Strategy Formulation, Choice and Evaluation
Domain 2 tests strategy formulation at corporate and business levels and the discipline of choosing between options. SL3 questions often ask you to evaluate, not merely describe, a proposed strategy.
Core rules and concepts
- Strategy hierarchy: mission and objectives guide corporate strategy (portfolio scope, diversification, vertical integration), business strategy (cost leadership, differentiation, focus) and functional strategies.
- Ansoff matrix: market penetration (existing products/markets), product development (new products/existing markets), market development (existing products/new markets) and diversification (new products/new markets). Risk generally rises as you move away from the current position.
- SAFe evaluation: suitability (does it fit the environment and resources?), acceptability (risk, return and stakeholder reactions) and feasibility (capability, finance and time).
- Use a weighted decision matrix to make trade-offs explicit, then test the result with sensitivity analysis. Portfolio tools such as BCG classify units by growth and share; use them as cash-flow diagnostics, not labels.
Worked example
A conglomerate scores two diversification options out of 5. Weights are suitability 0.40, acceptability 0.35, feasibility 0.25. Option A scores 4, 3 and 4: (0.40×4)+(0.35×3)+(0.25×4)=1.60+1.05+1.00=3.65. Option B scores 3, 5 and 2: 1.20+1.75+0.50=3.45. Choose A, but note that B is more acceptable and A depends on closing a feasibility gap. If feasibility is weighted at 0.40 instead, B may overtake A, so the board must decide whether execution capability is the binding constraint.
Traps that cost marks
Choosing the highest projected return while ignoring feasibility; confusing corporate with business strategy; misplacing Ansoff options; and treating BCG stars and cash cows as prescriptions rather than cash-flow diagnostics.