CHAPTER FOUR

STRATEGY FORMULATION:

STRATEGY ANALYSIS AND CHOICE

4.1 The 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.
 Strategic analysis (environment, culture and stakeholder analysis, and resources and strategic
capability) – to understand the strategic situation
 Strategic choice (generation of strategic options, evaluation of options and selection of
strategy) – to form the strategies

4.2 Types of strategy

Strategy can be formulated at three levels, namely, the corporate level, the business level, and the
functional level.
4.2.1. Corporate level strategy
 Major corporate strategies (growth, stability & defensive)
Corporate level strategy defines the business areas in which your firm will operate. It deals with
aligning the resource deployments across a diverse set of business areas, related or unrelated.
Strategy formulation at this level involves integrating and managing the diverse businesses and
realizing synergy at the corporate level. The top management team is responsible for formulating
the corporate strategy. The corporate strategy reflects the path toward attaining the vision of your
organization. For example, your firm may have four distinct lines of business operations,
namely, automobiles, steel, tea, and telecom. The corporate level strategy will outline whether
the organization should compete in or withdraw from each of these lines of businesses, and in
which business unit, investments should be increased, in line with the vision of your firm.

4.2.2 Business level strategy

Business level strategies are formulated for specific strategic business units and relate to a
distinct product-market area. It involves defining the competitive position of a strategic business
unit. Business level strategies detail actions taken to provide value to customers and gain a
competitive advantage by exploiting core competencies in specific, individual product or service
markets.
Customers are the foundation or essence of a organization's business-level strategies. Who will
be served, what needs have to be met, and how those needs will be satisfied are determined by
the senior management. Who are the customers? What are the goods and/or services that
potential customers need? Knowing ones customers is very import in obtaining and sustaining a
competitive advantage. Being able to successfully predict and satisfy future customer needs is
important.

How to satisfy customer needs? Organizations must determine how to bundle resources and
capabilities to form core competencies and then use these core competencies to satisfy customer
needs by implementing value-crating strategies.

Generic business strategies for gaining competitive advantage

There are three generic strategies that are used to help organizations establish a competitive
advantage over industry rivals. Firms may also choose to compete across a broad market or a
focused market. We also briefly discuss a fifth business level strategy called an integrated
strategy.

1. Cost Leadership – Organizations compete for a wide customer based on price. Price is based
on internal efficiency in order to have a margin that will sustain above average returns and cost
to the customer so that customers will purchase your product/service. Works well when
product/service is standardized can have generic goods that are acceptable to many customers,
and can offer the lowest price. Continuous efforts to lower costs relative to competitors are
necessary in order to successfully be a cost leader. This can include:

 Building state of art efficient facilities (may make it costly for competition to imitate)
 Maintain tight control over production and overhead costs
 Minimize cost of sales, R&D, and service.

 Earlier we discussed Porter's Model. A cost leadership strategy may help to remain
profitable even with: rivalry, new entrants, suppliers' power, substitute products, and
buyers' power.

 Rivalry – Competitors are likely to avoid a price war, since the low cost firm will
continue to earn profits after competitors compete away their profits (Airlines).
 Customers – Powerful customers that force firms to produce goods/service at lower
profits may exit the market rather than earn below average profits leaving the low cost
organization in a monopoly positions. Buyers then loose much of their buying power.
 Suppliers – Cost leaders are able to absorb greater price increases before it must raise
price to customers.
 Entrants – Low cost leaders create barriers to market entry through its continuous focus
on efficiency and reducing costs.
 Substitutes – Low cost leaders are more likely to lower costs to entice customers to stay
with their product, invest to develop substitutes, purchase patents.

Risks

 Technology
 Imitation
 Tunnel Vision

2. Differentiation - Value is provided to customers through unique features and

characteristics of an organization's products rather than by the lowest price. This is done
 through high quality, features, high customer service, rapid product innovation, advanced
technological features, image management, etc.

Risks of Using a Differentiation Strategy

 Uniqueness
 Imitation
 Loss of Value

Porter's Five Forces Model – Effective differentiators can remain profitable even when the five
forces appear unattractive.

 Rivalry – Brand loyalty means that customers will be less sensitive to price increases, as
long as the firm can satisfy the needs of its customers (audiofiles).
 Suppliers – Because differentiators charge a premium price they can more afford to
absorb higher costs and customers are willing to pay extra too.
 Entrants – Loyalty provides a difficult barrier to overcome. Substitutes (trans. 4-26) –
Once again brand loyalty helps combat substitute products.

3. Focused business strategy - Organizations not only compete based on price and
differentiation, but also select a small segment of the market to provide goods and services to.

Focused Strategies - Strategies that seek to serve the needs of a particular customer segment
(e.g., federal gov't).

Companies that use focused strategies may be able serve the smaller segment (e.g. business
travelers) better than competitors who have a wider base of customers. This is especially true
when special needs make it difficult for industry-wide competitors to serve the needs of this
group of customers. By serving a segment that was previously poorly segmented an organization
has unique capability to serve niche.
 4.2.3. Functional Level Strategy
Functional level strategies relate to the different functional areas which a strategic business unit
has, such as marketing, production and operations, finance, and human resources. These
strategies are formulated by the functional heads along with their teams and are aligned with the
business level strategies. The strategies at the functional level involve setting up short-term
functional objectives, the attainment of which will lead to the realization of the business level
strategy.

For example, the marketing strategy for a tea business which is following the differentiation
strategy may translate into launching and selling a wide variety of tea variants through company-
owned retail outlets. This may result in the distribution objective of opening 25 retail outlets in a
city; and producing 15 varieties of tea may be the objective for the production department. The
realization of the functional strategies in the form of quantifiable and measurable objectives will
result in the achievement of business level strategies as well.
In a single business scenario, the corporate and business level responsibilities are clubbed
together and undertaken by a single group, that is, the top management, whereas in a multi
business scenario, there are three fully operative levels.

Levels of Strategy
 Long term objectives
Strategy formulation is the process by which an organization chooses the most appropriate
courses of action to achieve its defined goals. This process is essential to an organization's
success, because it provides a framework for the actions that will lead to the anticipated results.
Stage-1 (Formulation Framework) or Input stage
1. External factor evaluation
2. Competitive matrix profile
3. Internal factor evaluation
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 Matrix)

BSC model

Balanced scorecard is a concept that enables comprehensive strategic management in an

enterprise. The analysis of literature allows to state that balanced scorecard evolves continuously,
because of which it enjoys a great interest from as well theoreticians as practitioners of this issue.
This modern concept allows converting the strategy of the enterprise into operational activities
and objectives. Balanced scorecard is flexible and universal method, thanks to which it
effectively fulfills the objectives set by managers of the organization.

Balanced Scorecard translates mission and strategy of the company into a comprehensive set of
performance indicators that provide a framework for assessing company´s strategy and
management system. It represents a multidimensional system that is used to define and
implement organizational and management strategies at all organizational levels of the company
to maximize the process of value creation. Balanced Scorecard is a management system used in
companies which provides efficient utilization of resources for shareholders.
The Balanced Scorecard consists of performance indicators, which influence a participant’s
motivation and monitor the achievement of a chosen strategy. It is a tool that helps to measure
business effectiveness through four perspectives:
• The Customer Perspective;

• The Financial Perspective;

• The Business Process Perspective;

• The Learning and Growth Perspective.

The 7’S model :

It is a tool that analyzes firm’s organizational design by looking at 7 key internal elements:
strategy, structure, systems, shared values, style, staff and skills, in order to identify if they are
effectively aligned and allow organization to achieve its objectives. The model can be applied to
many situations and is a valuable tool when organizational design is at question. The most
common uses of the framework are:

 To facilitate organizational change.

 To help implement new strategy.

 To identify how each area may change in a future.

 To facilitate the merger of organizations.

 Strategy – express how the company achieves its vision and how responds to
opportunities and threats from environment, means awareness of the strategy, its
explanation to external subjects not only to internal,
 Structure – the way how the company is structured, inferiority and superiority relations,
organizational structure supports the implementation of the strategy,
 Systems – formal and informal everyday activities and procedures carried out by
employees, it is about systems of planning, control and information that support the
implementation of the strategy.
 Style – style of leadership and choice of the appropriate style of leadership of the
company belong to important factors affecting the implementation of the strategy,
 Staff – employees and their basic skills are key factors of the success, companies should
have right people on the right place,
 Skills – actual skills and abilities of company´s employees, companies should focus on
the development of the skills in the future, extension of knowledge and acquisition of
experiences,
 Shared values – values enforced in the strategy are based on shared interests and are
included in the mission of the company, they are a key element that influences the
effectiveness of all other factors, it is an important feature of company´s culture that
supports the creation and implementation of the strategy.