OTCHERE-ANKRAH (Hon)
STRATEGIC MANAGEMENT
STRATEGY FORMULATION
BY: Dr. B. OTCHERE-ANKRAH
OTCHERE-ANKRAH (Hon)
STRATEGIC OPTIONS
• When a clear picture of the business
entity and external environment has
been established, strategic
alternatives can be developed.
• These are referred to as strategic
options.
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STRATEGIC OPTIONS.
It involves;
Reflection on the current situation
Identify key issues that should be addressed
Setting of priorities
Development of strategic alternatives
Selection of best mix of strategic alternatives
Strategic alternatives vary across industries and business
entities.
There are therefore different strategies across companies,
even those in the same industry even if they are equivalent in
size, years in operation, etc.
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STRATEGY HIERARCHY
• The formulation of strategies is guided by the strategy
hierarchy.
• Different strategies are required at different levels
within the strategy hierarchy.
• The strategy hierarchy covers 4 levels;
• Corporate strategy
• Business strategy
• Functional strategy
• Operating strategy
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Corporate Strategy
• This is the highest level of strategy which applies to
all part of the corporate entity.
• This normally occurs at the group or holding
company level.
• It establishes the business positions of a diversified
company in different industries and how to turn
cross business synergies into competitive
advantage.
• Under this broad corporate strategy there are
business unit, functional and operating strategies.
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Business Strategy
• Business strategy are strategies developed to
realize results in one specific line of business.
• The Business Unit is usually responsible for its
own budgeting, new product decisions, hiring
decisions, and price setting.
• A business Unit is treated as an internal profit
centre by corporate entity.
• Even though a Business Unit is responsible for
developing its business strategies, these must
be aligned with the broader corporate strategies
if it is a subsidiary of a diversified company.
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Functional Strategy
This covers strategies, tasks and actions employed in
managing particular functional areas of a business
entity.
The overall primary role of a Functional Strategy is to
support the company’s overall business strategy and
competitive approach.
Functional area strategies therefore draw from those of
the broader corporate and Business Unit level goals
and strategies.
Functional strategies include production strategies,
research and development strategies, human resource
strategies, marketing strategies, financial strategies,
legal strategies, information technology management
strategies, etc.
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Operational Strategy
The “lowest” level of strategy is
operational strategy.
This relates to strategic initiatives to
manage key operational functions such
as plant, distribution centre, etc and other
operating activities that have strategic
significance (such as brand promotion,
supply chain management, etc).
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Formulation
Generally, strategy formulation
involves the development of strategies
to achieve the goals and objectives set
out in the overall strategy.
It also includes the development of
Competitive Strategy on choices
regarding the products and markets to
compete in.
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Formulation
It is a direct response to the
business case the firm selects the
best strategic options or preferred
solutions for the main
issues/opportunities
Some of the preferred options are
mutually reinforcing and will
together strengthen the competitive
advantage of the firm.
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key considerations
Among the key considerations are strategies to:
Address internal weaknesses (organizational
structure, product quality, process deficiencies,
product and service quality, inadequate financing,
ICT, technology, financial management system, etc).
Strengthen human resource capacity and technical
expertise.
Strengthen competitive positioning and market share
(pricing, distribution channels, market deepening,
alliances, diversification, acquisition, merger, etc).
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key considerations
• Input stage
• Matching stage
• Decision stage
• Cultural aspect of strategy choice
• Politics of strategy choice
• Role of board of directors
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The preferred strategies are expected to:
To improve its financial
performance.
To strengthen its competitive
position.
To gain a sustainable competitive
advantage over its market rivals.
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Approaches to Strategy Formulation
Strategy formulation generally targets one of two broad
outcomes;
1. Business Process Re-engineering
It involves a fundamental rethink of organizational systems to
dramatically improve customer service, cut operational costs and
become a world-class competitor.
Re-engineering involves Radically redesigning and streamlining
work effort flows and processes to achieve dramatic
improvements in performance.
Using cross-functional teams, cutting-edge technology and
information systems to reset and refocus the organization’s
strategy.
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Approaches cont’
2 continuous improvement
This involves the development of strategies that focus on
improvement of processes in manufacturing, engineering,
supporting business processes and management on a
continuous basis.
Through the standardization of activities and processes,
this strategy aims to eliminate waste.
It also involves Creating a total quality culture bent on
continuously improving the performance of every task and
value chain activity (TQM).
A long-term race without a finish in which success comes
slowly in small steps forward (Japanese Kailzen).
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Low- Cost Strategy
What is low-cost strategy?
This arises when a company is able to deliver a
product or service to the market lower than all the
other competitors.
In targeting to be the low-cost leader, it is important
to ensure that the basic features of the product or
service considered essential are included.
For sustainability of low-cost leadership, the
methods for achieving low-cost advantage should
be difficult for competitors to imitate.
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Low- Cost Strategy
Low-cost advantage affects profitability in two
ways:
I. Use low-cost advantage to under-price to
attract price sensitive customers.
II. Maintain the price of the product or service
and use the lower-cost advantage to earn
higher margins per unit which will translate
into higher profits.
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Conditions under which low-cost strategy
work best
1. Rigorous price competition among rival firms.
2. The products or services are identical and can be supplied by
several competitors.
3. Product is used in the same way.
4. Buyers are generally price-sensitive.
5. The cost of switching by consumers between competitors is
low.
6. There are few avenues to differentiation.
7. Large number of buyers with the power to negotiate price
downwards.
8. Low-cost leader can use prices to deter new entrants.
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Examples of low-cost companies
WalMart
Southwest Airlines, Ryan air
Bic ballpoint pens
Whirlpool
Melcom (Ghana)
Ross (USA)
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Risks of low-cost strategy
1. When pushed beyond limit, low cost strategy can
reduce products/service attraction to the market and
lead to lower profits.
2. If achieved not in ways difficult for competitors to rival,
low cost strategy will not be sustainable in the long-term.
3. New technologies and innovations can readily wipe
away hard-won cost advantages.
4. There is a risk of the market moving towards upscale
products after some time.
5. Declining buyer sensitivity to price can undermine a
low cost strategy.
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Focused (Niche) strategy
Focused strategy concentrates of a segment of
the market.
The target segment can be defined by several
indicators such as:
Geographic concentration
Special product attributes
Special conditions of the target market
Special requirements to use the product or
service.
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Reasons why companies diversify
1. When there is an opportunity to mitigate the risk associated
with single business and single product/service.
2. When it can take advantage of opportunities and expand to
other industries and business to complement the present
business.
3. When diversifying into a new related business brings new
options for cost reduction and enhancement of profitability.
4. When it can leverage existing competencies and capabilities
by expanding into businesses where these are important
success factors and grant competitive advantage.
5. When the company can leverage and transfer strong brand
name to other products and services to drive sales and profits.
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Strategic Choices
Each of the competitive strategies should be
considered in establishing strategic alternatives.
Porter advices against implementing a combination.
Rather, one strategic choice should be pursued at a
time.
In reality, however:
Companies have successfully implemented a
combination of more than one of the generic strategies.
There are also instances where the adoptions of a
combination of the generic strategies have failed.
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Best Strategy Formulation Process?
There is no internationally standard framework for
formulating strategies.
Drawing from the findings of the Internal and
External Analyses, successful strategies cover at
least five steps.
However, 3 strategy formulation steps can be
pursued:
Identification of strategic options
Evaluation of each of the strategic options
Selection of preferred strategic options
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Other strategy alternatives?
I. Diversification
II. Strategies for competing in
foreign markets
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Students to read on the following
1. Cost Leadership
2. Consolidation Strategy
3. Downsizing
4. Operations Strategies
5. Financial Strategies
6. Marketing Strategies
7. Defensive Strategies
8. Offensive Strategies
