55  Strategy Formulation

55.1 What is Strategy Formulation?

Strategy formulation is the process of choosing what the organisation will do — its goals, its competitive position, and the actions through which it will compete. It comes after the diagnostic stage (vision, mission, strategic analysis) and before implementation.

Strategy is formulated at three levels (covered in topic 53): corporate, business, functional. Each level has its own classical frameworks.

TipStrategy Formulation at Three Levels
Level Question Classical frameworks
Corporate What businesses to be in? Ansoff matrix · BCG matrix · GE-McKinsey matrix · Grand strategies
Business / SBU How to compete in a chosen business? Porter’s generic strategies · Blue-Ocean strategy
Functional How does each function support? Functional strategies — marketing, HR, finance, ops

55.2 Porter’s Generic Strategies

Michael Porter’s Competitive Strategy (1980) identifies three generic strategies a firm can pursue at the business level (porter1980?; porter1985?):

TipPorter’s Generic Strategies
Strategy What it pursues Key levers Risk
Cost Leadership Low cost across the industry Scale, experience curve, tight cost control, lean operations Imitation; technology change
Differentiation Uniqueness valued by customers Brand, design, R&D, service, quality Imitation; customer indifference
Focus / Niche Cost or differentiation in a narrow segment Targeted expertise Segment shrinks; broad players catch up 

flowchart TB
  subgraph Generic [Porter's Generic Strategies]
    CL[Cost Leadership<br/>Broad market, lowest cost]
    D[Differentiation<br/>Broad market, unique]
    F[Focus<br/>Narrow market]
  end
  CL --- D
  D --- F
  style CL fill:#E3F2FD,stroke:#1565C0
  style D fill:#FCE4EC,stroke:#AD1457
  style F fill:#E8F5E9,stroke:#2E7D32

Porter warns against being stuck in the middle — pursuing both cost leadership and differentiation typically leaves the firm with neither advantage. Modern critics (e.g., Toyota, with both quality and cost) suggest a hybrid strategy is sometimes feasible — but is hard to sustain.

55.3 Ansoff Matrix — Product-Market Growth

Igor Ansoff’s Corporate Strategy (1957, 1965) introduced the product-market matrix — four growth strategies based on combinations of existing/new products and existing/new markets (ansoff1957?):

TipAnsoff’s Product-Market Matrix
Existing Product New Product
Existing Market Market Penetration Product Development
New Market Market Development Diversification
TipAnsoff’s Four Growth Strategies in Detail
Strategy What it does Risk
Market Penetration Sell more of existing products to existing customers Low
Product Development New products to existing customers Medium
Market Development Existing products to new customers / geographies Medium
Diversification New products to new markets Highest

55.4 BCG Matrix — Portfolio Analysis

The Boston Consulting Group’s (BCG) Growth-Share Matrix (Bruce Henderson, late 1960s) classifies SBUs into four quadrants by market growth rate (vertical) and relative market share (horizontal):

TipBCG Matrix — Four SBU Categories
Quadrant Market Growth Relative Share Cash Strategy
Star High High Neutral Invest to maintain leadership
Cash Cow Low High Generates Milk for cash; harvest
Question Mark High Low Consumes Invest selectively or divest
Dog Low Low Drains Divest

The corporate logic: cash cows fund stars and selected question marks; dogs are divested.

flowchart LR
  subgraph BCG [BCG Matrix]
    S[Star<br/>High Growth + High Share] --- Q[Question Mark<br/>High Growth + Low Share]
    C[Cash Cow<br/>Low Growth + High Share] --- D[Dog<br/>Low Growth + Low Share]
  end
  C -- "Cash flow" --> S
  C -- "Selective funding" --> Q
  style S fill:#FFF8E1,stroke:#F9A825
  style C fill:#E8F5E9,stroke:#2E7D32
  style Q fill:#E3F2FD,stroke:#1565C0
  style D fill:#FFEBEE,stroke:#C62828

55.5 GE-McKinsey Matrix

A nine-cell extension of BCG. Industry attractiveness (low/medium/high) on one axis and business strength / competitive position (weak/average/strong) on the other. Recommendations are invest/grow, hold, or harvest/divest depending on cell.

TipGE-McKinsey Three-Zone Recommendations
Zone Cells Recommendation
Green (Invest / Grow) Top-left three cells Invest aggressively
Yellow (Selective / Hold) Diagonal three cells Maintain selectively
Red (Harvest / Divest) Bottom-right three cells Reduce, harvest, exit

The GE-McKinsey is richer than BCG — it uses multiple variables for each axis — but is also more subjective.

55.6 Grand Strategies — Corporate Direction

Glueck and Jauch’s classic categorisation of corporate-level grand strategies:

TipFour Families of Corporate Grand Strategies
Family Sub-types When to use
Stability No-change · Profit · Pause / Proceed-with-caution Mature firms; environment unstable; consolidation
Growth Concentration · Vertical integration · Horizontal integration · Diversification (related / unrelated) Strong firms in growing markets
Retrenchment Turnaround · Divestment · Liquidation Distress; loss-making units
Combination Two or more applied to different SBUs Multi-business firms

55.7 Blue-Ocean Strategy

W. Chan Kim and Renée Mauborgne’s Blue-Ocean Strategy (2005) reframes competition: instead of fighting in red oceans (existing markets where competition is bloody), firms should create blue oceans — uncontested market spaces — through value innovation (kimmauborgne2005?).

TipRed Ocean vs Blue Ocean
Feature Red Ocean Blue Ocean
Strategy Compete in existing market Create uncontested market
Demand Exploit existing demand Create new demand
Cost-differentiation Trade-off Both — value innovation
Logic Strategic positioning Value innovation
Examples Most industries Cirque du Soleil; iPad; Nintendo Wii

The signature Four Actions Framework — Eliminate, Reduce, Raise, Create — and the Strategy Canvas are Kim and Mauborgne’s tools for designing blue-ocean moves.

55.8 Cooperative Strategies

Not all strategy is competitive. Modern firms also pursue cooperative strategies:

TipCommon Cooperative Strategies
Form What it does
Strategic alliance Long-term cooperation without equity link
Joint venture New entity with equity from each partner
Licensing / franchising Use of brand / IP under contract
Research consortia Shared R&D investment
Co-opetition Compete and cooperate at the same time (Brandenburger & Nalebuff)

55.9 Practice Questions

Q 01 Porter's Three Easy

Porter's three generic strategies are:

  • AStability, Growth, Retrenchment
  • BCost Leadership, Differentiation, Focus
  • CConcentration, Diversification, Vertical Integration
  • DStars, Cash Cows, Question Marks
View solution
Correct Option: B
Porter (1980): Cost Leadership · Differentiation · Focus. Focus may be cost-focus or differentiation-focus.
Q 02 Stuck in Middle Medium

A firm pursuing both cost leadership and differentiation simultaneously, with no clear focus, is, in Porter's terms:

  • AA "blue ocean" innovator
  • B"Stuck in the middle"
  • CA "first mover"
  • DA "fast follower"
View solution
Correct Option: B
Porter warns that pursuing two generic strategies usually leaves the firm "stuck in the middle" — without a clear competitive advantage.
Q 03 Ansoff Medium

Selling existing products to new geographic markets is, in Ansoff's matrix:

  • AMarket penetration
  • BProduct development
  • CMarket development
  • DDiversification
View solution
Correct Option: C
Ansoff: existing products + new markets = market development. Diversification = new products + new markets.
Q 04 BCG Medium

An SBU with high market share in a slow-growth industry is, in BCG terms, a:

  • AStar
  • BCash Cow
  • CQuestion Mark
  • DDog
View solution
Correct Option: B
Cash Cow = high share + low growth. Generates cash that funds stars and selected question marks.
Q 05 GE-McKinsey Medium

The GE-McKinsey nine-cell matrix uses which two axes?

  • AMarket growth and relative market share
  • BIndustry attractiveness and business strength / competitive position
  • CExisting/new product and existing/new market
  • DCost and differentiation
View solution
Correct Option: B
GE-McKinsey: industry attractiveness × business strength. Three-zone recommendations: invest, hold, harvest.
Q 06 Grand Strategies Medium

Selling off a loss-making division to focus on the rest of the business is an example of a:

  • AStability strategy
  • BGrowth strategy
  • CRetrenchment strategy (divestment)
  • DCombination strategy
View solution
Correct Option: C
Divestment is a form of retrenchment. Other forms: turnaround, liquidation.
Q 07 Blue Ocean Medium

Blue Ocean Strategy was developed by:

  • AMichael Porter
  • BW. Chan Kim and Renée Mauborgne
  • CHenry Mintzberg
  • DAnsoff
View solution
Correct Option: B
W. Chan Kim and Renée Mauborgne's 2005 book. Tools: Four Actions Framework (Eliminate-Reduce-Raise-Create) and Strategy Canvas.
Q 08 Diversification Medium

Disney expanding from films into theme parks is best described as:

  • AUnrelated (conglomerate) diversification
  • BRelated (concentric) diversification
  • CVertical integration
  • DHorizontal integration
View solution
Correct Option: B
Theme parks build on Disney's brand and characters — shared capabilities — making this related (concentric) diversification.
ImportantQuick recall
  • Strategy formulation = choosing what to do. Three levels: corporate, business, functional.
  • Porter’s Generic Strategies: Cost Leadership · Differentiation · Focus. Beware “stuck in the middle”.
  • Ansoff Matrix: 2×2 of existing/new product × existing/new market — Penetration, Product Development, Market Development, Diversification.
  • BCG Matrix: Stars · Cash Cows · Question Marks · Dogs. Cash cows fund stars; divest dogs.
  • GE-McKinsey: industry attractiveness × business strength → invest/hold/harvest.
  • Grand strategies: Stability, Growth, Retrenchment, Combination. Diversification: related vs unrelated. Rumelt (1974) — related does better.
  • Blue Ocean Strategy (Kim & Mauborgne, 2005): create uncontested space via value innovation. Tools: Four Actions Framework + Strategy Canvas.
  • Cooperative strategies: alliances, JVs, licensing, consortia, co-opetition.