BUSINESS STRATEGY

UNIT 4
STRATEGY FORMULATION

BBA/BBM
VIII Semester
 Business level strategy
• A business level strategy is an integral and set of
coordinated set of actions of the firm to gain
competitive advantages by exploring core
competencies in specific product markets.
• Generally, a business level strategy has three
issues they are:
• Whom it will serve?
• What are the needs of target customer, that it
will satisfy ?
• How those needs will be satisfied through
implementation of given strategy ?
 Generic competitive strategies
• Basic approaches to strategic planning that
can be adopted by any firm in any market or
industry to improve its competitive
performance. Michael Porter developed three
generic strategies, that a company could use
to gain competitive advantage, back in 1980.
These three are: cost leadership,
differentiation and focus.
• 1. Cost Leadership Strategy –

The cost leadership strategy advocates gaining

competitive advantage due to the lowest cost of
production of a product or service. Lowest cost need not
mean lowest price. Costs are removed from every link of
the value chain- including production, marketing, and
wastages and so on. The product could still be priced at
competitive parity (same prices as others), but because of
the lower cost of production, the company would be able
to sustain itself even through lean times and invest more
into the business all throughout.
Examples are the TPS system developed by the Toyota
Motor Company. The TPS system aims to cut costs
throughout the company, but Toyota cars are still priced at
almost the same levels as American or other Japanese
cars.
• Ways of cost reduction – Cost reduction
remains a central issue in cost leadership
strategy. The following are the ways of cost
reduction:
• 1. Economies of scale
• 2. Capacity utilization
• 3. Experiences
• 4. Resources sharing
• 5. Low cost materials
• 6. Direct marketing
• 7. Product design and process improvement
• 2. Differentiation Strategy

• The 'differentiation' strategy involves creation of

differentiated products for different segments. A variety of
products, each branded and promoted differently with levels
of function, allows a company to 'desensitize' prices, and on
the basis of being different, charge premium or higher
prices. This strategy also provides a hedge against different
markets and product life cycles, allowing cash flow to come
in even if a few products decline, while others grow or
mature.
A prime example of this strategy is Hindustan Lever, which,
while focused on FMCG, has a range of products even within
the soaps category for different segments. Such a strategy
needs strong segmentation, marketing and branding skills.
• Ways of Differentiation
• 1. Unique product feature
• 2. Unique product uses and performance
• 3. Unique services
• 4. Detailed information about product
• 3. Focus Strategy
• The 'focus' strategy involves focusing on a
narrow, defined segment of the market, also
called a 'niche' segment.
• For example, Porsche markets to the particular
segment that likes fast and expensive cars and
can afford it. A company in a niche market has
customers who understand, appreciate and can
pay a premium for their indulgence. Competitive
advantage - either by cost or differentiation- is
created specially for the niche. But the risks are
that the niche may not grow, or it may disappear
with time and change.
 Resource-based view to strategy formulation
• Resource availability and allocation are very
important in strategic management.
• It enhance organizational capabilities, provides
strength and enable exploitation of opportunities.
• It help sustainable competitive advantage and
achieve long term objectives. Resource and
capabilities work well if there is cooperation and
coordination between these.
• The resource and the capabilities should possess the
following characteristics for the sustainability of
competitive advantages.
1. Durability
•Refers to how long a resource can provide a competitive advantage before it
depreciates or becomes obsolete.
•Example: A strong brand name like Coca-Cola or an established reputation
like Harvard University lasts for decades, making them durable resources.
•Strategic Implication: Firms with durable resources maintain their market
position longer without needing constant renewal.

2. Transparency
•Refers to how easily competitors can understand and analyze a firm's
resources and strategies.
•If competitors can clearly see why a firm is successful, they can attempt to
copy it.
•Example: A patented drug formula is not transparent, but McDonald's fast-
food model is easy to understand.
•Strategic Implication: Firms should create complexity or secrecy around their
resources to maintain an advantage.
3. Transferability
•Refers to whether a resource can be easily acquired or moved to another
company.
•If a resource is highly transferable, competitors can obtain it and neutralize
the advantage.
•Example: Skilled employees can be hired away by competitors, while
company culture is less transferable.
•Strategic Implication: Firms should develop unique resources that are hard
to buy or move.
4. Replicability
•Refers to how easily competitors can imitate a firm's resource or capability.
•If a resource can be quickly copied, it loses its value as a competitive
advantage.
•Example: Tesla’s battery technology is difficult to replicate due to years of
research, while generic software can be easily copied.
•Strategic Implication: Firms should invest in proprietary technologies,
unique processes, or tacit knowledge that is hard to imitate.
 The industry life cycle strategy
• The industry life cycle states that industries passes
through four stages namely: introduction, growth,
maturity, and decline. The length of each cycle
may vary from industry to industry . Even in the
same industry, different strategies group may be
experiencing different stages of life cycle. A firm
has to ensure that its strategy is sufficiently robust
to meet the needs of each stage of the life cycle.
The different stage of life cycle has an impact on
the firm competitiveness
• 1.Introduction stage- In this stage an industry
is characterised by slow growth and high cost
per unit due to lower production.
• The research and development cost of
production is high as a result profit is
negative.
• However, the organization may get first
mover advantages if strategy focus the
uniqueness of the product or service for a
small group of customer
2. Growth stage- In this stage sales increased rapidly as
market grows.
•It allow the firm to reap the profit from economies of
scale.
•The higher profit may attract the new firm in the
industry.
•The firm must invest more in marketing to enhance
the customer loyalty.
•Research and development cost is high to make
change in product or service to better reflects of the
customers needs and suggestion. The firm should
adopt market development strategy during this stage
• 3. Maturity stage- In this stage the firm’s sales growth
and profit gets slow.
• Rivalry among the firms gets immense at this stage as
they compete on price basis.
• Some firm begin to exit and some firms may be
benefited from product innovation or finding new
customer market.
• 4. Decline stage- At this stage an industry, the sales and
profit both decreases rapidly.
• Consumer loyalty shift to other product based on
technology.
• Competition is based on pricing. Firm exit the industry
rapidly and Consolidation would be a strategy to deal
with the situation.
 Corporate level strategy
• Corporate level strategy is an overall strategy for the
organization. It is a companywide game plan for managing a
set of business line that company has diversified into. It
provides long term direction and scope to the organization as
a whole.
• Corporate strategy consists of the initiatives that the
company uses to establish business positions in different
industries. It involves the approaches that the company uses
to boast the combined performance of the set of businesses
the company has diversified into. The organization transfer
skills and capabilities developed in one unit to other units
that need such resources. Hence it attempts to obtained
synergy among numerous product lines and business units so
that the corporate whole results will be greater than the
sum of business units parts.
• 1. Stability strategies- Aims to continue the current
operations of an organization without any significant
change in directions. It can be appropriate for a
successful organization operating in a reasonably
predictable environment. It is popular for small
business with a niche market.
• Advantages- Less risky, simple does not require
change, suitable if the growth of business is risky,
maintaining profit,
• Disadvantages- lose opportunity created by change
in external environment, market share may decline
due to expansion by competitors, stakeholders
expectation may not be address
• Alternative strategies under stability strategy
• 1. Pause/ proceed with caution strategy- It is
deliberately attempt to make only incremental
improvements until a particular environment situation
change. It is a temporary strategy.
• 2. No change strategy – It is a decision to do nothing
i.e. Continue current operations and policies for a
predictable future. This is suitable if there is no
possibility of new competitors entry .
• 3. Profit strategy – It is an attempt to artificially
support profits when a company’s sales are declining
by reducing investment and short term discretionary
expenditures.
• 2. Expansion/Growth Strategies- Designed to
achieve growth in sales, assets, profits or some
combinations. Growth enables to advantages of
the experience curve to reduce the per-unit cost
of product sold, thereby increasing profits.
Organization can grow internally by expanding its
operations or it grow externally through merger
acquisition and strategic alliances.This strategy is
pursued in a competitive and dynamic business
environment.
•
• Alternative strategies under growth strategy
• 1. Concentration strategy- It is a decision to concentrate
resources on certain product lines. If an organization current
product lines have real growth potential, this strategy is
adopted.
• 2. Diversification – it is a decision to entre into the new
business. This strategy is pursued if the opportunities for
growth in the original business is low.
• Advantages- Business increase due to growth , strategic
advantages through high production and long experience, of
product and market, suitable when environment is highly
competitive and dynamic, enhance productivity and efficiency
• Disadvantages- Existing resources may hinder the growth
requirement, absence of knowledge of product market, growth
strategy is more risky.
• 3. Retrenchment Strategies- A company may
pursue retrenchment strategies when it has a
weak competitive position in some or its entire
product lines resulting in poor performance, like
sales are down and profits are becoming losses. It
aims to reduce the size or diversity of a company
for financial feasibility. This strategy is adopted
during highly threatening from environment. It is
useful in declining stage of life cycle.
• Some of retrenchment strategies are :
• Turnaround strategy- It focus on improvement of
operational efficiency by cutting cost and expenses.
• Captive company strategy- In this situation company
has weak competitive advantage, and sells the
product to one single buyer.
• Sell-out strategy- If a company has a weak competitive
advantage position and not in a position to sustain it
is better to sell out business.
• Bankrupt/ Liquidation strategy- It involves giving up
management of the firm to the courts in return for
some settlement of the company obligations.
• Retrenchment Strategies
• Advantages – Performance is not satisfactory
and opportunities lie in other business ,
environment is highly uncertain, organization
going through a deep crises, may lead to
improvement in business efficiency.
• Disadvantages- Profit decreases, customer
demand may not be able to meet.
• 4. Combination Strategy- Adaption of stability,
expansion and retrenchment strategies in different
business units simultaneously at the same time, or
different time in the same business it is called
combination or mixed strategy. It is suitable to deal
with multiple environmental situation.
• Advantages- Address diverse environmental
situation, suitable for multi business organization,
suitable for organization during financial problem
• Disadvantages- focused of top management may be
dispersed, not suitable for similar business.
• Related diversification
• The diversification aims for better returns at
high risk. A new product is produced. It takes
the organization away from its existing
markets and products. It exploits core
competencies in new business. It can be of
two types:
• 1. Related diversification: It is within the
industry. Existing skills and facilities are shared
. For example Uniliver is diversified in
consumer goods industry. Related
diversification can be:
• Vertical integration- Backward and forward
integration into adjacent activities of current
business. Backward is related to inputs whereas
forward is related to outputs. The organization
produces its own inputs through backward
integration. It distribute its outputs through
forward integration. For eg Mc Donald grows its
potatoes and own restaurants.
• Horizontal integration- Integration into which
are competitive or complementary with present
activities.
• Unrelated diversification- It is moving beyond
the industry in new business area. It can be in a
new market or already existing market> It builds
a portfolio of unrelated business. It is also known
as lateral diversification.
• Reasons for diversification
• Environmental adaption is facilitated.
• Saturation of market necessitate diversification
• Top management desire drive diversification
• Entrepreneurial spirit of managers drive
diversification
• Option for diversification
• i) On existing competency – Current
competencies of the organization are
exploited in new arenas.
• ii) With new competencies – New
competencies are developed for
diversification in new arenas.
 Implementing growth strategies
• The following are the ways of implementing
growth strategies:
• 1. Internal development
• 2. Acquisitions and Merger
• 3. Joint development and strategic alliences.
• Internal development
• The strategies developed by developing and building
organizations own resources and capabilities. The
ways of internal development are:
• i) Developing new product- A business that produces
highly technical product may choose to develop
product itself since it is the best way of acquiring the
necessary capabilities to compete successfully.
• Ii) Developing new market. The strategy is pursed to
expand the market by using core competency.
Develop the market by using direct marketing.

• contd
• Iii) Building competency through learning-
Internal development helps to build
competency through learning and gain
competitiveness in knowledge creation and
integration.
• iv) Cost spread- Internal development helps
spread cost to other activities. It can be
favourable for small companies.
• Acquisition and Merger
• a) Acquisition- An acquisition is a strategy in which
one firm buys a controlling, or 100 percent shares or
ownership in another firm. The acquired organization
generally keeps the separate identity as subsidiary.
• b) Merger- Merger is a strategy through which two or
more firms agree to integrate their operation on
agreed basis. It happen voluntarily and organizations
loses their previous identity. New organization is
created.
• Merger can be of following types:
contd
• Horizontal Merger- Combination of two similar
types of firms in terms of products and market.
For eg merger of two banks.
• Vertical Merger- Combination of two firms
producing complementary products. For eg
merger of sugar mill and sugar producer.
• Concentric Merger- Combination of two firm
serving same customer group. For eg bread and
biscuits
• Conglomerate Merger- Combination of two
firms unrelated to each other . For eg biscuits
and shoes.
• Joint Development and Strategic alliance
• Joint development is a cooperative approach
to strategy development. A cooperative
strategy is a strategy in which two or more
firms work together to achieve a shared
objective. Under it a firm attempts to get
competitive advantage in cooperation with
other firms. Two common cooperative
strategies are practiced. They are:
• Collusion
• Strategic allience
• 1. Collusion- Collusion is the active cooperation of the
firms within an industry to reduce out put and raise the
price. It may be explicit, in which cooperate through
direct communication and negotiation, or tacit, in which
firms cooperate indirectly through an informal system of
signals.
• Strategic alliance- A strategic alliance is a cooperative
strategy in which firms combine some of the resources
and capabilities to create a competitive advantages. It
involves some degree of exchange and sharing of
resources and capabilities to develop, sell and serve
goods or services. In strategic alliance firms combine
some of their resources and capabilities to create a new
competitive advantages.
• Types of strategic alliances
• 1. Joint venture- A joint venture is a strategic alliance
in which two or more firms create a legally
independent company to share some of their
resources and capabilities to develop a competitive
advantages. It is effective in establishing long term
relationships and in transferring tacit knowledge.
• 2. Equity alliance- Under this two or more firms own
different percentage of the company they have
formed by combining some of their resources and
capabilities to create a competitive advantages.
• 3. Non equity alliance- A non equity allience
involves two or more firms develop a
contractual relationship to share some of their
unique resources and capabilities to create a
competitive advantages.
• Reasons for Strategic alliance
• To obtain or learn new capabilities.
• To access to specific market
• To reduce financial risk
• To reduce political risk
• Co specialization
• Components for success of strategic alliances
• Trust between the partners
• Top management support
• Performance expectations
• Clear goals and organizational arregements
• Evaluation and monitor
 Portfolio analysis for Strategic choice
• Portfolio analysis is an approach to corporate
strategy in which the top management views its
product lines and business units as a series of
investment from which it excepts a portfolio returns.
• It enables a firm to review and refresh the portfolio
by closing down the unprofitable business units or
products and adding new investment in profitable
way. The aim of this analysis is to achieve the highest
return. Based on this view, a firm with multiple
product lines or business units undertake portfolio
analysis to formulate corporate strategy.
•
• Advantages of portfolio analysis
• It encourage top management to evaluate each of
the business units individually and to set objectives
and allocate resources accordingly.
• It stimulates the use of externally oriented data to
supplement management’s judgement and decision.
• It raise the issue of each cash-flow availability for use
in expansion and growth.
• Its graphic depiction facilitates communication.
 Boston Consulting Group (BCG) Matrix
• The Boston Consulting group's product
portfolio matrix (BCG) is designed to help with
long-term strategic planning, to help a
business consider growth opportunities by
reviewing its portfolio of products to decide
where to invest, to discontinue or develop
products.
• BCG Matrix
• It is a well-known Portfolio Management tool. It is based
on product life cycle theory. It was developed in the early
70s by the Boston Consulting Group. The BCG Matrix can
be used to determine what priorities should be given in
the product portfolio of a business unit. To ensure long-
term value creation, a company should have a portfolio
of products that contains both high-growth products in
need of cash inputs and low-growth products that
generate a lot of cash. The Boston Consulting Group
Matrix has 2 dimensions: market share and market
growth. The basic idea behind it is: if a product has a
bigger market share, or if the product's market grows
faster, it is better for the company.
• The four segments of the BCG Matrix
• Placing products in the BCG matrix provides 4
categories in a portfolio of a company:
• Stars (high growth, high market share) - Stars
are using large amounts of cash. Stars are
leaders in the business. Therefore they should
also generate large amounts of cash. Stars are
frequently roughly in balance on net cash
flow. However if needed any attempt should
be made to hold your market share in Stars,
because the rewards will be Cash Cows if
market share is kept
• Cash Cows (low growth, high market share).
• Profits and cash generation should be high.
Because of the low growth, investments which
are needed should be low. Cash Cows are
often the stars of yesterday and they are the
foundation of a company.
• Dogs (low growth, low market share)
• Avoid and minimize the number of Dogs in a
company. Watch out for expensive ‘rescue
plans’. Dogs must deliver cash, otherwise they
must be liquidated.
• Question Marks (high growth, low market
share)
• Question Marks have the worst cash
characteristics of all, because they have high
cash demands and generate low returns,
because of their low market share. If the
market share remains unchanged, Question
Marks will simply absorb great amounts of
cash. Either invest heavily, or sell off, or invest
nothing and generate any cash that you can.
Increase market share or deliver cash.
• Limitations of the BCG Matrix include:
• It neglects the effects of synergy between business units.
• High market share is not the only success factor.
• Market growth is not the only indicator for attractiveness of a
market.
• Sometimes Dogs can earn even more cash as Cash Cows.
• The problems of getting data on the market share and market
growth.
• There is no clear definition of what constitutes a "market".
• A high market share does not necessarily lead to profitability all
the time.
• A business with a low market share can be profitable too.
The model neglects small competitors that have fast growing
market shares.
 The General electric (GE) McKinsey Matrix
• The General Electric with the assistance of the
McKinsey & Company consulting firm develop GE
matrix. The matrix is based on two dimension i.e.
market attractiveness and competitive position.
The GE matrix has nine cell grid suggested three
basic strategic approaches in the corporate portfolio
depending on its location within the grid i.e. invest ,
selective growth , manage for earnings, and harvest
or divest for resources. The grid cell, both market
attractiveness and competitive position are classified
into high, medium, low level.
Market attractiveness Competitive position

Market size and growth Market share

Cyclicality Marketing and sales force

Competitive structure Research and development

Barriers to entry Manufacturing

Industry profitability Distribution

Technology Financial resources

Regulation Managerial competency

Workforce availability, Political ,legal Competitive position regarding

social & environmental issue Image, Product line, Customer
service
•
• GE Matrix is divided in nine cells

• Competitive position

Strong Medium Weak

1. Invest 2. Selective 3.
growth Manage for
High earnings
4. 5. 6.
Selective Manage for Harvest
Market growth earnings
attractiveness Medium
7. 8. 9.Divest
Manage for Harvest
earnings
Low
• Successful SUBs in GE Matrix require high market
attractiveness and strong competitive position. The
matrix can be divide in three zones for strategic
alternatives.
• i) Cell 1,2,4, Invest Grow: SUBs in these cells are overall
successful. They should be given priority in portfolio.
More investment should be allowed.
• Ii) Cell 3,5,7 Grow or Let go: SUBs in these cells have
medium success and attractiveness. They should be
included in portfolio on a selective basis for investment.
• iii) Cell 6,8,9 Harvest/ Divest: SUBs in these cells have
low success and attractiveness. They should be divested
or closed down.
• GE matrix forces managers to give attention to
the design of appropriate portfolio. But the
positioning of SUBs in the cells is judgemental.
More over unattractive SUBs may not
necessarily be unprofitable. GE matrix
provides broad strategy guidelines only.
 Strategy evaluation
• The strategic options are carefully evaluated
and analysed for making strategic choices. The
following criteria are to be considered while
evaluating strategic alternatives. They are:
• Suitability
• Acceptability
• Feasibility
• 1. Suitability
• Suitability is concerned with environmental fit of
the strategic option. The environment of every
organization is specific and different from others.
The strategic option should address the
circumstances in which the organization is
operating. It should fit with the future trends and
changes in the environment. The strategic option
should be suitable from the following point of
view.
• Exploiting opportunities and avoiding threats.
• Capitalization on strength and avoiding weakness
• Addressing stakeholders expectations.
• The methods for suitability screening
suitability are:
• 1. Ranking 2.Decision Tree 3.Scenarios
• 1. Ranking – It is a systematic way of assessing
strategic options against a set of key factors in
the environment, resources and stakeholders
expectations. It compares strategic option
against the key strategic factors identified by
SWOT analysis. A rank is established by
assessing weights for each option to indicate
its suitability
• 2. Decision tree
• Under decision tree options are eliminated by
progressively introducing further requirement to
be met. The preferred options emerge by
eliminating other undesired options.
• 3. Scenario planning
• Scenario planning match strategic options to
different possible future scenario. This is useful if
high degree of uncertainty exists. It is a
contingency plan which identifies the preferred
options for each possible future scenario.