STRATEGY FORMULATION

What is Strategy formulation/

strategic planning?
 Strategy formulation
 concerned with developing a corporation’s

mission, vision, objectives, strategies and

policies.
 Mission is the reason for which the organization
exists & what it will do. It describes the
products/services to be supplied, the markets to be
served and the technology to be applied, if critical.
 Vision Statement answers the question, What do
we want to become? It is futuristic and long term.
 Strategy formulation…
 Mission
 the purpose or reason for the organization’s existence

 It tells what the company is providing to society-either a

service or product
 It identifies the scope or domain of the company’s

operations in terms of products (including services)

offered and markets
 A mission statement may also include the firm’s values

and philosophy about how it does business and treats its

employees.
 Vision
 describes what the organization would like to become

 Objectives
 the end results of planned activity
Strategy formulation…
 Strategy
 forms a comprehensive master approach
that states how the corporation will achieve
its mission and objectives
 maximizes competitive advantage and
minimizes competitive disadvantage
 corporate, business, functional
Strategy formulation…
 Policy
 a broad guideline for decision making that
links the formulation of a strategy with its
implementation
 Companies use policies to make sure that
employees throughout the firm make
decisions and take actions that support the
corporation’s mission, objectives, and
strategies.
Strategy formulation…

Strategic Planning is making decisions

about:
• Determining the organization’s mission;
• Formulating policies to guide the organization
in establishing objectives, choosing a strategy,
and implementing the chosen strategy;
• Establishing long-range and short-range
objectives to achieve the organization’s
mission;
• Determining the strategies that are to be used
in achieving the organization’s mission
What is a strategic plan?
• A document that
says why an
organization exists,
what it aims to do,
and how it will do it
• It helps to focus the
organization’s vision
and priorities
Situation Analysis and
Business Strategy…
 Strategic planning process begins with
situation analysis.
 Situation analysis
 the process of finding a strategic fit
between external opportunities and internal
strengths while working around external
threats and internal weaknesses
 Situational Analysis:
SWOT Approach
 SWOT
 acronym used to describe the particular
Strengths, Weaknesses, Opportunities and
Threats that are potential strategic factors
for a specific company
 Strategy = opportunity/capacity
 Opportunity has no real value unless a
company has the capacity to take
advantage of that opportunity.
SWOT
Criticisms of SWOT analysis
 It is simply the opinions of those filling
out the boxes.
 Virtually everything that is a strength is
also a weakness.
 Virtually everything that is an
opportunity is also a threat.
 Adding layers of effort does not
improve the validity of the list.
 It generates lengthy lists.
Criticisms of SWOT analysis

 It uses a single point in time approach.

 There is no tie to the view from the
customer.
 There is no validated evaluation
approach.
Generating a Strategic Factors
Analysis Summary (SFAS)
Matrix
 SFAS (Strategic Factors Analysis
Summary) Matrix
 summarizes an organization’s strategic
factors by combining the external factors
from the EFAS Table with the internal
factors from the IFAS Table.
Strategic Factor Analysis
Summary (SFAS) Matrix
 Finding a Propitious Niche
 Propitious niche
 A niche is a need in the marketplace that is
currently unsatisfied.
 The goal of strategic factor analysis is to find a
propitious niche—an extremely favorable
niche—that is so well-suited to the firm’s internal
and external environment that other corporations
are not likely to challenge or dislodge it
 Strategic window
 a unique market opportunity that is available for a
particular time.
 The first firm through a strategic window can
occupy a propitious niche and discourage
competition (if the firm has the required internal
strengths).
Review of Mission and
Objectives
 A re-examination of an organization’s
current mission and objectives must be
made before alternative strategies can
be generated and evaluated.
 Performance problems can derive from
inappropriate (narrow or too broad)
mission statements and objectives.
 Business Strategies

 Business strategy
 focuses on improving the competitive
position of a company’s or business unit’s
products or services within the specific
industry or market segment that the
company or business unit serves
 Business strategy can be competitive and/or
cooperative
 Porter’s Competitive
Strategies
Competitive strategy raises the following
questions:
Should we compete on the basis of lower cost

(and thus price), or should we differentiate our

products or services on some basis other than
cost, such as quality or service?

Should we compete head to head with our

major competitors for the biggest but most
sought-after share of the market, or should we
focus on a niche in which we can satisfy a less
sought-after but also profitable segment of the
market?
 Porter’s Competitive
Strategies
 Michael Porter proposes three “generic”
competitive strategies for outperforming
other corporations in a particular industry:
lower cost, differentiation and focus.
 Cost leadership
 ability of a company or a business unit to
design, produce and market a comparable
product more efficiently than its competitors
 Differentiation
 ability of a company to provide unique and
superior value to the buyer in terms of product
quality, special features or after-sale service
 Porter’s Competitive
Strategies
 Focus
 ability of a company to provide unique and
superior value to a particular buyer group,
segment of the market line or geographic market
 When the lower-cost and differentiation
strategies have a broad mass-market target,
they are simply called cost leadership and
differentiation.
 When the lower-cost and differentiation
strategies are focused on a market niche
(narrow target), however, they are called cost
focus and differentiation focus.
 Porter’s Competitive
Strategies
 Porter proposed that a firm’s competitive advantage
in an industry is determined by its competitive
scope—that is, the breadth of the company’s or
business unit’s target market.
 Before using one of the two generic competitive
strategies (lower cost or differentiation), the firm or
unit must choose:
 range of product varieties it will produce,
 distribution channels it will employ,
 types of buyers it will serve,
 geographic areas in which it will sell, and
 array of related industries in which it will also
compete.
 Porter’s Competitive
Strategies
 Cost leadership
 lower-cost competitive strategy that aims at
the broad mass market and requires
“aggressive construction of efficient-scale
facilities, vigorous pursuit of cost reductions
from experience, tight cost and overhead
control, avoidance of marginal customer
accounts, and cost minimization”
 Provides a defense against rivals
 Provides a barrier to entry
 Generates increased market share
Porter’s Competitive
Strategies
 Differentiation
 involves the creation of a product or service
that is perceived throughout the industry as
unique.
 can be associated with design, brand image,
technology, features, dealer network or
customer service
 Lowers customers sensitivity to price
 Increases buyer loyalty
 Can generate higher profits
Porter’s Competitive
Strategies
 Cost focus
 low-cost competitive strategy that focuses
on a particular buyer group or geographic
market and attempts to serve only this
niche to the exclusion of others
 Differentiation focus
 concentrates on a particular buyer group,
product line segment or geographic market
to serve the needs of a narrow strategic
market more effectively than its
competitors
 Risks in Competitive
Strategies
 No one competitive strategy is
guaranteed to achieve success.
 For example, a company following a
differentiation strategy must ensure
that the higher price it charges for its
higher quality is not too far above the
price of the competition, otherwise
customers will not see the extra quality as
worth the extra cost.
 Issues in Competitive
Strategies
 A company or business unit must achieve
one of the previously mentioned generic
competitive strategies.

 Otherwise, the company or business unit is

stuck in the middle.

 Stuck in the middle

 when a company has no competitive advantage and
is doomed to below-average performance.
Issues in Competitive
Strategies
 Successful entrepreneurial ventures follow
focus strategies.
 They differentiate their product or service
from those of others by focusing on
customer wants in a segment of the market,
thereby achieving a dominant share of that
part of the market.
Industry Structure and
Competitive Strategy
 Fragmented industry
 many small- and medium-size companies
compete for relatively small shares of the
total market
 Products are typically in early stages of
product life cycle
 Focus strategies are used
 Industry Structure and
Competitive Strategy
 As an industry matures, fragmentation
is overcome, and the industry tends to
become a consolidated industry.

 Consolidated industry
 domination by a few large companies
 premium on a firm’s ability to achieve cost
leadership
Hyper-Competition and
Competitive Advantage
Sustainability
 Competitive advantage in a hyper-
competitive market is characterized by a
continuous series of multiple short-term
initiatives that replace current products
with new products before competitors
can do so.
Hyper-Competition and
Competitive Advantage
Sustainability
 Sustained competitive advantage is
increasingly a matter not of a single
advantage maintained over time, but
more a matter of sequencing
advantages over time.
Cooperative Strategies
 Cooperative strategies
 used to gain a competitive advantage
within an industry by working with other
firms
 The two general types of cooperative
strategies are collusion and strategic
alliances.
Cooperative Strategies
 Collusion
 the active cooperation of firms within an
industry to reduce output and raise prices
to avoid economic law of supply and
demand
 Collusion may be explicit or tacit
 Cooperative Strategies
 Strategic alliances
 a long-term cooperative arrangement
between two or more independent firms or
business units that engage in business
activities for mutual economic gain
 Cooperative arrangements fall along a
continuum from weak and distant to strong
and close.
Reasons to Form an Alliance
Types of Alliances

 Mutual service consortium

 partnership of similar companies in similar
industries that pool their resources to gain
a benefit that is too expensive to develop
alone, such as access to advanced
technology
Types of Alliances

 Joint venture
 cooperative business activity, formed by
two or more separate organizations for
strategic purposes, that creates an
independent business entity and allocates
ownership, operational responsibilities and
financial risks and rewards to each
member, while preserving their separate
identity/autonomy
Types of Alliances

 Licensing arrangement
 agreement in which the licensing firm
grants rights to another firm in another
country or market to produce and/or sell a
product
Types of Alliances

 Value-chain partnership
 a strong and close alliance in which one
company or unit forms a long-term
arrangement with a key supplier or
distributor for mutual advantage
Strategic Alliance Success
Factors
 Chapter end questions
 1. Is it possible for a company or business
unit to follow a cost leadership strategy
and a differentiation strategy
simultaneously? Why or why not?
 2. Is it possible for a company to have a
sustainable competitive advantage when
its industry becomes hypercompetitive?
 In class exercise
 Small- Group Exercise: How to Keep the Salsa Hot
 Break up into groups of three to five people, and discuss the
following scenario. Appoint one group member as spokesperson
for the group, who will communicate your findings to the class
when called upon to do so by the instructor.
 You are the managers of a company that has pioneered a new
kind of salsa for chicken that has taken the market by storm. The
salsa’s differentiated appeal has been based on a unique
combination of spices and packaging that has allowed you to
charge a premium price. Within the last 3 years, your salsa has
achieved a national reputation, and now major food companies,
seeing the potential of this market segment, are beginning to
introduce salsas of their own, imitating your product.
 1. Describe the generic business- level strategy you are pursuing.
 2. Describe the industry environment in which you are competing.
 3. What kinds of competitive tactics and maneuvers could you
adopt to protect your generic strategy in this kind of
environment?
 4. What do you think is the best strategy for you to pursue in this
 43

STRATEGY
FORMULATION:
CORPORATE
STRATEGY
 Corporate Strategy
44

 Corporate strategy
 the choice of direction of the firm as a
whole and the management of its business
or product portfolio
 Corporate Strategy
45

 Corporate strategy addresses three key issues

facing the corporation as a whole:
 1. The firm’s overall orientation toward growth,
stability or retrenchment (directional strategy).
 2. The industries or markets in which the firm
competes through its products and business units
(portfolio analysis).
 3. The manner in which management coordinates
activities and transfers resources and cultivates
capabilities among product lines and business units
(parenting strategy).
 Corporate Directional
46
Strategies
 Every corporation must decide its orientation toward
growth by asking the following three questions:
 1. Should we expand, cut back, or continue our
operations unchanged?
 2. Should we concentrate our activities within our
current industry, or should we diversify into other
industries?
 3. If we want to grow and expand nationally and/or
globally, should we do so through internal development
or through external acquisitions, mergers, or strategic
alliances?
 Corporate Directional
47
Strategies
 Directional Strategy
48

 A corporation’s directional strategy is

composed of three general orientations
(sometimes called grand strategies):
 Growth strategies
 expand the company’s activities
 Stability strategies
 make no change to the company’s current
activities
 Retrenchment strategies
 reduce the company’s level of activities
 Growth Strategies
49

 A corporation can grow internally by

expanding its operations both globally and
domestically, or it can grow externally
through mergers, acquisitions, and
strategic alliances.
 Merger
 a transaction involving two or more
corporations in which stock is exchanged but
in which only one corporation survives
 Acquisition
 100% purchase of another company
 Concentration Strategies
50

 The two basic growth strategies are

concentration on the current product
line(s) in one industry and diversification
into other product lines in other industries.

 If a company’s current product lines have real

growth potential, concentration of resources on
those product lines makes sense as a strategy
for growth.

 The two basic concentration strategies are

vertical growth and horizontal growth.
 Concentration Strategies
51

 Vertical growth
 achieved by taking over a function previously
provided by a supplier or distributor
 Vertical growth results in vertical
integration.

 Vertical integration
 the degree to which a firm operates vertically
in multiple locations on an industry’s value
chain from extracting raw materials to
manufacturing to retailing
 Vertical Integration
52

 Backward  Forward
integration integration
 assuming a  assuming a
function function
previously previously
provided by a provided by a
supplier distributor
 Concentration Strategies
53

 Horizontal growth
 expansion of operations into other geographic
locations and/or increasing the range of
products and services offered to current
markets
 Horizontal growth results in horizontal
integration
 Horizontal integration
 the degree to which a firm operates in multiple
geographic locations at the same point on an
industry’s value chain
 Diversification Strategies
54

 Concentric (Related) diversification

 growth into a related industry when a firm
has a strong competitive position but the
current industry attractiveness is low
 The search is for synergy.
 Synergy
 the concept that two businesses will
generate more profits together than they
could separately
 Diversification Strategies
55

 Conglomerate (Unrelated)
diversification
 diversifying into an industry unrelated to its
current one
 Management realizes that the current
industry is unattractive.
 Firm lacks outstanding abilities or skills
that it could easily transfer to related
products or services in other industries.
 Controversies in
56
Directional Strategies
 Is vertical growth better than horizontal
growth?
 Is concentration better than
diversification?
 Is concentric diversification better than
conglomerate diversification?
 Stability Strategies
57
 A Corporation may choose stability over growth by
continuing its current activities without any significant
change in direction.
 Some of the popular strategies are:
 Pause/Proceed with caution strategy
 an opportunity to rest before continuing a growth or
retrenchment strategy
 No-change strategy
 decision to do nothing new—a choice to continue current
operations and policies for the foreseeable future
 Profit strategies
 decision to do nothing new in a worsening situation but
instead to act as though the company’s problems are
only temporary
 Retrenchment Strategies
58

 Retrenchment strategies
 used when the firm has a weak competitive
position in some or all of its product lines
from poor performance
 management may follow one of several
retrenchment strategies, ranging from
turnaround or becoming a captive
company , selling out, bankruptcy, or
liquidation.
 Retrenchment Strategies
59

 Turnaround strategy
 emphasizes the improvement of operational
efficiency when the corporation’s problems are
pervasive but not critical.
 the two basic phases of a turnaround strategy
are contraction and consolidation
 Contraction
 effort to quickly “stop the bleeding” with a general,
across-the-board cutback in size and costs.
 Consolidation
 stabilization of the now -leaner corporation
 Retrenchment Strategies
60

 Captive company strategy

 company gives up independence in
exchange for security
 Sell-out strategy
 management can still obtain a good price
for its shareholders and the employees can
keep their jobs by selling the company to
another firm
 Divestment
 sale of a division with low growth potential
 Retrenchment Strategies
61

 Bankruptcy
 company gives up management of the firm to the
courts in return for some settlement of the
corporation’s obligations
 the company will be stronger and better able to
compete in a more attractive industry. This
perpetuates the company.
 Liquidation
 management terminates the firm
 When the industry is unattractive and the company
too weak to be sold as a going concern, management
may choose to convert as many saleable assets as
possible to cash
 Portfolio Analysis
62

 Portfolio analysis
 management views its product lines and business units as
a series of investments from which it expects a profitable
return
 Companies with multiple product lines or business units
must ask themselves how these various products and
business units should be managed to boost overall
corporate performance
 One of the most popular aids to developing corporate
strategy in a multiple-business corporation is portfolio
analysis.
 Using the BCG (Boston Consulting Group) Growth-
Share Matrix depicted in the Figure below is the
simplest way to portray a corporation’s portfolio of
investments.
 BCG Growth—Share Matrix
7-63
 BCG Matrix
64

 Question marks
 new products with the potential for success
but need a lot of cash for development
 Stars
 market leaders that are typically at or
nearing the peak of their product life cycle
and are able to generate enough cash to
maintain their high share of the market and
usually contribute to the company’s profits
 BCG Matrix
65

 Cash cows
 products that bring in far more money than
is needed to maintain their market share
 Dogs
 products with low market share and do not
have the potential to bring in much cash
 BCG Matrix—Limitations
66

 Use of highs and lows to form categories is

too simplistic.
 Link between market share and profitability
is questionable.
 Growth rate is only one aspect of industry
attractiveness.
 Product lines or business units are
considered only in relation to one
competitor.
 Market share is only one aspect of overall
competitive position.
GE Matrix
 General Electric developed a more
complicated matrix.
 As depicted in Figure below, the GE
Business Screen includes nine cells based on
long-term industry attractiveness and
business strength competitive position.
 The GE Business Screen, in contrast to the
BCG Growth-Share Matrix, includes much
more data in its two key factors than just
business growth rate and comparable market
share.
GE Matrix…
 At GE, industry attractiveness includes
market growth rate, industry
profitability, size, and pricing practices,
among other possible opportunities and
threats.
 Business strength or competitive
position includes market share as well as
technological position, profitability, and
size, among other possible strengths and
weaknesses.
GE Matrix…
 Advantages and Limitations of
70
Portfolio Analysis
Advantages
Encourages top management to evaluate

each of the corporation’s businesses

individually and to set objectives and
allocate resources for each
Stimulates the use of externally oriented

data to supplement management’s

judgment
Raises the issue of cash flow availability to

use in expansion and growth

 Advantages and Limitations of
71
Portfolio Analysis
Limitations
Defining product/market segments is

difficult
Suggest the use of standard strategies that

can miss opportunities or be impractical

Value-laden terms such as cash cow and

dog can lead to self-fulfilling prophecies

Lack of clarity on what makes an industry

attractive or where a product is in its life

cycle
 Corporate Parenting
72

 Corporate parenting
 views a corporation in terms of resources
and capabilities that can be used to build
business unit value as well as generate
synergies across business units
 Corporate Parenting
73

 Generates corporate strategy by

focusing on the core competencies of
the parent corporation and the value
created from the relationship between
the parent and its businesses
 Developing a Corporate
74
Parenting Strategy
 The search for appropriate corporate
strategy involves three analytical steps:
1. Examine each business unit in terms of
its strategic factors
2. Examine each business unit in terms of
areas in which performance can be
improved
3. Analyze how well the parent corporation
fits with the business unit
 Horizontal Strategy and
75
Multipoint Competition
 Horizontal strategy
 Is a corporate strategy that cuts across
business unit boundaries to build synergy
across business units and to improve
competitive position in one or more
business units
 Horizontal Strategy and
76
Multipoint Competition
 Multipoint competition
 large multi-business corporations compete against
other large multi-business firms in a number of
markets
 These multipoint competitors are firms that compete
with each other not only in one business unit, but
also in a number of business units.
 Business units may sometimes need some help from
its corporate parent, especially if the competitor
business unit is getting heavy financial support from
its corporate parent.
 Inthis instance, corporate headquarters develops a
horizontal strategy to coordinate the various goals and
strategies of related business units.
 Chapter End questions
77

 1. How does horizontal growth differ from

vertical growth as a corporate strategy?

 2. What are the major advantages and

disadvantages of an integrative strategy?

 3. How is corporate parenting different

from portfolio analysis? How is it alike? Is
it a useful concept in a global industry?
 In class exercise
 Small- Group Exercise: Formulate a strategy for your
business school
 Break up into groups of three to five people. Appoint one group
member as spokesperson for the group, who will communicate
your findings to the class when called upon to do so by the
instructor.
 Assume you are the managers of Addis Ababa University
School of Commerce. Construct a SWOT Matrix. Include what
you consider to be your University’s major external
opportunities, major external threats, major strengths, and
major weaknesses.
 Match key external and internal factors by recording in the
appropriate cell of the matrix alternative strategies or actions
that would allow you to capitalize on your strengths, overcome
your weaknesses, take advantage of your external
opportunities, and minimize the impact of external threats.
 Be sure to use the appropriate matching notation in the
strategy cells of the matrix. Because every individual (and
organization) is unique, there is no one right answer to this
exercise.
 79

STRATEGY
FORMULATION:
FUNCTIONAL STRATEGY
AND STRATEGIC CHOICE
 Functional Strategy
80

 Functional strategy
 the approach a functional area takes to
achieve corporate and business unit
objectives and strategies by maximizing
resource productivity
 Marketing Strategy
81

 Marketing strategy
 deals with pricing, selling and distributing a
product
 Marketing Strategy
82

 Market development strategy

 a company or business unit can (1) capture
a larger share of an existing market for
current products through market saturation
and market penetration or (2) develop new
uses and/or markets for current products.
 Marketing Strategy
83

 Product development strategy

 a company or unit can (1) develop new
products for existing markets or (2) develop
new products for new markets.
 Marketing Strategy
84

 Brand extension
 using a successful brand name to market
other products
 Push strategy
 trade promotions to gain or hold shelf
space in retail outlets
 Pull strategy
 advertising to “pull” products through the
distribution channels
 Marketing Strategy
85

 When pricing a new product, a company

or business unit can follow one of two
strategies.
 Skim pricing
 offers the opportunity to “skim the cream”
from the top of the demand curve with a
high price while the product is novel and
competitors are few
 Marketing Strategy
86

 Penetration pricing
 attempts to hasten market development
and offers the pioneer the opportunity to
use the experience curve to gain market
share with low price and then dominate the
industry
 Financial Strategy
87

 Financial Strategy
 examines the financial implications of
corporate- and business-level strategic
options and identifies the best financial
course of action
 The management of dividends and
stock price is an important part of a
corporation’s financial strategy.
 Financial Strategy
88

 Leveraged buyout
 company is acquired in a transaction
financed largely by debt usually obtained
from a third party, such as an insurance
company or an investment banker.
 Research and
89
Development Strategy
 Research and Development Strategy
 deals with product and process innovation
and improvement
 also deals with the appropriate mix of
different types of R&D and question of how
new technology should be accessed —
through internal development, external
acquisition or strategic alliances.
 Research and
90
Development Strategy
 The following are R & D choices:
 Technological leader
 pioneering an innovation
 Technological follower
 imitating the products of competitors
 Open innovation
 firm uses alliances and connections with
corporate, government, academic labs and
consumers to develop new products and
processes
 Operations Strategy
91

 Operations Strategy
 determines how and where a product or
service is to be manufactured, the level of
vertical integration in the production
process, the deployment of physical
resources and relationships with suppliers
 Purchasing Strategy
92

 Purchasing Strategy
 deals with obtaining raw materials, parts
and supplies needed to perform the
operations function
 The basic purchasing choices are
multiple, sole and parallel sourcing.
 Purchasing Strategy
93

 Multiple sourcing
 the purchasing company orders a
particular part from several vendors
 Sole sourcing
 relies on only one supplier for a particular
part
 Parallel sourcing
 two suppliers are the sole suppliers of two
different parts, but they are also backup
suppliers for each other’s parts
 Logistics Strategy
94

 Logistics Strategy
 deals with the flow of products into and out
of the manufacturing process
 Three trends related to this strategy
are evident:
 Centralization
 Outsourcing
 The use of Internet
 HRM Strategy
95

 HRM strategy
 addresses the issue of whether a company
or business unit should hire a large number
of low-skilled employees who receive low
pay, perform repetitive jobs and will most
likely quit after a short time (the fast-food
restaurant strategy) or hire skilled
employees who receive relatively high pay
and are cross-trained to participate in self-
managing work teams
 Information Technology
96

 Follow-the-sun management
 Multinational corporations are finding

that having a sophisticated intranet

allows employees to practice follow-
the-sun management, in which project
team members living in one country can
pass their work to team members in
another country in which the work day is
just beginning.
 The Sourcing Decision:
97
Location of Functions
 Outsourcing
 purchasing from someone else a product or
service that had been previously provided
internally
 the reverse of vertical integration
 Offshoring
 the outsourcing of an activity or a function
to a wholly owned company or an
independent provider in another country.
 Disadvantages of
98
Outsourcing
 Errors in Outsourcing to
99
Avoid
 A study of 91 outsourcing efforts
conducted by European and North
American firms found seven major errors
that should be avoided:
 Outsourcing the wrong activities
 Selecting the wrong vendor
 Writing a poor contracts
 Overlooking personnel issues
 Lack of control
 Overlooking hidden costs
 Lack of an exit strategy
 Proposed Outsourcing
100
Matrix
 Strategies to Avoid
101

Managers who have made poor analyses or lack

creativity may be trapped into considering some of the
following strategies to avoid:
 Stakeholder Priority Matrix
102

Stakeholders can be categorized in terms of their (1) interest in

the corporation’s activities and (2) relative power to influence the
corporation’s activities.
 Questions to Assess
103
Stakeholder Concerns
 Strategic managers should ask four
questions to assess the importance of
stakeholder concerns in a particular
decision:
1. How will this decision affect each
stakeholder?
2. How much of what stakeholders want are
they likely to get under the alternative?
3. What are the stakeholders likely to do if they
don’t get what they want?
4. What is the probability that they will do it?
 Pressures from
104
Stakeholders
 Political strategy
 plan to bring stakeholders into agreement
with a corporation’s actions
 Some of the most commonly used
political strategies are constituency
building, political action committee
contributions, advocacy advertising,
lobbying and coalition building.
 Pressures from the
105
Corporate Culture
 In evaluating a strategic alternative,
strategy makers must consider pressures
from the corporate culture and assess a
strategy’s compatibility with that culture.
If there is little fit, management must decide

if it should:
 Take a chance on ignoring the culture.
 Manage around the culture and change the
implementation plan.
 Try to change the culture to fit the strategy.
 Change the strategy to fit the culture.
 Process of Strategic Choice
106

 Strategic choice
 the evaluation of alternative strategies and
selection of the best alternative
 Failure almost always stems from the
actions of the decision maker, not from
bad luck or situational limitations.
 Avoiding the Consensus
107
Trap
 There is mounting evidence that the best strategic
decisions are not arrived at through consensus
when everyone agrees on one alternative.
 Two techniques help strategic managers avoid the
consensus trap :
 Devil’s advocate
 assigned to identify potential pitfalls and problems
with a proposed alternative strategy in a formal
presentation
 may be an individual or a group
 Dialectical inquiry
 requires that two proposals using different
assumptions be generated for each alternative
strategy under consideration
 Process of Strategic Choice
108

Criteria for evaluating alternatives includes:

 Mutual exclusivity: Doing any one
alternative would preclude doing any other.
 Success: It must be feasible and have a good
probability of success.
 Completeness: It must take into account all
the key strategic issues.
 Internal consistency: It must make sense
on its own as a strategic decision for the
entire firm and not contradict key goals,
policies and strategies currently being
pursued by the firm or its units.
 Developing Policies
109

The selection of the best strategic alternative is

not the end of strategy formulation.
Policies define the broad guidelines for

implementation.
When crafted correctly, an effective policy

accomplishes three things:

 It forces trade-offs between competing resource
demands.
 It tests the strategic soundness of a particular
action.
 It sets clear boundaries within which employees
must operate, while granting them the freedom
to experiment within those constraints.
 Chapter End Questions
110

1. Are functional strategies interdependent,

or can they be formulated independently
of other functions?
2. Why is penetration pricing more likely
than skim pricing to raise a company’s
or a business unit’s operating profit in
the long run?
3. What is the relationship of policies to
strategies?