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Strategic Management

Lecture 2
Pre-Planning/Strategic Planning & Crafting a
Strategy Stage. 26.02.2018
Pre-Planning Stage
Environmental Scanning

Environmental scanning is the monitoring, evaluating,

and disseminating of information from the external and
internal environments to key people within public or
private sector organization. Its purpose is to identify
strategic factors—those external and internal elements
that will determine the future of the organization. The
simplest way to conduct environmental scanning is
through SWOT analysis.
Features of Environmental Scanning

Holistic Exercise
Environmental analysis is a holistic exercise in the sense that it must
comprise a total view of the environment rather than a piecemeal view
of trends. It is a process of looking at the forest, rather than the trees.
Continuous Activity
The analysis of environment must be a continuous process rather than a
one – shot deal. Strategists must keep on tracking shifts in the overall
pattern of trends and carry out detailed studies to keep a close watch
on major trends.
Exploratory Process
Environmental analysis is an exploratory process. A large part of the
process seeks to explore the unknown terrain and the dimensions of
possible future. The emphasis must be on speculating systematically
about alternative outcomes, assessing probabilities, questioning
assumptions and drawing rational conclusions.
Techniques of Environmental Scanning

1. PESTEL analysis
2. SWOT analysis
5. EFE Matrix
6. CPM
PESTAL Analysis
PESTEL Analysis is a checklist to analyse the political, economic, socio-cultural,
technological, environmental and legal aspects of the environment.
SWOT Analysis

Environmental Threats and Opportunities Profile (ETOP) gives a

summarized picture of environmental factors and their likely
impact on the organisation. ETOP is generally prepared as
1. List environmental factors: The different aspects of the general
as well as relevant environmental factors are listed. For
example, economic environment can be divided into rate of
economic growth, rate of inflation, fiscal policy etc.
2. Assess impact of each factor: At this stage, the impact of
each factor is assessed closely and expressed in qualitative
(high, medium or low) or quantitative factors (1, 2, 3). It is to be
noted that not all identified environmental factors will have
the same degree of impact. The impact is assessed as positive
or negative.
3. Get a big picture: In the final stage, the impact of each factor
and its importance is combined to produce a summary of the
overall picture. An example of ETOP is on next slide.
EFE Matrix
Just like ETOP, the External Factor Evaluation Matrix (EFE Matrix)
helps to summarize and evaluate the various components of
external environment. The EFE Matrix can be developed in five
1. List 10 to 20 important opportunities and threats.
2. Assign a weight to each factor from 0.0 (not important) to 1.0
(most important). The higher the weight, the more important is
the factor to the current and future success of the company.
3. Assign a rating to each factor 1(poor), 2 (average), 3 (above
average), 4 (superior). The rating indicates how effectively the
firm’s current strategies respond to that particular factor.
4. Multiply each factor’s weight by its rating to determine a
weighted score.
5. Finally, add the individual weighted scores for all the external
factors to determine the total weighted score for the
QUEST (Quick Environment Scanning Technique) is a
four step process, which uses scenario building for
environmental analysis.
The four steps are:
1. Managers make observations about major events
and trends in the environment.
2. They speculate on a wide range of issues that are likely to
affect the future of the business enterprise.
3. A report is prepared summarizing the issues and their
implications to the firm, together with 2 to 3 scenarios.
4. The report and the scenarios are reviewed by strategists,
based on which they identify feasible options. Thus, QUEST
helps in generating feasible alternative strategies for
consideration of the management.
Competitive Profile Matrix (CPM)
This is a competitor analysis, which focuses on each company against whom
a firm competes directly. It helps to identify the strengths and weaknesses of
the major competitors of the firm, vis-à-vis the firm. Generally, the Critical
Success Factors (CSFs) are compared. In addition, other factors that can be
compared are breadth of product line, sales, distribution, production
capacity and efficiency, technological advantages etc. Using the format
shown in Table, a firm can prepare competitor profile matrix.
5 Key Success Factors for Orgz may be :
 Strategic Focus (Leadership, Management, Planning)
 People (Personnel, Staff, Learning, Development)
 Operations (Processes, Work)
 Marketing (Customer Relations, Sales, Responsiveness)
 Finances (Assets, Facilities, Equipment)
Strategic Planning Stage

Mission: An organization’s mission is the purpose or

reason for the organization’s existence. It tells what
the government or organization is providing to
Thompson defines mission as “The essential purpose of
the organisation, concerning particularly why it is in
existence, the nature of the business it is in, and the
customers it seeks to serve and satisfy”. Hunger and
Wheelen simply call the mission as the “purpose or
reason for the organisation’s existence”.
Importance Benefits of
Vision and Mission
1. To ensure unanimity of purpose within the organization
2. To provide a basis, or standard, for allocating
organizational resources
3. To establish a general tone or organizational climate
4. To serve as a focal point for individuals to identify with
the organization’s purpose and direction, and to deter
those who cannot from participating further in the
organization’s activities
5. To facilitate the translation of objectives into a work
structure involving the assignment of tasks to
responsible elements within the organization
6. To specify organizational purposes and then to
translate these purposes into objectives in such a way
that cost, time, and performance parameters can be
assessed and controlled
Vision 2025 Planning Commission of Pakistan
Goals and Objectives
 Objectives define strategies or implementation steps to attain the
identified goals. Unlike goals, objectives are specific, measurable, and
have a defined completion date. They are more specific and outline
the “who, what, when, where, and how” of reaching the goals.
Goal Objectives

Meaning The purpose toward which an Something that one's efforts or

endeavor is directed. actions are intended to attain or
accomplish; purpose; target.
Example I want to achieve success in the I want to complete this thesis on
field of genetic research and do genetic research by the end of
what no one has ever done. this month.

Action Generic action, or better still, an Specific action - the objective

outcome towards which we supports attainment of the
strive. associated goal.
Measure Goals may not be strictly Must be measurable and
measurable or tangible. tangible.
Time frame Longer term Mid to short term
The Strategy Map
Crafting/Formulation Stage

 Strategy crafting comprises of approaches for strategy

crafting. It includes defining the corporate mission,
specifying achievable objectives, developing strategies,
and setting policy guidelines.
5 approaches for crafting a competitive strategy
1. Macroeconomic Analysis
2. Industry Analysis
3. Game Theory
4. Capabilities-based-strategy formulation
5. Dynamic capabilities and evolutionary thinking
1-Macroeconomic Analysis
 MACROECONOMIC AGGREGATES: Before taking any strategic decision
managers have to identify the pertinent macroeconomic
aggregates, the relations between them and their TRENDS.
Aggregates GDP = C + I + G + X – M

total value of final goods and services produced within a nation

during a given year

C Household consumption of goods and services

physical investment (gross private capital formation) + additions to

inventory or Investment by businesses.

G Government expenditures

X Exports

M Imports

 Find the real GDP of two countries that you would like to
compare. Then find the total population of the same countries.
For example, the 2008 (estimated) GDP for the United States was
$14.33 trillion and its population was 304.5 million. The 2008
(estimated) GDP for Pakistan was $160.9 billion and its population
was 172.8 million.

 Divide GDP by population to calculate the per capita GDP of a

country. Real GDP divided by population equals GDP per capita

 Make the calculations. For the United States: $14,330,000,000,000

divided by 304,500,000 equals $47,060. For Pakistan:
$160,900,000,000 divided by 172,800,000 equals $931. This
comparison reveals that the real GDP per capita of the United
States is 50.5 times that of Pakistan.
2- Industry analysis (microeconomic analysis)
Microeconomics is study of economics at an individual/group/company level. Macroeconomics, on is the study of a
national economy as whole.

The situation prevailing in a market in which buyers and

sellers are so numerous and well informed that all
elements of monopoly are absent and the market price of
a commodity is beyond the control of individual buyers
and sellers.
Perfect competition provides a benchmark against which
the behavior of other market is judged. Even though
perfect competition is rarely, if ever, encountered in the
real world, we study the perfect competition model
because it provides an ideal against which other models
(cooperative and non- cooperative oligopoly and
duopoly, monopoly) and markets are compared.
Assumptions of perfect

Homogeneous Good
All firms sell an identical product. Consumers view the products of various
firms as the same, hence, are indifferent between them
 Perfect information
Buyers and sellers have all relevant information about the market
including the price and quality of the product
 Price Taking
Buyers and sellers cannot individually influence the price at which the
product can be purchased or sold. Price is determined by the market, so
each buyer takes the price as given
 No transaction Costs
Neither buyers nor sellers incur costs or fees to participate in the market
 Free Entry and Exit
Firms can enter and exit the industry quickly at any time without having
to incur any special expense. That is, firms do not face barriers to entry or
Profit Maximization
 The objective of any firm, including a competitive firm, is to maximize its
 As a result of the price-taking assumption above, the firm can sell all it
wants at price "p".
 If it is profitable for the firm to expand output as long as the extra revenue
(price or marginal revenue) from selling an additional unit exceeds the
extra cost (marginal cost) of producing that unit.
 The profit is maximum when Price=Marginal Cost
Marginal Cost:
 Marginal cost is the cost of the next unit or one additional unit of volume
or output. The total cost of producing 10,000 units is Rs 50,000. If you
produce a total of 10,001 units the total cost is Rs 50,002. That would
mean the marginal cost—the cost of producing the next unit—was Rs 2.
The reason that the marginal cost was Rs 2 instead of the previous
average cost of Rs 5 (Rs50,000 divided by 10,000 units) is that some costs
did not increase when the additional unit was produced. For example,
fixed costs such as salaries, depreciation, property taxes generally do not
increase when one additional unit is produced
Marginal Cost
The increase or decrease in the total cost of a production
run for making one additional unit of an item. It is computed in situations
where the breakeven point has been reached: the fixed costs have
already been absorbed by the already produced items and only the direct
(variable) costs have to be accounted for.

Price vs Marginal cost profit
Total Profit

Price > Marginal cost positive increases

Price = Marginal cost 0 maximum

Price < Marginal cost negative decreases

P Vs Quantity Curve:
A typical marginal cost curve with marginal
3- Game Theory

 The systematic study of behavior in situations involving

interdependencies between at least two actors.
 Examines situations in which a player in a game is
affected by what others do (or do not do) and, in turn,
that player's actions affect others
 A systematic way to develop strategies when one
firm's fortune depends on what other firms do.
 Two members of a criminal gang are arrested and
imprisoned. Each prisoner is in solitary confinement with no
means of speaking to or exchanging messages with the
other. The police admit they don't have enough evidence to
convict the pair on the principal charge. They plan to
sentence both to a year in prison on a lesser charge.
Simultaneously, the police offer each prisoner a bargain.
Each prisoner is given the opportunity either to betray the
other, by testifying that the other committed the crime, or to
cooperate with the other by remaining silent. Here's how it
 If A and B both betray the other, each of them serves 2 years
in prison
 If A betrays B but B remains silent, A will be set free and B will
serve 3 years in prison (and vice versa)
 If A and B both remain silent, both of them will only serve 1
year in prison (on the lesser charge)
b-Cournot Competition
 (Antoine Augustin Cournot) Cournot competition is
an economic model used to describe an industry structure in
which companies compete on the amount of output they will
produce, which they decide on independently of each other
and at the same time. It has the following features:
 There is more than one firm and all firms produce
a homogeneous product, i.e. there is no product differentiation;
 Firms do not cooperate, i.e. there is no collusion;
 Firms have market power, i.e. each firm's output decision affects the
good's price;
 The number of firms is fixed;
 Firms compete in quantities, and choose quantities simultaneously;
 The firms are economically rational and act strategically, usually
seeking to maximize profit given their competitors' decisions.

Stackelberg leadership model is a

strategic game in economics in which
the leader firm moves first and then the
follower firms move sequentially.
The leader firm picks its output level and
then the other firms are free to choose
their optimal quantities given their
knowledge of the leader's output. The
new product has a natural first-mover
d. The Nash Equilibrium

The Nash Equilibrium is the solution to a game in which two or more

players have a strategy, and with each participant considering an
opponent’s choice, he has no incentive, nothing to gain, by switching his
In the Nash Equilibrium, each player's strategy is optimal when considering
the decisions of other players. Every player wins because everyone gets
the outcome they desire.
To quickly test if the Nash equilibrium exists, reveal each player's strategy
to the other players. If no one changes his strategy, then the Nash
Equilibrium is proven.
For example, imagine a game between ABC Inc and XYZ Inc . In this
simple game, both players can choose strategy A, to receive Rs 1, or
strategy B, to lose Rs1. Logically, both players choose strategy A and
receive a payoff of Rs 1. If you revealed XYZ's strategy to ABC and vice
versa, you see that no player deviates from the original choice. Knowing
the other player's move means little and doesn't change either player's
behavior. The outcome A, A represents a Nash Equilibrium.
e. Bertrand Equilibrium

It describes interactions among firms

(sellers) that set prices and their
customers (buyers) that choose
quantities at the prices set. The only
important change is that firms now
set prices rather than quantities. Each
firm is willing to sell as much quantity
as is demanded at the price it sets.
4. Capabilities-based- strategy

An organization capability refers to

the way systems and people in the
Organization cooperate to get
things done:
Individual Organization

Technical Functional Competencies Business Capabilities

Social Leadership Competencies Organizational Capabilities

5- Dynamic capabilities and evolutionary

 How can senior managers of successful companies change their existing mental
models and paradigms to adapt to radical discontinuous change?
 Ultimately, how can companies maintain threshold capability standards and
hence ensure competitive survival?