School of Business and Economics

Department of Business Administration

BUSS 420

STRATEGIC MANAGEMENT

DR. EVANS MWITI

Open and Distance Learning Instructional Material

Published by Kenya Methodist University

P.O. BOX 267 – 60200, MERU

Email: info@kemu.ac.ke

TEL: 254 – 064 – 30301, 31146/0736752262

 Strategic Management

BUSS 420

© KeMU, 2014

All rights reserved.

No part of this module may be reproduced, stored in any retrieval system or

transmitted in any form or by any means, electronically, mechanically, by
photocopying or otherwise; without the prior written permission of Kenya
Methodist University.

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COURSE OVERVIEW

I welcome you to BUS 420 course on strategic management. This core course and it is
fundamental to all students doing Business Administration degree in School of Business and
Economics.

I wish to highlight to you the rationale of strategic management. A course in Strategic

Management usually has two aims: to draw together the various strands of a business course to
provide a holistic view of the business organization, and to develop a strategic perspective of
business management. This course is designed to capture the fundamentals of the strategy
process, incorporating analytically driven analyses, strategy formulation and implementation.
This course is structured to equip students with the necessary theoretical and practical skills to
enable them to think strategically and apply strategically-driven analytical tools within the
context of real-world settings.

Here is the overview of Course Description:-Basic Concepts of strategic management,

Components of strategy, and levels of a strategy. Corporate and Business functions. Strategy
formulation: Functional strategies and policies. Strategy implementation: Strategy evaluation,
consistency and feasibility. Choice of strategy; Environmental scanning techniques. Strategy &
social responsibility.

As stated above, the course consists of 12 topics organized into 12 lectures. As you study
through the course, you will be expected to complete all the activities and self
assessment questions at the end of each lecture to help you in self evaluation. You are also given
suggested text books for further reading at the end of each topic. However, you need to note that
this is not a restriction to refer to any other relevant textbook in management. You are strongly
advised to complete each activity before proceeding to the next lecture.
You are also advised to:
1. Ensure that you have the recommended texts for each lecture
2. Refer to the suggested a dditional resources to get further information on each
topic
3. Complete each lecture, including all activities and questions provided before proceeding

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 to the next one.

The “Self-Instructional Material” on Strategic management will be accompanied by Continuous

Assessment Tests (CATs) at the time of collection. The assignments may also be mailed to
you in your e-mail address in case they are not ready by the time you are registering for the
course. These assignments and CATs should be completed in good time and sent back to KeMU
on the specified dates communicated to you by ODLM office. At the end of 12 weeks (one
trimester), you will sit a written examination at a designated KeMU campus or centre. In case
You wish to sit your exam in a centre different from where you are registered, you must notify the
ODLM office at least a month before the examination date.

UNIT EVALUATION
CONTINOUS ASSESMENT TESTS 30%
 CAT
 Assignments
 Term paper
SEMESTER EXAMINATION 70%
TOTAL 100%

You will be given a university calendar, and any changes will be communicated to you by the
Distance Learning Office. If you need further assistance or advice, please contact any
KeMU campus or centre near you that is Meru (Main Campus), Nairobi; Nakuru; Nyeri; Kisii
and Mombasa or call the KeMU Learning Resource Centre on: (0164) 30301, 31229, 30367.

Thank you.

Dr Evans Mwiti (PhD)

______________________________________________
Lecturer in strategic management,
Business Administration Department
Kenya Methodist University.

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COURSE OBJECTIVES

By the end of this course, you should be able to:

 Discuss the application of strategic analysis in an effort to improve firm performance
 Explain the fundamental concepts underlying the study of business strategy and the
elements of the strategic management process;
 Describe the role of strategy in matching an organization’s resources, capabilities and
competencies with its environment in both static and dynamic contexts;
 Discuss the processes of strategy analysis, development and implementation,
especially those processes of strategic management that may lead to success;
 Explain the implementation of strategy within the organization, and the relevance of
firm culture within the context of organizational operation;
 Apply the analytical concepts taught within class in the analysis and development of
strategy for a business organization

REFERENCES
Course Texts
1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts &
Cases; 8th Ed. Prentice Hall International; United Kingdom.

Other Recommended textbooks

1. Thompson, A.A., & Strickland, A.J. (2001). Strategic Management (12th ed.). Boston:
McGraw-Hill Irwin.
2. Wheelen, T.L., & Hunger, J.D. (2000). Strategic Management and Business Policy (7th ed.).
MA: Addison Wesley.

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3. Hubbard, U., Morkel, A., Devenport, S., & Beamish, P. (2006). Cases in Strategic
Management. Frenchs Forrest, NSW: Pearson Education.
4. David, F. (1999) Strategic Management, Prentice Hall, Upper Saddle River, NJ
5. De Wit, R. & Meyer, R. (2004). Strategy Process, Content, Context; 3 rd Ed. Thompson:
Australia.
6. Mintzberg, H., Lampel, J., Quinn, J. & Ghoshal, S. (2003). The Strategy Process: Concepts,
Contexts and Cases. Prentice Hall: United States.
7. Mintzberg, H., Ahlstrand, B. & Lampel, J. (1998). Strategy Safari. Prentice Hall: Australia.
8. Davis, J. & Devinney, T. (1997). The Essence of Corporate Strategy: Theory for Modern
Decision Making. Allen & Unwin: Australia.
9. Grant, R. (1998). Contemporary Strategy Analysis: Concepts, Techniques, Applications.
Blackwell Publications: United States.
10. Norman, R. & Ramirez, R. (1998). Designing Interactive Strategy: From Value Chain to
Value Constellation. John Wiley Publications: United Kingdom.
11. Ansoff, H. Igor, (1969) Business Strategy. Middlesex: Penguin Books Ltd.

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SYMBOLS

Objectives

Summary

Activity

Self-Assessment Questions (SAQs)

Key note

Further reading

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COURSE OUTLINE

Week 1 Overview and nature of  Meaning of strategic management

management  Critical tasks in strategic management
 Dimensions of strategic management
 Levels of strategic management
 Importance and risks of strategic management
 Formality in strategic management
Week 2 Development of concept of  The evolution of strategic management
strategy  Early uses of strategy
 Scientific management approach
 Administrative theories
 Cotemporary contribution to strategic
management thought
Week 3 The strategic management  Strategic management as a process
process  The strategic management model
 Alternative models of strategic management
Week 4 Defining the company  Formulating the firms mission statement
mission and vision  The vision statement
 Content of mission statement
 Stakeholder management and agency theory
Week 5 Environmental analysis :  The remote environment
General external o Pestel
 The operating environment
o SWOT analysis
Week 6 Environmental analysis:  The industry environment
competitor and industry o The five forces industry
analysis  Customer analysis
 Competitor analysis

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Week 7 Environmental analysis:  Models of internal analysis
internal environment  The resource based view of the firm
 The value chain analysis
Week 8 Setting long-term objectives  Developing long term objectives
 Key areas of setting long term objectives
 Attributes of good objectives
Week 9 Strategy formulation:  Concept of competitive advantage
corporate strategic options  Directional strategies
 Portfolio strategies
 Parenting strategies
Week  Strategy formulation:  Business level strategic options
10 generic strategies  Cost leadership
 Differentiation
 Focus
Week Strategy implementation  Short term objectives
11  Functional tactics
 Developing company policies
Structure, leadership and culture
Week Strategic control and  Performance measurement
12 continuous improvement  Strategic control
Continuous improvement
Week 13 & 14 End of Trimester Exams

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 LECTURE 1
THE NATURE AND VALUE OF STRATEGIC MANAGEMEMT

I welcome you to lecture ONE, by the end of the lecture, you should be able to;
 Define and explain the meaning of strategic management
 Describe critical tasks in strategic management
 Outline dimensions of strategic management
 Identify levels of strategic management
 Discuss importance and risks of strategic management
 Explain Formality in strategic management

Introduction and meaning of strategic management

Strategic management as a discipline continues to evolve in response to the changes in organizational
cultures and the wider community. Strategic management is that set of managerial decisions and actions
that determines the long term performance of a corporation. The long-term effects on the business
community as a whole and on individual organizations will depend on their ability to manage their
organization strategically in an extremely volatile environment. From small local businesses through to
multinationals employing vast number of people, the plans that have been and will be made will
determine the future success of the business operation. Many organizational collapses, from the high-
profile corporate sector through to small business, could have been prevented by paying greater attention
to strategic management.

To understand the current role of strategic management it is useful to look at some of the sources of the
ideas and methods on which is based. Strategic management developed as industry having moved from
individuals working in their own homes through to multinationals working on a worldwide basis.
Strategic management does not seek to prescribe a course of action but rather to offer methods that can
be used by both large and small organizations seeking to reach their full potential. During the period of
its evolution it has allowed governments and organizations to withstand major social and economic
upheavals by being prepared for likely eventualities.
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 The study of strategic management includes environmental scanning (both external and internal),
strategy formulation, strategy implementation, and evaluation and control. The study of strategic
management emphasizes the monitoring and evaluation of external opportunities and threats in light of a
corporation’s strengths and weaknesses. Originally called business policy, strategic management
incorporates such topics as long-range planning and strategy. Business policy in contrast has a general
management orientation and tends to primarily to look inward with its concern for properly integrating
the corporation’s many functional activities. Strategic management as a field incorporates the integrative
concern of business policy with a heavy environmental and strategic emphasis. This means that strategic
management has tended to replace business policy as the preferred name in the field.

Strategic Management is a term used to describe all aspects of business policy and planning. Policy is
concerned with strategic decisions, i.e. those that affect the long-term direction of an organization.
During the last two decades a lot of emphasis has been placed on strategic management. This has been
occasioned by the rapid increase of uncertainty in all aspects of business management. As such, it has
become important to preempt business opportunities, future challenges and possible environmental
changes and accordingly plan for them.

A strategy gives direction to diverse activities, even though the conditions under which those activities
are carried out are rapidly changing. As the conditions under which businesses operate become
increasingly competitive, as the range of responses becomes more constrained, and as the survival stakes
become higher, strategy becomes increasingly relevant to sound management.

Sound strategic management has been identified as key to the enhancement of organizational capacity to
both take advantage of future opportunities and avoid ‘fire fighting’ actions when challenges crop up.
Strategic management is, therefore, proactive management. It is a preemptive tool for the management
of foreseen and unforeseen change.

So let us look at the definition of key concepts in strategic management:

i. Strategy
This is a set of activities or the process that the organization intends to use to achieve its goals. It
is the way the organization intends to pursue its goals given the threats and opportunities in the

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 environment and the resources and capabilities in the organization. The main components of a
strategy, therefore, are:
 The external environment
 The internal environment
 The goals that are being pursued

ii. Management
This is the process of implementing the functions of planning, leading, organizing and
controlling in an organization. It is the effective and efficient integration and coordination of the
management functions to achieve desired objectives.

iii. Strategic Management

Strategic Management has been variously defined as a process by which top management
determines the long-run direction and performance of the organization by ensuring that careful
formulation, effective implementation and continuous evaluation of strategy takes place. It is
therefore, the process of coordinating and integrating management functions in an organized
manner to achieve intended long-term goals. Strategic management is the set of decisions and
actions that result in the formulation and implementation of plans designed to achieve a
company's objectives.

1.2 Its critical tasks:

The strategic management as a process involves the following key tasks:

1. Formulate the company's mission, including broad statements about its purpose,
philosophy, and goals.
2. Conduct an analysis that reflects the company's internal conditions and capabilities.
3. Assess the company's external environment, including both the competitive and the
general contextual factors.
4. Analyze the company's options by matching its resources with the external environment.
5. Identify the most desirable options by evaluating each option in light of the company's
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 mission.
6. Select a set of long-term objectives and grand strategies that will achieve the most
desirable options.
7. Develop annual objectives and short-term strategies that are compatible with the selected
set of long-term objectives and grand strategies.
8. Implement the strategic choices by means of budgeted resource allocations in which the
matching of tasks, people, structures, technologies, and reward systems is emphasized.
9. Evaluate the success of the strategic process as an input for future decision-making.
It involves the planning, directing, organizing, and controlling of a company's strategy-related
decisions and actions.

Dimensions of Strategic Decisions

We have seen that strategic management is about the decisions and actions. So focusing on the
aspects of the decision, what are the key dimensions of strategic decisions?
1. Strategic Issues Require Top-Management Decisions
Since strategic decisions over -arch several areas of a firm's operation, they require top
management involvement, who has the perspective needed to understand the broad
implications of such decisions and the power to authorize the necessary resource allocations.

2. Strategic Issues Require Large Amounts of the Firm's Resources

Strategic decisions involve substantial allocations of people, physical assets, or moneys that
either must be redirected from internal sources or secured from outside the firm. They also
commit the firm to actions over an extended period.

3. Strategic Issues Often Affect the Firm's Long-Term Prosperity

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 Strategic decisions ostensibly commit the firm for a long time, typically five years; with the
impact lasting 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, and technologies by adopting a
radically different strategy.

4. Strategic Issues Are Future Oriented

Strategic decisions are based on what manager’s forecast, rather than on what they know.
Emphasis is placed on the development of projections that will enable the firm to select the
most promising strategic options. In the turbulent and competitive free enterprise
environment, a firm will succeed only if it takes a proactive (anticipatory) stance toward
change.

5. Strategic Issues Usually Have Multifunctional or Multi-business Consequences

Strategic decisions have complex implications for most areas of the firm. Decisions about
such matters as customer 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 from these decisions.

6. Strategic Issues Require Considering the Firm's External Environment

All business firms exist 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. They must
consider what relevant others (e.g., competitors, customers, suppliers, creditors, government,
and labor are likely to do.

The Levels of Strategy

There are three main levels of strategy in an organization, each with different players and
responsibilities as follows.

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 i). Corporate level
Key participants: board of directors and the CEOs and senior administrative officers
Key Responsibilities
 Firm's financial performance and for the achievement of non-financial goals, such as
enhancing the firm image and fulfilling its social responsibilities.
 Setting objectives and formulating strategies that span the activities and function; areas of
these businesses.
 Attempting to exploit the firm's distinctive competencies by adopting a portfolio approach to
the management (its businesses and by developing long-term plans, typically for a five-year
period.

ii). Business level –

Key participants: Business and corporate managers.

Key Responsibilities

 Translate the statement of direction and intent generated at the corporate level into concrete
objectives and strategies for individual business divisions, or SBUs.
 Business-level strategic managers determine how the firm will compete in the selected
product-market arena.
 They strive to identify and secure the most promising market segment within that arena. This
segment is the piece of the total market that the firm can claim and defend because of its
competitive advantages.

iii). Functional level –

Key participants: Managers of product, geographic, and functional areas.

Key Responsibilities

 They develop annual objectives and short-term strategies in such areas as production,
operations, research and development, finance and accounting, marketing, and human

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 relations.
 Their principal responsibility is to implement or execute the firm's strategic plans.

The Strategy Makers

The ideal strategic management team includes decision makers from all three company levels
(the corporate, business, and functional). The team obtains input from company planning staffs,
and from lower-level managers and supervisors. The latter provide data for strategic decision-
making and then implement strategies. Strategic decisions have a tremendous impact on a
company and require large commitments of company resources and therefore the top managers
must give final approval for strategic action.

Their principal responsibility is to implement or execute the firm's strategic plans. Whereas
corporate- and business-level managers center their attention on "doing the right things,'
managers at the functional level center their attention on "doing things right." Thus, they address
such issues as the efficiency and effectiveness of production and marketing systems, the quality
of customer service, and the success of particular products and service; in increasing the firm's
market shares.

The ideal strategic management team includes decision makers from all three company levels
(the corporate, business, and functional). The team obtains input from company planning staffs,
and from lower-level managers and supervisors. The latter provide data for strategic decision-
making and then implement strategies. Since Strategic decisions have a tremendous impact on a
company and require large commitments of company resources, the top managers must give final
approval for major strategic action.

From this categorization of strategic management at the three key levels, its therefore possible to
summarize the same by looking at the attributes/characteristics of strategic decisions at each of
these levels: The characteristics of strategic management decisions vary with the level of
strategic activity considered.
 Decisions at the corporate level tend to be more value oriented, more conceptual, and less
concrete than decisions at the business or functional level.

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 Corporate-level decisions are often characterized by greater risk, cost, and profit potential;
greater need for flexibility; and longer time horizons. Such decisions include the choice of
businesses, dividend policies, sources of long-term financing, and priorities for growth.
 Functional-level decisions implement the overall strategy formulated at the corporate and
business levels. They involve action-oriented operational issues and are relatively short range
and low risk. Functional-level decisions incur only modest costs, because they are dependent
on available resources. They usually are adaptable to ongoing activities and, therefore, can be
implemented with minimal cooperation.
 Business-level decisions help bridge decisions at the corporate and functional levels.

Importance of Strategic Management

Managers at all levels of the firm interact in planning and implementing. This promotes positive
behavioral consequences, which also enables the firm to achieve its financial goals.

Behavioral effects of strategic management improve the firm's welfare:

1. Strategy formulation activities enhance the firm's ability to prevent problems. Managers
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 differences 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
decisions, their greater awareness of the parameters that limit the available options makes

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 them more likely to accept those decisions.

Risks of Strategic Management

Managers must be trained to guard against three types of unintended negative consequences of
involvement in strategy formulation.
1. The time that managers spend on the strategic management process may have a negative
impact on operational responsibilities. Managers must be trained to minimize that impact by
scheduling their duties to allow the necessary time for strategic activities.
2. If the formulators of strategy are not intimately involved in its implementation, they may
shirk their individual responsibility for the decisions reached. Thus, strategic managers must
be trained to limit their promises to performance that the decision makers and their
subordinates can deliver.
3. Strategic managers must be trained to anticipate and respond to the disappointment of
participating subordinates over unattained expectations. Subordinates may expect their
involvement in even minor phases of total strategy formulation to result in both acceptance of
their proposals and an increase in their rewards, or they may expect a solicitation of their
input on selected issues to extend to other areas of decision-making. Sensitizing managers to
these possible negative consequences and preparing them with effective means of
minimizing such consequences will greatly enhance the potential of strategic planning.

Formality in Strategic Management

Formality refers to the degree to which participants; responsibilities, authority, and discretion in
decision-making are specified. It is an important consideration in the study of strategic
management, because greater formality is usually positively correlated with the cost,
comprehensiveness, accuracy, and success of planning. A formal strategy is defined by the extent
of deliberateness in planning, identifiable process, time spend on planning, documented and
communicated to others.

Formality determinants:
 The size of the organization,
 Its predominant management styles,

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  The complexity of its environment,
 Its production process,
 Its problems, and
 The purpose of its planning systems
In particular, formality is associated with the size of the firm and with its stage of development.
Methods of evaluating strategic success also are linked to formality.

What are the benefits of formality of strategy?

Formality in strategic management is associated with among others the following key benefits:-
• Promotes unity of purpose, direction and commitment
• Forces managers to deliberately think about strategy
• Requires analysis in addition to intuition
• Results in documented strategy
• Communication of strategy is easier.

However, managers need to be prepared for among others the following potential dangers of
formality:
• Inflexibility
• Creativity and originality may be inhibited
• Time consuming

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 Summary
In this lecture, we have discussed the following:
 Strategic Management has been variously defined as a process by which top management
determines the long-run direction and performance of the organization by ensuring that
careful formulation, effective implementation and continuous evaluation of strategy takes
place.
 Critical tasks in strategic management involves, Formulate the company's mission,
analysis for internal conditions and capabilities, Assess the company's external
environment, Analyze the company's options, Evaluate the success of the strategic process,
Select a set of long-term objectives and grand strategies, Develop annual objectives and
short-term strategies, Implement the strategic choices and last and not the least Identify
the most desirable options.
 Key dimensions of strategic decisions; Strategic Issues Require Top-Management
Decisions, Strategic Issues Require Large Amounts of the Firm's Resources, Strategic
Issues Often Affect the Firm's Long-Term Prosperity, Strategic Issues Are Future
Oriented, Strategic Issues Require Considering the Firm's External Environment,
Strategic Issues Usually Have Multifunctional or Multi-business Consequences
 There are three Levels of Strategy ; Corporate level ,Business level ,Functional level.
 Risks of Strategic Management; The time that managers spend on the strategic
management process, formulators of strategy not intimately getting involved,
disappointment of participating subordinates.

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 1. .what is key dimensions of strategic decisions?
2. . What are some of critical tasks in strategic management process?
3. Outline the benefit of strategic management?
4. What are the benefits of formality of strategy?

Further reading

1. Pearce and Robinson (2007): Strategic Management, 5th edition Mc Graw-Hill, New York
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts &
Cases; 8th Ed. Prentice Hall International; United Kingdom

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 LECTURE 2

DEVELOPMENT OF THE CONCEPT OF STRATEGY

Overview
Having discussed what strategic management is, let’s look at the historical development of the
strategic management has a discipline. Since the literature on corporate strategy emerged in the
1950s and 1960s, different contributors have emphasized different dimensions of strategy.
However, the fundamentals have always remained the same. What seems to change over time is
the form.

I Welcome you to lecture two, on the development of strategic management thought.

By the end of this lecture, you should be able to;
 Explain the early uses of strategy
 Describe the two major military players known for early development of strategy
 Explain the contribution of Max Weber to strategic management
 Illustrate mintzberg’s critique of formal strategic planning

THE EARLY USES OF STRATEGY

The development of organizations, perhaps first seen in the military situation and later in the
development of industry, made the need for organization more pressing. The strategists discussed are
recognized as leaders in their field in their time frame and have often been used as the basis for further
development and understanding of strategic management. The key ones among these include:

1. Military Classics on Strategy:

Early recorded uses of strategic management emerged as an essential part of military campaigns with
some records dating back to the Greeks and Romans. Two major military players known for early
development of strategy are Sun Tzu and Carl von Clausewitz.
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A. Sun Tzu:
The Art of War was written over 2000 years ago and is attributed to a Chinese military strategist and
general, Sun Tzu. This publication has thirteen books each dealing with a specific aspect of strategy.
The thirteen are:
SUN TZU BUSINESS MANAGEMENT

SUN TZU’S BOOKS COMPETITATIVE STRATEGIES

1. Planning
2. Competitive actions
3. Competitive strategies
4. Positioning
5. Opportunity and timing
6. Control
7. Managing direct conflict
8. Flexibility
9. Maneuvering
10. Types of competitive
situation and causes of failure
11. Competitive
conditions and offensive
12. Destroying reputation
13. Gathering intelligence
Planning of strategies, estimation and leadership
Resources and competitive actions
Competitive strategy and wisdom
Positioning and targeting, strengths and weaknesses estimation
Opportunity, timing and management structure
Control of market situations and climate
Management of conflict and avoiding confrontation
Flexibility and adaptability
Observing and maneuvering
Competitive situations and causes of failure
Competitive conditions and offensive strategy,
alliance and vision
Destroying and decision making
Intelligence and information

Sun Tzu emphasizes the importance of people, the environment and the strength of management in
the overall strategic planning and implementation roles. He also emphasized the desirability of
strategy – “the best policy of the military operations is to gain victory by means of strategy”.
Although there are situations where it is necessary for battles and direct confrontation to take place,
in most cases it is beneficial for both sides to be less destructive and avoid situations where winning
weakens not only the loser but also the winner. The parallel in business today is that direct
confrontation can often lead to demise or weakening of both protagonists.

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B). Car von Clausewitz:
 This was a nineteenth-century Prussian military strategist who recognized that strategy has a
timeless application in its own right.
 His work did not rely on the specifics of his time and situation, but rather on systems that could be
widely applied, independent of time or specific situation. This approach is still a major influence on
military strategy today.
 The greatest complaint about his work is not its relevance but rather the complexity of the original
material.
 In his work he looks at the relationships with other players such as government, moral farces such as
the spirit and qualities that motivates the contribution of the individual.
 He also emphasized the need to have tactics based on strategic plan that allow adaptation to the
situation at hand.
 In defining his concept theory, he says that its role was to “clarify concepts and ideas that have
become confused and entangled.” His model of strategy is summarized below:

CLAUSEWITZ MODEL OF STRATEGY

Theory Should explain rather than prescribe
Principles Are deductions based on the spirit and sense of a law.
They are universal but not absolute
Rules Rest on the truth but allow for exceptions
Methods Refer to the means that are developed to carry out the business. Once again,
these are not absolute but allow for exceptions.

Contemporary strategic managers are facing the same dilemma in the business world that Clausewitz
faced two centuries ago. To decide what is needed in the organization to retain its competitive edge,
managers are frequented by the need to balance the efficiency of the organization, usually achieved by
more rigid system, with the effectiveness of the organization, which is more readily served by being
open and ready to respond to changing situations.

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Scientific Management Approach:
a. Adam Smith:
One of the earliest applications of scientific management in organizational behavior was made by Adam
Smith, the 18th century economist and author of The Wealth of Nations (1776). His classic study
provided a forerunner to the production line involved the trade of pin making. Rather than rely on one
person to do all the work where a person would measure wire, straighten, cut, make head for the pin,
sharpen the pin, and solder the pin head and shaft together thus wasting much time and lack of
specialization.
Smith found that by systematically identifying each of the processes, breaking them down into
individual tasks and making one person responsible for each task, the process was streamlined and
productivity significantly increased. This changed the production output to a staggering 40,000 plus pins
per day from just 600. This division of labour enabled an improvement in both productivity and quality
as constant repetition of a task tended to improve both speed and skills.

b. Frederick Winslow Taylor:

He came up with the Principles of Scientific Management (1911). A mechanical engineer by profession,
Taylor sought to find a way in which the attitudes of both workers and managers could be changed. He
saw a need for managers to work in an organized way rather than the rampant adhockery that existed.
Having determined the most efficient way to carry out work, the manager’s task was to see that this was
done and ensure that suitable workers were employed who would apply the process consistently.

He also wanted worker trained in systems that would result in a more efficient and effective working
day. To achieve this, he said there was need for “the right persons, the right procedures and the right
attitude.” He recognized the need not only to improve methods of movement by increasing the financial
incentives to workers to achieve their stated goals. He achieved motivation by increasing the financial
incentives to workers who met their stated goals. Taylor’s success in providing the “one best way” to
achieve a task and the methodology to put it into practice encouraged him to transfer this process to
other areas.

c. Frank and Lillian Gibreth:

24
These two (a couple) developed the ideas of Taylor further. Their specific contributions were the
elimination of unnecessary hand and body movements and the development of tools that would more
readily assist in performing specialized tasks. They introduced the work “therbligs” (Gibreth spelt
backwards) as a term for the classification of the seventeen different hand motions they had identified.
Combining financial incentives and improved tools and more efficient work processes they achieve the
cooperation of both management and employees. Every movement involved in a task was studied and
collated to determine “the best” and most efficient way to complete a task.

On their study of time and motion, Lillian continued with this work after her husband’s death. Her major
contribution in the area was to transfer of the use of scientific management to the service sector. Both
Frank and Lillian developed and expanded the early management techniques of Taylor by taking into
account both the physical and psychological processes needed to manage the workforce.

Administrative Theories
Max Weber (1864-1920)
He developed a structured system of organization in which there was a clear line of authority and
guidelines for the work of each group or individual. It was an attempt to provide a theoretical structure
that could be used to organize groups of individuals working in large organizations. Weber developed
the concept “bureaucrary” which is used in a derogatory sense to mean an inflexible organization that is
bound by rules and a strict hierarchical structure, both of which are believed to be contrary to efficient
organization.
Little recognition is given to the fact that Weber devised the system as an “ideal type’ rather than as a
working blueprint. The components of the ideal type of organization are listed below:
 It has a clearly defined hierarchical structure
 It is efficient and rational in relation to the group that it controls
 It has clearly defined spheres of competence and responsibility
 It constitutes a career with a system of promotion based on seniority or competence, or a
combination of the two.
 It has a clearly defined system of control and discipline.

25
Cotemporary contribution to strategic management thought
According to Chandler (1962) strategy involves the determination of the long-term mission and
objectives of the organization and prescribes the courses of action needed to get there. In his
definition Chandler perceives strategy as setting the direction as well as the means towards that
direction.

Ansoff (1965) views strategy as the common threads among an organization’s activities. He
therefore perceives strategy as a unifying factor that provides direction for the activities of the
organization. This definition implies that strategy has something to do with resource allocation

Andrews (1971) adds another dimension to the strategy, which he defines as; “The pattern of
major objectives purpose or goals and the essential policies and plans for achieving those goals,
stated in such a way as to define what business the company is in or is to be in and the kind of
company it is or is to be”

According to Andrews strategy also defines the competitive position of the organization. The
additional dimension is the determination of the specific competitive posture of the organization
in the market place.

Porter (1980) agrees that strategy is the central vehicle for achieving competitive advantage in
the market place. The aim of strategy is to establish a sustainable and profitable position against
the competitive focus in the industry. Michael E. Porters work has greatly influenced modern
strategic management. He is mostly known for two major contribution: five forces model and
generic strategies.

In their definition Glueck and Jauch add a dimension that strategy is a company’s response to the
external environment given the resources a company has. They also view strategy as a consisted
unifying plan that coordinates the whole organization.

Mintzberg (1987) included several other ways of defining strategy i.e. 5 Ps of strategy:
 Strategy as a “plan”:- a direction, a guide, or course of action into the future.

26
  Strategy as a “pattern”:- a set of behaviors over time.
 Strategy as “position”:- selling particular products in particular markets.
 Strategy as “perspective”:- an organization’s fundamental way of doing things.
 Strategy as a “ploy”:- a maneuver intended to outwit a competitor.

These, different dimensions suggest that strategy is a multi-dimensional concept. It is evident

that no one definition would capture all the dimensions of strategy. The essential point is that all
these dimensions of strategy complement each other. This view is well summarized by
Mintzberg et al. (1998) “strategy is one of those words that we inevitably define in one way yet
often also use in another. From all these definitions strategy can be summarized by its
characteristics as follows:
i) Strategy is a means to the ends of an organization, which is value creation.
ii) It requires careful monitoring & analysis of changes in the organization external
environment
iii) It takes into account the relationship between external environmental forces and
the organization internal resources.
iv) Strategy involves the determination of the long-term mission and objectives of the
organization and prescribes the course of action needed to achieve competitive
advantage.
The decisions that strategy influences for an organization includes;
i) It’s markets,
ii) It’s operational activities,
iii) It’s own management structure,
iv) It’s own financial constitution,
v) It’s competition

27
 Summary
In this lecture, we have discussed the following:
 The development of organizations strategy are adopted from the military situation as
highlighted by Military Classics on Strategy by Sun Tzu and Carl von Clausewitz
 Cotemporary contribution to strategic management thought involves determination of
the long-term mission and objectives of the organization and prescribes the courses of
action needed to get there.
 Mintzberg Critique; fallacy of formal strategic planning are highlighted in three
aspect, the fallacy of prediction – the future is unknown, the fallacy of detachment --
impossible to divorce formulation from implementation, the fallacy of formalization --
inhibits flexibility, spontaneity, intuition and learning.

1. Differentiate between Sun Tzu and Carl von Clausewitz view of strategy
2. How does scientific management approach influence strategic management?
3. What is the contribution Mintzberg’s in Strategic management?

28
1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Hubbard, U., Morkel, A., Devenport, S., & Beamish, P. (2006). Cases in Strategic Management.
Frenchs Forrest, NSW: Pearson Education.

29
 LECTURE 3
THE STRATEGIC MANAGEMENT PROCESS

By the end of the lecture, you should be able to:

I. outline the historical evolution of strategic management thought

II. identify the early users of strategy
III. Describe the contribution of scientific management theory to strategic
management.
IV. Appreciate mintzbergs criticism of formal strategic planning.

Introduction
Viewing strategic management as a process
Important implications:
1. A change in any component will affect several or all of the other components.
2. Strategy formulation and implementation are sequential. The process begins with
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.
3. Then follow, in order, strategic choice, definition of long-term objectives, design of the grand
strategy, definition of short-term objectives, design of operating strategies,
institutionalization of the strategy, and review and evaluation.
4. The necessity of feedback from institutionalization, review, and evaluation to the early stages
of the process.

There is need therefore to regard strategic management process as a dynamic system. The term
dynamic characterizes the constantly changing conditions that affect interrelated and
interdependent strategic activities. The strategic management process undergoes continual

30
assessment and subtle updating.
Although the elements of the basic strategic management model rarely change, the relative
emphasis that each element receives will vary with the decision makers who use the model and
with the environments of their companies.

Strategic management is the set of decisions and actions that result in the formulation and
implementation of plans designed to achieve a company's objectives, because it involves long
term, future-oriented, complex decision making and requires considerable resources, top
management participation is essential

31
STRATEGIC MANAGEMENT MODEL

Company mission
Company profile External environment
(Internal environment  Remote
analysis: - strengths and  Industry
weaknesses)  Operating

Strategic analysis and choice

Long-term objective Grand strategies

(& Generic)

Annual objectives
Functional strategies Policies
(Short-term) (Operating)
(Empower action)

Institutionalize the strategy

(Restructure, reengineer & refocus)

Control and evaluation

(Continuous improvement)

Source: Pearce and Robinson (2007)

COMPONENTS OF STRATEGIC MANAGEMENT MODEL

1. Company Mission
The company mission is the unique purpose that sets it apart from other companies of its type
and identifies the scope of its operation. The mission describes the company's product, market,
and technological areas of emphases in a way that reflects the values and priorities of the

32
strategic decision makers. Social responsibility is a critical consideration for a company's
strategic decision makers since the mission statement must express how the company intends to
contribute to the societies that sustain it. A firm needs to set social responsibility aspirations for
itself, just as it does in other areas of corporate performance.

3. Internal Analysis
The company analyzes its quantity and quality of financial, human, and physical resources. It
also assesses the strengths and weaknesses of the management and organizational structure. It
contrasts the company's past successes and traditional concerns with the current capabilities in an
attempt to identify its future capabilities.

3. External Environment
It consists of all the conditions and forces that affect its strategic options and define its
competitive situation. The strategic management model shows the external environment as three
interactive segments: the remote, industry, and operating environments.

4. Strategic Analysis and Choice

This is assessment of both the external environment and the company profile to enable a firm to
identify a range of possibly attractive interactive opportunities. Opportunities are possible
avenues for investment and must be screened through the criterion of the company mission, to
generate a set of possible and desired opportunities.
This screening process results in the selection of options from which a strategic choice is made.
The process is meant to provide the combination of long-term objectives and generic and grand
strategies that optimally position the firm in its external environment to achieve the company
mission.

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5. Long-Term Objectives
The results that an organization seeks over a multiyear period are its long-term objectives. This
involve some or all of the following areas: profitability, return on investment, competitive
position, technological leadership, productivity, employee relations, public responsibility, and
employee development.

6. Generic and Grand Strategies

Many businesses explicitly and all implicitly adopt one or more generic strategies characterizing
their competitive orientation in the marketplace: Low cost, differentiation, or focus strategies.
Define the three fundamental options. Enlightened managers usually combine these capabilities
with a comprehensive, general plan of major actions through which their firm intends to achieve
its long-term objectives in a dynamic environment. Called the grand strategy, this statement of
means indicates how the objectives are to be achieved. Although every grand strategy is, in fact,
a unique package of long-term strategies,
There 14 Basic Approaches
These can be identified as:
1. Concentration,
2. Market development,
3. Product development,
4. Innovation,
5. Horizontal integration,
6. Vertical integration,
7. Joint venture,
8. Strategic alliances,
9. Consortia,
10. Concentric diversification,
11. Conglomerate diversification,
12. Turnaround,
13. Divestiture, and
14. Liquidation

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7. Action Plans and Short-Term Objectives
Action plans translate generic and grand strategies into "action" by incorporating four elements.
These are:
i) Identify specific functional tactics and actions to be undertaken in the next week, month,
or quarter as part of the business effort to build competitive advantage.
ii) A clear time frame for completion.
iii) Action plans create accountability by identifying who is responsible for each "action" in
the plan.
iv) Each "action" in an action plan has one or more specific, immediate objectives that are
identified as outcomes that action should generate.

8. Functional Tactics
Identify and undertake activities unique to the function that help build a sustainable competitive
advantage. Managers in each business function develop tactics that delineate the functional
activities undertaken in their part of the business and usually include them as a core part of their
action plan. Functional tactics are detailed statements of the "means" or activities that will be
used to achieve short-term objectives and establish competitive advantage.

9. Policies That Empower Action

One way to enhance speed and responsiveness is to force/allow decisions to be made whenever
possible at the lowest level in organizations. Policies are broad, precedent setting decisions that
guide or substitute for repetitive or time-sensitive managerial decision-making. Policies should
guide and "pre-authorize" the thinking, decisions, and actions of operating managers and their
subordinates in implementing the business's strategy. Policies often increase managerial
effectiveness by standardizing routine decisions and empowering or expanding the discretion of
managers and subordinates in implementing business strategies.

10. Restructuring, Reengineering, and Refocusing the Organization

Getting the work of the business done efficiently and effectively so as to make the strategy
successful may require that the company's structure, leadership, culture, and reward systems be
changed to ensure cost competitiveness and quality demanded by unique requirements of its

35
strategies.

11. Strategic Control and Continuous Improvement

Strategic control is concerned with tracking a strategy as it is being implemented, detecting
problems or changes in its underlying premises, and making necessary adjustments. Strategic
control seeks to guide action on behalf of the generic and grand strategies as they are taking
place and when the end results are still several years away. Continuous improvement provides a
way for managers to provide a form of strategic control that allows their organization to respond
more proactively and timely to rapid developments in areas that influence a business's success.

Strategic Management - efficiency and effectiveness

What does strategic management do?
1. Strategic management improves organizational effectiveness: Strategic management improves
organizational effectiveness by avoiding faddism and providing a methodology by which projects and
processes are integrated to achieve overall objectives.
In every organization there are essentially two prerequisites for success: efficiency and effectiveness.
 Efficiency relates to how well an activity or operation is performed. This ensures that an
organization does things right.
 Effectiveness relates to performing the correct activity or operation. This is determined by the
relationship between an organization and its environment. Effectiveness ensures that an organization
does the right things.
 Creating an efficient organization is often relatively easy. It involves setting up methods, procedures
and systems to solve day-to-day problems.
 Strategic management is mainly focused on creating effectiveness because it is concerned with the
long-term compatibility between an organization and its environment. It should be noted that
effectiveness alone will not secure the long-term future of an organization. Effective organizations
attract competition, thus reduce their uniqueness.
2. Strategic management creates organizational flexibility:
 Flexibility is essential if organizations are to respond effectively to the unknowns in the external
environment. Strategic mistakes caused by misinterpreting environmental trends or not reacting
rapidly enough to changed industry conditions can be devastating for an organization.

36
 Effective organizations need to consciously create flexibility through organizational design and
management of resources. This is particularly true for organizations that operate in highly
changeable and volatile environment.
 Strategic management assists organizations in developing strategies flexibility through a
combination of activities, including environmental scanning, creating resource buffer to minimize
the impact of sudden change of specific organizational activities, developing and positioning
individual staff as champions of the strategic management process and shortening decision lines to
allow for fast responses to changing conditions.

3. Strategy utilizes the core competencies of an organization:

Core competencies refer to those activities of the firm that create unique value. These activities are not
necessarily those on which the organization spends the most time, but those that have the potential to
create sustained competitive advantage.
4. Strategic management determines organizational risk profile
5. Strategic management creates patterns of investment
6. Strategic management creates sustainable competitive advantage (SCA)

STRATEGIC MANAGEMENT: WHAT IT REQUIRES

To be effective, however, strategic management need not always be a formal process. It can begin with
a few simple questions:
i. Where is the organization now? (not where we hope it is)
ii. If no changes are made, where will the organization be in 1, 2, or 3 years or 10 years? Are the
answers acceptable?
iii. Of the answers are not acceptable, what specific actions should management undertakes?
What are the risks and payoffs involved?
 To succeed, strategic management needs innovation, broad knowledge, senior management
involvement and strong leadership.

The characteristics of strategic management: The characteristics of strategic management demonstrate

that it is an extremely complex pursuit. Strategic managers are not only concerned with analyzing the
environment, or choosing and implementing strategies, but are also concerned with:

37
  Motivate people to participate in the process
 Seeking out and balancing viewpoints
 Creating a cohesive set of organizational values to guide behavior
 Fostering ideas
 Managing risk profiles
 Applying figurehead, innovation and interpersonal skills to act as dynamic leaders rather than
mechanistic managers

However, strategic management is complex because it is:

i) Multidimensional – it is influenced by a large number of variables, both internal and external
to the organization.
ii) Based on partial ignorance: Managers can never be sure of the nature and significance of all
external and internal trends affecting the organization in the future.
iii) High-risks: it involves the commitment of substantial resources for long periods of time.
iv) Contextual: the complex internal and external context in which strategy occurs not only
makes decision make difficult, but also complicates performance assessment.
v) Requires innovation—successful strategies are unique in some respect, they offer something
different and advantageous in comparison with competitors.

38
 Summary
In this lecture, we have learnt the following:
 Components of strategic management model; company mission, internal analysis, external
environment, strategic analysis and choice, long-term objectives, generic and grand strategies.
 Strategic management creates organizational flexibility, utilizes the core competencies of an organizatio
Strategic management determines organizational risk profile,. Strategic management
creates patterns of investment, Strategic management creates sustainable competitive advantage (SCA)
 Strategic managers is also concerned with :
 Motivate people to participate in the process
 Seeking out and balancing viewpoints
 Creating a cohesive set of organizational values to guide behavior
 Fostering ideas
 Managing risk profiles
 Applying figurehead, innovation and interpersonal skills to act as dynamic leaders rather
than mechanistic managers
?
1. What is strategic management process?
2. What are some of the essential components of strategic management model?
3. What does strategic management do?
4. What makes strategic management complex?

39
Further reading:

1. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases;
8th Ed. Prentice Hall International; United Kingdom
2. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.

40
 LECTURE 4

DEFINING THE COMPAY MISSION: VISION, PURPOSE AND VALUES

I welcome you to lecture FOUR ,

By the end of this lecture, you should be able to;
 Identify and answers for the key strategic question
 Differentiate Mission statement and vision statement
 Differentiate purpose statement and Value statements

INTRODUCTIONS
Fundamental to effective strategy development and implementation is the establishment of the
organization’s vision, purpose and values. The function of the mission is to identify the vision,
basic purpose and core values of the organization. The first task of strategic management begins
with thinking strategically about:
i) the firm’s future make up
ii) forming vision of the firm in 5-10 years
The task is to:
i) inject a sense of purpose in to the firms activities
ii) provide long term direction
iii) Give firm strong identity
iv) Decide who we are, what we do, and where we are headed
This is often referred to as the organization’s “mission.

Mission statement:
An organization’s mission is the organization’s purpose or fundamental reason for existence. A
statement of organizational aspirations. A mission statement is a broad declaration of the basic,
unique purpose and scope of operations distinguishing the organization from others of its type.
An organization mission:

41
i) Reflects management’s vision of what the firm seeks to do and become
ii) Provides clear view of what firm is trying to accomplish for its customers
iii) In indicates intent to stake out a particular business poison.
iv) For managers, it can be a benchmark against which to evaluate success.
v) For employees, it defines a common purpose, nurtures organizational loyalty, and fosters
a sense of community.
vi) For external groups, it helps provide unique insight into an organization’s values and
future directions.

Most missions contain three elements:

i) Vision statement—statement of the organization’s ideal – what it could achieve if it
performed perfectly.
ii) Purpose statement – summarizes the kind of work the organization does, what value it
creates for its stakeholders.
iii) Values statement – describe the beliefs of the organization, how it prefers to work as a
human enterprise

The mission statement typically defines the organization in terms of organizational attributes.
1. Customers: Who are the organization’s customers?
2. Products or services: What are the organization’s major products or services?
3. Location: Where does the organization compete?
4. Technology: What is the firm's basic technology?
5. Philosophy: What are the basic beliefs, values, aspirations, and philosophical priorities of the
organization?
6. Self-concept: What are the organization’s major strengths and competitive advantages?
7. Concern for public image: What are the organization’s public responsibilities, and what
image is desired?
8. Concern for employees: What is the organization’s attitude toward its employees?

42
Purpose of a mission statement:
 In attempt to reach organizational consensus many mission statements are too broad to be of
any value, they provide no real guidance for operational decisions.
 To be of value, a mission statement should be precise and concise. It should capture the
character and strategic intent of the organization in a simple statement that provides guidance
to managers undergoing day-to-day decision-making activities.
 The mission statement is fundamentally an internal working document which establishes the
boundaries to guide strategic decision making.

Vision statement:
Specifies what an organization could achieve if it performed perfectly. Most organizations make
them simple. There are certain questions that help from strategic visions:
i) What business are we in now?
ii) What business do we want to be in?
iii) What will our customers want in the future?
iv) What are expectations of our stakeholders?
v) Who will be our future competitors? Suppliers? Partners?
vi) What should our competitive scope be?
vii) How will technology impact out industry?
viii) What environmental scenarios are possible?

Why a Shared Vision Matters

A strategic vision widely shared among all employees functions similar to how a magnet aligns
iron fillings. When all employees are committed to firm’s long term direction, optimum choices
on business decisions are more likely:
 Individuals and teams know intent of firm’s strategic vision
 Daily execution of strategy is improved
Purpose Statement
The purpose statement is a description of the nature and scope of the activities of the
organization—in the private sector this usually termed the definition of the organization’s
“business”.

43
1. Narrow versus broad purpose:
Many organizations make the mistake of defining their business too narrow, leading to what is
known as “market myopia.”

Purpose and “Relevant Environment”

The relevant environment is that portion of the total economic, social, political and competitive
environment that is relevant to the purpose of the organization.
Stating organizational purpose is more than simply creating a striking sentence that describes
what the organization does.

Purpose and customer needs

It is important to consider customer needs in broad rather than narrow terms. Many organizations
make the mistake of defining customer needs in terms of a product or service, or in terms of
existing customer rather than in terms of the broad needs of both present and potential customers.

Purpose and customer segment:

By defining the purpose in terms of its customer segments, management is focusing on
customers that are already well known and hence the organization in building from strength.
Again, every senior manager need to be able to analyze an organization in terms of its customer
segments and to ask the questions: are there any further customer segments that have the
capability to serve? What skills and resources will have need to develop to satisfy these
segments?

Purpose and technology

Since technology is often the basis for new products and services and hence future growth, it
makes sense to define organizational purpose partly in terms of technology. Ideally, not
statement of organizational purpose should be constructed along a single dimension. It is
essential to consider all three elements i.e. customer needs, customer groups and technology. On
average, the mission statement should undergo a thorough review every two to five years.

44
Value statement:
Values are underlying beliefs of the organization, how it chooses to work as a human enterprise.
Value encourages unanimity of purpose and approach among staff.
Values help to set the organization apart from others of its type and can be used most effectively
as recruitment tool – people prefer to work in environments in which expected behaviors are
compatible with their personal beliefs.

Summary
In this lecture, we have learnt the following:
 A mission statement is a broad declaration of the basic, unique purpose and scope of operations
distinguishing the organization from others of its type
 Vision statement - statement of the organization’s ideal – what it could achieve if it performed
perfectly.
 Purpose statement – summarizes the kind of work the organization does, what value it creates for its
stakeholders.
 Values statement – describe the beliefs of the organization, how it prefers to work as a human
enterprise

?
What is the difference between mission and vision statement?
What are some of the questions asked to project a strategic vision statement?

45
Further reading:

1. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases;
8th Ed. Prentice Hall International; United Kingdom
2. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.

46
 LECTURE 5

INTERNAL ENVIRONMENT ANALYSIS

I welcome you to lecture FIVE on internal environmental analysis.

On completion of this module, you should be able to:

 perform an internal environment analysis using models like the
 the value chain of the business
 Resource based view of the firm
 SWOT analysis
 determine and prioritise a firm’s internal strengths and weaknesses; and

Introduction
All organizations have strengths and weaknesses in the functional areas of business. No
enterprise is equally strong or weak in all areas. The process of internal environment analysis
parallels that of the external analysis or audit. Representative Managers from throughout the
organisation need to be involved in determining the strengths and weaknesses of the firm. The
internal analysis or audit requires gathering and assimilating information about the firm’s
management, marketing, finance/accounting production/operations research and development
(R&D) and computer information systems operations. Key factors should be prioritized so that
firm’s most important strengths and weaknesses can be determined collectively. Critical success
factors can be identified and prioritized. In carrying out internal analysis, managers must ensure
that the strategies of the firm meet the following key considerations
 The strategy must be consistent with conditions in the competitive environment.
 The strategy must take advantage of existing or projected opportunities and minimize the
impact of major threats.
 The strategy must place realistic requirements on the firm's resources.

47
  The firm's pursuit of market opportunities must be based not only on the existence of
external opportunities but also on competitive advantages that arise from the firm's key
resources.
 The strategy must be carefully executed. The focus is on a realistic analysis of the firm's
resources.

Internal analysis looks at among others three major components of the organization as the
sources of the firms’ strengths or weaknesses:
 The firms resources,
 The organizational structure and
 The organizational Culture.
Others may include the organizational systems and leadership.
Managers perform these tasks so they can formulate strategies for competitive advantage. To
conduct internal environmental analysis, managers can use one or a combination of the following
analysis models:
i. The resource based view of the firm
ii. The value chain analysis
iii. Internal factor analysis summary

MODELS OF INTERNAL ENVIRONMENTAL ANALYSIS

i). The Resource Based View (RBV)
Resources come in many forms, from common factor inputs that are widely available and easily
purchased in arms-length transactions, to highly differentiated resources, like brand names, that
are developed over many years and are very difficult to replicate. Resources can be classified
into categories: tangible, intangible and organizational capabilities.
a) Tangible resources are the easiest to value and often are the only resources that appear on a
firm’s balance sheet. They include real estate, production facilities, and raw materials, among
others. Although tangible resources may be essential to a firm’s strategy, because of their
standard nature, they are only occasionally a source of competitive advantage.
b) Intangible resources include such things as company reputations, brand names, cultures,
technical knowledge, patents and trademarks, and accumulated learning and experience.

48
 These assets often play important roles in competitive advantage or otherwise and the
firm’s value.
c) Organizational capabilities are the complex combinations of both tangible and intangible
resources. Finely sharpened capabilities can be a source of competitive advantage. The
list of organizational capabilities includes a set of abilities describing efficiency and
effectiveness — faster, more responsive, higher quality, and so forth — that can be found
in any one of the firm’s activities, from product to development, to marketing, to
manufacturing.

Tangible

Resources
Capabilities Competencies
Competitive
Intangible Advantage
Resources

Figure : Resource-based view of competitive advantage

Let’s begin with a definition: Competitive advantage is the set of factors or capabilities that
allows firms to consistently outperform their rival. Figure depicts the way competitive advantage
can be obtained. Note that the objective of competitive advantage is to outperform the rivals and
not merely match the performance of other businesses.

What Makes a Resource Valuable?

manager face the challenge of determining which of its resources represent strengths or
weaknesses, which resources generate core competencies that are sources of sustained
competitive advantage. The RBV has addressed this by setting forth some key guidelines that
help determine what constitute a valuable asset, capability, or competence, that is, what makes a
resource valuable.
a) Competitative Superiority: This looks at whether the resource helps fulfill a customer's need
better than those of the firm's competitors. It is important to recognize that only resources
that contribute to competitive superiority are valuable

49
 b) Resource scarcity: Is the resource in short supply? The way resource scarcity contributes
value is when it can be sustained over time. Firms gain sustainable competitive advantage if
they control resources that are scarce i.e. where the competitors don’t have or find it difficult
to have similar resources.
c) Resource Inimitability: Is the resource easily copied or acquired? A valuable resource is one
that competitors find it difficult to copy or match. A resource that competitor can readily
copy can only generate temporary value and cannot generate a long-term competitive
advantage. However inimitability doesn't last forever. Competitors match or better any
resource as soon as they can. The RBV therefore identifies the following four characteristics,
called isolating mechanisms that firms can use to make their valuable resources difficult to
imitate:
i. Physically unique resources: Making resources impossible to imitate.
ii. Path-dependent resources: - Difficult to imitate because of the difficult "path"
another firm must follow to create that resource.
iii. Causal ambiguity: difficult for competitors to understand exactly how a firm has
created the advantage it enjoys.
iv. Economic deterrence involves large capital investments in capacity to provide
products or services in a given market that are scale sensitive.
d) Appropriability: Who gets the profit or benefits created by a resource? Resources that one
develops and controls where ownership of the resource and its role in value creation is
obvious (tightly controlled by the firm) are more valuable than resources that can be easily
bought, sold, or moved from one firm to another.
e) Durability: How rapidly will the resource depreciate? The slower a resource depreciates the
more valuable it is. Tangible assets, like commodities or capital, can have their depletion
measured. Intangible resources, like brand names or organizational capabilities, present a
much more difficult depreciation challenge.
f) Substitutability: Are other alternatives available? Consider whether the existing facilities and
operational resources can quickly create alternatives

ii). Value Chain Analysis

‘Value’ is the difference between what is paid or incurred in costs and what is received in

50
benefits from the performance of the product or service obtained from involvement in the
organization. A company can create more value/or its customers either by lowering the costs or
by making the product more attractive through superior design, functionality, quality and the
like, so that customers place a greater value on i~ and consequently, are willing to pay a high
price. According to them, the concept of value creation lies at the heart of competitive advantage.

The value chain is simply a diagram illustrating the various value-adding processes that occur
inside a firm or a business. In order to understand how a firm builds up its capabilities to
compete, one must identify the specific types of activities that make up the firms competitive
posture. Every firm engages in numerous activities that, in sum, determine its competitiveness in
serving customers in the marketplace. These activities create economic value.

The value chain describes all the activities that make up the economic performance and
capabilities of the firm. It portrays activities required to create value for customers of a given
product or service. As such, the value chain is an excellent means by which managers can
determine the strengths and weaknesses of each activity vis-à-vis the firm’s competitors.

The value chain classifies each firm’s activities into two broad categories: primary activities and
support activities.
a. Primary activities are activities that relate directly to the actual creation, manufacture,
movement, and sale of the product or service to the firm’s customer. These activities
represent the key tasks a firm performs to produce and deliver a product or service to a
customer. The sequences of activities through which raw materials are transformed into
benefits enjoyed by customers are called primary activities. Five major activities make up
this sequence.
i. Inbound logistics: In most industries, the transformation process begins with conveyance
or delivery of raw materials to manufacturing (or service) facilities of firms operating in
the industry.
ii. Operations: Inputs are transformed into products.
iii. Outbound logistics: Products are shipped to distributors or to final users.
iv. Marketing/sales: Users are informed about products and encouraged to buy them.

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 v. Service: Once in the customers’ hands, products are installed, repaired, and maintained.

b. Support activities refer to those tasks that contribute or assist the firm’s primary activities. In
other words, support activities work to enhance or to help the functioning of primary value-
adding activities. They include procurement, technology development, human resource
management, and firm-level infrastructure:
i. Procurement: inputs are secured for primary activities
ii. Technology development: methods of performing primary activities are improved
iii. Human resource management: employees who will carry out primary activities are
recruited, motivated and supervised
iv. Infrastructure: activities such as accounting, finance, legal affairs and regulatory
compliance are carried out to provide ancillary support for primary activities

Since each primary activity generally requires assistance in each of these four areas, the value
chain includes four cells above each primary activity — one for each category or support
activity. The combination of both primary and support activities determines the firm’s basis for
adding value. An example of this is y breaking competitor’s, lower cost, better quality, faster.

In other words, it is not enough to say that one firm is better than another in some overall way;
the value chain allows managers to compare their firm’s specific activities with the same
activities of competitors. Thus, comparing the value chains of competitors can provide valuable
insight on each firm’s individual strengths and weaknesses. Activities in the value chain can also
be characterized as being upstream or downstream. Upstream activities refer to those activities
that occur far away from the consumer, closer to the firm’s suppliers. In other words, upstream
activities are performed in the early stages of the value-adding process. Downstream activities
refer to those activities that occur closer to the firm’s buyers. Downstream activities add value to
those inputs that were processed through earlier upstream value-adding activities.

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iii). SWOT ANALYSIS
SWOT is the acronym for Strengths, Weaknesses, Opportunities and Threats. It is a simple,
much-used technique which can help to prepare or amend plans, in problem solving and decision
making.

SWOT analysis is a general technique which can be applied across diverse functions and
activities but generally for environmental analysis. Performing a SWOT analysis involves the
generation and recording of the strengths, weaknesses, opportunities, and threats in relation to a
particular task or objective. It is customary for the analysis to take account of internal resources
and capabilities (strengths and weakness) and factors external to the organisation (opportunities
and threats). It is a method used to evaluate the strengths, weaknesses, opportunities, and threats
involved in a project or in a business venture. It involves specifying the objective of the business
venture or project and identifying the internal and external factors that are favorable and
unfavorable to achieve that objective.

 Strengths: characteristics of the business or project that give it an advantage over

others.
 Weaknesses: characteristics that place the business or project at a disadvantage
relative to others
 Opportunities: elements that the project could exploit to its advantage
 Threats: elements in the environment that could cause trouble for the business or
project
The degree to which the internal environment of the firm matches with the external environment
is expressed by the concept of strategic fit. Setting the objective should be done after the SWOT
analysis has been performed. This would allow achievable goals or objectives to be set for the
organization.
Identification of SWOTs is important because they can inform later steps in planning to achieve
the objective.

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Conducting a SWOT analysis

1. Strengths - Think about what your company does well. What makes you stand out from your
competitors? What advantages do you have over other businesses?
2. Weaknesses - List the areas that are a struggle. What do your customers complain about?
What are the unmet needs of your sales force?
3. Opportunities - Try to uncover areas where your strengths are not being fully utilized. Are
there emerging trends that fit with your company's strengths? Is there a product/service area
that you could do well in but are not yet competing?
4. Threats. Look both inside and outside of your company for things that could damage your
business. Internally, do you have financial, development, or other problems? Externally, are
your competitors becoming stronger, are there emerging trends that amplify one of your
weaknesses, or do you see other threats to your company's success?
SWOT analysis is beneficial has it can provide:
 a framework for identifying and analyzing strengths, weaknesses, opportunities and
threats
 an impetus to analyze a situation and develop suitable strategies and tactics
 a basis for assessing core capabilities and competences
 the evidence for, and cultural key to, change
 A stimulus to participation in a group experience.

Summary
In this lecture we have learnt the importance of understanding the organization resource
capacity before formulating any strategies. This is done through a thorough internal
analysis using among other the following key analysis models:
 The value chain analysis
 The resource based view
 SWOT analysis

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Activity 5
Now that you have understood the important aspects of internal environment analysis, using an
organization you are familiar with as an illustration, identify’ 5 key strengths and 5 weaknesses of the
company of your choice .

Further reading:

1. Hubbard, U., Morkel, A., Devenport, S., & Beamish, P. (2006). Cases in Strategic Management. Frenchs
Forrest, NSW: Pearson Education.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases;
8th Ed. Prentice Hall International; United Kingdom
3. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.

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 LECTURE 6

EXTERNAL ENVIRONMENT ANALYSIS: THE GENERAL ENVIRONMENT

I welcome you to lecture SIX,

On completion of this module, you should be able to:
• Explain the importance of studying and understanding the firm’s external environment;
• Define and describe the general environment and the operating environment;
• Discuss the activities of the external environmental analysis process;
• Carry out a PESTEL analysis
• Conduct a TOWS analysis model

INTRODUCTION
Managers need to understand how the environment strongly influences their firm’s strategies and
operations. A firm’s environment represents all of the internal and external forces, factors, or
conditions that exert some degree of impact on the strategies, decisions, and actions taken by the
firm. The purpose of an external environment analysis is to identify or develop finite list of
opportunities that could benefit a firm and threats that could be avoided. The term finite suggests
that the external audit or analysis is not aimed at developing an exhaustive list of every possible
factor that could influence the business; rather it is aimed at identifying key variables that offer
actionable responses. Firms should be able to respond either offensively or defensively to the
factors by formulating strategies that take advantage of external opportunities or that minimize
the impact of potential threats (David, 1999). External analysis can be divided into macro-
environment and industry analyses.

The Macro environment

The macro environment is also referred to as the general or societal environment and includes all
of those external forces and conditions that affect every firm and organization within the (global)
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economy .Every firm in every industry is exposed to the rising globalization wave and it does
present some real exciting opportunities to the firm. So, whatever you analyze under the general
or macro environment, you need to keep the global aspects at the back of your mind always.

STEP ANALYSIS
The term STEP stands for Socio-cultural, Technological, economic and Political-legal
environments. Some other textbooks refer to them as PETS, SLEPT, PESTLE.

i). Socio-cultural Environment

The socio-cultural environment represents the set of values, ideals, and other characteristics that
distinguish members of one group from those of another. Firms need to be aware of how social
and cultural factors can directly affect the way they manage their operations, particularly human
resources and marketing. For example, managers need to be increasingly aware and sensitive to
the values and ideas of people from different upbringing and backgrounds. One of the most
important developments in this environment is the need for greater diversity awareness and
training; This environment also includes the demographic characteristics of people that make up
any individual unit of analysis, such as nation, state or region, or country/prefecture. The
importance of changes in demographics lies in their influence on the eventual makeup of each
firm’s workforce, on human resource practices, on marketing, and on the growth of the firm.

ii). Technological Environment

Many new advances in technologies can dramatically affect the way businesses compete. New
manufacturing technologies in the factory are improving product quality, accelerating turnaround
tinfe, and reducing inventory costs simultaneously. Technological developments represent a real
opportunity for people with the skills to understand and apply them; they simultaneously
represent genuine threats for people who are unskilled and cannot adjust to new advances.

iii). Economic Environment

The health of a nation’s economy affects the performance of individual firms and industries. The
economic environment refers to the nature and direction of the economy in which a firm
competes or may compete. Because of the interconnectedness among nations that is resulting

57
from the global economy, firms must scan, monitor, forecast and assess the health of economies
outside of their host nation.

iv). Political-Legal Environment

Political-legal arena is the one in which organizations and interest groups compete for attention,
resources and a voice in overseeing the body of laws and regulations guiding the interactions
among nations.

THE OPERATING ENVIRONMENT

The operating environment, also called the competitive or task environment, comprises factors in
the competitive situation that affect a firm's success in acquiring needed resources or in
profitably marketing its goods and services.

i) Competitive Position

Assessing its competitive position improves a firm's chances of designing strategies that
optimize its environmental opportunities. Although the exact criteria used in constructing a
competitor's profile are largely determined by situational factors, the following criteria are often
included:

1. Market share
2. Breadth of product line
3. Effectiveness of sales distribution
4. Proprietary and key-account advantages
5. Price competitiveness
6. Advertising and promotion effectiveness
7. Location and age of facility
8. Capacity and productivity
9. Experience
10. Raw materials costs
11. Financial position

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 12. Relative product quality
13. R&D advantages/position
14. Caliber of personnel
15. General images
16. Customer profile
17. Patents and copyrights
18. Union relations
19. Technological position
20. Community reputation

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.

ii) Customer Profiles

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. A second approach to
identifying customer groups is by segmenting industrial markets.

iii) Suppliers

In assessing a firm's relationships with its suppliers, several factors other than the strength of that
relationship should be considered. With regard to its competitive position with its suppliers, the
firm should address the following questions:

 Are the suppliers' prices competitive? Do the suppliers offer attractive quantity
discounts?
 How costly are their shipping charges? Are the suppliers competitive in terms of
production standards?

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  In terms of deficiency rates? Are the suppliers' abilities, reputations, and services
competitive?
 Are the suppliers reciprocally dependent on the firm?

iv) Creditors

Because the quantity, quality, price, and accessibility of financial, human, and material resources
are rarely ideal, assessment of suppliers and creditors is critical to an accurate evaluation of a
firm's operating environment. With regard to its competitive position with its creditors, among
the most important questions that the firm should addresses are the following:

 Do the creditors fairly value and willingly accept the firm's stock as collateral?
 Do the creditors perceive the firm as having an acceptable record of past payment?
 A strong working capital position? Little or no leverage?
 Are the creditors' loan terms compatible with the firm's profitability objectives?
 Are the creditors' able to expand the necessary lines of credit?

v) Human Resources: Nature of the Labor Market

A firm's ability to attract and hold capable employees is essential to its success. However, a
firm's personnel recruitment and selection alternatives are often influenced by the nature of its
operating environment. A firm's access to needed personnel is affected primarily by three factors:
the firm's reputation as an employer, local employment rates, and the ready availability of people
with the needed skills.

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THE TOWS MATRIX
Internal factors(IF) Strengths(S) Weaknesses(W)
List 5-10 internal strengths here List 5-10 weaknesses here
External factors(EF)  Strong advertising and  Obsolete facilities
promotions  Weak brand image
 Product innovation skills
Opportunities(O) SO strategies WO strategies
List 5-10 external Generate strategies hers that use Generate strategies here that
opportunities here strengths to take advantage of take advantage of
 Can adopt new opportunities opportunities by
ways - Use internet overcoming weaknesses
 Develop new - Adopt new technology - Buy new equipment
products
 Buy new
equipment
Threats (T) ST strategies WT strategies
List 5-10 external Generate strategies here that use Generate strategies here that
threats here strengths to avoid threats minimize weaknesses and
 Competition avoid threats
 Technology
 Shifting buyer
needs

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 Summary
In this lecture we have learnt that the purpose of an external environment analysis is to identify
or develop finite list of opportunities that could benefit a firm and threats that could be avoided.
External analysis can be divided into macro-environment and industry analyses.
The macro environment is also referred to as the general or societal environment and includes
all of those external forces and conditions that affect every firm and organization
within the (global) economy
The term STEP stands for Socio-cultural, Technological, economic and Political-legal
environments. Finally we appreciated the importance of carrying out SWOT analysis from the
previous chapter to make meaningful inferences form the results of the analysis.

Contact a business in your local area and do an external environmental analysis. You might find
that not all the STEP variables listed in the tables above are applicable or relevant for all
businesses.

Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases; 8 th
Ed. Prentice Hall International; United Kingdom.
3. Wheelen, T.L., & Hunger, J.D. (2000). Strategic Management and Business Policy (7th ed.). MA: Addison
Wesley.

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 LECTURE 7

EXTERNAL ENVIRONMENTAL ANALYSIS: INDUSTRY, COMPETITOR &

CUTOMER ANALYSIS

I welcome you to lecture SEVEN ,

On completion of this module, you should be able to:
• Understand the importance and implications for clearly defining the industry in which
the organization operates
• Identify the five competitive forces and explain how they determine an industry’s profit
potential
• Define strategic groups and describe their influence on the firm’s competitive actions
• Describe what firms need to know about their competitors and different methods used to
collect intelligence on their competitors.

INDUSTRY ANALYSIS
An industry is a group of organizations or business units producing close substitutes. According
to him, the industry definition should also include a geographic element and this might lead to
clearer thinking about who the real competitors are. But then, you have to be careful not to miss
any new trend outside the geographic region which often come from new entrants or substitutes.
This section will focus on Porter’s Five Forces Model and how it helps in your analysis.

The aim of this analysis is to assess the industry environment and answer the following questions

 What are the forces within the industry which are determining the profitability of the
industry?
 How are the forces changing, and expected to change, over time?

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  How will those changes affect future profitability?

Michael Porter developed a technique analyzing five forces that affect industry profitability. This
is the famous ‘Five Forces Model’. The forces described are the bargaining power of the
suppliers, bargaining power of the buyers, threat of new entrants, threat of substitutes and rivalry
among competitors.

PORTER’S FIVE FORCES

The model of the Five Competitive Forces was developed by Michael E. Porter in 1980. Since
that time it has become an important tool for analyzing an organizations industry structure in
strategic processes. Porter’s model is based on the insight that a corporate strategy should meet
the opportunities and threats in the organizations external environment. Especially, competitive
strategy should base on an understanding of industry structures and the way they change.

Porter has identified five competitive forces that shape every industry and every market. These
forces determine the intensity of competition and hence the profitability and attractiveness of an
industry. The objective of corporate strategy should be to modify these competitive forces in a
way that improves the position of the organization. Porter’s model supports analysis of the
driving forces in an industry. Based on the information derived from the Five Forces Analysis,
management can decide how to influence or to exploit particular characteristics of their industry.

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1. Bargaining Power of Suppliers
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or
services. Supplier bargaining power is likely to be high when:

 The market is dominated by a few large suppliers rather than a fragmented source of
supply,
 There are no substitutes for the particular input,
 The suppliers customers are fragmented, so their bargaining power is low,
 The switching costs from one supplier to another are high,
 There is the possibility of the supplier integrating forwards in order to obtain higher
prices and margins. This threat is especially high when
 The buying industry has a higher profitability than the supplying industry,
 Forward integration provides economies of scale for the supplier,
 The buying industry hinders the supplying industry in their development (e.g. reluctance
to accept new releases of products),

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  The buying industry has low barriers to entry.

In such situations, the buying industry often faces a high pressure on margins from their
suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the
organization.

2. Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much customers can impose
pressure on margins and volumes.

Customers bargaining power is likely to be high when

 They buy large volumes, there is a concentration of buyers,

 The supplying industry comprises a large number of small operators
 The supplying industry operates with high fixed costs,
 The product is undifferentiated and can be replaces by substitutes,
 Switching to an alternative product is relatively simple and is not related to high costs,
 Customers have low margins and are price-sensitive,
 Customers could produce the product themselves,
 The product is not of strategically importance for the customer,
 The customer knows about the production costs of the product
 There is the possibility for the customer integrating backwards.

3. Threat of New Entrants

The competition in an industry will be the higher; the easier it is for other companies to enter this
industry. In such a situation, new entrants could change major determinants of the market
environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent
pressure for reaction and adjustment for existing players in this industry.

The threat of new entries will depend on the extent to which there are barriers to entry. These are
typically

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  Economies of scale (minimum size requirements for profitable operations),
 High initial investments and fixed costs,
 Cost advantages of existing players due to experience curve effects of operation with
fully depreciated assets,
 Brand loyalty of customers
 Protected intellectual property like patents, licenses etc,
 Scarcity of important resources, e.g. qualified expert staff
 Access to raw materials is controlled by existing players,
 Distribution channels are controlled by existing players,
 Existing players have close customer relations, e.g. from long-term service contracts,
 High switching costs for customers
 Legislation and government action

4. Threat of Substitutes
A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing players.
This category also relates to complementary products. Similarly to the threat of new entrants, the
treat of substitutes is determined by factors like

 Brand loyalty of customers,

 Close customer relationships,
 Switching costs for customers,
 The relative price for performance of substitutes,
 Current trends.

5. Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players (companies) in an
industry. High competitive pressure results in pressure on prices, margins, and hence, on
profitability for every single company in the industry.

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Competition between existing players is likely to be high when

 There are many players of about the same size,

 Players have similar strategies
 There is not much differentiation between players and their products, hence, there is
much price competition
 Low market growth rates (growth of a particular company is possible only at the expense
of a competitor),
 Barriers for exit are high (e.g. expensive and highly specialized equipment).

COMPETITOR ANALYSIS
The competitor environment is an important part of external environmental analysis. It focuses
on each company against which a firm competes directly. Important in all industries, competitor
analyses are conducted energetically by companies competing in an industry with just a few
companies possessing relatively equal capabilities. For example, Nike and Reebok are keenly
interested in understanding each other’s objectives, strategies, assumptions and capabilities.
Critical to effective competitor analysis is the gathering of data and information that can help the
firm to understand competitors’ intentions and the strategic implications resulting from them.
Useful data and information the firm gathers to better understand and better anticipate
competitors’ objectives, strategies, assumptions and capabilities as mentioned in below. In
competitor analysis, the firm should gather intelligence not only about its about its competitors
but also regarding public policies in countries across the world. Intelligence about public policies
‘provides an early warning of threats and opportunities emerging from the global public policy
environment and analyses how they will affect the achievement of the company’s strategy. This
will aid you in making intelligent and well informed strategic decisions.

Key issues in Competitor Analysis

 When engaged in a competitor analysis, the firm seeks to understand:
 What drives the competitor, as shown by its future objectives;
 How do our goals compare with our competitors’ goals?
 Where will emphasis be placed?

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  What is the attitude towards risk?
 What the competitor is doing and can do, as is revealed by its current strategy;
 How are we currently competing?
 Does this strategy support changes in the competitive structure?
 What the competitor believes about itself and the industry, as shown by its assumptions
 Do we assume the future will be volatile?
 Are we operating under a status quo?
 What assumptions do our competitors hold about the industry and themselves?
 What the competitor’s capabilities are, as shown by its capabilities
 What are our strengths and weaknesses?
 How do we rate compared to our competitors?

If done properly, this analysis will help you to understand the competitor’s actions and initiatives
better and be able to address issues such as:

• What will our competitors do in the future?

• Where do we hold an advantage over our competitors?
• How will this change our relationship with our competitors?

Competitive Positioning: Strategic Groups

‘The term strategic group is used to capture competitive patterns that are visible across a set of
firms competing against each other either on an industry-wide basis-or within a segment (for
example, a set of customers with unique needs) of an industry. The term originated when a
researcher discovered that not all firms within the same industry were using the same strategy.
This finding was a little’ surprising, in that conventional wisdom at the time was that an
industry’s characteristics forced firms to compete in the same way. Groups of firms following
similar strategies were labeled strategic groups. Formally, a strategic group is a ‘group of firms
in an industry following the same or a similar strategy along the same strategic dimensions’.
Examples of strategic dimensions that firms in a strategic group treat similarly or identically
include the extent of technological leadership, the degree of product quality, pricing policies, the
choice of distribution channels, the degree and type of customer service the firms offer. Evidence

69
suggests that ‘organizations in a strategic group occupy similar positions in the market, offer
similar goods to similar customers, and may also make similar choices about product technology
and other organizational features’. Thus, membership in a particular strategic group defines the
essential characteristics of the firm’s strategy. The strategies of firms within a group are similar,
but they differ from strategies being implemented by companies in the industry’s other strategic
groups.

The notion of strategic groups is popular for analysing an industry’s competitive structure.
Contributing to its popularity is the assertion that strategic group analysis is a basic framework
that should be used in diagnosing competition, positioning and the profitability of firms within
an industry. The use of strategic groups for analysing industry structure requires that dimensions
relevant to the firms’ performances within an industry (for example, price and image) be
selected. Plotting companies along these dimensions helps to identify groups of firms competing
in similar ways. For example, there are unique radio markets because consumers prefer different
music formats, as well as different kinds of programming (news hours, talk radio, and so forth).
It is estimated that approximately 30 different radio formats exist. These formats suggest 30
strategic groups. Typically, a format is created through choices made regarding music or non-
music style, scheduling and announcer style. The strategies within each of the 30 formats are
similar, while the strategies across the total set of formats are dissimilar.

Strategic groups have several implications. Because firms within a group arc selling similar
products to the same customers, the competitive rivalry among them can be intense. The more
intense the rivalry, the greater is the threat to each firm’s profitability. Second, the strengths of
the five competitive forces (that is, the threats posed by new, entrants, suppliers, buyers and
product substitutes, and the intensity of rivalry among competitors) differ across strategic groups.
Third, the closer the strategic groups are in terms of strategies followed and dimensions
emphasised, the greater is the likelihood of rivalry between the groups. For example, two radio
stations with a classical music format, but different announcer styles, are relatively close
competitors, so the rivalry between them in a local market could be intense. In the Sydney and
Melbourne radio market there is intense rivalry between triple J and Triple M, each vying for

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position as premium radio station for the youth market. However, one station is government-
owned and has no advertisements, while the other is a commercial operation.

The value of strategic group analysis

Opinions vary about the value of strategic group analysis as a tool for understanding industry
dynamics and structure. Some even argue that there is no convincing evidence that strategic
groups exist or that a firm’s financial performance is influenced by membership within a certain
strategic group. Another criticism is that studying the actions of companies within a strategic
group may not yield any information that would not be captured by analysing an entire industry
and individual firms within it. However, recent research shows that there is ‘limited evidence
that a rigorous search for strategic groups may prove fruitful’. This evidence suggests that
caution should bç taken in studying strategic groups, but that the analysis can help a firm in
efforts to understand the industry in which it competes and to identify its most relevant
competitors. Thus, as with all tools, the benefits and limitations of strategic group analysis
should be recognised before the firm uses it to better understand an industry’s structure.
The next step in examining the industry’s competitive structure is to study the t market positions
of rival companies. One technique for revealing the competitive positions of industry participants
is strategic group mapping. This analytical tool is useful for comparing the market positions of
each firm separately or for grouping them into like positions when an industry has so many
competitors that it is not practical to examine each one in depth.

The procedure for constructing a strategic group map and deciding which firms belong in which
strategic group is straightforward:

• Identify the competitive characteristics that differentiate firms in the industry typical
variables are price/quality range (high, medium, low); geographic coverage (local, regional,
national, global); degree of vertical integration (none, partial, full); product-line breadth
(wide, narrow); use of distribution channels (one, some, all); and degree of service offered
(no-frills, limited, full).
• Plot the firms on a two-variable map using pairs of these differentiating characteristics.
• Assigns firms that fill in about the same strategy space to the same strategic group.
• Draw circles around each strategic group, making the circles proportional to the size of the

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 group’s respective share of total industry sales revenues.

CUSTOMER ANALYSIS
This most valuable activity related in environment analysis since although the organizations have
many cost centers, they have only one revenue center – the customer. Most successful
organizations are characterized by their ability to retain customers over the long term. This implies
that customers should not only buy once from organization, but should indulge in repeat
purchasing. It is useful therefore to think of a lost sale as a lost customer.

There are four key benefits to developing long term strategic perspective with customers;
1. There is the concept of the lifetime value of the customer
2. It is considered more expensive to attract a new customer than to maintain on existing one
3. The more interactions an organization has with an individual or client, the more opportunity
the organization has to develop a better understanding of their needs and then satisfy them
4. Satisfied long-term customers are a significant source of referred business. The more
satisfied customers are with an organization, the more likely they are to spend positive word
of mouth and encourage others to use the same organization.

a) Market Segmentation:
This is based on the fact that customers within a particular industry do not have identified needs.
Attempts to target the entire market in an industry is less successful than identifying segments of
specific need within the industry and satisfying the needs of each segment in a higher degree.
Each segment needs to be identified, described and understood and then predicting the behavior
of buyers. Otherwise, failure would lead to jeopardizing the effective performance of the market.

Before deciding to target a particular market segment, an organization must ensure that the
segment is: measurable, accessible, responsive, substantial, and unique. Upon proper screening a
proposed segment, an organization might need to adjust its strategy especially if:

i) The target marked does not show any distinctive characteristics in terms of need or
responsiveness. There is need to redefine the market more narrowly to ensure differentiation.

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ii) The chosen market is not substantial enough to be profitable. In this, the basis of target
market should be broadened to form one significant segment.
b) Customer Motivation:
It is important to discover what drive purchase decision in a given segment. This makes an
organization to develop key resources and skills that it can use to create a sustainable
competitive advantage in its market segments.

c) Unmet Needs of Customer Groups:

Discovering the unmet needs of different groups of customers requires an intimate knowledge of
the market place. The organization needs to develop ways of improving or meeting unmet needs
by either coming up with the right products/services of making the structure, system and
management style reflect the changes.

d) Greeting a customer profile:

The information discussed above should be analyzed to create a profile of the typical customer.
The profile is used in marketing program development designed to satisfy customers. A typical
customer profile addresses the following questions:

i. What benefits does the customer seek from the product/service?

ii. What socioeconomic factors influence demand for this product/services
iii. How do various elements of the organization’s marketing program influence
customers?
iv. Where do customers actually make the decision to buy our products/services
v. When is the decision made to buy our product or service?
vi. Why do customers choose our products/services in preference to those of our
competitors?
vii. Why do customers choose one of our products/services in preference to another?
viii. Who buys our products/services?
ix. Who buys our competitors’ products/services and why?
Together with the above answers are the demographic understandings of customers.

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 Summary
In this lecture we have learnt that the purpose of a carrying out an industry analysis. We emphasized
the importance of understanding the porter’s five forces of industry analysis and how each of these
forces influences competition and competitive advantage in an industry. We have also looked at
competitor analysis and customer analysis. Without a clear understanding of who you are competing
with and the customers you are competing for, it will be impossible for the firm to come up with
sustainable competitive advantage.

Using an industry you are familiar with, identify and discuss the application of porter’s five forces. Based
on this analysis, what is the most critical bases of competitive advantage in this industry?

Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases; 8th Ed.
Prentice Hall International; United Kingdom.
3. Wheelen, T.L., & Hunger, J.D. (2000). Strategic Management and Business Policy (7th ed.). MA: Addison
Wesley.

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 LECTURE 8
SETTING LONG-TERM OBJECTIVES

I welcome you to lecture eight, our focus now shifts from analysis to strategy formulation
On completion of this module, you should be able to:
• The link between long term objectives and the company mission
• The key performance areas that organizations commonly set their long term objectives
• The qualities of effective long term objectives

INTRODUCTION
The company mission encompasses the broad aims of the firm. Goals give a general sense of
direction but are not intended to provide specific benchmarks for evaluating the firm's progress
in achieving its aims. Objectives provide such benchmarks. Long-term objectives are statements
of the results a firm seeks to achieve over a specified period, typically three to five years.
Formulation of grand strategies provide a comprehensive general approach in guiding major
actions designed to accomplish the firm's long-term objectives.

Key Performance Areas for Setting Long-Term Objectives

Strategic managers recognize that short-run profit maximization is rarely the best approach to
achieving sustained corporate growth and profitability. To achieve long-term prosperity, strategic
planners commonly establish long-term objectives in seven areas:
1. Profitability:
The ability of any firm to operate in the long run depends on attaining an acceptable level of
profits. Strategically managed firms characteristically have a profit objective, usually
expressed in earnings per share or return on equity.

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2. Productivity
Strategic managers constantly try to increase the productivity of their systems. Firms that
can improve the input-output relationship normally increase profitability. Commonly used
productivity objectives include: number of items produced or the number of services
rendered per unit of input. But mostly stated in terms of desired cost decreases.

3. Competitive Position:
One measure of corporate success is relative dominance in marketplace. Firms establish an
objective in terms of competitive position, often using total sales or market share. Objective
with regard to competitive position may indicate a firm's long-term priority,

4. Employee Development
Employees value education and training, in part because it leads to increased compensation
and job security. Providing such opportunities often increases productivity and decreases
turnover.

5. Employee Relations:
Whether or not they are bound by union contracts, firms actively seek good employee
relations. Proactive steps in anticipation of employee needs and expectations are
characteristic of strategic managers. Productivity is linked to employee loyalty and to
appreciation of managers' interest in employee’s welfare. Objectives to improve employee
relations should be set expressed in form of safety programs, worker representation on
management committees, and employee stock option plans.

6. Technological Leadership
Firms must decide whether to lead or follow in the marketplace. Either approach can be
successful, but each requires a different strategic posture. Certain firms state an objective
with regard to technological leadership.

7. Public Responsibility

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 Managers recognize their responsibilities to their customers and to society at large. Many
firms seek to exceed government requirements. They work not only to develop reputations
for fairly priced products and services but also to establish themselves as responsible
corporate citizens.

Qualities of Effective Long -Term Objectives

1. Acceptable
Managers are most likely to pursue objectives that are consistent with their preferences.
Long-term corporate objectives should be acceptable to groups external to the firm.
2. Flexible
Objectives should be adaptable to unforeseen or extraordinary changes in the firm’s
competitive or environmental forecasts. One way of providing flexibility while minimizing
its negative effects is to allow for adjustments in the level, rather than in the nature, of
objectives
3. Measurable
Objectives must clearly and concretely state what will be achieved and when it will be
achieved. Thus, objectives should be measurable over time.
4. Motivating
People are most productive when objectives are set at a motivating level: one high enough
to challenge but not so high as to frustrate or so low as to be easily attained. The problem is
that individuals and groups differ in their perceptions of what is high enough.
5. Suitable
Objectives must be suited to the broad aims of the firm, which are expressed in its mission
statement. Each objective should be a step toward the attainment of overall goals.
6. Understandable
Strategic managers at all levels must understand what is to be achieved. They also must
understand the major criteria by which their performance will be evaluated. Objectives must
be so stated that they are as understandable to the recipient as they are to the giver.

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 7. Achievable
Objectives must be possible to achieve. Turbulence in the remote and operating
environments affects a firm's internal operations, creating uncertainty and limiting the
accuracy of the objectives set by strategic management

Summary
In this lecture we have appreciated that in formulating strategies a firm need to come up with long term
objectives based on seven common performance indicators namely: profitability, productivity, competitive
position, employee development, employee relations, technological leadership and public responsibility. We
have also learnt that organizations long term objectives must be SMART.

Using any of the illustrations you used earlier during the analysis, develop seven long term objectives
based on the firms’ key performance areas.

Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases;
8th Ed. Prentice Hall International; United Kingdom.

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 LECTURE 9

STRATEGY FORMULATION: CORPORATE STRATEGY ALTERNATIVES

I welcome you to lecture NINE on the formulation of corporate strategic options.

By the end of the lecture, you should be able to;
 Demonstrate understanding and source of Competitive advantage
 Explain the ingredients and challenges of coming up with the 'right' strategy
 Explain the main corporate level strategic options

Introduction
Strategic management is complex in theory and in practice because it involves analyzing an
entire organization in terms of an only partially understood and largely uncontrollable
environment. Practitioners and theorists alike now realize that strategy generation and selection
is largely contingency-based. That is, which strategy is “right” or “wrong” is contingent upon the
specific predicament facing an organization at a specific time?

The correct response to a variation in the environment will be determined not only by external
factors but also by the extent to which the structure and resources of the organization can
respond. Some strategies, even though they appear to be right according to all the analysis and
models, will never work because they are poorly implemented.

This belief gives rise to another belief that many CEOs select poor strategies because they don’t
know enough about strategic management, and many management consultants recommend poor
strategies because they don't know enough about the organization and its industry.

Avoiding such uncertainty is why some of the most successful conglomerates are those that hold
the philosophy that head office must be very small (to reduce overheads) and non-dictatorial (to

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give divisional management free rein). Divisional managers are the ones who know their
industry intimately. They generally don't need to be told by head office what strategies to pursue,
especially if head office is relatively ignorant of the industry concerned.

If divisional managers want the freedom to pursue whatever strategy they think best, they must
understand the rules. If head office is not to interfere, each division can only be assessed I its
financial performance. Any sustained lack of such performance usually requires divisional
management to start looking for another job!

The 'right' strategy is very elusive. It must:

 Fulfill a real market need
 Be competitively defended
 Suit internal organizational resources and skills
 Suit the culture of the organization.

Such strategies are every bit as important as more conventional product/market strategies and,
therefore, bring serious thought.

ANALYSIS OF COMPETITIVE ADVANTAGE

Competitive advantage simply refers the ability of the organization to outperform its rivals on
key performance criteria. Competitive advantage emerges as a result of both internal and external
activities. Changes in: external environment and even external to the industry can give an
organization the opportunity to gain competitive advantage over its less responsive rivals.
Alternatively, organizations can develop an advantage over their competitors as a result of
external activities. Internally motivated innovations can significantly reconfigure the value
chain, thereby giving one organization a clear and difficult to replicate advantage.

In developing alternative corporate strategies, it is important that managers carefully

analyze different sources of competitive advantage that organizations, including their own,
possess in the industry. This analysis can be very valuable in providing a broad framework
within which different) approaches can be developed.

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 Levels of Strategy:
Generating strategic alternatives, a distinction must be made between strategies applicable
at the corporate level and those applicable at the business level.
a) Corporate strategy refers to the management of the entire organization. In the private
sector this means more than one line of business and, in fact, might mean entire ups of
companies and many more product/service lines. Corporate strategy decisions concern an
assessment of which businesses an organization should continue to operate, from which it
should withdraw, and in which new areas of business it should invest. Corporate-level and
business-level strategies are separate and distinct from an analytical viewpoint.

In the public sector, corporate strategy involves a collection of functions or divisions, each
with a specific and different purpose, and usually with a different client/customer base. For
example, the corporate-level strategy of a transport department concerns overall issues
related to all sects of transportation including roads, rail, safety, capital works, maintenance
and so on. Here, corporate-level strategic decisions concern the addition (or deletion) of
functions or departments, then the clearly designated role of most public sector
organizations, the scope to practice corporate, strategy is somewhat limited in comparison
with private sector organizations.

b) Business strategy refers to the management of a discrete unit, either as a separate entity
or as part of a larger organization. In the private sector, this means deciding how an
organization intends to conduct its activities for a particular product/service or group of
related products/services public sector, business strategy refers to the effective and efficient
operation of each depart has function of servicing a discrete customer base or need.

Many public service operations definition single-function so that they have scope only for
business strategy. Some however have several functions that give scope for both corporate
and business strategy.

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 CORPORATE LEVEL STRATEGIC ALTERNATIVES
Corporate strategy aims at determining the choice of direction for the firm as a whole
irrespective of the size of business. This includes the decisions regarding the flow of
financial and other resources to and from a company’s product lines and business units.

Corporate strategy deals with three key issues for growth the corporation as a whole:
a) The firm’s overall orientation toward growth (directional strategy).
Directional strategy is composed of growth, stability and retrenchment strategies.
Vertical and horizontal integration and concentric and conglomerate diversifications
and international entry strategies.
b) The industrial or markets in which the firm completes through its products and
business units (portfolio). Portfolio analysis is a technique for managing a corporate
product lines and business units to maximize cash flow.
c) The manner in which management coordinates and transfers resources and
cultivates capabilities among product lines and business units (parenting strategy).
Patenting strategy aims to use capabilities found in various parts of the corporation to
generate synergies across these units.

GRAND (DIRECTIONAL) STRATEGIES:

Three questions are important:
 Should we expand, cut back or continue our operations unchanged?
 Should we concentration our activities within our current industry or should we
diversify into other industries?
 If growth or expansion is selected, should we do so through internal development
or through external acquisitions, mergers or strategic alliances?

1. GROWTH STRATEGIES:
These are strategies expend the company activities. This has two major strategies:
a) Concentrate strategies: This applies when a company’s current products lines have real
growth potential. Two major sub-strategies are:

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 i. Vertical growth or vertical integration: This relates to the degree to which a firm
operates vertically in multiple locations on an industry’s value chain from extracting
raw materials to manufacturing to retailing.
ii. Backward integration: Is going backward on a industry’s value chain by assuring a
function previously provided by a supplier.
b) Horizontal growth: Is achieved by expanding the firm’s products into other geographic
locations and or by increasing the range of products and services offered to current markets.

2. DIVERSIFICATION STRATEGIES:
The golden rule of corporate strategy is that it must add value to the combined businesses.
There two main diversification strategies:-
a) Concentric (related): This may be very appropriate strategy when a firm has a strong
competitive position but industry attractiveness in low. The point of commonality may
be similar technology, customer usage, distributor, managerial skills or product
similarity.
b) Conglomerate (unrelated): Most used when the current industry is unattractive and firm
lacks outstanding abilities or skills that it could easily transfer to related products or
services in other industries. The unrelatedness is applied to the industry in which it
enters into:

3. STABILITY STRATEGIES: IS THIS A STRATEGY?

Stability can be termed as no strategy but as a pause between strategies. However, stability
is a strategy in itself since no decision is the same as making a decision, thus it is a strategy
by default.
Stability is appropriate strategy for business where owners detest growth beyond his/her
abilities to manage it personality. Stability is perceived only as a viable short-term strategy
while strategic managers are waiting for key factors needed for growth to fall into place.
Some of the more popular of these strategies are: the pause/proceed with caution, no
changes and profit strategies.
1. A pause/proceed with caution strategy is a timeout. It is an opportunity to rest before
continuing a growth or retrenchment strategy. This is deliberate in nature.

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 2. A no change strategies – a decision to do nothing new.
3. A profit strategy – Decision to do nothing new in a worsening situation and act as if
problems are temporary.

4. RETRENCHMENT STRATEGIES:
This is applied when a firm has a weak competitive position in some or all of its product
lines resulting from poor performance. E.g. poor sales and profits. This may take the
following approaches/strategies:
i. Turnaround strategy: Aim to improve of operational efficiency and is probably more
appropriate when a corporation’s problems are persuasive, but no yet critical.
ii. Captive strategy – Is giving up independence in exchange of security.
iii. Sellout/Divestment strategy: if unable to pull itself up or to find a customer to which
it can become a captive, a firm may sellout and leave the industry. If the corporation
has multiple lines of business and sell out low growth potential divisions, this is
termed as divestment.
iv. Bankruptcy/liquidation strategy: Bankruptcy involves giving up management of the
firm to the court in return for some settlement of corporation’s obligations.
v. Liquidation – means total termination of the firm.

Summary
In this lecture, we have learnt the following:
The 'right' strategy is very elusive, but is very crucial for competitive advantage. The right strategy is
one that can Fulfill a real market need, Be competitively defended, Suits internal organizational
resources and skills and Suits the culture of the organization. At the corporate level make strategic
decision that determine the organizations overall direction. These directional strategies will determine
the strategic direction of the organization to grow, diversify, seek stability or retrenchment.

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 ?
Using the illustration of the result of IFAS and EFAS analysis done earlier, suggest the most
appropriate corporate strategies for your selected organization.
Should be organization choose one or a combination of these corporate level strategic options?
What should be the key attributes/ingredients of the strategic options that you choose (attributes of the
right strategy)?

Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases;
8th Ed. Prentice Hall International; United Kingdom.
3. Hubbard, U., Morkel, A., Devenport, S., & Beamish, P. (2006). Cases in Strategic Management.
Frenchs Forrest, NSW: Pearson Education.

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 LECTURE 10

STRATEGY FORMULATION: BUSINESS LEVEL STRATEGIC OPTIONS

Welcome you to lecture ten on the development of business level strategic options.
By the end of the lecture, you should be able to;
i. Explain Why firm must have business strategies
ii. Explain key generic competitive strategies by Michael Porter
iii. Come up with specific strategic options under each generic strategic option
iv. Relate the functional strategies with the business level strategies

Introduction
Business strategy focuses on improving the competitive position of a company’s or business
unit’s products or services within the specific industry or market segment that the company
or business unit serves. Business strategy can be competitive (battling against all
competitors for advantage) or cooperative (working with one or more competitors to gain
advantage against other competitors). Just as corporate strategy asks what industry(ies) the
company should be in, business strategy asks how the company or its units should compete
or cooperate in each industry.

Business strategies
Every business firm should have a business strategy for every industry or market segment it
serves. A business strategy aims at improving the competitive position of a business firms
products or services in a specific industry or market segment. Firms must therefore have
business strategies even if they are not organized on the basis of operating divisions.
Business strategy can be competitive and/or cooperative. Just as corporate strategy asks
what industry (ies) the company should be in, business strategy asks how the company or its
units should compete or cooperate in each industry. Nevertheless, it is still possible that

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 some business firms do not have clearly stated business strategies. If they hope to be
successful, however, they must have at least some rudimentary (even though unstated)
position they take in terms of getting and keeping customers or clients.
Porter’s Generic business strategies

Michael Porter proposes two generic competitive strategies for outperforming other
organisations in a particular industry: lower cost and differentiation. Basically, competitive
strategy raises the following questions:
 Should we compete on the basis of low cost (and thus price), or should we differentiate
our product or services on some basis other than cost, such as quality or service?
 Should we compete head to head with our major competitors for the biggest but most
sought-after share of the market but also profitable segment of the market?

1. Cost leadership is a low-cost competitive strategy that aims at the broad mass market and
requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost
reductions from experience, tight cost and overhead control, avoidance of marginal customer
accounts, and cost minimization in areas like R&D, service, sales force, advertising and so
on. Because of its lower costs, the cost leader is able to charge a lower price for its products
than its competitors and still make a satisfactory profit.

2. Differentiation is aimed at the broad mass market and involves the creation of a product or
service that is perceived throughout its industry as unique. The company or business unit
may then charge a premium for its product. This specialty can be associated with design or
brand image, technology, features, dealer network, or customer service. Differentiation is a
viable strategy for earning above-average returns in a specific business because the resulting
brand loyalty lowers customers’ sensitivity to price (Wheelen and Hunger, 2000).

3. Focused business strategies focus on a particular buyer group or geographic market and
attempts to serve only this niche to the exclusion of others.

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FUNCTIONAL STRATEGIES
These are 5 in which functional/ operational strategies should be formulated;
 Human Resource strategies
 Marketing strategy
 Production strategy
 Research & Development strategy
 Financial strategy

i) Human Resource strategies

This is the most important functions are in which there as need to develop strategy in Human
Resource, the functions include;
 Attracting, assessing, motivating and retaining a number of employees required to run the
business effectively.

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 This function is also responsible for the formative function planning and evaluating the
loyalty of the work environment. Take-collectively, the set of decision concerning people is
what is considered as H.R strategies.
 Like other strategies, it is issued on analyzing the internal and external environment.

External analysis may include activities such as

 Tracking union basics and regulation affecting employment
 Studying in labour unions and labour unions negotiation and
 Analyzing changes in labour market.

Internal analysis in the other hand include

 Investigating specific area in low productivity
 Excessive labour turnover and
 High on the job accorded rate as well are ability to motivate staff.
 Co. with good Human Resource strategies with specific characteristics
 The Co. has a genuine long term for people and also processes a positive view of employees
as an assets
 They are good training, and advancement system
 They pay well and have good compensation programme
 They are also able to retain employee’s low labour turnover
 They are good internal communication and open system
 Encourage employees participation in decision making there is top management commitment
to Human Resource.

ii) Marketing strategies

Marketing specialist in an organization normally focus on determining appropriate marketing for
the business offering in term of product and services. There is need to develop strategies in 4
major areas
 Product strategy
 Pricing strategy

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  Distribution strategy
 Promotion strategy

iii) Production strategy

Production or operation strategy requires people in such department to focus on making decision
about required plant capability manufacturing and production procession and lavatory
requirement. There are two important aspects of production or operation strategies;
 Strategy should control or low cost of production
 It should improve efficiency and productivity of plan operation.

iv) Research and development strategy

In many organization and industries the rural become questionable without research and
development. This is because – occur in taste and preferences of customer and some products
reach the decline stage. It is the role of R &D specialist to come up with new product for the
organization. R & D is very important. A view product can be highly profitable. The research has
shown that one characteristic of a successful Co. is one that is innovative Microsoft e.g. R&D
requires well planned strategies because it is normally time consuming, expressive and risky
It is however caution to encourage innovative ideas and strategies that can help an organization
to survive.

v) Financial strategies
Financial specialist is responsible for forecasting and financial planning evaluating investment
proposals as well as securing credit and finance for various projects. They contribute to strategy
formulation by accessing the potential project impact of various strategic alternatives and
evaluating the financial condition of the business.

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 Summary
In this lecture, we have appreciated that in order to compete within a product-market; firms need to
develop specific business level strategic options for competitive advantage. These business level
strategic options are based on the corporate strategic options selected at the corporate level
(previous lecture). Based on Michael porter’s generic strategic options, firms can choose to compete
in an industry using one or a combination of differentiation, cost leadership of focus strategic
options.

 What is the relationship of corporate and business level strategic options?

 Using the corporate strategic options developed in the previous lecture, develop the suggest
the appropriate business level strategic options.

Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases; 8 th Ed.
Prentice Hall International; United Kingdom.
3. Hubbard, U., Morkel, A., Devenport, S., & Beamish, P. (2006). Cases in Strategic Management.
Frenchs Forrest, NSW: Pearson Education.

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 LECTURE 11

STRATEGY IMPLEMENTATION

I welcome you to lecture ELEVEN, on strategic implementation.

by the end of the lecture, you should be able to;
 Appreciate the importance of careful implementation of strategies to realize the
desired outcomes
 Identify and explain the key steps in the implementation of strategies
 Explain the main factors that affect (positively and negatively) the process of strategy
implementation and how to manage them

Introduction
Implementing strategy affects an organization from top to bottom: it impacts all the
functional and divisional areas of a business. Although strategy formulation and
implementation are inextricable linked, both are different. Strategy formulation can be
contrasted in the following ways.
 Strategy formulation is positioning forces before the action.
 Strategy implementation is managing forces during the action.
 Strategy formulation focuses on effectiveness.
 Strategy implementation focuses on efficiency.
 Strategy formulation is primarily an intellectual process.
 Strategy implementation is primarily an operational process.
 Strategy formulation requires good intuitive and analytical skills.
 Strategy implementation requires special motivation and leadership skills.
 Strategy formulation requires coordination among a few individuals.
 Strategy implementation requires coordination among many persons

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Implementation issues are the reason why strategies do not get undertaken or why they are
not successful. In this module, we will discuss about organizational structure, staffing and
culture and how they affect the implementation process.

Strategy implementation is the sum total of the activities and choices required for the
execution of a strategic plan. It is the process by which strategies and policies are put into
action through the development of programs, budgets, and procedures. Although
implementation is usually considered after strategy has been formulated, implementation is a
key part of strategic management. Strategy formulation and strategy implementation should
thus be considered as two sides of the same coin. Poor implementation has been blamed for a
number of strategic failures.

To begin the implementation process, strategy makers must consider these questions:
 Who are the people who will carry out the strategic plan?
 What must be done to align the company’s operations in the new intended
direction?
 How is everyone going to do what is needed?

Who implements strategy?

Depending on how the corporation is organized, those who implement strategy will probably
be a much more diverse set of people than those who formulate it. In most large, multi-
industry corporations, the implementers are everyone in the organization. Vice-presidents of
functional areas and directors of divisions or SBUs work with theft subordinates to put
together large-scale implementation plans. Plant managers, project managers, and unit heads
put together plans for their specific plants, departments, and units. Therefore, every
operational manager down to the first-line supervisor and every employee is involved in
some way in the implementing of corporate, business, and functional strategies.

Many of the people in the organization who are crucial to successful strategy implementation
probably have little to do with the development of the corporate and even business strategy.
Therefore, they might be entirely ignorant of the vast amount of data and work that went into

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the formulation process. Unless changes in mission, objectives, strategies, and policies and
their importance to the company are communicated clearly to all operational managers, there
can be a lot of resistance and foot-dragging. Managers might hope to influence top
management into abandoning its new plans and returning to its old ways. This is one reason
why involving people from all organizational levels in the formulation and in the
implementation of strategy tend to result in better organizational performance.

What must be done?

The managers of divisions and functional areas work with their fellow managers to develop
programs, budgets, and procedures for the implementation of strategy. They also work to
achieve synergy among the divisions and functional areas in order to establish and maintain a
company’s distinctive competence.

Developing programs, budgets, and procedures

1. Programs
The purpose of a program is to make the strategy action-oriented. For example, assume Ajax
Continental chose forward vertical integration as its best strategy for growth. It purchased
existing retail outlets from another firm (Jones Surplus) instead of building its own. To
integrate the new stores into the company, various programs would now have to be
developed.
 A restructuring program to move the Jones Surplus stores into Ajax Continental’s
marketing chain of command so that store managers report to regional managers, who
report to the merchandising manager, who reports to the vice-president in charge of
marketing.
 An advertising program.
 A training program for newly hired store managers and for those Jones Surplus
managers the corporation has chosen to keep.
 A program to develop reporting procedures that will integrate the Jones Surplus stores
into Ajax Continental’s accounting system.

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  A program to modernize the Jones Surplus stores and to prepare them for a “grand
opening.”

2. Budgets
After programs have been developed, the budget process begins. Planning a budget is the last
real check a corporation has on the feasibility of its selected strategy. An ideal strategy might
be found to be completely impractical only after specific implementation programs are
costed in detail.

3. Procedures
After the program, divisional, and corporate budgets are approved, standard operating
procedures (SOPs) must be developed. They typically detail the various activities that must
be carried out to complete a corporation’s programs. Once in place, they must be updated to
reflect any changes in technology as well as in strategy. In the case of Aj ax Corporation’s
acquisition of Jones Surplus’ retail outlets, new operating procedures must be established for,
among others, in-store promotions, inventory ordering, stock selection, customer relations,
credits and collections, warehouse distribution, pricing, pay-check timing, grievance
handling, and raises and promotions.

Achieving synergy
One of the goals to be achieved in strategy implementation is synergy between and among
functions and business units. This is the reason why corporations commonly re-organize after
an acquisition. Synergy is said to exist for a divisional corporation if the return on investment
(ROl) of each division is greater than what the return would be if each division were an
independent business.

How is strategy to be implemented? Organizing for action

Before plans can lead to actual performance, a corporation should be appropriately
organized, programs should be adequately staffed, and activities should be directed toward
achieving desired objectives.

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Any change in corporate strategy is very likely to require some sort of change in the way an
organization is structured and in the kind of skills needed in particular positions. Managers
must, therefore, closely examine the way their company is structured in order to decide what,
if any, changes should be made in the way work is accomplished. Should activities be
grouped differently? Should the authority to make key decisions be centralized at
headquarters or decentralized to managers in distant locations? Should the company be
managed like a “tight ship” with many rules and controls, or “loosely” with few rules and
controls? Should the corporation be organized into a “tall” structure with many layers of
managers, each having a narrow span of control (that is, few employees per supervisor) to
better control his or her subordinates; or should it be organized into a “flat” structure with
fewer layers of managers, each having a wide span of control (that -is, more employees per
supervisor) to give more freedom to his or her subordinates?

Structure follows strategy

Alfred Chandler concluded that structure follows strategy — that is, changes in corporate
strategy lead to changes in organizational structure. He also concluded that organizations
follow a pattern of development from one kind of structural arrangement to another as they
expand. According to Chandler, these structural changes occur because the old structure,
having been pushed too far, has caused inefficiencies that have become too obviously
detrimental to bear. Chandler, therefore, proposed the following as the sequence of what
occurs.
New strategy is created.
New administrative problems emerge.
Economic performance declines.
New appropriate structure is invented.
Profit returns to previous level.

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 Summary
Strategy implementation is the sum total of the activities and choices required for the execution
of a strategic plan. It is the process by which strategies and policies are put into action through
the development of programs, budgets, and procedures. Who implement strategy will probably
be a much more diverse set of people than those who formulate it. In large, multi-industry
corporations, the implementers are everyone in the organization.
Involving people from all organizational levels in the formulation and in the implementation of
strategy tend to result in better organizational performance. Corporate strategy lead to changes
in organizational structure, organizations follows a pattern of development from one kind of
structural arrangement to another as they expand.

?
 Describe the process of strategy implementation?
 Identify a business that you would like to analyze. It can be the same business that you chose
for earlier analysis. Discuss the steps and the challenges of implanting strategies in that
organization.
 How can the management ensure adequate support and success in strategy implementation?

Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Wheelen, T.L., & Hunger, J.D. (2000). Strategic Management and Business Policy (7th ed.).
MA: Addison Wesley.

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 LECTURE 12
STRATEGY EVALUATION AND CONTROL

Welcome to lecture TWELVE on strategic evaluation and control.

By the end of the lecture, you should be able to;
 Appreciate the importance of strategic control
 Explain strategy evaluation framework
 Describe different processes of reviewing strategy
 Discuss characteristics of effective strategy-evaluation systems
 Outline types strategic controls

Introduction
Assessment of strategic performance is a difficult but essential part of the strategic planning
process. The correction between a strategy and organization performance is difficult to measure
accurately because of the large number of variables involved. Often, unexpected events like
competitive activities, interest rate changes or surges in demand have significant unexpected
impacts on performance.

Although we might know which variables caused a particular outcome, we might not know the
relative contribution of each variables. As a result, the evaluation of strategic performance may
only be possible at a macro-level by analyzing aggregate performance figures over relatively
long periods of time. Where strategy is implemented via specific projects, performance
measurement is much easier, and we can apply standard evaluation and control methods to
ensure that progress is being made according to plan.

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OVERVIEW OF STRATEGIC CONTROL
The success of any organization is determined by its ability to achieve its fundamental purpose
and live its stated values effectively. Both of these are stipulated in the mission statement.

In practice, however, it is seldom wise to make the mission statement the focus of strategy
evaluation because the dimensions it contains are usually too general to be of much use. For
successful strategy evaluation, specific control procedures must apply:
1. Setting standards
2. Measuring performance
3. Comparing performance with standards
4. Taking corrective action

Without a clear and defined focus for the activity, a great deal of discussion might occur with
little effective assessment and control eventuating. For these reasons, it is essential that an
evaluation framework be established that meets the needs of the organization rather than those of
individuals. The framework must be able to locate and deal with performance issues wherever
they might occur in the strategic management process.

ASSESSING SUCCESSFUL STRATEGIC PERFORMANCE

Many organizations fail to perform rigorous assessment of their performance when they feel they
are doing well. This fail makes them not identify key to their success. Without clear analysis, it
is impossible for the organization to replicate success in the future.

Failure to analysis success leads to complacency which is a big threat to an organization’s long
term survival as major upheavals in the external environment.
To solve this problem, the following questions must be asked:
 Why did we succeed?
 Did any unexpected trends make the achievement of objectives easier?
If the answers is “yes”, then there may be problems with the strategy itself with have not yet
manifested themselves purely because of factors outside the control of the organization.

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INTEGRATING CORPORATE AND BUSINESS LEVEL STRATEGY ASSESSMENT:
In most organizations, public and private, the success and thus the continuation of the
organization depends on the overall performance of multiple business unit rather than one
section. To determine success in this level, a typical strategy assessment procedure at the
corporate level involves a fair degree of management by exceptions – that is assessing only a
few carefully selected units.

The basis of assessment includes:

 Their potential impact on the overall performance of the organization
 The appropriateness of their particular strategy to the rest of the organization; or
 Their outstanding success.

At the corporate level, the strategy assessment criteria used include:

 Appropriateness: Does it reflect corporate strategy and core business objectives?
 Effectiveness: To what extent have agreed objectives been achieved?
 Efficiency: Is resource application maximized in achieving objectives?
 Prudence: Are risks being managed effectively in the implementation process?
These criteria demonstrate that objective and subjective measures are needed that will measures
both quantitative and qualitative data.

A STRATEGY EVALUATION FRAMEWORK:

Strategy evaluation is the final stage in the commonly applied “plan-do-check-act” quality
management cycle.
The choice of strategy assessment tools can vary between organizations, but basis strategy-
evaluation frameworks generally consist of three distinct activities: These are:

Activity 1: Review the strategy and assumptions on which it was based

During the evaluation process, it is important that these underlying assumptions are questioned
and sources of variance evaluated. For example, as competitors react to the organization’s
strategy, different opportunities and threats will emerge in the environment.

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What was previously an organizational strength might be considered a weakness due to changing
consumer tastes. Where major changes have occurred concerning original strategies, then
modifications may be essential.

There are different processes of reviewing strategy among them:

 A continuous watching brief: This process is required when potential problem areas must
be identified before they become a major issue.
 A series of regular formal reviews: This is the most common process for strategy review,
especially where strategy is implemented project by project. For example, performance
reports can be generated on a weekly, monthly, quarterly and annual basis to provide a
formal monitoring process for key performance indicators.
 Reviews at the end of each critical path element and end phase: For example, if the
organization has a stated objective of achieving 15% market share within twelve months,
a review of market share and related issues should be conducted at the end of the twelve-
month period.

Activity 2: Measure organizational performance:

The key objective is to ascertain the extent to which strategies have been applied and achieved.
This must be done in a specific manner. Major tools used to avoid ambiguity are: market share,
profit margins, asset growth, sales growth and return on investments.
Likewise, qualitative reports, qualitative criteria such as managerial assessment of risk should be
used to evaluate performance.
I. Criteria for Evaluating Strategy: Rummelt (1996) has outlined four criteria that
can be used to evaluating any strategy. These are:
i. Consistency: Strategy must not present mutually inconsistent goals or goals are
consistent with the organization’s overall strategic direction.
ii. Consonance: This refers to the need to consider strategy within the context of sets of
trends rather than individually against single trends. A change in consumer behavior
is rarely the result of a single trend; rather, it usually represents the outcome of a
combination of trends.

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 iii. Feasibility: This refers to the extent to which the strategy can be implemented
without putting the organization’s resources under undue strain.
iv. Advantage: Strategies should provide for or maintain the organization’s competitive
advantage relative to the competition. Such a strategy should be evaluated on the
basis of its contribution to the unique position of the company in the market place.

II Characteristics of effective strategy-evaluation systems:

The success of the evaluation process depends of the systems used and how they are used.
Effective strategy evaluation systems should have the following characteristics:
i. Economical; too much information is a bad as too little.
ii. Meaningful; Strategy-evaluation activities must be meaningful and relate directly to the
organization’s objectives
iii. Timely: Strategy-evaluation activities should provide timely information.
iv. Contextual: Strategy-evaluation activities should provide information that is contextual
and designed to show a true picture of what is happening.
v. Action-oriented: Information from strategy evaluation activities should be action-oriented
rather than information oriented and should be directed at those individuals in the
organization who are responsible for taking the relevant action
vi. Cooperation: The strategy evaluation process should facilitate cooperation between
departments during decision making to foster mutual understanding rather than
dominated activities.

Activity 3: Take corrective action

Key criteria to consider when developing and implementing a plan of corrective action to close
any gaps between anticipated performance and actual performance are:
i. Adaptiveness: To what extent is the organization able to adapt its current strategies to
reflect changes in the environment? Is it possible for the gaps to be closed through
incremental adaptation of existing programs, or is a major rethinking of strategy
required?
ii. Responsiveness: To what extent is the organization able to respond to changes and
unexpected developments in a timely and efficient way?

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 iii. Efficiency: Is the organization able to make the required changes in an efficient manner?

IMPLEMENTING STRATEGIC CONTROLS:

The control of a strategy should be the concern of all staff involved in the development and
implementation.
Some principles for effective strategic control process are:
1. Establish “loose/tight” controls. That is, allow no variation to control processes for all
critical elements of performance, but allow lower – level managers to develop and
implement their own “local controls”.
2. Remain objective in assessing strategic, even those that senior management had a major part
in establishing.
3. Select carefully the composition of important committees/teams in the assessment process.
The assessment group needs to be qualified, objective and well balanced in terms of
representation from across the organization.

Types of controls:
There are three basic types of control:
1. Steering controls: There are designed to detect deviations from set standards before a
sequence of events commences. For example, checking the specifications of inputs/raw
materials before allowing them to enter the production line or running a check on a
computer system before allowing it to operate in an actual situation.
2. Screening controls: These are controls that occur during processing and provide tests that
must be passed before the process can continue for example, quality control inspections on
production line.
3. Output controls: These measure the results of a completed activity – for example, customer
satisfaction surveys or an analysis of the impact of an advertising campaign.

Budgets as Strategy-Control Mechanism:

A budget is a formal statement of the financial resources set aside for carrying out specific
activities in a given period of time e.g. a month or year. Budgets control are the most
encountered management controls.

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 SUMMARY
For successful strategy evaluation, specific control procedures must apply: which include
Setting standards, Measuring performance, Comparing performance with standards and Taking
corrective action. We appreciated that failure to analysis success leads to complacency which is
a big threat to an organization’s long term survival. To solve this problem, the following
questions must be asked: Why did we succeed? And Did any unexpected trends make the
achievement of objectives easier?
Integrating corporate and business level strategy assessment; to determine success in this level,
a typical strategy assessment procedure at the corporate level involves a fair degree of
management by exceptions. Some principles for effective strategic control process are; establish
“loose/tight” controls, remain objective in assessing strategic, select carefully the composition.
There are three basic types of control: steering controls, screening controls, output controls.

?
 If the organization is already doing well, is there need to carry out an evaluation bearing
in mind the evaluation is costly and time consuming?
 Why should the strategy evaluation question the strategy and assumptions on which it was
based on?

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Further reading:

1. Pearce and Robinson (2007): strategic management, 5th edition Mc Graw-Hill, New York.
2. Johnson, G., Scholes, K. & Whittington, R. (2008). Exploring Corporate Strategy: Texts & Cases; 8th
Ed. Prentice Hall International; United Kingdom.
3. Wheelen, T.L., & Hunger, J.D. (2000). Strategic Management and Business Policy (7th ed.).
MA: Addison Wesley.

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