Assignment- Strategic Management

Question 1

Factors outside or organization are the elements of the external environment. The organization has no control over
how the external environment elements will shape up. The external environment embraces all general environmental
factors and an organization’s specific industry-related factors. The general environmental factors include those factors
that are common in nature and generally affect all organizations. The external environment consists of an
organization’s external factors that affect its businesses indirectly. The organization has no or little control over these
factors; that means, the external environment is generally non-controllable.

The external environmental factors reside outside the organization, which can lead to opportunities or threats.

The factors in the general environment. PESTLE Model covers political, economic, sociocultural, technological, legal,
and environmental (natural).

• Economic factors.
• Socio-cultural factors.
• Political-Legal factors.
• Technological factors.
• Economic Factors

Economic Factor

The economic factor of an organization is the overall status if the economic system in which the organization
operates. The important economic factors for business are inflation, interest rates, and unemployment. These
factors of the economy always affect the demand for products. During inflation, the company pays more for
its resources and to cover the higher costs for it, they raise commodity prices. When interest rates are high,
customers are less willing to borrow money and the company itself must pay more when it borrows. When
unemployment is high, the company can be very selective about who it hires, but customers’ buying power
is low as fewer people are working. A country’s economic conditions affect market attractiveness. The
performance of business organizations is affected by the health of a nation’s economy. Several economic
variables are relevant in determining business opportunities. There is thus a need to analyze the economic
environment prudently by the business firms.

Examples of economic factors include the trend in economic growth, income levels of population, inflation
rate, tax rates for individuals and business organizations, etc.

Socio-Cultural Factors
Customs, mores, values and demographic characteristics of the society in which the organization operates
are what made up the socio-cultural factors of the general environment.

The socio-cultural dimension must be well studied by a manager. It indicates the product, services, and
standards of conduct that society is likely to value and appreciate. The standard of business conduct varies
from culture to culture and so does the taste and necessity of products and services.
Socio-cultural forces include culture, lifestyle changes, social mobility, attitudes towards technology, and
people’s values, opinion, beliefs, etc.

Technological Factors

It denotes to the methods available for converting resources into products or services. Managers must be
careful about the technological factor. Investment decisions must be accurate in new technologies and they
must be adaptable to them.
 Technological factors include information technology, the Internet, biotechnology, global transfer of
technology and so forth. None can deny the fact that the pace of change in these technological dimensions is
extremely fast.
Technological changes substantially affect a firm’s operations in many ways. The advancement of
industrialization in any Country depends mostly on the technological environment. Technology has major
impacts on product development, manufacturing efficiencies, and potential competition.

Legal Factors
The legal environment consists of laws and regulatory frameworks in a country. Many laws regulate the
business operations of enterprises such as the Factories Act, Industrial Relations Ordinance, the Contract Act,
and the Company law, just to name a few. Business laws primarily protect companies from unfair competition
and also protect consumers from unfair business practices. Business laws also protect society at large. The
laws regarding a merger, acquisitions, industry regulation, employment conditions, unionization, workmen’s
compensation and the like affect a firm’s strategy. Even globalization has caused significant repercussions
in the legal environment. Thus, the business managers must have thorough knowledge about the major laws
that protect business enterprises, consumers and society.

And the overall situation of law implementation and justices in a country indicates that there is a favorable
situation in business in a country.
Competitive Factors

How do businesses stay competitive and still maintain a level of profitability that allows them to be
successful? The competitive environment has intensified with the development of new technologies, the
opening up of foreign markets, and the rise of consumer expectations. The local hardware store now finds
itself competing with “big box” stores such as Lowe’s and Home Depot. These larger stores have enough
clout with suppliers that they can often sell a product to the consumer for less than an independent store can
purchase it. Customers of these large chains can order online, get their items the same day, and receive loyalty
rewards, free delivery, customization, and even service and installation. Staying competitive is a challenge
for every business, and business owners are finding that benefits such as customer service, employee
knowledge, and high quality can help them survive.

Global Environment
From a business perspective, it is a small world, and it’s only getting smaller. Free trade among nations has
allowed goods and services to flow across international borders more efficiently and cheaply. Formal trade
agreements among nations have forged unprecedented links and interdependencies among economies. When
the price of foreign oil increases or decreases, businesses in the U.S. feel the impact. So, it’s not just the local
economy or even the national economy that businesses must track—they must also keep an eye on the world
economy in order to anticipate and adapt to changes that will impact their products and services.

One of the most fundamental factors we learn in economics is that satisfying customer demand is a must for every
business survival. It is obvious that your product is served for the needs of customers then under any circumstance,
your business can develop without following this mission. Beside to be the leading company entrepreneurs should not
only identify but also tailor their customer’s interest.
We all know that what people want, what people need, and what they demand are usually different from each other.
Customers need something to communicate with their family member outside their countries, they want to a
smartphone which can perform multi-function; however, they cannot afford that smartphone with a limited budget.
Therefore, their demand is just a typical phone which can perform basic functions. If your company is not able to
figure out what are your customer demands, you will face difficulty in how to make your products consumed by
customers.
Question 2

Porter’s Five Forces analysis is a framework that helps analyzing the level of competition within a certain industry. It
is especially useful when starting a new business or when entering a new industry sector. According to this framework,
competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five
basic forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute
products or services, and existing industry rivalry.

Threat of new entrants

New entrants in an industry bring new capacity and the desire to gain market share. The seriousness of the
threat depends on the barriers to enter a certain industry. The higher these barriers to entry, the smaller the
threat for existing players. Examples of barriers to entry are the need for economies of scale, high customer
loyalty for existing brands, large capital requirements, the need for cumulative experience, government
policies, and limited access to distribution channels. More barriers can be found in the table below.

Example: The threat of new entrants in the airline industry can be considered as low to medium. It takes quite
some upfront investments to start an airline company. Moreover, new entrants need licenses, insurances,
distribution channels and other qualifications that are not easy to obtain when you are new to the industry.
Furthermore, it can be expected that existing players have built up a large base of experience over the years
to cut costs and increase service levels. A new entrant is likely to not have this kind of expertise, therefore
creating a competitive disadvantage right from the start. .
Bargaining power of suppliers

This force analyzes how much power and control a company’s supplier has over the potential to raise its
prices or to reduce the quality of purchased goods or services, which in turn would lower an industry’s
profitability potential. The concentration of suppliers and the availability of substitute suppliers are important
factors in determining supplier power. The fewer there are, the more power they have. Businesses are in a
better position when there are a multitude of suppliers. Sources of supplier power also include the switching
costs of companies in the industry, the presence of available substitutes, the strength of their distribution
channels and the uniqueness or level of differentiation in the product or service the supplier is delivering.

Example: The bargaining power of suppliers in the airline industry can be considered very high. When
looking at the major inputs that airline companies need, we see that they are especially dependent on fuel and
aircrafts. These inputs however are very much affected by the external environment over which the airline
companies themselves have little control. The price of aviation fuel is subject to the fluctuations in the global
market for oil, which can change wildly because of geopolitical and other factors.

Bargaining power of buyers

The bargaining power of buyers is also described as the market of outputs. This force analyzes to what extent
the customers are able to put the company under pressure, which also affects the customer’s sensitivity to
price changes. The internet has allowed customers to become more informed and therefore more empowered.
Customers can easily compare prices online, get information about a wide variety of products and get access
to offers from other companies instantly. Companies can take measures to reduce buyer power by for example
implementing loyalty programs or by differentiating their products and services.

Example: Bargaining power of buyers in the airline industry is high. Customers are able to check prices of
different airline companies fast through the many online price comparisons websites. In addition, there aren’t
any switching costs involved in the process. Customers nowadays are likely to fly with different carriers to
and from their destination if that would lower the costs. Brand loyalty therefore doesn’t seem to be that high.
Some airline companies are trying to change this with frequent flyer programs aimed at rewarding customers
that come back to them from time to time.
Threat of substitute products
 The existence of products outside of the realm of the common product boundaries increases the propensity
of customers to switch to alternatives. In order to discover these alternatives, one should look beyond similar
products that are branded differently by competitors. Instead, every product that serves a similar need for
customers should be taken into account. Energy drink like Redbull for instance is usually not considered a
competitor of coffee brands such as Nespresso or Starbucks. However, since both coffee and energy drink
fulfill a similar need, customers might be willing to switch from one to another if they feel that prices increase
too much in either coffee or energy drinks. This will ultimately affect an industry’s profitability and should
therefore also be taken into account when evaluating the industry’s attractiveness.
Example: In terms of the airline industry, it can be said that the general need of its customers is traveling. It
may be clear that there are many alternatives for traveling besides going by airplane. Depending on the
urgency and distance, customers could take the train or go by car. Especially in Asia, more and more people
make use of highspeed trains. Taken this altogether, the threat of substitutes in the airline industry can be
considered at least medium to high.
Rivalry among existing competitors

This last force of the Porter’s Five Forces examines how intense the current competition is in the marketplace,
which is determined by the number of existing competitors and what each competitor is capable of doing.
Rivalry is high when there are a lot of competitors that are roughly equal in size and power, when the industry
is growing slowly and when consumers can easily switch to a competitor offering for little cost. In addition,
rivalry will be more intense when barriers to exit are high, forcing companies to remain in the industry even
though profit margins are declining. These barriers to exit can for example be long-term loan agreements and
high fixed costs.

Example: When looking at the airline industry in the United States, we see that the industry is extremely
competitive because of a number of reasons which include the entry of low-cost carriers, the tight regulation
of the industry wherein safety become paramount leading to high fixed costs and high barriers to exit, and
the fact that the industry is very stagnant in terms of growth at the moment. The switching costs for customers
are also very low and many players in the industry are similar in size leading to extra fierce competition
between those firms. Taken altogether, it can be said that rivalry among existing competitors in the airline
industry is high.
Question 3a

Dow and Du Pont Companies employed Growth strategy initially. The most widely pursued corporate directional
strategies are those designed to achieve growth in sales, assets, profit or some combination of these. A growth strategy
is one under which management plans to advance further and achieve growth of the enterprise, in fields of
manufacturing, marketing, financial resources etc. In the fast-expanding economies of today, adoption of growth
strategies by business enterprises is a must for the survival, in the long-run; lest they should be swept away by
environmental influences, especially competition, technology and governmental regulations.

Advantages of Growth Strategy

Possibly the greatest competitive advantage of business growth is the ability to capitalize on the economies of scale.
As you increase your production output, you can bring down costs per unit and achieve savings across:

• purchasing
• marketing
• overheads

Business growth can also enable you to:

• increase your resources and stock

• generate more sales and profits
• reach new customers or markets
• put more money back into your business
• influence market price
• reduce external risks (eg from competition, market or technology changes)

Disadvantages of Growth Strategy

Larger businesses tend to be more complex than smaller businesses. Some of the common disadvantages of business
expansions are:

• shortage of cash
• compromised quality
• loss of control
• increased capital requirements
• increased staff turnover

In 1991 Du Pont decided to employ Turnaround Strategy. Turnaround strategy is a corporate practice designed and
planned to protect (save) a loss-making company and transform it into a profit-making one. It is a corporate action
that is taken (performed) to deal with issues of a loss-making (sick) company like increasing losses, lower return on
capital employed, and continuous decrease in the value of its shares. This looks into the problems from a lens favorable
to both the company and its employees. This process primarily involves dissolving of redundant branches of the
organization. This strategy is in part to check the fiscal backdrops without harming the interest of the employees to a
great degree. The strategy is the management’s plan for improving the performance of the firm and gaining a
competitive advantage.

At the business level, the strategies are more about developing and sustaining competitive advantage for the products
offered by the enterprise. It is concerned with positioning the business against competitors, in the marketplace.
Conversely, at the corporate level, the strategy is all about formulating strategies to maximizing profitability and
exploring new business opportunities.

Strategic decisions at corporate level are usually analytical and focused on value generation, organizational growth
and maximization of profits. On the other, at the business level, strategic decisions pertain to the activities carried out
to generate value for customers and attain a competitive edge in the market.
It is very important for organizations to formulate appropriate strategies for achieving their objectives. Corporate
strategies serve as a guide for organizations to attain their long-term objectives. On the other hand, business strategies
are important to attain specific objectives of the organizations at the business unit level. When relevant strategies are
in place, the organization is able to achieve its long-term goals of organizational growth and profit maximization, as
well as short-term goals of successfully competing in the market with other organizations.
Question 3b

Another strategy that either of these two companies could have used is Corporate Strategy takes a portfolio approach
to strategic decision making by looking across all of a firm’s businesses to determine how to create the most value.
In order to develop a corporate strategy, firms must look at how the various business they own fit together, how they
impact each other, and how the parent company is structured, in order to optimize human capital, processes, and
governance. Corporate Strategy builds on top of business strategy, which is concerned with the strategic decision
making for an individual business.

I would recommend the following points:

• Allocation of resources
• Organizational design
• Portfolio management
• Strategic tradeoffs

Allocation of Resources

The allocation of resources at a firm focuses mostly on two resources: people and capital. In an effort to maximize
the value of the entire firm, leaders must determine how to allocate these resources to the various businesses or
business units to make the whole greater than the sum of the parts.

Organizational Design

Organizational design involves ensuring the firm has the necessary corporate structure and related systems in place to
create the maximum amount of value. Factors that leaders must consider are the role of the corporate head office
(centralized vs decentralized approach) and the reporting structure of individuals and business units – vertical
hierarchy, matrix reporting, etc.

Portfolio Management

Portfolio management looks at the way business units complement each other, their correlations, and decides where
the firm will “play” (i.e., what businesses it will or won’t enter).

Strategic Tradeoffs
One of the most challenging aspects of corporate strategy is balancing the tradeoffs between risk and return across the
firm. It’s important to have a holistic view of all the businesses combined and ensure that the desired levels of risk
management and return generation are being pursued.

Managing risk
Firm-wide risk is largely depending on the strategies it chooses to pursue. True product differentiation, for example,
is a very high-risk strategy that could result in a market leadership position or total ruin. Many companies adopt a
copycat strategy by looking at what other risk-takers have done and modifying it slightly. It’s important to be fully
aware of strategies and associated risks across the firm. Some areas might require true differentiation (or cost
leadership) but other areas might be better suited to copycat strategies that rely on incremental improvements. The
degree of autonomy business units have is important in managing this risk.
Corporate Strategy is different than business strategy, as it focuses on how to manage resources, risk, and return across
a firm, as opposed to looking at competitive advantages. Leaders responsible for strategic decision making have to
consider many factors, including allocation of resources, organizational design, portfolio management, and strategic
tradeoffs. By optimizing all of the above factors, a leader can hopefully create a portfolio of businesses that is worth
more than just the sum of the parts.