(KMBN301) Unit 3: Strategy Formulation

Strategy Formulation

Strategy formulation is like making a plan for a long journey. Imagine you’re running a business, and you want it to succeed and grow over time. Strategy formulation is the process of deciding what you want to achieve, figuring out where you currently stand, and creating a plan with specific steps to get from where you are to where you want to be.

Example: Suppose you own a small coffee shop and want to become the most popular coffee spot in town. Here’s how you’d go about strategy formulation:

1. Set a Goal: Decide on what success looks like. In this case, it could be "Attract 50% more customers over the next year."
2. Analyze the Situation: Look at where your business is right now. Check out what your competitors are doing, the current market trends, and what your customers are asking for. Maybe you find that customers want unique coffee flavors, but the competition doesn’t offer them.
3. Formulate a Strategy: Develop a plan to reach your goal. You could decide to introduce a unique menu of seasonal coffee flavors that nobody else has. Maybe you’ll also partner with local pastry shops for exclusive treats to pair with the coffee.
4. Implementation Plan: Outline the steps to bring the strategy to life. For example, hire a barista who can create unique flavors, design new menus, and run a promotional campaign to get the word out.
5. Evaluation: As you execute your plan, keep checking if it’s working. Are more people visiting? Are they enjoying the new flavors? Adjust if necessary to keep moving toward your goal.

This step-by-step plan is what strategy formulation is all about: setting a direction, analyzing options, making decisions, and implementing actions to reach the desired outcome.

Situational Analysis using SWOT approach

Situational analysis is like checking the weather before a trip to see what you’ll need along the way. In business, it helps you understand your current position before deciding on your next steps. 

The SWOT approach is a popular tool for this analysis, breaking things down into Strengths, Weaknesses, Opportunities, and Threats. Here’s what each part means:

• Strengths: What your business is good at or unique resources you have.
• Weaknesses: Areas where your business could improve or things you lack.
• Opportunities: External chances to grow or expand, like new trends or demands.
• Threats: External challenges that could impact your success, like competitors or changes in the market.

Example of SWOT Analysis for a Small Coffee Shop

Using this SWOT table, the coffee shop can better understand its current position. By addressing weaknesses and leveraging opportunities, it can create a solid plan to attract more customers and stand out from competitors.

In strategic management, situational analysis is a foundational step that helps an organization understand its current position in relation to the external and internal environments. It’s like a strategic check-up that provides insights into what’s working, what needs improvement, and what could pose future challenges or opportunities. This analysis allows organizations to make well-informed decisions about their goals, strategies, and the actions they need to take to achieve a competitive advantage.

Situational analysis typically involves a few key components:

• External Analysis: This looks at the broader environment outside the organization, including economic, political, social, technological, and competitive factors. A popular framework for this is PESTEL (Political, Economic, Social, Technological, Environmental, and Legal factors), which assesses external forces impacting the organization.
• Internal Analysis: This focuses on the organization's internal environment, such as resources, capabilities, and operational efficiencies. It identifies the strengths and weaknesses within the organization.
• SWOT Analysis: Often used in situational analysis, the SWOT (Strengths, Weaknesses, Opportunities, Threats) approach helps integrate both external and internal perspectives.
• Competitive Analysis: This part of situational analysis examines the competitive landscape, understanding what other companies are doing, and identifying ways to differentiate.

Example of Situational Analysis in Strategic Management for a Tech Startup. Imagine a tech startup that develops a productivity app. Here’s how a situational analysis might look:

This situational analysis helps the startup understand its position and identify areas to focus on (e.g., finding funding for marketing, staying compliant with data regulations) to effectively compete and grow in the tech industry.

Business Strategies

Business strategies are like game plans for achieving success in a business. They’re the decisions and actions a business takes to reach specific goals, like attracting more customers, growing faster, or beating competitors.

Here are a few types of business strategies, explained in simple terms with examples:

• Cost Leadership Strategy: This strategy focuses on becoming the cheapest option for customers. Businesses that use this strategy try to keep costs low so they can sell products at lower prices than competitors. Example: Walmart offers a wide variety of products at low prices. By buying in bulk and keeping overhead costs low, they attract price-conscious shoppers who want to save money.
• Differentiation Strategy: This strategy aims to make a business stand out by offering unique products or services that are different from what competitors provide. It’s about adding special features or quality that customers can’t find elsewhere. Example: Apple uses a differentiation strategy by focusing on design, high quality, and an ecosystem of products that work seamlessly together. This appeals to customers who value innovation and a premium experience.
• Focus Strategy: Here, a business targets a specific group of customers or a particular market segment. Instead of trying to appeal to everyone, they focus on a niche where they can serve customers better than competitors. Example: Tesla initially targeted high-end electric vehicle buyers who were interested in eco-friendly luxury cars. By focusing on this niche, they built a strong brand before expanding to more affordable models.
• Growth Strategy: This strategy is all about expanding the business, either by entering new markets, adding new products, or acquiring other businesses. Example: Amazon started as an online bookstore but used a growth strategy to expand into other product categories, eventually becoming a marketplace for nearly everything.
• Innovation Strategy: Businesses using an innovation strategy focus on creating something entirely new to stand out in the market, often relying on the latest technology. Example: Netflix initially innovated by offering DVD rentals by mail and then shifted to streaming, revolutionizing the entertainment industry and leading the way in online content streaming.

Each of these strategies provides a roadmap for achieving business goals and can be tailored to suit the unique goals, industry, and market of any organization.

Competitive Strategy

Competitive Strategy is about deciding how a business will stand out in the market and gain an advantage over its competitors. There are three main types of competitive strategies:

• Cost Leadership: Aim to be the lowest-cost provider in the market.
• Differentiation: Focus on making your product or service unique.
• Focus: Target a specific group of customers or niche market.

Let’s break down each strategy with examples and then summarize them in a table.

1. Cost Leadership Strategy

This strategy is about offering products at the lowest price possible. Companies using cost leadership focus on reducing production and operational costs, often by producing in large volumes or finding cheaper suppliers. Example: Walmart is a cost leader because it sells products at low prices, attracting budget-conscious customers. By buying in bulk and using efficient logistics, Walmart keeps prices lower than many competitors.

2. Differentiation Strategy

Here, a business makes its product or service different from competitors, often by focusing on quality, features, or brand reputation. The idea is to create something unique that customers will pay extra for. Example: Apple uses a differentiation strategy by creating premium, high-quality products like the iPhone, which has a sleek design and unique features. This appeals to customers who want innovation and a high-end experience, even if it costs more.

3. Focus Strategy

With a focus strategy, a business chooses a specific segment of the market and concentrates on meeting the needs of that group better than anyone else. It’s like becoming the best choice for a particular type of customer. Example: Tesla initially targeted a niche of eco-conscious, high-income customers who wanted luxury electric vehicles. Tesla became the go-to brand for premium electric cars by focusing on this group before expanding.

Cooperative Strategy

A Cooperative Strategy is when two or more businesses work together to achieve common goals. It’s like a team-up between companies that can help them grow, compete, or solve problems they couldn’t handle on their own. Two common types of cooperative strategies are Collusion and Strategic Alliances.

Types of Cooperative Strategies:

1. Collusion

This is when companies secretly agree to cooperate on things like pricing or production. The goal is to reduce competition so both companies can make more profit. However, collusion is often illegal because it can lead to unfair pricing for customers. Example of Collusion: If two competing smartphone companies secretly agree to set similar prices, they reduce competition and ensure they both make higher profits. However, this can be against the law in many countries because it creates unfair conditions for customers.

2. Strategic Alliances 

In a strategic alliance, two or more companies openly work together for mutual benefit, usually by sharing resources, technology, or expertise. Unlike collusion, strategic alliances are typically legal and help each company offer better products or services. Example of Strategic Alliance: Spotify and Uber formed a strategic alliance where Uber riders could listen to their Spotify playlists during rides. This benefited both companies: Uber offered an enhanced experience to its customers, and Spotify reached a broader audience.

Corporate Strategies

Corporate strategies, specifically directional strategies, are like a company’s compass—they help a business decide which direction to move in over the long term. These strategies guide whether the company should grow, maintain its current size, or reduce its operations.

Types of Directional Strategies

• Growth Strategy: Focuses on expanding the business by increasing sales, opening new locations, launching new products, or even buying other companies.
• Stability Strategy: Focuses on maintaining the current size and performance of the business. Companies use this strategy when they are satisfied with their current position and want to avoid risks.
• Retrenchment Strategy: Involves shrinking or restructuring parts of the business, often used when a company is facing financial troubles or wants to focus on core activities.

Example of Directional Strategies in Action Let’s consider a retail company that operates a chain of stores and sells various consumer products.

Strategy

Corporate strategies are big-picture plans that guide a company's overall direction. Three common types of corporate strategies are Growth Strategies, Stability Strategies, and Retrenchment Strategies. Each of these strategies is like a different approach a company might take based on where it currently stands and what it wants to achieve. Let’s break them down in simple terms with examples and a table for easy understanding.

1. Growth Strategies

To expand the company, increase revenue, and reach new markets or customers. & Adding new products, entering new markets, acquiring other companies, or increasing sales.

Example: Starbucks constantly opens new stores worldwide and introduces new products like seasonal drinks to grow its customer base and brand presence.

2. Stability Strategies

To maintain the current position, focusing on steady performance without significant changes. & Continuing with the existing product line, serving the same markets, and keeping expenses low.

Example: Coca-Cola may use a stability strategy by continuing to focus on its core products (like Coke and Diet Coke) in established markets without making drastic changes.

3. Retrenchment Strategies

To reduce operations or cut back in certain areas to become more efficient or recover from losses. & Closing underperforming units, selling off parts of the business, or focusing only on the most profitable areas.

Example: Ford decided to stop producing most of its car models in the U.S., focusing on trucks and SUVs to cut losses and focus on more profitable segments.

Corporate Parenting

Corporate parenting is like the role of a parent in a family, but in a business setting. Just like a parent supports and guides each child according to their unique needs and strengths, a corporate parent (usually a large company or corporation) oversees and supports its smaller businesses or divisions (often called "subsidiaries"). 

The corporate parent ensures that these subsidiaries are on track, providing resources, expertise, and guidance so they can grow and succeed.

In other words, the corporate parent doesn't manage the daily operations of each business directly but helps them develop and succeed in ways they might not manage on their own.

Example: Procter & Gamble (P&G) is a corporate parent to many smaller brands, like Tide, Pampers, and Gillette. P&G doesn’t handle every detail of how Tide detergent is made or how Gillette markets razors. Instead, P&G offers these brands financial support, research facilities, marketing expertise, and a strong brand reputation, helping them succeed individually. P&G ensures that each brand has what it needs to grow, much like a parent providing support for each child’s strengths and needs.

Through corporate parenting, P&G can help Tide focus on laundry products, while Gillette focuses on grooming, allowing each to benefit from P&G's resources and expertise, but without micromanagement. 

Functional Strategies

Functional strategies are specific plans for different departments within a company, like marketing, finance, and human resources. Each department has its own strategy to help the business reach its overall goals. Think of it as each department having a "mini-strategy" that contributes to the larger company strategy.

Here’s a simple breakdown of different functional strategies, with examples and a table to make it easy to understand.

1. Marketing Strategy

To attract and retain customers by promoting products and services. Example: Nike uses celebrity endorsements, social media campaigns, and high-quality advertisements to build its brand and attract customers.

2. Financial Strategy

To manage the company’s finances, including budgeting, investing, and managing costs. Example: Apple maintains large cash reserves and invests in high-profit projects like new product development to maximize returns.

3. Research & Development (R&D) Strategy

To create new products or improve existing ones to stay competitive and innovative. Example: Tesla invests heavily in R&D to develop electric and autonomous vehicles, keeping them ahead in innovation.

4. Operations Strategy

To ensure smooth production and delivery of products or services, focusing on quality and efficiency. Example: Toyota uses lean manufacturing to minimize waste and improve efficiency in its car production process.

5. Purchasing Strategy

To procure raw materials or products needed for the business, ensuring quality at a good price. Example: McDonald's sources quality ingredients at low prices by negotiating with suppliers and buying in bulk.

6. Logistics Strategy

To manage the storage and transportation of goods, ensuring timely delivery to customers or stores. Example: Amazon uses advanced logistics to offer fast delivery, including same-day or two-day shipping for Prime members.

7. Human Resource Management (HRM) Strategy

To recruit, train, and retain employees, and manage employee benefits and performance. Example: Google focuses on hiring talented employees, providing a great work culture, and offering benefits like free meals and wellness programs.

8. Information Technology (IT) Strategy

To use technology to improve operations, customer experience, and data management. Example: Walmart uses advanced IT systems to track inventory in real-time, helping ensure products are always available for customers.

Each functional strategy supports the company's overall goals by making sure each department operates effectively, contributing to the success of the entire organization.

The sourcing decision: Outsourcing & offshoring

Sourcing decisions are about how a business gets the goods and services it needs to operate. Two common sourcing strategies are outsourcing and offshoring. While they might sound similar, they refer to different practices. Let’s break them down in simple terms, along with examples and a table for clarity.

1. Outsourcing

Outsourcing is when a business hires another company to handle certain tasks or functions instead of doing them in-house. The outsourced company could be located in the same country or abroad.
Purpose: Businesses often outsource to save money, gain expertise, or focus on core activities.

Example: A company might outsource its customer service to a call center that specializes in handling customer inquiries, allowing the company to focus on product development.

2. Offshoring

Offshoring is when a business relocates certain operations or processes to a different country, often to take advantage of lower labor costs or favorable business conditions. This can be done by either moving the entire business unit or subcontracting work to a foreign company.
Purpose: Companies offshore to reduce costs, increase efficiency, or access a global talent pool.

Example: A clothing manufacturer based in the U.S. might move its production to Bangladesh to take advantage of lower labor costs. 

Key Differences:

• Outsourcing focuses on delegating tasks to external providers, regardless of their location.
• Offshoring specifically involves relocating business processes to a different country to take advantage of various benefits.

Both strategies can help companies operate more efficiently and cost-effectively, but they serve different purposes depending on the needs and goals of the business.

Unit 2: Environmental Scanning

Unit 1: Introduction of Strategic Management & Corporate Governance

Unit 4: Strategy Choice and Analysis