Meaning of strategy formulation

Strategy formulation is the development of long range plans for the effective
management of environmental opportunities and threats in light of corporate
strengths and weaknesses. It includes defining the corporate mission, specifying
achievable objectives, developing strategies and setting policy guidelines. It
begins with situational analysis. The simplest way is to analyze through SWOT
analysis. This is the method to analyze the strengths and weaknesses in in order
to utilize threat and to overcome the threat. SWOT is the acronym for strength,
weakness, opportunities and threats. The TOWS Matrix illustrates how the
externa opportunities and threats facing a particular corporation can be matched
with that company’s internal strengths and weaknesses to result in four sets of
possible strategic alternatives.
Issues in strategy formulation
A number of issues directly affected the strategy formulation. They are as
follows;
1. Social responsibility and ethics
2. Managerial ethics
3. Organizational culture and strategies
4. Shaping the culture
Let’s see one by one in detail;

1. Social responsibility and ethics

Social responsibility the expectation that business firms should serve both
society and financial interests of shareholders. A firm’s stance on the social
responsibility can be a critical factor in making strategic decisions. If social
responsibility is not considered, decisions may be aimed only at profit or other
narrow objectives without concerning for balancing social objectives that the
firm might embody. The degree to which social responsibility is relevant in
strategic decision-making is widely debated.
From economic perspective business have always been expected to provide
employment for individuals and to meet consumer needs.
Today, however, society also expects firms to help preserve the environmental,
to sell safe products, to treat their employees equitably, and to be truthful with
their customers. Firms such as Home Depot and Johnson & Johnson recently
earned higher mark for social responsibility and firms like Bridgestone and
Philip Morris
Were at the bottom of the list.
Even if one accepts the notion that the fims have no social responsibility other
than the legal generation of profits for their share holders, firms should act in a
socially responsible manner for two primary reasons;
First, not doing so can increase the likelihood of the more costly government
regulations.
Second, stake holders affected by a firms, social responsibility stands- most
notably customers – are also those who must choose whether or not to transact
business with the firm.

2. Managerial ethics
Managerial ethics is an individual’s responsibility to make business decisions
that are legal, honest, moral and fair. Strategic decision should not require
managers or other employees to perform activities inconsistent with their ethical
convictions concerning the role that may be expected to lay in firm activities.
The line between social responsibility and managerial ethics can be difficult to
draw, as what may be considered by some to be socially irresponsible firm
behavior may be direct result of unethical managerial decision making. None
the less, while the debate over social responsibility continues, few worlds argue
that managers should not behave ethical. However what is morally right or
wrong continues to be a topic of debate, especially when firms operate across
borders where ethical standards can rarely considerable.
In US, for example, bribes to government officials to secure favorable treatment
would be considered unethical. In number of countries especially those with
developing economies- small “cash tips” are an accepted means of transacting
business and may even be considered an integral part of an underpaid
government official’s compensation.

3 ways of viewing ethical behavior

First, if each individual pursues his or her own economic self interest, society as
a whole benefit.
Second, the broader notion of self – interest. One who always promotes his or
her- short term interest at the expense of others will suffer greater loss in the
long term.
Third, is based on religious beliefs. In the United States, the strongest religious
tradition is the judes-christian heritage, where as Islam, Hinduism, and other
religious comprise the majority view point in other nations.

3. Organizational culture and strategies

Organizational culture is the shared value and patterns of belief and behavior
that are accepted and practiced by the members of a particular organization. It is
critical that any strategic decisions rendered by top management be consistent
with the characteristics of the culture of the organization. Each organization
develops its own culture (unique), even organizations within the same industry
and city will exhibit distinctly different ways of functioning. The organizational
culture enables a firm to adapt to environmental changes and to coordinate and
integrate its internal operations. Ideally, the values that define a firm’s culture
should be clear, easy to understand by all employees, embodied at the top of the
organization and reinforced over time.
The most important influence on an organization culture is its founder or
founders. Some founders have strong beliefs about business practice or have
strict procedures for transacting affairs.
Organizational culture can facilitate or hinder the firm’s strategic actions.
Studies have shown that firms with “strategically appropriated cultures” – such
as PepsiCo, Wal-Mart and shell-tend to outperform other corporations whose
cultures that emphasize 3 key groups of share holders and employees. Note that
the point is not that these corporations have strong cultures, but that the culture
must be appropriate to that firm’s strategy and must contain values that can help
the firm adapt to environmental change.
 4. Shaping the culture

Top executives can influence and shape the organizations culture in at least five
ways. The first of which is to systematically pay attention to areas of business
believed to be of key importance to the strategies success. The top executive
may take steps to accomplish this goal formally by measuring and controlling
the activities of those areas, or less formally by making specific comments or
questions at meetings.
The second means involves the leader’s reactions to critical incidents and
organizational crisis. The way CEO deals with a crisis such as declining sales or
technological obsolescence, can be emphasized norms, values and working
procedures, or even create new ones.
The third means is to serve as a deliberate role model, teacher, or coach. When a
CEO models certain behavior, others in the organization are likely to adopt it as
well.
The fourth means is the process through which top management allocates
rewards and status.
The fifth means of shaping the culture is to modifying the procedure to through
which the organization recruits, selects, promotes and terminates employees.
Strategy formation process and tools

Strategy formation process

Strategy formulation is both a leadership skill and a process that leaders use to
focuses there organization on whose they need to go ( positioning the firm ) ,to
adapt to their customer needs and to align there team in other words it is a
process of establishing the organization’s mission , objectives and choosing
among alternative strategies . Sometimes strategy formulation is called strategic
planning. Strategy formulation process has got the following components;

1. Establishing strategic intent

2. Environmental analysis
3. Organizational analysis
4. Strategic alternatives
5. Choice of strategy

1. Establishing strategic intent

Strategic intent consists of three elements, such as vision, Mission and
objectives. Vision represents what an organization would be in the future.
Mission is the fundamental unique purpose of an organization that sets it apart
from another organization. Objectives are the end results with an organsiation
strive to achieve in the future. Since organizations are deliberate creations, they
have some specific intent that is, what they will achieve in the future and why
they will achieve it. In SM it is termed as strategic intent.
 2. Environmental analysis
Since an organization is a social system it operates within the environment
which consist of many factors such as society, competitors, technology, legal
frame work, political and cultural frame work.
This interaction process provides threats as well as opportunities to the
organization. Therefore, there have to be a constant analysis of these factors.

3. Organizational analysis

Organizational analysis includes, SWOT analysis, preparing organizational

capability profile and competitive advantage profile. The strengths, weaknesses,
opportunities and threats has to be thoroughly examined and the weaknesses has
to be converted into strengths and threats into opportunities.Based on this the
capabilities and competitive advantage of the organization has to be set.

4. Identification of strategic alternatives

After the environmental and organizational analysis, the next step in the
strategic planning process is to develop strategic alternatives. Strategic
alternatives resolve around the question of whether to continue or change the
business enterprise which is current in or improve the efficiency and
effectiveness with which the firm achieves its corporate objectives in its chosen
business sector. All the alternatives cannot be chosen to implement. The
managers should be able to identify the important strategic alternatives.
Different kinds of strategic alternatives are;
 5. Choice of strategy

This is the stage of strategic decision process and all factors relevant for
decision making are relevant here. The selection of an appropriate strategy
depends upon two variables.
a) Environmental analysis
b) SWOT analysis

Environmental analysis i.e.; the macro and micro environments and an analysis
of opportunities and threats will help the organization to choose the appropriate
alternatives. Since a particular strategy attempts to affect the organizational
operation in some pre determined manner. The choice process systematically
considers how each alternative strategy affects the various critical factors of the
organizational functioning.
Strategy formulation tools
Managers formulate strategies that reflect environmental analysis lead to
fulfillment of organizational mission and result in reaching organizational
objectives. Special tools that can be used in formulating strategies include the
following ;
1. SWOT analysis.
2. Business Portfolio Analysis.
3. Porters Model For Industry Analysis.
4. Critical Question Analysis.

1. SWOT ANALYSIS
SWOT analysis is a strategic development tool that matches internal
organizational strengths and weaknesses with external opportunities and
threats. On identification of strengths and weaknesses the organization may
protect its strength to expansible as to overwhelm its competitors and to
convince prospective customers to supply the needed goods and services as per
requisite specification likewise ,it may tactfully under play its weakness to such
an extent that they elude the notice of both the customers and competitors .In
addition the organization may take suitable corrective measure to make up the
weaknesses over time.If the managers carefully review SWOT (strength
,weaknesses , opportunities and threats ) they can make a useful strategy for
ensuring organizational success.

2. Business portfolio analysis

Business portfolio analysis is an organizational strategy formulating tool that is
based on the philosophy that organizations should devolop strategy as much as
they handle investment portfolios.
In the way, in which the sound financial investment should be supported and
unsound ones discarded, sound organizational activities should be emphasized
and unsound ones de-emphasized.

2 Business port folio tools are;

 The BCG Growth Share Matrix by Boston consulting group.
 GE Multifactor Portfolio Matrix by General Electric Company

 BCG growth- share matrix

The Boston Consulting Group, a leading consulting firm developed and
popularized a portfolio analysis tool that help managers develop organizational
strategy based on market share of business and the growth of markets in which
business exist. The first step in using this model is identifying the organizations
strategic business units (SBU’s). A strategic business unit is a significant
organization segment that is analyzed to develop organizational strategy aimed
at generating future business revenue.
Exactly what contributes as SBU varies from company to company. In bigger
organizations SBU could be a company division. In smaller organization it
might be the entire company.
After identifying the SBU’s, the next step is to categorize each SBU within one
of the four matrix quadrants;

a) STARS: star SBU has a high share of a high growth market and typically
need large amounts of cash to support their rapid and significant growth.
Stars also generate large amounts of cash for the organizations and are
usually segments in which management can make additional investments
and earn attractive returns.
 b) CASH COWS: SBU’s that are cash cows have a large share of market
that is growing only slightly, naturally, these SBU’s provide the
organization with large amount of cash, but since their market is not
growing rapidly, the cash is generally used to meet the financial demands
of the organization in the other areas such as expansion of a STAR SBU.
c) QUESTION MARKS: These categories of SBU’s have a small share of
a high growth market. These are “question marks” because it is uncertain
whether management should invest more cash in them to gain a large
share of market or de-emphasize or eliminate them. Management will
choose the first option when it can turn the question mark into a star and
the second option when it thinks that future investment would be
fruitless.

d) DOGS: SBU’s that are dog have a relatively small share of a low growth
market. They may barely support themselves; in some cases, they
actually drain off cash resources generated by other SBU’s. These are the
SBU’s which are likely to be short listed for de-emphasize or
elimination.

Pit falls of BCG growth matrix

The matrix doesn’t consider the factors like;

 Various types of risk associated with product development.
 Threats that inflation and other economic conditions can create in the
future.
 Social, political and ecological pressure.
  GE Multifactor Portfolio Matrix

GE Multifactor Portfolio Matrix is a tool that helps managers develop

organizational strategies that is based primarily on market attractiveness and
business strength. The GE Multifactor Portfolio was deliberately designed to be
more complete than the BCG Growth Share Matrix.
Each of the organizations SBU’s is plotted on a two dimensional matrix of
industry attractiveness and business strength. These two dimensional is a
composite of a variety of factors that each firm must determine for it, given its
own unique situation.
Specific strategies for a company are implied by whether their businesses full
on the matrix. While port folio models are useful frame works and reference
points, no model is yet designed that will deal with all the various dynamics
involved in an organization and an industry and the changing environment.
Hence portfolio models should never be applied in a mechanistic fashion and
sound managerial judgment and experience is to be applied along with.

2. Porters Model for Industry Analysis

The best known tool for formulating strategy is the model developed by
Michael E Porter, an internationally acclaimed strategic management expert.
Essentially, Porters model outlines the primary forces that determine
competitiveness within an industry and illustrates how these forces are related.
The model suggests that in order to develop effective organizational strategies
managers must understand and react to those forces within an industry that
determine an organizations level of competitiveness within that industry.
According to this model, competitiveness within an industry is determined by
the following factors;
1. New entrants or new companies within the industry.
2. Substitute products or services- for goods or services that the companies
within the industry produce or provide.
3. Supplier’s ability to control issues like costs of material / inputs that
industry companies use to manufacture their products or provide their
services.
4. competition level among the firms in the industry.
According to the model, buyers, product substitutes, suppliers and
potential new companies within an industry all contribute to the level or
rivalry among industry firms.

4. Critical Question Analysis

Critical question analysis is one of the important tool for strategy
formulation.

It is based on questions. The four questions to be answered below are

1. What are the purpose and objectives of the organizations?
2. Where is the organization presently going?
3. In what kind of environment does the organization exist?
4. What can be done to better achieve organizational objectives in the
future?

Source
 Business Policy and Strategic Management- by N S Gupta
 Strategic Management- Marios I katsioloudes
 Business Policy and Strategic Management- P Subha Rao