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Formulating Business Strategy

Strategy is defined as long term plan of an organisation. Further, Michael Porter defined strategy as competitive advantage of an organisation; it refers that differentiate the organisation from competitors. Strategy is the determination of an organisation’s long term goals and objectives. Furthermore, Henry Mintzberg defined that strategy as five Ps such a plan, a pattern, a position, a perspective and a ploy. It is a plan of action created to achieve organisations goals and it reflexes the organisation’s entire business plan. Thus, all organisations create the strategy to thrive in market or create the competitive advantage.

The importance of Strategy

Strategy is essential to any organisations to success and sustain in the market. It helps to understand the core capabilities and identify the weakness and threats of any organisation. Thus, strategy is important to understand the challenges of external environment and finding opportunities to grow and sustain in market. Strategy forecast the future risk and helps to develop the ways in which they can break those obstacles.

A Strategy is important to identify the trend and future of an organisation. Thus, it helps to identify the major changes in the market such as political, social or technological changes as well as consumer changes and strategy helps to develop the tactics to face these changes in the future. A strategy helps to create the vision and direction for an organisation. Thus, it is essential to all staffs of an organisation have clear goals and are following correct direction of the organisation. Further, strategy provides the vision and prevents employees from losing the organisation’s vision.

However, Strategy has some limitations also. It has complex process and it may lead to barriers to operational effectiveness. Furthermore, strategy is more time consuming process and managers have to spend more time to preparing, research and communicating. Thus, implementing strategy is very difficult, because need full of attention, active participation and accountability from all level of organisation. Further, immediate crisis of organisation may affect the long term strategy. However, it is important to making choices, establishing priorities, allocating resources to achieve the goals. Further, strategy increase the alignment of all organisational activities at all levels of an organisation.

 

Importance and Limitation of Strategy 

Importance    Limitations
Strategy is essential to provide the direction and create the competitive advantages   Strategy is very complex process
It helps to understand the core capabilities and identify the weakness and threats of any organisation   Very time consuming process
Important to improve the economic and financial results of an organisation   Strategy may affect the operational effectiveness
Strategy is important to making choices, establishing priorities, allocating resources to achieve the goals   Difficult to implement.
Strategy provides the vision and prevents individuals from losing the organisation’s vision.   Strategy may affect by uncertainty environment.

Strategic Analysis

Strategic analysis defines as the process of conducting research on the business environments within an organisation runs in order to formulate the strategy. Further, business environments refer those internal and external factors that affect the organisation. Thus, external environment can divide as two parts such as micro and macro. Following figure  shows the Layers of the Business Environments.

Layers of the Business Environments    

Formulating Business Strategy

Business environments have major effect on the operations and performance of an organisation. Further, internal business environment refer that internal factors that affect the business as the, organisational culture, human resource, physical assets, management which can be controlled by the organisation.

Internal and External Environmental Analysis

External environment refers to factors affect the organisation from outside which is uncontrollable Political, Economically, Social, Technology, Environmental and Legal, it called as macro environment. Further, micro environment refer that factors affect the organisation’s operations, performance and decision making freedom. These factors are customers, competitors, suppliers, general public.

External analysis conducted on external environment of the business and it helps to identify the threat and opportunities. Further it helps to create the competitive advantages among the rivals and help to formulate the right strategy plan. Thus, organisations use the external analysis to prepare for varieties of potential scenarios.  However, internal environmental analysis conducted in internal factors of the organisations and it helps to identify the weakness and strength. Further, it helps to avoid the failures and provides the direction to achieve the goals. Thus, internal analysis is the internal condition assessment techniques of organisation and internal analysis includes four areas, such as financial resources, marketing resources, technical and labour resources.

 

Different between internal and external analysis    

Internal External
Conducted on internal factors such as financial resources, marketing resources, technical and labour resources. Conducted on external factors such as micro and macro environments
It helps to identify the strength and weakness. It helps to identify the opportunities and threats.

Strategic Positioning Models

Strategic positioning is the position of an organisation in the future. Furthermore, strategic positioning defined as the future position of an organisation on the basic of present and forecast development and makes the plan to realise the position. Thus, various tools are use by the organisation to implement their strategic plan. Further, following table shows the internal and external analysis tools and Author will next critically analysis the PESTEL tool.

Internal and External environmental analysis tools  

Internal analysis tools External  analysis tools
·         SWOT

·         Porter’s Generic Strategy

·         Value Chain Analysis

·         Stake Holders Analysis

·         BCG growth-share matrix

 

·         PESTEL

 

·         Porter’s 5 forces

 

Critical view of PESTEL Analysis

PESTEL analysis is the effective analysis tool used to analysis the external environment. PESTEL refers that Political, Economic, Social, Technology, Environmental and Legal factors; these factors affect the business from outside of the organisation. Thus, it called as the macro environment. Further, organisation cannot control these factors and these factors create the opportunities and treats for an organisation. Therefore, organisation has to analysis these factors to identify the opportunities and treats.

Factors of PESTEL      

 

Factors

 

Overview

 

Political

Government and Government policies impact on an organisation. It includes political stability, political policies, trade policies and taxation policies.
 

Economic

Economic factors directly impact on an organisation’s performance and profitability. Economic factors include interest rate, employment/unemployment rate and foreign exchange rate.
 

Social

Social factors impact on an organisation and identifying social trends help to understand the customer’s needs and wants. This factor includes Family structure, education levels, and cultural trends as well.
 

Technological

Rapid change of technology and innovation affect the market or industry. These factors include digital or mobile technology, automation and ERP technology.
 

Environmental

Rapid change of environment and environmental policies impact an organisation and it include climate change, waste management policies and recycling products.
 

Legal

An organisation should understand the legal factors and organisation should aware of legal changes. It includes employment law, consumer law, health and safety law and trade law.

PESTEL analysis reduces business threats through examining the political, economical, social, technology, environmental and legal factors. Further, this analysis helps in product development, product launch, and content marketing to increase the success. Thus, PESTEL is the very cost effective analysis tool and it providing the deep understanding of business. However, most of the data used as assumption basis in analysis, therefore result of this analysis not that much appropriate. PESTEL is very easy model and framework is easy to understand as well as it not takes long term to apply in analysis. However, it needs large quantity of data and PESTEL process take long term to identify, collecting data, evaluating and finding. Another advantage of PESTEL is people no need much background knowledge in business management to understand and this model encourages the development of strategic thinking. Even so, due to the simplicity of this model researcher’s argued that this analysis not sufficient and comprehensive to analysis the external environment. Thus, most critical disadvantage of the PESTEL analysis that only cover the external environment not useful or complete and this analysis need to consider other factors also. Even so, this model provides the principle guideline to managers to consider competitive environment from various areas.

Pros and Cons of PESTEL      

Pros Cons
Very simple tool and anyone can understand. For the effective result tool need to update regularly.
Help to identify the Macro environment better Most of the data used by assumption basis
Help to reduce the future threats. Very difficult to collect the large amount of data.
Help to identify the opportunities.  

It will take long time to collect the data.

Encourage the strategic thinking.

 

Critical view of Porter’s Generic strategy Model

Michael Porter explained that an organisation can compete or create competitive advantage through low cost, differentiation or focus strategy. Furthermore, an organisation can create the competitive advantage when they decide the cost lower than their rivals or they can compete when they create the differentiation from competitors or they can create competitive advantage through focus strategy for target market.

Generic Strategic is applicable to all size of organisation. Furthermore, low cost leadership strategy helps to low production cost and high profit. It allows the organisation enters into new market and it creates the barrier to new entries. However, it has been criticised that low cost product does not compete in market or it cannot create the competitive advantage in market. Thus, researchers contrast that cost minimisation does not create the competitive advantage; it can create only the economy product not unique product.

Differentiation enables to create the unique products from competitors. Further, Differentiation strategy helps organisation to sell the products to high price and organisation can earn above average profit. Thus, organisation can create the differentiation through design, technology, strong brand, and superior customer services. However, it has some criticism; for example, differentiation may create the high price. Thus, being different is very difficult in the technology world any good idea would be imitated and Low cost and differentiation contrast with the competitive advantage of the porter’s strategy. Thus, focus strategy market customer can pay for the premium product. However, sometimes niche may not grow this can be the biggest disadvantage of this strategy. However porter’s generic strategy provides the competitive advantage in market.

Pros and Cons of Porter’s generic strategic    

Pros Cons
This Model can appropriate for all size of organisations. This tool is very heavy for small organisations.
Can increase the revenue and market share through cost leadership strategy. Sometimes low cost product leads to economic product and cannot make differentiation from competitors.
Can create the competitive advantage through differentiation strategy. Differentiation can be imitating quickly.
Provide the direction to management and staffs. Low cost lead to small margin profits.

 

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