THE NATURE OF STRATEGIC MANAGEMENT
II. How should we compete in those industries?
CHAPTER 1
Learning Objectives:
a) Discuss the Strategic Management
b) Explain the nature of strategy formulation, implementation, and
evaluation activities.
c) Articulate how firm may achieve sustained competitive advantages.
Given the many challenges and opportunities in the global market,
today’s managers must do more than set long-term strategies and hope
for the best. They must go beyond what some have called “incremental
management” whereby they view their job as making a series of small,
minor changes to improve the efficiency of their firm’s operation. Rather
than seeing their role as mere custodians of the status quo, today’s
leaders must be proactive, and anticipate change and continually refine
and, when necessary, make dramatic changes to their strategies. The
organization’s strategic management must become both A PROCESS
and A WAY OF THINKING throughout the organization.
Defining Strategic Management
STRATEGIC MANAGEMENT – consists of analyses, decisions, and
actions an organization undertakes in order to create and sustain
competitive advantage.
2 Elements:
1. The strategic management of an organization entails three ongoing
process:
a) Analyses – concerned with the analysis of strategic goals
(vision, mission, and strategic objectives) and the analysis of
the organization's external and internal environments.
b) Decisions – leaders must make strategic decisions. These
decisions, broadly speaking, address two basic questions:
I. What industries should we compete in?
c) Actions – firms must take necessary actions to implement
their
strategies.
“ This requires leaders to allocate the necessary resources
and to design the organization to bring the intended strategies
to reality.”
2. The essence of strategic management is the study of why
some
firms outperform others.
Ex.
Managers need to determine how a firm is to compete so
that it can obtain advantages that are sustainable over a
lengthy period of time.
Two questions:
1. How should we compete in order to create competitive
advantages in the marketplace?
Managers need to determine if the firm should position itself
as the low-cost producer or develop products and services that
are unique and will enable the firm to change premium prices.
Or should they combine both.
2. How can we create competitive advantages in the
marketplace
that are unique, valuable and difficult for rivals to copy or
substitute?
Managers need to make such advantages sustainable, instead
of temporary.
Sustainable competitive advantage cannot be achieved
through operational effectiveness alone.
The popular management innovations of the last two
decades – total quality, just-in time, benchmarking, business
process
reengineering, outsourcing- are all about operational
effectiveness.
OPERATIONAL EFFECTIVENESS – means performing similar Stakeholder Strategy
activities - Have a vested claim or interest in the performance and
better than rivals. continued
Each of the innovations is important, but none lead to survival of the firm
sustainable
competitive advantage because everyone is doing it. - 2 Groups
keholders
Strategy is all about being different. i. Employees
ii. Stockholders
- It is about delivering superior value, while containing the cost iii. Board members
to
create it, or by offering similar value at lower cost. Managers
achieve these combinations of value and cost through strategic i. Customers
positioning. ii. Suppliers
- That is they stake out a unique position within an industry that iii. Alliance partners
allows iv. Creditors
the firm to provide value to customers, while controlling costs. v. Communities
- The greater the difference between value creation and cost, vi. Governments and various levels, and the
the vii. Media
greater the firm’s economic contribution and the more likely it
will all stakeholders make specific contributions to a firm, which
gain competitive advantage in turn provides different types of benefits to different
stakeholders. EMPLOYEES, contribute their time and talents to
Sustainable competitive advantage is possible only by the firm, receiving the wages and salaries and exchange.
performing different activities from rivals or performing similar SHAREHOLDERS contribute capital with expectation that the
activities in different ways. stock will rise and the firm will pay dividends. COMMUNITIES
provide real state, infrastructure, and public safety. In return,
STAKEHOLDERS STRATEGY AND COMPETITIVE ADVANTAGE they expect that companies will pay taxes, provide employment
and not pollute the environment.
Value creation
- Companies with a good strategy generate value for society. What is COMPETITIVE ADVANTAGE?
- When firms compete in their own self-interest while obeying A Firm that achieves superior performance relative to other
the law competitors in the same industry or the industry average
and acting ethically, they ultimately create value. has a competitive
- Companies with a good strategy are able to provide products advantage. COMPETITIVE ADVANTAGE is always relative,
or not absolute.
services to customers at a price point that can afford while To assess competitive advantage, we compare firm
keeping performance to a
their costs in check, thus making a profit at the same time. benchmark.
 A firm that is able to outperform its competitors or the Stages of Strategic Management
industry average
over a prolonged period has a SUSTAINABLE COMPETITIVE The strategic-management process consists of three stages: strategy
ADVANTAGE. formulation, strategy implementation, and strategy evaluation.

Ex. APPLE Strategy formulation stage

If a firm underperforms its rivals or industry average, it has COMPETITIVE external opportunities and
DISADVANTAGE. threats,
If two or more firms perform at the same level, they have COMPETITIVE
PARITY. -term objectives,
To gain competitive advantage, a firm must provide either goods and
services consumers value more highly than those of its competitors.
Because the rewards of superior value creation and capture are profitability
and market share. -formulation issues include deciding;

THE FOUR KEY ATTRIBUTES OF STRATEGIC MANAGEMENT abandon,

1. It is directed toward overall organizational goals and objectives;

2. It includes multiple stakeholders in decision making;
3. It requires incorporating both short-term and long-term perspectives; Formulation Implementation Evaluation
4. It involves the recognition of trade-offs between effectiveness and ,
efficiency.

Importance Of Strategic Management
Strategic Management is important because it provides overall
direction by providing plans and policies designed to achieve objectives
and then allocating resources to implement the plans. It is for the
organization to gain a competitive edge over their competitors.
Because no organization has unlimited resources, strategists must
decide which alternative strategies will benefit the firm most. Strategies
determine long-term competitive advantages.
Strategy Implementation stage

It makes a difference in how well an organization performs. Studies

have shown that organizations that use strategic management tend to have
higher levels of performance, usually measured as the "bottom line" or
profits. executed.
It ensures that the actions of the employees from all levels are coordinated.
An organization's various decisions, departments, and work activities need
to be coordinated and focused on achieving the organization's goals -supportive culture,
 resolving the issues.

orchestrated, or too formal, predictable, and rigid. Words should

represent the medium for explaining strategic issues and
performance. organizational responses.
en is called the “action stage” of
strategic management.
-routine; vary assignments, team
Strategy evaluation stage membership,
meeting formats, settings, and even the planning calendar.

management.
-evaluation activities are
1) reviewing external and internal factors that are the
bases for current strategies,
2) measuring performance,
3) taking corrective actions.
guarantee of success tomorrow! Success always creates new
and different problems; complacent organizations experience
demise.
Purpose of Strategic Management
actions and decision that allow an organization to achieve its goals.
strategic management is to exploit and create new
and different opportunities for tomorrow; long-range planning, in
contrast, tries to optimize for tomorrow the trends of today.
Guidelines for Effective Strategic Management
an that is implemented well will achieve
more that the perfectplan that never gets off the paper on which it
is typed.
-perpetuating
bureaucratic mechanism.Rather, it must be a self - reflective
learning
process that familiarizes managers and employees in the
organization with key strategic issues and feasible alternatives for
firm.
STRATEGIC MANAGEMENT PROCESS
Strategic Management Process is an ongoing iterative process of
implementing organization's strategies through proper analysis and
evaluation to achieve goals and gain competitive edge. It is achieved
through the 5 steps – setting goals, analyzing, formulation,
implementation and strategy evaluation. Using this process, an
organization decides to implement a selected few strategies along
with stakeholders, details the implementation plan and keeps on
appraising the progress & success of implementation through
regular assessment.
Importance of Strategic Management Process
The strategic management process enables the organization of plan
ahead through proper approach in order to gain competitive
advantage with respect to competitors. The process equips the
organization to deal various internal and external factors. The
process can differ for various organization depending on their size,
domain, focus and core competency but the importance of strategic
management process remains the same. It ensures that the
implementation of any strategy is not without proper due-diligence
andanalysis. Also, it makes sure that the evaluation is done after the
implementation to test if the results are desirable or not. If not,
organization can go back to the start to rectify the issues.
The strategy or tactic which works today may or may not work in
future at all. Hence every business needs to properly keep
analyzing, improving, modifying its strategies over time. This
process needs to be continuous in nature. Many organizations do
not revisit the strategies and find themselves losing competitive
advantage in the market.
Steps of Strategic Management Process
There are five strategic management process steps that must be
followed in their chronological order.
1. Goal setting
This is essentially clarifying the organization’s vision. The
vision will include short-term and long-term objectives, the
processes by which they can be accomplished, and the
persons responsible for implementing each task that
culminates in the set goals.
understand the process and know what their duties and
responsibilities are in order to fit in with the organization’s
overall goal.
5. Evaluation and Control
The evaluation and control actions for the strategic
management process internal and external issues. Where
necessary, the management of the organization can
implement corrective actions to ensure success of the SMP.
In order for a business’ efforts to have the most impact on a
business’ bottom line, strategic management process must
be employed. This will also go a long way in helping a
business to survive stiff competition in the market.

2. Analysis
Analysis involves gathering the data and information that is
relevant to accomplishing the set goals. It also covers
understanding the needs of the business in the market and
examining any internal and external data that may affect
the organization’s goals.

3. Strategy Formulation
A business will only succeed if it has the resources required
to reach the goals set in the first step. The process of
formulating a strategy to achieve this may involve
identifying which external resources the business needs to
succeed, and which goals must be prioritized.

4. Strategy Implementation
Since the purpose of strategic management process is to
propel an organization to its objectives, an implementation
plan must be put in place before the process is considered
viable. Everyone in the organization must
THE EXTERNAL ASSESSMENT Definition:
Chapter 2
External factors are elements from outside the company
Two types of factors influencing business decision: that affect business performance, such as competition,
economic climate, political and legal environment,
1. Internal Factors — are elements that come from within technological advances, or major global events.
or are under a company's control.
2. External Factors — are elements that come from outside. External Factors Affecting Business
Five main types of external factors affecting business
EXTERNAL ANALYSIS  Political
 Economic
A business can’t operate on its own. Outside the office  Sociocultural
walls, there are multiple factors that can dictate its  Technological
performance. Some examples include new technology and  Ecological
changes in taxes, interest rates, or minimum wages. In  Legal
business terms, these are called external factors.
External factors can have both positive and negative
A firm’s external environment consists of all factors outside impacts on business operations. To sustain profitable
the firm that can affect its potential to gain and sustain a growth, companies need to constantly monitor
competitive advantage. By analyzing the factors in the firm’s environmental changes to adapt and minimize their
external environment, strategic leaders can mitigate threats negative consequences.
and leverage opportunities. One common approach to
understanding how external factors impinge upon a firm is Political factors – result from the processes and actions of
to consider the source or proximity of these factors. government bodies that can influence the decisions and
We will now look at each of these environmental layers in behaviors of firms
detail, moving from a firm’s general environment to its task
environment. We will be looking from the outer ring to the
inner ring. that affects consumers,
employees, and businesses rights.
The PESTEL Model groups the factors in the firm’s general
environment into six segment Some examples of business-related legislation include:
The PESTEL model provides a relatively straightforward way o Anti-discrimination
to SCAN, MONITOR, AND o Intellectual property
EVALUATE the important external factors and trends that o Minimum wage
might impinge upon a firm. Such factors o Health and safety
create both opportunities and threats. o Consumer protection.

Generally, these are grouped into three categories:

 – These are laws that ensure businesses will provide
consumers with quality goods and services.
– These are laws that protect employee rights and
regulate the relationship between employees and consumers.
– These are laws that protect creative work
within the business world, e.g. copyrights of music, books, films, and
software.
Economic factors
Businesses and the economy have a mutual relationship.
The success of businesses
results in a healthier economy, whereas a strong economy
allows businesses to grow faster.
Thus, any changes in the economy will have a significant
impact on business development.
Economic factors in a firm’s external environment are
largely macroeconomic, affecting
economy-wide phenomena. Strategic leaders need to
consider how the following five
macroeconomic factors can affect firm strategy;
Economic activities can deeply be affected by changes in
1. Growth rates
An economic growth rate is the percentage change in the
value of all of the goods and services produced in a nation
during a specific period of time, as compared to an earlier
period. The economic growth rate is used to measure the
comparative health of an economy over time. The numbers
are usually compiled and reported quarterly and annually.
In most cases, the economic growth rate measures the
change in a nation's gross domestic product (GDP). In
nations with economies that are heavily dependant on
foreign earnings, gross national product (GNP) may be used.
The latter takes into account net income from foreign
investments.
2. Levels of Employment
Growth rates affect the level of employment. In boom
times, unemployment tends to be low, and skilled human
capital becomes a scarce and more expensive
resource. As the price of labor rises, firms have an incentive
to invest more in capital goods such as cutting-edge
equipment or artificial intelligence (AI). In economic
downturns, unemployement rises. As more people search
for employment, skilled human capital is more abundant
and wages usually fall.
3. Tax rates - A tax rate is a percentage at which an individual or
corporation is taxed. The United States, both the federal
government and many of the states, uses a progressive tax
rate system, in which the percentage of tax charged
increases as the amount of the person's or entity's taxable
income increases. A progressive tax rate collects more from
taxpayers with greater incomes.
4. Interest rates - An interest rate is the amount a borrower pays a
lender to use the lender’s capital. It is typically given as an
annual value or annual percentage rate (APR). The actual
amount the borrower pays is determined by the amount of
the loan, which is called the principal.
5. Inflation - Inflation is the rate of increase in prices over a given period of
time. Inflation is typically a broad measure, such as the
overall increase in prices or the increase in the cost of living
in a country.
One measure of economic performance is aggregate
demand. Aggregate demand is the total demand for goods
and services within an economy (including consumer and
government spending, investing, and exports, minus
imports). The higher the aggregate demand, the more
robust an economy is. However, too much demand can lead
to high inflation, resulting in higher prices for consumers.
Sociocultural - Socio-cultural factors include consumers'
lifestyles, buying
 habits, education, religion, beliefs, values, demographics,
social classes, sexuality and attitudes. These factors
determine the suitability of an organisation's products and
services for its customers' needs.Social influence also
includes the ethical side of a business, such as how a
company treats its employees, consumers, and suppliers.
An ethical business is one that considers the needs of all
shareholders, not just owners. Typically, business ethics
comprise three main aspects:
o Employees – Ensure work-life balance as well as the physical and
emotional well-being of the employees.
o Suppliers – Stick to the agreed contract and pay suppliers in a timely
fashion.
o Customers – Provide quality products at a fair price. Businesses should
not lie to consumers or sell products that do serious harm
to consumer
Technological factors
Technological factors capture then application of knowledge to create new
processes and products. Major innovations in process
technology include lean manufacturing.
product selling and customer support.
achieving more efficiency, which, in the long run, can result
in a competitive advantage.
Three key areas of technology:
Automation - the use of robots to perform repetitive tasks formerly done by
humans.
o Automation is applied throughout the supply chain of many industries,
including electronics manufacturing, automotive, retail,
online services, banks, etc.
o E-commerce - the buying and selling of goods and services on the internet.
Some examples of e-commerce include:
o An online bookstore
o Buying and selling through Amazon or eBay
o An online retailer.
The key incentive for businesses to move online is to reduce fixed costs.
While physical businesses have to pay healthy monthly fees for rent,
warehousing, and electricity on-site, an online business pays little to nofixed
costs.
digital media - are online channels that get businesses in contact with their
customers.
Some examples include
• websites,
• blogs,
• videos,
• Google and Facebook ads,
• emails,
• social media, etc.
While traditional marketing methods like billboards and banners are
restricted to local areas, online channels allow companies to communicate
their marketing messages across the globe in a matter of seconds.
Environmental/Ecological Factors
Organizations and the natural environment coexist in an interdependent
relationship. Managing these relationships in a responsible and sustainable
way directly influences the continued existence of human societies and the
organizations we create.
weather conditions, that might affect business operations
The production of goods and services is the major cause of climate change,
pollution, and waste. For example, the generation of electricity in coal-fired
plants releases a tremendous amount of carbon dioxide into the
atmosphere, which causes global warming and acid rain. The
fashion industry is another CO2 emitter, contributing to around 8-10% of
the total greenhouse gas emission each year.
The good news is that many companies nowadays have been adopting eco
friendly solutions to mitigate their impacts on the environment.
Some examples include:
ntroducing energy-saving plans
-efficient equipment
-trade suppliers.
Competitive factors
business environment. The impact can come from changes
in price, product, or business strategy. For example, if a
company selling similar products at a similar price to your
business suddenly drops its price to attract more customers,
you may have to reduce the price as well or risk losing
customers.
To avoid the impact of competitive influence, a company can
develop competitive advantages. These are attributes that
allow the company to outperform its rivals. A business can
gain a competitive advantage by investing in a high-quality
labour force, exceptional customer support, stellar
products, extra services, or a reputable brand image.
HOW DO CHANGES IN THE EXTERNAL ENVIRONMENT AFFECT BUSINESS?
In the modern world, external factors are changing at a rapid rate, causing
competition to become more intense than ever. Businesses that
underestimate competition or are too slow to adapt will get replaced by
more innovative firms.
Changes in the external environment are often caused by:
y, minimum wage.
nt bring both opportunities and
challenges for businesses.
For example, the emergence of online marketing channels such as Facebook
and Google ads allows businesses to market and sell their products more
effectively. However, their competitors will also have access to the exact
same tools and customer base. To gain a competitive advantage, businesses
cannot rely solely on external technology. They need to invest in their own
assets such as internal databases, human resources, and intellectual
property.
Another way to gain this advantage is to become more socially responsible.
With the external environment changing and the business landscape being
taken over by technology, businesses stand a better chance if they are seen
in a positive light. This does not mean companies should put on a show.
Instead, they should put in a genuine effort to better society.
PORTER’S FIVE FORCES
competitive forces that shape every industry and helps determine an
industry’s weaknesses and strengths. Five Forces analysis is frequently used
to identify an industry’s structure to determine corporate strategy.
understand the level of competition within the industry and enhance a
company’s long-term profitability. The Five Forces model is named after
Harvard Business School professor, Michael E. Porter.
Porter’s 5 forces are:
Porter’s Five Forces is a business analysis model that helps to explain why
various industries are able to sustain different levels of profitability.
1. Competition in the Industry
ability to undercut a company. The larger the number of competitors, along
with the number of equivalent products and services they offer, the lesser
the power of a company.
offer a better deal or lower prices. Conversely, when competitive rivalry is
low, a company has greater power to charge higher prices and set the terms
of deals to achieve higher sales and profits.
2. Potential of New Entrants Into an Industry
rants into its
market. The less time and money it costs for a competitor to enter a
company’s market and be an effective competitor, the more an established
company’s position could be significantly weakened.
ideal for existing companies
within that industry since the company would be able to charge higher
prices and negotiate better terms.
3. Power of Suppliers
next factor in the Porter model addresses how easily suppliers
can drive up the cost of inputs. It is affected by the number of
suppliers of key inputs of a good or service, how unique these
inputs are, and how much it would cost a company to switch to
another supplier. The fewer suppliers to an industry, the more a
company would depend on a supplier.
push for other advantages in trade. On the other hand, when there are
many suppliers or low switching costs between rival suppliers, a company
can keep its input costs lower and enhance its profits.
4. Power of Customers
prices lower or their level of
power is one of the Five Forces. It is affected by how many buyers or
customers a company has, how significant each customer is, and how much
it would cost a company to find new customers or markets for its output.
se means that each customer has
more power to negotiate for lower prices and better deals. A company that
has many, smaller, independent customers will have an easier time charging
higher prices to increase profitability.
5. Threat of Substitutes
ubstitutes. Substitute goods or
services that can be used in place of a company’s products or services pose
a threat. Companies that produce goods or services for which there are no
close substitutes will have more power to increase prices and lock in
favorable terms. When close substitutes are available, customers will have
the option to forgo buying a company’s product, and a company’s
power can be weakened.
THE EXTERNAL FACTOR EVALUATION MATRIX
External Factor Evaluation (EFE) Matrix is a strategy tool used to examine
company’s external environment and to identify the available opportunities
and threats.
External Factor Evaluation (EFE) Matrix is a strategic analysis tool used to
evaluate firm’s external environment and to reveal its strengths as well as
weaknesses. The external and internal factor analyses have been introduced
by Fred R. David in his book, Strategic Management[1]. According
to the author, both tools are used to summarise the information gained
from company’s external and internal environment analyses.
External Factor Analysis
Key External Factors
When using the EFE matrix we identify the key external opportunities and
threats that are affecting or might affect a company. By analysing the
external environment with the tools like PESTLE analysis, Porter’s Five
Forces or Profile Matrix, the key external factors can be identified. The
general rule is to identify as many key external and internal factors as
possible.
Weights
Each key factor should be assigned a weight ranging from 0.0 (low
importance) to 1.0 (high importance). The number indicates how important
the factor is if a company wants to succeed in an industry. If there were no
weights assigned, all the factors would be equally important, which
is an impossible scenario in the real world. The sum of all the weights must
equal 1.0. Separate factors should not be given too much emphasis
(assigning a weight of 0.30 or more) because the success in an industry is
rarely determined by one or few factors.
Ratings
The ratings in external matrix refer to how effectively company’s current
strategy responds to the opportunities and threats. The numbers range
from 4 to 1, where 4 means a superior response, 3 – above average
response, 2 – average response and 1 – poor response. Ratings, as well as
weights, are assigned subjectively to each factor. In our example, we can
see that the company’s response to the opportunities is rather poor,
because only one opportunity has received a rating of 3, while the rest have
received the rating of 1. The company is better prepared to meet the
threats, especially the first threat.
Weighted Score
The score is the result of weight multiplied by rating. Each key factor must
receive a score. Total weighted score is simply the sum of all individual
weighted scores. The firm can receive the same total score from 1 to 4 in
both matrices. The total score of 2.5 is an average score. In external
evaluation a low total score indicates that company’s strategies aren’t well
designed to meet the opportunities and defend against threats. In internal
evaluation a low score indicates that the company is weak against its
competitors.
Note that EFE analyses only help identify and evaluate the factors, but do
not directly help formulate a strategy or the next best strategic move.
The letters EFE are an acronym for External Factor Evaluations, which shows
how effectively the company’s current strategy responds to external
opportunities and threats.It’s viewed as a strategy tool that’s used to
investigate a company’s external environment and to identify the available
opportunities and threats.It must always be combined with the IFE matrix,
which stands for Internal Factor Evaluations. This strategy tool is used to
evaluate the internal environment of companies and discover both the
strengths and weaknesses.
The EFE matrix and IFE matrix were introduced by American strategic
planning scholar and consultant Fred R. David in his book ‘Strategic
Management‘ in 1997. According to him, both tools can be used to gather
information obtained from external and internal environmental analyses of
companies. The summarised information can be evaluated and used for
further purposes such as building a SWOT analysis.
An External Factor Evaluation (EFE) Matrix allows strategists to summarize
and evaluate economic, social, cultural, demographic, environmental,
political, governmental, legal, technological, and competitive information.
EFE Matrix indicates whether the firm is able to
effectively take advantage of existing opportunities along with minimizing
the external threats. Similarly, it will help the strategists to formulate new
strategies and policies on the basis of existing position of the company.
External factors are extracted after deep internal analysis of external
environment. Obviously there are some good and some bad for the
company in the external environment. That’s the reason external factors are
divided into two categories opportunities and threats. Opportunities
are the chances exist in the external environment, it depends firm whether
the firm is willing to exploit the opportunities or may be they ignore the
opportunities due to lack of resources. Threats are always evil for the
firm ,minimum no of threats in the external environment open many doors
for the firm. Maximum number of threats for the firm reduce their power in
the industry.Developing an EFE matrix is an intuitive process which works
conceptually very much the same way like creating the IFE matrix. An
External Factor Evaluation (EFE) Matrix can be developed
in five steps:
1.) List key external factors as identified in the external €‘audit process.
Include a total of from ten to twenty factors, including both
opportunities and threats affecting the firm and its
industry. List the opportunities first and then the threats. Be as specific as the IFE matrix is the type of factors that are included in the model. While
possible, using percentages, ratios, and comparative numbers whenever the IFE matrix deals with internal factors, the EFE matrix is
possible. concerned solely with external factors.

2.) Assign to each factor a weight that ranges from 0.0 (not important) to
1.0 (very important). The weight indicates the relative importance of that
factor to being successful in the firm’s industry. Opportunities often receive
higher weights than threats, but threats too can receive high weights if they
are especially severe or threatening. Appropriate weights can be
determined by comparing successful with unsuccessful competitors or by
discussing the factor and reaching a group consensus. The sum of all weights
assigned to the factors must equal 1.0.

3) Assign a 1 to 4 rating to each key external factor to indicate how

effectively the firm’s current strategies respond to the factor, where
4 = the response is superior, 3 = the response is above average, 2 =
the response is average, and 1 = the response is poor:
Ratings are based on effectiveness of the firm’s strategies. Ratings are thus
company €‘based, whereas the weights in Step 2 are industry €‘based. It is
important to note that both threats and opportunities can receive a 1, 2, 3,
or 4.

4.) Multiply each factor’s weight by its rating to determine a weighted score.

5.) Sum the weighted scores for each variable to determine the total
weighted score for the organization.

Regardless of the number of key opportunities and threats included in an

External Factor Evaluation (EFE) Matrix, the highest possible total weighted
score for an organization is 4.0 and the lowest possible total weighted score
is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0
indicates that an organization is responding in an outstanding way to
existing opportunities and threats in its industry. In other words, the firm’s
strategies effectively take advantage of existing opportunities and minimize
the potential adverse effect of external threats. A total score of 1.0 indicates
that the firm’s strategies are not capitalizing on opportunities or avoiding
external threats.

The External Factor Evaluation (EFE) Matrix is similar to Internal Factor

Evaluation (EFE) Matrix. The major difference between the EFE matrix and
CHAPTER 3: THE INTERNAL ASSESSMENT Setting budgets - managers will decide how much money a business can
spend within a specific period.
Learning Objectives: Conducting appraisals with staff - managers need to assess their staff to
a. Describe how to perform an internal strategic-management audit, ensure they are working effectively.
b. Explain the nature and role of management information system in
strategic management. Employees can influence a business through their:
c. Discuss cost/benefit analysis value chain analysis as strategic
management tools.

INTERNAL FACTORS
Businesses can be influenced and affected by internal factors as well
as external factors.Internal factors are factors within a business that
can be controlled by the organisation.

The three main internal factors are: Each of these areas of influence can impact positively or negatively on
business. Employees are the public face of a business. Badly performing
employees will result in inferior products being produced and a poor service
being offered to customers. The short and long term impact of badly
performing employees will have a negative effect on sales and the
reputation of the business.
HUMAN RESOURCES
Human resources relates to the people who work in a business organisation. FINANCE
The performance of a business is affected by the quality and impact of the A business needs adequate funds in place in order for it to survive and grow
people who work for it. successfully. To increase their market share and increase sales, businesses
need to grow. Finance is needed to help meet the needs of the business as it
Human resources covers: grows.
Managers
Finance may be needed for several different reasons:

Managers can influence a business through: Developing new products

Decision-making Good decision making can increase productivity,
increaseprofits and grow the business. Poor decisions could result in
employees losing motivation, production being disrupted and complaints
from customers. t

Creating policy - Managers create policies that aim to motivate employees

and set realistic goals.
Hiring and firing of employees - managers recruit new staff and let others
go
The impact of NEW TECHNOLOGY on the working habits of a design
Company
Examples of technologies that businesses rely on can include:
A business can use new technology to ensure efficiency and also to boost its
profile. Savings can be made by having staff using video conferencing
technology instead of travelling to meetings. By using smartphone and
tablet technology, staff can also work while away from the office.
Businesses need up-to-date technology to keep up with customers’ ever-
changing requirements.
For example, those that do not provide an option for customers to buy
products online are likely to lose out on valuable sales.
Some Major Internal Factors that Need to be Considered When Designing A
Strategic Plan
1. Marketing- It is the only department that looks at earning money
whereas other departments spend. Marketing is required for
advertising activities, customer analysis, customer acquisition
and retention, and understanding market trends and activities,
demand, opportunities creation, branding, etc.
2. Finance- It is important to understand the transaction of money,
investment, capital requirements, etc. Accounting helps to
understand the overall health of an organization in terms
of monetary matters. It helps in ratio analysis, cash inflow, and
outflow analysis, etc. It looks at how to spend money on the
necessary area.
3. Operations- It looks at the operations of daily activities and the
production of products of an organization. It looks at
process, inventory, quality, quantity, etc.
4. Research and development- It looks at the research of products/services
in the marketplace such as its demand, trends, customer
analysis, market analysis, product analysis, etc.
5. Human resource- It helps in analyzing the work done by the
employees, hiring strategies, training, motivation, salaries, benefits,
and others considered.
Strategic Management - Importance of Internal Factor Analysis
1. Internal factor analysis helps to analyze its resources and functional
strengths and weaknesses.
2. Internal factor analysis helps to understand the factors and work
upon those factors so as to gain competitive advantage, growth,
and profitability in the firm.
3. Internal factor analysis helps to internally assess the organization
and formulate, implement,and evaluate the strategic plan and
cross-functional decision so as to achieve the company's primary
objective of above-average return and competitive advantage.
4. Internal factor analysis explains the company's available resources
or ease of access to resources and whether those resources are
rare, easily, or hardly imitable, and whether substitute available or
not. Resources are defined by their type, nature, and amount.
Internal factors analysis helps to understand the organization
internally and with a clear understanding of its competencies and
capabilities that are distinctive from other competitors.
5. Internal factors analysis not only helps to understand its strengths
and weaknesses, but it also helps in gathering, analyzing,
assimilating, and distributing those resources effectively and
efficiently.
6. Internal factors analysis helps in understanding its past trends and
activities and understanding
the room for improvement
The Process of Performing an Internal Audit in Strategic Management
In strategic management, an internal audit determines the
organization’s position within its industry. This process is essential for
building and maintaining a sustainable competitive advantage, and
typically consists of at least one, or a combination of, distinct analytical
tools.
GAP ANALYSIS
between the
organization’s current situation and its desired position. For example, a
gap may exist
between an organization's current financial status and its desired
financial position. This
can be due to poor customer service, sales numbers or production.
Depending on the
cause and measure of the gap, organizational leaders will develop
strategic objectives
designed to close it, such as new training methods or shelving a product
that isn't selling.
SWOT ANALYSIS
to identify the
organization’s strengths, weaknesses, opportunities and threats, or
SWOT. Strengths and weaknesses are part of the internal audit process,
while opportunities and threats are due to external
influences. Strengths include those internal aspects of the organization
that leaders can capitalize on to build a sustainable competitive
advantage. Weaknesses consist of internal stressors that misalign
operational activities with the mission statement. These stressors
can range from poorly trained production employees to faulty
machines. The SWOT analysis requires all the members of management,
production, finance, marketing, research and development, and other
functional teams to be involved.
ORGANIZATIONAL CULTURE
and determines what aspects must change to best support strategic
objectives. The cultural audit often includes employee surveys to
analyze worker perceptions of whether they are treated fairly by
managers or paid fairly in comparison to coworkers.
COMPETENCIES
identify the core competencies of an organization. The existence of
strong core competencies is what typically leads consumers to choose
one organization over another. For example, a shoe brand that
successfully markets its products to build a loyal customer base can
charge higher prices than shoe brands that are relatively unknown.
A strategic audit is an in-depth review to determine whether a company
is meeting its organizational objectives in the most efficient way.
 In addition, it examines whether the company is utilizing its
resources fully. A successful strategic audit is beneficial to any
company.
Management Information System or MIS
helps in strategic planning, management control, operational control
and transaction processing. The MIS helps in the clerical personal in the
transaction processing and answers the queries on the data pertaining
to the transaction, the status of a particular record and reference on a
variety of documents.
 In response to a corporate business initiative, strategic systems
are information systems that are created. They are built to give
the company a competitive advantage. They may offer a lower
cost, differentiated product or service that focuses on a specific
consumer segment, or is creative.
 An SMIS offers business intelligence and organization as well. If
an information system is used in innovative ways to accomplish
the objectives and fulfill the organization's mission, TPS, MIS, or
any other type of system can be viewed as SMIS activities.
Strategic Management Information System
Strategic knowledge management, in a nutshell, allows
companies and organizations to identify, store, process, and
transfer the information they produce and obtain. It also
provides resources to help businesses apply metrics and
analytical tools to their collections of knowledge, enabling
them to recognize growth opportunities and find ways to
increase operational performance.
Characteristics of Strategic Management Information System
the
quality of the product or service that will be both appealing
on the market and will produce acceptable investment
returns.
characteristics that are competitively appealing in the
industry.
he IS strategy takes into account what knowledge is
required to achieve its goals at the strategic and
organizational levels of an organization.
improved benefit, etc.
cting the activities of an agency that
acquires, collects information and eventually provides
information.
required to achieve business goals.
using knowledge tools.
(market-oriented) demand.
and strategic business units of the company work well?)
discovery and creation of consumer
niches that have not been adequately filled.
core of the information management discipline and are often
considered the first systems of the information age. MIS
produce data-driven reports that help businesses make the right
decisions at the right time.
Management Information Systems
Management information systems (MIS) are applying computer-
base for managing information in an organization for
management roles such as interpersonal roles, informational
roles and decisional roles. MIS compound of theories of
computer science and management science.
These theories build system and program utilization. Normally,
MIS are integrated systems of users and machines
(computers)with aiming to provide organizations’ information
for operation, management and decision-making. These
systems use computer hardware and software.
Sub systems of Management Information Systems
Management Information Systems are integrated systems, so
they’re large and complicated. To
understand, there are divided Management Information
Systems into 4 sub systems by purpose
of use in each organization level. The organization levels
comprises of:
Operation
Elements of how a system is set in MIS:
Nature of Management Information System
Management Information Systems (MIS) can be simply referred
to as a system or process that facilitates the smooth working of
the organisation. The nature of MIS is truly multifold because it
plays a bigger role in business decisions, from costs to employee
management. Here are the major features that portray the
nature of MIS:
MIS is utilised by every level of a management
the management.
revenues and further reviews effectively and efficiently to bring
a balanced in finances and costs.
maintained either through manual systems or
automated systems or a combination of both.
measuring, tackling and limiting risks
.
management to bring a clear and concise communication
between employees.
aggregating information for a business.
SCOPE OF MIS
After understanding what is MIS and the nature of
management, we move on to the scope of MIS.
Information Systems is growing at a fast pace to become one of
the most promising career fields
in today’s world. With everything happening digitally, the
demand for MIS professionals is
increasing more than ever. MIS involves performing a number
of task simultaneously such as-
business
ion just like a nervous system in a
body by providing with the relevant information for ease in the
process of decision making.
information needs of everyone in the business. It means
providing the relevant information to those who need it.
 Successful businesses create value with each
transaction—for their customers in the form of
satisfaction and for themselves and their shareholders
in the form of profit. Companies that generate greater
value with each sale are better positioned to profit than
those that produce less value.
 To evaluate how much value your company is creating,
it’s critical to understand its value chain. Below is a look
at what a value chain is, why it’s important to
understand, and steps you can take to conduct one and
help your company create and retain more value from
its sales.
UNDERSTANDING THE VALUE CHAIN
The term value chain refers to the various business activities
and processes involved in creating a product or performing a
service. A value chain can consist of multiple stages of a
product or service’s lifecycle, including research and
development, sales, and everything in between. The concept
was conceived by Harvard Business School Professor Michael
Porter in his book The Competitive Advantage: Creating and
Sustaining Superior Performance.
WHAT IS VALUE CHAIN ANALYSIS?
f the
activities in a company’s value chain to understand where
opportunities for improvement lie. Conducting a value chain
analysis prompts you to consider how each step adds or
subtracts value from your final product or service. This, in turn,
can help you realize some form of competitive advantage, such
as:
3. Identify Opportunities for Competitive Advantage
in the value chain
more efficient and, therefore,
less expensive
resources
into activities like research and development, design, or
marketing that can help your product stand out
increasing the performance of one of the four
secondary activities can benefit at least one of the primary
activities.
HOW TO CONDUCT A VALUE CHAIN ANALYSIS
1. Identify Value Chain Activities
The first step in conducting a value chain analysis is to
understand all of the primary and
secondary activities that go into your product or service’s
creation. If your company sells multiple products or services, it’s
important to perform this process for each one.
2. Determine the Cost and Value of Activities
Once the primary and secondary activities have been identified,
the next step is to determine the value that each activity adds to
the process, along with the costs involved. When thinking about
the value created by activities, ask yourself: How does each
increase the end user’s satisfaction or enjoyment? How does it
create value for my firm? For example, does constructing the
product out of certain materials make it more durable or
luxurious for the user? Does including a certain feature make it
more likely your firm will benefit from network effects and
increased business? Similarly, it’s important to understand the
costs associated with each step in the process. Depending on
your situation, you may find that lowering expenses is an easy
way to improve the value each transaction provides.
Once you’ve compiled your value chain and understand the cost
and value associated with each step, you can analyze it through
the lens of whatever competitive advantage you’re trying to
achieve. For example, if your primary goal is to reduce your
firm’s costs, you should evaluate each piece of your value chain
through the lens of reducing expenses. Which steps could be
more efficient? Are there any that don’t create significant value
and could be outsourced or eliminated to substantially reduce
costs? Similarly, if your primary goal is to achieve product
differentiation, which parts of your value chain offer the best
opportunity to realize that goal? Would the value created justify
the investment of additional resources?
opportunities for your firm, which can prove difficult to
prioritize. It’s typically best to begin with improvements that
take the least effort but offer the greatest return on investment.
BENEFITS OF VALUE CHAINS
The value chain framework helps organizations understand and
evaluate sources of positive and negative cost efficiency.
Conducting a value chain analysis can help businesses in the
following ways:
activities and areas in the business. For example, issues in
human resources management and technology can
permeate nearly all business activities.
organizational expenses.
improvement.
however, when emphasizing granular process details in a
value chain, it's important to still give proper attention
to an organization's broader strategy.
Understanding the Top Value Chain Components
By thoroughly analyzing each one of following primary value
chain activities, a company can ensure that the value it's
creating exceeds the cost associated with creating that value.
PRIMARY ACTIVITIES
Inbound logistics. This includes functions like receiving,
warehousing, and managing inventory.
Operations. This entails procedures for converting raw
materials into finished products.
Outbound logistics. This describes activities directly involved
with distributing the company's final products to consumers.
Marketing and sales. This includes strategies aimed at
enhancing visibility and targeting appropriate customers, such
as advertising, promotion, and pricing campaigns.
Service. This includes programs that enhance the consumer
experience, such as customer service, maintenance, repair,
refund, and exchange functions.
SUPPORT ACTIVITIES
The following four support activities help make the
aforementioned primary activities more efficient:
Procurement. This concerns how a company obtains raw
materials.
Technological development. This is used at a firm's research
and development stage, entailing practices like developing
manufacturing techniques and automating processes.
Human resources (HR) management. This involves hiring and
retaining employees who carry out the firm's vision.
Infrastructure. This includes the composition of a company's
management team across its accounting, finance, and quality
control silos