Meaning of strategy formulation

Strategy formulation is the development of long range plans for the effective management of environmental opportunities and threats in light of corporate strengths and weaknesses. It includes defining the corporate mission, specifying achievable objectives, developing strategies and setting policy guidelines. It begins with situational analysis.

Issues in strategy formulation

Social responsibility and ethics Managerial ethics Organizational culture and strategies Shaping the culture

Social responsibility and ethics

the expectation that business firms should serve both society and financial interests of shareholders. A firms stance on the social responsibility can be a critical factor in making strategic decisions.

Why should firms act in a socially responsible manner?

First, not doing so can increase the likelihood of the more costly government regulations. Second, stake holders affected by a firms, social responsibility stands- most notably customers are also those who must choose whether or not to transact business with the firm.

Managerial ethics
Managerial ethics is an individuals responsibility to make business decisions that are legal, honest, moral and fair.

Organizational culture and strategies

Organizational culture is the shared value and patterns of belief and behavior that are accepted and practiced by the members of a particular organization. It is critical that any strategic decisions rendered by top management be consistent with the characteristics of the culture of the organization.

Shaping the culture

Top executives can influence and shape the organizations culture in at least five ways. The first of which is to systematically pay attention to areas of business believed to be of key importance to the strategies success. The second means involves the leaders reactions to critical incidents and organizational crisis.

 The third means is to serve as a deliberate role model, teacher, or coach. The fourth means is the process through which top management allocates rewards and status. The fifth means of shaping the culture is to modify the procedure to through which the organization recruits, selects, promotes and terminates employees.

Strategy formation process

Establishing strategic intent Environmental analysis Organizational analysis Strategic alternatives Choice of strategy

Establishing strategic intent

Strategic intent consists of three elements, such as vision, Mission and objectives.

Environmental analysis
Since an organization is a social system it operates within the environment which consist of many factors such as society, competitors, technology, legal frame work, political and cultural frame work.

Organizational analysis
Organizational analysis includes, SWOT analysis, preparing organizational capability profile and competitive advantage profile.

Identification of strategic alternatives

Strategic alternatives revolves around the question of whether to continue or change the business enterprise which is currently in or improve the efficiency and effectiveness with which the firm achieves its corporate objectives in its chosen business sector.

Choice of strategy
This is the stage of strategic decision process and all factors relevant for decision making are relevant here.

Strategy formulation tools

SWOT analysis. Business Portfolio Analysis. Porters Model For Industry Analysis. Critical Question Analysis.

SWOT ANALYSIS
SWOT analysis is a strategic development tool that matches internal organizational strengths and weaknesses with external opportunities and threats.

Business portfolio analysis

Business portfolio analysis is an organizational strategy formulating tool that is based on the philosophy that organizations should develop strategy as much as they handle investment portfolios. 2 Business port folio tools are;
The BCG Growth Share Matrix by Boston consulting group. GE Multifactor Portfolio Matrix by General Electric Company

BCG & GE Matrix

Relative Position (Market Share)

Firms Business Strength

Market Attractiveness

Market Growth

INTRODUCTION
BOSTON CONSULTING GROUP (BCG) MATRIX is developed by BRUCE HENDERSON of the BOSTON CONSULTING GROUP IN THE EARLY 1970s. According to this technique, businesses or products are classified as low or high performers depending upon their market growth rate and relative market share.

Relative Market Share and Market Growth

To understand the Boston Matrix you need to understand how market share and market growth interrelate.

MARKET SHARE
Market share is the percentage of the total market that is being serviced by your company, measured either in revenue terms or unit volume terms.

RELATIVE MARKET SHARE

RMS = Business unit sales this year Leading rival sales this year The higher your market share, the higher proportion of the market you control.

MARKET GROWTH RATE

Market growth is used as a measure of a markets attractiveness. MGR = Individual sales - individual sales this year last year Individual sales last year Markets experiencing high growth are ones where the total market share available is expanding, and theres plenty of opportunity for everyone to make money.

THE BCG GROWTH-SHARE MATRIX

It is a portfolio planning model which is based on the observation that a companys business units can be classified in to four categories: Stars Question marks Cash cows Dogs

It is based on the combination of market growth and market share relative to the next best competitor.

STARS
High growth, High market share

Stars are leaders in business. They also require heavy investment, to maintain its large market share. It leads to large amount of cash consumption and cash generation. Attempts should be made to hold the market share otherwise the star will become a CASH COW.

CASH COWS
Low growth , High market share
They are foundation of the company and often the stars of yesterday. They generate more cash than required. They extract the profits by investing as little cash as possible They are located in an industry that is mature, not growing or declining.

DOGS
Low growth, Low market share
Dogs are the cash traps. Dogs do not have potential to bring in much cash. Number of dogs in the company should be minimized. Business is situated at a declining stage.

QUESTION MARKS
High growth , Low market share
Most businesses start of as question marks. They will absorb great amounts of cash if the market share remains unchanged, (low). Why question marks? Question marks have potential to become star and eventually cash cow but can also become a dog. Investments should be high for question marks.

WHY BCG MATRIX ?

To assess : Profiles of products/businesses The cash demands of products The development cycles of products Resource allocation and divestment decisions

MAIN STEPS OF BCG MATRIX

Identifying and dividing a company into SBU. Assessing and comparing the prospects of each SBU according to two criteria : 1. SBUS relative market share. 2. Growth rate OF SBUS industry. Classifying the SBUS on the basis of BCG matrix. Developing strategic objectives for each SBU.

BENEFITS
BCG MATRIX is simple and easy to understand. It helps you to quickly and simply screen the opportunities open to you, and helps you think about how you can make the most of them. It is used to identify how corporate cash resources can best be used to maximize a companys future growth and profitability.

LIMITATIONS
BCG MATRIX uses only two dimensions, Relative market share and market growth rate. Problems of getting data on market share and market growth. High market share does not mean profits all the time. Business with low market share can be profitable too.

CONCLUSION
Though BCG MATRIX has its limitations it is one of the most FAMOUS AND SIMPLE portfolio planning matrix ,used by large companies having multi-products.

About GE Matrix
Developed by McKinsey & Company in 1970s. GE is a model to perform business portfolio analysis on the SBUs. GE is rated in terms of Market Attractiveness & Business Strength It is an Enlarged & Sophisticated version of BCG. The matrix is divided into 9 cells, it has 3 zones, one at the upper left, one at the lower right and one centraldiagonal

 The upper left zone represents business that are most important to the company: the lower right zone represents business that are least important: and the central diagonal zone represents businesses that are medium in their importance.
Using the ratings in the matrix, the firm can appropriately set its objectives and strategies in respect of each of its businesses.

 This Planning matrix ,holds that a company can suitably rate its different businesses for the purpose of strategic planning on the basis of two main parameters- (1) Industry attractiveness, and (2) Companys Business Strength. When the industry concerned is highly attractive and the company has the best of strengths for excelling in that industry, the business is rated as the most important one to the company. When the industry concerned is least attractive and the company's strength for excelling in that industry is also very low, the business is rated as the least important one. The other businesses will occupy a position somewhere between the two extremes. This is the idea of GE Matrix.

Classification
Firms Business Strength
Strong High Medium Weak
5.00

Market Attractiveness

3.67

Medium

2.33

Low
5.00

3.67

2.33

1.00

Overview
High High

Firms Business Strengths

Low

Market Attractiveness

Attractive

Moderate Attractive

Unattractive

Low

Market Attractiveness
Annual market growth rate Overall market size Historical profit margin Current size of market Market structure Market rivalry Demand variability Global opportunities

Business Strength
Current market share Brand image Brand equity Production capacity Corporate image Profit margins relative to competitors R & D performance Managerial personal Promotional effectiveness

Strategies
Protect Position Invest to grow Effort on maintaining strength Invest to Build Challenge for leadership Build selectively on strength

Build Selectively Invest in most attractive segment Build up ability to counter competition Emphasize profitability by raising productivity

Strategies
Protect & Refocus Manage for current earning Defend strength

Selectivity for Earning Protect existing program Investments in profitable segments

Build Selectively
Specialize around limited strength Seek ways to overcome weaknesses Withdraw if indication of sustainable growth are lacking

Strategies
Limited Expansion for Harvest Look for ways to expand without high risk

Manage for Earnings Protect position in profitable segment Upgrade product line Minimize investment Harvest Sell at time that will maximize cash value Cut fixed costs and avoid investment meanwhile

Case Study

Overview
High
High

Business Strengths

Low

Market Attractiveness

Attractive

Moderate Attractive

Unattractive

Low

Case Study of TATA

TATA

IT (Information Technology) : TCS Consumer Durable : Automobiles, Titan etc. Textiles : Tata Fabrics, West Sides etc

GE Matrix For TATA

High High

Business Strengths
IT Consumer Durables

Low

Market Attractiveness

Low

Textiles

BCG v/s GE
BCG
Market Growth

GE Market Attractiveness
Market strength 9 cell

Market share 4 cell Multi Products Primary tools

Multi Business Units

Secondary tools