cost And Value
• Co-specialization
• New Market Access
• Learning
• Risk Management
• Competition
 COMPONENTS FOR SUCCESS OF
STRATEGIC ALLIANCES

Trust
Senior Management Support
Strategic Purpose
Compatibility
Performance Expectation
Evolve And Change
 PORTFOLIO ANALYSIS
• Corporate strategy is concerned with the question: what businesses do we
want to compete in? which markets have we identified ?Where an
organization is made up of multiple business units, the question concerns how
resources are to be allocated across these businesses.
• The subject of portfolio strategy is concerned with managing these strategic
business units (SBU’s) to decide which businesses to invest in and which to
divest in order to maintain overall corporate performance.
• A portfolio is simply the different business units that an organization
possesses. Portfolio analysis allows the organization to assess the competitive
position and identify the rate of return it is receiving from its various business
units.
• The aim is to maximize the return on investment by allocating resources
between SBU’s to achieve a balanced portfolio.
• The two most widely used portfolio analyses are the
• Boston Consulting group (BCG) growth-share matrix and
• The general electric business (GE) – Mc-Kinsey Matrix
 BCG MATRIX

• This matrix was developed by the Boston consulting group and was widely used
in the 1970s and 1980s. The BCG matrix plots an organization’s business units
according to (1) its industry growth rate; and (2) its relative market share.
• Industry growth rate can be determined by reference to the growth rate of the
overall economy. Therefore, if the industry is growing faster than the economy
we can say it is a high growth industry. If the industry is growing slower than the
economy it is characterized as a slow growth industry.
• A business unit’s relative market share (or competitive position) is defined as the
ratio of its market share in relation to its largest competitor within the industry. A
business unit that is the market leader will have a market share greater than 1.0.
• A business unit can fall within one of four strategic categories in which it will be
characterized as a star, question mark, cash cow, or dog.
• These classifications can then be used to determine the strategic options for each
business unit; that is, which business justifies further resource allocation, which
generates cash for expansion, and which needs to be divested.
Stars
 Are characterized by high growth and high market share. These units typically generates
cash in excess of the amount of cash needed to maintain business. They are profitable and
may grow further.
 They represent the most favorable growth and investment opportunities to the organization.
As such, resources should be allocated to ensure that they maintain their competitive
position.
 At times stars may require funding in excess of their ability to generate funds, but this will
act as a deterrent to competitors.
 Over the long term, investment in stars will pay dividends, as their large market share will
enable them to generate cash as the market slows and they become cash cows.
Cash cows
 Experience high market share, but in low growth or mature industries.
 Their high market share provides low costs, which produces high profits and cash
generation. The business is mature and need lower level of investments.
 Their position in low growth industries means that they require little in terms of resource
allocation. The cash surpluses they generate can be used to fund stars and question marks.
Question marks
 Compete in high growth industries, but have low market share.
 Because they are in growth industries, question marks have high cash needs, but they
only generate small amounts of cash as a result of their low market share.
 The strategic options facing a question mark are to make the investment necessary to
increase market share and manage the business to a star. Over time, it will become a cash
cow as the industry matures.
 The other option is immediate divestment or winding the business down with no further
investment.

Dogs
 Have a low market share within a low growth industry.
 The lack of industry growth guards against allocating further resources to a dog.
 Often the cash needed to maintain its competitive position is in excess of the cash it
generates.
 Organizations need to ensure that only a minimal amount of its business units occupy
this position. The strategic option is one of divestment.
Advantages Of BCG Matrix
 Easy to use
 It is quantifiable
 Draws attention to the cash flow and investment needs.
 It facilitates of generators and users of resources
 It focuses on cost reduction and planning of cash flow.

Limitations Of BCG Matrix

 It is difficult to assess the high and low growth rate and market share.
 There might be a no. of variables affecting the industry attractiveness besides market
share and market growth rate.
 The link b/w market share and profitability is questionable. Low share business can
also be profitable.
 Growth rate is only one aspect of industry attractiveness and Market share is only one
aspect of overall competitive position.
 The analysis is based on only one competitor. The market leader. Small competitors
GE NINE CELL MATRIX
 GE NINE CELL MATRIX
Matrix used to perform business portfolio analysis as a step in the
strategic planning process.
The GE/ Mc-Kinsey matrix identifies the optimum business portfolio as
one that fits perfectly to the company's strengths and helps to explore
the most attractive industry sectors or markets.
Unlike the BCG matrix there is an attempt to broaden the analysis of a
business unit’s internal and external factors.
The objective of the analysis is to position each SBU on the chart
depending on the SBU's strength and the attractiveness of the industry
sector or market on which it is focused.
Each axis is divided into low, medium and high, giving the nine-cell
matrix as depicted below.
 GE NINE CELL MATRIX

 Different factors can be used to define industry attractiveness.

Like:-
Market size, market growth rate, demand variability, industry
profitability, competitive rivalry, global opportunities, entry
and exit barriers, capital requirement, macro environmental
factors (PEST)

 Different factors can also be used to define SBU’s strength. Like:-

Market share, distribution channel access, financial resources,
R&D capability, brand equity, production capacity, knowledge
of customer and market, caliber of management, relative cost
position
 GE NINE CELL MATRIX
Industry Business Unit Strength
Attractiveness

Strong Average Weak

High Grow Grow Hold

Medium Grow Hold Harvest

Low Hold Harvest Harvest

 GE NINE CELL MATRIX
GROW – Business units that fall under grow attract high
investment. Firms may go for product differentiation or cost
leadership. Huge cash is generated in this phase. Market leaders exist
in this phase.

HOLD – Business units that fall under hold phase attract moderate
investment. Market segmentation, market penetration, imitation
strategies are adopted in this phase. Followers exist in this phase.

HARVEST - Business units that fall under this phase are

unattractive. Low priority is given in these business units. Strategies
like divestment, diversification, mergers are adopted in this phase.
 Market Attractiveness

 Annual Market Growth Rate

 Overall Market Size
 Historical Profit Margin
 Current Size Of Market
 Market Structure
 Market Rivalry
 Demand Variability
 Global Opportunities
 Business Strength

 Current Market Share

 Brand Image
 Production Capacity
 Corporate Image
 Profit Margins Relative To
Competitors
 R & D Performance
Promotional Effectiveness
 GE NINE CELL MATRIX
Strength
a) It allows intermediate ratings between high and low and between strong and
week.

B) It helps in channeling the corporate resources to business and achieving

competitive advantage and superior performance.

C) It helps in better strategic decision making and better understanding of

business scope.

Weakness
A) Requires a consultant or a highly experienced person to determine
industry’s attractiveness and business unit strength as accurately as possible.

B) It is costly to conduct.
 STRATEGY EVALUATION

• The question we now need to address is: how can a company

differentiate between the strategic options that it faces?
• Strategy Evaluation is a process by which management
measures progress toward the attainment of organizational foals
so that timely actions can be taken to improve performance or
modify the goals if performance is not in accordance with plans.
• Strategy evaluation can help to surface the implications of
pursuing different strategic options before they are
implemented.
• Features of strategic evaluation are- gives right direction,
proactive, future oriented, responsibility, dynamic process, time
horizon and economy.
• One method is to assess the strategy according to its suitability,
feasibility, and acceptability
EVALUATION CRETERIA FOR
STRATEGIC ALTERNATIVES

Acceptabilit
Suitability Feasibility
y

Return Fund Flow

Ranking
Analysis Analysis

Decision Risk Break-Even

Tree Analysis Analysis

Resource
Stakeholders
Scenarios Deployment
Analysis
Analysis
 SUITABILITY

• Suitability is concerned with whether a strategy addresses the

circumstances in which an organization is operating- the strategic
position.
• It is concerned with the logic or rational on which it is based- how the
proposed strategy creates or maintain competitive advantage.
• The strategic options should be suitable from the following points of
view:
 Exploiting opportunities and avoiding threats.
 Capitalizing an organization’s strengths and avoiding or remedying weaknesses.
 Addressing expectations of stakeholders.

• Different methods can be used for screening suitability are:- Ranking,

Decision tree and Scenarios.
Ranking
• In case of ranking a particular strategic option is evaluated against key
strategic factors in environment such as stakeholders, investment funds,
technology, customer preference, quality etc. Ranking compares strategic
option against the key strategic factors identified by SWOT analysis.

Decision Tree
• The decision tree approach evaluates future options by progressively
eliminating others as additional criteria are introduced to the evaluation.

Scanarios
• Scanarios are perceptions about the likely environment a firm would face
in the future. Scanarios are build based on:Background information, future
trends, analyze past behavior and forecast scanerios as least favourable,
mostly favourable and most likely environment.
 ACCEPTABILITY
• Acceptability is concerned with the expected performance outcomes of a
strategic option.
• The assessment of the acceptability of a strategic option involves consideration
of the anticipated rewards relative to the goals of the organization.
• The assessment of the acceptability of a strategic option depends upon return,
risks and stakeholder expectations.

Return Analysis
• Returns are the benefits which stakeholders are expected to receive from a
strategy.
• There are a number of different approaches to understand return in an
organization by analyzing:- profitability alalysis
( Return on capital employed, pay bank period, Discounted cash flow),
Cost Benefit analysis and Shareholders value analysis.
Risk Analysis
• Risk concerns the probability and consequences of the failure of the strategy.
• While accepting a strategic option, it is essential to appraise the risk involved in it
in terms of time and allocation of resources and the ecpected effectiveness of the
given options.
• Different risk analysis methods can be used as financial ratios projections, sensative
analysis, simulation modeling, decision matrices etc.

Stakeholders Reactions Analysis

• Stakeholders are the individuals or groups anound the organization who have stake
in the outcomes of the organization. They can be shareholders, suppliers,
customers, competitors, government, labor unions, financial instituions, press etc.
• The likely acceptance of a strategic option is largely determined by the stakeholders
reactions.
• Stakeholder mapping and game theory method are the most used method for
analyzing stakeholders reactions.
 FEASIBILITY
• Feasibility is concerned with whether an organization has the resources and
competences to deliver a strategic option.
• Frequently this leads to an analysis of the tangible resources of the
organization, finance in particular but a wider consideration of all resources
and capabilities should not be ignored.
• There are different apporaches to understand feasibility as funds flow
analysis, break even analysis, resource deployment analysis.

Funds Flow Analysis

• Fund flows are inflows and outflows of cash and cash equivalent. Operating
activities are the principal cash inflow activities. Fixed assets, working
capital, tax, dividends are principal cash outflows activities.
• Fund flow analysis is done with identification of sources, indetification of
uses and identification and funding of shortfall.
Break- Even Analysis
 It is the procedure that estimated profit and loss figure for different levels of
output.
 This technique can determine the specific impact on profit as a result of
changes in cost, price and volume.
 Break-even analysis is a simple and widely used approach to assesssing the
feasibility of meeting targets of return.

Resource Deployment Analysis

 Resource deployment analysis identifies needs for resources and
competencies for a specific strategic option.
 A resource deployment assessment can be used to judge by accessing
organizational current capabilities and by identifying how unique resources or
core competence can be developed to sustain competitive advantage.
END OF CHAPTER 4

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