Strategy Formulation

STRATEGY FORMULATION

Strategy is a concept that has been borrowed from the military and adapted for use in business. In business, as in the military, strategy bridges the gap between policy and tactics. Together, strategy and tactics bridge the gap between ends and means.

Using the SWOT analysis, internal analysis and external analysis, problems are dissected opportunities are identified and priorities are set. These become the basis of developing strategies.

A good strategic plan must therefore contain the fourteen “F’s” to be effective.

Fourteen F's of Effective Strategies

Good strategies must:

Be Fundamentally Sound and Correct. This means it must be anchored on the realities of the environment or situation the organization is in. It must recognize major trends and directions in this environment. It must take account of what the organization can do and can not do, what it has and does not have.

Have Foresight. It must be able to determine the most likely future scenario in order to properly position the organization.

Take a Favored Course of Action. The implementors of the strategy must empathize with what they are doing. Otherwise, their motivation level would be low. They must actually identify with their strategy based on their vision, values and preferences.

Focus Efforts on a Few but Critical Activities. Effective strategies are rifle shots at a chosen target, not shotgun blasts that scatter the resources of the organization. They choose the few things that would make a big difference.

Have Force behind the Chosen Few Things. Organizations must put their full force and major resources behind the strategies taken. They must “put their money where their mouth is.”

Follow Through. A golfer or tennis player knows that hitting the ball is not enough. There must be a complete swing that directs the ball to its chosen destination. The whole organization must move to support its major thrust all the way to final acceptance by and satisfaction of its client system.

Have a Fit Among the Objectives, Tasks, People and Structure of the Organization. There must be consistently between the type of people operating within certain organizational structures and systems and the defined objectives, the chosen strategies and tasks of the organization. Avoid mismatches.

Have a Finite Time Frame. Unreachable stars have less motivating power than realizable objectives within finite time frames of five, ten to seven twenty years.

Be Feasible. This means that strategies must be do-able by the organization. It must work out in the field and produce good benefit-cost relationship.

Take a Full and Holistic Approach. Compartmentalized approaches lead to partial solutions that often lead to greater problems. Organizations must look at the full implications of relationships among variables reinforce rather than cancel each other out.

Get Feedback through Good Monitoring and Evaluation Systems. Every action produces a reaction and this reaction must be monitored closely and assessed as to whether it is moving towards the desired objectives.

Be Felt with Sufficient Impact by the Intended Targets. Development organizations tend to forget the very purpose of their strategy which is to positively affect the lives of the people they are serving. Strategies must therefore translate into felt impact.

Be Flexible Depending on Environmental Changes. The assumptions governing strategies chosen may change overtime. Hence, there is a need to modify, alter or overhaul strategies in the face of environmental changes.

Be Final Results Oriented. At the end of the day, the development organization must be responsible for its intended results and be accountable to the beneficiaries for such results. They should not concentrate on inputs or tasks only but should make sure that these inputs or tasks lead to the desired outputs and outcomes.

Other Concepts on Strategy
Strategy is about means. It is about the attainment of ends, not their specification. The specification of ends is a matter of stating those future conditions and circumstances toward which effort is to be devoted until such time as those ends are obtained. Strategy is concerned with how you will achieve your aims, not with what those aims are or ought to be, or how they are established. If strategy has any meaning at all, it is only in relation to some aim or end in view. Example: The objective is to increase profit by 20% annually in the next five years. The determinant factors for increasing profits would be a) increase sales with proportionately less cost b) reduction in costs without decrease in sales c) increase price to increase profit margin.The strategies therefore will have to be along these factors. Should the enterprise adopt reduction in cost as the core strategy, the programs and tactics could be those that will improve production costs such as 1) production intensification to reduce per unit overhead costs 2) JIT production in order to reduce inventory costs, handling costs and storage costs . Sales Efficiency Improvement Program could support the "increase in sales strategy. This will increase sales outputs of sale personnel. Should the company decides to pursue increasing margins as a strategy, then re-pricing program will have to be implemented. This will have to consider the price-sensitivity of the market, because undue price increases may affect sales volume.

Strategy is one element in a four-part structure. First are the ends to be obtained. Second are the strategies for obtaining them, the ways in which resources will be deployed. Third are tactics, the ways in which resources that have been deployed are actually used or employed. Fourth and last are the resources themselves, the means at our disposal. Thus it is that strategy and tactics bridge the gap between ends and means.

Establishing the aims or ends of an enterprise is a matter of policy (setting vision, missions, objectives and policies) is a matter of governance and not of management and, conversely, achieving them is mostly a matter of management and supervision and not of governance.
Those who govern are responsible for seeing to it that the ends of the enterprise are clear to the people who people that enterprise and that these ends are legitimate, ethical and that they benefit the enterprise and its members.

Strategy is the joint area of those who govern and those who manage. Tactics (programs and projects) belong to those who manage and supervise. Means or resources are jointly controlled. Those who govern and manage are jointly responsible for the deployment of resources. Those who manage are responsible for the employment of those resources—but always in the context of the ends sought and the strategy for their achievement.

Over time, the employment of resources yields actual results and these, in light of intended results, shape the future deployment of resources. Thus it is that "realized" strategy emerges from the pattern of actions and decisions. And thus it is that strategy is an adaptive, evolving view of what is required to obtain the ends in view.
Regardless of the definition of strategy, or the many factors affecting the choice of corporate or competitive strategy, there are some fundamental questions to be asked and answered. These include the following:

Related to Mission & Vision
Who are we?
What do we do?
Why are we here?
What kind of company are we?
What kind of company do we want to become?
What kind of company must we become?
Related to Corporate Strategy
What is the current strategy, implicit or explicit?
What assumptions have to hold for the current strategy to be viable?
What is happening in the larger environments?
What are our growth, size, and profitability goals?
In which markets will we compete?
In which businesses?
In which geographic areas?
Related to Competitive Strategy
What is the current strategy, implicit or explicit?
What assumptions have to hold for the current strategy to be viable?
What is happening in the industry, with our competitors, and in general?
What are our growth, size, and profitability goals?
What products and services will we offer?
To what customers or users?
How will the selling/buying decisions be made?
How will we distribute our products and services?
What technologies will we employ?
What capabilities and capacities will we require?
Which ones are core?
What will we make, what will we buy, and what will we acquire through alliance?
What are our options?
On what basis will we compete?

KRAS, PERFORMANCE MEASURES AND INDICATORS

KRAS, PERFORMANCE MEASURES AND INDICATORS

After the vision, mission and objectives are set in place, a method for measuring progress and success of implementation will be needed in the business plan. Choosing a balanced set of results-based performance measures to gauge the success in meeting the objectives is one of the important and difficult aspects of the strategic planning process.



Performance in the strategic plan should be measured because:

Most people want to do a good job. Usually, what gets measured gets done. Performance indicators and measures help managers and employees focus on what is important. By comparing actual with expected results, it enables managers and owners to evaluate progress towards the attainment of objectives.

Measuring performance is a good management practice. The enterprise requires that performance measures should be established thus providing accountability for results at each level of operating unit.

Measuring performance can enhance the quality of products and services. Performance measures or indicators inform staff of customers' needs and levels of satisfaction and make it possible to identify actions to improve quality and costs.

Measuring performance helps in budget and development review. Performance indicators and measures are valuable in the budget development process. They allow for more accurate assessment of resources needed to support activities. They also help identify what level of product or service will be provided for the amount of funding available.

Key Result Areas

Good performance measures need to be clearly identified and defined including exactly what is being measured. They must be tied and made fit to the missions and objectives. For example if an enterprise would have these objectives:

Increase in Profitability

Increase in Market Share

Enterprise Growth

In these examples, increase in profitability can be be manifested in the following key result areas:

Increase in profitability may be seen in the increase of absolute amount of gross profits, net profit before tax or net profit after tax for the planned period. Similarly, profits can also be looked at as increases in dividends declared or even return on investments, return on sales, return on assets and contribution margin. These items maybe considered as possible key result areas - because they manifest or show profitability.

Increase in the market share in terms number of product units sold or in terms of value could mean the relative position of the enterprise among similar players supplying similar products in a certain/defined geographic market territory. The percentage of market share becomes the key result area.

Enterprise growth can be seen in increases of assets, owners equity, number of additional offices/outlets, addition of affiliates in cases of franchises and increases in the number of product lines and outputs.



The Key Result Areas or KRA’s are qualitative manifestations that the objectives are being attained. KRA’s must be converted into numerical Performance Indicators or PIs. PIs are nothing but exact quantifications of the KRAs.

Performance Indicators

It is important that the key result areas be totally and clearly understood by the enterprise's operating units. Once the key result areas are identified and decided on, the enterprise need to define the quantitative performance measures, determine data requirements, identify current baselines, set realistic performance targets based on benchmarking and compare actual versus expected results.

A comprehensive set of performance measures will be linked to missions and objectives; will measure intermediate and final outcomes; will delineate clear responsibilities; will address multiple priorities and will be useful to the staff, management and owners of the enterprise.

In the previous examples used in this workbook, PIs for KRA "increase in profitability" could be expressed as

"Attain a net profit of P5.0 M by the year 200X"

"Achieve a sustained minimum return on investments of 25% in the next 5 years starting year 200X"

"Attain a return on equity of 14% by 200X, 16% by 200Y and 18% by 200Z"

Similarly for KRA=" enterprise growth"

"Attain an net asset value of P 60.M by the year 200x"

"Attain an annual net asset growth of 10% in the next five years"

"Attain an annual increase of 10 franchisees over the next five years"

Again, the PIs are the numerical quantification of the key result areas. It should be borne in mind however, that these key result areas and performance indicators should be the ultimate ones - meaning these are the KRAs and PIs of the enterprise as a whole.

Other KRAs and PIs could be done on the subordinate levels of the enterprise like , divisions, departments and sections. The KRA of a production department in a manufacturing set-up could be " reduction of rejects" and the PI could be " zero by the year 200X" or KRA and PI of " Increase in sales inquiries by 10% every six months for a marketing department as a result of an advertising program for an automotive dealership Other examples of an enterprise's subordinate-level organizational units are as follows:

"Increase of 15% in the present output of plastic film extrusion department by the end of the year."

"Reduce traveling expenses to 3% of total sales for the years 200X, 200Y and 200Z"

"Yearly increase of 5% in the commission sales force starting 200X to 200Y"



To further understand the nature of KRAs and PIs, strategic planning incorporates five common measures namely, input, output, outcome, efficiency and quality. Inputs measures the amount of resources needed to produce the products and services. Inputs include labor, materials, equipment and supplies. Input measures measures are useful in showing the total cost of providing a product or service and the related costs intertwined costs such as overhead.

Outputs on the other hand measures the amount or volume of products and services produced. Outputs focus on the level of activities in a particular enterprise unit. Outputs are useful in defining what a particular activity produces. However, they are limited because they do not indicate whether the objectives or goals are achieved and they do not reveal about quality or efficiency.

Outcomes reflect the actual results achieved as well as the impact of the enterprise activity or program. Both intermediate and long-term outcomes can be evaluated. Enterprise owners are generally the most interested in outcome measures. Yet information about the ultimate results is often not available or practical to measure. In these instances, it may be necessary to use proxy or substitute measures. For example, computerization in an enterprise may result in the fast production of databases and information. The outputs may be inventory updates, budget updates, personnel information etc. The outcome value of these outputs should result in good, fast, accurate and right management decisions. Similarly, a good personnel benefits program should result in not only making employees happy but also increase in workload outputs and quality. A training program should be evaluated not in terms of the number of personnel trained, the number of sessions conducted etc., but rather on whether the trained personnel have attained greater knowledge, achieved the right aptitude and attitude, enhanced effectiveness and efficiency.

Efficiency measures are also known as productivity measures. Efficiency can be measured in terms of cost per unit of output, the ratio of outputs per unit of input and the ratio of outputs per unit of time. Ratios can help express the relationships between different performance measures to convey more information about productivity and the cost effectiveness of an activity or enterprise program.

Measures of quality include reliability, accuracy, courtesy, competence, responsiveness and completeness associated with the product or service. Quality measures reflect the effectiveness in meeting the expectations of customers. Some of the examples include 1) number of defect-free products and services 2) Accuracy of information entered into the enterprise data bases 3) percentage of satisfied customers 4) meeting of product/service specifications and standards.

VISION, MISSION, OBJECTIVES

VISION, MISSION, OBJECTIVES

The Vision, Mission and Objectives are sets of statements answering the question "Where do we want to be ?"

Vision

A vision is an ideal state or condition which an organization wants to attain. It should not be too idealized, however, as to lose all meaning. A vision is an end scenario that could be achieved after successive stages of intermediate scenarios. A vision is an ideal state of the enterprise's future being - a lucid imagery of the ultimate success of the enterprise. It is a compelling, conceptual picture of the desired future. It is better to describe and picture the vision in vivid terms.

A vision statement should be clear and easily understood, appropriate and ambitious. It should orient the group's energies and serve as a guide to action.

The vision becomes a focal point for everyone in the enterprise. While in most cases, the enterprise vision is set by the owners, great visions are conceived through sharing between the enterprise owners, management and all levels in the organization. By sharing the vision, it establishes commitment to the over-all vision by employees at all levels.

The Process for Creating a Vision

Like much of strategic planning, creating a vision begins with and relies heavily on intuition and dreaming.

As part of the process, you may brainstorm with your staff or your board what you would like to accomplish in the future. Talk about and write down the values that you share in pursuing that vision. Different ideas do not have to be a problem. People can spur each other on to more daring and valuable dreams and visions -- dreams of changing the environment that they are willing to work hard for.

The vision may evolve through a strategic planning process. Or, it may be formed in one person's head in the shower one morning! a serendipity. The important point is that members of an organization without a vision may toil, but they cannot possibly be creative in finding new and better ways to get closer to a vision without that vision formally in place. Enterprises, with many of their staff and board members actively looking for ways to achieve a vision, have a powerful competitive and strategic advantage over organizations that operate without one.

When developing a vision statement, keep in mind of the following:

Brief and memorable

Inspiring and challenging

Descriptive of the ideal

Appealing to employees, customers and owners

Idealistic

Enduring

In addition, a vision statement should answer the following questions:

What does the enterprise want, what are its aspirations ?

How does the enterprise wish to be known by customers. employees and the community surrounding it.

How will the enterprise enhance or improve the quality of life for those who patronize its products and/or services

Perceptions of Ideal Futures: An Exercise in Forming Vision

This section outlines an exercise you may employ to assist your organization in
defining its own vision. By using this exercise to develop your organizational vision, you may be better assured that the vision statement that is developed is a shared vision.

At a retreat or at a board meeting or staff meeting or even when enjoying a company outing at the beach, take an hour to explore your vision. Breaking into small groups helps increase participation and generate creativity. Agree on a rough time frame, say five to ten years. Ask people to think about the following questions:

How do you want your customers, community, province, country to be different ?
What role do you want your enterprise to play in these environments ? What will success look like?

Then ask each group to come up with a metaphor for your organization, and to
draw a picture of success: "Our company is like ... a caterpillar with synchronized pods or feet movement with the head setting the direction and the feet contribute to the successful forward movement to destination". or " a train with comfortably-seated passengers and cargo, speedily and smoothly traveling over rails with its powerful engine pulling the carriages to its destination". The value of metaphors is that people get to stretch their minds and experiment with different ways of thinking about what success means to them.

Finally, have all the groups share their pictures of success with each other. One person should facilitate the discussion and help the group discuss what they mean and what they hope for. Look for areas of agreement, as well as different ideas that emerge. The goal is to find language and imagery that your organization's members can relate to as their vision for success.



Some of the examples of vision statements are as follows:


" Schmitz Transportation Corporation is the most dominant and transport service provider company operating in Cavite and Laguna areas providing the safest, most prompt and quality service"

"RSBI is the number one publisher of educational materials in the country in all educational levels, namely the basic education in both private and public schools, the tertiary education; the post collegiate level initially represented by the School of Law"

"NFG is the leading manufacturer and distributor of high quality garments, setting the trend and providing the benchmark of quality garments in the Philippines"


Mission Statement

A mission statement is the general thrust of the organization that is anchored on its vision. It is the primal motivation of the organization, its very reason for existence. It must be broad enough to inspire everybody in the organization but narrow enough to focus its efforts. A mission statement is a brief, comprehensive statement of purpose of an enterprise. The mission statement identifies what, and for whom, the enterprise do.

The mission statement is an invaluable tool in directing, planning and implementing enterprise efforts. The mission describes customers and products or services. The mission is a part of the organization’s identity, is all encompassing and rarely changes, and is the ultimate rationale for the existence of the enterprise.

When writing a mission statement, consideration should be given to these questions:

Who are we?

What do we do?

For whom do we do it?

Why do we do it?

In many cases, mission statements speak about the enterprise's purposes concerning its products, customers or clients, its employees and its owners.
Mission Statement Criteria

A good mission statement will:

Identify the overall purpose for the existence of the enterprise as established in its corporate papers.
Identify the basic needs or distinct problems that the enterprise is designed to address.
Identify clients, customers or users ( both internal and external) of the enterprise.

Help identify client, customer and stakeholder expectations, requirements, services and products provided to meet these requirements, and processes and resources used to satisfy the requirements.
Lead to the development of performance measures that reflect customer and stakeholder requirements.
Defining the Mission

To facilitate the development, review or revision of an enterprise mission, use the following process:

1. Identify the original purpose for the enterprise.
Why does the enterprise exist ? What problems were to be addressed by the enterprise ?
What functions, products or services are, or should be, provided?
2. Reflect the customer and stakeholder base in the statement.

Use the customer identification completed during the SWOT.
3. Identify current needs or distinct problems.

How do current expectations differ from the original purpose of the enterprise ? What are the primary needs or problems that have to be addressed?
4. Review and revise existing mission statements and draft new statements as appropriate.

Are enterprise program and subprogram missions clearly understood by employees and customers.?
Examples of Mission Statements:


"To provide the business community the availability of computer software needed using the most advanced and appropriate technology at highly competitive costs."
"To provide the best benefit package to the employees and considering them as part owners of the company."
"To provide the stockholders the highest returns on investments and regularly allow them to receive dividends"
"We profit most by giving the service that is best"


Objectives

The development of objectives completes the "Where do we want to be ?" part of the strategic planning process. Objectives are measurable end results that derive their impetus from the mission statements. In contrast to the vision, mission or goals, objectives are specific, time bound and measurable. Strategic planners have developed an acronym (SMART) for easy description of objectives- thus

Specific : Objectives should reflect specific accomplishments that are desired, not ways to accomplish them. Objectives should generate specific strategies or actions and be detailed enough to be understandable and give clear directions to others.

Measurable: Objectives must be measurable to determine when they have been accomplished. Accountability should be built into the planning process. A method for measuring an objective must be in place before work is actually began.

Aggressive and Attainable: If objectives are to be the standards for achievement, they should be challenging, but should be realistically achievable.

Result-Oriented: Objectives should specify a result. This is where the performance indicators are required. Results could either be quantifiable or descriptive

Time-Bound: Objectives must be attained over a specific period of time. Generally, objectives are more manageable by tying it down to budgets and fiscal calendars.

For many enterprises, the objectives are in the areas of profitability, enterprise growth in terms of number asset size, number of outlets/offices, market share and product diversification. The detailed description of objectives a more defined in this workbook section on "Key Result Areas and Performance Indicators".

Examples:

Objectives that are not "SMART"

To increase sales

To increase company assets

To increase market share

Objectives that are "SMART"

To increase sales by 10% annually in the next 5 years

To add sales outlets by 50 every year until 2008

To capture 80% market share in Metro Manila by the year 2007