SCRIPT+V_Strategy+Formulation. Presentation pdf

Strategic management

1. Part V: StrategyFormulation
PartI:
PartII:
PartIII:
PartIV:
Foundations of Strategic Management and the StrategyProcess
Mission, Vision and Goals of theCorporation
Internal StrategicAnalysis
External StrategicAnalysis
Part V: Strategy Formulation
Part VI: Strategy Implementation
Part VII:, Strategy Evaluation
Part VIII : Corporate Social Responsibility

2. Strategic Management Process
Source: Wheelen, Hunger (2012), ch.1.5
Strategy
formulation
Strategy
implementation
Evaluationand
control
Environmental
scanning
1 2
34
Goalsetting*
0

3. Formulation Of Strategy
Strategy formulation is what an organization is going to do – example;
choosing cost leadership strategy/differentiation etc.

Strategies exist at different levels in an organization & are classified
into three major categories according to their scope of coverage i.e.,
they are classified into:
❑Corporate,
❑Business and
❑Functional level strategies

4. Corporate Level Strategy
It specifies actions a firm takes to gain a competitive advantage
by selecting & managing a group of different businesses
competing in different product markets.
A corporate-level strategy is concerned with two key
questions:
❑What business should the firm be in?
❑How should the corporate office manage its group of
businesses?

5. Based on Wheelen, Hunger (2012), ch. 7.1,7.2
Directional
strategy
Growth
Stability
Defensive
▪Pause/Proceed WithCaution
▪NoChange
▪Turnaround
▪Sell-out/divestment
▪Bankruptcy/liquidation
Concentration
▪Verticalintegration
▪Horizontal
Diversification
▪Concentric
▪Conglomerate
Introduction to corporate level Directional Strategies
Opposite: Outsourcing
(Vertical
Disintegration)

6. Market
Penetration
Product
Development
Market
Development
Diversification
existing new
ne
w
existing
products
markets
Growth Strategies – Ansoff Matrix (1988)
Growth Strategies
Very common“new
market-strategy”:
Internationalization

7. Growth Strategies- Integration Strategies
Integration strategy focuses on moving to different industry
level, different product & technology but the basic market
remains the same.
There are two types of integrative growths:
1.Vertical integration
2.Horizontal integration

8. Growth Strategies- Integration Strategies cont..
Vertical
Integration
Strategies
Forward
Integration
Backward
Integration

9. Integration Strategy Cont’d …
Vertical Integration
Vertical Integration involves extending an organization’s present business in
two possible directions.
❑Forward integration moves the organization into distributing its own
products or services (Gaining ownership or increased control over
distributors or retailers)
❑Backward integration moves an organization into supplying some or
all the products or services used in producing its present products or
services (Seeking ownership or increased control of a firm’s
suppliers)

10. Integration Strategy Cont’d …
Horizontal integration
Horizontal integration occurs when an organization adds one or
more businesses that produce similar products or services and that
are operating at the same stage in the product market chain.
▪Its Seeking ownership or increased control over competitors.

❑Almost all horizontal integration is accomplished by buying
another organization in the same business.

11. Horizontal Vs Vertical Integration
❑Purchasing of computing companies in the
same industries
❑Merging with/purchasing firms that supply
similar products
❑Purchasing of companies at all
levels of production

12. Diversification
The entry of a firm or business unit into new lines of activity, either by
processes of internal business development or through other ways acquisition,
which entail changes in its administrative structure, systems and other
management processes

13. Growth Strategies- Diversification
Diversification
Strategies
Related
Diversification
Unrelated
Diversification

14. Diversification Strategies
▪Related diversification : adding new but related products or
services
▪Unrelated diversification : adding new, unrelated products or
services

15. HOW CAN COMPANIESDIVERSIFY?
Basic DiversificationStrategies
Concentric
diversification
= Growth intorelated
industry
Goal?
Search forsynergies
Who?Firms with astrong
competitive position…
…And outstanding,
transferableskills
Conglomerate
diversification
Growth intounrelated
industries
Goal?
Financial considerations
(cash flow/riskreduction)
Who? Current industry
lackingattractiveness…
…Transferable skills
missing

16. HOW CAN COMPANIESDIVERSIFY?
Basic DiversificationStrategies
Concentric
diversification
= Growth intorelated
industry
Goal?
Search forsynergies
Who?Firms with astrong
competitive position…
…And outstanding,
transferableskills
Conglomerate
diversification
Growth intounrelated
industries
Goal?
Financial considerations
(cash flow/riskreduction)
Who? Current industry
lackingattractiveness…
…Transferable skills
missing

17. GROWTH
▪Escape stagnant or declining industries (e.g.,Tobacco, oil,newspapers)
▪Satisfy managers’egos
▪Serve shareholders’interest
▪Size effects (economies of scale & scope, stability, employee attractiveness,
credibility .
RISK SPREADING
▪Reduction of the variance of profit flows etc.→
▪BUT often not of value for shareholders -they can hold diversified portfolios
themselves
VALUECREATION
Putting different businesses under common ownership in order toincrease
their profitability (synergies, economies of scope and skills→)
Based on Grant, Contemporary Strategy Analysis, 8th ed 2013, pp350-52
Reasons for Diversification

18. CORE ISSUES IN DIVERSIFICATIONDECISIONS
Basic DiversificationStrategies
Superior profit derives from twosources:
INDUSTRY
ATTRACTIVENESS
Diversification decisions involve these same twoissues:
▪How attractive is the industry to beentered?
▪Can the firm achieve a competitiveadvantage?
RETURN ONCAPITAL
> COST OFCAPITAL
COMPETITIVE
ADVANTAGE

19. If diversification is to create shareholder value, it must meet three tests:
1.The attractiveness test: diversification must be directed towards attractive
industries (or have the potential to become attractive)
2.The cost of entry test: the cost of entry shall be lower than all future profits
3.The better-off test: either the new unit must gain competitive advantage from its
link with thecompany,or vice-versa (i.e.,some form of “synergy” must bepresent)
PORTER’S ESSENTIALTESTS
Porter, From Competitive Advantage to Corporate Strategy, in: HBR, May-Jun 987, p46

20. Transaction Cost vs. AdministrativeCost
Grant, Contemporary Strategy Analysis, 8th ed 2013, pp.297-298
Performing an activity internally or by using an external
partner generates 2 types ofcosts
Transactioncosts:
All external cost related to
working with a marketpartner,
e.g. locating, negotiating, and
enforcing acontract
Administrativecosts:
All internal cost related
performing the activity inside the
company,
e.g. overhead and management
=>if:Administrative cost < Transaction cost →Integrate
Administrative cost > Transaction cost →De-integrate

21. RELATED VS. UNRELATEDDIVERSIFICATION
RELATEDDIVERSIFICATION UNRELATEDDIVERSIFICATION
▪BUT weaker in terms of
synergies
▪Lower risk for cannibalization
▪Greater synergies

▪BUT risk of canibalising core
products/services

22. Prof. Dr. AnnaRosin
Diversification and Profitability
Diversification andPerformance
▪No consistent relationship
▪Some evidence of a curvilinear
relationship:
▪Diversification first increases
profitability
▪Beyond the optimum further
diversification reduces
profitability (maybe due to
increasedcomplexity?)
▪McKinsey &Co.:
▪Benefits from moderate
diversification
▪Especially for firms that have run
out of growthopportunities→

23. ASSOCIATION VS. CAUSATION –WHAT DO YOUTHINK?
Diversification andPerformance
Based on Palich et al., 2000, pp 154-177; Grant, Contemporary Strategy Analysis, 8th ed 2013, pp358-360
Does diversificationenhance
profitability?
Or is superior profitability the reason to
diversify?

24. All the previously discussed growth strategies could be
implemented either through internal growth or external
growth (acquisition,merger,orjointventures).
Internal Growth
❑Internal growth occurs when a company expands its
current market share, its markets, or its products through
the use of internal resources.
❑Generally, internal growth strategies work well for
companies want to grow via product development or
market development.
Means of Diversification

25. Merger and Acquisition
Merger – is a strategy through which two or more firms agree to
integrate their operations on a relatively co-equal basis
▪Therefore, in merger, a single new company will be established with
new name, organizational structure, issuing new stock & other changes
▪However, the shareholders of the former firms will become
shareholders of the new enlarged organization

26. ❑Acquisition – a strategy through which one firm buys a
controlling of 100% interest in another firm with the
intent of making the acquired firm a subsidiary business
within its portfolio.
❑Therefore, an acquisition is a marriage of unequal
partners with one organization buying the other.
❑The shareholders of the acquired firm cease to be
owners of the acquiring company – unless payment is
made in terms of shares.
Merger and Acquisition cont’d …

27. Merger And Acquisition Cont’d …
What are the main reasons of an acquisition or merger strategy?
❑The main reasons why firms use these strategies is to strategic
competitiveness & earn above average returns
❑These can be achieved through increasing the market value of the stock
– synergistic effect.

28. Merger and Acquisition cont’d …
▪Securing or protecting sources of raw materials/components
▪To gain access to distribution channels
▪To make use of underutilized resources of the company
▪To increase market power –horizontal, vertical & related
acquisitions
▪To enter a new market, offer new products & avoiding cost of new
product development (Acquisition as substitute for innovation)
▪To overcome entry barriers(cross-border acquisition )etc.
There Could Be Other Reasons

29. Joint Ventures
❑A joint Venture occurs when two or more organizations
pool their resources for a given project or a business
product.
❑A joint venture can be on either a temporary or permanent
basis
❑Joint ventures are especially popular between firms in
different countries

30. Joint Ventures cont’d …
There are several reasons why a joint venture may be attractive to
respective participants:
▪By pooling their resources, the organizations may be capable of
doing things that they could not do separately
▪By joining with another firm or firms, the companies share the
risk of the venture.
▪Certain gov.t sponsored aggressively encouraged joint ventures
for the purpose involving minority business.
▪International companies are often encouraged by host countries
to enter joint ventures with local companies

31. 2. STABILITY STRATEGY
It is also called neutral strategy occurs when an organization is
satisfied with its current situation & wants to maintain the status quo.
Reasons for using stability strategy: The company is doing well “if it
works, don’t fix it”
The management wants to avoid additional hassles associated with
growth
Resources has been exhausted because of earlier growth strategies

32. 3. DEFENSIVE STRATEGIES
Defensive Strategies most often
used as a short-term solution to:
❑Reverse a negative trend
❑Overcome a crisis or problem
situation
It could be classified into decline
&closure strategies

33. DEFENSIVE STRATEGIES CONT’D …
•Retrenchment
•Harvesting
•Turn around
•Divestiture
Decline strategy includes:
•Liquidation
•Filing of bankruptcy
Closure strategy Includes:

34. Retrenchment
Regrouping through cost and asset reduction to reverse declining sales and profit.
It focuses on economizing, saving cost, cutting back costs mostly through layoffs,
firing employees etc.
Divestiture
Selling a division or part of an organization
Turn around
▪A defensive strategyfollowed by an organization when it feels that the
decision made earlier is wrong and needs to be undone before it damages
the profitability of the company.
▪It is a restructuring process that converts the loss-making company into a
profitable one.
LiquidationSelling all of a company’s assets, in parts, for their tangible worth
DEFENSIVE STRATEGIES CONT’D …

35. PORTFOLIO ANALYSIS
How to Plan a Corporate Portfolio?
➢The business portfolio is the collection of businesses (SBUs) &
products that make up the company.
➢SBU Is a unit of the company that has a separate mission &
objectives. It Can be a company division, a product line or even
individual brands
Types of portfolio techniques / matrixes in use, the most well
known of which are:
▪The Boston Consulting Group – BCG-Matrix (Hedley, 1977)
▪The General Electric Screen – GE-Matrix (Hofer and Schendel, 1978)

36. Boston Consulting Group
BCG-matrix
Source : Robert M. Grant Contemporary Strategy Analysis 8
th
edition p343

37. The Boston Consulting Group
(BCG) Matrix Cont’d …
❑Stars: The leading SBUs in a company’s portfolio. They
offer attractive long-term profit & growth opportunities –
still growing but not generating high profit
❑Question marks: can become a star if nurtured properly.
To become a market leader, a question mark requires
substantial net injections of cash – it is cash hungry
❑Cash cows: are cost leaders in their industries. The
capital investment requirements of cash cows are not
substantial – such businesses generate a strong
positive cash flow
❑Dogs: are unlikely to generate a positive cash flow &
may become cash hogs. They may require
substantial capital investments just to maintain their
low market share.

38. BCG MATRIX: “NORMSTRATEGIES”
„Question
marks“
„Stars“
„Poordogs“ „Cashcows“
Market
growth
h
ig
h
l
o
w
low high
Relative marketshare
PortfolioAnalysis
▪Cash Flow:
▪Highest for Stars & Cashcows
▪Lowest for Question marks
andDogs
▪Investment needs:
▪Highest for Question marks
andStars
▪Lowest for Cash cows and
Dogs
BCG Matrix and Product Life Cycle

39. The firm’s business – level strategy is a
deliberate choice about how it will perform
the value chain’s primary and support
activities to create unique value
Purpose of business – level strategy is to
create differences between the firm’s
position and those of its competitors
Business-level Strategy

40. Business-level Strategic Issues
In selecting business-level strategy, the firm should
determine:
Who will be served? Refers to types of customers
Whatneeds those target customers have that the firm will
satisfy? Refers to the benefits & features of products
Howthose needs will be satisfied? Refers to core
competencies

41. In Making A Business –
Level Strategy …
The firm faces a choice between
Performing Activities Differently (Low-Cost Leadership)
Or
Performing Different Activities (Differentiation)
Or
Some Combination Of Them!

42. Generic Strategies - Porter’s Five Generic Strategies
How to gain competitive advantage? 2 key dimensions:

43. Alternative Approaches
BusinessStrategy
▪Can approaches once considered as “stuck in the middle” be attractive
today?
Hybrid Strategies, e.g. considered by the “StrategyClock”
▪Is the “Positioning approach” stillsufficient?
Delta-Model
BlueOcean
https://upload.wikimedia.org/wikipedia/commons/thumb/a/a8/Swedish_Windsor_Chairs.jpg/640px -Swedish_Windsor_Chairs.jpg +flaticon

44. Corporate Vs Business – Level Strategy
Source

45. Questions?