Unit-2

STRATEGY
FORMULATION AND
CHOICE OF
ALTERNATIVES
 Strategy formulation
• Strategy formulation refers to the process
of
choosing the most appropriate course of
action the realization of
for and objectives
goals organizational
and thereby
achieving the organizational vision.
 Steps in strategy formulation
The process of strategy formulation basically
involves six main steps:

1. Setting Organizations’ objectives - strategy is

a wider term which believes in the manner of
deployment of resources so as to achieve the
objectives.
 Steps in strategy
formulation
2.Evaluating the Organizational Environment –
The next step is to evaluate the general economic
and industrial environment in which the
organization operates. This includes a review of
the organizations competitive position.
3. Setting Quantitative Targets- To compare with
long term customers, so as to evaluate the
contribution that might be made by various
product zones or operating departments.
 Steps in strategy
formulation
4.Aiming in context with the divisional plans - In this
step, the contributions made by each department or
division or product category within the organization is
identified and accordingly strategic planning is done for
each sub-unit.
5.Performance Analysis - Performance analysis includes
discovering and analyzing the gap between the planned
or desired performance. A critical evaluation of the
organizations past performance, present condition and
the desired future conditions must be done by the
organization.
 Steps in strategy
formulation
6.Choice of Strategy -The best course of action
is actually chosen after considering
organizational goals, organizational strengths,
potential and limitations as well as the
external opportunities.
 Process of strategy formulation
• Corporate Level: four strategic
The alternatives are:
– Stability Strategy
– Expansion/Growth strategy
– Retrenchment strategy
– Combination strategy
• Business level
• Functional level
 Corporate Level Strategy
Expansion/
Stability Retrenchment Combination
Growth
Strategy strategy strategy
strategy

 No-change  Expansion through

strategy concentration
 Turnaround
 Expansion through
 Profit integration strategy
 Expansion through  Simultaneous
strategy diversification  Divestment
combination
 Pause/  Expansion through strategy
cooperation(Merger&  Sequential
proceed- Acquisition)  Bankruptcy/
Combination
with-  Expansion through Liquidation
internationalization
caution  Expansion through strategy
digitalization
strategy
 Corporate level strategies
• It describes a company's overall direction in
terms of growth and management of its various
business and product lines.
• Corporate strategy deals with three key decisions
related to:
– Allocating resources among different businesses of a
firm.
– Transferring resources from one set of
business to other.
– Managing and nurturing a portfolio of businesses.
 Directional strategies (Grand
Strategies)
(i) Stability strategies:
– No-change strategy
– Profit strategy
– Pause/proceed-
with-caution
strategy
(ii) Expansion /
Growth
Strategies:
– Expansion through
concentration
– Expansion through
 Directional strategies (Grand
Strategies)
III. Retrenchment strategies:
– Turnaround strategy
– Divestment strategy
– Bankruptcy/Liquidation strategy
IV. Combination Strategies:
– Simultaneous combination
– Sequential Combination
– Combination of simultaneous & sequential strategies
 Stability Strategies
• A firm pursues stability strategy when:
– It continues to serve the public in the same
product or service, market, and function sectors
as defined in its business definition.
– Its main strategic decisions focus on incremental
improvement of functional performance.
 Why Stability
Strategies?
• It is less risky, involves less changes and
people feel comfortable with things as they
are.
• The environment faced is relatively stable.
• Expansion may be perceived as being
threatening
. is sought through stabilizing
• after
Consolidatio
a period of rapid expansion.
n
 Types of Stability
Strategies
• No change strategies
• Profit strategies
• Pause/proceed with caution strategies
• Modest Growth strategy
• Sustainable Growth strategy
 No Change Strategies
• Taking no decision sometimes, is a decision
too!
• This strategy is relevant in predictable and
certain external environment and stable
organizational environment.
• Small and medium sized firms rely on this
strategy.
 Profit Strategies
• Things do change.
• It is assumed that the problem is short lived.
• Only motive is sustaining profitability for
a temporary phase.
• It works only if the problems are really
short lived.
 Pause/Proceed With Caution
Strategies
• It is employed to test the ground before
moving ahead with a full-fledged corporate
strategy.
• The purpose is to let the system adapt to the
new strategies.
• It is deliberate and conscious attempt.
EXAMPLE: HINDUSTAN UNILIVER INTO SHOE
BUSINESS.
Expansion Strategies
Expansion Strategies
• The corporate strategy of expansion is
followed when an organization aims at high
growth by substantially broadening the scope
of one or more of its business in terms of their
respective customer groups, customer
functions and alternative technologies singly
or jointly-in order to improve its overall
performance.
 Expansion Strategies
• It may become imperative when the
environment demands increase in pace of
activity.
• Increasing size may lead to more control over
the market vis-à-vis competitors.
• Advantage from the experience curve and
scale of operation may accrue.
Expansion through
Concentration (intensification)
• Concentration is a simple, first-level type of
expansion strategy. It involves converging
resources in one or more of a firm businesses
in terms of their respective customer needs,
customer functions, or alternative
technologies-either singly or jointly- in such a
manner that expansion results.
 Types of Concentration
Strategies
• Market penetration :
It involves selling more product to the same
market
• Market development :
It involves selling the same products to new
markets
• Product development:
It involves selling new products to the same
markets
 Expansion through
Integration
• Integration (from the Latin ‘integer’ meaning
whole or entire ) generally means
combining parts so that they work together
or form a whole.
• Types:
– Horizontal Integration
– Vertical Integration
• Forward Integration
• Backward Integration
 Expansion through
Diversification
• Diversification involves a substantial change in business
definition-singly or jointly in terms of customer
functions, customer groups or alternative technologies
of one or more of a firm’s business.
• When new products are made for new markets then
diversification take place. The notion of diversifying is
therefore related to the newness of products or
markets or both.
• By adopting diversification, an organisation does
something novel in terms of making new products or
serving new markets or doing both simultaneously.
 Types of Diversification
• Concentric (Related) Diversification:
– Marketing-related concentric diversification
– Technology-related concentric diversification
– Marketing & Technology-related concentric
diversification
• Conglomerate (Unrelated)
Diversification
Why are Diversification Strategies
adopted?
• Diversification strategies are adopted to minimize
risk by spreading it over several business.
• Diversification may be used to capitalise on its
capabilities and business model so as to maximize
organizational strength or minimize weakness.
• Diversification may be the only way out if growth
in existing business is blocked due to
environmental and regulatory factors.
Expansion through
Internationalisation
• International strategies are type of
expansion strategies that require organizations
to market their products or services beyond
the domestic or national market.
• For doing so, an organization would have
to Asses the international
evaluat environment, its own
e
strategies to
capabilities enter
and
devisestretegy
foreign market a
s.
Types of Internationalisation
Strategies
• Bartlett & Ghoshal Model:
Advantages Of Expansion Through
Internationalisation
• Realising economies scale
• Realising economies of scope
• Expansion and extension of markets
• Access to resources overseas
Disadvantages Of Expansion Through
Internationalisation
• Higher risks
• Difficulty in managing cultural diversity
• High bureaucratic costs
• Trade barriers
 Expansion through
Cooperation
The term ‘cooperation’ expresses the idea of
simultaneous competition and cooperation among
rival firms for mutual benefits.

• Types of cooperative strategies:

1. Merger, Acquisition & takeoversJoint Ventures
2. Strategic alliances: (Precompetitive alliances, Non-
competitive alliances,Competitive alliances & Pre-competitive
alliances
Merger & Acquisition
• Refers to a combination of two or more companies
into a single company.
• Both the organizations are dissolved and their
assets and liabilities are combined to form a new
business entity.
• An acquisition refers to the process of gaining
partial or full control of one organization by
another.
• The main reason behind merger and acquisition is
the desire of an organization to increase ,gain
synergy and to create competitive advantage,
Types of M&A
• Horizontal Merger
o A merger occurring among the companies in the same industry.
o By merging the two companies expand their range but do not essentially do anything new.
 HP+ COMPACT
 ADITYA BIRLA+ L&T= ULTRA TECH CEMENT
 TATA+ CORUS

• Vertical:
o A merger between two or more organizations having different stages of business.
o The two companies are at different points in the supply chain.
o They create complementary either in terms of supply of inputs or outputs.
• Example:
 Tata fertilizers+ Tata chemicals
 EBay+ paypal

• Concentric :
o Takes place between firms related by Product , Market or Technology.

• Conglomerate Mergers
Case study

Chrysler Corporation Daimler Benz

• In 1998, Daimler-Benz and U.S. based Chrysler Corporation, two leading global
car manufacturers, agreed to combine their businesses in what was perceived
to be a ‘merger of equals’.
• Jurgen Schrempp, CEO of Daimler-Benz and Robert Eaton, Chairman and CEO
of Chrysler Corporation met to discuss the possible merger.
• The merged entity ranked third (after GM and Ford) in the world in terms of
revenues, market capitalization and earnings, and fifth (after GM, Ford, Toyota
and Volkswagen) in the number of units (passenger-cars and commercial
vehicles combined) sold.
• In 1998, co-chairmen and co-CEOs, Schrempp and Eaton led the merged
company to revenues of $155.3 billion and sold 4 million cars and trucks.
• But in 2000, it suffered third quarter losses of more than half a billion dollars,
and projections of even higher losses in the fourth quarter and into 2001.
• In early 2001, the merged company announced that it would slash 26,000 jobs
at its ailing Chrysler division.
• And finally it led Daimler to sell Chrysler in 2007 for 7 billion.
Expansion through Digitalisation
• Digitalisation is defined as digital coding of
information and the growing productivity
gains in processing and transmission it enable.

• The versatility and economy of digitalisation

makes information available efficiently, widely
and cheaply within outside organisations.
Digitalization transforming the value
chain and value system
• Deconstruction- Digitalization changes the
way that value chains and value systems might
work.
• Disintermediation- when some process in the
value chain are eliminated.
• Re-intermediation- When processes in the
value chain are supplemented by one or more
intermediaries.
 Digitalization transforming the value
chain and value system
• Industry morphing-Digitalisation has
created a situation where traditional
industries are transforming into entirely new
types of industries.
• Cannibalisation-A set of activities performed
in the value chain are being replaced by anew
set of activities, thus eating away that part of
value chain.
 Digitalization transforming the
value chain and value
system
• Techno-intensification- Digitalisation of the
value chain and value system results in a
situation where there is more intensive use of
technology and a decreased use of human
resources.
• Re-channelling – It takes place when
manufacturers of products & services pick and
choose some components in the value chain and
specialise in them while letting others perform
the rest of the processes in value chain.
Retrenchment Strategies
 Retrenchment Strategies
A retrenchment strategy is pursued by a firm
when:
• It sees the desirability of or necessity for
reducing its product or service lines, markets,
or functions.
• It focuses its strategic decisions on functional
improvement through the reduction of
activities in units with negative cash flows.
 Why Retrenchment strategies?
• The management no longer wishes to remain
in business either partly or wholly, due to
continuous losses and the organization
becoming viable.
• Stability can be ensured by reallocation of
resources from unprofitable to profitable
businesses.
• The environment faced is threatening.
Types of Retrenchment strategies
RETRENCHMENT STRATEGY

1. TURNAROUND

2.DIVESTMENT

3.LIQUIDATION
TURNAROUND
• Adopting revival measures for a period of time.
• Eliminating unprofitable outputs, cutting assets,
downsizing ,rethinking on firms product line and
customer group.
• Example: DELL
In 2006 planned to sell its product to the customer
directly.
DIVESTMENT
• Selling a stake of a company, subsidiary or other investments
EXAMPLE: Reliance Infra’s sale of Power business.
 Reliance infra sold its power business to Adani Group for
Rs.18800 Crore.
 The two companies signed a pact of 100% stake sale of
reliance Infra integrated business of generation transmission
and distribution of power for Mumbai in 2017.
LIQUIDATION
• Shutting down or winding of business organization.
• Example: KINGFISGER.
Combination Strategies
Combination Strategies
Combination strategies are used by a firm when:
• Its main strategic decisions focus on the
conscious use of several grand strategies
(expansion, stability, retrenchment) at the
same time(simultaneously) in several SBUs of
the company.
• It plans to use several grand strategies at
different future times (sequentially).
 Why Combination
Strategies?
• If the organization is large and faces complex
environment.
• The organization is composed of different
businesses, each of which lies in a different
industry, requiring a different response.
 Types of Combination
Strategies
• Simultaneous combination strategies

• Sequential combination strategies

 Strategic Choice
• Making a strategic choice is
1.
essentially a decision making
process.

• It helps the organisation to achieve 2.

its objectives in the best possible
manner and Finally implement the 3.
chosen alternative.
• It can be defined as ‘the decision to
select from among the grand
strategies considered, the strategy 4.
which will best meet the
enterprise’s objectives’.
Process of strategic choice
There are four steps involved. They are:
1. Focusing on strategic alternatives:
• This could be done by visualizing the
future and working backwards.This is
done through Gap Analysis.
 Expansion strategy: Large Gap +expected environmental
opportunity.
 Stability strategy: narrow Gap
 Retrenchment strategy: Large Gap
 Combination strategy: complex environment.
 Process of strategic
choice
2. Analysing the strategic alternatives:
The narrowed down alternatives are subject
to a thorough analysis. Such an analysis rely
on certain factors.
These factors are called Selection factors.
These selection factors can be divided into

(1)Objective:Based on analytical techniques and

facts or data.(expressed in percentages like Mkt
share)
(2)Subjective(based on one’s
 Process of strategic
choice
3. Evaluating the strategic alternatives:
- Each one of the narrowed down alternatives has to
be evaluated to its capacity to help the organisation
achieve its objectives.
-Its done on the basis of selection factors and by
using successive steps/procedures and strategists
may use any approach which suits the circumstance
better.
 Process of strategic
choice
4. Choosing from among the strategic
alternatives:
-Normally one or more strategies have to be
chosen for implementation.
-A blueprint has to be made that will describe
the strategies and the conditions under which
they would operate.
 Business
Strategy
• Business Strategies are the course of action
adopted by a firm for each of its business
separately to serve identified customer groups
and provide value to the customer by
satisfaction of their needs.
• In the process the firm uses its competencies
to gain, sustain, and enhance its strategies or
competitive advantage.
 Types of Strategies at Business
level

• Generic Strategic Alternative/Generic

Competitive Strategies

• Competitive Tactics
 Generic Strategies
• A company’s competitive strategy consists of the
business approach and initiative it undertakes to
attract customer and fulfill their expectation, to
withstand competitive pressure and to
strengthen its market position
• Analytical Tool: Porter’s Generic Strategy
What is competitive
advantage?
Higher profit than competitors in the
market place
How to gain competitive
advantage?
• By analyzing 2 key dimenssions.
1. Scope of the strategy.(Reach /
Customer Base)
Broad Market
Narrow Market.
2. Source of competitive advantage.
Differentiation
Low cost
 Competitive
Tactics
• Strategy gives rise to tactics and thus,
“tactics may be thought of as a sub-strategy.”
Categories of Competitive Tactics:
• Timing Tactics
– First-mover Strategies Advantage
– Second-mover and late –mover Strategies Advantages
• Market Location Tactics:
– Offensive Strategy
– Defensive Strategy
• Cooperative Strategies
HOW TO CONDUCT A VALUE
CHAIN ANALYSIS
1. Identify Value Chain Activities
• The first step in conducting a value chain analysis is to understand all of the primary and
secondary activities that go into your product or service’s creation. If your company sells
multiple products or services, it’s important to perform this process for each one.

2. Determine the Cost and Value of Activities

• Once the primary and secondary activities have been identified, the next step is to
determine the value that each activity adds to the process, along with the costs
involved.

• When thinking about the value created by activities, ask:

 How does each increase the end user’s satisfaction or enjoyment?
 How does it create value for my firm?
 For example, does constructing the product out of certain materials make it more durable or luxurious for the
user?
 Does including a certain feature make it more likely your firm will benefit from network effects and increased
business?
Similarly, it’s important to understand the costs associated with
each step in the process. Depending on your situation, you may
find that lowering expenses is an easy way to improve the value
each transaction provides.

3.
Identify Opportunities for Competitive
Advantage
• Once you’ve compiled your value chain and understand the
cost and value associated with each step, you can analyze it
through the lens of whatever competitive advantage you’re
trying to achieve.
Benchmarking: