Strategy Formulation

UNIT 4, Lecture 8: Hierarchy of Strategy, and Managing the Strategy

Formation Process
Lesson Structure
4.1 Lesson Objectives
4.2 Introduction
4.3 Concept of Strategy Formulation
4.4 Nature of Strategy Formulation
4.5 Process of Strategy Formulation
4.6 Hierarchy/Levels of Strategy
4.6.1 Corporate Level Strategy
4.6.2 Business Level Strategy
4.6.3 Functional Level Strategy
4.6.4 Operational level Strategy
4.7 Conclusion
4.8 Model Questions.
Lesson Objectives
At the end of lesson you should be able to:
 Discuss the challenges and potential risks associated with strategy formulation in
organisations
 Describe the elements that make up corporate-level strategy, including mission,
vision, objectives, and portfolio management.
 Discuss the purpose and significance of business-level strategies in achieving a
competitive advantage within specific markets or industries.
 Explore how functional-level strategies are formulated and executed within
specific departments (e.g. Marketing, operations, HR) to support broader business)
 Articulate the role of vision and mission statements in strategy formulation.
 Discuss the key steps involved in strategy formulation; and how the steps
contribute to developing an effective strategy.
Concept of Strategy Formulation
 Strategy formulation is the process by which an organisation chooses the most
appropriate courses of action to achieve its defined goals. It is appropriate
that an organisation uses this framework in order to provide proper direction
to a firm. An organisation will therefore seek to set the long-term goals and
objectives that help a firm exploit its strengths fully and exploit the
opportunities that are present in the environment.
 Strategy formulation is an outcome of analysing the external and internal
environments, allocating resources, and crafting a comprehensive plan that
guides the organisation to the best suitable course of action in order to meet
the organisational objectives and vision.
 Henry Mintzberg after much research found that strategy formulation is
typically not a regular continuous process but often an irregular, discontinuous
process proceeding in fits and starts depending on environmental changes.
Nature of Strategy Formulation

 Strategy formulation includes developing a vision and mission, identifying an

organisation’s external opportunities and threats, determining internal
strengths and weaknesses, establishing long-term objectives, generating
alternative strategies, and choosing particular strategies to pursue.
 Strategy formulation occurs at three hierarchical levels in a large and mature
organisation: Corporate, Business, and Functional. Smaller businesses may
only have the corporate and functional levels.
Process of Strategy Formulation
Strategy formulation includes the following steps:
 Defining Mission, Vision, and Values: Clarification of the strategic framework,
namely why the company exists (mission), what it aspires to become in the
future (Vision), and the principles that guide its actions (Core Values)
 Conducting a Situation Analysis: This involves an evaluation of the internal and
external environments. The internal environment includes an analysis of
resources, capabilities, culture, and the current state of operations. The
external analysis includes an assessment of market trends, competition,
regulatory changes, economic conditions, and technological advances
 Objectives and Goals Setting: This involves setting of specific, measurable,
achievable, relevant, and time bound (SMART) objectives. Goals and Objectives
should align with the organisation’s mission and vision and objectives should be
aligned to the analysis of the internal and external environments.
Process of Strategy Formulation
Developing Strategies: Strategic choices should be consistent with the
established objectives and goals. Examples of strategies may include market
penetration, market expansion, diversification, cost leadership, differentiation
etc.
Allocating Resources: This step involves allocating financial, human, and other
resources to support the selected strategies. Budgeting and resource planning
takes place at this stage of the formulation process to ensure that the necessary
assets are available for implementation
Formulating Action Plans: This involves developing action plans that specify how
the strategies will be executed. Responsibilities, timelines and key performance
indicators (KPIs) are assigned to respective team-members for tracking progress.
Process of Strategy Formulation
 Monitoring and Evaluation: Measurement of performance, analysing variances
and taking corrective actions in response to changing circumstances is regularly
done.
 Risk Assessment: It is fundamental that an organisation scans the environment
for potential risks and uncertainties in order to proactively develop contingency
plans to mitigate risks
 Communication and Alignment: This step involves the communication of the
strategy to all levels of the organisation for execution and alignment
 Review and Feedback Loop: It is imperative that the organisation surveys it
primary and secondary stakeholders for feedback in order to make informed
adjustments to strategy.
 Strategic Control: Involves a critical evaluation of plans, activities, and results
for corrective actions.
Process of Strategy Formulation

 Strategy formulation is an ongoing process that requires flexibility and

adaptability, as the business environment is constantly changing.
 Organisations must be prepared to adjust their strategies to remain
competitive and achieve their long term objectives.
The Hierarchy of Strategy
The hierarchy of strategies in an organisation refers to the structured framework of
strategic plans and decision that are developed and implemented at different levels
within the organisation. These levels of strategy are interconnected and provide a clear
direction for the organisation to achieve overall mission and objectives. The hierarchy
of strategies provides a structured approach to aligning the organisation’s effort from
the highest corporate-level goals down to the operational and tactical actions required
to achieve goals and objectives aligned with the organisation’s mission and vision.
The hierarchy includes the following levels:
 Corporate-level Strategy
 Business-level Strategy
 Functional-level Strategy
 Operational-level and Tactical Plans.
Corporate-level Strategy

Corporate Level Strategy Formulation: Corporate-level strategy

formulation is the process of developing a comprehensive and integrated
plan that defines how an organisation will achieve its goals and objectives
across the whole business or divisions. This level of strategy focuses on
the entire organisation and the various Strategic Business Units (SBU).
Corporate-level strategy provides a framework for decision- making
regarding the scope of the organisation and how it allocates resources
across its different parts. It is the roadmap for the entire business.
The key elements of corporate-level strategy formulation include:
Mission and Vision: The mission or purpose and the vision or long term
aspirations are articulated at this level of strategy.
 Objectives: The setting of high-level, long-term SMART objectives
that align with the mission and vision of the organisation are clearly
formulated at this level of strategy.
 Business Portfolio: At this level, the business will make make
strategic choices regarding which businesses or industries the
organisation will operate in. This will involve decisions such as
expansion, divestment, or restructuring of existing businesses.
Decisions at this level may include acquisitions, mergers, strategic
alliances, or the divestment of underperforming ones.
 Diversification Strategy: A diversification strategy may involve
decisions whether to pursue related diversification (related
businesses) or unrelated diversification (unrelated businesses)
 Resource Allocation: This involves allocating resources such as financial,
human, technological, etc. to support strategic priorities and growth potential
of each business unit.
 Strategic Alliances and Partnership: Decisions regarding the extent the
organisation will engage in strategic alliances, joint ventures, or other
partnerships are formulated at this level.
 Corporate Culture and Values: The desired corporate culture and values that
should be embedded in all parts of the organisation to support the corporate
level strategy are articulated and defined at his level of strategy.
 Risk Management: Enterprise risk management (ERM) involves identifying and
addressing methodically the potential factors that represent risks to the
achievement of strategic objectives, or to opportunities to gain competitive
advantage.
 Performance Metrics: Formulating key performance indicators (KPIs) and
metrics to monitor the progress and success of the corporate strategy is an
important element of the corporate strategy level.
 Governance and Decision-Making: This involves the establishment of decision
rights at corporate level, roles and responsibilities of top executives and the
board of directors.
 Communication and Alignment: It is imperative that the corporate-level
strategy is effectively communicated throughout the organisation, and that
all levels of management and employees understand how there respective
roles contribute to the overall corporate objectives.
 Scenario Planning: Preparing for various scenarios and contingencies that
may impact the organisation’s strategy is key for flexibility and agility.
Business-level Strategy
Business-level strategy formulation is the process of developing a detailed plan
that outlines how a specific business unit or division of an organisation will
compete in its chosen market or industry. This level of strategy focuses on
formulating a competitive advantage to achieve intended objectives ahead of
competitors.
Formulation of a business-level strategy include:
 Market Analysis: This involves conducting a thorough analysis of the industry,
market, and competitive landscape in order to understand customer needs,
trends, and the competitive forces at play.
 Competitive Advantage: This involves identifying how the business intends to
differentiate itself from competitors. This may be a choice of or combination
of: cost leadership, differentiation, or focus strategy, depending on the
business’s strengths and market positioning.
 Target Customer Segments: Defining the specific customer segments or
market niches that the business aims to serve, how to play and also
understanding the demographics, preferences, and needs of the target
audience.
 Positioning Strategy: Developing a clear and compelling positioning strategy
that determines how the business wants to be perceived by its customers.
 Product and Service Strategy: Involves defining the product or service
offerings, features, and quality standards that will enable the business to
deliver on its positioning strategy.
 Pricing Strategy: The pricing approach that aligns with the positioning and
competitive environment needs to be determined. For example this could
involve a choice of premium pricing, competitive pricing, etc
 Distribution Strategy: Distribution channels and partnerships are critical decisions
at the business level. This includes decisions about online and offline distribution.
 Marketing and Promotion: Building brand loyalty in the target markets involves
developing marketing and promotional plan to create awareness and attract
customers.
 Operational Excellence: the business’s internal processes and operations have to be
aligned with the chosen strategy.
 Resource allocation, performance Metrics all have to be aligned to the overall
strategy
 Risk Management: Risk mitigation action plans for the chosen strategies have to be
identified and put in place.
 Continuous Improvement: Creating mechanisms for ongoing monitoring and
improvement
Functional-level Strategy
The Functional- level strategy formulation is the process of developing detailed
plans and tactics within specific functional areas of an organisation to support
the achievement of the broader business and corporate level objectives.
Functional-level strategies focus on individual departments or functions within
the organisation, for example, Marketing, operations, human resource, finance,
etc.
Functional- level strategy formulation include:
 Functional Objectives: Establishing SMART objective for each functional area
as derived from the business and corporate-level objectives.
 Resource Allocation: Allocating resources includes budgets, personal,
technology, etc. based on the strategic priorities.
 Functional Alignment: Each function activities should be aligned to the
broader business and corporate objectives and direction.
 Key Initiatives: Identifying key initiatives or projects to achieve Function
objectives, for example, process improvements, talent development programs
or technology investments, etc.
 Performance Metrics: Performance KPIs are key for monitoring progress,
measure success, and make data-driven decisions.
 Continuous Improvement: it is critical to create mechanisms for continous
improvement within each functional area. This includes regular reviews,
feedback loops, and opportunities for innovation and optimisation.
Reflection!

Provide some examples of functional-level strategies in different departments?

Human Resources
Finance
Marketing
Operarions
IT
Operational-level Strategy
Operational level strategy deals with the day-to-day activities and processes
within an organisation.
It aims to improve efficiency, productivity, and effectiveness in the short term.
Operational strategies have a short- term perspective, typically covering periods
of weeks, months, or up to a year. For example, a weekly production plan, a
monthly sales
In terms of scope, it addresses specific operational issues and tasks to ensure
smooth functioning of day-to-day operations.
The decision makers are Middle and lower-level managers and frontline staff
who are involved in developing and implementing operational level strategies.
Reflection!

Who is responsible for strategy formulation and WHY?

 Primary Responsibilities

Strategy level Primary Strategy Development Strategy – Making Functions and Areas of
Responsibilities Focus
Corporate-level CEO and other key executives  Structuring and managing the portfolio
(Decisions are typically of business units. (making
reviewed/approved by Board of acquisitions, initiating divestitures,
Directors) strengthening existing business
positions).
 Coordinating business level strategies,
building Corporate level competitive
advantage
 Controlling the pattern of resource
allocation across the business units
 Primary Responsibilities cont’d
Strategy level Primary Strategy Development Strategy – Making Functions and Areas of
Responsibilities Focus
Business-level GM/Head of business unit.  Choosing how to compete and what
( Decisions are typically kind of competitive advantage to
reviewed/approved by senior build..
corporate executive, usually CEO)  Developing responses to changing
industry and competitive conditions.
 Coordinating the role/thrust of
functional area strategies.
 Primary Responsibilities cont’d
Strategy level Primary Strategy Development Strategy – Making Functions and Areas of
Responsibilities Focus
Functional-level Functional area heads.  Fleshing out the business strategy as it
( Decisions are typically applies to specific functional area and
reviewed/approved by business developing specific functional area
unit head) action plans to support successful
execution of business strategy.
 Primary Responsibilities cont’d
Strategy level Primary Strategy Development Strategy – Making Functions and Areas of
Responsibilities Focus
Operating-level Department heads/field unit  Developing action plans to carry out the
heads’/lower level – level day to day requirements of functional
managers within functional area support strategies.
areas. Functional area heads.
( Decisions are often made after
consultations with lateral peers
in closely related areas and are
typically reviewed/approved by
functional area head)
Managing the Strategy Formation
Process
 Organisations go about the strategy formulation process
differently.
 Small, owner – managed companies strategic plans tend to
be developed informally and may be the preserve of the
entrepreneur.
 Large firms develop strategic plans through an annual
planning cycle with predetermined procedures, forms and
timeframes. The process generally includes broad
management participation, numerous studies and
iterations.
Managing the Strategy Formation
Process Cont’d
 Managers have a choice of four approaches to strategy – making,
namely:
 The master strategic approach. The manager personally functions as
a chief strategist, and chief entrepreneur exercising strong influence
over the kind and level of analysis conducted, over the strategy
alternatives to be explored, and over details of strategy. The
manager shapes the strategy and acts as the strategy commander
with a big ownership stake in the chosen strategy.
Managing the Strategy Formation
Process Cont’d
 The delegate to others approach – The manager in charge delegates virtually
all of the strategic planning to a planning team in the organization. The
manager ends with little personal stake in the strategy statement. Ownership
of the strategy is delegated to the planners. This approach is a recipe for
failure as the plan lacks credibility
 The collaborative approach. The manager enlists the help of key
subordinates to formulate a consensus strategy which all the key players will
support and do their best to implement successfully. In this approach, those
charged with managing the formulation process are also charged with
implementing the chosen strategy. Giving subordinates a clear cut ownership
stake in the strategy they must subsequently implement enhances
commitment and effective execution and buy in.
Managing the Strategy Formation
Process Cont’d
 The champion approach – The manager in this approach supports subordinate
managers to develop, champion, and implement sound strategies. The
strategy moves bottom up. The executive serves as a judge, evaluating the
strategy proposals from subordinates.
 The champion approach is especially well suited for large diversified
corporations where it is impossible for the say the CEO to be on top of all the
strategic and operating problems facing each of the many business divisions.
 The CEO may articulate general strategic themes as organizational wide
guidelines to stimulate strategic thinking and innovation.
 The total strategy is strongly influenced by the sum of the championed
initiatives that get approved.
Methods of Pursuing Strategies cont’d
There are three methods of pursuing strategy :
 Organic development
 Acquisition (or disposal), and
 Strategic alliances
Methods of Pursuing Strategies cont’d
ORGANIC DEVELOPMENT
Organic development (or internal development) is when strategies are
developed by building on and developing an organisation’s own capabilities. For
many organisations, organic development has been the primary method of
strategy development.
Organic development is preferred for following reasons:
 Highly technical products in terms of design or method of manufacture lend
themselves to organic development since the process of development may be
the best way of acquiring the necessary capabilities to compete successfully.
For example Tons cane to Tons sugar ratio.
Methods of Pursuing Strategies cont’d

ORGANIC DEVELOPMENT
 Knowledge and capability development may be enhanced by organic
development. For example, last mile knowledge may be enhanced by own
sales force rather than using sales Agents.
 Spreading investment over time compared to one off investment
(acquisition).
 Minimizing disruption that come with for example political and cultural
problems of acquisition
 Nature of market may dictate organic development for example a monopoly
or foreign company attempting to enter Japanese market.
Methods of Pursuing Strategies cont’d

Mergers and Acquisitions

 An acquisition is where an organization takes ownership of another
organization where as a merger implies a mutually agreed decision for joint
ownership between organizations. In practice, few acquisitions are hostile
and few mergers are the joining of equals. In both acquisitions and mergers
typically involve the managers of one organization exerting strategic
influence over the other. Global activity in Mergers is dominated by North
America and Western Europe and less common in economies such as Japan.
Methods of Pursuing Strategies cont’d
Motives for Mergers and Acquisitions
There are different motives for developing through acquisition and mergers namely:
 Speed of entry compared to internal development
 Competitive pressure may compel acquisition to avoid market retaliation or avoid excess
capacity.
 Consolidation opportunities – optimizing supply and demand
 Financial markets may provide conditions that motivate acquisition – If the share value or
price/earnings (P/E) ratio of a company is high, it may see the opportunity to acquire a firm
with a low share value or P/E ratio. An extreme example is asset stripping where the
motive is short term gain by buying up undervalued assets and disposing of them piecemeal.
 Cost efficiency – for example to gain scale advantages.
 Obtaining new capabilities - For example, a company may be acquired for its R&D, or its
knowledge of particular business processes or markets.
Methods of Pursuing Strategies cont’d

Acquisitions and Financial performance

Acquisitions are not an easy or guaranteed route to improving financial
performance. Common pitfalls include :
 Paying too much for a company
 Poor financial advice from investment banks involved. .
 Managers over optimistic about the benefits of the acquisition.
 Limited information or over simplified data
 Incompatibility between the two firms – could be problems of cultural fit,
business systems
 Slow experience curve .
Methods of Pursuing Strategies cont’d
Acquisitions and Financial performance
Acquisitions are not an easy or guaranteed route to improving financial
performance. Common pitfalls include :
 Expected synergies may not be realised as quickly as forecast.
 Adding value to the acquired business may be problematic..
 Gaining the commitment of middle managers responsible for the operations
and the customer relations in the acquired business is important in order to
avoid internal uncertainties and maintain customer confidence..
 Poor change management process
 Employee rationalization.
Methods of Pursuing Strategies cont’d
STRATEGIC ALLIANCES
A strategic alliance is where two or more organizations share resources and activities to
pursue a strategy. Alliances vary from simple two – partner alliances co producing a product
to one with multiple partners providing complex products and solutions.
 Motives for alliances include: :
 The need for critical mass – by forming partnerships with either competitors or
providers of complementary products can reduce costs and improve customer offering.
 Co- specialisation - allowing each partner to concentrate on activities that best match
its capabilities e.g. local knowledge or expertise in distribution, website development
for e- business. .
 Learning from partners and developing competencies that may be more widely
exploited elsewhere. For example, Organizations may enter into alliances as a means of
experimentation to break out of sole reliance.
CONCLUSION……
Model Questions
1. You are a member of the board of directors for a large conglomerate. The
organisation is considering whether to expand into emerging markets or
concentrate on improving the profitability of its current businesses.
Required:
 Should the organisation expand into new markets or focus on optimising the
existing businesses.
 How would this decision impact on the corporate-level strategy
2. You are the Director of Marketing for a premium tea brand called Tanganda
Tea. Your business has been successful in differentiating itself based on product
quality and customer experience
Model Questions
Required:
 What are the key factors influencing the business’s competitive advantage
and how can you sustain it.
 How would you identify and sustain the factors that contribute to the
business’s competitive advantage.
3. You are the Operations manager for Kafue Steel plant. Your business is facing
pressure to reduce production costs without compromising product quality.
Required:
How would you develop a functional-level operations strategy to address this
challenge?
Model Questions
4. Define the concept of strategy formulation and discuss its significance in the context
of entrepreneurial enterprises. How does strategy formulation differ entrepreneurial
venture compared to established organisation.
5. Discuss the role of vision and mission statements in strategy formulation for
entrepreneurial enterprises. Hoe do entrepreneurs articulate their vision and mission,
and how does it shape their strategic decision?
6. Discuss the impact of technology and digital transformation on strategy formulation
in entrepreneurial enterprises. How do emerging technologies and digital platforms
shape the strategic options available to the entrepreneurs.
7. Reflect on a real life scenario of a successful entrepreurial venture and analyse its
strategy formulation process.
8. Discuss strategy formulation and explain its significance in organisational success..
Provide examples to support your answer.