3.
PART III: STRATEGY FORMULATION
1.1 Strategy formulation
 It is the art and science of formulating, implementing, and
evaluating cross-functional decisions that enable an organization to
achieve its objectives.
 It is performed to create unique competitive advantage by setting
the organization mission, analysing the competitive situations both
external perspective and internal perspective, and then developing
the strategies that fits in the environments.is in essence and
entrepreneurial activity.
3.2 There are 3 levels of the strategies.
 Grand strategy or corporate strategy is the highest level. It is very
essential for setting the organizational direction whether firm wants to
grow, stable or exit.
 Business strategy is the second that the company should describe the
company’s characteristics making competitiveness among the
competitors whether it wants to differentiate by offering the superior
values for customers, offering the affordable price by gaining the low cost
advantage, or creating distinctive values for its concentrated customers.
 Consequently, the company will contribute its grand strategy and
business strategy to each business functions in order to craft functional
strategies.
3.3 Improved performance
Strategic management can improve performance for the following reasons:
 Strategic management helps to identify and develop a competitive
advantage .managers know what edge their business has over the
competition.
 It provides a long –term indication of the direction that top management
visualizes for the business. Managers know where to place more effort.
 It sets priorities which may serve as a guideline for the allocation of the
limited resources.
Business that do formal strategic planning perform considerably better than
similar businesses that do not .The advantages of strategic planning are
particularly noticeable in the results of business that function in a complex
rapidly changing environment.
3.4 The level of strategic planning
The nature, size and diversification of a business determine the kind of strategic
planning process that will be used .Large, diversified businesses that operate in
different industries, find that it becomes increasingly difficult to allocate
resources effectively and to formulate a strategy for the different industries.
Three levels of strategy planning can be distinguished.
3.4.1 Strategic planning at corporate level
 Strategy formulation at corporate level comprises the consideration of
the overall nature and aim of the activities of the business and the
allocation of its resources to the various units in different industries.
 Top management is responsible for the formulation of the overall
strategy of the business and must make important decisions about the
mission of the business, what diversified product range to offer, what
market segments to serve, what industry to be involved in or to leave,
and the overall philosophy to be followed.
 The most important tasks are the formulation of a mission and
deciding on the strategies that will lead to the fulfilment of the
mission.
3.4.2 Strategic planning at strategic business units (SBU)
 To facilities the management of large businesses similar or related
activities in an industry are grouped together in a strategic business
unit and treated as separate units for the purpose of strategic planning.
 Strategic business unit can, for example, exist for the business’s
activities in the clothing, shoe, furniture, beer, television and steel
industry.
 The strategy at this level indicates how the strategic business unit will
function in the specific industry.
 Decisions must be made about the strategic business unit’s products
or services and market segments and how it can help within the
parameters of the corporate strategy and philosophy to achieve the
mission of the business.
3.4.3 Strategic planning for function activities
 Where a strategic human unit is organized on the basic of the
functional activities such as human resource management, purchasing
management production management , administrative management,
marketing management and financial management , functional
strategies must be decided upon that will indicate those policies and
procedures which lead to success financial policy should indicate
policy and procedures for budgets accounting practice and investment
.
 Strategy formulation is only concerned with giving general long-term
direction.
3.5 The strategic planning process
No single approach to strategic planning will necessarily be ideal for all
businesses in all circumstances. Individualistic approaches at certain stages my
produce the best results in a specific situation.
3.5.1 Evaluation of present performance and strategy
 The steps in the model for strategic planning of new business start
with the identification of the vision and mission.
 In the case of an existing business, present performance and strategy
must be evaluated.
 This step enables the business to determine is current strategic profile
and posture. It is important to know where the business is at present,
where it is going and how it is going to bridge the gap.
 To prevent a planning gap from developing, a gap analysis should be
done.
 A gap analysis comprises a comparison of the actual results and
chosen strategy to determine trends and is done with the help of
feedback from control activities (strategic tactical and operational) by
means of the database of the management information system.
 Trends, growth rate, goals, functional strategies and other information
are analyzed.
 If the actual performance has not led to the achievement of the goals
and mission the strategy should be adjusted.
 However, care must be taken that using the present performance and
strategy as point of departure does not lead to insufficient adjustment
of the strategy.
 The ideal is to develop a new strategy and to overcome the gap by
replacing the existing strategy with the new strategy and implement
the new strategy accordingly.
 Strategic planning can be seen as an annual course adjustment to
ensure that the business continues to proceed in the right direction.
3.6 Types of strategies
3.6.1 Cost leadership
The business tries to outmatch its competitors by emphasizing productivity .To
be a low-cost producer the business will build efficiently scaled facilities with a
low break –even point, set control objectives and become cost conscious in all
sections of the business. Lower costs will make it possible it charge lower prices
that can possibly generate larger sales and higher profits. The strategic planning
process and organizational design should facilitate overall cost leadership.
3.6.2 Differentiation
This strategy is concerned with the creation of product that are perceived to be
exceptional or unique. The differentiation can be based on factors such as
product features, brand image, customer service or distribution channels.
Effective differentiation requires creativity, basic research, innovation, effective
marketing and a reputation for quality. This strategy should incorporate a
flexible response to changing perceptions and preferences as well as cost
control.
3.6.3 Focus
The focus strategy strives to achieve cost leadership and differentiation or both
in a particular target market. The business focuses on one market segment rather
than completing throughout the whole market. A business pursing this strategy
is willing to serve customers with special financing, inventory or service needs,
to supply customers in isolated geographic areas or to meet unique demands or
supply small quantities. Businesses that use this strategy achieve success as a
result of their willingness to serve particular target markets.
3.6.4 A maintenance strategy
Top management is satisfied with the success of the business and continuous
with the present stable grow str4ategy .This is a low risk strategy and is
particularly suited to business that concentrate on one industry where the
environment does not change quickly .Characteristic of maintenance strategy is
that it is aimed at achieving the same objective and growth rate in the same
marker with the same products. Businesses grow by maintaining their market
share in a slowly growing market or with very little medication to their product
range market or geographical area.
3.6.5 A growth strategy
The values of top have a great influence on the choice of a strategy many
managers see the growth and progress of their business as indicative of their
personal success. When top management owns shares in the business, growth in
dividends and increased share prices become even more since management
stand to gain directly. Shareholders and investors find business that follows a
growth strategy an attractive investment opportunity. Growth should be the
result of effective management, while unplanned and excessive growth should
be guarded against .the choice of a growth strategy is inevitably associated with
risk. A growth is based on the expansion of activities by means of one or more
the following eight strategies:
3.6.5.1 Concentration on product line
The strategy assumes a more rapid increase of sales, profit and marker share
that in the past.it is based on a single product line, market and technology and is
particularly successful where the market for the product is large and still
growing. The strategy utilizes the skills and completive advantage of the
business.
Concentrating on a single product line holds the smallest risk in in terms of
additional resources, but poses a major if for some reason the demand for the
product drops drastically better exploitation of the market can occur by
extending the product line and distributing the product line in new geographical
areas and by finding new retail outlets and other market segment by means of
pricing strategies, product differentiation and advertising.
3.6.5.2 Market development
Next to concentration on one product line, market development holds the least
risk for the business .This strategy is based on the marketing of the present
products, mostly with small changes, in related markets through additional
distribution channels or by changing the content of advertisements or the
advertising media. The opening of further branches in other cities and towns
and the increased use of advertising media are important elements of this
strategy.
3.6.5.3 Product development
This strategy is aimed at extending the product life cycle of utilizing a
favourable reputation and successful trade mark or brand name .The business
introduces new products to satisfy customers by making fundamental changes to
existing distribution channels to existing customers. Examples this are new
model motorcar or a new, improved washing powder or toothpaste.
3.6.5.4 Innovation
In a rapidly changing environment consumer expect changing and improved
products all the time. It is risky for businesses not to be and stay at their
forefront of change .The business chooses the strategy of innovation and utilises
the originality of new products by applying the skimming –the-cream prizing
policy to initially make large profits on every new product of a similar kind
outdated and almost redundant. The appearance of the first Polaroid camera or
new generation of computers are good examples of innovation.
3.6.5.5 Integration
Horizontal integration consist of the takeover of a business at the same stage of
production or a business the manufactures related products. Thus a competitor is
eliminated and entry into new market is obtained. This can be done through the
purchase of a competitor’s shares or by the takeover of a competitor’s assets.
The amalgamation of banks and build societies to form ABSA and an Amcar
and ford are typical examples of horizontal integration.
Vertical integration as a growth strategy is based on the extension of the
business’s activities in the following two possible directions:
Forward integration is aimed at owning a business in the direction of consumer
or the marketing of the products. There are numerous examples of manufactures
that have their own retail outlet.
Backward integration consists of the take of supplier that delivers the business’s
input.one of the main reasons for backward integration is to ensure the supply of
important raw materials.
3.6.5.6 Joint venture
It sometimes happens that a business does not have sufficient resources at its
disposal to start a large project on its own .By forming a joint venture the skills
that are lacking (such as marketing) and resource (such as capital) can be
obtained. A business can also form a joint venture with a business in another
country or area with the aim of obtaining important raw material s or marketing
is products.
3.6.5.7 Concentric diversification
This strategy implies the addition of related new products to the business’s
product range. It utilizes the business’s knowledge and experience in
technology, markets, distribution channels customer base. The addition of
related products should maintain synergistic benefits and complement the
existing products. A business marketing clothing summer sportswear may, for
example, decide to marker winter sportswear as well.
3.6.5.8 Retrenchment strategies
A retrenchment strategy is usually followed when a business performs poorly
for some or other reason. It can be a result of an economic recession, a
technological breakthrough, entry of competitors or ineffective and inefficient
management, marketing or product. Also called the defensive strategy focus on
the desire or need to reduce organizational operations, usually through cost
reduction or asset reductions.
Retrenchment strategy includes many types of retrenchment such as harvest,
turnaround, divestiture, bankruptcy, and liquidation. A retrenchment strategy
can take place by means of one or more of the following three sub strategies.
(1) Harvest entails minimizing investments while attempting to maximize
short run profits and cash flow, with the long-run intention of exit the
market. It is often used when future growth in the market is doubtful or
will require investment that does not appear to be cost effective.
(2) Turnaround is designed to reverse a negative trend and restore the
Organization to appropriate levels of profitability. It is used for shifting
from a negative direction or a positive one. A company will push an effort
to reserve it resources in order to make a big turnaround.
(3) Divestiture involves an organization’s selling or divesting of a business or
part of a business. There are 2 different effects on this strategy. A company
may have a positive effect on the price of the firm’s stock but conversely it
may have a negative effect if divestitures are conducted in the absence of
clear strategic goals.
(4) Bankruptcy is a means whereby an organization that is unable to pay its
debts can seek court to protection from creditors and from certain contract
obligations while it attempts to regain financial stability.
(5) Liquidation entails dissolving an organization by disposing of all its assets
and settling its remaining debts. It usually occurs when serious difficulties,
such as bankruptcy cannot be resolved.
3.6.5.9 A combination strategy
Various of the above strategies are used for different strategic business units or
product line/services. Thus a maintenances strategy can be applied for a
particularly successful product line, a growth strategy for flagging product line.
Many businesses apply a form of a combination strategy for their product range
or activities.
3.7 Management and success
The different levels of management must lead the business to success, taking
consideration continual changes in external environment.
In order to make this possible, all employees must know exactly what they are
striving for and how the resources of the business are to be applied.
 The strategic plan gives direction it provides the strategy, goals and
business policy.
 The participation of each member of staff in the implementation of the
chosen plan is necessary.
 To make this possible, each subordinate, in conjunction with his manager,
must determine what he must achieve within the overall plan .this done
by allowing the worker to decide on an end result to be achieved.
 He/she must then continually monitor his progress towards attaining the
objectives and make adjustment where necessary.
 Thus each worker’s performance can be determined effectively and
remunerated accordingly.