Strategy formation (Classical school)

Strategy formation (Classical school)

The initial task in strategic management is typically the compilation and dissemination of a mission statement. This document outlines, in essence, the raison d'etre of an organization. Additionally, it specifies the scope of activities an organization wishes to undertake, coupled with the markets a firm wishes to serve.

Following the devising of a mission statement, a firm would then undertake an environmental scanning within the purview of the statement.

Strategic formation is a combination of three main processes which are as follows:

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  Performing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro-environmental and macro-environmental.
  
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  Concurrent with this assessment, objectives are set. These objectives should be parallel to a time-line; some are in the short-term and others on the long-term. This involves crafting vision statements (long term view of a possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.
  

Strategy evaluation and choice

An environmental scan will highlight all pertinent aspects that affect an organization, whether external or sector/industry-based. Such an occurrence will also uncover areas to capitalise on, in addition to areas in which expansion may be unwise.

These options, once identified, have to be vetted and screened by an organization. In addition to ascertaining the suitability, feasibility and acceptability of an option, the actual modes of progress have to be determined. These pertain to:

The basis of competition

The basis of competition is the competitive advantage used or established by the strategy. This advantage may derive from how an organization produces its products, how it acts within a market relative to its competitors, or other aspects of the business. Specific approaches may include:

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  Differentiation, in which a multitude of market segments are served on a mass scale. An example will include the array of products produced by Unilever, or Procter and Gamble, as both forge many of the world’s noted consumer brands serving a variety of market segments.
  

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  Cost-based, which often concerns economy pricing. An example would be dollar stores in the United States.
  

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  Market segmentation (or niche), in which products are tailored for the unique needs of a niche market, as opposed to a mass market. An example is Aston Martin cars.
  

Mode of action

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  Measuring the effectiveness of the organizational strategy, it's extremely important to conduct a SWOT analysis to figure out the internal strengths and weaknesses, and external opportunities and threats of the entity in business. This may require taking certain precautionary measures or even changing the entire strategy.
  

In corporate strategy, Johnson, Scholes and Whittington present a model in which strategic options are evaluated against three key success criteria:

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  Suitability; would it work?
  
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  Feasibility; can it be made to work?
  
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  Acceptability; will they work it?
  

Suitability

Suitability deals with the overall rationale of the strategy. The key point to consider is whether the strategy would address the key strategic issues underlined by the organisation's strategic position.

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  Does it make economic sense?
  
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  Would the organization obtain economies of scale or economies of scope?
  
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  Would it be suitable in terms of environment and capabilities?
  

Tools that can be used to evaluate suitability include:

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  Ranking strategic options
  
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  Decision trees
  

Feasibility

Feasibility is concerned with whether the resources required to implement the strategy are available, can be developed or obtained. Resources include funding, people, time, and information. or cash flow in the market

Tools that can be used to evaluate feasibility include:

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  cash flow analysis and forecasting
  
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  break-even analysis
  
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  resource deployment analysis
  

Acceptability

Acceptability is concerned with the expectations of the identified stakeholders (mainly shareholders, employees and customers) with the expected performance outcomes, which can be return, risk and stakeholder/stakeholders reactions.

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  Return deals with the benefits expected by the stakeholders (financial and non-financial). For example, shareholders would expect the increase of their wealth, employees would expect improvement in their careers and customers would expect better value for money.
  
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  Risk deals with the probability and consequences of failure of a strategy (financial and non-financial).
  
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  Stakeholder reactions deal with anticipating the likely reaction of stakeholders. Shareholders could oppose the issuing of new shares, employees and unions could oppose outsourcing for fear of losing their jobs, customers could have concerns over a merger with regards to quality and support.
  

Tools that can be used to evaluate acceptability include:

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  what-if analysis
  
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  stakeholder mapping
  

The direction of action

Strategic options may span a number of options, including:

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  Growth-based (inspired by Igor Ansoff's matrix – market development, product development, market penetration, diversification)
  
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  Consolidation
  
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  Divestment
  
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  Harvesting
  

The exact option depends on the given resources of the firm, in addition to the nature of products' performance in given industries. A generally well-performing organisation may seek to harvest (,i.e. let a product die a natural death in the market) a product, if via portfolio analysis it was performing poorly comparative to others in the market.

Additionally, the exact means of implementing a strategy needs to be considered. These points range from:

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  Strategic alliances
  
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  Capital Expenditures (CAPEX)
  
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  Internal development (,i.e. utilising one's own strategic capability in a given course of action)
  
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  M&A (Mergers and Acquisitions)
  

The chosen option in this context is dependent on the strategic capabilities of a firm. A company may opt for an acquisition (actually buying and absorbing a smaller firm), if it meant speedy entry into a market or lack of time in internal development. A strategic alliance (such as a network, consortium or joint venture) can leverage on mutual skills between companies. Some countries, such as India and China, specifically state that FDI in their countries should be executed via a strategic alliance arrangement.

Strategic implementation and control

Once a strategy has been identified, it must then be put into practice. The implementation of strategy is of great importance. Conducting a corporate strategy is worthless as long as it is not implemented correctly by each department of the organization This may involve organising, resourcing and utilising change management procedures:

Organizing

Organizing relates to how an organizational design of a company can fit or align with a chosen strategy. This concerns the nature of reporting relationships, spans of control, and any strategic business units (SBUs) that require to be formed. Typically, an SBU will be created (which often has some degree of autonomous decision-making) if it exists in a market with unique conditions, or has/requires unique strategic capabilities (,i.e. the skills needed for the running and competition of the SBU are different).

Resourcing

Resourcing is literally the resources required to put the strategy into practice, ranging from human resources, to capital equipment, and to ICT-based implements.

Change management

In the process of implementing strategic plans, an organization must be wary of forces that may legitimately seek to obstruct such changes. It is important then that effectual change management practices are instituted. These encompass:

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  The appointment of a change agent, as an individual who would champion the changes and seek to reassure and allay any fears arising.
  
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  Ascertaining the causes of the resistance to organizational change (whether from employees, perceived loss of job security, etc.)
  
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  Via change agency, slowly limiting the negative effects that a change may uncover.
  

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