Strategy formulation is the process of investigation, analysis, and decision making that provides the company with the criteria for attaining a competitive advantage. It includes defining the competitive advantages of the business (Strategy), crafting the corporate mission, specifying achievable objectives, and setting policy guidelines
Mission: Stating Purpose
An organization’s mission is the purpose or reason for the organization’s existence. It announces what the company is providing to society—either a service such as consulting or a product such as automobiles. A well-conceived mission statement defines the fundamental, unique purpose that sets a company apart from other firms of its type and identifies the scope or domain of the company’s operations in terms of products (including services) offered. Research reveals that firms with mission statements containing explicit descriptions of customers served and technologies used have significantly higher growth than firms without suchstatements.
Mission: Stating Purpose
An organization’s mission is the purpose or reason for the organization’s existence. It announces what the company is providing to society—either a service such as consulting or a product such as automobiles. A well-conceived mission statement defines the fundamental, unique purpose that sets a company apart from other firms of its type and identifies the scope or domain of the company’s operations in terms of products (including services) offered. Research reveals that firms with mission statements containing explicit descriptions of customers served and technologies used have significantly higher growth than firms without suchstatements.
A mission statement may also include the firm’s values and philosophy about how it does business and treats its employees; however, that is usually better kept as a separate document. It can put into words not only what the company is now but what it wants to become—management’s strategic vision of the firm’s future. The mission statement promotes a sense of shared expectations in employees and communicates a public image to important stakeholder groups in the company’s task environment. Some people like to consider vision and mission as two different concepts: Mission describes what the organization is now; vision
describes what the organization would like to become. We prefer to combine these ideas intoa single mission statement.
A classic example is that etched in bronze at Newport News Shipbuilding, unchanged
since its founding in 1886:
describes what the organization would like to become. We prefer to combine these ideas intoa single mission statement.
A classic example is that etched in bronze at Newport News Shipbuilding, unchanged
since its founding in 1886:
We shall build good ships here—at a profit if we can—at a loss if we must—but always good ships mission may be defined narrowly or broadly in scope. An example of a broad missionstatement is that used by many corporations: “Serve the best interests of shareowners, customers, and employees.” A broadly defined mission statement such as this keeps the company from restricting itself to one field or product line, but it fails to clearly identify either what it makes or which products/markets it plans to emphasize. Because this broad statement is so general, a narrow mission statement, such as the preceding example by Newport News Shipbuilding, is significantly more useful. A narrow mission very clearly states the organization’s primary business and will limit the scope of the firm’s activities in terms of the product or service offered, the technology used, and probably the market served
Objectives: Listing Expected Results
Objectives are the end results of planned activity. They should be stated as action verbs and tell what is to be accomplished by when and quantified if possible. The achievement of corporate objectives should result in the fulfillment of a corporation’s mission. In effect, this is what society gives back to the corporation when the corporation does a good job of fulfilling its mission. Coca-Cola has set the standard of a focused, international company. In their new Vision 2020 plan, they have laid out specific objectives including reducing the overall carbon footprint of their business operations by 15% by 2020, as compared to the 2007 baseline, and reducing the impact of their packaging by maximizing their use of renewable, reusable, and recyclable resources to recover the equivalent of 100% of their packaging. This type of focus has made Coca-Cola a perennial member of the Fortune 500, one of the Fortune 50 Most Admired Companies, one of Barron’s Most Respected Companies in the World and a Diversity, Inc. Top 50 company. Over the past 10 years they have raised their dividend an average of 9.8% per year and the company’s earnings per share have jumped 11.3% per year over the past 5 years.
The term goal is often used interchangeably with the term objective. In this book, we prefer to differentiate the two terms. In contrast to an objective, we consider a goal as an open-ended statement of what one wants to accomplish, with no quantification of what is to be achieved and no time criteria for completion. For example, a simple statement of “increased profitability” is thus a goal, not an objective, because it does not state how much profit the firm wants to make the next year. A good objective should be action-oriented and begin with the word to. An example of an objective is “to increase the firm’s profitability in 2014 by 10% over 2013.”
Objectives: Listing Expected Results
Objectives are the end results of planned activity. They should be stated as action verbs and tell what is to be accomplished by when and quantified if possible. The achievement of corporate objectives should result in the fulfillment of a corporation’s mission. In effect, this is what society gives back to the corporation when the corporation does a good job of fulfilling its mission. Coca-Cola has set the standard of a focused, international company. In their new Vision 2020 plan, they have laid out specific objectives including reducing the overall carbon footprint of their business operations by 15% by 2020, as compared to the 2007 baseline, and reducing the impact of their packaging by maximizing their use of renewable, reusable, and recyclable resources to recover the equivalent of 100% of their packaging. This type of focus has made Coca-Cola a perennial member of the Fortune 500, one of the Fortune 50 Most Admired Companies, one of Barron’s Most Respected Companies in the World and a Diversity, Inc. Top 50 company. Over the past 10 years they have raised their dividend an average of 9.8% per year and the company’s earnings per share have jumped 11.3% per year over the past 5 years.
The term goal is often used interchangeably with the term objective. In this book, we prefer to differentiate the two terms. In contrast to an objective, we consider a goal as an open-ended statement of what one wants to accomplish, with no quantification of what is to be achieved and no time criteria for completion. For example, a simple statement of “increased profitability” is thus a goal, not an objective, because it does not state how much profit the firm wants to make the next year. A good objective should be action-oriented and begin with the word to. An example of an objective is “to increase the firm’s profitability in 2014 by 10% over 2013.”
Some of the areas in which a corporation might establish its goals and objectives are:
- Profitability (net profits
- Efficiency (low costs, etc.
- Growth (increase in total assets, sales, etc.
- Shareholder wealth (dividends plus stock price appreciation
- Utilization of resources (ROE or ROI
- Reputation (being considered a “top” firm)
- Contributions to employees (employment security, wages, diversity
- Contributions to society (taxes paid, participation in charities, providing a needed product or service
- Market leadership (market share)\
- Technological leadership (innovations, creativity
- Survival (avoiding bankruptcy
- Personal needs of top management (using the firm for personal purposes, such as providing jobs for relatives)
Strategy: Defining the Competitive Advantages
An organization must examine the external environment in order to determine who constitutes the perfect customer for the business as it exists today, who the most direct competitors are for that customer, what the company does that is necessary to compete and what the companydoes that truly sets it apart from its competitors. These elements can be rephrased into the strengths of the business, the understanding of its weaknesses relative to its competitors, what opportunities would be most prudent, and what threats might affect the business’s primary competitive advantages.
A strategy of a corporation forms a comprehensive master approach that states how the corporation will achieve its mission and objectives. It maximizes competitive advantage and minimizes competitive disadvantage. Pfizer, the giant drug company has embraced the need for this type of approach. Faced with the rapid fall-off of its biggest blockbuster drugs (patents expiring), Pfizer was faced with the question of how to generate the R&D to create new drugs. Historically, the company had relied upon its cadre of scientists, but this changed in the past few years. Pfizer plans to have 50 drug development projects running with university research centers by 2015. They opened their first one in 2010. This is the crucial new ground from which they hope to replace such blockbusters as Lipitor, which expects to see sales drop by more than 80% (from US$12 billion in 2012) when the patent expired.
The typical business firm usually considers three types of strategy: corporate, business, and functional.
1. Corporate strategy describes a company’s overall direction in terms of its general attitude toward growth and the management of its various businesses and product lines. Corporate strategies typically fit within the three main categories of stability, growth, and retrenchment.
2. Business strategy usually occurs at the business unit or product level, and it emphasizes improvement of the competitive position of a corporation’s products or services in the specific industry or market segment served by that business unit. Business strategies may fit within the two overall categories: competitive and cooperative strategies. For example, Staples, the U.S. office supply store chain, has used a competitive strategy to differentiate its retail stores from its competitors by adding services to its stores, such as copying, UPS shipping, and hiring mobile technicians who can fix computers and install networks. British Airways has followed a cooperative strategy by forming an alliance with American Airlines in order to provide global service. Cooperative strategy may thus be used to provide a competitive advantage. Intel, a manufacturer of computer microprocessors, uses its alliance (cooperative strategy)with Microsoft to differentiate itself (competitive strategy) from AMD, its primary competitor.
3. Functional strategy is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a companyor business unit with a competitive advantage. Examples of research and development (R&D) functional strategies are technological followership (imitation of the products of other companies) and technological leadership (pioneering an innovation). For years, Magic Chef had been a successful appliance maker by spending little on R&D but by quickly imitating the innovations of other competitors. This helped the company keep its costs lower than those of its competitors and consequently to compete with lower prices. In terms of marketing functional strategies, Procter & Gamble (P&G) is a master of marketing “pull”—the process of spending huge amounts on advertising in order to create customer demand. This supports P&G’s competitive strategy of differentiating its products from those of its competitors.
Business firms use all three types of strategy simultaneously. A hierarchy of strategy is a grouping of strategy types by level in the organization. Hierarchy of strategy is a nesting of one strategy within another so that they complement and support one another. (See Figure 1–4.) Functional strategies support business strategies, which, in turn, support thecorporate strategy(ies).
Policies: Setting Guidelines
A policy is a broad guideline for decision making that links the formulation of a strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives, and
3. Functional strategy is the approach taken by a functional area to achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with developing and nurturing a distinctive competence to provide a companyor business unit with a competitive advantage. Examples of research and development (R&D) functional strategies are technological followership (imitation of the products of other companies) and technological leadership (pioneering an innovation). For years, Magic Chef had been a successful appliance maker by spending little on R&D but by quickly imitating the innovations of other competitors. This helped the company keep its costs lower than those of its competitors and consequently to compete with lower prices. In terms of marketing functional strategies, Procter & Gamble (P&G) is a master of marketing “pull”—the process of spending huge amounts on advertising in order to create customer demand. This supports P&G’s competitive strategy of differentiating its products from those of its competitors.
Business firms use all three types of strategy simultaneously. A hierarchy of strategy is a grouping of strategy types by level in the organization. Hierarchy of strategy is a nesting of one strategy within another so that they complement and support one another. (See Figure 1–4.) Functional strategies support business strategies, which, in turn, support thecorporate strategy(ies).
Policies: Setting Guidelines
A policy is a broad guideline for decision making that links the formulation of a strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives, and
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| Figure 1–4 |
strategies. For example, when Cisco decided on a strategy of growth through acquisitions, it established a policy to consider only companies with no more than 75 employees, 75% of whom were engineers.48 Consider the following company policies:
- 3M: 3M says researchers should spend 15% of their time working on something other than their primary project. (This supports 3M’s strong product development strategy.)
- Google: Google’s health care plan includes their onsite medical staff. Any employee who feels ill at work can make an appointment with the doctor at the Googleplex. This supports the Google HRM functional strategy to support its employees.
- General Electric: GE must be number one or two wherever it competes. (This supports GE’s objective to be number one in market capitalization.)
- Starbucks: All Starbucks employees are offered a Total Pay Package that includes a 401(k) savings plan, stock options, and an employee stock purchase plan. This goes a long way toward their goal of having every employee feel like a partner in the business
- Ryanair: Ryanair charges for everything a passenger might want or need on a flight. The only thing you get with your ticket is the right to a seat on the plane (and that seat depends upon how fast you can run to the plane).
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