Chapter 1

Hawassa University, Faculty of Business & Economics, Department of B. Management Course Title: Business Policy & Strategy (Mgmt 492) Course Instructor: Suleiman K.

Page 1 of 41Hawassa University

Faculty of Business and EconomicsDepartment of Business Management

Lecture note for the course Business Policy and Strategy (Mgmt 492)

Chapter One: Introduction to Business Policy and Strategic Management - A firm’s plan to gain Competitive advantage

1.1 Meaning of Strategic Management Strategy can be defined in various ways. Some of these definitions are given below:Strategy is the determination of the basic long-term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resource necessary for carrying out these goals.Strategy is the pattern of objective, purposes, goals, and the major policies and plans for achieving these goals stated in such a way so as to define what business the company is in or is to be and the kind of company it is or is to be.Strategy is a unified, comprehensive and integrated plan designed to assure that the basic objectives of the enterprise are achieved.Combining the above definitions, we will not attempt to define strategy yet in a novel way but try to analyze the elements we have come across. We note that a strategy is:

1. It involves a plan or course of action or a set of decision rules making a pattern or treating a common thread;

2. It is a way of stating the current and the desired future position of the company, and the objectives, goals major policies and plans required for taking the company from where it is to where it wants to be.

3. It outlines the pattern or common thread related to the organization’s activities which are derived from the policies, objectives, and goals;

4. It is concerned with pursuing those activities which move an- organization from its current position to a desired future state; and

5. Concerned with the resources necessary for implementing a plan or following a course of action.

Still, strategic management can be defined in various ways. Strategic management is that set of managerial decisions and actions that determines the long-run performance of an organization. It includes environmental scanning, strategy formulation, strategy implementation, evaluation and control.

Strategic management is a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives. According to this definition, the end result of strategic management is a strategy or a set of strategies for the organization.

Strategic management is the process of managing the pursuit of the organization’s mission while managing the relationship of the organization to its environment; especially with respect to environmental stakeholders and the major constitutes in its internal and external environments that affect the actions.

Strategic management is a systematic approach to a major and increasingly important responsibility of general management to position and relate the firm to its environment in a way which will assure its continued success and make it secure from surprises.

We observe that different authors have defined strategic management differently.


Page 2 of 41Strategic management is considered as both decision-making and planning, or the set of activities related to the formulation and implementation of strategies to achieve organizational objectives. The emphasis in strategic management is on those general management responsibilities which are essential to relate the organization to the environment in which a way that its objectives may be achieved.

1.2 Dimension of Strategic DecisionsThere are several dimensions that distinguish a company’s strategic decisions from other decisions. Typically, strategic issues have the following six dimensions.

1.2.1 Require Top-Management Decisions and CommitmentSince strategic decisions cover wider areas of a firm’s operations, they require top-managements' involvement. Usually only top management has the perspective needed to understand the broad implications of such decisions and the power to authorize the necessary resource allocations.

1.2.2 Require Large Amounts of the Firm’s ResourcesStrategic decisions involve substantial allocations of people, physical assets, or money. These resources are either redirected from internal sources or swerved from outside the firm. Strategic decisions also commit the firm to actions over an extended period.

1.2.3 Affect the Firm’s Long-Term PropertyStrategic decisions commit the firm for a long time, typically five years. However, their impact often lasts much longer. Once a firm has committed itself to a particular strategy, its image and competitive advantages usually are tied to that strategy. Firms become known in certain markets, for certain products, with certain technologies. They would jeopardize their previous gains if they shifted from these markets, products, or technologies by adopting a radically different strategy.

1.2.4 Future OrientationStrategic decisions are based on what managers forecast rather than on what they know. In such decisions, emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options.

1.2.5 Multi functional or Multi business consequencesStrategic decisions have complex implications for most areas of the firm. Decisions about such materials as customers mix, competitive emphasis, or organizational structure necessarily involve a number of the firm’s strategic business units (SBUs), divisions, or program units. All of these areas will be affected by allocations or reallocations of responsibilities and resources that result form these decisions.

1.2.6 Require considering External EnvironmentAll business firms operate in an open system. They affect and are affected by external conditions that are largely beyond their control. Therefore, to successfully position a firm in competitive situations, its strategic managers must look beyond its operations by “thinking outside of the box.”

1.3 Characteristics of Strategic Management1. Future oriented: Strategic management is focused on proposing the future course of action. An emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options.2. Requires considering external environment: as we frequently mentioned earlier, all business operate in open system. That means their day to day and long term commitment is highly influenced by the external environment. Hence, strategic management requires considering changes that will take place in the external environment.


Page 3 of 413. Requires larger resource commitment: Strategic management determines the future direction of an organization. In the process, substantial allocation of resources is proposed. Therefore, if there are failures of strategic management, the whole lot of resource of the organization will be allocated in the wrong direction.4. Requires involvement of top management : Since the future prospective success or failure is determined in the strategic management, top management groups are actively involved in determining major corporate objectives and framing out strategies.

1.4 Key Terms in Strategic Management and the Strategic Management Model

Key Terms in Strategic ManagementBefore we further discuss strategic management, we should define nine key terms:competitive advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

1. Competitive AdvantageStrategic management is all about gaining and maintaining competitive advantage. This term can be defined as “anything that a firm does especially well compared to rival firm”.’ When a firm can do something that rival firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage. Getting and keeping competitive advantage is essential for long-term success in an organization. Theories of organization present different perspectives on how best to capture and keep competitive advantage—that is, how best to manage strategically. Pursuit of competitive advantage leads to organizational success or failure. Strategic management researchers and practitioners alike desire to better understand the nature and role of competitive advantage in various industries. Normally, a firm can sustain a competitive advantage for only a certain period due to rival firms imitating and undermining that advantage. Thus it is not adequate to simply obtain competitive advantage.

A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal

capabilities, competencies, and resources; and by (2) effectively formulating, implementing, and evaluating strategies that capitalize

upon those factors.

2. StrategistsStrategists are the individuals who are most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Writers on organizational behavior say, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model”Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they


Page 4 of 41typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last five years, the position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of many organizations. This new corporate officer title represents recognition of the growing importance of strategic planning in the business world.Strategists differ as much as organizations themselves and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style.

3. Vision and Mission StatementsMany organizations today develop a vision statement that answers the question, “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. For example, the vision statement of the Ethiopian Electric Power Corporation (EEPCo) is “To be a centre of Excellence in providing quality electric service at every one’s door and being competitive export industry.”Mission statements are “enduring statements of purpose that distinguish onebusiness from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market term.” It addresses the basic question that faces all strategies: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization. An example of a mission statement is provided below for Microsoft.

Microsoft’s mission is to create software for the personal computer that empowers and enriches people in the workplace, at school and at home. Microsoft’s early vision of a computer on every desk and in every home is coupled today with a strong commitment to Internet-related technologies that expand the power and reach of the PC and its users. As the world’s leading software provider, Microsoft strives to produce innovative products that meet our customers’ evolving needs. At the same time, we understand that long-term success is about more than just making great products. Find out what we mean when we talk about Living Our Values (www.microsoft.com/mscorp/).

Another example of a mission statement of the Ethiopian Electric Power Corporation (EEPCo) is

To provide adequate and quality electricity generation, transmission, distribution, and sales services, through continuous improvement of utility management practices responsive to the socio-economic development and environmental protection need of the public”.

http://www.microsoft.com/mscorp/


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4. External Opportunities and ThreatsExternal opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future.Opportunities and threats are largely beyond the control of a single organization-thus the word external. The wireless revolution, biotechnology, population shifts, changing work values and attitudes, space exploration, recyclable packages, and increased competition from foreign companies are examples of opportunities or threats for companies. These types of changes are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe external threat of online sales capturing increasing market share in their industry.Other opportunities and threats may include the passage of a law, the introduction of a new product by a competitor, a national catastrophe, or the declining value of the dollar. A competitor’s strength could be a threat. Unrest in the Middle East, rising energy costs, or the war against terrorism could represent an opportunity or a threat.A basic tenet or principle of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations utilize to influence external opportunities and threats.

5. Internal Strengths and WeaknessesInternal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and development, and management information systems activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses.Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. For example, high levels of inventory turnover may not be a strength to a firm that seeks never to stock-out.Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

6. Long-Term ObjectivesObjectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission essential. Long-term means more than one year. Objectives are for organizational success because they state direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective


Page 6 of 41planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall company and for each division.

7. StrategiesStrategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint venture. Strategies are potential actions that require top management decisions and large amounts of the firm’s resources. In addition, strategies affect an organization’s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm.

8. Annual ObjectivesAnnual objectives are short-term milestones that organizations must achieve to reach long-term objectives. Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritized. They should be established at the corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of management, marketing, finance/accounting, production/operations, research and development, and management information systems (MIS) accomplishments. A set of annual objectives is needed for each long-term objective. Annual objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives represent the basis for allocating resources.

9. PoliciesPolicies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations.Policies are most often stated in terms of management, marketing, finance/ accounting, production/operations, research and development, and computer information systems activities. Policies can be established at the corporate level and apply to an entire organization at the divisional level and apply to a single division or at the functional level and apply to particular operational activities or departments. Policies, like annual objectives, are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. Policies allow consistency and coordination within and between organizational departments.Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. Take for example the “No Smoking” policies with in most organizations. No Smoking policies are usually derived from annual objectives that seek to reduce corporate medical costs associated with absenteeism and to provide a healthy workplace.

The Strategic-Management ModelThe Strategic Management process can best be studied and applied using a model. Every model represents some kind of process. The framework illustrated in the following diagram is a widely accepted, comprehensive model of the Strategic Management process. This model does not guarantee success, but it does represent


Page 7 of 41a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic-management process are shown in the model, which appears in all subsequent chapters with appropriate areas shaped to show the particular focus of each chapter.

Strategy Formulation Strategy Implementation Strategy Evaluation

Fig: A comprehensive Strategic Management Model

Identifying an organization’s existing vision, mission, objectives, and strategies is the logical starting point for strategic management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular course of action. Every organization has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or communicated. The answer to where an organization is going can be determined largely by where the organization has been!The strategic-management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, a shift in the economy could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objectives could require a change in policy; or a major competitor’s change in strategy could require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semi-annually. Hence , the strategic- management process never really ends.

The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of an organization. Many organizations conduct formal meetings semiannually to discuss and update the firm’s vision/mission, opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and performance. These meetings are commonly held off-premises and are called retreats. The rationale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants. Good communication and feedback are needed throughout the strategic-management process.Application of the strategic-management process is typically more formal in larger and well-established organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environments, such as technology companies, tend to be more formal in strategic planning. Firms that have many divisions, products, markets, and technologies also tend to be more

Develop Vision & Mission Statements

Establish Long – Term

Strategic

Generate, Evaluate, & Select

Strategies

Implement

Strategies –

Managem

Implement

Strategies –

Marketing,

Finance,

Measure & Evaluate Performance

Perform External

Perform Internal

Audit


Page 8 of 41formal in applying strategic-management concepts. Greater formality in applying the strategic-management process is usually positively associated with the cost, comprehensiveness, accuracy, and success of planning across all types and sizes of organizations.

1.5 The Strategic Management ProcessAs I mentioned above, the definitions quoted above give you the idea that, strategic management is a process that consists of different phases, which are sequential in nature. The process of strategic management is depicted through a model, which consists of different phases; and these phases are considered as sequentially linked to each other and each successive phase provides a feedback to the previous phases. Most authors agree that there are four essential phases in the strategic management process, though they may differ with regard to the sequence, emphasis or nomenclature.

These four phases could be put in a nutshell as follows:1) Environmental Scanning2) Strategy Formulation3) Strategy Implementation4) Evaluation and Control

Fig: Phases of the Strategic Management ProcessViewing strategic management as a process has several important implications. 1) First, a change in any component will affect several or all of the other components.

Most of the arrows in the model point two ways, suggesting that the flow of information usually is reciprocal. For example, forces in the external environment may influence the nature of a company’s mission, and the company may in turn affect the external environment by heightening competition.

2) The second implication is that strategy formulation and implementation are sequential. The process begins with the development or reevaluation of the company mission. This step is associated with, but essentially followed by, development of a company profile and assessment of the external environment. Then follow the other components of the model. Not every component of the strategic management process deserves equal attention each time planning activity takes place.

3) The third implication of viewing strategic management as a process is the necessity of feedback from implementation, review, and evaluation to the early stages of the process. Feedback can be defined as the collection of post implementation results to enhance future decision making. As shown in the model, strategic managers should assess the impact of implemented strategies on external environment and the company policy. Strategic managers should also analyze the impact of strategies on the possible need for modifications in the company mission.

Defining business mission, purpose

and objectivesDeveloping Strategies

Implementing Strategies

Evaluating and control of Strategies

Feedback

Company profile

External Environm

ent


Page 9 of 414) The fourth implication is the need to regard the strategic management process as

a dynamic system. The term dynamic characterizes the constantly changing conditions that affect interrelated and interdependent strategic attitudes. Since change is continuous, the dynamic strategic planning processes must be monitored constantly for significant shifts in any of its components as a precaution against implementing an obsolete strategy.

1.6 Benefits of Strategic ManagementStrategic Management

allows an organization to be more proactive than reactive in shaping its own future;

it allows an organization to initiate and influence (rather than just respond to) activities-and thus to exert control over its own destiny.

Small business owners, chief executive officers, presidents, and managers of many for-profit and non-profit organizations have recognized and realized the benefits of strategic management. Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice. This certainly continues to be a major benefit of strategic management, but research studies now indicate that the process, rather than the decision or document, is the more important contribution of strategic management. Communication is a key to successful strategic management. Through involvement in the process, managers and employees become committed to plan supporting the organization. Dialogue and participation are essential ingredients. The manner in which strategic management is carried out is thus exceptionally important. A major aim of the process is to achieve the understanding and commitment from all managers and employees. Understanding may be the most important benefit of strategic management, followed by commitment. When managers and employees understand what the organization is doing and why, they often feel that they are a part of the firm and become committed to assisting it. This is especially true when employees also understand linkages between their own compensation and organizational performance. Managers and employees become surprisingly creative and innovative when they understand and support the firm’s mission, objectives, and strategies. A great benefit of strategic management, then, is the opportunity that the process provides to empower individuals. Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination, and rewarding them for doing so.More and more organizations are decentralizing the strategic-management process, recognizing that planning must involve lower-level managers and employees. The notion of centralized staff planning is being replaced in organizations by decentralized line-manager planning. The process is a learning, helping, educating, and supporting activity, not merely a paper-shuffling activity among top executives. Strategic-management dialogue is more important than a nicely bound strategic-management document. The worst thing strategists can do is develop strategic plans themselves and then present them to operating managers to execute. Through involvement in the process, line managers become “owners” of the strategy. Ownership of strategies by the people who have to execute them is a key to success!Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer, both managers and employees must also be involved in strategy formulation, implementation, and evaluation activities. Participation is a key to gaining commitment for needed changes. An increasing


Page 10 of 41number of corporations and institutions are using strategic management to make effective decisions. But strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.

a) Financial Benefits of Strategic ManagementResearch indicates that organizations using strategic-management concepts are more profitable and successful than those that do not. Businesses using strategic management concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic planning activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with planning systems more closely resembling strategic-management theory generally exhibit superior long-term financial performance relative to their industry.

High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. On the other hand, firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. They typically underestimate their competitors’ strengths and overestimate their own firm’s strengths. They often attribute weak performance to uncontrollable factors such as a poor economy, technological change, or foreign competition.

It is quite normal to witness businesses in our country failing annually. Business failures include bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many factors besides a lack of effective strategic management can lead to business failure, the planning concepts and tools described in this teaching material can yield substantial financial benefits for any organization. An excellent Web site for businesses engaged in strategic planning is www.checkmateplan.com.

b) Non financial BenefitsBesides helping firms avoid financial demise, strategic management offers other tangible benefits, such as

an enhanced awareness of external threats, an improved understanding of competitors’ strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships.

Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. Firms that have nurtured their managers and employees, shared organizational objectives with them, empowered them to help improve the product or service, and recognized their contributions can turn to them for help in a pinch because of this interaction.In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic management may renew confidence in the current business strategy or point the need for corrective actions. The strategic-management process provides a basis for identifying and rationalizing


Page 11 of 41the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than as a threat.

Why Some Firms Do No Strategic PlanningSome firms do not engage in strategic planning, and some firms do strategic planning but receive no support from managers and employees. Some reasons for poor or no strategic planning are as follows:

Poor Reward Structures - When an organization assumes success, it often fails to reward success. When failure occurs, then the firm may punish. In this situation, it is better for an individual to do nothing (and not draw attention) than to risk trying to achieve something, fail, and be punished.

Fire-Fighting - An organization can be so deeply embroiled in crisis management and fire-fighting that it does not have time to plan.

Waste of Time - Some firms see planning as a waste of time since no marketable product is produced. But time spent on planning is an investment.

Too Expensive - Some organizations are culturally opposed to spending resources.

Laziness - People may not want to put forth the effort needed to formulate a plan.

Content with Success - Particularly if a firm is successful, individuals may feel there is no need to plan because things are fine as they stand. But success today does not guarantee success tomorrow.

Fear of Failure - By not taking action, there is little risk of failure unless a problem is urgent and pressing. Whenever something worthwhile is attempted, there is some risk of failure.

Overconfidence - As individuals amass experience, they may rely less on formalized planning. Rarely, however, is this appropriate. Being overconfident or overestimating experience can bring demise. Forethought is rarely wasted and is often the mark of professionalism.

Prior Bad Experience - People may have had a previous bad experience with planning, that is, cases in which plans have been long, cumbersome, impractical, or inflexible. Planning, like anything else, can be done badly.

Self-Interest - When someone has achieved status, privilege, or self-esteem through effectively using an old system, he or she often sees a new plan as a threat.

Fear of the Unknown - People may be uncertain of their abilities to learn new skills, of their aptitude with new systems, or of their ability to take on new roles.

Honest Difference of Opinion - People may sincerely believe the plan is wrong. They may view the situation from a different viewpoint, or they may have aspirations for themselves or the organization that are different from the plan. Different people in different jobs have different perceptions of a situation.

Suspicion - Employees may not trust management.

To summarize what has been said so far concerning the benefits of strategic management, using strategic management approach, managers at all levels of the firm interact in planning and implementing. As a result, the behavioral consequences of strategic management are similar to those of participative decision making. Therefore, an accurate assessment of the impact of strategy formulation on organizational performance requires not only financial evaluation criteria but also non-financial ones such as measures of behavior - based effects.The benefits of strategic management can be condensed into five points as follows:


Page 12 of 411) Strategy formulation activities enhance the firm’s ability to prevent problems.

Managers who encourage subordinates’ attention to planning are aided in their monitoring and forecasting responsibilities by subordinates who are aware of the needs of strategic planning.

2) Group-based strategic decisions are likely to be drawn from the best available alternatives. The strategic management process results in better decisions because group interaction generates a greater variety of strategies and because forecasts based on the specialized perspectives of group members improve the screening of options.

3) The involvement of employees in strategy formulation improves their understanding of the productivity - reward relationship in every strategic plan and, thus, heightens their motivation.

4) Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies difference in roles.

5) Resistance to change is reduced. Though the participants in strategy formulation may be no more pleased with their own decisions than they would be with authoritarian decision, their greater awareness of the parameters that limit the available options makes them more likely to accept those decisions.

1.7 Pitfalls in Strategic PlanningStrategic planning is an involved, intricate, and complex process that takes an organization into unchartered territory. It does not provide a ready-to-use prescription for success; instead, it takes the organization through a journey and offers a framework for addressing questions and solving problems. Being aware of potential pitfalls and being prepared to address them is essential to success.Some pitfalls to watch for and avoid in strategic planning are provided below:

Using strategic planning to gain control over decisions and resources Doing strategic planning only to satisfy accreditation or regulatory requirements Too hastily moving from mission development to strategy formulation Failing to communicate the plan to employees, who continue working in the

dark Top managers making many intuitive decisions that conflict with the formal plan Top managers not actively supporting the strategic-planning process Failing to use plans as a standard for measuring performance Delegating planning to a “planner” rather than involving all managers Failing to involve key employees in all phases of planning Failing to create a collaborative climate supportive of change Viewing planning to be unnecessary or unimportant Becoming so engrossed or absorbed in current problems on which insufficient

or no planning is done Being so formal in planning that flexibility and creativity are stifled

While the earlier mentioned benefits could accrue by using strategic-management approach given the above pitfalls, managers, should be aware of the possible risks and guard their firm against them. There are three types of unintended negative consequences of involvement in strategic management.

1. Managers may spend too much time on the strategic management process. This may have a negative impact on operational responsibilities. Therefore, managers must be trained to minimize this impact by scheduling their duties to allow the necessary time for the strategic activities.


Page 13 of 412. When the formulators of strategy are not involved in its implementation, they

may shrink on their individual responsibility for the decision reached. Thus, strategic managers must be trained to limit their premises to performance that the decision makers and their subordinates can do.

3. Strategic managers must be trained to anticipate and respond to the disappointment of participating subordinates over unattained expectations. This is so because the subordinates may expect their involvement in even minor phases of total strategy formulation.

1.8 Guidelines for Effective Strategic ManagementFailing to follow certain guidelines in conducting strategic management can foster criticisms of the process and create problems for the organization. An integral part of strategy evaluation must be to evaluate the quality of the strategic-management process. Issues such as “Is strategic management in our firm a people process or a paper process?” should be addressed.

Even the most technically perfect strategic plan will serve little purpose if it is not implemented. Many organizations tend to spend an inordinate or excessive amount of time, money, and effort on developing the strategic plan, treating the means and circumstances under which it will be implemented as afterthoughts!Change comes through implementation and evaluation, not through the plan. A technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is typed.

Strategic management must not become a self-perpetuating bureaucratic mechanism. Rather, it must be a self-reflective learning process that familiarizes managers and employees in the organization with key strategic issues and feasible alternatives for resolving those issues. Strategic management must not become ritualistic, stilted, orchestrated, or too formal, predictable, and rigid. Words supported by numbers, rather than numbers supported by words, should represent the medium for explaining strategic issues and organizational responses. A key role of strategists is to facilitate continuous organizational learning and change.An important guideline for effective strategic management is open mindedness. A willingness and eagerness to consider new information, new viewpoints, new ideas, and new possibilities is essential; all organizational members must share a spirit of inquiry and learning. Strategists such as chief executive officers, presidents, owners of small businesses, and heads of government agencies must commit themselves to listen to and understand managers’ positions well enough to be able to restate those positions to the managers’ satisfaction. In addition, managers and employees throughout the firm should be able to describe the strategists’ positions to the satisfaction of the strategists. This degree of discipline will promote understanding and learning.No organization has unlimited resources. No firm can take on an unlimited amount of debt or issue an unlimited amount of stock to raise capital. Therefore, no organization can pursue all the strategies that potentially could benefit the firm. Strategic decisions thus always have to be made to eliminate some courses of action and to allocate organizational resources among others. Most organizations can afford to pursue only a few corporate-level strategies at any given time. It is a critical mistake for managers to pursue too many strategies at the same time, thereby spreading the firm’s resources so thin that all strategies are jeopardized.


Page 14 of 41Strategic decisions require trade-offs such as long-range versus short-range considerations or maximizing profits versus increasing shareholders’ wealth. There are ethics issues too. Strategy trade-offs require subjective judgments and preferences. In many cases, a lack of objectivity in formulating strategy results in a loss of competitive posture and profitability. Most organizations today recognize that strategic-management concepts and techniques can enhance the effectiveness of decisions. Subjective factors such as attitudes toward risk, concern for social responsibility, and organizational culture will always affect strategy-formulation decisions, but organizations need to be as objective as possible in considering qualitative factors.

1.9 Business Ethics and Strategic ManagementBusiness ethics can be defined as principles of conduct within organizations that guide decision making and behavior. Good business ethics is a prerequisite for good strategic management; good ethics is just good business!A rising tide of consciousness about the importance of business ethics is sweeping Ethiopia like the entire world. Strategists are the individuals primarily responsible for ensuring that high ethical principles are espoused and practiced in an organization. All strategy formulation, implementation, and evaluation decisions have ethical ramifications.Newspapers and business magazines daily report legal and moral breaches of ethical conduct by both public and private organizations. Managers and employees of firms must be careful not to become scapegoats blamed for company environmental wrongdoings. Harming the natural environment is unethical, illegal, and costly. When organizations today face criminal charges for polluting the environment, firms increasingly are turning on their managers and employees to win leniency for themselves. Employee firings and demotions are becoming common in pollution-related legal suits. Managers’ being fired at in some organizations for being indirectly responsible for their firms’ polluting water exemplifies this corporate trend. Therefore, managers and employees today must be careful not to ignore, conceal, or disregard a pollution problem, or they may find themselves personally liable. In this regard, more and more companies are becoming ISO 14001 certified, as indicated in the “Natural Environment Perspective.”A new wave of ethics issues related to product safety, employee health, sexual harassment, AIDS in the workplace, smoking, acid rain, affirmative action, waste disposal, foreign business practices, cover-ups, takeover tactics, conflicts of interest, employee privacy, inappropriate gifts, security of company records, and layoffs has accented the need for strategists to develop a clear code of business ethics. A code of business ethics can provide a basis on which policies can be devised to guide daily behavior and decisions at the work site.

The explosion of the Internet into the workplace has raised many new ethical questions in organizations today.

The “E-Commerce Perspective” focuses on business ethics issues related to the Internet. Merely having a code of ethics, however, is not sufficient to ensure ethical business behavior. A code of ethics can be viewed as a public relations gimmick or device, a set of platitudes, or window dressing. To ensure that the code is read, understood, believed, and remembered, organizations need to conduct periodic ethics workshops to sensitize people to workplace circumstances in which ethics issues may


Page 15 of 41arise. If employees see examples of punishment for violating the code and rewards for upholding the code, this helps reinforce the importance of a firm’s code of ethics.

An ethics “culture” needs to permeate or fill organizations! To help create an ethics culture, some organizations have developed a code-of- conduct manual outlining ethical expectations and giving examples of situations that commonly arise in their businesses.

One reason strategists’ salaries are high compared to those of other individuals in an organization is that strategists must take the moral risks of the firm. Strategists are responsible for developing, communicating and enforcing the code of business ethics for their organizations. Although primary responsibility for ensuring ethical behavior rests with a firm’s strategists, an integral part of the responsibility of all managers is to provide ethics leadership by constant example and demonstration. Managers hold positions that enable them to influence and educate many people. This makes managers responsible for developing and implementing ethical decision making. Many scholars on the issue offer some good advice for managers: All managers risk giving too much because of what their companies demand from them. But the same superiors, who keep pressing you to do more, or to do it better, or faster, or less expensively, will turn on you should you cross that fuzzy line between right and wrong. They will blame you for exceeding instructions or for ignoring their warnings. The smartest managers already know that the best answer to the question “How far is too far?” is don’t try to find out.

A man (or woman) might know too little, perform poorly, lack judgment and ability, and yet not do too much damage as a manager. But if that person lacks character and integrity - no matter how knowledgeable, how brilliant, how successful - he destroys. He destroys people, the most valuable resource of the enterprise. He destroys spirit. And he destroys performance. This is particularly true of the people at the head of an enterprise. For the spirit of an organization is created from the top. If an organization is great in spirit, it is because the spirit of its top people is great. If it decays, it does so because the top rots. As the proverb has it, “Trees die from the top! No one should ever become a strategist unless he or she is willing to have his or her character serve as the model for subordinates.

No society anywhere in the world can compete very long or successfully with people stealing from one another or not trusting one another, with every bit of information requiring notarized confirmation, with every disagreement ending up in litigation, or with government having to regulate businesses to keep them honest. Being unethical is a recipe for headaches, inefficiency, and waste. History has proven that the greater the trust and confidence of people in the ethics of an institution or society, the greater its economic strength. Business relationships are built mostly on mutual trust and reputation. Short-term decisions based on greed and questionable ethics will preclude the necessary self-respect to gain the trust of others. More and more firms believe that ethics training and an ethics culture create strategic advantage.

Some business actions considered to be unethical include misleading advertising or labeling, causing environmental harm, poor product or service safety, padding expense accounts, insider trading, dumping banned or flawed products in foreign markets, lack of equal opportunities for women and minorities, overpricing, hostile takeovers, moving jobs overseas, and using nonunion labor in a union shop.


Page 16 of 41

Internet fraud, including hacking into company computers and spreading viruses, has become a major unethical activity that plagues every sector of online commerce from banking to shopping sites. More than three hundred Web sites now show individuals how to hack into computers; this problem has become endemic nationwide and around the world.

Ethics training programs should include messages from the CEO emphasizing ethical business practices, the development and discussion of codes of ethics, and procedures for discussing and reporting unethical behavior. Firms can align ethical and strategic decision making by incorporating ethical considerations into long-term planning, by integrating ethical decision making into the performance appraisal process, by encouraging whistle-blowing or the reporting of unethical practices, and by monitoring departmental and corporate performance regarding ethical issues.

In a final analysis, ethical standards come out of history and heritage. Our fathers, mothers, brothers, and sisters of the past left us with an ethical foundation to build upon. Even the legendary football coach Vince Lombardi knew that some things were worth more than winning, and he required his players to have three kinds of loyalty: to God, to their families, and to the Green Bay Packers, “in that order.”

1.10 Challenges in Strategic Management – the 21st century challengesThree particular challenges or decisions that face all strategists today are

1) Deciding whether the process should be more an art or a science, 2) Deciding whether strategies should be visible or hidden from stakeholders, and 3) Deciding whether the process should be more top-down or bottom-up in their

firm.

The Art or Science IssueThis teaching material is consistent with most of the strategy literature in advocating that strategic management be viewed more as a science than an art. This perspective contends that firms need to systematically assess their external and internal environments, conduct research, carefully evaluate the pros and cons of various alternatives, perform analyses, and then decide upon a particular course of action. In contrast, Mintzberg’s notion of “crafting” strategies embodies the artistic model which suggests that strategic decision making be based primarily on holistic thinking, intuition, creativity, and imagination. Mintzberg and his followers reject strategies that result from objective analysis, preferring instead subjective imagination. “Strategy scientists” reject strategies that emerge from emotion, intuition, creativity, and politics. Promoters of the artistic view often consider strategic planning exercises to be time poorly spent. The Mintzberg philosophy insists on informality whereas strategy scientists (and this teaching material) insist on more formality. Mintzberg refers to strategic planning as an “emergent” process whereas strategy scientists use the term “deliberate” process.The answer to the art versus science question is one that strategists must decide for themselves, and certainly the two approaches are not necessarily mutually exclusive. In deciding which approach is more effective, however, consider that the business world today has become increasingly complex and more intensely competitive. There is less room for error in strategic planning. Recall the points discussed before about the importance of intuition and experience and subjectivity in strategic planning that certainly require good judgment. But the idea of deciding upon strategies for any firm without thorough research and analysis is unwise. Certainly, in smaller firms there can


Page 17 of 41be more informality in the process compared to larger firms, but even for smaller firms, a wealth of competitive information is available on the Internet and elsewhere, and should be collected, assimilated, and evaluated before deciding on a course of action upon which survival of the firm may hinge. The livelihood of countless employees and shareholders may hinge on the effectiveness of strategies selected. Too much is at stake to be less than thorough in formulating strategies. It may not behoove a strategist to rely too heavily on gut feeling and opinion instead of research data, competitive intelligence, and analysis in formulating strategies.

The Visible or Hidden IssueThere are certainly good reasons to keep the strategy process and strategies themselves visible and open rather than hidden and secret. There are also good reasons to keep strategies hidden from all but top-level executives. Strategists must decide for themselves what is best for their firm. This teaching material comes down largely on the side of being visible and open but certainly this may not be best for all strategists and all firms. Scholars argued that all war is based on deception and that the best maneuvers are those not easily predicted by rivals. Business is analogous to war.

Some reasons to be completely open with the strategy process and resultant decisions are:

1. Managers, employees, and other stakeholders can readily contribute to the process. They often have excellent ideas. Secrecy would forgo many excellent ideas.

2. Investors, creditors, and other stakeholders have greater basis for supporting a firm when they know what the firm is doing and where the firm is going.

3. Visibility promotes democracy whereas secrecy promotes autocracy. Domestic firms and most foreign firms prefer democracy over autocracy as a management style.

4. Participation and openness enhances understanding, commitment, and communication within the firm.

Reasons why some firms prefer to conduct strategic planning in secret and keep strategies hidden from all but the highest-level executives are as follows:

1. Free dissemination of a firm’s strategies may easily translate into competitive intelligence for rival firms who could exploit the firm given that information.

2. Secrecy limits criticism, second guessing, and hindsight.3. Participants in a visible strategy process become more attractive to rival firms

who may lure them away.4. Secrecy limits rival firms from imitating or duplicating the firm’s strategies and

undermining the firm.

The obvious benefits of the visible versus hidden extremes suggest that a working balance must be sought between the apparent contradictions. Some scholars say that in a perfect world all key individuals, both inside and outside the firm, should be involved in strategic planning, but in practice particularly sensitive and confidential information should always remain strictly confidential to top managers. This balancing act is difficult but essential for survival of the firm.


Page 18 of 41

The Top-Down or Bottom-Up ApproachProponents of the top-down approach contend that top executives are the only persons in the firm with the collective experience, acumen, and fiduciary responsibility to make key strategy decisions. In contrast, bottom-up advocates argue that lower and middle-level managers and employees who will be implementing the strategies need to be actively involved in the process of formulating the strategies to assure their support and commitment. Recent strategy research and this teaching material emphasize the bottom-up approach, but earlier work by earlier scholars stressed the need for firms to rely on perceptions of their top managers in strategic planning. Strategists must reach a working balance of the two approaches in a manner deemed best for their firm at a particular time, while cognizant of the fact that current research supports the bottom-up approach, at least for firms in the developed world. Increased education and diversity of the work-force at all levels are reasons why middle- and lower-level managers and even non managers should be invited to participate in the firm’s strategic planning process, at least to the extent that they are willing and able to contribute.

So at last but not least, strategists in successful organizations realize that strategic management is first and foremost a people process. It is an excellent vehicle for fostering organizational communication. People are what make the difference in organizations.


Page 19 of 41Chapter Two: Business Environment Analysis and Environmental Scanning

2.1 Business Environment Analysis and Environmental ScanningStrategic management is concerned with determining long term objectives and strategies suitable to accomplishing such objectives. However, before determining long term objectives and proposing strategies, it is natural to look at what is available and not available at the hand of the organization. The competitive advantages that the organization should capitalize and weak sides of the company need to be analyzed. In the process of environmental scanning, the underlying logic is analyzing your competitive advantage and designing strategies that capitalize on such competitive advantage. Indeed, analyzing opportunities and threats that will come from the external environment must be analyzed. In more simple term, SWOT analysis is an essential part of strategic management especially at its first stage. As you can remember, SWOT analysis is a system used to identify and evaluate an organization in terms of its potential strengths, weaknesses, opportunities and threats. So carrying out such an analysis using the SWOT framework helps managers to focus their activities into areas where the organization is strong and where the greatest opportunities lay requiring consideration. Moreover, such an analysis reminds the company to be watchful of its weakness in the effort to take due consideration for the threats coming from the environment. So, SWOT analyses involve both internal and external environment analysis. Success in the world of business, therefore, is linked with the integration of sub systems (employees, units, sections, and departments) of an organization and its good marriage with external forces such as suppliers, customers, government and the society at large. The modern business managers, in this regard, are advised to continuously scan both the internal and external environment. Long-term plans are worked out having more detail information about both the internal and external forces. Therefore, before an organization can begin strategy formulation, it must scan the external environment to identify possible opportunities and threats and its internal environment for strength and weaknesses. Environmental Scanning is the monitoring, evaluating, and disseminating of information from the external and internal environment to key people within the corporation. A corporation uses this tool to avoid strategic surprise and to insure its long term health. Research has found a positive relationship between environmental scanning and profit.

2.1.1 External Environment AnalysisThe term environment can be defined in various ways. It can be defined as all the external factors influencing the life and activities of people, plants, and animals, even. It is the set of natural world, especially when it is regarded as being at risk from the harmful influence of human activities.The external environment analysis considers factors that are beyond the control of the organization and either brings an opportunity or pose threats to the organizations. Detailed analysis for external factors will be made in the up coming sections of this chapter. Now I shall focus on sources of opportunities and threats:

Source of Opportunitiesa) Unexpected Events

Unexpected events such as political turmoil, war breaks, government policy changes, floods and other natural or man made changes can provide opportunities to a business organization. The event can be unexpected success (good news) or an


Page 20 of 41expected failure (bad news). For example, if war breaks out where it is unexpected, it changes the economics and demand structure of the warring parties and their populations. This can provide opportunity if it is ethically pursued. Similarly, a break through in a peace negotiation also provides opportunity since it changes the economics of the former opponents.

b) The process needThis opportunity has its source in technology’s inability to provide the “big breakthrough “. Technicians often need to work out a way to get from point A to point B in some process. Currently, efforts are being made in areas of super conductivity, fusion, interconnectivity and the search for a treatment and cure for AIDS. Process need opportunities are often addressed by programmed research projects, which are the systematic research and analysis efforts designed to solve a single problem such as the efforts against AIDS.

c) Changes in TechnologyChanges in technology changes market and industry structures by altering costs, quality requirements and volume capabilities. This alteration can potentially make existing firms obsolete, which are not adjusted to it and are inflexible. But changes in technology may create opportunity for those who make themselves ready for the new technology.

d) Demographic Changes Demographic changes are changes in the population or subpopulation of society. Theses can be changes in the size, age, structure, employment, education, or incomes of these groups. Such changes influence all industries and firms by changing the mix of products and services demanded the volume of products and services, and the buying power of customers. Some of these changes are predictable since people who will be older are already alive and birth and death rates stay fairly stable over time. Population statistics are available for assessment, but opportunities can be found before the data are published by observing what is happening in the street and being reported in the newspaper.

e) Change in Perception People hold different perceptions of the same reality, and these differences affect the products and services they demand and the amount they spend. Some groups feel powerful and rich, others disenfranchised and poor. Some people think they are thin when they are not, others think they are too fat when they are not. The manager can sell power and status to the rich and powerful, and sell relief and comfort to the poor and oppressed/demoralized customers.

f) New Knowledge New Knowledge is often seen as the ‘superstar’ of business opportunity. It is not enough to have new knowledge but there must also be a way to make products from it and to protect the profits of those products from competition as the knowledge is spread to others. In additions, timing is critical. It frequently takes the convergence of many piece of new knowledge to make a product.

Source of ThreatsThe forces that can provide opportunity for an organization may sometime pose threat to business. Some of the sources of threats are discussed below.

a) Threat of SubstituteWhen managers propose long term plans to launch new products, they are not clearwhether other competitors will substitute their product and service or not. Hence, a potential threat will originate from the possibility of their product being replaced easily


Page 21 of 41and early. So, it is important for managers to understand the nature of substitute products for these reasons.

b) Threat of IntegrationA threatening environment will be created when competitors have strong relationship with suppliers, customers and the community. The customers will neglect the new proposal if competitors have strong relationship with their supplier, regardless of the quality of product offered by the new firm. And sometimes, the community, surrounding the business, will reject the products of the venture due to strong relationship with the existing firms.

* Identifying external strategic factorsWhy do companies often respond differently to the same environmental changes? One reason is because of differences in the ability of managers to recognize and understand external strategic issues and factors. No firm can successfully monitor all external factors. Choices must be made regarding which factors are important and which are not. Even though managers agree that strategic importance determines what variables are consistently tracked, they sometimes miss or choose to ignore crucial new developments. Personal values and functional experiences of a corporation’s managers as well as the success of current strategies are likely to bias both their perception of what is important to monitor in the external environment and their interpretations of what they perceive.

This willingness to reject unfamiliar as well as negative information is called StrategicMyopia. If a firm needs to change its strategy, it might not be gathering the appropriate external information to change strategies successfully.One way to identify and analyze developments in the external environment is to use the issues priority matrix as follows:

1) Identify a number of likely trends emerging in the societal and task environments. These are strategic environmental issues - those important trends that, if they occur, determine what the industry or the world will look like in the near future.

2) Assess the probability of these trends actually occurring from low to high.3) Attempt to ascertain the likely impact (from low to high) of each of these trends

on the corporation being examined.

Figure: Issues Priority Matrix

A corporation’s external strategic factors are those key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation. The issues priority matrix can then be used to


Page 22 of 41help managers decide which environmental trends should be merely scanned (low priority) and which should be monitored as strategic factors (high priority). Those environmental trends judged to be a corporation’s strategic factors are then categorized as opportunities and threats and are included in strategy formulation.

2.1.2 Internal Environment AnalysisUnderstanding opportunities from external environment is nothing unless there is internal capacity that enables to exploit opportunities on time. Hence, having understood the impact of the external environment, the next step is analyzing internal factors. The internal environment analysis is conducted in order to know the strengths and weaknesses of the organization.

Particularly, the internal environment analysis involves the following: Mission Statement - a statement that states the reason why an organization

exists. It tells what the company is providing to society. A well-convinced mission statement defines the fundamental, unique purpose that sets a company apart from other firms. It identifies the scope of the company’s operation in terms of products offered and markets served. It puts into word no only what the company is now, but also what it wants to become. It promotes a sense of shared expectation in employees and communicates a public image to important stakeholder groups in the company’s task environment. A mission statement reveals who is the company is and what it does.

Objectives - are end results of planned activity. They state what is to be accomplished by whom and should be quantified if possible. The achievement of corporate objective should result in the fulfillment of the company’s mission. Some of the areas in which a company might establish its objectives are:o Profitability or net income o Efficiency or low costo Reputation (being considered as top of all firm)o Contribution to employees (employees security or wage adjustment)o Contribution to society (tax paid, participation in charities, providing needed

products or services)o Market leadership (market share)o Technological leadership (innovativeness)o Survival (avoiding bankruptcy).

Policies - are broad guideline for decision making that links the formulation of strategy with its implementation. Companies use policies to make sure that employees through the firm make decisions and take actions that support the corporation’s mission, its objectives and its strategies.

Resources - consists of both human and non human resource. The profiles of the employees with their number need to be analyzed and compared with the anticipated activity. The materials resource such as machineries and their obsolescence can help in evaluating the organization’s internal strength and weakness.


Page 23 of 41 Procedures - are a system of sequential steps or techniques that describe in

detail how a particular task or job is to be done. They typically detail the various activities that must be carried out for completion of a corporation’s program.

2.2 External Environment AnalysisMost firms face external environments that are highly turbulent, complex, and global –conditions that make interpreting them increasingly difficult. The cope with what are often ambiguous and incomplete environmental data and to increase their understanding of the general environment, firms engage in a process called external environment analysis. Those analyzing the external environment should understand that completing this analysis is a difficult, yet significant, activity.

The firm’s choice of direction and action (strategy), its organizational structure, and its internal processes are influenced by a host of external factors. These factors, which constitute the external environment, can be divided into three interrelated subcategories: factors in the remote environment, factors in the industry environment, and factors in the operating environment. The success of the firm’s strategy is also affected by the realistic analysis of its internal capabilities and its consistency with conditions in the external environment.

Figure : A firm’s External Environment

2.2.1 Remote Environment and STEEP Factors

The remote environment comprises factors that originate beyond, and usually irrespective of, any single firm’s operating situation. It presents firms with opportunities, threats, and constraints, but rarely does a single firm exert any meaningful reciprocal influence. There are five forces in the firm’s remote environment with the popular acronym STEEP factors, which stands for Social, Technological, Economic, Ecological, and Political factors.

a. Social Factors

Remote EnvironmentSocialTechnologyEconomicEcologicPolitical

Industry EnvironmentEntry BarrierSupplier PowerBuyer PowerSubstitute AvailabilityCompetitive Rivalry

Operating EnvironmentCompetitorsCreditorsCustomersLaborSuppliers

The Firm


Page 24 of 41The social factors that affect a firm involve the beliefs, values, attitudes, opinions, and lifestyles of persons in the firm’s external environment; as developed form cultural, demographic, religions, educational, and ethnic conditioning.Like other forces in the remote external environment, social forces are dynamic. As social attitudes change, so does the demand for various types of clothing, books, and so on. The constant change in social environment is the result of efforts of individuals to satisfy their desires and needs by controlling and adapting to environmental factors.Several changes have occurred in the social environment. One of the most profound social changes in recent years has been the entry of large numbers of women into the labor market.Those social changes affected business in the following areas:

Hiring and compensation policies and resource capabilities of employers. Expanded demand for a wide range of products and services necessitated

by women’s absence form the home. For instance convenience foods, microwave ovens, and day-care centers are results of such changes.

A second profound social change has been the accelerating interest of consumers and employees in quality of life issues. Evidence of this change is seen in recent contract negotiations. In addition to traditional demand for increased salaries, flexible hours, four-day workweeks, opportunities for advanced training, lump-sum vacation plans have come into the scene.

A third profound social change has been the shift in the age distribution of the population. Changing social values and a growing acceptance of improved birth control methods are expected to raise mean ages. A result of the changing age distribution of the population is increased demands for modifications of retirement policies and lobbies for tax exemptions by the senior citizens.

b. Technological FactorsAwareness of technological changes that might influence the industry is important to the firm in order to avoid obsolescence and promote innovation. Creative technological adaptations can suggest possibilities for: new products, improvements in existing products, and improvements in manufacturing and marketing techniques.A technological break through can have a sudden and dramatic effect on a firms environment. It may generate sophisticated new markets and products of significantly shorten the anticipated life of a manufacturing facility.

Firms in a turbulent growth industries must strive for an understanding both of existing technological advances and the probable future advances that can affect their products and services. In other words, they need to foresee advancements and estimate their impact on an organization’s operations through technological forecasting.

c. Economic FactorsEconomic factors concern the nature and direction of the economy in which a firm operates. Because consumption patterns are affected by the relative affluence of various market segments, in its strategic planning each firm must consider economic trends in the segments that affect its industry. As far as economic factors are concerned, the firm must consider the general availability of credit, the level of disposable income, the propensity of people to spend, prime interest rates, inflation rates, and trends in the growth of the gross national product (GNP).


Page 25 of 41d. Ecological Factors

The term ecology refers to the relationship between human beings, other living things and air, soil, and water that support them. Threats to life-supporting ecology caused principally by human activities in an industrial society are commonly referred to as pollution. Specific concerns under ecological environment include global warming, loss of habitat and biodiversity, and pollution of air, water, and land.The global climate has been changing for years. However, it is non evident that humanity’s activities are accelerating tremendously.

A change in atmospheric radiation, due to ozone depletion, causing global warming.

Solar radiation that is normally absorbed into the atmosphere reaches the earth’s surface, heating the soil, water, and air.

Loss of habitat and biodiversity refer to the extinction of important flora and fauna is occurring at a rapid rate due to disturbance of the natural habitat by the human activities.

Air pollution is created by dust particles and gaseous discharges that contaminate the air.

Water pollution occurs principally when industrial toxic wastes are dumped or leak into the waterways.

Land pollution is caused by the need to dispose of ever-increasing amounts of waste.

As a major contributor to ecological pollution, business now is being held responsible for eliminating the toxic by-products of its current manufacturing processes and for cleaning up the environmental damage that it did previously. Increasingly, managers are required by the government or are being expected by the public to incorporate ecological concerns into their decision making.

Many large businesses are realizing that their decisions must no longer ignore environmental concerns. Every activity is linked to thousands of other transactions and their environmental impact. Therefore, corporate environmental responsibility must be taken seriously and environmental policy must be implemented to ensure a comprehensive organizational strategy. Such firms are called ‘Eco-efficient’ business since they produce more useful goods and services while continuously reducing resource consumption and pollution.

Reasons for businesses to be ‘Eco efficient’ customers demand for cleaner products. environmental regulations are increasingly more stringent. employees prefer to work for environmentally conscious firms. financing is more readily available for eco-efficient firms. government provides incentives to environment friendly firms.

e. Political FactorsThe direction and stability of political factors is a major consideration for managers in formulating company strategy. Political factors define the legal and regulatory parameters within which firms must operate.

Political constraints are placed on firms through: fair-trade decisions tax programs minimum wage legislation


Page 26 of 41 pollution and pricing policies employee protection acts protection of consumers and general public.

Although most of laws and regulations are commonly restrictive, some political actions are designed to benefit and protect firms through patent laws, government subsidies, and product research grants.

Political activity also has a significant impact on two governmental functions:

Suppliers Function: Government decisions regarding the accessibility of private businesses to government owned natural resources and national stock piles of agricultural products will affect profoundly the viability of the strategies of some firms.

Customer Function: Government demand for products and services, can create, sustain, enhance, or eliminate many market opportunities.

2.2.2 Industry Analysis

Analysis of industry and competitive conditions is the starting point in evaluating a company’s strategic situation and market position. The nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products and services, and the rivalry among existing firms. To establish a strategic agenda for dealing with the existing contending firms and to grow despite them, a company must understand how they work in its industry and how they affect the company in its particular situation. The following section details how these forces operate and suggest ways of adjusting them, and where possible, of taking advantage of them.

* Methods of Industry and Competitive AnalysisIndustries differ widely in their economic characteristics, competitive situations, and future outlooks.

The pace of technological change can range form fast to slow. Capital requirements can be big or small. The market can be worldwide or local. Products could be standardized or highly differentiated. Competitive forces can be strong or weak. Buyers demand can be rising or declining.

Industry conditions differ so much that leading companies in unattractive industries can filed if hard to earn respectable profits, while even weak companies in attractive industries can turn in good performance. Industry and competitive analysis utilizes concepts and techniques to get a clear fix on changing industry conditions and on the nature and strength of competitive forces. It is a way of thinking strategically about an industry’s overall situation and drawing conclusions about whether the industry is an attractive investment for company funds.

The framework for industry and competitive analysis hangs on developing probing answers to the following seven questions.

1) What are the chief economic characteristics of the industry?


Page 27 of 412) What factors are driving charges in the industry, and what impact will they

have?3) What competitive forces are at work in the industry, and how strong are they?4) Which companies are in the strongest or weakest competitive positions?5) Who will likely make what competitive moves next?6) What key factors will determine competitive success or failure?7) How attractive is the industry in terms of its prospects for above - average

profitability?

The collective answers to these questions boils understanding of a firm’s surrounding environment and form the basis for matching strategy to changing industry conditions and to competitive forces,

a. Threats of EntryNew entrants to an industry bring new capacity, the desire to gain market share and often substantial resources. The seriousness of the threat of entry depends on the barriers present and on reaction from existing competitors that the entrant can expect.

There are five major sources of barriers to entry:

1. Economies of ScaleEconomies of scale deter by forcing the aspirant either to come in on larger scale or to accept a cost disadvantage. Economics of scale also can act as hurdles or barriers in distribution, utilization of the sales force, financing, and nearly any other part of a business.

2. Product DifferentiationBrand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty. Advertising, customer service, being first in the industry, and product differences are among the factors fostering brand identification.

3. Capital RequirementThe need to invest large financial resources in on order to compete in the market creates a barrier to entry. Capital is necessary not only for fixed facilities but also for customer credit, inventories, and absorbing start-up losses.

4. Access to Distribution ChannelsA new product must displace others from the market through price breaks, promotions, intense selling efforts, and some other means. However, the more limited the wholesale or retail channels are the tougher that entry into that industry will be.Sometimes this barrier is so high that, to surmount it, a new firm must create its own distribution channel.

5. Government PolicyThe government can limit or even foreclose entry to industries, with such controls as license requirements and limit on access to raw materials. The government also can play a major indirect role by affecting entry barriers through such controls as air and water pollution standards and safety regulations.

b. Bargaining Power of Suppliers


Page 28 of 41Suppliers can exert bargaining power on participants of an industry by raising prices or reducing the quality of purchased goods and services. Powerful suppliers, thereby, can squeeze profitability out of an industry for unable to recover cost increases in its own prices.The power of each important supplier group depends on a number of characteristics of its market situation and on the relative importance of its sales to the industry compared to its overall business.

A supplier group is powerful if: It is dominated by a few companies and is more concentrated than the industry

it sells. Its products are unique or at least differentiated. It poses a credible threat of integrating forward into the industry’s business. The industry is not an important customer of the supplier group.

As indicated above, the supplier group will be powerful if its product is unique. This is so because buyers’ cost of switching or changing suppliers raises as its product specifications ties it to particular suppliers.

c. Bargaining Power of BuyersLike the supplier group customers also pose threat to the industry. They can force down prices, demand for higher quality products or more services, and play competitors off against each other. They can do all these at the expense of industry profit.A buyer group is powerful if:

It is concentrated or purchases in large volumes The products it purchases from the industry are standard or undifferentiated. The products it purchases are components of its products and represent a

significant fraction of its cost. It earns low profits, which create great incentive to lower its purchasing costs. The industry’s product is unimportant to the quality of the buyer’s products or

services. It poses a credible threat of integrating backward product.

Buyers group poses the above threats in that when the product is a major component or significant fraction of the buyers’ product, the buyer is likely to shop for a favorable price and buy selectively. The less profitable the buyer is, the more price sensitive it would be. Similarly, where the quality of the buyers product is not as such affected by the industry’s product, buyers are generally more sensitive to price and pose a threat to the industry.

d. Threat of Substitute Products and ServicesSubstitutes pose threat to the industry’s product in that substitute products or services limit the potential of an industry by placing a ceiling on the prices it can charge. Unless it can upgrade the quality of the product or differentiate it through marketing, the industry will suffer in earnings and possibly in growth. The more attractive the price-performance trade off offered by substitute products, the higher the threat it poses on the industry’s profit potential.

Substitute products that deserve the most attention strategically are those that are:


Page 29 of 41 Subject to trends improving their price-performance trade-off with the industry’s

product. Produced by industries earning high profits.

Substitutes often come rapidly into play if some development increases competition in their industries and causes price reduction or performance improvement.

e. Rivalry among Existing FirmsRivalry among existing competitors takes the familiar form of jockeying for position using tactics like price completion, product introduction, and advertising.

Rivalry among existing firms becomes intense when the following factors are present: Competitors are numerous or are roughly equal in size and power. Industry growth is slow, enhancing fights for market share. The product lacks differentiation or switching costs. Exit barriers are high and keep the companies competing even though they

earn low profit or losing. Fixed costs are high or the product is perishable, creating a strong temptation

to cut prices. The rivals are diverse in strategies, origins, and personalities.

While the company must live with many of the above factors, it may have some latitude for improving matters through strategic shifts. For example, the company may try to raise buyers switching costs through product differentiation.

* Industry StructureAn industry is a collection of firms that offer similar products or services. Similar products or services mean that customer perceive products to be substitutable for one another. Defining industry and its boundary is incomplete without an understanding of its structural attributes. Structural attributes are the enduring characteristics that give an industry its distinctive character. Industries vary widely in their nature of characteristics.

The variation among industries can be explained by examining four variables that industry comprises:

1) ConcentrationThis variable refers to the extent to which industry sales are dominated by only a few firms. In a highly concentrated industry (i.e. an industry whose sales are dominated by a handful of companies), the intensity of competition declines over time.

The reason for inverse relation between concentration and competition is that, high concentration serves as a barrier to entry into an industry, because it enables the firms that hold large market shares to achieve significant savings in production costs and to lower their prices.

2) Economies of ScaleThis variable refers to the savings that companies within an industry achieve due to increased volume. Simply, when the volume of production increases, the long-range average cost of a unit produced will decline. Economies of scale can result from technological and non technological sources. The technological sources are higher


Page 30 of 41level of mechanization or automation and a greater up-to-datedness of plant and facilities. The non technological sources include better managerial coordination of production functions and processes, long-term contractual agreements with suppliers, and enhanced employee performance arising from competition.

3) Product DifferentiationThis variable refers to the extent to which customers perceive products or services offered by firms in the industry is different. Differentiation of products can be real or perceived (fancied):

Real differentiation results from the use of different design principles and different construction technologies.

Perceived (Fancied) differentiation results from the way in which firms position their products and from their success in persuading customers about the differences.

Real and Perceived differentiations often intensify competition among existing firms. On the other hand, successful differentiation poses a competitive disadvantage for firms that attempt to enter an industry.

4) Barriers to EntryThese are obstacles that the firm must overcome to enter an industry. Barriers can be tangible or intangible.

The tangible barriers include: Capital requirements. Technological know-how. Resources. The laws regulating entry into an industry.

The intangible barriers include: Reputation of existing firms. Loyalty of consumers to existing brands. Access to managerial skills required for successful operation.

2.2.3 Operating EnvironmentThe operating environment, also called the competitive or talk environment, comprises factors in the competitive situation that affect a firm’s success in acquiring needed resources or in profitably marketing its goods and services. The operating environment is typically much more subject to the firm’s influence to control than the remote environment. Thus, firms can be much more proactive (as opposed to reactive) in dealing with operating environment than in dealing with the remote environment.The followings discuss the most important factors in the firm’s operating environment. Among those factors are the firm’s competitive position, the composition of its customers, its reputation among supplies and creditors, and its ability to attract capable employees.

a. Competitive PositionAssessing its competitive position improves a firm’s chance of designing strategies that optimize its environmental opportunities. Development of competition profile enables a firm to more accurately forecast both its short and long term growth and its profit potentials.


Page 31 of 41Although the exact criteria used in constructing a competitor’s profile are largely determined by situational factors, the following table includes the most often used criteria of competitor’s profile.

Once appropriate criteria have been selected, they are weighted to reflect their importance to a firm’s success. Then the competitor being evaluated is rated on the criteria; the ratings are multiplied by the weight; and the weighted scores are summed to yield a numerical profile of the competitor.

The process of developing competitions’ profile is of considerable help to a firm in defining its perception of the competitive position.

b. Customer ProfilesDeveloping a profile of a firm’s present and prospective customers improves the ability of its managers to plan strategic operations, to anticipate changes in the size of markets, and to reallocate resources so as to support forecast shifts in demand patterns. The traditional approach to segmenting customers is based on customer profiles constructed from geographic, demographic, psychographic, and behavioral information.

Geographic VariablesIt is important to define the geographic area from which customers come or could come. This is so because every product or service that the company offers to the market has some quality that makes it variably attractive to buyers from different locations.

Demographic VariablesThese variables are most commonly used to differentiate groups of present and potential customers. Demographic information such as age, sex, marital status, income, and occupation is comparatively easy to collect, quantify, and use in strategic forecasting. Such information is the minimum basis for a customer profile.

Psychographic VariablesPsychographic variables refer to customers’ personality and life styles. Accordingly, the personality and lifestyles of customers are often better predictors of customer purchasing behavior than geographic or demographic variables.

Behavioral Variables


Page 32 of 41These variables refer to the buyer’s behavior data. Accordingly, as a component of the customer profile, such data are used to explain and predict some aspects of customer behavior with regard to a product or service. They include such information as usage rate, benefits sought, and brand loyalty.

c. SuppliersDependable relationships between a firm and its suppliers are essential to the firm’s long-term survival and growth. A firm regularly relies on its suppliers for financial support services, materials and equipment. In addition, it occasionally is forced to make special requests for such favors as quick delivery, liberal credit terms, and return of broken-lot orders. Particularly at such times, it is essential for a firm to have had an ongoing relationship with its suppliers. In assessing a firm’s relationship with its suppliers, several factors should be considered.

With regard to its competitive position with its suppliers, the firm should address the following important points:

The competitiveness of the suppliers’ price Quantity discounts offered by suppliers The amount of their shipping charges The suppliers’ production standards The competitiveness of the suppliers’ abilities, reputations, and services.

2.3 Internal Environment Analysis

Strategy must plan realistic requirements on the firm’s internal capabilities. That is, the firm’s pursuit of market opportunities must be based not only on the existence of such opportunities but also on the firm’s key internal strengths.The following discussion will looks at the several ways managers achieve greater objectivity as they analyze their company’s internal capabilities. Managers often start their internal capabilities. Mangers often start their internal analysis with questions like “How well is the current strategy working?” “What is our current situation?” or “What are our strengths and weaknesses?”. Two approaches that provide answer to the above questions are discussed bellow. The approaches are SWOT (Strength, Weakness, Opportunity and Threat) Analysis and functional analysis. The Value chain analysis will also be addressed here to complement the briefing.

2.3.1 SWOT AnalysisSWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. While Strengths and Weaknesses are internal to the firm; opportunity and threats are environmental situations facing that firm so they are external factors. SWOT analysis is an easy technique through which managers create a quick overview of a company’s strategic situation. It is based on the assumption that an effective strategy is derived from a sound “fit” between a firm’s internal capabilities (Strengths and weaknesses) and its external situation (opportunities and threats). A good fix maximizes a firm’s strengths and opportunities and minimizes its weaknesses and threats. If it is accurately applied, this simple assumption has powerful implications for the design of a successful strategy.

2.3.1.1 Internal Capabilities


Page 33 of 41As discussed earlier the internal capabilities are the strengths and weaknesses of the firm. They are defined as follows:

a) StrengthsStrength is a resource, skills, or other advantages relative to competitors and the needs of the markets a firm serves or expects to serve. Strength is a distinctive competence when it gives the firm a comparative advantage in the market place. Strengths may exist with regard to:

Financial resources, Corporate image, Market leadership, and Buyer-supplier relations.

b) WeaknessWeakness is a limitation or deficiency in resources, skills, or capabilities that seriously impedes a firm’s effective performance.Weakness may exist with regard to:

Production facilities, Financial resources, Management capabilities, Marketing skills, and Brand image.

2.3.1.2 External SituationsExternal situations are the opportunities and threats. As you have seen it before, the industry environment analysis provides the information needed to identify opportunities and threats in a firm’s environment.

a) OpportunitiesAn opportunity is a major favorable situation in a firm’s environment. Key trends are oral sources of opportunities. The following points could represent opportunities for the firm:

Identification of a previously over looked market segment Changes in competitive or regulatory circumstances Technological changes, and Improved buyer or supplier relationships.

b) ThreatsA threat is a major unfavorable situation in a firm’s environment. Threats are key impediments to the firm’s current or desired position.Firms usually face threats when:

New competitors enter the industry Market growth is slow Bargaining power of key buyers and suppliers increase, and Technological changes occur.

The most common way to use SWOT analysis is as a logical framework guiding systematic discussion of a firm’s situation and the basic alternatives that the firm might consider. For instance, what one firm sees as an opportunity could be seen as a potential threat by another.

2.3.1.3 Structured Approach in SWOT Analysis


Page 34 of 41Another way in which SWOT analysis can be used to aid strategic analysis is the comparison of the key external opportunities and threats with internal strengths and weaknesses in a structured approach. The objective is identification of one of four distinct patterns in the match between a firm’s internal and external situations. The comparison is presented in the following figure.

Figure: SWOT Analysis Diagram

The patterns represented by the four cells in the figure are discussed as follows:

Cell 1This is the most favorable situation as the firm faces several environmental opportunities and has numerous strengths that encourage pursuit of those opportunities. This Situation suggests growth-oriented strategies to exploit the favorable match.

Cell 2In this cell, a firm with key strengths faces an unfavorable environment. In this situation, strategists would use current strengths to build long-term opportunities in more opportunistic product markets.

Cell 3A firm in this cell faces impressive market opportunity but is constrained by internal weaknesses. The focus of strategy for such a firm is eliminating the internal weaknesses so as to more effectively pursue the mark of opportunity.

Cell 4This is the least favorable situation with the firm facing major environmental threats situation clearly calls for strategies that reduce or redirect involvement in the products or markets.

In general, SWOT analysis highlights the control role that the identification of internal strengths and weaknesses plays in the firm’s search for effective strategies. The careful matching of a firm’s opportunities and threats with its strengths and weakness is the essence of sound strategy formulation.

2.3.2 The Functional Approach


Page 35 of 41

The functional approach is one way managers have traditionally sought to isolate and evaluate internal strengths and weaknesses. Accordingly, the key internal factors are a firm’s basic capabilities, limitations, and characteristics. The following lists are typical internal factors, some of which would be the focus of internal analysis in most firms.MARKETING

Firm’s products & services = breadth of product line Market share or sub market shares Channels of distribution &number, coverage and control Product & service image, reputation, and quality Pricing strategy and pricing flexibility After sale service and follow-up.

FINANCE AND ACCOUNTING Ability to raise short-term capital Ability to raise long-term capital - debt & equity Tax considerations Leverage position Working capital & flexibility of capital structure.

PRODUCTION / OPERATJ0NS / TECHNICAL Raw materials with cost and availability Inventory control systems Location of facilities Economics of scale Patents, trademarks, and similar legal protection Research and development - Technology & innovation

PERSONNEL Management team Employee’s skill and morale Employee turnover and absenteeism Efficiency and effectiveness of personnel policies

QULAITY MANAGEMENT Relationship with suppliers & customers Procedures for monitoring quality

INFORMATION SYSTEMS Timeliness and accuracy of information Ability of people to use the information provided

ORGANIZATION AND MANAGEMENT Organizational structure & culture Organizational communication system Use of systematic procedures and techniques

Firms are not likely to evaluate all of the factors listed above. To develop a revised strategy, managers would prefer to identify the few factors on which its success is most likely to depend. Strategists examine a firm’s past performance to isolate key internal contributors to favorable or unfavorable results. Analysis of past trends in a


Page 36 of 41firm’s sales, cost, and profitability is of major importance in identifying its strategic internal factors.

The identification of strategic internal factors requires an external focus. A strategist’s efforts to isolate key internal factors are assisted by analysis of industry conditions and trends and by comparisons with competitors. Changing conditions in an industry can lead to the need to reexamine a firm’s internal strengths and weaknesses in light of newly emerging determinants of success in that industry.

The functional approach to internal analysis focuses managers on basic business functions leading to a more objective, relevant analysis that enhances strategic decision making regardless of situational differences.

2.3.3 Value Chain AnalysisValues chain analysis is based on the assumption that a business’s basic purpose is to create value for uses of it products or services. In this analysis, managers divide the activities of their firm is to sets of separate activities that add value. Their firm is viewed as a chain of value-creating activities stating with procuring new materials or inputs and continuing through design, component production, manufacturing and assembly, distribution, sales, delivery, and support of the ultimate user of its products or services. Each of these activities can add value and each can be a source of competitive advantage. Value chain analysis divides a firm’s activities into two major categories, primary activities and support activities, as shown in the following figure.

Figure: The Value Chain

Primary activities are those involved in the physical creation of the product, marketing and transfer to the buyer, and after-sale support. Support activities assist the primary activities by providing infrastructure of inputs that allow them to take place on an ongoing basis.

Conducting the Value Chain AnalysisThe initial step in value chain analysis is to divide a company’s operations into specific activities or business processes, usually grouping them similarly to the primary and support activity categories as you have seen in figure above. Within each category, a firm typically performs a number of discrete activities that may represent key strengths or weaknesses.The next step is to attempt to attain costs to each discrete activity. Each activity in the value chain incurs costs and ties up time and assets. Value chain analysis requires


Page 37 of 41managers to sign costs and assets to each activity, thereby providing the basis to estimate costs to each activity. The result provides managers with a very different way of viewing costs than traditional cost accounting procedures would produce.

The data necessary to support value chain analysis can be formidable, particularly given its non traditional format. Traditional accounting identifies costs in broad expense categories - wages, benefits, travel, supplies, depreciation, and so on. Value chain analysis uses activity-based costing which requires managers to “disaggregate” these broad numbers across specific tasks and activities.

Once the company’s value chain has been documented and the costs are determined, managers used to identity the activities that are critical to buyers’ satisfaction and market success. Three considerations are essential at this stage in the value chain analysis:

The company’s basic mission needs to influence manager’s choice of activities that they examine in detail.

The nature of value chains and the relative importance of activities within them vary by industry.

The relative importance of value chain activities can vary by a company’s position in a broader value system that includes the value chains of its upstream suppliers and downstream customers or partners involved in providing products or services to end users.

Perspectives in Evaluating Internal Capability

Managers need an objective standard to use when examining internal capabilities or value building activities. Whether using SWOT analysis, the functional approach, or the value chain analysis, strategists rely on four basic perspectives to evaluate where their firm stacks up on its internal capabilities. These four perspectives will be discussed in the following section:

a) Comparison with Past PerformanceStrategists use the firm’s historical experience as a basis for evaluating internal factors. Managers are most familiar with the internal capability (strengths) or problems (weaknesses) of their firm because they have been immersed in its financial, marketing and production activities.

A manager’s assessment of whether a certain internal factors such as production facilities, sales organization, financial capacity, control systems, or key personnel - is a strength or a weakness well be strongly influenced by his or her experience in connection with that factor.Although historical experiences provide a relevant evaluation frame work, strategists must avoid tunnel vision in making use of it, because, using only historical experience as a basis for identifying strength and weaknesses can prove dangerously in accurate.

b) Stage of Industry EvolutionThe requirements for success in industry segments change over time. Strategists can use these changing requirements, which are associated with different stages of industry evolution, as a framework for identifying and evaluating the firm’s strengths and weaknesses.

These are four stages of industry evolution.


Page 38 of 411. Introduction: This is the early development of a product market which entails

minimal growth in sales, operating losses, and the need for sufficient resources to support unprofitable operation.

2. Growth: The strengths necessary for success change in this stage. Such factors as brand recognition and the financial resources to support both heavy marketing expenses and the effect of price competition can be key strengths at this stage.

3. Maturity: As the industry moves through a shakeout phases and into the maturity stage, industry growth continues, but at a decreasing rate since technological change slows considerably. Competition becomes more intense and promotional and pricing advantages became key internal strengths.

4. Decline: When the industry moves into this stage, strengths and weaknesses center on cost advantages, superior supplies or customer relationships, and financial control.

c) Benchmarking - Comparison with CompetitorsA major focus in determining a firm’s strengths and weaknesses is comparison with existing (and potential) competitor firms in the same industry often have different marketing skills, financial resources, operating facilities and locations, technical know-how, brand images, levels of integration, managerial talent and so on. These different internal capabilities can become relative strengths (or weaknesses) depending on the strategy a firm chooses. In choosing a strategy managers should compare the firm’s key internal capabilities with those of its rivals and weaknesses.

The ultimate objective in benchmarking is to identify the “best practices” in performing an activity, to learn how lower costs, fewer defects, or other outcomes linked to excellence are achieved. Companies committed to benchmarking attempt to isolate and identify where their costs or outcomes are out of line with the best practical of competitors and then attempt to change their activities to achieve the new best practices standard.

Benchmarking can prove useful in ascertaining internal capabilities (strengths and weaknesses) - significant favorable differences from competitors are potential cornerstones of a firm’s strategy by being its competitive advantage.

d) Comparison with Success Factors in the IndustryIndustry analysis involves identifying factors associated with success in a given industry. The key determinants of success in an industry may be used to identify a firm’s internal strengths and weaknesses. By scrutinizing industry competitions, as well as customer needs, vertical industry structure, channels of distribution cost, barriers to entry, availability of substitutes and suppliers, a strategist seeks to determine whether the firm’s current internal capabilities represent strengths or weaknesses.

2.4 The Global Environment and concepts of Globalization

Global environment is one of the special complications that confront a firm operating internationally. Globalization refers to the strategy of approaching world divided markets with standardized products. Awareness of the strategic opportunities faced by global corporations and of the threats posed to them is important to planners or strategist. Understanding the global markets and the environment is a required


Page 39 of 41competence of strategic managers, because, the growth in the number of global firms changes the structure of the competitive environment. The following discussion addresses issues such as reasons for globalization, considerations prior to globalization, complexity of the global environment, and international strategy options.

2.4.1 Reasons for GlobalizingA variety of reasons make conducting business across national boundaries profitable and attractive. Among the reasons, some of them are discussed below:

a. Safety NetGlobalization provides a safety net during business downturn. Usually a recession starts in one country and takes several months to move into other countries.

b. Low Labor CostIn many industries, labor constitutes a major proportion of costs. Since labor is cheaper in certain countries, it is economically attractive for firms to expand foreign operations. Labor sometimes represents as much as half of the product cost, so the cheaper the labor, the higher the profit.

c. Tax IncentivesSome countries differ in tax incentives to attract foreign business to their countries. An important motive for extending such tax incentives is to increase scarce foreign exchange and create jobs at home. A company finding such tax concessions viable will establish a plan in the low-tax country and sell the manufactured goods locally, as well as from export there to its primary markets.

d. New Product TestingMany companies find it more desirable to develop and/or test new products outside the domestic market. This avoids exposure to competitors and, to some extent, keeps the new development information secret until the product is ready for full introduction.

e. Desire for International ExperienceCompany’s presence in the global environment provides expanded access to advances in technology, world wide raw materials, and diverse international economic groups.

f. Changing Competitive StructuresBecause a lot of bigger firms are entering the domestic market, the domestic market might not be as it used to be. In addition, there might be a growing and intense competition from domestic firms. Therefore, firms look for global market and cross boundary trade.

g. Opportunity for Unlimited ExpansionFor firms having strong desire for expansion, the domestic market is too small with a very limited demand. Thus, if a firm establishes an objective of growth and expansion, it will have an opportunity to accomplish them by entering into global market.

h. To maintain profit marginThe profit margin of a firm maybe eroded due to several factors such as:


Page 40 of 41 Increasing costs as the result of inefficiency and Increasing local competition.

In order to maintain the profit margin, a firm may go globally where it can produce goods at lower costs using cheap labor and materials or selling them at higher prices.

2.4.2 Considerations Prior to Globalization

To begin globalization, firms are advised to take four steps. Scan The Global Situation: Scanning includes reading journals and patent

reports, and checking other printed sources-as well as meeting people at scientific-technical conferences and in house seminar.

Make Connections with Academic and Research Organization: Firms active in overseas R&D often pursue work-related projects with foreign academics and sometimes enter into consulting agreements with them.

Increase the Firm’s Global Visibility: Common methods that firms use to attract global attention include participating in trade fairs, circulating brochures on their products and inventions, and hiring technology acquisition consultants.

Undertake Research and Development: Involving in research projects with foreign firms to broaden their contacts, reduce foreign firms to broaden their contacts, reduce expense, diminish the risk for each partner or forestall the entry of competitors into their markets.

In a similar way, external and internal assessments may be conducted before a firm enters global markets. External assessment involves careful examination of critical feature of the global environment. Particular attention begins to be paid to the status of the host nations in such areas as economic progress, political control and nationalism. Internal assessment involves identification of the basic strengths of a firm’s operations. These strengths are particularly important in global operations, because they are often the characteristics of a firm that the host nation values most.

2.4.3 Complexity of the Global Environment

Global strategic planning is more complex than pure domestic planning. There are at least five factors that contribute to the increase in complexity.

The factor contributing for the complexity are: Global firms face multiple political, economic, legal, social, and cultural

environments as well as various rates of changes within each of them. Interactions between the national and foreign environments are complex

because of national sovereignty issues and widely differing economic and social conditions.

Geographic separation, cultural and national differences, and variations in business practices all tend to make communication and control efforts between head quarters and the overseas subsidiaries difficult.

Global firms face extreme competitions because of differences in industry structures.

Global firms are restricted in their selection of competitive strategies by various regional blocs and economic integrations.


Page 41 of 41An inherent complicating factor for many global firms is that their financial policies typically are designed to further the goals of the parent company and pay minimal attention to the goals of the host countries. Moreover, different financial environments make normal standards of company behavior (concerning the disposition of earnings, sources of finance, and the structure of capital) more problematic. Thus, it becomes increasingly difficult to measure the performance of international division.

2.4.4 International Strategy Options

In order to see the strategy options in global environment, carefully examine the following figure,

Figure: International strategy options

The figure represents the basic multinational strategy options that have been derived from a consideration of the location and coordination dimensions. Low coordination and geographic dispersion of functional activities are implied if a firm is operating in a multi-domestic industry and has chosen a country-centered strategy. This allows each subsidiary to closely monitor the local market conditions it faces and to respond freely to these conditions.

High coordination and geographic concentration of functional activities result from the choice of a pure global strategy. Although some functional activities, such as, after sales service, may need to be located in each market, light control of those activities is necessary to ensure standardized performance worldwide. High foreign investment with extensive coordination among subsidiaries would describe the choice of remaining at a particular stage, such as that of an exporter. Export - based strategy with decentralized marketing would describe the choice of moving toward globalization, which a multinational firm might make.

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