Strategy Formulation

IJ
 Strategy formulation
1. Vision Mission and Values:
2. Environmental Scanning and stakeholder
analysis
3. Developing goals and setting objectives
4. Formulating strategies to achieve goals
 Corporate issues
• Questions to raise:
• Should the company grow or consolidate?
How?
• Should it keep all six business? Acquire new
ones?
• How should the company allocate resources
between Businesses?
 Strategy Formulation
• An organization’s Strategy is its game plan for
out-performing its competitors and achieving
superior profitability.
• Strategy represents an integrated actions
considered essential for excelling in a
competitive environment.
 Cont’d
A corporation’s directional strategy is composed of
three general orientations
• Growth strategies expand co’s activities eg
concentration and diversification
• Stability strategies make no change to the co’s
current activities eg pause or proceed with
caution, no change, profit strategy
• Retrenchment strategies reduce the co’s level of
activities eg turnaround,
sellout/divestment/bankrpucy
 Cont’d
Strategy provides choices about:
• How to attract, please and retain customers;
• How to out-compete rivals;
• How to position the organization in the market place;
• How to respond to changing economic and market
conditions;
• How to capture attractive opportunities to grow the
organization;
• How to achieve the organization’s performance
targets.
 Levels of strategy
Corporate level strategy.
• The question What business are we in?.
• Strategic actions at this level usually relate to
the mergers and acquisitions of new
businesses; additions or divestments of
business units, plants, or product lines; and
joint ventures with other corporations in new
areas
 What makes up an organization’s
strategy?
Strategies of organizations are normally expressed or
described by the following actions:
• Actions to enter new markets or exit existing ones; 
• Actions to reduce costs to gain more market share;
• Actions to capture new market opportunities and
defend against threats to organizations business
prospects;
• Actions to strengthen market standing and
competiveness by acquiring or merging with other
organizations;
 Cont’d
• Actions to strengthen competiveness by entering into
alliances and or collaboration with other organizations;
• Actions to carry out Research and Development to
acquire new knowledge about products and or
competitive strategies;
• Actions to acquire or upgrade physical resources to
enhance competitiveness;
• Actions to strengthen the organization’s bargaining
position with suppliers, distributors and other;
• Actions to enhance performance features to capture or
widen the market share.
 Let us consider M & A
• Mergers and acquisitions (M&A) and corporate
restructuring are a big part of the corporate
finance world. Deals can be worth hundreds of
millions, or even billions, of dollars.
• Mergers and acquisitions are processes by
which two or more companies come together,
either voluntarily or involuntarily, to become
one company.
 M&A
Merger
• A merger happens when two
firms, often of about the same
size, agree to go forward as a
single new company rather than
remain separately owned and
operated. This kind of action is
more precisely referred to as a
"merger of equals." Both
companies' stocks are
surrendered and new company
stock is issued in its place
Acquisition
• When one company takes
over another and clearly
established itself as the new
owner, the purchase is called
an acquisition. From a legal
point of view, the
target company ceases to
exist, the buyer "swallows"
the business of the bought
and the buyer's stock
continues to be traded.
 Cont’d
Merger Acquisition
• An example in Uganda in this • An example here in Uganda
case was in the 1990s when is DFCU Bank and Crane
Pricewaterhouse and Coopers Bank. DFCU Bank bought
and Lybrand merged to form and swallowed the business
Pricewaterhousecoopers.
of crane bank.
• A purchase deal will also be
called a merger when both
CEOs agree that joining
together is in the best interest
of both of their companies.
 Benefits of M & A
• Increased market power
• Overcome entry barriers
• Avoid excessive competition
• Improved market reach and industry visibility
• Economies of scale
• Avoid of cost of new product development
• Lower risk compared to developing new
products and markets
 Limitations
• Integration difficulties
• Inadequate evaluation of targets
• Large or extraordinary debt
• Inability to achieve synergy
• Managers overly focused on acquisitions
• Too large or too complex
 New product development
• Coming up with a new best selling product on
the market
• Requires investment in R & D- be ready to
invest
• Must have a Marketing plan
• Must have a customer Care plan
 Alliance strategy
• A partnership of two or more corporations or
business units
• To achieve strategically significant objectives that
are mutually Beneficial.
• Why?
1. To obtain technology/ manufacturing capabilities
2. To obtain access to certain markets
3. To reduce financial risk
4. To reduce political risk
 Joint ventures
• A co-operative business activity formed by
two or more organizations for strategic
purposes that creates an independent
business entity and allocates responsibilities.
• Often happens when co. cannot legally merge.
Able to retain independence.
• Example: UCU and UTAMU
 Diversification strategy
• The problem: do diversified firms tend to be
more or less profitable than undiversified
firms
• Theory: Portfolio theory in 1970s promoted
unrelated diversification in order to spread
risk and balance cash flow. More recent
theories focus on value chain, warn against
over diversification
 Cont’d
• Research: a research on 55 different firms
showed that firms with related diversification
perform better than single business firms or
those with unrelated diversification
• Toyota began as textile manufacture
• Geographic: Over 50% of revenues of French
firms in foreign domains
 Stability strategies
• A firm may choose stability over growth by
continuing its current activities without any
significant changes. Very popular with SME
• Stability strategy: Pause and caution: has had
turbulent situation- pause before new
direction
• No change: everything is fine
• Profit: support present profit by giving up
future potential
 Retrenchment strategies
A strategy pursued when company is weak
position in some of or all its product lines
resulting in weak performance. Types are:
1. Contraction: stop the bleeding with across
the board cuts
2. Termination
3. Sell out/ divestment where the above can’t
work. Divestment is to sell a low growth
product line
 Business level strategy
• Crafting or selecting a working strategy requires
that a strategy manager understand the external
environment where the organization operates
and the internal environment of the organization
itself
• Generic Strategies are the frequently used
actions and approaches to setting an organization
apart, building strong customer loyalty, and
winning a competitive advantage at this level.
 Generic competitive strategies:

• Broad Low Cost Provider Strategy: Striving to

achieve lower overall costs than rivals on
comparable products that attracts a broad
spectrum of buyers ;
• Focus low cost strategy: Concentrating on a
narrow buyer segment or market niche and
outperforming rivals with a product offering that
meets special taste and requirements of the
niche members better than the product offering
of the rivals.
 Cont’d
• Broad Differentiation Strategy: Striving to
differentiate the company’s products from rivals with
superior attributes that appeal to a broad spectrum of
buyers.  
• Focused Differentiation Strategy: Concentrating on a
narrow buyer segment or market niche and
outcompeting rivals with product offering that meets
the special taste and requirement of niche members
better than the product offering of rivals;
• Value for Money: Developing an advantage based on
offering more value for money.
 Cost leadership strategy
• COST LEADERSHIP: Design, produce, market a
comparable product more efficiently. Because
of lower costs the cost leader Charges a lower
price than competitors and make profit
• Examples: Toyota
 Sources for org to obtain low cost
structure
• Product or services offered; designed for
average customers
• Economies of scale
• Research and development
• Product design; with low cost inputs, fewer
components, or few stages of manufacturing
• Organization culture
• Organization structure and processes
 Differentiation strategy
• DIFFERENTIATION: Creation of a product in the
broad market
• Perceived as unique. Company can charge
premium for uniqueness
• How: Design, brand image, features, customer
service, dealer network
• Example: Mercedes, Serena
• Required Skills
 Strong marketing abilities
 Cost focus strategy
This is a strategy that focuses on a
particular buyer group, etc
The idea is to serve a narrow target more
efficiently than competitors
Examples: CBS FM, Bukkedde TV, Rhim Cola
 Functional level strategy
• The question is how do we support the
business level competitive strategy?
• Functional strategies involves all of the major
functions, including finance, R & D, marketing,
manufacturing, production and HR
 Functional strategy cont’d
• Functional strategy concerns the different types
of activities
• performed in a company, typically for several
businesses
1. Core competencies: What does the company do
well & is important for our success. Which
distinctive competencies to develop
2. Outsourcing: What activities can we better let
others do for us
 Cont’d
• 3. Strategy issues in individual functions:
marketing, research, human resource
 Core competence
• Something that a company can do exceedingly
well
A core competency is a distinctive when:
• has customer value- we can use it for something
they will pay us
• Competitors unique- our competitors do not have
it
• Extendibility- it can be used for several products
• Every organization should know its core
competency
 Out sourcing
• To have an outside firm perform a function
that would traditionally be done in- house
• Philosophy: let us concentrate on what we do
best- Core Competencies.
• It is one way of cutting costs. Outsourcing now
occurs frequently
 Cont’d
• such functions as: Accounting, Catering,
housekeeping, Customer service, Sections of
human resource
• NB: The problems of out souring- image and
loss of control
 Selecting a strategy
• After analyzing the organization, industry, societal
environment and reviewed the company mission on
goals and strategic issues in areas of business level,
corporate level, functional level; should now
formulate strategy based on:
1. Designing alternative strategies that look promising
2. Check for common pitfalls: strategies to avoid
3. Review vision, mission and goals
4. Review SWOT and financial indicators
5. Select
 Strategies to avoid
• Follow the leader: imitating the company present leader-
but company may be going wrong direction. Crane Bank
• Another home run: imitating past success. Nb: if past
success was unique hard to imitate. Celtel
• Arms race: take competitors head on. Danger of price
wars and everyone loosing. Oil Companies
• Do everything: pursue all interesting opportunities- be
ware of running out of resources
• Losing hand: failing to recognize that cause is lost. You
keep throwing money at a bad venture
 Obstacles to strategic choice
• External Pressures: Unions, Government, creditors,
could be in position to obstruct your choice.
• Management’s risk aversion: tendency to stick to
the well tried path
• Corporate culture pressure: resistance from people
that will implement
• Needs of key managers: Ego, preferred location,
etc
• Recent example: Posta Uganda
 What makes a winning strategy? 
Tests should be applied to determine whether a
strategy is a winning strategy:
• The fit test: How well does the strategy fit the
organization’s situation?
• The competitive advantage test: Can the
strategy help the organization achieve a
sustainable competitive advantage?
• The performance test: Is the strategy producing
good organizational performance? For example
does the strategy generate competitive strength
and or profitability?
 Strategy Implementation
• Strategy implementation is the translation of
chosen strategy into organizational action so as
to achieve strategic goals and objectives.
• Strategy implementation is also defined as the
manner in which an organization should develop,
utilize, and amalgamate organizational structure,
control systems, and culture to follow strategies
that lead to competitive advantage and a better
performance.
 Cont’d
• Managing the strategy implementation is
probably the most demanding part of strategic
management.
• In most cases managing the strategy execution
process includes the following principal tasks:
a. Leadership
b. Structural design
c. Information and control systems
d. Human resources
 Cont’d
Leadership is ability to influence organization
members to adopt the behaviors needed for
strategy implementation
1. Motivating people and tying rewards directly to
achievement of performance targets;
2. Creating change in organization corporate
culture, values and work climate conducive to
successful strategy execution; and
3. Persuasion of people by exerting the internal
leadership needed to propel implementation
forward.
 Cont’d
Structural design typically begins with the
organization chart, managers’ responsibilities,
degree of authority, consolidation of facilities,
departments and divisions
1. Creating a strategy supportive organization
structure ie organization chart
2. Developing and strengthening strategy
supportive facilities/resources, task design and
capabilities;
3. Team work
 Cont’d
Information and control systems include reward systems,
pay incentives, budgets for allocating resources,
information systems, org policies and procedures
1. Reward systems and incentives for employees
2. Budgets 4 allocating resources to strategy critical
activities
3. Installing information and operating systems that
enable organization personnel to perform essential
activities;
4. Designing and implementing policies and procedures
that facilitate strategy implementation;
 Cont’d
Human resource
1. Staffing the organization with needed skills and
expertise ie recruitment and selection
2. Training and development can help employees
understand the purpose and importance of new
strategy or develop necessary specific skill and
behaviors
3. Layoffs/recalls sometimes employees may have
to be let go and replaced with new ones
4. Transfers and promotions
 N.B
N.B. Excellently formulated strategies will fail if
they are not properly implemented.
• Also, it is essential to note that strategy
implementation is not possible unless there is
stability between strategy and each
organizational dimension such as leadership,
organizational structure, Information and
system controls and human resource.
 Group discussion
• What are the key challenges to Strategy
Implementation in an organization and what
recommendations can you make to mitigate
them?
 Cont’d
• Key Limitations at Organization level include:
– An excessive focus on costs & failure to consider
the potential benefits
– A heightened perception of the risks involved
– Lack of coordination & cooperation in the change
process
– Attempting to integrate incompatible systems
• Key Limitations at the personal level:
– Overwhelming desire to reduce uncertainty
– The fear of loss of skill, position or profession
 Cont’d
 Vision / Mission Barriers – i.e. Where these are not
clear & not appealing to staff = no consensus on
way-forward = lack of motivation & commitment
 Management Barriers – i.e. where:
 Management focus is on controls rather than
implementation of strategies.
 Organizational structure doesn’t facilitate
strategy implementation.
 Functional specialization and departmental
rivalries characterized the organization
 Cont’d
• People Barriers – I.e. in cases of:
– Lack of competencies, knowledge & skills to
implement strategy.
– Personal goals, values, beliefs, attitudes, &
motivations being incompatible with
organization goals & objectives/Strategies.
• Operational Barriers – where:
– Key internal processes are not aligned to the
strategies e.g., Budgets & controls are at the
core of the activities and not the strategy.
 Cont’d
• Lack of Participatory approach/Teamwork in
Strategy formulation
• Lack of Implementation resources/poor
resource allocation
• Resistance to Change
 Solutions
Key Solutions for Barriers to Strategy
Implementation
Careful, collective diagnosis of the need for
change
Enlisting senior management support in the
change process
Alignment of staff interests with firm’s goals
Rewarding suitable communication,
education, training, participation and
involvement
 Cont’d
• Building Optimal Organizational Capacity:  
– Selecting capable people for key positions.
– Building core competencies & competitive capabilities.
– Matching organization structure to strategy.
– Supplementing the basic organization structure with
functional teams
• Developing budgets to steer ample resources into
those value–chain activities critical to the strategic
success (Linking budgets to strategies) 
• Establishing strategically appropriate policies and
procedures
 Cont’d
Instituting Best Practices and Mechanisms for Continuous
Improvement:
 Firm managerial commitments to best practices
 Continuous improvement
 Benchmarking
 Reengineering core business processes
TQM programs
Installing support systems that enable the organization personnel
to carry out their strategic roles successfully on a daily basis
 Well-conceived, state-of-the-art support systems to strengthen
organizational capabilities and provide competitive edge
Cutting-edge information systems and technologically
sophisticated operating capabilities that enable fast, efficient,
and effective organizational action