Strategy

Chapter Formulation,
Three Analysis and
Choice
 Environmental Analysis
 Environment literally means the surroundings, external objects,
influences or circumstances under which someone or something
exists.
 If an organization understands the environment in which it operates,
half the problem is solved.
 Environmental scanning is the monitoring, evaluating and
disseminating of information from the external and internal
environments to key people within corporation.
 Why Environmental Analysis?
 To develop an understanding of the opportunities which it can take advantage.
 To identifies threats which needs to be overcome.
 To assist an organization in recognizing its strengths and weaknesses.
 It enables an organization to determine what to do in order to avoid
any strategic surprises and to ensure its long term survival.
2
 Which environment do orgns analyze?
1. The general environment(macro):- it comprises broad nonspecific elements of the
organizations surroundings that affects the activities of the organizations. It composes
the following elements or forces:
 Economic elements
 Demographic elements
 Socio-cultural elements
 Technological elements
 Political- legal elements
2. The task(micro) environment:- it comprises more specific elements immediately
outside the organizations. These elements or forces can influence the business
activities of the organ directly such as:-
 Competitors'
 Customers
 Suppliers'
 Regulators
 Unions( organized groups of employees looking out their interests). 3
3. Internal environment:- it constitutes specific components that make
up the organization. These are:-
 Organizational resources
 Organizational distinctive capabilities
 Organizational culture
 Organizational structure
 Power and politics
 The nature of external environment:
 Environment is complex
 Environment has multi-dimensions
 Environment is not static
 Environment affects business strategies
 Environment is partially controllable

4
 Influence of Environment
The influences of the environment may be summarized as
SWOT analysis
 Strength:- an inherent capacity which an organization can use to
gain strategic advantage.
Weakness:-is an inherent limitation or constraint which
creates strategic disadvantages.
Opportunity: - is a favorable condition in the
organization‟s environment which creates conducive
environment to the organization.
Threat:- is an unfavorable condition in the
organization‟s environment which creates a risk for, or
causes damage to the organization.
5
 External Environmental Scanning/PEST/PESTL
 The macro environment is the broad environment outside of an
organization‟s industry and markets.
 It is generally beyond the influence of individual business but can
have a significant impact on the micro as well as internal
environments.
 Changes in the macro environment can:
Bring about the birth or death of an entire industry
Make markets expand or contract
Determine the level of competitiveness within an
industry.

6
PEST Analysis

7
8
 Internal Environment Scanning
Organizations may carryout internal analysis for some or
all of the following reasons:
 To identify resources, capabilities, core competencies and
competitive advantages
 To evaluate how effectively value adding activities are organized
 To identify areas of weaknesses to be addressed
 To evaluate financial performance, particularly in comparison
with competitors
 To evaluate the performance of products
 To evaluate investment potential if finance is being required from
external sources
 To assess the suitability, feasibility and acceptability of future
strategies
9
 Components Of Internal Analysis
Resources Analysis:
Resource is an input employed in the activities of the
business. Such as human, financial, material and
information.
Capabilities Analysis:
Refer to the firm's ability to utilize its resources
effectively.
Primary base for the firm‟s capabilities is the skills and
knowledge of its employees.

10
Core competencies:
 Core competencies are activities the company does especially
well compared with competitors and through which the firm adds
unique value to its goods or services.
Core competencies are resources and capabilities that
serve as a source of competitive advantage for a firm
over its rivals
Competitive Advantage:
 Is an advantage that a firm has over its competitors & able to
return higher profits than its competitors.
 An ability to generate greater value for the firm and its
shareholders.
 Competitive advantage can be taken as an advantage over
competitors that result from employing either cost leadership or
differentiation strategy.
11
 Industry Environment Analysis

An industry can be viewed as a group of firms that

attempt to serve essentially similar customer needs
in the same markets with similar products and
services.
Michael Porter (1980), developed a framework for
analyzing the nature and extent of competition
within an industry.
He argued that there are five competitive forces
which determine the nature of competition within
an industry.
12
8/26/2022 13
 Cont’d
By determining the relative “power” of each of
these forces, an organization can identify how to
position itself to take advantage of opportunities
and overcome threats.
When using the Porters framework, it is important
to identify which of the five forces are the key
forces at work in an industry at any given point in
time.
The stronger that each of these five forces is, the
more limited is the ability of established
companies to raise prices and earn greater profits
within their industry. 14
 Potential entry of new competitors
The threat of entry depends on the presence of entry
barriers and the reaction that can be expected from existing
competitors.
An entry barrier is an obstruction that makes it difficult for
a company to enter into an industry.
The possible barriers to entry:
Economies of scale
Product differentiation
Capital requirements
Switching costs of customers
Access to distribution channels
Governmental policy
15
The threat of new entrants is greatest when:
 Processes are not protected Switching costs are low
by regulations or patents.
The production process
 Customers have little
is easily learned
brand loyalty.
 Start-up costs are low for Access to inputs is easy.
new businesses entering Access to customers is
the industry easy
 The products provided are Economies of scale are
not unique
minimal.

16
 The Threat of Substitute Products
 Substitute goods or services are those goods/services that
appear to be different but can satisfy the same need as
another product/service.
 A product's price elasticity is affected by substitute
products - as more substitutes become available, the
demand becomes more elastic since customers have more
alternatives.
 Substitutes are greater threat when:
Your product doesn‟t offer any real d/t benefit compared
to other products.
It is easy for customers to switch.
Customers have little loyalty. 17
 Bargaining Power of Buyers/customers
 The power of buyers is the impact that customers have on a
producing industry.
 A buyer or a group of buyers is powerful if:
 A buyer purchases a large proportion of the seller‟s product or
service
 Alternative suppliers are plentiful because the product is standard
or undifferentiated
 Changing suppliers costs very little
 Buyers have an accurate information about the cost structure of
the supplier
 The bargaining power of customers can be reduced by;
 Increasing their loyalty to your business through partnerships or
loyalty programs,
 Selling directly to consumers, or
 Increasing the inherent or perceived value of a product by adding
features or branding.
 Select the customers who have little knowledge of the market and
have less power 18
 Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to
raise prices or reduce the quality of inputs they supply.
Suppliers become powerful when:
The product they sell has few substitutes and is
important to the company.
Its product or service is unique and/or has built up
switching costs
The buyers do not have a full understanding of their
supplier‟s market.
Suppliers are able to integrate forward and compete
directly with the present customers
19
Intensity of Rivalry among Competitors
 Rivalry refers to the competitive struggle between companies in an
industry to gain market share from each other.
 The competitive struggle can be fought using price, product design,
advertising and promotion spending, direct selling efforts, and after-
sales service and support.
 The intensity of rivalry among established companies within an
industry is largely a function of four factors:
 Industry competitive structure
 Demand conditions
 Cost conditions
 The height of exit barriers in the industry.

20
 Strategy Formulation: Developing Strategies
o A strategy of a corporation is a comprehensive plan stating
how the corporation will achieve its mission and
objectives.
o The typical business firm usually considers three types of
strategy:
 Corporate strategy
Business strategy
Functional strategy

21
 Corporate level strategy
In what industries and markets should we compete?
 Describes a company‟s overall direction in terms of its
general attitude toward growth and the management of
its various businesses and product lines.
 Corporate-level strategy specifies actions a firm takes
to gain a competitive advantage by selecting and
managing a group of different businesses competing in
different product markets.
 Crafted by the top level managers of the organization

22
 Cont’d
 There are three grand strategic alternatives
i. Growth/ Expansion strategy - The expansion grand strategy is
followed when an organization aims at high growth by
substantially broadening the scope of one or more of its businesses
in terms of their respective customer groups, customer functions
and alternative technologies singly or jointly in order to improve its
overall performance.
 Major reasons for adopting Expansion strategy
are:
 It may become important when environment demands increase in
pace of activity.
 Increasing size may lead to more control over the market vis-à-
vis competitors.

23
 Types of Expansion strategies
1) Expansion through Concentration :
 The firm directs its resources to the profitable growth of a single product, in
single market, or with a single technology.
2) Expansion through integration
 Backward Integration:
 In internal backward integration, the firm creates its own source of
supply, perhaps by establishing a subsidiary company.
 The external backward integration approach entails the purchase or
acquisition of an existing supplier.
 Forward Integration:
 A firm can accomplish forward integration internally by establishing
its own distribution/sales facilities or externally by acquiring firms that
already perform the desired function.
 Horizontal Integration:
 Horizontal integration is accomplished by buying another company in the
same business.
24
3. Expansion through Diversification:
 Diversification occurs when an organization moves into areas that are clearly
differentiated from its current business.
 This strategy may be appropriate for firms that cannot achieve their growth
objectives in their current industry with their current products and markets.
 Reasons for using diversification strategy
 To minimize risk by spreading it over several businesses
 Can be the only way out if growth in existing businesses is blocked due to
environmental and regulatory factors.
 To capitalize on an organization‟s strengths and minimize weaknesses
 Diversification Strategies:
 Concentric Diversification: involves expansion into related to the existing
business either in terms of customer groups, customer functions or
alternative technologies.
 Conglomerate Diversification: When an organization adopts a strategy which
requires taking up those activities which are unrelated to the existing
business either in terms of customer groups, customer functions or
alternative technologies.

25
4. Expansion through Cooperation:
 Competition and co-operation among rival firms for mutual benefit.
 Cooperative strategies could be of the following types:
 Merger :occurs when two or more firms combine to form a single or a
new company. Mergers are often the results of the firms mutually
agreeing to combine and create a new name and a new
organizational structure and make other changes.
 Takeovers or Acquisitions: is a „marriage‟ of two unequal partners
with one organization buying and subsuming the other party. In such a
transaction the shareholders of the smaller organization ceases to be
owners of the enlarged organization. The shares in the smaller company
are bought by the larger.
 Strategic Alliances: the term strategic alliance is used to describe
a range of collaborative arrangements between two or more
organizations. It refers to arrangements in which two or more
corporations combine forces to form cooperative/partnership to
accomplish something for which single organization is not suited.
26
ii. Stability Grand strategy:
 Stability strategy may be used for a relatively short period, after
which further growth is planned.
 Three alternatives are outlined below:
 Pause and Then Proceed: This stability strategy alternative may
be appropriate in either of two situations:
 The need for an opportunity to rest, digest, and combine
after growth or some turbulent events
 An uncertain or unfriendly environment in which it is wise
to stay in a "holding pattern"
 No Change: Is a decision to do nothing new (a choice to continue
current operation and policies for the foreseeable future).
 Profits Strategy: Is a decision to do nothing new in worsening
situation but instead to act as though the company‟s problems are
only temporary. The profit strategy is an attempt to artificially
support profits when a company‟s sales are declining by reducing
investment and short term discretionary expenditures rather than
announcing the company‟s poor position to shareholders. 27
iii. Defensive/ Decline /Retrenchment Strategies:
 Many organizations decline due to falling sales, declining profits and more
importantly declining demand.
 Demand in an industry declines for a variety of reasons:
 Emergence of new substitutes often with higher quality and lower price,
 Changing customer needs, life styles, and tastes.
 The following are some the retrenchment strategies:
 Turnaround: This strategy, deals with a company in serious trouble, attempts
to revive the company through a combination of contraction (general, major
cutbacks in size and costs) and consolidation (creating and stabilizing a
smaller, leaner company).
 Captive Company Strategy: Is the giving up of independence in exchange for
security. A company with a weak competitive position may not be able to
engage in a full blown turnaround strategy.
 Sell Out: If a company in a weak position is unable or unlikely to succeed
with a turnaround or captive company strategy, try to find a buyer and sell
itself (or divest, if part of a diversified corporation).
 Liquidation: When a company has been unsuccessful in or has none of the
previous three strategic alternatives available, the only remaining alternative is
liquidation, often involving a bankruptcy. 28
 Business level Strategy
 How are we going to compete for customers in this industry and market?
 Business-level strategy is an integrated and coordinated set of actions the
firm uses to gain a competitive advantage by exploiting core competencies
in specific product markets.
 This means that business-level strategy indicates the choices the firm has
made about how it intends to compete in individual product markets.
 The purpose of a business-level strategy is to create differences between
the firm‟s position and those of its competitors.
 To position itself differently from competitors, a firm must decide whether
it intends to perform activities differently or to perform different activities.
 Thus, the firm‟s business-level strategy is a deliberate choice about how it
will perform the value chain‟s primary and support activities in ways that
create unique value.

29
 Types of Business-Level Strategies
 Porter, classify business level strategies into the following types:
 Firms choose from among five business-level strategies to establish
and defend their desired strategic position against competitors:
 Cost leadership,
 Differentiation,
 Focused cost leadership,
 Focused differentiation,
 Integrated cost leadership/differentiation
 Each business-level strategy helps the firm to establish and exploit a
particular competitive advantage within a particular competitive
scope.

30
8/26/2022 31
Cost Leadership Strategy:
 The cost leadership strategy is an integrated set of actions taken
to produce goods or services with features that are acceptable to
customers at the lowest cost, relative to that of competitors.
 Cost leaders concentrate on finding ways to lower their costs
relative to those of their competitors by constantly rethinking how
to complete their primary and support activities to reduce costs
still further while maintaining competitive levels of
differentiation.
 Competitive risks associated with the cost leadership strategy
include:
 A loss of competitive advantage to newer technologies,
 A failure to detect changes in customers‟ needs, and
 The ability of competitors to imitate the cost leader‟s
competitive advantage through their own unique strategic
actions. 32
Differentiation Strategy:
 The differentiation strategy is an integrated set of actions taken to
produce goods or services (at an acceptable cost) that customers
perceive as being different In ways that are important to them.
 Differentiators target customers who perceive that value is
created for them by the manner in which the firm‟s products
differ from those produced and marketed by competitors.
 Risks associated with the differentiation strategy include
A customer group‟s decision that the differences between the
differentiated product and the cost leader‟s good or service are
no longer worth a premium price,
The inability of a differentiated product to create the type of
value for which customers are willing to pay a premium price,
The ability of competitors to provide customers with products
that have features similar to those associated with the
differentiated product, but at a lower cost 33
Focus Strategies:
 Firms choose a focus strategy when they intend to use their core
competencies to serve the needs of a particular industry segment
or niche to the exclusion of others.
 Examples of specific market segments that can be targeted by a
focus strategy include:
o A particular buyer group
o A different segment of a product line
o A different geographic market
 The competitive risks of focus strategies include
 A competitor‟s ability to use its core competencies to “out
focus” the focuser by serving an even more narrowly defined
competitive segment,
 Decisions by industry-wide competitors to focus on a
customer group‟s specialized needs, and
 A reduction in differences of the needs between customers in
a narrow competitive segment and the industry-wide market.34
 Integrated Cost Leadership/Differentiation Strategy:
 In a strategic context, this means that increasingly, customers want to
purchase low-priced, differentiated products.
 The objective of using this strategy is to efficiently produce products
with some differentiated attributes.
 Efficient production is the source of keeping costs low while some
differentiation is the source of unique value.
 Firms that successfully use the integrated cost leadership/differentiation
strategy have learned to quickly adapt to new technologies and rapid
changes in their external environments.
 The reason for this is that simultaneously concentrating on developing
two sources of competitive advantage (cost and differentiation)
increases the number of primary and support activities in which the
firm must become competent.
 The primary risk of this strategy is that a firm might produce products
that do not offer sufficient value in terms of either low cost or
differentiation. When this occurs, the company is “stuck in the middle.”
Firms stuck in the middle compete at a disadvantage and are unable to
earn more than average returns.
35
 Operational level or functional Strategy
 How can we best utilize resources to implement our business strategy?
 Is the approach taken by a functional area, such as Marketing,
Finance, Production ,research and development, to achieve
corporate and business unit objectives and strategies by maximizing
resource productivity.
 It is concerned with developing and fostering a distinctive
competence to provide a company or business unit with a
competitive advantage.

36
 Strategic Analysis and Choice
Strategic choice is the decision to select from among the
alternatives strategy which will best meet the
enterprise‟s objectives.
The decision involves focusing on a few alternatives,
considering the selection factors, evaluating the alternatives
against these criteria and making the actual choice.
An evaluation of strategic choice should lead to a clear
assessment of which alternative is the most suitable under
the existing conditions.
Corporate Portfolio Analysis:
 Corporate portfolio analysis defined as a set of techniques that help
strategists‟ decisions with regard to individual product or business
in a firm‟s portfolio.
37
 BCG Matrix
The Boston Consulting Group (BCG) matrix is
the one which provides graphic presentation for
an organization to examine the different businesses
in its portfolio on the basis of their relative market
shares and industry growth rates.
The four cells of the BCG matrix have been termed
as Stars, Cash cows, Questions marks (Problem
children), and Dogs.
Each of these cells represents a particular type of
businesses.
38
39
Stars:
 Stars are high growth- high market share businesses which may
or may not be self-sufficient in terms of cash flow.
 This cell corresponds closely to the growth phase of the product
life cycle (PLC).
 A company generally pursues an expansion or joint ventures
strategy to establish a strong competitive position.
Cash cows:
 Cash cows are businesses which generate large amounts of cash
but their rate of growth is slow.
 In terms of PLC, these are generally mature businesses which are
reaping the benefits of the experience curve.
 These businesses can adopt mainly stability strategies.
 Generate cash in excess of their needs
 Milked for other purposes
40
Question Marks:
 Businesses with high industry growth but low market share.
 They require large amounts of cash to maintain or gain market
share.
 Cash generation is low but Cash needs are high
 Decision to strengthen (intensive strategies) or divest
Dogs:
 Businesses which has slow growth in industries and low relative
market share.
 They neither generate nor require large amounts of cash.
 This cell corresponds closely to the declining stage of the product
life cycle (PLC).
 These businesses can adopt mainly retrenchments strategies.

41
 SWOT Matrix
 The formation of SWOT matrix results in four sets of possible
strategic alternatives after matching the company‟s internal strengths
and weaknesses with the external opportunities and threats.
 Generate a series of possible strategies for the company or the
business unit under consideration based on particular combinations of
the four sets of strategic factors.
 SO Strategies are generated by thinking of ways in which a company
or business unit could use its strengths to take advantage of
opportunities.
 WO Strategies attempt to take advantage of opportunities by
overcoming weaknesses.
 ST Strategies consider company‟s or unit‟s strengths as a way to
avoid threats.
 WT Strategies are generate strategies that minimize weakness and
avoid threat.
42
END OF CHAPTER THREE

10Q FOR YOUR ATTENTION!

43