Business Policy and Strategy
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Strategy Formulation
Module 003
STRATEGY FORMULATION
Strategy Formulation is the process of developing a strategy. And the
process by which an organization chooses the most appropriate courses
of action to achieve its defined goals.
At the end of this module, you will be able to:
1. define and identify terminologies;
2. Know the steps in formulating strategies;
3. Understand SWOT analysis and it's important in a business.
Strategy Formulation
Strategy formulation is the process by which an organization chooses the most
appropriate and most suitable courses of action to attain well defined goals. This
process is essential to an organization’s success, because it provides a framework for
the actions that will lead to the expected results. Strategic plans should be
communicated to all employees so that they will be aware of the organization’s
objectives, mission, and purpose. This may be done through a training seminar upon the
initial hiring of the employee. Strategy formulation forces an organization to carefully
look at the changing environment and to be prepared for the possible changes that may
occur in the course of the business. A strategic plan also enables an organization to
evaluate its available resources, allocate right amount of budgets, and determine the
most effective plan for maximizing the prospective ROI or RETURN OF INVESTMENT.
A company that has not taken the time to develop a strategic plan will not be able to
present its employees with the proper direction of the business. Rather than being
proactive in the face of business conditions, an organization that does not have a set
strategy will discover that it is being reactive; the organization will be addressing
unanticipated difficulties in the long run as they arise; and the organization will be at a
competitive disadvantage, which will greatly affect the business.
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.
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The process of strategy formulation basically involves six main steps:
1. Setting Organizations’ objectives
The key element of any strategy statement is to set the long-term objectives
of the business' organization. It is known that strategy is generally a medium
for the realization of organizational objectives. Objectives stress the state of
being there, whereas strategy stresses the process of reaching there. Strategy
includes both the fixation of objectives as well as the medium to be used to
realize those objectives. Thus, strategy is a wider term that includes believes
in the manner of deployment of resources so as to achieve the objectives.
While fixing the organizational objectives, it is necessary that the factors
which pressure the selection of objectives must be analyzed before the
selection of objectives. Once the objectives and the factors influencing
strategic decisions have been determined, it is easy to make strategic
decisions for the business.
2. Evaluating the Organizational Environment
The next step is to evaluate the general economic and industrial
environment in which the organization’s operates. This includes a review of
the organizations competitive situation. It is necessary 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.
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.
3. Setting Quantitative Targets
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.
4. Aiming in context with the divisional plans -
In this step, the contributions made by each department or division or
product category within the organization are identified and accordingly,
strategic planning is made. This requires a careful analysis of macroeconomic
trends.
5. Performance Analysis
Performance analysis includes discovering and analyzing the gap between
the planned or desired performance. A critical evaluation of the
organizations’ past performance, present condition, and desired future
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Strategy Formulation
conditions must be done by the organization. This critical evaluation
identifies the degree of a gap that persists between the actual reality and the
long-term aspirations of the organization. An attempt is made by the
organization to estimate its probable future condition if the current trends
persist.
6. Choice of Strategy
This is the ultimate step in Strategy Formulation. The best course of action is
actually chosen after considering organizational goals, organizational
strengths, potential and limitations as well as external opportunities.
Each area must be aware of its role within the company and how those roles
enable the organization to preserve its competitive situation. Another step in the
competitive strategy procedure requires an organization to develop proactive
responses to potential changes in the marketplace. An organization must not
wait for events in the marketplace to happen before taking steps; they must
identify possible events and be prepared to take action.
The final step in defining a competitive strategy is identifying an organization’s
resources and determining how those resources will be used. Each department,
division, or location will have its own set of needs, and a company must
determine how it will allocate resources in order to meet those needs
Constraints in Strategy Formulation
In order for managers to formulate useful strategies, they must be aware of
certain organizational constraints:
Availability of financial resources
Even when a particular strategy appears best for an organization, serious
consideration must be given to where the money to finance the strategy is going
to come from.
Attitude toward risk
Some firms are willing to accept only minimal levels of risk, regardless of the
level of potential return.
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Organizational capabilities
Some otherwise excellent strategies may require capabilities beyond those an
organization currently possesses.
Channel relationships
Strategies that call for the development of new channels of distribution or that
involve new suppliers require careful consideration of the availability of these
other organizations and their willingness to work with the firm.
Competitive retaliation
Some strategies may have the unintended effect of dramatically increasing
competitors' efforts in the marketplace.
Identify Opportunities and Threats from External Environment
The external environment of a business includes a variety of factors such as
competitors, suppliers, and regulations that influence major strategic decisions.
Examining and assessing the external environment is a very important part of strategic
decision-making in all business organizations.
This may helps business managers identify factors that cause opportunities or threats
to their businesses. A better understanding of the implications of external
environmental factors can help in the development of a successful business and its
survival in the industry.
In formulating strategic decisions, managers need to consider present and future
environmental opportunities and threats. It is essential to develop a basic business idea
with a target customer base. Then they proceed to scan the environment for
opportunities and threats and analyze the results in the light of company's resources
and strengths. This analysis gives the managers the information to decide on the
feasibility of the business. Failure to identify opportunities or threats can lead to
misguided strategic decisions and business failure.
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Strategy Formulation
Internal and External Analysis
SWOT Analysis
A business of any size can analyse its internal strengths and weaknesses and
external opportunities and threats — a process known by its acronym, SWOT —
to gain insight into the forces it does and doesn’t control and to set realistic
goals.
SWOT is an acronym used to illustrate the particular Strengths, Weaknesses,
Opportunities, and Threats that are strategic factors for a specific business
organization. A SWOT should represent an organization’s core competencies
while also identifying opportunities it cannot currently use to its advantage due
to a gap in resources.
Strengths and weaknesses are within a company’s control: Strengths give it a
competitive edge; weaknesses give rivals an opportunity to gain the upper hand.
Opportunities and threats originate outside the company, and a company can
only control how to anticipate and react to them: Opportunities are conditions a
business can leverage to its benefit, and threats are dangers that are best
avoided.
The SWOT analysis framework has gained widespread acceptance because of its
simplicity and power in developing strategy. Just like any planning tool, a SWOT
analysis is only as good as the information that makes it up. Research and
accurate data is vital to identify key issues in an organization’s environment.
SWOT analysis examines four elements:
• Strengths - internal attributes and resources that support a successful
outcome.
• Weaknesses - internal attributes and resources that work against a
successful outcome.
• Opportunities - external factors the project can capitalize on or use to its
advantage. Opportunity is an area of “need” in which a company can perform
profitably.
• Threats - external factors that could jeopardize the project.
Identification of SWOTs is important because they can inform later steps in
planning to achieve the objective. First, decision-makers should consider
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whether the objective is attainable, given the SWOTs. If the objective is not
attainable, they must select a different objective and repeat the process.
What needs to be assessed in a business:
a. Assess your market:
• What is happening externally and internally that will affect our company?
• Who are our customers?
• What are the strengths and weaknesses of each competitor? (Think
Competitive Advantage).
• What are the driving forces behind sales trends?
• What are important and potentially important markets?
• What is happening in the world that might affect our company?
• What does it take to be successful in this market? (List the strengths all
companies need to compete successfully in this market.)
b. Assess your business organization:
• What do we do best?
• What are our company resources – assets, intellectual property, and people?
• What are our company capabilities (functions)?
c. Assess your competition:
• How are we different from the competition?
• What are the general market conditions of our business?
• What needs are there for our products and services?
• What are the customer-market-technology opportunities?
• What are the customer’s problems and complaints with the current products
and services in the industry?
• What “If only….” statements does a customer make?
The Internal Analysis of strengths and weaknesses focuses on internal factors
that give an organization certain advantages and disadvantages in meeting the
needs of its target market. Strengths refer to core competencies that give the
firm an advantage in meeting the needs of its target markets. Any analysis of
company strengths should be market oriented/customer focused because
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Strategy Formulation
strengths are only meaningful when they assist the firm in meeting customer
needs.
Weaknesses refer to any limitations a company faces in developing or
implementing a strategy. Weaknesses should also be examined from a customer
perspective because customers often perceive weaknesses that a company
cannot see. Being market focused when analysing strengths and weaknesses
does not mean that non-market oriented strengths and weaknesses should be
forgotten. Rather, it suggests that all firms should tie their strengths and
weaknesses to customer requirements. Only those strengths that relate to
satisfying a customer need should be considered true core competencies.
https://financenewmexico.org/articles/general-
business-advice/swot-analysis-helps-businesses-plan-
growth/
Focus on your strengths. Shore up your weaknesses. Capitalize on your
opportunities. Recognize your threats.
Internal and External Factors
SWOT analysis aims to identify the key internal and external factors seen as
important to achieving an objective. SWOT analysis groups key pieces of
information into two main categories:
1. Internal factors – the strengths and weaknesses internal to the
organization
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2. External factors – the opportunities and threats presented by the
environment external to the organization
Strengths and Weaknesses: These are the internal factors within an
organization.
• Human resources - staff, volunteers, board members, target population
• Physical resources - your location, building, equipment
• Financial - grants, funding agencies, other sources of income
• Activities and processes - programs you run, systems you employ
• Past experiences - building blocks for learning and success, your reputation
in the community
Opportunities and Threats: These are external factors stemming from
community or societal forces.
• Future trends in your field or the culture
• The economy - local, national, or international
• Funding sources - foundations, donors, legislatures
• Demographics - changes in the age, race, gender, culture of those you serve
or in your area
• The physical environment (Is your building in a growing part of town? Is the
bus company cutting routes?)
• Legislation (Do new federal requirements make your job harder...or easier?)
• Local, national, or international events
When to use SWOT analysis
The uses of a SWOT analysis by a business organization is essential when
organize information, provide insight into barriers that may be present while
engaging in social change processes, and identify strengths available that can be
activated to counteract these barriers.
A SWOT analysis can be used to:
• Explore new solutions to problems
• Identify barriers that will limit goals/objectives
• Decide on direction that will be most effective
• Reveal possibilities and limitations for change
• To revise plans to best navigate systems, communities, and organizations
• As a brainstorming and recording device as a means of communication
• To enhance “credibility of interpretation” to be utilized in presentation to
leaders or key supporters.
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Strategy Formulation
Example of SWOT Analysis in Sale:
Strengths: Weaknesses:
You need to understand what your Every sales team has weaknesses.
sales team is good at. By identifying these you can find
1. What does your team do ways to strengthen them.
better than anyone else? 1. What does the competition
2. What benefits do your see as your biggest
customers get from working weakness?
with you? 2. What do your customers
3. What does your product or regard as a weakness in
solution offer that your your sales methods, product
competitors can’t? or service?
4. Do you have unique 3. When you lose a sale, why
processes, products, or did it happen?
services that set you apart?
Opportunities: Threats:
Opportunity is all around us, but is These can have a huge impact on
easily overlooked. your business. You have to
1. What do you see as a good understand where danger exists in
opportunity that will the marketplace.
strengthen your business? 1. Does more that 25% of your
2. In what segment of your sales revenue come from
market are clients less than 10% of your
consistently making customer base?
purchases? 2. What recurring challenges
3. What high margin products do your sales people face?
or services can you expose 3. Is there a competitor that
to a broader market? consistently beats you in the
4. Have you noticed a change marketplace?
you can exploit in your 4. How much bad debt are you
market? carrying
5. Is there a market you can 5. Are sales meeting
enter with greater profits expectations?
potential?
http://www.entrepreneurmag.co.za/advice/business-plans/business-plan-research-
and-preparation/swot-analysis-examples/
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Global Strategy
What is Global Strategy?
Global strategy as defined in business terms is an organization's strategic guide
to globalization. With such a connected world, your business’s revenue does not have to
be confined by borders. You can employ a global business strategy to gather the
rewards of trading in a worldwide market not just in the locality.
A sound global strategy should concentrate on several questions:
a. what must be (versus what is) the extent of market presence in the world's major
markets?
b. How to build the necessary global presence?
c. What must be AND (versus what is) the optimal locations around the world for the
various value chain activities?
d. How to run global presence into a global competitive advantage?
A global strategy may be appropriate in industries where firms are faced with strong
pressures for cost reduction but with weak pressures for local responsiveness.
Therefore, it allows these firms to sell a standardized product worldwide.
However, fixed costs (capital equipment) are substantial. Nevertheless, these firms are
able to take advantage of scale economies and experience curve effects, because it is
able to mass-produce a standard product, which can be exported (providing that
demand is greater than the costs involved).
A global strategy involves thinking in an integrated way about all aspects of business-its
suppliers, production sites, markets, and competition. It involves assessing every
product or service from the perspective of both domestic and international market
standards. It means embedding international perspectives in product formulations at
the point of design, not as afterthoughts. It means meeting world standards even before
seeking world markets and being world class even in local markets. It means deepening
the company's understanding of local and cultural differences in order to become truly
global.
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Strategy Formulation
Glossary
Analysis: detailed examination of the elements or structure of something, typically as
a basis for discussion or interpretation.
Formulation : the action of devising or creating something.
Global: relating to the whole world; worldwide.
Competitive Retaliation:<Definition of the word not taken from a source but based on
how it should be understood in the context of the lesson in the module>
Quantitative target: of, relating to, or involving the measurement of quantity or
amount
References and Supplementary Materials
Books and Journals
Thomas L. Wheelen and David Hunger; 2010; Philippines; Prentice Hall
Online Supplementary Reading Materials
https://www.saylor.org/site/wp-content/uploads/2013/09/Saylor.orgs-Strategy-
Formulation.pdf; September 1, 2017
Finance New Mexicol https://financenewmexico.org/articles/general-business-
advice/swot-analysis-helps-businesses-plan-growth/; September 1, 2017
Global Strategy; https://en.wikipedia.org/wiki/Global_strategy; Septemeber 1, 2017
Online Instructional Videos
How to do SWOT Analysis PowerPoint Presentation; https://www.youtube.com/
watch?v=a8-jrxMMQnU; September 1, 2017
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