STRATEGY FORMULATION

Chapter # 4

Formulation Strategies involves determining appropriate courses of action for achieving objectives.

Such activities it includes:-Analysis-Planning -Selecting strategies

STRATEGY FORMULATION

Inputs from environmental analysisInputs from environmental analysis

Two approaches that focuses on strategic formulation.

- Critical question Analysis

- SWOT analysis

Critical Question analysis Critical Question analysis Provides a frame work to understand organization current situation. It contains four basic questions.

1. What are the purpose and objectives of the organization?

2. Where is the organization presently going?

3. What critical factors organization currently facing?

4. What can be done to achieve organizational objectives more effectively in the future?

SWOT AnalysisSWOT Analysis

( SWOT stands for strengths, weaknesses, opportunities, and threats.)

This approach suggests that the major issues facing an organization

can be isolated through

Careful analysis of each of these four elements.

Formulating organizational Formulating organizational strategiesstrategiesOrganizational strategies are formulated by top management and are

designed to achieve the firm’s overall objects. Process includes two

related tasks. First, general strategies must be selected and developed.

Second, specific decisions must be made about what role various lines

of business in the organization will play and how resources will be

allocated among them.

GENERAL STRATEGIES GENERAL STRATEGIES ALTERNATIVESALTERNATIVES

An organization can choose from a wide variety of general strategies.

Concentration Strategies A concentration strategy is one in which of buisness.h an organization focuses on a single line.

This strategy used by firms seeking to gain a competitive advantage through a specialized knowledge and efficiency and to avoid problems involved in managing too many businesses.

Stability Strategy Stability Strategy

The organization that adopts a stability strategy focuses on its existing

line/ business lines and attempt to maintain them.

An organization in a low- growth industry that has no other viable

option may be forced to select a stability strategy.

Growth Strategy -1Growth Strategy -1Organizations usually seek growth in sales, profits ,market share, or some other measure as a primary objective.

growth strategies may be pursued by:

1.VERTICAL INTEGRATION :

it involves growth through acquisition of other organizations in a channel of distribution it is used to obtain greater control over a line of business and to increase the profits through better efficiency, or better selling efforts.

Growth Strategy - 2Growth Strategy - 2

2. HORIZONTAL INTEGRATION:

It involves growth through the acquisition of competing firms in the same line of business.It is adopted in an effort to increase the size, sales, profits, and potential market share of organization .

3. DIVERSIFICATION:

Involves growth through acquisition of firms in other industries or business lines.Useful while organization acquiring efficiency or market impact through The use of shared resources.

Mergers and joint venturesMergers and joint ventures

Merger:

- Joining of two companies to form a new organization

Joint Ventures

- An organization works for another company on a project too large to

handle by itself.

RETRENCHEMENT Strategies RETRENCHEMENT Strategies

When an organization’s survival is threatened and it is not

competing effectively.

RETRENCHEMENT Strategies types-1 RETRENCHEMENT Strategies types-1

1. Turnaround strategy

When an organization perform poorly but has not yet reached at

critical stage .

It involves cutting of / getting rid of unprofitable products, workforce,

distribution outlets.

RETRENCHEMENT Strategies types-2RETRENCHEMENT Strategies types-2

2.Divestment strategy

Involves business selling or setting it up as a separate corporation.

3. Liquidation strategy

least desirable strategy.

In this strategy business is terminated and its assets sold off,

it usually involves loses to both stockholders and employees.

Combination strategies Combination strategies

“ Large , Diversified organization commonly these strategies.”

Business Portfolio Model

Tools for analyzing

1.Relative position of each of an organization’s businesses in its industry.

2.Relationship between all of the businesses of organization.

Bcg’s Growth- share matrixBcg’s Growth- share matrix

BCG- Boston consulting Group , a leading management consulting

firm, developed and popularized a strategy formulation approach called

the growth share matrix

BCG BUSINESS PORTFOLIO MATRIX

High Low

High

Low

“Stars”

“Cash Cows”

“Question Marks”

“Dogs”

Industry Growth Rate

Relative Market Share Position

BCG Business Portfolio MatrixBCG Business Portfolio Matrix Firms should have a balanced portfolio of business such that

Some generate cash then they use and thus support other businesses that

need cash to develop and become profitable.

The VERTICLE AXIS indicates the ” Market Growth Rate”

The HORIZONTAL AXIS indicates “ Market Shares”

The growth - Share market consist on four cells

Reflect four possible combinations of High and Low Growth with High and

Low market share.

BCG Business Portfolio MatrixBCG Business Portfolio Matrix

1. Question marks ( known as Problem children):

Company businesses operate as a high-growth market with low market share.

2. Stars:

- Question marks Company businesses becomes successful.

- Market leader.

- But not necessarily to provide much cash

BCG Business Portfolio MatrixBCG Business Portfolio Matrix

3. Cash Cows:

Company businesses with less growth rath annually 10 percent. But

with largest relative market share.

Org. doesn’t need to finance a great deal / investment of expansion

because of lower market growth.

4. Dogs:

Company businesses with weak market shares in low growth markets.

alternative strategiesalternative strategies

A balanced portfolio has number of stars and cash cows and not too

many questions marks and dogs.

This balance is not only to important to maintain existing

businesses but also to develop new businesses.

alternative strategies- 1alternative strategies- 1

Four basic strategies can be described as:

1.Build Market Share: appropriate for “question marks” that must increase

shares to becomes “Stars”

2.Hold Market share: appropriate for “Cash Cows” with strong Share

position

3.Harvest: involves milking as much short-term cash from a business as

possible.

4.Divest: involves selling or liquidating a business becaouse the resources

devoted to it can be invested more profitability in other businesses.

Formulating business strategiesFormulating business strategies

INVOLVES:

- Decision making at the decision level or the business-unit level.

Formulating business strategiesFormulating business strategies

Structural Analysis of competitive Forces.

It includes:

- Threat of New entrants,

- the bargaining power of suppliers,

- the bargaining power of buyers ,

- Threat of subsitute of products

Structural Analysis of Structural Analysis of competitive Forces- 1competitive Forces- 1 Threat of New entrants:

Firms entering an industry bring new capacity and a desire to gain

market share and profits.

Bargaining Power of suppliers:

Suppliers can be a competitive threat in an industry because they can rise

the price of raw material or reduce their quality

Structural Analysis of Structural Analysis of competitive Forces- 2competitive Forces- 2

Bargaining Power of suppliers:

Suppliers can be a competitive threat , because they can raise the price of

raw material.

Bargaining Power of buyers:

Buyers compete with the industry by forcing prices down, bargain for

higher quality or more services, and playing competitors off against

each other

Structural Analysis of competitive Structural Analysis of competitive Forces- 3Forces- 3

Threat of Substitute Products:All firms in a industry are competition with industries producing

substitute products.

The more attractive the price – performances alternatives offered by

substitute. Tighter the lid on industry profits

Rivalry Among Existing Competitors:All firms try to take customers from one another by substitute.

Strategies such as price competition, advertising battles, new products

intro. And increased customer services

Formulating Functional strategiesFormulating Functional strategies

Functional strategies spells out the specific tasks that must be performed to implement the business strategy.

Research and Development Strategy :R&D responsible for to finds out new product ideas, and develop them until product goes into full production and enter the market.

Operation Strategy :It is all about decision and planning about production plant or business lines, like plant layout, manufacturing and production processes, and inventory requirements.

Formulating Functional strategies- 1Formulating Functional strategies- 1

Financial Strategy :

It contains forecasting and financial planning evaluating investment

proposals, securing financing for various investments. And controlling

financial resources

Marketing Strategy :

determines the appropriate markets for business offering and on developing

effective marketing mixes

Human Resource Strategy:

It is about to attracting, assessing, motivating, and retaining the number and

types of employees required to run the business effectively.

Strategy Formulation Constraints Strategy Formulation Constraints

Some strategies needs to be considered when planning and

selecting organizational, business, or functional strategies :

1.Availability of financial resources.

2.Attitude towards risk.

3.Organizational capabilities.

4.Channel relationships.

5.Competitive relation

Strategy selecting criteria Strategy selecting criteria

Strategic alternatives should be accepted to the degree that they meet the following criteria.

1.They are responsive to the external environment

2.They provide adequate flexibility for the business and the organization.

3.They conform to the organization’s mission and long term objectives.

4.They are organizationally feasible.