17 Strategy formulation

Strategy formulation

Strategy is about winning. It is how the mission of an organisation is accomplished. It is not a detailed plan or program of instructions; it is a unifying theme that gives coherence and direction to the actions and decisions of an organisation. Strategic formulation consists of five basic steps:

1.  Defining a primary task

The primary task represents the purpose of an organisation — what the organisation is in the business of doing. It also determines the competitive arena. As such, the primary task should not be defined too narrowly. For example, KTM is in the business of transportation, not railroads. Golden Screen Cinema is in the business of entertainment, leisure and communication, not just showing movies. Berjaya Time Square is in the business of providing the most enjoyable shopping experience together with theme park and restaurants, while Genting Highland’s theme park and casino are providing people exciting experience! The primary task is usually expressed in an organisation’s mission statement. The mission may be accompanied by a vision statement that describes what the organisation sees itself becoming.

2.  Auditing the industry environment

The business environment of an organisation consists of all the external influences that affect its decisions and performance. Given the vast number and range of external influences, we need some kind of system or framework for organising information. For instance, environmental influences can be classified by source as shown in Table 1.2.

Political/Legal/EcologicalMonopolies legislation, environmental protection law, taxation policy, foreign
trade regulations, employment law,
government stability, etc.
EconomicBusiness cycles, industry trend, economic/investment/work migration
trends, interest rates, inflation,
unemployment, disposable income,
energy availability/cost, etc.
Socio/DemographicPopulation demographics, income
distribution, social mobility, lifestyle
changes, attitudes to work and leisure,
consumerism, level of education, etc.
TechnologicalGovernment spending on research,
government and industry focus of
technological effort, new discoveries/
development, speed of technology
transfer, rates of obsolescence, etc.

Table 1.2  PESTLE analysis of general environmental influences

 

Though continuous scanning of the whole range of external influences might seem systematic and desirable, such extensive environmental analysis is unlikely to be cost effective and creates information overload. The prerequisite for effective environmental analysis is to distinguish the vital from the merely important. To do this, let us return to first principles. For the organisation to make profit, it must create value for customers. Hence, it must understand its customers. Second, in creating value, the organisation acquires goods and services from suppliers. Hence, it must understand its suppliers and manage relationships with them. Third, the ability to generate profitability depends on the intensity of competition among firms that compete for the same value-creating opportunities. Hence, the organisation must understand competition. Thus, the core of the organisation’s business environment is formed by its relationships with three sets of players: customers, suppliers and competitors. This is its industry environment.

This is not to say that macro-level PESTLE factors as shown in Table 1.2 are unimportant to strategy analysis. These factors may be critical determinants of the threats and opportunities an organisation will face in the future. The key issue is how these more general environmental factors affect the organisation’s industry environment as illustrated in Figure 1.6.


Figure 1.6 From environmental analysis to industry analysis

Consider the threat of global warming. For most firms, this is not an important strategic issue (at least, not for the next hundred years). However, for the producers of automobiles such as Proton and Perodua, global warming is a vital issue. In order to analyse the strategic implication of global warming, the automobile manufacturers need to trace its implication for their industry environment. For example, what will be the impact on demand — will consumers switch to more fuel-efficient imported cars? Will they abandon their cars in favour of public transportation such as LRT in KL or Rapid Penang? With regard to competition, will there be new entry by manufacturers of electric vehicle into the car industry? Will increased R & D costs cause the industry to consolidate?

3.  Assessing core competencies

Core competency is what an organisation does better than anyone else, its distinctive competence. An organisation’s core competence can be exceptional service, higher quality, faster delivery or lower cost. One organisation may strive to be the first to the market with innovative designs, whereas another may look for success arriving later but with better quality.

Based on experience, knowledge and know-how, core competencies represent sustainable competitive advantages. For this reason, products and technologies are seldom core competencies. The advantage they provide is short-lived, and other organisations can readily procure, emulate or improve on them. Core competencies are more likely to be processes, an organisation’s ability to do certain things better than a competitor. Thus, while a particular product is not a core competence, the process of developing new products is. Consider Chaparral Steel for example. Chaparral management allows its competitors to tour its plants at will because “they cannot take — what we do best — home with them.” Although Chaparral is known for its low cost and high technology, its core competency is not technology, but the ability to transform technology rapidly into new products and processes. By the time, a competitor copies its current technology, Chaparral will have moved on to something else.

Core competencies are not static. They should be nurtured, enhanced and developed over time. Close contact with the customer is essential to ensure that a competence does not become obsolete.

4.  Determining order winners and order qualifiers

An organisation is in trouble if the things it does best are not important to the customer. That is why it is essential to look towards customers to determine what influences their procurement decision.

Order qualifiers are the characteristics of a product or service that qualify it to be considered for procurement by a customer. An order winner is the characteristic of a product or service that wins orders in the marketplace — the final factor in the procurement decision. For example, when buying a DVD player, customers may determine a price range (order qualifier) and then choose the product with the most features (order winner) within that price range. Alternatively, they may have a set of features in mind (order qualifiers) and then select the least expensive DVD player (order winner) that has all the required features.

Order winners and order qualifiers can evolve over time, just as competencies can be gained and lost. Japanese automakers initially competed on price but had to ensure certain levels of quality before the US consumer would consider their product. Over time, the consumer was willing to pay a higher price (within reason) for the assurance of a superior-quality Japanese car. Price became a qualifier, but quality won the orders. Today, high quality, as a standard of the automotive industry, has become an order qualifier, and innovative design wins the orders.

It is important for an organisation to meet the order qualifiers and excel on the order winner. Ideally, an organisation’s distinctive competence should match the market’s order winner. If it does not, perhaps a segment of the market could be targeted that more closely matches the organisation’s expertise. On the other hand, the organisation could begin developing additional competencies that are more in tune with market needs.

5.  Positioning the organisation

No organisation can be all things to all people. Strategic positioning involves making choices — choosing one or two important things on which to concentrate and doing them extremely well. An organisation’s position strategy defines how it will compete in the marketplace — what unique value it will deliver to the customer. An effective positioning strategy considers the strengths and weaknesses of the organisation, the needs of the marketplace and the positions of competitors.

  Reading
Please read ‘Strategic procurement’ on page 35 – 43 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).

 

 

 

 

 

  Activity 1.4
Question to activity 1.4
Suggested answer to activity 1.4

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