Strategy Formulation: Develop the Basics for a Successful Strategy
The strategy formulation process sets the foundation for the company's future. Discover how to lead this process according to best practices and design a solid strategy that will take your company to new heights.
While most theoretical work on strategy execution assumes organizations have a strategy in place to begin with, experience shows this is often not the case. Strategy development is not a “black box” that produces a strategy ready to be implemented by the organization, but a very important process that should be analyzed carefully.
According to a 2006 survey made by McKinsey, most companies have a formal strategic planning process and believe the process plays a significant role in helping develop corporate strategy.
As it is, most successful companies follow a systematic strategy development process that starts by formulating the mission, vision and core values, continues by identifying strategic goals, performs a strategic analysis, and culminates in the formulation of a strategy for the organization. Kaplan and Norton state that the four strategy development steps address each of four relevant strategic questions:
1. What business are we in and why? (Mission, vision, and values)
2. Where are we going? (Strategic goals)
3. What are the key issues that our strategy must address? (Strategic analysis)
4. How can we best compete? (Strategy formulation)
Step 1. Crafting Mission, Vision and Value Statements
The first step in formulating a strategy for your organization is the mission. It should be a brief statement that defines the fundamental purpose of the organization and its overall goal. Kaplan and Norton quote Google’s as an example of an excellent mission statement: “To organize the world’s information and make it universally accessible and useful.”
The next step is the values: the way a company prescribes its desired behavior, character, and culture. An organization’s core values deal with the general appearance and behavior it has before the world.
Afterwards, the firm should define its vision, a concise statement that defines the mid- to long-term goals of an organization. It is external and expresses the role the company wants to have in the market or the world. The vision is one of the most important parts of the strategy development process and its definition will have a direct effect on the whole strategy-defining process.
Something important to consider when crafting a vision statement is that it is meant to guide strategy development and therefore must be measurable. It should guide the strategy formulation. It should have three essential components:
- A quantified success indicator,
- A definition of niche and
- A timeline for execution.
An example of a successful vision statement is John F. Kennedy’s for the U.S. space program in 1961: “To land a man on the moon and return him safely to Earth before the end of the decade.” This is a vision statement that sets an ambitious target for the strategy at the highest organizational level while providing the three essential components: travelling to the moon (definition of niche), landing a man there and returning him safely (quantified success indicator), and doing so before the end of the decade (timeline for execution).
The mission and core values remain relatively stable over time, while the vision clarifies direction over three to ten years. Even if these three don’t change often, it is advisable to reevaluate, review, and reaffirm the three of them at the start of every year to see that they stay relevant and appropriate to the organization.
When creating a vision for an organization, the management team should seek an enhanced vision: not only a simple outcome, but a more comprehensive picture of the enabling factors with which to achieve the vision, including key processes and intangible assets. An enhanced vision bridges vision and strategy by describing critical goals.
The critical goals are typically four points that deal with how your organization wants to progress towards its mission and vision while using its core values as the foundations for progress. In future steps of the strategy-defining process, each of these critical goals will be the base of the strategy map’s strategic themes.
Step 2. Strategic goals: Define and Decompose the Value Gap
Quantifying the vision makes it possible to integrate target setting with the exploration of feasible strategies. A strong leader then must rally the organization around achieving a stretch target objective and challenge the organization to become much better. Companies should not be afraid to set ambitious goals: Norton and Kaplan are quick to point out that BHAGs (Big Hairy Audacious Goals) are a common component of visionary companies.
In quantifying the vision, companies should identify the value gap: difference between the desired outcome and what could be achieved by maintaining the status quo with the existing strategy. It represents the difference between aspiration and reality and becomes the goal for the new strategy to fulfill.
Management teams should determine the value gap, as well as where and when improvements can be made. This is necessary to determine how a strategy can close the value gap and its degree of feasibility.
Establishing the vision and setting stretch targets at the front end of the strategy development process establishes the framework for subsequent steps of strategy development.
Step 3. Strategic Analysis
Once what the company must achieve is clear, it must perform an external and internal analysis that includes assessing the impact of industry trends and its own performance and positioning relative to competitors, as well as developing a detailed understanding of how it presently delivers value through a SWOT analysis.
The external analysis: includes an industry-level examination of industry economics using frameworks such as Michael Porter’s Five Forces (the bargaining power of buyers, the bargaining power of suppliers, the availability of substitutes, the threat of new entrants, and the intensity of industry rivalry). It centers on identifying forces that are shaping the industry. It should also include a comparison between the performance of the company and its competitors on multiple financial ratios. An important part is the competitor assessment: plot all competitors on a two-by-two table, with the axes representing some combination of key competitive dimensions.
The internal analysis: examines an organization’s own performance and capabilities. It is recommended to use the value chain analysis by Michael Porter, which identifies the sequence of processes necessary to deliver a company’s products and services to customers. It helps a firm identify those activities it needs to perform differently or better than competitors to establish sustainable competitive advantage.
The SWOT analysis: after performing the external and internal analyses, a SWOT analysis is the next step. It identifies a company’s existing strengths and weaknesses as well as emerging opportunities and worrisome threats. Its objective is to summarize useful information into a succinct list that helps the executive team understand the key issues in strategy formulation. Each SWOT dimension can be prioritized to reflect the importance of every element for the organization.
Once the company has developed a comprehensive understanding of where the company is, where it’s headed and where it competes, it should develop a strategy to get the company from point A to point B.
Leaders should keep in mind that, while having the correct strategy is important, it is not sufficient. As Jamie Dimon, CEO of JPMorgan Chase, said, “I’d rather have a first-rate execution and second-rate strategy any time than a brilliant idea and mediocre management.”
How to begin your strategy formulation process?
Studies show that only 45% of companies are content with their strategic planning process. Are you a part of that 45%?
At TRISSA we help our clients successfully formulate and execute their strategies throughout their organizations. We offer a comprehensive set of consulting services, executive education and software solutions to help to help organizations adopt the best practices in strategy management and achieve better results.
Author: Trissa Strategy Consulting
Source: Kaplan, Robert S., David P. Norton and Edward A. Barrows Jr. "Developing the Strategy: Vision, Value Gaps and Analysis." Balanced Scorecard Report (2008): 1-5. Online journal.