Chapter - 4
Strategy formulation (the second stage of SMP) is often referred to a process: ‘strategic analysis and choice’ (SAC) seeks to determine alternative course of action that could best enable the firm to achieve its mission and objectives.
The process of strategy formulation starts with, and critically depends on, the appraisal of the external and internal environment of the organization.
Therefore, Strategy formulation is concerned with developing right strategies and policies by finding: Matching with corporation’s Vision,
Mission and Long term objectives. It is a strategic fit between external opportunities & internal strengths while working around external threats & internal weaknesses.
According to Mr.Heinz Weihrich, systematic arrangement and analysis of SWOT could be the best for strategy formulation. He propounded TOWS matrix which is an important strategy formulation
– matching tool. TWOS basically help us to think which SWOT area is more important and when. It is basically postulates the following four alternative strategies:
INTERNAL FACTORS /
EXTERNAL FACTORS
External Opportunities (O)
External Threats (T)
INTERALNAL FACTORS
Internal Strengths (S) Internal Weaknesses (W)
SO (MAXI-MAXI) Strategy
ST (MAXI – MINI) Strategy
WO (MINI – MINI) Strategy
WT (MINI – MINI) Strategy
TOWS MATRIX

1.
2.
3.
4.
WT or the mini – mini strategy seeks to minimize the weaknesses and threats. Some of the weaknesses may be overcome or minimized . For example, managerial weaknesses may be solved by change of managerial personnel, conducting training etc. Weaknesses due to excess manpower may be addressed to by restructuring and volunteer retirement schemes. External threats may be met by strategic alliance, or by other types of joint ventures.
WO or mini – maxi Strategy aims at minimizing the weaknesses and maximizing the opportunities . For an example for a textile machinery manufacturer in India the main weaknesses were dependence on foreign firms for technology and the long time taken on execute an order. The solutions are to give thrust To R & D to develop technology and measures to reduce the time lag so as to be is a better position to explain to the maximum the growing demand.
ST or maxi -mini strategy attempts to use the organizations strengths to deal with the environmental threats. For an example Hindustan lever has been employing this strategy to fight the increasing competition from companies like
P & G, Nirma etc.
SO or Maxi -maxi strategy, which is the most desirable and advantageous strategy, seeks to mass up a firm’s strengths to exploit the opportunities.
Therefore, it is clear to us that strategy formulation mainly based on strategic analysis and strategy selection by standard criteria’s.
Strategy
Formulation
Strategy
Analysis
And
Choice
Strategy
Selection
By Criteria ’ s

However, Strategy formulation is not just a task for top executives.
Middle and lower level managers too must be involved in the strategic planning process to the extent possible. It is important to note that all levels / all persons responsible for strategic planning at the various levels ideally participate and understand the strategies at the other organizational levels to assure coordination, facilitation, and commitment while avoiding in consistency, inefficiency and miscommunication. The main objective is Right Strategy by Right People in Right level and in
Right time by Right manner.
Strategy formulation in different levels.
Pertaining to the organization as a whole, and the combination of Business Units and Production lines that make up of corporate entity – it addresses the overall strategy that organization follows. Process generally involves –
Selecting a Grand Strategy and
Using portfolio strategy approaches to determine the type of business.
A.1 : GS is the general plan of major action by which a firm intends to achieve its long term goals. It provides basic direction for the strategic action of a firm. Grand
Strategy fall into 4 general categories –

1.
Growth / expansion – Internal (exploited through intensification or
Diversification) and External – through Mergers, Take over, JVs.
2.
Stability Strategy: growing in a methodical but slow manner, firm follow
‘Safety – oriented, Status quo – type strategy without effecting any major changes in its present operations.
3.
Retrenchment Strategy : when the firm’s performance is disappointed or when its survival is at stake, it is forced to effect across the board cuts in
Personnel & Expenditure.
4.
4. Combination Strategy: Large diversified org. generally use a mixture of stability, expansion or retrenchment strategy either simultaneously or sequentially.
A.2: BCG Matrix
The Boston Consulting Group Matrix (BCG Matrix) is the best-known portfolio planning framework used to strategize for SBUs. A SBU is a business that can be planned separately from others, has its own set of Competitors, and is managed as a
Profit Centre. A SBU can either be an entire mid-size company or a division of a large corporation. It normally formulates its own business level strategy and often has separate objectives from the parent company.
A business portfolio is the collection of SBU that makes up a corporation. The optimal business portfolio is one that fits perfectly to the company's strengths and helps to exploit the most attractive industries or markets. The BCG growth share matrix is directly derived from the experience curve and based on the pattern of cash flow. The aim of the analysis is:
ƒ Analyze its current business portfolio and decide which SBUs’ should receive more or less investment,
ƒ
Develop growth strategies for adding new products and businesses to the portfolio, and
ƒ
Decide which businesses or products should no longer be retained.
Stars (high growth, high market share) : Stars are in the upper left quadrant of the matrix.
ƒ
They grow rapidly
They use large amounts of cash
ƒ Are leaders in the business so they should also generate large amounts of cash?
ƒ
There is generally a balance on net cash flow.
Over time all growth slows. Therefore, stars eventually become cash cows if they hold their market share. If they fail to hold market share, they become dogs.
Cash Cows (low growth, high market share): Cash cows are in the lower left quadrant of the matrix.
ƒ
Such products are profitable and cash generation is high,
ƒ Because of the low growth, investments needed should be low.
ƒ
Keep profits high
ƒ
They form the foundation of an organization.

Cash cows pay the dividends, pay the interest on debt and cover the corporate overhead.
Dogs (low growth, low market share) : Dogs are in the lower right quadrant.
ƒ These products need to be avoided. You should try to minimize the number of dogs in a company.
ƒ
Beware of expensive ‘turn around plans’.
ƒ
As soon as they stop delivering cash, they should be phased out or otherwise liquidated
They are essentially worthless and are generally cash traps.
Question Marks (high growth, low market share): They are in the upper right quadrant.
ƒ
These products have the worst cash characteristics of all, because high demands and low returns due to low market share
ƒ
If nothing is done to change the market share, question marks will simply absorb great amounts of cash and later, as the growth stops, turn into dogs.
ƒ
Either invests heavily or sells off; or invests nothing and generates whatever cash it can. Either you should increase market share or deliver cash.
Question marks are the real gambles. Their cash needs are great because of their growth. Yet, their cash generation is very low because their market share is low.
BCG Matrix:
Relative Market Share Position
Low
0.0
High
+20
High
1.0
II
I
Medium
0
III
Low
-20
IV

Business strategies focuses on improving the competitive position of a company’s or business unit’s products or services within the specific industry or market segments that the company serves.
Business Strategy can be
1 . Competitive strategy
2. Cooperative strategy or both
1. Competitive Strategy:
Battling against all competitors for competitive advantage raises two questions:
1. Should the firm compete on the basis of low cost or should the business differentiate it products or services?
2. Should the firm compete head to head with major competitors for profitable segment of the market?
Michael Porter’s Generic Strategies:
Business strategy focuses on improving the competitive position of a company’s or business unit’s products or services within the specific industry or market segments that the company or business unit serves. Business strategy can be competitive or cooperative or both. Business strategy asks how the company or its units should compete or cooperate in a particular Industry.
Now, what are competitive strategies? A competitive strategy creates a defendable position in an industry so that a firm can outperform competitors. It raises the following questions:
•
Should we compete on the basis of low cost (and thus price), or should we differentiate our products or services on some basis other than cost, such as quality or services?
•
Should we compete head to head with our major competitors for the biggest but most sought –after share of the market, or should we focus on a niche in which we can satisfy a less sought – after but also profitable segment of the market
Michael Porter, strategies allow organizations to gain competitive advantages from two different bases: lower cost and differentiation. These strategies are called Generic because they can be pursued by any type or size of business firm, even by not-for-profit organizations.
Lower cost strategy is the ability of a company or a business unit to design, produces, and market a comparable product more efficiently than its competitors.
Differentiation Strategy is the ability to provide unique and superior value to the buyer in terms of product quality, special features, or after sales services.

Porter further proposes that a firm’s competitive advantages in an industry is determined by its competitive scope, that is, the breadth of the target market of the company or business unit. Before using one of the two generic competitive strategies (lower cost or differentiation), the firm or unit must choose the range of product varieties it will produce, the distribution channels it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. Simply, put, a company or business unit can choose a broad target (i.e aim at the middle of the mass market) or a narrow target (i.e aim at a market niche). Combining these two types of target markets with two competitive strategies results in the four variations of generic strategies results in the four variations of generic strategies depicted below:
C
O
M
P
E Brought
T Target
I
T
I
V
E
S
C Narrow
O Target
P
E
Lower cost Differentiation
COST
LEADERSHIP
COST ADVANTAGES
COST FOCUS
DIFFERENTIATION
DIFFERENTIATION
FOCUS
Porter’s Generic Competitive strategies
When the lower cost and differentiation strategies have a broad mass-market target, they are simply called cost leadership and differentiation. When they are focused on a market niche (narrow market), however, they are called cost focus and differentiation focus.
Cost Leadership :
Cost leadership is a low cost competitive strategy that aims at the broad mass market and requires “ aggressive construction f efficient scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control , advance of marginal customers accounts and cost minimization n areas like R &
D, services, sales force, advertising and so on. Because of its lower costs, the cost leader is able to charge a lower price for its products than its competitors and still make a satisfactory profit. Some companies successfully following this strategy are Wal-Mart, Dell, southwest Airlines, Timex etc. As a result, cost leaders are likely to earn above average returns investment.

Differentiation:
Differentiation is aimed at the broad mass market and involves the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design or brand image, technology, features, dealer 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. Examples of companies that have successfully used a differentiation strategy are Walt Disney Production, Mayatag,
Nike, Apple computer and BMW automobiles.
Cost Focus : is a lower cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others. In using cost focus, the company or business unit seeks a cost advantages in the target segments. A good example of this strategy is Poltach
Corporation, a manufacturer of toilet tissues. Rather than compete directly against
Procter and Gamble’s Charmin, Poltach makes the house brands for Albertson’s
Safeway, Jewel, and many other grocery store chains.
The cost focus strategy is useful or valued for those who believe that a company or business unit that focuses its efforts is better able to serve its narrow strategic target more efficiently than can its competition. It does, however, require a trade – off between profitability and overall market share.
Differentiation Focus :
Differentiation focus is differentiation strategy that concentrates on a particular buyer group, product line segment, or geographic market. This strategy is valued by those who believe that a company or a unit that focuses its efforts is better able to serve the special needs of a narrow strategic target more effectively than can its competition
Before using one of the generic competitive strategies, the firm must choose.
„
The range of product varieties it will produce.
„
The distribution channels it will employ
„ The types of buyers it will serve
„
The geographic areas it will sell
„
The competitors
These decisions should reflect an understanding of the firm’s UNIQUE resources
2. Cooperative Strategy: When the business units or firm working with one or more competitors to gain advantages against other competitors called cooperative strategy or strategic alliance. Strategic alliance is nothing but mutual benefits and broadly it is
JV.
Functional Level Strategies are formulated by specialists in each area of a business like MARKETING, PERSONNEL, FINANCE, R&D etc.

„
FLS outline the ACTION Plans that must be put into practice to execute BLS.
„
BL & FL specialists must COORDINATE their activities to ensure that the strategies pursued by them are consistent and lead achievement of overall goals.
According to David Aaker, in any case while selecting appropriate strategies at corporate business & functional level, the following strategy selection criteria should be kept in mind:
1.
Strategies are responsive to the External environment.
2.
Strategies are offer a sustainable competitive advantages
3.
They are consistent with other strategies in the organization.
4.
They provide adequate flexibility for the business & the organization.
5.
They conform to the organization’s mission and long term objectives.
6.
They are organizationally feasible in terms of Cost effective, Creative and
Constructive (C3)
There different techniques are used for strategy formulations, these are:
ƒ
Review of SWOT
ƒ
Critical analysis through TOWS matrix
ƒ
List of the Strategy
ƒ
Priority of the Strategy
ƒ Strategy define
Now for understanding the entire matrix for a particular firm an example of SWOT analysis ( MODI Xerox) which was made in the early 1990s, is given below:
The company has repositioned itself from just a copier company to a document company and reformulated its corporate mission statement as:
“ to develop, manufacture, service and finance a complete range of document processing products and services to help our customers to make their office more productive”.
Strengths Weaknesses
•
Strong brand name
•
Strong market presence
•
Access to technology
•
Quality of trained and skilled
•
More expensive than competitors
•
Small product range
•
Low productivity (by manpower
•
Motivated sales force and excellent coverage international standards)
•
Inadequate investment on information
•
Soft ware systems and debase
Opportunities Threats
•
Large and growing market
•
Easy access to the Xerox
•
Fierce International competition technology
•
Advantage of synergy’s in the
(expected)
•
Prices down, costs up
•
High personnel attrition rate product range

Now, within this situation in Modi Xerox, what could be ideal strategies? As we know, strategy formulation involves relating organizational strengths and weaknesses to environmental threats and opportunities; therefore the strategists of Modi Xerox can formulate the strategies as follows:
Strength / weaknesses Opportunities / Threats Strategies
1. Strong brand name and strong market presence
1. Large and growing 1 Quality assurance and but more expensive than the competitors international competitors foreign firm having marketing muscle.
2. Small product Range
3. Access to Technology
2.Costs up, prices down
3. Easy access to the
Xerox technology
2.Acquire the competitor firm form joint venture.
3. Increase the productivity rate consultation with foreign firms.
5. Quality of trained and
4. Motivated sales force 4. Increasing competition and excellent market coverage but low productivity (by international) inadequate of investment on information software systems and debase. attrition environment with adequate investment on information software.