In the strategy formulation process, an organization’s directors generate a general plan of what an organization should and should not do, given its market forces and its internal resources, in order to best meet its goals.
Porter’s Generic Strategies:
A firm should consistently choose one of Porter’s generic strategies. The first dimension is whether you offer undifferentiated products at low costs (cost advantage) or you offer unique products at a price premium (differentiation advantage). The second dimension is whether you tailor your products to a single segment or to all types of customers (see Marketing: people if you are not familiar with these terms). This 2×2 matrix creates the following four generic strategies:
- cost focus: low cost (high volume, low margin, low differentiation), single segment targeting
- cost leadership: low cost (high volume, low margin, low differentiation), industry-wide targeting
- differentiation focus: differentiation (low volume, high margin, high differentiation), single segment targeting
- differentiation: differentiation (low volume, high margin, high differentiation), industry-wide targeting
Value Chain Positioning:
Once a firm is decided on the industry in which it will operate, it should then determine where it should position itself in the supply chain: where in the supply chain should it focus its activities on, and which supply chain activities it could outsource. The key here is in answering the following two questions correctly:
- Which activities in the supply chain create the most value for customers?
- Where in the supply chain is the most value captured?
- Where in the supply chain are the company’s unique resources most useful?
The Process of Strategy Formulation:
At a basic level, the following steps should help you come up with an excellent business strategy.
- review your objectives
- review the answer to the four questions summarizing your external analysis
- review your ideal position in the supply chain
- review your choice of Porter’s generic strategies
- review the resources of strategic importance to you, whether it is a point of strength or a weakness for your company
- Consider competing on a different dimension of the market (cost, price, quality), serving different customers, serving different customer needs, performing different activities than your competitors do, or perform the same activities differently.
- Formulate new strategy, exploiting the fit between your resources and market opportunities
- Validate your new strategy by (a) evaluating the effectiveness of this new strategy in response to changes in the industry and by (b) identifying what resources would be important for succeeding with this strategy.
It is important to realize that both industry landscape (or industry attractiveness) and internal strengths can be shaped by strategic targets of the organization itself. If you are not strong at a strategically important resource, then you must deliberately develop that resource through either in-house skill developments (e.g. hiring, training, team development), acquisitions, alliances, skill-development in a separate organizational unit, or through product sequencing (reaching your capability goals over time by producing a sequence of products with increasing difficulty).