STRATEGIC MANAGEMENT

MODULE-2

Strategy Formulation

Strategy formulation guides executives in defining the business their firm is in, the ends it
seeks and the means it will use to accomplish those ends. The approach of strategy
formulation is an improvement over that of traditional long-range planning. It is all about
developing a firm’s competitive plan of action which is future oriented perspective with
concern for the firm’s internal and external environments.

The strategy formulation begins with the definition of the Company mission, the purpose
of business is defined to reflect the values of a wide variety of interested parties, social
responsibility as a critical consideration for a company’s strategic decision makers since
the mission statement must express how the company intends to contribute to the
societies that sustains it. Central to the idea that companies should be operated in socially
responsible ways is the belief that managers will behave in an ethical manner. It
embodies the Company’s basic goals and philosophy which navigates the proper
strategies. .

Every organization develops some kind of mission, either explicitly or implicitly, either
written or unwritten. It addresses the following.

1. Why is the firm’s business?

2. What are our economic goals?
3. What is our operating philosophy in terms of quality, company image and self
concept?
4. what are our core competencies and competitive advantage?
5. what customers do and can we serve?

Elements of a mission statement,

1. Clearly articulated. – easy to understand the values and purpose.

2. Relevant – in terms of its history, culture and shared values.
3. Current – not outdated
4. Written in a Positive (Inspiring) Tone – capable of inspiring and stimulating
Commitment towards fulfilling the mission.
5. Unique – not copied from similar units.
6. Enduring – Should guide, inspire and challenging.
7. Adapted to the Target Audience – stock holders, consumers, employees through
shared values and standards of behavior.

Formulation of a Mission Statement:

1
 Mission statement is a formal document that states the organization’s mission.
Explicit mission statement is desirable as it serves the purpose of communicating to
the organization’s members about the corporate philosophy, character and image of the
organization which govern their behavior in the organization. It also creates
awareness to the society as to how to deal with the organization.

The following points are to be noted to arrive a mission statement.

1. Mission should be clear, both in terms of intentions and words used.

2. It should be feasible, neither too high to be unachievable, nor too low to
demotivate the people for work.
3. .It should be precise but explanatory, neither too narrow so as to restrict the
organization’s activities, nor too broad to make itself meaningless.
4. It should be distinctive, both in terms of the organization’s contributions to the
society and how these contributions can be made.

To arrive at a Mission Statement, following questions are answered.

1. What is the basic purpose of your organizations?

2. What is unique about your organization?
3. What is likely to be different about your business five years down the road?
4. What is in your company that will make it stand out in a crowd?
5. Who are, and who should be, your principal customers?
6. What, and what should be, your principal economic concerns?
7. What are the basic beliefs, values and philosophical priorities of your firm?

Mission statement can be altered from time to time to meet the changing needs.

Role of Mission in Strategy Formulation

Mission helps to strategies formulation in the following ways.

1. It helps in deciding the direction in which it proceeds. Therefore strategic actins

can easily be geared in that direction.
2. It helps the organization to clarify its aspiration and those of various stakeholders.
The strategic actions can be aligned to these aspirations.
3. It serves as a reference point in dealing with various stakeholders within and
outside the organization.
4. It helps in integrating the organization with its relevant environment by taking
suitable actions the way these have been specified in missions.
5. It helps in integrating the various subsystems of the organization as these
subsystems look at their objectives and operations in the light of the
organizational mission.
6. It conveys clear message about the organization to those outsiders who come in
contact with it. They develop positive attitudes towards organization if they are
well aware about its mission.

2
Setting Objectives

Importance of objective

1. Justify the organization – indicates the purpose and aims and thereby the social
justification for the existence of the organization.
2. Provide direction – direction for the functioning of the organization. When
objectives are clear, the aims of the activities of different people in the organization
converge for the achievement of the common purpose.
3. Basis for Management by Objectives - Management for results.
4. Help strategic planning/management; a means to achieve objectives, thus help
effective function of the organization in a given environment.
5. Help coordination – the attention of the employees to desirable standards of
behavior
6. Provide standards for assessment and control - . Making clear what the results
should be, provide the basis for control and assessment of organizational
performance.
7. Help decentralization – by assigning decision-making to lower level personnel,
given a subordinate executive or operator considerable leeway in deciding how to
perform his work.

The top management determines the overall objectives which members of the
organization unite to achieve. In some Cos, by the shareholders

The guidelines are,

1. Must be clearly specified.

2. Must be set taking into account the various factors affecting their achievement.
3. Should be consistent with organizational mission.
4. Should be rational and realistic rather than idealistic
5. Should be achievable but must provide challenge to those responsible for
achievement.
6. Should yield specific results when achieved.
7. Should be desirable for those who are responsible for the achievement.
8. Should start with the word ‘to’ and be followed by an achievement.
9. Should be consistent over the period of time.
10. Should be periodically reviewed.

Specimen for Example:

3
 1. We want to make our product the number one selling brand in its field in terms of
units sold. (Sales & Marketing )
2. We seek to produce the most durable, maintenance-free product that money can
buy (quality product)
3. Our profit objective is to increase the earning so that we earn 12 per cent post tax
return on the net worth of the company. (profit)
4. We strive to become leader in product innovation in our field by investing 5% of
our sales revenue on research and development (development)

Financial Objectives

The primary objective is concerned with the return to shareholders.

a) A satisfactory return; for a company must be sufficient to reward shareholders

adequately in the long run for the risks they take. The reward will take the form
of profits which can lead to dividends or in increase in the market value of
shares.
b) The size of return which is adequate for ordinary shareholders will vary according
to the risk involved.
There are different ways of expressing a financial objective in quantitative terms.
Financial objectives would include the following.

a) Profitability - It is just not the profit for every year. The investment must
provide future appreciation of worth and increased profits in future.
b) Return on investment (ROI) or return on capital employed (ROCE) - The return
on investment must be on increase year after year.
c) Low Risk - High risk projects might promise a high return but it may be safer to
opt for a project with a lower return but a greater guarantee of success.
d) Share price, earnings, dividends and market value - Earnings per share or
dividend payments are measures which recognize that a company is owned by
its shareholder –investors. Lesser the EPS, shareholders are likely to sell the
shares.
e) Market capitalization - total value of business shares on the stock market.
When the earnings and dividends are low, the market value of shares also drops.
f) Price/earnings ratio - measures the relationship between earnings per share and
the price at which the shares are traded. It is the market value divided by
earnings per share. This should not comedown.
g) Growth - The financial performance is measured in terms of growth of the
business like turnover, EPS, increase in market share, export etc.

Objective should not be static. Changes in the environment, organizational strengths and
weaknesses have effect on Objectives.

Kaplan & Norton’s Balanced Scorecard

4
An approach that tries to integrate the different measures of performance is the balanced
scorecard. Where key linkages between operating and financial performance are brought
to light. This offers four perspectives (1) Financial (2) Customer (3) Innovation and
learning (4) Internal business.

The scorecard should be used flexibly. The process of deciding what to measure forces
a business to clarify its strategy. For example, a manufacturing company may find that
50 -60% of costs are represented by bought-in components, so measurements relating to
suppliers could usefully be added to the scorecard. These could include payment terms,
lead times, or quality considerations etc. For an IT Co., the manpower cost &
establishment cost may go up to 40-50%. Hence it should concentrate on Manpower
cost.

A method of evaluating performance for a particular organization that emphasizes factors

that can create long term economic value such as business processes, innovation and
customer orientation, rather than traditional financial measure. The theme is Control
through Performance.

Because individual measures of performance can provide a limited snapshot of the firm, a
number of companies have begun using balanced scorecard approach to measuring
performance whereby measurement is not based on a single quantitative factor, but on an
array of quantitative and qualitative factors such as return on assets, market share,
customer loyalty and satisfaction, speed and innovation.

This will help the top managers to monitor the weaker side and to improve in that area. If
the company is doing poorly, the market rate falls or another company may come forward
to take over with an idea of making it more profitable. If the market rate goes up,
investors will come forward. The Progress card is the Balanced scorecard.

The Balanced scorecard is a set of measures that are directly linked to the company’s
strategy. It directs a company to link its own long-term strategy with tangible goals and
actions. The scorecard allows managers to evaluate the company from four perspectives
– Financial, customer knowledge, internal business processes, & learning, growth.

A properly constructed scorecard is balanced between short and long-term measures,

financial and non financial measures and internal and external performance perspective.
They also provide meaningful feedback. This can be used in Strategic Control area.

Company Goal

5
Goals and objectives are derived from mission and support it. For a business, a primary
corporate objective will be the return offered to shareholders. However, this is measured.
There may be other primary objectives and there will certainly be supporting objectives
for costs, innovation, markets, products and so on

Object may be defined as “those ends which the organization seeks to achieve by it’s
existence and operations.” May be long range or short range.
Goal is defined as “an intermediate result to be achieved by a certain time as part of
the plan.” A plan may have many goals. Specific goals referred to as targets.

Objectives sets targets. Goal is target oriented and organization sets itself for
achievement those targets. For example, the objective of a company is to touch a target
from 100 Cr to 200 Cr. The goal is to reach 200 Cr target. The goal can be measured. .
All efforts are to touch the target/goal in order to meet the object. Thus, Objectives &
Goals are the end results which an organization strives for. Since there may be different
ways in expressing the end results like market leadership ( a qualitative measurement),
or a certain percentage of increase in sales in a particular year ( a quantitative
measurement), the concept of achievement can be understood.

Company Philosophy

It is in the form of a Slogan or Statement. It projects the ethical and value based concept
(philosophy) a Company contributes to public. This is more related to the Social
Responsibility & Public Good. The corporation is a creation of society whose purpose
is the production and distribution of needed goods and services, for profit of society and
itself. The Company in it’s own interest has to promote the public welfare in a positive
way. Indeed, the corporate interest broadly defined by management can support
involvement in helping to solve virtually any social problem, because people who have
good environment, education and opportunity make better employees, customers and
neighbors for business than those who are poor, ignorant and oppressed.

Pollution control, contributing to public cause in the areas of health, education & poverty.
Payment of taxes genuinely, fair wages to employees, quality products/services to
consumers, all actions are based on legal and moral foundation etc.

Hierarchy of Strategic Intent

6
Strategic intent – an obsession with winning, unfettered by their resource constraints – in
their envisioning of the future.

The Strategic Intent is one of the approach to Competitive Advantage. Other

approaches are (1) Generic competititive strategy (2) Benchmarking (3) Synergistic
approach and (4) Critical success factors approach

Strategic Intent implies ambition and obsession for winning. Hamel and Prahald
emphasized on strategic intent as a means for competitive advantage view that
competitive battle through competitive innovation, which is the art of containing
competitive risks within manageable proportions. Keeping score of existing advantages
is not the same as building new advantages. The essence of strategy lies in creating
tomorrow’s competitive advantages faster than competitors mimic the ones you possess
today. An organization’s capacity to improve existing skills and learn new ones is the
most defensible competitive advantage of all.

This is done through, (1) Layers of Advantage - involves generating layers of advantage
on top of another advantage and moving up in value chain. (2) Loose Bricks – creating
advantage in those areas which have been let loose by the existing competitors.
(3) Changing the Rules of Engagement - studying the Critical Success Factors (CSF) of
competitors and innovating for different environment. (4) Collaborating – If you cannot
compete on your own, collaborate with others, who has better competitive advantage.

Merging the Strategic Vision, Objective and Strategy into a Strategic Plan

The Vision is the primary statement. Based on Vision statement, the Mission statement is
formed. The Objectives of the Company helps to prepare Strategic plan in various areas
like marketing, finance, production. Hence the genesis is Vision and Objectives of the
Company helps to draw the Strategic Plan in different areas of the Organization &
Business.

The strategic plan projects a prescriptive model based on predictive environment which is
a road map for execution. Strategic plan is translated into the operations planning. Any
deviation required is to be directed by strategic plan which takes care of the corporate
objective and factors commanding the change.

The emergent strategy is “let us try this strategy and continue it or change it depending in
our experience. The prescriptive strategy prescribed, “this is our strategy for the next five
years, administer it. “The emergent approach holds that the long term being uncertain, it
is unrealistic to prescribed in advance a strategy with long term perspective. The strategy
should evolve responding to emerging developments, and therefore, to some extent,
strategy development and implementation occur concurrently.

EXAMPLES

7
Mission statement always highlights what it can do for the Nation (society in
general) while purpose suggests how this contribution can be made)

HINDUSTAN LEVER -Mission: “Hindustan Lever’s commitment to national

priorities ensures that the Co is a part of people’s lives at the grass roots level, making a
difference to India and Indians – in depth, in width and in size. Hindustan Level has
always identifies itself with the nation’s priorities – employment generation, development
of backward areas, agricultural linkages, exports, and contribution to the exchequer.

The Co’s Philosophy indicates the approach that will be adopted in dealing with
various stakeholders.

ITC LTD - Philosophy :

1. Concern for their ultimate customers – millions of customers.

2. Concern for heir intermediate customers – trade
3. Concern for their suppliers – the source of raw materials and ancillaries.
4. Concern for their employees – their most valued assets.
5. Concern for their competitors whom they wish well – for, healthy
competition ultimately benefits the customer.
6. Concern for the national aspiration – India’s Future.

TATA International: Vision

To be the “Leading International Business Company” of the country and “International

Arm” of TATA Group, with a significant overseas reach, prescience and linkages, and
with focus on facilitiating globalization of TATA Group’s core business.

Mission

1. Promote the TATA Brand Equity Internationally.

2. Promote Internationally, products and services from the TATA Group, as also the
other quality conscious Indian and overseas Cos.
3. Source World Class Products and services for making in India.
4. Promote businesses with strong comparative advantages for the Co and upgrade
the Co’s strengths in the areas of technology, marketing and finance.
5. Identify global sources of technology, marketing and finance and offer services to
facilitate strategic alliances, joint ventures and collaborations for the TATA Group,
in India and Overseas.
6. Be a market-driven Co and continually strive to stakeholder value and satisfaction
through consistent quality in all areas of our operation. We perceive all stake
holders as customers, be they the buyers of products and services, suppliers,
employees, shareholders, or the society at large. In our pursuit of excellence, we
will benchmark our key operations and practices with those of global leaders in
their respective fields of activity.

8
 7. Nature and develop human resources, to enable us to undertake the challenges of
leadership and innovation, our areas of activity.

Business Definitions

1. Hindustan Lever: To meet everyday needs of people everywhere with branded

products.
2. Kodak India - A quality oriented photographic system appealing to the customer
who desires instant photography.
3. Mirc Electronics - High-quality electronic products.
4. Modern Foods. - National foods to be public who prefer instant foods.
5. Hero Cycles - Functionally valuable bicycles that common people can afford to
buy.
6. Hero Honda - World-class quality auto products that provide the highest level of
customer satisfaction.

ACC - Objectives

1. To strive continuously to maintain the leadership of the cement industry by

modernization, expansion and the establishment of wide and efficient marketing
network.
2. To achieve a fair and reasonable return on the capital employed by promoting
productivity throughout the Co.
3. To ensure a steady growth of business by strengthening the Co’s position in the
cement sector and also by diversifying into other areas consistent with the overall
corporate objectives.
4. To maintain the high quality of the Co’s products and services and to ensure
supply of these products and services at fair prices.
5. To promote and maintain fair and harmonious industrial relations , and an
environment for the effective involvement, welfare and development of staff at all
levels.
6. To promote research and development efforts in the areas of product development,
energy and fuel conservation, to innovate and optimize productivity.
7. To discharge its obligations to society, specifically in the areas of integrated rural
development schemes and safeguarding a environmental and natural ecological
balance.

Business Definition:

9
What business clarifies the firm’s opportunities it can pursue and the areas in which
these opportunities are to be looked for. It provides the blue print for choice of
product-market and changes thereof. Mission carries the substance of the business the
firm will pursue.

Helen Curtis Makes of products like hair dye, cosmetics and perfumes may define its
business “We are in the beauty enriching business. We will pursue ideas that would
generate products enhancing beauty and youthfulness of men and women.

Ford Motors - We are in the business of automotive and auto-related products and
services.
Mission – Is to make cleanliness common place, to lessen work for women, to foster
health and to contribute to person attractiveness that life may be more enjoyable for the
people who use our product.

Uniliever - We are in the business of home cleanliness (scouring powders, detergents,

floor cleaning materials) fostering Health (food products) Personal Attractiveness
(cosmetics, perfumes, facial make up and other lines can figure under this head)

CORE COMPETENCE

Unique and enduring strength of an organization relevant for generating competitive

advantage, this strength cannot be easily emulated (copied) by competitors. Those
strengths which are long-lasting becomes the core competence. Core competence is
generally defined in terms of special technical or product expertise. Honda has core
competence in auto-engines. Sony in miniaturization in products. Du Pont in Chemical
Engg. Tisco in Steel. L & T for the engineering design and manufacturing. division
although they have other lines like construction, info, electrical equipment -

Technology excellence, especially competence at the root of technologies, capacity to

integrate multiple streams of technologies and the expertise to harness diverse
production skills, are some of the requirements for acquainting core competence.

Attributes are, that

a) provides the firm the access to a variety of products/markets

b) Contributes significantly to customer benefits in the end products.
c) Is an exclusive preserve of the firm and cannot be imitated easily by
competitors.

10
COMPETITIVE ADVANTAGE;

Core Competence gives the Competitive Advantage. Is essentially a position of

superiority on the part of the firm in some function/factor/activity in relation to its
competition. It is through this superiority that the firm attempts to carve out a
comfortable position for itself in the relevant industry. The superiority can be in any
one of the multitude of functions/activities performed by the firm. Like some firms are
strong in Production and some in Marketing with respect to competitors specialization.

Factors affecting Competitive Advantage

1. Marketing; Market standing, Market share, Innovation in marketing, Customer

satisfaction level, Customer service level, New product leadership, Price
leadership, Channel strength, Marketing Communications strength, Advertising
effectiveness, Strength of personal selling/sales force productivity;, Market
research capability, Marketing organization, Marketing costs, Product-mix &
:product lines, Product-wise position in – profitability, product quality, stage of the
product in life cycle, Product design, Product’s sophistication/technological
strength, Differentiation, Positioning, Brand power, Quality of the marketing
capability in toto.

2. Finance: Assets, Liquidity, Leverage, Gearing, Cash flow, Cost of capital,

Profitability, Costs, Quality of financial management, Knowledge and dynamism in
tax planning

3. Manufacturing/Operations; Size or capacity of production – scale, Locational

advantage, Production facilities, Capacity utilization, Raw materials – their cost,
quality and delivery, Maintenances, Cost of production, Break=-even position,
Productivity, Inventory management, Value engineering capability, Experience
curve benefit, Flexibility, Automation.

4. R & D: Nature, depth and quality of R&D capability, Resource allocation to

R&D, Quality, expertise and experience of R&D personnel, Speed of R&D,
Engineering capability for pursuing R&D suggestions, Record of patents
generated, Comparisons of R&D investment vs new products launched.

5. Human Resources Quality, knowledge, expertise and experience of personnel,

Morale and motivation of personnel, Personnel turnover, Labor costs and Industrial
relations.

6. Corporate Factors and Overall Resources: Company Size, Corporate image,

Quality of management in general, CEO, Board of Directors- policy makers,
Corporate performance record, Innovation record, Quality of strategic planning,
Organizational culture, Organisational structure, Use of information technology -
Extent of use and degree of satisfaction.

11
12