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Summary Chapter 8 - Strategy Formulation and Execution
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Chapter 8 - Strategy Formulation and ExecutionWhat is Strategic Management
Strategic Management refers to the set of decisions and actions used to formulate and
execute strategies that will provide a competitively superior fit between the organization and
its environment so as to achieve organizational goals. Managers must ask the following
questions:
1. What changes and trends are occurring in the competitive environment?
2. Who are our competitors and what are their strengths and weaknesses?
3. Who are our customers?
4. What products or services should we offer and how can we offer them most
efficiently?
5. What does the future hold for our industry?
6. How can we change the rules of the game?
Purpose of Strategy
The first step in strategic management is to define an explicit strategy, which is the plan of
action that describes resource allocation and activities for dealing with the environment,
achieving a competitive advantage and attain the organization’s goals. Competitive
advantage refers to what sets the organization apart from others and provides it with a
distinctive edge for meeting customer or client needs in the marketplace. The essence of
formulating a strategy is choosing how the organization will be different. Strategy necessarily
changes over time to fit environmental conditions, but to achieve competitive advantage
companies must at least develop strategies that incorporate the elements to target specific
customers, focus on core competencies, provide synergy, and create value. An effective
strategy defines the customers and which of their needs are to be served by the company.
Managers can define a target market geographically and demographically. Some firms target
people who purchase primarily over the internet, whereas others aim to serve people who
like to shop in small stores with a limited selection of high-quality merchandise. A company’s
core competence is something that the organization does especially well in comparison to its
competitors. A core competence represents a competitive advantage because the company
acquires expertise that competitors do not have. A core competence may be in the area of
superior research and development, expert technological know-how, process efficiency or
exceptional customer service. When organizational parts interact to produce a joint effect
that is greater than the sum of the parts acting alone, synergy occurs. Synergy can also be
obtained by good relationships between organizations. Delivering value to the customer is at
the heart of strategy. Value can be defined as the combination of benefits received and costs
paid. Managers help their companies create value by devising strategies that exploit core
competencies and attain synergy.
Levels of Strategy
Another aspect of strategic management concerns the organizational level to which strategic
issues apply. Strategic managers normally think in terms of 3 levels of strategy.
1. What business are we in? Managers ask this question when they consider
corporate-level strategy. Corporate-level strategy pertains to the organization as a
whole and the combination of business units and product lines that make up the
corporate entity. Strategic actions at this level usually relate to the acquisition of new
businesses; additions or investments of business units, plants, or production lines:
, and joint ventures with other corporations in new areas.
2. How do we compete? Business-level strategy pertains to each business unit or
product line. Strategic decisions at this level concern amount of advertising, direction,
and extent of research and development, product changes, new product
development, equipment and facilities, and expansion or contraction of product and
service lines.
3. How do we support the business-level strategy? Functional-level strategy
pertains to the major functional departments within the business unit. Functional
strategies involve all of the major functions, including finance, research,
development, marketing, and manufacturing.
Strategic Management Process
The Strategic management process begins when executives evaluate their current position
with respect to mission, goals, and strategies. They then scan the organization’s internal and
external environments and identify strategic issues that might require change. For all
organizations, internal or external events sometimes indicate a need to redefine the mission
or goals or to formulate a new strategy at either the corporate, business or functional level.
Factors that alter a company’s ability to achieve its goals are called strategic issues. In a
turbulent environment and fast-changing industries, managers have to stay alert to strategic
issues that require a shift in strategy to stay in line both internal and external changes. The
final stage of a strategic management process is the execution of the new strategy.
Strategy formulation versus execution
Strategy formulation includes the planning and decision-making that leads to the
establishment of a specific strategic plan. Strategy formulation includes assessing the
external environment and internal problems to identify strategic issues, then integrating the
results into goals and strategies. Strategy execution is the use of managerial and
organizational tools to direct resources towards accomplishing strategic results. Strategic
execution is the administration and implementation of the strategic plan.
SWOT Analysis
Formulating strategy begins with understanding the circumstances, forces, events and
issues that shape the organization’s competitive situation. SWOT Analysis includes a careful
assessment of strengths, weaknesses, opportunities, and threats that affect organizational
performance. Opportunities and threats are external information that can be obtained from a
variety of sources such as, customers, government reports, professional journals, suppliers,
bankers, critical friends in other organizations, consultants, or professional association
meetings. Strengths and weaknesses are internal information that can be obtained from
sources such as budget statements, financial ratios, profit and loss statements, and surveys
of employee attitudes and satisfaction. Strengths are positive internal characteristics that the
organization can exploit to achieve its strategic performance goals. Weaknesses are
negative characteristics that inhibit or restrict the organization’s performance. Threats are
characteristics that may prevent the organization from achieving its strategic goals.
Opportunities are characteristics that have the potential to help the organization achieve or
exceed its strategic goals.
Formulating corporate-level strategy
There are three approaches to formulating corporate-level strategies: portfolio strategy, the
BCG matrix, and diversification.
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