Lesson 1: Introduction to Strategic Management

Topic: What is Strategic Management?

Learning Outcomes: At the end of this module, you are expected to:

1. Identify the Nature & Characteristics of Strategies

2. Define Strategic Management
3. Know the Process/ Elements of Strategic Management
4. List the Benefits of Strategic Management
5. Define Key Terms in Strategic Management
.
LEARNING CONTENT

Introduction:

The word Strategy comes from the Greek word ‘Strategos’ which means a general. In military science,
Strategy literally means the art & science of directing military forces in a war or battle. Today, the term strategy
is used in business to describe how an organization is going to achieve its overall objectives. Most
organizations have several alternatives for achieving its objectives. Strategy is concerned with deciding which
alternative is to be adopted to accomplish the overall objectives of the organization.

Strategy is a Comprehensive long-term plan. It tries to answer three main questions:

MGMT 1063 – Strategic Management | 1

Lesson Proper:

Definition of Strategy:

The term Strategy can be defined in a Simple words as follows:

Nature & Characteristics of Strategies

1. Objective Oriented
Strategies are developed in order to achieve the objectives of the organization. To formulate strategies,
one has to know the objectives that are to be pursued & also the policies that must be followed.

2. Future Oriented
Strategy is a future oriented plan. It is designed to attain future position of the organization. Through
Strategy, management studies the present position of the organization & their aims at attaining the
future position of the organization.

The strategy provides answer to certain questions relating to

 Profitability of the present business
 Continuity of the present business
 Entry into difference businesses in future
 Effectiveness of the present policies of the organization.
 Growth & expansion of the business in the long run.

MGMT 1063 – Strategic Management | 2

3. Unified, Comprehensive and Integrated
A Strategy is not Just plan. It is a unified, Comprehensive & integrated plan. It is unified as it unifies all
the parts of sections of the organization together. It is comprehensive as it covers all the major aspects
or areas of the organization. It is integrated as all the parts of the plan are compatible with each other
and fit together well.

4. Strategy Alternatives
Organizations need to frame alternative strategies. It is not sufficient to frame one or two strategies.
Small organizations survive with one or two strategies due to fewer complexities in their business.
However, large organizations need to frame alternative strategies in respect of growth & survival of the
organization.

It can be into fours broad groups:

 Stable Growth Strategy
 Growth Strategy
 Retrenchment Strategy
 Combination Strategy

5. Relates to the Environment

The internal and external environment affects the strategy formulation & implementation. The internal
environment relates to mission& objectives of the firm, the labor management relations, and the
technology used, the physical, financial & human resources. The external environment relates
Competition, Customer, Channel, intermediaries, Government policies & other social, economic &
political factors.

6. Allocation of Resources
For effective implementation of Strategy, there is a need for proper allocation of the resources. Proper
allocation of resources is required to undertake the various activities so as to attain objectives.

The resources can be broadly divided into 3 groups:

 Physical resources such as plant & machine
 Financial resources i.e. Capital
 Human resources i.e. Man Power

7. Universal Applicability
Strategy is universally applicable. It is applicable to business organization as well as to non-business
organization. This is because every organization need to frame strategies for their growth & survival.
The presence of Strategies keeps the organizations moving in the right direction.

8. Periodic Review
Strategies need to be reviewed periodically. Such review is required to revise the strategies depending
upon the changing needs of the business. Periodic review of strategies is required to gain competitive
advantage in the market.

9. Applicable to all functional areas

Strategies are applicable to all functional areas. The functional areas include production, marketing,
finance, human resources management, etc. Strategies aid in planning, organizing, directing &
controlling activities in all functional areas.

Strategic Management

Definition

MGMT 1063 – Strategic Management | 3

Process/ Elements of Strategic Management
The strategic management process can be broadly divided into four phases. Each phase consists of a number
of steps.

The four phases are as follows:

A. Environmental Scanning
- includes identifying an organization’s external opportunities and threats, determining internal strengths
and weaknesses.

External Environment
Parts:
1. Task Environment – elements or groups that directly affect and are affected by organization’s
major operations. Ex. Stockholders, government, suppliers, etc.
2. Societal Environment – includes general forces that do not directly affect the short run activities
of the organization but can influence its long run decisions. Ex. STEEPLED

Internal Environment
Parts:
1. Corporation’s Structure (chain of command) – the way organization is organized in terms of
communication and workflow. It is shown in the organization chart.
2. Corporation’s resources (human, financial, physical, information) – assets that from the raw
materials for the production of organization’s products and service.
3. Corporation’s culture (rules of conduct) – pattern of beliefs, expectations and values shared
by the corporation’s members.
i. acceptable behavior from top to bottom
ii. Reflects the mission of an organization. This is who we are, this is what we do,
this is what we stand for
Ex. Participative employees

B. Strategy formulation
- Strategy formulation can also be referred as strategic planning.
- It includes developing a vision and mission, establishing long-term objectives, generating alternative
strategies, and choosing particular strategies to pursue plan.

1. Mission – refers to the purpose or reason for the organization’s existence. It’s the declaration of an
organization’s “reason of being”.
MGMT 1063 – Strategic Management | 4
2. Objective – end results of planned activity. It states what is to be accomplished by when and should be
quantified.
Note: the achievement of objective results in the fulfillment of corporation’s mission.
3. Policies – broad guidelines which serves to link formulation of strategy and its implementation
4. Strategies – a statement of “how” an organization achieves its mission and objectives. It maximizes
competitive advantage (what the organization has that other do not have)

Hierarchy of Strategy Levels:

1. Corporate Strategy – explores the ways in which a firm can develop a favorable portfolio strategy.
2. Business Strategy – emphasizes improvement of the competitive position of a corporation’s product or
services in the specific industry or market segment served by the division
3. Functional Strategies – maximizing of resource productivity

a. Deciding what new businesses to enter,

b. What businesses to abandon,
c. How to allocate resources,
d. Whether to expand operations or diversify,
e. Whether to enter international markets,
f. Whether to merge or form a joint venture,
g. How to avoid a hostile takeover.

The strategy formulation involves the following steps:

1) Framing Mission & Objectives
The first step in the formulation of a strategy is to frame mission & objectives of the firm. The mission states
the philosophy & the purpose of the organization. The objectives are the aims or ends, which the
organization seeks to achieve. The mission & objective must be clearly defined.

2) Analysis of the Internal Environment

After setting the objectives or goals, the management needs to make an analysis of the internal
environment. The analysis of the internal environment may be done prior to setting of objectives. The
internal environment refers to manpower, machines, methods, procedures & other resources of the
organization. A proper analysis of the internal environment reveals strength & weakness of the organization.

3) Analysis of the External Environment.

The management must conduct an analysis of the external environment. The external environment refers
to government, competition, consumers, technological development & other environment factors that affect
the
organization. A proper analysis of the external environment reveals opportunities & threats

4) Gap analysis
The management also conducts “gap analysis”. For this purpose, the management must compare &
analyze its present performance level & the desired future performance level. Such a comparison would
reveal the extent of gap that exists between the present performance & future expectations of the
organization. If there is a sufficient gap, the management must think of suitable measures.

5) Framing Alternative Strategies

After making a SWOT analysis & the Gap Analysis, the management needs to frame alternative strategies
to accomplish the objectives of the firm. There is a need to frame alternative strategies as some strategies
may be put on hold & other strategies may be implemental.

6) Choice of strategies
The organization cannot implement all the alternative strategies. Therefore, the firm has to be selective.
The organization must select the best strategy depending upon the situation. Before selecting the best

MGMT 1063 – Strategic Management | 5

strategy, the organization needs to conduct a cost-benefit analysis of the alternative strategies. The
strategy, which gives the maximum benefits at minimum cost, would be selected.

C. Strategy Implementation
- requires a firm to establish annual objectives, devise policies, motivate employees, and allocate
resources so that formulated strategies can be executed
- often called the action stage. The process by which strategies and policies are put into action through the
development of programs, budgets and procedures.

1. Programs – statement of the activities or steps needed to accomplish a single use plan. It makes the
strategy action oriented.
2. Budgets – statement of program in financial terms
3. Procedures – are system of sequential steps or techniques that describe in detail how a particular task
or job is to be done

The strategies are formulated for each and every functional department such as production, marketing,
finance & personnel. Once the strategies are formulated, then the next stage is implementation of such
strategies.

The strategy implementation involves the following elements:

1) Formulation of plans, programs and projects
There is a need to frame plans, programs and projects. Strategy by itself does not lead to action. For
instance, if expansion strategy is formulated, then various types of expansion plan need to be formulated.
An expansion plan would involve expansion in production capacities of existing product &/or development
and production of new products Plans result in different kinds of programs. A program is a broad plan which
includes goals policies, procedures and other aspects required to implement a plan. For instance, there
can be R & D program for the development of new product. Programs lead to the formulation of project
which is a specific program for which the time schedule and cost is predetermined.

2) Project Implementation
A project passes through various stages before the actual implementation. The various phases include
 Conception phase, where idea are generally generates for future projects
 Definition phase, where preliminary analysis of the project is undertaken.
 Planning & Organizing phase, where the planning and organizing of resources required to
undertake the project is decided
 Implementation Phase, where details of the implementation of the product such as awarding
contracts, order placement etc. are decided.
 Clean-up Phase, which deals with disbanding the project infrastructure & banding over the plant to
the operating personnel.

3) Procedural Implementation
The organization needs to be aware of regulatory frame work of the regulatory (government) authorities
before implementing strategies. The regulatory elements to be reviewed are as follows:
 Regulation in respect of foreign technology
 Foreign collaboration procedures
 FEMA regulation
 Capital issue guidelines
 Foreign trade regulations etc.

4) Resource Allocation
It deals with the arrangement & commitment of physical, financial and human resources to various
activities so as to achieve the organization goals. The strategies need to allocate resources to the various
division, department etc. The resources need to be allocated depending upon the importance of activities in

MGMT 1063 – Strategic Management | 6

each of the departments or divisions. It includes allocation of manpower, machines, tools, money and other
resources for each and every activity.

5) Structural Implementation
Organization structure is the frame work through which the organization operates. There can be various
organizational structure for the implementation of Strategy, it can be
 Entrepreneurial (line) structure, which is suitable for small owner manager organization.
 Functional structure, which is suitable for multi-department organization.
 Matrix Structure, which is suitable for multi-project/product organization.

6) Functional Implementation
It deals with the implementation of the functional plans and policies. For effective implementation of
strategy, strategies have to provide direction to functional managers regarding the plans and policies to be
adopted. Plans and policies need to be formulated and implemented in all the functional areas such as
production, marketing, finance and personnel.

7) Behavioral Implementation
It deals with those aspects of strategy implementation that have an impact on the behavior of strategists in
implementing the strategies. It deals with issues of leadership, corporate culture, corporate politics and use
of power, personal value, business ethics and social responsibility.

D. Strategy Evaluation
- reviewing external and internal factors that are the bases for current strategies, measuring performance,
and taking corrective actions.
- The process in which corporate activities and performance results are monitored so that actual
performance can be compared with desired performance.

Evaluation of strategy is that phase of strategic management process in which managers try to assure that
the strategic choice is properly implemented and is meeting the objectives of the enterprise. It involves the
following elements.

1) Settling of Standard
The strategists need to establish performance targets standards and tolerance limit for the objectives,
strategies and implementation plans. The standard can be established in terms of quantity, quality, cost and
time. Standards need to be definite and they must be acceptable to employees.

2) Measurement of Performance
The next step is to measure the actual performance. For this, the manager may ask for performance
reports from the employees. The actual performance can be measured both in quantitative as well as
qualitative ways. The actual performance also needs to be measured in terms of time and the cost factor.

3) Comparison of actual performance with standards

The actual performance needs to be compared with the standards. There must be objective comparison of
the actual performance against the predetermined targets or standards. Such comparison is required to
find out deviation, if any.

4) Finding out deviations

After comparison, the managers may notice the deviations. For instance, if a particular brand’s sales
targets was 1000 units for a certain period and the actual sales are only 9000 units for that period then the
deviations are to the extent of 1000 units.

5) Analyzing deviations
The deviation must be reported to the higher authorities. The higher authorities analyze the causes of
deviations. For this purpose, the higher authorities may hold necessary discussions with functional staff.

MGMT 1063 – Strategic Management | 7

 For instance, the deviation of 1000 units may be due to poor promotion, faulty pricing, poor distribution and
so on. The exact cause or causes of deviation must be identified.

6) Taking corrective measures

After identifying the causes of deviations, the managers need to take corrective steps to correct the
deviations. At times, there may be a need for resetting of goals and objectives or re-framing plans, policies
and standards. The corrective steps must be taken at the right time so as to accomplish the objectives.

The Benefits of Strategic Management

1. Clearer sense of strategic vision for the firm.
2. Sharper focus on what is strategically important
3. Improved understanding of a rapidly changing environment
4. Historically, the principal benefit of strategic management has been to help organizations formulate
better strategies through the use of a more systematic, logical, and rational approach to strategic
choice
5. Communication is a key to successful strategic management
6. Through dialogue and participation, managers and employees become committed to supporting the
organization

The Bases of Policies and Strategies

 Legal mandate – must be based on the provisions of the articles of incorporation and by-laws of the
organization.
 Vision and mission statement – sense of direction for which the organization was conceived or
established.
 Specific objectives – these are purposely developed for the organization and for its members to pursue.
 Programs and policies – these are set forth in pursuit of short and long-term goals given certain
considerations at hand.

The Strategic Managers

 Technical skills – pertains to what is done and to working with things. Comprise one’s ability to use
technology to perform organizational task
 Human skills – pertains to how something is done and to working with people. Comprise one’s ability to
work with people to achieve goals.
 Conceptual skills – pertains to why something is done and to one’s view of the organization as a whole.
Comprise one’s ability to understand the complexities of a corporation as it affects and is affected by its
environment.

The responsibilities of the BOD

 To monitor – to keep abreast with the developments inside and outside the organization
 Evaluate and influence – to examine management’s proposals, decisions, and actions; agree or
disagree with them; give advice and offer suggestions; and outline alternatives
 Initiate and determine – to delineate a corporation’s mission and specify strategic options to its
management

The responsibilities of the top management

 Fulfill key roles
 Provide corporate leadership
 Manage strategic planning process

Key Roles
 Figurehead – acts as legal and symbolic head. Performs obligatory social, ceremonial and legal duties.
 Leader - motivates, develops and guides subordinates. Oversees staffing, training associated activities

MGMT 1063 – Strategic Management | 8

  Liaison – maintains network of contacts and information sources outside top management in order to
obtain information assistance
 Monitor – seeks and obtain information needed for understanding the corporation and its environments.
Acts as nerve center for the corporation.
 Disseminator – transmits information to the rest of top management team and other key people in the
organization.
 Spokesman – transmits information to key groups in the task environment
 Entrepreneur – searches the organization and its environment for projects to improve products,
processes, procedures and structures. Supervises the design and implementation of project.
 Disturbance handler – takes corrective actions in times of disturbance or crises.
 Resource allocator – allocates organization resources by making and/or improving decisions
 Negotiator – represents the organization in negotiating important agreement. Speaks directly or through
negotiator with key people.

Provide Corporate Leadership

Sense of mission, enthusiasm and positive attitude.
Characteristics:
CEO presents a Role (for others to identify and follow)
- sets example in terms of behavior and proper decorum
- displays clear-cut values and attitudes about the organization

Responsibility of Business Firm/Major Policy of an Enterprise

1. Friedman’s Traditional View of Business Responsibility. “To use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game which is to engage in
open and free competition without deception or fraud.
2. Archie Caroll’s View
Economic – produce goods/services with value to society so firm can repay its creditors and
stockholders. (must do)
Legal – responsibilities are defined by government laws (have to do)
Ethical – held beliefs ( should do)
- responsibilities that are purely obligatory in nature (might do)
Characteristics:
b. CEO articulates a Transcendent goal (John Teets)
- “Management’s job is to see the company not as it is… but as it can become”
c. CEO communicates High performance standard and shows confidence in the followers’ abilities to meet
standard.

Key Terms in Strategic Management

 Vision statement
 answers the question “What do we want to become?”
 often considered the first step in strategic planning
 Mission statements
 enduring statements of purpose that distinguish one business from other similar firms
 identifies the scope of a firm’s operations in product and market terms
 addresses the basic question that faces all strategists: “What is our business?”
 External opportunities and external threats
 refer to economic, social, cultural, demographic, environmental, political, legal, governmental,
technological, and competitive trends and events that could significantly benefit or harm an
organization in the future

Some Opportunities and Threats

 Computer hacker problems are increasing.
 Intense price competition is plaguing most firms.
MGMT 1063 – Strategic Management | 9
  Unemployment and underemployment rates remain high.
 Interest rates are rising.
 Product life cycles are becoming shorter.
 State and local governments are financially weak.

 Internal strengths and internal weaknesses

 an organization’s controllable activities that are performed especially well or poorly
 determined relative to competitors
 Objectives
 specific results that an organization seeks to achieve in pursuing its basic mission
 long-term means more than one year
 should be challenging, measurable, consistent, reasonable, and clear
 Strategies
 the means by which long-term objectives will be achieved
 may include geographic expansion, diversification, acquisition, product development, market
penetration, retrenchment, divestiture, liquidation, and joint-ventures
 Annual objectives
 short-term milestones that organizations must achieve to reach long-term objectives
 should be measurable, quantitative, challenging, realistic, consistent, and prioritized
 should be established at the corporate, divisional, and functional levels in a large organization
 Policies
 the means by which annual objectives will be achieved
 include guidelines, rules, and procedures established to support efforts to achieve stated
objectives
 guides to decision making and address repetitive or recurring situations

*** END of LESSON 1***

MGMT 1063 – Strategic Management | 10

 Lesson 2: The Strategic-Management Model and SWOT Analysis

Topic: The Strategic-Management Model

Learning Outcomes: At the end of this module, you are expected to:

1. Distinguish the key components of strategic management;

2. Describe the strategic management model.

LEARNING CONTENT

Introduction:

The strategic management model identifies concepts of strategy and the elements necessary for
development of a strategy enabling the organization to satisfy its mission. Historically, a number of
frameworks and models have been advanced which propose different normative approaches to
strategy determination.

MGMT 1063 – Strategic Management | 1

Lesson Proper:

Levels of Strategy

The strategy can be broadly classified into three levels:

A. Corporate Strategy
- It describes a company’s overall direction in terms of its general attitude towards growth and the
management of its various business and product lines. The corporate strategy typically fits within the
three main categories:
 Stability Strategy
 Growth Strategy
 Retrenchment Strategy

1. Stability Strategy
Firm using stability strategy try to hold on to their current position in the product market. The firms
concentrate on the same products and in the same markets. The stability strategy is followed by those
firms which are satisfied with their present position. This strategy is suitable in a simple and stable
environment. A stability strategy is less risky as it offers safe business to the organization unless there are
major changes in the environment.

2. Growth Strategy
It is also called as expansion strategy, when a firm aims at substantial growth strategy. A growth strategy is
one that an enterprise pursues when it increases its level of objectives upward in significant increment,
much
higher than an exploration of its past achievement level. The most request increase indicating a growth
strategy is to raise the market share and/ or sales.

In order to achieve higher targets than before, a firm may enter into new markets, introduce new product
lines, serve additional market segments and so on. This strategy involves greater effort and risk as
compared to stability strategy.

B. Business Strategy
- It usually occurs at the strategic business unit level or product level. It emphasizes improvement of the
competitive position of a firm’s products or services in a specific industry or market segment served by
that business unit. There can be two types of business strategy- Competitive and Cooperative strategy
unit or firm may try to co-operate with another firm in production and marketing of goods or services by
forming alliances like Joint ventures.

C. Functional Strategy
- It relates to the functional areas such as production, marketing, finance, personnel, etc. The functional
strategy aims at achieving functional objectives which in turn would help to achieve business unit and
overall organizational objectives.

MGMT 1063 – Strategic Management | 2

7-S FRAMEWORK
It is essential for an organization to know whether the time is right for change. In this context, the 7-S
framework, developed by Mc.Kinsey Company, a well-known consulting firm in the United States, in the late
70’s, can be helpful. It can provide insight into an organization’s working and help in formulating plans for
improvement.

The main thrust of change is not connected only with the organizational structure. It has to be understood by
the complex relationship that exists between strategy, structure, system, style, staff, skill and super-ordinated
goal. This is called the 7-S of the organization.

The 7-S framework suggests that there are several factors that influence an organization’s ability to change.
The variables involved are interconnected. Hence significant changes cannot be achieved without making
changes in all the variables. The framework has no starting point or implied hierarchy. It is also difficult to
pinpoint which of the seven S’s could be the driving force of change in an organization at a particular point of
time.

1. Strategy
- (As discussed in the previous chapter)
2. Super Ordinate Goals
- The Super- ordinate goal is alike to the organization’s purpose. It is a set of values and aspirations
going beyond the formal statement of corporate objectives. They can be considered as fundamental
ideas around which a business is built. Hence, they represent the main values of the organizations.
They can also provide the broad notions of future direction.
3. Structure
- Design of organization structure is a critical task for the top management. It refers to the more durable
organizational arrangements and relationships and forms the skeleton of the edifice of organizations. It
prescribes formal relationships, communication channels roles to perform and rules & procedures.

 Reduction of external uncertainty. Forecasting research and planning help in achieving this.
 Reduction in internal uncertainty due to variable, unpredictable, random human behavior. Control
mechanisms help in achieving this.

MGMT 1063 – Strategic Management | 3

  Coordination of the activities of the organizations to enable it to have a focus. Departmentalization,
specialization, division of labor and delegation of authority help in achieving this.
4. System
- System refers to the rules and procedures both formal and informal system complement the
organizational structure. They are similar to the term infrastructure. System include production,
planning and control systems, costing, capital budgeting, recruitment, training & development, planning
& budgeting and performance evaluation.
5. Style
- Top managers in organization use style to bring about change. The style of an organization becomes
evident through the patterns of actions taken by the top management over a period of time. These
decisions are also likely to influence the people in the lower levels of the organizations.
- Organizational reporting relationships convey the style. In some organizations, quality control may be
embedded in the manufacturing process, in some others, it may be a separate function under the Chief
Executive Officer. Some organizations may prefer R & D to be a part of the engineering. Study of the
style conveys the process of management, which is prevalent in the organization whether it is evolving
or still having traditional outlook.
6. Staff
- Proper staffing ensures human resource’s potential of a higher order, which can contribute to the
achievement of organizational goals. Staffing includes selections, placement, training and development
of appropriately qualified personnel.
- Staffing refers to the entire organization. The recruitment process may vary for different levels of
organization for different kind of jobs. It can start from appointing young recruits to the mainstream of
the organization’s activities & their career progression.
7. Skills
- Skill refers to crucial attributes or capabilities of an organization. They are used to describe that which
is found most in the organization. Eg. Hindustan lever is known for its marketing, TELCO for its
engineering skills, SONY for its new product development etc.
- Skills are developed over a period of time & are a result of the interactions of a number of factors, could
be personnel, top management, structure, system etc. Hence when a strategic decision is to be made,
it is necessary to build new skills. Skills in the 7-S framework can be considered as the distinctive
competence.

The Strategic-Management Model

The strategic management model identifies concepts of strategy and the elements necessary for
development of a strategy enabling the organization to satisfy its mission. Historically, a number of frameworks
and models have been advanced which propose different normative approaches to strategy determination.

Developing the strategic management model is important as it provides the basic framework for understanding
how strategic management can be operationalized at the firm level. Furthermore, the strategic management
model provides managers and strategists a greater comprehension of the iterative approach in conducting real
strategic management in the organizational setting.

MGMT 1063 – Strategic Management | 4

Benefits to a Firm That Does Strategic Planning

Financial Benefits
 Businesses using strategic-management concepts show significant improvement in sales, profitability,
and productivity compared to firms without systematic planning activities

MGMT 1063 – Strategic Management | 5

  High-performing firms seem to make more informed decisions with good anticipation of both short- and
long-term consequences
Nonfinancial Benefits
 It allows for identification, prioritization, and exploitation of opportunities.
 It provides an objective view of management problems.
 It represents a framework for improved coordination and control of activities.
 It minimizes the effects of adverse conditions and changes.
 It allows major decisions to better support established objectives.
 It allows more effective allocation of time and resources to identified opportunities.
 It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions.
 It creates a framework for internal communication among personnel.

Why Some Firms Do No Strategic Planning

 Lack of knowledge in strategic planning

 Poor reward structures
 Firefighting
 Waste of time
 Too expensive
 Laziness
 Content with success
 Fear of failure
 Overconfidence
 Prior bad experience
 Self-interest
 Fear of the unknown
 Honest difference of opinion
 Suspicion

Pitfalls in Strategic Planning

 Using strategic planning to gain control over decisions and resources
 Doing strategic planning only to satisfy accreditation or regulatory requirements
 Too hastily moving from mission development to strategy formulation
 Failing to communicate the plan to employees, who continue working in the dark
 Top managers making many intuitive decisions that conflict with the formal plan
 Top managers not actively supporting the strategic-planning process
 Failing to use plans as a standard for measuring performance
MGMT 1063 – Strategic Management | 6
  Delegating planning to a “planner” rather than involving all managers
 Failing to involve key employees in all phases of planning
 Failing to create a collaborative climate supportive of change

Guidelines for Effective Strategic Management

In the business world, as in many other places, decisions aren't made lightly. Rather, management spends a
long time considering the pros and cons of every choice. This lesson will teach you about one of the key ways
they do that, the SWOT analysis.

MGMT 1063 – Strategic Management | 7

Business Mission Statement

The foundation of any marketing plan is the firm's business mission statement. A mission statement explains
the purpose of why a company is in business and what they're trying to accomplish. A business statement can't
be created without analyzing the company and environmental conditions. A mission statement should be
focused on the market and environment, and not just on companies' products or services.

When a company focuses too closely on their products or services rather than benefits to consumers, then the
company is exhibiting marketing myopia. If a company writes a mission statement that says they're in the soda
business rather than in the beverage business, they are limiting their opportunities.

An example of an excellent business mission statement is Apple's. The mission statement is 'Apple is
committed to bringing the best personal computing experience to students, educators, creative professionals
and consumers around the world through its innovative hardware, software and Internet offerings.' This covers
a lot of ground, and as we know, allows Apple to delve into many areas of the market. Once a mission
statement has been created, then it is important to conduct a situational analysis on the overall business
environment in order to compete effectively.

Situational Analysis

Have you ever had to decide whether to take a risk? Maybe the risk was buying a brand new car? Choosing
your college? Most people make a list of the pros and cons to a choice before they make a final decision.
Businesses also have research and analyze choices before choosing a path.

Their decision-making process is called conducting a SWOT analysis, also known as a situational analysis.
SWOT stands for internal strengths, internal weaknesses, external opportunities and external threats. The
main purpose of the situational analysis is for marketers to understand the current and potential environments.

Internal Strengths and Weaknesses

The first part of the SWOT analysis is examining a company's internal strengths and weaknesses. In this step,
a marketing manager looks internally at the company's resources, such as finances, engineering, marketing,
employees and production, to see where they excel or need improvement. Marketing managers should not just
look at the current situation of the firm, but also look at past historical sales, profit and cost data.

When looking for a company's strengths, it's important to ask what you're best at and what you're known for.
Do you have a unique selling proposition? A USP, or unique selling proposition, is something that you're very
good at, but your competition is not. Disney would be an example of a company with great internal strengths in
the area of human resources and employee development. They are known for their excellent employee training
via Disney University.

MGMT 1063 – Strategic Management | 8

When looking for company weaknesses, a marketing manager asks what areas need improvement. What
could our competitors view as a weakness? What issues could cost us sales? They then attack those areas
and have a plan in place to protect and improve their situation.

If a company is realistic upfront, then they're less likely to fail down the road, or to be caught by a competitor. A
marketing manager needs to consider factors like poor location of the business, inexperienced marketing, poor
quality or poor reputation as a big weakness. Comcast constantly ends up voted with poor customer service,
and this would be a massive weakness in their industry.

External Opportunities and Threats

The second part of the SWOT analysis is examining the external

opportunities and threats. Marketing managers analyze the overall
marketing environment. They can accomplish this difficult task through the
use of environmental scanning, or the collection and interpretation of
environmental conditions, such as relationships, the economy, events,
demographics, social, political and technological changes. Scanning is done
in order to see what changes are happening in the marketplace that could
result in a positive opportunity or a negative threat.

For example, the fall of the housing market and inability for people to buy
homes has led to many companies shifting their products from expensive
redecorating and home improvement, to cheaper home fixer-upper items.
Marketers can consider new markets, mergers or even taking over an area
left by an ineffective competitor as excellent opportunities. Threats come in
the form of new competitors, pricing wars, new product innovation from a competitor or government
intervention in your industry, such as new or higher taxes.

SWOT Analysis

 Is a strategic planning 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 achieving that objective.
 Provides information that is helpful in matching the firm’s resources and capabilities to the competitive
environment in which it operates.

A SWOT analysis must first start with defining a desired end state or objective. A SWOT analysis may be
incorporated into the strategic planning model. An example of a strategic planning technique that incorporates
an objective-driven SWOT analysis is Strategic Creative Analysis (SCAN). Strategic Planning, including SWOT
and SCAN analysis, has been the subject of much research.

 Strengths: attributes of the person or company that is helpful to achieving the objective. A firm’s
strengths are its resources and capabilities than can be used as a basis for developing a competitive
advantage. What do you do well? What are your advantages?
 Weaknesses: attributes of the person or company that is harmful to achieving the objective. What is
done badly? What could be improved? What should be avoided? Are your competitors doing better?
 Opportunities: external conditions that is helpful to achieving the objective. What are the interesting
trends? Where are the opportunities available to you?
 Threats: external conditions which could do damage to the objective. What obstacles to you face? How
are your competitors fairing? Could changes in technology threaten your position? Do you have bad
debt or cash-flow problem?

MGMT 1063 – Strategic Management | 9

Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of
the selected objective may be derived from the SWOTs. To develop strategies that take into account a SWOT
matrix can be constructed.

SWOT MATRIX
Strengths Weaknesses
Opportunities S-O Strategies (pursue opportunities that W-O Strategies (Overcome weaknesses to
are good fit to the company’s strengths) pursue opportunities)
Threats S-T Strategies (identify ways that the firm W-T Strategies (Establish a defensive plan
can use its strengths to reduce its to prevent the firm’s weaknesses from
vulnerability to external threats) making it highly susceptible to external
threat)

Matching and converting

Matching - is used to find competitive advantages by matching the strengths to opportunities.

Converting - is to apply conversion strategies to convert threats or weaknesses into strengths or opportunities.

An example of conversion strategy is to find new markets.

If the threats or weaknesses cannot be converted a company should try to minimize or avoid them.

Internal and external factors

The aim of any SWOT analysis is to identify the key internal and external factors that are important to
achieving the objective. These come from within the company's unique value chain. SWOT analysis groups
key pieces of information into two main categories:

 Internal factors – The strengths and weaknesses internal to the organization. The factors may
include all of the 4P's; as well as personnel, finance, manufacturing capabilities, and so on.
 External factors – The opportunities and threats presented by the external environment to the
organization. The external factors may include macroeconomic matters, technological change,
legislation, and socio-cultural changes, as well as changes in the marketplace or competitive
position. The results are often presented in the form of a matrix.

Use a PEST or PESTLE analysis to help identify factors. PEST analysis stands for "Political, Economic,
Social, and Technological analysis" and describes a framework of macro-environmental factors used in
the environmental scanning component of strategic management. PESTLE analysis stands for "Political,
Economic, Social, and Technological, Legal and Environmental analysis". STEEPLED analysis stands
for "Social, Technological, Economic, Environmental, Political, Legal and Ethics and Demographic
analysis. It is a part of the external analysis when conducting a strategic analysis or doing market
research, and gives an overview of the different macro environmental factors that the company has to
take into consideration. It is a useful strategic tool for understanding market growth or decline, business
position, potential and direction for operations.

Use of SWOT Analysis

The usefulness of SWOT analysis is not limited to profit-seeking organizations.

1. SWOT analysis is used in any decision-making situation when a desired end-state (objective) has been
defined
2. SWOT analysis is used in pre-crisis planning and preventive crisis management.
3. SWOT analysis is used in creating a recommendation during a viability study.
MGMT 1063 – Strategic Management | 10
Business SWOT Analysis

1. It can help you uncover opportunities that you are well placed to exploit.
2. And by understanding the weaknesses of your business, you can manage and eliminate threats that
would otherwise catch you unawares.
3. By looking at yourself and your competitors using the SWOT framework, you can start to craft a
strategy that helps you distinguish yourself from your competitors, so that you can compete
successfully in your market.

How to Use the Tool

Strengths: Figure out your strengths. Think about the questions from your point of view and from
others.

 What advantages does your company have?

 What do you do better than anyone else?
 What unique or lowest-cost resources do you have access to?
 What do people in your market see as your strengths?
 What factors mean that you "get the sale"?

In looking at your strengths, think about them in relation to your competitors - for example, if all your
competitors provide high quality products, then a high quality production process is not strength in the market,
it is a necessity.

Weaknesses: Determine your weaknesses. Deal with any negative answers as soon as you can. You
should think about these questions from your point of view and from others.

 What could you improve?

 What should you avoid?
 What are people in your market likely to see as weaknesses?
 What factors lose you sales?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that
you do not see? Are your competitors doing any better than you? It is best to be realistic now, and face any
unpleasant truths as soon as possible.

Opportunities: Recognize your opportunities. Helpful opportunities can come from things like lifestyle events
and variations in societal patterns. A good method for looking at opportunities is to evaluate your strengths and
weaknesses.

 What are the interesting trends you are aware of?

 What good openings do you have?

Useful opportunities can come from such things as:

 Changes in technology and markets on both a broad and narrow scale.

 Changes in government policy related to your field.
 Changes in social patterns, population profiles, lifestyle changes.
 Local events.

A useful approach for looking at opportunities is to look at your strengths and ask yourself whether these open
up any opportunities. Alternatively, look at your weaknesses and ask yourself whether you could create
opportunities by eliminating them.
MGMT 1063 – Strategic Management | 11
Threats: Discover your threats. Ask: Doing this will let you know what should be done to put things in
perspective.

 What obstacles do you face?

 What is your competition doing that you should be worried about?
 Are the required specifications for your job, products or services changing?
 Is changing technology threatening your position?
 Do you have bad debt or cash-flow problems?
 Could any of your weaknesses seriously threaten your business?

Examples:

Strengths:

 We can respond very quickly as we have no red tape, no need for higher management approval.
 We can give really good customer care, as the current small amount of work means we have plenty of
time to devote to customers.
 Our lead consultant has strong reputation within the market.
 We can change direction quickly if our approach isn't working.
 We have little overhead, so can offer good value to customers.
 Patents, strong brand names, good reputation among customers, cost advantages from proprietary
know-how, exclusive access to high grade natural resources, and favorable access to distribution
networks

Weaknesses:

 Our company has no market presence or reputation.

 We have a small staff with a shallow skills base in many areas.
 We are vulnerable to vital staff being sick, leaving.
 Our cash flow will be unreliable in the early stages.
 Lack of patent protection, a weak brand name, poor reputation among customers, high cost structure,
lack of access to the best natural resources, lack of access to key distribution channels.

Opportunities:

 Our business sector is expanding, with many future opportunities for success.
 Our local council wants to encourage local businesses with work where possible.
 Our competitors may be slow to adopt new technologies.
 An unfulfilled customer needs, arrival of new technologies, loosening of regulations, removal of
international trade barriers

Threats:

 Will developments in technology change this market beyond our ability to adapt?
 A small change in focus of a large competitor might wipe out any market position we achieve.
 Shifts in consumer tastes away from the firm’s products, emergence of substitute products, new
regulations, and increased trade barriers

Using SWOT to analyze the market position of a small management consultancy with specialism in HRM.

MGMT 1063 – Strategic Management | 12

 Strengths Weaknesses Opportunities Threats

Reputation in Shortage of consultants Well established position Large consultancies

marketplace at operating level rather with a well-defined operating at a minor level
than partner level market niche.

Expertise at partner Unable to deal with multi- Identified market for Other small consultancies
level in HRM disciplinary assignments consultancy in areas looking to invade the
consultancy because of size or lack of other than HRM marketplace
ability

Track record –
successful
assignments

SWOT analysis example

This SWOT analysis example is based on an imaginary situation. The scenario is based on a business-to-
business manufacturing company, who historically rely on distributors to take their products to the end user
market. The opportunity, and therefore the subject for the SWOT analysis, is for the manufacturer to create a
new company of its own to distribute its products direct to certain end-user sectors, which are not being
covered or developed by its normal distributors.

Subject of SWOT analysis example: the creation of own distributor company to access new end-user
sectors not currently being developed.
STRENGTHS WEAKNESSES
End-user sales control and direction. Customer lists not tested.
Right products, quality and reliability. Some gaps in range for certain sectors.
Superior product performance vs competitors. We would be a small player.
Better product life and durability. No direct marketing experience.
Spare manufacturing capacity. We cannot supply end-users abroad.
Some staff have experience of end-user sector. Need more sales people.
Have customer lists. Limited budget.
Direct delivery capability. No pilot or trial done yet.
Product innovations ongoing. Don't have a detailed plan yet.
Can serve from existing sites. Delivery-staff need training.
Products have required accreditations. Customer service staff need training.
Processes and IT should cope. Processes and systems, etc
Management is committed and confident. Management cover insufficient.
OPPORTUNITIES THREATS
Could develop new products. Legislation could impact.
Local competitors have poor products. Environmental effects would favor larger competitors.
Profit margins will be good. Existing core business distribution risk.
End-users respond to new ideas. Market demand very seasonal.
Could extend to overseas. Retention of key staff critical.
New specialist applications. Could distract from core business.
Can surprise competitors. Possible negative publicity.
MGMT 1063 – Strategic Management | 13
Support core business economies. Vulnerable to reactive attack by major
Could seek better supplier deals.

Key Points

SWOT Analysis is a simple but powerful framework for analyzing your company's Strengths and Weaknesses,
and the Opportunities and Threats you face. This helps you to focus on your strengths, minimize threats, and
take the greatest possible advantage of opportunities available to you.

*** END of LESSON 2***

MGMT 1063 – Strategic Management | 14

Topic: The Firm’s External Environment

Learning Outcomes: At the end of this module, you are expected to:

1. Point out the major external forces that affect the organization
2. Relate the importance of monitoring external trends and events to the actual operation of the business
3. To determine the segments of the general environment (Societal Environment) such as:
Economic Forces
Socio-cultural
Demographic
Environmental Forces
Political, Governmental and Legal Forces
Technological Forces

LEARNING CONTENT

Introduction:

The External Environment: Opportunities, Threats, Industry Competition and Competitor Analysis

The external environment includes the areas of General, Industry and Competitor environment. The general
environment is the broader society dimensions that influence an industry and the firms within it. It is grouped
into seven dimensions or ‘environmental segments’ which cannot be controlled or manipulated. However,
segment intelligence of each of these can help reorient strategy to mitigate influence in the long term.

MGMT 1063 – Strategic Management | 1

Lesson Proper:

The General, Industry and Competitor Environments

A. The External Environment

1. General Environment— composed of dimensions in the broader society that influence the industry
and the firms within it.

Environmental Segments
a) Demographic c) Political/legal e) Socio cultural
b) Economic d) Technological f) Global

2. Industry Environment— refers to the set of factors that directly influences a firm and its competitive
actions and competitive responses.
3. Competitor Analysis— how companies gather and interpret information about their competitors.

EXTERNAL ENVIRONMENT ANALYSIS

Objective: “To identify opportunities and threats”

Opportunity- a condition in the general environment that if exploited, helps a company achieve
strategic competitiveness

Threat – a condition in the general environment that may hinder a company’s effort to achieve strategic
competitiveness

COMPONENTS OF ENVIRONMENTAL ANALYSIS

Scanning - entails the study of all the segments in the general environment
- identify early signals of potential changes in the general environment
- detect changes that are under way
Monitoring - detecting meaning through on going observations of environmental changes and trends
Forecasting - developing projections of anticipated outcomes based on monitored changes and trends
Assessing - determining the timing and importance of environmental changes and trends for firm’s
strategies and their management
MGMT 1063 – Strategic Management | 2
External forces

 affect the types of products developed, the nature of positioning and market segmentation strategies
the types of services offered, and the choice of business to acquire or sell.
 directly affect both suppliers and distributors.

The SEGMENTS of the GENERAL ENVIRONMENT

1. Demographic Segment
 concerned with a population size, age, structure, geographic distribution, ethnic mix and
income distribution

2. Economic segment
 refers to the nature and direction of the economy in which a firm compete or may compete

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

4. . Socio cultural Environment

 concerned with the society’s attitudes culture and values

5. Technological Segment
 includes the institutions and activities involved with creating new knowledge into new
outputs, products, process, and materials.

6. Global Segment
 includes new global markets, existing market that are changing, important international
political events and critical culture and institutional characteristics of global market.

The General Environment: Segments and Elements

Segments Elements
Demographics Population size, age structure, geographic distribution, ethnic mix, income
distribution
Economic Inflation rates, interest rates, trade deficits or surpluses, budget deficits or
surpluses, personal saving rate, business saving rates, GDP
Political/legal Taxation laws, deregulation, labor training law, educational philosophies and
policies
Socio cultural Women in the workplace, workforce diversity, attitudes about quality of work
life, concerns about environment shifts in work and career preferences, shifts
preferences regarding product and service characteristics
Technological Product innovation, applications of knowledge, new communication
technologies, Research and Dev’t. expenditures
Global Important political events, critical global markets, different cultural and
institutional attributes

The Task Environment

Stakeholder Criteria
1.Stockholder Price appreciation of securities
Dividends (How much and how often?)

MGMT 1063 – Strategic Management | 3

2. Labor unions Comparable wages
Stability of employment
Opportunity for advancement
Working conditions
3.Government Support of government programs
Adherence to laws and regulations
4. Suppliers Rapidity of payment
Consistency of purchases
5. Creditor Adherence to contract terms
Dependability
6. Customers/distributors Value given for the price paid
Availability of product or service
7. Trade associations Participation in association programs (time)
Participation in association programs(money)
8. Competitors Rate of growth
Product/Service innovations
9. Communities Contribution to community development through taxes, Participation in
charitable activities, etc.
Employment of local people
Minimum of negative side-effects
10. Special interest groups Employment of minority group
Contributions to urban improvement programs

INDUSTRY ENVIRONMENT ANALYSIS

Industry Environment- has more direct effect on firm’s strategies, competitiveness and above average returns
Industry – a group of firms producing products that are close substitute

FORCES DRIVING INDUSTRY COMPETITION

MGMT 1063 – Strategic Management | 4

THREAT OF NEW ENTRANTS
NEW ENTRANTS BRING:
*new capacity
*desire to gain market share
*substantial resources

SERIOUSNESS OF THE THREAT OF ENTRY DEPENDS ON:

A. presence of entry barriers
B. reaction from existing competitors

A. ENTRY BARRIERS
a.1. Economies of scale- the marginal improvements in efficiency that a firms experiences as
it incrementally increases its size
a.2. Product differentiation-forces entrants to spend heavily to overcome customer loyalty.
a.3. Capital requirements- need to invest large capital resources in order to compete.
a.4. Cost disadvantages independent of size- entrenched companies may have cost
advantages not available to potential rivals no matter what their size and attainable economies
of scale.
Stem from:
Learning curve - refers to the efficiency achieved over a period of time by workers through much
repetition

a.5. Access to distribution channels- new entrant must be able to displace others from the
distributor’s shelf
a.6. Government policy-the government can limit or even foreclose entry to industries with
such controls as license requirements and limits on access to raw materials.
a. 7. Switching costs – one- time costs customers incur when they buy from a different
suppliers

B. THE POTENTIAL RIVAL’S EXPECTATIONS ABOUT THE REACTION OF EXISTING COMPETITORS

ALSO WILL INFLUENCE ITS DECISION HETHER TO ENTER.
b.1. The incumbents have substantial resources to fight back. Ex. Productive capacity
b.2. The incumbents seem likely to cut prices to keep market share
b.3. Industry growth is slow, affecting its ability to absorb the new entrant.
b.4. The incumbents have a major stake in the industry (ex. It has assets with few, if any
alternative uses.

RIVALRY AMONG EXISTING FIRMS

- a competitive move by one firm can be expected to have a noticeable effect on its competitors and thus may
cause retaliation or counter-efforts.
a. Numerous equally balances competitors
b. Slow industry growth
c. High Fixed cost or High storage costs
d. Lack of Differentiation or Low switching costs
e. High strategic stakes
f. High exit barriers

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

-in effect, all corporations within one industry are competing with other industries that produce substitute
products.

PORTER: “Substitutes limit the potential returns of an industry by placing a ceiling on the prices firms in the
industry can profitably charge”

MGMT 1063 – Strategic Management | 5

BARGAINING POWER OF BUYERS
-buyers affect industry through their ability to force down prices, bargain for high quality or more services and
play competitors against each other.

A BUYER group is powerful if:

 it is concentrated or purchases in large volumes

 the product it purchases from the industry are standard or undifferentiated
 the product it purchases from the industry form a component of its product and represent a significant
fraction of its cost
 it earns a low profits, which create great incentive to lower its purchasing costs
 the industry’s product is unimportant to the quality of the buyer’s products or services
 the industry’s product does not save the buyer money
 the buyers pose credible threat of integrating backward to make the industry’s product

BARGAINING POWER OF SUPPLIERS

-they can affect an industry through their ability to raise prices or reduce the quality of purchased goods or
services

A SUPPLIER group is powerful if:

 it is dominated by few companies and more concentrated than the industry it sells to
 its product is unique or at least differentiated
 it builds up switching costs–are fixed cost buyers face in changing suppliers
 it is not obliged to contend with other products for sale to the industry
 it poses a credible threat of integrating forward into the industry’s business.
 the industry is not an important customer of the supplier group.

INTERPRETING INDUSTRY ANALYSES

The stronger competitive forces are, the lower the profit potential for an industry’s firm

An unattractive industry has low entry barriers, suppliers and buyers with strong bargaining positions, strong
competitive threats from product substitutes and intense rivalry among competitors. (Make it difficult for firms to
achieve strategic competitiveness and earn above average returns)

An attractive industry has high entry barriers, suppliers and buyers with little bargaining power, few competitive
threats from product substitute and relatively moderate rivalry.

STRATEGIC GROUP
- a set of firms emphasizing similar strategic dimensions to use a similar strategy

NOTE: Competition between firms within strategic groups in greater than the competition between a member
of a strategic group and companies outside strategic group. INTRA-STRATEGIC GROUP COMPETITION IS
MORE INTENSE THAN IN INTER-STRATEGIC GROUP.

MGMT 1063 – Strategic Management | 6

Strategic Dimensions of Which Firms within strategic group treat

*extent of technical leadership

*product quality

*pricing policies

similarly

PATTERN OF COMPETITION
“Organizations in a strategic group occupy similar positions in the market, offer similar groups to similar
customers and may also make similar choices about production technology and other organizational features”

IMPLICATIONS:
1. First, firms within which a group offers 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.
2. Secondly, strengths of the five industry forces differ across strategic groups.
3. Third, the closer the strategic groups are in terms of their structure, the greater is the likelihood of
rivalry between the groups.

COMPETITOR ANALYSIS
 Final part of the external environment requiring study
 Focuses on each company against whom a firm directly competes
 Example: Fuji and Kodak; Smart and Globe, Jollibee and McDo. Ecah should be keenly interested in
understanding each other’s objectives, strategies, assumptions and capabilities
 Intense rivalry creates a strong need to understand competitors
 In here, the firm seeks to understand the following?
o What drives the competitors, as shown by its future objectives
o What the competitor is doing and can do, as revealed by its current strategy
o What the competitor believes about the industry, as shown by its assumptions
o What the competitor’s capabilities are, as shown by its capabilities (its strength and weaknesses)
 Includes gathering intelligence about public policies as this will “provide an early warning of threats and
opportunities emerging from the global public policy environment, and analyzes how they will affect the
achievement of company’s strategy”

Note:
Information about these four dimensions helps the firm prepare an anticipated response profile for each
competitor. Thus, the results of an effective competitor analysis help a firm understand, interpret, and predict
its competitors’ actions and responses.

Critical to an effective competitor analysis is gathering data and information that can help the firm understand
its competitors’ intentions and strategic implications resulting from them.

MGMT 1063 – Strategic Management | 7

Competitor Intelligence
-the set of data and information the firm gathers to better understand and better anticipate competitors’
objectives, strategies, assumptions and capabilities.

*** END of LESSON 4***

MGMT 1063 – Strategic Management | 8

Topic: The Firm’s Internal Environment

Learning Outcomes: At the end of this module, you are expected to:

1. Explain the need for firms to study and understand their internal environment.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss how they are developed.
5. Describe four criteria used to determine whether resources and capabilities are core competencies.
6. Explain how value chain analysis is used to identify and evaluate resources and capabilities.
7. Define outsourcing and discuss the reasons for its use.
8. Discuss the importance of preventing core competencies from becoming core rigidities.

LEARNING CONTENT

Introduction:

THE INTERNAL ENVIRONMENT: Resources, Capabilities, and Core Competencies.

An organization's internal environment is composed of the elements within the organization, including current
employees, management, and especially corporate culture, which defines employee behavior. Although some
elements affect the organization as a whole, others affect only the manager. A manager's philosophical or
leadership style directly impacts employees. Traditional managers give explicit instructions to employees, while
progressive managers empower employees to make many of their own decisions. Changes in philosophy
and/or leadership style are under the control of the manager. This chapter describe some of the elements that
make up the internal environment.

MGMT 1063 – Strategic Management | 1

Lesson Proper:

THE IMPORTANCE OF INTERNAL ANALYSIS

An internal analysis examines your organization’s internal environment in order to assess its resources,
competencies, and competitive advantages. Performing an internal analysis allows you to identify the strengths
and weaknesses of your organization. This knowledge then aids the strategic decision making of management
while they carry out the strategy formulation and execution process.

Traditional Factors:

Key challenge in developing the ability to change rapidly:

1. Fostering an organizational setting in which experimentation and learning are expected and promoted.
2. A different managerial mind-set is required for firms to be in the global economy.

RESOURCES
- source of a firm’s capabilities.
- cover the spectrum of individual, social and organizational phenomena.
Competitive advantage - created through the unique bundling of several resources.

2 Types of Resources:
1. Tangible
- assets that can be seen and quantified
- The value of many tangible resources can be established through financial statements, but these -
statements do not account for the value of all of firm’s assets.
- The value of tangible resources is also constrained because they are difficult to leverage- it is hard to
derive additional business or value from tangible resources.

Examples:
 production equipment
 manufacturing plants
 formal reporting structures

4 Types of tangible Resources:

a. Financial resources - the firms borrowing capacity. The firm’s ability to generate internal funds.
b. Organizational resources - the firm’s formal reporting structure and its formal planning,
controlling and coordinating systems.
c. Physical resources - sophistication and location of a firm’s plant and equipment. Access to raw
materials.
d. Technological resources - stock of technology, such as patents, trademarks, copyrights and
trade secrets.

2. Intangible
- includes assets that typically are rooted deeply in the firm’s history and have accumulated overtime.
MGMT 1063 – Strategic Management | 2
 - Relatively difficult for competitors to analyze and imitate.
- Is a superior and more potent source of core competencies.

Examples:
 knowledge
 trust between managers and employees
 ideas
 the capacity for innovation
 managerial capabilities
 organizational routines
 specific capabilities
 firm’s reputation for its goods or services and how it interacts with people.

3 Types of Intangible:
a. Human resources –knowledge; trust; managerial capabilities; organizational routines
b. Innovation resources –ideas; scientific capabilities; capacity to innovate
c. Reputational resources –reputation with customers; brand name; perceptions of product
quality, durability and reliability; -reputation and suppliers (for efficient, effective, supportive and
mutually beneficial interactions and relationships)

CAPABILITIES
- these are the firm’s capacity to deploy resources that have been purposely integrated to achieve a
desired end state
- the foundation of many capabilities lies in the skills and knowledge of a firm’s employees and often,
their functional expertise. Hence, the value of human capital in developing and using capabilities and,
ultimately, core competencies cannot be overstated.

Firms committed to continuously developing their people’s capabilities seem to accept the adage that:
“the person who knows how will always have a job. The person who knows why will
always be his boss.”

- Global business leaders support the view that the knowledge possessed by human capital is among the
most significant of an organization’s capabilities and ultimately be at the root of all competitive
advantages

CORE COMPETENCIES

MGMT 1063 – Strategic Management | 3

*Some resources and capabilities may result in incompetence.

Creating Value

 Value – is measured by a products performance characteristic and by its attributes which customers
are willing to pay.
 Creating Customer Value –is the source of a firm’s potential to earn above-average returns.
*Firms intend regarding value creation affect its choice of business-level strategy and its
organizational structure.
 Differentiation strategy –is an integrated set of actions designed by a firm to produce or deliver goods
or services (at an acceptable cost) that customers perceived as being different in ways that are
important to them.

The challenge of Internal Analysis

Making these decisions

- identifying, developing, deploying and protecting resources, capabilities and are competencies.
- This task is challenging and difficult as any other with which managers are involved.

To facilitate the development and use of core competencies, managers must have:

Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies:
1. Uncertainty – regarding characteristics of the general and the industry environments, competitor’s
action and customer’s preferences.
2. Complexity – regarding the interrelated causes shaping a firm’s environments and perceptions of the
environments.

MGMT 1063 – Strategic Management | 4

 3. Intra organizational conflicts – among people making managerial decisions and those affected by
them.

Judgment – is the capability of making successful decisions when no obviously correct model or rule is
available or when relevant data are unreliable or incomplete.

Denial – is unconscious coping mechanism used to block out and not initiate painful changes.

BUILDING CORE COMPETENCIES

2 Tools help the firm identify and build its core competencies:
1. Four specific criteria of sustainable advantage
a. Valuable – allow the firm to exploit opportunities or neutralize threats in its external environment.
b. Rare capabilities – not possess by many other firms.
c. Costly to imitate – capabilities that other firms cannot easily develop.
d. Non-substitutable – capabilities that do not have strategic equivalents.

2. Value Chain Analysis –allows the firms to understand the parts of its operations that create value and
those that do not. Refers to the process whereby a firm determines the costs associated with
organizational activities from purchasing raw materials to manufacturing product/s to marketing those
products.

Activities:
 Obtaining raw materials, designing products, building manufacturing facilities, developing
cooperative agreements, and providing customer service.

VALUE CHAIN SEGMENTS

1. Primary Activities – are involved with a product’s physical creation, its sale and distribution to buyers
and its service after the sale.
a. Inbound logistics – activities such as materials handling, warehousing and inventory control,
used to received, stores and disseminate inputs to a product.
b. Operations – activities necessary to convert the inputs provided by inbound logistics into final
product form. Machining, packaging, assembly and equipment maintenance are examples of
operations activities.
c. Outbound logistics – activities involved with collecting, storing and physically distributing the
final product to customer. Ex: finished goods warehousing, materials handling and order
processing.

MGMT 1063 – Strategic Management | 5

 d. Marketing and Sales – activities completed to provide means through which customers can
purchase products and to induce them to do so.
 to effectively market and sell products, firms develop advertising and promotional
campaigns, select appropriate distribution channels, and select, develop and support
their sales force.
e. Service – activities designed to enhance or maintain a products value. Firms engage in a range
of service-related activities, including installation, repair, training and adjustments.

2. Support Activities – provide the support necessary for the primary activities to take place.
a. Procurement –activities completed to purchase the inputs needed to produce a firm’s product.
Ex: raw materials and surplus, as well as fixed assets- machinery, laboratory equipment, office
equipment, buildings.
b. Technological Development – activities completed to improve a firm’s product and the
processes used to manufactures it. Ex: process equipment, basic research and product design
and servicing procedure.
c. Human Resource Mgmt. – activities involved with recruiting, hiring, and training, developing
and compensating all personnel.
d. Firm Infrastructure – includes activities such as general management, planning, finance,
accounting, legal support, and government relations that are required to support the work of the
entire value chain.

To verify that the appropriate primary and support activities are outsourced, four skills are essential for
managers involved in outsourcing programs:
 Strategy thinking
 Deal making
 Partnership governance
 Managing change

Outsourcing can significantly change how an organization operates; managers administering these programs
must also be able to manage that change, including resolving employees’ resistance that accompanies any
significant change effort.

Reasons for outsourcing

1. LACK OF EXPERTISE:
a. You have to outsource if you don't have the rightly skilled professionals.
b. Leverage the provider's extensive investments in technology, methodologies and people
2. CAPITAL:
a. Conservation: Reduce overheads, free up resources, the money can be applied to develop the Core
business rather on overheads such as computers, desks etc.
b. Cost Effective: No HR recruiting, training, solution providing.
c. Reduced operating costs.
d. Reduction of financial risk: as investment shared.
3. MANAGEMENT
a. Sharper focus on core business
b. Improved efficiency
c. Better concentration on strategic thinking, process developing
d. Increasing customer satisfaction
e. Reduce the risk of technological obsolescence and increase efficiency by consolidating and
centralizing functions
MGMT 1063 – Strategic Management | 6
 f. Reduce the overall head ache and develop market presence tension free.
g. Obtain needed project management and implementation consulting expertise, along with access to
best practices and proven methodologies
4. GOOD BUSINESS SENSE
a. Availability of world best services at half the cost.
b. Save the ever-critical time
c. Get access to specialized professionals and skills
d. Great flexibility: it is much easier to cancel a contract than fire personal employees.
e. Avoid the cost of starting from scratch and gain from the experience of custom built outsourcing
solutions available.
5. EDGE OVER COMPETITION
a. Provide value added service
b. Provide better, specialized, customized and dedicated customer service
c. Increase customer satisfaction
d. Keep pace with the rapidly changing business modules
e. Be reliable and innovative
f. Shedding of HR or IT burden helps you do better in core business.
6. TOWARDS GLOBALIZATION
a. Reduce your marketing and software delivery costs
b. Gain access to global buyer base needing software development
c. Manage your projects online with buyer participation
d. Neutral marketplace with global choices

Disadvantages of Outsourcing

a. Less managerial control - It may be harder to manage the outsourcing service provider as compared to
managing your own employees.

b. May be more expensive - Sometimes it is cheaper to keep a process in-house as compared to

outsourcing.

c. Security and confidentiality issues - If your company is outsourcing business processes such as payroll,
confidential information such as salary will be known to the outsourcing service provider.

d. Quality Risk - Outsourcing can expose an organization to potential risks and legal exposure. As an
example, if a car is recalled for faulty parts and that part was outsourced, the car manufacturer carries
the burden of correcting the potentially damaged reputation of the car maker. While the vendor would
need to make good on the faulty product by contract, the manufacturer still has the “black eye” from the
incident and carries the burden of correcting the negative public perception.

e. Quality Service - Unless a contract specifically identifies a measurable process for quality service
reporting, there could be a poor service quality experience. Some contracts are written to intentionally
leave service levels out to save on costs.

f. Language Barriers - If a customer call center is outsourced to a country that speaks a different
language, there may be levels of dissatisfaction for customers dealing with the language barriers of
someone with a strong accent.

g. Employee/Public Opinion - There can be negative perceptions with outsourcing and the sympathy of
lost jobs. This needs to be managed with sensitivity and grace.

h. Organizational Knowledge - An outsourced employee may not have the same understanding and
passion for an organization as a regular employee. There is the potential that an outsourced employee

MGMT 1063 – Strategic Management | 7

 will come in contact with customers and not be as knowledgeable of the organization, resulting in a
negative customer experience.

i. Labor Issues - Organized labor in the United States has very strong feelings about outsourcing to other
countries that have a less standard of living and worse working conditions. This viewpoint can affect
how the workforce responds to outsourcing and can affect their daily productivity.

j. Legal Compliance and Security - It is important that issues regarding legal compliance and security be
addressed in formal documentation. Processes that are outsourced need to be managed to ensure
there is diligence with legal compliance and system security. An example of this is outsourcing the IT
function and having an outsourced employee use their access to confidential customer data for their
own gain.

k. Employee Layoffs - Outsourcing commonly results in the need to reduce staffing levels. Unless it can
be planned through attrition, layoffs are inevitable. This is difficult at best and if not managed
appropriately, can have a negative impact on remaining employees.

l. Finally, when researching vendors for outsourcing be sure to think through your specific needs and get
at least three Requests for Proposals (RFP) to ensure you are getting the best value for your dollar.

Core Competencies: Cautions and Reminders

Tools such as outsourcing can help the firm focus on its core competencies. However, evidence shows that the
value-creating ability of core competencies should never be taken for granted.

The ability of a core competence to be a permanent competitive advantage can’t be assumed. The reason for
these cautions is that all core competencies have the potential to become core rigidities.

Competence:
Strength – because it is the source of competitive Weakness – because if emphasized when it is no longer
advantage. competitively relevant, it can be a seed of organizational
- strategic competitiveness inertia (apathy, sluggishness).

MGMT 1063 – Strategic Management | 8

 Topic: The Firm’s Business Environment

Learning Outcomes: At the end of this module, you are expected to:

1. Discuss the Business Internal Environment

2. Discuss the Business External Environment

LEARNING CONTENT

Introduction:

The internal and external environments have

different impacts on your business. The lesson
discusses what to look for when doing internal and
external analyses and what a business can gain
from doing these analyses.

An organization must have the ability to examine and

make changes based on internal and external
environmental factors that affect its performance.
The use of tools to analyze these environmental
factors is the key to a successful organization.

Managers must recognize and respond to all factors

that affect their organizations. This lesson also
describes how the internal and external environments of an organization drive change within the company.

MGMT 1063 – Strategic Management | 1

Lesson Proper:

The Business Environment

Imagine that you run an athletics store, Tip Top Sports, in your hometown. You specialize in producing local high
school and college apparel. You've been open for about 10 years, and recently you've noticed that you haven't
quite met your business development goals.

In order for you to figure out what's impacting your business, your local consultant suggests that you do an
analysis of your business environment. He explains that your business environment is the setting (or system)
that your business operates in. This can be the internal environment, which is dominated by things such as your
staff or financial status; or it can be the external environment, which includes factors like politics or competitors.
Because each environment will tell you different information about your business, you will want to analyze both
the internal and external environments.

Internal & External Analysis

Accompanying an internal analysis should always be an external analysis - which scans the external environment
of the organization. The combination of both an internal & external scan is key in gaining a holistic picture of the
organization's environment and developing a strategy that will allow your organization to succeed. The
internal/external scan should always be undertaken before the actual creation of your strategy begins. If you're
in the process of creating a new strategic plan and have skipped this step, we'd recommend pausing and
completing an internal/external scan first. You can then move back into the strategy creation process with
confidence.

Internal Analysis

MGMT 1063 – Strategic Management | 2

Your internal business environment is the conditions or situation within your company's day-to-day operations.
When analyzing your internal environment, you want to identify how the internal operations are affecting your
business.

You want to look at such things as:

Effectiveness of your management team

Quality of employee relationships

Communication between departments

Overall quality and motivation of staff members

For example, let's say that Tip Top Sports has twenty employees who focus
on sales: five in marketing, and two in design. Although you own the
business, your general manager, Ben, oversees the daily functions. Ben is a
kind manager, but he has had no previous management experience. As you
start to look at daily tasks, talk to the team members, and evaluate performance, you find out that design
deadlines are not being met and orders are consistently late. Furthermore, you find out that Ben isn't taking steps
to increase efficiency or find solutions to speed up the design team.

There also seems to be a problem with the direct sales team. Ben says staff members aren't showing up at their
scheduled times, and they are complaining about one another during breaks. Also, things on the floor seem
tense. He tells you that he's afraid the customers have noticed the frustration among staff members.

By analyzing your internal environment, you've found out a lot about how your company is operating and what
may be affecting your profitability. The internal analysis has shown you that your projects are being completed
late, there is an issue with the quality of your management, and the culture among the direct sales staff may be
offending customers. Understanding your internal environment has provided you with valuable information about
the issues that could be decreasing sales.

Why Conduct an Internal Analysis?

As mentioned earlier, an internal analysis will highlight an organization's strengths and weaknesses in the areas
of their competencies, resources, and competitive advantage. Once complete, the organization should have a
clear idea of where they're excelling, where they're doing OK and where current deficits and gaps lie. The
analysis will arm management with the knowledge to exploit their strengths and opportunities. It also allows
management to develop strategies to mitigate any threats and compensate for identified weaknesses.

Beginning strategy formulation after this analysis will ensure your strategic plan has been formulated to take
advantage of strengths and opportunities, and offset or improve weaknesses & threats. Your organization can
then be confident that you're funneling your resources, time, and focus effectively and efficiently.

External Analysis

MGMT 1063 – Strategic Management | 3

While your internal analysis is concerned about everything happening within your company, the external analysis
is looking at the outside environment's effects on your business.

Doing an external analysis requires asking questions such as:

Who are your competitors?
Are there new competitors?
How is the economy affecting your sales?
Are there tax or tariff laws?
Is new technology (such as online purchasing) affecting your sales?

Consider that Tip Top Sports has a new competitor, Sunny Sports. You find out that Sunny Sports is selling
products at ten percent lower prices than you and is offering free delivery. A further look at your competition
shows that there's an online company that offers the local collegiate apparel for delivery and even gives
customization options. This analysis helps you understand that you might need to incorporate an online sales
platform and provide more flexible options for your customers.

All businesses and organizations operate in a changing world and are subject to forces which are more powerful
than they are, and which are beyond their control. Just as a ship at sea is subject to powerful natural forces of
which it needs to be aware and deal with, organizations are influenced by forces in their external business
environment.

Any business strategy needs to take account of all these forces so that opportunities and threats can be identified
and the organization can navigate its way to success by matching its internal strengths to external opportunities.
(A SWOT Analysis can help here.) As an aid to identifying all these external forces, a couple of acronyms come
in handy.

Internal and External Environments

If there is anything that is steadfast and unchanging, it is change itself. Change is inevitable, and organizations
that don't accept change and that make adjustments to their business model to keep up with changes are
doomed to fail. There are events or situations that occur that affect the way a business operates, in a positive or
negative way. These events or situations can have either a positive or a negative impact on a business and are
called environmental factors.

There are two types of environmental factors: internal environmental factors and external environmental factors.
Internal environmental factors are events that occur within an organization. Generally speaking, internal
environmental factors are easier to control than external environmental factors. Some examples of internal
environmental factors are:

• Management changes
• Employee morale
• Culture changes
• Financial changes and/or issues

External environmental factors are events that take place outside of the organization and are harder to predict
and control. External environmental factors can be more dangerous for an organization given the fact they are
unpredictable, hard to prepare for, and often bewildering. Some examples of external environmental factors are:

• Changes to the economy

• Threats from competition
• Political factors
MGMT 1063 – Strategic Management | 4
 • Government regulations
• The industry itself

Navigating Change in Organizations

Navigating in today's chaotic business environments is much like trying to steer a tiny boat back to shore while
caught in the center of a hurricane. There are many forces at work that a person will need to respond to in order
to make it safely back to port. Just like this tiny ship, today's organizations and their managers are faced with a
significant number of factors that require an immediate response, often in the form of organizational change. The
forces that drive this change in business are known as the internal and external environments. This part of the
lesson will discuss how both the internal and external environments of an organization induce change.

The Internal Environment

The internal environment of an organization refers to events, factors, people, systems, structures, and conditions
inside the organization that are generally under the control of the company. The company's mission statement,
organizational culture, and style of leadership are factors typically associated with the internal environment of an
organization. As such, it is the internal environment that will influence organizational activities, decisions, and
employee behavior and attitudes. Changes in the leadership style, the organization's mission, or culture can
have a considerable impact on the organization.

The External Environment

The external environment are those factors that occur outside of the company that cause change inside
organizations and are, for the most part, beyond the control of the company. Customers, competition, the
economy, technology, political and social conditions, and resources are common external factors that influence
the organization. Even though the external environment occurs outside of an organization, it can have a
significant influence on its current operations, growth, and long-term sustainability. Ignoring external forces can
be a detrimental mistake for managers to make. As such, it is imperative that managers continually monitor and
adapt to the external environment, working to make proactive changes earlier on rather than having to take a
reactive approach, which can lead to a vastly different outcome.

Environmental Scanning and Change

In order for managers to react to the forces of internal and external environments, they rely on environmental
scanning.

•refers to the monitoring of the organization's internal and external

Environmental environments for early signs that a change may be needed, to
scanning accommodate potential opportunities or threats, and to make adjustments
to allow the company's strengths to combat its weaknesses.

If you recall, one common type of environmental scan is the SWOT analysis, which looks specifically into the
strengths, weaknesses, opportunities, and threats of the internal and external environments. A manager will
begin analyzing the internal environment by looking into inefficiencies inside the organization, and will then look
outside to the external environment and things occurring independent of the organization. Environmental scans
allow managers to use the knowledge gained during the scanning process to decide what strategic steps, or
changes, the organization needs to take to create or maintain a competitive advantage.

Changing for the Internal Environment

To better understand changes in the internal environment, let's look at the following example. After graduating
from college, Cassandra decided to buy an existing tanning salon in her community. Before Cassandra
purchased the salon, it was in terrible financial trouble. Many of the employees complained about the general
manager's leadership style, and the staff were often confused about what products and services they offered at
the salon because the manager continuously implemented his next 'bright idea' with little warning, most of which
were complete failures.

MGMT 1063 – Strategic Management | 5

Cassandra knew that if she was ever going to be able to bring any level of success to the salon, she needed to
make several changes to the internal environment of the tanning salon. The first thing Cassandra did was to fire
the existing manager because of his ineffective leadership style. She replaced the manager with someone who
practiced a leadership style that was better aligned with the company and its employees. Next, Cassandra spent
time developing a clear mission of the company and communicated the new mission to all employees. Over the
next several months, Cassandra spent time getting to know her employees and worked hard to foster a culture
that was positive and rewarding. All of these changes made by Cassandra were necessary due to the internal
forces that were pushing for change, and with the help of her employees, Cassandra was able to bring the much-
needed changes to the internal environment of the company.

Changing for the External Environment

If we return to the example of Cassandra's tanning salon, we can also find some external forces that required
additional change at the tanning salon. If you remember, one of the major issues the staff was having with the
previous general manager was his continuous changing of products and services at the salon. What his staff did
not know was that he was trying to respond to external factors relating to changing customer demands. As a
result, Cassandra spent time talking to her customers to find out what they really want in a tanning salon, and
was sure to make any changes necessary to accommodate those demands. Additionally, because of the
struggling economy, Cassandra needed to ensure her pricing was affordable to her clients and comparable to
what her competition was offering for similar tanning services and products at their salons.

Lesson Summary
Your business environment refers to the conditions in which your company operates and includes both the
internal and external environments. The internal environment, or everything occurring within your organization
(such as staff relationships, quality of management, and project completion time), will help you to see how
effective your internal processes are. The external environment considers how events outside of your business
impact your operations and affect your profitability and competitiveness. Because the internal and external
environments will each give you different information, it is important to evaluate them both to get as much relevant
information about potential risks to your business as possible.

MGMT 1063 – Strategic Management | 6

 Topic: Placing Strategies into Action

Learning Outcomes: At the end of this module, you are expected to:

1. Discuss the value of establishing long-term objectives.

2. Identify types of business strategies
3. Discuss the different types of strategies
4. Discuss Porter’s five generic strategies
5. Identify the means for achieving strategies
6. Explain the first mover advantages concept

LEARNING CONTENT

Introduction:

STRATEGY IN ACTION

Strategy is a long-range planning I order to develop a tactical plan. While Tactics deals with the use of
competencies in actual performance. Strategy in Action combines both to adapt behavior and provide
structure in order to achieve continuous improvements.

In this lesson, we will discuss about the importance of believing that lasting organizational change and action,
takes place only through and with people.

MGMT 1063 – Strategic Management | 1

Lesson Proper:

Long-term
•Represents the results expected from pursuing certain strategies.
Objectives

•Represent the actions to be taken to accomplish long-term

Strategies
objectives.

Nature of Long-term Objectives

✓ Quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and

congruent to organizational units.
✓ Stated in terms of assets, growth in sales, profitability, market share, degree and nature of
diversification, degree and nature of vertical integration, earnings per share, and social responsibility.
✓ Provide direction, allow synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize
conflicts, stimulate exertion, and aid in the allocation of resources and design of jobs.
✓ Needed at the corporate, divisional, and functional level of the organization.
✓ Important measure of managerial performance
✓ Help stakeholders understand their role in an organization’s future
✓ Provide a basis for consistent decision making of managers whose values and attitudes differ.
✓ Set forth organizational priorities and stimulate exertion and accomplishment.
✓ Set standards by which individuals, groups, departments, divisions, and entire organization can be
evaluated.
✓ Provide the basis for designing jobs and organizing activities to be performed in an organization.

Levels of Strategies

Corporate Level – primarily responsible for

having effective strategies at the various
levels, the CEO.

Divisional Level – divisional president or

executive vice president

Functional Level – finance, marketing, F&D,

manufacturing, information system, and human
resource manager.

Operational Level – plant managers, sales

managers, production and department
managers.

Types of Strategies

A. Integration Strategies
1. Forward Integration – involves gaining ownership or increased control over distributors or
retailers. An effective means of implementing forward integration is franchising.

Guidelines for effective strategy

MGMT 1063 – Strategic Management | 2

 a. When present distributors are expensive or unreliable or incapable of meeting the firm’
distribution needs.
b. When the availability of quality distributors is so limited as to offer a competitive advantage to
those firms that integrate forward.
c. When an organization competes in an industry that is growing and is expected to continue to
grow.
d. When an organization has both the capital and human resources needed to manage the new
business of distributing its own products.
e. When the advantages of stable production are particularly high.
f. When present distributors or retailers have high profit margins.

2. Backward Integration – seeking ownership or increased control of a firm’s suppliers.

Guidelines for effective strategy

a. When an organization’s present suppliers are expensive, or unreliable, or incapable of meeting
the firm’s needs for parts, components, assemblies, or raw materials.
b. When the number of suppliers is small and the number of competitors is large.
c. When an organization competes in an industry that is growing rapidly.
d. When an organization has both capital and human resources to manage the new business of
supplying its own raw materials.
e. When the advantages of stable prices are particularly important.
f. When present supplies have high profit margins, which suggests that the business of supplying
products
g. When an organization needs to quickly acquire a needed resource.

3. Horizontal Integration – seeking ownership of or increased control over a firm’s competitors.

Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale
and enhanced transfer or resources and competencies.

a. Merger – it is a transaction involving two or more corporations in which stock is exchanged, but
from which only one corporation survives
-usually between firms of somewhat similar size and are usually “friendly”
-name derived from composite firms

b. Acquisitions -the purchase of a corporation that is completely absorbed as an operating

subsidiary or division of the acquiring corporation

c. Joint venture -a strategy of forming temporary partnership or consortium for the purpose of
gaining synergy
-provides a way to temporarily fit the different strengths of partners together so that an
outcome of value of both is achieved

Guidelines for effective strategy

a. When an organization can gain monopolistic characteristics in a particular area or region
without being challenged by the government for “tending substantially” to reduce competition,
b. When an organization competes in a growing industry
c. When increased economies of scale provide major competitive advantages
d. When an organization has both the capital and human talent needed to successfully manage
an expanded organization.
e. When competitors are faltering due to a lack of managerial expertise or a need for particular
resources that an organization possesses.

MGMT 1063 – Strategic Management | 3

B. Intensive Strategies – requires intensive efforts if a firm’s competitive position with existing products is to
be improved.
1. Market Penetration – seeks to increase market share for present products or services in present
markets through greater marketing efforts. This includes increasing the number of salespersons,
increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity
efforts.

Guidelines for effective strategy:

a. When current markets are not saturated with a particular product or service.
b. When the usage rate of present customers could be increased significantly.
c. When the market shares of major competitors have been declining while total industry sales
have been increasing.
d. When the correlation between sales and marketing expenditures historically has been high.
e. When increased economies of scale provide major competitive advantages.

2. Market Development – involves introducing present products or services into new geographic
areas.

Guidelines for effective strategy:

a. When new channels of distribution are available that are reliable, inexpensive, and of good
quality.
b. When an organization is very successful at what it does.
c. When new untapped or unsaturated markets exists.
d. When an organization has the needed capital and human resources to manage expanded
operations.
e. When an organization has excess production capacity.
f. When an organization’s basic industry is becoming rapidly global in scope.

3. Product Development – seeks to increase sales by improving or modifying present products or

services.

Guideline for effective strategy:

a. When the organization has successful products that are in the maturity stage of the product life
cycle.
b. When an organization competes in an industry that is characterized by rapid technological
developments.
c. When major competitors offer better-quality products at comparable prices.
d. When an organization competes in a high-growth industry.
e. When an organization has especially strong research and development capabilities.

C. Diversification Strategies- strategy which different products or divisions are added to the corporation
1. Related/concentric Diversification – their value chains possess competitively valuable cross-
business strategic fits. Most companies favor related diversification strategies in order to capitalize on
synergies as follows;
a. Transferring competitively valuable expertise, technological know-how, or other capabilities from
one business to another.
b. Combining the related activities of separate businesses into single operations to achieve lower
costs.
c. Exploring common use of a well-known brand name.
d. Cross-business collaboration to create competitively valuable resource strengths and
capabilities.

Guidelines for effective strategy:

a. When an organization competes in a no – growth or a slow – growth industry.

MGMT 1063 – Strategic Management | 4

 b. When adding new, but related, products would significantly enhance the sales of current
products.
c. When new, but related, products could be offered at highly competitive prices
d. When new, but related products have seasonal sales levels that counterbalance an
organization’s existing peaks and valleys.
e. When an organization’s products are currently in the declining stage of the product’s life cycle.
f. When an organization has a strong management team.

2. Unrelated/conglomerate Diversification – their value chains are so dissimilar that no competitively

valuable cross-business relationship exists.

Guidelines for effective strategy:

a. When revenues derived from an organization’s current products or services would increase
significantly by adding the new, unrelated products.
b. When an organization competes in a highly competitive and/or a no-growth industry, as
indicated by low industry profit margins and returns.
c. When an organization’s present channels of distribution can be used to market the new
products to current customers.
d. When the new products have countercyclical sales patterns compared to an organization’s
present products.
e. When an organization’s basic industry is experiencing declining annual sales and profits.
f. When an organization has the capital and managerial talent needed to compete successfully in
a new industry.
g. When an organization has the opportunity to purchase an unrelated business that is an
attractive investment opportunity.
h. When there exists financial synergy between the acquired and acquiring firm.
i. When existing markets for an organization’s present products are saturated.
j. When antitrust action could be charged against an organization that historically has
concentrated on a single industry.

Horizontal Growth •- the acquisition by one corporation of another corporation or

Strategy business unit in the same industry

•-is the strategy of a corporation that enters one or more businesses

Vertical Growth that provide goods or services necessary to the manufacture and
Strategy distribution of its own products but that were previously purchased
from other companies.
D. Defensive Strategies
1. Retrenchment – occurs when an organization regroups through cost and asset reduction to reverse
declining sales and profits. Designed to fortify an organization’s basic distinctive competence.
PHASES
a. Contraction- the initial effort to reduce size and costs; cutback in non-critical expenditures
b. Consolidation- the development of a program to stabilize the now-leaner corporation
c. Rebuilding- an attempt to once again expand the organization

Guidelines for effective strategy:

a. When an organization has a clearly distinctive competence but has failed consistently to meet
its objectives and goals over time.
b. When an organization is one of the weaker competitors in a given industry.
c. When an organization is plagued by inefficiency, low profitability, poor employee morale, and
pressure from stockholders to improve performance.
d. When an organization has failed to capitalize on external opportunities, minimize external
threats, take advantage of internal strengths, and overcome internal weaknesses over time.

MGMT 1063 – Strategic Management | 5

 e. When an organization has grown so large so quickly that major internal reorganization is
needed.

2. Divestiture – Selling a division or part of an organization. It is used to raise capital for further
strategic acquisitions or investments. It can be part of retrenchment strategy to rid an organization of
business that are unprofitable, that require too much capital, or that do not fit well with the firm’s other
activities.

Guidelines for effective strategy;

a. When an organization has pursued a retrenchment strategy and failed to accomplish needed
improvements.
b. When a division needs more resources to be competitive than the company can provide.
c. When a division is responsible for an organization’s overall poor performance.
d. When a division is a misfit with the rest of an organization; this can result from radically different
markets, customers, managers, employees, values or needs.
e. When a large amount of cash is needed quickly and cannot be obtained reasonably from other
sources.
f. When government antitrust action threatens an organization.

3. Liquidation – selling all of a company’s assets, in parts, for their tangible worth. It is recognition of
defeat and consequently can be an emotionally difficult strategy.

Guidelines for effective strategy:

a. When an organization has pursued both a retrenchment strategy and a divestiture strategy, and
neither has been successful.
b. When an organization’s only alternative is bankruptcy. It represents an orderly and planned
means of obtaining the greatest possible cash for an organization’s assets. A company can
legally declare bankruptcy first and then liquidate various divisions to raise needed capital.
c. When the stockholders of a firm can minimize their losses by selling the organization’s assets.

E. Stability strategy -appropriate for a successful corporation operating in an industry of medium

attractiveness.
-epitomized by steady-as-she-goes philosophy

1. No-change strategy -a corporation continues on its course

-success depends on a lack of change in the corporation’s external and internal environment
2. Profit strategy -it involves the sacrifice of future growth for present profits
-short-term success coupled to long-term stagnation
3. Pause strategy -it involves reducing the levels of a corporation’s objectives so that it can consolidate
its resources.
4. Proceed with caution strategy - -strategy results from a specific decision to proceed slowly because
of important factors developing in the external environment

MGMT 1063 – Strategic Management | 6

Michael Porter’s Five Generic Strategies

1. Overall cost leadership strategies - this strategy 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.”

Guidelines for effective strategy;

a. When price competition among rival sellers is especially vigorous.
b. When the products of rival sellers are essentially identical and suppliers are readily available
from any of several eager sellers.
c. When there are few ways to achieve product differentiation that have value to buyers.
d. When most buyers use the product in the same ways.
e. When buyers incur low costs in switching their purchases from one seller to another.
f. When buyers are large and have significant power to bargain down prices.
g. When industry newcomers use introductory low prices to attract buyers and build a customer
base.

2. Differentiation - this strategy involves the creation of a product or service that is perceived
throughout its industry as being unique.
- Uniqueness can be accomplished through design or brand image, technology, features, dealer
network, or customer service.
- Viable for earning above-average returns in a specific business because the resulting brand
loyalty lowers customer’s sensitivity to price.

Guidelines for effective strategy:

a. When there are many ways to differentiate the product or service and many buyers perceive
these differences as having value.
b. When buyer needs and uses are diverse.
c. When few rival firms are following a similar differentiation approach.
d. When technological change is fast paced and competition revolves around rapidly evolving
product features.

MGMT 1063 – Strategic Management | 7

 3. Focus - this strategy focuses on a particular buyer group, product line segment or geographic
segment.
- it is valued because of the belief that that an SBU that focuses its efforts is better able to serve
its narrow strategic target more effectively or efficiently than can its competitors.
- it does however necessitate a trade-off between profitability and overall market share

Guidelines for effective strategy;

a. When the target market niche is large, profitable, and growing
b. When industry leaders do not consider the niche to be crucial to their own success.
c. When industry leaders consider it too costly or difficult to meet the specialized needs of the
target market niche while taking care of their mainstream customers.
d. When the industry has many different niches and segments, thereby allowing a focuser to pick
a competitively attractive niche suited to its own resources.
e. When few, if any, other rivals are attempting to specialize in the same target segment.

Focus: maximize corporate and divisional resources

Manufacturing: strategy to reduce costs and to improve the quality of its output
Marketing: strategy to increase sales

Strategies to be avoided
1. Follow the leaders-ignores a firm’s particular strengths and weaknesses
2. Hit another home run-pioneering a successful product; 2nd chance to succeed is very slight
3. Arms race-spirited battle; example is price wars
4. Do everything-taking all opportunities at one time
5. Losing hand-continue throwing money to unsuccessful business

Means for Achieving Strategies

1. Joint Venture/Partnering – occurs when two or more companies form a temporary partnership or
consortium for the purpose of capitalizing on some opportunity.
- Allow companies to improve communications and networking, to globalize operations, and to
minimize risk.
- To pursue an opportunity that is to complex, uneconomical, or risky for a single firm to pursue
alone.
- Effective way to enhance corporate growth than mergers and acquisitions.

Reasons of failure:
a. Managers who must collaborate daily in operating the venture are not involved in forming or
shaping the venture.
b. The venture may benefit the partnering companies but may not benefit customers.
c. The venture may not be supported equally by both partners.
d. The venture may begin to compete more with one of the partners than the other.

Guidelines for effective strategy:

a. When a privately-owned organization is forming a joint venture with a publicly-owned
organization.
b. When a domestic organization is forming a joint venture with a foreign company.
c. When the distinct competencies of two or more firms complement each other especially well.
d. When some project is potentially very profitable but requires overwhelming resources and risks.
e. When two or more smaller firms have trouble competing with a large firm.
f. When there exists a need to quickly introduce a new technology.

2. Merger/Acquisition – occurs when two organization of about equal size unite to form one enterprise.
Reasons for merging:

MGMT 1063 – Strategic Management | 8

 a. Deregulation, technological change, excess capacity, inability to boost profits through price
increase, a depressed stock market, the need to gain economies of scale.
b. Increase market power, reduced entry barriers, reduced cost of new product development,
increased speed of products to market, lowered risk compared to developing new products,
increased diversification, avoidance of excessive competition, and opportunity to learn and
develop new capabilities.

Reasons why mergers fail:

a. Integration difficulties
b. Inadequate evaluation of target
c. Large or extraordinary debt
d. Inability to achieve synergy
e. Too much diversification
f. Managers overly focused on acquisitions
g. Too large an acquisition
h. Difficult to integrate different organizational cultures
i. Reduced employee morale due to layoffs and relocations

3. First Mover Advantages – refer to the benefits a firm may achieve by entering a new market or
developing a new product or service prior to rival firms.

Advantages:
a. Securing access to rare resources, gaining new knowledge of key factors and issues, and
carving out market share and a position that is easy to defend and costly for rival firms to
overtake.
b. Build a firm’s image and reputation with buyers
c. Produce cost advantages over rivals in terms of new technologies, new components, new
distribution channels, etc.
d. Create strongly loyal customers
e. Make imitation or duplication by a rival hard or unlikely.

4. Outsourcing – is a rapidly growing new business that involves companies taking over the functional
operations such as human resources, information systems, customer service and even marketing to
other firms.

REFERENCES

Textbooks

Rothaermel, Frank. (2017). Strategic Management 3rd Edition.

MGMT 1063 – Strategic Management | 9