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Abstract- In the field of management, strategic known as the plan and a set of instructions that contribute to help the organization to reach its goals. In the field of military, strategy known as the art and method of engagement. Strategy is sometimes described according to the areas that are using it. Strategy formulation processes a difficult task and focuses on the prediction and forecasting the future. This research paper discusses and reviews the elaborate methodologies for Strategy formulation and how information technology may affect the organization strategy.
Key words: strategy, strategy formulation methodologies, strategy formulation.
Strategic Management is a series of decisions and actions that lead to the development of an effective strategy to achieve the objectives of the organization, follow-up and assessment of opportunities and threats (Camillus, 2008).It aims to achieve a balance between the interests of various parties (Horovitz, 1981).Also it determines the future direction of the organization and a statement that it seeks through the analysis of environmental variables around it (Rose and Cray, 2010).
According to Rose and Cray (2010), there is no professional one specific word for the term strategy; the strategy is sometimes described according to the areas that are using it. For example, in the field of military, strategy known as the art and method of engagement and the distribution of forces and resources to achieve the objectives of the war. In the field of management, strategic known as the plan and a set of instructions that contribute to and help the organization to reach its goals (Eisenhardt and Sull, 2001). It is a long term plan that shows accurate steps and gives the instructions to be followed (Collis and Rukstad, 2008).
Strategy makes an organization takes the lead rather than be in a state of just has a reaction (Mintzberg, 1987). It is attempt to organize a series of qualitative and quantitative information in a manner that will allow decision makers to take action to help the organization to attain its goals (Collis and Rukstad, 2008). All organizations have strategies, whether declared or not and whether recognized or not (Andersen, 2004); (Harrington et al., 2004).
Hence, strategic decisions compared to non-strategic decisions which rely entirely on intuition and guesswork based primarily on objective criteria and scientific analysis, and not just on the past person experience or individual's feelings.
Strategy should indicate the intended target (Collis and Rukstad, 2008). The organization must have a goal to achieve for the strategy it applies as well as it should indicate the expected time to achieve that goal. The Strategy contributes to the organization in giving a competitive advantage for the organization by showing what is the thing that makes itself different from other organizations in its area of fields (Obolensky, 2001).
Strategy formulation is interested in clarifying and analyzing the factors affecting the strategy before the implementation of this strategy (Murthy, 2010).
Strategy implementation is implementing the strategic plan which means the exercise of the functions of planning, organization, direction, and oversight (Mintzberg, 1987). Furthermore, it implies conversion and translation of strategies and policies into actions through the programs and procedures (Andrews et al., 2009)
Strategy evaluation is monitoring and controling activities of the organization and the results of actual performance versus desired performance or planned (Collis and Rukstad, 2008). Evaluation shows weaknesses in the implementation of the strategy (Obolensky, 2001).
II. Levels of Strategic management
Strategic management consists of three levels: the corporate level, the business level, and the functional level.
The corporate level strategy concerning the organization as a whole, and it identifies trends in dealing with the external environment (Peng and Delios, 2006). Primary responsibilities for this level is thinking in the use of the strengths and weaknesses of the organization as a whole in making strategic decisions in general such as changing the type of main activity of the organization, or engage in a completely new activity. Corporate strategy affects the entire organization, and it takes a long time to show its impact on the organization (Mintzberg, 1987).
In the business level when the organization contains and controls smaller organizations or units, these small organizations or unites are strategic units in this level are responsible for the planning and organization of all activities of the strategic plan of the unit and take the necessary decisions to implement them (Devaraj et.al, 2004).
In the functional level special plan to implement a specific task. These strategies guided by the strategy of the strategic units, as well as the overall strategy (Collis and Rukstad, 2008). Relatively need short time to show their impact on the organization (Devaraj et al., 2004).
Figure 1: Strategic management levels
In this paper, the focus is mainly on strategy formulation and the relevance methodologies.
III. Strategy Formulation
While the strategy implementation phase concerned with the management factors that affect the organization during the operations and production (Andrews et al., 2009), strategy formulation focuses on the prediction and forecasting the future. Good formulation of the strategy is a first step for effective implementation of the strategy. (Pollitt and Bouchaert, 2004). Strategy formulation processes a difficult task; however, applied strategy successfully is more difficult (Obolensky, 2001).
Miller and Toulouse (1986) state that strategy formulation includes future planning, analysis, pro activeness, and risk taking. Porter (2001) assumes that strategy formulation includes clear goal, set of benefits, distinctive value chain, trade-offs, and continuity of direction. According to Collis and Rukstad (2008), company statement consists of five basic elements: mission, values, vision, strategy, and balanced score card or estimation. Good strategy statements consist of objective, scope (domain), and means to achieve objectives.
Mission is the main guide for all decisions and efforts, and usually it covers a relatively long period of time (Horovitz, 1981). Mission is achieved through the use of existing resources of the organization (Lee et al., 2002). Mission can be answer to the following questions; for what is the establishment of the organization? What services does the organization offer?
According to Devaraj et al. (2004), Value is the Beliefs shared by members of the organization and seek to put them into execution, which are guided organization members during the execution of their work
Vision is the organization dreams and aspirations that cannot be achieved under the current and potential but it can be accessed in the long term (Collis and Rukstad, 2008). Vision can be answer to the following questions: what are the organizations' perceptions of what should be in the next ten years? Perceptions, attitudes, ambitions, what should be in the future?
Balanced score card or estimation can be described as operations are to track and control the activities of the organization and the results of actual performance versus desired performance (Gurkov, 2009). The managers at all administrative levels, depending on the feedback, are to take remedial actions and solve problems (Devaraj et al., 2004). Evaluation and oversight are last elements of the strategic management.
Objective is represent, the organizational goals and objectives that management seeks to access (Rose and Cray, 2010). The organization to be able to achieve its future objective .it should use resources to the optimum level that are currently available, to the extent those organizational goals realistic and reflective of internal and external environment of the organization (Collis and Rukstad, 2008). Organization management is in front of a chance of success in designing and implementing efficient and effective strategy. These objectives are clear and measurable and can be applied. Objectives imply the final results of the activities; in other words, it indicates what must be done?
According to Peng and Delios (2006), Scope (domain) acts or activities determined by the organization itself among the many acts or possible activities. Scope of work includes time frame, geographical, and demographic.
Means to achieve objectives are ways and means which will be undertaken by the organization to achieve its objectives (Gurkov, 2009). It means ways in which strategy will be implemented and that make the organization distinct from the others.
IV. Strategy Formulation Process
According to Rose and Cray (2010), strategy formulation process begins by analyzing the current situation of the organization; it clarifies the opportunities and risks, strengths and weaknesses of the organization.
While internal analysis of the organization shows the strengths and weaknesses of the organization, external analysis of the organization shows the opportunities and threats facing the organization. (Andrews et al., 2009). Strategic focus on improving the strengths and exploit the available opportunities, reduce the weaknesses and remove them, also overcome the risks (Obolensky, 2001).
Strengths are the advantages and possibilities owned by the organization compared to those obtained by the competitors (Ortega, 2010). Efficiency of the organization and the ability to move and make the best achievements of the industrial economy are one of the strength that the organization could have.
Opportunities or Chances are the positive changes in the external environment of the organization and that have a positive impact on them (Andrews et al., 2009). Opportunities present the facts in a particular place of the market within a specified time period, which produces material benefits and non-material to the organization if it was invested properly.
According to Obolensky (2001), Weaknesses could be in performance or possibilities; they are problems that hinder the organization to compete effectively. It is weakened capacity to make the appropriate decision in light of the analysis of the possibilities and resources of the Organization.
Risks or Threats are changes that occur in the external environment against the interests of the organization and may have a negative impact. Threats are events that if they showed up cause real harm to the organization. (Horovitz, 1981)
V. Strategy Formulation Methodology
A. SWOT Analysis
According to Obolensky (2001) and Rose & Cray (2010), analysis of strengths, weaknesses, opportunities, and threats (SWOT), is a useful tool to analyze the general situation of the organization on the basis of the strengths and weaknesses, opportunities, and threats.
The external environment is composed of institutions, individuals, and social forces, political, economic, cultural and technological developments that affect the organization while the organization has no influence on them. The Internal environment consists of the physical characteristics and non-physical that describes the units of the organization. In general, environment implies the values that govern the administrative and technical practices.
Figure 2: SWOT Analysis
A bad reputation in the commercial market.
Poor achievement in the implementation of the plans.
Available financial resources.
A strong reputation.
New innovative product or service.
Table 1: Internal Environment
Potential entry of new competitors.
Change buying patterns, and changing needs of consumers.
Access to new markets in the marketplace.
Work with strategic partners in the field of industry.
Table 2: External Environment
Strengths & Opportunities Strategy
Weaknesses& Opportunities Strategy
Strengths & Threats Strategy
Weaknesses& Threats Strategy
Table 3: SWOT Matrix
This matrix will help in the development and selection strategy, where it is to use the information that was obtained from the analysis of strengths, weaknesses, opportunities and threats (Andrews et al., 2009). The company is trying to overcome the weaknesses.
In strengths and opportunities strategy, the strategy is to pursue opportunities in the market that is compatible with the existing strengths of the company.
In weaknesses and opportunities strategy, the basic principle of this strategy is to get rid of the weaknesses in order to pursue opportunities.
In strengths and threats strategy, the strategy is to explore ways in which enables the company to use their strengths in order to reduce rates of exposure to external threats.
In weaknesses and threats strategy, the general principle of this strategy is to create a defense plan with the objective of preventing weaknesses of the company from creation a very high sensitivity impact, threats come from external environments.
B. Top-Down, Bottom-Up and mutually Approaches to formulate strategy
Top-Down: According to Rose and Cray (2010), the senior management responsibility for setting goals and strategic plans in full. Of the most important benefits of such approach is that senior management set in advance to where the organization intend to access, and directed various departments to work together to reach the desired goal, and therefore the department should consider in advance and to provide and identify methods that would facilitate the process of reaching that goal.
Goals and strategic plans
Goals and strategic plans
Figure 3: Top-Down, Bottom-Up, and mutually approaches
Bottom-Up: The departments responsible for preparing their own plans and goals and send them to senior management for approval and adoption. The staff provides their suggestions to their managers, who in turn raise these proposals after review and revision them to the highest levels of the organization (Obolensky, 2001). Bottom-Up strategy helps to create a general feeling among workers in the organization to participate in determining their objectives and therefore lead to improve and raise the morale of the employees in the organization. When workers participate in the organization in preparing the strategic plan, it will lead to a feeling of satisfaction among the staff, and drive them to make the maximum effort to achieve their objectives (Lee et al., 2002).
Mutually approach: The senior management responsible for setting goals and mission. Responsibility of the departments to design and develop plans to achieve the goals set, it is the most commonly used and all departments in the organization are involved. (Rose and Cray, 2010).
C. Porter Three General Strategies
Based on Porter (1991), there are three general strategies that help the organization to formulate their strategy and achieve competitive advantage. Overall cost leadership, differentiation, and focus.
Overall cost leadership means that the company may look to become the least cost of production which often achieved by economy in expenditure. This can be achieved through the optimum use of resources.
Differentiation means search for excellence, or the special characteristics in the field of industry. Organizations characterized by their ability to produce products or services in which something of value to the customer so that the unique tags from competitors.
Focus mean that the organization is focused on a certain segment of the market and tries to meet their demands. Thus, in this case, the institution aims to achieve excellence in the products or price or both.
These divisions proposed by Porter received attention and in return received some criticism. It can be an institution that aims to reduce cost and provide distinctive products in the same time (Obolensky, 2001). Porter's methodology helps to identify a clear strategy (Murthy, 2010). The strategy aims to clear the direction and conduct of all employees in one direction; it is hard to be a strategy to achieve excellence and low price (Rose and Cray, 2010).
D. Porter's Five Forces Model
According to Obolensky (2001), Porter presented a model that helps in the analysis of the external environment, which affects the strategies of the organization, called Porter's five powers which are: threats of new entrants, bargaining power of suppliers, bargaining power of buyers, a strong contender among the participants in the competition, and threat of substitute services or products.
Threats of new entrants: In developing and formation, the strategy must be taken into account new entrants who bring new energy and a desire to own a stake in the market.
Bargaining power of suppliers: The suppliers of the biggest threats facing the institutions, is the fact that the resource contributes to a high degree in the price of the final product cost through the cost of purchasing raw materials.
Bargaining power of buyers: Customers is one of external threats that affect the organization's strategy and future plans, customers control the market share of the institution.
A strong contender among the participants in the competition: Organizations that share market shares and produce the same product, compete among themselves to attract customers and promote the products must be taken into account when analyzing the external environment of the organization.
Substitute services or products: Alternative products are a product differs from what is produced by others institutions, but they offer the same degree of saturation. The ability of any organization to produce products makes up an organization threatened with losing the market share of that organization.
The analysis of the external environment helps the administration in the formation of an early warning system in order to create the necessary preparations before the emergence of potential threats in a due time; thus be able to design efficient strategies to counter the threat and minimize its negative effects on the organization or a positive turn towards the achievement of strategic goals (Rose and Cray, 2010).
Organization can operate at maximum efficiency to exploit the opportunities and threats in the external environment by identifying the strengths and weaknesses in the internal environment of the organization; it makes sense that there is no organization equal force in all of its functions (Mintzberg, 1987).
Based on Porter (1996), value chain model used to analyze the main activities of the organization in order to identify sources of competitive advantage and therefore know the strengths and weaknesses in the current internal environment. Value chain Model consists of primary activities and support activities. The primary activities are: Internal supplies, operations, outbound logistics, sales and marketing, and Services. The supporting activities are: organizational structures, human resources management, technology development, and procurement.
VI. Role of Information Technology in Strategic Formulation
The Management Information System (MIS) provides information and reports needed by managers and decision makers in various levels (Murthy, 2010). MIS provides historical data on sales, prices, and production costs, and performance; it submitted to the Central Administration of such data for each unit of work, with the potential for comparison and evaluation (Ortega, 2010).In the lower management, they use the system to obtain the necessary data on the daily movement of material and use workers, expenses, and sales.
According to Ortega (2010), building a database of information strategy and the use of advanced systems in the processing and analysis of information contribute to improving the effectiveness and efficiency of operations and internal activities. Also, there are computer programs are integrated with manufacturing processes and production and contribute to the organization of each activity in the manufacturing environment and the end of the distribution of output of products and services. Accurate information is essential as a guide for action; every organization needs tools for data collection and tabulation to be a key as well as important evidence of performance, diagnose problems, sorting, and processing reports of critical information for strategic purposes. This is what can be achieved by information technology (Murthy, 2010).
Attribute associated with the Internet make it distinct from other means of information technology. Internet allows organizations to access to global markets, more effective marketing, connect effectively with partners and customers; also ability to link a particular activity with other activities, in addition to make the data available for a particular activity widespread within and outside the company (Porter, 2001).
VII. Summary and Conclusion
Organizations are looking for various elements that enable it to strengthen its position in the market and achieve competitive advantage. Strategic Plan is the plan laid down by the organization to achieve its goals. The formulation of the strategy concerned with a statement and analysis of the factors affecting the implementation of the strategic plan by the organization.
Porter introduced a model helps companies to choose one of the three comprehensive strategies and identifying potential areas of competitive advantage that can be taken by the company in its struggle with the five competitive forces. SWOT analysis a useful tool to analyze the general situation of the organization on the basis of the strengths and weaknesses, opportunities and threats. Mutually approach for strategy formulation is the most commonly used and involving all departments in the organization.
Information systems should be compatible and consistent with the organization to provide the necessary information needed by the organization. Organization should be conscious and open to the effects caused by information systems, and the direction to take advantage of modern technologies used by information systems and be able to uses them.