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4. THE STRATEGY FORMULATION
It is based on the analysis of the mission, vision and values of the organisation carried
out by the senior management.
As we have mentioned previously, the mission is a statement that defines the purpose
or raison d'etre (reason for existence) of the organisation and the vision is what the
organisation aims to achieve in the future. The values and ethical principles serve as a
foundation for the culture of the organisation. The formulation of strategy, therefore,
does not end with the establishment of the goals, but rather determines how to achieve
them based on the situation in which the organisation is.
Thus, it refers to different strategic options or alternatives that the company has, in
order to generate a response to numerous pressures and influences identified in the
strategic analysis.
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4.1. FORMULATION OF STRATEGY
The key to formulating a strategy is the awareness of the opportunities and threats
existing in the environment in which the company develops its activity, as well as a
proper estimation of the potential risk involved. However, before leaning towards one
option or another, the strengths and weaknesses of the company, as well as the
available resources need to be assessed. So, it will be necessary to determine its real
and potential capacity to take advantage of the needs of the market and deal with
inherent risks. The option that results from combining opportunity and strength at a risk
level is what can be called "economic strategy".
Five fundamental steps of strategy formulation:
1. Identification of the mission, targets and current strategies of the
organisation.
2. Analysis of the environment. It helps to determine which factors or
conditions of the environment can turn out to be valuable and which can
pose a risk to the company. In short, it is about identifying the opportunities
and threats in a company's environment.
3. Internal analysis. By using this analysis we know what resources, both current
and potential, the company has, and it can be determined which of them
constitute strengths and weaknesses of the company in respect of its
competitors.
4. Review of the mission and objectives of the organisation. It is about
determining if both the mission and the pre-established objectives are likely
to be reached, based on the analysis of the two previous phases. If this is not
the case, the purpose of this phase should be the modification of the mission
or objectives with a view to adapting them to the new conditions in which
the company carries out its activity.
5. Formulation of the strategy. The appropriate strategy will be selected so as
to achieve the objectives according to the business portfolio of the company.
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Once we have formulated a strategy, we should proceed to its implementation and
launching, which should be effective and contribute to achieving the objectives set by
the company.
It is important to note that poor implementation can make an adequate strategic
decision ineffective; so it is essential to examine the implementation process in order to
assess the advantages of the strategic options available to the organisation. The
implementation of the strategy includes a series of administrative activities. Once the
purpose is determined, it is possible to mobilize the resources of the company in order
to achieve its fulfilment. An appropriate organisational structure has to lead to effective
information systems and relationships that allow the coordination of subsequent
activities.
4.2. THE CONCEPT OF CORPORATE STRATEGY
The corporate strategy addresses three key issues that corporations face in general:
§ The general orientation of the company towards growth, stability or reduction
(directional strategy).
§ The industries or markets in which the company competes through its products
and business units (business portfolio strategy).
§ The way in which the administration coordinates the activities, transfers the
resources among the product lines, and cultivates the capacities of the business
units (umbrella strategy, parenting).
Corporate strategy mainly establishes the general management of a company and the
management of its business portfolio or products. This applies to both, a small company
and a large multinational corporation (CM).
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Corporate strategy is responsible for managing various product lines and business units
with the aim of obtaining maximum value. It includes decisions about the financial flow
among the lines of products and business units of a company.
4.3. HOW TO RELATE OPPORTUNITIES AND RESOURCES
The identification of the right strategy starts with the identification of opportunities and
risks in the environment. Elements that we need to identify at this stage:
- The margin of strategic options.
- Reduction of this margin caused by the recognition of the restrictions imposed
by corporate capacity.
- Determining one or more actions according to the level of risk.
4.3.1. The nature of the environment of the company
The environment, in which an organisation or any other organic entity develops, is the
pattern or model of all the decisions and influences that affect the life and development
of the company.
CORPORATE STRATEGY
The pattern of purposes and policies that define
the company and its field of action.
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FORMULATION: WHAT TO DO? IMPLEMENTATION: RESULTS
I. Identification of opportunities and risks. I. Structure and relations of the
organisation.
-Division of work.
-Coordination of the divided
responsibility.
-Information systems.
II. Determining the company's material, II. Processes and performance of the
technical, financial and administrative organisation.
resources. -Standards and quantification.
-Systems of motivation and incentives.
-Recruitment and development of
managers.
III. Personal values and aspirations of III. - High-level leadership.
senior administrators. - Strategic.
- Organisational.
- Personal.
IV. Recognition of the non-economic
responsibility towards society.
The environmental influences, relevant to the strategic decision, are technological,
economic, physical, social and political. The strategist is often fully aware - at least
intuitively - of the aspects of the environment in which he/she finds himself/herself.
However, in all of these categories changes take place at different paces; very fast in
technology, slower in policies. Changes in the environment require constant monitoring
of the company's definition of its business; otherwise, the organisation will make
mistakes and eventually become obsolete.
Given that, by definition, strategy formulation is designed bearing in mind what the
future may bring. The executive managers involved in the strategic planning process
should be aware of all the aspects of the environment.
In this way, we should consider:
▪ Technology: From the point of view of the corporate strategist, technological
developments are not only the fastest but also the most far-reaching ones when
it comes to expanding or restricting the opportunities of a well-established
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company. These developments include scientific discoveries, the impact of the
development of products related to them, less dramatic improvements in
equipment and processes as well as advances in automation and data
processing.
▪ Ecology: It used to be common practice to take for granted the physical
characteristics of the environment and use them freely for the industrial
development. Manufacturing centres were chosen in accordance with criteria
such as the presence of water for processes and cooling, access to different
means of transport, and the stability of the conditions of the soil. However, due
to the increasing sensitivity to the detrimental impact that industrial activity has
on the physical environment, it has become essential, and often legally
regulated, to consider the planned expansion, and even how the continuation of
the operation under changing parameters could affect and will affect the
conditions of the air, water, the density of traffic, and, in general, the quality of
life of any area in which a company operates. In other words, the conservation
of the environment has become a priority for companies.
▪ Economy: Companies need to get used to keeping track of economic trends so
as to avoid being surprised by drastic developments, such as the
internationalisation of competition, the development of third world countries,
the influence of world powers on the demand and the culture of developing
countries and the consequent reaction of nationalism, the growing importance
of multinational corporations and the consequences of the hostility of host
countries, the recurrence of the recession, and the persistence of inflation in all
the phases of the economic cycle. The consequences of global economic trends
need to be monitored in much greater detail.
▪ Industry: Although strategists often believe that they have a vast knowledge
about the industrial environment, many opportunities and risks are
misinterpreted because of an excessive acceptance and a lack of critical
perspective concerning the relative position of competitors.
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▪ Society: Social development, on which strategists are always updating
themselves, includes forces as influential as the struggle for equality of minority
groups, the demand for opportunities and recognition by women, changing
patterns of work and leisure, the effects of urbanisation on the individual, the
family, the neighbourhood, the increase in crime, the decline of conventional
morale and the changing composition of the world population.
▪ Political: the important political forces for the companies are similar in their
importance and complexity, changing relationships: the relationship between
private enterprise and the government, between employees and management,
the impact of national planning on corporate planning and the emergence of
what George Lodge (1975) calls community ideology.
Change threatens all established strategies. It is known that a thriving company - a living
system itself - is immersed in a variety of relationships with larger systems involving
technological, economic, ecological, social and political factors. If the developments of
the environment destroy and generate business opportunities, it is perceived as a
distinctive feature for smart planning to possess notions of specific relevance to a
particular company.
4.3.2. Identification of corporate competition and resources
The capacity of an organisation is its ability, current and potential, to carry out, against
circumstantial opposition or competition, what it has proposed to do. Every organisation
has current and potential strengths and weaknesses. Since, in formulating a strategy, it
is prudent to extend or maximize the forces and reduce or minimize the weaknesses, it
is important to determine what they consist of, and to distinguish clearly one from
another.
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Sources of capabilities
The strengths of a company, made of resources for growth and diversification, are
increased, primarily, by the experience of manufacturing and marketing a line of
products or the provision of a service.
Likewise, they are also inherent to:
✓ The strengths and weaknesses in the development of each of the individuals that
make up the organisation.
✓ The degree to which the individual capacity is effectively applied to the overall
work.
✓ The quality of coordination between the individual and the group effort.
How to identify strengths
The ability or distinctive capacity of an organisation is much more than what it can do;
it is what it can do particularly well.
The effort to find or generate a skill that is indeed distinctive may represent the true
factor that leads to the success of the company or its future development.
How to face the opportunity and the ability
The decrease in options, which are expanded through imagination, consists in
addressing the opportunity and the competence adequately and clearly for its future
importance. This combination is what establishes a company's economic mission, as well
as its position in its environment or surroundings.
Safety of strategy
In every company, the style in which distinctive resources and organisational values are
combined is, or should be, unique and original. The differences between companies are
as numerous as between individuals, the combinations of opportunity, to which the
distinctive qualities, resources, and values that can be applied, are equally extensive.
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4.4. EVALUATION OF BUSINESS STRATEGY
Without an evaluation process, a strategy cannot be formulated or adjusted to changing
circumstances, whether such an analysis is carried out by an individual or is part of an
organisational vision procedure. The evaluation of strategies is an essential step in the
management process of a company.
The person in charge of carrying out the evaluation should take into account aspects
such as:
✓ Every business strategy is unique and original.
✓ The strategy is devoted, as a priority, to the selection of goals and objectives.
✓ Formal systems of strategy revision should be established since sometimes,
conflicting situations could occur.
4.4.1. Standards of the strategic evaluation
I. Consistency. The strategy should not present goals or policies that are
inconsistent with each other.
II. Accordance. The strategy should represent an adaptive response to the external
environment, as well as the changes that occur in it.
III. Advantage. The strategy should facilitate the creation or preservation of the
competitive superiority in the chosen areas of activities.
IV. Feasibility. The strategy should not exhaust resources available nor create
unsolvable problems.
A strategy that fails to meet one or more of these criteria will be more than suspicious,
as it will not be able to perform one or more of the key functions for the survival of the
company. Previous experience in a specific field will enable the analyst to clearly define
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these criteria, as well as add others that are adequate for solving the complications that
arise.
The evaluation of a strategy is not an exclusively intellectual task. The aspects that it
consists of are closely associated with the distribution of power and authority to the
point that they themselves carry out the formulation and evaluation of strategies. In
fact, an explicit and formal evaluation of strategies is rarely undertaken. The assessment
of strategy is a continuous process, difficult to separate from the normal systems of
planning, reporting, controlling and rewarding.
As a process, the evaluation of management strategies is the result of activities and
events that are closely linked with rewards and control systems, as well as with their
respective systems for planning and information when it comes to their structure,
history and particular culture.
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