yyyInformation Sheet CBMEC 413 -2

STRATEGIC MANAGEMENT PROCESS: STRATEGY FORMULATION

Learning Objectives:
At the end of this module you must be able to understand and articulate the
following:

1. Define Strategy & Strategy Formulation

2. Understand the role of competitive analysis in strategy formulation
3. Formulating corporate level strategy, business level strategy and functional
level strategy through different analyses
4. Understand the Stages of strategic management and their usage in the
Strategic Management

Strategic Management requires the formulation and implementation of the initiatives

and major goals taken by the firm’s managers, considering the resources and
evaluation of the internal and external organization’s environments.
Through strategic management, overall direction to the enterprise in not unknown,
organization’s objectives are specified, policies and plans are developed and
resources are able to allocate to execute these plans.
I. What is Strategy?
According to Merriam-Webster dictionary, Strategy is a careful plan or method of
achieving a particular goal usually over a long period of time.
Strategy is a broad plan developed by an organization to take it from where it is to
where it wants to be. A well designed strategy will help an organization reach its
maximum level of effectiveness in reaching its goals whole constantly allowing it to
monitor its environment to adapt the strategy as necessary.
II. What is Strategy Formulation?
Strategy Formulation is the process of developing the strategy. It involves the
development of the vision and mission of the organization, identify its external
opportunities and threats and determine its internal strengths and weaknesses. And
the process by which an organization chooses the most appropriate course of action
to achieve its defined goals.
Strategy Formulation is one of the steps of the strategic management process in
which is essential to an organization’s success, because it provides a framework for
the actions that lead to the anticipated results.
It is an analytical process of selection of the best suitable course of action to meet
the organizational objectives and vision.
The strategic plan allows an organization to examine its resources, provides a
financial plan and establishes the most appropriate action plan for increasing profits.
Strategy formulation forces an organization to look carefully at the changing
environment and to be prepared for the possible changes that may occur. A strategic
plan also enables an organization to evaluate its resources, allocate budgets, and
determine the most effective plan for maximizing ROI (return on investment).
Strategy Formulation Vs. Strategy Implementation
Strategy formulation includes the planning and decision making that lead to the
establishment of the firm’s goals and the development of a specific strategic plan
Strategy implementation is the use of managerial and organizational tools to
direct resources toward accomplishing strategic results. Also, it is the administration
and execution of the strategic plan. Managers may use persuasion, new equipment,
changes in organization structure, or a reward system to ensure that employees and
resources are used to make formulated strategy a reality.
III. Strategic Analysis Models
External analysis is less about the organization itself, instead, it’s more about
of business environment including its competitors. It’s looking of the external
business analysis factors rather than the internal ones.
When assessing the organization’s resources and its goals, it needs to look at
the surroundings or environment, conscious of the external forces that might affect
the business’ operations and capitalize the profit. Dozens of generic techniques are
available, but some come to the forefront more frequently than other do which
include:
1. Michael Porter’s Five Forces:
This was first described by Michael Porter in his 1979 Harvard Business Review
article, Porter’s insights started a revolution in the strategy field and continue to
shape business practice and academic thinking nowadays. A Five Forces analysis can
help organizations to assess industry attractiveness, trends will affect competition in
the industry, which industries a company should compete in and how companies can
position themselves to sustain in the competition and gain long-term success.
It is a framework used to understand the competitive forces at work in an
industry which drive the way economic is divided among industry actors like rivalry
among existing competitors, bargaining power of buyers, bargaining powers of
suppliers, threat of new entrants, and threat of substitute products or services as
shown below.y

Bargaining power of Buyers: Powerful buyers can use their influence or power to
force prices down or demand more service at existing prices, therefore, capturing
more value for themselves. Buyers can play rivals mong themselves espeically if an
Prepared by: Mrs. Sarah Joy D. Martin
Strategic Management
CBMEC 423
industry’s products are undiffirentiated, it’s unpensive to switch loyalties and prices
triump quality.
Bargaining power of Suppliers: Powerful suppliers can use their negotiating leverage
to charge industry competitors, which lowers industry profitability, since companies
in every industry purchase various raw materials from suppliers which account for
differing proportions of cost.

Threat of New Entrants: The threat of new entrants into an industry can force current
players to keep prices down and spend more to retain customers. Indeed, the new
entry brings new capacity and pressure on prices and costs and therefore, puts a cap
on the profit potential of an industry.

Threat of Substitute Products or Services. Industry profitability suffers when a new

product or service meets the same basic need in a different way. On our present
situation because of pandemic, the videoconferencing is a substitute for travel while
the email is substitute for express mail. There’s a high threat of a substitute if it
offers an attractive price-performance trade-off relative to the industry’s product or if
the buyer’s cost of switching to the substitute is low.
Rivalry among Existing Competitors: The drive to make the prices down or dissipates
profits by raising the cost of competing happens if the rivalry is intense. Industries
compete away the value they create and at the same time, rivalry tends to be
deliberately aggressive if competitors are numerous or are roughly equal in size and

Prepared by: Mrs. Sarah Joy D. Martin

Strategic Management
CBMEC 423
market position, industry growth is slow, there are high fixed cost which create
incentives for price cutting, exit barriers are high, etc.
2. SWOT Analysis
The acronym SWOT stands for Strengths, Weaknesses, Opportunities and Threats
which are four factors to take into account during the environment check. SWOT
analysis is a technique developed at Stanford in the 1970s, frequently used for
strategic planning. This analysis is used to assess the different factors related to any
situation:
 Strengths – refer to the internal characteristics which may deem favorable to
the organization over the others like quick to respond to the market changes,
high spirit of the employees, etc
 Weaknesses – refer to the internal characteristics which may deem
unfavorable to the organization like existing workload is too high, missing
expertise in some areas, etc
 Opportunities – external characteristics which the organization may use to its
advantage like need to increase the market share, could convert existing
products for new markets, changes in customers preferences and tastes, etc
 Threats – external characteristics which may be potential sources of failure to
the organization like cost of technology investment, business partners has little
loyalty, etc.

In this analytical model, strengths and weaknesses are considered the internal
factors which are completely controlled by the organization while opportunities and
threats are external factors that might or might not be controlled of the organization.

3. PESTLE Analysis
Prepared by: Mrs. Sarah Joy D. Martin
Strategic Management
CBMEC 423
 Aside from the company’s internal resources and industry factors, there are
several other mac-economic factors that can be profound impact on the performance
of a company. One of the most commonly used analytical tools for assessing the
external macro-economic factors related to a particular situation is PESTLE Analysis
(formerly known as PEST).
PESTLE is an acronym for Political, Economic, Social, Technological, Legal and
Environmental, which is an analysis used to assess these external factors in relation
to the business situation.
This analysis helps the organization to determine how these factors will affect the
activities and performances of the business in the long-term. It is often used in
collaboration with other analytical business tools like the previous two, SWOT and
Porter’s Five Forces to give a comprehensible understanding of a situation and
related internal and external factors.

Role of Strategic Analysis in Formulating a Strategy

 gives its managers a clear picture of what they have to work with and also
what needs to be addressed when developing a plan for the firm’s success
 helps to understand if their business idea is feasible
 helps understand how to position their business relative to existing
competitors or potential customers in order to maximize their odds of success
Prepared by: Mrs. Sarah Joy D. Martin
Strategic Management
CBMEC 423
 IV. STEPS OF STRATEGY FORMULATION
Strategy formulation involves that process of choosing the most appropriate course
of action for the realization of the organizational goals and objectives and therefore
achieving the organizational vision.
The process of the strategy formulation basically involves six main steps as follows:
 Establishing Organizational Objectives: This involves establishing long-
term goals of an organization. Strategic decisions can be taken once the
organizational objectives are determined.
 Analysis of Organizational Environment: This involves SWOT analysis,
meaning identifying the company’s strengths and weaknesses and keeping
vigilance over competitors’ actions to understand opportunities and threats.
 Forming quantitative goals: Defining targets so as to meet the company’s
short-term and long-term objectives. Example, 30% increase in revenue this
year of a company.
 Objectives in context with divisional plans: This involves setting up
targets for every department so that they work in coherence with the
organization as a whole.
 Performance Analysis: This is done to estimate the degree of variation
between the actual and the standard performance of an organization.
 Selection of Strategy: This is the final step of strategy formulation. It
involves evaluation of the alternatives and selection of the best strategy
amongst them to be the strategy of the organization.

V. Levels of strategy formulation:

If the organization wants to take the business to the top of the market as faster as
possible, strategy must leads the way.
Corporate level strategy: This level outlines what you want to achieve: growth,
stability, acquisition or retrenchment. It focuses on what business you are going to
Prepared by: Mrs. Sarah Joy D. Martin
Strategic Management
CBMEC 423
enter the market. This usually outlines the general overall strategy, defines markets
it will operate in, plans how these markets will be entered.
Corporate strategy is concerned with;
 Entering new business
 Leaving existing business
Should the company target a different market or product;
Should the company expand slowly using equity capital or expand rapidly
using Debt capital

Business level strategy: This level answers the question of how you are going to
compete. It plays a role in those organization which have smaller units of business
and each is considered as the strategic business unit (SBU).
The Business level strategy uses corporate strategy to define the specific tactics for
each market, relates how each business unit will deliver these planned tactics.
What part of the geographic area should the new shops be opened (tier or 2
city);
What type of customers should the company target;
What should be the price (High, Medium, or Low)
Having selected a market, the organization must develop a plan to be successful in
that market.
The aim is to compete successfully in the individual market that the company
chooses to operate in;
Business strategy is concerned with how to;
 Achieve advantage over the competitors
 Avoid competitive disadvantages
Functional Strategy: This is concerned with how the Higher level strategies are
turned into action. This is the day-to-day actions need to deliver corporate and
business strategies, relationships needed between business units, departments and
team, how functional goals will be met and monitored.
Functional Strategy may include the following;
 HR Strategy – what kind of people to recruit & their salary, benefits
 Marketing Strategy – How the product is to communicated to the consumer
 Production Strategy – The production method, outsourcing, supplier selection

Prepared by: Mrs. Sarah Joy D. Martin

Strategic Management
CBMEC 423
  IT Strategy – Data to be collected, its purpose, storage and analyzes
Functional level strategy: This level concentrates on how an organization is going
to grow. It defines daily actions including allocation of resources to deliver corporate
and business level strategies
This is the bottom-level of strategy where the organization whoudl start to
think about the various departments within your business and how this will work
together to reach goals. The Marketing, Finance, Manufacturing, R&D, and other
departments will all have responsibilities and accountabilities to handle, and it the
task of the managers or owners to oversee these departments all to ensure
satisfactory results in the end.

Corporate Level Strategy:

What business are we in?

Business Level
Strategy: How do we
compete?

Functional Level Strategy: How do we support the

business-level strategy?

Absolutely, the company’s strategies will need to be continually monitored and

adjusted as it moves forward to ensure that the company is staying on its path that
is consistent with the goals of the business, so at all times, keep these three levels of
strategy near the front of organization’s mind as its guide and gives it directions.

Prepared by: Mrs. Sarah Joy D. Martin

Strategic Management
CBMEC 423