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To better understand the Strategy formulation process, the strategy should be clearly defined. There are different school of thought which defines the strategy in different way where Mintzberg(1994) describes that it is process to sense , evaluate, decide and perform where as Chandler (1994) argues that it is a long term planning to achieve goal of an organization and to plan the Corse of action according to it. The process which helps organization develop their strategic plan based on their goals, it can also be defined as the process in which an organization analyze its current position in the market and where it want to see in future and what should be done to get there but we can see a criticism where Kenichi Ohmae (1983) criticized that the strategy formulation process is a bit too formal and possessed with pacts and figures.
Therefore the process to perform this analysis involves certain steps which includes the internal and external environment analysis which can be done through SWOT an PEST analysis , the internal capabilities, the strategy developed and to evaluate the performance. There are a lot of other tools which can be used to carry out the analysis depending on the products and also the size of the organization. The analysis of the environment provides an organization position in the market and keep the aware of the external forces which can include competitors or even the economy .
Environmental Forces :
The analysis of environmental forces can be done by using different tool , the most common and successful tool which is being used is known as PEST or in some cases PESTEL analysis , its good for a preliminary scan G.Johnson, K.Scholes(2002) describes it as the most successful way of planning to Globalize, with a proactive approach and to see the changes ahead , rather than looking for alternative in the product or policies. This analysis is based on normally four forces Political,. Economical, Social and Technological.
Political analysis :
The analysis of the influence of political changes in the industry , these changes can have a large significance in organizational strategic goals and objectives. When companies are planning to expand or developing a strategy , this analysis can be done with an extensive research and also to forecast the future changes as well . Government mostly influence the company in terms of taxation laws, permission for the plants , health and safety or employment laws etc . The middle east government will never allow the liquor companies to operate in their countries , the big industries like oil, telecom and mostly have some effect on the changes e.g. in UK this year the VAT rise have created a massive changes most of the companies have re shaped or remodeled their product or services because ultimately the end user have to pay this tax.
This analysis is related to the social analysis , is deals with the analysis of the economy with it ups and downs , where the business gets high revenues when the economy is rising or vice versa. This analysis measures the changes in the interest and labor rates and also the inflation in the economy. Business mostly expand when the interest rate are low and there is a rise in the demand and when the economy falls down like few years before when there was a credit crunch in the economy we can see from an example that there was less deposable income therefore there was less spending.
This analysis is a bit more important when a company formulating a strategy because it carries the evaluation of the lifestyles and activities of the society. The analysis can be done in different age groups, incomes and spending etc. The result of this analysis actually tell the company that who are its prospect customers and also what is the best tiem to market the product e.g. the airline industry van be seen very active and coming with new offers every day at the time of vacations .
Now a days if a company needs to survive this analysis should be done every now and then because we are now living in the world of communication where an organization need to have to the latest technology to give the best customer service and to compete in the market. .e.g. most of the food retailers in UK can give the customer a chance to order online for home. The telecom operator in UK have different touch points for consumers physically they are on high street but technologically they are on their website and also the online trading website like EBay almost every retailer of UK have its online shop on EBAY.
The analysis which a company use to evaluate its strength weakness, opportunities and threats is know as SWOT analysis. Valentin (2001) describes this analysis as the approach to recognize the desired goals. This analysis changes the view of decision makes to think on the different aspects of the organization , that what need to be done to compete in the market , where are we lacking etc .Panagiotou (2003) delivers an argument that the analysis helps the organization to search for the gap and what should be done to fill that gap and how to put it into the strategy formulation. This gap is known as the opportunities in the market , filling the gaps which concern with the strength of the organization of if it lack what should done to cover for that weakness , the threats can be dealt by gaining a completive edge in the market to M.Porter (1996), states that to deal with the treat do something different than your competitors in the market. The SWOT analysis is further divided in two parts internal analysis which deals with the internal strength and weakness of the company and second is the external analysis which deal the opportunities in the market and threat from the competitors
Strength and Weakness : (internal analysis)
When a company is carrying an internal analysis then firstly is should consider its strength which depends on the resources , these resources can be in terms of financials, market position , employees or even technology which can be used to take the competitive advantage in the market. These strength can be measured on anything from strong brand names like Nike, Addidas to the good reputation among customers like Tesco's or Sainsbury's , it can also include the cost effective manufacturing to the excusive distribution network
Where as the weakness is concerned it can be view as the company not having any of the above strength or lacking in any of these e.g. location of the manufacturing result in increase in transport cost end up in high cost of goods , competition have better access to the distribution channels , the company is using the old technology which ends in poor or bad customer services because the product is not meeting the demand of the consumer which means bad product or services which result in the bad reputation in the market . While formulation a strategy these points should be kept in the mind to overcome the weakness of the organization .
Opportunities and Threats : (external analysis)
The company when doing an external analysis of the environment to look for the opportunities in the market and at the same time it have to look for the threats of the competitors , to gain a competitive advantage it have to look for the best opportunities. The opportunities can be seen in a way where there is gap in the market, the company can lower the cost by using some new technologies, or the government have given the relaxation in the taxes or else the cross border trade barriers are removed these are some example in which an organization can look for the opportunities e.g. telefonica Europe have recently started its operation in middle east before it was a monopole of just 2 operators , the company having a good track record in telecom is doing quiet well and capture a good percentage of market in a very short span.
In the same way when going for an opportunity the company should also consider for the threats ahead , these threats can be measured on the change of customer needs , change in demand the possible threat that there is some alternative in the market with less price there is change in government laws or the cross border selling is prohibited or the taxes are raised. Organization comes across these threats very often and when formulating a stragy these threats should be considered and also that there should be an alternative plan being made ahead to deal in these situations e.g. in UK T-Mobile and Orange joined their networks under the name of Everything Everywhere so that consumers of both companies can use each others network , therefore the rest of the market player if they are not merging their networks so they should increase the coverage area for themselves because if they don't then they are giving their consumer an option to go for Everything Everywhere .
Organizational capabilities have a direct impact on the strategy or it can bee seen as the strategy formulation process is dependant on organizational capabilities because a company can never develop a strategy which they are not capable of. These internal capabilities are directly linked with the strategy and competitive advantage. These capabilities or resources can be classified into three groups which are tangible , intangible and human resources. Tangible resources can include monetary functions like cash, borrowing in term of loans or securities, intangible resources can include the technology , market share and the culture where as the human recourses is concerned it deal with skilled and motivated labor. When developing a strategy a company needs to be good in all three resources , it its not then then it should be filled up with the tangible recourses so that it can back up the other two because if the company have good financials then it can purchase new technology , acquire the market share with that and bringing the skilled labor by offering them good salaries and incentives which will help the company to have a completive edge in the market. Mr. Richard Branson (Virgin Media) quoted that "just believe in yourself and you can do everything" .
An organization after doing all the analysis of the environment, internal and external and also the analysis of the capabilities so its now time to develop a strategy on the basis of those analysis. Therefore the company strategy should based on the new approach and competitive moves to meet the objectives of he strategy and to fulfill the needs. M.Porter (1995) the best approach for the success of the organization is the excellent execution if the strategy and the proper evaluation on the performance measures. The company can use different kinds of approach for the execution if these newly formulated strategy.
The last step of the strategy formulation process is the performance review which is very important because of the fact that sometimes after execution it goes on changing day by day to fulfill the objectives which ends in the firm long term goal which are known as the emergent strategies
A dramatic example of this occurred in 1994 and 1995 when Microsoft CEO Bill Gates shifted the company strategy after the unanticipated emergence of the World Wide Web (See Case Strategic Shift at Microsoft). According to critics of formal systems, such a flexible approach to strategy making is not possible within the framework of a traditional strategic planning process, with its implicit assumption that an organization's strategies need to be reviewed only during the annual strategic planning exercise.
Despite of high and lows in the external or internal environment of the organization the most important thing is to achieve the organizational goal , therefore to drive a strategy from which these goal can be achieved and there is no single tool which can justify that this strategy is best for the organization , however the tool which we have used are good for understanding the overall environment of the industry , position of the company and tell us that where the company should be in future .