AN INVESTIGATION ON THE STRATEGY FORMULATION PROCESS WITHIN THE ROMANIAN COMPANIES O. BORDEAN1, A. BORZA2, C. RUS3, C. MITRA4 Babes-Bolyai University of Cluj-Napoca 1
[email protected] 2
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the development of the strategic management process have been identified. Within this context one can easily see the utterly importance of well designed strategy. The formulation phase is just one of those elements without the strategy cannot work in practice. Thus, the assessment of strategy formulation becomes crucial for both practitioners and researchers in order to conduct and evaluate different formulation processes. Judging from the literature, formulation of a particular strategy can be only be examined reactively, by examining the strategy outcome after a period of time (Eden and Ackerman, 1993; Ramunajam et al., 1986). However, practitioners need greater confidence that their chosen strategic management decisions are going to lead to successful results. Starting from this point, Acur and Englyst (2006) strive to elaborate upon a proactive assessment tool of strategy formulation processes that ensures high quality in process and outcome. We were interested in how the Romanian managers are filling about this important step in the strategic management process, so we developed a questionnaire that was applied to a sample of managers while we were investigating some particular aspects about the formulation of strategy in their companies. This paper is structured as follows: it starts with a literature review on the strategic management process that is followed up by a thorough presentation of the formulation phase. During this stage the research questions are being hypothesized and a brief description of the research methodology follows. The paper continues with a discussion of the most relevant findings of the survey and ends up with some conclusions regarding the advantages and the drawbacks of the strategy formulation process within the Romanian companies.
ABSTRACT Strategic management is about managing the future, and effective strategy formulation is crucial, as it directs the attention and actions of an organization, even if in some cases actual implemented strategy can be very different from what was initially intended, planned or thought. The assessment of strategy formulation processes becomes crucial for practitioners and researchers alike in order to conduct and evaluate different formulation processes. Today, firms need to cope with competitive challenges related to innovation, dynamic responses, knowledge sharing, etc. by means of effective and dynamic strategy formulation. The purpose of this paper is to investigate the strategy formulation process for a sample of firms that are doing business in Cluj-Napoca. In order to evaluate the degree of importance that each firm places on the strategy formulation process a questionnaire was developed and used to test the research hypothesis. The findings of the study offer multi-perspective reflection on strategy formulation. Such reflection is assumed to enable managers to proactively evaluate the potential outcome of their chosen strategy.
KEY WORDS Strategic management, strategy formulation, strategic planning, strategic thinking.
1. Introduction Strategic management is a complex process that once implemented can lead to higher profits and ease the obtaining of the competitive advantage. Today’s dynamic external environment puts a huge pressure on every manager’s shoulder when it comes to create the best strategy on which the entire company has to rely on. To deal with these constrains a lot of thinking has been done in the past years and many approaches that can be used in
2. Literature review During time, many scholars tried to define the strategic management. We have reached by now a considerable number of definitions regarding strategic management,
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yet there exists little consensus about the similarities of such definitions. Ohmae’s (1982) ideas of strategic management offer a simple but robust initial definition. He draws attention to three key groups – the corporation, the costumer and the competitors. Strategic management might be defined, therefore, as the pursuit of superior performance by using a strategy that “ensures a better or stronger matching of corporate strengths to customer needs than is provided by competitors” (Ohmae, 1982: 91). Other remarkable contribution to the development of strategic management theory is that of Pettigrew and Whipp (1993) who also make the point about the importance of properly linking strategic and operational changes. Strategic intentions should be broken down to what they call actionable pieces, made the responsibility of change managers. Joyce and Woods (2002) consider strategic management as being a difficult process in part because it requires contradictory qualities and skills in dealing with paradoxical demands of situations. Indeed, strategic management is not one of the easy tasks managers have to accomplish. Moreover, the success of the strategy will rely on the ability of every strategist responsible of the implementation. In fact, Charles Handy, an influential management writer explains the role of the each management type and points out how the qualities and skills of different types may be present in single individuals, who have to bring together in complementary ways to deal with strategic tensions they confront (1991). Handy uses Greek myths and gods to personalize the four manager types that he describes in his book “The gods of management” (1991). The strategic management process consists of the following steps: (1) analysis of the external and internal environment; (2) strategy formulation; (3) strategy implementation and (4) strategy evaluation (Borza et al., 2008). Some authors make a clear distinction between strategic management (which is a term used especially in the academic world) and strategic planning (a term that was coined within the business world which is associated with the formulation phase). Figure 1 shows the specific elements that comprise the strategic management process.
The strategic management process starts with an analysis of the internal and external environment of the company. The role of this analysis is to determine which are the strategic factors that determine the future direction of the company. The external environment consists of those elements that are not controllable by the managers that form the context in which companies evolve. On the other hand, the internal environment includes the variables within the company (for example organizational structure corporate culture and the resources of the company). This first step usually ends up with the development of the SWOT analysis which will briefly include the strengths and weaknesses from the internal environment and the opportunities and threats from the external environment. As Figure 1 shows the strategic management is a continuous process that contains also a feedback phase suggesting that while the companies goes through all the steps it is possible to correct some of the decisions taken earlier or even changing the desired strategy. Strategy implementation deals with establishing the annual objectives, policies, programs, staff motivation and resource allocation in order to facilitate the strategies. During this phase, the strategists will try to determine every employee and manager to work together in order to transform the strategies into coherent actions. The following decisions are taken within this phase (David, 2008: 263): the creation of an organizational culture that will sustain the strategy; the creation of the marketing budget; the establishment of company budget; the development and use of the informational systems and the correlation of employees’ salaries with the company’s performance. Strategy evaluation offers managers valuable information about the way in which the strategy proved its efficiency. Managers will compare the results with the goals established during the first phases of the process. This is a step absolutely necessary because actual success of the current strategy is not a guarantee of the future success. The dynamics of the external environment will determine changes in the context in which companies act. Strategy evaluation includes the following activities (Borza, 2008: 19): (1) the analysis of the internal and external factors on which the strategy has been developed; (2) the assessment of company’s performance and (3) implementing corrective actions. Strategy formulation consists of determining the organization’s mission, goals, and objectives and selecting or crafting an appropriate strategy (Figure 2). Strategy formulation involves much research and decision making, yet it is primarily a process to answer the question, “How are we going to accomplish our goals and get where we want to go?” Before this question can be asked, however, the goals and objectives must already have been determined. Essentially, crafting the strategy can be thought of as a continuous effort to develop a set of directions, draft a blueprint or draw a road map. Strategy formulation is influenced by many factors, including:
Analysis of external and internal environment Strategy formulation
Strategy implementation
Strategy evaluation
Figure 1: The strategic management model Source: adapted from Wheelen and Hunger, 2006: 11
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Management values and philosophy
term. They may be financial such as a certain increase in earnings per share or non-financial such as a percentage increase in market share. In theory they should be capable of being quantifiable and hence susceptible to measurement. Strategic decisions are ones that are of fundamental importance to the business, but will not prove to have been right or wrong for some considerable time. Strategic decisions are normally such that they are irreversible or at least can only be reversed at considerable cost. In the context of company strategy, policies are rules or principles that are regarded as an integral part of the company’s success model; they are practices or ways of doing things, often long established, that are seen as indispensable parts of the company’s formula for achieving a sustainable competitive advantage.
Determination of mission
Mission statement
(1) evaluating the internal and external organization (especially the projected future environment); (2) establishing the predetermined mission and goals of the organization; (3) setting the organization’s strategic policies or guidelines; and (4) assessing the needs, values, and skills possessed by those who develop the strategy. The same factors influence development of the strategic objectives (Alkhafaji, 2003). STRATEGY FORMULATION
Establishment of objectives
Evaluation of strategic effectiveness
Strategic goals
Strategy planning Strategy
Corporate and business strategy
Strategic decision
Management information systems and reporting systems
Determination of policies Figure 2: The components of strategy formulation phase Source: adapted from Alkhafaji, 2003: 12
Figure 3: Mission statements and measurement of strategic effectiveness Source: adapted from Joyce and Woods, 2003: 66
Most large organizations these days have mission statements. Usually a mission statement is defined as being a formal expression of an organization’s purpose. This may be distinguished from the strategic vision, which is a description of a desired future state, and strategic goals, which are specific outcomes that contribute to the achievement of the mission in the circumstances that prevail or are emerging (Joyce and Woods, 2002). The importance of the mission statement is that it leads to focus and persistence by the organization and these things are generally assumed to be important for organizational achievement. It may also be argued that mission statements and strategic visions are important for motivating and inspiring managers and employees within an organization. The development of mission statements and strategic goals can be useful as one approach to developing systems for evaluating strategic effectiveness (Figure 3). In the devoted literature the terms objectives and goals are used interchangeably (Sadler, 2003). Strategic objectives are normally ones to be achieved over the medium or long
According to Bogner and Thomas (1993), there are two competing models of strategy formulation. The objective model is based on economic concepts (i.e., supply and demand, competition factors, etc.). The model begins with a company objective, which will finally be affected by competition. The competition will have an impact on strategy formulation process. The industry structure (combined competitors) will directly impact the formulation process, which in turn will affect resource allocation decisions. This process will continue until an external factor (i.e., technological change) will disrupt it, at which time a new objective model will be formulated. The second model is the cognitive model. It exposes a flaw in the objective model (i.e., the inability to capture the significance of the changes causing the objective formulation process to begin again). The cognitive model follows the sample principles as the first model. However, it also consists of a collective view of objective strategies, which are consolidated into one formulation process. This process is to define one’s one place in the industry and
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The data shows that a high percentage of the questioned managers revise their firm’s vision each year which means they are more concerned with the firm’s evolution as opposed to the 8% whom have established a vision two years ago and have not revised it since then. None of the questioned managers are in the situation of not revising their vision over a period of five years or more. When it comes to vision importance, 89% of the questioned managers think that establishing a vision is very important in contrast with the company’s activities and evolution as opposed to the 11 % whom think otherwise. The data shows that, although 89 % of the questioned managers think that vision is very important only 74 % of them have established one. We can observe a pretty significant difference between the two percentages from which we can conclude that even though some managers know about the importance of establishing a vision for their firm they choose not to.
cognitively organize one understands of competitive strategy (Bogner and Thomas, 1993).
3. Research methodology In order to see how the Romanian managers think about one of the most important stages in the strategic management process we have developed a questionnaire that was addressed to a number of 35 companies from Cluj-Napoca. The questionnaire comprised two sections: the former included factual questions, while the latter included 12 questions about different elements of the formulation phase of the strategy, such as: company visions, the SWOT analysis, the goals of the company and company’s values. The questionnaire was administrated in person during April and May 2010. Due to the type of questions it was absolutely necessary to have managers replying to the questionnaire. A very high proportion of the respondents held the position of manager (85%) and the rest declared that they had the necessary data needed to complete the survey. The respondents had an average age of 26, the youngest being 20 and the oldest being 40 years old. Among the respondents 17% of them were female while 83% were male. The companies that were included in the survey sample had an average lifetime of two years, the newest one being opened six months ago and the oldest one had ten years of market experience. The companies had a number of employees between 2 and 100 with an average of 20 employees.
The strategy Another part of the questionnaire referred to the strategy development. Out of the 35 questioned managers 71 % have developed a strategy for their firm while 29 % have not (Figure 5).
4. Findings and discussions Figure 5: Strategy development within the surveyed companies
The vision One of the first questions that were addressed to companies’ managers referred to the vision of their company. Out of the questioned managers 74% said that the company has established a vision while 26% declared that have not established one. When questioned about the process of revision of the vision out of the 35 respondents, 73% said that it was revised this year, 19% last year and 8% two years ago (Figure 4).
When it comes to the strategy revision process, 72 % of the questioned managers have revised their strategy this year, 16 % last year and 12 % two years ago (Figure 6).
Figure 6: The frequency of strategy revision within the surveyed companies
Only 72 % of the questioned managers respect the dynamic character of the strategic management process. The other 28%, even though have established a strategy, they have not revised it for over a year or even 2 years now. These managers chose to ignore the ever changing
Figure 4: The frequency of vision revision within the surveyed companies
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even if the firms have conducted a SWOT analysis last year or two years ago the data gathered at the respective time may have become incorrect or even irrelevant at the present time. As we stated before, the internal and external factors change continuously and managers need to understand and adapt to this fact. Incorrect data may lead to the implementation of the wrong type of strategy which can lead to negative outcomes, that is why continuously analyzing the internal and external factors, as they change, is a very important part of the strategic management process. We can conclude that not all the questioned managers assess the necessary importance to each step required in creating and implementing a good strategy.
internal and external factors which can affect the companies’ evolution in time which is a very negative thing. A good strategy may, in time, become obsolete due to the changes that occur in the market. The SWOT analysis An important part of the strategic management process is the SWOT analysis, which involves a detailed analysis of the strengths and weaknesses of the firm and the opportunities and threats that the firm is currently facing or the ones it may face in the future. Despite the great importance that this type of analysis plays in the process of strategy development, only 54 % of the questioned managers have conducted a SWOT analysis (Figure 7).
The long term objectives Another important element in the strategy formulation process is determining the long term objectives which the firm wishes to achieve. Surprisingly, although only 71 % out of the 35 questioned managers have developed a strategy, 89% of them have established long term objectives, which mean that managers consider long term objectives to be very important.
Figure 7: The use of SWOT analysis within the surveyed companies
After observing this difference between the managers who have established a strategy and those who have conducted a SWOT analysis we can conclude that 17 % of the questioned managers have either copied the strategy they have implemented from other firms or they have developed a strategy based solely on intuition. Incorrect implementation of the strategic management process may lead to negative consequences for the firms that haven’t started or implemented their strategic process based on the necessary data.
Figure 9: Long term objective development within the surveyed companies
The conclusion referring to the importance of long term objectives is also supported by the responses shown in the figure 10, 80 % of the questioned managers consider long term objectives to be very important. But only establishing long term objectives but no strategy with which to achieve them is not a valid option in the business world, firms need a correctly implemented strategy to help them reach their determined goals. Establishing long term objectives but not trying to achieve them represents a useless activity that can’t lead anywhere, for example, it is pointless to communicate to employees the objectives which the firm wants to achieve if they are not told what to do in order to help the firm achieve those objectives. A manager whom has established long term objectives for their firm without developing a valid strategy to achieve them can be compared to a navigator that doesn’t have a map.
Figure 8: The frequency of SWOT analysis revision within the surveyed companies
As shown in the figure above only 74% of those who conducted a SWOT analysis have conducted it this year while others chose to base their strategic management process on the data gathered a year ago or even two years ago. This data, even though it was relevant at the time it may have become incorrect at this moment. Therefore, 30
References [1] Acur, N., Englyst, L., (2006). Assessment of strategy formulation: how to ensure quality in process and outcome, International Journal of Operations and Production Management, 26(1), 69-91. [2] Alkhafaji, A.F., (2003). Strategic management. Formulation, evaluation and control in a dynamic environment, USA: The Haworth Press. [3] Bogner, W.C., Thomas, H., (1993). The role of competitive groups in strategy formulation: a dynamic integration of two competing models, Journal of Management Studies, 30(1), 51-67. [4] Borza, A., Bordean, O., Dobocan, C., Mitra, C., (2008). Strategic management. Concepts and cases, Risoprint Publishing House, Cluj-Napoca. [5] David, F., (2008). Strategic Management. Concepts and cases,11th Edition, New Jersey: Pearson/Prentice Hall. [6] Eden, C., Ackerman, F., (1993). Evaluating strategy – its role within the context of strategic control, The Journal of the Operations Research Society, 44(9), 853-865. [7] Handy, C., (1991). The gods of management, Business Books, London. [8] Joyce, P., Woods, A., (2002). Strategic management. A fresh approach to developing skills knowledge and creativity, Kogan Page Limited, London, UK. [9] Ohmae, K., (1982). The mind of the strategist, McGraw-Hill, London. [10] Pettigrew, A., Whipp, R., (1993). Managing change for competitive success, Blackwell Publishers, Oxford. [11] Ramanujam, V., Venkatraman, N., Camillus, C.J., (1986). Multi-objective assessment of effectiveness of strategic planning: a discriminate analysis approach, Academy of Management Journal, 29(2), 347-372. Sadler, P., (2003). Strategic management, 2nd Edition, Kogan Page Limited. [12] Wheelen, T., Hunger, D., (2006). Strategic Management and Business Policy, 12th Edition, New Jersey: Pearson Education.
Figure 10: The importance of long term objectives within the surveyed companies
Taking into account all the collected data we can conclude that over half of the questioned managers have respected the dynamic character of the strategic management process and have implemented it correctly in their firms. However a small percentage of the questioned managers, 7 % to be exact, have not established a vision or any long term objectives have not developed a strategy and have not conducted a SWOT analysis at all. This small percentage of managers should really consider implementing a strategic management process; also those who have implemented it already but in an incorrect manner should revise and correct it immediately.
5. Conclusions The strategic management has been defined as that set of decisions and actions which may lead to the development of an effective strategy or strategies to help achieve corporate objectives. Strategy formulation is the second step of the strategic management process that comes naturally after the analysis of both internal and external environment. The work presented in this paper identified the elements of strategy formulation phase within the Romanian companies. A simple questionnaire was developed and used to test validity of the successful strategy formulation. Simplistically, one might assume that strategic thinking is followed by strategic planning and then embedding in the organization. Rather than this sequential perception, however, we consider that the phases are managed as interrelated in parallel over the course of a strategy formulation process. Our study points out the fact that although there were many Romanian managers who developed a vision for their company and also established a strategy for their company, only few of them revise their strategy. We can also conclude that, despite the fact that some firms have incorrectly developed and implemented their strategic management process based on insufficient data, they have also chosen not to revise it periodically. This may lead towards very unpleasant situations or even situations that can put the firm’s survival at risk.
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