FORMULATING STRATEGIES

MODULE-6

Formulating long term and Grand strategies

A number of business writers have emphasized that strategy is the outcome of a formal
planning process and that top management plays the most important role in this process.
The task of analyzing the organization’s external and internal environment and then
selecting an appropriate strategy is normally referred to as strategy; formulation. In
contrast, strategy implementation typically involves designing appropriate organizational
structures and control systems to put the organization’s chosen strategy into action.

The planning process has 5 main steps

1. Select the corporate mission and major corporate goals.

2. Analyze the organization’s external competitive environment to identify
opportunities and threats.
3. Analyze the organization’s internal operating environment to identify the
organization’s strengths and weaknesses.
4. Select strategies that build on the organization’s strengths and correct its
weaknesses in order to take advantage of external opportunities and counter
external threats.
5. Implement the strategies

Grand Strategies;

Identification of various alternative strategies is an important aspect of strategic

management as it provides the alternatives which can be considered and selected for
implementation in order to arrive at certain results The basic objective of identification
of strategic alternatives is two fold: First, the managers should be aware about the
various courses of action available to them and second, even if large number of possible
alternative actions are available to them, even if large number of possible alternative
actions are available, they should be in a position to limit themselves to various relevant
alternatives so that unnecessary exercises are not taken up. The Grand strategy covers up

1. Stability - In an effective stability strategy, Cos will concentrate their resources

where the Company presently has or can rapidly develop a meaningful
competitive advantage in the narrowest possible product-market scope consistent
with the firm’s resources and market requirement.
2. Growth - Is one that an enterprise pursues when it increases its level of objectives
upward in significant increment, much higher than an exploration of its past
achievement level. The most frequent increase indicating a growth strategy; is to
raise the market share and or sales objectives upward significantly

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3. Retrenchment - Is one that an entries pursues when it decides to improve its
performance in reaching its objectives by (i) focusing on functional
improvement, specially reduction in cost (ii) reducing the number of functions it
performs by becoming a captive company or (iii) reducing the number of the
products and markets it serves up to and including liquidation of the business.
( Turnaround, divestment, liquidation)

4. Turnaround: Also known as cutback strategy has the basic philosophy “hold the
present business and cut the costs”. This situation needed as no organization is
immune from internal hard time-stagnation or declining performance no matter
what the state of economy is. It can be for a part of the Co when economical
advantage is under stress. It is a scanning process to cut costs to see that it
becomes viable.

5. Divestment Strategy: The organization after observing for sometime finds there is
no future to the dept or product decides to dispose off. This is done by
transferring transferring the shares to the buyer at a specific negotiated rate.
There may be reasons like a company wants to go for a new project wants to
dispose off the existing company can also go by disinvestment route.

6. Liquidation Strategy: When a specific line of activity i.e. production or service is

not profitable and no future and also that there are no buyers through
disinvestment process, can dismantle and liquidate the assets and collect money to
be used in the profitable areas. Generally, the Cos having accumulated losses or
forthcoming period is not promising, liquidation is one option.

7. Combination: It is a combination of stability, growth, retrenchment strategies in

various forms. The basic reason for adopting this strategy by a multi-business
organization is that a single strategy does not fit all businesses at a particular point
of time, because each business faces different kinds of problems. Like life cycle,
recession, severe completion from better technology products etc

8. Business Restructuring: Choosing the profitable lines and ignoring the loss
making or less profitable units so that more concentration can be given to the
prospering lines. Cutting down overheads by reducing less utility manpower
starting from top

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 Competing in Foreign Markets:

Globalization: in its true sense is a way of corporate life necessitated, facilitated

and nourished by transationalisation of the World economy and developed by
corporate strategies.. Globalization is an attitude of mind – it is mindset which views
the entire world as a single market so that the corporate strategy is based on the
dynamics of the global business environments.

Effects of Globalization on the firm. (1) Opportunities to compete abroad via exports
(2) Opportunities to invest abroad (2) Opportunities to raise finance from overseas
source of Capital.

Entry Strategies

1. Moving into new markets overseas by linking up with local dealers and
distributors.
2. Takes over their activities on its own by opening a branch.
3. Carryout the manufacturing and marketing in overseas on its own.
4. Have the headquarter in overseas and manage different units spread in abroad
countries.
5. Changeover to the local culture as if it is that country’s Company.(Global Co)
Registered in that country.

Essential Conditions for Globalization

1.
2. ;. Business Freedom: The host country should not have too much restriction on the
product or service and allow the Co to do the business without must hindrances.
2. Facilities: Govt should provide all infrastructural facilities like power, winter,
import of material, free land or cheap land, license etc.
3. Govt Support: Incentive policies, tax holidays, R & D support , financial support
like cheaper finance.
4. Resources : Liberal availability of resources like materials, power, water, liberal
visas for technical staff etc
5. Competitiveness: The product and services possessing competitive advantage in
terms of price, availability, quantities, technological superiority, after sales services.

Quest for competitive advantage in foreign markets

Why does a nation achieve international success in a particular industry? There are four
broad attributes of a nation that shape the environment in which local firms compete that
promote or impede the creation of competitive advantage. These factors are,

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 (1) Factor conditions; Competitive advantage from factors depend on how efficiently
Advance factors such as modern digital data communication infrastructure, highly
educated personnel and research institute in sophisticated disciplines.
Specialized factors such as narrowly skilled personnel, infrastructure with specific
properties, knowledge base in particular fields, and other factors with relevance to
a limited range or even to a single industry are more critical in determining the
competitive advantage.
Basic factors - such as natural resources, climate, location, unskilled and semi
skilled labor and debt capital.
Generalized factors such as the highway system, a supply of debt capital or pool
of well motivated educated employees.

(2) Demand conditions; Nations gain competitive advantage in industries where

the home demand gives their companies a clearer or earlier picture of emerging
buyer needs and where demanding buyers pressure, companies to innovate faster
and achieve more sophisticated competitive advantage than their foreign rivals. A
nation may also gain advantage when its domestic demand internationalizes and
pulls it products and services abroad.

(3) Related and Supporting Industries : The presence in the nation of relied and
supporting industries that are internationally competitive creates advantages in
downstream industries in several ways such as the supply of the most cost-effective
inputs in an efficient and sometimes preferential way.

(4) Firm Strategy, Structure and Rivalry: National circumstances and context create
strong tendencies in how companies are created, organized and managed as well as
what the nature o domestic rivalry will be. Always a foreign goods meets the in-
home producer’s resistance.

Strategic Alliances- Globalization Strategies

1. Exporting: Finding overseas market, getting in touch with the agency or

business house in the host country, exporting is the easiest alliance possible.
Known as “Marketing Niche” Like we import from other countries, we can export
commodities required by foreign country. This is monitored by Export-Import
policy of the Government.

2. Foreign Investment: Indian Companies are starting business in abroad through

investment route with a local partner or alone. The resources available in that
country is more economical to procure. Other infrastructural support is available
provided by the Government, foreign investment becomes easy.

3. Mergers and Acquisitions: Either takeover a Company by purchase of shares

and make investment or merge the company and invest if it is feasible. One will
get ready market, infrastructure etc to start with.

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 4. Joint Venture: With a foreign or home country business partner a joint venture -
an alliance can be worked out. The Co will get local govt support, customer
support , technology support etc. It is an equity participation to form a new entity
with a MOU sharing responsibilities and contributions in terms of technology,
finance, marketing etc.

5. Foreign Branching: The office and manufacturing activity can be taken in an

overseas Co and run the same as a branch.

6. Licensing & Contract Manufacturing: With the local business partner, we can
supply our drawings and specification for the production. The manufacturing is
done by the licensee with or without investor.

7. Franchising: The product or formula or specification of the product moves to the

foreign country where the Franchisee is marketing the product or service.

Joint Ventures & its relevance

Internal new venturing is an important means by which large, established companies can
maintain their momentum and grow from within. One alternative is to form strategic
alliances, and even establish a formal joint venture with a company that has a valuable
distinctive competency. Often in joint venture, two or more companies agree to pool
specific resources and capabilities that they believe will create more value for both
companies and appoint managers from both companies to control the new operations.

Setting and Qualifying long term objectives for Grand Strategies

Often called Master or Business Strategies, provide basic direction for strategic actions
They are the basis of coordinated and sustained efforts directed toward achieving long-
term business objectives. The Strategy indicates the time period over which long-range
objectives are to be achieved. Thus a grand strategy can be defined as a comprehensive
general approach that guides a firm’s major actions. The 15 principal grand strategies
are, concentrated growth, market development, product development, innovation,
horizontal integration, vertical integration, concentric diversification, conglomerate
diversification, turn around, divestiture, liquidation, bankruptcy, joint venture, strategic
alliances and consortia. Any one of these strategies could serve as the basis for achieving
the major long-term objectives of a single firm. But a firm involved with multiple
industries, businesses, product lines, or customer groups – as many firms are - usually
combines several grand strategies. For clarity, however, each of the principal grand
strategies is described independently in this section, with examples to indicate some of its
relative strength and weaknesses. .

Long-term objectives were defined as the results a firm seeks to achieve over a specified
period, typically five years. Seven common long-term objectives were discussed –
profitability, productivity, competitive position, employee development, employee

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relations, technological leadership and public responsibility. These, or any other long
term objective should be acceptable, flexible, measurable overtime, motivating, suitable,
understandable and achievable.

The grand strategies are (1) Stability (2) Growth (3) Retrenchment (4) Combination

Areas of application of Long Term Objectives

1. Profitability - Profit is the main objective expressed in earnings per share

or return on equity. Hence profitability is a continuous object of any firm.
2. Productivity; Should always engaged in increasing in the productivity of
their systems. Which results in cost reduction and improves the speed.
3. Competitive Position - Success rests on CP which gives highest strength to
the firm in a competitive environment.
4. Employee Development - Value addition through training and education
leads to improved earnings and security. It is time consuming and an effort
in the long term achievement
5. Employee Relation - A key factor which gives good stability and a tool for
achievements Productivity linked benefits, welfare improves the relations.
6. Technological Leadership - To sustain in a developing market, the Co
should expose the Technical Leadership as a part of marketing strategy.
Modern Technology gives an edge over development of goods and services.
7. Public Responsibility – Stake holder’s interest is a predominant factor of
success of any Co. Public image can be achieved by many ways through
charitable and educational contributions and community welfare schemes.

Innovation:

It has become increasingly risky not to innovate. Both consumer and industrial
markets have come to expect periodic changes and improvements in the products offered.
As a result, some firms find it profitable to make innovation their grand strategy. They
seek to reap the initially high profits associated with customer acceptance of a new or
greatly improved product. The underlying rationale of the grand strategy of innovation is
to create a new product life cycle and thereby make similar existing products obsolete.
Innovation is not product development. Growth orientation is possible through
innovation.

History of human civilization is full of innovation of different types, like technological

inventions have changed the patten of human lives. In the present globalised and
competitive environment in which customers aspirations are increasing day by day, every
forward looking Co is trying to satisfy its customers needs in innovative ways.
Innovation is the process of creating and doing new things. Incremental innovations
force organization in continuously improve their products and service and keep abreast or
ahead of the competition. In managing innovations there are two types of strategic issues
involved. Innovation generation - incremental in radical, functionality, technicality and

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(2) Innovation diffusion – spreading a new idea from its source of invention or creation to
its ultimate users or adopters.

Integration

This comes under Growth Strategy wherein the expansion can go with Vertical and
Horizontal integration. The condition is that the expansion is related to the same
product line. Ex. Nylon Textiles Co adding petro-chemical unit is backward ward
integration. Textiles expanding with products like Garments are a Forward. Integration.
Adding another Textile unit is a horizontal integration. In all the above, there is increase
in capacities, contributing to the larger & diversified markets like Garment, Textile and
Petroleum. Integration can be by way of merger, takeover, divestment route.
Ex: Plantation – Coffee Curing - Coffee packing, ore - ingots - rods - fabrication.,
Mining - Cement - mixed cement - hollow blocks

Diversification

Another growth strategy is diversification which is the process of entry into a business
which is new to an organization either market-wise, or technology-wise or both.
Diversification looks at higher yield and benefit than existing lines of business.
Industries have finance Companies, Cell phone trading, real-estate, IT etc
ITC having Hotel & Resorts, paper factory. Great Eastern Shipping goes to Real Estate.

Diversification can also be Horizontal, Veridical, Concentric and Conglomerate

integrations. The main reasons for diversification can be for

1. Motivation for obtaining better use of resources- Cement Co going for Hollow
blocks. Or Mixed Cement.
2. To increase capability for adapting to a rapidly changing and increasing
competitive environment - increase the production level or capture market share.
3. To overcome restraints of legal frame work. –Too much Govt control makes the
Co to go for diversification and slowly reduce the parent line of business.

Conglomerate (unrelated) Diversification

Means collected or clustered together. Conglomerate is a combination of two or more

products not closely related by technology or market factors like a Textile Co going for
Cement. Or Cement Co going for IT etc. A conglomerate looks like a well diversified
firm though a difference between the two can be made. Conglomerate is generally
formed by mergers, diversified major is created though internal sources.

The Benefits are, (1) Reduction of Risk - all eggs in one basket (2) economies of large
scale operation – with common facilities (3) increase in profits - idle capital turns to
utility (4) attain managerial competence

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Retrenchment

Growth strategies and stability strategies are generally adopted by firms that are in
satisfactory competitive positions. But, when the firm’s position is disappointing or, at
the extreme, when its survival is at stake, then retrenchment strategies may be
appropriate. Retrenchment strategies include Turnaround strategies, captive company
strategy, divestment strategy, transformation strategy and liquidation strategies.

Reasons for adopting Retrenchment Strategies

1. Prevalence of poor economic conditions.

2. Competitive pressures may also cause firms to curtail their operations
3. Operating and production inefficiencies may also cause firms to pursue
retrenchment strategies
4. Inability of the firm to implement latest technology caused by technological
revolution.
5. The Co is not doing well or perceives itself as doing poorly.
6. The Co has not met its objectives and there is pressure from shareholders,
customers or others to improve performance.
7. External environment poses threat and internal strengths are insufficient to face
the threat.
8. Better opportunities in the environment are perceived in other area of business or
other markets where a firm’s strengths can be utilized.

Restructuring

Is a combination strategy in the form of divesting non-core businesses and concentrating

on core businesses achieving growth in these areas through Greenfield projects or
through takeovers. When there is economic recession and unrelated diversification, the
low performance lines are to be restructured (dismantled) and more yield business lines
are given more attention.

At the Group Level - Based on future economic forecasters, managerial competence,

where it does not add to the Competitive Advantage, restructuring is the answer. After
trying all alternatives available like switching over to new lines of business, transferring
people to other positive lines, then the restructuring is adopted. Restructuring is done by
divesting, auctioning, and by de-merger,

At Organization Level Same as above by discontinuing and disposing off the inefficient
and loss making lines.

Tata Oil Mills (soap factory) was sold to Unilever.

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Turnaround Strategy

Improving internal efficiency can be done by turnaround strategy or cutback strategy . i.e.
“hold the present business and cut the costs” This situation is needed as no organization
is immune from internal hard time-situation or declining performance. . The aim of
turnaround strategy is to transform the organization into a more effective business.
Turnaround means reverse the negative trend. The different areas of the organization and
business are analyzed, down size manpower, reduce the fixed assets, discard or introduce
new resources.

The turnaround strategy involves that strategic actions which an organization takes to
compete in the same business in turnaround situations. Turnaround situations may be
improvement in organizational lower performance caused by downward trend which is
not controllable by present actions of management. The situations are,

1. Incurring losses continuously.

2. Declining demand for product and or services.
3. Increasing cash outflows and or declining cash inflows.
4. Declining sales and declining market share.
5. Increasing debt and debt service.
6. Continuous problems of working capital.
7. High rate of employee turnover and employee job dissatisfaction.
8. Significant decrease in the market prices of the share. Turnaround strategy should
aim at setting a reverse trend to this declining or negative situation.

GE Multifactor Portfolio Matrix/ 9 cell planning grid

In a group Co, the GE chart is used to find the position of each SBU to decide whether
any strategic decisions are to be taken. Similarly the GE Matrix can be used for different
production/business line to see the worthiness of the portfolio and take correcting actions.

The chart divides 3 categories like strong, average and weak on Business Strength
And 3 on strategic market growth rate. There are 9 cells. Each industry weight age and
rating product is taken and plotted on the matrix. One can visualize the place of the SBU
in order to take appropriate strategy like restructuring, turnaround, divestment etc based
on data collected.

The factors of attractiveness are generally, Market share, Market share growth, Brand
image, After sales service, Distribution capacity, Capacity utilization, Product quality,
Technology.

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Contingency Approach to Strategic Choice

A Co should also be well prepared to deal with contingencies .e. unforeseen or other
critical developments that affect the Co, like major changes in competitive environment,
govt policy or budget allocation, strikes, boycotts, war, internal disturbances, natural
calamities etc. A contingency plan thus, is a plan to cope up with critical developments
which mark major deviations from the strategies planning limits.

Since environmental variables are dynamic, their accurate forecast is difficult. The
strategy is formulated for each probable scenario at normal conditions. It is understood
that Contingency Strategy is an Alternate Strategy to meet the eventuality. Ex - When a
new product is launched, there are resistances from Competitors. It can be either
aggressive or not there. The planning must be for both so that the actions can be quick
and planned.

The fundamental purpose of a contingency strategy is to place the managers in a better

position to deal with unexpected developments than if they have not made preparations
for such developments. By failing to anticipate certain events, managers may not act as
quickly as they should in a critical situation and may create more damage financially,
cause delay and confusion.

Issues to the Contingency Strategy –

1. The subject of contingency strategy should be one for which the probability of
occurrence is considered lower than that for events included in strategic planning
process one, the actual occurrence of which will cause serious damages specially
if not dealt with quickly and the one the organization can plan ahead to deal with
swiftly if the event and condition is very wide for most of the organization.
2. Trigger Points or warning signals of the imminence of the event for which the
strategy was prepared. Provide the provision for trigger points in the plan.
3. Details: The details must be complete even for contingency plans. However, the
manager may find a different approach depending upon the situation arising at
that point of time.
4. Volume: There is no need to provide for every alternative. Only the major events
are given the alternative approaches. The weight age of damages will decide the
compulsion on bringing alternative course under the Contingency Strategy.

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