STRATEGIC MANAGEMENT

Lesson 3: The Levels and Formulation of Strategy

There is a need in modern times for strategies to achieve agreed goals and objectives, giving a sense of
purpose and direction to the organization, because of recent technological and social changes and competition
from rival organizations.

In ancient Greek, ‘stratos’ was the term for the army and so in military terms, ‘strategy’ referred to ‘the act
of the general’ so a strategy is some sort of future plan of action, undertaken by senior management at a high
level of abstraction.

A strategy is the mediating force or ‘match’ between the organization and the environment.

Strategy Formulation - 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.

I. Strategic Management Process

- method by which managers make a choice of a set of strategies for the organization that will enable it to
achieve better performance.

Strategic management is a continuous process that appraises the business and industries in which the
organization is involved; appraises its competitors and fixes goals to meet all the present and future
competitor’s and then reassesses each strategy.

Strategic management process has following four steps:

Environmental Scanning- a process of collecting, scrutinizing and providing information for strategic
purposes.
It helps in analyzing internal and external factors influencing an organization. After executing the environmental
analysis process, management should evaluate it on a continuous basis and strive to improve it.

Strategy Formulation- the process of deciding best course of action for accomplishing organizational
objectives to achieve organizational purpose. After conducting environment scanning, managers formulate
corporate, business and functional strategies.

Strategy Implementation- implies making the strategy work as intended or putting the organization’s chosen
strategy into action.
Strategy implementation includes designing the organization’s structure, distributing resources, developing
decision making process, and managing human resources.

Strategy Evaluation- the process of determining the effectiveness of a given strategy in achieving the
organizational objectives and taking corrective action wherever required.
The final step of strategy management process.
The key strategy evaluation activities are: appraising internal and external factors that are the root of
present strategies, measuring performance, and taking remedial / corrective actions. Evaluation makes sure
that the organizational strategy as well as its implementation meets the organizational objectives.

These components are steps that are carried, in chronological order, when creating a new strategic
management plan. Present businesses that have already created a strategic management plan will revert to
these steps as per the situation’s requirement, so as to make essential changes.
II. Levels of Strategy

Strategy can be formulated at three levels, namely, the corporate level, the business level, and the
functional level.

1. Corporate Level

Corporate level strategy defines the business areas in which your firm will operate.

It deals with aligning the resource deployments across a diverse set of business areas, related or unrelated.

Strategy formulation at this level involves integrating and managing the diverse businesses and realizing
synergy at the corporate level.

The top management team is responsible for formulating the corporate strategy.

The corporate strategy reflects the path toward attaining the vision of your organization.
For example, a firm may have four distinct lines of business operations, namely, automobiles, steel, tea, and
telecom. The corporate level strategy will outline whether the organization should compete in or withdraw from
each of these lines of businesses, and in which business unit, investments should be increased, in line with the
vision of the firm.

2. Business Level

Business level strategies are formulated for specific strategic business units and relate to a distinct product-
market area.

It involves defining the competitive position of a strategic business unit.

The business level strategy formulation is based upon the generic strategies of overall cost leadership,
differentiation, and focus.

Cost Leadership
- a strategy companies use to increase efficiencies and reduce production costs below the industry average or
their closest competitor.

It’s a method to reduce costs and produce the least expensive goods in a market or industry in an effort to gain
market share.

Organizations that pursue cost leadership gain a competitive advantage by reducing operating costs to a level
below the industry average. Business owners then pass these savings on to their customers with low-priced
merchandise or services or maintain average pricing to increase their profit margin.

Differentiation
- an approach that a business takes to develop a unique product or service that customers will find better
than, or in another way distinctive from, products or services offered by competitors

The main objective of implementing a differentiation strategy is to increase competitive advantage. A business
will usually accomplish this by analyzing its strengths and weaknesses, the needs of its customers and the
overall value they can provide.

Differentiation strategies have several advantages that may help develop a unique niche within an industry.
Possible benefits of creating a differentiation strategy are:

Reduced price competition. Differentiation strategy allows a company to compete in the market with
something other than lower prices.
For example, a candy company may differentiate their candy by improving the taste or using healthier
ingredients. Although its competitors have cheaper candy, they can’t provide the taste that consumers
may want from that specific candy company.

Unique products. This benefit of a differentiation strategy is that it builds on the unique qualities of a
product. A company may create a list of characteristics its products contain that your competitors lack.
Those characteristics will differentiate your product, and you may communicate this through effective
marketing and advertising.

Better profit margins. When products are differentiated and turned into higher-quality products, it
offers more opportunity for larger profit margins.
For example, if your target market is willing to pay a higher price for top quality or better value, you may
generate more revenue with fewer sales.

Consumer brand loyalty. Effective differentiation may create brand loyalty in customers if a business
maintains the perceived quality of your products.
For example, if you have a brand that is marketed by a sports figure, it will likely increase brand loyalty
because it enhances the value of your brand.

No perceived substitutes. A strategy that successfully differentiates may present the idea that there is
no other product available on the market to substitute it with. A business may gain an advantage in the
market even when there are similar products available because customers will not be willing to replace
your product for another one. Companies try to differentiate themselves by providing consumers with
unique products that are frequently revolutionized.

Focus
- identification of a niche- market and launching a unique product or service in that market.
 A niche-market is a narrow segment of a total market.

A niche can be identified based on certain issues:

 particular buyer group (such as women, youths, adolescents or aged 50+),
 geographic uniqueness (such as south of Luzon or South of Visayas),
 special product attributes that appeal only to niche members (such as specially designed neck-
tie),
 a particular product line (such as lemon juice, children’s shoes or detergent with bleach).

For example, a firm may choose overall cost leadership as a strategy to be pursued in its steel business,
differentiation in its tea business, and focus in its automobile business.
The business level strategies are decided upon by the heads of strategic business units and their teams in light
of the specific nature of the industry in which they operate.

III. Types of Strategy

Strategies may come about in different ways and different modes of strategy formulation, which are described
as follows:

Planned strategies come about where there are precise intentions, which are written down and
imposed by a central leadership. Key features include a large number of controls to ensure surprise-
free implementation in an environment, which is controllable, with managers who are able to ascertain,
review and evaluate every option available, and they are then able to choose what appears to be the
best option in the light of rational criteria.

Emergent Strategy can be deliberate or emergent or a stage in-between. There is a corporate intent
followed by its implementation. Sometimes this intent is not formally written down but emerges over
time as part of the culture, as a series of related decisions.  Flickr, Nintendo and PayPal all pivoted to
an emergent strategy. But the strategy is far from flawless. 

Opportunistic Strategy may come about in or entrepreneurial ways. An organization may take
advantage of changes in the environment or recognize new skills in an opportunistic manner.
Alternatively, a firm may be set up by an entrepreneur because of an opportunity in the market place.

Imposed strategy may be imposed on the organization. Government policies may have an impact on
the strategy; this has been the case for those public utilities recently privatized. Recession and threat of
a takeover may force a strategy of cost cutting and retrenchment. Technological developments may
cause an organization to develop new products to replace the ones that have become obsolete.