1. 1
Situational analysis:
SWOT analysis,
TOWS Matrix;
Corporate strategy;
Strategies for growth and diversification;
Process of strategic planning;
Stages of corporate development;
Portfolio analysis;
Corporate parenting;
Functional strategy;
Core competencies;
Strategic choice.
Unit III - Strategy Formulation
2. 2
Situational analysis:
THE INPUT STAGE
External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
Internal Factor Evaluation (IFE) Matrix
THE MATCHING STAGE
Strategic Position and Action Evaluation (SPACE) Matrix
Portfolio analysis - Boston Consulting Group (BCG) Matrix
Internal-External (IE) Matrix
Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix
Grand Strategy Matrix
THE DECISION STAGE
Quantitative Strategic Planning Matrix (QSPM)
Strategy Formulation Framework
3. Food for thought
"Weak leadership can wreck the soundest
strategy."—Sun Tzu
"Great spirits have always encountered violent
opposition from mediocre minds.“
—Albert Einstein
3
4. 4
Situational analysis
Strategy = Opportunity / Capacity
Strategic Alternative = Opportunity / (Strength – Weakness)
Offensive strategy (Attack is the best defense, so invest in strength areas)
Defensive strategy (work on your defenses, reinforce the weak links, a
chain is as strong as its weakest link
Financial objectives, strategic objectives and trade off
Financial objective
Revenue growth
Earning growth
Higher dividend
Higher profit margin
Higher ROI
Higher EPS
Rising stock price
Improved cash flow
5. 5
Situational analysis contd…
Strategic objective
Larger market share
Quicker on-time delivery
Shorter design to market times
Lower costs
Higher product quality
Wider geographic coverage
Achieving ISO 14001 certification
Technological leadership
Trade offs
Higher revenue through higher price vs loss of market share
Higher sales through sales promotion vs low brand equity
Bad corporate governance practices vs law suits
Poor environmental compliance vs regulatory punishment
Insider trading vs regulatory punishment
Cartelization vs anti trust suits
Questionable labor relation vs disputes
6. From weakness to SCA
6
Weaknesses ⇒ Strengths ⇒ Distinctive Competencies ⇒
Competitive Advantage
8. 8
Criticism of SWOT Analysis
Long list of mumbo-jumbo
No usage of weights or priorities (qualitative analysis)
Throws ambiguous words and phrases
Same factor can be strength or weakness
Opinion based, no data verification possible
No logical link to strategy implementation
9. 9
TOWS Matrix
TOWS is SWOT is reverse, here the transition is from external factors
(Threats & Opportunities) to internal factors (Weaknesses & Strengths)
leading to Strategy Formulation
TOWS Matrix is used to generate alternative strategies (Growth,
Retrenchment or Withdrawal Strategy)
10. 10
TOWS Matrix contd…
External
Strength (S) Weakness (W)
Opportunities (O) SO Strategy – Strength
to take advantage of
opportunities
WO Strategy – Take
advantage of
opportunities by
overcoming weaknesses
Threat (T) ST Strategy - Strength to
avoid threats
WT Strategy – Avoid
threats arising out of
weakneses
Internal
11. 11
Alternative Strategies Defined and Exemplified
Strategy Definition Examples
Forward
Integration
Seeking ownership or increased control of a firm’s distributors
or retailers
Beverage behemoths buying bottlers be it soft drinks or
beer
Backward
Integration
Seeking ownership or increased control of a firm’s raw
material suppliers
Power companies seeking coal linkages by bidding for
coal mines
Horizontal Seeking ownership or increased control over competitors Sun Pharma buying Ranbaxy
Market Penetration
Seeking increased market share for present products or
services in present markets through greater marketing efforts Banks doing road shows, loan melas
Market
Development
Introducing present products or services into new geographic
area
Most FMCG companies in India rushing to rural India,
white ATM's
Product
Development
Seeking increased sales by improving present products or
services or developing new ones
Amul entering Pizza, Icecream segments, Nestle's
(Maggi) Atta noodles
Related
Diversification Self explanatory
Tata Motors' move from commercial vehicles (buses and
trucks) to passenger cars
Unrelated
Diversification Adding new, unrelated products or services
Cisco Systems Inc. entered the camcorder business by
acquiring Pure Digital Technology
Retrenchment
Regrouping through cost and asset reduction to reverse
declining sales and profit
The world’s largest steelmaker, ArcelorMittal, shut down
half of its plants and laid off thousands of employees
even amid worker protests worldwide
Divestiture Selling a division or part of an organization
ITDC selling off sick hotel chains in Bhubaneswar, East
India
Liquidation
Selling all of a company’s assets, in parts, for their tangible
worth NTC, Modern Bakeries were liquidated
Acknowledgement: Adapted from David, Strategic Mgt – Concepts and cases, Prentice Hall,13 ed.
12. 12
Corporate Strategy
Generic Competitive Strategy
Cooperative strategy
Directional Strategy
Portfolio Strategy
Parenting strategy
Generic Competitive Strategy
Cost leadership
Cost focus
Increases market share
Comparatively weak entry barrier
Ability to design, produce and market a comparable product and service more
efficiently at a cheaper cost than competitors
Example: Wal-Mart, Nirma, Zenith, Tata Nano
Differentiation
Differentiation focus
Increases profit
Comparatively strong entry barrier
Ability to design, produce and market a comparable product and service providing
unique and superior value than competitors
Example Apple, Microsoft, Hagen-Daz, Nike, Mercedes Benz
14. 14
Risks of Generic Competitive Strategies
Risks of cost leadership Risks of Differentiation Risks of Focus
Non sustainable Non sustainable Target becoming
unattractive
Technology change Cost proximity is lost Risk of imitation
Cost focusers achieve even
lower cost in segments
Differentiation focusers
achieve even higher
differentiation in segments
Loss of demand
Customers become
indifferent to the
differentiation
Advantage of broad line
increases
18. 18
Cooperative strategy
Collusion or Cartel
Active co-operation of firms within an industry to reduce output and raise price to
tamper with the demand supply equation
Examples: OPEC, Archer Daniel Midlands, GE & Westinghouse, Cement
Manufacturers in India facing MRTPC investigation
Strategic Alliance
Strategic Alliance credo - Share the risk, share the objective & share
the spoils. By leveraging the combined intellect, pooled resources, new
products are created, new technologies explored, new markets created
or penetrated and world market scale is achieved through economy of
scale & economy of scope.
Big firms, mostly, are monolithic, bureaucratic structure they
accumulate a lot of fat & unwanted baggage like incompetence, sloth,
arrogance, false sense of invincibility.
Of late most of the young, upstart companies pose threats to
established players so typically strategic alliance gets formed between
big and small firms to access the subset of expertise of smaller firms,
smaller firms gain capital and organizational resources of bigger firms
19. 19
Strategy – Go it alone or Octopus
‘The whole is greater than sum of parts’, leveraging partnerships is not
empty talk if really synergistic partnership is forged, forward thinking
organizations have understood they can’t live in technology islands,
they are reaching out to outside talent & expertise, some examples:
German MBB, French Aerospatiale, Spanish CASA and British
Aerospace of UK formed The Airbus Industrie giving a run for their
money to Boeing, Lockheed Martin & McDonnel Douglas
IBM developed Liquid Crystal Display Screens (LCD) with Nippon
Telephone & Telegraph (NTT, Japan), Toshiba Japan.
JVC, Sharp, Toshiba, RCA networked together to make VHS
technology the industry standard in the VCR industry
20. 20
Octopus strategy Alliances of IBM
IBM
Intel to develop
microchip
technology
DEC to develop
OS technology
Toshiba to
develop LCD
technology
Microsoft to
develop
software
Siemens to
develop memory
technology
HP to develop
OS for Work
station
Apple to develop
OS technology
21. 21
Strategic alliance in service industry
Lufthansa
United Airlines
Tyrolean Singapore Airlines British Midland Thai Airways
SAS
Austrian Airlines
Air Canada
ANA
Mexicana
Spanair
Asiana Airlines
Air New Zealand Lauda
Varig
IA
22. 22
Forms of strategic alliance
Inter (Car makers working together to meet advanced emission norms,
developing hybrid, multi fuel cars, Fuel cell technology)
Paradigm shift from vertical integration to some you do and some
outsource
Pharma & Biotech companieswere earlier doing research,
development, production and sales & marketing
Erbitux a new drug to aid colorectal cancer was discovered in
Biotech firm ImClone Systems’ clinical labs but marketed by
pharma biggy Bristol-Meyers Squibb
23. 23
Forms of strategic alliance
Intra (Glaxo Wellcome with Apple, Fuji, Canon, Matsuhita)
Equity or shareholding pattern wise a strategic alliance can be
Joint venture (JV)
Contracting (Contract Manufacturing & Management
Contracting)
Collaboration (non JV)
R & D consortia or Mutual Service Consortia
Value Chain Partnership
24. 24
Marketing alliance
Product or service alliance (Hind Lever+Pepsico India for
Lipton Iced tea in glass bottles)
Promotional Alliance (P & G India using Bombay Dyeing
for promoting Ariel)
Logistics Alliance (Transystem JV of TCI & Mitsui
offering complete logistics support to Toyota Kirloskar
Pricing collaboration: Synergistic businesses joining hands
to derive (& pass on the benefits) competitive
advantage, e.g., hotels, car rentals and airlines
companies offering a package
25. 25
Motives behind SA formation
1. Improved access to capital and new business Airbus to counter Boeing & McDonell Douglas
2. Greater technical critical mass US microchip manufacturers to counter Japanese
3. Shared risk & liability GEC-Alsthom, JV between UK & French power
generator makers
4. Better relationship with strategic partners Airbus Industrie
5. Technology transfer benefits Customer supplier alliance – VW & Bosch
6. Reduce R & D cost GEC & Siemens 60/40 telecom JV GPT
7. Use of distribution skills Virgin Cola & Tesco
8. Access to marketing strength NMB - Intel
9. Access to technology IBM - Apple
10. Standardisation Sony’s effort to make Betamax tech standard
11. By product utilization Glaxo Wellcome, Canon, Fuji,
12. Management training Rover management with Honda
26. 26
Corporate strategy
Directional strategy
Firm’s overall orientation for
Growth (Infosys expanding into China, Cadbury Schweppes’ successful
confectionary business is on growth path)
Concentration
Vertical Growth (Ford, Micron, Reliance petrochem)
Horizontal Growth (Dell)
Diversification
Concentric (GCMMF – Amul)
Conglomerate (Titan, ITC)
Stability (Dot com and new economies )
Pause / Proceed
No Change
Profit
Retrenchment
Turnaround (Trump Gr of Companies of Donald Trump, Railways)
Captive Company
Sell out / Divestment (HZL, HCL, Centaur Hotel, Compaq)
Bankruptcy/ Liquidation (Lehman Brothers, Merril Lynch, Napster,
National Textile Company, Sick PSU’s)
27. Growth strategy
Sales, assets, profits, mkt share or some combination .
Grow for survival. Normally increasing sales, leverage experience curve, increase profits
Firms that have not reached “critical mass” (that is, gained the necessary economy of large-
scale production) face large losses unless they can find and fill a small, but profitable, niche
where higher prices can be offset by special product or service features.
Oracle acquired PeopleSoft, a rival software firm, in 2005. Oracle needed to double or even
triple in size by buying smaller and weaker rivals if it was to compete with SAP and
Microsoft - CEO Larry Ellison.
larger businesses tend to survive longer than smaller companies due to the greater availability
of financial resources, organizational routines, and external ties.
Options for internal (organic) growth - expanding its operations both globally and
domestically,
Options for external (inorganic) growth - mergers, acquisitions, and strategic alliances.
A merger is a transaction involving two or more corporations in which stock is exchanged but
in which only one corporation survives. Mergers usually occur between firms of somewhat
similar size and are usually “friendly.” The resulting firm is likely to have a name derived
from its composite firms. Allied Corporation and Signal Companies - Allied Signal
27
28. Growth strategy contd…
Acquisition - purchase of a company that is completely absorbed as an operating subsidiary or
division of the acquiring corporation.
Procter & Gamble’s (P&G’s) acquired Gillette.
Acquisitions usually occur between firms of different sizes, friendly or hostile (takeovers).
A growing flow of revenue into a highly leveraged corporation can create a large amount of
organization slack (unused resources) that can be used to quickly resolve problems and conflicts
between departments and divisions, turnaround. Larger firms also have more bargaining power
than do small firms and are more likely to obtain support from key stakeholders in case of
difficulty. A growing firm offers more opportunities for advancement, promotion, and
interesting jobs.
Grow by concentration on the current product line(s) in one industry and diversification into
other product lines in other industries.
Concentration by vertical growth and horizontal growth.
Vertical Growth. Vertical growth can be achieved by taking over a function previously provided
by a supplier or by a distributor. The company, in effect, grows by making its own supplies
and/or by distributing its own products. This may be done in order to reduce costs, gain control
over a scarce resource, guarantee quality of a key input, or obtain access to potential customers.
This growth can be achieved either internally by expanding current operations or externally
through acquisitions.
28
29. Growth strategy contd…
Henry Ford, built River Rouge plant outside Detroit. The manufacturing process was
integrated to the point that iron ore entered one end of the long plant, and finished
automobiles rolled out the other end, into a huge parking lot.
Cisco Systems, a maker of Internet hardware, chose the external route to vertical growth by
purchasing Scientific-Atlanta Inc., a maker of set-top boxes for television programs and
movies-on-demand. This acquisition gave Cisco access to technology for distributing
television to living rooms through the Internet. More specifically, assuming a function
previously provided by a supplier is called backward integration (going backward on an
industry’s value chain). Assuming a function previously provided by a distributor is labeled
forward integration (going forward on an industry’s value chain). FedEx, for example, used
forward integration when it purchased Kinko’s in order to provide store-front package drop-
off and delivery services for the small-business market.
29
30. RETRENCHMENT STRATEGIES
When - a weak competitive position in some or all of its product lines.
Symptoms - poor performance—sales are down, profits are becoming losses. These
strategies impose a great deal of pressure to improve performance.
Cure - turnaround, becoming a captive company to selling out, bankruptcy, or
liquidation.
Turnaround strategy – Condition of organization bad, still curable and repairable,
by improvement of operational efficiency. Cutting costs & expenses, by selling off
assets, contraction and consolidation. Contraction is the initial effort to quickly
“stop the bleeding” with a general, across-the board cutback in size and costs.
Howard Stringer, CEO of Sony Corporation, eliminated 10,000 jobs, closed 11 of
65 plants, and divested many unprofitable electronics businesses.
Consolidation, implements a program to stabilize the now leaner corporation,
reducing unnecessary overhead, making functional activities cost-justified.This is a
crucial time for the organization. Attrition is a challenge.
30
31. Captive Company
Giving up independence in exchange for security. The industry may not be
sufficiently attractive to justify such an effort from either the current management
or investors. Management desperately searches for an “angel” by offering to be a
captive company to one of its larger customers in order to guarantee the company’s
continuedexistencewithalong-termcontract.
Inthisway,thecorporationmaybeabletoreduce
thescopeofsomeofitsfunctionalactivities,suchasmarketing,thussignificantlyreducing
costs. The weaker company gains certainty of sales and production in return for
becoming heavily dependent on another firm for at least 75% of its sales. For
example, to become the sole supplier of an auto part to General Motors, Simpson
Industries of Birmingham, Michigan, agreed to let a special team from GM inspect
its engine parts facilities and books and interview its employees.
Inreturn,nearly 80% of the company’s production was sold to GM through long-
term contract
31
32. 32
Retrenchment - Bankruptcy/ Liquidation
Cadbury Schweppes, retrenched by selling its marginally profitable soft
drink business.
Chapter 11 of the bankruptcy code is to “reorganize” the business
and try to be profitable again, Indian counterpart is Bureau for Industrial
and Financial Restructuring (BIFR) filing, under chapter 7 the company
stops all operations and goes completely out of business, a trustee liquidates
its assets to pay off creditors and investors
As per Dunn & Bradstreet (an information services firm)
Bankruptcy filing for commercial business
2006 2008 %
Chapter 11 3600 6700 86
Chapter 7 11400 25000 119
Acknowledgement: Bankruptcies in the US, Gaurav Chaudhury, HT Business, Nov, 10, 2008
33. 33
Corporate strategy (contd…)
Portfolio analysis
Figuring out products, services basket
BCG, Ansoff, Opportunity, Threat Matrix
Parenting strategy
Manner of coordinating activities, resource transfer,
capability cultivation about product lines & business
units
34. 34
Portfolio analysis
Used for multi product / division industries
Used to segregate the “gems” from “rotten
apples”
Jack Welch of GE paraphrased – by weeding
/easing out the non or not so brilliant performers,
you do a favor to the organization as well as those
being eased out
2 approaches for Portfolio analysis:
BCG Growth –Share matrix &
GE Business Screen
35. 35
BCG Growth –Share matrix
Question Mark
Star
Cash Cow Dog
Business
Growth
Rate
(%)
Relative competitive position (Market share)
0
8
4
24
16
20
12
28
1x
1.5x
4x 0.5x 0.1x
Relative competitive position of A
= Mkt Share of co A / Mkt share of
leading competitor
37. Criticisms for portfolio analysis (BCG, GE Biz Screen
37
Oversimplification
Businesses fall in the middle, no easy classification
Matrix has no temporal qualities, is a snapshot.
Other variables - size of the market and competitive advantages, are important for
portfolio.
42. 42
Corporate Parenting
Portfolio Analysis does not answer questions like
which businesses an organizations should enter into and why?
For superior performance from company’s business units what type of
organizational structure, management processes and philosophy should
be adapted?
Corporate Parenting is the answer for such queries. The resources and
capabilities to build business unit value as well as generating synergies
across business units in a multi business company is Corporate Parenting.
3 steps of Corporate Parenting:
Examining each business units (or target firm to be acquired) in terms
of strategic factors
Examining each business units (or target firm to be acquired) in terms
of areas of performance improvement
Analyzing the fit between the parent and the business unit (s) / target
firm
43. 43
Parenting fit matrix
Heartland
Edge of heartland
Ballast
Alien Territory
Value trap
High
High
Low
Low
FIT between parenting opportunities and parenting characteristics
MISFIT
between
strategic
factors
and
Parenting
characteristics
44. 44
Functional strategy
What is Functional strategy?
An approach to strategy adopted by a functional area to
achieve corporate and business unit objectives by maximizing
resource productivity is Functional strategy
A business unit strategy of differentiation would mean a functional
strategy having following components:
Skilled and expensive workforce
Reliance on pull (by allocating greater ad budget for advertising &
brand building)
A business unit strategy of cost reduction would mean a functional strategy
having following components:
Low cost manufacturing (may be no manufacturing at all subject to
make or buy decision making)
Sales promotion, dealer’s discount to effect push sales etc
45. 45
Core competencies
Competency or expertise better or greater than a
competitor and sustaining that by reinvesting is called
core competency
It is one such asset that is depreciation proof
Core competency should be
Able to generate Customer perceived value
Able to provide unique advantage over competitors &
Extendable – something that can be used to develop new
products & services or to enter into new market
46. 46
Sources of Core Competency
Technological monopoly, patents etc, Xerox’ copying
patent, Microsoft’s os, Pfizer’s Viagra, Osteltamivir for
swine and bird flu etc
Acquired expertise, Whirlpool acquiring worldwide
distribution system from Phillips (appliance division)
Strategic Alliance, Apple worked with a little known firm
to create Apple II & Macintosh computers
Expertise extension, Honda extended its small motor
expertise from Motorcycles to Autos to lawnmowers
47. 47
Strategic choice
Generate a healthy list of competent alternatives
The potential winner should exploit the opportunities and withstand threats
The winner should satisfy the agreed on objectives in the least resources
with minimal adverse outcome
Following are some of the handy tools in making a Strategic Choice:
Scenario Building or Corporate Scenario: Forecasting the effect of
each alternate strategy based on Simulation, also known as ‘what
if’ analysis
Optimistic, pessimistic & most likely scenarios of 5, 10 or 15 years
into the future
Buying a firm in a foreign country having strong demand vs
starting own operation (Daichi Japan bought controlling stake in
Ranbaxy but Pfizer has been present in India through its own
subsidiary)
48. 48
Scenario Box
PROJECTIONS
200- 200- 200-
Factor Last year Hist. avg Trend
Analysis
O P M
L
O P ML O P M
L
Comments
GDP
CPI
SALES
NET P
EPS
ROI
ROE
Other
49. 49
Strategic choice – risk tolerance
Real options
Future uncertain, broad range of options (multiple scenarios)
Investment in stages and filtering, no full commitment in the beginning
Chevron in oil exploration, Airbus in cost calculation of their airlines
City authorities outsourcing electricity generation (Tennessee Valley
Authority, for example) and many venture capitalists use this
technique
NPV (Net Present Value)
Calculate the value of project by predicting its payouts, adjusting for risks and
subtracting the amount invested
Only one scenario, no flexibility
Not applicable when potential payouts are currently unknown
50. 50
Strategic choice process
To avoid consensus trap, following techniques
can be used:
Devil’s advocate
Dialectical enquiry
Strategy Shadow Committee
Prominent follower is Anheuser-Busch
51. Acknowledgements:
C. Stadler, “The Four Principles of Enduring Success,” Harvard Business
Review (July– August 2007), pp. 62–72.
D. J. Flanagan, “Announcements of Purely Related and Purely Unrelated
Mergers and Shareholder Returns: Reconciling the Relatedness Paradox,”
Journal of Management, Vol. 22, No. 6 (1996), pp. 823–835;
R. N. Palter and D. Srinivasan, “Habits of Busiest Acquirers,” McKinsey on
Finance (Summer 2006), pp. 8–13.
49. D. R. King, D. R. Dalton, C. M. Daily, and J. G. Covin, “MetaAnalyses
of Post-Acquisition Performance: Indications of Unidentified Moderators,”
Strategic Management Journal (February 2004), pp. 187–200; W. B.
Carper, “Corporate Acquisitions and Shareholder Wealth: A Review and
Exploratory Analysis” Journal of Management (December 1990), pp. 807–
823; P . G. Simmonds, “Using Diversification as a Tool for Effective
Performance,” Handbook of Business Strategy, 1992/93 Yearbook, edited
by H. E. Glass and M. A. Hovde (Boston: Warren, Gorham & Lamont,
1992), pp. 3.1–3.7;
51
