Skip to content

Operations Management and Strategic Management · Formulation and Implementation of Strategy

Strategy Formulation Process: Steps and SWOT Analysis

Updated 10 October 2026 · Fact-checked

Strategy formulation is the stage of strategic management where a firm decides what it will do to achieve its aims. The usual steps are: set vision, mission and objectives, scan the environment, analyse internal strengths and weaknesses, use SWOT to generate options, evaluate alternatives and choose a strategy.

Understand Strategy Formulation Process

A strategy is a plan that links what a firm wants to achieve with the resources it has and the environment it works in. Strategy formulation is the thinking stage. It comes before implementation (putting the plan into action) and evaluation (checking results).

The process starts with direction. The firm states its vision (where it wants to be), mission (why it exists and whom it serves) and objectives (specific targets to reach). Without these, you cannot judge whether any strategy is good.

Next comes environmental scanning. The firm studies outside factors it cannot control: political, economic, social, technological, legal and environmental trends (PESTEL), plus industry forces such as competitors, customers and suppliers. The aim is to spot opportunities and threats. Then the firm looks inward at its own resources, skills, finance, people and operations to find strengths and weaknesses. This is internal appraisal.

SWOT analysis puts all four together: Strengths and Weaknesses (internal), Opportunities and Threats (external). It helps the firm see where it can use strengths to grab opportunities, and where weaknesses expose it to threats.

Finally, the firm generates strategic alternatives (for example growth, stability, retrenchment, or a mix), evaluates them against objectives, resources and risk, and makes a strategic choice. The choice is then written into a strategic plan, ready for implementation. Strategy formulation is not one-time. Firms revisit it when the environment changes.

Key rules to remember

Steps in strategy formulation (sequence)
Vision, mission and objectives → Environmental scanning → Internal appraisal → SWOT → Generate alternatives → Evaluate and choose → Strategic plan
Textbooks vary in how they number the steps. Keep this logical order and name each step clearly.
SWOT classification rule
Strengths and Weaknesses = internal; Opportunities and Threats = external
Internal factors are within the firm's control. External factors are not.
SWOT strategy pairings
SO: use strengths to exploit opportunities; WO: overcome weaknesses using opportunities; ST: use strengths to counter threats; WT: reduce weaknesses and avoid threats
This pairing is often called the TOWS approach. Use it to turn a SWOT list into strategic options.
Environmental scanning outputs
Environment → Opportunities (favourable) + Threats (unfavourable)
The same trend can be an opportunity for one firm and a threat for another.

How to solve Strategy Formulation Process questions

Use this method for any question on the strategy formulation process, whether it is a short note, a case study or a SWOT task.

  1. 1Read the question and note what is asked: list the steps, explain one step, or apply the process to a given firm.
  2. 2Open with a one-line definition of strategy formulation and where it sits in strategic management.
  3. 3Write the steps in logical order: vision, mission and objectives; environmental scanning; internal appraisal; SWOT; alternatives; evaluation and choice.
  4. 4Explain each step in one or two lines. Say what is done and what output it gives.
  5. 5For a case, sort the facts into S, W, O and T. Check that each item is correctly internal or external.
  6. 6Link the SWOT to options. Show which strategy fits and why, using the SO, WO, ST and WT pairings.
  7. 7State the choice and the criteria used, such as fit with objectives, resources, risk and feasibility.
  8. 8Close with a line that formulation is continuous and feeds into implementation and control.

Quickest way: Remember it as: Direction, Outside, Inside, Match, Choose

When to use it: Use when time is short, for a 4 to 6 mark short note or when you need a fast outline for a longer answer.

  1. Direction: vision, mission, objectives.
  2. Outside: environmental scanning gives opportunities and threats.
  3. Inside: internal appraisal gives strengths and weaknesses.
  4. Match: SWOT and alternatives.
  5. Choose: evaluate options and select the strategy.
  6. Add one example from an Indian firm to earn extra marks.

Common mistakes in Strategy Formulation Process

  • Placing a factor in the wrong SWOT quadrant, such as calling a new government policy a strength.

    Students judge a factor as good or bad instead of asking whether it is internal or external.

    Fix: First ask: is it inside the firm's control? If yes, it is a strength or weakness. If no, it is an opportunity or threat.

  • Treating SWOT as the whole strategy formulation process.

    SWOT is the most familiar tool, so students stop there.

    Fix: Show SWOT as one step. Add objectives before it and alternatives, evaluation and choice after it.

  • Mixing up formulation with implementation.

    Both are stages of strategic management and the words sound close.

    Fix: Formulation decides what to do. Implementation covers structure, resources, leadership and systems to carry it out.

  • Writing environmental scanning as a list of terms without showing the output.

    Students memorise PESTEL letters but do not link them to the decision.

    Fix: End the point with the result: the scan identifies opportunities and threats that shape strategic choice.

  • Listing a SWOT with no conclusion.

    Students assume the table is the answer.

    Fix: Add two or three lines recommending a strategy based on the SWOT, using SO, WO, ST and WT logic.

  • Skipping objectives and choosing a strategy directly.

    Case questions push students to jump to the answer.

    Fix: State the firm's objectives first, then judge each alternative against them.

Worked examples

Example 1

Explain the steps in the strategy formulation process. (Short answer)

Show the solution
  1. Define: strategy formulation is deciding the course of action a firm will follow to reach its objectives.
  2. Step 1: Define vision, mission and objectives. This gives direction and a yardstick.
  3. Step 2: Scan the external environment (PESTEL and industry factors) to identify opportunities and threats.
  4. Step 3: Appraise the internal environment (resources, skills, finance, operations) to identify strengths and weaknesses.
  5. Step 4: Carry out SWOT analysis to match internal capabilities with external conditions.
  6. Step 5: Generate strategic alternatives such as growth, stability or retrenchment.
  7. Step 6: Evaluate alternatives against objectives, resources, risk and feasibility, and make the strategic choice.
  8. Step 7: Record the choice in a strategic plan for implementation, and review it as conditions change.

Answer: Strategy formulation moves from direction (vision, mission, objectives) through environmental scanning, internal appraisal and SWOT to generating, evaluating and choosing alternatives, ending in a strategic plan.

Example 2

Meenakshi Foods, a Coimbatore packaged snacks maker, has a strong regional brand and efficient plants, but weak digital marketing and heavy dependence on one distributor. Rising demand for healthy snacks is seen in cities, while raw material prices are volatile and national brands are expanding into its region. Prepare a SWOT and suggest a strategic direction.

Show the solution
  1. Check internal or external for each fact. Brand and plants are inside the firm. Digital marketing and distributor dependence are inside the firm. Demand trend, raw material prices and competitor entry are outside.
  2. Strengths: strong regional brand; efficient plants.
  3. Weaknesses: weak digital marketing; dependence on a single distributor.
  4. Opportunities: rising urban demand for healthy snacks.
  5. Threats: volatile raw material prices; national brands entering the region.
  6. SO option: use the brand and efficient plants to launch a healthy snack range for urban markets.
  7. WO option: build digital marketing and add distributors to reach urban customers who want healthy snacks.
  8. ST option: use brand loyalty and plant efficiency to defend the region against national brands.
  9. Choice: a focused growth strategy through product development in healthy snacks, supported by fixing distribution and digital gaps. Check it against objectives, resources and risk before adopting.

Answer: Strengths: regional brand, efficient plants. Weaknesses: weak digital marketing, single-distributor dependence. Opportunity: healthy snack demand. Threats: raw material volatility, national competitors. Recommended direction: growth through a healthy snack range, with distribution and digital capability strengthened.

Exam tips

  • For a 'steps' question, write the steps as a numbered list with a one-line explanation each. Examiners reward clear sequence.
  • In SWOT case studies, label each point S, W, O or T, and finish with a recommended strategy. A table alone loses marks.
  • For MCQs, remember that strengths and weaknesses are internal, opportunities and threats are external. Many options test only this.
  • Add a short Indian company example in theory answers. Keep it generic if you are unsure of facts.
  • Do not confuse this topic with the broader strategic management process. Formulation is one phase; implementation and evaluation are separate.

Practice questions from Formulation and Implementation of Strategy

Strategy Formulation Process in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Strategy Formulation Process: frequently asked questions

What are the steps in strategy formulation?

The common sequence is setting vision, mission and objectives, scanning the external environment, appraising internal strengths and weaknesses, doing SWOT, generating alternatives, and evaluating and choosing a strategy. Books may group or number these differently. Keep the logical order in your answer.

What is environmental scanning in strategic management?

It is the continuous study of external factors that affect a firm, such as political, economic, social, technological, legal and environmental trends, along with industry forces. Its purpose is to identify opportunities and threats. The output feeds into SWOT and strategic choice.

How is SWOT used in strategy formulation?

SWOT sorts the findings from external scanning and internal appraisal into four groups. You then match them to create options: use strengths for opportunities, fix weaknesses using opportunities, use strengths against threats, and limit weaknesses that face threats.

Is strategy formulation the same as strategic planning?

The two are closely related and often used together. Strategy formulation focuses on deciding what strategy to follow. Strategic planning is the wider activity that includes documenting that choice in a plan. Check how your question words it and answer accordingly.