1. 1. At first select your business definition. You must examine where
where we are in or want to be in?
This definition needs to clarify
a) Products or services provided
b) Market niches served
c) Function Performed.
The choice of products or services requires questions about the breadth
and depth of offering. Should the product line be broad or narrow?
At this stage you have to decide about product differentiation
Do they provide form, time, place utility?
2. The choice of the Market: Involves Territory, Local region, International.
Channel – Wholesale – Retail, Two level channel, 3 level channel.
Customer types – Industrial , Consumer,
Institutional, Governmental, Reseller , Non profit, Military
Differentiated
Undifferentiated
3) Function: How the firm wishes to add value
By transferring input into output
Jack of all trades vs specialization.Now we can proceed to choose alt. St.
2. Now Determine:
1. What is our business? What should it be? What business should we
be 5 years from now? 10 years from now?
2. Should we stay in the same business?
3. Should we get out of the business entirely or parts of it?
(Retrenchment.)
4. Should we expand by Product, Function or Market?
5. Should we carry out alternative 3+4, 2+4, 2+3? Simultaneously or
sequentially? ( Combination.)
Grand strategies:
A firm pursues stability strategy when:
1. It continues to serve the public the same product, market, function.
2. Its main strategic decisions focus on incremental improvement in
functional performance.
Characteristics :
a) Concentrate into resources in where it presently exists to develop
competitive advantage consistent with its resources.
b) It leads to defensive moves such as obtaining patent, taking legal
action.
c) It is not a do nothing approach.
d) You can have the goal of profit growth through improving current
operations.
e) It provides support to other strategy and acts as an element of risk
3. Why do companies follow it?
1. The firm is doing well or perceives itself as successful.
2. It is less risky.
3. It is used by reactionary managers usually.
4. It is easier and comfortable to pursue.
5. When the environment is perceived to be stable.
6.Too much expansion can lead to inefficiency.
Expansion:
A firm pursues Expansion Strategy when
1. It serves the public in additional product, market, function.
2. It focuses on major increases in the pace of activity within its
present business definition.
a) It increases current operations.
b) It leads to redefinition of the business.
c) It may lead to short-run inefficiencies.
4. Why do we follow Expansion Strategy?
1)In volatile industry stability means short-run success, long-run
death. So, expansion in necessary.
2) Expansion means effectiveness.
3) Society benefits from expansion.
4) Managerial motivation. Expansion brings reward. Managers who
follows the policy of “steady as it goes” are never remembered .
5) As a firm expands in size and experience it improves in
performance & productivity.
6) Belief that growth will yield more monopoly power.
7)Pressure from stockholders force CEOs to expand.
Retrenchment:
A firm follows Retrenchment Strategy when
1. It sees the desirability of or necessity for reducing its products
or service lines, function or markets.
2. It focuses its strategic decisions on functional improvement
through the reduction of activities in units with negative Cash
Flows.
Characteristics:
a) This results in reduction of activities.
b) This results in divesting products, market, or functions.
c) This results in lay off.
d) This results in reduction of Research and Development.
5. Why a firm follows retrenchment strategy?
1) The firm is not doing well
2) The firm has not met its objective by following one of the grand strategies.
3) The environment is so threatening that internal strength is insufficient to meet
problems.
4) Better opportunities are perceived elsewhere where strength can be utilized.
Combination Strategy :
A combination Strategy is a strategy that a firm pursues when:
1. Its main strategic decisions focus on the conscious use of several grand
strategies (stability, growth, retrenchment ) at the same time
(simultaneously) in several SBUs of the company.
2. It plans to use several grand strategies at different future times
(sequentially).
With combination strategies, the decision maker consciously apply several
grand strategies to different parts of the firm or to different future periods.
The logical possibilities for a simultaneous approach are stability in some
areas, expansion in others , stability in some areas, retrenchment in others ,
retrenchment in some areas, expansion in others ; and all three grand
strategies in different areas of the company.
6. Why do companies follow a Combination Strategy ?
1. When a company faces many environments and these environments are
changing at different rates .
2. When the company’s products are in different stages of the life cycle.
3. This is suitable for a multiple industry firm whose divisions belong to
different stages of the business cycle .
4. This strategy is suitable for a firm whose products are in different stages of
the product life cycle.
5. This is the best strategy for a firm whose divisions perform unevenly or do
not have the same future potential.
What is Payoff?
Payoff means return. Payoff occurs as a result of some unexpected events. Matrix
means rectangular array of some numbers.
So, payoff is the amount of profit that a decision maker wants or expects under
different conditions of uncertainty and for taking different strategies and when it is
expressed in a systematic array of numbers within brackets.
Significance of payoff matrix in business: A businessman conducts his business
under different conditions of uncertain environment. The economic conditions are
also different in different environments such as boom, depression, recession,
slump etc.
A businessman takes different strategies under different business conditions. Thus a
businessman can be aware of the outcomes of different strategies taken under
various economic conditions through payoff matrix.
7. For conceptualizing about decision making process payoff matrix converts the
decision making process into formal
1) Description of objectives.
2) Description of payoffs.
3) Evaluation of payoffs.
4) Selection from among the alternative payoffs. In addition to this, payoff
matrix plays a great role in game theory. We can also consider the payoff
under different stages of the product like cycle.
What do you mean by BCG product portfolio matrix?
The BCG product portfolio matrix is a matrix that shows market share on the
horizontal axis and the business growth rate on the vertical axis. It is a
technique to select a strategy from among alternative strategies available.
Growth rate is measured as a percentage increase in a market’s sales or
unit volume over the 2 most recent years. Market share is calculated by
dividing the sales of a company/unit by the total sales volume.
8. How to make strategic choice?
Answer: There are four grand strategies that a firm can follow. Those strategies are
stability, growth, retrenchment and combination. But it is sometimes difficult to select
a particular strategy. Boston Consulting Group has developed a technique that helps
a business firm to select a particular strategy. BCG product portfolio matrix is a
matrix that shows market share on the horizontal axis and the business growth rate
on the vertical axis. It is a technique to select a strategy from among alternative
strategies available. Growth rate is measured as a percentage increase in a market’s
sale or unit volume over the 2 most recent years. Market share is calculated by
dividing the sales of a company unit by the total sales volume.
The product portfolio matrix can be explained with the help of the following.
According to BCG product portfolio matrix there are four types of firms. They are (i) Star, (ii) Question Marks
(iii) Cash cow (iv) Dogs.
These types of industries are identified by some characteristics.
BCG product portfolio matrix
L
HH ? HL
HL
Cash cow
LL
H
L
9. Star: Characteristics:
Growing rapidly
Needs large amount of cash
Leaders in the business
Generate cash
Cash flow will roughly in balance.
If a company possesses the above characteristics then it is termed as “Star” and
expansion strategy is suggested for it
Cash cow: Characteristics:
Low Growth
High Market Share
Low cost and generates cash
Provide funds for overhead, dividend and investment.
Foundation of the firm.
If a company possesses the above characteristics, then it is called cash cow
and stability strategy is suggested for this type of company.
Dog: Characteristics:
Low growth
Low Market Share
Poor Profits.
10. If a company is ‘dog’ type then divest or liquidate the company
Question Mark: Characteristics:
High Growth
Low Market Share
Cash need is high
Cash generation is low.
For a ‘Question Mark company’ the strategist should either (i) convert it into star and
then into cash cow or (ii) divestment may be suggested for this type of firm.
5) Developing Distinctive Competence:
Readjust resource allocation.
2. (a) Make use of technology, sales network and so on
(b) Make use of other differences in the composition of assets.
3. Challenge accepted assumption about the way the business is done and gain a
novel advantage by creating new success factors,
4. Finally, a competitive advantage may be created by means of innovations which
open new markets or results in new products; Innovation often involves market
segmentation and finding new ways of satisfying the customer’s utility function.
11. Managerial selection factors
Strategic choice decisions are influenced by four managerial selection factors :
1. Managerial perceptions of external dependence
2. Managerial attitudes toward risk.
3. Managerial awareness of part enterprise strategies; and
4. Managerial power relationships
These are described below:
1.Managerial perception of external dependence: Firms do not work in isolation from
the environment. They depend on other units for their survival and prosperity. These
units include the owners, competitors, customers, government and the community.
The more dependent a firm is on these other units, the less flexible its strategic
choices can be. Thus the range of strategic choice is limited. The strategic choice
results from interaction of the firm with the environment. The strategic choices are
outcomes that are negotiated as various parties maneuver to reach their objectives.
You may have to depend on an owner who holds more than 5% stock. You may have
to depend on a supplier. But dependence does not always restrict alternatives. If the
gap in performance is unsatisfactory then several approaches can be followed:
1. New supplier can be found
2. The firm can vertically integrate to make the input
3. The firm can enter into a joint venture or merger with a supplier to reduce the
dependence
Thus dependence is, in reality, only a constraint to the extent that it is perceived to be
a limiting factor by the strategists.
12. MANAGERIAL ATTITUDES TOWARD RISK
Another factor influencing strategic choice is how much risk the firm, its
stockholders, and management can tolerate. Managerial attitudes toward risk vary
from comfort if not exhilaration with high risk to strong risk aversion. The risk
averters probably view the firm as very weak and will accept only defensive
strategies with very low risks. Three polar conditions with regard to risk can be
conceived .
Risk Attitudes and strategic choice
Managerial attitudes toward Risk Probable choice filters Probable strategies
1. Risk is necessary for success.
Optimistic; high risk leads to
reward.
2. Risk is a fact of life, and some
risk is acceptable.
3. High risk is what destroys
enterprises; it needs to be
minimized
1. High risk projects are
acceptable or desirable
2. Balance high-risk
choice with low risk
choices (bet hedging
3. “Risk aversion: risky
projects are rejected.
1.Expansion
2.Combination
3.Stability
Exhibit
Risk attitudes can change. Risk attitudes vary by industry volatility and
environmental uncertainty. In very volatile industries, executives must be capable of
absorbing greater amounts of risks; otherwise, they cannot function.
13. Risk attitudes can also vary on the basis of the internal conditions. How much are
you gambling on any given project? If you are betting the whole company, your risk
assessment may be different than if there were little to lose. Similarly, how much can
you afford to lose? And is it your money? Are you financially strong or weak. Past
success also has an influence on the perception of risk. If you have won recently,
you may see less risk in the future.
Thus assessing the manager’s perception of risk will help you understand the
potential acceptability of a given strategic option. Insofar as they influence
managerial attitudes, the risk attitudes of the managers and stockholders will
eliminate some strategic alternatives and highlight others. For instance, if risk is
being balanced, managers are likely to pursue stability in major parts of the business
with expansion in one or a few SBUs. Note that this balanced risk position is
assumed by the BCG product portfolio prescriptions. But if risk is seen as necessary
firms are likely to eliminate stability as a viable option.
MANAGERIAL AWARNESS OF PAAST STRATEGIES
This factor’s influence can be summarized very simply: Past strategies are the
beginning point of strategic choice and may eliminate some strategic choice as a
result. Recall that in the gap analysis it is assumed that the beginning point of the
process is the present position of the firm. From there, the initial question is, will the
continuation of our strategy lead to the expected attainment of desired objectives?
To the extent that the gap is small, past strategy will be continued. And to the extent
that managers are committed to continuing the strategy, other alternatives will be
ignored.
14. Mintzberg and several other researchers have concluded that past strategic choices
strongly influence later strategic choices, Specifically they found that.
1. The present strategy evolves from a past strategy developed by a powerful leader.
This unique and tightly integrated strategy is a major influence on later strategic
choice.
2. The strategy becomes programmed, And the bureaucratic momentum keeps it
going. Mintzberg calls this the push-pull phenomenon the original decision maker
pushes the strategy, and then lower management pulls it along.
3. When this strategy begins to fail because of changing conditions, the enterprise
grafts new sub-strategies onto the old and only later groups for a new strategy.
4. As the environment changes even more, the enterprise begins to consider
seriously the retrenchment, combination or expansion strategies previously
suggested by a few executives who were ignored at the time.
In many cases strategic change is more likely to come about when new managers
are brought in from outside the firm. Strategic change is less likely if new executives
are promoted from within, and it is least likely if the existing management group
remains in power. Thus the selection of a new CEO is one area where the board of
directors has a particularly strong influence if strategic change is necessary or
desirable.
Finally, expectations about the product life cycle can influence strategic change. In
this sense, past strategic decisions regarding product introductions may influence
future decisions.
15. MANAGERIAL POWER RELATIONSHIPS
Those with experience know that power relationships are a key reality in organizational
life. In many enterprises, if the top manager begins to advocate one alternative, the
decision to choose it is soon unanimous. In others, cliques develop, and if one clique
begins to support an alternative, the other opposes it.
Sometimes personalities get involved in the strategic choice: whom the boss likes and
respects has a lotto do with which strategic choice is made. And sometimes if mistakes
are made, the powerful can shift the blame to lower level executive.
None doubts that power or politics influence decisions, including strategic decisions.
From all that we we’ve said up to now, we would conclude that politics always plays a
role, even to the extent of influencing objectives and the way the analytical approaches
are used and interpreted. And politics seems to be an overriding factor in the strategic
choice process about 30 percent of the time according to Mintzberg. Thus it is important
to analyze the values and goals of the key managers. if you are to understand the
probability of acceptance of a given strategic recommendation.
Remember that the power of lower level participants also plays a role in strategic
decisions making. Of course top managers make the strategic choices. But earlier
strategic choices made by their subordinates limit the strategic choices usually
considered. Recall the subordinates can choose to hold or submit proposals
for strategic change. They can also influence the choice by providing analytical data
which support their proposal (as opposed to unbiased) pros and cons. Moreover
strategies must be implemented and lower level managers have the power to make or
break a strategy.
16. Finally, in Europe and elsewhere, sometimes, workers councils have an influence on
strategic choice. This is true in Sweden, for example. Volvo’s decision to open a plant
in the United States was influenced by the demand of the workers’ council not to close
any operations in Sweden. German workers councils have had an effect on
Volkswagen’s strategic choices in shifting its resources. Thus similar to the
dependence variable discussed earlier, the power of insiders and outsiders can be a
strong political influence on the strategic decision. Coalitions develop influence the
formulation of objectives and strategies.
