Strategy Formulation: Concept, Process & Affecting Factors
Strategy formulation is the process of offering proper direction to a firm. It seeks to set the long-term goals that help a firm exploit its strengths fully and encash the opportunities that are present in the environment. There is a conscious and deliberate attempt to focus attention on what the firm can do better than its rivals. To achieve this, a firm seeks to find out what it can do best. Once the strengths are known, opportunities to be exploited are identified; a long-term plan is chalked out for concentrating resources and effort.
Since strategies consume time, energy and resources, they must be formulated carefully. Strategies, once formulated, must ensure a best fit between goals, resources and effort put in by people. The ultimate goal of every strategy that is being formulated should be to deliver outstanding value to customers at all times.
Henry Mintzberg, after much research found that strategy formulation is typically not a regular, continuous process. “It is small often an irregular, discontinuous process, proceeding in fits and starts. There are periods of stability in strategy development, but also there are periods of flux, of grouping of piecemeal changes and of global change.”
Performance results are generally periodic measurements of developments that occur during a given time period like return on investment, profits after taxes, earnings per share and market share. Current performance results are compared with the current objectives and with that of the previous year’s performance results. If the results are equal to or greater than the current objectives and past year’s results, the company will mostly continue with the current strategy otherwise, the strategy formulation process begins in earnest.
The strategic managers must evaluate the mission, objectives and policies. In fact, the strategic managers are evaluated in terms of management style, values and skills by the top management. Henry Mintzberg has pointed out that a corporation’s objectives and strategies are strongly affected by top management’s view of the world. This view determines the mode to be used in strategy formulation.
These modes include:
- Entrepreneurial Mode:
Strategy is formulated by one powerful individual. The focus is on opportunities rather than on problems. Strategy is guided by the founder’s own visions of direction.
- Adaptive Mode:
This strategy formulation mode is characterised by reactive solutions to existing problems rather than a proactive search for new opportunities.
- Planning Mode:
Analysts assume main responsibility for strategy formulation. Strategic planning includes both the proactive search for new opportunities and the reactive solution of existing problems.
Strategic planning is a systemic and disciplined exercise to formulate strategies. It relates to the enterprise as a whole or to particular business units (identified as strategic business units – SBUs) of a divisionalised organisation. It consists of making risk- taking decisions -entrepreneurial decisions – for the future with the best possible knowledge of their probable outcome and effects.
In short, strategic planning concerns itself with the formulation of strategic alternatives to obtain sanctions for one of the alternatives which is to be ultimately interpreted and communicated in operational terms. Thus, strategic planning is a forward-looking exercise which determines the future posture of the enterprise with special reference to its products-market posture, profitability, size, rate of innovation and external institutions.
Strategic planning differs from project planning tactical, planning and operational planning. Strategic planning is more comprehensive, for strategy is dealt with at corporate level and is concerned mainly with the long-term aspects of business. It deals with what business the company wants to be in.
Project planning involves looking for new markets for existing products, developing new products, creating demand for the same, and utilising the existing facilities if they have the capacity to meet the marketing and selling requirements of the new product. Tactical planning is done at the functional level. It is concerned more with the present than the future. It implies an ad hoc approach based on expediency with a time schedule.
Operational planning, on the other hand, is essentially concerned with the existing product-market operations – the ‘bread and butter lines’ of the business. The scope of operational planning is restricted to the operations in the market with which the company has built up a rapport with the existing range of products through the facilities which are already in harness.
Choice activity consists of selecting the most appropriate strategy from among the alternatives. This framework is helpful in understanding the essential elements involved in strategy formulation. But the sequence of intelligence, design and choice activity may not be practiced in the same order. It is possible for a strategic planner to first choose a preferred strategy, then develop other options (alternatives) to analyse for rationalising the choice.
The degree of uncertainty in tactical planning and operational planning is of a low order. It is of a higher order in project planning, while in strategic planning risk and uncertainty involved are much greater. The time span of discretion is relatively shorter in tactical and operational planning than in project planning. It is much longer in strategic planning as compared with that of project planning. Thus the value of judgment is of much greater significance in strategic planning than in project planning or operational planning.
The strategy formulation involves the following steps:
Step # 1. Developing Strategic Vision:
- Vision specifies what direction or path to follow.
- Specify what products, markets, technologies and customer policies to follows
- Vision communicate management aspirations to stack holders of company.
- Helps to boost morale of organization and engages them for a common direction.
- Clear vision helps to provide a motivated and stimulated environment in the organization.
- Vision specify management aspiration for the business in long-term.
Step # 2. Setting Objectives:
Corporate objectives are outcome of “Mission and Vision” of organization. Objectives define specific performance targets, results and growth that organization wants to achieve.
To determine the objectives an approach known as Balance Score Card is used.
Balance Score Card Approach:
Overall a company should set both strategic and financial objectives. However, organization can use Balance Score Card approach for setting objectives. This approach states that “Organization should focus more on achieving strategic objectives – like “performance”, “customer satisfaction”, “innovation” and “profitability” – than financial objectives (i.e., profit and profit growth) only.
Balance Score Card also provides a basis to measure company performance against set objectives.
Company strategic and financial objectives should be set both as, short-term and long-term objectives.
Long-Term and Short-Term Objectives:
- Competitive Position.
- Employee Development.
- Employee Relations.
- Technological Leadership.
- Public Responsibility.
Long-term objectives represent the results expected from pursuing certain strategies, usually from two to five years.
Qualities of Long-Term Objectives:
Objectives are commonly stated in the following terms; growth in assets, growth in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and social responsibility.
Short-range objectives can be identical to long-range objectives for example, if a company has long- term objective of 15 percent profit growth every year, then the company’s short-term objective would also be 15% profit growth for current year.
Concept of Strategic Intent:
Here intent refers to intension. A company exhibits strategic intent when it relentlessly (aggressively) pursues an ambitious strategic objective and concentrates its full resources and competitive actions on achieving that objective.
A company’s strategic intent can helps in many ways to the company, like –
- In becoming the dominant company in the industry;
- Unseating the existing industry leader;
- Delivering the best customer service in the industry (or the world);
- Turning new technology into products which capable of changing the way people work and live.
Sometime ambitious companies begin with strategic intents that are out of proportion to their immediate capabilities and market positions. But they continuously work hard— even achievement of objective may take a sustained effort of 10 years or more. Moreover, on reaching one target they stretch the set objectives and again pursue them relentlessly, sometimes even obsessively.
The Need for Objectives at all Organizational Levels:
Objective setting should not stop with top management’s setting the companywide performance targets. Company objectives need to be broken down into performance targets for each separate business, product line, functional department, and individual work unit.
Company performance can’t reach full potential unless each area of the organization does its part and contributes directly to the desired companywide outcomes and results. This means that objectives should be given to each and every business units and those should be combined with overall company objectives.
Step # 3. Crafting a Strategy to Achieve the Objectives and Vision:
A company can achieve its mission and objectives when all the components of a company work together. A company’s strategy is at full power only when its many pieces are united. Achieving unity in strategy planning and formulation is partly a function of communicating the company’s basic strategy themes effectively across the whole organization.
A company’s strategic plan lays out its future direction, performance targets, and strategy.
“Developing a strategic vision, setting objectives, and crafting a strategy are basic direction-setting tasks”.
Vision, Objectives and crafting a strategy set the both short-term and long-term performance targets for organization. Together, they constitute a strategic plan to deal with industry and competitive conditions.
For crafting or developing a strategy many assessments are performed.
However, three assessments are very important:
- The first determine organizational strengths and weaknesses.
- The second evaluates competitor strengths, weaknesses, and strategies, because an organization’s strength is of less value if it is neutralized by a competitor’s strength or strategy.
- The third assesses the competitive environment, the customers and their needs, the market, and the market environment.
These assessments, based on the strategy selected, focus on finding how attractive the selected market will be. The goal is to develop or formulate a strategy that exploits business strengths and competitor weaknesses and neutralizes business weaknesses and competitor strength.
Step # 4. Implementing & Executing the Strategy:
Strategy implementation and execution is an operations-oriented activity. This stage is the most demanding and time-consuming part of the strategy-management process.
Till now, in the above stages everything was planning only. In this stage above plans are given actions. In this stage, based on company and competitor’s strength and weaknesses various activities are implemented.
This stage is like management process and includes followings:
- Staffing the organization with the needed skills and expertise.
- Developing budgets and organizing resources to carry out those activities which are critical to strategic success.
- Using the best-known practices to perform business activities and pushing for continuous improvement.
- Motivating people to pursue the target objectives energetically.
- Tying rewards and incentives directly to the achievement of performance objectives and good strategy execution.
- Creating a company good culture and work climate for successful strategy implementation and execution.
- Keep on improving strategy execution and when the organization encounters stumbling blocks or weaknesses, management has to see that they are addressed and rectified quickly.
Good Strategy Execution Involves Creating Strong “Fits”:
- Between strategy and organizational capabilities.
- Between strategy and the reward structure
- Between strategy and internal organization working systems, and
- Between strategy and the organization’s work climate and culture.
Step # 5. Monitoring Implemented Strategy and Making Corrective Adjustments:
A company’s vision, objectives, crafting strategy, and implementing and execution of strategy are not final thing in strategic management – managing strategy is an ongoing process.
There is one more stage in the corporate strategy management and that stage is—monitoring and evaluating the company’s progress. As long as the company’s strategy is going well, executives may remain stick to implemented strategy except more changes are required with time.
But whenever a company encounters disruptive changes or downturn in its market positions then company managers are required to search out whether the reasons of downturn are due to poor strategy, poor execution, or both to take timely corrective action.
A company’s direction, objectives, and strategy have to be revisited anytime external or internal conditions warrant. It is to be expected that a company will modify its strategic vision, direction, objectives, and strategy over time, if required.
The practice of strategy formulation is an ongoing exercise that is refined over the years. During the process, tools and techniques are validated and demonstrated by way of successful deployment in organizations. This is true for different kinds of organizations such as partnership firms, privately-held companies, corporate bodies, government businesses, and not-for-profit organizations.
Strategy formulation has to be scientific. We come across many instances wherein the strategic management process has failed to deliver the required results for competitive growth. This failure, in some cases, is attributed to a lacuna in the strategy formulation stage, leading to a failure in the subsequent strategy implementation stage. This obviously reflects the multiplicity and complexity of challenges faced at this stage.
The following points try to capture such challenges in the context of effective operation of a business:
i. Achieving Shared Vision:
This is one of the major issues in strategy formulation. There are instances where after choosing an appropriate strategy, the top management, among themselves and across organizations, fails to achieve synchronization of the vision, strategic intent and hence the strategy for way forward.
This leads to problems in implementation and in the obtainment of commitment from the stakeholders. This is a serious issue in making major decisions. For example, while venturing into inorganic moves such as mergers, acquisitions, sell offs, or divestiture, such instances are common. In this process, there could be a delay in pursuing the strategy, which may lead to value erosion.
One of the authors was involved in the selection of technology and boilers for a small power plant for co-generation of power and steam for processing. The delay in decision making made the company lose one operating season as it was a highly seasonal industry. The delay was mainly because the vision for co-generation of power was fully understood but the streamlining with operations was not clear. It required a combination of vision and operations expertise to consummate the idea, causing the delay.
To overcome such problems, creating a shared vision is critical. All successful organizations have one. Building confidence among stakeholders and communicating objectively are critical for creating a shared vision. It not only creates a shared vision but also a philosophy of oneness and growth through commitment of effort and energy for the benefit of all stakeholders.
ii. Inability of Partners to Map a Vision:
The inability of partners to map a vision and agree on strategy formulation could be another issue, especially in case of alliances and joint ventures, venture capitalists, and group companies. Though partners have well defined areas of interest, when it comes to the nitty-gritty of strategy formulation, there could be divergence of views. In addition, there could be a possibility of a dominant partner having a ‘big brother’ attitude, because of which the strategy formulation process could be jeopardized.
In case venture capitalists are active at the strategy formulation stage, they may try to overplay the role because of experience elsewhere or lack of on-ground realities. Many times, even debt fund providers drive strategic intent because of certain contractual clauses, such as the right to be present on the board. The inconvenient exposure may lead to a loss of control in making right decisions in the interest of all the stakeholders.
However, the problems among partners can be addressed by promoting healthy understanding and transparency. Key partners such as a venture capitalist can be given board responsibilities and may be involved in decision making. It may be a good idea to have an open and clear communication rather than taking problems to a breaking point and then trying to resolve them.
iii. Leadership and Managerial Bias:
Imposing leaders and self-motivated managers are often causes of dissonance at the strategy formulation stage. To overcome the same, leaders and managerial bias needs to be addressed effectively. A strong and active board is one which can balance this bias. Such an approach is possible only with large companies. Small and mid-sized companies have a problem in getting directors, who could overpower this bias, on the board of the company. In such cases, the strategy formulation team may need to involve the right advisors and experts to bring a balance.
Leaders who have a tendency to follow the success of others must be engaged in the details of operational situations and exposed to internal factors adequately so that someone’s success is not imitated. Wherever leaders have a problem with respect to assimilating the nuances of technical or functional perspectives, adequate time must be allocated during the formulation stage. Without the right perspectives, if leaders are driving or are driven by any of the stakeholders, the post-decision correction process could be time consuming. In addition, such moves may lead to strategic lapses, requiring resources and effort.
iv. Managers Over-Emphasizing Tools and Techniques:
Another issue involves managers over-emphasizing tools and techniques and losing touch with the pulse of the market or going in the wrong direction due to a herd mentality. Sometimes, they may be following the market without understanding the internal factors, leading to difficulty in strategy formulation. This is the most common issue when external agents or advisors are used to formulate a strategy.
Many times, investment bankers get enthusiastic and highly impressed with an idea, which may result in a slip at the input stage of strategy formulation. There are a number of examples especially in major strategic decisions such as sell-offs, mergers, diversification, and funding, which state that such problems of investment bankers’ overdrive have resulted in big mistakes.
It is not erroneous on the part of the advisors to commit to such situations. Many times, the internal strategists do not understand the situation in perspective or lack the ability to communicate clearly the various facets and risks of business. More importantly, the high brand value of such advisors overawes some clients, who leave the decision process to the advisors, instead of taking an active role.
The ability to manage the issue of bias towards tools and techniques, and find the right balance of experience, intellect and deployment of tools and techniques for decision making is required. This can again be achieved by involving senior board members and making a committee responsible for major strategic decisions. Such a committee can bridge the art and science of decision making for effective formulation of strategies.