Business Strategy Formulation. The 5 Levels

This article deals with strategy formulation, particularly, the essential elements that are involved in the formulation of strategy. It discusses how strategy formulation gives the direction that the organisation wants to go. The different levels of strategy formulation are enumerated. The article ends by giving vivid information on the background of strategy formulation in business organisations.

   Meaning and Definition

Strategy formulation is the process whereby management develops an organisation”s strategic mission, derives specific strategic objectives and chooses a strategy to implement. It includes all the direction-setting components of managing the total organisation.

Formulation of Strategy and Direction of Organisation

Usually, organisation”s managers have choices about which part to take in achieving strategic objectives. As the adage goes, “There are more than one way to skin a cat”. So, an organization strategy represents the pattern of choices management has made among the alternative means. A strategy is just the trajectory or the height path toward the target objective. It is made up of the entrepreneurial competitive and functional area approaches that the management intends to employ in positioning the enterprise and in managing its overall portfolio of activities.

Since each organisation is unique, strategy formulation is custom-tailored by management to suit or fit all the relevant internal and external circumstances that surround the organisation. Also, because the organisation”s circumstances change, its strategy also changes and is always evolving as the managers either fine-tune or overhaul the ways they try to achieve strategic objectives.

Corporate-Level Strategy

This is senior management”s game plan for directing and running the organisation as a whole. It cuts across all of the organisation’s activities such as different businesses, divisions, product line and technologies. The corporate level strategy formulation should involve three tasks, which are:

1. Development of plan for managing the scope and the mix of the organisation”s various activities in order to achieve or improve corporate performance.
2. Provision of co-ordination among different businesses in the portfolio.
3. Establishment of investment priorities and allocation of corporate resources across the company”s different activities.

The portfolio management actions of corporate officers in entering a new or existing business and in pursuing some opportunities more boldly than others are strategically important because they determine the organisation”s business position.

The strategy to be formulated at this level may be a combination of offensive moves to pursue selected opportunities and build new or stronger business positions, and defensive moves to protect existing positions against emerging threats.

Coordination of strategic plans across business units is equally an important task for corporate managers. This is because it is through the coordination of the interrelated activities of the corporation”s different business units that a corporate-level competitive advantage can be created.

Controlling the level of the pattern of corporate resource allocation is of no less importance. It is very crucial because the number of “worthy projects” and “can’t miss opportunities” put forward for funding may entail a lot of capital requirements even beyond the corporate resources. The allocation of the resources must therefore, be genuinely done.

Line of Business Strategy Formulation

This is the managerial action plan for directing and running a particular business unit. The strategy at this level deals explicitly with

1. How the enterprise intends to compete in that specific business.
2. Developing responses to changing industry and competitive conditions.
3. Controlling the pattern of resources allocation within the business unit.

The internal key to good business strategy concerns the development and use of a strategy-supportive distinctive competence. This means the skill or activity that a firm does especially well in comparison to the rival firm. Formulation and selection of a business strategy that is closely matched to the firm”s skills resource base is very essential

For a single business enterprise, corporate strategy and business strategy become one and the same except when the single business is contemplating on diversification.

Functional Area Support Strategy

These are strategic formulation for managing the principal subordinate activities within a business. This should be for each part of the business, production, marketing, finance, research and development and human resources. This task is delegated by the business level manger to the functional area heads. The functional heads then formulate strategies to achieve their set objectives.

Operational-Level Strategy

The operating-level strategies are formulated to enable the departmental and supervisory-level managers to carry out fine details of functional area support strategies.

Levels of Strategy Formulation

This is another important aspect of strategic management. This aspect brings into play the critical issue of how the targeted results are to be accomplished. The objectives of the organisation are the “ends” while the strategy is the “means” of achieving them. Strategy formulation is a difficult task. It entails taking into account all the relevant aspects of the organisation’s internal and external situation and coming up with a detailed action plan for achieving the targeted short-run and long-run results consistent with the organisation’s objectives.

Strategy is regarded as a blueprint of all the important entrepreneurial, competitive and functional area actions that are to be taken in pursuing organisational objectives and positioning the organisation for sustainable success. Consequently, in formulating a strategy, there are issues that must be addressed which include the following:

How to Respond to Changing Strategy Conditions

These conditions include shifts in customer needs, emerging industry trends, how to defend against competitors and other externally imposed threats, etc.

Resources Allocation

In formulating strategy, resources allocation over the organisation’s various business units, divisions, and functional departments are important. Making decisions that will provoke investment and human resources in the chosen strategic plan are very crucial. To achieve success, a kind of strategy-supportive guidelines for resources allocation must be in place.

Competition within the Industry

This has to do with the decisions on how to develop customer appeal, position the firm against rivals, emphasise some products and de-emphasises others to meet some specific competitive threats, which are important for survival and the achievement of  a definable competitive advantage.

The Actions and Approaches to take in Each of the Functional Areas of an Operational Department

The different functional and operating level strategies ought to be co-ordinated rather than be allowed to go off on independent courses.

They need to support the creation of a sustainable competitive position and advantage. Strategy formulation should cover the different levels of the organisation. There should be strategy for the organisation as a whole (which is top management responsibility).

There should be strategies for each line of business that the organisation is operating and also at functional area level such as manufacturing, marketing, finance and human resources, within each business. There should also be strategy formulation at the operating levels, e.g. for each functional department and unit in order to be able to carry out the details of functional area strategy.

Strategy formulation is mainly an exercise carried out by entrepreneurship. Its contents reflect the entrepreneurial judgments about the long-term direction of the organization: any need for major new initiatives such as increased competitive aggressiveness, diversification moves and divestiture of unattractive activities.

The specific involvement of entrepreneurial aspects of strategy formulation is to:

1. search actively for innovative ways the organisation can improve on what it is already doing
2. ferret out new opportunities for the organisation to the purpose

iii.              develop ways to increase the firm”s competitive strength and put it in a stronger position to cope with competitive forces

1. devise ways by which to build and maintain a competitive advantage
2. decide on how to meet threatening external developments
3. encourage individuals throughout the organisation to put forth innovative proposals and champions those that have promise

vii.             direct resources away from areas of low or diminishing results towards areas of high or increasing results

viii.          decide when and how to diversify

1. choose which business or product to abandon, the ones to continue to emphasize and the new ones to add.

So, the entrepreneur needs a critical skill to be able to make strategic choices that will keep the organisation in a position of sustainable success.

Other crucial factors in strategy formulation are analysis and judgment. The right strategy formulated and chosen for one organisation may not be the right one for another organisation, even when they are in the same business and the same environment. This is because situations differ from one organisation to another and from time to time. Also, strongly positioned firms can do things that the weak ones dare not do, and weak firms can do things which the strong firms cannot do. A good strategy is one that is right for the organisation, considering all the relevant specifics of its situation.

Therefore, in formulating strategies, the entrepreneurial task involves and requires heavy dozes of situational analysis and judgment with the aim of achieving “goodness of fit” between the formulated strategy and all the relevant aspects of the organisation’s internal situation and external environment. In fact, the value of any manager is in his ability to develop customised solutions that fit the unique features of an organisation’s situation.

In the main, the real purpose, and value, of strategy formulation is to come up with an action plan that will successfully attract buyers, produce a sustainable competitive advantage, boost the firm’s market structure, put added competitive pressures on rivals, shape the nature of the competitive battle, influence the direction of industry, change in their favour, and push performance to superior levels.

The ideal result and outcome is the one where the firm’s formulation strategy propels it to a leadership position above and apart from the rival firms in the industry in a way that earnings prosper and multiply; and its products (services) become the standard or the yardstick for the industry comparison.

The Strategy Making Hierarchy

Strategy Level	Primary Strategy Development Responsibility	Strategy    Making     Functions and Areas of Focus
Corporate Strategy	CEO, other key Executive (Decisions are typically reviewed and approved by board of directors)	Structuring and managing the portfolio of business units. (Making acquisition, divestitures, strengthening the existing position).
Line-of-Business Strategy	General Manager/head of Business Unit (Decisions are typically reviewed) approved by senior corporate executive (CEO)	Co-ordinating business level strategies. Building business level competitive advantage. Controlling the pattern of resources allocation. Choosing how to compete and what type of competitive advantage to build.
Functional area support strategy	Functional area heads (Decisions are typically reviewed/approved by business units/heads)	Developing response to changing industry and competitive conditions. Co-ordinating the role/thrust of functional area strategies.
Operational-level strategy	Departmental heads/ field unit heads lower level managers within functional areas (decisions are often made after consultation with lateral pears in closely related areas and are reviewed /approved by functional area heads	Controlling the pattern of resource allocation within the business unit. Fleshing out the business strategy as applied to specific functional areas and developing specific functional area action plans to support successful execution of the strategy. Developing action plans to carry out the day-to- day requirements of functional area support strategies.

 Adapted from Thompson and Strickland, strategic management: concepts and cases (1987).