FORMULATION PROCESS STRATEGIC ANALYSIS AND CHOICE Strategic analysis and choice is the step in the strategic management

process whereby managers consider alternatives strategies and choose those that the firm will pursue. This step usually involve the choice of a corporate- level strategy identifying the business that the firm will be involved in and then the choice of the competitive strategy that each of the business will pursue Corporate Strategy Analysis an !"oi!e The analysis and choice of corporate strategy varies according to the complexity of the business involved. For firm that are predominantly in one line of business, corporate strategy is concerned with deciding whether to concentrate solely on that line of business or to become involved in other lines of business that are either related or unrelated to it. For firm that are already involved in several line of business, corporate strategy is concerned with deciding whether to increase the resource committed to the current line of business and whether to become involved in other lines that are either related or unrelated to them The challenge for corporate strategist using this perspective is to decide when the corporate conditions for movement to a new strategy. Strategists in single- business or dominant business firm face a choice among 1 grand strategies as they see! strategy alternatives that offer a strong fit with a firm"s overall situation. #e shall loo! at two ways of analy$ing this situation fit.

Gran Strategy Sele!tion Matri# %ne valuable guide to the selection of a promising grand strategy is the matrix shown in Figure 1 below Fig$re %
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Gran Strategy Sele!tion Matri#

%vercome #ea!nesses Turnaround or retrenchment &ivestiture (i)uidation *nternal ,redirected resources within the firm. 'oncentrated growth 0ar!et development 1roduct development *nnovation 0aximi$e Strengths. The basic idea underlying the matrix is that two variables are of central concern in the selection process3 ,1. the principal purpose of the grand strategy and , . the choice of an internal or external emphasis for growth and4 or profitability. *n the past, planners were advised to follow certain rules or prescriptions in their choice of strategies. 5ow, most experts agree that strategy selection is better guided by the conditions of the planning period and by company strengths and wea!nesses. 11 111 vertical integration 'onglomerate diversification +xternal ,ac)uisition or merger for resource capability. /ori$ontal integration 'oncentric diversification 2oint venture

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*t should be noted, however, that even the early approaches to strategy selection sought to match a concern over internal versus external growth with a desire to overcome wea!nesses or maximi$e strengths. The same considerations led to the development of the grand strategy selection matrix. 6 firm in )uadrant *, with 7all its eggs in one bas!et8 often views itself as over committed to a particular business with limited growth opportunities or high ris!s. %ne reasonable solution is vertical integration, which enables the firm to reduce ris! by reducing uncertainty about inputs or access to customers. 6nother is conglomerate diversification, which provides a profitable investment alternative without diverting management attention from the original business. /owever, the external approaches to overcoming wea!nesses usually result in the most costly grand strategies. 6c)uiring a second business demands large investments of time and si$able financial resources. Thus, strategic managers considering these approaches must guard against exchanging one set of wea!nesses for another. 0ore conservative approaches to overcoming wea!nesses are found in )uadrant **. Firms often choose to redirect resources from one internal business activity to another. This approach maintains the firm"s commitment to its basic mission, rewards success, and enables further development of proven competitive advantages. The least disruptive of the )uadrant ** strategies is retrenchment, pruning the current activities of a business. *f the wea!nesses of the business arose from inefficiencies, retrenchment can actually serve as a turnaround strategy that is, the business gains new strength from the streamlining of its operations and the elimination of waste. /owever, if those wea!nesses are a ma9or obstruction to success in the industry and the costs of overcoming them are unaffordable or are not 9ustified by a cost-benefit analysis, then eliminating the business must be considered.

Divestiture offers the best possibility for recouping the firm"s investment, but even liquidation can be an attractive option if the alternatives are ban!ruptcy or an unwarranted drain on the firm"s resources. 6 common business adage states that a firm should build from strength. The premise of this adage is that growth and survival depend on an ability to capture a mar!et share that is large enough for essential economies of scale. *f a firm believes that this approach will be profitable and prefers an internal emphasis for maximi$ing strengths, four grand strategies hold considerable promise. 6s shown in )uadrant ***, the most common approach is concentrated growth, that is, mar!et penetration. The firm that selects this strategy is strongly committed to its current products and mar!ets. *t strives to solidify its position by reinvesting resources to fortify its strengths. Two alternative approaches are market development and product development. #ith these strategies, the firm attempts to broaden its operations. 0ar!et development is chosen if the firm"s strategic managers feel that its existing products would be well received by new customer groups. 1roduct development is chosen if they feel that the firm"s existing customers would be interested in products related to its current lines. 1roduct development may also be based on technological or other competitive advantages. The final alternative for )uadrant *** firms is innovation. #hen the firm"s strengths are in creative product design or uni)ue production technologies, sales can be stimulated by accelerating perceived obsolescence. This is the principle underlying the innovative grand strategy. 0aximi$ing a firm"s strengths by aggressively expanding its base of operations usually re)uires an external emphasis. The preferred options in such cases are shown in )uadrant *-. Horizontal integration is attractive because it ma!es possible a )uic! increase in output capability.

0oreover, in hori$ontal integration, the s!ills of the managers of the original business are often critical in converting newly ac)uired facilities into profitable contributors to the parent firm< this expands a fundamental competitive advantage of the firm its management. 'oncentric diversification is a good second choice for similar reasons. =ecause the original and newly ac)uired businesses are related, the distinctive competences of the diversifying firm are li!ely to facilitate a smooth, synergistic, and profitable expansion. The final alternative for increasing resource capability through external emphasis is a 9oint venture. This alternative allows a firm to extend its strengths into competitive arenas that it would be hesitant to enter alone. 6 partner"s production, technological, financial, or mar!eting capabilities can reduce the firm"s financial investment significantly and increase its probability of success. Mo el o& Gran Strategy Cl$sters. 6 second guide to selecting a promising grand strategy is shown in Figure . The figure is base on the idea that the situation of a business is defined in terms of the growth rate of the general mar!et and the firm"s competitive position in that mar!et. #hen these factors are considered simultaneously, a business can be broadly categori$ed in one of four )uadrants3 ,*. Strong competitive position in a rapidly growing mar!et, ,**. #ea! position in a rapidly growing mar!et, ,***. #ea! position in a slow-growth mar!et, or ,*-. Strong position in a slow-growth mar!et. +ach of these )uadrants suggests a set of promising possibilities for the selection of a grand strategy.

FIGURE ' Mo el o& Gran Strategy Cl$sters(

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?apid mar!et @rowth 1. 'oncentrate growthA . -ertical integration :. 'oncentric diversification 1. ?eformulation of concentrated growthA . /ori$ontal integration :. &ivestiture ;. (i)uidation Strong competitive position 1. 'oncentric diversification . 'onglomerate diversification :. 2oint ventures 1 111 111 1. Turnaround or retrenchment . 'oncentric diversification :. 'onglomerate diversification ;. &ivestiture >. (i)uidation Slow mar!et growth Firms in )uadrant * are in an excellent strategic position. %ne obvious grand strategy for such firms is continued concentration on their current business as it is currently defined. #ea! competitive position

=ecause consumers seem satisfied with the firm"s current strategy, shifting notably from it would endanger the firm"s established competitive advantages. /owever, if the firm has resources that exceed the demands of a concentrated growth strategy, it should consider vertical integration. +ither forward or bac!ward integration helps a firm protect its profit margins and mar!et share by ensuring better access to consumers or material inputs. Finally, to diminish the ris!s associated with a narrow product or service line, a )uadrant * firm might be wise to consider concentric diversification< with this strategy, the firm continues to invest heavily in its basic area of proven ability. Firms in )uadrant ** must seriously evaluate their present approach to the mar!etplace. *f a firm has competed long enough to accurately assess the merits of its current grand strategy, it must determine ,1. why that strategy is ineffectual and , . whether it is capable of competing effectively. &epending on the answers to these )uestions, the firm should choose one of four grand strategy options3 formulation or reformulation of a concentrated growth strategy, hori$ontal integration, divestiture, or li)uidation. *n a rapidly growing mar!et, even a small or relatively wea! business is often able to find a profitable niche. Thus, formulation or reformulation of a concentrated growth strategy is usually the first option that should be considered. /owever, if the firm lac!s either a critical competitive element or sufficient economies of scale to achieve competitive cost efficiencies, then a grand strategy that directs its efforts toward hori$ontal integration is often a desirable alternative. 6 final pair of options involves deciding to stop competing in the mar!et or product area of the business. 6 multiproduct firm may conclude that it is most li!ely to achieve the goals of its mission if the business is dropped through divestiture.

This grand strategy not only eliminates a drain on resources but may also provide funds to promote other business. 6s an option of last resort, a firm may decide to li)uidate the business. This means that the business cannot be sold as a going concern and is at best worth only the value of its tangible assets. The decision to li)uidate is an undeniable admission of failure by a firm"s strategic management and is thus often delayed to the further detriment of the firm. Strategic managers tend to resist divestiture because it is li!ely to 9eopardi$e their control of the firm and perhaps even their 9obs. Thus, by the time the desirability of divestiture is ac!nowledged, businesses often deteriorate to the point of failing to attract potential buyers. The conse)uences of such delays are financially disastrous for firm owner because the value of a going concern is many times greater than the value of its assets. Strategic managers who have a business in )uadrant *** and expect a continuation of slow mar!et growth and a relatively wea! competitive position will usually attempt to decrease their resource commitment to that business. 0inimal withdrawal is accomplished through retrenchment< this strategy has the side benefits of ma!ing resources available for other investments and of motivating employees to increase their operating efficiency. 6n alternative approach is to divert resources for expansion through investment in other businesses. This approach typically involves either concentric or conglomerate diversification because the firm usually wants to enter more promising arenas of competition than forms of integration or development would allow. The final options for )uadrant ** businesses are divestiture, if and optimistic buyer can be found, and li)uidation. Duadrant *- businesses ,strong competitive position in a slow-growth mar!et. have a basis of strength from which to diversify into more promising growth areas.

These businesses have characteristically high cash flow levels and limited internal growth needs. Thus, they are in an excellent position for concentric diversification into ventures that utili$e their proven acumen. 6 second option is conglomerate diversification, which spreads investment ris! and does not divert managerial attention from the present business. The final option is 9oint ventures, which are especially attractive to multinational firms. Through 9oint ventures, a domestic business can gain competitive advantages in promising new fields while exposing itself to limited ris!s. Managing Di)ersi&ie Corporate Port&olios #hen a single or dominant- business firm is transformed into a collection of numerous businesses across several industries, strategic analysis become much more complex %ne of the early methods that attempted to aid corporate strategists in this tas! was the portfolio approach. Designing t"e *$siness Port&olio @uided by the companyFs mission statement and ob9ectives, management now. must plan its business portfolio-the collection of businesses and products that ma!e up the company. The best business portfolio is the one that best fits the companyFs strengths and wea!nesses to opportunities in the environment. =usiness portfolio planning involves two steps. First, the company must analy$e its current business portfolio and decide which businesses should receive more, less, or no investment. Second, it must shape the future portfolio by developing strategies for growth and downsi$ing. Analy+ing t"e C$rrent *$siness Port&olio

The ma9or activity in strategic planning is business portfolio analysis, whereby management evaluates the products and businesses ma!ing up the company. The company will want to put strong resources into its more profitable businesses and phase out or drop its wea!er ones. 0anagementFs first step is to identify the !ey businesses ma!ing up the company. These can be called the strategic business units. 6 strategic business unit ,S=H. is a unit of the company that has a separate mission and ob9ectives and that can be planned independently from other company businesses. 6n S=H can be a company division, a product line within a division, or sometimes a single product or brand. The next step in business portfolio analysis calls for management to assess the attractiveness of its various S=Hs and decide how much support each deserves. 0ost companies are well advised to Istic! to their !nittingI when designing their business portfolios. *tFs usually a good idea to focus on adding products and businesses that fit closely with the firmFs core philosophy and competencies. The purpose of strategic planning is to find ways in which the company can best use its strengths to ta!e advantage of attractive opportunities in the environment. So most standard portfolio analysis methods evaluate S=H"s on two important dimensions- the attractiveness of the S=H mar!et or industry and the strength of the S=H"s position in the mar!et or industry The best !nown portfolio-planning method was developed by the =oston 'onsulting group- a leading management consulting firm

THE BCG GROWTH SHARE MATRIX

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?elative 'ompetitive position ,mar!et share. /igh ST6? '6S/ '%# /igh 0ar!et @rowth ?ate (ow (ow DH+ST*%5 06?K &%@

T"e *oston !ons$lting gro$p approa!" Hsing the =oston 'onsulting @roup ,='@. approach a companv classifies all its S=Hs according to the growth-share matrix shown above. %n the vertical axis, market growth rate provides a measure of mar!et attractiveness. %n the hori$ontal axis, relative market share serves as a measure of company strength m the mar!et. The growth-share matrix defines four types of S=Hs3 Stars. Stars are high-growth, high-share businesses or products. They often need heavy investment to finance their rapid growth. +ventually then growth will slow down, and they will turn into cash cows. Cash cows. 'ash cows are low-growth, high-share businesses or products. These established and successful S=Hs need less investment to hold their mar!et share. Thus, they produce a lot of cash that the company uses to pay its bills and to support other S=Hs that need investment( Question mar s. Duestion mar!s are low-share business units in high-growth mar!ets. They re)uire a lot of cash to hold their share, let alone increase it. 0anagement has to thin! hard about which )uestion mar!s it should try to build into stars and which should be phased out.
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!o"s. &ogs are low-growth, low-share businesses and products. They may generate enough cash to maintain themselves but do not promise to be large sources of cash. %nce a company has classified its S=Hs, the company must determine what role each will play in the future. %ne of four strategies can be pursued for each S=&. The company can invest more in the business unit in order to build its share. %r it can invest 9ust enough to hold the S=HFs share at the current level. *t can harvest the S=H, mil!ing its short-term cash flow regardless of the long-term effect. Finally, the company can divest the S=H by selling it or phasing it out and using the resources elsewhere. 6s time passes, S=Hs change their positions in the growth-share matrix. +ach S=H has a life cycle. 0any S=Hs start out as )uestion mar!s and move into the star category if they succeed. They later become cash cows as mar!et growth falls, then finally die off or turn into dogs toward the end of their life cycle. The company needs to add new products and units continuously so that some of them will become stars and, eventually, cash cows that will help finance other S=Hs. ,"at -e"a)ioral &a!tors an !onsi erations !an a&&e!t strategi! !"oi!es. 1. ?ole of current strategy - #ho has an interest in maintaining the status )uoL . &egree of the firmFs external dependence - 6re we dependent on another firmL for whatL %rgani$ational dependence refers to the ability of managers to influence the actions of customers and suppliers. The lower the influence of managers on customer and supplier actions, the greater the organi$ational dependence on customers and suppliers. For example, a company with a single ma9or customer is often very dependent on that customer for future sales.

:. 0anagement attitudes toward ris! - 'an we afford a lossL how muchL ;. *nternal political considerations - #ho is involved in the decisionL 6re there any hidden agendasL >. Timing issues o time constraints - #hen do we need to ma!e a decisionL o when action should occur for maximum impact - #hen should we ta!e actionL o planning time hori$on - #hat is an appropriate planning hori$onL B. 'ompetitive reaction - /ow will our competitors react to our proposed actionL Strategy C"oi!e Criteria 1. Consistent. *s the proposed strategy consistent with the organi$ationFs environment, internal capabilities and characteristics, available resources, and ris! preferencesL . Goal/Dire!te . *s the strategy aimed at clearly identified goalsL :. Appropriate Ti0ing. &oes the strategy appear to have appropriate timing relative to competitors and does it minimi$e action conflictsL ;. Fle#i-le. &oes the strategy allow sufficient flexibility to deal with competitorsF responses and environmental changesL >. Strong S$pport. *s the companyFs leadership committed to the strategyL General Criteria &or E)al$ating Strategies 6cceptability test examines the attitudes that ma9or sta!eholders will have toward the proposed strategy. +conomic feasibility test focuses on returns and costs in both the short and long-term. %perational ris! refers to the possibility that new strategies and plans will fail. #or!ability test determines if the strategy will wor!

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