Strategy Formulation

Rex C. Mitchell, Ph.D.

INTRODUCTION
It is useful to consider strategy formulation as art of a strategic management rocess that
comrises three hases! diagnosis, formulation, and imlementation. "trategic management is an
ongoing rocess to de#elo and re#ise future$oriented strategies that allo% an organi&ation to
achie#e its o'(ecti#es, considering its caa'ilities, constraints, and the en#ironment in %hich it
oerates.
Diagnosis includes! )a* erforming a situation analysis )analysis of the internal en#ironment
of the organi&ation*, including identification and e#aluation of current mission, strategic o'(ecti#es,
strategies, and results, lus ma(or strengths and %ea+nesses, )'* analy&ing the organi&ation-s
external en#ironment, including ma(or oortunities and threats, and )c* identifying the ma(or
critical issues, %hich are a small set, tyically t%o to fi#e, of ma(or ro'lems, threats, %ea+nesses,
and.or oortunities that re/uire articularly high riority attention 'y management.
Formulation, the second hase in the strategic management rocess, roduces a clear set of
recommendations, %ith suorting (ustification, that re#ise as necessary the mission and o'(ecti#es
of the organi&ation, and suly the strategies for accomlishing them. In formulation, %e are trying
to modify the current o'(ecti#es and strategies in %ays to ma+e the organi&ation more successful.
This includes trying to create 0sustaina'le0 cometiti#e ad#antages $$ although most cometiti#e
ad#antages are eroded steadily 'y the efforts of cometitors.
1 good recommendation should 'e! effecti#e in sol#ing the stated ro'lem)s*, ractical )can
'e imlemented in this situation, %ith the resources a#aila'le*, feasi'le %ithin a reasona'le time
frame, cost$effecti#e, not o#erly disruti#e, and acceta'le to +ey 0sta+eholders0 in the
organi&ation. It is imortant to consider 0fits0 'et%een resources lus cometencies %ith
oortunities, and also fits 'et%een ris+s and exectations.
There are four rimary stes in this hase!
2 Re#ie%ing the current +ey o'(ecti#es and strategies of the organi&ation, %hich usually
%ould ha#e 'een identified and e#aluated as art of the diagnosis
2 Identifying a rich range of strategic alternati#es to address the three le#els of strategy
formulation outlined 'elo%, including 'ut not limited to dealing %ith the critical issues
2 Doing a 'alanced e#aluation of ad#antages and disad#antages of the alternati#es relati#e to
their feasi'ility lus exected effects on the issues and contri'utions to the success of the
organi&ation
2 Deciding on the alternati#es that should 'e imlemented or recommended.
In organi&ations, and in the ractice of strategic management, strategies must 'e implemented
to achie#e the intended results. The most %onderful strategy in the history of the %orld is useless if
not imlemented successfully. This third and final stage in the strategic management rocess
in#ol#es de#eloing an imlementation lan and then doing %hate#er it ta+es to ma+e the ne%
strategy oerational and effecti#e in achie#ing the organi&ation-s o'(ecti#es.
The remainder of this chater focuses on strategy formulation, and is organi&ed into six sections!
Three 1sects of "trategy 3ormulation, Cororate$4e#el "trategy, Cometiti#e "trategy, 3unctional
"trategy, Choosing "trategies, and Trou'lesome "trategies.
T5R66 1"P6CT" O3 "TR1T678 3ORMU41TION
The follo%ing three asects or le#els of strategy formulation, each %ith a different focus, need to 'e
dealt %ith in the formulation hase of strategic management. The three sets of recommendations
must 'e internally consistent and fit together in a mutually suorti#e manner that forms an
integrated hierarchy of strategy, in the order gi#en.
Corporate Level Strategy: In this asect of strategy, %e are concerned %ith 'road decisions a'out
the total organi&ation-s scoe and direction. 9asically, %e consider %hat changes should 'e made in
our gro%th o'(ecti#e and strategy for achie#ing it, the lines of 'usiness %e are in, and ho% these
lines of 'usiness fit together. It is useful to thin+ of three comonents of cororate le#el strategy!
)a* gro%th or directional strategy )%hat should 'e our gro%th o'(ecti#e, ranging from retrenchment
through sta'ility to #arying degrees of gro%th $ and ho% do %e accomlish this*, )'* ortfolio
strategy )%hat should 'e our ortfolio of lines of 'usiness, %hich imlicitly re/uires reconsidering
ho% much concentration or di#ersification %e should ha#e*, and )c* arenting strategy )ho% %e
allocate resources and manage caa'ilities and acti#ities across the ortfolio $$ %here do %e ut
secial emhasis, and ho% much do %e integrate our #arious lines of 'usiness*.
Competitive Strategy (often called Business Level Strategy): This in#ol#es deciding ho% the
comany %ill comete %ithin each line of 'usiness )4O9* or strategic 'usiness unit )"9U*.
Functional Strategy: These more locali&ed and shorter$hori&on strategies deal %ith ho% each
functional area and unit %ill carry out its functional acti#ities to 'e effecti#e and maximi&e resource
roducti#ity.
CORPOR1T6 46:64 "TR1T678
This comrises the o#erall strategy elements for the cororation as a %hole, the grand strategy, if
you lease. Cororate strategy in#ol#es four +inds of initiati#es!
2 Ma+ing the necessary mo#es to esta'lish ositions in different 'usinesses and achie#e an
aroriate amount and +ind of di#ersification. 1 +ey art of cororate strategy is ma+ing
decisions on ho% many, %hat tyes, and %hich secific lines of 'usiness the comany
should 'e in. This may in#ol#e deciding to increase or decrease the amount and 'readth of
di#ersification. It may in#ol#e closing out some 4O9-s )lines of 'usiness*, adding others,
and.or changing emhasis among 4O9-s.
2 Initiating actions to 'oost the com'ined erformance of the 'usinesses the comany has
di#ersified into! This may in#ol#e #igorously ursuing raid$gro%th strategies in the most
romising 4O9-s, +eeing the other core 'usinesses healthy, initiating turnaround efforts in
%ea+$erforming 4O9-s %ith romise, and droing 4O9-s that are no longer attracti#e or
don-t fit into the cororation-s o#erall lans. It also may in#ol#e sulying financial,
;
managerial, and other resources, or ac/uiring and.or merging other comanies %ith an
existing 4O9.
2 Pursuing %ays to cature #alua'le cross$'usiness strategic fits and turn them into
cometiti#e ad#antages $$ esecially transferring and sharing related technology,
rocurement le#erage, oerating facilities, distri'ution channels, and.or customers.
2 6sta'lishing in#estment riorities and mo#ing more cororate resources into the most
attracti#e 4O9-s.
It is useful to organi&e the cororate le#el strategy considerations and initiati#es into a
frame%or+ %ith the follo%ing three main strategy comonents! gro%th, ortfolio, and arenting.
These are discussed in the next three sections.
What Should be Our Growth Objective and Strategies?
7ro%th o'(ecti#es can range from drastic retrenchment through aggressi#e gro%th.
Organi&ational leaders need to re#isit and ma+e decisions a'out the gro%th o'(ecti#es and the
fundamental strategies the organi&ation %ill use to achie#e them. There are forces that tend to ush
to decision$ma+ers to%ard a gro%th stance e#en %hen a comany is in trou'le and should not 'e
trying to gro%, for examle 'onuses, stoc+ otions, fame, ego. 4eaders need to resist such
temtations and select a gro%th strategy stance that is aroriate for the organi&ation and its
situation. "ta'ility and retrenchment strategies are underutili&ed.
"ome of the ma(or strategic alternati#es for each of the rimary gro%th stances )retrenchment,
sta'ility, and gro%th* are summari&ed in the follo%ing three su'$sections.
Growth Strategies
1ll gro%th strategies can 'e classified into one of t%o fundamental categories! concentration
%ithin existing industries or diversification into other lines of 'usiness or industries. <hen a
comany-s current industries are attracti#e, ha#e good gro%th otential, and do not face serious
threats, concentrating resources in the existing industries ma+es good sense. Di#ersification tends
to ha#e greater ris+s, 'ut is an aroriate otion %hen a comany-s current industries ha#e little
gro%th otential or are unattracti#e in other %ays. <hen an industry consolidates and 'ecomes
mature, unless there are other mar+ets to see+ )for examle other international mar+ets*, a comany
may ha#e no choice for gro%th 'ut di#ersification.
There are t%o 'asic concentration strategies, vertical integration and horizontal growth.
Di#ersification strategies can 'e di#ided into related )or concentric* and unrelated )conglomerate*
di#ersification. 6ach of the resulting four core categories of strategy alternati#es can 'e achie#ed
internally through in#estment and de#eloment, or externally through mergers, ac/uisitions, and.or
strategic alliances $$ thus roducing eight ma(or gro%th strategy categories.
Comments a'out each of the four core categories are outlined 'elo%, follo%ed 'y some +ey
oints a'out mergers, ac/uisitions, and strategic alliances.
1. Vertical Integration: This tye of strategy can 'e a good one if the comany has a strong
cometiti#e osition in a gro%ing, attracti#e industry. 1 comany can gro% 'y ta+ing o#er
functions earlier in the #alue chain that %ere re#iously ro#ided 'y suliers or other organi&ations
)0'ac+%ard integration0*. This strategy can ha#e ad#antages, e.g., in cost, sta'ility and /uality of
comonents, and ma+ing oerations more difficult for cometitors. 5o%e#er, it also reduces
=
flexi'ility, raises exit 'arriers for the comany to lea#e that industry, and re#ents the comany
from see+ing the 'est and latest comonents from suliers cometing for their 'usiness.
1 comany also can gro% 'y ta+ing o#er functions for%ard in the #alue chain re#iously
ro#ided 'y final manufacturers, distri'utors, or retailers )0for%ard integration0*. This strategy
ro#ides more control o#er such things as final roducts.ser#ices and distri'ution, 'ut may in#ol#e
ne% critical success factors that the arent comany may not 'e a'le to master and deli#er. 3or
examle, 'eing a %orld$class manufacturer does not ma+e a comany an effecti#e retailer.
"ome %riters claim that 'ac+%ard integration is usually more rofita'le than for%ard
integration, although this does not ha#e general suort. In any case, many comanies ha#e mo#ed
to%ard less #ertical integration )esecially 'ac+%ard, 'ut also for%ard* during the last decade or so,
relacing significant amounts of re#ious #ertical integration %ith outsourcing and #arious forms of
strategic alliances.
2. Horizontal Growth: This strategy alternati#e category in#ol#es exanding the comany-s
existing roducts into other locations and.or mar+et segments, or increasing the range of
roducts.ser#ices offered to current mar+ets, or a com'ination of 'oth. It amounts to exanding
side%ays at the oint)s* in the #alue chain that the comany is currently engaged in. One of the
rimary ad#antages of this alternati#e is 'eing a'le to choose from a fairly continuous range of
choices, from modest extensions of resent roducts.mar+ets to ma(or exansions $$ each %ith
corresonding amounts of cost and ris+.
3. Related i!ersi"ication #a$a %oncentric i!ersi"ication&: In this alternati#e, a comany
exands into a related industry, one ha#ing synergy %ith the comany-s existing lines of 'usiness,
creating a situation in %hich the existing and ne% lines of 'usiness share and gain secial
ad#antages from commonalities such as technology, customers, distri'ution, location, roduct or
manufacturing similarities, and go#ernment access. This is often an aroriate cororate strategy
%hen a comany has a strong cometiti#e osition and distincti#e cometencies, 'ut its existing
industry is not #ery attracti#e.
'. (nrelated i!ersi"ication #a$a %onglomerate i!ersi"ication&: This fourth ma(or category of
cororate strategy alternati#es for gro%th in#ol#es di#ersifying into a line of 'usiness unrelated to
the current ones. The reasons to consider this alternati#e are rimarily see+ing more attracti#e
oortunities for gro%th in %hich to in#est a#aila'le funds )in contrast to rather unattracti#e
oortunities in existing industries*, ris+ reduction, and.or rearing to exit an existing line of
'usiness )for examle, one in the decline stage of the roduct life cycle*. 3urther, this may 'e an
aroriate strategy %hen, not only the resent industry is unattracti#e, 'ut the comany lac+s
outstanding cometencies that it could transfer to related roducts or industries. 5o%e#er, 'ecause
it is difficult to manage and excel in unrelated 'usiness units, it can 'e difficult to reali&e the hoed$
for #alue added.
)ergers* +c,uisitions* and Strategic +lliances: 6ach of the four gro%th strategy categories (ust
discussed can 'e carried out internally or externally, through mergers, ac/uisitions, and.or strategic
alliances. Of course, there also can 'e a mixture of internal and external actions.
:arious forms of strategic alliances, mergers, and ac/uisitions ha#e emerged and are used
extensi#ely in many industries today. They are used articularly to 'ridge resource and technology
gas, and to o'tain exertise and mar+et ositions more /uic+ly than could 'e done through internal
>
de#eloment. They are articularly necessary and otentially useful %hen a comany %ishes to
enter a ne% industry, ne% mar+ets, and.or ne% arts of the %orld.
Desite their extensi#e use, a large share of alliances, mergers, and ac/uisitions fall far short
of exected 'enefits or are outright failures. 3or examle, one study u'lished in Business Wee in
?@@@ found that A? ercent of alliances %ere either outright failures or 0liming along.0 Research
on mergers and ac/uisitions includes a Mercer Management Consulting study of all mergers from
?@@B to ?@@A %hich found that nearly half 0destroyed0 shareholder #alue, an 1. T. Cearney study of
??D multi'illion$dollar, glo'al mergers 'et%een ?@@= and ?@@A %here DE ercent failed to create
0su'stantial returns for shareholders0 in the form of di#idends and stoc+ rice areciation, and a
Price$<aterhouse$Cooers study of @F ac/uisitions o#er GDBB million from ?@@> to ?@@F in %hich
t%o$thirds of the 'uyer-s stoc+s droed on announcement of the transaction and a third of these
%ere still lagging a year later.
Many reasons for the ro'lematic record ha#e 'een cited, including aying too much,
unrealistic exectations, inade/uate due diligence, and conflicting cororate cultures, ho%e#er, the
most o%erful contri'utor to success or failure is inade/uate attention to the merger integration
rocess. 1lthough the la%yers and in#estment 'an+ers may consider a deal done %hen the aers
are signed and they recei#e their fees, this should 'e merely an incident in a multi$year rocess of
integration that 'egan 'efore the signing and continues far 'eyond.
Sta-ility Strategies
There are a num'er of circumstances in %hich the most aroriate gro%th stance for a comany is
sta'ility, rather than gro%th. Often, this may 'e used for a relati#ely short eriod, after %hich
further gro%th is lanned. "uch circumstances usually in#ol#e a reasona'le successful comany,
com'ined %ith circumstances that either ermit a eriod of comforta'le coasting or suggest a ause
or caution. Three alternati#es are outlined 'elo%, in %hich the actual strategy actions are similar,
'ut differing rimarily in the circumstances moti#ating the choice of a sta'ility strategy and in the
intentions for future strategic actions.

1. .ause and /hen .roceed: This sta'ility strategy alternati#e )essentially a timeout* may 'e
aroriate in either of t%o situations! )a* the need for an oortunity to rest, digest, and
consolidate after gro%th or some tur'ulent e#ents $ 'efore continuing a gro%th strategy, or )'* an
uncertain or hostile en#ironment in %hich it is rudent to stay in a 0holding attern0 until there is
change in or more clarity a'out the future in the en#ironment.
2. 0o %hange: This alternati#e could 'e a co$out, reresenting indecision or timidity in ma+ing a
choice for change. 1lternati#ely, it may 'e a comforta'le, e#en long$term strategy in a mature,
rather sta'le en#ironment, e.g., a small 'usiness in a small to%n %ith fe% cometitors.
3. Gra- .ro"its 1hile 2ou %an: This is a non$recommended strategy to try to mas+ a
deteriorating situation 'y artificially suorting rofits or their aearance, or other%ise trying to
act as though the ro'lems %ill go a%ay. It is an unsta'le, temorary strategy in a %orsening
situation, usually chosen either to try to delay letting sta+eholders +no% ho% 'ad things are or to
extract ersonal gain 'efore things collase. Recent terri'le examles in the U"1 are 6nron and
<orldCom.
Retrenchment Strategies
D
/urnaround: This strategy, dealing %ith a comany in serious trou'le, attemts to resuscitate or
re#i#e the comany through a com'ination of contraction )general, ma(or cut'ac+s in si&e and
costs* and consolidation )creating and sta'ili&ing a smaller, leaner comany*. 1lthough difficult,
%hen done #ery effecti#ely it can succeed in 'oth retaining enough +ey emloyees and re#itali&ing
the comany.
%a3ti!e %om3any Strategy: This strategy in#ol#es gi#ing u indeendence in exchange for some
security 'y 'ecoming another comany-s sole sulier, distri'utor, or a deendent su'sidiary.
Sell 4ut: If a comany in a %ea+ osition is una'le or unli+ely to succeed %ith a turnaround or
cati#e comany strategy, it has fe% choices other than to try to find a 'uyer and sell itself )or
di#est, if art of a di#ersified cororation*.
5i,uidation: <hen a comany has 'een unsuccessful in or has none of the re#ious three strategic
alternati#es a#aila'le, the only remaining alternati#e is li/uidation, often in#ol#ing a 'an+rutcy.
There is a modest ad#antage of a #oluntary li/uidation o#er 'an+rutcy in that the 'oard and to
management ma+e the decisions rather than turning them o#er to a court, %hich often ignores
stoc+holders- interests.
What Should Be Our !ortfolio Strateg"?
This second comonent of cororate le#el strategy is concerned %ith ma+ing decisions a'out the
ortfolio of lines of 'usiness )4O9-s* or strategic 'usiness units )"9U-s*, not the comany-s
ortfolio of indi#idual roducts.
Portfolio matrix models can 'e useful in reexamining a comany-s resent ortfolio. The
urose of all ortfolio matrix models is to hel a comany understand and consider changes in its
ortfolio of 'usinesses, and also to thin+ a'out allocation of resources among the different 'usiness
elements. The t%o rimary models are the 9C7 7ro%th$"hare Matrix and the 76 9usiness "creen
)Porter, ?@EB, has a good summary of these*. These models consider and dislay on a t%o$
dimensional grah each ma(or "9U in terms of some measure of its industry attracti#eness and its
relati#e cometiti#e strength
The B#G Growth$Share %atri& model considers t%o relati#ely simle #aria'les! gro%th rate
of the industry as an indication of industry attracti#eness, and relati#e mar+et share as an indication
of its relati#e cometiti#e strength. The G' Business Screen, also associated %ith McCinsey,
considers t%o comosite #aria'les, %hich can 'e customi&ed 'y the user, for )a* industry
attracti#eness )e.g, one could include industry si&e and gro%th rate, rofita'ility, ricing ractices,
fa#ored treatment in go#ernment dealings, etc.* and )'* cometiti#e strength )e.g., mar+et share,
technological osition, rofita'ility, si&e, etc.*
The 'est test of the 'usiness ortfolio-s o#erall attracti#eness is %hether the com'ined gro%th
and rofita'ility of the 'usinesses in the ortfolio %ill allo% the comany to attain its erformance
o'(ecti#es. Related to this o#erall criterion are such /uestions as!
2 Does the ortfolio contain enough 'usinesses in attracti#e industriesH
2 Does it contain too many marginal 'usinesses or /uestion mar+sH
2 Is the roortion of mature.declining 'usinesses so great that gro%th %ill 'e sluggishH
2 1re there some 'usinesses that are not really needed or should 'e di#estedH
A
2 Does the comany ha#e its share of industry leaders, or is it 'urdened %ith too many
'usinesses in modest cometiti#e ositionsH
2 Is the ortfolio of "9U-s and its relati#e ris+.gro%th otential consistent %ith the strategic
goalsH
2 Do the core 'usinesses generate deenda'le rofits and.or cash flo%H
2 1re there enough cash$roducing 'usinesses to finance those needing cash
2 Is the ortfolio o#erly #ulnera'le to seasonal or recessionary influencesH
2 Does the ortfolio ut the cororation in good osition for the futureH
It is imortant to consider di#ersification #s. concentration %hile %or+ing on ortfolio
strategy, i.e., ho% 'road or narro% should 'e the scoe of the comany. It is not al%ays desira'le to
ha#e a 'road scoe. "ingle$'usiness strategies can 'e #ery successful )e.g., early strategies of
McDonald-s, Coca$Cola, and 9IC Pen*. "ome of the ad#antages of a narro% scoe of 'usiness are!
)a* less am'iguity a'out %ho %e are and %hat %e do, )'* concentrates the efforts of the total
organi&ation, rather than stretching them across many lines of 'usiness, )c* through extensi#e
hands$on exerience, the comany is more li+ely to de#elo distincti#e cometence, and )d* focuses
on long$term rofits. 5o%e#er, ha#ing a single 'usiness uts 0all the eggs in one 'as+et,0 %hich is
dangerous %hen the industry and.or technology may change. Di#ersification 'ecomes more
imortant %hen mar+et gro%th rate slo%s. 9uilding sta'le shareholder #alue is the ultimate
(ustification for di#ersifying $$ or any strategy.
What Should Be Our !arenting Strateg"?
This third comonent of cororate le#el strategy, rele#ant for a multi$'usiness comany )it is moot
for a single$'usiness comany*, is concerned %ith ho% to allocate resources and manage
caa'ilities and acti#ities across the ortfolio of 'usinesses. It includes e#aluating and ma+ing
decisions on the follo%ing!
2 Priorities in allocating resources )%hich 'usiness units %ill 'e stressed*
2 <hat are critical success factors in each 'usiness unit, and ho% can the comany do %ell
on them
2 Coordination of acti#ities )e.g., hori&ontal strategies* and transfer of caa'ilities among
'usiness units
2 5o% much integration of 'usiness units is desira'le.
COMP6TITI:6 )9U"IN6"" 46:64* "TR1T678
In this second asect of a comany-s strategy, the focus is on ho% to comete successfully in each of
the lines of 'usiness the comany has chosen to engage in. The central thrust is ho% to 'uild and
imro#e the comany-s cometiti#e osition for each of its lines of 'usiness. 1 comany has
cometiti#e ad#antage %hene#er it can attract customers and defend against cometiti#e forces
'etter than its ri#als. Comanies %ant to de#elo cometiti#e ad#antages that ha#e some
sustaina'ility )although the tyical term 0sustaina'le cometiti#e ad#antage0 is usually only true
dynamically, as a firm %or+s to continue it*. "uccessful cometiti#e strategies usually in#ol#e
'uilding uni/uely strong or distincti#e cometencies in one or se#eral areas crucial to success and
using them to maintain a cometiti#e edge o#er ri#als. "ome examles of distincti#e cometencies
F
are suerior technology and.or roduct features, 'etter manufacturing technology and s+ills,
suerior sales and distri'ution caa'ilities, and 'etter customer ser#ice and con#enience.
%om3etiti!e strategy is a-out -eing di""erent. It means deli-erately choosing to 3er"orm
acti!ities di""erently or to 3er"orm di""erent acti!ities than ri!als to deli!er a uni,ue mi6
o" !alue. )Michael 6. Porter*
/he essence o" strategy lies in creating tomorrow7s com3etiti!e ad!antages "aster than
com3etitors mimic the ones you 3ossess today. )7ary 5amel I C. C. Prahalad*
<e %ill consider cometiti#e strategy 'y using Porter-s four generic strategies )Porter ?@EB, ?@ED*
as the fundamental choices, and then adding #arious cometiti#e tactics.
!orter(s Four Generic #ompetitive Strategies
5e argues that a 'usiness needs to ma+e t%o fundamental decisions in esta'lishing its cometiti#e
ad#antage! )a* %hether to comete rimarily on rice )he says 0cost,0 %hich is necessary to sustain
cometiti#e rices, 'ut rice is %hat the customer resonds to* or to comete through ro#iding
some distincti#e oints of differentiation that (ustify higher rices, and )'* ho% 'road a mar+et
target it %ill aim at )its cometiti#e scoe*. These t%o choices define the follo%ing four generic
cometiti#e strategies. %hich he argues co#er the fundamental range of choices. 1 fifth strategy
alternati#e )'est$cost ro#ider* is added 'y some sources, although not 'y Porter, and is included
'elo%!
1. 4!erall .rice #%ost& 5eadershi3: aealing to a 'road cross$section of the mar+et 'y
ro#iding roducts or ser#ices at the lo%est rice. This re/uires 'eing the o#erall lo%$cost ro#ider
of the roducts or ser#ices )e.g., Costco, among retail stores, and 5yundai, among automo'ile
manufacturers*. Imlementing this strategy successfully re/uires continual, excetional efforts to
reduce costs $$ %ithout excluding roduct features and ser#ices that 'uyers consider essential. It
also re/uires achie#ing cost ad#antages in %ays that are hard for cometitors to coy or match.
"ome conditions that tend to ma+e this strategy an attracti#e choice are!
2 The industry-s roduct is much the same from seller to seller
2 The mar+etlace is dominated 'y rice cometition, %ith highly rice$sensiti#e 'uyers
2 There are fe% %ays to achie#e roduct differentiation that ha#e much #alue to 'uyers
2 Most 'uyers use roduct in same %ays $$ common user re/uirements
2 "%itching costs for 'uyers are lo%
2 9uyers are large and ha#e significant 'argaining o%er
2. i""erentiation: aealing to a 'road cross$section of the mar+et through offering differentiating
features that ma+e customers %illing to ay remium rices, e.g., suerior technology, /uality,
restige, secial features, ser#ice, con#enience )examles are Nordstrom and 4exus*. "uccess %ith
this tye of strategy re/uires differentiation features that are hard or exensi#e for cometitors to
dulicate. "ustaina'le differentiation usually comes from ad#antages in core cometencies, uni/ue
comany resources or caa'ilities, and suerior management of #alue chain acti#ities. "ome
conditions that tend to fa#or differentiation strategies are!
2 There are multile %ays to differentiate the roduct.ser#ice that 'uyers thin+ ha#e
su'stantial #alue
2 9uyers ha#e different needs or uses of the roduct.ser#ice
E
2 Product inno#ations and technological change are raid and cometition emhasi&es the
latest roduct features
2 Not many ri#als are follo%ing a similar differentiation strategy
3. .rice #%ost& Focus: a mar+et niche strategy, concentrating on a narro% customer segment and
cometing %ith lo%est rices, %hich, again, re/uires ha#ing lo%er cost structure than cometitors
)e.g., a single, small sho on a side$street in a to%n, in %hich they %ill order electronic e/uiment
at lo% rices, or the cheaest automo'ile made in the former 9ulgaria*. "ome conditions that tend
to fa#or focus )either rice or differentiation focus* are!
2 The 'usiness is ne% and.or has modest resources
2 The comany lac+s the caa'ility to go after a %ider art of the total mar+et
2 9uyers- needs or uses of the item are di#erse, there are many different niches and segments
in the industry
2 9uyer segments differ %idely in si&e, gro%th rate, rofita'ility, and intensity in the fi#e
cometiti#e forces, ma+ing some segments more attracti#e than others
2 Industry leaders don-t see the niche as crucial to their o%n success
2 3e% or no other ri#als are attemting to seciali&e in the same target segment
'. i""erentiation Focus: a second mar+et niche strategy, concentrating on a narro% customer
segment and cometing through differentiating features )e.g., a high$fashion %omen-s clothing
'outi/ue in Paris, or 3errari*.
8est9%ost .ro!ider Strategy: )although not one of Porter-s 'asic four strategies, this strategy is
mentioned 'y a num'er of other %riters.* This is a strategy of trying to gi#e customers the 'est
cost.#alue com'ination, 'y incororating +ey good$or$'etter roduct characteristics at a lo%er cost
than cometitors. This strategy is a mixture or hy'rid of lo%$rice and differentiation, and targets a
segment of #alue$conscious 'uyers that is usually larger than a mar+et niche, 'ut smaller than a
'road mar+et. "uccessful imlementation of this strategy re/uires the comany to ha#e the
resources, s+ills, caa'ilities )and ossi'ly luc+* to incororate u$scale features at lo%er cost than
cometitors.
This strategy could 'e attracti#e in mar+ets that ha#e 'oth #ariety in 'uyer needs that ma+e
differentiation common and %here large num'ers of 'uyers are sensiti#e to 'oth rice and #alue.
Porter might argue that this strategy is often temorary, and that a 'usiness should choose and
achie#e one of the four generic cometiti#e strategies a'o#e. Other%ise, the 'usiness is stuc+ in the
middle of the cometiti#e mar+etlace and %ill 'e out$erformed 'y cometitors %ho choose and
excel in one of the fundamental strategies. 5is argument is analogous to the threats to a tennis
layer %ho is standing at the ser#ice line, rather than near the 'aseline or getting to the net.
5o%e#er, others resent examles of comanies )e.g., 5onda and Toyota* %ho seem to 'e a'le to
ursue successfully a 'est$cost ro#ider strategy, %ith sta'ility.
#ompetitive )actics
1lthough a choice of one of the generic cometiti#e strategies discussed in the re#ious section
ro#ides the foundation for a 'usiness strategy, there are many #ariations and ela'orations. 1mong
these are #arious tactics that may 'e useful )in general, tactics are shorter in time hori&on and
narro%er in scoe than strategies*. This section deals %ith cometiti#e tactics, %hile the follo%ing
section discusses cooerati#e tactics.
@
T%o categories of cometiti#e tactics are those dealing %ith timing )%hen to enter a mar+et*
and mar+et location )%here and ho% to enter and.or defend*.
/iming /actics: <hen to ma+e a strategic mo#e is often as imortant as %hat mo#e to ma+e.
<e often sea+ of first$movers )i.e., the first to ro#ide a roduct or ser#ice*, second$movers or
raid follo%ers, and late movers )%ait$and$see*. 6ach tactic can ha#e ad#antages and
disad#antages.
9eing a first$mo#er can ha#e ma(or strategic ad#antages %hen! )a* doing so 'uilds an
imortant image and reutation %ith 'uyers, )'* early adotion of ne% technologies, different
comonents, exclusi#e distri'ution channels, etc. can roduce cost and.or other ad#antages o#er
ri#als, )c* first$time customers remain strongly loyal in ma+ing reeat urchases, and )d* mo#ing
first ma+es entry and imitation 'y cometitors hard or unli+ely.
5o%e#er, 'eing a second$ or late$mo#er isn-t necessarily a disad#antage. There are cases in
%hich the first$mo#er-s s+ills, technology, and strategies are easily coied or e#en surassed 'y
later$mo#ers, allo%ing them to catch or ass the first$mo#er in a relati#ely short eriod, %hile
ha#ing the ad#antage of minimi&ing ris+s 'y %aiting until a ne% mar+et is esta'lished. "ometimes,
there are ad#antages to 'eing a s+illful follo%er rather than a first$mo#er, e.g., %hen! )a* 'eing a
first$mo#er is more costly than imitating and only modest exerience cur#e 'enefits accrue to the
leader )follo%ers can end u %ith lo%er costs than the first$mo#er under some conditions*, )'* the
roducts of an inno#ator are some%hat rimiti#e and do not li#e u to 'uyer exectations, thus
allo%ing a cle#er follo%er to %in 'uyers a%ay from the leader %ith 'etter erforming roducts, )c*
technology is ad#ancing raidly, gi#ing fast follo%ers the oening to leafrog a first$mo#er-s
roducts %ith more attracti#e and full$featured second$ and third$generation roducts, and )d* the
first$mo#er ignores mar+et segments that can 'e ic+ed u easily.
)ar$et 5ocation /actics: These fall con#eniently into offensi#e and defensi#e tactics.
Offensi#e tactics are designed to ta+e mar+et share from a cometitor, %hile defensi#e tactics
attemt to +ee a cometitor from ta+ing a%ay some of our resent mar+et share, under the
onslaught of offensi#e tactics 'y the cometitor. "ome offensi#e tactics are!
2 Frontal *ssault+ going head$to$head %ith the cometitor, matching each other in e#ery
%ay. To 'e successful, the attac+er must ha#e suerior resources and 'e %illing to
continue longer than the comany attac+ed.
2 Flaning %aneuver+ attac+ing a art of the mar+et %here the cometitor is %ea+. To 'e
successful, the attac+er must 'e atient and %illing to carefully exand out of the relati#ely
undefended mar+et niche or else face retaliation 'y an esta'lished cometitor.
2 'ncirclement+ usually e#ol#ing from the re#ious t%o, encirclement in#ol#es encircling
and ushing o#er the cometitor-s osition in terms of greater roduct #ariety and.or
ser#ing more mar+ets. This re/uires a %ide #ariety of a'ilities and resources necessary to
attac+ multile mar+et segments.
2 B"pass *ttac+ attemting to cut the mar+et out from under the esta'lished defender 'y
offering a ne%, suerior tye of roduce that ma+es the cometitor-s roduct unnecessary
or undesira'le.
2 Guerrilla Warfare+ using a 0hit and run0 attac+ on a cometitor, %ith small, intermittent
assaults on different mar+et segments. This offers the ossi'ility for e#en a small firm to
ma+e some gains %ithout seriously threatening a large, esta'lished cometitor and
e#o+ing some form of retaliation.

"ome Defensi#e Tactics are!
2 ,aise Structural Barriers+ 'loc+ a#enues challengers can ta+e in mounting an offensi#e
?B
2 -ncrease '&pected ,etaliation+ signal challengers that there is threat of strong retaliation if
they attac+
2 ,educe -nducement for *ttacs+ e.g., lo%er rofits to ma+e things less attracti#e )including
use of accounting techni/ues to o'scure true rofita'ility*. Ceeing rices #ery lo% gi#es
a ne% entrant little rofit incenti#e to enter.
The general exerience is that any cometiti#e ad#antage currently held %ill e#entually 'e
eroded 'y the actions of cometent, resourceful cometitors. Therefore, to sustain its initial
ad#antage, a firm must use 'oth defensi#e and offensi#e strategies, in ela'orating on its 'asic
cometiti#e strategy.
#ooperative Strategies
1nother grou of 0cometiti#e0 tactics in#ol#e cooeration among comanies. These could
'e groued under the heading of #arious tyes of strategic alliances, %hich ha#e 'een discussed to
some extent under Cororate 4e#el gro%th strategies. These in#ol#e an agreement or alliance
'et%een t%o or more 'usinesses formed to achie#e strategically significant o'(ecti#es that are
mutually 'eneficial. "ome are #ery short$term, others are longer$term and may 'e the first stage of
an e#entual merger 'et%een the comanies.
"ome of the reasons for strategic alliances are to! o'tain.share technology, share
manufacturing caa'ilities and facilities, share access to secific mar+ets, reduce
financial.olitical.mar+et ris+s, and achie#e other cometiti#e ad#antages not other%ise a#aila'le.
There could 'e considered a continuum of tyes of strategic alliances, ranging from! )a* mutual
ser#ice consortiums )e.g., similar comanies in similar industries ool their resources to de#elo
something that is too exensi#e alone*, )'* licensing arrangements, )c* (oint #entures )an
indeendent 'usiness entity formed 'y t%o or more comanies to accomlish certain things, %ith
allocated o%nershi, oerational resonsi'ilities, and financial ris+s and re%ards*, )d* #alue$chain
artnershis )e.g., (ust$in$time sulier relationshis, and out$sourcing of ma(or #alue$chain
functions*.
3UNCTION14 "TR1T67I6"
3unctional strategies are relati#ely short$term acti#ities that each functional area %ithin a comany
%ill carry out to imlement the 'roader, longer$term cororate le#el and 'usiness le#el strategies.
6ach functional area has a num'er of strategy choices, that interact %ith and must 'e consistent %ith
the o#erall comany strategies.
Three 'asic characteristics distinguish functional strategies from cororate le#el and 'usiness
le#el strategies! shorter time hori&on, greater secificity, and rimary in#ol#ement of oerating
managers.
1 fe% examles follo% of functional strategy toics for the ma(or functional areas of
mar+eting, finance, roduction.oerations, research and de#eloment, and human resources
management. 6ach area needs to deal %ith sourcing strategy, i.e., %hat should 'e done in$house and
%hat should 'e outsourcedH
Mar+eting strategy deals %ith roduct.ser#ice choices and features, ricing strategy, mar+ets
to 'e targeted, distri'ution, and romotion considerations. 3inancial strategies include decisions
a'out caital ac/uisition, caital allocation, di#idend olicy, and in#estment and %or+ing caital
management. The roduction or oerations functional strategies address choices a'out ho% and
??
%here the roducts or ser#ices %ill 'e manufactured or deli#ered, technology to 'e used,
management of resources, lus urchasing and relationshis %ith suliers. 3or firms in high$tech
industries, RID strategy may 'e so central that many of the decisions %ill 'e made at the 'usiness
or e#en cororate le#el, for examle the role of technology in the comany-s cometiti#e strategy,
including choices 'et%een 'eing a technology leader or follo%er. 5o%e#er, there %ill remain more
secific decisions that are art of RID functional strategy, such as the relati#e emhasis 'et%een
roduct and rocess RID, ho% ne% technology %ill 'e o'tained )internal de#eloment #s. external
through urchasing, ac/uisition, licensing, alliances, etc.*, and degree of centrali&ation for RID
acti#ities. 5uman resources functional strategy includes many toics, tyically recommended 'y
the human resources deartment, 'ut many re/uiring to management aro#al. 6xamles are (o'
categories and descritions, ay and 'enefits, recruiting, selection, and orientation, career
de#eloment and training, e#aluation and incenti#e systems, olicies and disciline, and
management.executi#e selection rocesses.
C5OO"IN7 T56 96"T "TR1T678 14T6RN1TI:6"
Decision ma+ing is a comlex su'(ect, %orthy of a chater or 'oo+ of its o%n. This section can
only offer a fe% suggestions. 1mong the many sources for additional information, I recommend
5arrison )?@@@*, McCall I Calan )?@@B*, and <illiams );BB;*. 5ere are some factors to consider
%hen choosing among alternati#e strategies!
2 It is imortant to get as clear as ossi'le a'out o'(ecti#es and decision criteria )%hat ma+es
a decision a 0good0 oneH*
2 The rimary ans%er to the re#ious /uestion, and therefore a #ital criterion, is that the
chosen strategies must 'e effecti#e in addressing the 0critical issues0 the comany faces at
this time
2 They must 'e consistent %ith the mission and other strategies of the organi&ation
2 They need to 'e consistent %ith external en#ironment factors, including realistic
assessments of the cometiti#e en#ironment and trends
2 They fit the comany-s roduct life cycle osition and mar+et attracti#eness.cometiti#e
strength situation
2 They must 'e caa'le of 'eing imlemented effecti#ely and efficiently, including 'eing
realistic %ith resect to the comany-s resources
2 The ris+s must 'e acceta'le and in line %ith the otential re%ards
2 It is imortant to match strategy to the other asects of the situation, including! )a* si&e,
stage, and gro%th rate of industry, )'* industry characteristics, including fragmentation,
imortance of technology, commodity roduct orientation, international features, and )c*
comany osition )dominant leader, leader, aggressi#e challenger, follo%er, %ea+, 0stuc+
in the middle0*
2 Consider sta+eholder analysis and other eole$related factors )e.g., internal and external
ressures, ris+ roensity, and needs and desires of imortant decision$ma+ers*
2 "ometimes it is helful to do scenario construction, e.g., cases %ith otimistic, most li+ely,
and essimistic assumtions.
"OM6 TROU946"OM6 "TR1T67I6" TO 1:OID OR U"6 <IT5 C1UTION
?;
Follow the 5eader: %hen the mar+et has no more room for coycat roducts and loo+$ali+e
cometitors. "ometimes such a strategy can %or+ fine, 'ut not %ithout careful consideration of the
comany-s articular strengths and %ea+nesses. )e.g., 3u(itsu 4td. %as dri#en since the ?@ABs to
catch u to I9M in mainframes and continued this /uest e#en into the ?@@Bs after mainframes %ere
in stee decline, or the decision 'y "tandard Oil of Ohio to follo% 6xxon and Mo'il Oil into
conglomerate di#ersification*
%ount 4n Hitting +nother Home Run: e.g., Polaroid tried to follo% its early success %ith instant
hotograhy 'y de#eloing 0Pola#ision0 during the mid$?@FBs. Unfortunately, this #ery exensi#e,
instant de#eloing, Emm, 'lac+ and %hite, silent motion icture camera and film %as dislayed at a
stoc+holders- meeting a'out the time that the first 'eta$format #ideo recorder %as released 'y "ony.
Polaroid reortedly %rote off at least GDBB million on this #enture %ithout selling a single camera.
/ry to o :!erything: esta'lishing many %ea+ mar+et ositions instead of a fe% strong ones
+rms Race: 1ttac+ing the mar+et leaders head$on %ithout ha#ing either a good cometiti#e
ad#antage or ade/uate financial strength, ma+ing such aggressi#e attemts to ta+e mar+et share
that ri#als are ro#o+ed into strong retaliation and a costly 0arms race.0 "uch 'attles seldom
roduce a su'stantial change in mar+et shares, usual outcome is higher costs and rofitless sales
gro%th
.ut )ore )oney 4n a 5osing Hand: one #ersion of this is allocating RID efforts to %ea+
roducts instead of strong roducts )e.g., Pola#ision again, Pan 1m-s attemt to continue glo'al
routes in ?@EF*
4!er9o3timistic :63ansion: Using high de't to finance in#estments in ne% facilities and
e/uiment, then getting traed %ith high fixed costs %hen demand turns do%n, excess caacity
aears, and cash flo%s are tight
(nrealistic Status9%lim-ing: 7oing after the high end of the mar+et %ithout ha#ing the reutation
to attract 'uyers loo+ing for name$'rand, restige goods )e.g., "ears- attemts to introduce designer
%omen-s clothing*
Selling the Sizzle 1ithout the Stea$: "ending more money on mar+eting and sales romotions
to try to get around ro'lems %ith roduct /uality and erformance. Deending on cosmetic
roduct imro#ements to ser#e as a su'stitute for real inno#ation and extra customer #alue.
Selected ,eferences
5arrison, 6. 3ran+ )?@@@*. )he %anagerial Decision$%aing !rocess )D
th
ed.*. 9oston! 5oughton
Mifflin.
McCall, Morgan <., Jr., I Calan, Ro'ert C. )?@@B*. Whatever it taes+ )he realities of
managerial decision maing );nd ed.*. 6ngle%ood Cliffs, NJ! Prentice$5all.
?=
Porter, Michael 6. )?@EB*. #ompetitive Strateg"+ )echni.ues for anal"zing industries and
competitors/ Ne% 8or+! 3ree Press.
Porter, Michael 6. )?@ED*. #ompetitive advantage+ #reating and sustaining superior performance/
Ne% 8or+! 3ree Press.
<illiams, "te#e <. );BB;*. %aing better business decisions+ 0nderstanding and improving
critical thining and problem solving sills. Thousand Oa+s, C1! "age Pu'lications.
?>