How To Use Strategy Formulation: A Step-By-Step Guide
Updated 30 September 2022
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Organisations may choose a series of actionable steps to fulfil their vision, goals and business objectives. Strategy formulation is a process by which organisations develop strategies to achieve the desired outcome. If you are part of the senior leadership team of an organisation, you can benefit from learning about strategy formulation and how it can help a company. In this article, we discuss what strategy formulation is, explain how to use strategy formulation to achieve organisational goals and share some additional tips to implement it.
What Is Strategy Formulation?
Strategy formulation is a process of establishing organisational goals and selecting a suitable course of action to fulfil its desired objectives. Organisations use this method to formulate long-term plans and allocate resources to achieve them. After creating these strategies, an organisation ensures that its employees are aware of the business objectives, the organisation's purpose and short-and long-term goals.
Related: Business Strategy Components And Examples
How To Use Strategy Formulation
Examine the following steps to learn how to use strategy formulation in an organisation:
1. Define a purpose
An organisational purpose guides an organisation to fulfil its business objectives and remain aligned with its mission and vision. Having a well-defined purpose is essential to unifying employees, helping them understand an organisation's direction and guiding them in working towards a common goal. These are essential components to consider when defining a purpose:
Mission: The mission statement defines why a company exists, what it wants to achieve and how it plans to serve its customers. It describes the intent behind a company's existence.
Vision: A vision statement clarifies what a company wants to achieve in the long term and provides a well-defined plan it can take to fulfil those objectives.
Goals: A business goal is a predetermined objective that an organisation hopes to achieve in a specific period.
2. Establish organisational goals
Companies set organisational goals to fulfil business objectives. After setting these goals, they streamline business processes and guide employees' efforts towards achieving them. Before setting organisational goals, there are factors that a company requires considering:
Business areas: A company requires determining the areas of business in which it intends to operate. Based on the areas of business, a company requires developing a product or service that differentiates it from other competitors.
Financial position: The financial position of a company determines the resources and the budget that it can allocate towards achieving a business objective. This includes a company's recorded assets, liabilities and equity.
Customers: Developing a business goal involves identifying the purchasing habits and behaviours of target customers. This helps businesses determine the right channels through which they can promote their product or service to reach a larger audience.
Innovation: It is essential for companies to decide if they want to use third-party services or develop in-house solutions. Based on their decision, they can direct their resources towards research and development activities or focus on investing in other areas.
Related: What Is An Organisation? (Characteristics And Structures)
3. Define strategic objectives
Strategic objectives define what a company has to accomplish for it to remain sustainable and to have a competitive advantage. It is necessary for top management to convey these objectives to employees and the importance of their job role in achieving them. When employees have a sense of purpose at work and are aware of the objectives they are working towards, they can contribute more effectively. Managers in various business units can direct employees towards achieving these objectives by assigning tasks, allocating resources and ensuring their timely completion.
Related: Your Guide To The Strategic Management Process
4. Conduct performance analysis
Conducting performance analysis helps organisations determine their current progress and future potential. It is a common practice for organisations to conduct a strength, weaknesses, opportunities and threats (SWOT) analysis. This technique helps assess the internal and external factors that affect a business. These are some ways how a SWOT analysis can benefit a business:
Building on strengths: SWOT analysis helps a business identify areas where it is performing well. It is essential for them to maintain their areas of strength to continue having a competitive advantage.
Minimising weaknesses: Weaknesses are areas that create disadvantages for a business. SWOT analysis helps businesses identify areas of weakness and direct efforts towards improving them.
Identifying opportunities: Businesses can capitalise on opportunities to help them expand and generate higher profits. SWOT analysis helps identify opportunities, such as new customer trends or changes in the market.
Countering threats: With the help of a SWOT analysis, businesses can identify threats and incorporate measures to counteract them. The threats can include changes to the market, new policies or competitors.
Related: SWOT Analysis Guide (With Examples)
5. Evaluate the strategy
By evaluating a strategy, companies can assess its implementation and effectiveness. Companies can follow these steps to evaluate their strategies:
Establish standards. Companies can compare the actual performance of an organisation with the desired results to evaluate the effectiveness of a strategy. This can include qualitative factors such as workability, flexibility, core competencies and quantitative factors, such as revenue, debt, assets and profitability.
Measure performance. Companies can use data such as the number of materials used, units produced, overhead costs, number of defects found, maintenance costs and return on investment to measure the actual performance. They can compare this against historical data and evaluate if a strategy has been effective.
Take action. If the actual performance is below a threshold limit, companies can take measures to identify the problems and solve them. This might require introducing changes in the strategy or devising a new one based on the severity of the issue.
Related: Values, Mission And Vision Statements: Definition And Aim
4 Levels Of Strategy Formulation
The four levels of strategy formulation are:
1. Corporate level strategy
In corporate-level strategies, the top management of an organisation analyses business operations and develops plans to increase its value or growth. The purpose of corporate-level strategies is to increase market share, create strategic goals, motivate the workforce, improve business processes and increase revenue. It is typical for companies to develop these strategies during the founding process and then alter them according to internal and external circumstances.
Related: What Is Strategy Consulting? (Skills, Careers And Salary)
2. Business level strategy
In business-level strategies, companies outline a detailed set of plans intended to improve customer experience and gain a competitive advantage in the market. The integral elements of a business strategy include:
Improving customer satisfaction
Developing and maintaining a competitive advantage
Managing competitive risks
Increasing the return on investment
A company can establish its position amongst competitors in various ways, such as reducing operational costs, charging industry-average prices, charging lower prices than competitors and offering unique products and services.
Related: Q&A: What Is A Strategy Manager? (With Duties And Salary)
3. Functional level strategy
Each business unit in an organisation outlines a set of actions and goals to support corporate-level strategies and business-level strategies. This can include setting smaller targets that a business unit can aim to achieve as part of its daily operations. The purpose of a functional level strategy includes:
Reflecting the corporate-and business-level strategies
Ensuring optimal allocation of resources to each business unit
Enabling coordination between various business units of an organisation to maximise the output
Related: What Is The Difference Between Sales And Marketing?
4. Operational level strategy
These are strategies that companies use to fulfil their overall objectives. A company's operational strategies aim to enhance its business processes and optimise resource utilisation. The various strategies include:
Customer-driven strategy: This strategy aims to increase sales, brand loyalty and customer satisfaction by focusing on customer needs. To do this, companies upgrade their products, adapt to changing needs and invest in customer service.
Product strategy: This strategy focuses on designing compelling products and offering services that consistently meet the customers' expectations. Companies do this by introducing new products into the market and modifying existing ones.
Supply chain strategy: The key objective of this strategy is to deliver the products to customers in the most efficient way possible. It involves optimising every aspect of the supply chain, beginning with raw materials and manufacturing to delivery and logistics.
Market penetration strategy: In this strategy, companies introduce their existing products or services in a highly competitive environment to increase their market share and gain a competitive advantage.
Related: Strategic Vs. Operational Management (With Career Options)
Tips For A Successful Strategy Formulation
Here are some tips that organisations can follow for a successful strategy formulation:
Use SMART goals
SMART goals are specific, measurable, achievable, relevant and time-bound. A SMART goal can help companies set achievable targets, devise strategies to achieve them and track their progress. Some essential elements to consider are:
Creating measurable goals
Setting attainable goals
Setting goals that apply to the business
Ensuring that the goals are time-bound and easy to track
Setting goals aligned with the vision and mission of a company
Related: SMART Goals: Definition And Examples
Take employee feedback
It is essential that the employees of an organisation are aware of its business objectives, organisation purpose and short-and long-term goals. This motivates them to work towards a common goal and improves employee engagement and satisfaction. After having implemented a strategy, a company can conduct a survey to learn what the employees think of it and receive suggestions on how to make it more effective. Employee participation in strategy formulation increases employee morale, promotes new ideas and allows them to take part in decision-making.
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