56  Strategy Formulation

56.1 What is Strategy Formulation?

Strategy Formulation is the second stage of the strategic-management process — the development of long-term plans for managing environmental opportunities and threats given organisational strengths and weaknesses. It translates analysis into choice. The classical text is Fred R. David’s Strategic Management and Hitt, Ireland & Hoskisson’s integrated framework.

flowchart LR
  A[Strategic Analysis<br/>Topic 54] --> SF[Strategy<br/>Formulation]
  SF --> SI[Strategy<br/>Implementation]
  SF --> CO[Corporate Strategy]
  SF --> BU[Business / SBU Strategy]
  SF --> FU[Functional Strategy]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

56.2 Three-Tier Strategic Choice

TipStrategy choices at three tiers
Level Key question Outputs
Corporate What businesses to be in? Growth, stability, retrenchment, portfolio choices
Business / SBU How to compete in each business? Cost leadership, differentiation, focus, hybrid
Functional How do functions support strategy? Marketing, HR, Operations, Finance sub-strategies

56.3 Corporate-Level Strategies

56.3.1 Grand Strategies — Glueck

William Glueck classified corporate strategies into four grand strategies:

TipGlueck’s four grand strategies
Strategy When suitable Sub-types
Stability Industry maturity, satisfactory performance No-change · Profit · Pause/Proceed-with-caution · Sustainable growth
Growth / Expansion Favourable environment, ambitious aspirations Intensive · Integration · Diversification · M&A · JV · Alliance
Retrenchment Performance decline, distress Turnaround · Divestment · Liquidation
Combination Multi-SBU firms Mix of above for different SBUs

56.3.2 Ansoff’s Product-Market Matrix (1957)

H. Igor Ansoff — “Strategies for Diversification”, HBR (1957) — gave the 2 × 2 growth matrix:

TipAnsoff Matrix
Existing Markets New Markets
Existing Products Market Penetration Market Development
New Products Product Development Diversification

Risk increases as we move from Market Penetration (lowest) to Diversification (highest).

56.3.3 Intensive Growth Strategies (Ansoff)

TipIntensive growth options
  • Market Penetration — sell more of existing products to existing markets (pricing, promotion, distribution, usage rate).
  • Market Development — take existing products to new markets (new geography, new segment).
  • Product Development — develop new products for existing markets.
  • Diversification — new products + new markets (highest risk).

56.3.4 Integration Strategies

TipIntegration strategies
Type Direction Example
Vertical Forward Toward customer / distribution Reliance Petroleum → Retail
Vertical Backward Toward supplier / raw materials Tata Steel → mines
Horizontal Toward competitors at same stage Vodafone-Idea (2018)

56.3.5 Diversification Strategies

TipTypes of diversification
  • Concentric / Related Diversification — into a business sharing technology, channels, brand (HUL → personal care; Tata Coffee → Tata Tea).
  • Conglomerate / Unrelated Diversification — into completely new business (ITC: tobacco → hotels → FMCG → agribusiness).
  • Horizontal Diversification — into new products for existing customer base.
  • Vertical Diversification — through forward or backward integration.

56.3.6 Cooperative Strategies

TipCooperative strategies
  • Strategic Alliances — long-term cooperation without merger.
  • Joint Ventures — separate entity created (Maruti-Suzuki 1982).
  • Mergers and Acquisitions (Topic 48).
  • Licensing and Franchising.
  • Outsourcing — leveraging external capabilities.
  • Networks and Constellations.
  • Ecosystems and Platforms (modern).

56.3.7 Retrenchment Strategies

TipRetrenchment options
  • Turnaround — operational or strategic recovery.
  • Divestment — sell off non-core unit.
  • Spin-off — separate listing.
  • Equity Carve-out — partial divestiture.
  • Liquidation — last resort.
  • Bankruptcy / IBC route in India.
NoteTurnaround Strategy

Turnaround typically involves: management change · cost reduction · revenue generation · asset restructuring · debt rescheduling. Famous Indian examples: Tata Motors under Ratan Tata (2001-04); Mahindra-Satyam post-2009 fraud.

56.4 Business-Level Strategies — Porter’s Generic Strategies

flowchart TB
  G[Source of Advantage]
  G --> CL[Cost Leadership]
  G --> DI[Differentiation]
  G --> F[Focus]
  F --> CF[Cost Focus]
  F --> DF[Differentiation Focus]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

TipPorter’s Generic Strategies
Strategy Source of Advantage Target Example
Cost Leadership Lowest cost Broad market Maruti Suzuki, Walmart, IKEA
Differentiation Uniqueness Broad market Apple, Mercedes-Benz, Taj Hotels
Cost Focus Lowest cost Narrow market Low-cost regional airlines
Differentiation Focus Uniqueness Narrow market Rolls-Royce, Ferrari

56.4.1 Cost Leadership — Drivers

TipSources of cost leadership
  • Economies of scale.
  • Experience / learning curve.
  • Process efficiency.
  • Low-cost raw materials and labour.
  • Vertical integration to reduce intermediary costs.
  • Tight cost control.
  • Standardisation.

56.4.2 Differentiation — Drivers

TipSources of differentiation
  • Brand and reputation.
  • Product features and quality.
  • Innovation and R&D.
  • Customer service.
  • Channel coverage.
  • Marketing communications.
  • Customisation.
  • Design and aesthetics.

56.4.3 Hybrid Strategies

Modern strategists (Hill, Murray) argue cost + differentiation are not mutually exclusive — Toyota does both via lean production; Zara combines fast fashion with affordability.

56.5 Bowman’s Strategy Clock — Cliff Bowman (1996)

Cliff Bowman’s strategy clock — eight competitive positions on price vs perceived value axes:

TipBowman’s 8 strategic positions
# Strategy Price Perceived Value
1 Low Price / Low Value (No-frills) Low Low
2 Low Price Low Medium
3 Hybrid Low High
4 Differentiation Medium-High High
5 Focused Differentiation High High (niche)
6 Risky high margins High Medium
7 Monopoly pricing High Low
8 Loss of market share Medium Low

56.6 Blue Ocean Strategy — Kim & Mauborgne (2005)

W. Chan Kim and Renée Mauborgne (INSEAD) — Blue Ocean Strategy (2005) — argue firms should create “Blue Oceans” (uncontested market space) rather than fight in “Red Oceans” (saturated, bloody competition). Achieved through value innovation.

TipFour Actions Framework (ERRC)
  • Eliminate — which factors taken for granted should be eliminated?
  • Reduce — which factors should be reduced well below industry standard?
  • Raise — which factors should be raised well above industry standard?
  • Create — which factors should be created that the industry has never offered?

Iconic examples: Cirque du Soleil · Yellow Tail Wine · Nintendo Wii · Tata Nano · Airbnb · Uber.

56.7 Portfolio Analysis Frameworks

56.7.1 BCG Growth-Share Matrix (1968)

The BCG Matrix by Bruce Henderson at the Boston Consulting Group (1968-70) — classifies SBUs/products on two axes: Market Growth Rate and Relative Market Share (vs largest competitor).

TipBCG Matrix — four quadrants
Cell Market Share Growth Strategy
Star High High Invest to grow; future cash cow
Cash Cow High Low Milk; fund others
Question Mark / Problem Child Low High Invest or divest selectively
Dog Low Low Harvest or divest
NoteLimitations of BCG
  • Two-dimensional and simplistic.
  • Market share as the only competitive variable.
  • Assumes growth = attractiveness (not always true).
  • Ignores synergies across SBUs.
  • “Dogs” can be profitable.

56.7.2 GE / McKinsey Matrix (1970s)

General Electric + McKinsey — refined BCG into a 3 × 3 matrix:

TipGE-McKinsey Matrix
Industry Attractiveness High Med Low
Business Strength High Invest/Grow Invest/Grow Selective
Med Invest/Grow Selective Harvest
Low Selective Harvest Divest

Industry Attractiveness includes — market size, growth, profitability, competitive intensity. Business Strength includes — market share, brand, technology, profitability, distribution.

56.7.3 Other Portfolio Frameworks

TipOther portfolio frameworks
  • Shell Directional Policy Matrix — similar to GE matrix.
  • ADL Life Cycle Matrix — Arthur D. Little; industry maturity × competitive position.
  • Hofer’s Product/Market Evolution Matrix.
  • Strategic Position and Action Evaluation (SPACE) Matrix.
  • Boston Consulting Group’s New Matrix (2000s) — sources of advantage × size of advantage.

56.8 Strategy Formulation Models

56.8.1 SPACE Matrix (Strategic Position and Action Evaluation)

Four quadrants: Aggressive · Conservative · Defensive · Competitive — based on internal dimensions (Financial Strength, Competitive Advantage) and external (Environmental Stability, Industry Strength).

56.8.2 Grand Strategy Matrix — David

Fred R. David — 4 quadrants based on market growth and competitive position:

TipGrand Strategy Matrix
Quadrant Position Suggested
I Strong + Growing Market dev, penetration, related diversification
II Weak + Growing Penetration, divestiture, liquidation
III Weak + Slow Retrenchment, divestiture, liquidation
IV Strong + Slow Diversification, JVs

56.8.3 QSPM — Quantitative Strategic Planning Matrix

Fred R. David — a tool to objectively evaluate alternative strategies based on internal and external factors with weights.

56.9 Strategic Choice — Criteria for Selection

TipCriteria for strategy selection (Johnson-Scholes-Whittington)
  • Suitability — addresses environment + uses strengths.
  • Acceptability — to stakeholders (return, risk, reactions).
  • Feasibility — resources, capabilities, timing.
  • Sometimes called the SAF / SFA test.

56.10 Strategy under Uncertainty — Real Options

Stewart Myers (1977) — strategic flexibility valued via real options:

TipReal options in strategy
  • Option to defer — wait for clarity.
  • Option to expand — scale up.
  • Option to abandon — exit.
  • Option to switch — alternatives.
  • Compound options — sequenced commitments.
  • Growth options — embedded in current investments.

56.11 International Strategy

TipFour international strategies (Bartlett-Ghoshal 1989)
Strategy Global Integration Local Responsiveness
International Low Low
Multinational Low High
Global High Low
Transnational High High

56.11.1 Modes of Entry

TipForeign entry modes — increasing commitment
  • Exporting — direct, indirect.
  • Licensing.
  • Franchising.
  • Contract manufacturing.
  • Management contracts.
  • Joint Ventures — international JV.
  • Strategic Alliances.
  • Wholly-Owned Subsidiary.
  • Greenfield investment — build from scratch.
  • Brownfield / Acquisitions.

56.12 Disruptive Innovation — Clayton Christensen (1997)

Clayton Christensen — The Innovator’s Dilemma (1997) — incumbents fail when disruptive innovations (lower performance, lower price, simpler) move upmarket to displace established players.

TipDisruptive vs Sustaining innovation
  • Sustaining innovation — improves existing performance trajectory.
  • Disruptive innovation — starts at low end or new market; eventually upmarket.
  • Examples: digital photography vs film; cloud vs on-premise; budget airlines vs full-service.

56.13 Hypercompetition — D’Aveni (1994)

Richard D’Aveni — competitive advantage is temporary; firms compete by stringing together short-lived advantages through:

TipD’Aveni’s 7-S framework for hypercompetition
  • Superior Stakeholder Satisfaction.
  • Strategic Soothsaying.
  • Speed.
  • Surprise.
  • Shifting the Rules.
  • Signalling Strategic Intent.
  • Simultaneous and Sequential Strategic Thrusts.

56.15 Practice Questions

Q 01 Ansoff Easy

Selling existing products to existing markets is called:

  • AMarket Penetration
  • BMarket Development
  • CProduct Development
  • DDiversification
View solution
Correct Option: A
Ansoff (1957): existing products + existing markets = Market Penetration.
Q 02 Glueck Medium

Glueck classified corporate strategies into four "Grand Strategies". Which is NOT one?

  • AStability
  • BGrowth
  • CRetrenchment
  • DVertical integration
View solution
Correct Option: D
Four Grand Strategies: Stability · Growth · Retrenchment · Combination. Vertical integration is a sub-type of growth.
Q 03 BCG Medium

In the BCG matrix, a "Cash Cow" has:

  • AHigh share, high growth
  • BHigh share, low growth
  • CLow share, high growth
  • DLow share, low growth
View solution
Correct Option: B
High share, low growth → Cash Cow (milked to fund Stars and Question Marks).
Q 04 BCG Star Easy

A "Star" in BCG has:

  • AHigh share, high growth
  • BHigh share, low growth
  • CLow share, high growth
  • DLow share, low growth
View solution
Correct Option: A
Star = high share + high growth.
Q 05 Porter generic Easy

Porter's generic strategies include all EXCEPT:

  • ACost Leadership
  • BDifferentiation
  • CFocus
  • DDiversification
View solution
Correct Option: D
Diversification is a *corporate* strategy, not Porter's generic business strategy.
Q 06 Blue Ocean Medium

The "ERRC" framework in Blue Ocean Strategy stands for:

  • AEliminate, Reduce, Raise, Create
  • BExpand, Retain, Reduce, Communicate
  • CEngage, Replace, Relate, Curate
  • DEnsure, Raise, Reduce, Compete
View solution
Correct Option: A
Eliminate · Reduce · Raise · Create — Kim & Mauborgne (2005).
Q 07 Diversification Medium

ITC's expansion from tobacco to hotels and FMCG is an example of:

  • AConcentric diversification
  • BConglomerate diversification
  • CHorizontal integration
  • DVertical integration
View solution
Correct Option: B
Unrelated businesses → conglomerate diversification.
Q 08 BCG creator Hard

The BCG matrix was developed in 1968-70 by:

  • ABruce Henderson
  • BMichael Porter
  • CIgor Ansoff
  • DHenry Mintzberg
View solution
Correct Option: A
Bruce Henderson, founder of BCG.
Q 09 SAF Hard

Johnson-Scholes-Whittington's strategic-choice test "SAF" stands for:

  • ASuitability, Acceptability, Feasibility
  • BStrategy, Action, Feedback
  • CSpeed, Agility, Flexibility
  • DStakeholder, Acceptance, Forecast
View solution
Correct Option: A
Suitability · Acceptability · Feasibility.
Q 10 Christensen Medium

"Disruptive Innovation" theory (1997) is by:

  • AClayton Christensen
  • BGeoffrey Moore
  • CJoseph Schumpeter
  • DHenry Chesbrough
View solution
Correct Option: A
Clayton Christensen, *The Innovator's Dilemma* (1997).
Q 11 Hybrid Medium

A "hybrid" strategy that combines low cost AND differentiation is best exemplified by:

  • ARolls-Royce
  • BToyota
  • CTata Nano
  • DMaruti Suzuki
View solution
Correct Option: B
Toyota — Lean production combines cost + quality.
Q 12 Hypercompetition Hard

"Hypercompetition" (1994) was proposed by:

  • ARichard D'Aveni
  • BMichael Porter
  • CHenry Mintzberg
  • DEugene Fama
View solution
Correct Option: A
Richard D'Aveni, *Hypercompetition* (1994).
Q 13 Entry mode Medium

Which is the lowest-commitment foreign entry mode?

  • AWholly-Owned Subsidiary
  • BJoint Venture
  • CExporting
  • DGreenfield investment
View solution
Correct Option: C
Exporting — lowest commitment; Greenfield/WOS = highest.
Q 14 BCG dog Easy

A "Dog" in BCG matrix is recommended to be:

  • AHeavily invested in
  • BHarvested or divested
  • CMilked
  • DPromoted to Star
View solution
Correct Option: B
Dogs: low share + low growth → harvest or divest.
Q 15 Bowman Hard

Bowman's Strategy Clock plots:

  • AGrowth × Market share
  • BPrice × Perceived value
  • CCost × Differentiation
  • DTime × Strategy
View solution
Correct Option: B
Cliff Bowman (1996) — 8 positions on Price × Perceived Value.
Q 16 Maruti Medium

Maruti-Suzuki was established in 1982 as a:

  • AStrategic alliance
  • BJoint venture
  • CLicensing agreement
  • DGreenfield WOS
View solution
Correct Option: B
JV between Maruti Udyog (GoI) and Suzuki (Japan).
Q 17 GE matrix Medium

The GE-McKinsey Matrix uses how many cells?

  • A4 (2 × 2)
  • B9 (3 × 3)
  • C16 (4 × 4)
  • D25 (5 × 5)
View solution
Correct Option: B
3 × 3 = 9 cells — Industry attractiveness × Business strength.
Q 18 QSPM Hard

QSPM stands for:

  • AQuantitative Strategic Planning Matrix
  • BQuality Strategy Performance Model
  • CQuick Strategy Planning Method
  • DQuarterly Sales Profit Measurement
View solution
Correct Option: A
Quantitative Strategic Planning Matrix — Fred R. David.
Q 19 Cooperative Easy

Which is NOT a cooperative strategy?

  • AJoint Venture
  • BLicensing
  • CStrategic Alliance
  • DLiquidation
View solution
Correct Option: D
Liquidation is a retrenchment strategy, not cooperative.
Q 20 Match frameworks Hard

Match the framework with its author:

(i) BCG Matrix (a) Kim & Mauborgne
(ii) Generic Strategies (b) Ansoff
(iii) Product-Market Matrix (c) Porter
(iv) Blue Ocean (d) Bruce Henderson
  • A(i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)
  • D(i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
View solution
Correct Option: A
BCG — Henderson; Generic — Porter; Ansoff Matrix — Ansoff; Blue Ocean — Kim & Mauborgne.

56.15.1 Advanced Format Questions

AR 1Assertion-ReasonHard

A: Ansoff Matrix offers 4 growth options.
R: They are Market Penetration, Market Development, Product Development, Diversification.

  • ABoth true; R explains A
  • BBoth true; R does not explain A
  • CA true, R false
  • DA false, R true
View solution
Correct Option: A
S 1Statement-basedMedium

BCG Matrix cells: (i) Star. (ii) Cash Cow. (iii) Question Mark. (iv) Dog.

  • AAll four
  • B(i) and (ii) only
  • C(iii) and (iv) only
  • D(i), (ii), (iii) only
View solution
Correct Option: A
S 2Statement-basedHard

Generic strategies (Porter): (i) Cost leadership. (ii) Differentiation. (iii) Focus. (iv) Hybrid (Bowman's clock).

  • A(i), (ii), (iii) Porter's; (iv) is Bowman's extension
  • BAll four Porter's
  • C(i) only
  • D(iv) only
View solution
Correct Option: A

56.16 Quick Recall

ImportantQuick recall
  • Strategy Formulation = translating analysis into choice; 2nd stage of strategic management.
  • Three tiers: Corporate (what businesses?) · Business/SBU (how to compete?) · Functional (how do functions support?).
  • Glueck’s 4 grand strategies: Stability · Growth · Retrenchment · Combination.
  • Ansoff (1957): Market Penetration · Market Development · Product Development · Diversification — risk rises.
  • Integration: Vertical Forward · Vertical Backward · Horizontal.
  • Diversification: Concentric (related) · Conglomerate (unrelated) · Horizontal · Vertical.
  • Cooperative: Strategic Alliance · JV · M&A · Licensing · Franchising · Outsourcing · Networks · Ecosystems.
  • Retrenchment: Turnaround · Divestment · Spin-off · Carve-out · Liquidation · IBC.
  • Porter Generic Strategies (1980): Cost Leadership · Differentiation · Cost Focus · Differentiation Focus. Stuck-in-the-middle warning.
  • Hybrid strategies — Toyota, Zara — modern view permits.
  • Bowman’s Strategy Clock (1996) — 8 positions on Price × Perceived Value.
  • Blue Ocean — Kim & Mauborgne (2005): ERRC framework (Eliminate, Reduce, Raise, Create); value innovation.
  • BCG Matrix — Bruce Henderson (1968): Star · Cash Cow · Question Mark · Dog (Growth × Market Share).
  • GE-McKinsey Matrix — 3 × 3 = 9 cells (Industry Attractiveness × Business Strength).
  • Other: Shell DPM · ADL Life Cycle · SPACE · BCG New Matrix · Hofer.
  • Strategy formulation models: SPACE · Grand Strategy Matrix (David) · QSPM (David).
  • Strategic Choice — Johnson-Scholes-Whittington SAF/SFA test: Suitability · Acceptability · Feasibility.
  • Real Options (Myers 1977) — strategic flexibility.
  • International strategies (Bartlett-Ghoshal 1989) — International · Multinational · Global · Transnational.
  • Entry modes (lowest to highest commitment): Export → Licensing → Franchising → Contract Mfg → JV → Alliance → WOS → Greenfield/Brownfield.
  • Disruptive Innovation — Christensen (1997) — The Innovator’s Dilemma.
  • Hypercompetition — D’Aveni (1994) — 7-S framework.
  • Modern trends: Platforms · Ecosystem orchestration · Business model innovation · Lean strategy · Agile/OKRs · AI-augmented · Stakeholder strategy · Open strategy · VUCA/BANI · Frugal innovation · Reverse Innovation (Govindarajan) · Web3/DAO strategy.