Strategy Formulation Process
Strategy formulation refers to the process of choosing the most appropriate course of
action for the realization of organizational goals and objectives and thereby achieving
the organizational vision. The process of strategy formulation basically involves six
main steps. Though these steps do not follow a rigid chronological order, however
they are very rational and can be easily followed in this order.
1. Setting Organizations’ objectives - The key component of any strategy statement is
to set the long-term objectives of the organization. It is known that strategy is
generally a medium for realization of organizational objectives. Objectives stress the
state of being there whereas Strategy stresses upon the process of reaching there.
Strategy includes both the fixation of objectives as well the medium to be used to
realize those objectives. Thus, strategy is a wider term which believes in the manner
of deployment of resources so as to achieve the objectives.
While fixing the organizational objectives, it is essential that the factors which
influence the selection of objectives must be analyzed before the selection of
objectives. Once the objectives and the factors influencing strategic decisions have
been determined, it is easy to take strategic decisions.
2. Evaluating the Organizational Environment - The next step is to evaluate the
general economic and industrial environment in which the organization operates. This
includes a review of the organizations competitive position. It is essential to conduct a
qualitative and quantitative review of an organizations existing product line. The
purpose of such a review is to make sure that the factors important for competitive
success in the market can be discovered so that the management can identify their
own strengths and weaknesses as well as their competitors’ strengths and weaknesses.
After identifying its strengths and weaknesses, an organization must keep a track of
competitors’ moves and actions so as to discover probable opportunities of threats to
its market or supply sources.
3. Setting Quantitative Targets - In this step, an organization must practically fix the
quantitative target values for some of the organizational objectives. The idea behind
this is to compare with long term customers, so as to evaluate the contribution that
might be made by various product zones or operating departments.
4. Aiming in context with the divisional plans - In this step, the contributions made by
each department or division or product category within the organization is identified
and accordingly strategic planning is done for each sub-unit. This requires a careful
analysis of macroeconomic trends.
5. Performance Analysis - Performance analysis includes discovering and analyzing
the gap between the planned or desired performance. A critical evaluation of the
organizations past performance, present condition and the desired future conditions
must be done by the organization. This critical evaluation identifies the degree of gap
that persists between the actual reality and the long-term aspirations of the
organization. An attempt is made by the organization to estimate its probable future
condition if the current trends persist.
6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The best
course of action is actually chosen after considering organizational goals,
organizational strengths, potential and limitations as well as the external
opportunities.
Things to Consider When Formulating a Strategy
1. Level of development of the economy
In determining goals and strategies, policy makers consider the level of
development of the country. They should look at the previous plan and its
achievements. In case some goals of the plan have not been achieved, planners
should look into the cases of the failure. In a situation where there is no previous
plan, adequate research should be carried out to determine the needs of the
country and areas of priority.
2. Availability of statistical data
For successful planning, adequate information about the various sectors of
the economy is necessary: that is, how each of the sectors in the economy is
performing and the relative importance of each sector in its contribution to the
GDP. It is also important to know about the population, its growth, structure and
distribution.
3. Availability of resources
Before goals are formulated it is essential to know the availability of capital,
labour and natural resources. If the resources available locally are not adequate, it
is necessary to consider how these could be acquired from outside the country.
4. The available technology
In case of inappropriate technology, more research should be done to come
up with what is appropriate. It might also be necessary to import technology from
outside, but care should be taken to ensure its appropriateness.
5. Political factors
The development of a country is determined by the political set-up within the
country. Political systems differ from one country to another. Some systems
promote private enterprise while others are socialistic in approach. The political
system determines the economic system in a country. Therefore, planners should
take into account the prevailing political climate when formulating goals and
strategies of development.
6. Cultural factors
When formulating goals and strategies planners should not be insensitive to
the cultural factors within the country. They should always consider the rules of
the society,the religious beliefs of the people, and the aspirations of the various
communities in the country. However, these should not be a drawback to sound
planning.
7. Infrastructure
Planners should assess the available infrastructure and consider whether it
can support the intended development. That is, they should evaluate the existing
transport and communications network, power, water and social amenities such
as schools and hospitals. They should also look into ancillary services, e. g.
banking, insurance and security.
8. Natural factors
Planners should always take into account unforeseen problems brought about
by natural factors. Such factors include drought, floods, disease, wars, pests and
frost. Agriculture is particularly prone to natural hazards. Contingency measures
should devised within the plan to cater for these hazards.
Strategy Evaluation Process and its Significance
Strategy Evaluation is as significant as strategy formulation because it throws
light on the efficiency and effectiveness of the comprehensive plans in achieving the
desired results. The managers can also assess the appropriateness of the current
strategy in today’s dynamic world with socio-economic, political and technological
innovations. Strategic Evaluation is the final phase of strategic management.
The significance of strategy evaluation lies in its capacity to co-ordinate the task
performed by managers, groups, departments etc, through control of performance.
Strategic Evaluation is significant because of various factors such as - developing
inputs for new strategic planning, the urge for feedback, appraisal and reward,
development of the strategic management process, judging the validity of strategic
choice etc.
The process of Strategy Evaluation consists of following steps
1. Fixing benchmark of performance
While fixing the benchmark, strategists encounter questions such as - what
benchmarks to set, how to set them and how to express them. In order to
determine the benchmark performance to be set, it is essential to discover the
special requirements for performing the main task. The performance indicator
that best identify and express the special requirements might then be determined
to be used for evaluation. The organization can use both quantitative and
qualitative criteria for comprehensive assessment of performance. Quantitative
criteria includes determination of net profit, ROI, earning per share, cost of
production, rate of employee turnover etc. Among the Qualitative factors are
subjective evaluation of factors such as - skills and competencies, risk taking
potential, flexibility etc.
2. Measurement of performance
The standard performance is a bench mark with which the actual
performance is to be compared. The reporting and communication system help in
measuring the performance. If appropriate means are available for measuring the
performance and if the standards are set in the right manner, strategy evaluation
becomes easier. But various factors such as managers contribution are difficult to
measure. Similarly divisional performance is sometimes difficult to measure as
compared to individual performance. Thus, variable objectives must be created
against which measurement of performance can be done. The measurement must
be done at right time else evaluation will not meet its purpose. For measuring the
performance, financial statements like - balance sheet, profit and loss account
must be prepared on an annual basis.
3. Analyzing Variance
While measuring the actual performance and comparing it with standard
performance there may be variances which must be analyzed. The strategists
must mention the degree of tolerance limits between which the variance between
actual and standard performance may be accepted. The positive deviation
indicates a better performance but it is quite unusual exceeding the target always.
The negative deviation is an issue of concern because it indicates a shortfall in
performance. Thus in this case the strategists must discover the causes of
deviation and must take corrective action to overcome it.
4. Taking Corrective Action
Once the deviation in performance is identified, it is essential to plan for a
corrective action. If the performance is consistently less than the desired
performance, the strategists must carry a detailed analysis of the factors
responsible for such performance. If the strategists discover that the
organizational potential does not match with the performance requirements, then
the standards must be lowered. Another rare and drastic corrective action is
reformulating the strategy which requires going back to the process of strategic
management, re-framing of plans according to new resource allocation trend and
consequent means going to the beginning point of strategic management process.
Through the process of strategic evaluation and control, the strategists attempt to
answer set of questions, as below.
Are the premises made during strategy formulation proving to be correct?
Is the strategy guiding the organization towards its intended objectives?
Are the organization and its managers doing things which ought to be done?
Is there a need to change and reformulate the strategy?
How is the organization performing?
Are the time schedules being adhered to?
Are the resources being utilized properly?
What needs to be done to ensure that resources are utilized properly and
objectives met?
Has there been an increase in profitability?
Have sales increased?
Have profit margin, ROI, EPS ratios increased?
IMPORTANCE OF STRATEGY EVALUATION:
Strategy Evaluation helps to keep a check on the validity of a strategic choice.
An ongoing process of evaluation would, in fact, provide feedback on the
continued relevance of the strategic choice made during the formulation phase.
This is due to the efficacy of strategic evaluation to determine the effectiveness of
strategy.
Strategy Evaluation can help to assess whether decisions match the intended
strategy requirements.
Strategy Evaluation, through its process of control, feedback, rewards and
review, helps in a successful culmination of the Strategic Management process.
In the absence of such evaluation process, managers would not know explicitly
how to exercise such discretion.
The process of Strategic Evaluation provides a considerable amount of
information and experience to strategists that can be useful in new strategic
planning.
REQUIREMENTS FOR EFFECTIVE EVALUATION:
Control should involve only minimum amount of information as too much
information creates confusion.
Control should monitor only managerial activities and results.
Controls should be timely so that corrective actions can be taken quickly.
Long-term and short-term controls should be used so that a balanced approach
can be adopted.
Controls should aim at pinpointing exceptions as nitpicking does not result in
effective evaluation. The ‘80:20 principle’ where 20 per cent of the activities
results in 80 per cent of achievements, needs to be emphasized.
Reward of meeting or exceeding standards should be emphasized so that
managers are motivated to perform.
Unnecessary emphasis on penalties tend to pressurise the managers to rely on
efficiency rather than effectiveness
CRITERIA FOR EVALUATING STRATEGIES:
1. CONSISTENCY: Strategy must not present mutually inconsistent goals and
policies.
2. CONSONANCE: The Strategy must represent an adaptive response to the
external environment and to the critical changes occurring within it.
3. ADVANTAGE: A Strategy must provide for the creation and/or maintenance of
competitive advantage in a selected area of the activity.
4. FEASIBILITY: A Strategy must neither overtax available resources nor create
unsolvable sub-problems. The final broad test of Strategy is its feasibility, that is,
can the Strategy be attempted within the physical, human and financial resources
of the enterprise?
5. STRATEGY EVALUATION FRAMEWORK:
