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Chapter 2 will introduce the users about the Methodology used in conducting the research and analysis of the strategies used by Saba Restaurant. The type of methodology used in the conducting this research is The Strategy-Formulation Framework. The purposes of introducing this methodology to the user are to provide the information by which the validity of the research will be ultimately judged. This is to ensure that the team that carries out the research will be able to provide the users with clear and precise descriptions of how the research and analysis was done, and the rationale for the specific key points chosen. In such this will allow the users of the report to carry out similar strategy formulation method to evaluate whether the results are reproducible, and also allow the users to judge whether the results and conclusions are relevant, reliable and valid in the sense that the result will reflect the business natures and it industries.
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2.1 Vision and Mission Statement
First and foremost for the first part of the Chapter 2, the users will be introduced about the formulation and the evaluation of a company’s vision and mission statement. To enable an organization to formulate and implement good alternative strategies, a clear vision and mission statements are needed. This part will be focusing on the concepts and tools needed to evaluate and formulate a good business vision and mission statement. In order to give users a better understanding on vision and mission statement of a business, it is important to focus on the business when it is first started.
Vision and mission statements are the resulting written documents which mirrors the basic ideas of the sets of belief about a business. It is crucial for the owner or manager to revise the founding set of beliefs as the business starting to grow. Those new ideas will then be reflected in the revised vision and mission statement. Synergies are said to be achieved when the managers and employees work together to formulate the vision and mission statements for an organization. As a result of such work, the output gained in the form of resultant documents can reflect the personal visions that managers and employees have in their hearts and minds about their own futures. In the end, such shared vision will create commonality of interest within the organization that will motivate both the employees and management to achieve the organizational goal as one.
2.1.1 Vision Statement Evaluation
In order to formulate a good vision statement, it is important to involve all the managers and executives in an organization to come out with a common agreed vision that will strives to achieve in the long-term organizational goals. Basically, most of the organizations nowadays have both a vision and mission statement but in order for an organization to operate in long run, the vision statement should be established first and followed by the establishment of the mission statement of an organization.
A clear vision statement should be able to answer the question of “What do we want to become?” Thus, the said vision will able to provide the organisation the foundation for developing a comprehensive mission statement in which that enables an organization to operate effectively and efficiently in the short-run. A vision statement basically is evaluated based on the following characteristics:
Should be short and clear, preferably in one sentence; and
Should involve as many managers or executives as possible when developing the vision statement.
All in all, it is very important to have a clear vision statement before an organization set up its mission statement in order to have a clear view of an organization’s long term business operation and to always strive for the vision to achieve desired future position of the company.
2.1.2 Mission Statement Evaluation
In order to formulate an effective mission statement, the mission statement should always be broad in scope. The term broad in scope highlight the relationship between specificity and generality of the mission statement. Due to the fact that an overly specificity statement would most likely limit the potential of creative growth for the organization; while an overly generality statement which includes various strategy alternatives could lead to dysfunctional in an organization. Thus, an effective mission statement should be able to answer the question “What is our business?” As a mission statement reveals an organization’s effort in become what they want to be and whom they wish to serve their products and services. A good mission statement will enable the management of an organization in the formulation and consideration of a range of possible alternative objectives and strategies without excessively limiting the management creativity.
Besides that, an effective mission statement needs to be reconciliatory so that the organization is able to reconcile the differences effectively among the organization’s diverse stakeholders and appeal these differences to them. Nonetheless, a good mission statement should be able to assist organization in identifying the relative attention that it needs to dedicate to meeting the claims and obligations to various stakeholders. The harmony relationship between the specificity and generality of mission statement is usually difficult to achieve, but it is well worth the effort. The following characteristics are what an effective mission statement should have:
Broad in scope; do not include monetary amount, numbers percentages, ratios, or objectives
Less than 250 words in length
Identify the utility of a firm’s products
Reveal that the firm is both socially and environmentally responsible
Include the nine mission statement components
Nevertheless, as mission statement is often the most visible and public part of the strategic-management process, it is important that it also includes the nine components which made up of the following:
Who are the firm’s customers?
What are the firm’s major products and services?
Where does the firm compete (geographically)?
Is the firm technologically current?
Survival, growth & profitability
Is the firm committed to growth and financial soundness?
What are the basic beliefs, values, aspirations and ethical priorities of the firm?
What is the firm’s distinctive competence or major competitive advantage?
Is the firm responsive to social, community, and environmental concern?
Are employees treated as valuable assets of the firm?
In conclusion, an effective business mission statement must be able to reflect the judgments about the future growth directions and strategies that are able to achieve an organization’s long-term goals and objectives. Besides that, an effective mission statement should provide useful criteria for selecting among alternative strategies and act as a basis for decision making over various strategic option. Thus enable the organization to determine the best alternative strategies to strive for and what type of decisions to be made in order to achieve the organization’s goal and objectives. As such, the mission statement should be updated often to stay relevant.
2.2 Strategy-Formulation Framework
Chapter 2 Part 2 will be discussing about the Strategy Formulation Framework in details to enable users to understand the nature of the framework and also to understand each stages of strategy formulation framework.
Strategic management analysis plays an important role in an organization as it largely involves managers, executives or strategists in making critical alternative decisions based on objectives information. Users will able to understand the important concepts that help managers, executives or strategist in formulating, evaluating and deciding which alternatives is the best course of action. Factors that will determine the decision of the management in generating alternative strategies are the External Environment Forces and the Internal Environment Forces.
Both the External and Internal Environments Forces have strong relationship within organizations, as these forces are the Strengths, Weaknesses, Opportunities and Threats (SWOT) that the organizations currently have and will be anticipating in the near future. Firstly any changes the External Environment Forces will affect the consumer demand for both industrial and consumer products and services. Nevertheless, the external forces also directly affect both suppliers and distributors. Any changes made in the external force will ultimately alter an organization’s effort on the opportunities and threats anticipation. Organizations will able to develop clear mission, develop long-term strategies and develop policies to achieve annual objectives and organizational goals through identifying and evaluating both external opportunities and threats. The external environments forces include the following factors that will be used to evaluate and gather information on organizations’ opportunities and threats:
Key External Forces
Factors comprises of the demographic forces are usually the population demographic such as age, gender & race distributions, marriage & divorce rates, immigration rate, education systems, education levels, distribution of income & wealth, and other factors that will affect the populations’ demographic
These forces mainly consist of factors such as inflation rate, GDP growth rate, unemployment rates, import or export conditions and other factors that will generally affect the economics of the world.
Factors which needed to be consider in this forces are the government stability & relations with other countries, government spending and taxation policies, industrial policies, laws and regulations on employments, environment protection, foreign trade, duties and tariffs, and other factors that may affect these type of forces.
Socio-cultural forces mainly consists the factors of the social class structure and mobility, the attitudes towards lifestyle trends, work places, consumerism and environmentalism, and other factors in which might affect these type of forces.
Factors such as the new discoveries or development in the industry, speed of technological transfer, obsolescence rates within own or related industry, government polices and spending on research, technology changes and others should be considered.
Global forces mainly consists of factors arises from all other external forces that are in relation to global contexts.
Factors that focus on the physical existences and locations of an organization in a specific area will affect its market capabilities.
Industry forces mainly comprises of the competitive forces of an organization with all its competitors in the industry. Factors such as the bargaining power of customers & suppliers, threat of new competitors & substitute products or services and rivalry among existing competitors.
Secondly, the Internal Environment Forces will be the organizations’ Strengths and Weaknesses in the functional areas of business. No organization is equally strong or weak in all areas. Objectives and strategies are established with the purpose of capitalizing the organizations internal strength to overcome the weaknesses. An organization strengths and weaknesses can be seen and evaluated from its effort in marketing, finance, accounting, management, management information system, production or operation and its research & development efforts. The internal environment forces include the following factors which will be used to evaluate and gather information on organizations’ strengths and weaknesses:
Key Internal Forces
This key internal factor mainly focuses on the organization’s internal resources such as materials or other assets that are used to produce economical benefits for the organization. Examples of such factors are the financial resources, human resources, physical resources and other resources that may affect an organization’s operation.
Capability is the ability of an organization to initiate and perform its daily operation. It concern about the ability of an organization to utilize the resources and transform them into future benefits, and to create competitiveness edge over its competitors.
Core Competency is reflected as a unique ability that an organization has which cannot be easily imitated that give an organization one or more competitive advantages, in creating and delivering value to its customers in its industry.
Then again, the Strategy-Formulation Framework is regarded as important strategy-formulation techniques which are integrated into a three-stage decision-making framework. The tools used in this framework are applicable to all organizations type and able to help strategists formulate, evaluate and select strategies.
Stage I: The Input Stage
External Factor Evaluation (EFE) Matrix
Competitive Profile Matrix (CPM)
Internal Factor Evaluation (EFE) Matrix
Stage II: The Matching Stage
Strengths-Weaknesses-Opportunity-Threat (SWOT) Matrix
Strategic Position and Action Evaluation (SPACE) Matrix
Boston Consulting Group (BCG) Matrix
Internal-External (IE) Matrix
Grand Strategy Matrix
Stage III: The Decision Stage
Quantitative Strategic Planning Matrix (QSPM)
As show in Table 1, Stage 1 of the formulation framework consists of the EFE Matrix, the IFE Matrix and the Competitive Profile Matrix. Being the Input Stage, Stage 1 act as the basic input to summarize the information needed to formulate strategies. This information is largely dependent on the Key External and Internal Forces that managements or strategists have identified and evaluated.
Stage 2 which is the Matching Stage, focuses on generating feasible alternative strategies by using the key external and internal factors that have been summarized in Stage 1. Tools in Stage 2 include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consultation Group (BCG) Matrix, the Internal-External (IE) Matrix and lastly the Grand Strategy Matrix. Results from Stage 1 and 2 are then be used in Stage 3 to indicate which alternative strategies are the best for the organization in its current state and to achieve long term objectives.
Stage 3 also known as the Decision Stage involves a single analytical technique that is designed to determine the relative attractiveness of feasible alternative strategies or actions. Quantitative Strategic Planning Matrix (QSPM) uses input information from Stage 1 to objectively evaluate feasible alternative strategies identified in Stage 2. As QSPM will reveals the relative attractiveness of alternative strategies and thus provide an objective basis for selecting specific strategies.
Details on all nine techniques of strategy formulation framework will be further discussed in the following part starting from Chapter 2 part 3.
2.3 Stage 1: The Input Stage
Stage 1 of the formulation framework consists of the EFE Matrix, the IFE Matrix, and the Competitive Profile Matrix (CPM). As the Input Stage, these three tools basically are the summary of basic input information needed to formulate strategies. The information derived from these three matrixes will provide the basic input information for the Stage 2 and Stage 3 of the framework.
2.3.1 External Factor Evaluation (EFE) Matrix
In stage 1, users will be focusing on identifying an organization’s internal and external environment factors by using The External Factor Evaluation (EFE) Matrix. EFE Matrix also known as the Industry Analysis focuses on summarizing and evaluating an organization’s external environment which covers the industry’s economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. These external environment forces will ultimately affect an organization in making decision on choosing feasible strategies alternatives to meet its long term goal. Table 2 is the example of EFE Matrix.
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Key External Factors
Steps in developing EFE Matrix
List a total of 16 to 24 key external factors consist of both opportunities and threats that affect an organization’s industry which are identified in Chapter 3′ External Environment. Information picked should be as specific or objectives as possible, using percentages, ratios and comparative numbers.
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Assign each factor with a weight that ranges from 0.0 (not important) to 1.0 (very important). Usually opportunities receive higher weights than threats, but if threats are severe or threatening, then it should be given higher weights. The sum of all weights assigned to the factors must equal to 1.0
Assign a rating between 1 and 4 for each key external factor. This is to indicate how an organization’s current strategies will effectively respond to these external factors, where 4 = superior response, 3 = above average response, 2 = average response and 1 = poor response.
Multiply each factor’s weight by its rating to determine a weighted score.
Sum the weighted score for each variable to determine the total weighted score for chosen organization.
Factors includes in EFE Matrix should always be as objective as possible, where factors should be stated in quantitative terms to the extent, rather than being just vague terms. No matter how many numbers of key opportunities and threats included in an EFE Matrix, the maximum or highest possible total weighted score for an organization will always be 4.0 and the minimum or lowest possible total weighted score is 1.0 and an average score of 2.5.
Rating above average rating of 2.5 indicates that the organization is taking the advantage of existing opportunity and minimizes the potential threats; rating below 2.5 indicates that an organization is not effectively taking advantage on the external opportunities and also trying to avoid the threat they are facing.
As conclusion, the EFE is used to summarize and evaluate the key external opportunities and threats that are beyond the control of the organization.
2.3.2 Competitive Profile Matrix (CPM)
Other than External Factors Evaluation (EFE) Matrix, Stage 1 also includes the Competitive Profile Matrix (CPM) that is used to identify an organization’s major competitors and its particular strengths and weaknesses in relation to a sample organization’s strategic position. Similar to EFE Matrix, the weights and total weighted scores in CPM have the same meaning and purposes. Illustration of Table 3 will further allow users to understand the calculation and evaluation of a CPM.
Critical Success Factors
Critical Success Factors in the CPM include both the internal and external forces issues that make up the factors in the EFE Matrix and IFE Matrix, and thus the ratings for the factors are referred to strengths and weaknesses, whereby 4 =major strength, 3 = minor strength, 2 = minor weakness, and 1 = major weakness. However, these critical success factors are not grouped into opportunities and threats as the ones in the EFE Matrix.
The rating and total weighted scores for rival firms can be used to compare the competitive performance to the sample firm. The results from the comparative analysis will provide important internal strategic information. However, users have to aware that they should avoid assigning the same rating to firms included in the CPM analysis. Nonetheless, users should also be reminded that the rating in a CPM are not aiming to arrive at a single number, but rather to integrate and evaluate information that aids in decision making.
In conclusion, the CPM is used to identify a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position. The rating results from CPM should be used to aid an organization in decision making.
2.3.3 Internal Factor Evaluation (IFE) Matrix
Last technique used in Stage 1 will be the Internal Factor Evaluation (IFE) Matrix. Users will be focusing on constructing IFE to summarize and evaluate on the internal strategic management or the major strengths and weaknesses in the functional area of an organization. When developing IFE Matrix, users are required to use their intuitive judgments. Below is an example of IFE Matrix which is illustrated in Table 4.
Key Internal Factors
Steps in developing IFE Matrix
List a total of 16 to 24 key internal factors consists of both strengths and weaknesses which are identified in Chapter 3’s Internal Environment. Information picked should be as specific or objectives as possible, using percentages, ratios and comparative numbers.
Assign each factor with a weight that ranges from 0.0 (not important) to 1.0 (very important). The sum of all weights assigned to the factors must equal to 1.0. Factors being strengths or weaknesses that have the greatest impact on organizational performance should be given the highest weights.
Assign a rating of 1 to 4 to each key internal factor. Rating 1 = major weakness, 2 = minor weakness, 3 = minor strengths and 4 = major strengths. Beware that only weaknesses will receive rating 1 to 2; and strength will receive rating 3 to 4.
Multiply each factor’s weight by its rating to determine a weighted score.
Sum the weighted score for each variable to determine the total weighted score for chosen organization.
Just like EFE Matrix, factors includes in IFE Matrix should always be as objective as possible, where factors should be stated in quantitative terms to the extent, rather than being just vague terms. No matter how many numbers of key internal strengths and weaknesses that are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0 and an average score of 2.5. Rating above average rating of 2.5 indicates that the organization is internally strong, while rating below 2.5 indicates the organization is internally weak.
It is important to user that while developing IFE Matrix, try not to have the financial ratio analysis as key internal factors to be more than 30 percent of the total factors. This is because financial ratios are generally the result of many other factors and thus this may create confusion and disorient the organization in which strategies to be considered based on the financial ratios analysis.
In conclusion, the IFE Matrix is used as a technique to summarize and evaluate the key internal strengths and weaknesses of an organization, also to act as a basis for identifying and evaluating the relationship among the key internal factors. By the end of Stage 1, users will now able to understand the use of the three techniques or tools (EFE Matrix, CPM and IFE Matrix) to summarize and evaluating both key internal and external factors of the organizations and its industries.
Next part of the Chapter 2 will be focusing on the Stage 2 of the Strategy Formulation Framework which is the Matching Stage.
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