Introduction
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.
Strategy Alternatives
Typically, when a company's management or its investors think that the firm needs to restructure itself in a radical way, it will announce it's looking for alternatives.
To attain superior profitability, the firm seeks to develop a competitive advantage over its rivals.
A competitive advantage can be based on cost or differentiation.
There are four generic strategies from which the firm can choose i.e. Stability, Expansion, Retrenchment or Combination Strategies.
Stability Strategy
Stability Strategy is a corporate strategy where a company concentrates on maintaining its current market position.
A company that adopts such an approach focuses on its existing product and market.
A few examples of this strategy are offering the same products to the same clients, not introducing new products, maintaining market share, and more.
Usually, a company that is satisfied with its current market share or position uses such a strategy. Also, a company following this strategy does not need any additional resources and work using the existing expertise of the workforce.
Stability Strategy can be of three types:
NO-CHANGE STRATEGY
- A no change strategy is a decision to do nothing new.
- A firm adopts this strategy when their internal and external environment is stable.
- Small and medium firms adopt this sort of strategy.
PROFIT STRATEGY
A profit strategy is one that capitalizes on a situation in which old and obsolete product or technology is being replaced by a new one.
This type of strategy does not require new investment, so it is not a growth strategy.
Firms adopting this strategy decide to follow the same technology, at least partially, while transiting into new technological domains.
Strategists in these firms reason that the huge number of product based on older technologies on the market would create an aftermarket for spare parts that would last for years.
PAUSE/PROCEED WITH CAUTION STRATEGY
A company adopts such a strategy if, in the past, it has enjoyed rapid growth.
By using this strategy, the company wants to take some rest before pushing for growth again.
Or, we can say, a company moves cautiously for sometime before pursuing growth. It is a temporary strategy.
A company can use the rest period to make its production more efficient to exploit future opportunities.
Expansion Strategy
The Expansion Strategy is adopted by an organization when it attempts to achieve a high growth as compared to its past achievements.
In other words, when a firm aims to grow considerably by broadening the scope of one of its business operations in the perspective of customer groups, customer functions and technology alternatives, either individually or jointly, then it follows the Expansion Strategy.
The reasons for the expansion could be survival, higher profits, increased prestige, economies of scale, larger market share, social benefits, etc.
The expansion strategy is adopted by those firms who have managers with a high degree of achievement and recognition.
Their aim is to grow, irrespective of the risk and the hurdles coming in the way.
The firm can follow either of the five expansion strategies to accomplish its objectives:
Concentration Strategy
The Expansion through Concentration is the first level form of Expansion strategy that involves the investment of resources in the product line, catering to the needs of the identified market with the help of proven and tested technology.
The organization may follow any of the ways to practice Expansion through concentration:
Market penetration strategy: The firm focusing intensely on the existing market with its present product.
Market Development type of concentration: Attracting new customers for the existing product.
E.g. Athletic brands such as Adidas and Nike, continue to expand their global reach and attract new demographics of customers with their existing footwear products.
Product Development type of Concentration: Introducing new products in the existing market.
E.g. Mobile phone companies introducing new brands in the existing market.
Expansion through Integration
The Expansion through Integration means combining one or more present operation of the business with no change in the customer groups. This combination can be done through a value chain.
The value chain comprises of interlinked activities performed by an organization right from the procurement of raw materials to the marketing of finished goods. Thus, a firm may move up or down the value chain to focus more comprehensively on the needs of the existing customers.
The expansion through integration widens the scope of the business and thus considered as the grand expansion strategy. There are two ways of integration:
Vertical integration: The vertical integration is of two types: forward and backward. When an organization moves close to the ultimate customers, i.e. facilitate the sale of the finished goods is said to have made a forward integration. Example, the manufacturing firm open up its retail outlet.
Whereas, if the organization retreats to the source of raw materials, is said to have made a backward integration. Example, the shoe company manufactures its own raw material such as leather through its subsidiary firm.
Horizontal Integration: A firm is said to have made a horizontal integration when it takes over the same kind of product with similar marketing and production levels. Example, the pharmaceutical company takes over its rival pharmaceutical company.
Expansion through Diversification
The Expansion through Diversification is followed when an organization aims at changing the business definition, i.e. either developing a new product or expanding into a new market, either individually or jointly.
A firm adopts the expansion through diversification strategy, to prepare itself to overcome the economic downturns.
Generally, the diversification is made to set off the losses of one business with the profits of the other; that may have got affected due to the adverse market conditions.
There are mainly two types of diversification strategies undertaken by the organization:
Concentric Diversification: When an organization acquires or develops a new product or service that are closely related to the organization’s existing range of products and services is called as a concentric diversification.
For example, the shoe manufacturing company may acquire the leather manufacturing company with a view to entering into the new consumer markets and escalate sales.
Conglomerate Diversification: When an organization expands itself into different areas, whether related or unrelated to its core business is called as a conglomerate diversification.
Simply, conglomerate diversification is when the firm acquires or develops the product and services that may or may not be related to the existing range of product and services.
Generally, the firm follows this type of diversification through a merger or takeover or if the company wants to expand to cover the distinct market segments. TATA is the best example of conglomerate diversification.
Expansion through Cooperation
The Expansion through Cooperation is a strategy followed when an organization enters into a mutual agreement with the competitor to carry out the business operations and compete with one another at the same time, with the objective to expand the market potential.
The expansion through cooperation can be done by following any of the strategies as explained below:
Merger: The merger is the combination of two or more firms wherein one acquires the assets and liabilities of the other in the exchange of cash or shares, or both the organizations get dissolved, and a new organization came into the existence.
The firm that acquires another is said to have made an acquisition, whereas, for the other firm that gets acquired, it is a merger.
Takeover: Takeover strategy is the other method of expansion through cooperation. In this, one firm acquires the other in such a way, that it becomes responsible for all the acquired firm’s operations.
The takeovers can either be friendly or hostile. In the former, both the companies agree for a takeover and feels it is beneficial for both.
However, in the case of a hostile takeover, a firm tries to take on the operations of the other firm forcefully either known or unknown to the target firm.
Joint Venture: Under the joint venture, both the firms agree to combine and carry out the business operations jointly.
The joint venture is generally done, to capitalize the strengths of both the firms.
The joint ventures are usually temporary; that lasts till the particular task is accomplished.
Strategic Alliance: Under this strategy of expansion through cooperation, the firms unite or combine to perform a set of business operations, but function independently and pursue the individualized goals. Generally, the strategic alliance is formed to capitalize on the expertise in technology or manpower of either of the firm.
Thus, a firm can adopt either of the cooperation strategies depending on the nature of business line it deals in and the pursued objectives.
Expansion through Internationalization
The Expansion through Internationalization is the strategy followed by an organization when it aims to expand beyond the national market. The need for the Expansion through Internationalization arises when an organization has explored all the potential to expand domestically and look for the expansion opportunities beyond the national boundaries.
But however, going global is not an easy task, the organization has to comply with the stringent benchmarks of price, quality and timely delivery of goods and services, that may vary from country to country.
The expansion through internationalization could be done by adopting either of the following strategies:
International Strategy: The firms adopt an international strategy to create value by offering those products and services to the foreign markets where these are not available.
This can be done, by practicing a tight control over the operations in the overseas and providing the standardized products with little or no differentiation.
Multidomestic Strategy: Under this strategy, the multi-domestic firms offer the customized products and services that match the local conditions operating in the foreign markets.
Obviously, this could be a costly affair because the research and development, production and marketing are to be done keeping in mind the local conditions prevailing in different countries.
Global Strategy: The global firms rely on low-cost structure and offer those products and services to the selected foreign markets in which they have the expertise.
Thus, a standardized product or service is offered to the selected countries around the world.
Transnational Strategy: Under this strategy, the firms adopt the combined approach of multi-domestic and global strategy.
The firms rely on both the low-cost structure and the local responsiveness i.e. according to the local conditions.
Thus, a firm offers its standardized products and services and at the same time makes sure that it is in line with the local conditions prevailing in the country, where it is operating.
So, in order to globalize, the firm should assess the international environment first, and then should evaluate its own capabilities and plan the strategies accordingly to enter into the foreign markets.
Retrenchment Strategy
The Retrenchment Strategy is adopted when an organization aims at reducing its one or more business operations with the view to cut expenses and reach to a more stable financial position.
The firm can either restructure its business operations or discontinue it, so as to revitalize its financial position. There are three types of Retrenchment Strategies:
The Turnaround Strategy is a retrenchment strategy followed by an organization when it feels that the decision made earlier is wrong and needs to be undone before it damages the profitability of the company.
Simply, turnaround strategy is backing out or retreating from the decision wrongly made earlier and transforming from a loss making company to a profit making company.
Retrenchment Strategy
When should the firm should adopt the turnaround strategy? Following are certain indicators which make it mandatory for a firm to adopt this strategy for its survival. These are:
- Continuous losses
- Poor management
- Wrong corporate strategies
- Persistent negative cash flows
- High employee attrition rate
- Poor quality of functional management
- Declining market share
- Uncompetitive products and services
Also, the need for a turnaround strategy arises because of the changes in the external environment E.g., change in the government policies, saturated demand for the product, a threat from the substitute products, changes in the tastes and preferences of the customers, etc.
Divestment Strategy: is another form of retrenchment that includes the downsizing of the scope of the business. The firm is said to have followed the divestment strategy, when it sells or liquidates a portion of a business or one or more of its strategic business units or a major division, with the objective to revive its financial position.
The divestment is the opposite of investment; wherein the firm sells the portion of the business to realize cash and pay off its debt. Also, the firms follow the divestment strategy to shut down its less profitable division and allocate its resources to a more profitable one.
Liquidation Strategy: is the most unpleasant strategy adopted by the organization that includes selling off its assets and the final closure or winding up of the business operations.
It is the most crucial and the last resort to retrenchment since it involves serious consequences such as a sense of failure, loss of future opportunities, spoiled market image, loss of employment for employees, etc.
Combination Strategy
The Combination Strategy means making the use of other grand strategies (stability, expansion or retrenchment) simultaneously. Simply, the combination of any grand strategy used by an organization in different businesses at the same time or in the same business at different times with an aim to improve its efficiency is called as a combination strategy.
Such strategy is followed when an organization is large and complex and consists of several businesses that lie in different industries, serving different purposes.
A baby diaper manufacturing company augments its offering of diapers for the babies to have a wide range of its products (Stability) and at the same time, it also manufactures the diapers for old age people, thereby covering the other market segment (Expansion). In order to focus more on the diapers division, the company plans to shut down its baby wipes division and allocate its resources to the most profitable division (Retrenchment).
In the above example, the company is following all the three grand strategies with the objective of improving its performance.
The strategist has to be very careful while selecting the combination strategy because it includes the scrutiny of the environment and the challenges each business operation faces.
The Combination strategy can be followed either simultaneously or in the sequence.
