CHAPTER 3

STRATEGY FORMULATION:

Strategic Management
 Introduction
 Strategy formulation is the development of long-range plans
for the effective management of environmental opportunities
and threats, in light of corporate strengths and weaknesses
(SWOT).

 It begins with situation analysis- “the process of finding a

strategic fit between external opportunities and internal
strengths while working around external threats and internal
weaknesses”.

 It includes defining the corporate Vision and mission, specifying

achievable objectives, developing strategies, and setting policy
guidelines
 What is Vision?

 Miller and Dess defined vision as: the “category

of intentions that are broad, all inclusive and forward
thinking”
 Hickman and Silva (1984): “It is a mental trip from
what is well-known to what is much stranger, the creation
of the future from an assemblage of real facts, hopes,
dreams, risks and opportunities ”.
 Hamel and Prahalad (1994): It is a dream widely
shared in which each and every one of the people of the
organization participates”.
 Morrisey (1996): “It is intuition, what is thought that
the future of the organization should be from the
point of view of the clients, employees, owners and other
important stakeholders”
 Cont’d

 In a nutshell:
 ‘vision’ is future aspirations that lead to an inspiration to
be the best in one’s field of activity
 vision is a forward-looking view of what an organization
wishes to become
 It is more of a dream than articulated idea
 Vision articulates the position of an organization which it
may attain in distant future
 Thus, a vision statement should answer the basic
question, “What do we want to become?”
 A strategic vision is a description of what the company is
capable of becoming
 Envisioning

 Is the process of creating vision. It is a difficult and

complex task

 Forming a strategic vision is not merely a words-

meting exercise designed to create a catchy slogan;
rather it is an exercise in thinking carefully about
where a company needs to head to be successful

 The vision statement should be short, preferably

one sentence, and as many managers as possible
should have input into developing the statement.
 Cont’d

 A well conceived vision must have:

 Core Ideology: The core ideology describes the
continuing character of an organization that remains fixed as
it passes through the changes of courses, such as,
technology, competition, or management craze. It consists of
core values & core purpose.
 Core values the important and lasting tenets of an
organization
 Core determination is related to an organization’s reason
for being

Envisioned Future : Envisioned Future will basically
deal with following:
• The long term audacious goal of the organization
• a vivid description of articulated future
Who is responsible to state vision

 As vision is a permanent statement, it

should be articulated by the CEO of the
company who may be Managing
Director, President, Chairman, etc
 But organization-wide management
involvement is advisable
 Benefit of vision

• It help in the formation of a common identity & a

shared sense of purpose
• It raises the standard of excellence
• It establishes meaning for today
• It gives hope for the future
• It provides a sense of continuity
• It raises commitment level; inspiring & motivating
employees
• It foster risk-taking, experimentation & foster long-
term thinking
• Good vision represent integrity
 Pitfall of vision

Though vision is important it can fail:

 if it reflects merely the leaders internal needs
 if internal and external factors are not analyzed well
 due to lack of acceptance by the market and by
those who implement it
 If it ignores stakeholders needs
 If it miscalculates the resources needed and
available to achieve it
 The purpose of a vision statement

 To communicate with the employees & to those who

are in some way connected or concerned with the
organization about its very existence in terms of
corporate purpose, business scope, & the
competitive leadership
 to cast a framework that would lead to
development of interrelationships between firm and
stakeholders viz. employees, shareholders,
suppliers, customers, and various communities that
may be directly or indirectly involved with the firm
 Shared vision creates a commonality of interests
that can lift workers out of the monotony of daily
work and put them into a new world of opportunity
 Criteria for Evaluation - Vision

 Future casting: Does our vision statement provides a powerful

picture of what our business will look like in the future from now?
 Audacious (brave): Does our vision statement represents a dream
that is beyond what we think is possible? Does it represent the
mountaintop of where the company is headed?
 Motivating : Does our vision statement clarify the direction in which
our organization needs to move?
 Purpose-Driven: Does our vision statement give employees a larger
sense of purpose?Is our vision statement worded in such a way that
our employees see themselves as “building a Construction” rather
than “laying stones.”
 Inspiring: Is our vision statement worded in engaging language that
inspires and engages people and create eagerness ?
 I
Cont’d
 Cont’d

 DASHEN BANK: ‘‘In as much as Mount Dashen

excels all other mountains in Ethiopia, Dashen
Bank continues to prove excellence in
banking services.’’
 NIB: “To become an Icon of Excellence and
the leading Commercial Bank in Ethiopia.”
 Ethio-telecom: “To be a world-class provider
of telecom services.”
 Mission of the company

 Also called a creed statement, a statement of

purpose, a statement of philosophy, a statement of
beliefs, and a statement of business principles
 Organizations mission is written in terms of the
general set of products and services the organization
provides and the markets and clients it serves
 What is mission?
1-15

 Mission statements:
 An organization’s mission is the purpose or reason for the
organization’s existence.
 Is a declaration of an organization’s “reason for being.”
 identifies the scope of a firm’s operations in product & market
terms
 is enduring statements of purpose that distinguish one business
from other similar firms
 describes what the company does
 tells what the company is providing to society—either a service
such as housecleaning or a product such as automobiles.
 It addresses the basic question that faces all strategists: “What
business are we in?”
E.g. Kodak: we make cameras and films(product)
We help preserve beautiful memory(mkt)
 Cont’d

 Mission statement expresses:

-the essential characteristics of the organization

-the nature of its business,
-the groups who are served by the company (its corporate
responsibilities)
-the principles/values under which it operates
-it define the scope of the company ‘s operation in
terms of
products offered and markets served
-defines the fundamental , unique purpose that sets a
company apart from other firms of its types.
-It is the declaration of its corporate identity.
 Quality of Good Mission Statement

 realistic and achievable: impossible statements do

not motivate people. Aims should be developed in
such a way so that may become feasible
 It should neither be too broad nor be too narrow.
If it is broad, it will become meaningless dynamic environment
A narrower mission statement restricts the activities of
organization
 A mission statement should not be ambiguous. It
must be clear for action
 A mission statement should be distinct. If it is not
distinct, it will not have any impact. Copied mission
statements do not create any impression
 Cont’d

 It should have societal linkage: mission relates an

organization to society. Linking the organization to
society will build long term perspective in a better way
 It should not be static:
 To cope up with ever changing environment, dynamic
aspects must be looked into
 Once formulated, a mission statement, should serve an
organization for many years. But as the organization
grows and increases new products, markets and
technologies to its activities a mission may become
unclear
 Then the mission has to be reassessed and reexamined
to either change or discard it, and evolve a fresh
statement of mission
 Cont’d

 It should be motivating for members of the

organization and of society. The employees of the
organization may enthuse themselves with mission
statement
 It facilitates the translation of objectives &
strategies. The mission statement should indicate
the process of accomplishing objectives
 Shared vision creates a commonality of interests
that can lift workers out of the monotony of daily
work and put them into a new world of opportunity
and challenge.
 Mission serves to ensure unanimity of purpose
Cont’d

2-20
 Nine components of a Mission Statement

1. Customers: Who are the organization’s customers?

2. Products or services: What are the organization’s major products or services?
3. Markets: Where does the organization compete geographically?
4. Technology: How technologically current is the organization?
5. Concern for survival growth, and profitability: Is the organization committed to growth and
financial stability?

6. Philosophy: What are the organization’s basic beliefs, values,

aspirations, and ethical priorities?
7. Self-concept: What is the organization’s major competitive
advantage and core competencies?
8. Concern for public image: How responsive is the organization
to societal and environmental concerns?
9. Concern for employees: Does the organization consider
employees a valuable asset?
 Source of information

 The mission statements are formulated from the

following sources:
 National Priorities projected in plan documents and industrial
policy statements
 Corporate philosophy as developed over the years
 Major strategists have vision to develop mission statements
 The services of consultants may be hired
 Mission Vs purpose

 The term purpose was used by some strategists. At

some places, it was used as synonymous to mission.

 A few major points of distinction are as follows:

 Mission is the societal reasoning while the purpose is

the overall reason
 Mission is external reasoning and relates to external
environment. Purpose is internal reasoning and
relates to internal environment
 Mission is for outsiders while purpose is for its own
employees.
Example of mission

 Dell’s mission is to be the most successful computer

company (2-product) in the world (3-market) at
delivering the best customer experience in markets we
serve (1-customer). In doing so, Dell will meet customer
expectations of highest quality; leading technology (4-
technology); competitive pricing; individual and company
accountability (6-philosophy); best-in-class service and
support (7self concept); flexible customization capability
(7); superior corporate citizenship (8-concern for public);
financial stability (5-concern for survival).
 Cont’d

 We aspire to make PepsiCo the world’s (3-market) premier consumer

products company, focused on convenient foods and beverages (2-
product). We seek to produce healthy financial rewards for investors
(5-concern for survival) as we provide opportunities for growth and
enrichment to our employees (9-employee), our business partners
and the communities (8-concern for public ) in which we operate. And
in everything we do, we strive to act with honesty, openness, fairness
and integrity (6-philosophy).
 Cont’d

 Fleetwood Enterprises will lead the recreational

vehicle and manufactured housing industries (2), in
providing quality products(7), with a passion for
customer-driven innovation (1). We will emphasize
training, embrace diversity and provide growth
opportunities for our associates and our dealers (9).
We will lead our industries in the application of
appropriate technologies (4). We will operate at the
highest levels of ethics and compliance with a focus
on exemplary corporate governance (6). We will
deliver value to our shareholders, positive operating
results and industry-leading earnings (5).
 Cont’d

 Procter & Gamble will provide branded products and

services of superior quality and value (7) that improve
the lives of the world’s (3) consumers. As a result,
consumers (1) will reward us with industry leadership
in sales, profit (5), and value creation, allowing our
people (9), our shareholders, and the communities (8)
in which we live and work to prosper.

 At L’Oreal, we believe that lasting business success is

built upon ethical (6) standards which guide growth
and on a genuine sense of responsibility to our
employees (9), our consumers, our environment and
to the communities in which we operate (8).
 Cont’d

 Dashen Bank: ‘‘Provide efficient and customer

focused domestic and international banking services,
overcoming the continuous challenges for excellence
through the application of appropriate technology.’’
 NIB: “To provide customer focused, efficient and
effective full-fledged commercial banking services by
deploying qualified, honest, motivated staff and state-
of-the art technology and thereby optimize
stakeholders’ interest.”

 Ethio-telecom: “To provide world-class, modern and

high quality telecom services for all citizens equitably
so as to transform the multifaceted development of
 Comparison between mission &
vision
29

A Mission statement A Vision

statement
talks about HOW you will get outlines WHERE you want to
to where you want to be. be

It answers the question, “What It answers the question, “Where

do we do? What makes us do we aim to be?”
different?”

A mission statement talks about A vision statement talks about

the present leading to its future your future

11/01/25
 The Values Statement

 The values statement differs from both the vision

and mission statements.
 Vision states where the organization is going &
mission emphasized on what it will do to get there.

 Together, the vision, mission, and values statements

provide direction for everything that happens in an
organization.

 They keep everyone focused on where the

organization is going and what it is trying to achieve.
 What is values statement

 Value represent behavioral principles which

employees will follow in performing their duties
 Values refers the code of ethics

 The values statement defines what the organization

believes in and how people in the organization are
expected to behave—with each other, with customers
and suppliers, and with other stakeholders.

 Core values can best be described as operating

philosophies or principles that guide an organization’s
internal conduct as well as its relationship with the
external world
 Main purpose of values
 establishes a standard for assessing actions
 provides a standard for employees to judge violations
 provides a moral direction for the organization that guides
decision. As said by Roy Disney, "It’s not hard to make
decisions when you know what your values are”.
NB: They are not intended to be a straitjacket that restricts or
inhibits initiative and innovation, but they are intended to guide
decisions and behaviors to achieve common ends
Examples of value:
 Social cohesion
 Transparency
 Equity
 Integrity
 Confidentiality
 Customer Care- centered
 respect for people’
 How long is values?

 Values are often described by one or two words (e.g.

‘student focus’, ‘high performance’, or
‘inclusiveness’).
 However, it is often useful to further elaborate on
this with a short accompanying sentence that can
help define its particular relevance or how it
influences the work of the organization. Once again
this can help guard against over-generalization and
provide the opportunity to demonstrate its roots and
relevance to the institution
 Living the values
 Institutions must resist the temptation to treat the
publication of their core values as the end of the process.
 Managers cannot just create a values statement and
expect it to be followed.
 For a values statement to be effective, it must be
reinforced at all levels of the organization and must be
used to guide attitudes and actions.
 In order to be effective the values must be something
shared, adopted and believed in by the organization as a
whole
 Discrepancies between stated values and organizational
behavior might not be immediately apparent but with a
moments of reflection it is easy to see how strong negative
influence it will have on people’s perception
 Strategic Objectives

 Strategic objectives operationalize the mission

statement and hence it must be consistent with
vision and mission
 The achievement of corporate objectives should bring
about the fulfillment of a corporation’s mission
 Goal/objectives are the end results of planned
activity
 Objectives represent desired results which the
organization wishes to attain.
 They should be stated using action verbs
 Distinction between Goals and Objectives

 Time frame: Goals are timeless, enduring, and unending; objectives

are temporal, time-phased
 Specificity: goals are stated in broad general terms. Goals are seen
as an open-ended statement of what one wants to accomplish with no
quantification of what is to be achieved and no time criteria for
completion. Objectives are much more specific, stated in terms of
particular result that will be accomplished by a specific date.
E.g. maintaining market leadership, striving continuously for
technological superiority
P&G: “Increase sales growth 6% to 8% in each of the next five years”
 Focus: Goals are usually stated in terms of some relevant
environment which is external to the organization. Objectives are more
internally focused and carry important implications about how
resources of the organization utilized in future
 Measurement: objectives tend to be mainly quantitative in
specification while goals may be qualitative. Objectives make the goals
operational.
 What objectives should be set

 Profit Objective: It is the most important objective for

any business enterprise. In order to earn a profit, an
enterprise has to set multiple objectives in key result areas
such as market share, new product development, quality of
service etc. Ackoff calls them performance objectives.

Marketing Objective: may be expressed as “to increase
market share to 20 percent within five years” or “to
increase total sales by 10 percent annually”. They are related
to a functional area.
 Productivity Objective: may be expressed in terms of
ratio of input to output. This objective may also be stated
in terms of cost per unit of production.
 Product Objective: may be expressed in terms of
product development, product diversification, branding
etc.
 Cont’d

 Social Objective: may be described in terms of social

orientation. It may be tree plantation or provision of drinking water
or development of parks or setting up of community centers.
 Financial Objective : relates to cash flow, debt equity ratio,
working capital, new issues, stock exchange operations, collection
periods, debt instruments etc. For example a company may state to
decrease the collection period to 30 days by the end of this year.
 Human resource Objective: may be described in terms
of absenteeism, turnover, Strategic Framework number
of grievances, strikes and lockouts etc. An example may be “to
reduce absenteeism to less then 10 percent by the end of six
months”.
 Roles of objectives

 Objectives define the organization’s relationship with its

environment: by stating its objectives, and organization
commits itself to what it has to achieve for its employees,
customers and society at large
 Objectives help an organization to pursue its vision and
mission: long term perspective is translated in short-term objectives
 Objectives provide the basis for strategic decision-making:
all decisions taken at all levels of management are oriented
towards accomplishment of objectives
 Objectives provide the standard for performance appraisal:
it provide yardstick to measure performance of a department or SBU
or organization
 Objectives serve as a motivating force: all people work to
achieve the objectives.
 Characteristics of Objectives

 Objectives should be concrete and specific: “our company

seeks to increase its sales’ is more specific than our company plans
to achieve a 12percent increase its sales”
 Objectives should be measurable and controllable:
(yardstick for rewards and incentives). number of vehicles
manufactured per year, market share in percent….
 Objectives should be challenging but achievable: to set
high sales targets in a decreasing market does not lead to victory.
Equally a low sales target in a growing market is easily attainable
and, therefore, leads to a sub optimal performance.
 Objectives should be realistic
 Objectives should be related to a time frame: the
managers know the duration within which they have to be achieved
if objectives are related to a timeframe. E.g. Our company plans to
increase its sales by 12% by the end of two years
 Cont’d

 Different objectives should correlate with each other

E.g. source of inter-departmental fights, is setting sales and production
objectives. insist on a broader variety of products to provide to a variety of
market segments while production departments generally wish to have
greater product consistency
 Apparently, compromises are essential to be made so that different
objectives associate with each other, are mutually supportive, &
result in synergistic advantages
 Objectives should be set within constraints
 In objective-setting there are many constraints – internal as well as
external – which have to be considered.
 For best resource utilization different objectives compete for rare
resources and compromises are essential. Many external constraints
like legal requirements, consumer activism and environmental
protection are faced by organizations. All these limit the
organization’s ability to set and achieve objectives.
 Strategies

 A strategy of a corporation forms a comprehensive

master plan that states how the corporation will
achieve its mission and objectives. It maximizes
competitive advantage and minimizes competitive
disadvantage.
 The typical business firm usually considers three
types of strategy: corporate, business, and
functional.

 Each of these strategy will be discussed in details in

the next chapter
 Policy

 A policy is a broad guideline for decision making that links

the formulation of a strategy with its implementation.
 Companies use policies to make sure that employees

throughout the firm make decisions and take actions that

support the corporation’s mission, objectives, and
strategies
e.g.
Southwest Airlines: Southwest offers no meals or reserved seating on
airplanes. (This supports Southwest’s competitive strategy of having
the lowest costs in the industry.)
Policies such as these provide clear guidance to managers
throughout the organization
 Conclusion

 The vision, mission, and values statements form the

foundation for all activities in an organization.
 The vision statement describes what the organization will
become in the future. It is a broad and inspirational
statement intended to engender support from
stakeholders.
 The mission statement defines how the organization
differentiates itself from other organizations in its industry.
It is more specific than the vision statement and is
intended to show how stakeholders’ needs will be satisfied.
 The values statement defines how people in the
organization should behave. It provides a guideline for
decision making.
 Goal/objectives are the end results of planned activity