CHAPTER - 3

Strategy formulation: Alternatives & Choice

Prof. Kishor Chandra Meher

Professor(Management)

Prof. Kishor Chandra Meher 1

Tomorrow always arrives. It is always different.
And even the mightiest company is in trouble if it
has not worked on the future. Being surprised
by what happens is a risk that even the largest
and richest company cannot afford, and even the
smallest business need not run.
Peter Drucker

Prof. Kishor Chandra Meher 2

 Strategy formulation: Alternatives & Choice

3.1 Porter generic strategies

According to Micheal E. Porter strategies allow
organizations to gain competitive advantage
from three different bases. (O-D-F MODEL)
 Overall cost leadership
 Differentiation, and
 Focus.

Prof. Kishor Chandra Meher 3

 Porter’s Generic Strategies

Prof. Kishor Chandra Meher 4

 Gaining Competitive Advantage

• Competitive advantage is where one business entity has an

advantage over its rivals when competing with them in the
marketplace. In order to be successful, each business must
have a source of competitive advantage. If not, in the long
term its competitors will attract more customers and
ultimately the organisation will go out of business.
• Michael Porter identified two basic types of competitive
advantage:
• Cost leadership and
• Differentiation.
• Let’s look at each:

Prof. Kishor Chandra Meher 5

 Generic Strategies
• So when we put all of this together, what do we get?
Well, what we’ve outlined is a set of four “generic
strategies”. An organisation can follow one or another
of these generic strategies, depending on its choice of
cost leadership or differentiation and narrow and wide
focus. Now we’ve learned about each strategy, let’s
look at these four strategies again on the diagram. You
can see that two main strategies of cost leadership and
differentiation, can be made into four when you add
the element of narrow focus. So a “cost focus” strategy
is a cost leadership strategy whose focus is niche, not
broad.
Prof. Kishor Chandra Meher 6
 There are two basic types of competitive
advantage a firm can possess:
 Low cost or
 Differentiation.
The two basic types of competitive advantage combined with
the scope of activities by which a firm seeks to achieve them,
lead to three internally consistent generic competitive
strategies that can be used by the organization to outperform
competition and defend its position in the industry. These
strategies are:
 Cost Leadership
 Differentiation, and
 Focus and Niche Strategies.
Prof. Kishor Chandra Meher 7
 Being “stuck in the middle”
• Michael Porter argued that to be successful
over the long-term, an organisation must
select one of these generic strategies. If it
does not, competitors will be in a strong
position and it will be “stuck in the middle”. In
the long term an organisation which is stuck in
the middle has no competitive edge and will
not be successful.

Prof. Kishor Chandra Meher 8

Strategies designed to give competitive advantage
1.) Overall cost leadership emphasizes
producing standardized products at a very low
per-unit for consumers who are price – sensitive.
Differentiation is a strategy aimed at producing
products and services considered unique industry
wide and directed at consumers who are
relatively price-insensitive. Focus means
producing products and services that fulfill the
needs of small groups of consumers.

Prof. Kishor Chandra Meher 9

 Overall cost leadership
• Overall cost leadership yields a firm above –
average returns in its industry despite the presence
of strong competitive forces.
• However, this strategy often requires high relative
market share or other advantages, such as favorable
access to raw materials or the ready availability of
cash to finance the purchase of the most efficient
equipment.
EX:- National Can Company, is in a no-growth
industry but depends on being the low-cost producer
of cans and bottles to increase its profits.
Prof. Kishor Chandra Meher 10
 Differentiation and Focus
•Differentiation involves creating and marketing unique products for
the mass market. Approaches to differentiation include developing
unique brand images (Levi’s jeans), unique technology (MacIntosh
stereo components), unique features (Jenn – Air electric ranges),
unique channels (Tupperware), unique customer service (IBM), or
the like. In other words, the key to differentiation is obtaining a
differential advantage that is readily perceived by the consumer.
Differentiation is a viable strategy for earning above – average
returns in an industry, because it creates a defensible position for
coping with the five competitive forces.
•Focus is essentially a strategy of segmenting markets and appealing
to only one or a few groups of consumers or industrial buyers. The
logic of this approach is that a firm that limits its attention to one or
a few market segments can serve those segments better than firms
that seek to influence the entire market.
Prof. Kishor Chandra Meher 11
 Focus Strategies
• Porter also noted that both leadership and differentiation
strategies could be followed with narrow or wide market focus.
• Board focus – The organisation sells a product range which will
appeal to a wide cross-section of customers.
• For example, Ryanair is the basic low-cost airline designed to
appeal to as many people as possible.
• Narrow focus – The organisation focuses effort and resources
on a narrow, defined segment of a market. This strategy is
often used by smaller organisation who cannot afford to target
the market as a whole.
• For example, Xojet specialise in private jet hire with exceptional
personal service for their wealthy clients or corporations. They
are targeting a narrow group of customers and providing a
specialised service to that group.
Prof. Kishor Chandra Meher 12
 METHODS OF GROWTH STRATEGIES
• ORAGANIC GROWTH STRATEGIES
• ANSOFF GROWTH MATRIX
• INORGANIC GROWTH STRATEGIES
Organizations usually seek growth in sales, profits,
market share, or some other measure as a primary
objective. The different grand strategies in this category
are: (CIDMJ)
Concentration
Integration
Mergers and acquisitions
Joint Ventures
Prof. Kishor Chandra Meher 13
ANSOFF GROWTH MATRIX

Prof. Kishor Chandra Meher 14

 Ansoff’s matrix provides four different growth strategies:
• MarketPenetration
With this low risk strategy, the organisation seeks to
achieve growth with existing products in their existing
market segments. This means increasing market share,
perhaps though reducing prices, increasing advertising or
further differentiating the product.
• This is the least risky strategy since it builds upon many of
the organisation’s existing resources and capabilities. In a
growing market, simply maintaining market share will
result in growth. However, market penetration has limits,
and once the market approaches saturation another
strategy must be pursued if the organisation is to continue
to grow.
Prof. Kishor Chandra Meher 15
• There are a number of approaches to achieving market penetration which may
be used in combination:
• Altering the pricing structure e.g. competitive pricing, short term pricing deals,
favourable multiple purchase deals.
• Advertising e.g. an aggressive, comprehensive advertising campaign.
• Increasing sales resources e.g. more sales representatives or sales outlets.
• Other sales promotions e.g. free gifts with purchases.
• Initiatives to increase usage e.g. encouraging repetition of a task to secure an
improved outcome. Alternatively the company could employ a loyalty scheme.
• Buying a competitor. This reduces the competition in the market and also
increases distribution and availability if all sales outlets are maintained. Buying a
competitor is also known as horizontal integration. This achieves a very quick
increase in market share and instantly removes a competitor.
• Netflix began streaming videos in 2007, originally in the US. They penetrated the
market using through significant advertising and promotion and quick became
the US market leader in this emerging technology. By 2013 they had over 30m
users which in the US which represented 75% of their worldwide customer base.
Prof. Kishor Chandra Meher 16
 Market development

• Alternatively, a company could look to sell its current product into a

new market. This has is a higher risk strategy than market penetration
as understanding of the new market may be limited, although it still
has the advantage that the product is known. Strategies to achieve
market development include:
• Identifying new geographical markets e.g. through export to another
country or possibly selling to a new location in the current country.
• Creating new distribution outlets e.g. e-commerce options such as
eBay, Amazon or own website, mail order or franchise.
• Repackaging the product to sell to industrial, as opposed to domestic
users and vice versa.
• Using alternative pricing policies to appeal to a different group of
customers e.g. bulk purchase discounts.
• For example, while Netflix initially confined its operations to the
United States it soon began to expand internationally. By 2016 it
operated in 190 countries. That a some market development!
Prof. Kishor Chandra Meher 17
 Product Development

• This time the company is looking to introduce a new

product or modified version of its existing product into its
current market. The risk is therefore higher than for
market penetration as the product is untried, but the
company can employ its existing knowledge of the market
to assess success. Product development can be achieved in
the following ways:
• Creating its own research and development team to spot
“needs” in the current market and develop products
accordingly.
• Agreeing to re brand another company’s products to sell
on.
• Purchasing the right to produce and sell another
company’s product.
Prof. Kishor Chandra Meher 18
 Diversification

• In this strategy, the organisation grows by diversifying:

that is, by developing new products for new markets.
• Diversification can take multiple forms and it the most
risky of the four growth strategies since it requires
both product and market development and may be
outside the core competencies of the firm. However,
diversification may be reasonable choice if the high risk
is compensated by the chance of a high rate of return.
• Other advantages of diversification include the
potential to gain a foothold in an attractive industry and
the reduction of overall business risk through not being
dependent on just one industry.

Prof. Kishor Chandra Meher 19

• Related (or vertical) Diversification
• Related diversification is the diversification into product and markets which are
new, but related in some way to the existing products and markets in which the
organisation operates.
• The most common way this is done is through vertical integration which is the
degree to which a firm owns its upstream suppliers and its downstream buyers.
Expansion of activities downstream is referred to as forward integration, and
expansion upstream is referred to as backward integration.
• If Netflix were to purchase one of the production companies that produce its
content then that would be a good example of backward integration.
• Benefits
• Improve supply chain co-ordination (e.g. delivery times of components).
• Provide more opportunities to differentiate by means of increased control over
inputs.
• Capture downstream profit margins with a guaranteed customer.
• Increase entry barriers to potential competitors, for example, if the firm can gain
sloe access to scare resources.
• Reduced supplier power.
Prof. Kishor Chandra Meher 20
• Disadvantages
• Capacity balancing issues. For example, the firm may need to build more capacity in an
acquired business to ensure sufficient supply is available. Let’s say Netflix previously used
5 production companies and purchased one of them, then that one may need to expand
to meet all Netflix’s needs.
• Lack of supplier competition causing higher cost long term.
• Increased operating gearing as variable costs are converted into fixed costs, or
“overheads”. For example, if the production company is external, then costs are reduced
if Netflix decides not to commission new shows. But if the producer is in-house, then the
fixed costs of that producer must still be met, whatever the output. This increases risk.
• Large capital investment is needed, if the organisation is making an acquisition.
• Reduced flexibility to choose suppliers in the future, since the organisation is now
heavily invested in using its vertically-integrated source of supply.
• New managerial requirements, as new skills nave been brought in-house. E.g. the board
now need to manage both a streaming service and a content production company.

Prof. Kishor Chandra Meher 21

• Unrelated/conglomerate Diversification
• This is where the company expands into products and markets
unrelated to its existing operations. This is the most risky of the
strategies due to the lack of experience and knowledge of both
the product and market area.
• So for example, had Netflix bought up a virtual reality gaming
company this would have been a conglomerate acquisition,
completely unrelated to its current operations. Netflix would
literally be banking on virtual reality becoming the next big thing:
a big risk, but one they may take if they feel that is the future.
Facebook purchased Oculus Rift as they saw huge potential in the
market despite the market uncertainty at the time.

Prof. Kishor Chandra Meher 22

 INORGANIC GROWTH STRATEGIES
• CONCENTRATION
• The most common grand strategy is concentration on the
current business.
• A concentration strategy is one in which an organization
focuses on a single line of business.
• The firm directs its resources to the profitable growth of
a single product, in a single market, and with a single
technology.
• Some of America’s largest and most successful
companies have traditionally adopted the concentration
approach. For example, Mc Donald’s concentrates on
the fast food industry.
Prof. Kishor Chandra Meher 23
 Concentration strategies
Succeed for so many businesses – including the vast
majority of smaller firms – because of the advantages of
business – level specialization.
By concentrating on one product, in one market, and
with one technology, a firm can gain competitive
advantages over its more diversified competitors in
production skill, marketing know-how, customer
sensitivity, and reputation in the marketplace.
The reasons for selecting a concentration grand strategy
are easy to understand. Concentration is typically
lowest in risk and in additional resources required.

Prof. Kishor Chandra Meher 24

 INTEGRATION
Integration may take two forms: vertical and horizontal
integration.
A.)Vertical Integration:- Vertical integration strategy
involves growth through acquisition of other organizations
in a channel of distribution. When an organization
purchases other companies that supply it, it engages in
backward integration. The organization that purchases other
firms that are closer to the end users of the product (such as
wholesalers and retailers) engages in forward integration.
Vertical integration is used to obtain greater control over a
line of business and to increase profits through greater
efficiency or better selling efforts.
Prof. Kishor Chandra Meher 25
B.)Horizontal Integration This strategy involves growth
through the acquisition of competing firms in the same line of
business. It is adopted in an effort to increase the size, sales,
profits, and potential market share of an organization. This
strategy is sometimes used by smaller firms in an industry
dominated by one or a few large competitors, such as the soft
drink and computer industries.
• BHEL had undertaken the path of backward integration for
the manufacture of assorted equipments such as,
switchgears and transformers, to the full-fledged production
of thermal, hydel, and nuclear power generation equipment.

Prof. Kishor Chandra Meher 26

 MERGERS AND ACQUISITIONS
In a merger, a company joins with another company to form a
new organization.
A mergers is a voluntary and permanent combination of
business whereby one or more firms integrate their operations and
identities with those of another and henceforth work under a
common name and in the interests of the newly formed
amalgamations.
• Motives for acquisitions :
1. Removal of competitor 
2. Reduction of the Co failure through spreading risk

Prof. Kishor Chandra Meher 27

 JOINT VENTURES

• Two or more firm join together to create a new business

entity that is legally separate and distinct from its parents. It
involves shared ownership.
• In a joint venture, an organization works with another
company on a project too large to handle by itself, such as
some elements of the space program. Similarly,
organizations in different countries may work together to
overcome trade barriers in the international market or to
share resources more efficiently.
• For example, GMF Robotics is a joint venture between
General Motors Corporation and Japan’s Fanuc Ltd. to
produce industrial robots.
Prof. Kishor Chandra Meher 28
 RETRENCHMENT STRATEGIES

• When an organization’s survival is threatened and it

is not competing effectively, retrenchment strategies
are often needed. The three basic types of
retrenchment are
 Turnaround,
 Divestment, and
 Liquidation.

Prof. Kishor Chandra Meher 29

 Turnaround

• This strategy is used when an organization is

performing poorly but has not yet reached a
critical stage.
• It usually involves getting rid of unprofitable
products, pruning the work force, trimming
distribution outlets, and seeking other methods
of making the organization more efficient.
• If the turnaround is successful, the organization
may then focus on growth strategies.
Prof. Kishor Chandra Meher 30
3.3.2 Divestment
• Strategy involves selling the business or setting it up as a
separate corporation.
• Divestment is used when a particular business doesn’t fit well
in the organization or consistently fails to reach the objectives
set for it.
• Divestment can also be used to improve the financial position
of the divesting organization.
3.3.3 Liquidation
• Strategy involves closure of the business, which is no longer
profitable.
• It may be technologically obsolete or out of times with
market trends.
Prof. Kishor Chandra Meher 31
 Choices: How do firms choose strategies?
Stability strategy is adopted because
1.It is less risky, involves fewer changes and people feel comfortable with things
as they are
2.The environment faced is relatively stable
3.Expansion may be perceived as being threatening
4.Consolidation is sought through stabilizing after a period of rapid expansion.
Expansion strategy is adopted because
5.It may become imperative when environment demands increase in pace of
activity
6.Psychologically, strategists may feel more satisfied with the prospects of
growth from expansion: chief executives may take pride in presiding over
organizations perceived to be growth-oriented.
7.Increasing size may lead to more control over the market vis-à-vis competitors

Prof. Kishor Chandra Meher 32

Retrenchment strategy is adopted because:
9.The management no longer wishes to remain in business
either partly or wholly due to continuous losses and in
viability
10.The environment faced is threatening
11.Stability can be ensured by reallocation of resources from
unprofitable to profitable businesses.
Combination strategy is adopted because:
12.The organization is large and faces a complex environment
13.The organization is composed of different businesses, each
of which lies in a different industry requiring a different
response.
Prof. Kishor Chandra Meher 33
 PORTFOLIO- RESTRUCTURING
• Large, diversified organizations commonly use a number of these
strategies in combination. For example, an organization may
simultaneously seek growth through the acquisition of new businesses,
employ a stability strategy for some of its existing businesses, and
divest itself of other businesses.
• Clearly, formulating a consistent organizational strategy in large,
diversified companies is very complicated, because a number of
different business – level strategies need to be coordinated to achieve
overall organizational objectives. Business portfolio models are
designed to help managers deal with this problem.
Business portfolio models are tools for analyzing
(1) the relative position of each of an organization’s businesses in its
industry and
(2) the relationships among all the of the organization’s businesses.
Prof. Kishor Chandra Meher 34
 Two well-known approaches to developing
business portfolios include:

Boston Consulting Group (BCG) growth –

share matrix ,
General Electric’s (GE’s) multi-factor
portfolio matrix.

Prof. Kishor Chandra Meher 35

 BCG’s Growth – Share Matrix

• The Boston Consulting Group, a leading management

consulting firm, developed and popularized a strategy
formulation approach called the growth – share matrix.
• The basic idea underlying this approach is that a firm
should have a balanced portfolio of businesses such that
some generate more cash than they use and can thus
support other businesses that need cash to develop and
become profitable.
• The role of each business is determined on the basis of
two factors:
 Growth rate of its market and the
 Share of that market that it enjoys.
Prof. Kishor Chandra Meher 36
 Relative Market Share
• The vertical axis indicates the market growth rate, what is
the annual growth percentage of the market (current or
forecasted) in which the business operates.
• The horizontal axis indicates market share dominance or
relative marker share. It is computed by dividing the firm’s
market share (in units) by the market share of the largest
competitor).
• The growth – share matrix has four cells, which reflect the
four possible combinations of high and low growth wit high
and low market share. These cells represent particular
types of businesses, each of which has a particular role to
play in the overall business portfolio. The cells are labeled:

Prof. Kishor Chandra Meher 37

Prof. Kishor Chandra Meher 38
BCG MATRIX

39
 GROWTH – SHARE MATRIX : FOUR CELLS
1.Question marks (sometimes called problem children) Company business
that operate in a high-growth market but have low relative market share.
Most businesses start off as question marks, in that they enter a high – growth
market in which there is already a market leader.
A question mark generally requires the infusion of a lot of funds. It has to
keep adding plant, equipment, and personnel to keep up with the fast –
growing market, and it wants to overtake the leader.
The term question mark is well chosen, because the organization has to think
hard about whether to keep investing funds in the business or to get out.
2.Stars They are question – mark businesses that have become successful. A
star is the market leader in a high – growth market, but it does not necessarily
provide much cash. The organization has to spend a great deal of money
keeping up with the market’s rate of growth and fighting off competitors’
attacks. Stars are often cash – using rather than cash –generating Even so,
they are usually profitable in time.

Prof. Kishor Chandra Meher 40

3.Cash cows Businesses in markets whose annual growth rate is less
than 10 percent but that still have the largest relative market share. A
cash cow is so called because it produces a lot of cash for the
organizations. The organization does not have to finance a great deal of
expansion because the market’s growth rate is low. And the business is a
market leader, so it enjoys economies of scale and higher profit margins.
The organization uses its cash-cow businesses to pay its bills and
support its other struggling businesses.
4.Dogs Businesses that have weak market shares in low-growth markets.
They typically generate low profits or losses, although they may bring
in some cash. Such businesses frequently consume more management
time than they are worth and need to be phased out. However, an
organization may have good reasons to hold onto a dog, such as an
expected turnaround in the market growth rate or a new chance at
market leadership.

Prof. Kishor Chandra Meher 41

 Depending on the position of each business,
Four basic strategies can be formulated:
• 1.Build market share This strategy is appropriate for question marks that
must increase their share in order to become stars. For some businesses,
short-term profits may have to be forgone to gain market share and future
long-term profits.
• 2.Hold market share This strategy is appropriate for cash cows with strong
share positions. The cash generated by mature cash cows is critical for
supporting other businesses and financing innovations. However, the cost of
building share for cash cows is likely to be too high to be a profitable strategy.
• 3.Harvest Harvesting involves milking as much short-term cash from a
business as possible, even allowing market share to decline if necessary.
Weak cash cows that do not appear to have a promising future are candidates
for harvesting, as are question marks and dogs.
• 4.Divest Divesting involves selling or liquidating a business because the
resources devoted to it can be invested more profitably in other businesses.
This strategy is appropriate for those dogs and question marks that are not
worth investing in to improve their positions.

Prof. Kishor Chandra Meher 42