Strategy Formulation Essay Example for Free

Strategy Formulation Essay Basic strategic planning is comprised of several components that build upon the previous piece of the plan, and operates much like a flow chart. However, prior to embarking on this process, it is important to consider the players involved. There must be a commitment from the highest office in the organizational hierarchy. Without buy-in from the head of a company, it is unlikely that other members will be supportive in the planning and eventual implementation process, thereby dooming the plan before it ever takes shape. Commitment and support of the strategic-planning initiative must spread from the president and/or CEO all the way down through the ranks to the line worker on the factory floor. Just as importantly, the strategic-planning team should be composed of top-level managers who are capable of representing the interests, concerns, and opinions of all members of the organization. As well, organizational theory dictates that there should be no more than twelve members of the team. This allows group dynamics to function at their optimal level. The components of the strategic-planning process read much like a laundry list, with one exception: each piece of the process must be kept in its sequential order since each part builds upon the previous one. This is where the similarity to a flow chart is most evident, as can be seen in the following illustration. The only exceptions to this are environmental scanning and continuous implementation, which are continuous processes throughout. This article will now focus on the discussion of each component of the formulation process: environmental scanning, continuous implementation, values assessment, vision and mission formulation, strategy design, performance audit analysis, gap analysis, action-plan development, contingency planning, and final implementation. After that, this article will discuss a Japanese variation to Strategy Formulation, Hoshin Planning, which has become very popular. ENVIRONMENTAL SCANNING This element of strategy formulation is one of the two continuous processes. Consistently scanning its surroundings serves the distinct purpose of allowing a company to survey a variety of constituents that affect its performance, and which are necessary in order to conduct subsequent pieces of the planning process. There are several specific areas that should be considered, including the overall environment, the specific industry itself, competition, and the internal environment of the firm. The resulting consequence of regular inspection of the environment is that an organization readily notes changes and is able to adapt its strategy accordingly. This leads to the development of a real advantage in the form of accurate responses to internal Figure 1 Strategic Planning Process   and external stimuli so as to keep pace with the competition. CONTINUOUS IMPLEMENTATION The idea behind this continual process is that each step of the planning process requires some degree of implementation before the next stage can begin. This naturally dictates that all implementation cannot be postponed until completion of the plan, but must be initiated along the way. Implementation procedures specific to each phase of planning must be completed during that phase in order for the next stage to be started. VALUES ASSESSMENT All business decisions are fundamentally based on some set of values, whether they are personal or organizational values. The implication here is that since the strategic plan is to be used as a guide for daily decision making, the plan itself should be aligned with those personal and organizational values. To delve even further, a values assessment should include an in-depth analysis of several elements: personal values, organizational values, operating philosophy, organization culture, and stakeholders. This allows the planning team to take a macro look at the organization and how it functions as a whole. Strategic planning that does not integrate a values assessment into the process is sure to encounter severe implementation and functionality problems if not outright failure. Briefly put, form follows function; the form of the strategic plan must follow the functionality of the organization, which is a direct result of organizational values and culture. If any party feels that his or her values have been neglected, he or she will not adopt the plan into daily work procedures and the benefits will not be obtained. VISION AND MISSION FORMULATION This step of the planning process is critical in that is serves as the foundation upon which the remainder of the plan is built. A vision is a statement that identifies where an organization wants to be at some point in the future. It functions to provide a company with directionality, stress management, justification and quantification of resources, enhancement of professional growth, motivation, standards, and succession planning. Porrus and Collins (1996) point out that a well-conceived vision consists of two major components: a core ideology and the envisioned future. A core ideology is the enduring character of an organization; it provides the glue that holds an organization together. It itself is composed of core values and a core purpose. The core purpose is the organizations entire reason for being. The envisioned future involves a conception of the organization at a specified future date inclusive of its aspirations and ambitions. It includes the BHAG (big, hairy, audacious goal), which a company typically reaches only 50 to 70 percent of the time. This envisioned future gives vividly describes specific goals for the organization to reach. The strategic results of a well formulated vision include the survival of the organization, the focus on productive effort, vitality through the alignment of the individual employees and the organization as a whole, and, finally, success. Once an agreed-upon vision is implemented, it is time to move on to the creation of a mission statement. An explicit mission statement ensures the unanimity of purpose, provides the basis for resource allocation, guides organizational climate and culture, establishes organizational boundaries, facilitates accountability, and facilitates control of cost, time, and performance. When formulating a mission statement, it is vital that it specifies six specific elements, including the basic product or service, employee orientation, primary market(s), customer orientation, principle technologies, and standards of quality. With all of these elements incorporated, a mission statement should still remain short and memorable. For example, the mission statement of the American Red Cross, reads: The mission of the American Red Cross is to improve the quality of human life; to enhance self-reliance and concern for others; and to help people avoid, prepare for, and cope with emergencies. Other functions of a mission statement include setting the bounds for development of company philosophy, values, aspirations, and priorities (policy); establishing a positive public image; justifying business operations; and providing a corporate identity for internal and external stakeholders. STRATEGY DESIGN This section of strategy formulation involves the preliminary layout of the detailed paths by which the company plans to fulfill its mission and vision. This step involves four major elements: identification of the major lines of business (LOBs), establishment of critical success indicators (CSIs), identification of strategic thrusts to pursue, and the determination of the necessary culture. A line of business is an activity that produces either dramatically different products or services or that are geared towards very different markets. When considering the addition of a new line of business, it should be based on existing core competencies of the organization, its potential contribution to the bottom line, and its fit with the firms value system. The establishment of critical success factors must be completed for the organization as a whole as well as for each line of business. A critical success indicator is a gauge by which to measure the progress toward achieving the companys m ission. In order to serve as a motivational tool, critical success indicators must be accompanied by a target year (i.e. 1999, 1999–2002, etc.). This also allows for easy tracking of the indicated targets. These indicators are typically a mixture of financial figures and ratios (i.e. return on investment, return on equity, profit margins, etc.) and softer indicators such as customer loyalty, employee retention/turnover, and so on. Strategic thrusts are the most well-known methods for accomplishing the mission of an organization. Generally speaking, there are a handful of commonly used strategic thrusts, which have been so aptly named grand strategies. They include the concentration on existing products or services; market/product development; concentration on innovation/technology; vertical/horizontal integration; the development of joint ventures; diversification; retrenchment/turnaround (usually through cost reduction); and divestment/liquidation (known as the final solution). Finally, in designing strategy, it is necessary to determine the necessary culture with which to support the achievement of the lines of business, cr itical success indicators, and strategic thrusts. Harrison and Stokes (1992) defined four major types of organizational cultures: power orientation, role orientation, achievement orientation, and support orientation. Power orientation is based on the inequality of access to resources, and leadership is based on strength from those individuals who control the organization from the top. Role orientation carefully defines the roles and duties of each member of the organization; it is a bureaucracy. The achievement orientation aligns people with a common vision or purpose. It uses the mission to attract and release the personal energy of organizational members in the pursuit of common goals. With a support orientation, the organizational climate is based on mutual trust between the individual and the organization. More emphasis is placed on people being valued more as human beings rather than employees. Typically an organization will choose some mixture of these or other predefined culture roles that it feels is suitable in helping it to achieve is mission and the other components of strategy design. PERFORMANCE AUDIT ANALYSIS Conducting a performance audit allows the organization to take inventory of what its current state is. The main idea of this stage of planning is to take an in-depth look at the companys internal strengths and weaknesses and its external opportunities and threats. This is commonly called a SWOT analysis. Developing a clear understanding of resource strengths and weaknesses, an organizations best opportunities, and its external threats allows the planning team to draw conclusions about how to best allocate resources in light of the firms internal and external situation. This also produces strategic thinking about how to best strengthen the organizations resource base for the future. Looking internally, there are several key areas that must be analyzed and addressed. This includes identifying the status of each existing line of business and unused resources for prospective additions; identifying the status of current tracking systems; defining the organizations strategic profile; listing the available resources for implementing the strategic thrusts that have been selected for achieving the newly defined mission; and an examining the current organizational culture. The external investigation should look closely at competitors, suppliers, markets and customers, economic trends, labor-market conditions, and governmental regulations. In conducting this query, the information gained and used must reflect a current state of affairs as well as directions for the future. The result of a performance audit should be the establishment of a performance gap, that is, the resultant gap between the current performance of the organization in relation to its performance targets. To close this gap, the planning team must conduct what is known as a gap analysis, the next step in the strategic planning process. GAP ANALYSIS A gap analysis is a simple tool by which the planning team can identify methods with which to close the identified performance gap(s). All too often, however, planning teams make the mistake of making this step much more difficult than need be. Simply, the planning team must look at the current state of affairs and the desired future state. The first question that must be addressed is whether or not the gap can feasibly be closed. If so, there are two simple questions to answer: What are we doing now that we need to stop doing? and What do we need to do that we are not doing? In answering these questions and reallocating resources from activities to be ceased to activities to be started, the performance gap is closed. If there is doubt that the initial gap cannot be closed, then the feasibility of the desired future state must be reassessed. Collins, James C., and Jerry I. Porras. Building Your Companys Vision. Harvard Business Review, September-October 1996, 65–90. Goldstein, Leonard D., Timothy M. Nolan, and J. William Pfeiffer. Applied Strategic Planning: How to Develop a Plan that Really Works. New York: McGraw-Hill, Inc., 1993. Harrison, Roger, and Herb Stokes. Diagnosing Organizational Culture. San Francisco: Pfeiffer, 1992. King, Bob. Hoshin Planning: the Developmental Approach. Methuen, MA: GOAL/QPC, 1989. Mellum, Mara Minerva, and Casey Collett. Breakthrough Leadership: Achieving Organizational Alignment through Hoshin Planning. Chicago: American Hospital Publishers, Inc., 1995.