CHATER FIVE

STRATEGY ANALYSIS AND CHOICE

5.1 The Nature of Strategy Analysis and Choice

Strategy analysis and choice seek to determine alternative courses of

action that could best enable the firm to achieve its mission and
objectives. The firm's present strategies, objectives: and mission. coupled
with the external and internal audit information, provide B basis for
generating and evaluating feasible alternative strategies. Unless a
desperate situation confronts he firm, alternative strategies will likely
represent incremental steps that move the firm from its present position
to a desired future position. Alternative strategies do not come out of the
wild blue yonder; they are derived from the firm's vision, mission,
objectives, external audit, and internal audit; they are consistent with, or
build on, past strategies that have worked well.,

5.2 The Process of Generating and Selecting Strategies

Strategists never consider all feasible alternatives that could benefit the
firm because there are an infinite number of possible actions and an
infinite number of ways to implement those actions. Therefore, a
manageable set of the most attractive alternative strategies must be
developed. The advantages, disadvantages, trade-offs, costs, and benefits
f hese strategies should be determined. Identifying and evaluating
alternative strategies should involve many of the managers and
employees who earlier assembled the organizational vision and mission
statements, performed the external audit, and conducted the internal
audit. Representatives from each department and division of the firm
should be included in this process, as was the case in previous strategy-
formulation activities. Recall that involvement provides the best
opportunity for managers and employees to gain an understanding of
what the firm is doing and why and to become committed to helping the
firm accomplish its objectives. All participants in the strategy analysis and
choice activity should have the firm's external and internal audit
information by their sides. This information, coupled with the firm's
mission statement, will help participants crystallize in their own minds
particular strategies that they believe could benefit the firm most.
Creativity should be encouraged in this thought process. Alternative
strategies proposed by participants should be considered and discussed in
a meeting or series of meetings: Proposed strategies should be listed in
writing. When all feasible strategies identified by participants are given
and understood, the strategies should be ranked in order of attractiveness
by all participants, with 1 = should not be implemented, 2 possibly should
be implemented, 3 = probably should be implemented, and 4 = definitely
M should be implemented. This process will result in a prioritized list of
best strategies that reflects the collective wisdom of the group.

5.3 Types of strategies

Integration Strategies Forward integration, backward integration, and

horizontal integration are sometimes collectively referred to as vertical
integration strategies. Vertical integration strategies allow a firm to gain
control over distributors, suppliers, and/or competitors.

Strategy analysis and choice involve evaluating strategic alternatives and

selecting the best course of action to achieve organizational goals. This
process is critical in strategic management as it determines the future
direction of the firm.

Integration Strategies

Forward integration, backward integration, and horizontal integration are

sometimes collectively referred to as vertical integration strategies.
Vertical integration strategies allow a firm to gain control over distributors,
suppliers, and/or competitors.

Forward Integration

Forward integration involves gaining ownership or increased control over

distributors or retailers. Increasing numbers of manufacturers (suppliers)
today are pursuing P forward integration strategy by establishing Web
sites to directly sell products to consumers. An effective means of
implementing forward integration is franchising. These six guidelines
indicate when forward integration may be an especially effective strategy:

• When an organization's present distributors are especially expensive, or

unreliable, or incapable of meeting the firm's distribution needs.

• When the availability of quality distributors is so limited as to offer a

competitive advantage to those firms that integrate forward.

Backward Integration

Both manufacturers and retailers purchase needed materials from

suppliers. Backward integration is a strategy of seeking ownership or
increased control of a firm's suppliers. This strategy can be especially
appropriate when a firm's current suppliers are unreliable, too costly, or
cannot meet the firm's needs. Seven guidelines for when backward
integration may be an especially effective strategy are:
• When an organization's present suppliers are especially expensive, or
unreliable, or incapable of meeting the firm's needs for parts,
components, assemblies, or raw materials.

• When the number of suppliers is small and the number of competitors is

large,

• When an organization competes in an industry that is growing rapidly;

this is a factor because integrative-type strategies (forward, backward,
and horizontal) reduce an organization's ability to diversify in a declining
industry.

Horizontal Integration

Horizontal integration refers to a strategy of secking ownership of or

increased control over a firm's competitors. One of the most significant
trends in strategic management today is the increased use of horizontal
integration as a growth strategy. Mergers, acquisitions, and takeovers
among competitors allow for increased economies of scale and enhanced
transfer of resources and competencies. enneth Davidson makes the
following observation about horizontal integration:

The trend towards horizontal integration seems to reflect strategists'

misgivings about their ability to operate many unrelated businesses.
Mergers between direct competitors are more likely to create efficiencies
than mergers between unrelated businesses, both because there is a
greater potential for eliminating duplicate facilities and because the
management of the acquiring firm is more likely to understand the
business of the target. These five guidelines indicate when horizontal
integration may be an especially effective strategy:

• When an organization can gain monopolistic characteristics in a

particular area or region without being challenged by the federal
government for "tending substantially" to reduce competition. e When an
organization competes in a growing industry.

Intensive Strategies

Market penetration, market development, and product development are

sometimes referred to as intensive strategies because they require
intensive efforts if a firm's competitive position with existing products is to
improve,

Market Penetration

A market penetration strategy seeks to increase market share for present

products or services in present markets through greater marketing_
efforts. This strategy is widely used alone and in combination with other
strategies. Market penetration includes increasing the number of
salespersons, increasing advertising expenditures, offering extensive sales
promotion items, or increasing publicity efforts. These five guidelines
indicate when market penetration may be an especially effective strategy:

• When current markets are not saturated with a particular product or

service. ◦ When the usage rate of present customers could be increased
significantly.

Market Development

Market development involves introducing present products or services into

new geographic areas. For example, Manufacturers such as Uniliver,
Britain, are expanding further into Ethiopia in 2014/15. Ethiopian Airlines
in 2015 began serving 5 new international destinations as part of a
strategy by the newly bought boing 777.

These six guidelines indicate when market development may be an

especially effective strategy: When new channels of distribution are
available that are reliable, inexpensive, and of good quality.

• When an organization is very successful at what it does When new

untapped or unsaturated markets exist.

Product development

is a strategy that seeks increased sales by improving or modifying

present products or services. Product development usually entails large
research and development expenditures. Coca Cola Company introduced
new orange flavored Fanta in 2016.

These five guidelines indicate when product development may be an

especially effective strategy to pursue:

• When an organization has successful products that are in the maturity

stage of the product life cycle; the idea here is to attract satisfied
customers to try new (improved) products as a result of their positive
experience with the organization's present products or services,

• When an organization competes in an industry that is characterized by

rapid technological developments

Diversification Strategies

There are two general types of diversification strategies: related and

unrelated., Businesses are said to be related when their value chains
posses competitively valuable cross- business strategic fits; businesses
are said to be unrelated when their value chains are so dissimilar that no
competitively valuable cross-business relationships exist. Most companies
favor related iversification strategies in order to capitalize on synergies as
follows:

• Transferring competitively valuable expertise, technological know-how,

or other capabilities from one business to another.

• Combining the related activities of separate businesses into a single

operation to achieve lower costs

Related diversification

Six guidelines for when related diversification may be an effective

strategy are as follows. When an organization competes in a no-growth or
a slow-growth industry:

• When adding new, but related, products would significantly enhance the
sales of current products.

• When new, but related, products could be offered at highly competitive

prices.

Unrelated Diversification

An unrelated diversification strategy favors capitalizing on a portfolio of

businesses that are capable of delivering excellent financial performance
in their respective industries, rather than striving to capitalize on value
chain strategic fits among the businesses.

unrelated diversification entails being on the hunt to acquire companies

whose assets are undervalued, or companies that are financially
distressed, or companies that have high growth prospects but are short on
investment capital. An obvious drawback of unrelated diversification is
that the parent firm must have an excellent top management team that
plans, organizes, motivates, delegates, and controls effectively. It is much
more difficult to manage businesses in many industries than in a single
industry.

Ten guidelines for when unrelated diversification may be an especially

effective strategy are:

• When revenues derived from an organization's current products or

services would increase significantly by adding the new, unrelated
products.

Defensive Strategies
 In addition to integrative, intensive, and diversification strategies,
organizations also could pursue retrenchment, divestiture, or liquidation.
Retrenchment occurs when an organization regroups through cost and
asset reduction to reverse declining sales and profits. Sometimes called a
turnaround or reorganizational strategy, retrenchment is designed to
fortify an organization basic distinctive competence. During retrenchment,
strategists work with limited resources and face pressure from
shareholders, employees, and the media. Retrenchment can entail selling
off land and buildings to raise needed cash, pruning_ product lines, closing
marginal businesses, closing, obsolete factories, automating processes,
reducing the number of employees, and instituting expense control
systems.

Five guidelines for when retrenchment may be an especially effective

strategy to pursue are as follows:

• When an organization has a clearly distinctive competence but has

failed consistently to meet its objectives and goals over time.

• When an organization is one of the weaker competitors in a given

industry.

Divestiture

Selling a division or part of an organization is called divestiture.

Divestiture often is used to raise capital for further strategic acquisitions
or investments. Divestiture can be part of an overall retrenchment
strategy to rid an organization of businesses that are unprofitable, that
require too much capital, or that do not fit well with the firm's other
activities. Divestiture has also become a popular strategy for firms to
focus on their core businesses and become less diversified.

Six guidelines for when divestiture may be an especially effective

strategy to pursue follow:

• When an organization has pursued retrenchment strategy and failed to

accomplish needed a improvements.

• When a division needs more resources to be competitive than the

company can provide.

Liquidation

Selling all of a company's assets, in parts, for their tangible worth is

called liquidation. Liquidation is recognition of defeat and consequently
can be an emotionally difficult strategy. However, it may be better to
cease operating than to continue losing large sums of money.
 These three guidelines indicate when liquidation may be an especially
effective strategy t pursue:

• When an organization has pursued both a retrenchment strategy and a

divestitute strategy, and neither has been successful.

• When an organization's only alternative is bankruptcy. Liquidation

represents an orderly planned means of obtaining the greatest possible
cash for an organization's assets.

Level of strategy

Strategy can be formulated on three different levels:

 corporate level
 business unit level
 Functional or departmental level

 Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of

businesses in which the company should compete and with the
development and coordination of that portfolio of businesses.

In this aspect of strategy, we are concerned with broad decisions about

the total organization's scope and direction. Basically, we consider what
changes should be made in our growth objective and strategy for
achieving it, the lines of business we are in, and how these lines of
business fit together. It is useful to think of three components of corporate
level strategy: (a) growth or directional strategy (what should be our
growth objective, ranging from retrenchment through stability to varying
degrees of growth - and how do We accomplish this), (b) portfolio strategy
(what should be our portfolio of lines of business, which implicitly requires
reconsidering how much concentration or diversification we should have),
and (c) parenting strategy (how we allocate resources and manage
capabilities and activities across the portfolio ==

where do we put special emphasis, and how much do we integrate our

various lines of business).

 Business Unit Level Strategy

strategic business unit may be division, product line, or other profit

center that can be planned independently from the other business units of
the firm. At the business unit level, the strategic 1ssues are less about the
coordination of operating units and more about developing and sustaining
a competitive advantage for the goods and services that are produced.
Competitive Strategy often called Business Level Strategy. This involves
deciding how the company will compete within each line of business (LOB)
or strategic business unit (SBU)

 Functional Level Strategy

The functional level of the organization is the level of the operating

divisions and departments The strategic issues at the functional level are
related to business processes and the value chain. Functional level
strategies in marketing, finance, operations human resources, and R&D
involve the development and coordination of resources through which
business unit level strategies can be executed efficiently and effectively.
Functional units of an organization are involved in higher level strategies
by providing input into the business unit level and corporate level
strategy, uch as providing information on resources and capabilities on
which the higher level strategies can be based, Once the higher-level
strategy is developed, the functional units translate it into discrete action-
plans that each department or division must accomplish for the strategy
to succeed. These more localized and shorter-horizon strategies deal with
how each functional area and unit will carry out its functional activities to
be effective and maximize resource productivity.

Long-Term Objectives

Long-term objectives represent the results expected from pursuing

certain strategies. Strategies represent the actions to be taken to
accomplish long-term objectives. The time frame for objectives and
strategies should be consistent, usually from two to five years. The Nature
of Long-Term Objectives Objectives should be quantitative, measurable,
realistic, understandable, challenging, hierarchical, obtainable, and
congruent among organizational units. Each objective should also be
associated with a timeline. Objectives are commonly stated in terms such
as growth in assets, growth in sales, profitability, market share, degree
and nature of diversification, degree and nature of vertical integration,
earnings per share, and social responsibility. Clearly established objectives
offer many benefits. They provide direction, . allow synergy, aid in
evaluation,

• establish priorities, reduce uncertainty,

• minimize conflicts,

• stimulate exertion, and aid in both the allocation of resources and the
design of jobs.

• Objectives provide a basis for consistent decision making by managers

whose values and attitudes differ.
5.4 Balanced Scorecard (BSC) Model
The Balanced Scorecard (BSC) is a strategic planning tool that translates
vision into measurable objectives across four perspectives:
Our Four Perspectives:
1. Financial: Profitability, revenue growth, cost reduction.
2. Customer: Customer satisfaction, market share, brand loyalty.
3. Internal Processes: Efficiency, quality, innovation.
4. Learning & Growth: Employee skills, technology, corporate culture.
Benefits of BSC:
- Provides a holistic view of performance.
- Aligns short-term actions with long-term strategy.
- Improves communication and accountability.
5.5 A Comprehensive Strategy Formulation Framework
A structured approach to strategy formulation ensures systematic
evaluation and selection.
Steps in Strategy Formulation:
1. Environmental Scanning
- PESTEL (Political, Economic, Social, Technological, Environmental,
Legal) analysis.
- Porter’s Five Forces (industry competition analysis).
2. Internal Analysis:
- Value chain analysis.
- Resource-Based View (RBV) to identify core competencies.
3. Strategy Generation:
- Using tools like TOWS Matrix (SWOT-based strategies).
4. Strategy Evaluation & Selection:
- Quantitative Strategic Planning Matrix (QSPM) to rank strategies.
- Risk assessment and feasibility analysis.

5. Implementation Planning:
- Setting budgets, timelines, and KPIs.
Models Used:
- BCG Matrix: Evaluates business units based on market growth and share.
- Ansoff Matrix: Analyzes growth strategies (Market Penetration,
Development, Product Development, Diversification).
- Grand Strategies Matrix: Classifies firms based on competitive position
and market growth.
Conclusion
Strategy analysis and choice are crucial for organizational success. By
evaluating internal and external factors, setting long-term objectives,
using models like BSC, and following a structured framework, firms can
make informed strategic decisions that drive sustainable growth.
This note provides a structured overview of Chapter Five: Strategy
Analysis and Choice covering key concepts, models, and frameworks
essential for strategic management. Let me know if you need further
elaboration on any section!