University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
3.2
STRATEGY FORMULATION
3.2.1 SWOT Analysis
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Situation analysis begins the process of strategy formulation and
requires that strategic managers attempt to find a strategic fit between
external opportunities and internal strengths while working around external
threats and internal weaknesses.
SWOT (Strength, Weaknesses, Opportunities and Threats) analysis
should identify a corporation’s distinctive competence the particular
skills and resources a firm possesses and the superior way in which they
are used.
Distinctive competence is considered to be a collection of core
capabilities that differentiate a company strategically.
One way to summarise the corporation’s strategic factors is to combine
the external strategic factors (EFAS) and internal strategic factors (IFAS)
into a Strategic Factors Analysis Summary (SFAS) (refer to example in
text book p.146 & 147) The strategic factors analysis summary requires
the strategic manager to condense these factors into less than 10 factors.
(usually stated in priority order) The SFAS contains only the most
important factors and provides the basis for strategic formulation.
3.2.2 Reviewing the Mission, Goals and Objectives
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When making a decision, there is an important universal tendency to
concentrate on the alternatives – the action possibilities – rather than on
the goals and objectives we want to achieve.
Problems in performance can arise from an inappropriate statement of
mission, which may be too narrow or too broad. If a mission statement
does not provide a common thread for a corporation’ businesses,
managers may be unclear about where the company is heading.
Goals, objectives and strategies might conflict, with divisions competing
against one another rather than against outside competition, which is to
the detriment of the corporation as a whole.
A company’s goals and objectives may also be stated inappropriately.
They amy either focus too much on short term operational goals or b so
general that they provide little real guidance. There may be a planning
gap between planned and achieved objectives.
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
3.2.3 Developing Strategies
a.
Corporate strategy
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Corporate strategy specifies
1. The firm’s orientation toward growth, and
2. The industries or markets in which
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Corporate strategy can provide a strategic platform, or the ability of the
organisation to handle business in various environment with a common
set of capabilities.
There are certain questions o extreme importance associated with
corporate strategy, namely:
1. Should be expand, cut back, or continue our operations
unchanged?
2. Should we concentrate our activities within our current industry
or should we diversify into other industries?
3. If we want to grow and expand, should we do so through
internal development or through external acquisitions, mergers,
or joint venture?
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Corporate strategy embodies THREE general grand strategies:
1. GROWTH
2. STABILITY
3. RETRENCHMENT
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From a SWOT analysis, the strategic managers is a single business firm
can consolidate the company’s many external strategic factors
(opportunities and threats) under the category industry attractiveness.
They can also consolidate the company’s many internal strategic
factors (strength and weaknesses) under the category of competitive
position
Growth Strategies
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By far the most pursued corporate strategies are those designed to
achieve growth in sales, assets, profits or some combination
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
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Companies that do business in dynamic environment must grow in order
to survive.
Continuing growth means increasing sales and a chance to take
advantage of the experience curve to reduce the per unit cost of products
sold, thereby increasing profits.
Growth, however is a very seductive strategy for two main reasons:
1. A growing firm can cover up mistakes and inefficiencies more easily
than can a stable one.
2. A growing firm offers more opportunities for advancement,
promotion, and interesting jobs. Growth itself is exciting and ego
enhancing of CEO’s. A growing organisation tends to be seen as a
“winner” or “above the move” by the market place and by the
potential investors.
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The two basic growth strategies are CONCENTRATION IN NOE
INDUSTYR and DIVERSIFICATION into OTHER INDUSTIRES.
Concentration through vertical integration:
 Growth through concentration in the firm’s current industry can be
achieved via VERTICAL INTERGRATION (that is taking over a function
previously performed by a supplier (BACKWARD INTERGRATION) or by
a distributor (FORWARD INTERGRATION)
 This strategy is logical for a corporation or business unit with a strong
competitive position in a highly attractive industry.
 Vertical integration is common in the oil, basic materials, motor vehicle,
and forest products industries and its advantages include lowering of
costs and improving coordination and control.
 Vertical integration is ideal fro a strong firm to increase its competitive
advantage in an attractive industry.
Concentration through horizontal integration
 Growth through concentration in the firm’s current industry can be
achieved via HORIZNTAL INTERGRATION (by expanding the firm’s
activities into other GEOGRAPHICAL LOCATIONS and / or by
INCREASING the RANGE of PRODUCTS and SERVICES offered to
current markets.
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
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MBA/MPA Programme
ADM 007
 A company who wants to expand horizontally can acquire market share,
production facilities, distribution outlets, or specialised technology
internally through R&D or externally through acquisitions or joint ventures
with another firm in the same industry.
Concentric Diversification
 Growth through DIVERSIFICATION into a RELATED INDUSTRY may be
an appropriate corporate strategy when a firm has a strong competitive
position but with low attractiveness.
 The emphasis in this strategy is to build on a firm’s key resources and
capabilities. The firm attempts to SECURE strategic fit in a new industry
where the firm can apply the product knowledge, manufacturing
capabilities, and marketing skills it used so effectively in the original
industry.
 The search is for SYNERGY (2+2=5), that will allow two businesses to
generate MORE profits together than they could separately. The point of
commonalty may be similar technology, customer use, distribution,
managerial skills or product similarity.
 Companies most likely to diversify out their current industry into a related
industry are those that are the leaders in their core businesses and have
the capabilities needed for success in the new industry.
 A firm may choose to diversify concentrically, through either internal or
external means.
Conglomerate Diversification
 Growth diversification out of an industry into an UNRELATED INDUSTRY
may be appropriate corporate strategy when a firm’s competitive position
is only average and industry attractiveness is low. (EXAMPLE: S.A.
Breweries from the liquor industry bought the majority of shares in O.K.
Bazaars, and Edgars, who are in the food, clothing and household
industries)
 When management realises that the current industry is unattractive and
that the firm lacks outstanding abilities or skills that it could transfer easily
to related products or services in other industries, its most likely strategy is
to diversify into an unrelated industry.
 In conglomerate diversification, timing is important, early entry seems to
be a key success when established companies move into a younger
industry.
 The emphasis in conglomerate diversification on financial synergy rather
than on the product market synergy common to centric diversification. A
cash rich company with few opportunities for growth in its “own” industry,
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
for example, might move into another industry where opportunities are
great but cash is hard to find.
 Another instance of conglomerate diversification might be the purchase by
a company with a seasonal and therefore uneven cash flow of a firm in an
unrelated industry with complementing seasonal sales that will level out
the cash flow.
 Conglomerate diversification through acquisition and mergers also let
established corporations move into attractive industries without the
baggage of their core businesses.
Stability strategies
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The stability category of corporate strategies probably for a reasonable
successful company operating in an industry of medium attractiveness.
Pause or “proceed with caution”
 A company with a strong position in an industry of only moderate
attractiveness may NOT pursue any significant change in corporate
strategy.
 A pause strategy may be appropriate as a temporary strategy to enable
a company to consolidate its resources after prolonged rapid growth in
an industry now facing an uncertain future.
 The situation within the industry may call for a “proceed with caution”
strategy because the external environment could soon become highly
attractive with many new opportunities or unattractive with many new
threats, management is not likely to make sudden moves or take
unjustified risks by investing either in or out of the industry.
No change or profit strategies :
 A company may pursue a no change strategy or a profit strategy where it
is operating in an industry of medium attractiveness and has only an
average competitive position.
 If the company faces no obvious opportunities or threats and has no
significant strengths or weaknesses. Few aggressive new competitors are
likely to enter such an industry.
 A no change strategy’s success depends on a lack of significant change in
a corporation s’ situation. Most small town businesses probably follow this
strategy.
 When an industry is reaching maturity (dropped from high attractiveness
to medium attractiveness) a company with only an average competitive
position may find its sales and profits levelling off and perhaps even
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
beginning to decrease. Rather than announcing this to shareholders and
the investment community at large, top management may be tempted to
follow the “profit strategy”.
 The profit strategy is useful only to help a company get through a
temporary difficulty when the industry’s attractiveness is dropping.
Wanting to believe that this drop in industry attractiveness is only
temporary, management defers or cuts some short term discretionary
expenses, such as R&D, maintains, and advertising, to stabilise profits
during this period.
Retrenchment strategies
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Retrenchment strategies may be pursued when a company has a weak
competitive position regardless of the industry’s attractiveness. The weak
competitive position typically results in poor performance – sales are down
and profits may become losses.
Depending on the attractiveness of the industry, managers could select
from among the turnaround, captive company or selling out, and
bankruptcy or liquidation strategies.
Turnaround
 The turnaround strategy is most appropriate when a corporation is in a
highly attractive industry and its problems are pervasive but not yet
critical. This strategy emphasises the improvement of operational
efficiency. The are tow phases of turnaround strategy, namely
CONTACTION and CONSOLIDATION.
 Contraction is the initial effort to “stop the bleeding” quickly with across
the board cutbacks in size and costs.
 Consolidation is the implementation of a program to stabilise the now
learner corporation. To streamline the company, management develops
plans to reduce unnecessary overhead and to justify the costs of
functional activities. If management doesn’t conduct the consolidation
phase in a positive manner, many of the company’s best people will
leave.
Captive company or selling out
 A company with a weak competitive position in an industry of only medium
(or probably declining) attractiveness may not be able to engage in a full
blown turnaround strategy. A company in such a position faces poor sales
and increasing losses unless it takes some kind of action.
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
 Management is now desperately searching for an “angel” by offering to be
a captive company to one of its larger customers in order to guarantee
the company’s continued existence with a long term contract.
 In this way the company may be able to reduce the scope of some of its
functional activities, such as marketing, thus reducing costs significantly.
The weaker company gains certainly of sales and production in return for
becoming heavily dependent on one firm for at least 75% of its sales.
 If a corporation with a weak competitive position in its industry is unable
either the pull itself up by its “bootstraps” or to find a customer to which it
can become a captive company, it may have no choice but to sell out and
leave the industry completely.
 The selling out strategy makes sense if a company doesn’t see any way to
build some strengths or shore up its weaknesses and management
believes that the industry isn’t soon likely to become more attractive. It
can still obtain a good price by selling out to firms with moderately
attractive positions that are expanding through horizontal integration.
(refer to 6.3.1.2 on page 36)
Bankruptcy or Liquidation
 When a company finds itself in the worst possible situation with a weak
competitive in an industry of low attractiveness, management’s
alternatives are limited and all are distasteful.
 To the extent that top management identifies with the corporation,
bankruptcy or liquidation may be perceived as admission of failure. Pride
and reputation, as well as jobs and financial assets, are liquidated.
 Bankruptcy involves giving up management of the firm to the courts in
return for some settlement of the corporation’s obligations.
 In contrast to bankruptcy, which seeks to perpetuate the corporation,
Liquidation terminates the firm. When the industry is unattractive and the
company is too weak to be sold as a going concern, management may
choose to convert as many saleable assets as possible to cash, which the
company then distributes its shareholders after paying all obligations.
Portfolio analysis
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One of the most popular aids to developing corporate strategy in a multibusiness corporation is portfolio analysis.
This approach places corporate headquarters in the role of an internal
banker. Top management views its business units as a series of
investments from which it expects to earn a profitable return.
Management conducts portfolio analysis with a series of two dimensional
matrixes that summarise the internal and external strategic factors.
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
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Advantages of portfolio analysis:
1. It encourages top management to evaluate each business
individually and to set objectives and allocate resources for it.
2. It stimulates the use of external data to supplement management’s
judgement.
3. It raises the issue of cash flow availability for use in expansion and
growth.
4. Its graphic representation makes interpretation and communication
easy.
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Limitations of portfolio analysis
1. Defining product / market segments is not easy.
2. Using standard strategies may miss opportunities or be impractical.
3. Providing an illusion of scientific rigor masks the reality that
positions are based on subjective judgements.
4. Utilising value added terms such as cash cow and dog may lead to
self-fulfilling prophecies.
5. Determining what makes an industry attractive or what stage a
product is in its life cycle is not always possible.
6. Following naively the presentations of a portfolio method may
actually reduce corporate profits it they are used inappropriately.
b.
Business and Functional Strategies
(See section 1.2: Hierarchy of Strategy)
c.
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Selection of the best Strategy
After management has identified and evaluated strategic alternatives, it
must select ONE for implementation. Because many alternative will
likely has emerged as feasible, HOW do managers determine which
one is the best strategy?
Perhaps the most important criterion is the ability of the proposed
strategy to deal with the specific strategic factors developed earlier in
the SWOT anaylis.
Another important consideration in the selection of a strategy is the
ability of each alternative to satisfy agreed on goals and objectives with
the least use of resources and with the fewest number of negative side
effects.
Copyright © Prof. WPJ van Rensburg
Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
Scenario construction
 Using pro forma (estimated future) balance sheets income statements,
management can construct detailed scenarios on a PC using
spreadsheets to forecast the likely effect of each alternative strategy and
its various programs on divisional and corporate return on investment.
(ROI)
 To construct a scenario, first use the industry scenarios and develop a set
of assumptions about the task environment.
 Second, develop common size financial statements for the company’s
previous years to serve as a basis for the pro forma financial statements.
For each strategic alternative, develop a set of optimistic, pessimistic, and
most likely assumptions. Example: Forecast three sets of sales and cost
of goods sold figures for at least five years into the future. Look at
historical data and make adjustments based on the environmental
assumptions made.
 Third, construct detailed pro forma financial statements for each strategic
alternative. Do this exercise with optimistic, pessimistic and most likely
assumptions.
Pressure from the external environment
 The attractiveness of a strategic alternative will be affected by its
perceived compatibility with the principal stakeholders in a corporation’s
task environment. Creditors want to be paid on time, unions exert
pressure for comparable wages and employment security, governments
and interest groups demand social responsibility and shareholders want
dividends.
 Strategic mangers should ask four questions to assess the importance of
stakeholder concerns in a particular decision, namely:
1. Which stakeholders are most crucial for corporate success?
2. How much of what they want are they likely to get under this
alternative?
3. What are they likely to do if they don’t get what they want?
4. What is the probability that they will do so?
 Strategic decision makers should be able to choose strategic alternatives
that minimise external pressures an maximise stakeholder support.
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Derived from Wheelen and Hunger: Strategic Management and Business Policy
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University of North-West
Graduate School of Business and Government Leadership
MBA/MPA Programme
ADM 007
Pressures from the corporate culture:
 If a strategy is compatible with the corporate culture, it probably won’t
succeed.
 Foot dragging and even sabotage may well result, as employees fight to
resist a radical change in corporate philosophy.
 In considering a strategic alternative, the decision makers must assess its
comp ability with the corporate culture. If there is a little fit, management
must decide whether it should.:
1.
2.
3.
4.
Take a chance on ignoring the culture
Mange around the culture and change the implementation plan.
Try to change the culture to fit the strategy, or
Change the strategy to fit the culture.
Needs and desires of key managers:
 Even the most attractive alternative might not be selected if it runs
contrary to the needs and desires of important top managers.
 People’s egos may be tied to a particular proposal to the extend that they
strongly lobby against all other alternatives. Key executives in operating
divisions, for example, might be able to influence other people in top
management to favour a particular alternative and ignore objections to it.
d.
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Policy Development
The selection of the best strategic alternative isn’t the end strategy
formulation. Management must now establish polices to define the
ground rules for implementation.
Flowing form the selected strategy, they provide guidelines for decision
making and actions throughout the organisation.
Policies are crucial in multinational corporations where subsidiaries in
different geographical areas may feel free to develop product
strategies independently of the rest of the company.
Some policies will be expressions of a corporation’s critical success
factors. Critical success factors are the elements that determine a
company’s strategic success or failure, emphasising its distinctive
competence to ensure competitive advantage.
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Derived from Wheelen and Hunger: Strategic Management and Business Policy
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