The Formulation of Strategy

The position audit outlines the array of factors which should be considered when formulating a strategy for attaining organizational objectives and goals. The role of strategy, therefore, is to select the best way of getting from the present position to the goals which have been derived from the organization's objectives. The first stage in the formulation of a strategy is an analysis of the gap between the present position and the desired position, which takes into account the forecasts which will have been made. Gap analysis involves the following questions:

1 What will happen if nothing is done?

2 What will happen if we pursue present policies?

3 What should be done to attain organizational goals?

Gap analysis and the profit goal

The effects of alternative policies on profits is a very good example of gap analysis. Once the profit goal has been determined, it may be compared with the level of earnings for the business as it is presently operated. If no changes were made, present earnings would probably begin to decline after a period of time. This is because, as technology changes, as market demand and tastes change, as competitors improve performance etc., existing products are likely to become less profitable.

Previous long-range planning exercises, however, will have built into the operations of the firm tactics to counter the fall-off in performance which would have occurred due to the causes mentioned. The difference between these two forecasts may be called the 'improvement gap'. It illustrates the value to the firm of former plans. The difference between the profit improvement figure and the profit goal is called the strategic gap. This represents the profit which the firm is required to make to meet the shortfall in its profit goal.

Long-range planning and gap analysis

The essence of long-range planning is really one of gap analysis. The problem involved in this analysis is the evaluation of alternative strategies for closing. the strategic gap and selecting that strategy which is seen as the best one. Future cash flows, and consequently profits, are highly constrained by past and present capital expenditure decisions. Therefore, a pie-requisite to gap analysis is a search process to discover suitable projects in which the firm should invest. Throughout the search process, the firm is concerned typically with the following questions:

Can present operations be extended to meet organizational goals? If so, what does this mean in terms of greater penetration of existing markets, the exploration of new markets, the need for finance, assets, manpower etc.?

If present operations cannot be extended, how should the firm proceed? Should less profitable activities be abandoned and resources redeployed in new activities?

The search process is costly and time consuming. An influential factor in determining the scope of search is the affinity between search areas and the present activities of the organization. Areas of search should be chosen which will complement current areas of activity, thereby providing synergistic opportunities. Synergy arises when two activities or actions performed jointly produce a greater total effect than if they had been performed separately. For example, the addition of a restaurant to the activities of a departmental store produces a synergistic effect in that the restaurant makes the store a more convenient place in which to shop, and the store provides a ready clientele for the restaurant. Hence, the total volume of business enjoyed by both the store and the restaurant is greater than if they had been established and maintained as separate businesses in different locations. The synergistic effect is often called the '2 + 2 = 5 effect' for this reason (Ansoff, 2009).

At this stage, assumptions may have to be made about the future in order that realistic plans may be prepared. Clearly, the possibility of making grave and expensive errors exists as a result of making such assumptions. In this connection, one has only to think of the many expensive defence projects undertaken by governments since the Second World War which ultimately have had to be abandoned. Unlike a government, a business enterprise is much more exposed to penalties for errors of large magnitude. Risk analysis has an important role to play in planning. It is a technique which involves assigning a 'probability factor' to assumptions. Obviously, there is a great difference between a plan which has only a 50 per cent chance of success, and one for which the chances of success are thought to be as high as 95 per cent. This notion is central to risk analysis.

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In estimating future cash flows, which are intended to result from a planned course of action, managers are able to draw on a great deal of inside information which is at their disposal. Top managers are placed in a unique position to assess a wide range of opportunities open to the firm, and to relate its present or potential technological, production and financial resources to these opportunities in the process of selecting the best strategy for attaining corporate objectives. This process of assessment is conducted by means of a position audit, which has an external and an internal aspect.The Position Audit