Strategy formulation is a sequence tasks, all intended to prepare the grounds towards implementation and evolution of corporate strategies. David (2007) divides those tasks into five categories, each one represents bulks of steps:
- Develop vision and mission statement
- Perform internal audit
- Perform external audit
- Establish long-term objectives
- Generate, evaluate and select strategies
This executive summary will provide an overview on the first three categories, focusing mainly on their implications on Organizational Behavior (OB). Furthermore, the paper provides a battery of matrixes, which formulize the theory into practical managerial toolkits. It is thus a comprehensive analysis of first three steps in strategic management, referring to internal as well as external forces.
The matrixes always involve two forces, which are both related in some way but are not mutually exclusive. That is, when dealing with an issue (e.g. restructuring decisions), more than a few forces affect or are being affected by managerial decisions (e.g. pressure from shareholders and unions); a manager will have to measure and prioritize the two existing forces, and then decide how to compromise between them. Thus, the main purpose of the matrixes is to evaluate the intensity of each of the two forces and then compare between the two scores.
Some matrixes comprise an internal force, which is being compared to an external force. This approach is needed when there are trade-offs between the two forces.
When managers pursue a restructuring course, their main intention is to increase efficiency and effectiveness by reducing labor cost. It is hence a strategic shift that affects the firm’s long-term operations. Some forces to compare here are:
- Shareholders’ pressure to change vs. labor union’s ability to resist change
- Main competitors’ revenue-per-employee ratios vs. the firm’s own ratio (benchmarking)
- Risk of sanctions from change-resisting stakeholders (e.g. customers, government) vs. financial benefit from the restructuring process
- Value of potential leavers vs. competitors’ probability to hire them
The essence of organizational mission is answering the question: “what is our business?” (Robinns, Coulter, Cox & Cox, 2007). It is thus a formulation of short- and medium tasks, which involve tactical as well as strategic thinking. Mission statement should not be confused with a firm’s vision statement, which answers the question: “What do we want to become?” and represent a clear strategic long-term view (David, 2007). Possible matrixes to evaluate mission statements are:
- Customer orientation vs. product orientation
- Concern for profitability vs. concern for employees
- Referral to organizational culture vs. referral to external culture(s)
- Clarity of goals vs. strategic flexibility
The level of government purchases and taxes, known as fiscal policy (not to confuse with monetary policy, which mainly deals with money market activities), has two direct influences on a firm. It affects the latter’s tax expenditure (and thus influences all the other expenditure and investment decision-making), and may be a crucial factor for sellers of goods and services for the public sector (e.g. infrastructures and big-ticket items). As such, evaluating fiscal policy is an important part of a firm’s external audit. This evaluation should take into consideration:
- Prospective government expenditure (expansion/ contraction) vs. dependency on public expenditure
- Prospective profitability on current operations vs. level of taxation
- Prospective foreign government’s fiscal policy vs. level of exposure to that market (note: this matrix considers fiscal policy’s influence on a given economy’s aggregated demand)
- Level of current/prospective taxation policies vs. current/prospective investment opportunities
A firm’s competitive environment is decisive for growth, profitability and almost any other business decision-making. Through understanding of the competitive environment is thus a fundamental external issue. Based on this analysis, a company must pursue strategies, which will exploit competitive advantages and circumvent competitive disadvantages. Some related measurements are:
- Feasibility of integration vs. bargaining power of consumers/suppliers
- The competitive advantage of the firm (e.g. financial position, brand equity) vs. the extent of this advantage over the nearest competition
- The competitive advantage of the firm vs. the intensity of this advantage as an opportunity in a prospective market
- Ease of access for new competitors vs. ease of departure from the market
The external economic environment is rich with opportunities and threats to a business. It is clear, though, that when discussing economic factors, one must always evaluate the level of certainty to which a factor is expected to exist in the future (a.k.a. market risk). Some major economic matrixes might be:
- Growth rate vs. market stability
- Unemployment vs. cost of labor (wages)
- Cost of financing (interest rates) vs. investment opportunities
- GDP current/prospective composition vs. level of attractiveness to the firm
Demand for a firm’s market offerings should not be taken as given. The main reason for that is that demand can be influenced from the company’s decisions such as pricing and value composition. In order to avoid stagnation towards demand, the company must consider issues such as:
- Price elasticity of demand vs. internal cost structures
- Trends in demand vs. current market offering
- Trends in demand vs. current strengths/weaknesses
- Probability for decrease in income vs. profit margins.
Expansion through global operations is a necessity for growth among many medium- and big sized companies. Globalization requires a thorough external analysis prior to entry. Such analysis should encompass numerous fields, including:
- Prospective pricing (i.e. income) vs. prospective costs of entering the market
- Factors of organizational culture vs. the same factors on the target market
- Risk levels (e.g. political, currency) vs. prospective sales
- Preferences of potential stakeholders vs. the boundaries and abilities of the organization.
- David, F. R. (2007). Strategic Management: Concepts and Cases (11ed). Upper Saddle River: Pearson Prentice Hall.
- Robbins, S. P., Coulter, M. K., Cox, S. M. & Cox, A. (2007). Management. Upper Saddle River: Pearson Prentice Hall.