TOPIC FIVE
STRATEGY FORMULATION
Meaning of strategy formulation
Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving the organizational vision.
Importance of strategy formulation
1. The formulation of a sound strategy facilitates a number of actions and desired results that would be difficult otherwise.
2. A strategic plan, when communicated to all members of an organization, provides employees with a clear vision of what the purposes and objectives of the firm are.
3. The formulation of strategy forces organizations to examine the prospect of change in the foreseeable future and to prepare for change rather than to wait passively until market forces compel it.
4. It enables the organization to make a large market share.
5. It enhances the organization to maximize profit.
6. To make the organization become more competitive.
7. It makes the organization to achieve the organizational goals effectively and effectively
Levels of strategy formulation
Organizational level strategy
This strategy formulated at organizational level by top management.
To oversee the interests and operation of organizations.
Deals with the objectives of firm, acquisition and allocation of resources, and coordination of strategy of various units.
It applies to the enterprise as a whole.
It explains the business in which a firm will compete and how it should utilize its resources.
It occupies the highest level of strategic decision making. Business level strategy
This strategy formulated at business level by managers.
It concerned with managing the interests and operations of a particular line of business.
A managerial game plan for a single business.
Here strategy is about which product or services should be developed and offered to which market and to which customers.
Functional level strategy.
A functional strategy is a short term game plan for a key functional area within a company.
Functional strategies help in implementing grand strategy.
Its focus on external environment.
Types of functional strategies
a) Marketing strategy.
b) Operations strategy.
c) R & D (Research & Development Strategy).
d) Information system strategy.
e) HR strategy (Human Resource).
f) Financial Strategy
Models of strategy formulation
Step 1 Know thyself
The Ancient Greek aphorism ―Know thyself‖ is also true in strategy formulization, by understanding a company‘s capabilities the strategist can take advantage of them, likewise by knowing the weaknesses s/he can steer the company away from them or find way to supplement them (Birchall & Tovstiga 2005). For any company knowing what its capabilities and disabilities are allows it to play to its strengths or identify weaknesses that need rectifying if a chosen strategy does not fit (Christensen 2000). See Table Internal
Analysis.
Step 2 Define the Market
Step two is to define the market where the product or service is sold. The standard competitive strategy would be to simply describe the existing market segment and obtain statistics on current market share, sales volumes and trends.
Step 3 External Analysis
Step Three is to analyze the external environment; this is where the Structuralist school has many tools; however this is not just the market but all external influences on the business. Tools such as PESTLE (Johnson et al 2008) and 5-forces (Porter) are extremely good at documenting the understanding the external environment. The output of this analysis is a list of Key Drivers for the market.
Step 4 Create a New Position
Step Four is where the positioning of the company/product/service is decided; where the business will compete and what it will stand for. This is about comparing the internal analysis with the external analysis and deciding what to do.
Tools such as SWOT and the Strategic Clock are helpful here. The output of this is the proposed strategy direction.
Step 5 Validating the Strategy
Step five is about validating the selected strategy and checking if it is actually going to be successful. Johnson et al (2008) suggest that there are three areas to satisfy when validating a strategy: First is it suitable; does the strategy match the organization that will have to implement it? Secondly, is it acceptable to the stakeholders; Financial ROI, payback period, Risk… Finally, check that it is
feasible from a resource / capabilities point of view.
Step 6 Definitions of Mission and Vision
Step Six is the pulling together of the actual Vision and Mission statements.
