Strategic Management

Strategy Formulation |1

Module 6 Strategy Formulation

Course Learning Outcomes:

1. To take an in-depth look in Strategy Formulation – on how it helps to

come up with management strategies.
2. To fully understand the Steps for an Effective and Winning Strategy
Formulation.

Strategy Formulation

Strategy Formulation is an analytical process of selection of the best suitable course of

action to meet the organizational objectives and vision. It is one of the steps of
the strategic management process. The strategic plan allows an organization to
examine its resources, provides a financial plan and establishes the most appropriate
action plan for increasing profits.

It is examined through SWOT analysis. SWOT is an acronym for strength, weakness,

opportunity and threat. The strategic plan should be informed to all the employees so
that they know the company’s objectives, mission and vision. It provides direction and
focus to the employees.

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Steps of Strategy Formulation

The steps of strategy formulation include the following:

1. Establishing Organizational Objectives: This involves establishing long-term

goals of an organization. Strategic decisions can be taken once the organizational
objectives are determined.

2. Analysis of Organizational Environment: This involves SWOT analysis,

meaning identifying the company’s strengths and weaknesses and keeping vigilance
over competitors’ actions to understand opportunities and threats.

Strengths and weaknesses are internal factors which the company has control over.
Opportunities and threats, on the other hand, are external factors over which the
company has no control. A successful organization builds on its strengths, overcomes
its weakness, identifies new opportunities and protects against external threats.

3. Forming quantitative goals: Defining targets so as to meet the company’s

short-term and long-term objectives. Example, 30% increase in revenue this year of a
company.

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4. Objectives in context with divisional plans: This involves setting up targets

for every department so that they work in coherence with the organization as a whole.

5. Performance Analysis: This is done to estimate the degree of variation

between the actual and the standard performance of an organization.

6. Selection of Strategy: This is the final step of strategy formulation. It involves

evaluation of the alternatives and selection of the best strategy amongst them to be
the strategy of the organization.

Strategy formulation process is an integral part of strategic management, as it helps in

framing effective strategies for the organization, to survive and grow in the
dynamic business environment.

Levels of Strategy Formulation

There are three levels of strategy formulation used in an organization:

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 Corporate level strategy: This level outlines what you want to achieve: growth,
stability, acquisition or retrenchment. It focuses on what business you are going to
enter the market.
 Business level strategy: This level answers the question of how you are going to
compete. It plays a role in those organization which have smaller units of business and
each is considered as the strategic business unit (SBU).
 Functional level strategy: This level concentrates on how an organization is going to
grow. It defines daily actions including allocation of resources to deliver corporate and
business level strategies.

Hence, all organizations have competitors, and it is the strategy that enables one
business to become more successful and established than the other.

Steps for an Effective and Winning Strategy Formulation

So you want your business to earn more than a decent amount of profit. You want
your business to grow and be a force to reckon with in the industry. Naturally, you also
want to be ahead of the competition, beating them soundly and putting as much
distance as you can between you.

First, you have to come up with winning strategies, which you will then implement to
come out on top. Your strategy formulation should roughly follow these steps:

1. Define the Organization and its Environment

The first step requires you to take a look at the organization. The points of interest are:

 Target market – This is the domain that the business hopes to dominate, so there is a
need for the organization to clearly identify and define the particular group that it will
target. Demographic and psychographic factors are the primary indicators considered
in defining the organization’s target market.

 Customers – They are the end users of the products and services that the company
offers. Who are they? How do they perceive value? Are you able to meet that
perception? How do they make their purchasing decisions? Why do they purchase
your products or services?

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 Offerings – These are the products or services that you are selling to the customers.
Do they offer value to the customers, and does that value meet their perceived value?
How does the price point affect its value, if at all? What are the end benefits that these
products and services have that convince customers to buy them?

 Adaptation to changes and challenges – Business environments are, at best,

unstable in the sense that changes are expected and even anticipated. Anticipation will
spur the company to come up with strategies to be able to adapt quickly and
effectively. Therefore, the organization has to identify the potential challenges that are
expected to arise. The most common examples are the introduction of new
technologies and equipment, and updates in systems.

2. Define the Strategic Mission

Organizations are forward-looking, and they want to achieve something as they move
the business along. The strategic mission will provide a clear picture of that long-range
outlook, providing an overview of what the business wants to achieve. This will serve
as a definitive and clear guide for the organization and its members as they carry out
the tasks indicated in the plan.

A strong strategic mission should have all, if not most, of the following:

 An indication of a long-range perspective. The business is looking at the long term,

not just one, three or five years down the road. It has to be clear on that front.

 Core values of the organization. The mission must include the values that are upheld
and highly esteemed by the organization. These values will largely dictate how you are
going to go about the process of achieving the goals of the organization.

 Nature of the business. Briefly, include a description of the core activities or main
line of business of the organization. Is it in commercial retail, healthcare services, or
automobile manufacturing?

 Current position of the organization in the market. Is the organization currently

holding the leader position in the market? Are there special characteristics or features
that clearly distinguish the organization from the rest? These should also be noted in
the strategic mission.

 Vision of the organization. This is a statement of what and where the organization
wants to be in the future, on its own and in the market.

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Here are some tips that may help you when crafting your Strategic Mission statement.

 Start by taking a look at the main operations and offerings of the business and how
they go about them. Consider also the end users or recipients of the output of these
operations.

 Focus on the “what is”, not the “what should be”. That means you have to be
objective in looking at the current state of affairs in the organization and the industry it
belongs to.

 Present your drafts to other members of the information for critiquing. You may be
able to get more pointers from their feedback, since they are likely to be more
objective when evaluating the mission statement.

 Get pointers from other companies. In fact, it would be a great idea to take a look at
the mission statements of your competitors, considering how you are pretty much in
the same position and, probably, with a similar vision. Be careful, however, that you
won’t be copying their mission statements outright.

 You might end up making dozens of draft mission statements and scrapping all of
them. That is fine. Keep revising and improving until you have a draft of a mission
statement that you are fully satisfied with, and that captures and reflects the
organizations long-range perspective perfectly.

3. Define and Set the Strategic Objectives

Strategic objectives represent what the organization must achieve in order for it to
become competitive – or to remain competitive – and ensure sustainability of the
business over the long term. They come in the form of specific responses or aims of
the organization to address issues regarding competitiveness, long-term sustainability
and other business advantages.

If the strategic mission will serve as a directional guide for where the business wants to
be, the strategic objectives will serve as a directional guide on how the business will
make use of its resources and carry out key functions and activities.

In essence, defining the strategic objectives involves identifying performance targets

that the members of the organization will aim for, and these targets are clearly geared
towards the attainment of the goals.

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When setting strategic objectives, keep the following in mind:

 They should be specific and easy to understand by everyone, especially the members
of the organization.

 They should be aligned with the strategic mission of the organization.

 They should be communicated to all employees and other members of the

organization, and every effort must be made to ensure that they fully understand the
objectives, as well as their individual and collective roles in achieving these targets.

4. Define the Competitive Strategy

The next step in strategy formulation is where the organization will start identifying
and coming up with its long-term plan to gain advantage – and maintain it – over the
competition. This is known as the competitive advantage, and the plan is referred to as
the competitive strategy.

There are three factors at play when determining the Competitive Strategy of the
organization.

The industry that the organization belongs to

This involves taking a look at the industry or the marketplace and its various aspects.

 Market size: Logic would dictate that the overall competitive strategy of a business
in the South American hotel industry will have differences with that of a firm in the
larger European hotel industry. The size of the market comes with several implications.
For example, larger markets generally have more players, which means more
competitors. It also often means higher amounts of investment and resource
allocations by the company since they have a larger area to cover. These, and other
factors, are sure to influence an organization’s competitive strategy.

 Market growth trends: This requires looking into past market growth, how the
market is currently moving along, and any potential growth in the future. Many
industrial and market analysts conduct these types of studies from time to time,
providing businesses with their inputs and thoughts on the future of the market, which
these businesses will then use in its strategic management processes.

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 Competition: A particular point of interest is competitive profitability. How are the

competing firms in the market doing in terms of profit-earning? Are their huge
disparities in their profit levels? Is the average actual profitability of the firms lower or
higher than the expected industry average?

 Movements in and out of the market: You also have to consider the number of new
market entries, withdrawals from the market, and a comparison of the two. A market
with too many new entrants can mean a lot of things. It is possible that new players
are coming in because they think there is still room for them. Some may also deem the
existing firms in the market as weak competition, which is why they are coming in.

 Threats to the industry: Some industries are prone to more threats than others, and
this is bound to affect the formulation of strategies. Aside from getting a feel for the
level of vulnerability of the industry to threats, the potential threats should also be
clearly identified.

The competitive position of the organization

This time, the focus is on the competition. Know who your competitors are and
understand how they work. In aid of defining a competitive strategy, you should:

 Gain an understanding of the operations of competitors, such as their products and

services, their marketing campaigns, and their customer bases.

 Analyze how the competitors are able to deliver value to their customers through
their product offerings.

 Identify the strengths and weaknesses of competitors, and analyze how they are
opportunities and threats to the organization.

The strengths and weaknesses of the organization

The organization also has to look internally and look into itself. In particular, it has to
identify its strengths and acknowledge its weaknesses. By doing so, defining a
competitive strategy will be easier.

Again, specificity is important when coming up with competitive strategies. Let us take
a look at some competitive strategy examples:

 Produce at low cost and sell at a low price, but at high volume

 Pursue a market niche strategy

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5. Implementation of Strategies

Organizations may have come up with very good strategies, but they will be
completely wasted and will benefit no one unless they are implemented.

Identify the tactics or methods that will be used in the implementation of the chosen
strategies. As the implementation moves forward, management may spot some
methods or tactics that are not working, or they may realize that another tactic may
work better. In that case, the corresponding adjustments may be made.

At this point, it is possible that the company was able to come up with several
strategies. However, as much as they’d want to implement all these strategies, that is
not just possible. Review of the strategies will help the strategic management team to
prioritize the strategies and identify which ones to implement.

This time, let us take a look at some tactics, methods or steps undertaken by New Leaf
Paper. Keep in mind that the competitive strategy is to introduce product innovations
and putting emphasis on environment and social values.

6. Evaluate Progress and effectiveness

It is important to track the progress of the implementation of the strategies. Are they
being properly implemented? Are they being measured properly? Are the safeguards to
ensure reliability of the results in place?

On top of that, the effectiveness of the strategy implemented should also be assessed. Is
the strategy working? Does it have the potential to bring the company closer to the
fulfillment of its goals, as laid out in the Mission Statement?

Feedback plays a very important role in the evaluation stage, providing the strategists
with insights on how the implemented strategies are faring.

It takes a lot of smarts, determination and hard work to make a business succeed, beat
the competitors, and have the upper hand in the competitive arena within the
marketplace. A great part of this rides on the strategies and how they are implemented,
but never forget that it all starts with the strategy. In order to have an effective strategy,
make sure that they are in line with the overall organizational goals.

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References

https://businessjargons.com/strategy-formulation.html

https://www.cleverism.com/strategy-formulation-guide/

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