Strategy Formulation

Strategy formulation is designed to guide executives in

defining the business their company is in, the aims it
seeks and the means it will use to accomplish these
aims.

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 Defining the company mission
The company mission will guide future executive
action. It is defined as:
“The fundamental, unique purpose that sets a business
apart from other firms of its type and indentifies the
scope of its operations in product and market terms
and reflect the values and priorities of strategic
decision markers”.

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The Need for an Explicit mission:
(1)To ensure unanimity of purpose within the organization.
(2)To provide a basis for motivating the use of organization’s
resources.
(3)To develop a basis or standard for allocating organizational
resources.
(4)To establish a general tone or organizational climate.
(5)To serve as a focal point for those who can identify with the
organization's purpose and direction.
(6)To facilitate the translation of objectives and goals into a work
structure involving the assignment of tasks to responsible
elements within the organization.
(7)To specify organizational purposes and the translation of these
purposes into goals in such a way that cost, time and
performance parameters can be assessed and controlled.

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 Components of Mission Statement
A mission statement typically has three main
components:
(i)A statement of the reason for existence i.e. why the
company is in operation.
(ii)A statement of the key values or guiding standards
that shape and drive the action and behavior of
employees.
(iii)Statement of major goals or objectives.

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Formulating the Mission:
To (i) define the organization’s business:
Essentially the definition answers the following
questions:
(a)What is our business?
(b)What will it be?
(c)What should it be?

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To (a): Business should be defined in terms of three
dimensions:
(i)Who is being satisfied? What customer groups?
(ii)What is being satisfied (what customer needs).
(iii)How customers needs are being satisfied (by what
skills, knowledge or distinctive competencies).

• Customer oriented should be stressed & not product

oriented business definition e.g.
production of typewriters in the 60s vs. information
processing.

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To (ii) Values:
The values of a company state how managers and
employee should conduct themselves, how they
should do business, and what kind of organization
they should build to help a company achieve its
mission.
Since they shape behavior within a company, values are
commonly seen as the bedrock of a company’s
organizational culture i.e. the set of values, norms and
standards that control how employees work to
achieve an organization’s mission and goals.

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To (iii) Establishing major goals and objectives is the
third component in the statement of a mission. A goal
is a desired future state or objective that a company
attemp to realize. Well- constructed goals have the
following four main characteristics:
(a)They are specific and measurable.
(b)They address crucial issues.
(c)They are challenging but realistic.
(d)They specify a time period.
Well- constructed goal also provide a means by whish
the performance of managers can be evaluated.

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(iv) Acknowledgment of the legitimate claims of
stakeholders e.g. investors, employees, customers,
suppliers, government, unions, competitors, local
communities and general public.

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II. Assessing the External Environment:
The host of external factors which influence the firm’s
strategic choice of direction and action and which
constitute the external environment can be divided
into two interrelated subcategories:
(a)Those in the remote environment .
(b)Those in the more immediate operating environment
(task or competitive environment). See the figure
below (Fig. 4-1.p.101).

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 Business
firm

Area of Area of
remote operating
environmen environment
t impact impact
Area of total
Remote external Operating
environment environment :Environment
Economic impact
political social Competitors -
Technological Customers -
Legal Labor market -
Supplies -

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 A. Remote Environment:
The remote environment is composed of a set of forces
that originate beyond and usually irrespective of
any single firm’s operating situation i.e. political,
economic, social, technological and industry
factors. It represents opportunities, threats and
constraints for the firm, while the organization
rarely exerts any meaningful reciprocal
influence .e.g. economic recession, political
agreements like WTO.

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(i) Economic Considerations:
On both national and international levels, a firm must consider
the general availability of credit, the level of disposable
income, rate of interest, rate of inflation, levels of
unemployment, growth trends.

(ii) Social Considerations:

Social considerations involve the beliefs, values, attitudes,
opinions and life styles as developed from their cultural,
ecological, demographic, religious educational and ethnic
conditions. As social attitudes change so does demand for
various clothing styles, books, leisure activities etc…
e.g. large number of women who studied & entered the
labor market increasing interest in quality – of life issues vs.
greater affluence, changes in the distribution of population
agewise, urbanization ….

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(iii) Political Considerations:
The direction and stability of political factors is a major consideration for
managers in formulating company strategy. Political considerations define
the legal and otherwise governing parameters in which the firm must or
may wish to operate e.g. antitrust laws, fair trade decisions, tax programs,
minimum wage legislation, pollution and pricing policies ……
These laws are restrictive (constraints which may reduce profits).
However other political actions are designed to benefit and protect a company
e.g. patent laws, government subsidies, research grants …

(iv) Technological Considerations:

To avoid obsolescence and promote innovation, a firm must be aware of
technological changes that might influence its industry.
A technological innovation can have a sudden and dramatic effect on the
environment of a firm. A break through may result in sophisticated new
markets and products or significantly shorten the anticipated life of
manufacturing facility.
Technological forecasting can help protect and improve the profitability.
It alerts strategic managers to both impending challenges and promising
opportunities.
(v) Environment.
(vi) Legal.
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The PESTEL framework which categorizes forces of
the macro environment in the six main types:
Political, economic, social, technological,
environmental & legal, provides a frame work for
identifying and assessing the impact of these forces
on the organization in terms of opportunities and threats
and strengths or weaknesses.

See Exhibit 2.2 (attached)*

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 1.2. The Operating Industries &
Sectors Environment: 77.
 An industry is a group of firms producing the same principal
products.
 It is useful from strategic management point of view for
managers of organization to understand the competitive
forces acting on and between organizations in the same
industry and the way in which individual organizations
might choose to compete (product/market strategy).
 Boundaries of an industry my be changing by convergence
of previously separated industries e.g. computing,
telecommunications and entertainment. Convergence is
where previously separate industries begin to overlap in
terms of activities, technologies, product and customers.
 Convergence may be driven by:
(i)Supply-led: where organizations start to behave as
though there are linkages between the separate
industries or sectors e.g. Ministry of Education,
Education& science, Education& Employment etc. The
government may hinder convergence through
regulation or deregulation (financial sectors). Also e-
commerce is destroying the boundaries of traditional
retailing by offering manufacturers new or
complementary ways to trade.
(ii)Demand-led Convergence: consumers start to behave
as though industries have converged e.g. TVs and PCs
substitute TVs . or the package holiday is an example
of bundling air travel, hotels and entertainment to form
anew market segment in the travel industry. See
illustration 2040 p.79.
 1.2.1 Sources of Competition:
Porter’s five forces Framework
 Inherent within the notion of strategy is the issue of
competitiveness i.e. in business implies gaining
advantage over competitors and the public sector
implies demonstrating excellence within a sector
and/or advantage in the procurement of resources.
 Porter's five forces framework (developed to assess
attractiveness of different industries in term of
profit potential), can help in identifying the sources
of comeetition in an industry or sector, see Exhibit
2.5 p.80.
 1- The threat of entry:
 Threat of entry will depend on the extent to
which there are barriers to entry like:
(a)Economies of scale.
(b)The capital requirement of entry.
(c)Access to supply or distribution channels.
(d)Customer or supplier loyalty.
(e)Experience.
(f)Expected retaliation.
(g)Legislation or government action.
(h)Differentiation.
 2- The threat of substitutes:
 Substitution reduces demand for particular “class” of products as
customers switch to the alternatives. This depends on whether a
substitute provides a higher perceived benefits or value. Substitution
may take the following different forms:
(a) Product for product substitution e.g. e-mail substituting for a postal
service. There may also be other organizations that are
complementary e.g. Intel and Microsoft i.e. more processing
capability fuels demand for a butter operating system and
application software which in turn creates demand for more
processing and so on.
(b)Substitution of need by a new product or service.
(c) Generic substitution:
Occurs where products or services compete for disposable income.
So some industries suffer because consumers decide to “do-
without” and spend their money else where
 3/.4. The Power of Buyers and
suppliers:
It is important for an organization to understand its relative power with
its buyers and suppliers because it is likely to influence the profit
potential of different parts of an industry (e.g. supply, manufacture
and distribution).
Buyer Power is likely to be high when:
(i) There is a concentration of buyers (high volume of purchase).
(ii)The cost of switching a supplier is low or involves little risk.
(iii)There is a threat of the supplier being acquired by the buyer or the
buyer setting up in competition with the supplier.
Supplier Power is likely to be high when:
(i) There is a concentration of suppliers.
(ii)The switching costs from one supplier to another are high
(dependence on supplier's product)
(iii)The possibility of the suppliers competing directly with their buyers
(forword integration).
5. Competitive Rivalry
 The Strategic Capability/
The Company Profile
Internal Analysis of the Firm (S/W) analysis
For a strategy to be successful at least three ingredients
are critical: First, the strategy must be consistent with
conditions in the competitive environment i.e. it must
take advantage of existing and/or projected
opportunities and minimize the impact of major
threats. Second: the strategy must place realistic
requirements on the firm’s internal resources and
capabilities.
Finally: the strategy must be carefully executed.
• Internal analysis is difficult and challenging.
An internal analysis that leads to a realistic
company profile frequently involves trade-off,
value judgments, and educated guesses as well
as objective, standardized analysis.
 Internal analysis must identify the strategically
important strengths and weaknesses on which a firm
should ultimately base its strategy. Ideally, this purpose
can be achieved by first identifying
(i)key internal factors (e.g. distribution channels, cash
flow, locations, technology and organizational
(structure) and second by evaluating.
(ii)these factors. In actual practice, the process is neither
linear nor simple. The steps tend to overlap and
managers in different positions and levels approach
internal analysis in different ways.
 Developing the company Profile:

A company profile is the determination of firm’s

strategic competencies (strengths) and
weaknesses. This is accomplished by
identifying and then evaluating strategic
internal factors.
 (1) Identification of
Strategic :Internal Factors
Strategic internal factors are a firms basic capabilities, limitations and
characteristics, see fig 7-3 p-186-187. broken down by functional lines e.g.
(a) Marketing: product/service, breadth of product line, sales, market share,
product/service mix, channel of distribution …
(b) Finance & Accounting: ability to raise short-term capital, debt/equity, cost of
capital...
(c) Production/operations/technical
Cost& availability of raw material, suppliers, economies of scale, technical
efficiency, research & development, patents & trademarks,……
(d) HRM: Management, employees skills & morale, industrial relations,
turnover, experience,…….
(e) organization of general management:
Organizational structure, image & prestige, communication system, culture,….
 Analysis of past trends in sales, costs and
profitability is of major importance in identifying
strategic internal factors.
 Identifying strategic factors requires an external
focus, as well, because considering industry
conditions/ trends and comparisons with competitors
also provide in sights e.g. changes in industry
conditions can lead to the need to re-examine
internal strengths and weaknesses in light of newly
emerging determinants of success in the industry.
 (2) Evaluation of Internal
Strategic :Factors
Internal analysis must identify and evaluate a
limited number of strengths and weaknesses
relative to the opportunities targeted in the
firm’s current and future competitive
environment.
 What are potential strengths and
weaknesses?
A factor is considered a strength if it is a distinct
competency or competitive advantage. It is
something the firm does (or has the future capacity
to do) particularly well relative to abilities of
existing or potential competitors.
A factor is considered a weakness if it is something
the firm does poorly, or doesn’t have the capacity to
do although key rivals have the capacity e.g. limited
financial resources, outdated production facilities…
There are four basic perspectives in evaluating
internal factors:
(a) Comparison with competitors:
A major focus in determining a firm’s strengths and
weaknesses is comparison with existing and
potential competitors. In choosing strategy, a
manager should compare the company’s key
internal capabilities with those of its rivals,
thereby isolating key strengths or weaknesses.
Through comparison to major competitors, a firm
may avoid strategic commitments it cannot
competitively support.
 (b) Comparison with Past Performance:

Strategists also use the historical experience of the firm

as a basis for evaluating internal factors. Not
surprisingly, a manager’s assessment of whether
certain internal factors such as production facilities,
sales organization, financial capacity, control systems
and key personnel are strengths or weaknesses are
strongly influenced by his or her internal experience.
Clearly using only historical experience as a basis for
identifying strengths and weaknesses can prove
dangerously inaccurate.
 c) Stages in Product/Market Evolution
The requirements for success in product/market segments
evolve and change over time. As a result, strategists can
use these changing patterns associated with different
stages in product/market evolution as a framework for
identifying and evaluating the firm’s strengths and
weaknesses. Fig.7-4 p.194 shows four general stages of
product/market evaluation (introduction/growth,
maturity & decline) and the typical changes in
functional capabilities that are often associated with
business success at each stage. P.193 these stages of
evolution must be considered in internal analysis when
developing a company profile.
 (d) Success Factors in the Industry:
(Industry level Analysis)
The key determinates of success in an industry may be
used to identify the internal strengths and weaknesses
of a firm.
By scrutinizing industry competitors as well as customer
needs, vertical industry structure, channels of
distribution, costs, barriers to entry, availability of
substitutes and suppliers, a strategist seeks to determine
whether a firm’s current internal capacities represent
strengths or weaknesses in new competitive arenas (see
porter model about the 5 forces of competition.
 Grand Strategies
• Grand strategies provide basic direction for
strategic actions.
• They are seen as the basis for coordinated and
sustained efforts toward achieving long-term
objectives.

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 List of Grand Strategies
1- Concentration:
The most common grand strategy is
concentration on the current business i.e. the
firm directs its resources to the profitable
growth of a single product, in a single market
and with a single technology. The reasons for
adopting concentration strategy are:
(i) it is typically lowest in risk and
(ii) additional resource required
(iii) it is based on the known competencies of the
firm

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Its disadvantages include:
(i) for most companies concentration tends to
result in steady but slow increases in growth
and profitability
(ii) narrow range of investment options
(iii) Because of their narrow base of competition,
concentrated firms are especially susceptible
to performance variations resulting from
industry trends.

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Concentration strategies succeed for many small business
because of the advantages of business-level
specialization, which may enable them to have
competitive advantages over its more diversified
competitors.
A grand strategy of concentration allows for a
considerable range of action. Broadly speaking, the
business can attempt to capture a larger market share by
increasing present customers’ rate of usage, by
attracting competitors’ customers, or by interesting
nonusers in the product or service.
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 2- Market Development:
It means marketing present products often with only
cosmetic modification, to customers in related market
areas by adding different channels of distribution or by
changing the contents of advertising or the promotional
media.
Examples
Businesses that open branch offices in new cities or
countries e.g. Gum Arabic company, are practicing
market development. Also companies that switch from
advertising in trade publications to newspapers or add
jobbers to supplement their mail-order sales efforts are
using a market development approach.
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 3- Product Development
Product Development involves substantial modification of
existing products or creation of new but related items that
can be marketed to current customers through established
channels. The product development strategy is often
adopted either to prolong the life cycle of current products
to take advantage of favorable reputation and brand name.
Examples
A revised edition of a college textbook, a new car style and a
second formula of shampoo for oily hair each represents a
product development strategy.

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 4- Innovation
In many industries it is increasingly risky not to
innovate, due to changes. The underlying
philosophy of a grand strategy of innovation is
creating a new product life cycle, there by
making any similar existing products obsolete.
It is different from the product development
strategy of extending an existing product’s life
cycle.

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 5- Horizontal Integration
When the long-term strategy of a firm is based
on growth through the aquisition of one or
more similar business operating at the same
stage of the production-marketing chain, its
grand strategy is called horizontal integration.
Such acquisitions provide access to new
markets for the aqueering firm and eliminate
competitors.

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 6- Vertical Integration
Vertical integration as a grand strategy means that the firm is involved
in the a quisition of businesses that either supply the firm with
inputs (e.g. raw materials) or serve as a customer for the firm’s
output such as warehouses for finished products. The first type of
acquisition (supply sources) is known as backward vertical
integration while the second is an example of forward vertical
integration.
The main reason for backward integration is the desire to increase the
dependability of supply or quality of raw maternals or production
inputs particularly when the number of suppliers is small and
competitor is large (energy)
Forward integration is a preferred grand strategy if the advantages of
stable production are particularly high.
Vertical integration requires strategic managers to broaden the base of
their competencies and assume additional responsibilities.

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 7- Joint Venture
Occasionally two or more capable companies lack a
necessary component for success in a particular
competitive environment. The solution is form a joint
venture with domestic or/and foreign businesses. Some
countries encourage joint venture since it minimizes the
threat of forging domination and enhance the skills,
employment, growth and profits of local businesses.
On the other hand, joint venture often limit partner
discretion, control and profit potenial while demanding
managerial attention and other resources that might
otherwise be directed toward the mainstream activities
of the firm.

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 8- Concentric Diversification:
Grand strategies involving diversification represent
distinctive departures from a firm’s existing base
of operations. When diversification involves the
addition of a business related to the firm in terms
of technology, markets or products, it is a
concentric diversification. With this type of
grand strategy, the new businesses selected
possess a high degree of compatibility with the
current businesses.

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9- Conglomerate Diversification:
Conglomerate diversification is adopted as a
grnnd strategy when a large firm plans to a
quire a business because it represent the most
promising investment opportunity available
mainly in terms of the profit pattern of the
venture. Unlike concentric diversification,
there is little concern with product/market
synergy. Financial synergy is what is sought
by conglomerate diversifiers.
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 10- Retrenchment/ Turnaround:
When a firm finds itself with declining profit due to such reasons like economic
recessions, production inefficiencies and innovative break through by competitors,
strategic managers believe the firm can survive and eventually recover if a
concerted effort is made over a period of few years to fortify basic distinctive
competencies.
A retrenchment strategy can be typically accomplished by.
(a) Cost reduction, e.g. decreasing workforce, leasing rather than purchasing
equipment, reduction of promofoinal activities.
(b) Asset reduction: e.g. sale of land (Sudanese Exhibitions & Free Duty Markets
Corporation) building & equipment and elimination of (perks) like the company air
plane and executive cars.
If the above mentioned measures fail to achieve the required reductions, more drastic
action may be necessary e.g. to lay off employees, drop items from production line,
and even eliminate low-onargin customers-since the underlying purpose of
retrenchment is to reverse current negative trends, the method is often referred to as
a turnaround strategy. Interestingly the turnarourel mist commonly associated with
this approach is in management position. This is believed to introduce new
perspectives of the firm situation, to raise employee morals and to facilitate drastic
action such as deep budgetary cuts in established programs.

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 11- Divestiture:
A divestiture strategy involves the sale of a
business or a major business component.
When retrenchment fails to a accomplish the
desired turn around, strategic managers often
decide to sell the business because:
(a)Mismatched between a quired business and
the parent corporation.
(b) financial needs
(c)Government antitrust action. e.g. General
Motors is selling SAAB
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 12- Liquidation:
1. Liquidation strategy means the business is
typically sold in parts, only occasionally as a
whole, but for its tangible asset value and not
as a going concern.
Liquidation means admitting failure it is seen as
the least attractive of all grand strategies.
However as a long term strategy it minimizes
the loss to all stakeholders.

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