Strategic formulation


Goals indicate what a business unit wants to achieve. Strategy is a game plan for getting there. Every business must design a strategy for achieving its goals, consisting of a marketing strategy, and a compatible technology strategy and sourcing strategy.
Michael Porter has proposed three generic strategies that provide a good starting point for strategic thinking, overall cost leadership, differentiation, and focus.

Overall Cost Leadership

The business works hard to achieve the lowest production and distribution costs so that it can price lower than its competitors and win a large market share. Firms pursuing this strategy must be good at engineering, purchasing, manufacturing, and physical distribution. They need less skill in marketing. The problem with this strategy is that other firms will usually compete with still lower costs and hurt the firm that rested its whole future on cost.


The business concentrates on achieving superior performance in an important customer benefit area valued by a large part of the market. The firm cultivates those strengths that will contribute to the intended differentiation. Thus the firm seeking quality leadership must make products with the best components, put them together expertly, inspect them carefully, and effectively communicate their quality.


The business focuses on one or more narrow market segments. The firm gets to know these segments intimately and pursues either cost leadership or differentiation within the target segment.

The online air travel industry provides a good example of these three strategies: Travelocity is pursuing a differentiation strategy by offering the most comprehensive range of services to the traveler. Lowest fare is pursuing a lowest-cost strategy; and Last Minute is pursuing a niche strategy in focusing on travelers who have the flexibility to travel on very short notice.

According to Porter, firms pursuing the same strategy directed to the same target market constitute a strategic group. The firm that carries out that strategy best will make the most profits. Firms that do not pursue a clear strategy and try to be good on all strategic dimensions do the worst. International Harvester went out of the farm equipment business because it did not stand out in its industry as lowest in cost, highest in perceived value, or best in serving some market segment. It drew a distinction between operational effectiveness and strategy

Many companies believe they can win by performing the same activities more effectively than their competitors; but competitors can quickly copy the operationally effective company using benchmarking and other tools, thus diminishing the advantage of operational effectiveness. Porter defines strategy as “the creation of a unique and valuable position involving a different set of activities.� A company can claim that it has a strategy when it “performs different activities from rivals or performs similar activities in different ways.� Companies such as IKEA, Southwest Airlines, Dell Computer, Saturn, and their competitors would find it hard to copy and synchronize all the different activities that a strategically differentiated company carries out.

Strategic Alliances:

Companies are also discovering that they need strategic partners if they hope to be effective. Even giant companies AT&T, IBM, Philips, Siemens cannot achieve leadership, either nationally or globally, without forming alliances with domestic or multinational companies that complement their capabilities and resources.

Just doing business in another country may require the firm to license its product form a joint venture with a local firm, or buy from local suppliers to meet “domestic content� requirements. As a result, many firms are rapidly developing global strategic networks, and victory is going to those who build the better global network. The Star Alliance for example, brings together 16 airlines—Lufthansa, United Airlines, Mexicana, Air Canada, ANA, Austrian Airlines, British Midland, Singapore Airlines, Tyrolean, Lauda, SAS, Thai Airways, Varig, Air New Zealand, Asiana Airlines, and Spanair into a huge global partnership that allows travelers to make nearly seamless connections to about 700 destinations.

In India strategic alliances are made by international automobile companies like Suzuki, Honda, Hyundai, General Motors with the existing Indian automobile manufacturers. In other sectors also such alliances have taken place.

Many strategic alliances take the form of marketing alliances. These fall into four major categories

1. Product or service alliances: One company licenses another to produce its product, or two companies jointly market their complementary products or a new product. For instance, H&R Block and Hyatt Legal Services—two service businesses—have also joined together in a marketing alliance.

2. Promotional alliances: One company agrees to carry a promotion for another company’s product or service. McDonalds, has often teamed up with Disney to offer products related to current Disney films as part of its meals for children.

3. Logistics alliances: One company offers logistical services for another company’s product. Abbott Laboratories warehouses and delivers all of 3M’s medical and surgical products to hospitals across the United States.

4. Pricing collaborations: One or more companies join in a special pricing collaboration. Hotel and rental car companies often offer mutual price discounts.

Companies need to give creative thought to findings partners that might complement their strengths and offset their weaknesses. Well-managed alliances allow companies to obtain a greater sales impact at less cost. To keep their strategic alliances thriving, corporations have begun to develop organizational structures to support them and have come to view the ability to form and manage partnership as core skills (called Partner Relationship Management, PRM)

Both pharmaceutical and biotech companies are starting to make partnership a core competency. In the 1980s and 1990s pharmaceutical and biotech firms were vertically integrated, doing all the research, development, and marketing and sales themselves. Now they are joining forces and leveraging their respective strengths. For example, Erbitux, a new drug to aid treatment of colorectal cancer, is the result of just such a partnership. The drug was originally discovered in the biotech company ImClone Systems’ clinical labs, but will be marketed via ImClone’s partnership with pharmaceutical giant Bristol-Meyers Squibb.

In India strategic alliances are taking place much more rapidly than in the past even between Indian companies. The alliance may be either for technology or marketing or for both.