Strategy formulation is vital to the well-being of a company or organization. There are two major types of strategy: (1) corporate strategy, in which companies decide which line or lines of business to engage in; and (2) business or competitive strategy, which sets the framework for achieving success in a particular business. While business strategy often receives more attention than corporate strategy, both forms of strategy involve planning, industry/market analysis, goal setting, commitment of resources, and monitoring.
Importance of Strategy
The formulation of a sound strategy facilitates a number of actions and desired results that would be difficult otherwise. A strategic plan, when communicated to all members of an organization, provides employees with a clear vision of what the purposes and objectives of the firm are.
The formulation of strategy forces organizations to examine the prospect of change in the foreseeable future and to prepare for change rather than to wait passively until market forces compel it. Strategic formulation allows the firm to plan its capital budgeting. Companies have limited funds to invest and must allocate capital funds where they will be most effective and derive the highest returns on their investments.
On the other hand, a firm without a clear strategic plan gives its decision makers no direction other than the maintenance of the status quo. The firm becomes purely reactive to external pressures and less effective at dealing with change. In highly competitive markets, a firm without a coherent strategy is likely to be outmaneuvered by its rivals and face declining market share or even declining sales.
The formulation of sound strategy may be seen as having six important steps:
- The company or organization must first choose the business or businesses in which it wishes to engage—in other words, the corporate strategy.
- The company should then articulate a “mission statement” consistent with its business definition.
- The company must develop strategic objectives or goals and set performance objectives (e.g., at least 15 percent sales growth each year).
- Based on its overall objectives and an analysis of both internal and external factors, the company must create a specific business or competitive strategy that will fulfill its corporate goals (e.g., pursuing a market niche strategy, being a low-cost, high-volume producer).
- The company then implements the business strategy by taking specific steps (e.g., lowering prices, forging partnerships, entering new distribution channels).
Finally, the company needs to review its strategy’s effectiveness, measure its own performance, and possibly change its strategy by repeating some or all of the above steps.
Defining the Business
While this would appear to be the easiest of the six steps listed above, the simplicity of this first step is deceptive. Businesses must be defined in terms of their customers. Without customers, there is no business. They are a firm’s only real source of revenue and, hence, of power. Successful businesses are those that create profitable customers. With this in mind, it makes sense to define any business in terms of its customers. Some companies achieve success by concentrating on product development, product quality, efficient production, and other product related functions. However, it is important to remember that the success of these companies is entirely dependent upon customers valuing a firm’s products above others, or appreciating the lower prices provided through the firm’s abilities to produce at lower costs. One cannot assume that customers always want to pay less for their goods and services. In the markets for luxury goods like perfumes, for example, few companies have been successful in pursuing the strategy of being the low-cost supplier, whereas in other markets this is a highly coveted industry status.
Industry Definition by end Benefits.
Business scholars have long urged corporate leaders to define their businesses broadly and in terms of the end benefits their customers receive. Hence, oil companies should not view themselves as being in the “oil business,” but in terms of the broader category of “energy,” when attempting to market oil as a fuel. Automobile drivers don’t necessarily have a strong preference for exactly what fuels their vehicle. If ethanol could power their vehicle as conveniently as gasoline, the consumer would have little preference between the two systems. If ethanol were more convenient and less expensive than gasoline, consumers would buy ethanol and not gasoline. Drivers aren’t buying gasoline for its own sake when they visit a service station; rather, what they are buying is energy to facilitate transportation.
An example of an effectively broad industry definition comes from Charles Revson (1906-1975), founder of Revlon cosmetics, who often said he was in the business of selling “the promise of hope.” This insightful business definition led Revson to concentrate his efforts on meticulously creating advertising depicting feminine images that were unrealistic to the vast majority of his customers, yet were perfectly consistent with their deepest hopes for themselves. Lotteries operate on the same principles. Few people expect to win, so the benefit is the hope of winning. Hope can be a very profitable business to be in even if it is difficult to imagine as an industry.
Source: Reference For Business
