Strategy formulation is a central process in strategic management, where organisations decide how to allocate their resources and capabilities to achieve long-term objectives. It involves identifying competitive positions, selecting strategic options, and aligning them with the organisation’s mission, vision, and goals. According to Grant (2019), strategy formulation provides the blueprint for competing effectively in dynamic markets, ensuring firms remain relevant and sustainable.
This essay explores the concepts, levels, and methods of strategy formulation, using academic theories, real-world examples, and critical evaluation. It focuses on Porter’s generic strategies, corporate and business-level strategies, and the role of core competencies in creating sustainable competitive advantage.
Foundations of Strategy Formulation
The first step in strategy formulation is understanding the internal and external environments. The SWOT analysis (strengths, weaknesses, opportunities, and threats) is often used to align internal capabilities with external conditions (Wheelen & Hunger, 2020). For example, Tesla identifies its strengths in innovation and brand recognition, but must also respond to external threats such as increasing competition in the electric vehicle market (Zang et al., 2025).
Strategy formulation also requires clarity of mission and vision. As Hitt et al. (2021) argue, an effective mission statement helps define an organisation’s competitive scope and guides strategic choice. For instance, Google’s mission—“to organise the world’s information”—provides a broad scope for strategies that include diversification into artificial intelligence and cloud computing.
Porter’s Generic Strategies
Michael Porter’s (1985) framework identifies three generic strategies: cost leadership, differentiation, and focus. Each provides a distinct pathway to competitive advantage.
- Cost Leadership
This strategy seeks to become the lowest-cost producer in an industry. Firms following cost leadership achieve economies of scale, efficient production, and tight cost control. Aldi, for example, implements cost leadership by minimising operating costs, offering limited product lines, and leveraging supply chain efficiency (Barney & Hesterly, 2019). - Differentiation
Differentiation involves offering products or services perceived as unique, allowing firms to charge premium prices. Rolls-Royce differentiates through unmatched craftsmanship and prestige, creating a strong brand identity that justifies its high pricing (Gonzales, 2024). Similarly, Apple employs differentiation via design, innovation, and ecosystem integration. - Focus Strategy
The focus strategy targets a specific market niche. Firms may adopt either cost focus (serving a niche at the lowest cost) or differentiation focus (offering unique products to a niche market). For example, Innocent Drinks targets health-conscious consumers by differentiating with natural, sustainable ingredients (Alhakimi & Al-Ariqi, 2025).
Although powerful, Porter warns against being “stuck in the middle”, where firms fail to achieve either low cost or differentiation, resulting in weak competitive positions (Porter, 1985).
Business-Level vs Corporate-Level Strategy
A distinction exists between business-level and corporate-level strategies.
- Business-Level Strategy: Determines how a firm competes in a particular industry or market segment. For instance, Samsung competes at the business level with both cost leadership (mass-market smartphones) and differentiation (flagship Galaxy devices).
- Corporate-Level Strategy: Involves decisions about the overall scope of the firm, such as diversification, mergers, acquisitions, or global expansion. Disney, for example, has diversified into film, theme parks, and streaming platforms, achieving synergy across its businesses (Wheelen & Hunger, 2020).
Betchoo (2025) argues that corporate strategy formulation is increasingly tied to sustainability, requiring firms to integrate environmental, social, and governance (ESG) principles into their long-term plans.
Role of Core Competencies
The concept of core competencies was introduced by Prahalad and Hamel (1990) and remains critical in strategy formulation. Core competencies are the unique capabilities that allow a firm to deliver superior value.
For example:
- IKEA’s core competence lies in efficient design and supply chain integration, allowing it to deliver affordable furniture globally.
- Amazon’s competence in logistics and digital platforms underpins both its e-commerce dominance and its diversification into cloud services.
Core competencies must be rare, valuable, and difficult to imitate, aligning with the resource-based view (RBV) of the firm (Barney, 1991). This ensures sustained competitive advantage beyond temporary market trends.
Contemporary Approaches to Strategy Formulation
While Porter’s framework and the RBV remain influential, contemporary approaches highlight new factors:
- Dynamic Capabilities
Firms must continually reconfigure resources in response to environmental changes. Teece (2014) emphasises that innovation and adaptability are now central to strategy formulation. Netflix demonstrates this by shifting from DVD rentals to online streaming, and now to content production. - Blue Ocean Strategy
Instead of competing in saturated markets, firms can create uncontested markets, or “blue oceans” (Kim & Mauborgne, 2015). For example, Cirque du Soleil created a new entertainment category by blending circus acts with theatre, avoiding direct competition with traditional circuses. - Globalisation and Digitalisation
Global competition and digital transformation demand flexible strategies. Firms like Huawei use global R&D hubs to adapt products to different markets, while Uber leverages digital platforms to scale globally.
Challenges in Strategy Formulation
Despite its importance, strategy formulation faces challenges:
- Uncertainty: Global crises such as COVID-19 showed how unpredictable environments can undermine long-term strategies (Cao, 2025).
- Over-diversification: Corporate strategies that spread resources too thinly may erode core competencies. For example, General Electric’s diversification led to financial strain before its restructuring.
- Cultural Resistance: Organisational culture may hinder strategy implementation, especially in firms resistant to change (Hitt et al., 2021).
Effective formulation must therefore be flexible, evidence-based, and aligned with organisational culture and capabilities.
In conclusion, strategy formulation is the backbone of strategic management, enabling firms to navigate competitive markets and achieve sustainable growth. By leveraging Porter’s generic strategies, distinguishing between business and corporate-level strategies, and focusing on core competencies, organisations can create robust competitive advantages. Contemporary perspectives, such as dynamic capabilities and blue ocean strategies, highlight the importance of adaptability and innovation in today’s volatile markets.
Ultimately, successful strategy formulation requires a balance of analytical rigour and creative vision, ensuring strategies are both grounded in resources and responsive to external opportunities. Firms like Tesla, Apple, and Amazon illustrate how well-formulated strategies can reshape industries, while failures in strategic alignment highlight the risks of neglecting this critical process.
References
Barney, J. (1991) ‘Firm resources and sustained competitive advantage’, Journal of Management, 17(1), pp. 99–120.
Barney, J.B. and Hesterly, W.S. (2019) Strategic Management and Competitive Advantage. 6th edn. Harlow: Pearson.
Betchoo, N.K. (2025) Corporate Strategy and Competitiveness for Sustainability. HAL Open Science. Available at: https://hal.science/hal-05062749/
Cao, Q. (2025) ‘The strategic management of Xiaomi Corporation and inspiration to startups’, Proceedings of the ICFRIM 2025. Atlantis Press.
Ghaleb, B.D.S. (2024) ‘The relationship between strategic types and strategic management processes’, ResearchGate. Available at: https://www.researchgate.net/publication/385229267.
Gonzales, J. (2024) ‘Porter’s generic strategies in the context of homegrown restaurants’, ResearchGate. Available at: https://www.researchgate.net/publication/391861952.
Grant, R.M. (2019) Contemporary Strategy Analysis. 10th edn. Chichester: Wiley.
Hitt, M.A., Ireland, R.D. and Hoskisson, R.E. (2021) Strategic Management: Competitiveness and Globalisation. 14th edn. Boston: Cengage.
Kim, W.C. and Mauborgne, R. (2015) Blue Ocean Strategy. Expanded edn. Boston: Harvard Business Review Press.
Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard Business Review, 68(3), pp. 79–91.
Teece, D.J. (2014) ‘A dynamic capabilities-based entrepreneurial theory of the multinational enterprise’, Journal of International Business Studies, 45(1), pp. 8–37.
Wheelen, T.L. and Hunger, J.D. (2020) Strategic Management and Business Policy: Globalisation, Innovation and Sustainability. 16th edn. Harlow: Pearson.
Zang, X., Abdullah, R.N. and Feng, Y. (2025) ‘Mediating role of 6V-based SBMI between competitive strategies and firm performance’, World Electric Vehicle Journal, 16(5), pp. 1–19.
