Strategic formulations

Strategic formulations

• Alternate strategies are formulated based on-– Situation Analysis- the process of

finding a strategic fit between external opportunities and internal strengths while working around external and internal weaknesses

Situational analysis

• SWOT- Strengths-Weaknesses-Opportunities-Threats

• Strategy= opportunity/capacity• Opportunity has no real value unless

a company has the capacity to take advantage of that opportunity

Criticisms of SWOT analysis

• Generates lengthy lists• Uses no weights to reflect priorities• Uses ambiguous words and phrases• Same factor can be in 2 categories• No obligation to verify opinion with

data or analysis• Requires only a single level of analysis• No logical link to strategy

implementation

Situational analysis- Ways to improve on swot

• Generating a Strategic Factors Analysis Summary (SFAS) Matrix

• SFAS summarizes an organization’s strategic factors by combining the external factors from the EFAS Table with the internal factors from the IFAS Table

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TOWS Matrix

• illustrates how the external opportunities and threats can be matched with internal strengths and weaknesses to result in 4 possible strategic alternatives

• Provides a means to brainstorm alternative strategies

• Forces managers to create various kinds of growth and retrenchment strategies

• Used to generate corporate as well as business strategies

Prentice Hall, Inc. ©2009 6-9

Strategic formulations at 3 level

• Corporate

• Business

• functional

Corporate strategies

• It mean strategies for enterprise consisting of more than one business and or company

• In small and medium organisations, same set of people perform corporate, business and functional strategies

Corporate strategies

• It concern with the choice of direction of the group as a whole and the management of its business or product portfolio-– Directional strategy- the firm’s overall

orientation toward growth, stability, or retrenchment

– Portfolio analysis- industries or markets in which the firm competes through its products and business unites

– Parenting strategy- the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units

Directional alternatives

• Expansion strategies

• Stability strategies

• Retrenchment strategies

• Combination strategies

Forms of expansion

• Expansion or concentration– Adding capacities– Integrations-

• Vertical integrations-– Backward integration- in raw materials– Forward integration- distribution

• Diversifications-– In related areas or concentric diversifications

• Marketing concentric• Technology concentric

– Unrelated or conglomerate diversification In new and unrelated businesses

Simplified Stages of Vertical Integration: Shaw Industries

Raw Materials Manufacturing of final product DistributionRaw Materials Manufacturing of final product Distribution

PolypropyleneFiber Production

Carpet Manufacturing Retail Stores

Backward Integration Forward Integration

integrations

• Full integration- a firm internally makes 100% of its key suppliers and completely controls its distributors

• Tapered integration- a firm internally produces less than half of its own requirements and buys the rest from outside suppliers-some elements could be fully integrated

– create competition and save in cost– Quality and timely supply– Avoid total dependence on outsiders

• Quasi-integration- a company does not make any of its key supplies but purchases most of its requirements from outside suppliers that are under its partial control

• Long-term contracts- agreements for supply of agreed-upon goods and services to each other for a specific period of time

Benefits and Risks of Vertical Integration

• Benefits-

• Cut inventory cost

• Reduce uncertainties of procurement and sales

• Eliminate or reduce buying and selling expenses

• Quality and timely supply

• Avoid dependence on outsiders

• Protection and control over valuable assets

• Access to new business opportunities and profitability

• Risks- Costs and expenses associated with increased overhead and capital expenditures

• Loss of flexibility resulting from large investments

• Technologies in some part could be prone to changes. So it open many fronts

• unbalanced capacities enhance transaction cost

• Additional administrative costs associated with managing a more complex set of activities

• Some sections could require special skills and salaries. Create anomaly

Conditions of integration

• Is existing supply chain meeting final customer needs? If yes don’t change- Nike

• How volatile is competitive situation- if it is don’t go for integration

• Is it possible to own without buying or investing? HUL

• Will integration enhance your structural or bargaining power- hybrid integrations, forward integrations to distribution

Ansoff’s product-market matrix

PRODUCT PRESENT NEW

MARKET

MARKET PRODUCTPRESENT PENETRATION DEVELOPMENT

MARKET DIVERSIFICATIONNEW DEVELOPMENT

Adapted from H. I. Ansoff: “Strategies for Diversification” in Harvard Business Review, 1957, 5, pp. 113-124.

Ansoff’s matrix for diversification strategies

------------------------------------------------------------------------- ----- New products

------------------------------------------------------------------------------ Related technology Unrelated

technology------------------------------------------------------------------------------

New functions------------------------------------------------------------------------------

Firm its own Vertical integrationcustomer

------------------------------------------------------------------------------Same type Horizontal diversification

of product------------------------------------------------------------------------------

Similar type Marketing and Marketing relatedof product technology-related concentric

diversification diversification------------------------------------------------------------------------------

New type Technology-related Conglomerateof product concentric diversification diversification

------------------------------------------------------------------------------Adapted from H.I. Ansoff: Corporate Strategy (New York: McGraw-Hill, 1965), p.132.

Diversification strategies

• Also called horizontal diversification- moving into new business

• 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 businesses.

Concentric or related diversification

• Marketing-related concentric diversification

• Technology-related concentric diversification

• Marketing- and technology-related concentric diversification

Conglomerate or unrelated diversification

• When an organisation adopts a strategy which requires taking up those activities which are unrelated to the existing business definition of one or more of its businesses either in terms of their respective customer groups, customer functions or alternative technologies

• Increase spread• Decrease competency

and specialty

Means of expansion- in both- integration or diversification

• Acquisitions- the purchase of a company that is completely absorbed by the subsidiary or division of the acquiring corporation

• Merger- a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives

• Strategic alliances, Joint ventures• Internal developments• Greenfield projects

benifits

• Capitalizing on core competencies

• Increasing market power

• Sharing infrastructure

• Balancing financial resources

Stability Strategies- continuing activities without any significant

change in direction

• Pause/Proceed with caution strategy- an opportunity to rest before continuing a growth or retrenchment strategy

• No change strategy- continuance of current operations and policies

• Profit Strategies- to do nothing new in a worsening situation but instead to act as though the company’s problems are only temporary

Retrenchment Strategies- used when the firm has a weak competitive position in

some or all of its product lines from poor performance

• Turnaround strategy- emphasizes the improvement of operational efficiency when the corporation’s problems are pervasive but not critical– Contraction- effort to quickly “stop the bleeding” across

the board but in size and costs– Consolidation- stabilization of the new leaner corporation

• Captive Company Strategy- company gives up independence in exchange for security

Retrenchment Strategies- used when the firm has a weak competitive position in

some or all of its product lines from poor performance

• Sell-out strategy- management can still obtain a good price for its shareholders and the employees can keep their jobs by selling the company to another firm

• Divestment- sale of a division with low growth potential

• Bankruptcy- company gives up management of the firm to the courts in return for some settlement of the corporation’s obligations

• Liquidation- management terminates the firm

Portfolio analysis-

• Portfolio analysis- management views its product lines and business units as a series of investments from which it expects a profitable return

• Popular portfolio analysis techniques include:– BCG Matrix– GE Business Screen

BCG

• Question marks- new products with the potential for success but require a lot of cash for development

• Stars- market leaders at the peak of their product cycle and are able to generate enough cash to maintain their high market share and usually contribute to the company’s profits

• Cash cows- products that bring in far more money than is needed to maintain their market share

• Dogs- products with low market share and do not have the potential to bring in much cash

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BCG Matrix- Limitations

• Use of highs and lows to form categories is too simplistic

• Link between market share and profitability is questionable

• Growth rate is only one aspect of industry attractiveness

• Product lines or business units are considered only in relation to one competitor

• Market share is only one aspect of overall competitive position

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GE Business Screen- Limitations

• Complex and cumbersome• Numerical estimates of industry attractiveness

and business strength/competitive position give the appearance of objective, but are actually subjective judgments that can vary from person to person

• Cannot effectively depict the positions of new products and business units in developing industries

Advantages and Limitations of Portfolio Analysis

Advantages:• Encourages top management to evaluate each

of the corporation’s businesses individually and to set objectives and allocate resources for each

• Stimulates the use of externally oriented data to supplement management’s judgment

• Raises the issue of cash flow availability to use in expansion and growth

Advantages and Limitations of Portfolio Analysis

Limitations:• Defining product/market segments is difficult• Suggest the use of standard strategies that can

miss opportunities or be impractical• Provides an illusion of scientific rigor when in

reality positions are based on objective judgments

• Value-laden terms such as cash cow and dog can lead to self-fulfilling prophecies

• Lack of clarity on what makes an industry attractive or where a product is in its life cycle

Managing a Strategic Alliance Portfolio

1. Developing and implementing a portfolio strategy for each business unit and a corporate policy for managing all the alliances of the entire company

2. Monitoring the alliance portfolio in terms of implementing business units’ strategies and corporate strategy and policies

3. Coordinating the portfolio to obtain synergies and avoid conflicts among alliances

4. Establishing an alliance management system to support other tasks of multi-alliance management

Corporate parenting

• views a corporation in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units

• Generates corporate strategy by focusing on the core competencies of the parent corporation and the value created from the relationship between the parent and its businesses

Developing a Corporate Parenting Strategy

1. Examine each business unit in terms of its strategic factors

2. Examine each business unit in terms of areas in which performance can be improved

3. Analyze how well the parent corporation fits with the business unit

Horizontal Strategy and Multipoint Competition

1. horizontal strategy- cuts across business unit boundaries to build synergy across business units and to improve competitive position in one of more business units

2. Multipoint competition- large multi-business corporations compete against other large multi-business firms in a number of markets