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Strategy formulation could be considered as the portion of the entire strategic management process which consists of three fundamental steps and they are diagnosis, formulation and strategic implementation. Strategic formulation is not a one time event and hence its is an ongoing process to prepare and revisit strategies for the future of the organization so that an organization is able to attain its qualitative and quantitative objectives on the basis of organization's capabilities, limitations and the external factors of the environment (business environment) in which the organization is functional.
It is critical step in the strategy formulation process since overall diagnosis play an important role in landing on the right approaches to be adopted. Hence diagnosis steps fundamentally contain the situational analysis for the organization which covers both internal and external analysis along with the revisiting of the current mission, strategic objectives, current strategies and the outcome from the execution of the strategies. This step also comprise of the evaluation of the weakness and strengths of the organization which potentially has lead the organizations towards success or failure. The diagnosis of external environment to understand the current opportunities and threat to the organization, exploration of key critical issues, which are a small set, typically three to six of the key problems, threats to help organization setting the priority to give attention by the top management.
Formulations of Strategy
This step of the process deals in setting the clear recommendations with a support to justify each of the recommendations which may end up in revising the mission, objectives for the organization and finalize strategies for the accomplishment of the objectives.
In the formulation step, organization tries to bring amendment in the current strategies and objective so that the organization remains more successful and productive depending on the situation. This step contains in creating sustainability for the organization by attaining the competitive advantages, though many of the competitive advantages are eaten away progressively by competitors' efforts.
A comprehensive recommendation should be a mixture of ability to resolve the issue or meeting the challenge, handy so that the strategy is executable and is backed with the availability of resources needed for the execution and hence is based on the specific time frame to be monitored with operational efficiency. Hence the acceptability at the stakeholder level is imperative and fundamental; the acceptability of the strategy is primarily based on the non disruptiveness of the actions needed. It is also important that the strategic recommendation is a best fit between the available or needed resources and the strengths and competence of the organization which are align with the external opportunities so that to avoid the risks and ensure possible set outcome.
This phase of the strategy formulation consists of four basic components and they are:
Review of organization's current objective and strategies that are usually are identified and evaluated as a normal course of diagnosis
Exploring the rich range of strategic substitutes that could address the three level of the formulation of strategy that are do not limit in dealing the critical issues/
Carrying out the balance evaluation of pros and cons of the substitutes in relation to their possible outcome and feasibility on addressing the issues and potential contribution in the organization's success.
Finalizing the substitutes which could be implemented or suggested.
Within the organization, strategies are implemented in order to attain the desire outcome both in term of quantitative and qualitative objectives, if the strategy that could not be implemented is useless for the organization and hence the monitoring of strategic impact and outcome is fundamental for organization. The concluding stage in strategic formulation or strategic management process comprise of developing the implementing plan followed by coming into action to bring the devised strategy into process of being implemented to achieve the objective stated by the organization.
Strategic formulation process could generally evolved around following three aspects:
Corporate level strategy
Competitive strategy and
THREE ASPECTS OF STRATEGY FORMULATION
The above mentioned three aspects or levels have different focus and hence required to be dealt differently in the strategic formulation process of strategic management. However, these three aspects are high coordinated and provide synergistic impact on each other. Although their focus and considerations are entirely different from each others but they help organizations landing on setting the objectives for the organizational objectives and goals.
CORPORATE LEVEL STRATEGY
This aspect of strategy is highly concern with the broad decision for the entire organizational scope and direction. Fundamentally, in this aspect, organization considers about the changes to be brought in order to ensure organization's growth or setting growth objective to achieve. Organization in phase considers the area of business that is in, and how the current business lines fit together. Hence the thinking of organization is based on following three components:
Growth and direction of the organization
Competitive Strategy: It is also called as the business level strategy which involves in taking decision about how the organization is going to compete in the business world from each of its business unit and hence is based on complete diagnosis of the business unit.
Functional Strategy: This is more localized and shorter-horizon strategy which deals in how each of the functional area and unit will carry out its functional activities to be effective and maximize resource productivity.
CORPORATE LEVEL STRATEGY
This is the grand strategy since it consists of overall strategy components for an organization and is involved of four types of inventiveness
Making the necessary moves to establish positions in different businesses and achieve an appropriate amount and kind of diversification. A key part of corporate strategy is making decisions on how many, what types, and which specific lines of business the company should be in. This may involve deciding to increase or decrease the amount and breadth of diversification. It may involve closing out some business lines or opening new business lines and bringing any alteration in any of the business area
Initiating actions to boost the combined performance of the businesses the company has diversified into: This may involve vigorously pursuing rapid-growth strategies in the most promising businesses lines, keeping the other core businesses healthy, initiating turnaround efforts in weak-performing business unit with promise, and dropping business unit which is no longer attractive or don't fit into the corporation's overall plans. It also may involve supplying financial, managerial, and other resources, or acquiring and/or merging other companies with an existing business unit.
Pursuing ways to capture valuable cross-business strategic fits and turn them into competitive advantages -- especially transferring and sharing related technology, procurement leverage, operating facilities, distribution channels, and/or customers.
Establishing investment priorities and moving more corporate resources into the most attractive Lines of businesses or business units.
The leaders in the organizations revisit and make decisions for the organization's growth and objectives and the basic strategies for the achievement of growth objectives. The decision makers within the organizations are pushed by certain forces towards the growth even in a situation when an organization is in problem. The decision makers tend to resist such temptations and choose a strategy which is appropriate in the given situation for the organization.
There are two fundamental categories of growth strategies and they are penetration within the same industry or enter into an entirely different industry to attain growth and success. Organization tends to choose focusing into its existing industries when the industry is lucrative and organization still has more potential to grab. Usually, organization that are leader in the industry tend to focus more on the penetration along with diversification and on the other hand the organization that are not leader but passing through its growth phase tend to focus more on penetration within the same industry rather than considering for diversification because for the diversification carries more risk and challenges for them against their strengths and competencies.
1. Vertical Integration: Organization tend to focus on vertical integration if it strong enough to compete within the industry and holding a competitive position for its growth. A company can grow by taking over functions earlier in the value chain that were previously provided by suppliers or other organizations ("backward integration"). This strategy can have advantages such as in cost, stability and quality of components, and making operations more difficult for competitors.
Though, it also minimizes flexibility, increases exit barriers for the organization to have exist from the industry, and puts off the organization from looking for the finest and newest mechanism from suppliers competing for their business.
2. Horizontal Growth: This deals in opening the newer markets or geographical areas for an organization and hence supports organization to grow in the other market with the same businesses and portfolio
3. Related Diversification: In this substitute, an organization expands into a related industry, one having synergy with the company's existing lines of business, creating a situation in which the existing and new lines of business share and gain special advantages from commonalities such as technology, customers, distribution, location, product or manufacturing similarities, and government access.
4. Unrelated Diversification: This fourth major category of corporate strategy alternatives for growth involves diversifying into a line of business unrelated to the current ones. The reasons to consider this alternative are primarily seeking more attractive opportunities for growth in which to invest available funds (in contrast to rather unattractive opportunities in existing industries), risk reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage of the product life cycle).
It deals in making decisions about the businesses portfolio of an organization is operational or its intention to be operational and hence it is more business unit or line of business focus. To reexamine the organization's current portfolio, portfolio matrix model is ideal. The portfolio model helps organization in gaining understanding and to consider changes required in the business or product portfolio. GE business screen as presented by Porter (1980) and BCG growth matrix are two basic models could be used in this phase/strategy (Harrison, 1999). These models generally help organizations in getting answers of following questions:
Does the portfolio contain enough businesses in attractive industries?
Does it contain too many marginal businesses or question marks?
Is the proportion of mature/declining businesses so great that growth will be sluggish?
Are there some businesses that are not really needed or should be divested?
Does the company has its share of industry leaders, or is it burdened with too many businesses in modest competitive positions?
Is the portfolio of Business units and its relative risk/growth potential consistent with the strategic goals?
Do the core businesses generate dependable profits and/or cash flow?
Are there enough cash-producing businesses to finance those needing cash
Is the portfolio overly vulnerable to seasonal or recessionary influences?
Does the portfolio put the corporation in good position for the future?
This third component of corporate level strategy, relevant for a multi-business company (it is moot for a single-business company), is concerned with how to allocate resources and manage capabilities and activities across the portfolio of businesses. It includes evaluating and making decisions on the following:
* Priorities in allocating resources (which business units will be stressed)
* What are critical success factors in each business unit, and how can the company do well on them
* Coordination of activities (e.g., horizontal strategies) and transfer of capabilities among business units
* How much integration of business units is desirable.
These represent relatively short term activities of the organization that each functional area within a company will carry out to implement the broader, longer-term corporate level and business level strategies. Each functional area has a number of strategy choices, which interact with and must be consistent with the overall company strategies.
Three basic characteristics distinguish functional strategies from corporate level and business level strategies: shorter time horizon, greater specificity, and primary involvement of operating managers.
A few examples follow of functional strategy topics for the major functional areas of marketing, finance, production/operations, research and development, and human resources management. Each area needs to deal with sourcing strategy, i.e., what should be done in-house and what should be outsourced?
Marketing strategy deals with product/service choices and features, pricing strategy, markets to be targeted, distribution, and promotion considerations. Financial strategies include decisions about capital acquisition, capital allocation, dividend policy, and investment and working capital management. The production or operations functional strategies address choices about how and where the products or services will be manufactured or delivered, technology to be used, management of resources, plus purchasing and relationships with suppliers. For firms in high-tech industries, R&D strategy may be so central that many of the decisions will be made at the business or even corporate level (McCall & Kaplan,1990).