Lesson 2Lesson 2

STRATEGY FORMULATION STRATEGY FORMULATION PROCESSPROCESS

The basic purpose of any strategy is to provide the firm with The basic purpose of any strategy is to provide the firm with a competitive advantage, an edge over competition. a competitive advantage, an edge over competition. -any strategy without competitive advantage is like a car -any strategy without competitive advantage is like a car without fuel. without fuel. Competit ive AdvantageCompetit ive Advantage It is defined as the ability to do It is defined as the ability to do something so well that an organisation performs better than something so well that an organisation performs better than its competitors. its competitors. It is the ability to use resources in such a way that the It is the ability to use resources in such a way that the organization performs better than the competitors.organization performs better than the competitors.Ex: Competitive advantage of Samsung: Product variety, Ex: Competitive advantage of Samsung: Product variety, high technology like in Galaxy III, IV, fair price, etc.,high technology like in Galaxy III, IV, fair price, etc.,

Sources / AREAS of Competitive AdvantageSources / AREAS of Competitive Advantage

Cost and QualityCost and Quality- emphasis on operating efficiency and - emphasis on operating efficiency and product quality.product quality.

(Mobiles are priced reasonable and (Mobiles are priced reasonable and quality is high)quality is high)

Knowledge and SpeedKnowledge and Speed –emphasis on innovation and speed –emphasis on innovation and speed of delivery to market for new ideas. New features are brought of delivery to market for new ideas. New features are brought in and also fast)in and also fast)

Barriers to EntryBarriers to Entry – emphasis on creating a strong market – emphasis on creating a strong market that protects similar entry by others ( Red Bull entered Gulf that protects similar entry by others ( Red Bull entered Gulf and has strongly protected market thro Ads & publicity like and has strongly protected market thro Ads & publicity like stalls in colleges).stalls in colleges).

Financial ResourcesFinancial Resources – emphasis on creating strong financial – emphasis on creating strong financial base /investments or loss can be absorbed by the company base /investments or loss can be absorbed by the company that competitors can’t match.that competitors can’t match.

Steps in the Strategic Steps in the Strategic Management processManagement process

Stage I:Stage I: Mission and ObjectivesMission and Objectives :: The first stage in the formulation of strategy is The first stage in the formulation of strategy is to to

establish the mission statement of an organisationestablish the mission statement of an organisation. . Mission Mission states the very purpose of the existence of an states the very purpose of the existence of an

organisation. organisation. addresses the basic question: “What is our business?”

It enlists the business psychology and management It enlists the business psychology and management intention in defining its core values pertaining to its intention in defining its core values pertaining to its customers and stakeholders customers and stakeholders

Vision statement – answers the question “What do we want to become?”

ObjectivesObjectives are the end results that lead to achieve are the end results that lead to achieve the mission the mission

ObjectivesObjectives are derived from the mission statement. are derived from the mission statement. Objectives are formulated at the corporate level, Objectives are formulated at the corporate level,

department level and operational level. department level and operational level.

ActivityActivity

Write the mission statement if ICT and Write the mission statement if ICT and department objectives of Business department objectives of Business StudiesStudies

Who are the stakeholders for ICT?Who are the stakeholders for ICT? Stakeholders of an organisation are Stakeholders of an organisation are

owners/ shareholders, employees, owners/ shareholders, employees, suppliers, financiers, government, suppliers, financiers, government, societysociety

ICT Vision We will be a leading technological institution,

providing high quality teaching and learning to prepare and empower the Omani professionals of the future to contribute to national socio-economic development.

ICT Mission To deliver high quality student-centred education

that produces competitive graduates who enter the labor market with confidence, strong technological and personal skills, prepared for a life of contribution and success.

Stage II :Organisational analysis & Environmental Analysis

Since the environment is not stable and keeps on changing, it keeps on presenting with the new opportunities and threats. An environmental scan is done to identify available opportunities and threats.

Industry analysis: The basic purpose of industry analysis is to assess the strengths and weaknesses of an organization relative to other players in the industry.

It can be done by SWOT analysis

SWOT ANALYSISSWOT ANALYSIS

Strengths The strengths can be identified based on the

factors of ability and resources What does the company do well? Is the company strong in its market? Does the company have a strong sense of

purpose and the culture to support the purpose? Weaknesses What does the company do poorly? What problems could be avoided? Does the company have serious financial

liabilities?

Opportunit ies Are industry trends moving upward? Do new markets exist for the company’s

products/ services? Are there new technologies that the

company can exploit?   Threats What are competitors doing well? What obstacles does the company face? Are there troubling changes in the

company’s business environment (technologies, laws, and regulations)?

DISCUSSION The second-largest bookstore chain in the

United States, Borders Group, declared bankruptcy in 2011 as the firm had not adapted well to changes in book retailing from traditional bookstore shopping to customers buying online, preferring digital books to hard copies

Borders was on the brink of financial collapse before being acquired in July 2011 by Direct Brands

( Do SWOT for the case given)( Do SWOT for the case given)In the mid-1990s, Dell Computer used a SWOT analysis to create a strong

business strategy that has helped it become a very strong competitor in its industry value chain. Dell identified its strengths in selling directly to customers and in designing its computers and other products to reduce manufacturing costs. It acknowledged the weakness of having no relat ionships with local computer dealers . Dell faced threats from competitors such as Compaq and IBM, both of which had much stronger brand names and reputations for quality at that time. Dell identified an opportunity by noting that i ts customers were becoming more knowledgeable about computers and could specify exactly what they wanted without having Dell salespersons answer questions or develop configurations for them. It also saw the internet as potential marketing tool.

The strategy that Dell followed after doing the analysis took all for of the SWOT elements into consideration. Dell decided to offer customized computers built to order and sold over the phone, and eventually, over the internet. Dell’s strategy capitalized on its strengths and avoiding relying on a dealer network. The brand and quality threats posed by Compaq and IBM were lessoned by dell’s ability to deliver higher perceived quality because each computer was custom made for each buyer.

Environmental analysisEnvironmental analysis

Environmental analysis: The process by Environmental analysis: The process by which organizations monitor their relevant which organizations monitor their relevant environment to identify opportunities and environment to identify opportunities and threats affecting their business is known as threats affecting their business is known as environmental scanning or environmental environmental scanning or environmental analysis.analysis.

Firm’s macro environment refers to the Firm’s macro environment refers to the PESTEL framework: This covers the total PESTEL framework: This covers the total analysis of the country of operationsanalysis of the country of operations; the ; the forces, which have a definite bearing on the forces, which have a definite bearing on the firm's operations and planningfirm's operations and planning

Stage III & IV: Identif ication and choice of Strategic Alternatives:

Once the clear picture of the organisation and its environment are available,

specific strategies can be developed. Different organisations -different strategies

depending on their situation Michael Porter has identified certain generic

strategies such as cost leadership, differentiation and focus.

Once the environment is scanned - weigh appropriate strategy to match its objectives. done sWOT and resources.

Stage IV: Implementation of Strategy strategies are identified should allocate resources for implementing

the strategy. resources may be financial, human or new

technology. Necessary change mechanism is to be

incorporated at various levels in the organisation to accept the new strategy.

A manager has to prepare plans to cover all the functional areas of business— finance, technology, creation of facilities, products, services, distribution, suppliers, etc., and arrange for necessary resources.

Stage VI: Review and Control of Strategy

Once implemented… the results of the strategy needs to be measured and

evaluated so that required changes can be made to

keep the plan on track. Control systems should be developed so that implementation

can be monitored.

Examples: Mission and Vision Statements

Our vision: Getting to a billion connected computers

worldwide, millions of servers, and trillions of dollars

of e-commerce. Intel’s core mission is being the

building block supplier to the Internet economy and

spurring efforts to make the Internet more useful.

Being connected is now at the center of people’s

computing experience. We are helping to expand the

capabilities of the PC platform and the Internet.

Intel

Examples: Mission and Vision Statements

Otis Elevator

Our mission is to provide any customer a means of moving people and things up, down, and sideways over short distances with higher

reliability than any similar enterprise in the world.

Our business is renting cars. Our mission is total customer satisfaction.

Avis Rent-a-Car

Examples of Strategic Objectives Increase firm’s market share Overtake key rivals on quality or customer service

or product performance Attain lower overall costs than rivals Boost firm’s reputation with customers Attain stronger foothold in international markets Achieve technological superiority Become leader in new product introductions Capture attractive growth opportunities

Example: Strategic Objectives

To satisfy our customers by providing Quality cars and trucks, Developing new products, Reducing the time it takes to bring new

vehicles to market, Improving the efficiency of all our plants &

processes, and Building on our teamwork with employees,

unions, dealers, and suppliers.

Environmental analysisEnvironmental analysis

P- Polit ical - Political environment has a direct impact on the strategy of organisations.

The party in power , Political stability, laws and regulations, import tariffs and export incentives, industrial climate and support. 

E- Economical - Economic conditions, economic policies and the economic system are the important external

factors of economic environment.The economic condition of a country ---

nature of the economy, the stage of development,

gross domestic product, level of income, the distribution of income,

the size of population, the distribution of population etc.

In developing or poor countries, the low level of incomes may be reason for low demand of goods and services. In such cases, prices have to be reduced or new products developed for such markets.

  Type of environment Internal or external

Economic conditions  

economic policies   

effluent treatment.    

family and pattern of l ife styles  

 gross domestic product   

import tariffs and export incentives    

industrial climate and support.    

laws and regulations    

Legal framework of the country    

level of income   

nature of the economy  

Polit ical stabil ity    

Regulations to protect the consumer interests

   

social awareness and pollution

control mechanism

   

Technological developments    

the distr ibution of income  

the distr ibution of population  

the size of population  

urbanization    

S- Social-cultural - Socio-cultural factors,

family and pattern of life styles,

role of women, urbanization,

life expectancy, )age group of people)age distribution,

religion. The socio cultural factors have to be understood by the organisations to be successful.

organisations have to understand the values, customs, traditions (dress as per culture), tastes (can we sell spicy food in

Oman)and preferences of the society where they are doing business.

For a business to be successful, its strategy should be the one that is appropriate in the socio cultural environment. For example,

Nestle today provides different types of instant coffees to satisfy to satisfy different national tastes.

Also, the tastes and prefrences of the customers keep changing from time to time. For example people preferred big cars in U.S. But rising oil prices have forced people in most of the oil importing countries to change to smaller cars. This has resulted most of the car companies doing research and development on small car projects

T- Technological - . Technological developments may increase the demand for some existing products.

For example, voltage stablisers help increase the sale of electrical equipments in markets which have high voltage fluctuations in power supply. However, introduction of TVs, refrigerators with in-built voltage stabliser affects the demand for voltage stablisers.

E- Ecological - Environmental issues, social awareness and pollution control mechanism, legal framework and regulations, effluent treatment.

L- Legal factors prevailing within the country of operations - Legal framework of the country, Regulations to protect the consumer interests and purity of the environment and ecological balance have assumed greater importance in recent years.

In most countries, advertisements have subject to various types of controls. For example in many countries using children in commercial advertisements is prohibited. In many countries, production of alcohol is prohibited. patents and business laws, labour and industrial disputes, companies act.

RED BULL – PEST ANALYSISPolit ical Bans from EU countries No regulation on labelling of such drinks Age limits should be set on purchasing Health risks affecting NHS and increased spending possibly leading to increase

taxes Economic PDI and Consumer Expenditure Rising disposable incomes encourage premium purchases Major soft drink manufacturers have been attracted to the sports and energy

drink market partly by the premium prices that currently exist for these products. Social Negative Health concerns Global warming Longer working hours, increased road traffic, more need for energy boost Increasing consumer concern around diet and personal health Technological Improved manufacturing techniques and process could lead to lower prices Innovation within the market – new products – looking for ultimate hangover cure

Some Opportunit ies and Threats Computer hacker problems are increasing. Intense price competition is plaguing most

firms. Unemployment and underemployment rates

remain high. Interest rates are rising. Product life cycles are becoming shorter. State and local governments are financially

weak.

Sample Strategies in Action in 2011