On October 23rd, 2014, we updated our
By continuing to use LinkedIn’s SlideShare service, you agree to the revised terms, so please take a few minutes to review them.
strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision.
Process of Strategy Formulation
The process of strategy formulation basically involves six main steps,
Setting Organizations objectives
Evaluating the organizational environment
Setting Quantitative Targets
Aiming in context with the divisional plans
Choice of Strategy
Setting Organization’s objectives :-
The key component of any strategy statement is to set the long-term objectives of the organization.
It is known that strategy is generally a medium for realization of organizational objectives.
strategy is a wider term which believes in the manner of deployment of resources so as to achieve the objectives
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.
It is essential to conduct a qualitative and quantitative review of an organizations existing product line
Setting Quantitative Targets –
In this step, an organization must practically fix the quantitative target values for some of the organizational objectives.
The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.
Aiming in context with the divisional plans
In this step, the contributions made by each department or division or product category within the organization
strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.
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
Choice of Strategy
This is the ultimate step in Strategy Formulation. The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.
Formulation of Strategies MODERNIZATION, DIVERSIFICATION, INTEGRATION
Meaning “Bridging an organization's past, present, and future”
Once modernization is defined at the very highest level as making improvements to current business processes, all other sub-categories of modernization fall semi-neatly into place
The definition of modernization must be business-centric and cares about business process that help:-
-increase share price.
So the definition of modernization that excites business leaders is: "Improving current business processes to better support organizational objectives."
Modernization Strategy Framework
Application migration —run existing applications on a lower-cost platform.
Application replacement —substitute an off-the-shelf package for existing functionality.
Application redevelopment —redevelop applications that offer high business value but that cannot be extended easily to meet new business needs
Three Best Practices
To win business support and funding, plans for modernization then focus on improving business process, not replacing IT systems
A down economy is no excuse for tabling modernization in favor of "do nothing" -- it's often the case that relatively small and inexpensive changes can result in significant business process improvement
Sometimes modernization is about discovering -- through careful study and calculation -- that the painful change everyone was dreading is actually not required after all
Used to expand firm’s operations by adding markets, products, services, or stages of production to the existing business.
Purpose is to allow the company to enter lines of business that are different from current operations.
On the basis of growth strategies
Concentric Diversification-When a firm adds related products.
Conglomerate Diversification- When a firm diversifies into areas that are unrelated to its current line of business
GROW OR BUY?
INTERNAL DIVERSIFICATION, expanding a firm's product or market base two TYPES are,
1.Market existing products in new markets
2.Market new products in existing markets
EXTERNAL DIVERSIFICATION, when a firm looks outside of its current operations and buys access to new products or markets
VERTICAL OR HORIZONTAL?
Based on the direction
VERTICAL DIVERSIFICATION- When firms undertake operations at different stages of production.
HORIZONTAL DIVERSIFICATION- When a firm enters a new business (related or unrelated) at the same stage of production as its current operations.
Guidelines for Conglomerate Diversification
Declining annual sales and profits
Capital and managerial talent to compete successfully in a new industry
Financial synergy between the acquired and acquiring firms
Exiting markets for present products are saturated
Guidelines for Horizontal Diversification
Revenues from current products/services would increase significantly by adding the new unrelated products
Highly competitive and/or no-growth industry w/low margins and returns
Present distribution channels can be used to market new products to current customers
New products have counter cyclical sales patterns compared to existing products
Benefits of vertical integration
Distributors (forward integration) Gaining ownership or increased control over distributors or retailers
Suppliers (backward integration)
Competitors (horizontal integration)
Takeover and Joint Strategies
In business, a takeover is the purchase of one company (the target ) by another (the acquirer , or bidder ). It can also termed as the acquisition of a company whose shares are listed on a stock exchange. It can be willingly or unwillingly of the target company.
Types of Takeover
Friendly takeovers - Before making a bid offer for another company, it usually first informs the company's board of directors.
Hostile takeovers - A hostile takeover is a take over to a target company whose management is unwilling to agree to a takeover.
Reverse takeovers - Type of takeover where a private company acquires a public company.
Mainly there are two types of Strategy
Opportunistic – Its mainly the acquiring company use the target company as the future money maker for long run.
Strategic - Its not only earning money from target company but also use the target companies earned market and relations for profitability.
Actually it depends upon the acquiring company how they want to implement their takeover strategy. How they want to use the target company.
Increase in sales/revenues.
Venture into new businesses and markets.
Profitability of target company.
Increase market share.
Enlarge brand portfolio.
Increase in product publicity into the target market.
Goodwill, often paid in excess for the acquisition.
Cultural integration/conflict with new management
Hidden liabilities of target entity.
The monetary cost to the company.
Lack of motivation for employees in the company being bought up.
The takeover of Cadbury (UK) by the US based Kraft Food Inc.
Takeover of Cadbury by The Kraft foods Inc.
Background of Two Companies
The origins of Cadbury was in 1824, John Cadbury , a Quaker, opened a shop in Birmingham, central England.
Cadbury was the second biggest confectionery group in the world, UK based.
Kraft Food Inc.
Kraft was the world's second largest food company in the world, US based .
Product line Packaged food products, including snacks, beverage, cheese, meals, and packaged grocery products e.g., Oreo cookies , Philadelphia cream cheese etc.
Important Case Details
It was held on February 2010
It was the that year’s biggest overseas takeover.
Cadbury–Kraft planed for join portfolio for more than 40 brands each with expected yearly sale of US $100 million.
The takeover offer was US $19.7 billion.
Kraft paid 850 pence/share where 500 pence was in cash and rest was in share.
Positives for Kraft Food & Cadbury
Both the companies will become a global confectionery giant.
It help Kraft in increasing its market share and overseas growth
It also helps Cadbury to reach new markets and establish its presence in the US confectionery market.
It would create a global powerhouse with annual sales of around US$ 50 billion yearly.
The Negatives hits Cadbury
Cadbury lost its crown of being 2 nd largest confectionary group.
Its was reported that 120 managers and executives of 170 quite Cadbury after that takeover.
Cadbury also lost its independent reputation in global chocolate market.
it is the merging of two (or more) companies, enterprise or organization towards a more profitable, mutually beneficial and stronger entity in the market. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise.
Advantages of JS
Increase the ability to work with rivalries.
Decrease the threat of Competition.
Help organization to cut down there failure rate.
Easy to remove most common mistakes.
Develop a strong relationship chain into the industries
Disadvantages of JS
It takes time and effort to build the right relationship and partnering with another business can be challenging.
There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.
The partners don't provide enough leadership and support in the early stages.
Success in a joint venture depends on thorough research and analysis of the objectives.
Joint Strategy of Addidas & Reebok to pull down Nike International Inc.
Joint Strategy of Addidas & Reebok
The story of Adidas started back to the year 1920 when Adolf Dassler (Adi) produced a handmade shoe fitted with black spikes.
In 1924, Adi and his brother Rudolf Dassler (Rudolf) started a company under the name "Dassler Brothers OHG".
By 1949, Adidas was registered as a company - 'Adi' from Adolf and 'Das' from Dassler. Adi registered the "Three Stripes" as his official logo.
The company launched its first jogging shoe called, "Achille" in 1968. The "Trefoil Logo" was introduced in 1972.
Important Case Details
On August, 2005, Adidas-Salomon AG (Adidas), Germany's largest sporting goods maker announced acquisition of the US-based Reebok International Limited (Reebok) for $3.8 billion.
August , 2005 the share price of Adidas increased by 7.4% from €147.52 to €158.45 on the Frankfurt stock exchange, while Reebok's share price at the New York Stock Exchange rose to $57.14 an increase of 30% share price of $43.95.
There main goal was to take down the share of Nike International Inc. in US sports market.
US is the biggest market of sports goods in all over the world.
33% of athletic footwear purchased every year for fitness and sports activities.
40% of the consumers of sports apparel lay in the age group 12-24.
Sports apparel retail sales in the US were worth $38.8 billion and increasing.
Athletic footwear retail sales were $16.4 billion and growing.
JS of Addidas & Reebok
The JS planed on August 2005
As per the JS Addidas gave $59/share.
They will use same retail shops to sell their sports goods.
Addidas is known for comfort goods, where as Reebok is mainly on the Style of product.
They plan to exchange the ideas to create a totally satisfactory sports product
Positive Side of the JS
They some extend successful to their plan of take down the share of NIKE in US sports market.
Some analysis of data of the case denotes that the Addidas-Reebok JS could beat Nike to become leader.
The biggest benefit is Addidas has removed a competitor as Reebok.
By this JS Addidas has got the chance to enter a vast market of US sports arena.
Divestment & Liquidation Strategy
Divestment is a form of retrenchment strategy used by businesses when they downsize the scope of their business activities
Firms may elect to sell, close or spin-off a strategic business unit, major operating division or product line
This move often is the final decision to eliminate unrelated, unprofitable or unmanageable operations
Reasons to Divest
Market share too small
Firms may divest when their market share is too small for them to be competitive or when the market is too small to provide the expected rates of return
Availability of better alternatives
Firms may also decide to divest because they see better investment opportunities. Organizations have limited resources. They are often able to divert resources from a marginally profitable line of business to one where the same resources can be used to achieve a greater rate of return
Need for increased investment
Firms sometimes reach a point where continuing to maintain an operation is going to require large investments in equipment, advertising, research and development, and so forth to remain viable. Rather than invest the monetary and management resources, firms may elect to divest that portion of the business
Lack of strategic fit
A common reason for divesting is that the acquired business is not consistent with the image and strategies of the firm. This can be the result of acquiring a diversified business. It may also result from decisions to restructure and refocus the existing business
Legal pressures to divest
Firms may be forced to divest operations to avoid penalties for restraint of trade. Service Corporation Inc., a large funeral home chain acquired so many of its competitors in some areas that it created a regional monopoly. The Federal Trade Commission required the firm to divest some of its operations to avoid charges of restraint of trade
Implementation of Divestment Strategy
Firms may pursue a divestment strategy by spinning off a portion of the business and allowing it to operate as an independent business entity
Firms may also divest by selling a portion of the business to another organization(Kelvinator India-spin-off-Avanti scooters–high production cost)
Firms may also close a portion of its operations
F aced with a decline in its market share of almost half in the 14 to 19 male age group and no introduction of a successful new product in years, and rising manufacturing costs, Levi Strauss found it necessary to divest some of its operations. Since 1997 the company has announced plans to shut twenty-nine factories in North America and Europe and to eliminate 16,310 jobs
Grand strategy, firm typically sold in parts, only occasionally as a whole
Less attractive of all the grand strategies as it brings great hardships to the business and the employees
Columbia Corporation, a $130 million diversified firm, liquidated its assets for more cash per share than the market value of its stock
Reasons for Liquidation
A company being unable to repay its debts, making it insolvent
Company directors wanting the business to avoid trading while insolvent
There being no purpose or benefit to be gained by the company continuing
The management may hesitate to liquidate due to fear of failure
The trade unions would naturally resist the loss of employment of workers
Moreover inadequate compensation for most unusable assets as they will be considered as scrap
Also it creates a bad impact on the company or the Business group
Effects of Liquidation
When appointed, liquidators take control of all of the company’s assets; if it is still trading, this includes the business itself
The liquidator has the authority to sell any business in the name of the company
Director(s) of a company lose their power when a liquidator is appointed
The company’s assets will be disposed of by the liquidator who will ensure that the proceeds of the sale are provided to creditors
Legal issues of Liquidation
Under the Companies Act , 1956, liquidation is termed as winding-up . The Act defines winding-up of a company as the process whereby it’s life is ended and it’s property administered for the benefit of it’s creditors and members
At the end of winding up, the company will have no assets or liabilities
When the affairs of a company are completely winded up, the dissolution of the company takes place
Process of Strategic choice and the factors affecting it
Results of the strategy formulation process Results of Process Strategic Intent Strategic Assessment Available Options Chosen Strategy CONTEXT
Choosing a strategy from among strategic options Choice Criteria/ No options identified Strategic Intent Strategic Assessment Available Options Logically viable options/ Chosen Strategy Feasible but Unaligned Options Aligned but Infeasible Options
Importance Of Choice in Strategy
Strategic Choice is the third logical element of strategic formulation process
If there are no choices to be made, there can of little value of thinking the strategy.
When considering choice it is necessary to make a perspective view
What Options are available? Structure for making strategic choice Options of method on how to progress Options about products, markets and services Options to improve resources & capabilities Making the Choice Choice Criteria -Assessment -Intent Theoretical Frameworks for making strategic choice Who should be involved in the Choice? Linking into available strategic options Chosen Strategy
Options for Markets and Products Market Need Present New Present New Product Product Development Diversification (related or unrelated) Market Development Corporate Strategy Market Geography (the third dimension) New Present ‘ Do Nothing’ Withdraw Consolidate Market penetration
Options in methods of implementation
Strategic alliances and partnerships
Product/market, resource/capability and implementation method may be grouped to form strategic options
Combining top-down and bottom-up thinking
Strategic Options tested:
Aligned with strategic intent
Feasible in terms of capabilities and resources
Acceptable to those who have to approve and implement it
Who should be involved with strategic choice?
Political as much as logical process
Political reality revealed by asking:
Who stands to gain or lose?
How will existing coalitions be affected?
Who may be seen to have originated choices?
Board approval is one thing
Support from those who will make it happen is also essential
Porter’s 3 Generic Strategies
The Strategy Clock High Low Low High Price Perceived Added Value Low price/ added value 1 2 3 4 5 6 7 8 Low Price Hybrid Differentiation Focused Differentiation Strategies Destined for ultimate failure
Factors affecting The Strategic Choice
Nature of environment
Firms internal realities
Ambition of CEO/Owners
Corporate Portfolio Analysis
How much of our time and money should we spend on our best products to ensure that they continue to be successful?
How much of our time and money should we spend developing new costly products, most of which will never be successful?
“ Strategic market planning is concerned with adapting the organisation to a changing environment
The organisation will prosper when it meets customer needs better than the competition
Success is achieved when a strategy is developed for an organisation which fits the environment within which it operates
BUT customer needs change
competitors develop new products and technologies which add value
Corporate failure is often due to management inability to adapt to change
Environmental changes may be continuous (changes are slow and reasonably predictable, giving time to adapt) or discontinuous (sudden, dramatic and unpredictable, making it difficult to plan)
Sudden environmental changes can trigger shocks or strategic windows or paradigm shifts
Existing market leaders often ill-equipped to match the new circumstances and new contenders go through the window and displace the current players
Can current leaders close the strategic window before new contenders can get established?
New contenders need to get through the window fast before it closes
Major causes of strategic windows opening:
New technology can rapidly make obsolete the major strengths of current market leaders (e.g. Ever Ready zinc batteries displaced by Duracel lithium batteries)
New channels of distribution (e.g. Direct Line)
Market redefinition (nature of demand changes)
New legislation (e.g. privatisations)
Environmental shocks (sudden unpredicted changes in currencies, commodity prices or political events)
Corporate mission Resource allocation Corporate objectives Identify strategic business units Explore synergies Corporate development Components of corporate strategy
Beyond a certain size a company needs to divide into SBUs to promote managerial performance
Each SBU needs a definition of its business, specifying the competitive arena in which it will compete
Often define business in product terms but perhaps should define by customer needs served
Can define the business in terms of:
Customer group dimension (how many market segments will the business seek to serve?)
Customer need dimension (how many customer needs will it meet?)
Technology dimension (what technologies will it seek to master?)
An SBU must be a clear, sensible management entity
Must be capable of being run as an independent business
SBU management must consider the best growth direction
It should serve an external market, with distinct customers and competitors
A major strand of technique development is to consider the business as a portfolio of investments
This can give added insight, highlight potential problems and offer some strategic guidance
A company has a portfolio of SBUs
Some SBUs offer much more attractive growth and profit opportunities than others
SBUs will be targeted for build , growth , maintain , harvest or divestment
SBUs will differ also in cash flow characteristics
An SBU with a major new product or pursuing new market opportunities is likely to require net cash investment
An SBU with strong market share in a mature market may be a strong cash generator
SBU objectives and resourcing decisions depends on:
Attractiveness of the market (function of market size, growth, competitive intensity, profit levels, government regulations, sensitivity to economic fluctuations)
Relative competitive strength of the SBU (function of market share, product positioning, cost competitiveness, technical skills, marketing and distribution capabilities, organisational flexibility)
SBUs in attractive markets with competitive advantage should be set ambitious objectives and resources priority
Portfolio analysis enables a business to:
Assess the balance of its portfolio (between cash use and cash generation)
Have a framework for strategic market planning; successful SBUs follow a life cycle
Develop a clear objective appropriate to its portfolio position - growth, maintenance, harvest, divestment
Top management evaluates each of firm’s businesses individually
Use of externally-oriented data to supplement management judgment
Raises issue of cash flow availability
Difficult to define product/market segments
Standard strategies can miss opportunities
Illusion of scientific rigor
Models of the learning curve effect and the closely related experience curve effect express the relationship between equations for experience and efficiency or between efficiency gains and investment in the effort.
The rule used for representing the learning curve effect states that the more times a task has been performed, the less time will be required on each subsequent iteration.
This relationship was probably first quantified in 1936 where it was determined that every time total aircraft production doubled, the required labour time decreased by 10 to 15 %.
The experience curve effect is broader in scope than the learning curve effect encompassing far more than just labour time.
The experience of "learning curves" was first observed by the 19th century German psychologist Hermann Ebbinghaus.
The rule used for representing the learning curve effect states that the more times a task has been performed, the less time will be required on each subsequent iteration.
Learning curve theory states that as the quantity of items produced doubles, costs decrease at a predictable rate.
The learning curve describes the observed reduction in the number of required direct labour hours as workers learn their jobs.
The Experience Curve
In the late 1960s Bruce Henderson of the Boston Consulting Group (BCG) began to emphasize the implications of the experience curve for strategy.
The experience curve effect is broader in scope than the learning curve effect encompassing far more than just labor time.
It states that the more often a task is performed, the lower will be the cost of doing it. The task can be the production of any good or service.
Each time cumulative volume doubles, value added costs fall by a constant and predictable percentage.
Reasons for the effect
Standardization, specialization, and methods improvements
Better use of equipment
Changes in the resource mix
Network-building and use-cost reductions
Shared experience effects
Experience Curve Discontinuities
The experience curve effect can on occasion come to an abrupt stop when :
Competitors introduce new products or processes that you must respond to
Key suppliers have much bigger customers that determine the price of products and services, and that becomes the main cost driver for the product
Technological change requires that you or your suppliers change processes
The experience curve strategies must be re-evaluated because
they are leading to price wars
they are not producing a marketing mix that the market values
The BCG strategists examined the consequences of the experience effect for businesses.
The reasoning is increased activity leads to increased learning, which leads to lower costs, which can lead to lower prices, which can lead to increased market share, which can lead to increased profitability and market dominance.
One consequence of the experience curve effect is that cost savings should be passed on as price decreases rather than kept as profit margin increases.
Relatively low cost of operations is a very powerful strategic advantage, firms should capitalize on these learning and experience effects.
If a firm is able to gain market share over its competitors, it can develop a cost advantage.
Penetration pricing strategies and a significant investment in advertising, sales personnel, production capacity, etc. can be justified to increase market share and gain a competitive advantage.
When evaluating strategies based on the experience curve, a firm must consider the reaction of competitors who also understand the concept.
Some authors claim that in most organizations it is impossible to quantify the effects.
They claim that experience effects are so closely intertwined with economies of scale that it is impossible to separate the two.
Economies of scale should be considered one of the reasons why experience effects exist.
Likewise, experience effects are one of the reasons why economies of scale exist.
Experience Curve Graph
Know the stages of the product life cycle
Realize how marketing strategies change during the product’s life cycle