Steps to Strategy Formulation (Read Only If You Want To Outcompete Competitors)
The most successful endeavors started with well-made plans. The biggest businesses grew with the aid of well-developed strategies. In fact, if you take a look at businesses, every decision made, every action taken, and every resource allocated and spent, had logic behind them. This logic or basis is a strategy.
However, strategies aren’t pulled out of thin air, and they are not readily served to entrepreneurs and managers on a silver platter. A lot of thought and effort go into the creation of plans – whether they are simple or elaborate – and the formulation of the strategies and specific steps within these plans.
We often hear the phrase “strategic planning” bandied about, and you’ve probably even learned about it extensively in your business classes or similar courses you’ve taken in the past. And then, out of nowhere, you hear “strategy formulation”, and this brings a whole new set of questions in your head. Is it a new concept? Do you have to take a separate course to learn about it, especially on how you can apply it to your business?
Here’s the good news: you don’t have to. That is because “strategy formulation” is simply another way to refer to strategic planning.
THE FUNDAMENTALS OF STRATEGY FORMULATION
Strategic Management is a very broad discipline, its scope spanning the entire strategic decision-making structure of the organization, from the management processes and decisions to the activities performed in all its functional units. The primary focus of this discipline is the conduct of the strategic management process, which pretty much covers all the activities and functions performed to enable the organization to cope well with change over the long term.
The systematic nature of the strategic management process is apparent in how it was split into three stages: Strategy Formulation, Strategy Implementation, and Strategy Evaluation and Control.
In this discussion, we will take an in-depth look at the first stage – Strategy Formulation – and the six steps that you should follow in order to come up with management strategies that will propel your organization forward, far ahead of your competitors and rivals.
Strategy formulation is the process of determining and establishing the goals, mission and objectives of an organization, and identifying the appropriate and best courses or plans of action among all available alternative strategies to achieve them.
Always, there is an end in sight, and that is the organizational goals of the firm. The organization anticipates specific results, which they can only achieve by following a specific route, or acting within the confines or parameters of a specific framework. That route or framework will be created through strategy formulation.
The main reason that the strategy formulation is also referred to at times as “strategic planning” is because they basically follow the same concept. Through strategic planning, management is able to evaluate its resources and determine the best ways to maximize the company’s return on investment (ROI). The output – the strategic plan – will serve as the framework or guide for the members of the organization in carrying out their respective roles.
Therefore, it is important to note that, although the two phrases are sometimes used interchangeably, and although they are similar in a lot of ways, they are not exactly the same.
Aspects of Strategy Formulation
Strategy formulation has three levels or aspects, with the resulting recommendations in each level being consistent in order to ensure the formulation of strategies that are cohesive, realistic and viable.
Corporate Level Strategy
In this level, the perspective is broad and wide, so the focus is on the overall scope, direction and goals of the entire organization. Since we are looking at the big picture, our concern is the total structure of the business.
This aspect of strategy formulation has the following components:
- Growth strategy: This component is concerned with the direction that the business is taking. What are the organization’s growth objectives? How is its overall performance, and does it coincide with what the business had in mind when it developed its growth objectives? Are the growth strategies still consistent with the growth objectives and, if not, what changes or modifications must be made?
- Portfolio strategy: This aspect is all about taking stock of the organization’s operational structure. What are the lines of business in the organization’s portfolio? How are these lines interconnected or how do they fit together? The most common strategies developed at this level address queries on whether a business should diversify its portfolio or keep them as they are, and focusing on their concentrations or weights instead.
- Parenting strategy: The main point of concern here is the allocation of resources and capabilities across the lines of business of the organization. How will the items in the portfolio be managed? Which lines require more direct management and control? Which lines are in need of additional resources to boost their performance?
Business Level Strategy
Large companies usually have multiple lines of business in their portfolio. The larger firms even distinguish them as separate strategic business units (SBUs) under a single organizational umbrella. As strategic business units, they are operational as stand-alone businesses, which means that competition is bound to arise.
In this level, strategy formulation is geared towards coming up with competitive strategies between and among the lines of businesses or SBUs of the organization.
Functional Level Strategy
Compared to the other two levels, the functional level has a shorter outlook. Within each line of business or SBU, there are functional units with their own specific tasks and sets of activities. Strategies at this level are required, primarily addressing how these activities and tasks will be carried out effectively and efficiently.
STEPS FOR AN EFFECTIVE AND WINNING STRATEGY FORMULATION
So you want your business to earn more than a decent amount of profit. You want your business to grow and be a force to reckon with in the industry. Naturally, you also want to be ahead of the competition, beating them soundly and putting as much distance as you can between you.
First, you have to come up with winning strategies, which you will then implement to come out on top. Your strategy formulation should roughly follow these steps:
1. Define the organization and its environment
The first step requires you to take a look at the organization. The points of interest are:
- Target market – This is the domain that the business hopes to dominate, so there is a need for the organization to clearly identify and define the particular group that it will target. Demographic and psychographic factors are the primary indicators considered in defining the organization’s target market.
- Customers – They are the end users of the products and services that the company offers. Who are they? How do they perceive value? Are you able to meet that perception? How do they make their purchasing decisions? Why do they purchase your products or services?
- Offerings – These are the products or services that you are selling to the customers. Do they offer value to the customers, and does that value meet their perceived value? How does the price point affect its value, if at all? What are the end benefits that these products and services have that convince customers to buy them?
- Adaptation to changes and challenges – Business environments are, at best, unstable in the sense that changes are expected and even anticipated. Anticipation will spur the company to come up with strategies to be able to adapt quickly and effectively. Therefore, the organization has to identify the potential challenges that are expected to arise. The most common examples are the introduction of new technologies and equipment, and updates in systems.
2. Define the strategic mission
Organizations are forward-looking, and they want to achieve something as they move the business along. The strategic mission will provide a clear picture of that long-range outlook, providing an overview of what the business wants to achieve. This will serve as a definitive and clear guide for the organization and its members as they carry out the tasks indicated in the plan.
A strong strategic mission should have all, if not most, of the following:
- An indication of a long-range perspective. The business is looking at the long term, not just one, three or five years down the road. It has to be clear on that front.
- Core values of the organization. The mission must include the values that are upheld and highly esteemed by the organization. These values will largely dictate how you are going to go about the process of achieving the goals of the organization.
- Nature of the business. Briefly, include a description of the core activities or main line of business of the organization. Is it in commercial retail, healthcare services, or automobile manufacturing?
- Current position of the organization in the market. Is the organization currently holding the leader position in the market? Are there special characteristics or features that clearly distinguish the organization from the rest? These should also be noted in the strategic mission.
- Vision of the organization. This is a statement of what and where the organization wants to be in the future, on its own and in the market.
Here are some tips that may help you when crafting your Strategic Mission statement.
- Start by taking a look at the main operations and offerings of the business and how they go about them. Consider also the end users or recipients of the output of these operations.
- Focus on the “what is”, not the “what should be”. That means you have to be objective in looking at the current state of affairs in the organization and the industry it belongs to.
- Present your drafts to other members of the information for critiquing. You may be able to get more pointers from their feedback, since they are likely to be more objective when evaluating the mission statement.
- Get pointers from other companies. In fact, it would be a great idea to take a look at the mission statements of your competitors, considering how you are pretty much in the same position and, probably, with a similar vision. Be careful, however, that you won’t be copying their mission statements outright.
- You might end up making dozens of draft mission statements and scrapping all of them. That is fine. Keep revising and improving until you have a draft of a mission statement that you are fully satisfied with, and that captures and reflects the organizations long-range perspective perfectly.
Take a look at the following example of a well-written strategic mission of New Leaf Paper, manufacturer and distributor of printing and office papers using environment-friendly virgin-fiber products. It is one of the largest and leading paper companies in the United States today.
“The mission of New Leaf Paper is to be the leading national source for environmentally responsible, economically sound paper. We supply paper with the greatest environmental benefit while meeting the business needs of our customers. Our goal is to inspire — through our success — a fundamental shift toward sustainability in the paper industry.”
3. Define and set the strategic objectives
Strategic objectives represent what the organization must achieve in order for it to become competitive – or to remain competitive – and ensure sustainability of the business over the long term. They come in the form of specific responses or aims of the organization to address issues regarding competitiveness, long-term sustainability and other business advantages.
If the strategic mission will serve as a directional guide for where the business wants to be, the strategic objectives will serve as a directional guide on how the business will make use of its resources and carry out key functions and activities.
In essence, defining the strategic objectives involves identifying performance targets that the members of the organization will aim for, and these targets are clearly geared towards the attainment of the goals.
When setting strategic objectives, keep the following in mind:
- They should be specific and easy to understand by everyone, especially the members of the organization.
- They should be aligned with the strategic mission of the organization.
- They should be communicated to all employees and other members of the organization, and every effort must be made to ensure that they fully understand the objectives, as well as their individual and collective roles in achieving these targets.
A strategic objective may be something as specific as “to increase annual growth sales rate by 15%”. Or it could be something like how New Leaf Paper set out to develop a new market for environmentally sustainable papers, and pioneer that market by introducing innovative environmental paper products. It is in keeping with how their mission statement referred to the organization’s environmental and sustainability thrusts, as well as that reference to inspiring and stimulating a shift in the paper industry.
4. Define the competitive strategy
The next step in strategy formulation is where the organization will start identifying and coming up with its long-term plan to gain advantage – and maintain it – over the competition. This is known as the competitive advantage, and the plan is referred to as the competitive strategy.
There are three factors at play when determining the Competitive Strategy of the organization.
The industry that the organization belongs to
This involves taking a look at the industry or the marketplace and its various aspects.
- Market size: Logic would dictate that the overall competitive strategy of a business in the South American hotel industry will have differences with that of a firm in the larger European hotel industry. The size of the market comes with several implications. For example, larger markets generally have more players, which means more competitors. It also often means higher amounts of investment and resource allocations by the company since they have a larger area to cover. These, and other factors, are sure to influence an organization’s competitive strategy.
- Market growth trends: This requires looking into past market growth, how the market is currently moving along, and any potential growth in the future. Many industrial and market analysts conduct these types of studies from time to time, providing businesses with their inputs and thoughts on the future of the market, which these businesses will then use in its strategic management processes.
- Competition: A particular point of interest is competitive profitability. How are the competing firms in the market doing in terms of profit-earning? Are their huge disparities in their profit levels? Is the average actual profitability of the firms lower or higher than the expected industry average?
- Movements in and out of the market: You also have to consider the number of new market entries, withdrawals from the market, and a comparison of the two. A market with too many new entrants can mean a lot of things. It is possible that new players are coming in because they think there is still room for them. Some may also deem the existing firms in the market as weak competition, which is why they are coming in.
- Threats to the industry: Some industries are prone to more threats than others, and this is bound to affect the formulation of strategies. Aside from getting a feel for the level of vulnerability of the industry to threats, the potential threats should also be clearly identified.
The competitive position of the organization
This time, the focus is on the competition. Know who your competitors are and understand how they work. In aid of defining a competitive strategy, you should:
- Gain an understanding of the operations of competitors, such as their products and services, their marketing campaigns, and their customer bases.
- Analyze how the competitors are able to deliver value to their customers through their product offerings.
- Identify the strengths and weaknesses of competitors, and analyze how they are opportunities and threats to the organization.
The strengths and weaknesses of the organization
The organization also has to look internally and look into itself. In particular, it has to identify its strengths and acknowledge its weaknesses. By doing so, defining a competitive strategy will be easier.
Again, specificity is important when coming up with competitive strategies. Let us take a look at some competitive strategy examples:
- Produce at low cost and sell at a low price, but at high volume
- Pursue a market niche strategy
In New Leaf Paper’s case, its competitive strategy involved “serving the market through leading product innovation, while ensuring that each product line and business relationship is deeply entrenched with New Leaf Paper’s environmental and social values.”
(Technically, this is where Strategy Formulation ends, and we move on to the next stage in the Strategic Management Process. However, in order to further emphasize the crucial role played by Strategy Formulation, let us continue on to the succeeding steps in the process.
On the other hand, considering how strategy formulation is also done throughout the strategic management process, it won’t be entirely wrong to say that the next two steps may also fall under Strategy Formulation. After all, management may discover new information or circumstances that will result to formulation of new and improved strategies.)
5. Implementation of strategies
Organizations may have come up with very good strategies, but they will be completely wasted and will benefit no one unless they are implemented.
Identify the tactics or methods that will be used in the implementation of the chosen strategies. As the implementation moves forward, management may spot some methods or tactics that are not working, or they may realize that another tactic may work better. In that case, the corresponding adjustments may be made.
At this point, it is possible that the company was able to come up with several strategies. However, as much as they’d want to implement all these strategies, that is not just possible. Review of the strategies will help the strategic management team to prioritize the strategies and identify which ones to implement.
This time, let us take a look at some tactics, methods or steps undertaken by New Leaf Paper. Keep in mind that the competitive strategy is to introduce product innovations and putting emphasis on environment and social values.
- Development of innovative products. New Leaf Product was the first to develop, manufacture, and sell innovative and ground-breaking paper products, and some of the most notable ones are:
- “New Leaf Reincarnation, the first 100% recycled coated paper (1998)
- “New Leaf Ecobook 100”, the first trade book paper, made with post-consumer waste (PCW) content and PCF (2001)
- “New Leaf Opaque 100”, the first white opaque paper made with 100 PCW and PCF (2003)
- “New Leaf Primavera”, the first high-end gloss coated paper with 40% PCW and PCF (2004)
- “New Leaf Sakura”, the first silk-coated paper in the US (2006)
- Certification as a Certified B corporation. New Leaf Paper is one of the first 81 companies named as a Certified B Corporation, known for using “the power of business to solve social and environmental problems”.
- Obtaining environmental certifications. In 1999, New Leaf Paper produced the “New Leaf Ecomatte”, which was the first coated paper to be granted a certification by the Forest Stewardship Council (FSC). Other environmental certifications earned were from Biogas Energy, Green-e Certified Renewable Energy, and Ancient Forest Friendly.
- Tie-ups with major companies and undertakings, one of the most notable ones being when “New Leaf Paper Ecobook 100” was used to print 950,000 copies of J.K. Rowling’s “Harry Potter and the Order of the Phoenix” in 2003.
- Leveraging partnerships. New Leaf Paper partnered with Bank of America and developed the “New Leaf Everest”, the first bright white letterhead paper in the world, made with 100 PCW and PCF.
6. Evaluate progress and effectiveness
It is important to track the progress of the implementation of the strategies. Are they being properly implemented? Are they being measured properly? Are the safeguards to ensure reliability of the results in place?
On top of that, the effectiveness of the strategy implemented should also be assessed. Is the strategy working? Does it have the potential to bring the company closer to the fulfillment of its goals, as laid out in the Mission Statement?
When we look at the example of New Leaf Paper, its strategies resulted in other paper companies launching their own lines of environmentally responsible paper products that are very similar with New Leaf products. For example, the success of “New Leaf Everest” spurred five competing paper companies to launch their own brands. Clearly, this is an indication that the company is making strides in its vision of inspiring – through their success – that fundamental shift toward sustainability in the paper industry.
Feedback plays a very important role in the evaluation stage, providing the strategists with insights on how the implemented strategies are faring.
It takes a lot of smarts, determination and hard work to make a business succeed, beat the competitors, and have the upper hand in the competitive arena within the marketplace. A great part of this rides on the strategies and how they are implemented, but never forget that it all starts with the strategy. In order to have an effective strategy, make sure that they are in line with the overall organizational goals.
It’s the middle of the night and you suddenly wake up with a business idea in your mind – while …