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Chapter One: Introduction to Business Policy and Strategic Management -  

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Strategy can be defined in various ways. Some of these definitions are given below:
Strategy is the determination of the basic long-term goals and objectives of an
enterprise and the adoption of the courses of action and the allocation of resource
necessary for carrying out these goals.
Strategy is the pattern of objective, purposes, goals, and the major policies and plans
for achieving these goals stated in such a way so as to define what business the
company is in or is to be and the kind of company it is or is to be.
Strategy is a unified, comprehensive and integrated plan designed to assure that the
basic objectives of the enterprise are achieved.
Combining the above definitions, we will not attempt to define strategy yet in a novel
way but try to analyze the elements we have come across. We note that a strategy is:
1. It involves a plan or course of action or a set of decision rules making a pattern
or treating a common thread;
2. It is a way of stating the current and the desired future position of the company,
and the objectives, goals major policies and plans required for taking the
company from where it is to where it wants to be.
3. It outlines the pattern or common thread related to the organization¶s activities
which are derived from the policies, objectives, and goals;
4. It is concerned with pursuing those activities which move an- organization from
its current position to a desired future state; and
5. Concerned with the resources necessary for implementing a plan or following a
course of action.
Still, strategic management can be defined in various ways. Strategic management is
that set of managerial decisions and actions that determines the long-run performance
of an organization  "
    
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Strategic management is a stream of decisions and actions which leads to the

development of an effective strategy or strategies to help achieve corporate
objectives. According to this definition, the end result of strategic management is a
strategy or a set of strategies for the organization.

Strategic management is the process of managing the pursuit of the organization¶s

mission while managing the relationship of the organization to its environment;
especially with respect to environmental stakeholders and the major constitutes in its
internal and external environments that affect the actions.

Strategic management is a systematic approach to a major and increasingly important

responsibility of general management to position and relate the firm to its environment
in a way which will assure its continued success and make it secure from surprises.

We observe that different authors have defined strategic management differently.


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Strategic management is considered as both decision-making and planning, or the set
of activities related to the formulation and implementation of strategies to achieve
organizational objectives. The emphasis in strategic management is on those general
management responsibilities which are essential to relate the organization to the
environment in which a way that its objectives may be achieved.

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There are several dimensions that distinguish a company¶s strategic decisions from
other decisions. Typically, strategic issues have the following six dimensions.
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Since strategic decisions cover wider areas of a firm¶s operations, they require top-
managements' involvement. Usually only top management has the perspective
needed to understand the broad implications of such decisions and the power to
authorize the necessary resource allocations.
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Strategic decisions involve substantial allocations of people, physical assets, or
money. These resources are either redirected from internal sources or swerved from
outside the firm. Strategic decisions also commit the firm to actions over an extended
period.
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Strategic decisions commit the firm for a long time, typically five years. However, their
impact often lasts much longer. Once a firm has committed itself to a particular
strategy, its image and competitive advantages usually are tied to that strategy. Firms
become known in certain markets, for certain products, with certain technologies.
They would jeopardize their previous gains if they shifted from these markets,
products, or technologies by adopting a radically different strategy.
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Strategic decisions are based on what managers forecast rather than on what they
know. In such decisions, emphasis is placed on the development of projections that
will enable the firm to select the most promising strategic options.
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Strategic decisions have complex implications for most areas of the firm. Decisions
about such materials as customers mix, competitive emphasis, or organizational
structure necessarily involve a number of the firm¶s strategic business units (SBUs),
divisions, or program units. All of these areas will be affected by allocations or
reallocations of responsibilities and resources that result form these decisions.
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All business firms operate in an open system. They affect and are affected by external
conditions that are largely beyond their control. Therefore, to successfully position a
firm in competitive situations, its strategic managers must look beyond its operations
by ³thinking outside of the box.´

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% Strategic management is focused on proposing the future course
of action. An emphasis is placed on the development of projections that will enable the
firm to select the most promising strategic options.

  
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* as we frequently mentioned
earlier, all business operate in open system. That means their day to day and long
term commitment is highly influenced by the external environment. Hence, strategic
management requires considering changes that will take place in the external
environment.

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* Strategic management determines the
future direction of an organization. In the process, substantial allocation of resources
is proposed. Therefore, if there are failures of strategic management, the whole lot of
resource of the organization will be allocated in the wrong direction.
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  * Since the future prospective
success or failure is determined in the strategic management, top management
groups are actively involved in determining major corporate objectives and framing out
strategies.

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Before we further discuss strategic management, we should define nine key terms:
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Strategic management is all about gaining and maintaining 
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This term can be defined as + 
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something that rival firms desire, that can represent a competitive advantage. Getting
and keeping competitive advantage is essential for long-term success in an
organization. Theories of organization present different perspectives on how best to
capture and keep competitive advantage²that is, how best to manage strategically.
Pursuit of competitive advantage leads to organizational success or failure. Strategic
management researchers and practitioners alike desire to better understand the
nature and role of competitive advantage in various industries. ùormally, a firm can
sustain a competitive advantage for only a certain period due to rival firms imitating
and undermining that advantage. Thus it is not adequate to simply obtain competitive
advantage.

A firm must strive to achieve sustained competitive advantage by

(1) continually adapting to changes in external trends and events and internal
capabilities, competencies, and resources; and by
(2) effectively formulating, implementing, and evaluating strategies that capitalize
upon those factors.

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Strategists are the individuals who are most responsible for the success or failure of
an organization. Strategists have various job titles, such as  ()
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. Writers on organizational behavior say, ³All strategists have to be chief
learning officers. We are in an extended period of change. If our leaders aren¶t highly
adaptive and great models during this period, then our companies won¶t adapt either,
because ultimately leadership is about being a role model´
Strategists help an organization gather, analyze, and organize information. They track
industry and competitive trends, develop forecasting models and scenario analyses,
evaluate corporate and divisional performance, spot emerging market opportunities,
identify business threats, and develop creative action plans. Strategic planners usually
serve in a support or staff role. Usually found in higher levels of management, they

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typically have considerable authority for decision making in the firm. The CEO is the
most visible and critical strategic manager. Any manager who has responsibility for a
unit or division, responsibility for profit and loss outcomes, or direct authority over a
major piece of the business is a strategic manager (strategist). In the last five years,
the position of chief strategy officer (CSO) has emerged as a new addition to the top
management ranks of many organizations. This new corporate officer title represents
recognition of the growing importance of strategic planning in the business world.
Strategists differ as much as organizations themselves and these differences must be
considered in the formulation, implementation, and evaluation of strategies. Some
strategists will not consider some types of strategies because of their personal
philosophies. Strategists differ in their attitudes, values, ethics, willingness to take
risks, concern for social responsibility, concern for profitability, concern for short-run
versus long-run aims, and management style.

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—any organizations today develop a )
  that answers the question,
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2- Developing a vision statement is often considered
the first step in strategic planning, preceding even development of a mission
statement. —any vision statements are a single sentence. ÷  
 the vision
statement of the Ethiopian Electric Power Corporation (EEPCo) is  a
 
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 are ³enduring statements of purpose that distinguish one
business from other similar firms. A mission statement identifies the scope of a firm¶s
operations in product and market term.´ It addresses the basic question that faces all
strategies ³What is our business?´ A clear mission statement describes the values
and priorities of an organization. Developing a mission statement compels strategists
to think about the nature and scope of present operations and to assess the potential
attractiveness of future markets and activities. A mission statement broadly charts the
future direction of an organization. An example of a mission statement is provided
below for —icrosoft.

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Another example of a mission statement of the Ethiopian Electric Power Corporation
(EEPCo) is

       
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 and ($  refer to economic, social, cultural,
demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization
in the future.
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 and  are largely beyond the control of a single organization-
thus the word external. The wireless revolution, biotechnology, population shifts,
changing work values and attitudes, space exploration, recyclable packages, and
increased competition from foreign companies are examples of opportunities or
threats for companies. These types of changes are creating a different type of
consumer and consequently a need for different types of products, services, and
strategies. —any companies in many industries face the severe external threat of
online sales capturing increasing market share in their industry.
Other opportunities and threats may include the passage of a law, the introduction of a
new product by a competitor, a national catastrophe, or the declining value of the
dollar. A competitor¶s strength could be a threat. Unrest in the —iddle East, rising
energy costs, or the war against terrorism could represent an opportunity or a threat.
A basic tenet or principle of strategic management is that firms need to formulate
strategies to take advantage of external opportunities and to avoid or reduce the
impact of external threats. For this reason, identifying, monitoring, and evaluating
external opportunities and threats are essential for success. This process of
conducting research and gathering and assimilating external information is sometimes
called )
$  or   $ . Lobbying is one activity that
some organizations utilize to influence external opportunities and threats.

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  are an organization¶s controllable activities
that are performed especially well or poorly. They arise in the management,
marketing, finance/accounting, production/operations, research and development, and
management information systems activities of a business. Identifying and evaluating
organizational strengths and weaknesses in the functional areas of a business is an
essential strategic-management activity. &
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Strengths and weaknesses are determined  to competitors. Relative deficiency
or superiority is important information. Also, strengths and weaknesses can be
determined by elements of being rather than performance. ÷ 
, a strength may
involve ownership of natural resources or a historic reputation for quality. Strengths
and weaknesses may be determined relative to a firm¶s own objectives ÷  
,
high levels of inventory turnover may not be a strength to a firm that seeks never to
stock-out.
Internal factors can be determined in a number of ways, including computing ratios,
measuring performance, and comparing to past periods and industry averages.
Various types of surveys also can be developed and administered to examine internal
factors such as employee morale, production efficiency, advertising effectiveness, and
customer loyalty.
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pursuing its basic mission essential. %

means more than one year. Objectives
are for organizational success because they state direction; aid in evaluation; create
synergy; reveal priorities; focus coordination; and provide a basis for effective

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planning, organizing, motivating, and controlling activities. Objectives should be
challenging, measurable, consistent, reasonable, and clear. In a multidimensional
firm, objectives should be established for the overall company and for each division.

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Business strategies may include geographic expansion, diversification, acquisition,
product development, market penetration, retrenchment, divestiture, liquidation, and
joint venture.
Strategies are potential actions that require top management decisions and large
amounts of the firm¶s resources. In addition, strategies affect an organization¶s long-
term prosperity, typically for at least five years, and thus are future-oriented.
Strategies have multifunctional or multidivisional consequences and require
consideration of both the external and internal factors facing the firm.
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 a are short-term milestones that organizations must achieve to reach
long-term objectives. Like long-term objectives, annual objectives should be
measurable, quantitative, challenging, realistic, consistent, and prioritized. They
should be established at the corporate, divisional, and functional levels in a large
organization. Annual objectives should be stated in terms of management, marketing,
finance/accounting, production/operations, research and development, and
management information systems (—IS) accomplishments. A set of annual objectives
is needed for each long-term objective. $

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 Annual objectives represent the basis for allocating resources.

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" a are the means by which  (*
 will be achieved. Policies include
guidelines, rules, and procedures established to support efforts to achieve stated
objectives. Policies are guides to decision making and address repetitive or recurring
situations.
Policies are most often stated in terms of management, marketing, finance/
accounting, production/operations, research and development, and computer
information systems activities. Policies can be established at the corporate level and
apply to an entire organization at the divisional level and apply to a single division or
at the functional level and apply to particular operational activities or departments.
Policies, like annual objectives, are especially important in strategy implementation
because they outline an organization¶s expectations of its employees and managers.
Policies allow consistency and coordination within and between organizational
departments.
Substantial research suggests that a healthier workforce can more effectively and
efficiently implement strategies. Take for example the ³ùo Smoking´ policies with in
most organizations. ùo Smoking policies are usually derived from annual objectives
that seek to reduce corporate medical costs associated with absenteeism and to
provide a healthy workplace.

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The Strategic —anagement process can best be studied and applied using a model.
Every model represents some kind of process. The framework illustrated in the
following diagram is a widely accepted, comprehensive model of the Strategic
—anagement process. This model does not guarantee success, but it does represent

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a clear and practical approach for formulating, implementing, and evaluating
strategies. Relationships among major components of the strategic-management
process are shown in the model, which appears in all subsequent chapters with
appropriate areas shaped to show the particular focus of each chapter.




  

Implement "


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Identifying an organization¶s existing vision, mission, objectives, and strategies is the

logical starting point for strategic management because a firm¶s present situation and
condition may preclude certain strategies and may even dictate a particular course of
action. Every organization has a vision, mission, objectives, and strategy, even if
these elements are not consciously designed, written, or communicated. The answer
to where an organization is going can be determined largely by where the organization
has been!
The strategic-management process is dynamic and continuous. A change in any one
of the major components in the model can necessitate a change in any or all of the
other components. For instance, a shift in the economy could represent a major
opportunity and require a change in long-term objectives and strategies; a failure to
accomplish annual objectives could require a change in policy; or a major competitor¶s
change in strategy could require a change in the firm¶s mission. Therefore, strategy
formulation, implementation, and evaluation activities should be performed on a
continual basis, not just at the end of the year or semi-annually. Hence , the strategic-
management process never really ends.

The strategic-management process is not as cleanly divided and neatly performed in

practice as the strategic-management model suggests. Strategists do not go through
the process in lockstep fashion. Generally, there is give-and-take among hierarchical
levels of an organization. —any organizations conduct formal meetings semiannually
to discuss and update the firm¶s vision/mission, opportunities/threats,
strengths/weaknesses, strategies, objectives, policies, and performance. These
meetings are commonly held off-premises and are called . The rationale for
periodically conducting strategic-management meetings away from the work site is to
encourage more creativity and candor from participants. Good communication and
feedback are needed throughout the strategic-management process.
Application of the strategic-management process is typically more formal in larger and
well-established organizations. Formality refers to the extent that participants,
responsibilities, authority, duties, and approach are specified. Smaller businesses
tend to be less formal. Firms that compete in complex, rapidly changing environments,
such as technology companies, tend to be more formal in strategic planning. Firms

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that have many divisions, products, markets, and technologies also tend to be more
formal in applying strategic-management concepts. Greater formality in applying the
strategic-management process is usually positively associated with the cost,
comprehensiveness, accuracy, and success of planning across all types and sizes of
organizations.

Ô  '

   
  
As I mentioned above, the definitions quoted above give you the idea that, strategic
management is a process that consists of different phases, which are sequential in
nature. The process of strategic management is depicted through a model, which
consists of different phases; and these phases are considered as sequentially linked
to each other and each successive phase provides a feedback to the previous
phases. —ost authors agree that there are four essential phases in the strategic
management process, though they may differ with regard to the sequence, emphasis
or nomenclature.

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áefining business
mission, purpose and áeveloping Strategies Implementing Evaluating and control
objectives Strategies of Strategies

Company
profile
÷  External
Environment

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Viewing strategic management as a process has several important implications.
1) First, a change in any component will affect several or all of the other components.
—ost of the arrows in the model point two ways, suggesting that the flow of
information usually is reciprocal. For example, forces in the external environment
may influence the nature of a company¶s mission, and the company may in turn
affect the external environment by heightening competition.
2) The second implication is that strategy formulation and implementation are
sequential. The process begins with the development or reevaluation of the
company mission. This step is associated with, but essentially followed by,
development of a company profile and assessment of the external environment.
Then follow the other components of the model. ùot every component of the
strategic management process deserves equal attention each time planning
activity takes place.
3) The third implication of viewing strategic management as a process is the
necessity of feedback from implementation, review, and evaluation to the early
stages of the process. Feedback can be defined as the collection of post
implementation results to enhance future decision making. As shown in the model,
strategic managers should assess the impact of implemented strategies on
external environment and the company policy. Strategic managers should also


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analyze the impact of strategies on the possible need for modifications in the
company mission.
4) The fourth implication is the need to regard the strategic management process as
a dynamic system. The term dynamic characterizes the constantly changing
conditions that affect interrelated and interdependent strategic attitudes. Since
change is continuous, the dynamic strategic planning processes must be
monitored constantly for significant shifts in any of its components as a precaution
against implementing an obsolete strategy.

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Strategic —anagement
M allows an organization to be more proactive than reactive in shaping its own
future;
M it allows an organization to initiate and influence (rather than just respond to)
activities-and thus to exert control over its own destiny.
Small business owners, chief executive officers, presidents, and managers of many
for-profit and non-profit organizations have recognized and realized the benefits of
strategic management.
Historically, the principal benefit of strategic management has been   

+
  
          
  
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  a   a a a This certainly continues to be a
major benefit of strategic management, but research studies now indicate that the
process, rather than the decision or document, is the more important contribution of
strategic management. Communication is a key to successful strategic management.
Through involvement in the process, managers and employees become committed to
plan supporting the organization. Dialogue and participation are essential ingredients.
The manner in which strategic management is carried out is thus exceptionally
important. A major aim of the process is to achieve the 
 

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a



 from all managers and employees. Understanding may be the most
important benefit of strategic management, followed by commitment. When managers
and employees understand what the organization is doing and why, they often feel
that they are a part of the firm and become committed to assisting it. This is especially
true when employees also understand linkages between their own compensation and
organizational performance. —anagers and employees become surprisingly creative
and innovative when they understand and support the firm¶s mission, objectives, and
strategies. A great benefit of strategic management, then, is the opportunity that the
process provides to empower individuals. 
 

 is the act of strengthening
employees¶ sense of effectiveness by encouraging them to participate in decision
making and to exercise initiative and imagination, and rewarding them for doing so.
—ore and more organizations are decentralizing the strategic-management process,
recognizing that planning must involve lower-level managers and employees. The
notion of centralized staff planning is being replaced in organizations by decentralized
line-manager planning. The process is a learning, helping, educating, and supporting
activity, not merely a paper-shuffling activity among top executives. Strategic-
management dialogue is more important than a nicely bound strategic-management
document. The worst thing strategists can do is develop strategic plans themselves
and then present them to operating managers to execute. Through involvement in the
process, line managers become ³owners´ of the strategy. &
    
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Although making good strategic decisions is the major responsibility of an
organization¶s owner or chief executive officer, both managers and employees must

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also be involved in strategy formulation, implementation, and evaluation activities.
Participation is a key to gaining commitment for needed changes. An increasing
number of corporations and institutions are using strategic management to make
effective decisions. But strategic management is not a guarantee for success; it can
be dysfunctional if conducted haphazardly.

9 $8
. 
Research indicates that organizations using strategic-management concepts are more
profitable and successful than those that do not. Businesses using strategic
management concepts show significant improvement in sales, profitability, and
productivity compared to firms without systematic planning activities. High-performing
firms tend to do systematic planning to prepare for future fluctuations in their external
and internal environments. Firms with planning systems more closely resembling
strategic-management theory generally exhibit superior long-term financial
performance relative to their industry.

High-performing firms seem to make more informed decisions with good anticipation
of both short- and long-term consequences. On the other hand, firms that perform
poorly often engage in activities that are shortsighted and do not reflect good
forecasting of future conditions. Strategists of low-performing organizations are often
preoccupied with solving internal problems and meeting paperwork deadlines. They
typically underestimate their competitors¶ strengths and overestimate their own firm¶s
strengths. They often attribute weak performance to uncontrollable factors such as a
poor economy, technological change, or foreign competition.

It is quite normal to witness businesses in our country failing annually. Business

failures include bankruptcies, foreclosures, liquidations, and court-mandated
receiverships. Although many factors besides a lack of effective strategic
management can lead to business failure, the planning concepts and tools described
in this teaching material can yield substantial financial benefits for any organization.
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Besides helping firms avoid financial demise, strategic management offers other
tangible benefits, such as
M an enhanced awareness of external threats,
M an improved understanding of competitors¶ strategies,
M increased employee productivity,
M reduced resistance to change, and
M a clearer understanding of performance-reward relationships.
Strategic management enhances the  


a of organizations
because it promotes interaction among managers at all divisional and functional
levels. Firms that have nurtured their managers and employees, shared organizational
objectives with them, empowered them to help improve the product or service, and
recognized their contributions can turn to them for help in a pinch because of this
interaction.
In addition to empowering managers and employees, strategic management often

   
  a
 to an otherwise floundering firm. It can be the beginning of
an efficient and effective managerial system. Strategic management may renew
confidence in the current business strategy or point the need for corrective actions.

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The strategic-management process provides a basis for identifying and rationalizing
the need for change to all managers and employees of a firm; it helps them 
a
 
  

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Some firms do not engage in strategic planning, and some firms do strategic planning
but receive no support from managers and employees. Some reasons for poor or no
strategic planning are as follows:
M 

 , . - When an organization assumes success, it often

fails to reward success. When failure occurs, then the firm may punish. In this
situation, it is better for an individual to do nothing (and not draw attention) than
to risk trying to achieve something, fail, and be punished.
M  - An organization can be so deeply embroiled in crisis
management and fire-fighting that it does not have time to plan.
M 1
  - Some firms see planning as a waste of time since no
marketable product is produced. But time spent on planning is an investment.
M

 '() - Some organizations are culturally opposed to spending

resources.
M ; - People may not want to put forth the effort needed to formulate a
plan.
M 
 , . - Particularly if a firm is successful, individuals may
feel there is no need to plan because things are fine as they stand. But success
today does not guarantee success tomorrow.
M 
 $ - By not taking action, there is little risk of failure unless a
problem is urgent and pressing. Whenever something worthwhile is attempted,
there is some risk of failure.
M ")
 - As individuals amass experience, they may rely less on
formalized planning. Rarely, however, is this appropriate. Being overconfident
or overestimating experience can bring demise. Forethought is rarely wasted
and is often the mark of professionalism.
M 
8'( - People may have had a previous bad experience with
planning, that is, cases in which plans have been long, cumbersome,
impractical, or inflexible. Planning, like anything else, can be done badly.
M .$3  When someone has achieved status, privilege, or self-esteem
through effectively using an old system, he or she often sees a new plan as a
threat.
M 
<4
, - People may be uncertain of their abilities to learn new
skills, of their aptitude with new systems, or of their ability to take on new roles.
M c
 
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 - People may sincerely believe the plan is
wrong. They may view the situation from a different viewpoint, or they may
have aspirations for themselves or the organization that are different from the
plan. Different people in different jobs have different perceptions of a situation.
M .
 - Employees may not trust management.

To summarize what has been said so far concerning the benefits of strategic
management, using strategic management approach, managers at all levels of the
firm interact in planning and implementing. As a result, the behavioral consequences
of strategic management are similar to those of participative decision making.
Therefore, an accurate assessment of the impact of strategy formulation on
organizational performance requires not only financial evaluation criteria but also non-
financial ones such as measures of behavior - based effects.

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The benefits of strategic management can be condensed into five points as follows:
1) Strategy formulation activities enhance the firm¶s ability to prevent problems.
—anagers who encourage subordinates¶ attention to planning are aided in their
monitoring and forecasting responsibilities by subordinates who are aware of
the needs of strategic planning.
2) Group-based strategic decisions are likely to be drawn from the best available
alternatives. The strategic management process results in better decisions
because group interaction generates a greater variety of strategies and
because forecasts based on the specialized perspectives of group members
improve the screening of options.
3) The involvement of employees in strategy formulation improves their
understanding of the productivity - reward relationship in every strategic plan
and, thus, heightens their motivation.
4) Gaps and overlaps in activities among individuals and groups are reduced as
participation in strategy formulation clarifies difference in roles.
5) Resistance to change is reduced. Though the participants in strategy
formulation may be no more pleased with their own decisions than they would
be with authoritarian decision, their greater awareness of the parameters that
limit the available options makes them more likely to accept those decisions.

Ô6 $$.$
Strategic planning is an involved, intricate, and complex process that takes an
organization into unchartered territory. It does not provide a ready-to-use prescription
for success; instead, it takes the organization through a journey and offers a
framework for addressing questions and solving problems. Being aware of potential
pitfalls and being prepared to address them is essential to success.
Some pitfalls to watch for and avoid in strategic planning are provided below:
M Using strategic planning to gain control over decisions and resources
M Doing strategic planning only to satisfy accreditation or regulatory requirements
M Too hastily moving from mission development to strategy formulation
M Failing to communicate the plan to employees, who continue working in the
dark
M Top managers making many intuitive decisions that conflict with the formal plan
M Top managers not actively supporting the strategic-planning process
M Failing to use plans as a standard for measuring performance
M Delegating planning to a ³planner´ rather than involving all managers
M Failing to involve key employees in all phases of planning
M Failing to create a collaborative climate supportive of change
M Viewing planning to be unnecessary or unimportant
M Becoming so engrossed or absorbed in current problems on which insufficient
or no planning is done
M Being so formal in planning that flexibility and creativity are stifled

While the earlier mentioned benefits could accrue by using strategic-management

approach given the above pitfalls, managers, should be aware of the possible risks
and guard their firm against them. There are three types of unintended negative
consequences of involvement in strategic management.
1. —anagers may spend too much time on the strategic management process.
This may have a negative impact on operational responsibilities. Therefore,
managers must be trained to minimize this impact by scheduling their duties
to allow the necessary time for the strategic activities.

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2. When the formulators of strategy are not involved in its implementation, they
may shrink on their individual responsibility for the decision reached. Thus,
strategic managers must be trained to limit their premises to performance that
the decision makers and their subordinates can do.
3. Strategic managers must be trained to anticipate and respond to the
disappointment of participating subordinates over unattained expectations.
This is so because the subordinates may expect their involvement in even
minor phases of total strategy formulation.

Ô 7 =$
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Failing to follow certain guidelines in conducting strategic management can foster
criticisms of the process and create problems for the organization. An integral part of
strategy evaluation must be to evaluate the quality of the strategic-management
process. Issues such as !  a



 
  
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Strategic management must not become a self-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
resolving those issues. Strategic management must not become ritualistic, stilted,
orchestrated, or too formal, predictable, and rigid. /      

 



      should represent the medium for explaining
strategic issues and organizational responses. A key role of strategists is to facilitate
continuous organizational learning and change.
An important guideline for effective strategic management is 



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willingness and eagerness to consider new information, new viewpoints, new ideas,
and new possibilities is essential; all organizational members must share a spirit of
inquiry and learning. Strategists such as chief executive officers, presidents, owners of
small businesses, and heads of government agencies must commit themselves to
listen to and understand managers¶ positions well enough to be able to restate those
positions to the managers¶ satisfaction. In addition, managers and employees
throughout the firm should be able to describe the strategists¶ positions to the
satisfaction of the strategists. This degree of discipline will promote understanding and
learning.
ùo organization has unlimited resources. ùo firm can take on an unlimited amount of
debt or issue an unlimited amount of stock to raise capital. Therefore, no organization
can pursue all the strategies that potentially could benefit the firm. Strategic decisions
thus always have to be made to eliminate some courses of action and to allocate
organizational resources among others. —ost organizations can afford to pursue only
a few corporate-level strategies at any given time. It is a critical mistake for managers
to pursue too many strategies at the same time, thereby spreading the firm¶s
resources so thin that all strategies are jeopardized.


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Strategic decisions require trade-offs such as long-range versus short-range
considerations or maximizing profits versus increasing shareholders¶ wealth. There
are ethics issues too. Strategy trade-offs require subjective judgments and
preferences. In many cases, a lack of objectivity in formulating strategy results in a
loss of competitive posture and profitability. —ost organizations today recognize that
strategic-management concepts and techniques can enhance the effectiveness of
decisions. Subjective factors such as attitudes toward risk, concern for social
responsibility, and organizational culture will always affect strategy-formulation
decisions, but organizations need to be as objective as possible in considering
qualitative factors.

 Ô = 8'. 

O 
  a can be defined as principles of conduct within organizations that
guide decision making and behavior. Good business ethics is a prerequisite for good
strategic management; good ethics is just good business!
A rising tide of consciousness about the importance of business ethics is sweeping
Ethiopia like the entire world. Strategists are the individuals primarily responsible for
ensuring that high ethical principles are espoused and practiced in an organization. All
strategy formulation, implementation, and evaluation decisions have ethical
ramifications.
ùewspapers and business magazines daily report legal and moral breaches of ethical
conduct by both public and private organizations. —anagers and employees of firms
must be careful not to become scapegoats blamed for company environmental
wrongdoings. Harming the natural environment is unethical, illegal, and costly. When
organizations today face criminal charges for polluting the environment, firms
increasingly are turning on their managers and employees to win leniency for
themselves. Employee firings and demotions are becoming common in pollution-
related legal suits. —anagers¶ being fired at in some organizations for being indirectly
responsible for their firms¶ polluting water exemplifies this corporate trend. Therefore,
managers and employees today must be careful not to ignore, conceal, or disregard a
pollution problem, or they may find themselves personally liable. In this regard, more
and more companies are becoming ISO 14001 certified, as indicated in the 1




" a 
A new wave of ethics issues related to product safety, employee health, sexual
harassment, AIDS in the workplace, smoking, acid rain, affirmative action, waste
disposal, foreign business practices, cover-ups, takeover tactics, conflicts of interest,
employee privacy, inappropriate gifts, security of company records, and layoffs has
accented the need for strategists to develop a clear code of business ethics. A code of
business ethics can provide a basis on which policies can be devised to guide daily
behavior and decisions at the work site.

The explosion of the Internet into the workplace has raised many new ethical
questions in organizations today.

The #

a " a focuses on business ethics issues related to the
Internet. —erely having a code of ethics, however, is not sufficient to ensure ethical
business behavior. A code of ethics can be viewed as a public relations gimmick or
device, a set of platitudes, or window dressing. To ensure that the code is read,
understood, believed, and remembered, organizations need to conduct periodic ethics
workshops to sensitize people to workplace circumstances in which ethics issues may


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arise. If employees see examples of punishment for violating the code and rewards for
upholding the code, this helps reinforce the importance of a firm¶s code of ethics.

An ethics a needs to permeate or fill organizations! To help create an ethics

culture, some organizations have developed a code-of- conduct manual outlining
ethical expectations and giving examples of situations that commonly arise in their
businesses.

One reason strategists¶ salaries are high compared to those of other individuals in an
organization is that strategists must take the moral risks of the firm. Strategists are
responsible for developing, communicating and enforcing the code of business ethics
for their organizations. Although primary responsibility for ensuring ethical behavior
rests with a firm¶s strategists, an integral part of the responsibility of all managers is to
provide ethics leadership by constant example and demonstration. —anagers hold
positions that enable them to influence and educate many people. This makes
managers responsible for developing and implementing ethical decision making. —any
scholars on the issue offer some good advice for managers: $

  

 
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A man (or woman) might know too little, perform poorly, lack judgment and ability, and
yet not do too much damage as a manager. But if that person lacks character and
integrity - no matter how knowledgeable, how brilliant, how successful - he destroys.
He destroys people, the most valuable resource of the enterprise. He destroys spirit.
And he destroys performance. This is particularly true of the people at the head of an
enterprise. For the spirit of an organization is created from the top. If an organization
is great in spirit, it is because the spirit of its top people is great. If it decays, it does so
because the top rots. As the proverb has it,    
   . ùo one should
ever become a strategist unless he or she is willing to have his or her character serve
as the model for subordinates.

ùo society anywhere in the world can compete very long or successfully with people
stealing from one another or not trusting one another, with every bit of information
requiring notarized confirmation, with every disagreement ending up in litigation, or
with government having to regulate businesses to keep them honest. Being unethical
is a recipe for headaches, inefficiency, and waste. History has proven that the greater
the trust and confidence of people in the ethics of an institution or society, the greater
its economic strength. Business relationships are built mostly on mutual trust and
reputation. Short-term decisions based on greed and questionable ethics will preclude
the necessary self-respect to gain the trust of others. —ore and more firms believe that
ethics training and an ethics culture create strategic advantage.

Some business actions considered to be unethical include misleading advertising or

labeling, causing environmental harm, poor product or service safety, padding
expense accounts, insider trading, dumping banned or flawed products in foreign
markets, lack of equal opportunities for women and minorities, overpricing, hostile
takeovers, moving jobs overseas, and using nonunion labor in a union shop.

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Internet fraud, including hacking into company computers and spreading viruses, has
become a major unethical activity that plagues every sector of online commerce from
banking to shopping sites. —ore than three hundred Web sites now show individuals
how to hack into computers; this problem has become endemic nationwide and
around the world.

Ethics training programs should include messages from the CEO emphasizing ethical
business practices, the development and discussion of codes of ethics, and
procedures for discussing and reporting unethical behavior. Firms can align ethical
and strategic decision making by incorporating ethical considerations into long-term
planning, by integrating ethical decision making into the performance appraisal
process, by encouraging whistle-blowing or the reporting of unethical practices, and
by monitoring departmental and corporate performance regarding ethical issues.

In a final analysis, ethical standards come out of history and heritage. Our fathers,
mothers, brothers, and sisters of the past left us with an ethical foundation to build
upon. Even the legendary football coach Vince Lombardi knew that some things were
worth more than winning, and he required his players to have three kinds of loyalty: to
God, to their families, and to the Green Bay Packers, ³in that order.´
 Ô Ô> $$. ?
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Three particular challenges or decisions that face all strategists today are
1) Deciding whether the process should be more an art or a science,
2) Deciding whether strategies should be visible or hidden from stakeholders, and
3) Deciding whether the process should be more top-down or bottom-up in their
firm.

'-
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This teaching material is consistent with most of the strategy literature in advocating
that strategic management be viewed more as a science than an art. This perspective
contends that firms need to systematically assess their external and internal
environments, conduct research, carefully evaluate the pros and cons of various
alternatives, perform analyses, and then decide upon a particular course of action. In
contrast, —intzberg¶s notion of a
 strategies embodies the artistic model which
suggests that strategic decision making be based primarily on holistic thinking,
intuition, creativity, and imagination. —intzberg and his followers reject strategies that
result from a 
  , preferring instead a 


. ³Strategy
scientists´ reject strategies that emerge from emotion, intuition, creativity, and politics.
Promoters of the artistic view often consider strategic planning exercises to be time
poorly spent. The —intzberg philosophy insists on informality whereas strategy
scientists (and this teaching material) insist on more formality. —intzberg refers to
strategic planning as an +- process whereas strategy scientists use the
term +$%- process.
The answer to the art versus science question is one that strategists must decide for
themselves, and certainly the two approaches are not necessarily mutually exclusive.
In deciding which approach is more effective, however, consider that the business
world today has become increasingly complex and more intensely competitive. There
is less room for error in strategic planning. Recall the points discussed before about
the importance of intuition and experience and subjectivity in strategic planning that
certainly require good judgment. But the idea of deciding upon strategies for any firm
without thorough research and analysis is unwise. Certainly, in smaller firms there can

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be more informality in the process compared to larger firms, but even for smaller firms,
a wealth of competitive information is available on the Internet and elsewhere, and
should be collected, assimilated, and evaluated before deciding on a course of action
upon which survival of the firm may hinge. The livelihood of countless employees and
shareholders may hinge on the effectiveness of strategies selected. Too much is at
stake to be less than thorough in formulating strategies. It may not behoove a
strategist to rely too heavily on gut feeling and opinion instead of research data,
competitive intelligence, and analysis in formulating strategies.

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There are certainly good reasons to keep the strategy process and strategies
themselves visible and open rather than hidden and secret. There are also good
reasons to keep strategies hidden from all but top-level executives. Strategists must
decide for themselves what is best for their firm. This teaching material comes down
largely on the side of being visible and open but certainly this may not be best for all
strategists and all firms. Scholars argued that all war is based on deception and that
the best maneuvers are those not easily predicted by rivals. Business is analogous to
war.

Some reasons to be completely open with the strategy process and resultant
decisions are:
1. —anagers, employees, and other stakeholders can readily contribute to the
process. They often have excellent ideas. Secrecy would forgo many excellent
ideas.
2. Investors, creditors, and other stakeholders have greater basis for supporting a
firm when they know what the firm is doing and where the firm is going.
3. Visibility promotes democracy whereas secrecy promotes autocracy. Domestic
firms and most foreign firms prefer democracy over autocracy as a
management style.
4. Participation and openness enhances understanding, commitment, and
communication within the firm.

Reasons why some firms prefer to conduct strategic planning in secret and keep
strategies hidden from all but the highest-level executives are as follows:
1. Free dissemination of a firm¶s strategies may easily translate into competitive
intelligence for rival firms who could exploit the firm given that information.
2. Secrecy limits criticism, second guessing, and hindsight.
3. Participants in a visible strategy process become more attractive to rival firms
who may lure them away.
4. Secrecy limits rival firms from imitating or duplicating the firm¶s strategies and
undermining the firm.

The obvious benefits of the visible versus hidden extremes suggest that a  


a must be sought between the apparent contradictions. Some scholars say that
in a perfect world all key individuals, both inside and outside the firm, should be
involved in strategic planning, but in practice particularly sensitive and confidential
information should always remain strictly confidential to top managers. This balancing
act is difficult but essential for survival of the firm.


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Proponents of the top-down approach contend that top executives are the only
persons in the firm with the collective experience, acumen, and fiduciary responsibility
to make key strategy decisions. In contrast, bottom-up advocates argue that lower and
middle-level managers and employees who will be implementing the strategies need
to be actively involved in the process of formulating the strategies to assure their
support and commitment. Recent strategy research and this teaching material
emphasize the bottom-up approach, but earlier work by earlier scholars stressed the
need for firms to rely on perceptions of their top managers in strategic planning.
Strategists must reach a working balance of the two approaches in a manner deemed
best for their firm at a particular time, while cognizant of the fact that current research
supports the bottom-up approach, at least for firms in the developed world. Increased
education and diversity of the work-force at all levels are reasons why middle- and
lower-level managers and even non managers should be invited to participate in the
firm¶s strategic planning process, at least to the extent that they are willing and able to
contribute.

So at last but not least, strategists in successful organizations realize that strategic
management is first and foremost a people process. It is an excellent vehicle for
fostering organizational communication. People are what make the difference in
organizations.


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Chapter Two: Business Environment Analysis and Environmental Scanning

Ô  
-   
 
Strategic management is concerned with determining long term objectives and
strategies suitable to accomplishing such objectives. However, before determining
long term objectives and proposing strategies, it is natural to look at what is available
and not available at the hand of the organization. The competitive advantages that the
organization should capitalize and weak sides of the company need to be analyzed. In
the process of environmental scanning, the underlying logic is analyzing your
competitive advantage and designing strategies that capitalize on such competitive
advantage. Indeed, analyzing opportunities and threats that will come from the
external environment must be analyzed. In more simple term, SWOT analysis is an
essential part of strategic management especially at its first stage. As you can
remember, SWOT analysis is a system used to identify and evaluate an organization
in terms of its potential strengths, weaknesses, opportunities and threats. So carrying
out such an analysis using the SWOT framework helps managers to focus their
activities into areas where the organization is strong and where the greatest
opportunities lay requiring consideration. —oreover, such an analysis reminds the
company to be watchful of its weakness in the effort to take due consideration for the
threats coming from the environment. So, SWOT analyses involve both internal and
external environment analysis. Success in the world of business, therefore, is linked
with the integration of sub systems (employees, units, sections, and departments) of
an organization and its good marriage with external forces such as suppliers,
customers, government and the society at large. The modern business managers, in
this regard, are advised to continuously scan both the internal and external
environment. Long-term plans are worked out having more detail information about
both the internal and external forces. Therefore, before an organization can begin
strategy formulation, it must scan the external environment to identify possible
opportunities and threats and its internal environment for strength and weaknesses.
 
   is the monitoring, evaluating, and disseminating of
information from the external and internal environment to key people within the
corporation. A corporation uses this tool to avoid strategic surprise and to insure its
long term health. Research has found a positive relationship between environmental
scanning and profit.

Ô Ô 1
   
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The term environment can be defined in various ways. It can be defined as  

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The external environment analysis considers factors that are beyond the control of the
organization and either brings an opportunity or pose threats to the organizations.
Detailed analysis for external factors will be made in the up coming sections of this
chapter. ùow I shall focus on sources of opportunities and threats:

M  2


! 1


Unexpected events such as political turmoil, war breaks, government policy changes,
floods and other natural or man made changes can provide opportunities to a
business organization. The event can be unexpected success (good news) or an

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expected failure (bad news). For example, if war breaks out where it is unexpected, it
changes the economics and demand structure of the warring parties and their
populations. This can provide opportunity if it is ethically pursued. Similarly, a break
through in a peace negotiation also provides opportunity since it changes the
economics of the former opponents.
(! '  
This opportunity has its source in technology¶s inability to provide the 
 . Technicians often need to work out a way to get from point A to point
B in some process. Currently, efforts are being made in areas of super conductivity,
fusion, interconnectivity and the search for a treatment and cure for AIDS. Process
need opportunities are often addressed by programmed research projects, which are
the systematic research and analysis efforts designed to solve a single problem such
as the efforts against AIDS.
! $ ' 
Changes in technology changes market and industry structures by altering costs,
quality requirements and volume capabilities. This alteration can potentially make
existing firms obsolete, which are not adjusted to it and are inflexible. But changes in
technology may create opportunity for those who make themselves ready for the new
technology.
!   $ 
Demographic changes are changes in the population or subpopulation of society.
Theses can be changes in the size, age, structure, employment, education, or
incomes of these groups. Such changes influence all industries and firms by changing
the mix of products and services demanded the volume of products and services, and
the buying power of customers. Some of these changes are predictable since people
who will be older are already alive and birth and death rates stay fairly stable over
time. Population statistics are available for assessment, but opportunities can be
found before the data are published by observing what is happening in the street and
being reported in the newspaper.
! $  

People hold different perceptions of the same reality, and these differences affect the
products and services they demand and the amount they spend. Some groups feel
powerful and rich, others disenfranchised and poor. Some people think they are thin
when they are not, others think they are too fat when they are not. The manager can
sell power and status to the rich and powerful, and sell relief and comfort to the poor
and oppressed/demoralized customers.
! 3
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ùew Knowledge is often seen as the w of business opportunity. It is not
enough to have new knowledge but there must also be a way to make products from it
and to protect the profits of those products from competition as the knowledge is
spread to others. In additions, timing is critical. It frequently takes the convergence of
many piece of new knowledge to make a product.

M  ' 

The forces that can provide opportunity for an organization may sometime pose threat
to business. Some of the sources of threats are discussed below.
! ' 
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When managers propose long term plans to launch new products, they are not clear
whether other competitors will substitute their product and service or not. Hence, a
potential threat will originate from the possibility of their product being replaced easily


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and early. So, it is important for managers to understand the nature of substitute
products for these reasons.
(! ' 
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A threatening environment will be created when competitors have strong relationship
with suppliers, customers and the community. The customers will neglect the new
proposal if competitors have strong relationship with their supplier, regardless of the
quality of product offered by the new firm. And sometimes, the community,
surrounding the business, will reject the products of the venture due to strong
relationship with the existing firms.

4"
1
  

 
 
Why do companies often respond differently to the same environmental changes?
One reason is because of differences in the ability of managers to recognize and
understand external strategic issues and factors. ùo firm can successfully monitor all
external factors. Choices must be made regarding which factors are important and
which are not. Even though managers agree that strategic importance determines
what variables are consistently tracked, they sometimes miss or choose to ignore
crucial new developments. Personal values and functional experiences of a
corporation¶s managers as well as the success of current strategies are likely to bias
both their perception of what is important to monitor in the external environment and
their interpretations of what they perceive.

This willingness to reject unfamiliar as well as negative information is called 

 
 . If a firm needs to change its strategy, it might not be gathering the
appropriate external information to change strategies successfully.
One way to identify and analyze developments in the external environment is to use
the   

1 as follows:
1) Identify a number of likely trends emerging in the societal and task
environments. These are strategic environmental issues - those important
trends that, if they occur, determine what the industry or the world will look like
in the near future.
2) Assess the probability of these trends actually occurring from low to high.
3) Attempt to ascertain the likely impact (from low to high) of each of these trends
on the corporation being examined.

÷,!  " —

A corporation¶s external strategic factors are those key environmental trends that are
judged to have both a medium to high probability of occurrence and a medium to high
probability of impact on the corporation. The issues priority matrix can then be used to

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help managers decide which environmental trends should be merely scanned (low
priority) and which should be monitored as strategic factors (high priority). Those
environmental trends judged to be a corporation¶s strategic factors are then
categorized as opportunities and threats and are included in strategy formulation.

Ô  "
   
- 
Understanding opportunities from external environment is nothing unless there is
internal capacity that enables to exploit opportunities on time. Hence, having
understood the impact of the external environment, the next step is analyzing internal
factors. The internal environment analysis is conducted in order to know the strengths
and weaknesses of the organization.

Particularly, the internal environment analysis involves the following:

M  


 - a statement that states the reason why an organization
exists. It tells what the company is providing to society. A well-convinced
mission statement defines the fundamental, unique purpose that sets a
company apart from other firms. It identifies the scope of the company¶s
operation in terms of products offered and markets served. It puts into word no
only what the company is now, but also what it wants to become. It promotes a
sense of shared expectation in employees and communicates a public image to
important stakeholder groups in the company¶s task environment. A mission
statement reveals who is the company is and what it does.

M 2(*
 - are end results of planned activity. They state what is to be
accomplished by whom and should be quantified if possible. The achievement
of corporate objective should result in the fulfillment of the company¶s mission.
Some of the areas in which a company might establish its objectives are:
o Profitability or net income
o Efficiency or low cost
o Reputation (being considered as top of all firm)
o Contribution to employees (employees security or wage adjustment)
o Contribution to society (tax paid, participation in charities, providing needed
products or services)
o —arket leadership (market share)
o Technological leadership (innovativeness)
o Survival (avoiding bankruptcy).

M   - are broad guideline for decision making that links the formulation of
strategy with its implementation. Companies use policies to make sure that
employees through the firm make decisions and take actions that support the
corporation¶s mission, its objectives and its strategies.

M . - consists of both human and non human resource. The profiles of
the employees with their number need to be analyzed and compared with the
anticipated activity. The materials resource such as machineries and their
obsolescence can help in evaluating the organization¶s internal strength and
weakness.

M    - are a system of sequential steps or techniques that describe in

detail how a particular task or job is to be done. They typically detail the various
activities that must be carried out for completion of a corporation¶s program.

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—ost firms face external environments that are highly turbulent, complex, and global ±
conditions that make interpreting them increasingly difficult. The cope with what are
often ambiguous and incomplete environmental data and to increase their
understanding of the general environment, firms engage in a process called 1
  
 
   Those analyzing theexternal environmentshould understand
that completing this analysis is a difficult, yet significant, activity.

The firm¶s choice of direction and action (strategy), its organizational structure, and its
internal processes are influenced by a host of external factors. These factors, which
constitute the external environment, can be divided into three interrelated
subcategories: 
   
 )
/ 
    
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/ and

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. The success of the firm¶s
strategy is also affected by the realistic analysis of its internal capabilities and its
consistency with conditions in the external environment.
.
 

M Social
M Technology
M Economic
M Ecologic
M Political

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M Entry Barrier
M Supplier Power
M Buyer Power
M Substitute Availability
M Competitive Rivalry

2
 

M Competitors
M Creditors
M Customers
M Labor
M Suppliers

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The remote environment comprises factors that originate beyond, and usually
irrespective of, any single firm¶s operating situation. It presents firms with
opportunities, threats, and constraints, but rarely does a single firm exert any
meaningful reciprocal influence. There are five forces in the firm¶s remote environment
with the popular acronym ' factors, which stands for   # '  #
  #  #and
  factors.

   
 
The social factors that affect a firm involve the beliefs, values, attitudes, opinions, and
lifestyles of persons in the firm¶s external environment; as developed form cultural,
demographic, religions, educational, and ethnic conditioning.

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Like other forces in the remote external environment, social forces are dynamic. As
social attitudes change, so does the demand for various types of clothing, books, and
so on. The constant change in social environment is the result of efforts of individuals
to satisfy their desires and needs by controlling and adapting to environmental factors.
Several changes have occurred in the social environment. One of the most profound
social changes in recent years has been the  
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4
Those social changes affected business in the following areas:
M Hiring and compensation policies and resource capabilities of employers.
M Expanded demand for a wide range of products and services necessitated
by women¶s absence form the home. For instance convenience foods,
microwave ovens, and day-care centers are results of such changes.
A second profound social change has been the $


$
$ 
$. Evidence of this change is seen in recent
contract negotiations. In addition to traditional demand for increased salaries, flexible
hours, four-day workweeks, opportunities for advanced training, lump-sum vacation
plans have come into the scene.

A third profound social change has been      %

 

$
 Changing social values and a growing acceptance of improved birth
control methods are expected to   . A result of the changing age
distribution of the population is increased demands for modifications of retirement
policies and lobbies for tax exemptions by the senior citizens.

(  '  
 
Awareness of technological changes that might influence the industry is important to
the firm in order to avoid obsolescence and promote innovation. Creative
technological adaptations can suggest possibilities for: new products, improvements in
existing products, and improvements in manufacturing and marketing techniques.
A technological break through can have a sudden and dramatic effect on a firms
environment. It may generate sophisticated new markets and products of significantly
shorten the anticipated life of a manufacturing facility.

Firms in a turbulent growth industries must strive for an understanding both of existing
technological advances and the probable future advances that can affect their
products and services. In other words, they need to foresee advancements and
estimate their impact on an organization¶s operations through technological
forecasting.

   
 
Economic factors concern the nature and direction of the economy in which a firm
operates. Because consumption patterns are affected by the relative affluence of
various market segments, in its strategic planning each firm must consider economic
trends in the segments that affect its industry. As far as economic factors are
concerned, the firm must consider the general availability of credit, the level of
disposable income, the propensity of people to spend, prime interest rates, inflation
rates, and trends in the growth of the gross national product (GùP).

    
 
The term 
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 refers to the relationship between human beings, other living things
and air, soil, and water that support them. Threats to life-supporting ecology caused

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principally by human activities in an industrial society are commonly referred to as

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. Specific concerns under ecological environment include global warming,
loss of habitat and biodiversity, and pollution of air, water, and land.
The global climate has been changing for years. However, it is non evident that
humanity¶s activities are accelerating tremendously.
M A change in atmospheric radiation, due to ozone depletion, causing global
warming.
M Solar radiation that is normally absorbed into the atmosphere reaches the
earth¶s surface, heating the soil, water, and air.
M Loss of habitat and biodiversity refer to the extinction of important flora and
fauna is occurring at a rapid rate due to disturbance of the natural habitat by
the human activities.
M Air pollution is created by dust particles and gaseous discharges that
contaminate the air.
M Water pollution occurs principally when industrial toxic wastes are dumped or
leak into the waterways.
M Land pollution is caused by the need to dispose of ever-increasing amounts of
waste.
As a major contributor to ecological pollution, business now is being held responsible
for eliminating the toxic by-products of its current manufacturing processes and for
cleaning up the environmental damage that it did previously. Increasingly, managers
are required by the government or are being expected by the public to incorporate
ecological concerns into their decision making.

—any large businesses are realizing that their decisions must no longer ignore
environmental concerns. Every activity is linked to thousands of other transactions
and their environmental impact. Therefore, corporate environmental responsibility
must be taken seriously and environmental policy must be implemented to ensure a
comprehensive organizational strategy. Such firms are called w'
 business
since they produce more useful goods and services while continuously reducing
resource consumption and pollution.

Reasons for businesses to be w'


M customers demand for cleaner products.
M environmental regulations are increasingly more stringent.
M employees prefer to work for environmentally conscious firms.
M financing is more readily available for eco-efficient firms.
M government provides incentives to environment friendly firms.

  
 
 
The direction and stability of political factors is a major consideration for managers in
formulating company strategy. Political factors define the legal and regulatory
parameters within which firms must operate.

Political constraints are placed on firms through:

M fair-trade decisions
M tax programs
M minimum wage legislation
M pollution and pricing policies
M employee protection acts
M protection of consumers and general public.

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Although most of laws and regulations are commonly restrictive, some political actions
are designed to benefit and protect firms through patent laws, government subsidies,
and product research grants.

Political activity also has a significant impact on two governmental functions:

.$ 
* Government decisions regarding the accessibility of private
businesses to government owned natural resources and national stock piles of
agricultural products will affect profoundly the viability of the strategies of some firms.


 
* Government demand for products and services, can create,
sustain, enhance, or eliminate many market opportunities.

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- 

Analysis of industry and competitive conditions is the starting point in evaluating a

company¶s strategic situation and market position. The nature and degree of
competition in an industry hinge on ) 
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establish a strategic agenda for dealing with the existing contending firms and to grow
despite them, a company must understand how they work in its industry and how they
affect the company in its particular situation. The following section details how these
forces operate and suggest ways of adjusting them, and where possible, of taking
advantage of them.

4
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- 
Industries differ widely in their economic characteristics, competitive situations, and
future outlooks.
M The pace of technological change can range form fast to slow.
M Capital requirements can be big or small.
M The market can be worldwide or local.
M Products could be standardized or highly differentiated.
M Competitive forces can be strong or weak.
M Buyers demand can be rising or declining.
Industry conditions differ so much that leading companies in unattractive industries
can filed if hard to earn respectable profits, while even weak companies in attractive
industries can turn in good performance. Industry and competitive analysis utilizes
concepts and techniques to get a clear fix on changing industry conditions and on the
nature and strength of competitive forces. It is a way of thinking strategically about an
industry¶s overall situation and drawing conclusions about whether the industry is an
attractive investment for company funds.

The framework for industry and competitive analysis hangs on developing probing
answers to the following seven questions.

1) What are the chief economic characteristics of the industry?

2) What factors are driving charges in the industry, and what impact will they
have?
3) What competitive forces are at work in the industry, and how strong are they?

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4) Which companies are in the strongest or weakest competitive positions?
5) Who will likely make what competitive moves next?
6) What key factors will determine competitive success or failure?
7) How attractive is the industry in terms of its prospects for above - average
profitability?

The collective answers to these questions boils understanding of a firm¶s surrounding

environment and form the basis for matching strategy to changing industry conditions
and to competitive forces,

 ' 


ùew entrants to an industry bring new capacity, the desire to gain market share and
often substantial resources. The seriousness of the threat of entry depends on the
barriers present and on reaction from existing competitors that the entrant can expect.

There are five major sources of barriers to entry:

Ô    
Economies of scale deter by forcing the aspirant either to come in on larger scale or to
accept a cost disadvantage. Economics of scale also can act as hurdles or barriers in
distribution, utilization of the sales force, financing, and nearly any other part of a
business.

  
 


Brand identification creates a barrier by forcing entrants to spend heavily to overcome
customer loyalty. Advertising, customer service, being first in the industry, and product
differences are among the factors fostering brand identification.

 $ 
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The need to invest large financial resources in on order to compete in the market
creates a barrier to entry. Capital is necessary not only for fixed facilities but also for
customer credit, inventories, and absorbing start-up losses.

  - 

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A new product must displace others from the market through price breaks,
promotions, intense selling efforts, and some other means. However, the more limited
the wholesale or retail channels are the tougher that entry into that industry will be.
Sometimes this barrier is so high that, to surmount it, a new firm must create its own
distribution channel.

  6 
 
The government can limit or even foreclose entry to industries, with such controls as
license requirements and limit on access to raw materials. The government also can
play a major indirect role by affecting entry barriers through such controls as air and
water pollution standards and safety regulations.

(    
  
Suppliers can exert bargaining power on participants of an industry by raising prices
or reducing the quality of purchased goods and services. Powerful suppliers, thereby,


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can squeeze profitability out of an industry for unable to recover cost increases in its
own prices.
The power of each important supplier group depends on a number of characteristics
of its market situation and on the relative importance of its sales to the industry
compared to its overall business.

A supplier group is powerful if:

M It is dominated by a few companies and is more concentrated than the industry
it sells.
M Its products are unique or at least differentiated.
M It poses a credible threat of integrating forward into the industry¶s business.
M The industry is not an important customer of the supplier group.

As indicated above, the supplier group will be powerful if its product is unique. This is
so because buyers¶ cost of switching or changing suppliers raises as its product
specifications ties it to particular suppliers.

   
  
Like the supplier group customers also pose threat to the industry. They can force
down prices, demand for higher quality products or more services, and play
competitors off against each other. They can do all these at the expense of industry
profit.
A buyer group is powerful if:
M It is concentrated or purchases in large volumes
M The products it purchases from the industry are standard or undifferentiated.
M The products it purchases are components of its products and represent a
significant fraction of its cost.
M It earns low profits, which create great incentive to lower its purchasing costs.
M The industry¶s product is unimportant to the quality of the buyer¶s products or
services.
M It poses a credible threat of integrating backward product.

Buyers group poses the above threats in that when the product is a major component
or significant fraction of the buyers¶ product, the buyer is likely to shop for a favorable
price and buy selectively. The less profitable the buyer is, the more price sensitive it
would be. Similarly, where the quality of the buyers product is not as such affected by
the industry¶s product, buyers are generally more sensitive to price and pose a threat
to the industry.

  ' 
(


 
   
Substitutes pose threat to the industry¶s product in that substitute products or services
limit the potential of an industry by placing a ceiling on the prices it can charge. Unless
it can upgrade the quality of the product or differentiate it through marketing, the
industry will suffer in earnings and possibly in growth. The more attractive the price-
performance trade off offered by substitute products, the higher the threat it poses on
the industry¶s profit potential.

Substitute products that deserve the most attention strategically are those that are:
M Subject to trends improving their price-performance trade-off with the industry¶s
product.

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M Produced by industries earning high profits.

Substitutes often come rapidly into play if some development increases competition in
their industries and causes price reduction or performance improvement.

  .   1
 
Rivalry among existing competitors takes the familiar form of jockeying for position
using tactics like price completion, product introduction, and advertising.

Rivalry among existing firms becomes intense when the following factors are present:
M Competitors are numerous or are roughly equal in size and power.
M Industry growth is slow, enhancing fights for market share.
M The product lacks differentiation or switching costs.
M Exit barriers are high and keep the companies competing even though they
earn low profit or losing.
M Fixed costs are high or the product is perishable, creating a strong temptation
to cut prices.
M The rivals are diverse in strategies, origins, and personalities.

While the company must live with many of the above factors, it may have some
latitude for improving matters through strategic shifts. For example, the company may
try to raise buyers switching costs through product differentiation.

4"


 
An industry is a collection of firms that offer similar products or services. Similar
products or services mean that customer perceive products to be substitutable for one
another. Defining industry and its boundary is incomplete without an understanding of
its structural attributes. Structural attributes are the enduring characteristics that give
an industry its distinctive character. Industries vary widely in their nature of
characteristics.

The variation among industries can be explained by examining  variables that
industry comprises:

Ô! $ 


This variable refers to the extent to which industry sales are dominated by only a few
firms. In a highly concentrated industry (

    

 

 a

 * the intensity of competition declines over time.

The reason for inverse relation between concentration and competition is that, high
concentration serves as a barrier to entry into an industry, because it enables the
firms that hold large market shares to achieve significant savings in production costs
and to lower their prices.

!   
This variable refers to the savings that companies within an industry achieve due to
increased volume. Simply, when the volume of production increases, the long-range
average cost of a unit produced will decline. Economies of scale can result from
technological and non technological sources. The technological sources are 
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This variable refers to the extent to which customers perceive products or services
offered by firms in the industry is different. Differentiation of products can be real or
perceived (fancied):
M .   

 results from the use of different design principles and
different construction technologies.
M     !  

 results from the way in which firms
position their products and from their success in persuading customers about
the differences.
Real and Perceived differentiations often intensify competition among existing firms.
On the other hand, successful differentiation poses a competitive disadvantage for
firms that attempt to enter an industry.

!   


These are obstacles that the firm must overcome to enter an industry. Barriers can be
tangible or intangible.

The tangible barriers include:

M Capital requirements.
M Technological know-how.
M Resources.
M The laws regulating entry into an industry.

The intangible barriers include:

M Reputation of existing firms.
M Loyalty of consumers to existing brands.
M Access to managerial skills required for successful operation.

 2
 

The operating environment, also called the 
) or $4 )
,
comprises factors in the competitive situation that affect a firm¶s success in acquiring
needed resources or in profitably marketing its goods and services. The operating
environment is typically much more subject to the firm¶s influence to control than the
remote environment. Thus, firms can be much more 
) (as opposed to
reactive) in dealing with operating environment than in dealing with the remote
environment.
The followings discuss the most important factors in the firm¶s operating environment.
Among those factors are   
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Assessing its competitive position improves a firm¶s chance of designing strategies
that optimize its environmental opportunities. Development of competition profile
enables a firm to more accurately forecast both its short and long term growth and its
profit potentials.


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Although the exact criteria used in constructing a competitor¶s profile are largely
determined by situational factors, the following table includes the most often used
criteria of competitor¶s profile.

Once appropriate criteria have been selected, they are weighted to reflect their
importance to a firm¶s success. Then the competitor being evaluated is rated on the
criteria; the ratings are multiplied by the weight; and the weighted scores are summed
to yield a numerical profile of the competitor.

The process of developing competitions¶ profile is of considerable help to a firm in

defining its perception of the competitive position.

(  $
  
Developing a profile of a firm¶s present and prospective customers improves the ability
of its managers to plan strategic operations, to anticipate changes in the size of
markets, and to reallocate resources so as to support forecast shifts in demand
patterns. The traditional approach to segmenting customers is based on customer
profiles constructed from geographic, demographic, psychographic, and behavioral
information.

=
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It is important to define the geographic area from which customers come or could
come. This is so because every product or service that the company offers to the
market has some quality that makes it variably attractive to buyers from different
locations.


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These variables are most commonly used to differentiate groups of present and
potential customers. Demographic information such as age, sex, marital status,
income, and occupation is comparatively easy to collect, quantify, and use in strategic
forecasting. Such information is the minimum basis for a customer profile.

 
0%$
Psychographic variables refer to customers¶ personality and life styles. Accordingly,
the personality and lifestyles of customers are often better predictors of customer
purchasing behavior than geographic or demographic variables.

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These variables refer to the buyer¶s behavior data. Accordingly, as a component of the
customer profile, such data are used to explain and predict some aspects of customer
behavior with regard to a product or service. They include such information as usage
rate, benefits sought, and brand loyalty.

  
Dependable relationships between a firm and its suppliers are essential to the firm¶s
long-term survival and growth. A firm regularly relies on its suppliers for financial
support services, materials and equipment. In addition, it occasionally is forced to
make special requests for such favors as quick delivery, liberal credit terms, and
return of broken-lot orders. Particularly at such times, it is essential for a firm to have
had an ongoing relationship with its suppliers. In assessing a firm¶s relationship with
its suppliers, several factors should be considered.

With regard to its competitive position with its suppliers, the firm should address the
following important points:
M The competitiveness of the suppliers¶ price
M Quantity discounts offered by suppliers
M The amount of their shipping charges
M The suppliers¶ production standards
M The competitiveness of the suppliers¶ abilities, reputations, and services.

 "
   
-  

Strategy must plan realistic requirements on the firm¶s internal capabilities. That is, the
firm¶s pursuit of market opportunities must be based not only on the existence of such
opportunities but also on the firm¶s key internal strengths.
The following discussion will looks at the several ways managers achieve greater
objectivity as they analyze their company¶s internal capabilities. —anagers often start
their internal capabilities. —angers often start their internal analysis with questions like
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to the above questions are discussed bellow. The approaches are 72'@./
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  9 -  and 
   . The Value
chain analysis will also be addressed here to complement the briefing.

Ô 72'- 
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. While
Strengths and Weaknesses are internal to the firm; opportunity and threats are
environmental situations facing that firm so they are external factors. SWOT analysis
is an easy technique through which managers create a quick overview of a company¶s
strategic situation. It is based on the assumption that an effective strategy is derived
from a sound 8
9 between a firm¶s internal capabilities (Strengths and weaknesses)
and its external situation (opportunities and threats). A good fix maximizes a firm¶s
strengths and opportunities and minimizes its weaknesses and threats. If it is
accurately applied, this simple assumption has powerful implications for the design of
a successful strategy.

Ô Ô "
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As discussed earlier the internal capabilities are the strengths and weaknesses of the
firm. They are defined as follows:
! 


Strength is a resource, skills, or other advantages relative to competitors and the
needs of the markets a firm serves or expects to serve. Strength is a distinctive
competence when it gives the firm a comparative advantage in the market place.
Strengths may exist with regard to:
M Financial resources,
M Corporate image,
M —arket leadership, and
M Buyer-supplier relations.
(! 7 ,
Weakness is a limitation or deficiency in resources, skills, or capabilities that seriously
impedes a firm¶s effective performance.
Weakness may exist with regard to:
M Production facilities,
M Financial resources,
M —anagement capabilities,
M —arketing skills, and
M Brand image.

Ô  1
  


External situations are the opportunities and threats. As you have seen it before, the
industry environment analysis provides the information needed to identify
opportunities and threats in a firm¶s environment.

! 2


An opportunity is a major favorable situation in a firm¶s environment. Key trends are
oral sources of opportunities. The following points could represent opportunities for
the firm:
M Identification of a previously over looked market segment
M Changes in competitive or regulatory circumstances
M Technological changes, and
M Improved buyer or supplier relationships.

(! ' 

A threat is a major unfavorable situation in a firm¶s environment. Threats are key
impediments to the firm¶s current or desired position.
Firms usually face threats when:
M ùew competitors enter the industry
M —arket growth is slow
M Bargaining power of key buyers and suppliers increase, and
M Technological changes occur.

The most common way to use SWOT analysis is as a logical framework guiding
systematic discussion of a firm¶s situation and the basic alternatives that the firm might
consider. For instance, what one firm sees as an opportunity could be seen as a
potential threat by another.

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Another way in which SWOT analysis can be used to aid strategic analysis is the
comparison of the key external opportunities and threats with internal strengths and
weaknesses in a structured approach. The objective is identification of one of four
distinct patterns in the match between a firm¶s internal and external situations. The
comparison is presented in the following figure.

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  3


The patterns represented by the four cells in the figure are discussed as follows:

$Ô
This is the most favorable situation as the firm faces several environmental
opportunities and has numerous strengths that encourage pursuit of those
opportunities. This Situation suggests growth-oriented strategies to exploit the
favorable match.

$ 
In this cell, a firm with key strengths faces an unfavorable environment. In this
situation, strategists would use current strengths to build long-term opportunities in
more opportunistic product markets.

$

A firm in this cell faces impressive market opportunity but is constrained by internal
weaknesses. The focus of strategy for such a firm is eliminating the internal
weaknesses so as to more effectively pursue the mark of opportunity.

$
This is the least favorable situation with the firm facing major environmental threats
situation clearly calls for strategies that reduce or redirect involvement in the products
or markets.

In general, SWOT analysis highlights the control role that the identification of internal
strengths and weaknesses plays in the firm¶s search for effective strategies. The
careful matching of a firm¶s opportunities and threats with its strengths and weakness
is the essence of sound strategy formulation.

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The functional approach is one way managers have traditionally sought to isolate and
evaluate internal strengths and weaknesses. Accordingly, the key internal factors are
a firm¶s basic capabilities, limitations, and characteristics. The following lists are
typical internal factors, some of which would be the focus of internal analysis in most
firms.
A' 3:=
M Firm¶s products & services = breadth of product line
M —arket share or sub market shares
M Channels of distribution &number, coverage and control
M Product & service image, reputation, and quality
M Pricing strategy and pricing flexibility
M After sale service and follow-up.

3::':"<: 3:=
M Ability to raise short-term capital
M Ability to raise long-term capital - debt & equity
M Tax considerations
M Leverage position
M Working capital & flexibility of capital structure.

"< 3":B"' C>:.B 'c:3

M Raw materials with cost and availability
M Inventory control systems
M Location of facilities
M Economics of scale
M Patents, trademarks, and similar legal protection
M Research and development - Technology & innovation

'."::'
M —anagement team
M Employee¶s skill and morale
M Employee turnover and absenteeism
M Efficiency and effectiveness of personnel policies

Ú<3 D :=' ': 

M Relationship with suppliers & customers
M Procedures for monitoring quality

3:"  3":.D. ' .

M Timeliness and accuracy of information
M Ability of people to use the information provided

"=:3E 3":: :=' ': 

M Organizational structure & culture
M Organizational communication system
M Use of systematic procedures and techniques
Firms are not likely to evaluate all of the factors listed above. To develop a revised
strategy, managers would prefer to identify the few factors on which its success is
most likely to depend. Strategists examine a firm¶s past performance to isolate key
internal contributors to favorable or unfavorable results. Analysis of past trends in a

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firm¶s sales, cost, and profitability is of major importance in identifying its strategic
internal factors.

The identification of strategic internal factors requires an external focus. A strategist¶s

efforts to isolate key internal factors are assisted by analysis of industry conditions
and trends and by comparisons with competitors. Changing conditions in an industry
can lead to the need to reexamine a firm¶s internal strengths and weaknesses in light
of newly emerging determinants of success in that industry.

The functional approach to internal analysis focuses managers on basic business

functions leading to a more objective, relevant analysis that enhances strategic
decision making regardless of situational differences.

 0 $ - 

Values chain analysis is based on the assumption that a business¶s basic purpose is
to create value for uses of it products or services. In this analysis, managers divide the
activities of their firm is to sets of separate activities that add value. Their firm is
viewed as a chain of value-creating activities stating with procuring new materials or
inputs and continuing through design, component production, manufacturing and
assembly, distribution, sales, delivery, and support of the ultimate user of its products
or services. Each of these activities can add value and each can be a source of
competitive advantage. Value chain analysis divides a firm¶s activities into

 major
categories,   

 and 


, as shown in the following
figure.

÷,'#


  

 are those involved in the physical creation of the product,
marketing and transfer to the buyer, and after-sale support. 


 assist
the primary activities by providing infrastructure of inputs that allow them to take place
on an ongoing basis.

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The initial step in value chain analysis is to divide a company¶s operations into specific
activities or business processes, usually grouping them similarly to the primary and
support activity categories as you have seen in figure above. Within each category, a
firm typically performs a number of discrete activities that may represent key strengths
or weaknesses.
The next step is to attempt to attain costs to each discrete activity. Each activity in the
value chain incurs costs and ties up time and assets. Value chain analysis requires

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managers to sign costs and assets to each activity, thereby providing the basis to
estimate costs to each activity. The result provides managers with a very different way
of viewing costs than traditional cost accounting procedures would produce.

The data necessary to support value chain analysis can be formidable, particularly
given its non traditional format. ' 
  
 identifies costs in broad
expense categories - wages, benefits, travel, supplies, depreciation, and so on. Value
chain analysis uses activity-based costing which requires managers to
8  
9 these broad numbers across specific tasks and activities.

Once the company¶s value chain has been documented and the costs are determined,
managers used to identity the activities that are critical to buyers¶ satisfaction and
market success. '  considerations are essential at this stage in the value chain
analysis:
M The company¶s basic mission needs to influence manager¶s choice of activities
that they examine in detail.
M The nature of value chains and the relative importance of activities within them
vary by industry.
M The relative importance of value chain activities can vary by a company¶s
position in a broader value system that includes the value chains of its
upstream suppliers and downstream customers or partners involved in
providing products or services to end users.

 
 
"
  $  (


—anagers need an objective standard to use when examining internal capabilities or
value building activities. Whether using SWOT analysis, the functional approach, or
the value chain analysis, strategists rely on  basic perspectives to evaluate where
their firm stacks up on its internal capabilities. These four perspectives will be
discussed in the following section:

! $ 

 
    
Strategists use the firm¶s historical experience as a basis for evaluating internal
factors. —anagers are most familiar with the internal capability (strengths) or problems
(weaknesses) of their firm because they have been immersed in its financial,
marketing and production activities.

A manager¶s assessment of whether a certain internal factors such as production

facilities, sales organization, financial capacity, control systems, or key personnel - is
a strength or a weakness well be strongly influenced by his or her experience in
connection with that factor.
Although historical experiences provide a relevant evaluation frame work, strategists
must avoid tunnel vision in making use of it, because, using only historical experience
as a basis for identifying strength and weaknesses can prove dangerously in accurate.
(! 
"


The requirements for success in industry segments change over time. Strategists can
use these changing requirements, which are associated with different stages of
industry evolution, as a framework for identifying and evaluating the firm¶s strengths
and weaknesses.

These are  stages of industry evolution.


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% This is the early development of a product market which entails
minimal growth in sales, operating losses, and the need for sufficient resources
to support unprofitable operation.
 6 

% The strengths necessary for success change in this stage. Such
factors as brand recognition and the financial resources to support both heavy
marketing expenses and the effect of price competition can be key strengths at
this stage.

 
 
% As the industry moves through a shakeout phases and into the
maturity stage, industry growth continues, but at a decreasing rate since
technological change slows considerably. Competition becomes more intense
and promotional and pricing advantages became key internal strengths.
   % When the industry moves into this stage, strengths and weaknesses
center on cost advantages, superior supplies or customer relationships, and
financial control.

!   ,)$ 


$

 
A major focus in determining a firm¶s strengths and weaknesses is comparison with
existing (and potential) competitor firms in the same industry often have different
marketing skills, financial resources, operating facilities and locations, technical know-
how, brand images, levels of integration, managerial talent and so on. These different
internal capabilities can become relative strengths (or weaknesses) depending on the
strategy a firm chooses. In choosing a strategy managers should compare the firm¶s
key internal capabilities with those of its rivals and weaknesses.

The ultimate objective in benchmarking is to identify the +% - in

performing an activity, to learn how lower costs, fewer defects, or other outcomes
linked to excellence are achieved. Companies committed to benchmarking attempt to
isolate and identify where their costs or outcomes are out of line with the best practical
of competitors and then attempt to change their activities to achieve the new best
practices standard.

Benchmarking can prove useful in ascertaining internal capabilities (strengths and

weaknesses) - significant favorable differences from competitors are potential
cornerstones of a firm¶s strategy by being its competitive advantage.

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Industry analysis involves identifying factors associated with success in a given
industry. The key determinants of success in an industry may be used to identify a
firm¶s internal strengths and weaknesses. By scrutinizing industry competitions, as
well as customer needs, vertical industry structure, channels of distribution cost,
barriers to entry, availability of substitutes and suppliers, a strategist seeks to
determine whether the firm¶s current internal capabilities represent strengths or
weaknesses.

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Global environment is one of the special complications that confront a firm operating
internationally. 6( :
 refers to the strategy of approaching world divided
markets with standardized products. Awareness of the strategic opportunities faced by
global corporations and of the threats posed to them is important to planners or
strategist. Understanding the global markets and the environment is a required

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competence of strategic managers, because, the growth in the number of global firms
changes the structure of the competitive environment. The following discussion
addresses issues such as     ( :
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A variety of reasons make conducting business across national boundaries profitable
and attractive. Among the reasons,  of them are discussed below:
  
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Globalization provides a safety net during business downturn. Usually a recession
starts in one country and takes several months to move into other countries.

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In many industries, labor constitutes a major proportion of costs. Since labor is
cheaper in certain countries, it is economically attractive for firms to expand foreign
operations. Labor sometimes represents as much as half of the product cost, so the
cheaper the labor, the higher the profit.

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Some countries differ in tax incentives to attract foreign business to their countries. An
important motive for extending such tax incentives is to increase scarce foreign
exchange and create jobs at home. A company finding such tax concessions viable
will establish a plan in the low-tax country and sell the manufactured goods locally, as
well as from export there to its primary markets.

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—any companies find it more desirable to develop and/or test new products outside
the domestic market. This avoids exposure to competitors and, to some extent, keeps
the new development information secret until the product is ready for full introduction.

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Company¶s presence in the global environment provides expanded access to
advances in technology, world wide raw materials, and diverse international economic
groups.

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Because a lot of bigger firms are entering the domestic market, the domestic market
might not be as it used to be. In addition, there might be a growing and intense
competition from domestic firms. Therefore, firms look for global market and cross
boundary trade.

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For firms having strong desire for expansion, the domestic market is too small with a
very limited demand. Thus, if a firm establishes an objective of growth and expansion,
it will have an opportunity to accomplish them by entering into global market.

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The profit margin of a firm maybe eroded due to several factors such as:

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M Increasing costs as the result of inefficiency and
M Increasing local competition.

In order to maintain the profit margin, a firm may go globally where it can produce
goods at lower costs using cheap labor and materials or selling them at higher prices.

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To begin globalization, firms are advised to take four steps.
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% Scanning includes reading journals and patent
reports, and checking other printed sources-as well as meeting people at
scientific-technical conferences and in house seminar.
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% Firms
active in overseas R&D often pursue work-related projects with foreign
academics and sometimes enter into consulting agreements with them.
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% Common methods that firms use to
attract global attention include participating in trade fairs, circulating brochures
on their products and inventions, and hiring technology acquisition consultants.
M 
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% Involving in research projects with
foreign firms to broaden their contacts, reduce foreign firms to broaden their
contacts, reduce expense, diminish the risk for each partner or forestall the
entry of competitors into their markets.

In a similar way, external and internal assessments may be conducted before a firm
enters global markets. External assessment involves careful examination of critical
feature of the global environment. Particular attention begins to be paid to the status
of the host nations in such areas as economic progress, political control and
nationalism. Internal assessment involves identification of the basic strengths of a
firm¶s operations. These strengths are particularly important in global operations,
because they are often the characteristics of a firm that the host nation values most.


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Global strategic planning is more complex than pure domestic planning. There are at
least  factors that contribute to the increase in complexity.

The factor contributing for the complexity are:

M Global firms face multiple political, economic, legal, social, and cultural
environments as well as various rates of changes within each of them.
M Interactions between the national and foreign environments are complex
because of national sovereignty issues and widely differing economic and
social conditions.
M Geographic separation, cultural and national differences, and variations in
business practices all tend to make communication and control efforts between
head quarters and the overseas subsidiaries difficult.
M Global firms face extreme competitions because of differences in industry
structures.
M Global firms are restricted in their selection of competitive strategies by various
regional blocs and economic integrations.


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An inherent complicating factor for many global firms is that their financial policies
typically are designed to further the goals of the parent company and pay minimal
attention to the goals of the host countries. —oreover, different financial environments
make normal standards of company behavior (concerning the disposition of earnings,
sources of finance, and the structure of capital) more problematic. Thus, it becomes
increasingly difficult to measure the performance of international division.

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In order to see the strategy options in global environment, carefully examine the
following figure,

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The figure represents the basic multinational strategy options that have been derived
from a consideration of the location and coordination dimensions. Low coordination
and geographic dispersion of functional activities are implied if a firm is operating in a
multi-domestic industry and has chosen a country-centered strategy. This allows each
subsidiary to closely monitor the local market conditions it faces and to respond freely
to these conditions.

High coordination and geographic concentration of functional activities result from the
choice of a pure global strategy. Although some functional activities, such as, after
sales service, may need to be located in each market, light control of those activities is
necessary to ensure standardized performance worldwide.
High foreign investment with extensive coordination among subsidiaries would
describe the choice of remaining at a particular stage, such as that of an exporter.
Export - based strategy with decentralized marketing would describe the choice of
moving toward globalization, which a multinational firm might make.