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Chapter 6 STRATEGIC FORMULATION

Intended Learning Outcomes: At the end of this chapter, the students are expected to:

1. Identify and explain the basics of formulating a strategy.

This chapter would tackle formulating a vision and mission, analyzing external
environment, external factor evaluation matrix, and choosing a strategy.

Strategic Formulation

Outline on Strategic Formulation

A. Vision and Mission

B. Analyzing External Environment
i. PESTLE/STEEP Analysis
ii. Competitive Analysis: Porter's Five Forces Model
C. External Factor Evaluation (EFE) Matrix
D. Analyzing the Internal Environment
a. Situational Analysis
b. Internal Factor Evaluation (IFE) Matrix
E. Choosing a Strategy
i. SWOT Analysis

A. Vision and Mission

❖ What is a vision statement?
✓ It answers the basic question: “What do we want to become?”
✓ It provides the foundation for developing a comprehensive mission statement.
❖ What is a mission statement?
✓ It answers the basic question: “What is our business?”
✓ A declaration of an organization’s “reason for being.”
✓ Essential for effectively establishing objectives and formulating strategies.
✓ It is a statement of purpose, philosophy, beliefs & business principles.
✓ It reveals what an organization wants to be and whom it wants to serve.

VISION MISSION
ABOUT A Vision statement A Mission statement talks
outlines WHERE you want about HOW you will get to
to be. Communicates both where you want to be.

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 the purpose and values of
your business.
ANSWER It answers the question,
“Where do we aim to be?”
TIME A vision statement talks
about your future.
FUNCTION It lists where you see
yourself some years from
now. It inspires you to give
your best. It shapes your
understanding of why you
are working here.
CHANGE As your organization
evolves, you might feel
tempted to change your
vision. However, mission
or vision statements
explain your organization's
foundation, so change
should be kept to a
minimum.
DEVELOPING A Where do we want to be
STATEMENT going forward? When do
we want to reach that
stage? How do we want to
do it?
FEATURES OF AN Clarity and lack of
EFFECTIVE STATEMENT ambiguity: Describing a
bright future (hope);
Memorable and engaging
expression; realistic
aspirations, achievable;
alignment with
organizational values and
culture.
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Defines the purpose and
primary objectives related
to your customer needs
and team values.
It answers the question,
“What do we do? What
makes us different?”
A mission statement talks
about the present leading
to its future.
It lists the broad goals for
which the organization is
formed. Its prime function
is internal; to define the
key measure or measures
of the organization's
success and its prime
audience is the leadership,
team and stockholders.
Your mission statement
may change, but it should
still tie back to your core
values, customer needs
and vision.
What do we do today? For
whom do we do it? What
is the benefit? In other
words, Why we do what
we do? What, For Whom
and Why?
Purpose and values of the
organization: Who are the
organization's primary
"clients" (stakeholders)?
What are the
responsibilities of the
organization towards the
clients?
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Importance/Benefits of Vision and Mission Statements
1. To ensure unanimity of purpose within the organization.
2. To provide a basis, or standard, for allocating organizational resources.
3. To establish a general tone or organizational climate.
4. To serve as a focal point for individuals to identify with the organization’s
purpose and direction, and to deter those who cannot from participating further
in the organization’s activities.
5. To facilitate the translation of objectives into a work structure involving the
assignment of tasks to responsible elements within the organization.
6. To specify organizational purposes and then to translate these purposes into
objectives in such a way that cost, time, and performance parameters can be
assessed and controlled.

Vision and Mission (example)

USM Vision:
“Quality and relevant education for its clientele to be globally competitive,
culture-sensitive and morally responsive human resources for sustainable
development.”
USM Mission:
“Help accelerate socio-economic development, promote harmony among
diverse communities and improve quality of life through instruction, research,
extension and resource generation in Southern Philippines.”

B. Analyzing External Environment

Sociological, Technological, Economic, Environmental, and Political (STEEP) Analysis
❖ STEEP is an analytical tool which considers external factors and helps you to
think about their impacts
❖ Is a useful tool for understanding the “big picture” of the environment in which
you are operating
❖ By understanding your environment, you can take advantage of the
opportunities and minimize the threats.

❖ This provides the context within which more detailed planning can take place to
take full advantage of the opportunities that present themselves.

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The factors in STEEP analysis
• S - Sociological - The ways in which changes in society affect the project
• T - Technological - How new and emerging technology affects our project/
organization
• E - Economic - The local, national and world economic impact
• E - Environmental - Local, national and global environmental issues
• P – Political - The current and potential influences from political pressures
Sociological:
– Cultural aspects, health consciousness, population growth rate, age
distribution,
– Organizational culture, attitudes to work, management style, staff attitudes
– Education, occupations, earning capacity, living standards
– Ethical issues, diversity, immigration/emigration, ethnic/religious factors
– Media views, law changes affecting social factors, trends, advertisements,
publicity
– Demographics: age, gender, race, family size
Technological:
– Maturity of technology, competing technological developments, research
funding, technology legislation, new discoveries
– Information technology (IT), internet, global and local communications
– Technology access, licensing, patents, potential innovation, replacement
technology/solutions, inventions, research, intellectual property issues,
advances in manufacturing
– Transportation, energy uses/sources/fuels, associated/dependent
technologies, rates of obsolescence, waste removal/recycling
Economic:
– Stage of a business cycle
– Current and projected economic growth, inflation and interest rates
– Unemployment and supply of labor
– Labor costs
– Levels of disposable income and income distribution
– Impact of globalization
– Likely impact of technological or other changes on the economy
– Likely changes in the economic environment

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Environmental:
– Ecological
– environmental issues, environmental regulations
– customer values, market values, stakeholder/ investor values
– management style, staff attitudes, organizational culture, staff engagement
Political:
– Government type and stability
– Freedom of the press, rule of law and levels of bureaucracy and corruption
– Regulation and de-regulation trends
– Social and employment legislation
– Tax policy, and trade and tariff controls
– Environmental and consumer-protection legislation
– Likely changes in the political environment

C. External Factor Evaluation (EFE) Matrix

Environmental Scanning/ External audit
• Focuses on identifying and evaluating trends and events beyond the control of a
single firm/organization such as aging society, increased foreign competition,
etc.
• It reveals key opportunities and threats confronting an organization so that
managers can formulate strategies to take advantage of the opportunities and
avoid/reduce the impact of threats.
The External Factor Evaluation Matrix
• EFE matrix method is a strategic-management tool often used for assessment of
current business/ organization conditions.
• The EFE matrix is a good tool to visualize and prioritize the opportunities and
threats that a business/ organization is facing.
• External factors assessed in the EFE matrix are the ones that are subjected to the
will of social, technological, economic, environmental, political, and other
external forces.
EFE Matrix can be developed in five steps:
1. Gather a list of external factors. (List Factors)
➢ Divide factors into two groups: opportunities and threats.
➢ Use a total of ten to twenty external factors, including both opportunities
and threats.

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 ➢ List opportunities first and then threats.
➢ Be as specific as possible, using percentages, ratios, and comparative
numbers.
2. Assign a weight to each factor. (Assign Weights)
➢ The value of each weight should be between 0 and 1 (or alternatively
between 10 and 100 if you use the 10 to 100 scale).
➢ Zero means the factor is not important. One or hundred means that the
factor is the most influential and critical one.
➢ The total value of all weights together should equal 1 or 100.

3. Assign a rating to each factor. (Rate Factors)

➢ Rating should be from 1 to 4.
➢ Rating indicates how effective the firm’s current strategies respond to the
factor: 1 = the response is poor; 2 = the response is below average; 3 = above
average; 4 = superior.
➢ Weights are industry-specific. Ratings are company-specific.

4. Multiply weights by ratings.

➢ Multiply each factor weight with its rating. This will calculate the weighted
score for each factor.

5. Total all weighted scores.

➢ Add all weighted scores for each factor. This will calculate the total weighted
score for the company.
➢ Total weighted scores well below 2.5 characterize the organization’s weak
ability to respond to external factors, whereas scores significantly above 2.5
indicate a strong external position.

E. Analyzing the Internal Environment

• A strategic-management audit of a firm’s/organization’s internal operations is
vital to organizational health.
• They must identify the strengths and weaknesses in order to effectively
formulate and choose among alternative strategies (David, 2011).
• The process of performing internal audit represents an opportunity for managers
and employees throughout the organization to participate in determining the
future of the firm/organization (David, 2011).

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 • 2 basic activities involved, conducting:
• Situational Analysis
• Internal Factor Evaluation (IFE) Matrix
Nature of Internal Audit
• All organizations have strengths and weaknesses in the functional areas of a
business.
• Internal strengths and weaknesses coupled with external opportunities and
threats and a clear statement of mission, provide basis for establishing
objectives and strategies.
• Objectives and strategies are established with the intention of capitalizing upon
internal strengths and overcoming weaknesses (David, 2011).

Key Internal Forces

• The usual functional areas of a business:

✓ Management
✓ Marketing
✓ Finance/accounting
✓ Production/operations
✓ Research and development
✓ Human Resource
• For different types of organization like hospitals, universities and government
agencies, the functional business areas differ.

• Example: HOSPITAL • UNIVERSITY

– Cardiology – Athletic programs
– Hematology – Placement services
– Nursing – Housing
– Maintenance – Fund-raising
– Physical support – Academic research
– Counseling
– Intramurals program

Performing an Internal Audit

• Representative managers and employees from throughout the firm need to be
involved in determining a firm’s strengths and weaknesses.
• Internal audit requires gathering and assimilating information about the firm’s
management, marketing, finance/accounting, production/operations, etc.
(David, 2011)

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 A. Situational Analysis
• Analysis of the Internal Environment
✓ Marketing
➢ Product flows and markets
➢ Advertising and Promotional Events
➢ Indicators of effective marketing (e.g. sales performance)

BOX 1
Since Juby and Nene Homemade Durian Delicacies is a micro-
scale enterprise, word of mouth is the best marketing strategy
they came up along with targeting populated areas as their site in
selling. Also, they mostly market their products to relatives or
friends especially the balikbayan of their regular customers. On
the other hand, packaging and expanding their markets are
aspects where the firm needs some improvement.

✓ Finance
• Financial ratio analysis
– Profitability
– Asset utilization
– Liquidity
– Debt Utilization
• Working capital analysis
• Financing decision

BOX 2
Durian delicacies-making is profitable judging from the values
– estimated income (Php 15,000-20,000 per month) and the
production costs (Php 7,000-8,000) – the owner gave us. However,
there are chances of low met income due to unavailable durian
during its off-seasons.

✓ Operations
• Inbound & outbound logistics
• Operations process (e.g. production process)

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 BOX 3

Comparing the estimated income (Php 15,000-20,000 per

month) and the production costs (Php 7,000-8,000) of the firm, it
can be inferred that the firm has high profit. One factor is the
procurement of ingredients from local farms. In addition to that,
partnerships with other establishments, in this case, Waterfront
Hotel and Gaisano Mall Supermarket increase the sales and
market of the firm. Moreover, pre-ordering of their products has
been an important factor that contributes greatly to their sales.
They also engage more in pre-ordering than in direct selling since
there is sure sales in the former. Also, they maintain the quality of
their product by not selling the previous day’s unsold products and
there is high chance of this to occur in direct-selling.

✓ Human Resource
• Organizational Structure
• Recruitment
• Trainings

BOX 4
Since the firm is a micro-scale enterprise it is managed by the owner
herself. The employees are relatives (e.g. children) of the owner which
doesn’t take up much of the labor costs. However, since they are related
the employees might slack at their jobs. Moreover, the employees have not
undergone proper trainings.

B. Internal Factor Evaluation (IFE) Matrix

• A summary step in conducting an internal strategic-management audit is to
construct an Internal Factor Evaluation (IFE) Matrix.
• This strategy-formulation tool summarizes and evaluates the major
strengths and weaknesses in the functional areas of a business, and it also
provides a basis for identifying and evaluating relationships among those
areas.
• Intuitive judgments are required in developing an IFE Matrix, so the
appearance of a scientific approach should not be interpreted to mean this
is an all-powerful technique.

IFE Matrix can be developed in five steps:

1. List key internal factors as identified in the internal-audit process.
➢ Use a total of ten to twenty internal factors, including both strengths and
weaknesses.
➢ List strengths first and then weaknesses.

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 ➢ Be as specific as possible, using percentages, ratios, and comparative
numbers.
2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to
each factor.
➢ The weight assigned to a given factor indicates the relative importance of the
factor to being successful in the firm's industry.
➢ Regardless of whether a key factor is an internal strength or weakness,
factors considered to have the greatest effect on organizational performance
should be assigned the highest weights.
➢ The sum of all weights must equal 1.0.
3. Assign a I-to-4 rating to each factor.
➢ Indicate whether that factor represents a major weakness (rating = 1), a
minor weakness (rating = 2), a minor strength (rating = 3), or a major
strength (rating = 4).
➢ Note that strengths must receive a 4 or 3 rating and weaknesses must
receive a 1 or 2 rating.
➢ Ratings are thus company-based, whereas the weights in Step 2 are
industry-based.
4. Multiply each factor's weight by its rating to determine a weighted score for each
variable.
5. Sum the weighted scores for each variable to determine the total weighted score
for the organization.

IFE Matrix
❖ Regardless of how many factors are included in an IFE Matrix, the total
weighted score can range from a low of 1.0 to a high of 4.0, with the average
score being 2.5.
❖ Total weighted scores well below 2.5 characterize organizations that are weak
internally, whereas scores significantly above 2.5 indicate a strong internal
position.
❖ An IFE Matrix should include from 10 to 20 key factors.
❖ The number of factors has no effect upon the range of total weighted scores
because the weights always sum to 1.0.
❖ When a key internal factor is both a strength and a weakness, the factor
should be included twice in the IFE Matrix, and a weight and rating should be
assigned to each statement.

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 INTERNAL STRENGTHS WEIGHT RATING WEIGHTED
SCORE
1. The micro-enterprise is continually growing due to the 10% 4 0.4
support of their recurrent customers via their
recommendations. (BOX 1)
2. Increasing demand due to effective marketing 10% 3 0.3
strategies. The specific locations of their target
market is largely populated thereby yielding
adequate profit. (BOX 1)
3. Locally available ingredients and their relatives as 15% 4 0.6
employees is cost-efficient which leads to low
production cost - Php 7,000-8,000 per month. (BOX 2)

4. Pre-orders from the customers contributes 10% 4 0.4

significantly to the sales of the firm. (BOX 3)
5. The business is personally managed by the owner. 10% 4 0.4
(BOX 4)
INTERNAL WEAKNESSES
6. Needs improvement in their packaging, how they 10% 2 0.2
endorse their products, or covering more locations
by introducing their product to other markets near
the existing ones. (BOX 1)
7. Despite the availability of durian in Davao City, prices 15% 1 0.15
are still subject to fluctuation depending on the
season of the fruit. This leads to higher production
costs and potentially lower net income during off-
seasons. (BOX 2)
8. Despite the strong partnership of the firm with the 10% 1 0.1
Waterfront hotel and GMall supermarket, the firm
could improve more in the aspect of direct-selling.
(BOX 3)
9. Lack of proper training for the employees. (BOX 4) 5% 2 0.1
10. Most employees are related to the owner. The 5% 2 0.1
relatives have the tendency to slack at their jobs since
employed relatives are much harder to fire than
employees who does not have any relation to the
owner. (BOX 4)
TOTAL WEIGHTED SCORE 100% 2.75

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E. Choosing a Strategy: SWOT Analysis

SWOT Analysis

❖ The Strengths-Weaknesses-Opportunities-Threats (SWOT) analysis is a key tool

used in businesses to formulate strategic plans.
❖ The typical SWOT model analyzes factors that are internal to the business and
also factors in the external environment that may affect the company.
❖ Strengths and weaknesses in the SWOT matrix are the internal factors while the
opportunities and threats are the external factors.
❖ The SWOT Matrix is an important matching tool that helps managers develop
four types of strategies:
SWOT Analysis – Strategies
▪ SO (strengths-opportunities) Strategies: SO Strategies use a firm’s internal
strengths to take advantage of external opportunities.
▪ WO (weaknesses-opportunities) Strategies: WO Strategies aim at improving
internal weaknesses by taking advantage of external opportunities
▪ ST (strengths-threats) Strategies: ST Strategies use a firm’s strengths to avoid or
reduce the impact of external threats
▪ WT (weaknesses-threats) Strategies: WT Strategies are defensive tactics
directed at reducing internal weakness and avoiding external threats.
➢ Matching key external and internal factors is the most difficult part of developing
a SWOT Matrix and requires good judgment.
➢ Always be specific to the extent possible in stating factors and strategies. State
these in quantitative terms.
➢ The purpose for SWOT Analysis (and matrix) is to generate feasible alternative
strategies, not to select or determine which strategies are best.
➢ Not all of the strategies developed in the SWOT Matric, therefore, will be
selected for implementation.

➢ Include the S1, S2 type notations after each strategy in a SWOT Matrix. This
notation reveals the rationale for each alternative strategy.
Example: Modern Historian Society – Outreach Program

Opportunities and Threats Strengths and Weaknesses

• O1: Many interventions can be done • S1: Talented and skilled members.
in the selected site. • W1: Lack of unity among members.
• T1: Weather might hinder the activity
• T2: Have to ask permission to
barangay officials first.

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 INTERNAL FACTORS

STRENGTHS WEAKNESSES

S1: Talented and smart members. W1: Lack of unity

among members.

EXTERNAL FACTORS SO Strategies WO Strategies

OPPORTUNITIES S1O1: Students can showcase their W1O1: Since they are
talents and skills BY conducting many interventions to
O1: Many interventions
different activities (e.g. dancing, be employed, the org.
can be done in the
story-telling). can form committees
selected site.
so as to avoid conflict.
THREATS ST Strategies WT Strategies
T1: Weather might S1T1: Assign some members to W1T2: Assign only 1
hinder the activity research the weather forecast of person to make letter
the chosen date of the activity. to ask permission
T2: Have to ask
S1T2: Members who have good from officials.
permission to barangay
communication skills will be
officials first.
assigned to ask permission from
the barangay officials.

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