The formulation of a sound strategy facilitates a number of actions and desired results that would be difficult otherwise. A strategic plan, when communicated to all members of an organization, provides employees with a clear vision of what the purposes and objectives of the firm are. The formulation of strategy forces organizations to examine the prospect of change in the foreseeable future and to prepare for change rather than to wait passively until market forces compel it. Strategic formulation allows the firm to plan its capital budgeting.
Companies have limited funds to invest and must allocate capital funds where they will be most effective and derive the highest returns on their investments. On the other hand, a firm without a clear strategic plan gives its decision makers no direction other than the maintenance of the status quo. The firm becomes purely reactive to external pressures and less effective at dealing with change. In highly competitive markets, a firm without a coherent strategy is likely to be outmaneuvered by its rivals and face declining market share or even declining sales.
The formulation of sound strategy may be seen as having six important steps: 1. The company or organization must first choose the business or businesses in which it wishes to engage—in other words, the corporate strategy. 2. The company should then articulate a “mission statement” consistent with its business definition. 3. The company must develop strategic objectives or goals and set performance objectives (e. g. , at least 15 percent sales growth each year). 4.
Based on its overall objectives and an analysis of both internal and external factors, the company must create a specific business or competitive strategy that will fulfill its corporate goals (e. g. , pursuing a market niche strategy, being a low-cost, high-volume producer). 5. The company then implements the business strategy by taking specific steps (e. g. , lowering prices, forging partnerships, entering new distribution channels). 6. Finally, the company needs to review its strategy’s effectiveness, measure its own performance, and possibly change its strategy by repeating some or all of the above steps.