Steps in 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.

Meaning and Steps in Implementing a

Strategy
Strategy implementation is the translation of chosen strategy into organizational action so as to
achieve strategic goals and objectives. Strategy implementation is also defined as the manner in
which an organization should develop, utilize, and amalgamate organizational structure, control systems,
and culture to follow strategies that lead to competitive advantage and a better performance.

Organizational structure allocates special value developing tasks and roles to the employees and states
how these tasks and roles can be correlated so as maximize efficiency, quality, and customer
satisfaction-the pillars of competitive advantage. But, organizational structure is not sufficient in itself to
motivate the employees.

An organizational control system is also required. This control system equips managers with
motivational incentives for employees as well as feedback on employees and organizational
performance. Organizational culture refers to the specialized collection of values, attitudes, norms and
beliefs shared by organizational members and groups.

Following are the main steps in implementing a strategy:

Developing an organization having potential of carrying out strategy successfully.

Disbursement of abundant resources to strategy-essential activities.

Creating strategy-encouraging policies.

Employing best policies and programs for constant improvement.

Linking reward structure to accomplishment of results.

Making use of strategic leadership.

Excellently formulated strategies will fail if they are not properly implemented. Also, it is essential to note
that strategy implementation is not possible unless there is stability between strategy and each
organizational dimension such as organizational structure, reward structure, resource-allocation
process, etc.

Strategy implementation poses a threat to many managers and employees in an organization. New
power relationships are predicted and achieved. New groups (formal as well as informal) are formed
whose values, attitudes, beliefs and concerns may

Strategy Formulation vs Strategy

Implementation
Following are the main differences between Strategy Formulation and Strategy Implementation-

Strategy Formulation Strategy Implementation

Strategy Formulation includes planning and Strategy Implementation involves all those means
decision-making involved in developing related to executing the strategic plans.
organization’s strategic goals and plans.

In short, Strategy Formulation is placing the In short, Strategy Implementation is managing

Forces before the action. forces during the action.
Strategy Formulation is an Entrepreneurial Strategic Implementation is mainly
Activity based on strategic decision-making. an Administrative Task based on strategic and
operational decisions.

Strategy Formulation emphasizes Strategy Implementation emphasizes

on effectiveness. on efficiency.

Strategy Formulation is a rational process. Strategy Implementation is basically

an operational process.

Strategy Formulation requires co-ordination Strategy Implementation requires co-ordination

among few individuals. among many individuals.

Strategy Formulation requires a great deal Strategy Implementation requires

of initiative and logical skills. specific motivational and leadership traits.

Strategic Formulation precedes Strategy Strategy Implementation follows Strategy

Implementation. Formulation.

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, reframing of plans according to new resource allocation
trend and consequent means going to the beginning point of strategic management process.

Strategic Decisions - Definition and

Characteristics
Strategic decisions are the decisions that are concerned with whole environment in which the firm
operates, the entire resources and the people who form the company and the interface between the
two.

Characteristics/Features of Strategic Decisions

a. Strategic decisions have major resource propositions for an organization. These decisions may
be concerned with possessing new resources, organizing others or reallocating others.
b. Strategic decisions deal with harmonizing organizational resource capabilities with the threats
and opportunities.
c. Strategic decisions deal with the range of organizational activities. It is all about what they want
the organization to be like and to be about.
d. Strategic decisions involve a change of major kind since an organization operates in ever-
changing environment.
e. Strategic decisions are complex in nature.
f. Strategic decisions are at the top most level, are uncertain as they deal with the future, and
involve a lot of risk.
 g. Strategic decisions are different from administrative and operational decisions. Administrative
decisions are routine decisions which help or rather facilitate strategic decisions or operational
decisions. Operational decisions are technical decisions which help execution of strategic
decisions. To reduce cost is a strategic decision which is achieved through operational decision of
reducing the number of employees and how we carry out these reductions will be administrative
decision.

The differences between Strategic, Administrative and Operational decisions can be summarized as
follows-

Strategic Decisions Administrative Decisions Operational Decisions

Strategic decisions are long-term Administrative decisions are Operational decisions are not
decisions. taken daily. frequently taken.

These are considered where The These are short-term based These are medium-period
future planning is concerned. Decisions. based decisions.

Strategic decisions are taken in These are taken according to These are taken in accordance
Accordance with organizational strategic and operational with strategic and
mission and vision. Decisions. administrative decision.

These are related to overall These are related to working These are related to
Counter planning of all of employees in an production.
Organization. Organization.

These deal with organizational These are in welfare of These are related to production
Growth. employees working in an and factory growth.
organization.

Benefits of Strategic Management

There are many benefits of strategic management, and they include identification, prioritization,
and exploration of opportunities. For instance, newer products, newer markets, and newer forays into
business lines are only possible if firms indulge in strategic planning.

Next, strategic management allows firms to take an objective view of the activities being done by it and
do a cost benefit analysis as to whether the firm is profitable.

Just to differentiate, by this, we do not mean the financial benefits alone (which would be discussed
below) but also the assessment of profitability that has to do with evaluating whether the business is
strategically aligned to its goals and priorities.

The key point to be noted here is that strategic management allows a firm to orient itself to its market
and consumers and ensure that it is actualizing the right strategy.
Financial Benefits
It has been shown in many studies that firms that engage in strategic management are more profitable
and successful than those that do not have the benefit of strategic planning and strategic management.

When firms engage in forward looking planning and careful evaluation of their priorities, they have
control over the future, which is necessary in the fast changing business landscape of the 21st century.

It has been estimated that more than 100,000 businesses fail in the US every year and most of these
failures are to do with a lack of strategic focus and strategic direction. Further, high performing firms
tend to make more informed decisions because they have considered both the short term and long-term
consequences and hence, have oriented their strategies accordingly. In contrast, firms that do not
engage themselves in meaningful strategic planning are often bogged down by internal problems and
lack of focus that leads to failure.

Non-Financial Benefits
The section above discussed some of the tangible benefits of strategic management. Apart from these
benefits, firms that engage in strategic management are more aware of the external threats, an
improved understanding of competitor strengths and weaknesses and increased employee productivity.
They also have lesser resistance to change and a clear understanding of the link between performance
and rewards.

The key aspect of strategic management is that the problem solving and problem preventing capabilities
of the firms are enhanced through strategic management.

Strategic management is essential as it helps firms to rationalize change and actualize change and
communicate the need to change better to its employees. Finally, strategic management helps in
bringing order and discipline to the activities of the firm in its both internal processes and external
activities.

Closing Thoughts

In recent years, virtually all firms have realized the importance of strategic management. However, the
key difference between those who succeed and those who fail is that the way in which strategic
management is done and strategic planning is carried out makes the difference between success
and failure.

Of course, there are still firms that do not engage in strategic planning or where the planners do not
receive the support from management. These firms ought to realize the benefits of strategic
management and ensure their longer-term viability and success in the marketplace.
Business Policy - Definition and
Features
Definition of Business Policy

Business Policy defines the scope or spheres within which decisions can be taken by the subordinates
in an organization. It permits the lower level management to deal with the problems and issues without
consulting top level management every time for decisions.

Business policies are the guidelines developed by an organization to govern its actions. They define
the limits within which decisions must be made. Business policy also deals with acquisition of resources
with which organizational goals can be achieved.

Business policy is the study of the roles and responsibilities of top level management, the significant
issues affecting organizational success and the decisions affecting organization in long-run.

Features of Business Policy

An effective business policy must have following features-

1. Specific- Policy should be specific/definite. If it is uncertain, then the implementation will become
difficult.
2. Clear- Policy must be unambiguous. It should avoid use of jargons and connotations. There
should be no misunderstandings in following the policy.
3. Reliable/Uniform- Policy must be uniform enough so that it can be efficiently followed by the
subordinates.
4. Appropriate- Policy should be appropriate to the present organizational goal.
5. Simple- A policy should be simple and easily understood by all in the organization.
6. Inclusive/Comprehensive- In order to have a wide scope, a policy must be comprehensive.
7. Flexible- Policy should be flexible in operation/application. This does not imply that a policy
should be altered always, but it should be wide in scope so as to ensure that the line managers
use them in repetitive/routine scenarios.
8. Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in minds of
those who look into it for guidance.
Difference between Policy and Strategy

The term “policy” should not be considered as synonymous to the term “strategy”. The difference
between policy and strategy can be summarized as follows-

1. Policy is a blueprint of the organizational activities which are repetitive/routine in nature. While
strategy is concerned with those organizational decisions which have not been dealt/faced
before in same form.
2. Policy formulation is responsibility of top level management. While strategy formulation is
basically done by middle level management.
3. Policy deals with routine/daily activities essential for effective and efficient running of an
organization. While strategy deals with strategic decisions.
4. Policy is concerned with both thought and actions. While strategy is concerned mostly with
action.
5. A policy is what is, or what is not done. While a strategy is the methodology used to achieve a
target as prescribed by a policy.

What is Competitive Advantage in the

Field of Strategic Management?
What is Competitive Advantage?

It is a truism that strategic management is all about gaining and maintaining competitive advantage. The
term can be defined to mean “anything that a firm does especially well when compared with rival firms”.
Note the emphasis on comparison with rival firms as competitive advantage is all about how best to best
the rivals and stay competitive in the market.

Competitive advantage accrues to a firm when it does something that the rivals cannot do or
owns something that the rival firms desire. For instance, for some firms, competitive advantage in
these recessionary times can mean a hoard of cash where it can buy out struggling firms and increase its
strategic position. In other cases, competitive advantage can mean that a firm has lesser-fixed assets
when compared to rival firms, which is again a plus in an economic downturn.

What is Sustained Competitive Advantage?

We have defined what competitive advantage is as it relates to strategic management and the sources of
competitive advantage differing from firm to firm. However, a firm can have a source of competitive
advantage for only a certain period because the rival firms imitate and copy the successful firms’
strategies leading to the original firm losing its source of competitive advantage over the longer term.
Hence, it is imperative for firms to develop and nurture sustained competitive advantage.
This can be done by:

▪ Continually adapting to the changing external business landscape and matching internal
strengths and capabilities by channeling resources and competencies in a fluid manner.
▪ By formulating, implementing, and evaluating strategies in an effective manner which make use
of the factors described above.

The fact that firms lose their sources of competitive advantage over the longer term is borne out by
statistics that show that the top three broadcast networks in the United States had over 90 percent
market share in 1978 which has now come down to less than 50 percent.

The Advent of the Internet and Competitive Advantage

With the advent of the internet, competitive advantage and the gaining of it has become easier as firms
directly sell to the consumers and interlink the suppliers, customers, creditors, and other stakeholders
into its value chain. Because of the removal of intermediaries, firms can reduce costs and improve
profitability. Essentially, the internet has changed the rules of the game and hence sources of
competitive advantage in this digital era are now about how well firms utilize the digital platform and
social media to gain advantage over their rivals.

Closing Thoughts

Finally, competitive advantage has to be earned, gained, and defended as the preceding discussion
shows. Hence, those firms that are agile and responsive to changing market conditions and whose
internal capabilities are aligned with the external opportunities are those who would survive in the brutal
business landscape of the 21st century. As can be seen from the characterization of competitive
advantage, it is ethereal and subject to change and hence firms must always been on the lookout for
newer sources of competitive advantage and be alert for competitors’ moves.

Human, Social, and Intellectual Capital

as a Means of Competitive Advantage
Introduction: Why Should Firms and Nations Invest in Human, Social, and Intellectual
Capital

We often hear economists and management experts exhorting nations and firms to invest in human,
social, and intellectual capital. these calls range from asking governments to set aside substantial
amounts of money to educate and skill the workforce as well as asking the firms and governments to
create a web of social relationships in addition to moving up the value curve by investing in research and
development. Before we launch into a discussion about how these measures would benefit nations and
firms, we should first define what is meant by human, social, and intellectual capital.
In the same manner in which financial capital and physical infrastructure are the factors of production, a
skilled workforce is a vital component and determinant of a firm’s success. This means that firms need
workers who are educated and skilled and are employable and efficient. Economists and management
experts talk about this human capital. In the same manner in which an educated and skilled workforce
raises the productivity of firms, nations also benefit from having a ready pool of workers who are skilled
and capable. Just as firms need to hire these workers, it is upon the nation to provide them the basic
education and skills both through subsidized education and through the provision of skills through
vocational training or teaming up with the private sector in a PPP (Public Private Partnership) model to
impart education to the workers.

Next, social capital is what is the result of the networks of relationship between individuals, communities,
and the ties that bind them in the broader society. You might ask as to why it is important for firms and
nations to have social capital in addition to human capital. The answer is that just as the firms need
educated and skilled workers, the broader society to be healthy and well functioning needs workers and
individuals to be tightly knit into the fabric of society. This social capital leads to less crime, more
productivity, more efficiency, and the formation of communities that are self-sustaining and which are
incubators of physically, mentally, and emotionally healthy and intelligent individuals.

Third, just as human capital and social capital lead to better productivity and a workforce that is efficient,
the next evolutionary step for firms and nations once they have actualized human and social capital is
through moving up the value chain by filing patents, encouraging research, and innovating as well as
leading to the creation of an economy that is characterized by these aspects. Therefore, it is important to
note that in addition to human and social capital, intellectual capital is also needed for firms and nations
to forge ahead in the race to deliver and actualize superior economic value.

As can be seen from the fact that human capital leads to higher productivity and efficiency and social
capital leads to emotionally intelligent workers, intellectual capital leads economies and nations into the
orbit where they can be challenged only by those competitors who have mastered all the three aspects
of evolutionary value creation. Indeed, one of the reasons (as we shall discuss in detail in the next
section) for the relative ascendance of the west over the east and which continue s to this day is that the
former have successfully invested in these forms of capital whereas the latter are playing catch-up and
are now trying to emulate them in their quest for economic growth.

Trajectories of Firms and Nations That Have Invested in These Capital Aspects

Why do Google and Microsoft in addition to AT&T, 3M, and Apple remain so profitable and competitive?
Why are some firms such as these more successful in generating patents and innovating better than the
rest of the competition? Further, why does Facebook generate such valuations and is considered as one
of the greatest ideas apart from the Smartphones and Search Engines and the invention of the Personal
Computer? The answers to all these questions lies in the fact that these firms were able to first invest in
their workforce or the formation and incubation of human capital, next, they were able to leverage the
college like atmosphere and the free flowing ideas generated by their workforce which is the social
capital and third, these firms were able to move up the curve and indeed, continue moving up the curve
to reap the benefits of intellectual capital that follows from the first two forms of capital.

Similarly, why is the United States such a dominant force in the global economy whereas even China and
India that have large populations of educated workers still are unable to challenge its dominance? The
reason for this is that the United States and largely, Europe have substantially invested in educating and
training apart from skilling their populations over the last century and half and hence, are now reaping
the benefits of such investments. Moreover, by creating a system that encourages creativity and
innovation instead of stifling them, these countries have managed to move up the value curve and stay
there. In addition, whenever they felt that their economic dominance is under threat, these nations have
always found better ideas to become more efficient as can be seen from the Offshoring of
manufacturing to China and back office work to India. In this manner, they have retained their focus on
value creation using the three forms of capital in a way in which the rest of the world is unable to do so
even now.
As individuals, we too can ensure that we do our bit to accelerate the formation of these forms of capital
and this is through investing in oneself, forming networks with our peers, coworkers, families, and
communities so that we become more emotionally intelligent, and then by continuously improving and
leaving nothing to chance or becoming complacent thereby being in a creative mode where ideas flow
freely. Further, we can all become wiling partners in the development of these forms of capital by making
conscious choices that lead us to better outcomes for everyone concerned.

Catch-Up and Moving up the Curve

Having considered the successes of firms that invest in these forms of capital, we now turn to how
competitors and countries in the developing world can catch up the dominant firms and countries. The
first step is to provide universal education without discriminating based on class, gender, or race, as well
as through substantially revamping the education system so that instead of rote learning, innovation and
creativity are encouraged. Next, instead of forming clan based and class-based relationships alone, there
must be an emphasis on forming networks where class barriers, gender differences, and ethnic and
racial factors are non-existent meaning that social capital must be incubated that is free from the narrow
constraints imposed by these elements. Third, governments must invest in research and development
and encourage highly skilled scientists and researchers to continue their pioneering work instead of
discouraging and frustrating them, which as often happens, in Asian countries, leads to these individuals
seeking employment and greener pastures in the West.

Though this section sounds like an idealist rant, some of these measures have already been put in place
in China, Southeast Asia, and to a lesser extent in Latin America. Therefore, it is indeed the case that the
firms and the economies of these nations are emerging as challengers to the Western dominance, which
is not surprising considering the trajectory of value creation. Further, some Indian companies have also
succeeded in actualizing these forms of capital though the overall record leaves much to be desired.
Indeed, it is the case that when India starts building these assets, it can emerge as a potent force to be
reckoned with.

Conclusion

Finally, human, social, and intellectual capital differ from physical and financial capital in the sense that
they can be incubated even by those with less of the latter as hard work, determination, and a culture of
openness can all lead to value creation. Therefore, the clear conclusion is that we do not need Billions of
Dollars in investment and just by making use of the available resources, firms and nations can indeed
prosper in the same way the Western countries and their peoples have enjoyed a higher standard of
living.