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Strategy Formulation
Module III
Rajan Shah
SIMCA, Vijapur
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Learning Objectives
What is Strategy??
Understanding Strategic Management Process
Levels of Strategy Formulation
A. Corporate Level Strategy
B. Business Level Strategy
C. Operational Strategy Summary
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What is Strategy???
Strategy is the direction and scope of an
organisation over the long-term: which achieves
advantage for the organisation through itsconfiguration of resources within a challenging
environment, to meet the needs ofmarkets and
to fulfill stakeholderexpectations
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Contd
* Where is the business trying to get to in the long-term (direction)
* Which markets should a business compete in and what kind of activities
are involved in such markets? (markets; scope)* How can the business perform better than the competition in those
markets? (advantage)?
* What resources (skills, assets, finance, relationships, technical
competence, facilities) are required in order to be able to compete?
(resources)?* What external, environmental factors affect the businesses' ability to
compete? (environment)?
* What are the values and expectations of those who have power in and
around the business? (stakeholders)
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Strategic Management Process
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Strategic Analysis
Analyzing the strength ofbusinesses' position and
understanding the important external factors that
may influence that position.
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Contd
PEST Analysis - a technique for understanding the "environment" in which a business
operates
Scenario Planning- a technique that builds various plausible views of possible futures for a
business
Five ForcesA
nalysis - a technique for identifying the forces which affect the level ofcompetition in an industry
Market Segmentation - a technique which seeks to identify similarities and differences
between groups of customers or users
Directional Policy Matrix - a technique which summarises the competitive strength of a
businesses operations in specific markets
CompetitorAnalysis - a wide range of techniques and analysis that seeks to summarise abusinesses' overall competitive position
CriticalSuccess FactorAnalysis - a technique to identify those areas in which a business
must outperform the competition in order to succeed
SWOT Analysis - a useful summary technique for summarising the key issues arising from
an assessment of a businesses "internal" position and "external" environmental
influences.
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Strategic Choice
This process involves understanding the nature of
stakeholder expectations (the "ground rules"),
identifying strategic options, and then evaluatingand selecting strategic options.
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Strategic Implementation
Often the hardest part
When a strategy has been analysed and
selected, the task is then to translate it into
organisational action
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Corporate Level Strategy
It is concerned with the overall purpose and scope of
the business to meet stakeholder expectations.
This is a crucial level since it is heavily influenced byinvestors in the business and acts to guide strategic
decision-making throughout the business.
Corporate strategy is often stated explicitly in a
"mission statement". Specifies actions a firm takes to gain a competitive
advantage by selecting and managing a group of
different businesses competing in different product
markets
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Contd
Various Corporate Level Strategies are:
A. Vertical Integration
B. DiversificationC. Joint Venture
D. Strategic Alliances
E. Mergers & AcquisitionsF. New Ventures
G. Business Portfolio Restructuring
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A. Vertical Integration
Expanding operations backward into an industry
that produces inputs for the company or forward
into an industry that distributes the companysproducts
In short, company acquires its suppliers or start
producing raw material on its own
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Contd
Raw Materials
Manufacturing
Distribution
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Contd
Raw Materials
Manufacturing
Distribution
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Types of VI
Backward Vertical Integration When it controls subsidiaries that produce some of the
inputs used in the production of its products for instance,an automobile company may own a tire company
Eg. Ford Motors approach in 1920s
Forward Vertical Integration It controls distribution centres and retailers where its
products are sold.
Eg. Oil Companies own retail petrol pumps
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Examples
o American Apparel
Los Angeles based fashion retailer and manufacturer
Control the dyeing, finishing, designing, sewing, cutting,marketing and distribution of the company's product
o ExxonMobil / BP / Royal Dutch Shell
Deposits, drilling and extracting crude, transporting it around
the world
o Reliance
Manufactured its own polyester fibers
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Advantages VI
Building barriers to entry
Eg. Nirama, in Soda Ash manufacturing
Big Bazaar acquiring a Sugar Manufacturing firm Facilitating investments in specialized assets
Protecting product quality
Eg. McDonalds products
Improved scheduling
Eg. Ford Motors
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Disadvantages VI
Cost disadvantages
Company-owned suppliers that have higher costs
than external suppliers
Eg. Coca Cola owned its bottlers but later on itfocused on manufacturing and innovating soft drinks
Rapid technological change
Tying a company to an obsolescent technology
Eg. Adobe
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Contd
Demand unpredictability
Difficulty of achieving close coordination
among vertically integrated activities
Eg. PC manufacturing company
Bureaucratic costs
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B. Diversification
Basic questions to be asked???
Grow a capability
Poor business prospects
Smooth out cyclicality
Balance a portfolio
Reduce one type of risk Too much cash?
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When Does Diversification
Start to Make Sense?Strong competitive position,
rapid market growth -- Not
a good time to diversify
Eg. Jet Airways, IKEA
Weak competitive position,
rapid market growth -- Not
a good time to diversify
Eg. Maxx Mobile
Strong competitive position,
slow market growth --
Diversification is toppriorityconsideration
Eg. IBM in PC market to server
Weak competitive position,
slow market growth --
Diversification meritsconsideration
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Related vs. Unrelated
DiversificationRelated Diversification
Involves diversifying into
businesses whose value
chains possess competitively
valuable strategic fits with
the value chain of the firms
present business
Sometimes known as
concentric diversification
Unrelated Diversification
Involves diversifying into
businesses where there is no
deliberate effort to seek out
businesses having strategic fit
with the firms other business
Sometimes known as
conglomerate diversification
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What is Related Diversification?
(L
owL
evel)
Involves diversifying into businesses whose
value chains possess competitively valuable
strategic fits with the value chain of thepresent business
Capturing the strategic fits makes related
diversification a1 + 1 = 3
phenomenon
Firms in the organization do better together
than they could have alone. Synergy occurs!
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Concept: Strategic Fit
Exists wheneverone or more activities in the value
chains of different businesses are sufficiently similarto present opportunities for
Transferring competitively valuable expertise ortechnological know-how from one business toanother
Combining performance of common value chain
activities to achieve lower costs Exploitinguse of a well-known brand name
Cross-business collaboration to createcompetitively valuable resource strengths and
capabilities
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Contd.
Cross-business strategic fits can exist anywhere
along the value chain
R&D and technology activities
Supply chain activities
Manufacturing activities
Distribution activities
Sales and marketing activities
Managerial and administrative support activities
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Few Examples
Bajaj Autos Entry into Three & Four Wheeler
Coca Colas offering in bottled water i.e. Kenly
LG / Samsung / Sony for all their Electronics products Indian bank entered into Insurance business
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What is Unrelated
Diversification? (HighL
evel) Involves diversifying into businesses with
No strategic fit
No meaningful value chainrelationships
No unifying strategic theme
Approach is to venture into any business
in which we think we can make a profit Firms pursuing unrelated diversification are often
referred to as conglomerates
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Few Examples.
Virgin Group
Tatas venture into Electronics i.e. Croma
Torrent Pharma enters into Electricity business
Googles Acquisition of YouTube, Orkut
ITC from Tobacco based business to hotels
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Criteria For Unrelated
Diversification
Can business meet corporate targets forprofitabilityand ROI?
Will business require substantial infusions ofcapital?
Is business in an industry with growth potential? Is business big enough to contribute to the parent
firms bottom line? Is there potential for union difficulties or adverse
government regulations? Is industry vulnerable to recession, inflation, high
interest rates, or shifts in government policy?
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Summary
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Strategies for Entering
New Businesses
Acquire existing company
Internal start-up
Joint venture/strategic partnerships
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Acquisition of an Existing
Company
Most popular approach to diversification
Advantages
Quicker entry into target market Easier to hurdle certain entry barriers
Technological inexperience
Gaining access to reliable suppliers
Being of a size to match rivals in terms of
efficiency and costs
Getting adequate distribution access
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Internal Startup
More attractive when
Ample time exists to create a newbusiness from ground up
Incumbents slow in responding to new entry
Less expensive than buying an existing firm
Company already has most of needed skills, likeproprietary technology
Additional capacity will not adversely impactsupply-demand balance in industry
New start-up does not have to go head-to-headagainst powerful rivals
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Joint Ventures and Strategic
Partnerships
JV= new entity created
SP = working agreement between 2 or more firms
Good way to diversify when
Uneconomical or risky to go it alone
Pooling competencies of two partners provides morecompetitive strength
Foreign partners are needed to surmount
Import quotas Tariffs
Nationalistic political interests
Cultural roadblocks
Lack of knowledge about markets of particular countries
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Turnaround (retrenchment)
Strategies: The Options
Sell or close down a portion of operations
Shift to a different, and hopefully better, business-level
strategy
Launch new initiatives to boost
revenues
Pursue cost reduction
Combination of efforts