Assignment

Strategy Management

Submitted By :
Tejashvi.V
MFM/16/706
INTRODUCTION
It is useful to consider strategy formulation as part of a strategic
management process that comprises three phases: diagnosis,
formulation, and implementation. Strategic management is an
ongoing process to develop and revise future-oriented strategies
that allow an organization to achieve its objectives, considering its
capabilities, constraints, and the environment in which it operates.

Diagnosis includes: (a) performing a situation analysis (analysis

of the internal environment of the organization), including
identification and evaluation of current mission, strategic
objectives, strategies, and results, plus major strengths and
weaknesses; (b) analyzing the organization's external environment,
including major opportunities and threats; and (c) identifying the
major critical issues, which are a small set, typically two to five, of
major problems, threats, weaknesses, and/or opportunities that
require particularly high priority attention by management.

Formulation, the second phase in the strategic management process,

produces a clear set of recommendations, with supporting
justification, that revise as necessary the mission and objectives of
the organization, and supply the strategies for accomplishing them.
In formulation, we are trying to modify the current objectives and
strategies in ways to make the organization more successful. This
includes trying to create "sustainable" competitive advantages --
although most competitive advantages are eroded steadily by the
efforts of competitors.

A good recommendation should be: effective in solving the stated

problem(s), practical (can be implemented in this situation, with the
resources available), feasible within a reasonable time frame, cost-
effective, not overly disruptive, and acceptable to key
"stakeholders" in the organization. It is important to consider "fits"
between resources plus competencies with opportunities, and also
fits between risks and expectations.

There are four primary steps in this phase:

* Reviewing the current key objectives and strategies of the

organization, which usually would have been identified and
evaluated as part of the diagnosis

* Identifying a rich range of strategic alternatives to address

the three levels of strategy formulation outlined below,
including but not limited to dealing with the critical issues

* Doing a balanced evaluation of advantages and disadvantages

of the alternatives relative to their feasibility plus expected
effects on the issues and contributions to the success of the
organization

* Deciding on the alternatives that should be implemented or

recommended.

In organizations, and in the practice of strategic management,

strategies must be implemented to achieve the intended results.
The most wonderful strategy in the history of the world is useless if
not implemented successfully. This third and final stage in the
strategic management process involves developing an
implementation plan and then doing whatever it takes to make the
new strategy operational and effective in achieving the
organization's objectives.
The remainder of this chapter focuses on strategy formulation, and
is organized into six sections:

Three Aspects of Strategy Formulation, Corporate-Level Strategy,

Competitive Strategy, Functional Strategy, Choosing Strategies, and
Troublesome Strategies.

THREE ASPECTS OF STRATEGY

FORMULATION
The following three aspects or levels of strategy formulation, each
with a different focus, need to be dealt with in the formulation
phase of strategic management. The three sets of
recommendations must be internally consistent and fit together in a
mutually supportive manner that forms an integrated hierarchy of
strategy, in the order given.

Corporate Level Strategy

Competitive Strategy (often called Business
Level Strategy)
 Functional Strategy
Horizontal Integration
Expanding by acquiring or merging with one of the rival
organizations is known as horizontal integration.

An acquisition occurs when an organization buys another

organization. Generally, the acquired organization is smaller than
the buyer organization. A merger joins two companies into one.
Mergers occur with similar sized companies.


Horizontal integration is preferable and attractive for many

reasons. Horizontal integration may lower costs by gaining a greater
economies of scale. Fitting horizontal integration alongside Porter’s
five forces model, it means that such moves also reduces the
intensity of rivalry and can make the industry more profitable.

Horizontal integration can also offer new distribution channels,

where a firm may produce or acquire production units that are
similar—either complementary or competitive.

Example : Cadbury
In 1989, Kraft’s parent company merged Kraft and General Foods. In
2000, Kraft bought Nabisco Holdings, and in 2009 bought Cadbury
for about US$19 billion, making Kraft a “global confectionery
leader.” At the time, Cadbury was the second-largest confectionery
brand in the world after Wrigley’s.
Vertical integration (VI)
Vertical integration is used strategically to gain control over the
industry’s value chain. The important issue to consider is, whether
the company participates in one activity (one industry) or many
activities (many industries).

A company may choose that it only manufactures its products or

would get involved in retailing and after-sales services too. Two
issues have to be considered before integration:

 Costs - An organization must integrate vertically when costs

producing inside the company are less than the costs of
availing that product in the market. 

 Scope of the firm – It is necessary to think over the fact,
whether moving into new industries would not dilute its
current competencies. New activities are often harder to
manage and control. These factors contribute to a decision if
a company will pursue none, partial or full VI.
Types of Vertical Integration 


Forward Integration 


Engaging in sales or after-sales industries for a manufacturing

company, it is a forward integration strategy. This strategy is used
to achieve higher economies of scale and larger market share.
Forward integration strategy is boosted by internet. Many
companies have built their online stores and started selling their
products directly to consumers, bypassing retailers. 
 Forward
integration strategy is effective when: 


 Few quality distributors exist in the industry. 


 Profit is high for distributors or retailers. 

 Distributors are very expensive, unreliable or unable to offer
quality service. 

 The industry is going to grow significantly. 

 Stable production and distribution is possible. 

 The company has vast resources and capabilities to manage
the new business. 


Example : Myntra
Initially Myntra was selling other brands products as fashion Market
place , But after a point it started selling its own private Label
: HRX, Roadster, Dressberry, Anouk.

Backward Integration 

If a manufacturing company starts creating intermediate goods for
itself or buys its previous suppliers, it is a backward integration
strategy. It is used to secure stable input of resources and become
more efficient. 


Backward integration strategy is most beneficial when:

 Existing suppliers are unreliable, expensive or unable to

provide the required inputs. 


 Only a few small suppliers but several competitors exist in the

industry. 


 Industry is in rapid expansion mode. 


 Price and inputs become unstable. 


 Suppliers earn very high profit margins. 
 A company has the

needed resources and capabilities to maintain the new
business. 


Example : Textport Overseas.

Textport Overseas is Export House, which initially started their
journey with production unit, but after growth in production
instead of outsourcing washing , Embroidery, Printing. They started
there own units of washing, Embroidery, Printing. It is known as
Backward Integration.

Advantages of VI Strategy 


 Lower costs as market transaction costs are diminished. 


 Greater quality of supplies. 

 VI can make critical resources available. 

 Better coordination in supply chain becomes possible. 

 Provides a bigger market share. 

 Secured distribution channels. 

 It enhances investment in specialized assets (site, physical-
assets and human- assets). 

 New competencies.

Disadvantages of VI Strategy 


 Higher costs, in case, the company cannot manage new

activities efficiently. 

 May lead to lower quality products and reduced efficiency as
competition recedes. 

 Reduced flexibility due to increased bureaucracy and higher
investments. 

  Higher potential for legal repercussion due to size. 

 New competencies and old ones may collide and lead to
competitive disadvantage. 


Market Penetration
Market penetration means gaining additional share of an
organization’s existing markets by utilizing existing products.
Advertising is a major way to attract customers within the existing
markets.

Example : Nike
Nike features popular and known athletes in print and television ads
to snatch market share within the athletic shoes business from
rivals Adidas and Lotto.

Market Development
Market development means to sell existing products in new markets.
A popular way to reach a new market is by entering a new retail
channel.

Example : Kicking Horse Coffee

Kicking Horse Coffee, based in a remote town, sells only organic
fair trade coffee and Indian chai. It has been a mainstay of the
town since the company started in 1996. Remote town is now the
base for the 8400 m2 production facility.

Product Development
Product development involves building and selling new products to
already existing markets. In the 1940s, Disney developed its
products within the film business venturing out of cartoons and
creating movies featuring real actors.

Example : Starbucks
In 2009, Starbucks introduced VIA, an instant coffee variety for
customers when they do not have easy access to a Starbucks store
or a coffeepot. Now many blends of Starbucks coffee and Tazo tea
are widely available in markets in the popular one-cup format.

Diversification strategies
Diversification strategies are used to extend the company’s product
lines and operate in several different markets. The general
strategies include concentric, horizontal and conglomerate
diversification.

Each strategy focuses on a specific method of diversification. The

concentric strategy is used when a firm wants to increase its
products portfolio to include like products produced within the
same company, the horizontal strategy is used when the company
wants to produce new products in a similar market, and the
conglomerate diversification strategy is used when a company starts
operating in two or more unrelated industries. Diversification
strategies help to increase flexibility and maintain profit during
sluggish economic periods.

Warren Buffet on Diversification

“Diversification is protection against ignorance, it makes little sense

for those who know what they’re doing.”

Concentric Diversification
A concentric diversification strategy lets a firm to add similar
products to an already established business. For example, when a
computer company producing personal computers using towers
starts to produce laptops, it uses concentric strategies. The
technical knowledge for new venture comes from its current field
of skilled employees.

Concentric diversification strategies are rampant in the food

production industry.

Example :
a ketchup manufacturer starts producing salsa, using its current
production facilities.

Horizontal Diversification
Horizontal diversification allow a firm to start exploring other
zones in terms of product manufacturing. Companies depend on
current market share of loyal customers in this strategy.

A downside is the company’s dependence on one group of

consumers. The company has to leverage on the brand loyalty
associated with current products. This is dangerous since new
products may not garner the same favor as the company’s other
products.

Example : Onida
When a television manufacturer starts producing refrigerators,
freezers and washers or dryers, it uses horizontal diversification.

Conglomerate Diversification
In conglomerate diversification strategies, companies will look to
enter a previously untapped market. This is often done using
mergers and acquisitions.

Moving into a new industry is highly dangerous, due to unfamiliarity

with the new industry. Brand loyalty may also be reduced when
quality is not managed. However, this strategy offers increasing
flexibility in reaching new economic markets.

Example :
A company into automotive repair parts may enter the toy
production industry. Each company allows for a broader base of
customers. There is an opportunity of income when one industry's
sales falter.

Downsizing Strategies
Companies often need to downsize themselves to be lean and
compete better against stiff competition. The idea is to make a
more productive company incur lesser costs. There are mainly two
major ways to downsize, known as Retrenchment and Restructuring.

Retrenchment
In the early 20th century, battles in World War I, occurred in series
of parallel trenches. If an attacking army forced the enemy to
abandon a trench, the defenders used to move back to the next
trench. The handy adjustments were far more preferable to losing
the battle completely. Retrenchment, a popular business strategy
now, owes its origin to this trench warfare. Firms that follow
retrenchment strategy generally shrink one or more business units.

Retrenchment is accompanied often by laying off employees. This

reduces the overall cost of management and provides a better way
to manage the employees more productively. This type of strategy is
best applicable to a saturated and low margin market such as
groceries where retailers look to add non-food merchandise to their
stocks to improve the bottom line.
Restructuring
Some better and more effective strategies are needed for some
firms to survive and become successful in the future. Divestment
means selling off a portion of the firm’s operations. Sometimes,
divestment usually reverses a forward vertical integration strategy,
such as in the case where Ford sold Hertz. Divestment can also lead
to reverse backward vertical integration.

General Motors (GM), once turned their parts supplier, called

Delphi Automotive Systems Corporation, from the original GM
subsidiary into a newly formed and independent firm. This was done
via a spin-off, which includes creating a completely new company
the stock of which is owned by investors. This often accompanies
stock splits for large companies.

Divestment can also help the company to undo diversification

strategies. Firms that have engaged in unrelated diversification find
the diversification strategies more useful. Investors, however, often
find it complex to understand the process of diversified firms, and
this can result in relatively poor performance by the stocks of such
firms. This is called diversification discount.

Executives sometimes break up diversified companies to derive the

stock value. Sometimes, the operations of a firm have no value at
all. When sale of a part of business is not possible, the best option
may be liquidation.

In liquidation, the parts that generate no value are simply shut

down, often at a tremendous financial loss.

GM has liquidated its Geo, Saturn, Oldsmobile, and Pontiac brands.

Such moves are painful as large portions of investments have to be
written off, but becoming “leaner and meaner” may at least save the
company from becoming obsolete.

Example :
Retrenchment : Zovi + Inkfruit.

liquidation : Zovi