Year: 2020

Strategy Formulation is an analytical process of selection of the best suitable course of action to meet the organizational objectives and vision. It is one of the steps of the strategic management process. The strategic plan allows an organization to examine its resources, provides a financial plan and establishes the most appropriate action plan for increasing profits.

It is examined through SWOT analysis. SWOT is an acronym for strength, weakness, opportunity and threat. The strategic plan should be informed to all the employees so that they know the company’s objectives, mission and vision. It provides direction and focus to the employees.

Steps of Strategy Formulation

The steps of strategy formulation include the following:

1. Establishing Organizational Objectives

This involves establishing long-term goals of an organization. Strategic decisions can be taken once the organizational objectives are determined.

2. Analysis of Organizational Environment

This involves SWOT analysis, meaning identifying the company’s strengths and weaknesses and keeping vigilance over competitors’ actions to understand opportunities and threats.

Strengths and weaknesses are internal factors which the company has control over. Opportunities and threats, on the other hand, are external factors over which the company has no control. A successful organization builds on its strengths, overcomes its weakness, identifies new opportunities and protects against external threats.

3. Forming quantitative goals

Defining targets so as to meet the company’s short-term and long-term objectives. Example, 30% increase in revenue this year of a company.

4. Objectives in context with divisional plans

This involves setting up targets for every department so that they work in coherence with the organization as a whole.

5. Performance Analysis

This is done to estimate the degree of variation between the actual and the standard performance of an organization.

6. Selection of Strategy

This is the final step of strategy formulation. It involves evaluation of the alternatives and selection of the best strategy amongst them to be the strategy of the organization.

Strategy formulation process is an integral part of strategic management, as it helps in framing effective strategies for the organization, to survive and grow in the dynamic business environment.

Levels of strategy formulation

There are three levels of strategy formulation used in an organization:

1. Corporate level strategy

This level outlines what you want to achieve: growth, stability, acquisition or retrenchment. It focuses on what business you are going to enter the market.

2. Business level strategy

This level answers the question of how you are going to compete. It plays a role in those organization which have smaller units of business and each is considered as the strategic business unit (SBU).

3. Functional level strategy

This level concentrates on how an organization is going to grow. It defines daily actions including allocation of resources to deliver corporate and business level strategies.

Hence, all organizations have competitors, and it is the strategy that enables one business to become more successful and established than the other.

Corporate-Level Strategy refers to the top management’s approach or game plan for administering and directing the entire concern. These are based on the company’s business environment and internal capabilities. It also called as Grand Strategy.

It reflects the combination and pattern of business moves, actions and hidden goals, in the strategic interest of the concern, considering various business divisions, product lines, customer groups, technologies and so forth.

Salient Features of Corporate Level Strategy

• Corporate Level Strategies is developed by the company’s highest level of management considering the company’s overall growth and opportunities in future.
• It describes the orientation and direction of the enterprise in the long run and the overall boundaries which acts as the basis for formulating the company’s middle and low-level strategies, i.e. business strategies and functional strategies.
• While formulating corporate-level strategies, the company’s available resources and environmental factors are kept in mind.
• It is concerned with the decisions regarding the two-way flow of company’s information and resources between the various levels of management.

In better words, corporate-level strategy implies the topmost degree of strategic decision making, which covers those business plans which are concerned with the company’s objective, procurement and optimal allocation of resources and coordination of business strategies of different units and divisions for satisfactory performance.

Classification of Corporate-Level Strategies

The corporate-level strategies are classified into four parts:

1. Stability Strategy

Stability is a critical business goal which is required to defend the existing interest and strengths, to follow the business objectives, to continue with the existing business, to keep the efficiency in operations, etc.

In the stability strategy, the firm continues with its existing business and product markets, as well as it maintains the current level of endeavour as the firm is satisfied with the marginal growth.

When a company finds that it should continue in the existing business and is doing reasonably well in that business but no scope for significant growth, the stability is the strategy to be adopted.

The stability strategy is not a “do nothing” strategy. It may involve incremental improvements.

Long-term stability strategy also requires reinvestment, R& D and innovation. However, the business definition remains the same.

Reasons for Adopting Stability Strategy

• The company is doing fairly well or perceives itself as successful and expects the same in the future.
• The stability strategy is less risky. Frequent changes involving new products or new ways of doing things may lead to failure of the firm. The larger the firm and the more successful it has been, the greater is the resistance to the risk.
• The stability strategy can evolve because the managers prefer action to thought and do not tend to consider any other alternatives. Many of the firms that follow stability strategy do this unconsciously. Such companies react to the changes in the forces in the environment.
• To follow a stability strategy, it is easier and more comfortable for all concerned as activities take place in routines.
• The management pursuing stability strategy does not have the mind-set of a strategist to appraise the environmental opportunities and threats and take advantage of the opportunities.
• The company that has core competence in the existing business does not want to take the risk of diverting attention from the current business by opting for diversification.

2. Expansion Strategy

Also called a growth strategy, wherein the company’s business is reevaluated so as to extend the capacity and scope of business and considerably increasing the overall investment in the business.

In the expansion strategy, the enterprise looks for considerable growth, either from the existing business or product market or by entering a new business, which may or may not be related to the firm’s existing business. Basically, it encompasses diversification, merger and acquisitions, strategic alliance, etc.

This strategy involves redefining the business either adding to the scope of activity or substantially increasing the efforts of the present business.

When expansion strategy is pursued, it could lead to addition of new products or new markets or functions. Even without a change in business definition many firms undertake major increases in the pace of activities.

Expansion strategy is often considered as “entrepreneurial” strategy where firms develop and introduce new products and markets or penetrate markets to build share. Expansion is usually thought as the way to improve performance.

Strategists need to distinguish between desirable and undesirable expansion.

Reasons for Adopting Expansion Strategy

• If business environments are volatile, expansion may be a necessary strategy for survival.
• Many executives may feel more satisfied with the prospects of growth expansion.
• Chief Executive Officer may feel pride in presiding over organizations perceived to be growth-oriented.
• Some executives believe that expansion is in the benefit of the society.
• Expansion provides more financial and other rewards.
• Expansion enables to reap advantages from the experience curve and scale of operations.

3. Retrenchment Strategy

This is pursued when the company opts for decreasing its scope of activity or operations. In retrenchment strategy, a number of business activities are retrenched (cut or reduced) so as to minimize cost, as a response to the firm’s financial crisis. Sometimes, the business itself is dropped by selling out or liquidation.

Therefore, areas where there is a problem is identified and reasons for those problems are diagnosed, after that corrective or remedial steps are taken to solve those problems. So, when the firm concentrates on the ways to reverse the process of decline, it is called a turnaround strategy.

However, if it drops the loss-making venture or part of the company or minimizes the functions undertaken, it is called a divestment or divestiture strategy. If nothing works, then the firm may choose for closing down the firm, it is called a liquidation strategy.

Retrenchment strategy is generally followed during the period of decline of a business when it is thought possible to bring profitability back to the firm. If the prospects of restoring profitability are not good, abandoning market share, reducing expenses and assets can use controlled divestment.

Reasons for following retrenchment strategy

• The firm is doing poorly.
• If there is pressure from various groups of stakeholders to improve performance.
• If better opportunities of doing business are available elsewhere a firm can better utilize its strengths.

The retrenchment strategy is particularly followed for dealing with crises. For minor crises pace retrenchment will be suitable, for moderate crises, divestiture of some division or units may be inevitable whereas for serious crises, a liquidation strategy will be imperative.

4. Combination Strategy

In this strategy, the enterprise combines any or all of the three corporate strategies, so as to fulfill the firm’s requirements. The firm may choose to stabilize some areas of activity while expanding the other and retrenching the rest (loss-making ones).

The primary focus on corporate-level strategies is on the “directing” the managers on ‘how to manage the scope of various business activities’ and ‘how to make optimum utilization of firm’s resources (material, money, men, machinery), etc. on different business activities’.

Reasons for following Combination strategies

• When the organization is large and faces a fast changing complex environment.
• The company’s products are in different stages of the life-cycle.
• A combination strategy is suitable for a multiple-industry firm at the time of recession.
• The combination strategy is best for firms, divisions of which perform unevenly or do not have the same future potential.

Business-level strategy focuses on how to attain and satisfy customers, offer goods and services that meet their needs, and increase operating profits. To do this, business-level strategy focuses on positioning itself against competitors and staying up to date on market trends and technology changes.

Economist Michael Porter theorizes that there are two main types of business strategy: cost leadership and differentiation. A business can also integrate these two strategies.

A Business-Level Strategy can help your organization achieve a competitive advantage in the marketplace. They provide a way to provide value to customers by exploiting your organization’s core competencies.

Business level strategies are relate to a particular business are known as business level strategies. It is developed by the general managers, who convert mission and vision into concrete strategies. It is like a blueprint of the entire business.

Types of Business Level Strategies

1. Cost Leadership

Cost Leadership is a situation in which market leader sets the price of a product or service, and competitors feel compelled to match that price.

Cost Leadership is perhaps the clearest of the three generic strategies. In it, a firm set out to become the low-cost producer in its industry. The firm has a broad scope and serves many industry segments, and may even operate in related industries, the firm’s breadth is often important to its cost advantage.

The sources of cost advantages are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors. A low-cost product must find and exploit all sources of cost advantage. Low-cost producers typically sell a ‘standard’ or ‘no frills’ product and place considerable emphasis on reaping scale or absolute cost advantages from all sources.

2. Differentiation

The second generic strategy is Differentiation. In a Differentiation Strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. It is rewarded for its uniqueness with a premium price.

The means for Differentiation are peculiar to reach industry. Differentiation can be based on the product itself, the delivery system by which it is sold, the marketing approach, and a broad range of other factors. In construction equipment, for example, Caterpillar Tractor’s Differentiation is based on product durability, service, spare parts availability, and an excellent dealer network. In cosmetics, Differentiation tends to be based more on product image and the positioning of counters in the stores.

In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. Differentiation will cause buyers to prefer the company’s product/service over the brands of rivals. An organization pursuing such a strategy can expect higher revenues/margins and enhanced economic performance.

The challenge in finding ways to differentiate that creates value for buyers and that are not easily copied or matched by rivals. Anything a company can do to create value for buyers represents a potential basis for differentiation.

Successful differentiation creates lines of defence against the five competitive forces. It provides insulation against competitive rivalry because of brand loyalty of customers and hence lower sensitivity to price. The customer loyalty also provides a disincentive for new entrants who will have to overcome the uniqueness of the product or service.

3. Focus and Niche Strategies

The third generic strategy is focus. This strategy is quite different from the others because it rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment of group of segments in the industry and tailors its strategy to serving them to the exclusion of others. By optimizing this strategy for the target segments, the focuser seeks to achieve a competitive advantage in its target segments even though it does not possess a competitive advantage overall.

The focus strategy has two variants, in cost focus, a firm seeks a cost advantage in its target segment, while in differentiation focus, and a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segments and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments.

Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segment. Such differences imply that the segments are poorly served by broadly targeted competitors who serve them at the same time as they serve others.

The focuser can thus achieve competitive advantage by dedicating itself to the segments exclusively. Breadth of target is clearly a matter of degree, but the essence of focus is the exploitation of a narrow target’s differences from the balance of the industry. Narrow focus in and/or itself is not sufficient for above-average performance.

A focuser takes advantage of sub-optimization in either direction by broadly-targeted competitors. Competitors may be underperforming in meeting the needs of a particular segment, which opens the possibility for differentiation focus. Broadly-targeted competitors may also be over performing in meeting the needs of a segment, which means that they are bearing higher than necessary cost in serving it. An opportunity for cost focus may be present in just meeting the needs of such a segment and no more.

There are two aspects to this strategy, the cost focus and the differentiation focus. In the cost focus, a firm seeks a cost advantage in its target market. The objective is to achieve lower costs than competitors in serving the market; this is how cost producer strategy focused on the target market only. This requires the organization to identify buyer segments with needs/preferences that are less costly to satisfy as compared to the rest of the market. Differentiation focus offers niche buyers something different from other competitors. The firm seeks product differentiation it its target market.

Both variants of the focus strategy rest on differences between a focuser’s target market and other markets in the industry. The target markets must either have buyers with unusual needs or else the production and delivery system that best serves the target market must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some markets. While differentiation focus explants its special needs of buyers in certain markets. A focuser may do both to earn a sustainable competitive advantage though this is difficult.

Focus strategy is successful if the organization can choose a market niche where buyers have distinctive preferences, special requirements, or unique needs and they developing a unique ability to serve the needs of the target buyer segments. Even though the focus strategy does not achieve low cost or differentiation from the perspective of the market as a whole, it does achieve this in its narrow target.

However, the market segment has to be big enough to be profitable and it has growth potential. The organization has to identify a buyer group or segment of a product line that demands unique product attributes. Alternatively, it has to identify a geographical region where it can make such offerings.

Focusing organizations develop the skills and resources to serve the market effectively. They defend themselves against challengers via the customer goodwill they have built up and their superior ability to serve buyers in the market.

The competitive power of a focus strategy is greatest when the industry has fast-growing segments that are big enough to be profitable but small enough to be of secondary interest to large competitors and no other rivals are concentrating on the segment. Their position is strengthened as the buyers in the segment require specialized expertise or customized product attributes.

A focuser’s specialized ability to serve the target market niche builds a defence against competitive forces. Its focus means that either organization has a low cost option as its strategic target, high differentiation, or both. The logic that has been laid out earlier for cost leadership and differentiation also is applicable here.

Functional Level Strategy can be defined as the day to day strategy which is formulated to assist in the execution of corporate and business level strategies. These strategies are framed as per the guidelines given by the top level management.

Functional Level Strategy is concerned with operational level decision making, called tactical decisions, for various functional areas such as production, marketing, research and development, finance, personnel and so forth.

As these decisions are taken within the framework of business strategy, strategists provide proper direction and suggestions to the functional level managers relating to the plans and policies to be opted by the business, for successful implementation.

Role of Functional Strategy

• It assists in the overall business strategy, by providing information concerning the management of business activities.
• It explains the way in which functional managers should work, so as to achieve better results.

Functional Strategy states what is to be done, how is to be done and when is to be done are the functional level, which ultimately acts as a guide to the functional staff. And to do so, strategies are to be divided into achievable plans and policies which work in tandem with each other. Hence, the functional managers can implement the strategy.

Functional Areas of Business

There are several functional areas of business which require strategic decision making, discussed as under:

1. Marketing Strategy

Marketing involves all the activities concerned with the identification of customer needs and making efforts to satisfy those needs with the product and services they require, in return for consideration. The most important part of a marketing strategy is the marketing mix, which covers all the steps a firm can take to increase the demand for its product. It includes product, price, place, promotion, people, process and physical evidence.

For implementing a marketing strategy, first of all, the company’s situation is analyzed thoroughly by SWOT analysis. It has three main elements, i.e. planning, implementation and control.

There are a number of strategic marketing techniques, such as social marketing, augmented marketing, direct marketing, person marketing, place marketing, relationship marketing, Synchro marketing, concentrated marketing, service marketing, differential marketing and demarketing.

2. Financial Strategy

All the areas of financial management, i.e. planning, acquiring, utilizing and controlling the financial resources of the company are covered under a financial strategy. This includes raising capital, creating budgets, sources and application of funds, investments to be made, assets to be acquired, working capital management, dividend payment, calculating the net worth of the business and so forth.

3. Human Resource Strategy

Human resource strategy covers how an organization works for the development of employees and provides them with the opportunities and working conditions so that they will contribute to the organization as well. This also means to select the best employee for performing a particular task or job. It strategizes all the HR activities like recruitment, development, motivation, retention of employees, and industrial relations.

4. Production Strategy

A firm’s production strategy focuses on the overall manufacturing system, operational planning and control, logistics and supply chain management. The primary objective of the production strategy is to enhance the quality, increase the quantity and reduce the overall cost of production.

5. Research and Development Strategy

The research and development strategy focuses on innovating and developing new products and improving the old one, so as to implement an effective strategy and lead the market. Product development, concentric diversification and market penetration are such business strategies which require the introduction of new products and significant changes in the old one.

For implementing strategies, there are three Research and Development approaches:

• To be the first company to market a new technological product.
• To be an innovative follower of a successful product.
• To be a low-cost producer of products.

Functional level strategies focus on appointing specialists and combining activities within the functional area.

Strategists may adopt a submissive, confrontational, or collaborative stance. They can try to conform to the regulations, confront the regulations by informed criticism and lobbying and public relations or work with the government to improve the regulatory framework. At the same time they can adopt an ‘existentialist’ view and continually look for opportunities within the business environment as such an environment is substantially affected by government plans, priorities, policies and actions.

Following the procedures laid down for implementation constitutes an important component of strategy implementation in the Indian context :

• Licensing Procedure
• Foreign Collaboration Procedure
• FERA Requirements
• MRTP Requirements
• Capital Issue Control Requirements
• Import and Export Requirements
• Incentives and Facilities Benefits

Resource allocation is a process and strategy involving a company deciding where scarce resources should be used in the production of goods or services. A resource can be considered any factor of production, which is something used to produce goods or services. Resources include such things as labor, real estate, machinery, tools and equipment, technology, and natural resources, as well as financial resources, such as money.

The 5 Best Methods of Successful Resource Allocation

1. Make room for strategic reallocation

Your allocation responsibilities seldom end with the first installment as reallocation is an unavoidable outcome of ad hoc requirements. But reallocation does not necessarily mean overloading work onto the same set of resources. Strategic reallocation lets you look for replacements and a few extra hands that can take on the additional responsibility. Such smart reallocation invariably depends on the all-round visibility of your projects and resources. This is essential to keep your workforce occupied optimally.

2. Diversify skill sets and responsibilities

It always pays to have resources who have been trained in a wide range of skills or at least those who are accustomed to being placed onto different tasks. It is essential that you recognize the secondary skill sets your employees may have and nurture them. When faced with reallocation requirements that are likely to exceed your capacity, this could easily solve your immediate problems.

For example, one of your engineers is a communication minor and an amateur blogger. He/she can be a great asset to your internal branding activities that require an understanding of your products along with having a flair for the language.  For employees, this can prove to be both motivating and fruitful to have been given a chance to diversify and grow. Stagnation is nobody’s dream and good managers not only understand that but also accommodate it in their allocation strategy.

3. Subscribe to an easy, automated resource request process

One of the most obvious hindrances to your resource allocation process is often the convoluted process you need to stick to while having a resource placed onto your project or job.  Having to manually sift through your resource pool or take phone/email requests from individual managers makes it a very unyielding ride before you can find the project resource you are looking for.

An automated process in a dedicated channel, independent of spreadsheets, changes everything. Automated resource requesting lets managers specify the skill sets, the level of competency and years of experience they are looking for along with timelines of the project. This directly reaches your inbox or that of the resource manager in charge. Coupled with all round visibility, you can allocate and reallocate without batting an eyelid thereby saving precious hours. In addition, a set process lets you track your allocation record and end any process related confusions that may arise when you cannot trace resources.

4. Make ‘optimal utilization’ the benchmark

Having optimal utilization as the default status that your reports achieve is the first sign that you have healthy allocation habits. When resource utilization levels are optimal across the pool, it means you are not over or under allocating onto your resources under any circumstances. As a result, the output that your resources deliver does not suffer as well. Optimal utilization must further be the overall outcome you get as opposed to a chanced upon the result of ad hoc measures. Every method you adopt to allocate must fulfill this criterion.

5. Base timelines on booked vs. actual reports

To tie in all these steps realistically, it is best that you base your estimates on the booked vs. actual reports you draw. If you do not have a tool that lets you directly access these comparisons, you can do so manually by comparing them with earlier project reports that you might have.

The steps here are simple: analyze the previous bookings you have made and the time that their actual execution took. If the execution took longer, there must have been roadblocks that caused them. Understand the roadblocks. Evaluate whether or not they will repeat themselves. Now, you can draw timelines for tasks based on this execution period. With each repeat cycle, you are likely to get closer to making accurate bookings. Most importantly, you will not have under or over-utilized resources either.

Alternatively, switching to a resource planning tool that has been designed to help you asses booked vs. actuals with precise metrics is a great initiative you could take to improve your overall resource allocation strategy.

The best-kept secret of resource managers is the ‘trial and error’ system they have had to undergo before they could perfect efficient allocation of resources. Most success stories are likely to have precedent failures that are not spoken about. So go on, be unconventional, apply a combination of these practices and find out what your team is most receptive towards.

Successful strategic management involves ensuring that all company resources perform effectively. By learning how to manage competing priorities, successful business professionals enable employees to balance job tasks, schedule work efficiently and ensure that work flows smoothly from one process to the next. Today’s dynamic, global environment poses challenges for company executives and project managers. By establishing a comprehensive strategic plan for allocating workers and supplies, you avoid costly mistakes that lead to overruns and delays.

1. Coordinate project and operational effectively by establishing a comprehensive program management strategy. Evaluate project proposals on a monthly or quarterly basis to decide which ones gets sponsorship. Consolidate multiple similar efforts under one program leader; this tends to enable the use of key resources more effectively and allow you to make critical deadlines.
2. Employ software tools, such project management software such as Microsoft Project, dotProject.net or Basecamp, to identify project tasks, allocate resources effectively, avoid overallocation and prevent employee burnout. Approve budgets, finish dates and the amount of flexibility in the deadlines if you are a company executive to help project managers make decisions aligned with the company’s strategic goals.
3. Delay tasks until staff have time available to work on them or split up tasks and hire additional workers to prevent staff from working more than 40 hours in a typical week and becoming burned out.
4. Outsource routine tasks to companies that specialize in a particular function, such as payroll processing, customer service or technical support.
5. Train employees so they have the required skills and job tasks get completed on time to ensure timely delivery of products and services. Train less experienced workers to complete job tasks if you experience unexpected demand or attrition. Obtain specialized training from authorized providers to ensure that your company runs a safe workplace that complies with local, state and federal regulations.
6. Manage suppliers by analyzing work flow of resource materials from one process to the next. Gather input from experts before considering alternative solutions to backlogs. Take prompt action to rectify problems if a supplier provides poor quality materials or delivers them late. Require that the supplier improves the quality of raw materials and provides them on time.