BUSINESS POLICY

CHAPTER IV- STRATEGY FORMULATION

Learning Objectives:

At the end of the chapter, you should be able to:

1. Discuss thoroughly the meaning and relevance of objectives and mission/vision statement;
2. Describe the 5 power Ps;
3. Enumerate and explain the business excellence criteria;
4. Know and understand Porter’s Generic Strategies; and
5. Discuss the essentials of the Balanced Scorecard

A reexamination of an organization’s current mission and objectives must be made before

alternative strategies can be generated and evaluated. Even when formulating strategy, decision
makers tend to concentrate on the alternatives- the action possibilities – rather than on a mission
to be fulfilled and objectives to be achieved. This tendency is so attractive because it is much easier
to deal with alternative courses of action that exist right here and now than to really think about
what you want to accomplish in the future. The end result is that we often choose strategies that
set our objectives for us. Rather than having our choices incorporate clear objectives and a mission
statement.

Problems in performance can derive from an inappropriate statement of mission, which may
be too narrow or too broad. If the mission does not provide a common thread (a unifying theme)
for a corporation’s businesses, managers may be unclear about where the company is heading.
Objectives and strategies might be in conflict with each other. Divisions might be competing against
one another, rather than against outside competition, to the detriment of the corporation as a
whole.

A company’s objective can also be inappropriately stated. They can either focus too much on
short-term operational goals or be so general that that they provide little real guidance. There may
be a gap between planned and achieved objectives. When such a gap occurs, either the strategies
have to be changed to improve performance or the objectives need to be adjusted downward to
be realistic. Consequently, objectives should be constantly reviewed to ensure their usefulness. This
is what happened at Toyota Motor Corporation when top management realized that its “Global
10” objective of aiming for 10% of the global vehicle market was no longer feasible. Emphasis was
then shifted from market shares to profits. Interestingly, as the same time that both Toyota and
General Motors Company was stating that it wanted to be Number 1 in sales worldwide, Alexander
Trotman, Ford’s Chairman of the Board, contends “Have you ever seen a team run out on the
field and say, ‘We’re going to be Number 2?”

The Strategic Management Process continues with the formulation of strategies. The first step
is the mission/vision statements.

VISION/MISSION STATEMENTS

MISSION—summarizes the purpose or the reason for the company’s existence

—tells what the company now and what it is doing at the present
—tells what types of customers are being served, how the company does its products or
services and its desired level of performance
—defines the product or services offered and the types of consumers served
—identifies the market where the company wants to compete
—should also answer the question of the firm’s competitiveness and its responsibility to
the community or society at large

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VISION—explains what the company wants to become in the future

—becomes a company’s inspiration and establishes the framework of action plans to
realize it

Both the mission and vision statements identify the direction of the company. They reflect
who the owners are, how they do business, who their customers are, and in what direction they
want the company to go into. The mission and vision statements differentiate the company from
its competitors. They help in defining the parameters by which managers formulate their strategic
plans.
Strategizing is more than just visioning or planning. To strategize is to be aware of what
the competitors are doing. Therefore, to strategize means being a competitor-oriented.
Formulating competitive strategies means building Sustainable Competitive Advantage—it
is the creation of prolonged, unique strategy that will be difficult for competitors to be neither
duplicated nor surpassed.
On the other hand, Jack Welch, the legendary former chief executive officer of GE matrix
discussed Business Strategy Stretching—it is doing the best possible strategy and beyond; it starts
with the formulation of strategies that are easily achievable: once they are realized, the company
will go much, much higher.

THE FIVE POWER Ps

1. Position. The advantage that an organization gains in the hands of the consumers. It is the
position that a company should not allow to be snatched by its competitors.
2. Power. A company should enjoy power over its competitors.
3. Pace. There is timing and intensity of strategy put on the ground. It is the right time for
the strategy to work. This includes the adaptive methods.
4. Potential. It is the probability of the success element of a particular strategy. It is necessary
to know the important characteristics of a product or service that will spell success.
5. Performance. It is the effective implementation of a particular strategy. Excellent
performance relates to growth strategies.

PORTER’S FOUR COMPETITIVE STRATEGIES

 Derived from Michael Porter, a Harvard Business School Professor
 Also called as “four generic strategies”
Four Strategies:
a. Cost-Leadership Strategy: Keeping Costs and Prices Low for a Wide Market
Cost-leadership strategy—to keep the costs, and hence prices, of a product or service below those
of competitors and to target a wide market

b. Differentiation Strategy: Offering Unique and Superior Value for a Wide Market
Differentiation Strategy—to offer products or services that are of unique and superior value
compared to those of competitors but to target a wide market

c. Cost-Focus Strategy: Keeping Costs and Prices Low for a Narrow Market
Cost-focus strategy—to keep the costs, and hence prices, of a product or service below those of
competitors and to target a narrow market

d. Focused-Differentiation Strategy: Offering Unique and Superior Value for a Narrow Market
Focused-differentiation strategy—to offer products or services that are of unique and superior value
compared to those of competitors and to target a narrow market

POWER STRATEGIES

1. Horizontal Integration—strategy of the company to expand its business into different

products that are similar to current lines.
2. Vertical Integration
2 types:

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a. Forward Integration—strategy of a company to control the direct distribution of its

products
b. Backward Integration—strategy of a company to purchase the suppliers in order to
reduce dependency. For ex: a car manufacturer has a tire company.

ADAPTIVE METHODS

3 Approaches:

1. Defenders Approach—“Let’s Stick with What We do Best, Avoid Other Involvements”—

are expert at producing and selling narrowly defined products and services
2. Prospectors Approach—“Let’s Create Our Own Opportunities, Not Wait For Them To
Happen”—focus on developing new products or services and in seeking out new markets,
rather than waiting for things to happen

3. Analyzers Approach—“Let Others Take the Risks of Innovating, and We’ll Imitate What
Works Best”—let other organizations take the risks of product development and
marketing and then imitate (or perhaps slightly improve on) what seems to work best

ESSENTIALS OF POTENTIAL STRATEGIES

For a company to be competitive in the market, the product or service should have the potential
to succeed. This potential is expressed in the following characteristics:

1. Transferability. The product can be transformed into something highly valued by

costumers.
2. Competitive Dominance. The product or service is better than the capabilities of the
competitors.
3. Uniqueness. The product or service cannot easily be copied by competitors.
4. Substitutability. The product or service cannot be replaced through substitution by the
competitors.
Durability. The product or service does not deteriorate or depreciate quickly.

GROWTH STRATEGIES:

1. Diversification—it is the development of new products for new markets. This is risky
because both the product and market are untested yet.
2. Market Development—it is the development of a new market for existing products and
services. This can be in a form of export or tapping an unexplored segment of the market.
This can also be done by making improvements through the product’s packaging and
expanding its distribution channels.
3. Product Development—development of new products to existing markets.
4. Market Penetration—it is the desire to achieve greater percentage of the market share
through the company’s existing products in existing market.

BALANCED SCORECARD
 It is a system that measures the organization’s progress in accomplishing its strategic
objectives.
 Developed by Robert Kaplan and David Norton in 1992 which incorporates financial
indicators as well as three other aspects: customers, internal business, and
learning/innovation.
 Its purpose is to align the company’s vision and strategies to the activities of the
organization.
 It helps in predicting what should be done and measured in the future.

4 Implementing Strategies:
1. Developing a clear-cut strategy. This is a direct conversion of strategic objectives into
measurable quantifiable terms.

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2. Communicating the strategic objectives. Communicate the strategy to the entire

organization.
3. Planning strategies. Targets are set and efforts are aligned to reach the planned targets.
4. Monitoring strategic implementation. After the implementation of the strategies, top
management monitors and receives feedback.

Financial

Business
Process STRATEGY Customer

Learning
and
Growth

Figure 4.1 Balanced Scorecard by Kaplan and Norton

Four Perspectives:
1. Financial Perspective—includes financial measures such as operating income, return on
investment, and economic value. Managers analyse the costs and how the funds can realize
customer satisfaction.
2. Customer Perspective—includes measures on customer satisfaction, customer loyalty, and
market share.
3. Business Process Perspective—includes procurement of materials, production, and other
fulfilment. Managers see to it that the products and services conform to customer
requirements and standards.
4. Learning and Growth Perspective—includes measures of employees’ satisfaction and
retention. This includes employee training and improvement since employees are
considered as the main resource when it comes to knowledge.

The Balance Scorecard also emphasizes learning as an everyday thing. It also shapes
mentoring, communicating, and performing outstanding work.

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STRATEGIC INSIGHTS
(Adapted and inspired by the book: On the Profession of Management by Peter Drucker, 2003)
Managers make important decisions but the most important one is that of people decisions.
There are decisions that have something to do with people such as hiring them and making them
perform.
When managers hire people and place them in certain positions, these people are expected
to perform. If these people do not perform, managers should not blame the employees. In the
first place, the managers are responsible for hiring them. And they should make sure they take
the right decisions in choosing whom to hire; they better make sure people would be placed in
positions that fit them.
Newly hired personnel should not be given new major tasks when these assignments need
performers who are already familiar with the company and who have already earned reputation
in the company in terms of performance. If these tasks are given to new employees, it just
complicates the situation and increases the risks of non-performance or nonachievement of a
goal.
Qualified newcomers are placed in positions that are already established and there are people
who are available to help. They are given tasks commensurate to what they have applied for in
the first place and not on new tasks that may put them and the entire organization in a very
risky position.
Managers should not risk the organization’s overall performance with wrong people
decisions. Managers are to blame for people they hired who do not perform.

Strategic Activity

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The Most Admired Companies

INSTRUCTIONS: Read the article and evaluate the strategies used by the most admired companies.
Browse the internet for more information on these companies. The instructor can have a detailed
discussion on the strategies. Read the latest on the most admired companies. Changes in positions
or changes in standing of these companies can spark a debate in class.

In the latest survey of Wall Street Journal Asia, /Jollibee is the most admired company in the
Philippines. In terms of innovation and reputation, Jollibee toppled down Ayala Corporation to
second spot.
Jollibee is also singled out for its affordability of its products and accessibility. As of June 2009,
Jollibee has 1,825 stores including 307 overseas. Jollibee is also the top choice among consumers,
thus, giving up other more expensive restaurants. It is also chosen for its quick service.
This most admired company has recently opened a store in Queens, New York with upcoming
branches in Asia and the Middle East.
Jollibee registered a 17.2 % rise in earnings for the 1st quarter of 2009 and its system wide sales are
13.8% to P15.18.
Aside from Jollibee and Ayala Corporation, the third spot went to Ayala Land, Inc., followed by
San Miguel Corporation. On the 5th spot is the Bank of Philippine Islands, then Globe Telecoms.
On the 7th place is Banco de Oro, 8th is the Philippine Long Distance Telephone Co., and 9th and
10th spots to SM Prime Holdings and Metropolitan Bank and Trust Co., respectively.

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