Unit 3: Formulation of Corporate Strategies
Formulating corporate strategies involves a systematic process, from understanding the organization's mission and vision to analysing the environment, setting goals, developing strategies, and implementing them. This process can be approached through various perspectives, including planning-based, fit-based, and emergent approaches.
Key Approaches to Strategy Formulation
- o Planning-based Approach: This approach focuses on long-term planning and execution to achieve organizational goals. It involves setting clear objectives, developing detailed plans, and allocating resources to ensure successful implementation.
- o Fit-based Approach: This approach emphasizes aligning internal strengths and weaknesses with external opportunities and threats. It involves conducting a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to identify strategic fits.
- o Emergent Approach: This approach acknowledges that strategies can evolve and emerge over time as organizations respond to changing circumstances. It emphasizes flexibility and adaptability in strategy development.
Steps in the Strategy Formulation Process
[Strategy formulation process diagram would be placed here]
Major Strategy Options - Stability, Growth and Expansion
Major strategic options for a company include Stability, Growth, and Expansion, each representing a different approach to managing the business. Stability focuses on maintaining the current market position, while growth and expansion aim to increase the company's scale and reach. These strategies are often pursued in combination and can be implemented at different levels within the organization.
| Items | Stability Strategy | Growth Strategy | Expansion Strategy |
|---|---|---|---|
| Purpose | To maintain the current market position and operations without significant changes. | To increase the company's size, revenue, or market share. | To broaden the scope of the business, often involving diversification or entering new markets. |
| When to use | When the company is performing well and wants to sustain its market share, or when facing industry or economic turmoil. | When the company wants to expand its reach, improve its market position, or capitalize on new opportunities. | When the company wants to leverage its resources and capabilities to expand its operations, or when seeking to diversify its risk. |
| Key elements | Maintaining the status quo, improving functional performance, and consolidating existing business. | Market penetration, product development, market development, and diversification. | Diversification into related or unrelated industries, geographical expansion, and strategic alliances. |
| Examples | Consolidating existing operations, improving efficiency, or focusing on internal improvements. | Entering new markets, launching new products, acquiring other companies, or increasing marketing efforts. | Developing new products or services, expanding into new geographic locations, or acquiring other businesses. |
Concentration Strategy
A concentration strategy focuses on a single product or market segment. The firm devotes its resources to strengthening its position in one area rather than spreading across multiple domains. Example: Coca-Cola focusing on its beverages business worldwide.
Types
- Market Penetration – Increase market share in existing markets (e.g., aggressive promotions)
- Market Development – Entering new markets with existing products (e.g., new regions)
- Product Development – Offering new or improved products in existing markets
👍 Pros
- o Easier management
- o Builds core competencies
- o Lower risk and cost than diversification
👎 Cons
- o Over-dependence on one market/product
- o Vulnerable to market changes or disruption
Integration Strategy
Integration involves combining operations with other companies or expanding within the value chain to gain control over supply, production, or distribution. Example: Reliance integrating retail, telecom, and oil businesses to control supply and distribution.
Types
- Vertical Integration
- Forward Integration: Control distribution channels (e.g., a manufacturer opening retail stores)
- Backward Integration: Control over suppliers (e.g., a car maker acquiring a tire company)
- Horizontal Integration: Merging with or acquiring competitors in the same industry (e.g., Facebook acquiring Instagram)
👍 Pros
- o Cost savings through economies of scale
- o Better control over the supply chain
- o Increases market power
👎 Cons
- o High cost of acquisition
- o Risk of antitrust issues or management complexity
Diversification Strategy
Diversification involves entering new products and/or markets to reduce risk and exploit growth opportunities. Example: ITC started as a tobacco company, diversified into hotels, paperboards, FMCG.
Types
- Related Diversification: Expansion into businesses with strategic fit (e.g., Apple moving from computers to phones and wearables)
- Unrelated Diversification: Entry into totally different industries (e.g., Tata Group in steel, cars, tea, hotels)
👍 Pros
- o Reduces dependency on one product/market
- o Creates cross-business synergy
👎 Cons
- o Higher management complexity
- o Risk of losing focus
Internationalization Strategy
Internationalization is expanding the business beyond domestic borders into global markets. Example: McDonald's operating franchises in over 100 countries.
Modes of Entry
- Exporting: Selling domestic products directly or indirectly to foreign markets. It involves low investment and risk but offers limited control over distribution and marketing abroad.
- Licensing/Franchising: A company allows a foreign firm to use its intellectual property, brand, or business model for a fee or royalty. Licensing suits manufacturing; franchising is common in services like fast food or retail.
- Joint Ventures: Two or more companies form a new entity by pooling resources to operate in a foreign market. It shares risk, investment, and control but may lead to conflict due to cultural or strategic differences.
- Wholly-owned subsidiaries: A company fully owns and controls a foreign operation, either through a new investment (greenfield) or acquisition. It provides maximum control and profit but involves high risk and investment.
- Strategic Alliances: Firms collaborate without forming a new entity to share knowledge, technology, or market access. It is flexible and resource-efficient but may lack binding commitment and long-term stability.
👍 Pros
- o Access to new markets and customers
- o Economies of scale
- o Diversification of risk
👎 Cons
- o Cultural and legal challenges
- o Political and economic risks
Cooperation Strategy
Firms may cooperate with other companies instead of competing, for mutual benefit. These are alliances to achieve shared goals. Example: Starbucks & Tata Group alliance in India.
Types
- Joint Ventures: New entity formed by two companies
- Strategic Alliances: Collaborative agreement without new entity
- Franchising: Licensing brand and business model
- Consortia: Group collaboration for large projects (e.g., infrastructure)
👍 Pros
- o Shared risk and cost
- o Access to new competencies and markets
👎 Cons
- o Conflicts of interest
- o Shared control may limit flexibility
Digitalization Strategy
A digitalization strategy uses digital technologies (AI, IoT, automation, cloud, big data, etc.) to transform operations, customer engagement, and value creation. Example: Netflix shifting from DVD rental to a digital streaming platform using customer data and AI.
Components
- Digital platforms (e-commerce, mobile apps): Online tools that enable businesses to deliver products, services, and experiences digitally to customers.
- Data analytics: The process of analysing large volumes of data to uncover trends, patterns, and insights for informed decision-making.
- Automation & AI: Technologies that perform tasks with minimal human intervention, enhancing speed, accuracy, and efficiency.
- Cloud infrastructure: On-demand computing services like storage, servers, and databases delivered over the internet for scalability and flexibility.
- Cybersecurity: Protecting digital systems, networks, and data from unauthorized access, attacks, or damage.
👍 Pros
- o Enhanced efficiency and scalability
- o Improved customer experience
- o Innovation-driven growth
👎 Cons
- o High investment
- o Requires skilled workforce and cultural change
Retrenchment Strategy
A retrenchment strategy involves cutting down operations to reduce losses or improve financial health. It is often used in crisis or turnaround situations. Example: General Motors selling off brands like Hummer and Saab.
Types
- Turnaround: Reorganization to improve performance
- Divestment: Selling off non-core or unprofitable units
- Liquidation: Closing down the entire business or a part of it
👍 Pros
- o Frees up resources
- o Stops losses
- o Brings focus back to core operations
👎 Cons
- o May hurt brand/image
- o Job losses and morale issues
Combination Strategy
A combination strategy blends two or more strategic options based on the company's needs, resources, and external environment.
Example: Tata Motors using
- Diversification (cars, trucks, EVs),
- Internationalization (Jaguar-Land Rover),
- Digitalization (connected car technologies),
- Cooperation (strategic alliances for electric vehicles)
When to Use
- In complex and dynamic industries
- For conglomerates with multiple business units
👍 Pros
- Flexibility
- Balanced risk and growth
- Customizable to changing scenarios
👎 Cons
- Harder to manage and align
- Resource allocation complexity
