Strategic formulation
Strategy Formulation
Vision & Mission
External Opportunities & Threats
Internal Strengths & Weaknesses
Long-Term Objectives
Alternative Strategies
Strategy Selection
Strategies in Action
Strategies for taking the hill won’t
necessarily hold it. –
Amar Bhide
The early bird may get the worm, but the
second mouse gets the cheese. –
Unknown
Strategies in Action
Companies Embrace Strategic Planning
-- Quest for higher revenues
-- Quest for higher profits
Long-Term Objectives
• Results expected from pursuing certain
strategies
• Strategies represent actions to
accomplish long-term objectives
Objectives are commonly stated in terms such as growth in assets,
growth in sales, profitability, market share, degree and nature of
diversification.
Long-term objectives are needed at the corporate, divisional, and
functional levels in an organization.
They are an important measure of managerial performance.
Long-Term Objectives
Objectives -Quantifiable
Measurable
Realistic
Understandable
Challenging
Hierarchical
Obtainable
Congrugent (fit- together)
Time-line
Financial vs. Strategic
Objectives
Financial Objectives
Strategic Objectives
Growth in revenues
Larger market share
Growth in earnings
Quicker on-time delivery than rivals
Higher dividends
Quicker design-to-market times than
rivals
Higher profit margins
Higher earnings per
share
Improved cash flow
Lower costs than rivals
Higher product quality than rivals
Wider geographic coverage than rivals
Financial vs. Strategic
Objectives
Trade-Off
Maximize short-term financial objectives – harm
long-term strategic objectives
Pursue increased market share at the expense
of short-term profitability
Tradeoffs related to risk of actions; concern for
business ethics; need to preserve natural
environment; social responsibility issues
Types of Strategies
•
•
•
•
Vertical Integration Strategies
Intensive Strategies
Diversification Strategies
Defensive Strategies
Types of Strategies
Forward
Integration
Vertical
Integration
Strategies
Backward
Integration
Horizontal
Integration
Forward Integration Strategies
Attempts to gain control over:
Distributors and Retailers
Some guidelines:
Current distributors – expensive or unreliable
Availability of quality distributors – limited
Firm competing in industry expected to grow
markedly
Firm has both capital & HR to manage new
business of distribution
Current distributors have high profit margins
Backward Integration
Strategies
Control of Firm’s suppliers
Guidelines:
Current suppliers – expensive or unreliable
# of suppliers is small; # of competitors is large
High growth in industry sector
Firm has both capital & HR to manage new
business
Stable prices are important
Current suppliers have high profit margins
Horizontal Integration
Strategies
Control of Firm’s Competitors
Guidelines:
Gain monopolistic characteristics w/o federal
government challenge
Competes in growing industry
Increased economies of scale – major
competitive advantages
Faltering due to lack of managerial expertise or
need for particular resource
Types of Strategies
Market
Penetration
Intensive
Strategies
Market
Development
Product
Development
Market Penetration Strategies: Increased
Market Share of Present products/services
or Present markets
Strategy should be adopted when :
Current markets not saturated
Rate of present customers can be increased
significantly
Shares of competitors declining; industry sales
increasing
Increased economies of scale (increase units of
production cause reduction in average cost to
produce a unit) provide major competitive advantage
Market Development Strategies: New
Markets -- Present products/services to
new geographic areas
Strategy should be adopted when :
New channels of distribution – reliable, inexpensive,
good quality
When Firm is successful at what it does
Untapped/unsaturated markets
Excess production capacity
Basic industry rapidly becoming global
Product Development Strategies:
Increased Sales -- Improving present
products/services or developing new
products/services
Products in maturity stage of life cycle
Industry characterized by rapid technological
development
Competitors offer better-quality products @
comparable prices
Strong R&D capabilities
Types of Strategies
Related
Diversification
Diversification
Strategies
Unrelated
Diversification
Diversification
• Related – When their value chains posses
competitively valuable cross-business
strategic fits
• Unrelated – When their value chains are
so dissimilar that no competitively valuable
cross-business relationships exist
Related Diversification Preferred
To Capitalize on:
• Combining the related activities of
separate businesses into a single
operation to lower costs
• Cross-business collaboration to create
competitively valuable resource strengths
and capabilities
Related Diversification May be Effective
When:
• An organization competes in a no-growth
or a slow growth industry
• New, but related, products have seasonal
sales levels that counterbalance an
organization’s existing peaks and valleys
• An organization’s products are currently in
the declining stage of the product’s life
cycle
Unrelated Diversification
• Favors capitalizing on a portfolio of
businesses that are capable of delivering
excellent financial performance
• Entails hunting to acquire companies:
– Whose assets are undervalued
– That are financially distressed
– With high growth potential but are short on
investment capital
Unrelated Diversification May be Effective
When:
• An organization’s current distribution channels
can be used to market new products to existing
customers
• An organization has the capital and managerial
talent to compete successfully in a new industry
• An organization’s basic industry is experiencing
declining annual sales and profits
• An organization has the opportunity to purchase
an unrelated business as an attractive
investment opportunity
Types of Strategies
Retrenchment
Defensive
Strategies
Divestiture
Liquidation
Defensive Strategies
 Retrenchment: reduce Costs & assets to
reverse declining sales & profit
Divesture: Selling a division or part
of an organization
Liquidation: Sell Company’s assets,
in parts, for only their tangible worth;
not for their copyrights …
Retrenchment Strategies
Guidelines -Failed to meet objectives & goals consistency; has
distinctive competencies
Firm is one of weaker competitors
Inefficiency, low profitability, poor employee morale,
pressure for stockholders
Strategic managers have failed
Rapid growth in size; major internal reorganization
necessary
Divestiture Strategies
Guidelines -Retrenchment failed to attain improvements
Division needs more resources than are available
Division responsible for firm’s overall poor
performance
Division is a mis-fit with organization
Large amount of cash is needed and cannot be
raised through other sources
Liquidation Strategies
Guidelines -Retrenchment & divestiture failed
Only alternative is bankruptcy
Minimize stockholder loss by selling firm’s assets
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies
Generic Strategies
Low Cost strategy: the basic idea
underprice competitors or offer a better value
thereby gain market share and sales
 driving some competitors out of the market entirely.
Cost Leadership
•
Ways of ensuring total costs across value
chain are lower than competitors’ total
costs
1. Perform value chain activities more efficiently
than rivals and control factors that drive costs
2. Revamp the firm’s overall value chain to
eliminate or bypass some cost-producing
activities
Cost Leadership
•
Can be especially effective when:
1. Price competition among rivals is vigorous
2. Rival’s products are identical and supplies
are readily available
3. There are few ways to achieve differentiation
4. Most buyers use the product in the same way
5. Buyers have low switching costs
6. Buyers are large and have significant power
7. Industry newcomers use low prices to attract
buyers
Generic Strategies
Differentiation: (Type 3)
producing products that are considered unique
allows a firm to charge higher prices
Or gain customer loyalty
 risk of differentiation strategy:
unique product may not be valued highly enough by customers to
justify the higher price.
requirements for a successful differentiation strategy:
strong coordination among the R&D and marketing functions
and substantial amenities to attract scientists and creative
people.
Differentiation
•
Can be especially effective when:
1. There are many ways to differentiate and
many buyers perceive the value of the
differences
2. Buyer needs and uses are diverse
3. Few rival firms are following a similar
differentiation approach
4. Technology change is fast paced and
competition revolves around evolving product
features
Generic Strategies
Focused Strategies (Type 4 & 5)
producing products and services that fulfill the
needs of small groups of consumers (niche market).
 two types:
products or services to a small range (niche) of
customers at the lowest price available on the
market.
products or services to a small range (niche) of
customers at the lowest price available on the
market. (focused differentiation)
Focused Strategy
•
Can be especially effective when:
1. The target market niche is large, profitable,
and growing
2. Industry leaders do not consider the niche
crucial
3. Industry leaders consider the niche too costly
or difficult to meet
4. The industry has many different niches and
segments
5. Few, if any, other rivals are attempting to
specialize in the same target segment
Means for Achieving Strategies
1 Joint Venture/Partnering

Two or more companies form a temporary
partnership or consortium for purpose of
capitalizing on some opportunity
Means for Achieving Strategies
Joint Ventures are effective when
• A privately owned organization forms one with a
public organization.
• A domestic organization works with a foreign
company.
• The distinct competencies of the firms complement
each other especially well.
• Some project is potentially profitable but requires
much risk.
• Two or more smaller firms wish to compete against
a larger firm.
• There is a need to introduce a new technology
quickly.
Consider what guidelines should be considered
before a joint venture in Russia
Means for Achieving Strategies
2 Mergers and Acquisitions;
• A merger occurs when two organizations
of about equal size unite to form one
enterprise.
• An acquisition occurs when a large
organization purchases (acquires) a
smaller firm or vice versa.
Means for Achieving Strategies
Reasons for considering Mergers &
Acquisitions
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



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Provide improved capacity utilization
Better use of existing sales force
Reduce managerial staff
Gain economies of scale
Smooth out seasonal trends in sales
Gain new technology
Access to new suppliers, distributors, customers,
products, creditors
Recent Mergers
Acquiring Firm
IBM
Philip Morris
Acquired Firm
Ascential Software
PT Hanjaya Mandala
Samp
National Steel Corp
PeopleSoft
Brookstone
U.S. Steel
Oracle
OSIM International
Ltd
Adobe Systems
Macromedia
US Airways
American West
United Parcel Service Overnight Corp.
Outsourcing

Companies taking over the functional
operations for other firms

Less expensive
Allows firm to focus on core business
Enables firm to provide better services
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Questions
• Discuss three different types of strategies, not including
porter’s three strategies, firms can adopt and discuss
how to achieve these strategies.
• Discuss integrative, intensive and diversification
strategies and their relationship to Porter’s strategies:
low-cost, differentiation and focus.
• Discuss the type of strategy: integration, intensive,
diversification or defensive, which you would consider to
be most appropriate for a the D.I.T.
• Discuss the different means of achieving a strategy and
propose which one an organisation of your choice may
use in order to pursue a strategy of their choice.