LESSON 11 STRATEGY FORMULATION

Strategy formulation is the process of deciding the best course of action for achieving the
organizational objectives and fulfilling its mission and vision. he first step in forming a strategy
is to review the information gleaned from completing the analysis. Determine what resources
the business currently has that can help reach the defined goals and objectives. Identify any
areas of which the business must seek external resources. The issues facing the company
should be prioritized by their importance to your success. Once prioritized, begin formulating
the strategy. Because business and economic situations are fluid, it is critical in this stage to
develop alternative approaches that target each step of the plan. After conducting environment
scanning and analysis, three kinds of strategies are formulated:

A. Corporate strategy

Corporate strategy defines what business or businesses the firm is in or should be in,
how each business should be conducted, and how it relates to society. This strategy is for the
company and all of its business as a whole. Corporate strategies are established at the highest
levels in the organization; they generally involve a long-range time horizon and focus on the
entire organization. At the corporate level the concern revolves around the definition of
business in which the corporation wishes to participate and the acquisition and allocation of
resources to these business units. It is the growth strategy of the firm. It is formulated by the
top managers. It includes major decisions like determinations of business lines, expansion and
growth, diversification, takeover and mergers, new investment decisions and so on. It
Corporate strategy is the overall managerial game plan for a diversified company.

Characteristics of corporate strategies

The characteristics of the corporate strategy are explained as below:

1. Wider in Scope: The scope of corporate strategies is wide as it applies to whole

organization. Corporate strategy aims at formulating vision and mission for the entire
organization and attempts to coordinate the efforts of all towards the achievement of
the same.
2. Top Hierarchical Level: These strategies are formulated at the top most level of
management. Other strategies have to confirm to the overall objective of the firm
formulated at this level.
 3. General and conceptual: Corporate strategies are not specific like Business and
functional strategies. It deals with number of strategic issues and involves lot of
intellectual thinking.
4. Long Term Orientation: Corporate strategies are characterized by long term orientation.
They decide where the company intends to be in future. It charts the future course of
action for the managers. Fulfilling the long range plan and vision is not a short term
process but a long one.
5. Applicable to whole organization: Corporate strategies entail setting overall objectives
for the firm that applies to the entire organization. Everyone working at every level in
the organization, work in coordination to achieve the overall vision of the firm.

Types of Corporate Level Strategies

 Stability Strategy

It is adopted when the organization attempts to maintain its current position and focuses only on the
incremental improvement by merely changing one or more of its business operations in the perspective
of customer groups, customer functions and technology alternatives, either individually or collectively. It
is adopted by the firms that are risk averse, usually the small scale businesses or if the market conditions
are not favorable, and the firm is satisfied with its performance, then it will not make any significant
changes in its business operations.

Stability Strategies could be of three types:

a. No-Change Strategy - As the name itself suggests, is the stability strategy followed when an
organization aims at maintaining the present business definition. Simply, the decision of not
doing anything new and continuing with the existing business operations and the practices
referred to as a no-change strategy.
b. Profit Strategy – It is followed when an organization aims to maintain the profit by whatever
means possible. Due to lower profitability, the firm may cut costs, reduce investments, raise
prices, increase productivity or adopt any methods to overcome the temporary difficulties.
c. Pause/Proceed with Caution Strategy - The companies tests the environment and
particularly the market conditions, whenever they introduce a new product or service. At
that time, they observe the reactions of the market and proceed in accordance with the
positive reactions of the market. They pause the business operations including production
and marketing, if the market reactions are negative. Thus, the companies follow pause and
proceed strategies until the environment reaches the stability stage. Once the environment
is stable, the company would follow stability strategy.

 Growth Strategy

Organizations may select a growth strategy to increase their profits, sales and/or market share.
They also pursue a growth strategy to reduce the cost of production per unit. Growth strategies
involve a significant increase in performance objectives. These strategies are adopted when
firms remarkably broaden the scope of their customer groups, customer functions and
alternative technologies either singly or in combination with each other.

Types of Growth Strategy

a. Internal Growth Strategy- It is achieved through increasing the firm’s production capacity, employees and
sales. Some firms prefer this strategy to the strategy of external growth as internal growth preserves their
efficiency, quality and image unlike in external growth.
b. Concentration Strategy – It focuses on improving current products and/or markets without changing any
other factors. The firm directs its resources to the profitable growth of a single product, in a single market,
and with a single technology. A strategy of concentration allows for a considerable range of action: the
business can attempt capturing a large market share by increasing present customer's rate of usage, by
attracting competitors' customers, or by interesting nonusers in the products or services.
c. Takeovers or Acquisitions Strategy - Sometimes firms want to grow through the strategy of takeover or
acquisition. It is when they acquire ownership or control over another firm against the wishes of the
latter’s management (and purchase some of its stakeholders).
d. Horizontal Integration - Many companies expand by creating other firms in their same line of business.
The reasons for engaging in this process of horizontal integration are: (a) to increase the market share, (b)
to reduce the cost of operations per unit of business through the large scale economies, (c) to get greater
leverage to deal with the customers and suppliers, (d) to promote the products and services more
efficiently to a larger audience, (e) to have greater access to the channels of distribution, (f) to enjoy
increased operational flexibility, (g) finally, to take the advantage of the benefits of synergy. When the
combination of two or more business units (existing and created) results in greater effectiveness and
efficiency than the total yielded by those businesses, when they were operated separately, then synergy
has been attained.
e. Vertical Integration – It is where new products and/or services, which are complementary to the existing
product and/or service lines, are added. Vertical integration is characterized by the extension of the
company’s business definition in three possible directions from the existing business, viz., (i) backward
integration, (ii) forward integration, and (iii) both backward and forward integrations. Backward vertical
integration occurs when the firms acquire or create the company that supply the firm, the raw materials
or components and other inputs. Forward vertical integration occurs when the firms acquire or create the
company that purchases its products and/ or services.
  Retrenchment Strategy

It is adopted when an organization aims at reducing its one or more business operations with
the view to cut expenses and reach to a more stable financial position. A firm decides to
eliminate its activities through a considerable reduction in its business operations, in the
perspective of customer groups, customer functions and technology alternatives, either
individually or collectively is called as Retrenchment Strategy. The firm can either restructure its
business operations or discontinue it, so as to revitalize its financial position.

There are three types of Retrenchment Strategies:

a. Turnaround – it followed by an organization when it feels that the decision made

earlier is wrong and needs to be undone before it damages the profitability of the
company.
Example: Dell is the best example of a turnaround strategy. In 2006,Dell announced
the cost-cutting measures and to do so; it started selling its products directly, but
unfortunately, it suffered huge losses. Then in 2007, Dell withdrew its direct selling
strategy and started selling its computers through the retail outlets and today it is
the second largest computer retailer in the world.
b. Divestment – It is another form of retrenchment that includes the downsizing of the
scope of the business. The firm is said to have followed the divestment strategy,
when it sells or liquidates a portion of a business or one or more of its strategic
business units or a major division, with the objective to revive its financial position.
c. Liquidation – It is the most unpleasant strategy adopted by the organization that
includes selling off its assets and the final closure or winding up of the business
operations.

B. Business Strategy

Business strategy defines how each individual business will attempt to achieve its mission
within its chosen area of endeavour. The strategies that are outlined at this level are slightly
more specific and they usually relate to the smaller businesses within the larger organization.
This strategy pertains to each separate business unit (SBU) and deals with two significant issues:

 the scope of each business and the operational links with corporate strategy;
 the basis on which the business unit will achieve and maintain a competitive advantage
within its industry.

The business strategy consists of plans of action that managers adapt to use company’s
resources and distinctive competencies to gain competitive advantage over its rivals in a
market. Business strategy is typically formulated in line with the corporate strategy. The main
focus of the business strategy is on product development, innovation, integration, market
development, diversification and the like.

Characteristics of Business Strategies

1. Specificity: Business-level strategies are specific in nature unlike corporate strategy

which is more generalized. These strategies deal specifically with issues affecting the
particular business unit. Examples of specific issues are deciding a pricing strategy and
creating a product mix. These strategies deal only with the specific business unit and do
not apply to the rest of the organization.
2. Short-Term Perspective: Corporate strategy tends to be oriented toward long-term
goals whereas; business-level strategy is focused on short-term objectives. Examples of
short-term goals include quarterly and annual revenues, return on investments, sales
and production levels. Business units tend to focus on these short-term goals while
allowing corporate strategists to make decisions regarding the long-term plans of the
organization.
3. Applicability: Business strategy does not apply to the entire organization. It is specifically
concerned with setting objectives, goals and targets for individual business units. Every
business unit sets its own tangible and achievable goals in contrast to corporate
strategy.
4. Independence: One of the important characteristic of business-level strategies is the
concept of business-unit independence. The individual business units are given the
independence from the organization as a whole. This is done so as to let them decide
certain strategic issues on their own. This enables business-level strategies to deal
mainly with the concerns of the business unit without any intrusion from other units.
5. Scope: Business strategy is narrow in scope as it is not applicable to whole organization.
Since it is concerned with individual business units, the scope is also restricted. But in
comparison to functional strategy, the scope is bigger.

Types of Business Unit Level Strategies

a. Cost Leadership - Organizations that pursue cost leadership gain a competitive

advantage by reducing operating costs to a level below the industry average. Business
owners then pass these savings on to their customers with low-priced merchandise or
services or maintain average pricing to increase their profit margin.
b. Differentiation - Companies that leverage a differentiation business-level strategy win
market share and defend higher pricing by offering a unique product or service features
that are valued by their customers. Value is provided to customers through unique
features and characteristics of an organization's products rather than by the lowest
 price. This is done through high quality, features, high customer service, rapid product
innovation, advanced technological features, image management, etc.
c. Focus - Focus strategies involve achieving cost leadership or differentiation within niche
markets in ways broadly-focused players cannot.
 Focused Low Cost- Organizations not only compete on price, but also select a
small segment of the market to provide goods and services to. For example a
company that sells only to the U.S. government.
 Focused Differentiation - Organizations not only compete based on
differentiation, but also select a small segment of the market to provide goods
and services.

C. Functional strategy

Functional strategy focuses on supporting the corporate and business strategies. This
strategy is the strategy for each specific functional unit within a business. Functional strategies
principally are concerned with the activities of the functional areas of a business (i.e., human
resource, operations, finance, marketing, research & development etc.). This is the day-to-day
strategy that is going to keep your organization moving in the right direction. Just as some
businesses fail to plan from a top-level perspective, other businesses fail to plan at this bottom-
level. This level of strategy is possibly the most significant of all, as without a daily plan we are
going to get stuck while our competition continues to excel. They support the desired
competitive business level strategy and are complementary each other. The term functional
strategy refers to the managerial action plan for a particular functional activity, business
process, or a department within a business. An organization needs functional strategy for every
major business activity and the particular business unit. Functional strategy is narrower in scope
than business strategy but still is relevant for the overall business strategy.

Characteristics of functional strategies

Functional Strategies can be characterized by number of factors. These are discussed below:

1. Operational Hierarchical Level: Functional strategy is formulated at the bottom level of

decision making. These decisions are taken by the operational managers who are
experts in specific functional areas like marketing, human resource, financial planning,
etc.
2. Short Term Orientation: The time horizon of a functional strategy is usually
comparatively short. Functional strategies identify and coordinate short- term actions,
usually undertaken in a year or less.
 3. Specificity: A functional strategy is more specific than business strategy. The business
strategy provides general direction. Functional strategies give specific guidance to
managers responsible for accomplishing annual objectives.
4. Scope: Functional strategy is narrow in scope as it deals with setting short term goals
achievable in a year or less, unlike corporate strategy which has a long term orientation.
5. Well integrated: Functional or operational strategies have to confirm to overall objective
and vision of the company. They depend upon both corporate and business strategies
and cannot work independently.

Types of functional strategies

 Marketing Strategy – it is a practice that allows an organization to focus on the available

resources and turn the opportunities into productivity to increase sales and achieve
justifiable competitive lead. It provides detailed information to the necessary plans to be
taken, to carry out the marketing program.
 Financial Strategy – it deals with the availability or sources, usages, and management of
funds. It focuses on the alignment of financial management with the corporate and
business objectives of an organization to gain strategic advantage.
 Operations Strategy – it refers to the day-to-day activities or tactics to manage things
such as – pricing, promotion of product or service, and its distribution.
 Human Resource Management Strategy – It assists in implementing the specific function
of human resource management to any organization. Human resource management
strategy provides a practical framework of managing human resource in line with the
organization’s corporate objectives.

(Don’t forget to answer the Self – Check Question 3.3 and Activity 3.3!)
Strategy Implementation

Successful strategy implementation is crucial for the success of the business unit. This is the
action stage of the strategic management process. If the overall strategy does not work with
the business' current structure, a new structure should be installed at the beginning of this
stage. Everyone within the organization must be made clear of their responsibilities and duties,
and how that fits in with the overall goal. Additionally, any resources or funding for the venture
must be secured at this point. Once the funding is in place and the employees are ready,
execute the plan. Strategy implementation includes designing the organization’s structure,
distribution and allocation of resources, developing decision making process, and managing the
human resources. For effective execution, strategy needs to be divided into more detailed
policies at different functional levels like:

a. Marketing
b. Procurement
c. Human Resource
d. Finance
e. Research & Development
f. Production & Operations
g. Information & Communication

Strategy Evaluation and Selection

The strategic management process may not be implemented as planned due to changes in
environmental factors, incompatibility of strategies to the conditions of the host country, etc.
Therefore, the global company has to evaluate the process and control it. The activities in this
regard include:

• Establish the standards of strategic management process

• Measure the performance of the process at every stage

• Compare the performance with the standards

• Observe the deviations

• Take corrective steps

SELF - CHECK QUESTIONS 2.3

 How well did you remember what you read?
Identify the differences of the 3 kinds of strategies.

DIFFERENCES CORPORATE STRATEGY BUSINESS STRATEGY FUNCTIONAL STRATEGY

Meaning

Scope

Formulated by

Features

ACTIVITY 2.3

Let us test your knowledge! Answer the following questions briefly.

 1. Create 2 corporate, business, and functional level strategies based on the SWOT and
PESTLE analysis of your chosen business.
A. Corporate Strategy

a. _________________________________________________________

b. _________________________________________________________

B. Business Strategy

a. _________________________________________________________

b. _________________________________________________________

C. Functional Strategy

a. _________________________________________________________

b. _________________________________________________________

2. What is the importance of a strategy in a business?

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