Strategy formulation is part of the strategic management process which is concerned with setting the direction of the firm. The formulation process of a strategy is concerned with defining the business, establishing strategic objectives and formulating a comprehensive strategy. The setting of organizational objectives should always begin with a clear concept and vision of what business the firm doing and what path its developments should take. Strategy formulation considers several issues. The first issue is whether the firm concentrates on a single business or should it diversify its business line.
Then, in the case of diversification, it is established whether the lines of business will be related or not. Other issues include what product, technologies, and industry do the firm need to have. It should also address the needs of the customers that the enterprise should meet. All these issues are addressed in the mission statement of the company. The mission statement basically means what the business exists to do or serve. When the mission statement is formulated, environmental scanning is done in the context of the mission statement. The strategy formulation stage entails developing long-range plans for managing environmental threats and opportunities.
This is done in light of corporate strengths and weaknesses. The activity will, therefore, include: defining the corporate mission, setting achievable objectives, developing strategies and also setting the policy guidelines that will be followed in the whole process or activity. This paper will seek to analyze how the business environment is considered in strategy formulation.
Business environment in strategy formulation
Since business is surrounded by many factors which might affect the implementation of a strategy, there is a need to analyze its environment and ensure that it is conducive for the strategy implementation. The process of strategy implementation considers both the internal and the external the internal environment of the business. The strategy formulation should take into consideration the contexts of business strategy.
Defining the contexts of business strategy
The context of business strategy requires the designers to fit between business strategy and the environment. This is what will enable the business strategy to be fit and provide superior value to the targeted population. Providing superior value, in this case, means that the business should offer services that are differentiated from those of the customers. The value, in this case, should be taken as perceived by the customers.
Differentiation is achieved by employing the core competencies of the business to advantage so as to provide unique products. When the core competencies are distinct, customer value tends to increase as they can identify superior features of the business products that are superior to those of competitors. The core competencies could be defined as the skills, knowledge and capabilities that the business possesses distinct from those of the competitors. These core competitors enable the business to be more competitive in the market.
For the business strategy to be effective, its basics such as mission, goals and objectives should be set in the right context. The context, in this case, means identifying the right environment where they can be achieved. Both the external and the internal environment of the business must be conducive for these basics to be realized. Analysis of the business environment will ensure that all the resources needed are available and also help identify the possible risk to strategy implementation.
Analyzing how the business environment is considered in strategy formulation
In the strategy formulation, the business environment is considered in two broad categories; the external and the internal environment.
External environment analysis
This entails the analysis of the external factors that “a firm’s choice of direction and action and, ultimately, its organizational structure and internal processes” (Pearce and Robinson, 2004, chapter 3). These factors could be divided into three interrelated subcategories: the remote environmental factors, the industry environment and the operating environmental factors. These factors are the determinants of the opportunities and threats encountered by the firm or business in its competitive environment.
The remote environmental factors
This business environment considers the factors that are beyond the control of the business and which are not as a result of any firm’s operational activities. These factors include the economic, social, political, technological and ecological factors that are beyond the control of the business. The economics factors define the nature and direction of the economy in the territory where the company is situated and operates. According to Pearce and Robinson, “Because consumption patterns are affected by the relative affluence of various market segments, each firm must consider economic trends in the segments that affect its industry” (Pearce and Robinson, 2004). The managers should, therefore, consider factors such as the general availability of credit, disposable income of the target customers, and their spending habits. Other considerations are inflation rates and prime interest rates, among others.
The social factors that need to be considered are beliefs, values, attitudes, opinions and lifestyles of the people in the external business environment. These factors have an impact on the consumption factors of the people.
The political and stability factors of a country have a direct impact on the strategy formulation. These factors determine the legal and regulatory parameters in which the company’s operations will take place. They, therefore, need to be considered in strategy formulation.
Technological and ecological factors
The managers must ensure that the company keeps pace with the current technology to avoid obsolescence and promote innovation. This is the step that was taken by Patagonia Incl., an outdoor clothing company. To prevent the effects on the ecological environment, the company changed from selling synthetic shirts to selling organic cotton shirts to trousers. Ecological factors include factors related to human activities and which are likely to affect the implementation of the strategy.
The following diagram shows how remote and operational factors work together to for industry analysis.
The internal environmental factors
The internal environmental analysis considers the factors within the business that are likely to affect the implementation of its strategy. These factors determine the strengths and weaknesses of the company based on its internal resources and capabilities. The main questions answered in this strategy are; how is the current strategy working, how is the current situation, and what are the strengths and weakness of the business (Bryson and Farnum, 2006).
The significance of stakeholder analysis
Stakeholder’s analysis is the process of identifying the parties or individuals that are likely to influence the implementation of the firm’s strategy. This is important in business environment analysis because the business survives based on how well it satisfies its stakeholders. These stakeholders may include the customers, the suppliers and employees, among others that are likely to affect the operations of the company.
Environmental and organizational audit of Starbucks Corporation
Starbucks Corporation is the largest coffeehouse in the world situated in Washington and also operating in different other countries. The company is expanding globally with the aim of providing quality coffee in different countries. This calls for the need to select convenient and feasible locations in the world for the business. One of the business environmental factors the company is considering is the macroeconomic forecast.
This is important in strategic planning since it will enable the company to benchmark economic conditions that boost profitability, growth and increases the market share of the company in the industry. As a result, the company has expanded packaged coffee offerings and has introduced other ready to drink beverages. There are other factors like social, cultural factors that affect the company. These include beliefs, values, attitudes, opinions and lifestyle of people in different locations of the company. The company should pay much attention to customer’s cultural preferences so as to satisfy them fully.
Application of Strategic positioning techniques to the analysis of Starbucks Corporation
Strategic positioning entails positioning the company into the future while still taking into account the changes in the environment. It’s meant to ensure the continuity of the company to a foreseeable future. Starbucks Corporation may employ a strategy like strategic service vision where they may segment their customers and treat them differently according to their social status. They may also use Retail Design Strategies, where they may increase their operation units in order to satisfy the growing market. They may also use capacity strategies where they ensure sufficient capacity at all times with quality and cost-effectiveness took into consideration.
Under capacity strategies, the timing may also help the company in maximizing its profitability. The company could take advantages of peak seasons, especially holidays or any other occasion. This will make the company survive the low season by making enough profit during the peak seasons. The company should also try to avoid shortages when the demand is high. They should ensure that supply satisfies the demand in the market. All these strategies will give the company a chance to survive in future by building customer loyalty.
Strategy formulation is the most important step in the strategic management process. It ensures that the company has a sense of direction and is well-positioned to cope with its environment. Strategy formulation takes into account the internal and external environment of the company. The internal analysis of the company involves assessing the strengths and weaknesses of the company while the external environment assesses the opportunity and threats of the company. According to Mitchell (n. d), Strategy formulation tries to modify the current objectives and strategies to cope with the current and changing business environment.
Bryson, J., and Farnum, K., 2006. Creating and Implementing Your Strategic Plan: A Workbook for Public and Nonprofit Organizations. London: Jossey-Bass Public Administration Series.
Mitchell, R. C., n. d. Strategy Formulation. New York: Free Press.
Pearce, J. and Robinson, R., 2004. Strategic Management: Formulation, Implementation, and Control, 9e. Columbus: The McGraw-Hill Companies.