Good day Ma’am and Classmates.

Today ill be discussing about the five elements of

administrative Process

Henri Fayol is often known as the father of modern management theory. In 1916, he
published a book called “Administration Industrielle et Generale” (General and Industrial
Management), in which he outlined five essential functions of administration: Planning,
Organizing, Staffing, Leading, and Controlling, which I will be discussing one by one:

1. Planning
The first function of administrative process is planning. Planning involves
setting objectives and developing a course of action for achieving those
objectives. It requires managers to think ahead and anticipate potential problems
or opportunities that could impact the organization.
Fayol says that planning, also labelled as a “plan of action,” “is one of the most
difficult and…important matters of every business and brings into play all
departments and all functions, especially [management].” He states that
planning is comprised of four components:
 The desired result
 The action;
 The stages; and
 The methods.
In order to create a plan, a manager must consider the firm’s tangible and
intangible resources, work already in progress, trends, and future events.
The ideal plan should combine:
 purposefulness, i.e. the general plan to be supported by the separate
plans of the smaller structures and units in the organization;
 continuity, i.e. the planned actions to be considered as elements of a
continuous process of development;
 flexibility, i.e. the plan to take into account the possibility of unexpected
circumstances;
 accuracy, i.e. the plan should be as accurate as possible.

In line with the planning function of management, Fayol pays serious attention
to forecasting, which requires the development of one-day, weekly, monthly,
annual, five-year, and ten-year forecasts, which should be adjusted promptly
given the circumstances.
 One example of Fayol’s planning function is creating a budget.
This applies to setting goals for the organization and determining how to best
use resources to achieve those goals.

There are many different types of plans and planning.

Strategic planning involves analyzing competitive opportunities and threats, as
well as the strengths and weaknesses of the organization, and then determining
how to position the organization to compete effectively in their environment.
Strategic planning has a long time frame, often three years or more. Strategic
planning generally includes the entire organization and includes formulation of
objectives. Strategic planning is often based on the organization’s mission,
which is its fundamental reason for existence. An organization’s top
management most often conducts strategic planning.
Tactical planning is intermediate-range (one to three years) planning that is
designed to develop relatively concrete and specific means to implement the
strategic plan. Middle-level managers often engage in tactical planning.
Operational planning generally assumes the existence of organization-wide or
subunit goals and objectives and specifies ways to achieve them. Operational
planning is short-range (less than a year) planning that is designed to develop
specific action steps that support the strategic and tactical plans.

2. Organizing
The second function of administrative process is organizing. This involves putting
the resources of the organization to work in a way that will best accomplish the
objectives outlined in the plan.

This includes things like developing structure, assigning tasks, and allocating
resources. It is crucial for managers to consider both the short-term and long-term
needs of the organization when organizing.

Fayol pays serious attention to the so-called "Organizational structure" and

assumes that the form of the organization depends mainly on the number of staff.
As the number of people increases, so do the various functions that are performed
in the organization, respectively the need for control over the work of people
increases.

All this leads to a well-known model of organizational pyramid or hierarchy. In

this connection, Fayol considers that:
 "Each new group of ten, twenty, thirty workers needs a foreman to lead it. If these
masters are two, three, or four, the need arises for one of them to be of a higher
rank. Two or three with a higher rank need a head-to-head entire department.

The organizational pyramid should be built similarly until it covers the whole
organization to its highest level. Also, each new boss should not have more than
4-5 subordinates.

An example of Fayol’s organizing function is creating an organizational chart.

This involves determining the different roles that need to be filled in the
organization and assigning employees to those roles.

3. Commanding
The third function of administrative process is commanding. This involves giving
employees the direction they need to complete their tasks and ensuring that they
have the resources they need to do so. It also includes setting performance
standards and providing feedback to employees on their progress.

In order for this function to be effective, managers need to have a clear

understanding of what they expect from their employees and be able to
communicate this in a clear and concise way.

Concerning the Ordering function, Fayol attaches great importance to the

importance of motivation as well as to the delegation of staff rights. Fayol
believes that:

"The leader can stimulate the initiative of his subordinates by delegating rights to
them, thus providing them with opportunities to fully realize their potential and
skills. This can happen at the cost of making individual mistakes, the severity of
which is significantly limited with proper control.

The manager can quickly turn a person with unspeakable abilities into a first-class
specialist, not doing all the work for him, but helping him through the method of
prompting. Yes, for this purpose the leader will have to humbly limit his pride.”

An example of Fayol’s commanding function is giving employees instructions.

This involves telling employees what needs to be done and setting deadlines for
completing tasks.

4. Coordinating
 The fourth function of administrative process is coordinating. This involves
bringing all the different parts of the organization together and making sure they
are working towards the same goal.

This includes things like communication, team building, and conflict resolution.
Coordinating is important because it helps to ensure that the organization is
running smoothly and efficiently.

Good coordination facilitates the work and makes the functioning of the
organization more successful. This function is designed to balance the different
aspects of the work, for example, to observe proportional spending in terms of
available financial resources, production needs, stocks, and market demand.

For the sake of good coordination, Fayol recommends holding daily meetings.
The purpose of the meeting is as follows:

"The meeting should inform the management of the company's work, discuss
issues of cooperation between the various departments, and address issues of
common interest.

Participants in such a meeting should not be concerned with planning, but with
questions about the implementation of existing plans.

At the meeting, the discussion may take place only for a short period, usually not
exceeding one week, in connection with the harmonization of activities and
setting current priorities.

One example of Fayol’s coordinating function is holding team meetings.

This involves bringing employees together to discuss the status of projects and
identify any problems that need to be addressed.

5. Controlling
The fifth and final function of administrative process is controlling. This involves
monitoring progress towards objectives and making changes where necessary to
ensure that goals are still being met.

It also includes taking corrective action when problems arise. Controlling is

essential because it helps managers to identify and correct issues before they get
out of hand.

In such a context, control aims to detect errors and weaknesses in the work to
neutralize them and prevent them from recurring in the future. As Fayol writes:
 "Control affects everything - products, people, and operations."

Fayol believes that control should not be the sole responsibility of management.
This should be dealt with by impartial quality managers who are not in a
hierarchical relationship of power with the employees. Control of this nature is a
valuable addition to management, which allows obtaining information that would
otherwise remain inaccessible under normal control.

For Fayol’s controlling function, conducting performance reviews is a great

example.

This involves assessing how well employees are doing and providing feedback on
areas where improvement is needed

Strategic management involves formulation and implementation of the major goals and
initiatives taken by a company´s top management on behalf of owners, based on consideration of
resources and an assessment of the internal and external environment in which the organization
competes

Role of an Administrator in Strategic Management

 Formulation of Strategy
 Implementation of Strategy

 Determine objectives for the organisation. Objectives may relate to profit, business
growth, survival, prestige, competitive pricing, marketing method, widening the area of
sales, relations with workers, customers, public etc.
 Frame the Policy. To frame the policies and chalk out the plans to carry out the objectives
and policies. Policies may relate to different aspects of the organisation. For example,
production policy deals with the quality, product variety, scheduling of production to
meet the market demand etc. Marketing policy deals with such matters as advertising and
sales promotion techniques, pricing the product, channel of distribution, commission,
discounts, placement, training, remuneration, promotion, appraisal of performance etc. of
the personnel. Financial policy relates to the procurement of funds, source of finance,
management of earning etc.
 Organisational Framework. Top management determines the organisational structure for
the purpose of executing the plans that have been laid down. Execution of plans is
necessary to carry out the objectives and policies.
  Assemble the Resources. For the purpose of executing the plans, the resources of men,
machines, materials and money have to be assembled. This again is the .task of top
management.
 (e) Control the Operations through Organisation. Top management also controls
operations through budget, cost, and statistical quality control and accounting devices
Developing a Strategic Vision and Mission
The first step, developing a strategic vision and mission, involves putting management’s long-
term view of where the company is going on paper and making that known to the employees of
the company. This step is made up of both the vision and the mission. The mission is used to
define why the organization exists. Often companies within the same industry with have similar
mission statements. The vision is management’s view of where the company is going. This task
is usually the responsibility of the CEO.

Executive leadership should not be pulling the mission and vision from thin air. There is a
mission and a vision present for all companies. Sometimes the vision is present only as ideas in
the heads of top management. Management must find out what it is and communicate that to the
employees. A clear and concise mission and vision will help the company work together for the
same purpose. It is also used in the other steps of strategic management.

Setting Objectives
The second step, setting objectives, takes the strategic vision and creates specific goals that will
occur to accomplish what is laid out in the vision statement. Goals should be feasible but also not
easily attainable. These types of goals are called “stretch” goals because they force the company
to go as far as they can to attain the goal. If goals are set too low, complacency will occur.
Establishing these goals removes confusion employees may have on what should be
accomplished.

Managers can set both financial objectives and strategic objectives. Financial objectives are
those that state what management wants to achieve in “dollars and cents.” Strategic objectives
are goals that strive to increase competitive position, gain market share, or to develop a
competitive advantage. Strategic objectives have the power to motivate and prompt action where
financial objectives are seen more as a constraint. Managers should define both goals but
concentrate on strategic objectives will bring about better results.

Both long-term and short-term objectives should be set. Short-term objectives will motivate
present performance while long-term objectives will put the company in the proper position to
achieve what is outlined in the vision down the road. Priority should be placed on long-term
objectives over the short-term. Companies that stress short-term objectives end up in business
short-term.

Crafting Tactics to Achieve Organizational Objectives

The third step, crafting tactics to achieve organizational objectives, is where management defines
how to achieve the defined objectives. In this step, management decides how best to respond to
changes in the environment, how to rise above the competition, and how to move towards the
corporate vision and strategic objectives.

Implementing and Executing the Tactics

The fourth step, implementing and executing the tactics, includes determining what company
resources should be allocated to each activity, establishing policies, motivating employees,
providing the resources necessary to achieve objectives, and encouraging a continuous
improvement culture.

Tactics must be tailored to organizational capabilities and culture for them to work efficiently.
Change will most likely be needed, but the amount of change varies depending on how new the
tactics are. This usually involves revising policies or resource allocation, moving people around,
retraining and retooling, or making changes to reward systems. Each manager must look at the
tactics and their department to determine how best to implement each tactic correctly.

Evaluating and Measuring Performance

The fifth step, evaluating and measuring performance, is how management determines whether
or not the tactics implemented effectively to achieve organizational objectives and comply with
the strategic vision. If performance is not to expectations, corrective action must be taken.

Performance can be measured by various methods such as financial data, customer satisfaction,
quality reports, employee satisfaction, and capital utilization. Each of these types of measures
should be used to analyze tactics to get a full picture of a tactic’s success.

 Strategic management is a process that requires the ability to manage change.

Consequently, executives must be careful to monitor and to interpret the
events in their environment, to take appropriate actions when change is
 needed, and to monitor their performance to ensure that their firms are able to
survive and, it is hoped, thrive over time.

Identifying critical factors in a firms external environment

Business decisions are influenced by two sets of factors known as internal
environmental factors and external environmental factors. Therefore, these two
factors are very important to any business so for its decisions are concerned.
For any organization, the environment consists of the set of external conditions
and forces that have the potential to influence the organization. The general
environment (or macroenvironment) includes overall trends and events in society
such as social trends, technological trends, demographics, and economic
conditions. The industry (or competitive environment) consists of multiple
organizations that collectively compete with one another by providing similar
goods, services, or both.

Why Does the Environment Matter?

Understanding the environment that surrounds an organization is important to the
executives in charge of the organizations. There are several reasons for this. First,
the environment provides resources that an organization needs in order to create
goods and services. In the seventeenth century, British poet John Donne famously
noted that “no man is an island.” Similarly, it is accurate to say that no
organization is self-sufficient. As the human body must consume oxygen, food,
and water, an organization needs to take in resources such as labor, money, and
raw materials from outside its boundaries.
Second, the environment is a source of opportunities and threats for an
organization. Opportunities are events and trends that create chances to improve
an organization’s performance level.
Executives must also realize that virtually any environmental trend or event is
likely to create opportunities for some organizations and threats for others.
Third, the environment shapes the various strategic decisions that executives
make as they attempt to lead their organizations to success. The environment
often places important constraints on an organization’s goals, for example. A firm
that sets a goal of increasing annual sales by 50 percent might struggle to achieve
this goal during an economic recession or if several new competitors enter its
business. Environmental conditions also need to be taken into account when
examining whether to start doing business in a new country, whether to acquire
another company, and whether to launch an innovative product, to name just a
few.
An organization’s environment includes factors that it can readily affect as well as
factors that largely lay beyond its influence. The latter set of factors are said to
exist within the general environment. Because the general environment often has
a substantial influence on an organization’s level of success, executives must
track trends and events as they evolve and try to anticipate the implications of
these trends and events.

PESTEL analysis is one important tool that executives can rely on to organize
factors within the general environment and to identify how these factors influence
industries and the firms within them. PESTEL is an anagram, meaning it is a word
that created by using parts of other words. In particular, PESTEL reflects the
names of the six segments of the general environment: (1) political, (2) economic,
(3) social, (4) technological, (5) environmental, and (6) legal. Wise executives
carefully examine each of these six segments to identify major opportunities and
threats and then adjust their firms’ strategies accordingly..

1. Political
political factors involve how and to what extent a government intercedes on an
organization or a specific industry. It refers to the influences of governmental
policies may have on your business. Political factors include the government
policies with regards to business, like taxation, trade, labour and environmental
laws. Political stability, corruption reputation, but also education system,
infrastructure and health regulations can also be considered at this stage to assess
the accessibility and attractiveness of a potential market.
Complete political stability from one administration to the next is hard to
guarantee. By taking changing political factors into account, businesses can
prepare to alter their own practices should new employment laws, foreign trade
policies, deregulation actions, or trade restrictions arise. Similarly, they can watch
for any incentives and subsidies the government might offer them to expedite
certain processes.

2. Economic
The economic state of a country is also a huge determinant in the prospects of
investments and running businesses; no one would want to put in their assets in a
country where the economy is in turmoil. However, some investors might find
recession beneficial and might want to take advantage of it to enjoy the following
boom.
It all comes down to the nature and prospects of the business really. Some factors
which might arise out of the economic umbrella are expansion/globalization,
interest rates in various sectors of the economy, buying power of the people,
industry growth, inflation, etc.
Another interesting thing to consider when we talk about the economy is the rate
of unemployment. Chances are that you will find many people to hire if you plan
on starting a business amidst soaring rates of unemployment, especially during the
pandemic.
Monetary policies also affect the economy, especially prices of raw material for
production companies. So having a thorough idea of economic trends is very
important.
The broader economy has a powerful influence over both companies and
consumers. Inflation rates, tariff and tax policy, exchange rates, gross domestic
product (GDP) growth, and more all affect how companies can operate since they
directly affect the disposable income levels and purchasing power of their
customers.

3. Social
.Socio cultural fabric is on important environmental factors that would be
analysed while formulation business strategies. For a successful business, the
buying and consumption habits of the people, their languages, beliefs and values,
customs and traditions, taste and preferences and education level should have to
be considered and then it has to decide its strategy so that it will be fit in social -
cultural environment.
When a company or a business decides to operate in a particular market, be it a
result of expansion or anything else, it is very important to be aware of the
segmentation.
You will come across a variety of income groups, age groups, lifestyle choices,
spending habits and behaviors in every market you see. It is detrimental for a
business to have a solid understanding of their target demographic.
Every nation has its own culture, some countries even have subcultures so if an
organization thinks of expanding on a global level, they will have to do things
differently everywhere.
McDonald’s operates around the world; they have specific items in each country
which aren’t found anywhere else because they are made for certain palates.
Often some things which are totally acceptable or even celebrated in one culture
are deemed inappropriate and offensive in others so it’s advisable to be careful
during operations because if the business does not mix with the socio-cultural
environment of a country it won’t be successful.
Broader cultural factors and social trends greatly impact businesses. For example,
if the age distribution of a society is skewing younger rather than older,
companies that tailor their products to older generations might need to adapt to
survive and thrive. Social movements—whether they reflect a broader health
consciousness or calls for greater consumer protection—can also help you decide
how to adapt your company’s practices to contemporary norms.

4. Technological
A business that has an edge on its technology is probably way ahead of its
competitors already, however having a sound grasp on it and more importantly,
having access to it are make or break conditions.
It is one thing to have good technology but another thing to know how to use it to
your advantage; is the workforce capable of handling the kind of technology your
business needs to thrive in the country or region you want to grow out of?
Some businesses might benefit from getting a technological upgrade. Knowing
your business in and out and understanding what technological advances you will
need to support your growth strategy is extremely important.
A very important benefit of having strong technology is the reduced costs.
Whether you are in manufacturing or services, technology makes it possible to cut
down your overall costs by increasing efficiency.
An important aspect of technological advancement is how tech-friendly the
customer base is; try and understand their habits. Will they be researching your
business on the internet frequently? If you are a technology business, will the
people be able to comprehend your offering?
From one year to the next, technological change proves constant—and new
technology opens the door into new markets. Keep an eye on automation trends,
data protection laws, and innovations both inside and outside of your industry.
Use this sort of external analysis to further your internal research and
development goals.

5. Environmental
It is important to be aware of the environment in which an organization does
business because sometimes the geographical location, the climate, and weather
just don’t do anything positive for it.
However, a far more important aspect of the environmental factor is the opposite;
most businesses aren’t safe or suitable for the health of the environment. The
human impact is increasing at an exponential rate each day.
The waste produced by industries around the world has destroyed our ecosystem
in totality. The recent climate report released mentions how dire the situation has
become.
Be wary of how your business impacts the wildlife, plant life, and the people
around you. If you are taking away more than you are giving, what is the point?
Environmental factors relate to the importance of CSR (Corporate Sustainability
Responsibility) within the surrounding environment, for example ecological
aspects like carbon footprint targets, climate change policy, recycling standards,
waste disposal and sustainability of resources. More recently, ethical standards’
influence has risen within this assessment.
In an era of ecological crises and climate change concerns, it’s more important
than ever for businesses to pay attention to environmental issues as they arise.
This facet of PESTEL analysis informs companies as to how they can reduce their
carbon footprint, respond to natural disasters, and increase their sustainability.

6. Legal
It goes without saying that your business should be legal by all definitions.
Although many organizations are able to find legal loopholes, it is not a worthy
risk to take at any point. Do not break laws people! It is not cool.
A business develops respect and consequently garners attention from customers
and investors alike when it adheres to the laws of the country; not just the country
but laws of international trading as well.
 An organization has a duty towards the environment as well, some countries have
made it abundantly clear on how to make sure that the environment does not get
degraded. Laws regarding labor such as minimum wage and keeping their health
in check also exist in many parts of the world.

Tax fraud can also be avoided if businesses file their taxes regularly and if
extensive audits take place regularly.
Some businesses are better suited to certain laws; an LGBTQ-themed business
will not be able to operate in Saudi Arabia for example because homosexuality is
against the law in the country.
So be very keen about the laws and restrictions (especially custom duties,
import/export policies and rates) in the countries affected or served by your
business so as to avoid any entanglement with law enforcement agencies.
This PESTEL factor differs from its political counterpart because it focuses on
current laws rather than potential ones. In order to maintain both integrity and
profitability, a company must observe all relevant intellectual property and
antitrust laws. Adhering to antidiscrimination laws is also essential.

A firm’s macro environment contains elements that can impact the firm but are generally beyond
its direct control. These elements are characteristics of the world at large and are factors that all
businesses must contend with, regardless of the industry they are in or type of business they are.
In the Exhibit 8.4, the macro environment is indicated in blue. Note that the terms contained in
the blue ring are all “big-picture” items that exist independently of business activities. That is not
to say that they do not affect firms or that firm activities cannot affect macro environmental
elements; both can and do happen, but firms are largely unable to directly change things in the
macro environment.

Strategists study the macro environment to learn about facts and trends that may present
opportunities or threats to their firms. However, they do not usually just think in terms of SWOT.
Strategists have developed more discerning tools to examine the external environment.

Political factors in the macro environment include taxation, tariffs, trade agreements, labor
regulations, and environmental regulations. Note that in PESTEL, factors are not characterized
as opportunities or threats. They are simply things that a firm can take advantage of or treat as
problems, depending on its own interpretation or abilities.
Economic Factors
All firms are impacted by the state of the national and global economies. The increased
interdependence of individual country economies has made evaluating the economic factors in a
firm’s macro environment more complex. Firms analyze economic indicators to make decisions
about entering or exiting geographic markets, investing in expansion, and hiring or laying off
employees. As discussed earlier in this chapter, employment rates impact the quantity, quality,
and cost of employees available to firms. Interest rates impact sales of bigticket items that
consumers normally finance, such as appliances, cars, and homes. Interest rates also impact the
cost of capital for firms that want to invest in expansion. Exchange rates present risks and
opportunities to all firms that operate across national borders, and the price of oil impacts many
industries, from airlines and transportation companies to solar panel producers and plastic
recycling companies. Once again, any scenario can be a threat to one firm and an opportunity to
another, so economic forces should not be assumed to be intrinsically good or bad.
Sociocultural Factors
Quite possibly the largest category of macro environmental factors an analyst might examine are
sociocultural factors. This broad category encompasses everything from changing national
demographics to fashion trends and many things in between. Demographics, a subset of this
category, includes facts about income, education levels, age groups, and the ethnic and racial
composition of a population. All of these facts present market challenges and possibilities. Firms
can target products to specific market segments by studying the needs and preferences of
demographic groups, such as working women (they might need daycare services but not watch
daytime television), college students (who would be interested in affordable textbooks but
couldn’t afford to buy new cars), or the elderly (who would be willing to pay for lawn-mowing
services but might not be interested in adventure tourism).

Changes in people’s values and interests are also included in this category. Environmental
awareness has spurred demand for solar panels and electric and hybrid cars. A general interest in
health and fitness has created industries in gyms, home gym equipment, and organic food. The
popularity of social media has created an enormous demand for instant access to information and
services, not to mention smartphones. Values and interests are constantly changing and vary
from country to country, creating new market opportunities as well as communication challenges
for companies trying to enter unfamiliar new markets.
Technological Factors
The rise of the Internet may be the most disruptive technological change of the last century. The
globe has become more interconnected and interdependent because of the fast, low-cost
communications the Internet provides. Customer service agents in India can serve customers in
Kansas because technology has advanced to the point that the customer’s account information
can be instantly accessed by the service provider in India. Entrepreneurs around the world can
reach customers anywhere through companies such as eBay, Alibaba, and Etsy, and they can get
paid, regardless of their customers’ currency, through PayPal. The Internet has enabled Jeff
Bezos, who started an online bookselling company called Amazon in 1994, to transform how
consumers shop for goods.

How else have technological factors impacted business? The Internet is not the only
technological advance that has transformed how businesses operate. Automation has increased
efficiency for manufacturers. MRP (materials requirement planning) systems have changed how
companies and their suppliers work together, and global-positioning technology has helped
construction engineers manage large projects more accurately. Consumers and firms have nearly
unlimited access to information, and this access has empowered consumers to make more-
informed buying decisions and challenged firms to develop ways to analyze the large amounts of
data their businesses generate.

Environmental Factors
The physical environment, which provides natural resources for manufacturing and energy
production, has always been a key part of human business activity. As resources become scarcer
and more expensive, environmental factors impact businesses more every day. Firms are
developing technology to operate more cleanly and using fewer resources. Political pressure on
businesses to reduce their impact on the natural environment has increased globally and
dramatically in the 21st century. In 2017, London, Barcelona, and Paris announced their plans to
ban cars with internal combustion engines over the next few decades, in order to combat air-
quality issues.7

This external environment category often overlaps with others in PESTEL because concern for
the environment is also a sociocultural trend, as more consumers look for recycled products and
buy electric and hybrid cars. On the political front, firms are facing increased regulation around
the world on their carbon emissions and natural resource use. Although SWOT would
characterize these factors as either opportunities or threats, PESTEL simply identifies them as
aspects of the external environment that firms must consider when planning for their futures.

Legal Factors
Legal factors in the external environment often coincide with political factors because laws are
enacted by government entities. This does not mean that the categories identify the same issues,
however. Although labor laws and environmental regulations have deep political connections,
other legal factors can impact business success. For example, in the streaming video industry,
licensing fees are a significant cost for firms. Netflix pays billions of dollars every year to movie
and television studios for the right to broadcast their content. In addition to the legal requirement
to pay the studios, Netflix must consider that consumers may find illegal ways to view the
movies they want to see, making them less willing to pay to subscribe to Netflix. Intellectual
property rights and patents are major issues in the legal realm.

Note that some external factors are difficult to categorize in PESTEL. For instance tariffs can be
viewed as either a political or economic factor while the influence of the internet could be
viewed as either a technological or social factor. While some issues can overlap two or more
PESTEL areas, it does not diminish the value of PESTEL as an analytical tool.

Industry Rivalry
Industry rivalry, the first of Porter’s forces, is in the center of the diagram. Note that the arrows
in the diagram show two-way relationships between rivalry and all of the other forces. This is
because each force can affect how hard firms in an industry must compete against each other to
gain customers, establish favorable supplier relationships, and defend themselves against new
firms entering the industry.

When using Porter’s model, an analyst will determine if each force has a strong or weak impact
on industry firms. In the case of rivalry, the question of strength focuses on how hard firms must
fight against industry rivals (competitors) to gain customers and market share. Strong rivalry in
an industry reduces the profit potential for all firms because consumers have many firms from
which to purchase products or services and can make at least part of their purchasing decisions
based on prices. An industry with weak rivalry will have few firms, meaning that there are
enough customers for everyone, or will have firms that have each staked out a unique position in
the industry, meaning that customers will be more loyal to the firm that best meets their
particular needs.

This measures the degree of competition between existing firms. The higher the
degree of rivalry, the more difficult it is for existing firms to generate high profits.
The most prominent factors that experience shows to affect the intensity of firms’
rivalries are (1) numerous competitors, (2) slow industry growth, (3) high fixed costs,
(4) lack of differentiation, (5) high strategic stakes and (6) high exit barriers.

The Threat of New Entrants

In an industry, there are incumbent (existing) firms that compete against each other as rivals. If
an industry has a growing market or is very profitable, however, it may attract new entrants.
These either are firms that start up in the industry as new companies or are firms from another
industry that expand their capabilities or target markets to compete in an industry that is new to
them.

Different industries may be easier or harder to enter depending on barriers to entry, factors that
prevent new firms from successfully competing in the industry. Common barriers to entry
include cost, brand loyalty, and industry growth. For example, the firms in the airline industry
rarely face threats from new entrants because it is very expensive to obtain the equipment, airport
landing rights, and expertise to start up a new airline.

Brand loyalty can also keep new firms from entering an industry, because customers who are
familiar with a strong brand name may be unwilling to try a new, unknown brand. Industry
growth can increase or decrease the chances a new entrant will succeed. In an industry with low
growth, new customers are scarce, and a firm can only gain market share by attracting customers
of other firms. are not always external, firms often lobby politicians for regulations that can be a
barrier to entry.

The more difficult it is for other firms to enter a market, the more likely it is that existing firms
can make relatively high profits.

Threat of Substitutes
In the context of Porter’s model, a substitute is any other product or service that can satisfy the
same need for a customer as an industry’s offerings. Substitutes are completely different
products or services that consumers would be willing to use instead of the product they currently
use.

In general, product substitutes present a strong threat to a firm when customers face
few, if any, switching costs and when the substitute product’s price is lower or its
quality and performance capabilities are equal to or greater than those of the
competing product. Differentiating a product along dimensions that customers value
(such as price, quality, service after the sale, and location) reduces a substitute’s
attractiveness.
Supplier Power
Virtually all firms have suppliers who sell parts, materials, labor, or products. Supplier power
refers to the balance of power in the relationship between firms and their suppliers in an industry.

The stronger the power of suppliers in an industry, the more difficult it is for firms
within that sector to make a profit because suppliers can determine the terms and
conditions on which business is conducted. Increasing prices and reducing the quality
of its products are potential means used by suppliers to exert power over firms
competing within an industry. If a firm is unable to recover cost increases by its
suppliers through its pricing structure, its profitability is reduced by its suppliers’
actions.
Buyer Power
The last of Porter’s forces is buyer power, which refers to the balance of power in the
relationship between a firm and its customers. If a firm provides a unique good or service, it will
have the power to charge its customers premium prices, because those customers have no choice
but to buy from the firm if they need that product. In contrast, when customers have many
potential sources for a product, firms will need to attract customers by offering better prices or
better value for the money if they want to sell their products. One protection firms have against
buyer power is switching costs, the penalty consumers face when they choose to use a particular
product made by a different company. Switching costs can be financial (the extra price paid to
choose a different product) or practical (the time or hassle required to switch to a different
product).

The stronger the power of buyers in an industry, the more likely it is that they will be
able to force down prices and reduce the profits of firms that provide the product.
Firms seek to maximize the return on their invested capital. Alternatively, buyers
(customers of an industry or firm) want to buy products at the lowest possible price
—the point at which the industry earns the lowest acceptable rate of return on its
invested capital. To reduce their costs, buyers bargain for higher-quality, greater
levels of service, and lower prices. These outcomes are achieved by encouraging
competitive battles among the industry’s firms.
1. Being the topmost general manager of the organization, the CEO integrates different functional
areas of management and visualizes the total organization.
Reaches consensus on final strategic plan 4 Strategizes deployment and implementation methods 4
Chooses what gets published

Provides overall leadership and guidance to the organization regarding the strategic plan 4 Formally and
informally communicates the published strategic plan to the workforce, customers, and stakeholders 4
Champions the change that the plan represents 4 Works with the budget officer to plan for resource
allocation to implement the strategic pla

2. The CEO foresees the external environmental factors and their impact on the business.

3. The CEO organizes the whole data, ideas and information and conceptualizes them.

4. The CEO looks forward based on his past experience and ability to understand the future
changes.

5. The CEO evaluates the present mission, objectives, policies and strategies against the
future probable changes and reformulates them, if necessary.

6. The CEO formulates new objectives, policies and strategies as and when grand changes take
place in the environment like economic liberalization and technological advancement.

7. The CEO provides information and data to the board regarding strategy formulation.

8. The CEO provides the observations of strategy evaluation to the board and advises it either to
continue the present strategy or to reformulate it or formulate a new strategy.

9. The CEO provides data regarding the external environment, to senior managers, guides and
helps them in formulating, implementing and evaluating and reformulating strategies at strategic
business units are based on the corporate strategies.

Provides overall leadership and guidance to the organization regarding the strategic plan
4 Formally and informally communicates the published strategic plan to the workforce,
customers, and stakeholders 4 Champions the change that the plan represents 4 Works
with the budget officer to plan for resource allocation to implement the strategic plan

• Developing a Strategic Vision and Mission

•
integrates different functional areas of management and visualizes the total organization
 Top-level managers define what the company should achieve and where it should go.
They determine the company’s vision and mission.
• Setting Objectives
Top-level managers design strategic plans to achieve goals. It provides direction and focuses for
the entire organization, eventually implemented at lower levels. Top-level managers
establish, review and maintain systems and policies to ensure the organization
can achieve its goals effectively and efficiently. So, organizational policies must
be built on goals and aligned with company values. Top-level managers
organize departments and activities throughout the organization. They regulate
how these activities or parts synergize and support each other to achieve goals.

• Crafting Tactics to Achieve Organizational Objectives

• All the strategies to be adopted by the business must be developed with utmost care by
the top-level management. The top-level management must consider all the dynamics
of the market related to the business before developing a strategy. Proper strategy
must be developed for all functional areas of a business.
•
Top-level managers collect and allocate resources within the company in
the most efficient way. These resources include tangible assets such as
hardware and intangible assets such as human capital.

• Implementing and Executing the Tactics

Top-level managers collect and allocate resources within the company in

the most efficient way. These resources include tangible assets such as
hardware and intangible assets such as human capital.

All the major decisions are taken by the top-level management. It is always advisable that the
decisions must be taken strategically to effectively utilize the available resources and bring the
desired outcome.

• Evaluating and Measuring Performance

 • The fifth step, evaluating and measuring performance, is how
management determines whether or not the tactics implemented
effectively to achieve organizational objectives and comply with
the strategic vision. If performance is not to expectations,
corrective action must be taken.
• Performance can be measured by various methods such as
financial data, customer satisfaction, quality reports, employee
satisfaction, and capital utilization. Each of these types of
measures should be used to analyze tactics to get a full picture of
a tactic’s success.
•
•

Developing a Strategic Vision and Mission

The first step, developing a strategic vision and mission, involves

putting management’s long-term view of where the company is going
on paper and making that known to the employees of the company.
This step is made up of both the vision and the mission. The mission is
used to define why the organization exists. Often companies within the
same industry with have similar mission statements. The vision is
management’s view of where the company is going. This task is usually
the responsibility of the CEO.

Executive leadership should not be pulling the mission and vision from
thin air. There is a mission and a vision present for all companies.
Sometimes the vision is present only as ideas in the heads of top
management. Management must find out what it is and communicate
that to the employees. A clear and concise mission and vision will help
the company work together for the same purpose. It is also used in the
other steps of strategic management.

Setting Objectives

The second step, setting objectives, takes the strategic vision and
creates specific goals that will occur to accomplish what is laid out in
the vision statement. Goals should be feasible but also not easily
attainable. These types of goals are called “stretch” goals because they
force the company to go as far as they can to attain the goal. If goals are
set too low, complacency will occur. Establishing these goals removes
confusion employees may have on what should be accomplished.

Managers can set both financial objectives and strategic objectives.

Financial objectives are those that state what management wants to
achieve in “dollars and cents.” Strategic objectives are goals that strive
to increase competitive position, gain market share, or to develop a
competitive advantage. Strategic objectives have the power to motivate
and prompt action where financial objectives are seen more as a
constraint. Managers should define both goals but concentrate on
strategic objectives will bring about better results.

Both long-term and short-term objectives should be set. Short-term

objectives will motivate present performance while long-term
objectives will put the company in the proper position to achieve what
is outlined in the vision down the road. Priority should be placed on
long-term objectives over the short-term. Companies that stress short-
term objectives end up in business short-term.

Crafting Tactics to Achieve Organizational Objectives

The third step, crafting tactics to achieve organizational objectives, is

where management defines how to achieve the defined objectives. In
this step, management decides how best to respond to changes in the
environment, how to rise above the competition, and how to move
towards the corporate vision and strategic objectives.

Implementing and Executing the Tactics

The fourth step, implementing and executing the tactics, includes

determining what company resources should be allocated to each
activity, establishing policies, motivating employees, providing the
resources necessary to achieve objectives, and encouraging a
continuous improvement culture.

Tactics must be tailored to organizational capabilities and culture for

them to work efficiently. Change will most likely be needed, but the
amount of change varies depending on how new the tactics are. This
usually involves revising policies or resource allocation, moving people
around, retraining and retooling, or making changes to reward
systems. Each manager must look at the tactics and their department
to determine how best to implement each tactic correctly.
Evaluating and Measuring Performance