Introduction of Strategy Formulation

7/29/2019 Introduction of Strategy Formulation

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1.1 INTRODUCTION OF STRATEGY FORMULATION

It is useful to consider strategy formulation as part of a strategic management process that

comprises three phases: diagnosis, formulation, and implementation. Strategic

management is an ongoing process to develop and revise future-oriented strategies that

allow an organization to achieve its objectives, considering its capabilities, constraints,and the environment in which it operates.

Diagnosis includes: (a) performing a situation analysis (analysis of the internal

environment of the organization), including identification and evaluation of current

mission, strategic objectives, strategies, and results, plus major strengths and weaknesses;

(b) analyzing the organization's external environment, including major opportunities and

threats; and (c) identifying the major critical issues, which are a small set, typically two

to five, of major problems, threats, weaknesses, and/or opportunities that require

particularly high priority attention by management.

Formulation, the second phase in the strategic management process, produces a clear set

of recommendations, with supporting justification, that revise as necessary the mission

and objectives of the organization, and supply the strategies for accomplishing them. In

formulation, we are trying to modify the current objectives and strategies in ways to

make the organization more successful. This includes trying to create "sustainable"

competitive advantages -- although most competitive advantages are eroded steadily by

the efforts of competitors.

A good recommendation should be: effective in solving the stated problem(s), practical

(can be implemented in this situation, with the resources available), feasible within areasonable time frame, cost-effective, not overly disruptive, and acceptable to key

"stakeholders" in the organization. It is important to consider "fits" between resources

plus competencies with opportunities, and also fits between risks and expectations.

There are four primary steps in this phase:

* Reviewing the current key objectives and strategies of the organization, which

usually would have been identified and evaluated as part of the diagnosis

* Identifying a rich range of strategic alternatives to address the three levels of

strategy formulation outlined below, including but not limited to dealing withthe critical issues

* Doing a balanced evaluation of advantages and disadvantages of the alternatives

relative to their feasibility plus expected effects on the issues and contributions

to the success of the organization

* Deciding on the alternatives that should be implemented or recommended.



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In organizations, and in the practice of strategic management, strategies must be

implemented to achieve the intended results. The most wonderful strategy in the history

of the world is useless if not implemented successfully. This third and final stage in the

strategic management process involves developing an implementation plan and thendoing whatever it takes to make the new strategy operational and effective in achieving

the organization's objectives.

Defination Of Strategy Formulation

Strategy formation creates strategy, designing new businesses and organizations to carryout those businesses. Formation involves exploration, the search for new advantages and business possibilities. Strategy formation creates a theory of business and itsaccompanying hypotheses. Strategy formation, or creation, is an aspect of strategicmanagement. The BAi strategic management construct labels this aspect creates art.

"Strategy formation is judgmental designing, intuitive visioning, and emergent learning;it is about transformation as well as perpetuation; it must involve individual cognitionand social interaction, cooperation as well as conflict; it has to include analyzing beforeand programming after as well as negotiating during; and all of this must be in responseto what can be a demanding environment. Just try and leave any of this out and see whathappens!”



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1.2 THREE ASPECT OF STRATEGY FORMULATION

The following three aspects or levels of strategy formulation, each with a different focus,

need to be dealt with in the formulation phase of strategic management. The three sets of

recommendations must be internally consistent and fit together in a mutually supportive

manner that forms an integrated hierarchy of strategy, in the order given.

Corporate Level Strategy:

In this aspect of strategy, we are concerned with broad decisions about the total

organization's scope and direction. Basically, we consider what changes should be made

in our growth objective and strategy for achieving it, the lines of business we are in, and

how these lines of business fit together. It is useful to think of three components of

corporate level strategy: (a) growth or directional strategy (what should be our growth

objective, ranging from retrenchment through stability to varying degrees of growth - and

how do we accomplish this), (b) portfolio strategy (what should be our portfolio of linesof business, which implicitly requires reconsidering how much concentration or

diversification we should have), and (c) parenting strategy (how we allocate resources

and manage capabilities and activities across the portfolio -- where do we put special

emphasis, and how much do we integrate our various lines of business).

Competitive Strategy (often called Business Level Strategy):

This involves deciding how the company will compete within each line of business

(LOB) or strategic business unit (SBU).

Functional Strategy:

These more localized and shorter-horizon strategies deal with how each functional area

and unit will carry out its functional activities to be effective and maximize resource

productivity.



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CORPORATE LEVEL STRATEGY

This comprises the overall strategy elements for the corporation as a whole, the grand

strategy, if you please. Corporate strategy involves four kinds of initiatives:

* Making the necessary moves to establish positions in different businesses andachieve an appropriate amount and kind of diversification. A key part of

corporate strategy is making decisions on how many, what types, and which

specific lines of business the company should be in. This may involve deciding

to increase or decrease the amount and breadth of diversification. It may

involve closing out some LOB's (lines of business), adding others, and/or

changing emphasis among LOB's.

* Initiating actions to boost the combined performance of the businesses the

company has diversified into: This may involve vigorously pursuing rapid-

growth strategies in the most promising LOB's, keeping the other core businesses healthy, initiating turnaround efforts in weak-performing LOB's with

promise, and dropping LOB's that are no longer attractive or don't fit into the

corporation's overall plans. It also may involve supplying financial, managerial,

and other resources, or acquiring and/or merging other companies with an

existing LOB.

* Pursuing ways to capture valuable cross-business strategic fits and turn them

into competitive advantages -- especially transferring and sharing related

technology, procurement leverage, operating facilities, distribution channels,

and/or customers.

* Establishing investment priorities and moving more corporate resources into the

most attractive LOB's.

It is useful to organize the corporate level strategy considerations and initiatives into a

framework with the following three main strategy components: growth, portfolio, and

parenting. These are discussed in the next three sections.

What Should be Our Growth Objective and Strategies?

Growth objectives can range from drastic retrenchment through aggressive growth.

Organizational leaders need to revisit and make decisions about the growth

objectives and the fundamental strategies the organization will use to achieve them.

There are forces that tend to push top decision-makers toward a growth stance even when

a company is in trouble and should not be trying to grow, for example bonuses, stock

options, fame, ego. Leaders need to resist such temptations and select a growth strategy



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stance that is appropriate for the organization and its situation. Stability and

retrenchment strategies are underutilized.

Some of the major strategic alternatives for each of the primary growth stances

(retrenchment, stability, and growth) are summarized in the following three sub-sections.

Growth Strategies

All growth strategies can be classified into one of two fundamental categories:

concentration within existing industries or diversification into other lines of business or

industries. When a company's current industries are attractive, have good growth

potential, and do not face serious threats, concentrating resources in the existing

industries makes good sense. Diversification tends to have greater risks, but is an

appropriate option when a company's current industries have little growth potential or are

unattractive in other ways. When an industry consolidates and becomes mature, unless

there are other markets to seek (for example other international markets), a company may

have no choice for growth but diversification.

There are two basic concentration strategies, vertical integration and horizontal

growth. Diversification strategies can be divided into related (or concentric) and

unrelated (conglomerate) diversification. Each of the resulting four core categories of

strategy alternatives can be achieved internally through investment and development, or

externally through mergers, acquisitions, and/or strategic alliances -- thus producing eight

major growth strategy categories.

Comments about each of the four core categories are outlined below, followed by

some key points about mergers, acquisitions, and strategic alliances.

1. Vertical Integration: This type of strategy can be a good one if the company has a

strong competitive position in a growing, attractive industry. A company can grow by

taking over functions earlier in the value chain that were previously provided by suppliers

or other organizations ("backward integration"). This strategy can have advantages, e.g.,

in cost, stability and quality of components, and making operations more difficult for

competitors. However, it also reduces flexibility, raises exit barriers for the company to

leave that industry, and prevents the company from seeking the best and latest

components from suppliers competing for their business.

A company also can grow by taking over functions forward in the value chain

previously provided by final manufacturers, distributors, or retailers ("forward

integration"). This strategy provides more control over such things as final



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products/services and distribution, but may involve new critical success factors that the

parent company may not be able to master and deliver. For example, being a world-class

manufacturer does not make a company an effective retailer.

Some writers claim that backward integration is usually more profitable than

forward integration, although this does not have general support. In any case, manycompanies have moved toward less vertical integration (especially backward, but also

forward) during the last decade or so, replacing significant amounts of previous vertical

integration with outsourcing and various forms of strategic alliances.

2. Horizontal Growth: This strategy alternative category involves expanding the

company's existing products into other locations and/or market segments, or increasing

the range of products/services offered to current markets, or a combination of both. It

amounts to expanding sideways at the point(s) in the value chain that the company is

currently engaged in. One of the primary advantages of this alternative is being able to

choose from a fairly continuous range of choices, from modest extensions of present products/markets to major expansions -- each with corresponding amounts of cost and

risk.

3. Related Diversification (aka Concentric Diversification): In this alternative, a

company expands into a related industry, one having synergy with the company's existing

lines of business, creating a situation in which the existing and new lines of business

share and gain special advantages from commonalities such as technology, customers,

distribution, location, product or manufacturing similarities, and government access.

This is often an appropriate corporate strategy when a company has a strong competitive

position and distinctive competencies, but its existing industry is not very attractive.

4. Unrelated Diversification (aka Conglomerate Diversification): This fourth major

category of corporate strategy alternatives for growth involves diversifying into a line of

business unrelated to the current ones. The reasons to consider this alternative are

primarily seeking more attractive opportunities for growth in which to invest available

funds (in contrast to rather unattractive opportunities in existing industries), risk

reduction, and/or preparing to exit an existing line of business (for example, one in the

decline stage of the product life cycle). Further, this may be an appropriate strategy

when, not only the present industry is unattractive, but the company lacks outstanding

competencies that it could transfer to related products or industries. However, because itis difficult to manage and excel in unrelated business units, it can be difficult to realize

the hoped-for value added.



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Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy

categories just discussed can be carried out internally or externally, through mergers,

acquisitions, and/or strategic alliances. Of course, there also can be a mixture of internal

and external actions.

Various forms of strategic alliances, mergers, and acquisitions have emerged andare used extensively in many industries today. They are used particularly to bridge

resource and technology gaps, and to obtain expertise and market positions more quickly

than could be done through internal development. They are particularly necessary and

potentially useful when a company wishes to enter a new industry, new markets, and/or

new parts of the world.

Despite their extensive use, a large share of alliances, mergers, and acquisitions fall

far short of expected benefits or are outright failures. For example, one study published

in Business Week in 1999 found that 61 percent of alliances were either outright failures

or "limping along." Research on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from 1990 to 1996 which found that nearly

half "destroyed" shareholder value; an A. T. Kearney study of 115 multibillion-dollar,

global mergers between 1993 and 1996 where 58 percent failed to create "substantial

returns for shareholders" in the form of dividends and stock price appreciation; and a

Price-Waterhouse-Coopers study of 97 acquisitions over $500 million from 1994 to 1997

in which two-thirds of the buyer's stocks dropped on announcement of the transaction and

a third of these were still lagging a year later.

Many reasons for the problematic record have been cited, including paying too

much, unrealistic expectations, inadequate due diligence, and conflicting corporatecultures; however, the most powerful contributor to success or failure is inadequate

attention to the merger integration process. Although the lawyers and investment bankers

may consider a deal done when the papers are signed and they receive their fees, this

should be merely an incident in a multi-year process of integration that began before the

signing and continues far beyond.

Stability Strategies

There are a number of circumstances in which the most appropriate growth stance for a

company is stability, rather than growth. Often, this may be used for a relatively short

period, after which further growth is planned. Such circumstances usually involve a

reasonable successful company, combined with circumstances that either permit a period

of comfortable coasting or suggest a pause or caution. Three alternatives are outlined

below, in which the actual strategy actions are similar, but differing primarily in the



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circumstances motivating the choice of a stability strategy and in the intentions for future

strategic actions.

1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout)may be appropriate in either of two situations: (a) the need for an opportunity to rest,

digest, and consolidate after growth or some turbulent events - before continuing a

growth strategy, or (b) an uncertain or hostile environment in which it is prudent to stay

in a "holding pattern" until there is change in or more clarity about the future in the

environment.

2. No Change: This alternative could be a cop-out, representing indecision or timidity in

making a choice for change. Alternatively, it may be a comfortable, even long-term

strategy in a mature, rather stable environment, e.g., a small business in a small town with

few competitors.

3. Grab Profits While You Can: This is a non-recommended strategy to try to mask a

deteriorating situation by artificially supporting profits or their appearance, or otherwise

trying to act as though the problems will go away. It is an unstable, temporary strategy in

a worsening situation, usually chosen either to try to delay letting stakeholders know how

bad things are or to extract personal gain before things collapse. Recent terrible

examples in the USA are Enron and WorldCom.

Retrenchment Strategies

Turnaround: This strategy, dealing with a company in serious trouble, attempts toresuscitate or revive the company through a combination of contraction (general, major

cutbacks in size and costs) and consolidation (creating and stabilizing a smaller, leaner

company). Although difficult, when done very effectively it can succeed in both

retaining enough key employees and revitalizing the company.

Captive Company Strategy: This strategy involves giving up independence in

exchange for some security by becoming another company's sole supplier, distributor, or

a dependent subsidiary.

Sell Out: If a company in a weak position is unable or unlikely to succeed with a

turnaround or captive company strategy, it has few choices other than to try to find a

buyer and sell itself (or divest, if part of a diversified corporation).

Liquidation: When a company has been unsuccessful in or has none of the previous

three strategic alternatives available, the only remaining alternative is liquidation, often



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involving a bankruptcy. There is a modest advantage of a voluntary liquidation over

bankruptcy in that the board and top management make the decisions rather than turning

them over to a court, which often ignores stockholders' interests.

What Should Be Our Portfolio Strategy?

This second component of corporate level strategy is concerned with making decisions

about the portfolio of lines of business (LOB's) or strategic business units (SBU's), not

the company's portfolio of individual products.

Portfolio matrix models can be useful in reexamining a company's present

portfolio. The purpose of all portfolio matrix models is to help a company understand

and consider changes in its portfolio of businesses, and also to think about allocation of

resources among the different business elements. The two primary models are the BCG

Growth-Share Matrix and the GE Business Screen (Porter, 1980, has a good summary of

these). These models consider and display on a two-dimensional graph each major SBU

in terms of some measure of its industry attractiveness and its relative competitive

strength

The BCG Growth-Share Matrix model considers two relatively simple variables:

growth rate of the industry as an indication of industry attractiveness, and relative market

share as an indication of its relative competitive strength. The GE Business Screen, also

associated with McKinsey, considers two composite variables, which can be customized

by the user, for (a) industry attractiveness (e.g, one could include industry size and

growth rate, profitability, pricing practices, favored treatment in government dealings,

etc.) and (b) competitive strength (e.g., market share, technological position, profitability,

size, etc.)

The best test of the business portfolio's overall attractiveness is whether the

combined growth and profitability of the businesses in the portfolio will allow the

company to attain its performance objectives. Related to this overall criterion are such

questions as:

* Does the portfolio contain enough businesses in attractive industries?

* Does it contain too many marginal businesses or question marks?

* Is the proportion of mature/declining businesses so great that growth will be

sluggish?

* Are there some businesses that are not really needed or should be divested?



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* Does the company have its share of industry leaders, or is it burdened with too

many businesses in modest competitive positions?

* Is the portfolio of SBU's and its relative risk/growth potential consistent with the

strategic goals?

* Do the core businesses generate dependable profits and/or cash flow?

* Are there enough cash-producing businesses to finance those needing cash

* Is the portfolio overly vulnerable to seasonal or recessionary influences?

* Does the portfolio put the corporation in good position for the future?

It is important to consider diversification vs. concentration while working on

portfolio strategy, i.e., how broad or narrow should be the scope of the company. It is notalways desirable to have a broad scope. Single-business strategies can be very successful

(e.g., early strategies of McDonald's, Coca-Cola, and BIC Pen). Some of the advantages

of a narrow scope of business are: (a) less ambiguity about who we are and what we do;

(b) concentrates the efforts of the total organization, rather than stretching them across

many lines of business; (c) through extensive hands-on experience, the company is more

likely to develop distinctive competence; and (d) focuses on long-term profits. However,

having a single business puts "all the eggs in one basket," which is dangerous when the

industry and/or technology may change. Diversification becomes more important when

market growth rate slows. Building stable shareholder value is the ultimate justification

for diversifying -- or any strategy.

What Should Be Our Parenting Strategy?

This third component of corporate level strategy, relevant for a multi-business company

(it is moot for a single-business company), is concerned with how to allocate resources

and manage capabilities and activities across the portfolio of businesses. It includes

evaluating and making decisions on the following:

* Priorities in allocating resources (which business units will be stressed)

* What are critical success factors in each business unit, and how can the company

do well on them

* Coordination of activities (e.g., horizontal strategies) and transfer of capabilities

among business unit



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COMPETITIVE (BUSINESS LEVEL) STRATEGY

In this second aspect of a company's strategy, the focus is on how to compete

successfully in each of the lines of business the company has chosen to engage in. The

central thrust is how to build and improve the company's competitive position for each of

its lines of business. A company has competitive advantage whenever it can attractcustomers and defend against competitive forces better than its rivals. Companies want

to develop competitive advantages that have some sustainability (although the typical

term "sustainable competitive advantage" is usually only true dynamically, as a firm

works to continue it). Successful competitive strategies usually involve building

uniquely strong or distinctive competencies in one or several areas crucial to success and

using them to maintain a competitive edge over rivals. Some examples of distinctive

competencies are superior technology and/or product features, better manufacturing

technology and skills, superior sales and distribution capabilities, and better customer

service and convenience.

Competitive strategy is about being different. It means deliberately choosing to perform

activities differently or to perform different activities than rivals to deliver a unique mix

of value. (Michael E. Porter)

The essence of strategy lies in creating tomorrow's competitive advantages faster than

competitors mimic the ones you possess today. (Gary Hamel & C. K. Prahalad)

We will consider competitive strategy by using Porter's four generic strategies (Porter

1980, 1985) as the fundamental choices, and then adding various competitive tactics.

Porter's Four Generic Competitive Strategies

He argues that a business needs to make two fundamental decisions in establishing its

competitive advantage: (a) whether to compete primarily on price (he says "cost," which

is necessary to sustain competitive prices, but price is what the customer responds to) or

to compete through providing some distinctive points of differentiation that justify higher

prices, and (b) how broad a market target it will aim at (its competitive scope). These

two choices define the following four generic competitive strategies. which he argues

cover the fundamental range of choices. A fifth strategy alternative (best-cost provider)is added by some sources, although not by Porter, and is included below:

1. Overall Price (Cost) Leadership: appealing to a broad cross-section of the market

by providing products or services at the lowest price. This requires being the overall low-

cost provider of the products or services (e.g., Costco, among retail stores, and Hyundai,

among automobile manufacturers). Implementing this strategy successfully requires



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continual, exceptional efforts to reduce costs -- without excluding product features and

services that buyers consider essential. It also requires achieving cost advantages in ways

that are hard for competitors to copy or match. Some conditions that tend to make this

strategy an attractive choice are:

* The industry's product is much the same from seller to seller

* The marketplace is dominated by price competition, with highly price-sensitive

buyers

* There are few ways to achieve product differentiation that have much value to

buyers

* Most buyers use product in same ways -- common user requirements

* Switching costs for buyers are low

* Buyers are large and have significant bargaining power.

2. Differentiation: appealing to a broad cross-section of the market through offering

differentiating features that make customers willing to pay premium prices, e.g., superior

technology, quality, prestige, special features, service, convenience (examples are

Nordstrom and Lexus). Success with this type of strategy requires differentiation

features that are hard or expensive for competitors to duplicate. Sustainable

differentiation usually comes from advantages in core competencies, unique company

resources or capabilities, and superior management of value chain activities. Some

conditions that tend to favor differentiation strategies are:

* There are multiple ways to differentiate the product/service that buyers think

have substantial value

* Buyers have different needs or uses of the product/service

* Product innovations and technological change are rapid and competition

emphasizes the latest product features

* Not many rivals are following a similar differentiation strategy

3. Price (Cost) Focus: a market niche strategy, concentrating on a narrow customer

segment and competing with lowest prices, which, again, requires having lower cost

structure than competitors (e.g., a single, small shop on a side-street in a town, in which

they will order electronic equipment at low prices, or the cheapest automobile made in



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the former Bulgaria). Some conditions that tend to favor focus (either price or

differentiation focus) are:

* The business is new and/or has modest resources

* The company lacks the capability to go after a wider part of the total market

* Buyers' needs or uses of the item are diverse; there are many different niches

and segments in the industry

* Buyer segments differ widely in size, growth rate, profitability, and intensity in

the five competitive forces, making some segments more attractive than others

* Industry leaders don't see the niche as crucial to their own success

* Few or no other rivals are attempting to specialize in the same target segment

4. Differentiation Focus: a second market niche strategy, concentrating on a narrow

customer segment and competing through differentiating features (e.g., a high-fashion

women's clothing boutique in Paris, or Ferrari).

Best-Cost Provider Strategy: (although not one of Porter's basic four strategies, this

strategy is mentioned by a number of other writers.) This is a strategy of trying to give

customers the best cost/value combination, by incorporating key good-or-better product

characteristics at a lower cost than competitors. This strategy is a mixture or hybrid of

low-price and differentiation, and targets a segment of value-conscious buyers that isusually larger than a market niche, but smaller than a broad market. Successful

implementation of this strategy requires the company to have the resources, skills,

capabilities (and possibly luck) to incorporate up-scale features at lower cost than

competitors.

This strategy could be attractive in markets that have both variety in buyer needs

that make differentiation common and where large numbers of buyers are sensitive to

both price and value.

Porter might argue that this strategy is often temporary, and that a business should

choose and achieve one of the four generic competitive strategies above. Otherwise, the

business is stuck in the middle of the competitive marketplace and will be out-performed

by competitors who choose and excel in one of the fundamental strategies. His argument

is analogous to the threats to a tennis player who is standing at the service line, rather

than near the baseline or getting to the net. However, others present examples of

companies (e.g., Honda and Toyota) who seem to be able to pursue successfully a best-

cost provider strategy, with stability.



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Competitive Tactics

Although a choice of one of the generic competitive strategies discussed in the previous

section provides the foundation for a business strategy, there are many variations andelaborations. Among these are various tactics that may be useful (in general, tactics are

shorter in time horizon and narrower in scope than strategies). This section deals with

competitive tactics, while the following section discusses cooperative tactics.

Two categories of competitive tactics are those dealing with timing (when to enter

a market) and market location (where and how to enter and/or defend).

Timing Tactics: When to make a strategic move is often as important as what

move to make. We often speak of first-movers (i.e., the first to provide a product or

service), second-movers or rapid followers, and late movers (wait-and-see). Each tactic

can have advantages and disadvantages.

Being a first-mover can have major strategic advantages when: (a) doing so builds

an important image and reputation with buyers; (b) early adoption of new technologies,

different components, exclusive distribution channels, etc. can produce cost and/or other

advantages over rivals; (c) first-time customers remain strongly loyal in making repeat

purchases; and (d) moving first makes entry and imitation by competitors hard or

unlikely.

However, being a second- or late-mover isn't necessarily a disadvantage. There are

cases in which the first-mover's skills, technology, and strategies are easily copied or even surpassed by later-movers, allowing them to catch or pass the first-mover in a

relatively short period, while having the advantage of minimizing risks by waiting until a

new market is established. Sometimes, there are advantages to being a skillful follower

rather than a first-mover, e.g., when: (a) being a first-mover is more costly than imitating

and only modest experience curve benefits accrue to the leader (followers can end up

with lower costs than the first-mover under some conditions); (b) the products of an

innovator are somewhat primitive and do not live up to buyer expectations, thus allowing

a clever follower to win buyers away from the leader with better performing products; (c)

technology is advancing rapidly, giving fast followers the opening to leapfrog a first-

mover's products with more attractive and full-featured second- and third-generation

products; and (d) the first-mover ignores market segments that can be picked up easily.

Market Location Tactics: These fall conveniently into offensive and defensive

tactics. Offensive tactics are designed to take market share from a competitor, while

defensive tactics attempt to keep a competitor from taking away some of our present



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market share, under the onslaught of offensive tactics by the competitor. Some offensive

tactics are:

* Frontal Assault: going head-to-head with the competitor, matching each other

in every way. To be successful, the attacker must have superior resources and

be willing to continue longer than the company attacked.

* Flanking Maneuver: attacking a part of the market where the competitor is

weak. To be successful, the attacker must be patient and willing to carefully

expand out of the relatively undefended market niche or else face retaliation by

an established competitor.

* Encirclement: usually evolving from the previous two, encirclement involves

encircling and pushing over the competitor's position in terms of greater product

variety and/or serving more markets. This requires a wide variety of abilities

and resources necessary to attack multiple market segments.

* Bypass Attack: attempting to cut the market out from under the established

defender by offering a new, superior type of produce that makes the competitor's

product unnecessary or undesirable.

* Guerrilla Warfare: using a "hit and run" attack on a competitor, with small,

intermittent assaults on different market segments. This offers the possibility for

even a small firm to make some gains without seriously threatening a large,

established competitor and evoking some form of retaliation.

Some Defensive Tactics are:

* Raise Structural Barriers: block avenues challengers can take in mounting an

offensive

* Increase Expected Retaliation: signal challengers that there is threat of strong

retaliation if they attack

* Reduce Inducement for Attacks: e.g., lower profits to make things less attractive

(including use of accounting techniques to obscure true profitability). Keeping

prices very low gives a new entrant little profit incentive to enter.

The general experience is that any competitive advantage currently held will

eventually be eroded by the actions of competent, resourceful competitors. Therefore, to

sustain its initial advantage, a firm must use both defensive and offensive strategies, in

elaborating on its basic competitive strategy.



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Cooperative Strategies

Another group of "competitive" tactics involve cooperation among companies.

These could be grouped under the heading of various types of strategic alliances, whichhave been discussed to some extent under Corporate Level growth strategies. These

involve an agreement or alliance between two or more businesses formed to achieve

strategically significant objectives that are mutually beneficial. Some are very short-term;

others are longer-term and may be the first stage of an eventual merger between the

companies.

Some of the reasons for strategic alliances are to: obtain/share technology, share

manufacturing capabilities and facilities, share access to specific markets, reduce

financial/political/market risks, and achieve other competitive advantages not otherwise

available. There could be considered a continuum of types of strategic alliances, rangingfrom: (a) mutual service consortiums (e.g., similar companies in similar industries pool

their resources to develop something that is too expensive alone), (b) licensing

arrangements, (c) joint ventures (an independent business entity formed by two or more

companies to accomplish certain things, with allocated ownership, operational

responsibilities, and financial risks and rewards), (d) value-chain partnerships (e.g., just-

in-time supplier relationships, and out-sourcing of major value-chain functions).



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FUNCTIONAL STRATEGIES

Functional strategies are relatively short-term activities that each functional area within a

company will carry out to implement the broader, longer-term corporate level and

business level strategies. Each functional area has a number of strategy choices, that

interact with and must be consistent with the overall company strategies.

Three basic characteristics distinguish functional strategies from corporate level

and business level strategies: shorter time horizon, greater specificity, and primary

involvement of operating managers.

A few examples follow of functional strategy topics for the major functional areas

of marketing, finance, production/operations, research and development, and human

resources management. Each area needs to deal with sourcing strategy, i.e., what should

be done in-house and what should be outsourced?

Marketing strategy deals with product/service choices and features, pricing

strategy, markets to be targeted, distribution, and promotion considerations. Financial

strategies include decisions about capital acquisition, capital allocation, dividend policy,

and investment and working capital management. The production or operations

functional strategies address choices about how and where the products or services will

be manufactured or delivered, technology to be used, management of resources, plus

purchasing and relationships with suppliers. For firms in high-tech industries, R&D

strategy may be so central that many of the decisions will be made at the business or even

corporate level, for example the role of technology in the company's competitive strategy,

including choices between being a technology leader or follower. However, there willremain more specific decisions that are part of R&D functional strategy, such as the

relative emphasis between product and process R&D, how new technology will be

obtained (internal development vs. external through purchasing, acquisition, licensing,

alliances, etc.), and degree of centralization for R&D activities. Human resources

functional strategy includes many topics, typically recommended by the human resources

department, but many requiring top management approval. Examples are job categories

and descriptions; pay and benefits; recruiting, selection, and orientation; career

development and training; evaluation and incentive systems; policies and discipline; and

management/executive selection processes.



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CHOOSING THE BEST STRATEGY ALTERNATIVES

Decision making is a complex subject, worthy of a chapter or book of its own. This section can

only offer a few suggestions. Among the many sources for additional information, I recommend

Harrison (1999), McCall & Kaplan (1990), and Williams (2002). Here are some factors to

consider when choosing among alternative strategies:

* It is important to get as clear as possible about objectives and decision criteria (what

makes a decision a "good" one?)

* The primary answer to the previous question, and therefore a vital criterion, is that the

chosen strategies must be effective in addressing the "critical issues" the company faces

at this time

* They must be consistent with the mission and other strategies of the organization

* They need to be consistent with external environment factors, including realistic

assessments of the competitive environment and trends

* They fit the company's product life cycle position and market attractiveness/competitive

strength situation

* They must be capable of being implemented effectively and efficiently, including being

realistic with respect to the company's resources

* The risks must be acceptable and in line with the potential rewards

* It is important to match strategy to the other aspects of the situation, including: (a) size,

stage, and growth rate of industry; (b) industry characteristics, including fragmentation,

importance of technology, commodity product orientation, international features; and

(c) company position (dominant leader, leader, aggressive challenger, follower, weak,

"stuck in the middle")

* Consider stakeholder analysis and other people-related factors (e.g., internal and

external pressures, risk propensity, and needs and desires of important decision-makers)

* Sometimes it is helpful to do scenario construction, e.g., cases with optimistic, most

likely, and pessimistic assumptions.



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SOME TROUBLESOME STRATEGIES TO AVOID OR USE WITH

CAUTION

Follow the Leader: when the market has no more room for copycat products and look-alike

competitors. Sometimes such a strategy can work fine, but not without careful consideration of

the company's particular strengths and weaknesses. (e.g., Fujitsu Ltd. was driven since the 1960s

to catch up to IBM in mainframes and continued this quest even into the 1990s after mainframes

were in steep decline; or the decision by Standard Oil of Ohio to follow Exxon and Mobil Oil into

conglomerate diversification)

Count On Hitting Another Home Run: e.g., Polaroid tried to follow its early success with

instant photography by developing "Polavision" during the mid-1970s. Unfortunately, this very

expensive, instant developing, 8mm, black and white, silent motion picture camera and film was

displayed at a stockholders' meeting about the time that the first beta-format video recorder was

released by Sony. Polaroid reportedly wrote off at least $500 million on this venture without

selling a single camera.

Try to Do Everything: establishing many weak market positions instead of a few strong ones

Arms Race: Attacking the market leaders head-on without having either a good competitiveadvantage or adequate financial strength; making such aggressive attempts to take market share

that rivals are provoked into strong retaliation and a costly "arms race." Such battles seldom

produce a substantial change in market shares; usual outcome is higher costs and profitless sales

growth

Put More Money On a Losing Hand: one version of this is allocating R&D efforts to weak

products instead of strong products (e.g., Polavision again, Pan Am's attempt to continue global

routes in 1987)

Over-optimistic Expansion: Using high debt to finance investments in new facilities and

equipment, then getting trapped with high fixed costs when demand turns down, excess capacity

appears, and cash flows are tight



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Unrealistic Status-Climbing: Going after the high end of the market without having the

reputation to attract buyers looking for name-brand, prestige goods (e.g., Sears' attempts to

introduce designer women's clothing)

Selling the Sizzle Without the Steak: Spending more money on marketing and sales

promotions to try to get around problems with product quality and performance. Depending on

cosmetic product improvements to serve as a substitute for real innovation and extra customer

value.



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1.3 LEVELS OF STRATEGY FORMULATION

Strategy may be formulated at the corporate level, business level and functional level.

Corporate strategy:

Corporate strategy is one, which decides what business the organization should be in, andhow the overall group of activities should be structured and managed. Porter hasdescribed it as the overall plan for a diversified business. The strategies are then evolvedfor each strategic business unit and strategic business area.

Strategic business unit:As the number and diversity of products increases the structure is likely to be centeredupon division called Strategic Business Unit (SBU). SBU are responsible individually for developing, manufacturing and marketing their own product or group of products.

Strategic Business Area (SBA):

SBA is a distinctive segment of the environment in which the firm does want to do business. A company instead of trying to compete in all the area, it selects the area of itscompetitive advantage and invest its money and strategies in that area. This helps thecompany to concentrate its strategies in a particular area and to reduce the unnecessaryexpenses in non-profitable area.

Functional Strategy:

Strategy that is related to each functional area of business such as production, marketingand personnel is called functional strategy. It is designed and managed in a coordinatedway so that they interrelate with each other and at the same time collectively allow thecompetitive strategy to be implemented properly.

Competitive Strategy:Competitive Strategy is concerned with creating and maintaining a competitive advantagein each and every area of business.



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1.4 Steps Of Strategy Formulation

Strategy formulation refers to the process of choosing the most appropriate course of action for the realization of organizational goals and objectives and thereby achieving theorganizational vision. The process of strategy formulation basically involves six main

steps. Though these steps do not follow a rigid chronological order, however they arevery rational and can be easily followed in this order.

1. Setting Organizations’ objectives –

The key component of any strategy statement is to set the long-term objectives of the organization. It is known that strategy is generally a medium for realization of organizational objectives. Objectives stress the state of being there whereasStrategy stresses upon the process of reaching there. Strategy includes both thefixation of objectives as well the medium to be used to realize those objectives.Thus, strategy is a wider term which believes in the manner of deployment of

resources so as to achieve the objectives.

While fixing the organizational objectives, it is essential that the factors whichinfluence the selection of objectives must be analyzed before the selection of objectives. Once the objectives and the factors influencing strategic decisionshave been determined, it is easy to take strategic decisions.

2. Evaluating the Organizational Environment –

The next step is to evaluate the general economic and industrial environment inwhich the organization operates. This includes a review of the organizations

competitive position. It is essential to conduct a qualitative and quantitativereview of an organizations existing product line. The purpose of such a review isto make sure that the factors important for competitive success in the market can be discovered so that the management can identify their own strengths andweaknesses as well as their competitors’ strengths and weaknesses.

After identifying its strengths and weaknesses, an organization must keep a track of competitors’ moves and actions so as to discover probable opportunities of

threats to its market or supply sources.

3. Setting Quantitative Targets –

In this step, an organization must practically fix the quantitative target values for some of the organizational objectives. The idea behind this is to compare withlong term customers, so as to evaluate the contribution that might be made byvarious product zones or operating departments.



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4. Aiming in context with the divisional plans -

In this step, the contributions made by each department or division or productcategory within the organization is identified and accordingly strategic planning isdone for each sub-unit. This requires a careful analysis of macroeconomic trends.

5. Performance Analysis –

Performance analysis includes discovering and analyzing the gap between the planned or desired performance. A critical evaluation of the organizations past performance, present condition and the desired future conditions must be done bythe organization. This critical evaluation identifies the degree of gap that persists between the actual reality and the long-term aspirations of the organization. Anattempt is made by the organization to estimate its probable future condition if thecurrent trends persist.

6.

Choice of Strategy –

This is the ultimate step in Strategy Formulation. The best course of action isactually chosen after considering organizational goals, organizational strengths, potential and limitations as well as the external opportunities.



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1.5 STRATEGY FORMULATION AT BUSINESS LEVEL

Stated simply, strategy is a road map or guide by which an organization moves from acurrent state of affairs to a future desired state. It is not only a template by which dailydecisions are made, but also a tool with which long-range future plans and courses of

action are constructed. Strategy allows a company to position itself effectively within itsenvironment to reach its maximum potential, while constantly monitoring thatenvironment for changes that can affect it so as to make changes in its strategic planaccordingly. In short, strategy defines where you are, where you are going, and how youare going to get there.

ENVIRONMENTAL SCANNING

This element of strategy formulation is one of the two continuous processes. Consistentlyscanning 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 toconduct subsequent pieces of the planning process. There are several specific areas thatshould 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 isable to adapt its strategy accordingly. This leads to the development of a real advantagein the form of accurate responses to internal

Figure 1

Strategic Planning Processand 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 requiressome degree of implementation before the next stage can begin. This naturally dictatesthat all implementation cannot be postponed until completion of the plan, but must beinitiated along the way. Implementation procedures specific to each phase of planningmust be completed during that phase in order for the next stage to be started.



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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 isto 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 assessmentshould include an in-depth analysis of several elements: personal values, organizationalvalues, 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 toencounter severe implementation and functionality problems if not outright failure.Briefly put, form follows function; the form of the strategic plan must follow thefunctionality of the organization, which is a direct result of organizational values andculture. If any party feels that his or her values have been neglected, he or she will notadopt 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 whichthe remainder of the plan is built. A vision is a statement that identifies where anorganization wants to be at some point in the future. It functions to provide a companywith 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 thatholds an organization together. It itself is composed of core values and a core purpose.The core purpose is the organization's entire reason for being. The envisioned futureinvolves a conception of the organization at a specified future date inclusive of itsaspirations and ambitions. It includes the BHAG (big, hairy, audacious goal), which acompany typically reaches only 50 to 70 percent of the time. This envisioned future givesvividly 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 employeesand the organization as a whole, and, finally, success. Once an agreed-upon vision isimplemented, 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 sixspecific elements, including the basic product or service, employee orientation, primarymarket(s), customer orientation, principle technologies, and standards of quality. With all



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of these elements incorporated, a mission statement should still remain short andmemorable. 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; toenhance 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 thedetermination 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 additionof a new line of business, it should be based on existing core competencies of theorganization, its potential contribution to the bottom line, and its fit with the firm's valuesystem.

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 bywhich to measure the progress toward achieving the company's mission. In order to serveas 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 oninvestment, 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 anorganization. Generally speaking, there are a handful of commonly used strategic thrusts,which have been so aptly named grand strategies. They include the concentration onexisting products or services; market/product development; concentration oninnovation/technology; vertical/horizontal integration; the development of joint ventures;diversification; retrenchment/turnaround (usually through cost reduction); anddivestment/liquidation (known as the final solution).

Finally, in designing strategy, it is necessary to determine the necessary culture withwhich to support the achievement of the lines of business, critical success indicators, andstrategic thrusts. Harrison and Stokes (1992) defined four major types of organizational



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cultures: power orientation, role orientation, achievement orientation, and supportorientation. Power orientation is based on the inequality of access to resources, andleadership is based on strength from those individuals who control the organization fromthe top. Role orientation carefully defines the roles and duties of each member of theorganization; 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 energyof organizational members in the pursuit of common goals. With a support orientation,the organizational climate is based on mutual trust between the individual and theorganization. More emphasis is placed on people being valued more as human beingsrather 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 missionand 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

Figure 2

SWOT Analysisin-depth look at the company's internal strengths and weaknesses and its externalopportunities and threats. This is commonly called a SWOT analysis.

Developing a clear understanding of resource strengths and weaknesses, an organization's best opportunities, and its external threats allows the planning team to draw conclusionsabout how to best allocate resources in light of the firm's internal and external situation.This also produces strategic thinking about how to best strengthen the organization'sresource base for the future.

Looking internally, there are several key areas that must be analyzed and addressed. Thisincludes identifying the status of each existing line of business and unused resources for prospective additions; identifying the status of current tracking systems; defining theorganization's strategic profile; listing the available resources for implementing thestrategic thrusts that have been selected for achieving the newly defined mission; and anexamining the current organizational culture. The external investigation should look closely at competitors, suppliers, markets and customers, economic trends, labor-marketconditions, and governmental regulations. In conducting this query, the informationgained 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



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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 asa 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 withwhich to close the identified performance gap(s). All too often, however, planning teamsmake the mistake of making this step much more difficult than need be. Simply, the planning team must look at the current state of affairs

Figure 3

Gap Analysisand the desired future state. The first question that must be addressed is whether or notthe gap can feasibly be closed. If so, there are two simple questions to answer: "What arewe doing now that we need to stop doing?" and "What do we need to do that we are notdoing?" In answering these questions and reallocating resources from activities to beceased 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 bereassessed.

ACTION PLAN DEVELOPMENT

This phase of planning ties everything together. First, an action plan must be developedfor each line of business, both existing and proposed. It is here that the goals andobjectives for the organization are developed.

Goals are statements of desired future end-states. They are derived from the vision andmission statements and are consistent with organizational culture, ethics, and the law.

Goals are action oriented, measurable, standard setting, and time bounded. In strategic planning, it is essential to concentrate on only two or three goals rather than a great many.The idea is that a planning team can do a better job on a few rather than on many. Thereshould never be more than seven goals. Ideally, the team should set one, well-definedgoal for each line of business.

Writing goals statements is often a tricky task. By following an easy-to-use formula,goals will include all vital components.



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Accomplishment/target (e.g., to be number one in sales on the East Coast by2005)

A measure (e.g., sales on the East Coast) Standards (e.g., number one) Time frame (e.g., long-term)

Objectives are near-term goals that link each long-term goal with functional areas, suchas operations, human resources, finance, etc., and to key processes such as information,leadership, etc. Specifically, each objective statement must indicate what is to be done,what will be measured, the expected standards for the measure, and a time frame lessthan one year (usually tied to the budget cycle). Objectives are dynamic in that they canand do change if the measurements indicate that progress toward the accomplishment of the goal at hand is deficient in any manner. Simply, objectives spell out the step-by-stepsequences of actions necessary to achieve the related goals.

CONTINGENCY PLANNING

The key to contingency planning is to establish a reactionary plan for high impact eventsthat cannot necessarily be anticipated. Contingency plans should identify a number of keyindicators that will create awareness of the need to reevaluate the applicability andeffectiveness of the strategy currently being followed. When a red flag is raised, thereshould either be a higher level of monitoring established or immediate action should betaken.

IMPLEMENTATION

Implementation of the strategic plan is the final step for putting it to work for an

organization. To be successful, the strategic plan must have the support of every member of the firm. As mentioned in the beginning, this is why the top office must be involvedfrom the beginning. A company's leader is its most influential member. Positive receptionand implementation of the strategic plan into daily activities by this office greatlyincreases the likelihood that others will do the same.

Advertising is key to successful implementation of the strategic plan. The more oftenemployees hear about the plan, its elements, and ways to measure its success, the greater the possibility that they will undertake it as part of their daily work lives. It is especiallyimportant that employees are aware of the measurement systems and that significantachievements be rewarded and celebrated. This positive reinforcement increases supportof the plan and belief in its possibilities.

HOSHIN PLANNING

Hoshin planning, or "hoshin kanri" in Japanese, is a planning method developed in Japanduring the 1970s and adopted by some U.S. firms starting in the 1980s. Also known inthe United States as policy deployment, management by policy, and hoshin management,



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it is a careful and deliberate process by which the few most important organizationalgoals are deployed throughout the organization. It consists of five major steps:

1. Development at the executive level of a long-term vision.2. Selection of a small number of annual targets that will move the organization

toward the vision.3. Development of plans at all levels of the organization that will together achievethe annual targets.

4. Execution of the plans.5. Regular audits of the plans. Among U.S. companies that utilize this method are

Hewlett-Packard and Xerox.

THE CONTEXT FOR HOSHIN PLANNING

Hoshin planning should be seen in the context of total quality management (TQM).Several elements of TQM are especially important for the effectiveness of hoshin

planning. Most basic is a customer-driven master plan that encapsulates the company'soverall vision and direction. Hoshin planning also assumes an effective system of dailymanagement that keeps the company moving on course, including an appropriate business structure and the use of quality tools such as SPC. A third important element of TQM is the presence of cross-functional teams. Experience in problem solving andcommunications across and between levels of the organization are vital for hoshin planning.

A number of general principles underlie this method. Of utmost importance is participation by all managers in defining the vision for the company as well as inimplementing the plans developed to reach the vision. Related to this is what the

Japanese call "catchball," which means a process of lateral and vertical communicationthat continues until understanding and agreement is assured. Another principle isindividual initiative and responsibility. Each manager sets his own monthly and yearlytargets and then integrates them with others. Related to this principle is a focus on the process rather than strictly on reaching the target and a dedication to root cause analysis.A final principle that is applied in Japan-but apparently not in the United States-is thatwhen applying hoshin planning, there is no tie to performance reviews or other personnelmeasures.

STEPS OF POLICY DEPLOYMENT

In its simplest form, hoshin planning consists of a plan, execution, and audit. In a moreelaborated form it includes a long-range plan (five to ten years), a detailed one-year plan,deployment to departments, execution, and regular diagnostic audits, including an annualaudit by the CEO.



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FIVE- TO TEN-YEAR VISION.

The long-range vision begins with the top executive and his staff, but is modified withinput from all managers. The purpose is to determine where the company wants to be atthat future point in time, given its current position, its strengths and weaknesses, the

voice of the customer, and other aspects of the business environment in which it operates.Beyond stating the goal, this long-range plan also identifies the steps that must be takento reach it. It focuses on the vital few strategic gaps that must be closed over the time period being planned.

Once the plan has been drafted, it is sent to all managers for their review and critique.The object is to get many perspectives on the plan. The review process also has the effectof increasing buy-in to the final plan. This process is easier in Japanese companies than inmost U.S. firms because most Japanese companies have only four layers of management.

ANNUAL PLAN.

Once the long-range vision is in place, the annual plan is created. The vital few areas for change that were identified in the vision are translated into steps to be taken this year.Again, this process involves lateral and vertical communication among managers. Thetargets are selected using criteria such as feasibility and contribution to the long-termgoals. The targets are stated in simple terms with clearly measurable goals. Somecompanies and authors refer to such an annual target as a hoshin. Most companies set nomore than three such targets, but others establish as many as eight. Not all departmentsare necessarily involved in every hoshin during a given year. The targets are chosen for the sake of the long-term goals, not for involvement for its own sake.

DEPLOYMENT TO LOWER LEVELS.

Once the targets, including the basic metrics for each, are established, the plan isdeployed throughout the company. This is the heart of hoshin planning. Each hoshin hassome sort of measurable target. Top-level managers, having discussed it with their subordinates earlier in the process, commit to a specific contribution to that target, andthen their subordinates develop their own plans to reach that contribution, includingappropriate metrics. Plans are deployed to lower levels in the same way (see Figure 1).An important principle here is that those who have to implement the plan design the plan.In addition to the lower level targets, the means and resources required are determined.Catchball plays an important role here. A key element of the hoshin discipline is thehorizontal and vertical alignment of the many separate plans that are developed. Allambiguities are clarified, and conflicting targets or means are negotiated.

The final step in deploying the hoshin is rolling up the separate plans and targets toensure that they are sufficient to reach the company-wide target. If not, more work isdone to reconcile the difference.



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EXECUTION.

The best-laid plans can come to naught if they are not properly executed. In terms of TQM, the execution phase is where hoshin management hands responsibility over todaily management. The strategies identified in the plan become part of the daily operation

of the company. If the process has been done properly, all employees know what has to be done at their level to reach the top-level goals and thereby move the company towardthe future described in the long-term vision.

AUDITING THE PLAN.

Essential to hoshin planning is the periodic diagnostic audit, most often done on amonthly basis. Each manager evaluates the progress made toward his own targets, andthese reports are rolled up the organization to give feedback on the process to the highestlevels. Successes and failures are examined at every level, and corrective action is takenas necessary. If it becomes apparent that something is seriously amiss in the execution,

because of a significant change in the situation or perhaps a mistake in the planning phase, the plan may be adjusted and the change communicated up and down theorganizational structure as necessary. The audit is a diagnostic review, an opportunity for mid-course corrections and not a time for marking up a scorecard. At the end of the year,the CEO makes an annual diagnostic review of the entire plan, focusing not only on theoverall success or failure, but also on the entire process, including the planning phase.The results of this audit become part of the input for the next annual plan, along with thefive-to-ten-year plan and changes in the internal or external business environment.

EVALUATION

Although full implementation of hoshin planning in a large organization takesconsiderable effort, it is recognized as having many advantages over traditional business planning. The discipline of



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Figure 4

hoshin planning uncovers the vital few changes that need to be made and ties them tostrategic action. It transmits the signals from top management to the rest of the

organization in a form that can bring about change at every level. It is participative: theindividuals that have to implement the plans have input into their design. Perhaps mostimportantly, it focuses on the process rather than just the result. This includes continualimprovement of the hoshin planning process itself. Organizations that persist in thismethod over a period of a few years report great benefits from its use.



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1.6 BENEFITS OF STRATEGY FORMULATION

Strategy formulation is vital to the well-being of a company or organization. There are

two major types of strategy: (1) corporate strategy, in which companies decide which line

or lines of business to engage in; and (2) business or competitive strategy, which sets the

framework for achieving success in a particular business. While business strategy often

receives more attention than corporate strategy, both forms of strategy involve planning,

industry/market analysis, goal setting, commitment of resources, and monitoring.

1. The company or organization must first choose the business or businesses inwhich it wishes to engage — in other words, the corporate strategy.

2. The company should then articulate a "mission statement" consistent with its business definition.

3. The company must develop strategic objectives or goals and set performanceobjectives (e.g., at least 15 percent sales growth each year).

4. Based on its overall objectives and an analysis of both internal and externalfactors, the company must create a specific business or competitive strategy thatwill fulfill its corporate goals (e.g., pursuing a market niche strategy, being a low-cost, high-volume producer).

5. The company then implements the business strategy by taking specific steps (e.g.,lowering prices, forging partnerships, entering new distribution channels).

6. Finally, the company needs to review its strategy's effectiveness, measure its own performance, and possibly change its strategy by repeating some or all of theabove steps.



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SUMMARY AND CONCLUSION

The fast pace of change in the business environment has compelled international firms

to decide where and how they should compete. Managers realize that to remain

competitive, they must go into foreign countries both to market products and to source

inputs. Companies are faced with choosing from a wide assortment of strategy optionsas to how best to compete and maintain a sustainable advantage over their rivals. No

obvious formula makes a strategy successful. Constant innovation is often needed to

keep ahead of one's competitors. At the same time, firms need to be able to respond

effectively to their diverse customers located in different countries. Operating

internationally requires flexibility on the part of the firm so that it can meet the

challenges and at the same time take advantage of the knowledge, experience, and

insights that become available. Strategy formulation and implementation are key

managerial tasks that determine how successful a firm will be. Strategy is about seeking

new advantages in the marketplace while slowing the erosion of present advantages.

Effective strategy is grounded in insightful monitoring of the competitive environment,

coupled with the firm's own strength and resources. Various foreign market entry and

ownership choices are available to international business managers, and the next three

chapters discuss the characteristics and appropriateness of these choices.



BIBLOGHRAPHY

BOOKS

Ansoff, Igor H. Strategic Management. John Wiley & Sons, 1979.

Hofer, Charles W. and Dan. Schendel. Strategy Formulation: Analytical Concepts. WestPublishing, 1978

WEBSITE

www,strategic Analysis,University of Texas.com

www.developing strategy formulation .com

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