UNIT-3

STRATEGIC FORMULATION
Meaning of Strategy Formulation:
Strategy formulation is the process of offering proper direction to a firm.
It seeks to set the long-term goals that help a firm exploit its strengths fully and
encash the opportunities that are present in the environment. There is a conscious
and deliberate attempt to focus attention on what the firm can do better than its
rivals. To achieve this, a firm seeks to find out what it can do best. Once the
strengths are known, opportunities to be exploited are identified; a long-term plan
is chalked out for concentrating resources and effort.
A well-designed strategy will help an organization reach its maximum
level of effectiveness in reaching its goals while constantly allowing it to monitor
its environment to adapt the strategy as necessary. Strategy Formulation is the
process of developing the strategy. And the process by which an organization
chooses the most appropriate courses of action to achieve its defined goals. This
process is essential to an organization’s success, because it provides a framework
for the actions that lead to the anticipated results.
Sometimes Strategic Formulation called “Strategic Planning” A
strategic plan also enables an organization to evaluate its resources, allocate
budgets, and determine the most effective plan for maximizing ROI (return on
investment). A company that has not taken the time to develop a strategic plan
will not be able to provide its employees with direction or focus.
Definition: Strategy Formulation is an analytical process of selection of the best
suitable course of action to meet the organizational objectives and vision. It is one
of the steps of the strategic management process. The strategic plan allows an
organization to examine its resources, provides a financial plan and establishes
the most appropriate action plan for increasing profits.

Steps of Strategy Formulation

The steps of strategy formulation include the following:

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1. Establishing Organizational Objectives: This involves establishing
long-term goals of an organization. Strategic decisions can be taken once
the organizational objectives are determined.
2. Analysis of Organizational Environment: This involves SWOT analysis,
meaning identifying the company’s strengths and weaknesses and keeping
vigilance over competitors’ actions to understand opportunities and threats.
Strengths and weaknesses are internal factors which the company has
control over. Opportunities and threats, on the other hand, are external
factors over which the company has no control. A successful organization
builds on its strengths, overcomes its weakness, identifies new
opportunities and protects against external threats.
3. Forming quantitative goals: Defining targets so as to meet the company’s
short-term and long-term objectives. Example, 30% increase in revenue
this year of a company.
4. Objectives in context with divisional plans: This involves setting up
targets for every department so that they work in coherence with the
organization as a whole.
5. Performance Analysis: This is done to estimate the degree of variation
between the actual and the standard performance of an organization.
6. Selection of Strategy: This is the final step of strategy formulation. It
involves evaluation of the alternatives and selection of the
best strategy amongst them to be the strategy of the organization.

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 Strategy formulation process is an integral part of strategic management, as it
helps in framing effective strategies for the organization, to survive and grow
in the dynamic business environment.

TYPES OF STRATEGIES
(A)INTENSIVE STRATEGIES/CONCETRATION STRATEGIES
Intensive strategies are those strategies, which demand furthermore intensive
efforts to improve the performance of existing products in the market. We may
also say that when an organization struggles to improve its competitive position
with the current products then different types of intensive strategies should be
considered.
The aim of intensive strategies is to broaden the market share and to increase the
profit by making the existing products more effective and by introducing new and
various sets of products in order to increase the market share too.
Types of Intensive Strategies in Strategic Management
1. Market Penetration
2. Market Development
3. Product Development
Each one is discussed below in detail:
1. Market Penetration
In this strategy, the organization tries to enhance its market share through greater
marketing efforts for its present products or services. This means that the
organization does not launch new products or does not modify its existing
products.
Rather it increases the sales volume of its existing products by focusing more on
the marketing efforts in the existing markets. Market Penetration Strategies are
used both solely & together with other strategies. Marketing penetration includes
effective marketing efforts which are as follows.
• Enhancing the number of salespersons
• The advertising expenditure is enhanced
• Sales promotion items are extensively offered
• The publicity efforts are enhanced
Guidelines for Market Penetration

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There are certain conditions that are more suitable to the market penetration
strategy. In order to make market penetration strategy effective, certain guidelines
should be followed by the organization in this regard.
• When the current markets are not much saturated
• The present customers are positively forced to increase the usage rate of
the products of the market
• The condition in which the market share of the competitors fall while there
is sales growth in the overall industry
• Major competitive advantages are availed by the greater economies of
scale
Aspects of Market Penetration
Market penetration has two aspects which are as follow
a) Rapid Market Penetration: The following two assumptions are based on it.
• To decrease the price
• To increase the promotional activities
b) Slow Market Penetration: Two assumptions are based on it, which are as
follow
• To decrease the price
• Promotional activities remain the same

2. Market Development

Market development strategy is the kind of intensive strategy in which

the business Organization launches its existing products in the new markets or
geographical areas. This means that the organization does not introduce new or
modified products rather the products remain the same but the new markets are
added by entering into new geographical areas.

In recent years market development is rapidly employed on an international basis

where multinational companies increase the market share by entering new regions
& countries of the world through their existing products. Furthermore, the airline
industry must also consider proper market development in the international
market for its survival.

Guidelines for Market Development

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There are certain conditions where the market development strategy can be more
effective. For this purpose following are some important guidelines that need to
be considered while pursuing this strategy.

• New distribution channels should be approached that are inexpensive,

reliable & have good quality
• The organization become successful in its current operations
• When there are unsaturated or untapped markets available
• Human & capital resources are essential factors for managing the
expanding operations of the organization
• The condition when the production capacity is excessive enough
• The basic industry is quickly converted into a global one

3. Product Development

In this strategy, the organization tries to improve its competitive position & sales
through improvement & modification in its existing products. Usually, there are
large portions of expenditures that are associated with the New Product
Development Strategy as it requires detailed research & development activities
to modify or improve the products.

There is a better example of a product development strategy that is employed by

US postal service that offers postage & stamps through the Internet. The stamps
are acquired from a number of online websites like stamps.com etc., which are
printed through an inkjet printer or ordinary laser.

Guidelines for Product Development

There are certain conditions that make the product development strategy much
more effective. The following are some of the guidelines in this regard.

1. When the product is passing through the maturity stage of its life cycle
2. The industry where there are much more technological advancements
occurring is effective for the employment of new product development
strategy by the relating organizations
3. Most of the competitors offer high-quality products at reasonable rates
4. The industry that shows high growth is favourable for the product
development strategy
5. The organization with potential research & development capabilities is
more suitable for this strategy.

(B)INTEGRATION STRATEGIES

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Integration strategy is a strategy combining business activities related to the
present activity of a firm. Such a combination may be done through value chain.
A value chain is a set of interrelated activity performed by an organization right
from the procurement of basic raw materials down to the marketing of finished
products to the ultimate customers. Integration strategy is also known as
management control strategy. As the name implies, it provides the business an
option to have control over various processes like competitors, suppliers, or
distributors.
Types of integration strategies in Strategic Management:
1. Horizontal integration and
2. Vertical integration
(1)Horizontal integration:
The horizontal integration is the acquisition of business activities that are at the
same level of the value chain in similar or different industries.
In simpler terms, horizontal integration is the acquisition of a related business: a
fast-food restaurant chain merging with a similar business in another country to
gain a fast food restaurants in foreign markets.

Advantages of horizontal integration:

The advantages of horizontal integration are economies of scale, increased
differentiation (more features that distinguish it from its competitors), increased
market power, and the ability to capture new markets.
• Economies of scale: The bigger, horizontally integrated company can
achieve a higher production than the companies merged, at a lower cost.
• Increased differentiation: The Company will be able to offer more product
features to customers.
• Increased market power: The new company, because of the merger of
companies, will become a bigger customer for its old suppliers. It will
command a bigger end-product market and will have greater power over
distributors.
• Ability to enter new markets: If the merger is with an organisation abroad,
the new company will have an additional foreign market.
Disadvantages of horizontal integration strategy
▪ Rigidness. Sometimes horizontal integration brings a lot of benefits in
many ways. But it becomes bigger and loses its management and

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 operational flexibility. The functionality of the company becomes so rigid
that it would become very difficult to change it.
▪ Legal Issues. The acquiring and merging companies should keep in mind
the legal issues. If the alliance of two firms becomes a monopoly and it
threatens to end the business of competitors permanently, then it would
result in serious legal issues
(2)Vertical integration:
Vertical integration is a competitive strategy by which a company takes complete
control over one or more stages in the production or distribution of a product.
A company opts for vertical integration to ensure full control over the supply of
the raw materials to manufacture its products. It may also employ vertical
integration to take over the reins of distribution of its products.
Types of Vertical Integration:
There are basically three types of vertical integration. They are;
a) Backward Integration.
b) Forward Integration.
c) Combined/ balanced Integration
(a) Backward Integration:
Simply involves the business taking ownership/ control over its suppliers. It
involves itself in a backward stage of the supply chain. Using our bakery as an
example, we can understand backward integration better. If the bakery doesn’t
like dealing with the suppliers, they can go ahead and buy their suppliers’
business and hence control it. This is what is referred to as backward integration.
It is used by businesses that feel the need for total control of their suppliers to
reduce deficiencies in the supplier’s work.
(b) Forward Integration:
When a business takes over the distribution system and sells its products/services
directly to the customers. In this case, the bakery can decide to control the retailers
of its product or sets a retail store for itself. This is done by many businesses that
feel the retailers of their good are taking advantage of the customers. It is also
done by businesses that want to get rid of counterfeit goods by recommending
that customers only buy from their retail stores.
(c)Combined/ balanced Integration:
There is a third type of vertical integration, called balanced integration, which is
a judicious mix of backward and forward integration strategies. Here the business

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acquires both raw material supply chain and distribution channels to control
everything.
Advantages of vertical integration:
▪ Effectiveness. When a company buys either one of the channels or both,
its productivity and core effectiveness would increase.
▪ Cost & Profit. The most important benefit of vertical integration that it
helps the company to lower the cost and the business makes more profit as
a result.
▪ Efficient. When a company takes over the distribution channels, it allows
the company to carefully deliver the final products.
▪ Smooth Supply. It allows the company to have a smooth supply of raw
material without inconsistency.
Disadvantages of vertical integration:
▪ Management Issues. When a company integrates with either one of the
channels, it changes the company’s focus on the supply chain or the
distribution channels. The company’s core products suffer resultantly.
▪ Sustainability Problem. The company increases the supply of raw
materials to achieve economies of scale. It loses control over the
production of raw material.
▪ Low Quality. When you remove the competition from the market, the
quality of the raw material or the finished goods would fall

(C)DIVERSIFICATION STRATEGIES
Diversification strategy is a business growth strategy identified by a company
developing new products in new markets. Diversification is used by businesses
to help them expand into markets and industries that they haven’t currently
explored. This is achieved by adding new products, services, or features that will
appeal to the customers in these new markets. Diversification strategies help to
increase flexibility and maintain profit during sluggish economic periods.
THIS IS EXPLAINED BY USING ANSOFF MATRIX:
The Ansoff Matrix
These four growth strategies were identified by Ansoff using a 2×2 matrix (now
known as the Ansoff Matrix) and was made up of new or existing products on
one axis and new and existing markets on the other. The Ansoff matrix is a widely

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used strategic planning tool that provides a simple, yet effective framework to
help companies plan and implement an effective growth strategy.

TYPES OF DIVERSIFICATION STRATEGIES:

(1)Horizontal Diversification:
If the company decides to add products or services that are related or unrelated to
what you offer currently, but may meet some more needs of your existing
customers, this is known as horizontal diversification.
There are two types of horizontal diversification
• Concentric Diversification
• Conglomerate Diversification
(a)Concentric Diversification:
Concentric diversification, a type of horizontal diversification, involves
introducing new products or services to your product/service line that are closely
related to your existing products or service.
Concentric diversification occurs when a company enters a new market with a
new product that is technologically similar to their current products and therefore
are able to gain some advantage by leveraging things like industry experience,
technical know-how, and sometimes even manufacturing processes already in
place.
A concentric diversification strategy lets a firm to add similar products to an
already established business. Concentric diversification can be beneficial if sales
are declining for one product, as loss in revenue can be offset by a rise in sales
from other products.

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For example, when a computer company producing personal computers using
towers starts to produce laptops, it uses concentric strategies. The technical
knowledge for new venture comes from its current field of skilled employees.
(b) Conglomerate Diversification:
Conglomerate Diversification is a type of horizontal diversification, means to
introduce brand new products or services that have no relation to your business’s
current product offering, therefore entering a completely new market and
appealing to customers that may have had zero interest in your business
previously.
In conglomerate diversification strategies, companies will look to enter a
previously untapped market. This is often done using mergers and acquisitions.
The term conglomerate refers to a single corporate group operating multiple
business entities within entirely different industries.
Moving into a new industry is highly dangerous, due to unfamiliarity with the
new industry. Brand loyalty may also be reduced when quality is not managed.
However, this strategy offers increasing flexibility in reaching new economic
markets.
For example, a company into automotive repair parts may enter the toy
production industry
(2)Vertical Diversification:
Vertical diversification also referred to as vertical integration, entails a growth
strategy where the company expands its product line through a forward or
backward integration of products within its existing supply chain
Vertical diversification has a number of benefits, including:
• strengthening and enhancing your business’s supply chain,
• capturing upstream or downstream profits,
• accessing new distribution channels and
• Gaining more revenue.

MICHAEL PORTER GENERIC STRATEGIES

Michael Porter, a professor at Harvard Business School, wrote several well-
known books about competitive strategies for businesses. His works on generic
strategies are popular worldwide, and are used by all levels of management.

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In 1985, in his book Competitive Advantage: Creating and Sustaining Superior
Performance, Michael Porter, outlined a set of generic strategies that could be
applied to all products or services. Porter believed that a business must identify
and implement a clear strategy to beat the competition and survive in the long
term.
Porter's generic strategies are as follows:
Cost Leadership Strategy.
Differentiation Strategy.
Cost Focus.
Differentiation Focus.

(1)Cost Leadership
A cost leadership strategy works if the company can produce its products at the
lowest cost in the industry. This strategy is commonly used in markets with
products that are not distinctly different from each other. They are "standard"
products in a broad market, frequently purchased and universally accepted by
most consumers.
To become a cost leader, a company strives to reach the lowest cost of production
with the least distribution cost so that it can offer the cheapest price in the market.
With the lowest price, the company hopes to attract the most buyers and dominate
the market by driving competitors out.

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A successful cost leadership strategy requires the optimization of all aspects of a
company's operations. To become the lowest-cost producer, a business might
pursue the following:
• Productivity: Study any process that uses labour and find ways to improve
productivity and increase efficiency.
• Bargaining power: One way to lower the cost of production is to exploit
the economies of scale. Higher volumes enable the business to negotiate
lower prices from material suppliers and reduced costs for transportation.
• Technology: Improvements in technology happen rapidly, and a company
must invest in the latest innovations to remain competitive.
• Distribution: As with technology, the methods of distribution are
constantly evolving. Businesses must continuously analyse changes in
distribution costs to find the lowest cost to transport their goods.
• Production methods: Lowering the cost of production is a continuous
process. For example, implementing just-in-time inventory controls for
raw materials is a way to reduce financing costs of assets.

Walmart is one of the most well-known companies that has an effective cost
leadership strategy. Their approach is to market to the largest number of
customers with the lowest prices on all of its products.
The company has been able to dominate the low-cost market by negotiating price-
volume discounts with suppliers and building an incredibly cost-efficient
distribution system. Walmart works with all of its internal processes to operate at
the lowest cost.
(2)Differentiation Strategy
A differentiation strategy requires the company to offer products with unique
characteristics that consumers believe have value and are willing to pay more for
them. If consumers perceive that these unique properties are worthwhile, the
company can charge premium prices for its products.
Ideally, the premium prices will be more than enough to offset the higher costs
of production and allow the company to make a reasonable profit.
Companies that succeed with a differentiation generic marketing strategy need to
have a talented and creative product development staff. These people must have
the ability to survey the market and get into the minds of the potential buyers to

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identify the features that will attract consumers and make them willing to pay
more for the products.
Having a unique product is not the end of the story. The implementation of a
differentiation strategy requires a sales team that has the skills to effectively
communicate the unique properties of the products and convince consumers that
they are receiving more value for their money. At the same time, marketing
campaigns should promote and establish the company as a reputable firm known
for high-quality and innovative products.
A differentiation strategy has several risks. Competitors will not remain idle when
losing market share; they will find ways to imitate products and begin their own
differentiation campaigns.
Another risk is changing consumer tastes. Unique product characteristics that
capture the minds of consumers at one time can fade away as competitors
introduce other features that catch the eyes of buyers.
(3)Cost Focus
A cost focus strategy centres on a limited market segment or a particular niche. It
requires the company to understand the market and the unique needs of those
specific customers.
Companies that pursue a cost focus strategy are taking a risk by abandoning the
mass market. While concentrating on a specific demographic may develop a loyal
pool of customers, the company is basing its fortunes on a small group of buyers.
The features that are attractive to this niche market may not appeal to the broader
market.
(4)Differentiation Focus
Like a cost focus strategy, the differentiation focus approach aims for a narrow
niche market. In this case, the company finds unique features of its products that
appeal to a particular group of customers.
However, the company is depending on the spending habits of a small group of
consumers for its profits. If this group changes its tastes, the company will have
difficulty switching direction to start selling to the mass market.
A successful differentiation focus strategy depends on developing a strong brand
loyalty from its customers and constantly finding unique features to stay ahead of
the competition.

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