Chapter Five: Strategy Formulation:

Strategy Analysis and Choice

Chapter objectives
Up on completion of this unit, the learner is expected to:
 The nature of strategy analysis and choice
 types of strategies
 Michael Porter’s generic strategies
 Long term objectives
 A comprehensive strategy formulation
 The decision stage
 BSC model
 The 7’S model

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 5.1The nature of strategy analysis and choice

• In this chapter focuses on generating and evaluating

alternative strategies, as well as 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, coupled with the external and internal
audit information, provide a basis for generating
and evaluating feasible alternative strategies.

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 5.2 Types of strategy
•There are three types of strategies
A. Corporate level strategy fundamentally is concerned
with the selection of businesses in which the company
should compete and with the development and
coordination of that portfolio of businesses
.an over all plan of action which includes all the
activities and functions performed by a business firm

3
 Corporate level strategy is concerned with:

 Reach - defining the issues that are corporate

responsibilities;
 Competitive Contact - defining where in the corporation
competition
 Managing Activities and Business Interrelationships -

 Management Practices - Corporations decide how business

units are to be governed:
•Corporations are responsible for creating value through their
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businesses.
 B. Business Unit Level Strategy

•A strategic business unit may be a division, product

line, or other profit center
•At the business level, the strategy formulation phase
deals with:
 positioning the business against rivals

 anticipating changes in demand and technologies

 Influencing the nature of competition through

strategic actions
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 C. Functional-Level Strategy
• This kind of strategy is concerned with making
improvements to business functions that support
business and corporate strategy.
• The functional level of the organization is the level
of the operating divisions and departments.
• The strategic issues at the functional level are
related to business processes and the value chain.
• Functional level strategies in marketing, finance,
operations, human resources, and R&D involve the
development and coordination of resources
through which business unit level strategies can be
executed efficiently and effectively. 6
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 5.2.1 Types of Corporate-level strategies

1. Integration Strategies
•Focuses on moving to different industry level, different
product & technology but the basic market remains the
same.
•There are three types of integrative growths,
a. Forward integration,
b. backward integration, and
c. horizontal integration are sometimes collectively
referred to as vertical integration strategies.
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 Conti…..

Vertical integration strategies allow a firm to gain control

over distributors, suppliers, and/or competitors.
– Exists when a firm produces its own inputs
(backward integration) or owns channels of
distribution of outputs (forward integration)
– A firm pursuing vertical integration usually is
motivated to strengthen its position in its core
business by gaining market power over
competitors
• Benefits of vertical integration strategy
• Allow a firm to gain control over:
 Distributors (forward integration)
 Suppliers (backward integration) 9
 Types of Integration Strategies

A. Forward integration
• involves gaining ownership or increased control
over distributors or retailers. It also refers to the
transactions between the customers and firm.
• Increasing numbers of manufacturers (suppliers)
today are pursuing a forward integration strategy by
establishing Web sites to directly sell products to
consumers.
• For example, Microsoft is opening its own retail
stores, a forward integration strategy similar to rival
Apple Inc., which currently has more than 200
stores around the world. 10
 B. Backward Integration
• Backward integration is a strategy of seeking
ownership or increased control of a firm's suppliers.
• This strategy can be especially appropriate when a
firm's current suppliers are unreliable, too costly, or
cannot meet the firm's needs.
• In a major strategic shift to design its own computer
chips, Apple Inc. in 2009 began a backward
integration strategy to shield Apple technology from
rival firms.
• Apple envisions soon producing its own internally
developed chips for its iPhone and iPod Touch
devices. 11
 C. Horizontal Integration
•Horizontal integration refers to a strategy of seeking ownership of
or increased control over a firm's competitors
•It is looking for new opportunities either by the purchase of the
new firm or hostile take over the other firm.
• It should be done that every firm wants to increase its area of
influence, market share and business.
•Horizontal integration refers to the acquisition of similar
products & services
 The two corporate tools to achieve integrative growth are:
• Acquisition
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• Internal development
 2. Intensive Strategies
• Market penetration, market
development, and product
development are sometimes referred
to as intensive strategies because
they require intensive efforts to
improve a firm's competitive position
with existing products.

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 Types of Intensive Strategies
A. Market Penetration
• A market-penetration strategy seeks to increase
market share for present products or services in
present markets through greater marketing efforts.
• This strategy is widely used alone and in
combination with other strategies.
• Market penetration includes increasing the number
of
salespersons,
increasing advertising expenditures,
offering extensive sales promotion items, or
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 Conti…

• There are two aspects of market

penetration:
• Rapid market penetration:
• based on two assumptions, to lower the
price and promotional activities can be
increased.
• Slow market penetration: also based on
two assumptions, to lower the price but
promotional activities are not changed.
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 B. Market Development
• Market development involves introducing present
products or services into new geographic areas.
• It is selling present products in new markets –
additional regional, national & international
expansions.
• Attracting other market segments through:
– Developing product versions to appeal to
other segments
– Entering other channels of distribution
– Advertising in other media
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 C. Product Development
• Product development is a strategy that seeks
increased sales by improving or modifying present
products or services.
• Product development usually entails large research
and development expenditures.
• Product development: is developing new products
for present markets. This involves:
– Developing new product features:
• Modifying (change color, form, shape, etc.)
• Magnify & minify
• Rearrange (layout, patterns, etc.) 17
 3. Diversification Strategies
•Diversification growth strategy: is a change the
characteristics of products, markets & technology or
all the three.
•Thus, the chosen industry for diversification must be
attractive enough to yield consistently high returns on
investment and offer potential across the operating
divisions for synergies greater than those entities
could achieve alone. 18
 Conti….

• There are three general types of diversification

strategies: concentric, horizontal, and
conglomerate.
A. Concentric Diversification
• Adding new, but related, products or services is
widely called concentric diversification
• Concentric: seeking growth with new market &
product having meaningful synergy or fit with
existing business– Related Diversification.
• Businesses are said to be related when their value
chains posses competitively valuable cross-business
strategic fits 19
 B. Conglomerate Diversification

• Adding new, unrelated products or services is called

conglomerate diversification.
• Businesses are said to be unrelated when their
value chains are so dissimilar that no competitively
valuable cross-business relationships exist.
• Conglomerate: seeking growth by appealing to new
markets with new product that have no technology
relationships to current product – Unrelated
Diversification.
– Most of the acquisitions are principally done on profit
considerations
– Example: Virgin Group, MIDROC Ethiopia, West farmers, 20
 C. Horizontal Diversification

• Adding new, unrelated products or services

for present customers is called horizontal
diversification.
• This strategy is not as risky as conglomerate
diversification because a firm already should
be familiar with its present customers.
• Horizontal: seeking growth by appealing to
current market, with new products that are
technologically unrelated to present products
(hotels & tour operators) .
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 4. Defensive Strategies
• It can be used as a short-term solution to:
 Reverse a negative trend
 Overcome a crisis or problem situation
• Reasons:
 The company faced financial problems – certain
parts of the organization are doing poorly
 The company forecasts hard times ahead related to:
– Challenges from new competitors & products
– Changes in government regulations
• Therefore, in addition to integrative, intensive, and
diversification strategies, organizations also could
pursue retrenchment, divestiture, or liquidation. 22
 a. Retrenchment
• Retrenchment occurs when an organization
regroups through cost and asset reduction to
reverse declining sales and profits
• Retrenchment strategy will be used when the
company wants to reduce its operations – primarily,
by reducing product lines
– The main purpose of retrenchment is economizing
through cutting production costs
• During retrenchment, strategists work with limited
resources and face pressure from shareholders,
employees, and the media.
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 b. Divestiture

• 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 strategy occurs when an organization
sells or divests itself of a business or part of a
Increase the performance of the remaining
businesses
Settle its debt – liquidity
• Divestiture has become a very popular strategy as
firms try to focus on their core strengths, lessening
their level of diversification.
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 c. Liquidation
• Selling all of a company's assets, in parts, for their
tangible worth is called liquidation.
• Liquidation occurs when an entire company is either
sold or dissolved either by choice or force
• When by force, the decision often occurs because of
a deteriorated financial condition:
 Such circumstances leave the seller in a weak
bargaining position
 It is the last resort measure & generally is forced by
financial institutions
• Liquidation is recognition of defeat and,
consequently, can be an emotionally difficult strategy.
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 5.2.2 Michael Porter’s generic strategies
(Business level strategy)
• They can choose from three basic generic
competitive approaches
• cost leadership,
• differentiation, and
• Focus
• These strategies are called generic because all
businesses or industries can pursue them,
regardless of whether they are
manufacturing, service, or nonprofit 27
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 a. Cost Leadership Strategy
• A company’s produce goods or services at a
cost lower than those of competitors.
• An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to competitors with
features that are acceptable to customers.
• Relatively standardized products
• features acceptable to many customers
• lowest competitive price
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 Cost saving actions required by this strategy
• Building efficient scale facilities ,
• Tightly controlling production costs and
overhead,
• Minimizing costs of sales, R&D and service,
• building efficient manufacturing facilities,
• monitoring costs of activities provided by
outsiders
• simplifying production processes
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 Risks of Cost Leadership Strategy
• Processes used by the cost leader to produce
and distribute its good or service could
become obsolete because of competitors’
innovations
• Too much focus by the cost leader on cost
reductions may occur at the expense of trying
to understand customers’ perceptions of
“competitive levels of differentiation
• Competitors may learn how to successfully
imitate the cost leader’s strategy 31
 b. Differentiation Strategy

• The objective of the generic differentiation strategy

is to achieve a competitive advantage by creating a
product that is perceived by customers to be unique
in some important way.
• The differentiated product’s ability to satisfy a
customer’s need in a way that its competitors cannot
means that the company can charge a premium price
—a price considerably above the industry average.
• An integrated set of actions designed by a firm to
produce or deliver goods or services (at an
acceptable cost) that customers perceive as being
different in ways that are important to them
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 Conti…

• Price for product can exceed what the firm’s target

customers are willing to pay
• Non standardized products
• customers value differentiated features more than
they value low cost
• Value provided by unique features and value
characteristics
• Command premium price
• High customer service
• Superior quality
• Prestige or exclusivity
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 Differentiation actions required by this
strategy:
–developing new systems and processes
–shaping perceptions through
advertising
–quality focus
–capability in R&D
–maximize human resource
contributions through low turnover and
high motivation 34
 Major Risks of Differentiation Strategy
• Experience may narrow customer’s
perceptions of the value of
differentiated features of the firm’s
products
• Makers of counterfeit goods may
attempt to replicate differentiated
features of the firm’s products
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 c. Focused Strategies
• In this strategy the firm concentrates on a select
few target markets.
• It is also called niche strategy.
• It is hoped that by focusing your marketing efforts
on one or two narrow market segments
• The firm typically looks to gain a competitive
advantage through effectiveness rather than
efficiency.
• It is most suitable for relatively small firms but can
be used by any company.
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 Conti…

• A focus strategy must exploit a narrow

target’s differences from the balance of
the industry by:
– isolating a particular buyer group
– isolating a unique segment of a product
line
– concentrating on a particular geographic
market
– finding their “niche”
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 Major Risks of Focused Strategies

• Firm may be “out focused” by

competitors
• Large competitor may set its sights on
your niche market
• Preferences of niche market may
change to match those of broad
market
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 d. Integrated Strategy
• A firm that successfully uses an
integrated cost
leadership/differentiation strategy
should be in a better position to:
– adapt quickly to environmental changes
– learn new skills and technologies more
quickly
– effectively leverage its core competencies
while competing against its rivals
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 Benefits of Integrated Strategy

• Successful firms using this strategy

have above-average returns
–Firm offers two types of values to
customers some differentiated
features (but less than a true
differentiated firm)
–relatively low cost (but now as low as
the cost leader’s price
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 Major Risks of Integrated Strategy
• An integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost nor
the most differentiated firm)
• The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy 41
 5.2.3 Functional Level Strategy
• Functional-level strategies are concerned with
coordinating the functional areas of the
organization (marketing, finance, human resources,
production, research and development, etc.) so that
each functional area upholds and contributes to
individual business-level strategies and the overall
corporate-level strategy.
• This involves coordinating the various functions and
operations needed to design, manufacturer, deliver,
and support the product or service of each business
within the corporate portfolio.
• Functional strategies are primarily concerned with:
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 Conti…..

 Efficiently utilizing specialists within the functional

area.
 Integrating activities within the functional area (e.g.,
coordinating advertising, promotion, and marketing
research in marketing; or purchasing, inventory
control, and shipping in production/operations).
 Assuring that functional strategies mesh with
business-level strategies and the overall corporate-
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 5.3 Long term objectives

• Long-term objectives represent the

results expected from pursuing certain
strategies.
• Strategies represent the actions to be
taken to accomplish long-term
objectives.
• The time frame for objectives and
strategies should be consistent, usually
from two to five years. 44
 The Nature of Long-Term Objectives

• Objectives should be quantitative, measurable,

realistic, understandable, challenging, hierarchical,
obtainable, and congruent among organizational
units.
• Each objective should also be associated with a time
line.
• Objectives are commonly stated in terms such as
growth in assets, growth in sales, profitability,
market share, degree and nature of diversification,
degree and nature of vertical integration, earnings
per share, and social responsibility.
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 5.4 A comprehensive strategy formulation
Framework
• Important strategy-formulation
techniques can be integrated into a
three-stage decision-making framework.
• Stage-1 (Formulation Framework)
1. External factor evaluation
2. Competitive matrix profile
3. Internal factor evaluation
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 Stage-2 (Matching stage)
1. TWOS Matrix (Threats-Opportunities-
Weaknesses-Strengths)
2. SPACE Matrix (Strategic Position and
Action Evaluation)
3. BCG Matrix (Boston Consulting Group)
4. IE Matrix (Internal and external)
5. GS Matrix (Grand Strategy)
• Stage-3 (Decision stage)
• 1. QSPM (Quantitative Strategic Planning
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 Stage-1 (Formulation Framework)
1. The External Factor Evaluation (EFE) Matrix
• allows strategists to summarize and evaluate economic, social,
cultural, demographic, environmental, political, governmental,
legal, technological, and competitive information.
• The EFE matrix consists of five steps process.
1. List key external factors as identified in the external-audit
process
2. Assign to each factor a weight that ranges from 0.0 (not
important) to 1.0 (very important).
3. Assign a 1-to-4 rating to each key external factor
4. Multiply each factor's weight by its rating to determine a
weighted score.
5. Sum the weighted scores for each variable to determine the
total weighted score for the organization. 48
49
 2. The Competitive Profile Matrix (CPM)

•It identifies a firm's major competitors and their

particular strengths and weaknesses in relation to a
sample firm's strategic position.
•In a CPM the ratings and total weighted scores for
rival firms can be compared to the sample firm.
• This comparative analysis provides important
internal strategic information.

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51
 Stage-2 (Matching stage)

1. THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS
(TOWS) MATRIX
• Analysis is a strategic planning tool used to evaluate the
Threats, Opportunities and Strengths, Weaknesses,
involved in a project or in a business venture or in any
other situation requiring a decision.
• This is an important tool in order to formulate strategy.
This Matrix is an important matching tool that helps
managers develops four types of strategies: SO
• Strategies (strength-opportunities), WO Strategies
(weakness- opportunities), ST Strategies (strength-
threats), and WT Strategies (weakness-threats).The most
difficult part of TOWS matrix is to match internal and
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external factor.