Business Administration
Study guide for Strategic Management
Dear student
First of all, I would like to appreciate your initiative to learn amidst your busy hour. You have just responded at the right time. The world out there is competitive and compelling everybody to update and upgrade everyday. Your business learning would armor you to combat in the career battle. I provide you few information to help you follow this course:
01. Aims of the Course
The Strategic Management course aims to:
• provide students with a broad understanding of strategic management concepts and theories, and their importance for the organization, industry and society
• assist students in developing strategic decision-making skills and conducting case analysis.
Strategic Objectives
While personal objectives for taking this course vary, there are certain core objectives that carry value. Globally, these are:
o Developing your understanding of "strategy" and strategic management, and the application of same to complex relationships existing in business. This requires a perspective of strategic thinking (integrated and comprehensive analysis).
o Developing a sharper awareness of the various environmental contexts under which strategic formulation and implementation occur.
o Developing your ability to thoroughly analyze business problems and then to act upon same.
o Developing your ability to function effectively as a member or chairperson of a strategic team.
o Developing your ability to effectively communicate your analyses, both orally and in writing.
Therefore, the course specifically seeks to build skills in:
o decision-making
o communications
o turning information into intelligence
o functional area development
o team dynamics
o organizational dynamics
02. Learning Outcomes
By the end of this course students should be able to:
• distinguish between various environments, present and emerging, in which businesses function
• understand the roles and responsibilities of the key managers in strategic management positions within the corporation, with particular emphasis upon decision-making at the business level
• develop a comprehensive, critical understanding of the important areas in designing, implementing and evaluating strategic plans
• identify and critically evaluate central issues and problems in complex, comprehensive cases and suggest alternative courses of action
• integrate previously learned aspects of corporations
• develop some research capabilities necessary to collect and interpret key environmental data
present their analyses, critical discussions and propositions in structured essays, in accordance with
appropriate scholarly conventions.
03. Lecture sheets are not sufficient alone to conceptualize this course.
I have prepared the lecture sheets in a way that would help only when you have gone through the text as specified.
04. The classes are not for lecturing by the teacher
The 7 classes you attend are for discussion that’s why we call it tutorial class instead of class only. The tutor expects you to have thorough idea about two of the lectures scheduled to be discuss on a particular day. Unless you follow this guideline it won’t be possible to get the benefit of this course.
05. You must contact to your virtual teacher
I am your virtual teacher. My e-mail address has been provided to you. You can reach to me any moment. I will be there to answer you.
I hope you to get along with our e-based design of learning and keep your spirit up all the way you are with Southeast. Always remember that holding the spirit up- is the only way to succeed and excel.
Wishing you all the best.
Business policy & Strategic Management
Sessions No. of Lectures Name of chapters Topics to be Covered
Session-1
Lecture # 1
Strategic Management: An Overview
Dealing with Change: Strategy and Strategic Management,
The Strategic Management Process
Defining the Organization's Guiding Philosophy
Role of Ethics in Developing Guiding Philosophies of
Organizations
Codes of Ethics, Developing Organizational Policies from
the Guiding Philosophy
Defining the Organization's Purposes
Defining the Organization's Mission, Mission Content and
Format,
Mission and Management Mission and Stakeholders,
Changing the Mission.
Establishing Organizational Objectives, Selecting a Strategy,
Identifying a Strategy Hierarchy of Strategies
Strategic Business Units (SBUs)
Model of the Strategic Management Process
Lecture # 2 Strategic Objectives Objectives VS. constraints of the interest groups
Gap Analysis
Characteristics of objectives
Vital areas of objectives setting.
Session-2
Lecture # 3
Strategic Planning and Policies
Ideas of Strategic Planning and Policies
Strategic mission, objectives and Strategies of the
organization.
Strategic Planning Process or Steps.
Lecture # 4 Analyzing the External Environment
Characteristics of an Organization's Environment,
Requirements of Environmental Analysis
Defining the External Environment, Scanning and
Forecasting,
Interpreting Environmental Information
Session-3
Lecture # 5
Industry and Competitive Analysis
Purpose and Contributions of Industry and Competitive
Analysis
The Process of Industry and Competitive Analysis
Defining the Boundaries of the Industry and Selecting the
Served Market
Understanding the Industry's Life Cycle Analyzing the
Structure of the Industry Understanding the
Dynamics of Competition
Identifying the Industry's Key Success Factors
Performing Strategic Group Analysis, Conducting
Competitive Intelligence
Evaluating and Profiling the Competition
Interpreting Competitive Signals
Identifying Opportunities and Threats
Lecture # 6
Analyzing the Internal Environment and Establishing Long Range Objectives
Responsibility for Performing an Internal Environmental
Analysis,
Areas Covered by an Internal Environmental Analysis,
Financial Position, Product/Service Position, Product/Service
Quality Marketing Capability, Research and Development
Capability, Organizational Structure, Human Resources,
Condition of Facilities and Equipment,
Past SWOT Analysis, and Current Objectives and Strategies,
Session-4
Lecture # 7 + Class Test
Identifying Strategic Alternatives
Corporate Strategy Alternatives, Stable Growth Strategies,
Growth Strategies,
Session-5 Lecture # 8
Identifying Strategic Alternatives Defensive Strategies, Harvesting Strategies,
Combination Strategies,
Lecture # 9
Identifying Strategic Alternatives Business Unit Strategy Alternatives, Overall Cost Leadership,
Differentiation of the Product/Service
Focus of the Product/Service
Session-6
Lecture # 10
Functional Strategies, Plans & Policies
Functional Strategies, Vertical Fit, Horizontal Fit
Functional Plans & Policies
Nature of Functional Plans & Policies
Development of Functional Plans & Policies
Financial Plans & Policies : Sources of funds, usage of
Funds management of funds
Marketing Plans & Policies : Product, Price, Place,
Promotion, Integrative & Systematic factors
Operations plans & policies Production system
Operations planning & control
Research & Development
Lecture # 11
Strategy Evaluation and Selection
The Performance Gap, Adjusting the Current Strategy,
Changing or Adding New Strategies,
Strategy Evaluation, Boston Consulting Group's
Growth Share Matrix, Planning Grid, Precautions and
Assumption in the Use of the Growth Share Matrix
and Competitive Strategy Formulation, Life Cycle Approach,
Session-7 Lecture # 12
Implementing Strategy: Management Issues
Communicating Strategy, Issues in Strategy Communication,
Strategy and Structure,
Basic Organizational Structures, Organization's Structure,
Guidelines for Designing Effective Organizational Structures,
Developing and Maintaining Policies, Organizational Leadership
Matching Leaders with Strategies
Lecture # 13
Strategic Control, Learning, and Continuous Improvement
The Purpose and Contributions of Strategic Controls, Designing
Effective Strategic Control Systems,
Building Effective Strategic Controls, Limitations of
Strategic Controls, Why Do Control Systems Fail?
Misconceptions about the Strategic Controls,
Referred text
Strategic Management- Lloed l. Byars, Leslie W. Rue,Shakera. Zahra ,
Reference books :
1.Azhar Kazmi
Business Policy & Strategic Management
2.Thompson and Strickland
Strategic Management
3.Koontz and Weihrich
Management
Lecture-01
Strategic Management: An overview
Learning Objectives
After studying this Lecture, you should be able to:
• Define strategic management;
• Discuss the three phases of Strategic management;
• Define guiding philosophy, purpose, mission, objectives and strategy.
• Discuss corporate, business and functional level strategy.
• Explain what a strategic business unit is.
• Explain the model of Strategic Management.
Strategy and Strategic Management:
Strategic Management is one of the important fields of study. For starting a new business, selection of strategy is very important and critical also. In the competitive age without strategy organization can’t survive and run the organization successfully that is why formulation of strategies its implementation and evaluation desire proper management. Which may be termed as strategic management. Like other areas of management, strategic management has become one of the popular subjects in business. It includes strategy and policy formulation, strategy implementation and evaluation. These three elements will cover many others chapters through out the text. The present text has been divided into three parts. First part covers strategic formulation, Second one incorporates strategy implementation and in the Third part strategic evaluation has been examined.
Definition of Strategy:
The term “strategy” is usually used in two perspectives. As an adjective assigning particular important to some actions, activity or process, it is possible to speak of strategic management, strategic planning or decision making. These are all dreams to be activities, which are essential to the organization existence. It can also be used as a noun, to describe a path way along which the organization moves towards its goals or objectives.
The term “strategy” stems from the natural, physical behavior and natural sciences. But much of the terminology betrays its origin: terms such as lifecycle, evolutionary niche, competitive behavior, boundary and entropy, as well as visions, mission, goals, targets and tactics. However few definitions of strategy are listed below:
1. Von Neumann & Morgenstern: Strategy is a series of actions by a firm that are decided according to the particular situation.
2. P.F. Drucker: Strategy is analyzing the present situation and changing it as necessary. Incorporated in this is finding out what one's resources are or what they should be.
3. Chandler: Strategy is the determination of the basic long run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.
4. Glueck: Strategy is a unified, comprehensive, and integrated plan designed to assure that the basic objectives of the enterprise are achieved.
5. Steiner and Milner: Strategy is the forging of company missions, setting objectives for the organization in light of external and Internal forces, formulating specific policies and strategies to achieve objectives, and ensuring their proper Implementation so that the basic purposes and objectives of the or Organization will be achieved.
6. Jaunch and Glueck: Strategy is a unified, comprehensive, and integrated plan that relates the strategic advantages of the firm to the challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are achieved through proper execution by the organization.
7. Thompson and Strickland: Strategy is the pattern of organizational moves and managerial approaches used to achieve organizational objectives, and to pursue the organization’s mission.
Definition of Strategic Management:
Strategic Management has been defined in many ways: It is defined as a process of taking any action step for the achievement of pre-determined organizational strategic goal.
1. Fred R. David: Strategic Management can be defined as the art and science of formulating, implementing, and evaluating cross- functional decisions that enable on organization to achieve its objectives.
As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting, production/operations, research and development, and computer information system to achieve organizational success. The letter term is more often used in the business world, where as the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation and evaluation with strategic planning referring only to strategy formulation.
2. L.L. Byars LW. Rue & Shaker A Zahra
Strategic management is the process by which top management determines the long run direction and performance of the organization by ensuring that careful formulation effective implementation and continuous evaluation of the strategic takes place.
From the above discussion it can be said that strategic management is a process of analyzing, formulating, implementing and evaluating some set of actions taken or to be taken for the achievement of predetermined organizational goals and objectives.
The strategic management process:
A description of the strategic management process involves the use of terms and expressions that have a variety of meanings and interpretations depending on the author and source. For example, some of the phrases used interchangeable with strategic management are strategy and policy formulation, long range planning and business policy. The purpose of this chapter is to define the terminology used in this book and to present a framework for analysis of the strategic management process.
Basically, strategic management can be broken down into three phases: strategy formulation, strategy implementation and strategy evaluation. Strategy formulation is concerned with making decisions with regard to:
1. Defining the organization’s guiding philosophy, purpose, and mission.
2. Establishing long range objectives to achieve the mission.
3. Selecting the strategy to achieve the long range objectives.
Strategy implementation is concerned with aligning the organizational structure, systems and processes with the chosen strategy. It involves making decisions with regard to:
1. Developing an organizational structure, selecting leadership and providing motivational systems to achieve the strategy.
2. Establishing short range objectives, developing budgets and developing functional strategy.
Strategy evaluation sometimes referred to as strategic evaluation and control, involves the following activities:
1. Establishing standards of performance for the overall organization and its different units or functional areas.
2. Monitoring progress in the execution of the organization’s strategy. This requires assessing and measuring the implementation of the strategies pursued by different units throughout the organization.
3. Initiating corrective actions to ensure continued commitment to the implementation of the strategy. Taking corrective actions requires the timely dissemination of feedback data to the managers of the organization’s different units, its top executives, and members of its board of directors.
Defining the organization’s Guiding Philosophy:
An organization’s guiding philosophy establishes the values and beliefs of the organization about what is important in both life and business, how business should be conducted, its view of humanity its role in society, the way the world works and what is to be held inviolate. An organization’s Philosophy establishes the relationship between the organization and its stakeholders, employees, customers, shareholders, suppliers, government and the public at large.
Thomas peters and Robert Waterman found that the philosophies of excellent companies included the following basic beliefs.
• Belief in being the best.
• Belief in the importance of the details of execution the nuts and bolts of doing the job well.
• Belief in the importance of people as individuals.
• Belief in superior quality and service.
• Belief that most members of the organization should be innovators and its corollary the willingness to support failure.
• Belief in the importance of informality to enhance communication.
• Belief in recognition of the importance of economic growth and profits.
Role of Ethics in developing guiding philosophies of organizations:
Ethics are principles of conduct that govern the decision making and behavior of an individual or group. Since strategic management is concerned with making decisions about the future direction of an organization, the ethics of the individual or group making those decisions has significant implications for an organization’s stakeholders its employees, customers, shareholders and suppliers as well as the government and the public at large. In earlier times, the principle of caveat emptor – “let the buyer beware” governed the decision making and behavior of too many organizations. Recently the role of ethics in strategy decisions is receiving increased emphasis.
Codes of ethics: One outcome of questionable business ethics is the passage of laws to regulate organizational behavior. In fact, there are many laws directly relating to the issues of ethics in business. For example, the federal Fair Packaging and labeling act regulates labeling procedures for businesses. The truth in lending act regulates the extension of credit to individuals. The consumer product safety act protects consumers against unreasonable risks of injury associated with consumer product. The foreign corrupt practices act makes it illegal to obtain or retain business through payments to influence foreign officials and governments improperly.
Codes of ethics should be formal, written and communicated to all employees. Although ethics codes differ in content, one study found that those of manufacturing firms often include the following elements:
1. Conduct business in compliance with all laws.
2. Comply with all antitrust and trade regulations.
3. Provide products and services of the highest quality.
4. Perform assigned duties to the best of your ability.
5. Conserve resources and protect the environment.
6. Comply with safety, health and security regulations.
This same study found that the codes of ethics of service organizations more often include the following elements:
1. Avoid outside activities that impair duties.
2. Do not use company’s property for personal benefit.
3. Illegal drugs and alcohol at work are prohibited.
4. Mange personal finance well.
5. Make decisions without regard for personal gain.
6. Dress in businesslike attire.
Defining the organization’s purpose:
Organizational purpose defines the fundamental reason for the organization’s existence. Organizations should be able to describe their reason for being in one or two sentences. The reason for being should clearly describe how the organization fills basic human needs or how it impacts the world. Some examples of organizational statements of purpose include the following
Merck
We are in the business of preserving and improving human life.
McKinsey and company
The purpose of McKinsey and Company is to help leading corporations and governments to be more successful.
Walt Disney Company
To make people happy.
While many organizations explicitly record their organizational purpose, purpose may also be implicit. The term organizational purpose is used to refer to an explicit or implicit understanding of why the organization exists. When this understanding is shared and agreed on by the management of an organization, it provides a common framework for decision making that provides direction for the organization.
Organizational statements of purpose are determined by an organization by asking itself the following types of questions: what would the world lose if our company ceased to exist? What does our organization do to fill basic human needs? What does our organization do that impact the world?
Defining the organization’s mission:
An organization’s mission is an overall goal of the organization that provides a sense of direction and a guide to decision making for all levels of management. Without a clear mission, it is virtually impossible for an organization to develop objectives and strategies. Organizational mission should define the organization’s line or lines of business, identify its products and services and specify the markets it serves at present and within a time frame of three of five years. An effective mission should be challenging to the organization, but should be achievement.
One study categorized four approaches to setting organizational missions:
• Targeting.
• Common enemy.
• Role model.
• Internal transformation.
1. Targeting involves setting a cleat target and aiming for it. For example, home depot set its target mission to be as follows:
To go national with $10 billion in sales and 350 locations by 1995.
2. Common enemy missions create a goal focused on defeating a common enemy. For example at one point in its history, Pepsi’s mission was to “Beat Coke”. Role model missions create a goal in which one company seeks to emulate a well respected and well managed company.
04
3. Role model missions are normally established by small and mid sized companies that want to be like a larger company. The role model company does not have to be in the same industry as the company that is establishing its mission.
4. Internal transformation missions are generally found in order organizations that need to change themselves to stay competitive and healthy. In its early years, Procter and Gamble set an internal transformation mission to reach a point where it could provide steady employment for its employees, rather than hiring and firing employees based on seasonal demands.
Peter Drucker has postulated that an organization’s mission is not determined by the organization’s products and services define its mission. Thus defining an organization’s mission starts with a clear description of its customers.
Questions that need to be answered are:
1. Who is the customer?
a. Where is the customer located?
b. How does the customer buy?
c. How can the customer be reached?
2. What does the customer buy?
3. What does the customer consider value? (What does the customer look for when he or she buys the product?)
Since a mission statement is also concerned with an organization’s future business activities, its potential customers must also be described. The following questions need to be answered:
1. What are the market trends and market potential?
2. What changes in market structure might occur as a result of economic developments, changes in styles or fashions, or moves by the competition?
3. What innovations will alter the customer’s buying habits?
4. What needs does the customer currently have that are not being adequately met by available products and services?
One final question needs to be addressed in determining an organization’s mission: is the organization in the right business, or should it change it business?
Mission Content and Format:
No widely accepted standard exists for the contents and format of a mission statement. One study suggested that a mission statement should include the following components:
• Target customers and markets.
• Principal products and services.
• Geographic domain.
• Core technologies.
• Concern for survival, growth and profitability.
• Organizational self concept.
• Desired public image.
It is important to note, however that organizational philosophy, purpose, and mission statements are not always separate and distinct documents. Often these statements are combined into one document but that one document still embodies the essential features of the philosophy, purpose and mission statements described in the previous paragraphs.
Mission and management:
Mission must be communicated to and internalized by managers and employees. When a mission is recognized and accepted by managers and employees, it becomes a common framework for making decisions and setting priorities. It is something that every one in the organization is aware of and employees can relate their activities to other activities through the mission.
Mission provides criteria for strategy selection by the management of the organization. Many potential acquisitions or diversification moves have been ruled out because the new business was not within the framework established by the organization’s mission. Mission defines the boundaries or domain within which the organization will operate. These boundaries may be defined as industries or types of industries. Mission does not prevent change; it simply provides direction for seeking new opportunities. A good mission statement is broad enough to allow exploration of new opportunities but specific enough to prevent the organization from going too far a field.
Mission and stakeholder:
Many individuals and groups outside the organization make decisions crucial to organizational success. The investment community makes judgments concerning the level of financial support it will provide, customers judge whether to support the organization by purchasing goods and services and potential employees determine whether their individual goals will be furthered by joining the organization. The mission of the organization can affect these decisions. There is little doubt that potentially valuable supporters can be lost if they do not approve the organization mission. It is important, therefore, that the mission be explicitly communicated to avoid misunderstanding of the fundamental purpose of the organization.
Establishing Organizational Objectives:
An objective is a statement of what is to be achieved. Objectives normally are stated in terms of a desired level of attainment within a specific time frame. For example, one objective might be “to increase sales revenues to $8 million by the end of the current fiscal year.” Ideally, objectives are quantifiable, simply stated and measurable.
Objectives can be classified as either short range or long range. Normally, objectives with a time span of one year or less are classified as short range, objectives spanning more than one year are classified as long range. While many managers use only short range and long range objectives some also utilize intermediate range usually means one to three years and long range means anything over three years.
Objectives also can be classified according to their breadth of influence in the organization. For example, objectives that apply to the entire organization are called corporate or organizational objectives. Objectives that apply only to a certain division within an organization are referred to as divisional objectives; those that apply to a certain function or department within an organization are referred to as functional or departmental objectives.
An organization’s objectives depend on the particular organization and its mission. Although objectives can vary widely from organization to organization normally they can be categorized as follows: 1. Profitability, 2. service to customers, clients or other recipients, 3. employee needs and well being and, 4. social responsibility.
Process for strategy identification:
Does an identifiable
Strategy exists? ___ no__________ 1.
Yes
Was the strategy
Formally developed? _____no________ 2.
Yes
Has the strategy
been announced in writing _____no____ 3.
Yes 4.
Selecting a strategy:
1. An organization that has no explicit strategy is relatively easy to identify. Its activities usually don’t have a common thread, and executives leap at every opportunity as equally attractive or turn down all new ideas as equally risky. Lack of strategy does not always show up on the bottom line, especially in the short run. However, the probabilities of long term success are greatly reduced without a consciously developed strategy.
2.Strategy may exist even when it is not formally developed and explicitly communicated. Entrepreneurs, for example, may have an intuitive understanding which they have never really recorded or even verbalized, of how their company can successfully compete. Similarly, larger organizations may develop a strategy through a trial and error process without really articulating why they are able to exploit certain products and markets and are not able to be successful with mode is similar to a detective process. The clues are provided by key decisions make over time. Similarities in these decisions allow the analyst to find patterns. These patterns constitute strategy.
3.If the strategy has been developed but not written it becomes necessary to look for evidence of strategy, rather than for a statement of the strategy itself. The evidence is then used to construct a strategy statement. This may occur when an organization is in the early phases of the planning mode.
4.In this situation, a formally developed, written strategy makes identification simply a process of locating the statement of strategy makes identification simply a process of locating the statement of strategy or an individual who can divulge it. The situation usually occurs when an organization is in the later phases of planning.
Hierarchy of strategies:
Strategies exist at different levels in an organization they are classified according to the scope of what they are intended to accomplish. Most organizations can be segmented into business units.
Strategies that address what businesses a multiple business unit organization will be in and how resources will be allocated among those businesses are referred to as corporate strategies. They are established at the highest levels of management and involve a long range time horizon. Business strategies focus on how to compete in a given business. Narrower in scope than a corporate strategy, business strategy generally applies to a single business unit. A third level of strategy is the functional strategy. Functional strategies are narrower in scope than business strategies and deal with the activities of the functional areas production, finance, marketing, personnel, and the like. Functional strategies must support business strategies, but they are mainly concerned with how to issues.
Purpose
.
Mission .
Objective .
Corporate strategy .
Business unit strategies .
Functional strategies
Figure 1.1: Hierarchy of strategies:
Strategic business Units (SBU):
Generally, the following criteria should be considered in classifying an organizational unit as an SBU:
• First an SBU should service an external rather than an internal; market that is it should have a set of external customers and not merely serve as an internal supplier.
• Second, it should have a clear set of external competitors, which it is trying to equal or surpass.
• Third it should have control over its own destiny. This means that it must be able to decide for itself what products to offer how and when to go to market and where to obtain its supplies, components, or even products. This does not mean that it cannot use pooled resources such as a common manufacturing plant or a combined sales force or even corporate R&D. The key is choice it must be able to choose and not merely be the victim of someone else’s decisions. It must have options from which it may select objectives.
• Fourth, its performance must be measurable in terms of profit and loss that is it should be a true profit center.
Model of the strategic management process:
Different organizations may use somewhat different approaches to the strategic management process, fortunately however most successful approaches share several common components and a common sequence.
Making strategic decision:
Most large organizations have a multi level strategic management process. Generally, the cycle of events goes as follows:
• Top management determines the corporate philosophy, purpose, mission, objectives and strategy for the organization as a whole as well as guidelines for each of the strategic business units.
• Each business unit or SBU then does its own strategic planning.
• If the organization has a planning department, its function is to assist the SBUs in their strategic planning or to supply information that the SBU may need.
• Top management then reviews and approves the strategic plans of each SBU.
• Each SBU then moves to develop a strategic plan for each of its functional areas.
• After the development of strategic plans for each of the functional areas of the business or SBU unit, budgets are developed. As can be seen from this description, virtually all levels of management become involved in the strategic management process at some point.
Strategic Analysis Strategy Formulation & selection
Strategy Implementation, Control & Selection
Figure 1.2: Model of the strategic management process
Model Questions
01. What is strategy?
02. Define strategic management?
03. What is an organization’s guiding philosophy?
04. Explain role of Ethics in developing guiding philosophies of organizations.
05. Explain the organizational policies?
06. What is organizational mission? Discuss the contents of mission format.
07. Categorize four approaches to establishing an organizational mission?
08. What is the difference between long and short-range objectives?
09. Define the corporate strategies, business strategies, and functional strategies?
10. What is strategies business unit?
11. Briefly explain the process / model of strategic management.
Lecture-02
Strategic Objectives
Learning Out come
After studying this Lecture, you should be able to:
• Students will be able to know who Objectives is or Characteristics are to be considered.
• To know about the objectives VS. Constraints of the interest groups.
• What is understood by Gap Analysis
• To have the idea of characteristics of objectives
• To get an idea of characteristics of objectives
• To be aware of the issues in objectives setting.
• To be aware of the vital areas of objectives setting.
• To know how to formulate objectives.
Introduction:
The question of setting objectives in a strategic context is a more complex, but very important aspect of management. The main task of management is to make decisions which need to be made in the fight of strategic objectives.
When discussing objectives in industry, the first question to ask is: Whose objectives?
In considering the objectives of an enterprise there are several parties involved. The three most obvious parties are the shareholders, the managers and the employees.
I. Shareholders Interests: The interests and objectives of shareholders may vary. For example, some may be interested primarily in high dividends now, while others interested in rising share prices or future growth or reinvestment of profits. The shareholder's objective may be to maximize dividends, although with some differences in emphasis on the present benefits visa vis future benefits and on attitudes to risk. The state as a shareholder, either in a public company or in a statutory state enterprise, will have a number of wider and often conflicting interests. As owner it will want to see high profits and dividends; from a narrow budgetary point of view, it will want to keep down the borrowing requirement; but as the representative of the consumers, it will also be interested in km prices or high standards of service i.e. the Government will have two fold objectives to ensure higher revenue of the Government and simultaneously to offer cheaper & quality goods to the consumers.
II. Managerial Interests: The objective of the professional management is to make money for its employers or owners while the objective of small businessman is to make money for himself. One interest that management generally has in common is the expansion of the company, in that this is a surer way to promotion and higher pay than increased profitability.
III. Employees Interest: Employee interests and objectives are more straightforward: (a) high pay, (b) good working conditions, (c) job satisfaction and job security. Employee’s standard of performances are influenced. There is frequently a significant divergence between the interests of different by these components or factors groups of employees.
Other Interests are: (a) Customers, (b) suppliers, (c) Government, and of (d) Pressure Groups: There are also a number of other interests that come into play in determining strategic objectives. Most fundamental of these is the interest of the customer, since without a market or customer the firm has no future or no prospect. In many cases the interests of the suppliers also have to be taken into account. Another set of interested parties is the banks and debt holders, particularly if the firm is in financial difficulties or financial requirements. The interest of the Government or the regulation of the Government in the affairs of the firm or industry should be considered in determining strategic objectives. Especially the big companies like Gas Company formulate their policy on the basis of the Government regulations or Acts. Moreover large firms in politically sensitive industries, like airlines, electric supply are very sensitive to government action and control. More loosely related to the firm, but still important, are the public pressure groups, like the environmental groups. Firms operating in a single locality, particularly where they are the major source of employment, are inevitably particularly sensitive to pressure from local interests.
Social Objectives: The most difficult group of objectives to put into perspective are those that are generally termed ‘Social’, as opposed to ‘economic’ -costs or benefits that do not readily bear a price tag. These tend to fall into two categories:
a) those affecting the people Connected with the enterprise, such as the quality of life within the organization, job security, occupational health hazards and discrimination by sex, race or religion; and
b) Social factors external to the organization, such as pollution, the effect of the company on the local community or the effect of the products on the consumer (e.g. tobacco).
3. Objectives and Constraints In practice, firms are run primarily for the benefit of the three parties mainly concerned; shareholders, management and employees. The Interests of other parties represent a constraint rather than an objective. In other words, they are something to be satisfied up to a certain level rather than maximized. Even among the three main parties, the distinction between what is an objective and what is a constraint depends on the party in question. For the shareholders, maximum profits will be an objective and a good level of wages a constraint. On the other hand, for the employees, adequate dividends to satisfy the shareholders will be a constraint, and as high a level of pay as possible an objective. Both points of view are legitimate. These need to be settled at a reasonable level having a rational & Just attitude from both sides.
4. Gap analysis: The concept of a ‘strategic gap’ between the objective sought and the likelihood of achieving it is a simple but very useful analytical tool. If, for example, the strategic objective is to achieve a certain level of profits in five years time, the analysis would start with a forecast of profit in that year on the assumption of a continuation of existing policies, this forecast is then compared with the profit objective, and the difference represents the strategic gap to be filled if the objective is to be achieved. The next step is to consider the various steps that might be taken to close the gap, either as alternatives or in combination in other words, to analyze the benefits to be obtained from different strategic moves. Consideration of such moves may provide a means of closing the gap, wholly or partially; in the latter case, either a strategic objective must be modified or more radical strategies must be sought.
profit targer
profit forecasts: strategic gap
a) existing
policies
b) base case
Figure: 1 Strategic gap
5. Goals and Objectives
(i) Goals denote what an organization hopes to accomplish in a future period of time.
(ii) Objectives are the ends that state specifically how the goals shall be achieved. They are concrete and specific in contrast to goals which are generalized. In this manner, objectives make the goals operational. While goals may be qualitative, objectives tend to be mainly quantitative in specification. In this way they are measurable and comparable.
(iii) Examples of Objectives:
* Growth may be achieved in terms of customers (20 million), reserves (Tk 200 crore), average business per employee (Tk 21 lakh), branch (Tk.4 crore) and priority sector lending (47 per cent of net credit against an industry norm of only 40 per cent).
* Innovativeness was reflected in a number of new schemes like mutual funds.
* A high profit of Tk. 45 crore in 1987; the highest among all public sector banks, and almost equal to that of the industry leader, Bangladesh Bank.
(iv) Also often they (goals & objectives) are used interchangeably. There is overwhelming evidence available now, as inferred from recent strategic management literature, that goals connote the broader sense of the term objectives.
(v) Role of Objectives
Objectives play an important role in strategic management as stated below.
* Objective defines the organization’s relationship with its environment. What it has to achieve for its employees, customers and society at large.
* Objectives help an organization to pursue its vision and mission. By defining the long terrn position and the short term targets to be achieved.
6. Characteristics of Objectives
Objectives, should possess certain desirable characteristics in order to be effective as given below:
• Objectives should be understandable to those who have to achieve them.
• Objectives should be concrete and specific.
• Objectives should be related to a time frame, e.g. for example, our company plans to increase its sales by 12 per cent by the end of two years.
• Objectives should be measurable and controllable, for ecample, measures like the number and quality of job applications received, average emoluments offered, or staff turnover per year could be devised.
• Objectives should be challenging.
• Different objectives should correlate with each other. If objectives are set in one area disregarding the other areas such an action is likely to lead to problems.
• Objectives should be set within constraints, internal as well as external which have to be considered in objective setting.
• In sum, objective setting is a complex process. We will further examine a few issues relevant to objectives, in order to understand this complex process.
7. Issues in Objective-setting
There are many issues in objective setting as noted below:
• Specificity. Objectives may be stated at different levels of specificity.
• Multiplicity. Objectives deaf with a number of performance areas, a variety of them have to be formulated to cover all aspects of the functioning of an organisation e.g. functions like marketing or finance. Another issue, related to multiplicity, is the number and type of objectives to be set.
• Periodicity. Objectives are formulated for different time periods. 10s possible to set long term, medium term and short term objectives.
• Reality. It is a common observation that organisations tend to have two sets of objectives official and operative. Official objectives are those which organizations profess to attain while operative objectives are those which they seek to attain in reality.
• Quality Objectives may be both good and bad. The quality of an objective can be judged on the basis of its capability to provide a specific direction, e.g. to increase market share to a minimum of 40 percent.
• Objectives have a number of characteristics and a variety of issues are involved in setting those. The determination of objectives is, therefore, a complex task.
8. What Objectives are Set (Vital areas of objective setting.)
Objectives have to be set in all those performance areas which are of strategic importance to an organization. In general, according to Drucker, objectives need to be set in the eight vital areas of market standing, innovation, productivity, physical and financial resources, profitability, manager performance and development, worker performance and attitude, and public responsibility. We may consider one such study in the Indian context. B R Singh, who has studied 28 large companies.
• The study reports that the objectives were set in areas like:
• profit (return on investment, net profits as a percentage of sales)
• marketing (increase in sales volume, market development for existing products, new product development, reduction in marketing cost, improving customer service)
• growth (output, sales turnover, investment) employees (industrial relations, welfare and development)
• social responsibility (community service, rural development, family welfare).
9. Formulation of objectives: 1
The factors that are taken into account for the formulation of objectives are the forces in the environment, realities of an enterprise's resources and internal power relationships, the value system of the top executives, and awareness by management.
10. Critical success factors (CSF) are essential for organizational achievement. Strategists attach importance to such factors and take them into consideration for strategic management.
Managers are concerned about identifying those critical factors which will lead to success for their organizations. Critical success factors (CSFs), sometimes referred to as strategic factors or key factors for success, are those which are crucial for organizational success.
Model Questions
1. Which parties are involved in considering the objectives of an enterprise?
2. Classify shareholder's interests
3. What are the natures of employee interests?
4. What are the interested parties in considering objectives?
5. How the interest of a party may represent constraints?
6. Distinguish between goals and objectives.
7. What factors are considered in formulating objectives?
8. What is meant by CSF?
9. Give a conception of 'Gap Analysis'.
10. What are the characteristics of objectives?
11. Explain the issues in objective setting
12. What are the 'vital areas' of objective setting?
Lecture-03
Strategic Planning and Policies
Learning Out come:
After studying this lecture, you should be able to:
To have and ideas of Strategic Planning and Policies
To gain the concept of Strategic Planning Process or Steps.
To identify the mission, objectives and Strategies of the organization.
To know the technique of analyzing the environment.
To identify strength, weakness, opportunity & threat.
To acquire the knowledge of assessing organizations, mission, objectives and strategies.
To know the skill of formulating strategies, implementing and evaluating strategies.
Introduction
Strategies refer to'the determination of the purpose and the basic long term objectives of an 'enterprise and the adoption of courses of action and allocation of resources essential to gain these aims & objectives. Henc.e, objectives are a part of strategy formulation.
Policies refer to general statements or understandings that guide managers in the preparation of decision making. They provide an ideal outline within which decisions need to be taken. Policies normally do not require action but are intended to guide managers & executives in their commitment to the decision they ultimately prepare.
The essence of policy is discretion. (Power to exercise own judgment] Reversely, strategy concerns the direction in witch human & material resources are applied with a view to increasing the chance of achieving selected objectives.
Certain major policies and strategies may be essentially the same. A distinction between the two terms may be made as follows:
Policies normally guide a manager's thinking in decision making while a strategy refers to the commitment of resources in a given direction.
The key or principal function of strategies and policies is to unify and give direction to plans. The principal of the strategy and policy framework is, "the more strategies & policies are clearly understood and implemented in practice, the more consistent and effective will be the framework. for enterprise plans".......Koontz.
2. Strategic planning process
Nine steps are observed in the strategic planning Process:
a. To identify mission, objectives and strategies of the organization;
b. To analyze & interpret the environment;
c. To identify opportunities & threats;
d. To analyze resources of the organization;
e. To identify strengths & weaknesses;
f. To re evaluate mission, objectives and strategies of the organization;
g. To formulate strategies;
h. To evaluate results;
The above points are briefly described bellow:
[a] To identify mission, objectives and strategies of the organization:
Every organization or enterprise has a definite mission, which defines its purpose. What type of business an organization is going to undertake, for example, hotel business or exploration activity like oil extraction, etc. It encourages the management to explain intelligently & continuously the scope of its Products or services.
The purpose of the hotel is to serve fresh foods to its customers so as to fulfill their demand, taste & Pleasure. The purpose of the oil company is to extract oil from a well for a given period. In each case, they are committed to create surplus and profit in order to survive. But this basic objective is accomplished by undertaking activities, going in clearly defined directions, achieving goals and accomplishing a mission.
[b) To analyze & interpret the environment:
An organization cannot run quite independently and without attaching importance to different forces surrounding it, i.e., each organization has a relation with its out side environment or it is influenced favorably or adversely, greatly or slightly by a number of environmental forces like general environment [e.g., economic, legal, political, social, cultural, technological] and specific environment [e.g., customers, suppliers, competitors, Government agencies, international bodies & pressure groups].
[c] To identify opportunities and threats:
External environment may provide opportunities and treats to an organization. The management is required to evaluate both these aspects so that it can fruitfully exploit the situation and also protect itself against the, barriers or bottlenecks’ of the business. According to strategic management principle, successful strategists aim at capturing a company's best growth opportunities and creation defenses against external threats to its competitive position and future performance.
[d&e] To analyze, organization's re sources and to identify strength & weakness:
From the viewpoint of a strategy making process', a company's resource strengths are significant as they can form the foundation of strategy and also the basis for creating competitive advantage. If a particular company does not have the resources & competitive capabilities around which to craft an attractive strategy, managers need to take appropriate remedial action in order to upgrade existing organizational resources and capabilities as needed. At the same time, managers need to correct competitive weaknesses that make the company valuable, hold down profitability or disqualify it from pursuing an attractive opportunity.
[f] To reassess organization's mission, objectives and strategies:
The management of a given company needs to reassess or reevaluate its missions and objectives occasionally or at times when situation demands for such action. This sort of activity is necessary to examine to what extent these are realistic & practical in view of changing circumstances.
[g] To formulate strategies: Strategies are determined at tile following three levels:
1. Corporate level It refers to the level of a firm that consists of more than one business;
2. Business level It refers to the firm or a given business that competes directly with one another for capturing markets.
3. Functional level Like marketing, purchasing, research & development, building information systern, building human resource management or building organizational capabilities. The management of all organization is required to develop and evaluate alternative strategies and choose an alternative that is appropriate to each level and enable the organization to maximize the utilization of its resources and the opportunities available.
[h] Implementing and evaluating strategies:
Although implementation does not form a part of the strategic planning process, it is essential to consider it during all pha!ses of the planning process beginning from setting goals to identding threats, opportunities, forecasting future environment, developing alternative strategies. The middle-level & lower or subordinate level management is required to follow the directions of the top management/top leaders to attain the predetermined target or goat of the enterprise. The management is required to compare continuously the actual performance with the laid down plans and make necessary adjustments promptly so as to disallow problems or deviations to increase further at the end of the year.
Using SWOT Analysis to formulate strategy:
1. The starting point in formulating strategy is usually SWOT analysis. The term stands for strengths, weaknesses, opportunities, and threats, SWOT analysis is a careful evaluation of an organization's internal strengths and weaknesses as well as its environmental opportunities and threats.
* Through SWOT analysis, the management attempts to utilize the best strategy by exploiting the opportunities and strengths of an organization while neutralizing threats & weaknesses of the organization.
* Organizational strengths are skills and capabilities that enable an organization to conceive of and implement its strategies.
2. SWOT analysis divides organizational strengths into two categories:
common strengths and distinctive competencies:
a) A common strength is an organizational capability possessed by numerous competing firms. For example, all the major Hollywood film studios posses common strengths in lighting, sound recording, set and costume design, and makeup. A film company that exploits only its common strengths in choosing and implementing strategies is not likely to go beyond average performance.
b) A distinctive competency is a strength possessed by only a small number of competing firms. Distinctive competencies are rare among a set of competitors. Organizations that exploit their distinctive competencies often obtain a competitive advantage and attain above normal economic performance. The main purpose of SWOT analysis is to discover an organization's distinctive competencies so that the organization can choose and implement strategies that exploit its unique organizational strengths.
3. Organizational weaknesses are skills and capabilities that do not enable an organization'to choose and implement strategies that support its mission.
* Organizations that fail either to recognize or overcome their weaknesses are likely to suffer from competitive disadvantages. An organization has a competitive disadvantage when it is not implementing valuable strategies that are being implemented by competing organizations. Organizations with a compefitive disadvantage can expect to attain below average levels of performance.
4. Organizational opportunities are areas that may generate higher performance. Organizational threats are areas that increase the difficulty of an organization performing at a high level. Porter's five forces model of the competitive environment, can be used to characterize the extent of opportunity and threat in an organization's environment.
* When all these forces are observed in a higher degree, an industry has relatively few opportunities & numerous threats.
* Firms in these types of industries usually have the potential to achieve only normal economic performance. These industries hold the potential for above normal performance for member organizations.
* Reversely, where these five forces are all low, industry will possess numerous opportunities & relatively few threats.
Model Questions:
A. Objective questions:
1 What is meant by Strategy?
2. What is meant by Policy?
3. Name the steps involved in the strategic planning process.
4. What is understood by SWOT?
5. What may be the strengths and weaknesses of an organization?
6. What are opportunities and threat of an organization?
B. Broad questions:
7. Give a clean conception of strategic planning and policies.
8. Explain how a manager will use the concept of Strategic Planning technique for running a modern business organization.
9. Explain how SWOT analysis may become a careful evaluation of an organizations strengths and weaknesses and environmental opportunities and threats.
Lecture-04
Analyzing the External Environment
Learning Out come:
After studying this lecture, you should be able to:
• Explain Environmental Analysis.
• Discuss the relationship among environmental analysis, competitive analysis and internal organizational analysis.
• Explain three major steps involved in Environmental analysis.
• Describe four major environmental forces that can influence an organization.
In deciding on an organization’s future direction, management must answer three basic questions:
1. What is the organization's present position?
2. Where does management want the organization to be (i.e. what are its objectives)?
3. How does the organization move from its present position to where management wants it to be (i.e., what strategy is to be used)?
To answer the first question, management must analyze the organization's exter¬nal and internal environment. An organization's external environment consists of competitors and other forces outside' its industry that are not under the direct con¬trol of the organization and its industry. Figure 4-1 pictorially illustrates the exter¬nal environment of an organization.
Competitive analysis is described in detail in next Chapter. An organization's internal environment is analyzed through a process called internal organizational analysis, which is described in detail in Chapter 4. Environmental analysis, which is the subject of this chapter, is concerned with examining those forces not under the direct control of the organization or its industry but which can profoundly influence the industry and organizations within the industry.
Environmental analysis is a critical component of strategic management because it produces much of the information required to assess the outlook for the future.
Environmental forces
The environment is a significant source of change. Some organizations become victims of change, while others use change to their advantage. Organizations are more likely to be able to turn change to their advantage if they are forewarned. This is a major purpose of the environmental analysis process.
Figure 4-2 illustrates the relationships among environmental analysis, com¬petitive analysis, and internal organizational analysis. Environmental analysis and competitive analysis identify threats to and opportunities for the organiza¬tion. Competitive analysis and internal organizational analysis identify the strengths and weaknesses of the organization. This type of analysis is often referred to as strengths, weaknesses, opportunities, and threats (SWOT) analysis.
Characteristics of an Organization's Environment
Before beginning an analysis of an organization's environment, some basic char¬acteristics of the environment need to be understood. First, no two organizations face exactly the same external environment. Even competitors who provide prod¬ucts/services to similar customers do not face the same external conditions. The analysis of the external environment must be tailored specifically for the organi-zation for which strategy is to be formulated.
Next, the relationships, events, and conditions that make up the unique envi¬ronment of any organization are not static. Very few organizations face the same set of factors at the same magnitudes of importance for many years. Customer needs and tastes change; legal obligations and restraints change; or the organiza¬tion simply grows and establishes a different position relative to competitors. Some of these environmental changes are so fundamental that they may affect the long-term survival of an organization, while others are only temporary and may be ignored. The dynamic nature of the environment means that environmental assessment must be continuous.
Finally, organizations are not helpless in the face of environmental forces, but certainly some aspects of environmental change are more amenable than others to control or influence. The political environment on all levels is notoriously open to influence by special interest groups. Other environmental changes, such as social changes, which relate to changes in the values, attitudes, and demographic char¬acteristics of an organization's customers, are less predictable and, thus, are less controllable by an organization or its industry.
This variability in control means that an organization may work to shape parts of its environment but that it may also have to alter its strategy or its objectives when faced with insurmountable environmental obstacles.
Requirements of Environmental Analysis:
Environmental analysis seeks uncover relevant information, rather than exten¬sive information; it rewards the pursuit of quality, rather than quantity. Furthermore, the process must be future-oriented to provide for adequate response time, whether the desired response is to capitalize on a trend or to influ¬ence its direction. Finally, the information must be translated into a form that facil¬itates its use in formulating strategy. From these requirements, environmental analysis can be divided into three major steps:
1.Defining: Determining the relevant environmental forces and
the geographical scope of operations.
2.Scanning and forecasting: Ensuring that information is available
concerning the defined environment.
3.Interpreting: Packaging the information into forms that are useful for
strategic planning.
01. Defining the External Environment:
Every organization is subject to general forces that are felt in many industries and that are not usually amenable to influence by a single organization. These forces can be classified as economic, technological, social, and political (or regulatory). The nature of these forces varies with the geographical scope of the organization's operations. For example, a local restaurant is much more inf1uenccd by local and to a lesser extent regional force than a national chain of fast-food restaurants. A fast-food company, such as McDonald's, which is international in scope of opera¬tions, has a still wider range of environmental forces to which it must respond.
Economic Forces: The fluctuations of local, national, and world economies arc related in many ways, but it is still important to make separate assessments based on organizational scope. To assess the local situation, an organization might seek information concerning the economic base and future of the region and the effects of this outlook on wage rates, disposable income, unemployment, and the trans¬portation and commercial base. On the national level, trends in growth, income levels, inflation, balance of payments, and taxation are only a few of the indicators of the ability of the economy to produce and consume goods and services.
The international economy can be divided into four economic categories: (1) the western democracies (including Japan), (2) the eastern bloc, (3) the underde¬veloped nations, and (4) the developing nations. In the western democracies, growth is concentrated in the service, high technology, and leisure industries. Population growth is slow, causing more and more businesses to rely on segmen¬tation of markets. The political situation is usually stable. The eastern bloc is fol¬lowing the path of the western democracies but has not made as complete a shift to service. The underdeveloped nations are characterized by rising populations, low standards of education, and lack of a transportation and commercial base. The standard of living in these countries has changed only marginally throughout their history. In the developing nations, gross national product (GNP) is rapidly increasing, but wages are low and consumer goods scarce. Most critical is the unevenness of income and wealth, the rapidity of change, and the political insta¬bility that can threaten organizations operating in such areas. Thus, it is possible for an international organization to be operating in or dealing with as many as four different economic environments.
Technological Forces: Technology refers to the means chosen to do useful work. Technological forces include not only the glamorous invention that revolutionizes our lives but also the gradual improvements in methods, in materials, in design, in application, in diffusion into new industries, and in efficiency. For centuries, the simple process of handling business correspondence has involved dictation, transcription, and final review and signature. Technological improvements, which made the process more efficient, include the creation of a standardized shorthand writing system, the invention of the typewriter, the use of voice recording machines for dictation, and the use of the microcomputer for transcription and editing. All four represent technological change even though only the typing, recording, and word processing activities involve machines.
The effects of technological changes are felt in the following ways:
• New products or services. The development of the internal combustion engine produced new products, from automobiles to lawn mowers to motorcycles, as innovators began to visualize better work methods and leisure applications for the engine.
• Alternate processing methods, raw materials, and service delivery. The introduc¬tion of robotics to assembly line work has altered mass production technology in some sectors of the automobile industry, while the development of alloys and plastics has made cars lighter and more fuel-efficient.
• Changes in complementary products or services. Blacksmiths have all but dis¬appeared, but van customization has become a significant business in some areas of the country. Both related to the development and applications of the internal combustion engine.
All organizations feel the effects of "progress," but the dramatic shifts in tech¬nology that render whole sectors of the economy almost obsolete are rare.
Foreseeing technological change is probably not as critical a skill for the strategist as choosing the proper time frame for reacting to and determining the implica¬tions of changes. It is less important to track every possible change that may affect the organization than to consider only several of the most important changes.
Social Forces: Social forces include factors that relate to the values, attitudes, and demographic characteristics of an organization's customers. Dynamic social forces can significantly influence the demand for an organization's products or services and can alter its strategic decisions.
An organization, for example, can obtain a general picture of the U.s. con¬sumer in the year 2000 by looking at some key demographic changes in the population. The median age in the United States is predicted to increase to 40 by the year 2000. Dual-income families will continue to increase. By the year 2000, 90 percent of women with children under the age of 6 will be employed outside the home. The number of households headed by a single person will increase to about 33 percent of all U.S households. The middle class will decline in size, while the number of people in the affluent and poor classes will increase. Also by the year 2000, 85 percent of the workers entering the work force will be women or minority men. Obviously, these trends will have a significant impact on organi¬zations.
Determining the exact impact of social forces on an organization's objectives is, difficult at best. Nevertheless, assessing the changing values, attitudes, and demographic characteristics of an organization's customers is an essential element in establishing organizational objectives.
Political (or Regulatory) forces:
In the regulatory' environment, federal, state, and local governments have increasingly passed laws that affect the operation of businesses. Federal laws influence the hiring and firing of employees, compensation, working hours, and working conditions. Laws also influence advertising practices, the pricing of products, and corporate growth by mergers and acquisitions. In addition to these law, governmental tax policies influence the financial structure and investment decisions of organizations.
Government agencies created by this legislation enforce most of the laws that make up the legal environment of organizations. Today, many federal agencies exercise some degree of control over business organizations. A brief examination of the function of just a few of these federal agencies illustrates this impact. Not all government actions are restrictive in nature;
In addition to the regulatory environment, a widening array of special interest groups influence strategic' decision-making. The ethical-investor movement, public-interest groups, and the environmental protection movement are just a few of the groups that have brought public influence to bear on the strategic decision making of businesses.
02. Scanning and Forecasting:
In order to obtain accurate information concerning current events and reasonable assessments of future trends, an intelligence function must be in place. It may be informal or part of a sophisticated information system. The intelligence function must be designed and judged on the basis of the benefit to the organization, rather than the size, sophistication, or cost of the effort. In the face of information over¬load, it is probably more important to pick up a few key trends and incorporate them into strategy formulation than to amass a vast collection of detailed infor¬mation that no one knows how to use.
Research indicates that organizations often overlook important sources of information if they fail to maintain contacts with customers, suppliers, and com¬petitors. However, maintaining these contacts is not enough; the information gleaned must reach the place in the organization where its significance can be evaluated.
How Much Is Enough? Two basic approaches can be used in environmental scanning. With the first approach, an organization selects areas for intelligence gathering that are based on those areas of the organization's activities most sensi¬tive to environmental change. A personal computer software producer, for exam¬ple, might concentrate most of its environmental intelligence effort on the changes in microprocessor technology and on the activities of key competitors. This approach has the advantage of focusing the effort and expending resources on proven areas of critical influence. With the second approach, an organization would take a broad-based look at many environmental areas without initial refer¬ence to the organization's particular areas of vulnerability. The advantage of this approach is that threats frequently come from new sectors not necessarily impor¬tant in the past. The disadvantage is that much information of marginal usefulness may also be acquired. Which approach to follow should be a conscious decision by top management and should periodically be reevaluated.
Who Will Do It? Gathering information about the environmental may be done by top managers, corporate staff, line middle managers, or consultants. While staff and consultants have the advantage of specialization and concentration in intelligence gathering, top management and line management participation is necessary to ensure that the information is incorporated into strategic planning in a meaningful way. Employees on all level can be particularly valuable sources of information when they have their direct with distributors, end users, raw materials suppliers, substitute-product manufacturers, machinery suppliers, advertising agencies, investment bankers, and financial analysts. Top manage¬ment can encourage the upward flow of information by using the information, rather than ignoring it, by preventing negative consequences for passing along information, and by providing suitable rewards for useful information. Other managers can enhance their ability to contribute by:
• Maintaining an awareness of the strategy of the organization.
• Cultivating contacts who have needed information.
• Keeping current in their own functional areas.
• Passing on information in a form that is likely to be accepted (brief and through proper channels).
What Are the Available Sources of Information? Published data are plentiful and can provide insights into environmental events and trends. The appendix to this chapter lists some of these sources. Forecasts are also available for selected sectors of the environment. Forecasters have been most active in projecting events in the economic sector and in the social sector through demographic projections. Economic forecasts are in plentiful supply from many university business schol¬ars, the federal government, and various private organizations. Demographic forecasts may be prepared by consultants for special purposes or may be available from a variety of public and private sources concerning general trends, such as age distribution of the population. .
03. Interpreting Environmental Information:
The forecasts and predictions that result from environmental scanning provide the raw material from which projections about the future arc developed. Projections about the future should provide a consistent planning base throughout the organization.
Model Questions:
01. Outline the three questions management must answer in deciding about the future direction of an organization?
02. What is the relationship among environmental analysis, competitive analysis, and internal organizational analysis?
03. What are the characteristics of an organization’s environment?
04. Explain the three major steps in environmental analysis?
05. Describe the four major environmental forces that can influence an organization
06. Describe the social forces that can influence an organization?
07. What two basic approaches can be used in environment scanning?
Lecture-05
Industry and Competitive Analysis
Learning out come learning Out come:
After studying this lecture, you should be able to:
• Define and discuss the contributions of industry and competitive analysis.
• Students will be able to know the process of industry and competitive analysis.
• Present the concept of the industry life cycle.
• Presenting the five forces of competition model.
• Discuss the Key Success factors in Industry.
• Discuss Competitive signals competitive intelligence.
Understanding the company’s external environment is important for developing and implementing an effective strategy. To gain a greater appreciation of their environment, executives should also analyze their industry and competitors. In recent years, industry and competitive analyses has become a centerpiece in the strategic management process. These analyses help executives to define their industry’s boundaries, examine its structure and identify the factors that determine the competition and delineate key factors of success in the industry. Along with the data obtained from analyzing the macro environment, the results of industry analysis can clarify the company’s major opportunities and threats.
Competitive analysis should answer the questions:
Who are the company’s current and potential competitors? What are their goals, aspirations, and capabilities? What is their strategic intent? What are their strategies? How and where will they compete? Competitive analysis complements industry analysis. It helps to focus manager’s attention on key rivals and appraise the company’s strengths and weaknesses. Competitive analysis helps to define the company’s distinctive competence and competitive advantage. A distinctive competence is an activity where the firm’s position is superior to its rivals. An example is the company’s ability to create and commercialize new products. The speed of these processes is the company’s distinctive competence. A competitive advantage refers to the company’s superior competitive position that allows to it achieve higher profitability than the industry’s average. To develop a competitive advantage, the company should develop distinctive competencies and then use them to creatively compete in its market.
Purpose and Contribution of Industry and Competitive Analysis:
Success in today’s highly dynamic markets requires a through understanding of the industry and its competitors. In recent years, industry and competitive analyses have become important organizational activities that help managers collect, analyze and interpret data about their industry and their competitors to achieve several purposes:
01.Identifying and selecting the company’s competitive arena by defining its industry and served markets: An industry is a group of companies that offer products, goods, or services that satisfy similar customers needs. A served market refers to that portion of industry the company will target. By defining the served market the company is positioned to identify its customers and competitors.
02.Identifying business opportunities: A through examination of markets and competitors can be useful in identifying new market trends and uncovering niches the company can serve.
03.Providing a benchmark for evaluating the company relative to the competition: This information can assist managers in developing and acquiring the skills and capabilities necessary for success.
04.Shortening the company’s response time to competitor’s moves: By identifying competitor’s strengths and weaknesses the company is positioned to predict its competitor’s moves. For instance, knowing a competitor’s cost structure allows managers to develop an appropriate strategy to respond to price changes by competitors.
05.Encouraging organizational development through communication: Because the analysis requires the participation and interaction of diverse units or groups, it encourages the exchange of ideas among executives. Frequent interactions enhance manager’s commitment to a common mission, improve the quality of managerial decision making, improve communication, and foster the integration of the company’s units.
06.Helping the company to gain a competitive advantage: Competitive analysis provides executives with data on their competitor’s goals, capabilities and resources. This information can be useful in identifying any area(s) where the firm holds a significant advantage over its rivals.
07. Promoting learning from the competition: Competitive analysis enhances organizational learning by exposing managers to the ideas and actions of their rivals. Xerox offers an interesting example. After dominating the worldwide copier industry for two decades, Xerox’s position was threatened by the entry of several Japanese rivals. These new competitors targeted and captured the small-copier segment of the industry. In response, Xerox adopted a process of identifying the best practices in the industry.
.
08. Aiding the development of the strategy and its successful implementation: Competitive analysis provides invaluable insights into the industry, the competition and the company’s strengths and weaknesses. Therefore it helps managers identify appropriate strategic options, select the company’s strategy, and implement its chosen strategy.
The Process of Industry and Competitive Analysis
Industry analysis is a complex task, which entails several related activities that include:
• Defining and choosing the boundaries of the industry and the company’s served market.
• Understanding the structure of the industry.
• Analyzing the forces of the competition.
• Conducting strategic group analysis.
• Determining key success factors.
• Performing competitive intelligence.
• Interpreting competitive signals.
• Identifying opportunities and threats.
1. Defining the boundaries of the industry and selecting the served market: An industry is a group of companies that offers products (services) that satisfy similar customer needs. Therefore, defining the boundaries of the industry requires a focus on customer’s needs and expectations. This demands attention to three important variables:
-The customer segments to be served.
-The customer needs and purchasing patterns.
-The technology to be used in meeting customer needs and expectations.
Understanding the industry’s life cycle
Upon completion of the process of determining industry boundaries managers need to examine the nature of competition in the industry. This requires an understanding of the industry life cycle. Industries come into existence because of technological, social, and economic changes. Technological advances have been influential in creating the aircraft manufacturing, telecommunication, multimedia, PC computer, and software and semiconductor industries. However technological forces alone would not have made these industries a reality. Changes in life styles and values have also played a major role in this regard.
Figure-4.1 The Industry’s Life Cycle
Industries change over time. These transitions mirror changes in society as well as in companies’ innovations and strategic moves. Managers need to understand the changes that occur in the industry over time. These changes affect the intensity and bases of competitions. The concept of the industry life cycle is a useful tool for conducting this analysis. Accordingly, an industry progresses along fairly predictable stages (phases): emergence, growth, maturity and decline. These phases resemble the familiar product life cycle. Of course, the industry life cycle is only a framework that depicts the general pattern of industry evolution.
Various stages of industry life cycle are discussing below:
Emerging stage: At this stage, industry boundaries are vague. This is the case today in the multimedia industry. To some, this industry means integrating computers, printed text, audio and video. Other companies see other possibilities in integrating additional technologies.
In the emerging phase of the industry life cycle, companies offers products that show little standardization because the technology is not well developed. These companies also face major challenges because the channels of distribution are not well-established and potential customers and their buying habits are not well known. There is also a great deal of uncertainty about the number of companies in the industry. Data about competitors and their strategies are scarce.
As some companies succeed, they attract entry by new startups and established companies in other industry. These companies enter as the industry’s sales curve rises. This influx of so many new companies may cause many of them to fail.
Growth stage: This is perhaps the most exciting phase of the industry life cycle. Companies that survive the emerging phase look forward to building their name recognition, acquiring market share and achieving profitability. Companies achieve these goals as industry sales expand, thus allowing companies to benefit from product differentiation and aggressive marketing. With a technologically dominant design in place, companies can now standardize their operations and achieve economies of scale. Companies aspire to achieve efficiency in their internal operations as they continue to achieve growth.
Success in the growth stage in the industry does not always go the pioneers. Latecomers can leapfrog the pioneers by acquiring, rather than developing, the technology. In fact, sometimes latecomers can avoid some of the challenges the pioneers had to endure earlier in the industry evolution such as investing heavily in customers’ education.
Shakeout stage: Following a period of growth, an industry may experience a massive shakeout. In recent years airlines, banks, biotechnology, computer disk producers, movie theaters, PCs, trucking companies and videogame production have experienced massive shakeout. Factors that have contributed to these shakeouts include:
- The saturation of the industry because of the large number of competitors or competing brands.
- A decline in the industry’s growth rate, which reduces the industry’s ability to support all existing competitors. This decline may result from shifting demand, the emergence of substitutes or the possibility that the industry has reached its natural growth limits.
- A radical change in the forces of competition, such as the deregulation of the industry or the emergence of a radically alternative technology.
Maturity stage: As the industry approaches maturity, new factors come into play. The most notable is that technology reaches its upper limit, signaling its wide diffusion in the industry. The technology and products becomes fairly standardized. Thus companies rely more heavily on modifying their existing products. Success in a mature industry depends on aggressive marketing, advertising and promotional activities. Companies emphasize differentiation using aggressive marketing and advertising. Further, because existing companies have achieved economies of scale in their operations, they are likely to use low prices as a major competitive weapon. In this case it is important for companies to achieve low cost throughout their operations. When excess production capacity exists in the industry price wars may erupt.
Decline stage: As demand for industry products continues to decline, the industry enters a new phase of its evolution. Executives are force to reassess the causes and speed of this decline. They need to determine whether decline is irreversible or not. Radical shifts in customer demand or demographics are sometimes irreversible and often cause the demise of the industry. Executives should warning signal of a major upheaval that will cause a permanent decline. Guided by the results of analysis of declining conditions, executives should assess exit barriers. These barriers may include irreversible investments, specialized assets, and many standing commitments.
Competing in a decline industry can be challenging. Decline compels managers to reconsider the company’s mission. Executives must, therefore, determine whether they will remain in the industry or exit.
2. Analyzing the structure of the industry: This structure influences a company’s strategy, which in turn, determines its success or failure. Industry structure refers to the competitive profile of the industry. Some industries are highly competitive, while others are not. Understanding variations in industry structures requires attention to four major factors:
• Barriers to entry and exit.
• Level of product differentiation.
• Level of concentration.
• Economies of scale and scope.
Though these four factors are presented separately for clarity in the following paragraphs, in reality they jointly affect the industry of competition in an industry.
Barriers to entry and exit. Understanding the structure of an industry requires an examination of the nature and extent of barriers to entry and exit. Entry barriers reduce new companies’ ability to participate in an industry.
Entry barriers can be tangible or intangible. Tangible barriers include capital requirements, access to technological know-how, access to distribution channels, and the extent of governmental control of the industry. New companies, whether startups or companies from other industries, must work hard to overcome these barriers. Intangible barriers include the reputation of existing companies and brands, customer loyalty to current producers and cost of customer switching. Together tangible and intangible barriers protect the positions of existing companies by discouraging new comers from entering the industry.
Industry differs in the degree of entry barriers. Industries that have high entry barriers include mainframe computer, pharmaceutical, petroleum refining and aircraft manufacturing. High barriers make it very difficult for new companies to penetrate these industries. Industries with low barriers to entry include footwear, clothing, canned fruits and vegetables, and meatpacking.
Industries differ also in the types of industry barriers. For example, having unique products and strong brand name recognition are barriers in the cosmetics industry. Capital and technological resources are barriers to entry in the aircraft industry.
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Product differentiation: Companies use technology and marketing to differentiate their products from those offered by the competition. Early in the formative years of an industry, companies rely on technology to make their products unique. One reason for this tendency is the absence of a widely used standard. A standard (usually called the dominant design) develops based on market acceptance of a particular product configuration or because of a legal mandate. In the early years of the PC industry, IBM and Apple vied for the industry’s technological leadership. Their products attempted to essentially the same thing, but using different technologies. The product differed in their memory, data processing logic and layout.
Concentration: The level of industry concentration can profoundly affect the intensify of competition. Concentration refers to the extent to which the leading companies dominate industry sales. It is usually measured as a ratio that reflects the sales of the leading companies to the industry’s overall sales. The concentration ratio (CR) reflects the dominance of the top 4,8,12, or 20 leading companies. The concentration ratio of the top four companies (CR4) is widely used to indicate an industry’s concentration. The CR4 equals the sales of the four companies divided by the total sales of the industry.
Economies of scale and scope: The intensity of competition in an industry also depends on the extent of economies of scale and how companies use them. These economies of scale result from the savings companies achieve from producing large quantities.
Economies result from two major sources: technical and pecuniary (non technical). Technical economies are the result of saving from automation, the use of innovation production processes and adoption of information technologies. They result also from the learning curve: as the company produces more and more learning occurs. For example, as employees produce more of the same products, they often acquire skills that reduce waste of raw material. Savings can be used to charge lower prices than the competition and increase the company’s dales. In turn, this increases production volume and leads to additional reductions in production costs.
3. Understanding the Dynamics of Competition:
Managers should be careful in drawing conclusions from the analysis of industry structure. This analysis is best suited for explaining historical trends in the industry. Managers can gain insight into competitive dynamics by using Porter’s five forces of competition. In many ways this approach presents a refinement and extension of the industry structure framework, discussed above. However, it offers a richer view of the competition by capitalizing on the interrelationships of five powerful and dynamic forces, as illustrated in fig 3-5. It includes five forces like potential entry, the power of buyers, and the power of suppliers, substitutes and rivalry among existing competitors.
Threat of Entry: As mentioned, several variables can reduce entry into the industry. They may include economies of scale, product differentiation, capital requirements, access to distribution channels, and regulatory forces. Entry barriers also include reputation and goodwill of existing companies. Finally, switching costs can deter competition. These costs arise when a customer switches from one supplier to another. In some cases, these costs can be substantial, as in the aircraft manufacturing and steel furnace industries.
Barriers to entry also affect the existing companies’ response to entry. For example, where economies of scale are abundant, an existing company may reduce its price significantly to preempt a newcomers’ entry. Further, the threat of relation by existing companies can become a barrier to entry. For instance, if a new company is contemplating entry and recognizes that existing firms will retaliate swiftly and vigorously, entry may not occur.
Bargaining power of buyers:
In some industries buyers exert considerable influence on producers. This may happen under the following conditions:
-Buyers are few and they buy in large volumes relative to the total industry sales. For example, General Motor can exert considerable influence on its suppliers because it is their major buyer.
-The product represents a major component of the buyer’s cost. This means that the buyer has an incentive to reduce the cost. With rapidly advancing technologies and a fiercely competitive market, PC makers themselves have been pressured to reduce costs in order to lower prices.
-The product is not differentiated and therefore, easily substitutable. PC keyboards have approached this stage. Often PC makers can easily substitute one keyboard for another.
-The buyer earns low profits and is pressured to reduce costs.
-The buyer has little switching costs. For example, customers have virtually no switching cost in buying from a new grocery store, staying in a new hotel or buying a different keyboard.
-The buyer can integrate backward and produce its own parts internally.
Bargaining power of suppliers:
Suppliers can exert considerable influences on companies in an industry, especially when:
-There were very few suppliers.
-There are very few substitute products.
-The products are differentiated and have built-in significant switching costs.
-Suppliers can integrate forward.
For example, producers of specialized scientific equipment exert considerable influence on buyers because there were very few substitutes for their products. Moreover, the products are very expensive and require specialized expertise to assemble and operate. The same situation exists in the medical and surgical equipment industry, where producers have significant powers over hospitals.
Threat of substitutes:
The extent to which substitutes products exist affects the intensity of rivalry and the dynamics of competition. Substitutes are products that accomplish the same purpose or fulfill the same needs. For example, to many people, cars, trains, and airplanes are substitute means of transportation. Similarly, FedEx, fax machines and e-mail have emerged as substitutes to the traditional services of the post office. Therefore, companies need to identify potential substitutes for their products and services and use this information in designing their competitive strategy.
However the concept of substitutes is often elusive and hard to define. For one thing, customers define their needs quite differently and therefore, may view the product as fulfilling different needs. To some, traveling by a boat is quite different from flying. Therefore, in conducting competitive analysis, it is important to recognize how customers view competing brands.
Rivalry among existing firms:
Competition intensifies among existing companies when:
-There are numerous or equally balanced companies. When many companies exist, the probability of collusion or complacency declines. Companies must compete fiercely to survive. Conversely, as mentioned, when only few companies exist, competition may decline.
-Competition is likely to increase when companies are smaller to each other in size. In this case, there is no industry leader and companies will compete to distinguish themselves from their rivals.
-Diversity of competitors intensifies competition. In industries where companies are of different national origins, cultures, and goals, competition will be high. Diversity among competitors may prevent collusion and may encourage wide variations in the strategies followed in the industry.
-The industry’s growth rate is slow. In this situation, companies must work hard to maintain their market share. If the company seeks additional market share, it must acquire it from other existing companies.
-High fixed costs pressure companies to produce near capacity. In turn, this may lead to aggressive marketing and price-cutting.
In summary understanding the dynamics of competition is a crucial step in analyzing the industry. It helps managers to determine the factors that affect rivalry in their industry, to identify potential rivals, to recognize current and emerging substitutes and to understand how different rivals compete. Data on industry structure and dynamics of competition can be useful in delineating key factors of success.
4. Performing strategic group analysis:
Understanding the industry structure, the dynamics of competition and the KSF sets the stage for conducting strategic group analysis. The purpose is to identify clusters (or groups) of companies in an industry that pursue similar competitive strategies. Companies in the same group have much in common in terms of their competitive approach but may still differ in other ways.
5. Identifying the industry’s key success factors:
Key success factors (KSF) determine the requirement for successful participation in an industry. KSF vary from one industry to another. The factors that lead to success in the oil industry are not necessarily the same as those needed in the software industry. Additionally, KSF vary from one phase of the industry lifecycle to the next. Success in the PC industry in the early 1980s depended on having technologically superior but user-friendly products and aggressive marketing. While these factors are still important, today’s companies should consider performance to price, availability of software applications and ease of upgrades. Delineating KSF requires two interrelated activities:
-Analysis of customers requires attention to three areas: who are the customers? What do they want? How do customers choose between competing companies?
-Analysis of competition often centers on delineating those factors that lead to market and financial success in an industry. It focuses on examining the factors that determine the success of leading companies. One must be careful, however, because success cannot be achieved simply by coping industry leaders.
6. Conducting competitive intelligence (CI):
Conducting an effective industry and competitive analysis requires collecting data about the company’s major rivals. Some data are readily available in secondary sources but must organize, studied and analyzed to infer competitor’s plans and strategies. Competitive intelligence (CI) requires gathering, analyzing and interpreting data about the company’s key rivals. This demands attention to several factors: data sources, time financial requirements and managerial skills. Some companies have created competitive intelligence units that perform these activities. However, most of the CI programs or units are in their infancy. Other companies have developed CI units within other existing functions, such as marketing and planning.
The mission of CI units: CI units pursue three basic missions: informational, defensive and offensive. The informational mission centers on improving senior executives understanding of the industry and competition. The defensive mission centers on identifying competitors potential moves that would endanger the company and its operations. The offensive mission requires the identification of the competitor’s areas of weakness and the potential effect of the company’s actions on their rivals. This helps executives to decide how, when, and where to attack the competition. Currently, most CI activities emphasize the informational mission. However, as competition intensifies and the CI function gains greater corporate acceptance, attention to both the defensive and offensive missions will increase.
Sources of CI data: Companies use secondary and primary sources to collect data about their rivals. Secondary sources include:
*Competitor’s publications, such as newsletters and annual reports.
*Trade publications that cover the industry.
*Government publications, such as patent applications and listings.
*Published studies by trade associations or researchers.
CI professionals also collect data about the company’s rivals, using such primary sources as surveying customers and suppliers, surveillance of the competition, interviewing former employees or managers and becoming familiar with rivals operations by visiting their facilities.
7. Interpreting competitive signals:
Companies intentionally or unintentionally reveal a great deal about themselves to their rivals. These revelations convey important messages about ongoing or intended moves, including:
• Informing rivals of changes in the company’s direction to avoid costly relation.
• Testing the company’s assumptions about the competition. By observing the companies that respond to its signals and how they respond, managers can gain insights into competitor’s ways of thinking.
• Warning competitors. In this case, signaling is a precursor to a counter-attack.
• Bluffing to buy more time for the sender or confuse the competition.
Like other forms of communication, competitive signals require thoughtful analysis to ensure accurate interpretations. These analyses are influenced by many factors, including past experiences with the sender, perceptions of the sender (aggressive or not) and its capabilities, the firm’s own assumptions about the industry. This interpretation can be improved by examining the patterns of competitive interaction (i.e., actions and responses) in an industry or a strategic group
Guidelines for Effective Competitive Analysis
* Identify key competitors, even if they have different organizational types than your company.
* Identify substitutes, both domestic and foreign, whether traditional or nontraditional.
* Use both formal and informal means of collecting information about your competition. Informal sources of data, while costly, are sometimes more revealing and informative than official information.
* Develop knowledge of the national and organizational cultures. This knowledge is important in gaining access to vital information and to accurately interpreting data about the competition. Without this knowledge, key cues are likely to be missed.
* Give special attention to the network (group) of companies to which the competitors may belong. Not only do they determine access to markets and resources but they also ensure coordination of strategic moves.
* As with domestic competitive analysis, pay attention to the competitor’s unique attributes. This means that you should delve deeply into their operations, culture and organization.
8. Identifying opportunities and threats:
Industry and competitive analysis and environmental scanning are useful in defining the company’s opportunities and threats. Opportunities are favorable conditions in the company’s external environment, industry or competitive dynamics. Threats are unfavorable trends in the environment, industry or competition.
Conclusion
Industry and competitive analyses are needed to identify the company’s opportunities and threats, develop strategic alternatives and select an effective strategy. Industry and competitive analyses complement external environmental analyses, scanning, and forecasting activities, discussed in lecture 04. Still, to develop an effective strategy, managers need to appraise their company and its operations to delineate its strengths and weaknesses. Issues relating to the internal analysis are discussed in lecture.
Model Questions:
01.Define and discuss the contributions of industry and competitive analysis.
02.Discuss the process of industry and competitive analysis.
03.Discuss the concept of the industry life cycle.
04.Presenting the five forces of competition model.
05.Discuss the Key Success factors in Industry.
06Discuss Competitive signals and competitive intelligence.
07.Discuss the guidelines for effective competitive analysis.
Lecture-06
ANALYZING THE INTERNAL ENVIRONMENT
Learning Objectives:
After studying this Lecture, you should be able to:
• Describe the internal environmental analysis process.
• Outline nine areas that organizations should analyze in performing an internal environmental analysis.
• Describe basis steps in a SWOT analysis.
• Discuss the relationship between a SWOT analysis and objective setting process.
An organization’s ability to achieve its desired levels of performance can be enhanced or diminished by its environment. However, an organization is not helpless in the face of environmental threats nor is it guaranteed success by the presence of opportunities. The ability to minimize threats and capitalize on opportunities depends on the actions that the organization can take in the face of environmental trends. These action capabilities may be thought of as strengths with strategic significance. It is impossible to consider an organization’s fitness for the future without enumerating the organization’s strengths and evaluating the significance of those strengths. It is also necessary to determine areas of vulnerability.
Internal analysis begins with identification of the organization’s resource allocations. This analysis should produce an enumeration of organizational strength - what the organization does well. Strengths must then be analyzed for their strategic significance. It is also necessary to identify areas of weakness and to determine whether these weaknesses have strategic significance – that is, whether they make the organization vulnerable. All these assessments are relative; they must incorporate environmental information.
Once external and internal environmental analyses have been completed, organizational objectives can then be formulated. This lecture discusses internal environmental analysis and the establishment of organizational objectives.
Internal environmental analysis evaluates relevant factors in an organization in order to determine its strengths and weaknesses. Typically, every area of the organization that can significantly influence its long-term survival and success should be analyzed. Some of the areas that most organizations should analyze include the following:
1. Financial position
Financial analysis is a comprehensive term that refers to any use available financial data to evaluation that financial position of an organization.
2. Product / service position
For a business to be a successful, it must be acutely aware of its product or service position in the marketplace. Without this type of information, no business can survive very long in today’s competitive environment. When assessing an organization’s product / service position, managers need not to first determine the market share of its major product and or / services.
3. Product / service quality
Product / service quality has become a major issue in almost all markets today. If a product / service is to survive and growth, it must be perceived in the market place as providing high quality relative to its price.
4. Marketing capability
Closely allied with an organization’s product position is its marketing capability. Marketing capability include its distribution channels, the types of advertising and promotions used, and identification of the specific markets being targeted.
5. Research and development capability
Every organization, whether it has a formal research and development department or not, must be concerned about it’s ability to develop new product and services. For some industries, such as computers and medical technology, the research and development department (R&D) capability of a business is critical if it is to survive.
6. Organizational structure
All organizations produce and market their products through an organizational structure. This structure can either help or hinder an organization in achieving its objectives. To assess an organization’s internal strengths and weaknesses, its structure must be evaluated.
7. Human resources
All the activities of an organization are significantly influenced by the quality and quantity of its human resources. Effective human resource systems can give an organization a very real competitive edge in attracting and retaining high-quality personnel.
8. Condition of facilities and equipment
The condition of an organization’s facilities and equipment can either enhance or hinder its competitiveness. An evaluation of the facilities and equipment should also include an evaluation of the production / service processes used.
9. Past and current objectives and strategies
In general, it can be said that past and current objectives and strategies are a strong indicators of future objectives and strategies. Four basic questions need to be answered in this area:
• What have been the organization’s major objectives in the relatively recent past?
• Has it achieved these objectives?
• What strategies has it employed in the relatively recent past?
• Have these strategies been successful?
SWOT Analysis
SWOT is an acronym for an organization’s strengths, weaknesses, opportunities, and threats. SWOT analysis has been defined by Whelen & Hunger as follows ‘Analysis that involves the strengths, weaknesses opportunities and threats that may be strategic factors for a specific company’. The underlying assumption of a SWOT analysis is that managers can better formulate a successful strategy after they have carefully reviewed the organization’s strengths and weaknesses in light of the threats and opportunities presented by the environment. A SWOT analysis emphasizes that organizational strategies must result in a good fit between the organization’s internal and external environments.
SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis. It is applicable to either the corporate level or the business unit level and frequently appears in marketing plans
Lecture 04 and 05 discussed how to identify the opportunities and threats posed by both the broad and competitive external environments. Isolating internal strengths and weaknesses was discussed earlier in this chapter. Thus, a SWOT analysis results from the intersection from the broad external environmental analysis, competitive analysis, and internal organizational analysis.
The following Figure 6.1 presents several factors that managers should consider when assessing an organization's strengths and weaknesses and the threats and opportunities presented by board and competitive environments. Once the strengths, weaknesses, opportunities, and threats have been identified, the management them is then in a position to completed the SWOT analysis by drawing conclusions about the attractiveness (or unattractiveness) of the organization's current situation and the need for strategic action.
SWOT Analysis Factors
Potential Internal Strengths Potential Internal Weaknesses
Core Competencies in key areas.
Adequate financial resources.
Well through of by buyers.
An acknowledged market leader.
Well-conceived functional area strategies.
Access to economies of scale.
Insulated (at least somewhat) from strong competitive pressures.
Proprietary technology.
Cost advantages.
Better Advertising campaigns.
Product innovation skills
Proven management.
Ahead on experience curve.
Better manufacturing capability.
Superior technological skills.
Others?
No clear strategic direction.
Obsolete facilities,
Subpart profitability because....
Lack of managerial depth and talent.
Missing some key skills or competencies.
Poor track record in implementing strategy.
Plagued with internal operating problems.
Falling behind in R&D
Too narrow a product line.
Weak market image.
Weak distribution network.
Below average marketing skills.
Unable to finance needed changes in strategy.
Higher overall unit costs relative to key competitors.
Other?
Potential External Opportunities Potential External Threats
Serve additional customer groups.
enter new markets or segments.
Expand product line to meet broader range of customer needs.
Diversify into related products.
Vertical integration (forward or backward)
Falling trade barriers in attractive foreign markets.
Complacency among rival firms.
Faster market growth.
Others?
Entry of lower-cost foreign competitors.
Rising sales of substitute products.
Slower market growth
Adverse shifts in foreign exchange rates and trade policies of foreign governments.
Costly regulatory requirements.
Vulnerability to recessions and business cycles.
Growing bargaining power of customers or suppliers.
Changing buyer needs and tastes.
Adverse demographic change.
Others?
Step-by-Step Summary of a SWOT Analysis:
SWOT analysis has several steps. These steps include brought Broad External Environmental Analysis, Competitive Analysis, Internal Environment SWOT Analysis, SWOT Analysis. All these four steps have many areas. These are mentioned in the following table.
Step-1 Step-2 Step-3 Step-4
Broad External
Environmental Analysis Competitive
Analysis Internal Environment SWOT
Analysis SWOT Analysis
Areas for Analysis Areas for Analysis Areas for Analysis Areas for Analysis
1. Political
2. Economic
3. Social
4. Technological
Procedure
1. Identify the key forces that are most likely to affect the organization.
2. Monitor information on the key environmental forces.
3. Select the method to be used in forecasting these forces.
4. Forecast the trends in these forces.
5. Identify the threats to and opportunities for the organization on the basis of the forecast of these forces. 1. Industry structure
2. Individual Competitor
Procedure
1. Analyze the competitive nature of the industry.
2. Identify and analyze competitors
3. Identify key strengths and weaknesses of the organization as compared to those of its competitors.
4. Identify the threats to and opportunities for the organization on the basis of its industry competitiveness. 1. Financial position
2. Product/service position
3. Product/service quality
4. Marketing capability
5. Research and development capability
6. Organizational structure
7. Human Resources
8. Condition of facilities and equipment
9. Past objectives and strategic
Procedure
1. Analyze each of above areas
2. Identify the internal strengths and weaknesses as a result of the analysis 1. Strengths
2. Weaknesses
3. Opportunities
4. Threats
Procedure
1. Assess the attractiveness of the organization’s situation
2. Draw conclusions regarding the need for strategic action.
Table-6.2 Step-by-Step Summary of a SWOT Analysis
Model Questions:
01. What is an internal environmental analysis?
02.Outline nine areas that need to be analyzed in performing an internal organizational analysis.
03.What do you understand by SWOT analysis?
04.What are the factors of SWOT analysis?
05.Give a tabular form of step by step summary of SWOT analysis.
06.Do you find any relationship between SWOT analysis and the achievement of
organizational objectives.
07. List the basic steps required by a SWOT
Lecture-07,08 and 09
Identifying Strategic Alternatives
Chapter Learning Objectives:
After studying this chapter, you should be able to:
• Distinguish among corporate, business unit, and functional strategies.
• Explain the characteristics of a stable growth strategy.
• Describe three general approaches to pursuing a concentration strategy.
• Define vertical integration.
• Discuss the difference between concentric and conglomerate diversification.
• Distinguish among acquisition, merger, and joint venture.
• Explain a takeover and tender offer.
• Describe a harvesting strategy.
• Discuss the defensive strategies of turnaround, divestment, liquidation, filing for bankruptcy, and becoming a captive.
• Distinguish among overall cost leadership, differentiation of the product/service, and focus of the product/service strategies.
Strategy outlines the fundamental steps an organization in- tends to take in order to achieve a set of objectives. Manage¬ment develops a strategy by evaluating options available to the organization and choosing one or more of the options.
Strategies exist at different levels in an organization and are classified accord¬ing to the scope of their coverage. Strategies that address what businesses an orga¬nization will be in and how resources will be allocated among those businesses are called Corporate strategies. Corporate strategies are established at the highest levels of the organization and involve a long-range time horizon. Business unit strategies focus on how to compete in a given business. The scope of a business strategy is narrower than a corporate strategy and generally applies to a strategic business unit (SBU). A third level of strategy is functional strategies, which are narrower in scope than business strategies. Functional strategies are concerned with the activi¬ties of the different functional areas, such as production, finance, marketing, and personnel. Usually functional strategies are for a relatively short-time normally one year or less.
Functional area strategies, which are designed to improve the internal opera¬tions or condition of an organization, frequently hold the key to success for longer-range corporate strategies. For example, a functional information systems strategy that is designed to link all retail stores with central purchasing and inven¬tory control could be the necessary precursor for extensive expansion. Functional strategies are used not only to support corporate and business unit strategies but also to upgrade strengths and to eliminate weaknesses.
In choosing corporate and business unit strategies, most organizations have a wide variety of options. Figure 7-1 summarizes the alternatives available to most organizations. As can be seen, corporate strategy options fall into one of five basic categories: (1) stable growth, (2) growth, (3) harvesting, (4) defensive, or (5) a com¬bination of the previous four. Business unit strategy options fall into three Basic categories, these are:
(1) Overall cost leadership, (2) differentiation of product/service, or (3) focus of product/service. Each of these strategy options is described in greater detail in the following sections.
I. Corporate Strategy Alternatives
A. Stable Growth Strategy
B. Growth Strategy
1. Concentration Strategy
a. Market Development
b. Product Development
c. Horizontal Integration
2.Vertical Integration
3. Diversification
a. Concentric Diversification
b. Conglomerate Diversification
C. Harvesting Strategies
D. Defensive Strategies
a. Turnaround
b. Divestment
c. Liquidation
d. Filing for Bankruptcy
e. Becoming a Captive
E. Combination Strategies
a. Simultaneous
b. Combination
II. Business Unit Strategy Alternatives
A. Overall Cost Leadership
B. Differentiation of Product/Service
C. Focus of Product/Service
Figure-7-1 Corporate and Business Unit Strategy
Alternatives
I. Corporate Strategy Alternatives
Keep in mind that corporate strategy is concerned with which businesses an organization will be in and how its resources will be distributed among those businesses. In choosing corporate strategies, most organizations have a wide variety of options. These alternative strategies are:
A. Stable Growth Strategies
A stable growth strategy can be characterized as follows:
• The organization is satisfied with its past performance and decides to con¬tinue to pursue the same or similar objectives.
• Each year the level of achievement expected is increased by approximately the same percentage.
• The organization continues to serve its customers with basically the same products or services.
A stable growth strategy is a relatively low-risk strategy and is quite effective for successful organizations in an industry that is growing and in an environment that is not volatile. For many organizations, stable growth is probably the most effective strategy.
Some of the reasons for the use of a stable growth strategy are:
• Management may not wish to take the risk of greatly modifying its present strategy. Change threatens those people who employ previously learned skills when new skills are required. It also threatens old positions of influence. Furthermore, the management of a successful organization quite frequently assumes that strategies that have proved to be successful in the past will continue to be successful in the future.
• Changes in strategy require changes in resource allocations. Changes in pat¬terns of resource allocation in an established organization are difficult to achieve and frequently require long periods.
• Too-rapid growth can lead to situations in which the organization's scale of operations outpaces its administrative resources. Inefficiencies can quickly occur.
• The organization may not keep up with or be aware of changes that may affect its product and market.
Generally, organizations that pursue a stable growth strategy concentrate on one product/service. They grow by maintaining their share of the steadily increasing market, by slowly increasing their share of the market, by adding new product(s)/service(s) (but only after extensive marketing research), or by expand¬ing their market coverage geographically. Many organizations in the public util¬ity, transportation, and insurance industries follow a stable growth strategy. In fact, for many industries and for many organizations, stable growth is the most logical and appropriate strategy.
B.Growth strategy:
Organizations pursuing a growth strategy can be described as follows:
• They do not necessarily grow faster than the economy as a whole but do grow faster than the markets in which their products are sold.
• They tend to have larger-than-average profit margins.
• They attempt to postpone or even eliminate the danger of price competition in their industry.
• They regularly develop new products, new markets, new processes, and new uses for old products.
• Instead of adapting to changes in the outside world, they tend to adapt the outside world to themselves by creating something or a demand for something that did not exist before.
Organizations pursuing growth strategies, however, are not confined to growth industries. They can be found in industries with relatively fixed markets and established product lines.
Reasons of Growth strategy:
Why does an organization decide to pursue a growth strategy? While there is no single reason, several different possibilities exist:
• Growth has been ingrained in Americans as "the path of success." Since childhood, many Americans have held the dream of starting and growing their own businesses. This has always been, and still is, viewed as the quickest way to get rich.
• Managers are often given bonuses, salary increases, and continued employment for achieving growth in sales and profits. For example, it is not unusual for a bonus based on growth in profits to be written into a top-level manager's employment contract.
• Managers who did not start, and may not even own, a significant interest in the company want to be remembered as having made significant contributions to the company. More often than not, making "significant contributions" is inter¬preted as having expanded the company.
• Pressures from investors and others with a financial interest in the company stress growth. Stockholders, security analysts, and bankers like to invest in and support growth-oriented companies.
• A belief exists that the company must grow if it is to survive. In certain volatile industries, an organization does not have the option of remaining stable if it is to survive.
Types of Growth strategy:
Several different generic strategies fall in the growth category. The most fre¬quently encountered and clearly identifiable of the growth strategies are dis¬cussed in the following sections.
01.Concentration Strategy. A concentration strategy focuses on a single product/ service or on a small number of closely related products/services and involves increasing sales, profits, or market share faster than it has increased in the past. Several factors might influence an organization to pursue a concentration strategy.
Some of these factors include:
• Lack of a full product line in the relevant market (product line gap).
• Absent or inadequate distribution system to or within the relevant market (distribution gap).
• Less than full usage in the market (usage gap).
• Competitor's sales (competitive gap).
Some of the actions available to an organization in filling these gaps include the following:
• Filling out the existing product line (e.g., new sizes, options, style colors could be offered for the existing product line).
• Developing new products in the existing product line (e.g., Cherry Coke was a new product in an existing product line).
• Expanding distribution into new geographic areas either nationally or internationally.
• Expending the number of distribution outlets in a geographic area.
• Expending shelf space and improving the location and displays of the product in present distribution outlets.
• Encouraging nonusers to use the product and Sight users to in more frequently through the of advertising, promotions, and special pricing campaigns.
• Penetrating competitors positions through pricing strategies, product diffraction, and advertising.
Approaches to pursuing a concentration strategy:
Basically, there are three general approaches to pursuing a concentration strategy: market development, product development, and horizontal integration.
A. Market Development. The thrust under a market development approach is to expand the markets of the current business. This can be done by gaining a larger share of the current market, expanding into new geographic areas, or attracting new market segments. Coca-Cola has continued to follow a market development strategy since its inception. It amassed its impressive market share through large-scale advertising programs and has continued to expand into new geographic areas.
B. Product Development. The thrust under a product development approach is to alter the basic product or service or to add a closely related product or service that can be sold through the current marketing channels. Successful product develop¬ment strategies often capitalize on the favorable reputation of the company or related products. The telephone companies' introduction of numerous styles of phones and additional services, such as call forwarding and call holding, is an example of a product development strategy. Strategy in Action 5-2 describes Honda's product development strategy.
C. Horizontal Integration. Horizontal integration occurs when an organization adds one or more businesses that produce similar products or services and that are operating at the same stage in the product-marketing chain. Almost all-hori¬zontal integration is accomplished by buying another organization in the same business.
A concentration strategy offers an organization several advantages. First, the organization already has much of the knowledge and many of the resources nec¬essary to compete in the market place. A second advantage is that a concentration strategy allows the organization to focus its attention on doing a small number of things extremely well.
2.Vertical Integration. Vertical integration is a growth strategy that involves extending an organization's present business in two possible directions. Forward integration moves the organization into distributing its own products or services. Backward integration moves an organization into supplying some or all of the prod¬ucts or services used in producing its present products or services.
Several factors, including the following, might cause an organization to pur¬sue either forward or backward integration:
• Backward integration gives an organization more control over the cost, availability, and quality of the raw materials it uses.
• When suppliers of an organization's products or services have large profit margins, the organization can convert a cost-center into a profit-center by integrat¬ing backward.
• Forward integration gives an organization control over sales and distribu¬tion channels, which can help in eliminating inventory buildups and production slowdowns.
• When the distributors of an organization's products or services have large markups, the organization may increase its own profits by integrating forward.
• Some organizations use either forward or backward integration in hopes of benefiting from the economies of scale available from the creation of nationwide sales and marketing organizations and the construction of larger manufacturing plants. These economies of scale may result in lower overall costs and thus increased profits.
• Some organizations use either backward or forward integration to increase their size and power in a particular market or industry in order to gain some degree of monopolistic control.
03. Diversification: Diversification occurs when an organization moves into areas that are clearly differentiated from its current businesses.
The reasons for embark¬ing on a diversification strategy can be many and varied, but one of the most fre-quently encountered is to spread the risk so the organization is not totally subject to the whims of any one given product or industry.2 For example, both Philip Morris and R. J. Reynolds have diversified significantly since the time that ciga¬rettes were first linked to cancer.
A second reason to diversify is that management may believe the move represents an unusually attractive opportunity especially when compared with other possible growth strategies. Possible reasons for this attractiveness could be that the markets for current products and services are sat¬urated or, if current markets are not saturated, that the profit potential of diversi¬fication looks greater than that of expanding the current business.
A third reason to diversify is that the new area may be especially intriguing or challenging to management. A fourth reason why diversification can be attractive is to balance out seasonal and cyclical fluctuations in product demand.
Most diversification strategies can be classified as either concentric diversifi¬cation or conglomerate diversification. Concentric diversification occurs when the diversification is in some way related to, but clearly differentiated from, the orga¬nization's current business. Conglomerate diversification occurs when the firm diversifies into an area(s) totally unrelated to the organization's current business.
A. Concentric Diversification
The basic difference between a concentric diversifi¬cation strategy and a concentration strategy is that a concentric diversification strategy involves expansion into a related, but distinct, area whereas concentra¬tion involves expansion of the current business. Concentric diversification involves adding products or services that lie within the organization's know-how and experience in terms of technology employed, product line, distribution sys¬tem, or customer base.
B. Conglomerate Diversification. Conglomerate diversification is a growth strategy that involves adding new products or services that are significantly different from the organization's present products or services. Conglomerate diversification can be pursued internally or externally. Most frequently, however, it is achieved through mergers, acquisitions, or joint ventures.
Reasons for Conglomerate Diversification:
The reasons for following such a strategy are also numerous. Some of the more important ones follow:
• Supporting some strategic business units (SBUs) with the cash flow from other SBUs during a period of development or temporary difficulties.
• Using the profits of one SBU to cover expenses in another SBU without pay¬ing taxes on the profits from the first SBU.
• Encouraging growth for its own sake or to satisfy the values and ambitions of management or the owners.
• Taking advantage of unusually attractive growth opportunities.
• Distributing risk by serving several different markets.
• Improving the overall profitability and flexibility of the organization by moving into industries that have better economic characteristics than those of the acquiring organization.
• Gaining better access to capital markets and better stability or growth in earnings.
• Increasing the price of an organization's stock.
• Reaping the benefits of synergy. Synergy results from a conglomerate merger when the combined organization is more profitable than the two organizations operating independently.
C. Harvesting Strategies.
Most products and services eventually reach a point where future growth appears doubtful or not cost-effective. This may be because of new competition, changes in consumer preferences, or some other similar factor. When this occurs, organi¬zations often attempt to "harvest" as much as they can from the product/service.
The usual approach is to limit additional investment and expenses and to maxi¬mize short-term profit and cash flow. Ideally, organizations using a harvesting strategy will maintain market share at least over the short run.
A Harvesting strat¬egy should be considered under the following conditions:
• The product/service is in a saturated or declining market.
• The current market share of the product/service is small, and it is not cost-effective to try to increase it.
• The profit prospects are not especially attractive.
• The organization has more attractive uses for any freed-up resources.
• A decrease in expenses and investment will not cause a sharp decline in sales.
• The product/service is not a major contributor of sales, stability, or prestige to the organization.
Naturally, the more of the above characteristics are present, the more likely that the product/service is a candidate for harvesting.
D. Defensive strategies:
Defensive strategies sometimes referred to as retrenchment strategies, are used when accompany wants or needs to reduce its operations. Most often, defensive strategies are used to reverse a negative trend or to overcome a crisis or problem situa¬tion. Consequently, defensive strategies usually are chosen as a short-term solu¬tion or because no better alternative exists.
Specific reasons for using defensive strategies include:
• The company is having financial problems. These problems can stem from the fact at all or only certain parts of the organization are doing poorly.
• The company forecasts hard times ahead. This can be caused by such factors as new competitors offering the market, new products, or changes in government regulations.
• Owners either get tired of the business or have an opportunity to profit sub¬stantially by selling.
Defensive strategies include turnaround, divestment, liquidation, filing for bank¬ruptcy, and becoming a captive.
Types of Defensive strategies:
a. Turnaround. A turnaround strategy is designed to reverse a negative trend and get the organization back on the track to profitability. Turnaround strategies usu¬ally try to reduce jog rating costs, either by cutting "excess fat" and operating more efficiently or by reducing" the size of operations. Specific actions that can be taken to operate more efficiently include eliminating or cutting back employee compensation and/or benefits, replacing higher-paid employees with lower-paid employees, leasing rather than buying equipment, reducing expense accounts, and even cutting back marketing efforts. Examples of ways to reduce the size of operations include eliminating low-margin or unprofitable products, selling buildings or equipment, laying off employees, and dropping low-margin cus¬tomers.
b. Divestment. Divestment involves selling off a part of the business, which can be a SBU, a product line, or a division. Divestment is a frequently used strategy when either harvesting or turnaround strategies are not successful. There are many rea¬sons why an organization may adopt a divestment strategy, but probably the most frequently encountered one is that a previous diversification did not work out. Sometimes a company's situation has deteriorated to the point that the only chance for survival is to sell major components and thereby raise sufficient capi¬tal to put the remaining parts of the business on firm footing.
c. Liquidation. Liquidation occurs when an entire company is either sold or dis¬solved. The decision to sell or dissolve may come by choice or force. When liqui¬dation comes by choice, it can be because the owners are tired of the business or are near retirement. Similarly, the chance to "get rich quick" has lured many own¬ers of small, privately held organizations into selling. In other situations, man-agement may have a negative view of the organization's future potential and, therefore, desire to sell while the business can still fetch a good price.
d. Filing for Bankruptcy. Filing for bankruptcy has recently emerged as a type of defensive strategy. It allows a company to protect itself from creditors and from enforcement of executor contracts, which legally are those not yet completed, including labor contracts. The reasoning behind that, a company should have an opportunity to rehabilitate itself and avoid insolvency. The bankruptcy court on an individual case-by-case basis establishes the degree of financial soundness that may prevent a company from filing bankruptcy under Country’s act.
e. Becoming a Captive. Becoming a captive of another organization occurs when an independently owned organization allows another organization's manage¬ment to make certain decisions for it in return for a guarantee that the managing organization will buy a certain amount of the captive's product or service. More often than not, such arrangements are made between a small to medium-sized manufacturer or supplier and a larger retailer. A captive organization may give up decisions in the areas of sales, marketing, product design, and even personnel.
F. Combination Strategies
Most multi business organizations use some type of combination strategy, espe¬cially when they are serving several different markets. Certain types of strategies lend themselves to combination with other strategies. For example, a divestment strategy in one area of an organization is normally used in combination with one or more strategies in other areas. Combination strategies, which can be either simultaneous or sequential, are the norm.
II. Business Unit Strategy Alternatives
As previously noted, corporate strategies identify which businesses the organiza¬tion intends to be in and how the resources will be allocated among those busi¬nesses. Business unit strategies outline how each business will compete within its respective industry. For purposes of this discussion, an industry is defined as "the group of firms producing products [or services] that are close substitutes for each other.
By nature, business unit strategies tend to be much less generic than corpo¬rate-level strategies. This is because most business unit strategies must be fitted to a unique business situation in terms of the organization's position in the industry and the competition. Although all business unit strategies are tailored in some degree to a specific situation, it is nevertheless possible to categorize most busi¬ness unit strategies according to three major types: (1) overall cost leadership, (2) differentiation of the product or service, and (3) focus of the company.
(1) Overall cost leadership: The idea behind an overall cost leadership strategy is to be able to produce and deliver the product or service at a lower cost than the competition. Cost leader¬ship is usually attained through a combination of experience and efficiency. More specifically, cost leadership requires close attention to production methods, over¬head, marginal customers, and overall cost minimization in such areas as sales and research and development (R&D).
Some of the reasons why a cost leadership strategy can be attractive are as follows:
• It can give the firm above-average returns even in the face of strong com¬petitive forces.
• It can defend the firm against rivalry from competitors because it is difficult for competitors to force the firm out on the basis of price.
• It can defend the firm against powerful buyers because buyers can exert pressure only to drive prices down to the level of the next most efficient com¬petitor.
• It can defend the firm against powerful suppliers by providing flexibility to deal with input cost increases.
• The factors contributing to a low-cost position can provide substantial bar¬riers to entry (such as expensive production equipment).
• It can put the firm in a favorable position to fend against substitutes from the firm's competitors.10
(2) Differentiation of the product or service: A differentiation strategy requires that an organization create a product or service that is recognized industry wide as being unique, thus permitting the organization to charge higher-than-average prices. Differentiation can take many forms, such as design or brand image, technology, customer service, or dealer network. The basic purpose of a differentiation strategy is to gain the brand loyalty of customers and a resulting lower sensitivity to price.
Differentiation has several potential advantages:
• It can provide protection against competition because of brand loyalty by customers and their resulting willingness to support higher prices for brand items.
• It can increase margins because of the ability to charge a higher price.
• Through higher margins, it can provide flexibility for dealing with supplier power (such as raising the cost of raw materials).
• It can mitigate buyer power because there are no comparable alternatives.
• It can provide entry barriers for competitors as a result of customer loyalty and the need for a competitor to overcome the product or service uniqueness.
• Because of customer loyalty, it can put the company in a favorable position to fend against substitutes from competitors.
(3) Focus of the company: A third business unit strategy is to focus on a particular market segment. The seg¬ment sought may be defined by a particular buyer group, a geographic mar¬ket segment, or a certain part of the product line. As opposed 'to low-cost and dif¬ferentiation strategies, which have industry wide appeal, a focus strategy is based on the premise that the firm is able to serve a well-defined but narrow market bet¬ter than competitors who serve a broader market. The basic idea of a focus strat¬egy is to achieve a least-cost position or differentiation, or both, within a narrow market.
Model Questions
1. Explain corporate, business unit, and functional strategies.
2. Describe the characteristics of a stable growth strategy.
3. Define the following concentration strategies:
a. Market development.
b. Product development.
c. Horizontal integration.
4. Describe vertical integration strategy.
5. Distinguish between concentric and conglomerate diversification.
6. Define acquisition, merger, and joint venture.
7. Explain what is meant by the terms takeover and tender offer.
8. Explain what occurs under a harvesting strategy.
9. Define the following defensive strategies:
a. Turnaround
b. Divestment.
c. Liquidation.
d. Filing for bankruptcy.
e. Becoming a captive.
10. Distinguish among the following business unit strategies: overall cost leadership, differentiation of the product/service, and focus of the product/service.
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