2 Strategy Formulation

 Environment Analysis and Scanning (SWOT)

 Corporate Level Strategy (Stability, Growth, Retrenchment, Integration and
Internationalization)
 Business Level Strategy (Cost Leadership, Differentiation, Focus)
 Functional Level Strategy (R&D, HR, Finance, Marketing, Production)

Environmental scanning is a constant and careful analysis of the internal and

external environment of an organization in order to detect opportunities, threats, trends,
important lessons, and weaknesses which can impact the current and future strategies of the
organization.

Identification of these variables can either be used to build strategies either to expand the
business or to minimize their impacts on the growth of the business.

What is Environmental scanning?

Environmental scanning is an important part of the business process as it is the responsibility of

an organization to keep a check on things which can put negative impacts on their business and
their consumers.

The members of the organization look for the prominent internal and external threats which
adversely affect the organization. Not only the issues which directly impact their consumers and
suppliers but also the issues which impact the competitors and overall environment of the
industry are scanned and new strategies are developed to deal with these issues.

Large organizations have employees specially hired for the research purpose who constantly
research and learn about market changes and provide information to the higher management so
that company doesn’t lag behind because of the lack of the knowledge about the market place
changes.
Having knowledge about the issues in the business and market changes, management can take
important decision for the future of the organization.

Scanning means detection. Environmental scanning means having a detailed investigation of the
environment. Environmental scanning can also be termed as SWOT analyses. In order to survive
and grow in a competitive business environment, it is essential for every business firm to
undertake SWOT analyses.

This is the process in which the enterprise monitors environmental factors to identify
opportunities and threats of the business. Environmental scanning is essential to understand
current and probable changes in the business environment comprising economic, political,
technological, cultural etc.

PURPOSE OF ENVIRONMENTAL SCANNING

• Effective utilization of resources
• Constant monitoring of resources
• Strategy formulation
• Identification of threats and opportunities
• Useful for the managers
• Prediction of future

SWOT Analysis stand for:

S – Analysing Strength of the firm

W – Analysing weakness of the firm

O – Analysing opportunities of the firm

T – Analysing threats of the firm

It is rightly said that, the firm should maximise the strength, minimise the weakness, grab the
opportunities and diffuse off the threat for survival and growth of the business firm.
SWOT Analysis:
The internal analysis of the firm identifies strength and weakness, and the external analyses helps
to observe opportunities and threats coming the way of business.

Positive Negative

Strength (Internal) Weakness (Internal)

1. Technological skills 1. Absence of employee skill

2. Leading brands 2. Unreliable product

3. Distribution channels 3. Poor access to distribution

4. Customer relationship and 4. Low customer retention

Loyalty
5. Poor management
5. Management

Opportunities (External): Threats (External):

1. Changing & unfulfilled 1. Changing customer taste &

customer need2. Technological emergence of substitute product.
advances
2. Arrival of new technologies
3. Favorable change in
3. Unfavorable change in
government policies
government policies

4. Liberalisation of market
4. Closing of market
Strengths
Strengths—internal to the unit; are a unit’s resources and capabilities that can be
used as a basis for developing a competitive advantage; strength should be realistic and not
modest.
The list of strengths should be able to answer:
• What are the unit’s advantages?
• What does the unit do well?
• What relevant resources do you have access to?
• What do other people see as your strengths?
• What would you want to boast about to someone who knows nothing about this organization
and its work?
• Examples: good reputation among customers, resources, assets, people, : experience,
knowledge, data, capabilities
• Think in terms of: capabilities; competitive advantages; resources, assets, people
• (experience, knowledge); marketing; quality; location; accreditations
• qualifications, certifications; processes/systems

Weaknesses
Weaknesses—internal force that could serve as a barrier to maintain or achieve a
competitive advantage; a limitation, fault or defect of the unit;
It should be truthful so that they may be overcome as quickly as possible
The list of weaknesses should be able to answer:
• What can be improved?
• What is done poorly?
• What should be avoided?
• What are you doing as an organization that you feel could be done more effectively/efficiently?
• What is this organization NOT doing that you feel it should be doing?
• If you could change one thing that would help this department function more effectively, what
would you change?
• Examples: gaps in capabilities, financial, deadlines, morale
• lack of competitive
Opportunities
Opportunities—any favorable situation present now or in the future in the external
environment.
• Examples: unfulfilled customer need, arrival of new technologies, loosening of regulations,
global influences, economic boom, demographic shift
• Where are the good opportunities facing you?
• What are the interesting trends you are aware of?
• Think of: market developments; competitor; vulnerabilities; industry/ lifestyle trends;;
geographical; partnerships

Threats
External force that could inhibit the maintenance or attainment of a competitive
advantage; any unfavorable situation in the external environment that is potentially
damaging now or in the future.
• Examples: shifts in consumer tastes, new regulations, political or legislative effects,
environmental effects, new technology, loss of key staff, economic downturn, demographic
shifts, competitor intent; market demands; sustaining internal capability; insurmountable
weaknesses; financial backing
• The list of threats should be able to answer:
• What obstacles do you face?
• What is your competition doing?
• Are the required specifications for your job/services changing?
• Is changing technology threatening your position?
• Do you have financial problems?
• Could any of your weaknesses seriously threaten your unit?

PEST Analysis
• It is very important that an organization considers its environment before beginning the
marketing process. In fact, environmental analysis should be continuous and feed all aspects of
planning. The macro-environment consists of e.g. Political (and legal) forces, Economic forces,
Sociocultural forces, and Technological forces. These are known as PEST factors.
POLITICAL FACTORS
The political arena has a huge influence upon the regulation of businesses, and the
spending power of consumers and other businesses. One must consider issues such as:
• 1.How stable is the political environment?
• 2. Will government policy influence laws that regulate or tax your business?
• 3.What is the government's position on marketing ethics?
• 4. What is the government's policy on the economy?
• 5. Does the government have a view on culture and religion?
• 6. Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?

ECONOMIC FACTORS
Marketers need to consider the state of a trading economy in the short and long-terms.
This is especially true when planning for international marketing. One need to look at:
• 1. Interest rates.
• 2. The level of inflation Employment level per capita.
• 3. Long-term prospects for the economy Gross
Domestic Product (GDP) per capita, and so on.

SOCIO-CULTURAL FACTORS
The social and cultural influences on business vary from country to country. It is very
important that such factors are considered.
Factors include:
• 1.What is the dominant religion?
• 2.What are attitudes to foreign products and services?
• 3. Does language impact upon the diffusion of products onto markets?
• 4.How much time do consumers have for leisure?
• 5.What are the roles of men and women within society?
• 6. How long are the population living? Are the older generations wealthy?
• 7. Do the population have a strong/weak opinion on green issues?
TECHNOLOGICAL FACTORS
Technology is vital for competitive advantage, and is a major driver of globalization.
Consider the following points:
• 1. Does technology allow for products and services to be made more cheaply and to a better
standard of quality?
• 2.Do the technologies offer consumers and businesses more innovative products and services
such as Internet banking, new generation mobile telephones, etc?
• 3.How is distribution changed by new technologies e.g. books via the Internet, flight tickets,
auctions, etc?
• 4.Does technology offer companies a new way to communicate with consumers e.g. banners,
Customer Relationship Management (CRM), etc?

Corporate Level Strategy (Stability, Growth, Retrenchment, Integration and

Internationalization)

Business owners need targeted corporate level strategies to position themselves for success.
Corporate-level strategies define a plan to hit a specific target needed to achieve business goals.
Strategies tend to be long-term in nature, but allow for dynamic adjustments, based on
uncertainty and changing market conditions.

Definition: Corporate-Level Strategy refers to the top management’s approach or game plan for
administering and directing the entire concern. These are based on the company’s business
environment and internal capabilities. It also called as Grand Strategy.

What is a corporate-level strategy?

A corporate-level strategy is a plan made by a company to see which organizations they interact
with over a given period. For example, an organization can decide to only work with small
businesses if their goal is to sell their product to business-to-business (B2B) customers. A
corporate-level strategy can be used by a small business to increase its profits over the next fiscal
year, whereas a large corporation can be overseeing the operations of multiple businesses to
achieve more complex goals like selling the company or entering a new market.

Types of corporate-level strategy

When you're constructing your company's corporate-level strategy, you're seeking the best ways
to evenly distribute resources to serve the needs of the company to complete planned objectives.
It can also help you come up with a contingency plan, you remain prepared to work under
unforeseen circumstances.

Let's review the different types of corporate-level strategies that you can employ:

 Stability strategy: The stability strategy is when you proceed in working with clients in
your industry. This strategy also assumes that your company is doing well under this
current business model. Since the pathway to growth is uncertain, you should employ a
stability strategy to ensure incremental progress that still brings in revenue, which includes
practices such as research and development and product innovation. An example can be
offering free trials of your existing products to your target audience to increase its
engagement.

 No Change
 Profit
 Investigation

 Expansion strategy: The expansion strategy is great for you if your company is planning
on creating new products and reaching new audiences. It can also be used if you're
upgrading the level of activity within your business like taking on new clients and hiring
more employees. You can apply this strategy if the region you're operating in has a strong
economy or if your focus is to enhance your performance. Overall, this strategy has large
earnings potential for executives, which can lead to raises and expansion to employee
benefits packages as well.
  Concentration
 Diversification
 Forward Or Backward Integration

 Retrenchment strategy: A retrenchment strategy requires you to strongly consider

switching your business model. This may involve stopping the manufacturing of a product
or reducing its functionality. You may need to allocate more energy to accounts receivable
to ensure you're still getting payments of services you provided to maintain your
organization's cash flow. This strategy is only used when the company is looking to take
protective measures in keeping the solvency of the business. You should compile
a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis to see which
marketing you can successfully operate in.

 Turnaround
 Divestment
 Liquidation

 Combination strategy: A combination strategy is a hybrid of the previous three strategies

to create your business model. Its main purpose is to increase the company's performance
and find out which areas of your company can grow and retract based on market
conditions. This approach makes it easier for you to make adjustments to your strategy
because you can be more flexible with your time and how much should be allocated to
each function of your strategy.

Business Level Strategy (Cost Leadership, Differentiation, Focus)

Michael Porter, a professor at Harvard Business School, is widely regarded as the Father of
Corporate Strategy. According to Porter, there are three types of business-level strategy any
organization can pursue to gain an advantage over its competitors. These are cost leadership,
differentiation and focus.

At a high level, each strategy is defined as follows:

  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. Common mechanisms to drive down costs
include:
 Establishing rigid cost controls.
 Building state-of-the-art facilities to produce at scale at a low cost.

 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.
Common mechanisms to differentiate include:
 Superior quality.
 Customer service.
 Design.
 Uniqueness.

 Focus
Focus strategies involve achieving cost leadership or differentiation within niche markets
in ways broadly-focused players can not.
Common mechanisms to adopt a focused cost leadership strategy include:
 Focusing on serving a small group of customers.
 By understanding the needs of your smaller target market, you can uniquely cut costs to
serve the needs of that market.
Functional Level Strategy
Functional Level Strategy can be defined as the day to day strategy which is formulated to assist
in the execution of corporate and business level strategies. These strategies are framed as per the
guidelines given by the top level management.

Functional Level Strategy is concerned with operational level decision making, called tactical
decisions, for various functional areas such as production, marketing, research and development,
finance, personnel and so forth.

As these decisions are taken within the framework of business strategy, strategists provide proper
direction and suggestions to the functional level managers relating to the plans and policies to be
opted by the business, for successful implementation.

Role of Functional Strategy

 It assists in the overall business strategy, by providing information concerning the

management of business activities.
 It explains the way in which functional managers should work, so as to achieve better
results.

Functional Strategy states what is to be done, how is to be done and when is to be done are the
functional level, which ultimately acts as a guide to the functional staff. And to do so, strategies
are to be divided into achievable plans and policies which work in tandem with each other.
Hence, the functional managers can implement the strategy.
Functional Areas of Business
There are several functional areas of business which require strategic decision making, discussed
as under:
 1. Marketing Strategy
Marketing involves all the activities concerned with the identification of customer needs and
making efforts to satisfy those needs with the product and services they require, in return for
consideration. The most important part of a marketing strategy is the marketing mix, which
covers all the steps a firm can take to increase the demand for its product. It includes product,
price, place, promotion, people, process and physical evidence.
For implementing a marketing strategy, first of all, the company’s situation is analyzed
thoroughly by SWOT analysis. It has three main elements, i.e. planning, implementation and
control.
There are a number of strategic marketing techniques, such as social marketing, augmented
marketing, direct marketing, person marketing, place marketing, relationship marketing, Synchro
marketing, concentrated marketing, service marketing, differential marketing and demarketing.
2. Financial Strategy
All the areas of financial management, i.e. planning, acquiring, utilizing and controlling the
financial resources of the company are covered under a financial strategy. This includes raising
capital, creating budgets, sources and application of funds, investments to be made, assets to be
acquired, working capital management, dividend payment, calculating the net worth of the
business and so forth.
3. Human Resource Strategy
Human resource strategy covers how an organization works for the development of employees
and provides them with the opportunities and working conditions so that they will contribute to
the organization as well. This also means to select the best employee for performing a particular
task or job. It strategizes all the HR activities like recruitment, development, motivation,
retention of employees, and industrial relations.
 4. Production Strategy
A firm’s production strategy focuses on the overall manufacturing system, operational planning
and control, logistics and supply chain management. The primary objective of the production
strategy is to enhance the quality, increase the quantity and reduce the overall cost of production.
5. Research and Development Strategy
The research and development strategy focuses on innovating and developing new products and
improving the old one, so as to implement an effective strategy and lead the market. Product
development, concentric diversification and market penetration are such business strategies
which require the introduction of new products and significant changes in the old one.
For implementing strategies, there are three Research and Development approaches:

 To be the first company to market a new technological product.

 To be an innovative follower of a successful product.
 To be a low-cost producer of products.

Functional level strategies focus on appointing specialists and combining activities within the
functional area.