BUSINESS POLICY AND STRATEGIC

MANAGEMENT
CHAPTER-III

BY

Dr. A. SURESH KUMAR

Associate Professor
Department of Management
College of Business and Economics
Oda Bultum University
 STRATEGY FORMULATION
• Strategy formulation refers to the process of choosing the most appropriate course of action for the
realization of organizational goals and objectives and thereby achieving the organizational vision.
• Steps in strategy formulation
• The process of strategy formulation basically involves six main steps:
1. Setting Organizations’ objectives: strategy is a wider term which believes in the manner of deployment of
resources so as to achieve the objectives.
2. Evaluating the Organizational Environment: The next step is to evaluate the general economic and
industrial environment in which the organization operates. This includes a review of the organizations
competitive position.
3. Setting Quantitative Targets: To compare with long term customers, so as to evaluate the contribution that
might be made by various product zones or operating departments.
4. Aiming in context with the divisional plans: In this step, the contribution made by each

department or division or product category within the organization is identified and accordingly

strategic planning is done for each sub-unit.

5. Performance Analysis: Performance analysis includes discovering and analyzing the gap

between the planned or desired performance. A critical evaluation of the organizations past

performance, present condition and the desired future conditions must be done by the organization.

6. Choice of Strategy: The best course of action is actually chosen after considering organizational

goals, organizational strengths, potential and limitations as well as the external opportunities.
 Formulation of Corporate Strategy
• It describes a company's overall direction in terms of growth and management of its
various business and product lines.
• Corporate strategy deals with three key decisions related to:
 Allocating resources among different businesses of a firm.
 Transferring resources from one set of business to other.
 Managing and nurturing a portfolio of businesses.
• It is useful to organize the corporate level strategy considerations and initiatives into a
framework with the following four main strategy components: Expansion or Growth,
Stability, Retrenchment and combination strategy. These are discussed in the next three
sections.
a. Growth / Expansion Strategy: It includes Concentration, integration, Diversification,
Cooperation, and Internalization strategies.

b. Stability Strategy: It includes No change, Pause/proceed with caution and profit

strategies.

c. Retrenchment Strategy: It includes Turnaround, Divestment and liquidation

strategies.

d. Combination Strategy: It includes Simultaneous, sequential and combination of both

strategies.
 EXPANSION/GROWTH STRATEGY
• An expansion strategy is synonymous with a growth strategy. A firm seeks to achieve faster growth, compete, achieve
higher profits, grow a brand, capitalize on economies of scale, have greater impact, or occupy a larger market share.
This may entail acquiring more market share through traditional competitive strategies, entering new markets, targeting
new market segments, offering new produce or services, expanding or improving current operations.

• Below are common expansion strategies:

a. Expansion through Concentration: This involves focusing resource allocation and operational efficiency on one or a
selected group of business units or core business functions. Concentration might include:

 Penetrating an existing market with an existing value proposition (increase market share for present products or
services in present markets through greater marketing efforts);

 Developing a new market by attracting new customers to an existing value proposition;

 Developing a new value proposition to introduce in the existing market.

• The benefits of expansion through concentration are that it allows the firm to focus on
areas where it already has operations and a level of competency. It is comfortable to avoid
major changes in operations while employing existing knowledge.

• This type of strategy can be risky from the stand point of putting too many eggs in one
basket. Changes in the market (price fluctuations, customer sentiment, new value
propositions, etc.) may cause the strategy to be unsuccessful.
b. Expansion through Diversification: This strategy involves diversifying the value
offering of the company in one of two methods:
 Concentric/related diversification: which entails developing a new value proposition
that are related to existing value propositions; or
 Conglomerate/unrelated diversification: which entails entering into new markets (either
with an existing value proposition or by combining with another industry competitor)
• This strategy generally reduces specific industry risks, such as an economic downturn.
The profits of one value offering might offset losses in another business unit during
difficult times.
a. Expansion through Integration: Integration involves the consolidation of operational units
anywhere along the value chain to create greater efficiency and produce economies of scale.
Unlike other strategies, it does not involve making changes to existing markets or targeting new
customer groups. There are two primary types of integration:
 Vertical integration: involves consolidation up or down the value chain. Forward vertical
integration. It refers to the transactions between the customers and firm.
 Forward integration strategy involves gaining ownership or increased control over distributors
or retailers.
• 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.
• Horizontal integration: involves consolidating operations at the same point in the value chain.
This consolidation may be between business units or by acquiring or combining with competitors.
• Expansion through Cooperation: This strategy entails working closely with a competitor (while
potentially still competing against them in the market). Working with the competitor provides both
companies an advantage that trumps any advantage (or disadvantage caused to the competitor)
from not working together.

• Working together will generally provide operational efficiency to one or both competitors or
expand the market potential for one or both competitors. Working together may take the form of
consolidation of business units (mergers or acquisitions), strategic alliance (affinity group or
association), or joint venture (loose partnership-like alliance generally used to undertake a project
or enter into foreign markets).
a. Expansion through Internationalization: This method involves creating new markets for a
value offering by looking outside of the immediate nation. Generally, this option is preferable
when there is little room for expansion in domestic markets. Internationalization can be carried
out through the following strategic approaches:
 International Strategy- focusing on offering a value proposition in a foreign country without
modification of differentiation;
 Multi-domestic Strategy- involves modifying or differentiating a product to make it attractive or
suitable to foreign markets;
 Global Strategy- focuses on delivering the standardized value proposition in countries where
there is a low cost structure for delivery;
• Transnational Strategy- employs both a global and multi-domestic strategy by modifying or
differentiating a product in foreign markets where there is a low cost structure that results in
profits from delivering the value proposition.
 STABILITY STRATEGY
• As the name implies, a stability business strategy seeks to maintain operations and market size and
position. This strategy is characteristic of small risk-averse firms or firms operating in a very precarious
market that is comfortable with its current position.
• These strategies are generally broken into:
• No Change Strategies: a firm makes any considerable changes to its objectives or operations. The firm
examines the internal and external factors affecting the firm in its current operating and market
environment. The firm makes a conscious decision to maintain its current strategic objectives. This is most
common in low competition environments, with no major or market-shifting occurrences, and the firm’s
competitive position is stable. For example, firms operating in niche markets commonly choose a niche
(cost or differentiation) strategy and maintain that strategy until internal or external factors necessitate a
change.
• Profit Strategies: A profit strategy endorses any action necessary to maintain or improve profitability. This
may include cutting costs (operational efficiency, outsourcing), selling assets, raising prices, increasing
output (sales), or offsetting losses with profits from another business unit.

• This strategy is common with firms that are profitable but are facing temporary pressures that are
threatening their profitability, such as competition, market conditions, recession, inflation, cost escalations,
etc. If these pressures become long-term, a profit strategy risks harming the firm by reducing
competitiveness (particularly if the firm competes on cost or price).

• If a firm’s value offering or resources are becoming obsolete, the profit strategy may provide temporary
profits before the business unit is dissolved or otherwise disposed of. In any event, the strategy generally
does not involve the investment of new resources. Profitability is maintained with present levels or less
resources.
• Caution Strategies: This strategy requires a firm to wait and continue to assess the market before
employing any particular strategy. It is basically reconnaissance before strategic action is taken.
This is a temporary strategy employed for a limited time while deciding on a formal strategy to
pursue.

• It avoids making any significant investment of resources and discontinues any strategy formula
pursued until the firm has a full understanding of the market and the effect of former strategies.
This strategy is common among manufacturing companies evaluating the launch of new products.
 RETRENCHMENT STRATEGY
• A redemption strategy seeks to restructure, sell or otherwise divest a business unit. The purpose is to reduce
costs, streamline operations, or stabilize cash flow. The three primary types of retrenchment strategy are:
a. Turnaround Strategy: This is a restructuring strategy. It calls for realigning operations to be more cost
efficient or profitable. It often comes in response to an ineffective strategy causing harm to the company.
• Divestment Strategy: This means reducing operations or completing divesting (getting rid of) a business
unity. Generally, the operational unit will be losing money or not fit with the company’s core operational
objectives. Some the drivers of this strategy are negative cash flows, sustained losses, poor business
integration, better alternative use of assets, the value proposition is becoming obsolete, rising costs, or small
(non-growing) market share. The firm may now allocate resources to a more profitable or appropriately
aligned business unit. Generally, a divestment comes after a turnaround strategy has proved ineffective.
• Liquidation Strategy: A liquidation strategy is similar to a divestment. It focuses on selling
specific assets or shutting down business units. Unlike divestment, which seeks to streamline
operations and focus resource allocation, liquidation sees a business unit as a loss or failure.
Scenarios leading to a liquidation strategy include: extensive losses, lack of profitability, failure of
a current strategy, obsolete assets, or technology, ineffective processes, obsolete value proposition,
poor management, or lack of integration of the business unit.
 COMBINATION STRATEGY

• It is the combination of stability, growth & retrenchment strategies adopted by an organization,

either at the same time in its different businesses, or at different times in the same business with
the aim of improving its performance. For example, it is certainly feasible for an organization to
follow a retrenchment strategy for a short period of time due to general economic conditions and
then pursue a growth strategy once the economy strengthens.
• The obvious combination strategies include (a) retrench, then stability; (b) retrench, then growth;
(c) stability, then retrench; (d) stability, then growth; (e) growth then retrench, and (f) growth,
then stability.
• Reasons for adopting combination strategies are given below

 Rapid Environment change

 Liquidate one unit, develop another

 Involves both divestment & acquisition (take over)

a. Simultaneous Combination :

• This strategy can be used in the following way:

 Divesting a Strategic Business Units (SBU) or product line while at the same time adding
a SBU or product line somewhere else.

 For some products or businesses the company may adopt a turnaround strategy whereas
for others it may adopt a growth strategy.
• The company may be harvesting some products whereas for others it may follow a growth
strategy.
a. Sequential Combination :

• This can be used by the company in the following ways:

 At first employing a growth strategy and then switching over to a stability strategy.

 First employing a turnaround strategy and then using the growth strategy once the ground
level situation gets better.
 Formulation of Generic competitive strategy

• Generic strategies as the name suggests are generic in nature and is a way for a company
to pursue its competitive advantage across the market scope of choice. While the
advantage can be in the form of low cost or product differentiation the scope can be broad
(Industry-wide) or narrow (Market Segment).

• Keeping in mind these advantages and scope three generic strategies can be made: Cost
Leadership, Differentiation Strategy and Focus Strategy (Low Cost or Differentiated).
 Porter's Four Generic Competitive Strategies

• He argues that a business needs to make two fundamental decisions in establishing its competitive
advantage:

a. Whether to compete primarily on price (he says "cost," which is necessary to sustain
competitive prices, but price is what the customer responds to) or to compete through
providing some distinctive points of differentiation that justify higher prices, and
• How broad a market target it will aim at (its competitive scope). These two choices define the
following four generic competitive strategies.
 Sources of Competitive advantage

Low Cost High Cost

Broad Cost leadership Differentiation

business
where

Narrow Cost focus Differentiation focus

(Markets
scope
1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market by providing products or services at
the lowest price. This requires being the overall low-cost provider of the products or services (e.g., Costco, among retail
stores, and Hyundai, among automobile manufacturers). Implementing this strategy successfully requires continual,
exceptional efforts to reduce costs -- without excluding product features and services that buyers consider essential. It
also requires achieving cost advantages in ways that are hard for competitors to copy or match. Some conditions that
tend to make this strategy an attractive choice is:

 The industry's product is much the same from seller to seller

 The marketplace is dominated by price competition, with highly price-sensitive buyers

 There are few ways to achieve product differentiation that have much value to buyers

 Most buyers use product in same ways -- common user requirements

 Switching costs for buyers are low

 Buyers are large and have significant bargaining power

1. Differentiation: appealing to a broad cross-section of the market through offering differentiating features that make
customers willing to pay premium prices, e.g., superior technology, quality, prestige, special features, service,
convenience (examples are Nordstrom and Lexus). Success with this type of strategy requires differentiation features
that are hard or expensive for competitors to duplicate. Sustainable differentiation usually comes from advantages in
core competencies, unique company resources or capabilities, and superior management of value chain activities.
Some conditions that tend to favor differentiation strategies are:

 There are multiple ways to differentiate the product/service that buyers think have substantial value

 Buyers have different needs or uses of the product/service

 Product innovations and technological change are rapid and competition emphasizes the latest product features

 Not many rivals are following a similar differentiation strategy

1. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer segment and competing with lowest
prices, which, again, requires having lower cost structure than competitors (e.g., a single, small shop on a side-street
in a town, in which they will order electronic equipment at low prices, or the cheapest automobile made in the former
Bulgaria).

• Some conditions that tend to favor focus (either price or differentiation focus) are:

 The business is new and/or has modest resources

 The company lacks the capability to go after a wider part of the total market

 Buyers' needs or uses of the item are diverse; there are many different niches and segments in the industry

 Buyer segments differ widely in size, growth rate, profitability, and intensity in the five competitive forces, making
some segments more attractive than others

 Industry leaders don't see the niche as crucial to their own success

 Few or no other rivals are attempting to specialize in the same target segment
• Differentiation Focus: a second market niche strategy, concentrating on a narrow
customer segment and competing through differentiating features (e.g., a high-fashion
women's clothing boutique in Paris, or Ferrari).
 OFFENSIVE AND DEFENSIVE STRATEGY
• Offensive strategies: An offensive strategy consists of a company’s actions directed against the market
leaders to secure competitive advantage. Offensive business strategies involve taking proactive,
often aggressive action in the market. This action can be focused directly at competitors or aimed at securing
market share regardless of the existing competition.

• Offensive strategies include a dramatic reduction of price, a highly creative and imaginative advertising
campaign, or a uniquely designed new product that suddenly attracts customers substantially. An offensive
competitive strategy is a type of corporate strategy that consists of actively trying to pursue changes within
the industry.

• Companies that go on the offensive generally invest heavily in research and development (R&D) and
technology in an effort to stay ahead of the competition. They will also challenge competitors by cutting off
new or underserved markets, or by going head-to-head with them.
• Six types of offensive strategies

• Most companies go on offensive strategy to improve its market position. They usually are motivated by a
desire to win sales and market share at the expense of other companies in the industry. There are
six basic types of offensive strategy.

a. Frontal attack or Initiatives to match competitor’s strength.

b. Flank attack or Initiatives to capitalize on competitor weakness.

c. Encirclement attack or immediate initiatives on many fronts.

d. By pass attack or Leap frog strategy or End run offensive.

e. Guerrilla offensive.

f. Preemptive strikes.
 Frontal attack: A frontal attack is attacking a competitor ahead on by producing similar
products with similar quality and price; it is highly risky unless the attacker has a clear
advantage. In the frontal attack, firms concentrate on competitor’s strengths rather than
weaknesses.

 Flank attack: Flank attack is less risky when compared to that of frontal attack in which
firms attacking at the competitor’s weak point or blind spot. In this strategy firms follow
the path of least resistance where the competitor is incapable of defending.
 Encirclement attack: It is the combination of both frontal and flank attacks. Here the
challenging firm attacks the competitor firm on its entire major fronts i.e. strengths and
weaknesses. There are two strategies that can be used under the encirclement attack.
 Product encirclement: In this strategy, the challenger firm introduces different types of
products with varied features, quality and price.
• Market encirclement: In market encirclement strategy the challenger firm introduces the
products into the new market segments which are left untapped by the competitor’s
firms.
• Bypass attack: Bypass attack is the most indirect form of marketing strategy in which challenging firms produce next
generation products to occupy the competitor’s market share. Challengers may diversify into unrelated products with
new technology or may enter into new geographical markets. The challenger firm performs a thorough research and
produces next generation products in order to attract the more customers this strategy is also called as leapfrogging
strategy.
 Guerrilla attack: The guerrilla attack is expensive, but it is less than the frontal, flank and encirclement attacks. In
guerrilla warfare, the challenger firm applies strategies with an intention to demoralize and harass the competitor by
the following strategies.
 Giving free samples to the customers
 Allowing the customers to pay in any form i.e. cash, credit or debit cards
 Attracting new customers by giving advertisements in social networks
 By using powerful advertisement strategies
 Pre-emptive strategy: A "preemptive strategy" is simply the natural
advantage a company has when it is the first to serve a particular marketplace or
demographic. It can be exceptionally hard to unseat. Also known as "first-mover"
advantage.
• Defensive strategies: Defensive strategy is defined as a marketing tool that
helps companies to retain valuable customers that can be taken away by competitors.
Competitors can be defined as other firms that are located in the same market category or
sell similar products to the same segment of people. Defensive strategies are only used by
market leaders in strategic management.
• Types of defensive strategies
a. Position Defense: The position defense is the simplest defensive strategy. It simply
involves trying to hold the current position in the market. To do this, business
simply continues to invest in current markets and attempt to build their brand name
and customer loyalty. The problem with this strategy is that it can make a target for new
entrants to the market.
• Mobile Defense: The mobile defense involves making constant changes to business so that
it is difficult for competitors to compete. This can involve introducing new products,
entering new markets or simply making changes to existing products. This constant
moving between strategies requires a flexible business that can adjust to change.
a. Flanking Defense: When a firm uses the flanking defense, it defends its market share by
diversifying into new markets and niche segments. The idea behind the strategy is that if
business loses its market share in the existing market it can make up for it in these new
markets. The danger of the flanking defense is that it can stretch business resources thin and
pull attention away from main focus.

b. Counter-Offensive Defense: The counter-offensive defense is a retaliatory strategy. When a

competitor attacks business, it strike back with own attack. For instance, if business operate a
bakery that only produces gluten-free products and a competitor who produces regular bread
also begins producing gluten-free products, it could hit back at it by introducing regular bread
products.
• Contraction Defense: The contraction defense is the least desirable defense because it
involves retreating from markets. If a business doesn’t believe it can successfully defend
those markets, however, then it can be the best option. This allows redeploying the
resources into other areas.

• For example, imagine that you manufacture two products: liquid soap and bar soap. If you
find that you can no longer compete in the bar soap market, then it makes sense to retreat
from that market and focus on liquid soaps.