Strategy Formulation and the Relevance of Methodologies
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Published: Mon, 5 Dec 2016
To formulate a successful business strategy, organisations need to define and form a strategic understanding to their internal and external environment. This process involves searching, selecting, interpreting, and evaluating information. This research starts by identifying the importance of strategy and strategy formulation methodologies on organisational performance. Thus, the high failure rate of strategy execution raises many questions. Indeed, critical obstacles to successful strategy implementation are present. Researchers recognise the lack of methods, and namely a relevant methodology, as one of the main tasks of strategy formulation. Indeed, they even consider it as one of the main factors behind successful strategy implementation. In this context, this research discusses the major strategies in business environment with focus on achieving the most common strategic goals, which are customer’s satisfaction, the optimal use of resources and organisational expansion. Thereafter, the research discusses the importance of implementing a clear and cohesive methodology in strategy formulation. Indeed, this research examines the contribution of Swot analysis and 3C’s methodology to strategy formulation critically. In fact, Swot analysis is one of the most important tools in strategy formulation. At the same time, Avon business organisation strategic record is examined with focus on evaluating the success and failure of its strategies in the light of Swot analysis and 3c’s methodology. Finally yet importantly, the research summarises the learned lessons.
Business world is involving in global economic phenomena’s that includes globalisation, mergers, acquisitions, downsizing, and business transformation. Indeed, globalisation is swarming local economies and eliminating boundaries between world economies. At the same time, strategic management emerges as a new approach for optimising business organisations performance. even small business organisations must develop a clear strategy in order to survive and evolve in business environment (Mintzberg, 1998). Strategy is a plan of action designed specifically to achieve a specific objective of an organisation over the long-term, which eventually achieves the competitive advantage for the organisation (Porter, 1996). On the other hand, method is the tools of achieving certain tasks with in this strategy while methodology is the principles that govern the way that these tools behave (Highsmith, 2001).
This research tries to shed light on the argument concerning the claim that strategy formulation requires consistent methodologies in order to achieve success. To analyse this question, the research is divided into six sections. The second section contains a deep discussion to the importance of implementing a strategy in business organisations. Thereafter, section three addresses strategy formulation methodologies and their arguable role in delivering a successful strategy. Then, section four reviews some of the most important methodologies in strategy formulation. Thereafter, the research applies its theory to Avon company strategic behaviour. Finally yet importantly, section six syntheses up the lessons learned by the research.
The Importance of Forming a Strategy in Business Environment
Business strategy refers to the methods that managers use to manage their business (Zahra & Covin, 1993). In fact, studies show that it is important to have a clear business strategy in place (Vernet & Arasti, 1999). Certainly, strategy aims to achieve the competitive advantage, which revolves around three main strategic objectives. In brief, these objectives are maintaining and expanding customers base, the optimal use of Resources and achieve growth. The following is a demonstration of these strategic goals:
Maintain and Expand Customers Base
On a practical level, losing customers is the easiest way to fall in business (Vernet, 1999). Organisations that do not have a strong business strategy for handling customer service usually lose any chance to achieve the competitive advantage. In other words, customer’s requirements must be handled by an efficient customer service strategy. In fact, this will eliminate customer stress and speed-up service process, which leads to customer retention and boosts profit. In this context, product differentiation is a business strategy aims to create and show differences between organisation and competitors products.
The Optimal Use of Resources
The resource-based-view (RBV) theory states that the wise management and allocation of resources leads to achieving a high performance (Barney, 2002). Moreover, RBV asserts the important role of internal capabilities of business organisation in developing a strategy that achieves a sustainable competitive advantage in its environment. To illustrate, Cost Leadership describes the methodology to achieve the competitive advantage by emphasising the implementation of principles and methodologies that leads to reaching the lowest cost of production in the industry.
Organisational Expansion and Growth
A good business strategy explores business opportunities outside of traditional business environment (Cooper, 2000). Indeed, growth strategies assert the importance of organisational expansion in achieving the competitive advantage. To illustrate, Strategic Alliance is a corporation strategy occurs between two or more organisations to achieve a set of certain goals or to meet an essential business need (Dussauge & Garrette, 1998) while sustaining the state of dependency between allied organisations. Strategic alliances may include resources including products, distribution channels, and expertise.
The Importance of Following a Methodology in Strategy Formulation
Strategy formulation aims to construct integrated plans for managing the organisation in the light of environmental opportunities and threats (Hackney & Little, 1999). Besides, strategy formulation includes defining the organisation mission, forming objectives on different levels, developing support plans and setting organisation policies (Hill & Westbrook, 1997). At the same time, strategy formulation begins with a comprehensive analysis to the strengths, weaknesses, opportunities and threats. In the same context, it is important to illustrate the critical role of implementing an appropriate methodology in strategy formulation. Tiwana and Keil (2004) conducted a study during a multi-year research programme. In fact, the study includes asking managers in sixty organisations to evaluate seven hundred and twenty projects. The goal of the study is to find the most important risk drivers in information systems project management. Figure 1 shows the results of this study (Tiwana and Keil 2004, p. 74).
It is quite clear that the most important risk driver is the choice of methodology.
Tiwana and Keil (2004) further state that the other risk drivers are related to the implementation of wrong methodology; in fact, these drivers include low customer participation, and no adequate project management mechanisms, and dissimilarity to previous projects and project complexity. Clearly, looking at the three drivers behind the choice of methodology, these drivers are related to methodology and its features. Without a consistent methodology, organisations would be neither competitive nor successful. To illustrate, the importance of methodology arises from various drivers; the following is a demonstration of these drivers:
Methodology is important to customers because it adds new value to them. The following features illustrate this claim:
Involve customers in systems planning and strategy formulation: Agile Software Development (ASD) methodology place’s users at the core of software development. In fact, it considers their satisfaction and involvement as the key in project success (Karlstrom & Runeson, 2005). Thus, user participation must follow a certain methodology in order to be constructive; therefore, ASD explicitly determines the how, when and where users must participate. Naturally, other methodologies as Waterfall model consider ASD model of user involvement in planning as non-constructive (Cockburn & Highsmith, 2001). To summarise, customer role in strategy formulation depends on following a certain methodology in order to be constructive.
Figure 1. The relative weights associated with six key software project risk drivers.
Figure Source: (Tiwana and Keil 2004, p. 74)
Support customisation strategies: customisation provides a new opportunity in business competition for both organisation and users (Kotha, 1995). Delivering a customised solution to customers implies the need for following a variety of processing methodologies in order to shape and feed an adequate business strategy. Clearly, customisation based strategies provides a competitive advantage and economic value.
The Optimal Use of Resources
To achieve its mission, organisations abuse its resources in full potential. Indeed, most management practices are focused on abusing resources.
To illustrate, the following three points represent a demonstration of this concept:
Apply systemic approach in business strategy formulation: the integration of systemic approach in strategy formulation holds many benefits. Indeed, most methodologies are based on systemic approach (Iivari, Hirschheim & Klein, 2001). Systemic analysis solves complex problems through dividing them into manageable time-based components and understands how these components interact with each other, which provides a full understanding to the system behaviour. In addition, applying systemic approach enables managers to draw a system diagram for their organisation, which provides the bases for efficient problem solving, and consequently, produce a systematic and dynamic strategy.
Enable reusability and portability: a methodology provides the ability to use resources optimally through supporting reusability techniques. Indeed, methodology is made of an integrated group of methods and techniques, which can be reused multiple times on different systems (Yen, Hor & Lively, 1994), and support portability. This feature enables strategic handlers to draw an optimal resource management strategy. Yet but most importantly, reusability also means that strategic planners can re-use successful methodologies in the formulation of different strategies. Of course, the nature of a methodology with its clear and consistent structure enables reusability.
Provide an integrated framework for problem solving: employees need a guide of the steps and methods of achieving a specific task (Dingsoyr & Moe, 2008). In fact, following a methodology provides the ability to construct a database of solutions and reinforce organisational learning. Consequently, the time, effort, and processing cost are reduced essentially. Furthermore, providing such database enables strategic handlers to learn from experiences and optimise strategy formulation process. Besides, testing and evaluating methodologies and their output is much easier than testing random practices.
Strategy Formulation Methodologies
Strategic management books are full of theoretical debate about strategy formulation methodologies and their effects on the long term (Highsmith, 2001). The following is demonstration of three of these methodologies:
SWOT Analysis Methodology
SWOT analysis is a strategy formulation methodology used to study the strengths, weaknesses, opportunities, in the light of external and internal threats (Hill & Westbrook, 1997). In addition, SWOT analysis involves forming the objective of the organisation and identifying the internal and external factors that affect these objectives. To illustrate, the following is a demonstration of SWOT meaning:
Strengths: are positive and tangible attributes that make an organisation superior comparing to competitors (Hill & Westbrook, 1997).
Weaknesses: are negative and tangible attributes that make an organisation inferior comparing to other competitors (Houben, Lenie & Vanhoof, 1999).
Opportunities: external factors that represent the chance for an organisation to achieve its goals (Houben, Lenie & Vanhoof, 1999).
Threats: external factors that represent a serious threat to the organisation (Hill & Westbrook, 1997).
SWOT analysis attempts to take advantage of positives and minimise negatives. In addition, it provides managers with strategic knowledge, which can be used effectively in strategic planning.
3 C’s Strategy Formulation Methodology
Also known as the strategic triangle, the 3C’s methodology is a framework that concentrates on the three main elements behind organisation success. These elements are the corporation, the customer, and the competitors (Grant, 2002). To illustrate, the following is an explanation of these derivatives:
The corporation: strategy objectives must be realised in a way that puts the organisation ahead of its competitors by taking advantage of strengths and neutralising threats (Grant, 2002). Clearly, this strategy framework leads the organisation to a superior position. To illustrate, 3 C’s model follows the following methods:
Following a realistic approach: 3C’s methodology follows a realistic approach by emphasising the fact that corporation should not excel at every division in order to achieve the competitive advantage (Koch, 2000). Instead, organisation should concentrate on improving certain divisions in order to achieve the competitive advantage. Thus, organisations can improve other divisions sequentially.
Improving cost effectiveness: reduce cost and improve efficiency can be achieved through implementing more optimised methods that intended for Rationing consumption.
The Customer: organisations are struggling in order to create the perfect systems for satisfying their demanding customers (Koch, 2000). As a result, the main strategic goal supposed to be customer oriented and not shareholders oriented. In fact, satisfying customers leads to success, and consequently, satisfy investors on the long run.
The competitors: 3c’s methodology emphasise the need for developing strategies that differentiate products and shape a different identity for them (Grant, 2002). Indeed, popular brands are more successful than un-popular brands because of the popular image that they form in the eyes of their customers.
Strategic Information Systems
Strategic information systems refer to computers and networks systems that execute business strategies (Gottschalk, 1999). In other words, information systems are used in taking advantage of strategic business opportunities in a methodology that drives organisation’s products and business operations toward achieving the competitive advantage. However, researchers argue that information systems may not achieve the competitive advantage (Gottschalk, 1999); instead, it can act positively in strategic planning.
To illustrate, researchers use the term strategic thrusts for describing the plans that companies implement in order to achieve the competitive advantage (Rogerson & Fidler, 1994). At the same time, they further state that information technology can be integrated with strategic thrusts in a way that exploits cost advantages, which results due to business expansion.
In brief, the following are the main types of strategic thrusts:
Differentiation Thrusts: A differentiation thrust is about filling gaps in products and services.
Cost Thrusts: theses strategy thrusts aims to reduce costs or try to implement a price leading strategy.
Innovation Thrusts: these strategy thrusts try to motivate the organisation for creating new products and support innovations.
Growth Thrusts: these thrusts aim to expand market’s size and add new services to value chain.
Alliance Thrusts: these thrusts aim to protect the organisation and achieve profit through building strong relations with other organisations.
Avon Case Analysis
Avon is a multi-level marketing company located in New York. Avon is specialised in producing and marketing of beauty products, in more than one hundred countries (Avoncompany.com, 2010). Naturally, Avon implemented multiple strategies during its lifetime, so Avon strategic decisions represent a rich material for strategy study and analysis. In the following sub-sections, the research attempts to analyse Avon strategic profile in the light of previously defined methodologies.
Avon Swot Analysis
The following is a SWOT analysis of Avon Company during the eighties of the past century.
Brand reputation is strong globally (The focus Magazine, 2007).
Direct sales policy is working (Jui-Yen, Mei-Liang & Yi- chieh, 2008).
Targeting Global markets and increasing market share (Jui-Yen, Mei-Liang & Yi- chieh, 2008).
Brand reputation is weak locally (Anderson, 2001).
Marketing experience underdeveloped (The focus Magazine, 2007).
Lack of strong leadership (Anderson, 2001).
Weak Support for innovation, Research and development initiatives (The focus Magazine, 2007).
Globalisation and the emergence of new markets emphasise the need for following growth strategies.
Improving Avon image in local market through applying the same successful strategies that Avon follows in global markets.
Involvement in e-business and its applications and markets.
Competition and the emergence of strong rivals in the market.
Expanding at this point in new products and markets.
Changes of the forces that control global markets. For example, governments members, international politics and taxes.
Implications of World economic crisis and Economic slowdown.
Avon may loose competition because of its poor research and development expenditure.
Avon Diversification Strategy
At the beginning of the eighties, Avon acquired Mallinckrodt, a medical equipment supplier. (Avoncompany.com, 2010) Avon followed this Acquisition with Acquiring Foster Medical Corporation. At that point, foster was effected by cost-containment strategy. At the same time, Avon profits were steadily decreasing (Avoncompany.com 2010) because Avon products were effected by the competition with lower priced merchandise, a lower-quality products that sold at lower price. Despite of that, Avon continues to focus on acquiring health corporations. Indeed, Avon acquired Mediplex Group, a nursing services corporation. However, the profits of these Medicare corporations were lower than expected. In fact, the income of these Medicare corporations formed fifteen per cent of Avon’s sales (Klepacki, 2005). Consequently, Avon left its diversification plan and sold all of its Medicare corporations from 1986 to 1990 with great loss (Klepacki, 2005).
Criticism to Avon Strategy Formulation Methodology
Avon diversification strategy is a clear example of choosing the wrong strategy because of following a wrong methodology in strategy formulation. In fact, Swot analysis shows that Avon lacks mature marketing experience and Avon image is weak locally; in addition, Avon competes with strong rivals in the market. Therefore, analysis shows that diversification strategy and acquiring local Medicare corporations is a very risky. Indeed, with low experience in marketing (The focus Magazine, 2007). Avon should not involve in totally new sectors that it do not have adequate experience in. Similarly, 3C’s methodology analysis shows that choosing Medicare sector with low marketing experience is a very risky choice. In addition, 3 C’s emphasise the need for setting up strategies to deal with competitors. In contrary, Avon entered the business of Medicare with no adequate experience and no clear strategy. Moreover, inconsistently with 3C’s methodology requirements, Avon did not follow plans for improving cost effectiveness (The focus Magazine, 2007), which leads to customer satisfaction. As a result, competitors occupied Avon market share.
Avon Strategic Reforms
At the beginning of the nineties, Avon carried-out strategic reforms (Avoncompany.com, 2010) that show a mature understanding of strategy formulation methodologies. Indeed, the new strategies are consistent with the analysis that is conducted by this research. To improve its deteriorated performance, Avon focused on improving its direct-selling strategy, which concentrates on hiring representatives to sell directly to customers (Jui-Yen, Mei-Liang & Yi-chieh, 2008). Moreover, Avon focused on improving its brand name (Jui-Yen, Mei-Liang & Yi-chieh, 2008). In fact, Avon launched advertising campaigns locally and globally in order to build a strong brand for its products.
To achieve customer satisfaction, Avon developed representatives development programme that aims to graduate professional representatives for its products (U.S. Household & Personal Products, 2010). Moreover, Avon developed a superior CRM system that takes advantage of Internet capabilities in order to deliver products in correct order, and track products shipment (U.S. Household & Personal Products, 2010). In addition, customer service provides a professional advisory service to customers.
During the year 2002, Avon research budget rise to one hundred million dollar in order to build its first research and development Centre (U.S. Household & Personal Products, 2010), which aims to speed-up products design and development time. Consequently, Avon introduced modern and high quality products to its old franchise.
At the same time, Avon developed its E-commerce strategy with thousands of products and quick feedback to customers. As a result, Avon sales increased rapidly (Jui-Yen, Mei-Liang & Yi-chieh, 2008).
Naturally, achieving the competitive advantage is the main derivatives behind professional strategic planning. Indeed, business organisations push researchers toward forming the perfect strategy. However, the research shows that forming a strategy is more important than implementing it. At the same time, following a methodology in strategy formulation is very important in order to form a successful one. However, methodology is a double-edged sword; this is because following the wrong methodology may lead to strategic failure. Indeed, Avon strategic failure is a clear example of this fact. In the same context, Swot analysis and 3 C’s methodology construct a detailed mapping to the organisation strategic state. In fact, Avon case analysis demonstrates the critical role of these methodologies in strategic planning. However, the research emphasise the importance of leadership in strategy formulation. Indeed, a strategic handler with a clear vision is an essential factor in strategic success. Moreover, Avon case shows that research and development process is essentially important in business success.
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