1
CHAPTER SIX
STRATEGY FORMULATION: BUSINESS STRATEGY
This chapter is the first of three chapters dealing with the formulation of strategy. Following the strategic decision-
making process introduced in Chapter 1 and depicted in Figure 1.5, these chapters emphasize steps 5(a), situation
analysis of strategic factors; 5(b), the review and revision of a firm’s current mission and objectives; 6(a), the
generation and evaluation of strategic alternatives; and 6(b), the selection and recommendation of the best
alternative. Situation analysis is conducted using SWOT in the form of generating a Strategic Factors Analysis
Summary (SFAS) matrix to summarize a corporation’s strategic factors and to help identify propitious niches. Once
a corporation’s strengths, weaknesses, opportunities, and threats are identified, strategic managers should review and
revise, if necessary, the mission and objectives before proceeding to developing feasible alternative strategies. The
chapter then presents the TOWS matrix as one way of generating alternative corporate and business unit strategies
by using strengths to capitalize on opportunities and/or working around weaknesses to avoid threats. Business
strategies are explained in terms of competitive and cooperative strategies. Competitive tactics are also discussed.
LEARNING OBJECTIVES
1. Utilize the SFAS matrix and a SWOT diagram to examine business strategy.
2. Develop a mission statement that addresses the five elements of good design.
TOPICS OUTLINE COVERED
1. A Framework for Examining Business Strategy
a. Generating a Strategic Factors Analysis Summary (SFAS) Matrix
b. Finding Market Niches
SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
6-1. How does a hypercompetitive environment change the strategic approach for a company?
Hypercompetitive environments require companies to continue improving their competitive advantage through
6-2. Explain how our understanding of the three generic strategic approaches available to companies can
be used to direct the efforts of all employees at those companies.
The three generic strategies include cost leadership, differentiation, and focused. Cost leadership is the ability of a
company or business to design, produce, and market a comparable product more efficiently than its competitors.
2
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
6-3. What industry forces might cause a propitious niche to appear or disappear?
Newman’s argument for a propitious niche includes the implication that a corporation with such a niche will be
The key to answering this question is in understanding that a propitious niche exists not only because of
environmental opportunities, but also because a company has the resources to take advantage of these opportunities.
Therefore, a niche can disappear because of changes within a company as well as because of environmental changes.
Some of the possible changes are:
a. The environment/industry changes. The company/SBU continues to make its products or services, but the
size of the market changes.
1) Contracts. The market gets smaller because of factors beyond the control of the company/SBU. For
2) Expands. The company/SBU, through its own efforts, not only fills a demand in the market but also
causes the market to expand. Unless the company/SBU can manufacture sufficient products to meet
b. The company/SBU changes. The same market demand continues for specific products or services, but the
company/SBU itself changes so that there is no longer synchronization between itself and the market.
1) Contracts. Due to demands for resources elsewhere in the corporation, the company/SBU may be
forced to cut back its activities. It is unable to satisfy market demand. Customers either leave the
2) Expands. Its own success in the niche may cause the company/SBU to move into nearby niches.
The need for resources in the battle for new niches may cause the company/SBU to take its original
6-4. What are the major sources of competitive advantages of an organization that can be effectively
developed to support a cost leadership strategy for competing in the market?
To answer this question, it is necessary for students to find out how an organization can strategize to lower its fixed
costs, how it can attain economy of scale, how it can avoid marginal customer accounts, etc.
3
6-5. How can an organization develop a competitive advantage internally without the help of outsiders?
Competitive advantage can be developed internally through innovation. Innovation provides a basis for competing in
the market. Examples of innovation within an organization include development of new products, new packaging,
6-6. Explain the importance of strategic alliances.
A strategic alliance is a cooperative relationship between two or more companies involving the sharing or grouping
of resources in pursuit of common goals. Increased market competition demands that organizations identify new
opportunities to be able to enhance their competitive advantages. Many successful organizations prefer to pursue
competitiveness in a collaborative way because it allows them to be more flexible and pool required resources. This
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A6-1. How can a company overcome the limitations of being in a fragmented industry?
As pointed out in the text, a fragmented industry is an industry with many small- and medium-sized companies
competing for relatively small market shares. No one firm or group of firms is able to dominate the industry in any
4
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
Select an industry to analyze. Identify companies for each of Porter’s four competitive strategies. How many
different kinds of differentiation strategies can students find?
This strategic practice exercise challenges students to list companies that illustrate cost leadership, differentiation,
cost focus, and differentiation focus competitive strategies. The class will normally be able to identify companies
following the broad scope cost leadership strategy based on their well-advertised low prices. Walmart and