STRATEGYFORMULATION.pptx

© 2001 Prentice Hall
Ch. 5-1
STRATEGY FORMULATION
• Making subjective decisions based on
objective information
• Generate feasible alternatives (INPUT &
MATCHING STAGE)
• Develop set of most attractive alternative strategies
• Evaluate alternatives (determine for the
set):
• Advantages
• Disadvantages
• Trade-offs
• Costs
• Benefits

ANALYTICAL FRAMEWORK
Ch. 5-2

Input Stage
Ch. 5-3

For EFE matrix
• Assign a rating between 1 and 4 to each key external
factor to indicate how effectively
• the firm’s current strategies respond to the factor,
where 4 = the response is superior, 3 = the response
is above average, 2 = the response is average, and 1
= the response is poor. Ratings are based on
effectiveness of the firm’s strategies.
• Ratings are thus company-based, whereas the
weights in Step 2 are industry-based.
• It is important to note that both threats and
opportunities can receive a 1, 2, 3, or 4.
Ch. 5-4

Input Stage
Ch. 5-5

For IFE matrix
Ch. 5-6

Competitor Profile Matrix
(CPM)
Ch. 5-7

Competitor Profile Matrix
(CPM)
Ch. 5-8

Ch. 5-9
– Select specific course of action based on
• Internal and external audit information
• Firm’s vision-mission statements, objectives
(STRATEGIC INTENTS)
• Rank in order of attractiveness

Ch. 5-10
STRATEGIC INTENTS
• VISION
• MISSION
• LONG TERM OBJECTIVES
Based on vision, mission, long-term
objectives and external-internal audits,
the following will be formulated:
– CORPORATE STRATEGY
– SBU/BUSINESS LEVEL STRATEGY
– FUNCTIONAL STRATEGY

Ch. 5-11
CORPORATE STRATEGY
• SETS OVERALL DIRECTION FOR THE
ORGANIZATION
– GROWTH STRATEGIES - integration,
intensive, and diversification strategies
– STABILITY - maintaining status quo and
reinforcing existing strategies
– RETRENCHMENT - defensive strategies

Ch. 5-12
Growth Strategies
Vertical Integration Strategies
• Forward integration
• Backward integration
• Horizontal integration

Ch. 5-13
Growth Strategies
Defined
• Gaining
ownership or
increased control
over distributors
or retailers
Example
• General Motors is
acquiring 10% of its
dealers.
Forward
Integration

Ch. 5-14
Corporate Strategies
Guidelines for Forward Integration
 Present distributors are expensive, unreliable, or
incapable of meeting firm’s needs
 Availability of quality distributors is limited
 When firm competes in an industry that is expected
to grow markedly
 Advantages of stable production are high
 Present distributor have high profit margins

Ch. 5-15
Strategies in Action
Defined
• Seeking
ownership or
increased control
of a firm’s
suppliers
Example
• Motel 8 acquired a
furniture
manufacturer.
Backward
Integration

Ch. 5-16
Guidelines for Backward Integration
 When present suppliers are expensive, unreliable, or
incapable of meeting needs
 Number of suppliers is small and number of
competitors large
 High growth in industry sector
 Firm has both capital and human resources to
manage new business
 Advantages of stable prices are important
 Present supplies have high profit margins

Ch. 5-17
Defined
• Seeking
ownership or
increased control
over competitors
Example
• Hilton recently
acquired Promus.
Horizontal
Integration

Ch. 5-18
Guidelines for Horizontal Integration
 Firm can gain monopolistic characteristics without
being challenged by federal government
 Competes in growing industry
 Increased economies of scale provide major
competitive advantages
 Faltering due to lack of managerial expertise or need
for particular resources

Ch. 5-19
Intensive Strategies
• Market penetration
• Market development
• Product development

Ch. 5-20
Defined
• Seeking increased
market share for
present products
or services in
present markets
through greater
marketing efforts
Example
• Ameritrade, the on-
line broker, tripled its
annual advertising
expenditures to $200
million to convince
people they can make
their own investment
decisions.
Market
Penetration

Ch. 5-21
Guidelines for Market Penetration
 Current markets not saturated
 Usage rate of present customers can be increased
significantly
 Market shares of competitors declining while total
industry sales increasing
 Increased economies of scale provide major
competitive advantages

Ch. 5-22
Defined
• Introducing
present products
or services into
new geographic
area
Example
• Britain’s leading
supplier of buses,
Henlys PLC, acquires
Blue Bird Corp. North
America’s leading
school bus maker.
Market
Development

Ch. 5-23
Guidelines for Market Development
 New channels of distribution that are reliable,
inexpensive, and good quality
 Firm is very successful at what it does
 Untapped or unsaturated markets
 Capital and human resources necessary to manage
expanded operations
 Excess production capacity
 Basic industry rapidly becoming global

Ch. 5-24
Defined
• Seeking increased
sales by improving
present products
or services or
developing new
ones
Example
• Apple developed the
G4 chip that runs at
500 megahertz.
Product
Development

Ch. 5-25
Guidelines for Product Development
 Products in maturity stage of life cycle
 Competes in industry characterized by rapid
technological developments
 Major competitors offer better-quality products at
comparable prices
 Compete in high-growth industry
 Strong research and development capabilities

Ch. 5-26
Diversification Strategies
• Concentric diversification
• Conglomerate diversification
• Horizontal diversification

Ch. 5-27
Defined
• Adding new, but
related, products
or services
Example
• National Westminister
Bank PLC in Britain
bought the leading
British insurance
company, Legal &
General Group PLC.
Concentric
Diversification

Ch. 5-28
Guidelines for Concentric Diversification
 Competes in no- or slow-growth industry
 Adding new & related products increases sales of
current products
 New & related products offered at competitive prices
 Current products are in decline stage of the product
life cycle
 Strong management team

Ch. 5-29
Defined
• Adding new,
unrelated products
or services
Example
• H&R Block, the top tax
preparation agency,
said it will buy
discount stock
brokerage Olde
Financial for $850
million in cash.
Conglomerate
Diversification

Ch. 5-30
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

Ch. 5-31
Defined
• Adding new,
unrelated products
or services for
present customers
Example
• The New York Yankees
baseball team are
merging with the New
Jersey Nets basketball
team.
Horizontal
Diversification

Ch. 5-32
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

Ch. 5-33
Defensive Strategies
Defensive Strategies
• Joint venture
• Retrenchment
• Divestiture
• Liquidation

Ch. 5-34
Defense Strategies
Defined
• Two or more
sponsoring firms
forming a separate
organization for
cooperative
purposes
Example
• Lucent Technologies
and Philips Electronic
NV formed Philips
Consumer
Communications to
make and sell
telephones.
Joint Venture

Ch. 5-35
Guidelines for Joint Venture
 Combination of privately held and publicly held can
be synergistically combined
 Domestic forms joint venture with foreign firm, can
obtain local management to reduce certain risks
 Distinctive competencies of two or more firms are
complementary
 Overwhelming resources and risks where project is
potentially very profitable (e.g., Alaska pipeline)
 Two or more smaller firms have trouble competing
with larger firm
 A need exists to introduce a new technology quickly

Ch. 5-36
Defined
• Regrouping
through cost and
asset reduction to
reverse declining
sales and profit
Example
• Singer, the sewing
machine company,
declared bankruptcy.
Retrenchment

Ch. 5-37
Guidelines for Retrenchment
 Firm has failed to meet its objectives and goals
consistently over time but has distinctive competencies
 Firm is one of the weaker competitors
 Inefficiency, low profitability, poor employee morale,
and pressure from stockholders to improve
performance.
 When an organization’s strategic managers have failed
 Very quick growth to large organization where a major
internal reorganization is needed.

Ch. 5-38
Defined
• Selling a division
or part of an
organization
Example
• Harcourt General, the
large US publisher, is
selling its Neiman
Marcus division.
Divestiture

Ch. 5-39
Guidelines for Divestiture
 When firm has pursued retrenchment but failed to
attain needed improvements
 When a division needs more resources than the firm
can provide
 When a division is responsible for the firm’s overall
poor performance
 When a division is a misfit with the organization
 When a large amount of cash is needed and cannot
be obtained from other sources.

Ch. 5-40
Defined
• Selling all of a
company’s assets,
in parts, for their
tangible worth
Example
• Ribol sold all its assets
and ceased business.
Liquidation

Ch. 5-41
Guidelines for Liquidation
 When both retrenchment and divestiture have been
pursued unsuccessfully
 If the only alternative is bankruptcy, liquidation is an
orderly alternative
 When stockholders can minimize their losses by
selling the firm’s assets

Ch. 5-42
Strategy Analysis & Choice
The TOWS Matrix
• List the firm’s key external opportunities
• List the firm’s key external threats
• List the firm’s key internal strengths
• List the firm’s key internal weaknesses

Ch. 5-43
The TOWS Matrix
• Match internal strengths with external opportunities
and record the resultant SO Strategies
• Match internal weaknesses with external
opportunities and record the resultant WO Strategies
• Match internal strengths with external threats and
record the resultant ST Strategies
• Match internal weaknesses with external threats and
record the resultant WT Strategies

Ch. 5-44
TOWS Matrix
WT Strategies
Minimize weaknesses
and avoid threats
ST Strategies
Use strengths to avoid
threats
Threats-T
List Threats
WO Strategies
Overcome weaknesses
by taking advantage of
opportunities
SO Strategies
Use strengths to take
advantage of
opportunities
Opportunities-O
List Opportunities
Weaknesses-W
List Weaknesses
Strengths-S
List Strengths
Leave Blank

Ch. 5-45
Boston Consulting Group Matrix
(BCG)
• Enhances multidivisional firms’ efforts to
formulate strategies
• Autonomous divisions (or profit centers)
constitute the business portfolio
• Firm’s divisions may compete in different
industries requiring separate strategy

Ch. 5-46
(BCG)
• Graphically portrays differences among
divisions
• Focuses on market share position and
industry growth rate
• Manage business portfolio through relative
market share position and industry growth
rate

Ch. 5-47
(BCG)
• Relative market share position defined:
 Ratio of a division’s own market share in a
particular industry to the market share held by the
largest rival firm in that industry.

Ch. 5-48
BCG Matrix
Dogs IV
(Liquidate, Divest,
Retrenchment)
Cash Cows III
(Product dev’t, concentric
diversification = strong cows;
Retrenchment for weal cows)
Question Marks I
(Intensive strategies, divest)
Stars II
(integration, intensive and joint
ventures)
Relative Market Share Position
High
1.0
Medium
.50
Low
0.0
Industry
Sales
Growth
Rate
High
+20
Low
-20
Medium
0

Ch. 5-49
BCG Matrix
• Question Marks
Low relative market share position yet
compete in high-growth industry.
 Cash needs are high
 Cash generation is low
Decision to strengthen (intensive
strategies) or divest

Ch. 5-50
BCG Matrix
• Stars
High relative market share and high
industry growth rate.
 Best long-run opportunities for growth and
profitability
Substantial investment to maintain or
strengthen dominant position
 Integration strategies, intensive strategies, joint
ventures

Ch. 5-51
BCG Matrix
• Cash Cows
High relative market share position, but
compete in low-growth industry
 Generate cash in excess of their needs
 Milked for other purposes
Maintain strong position as long as
possible
 Product development, concentric diversification
 If becomes weak—retrenchment or divestiture

Ch. 5-52
BCG Matrix
• Dogs
Low relative market share position and
compete in slow or no market growth
 Weak internal and external position
Decision to liquidate, divest, retrenchment

Ch. 5-53
Internal-External (IE) Matrix
Strong 3.0 to
4.0
Average 2.0
to 2.99
Weak 1.0 to
1.99
4.0 3.0 2.0 1.0
High 3.0 to 4.0 3.0
I II III
Medium 2.0 to
2.99 2.0
IV V VI
Low 1.0 to 1.99 1.0
VII VIII IX
Grow and build
Hold and Maintain
Harvest or divest
The EFE
weighted
scores
The IFE Weighted Scores

Ch. 5-54
Grand Strategy Matrix
Quadrant IV
• Conglomerate
diversification
• Joint ventures
Quadrant III
• Retrenchment
• Conglomerate
diversification
• Liquidation
Quadrant I
• Forward integration
• Backward integration
Quadrant II
• Divestiture
• Liquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
WEAK
COMPETITIVE
POSITION
STRONG
COMPETITIVE
POSITION

Ch. 5-55
SPACE Matrix

DECISION STAGE: QSPM
Ch. 5-56

QSPM SCORING
• Step 1 Make a list of the firm’s key external
opportunities/threats and internal
• strengths/weaknesses in the left column of
the QSPM
• Step 2 Assign weights to each key external and
internal factor
• Step 3 Examine the Stage 2 (matching)
matrices, and identify alternative strategies
that the organization should consider
implementing.
Ch. 5-57

QSPM SCORING
• Step 4 Determine the Attractiveness Scores
(AS) defined as numerical values that indicate the
relative attractiveness of each strategy in a given set
of alternatives. The range for Attractiveness Scores is
1 = not attractive, 2 = somewhat attractive, 3 =
reasonably attractive, and 4 = highly attractive.
• By attractive, means the extent that one
strategy, compared to others, enables the firm
to either capitalize on the strength, improve on
the weakness, exploit the opportunity, or
avoid the threat
Ch. 5-58

QSPM SCORING
• Step 5 Compute the Total
Attractiveness Scores. (WEIGHT X
AS)
• Step 6 Compute the Sum Total
Attractiveness Score. The Sum Total
Attractiveness Scores (STAS) reveal
which strategy is most attractive in
each set of alternatives (higher score)
Ch. 5-59

Ch. 5-60

Ch. 5-61
SBU/BUSINESS-LEVEL STRATEGIES
Michael Porter’s Generic Strategies
Cost Leadership Strategies
Differentiation Strategies
Focus Strategies

Ch. 5-62
Porter’s Generic Competitive
Strategies
5.7 Porter’s Generic Competitive Strategies (Fig. 5.4)
Source: Reprinted with permission of The
Free Press, an imprint of Simon &
Schuster, from The Competitive Advantage
of Nations by Michael E. Porter, p. 39.
Copyright © 1990 by Michael E. Porter.
Differentiation
Competitive Advantage
Cost Leadership Differentiation
Cost Focus Focused
Differentiation
Competitive
Scope
Lower Cost

Ch. 5-63
Generic Strategy Commonly Required Skills and Common Organizational
Resources Requirements
Overall Cost Leadership Sustained capital investment Tight cost control
and access to capital Frequent detailed control reports
Process engineering skills Structured organization and
Intense supervision of labor responsibilities
Products designed for ease Incentives based on meeting strict
of manufacture quantitative targets
Low-cost distribution system
Differentiation Strong marketing abilities Strong coordination among functions
Product engineering in R&D
Creative flair Subjective measurement and
Strong capability in basic research incentives instead of quantitative
Corporate reputation for quality or measures
technological leadership Amenities to attract highly skilled
Long tradition in the industry or unique labor, scientists, or creative
combination of skills drawn from other people
businesses
Strong cooperation from channels
Focus Combination of the above policies directed Combination of the above policies
directed at the particular strategic target at the particular strategic target
Requirements for Generic Competitive Strategies

Ch. 5-64
Functional Strategies
Marketing strategy –
Involved with pricing, selling, and
distributing a product.
Market development strategy –
• Capture a larger share of existing
market through market saturation
and market penetration
• Develop new markets for current
products

Ch. 5-65
Product development strategy –
•Develop new products for existing markets
•Develop new products for new markets
Advertising or Promotion strategy –
Push marketing strategy
Investing in trade promotion to gain or hold share
Pull marketing strategy
Investing in consumer advertising to build brand awareness
Marketing strategy

Ch. 5-66
Financial strategy –
– Examines the financial implications of
corporate and business-level strategic
options and identifies the best
financial course of action.
– Maximizes financial value of the firm
Leveraged buy out (LBO) –
– Company is acquired financed largely
by debt (from a third party).
• Debt paid by acquired company’s
operations or sale of assets

Ch. 5-67
R&D Strategy –
Deals with product and process
innovation and improvement
Choice:
– Technological leader
– Technological follower

Ch. 5-68
Research and Development Strategy
and Competitive Advantage
Technological Leadership Technological Followership
Cost Advantage
Differentiation
Pioneer the lowest cost product
design.
Be the first firm down the learning
curve.
Create low-cost ways of
performing value activities.
Pioneer a unique product that
increases buyer value.
Innovate in other activities to
increase buyer value.
Lower the cost of the product or
value activities by learning from
the leader’s experience.
Avoid R&D costs through
imitation.
Adapt the product or delivery
system more closely to buyer
needs by learning from the
leader’s experience.

Ch. 5-69
Operations strategy –
Determines:
• How and where product is
manufactured
• Level of vertical integration in process
• Deployment of physical resources
• Relationships with suppliers
– Affected by product life cycle
• Job shop
• Connected line batch flow
• Flexible manufacturing system
• Dedicated transfer lines

Ch. 5-70
Manufacturing strategy –
Movement from mass production to:
• Continuous improvement
• Modular manufacturing
• Mass customization
Purchasing strategy –
Obtaining raw materials, parts and
supplies
• Basic Purchasing Choices:
– Multiple sourcing
– Sole sourcing
– Parallel sourcing

Ch. 5-71
Logistics strategy –
– Flow of products into and out of the
process
• Three current trends:
– Centralization
– Outsourcing
– Use of the Internet

Ch. 5-72
HRM strategy –
– Addresses issues of:
• Low-skilled employees
– Low pay
– Repetitive tasks
– High turnover
• Skilled employees
– High pay
– Cross trained
– Self-managing teams
Information systems strategy –
Technology to provide business units
with competitive advantage

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