Strategic Choices: formula sheet

Key formulas

Stability strategy

Continue present business, products and markets; aim at incremental improvement only

Used when the firm is doing reasonably well and the environment is stable. It is a deliberate choice, not inaction.

Expansion strategy

Growth within the same business: market penetration, market development, product development, plus expansion through mergers, acquisitions and strategic alliances

Remember the key link: expansion = more of the same business, in existing or related products and markets.

Diversification strategy

Entry into new businesses: concentric (related) or conglomerate (unrelated)

Concentric builds on existing technology or marketing links. Conglomerate has no such link, usually for spreading risk or finding profit.

Retrenchment strategy

Turnaround, divestment, liquidation

Turnaround tries to fix the business. Divestment sells a unit. Liquidation closes the business and sells its assets.

Combination strategy

Stability + expansion + retrenchment applied together or in sequence

Typical for large multi-business firms.

Vertical integration test

Same industry chain, different stage = vertical

Backward = towards inputs or suppliers. Forward = towards distribution or customers.

Horizontal integration test

Same stage, same industry = horizontal

Acquiring or merging with a competitor.

Concentric vs conglomerate

Related new business = concentric; unrelated = conglomerate

Look for a link in technology, product, marketing or customers.

Concentration routes

Same business: existing product + existing market = penetration; existing product + new market = market development; new or improved product in the same industry + existing market = product development

Follows the Ansoff product-market logic. Product development stays within the existing business. A product outside the existing business is diversification.

Retrenchment order

Turnaround → Divestment → Liquidation

Increasing severity. Turnaround keeps the whole business, divestment sells a part, liquidation ends it.

Stability types test

No-change = carry on; Profit = cut investment and discretionary spending to hold profits in a temporary difficult period; Pause = wait and proceed with caution

For profit strategy, look for cuts in investment or discretionary expenditure to protect profits.

Porter's generic strategy grid

Advantage (lower cost or differentiation) × Scope (broad or narrow) = Cost leadership | Differentiation | Cost focus | Differentiation focus

Broad scope gives cost leadership or differentiation. Narrow scope gives focus, either on cost or on differentiation.

Cost leadership sources

Economies of scale + experience curve + cost control + efficient processes + low-cost inputs

Use this list to explain how a firm becomes the low-cost player.

Differentiation sources

Quality + brand + design + features + service + technology

Customers must value the uniqueness enough to pay a premium.

Combination moves

Merger = many become one | Acquisition = one buys control | Joint venture = new jointly owned entity | Alliance = cooperation without a new entity

The common exam comparison is based on these definitions.

Relative market share (BCG)

Relative market share = Your business's market share ÷ Market share of the largest competitor

Above 1 means you are the market leader (high share). Below 1 means you trail the leader. Many books use 1 as the dividing line, but check the question's data.

BCG four cells

High growth + high share = Star; Low growth + high share = Cash cow; High growth + low share = Question mark; Low growth + low share = Dog

Growth is on the vertical axis and relative share on the horizontal axis, with share usually shown high on the left.

BCG strategies

Star: build/hold; Cash cow: hold/harvest; Question mark: build selectively or divest; Dog: divest/liquidate/harvest

Always pair the cell with its strategy.

Ansoff matrix

Existing product + existing market = Market penetration; Existing product + new market = Market development; New product + existing market = Product development; New product + new market = Diversification

Risk is lowest in penetration and highest in diversification.

GE matrix axes

Industry attractiveness (high/medium/low) × Business strength (strong/average/weak) = 9 cells

Three zones: invest/grow, selectivity/earnings, harvest/divest.

ADL matrix axes

Industry maturity stage × Competitive position (dominant, strong, favourable, tenable, weak)

Strategy depends on the combination, for example natural development, selective development, or withdrawal.

Three levels of strategy

Corporate level → Business level → Functional level

Functional strategies sit at the bottom and support the business strategy. They are short-term and specific.

Main functional areas

Marketing, Finance, HR, Operations, R&D

Pick the areas the question names. Give one or two action points for each.

Factors in strategic choice

Risk, Past strategies, Power relationships, Timing, Managerial perceptions, Competitor reactions

Use these headings and add a one-line example under each.

Strategic choice process

Focus on alternatives → Evaluate alternatives → Choose and record the decision

The choice is made after strategic analysis and before implementation.

Quick revision

• Strategy works at three levels: corporate, business and functional.
• Corporate strategy decides overall direction and the portfolio of businesses.
• The three broad grand strategies are stability, expansion and retrenchment.
• Stability means continuing the present course without major change.
• Expansion covers growth routes such as concentration, integration and diversification.
• Retrenchment covers turnaround, divestment and liquidation.
• Porter's generic strategies are cost leadership, differentiation and focus.
• Cost leadership wins through the lowest cost; differentiation wins through a unique offering.
• The BCG matrix classifies businesses as stars, cash cows, question marks and dogs.
• Cash cows fund the rest; dogs are usually candidates for exit.
• Functional strategies turn the chosen strategy into departmental plans.
• In written answers, always name the strategy, define it, then link it to the case.

Common mistakes

• Treating stability as doing nothing. Fix: Write that stability is a conscious choice to continue present business, often with efficiency improvements, used when performance is satisfactory.
• Calling entry into a new business 'expansion'. Fix: Keep the split clear. Expansion stays in the same business. Diversification enters a new one.
• Calling a rival acquisition vertical integration. Fix: Check the stage. Same stage and same product means horizontal. Different stage in the chain means vertical.
• Confusing concentric with conglomerate diversification. Fix: Look for a link in technology, product or customers. A link means concentric. No link means conglomerate.
• Treating focus as a separate third basis of advantage instead of a scope choice. Fix: Remember that focus is cost or differentiation applied to a narrow segment. Mention cost focus and differentiation focus.
• Saying cost leadership means low quality. Fix: Say lowest cost for an acceptable level of quality. The aim is a cost advantage, not a weak product.
• Mixing up question marks and dogs Fix: Look at growth too. High growth with low share is a question mark. Low growth with low share is a dog.
• Using absolute market share instead of relative market share in BCG Fix: Compare with the largest rival. If the leader has 40%, your 30% gives a relative share of 0.75, which is low.
• Writing business level strategies such as cost leadership or differentiation as functional strategies. Fix: Remember that functional strategies are departmental action plans. Cost leadership is business level; a lean production plan is functional.
• Listing only marketing and finance and skipping HR, operations and R&D. Fix: Learn all five areas with two example actions each.

Exam tips

• Write definitions first. Many questions award marks for the meaning even before the application.
• In case-based questions, quote one or two facts from the case when naming the strategy. This shows the link examiners want.
• Learn the sub-types as a tree: stability, growth (expansion, diversification), retrenchment (turnaround, divestment, liquidation), combination.
• Use a short example for every type. One line is enough.
• For MCQs, spot the clue word first, then eliminate options that name a different direction.
• Most questions give a small scenario and ask you to name the strategy. Practise reading for the action, not the company's own words.
• When asked to distinguish two strategies, write at least three differences in a two-column style using short bullet lines, or one definition plus one example each.
• Learn one stock example for each type, such as backward integration, concentric diversification and divestment, so you can write quickly.