After the managers involved in the strategic management process have analyzed the environment and determined organizational direction through the development of a mission statement and organizational objective, they are ready to formulate strategy.
STRATEGY FORMULATION is the process of determining appropriate courses of action for achieving organizational objectives and thereby accomplishing organizational purpose.
Managers formulate strategies that reflect environmental analysis, lead to fulfillment of organizational mission, and result in reaching organizational objectives.
Special tools they can use to assist them in formulating strategies include the following:
- CRITICAL QUESTION ANALYSIS
- SWOT ANALYSIS
- BUSINESS PORTFOLIO ANALYSIS
- PORTER’S MODEL FOR INDUSTRY ANALYSIS.
These 4 strategy development tools are related but distinct. Managers should use the tools or combination of tools that seems most appropriate for them and their organizations.
CRITICAL QUESTION ANALYSIS:
The 4 critical questions to be answered here are:
- What are the purposes and objectives of the Organization?
- Where is the Organization presently going?
- In what kind of environment does the organization now exist?
- What can be done to better achieve organizational objectives in the future?
SWOT Analysis is a strategic development tool that matches internal organizational strengths and weaknesses with external opportunities and threats.
SWOT is an acronym for the organization’s Strengths, Weakness, Opportunities and Threats.
It is based on the assumption that if managers carefully review such strengths, weaknesses, opportunities and threats, a useful strategy for ensuring organizational success will become evident to them.
BUSINESS PORTFOLIO ANALYSIS:
Business Portfolio Analysis is an organizational strategy formulation technique that is based on the philosophy that Organizations should develop strategy much as they handle investment portfolios.
In the way, in which the sound financial investments should be supported and unsound ones discarded, sound organizational activities should be emphasized and unsound ones deemphasized.
2 Business Portfoilo tools are:
- The BCG Growth Share Matrix by Boston Consulting Group.
- GE Multifactor Portfolio Matrix by General Electric Company.
BCG Growth-Share Matrix:
The Boston Consulting Group, a leading consulting firm, developed and popularized a portfoilo analysis tools that helps managers develop organizational strategy based on market share of businesses and the growth of markets in which businesses exist.
The 1st step in using this model is identifying the organization’s strategic business units (SBUs). A Strategic business Unit is a significant organization segment that is analysed to develop organizational strategy aimed at generating future business or revenue.
Exactly what constitutes as SBU varies from company to company. In bigger organizations, and SBU could be a company division, a single product or a complete Product Line.
In smaller organizations, it might be the entire company.
Eventhough they vary drastically in form each SBU has the following characteristics:
- It is a single business or collection of related businesses.
- It has its own competitors.
- It has a manager who is accountable for its operation.
- It is an area that can be independently planned for within the organization.
After identifying the SBUs, the next step is to categorize each SBU within one of the 4 Matrix Quadrants:
- STARS – Star SBUs have a high share of a high growth market and typically need large amounts of cash to support their rapid and significant growth. Stars also generate large amounts of cash for the organization and are usually segments in which management can make additional investments and earn attractive returns.
- CASH COWS: SBUs that are Cash Cows have a large share of a market that is growing only slightly. Naturally, these SBUs provide the organization with large amounts of Cash, but since their market is not growing significantly, the cash is generally used to meet the financial demands of the organization in other areas, such as the expansion of a STAR SBU.
- QUESTION MARKS: These category of SBUs have a small share of a high growth market. These are “question marks” because it is uncertain whether management should invest more cash in them to gain a larger share of the market or deemphasize or eliminate them. Management will choose the 1st option when it believes it can turn the question mark into a star, and the 2nd option when it thinks that future investments would be fruitless.
- DOGS : SBUs that are dogs have a relatively small share of a low-growth market. They may barely support themselves; in some cases, they actually drain off cash resources generated by other SBUs. These are the SBUs which are likely to be shortlisted for deemphasize or elimination.
PITFALLS of the BCG Growth Matrix Model:
The matrix does not consider factors like:
- Various types of Risk associated with product development
- Threats that inflation and other economic conditions can create in the future.
- Social,Political and Ecological Pressures.
GE Multifactor Portfolio Matrix:
GE Multifactor Portfolio Matrix is a tools that helps managers develop organizational strategy that is based primarily on market attractiveness and business strengths.
The GE Multifactor Portfolio was deliberately designed to be more complete than the BCG Growth Share Matrix.
Each of the organization’s SBUs are plotted on a 2 dimensional matrix of Industry Attractiveness and Business Strength.
Each of these 2 dimensions are a composite of a variety of factors that each firm must determine for itself, given its own unique situation.
As examples, Industry Attractiveness might be determined by such factors as:
- No. of Competitors in the Industry
- Rate of Industry Growth
- Weakness of Competitors within an Industry
Business Strengths might be determined by such factors as:
- Company’s Financial Solid Position
- Its Good Bargaining Position over Suppliers
- Its high level of Technology Use.
Specific strategies for a company are implied by where their businesses fall on the matrix.
While portfolio models are useful frameworks and reference points, no model is yet designed that will deal with all the various dynamics involved in an organization and an industry and the changing environment. Hence Portfolio models should never be applied in a mechanistic fashion and sound managerial judgement and experience is to be applied alongwith.
PORTERS MODEL FOR INDUSTRY ANALYSIS:
Perhaps the best known tool for formulating strategy is the model developed by Michael E. Porter, an internationally acclaimed strategic management expert.
Essentially, Porter’s model outlines the primary forces that determine competitiveness within an industry and illustrates how those forces are related.
The model suggests that in order to develop effective organizational strategies, managers must understand and react to those forces within an industry that determine an organization’s level of competitiveness within that industry.
According to these model, competitiveness within an industry is determined by the following factors:
- New Entrants or New Companies within the Industry
- Substitute Products or Services – for goods or services that the companies within the industry produce/provide.
- Supplier’s Ability to control issues like costs of material/ inputs that industry companies use to manufacture their products or provide their services.
- Competition level among the firms in the industry.
According to the model, buyers, product substitutes, supplier and potential new companies within an Industry all contribute to the level or rivalry among industry firms.
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