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Course Title: Business Policy & Strategy (Mgmt 492)
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Hawassa University Faculty of Business and Economics Department of Business Management
Lecture note for the course Business Policy and Strategy (Mgmt 492)
Chapter One: Introduction to Business Policy and Strategic Management - A firm’s plan to gain Competitive advantage
1.1 Meaning of Strategic Management Strategy can be defined in various ways. Some of these definitions are given below: Strategy is the determination of the basic long-term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resource necessary for carrying out these goals. Strategy is the pattern of objective, purposes, goals, and the major policies and plans for achieving these goals stated in such a way so as to define what business the company is in or is to be and the kind of company it is or is to be. Strategy is a unified, comprehensive and integrated plan designed to assure that the basic objectives of the enterprise are achieved. Combining the above definitions, we will not attempt to define strategy yet in a novel way but try to analyze the elements we have come across. We note that a strategy is: 1. It involves a plan or course of action or a set of decision rules making a pattern or treating a common thread; 2. It is a way of stating the current and the desired future position of the company, and the objectives, goals major policies and plans required for taking the company from where it is to where it wants to be. 3. It outlines the pattern or common thread related to the organization’s activities which are derived from the policies, objectives, and goals; 4. It is concerned with pursuing those activities which move an- organization from its current position to a desired future state; and 5. Concerned with the resources necessary for implementing a plan or following a course of action. Still, strategic management can be defined in various ways. Strategic management is that set of managerial decisions and actions that determines the long-run performance of an organization. It includes environmental scanning, strategy
formulation, strategy implementation, evaluation and control.
Strategic management is a stream of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives. According to this definition, the end result of strategic management is a strategy or a set of strategies for the organization. Strategic management is the process of managing the pursuit of the organization’s mission while managing the relationship of the organization to its environment; especially with respect to environmental stakeholders and the major constitutes in its internal and external environments that affect the actions. Strategic management is a systematic approach to a major and increasingly important responsibility of general management to position and relate the firm to its environment in a way which will assure its continued success and make it secure from surprises.
Hawassa University, Faculty of Business & Economics, Department of B. Management Course Instructor: Suleiman K.
Course Title: Business Policy & Strategy (Mgmt 492)
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We observe that different authors have defined strategic management differently. Strategic management is considered as both decision-making and planning, or the set of activities related to the formulation and implementation of strategies to achieve organizational objectives. The emphasis in strategic management is on those general management responsibilities which are essential to relate the organization to the environment in which a way that its objectives may be achieved. 1.2 Dimension of Strategic Decisions There are several dimensions that distinguish a company’s strategic decisions from other decisions. Typically, strategic issues have the following six dimensions. 1.2.1 Require Top-Management Decisions and Commitment Since strategic decisions cover wider areas of a firm’s operations, they require topmanagements' involvement. Usually only top management has the perspective needed to understand the broad implications of such decisions and the power to authorize the necessary resource allocations. 1.2.2 Require Large Amounts of the Firm’s Resources Strategic decisions involve substantial allocations of people, physical assets, or money. These resources are either redirected from internal sources or swerved from outside the firm. Strategic decisions also commit the firm to actions over an extended period. 1.2.3 Affect the Firm’s Long-Term Property Strategic decisions commit the firm for a long time, typically five years. However, their impact often lasts much longer. Once a firm has committed itself to a particular strategy, its image and competitive advantages usually are tied to that strategy. Firms become known in certain markets, for certain products, with certain technologies. They would jeopardize their previous gains if they shifted from these markets, products, or technologies by adopting a radically different strategy. 1.2.4 Future Orientation Strategic decisions are based on what managers forecast rather than on what they know. In such decisions, emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options. 1.2.5 Multi functional or Multi business consequences Strategic decisions have complex implications for most areas of the firm. Decisions about such materials as customers mix, competitive emphasis, or organizational structure necessarily involve a number of the firm’s strategic business units (SBUs), divisions, or program units. All of these areas will be affected by allocations or reallocations of responsibilities and resources that result form these decisions. 1.2.6 Require considering External Environment All business firms operate in an open system. They affect and are affected by external conditions that are largely beyond their control. Therefore, to successfully position a firm in competitive situations, its strategic managers must look beyond its operations by “thinking outside of the box.” 1.3 Characteristics of Strategic Management 1. Future oriented: Strategic management is focused on proposing the future course of action. An emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options. 2. Requires considering external environment: as we frequently mentioned earlier, all business operate in open system. That means their day to day and long term commitment is highly influenced by the external environment. Hence,
Hawassa University, Faculty of Business & Economics, Department of B. Management Course Instructor: Suleiman K.
Course Title: Business Policy & Strategy (Mgmt 492)
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strategic management requires considering changes that will take place in the external environment. 3. Requires larger resource commitment: Strategic management determines the future direction of an organization. In the process, substantial allocation of resources is proposed. Therefore, if there are failures of strategic management, the whole lot of resource of the organization will be allocated in the wrong direction. 4. Requires involvement of top management : Since the future prospective success or failure is determined in the strategic management, top management groups are actively involved in determining major corporate objectives and framing out strategies. 1.4 Key Terms in Strategic Management and the Strategic Management Model
Key Terms in Strategic Management Before we further discuss strategic management, we should define nine key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies. 1. Competitive Advantage Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as “anything that a firm does especially well compared to rival firm”.’ When a firm can do something that rival firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage. Getting and keeping competitive advantage is essential for long-term success in an organization. Theories of organization present different perspectives on how best to capture and keep competitive advantage—that is, how best to manage strategically. Pursuit of competitive advantage leads to organizational success or failure. Strategic management researchers and practitioners alike desire to better understand the nature and role of competitive advantage in various industries. Normally, a firm can sustain a competitive advantage for only a certain period due to rival firms imitating and undermining that advantage. Thus it is not adequate to simply obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and by (2) effectively formulating, implementing, and evaluating strategies that capitalize upon those factors. 2. Strategists Strategists are the individuals who are most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Writers on organizational behavior say, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model”
Hawassa University, Faculty of Business & Economics, Department of B. Management Course Instructor: Suleiman K.
Course Title: Business Policy & Strategy (Mgmt 492)
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Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last five years, the position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of many organizations. This new corporate officer title represents recognition of the growing importance of strategic planning in the business world. Strategists differ as much as organizations themselves and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style. 3. Vision and Mission Statements Many organizations today develop a vision statement that answers the question, “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. For example, the vision statement of the Ethiopian Electric Power Corporation (EEPCo) is “To be a centre of Excellence in providing quality electric service at every one’s door and being competitive export industry.” Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market term.” It addresses the basic question that faces all strategies: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization. An example of a mission statement is provided below for Microsoft.
Microsoft’s mission is to create software for the personal computer that empowers and enriches people in the workplace, at school and at home. Microsoft’s early vision of a computer on every desk and in every home is coupled today with a strong commitment to Internet-related technologies that expand the power and reach of the PC and its users. As the world’s leading software provider, Microsoft strives to produce innovative products that meet our customers’ evolving needs. At the same time, we understand that long-term success is about more than just making great products. Find out what we mean when we talk about Living Our Values (www.microsoft.com/mscorp/).
Another example of a mission statement of the Ethiopian Electric Power Corporation (EEPCo) is
To provide adequate and quality electricity generation, transmission, distribution, and sales services, through continuous improvement of utility management
monitoring. For this reason. These types of changes are creating a different type of consumer and consequently a need for different types of products. A basic tenet or principle of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats. the introduction of a new product by a competitor. production/operations. Also. space exploration. Course Title: Business Policy & Strategy (Mgmt 492) Page 5 of 43 practices responsive to the socio-economic development and environmental protection need of the public”. environmental. For example. Strengths and weaknesses may be determined relative to a firm’s own objectives. 4. services. The wireless revolution. Lobbying is one activity that some organizations utilize to influence external opportunities and threats. Faculty of Business & Economics. and increased competition from foreign companies are examples of opportunities or threats for companies. recyclable packages. changing work values and attitudes. governmental. A competitor’s strength could be a threat. or the declining value of the dollar. population shifts.Hawassa University. For example. identifying. finance/accounting. social. and strategies. Department of B. including computing ratios. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses. and management information systems activities of a business. a national catastrophe. a strength may involve ownership of natural resources or a historic reputation for quality. legal. Strengths and weaknesses are determined relative to competitors. research and development. Opportunities and threats are largely beyond the control of a single organizationthus the word external. high levels of inventory turnover may not be a strength to a firm that seeks never to stock-out. They arise in the management. rising energy costs. Internal factors can be determined in a number of ways. cultural. and competitive trends and events that could significantly benefit or harm an organization in the future. and evaluating external opportunities and threats are essential for success. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. 5. Relative deficiency or superiority is important information. technological. Other opportunities and threats may include the passage of a law. political. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. biotechnology. strengths and weaknesses can be determined by elements of being rather than performance. and comparing to past periods and industry averages. Many companies in many industries face the severe external threat of online sales capturing increasing market share in their industry. marketing. demographic. Unrest in the Middle East. Various types of surveys also can be developed and administered to examine internal . or the war against terrorism could represent an opportunity or a threat. measuring performance. Management Course Instructor: Suleiman K. Internal Strengths and Weaknesses Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. External Opportunities and Threats External opportunities and external threats refer to economic.
reasonable. Take for example the “No Smoking” policies with in most organizations. No Smoking policies are usually derived from annual objectives . Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm. and customer loyalty. and controlling activities. and provide a basis for effective planning. Department of B. divestiture. Policies can be established at the corporate level and apply to an entire organization at the divisional level and apply to a single division or at the functional level and apply to particular operational activities or departments. quantitative. and thus are future-oriented. consistent. research and development. Annual objectives are especially important in strategy implementation. and prioritized. Policies allow consistency and coordination within and between organizational departments. measurable. Business strategies may include geographic expansion. Faculty of Business & Economics. like annual objectives. 8. advertising effectiveness. Annual objectives should be stated in terms of management. They should be established at the corporate. production efficiency. divisional. In a multidimensional firm. Course Title: Business Policy & Strategy (Mgmt 492) Page 6 of 43 factors such as employee morale. market penetration. organizing. aid in evaluation. Objectives are for organizational success because they state direction. 7. objectives should be established for the overall company and for each division. Management Course Instructor: Suleiman K. diversification. and procedures established to support efforts to achieve stated objectives. and functional levels in a large organization. Strategies are potential actions that require top management decisions and large amounts of the firm’s resources.Hawassa University. Long-Term Objectives Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission essential. Policies. and management information systems (MIS) accomplishments. Objectives should be challenging. focus coordination. finance/accounting. are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. realistic. A set of annual objectives is needed for each long-term objective. Policies are most often stated in terms of management. Annual objectives represent the basis for allocating resources. strategies affect an organization’s longterm prosperity. liquidation. Like long-term objectives. marketing. consistent. Policies are guides to decision making and address repetitive or recurring situations. typically for at least five years. reveal priorities. production/operations. In addition. acquisition. Policies Policies are the means by which annual objectives will be achieved. marketing. create synergy. Long-term means more than one year. challenging. whereas long-term objectives are particularly important in strategy formulation. Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. and clear. product development. retrenchment. 9. and joint venture. annual objectives should be measurable. 6. production/operations. Annual Objectives Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. and computer information systems activities. rules. Strategies Strategies are the means by which long-term objectives will be achieved. Policies include guidelines. motivating. research and development. finance/ accounting.
Management Course Instructor: Suleiman K. The answer to where an organization is going can be determined largely by where the organization has been! The strategic-management process is dynamic and continuous. Accountin g. objectives. mission. A change in any one of the major components in the model can necessitate a change in any or all of the other components. Perform External Implement Strategies – Manageme nt Issues Implement Strategies – Marketing. Course Title: Business Policy & Strategy (Mgmt 492) Page 7 of 43 that seek to reduce corporate medical costs associated with absenteeism and to provide a healthy workplace. the strategicmanagement process never really ends. written. but it does represent a clear and practical approach for formulating. objectives. and evaluating strategies. & Select Strategies Measure & Evaluate Performance Strategy Formulation Strategy Implementation Strategy Evaluation Fig: A comprehensive Strategic Management Model Identifying an organization’s existing vision. implementing. Finance.Hawassa University. For instance. Department of B. Relationships among major components of the strategic-management process are shown in the model. Many organizations conduct formal meetings semiannually to discuss and update the firm’s vision/mission. or communicated. opportunities/threats. objectives. Every model represents some kind of process. Develop Vision & Mission Statements Establish Long – Term Strategic Managem Perform Internal Audit Generate. or a major competitor’s change in strategy could require a change in the firm’s mission. The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests. and strategy. implementation. comprehensive model of the Strategic Management process. Therefore. and strategies is the logical starting point for strategic management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular course of action. a failure to accomplish annual objectives could require a change in policy. policies. there is give-and-take among hierarchical levels of an organization. even if these elements are not consciously designed. Generally. This model does not guarantee success. a shift in the economy could represent a major opportunity and require a change in long-term objectives and strategies. The Strategic-Management Model The Strategic Management process can best be studied and applied using a model. mission. and evaluation activities should be performed on a continual basis. The framework illustrated in the following diagram is a widely accepted. These . strategies. strengths/weaknesses. Hence . strategy formulation. which appears in all subsequent chapters with appropriate areas shaped to show the particular focus of each chapter. Every organization has a vision. Faculty of Business & Economics. Strategists do not go through the process in lockstep fashion. and performance. Evaluate. R&D. not just at the end of the year or semi-annually.
though they may differ with regard to the sequence. such as technology companies. which are sequential in nature. responsibilities. . suggesting that the flow of information usually is reciprocal. rapidly changing environments. markets. Good communication and feedback are needed throughout the strategic-management process. Department of B. tend to be more formal in strategic planning. purpose and objectives Developing Strategies Implementing Strategies Evaluating and control of Strategies Compan y profile Feedback Externa l Environ m ent Fig: Phases of the Strategic Management Process Viewing strategic management as a process has several important implications. comprehensiveness. authority. The process of strategic management is depicted through a model. and technologies also tend to be more formal in applying strategic-management concepts. Firms that compete in complex. These four phases could be put in a nutshell as follows: 1) Environmental Scanning 2) Strategy Formulation 3) Strategy Implementation 4) Evaluation and Control Defining business mission. and the company may in turn affect the external environment by heightening competition. The rationale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants. forces in the external environment may influence the nature of a company’s mission. Firms that have many divisions. duties. Formality refers to the extent that participants. Application of the strategic-management process is typically more formal in larger and well-established organizations. This step is associated with. and success of planning across all types and sizes of organizations.5 The Strategic Management Process As I mentioned above. and these phases are considered as sequentially linked to each other and each successive phase provides a feedback to the previous phases. which consists of different phases.Hawassa University. Smaller businesses tend to be less formal. products. Course Title: Business Policy & Strategy (Mgmt 492) Page 8 of 43 meetings are commonly held off-premises and are called retreats. accuracy. but essentially followed by. Most authors agree that there are four essential phases in the strategic management process. strategic management is a process that consists of different phases. Management Course Instructor: Suleiman K. 2) The second implication is that strategy formulation and implementation are sequential. For example. The process begins with the development or reevaluation of the company mission. Faculty of Business & Economics. and approach are specified. 1. the definitions quoted above give you the idea that. emphasis or nomenclature. development of a company profile and assessment of the external environment. Greater formality in applying the strategic-management process is usually positively associated with the cost. 1) First. Most of the arrows in the model point two ways. a change in any component will affect several or all of the other components.
rather than the decision or document. the dynamic strategic planning processes must be monitored constantly for significant shifts in any of its components as a precaution against implementing an obsolete strategy. Course Title: Business Policy & Strategy (Mgmt 492) Page 9 of 43 Then follow the other components of the model. Historically. A major aim of the process is to achieve the understanding and commitment from all managers and employees. Since change is continuous. More and more organizations are decentralizing the strategic-management process.Hawassa University. 3) The third implication of viewing strategic management as a process is the necessity of feedback from implementation. Dialogue and participation are essential ingredients. Managers and employees become surprisingly creative and innovative when they understand and support the firm’s mission. The . The term dynamic characterizes the constantly changing conditions that affect interrelated and interdependent strategic attitudes. chief executive officers. is the more important contribution of strategic management. they often feel that they are a part of the firm and become committed to assisting it. strategic managers should assess the impact of implemented strategies on external environment and the company policy. review. Strategic managers should also analyze the impact of strategies on the possible need for modifications in the company mission. and managers of many for-profit and non-profit organizations have recognized and realized the benefits of strategic management. This is especially true when employees also understand linkages between their own compensation and organizational performance. The manner in which strategic management is carried out is thus exceptionally important. When managers and employees understand what the organization is doing and why. Small business owners. As shown in the model. and strategies. Feedback can be defined as the collection of post implementation results to enhance future decision making. Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination. Department of B. recognizing that planning must involve lower-level managers and employees. and evaluation to the early stages of the process. Management Course Instructor: Suleiman K. 1. Faculty of Business & Economics. then. This certainly continues to be a major benefit of strategic management.6 Benefits of Strategic Management Strategic Management allows an organization to be more proactive than reactive in shaping its own future. objectives. but research studies now indicate that the process. the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic. and rational approach to strategic choice. managers and employees become committed to plan supporting the organization. logical. it allows an organization to initiate and influence (rather than just respond to) activities-and thus to exert control over its own destiny. and rewarding them for doing so. Not every component of the strategic management process deserves equal attention each time planning activity takes place. Through involvement in the process. Understanding may be the most important benefit of strategic management. is the opportunity that the process provides to empower individuals. A great benefit of strategic management. followed by commitment. presidents. Communication is a key to successful strategic management. 4) The fourth implication is the need to regard the strategic management process as a dynamic system.
Although many factors besides a lack of effective strategic management can lead to business failure. High-performing firms seem to make more informed decisions with good anticipation of both short. and productivity compared to firms without systematic planning activities. strategic management offers other tangible benefits. b) Non financial Benefits Besides helping firms avoid financial demise. line managers become “owners” of the strategy. On the other hand. firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. such as an enhanced awareness of external threats. increased employee productivity. Business failures include bankruptcies. not merely a paper-shuffling activity among top executives. Strategicmanagement dialogue is more important than a nicely bound strategic-management document. and supporting activity. An increasing number of corporations and institutions are using strategic management to make effective decisions.Hawassa University. the planning concepts and tools described in this teaching material can yield substantial financial benefits for any organization. The worst thing strategists can do is develop strategic plans themselves and then present them to operating managers to execute. educating. The process is a learning. Department of B.and long-term consequences. . it can be dysfunctional if conducted haphazardly. Faculty of Business & Economics. Firms with planning systems more closely resembling strategic-management theory generally exhibit superior long-term financial performance relative to their industry.checkmateplan. foreclosures.com. Course Title: Business Policy & Strategy (Mgmt 492) Page 10 of 43 notion of centralized staff planning is being replaced in organizations by decentralized line-manager planning. Management Course Instructor: Suleiman K. Ownership of strategies by the people who have to execute them is a key to success! Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer. and evaluation activities. Strategists of low-performing organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. both managers and employees must also be involved in strategy formulation. or foreign competition. technological change. profitability. and court-mandated receiverships. an improved understanding of competitors’ strategies. implementation. Through involvement in the process. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. helping. They often attribute weak performance to uncontrollable factors such as a poor economy. They typically underestimate their competitors’ strengths and overestimate their own firm’s strengths. a) Financial Benefits of Strategic Management Research indicates that organizations using strategic-management concepts are more profitable and successful than those that do not. liquidations. Businesses using strategic management concepts show significant improvement in sales. Participation is a key to gaining commitment for needed changes. An excellent Web site for businesses engaged in strategic planning is www. But strategic management is not a guarantee for success. It is quite normal to witness businesses in our country failing annually.
or self-esteem through effectively using an old system. he or she often sees a new plan as a threat. . Strategic management may renew confidence in the current business strategy or point the need for corrective actions. and recognized their contributions can turn to them for help in a pinch because of this interaction.Some firms see planning as a waste of time since no marketable product is produced.Hawassa University.An organization can be so deeply embroiled in crisis management and fire-fighting that it does not have time to plan. Department of B. it often fails to reward success. cumbersome. privilege.When an organization assumes success. Content with Success . however. Whenever something worthwhile is attempted. When failure occurs.Particularly if a firm is successful. is this appropriate. impractical.Some organizations are culturally opposed to spending resources. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. that is. Fire-Fighting . and some firms do strategic planning but receive no support from managers and employees.People may not want to put forth the effort needed to formulate a plan. shared organizational objectives with them. empowered them to help improve the product or service. Planning. Firms that have nurtured their managers and employees. Waste of Time . fail. Overconfidence . can be done badly. Being overconfident or overestimating experience can bring demise. But time spent on planning is an investment. there is little risk of failure unless a problem is urgent and pressing. they may rely less on formalized planning. The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm. and a clearer understanding of performance-reward relationships. individuals may feel there is no need to plan because things are fine as they stand. Rarely. and be punished. Too Expensive . Laziness . then the firm may punish. Course Title: Business Policy & Strategy (Mgmt 492) Page 11 of 43 reduced resistance to change. Faculty of Business & Economics. In addition to empowering managers and employees. In this situation. Fear of Failure .People may have had a previous bad experience with planning. Forethought is rarely wasted and is often the mark of professionalism. It can be the beginning of an efficient and effective managerial system. Why Some Firms Do No Strategic Planning Some firms do not engage in strategic planning.When someone has achieved status.By not taking action. Self-Interest . Management Course Instructor: Suleiman K. But success today does not guarantee success tomorrow. it helps them view change as an opportunity rather than as a threat. Some reasons for poor or no strategic planning are as follows: Poor Reward Structures . strategic management often brings order and discipline to an otherwise floundering firm. there is some risk of failure. like anything else. cases in which plans have been long. Prior Bad Experience . or inflexible.As individuals amass experience. it is better for an individual to do nothing (and not draw attention) than to risk trying to achieve something.
Management Course Instructor: Suleiman K. 3) The involvement of employees in strategy formulation improves their understanding of the productivity . their greater awareness of the parameters that limit the available options makes them more likely to accept those decisions.People may be uncertain of their abilities to learn new skills. Managers who encourage subordinates’ attention to planning are aided in their monitoring and forecasting responsibilities by subordinates who are aware of the needs of strategic planning. The benefits of strategic management can be condensed into five points as follows: 1) Strategy formulation activities enhance the firm’s ability to prevent problems. the behavioral consequences of strategic management are similar to those of participative decision making. Different people in different jobs have different perceptions of a situation.7 Pitfalls in Strategic Planning Strategic planning is an involved. intricate.reward relationship in every strategic plan and. instead. 5) Resistance to change is reduced. 2) Group-based strategic decisions are likely to be drawn from the best available alternatives. thus. 1. Suspicion . managers at all levels of the firm interact in planning and implementing. or they may have aspirations for themselves or the organization that are different from the plan. They may view the situation from a different viewpoint. and complex process that takes an organization into unchartered territory. Though the participants in strategy formulation may be no more pleased with their own decisions than they would be with authoritarian decision. The strategic management process results in better decisions because group interaction generates a greater variety of strategies and because forecasts based on the specialized perspectives of group members improve the screening of options.Hawassa University. Therefore. Department of B. who continue working in the dark Top managers making many intuitive decisions that conflict with the formal plan Top managers not actively supporting the strategic-planning process . As a result. It does not provide a ready-to-use prescription for success. Course Title: Business Policy & Strategy (Mgmt 492) Page 12 of 43 Fear of the Unknown . 4) Gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies difference in roles. Being aware of potential pitfalls and being prepared to address them is essential to success.based effects. heightens their motivation.People may sincerely believe the plan is wrong. or of their ability to take on new roles. To summarize what has been said so far concerning the benefits of strategic management. an accurate assessment of the impact of strategy formulation on organizational performance requires not only financial evaluation criteria but also nonfinancial ones such as measures of behavior . of their aptitude with new systems. using strategic management approach.Employees may not trust management. Some pitfalls to watch for and avoid in strategic planning are provided below: Using strategic planning to gain control over decisions and resources Doing strategic planning only to satisfy accreditation or regulatory requirements Too hastily moving from mission development to strategy formulation Failing to communicate the plan to employees. Faculty of Business & Economics. it takes the organization through a journey and offers a framework for addressing questions and solving problems. Honest Difference of Opinion .
Many organizations tend to spend an inordinate or excessive amount of time. Managers may spend too much time on the strategic management process. managers. and rigid. Course Title: Business Policy & Strategy (Mgmt 492) Page 13 of 43 Failing to use plans as a standard for measuring performance Delegating planning to a “planner” rather than involving all managers Failing to involve key employees in all phases of planning Failing to create a collaborative climate supportive of change Viewing planning to be unnecessary or unimportant Becoming so engrossed or absorbed in current problems on which insufficient or no planning is done Being so formal in planning that flexibility and creativity are stifled While the earlier mentioned benefits could accrue by using strategic-management approach given the above pitfalls. it must be a self-reflective learning process that familiarizes managers and employees in the organization with key strategic issues and feasible alternatives for resolving those issues.8 Guidelines for Effective Strategic Management Failing to follow certain guidelines in conducting strategic management can foster criticisms of the process and create problems for the organization. Strategic managers must be trained to anticipate and respond to the disappointment of participating subordinates over unattained expectations. Words supported by numbers. A technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is typed. they may shrink on their individual responsibility for the decision reached. This may have a negative impact on operational responsibilities. A key role of strategists is to facilitate continuous organizational learning and change. An integral part of strategy evaluation must be to evaluate the quality of the strategic-management process. orchestrated. stilted. or too formal. Management Course Instructor: Suleiman K. 1. strategic managers must be trained to limit their premises to performance that the decision makers and their subordinates can do. . managers must be trained to minimize this impact by scheduling their duties to allow the necessary time for the strategic activities. 3. Strategic management must not become a self-perpetuating bureaucratic mechanism. should be aware of the possible risks and guard their firm against them.Hawassa University. Faculty of Business & Economics. There are three types of unintended negative consequences of involvement in strategic management. Strategic management must not become ritualistic. Even the most technically perfect strategic plan will serve little purpose if it is not implemented. treating the means and circumstances under which it will be implemented as afterthoughts! Change comes through implementation and evaluation. 1. and effort on developing the strategic plan. Issues such as “Is strategic management in our firm a people process or a paper process?” should be addressed. predictable. Thus. Rather. 2. should represent the medium for explaining strategic issues and organizational responses. rather than numbers supported by words. Department of B. This is so because the subordinates may expect their involvement in even minor phases of total strategy formulation. When the formulators of strategy are not involved in its implementation. Therefore. money. not through the plan.
all organizational members must share a spirit of inquiry and learning. or they may find themselves personally liable. Faculty of Business & Economics. Subjective factors such as attitudes toward risk. In this regard. implementation. Good business ethics is a prerequisite for good strategic management. concern for social responsibility. All strategy formulation. A willingness and eagerness to consider new information. and costly. Strategists such as chief executive officers. Strategic decisions thus always have to be made to eliminate some courses of action and to allocate organizational resources among others. No firm can take on an unlimited amount of debt or issue an unlimited amount of stock to raise capital. Most organizations can afford to pursue only a few corporate-level strategies at any given time. or disregard a pollution problem. It is a critical mistake for managers to pursue too many strategies at the same time. Strategists are the individuals primarily responsible for ensuring that high ethical principles are espoused and practiced in an organization. Managers and employees of firms must be careful not to become scapegoats blamed for company environmental wrongdoings. In addition. new viewpoints. Strategy trade-offs require subjective judgments and preferences. Most organizations today recognize that strategic-management concepts and techniques can enhance the effectiveness of decisions. presidents. and organizational culture will always affect strategy-formulation decisions. No organization has unlimited resources. Therefore. This degree of discipline will promote understanding and learning. Harming the natural environment is unethical. Department of B. Employee firings and demotions are becoming common in pollutionrelated legal suits. and heads of government agencies must commit themselves to listen to and understand managers’ positions well enough to be able to restate those positions to the managers’ satisfaction. There are ethics issues too.9 Business Ethics and Strategic Management Business ethics can be defined as principles of conduct within organizations that guide decision making and behavior. a lack of objectivity in formulating strategy results in a loss of competitive posture and profitability. thereby spreading the firm’s resources so thin that all strategies are jeopardized. Therefore. conceal. firms increasingly are turning on their managers and employees to win leniency for themselves. Managers’ being fired at in some organizations for being indirectly responsible for their firms’ polluting water exemplifies this corporate trend. more . and new possibilities is essential.Hawassa University. Management Course Instructor: Suleiman K. but organizations need to be as objective as possible in considering qualitative factors. no organization can pursue all the strategies that potentially could benefit the firm. When organizations today face criminal charges for polluting the environment. Course Title: Business Policy & Strategy (Mgmt 492) Page 14 of 43 An important guideline for effective strategic management is open mindedness. Strategic decisions require trade-offs such as long-range versus short-range considerations or maximizing profits versus increasing shareholders’ wealth. managers and employees today must be careful not to ignore. 1. and evaluation decisions have ethical ramifications. In many cases. new ideas. owners of small businesses. Newspapers and business magazines daily report legal and moral breaches of ethical conduct by both public and private organizations. good ethics is just good business! A rising tide of consciousness about the importance of business ethics is sweeping Ethiopia like the entire world. illegal. managers and employees throughout the firm should be able to describe the strategists’ positions to the satisfaction of the strategists.
Strategists are responsible for developing. how successful . waste disposal. This makes managers responsible for developing and implementing ethical decision making. how brilliant. it does so .conduct manual outlining ethical expectations and giving examples of situations that commonly arise in their businesses. perform poorly. communicating and enforcing the code of business ethics for their organizations. They will blame you for exceeding instructions or for ignoring their warnings. He destroys spirit. If employees see examples of punishment for violating the code and rewards for upholding the code. foreign business practices.no matter how knowledgeable. employee health. AIDS in the workplace. A code of ethics can be viewed as a public relations gimmick or device. believed. takeover tactics. sexual harassment. a set of platitudes. understood. who keep pressing you to do more. it is because the spirit of its top people is great. lack judgment and ability. The explosion of the Internet into the workplace has raised many new ethical questions in organizations today. inappropriate gifts. Although primary responsibility for ensuring ethical behavior rests with a firm’s strategists. affirmative action. or faster. Faculty of Business & Economics. conflicts of interest. acid rain. or to do it better. or window dressing. And he destroys performance. An ethics “culture” needs to permeate or fill organizations! To help create an ethics culture.” A new wave of ethics issues related to product safety. however. is not sufficient to ensure ethical business behavior.he destroys. an integral part of the responsibility of all managers is to provide ethics leadership by constant example and demonstration. A code of business ethics can provide a basis on which policies can be devised to guide daily behavior and decisions at the work site. or less expensively. The “E-Commerce Perspective” focuses on business ethics issues related to the Internet. One reason strategists’ salaries are high compared to those of other individuals in an organization is that strategists must take the moral risks of the firm. cover-ups. Management Course Instructor: Suleiman K. To ensure that the code is read. this helps reinforce the importance of a firm’s code of ethics. some organizations have developed a code-of. Many scholars on the issue offer some good advice for managers: All managers risk giving too much because of what their companies demand from them. employee privacy. Merely having a code of ethics. A man (or woman) might know too little. For the spirit of an organization is created from the top. as indicated in the “Natural Environment Perspective. This is particularly true of the people at the head of an enterprise. smoking. But the same superiors. The smartest managers already know that the best answer to the question “How far is too far?” is don’t try to find out. and yet not do too much damage as a manager. security of company records. organizations need to conduct periodic ethics workshops to sensitize people to workplace circumstances in which ethics issues may arise. If an organization is great in spirit. and layoffs has accented the need for strategists to develop a clear code of business ethics. If it decays. Managers hold positions that enable them to influence and educate many people. He destroys people.Hawassa University. Course Title: Business Policy & Strategy (Mgmt 492) Page 15 of 43 and more companies are becoming ISO 14001 certified. the most valuable resource of the enterprise. But if that person lacks character and integrity . and remembered. Department of B. will turn on you should you cross that fuzzy line between right and wrong.
History has proven that the greater the trust and confidence of people in the ethics of an institution or society. Internet fraud. and he required his players to have three kinds of loyalty: to God. including hacking into company computers and spreading viruses. Ethics training programs should include messages from the CEO emphasizing ethical business practices. Even the legendary football coach Vince Lombardi knew that some things were worth more than winning. Firms can align ethical and strategic decision making by incorporating ethical considerations into long-term planning. dumping banned or flawed products in foreign markets. and to the Green Bay Packers. Some business actions considered to be unethical include misleading advertising or labeling. “in that order. inefficiency. Department of B. and sisters of the past left us with an ethical foundation to build upon. by encouraging whistle-blowing or the reporting of unethical practices. has become a major unethical activity that plagues every sector of online commerce from banking to shopping sites. and using nonunion labor in a union shop.Hawassa University. the development and discussion of codes of ethics. No society anywhere in the world can compete very long or successfully with people stealing from one another or not trusting one another. and by monitoring departmental and corporate performance regarding ethical issues. padding expense accounts. ethical standards come out of history and heritage. overpricing. “Trees die from the top! No one should ever become a strategist unless he or she is willing to have his or her character serve as the model for subordinates. to their families. Faculty of Business & Economics. with every bit of information requiring notarized confirmation.10 Challenges in Strategic Management – the 21st century challenges Three particular challenges or decisions that face all strategists today are 1) Deciding whether the process should be more an art or a science. and procedures for discussing and reporting unethical behavior. and waste. insider trading. hostile takeovers. poor product or service safety. In a final analysis. or with government having to regulate businesses to keep them honest. Short-term decisions based on greed and questionable ethics will preclude the necessary self-respect to gain the trust of others. causing environmental harm. mothers. Being unethical is a recipe for headaches. brothers. lack of equal opportunities for women and minorities. Business relationships are built mostly on mutual trust and reputation. this problem has become endemic nationwide and around the world. and 3) Deciding whether the process should be more top-down or bottom-up in their firm. Course Title: Business Policy & Strategy (Mgmt 492) Page 16 of 43 because the top rots. moving jobs overseas. More than three hundred Web sites now show individuals how to hack into computers. the greater its economic strength. by integrating ethical decision making into the performance appraisal process. This perspective . Management Course Instructor: Suleiman K. More and more firms believe that ethics training and an ethics culture create strategic advantage. As the proverb has it.” 1. 2) Deciding whether strategies should be visible or hidden from stakeholders. with every disagreement ending up in litigation. Our fathers. The Art or Science Issue This teaching material is consistent with most of the strategy literature in advocating that strategic management be viewed more as a science than an art.
conduct research. consider that the business world today has become increasingly complex and more intensely competitive. Strategists must decide for themselves what is best for their firm. Mintzberg refers to strategic planning as an “emergent” process whereas strategy scientists use the term “deliberate” process. Mintzberg’s notion of “crafting” strategies embodies the artistic model which suggests that strategic decision making be based primarily on holistic thinking. in smaller firms there can be more informality in the process compared to larger firms. 3. “Strategy scientists” reject strategies that emerge from emotion. Department of B.Hawassa University. competitive intelligence. a wealth of competitive information is available on the Internet and elsewhere. perform analyses. and other stakeholders can readily contribute to the process. This teaching material comes down largely on the side of being visible and open but certainly this may not be best for all strategists and all firms. Visibility promotes democracy whereas secrecy promotes autocracy. The answer to the art versus science question is one that strategists must decide for themselves. and imagination. Some reasons to be completely open with the strategy process and resultant decisions are: 1. But the idea of deciding upon strategies for any firm without thorough research and analysis is unwise. preferring instead subjective imagination. Promoters of the artistic view often consider strategic planning exercises to be time poorly spent. Management Course Instructor: Suleiman K. The Visible or Hidden Issue There are certainly good reasons to keep the strategy process and strategies themselves visible and open rather than hidden and secret. creativity. creativity. Business is analogous to war. Course Title: Business Policy & Strategy (Mgmt 492) Page 17 of 43 contends that firms need to systematically assess their external and internal environments. The livelihood of countless employees and shareholders may hinge on the effectiveness of strategies selected. assimilated. There are also good reasons to keep strategies hidden from all but top-level executives. Mintzberg and his followers reject strategies that result from objective analysis. Domestic firms and most foreign firms prefer democracy over autocracy as a management style. and then decide upon a particular course of action. Scholars argued that all war is based on deception and that the best maneuvers are those not easily predicted by rivals. creditors. . 2. however. In contrast. intuition. carefully evaluate the pros and cons of various alternatives. employees. They often have excellent ideas. and evaluated before deciding on a course of action upon which survival of the firm may hinge. Faculty of Business & Economics. Recall the points discussed before about the importance of intuition and experience and subjectivity in strategic planning that certainly require good judgment. Managers. and analysis in formulating strategies. Certainly. In deciding which approach is more effective. There is less room for error in strategic planning. intuition. It may not behoove a strategist to rely too heavily on gut feeling and opinion instead of research data. and certainly the two approaches are not necessarily mutually exclusive. Investors. The Mintzberg philosophy insists on informality whereas strategy scientists (and this teaching material) insist on more formality. Too much is at stake to be less than thorough in formulating strategies. and politics. and other stakeholders have greater basis for supporting a firm when they know what the firm is doing and where the firm is going. but even for smaller firms. and should be collected. Secrecy would forgo many excellent ideas.
3. acumen. and fiduciary responsibility to make key strategy decisions. at least for firms in the developed world. People are what make the difference in organizations. Secrecy limits criticism. bottom-up advocates argue that lower and middle-level managers and employees who will be implementing the strategies need to be actively involved in the process of formulating the strategies to assure their support and commitment. commitment. strategists in successful organizations realize that strategic management is first and foremost a people process. Secrecy limits rival firms from imitating or duplicating the firm’s strategies and undermining the firm. . It is an excellent vehicle for fostering organizational communication. Strategists must reach a working balance of the two approaches in a manner deemed best for their firm at a particular time. So at last but not least. The obvious benefits of the visible versus hidden extremes suggest that a working balance must be sought between the apparent contradictions. Course Title: Business Policy & Strategy (Mgmt 492) Page 18 of 43 4. In contrast. but in practice particularly sensitive and confidential information should always remain strictly confidential to top managers. Participation and openness enhances understanding. 4. This balancing act is difficult but essential for survival of the firm. Faculty of Business & Economics. Reasons why some firms prefer to conduct strategic planning in secret and keep strategies hidden from all but the highest-level executives are as follows: 1. and communication within the firm. at least to the extent that they are willing and able to contribute. Recent strategy research and this teaching material emphasize the bottom-up approach. Department of B. Free dissemination of a firm’s strategies may easily translate into competitive intelligence for rival firms who could exploit the firm given that information. and hindsight.and lower-level managers and even non managers should be invited to participate in the firm’s strategic planning process.Hawassa University. second guessing. but earlier work by earlier scholars stressed the need for firms to rely on perceptions of their top managers in strategic planning. The Top-Down or Bottom-Up Approach Proponents of the top-down approach contend that top executives are the only persons in the firm with the collective experience. Increased education and diversity of the work-force at all levels are reasons why middle. while cognizant of the fact that current research supports the bottom-up approach. 2. Management Course Instructor: Suleiman K. both inside and outside the firm. should be involved in strategic planning. Participants in a visible strategy process become more attractive to rival firms who may lure them away. Some scholars say that in a perfect world all key individuals.
Long-term plans are worked out having more detail information about both the internal and external forces. As you can remember. Department of B. units. In more simple term. analyzing opportunities and threats that will come from the external environment must be analyzed. the underlying logic is analyzing your competitive advantage and designing strategies that capitalize on such competitive advantage. Course Title: Business Policy & Strategy (Mgmt 492) Page 19 of 43 Chapter Two: Business Environment Analysis and Environmental Scanning 2. Faculty of Business & Economics.Hawassa University. However. therefore. The modern business managers. So carrying out such an analysis using the SWOT framework helps managers to focus their activities into areas where the organization is strong and where the greatest opportunities lay requiring consideration. SWOT analyses involve both internal and external environment analysis. weaknesses. So. before an organization can begin . in this regard. and departments) of an organization and its good marriage with external forces such as suppliers. The competitive advantages that the organization should capitalize and weak sides of the company need to be analyzed. such an analysis reminds the company to be watchful of its weakness in the effort to take due consideration for the threats coming from the environment. opportunities and threats. customers. is linked with the integration of sub systems (employees.1 Business Environment Analysis and Environmental Scanning Strategic management is concerned with determining long term objectives and strategies suitable to accomplishing such objectives. before determining long term objectives and proposing strategies. SWOT analysis is a system used to identify and evaluate an organization in terms of its potential strengths. are advised to continuously scan both the internal and external environment. Moreover. Success in the world of business. Indeed. In the process of environmental scanning. SWOT analysis is an essential part of strategic management especially at its first stage. government and the society at large. sections. it is natural to look at what is available and not available at the hand of the organization. Therefore. Management Course Instructor: Suleiman K.
d) Demographic Changes Demographic changes are changes in the population or subpopulation of society. it changes the economics and demand structure of the warring parties and their populations. It is the set of natural world. This alteration can potentially make existing firms obsolete. even. Process need opportunities are often addressed by programmed research projects. which are the systematic research and analysis efforts designed to solve a single problem such as the efforts against AIDS. especially when it is regarded as being at risk from the harmful influence of human activities. Management Course Instructor: Suleiman K. Faculty of Business & Economics. Theses can be changes in the size. b) The process need This opportunity has its source in technology’s inability to provide the “big breakthrough “. For example. interconnectivity and the search for a treatment and cure for AIDS. structure. c) Changes in Technology Changes in technology changes market and industry structures by altering costs. a break through in a peace negotiation also provides opportunity since it changes the economics of the former opponents. But changes in technology may create opportunity for those who make themselves ready for the new technology. A corporation uses this tool to avoid strategic surprise and to insure its long term health. This can provide opportunity if it is ethically pursued. and disseminating of information from the external and internal environment to key people within the corporation.Hawassa University. Detailed analysis for external factors will be made in the up coming sections of this chapter. quality requirements and volume capabilities. which are not adjusted to it and are inflexible. and the buying power of customers. government policy changes. Now I shall focus on sources of opportunities and threats: Source of Opportunities a) Unexpected Events Unexpected events such as political turmoil. The external environment analysis considers factors that are beyond the control of the organization and either brings an opportunity or pose threats to the organizations. evaluating. employment. Currently. fusion. war breaks. education. Department of B. if war breaks out where it is unexpected. efforts are being made in areas of super conductivity. it must scan the external environment to identify possible opportunities and threats and its internal environment for strength and weaknesses. Course Title: Business Policy & Strategy (Mgmt 492) Page 20 of 43 strategy formulation. 2. Technicians often need to work out a way to get from point A to point B in some process.1 External Environment Analysis The term environment can be defined in various ways. Research has found a positive relationship between environmental scanning and profit.1. and animals. plants. Similarly. Environmental Scanning is the monitoring. floods and other natural or man made changes can provide opportunities to a business organization. or incomes of these groups. age. Such changes influence all industries and firms by changing the mix of products and services demanded the volume of products and services. Some of these changes are predictable since people who will be older are already alive and birth and death rates stay fairly stable over . The event can be unexpected success (good news) or an expected failure (bad news). It can be defined as all the external factors influencing the life and activities of people.
the community. Personal values and functional experiences of a corporation’s managers as well as the success of current strategies are likely to bias both their perception of what is important to monitor in the external environment and their interpretations of what they perceive. they sometimes miss or choose to ignore crucial new developments. Faculty of Business & Economics. they are not clear whether other competitors will substitute their product and service or not. Choices must be made regarding which factors are important and which are not. Some of the sources of threats are discussed below. timing is critical. will reject the products of the venture due to strong relationship with the existing firms. Department of B. others think they are too fat when they are not. The manager can sell power and status to the rich and powerful. * Identifying external strategic factors Why do companies often respond differently to the same environmental changes? One reason is because of differences in the ability of managers to recognize and understand external strategic issues and factors. Population statistics are available for assessment. a) Threat of Substitute When managers propose long term plans to launch new products. regardless of the quality of product offered by the new firm. It frequently takes the convergence of many piece of new knowledge to make a product. and sell relief and comfort to the poor and oppressed/demoralized customers. . e) Change in Perception People hold different perceptions of the same reality. and these differences affect the products and services they demand and the amount they spend. In additions.Hawassa University. others disenfranchised and poor. If a firm needs to change its strategy. f) New Knowledge New Knowledge is often seen as the ‘superstar’ of business opportunity. Source of Threats The forces that can provide opportunity for an organization may sometime pose threat to business. The customers will neglect the new proposal if competitors have strong relationship with their supplier. but opportunities can be found before the data are published by observing what is happening in the street and being reported in the newspaper. it might not be gathering the appropriate external information to change strategies successfully. a potential threat will originate from the possibility of their product being replaced easily and early. Even though managers agree that strategic importance determines what variables are consistently tracked. Hence. It is not enough to have new knowledge but there must also be a way to make products from it and to protect the profits of those products from competition as the knowledge is spread to others. b) Threat of Integration A threatening environment will be created when competitors have strong relationship with suppliers. surrounding the business. customers and the community. Some groups feel powerful and rich. So. it is important for managers to understand the nature of substitute products for these reasons. And sometimes. Some people think they are thin when they are not. Management Course Instructor: Suleiman K. No firm can successfully monitor all external factors. This willingness to reject unfamiliar as well as negative information is called Strategic Myopia. Course Title: Business Policy & Strategy (Mgmt 492) Page 21 of 43 time.
It promotes a sense of shared expectation in employees and communicates a public image to important stakeholder groups in the company’s task environment. Management Course Instructor: Suleiman K. Course Title: Business Policy & Strategy (Mgmt 492) Page 22 of 43 One way to identify and analyze developments in the external environment is to use the issues priority matrix as follows: 1) Identify a number of likely trends emerging in the societal and task environments. These are strategic environmental issues .1. the next step is analyzing internal factors. if they occur. the internal environment analysis involves the following: Mission Statement . The issues priority matrix can then be used to help managers decide which environmental trends should be merely scanned (low priority) and which should be monitored as strategic factors (high priority). 2) Assess the probability of these trends actually occurring from low to high. A well-convinced mission statement defines the fundamental. Particularly. . having understood the impact of the external environment.those important trends that. 3) Attempt to ascertain the likely impact (from low to high) of each of these trends on the corporation being examined. It tells what the company is providing to society. It identifies the scope of the company’s operation in terms of products offered and markets served. Figure: Issues Priority Matrix A corporation’s external strategic factors are those key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation. Those environmental trends judged to be a corporation’s strategic factors are then categorized as opportunities and threats and are included in strategy formulation. A mission statement reveals who is the company is and what it does.2 Internal Environment Analysis Understanding opportunities from external environment is nothing unless there is internal capacity that enables to exploit opportunities on time. Department of B. Faculty of Business & Economics. but also what it wants to become. Hence. determine what the industry or the world will look like in the near future. 2. It puts into word no only what the company is now.a statement that states the reason why an organization exists. The internal environment analysis is conducted in order to know the strengths and weaknesses of the organization.Hawassa University. unique purpose that sets a company apart from other firms.
Department of B. The achievement of corporate objective should result in the fulfillment of the company’s mission. The cope with what are often ambiguous and incomplete environmental data and to increase their understanding of the general environment. The materials resource such as machineries and their obsolescence can help in evaluating the organization’s internal strength and weakness. They typically detail the various activities that must be carried out for completion of a corporation’s program. and global – conditions that make interpreting them increasingly difficult. which constitute the external environment. and factors in the operating environment. These factors. providing needed products or services) o Market leadership (market share) o Technological leadership (innovativeness) o Survival (avoiding bankruptcy).are broad guideline for decision making that links the formulation of strategy with its implementation. They state what is to be accomplished by whom and should be quantified if possible.are end results of planned activity. participation in charities. Policies . its objectives and its strategies. The success of the firm’s strategy is also affected by the realistic analysis of its internal capabilities and its consistency with conditions in the external environment. firms engage in a process called external environment analysis. The profiles of the employees with their number need to be analyzed and compared with the anticipated activity. Those analyzing the external environment should understand that completing this analysis is a difficult. activity. Faculty of Business & Economics. complex. Some of the areas in which a company might establish its objectives are: o Profitability or net income o Efficiency or low cost o Reputation (being considered as top of all firm) o Contribution to employees (employees security or wage adjustment) o Contribution to society (tax paid.consists of both human and non human resource. Resources .2 External Environment Analysis Most firms face external environments that are highly turbulent. The firm’s choice of direction and action (strategy).Hawassa University. Procedures . its organizational structure. yet significant. factors in the industry environment. Management Course Instructor: Suleiman K.are a system of sequential steps or techniques that describe in detail how a particular task or job is to be done. Companies use policies to make sure that employees through the firm make decisions and take actions that support the corporation’s mission. 2. can be divided into three interrelated subcategories: factors in the remote environment. and its internal processes are influenced by a host of external factors. Course Title: Business Policy & Strategy (Mgmt 492) Page 23 of 43 Objectives . .
and constraints. A second profound social change has been the accelerating interest of consumers and employees in quality of life issues. For instance convenience foods.1 Remote Environment and STEEP Factors The remote environment comprises factors that originate beyond. Like other forces in the remote external environment. values. and so on. educational. religions. Technological. and Political factors. Management Course Instructor: Suleiman K. attitudes. opinions. demographic. books. Course Title: Business Policy & Strategy (Mgmt 492) Page 24 of 43 Remote Environment Social Technology Economic Ecologic Political Entry Barrier Supplier Power Competitors Buyer Power Creditors Substitute Availability Customers Rivalry Competitive Labor Suppliers Industry Environment Operating Environment The Firm Figure : A firm’s External Environment 2.2. a. Evidence of this change is seen in recent contract negotiations. threats. Department of B. social forces are dynamic. Expanded demand for a wide range of products and services necessitated by women’s absence form the home. any single firm’s operating situation. Those social changes affected business in the following areas: Hiring and compensation policies and resource capabilities of employers. Ecological. Social Factors The social factors that affect a firm involve the beliefs. The constant change in social environment is the result of efforts of individuals to satisfy their desires and needs by controlling and adapting to environmental factors. but rarely does a single firm exert any meaningful reciprocal influence. Faculty of Business & Economics. and usually irrespective of. Economic. and day-care centers are results of such changes. It presents firms with opportunities. flexible .Hawassa University. microwave ovens. In addition to traditional demand for increased salaries. and ethnic conditioning. As social attitudes change. One of the most profound social changes in recent years has been the entry of large numbers of women into the labor market. and lifestyles of persons in the firm’s external environment. which stands for Social. as developed form cultural. There are five forces in the firm’s remote environment with the popular acronym STEEP factors. so does the demand for various types of clothing. Several changes have occurred in the social environment.
prime interest rates. Because consumption patterns are affected by the relative affluence of various market segments. water. Threats to life-supporting ecology caused principally by human activities in an industrial society are commonly referred to as pollution. improvements in existing products. It may generate sophisticated new markets and products of significantly shorten the anticipated life of a manufacturing facility. Faculty of Business & Economics. Management Course Instructor: Suleiman K. Course Title: Business Policy & Strategy (Mgmt 492) Page 25 of 43 hours.Hawassa University. Creative technological adaptations can suggest possibilities for: new products. the level of disposable income. A third profound social change has been the shift in the age distribution of the population. the propensity of people to spend. Changing social values and a growing acceptance of improved birth control methods are expected to raise mean ages. Solar radiation that is normally absorbed into the atmosphere reaches the earth’s surface. A result of the changing age distribution of the population is increased demands for modifications of retirement policies and lobbies for tax exemptions by the senior citizens. loss of habitat and biodiversity. The global climate has been changing for years. the firm must consider the general availability of credit. four-day workweeks. b. and trends in the growth of the gross national product (GNP). and land. Technological Factors Awareness of technological changes that might influence the industry is important to the firm in order to avoid obsolescence and promote innovation. d. and air. As far as economic factors are concerned. A technological break through can have a sudden and dramatic effect on a firms environment. due to ozone depletion. . Ecological Factors The term ecology refers to the relationship between human beings. and water that support them. c. However. Loss of habitat and biodiversity refer to the extinction of important flora and fauna is occurring at a rapid rate due to disturbance of the natural habitat by the human activities. In other words. causing global warming. inflation rates. they need to foresee advancements and estimate their impact on an organization’s operations through technological forecasting. it is non evident that humanity’s activities are accelerating tremendously. Firms in a turbulent growth industries must strive for an understanding both of existing technological advances and the probable future advances that can affect their products and services. Economic Factors Economic factors concern the nature and direction of the economy in which a firm operates. Department of B. lump-sum vacation plans have come into the scene. Specific concerns under ecological environment include global warming. water. heating the soil. and improvements in manufacturing and marketing techniques. soil. other living things and air. opportunities for advanced training. and pollution of air. in its strategic planning each firm must consider economic trends in the segments that affect its industry. A change in atmospheric radiation.
Increasingly. Political Factors The direction and stability of political factors is a major consideration for managers in formulating company strategy. environmental regulations are increasingly more stringent.Hawassa University. Political constraints are placed on firms through: fair-trade decisions tax programs minimum wage legislation pollution and pricing policies employee protection acts protection of consumers and general public. financing is more readily available for eco-efficient firms. Faculty of Business & Economics. employees prefer to work for environmentally conscious firms. . Water pollution occurs principally when industrial toxic wastes are dumped or leak into the waterways. Every activity is linked to thousands of other transactions and their environmental impact. Political factors define the legal and regulatory parameters within which firms must operate. government subsidies. e. business now is being held responsible for eliminating the toxic by-products of its current manufacturing processes and for cleaning up the environmental damage that it did previously. Although most of laws and regulations are commonly restrictive. Political activity also has a significant impact on two governmental functions: Suppliers Function: Government decisions regarding the accessibility of private businesses to government owned natural resources and national stock piles of agricultural products will affect profoundly the viability of the strategies of some firms. Such firms are called ‘Eco-efficient’ business since they produce more useful goods and services while continuously reducing resource consumption and pollution. Department of B. Reasons for businesses to be ‘Eco efficient’ customers demand for cleaner products. Land pollution is caused by the need to dispose of ever-increasing amounts of waste. and product research grants. Management Course Instructor: Suleiman K. Therefore. managers are required by the government or are being expected by the public to incorporate ecological concerns into their decision making. As a major contributor to ecological pollution. some political actions are designed to benefit and protect firms through patent laws. government provides incentives to environment friendly firms. corporate environmental responsibility must be taken seriously and environmental policy must be implemented to ensure a comprehensive organizational strategy. Course Title: Business Policy & Strategy (Mgmt 492) Page 26 of 43 Air pollution is created by dust particles and gaseous discharges that contaminate the air. Many large businesses are realizing that their decisions must no longer ignore environmental concerns.
Industry conditions differ so much that leading companies in unattractive industries can filed if hard to earn respectable profits. Industry and competitive analysis utilizes concepts and techniques to get a clear fix on changing industry conditions and on the nature and strength of competitive forces. Capital requirements can be big or small. of taking advantage of them. while even weak companies in attractive industries can turn in good performance.2 Industry Analysis Analysis of industry and competitive conditions is the starting point in evaluating a company’s strategic situation and market position. The following section details how these forces operate and suggest ways of adjusting them. or eliminate many market opportunities. and where possible. Competitive forces can be strong or weak. a company must understand how they work in its industry and how they affect the company in its particular situation. Products could be standardized or highly differentiated. and how strong are they? 4) Which companies are in the strongest or weakest competitive positions? 5) Who will likely make what competitive moves next? 6) What key factors will determine competitive success or failure? 7) How attractive is the industry in terms of its prospects for above . The nature and degree of competition in an industry hinge on five forces: the threat of new entrants.Hawassa University. and future outlooks. Management Course Instructor: Suleiman K. and what impact will they have? 3) What competitive forces are at work in the industry. can create. * Methods of Industry and Competitive Analysis Industries differ widely in their economic characteristics. Course Title: Business Policy & Strategy (Mgmt 492) Page 27 of 43 Customer Function: Government demand for products and services. 2. and the rivalry among existing firms. The framework for industry and competitive analysis hangs on developing probing answers to the following seven questions. the bargaining power of buyers. Department of B. the threat of substitute products and services.2. The market can be worldwide or local. competitive situations. It is a way of thinking strategically about an industry’s overall situation and drawing conclusions about whether the industry is an attractive investment for company funds. the bargaining power of suppliers. Buyers demand can be rising or declining.average profitability? . enhance. The pace of technological change can range form fast to slow. 1) What are the chief economic characteristics of the industry? 2) What factors are driving charges in the industry. To establish a strategic agenda for dealing with the existing contending firms and to grow despite them. sustain. Faculty of Business & Economics.
Sometimes this barrier is so high that. There are five major sources of barriers to entry: 1. to surmount it. utilization of the sales force. the more limited the wholesale or retail channels are the tougher that entry into that industry will be. Department of B. 2. a new firm must create its own distribution channel. Advertising. The power of each important supplier group depends on a number of characteristics of its market situation and on the relative importance of its sales to the industry compared to its overall business. the desire to gain market share and often substantial resources. Government Policy The government can limit or even foreclose entry to industries. Faculty of Business & Economics. inventories. can squeeze profitability out of an industry for unable to recover cost increases in its own prices. intense selling efforts. with such controls as license requirements and limit on access to raw materials. . 4. customer service. Management Course Instructor: Suleiman K. 5. Threats of Entry New entrants to an industry bring new capacity. and absorbing start-up losses. The government also can play a major indirect role by affecting entry barriers through such controls as air and water pollution standards and safety regulations. Economies of Scale Economies of scale deter by forcing the aspirant either to come in on larger scale or to accept a cost disadvantage. promotions. financing. thereby. b.Hawassa University. Capital is necessary not only for fixed facilities but also for customer credit. Bargaining Power of Suppliers Suppliers can exert bargaining power on participants of an industry by raising prices or reducing the quality of purchased goods and services. Product Differentiation Brand identification creates a barrier by forcing entrants to spend heavily to overcome customer loyalty. However. and nearly any other part of a business. being first in the industry. Course Title: Business Policy & Strategy (Mgmt 492) Page 28 of 43 The collective answers to these questions boils understanding of a firm’s surrounding environment and form the basis for matching strategy to changing industry conditions and to competitive forces. 3. and product differences are among the factors fostering brand identification. Economics of scale also can act as hurdles or barriers in distribution. Powerful suppliers. a. and some other means. Capital Requirement The need to invest large financial resources in on order to compete in the market creates a barrier to entry. Access to Distribution Channels A new product must displace others from the market through price breaks. The seriousness of the threat of entry depends on the barriers present and on reaction from existing competitors that the entrant can expect.
Its products are unique or at least differentiated. Substitute products that deserve the most attention strategically are those that are: Subject to trends improving their price-performance trade-off with the industry’s product. which create great incentive to lower its purchasing costs. the industry will suffer in earnings and possibly in growth. Course Title: Business Policy & Strategy (Mgmt 492) Page 29 of 43 A supplier group is powerful if: It is dominated by a few companies and is more concentrated than the industry it sells. demand for higher quality products or more services. It earns low profits.Hawassa University. It poses a credible threat of integrating backward product. Substitutes often come rapidly into play if some development increases competition in their industries and causes price reduction or performance improvement. . Bargaining Power of Buyers Like the supplier group customers also pose threat to the industry. Similarly. The more attractive the priceperformance trade off offered by substitute products. where the quality of the buyers product is not as such affected by the industry’s product. Buyers group poses the above threats in that when the product is a major component or significant fraction of the buyers’ product. It poses a credible threat of integrating forward into the industry’s business. The less profitable the buyer is. Unless it can upgrade the quality of the product or differentiate it through marketing. the buyer is likely to shop for a favorable price and buy selectively. Produced by industries earning high profits. Faculty of Business & Economics. the supplier group will be powerful if its product is unique. A buyer group is powerful if: It is concentrated or purchases in large volumes The products it purchases from the industry are standard or undifferentiated. The products it purchases are components of its products and represent a significant fraction of its cost. The industry’s product is unimportant to the quality of the buyer’s products or services. c. They can force down prices. buyers are generally more sensitive to price and pose a threat to the industry. Management Course Instructor: Suleiman K. The industry is not an important customer of the supplier group. the higher the threat it poses on the industry’s profit potential. This is so because buyers’ cost of switching or changing suppliers raises as its product specifications ties it to particular suppliers. d. and play competitors off against each other. As indicated above. They can do all these at the expense of industry profit. the more price sensitive it would be. Department of B. Threat of Substitute Products and Services Substitutes pose threat to the industry’s product in that substitute products or services limit the potential of an industry by placing a ceiling on the prices it can charge.
The rivals are diverse in strategies. Defining industry and its boundary is incomplete without an understanding of its structural attributes. While the company must live with many of the above factors.e. and advertising. Fixed costs are high or the product is perishable. when the volume of production increases. the intensity of competition declines over time. high concentration serves as a barrier to entry into an industry. The product lacks differentiation or switching costs. Similar products or services mean that customer perceive products to be substitutable for one another. enhancing fights for market share. 2) Economies of Scale This variable refers to the savings that companies within an industry achieve due to increased volume. In a highly concentrated industry (i. The non technological sources include better managerial coordination of production functions and processes.Hawassa University. the company may try to raise buyers switching costs through product differentiation. because it enables the firms that hold large market shares to achieve significant savings in production costs and to lower their prices. Industries vary widely in their nature of characteristics. origins. Industry growth is slow. Department of B. Exit barriers are high and keep the companies competing even though they earn low profit or losing. For example. creating a strong temptation to cut prices. Simply. The reason for inverse relation between concentration and competition is that. Faculty of Business & Economics. Economies of scale can result from technological and non technological sources. Course Title: Business Policy & Strategy (Mgmt 492) Page 30 of 43 e. long-term contractual . and personalities. an industry whose sales are dominated by a handful of companies). Management Course Instructor: Suleiman K. product introduction. Rivalry among Existing Firms Rivalry among existing competitors takes the familiar form of jockeying for position using tactics like price completion. The variation among industries can be explained by examining four variables that industry comprises: 1) Concentration This variable refers to the extent to which industry sales are dominated by only a few firms. the long-range average cost of a unit produced will decline. it may have some latitude for improving matters through strategic shifts. Rivalry among existing firms becomes intense when the following factors are present: Competitors are numerous or are roughly equal in size and power. * Industry Structure An industry is a collection of firms that offer similar products or services. The technological sources are higher level of mechanization or automation and a greater up-to-datedness of plant and facilities. Structural attributes are the enduring characteristics that give an industry its distinctive character.
a. 3) Product Differentiation This variable refers to the extent to which customers perceive products or services offered by firms in the industry is different. Loyalty of consumers to existing brands. Faculty of Business & Economics. Access to managerial skills required for successful operation. Competitive Position Assessing its competitive position improves a firm’s chance of designing strategies that optimize its environmental opportunities. The laws regulating entry into an industry. Management Course Instructor: Suleiman K. The tangible barriers include: Capital requirements. Barriers can be tangible or intangible.2. firms can be much more proactive (as opposed to reactive) in dealing with operating environment than in dealing with the remote environment. 4) Barriers to Entry These are obstacles that the firm must overcome to enter an industry. comprises factors in the competitive situation that affect a firm’s success in acquiring needed resources or in profitably marketing its goods and services. its reputation among supplies and creditors. successful differentiation poses a competitive disadvantage for firms that attempt to enter an industry.3 Operating Environment The operating environment. Development of competition profile enables a firm to more accurately forecast both its short and long term growth and its profit potentials.Hawassa University. Real and Perceived differentiations often intensify competition among existing firms. and enhanced employee performance arising from competition. . Among those factors are the firm’s competitive position. and its ability to attract capable employees. On the other hand. the composition of its customers. Technological know-how. Course Title: Business Policy & Strategy (Mgmt 492) Page 31 of 43 agreements with suppliers. Thus. Perceived (Fancied) differentiation results from the way in which firms position their products and from their success in persuading customers about the differences. The operating environment is typically much more subject to the firm’s influence to control than the remote environment. also called the competitive or talk environment. Differentiation of products can be real or perceived (fancied): Real differentiation results from the use of different design principles and different construction technologies. Department of B. The followings discuss the most important factors in the firm’s operating environment. Resources. The intangible barriers include: Reputation of existing firms. 2.
sex. Behavioral Variables . The traditional approach to segmenting customers is based on customer profiles constructed from geographic. Course Title: Business Policy & Strategy (Mgmt 492) Page 32 of 43 Although the exact criteria used in constructing a competitor’s profile are largely determined by situational factors. and to reallocate resources so as to support forecast shifts in demand patterns.Hawassa University. Accordingly. and the weighted scores are summed to yield a numerical profile of the competitor. they are weighted to reflect their importance to a firm’s success. Psychographic Variables Psychographic variables refer to customers’ personality and life styles. Such information is the minimum basis for a customer profile. b. and use in strategic forecasting. Once appropriate criteria have been selected. Faculty of Business & Economics. Then the competitor being evaluated is rated on the criteria. quantify. marital status. Geographic Variables It is important to define the geographic area from which customers come or could come. Management Course Instructor: Suleiman K. psychographic. Demographic Variables These variables are most commonly used to differentiate groups of present and potential customers. Demographic information such as age. Department of B. demographic. to anticipate changes in the size of markets. and occupation is comparatively easy to collect. the ratings are multiplied by the weight. This is so because every product or service that the company offers to the market has some quality that makes it variably attractive to buyers from different locations. The process of developing competitions’ profile is of considerable help to a firm in defining its perception of the competitive position. the personality and lifestyles of customers are often better predictors of customer purchasing behavior than geographic or demographic variables. the following table includes the most often used criteria of competitor’s profile. income. Customer Profiles Developing a profile of a firm’s present and prospective customers improves the ability of its managers to plan strategic operations. and behavioral information.
benefits sought. opportunity and threats are environmental situations facing that firm so they are external factors. With regard to its competitive position with its suppliers. such data are used to explain and predict some aspects of customer behavior with regard to a product or service. In assessing a firm’s relationship with its suppliers. Two approaches that provide answer to the above questions are discussed bellow.1 SWOT Analysis SWOT is an acronym for Strengths. it occasionally is forced to make special requests for such favors as quick delivery. 2. That is. 2. c. Opportunity and Threat) Analysis and functional analysis. liberal credit terms. reputations. While Strengths and Weaknesses are internal to the firm.Hawassa University. SWOT analysis is an easy technique through which managers create a quick overview of a company’s strategic situation.3. it is essential for a firm to have had an ongoing relationship with its suppliers. this simple assumption has powerful implications for the design of a successful strategy. and services. Weakness. If it is accurately applied. Management Course Instructor: Suleiman K. Weaknesses. the firm should address the following important points: The competitiveness of the suppliers’ price Quantity discounts offered by suppliers The amount of their shipping charges The suppliers’ production standards The competitiveness of the suppliers’ abilities. The Value chain analysis will also be addressed here to complement the briefing. and brand loyalty. A good fix maximizes a firm’s strengths and opportunities and minimizes its weaknesses and threats. Suppliers Dependable relationships between a firm and its suppliers are essential to the firm’s long-term survival and growth. In addition. several factors should be considered. materials and equipment. Faculty of Business & Economics. and return of broken-lot orders. The approaches are SWOT (Strength. Managers often start their internal capabilities. A firm regularly relies on its suppliers for financial support services. Accordingly.3 Internal Environment Analysis Strategy must plan realistic requirements on the firm’s internal capabilities. the firm’s pursuit of market opportunities must be based not only on the existence of such opportunities but also on the firm’s key internal strengths. Opportunities and Threats. Course Title: Business Policy & Strategy (Mgmt 492) Page 33 of 43 These variables refer to the buyer’s behavior data. The following discussion will looks at the several ways managers achieve greater objectivity as they analyze their company’s internal capabilities. . Particularly at such times. Department of B. They include such information as usage rate. It is based on the assumption that an effective strategy is derived from a sound “fit” between a firm’s internal capabilities (Strengths and weaknesses) and its external situation (opportunities and threats). Mangers often start their internal analysis with questions like “How well is the current strategy working?” “What is our current situation?” or “What are our strengths and weaknesses?”. as a component of the customer profile.
Hawassa University. or other advantages relative to competitors and the needs of the markets a firm serves or expects to serve. Strengths may exist with regard to: Financial resources. The following points could represent opportunities for the firm: Identification of a previously over looked market segment Changes in competitive or regulatory circumstances Technological changes. 2. Key trends are oral sources of opportunities. Management Course Instructor: Suleiman K. b) Weakness Weakness is a limitation or deficiency in resources. Threats are key impediments to the firm’s current or desired position. Financial resources. Department of B. the industry environment analysis provides the information needed to identify opportunities and threats in a firm’s environment. Strength is a distinctive competence when it gives the firm a comparative advantage in the market place. The most common way to use SWOT analysis is as a logical framework guiding systematic discussion of a firm’s situation and the basic alternatives that the firm might .1.2 External Situations External situations are the opportunities and threats. Corporate image. or capabilities that seriously impedes a firm’s effective performance. and Improved buyer or supplier relationships. They are defined as follows: a) Strengths Strength is a resource. Course Title: Business Policy & Strategy (Mgmt 492) Page 34 of 43 2. and Brand image. and Buyer-supplier relations.3. Firms usually face threats when: New competitors enter the industry Market growth is slow Bargaining power of key buyers and suppliers increase. and Technological changes occur. Management capabilities. Marketing skills. Market leadership. skills. As you have seen it before.1.1 Internal Capabilities As discussed earlier the internal capabilities are the strengths and weaknesses of the firm.3. a) Opportunities An opportunity is a major favorable situation in a firm’s environment. b) Threats A threat is a major unfavorable situation in a firm’s environment. skills. Weakness may exist with regard to: Production facilities. Faculty of Business & Economics.
Department of B. Figure: SWOT Analysis Diagram The patterns represented by the four cells in the figure are discussed as follows: Cell 1 This is the most favorable situation as the firm faces several environmental opportunities and has numerous strengths that encourage pursuit of those opportunities.3 Structured Approach in SWOT Analysis Another way in which SWOT analysis can be used to aid strategic analysis is the comparison of the key external opportunities and threats with internal strengths and weaknesses in a structured approach. what one firm sees as an opportunity could be seen as a potential threat by another. Cell 3 A firm in this cell faces impressive market opportunity but is constrained by internal weaknesses. Cell 2 In this cell. Course Title: Business Policy & Strategy (Mgmt 492) Page 35 of 43 consider. This Situation suggests growth-oriented strategies to exploit the favorable match. For instance. Faculty of Business & Economics. In this situation. strategists would use current strengths to build long-term opportunities in more opportunistic product markets. The focus of strategy for such a firm is eliminating the internal weaknesses so as to more effectively pursue the mark of opportunity. Cell 4 This is the least favorable situation with the firm facing major environmental threats situation clearly calls for strategies that reduce or redirect involvement in the products or markets. The comparison is presented in the following figure.1.Hawassa University.3. The objective is identification of one of four distinct patterns in the match between a firm’s internal and external situations. . Management Course Instructor: Suleiman K. a firm with key strengths faces an unfavorable environment. 2.
2 The Functional Approach The functional approach is one way managers have traditionally sought to isolate and evaluate internal strengths and weaknesses.3. Department of B. and characteristics. some of which would be the focus of internal analysis in most firms.debt & equity Tax considerations Leverage position Working capital & flexibility of capital structure.Technology & innovation PERSONNEL Management team Employee’s skill and morale Employee turnover and absenteeism Efficiency and effectiveness of personnel policies QULAITY MANAGEMENT Relationship with suppliers & customers Procedures for monitoring quality INFORMATION SYSTEMS Timeliness and accuracy of information Ability of people to use the information provided . The following lists are typical internal factors. MARKETING Firm’s products & services = breadth of product line Market share or sub market shares Channels of distribution &number. limitations. Course Title: Business Policy & Strategy (Mgmt 492) Page 36 of 43 In general. 2. FINANCE AND ACCOUNTING Ability to raise short-term capital Ability to raise long-term capital . coverage and control Product & service image. PRODUCTION / OPERATJ0NS / TECHNICAL Raw materials with cost and availability Inventory control systems Location of facilities Economics of scale Patents. Faculty of Business & Economics. Accordingly. SWOT analysis highlights the control role that the identification of internal strengths and weaknesses plays in the firm’s search for effective strategies.Hawassa University. trademarks. the key internal factors are a firm’s basic capabilities. and similar legal protection Research and development . The careful matching of a firm’s opportunities and threats with its strengths and weakness is the essence of sound strategy formulation. reputation. and quality Pricing strategy and pricing flexibility After sale service and follow-up. Management Course Instructor: Suleiman K.
cost.3. managers divide the activities of their firm is to sets of separate activities that add value. relevant analysis that enhances strategic decision making regardless of situational differences. Each of these activities can add value and each can be a source of competitive advantage. Their firm is viewed as a chain of value-creating activities stating with procuring new materials or inputs and continuing through design. and profitability is of major importance in identifying its strategic internal factors. Changing conditions in an industry can lead to the need to reexamine a firm’s internal strengths and weaknesses in light of newly emerging determinants of success in that industry. The identification of strategic internal factors requires an external focus. Value chain analysis divides a firm’s activities into two major categories. In this analysis. delivery. 2. Faculty of Business & Economics. A strategist’s efforts to isolate key internal factors are assisted by analysis of industry conditions and trends and by comparisons with competitors. Management Course Instructor: Suleiman K. Course Title: Business Policy & Strategy (Mgmt 492) Page 37 of 43 ORGANIZATION AND MANAGEMENT Organizational structure & culture Organizational communication system Use of systematic procedures and techniques Firms are not likely to evaluate all of the factors listed above.3 Value Chain Analysis Values chain analysis is based on the assumption that a business’s basic purpose is to create value for uses of it products or services. distribution. manufacturing and assembly. primary activities and support activities. Figure: The Value Chain Primary activities are those involved in the physical creation of the product. as shown in the following figure. To develop a revised strategy. component production.Hawassa University. Department of B. The functional approach to internal analysis focuses managers on basic business functions leading to a more objective. and after-sale support. managers would prefer to identify the few factors on which its success is most likely to depend. Strategists examine a firm’s past performance to isolate key internal contributors to favorable or unfavorable results. Support activities assist . marketing and transfer to the buyer. sales. Analysis of past trends in a firm’s sales. and support of the ultimate user of its products or services.
Each activity in the value chain incurs costs and ties up time and assets. managers used to identity the activities that are critical to buyers’ satisfaction and market success. Value chain analysis requires managers to sign costs and assets to each activity. Within each category. a firm typically performs a number of discrete activities that may represent key strengths or weaknesses. Managers are most familiar with the internal capability (strengths) or problems (weaknesses) of their firm because they have been immersed in its financial. The relative importance of value chain activities can vary by a company’s position in a broader value system that includes the value chains of its upstream suppliers and downstream customers or partners involved in providing products or services to end users. Department of B. The nature of value chains and the relative importance of activities within them vary by industry. supplies. marketing and production activities. the functional approach. thereby providing the basis to estimate costs to each activity. travel. Three considerations are essential at this stage in the value chain analysis: The company’s basic mission needs to influence manager’s choice of activities that they examine in detail. and so on. particularly given its non traditional format. strategists rely on four basic perspectives to evaluate where their firm stacks up on its internal capabilities. usually grouping them similarly to the primary and support activity categories as you have seen in figure above. Course Title: Business Policy & Strategy (Mgmt 492) Page 38 of 43 the primary activities by providing infrastructure of inputs that allow them to take place on an ongoing basis. . Traditional accounting identifies costs in broad expense categories . Conducting the Value Chain Analysis The initial step in value chain analysis is to divide a company’s operations into specific activities or business processes. or the value chain analysis. Perspectives in Evaluating Internal Capability Managers need an objective standard to use when examining internal capabilities or value building activities. Whether using SWOT analysis. The result provides managers with a very different way of viewing costs than traditional cost accounting procedures would produce. The next step is to attempt to attain costs to each discrete activity. Faculty of Business & Economics. These four perspectives will be discussed in the following section: a) Comparison with Past Performance Strategists use the firm’s historical experience as a basis for evaluating internal factors. Value chain analysis uses activity-based costing which requires managers to “disaggregate” these broad numbers across specific tasks and activities. benefits.wages. The data necessary to support value chain analysis can be formidable. Once the company’s value chain has been documented and the costs are determined. depreciation. Management Course Instructor: Suleiman K.Hawassa University.
fewer defects. Decline: When the industry moves into this stage. strengths and weaknesses center on cost advantages. control systems. Such factors as brand recognition and the financial resources to support both heavy marketing expenses and the effect of price competition can be key strengths at this stage. Department of B. industry growth continues. or other outcomes linked to excellence are achieved. financial resources. The ultimate objective in benchmarking is to identify the “best practices” in performing an activity. but at a decreasing rate since technological change slows considerably. as a framework for identifying and evaluating the firm’s strengths and weaknesses.is a strength or a weakness well be strongly influenced by his or her experience in connection with that factor. which are associated with different stages of industry evolution. brand images. c) Benchmarking . b) Stage of Industry Evolution The requirements for success in industry segments change over time. and financial control. Benchmarking can prove useful in ascertaining internal capabilities (strengths and weaknesses) . Introduction: This is the early development of a product market which entails minimal growth in sales. strategists must avoid tunnel vision in making use of it. operating losses. 2. These are four stages of industry evolution.Comparison with Competitors A major focus in determining a firm’s strengths and weaknesses is comparison with existing (and potential) competitor firms in the same industry often have different marketing skills. Management Course Instructor: Suleiman K. In choosing a strategy managers should compare the firm’s key internal capabilities with those of its rivals and weaknesses. using only historical experience as a basis for identifying strength and weaknesses can prove dangerously in accurate. or key personnel . Although historical experiences provide a relevant evaluation frame work. Competition becomes more intense and promotional and pricing advantages became key internal strengths. sales organization. superior supplies or customer relationships. 4. Faculty of Business & Economics. Strategists can use these changing requirements. 1. and the need for sufficient resources to support unprofitable operation.Hawassa University. Course Title: Business Policy & Strategy (Mgmt 492) Page 39 of 43 A manager’s assessment of whether a certain internal factors such as production facilities. Growth: The strengths necessary for success change in this stage. levels of integration.significant favorable differences from competitors are potential cornerstones of a firm’s strategy by being its competitive advantage. d) Comparison with Success Factors in the Industry . to learn how lower costs. Companies committed to benchmarking attempt to isolate and identify where their costs or outcomes are out of line with the best practical of competitors and then attempt to change their activities to achieve the new best practices standard. These different internal capabilities can become relative strengths (or weaknesses) depending on the strategy a firm chooses. operating facilities and locations. financial capacity. 3. Maturity: As the industry moves through a shakeout phases and into the maturity stage. managerial talent and so on. because. technical knowhow.
complexity of the global environment. Low Labor Cost In many industries. c. b. Management Course Instructor: Suleiman K. as well as customer needs. The key determinants of success in an industry may be used to identify a firm’s internal strengths and weaknesses.1 Reasons for Globalizing A variety of reasons make conducting business across national boundaries profitable and attractive. New Product Testing Many companies find it more desirable to develop and/or test new products outside the domestic market. the higher the profit. . An important motive for extending such tax incentives is to increase scarce foreign exchange and create jobs at home. keeps the new development information secret until the product is ready for full introduction. 2. A company finding such tax concessions viable will establish a plan in the low-tax country and sell the manufactured goods locally. This avoids exposure to competitors and. and international strategy options. a strategist seeks to determine whether the firm’s current internal capabilities represent strengths or weaknesses. Understanding the global markets and the environment is a required competence of strategic managers. Department of B.4. vertical industry structure. Among the reasons. as well as from export there to its primary markets. By scrutinizing industry competitions. labor constitutes a major proportion of costs. channels of distribution cost. because. some of them are discussed below: a.4 The Global Environment and concepts of Globalization Global environment is one of the special complications that confront a firm operating internationally. Awareness of the strategic opportunities faced by global corporations and of the threats posed to them is important to planners or strategist. e. to some extent. d. Usually a recession starts in one country and takes several months to move into other countries. Safety Net Globalization provides a safety net during business downturn. Course Title: Business Policy & Strategy (Mgmt 492) Page 40 of 43 Industry analysis involves identifying factors associated with success in a given industry. the growth in the number of global firms changes the structure of the competitive environment. 2. and diverse international economic groups. Faculty of Business & Economics. barriers to entry. it is economically attractive for firms to expand foreign operations. availability of substitutes and suppliers. Tax Incentives Some countries differ in tax incentives to attract foreign business to their countries. Desire for International Experience Company’s presence in the global environment provides expanded access to advances in technology. Globalization refers to the strategy of approaching world divided markets with standardized products. The following discussion addresses issues such as reasons for globalization. Since labor is cheaper in certain countries. world wide raw materials. Labor sometimes represents as much as half of the product cost. so the cheaper the labor.Hawassa University. considerations prior to globalization.
diminish the risk for each partner or forestall the entry of competitors into their markets.4. In a similar way. Thus. the domestic market is too small with a very limited demand. a firm may go globally where it can produce goods at lower costs using cheap labor and materials or selling them at higher prices. Opportunity for Unlimited Expansion For firms having strong desire for expansion. reduce expense. g. Therefore. because they are often the characteristics of a firm that the host nation values most.3 Complexity of the Global Environment . These strengths are particularly important in global operations.2 Considerations Prior to Globalization To begin globalization. firms are advised to take four steps.Hawassa University. firms look for global market and cross boundary trade. h. Management Course Instructor: Suleiman K. political control and nationalism. Department of B. and checking other printed sources-as well as meeting people at scientific-technical conferences and in house seminar. External assessment involves careful examination of critical feature of the global environment. if a firm establishes an objective of growth and expansion. Internal assessment involves identification of the basic strengths of a firm’s operations. Make Connections with Academic and Research Organization: Firms active in overseas R&D often pursue work-related projects with foreign academics and sometimes enter into consulting agreements with them.4. Undertake Research and Development: Involving in research projects with foreign firms to broaden their contacts. 2. there might be a growing and intense competition from domestic firms. Course Title: Business Policy & Strategy (Mgmt 492) Page 41 of 43 f. 2. it will have an opportunity to accomplish them by entering into global market. Particular attention begins to be paid to the status of the host nations in such areas as economic progress. external and internal assessments may be conducted before a firm enters global markets. circulating brochures on their products and inventions. In order to maintain the profit margin. In addition. Changing Competitive Structures Because a lot of bigger firms are entering the domestic market. the domestic market might not be as it used to be. Increase the Firm’s Global Visibility: Common methods that firms use to attract global attention include participating in trade fairs. Scan The Global Situation: Scanning includes reading journals and patent reports. To maintain profit margin The profit margin of a firm maybe eroded due to several factors such as: Increasing costs as the result of inefficiency and Increasing local competition. reduce foreign firms to broaden their contacts. Faculty of Business & Economics. and hiring technology acquisition consultants.
Management Course Instructor: Suleiman K. and variations in business practices all tend to make communication and control efforts between head quarters and the overseas subsidiaries difficult. social. The factor contributing for the complexity are: Global firms face multiple political. Moreover.4.4 International Strategy Options In order to see the strategy options in global environment. economic. An inherent complicating factor for many global firms is that their financial policies typically are designed to further the goals of the parent company and pay minimal attention to the goals of the host countries. Thus. There are at least five factors that contribute to the increase in complexity. Figure: International strategy options The figure represents the basic multinational strategy options that have been derived from a consideration of the location and coordination dimensions. and the structure of capital) more problematic. different financial environments make normal standards of company behavior (concerning the disposition of earnings. legal. Department of B. sources of finance. cultural and national differences. 2. This allows each subsidiary to closely monitor the local market conditions it faces and to respond freely to these conditions. Faculty of Business & Economics. Interactions between the national and foreign environments are complex because of national sovereignty issues and widely differing economic and social conditions. . Global firms face extreme competitions because of differences in industry structures. Course Title: Business Policy & Strategy (Mgmt 492) Page 42 of 43 Global strategic planning is more complex than pure domestic planning. Geographic separation.Hawassa University. Low coordination and geographic dispersion of functional activities are implied if a firm is operating in a multi-domestic industry and has chosen a country-centered strategy. carefully examine the following figure. and cultural environments as well as various rates of changes within each of them. Global firms are restricted in their selection of competitive strategies by various regional blocs and economic integrations. it becomes increasingly difficult to measure the performance of international division.
High foreign investment with extensive coordination among subsidiaries would describe the choice of remaining at a particular stage. may need to be located in each market. which a multinational firm might make. Management Course Instructor: Suleiman K. Course Title: Business Policy & Strategy (Mgmt 492) Page 43 of 43 High coordination and geographic concentration of functional activities result from the choice of a pure global strategy.Hawassa University. . such as. light control of those activities is necessary to ensure standardized performance worldwide.based strategy with decentralized marketing would describe the choice of moving toward globalization. Export . such as that of an exporter. Faculty of Business & Economics. Although some functional activities. Department of B. after sales service.
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