Course Content
Definition and importance of management Functions of management Managerial roles Evolution of management thought Types of management environment
Meaning and importance of planning Principles of planning Purpose of planning Types of plans Planning tools Process of planning Planning challenges Making plans effective Management by objectives
Meaning and Importance of Organizing Structure and Designs of Organizations Principles of Organizing Process of Organizing Delegation Coordination Centralization and Decentralization Informal Organizations
Meaning and Importance of Staffing Human Resource Planning Recruitment and Selection Training and Development Performance Management Reward Management Separation
Meaning and Importance of Directing Leadership Motivation Communication Group Dynamics Conflict Management
Meaning and Importance of Controlling Elements of Control Characteristics of Effective Controls Control Process Role of Control in an Organization Tools of Controlling
Overview of Strategic Management SWOT Analysis Strategy Formulation Strategy Implementation Strategy Evaluation
Organization Culture Ethics and Social Responsibility Managing Innovation and Change Diversity and Inclusion Corporate Governance Globalization
Principles and Practices of Management
About Lesson

Strategy Formulation is an analytical process of selecting the best suitable and most appropriate course of action to help realize the organizational objectives, goals, mission, and vision. 

Steps in Strategy Formulation
  1. Establish Organizational goals
  2. Analyze the firm’s environment
  3. Form SMART objectives.
  4. Match company objectives to departmental plans
  5. Performance Analysis to estimate the degree of variation between the actual and the standard performance 
  6. Select the best Strategy from the many alternatives.

The strategy formulation process is an integral part of strategic management; it helps frame effective strategies for the organization to survive and grow in the dynamic business environment and in the achievement of company aspirations.

Organizational Strategies

Organizational strategies are classified as follows:

  1. Corporate strategies
  2. Business strategies
  3. Functional strategies
1. Corporate / Grand Strategies

Corporate Strategy takes a portfolio approach to strategic decision-making by creating the most value for a firm’s businesses. To develop a corporate strategy, firms must look at how the various business they own fit together, how they impact each other, and how the parent company is structured to optimize human capital, processes, and governance. Several essential components of corporate Strategy that organization leaders should focus on are:

Different types of strategies exist for corporate management:

  1. Growth Strategies,
  2. Stability Strategies,  
  3. Retrenchment Strategies, and
  4. Combination Strategies

A. Growth Strategies

This is a strategy the company uses to achieve its expansion goals. Generally, growth strategy applies to anyone or a combination of the following:

  • Growth in profits
  • Growth in the geographical area
  • Growth in market share
  • Growth in the number of businesses or products
  • Growth in size as measured by assets or sales

Internal growth may increase sales by introducing new products and services while retaining the old ones. Horizontal internal growth involves creating new companies that operate in the same business as the original firm, related companies, or unrelated businesses. Vertical internal growth refers to creating businesses within the firm’s vertical channel of distribution and takes supplier-customer relationships. Finally, external growth can be accomplished through mergers or acquisitions, joint ventures, and vertical integration. 

Types of growth strategies

1.Concentration Strategies –Concentrated growth strategies center on improving current products and markets without changing any other factors. The firm directs its resources to the profitable growth of a single product, in a single market, and with a single technology. The Strategy allows for a considerable range of action. For example, the business can capture a significant market share by increasing the present customer’s rate of usage, attracting competitors’ customers, or interesting nonusers in the products or services. There are three approaches to pursuing a concentration strategy: market development, product development, and horizontal integration.

  1. Market Development: involves introducing present products into new geographic areas. 
  2. Product Development: Seeks to increase sales by improving or modifying present Products to increase their market penetration within existing customer groups and attract satisfied customers to new products due to their positive experience with the company’s initial offering. 

A concentration strategy has the advantage of low initial risk because the firm already has much of the knowledge and many of the resources necessary to compete in the marketplace. This Strategy allows the organization to focus its attention on doing a small number of things exceptionally well. The notable drawback is that it places all or most of the organization’s resources in the same basket. If a sudden change occurs in the industry, the organization can suffer significantly.

2. Diversification Strategies: Diversification occurs when an organization moves into areas that are clearly differentiated from its current businesses.

Reasons for diversification

  1. If the firm cannot achieve its growth objectives in its current industry, its current products, and markets. 
  2. When the current demands for current business(es) are approaching the point of saturation.
  3. Existing business(es) are generating excess cash that can be invested elsewhere more profitably.
  4. When synergy is possible from new business.
  5. When Antitrust/government regulations prohibit expansion in the present industry.
  6. As a strategy to enter the international markets quickly.
  7. To gain technical expertise quickly.
  8. As a strategy to attract and hold experienced executives.

Diversification strategies can be classified as:

  1. Concentric diversification: Occurs when the diversification is in some way related to, but clearly differentiated from, and distinct from the organization’s current business. Points in common could be similar technology, customer usage, distribution, managerial skills, or product similarity. This Strategy helps an organization to build on its expertise in a related area. A related diversification strategy involves diversifying into businesses that possess some kind of “strategic fit.” This effect which can produce a combined return on the firm’s resources greater than the sum of its part, is frequently referred to as synergy (the 2 + 2 = 5 effect).
  2. Conglomerate diversification: Involves adding new products or services significantly different from the organization’s present products or services. It occurs when the firm diversifies into an area that is unrelated to the organization’s current business. The advantages of this Strategy include:
  • Business risk is scattered over a variety of industries.
  • Capital resources can be invested in whatever industries hence best profit prospects. 
  • Company profitability is somewhat more stable because hard times in one industry may be partially offset by good times in another.
  • Shareholder wealth can be enhanced.

The difficulties of managing broad diversification and the absence of strategic opportunities to turn diversification into competitive advantage could be the most significant impediments of this Strategy.

3. Integration Strategies: Integration means joining activities related to the present activities to widen the scope of the business. Integration is of two types:

i) Horizontal Integration occurs when a firm takes over the other firm operating at the same level of production or marketing, mostly through acquisition or merger with other competitors, or at least another firm operating at the same level in the value chain. Reasons for horizontal integration include:

  1. To be more efficient through larger economies of scale
  2. To enter another geographic market
  3. To reduce competition for suppliers and customer
  4. To increase Market share
  5. To enjoy pooled skills and capabilities that generate synergy

ii) Vertical Integration: Vertical integration is a growth strategy that involves extending an organization’s present business in two possible directions:

  1.    Backward Integration: If a business integrates by moving into supplying so that the firm creates its own sources of supply, perhaps by establishing a subsidiary company or purchasing/acquiring an existing supplier.
  2.    Forward Integration:Occurs if a business integrates by moving into an area that serves as a customer or user of its products or services. A firm can accomplish forward integration internally by establishing its own production facility, salesforce, wholesale system, or retail outlets. External forward integration can be accomplished by acquiring firms that presently are customers/perform useful functions.

Some of the reasons for backward vertical integration include cutting down the cost of production, timely delivery of raw materials, dependability of supplies, and good quality raw materials. Conversely, the rationale for forward vertical integration includes reduction of costs, effectiveness, greater control over marketing, and closer coordination between distribution channels and manufacturing to improve sales. Notable, though, is the fact that integrated organizations have been associated with mature and less profitable industries and that escape from these industries is particularly difficult.

4. Cooperation: It means cooperation among competitors. It may take the form of 

a) Mergers and Acquisitions 

Mergers and acquisitions (M&A) are defined as the consolidation of companies. Differentiating the two terms, Mergers is where two companies come together to form one, while Acquisitions is where one company takes over the other company to form one. The rationale behind M & M&A is that two separate companies create more value than a single stand company’. Mergers & Acquisitions can take place by purchasing assets, common shares, exchange of shares for assets or by exchanging shares for shares

Merger or amalgamation may take two forms: merger through absorption or merger through consolidation. Mergers can also be classified into three types from an economic perspective depending on the business combinations, whether in the same industry or not, into horizontal ( two firms are in the same industry), vertical (at different production stages or value chain), and conglomerate (unrelated industries). From a legal perspective, there are different types of mergers like short-form mergers, statutory mergers, subsidiary mergers, and mergers of equals.

Reasons for Mergers and Acquisitions:

  • Financial synergy for lower cost of capital
  • Improving company’s performance and accelerate growth
  • Economies of scale
  • Diversification for higher growth products or markets
  • To increase market share and positioning giving broader market access
  • Strategic realignment and technological change
  • Tax considerations
  • Undervalued target
  • Diversification of risk
  • Principle behind any M&A is 2+2=5

Reasons for the failure of M&A

  • Poor strategic fit:Wide difference in objectives and strategies of the company
  • Poorly managed Integration: Integration is often poorly managed without planning and design. This leads to failure of implementation
  • Incomplete due diligence:Inadequate due diligence can lead to failure of M&A as it is the crux of the entire Strategy
  • Overly optimistic:Too optimistic projections about the target company lead to bad decisions and failure of the M&A

b) Joint Ventures

c) Strategic Alliances

5. Internationalization: It means marketing products/services beyond the national market

B. Stability Strategies:

Applies when a firm is after incremental performance improvement. The approach seeks to maintain the present course as steady as possible. Stability strategies can take the forms of:

  1. No-change strategy– Where a firm maintains its current status quo doing things the normal way. Taking no decision is a decision too. Applicable when the firm is comfortable with the way things are running.
  2. Profit strategy. These firms are after slow incremental profits; hence lie low and manage profit through cost-cutting, price rise, etc. Mostly applicable in times of crisis and recession.
  3. Pause or proceed-with-caution Strategy– Applicable, especially when there is a change of strategies, so that time is required to cement the gains before proceeding to the next Strategy

C. Retrenchment Strategies This Strategy involves a substantial reduction in the scope of business activities. It includes the following approaches:

  1.   Turnaround strategy involves revamping an organization from the declining trend to the desired performance trajectory through restructuring and other strategies.
  2.    Divestment strategy involves Selling-off or hiving-off a non-core business unit or divisions.
  3.    Disinvestment– dilution of control through the sale of equity.
  4.    Liquidation Strategy refers to converting all business assets into money for the eventual winding up of the company.

D. Combination Strategy: This is where the growth, stability or and retrenchment strategies are applied simultaneously, sequentially, or in a combination.

2. Business Level Strategies

Business-level strategies are fundamentally concerned with competition. Michael Porter singled out three generic strategies, which can be converted into four. The generic strategies are:

  1. Cost-leadership
  2. Differentiation
  3. Focus, which may rely on either cost leadership or differentiation.

Business-level Strategies is an integrated and coordinated set of actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. It indicates the choices of the firm to compete in the market. Business-level Strategy aims at creating 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 perform different activities. Strategy defines the path hence the direction of actions to be taken by leaders.

A. Cost Leadership Strategy

The Strategy emphasizes efficiency by producing high volumes of standardized products. The firm hopes to take advantage of economies of scale and experience curve effects. The product is often a basic standardized product produced at a relatively low cost and made available to an extensive customer base. A continuous search for cost reductions strategies is essential if this Strategy is to work. The firm should further aim to have the most extensive distribution network as possible to secure a considerable market share advantage or preferential access to raw materials, components, labor, and or some other important input. Without any of these advantages, the Strategy can quickly be adopted by competitors. Successful implementation of this Strategy benefits from:

  1. Process engineering skills for efficiency
  2. Standardized production.
  3. Sustained access to cheap capital
  4. Close supervision of labor
  5. Tight cost control
  6. Remuneration/Incentives based on quantitative targets.
  7. Minimum cost possible

Risks associated with this Strategy include:

  1. The processes used by the cost leader to produce and distribute its products could become obsolete because of competitors’ innovations.
  2. Too much focus by the cost leader on cost reductions may occur at the expense of understanding and meeting customers’ demands and needs.
  3. Imitation of the cost leadership strategy. Using their own core competencies, competitors sometimes learn how to imitate the cost leader’s Strategy successfully.
  4. Technological change that erases past investments and outdates past learning.
  5. Unexpected inflation in costs reduces the firm’s ability to offset product differentiation through cost leadership

B. Differentiation Strategy

Differentiation is aimed at the broad market that involves creating products perceived throughout its industry as unique. The business unit may then charge a premium price for the product. This specialty can be associated with design, brand image, technology, features, dealers, network, or customer service. Differentiation is a viable strategy for earning above-average returns in a specific business because the resulting brand loyalty lowers customers’ sensitivity to price. Increased costs can usually be passed on to the buyers. Buyers’ loyalty will always serve as an entry barrier to new firms as they have to develop their own distinctive competence to differentiate their products in some way in order to compete successfully. This Strategy is more likely to generate higher profits than a low cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to generate an increase in market share.

Risks associated with this Strategy include:

  1. Customers might feel that the price differential between the differentiator’s product and the cost leader’s product is too large.
  2. The firm’s means of differentiation may cease to provide value for which customers are willing to pay.
  3. Experience can narrow customers’ perceptions of the value of a product’s differentiated features.
  4. Possibility of counterfeit products. Resulting regrets create distrust of the branded product hence reduce differentiation.

C. Focus Strategy

The firm concentrates on select few target markets. Also called niche strategy, it works on the notion that by focusing marketing efforts on one or two narrow market segments tailoring marketing mix to the specialized markets, the firm can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through effectiveness rather than efficiency. It is most suitable for relatively small firms and may be used to select targets that are less vulnerable to substitutes or where competition is weakest to earn above-average return on investment. The focus strategy has two variants.

  1. Cost focus where a firm seeks a cost advantage in its target segment. This Strategy exploits differences in cost behavior in some segments
  2. Differentiation focus where a firm seeks differentiation/uniqueness in its target segment. This Strategy exploits the special needs of buyers in certain segments.

Both variants of the focus strategy rest on differences between a focuser’s target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments.

Risks associated with these strategies include:

  1. A competitor may be able to focus on a more narrowly defined competitive segment and thereby “out-focus” the focuser.
  2. A company competing on an industry-wide basis may decide that the market segment served by the firm using a focus strategy is attractive and worthy of competitive pursuit.
  3. Customers’ needs within a narrow competitive segment may become more similar to those of industry-wide customers over time, eliminating the advantages of a focus strategy.

Generally firms pursue only one of the above generic strategies. However, some firms make an effort to pursue more than one Strategy by bringing out a differentiated product at a low cost. Though approaches like these are successful in the short term, they are hardly sustainable in the long term. If firms try to maintain cost leadership and differentiation at the same time, they may fail to achieve either. Combining multiple strategies is successful in only one case. For example, combining a market segmentation strategy with a product differentiation strategy is an effective way of matching your firm’s product strategy (supply side) to your target market segments (demand side). But combinations like cost leadership with product differentiation are hard (but not impossible) to implement due to the potential for conflict between cost minimization and the additional cost of value-added differentiation. A situation called “stuck in the middle.” May result. Being stuck in the middle means that the firm’s cost structure is not low enough to attractively price its products. Its products are not sufficiently differentiated to create value for the target customer.

3. Functional Level Strategies

Functional level strategies refer to the everyday strategies formulated in line with the top-level management guidelines to help apply business and corporate-level strategies. These strategies are directly associated with decision-making at the operational level, also called tactical decisions used for various functional areas such as marketing, manufacturing, research and development, human resources, finance, logistics, etc.

  1. Marketing function: Concerned with all the strategies related to: Identification of needs to delivery of the product, and it’s after-sales come under marketing: The marketing mix involves steps taken by a firm to increase the demand for the product or service: Techniques of strategic marketing like augmented marketing, relationship marketing, social marketing, concentrated marketing, guerilla marketing, etc.
  2. Financial Strategy: The financial Strategy covers all the Financial management-related issues, including planning, utilizing, acquiring, and controlling the available financial resources.
  3. Human Resource Strategy: They are concerned with the employees working in an organization. These strategies help ensure good and healthy working conditions to contribute to organizational success. The Human Resource department manages human resources activities like recruitment, personal development, motivation, salary management, and employee retention.
  4. Production Strategy: It is concerned with manufacturing products, including the firm’s operations control, logistics, and other ancillary functions. The primary purpose of the Production Strategy is to improve quality production, quality and reduction of manufacturing cost.
  5. Research strategy: This Strategy focuses on innovation for the development and improvement of the new and existing products, which helps the company get an edge over the competition.

Why functional strategies?

  1. They make strategies formulated at the top management level practically feasible at the departmental level. 
  2. Allow the flow of strategic decisions to the lowest levels of an organization. 
  3. The basis for controlling activities in different functional areas. 
  4. Reduce time spent by functional managers in decision-making as plans clearly define what is to be done. In contrast, Policies provide the discretionary framework within which decisions need to be taken. 
  5. Help ensure harmony and coordination as they remain an integral part of effective strategies. 
  6. Consistency in handling similar situations occurring in different functional areas 
  7. They provide support to the overall business and corporate Strategy. 
  8. They motivate better performance in the respective functional areas. 
  9. Provide managerial roadmap in line with the grand Strategy 
  10. Ensure effectiveness and efficiency in business operations

Features of Functional Strategies

  1. A shorter period compared to business-level strategy. 
  2. Attention is on what needs to be done now to make the grand strategy work. 
  3. More specific and action-oriented towards corporate objectives. 
  4. Functional Strategy pertains to the function, department, division of the enterprise. 
  5. In pursuit of the overall corporate Strategy. 
  6. It acts to maximize resource productivity. 
  7. It is the game plan to manage a principal subordinate activity within a business. 
  8. Concerned with developing and nurturing a distinctive competence for competitive advantage. 
  9. The orientation is dictated by its parent business unit’s Strategy. 
  10. Functional Strategy is narrower in scope than business strategy. 
  11. It may differ from region to region. 
  12. These functional strategies have to be related to each other 
  13. Implementation requires support by a wide range of policy decisions
  14. A functional strategy supports business-level strategy, which supports corporate-level Strategy. 
Strategy formulation constraints 
  1. Attitude toward risk : Some firms may not be willing to accept risks or prefer only minimal levels of risk, regardless of the level of potential return.
  2. Organizational capabilities: Some otherwise excellent strategies may require capabilities beyond those an organization currently possesses.
  3. New Channel relationships: Strategies that call for the development of new channels of distribution or that involve new suppliers require careful consideration of the availability of these other organizations and their willingness to work with the firm.
  4. Competitive retaliation: Some strategies may have the unintended effect of dramatically increasing competitors’ efforts in the marketplace.
  5. Achieving Shared Vision: This is the inability of the top management, among themselves and across organizations to achieve synchronization of the vision, strategic intent, and hence the Strategy for the way forward.
  6. The inability of Partners to Map a Vision and agree on strategy formulation could be another issue, especially in the case of alliances and joint ventures, venture capitalists, and group companies.
  7. Leadership and Managerial Bias: Imposing leaders and self-motivated managers are often causes of dissonance at the strategy formulation stage. To overcome the same, leaders and managerial bias need to be addressed effectively. 
  8. Managers Over-Emphasizing Tools and Techniques and losing touch with the pulse of the market. Sometimes, they may be following the market without understanding the internal factors, leading to difficulty in strategy formulation.
  9.  Insufficient information for strategy formulation. 
  10. Too Much Data: Sometimes strategy formulation may suffer due to too much data but not enough information. 
  11. Old Mindset. Business runs in a cyclical mode: There are periods of stability interrupted by radical and revolutionary change periods. As times move, senior managers may be out of touch with the environment.
  12. Prior Bad Experience and Fire-Fighting: If the managers had a previous bad experience with strategy (cumbersome, impractical, or inflexible strategic plans) or if present it is so engrossed with the crisis management and fire-fighting.
  13. Contented with Current Success: The firm is currently doing well hence the feeling of no need for strategy formulation. To them it is merely a waste of time and money.
  14. Other Impediments: Poor reward structure, fear of failure, self-interest (status achieved using old Strategy), fear of the unknown (to undertake new roles), different perceptions of a situation, and distrust in management are the other barriers to strategy formulation.
  15. Unavailability of financial resources: Even when a particular strategy appears optimal for an organization, serious consideration must be given to where the money to finance the Strategy will come from.
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