35 Strategy Formulation

R. Swaranalatha

Strategy formulation is a planning process which requires making decisions after a thorough study of internal and external environmental factors relevant for the organisation. It is the second step involved in the strategic management process.

The strategic management process means defining the organization’s strategy. It is also defined as the process by which managers make a choice of a set of strategies for the organization that will enable it to achieve better performance.

Strategic management is a continuous process that appraises the business and industries in which the organization is involved; appraises its competitors; and fixes goals to meet all the present and future competitor’s and then reassesses each strategy.

Strategic management process has following four steps:

1. Environmental Scanning– Environmental scanning refers to a process of collecting, scrutinizing and providing information for strategic purposes. It helps in analysing the internal and external factors influencing an organization. After executing the environmental analysis process, management should evaluate it on a continuous basis and strive to improve it

2.Strategy Formulation– Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives and hence achieving organizational purpose. After conducting environment scanning, managers formulate corporate, business and functional strategies.

3.Strategy Implementation– Strategy implementation implies making the strategy work as intended or putting the organization’s chosen strategy into action. Strategy implementation includes designing the organization’s structure, distributing resources, developing decision making process, and managing human resources.

4. Strategy Evaluation– Strategy evaluation is the final step of strategy management process. The key strategy evaluation activities are: appraising internal and external factors that are the root of present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure that the organizational strategy as well as its implementation meets the organizational objectives.

Figure-1: Components of Strategic Management Process

Strategic 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.

Schools of strategy formulation

Mintzberg et al (1998) has identified ten schools of thought of strategy formulation developed over the period of time.

Design School
Planning School
Positioning School
Entrepreneurial School
Cognitive School
Learning School
Power School
Cultural School
Environmental School
Configuration School

Two more school of thoughts have been developed later. Warren in 2002 developed dynamic strategy school of thought and Kim and Mauborgne developed Reconstructionist school of thought in 2005.

1. Design School

This school views strategy formulation as a process of conception. Developed during late 1950’s and 60’s, it views that strategies are formulated in a deliberate process with a view to match organisational situation with environmental situation.

The chief executive of the organisation guides the process of strategy formulation. The process tends to be simple and informal and is based on judgement and thinking. It supports strong and visionary leadership

The major contributors in this school are Selznick (1957) and Andres (1965).

The school of thought is applicable to those organisations which operate in simple and stable environment. This does not apply to those organisations operating in dynamic and flexible environment.

2. Planning School

Planning school views strategy formation as a formal process that includes rigorous set of steps from the analysis of the situation to formulate a strategy to the implementation of the strategy.

It was developed in 1960’s, which views strategy as a plan divided into sub strategies and programmes.

The lead role in the strategy formation is played by the planners.

The main contribution in the planning school is from Ansoff in 1965. This school gives clear direction for action, and enables resource allocations as the planners can pre-screen the facts. This thought too does not work in the dynamic environment.

3. Positioning School

This school views strategy formation as an analytical process and places a business within the context of its industry and looks at how the organisation can improve its strategic propositioning within that industry.

Developed during 1970’s and 1980’s, the positioning school puts emphasis on analysing the nature of the industry concerned and the strategy is based on that analysis.

The major contributors in this school are Schendel and Hatten (1970) and Porter (1980).

It provides strategy formation in a systematic way and focuses on economic facts.

This school ignores certain key variables like power, politics and culture of the organisation that shapes the strategy.

4. Entrepreneurial School

This school views strategy formation as a visionary process which takes place within the mind of the leader of founder of the organisation. Such a leader has some kind of charismatic qualities and the strategy is the outcome of those qualities.

It was developed during 1950’s and the major contributors to this school are Schumpeter (1950) and Cole (1959).

This school places emphasis on the most innate process –intuition, wisdom, judgement, insight and experience.

5. Cognitive School

This school views strategy formation as a mental process involving the analysis of how people perceive patterns and process in strategy formation.

This was developed during 1940’s and 50’s and concentrates on the analysis of what is happening in the mind of the strategist and how he processes the information.

The lead role in strategy formation is played by the thinker-philosopher. Thus, the process of strategy formation is mental and emergent.

The major contributors in this school are Simon (1947 and 1957) and March and Simon (1958).

The major contribution of this school is that strategies emerge as concepts, maps, schemes and frames of reality. Thus, it points to the creative side of strategy formation process.

6. Learning School

This school of thought views strategy formation as an emergent process in which management pays close attention over what does work and what does not work.

This was developed during 1950’s and the contributors to this school are Lindblom (1959), Cyert and March (1963), Weick (1969), Quinn (1980), Senge (1990) and Prahalad and Hamel (early 1990’s).

In this school, strategies emerge in small steps as an organisation adapts or learns. This school of thought views the plan as tactics, as it involves small and sensible steps in formulating the plan. It offers a solution to deal with complexity and unpredictability in strategy formation.

It emphasises that anyone who learns may become a strategist.

7. Power School

This school views strategy formation as a negotiation process in which a strategy is developed as a process of negotiation between power holders within an organisation or between organisation and its external stakeholders.

It was developed during 1970’s and 1980’s and the major contributors to this school of thought are Allison (1971), Pfeffer and Salancik (1978) and Astley (1984).

This school treats strategy formation as a political process based on the theories of coalition and bargaining. It can help to breakthrough obstacles to necessary change. It can help to decrease resistance after a decision is made. It is democratic and realistic.

It gives insights to understand strategic alliances, joint ventures and analyse stake holders. This school overstates the role of power relationship as a major determinant of strategy formation which is true in only very limited number of situations.

It can lead to distortions and aberrations and is costly. It overstates the role of power in strategy formation.

8. Cultural School

This school views strategy formation as a collective process in which various groups and departments of an organisation involve collectively in strategy formation. It was developed during 1960’s and the major contributors to this school of thought are Rhenman and Normann (1960).

This school states that the strategy that is developed is a reflection of the organisational members. It explains the role of social process, values and beliefs, which prevail in an organisation in its strategy formation. It also helps in explaining the logic behind resistance to strategic change. This school places more emphasis on mergers and acquisitions.

9. Environmental School

This school views strategy formation as a reactive process in which strategy formation is a kind of response to the challenges imposed by the external environment.

It was developed during 1960’s and 70’s and the major contributors to this school are Hannan and Freeman (1997) and contingency theorists like Pugh et al (late 1970’s).

This school views environment as a major factor in strategy formation process whereas other schools have treated this as one of the factors in the strategy formation.This school of thought appears to be reactive in the sense that it puts emphasis on environmental response implying that an organisations’ strategy depends on the kind of existing environment.

10. Configuration School

This school views strategy formation as a transformation process in which strategy formation aims at transforming from one state to another state.

Developed during 1960’s and 1970’s, this school states that strategy formation takes place in a context and depending on the nature of that context, strategy formation may undertake any process identified by other schools.

Strategy formation tends to be integrative, episodic and sequential incorporating various elements. This school of thought gives due importance to some stable factors of organisation, which relates to all time periods.

11. Warren’s Dynamic Strategy School

This school opines that the ultimate concern of strategic management is to quantitatively improve performance through time. The dynamic model of the strategy process is a way of understanding how strategic actions occur. It recognizes that strategic planning is dynamic, that is, strategy-making involves a complex pattern of actions and reactions.

This school of thought developed by Warren, suggests that the target of strategy dynamics is to answer some challenging situations in the business scenario.

According to Warren, there are three principles in strategic dynamics:

1.Performance depends on resources.

2.Resources are utilised and gets depleted.

3. The flow rate depends on existing resources.

When combined, these principles create an integrated strategy, suitable for the organisation in dynamic environment.

12. Kim and Mauborgne’s Reconstructionist School of Strategy Formulation

This school views strategy formulation based on a worldview in which market boundaries and industries can be reconstructed by the actions and beliefs of industry players.

Kim and Mauborgne, contributors of this school, have termed various strategies that are based on competition in an industry as red ocean strategies. They feel that these strategies are based on the assumption that industry structural conditions are given and firms are forced to compete within them.

The contributors of this thought have identified Blue ocean strategies, as the developing and innovative markets, that have less or nil competition, known as blue oceans.

This strategy stipulates that operating in blue oceans, where there is no competition, leads to cost efficiency and value addition for both the company and the customers.

Therefore, this thought is quite innovative and makes the strategists to think about, how to maximise customer value through differentiation and cost efficiency.

The contributors of this school of thought opine that this blue ocean strategy can be applied by all organisations which supports innovative culture and takes great risk in the business.

Strategy Formulation Process

Strategy formulation is concerned with evolving a corporate’s mission, objectives, strategies and policies. Strategy formulation starts with situation analysis, which involves assessing the strategic fit between external opportunities and internal strengths and external threats and internal weakness.

Strategy formulation process is concerned with the following tasks.

1.Development of organisation vision and mission

2.Environment Scanning

* Internal appraisal

* External appraisal

3.Formulation of strategy alternatives

4. Development of strategic choice

5. Strategy evaluation and selection of strategy

1.Development of organisation vision and mission

The starting point in strategy formulation is establishing strategic intent containing vision, mission and objectives. Vision occupies the top position in the hierarchy. Therefore, all strategic actions should focus on the vision to conver it into reality.

The visionof the organisation refers to the broad category of long term intentions that the organisations wishes to pursue. It is the image of how the organisation sees itself. Good vision statements specify the category of intentions that are:

Broad, all inclusive, forward thinking,
Aspirations for the future,
mental image of the future state and
a dream that is shared across the entire organisation.

An ideal vision should be:

Inspiring, motivating and challenging,
Realistic,credible and attractive,
Future focus-orientation,
Actionable slogan and
Easily communicated and shared among the whole organisation and its stakeholders.

Vision helps in formulating strategies in the following manner:

1. Vision provides clue about where the organisation is heading for the future.

2.It tries to place the organisation in a unique position which requires unique actions.

3. It encourages organisational work force to contribute to the formulation of strategies.

The Mission statement makes the vision statement more tangible and comprehensible. It is at the second level of hierarchy of strategic intent and broadly defines why an organisation exists.

Pearce and Robinson have defined mission as the fundamental unique purpose that sets a business apart from other firms of its type and identifies the scope of its operations in product and market terms.

Mission supports the strategy formulation in the following ways:

1.It helps in deciding the direction in which the organisation proceeds.

2.It helps the organisatiuon to clarify its aspirations and those of various stake holders.

3. It serves as a rference point in dealing with various stakeholders withing and outside the organisation.

4.It helps in integrating the organisation with its relevant environment by taking suitable actions.

5.It helps in integrating the various sub systems of the organisation as these sub systems look at their objectives and operations in the light of organisational mission.

6.It conveys clear message about the organisation to those outsiders, who come in contact with it.

7.They develop positive attitude towards organisation if they are well aware about its mission.

It should be clear, both in terms of intentions and words used.
It should be feasible to achieve the desired results. *It should be precise and
It should be distinctive to reveal the contributions to the society.

The key component of any strategy statement is to set the long-term objectives of the organization.

It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereas Strategy stresses upon the process of reaching there.

Strategy formation includes both the fixation of objectives as well the medium to be used, to realize those objectives.

While fixing the organizational objectives, it is essential that the factors which influence the selection of objectives must be analysed before the selection of objectives. Once the objectives and the factors influencing strategic decisions have been determined, it is easy to take strategic decisions.

This leads to defining the Company profile, which states the vision, mission, objectives, goals, capabilities, resource availability, management policies, product details, technology adopted, and so on to decide the strategy.

2. Environment Scanning (Internal appraisal and External appraisal)

Environment Scanning refers to analysing the internal and external environmental factors to identify the strengths, weakness, opportunities and threats.

The next step is to evaluate the general economic and industrial environment in which the organization operates. This includes a review of the organizations competitive position.

It is essential to conduct a qualitative and quantitative review of an organization’s existing product line. The purpose of such a review is to make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths and weaknesses as well as their competitors’ strengths and weaknesses.

a. Micro environment / internal environment

The analysis of the internal environment of an organisation like its company business policy, nature of customers, workforce, competitors, suppliers, investors, marketing intermediaries, government departments, etc., serves to pinpoint the strengths and weakness of the organisation.

It will help to identify the unique skills and resources that give an opportunity for the organisation to improve its competencies and performance.

It results in competitive advantage, leading to superior efficiency, superior quality, superior innovation and superior customer responsiveness.

b. Macro environment / external environment

The analysis of the external factors- political, economic, socio-cultural, technological, legal and ecological or natural factors will help to primarily identify the strategic opportunities and threats in the organisation’s operating environment.

This comprehensive analysis is known as SWOT analysis, which will support in providing a realistic understanding of the organisation in relationship to its environment

After identifying its strengths and weaknesses, an organization must keep a track of competitors’ moves and actions so as to discover probable opportunities of threats to its market or supply sources.

After analysing the environment, the business firm takes steps to identify various strategies, suitable for achieving organisational vision, mission, goals and objectives.

3. Formulation of strategy alternatives

In this step, an organization must practically fix the quantitative target values for some of the organizational objectives.

The idea behind this is to compare with long term customers, so as to evaluate the contribution that might be made by various product zones or operating departments.

In this step, the contributions made by each department or division or product category within the organization is identified and accordingly strategic planning is done for each sub-unit. This requires a careful analysis of macroeconomic trends.

A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done by the organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization.

Based on the gap analysis, long term strategies, effective for achieving strategic intent are developed along with short term strategies, deciding the budget and resource allocation for the strategy.

4.Choice of Strategy

The best course of action is actually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities

5.Evaluation and selection of strategy

This is the ultimate step in Strategy Formulation. Defined strategies are evaluated and the best strategy, that has a ‘strategic fit’ between business environment and resources availability are selected for implementation.

Therefore, Strategy formulation is the process of deciding best course of action for accomplishing organizational objectives after performing situation analysis and understanding the internal and external environment.

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References:

NitishSengupta and Chandan.J.S. (2003). Strategic Management-Contemporary Concepts and Cases, First Edition, Vision Books, New Delhi, p. 19-28
AbassF.Alkhafaji, (2008), Strategic Management-Formulation, Implementation and Control in a dynamic environment , First Edition, Jaico Publishing House, Mumbai, p. 3-80.
Prasad.L.M, (2008), “Strategic Management”, Fifth edition, Sultan Chand & Sons, New Delhi, p. (35-39).
Jeyarathnam, M. (2012), “Strategic Management”, fourth edition, Himalaya Publishing House, New Delhi.
Vipin Gupta, Kamala Gollakota, Srinivasan, (2005), Business Policy and Strategic Management, Prentice hall of India pvt.Ltd., New Delhi.
Ghosh.P.K., (2010), “Strategic Planning and management”, Sultan Chand & Sons, New Delhi.

Web links

https://www.managementstudyguide.com/strategy-formulation-process.htm
www.csun.edu/~hfmgt001/formulation.doc