POLICY ANALYSIS and

STRATEGIC MANAGEMENT

CHAPTER – I. INTRODUCTION

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 Defining Strategic Management

• Strategic management can be defined as the art

and science of formulating, implementing and
evaluating cross-functional decisions that enable
an organization to achieve its objectives.
• This definition implies, SM focuses on integrating
management, marketing, finance and accounting,
production and operations, research and
development (R&D), and information systems to
achieve organizational success.

2
• Strategic management is concerned with the
character and direction of the enterprise as a
whole.
• Strategic management is also concerned with
management planning and decision-making for
the medium to long-term future.
• It is concerned with the anticipation of that
future, and with the establishment of a vision or
view of how the enterprise should develop into
the future that it must face.

3
 Stages of Strategic Management
• The strategic-management process consists of three stages:
I. Strategy formulation
II. Strategy implementation and
III. Strategy evaluation
I. Strategy formulation includes
 Developing a vision and mission,
 Identifying an organization’s external opportunities and
threats,
 Determining internal strengths and weaknesses,
 Establishing long-term objectives,
 Generating alternative strategies, and
 Choosing particular strategies to pursue.

4
• Strategy-formulation decisions commit an
organization to specific products, markets,
resources, and technologies over an extended
period of time. Strategies determine long-term
competitive advantages.
• For better or worse, strategic decisions have
major multifunctional consequences and enduring
effects on an organization.
• Top managers have the best perspective to
understand fully the ramification of strategy-
formulation decisions; they have the authority to
commit the resources necessary for
implementation.
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 II. Strategy Implementation
• It requires a firm to establish annual objectives, devise
policies, motivate employees, and allocate resources so
that formulated strategies can be executed.
• Strategy implementation includes
o Developing a strategy-supportive culture
o Creating an effective organizational structure
o Redirecting marketing efforts
o Preparing budgets
o Developing and utilizing information systems, and
o Linking employee compensation to organizational
performance

6
• Strategy implementation often is called the “action
stage” of strategic management.
• Implementing strategy means mobilizing employees
and managers to put formulated strategies into action.
• Often considered to be the most difficult stage in
strategic management, strategy implementation requires
personal discipline, commitment, and sacrifice.
• Successful strategy implementation hinges on
managers’ ability to motivate employees, which is more
an art than a science.
• Strategies formulated but not implemented serve no
useful purpose.

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 III. Strategy Evaluation
• It is the final stage in strategic management.
• Managers desperately need to know when particular
strategies are not working well; strategy evaluation is the
primary means for obtaining this information.
• All strategies are subject to future modification because
external and internal factors constantly change. Three
fundamental strategy-evaluation activities are
(1) reviewing external and internal factors that are the bases for current strategies
(2) measuring performance, and
(3) taking corrective actions
• Strategy evaluation is needed because success today is no
guarantee of success tomorrow! Success always creates
new and different problems

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• Formulation, implementation, and evaluation of
strategy activities occur at three hierarchical
levels in a large organization: corporate,
divisional or strategic business unit, and
functional.
• By fostering communication and interaction
among managers and employees across
hierarchical levels, strategic management helps a
firm function as a competitive team.

9
1.3. Key Terms in Strategic Management

• Before we further discuss strategic

management, we should define nine key terms:
– Competitive advantage, strategists, vision and
mission statements, external opportunities and
threats, internal strengths and weaknesses, long-
term objectives, strategies, annual objectives, and
policies.

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 Competitive advantage

• Strategic management is all about gaining and

maintaining competitive advantage.
• Competitive Advantage can be defined as any
activity a firm does especially well compared to
activities done by rival firms, or any resource a
firm possesses that rival firms desire.

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• Normally, a firm can sustain a competitive
advantage for only a certain period because of
rival firms imitating and undermining that
advantage. Thus, it is not adequate simply to
obtain competitive advantage.
• A firm must strive to achieve sustained
competitive advantage by
 Continually adapting to changes in external trends and
events and internal capabilities, competencies, and
resources; and
 Effectively formulating, implementing, and evaluating
strategies that capitalize on those factors.

12
 Strategists

• Strategists are the individuals most responsible for

the success or failure of an organization.
• They have various job titles, such as chief executive
officer, president, owner, chair of the board,
executive director, chancellor, dean, and
entrepreneur.
• Athletic coaches are also strategists. Football,
basketball, baseball, soccer, and in fact most athletic
contests are often won or lost based a team’s game
plan.

13
 Vision & Mission Statements

• Many organizations today develop a vision statement

that answers the question ―What do we want to
become?‖
• Many vision statements are a single sentence.
• Mission statements are ―enduring statements of
purpose that distinguish one business from other
similar firms. A mission statement identifies the scope
of a firm’s operations in product and market terms.‖ It
addresses the basic question that faces all strategists:
―What is our business?‖

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Opportunities and threats

• Opportunities and 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.
• Opportunities and threats are largely beyond
the control of a single organization—thus the
word external.

15
• A basic tenet of strategic management is that firms need
to formulate strategies to take advantage of external
opportunities and avoid or reduce the impact of external
threats.
• For this reason, identifying, monitoring, and evaluating
external opportunities and threats are essential for
success.
Internal strengths and internal weaknesses
• Internal strengths and internal weaknesses are an
organization’s controllable activities that are performed
especially well or poorly. They arise in the management,
marketing, finance/ accounting, production/operations,
research and development, and management information
systems (MIS) activities of a business.
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Long term Objectives

• Objectives can be defined as specific results that

an organization seeks to achieve in pursuing its
basic mission. Long-term means more than one
year.
• Objectives are essential for organizational success
because they provide direction; aid in evaluation;
create synergy; reveal priorities; focus
coordination; and provide a basis for effective
planning, organizing, motivating, and controlling
activities.
• Objectives should be challenging, measurable,
consistent, reasonable, and clear.
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Strategies
• Strategies are the means by which long-term
objectives will be achieved.
• Business strategies may include geographic
expansion, diversification, acquisition, product
development, market penetration,
retrenchment, divestiture, liquidation, and joint
ventures.
• Strategies are potential actions that require top-
management decisions and large amounts of
the firm’s resources.
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 Annual Objectives

• Annual objectives are short-term milestones that organizations must

achieve to reach long term objectives. Like long-term objectives,
annual objectives should be measurable, quantitative, challenging,
realistic, consistent, and prioritized.
• They must also be established at the corporate, divisional, and
functional levels in a large organization. Annual objectives should
be stated in terms of management, marketing, finance/accounting,
production/operations, R&D, and MIS accomplishments. A set of
annual objectives is needed for each long-term objective.
• Annual objectives provide the basis for allocating resources.

19
Policies
• Policies are the means by which annual objectives will
be achieved. Policies include guidelines, rules, and
procedures established to support efforts to achieve
stated objectives.
• Policies are guides to decision making and address
repetitive or recurring situations. Usually, policies are
stated in terms of management, marketing,
finance/accounting, production/ operations, R&D, and
MIS activities.
• They may be established at the corporate level and
apply to an entire organization, at the divisional level
and apply to a single division, or they may be
established at the functional level and apply to
particular operational activities or departments.

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Types of Strategy
1. Corporate strategy refers to the
overarching strategy of the diversified firm.
• Such a corporate strategy answers the
questions of "which businesses should we be
in?" and "how does being in these businesses
create synergy and/or add to the competitive
advantage of the corporation as a whole?"

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2. Business strategy refers to the aggregated
strategies of single business firm or a strategic
business unit (SBU) in a diversified corporation.
3. Functional strategies include marketing
strategies, new product development strategies,
human resource strategies, financial strategies,
legal strategies, supply-chain strategies, and
information technology management strategies.
• The emphasis is on short and medium term
plans and is limited to the domain of each
department’s functional responsibility.

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Characteristics of Strategic Management
• Strategic management involves adapting the
organization to its business environment.
• Strategic management is fluid and complex. Change
creates novel combinations of circumstances requiring
unstructured non-repetitive responses.
• Strategic management affects the entire organization
by providing direction.
• Strategic management involves both strategy
formulation ( content) and also strategy
implementation ( process).
• Strategic management is done at several levels: overall
corporate strategy, and individual business strategies.
• Strategic management involves both conceptual and
analytical thought processes

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 A comprehensive Strategic Management Model

Perform Implement
External Audit Strategies- Measure
Implement Marketing, &
Generate, Strategies – Finance, Evaluate
Establish Evaluate, & Managemen Accounting,
Develop
t Issues R&D, and MIS
Performa
Vision & Long – Term Select nce
Issues
Mission objectives Strategies

Perform
Internal Audit

Strategy Formulation Strategy

Strategy Implementation Evaluation

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 CHAPTER – II
STRATEGY FORMULATION:
THE BUSINESS MISSION, VISION AND VALUES
 Vision Statement
• Defines the desired or intended future state of an
organization or enterprise in terms of its strategic
direction.
• Vision is a long term view, sometimes describing
how the organization would like the world in
which it operates to be.
• Vision is what or where your business intends to
be – it’s hoped for destination
• Vision should indicate in what significant ways
your business intends to be different than it is
today.
• VISION represents the strategic intent, the mental
projection in the present of the company’s future
expectations.
• Vision statement answers the question:
“What do we want to become?”
• The Vision Statement focuses on the future; it is a
source of inspiration and motivation.
• Often it describes not just the future of the
organization but the future of the industry or
society in which the organization hopes to effect
change.
Features of an effective vision statement include:

 Clare and free of ambiguity

 Describing a bright future (hope)
 Memorable and engaging expression
 Realistic aspirations, achievable
 Alignment with organizational values and culture
 Time bound if it talks of achieving any goal or
objective
 Examples of Vision Statement

“ To Become the worldwide leader in retailing.”

Wal-Mart Stores
“To become the world’s leading consumer
company for automotive products & services”
Ford Motor
Mission Statement
• An enduring statement of purpose that
distinguishes one organization from other
similar enterprises
• A declaration of an organization’s ―reason for
being‖
• Mission statement answers the question:
“What is our business?”
• The unique purpose that sets a company
apart from others of its type and identifies the
scope of its operation, in product, market, and
technology.
• A mission statement is a sentence describing the
company's function, markets and competitive
advantages
• It is a short written statement of your business
goals and philosophies
• A mission statement defines what an
organization is, why it exists, its reason for
being.
• At a minimum, your mission statement should
define who your primary customers are, identify
the products and services you produce, and
describe the geographical location in which you
operate
• The mission statement guides the day-to-day
operations and decision-making of the
organization.
• It helps in tactical planning
• The mission statement helps members of the
organization get on the same page on what
they should do and how they should do it.
Features of an effective mission statement are:

• Purpose and values of the organization

• What business the organization wants to be in
(products or services, market) or who are the
organization's primary "clients" (stakeholders)
• What are the responsibilities of the
organization towards these "clients"
• What are the main objectives that support the
company in accomplishing its mission
How to write a Mission?

• Ask
"What do we do?";
"How do we do it?"; and
 "For whom do we do it,"
 An effective mission statement:
• Broad in scope
• Generate range of feasible strategic alternatives
• Not excessively specific
• Reconcile interests among diverse stakeholders
• Arouse positive feelings and emotions
• Motivate readers to action
• Generate the impression that firm is successful, has
direction, and is worthy of time, support, and investment
• Reflect judgments : future growth
• Provide criteria for selecting strategies
• Basis for generating & screening strategic options
• Are dynamic in orientation
Mission Components
1. Customers
2. Products or services
3. Markets
4. Technology
5. Survival, growth, and profitability
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees
 Products
Services Markets
Customers

Technology

Employees
Mission
Elements
Survival
Growth
Profit
Public
Image
Self-Concept
Components of mission and corresponding
questions to be answered:

• Customers:
“Who are the firm’s customers?”

• Products or services:
“What are the firm's major products or
services?”

Ch. 2-38
• Markets:
“Geographically, where does the firm compete?”
• Technology:
“Is the firm technologically current?”
• Concern for survival, growth, and profitability:
“Is the firm committed to growth and financial
soundness?”
• Philosophy:
“What are the basic beliefs, values, aspirations, and
ethical priorities of the firm?”

Ch. 2-39
• Self-concept:
“What is the firm’s distinctive competence or
major competitive advantage?”

• Concern for public image:

“Is the firm responsive to social, community,
and environmental concerns?”

• Concern for employees:

“Are employees a valuable asset of the firm?”

Ch. 2-40
 Business values
• Guiding principle of an organization in undertaking
its businesses.
– Values are broad beliefs about what is or is not
appropriate.

– Strong core values for an organization helps build

institutional identity, gives character to an organization, and
it backs up the mission statement.

– Organizational culture reflects the dominant value system

of the organization as a whole.
Ch. 2-41
 Setting Goals and Objectives
A GOAL is an open-ended statement of what one wants to
accomplish with no quantification of what is to be achieved
and/or no time criteria for completion.
Goal _ is expected (desired) performance to be accomplished but
it is not set specifically- is desired future outcome that an
organization strives to achieve generally.
Goal is an end that the organization strives to attain. Supervisors
break down processes, analyze them, set objectives and then
drive hard to achieve them. Doing the same thing and
expecting different results doesn't work.
Objective
• An objective is simply a statement of what is to done and
should be stated in terms of results. A mnemonic aid to
write objectives is SMART (Specific, Measurable,
Attainable, Result-oriented, Time-limited).
The end results of planned activity
• WHAT is to be accomplished
• Time in which to accomplish it (WHEN)
• Characteristics of good (effective) objective (SMART)
I. Specific; Objectives should state the exact level of
performance expected specifically. An objective must be
specific with a single key result.

43
II. Measurable- as much as possible objectives
should be expressed quantitatively, therefore, it is
possible to easily determine whether or not goals
have been achieved.
III. Appropriate- objectives should be prepared in
suitable, acceptable and achievable manner.
IV. Realistic and challenging- objectives should be
attainable or real rather than fantasy. An objective
must be attainable with the resources that are
available. It must be realistic.
V. Time bound _ objectives should be set with in
specific time limits or target dates for their
attainment. The objective should be traceable.

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 CHAPTER THREE
Strategy Formulation

External Environmental Analysis

 External Environment

 The environment that exists outside the

organization,
 Also called as general or remote environment.
An external audit focuses on identifying
and evaluating trends and events beyond
the control of a single firm.

46
Opportunities arise when an organization can take
advantage of conditions in its external environment
to formulate and implement strategies that enable it
to improve performance.

Whereas, threats arise when conditions in the

external environment endanger the integrity of the
organization's activities

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Opportunities and 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.
Therefore, a basic tenet of strategic management is that
firms need to formulate strategies to take advantage of
external opportunities and to avoid or reduce the
impact of external threats

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 A n a l y zi n g t h e e x t e r n a l e n v i ro n m e n t

The purpose is to develop a finite list of

opportunities that could benefit a firm and threats
that should be avoided
Thus, organization should be able to respond to the
factors by formulating strategies that
take advantage of external opportunities or
minimize the impact of potential threats

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 Process of Performing an External Audit

• Managers need information in order to know and

develop an understanding about what is happening
in the external environment
• Three approaches to information gathering:
– Scanning: general surveillance of environmental
changes; looking for early signals of changes
– Monitoring: close attention to specific developments
that could affect the organization
– Competitive Intelligence: following actions of
competitors
• Assimilate & evaluate information
• Resulting in a list of the most important key external
factors
The External Environment
 Economic Forces
• Affect the general health and well-being of a nation or
the regional economy of an organization, which in turn
affect companies’ and industries’ ability to earn an
adequate rate of return.
• Have a direct impact on the potential attractiveness of
various strategies.
• The four most important macroeconomic forces are the
– Growth rate of the economy,
– Interest rates,
– Currency exchange rates,
– Inflation (or deflation) rates.
• They affect the economic factors and affect the
customers buying behaviors.
 Economic Forces
key economic factors such as:
• Foreign countries’ economic conditions
• Import/export factors
• Demand shifts for goods/services
• Income differences by region/customer
• Price fluctuations
• labor & capital
• Tax rates etc.
 Technological Forces

• Technological developments relevant to a

business
– Telecommunications
– Internet
– On-line training
– Product and process innovations

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Demographic Forces
– Outcomes of change in characteristics of the population
such as
–Size of population and growth rate
–Age distribution of population
–Education levels
–Income distribution
–Ethnic diversity
–Geographic distribution
Political and legal conditions affecting business

– Government policies toward business

– Investment incentives

– Business regulation: labor, environment

– Budget conditions and plans

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Socio-cultural
• Influence of values, beliefs, and lifestyles of
a country on business
– Family relationships
– Attitudes about work
– Living arrangements
– Styles of entertainment
– Attitudes toward health

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Global
• International developments that can impact a
business
– Rising global trade and WTO
– Intellectual property protection
– Important political events:
– Search for low cost suppliers

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Industry Environment Analysis
• Industry Defined
– A group of firms producing products that are
close substitutes
• Firms that influence one another
• Includes a rich mix of competitive strategies
that companies use in pursuing strategic
competitiveness and above-average returns
• Industry Environment: The set of factors directly
influencing a firm and its competitive actions and
competitive responses

2–59
The Five Forces of Competition Model

2–60
The Threat of New Entrants to the Industry

• It adds new production capacity and

potential to erode the market share of the
existing industry.
• New entrants into the industry are potential
competitors.
• Potential competitors are organizations that
currently are not competing in an industry
but have the capability to do so if they
choose.
• Fundamental question: how easy is it for another
company to enter the industry?
• Factors making easy entry to industry
– Economies of Scale
– Low product differentiation
– Low capital requirements
– No switching costs for buyer (Switching Costs One-
time costs customers incur when they buy from a different
supplier)
– Easy access to distribution channels
– Little government regulation
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The Bargaining Power of Suppliers
• Providers of goods and services to an industry
have power over their customers through their
ability to set price and control quality, delivery
time, and order quantity.
• Can be viewed as a threat when they are able to
force up the price that an organization must pay
for input or reduce the quality of goods
supplied, thereby depressing the organization’s
success.
• Alternatively, week supplies give a company
the opportunity to force down prices and
demand higher quality.
• Fundamental question: how badly does a supplier
need your business?
• Factors giving power to supplier:
– Supplier industry dominated by few firms
– Buyer is not important to supplier
– Supplier’s product is important input to buyer’s product
– Supplier’s products have high switching costs
– Supplier can “integrate forward” and become
competitor of buyer

64
The Threat of Substitute Products
• Here, the products of industries that serves similar
consumer needs as those of the industry being analyzed.
• A substitute may be regarded as something, which meets
the same needs as the product in any industry.
For example:
• Organization in the coffee industry competes indirectly
with those in the tea and soft-drink industries.
• The extent to which substitutes limit price and profit
depends on:
– The buyers propensity to substitute
– Relative price and performance of substitutes
• The existence of close substitutes presents a strong
competitive threat, limiting the price an organization can
charge and thus its success.
• Fundamental question: what other products or
services could perform the same function as your
products or services?
• Factors indicating high threat of substitutes:
– Few switching costs for buyer
– Price of substitute lower or quality higher than for your
products

66
 The Bargaining Power of Buyers
• Buyers of an industry product can exert bargaining
power over that industry by
– forcing prices down,
– reducing the amount of good they purchased from
the industry, and
– demanding better quality for the same price.
• Buyers can be viewed as a competitive threat when
they force down prices or when they demand higher
quality and better service (which increases operating
costs).
• Alternatively, weak buyers give an organization the
opportunity to raise prices and earn greater returns.
• Fundamental questions: How badly does a buyer
need your products or services?
• Factors contributing to high buyer power:
– Few buyers compared to the number of sellers
– Buyers purchases high relative to seller’s sales
– Products are undifferentiated
– Buyer has low switching costs
– Buyer can “integrate backward” and supply the
product to itself

68
 Competitive Rivalry
• It describes the intensity of rivalry among competitors
or established organizations within in the industry.
• Some industries appear “sleepy” because of a low level
of rivalry among competitors .
• On the other hand, some industries are characterized by
a high level of competitive activity.
• If this competitive force is weak, organizations have an
opportunity to raise prices and earn greater profits.
• But if it is strong, significant price competition,
including price wars, may result from the intense rivalry.
• Fundamental question: how intense is
competition in the industry?
• Factors leading to high competitive rivalry:
– Numerous or equally balanced competitors
– High fixed costs
– Slow industry growth
– Lack of differentiation or switching costs
– High exit barriers

70
Complementary
– The network of companies that sell
complementary products or services or are
compatible with the focal firm’s own product or
service.
• If a complementor’s product or service adds value to
the sale of the focal firm’s product or service, it is
likely to create value for the focal firm.
• However, if a complementor’s product or service is in
a market into which the focal firm intends to expand,
the complementary can represent a formidable
competitor.

2–71
 CHAPTER FOUR
Internal Environment Assessment

72
 The Nature of Internal Audit

The Strengths and Weakness of the Firm

– A Firm’s Tangible & Intangible Resources combine with firm’s
capabilities to create distinctive competencies
– Distinctive Competencies – those activities that a firm
performs better than any competing firm
– Sustained Competitive Advantage – firms that possess
and exploit costly to imitate, rare, and valuable
resources & capabilities in choosing and implementing
their strategies may enjoy a period of sustained
competitive advantage and above normal economic
profit.
Capabilities
 Emerge over time through complex interaction between and
among tangible and intangible resources.
 Become stronger and more valuable strategically through
repetition and practice.
 Skills and knowledge of firm’s employees, including functional
expertise (human capital)
Examples:
• Toyota’s efficient distribution systems - Just-in-time (JIT)
delivery, strong supplier relationships, and well-trained
inventory specialists.
• Nike’s new product development procedures – creative
workforce and innovation-driven culture, strong leadership,
and effective market research.
Distinctive Competencies
 Question of Value: Do a firm’s resources and
capabilities enable the firm to respond to neutralize
external threats and/or capitalize on external
opportunities?
 Question of Rarity: Is a resource or capability currently
controlled by only a small number of competing firms?
 Question of Inimitability: Do firms without the
resource or capability face a cost disadvantage in
obtaining or developing it?
 Question of Organization: Are a firm’s other policies
and procedures organized to support the use of its
valuable, rare, and costly to imitate resources and/or
capabilities?
Internal Analyses
By studying the internal
environment, firms
identify what they can do

Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)
• STRENGTH = factor that is better than:
– past performance
– key competitors
– industry as a whole
• WEAKNESS = factor that is worse than:
– past performance
– key competitors
– industry as a whole

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Internal Audit

Information from:
 Management
 Marketing
 Finance/accounting
 Production/operations
 Research & Development
 Management information Systems
 General Management Factors
• Structure of the organization
• Organizational Culture
• Record in Achieving Objectives
• Top management skills, capabilities, &
interests.
• Reputation of the Organization and Top
Management
• Social Responsibility record
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 Human Resource Management

• Number of employees
• Employee skills and morale
• Recognition/promotion/reward systems
• Training programs

80
Marketing
Marketing Functions

 Selling products/services
 Product & service planning
 Pricing
 Distribution
 Marketing research
Operations (Manufacturing or Service Firms)

• Quality Initiatives
– Quality certifications
• Location of facilities
• Outsourcing
• Raw material costs and availability
• Economies of scale
– decreasing fixed costs/ unit when producing more
• Re-engineering
• Percentage of cost of goods sold to sales
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Research & Development

Research & Development Functions

 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to reduce
costs
Management Information Systems

• Information Systems
• Security
• User-friendly
• E-commerce
 Purpose of Internal Analysis
• Identify and evaluate what’s going on inside
the firm.
• The goal is to assess what are strengths and
what are weaknesses.

• Critical in making decisions about the future

of the organization.
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Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies

 Uncertainty regarding characteristics of the general and

the industry environments, competitors’ actions, and
customers’ preferences
 Complexity regarding the interrelated causes shaping a
firm’s environments and perceptions of the environments
 Intra organizational Conflicts among people making
managerial decisions and those affected by them
Choosing the right tools for internal analysis
 Start with simple techniques
 Consider all tools and identify those likely to be useful
 Define the competitive capabilities the enterprise
needs
 Identify the subsystems which support these
capabilities
 Identify core competence relative to competitive
capabilities
 Determine changes to enhance/improve core
competence
 Take a systemic view
 Adjust the methods of analysis in the light of what is
found
Some commonly used techniques
for internal analysis

Single Businesses Multiple Businesses

Resource Audit Portfolio Analysis
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis

Both Single and Multiple Businesses

Core Competencies
Shareholder Value Analysis
End!

89
 CHAPTER THREE
Strategy Formulation

External Environmental Analysis

 External Environment

 The environment that exists outside the

organization,
 Also called as general or remote environment.
An external audit focuses on identifying
and evaluating trends and events beyond
the control of a single firm.

2
Opportunities arise when an organization can take
advantage of conditions in its external environment
to formulate and implement strategies that enable it
to improve performance.

Whereas, threats arise when conditions in the

external environment endanger the integrity of the
organization's activities

3
Opportunities and 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.
Therefore, a basic tenet of strategic management is that
firms need to formulate strategies to take advantage of
external opportunities and to avoid or reduce the
impact of external threats

4
 A n a l y zi n g t h e e x t e r n a l e n v i ro n m e n t

The purpose is to develop a finite list of

opportunities that could benefit a firm and threats
that should be avoided
Thus, organization should be able to respond to the
factors by formulating strategies that
take advantage of external opportunities or
minimize the impact of potential threats

5
 Process of Performing an External Audit

• Managers need information in order to know and

develop an understanding about what is happening
in the external environment
• Three approaches to information gathering:
– Scanning: general surveillance of environmental
changes; looking for early signals of changes
– Monitoring: close attention to specific developments
that could affect the organization
– Competitive Intelligence: following actions of
competitors
• Assimilate & evaluate information
• Resulting in a list of the most important key external
factors
The External Environment
 Economic Forces
• Affect the general health and well-being of a nation or
the regional economy of an organization, which in turn
affect companies’ and industries’ ability to earn an
adequate rate of return.
• Have a direct impact on the potential attractiveness of
various strategies.
• The four most important macroeconomic forces are the
– Growth rate of the economy,
– Interest rates,
– Currency exchange rates,
– Inflation (or deflation) rates.
• They affect the economic factors and affect the
customers buying behaviors.
 Economic Forces
key economic factors such as:
• Foreign countries’ economic conditions
• Import/export factors
• Demand shifts for goods/services
• Income differences by region/customer
• Price fluctuations
• labor & capital
• Tax rates etc.
 Technological Forces

• Technological developments relevant to a

business
– Telecommunications
– Internet
– On-line training
– Product and process innovations

10
Demographic Forces
– Outcomes of change in characteristics of the population
such as
–Size of population and growth rate
–Age distribution of population
–Education levels
–Income distribution
–Ethnic diversity
–Geographic distribution
Political and legal conditions affecting business

– Government policies toward business

– Investment incentives

– Business regulation: labor, environment

– Budget conditions and plans

12
Socio-cultural
• Influence of values, beliefs, and lifestyles of
a country on business
– Family relationships
– Attitudes about work
– Living arrangements
– Styles of entertainment
– Attitudes toward health

13
Global
• International developments that can impact a
business
– Rising global trade and WTO
– Intellectual property protection
– Important political events:
– Search for low cost suppliers

14
Industry Environment Analysis
• Industry Defined
– A group of firms producing products that are
close substitutes
• Firms that influence one another
• Includes a rich mix of competitive strategies
that companies use in pursuing strategic
competitiveness and above-average returns
• Industry Environment: The set of factors directly
influencing a firm and its competitive actions and
competitive responses

2–15
The Five Forces of Competition Model

2–16
The Threat of New Entrants to the Industry

• It adds new production capacity and

potential to erode the market share of the
existing industry.
• New entrants into the industry are potential
competitors.
• Potential competitors are organizations that
currently are not competing in an industry
but have the capability to do so if they
choose.
• Fundamental question: how easy is it for another
company to enter the industry?
• Factors making easy entry to industry
– Economies of Scale
– Low product differentiation
– Low capital requirements
– No switching costs for buyer (Switching Costs One-
time costs customers incur when they buy from a different
supplier)
– Easy access to distribution channels
– Little government regulation
18
The Bargaining Power of Suppliers
• Providers of goods and services to an industry
have power over their customers through their
ability to set price and control quality, delivery
time, and order quantity.
• Can be viewed as a threat when they are able to
force up the price that an organization must pay
for input or reduce the quality of goods
supplied, thereby depressing the organization’s
success.
• Alternatively, week supplies give a company
the opportunity to force down prices and
demand higher quality.
• Fundamental question: how badly does a supplier
need your business?
• Factors giving power to supplier:
– Supplier industry dominated by few firms
– Buyer is not important to supplier
– Supplier’s product is important input to buyer’s product
– Supplier’s products have high switching costs
– Supplier can “integrate forward” and become
competitor of buyer

20
The Threat of Substitute Products
• Here, the products of industries that serves similar
consumer needs as those of the industry being analyzed.
• A substitute may be regarded as something, which meets
the same needs as the product in any industry.
For example:
• Organization in the coffee industry competes indirectly
with those in the tea and soft-drink industries.
• The extent to which substitutes limit price and profit
depends on:
– The buyers propensity to substitute
– Relative price and performance of substitutes
• The existence of close substitutes presents a strong
competitive threat, limiting the price an organization can
charge and thus its success.
• Fundamental question: what other products or
services could perform the same function as your
products or services?
• Factors indicating high threat of substitutes:
– Few switching costs for buyer
– Price of substitute lower or quality higher than for your
products

22
 The Bargaining Power of Buyers
• Buyers of an industry product can exert bargaining
power over that industry by
– forcing prices down,
– reducing the amount of good they purchased from
the industry, and
– demanding better quality for the same price.
• Buyers can be viewed as a competitive threat when
they force down prices or when they demand higher
quality and better service (which increases operating
costs).
• Alternatively, weak buyers give an organization the
opportunity to raise prices and earn greater returns.
• Fundamental questions: How badly does a buyer
need your products or services?
• Factors contributing to high buyer power:
– Few buyers compared to the number of sellers
– Buyers purchases high relative to seller’s sales
– Products are undifferentiated
– Buyer has low switching costs
– Buyer can “integrate backward” and supply the
product to itself

24
 Competitive Rivalry
• It describes the intensity of rivalry among competitors
or established organizations within in the industry.
• Some industries appear “sleepy” because of a low level
of rivalry among competitors .
• On the other hand, some industries are characterized by
a high level of competitive activity.
• If this competitive force is weak, organizations have an
opportunity to raise prices and earn greater profits.
• But if it is strong, significant price competition,
including price wars, may result from the intense rivalry.
• Fundamental question: how intense is
competition in the industry?
• Factors leading to high competitive rivalry:
– Numerous or equally balanced competitors
– High fixed costs
– Slow industry growth
– Lack of differentiation or switching costs
– High exit barriers

26
Complementary
– The network of companies that sell
complementary products or services or are
compatible with the focal firm’s own product or
service.
• If a complementor’s product or service adds value to
the sale of the focal firm’s product or service, it is
likely to create value for the focal firm.
• However, if a complementor’s product or service is in
a market into which the focal firm intends to expand,
the complementary can represent a formidable
competitor.

2–27
End!
 CHAPTER FOUR
Internal Environment Assessment

1
 The Nature of Internal Audit

The Strengths and Weakness of the Firm

– A Firm’s Tangible & Intangible Resources combine with firm’s
capabilities to create distinctive competencies
– Distinctive Competencies – those activities that a firm
performs better than any competing firm
– Sustained Competitive Advantage – firms that possess
and exploit costly to imitate, rare, and valuable
resources & capabilities in choosing and implementing
their strategies may enjoy a period of sustained
competitive advantage and above normal economic
profit.
Capabilities
 Emerge over time through complex interaction between and
among tangible and intangible resources.
 Become stronger and more valuable strategically through
repetition and practice.
 Skills and knowledge of firm’s employees, including functional
expertise (human capital)
Examples:
• Toyota’s efficient distribution systems - Just-in-time (JIT)
delivery, strong supplier relationships, and well-trained
inventory specialists.
• Nike’s new product development procedures – creative
workforce and innovation-driven culture, strong leadership,
and effective market research.
Distinctive Competencies
 Question of Value: Do a firm’s resources and
capabilities enable the firm to respond to neutralize
external threats and/or capitalize on external
opportunities?
 Question of Rarity: Is a resource or capability currently
controlled by only a small number of competing firms?
 Question of Inimitability: Do firms without the
resource or capability face a cost disadvantage in
obtaining or developing it?
 Question of Organization: Are a firm’s other policies
and procedures organized to support the use of its
valuable, rare, and costly to imitate resources and/or
capabilities?
Internal Analyses
By studying the internal
environment, firms
identify what they can do

Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)
• STRENGTH = factor that is better than:
– past performance
– key competitors
– industry as a whole
• WEAKNESS = factor that is worse than:
– past performance
– key competitors
– industry as a whole

6
Internal Audit

Information from:
 Management
 Marketing
 Finance/accounting
 Production/operations
 Research & Development
 Management information Systems
 General Management Factors
• Structure of the organization
• Organizational Culture
• Record in Achieving Objectives
• Top management skills, capabilities, &
interests.
• Reputation of the Organization and Top
Management
• Social Responsibility record
8
 Human Resource Management

• Number of employees
• Employee skills and morale
• Recognition/promotion/reward systems
• Training programs

9
Marketing
Marketing Functions

 Selling products/services
 Product & service planning
 Pricing
 Distribution
 Marketing research
Operations (Manufacturing or Service Firms)

• Quality Initiatives
– Quality certifications
• Location of facilities
• Outsourcing
• Raw material costs and availability
• Economies of scale
– decreasing fixed costs/ unit when producing more
• Re-engineering
• Percentage of cost of goods sold to sales
11
Research & Development

Research & Development Functions

 Development of new products before

competitors
 Improving product quality
 Improving manufacturing processes to reduce
costs
Management Information Systems

• Information Systems
• Security
• User-friendly
• E-commerce
 Purpose of Internal Analysis
• Identify and evaluate what’s going on inside
the firm.
• The goal is to assess what are strengths and
what are weaknesses.

• Critical in making decisions about the future

of the organization.
14
Conditions Affecting Managerial Decisions About
Resources, Capabilities, and Core Competencies

 Uncertainty regarding characteristics of the general and

the industry environments, competitors’ actions, and
customers’ preferences
 Complexity regarding the interrelated causes shaping a
firm’s environments and perceptions of the environments
 Intra organizational Conflicts among people making
managerial decisions and those affected by them
Choosing the right tools for internal analysis
 Start with simple techniques
 Consider all tools and identify those likely to be useful
 Define the competitive capabilities the enterprise
needs
 Identify the subsystems which support these
capabilities
 Identify core competence relative to competitive
capabilities
 Determine changes to enhance/improve core
competence
 Take a systemic view
 Adjust the methods of analysis in the light of what is
found
Some commonly used techniques
for internal analysis

Single Businesses Multiple Businesses

Resource Audit Portfolio Analysis
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis

Both Single and Multiple Businesses

Core Competencies
Shareholder Value Analysis
 CHAPTER - 5
STRATEGY ANALYSIS &
CHOICE
The Process of Generating and Selecting Strategies

 Nature of Strategy Analysis & Choice

• Generating alternative strategies
• Evaluating alternative strategies
• Selecting strategies to pursue
 Seeks to determine alternative courses of
action that could best enable the firm to
achieve its mission and objectives
 Strategy Analysis & Choice

Generating Alternatives
• Participation in generating alternative strategies
should be as broad as possible
• Alternative strategies proposed by participants
should be considered, discussed, and ranked in
order of attractiveness

Ch 7 -3 Copyright © 2011 Pearson Education

The Strategy-Formulation Analytical Framework

6-4
A Comprehensive Strategy-Formulation Framework

 Stage 1 - Input Stage

 Summarizes the basic input information
needed to formulate strategies
 Consists of the EFE Matrix, the IFE Matrix,
and the Competitive Profile Matrix (CPM)
 Stage 2 - Matching Stage

 Focuses on generating feasible alternative strategies

by aligning key external and internal factors
 Techniques include the
• Strengths-Weaknesses-Opportunities-Threats (SWOT)
Matrix,
• Strategic Position and Action Evaluation (SPACE) Matrix,
• Boston Consulting Group (BCG) Matrix,
• Internal-External (IE) Matrix, and
• Grand Strategy Matrix
Matching Key External and Internal Factors
to Formulate Alternative Strategies
 SWOT Matrix

1. List the firm’s key external opportunities

2. List the firm’s key external threats
3. List the firm’s key internal strengths
4. List the firm’s key internal weaknesses
 The Matching Stage

 The Strengths-Weaknesses-Opportunities-
Threats (SWOT) Matrix helps managers
develop four types of strategies:
 SO (strengths-opportunities) Strategies
 WO (weaknesses-opportunities) Strategies
 ST (strengths-threats) Strategies
 WT (weaknesses-threats) Strategies
 SO Strategies

Strengths
Use a firm’s
Weaknesses
internal strengths
Opportunities
to take advantage
Threats
SO of external
Strategies opportunities
SWOT

For example the firm enjoying a good financial position which is

strength for a firm and externally government policy opportunity to
expand business.
Ch 7 -10 Copyright © 2011 Pearson Education
 WO Strategies

Strengths
Improving internal
Weaknesses
weaknesses by
Opportunities
taking advantage
Threats WO of external
Strategies opportunities
SWOT

For example the firm is in the critical financial problems that is

weakness and firm is availing merger with Multinational
Corporation.
Ch 7 -11 Copyright © 2011 Pearson Education
 ST Strategies

Strengths Use a firm’s

Weaknesses strengths
Opportunities to avoid or
Threats reduce the impact
ST
of external
Strategies
SWOT threats

Opening new branches in order to overcome competitive

threat.
Ch 7 -12 Copyright © 2011 Pearson Education
 WT Strategies
Defensive tactics
Strengths aimed at reducing
Weaknesses internal
Opportunities weaknesses &
Threats avoiding
environmental
WT
SWOT threats
Strategies

•fight for its survival, merge, retrench, declare bankruptcy or

choose liquidation
Ch 7 -13 Copyright © 2011 Pearson Education
 STEPS FOR DEVELOPING SWOT Matrix

Strengths – S Weaknesses – W

List Strengths List Weaknesses

Opportunities – O SO Strategies WO Strategies

Use strengths to Overcoming weaknesses

List Opportunities take advantage of by taking advantage of
opportunities opportunities

Threats – T ST Strategies WT Strategies

Use strengths to Minimize weaknesses

List Threats avoid threats and avoid threats
Ch 7 -14 Copyright © 2011 Pearson Education
 Strategic Position & Action Evaluation Matrix
(SPACE Matrix)
•It explains that what is our strategic position and what
possible action can be taken.
•It is prepared on graph.
•It contains four-quadrant named aggressive, conservative,
defensive, or competitive strategies.
The axes of the SPACE Matrix represent
Two internal dimensions (financial position [FP] and
competitive position [CP])
Two external dimensions (stability position [SP] and industry
position [IP])

Ch 7 -15
Factors That Make Up the SPACE
Matrix Axes
Factors That Make Up the SPACE Matrix Axes
Steps to Develop a SPACE Matrix

1. Select a set of variables to define financial position

(FP), competitive position (CP), stability position
(SP), and industry position (IP)
2. Assign a numerical value ranging from +1 (worst) to
+7 (best) to each of the variables that make up the
FP and IP dimensions.
Assign a numerical value ranging from –1 (best) to –
7 (worst) to each of the variables that make up the
SP and CP dimensions
Steps to Develop a SPACE Matrix

3. Compute an average score for FP, CP, IP, and SP and

dividing by the number of variables
4. Plot the average scores for FP, IP, SP, and CP on the
appropriate axis in the SPACE Matrix
5. Add the two scores on the x-axis and plot the resultant
point on X. Add the two scores on the y-axis and plot
the resultant point on Y. Plot the intersection of the
new xy point
Steps to Develop a SPACE Matrix

6. Draw a directional vector from the origin of

the SPACE Matrix through the new
intersection point
 This vector reveals the type of strategies
recommended for the organization: aggressive,
competitive, defensive, or conservative
The SPACE Matrix

6-21
 The Boston Consulting Group (BCG) Matrix

 BCG Matrix
 is a management consulting firm founded by Bruce
Henderson in 1963
 graphically portrays differences among divisions in
terms of relative market share position and industry
growth rate
 corporate analysts would plot a scatter graph of their
business units, ranking their relative market shares
and the growth rates of their respective industries.
 This led to a categorization of four different types
of businesses:
 BCG Matrix
Relative Market Share Position
High Medium Low
1.0 .50 0.0

High
+20
Stars Question Marks
Industry Sales Growth Rate

II I
Medium
0

Cash Cows Dogs

III IV
Low
-20
The BCG Matrix
 The BCG Matrix
 Question marks – Quadrant I
 Units with low market share in a fast-growing industry
 Such business units require large amounts of cash to
grow their market share.
 The corporate goal must be to grow the business to
become a star.
 Organization must decide whether to strengthen them
by pursuing an intensive strategy (market penetration,
market development, or product development) or to sell
them
 BCG Matrix

Stars Quadrant II
• High relative market share and high growth rate
- Best long-run opportunities for growth &
profitability
• Substantial investment to maintain or strengthen
dominant position
- Integration strategies, intensive strategies, joint
ventures

Ch 7 -26 Copyright © 2011 Pearson Education

 BCG Matrix

Cash Cows Quadrant III

• High relative market share, competes in low-growth
industry
- Generate cash in excess of their needs
- Milked for other purposes
• Maintain strong position as long as possible
- Product development, concentric diversification
- If weakens – retrenchment or divestiture
Ch 7 -27 Copyright © 2011 Pearson Education
 BCG Matrix

Dogs Quadrant IV
• Low relative market share, competes in
slow or no market growth
- Weak internal & external position
• Liquidation, divestiture, retrenchment

Ch 7 -28 Copyright © 2011 Pearson Education

 The Internal-External Matrix
 Positions an organization’s various divisions in
a nine-cell display
 Similar to BCG Matrix except the IE Matrix:
- Requires more information about the divisions
- Strategic implications of each matrix are different

Ch 7 -29 Copyright © 2011 Pearson Education

 The External Factor Evaluation (EFE) Matrix

 allows strategists to summarize and evaluate

economic, social, cultural, demographic,
environmental, political, governmental, legal,
technological, and competitive information
Five-Step process:
 List key external factors (10-20)
Opportunities & threats
 Assign weight to each (0 to 1.0)
 0.0 (not important) to 1.0 (very important). The weight
indicates the relative importance of that factor to being
successful in the firm’s industry
 Sum of all weights = 1.0
 The External Factor Evaluation (EFE) Matrix

 Assign 1-4 rating to each factor

• Firm’s current strategies response to the factor
• 4 = the response is superior, 3 = the response is above
average, 2 = the response is average and 1 = the
response is poor.

 Multiply each factor’s weight by its rating

• Produces a weighted score
 Sum the weighted scores for each
 Determines the total weighted score for the organization.

 Highest possible weighted score for the organization

is 4.0; the lowest, 1.0. Average = 2.5
 The External Factor Evaluation (EFE) Matrix

Total weighted score of 4.0 =

Organization response is outstanding to threats &
opportunities
Total weighted score of 1.0 =
Firm’s strategies not capitalizing on opportunities
or avoiding threats
 Key External Factors Weight Rating
Weighted
score
Opportunities
Global markets untapped .15 1 .15
Increased demand .05 3 .15
Astronomical Internet growth .05 1 .05
Pinkerton leader in discount market .15 4 .60
More social pressure to quit smoking .10 3 .30
Threats
Legislation against the tobacco industry .10 2 .20
Production limits on tobacco .05 3 .15
Smokeless market SE region U.S. .05 2 .10
Bad media exposure from FDA .10 2 .20
Clinton Administration .20 1 .20
TOTAL 1.00 2.10
 The firm in the previous example, has a total
weighted score of 2.10 indicating that
– the firm is below average in its effort to
pursue strategies that capitalize on external
opportunities and avoid threats.
Note: Understanding of the factors used in the
EFE Matrix is more important than the actual
weights and ratings assigned.
 Internal Factor Evaluation (IFE) Matrix

A summary step in conducting an internal

strategic-management audit is to construct
an Internal Factor Evaluation (IFE) Matrix.
 This strategy-formulation tool summarizes
and evaluates the major strengths and
weaknesses in the functional areas of a
business, and it also provides a basis for
identifying and evaluating relationships
among those areas.
 IFE Matrix can be developed in five steps:
1) List key internal factors as identified in the internal-
audit process. The list of all strength and
weaknesses should consist of 10-20 factors.
2) Assign a weight (either in %age or in numerical
value) that ranges from 0.0 (not important) to 1.0
(all-important) to each factor. The weight assigned to
a given factor indicates the relative importance of the
factor to being successful in the firm's industry.
The sum of all weights must equal 1.0.
3) Assign a 1-to-4 rating (rating means what is the
capability of the firm to meet its strength and weaknesses)
to each factor to indicate whether that factor represents a
major weakness (rating 1), a minor weakness (rating 2), a
minor strength (rating 3), or a major strength (rating 4).
 Note that strengths must receive a 4 or 3 rating and
weaknesses must receive a 1 or 2 rating.
4) Multiply each factor's weight by its rating to determine a
weighted score for each variable.
5) Sum the weighted scores for each variable to determine
the total weighted score for the organization.
 Highest possible weighted score for the
organization is 4.0; the lowest, 1.0. Average =
2.5.
 Total weighted scores well below 2.5
characterize organizations that are weak
internally, whereas scores significantly above
2.5 indicate a strong internal position.
 Like the EFE Matrix, an IFE Matrix should
include from 10 to 20 key factors.
Copyright 2007
Prentice Hall
The Internal-External (IE) Matrix
The Grand Strategy Matrix

 In this matrix all organization divides into

four quadrants.
 Any organization should be placed in any
one of four quadrants.
 based on two evaluative dimensions:
• competitive position and
• market (industry) growth
The Grand Strategy Matrix
 The Grand Strategy Matrix

 Quadrant I
 continued concentration on current markets
(market penetration and market development)
and products (product development) is an
appropriate strategy
 Quadrant II
 unable to compete effectively
 need to determine why the firm’s current
approach is ineffective and how the company
can best change to improve its competitiveness
 The Grand Strategy Matrix

 Quadrant III
 must make some drastic changes quickly to
avoid further decline and possible liquidation
 Extensive cost and asset reduction
(retrenchment) should be pursued first
 Quadrant IV
 have characteristically high cash-flow levels and
limited internal growth needs and often can
pursue related or unrelated diversification
successfully
Strategy-Formulation Analytical Framework

Quantitative Strategic
Stage 3:
Planning Matrix
The Decision Stage (QSPM)

Ch 7 -46 Copyright © 2011 Pearson Education

A Comprehensive Strategy-Formulation
Framework
 Stage 3 - Decision Stage
 involves the Quantitative Strategic Planning
Matrix (QSPM)
 A QSPM uses input information from Stage 1
to objectively evaluate feasible alternative
strategies identified in Stage 2
 reveals the relative attractiveness of
alternative strategies
 provides objective basis for selecting specific
strategies
 QSPM : information from IFE and
EFE Strategic Alternatives
Key External Factors Weight Strategy 1 Strategy 2 Strategy 3
Economy/Political/Legal/Governm
ental/Social/Cultural/Demographic
/Environmental/Technological
Competitive
Key Internal Factors
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information Systems
Sum total A.S.
Steps in a QSPM

1. Make a list of the firm’s key external

opportunities/threats and internal
strengths/weaknesses in the left column of the
QSPM
2. Assign weights to each key external and
internal factor
3. Examine the Stage 2 (matching) matrices, and
identify alternative strategies that the
organization should consider implementing
 Steps in a QSPM (cont.)

4. Determine the Attractiveness Scores (AS)

5. Compute the Total Attractiveness Scores
6. Compute the Sum Total Attractiveness
Score
 Positive Features of the QSPM

 Sets of strategies can be examined

sequentially or simultaneously
 Requires strategists to integrate pertinent
external and internal factors into the
decision process
 Can be adapted for use by small and
large for-profit and nonprofit organizations
 Limitations of the QSPM

 Always requires intuitive judgments and

educated assumptions
 Only as good as the prerequisite
information and matching analysis upon
which it is based
A QSPM for a Retail Computer Store
A QSPM for a Retail Computer Store
 The Balanced Scorecard (BSC model )
 There is a clear link between setting objectives and
the setting of performance measures.
 (Kaplan and Norton, 1992, 1993) suggest that a
balanced set of objectives should be created and at
the same time a coherent set of performance
measures should be developed alongside them.
 At the core of the balanced scorecard approach is the
belief that managers have to be able to look at a
business from four key perspectives:
 Customer perspective
 Internal perspective
 Innovation and learning perspective
 Financial perspective
6-57
The 7’S model (The seven S’s)

6-58
 CHAPTER 6
IMPLEMENTING
STRATEGIES: MANAGEMENT
& OPERATIONS ISSUES
Strategy Implementation is the process by which
strategies and policies are put to action through the
development of programs, budgets and procedures
Strategy Implementation is the secondary function of
the organization

It is an administration task which ensures that the

strategy formulated is executed in the right direction
to achieve the stated objectives

It determines the success of an organization

DEVELOPING PROGRAMS, BUDGETS AND PROCEDURES

Strategy implementation is composed of establishing

 Programs (to create a series of new organizational

activities),

 Budgets (to allocate funds to the new activities),

and

 Procedures (to handle the day-to-day activities)

 The different aspects of strategy implementation
are:
1. Strategies:
 It consists of the combination of competitive moves and
business approaches that managers employ to please customers,
compete successfully, and achieve organizational objectives

 A strategy provides a central purpose and direction to the

activities of the organization
2. Policies:
 A policy is a verbal, written, or implied overall guide
setting up boundaries that supply the general limits and
directions in which managerial actions will take place
 Policies provide the framework within which, decision
makers will operate while making decisions relating to the
organization
3. Procedures:
 Procedures are a guide to action and represent how a
particular activity is to be carried out
 They establish the time sequence for the work to be done
4. Programs:
 Programs detail out every small aspect of an activity i.e.,
when will a particular thing be done, how it will be done,
within that time frame, where it will be done, and the like.
 Programs are actually POAs (Plans of Action) that provide
clear-cut guidelines and specifications
5. Rules:
 Rules specify what can be done and what cannot be done.
 Rules demand strict compliance and are very rigid
 Violation of rules attracts disciplinary action
6. Methods:
 Methods specify the way in which a particular step is
to be formed
 Its scope is limited as compared to a procedure as it
addresses only one step of procedure
 However, it is more detailed than procedure as it
explains the concerned step in detail
7. Budgets:
 Budgets essentially give information on the quantum
of money available for a particular activity
 Budgets have to be developed to steer ample resources
into those value chain activities critical to strategic
success
Strategy Formulation vs. Implementation
Strategy Formulation (SF) Strategy Implementation (SI)
 Positioning forces before  Managing forces during the
the action action
 Focus on effectiveness  Focus on efficiency
 Primarily intellectual  Primarily operational
 Requires good intuitive  Requires special motivation
and analytical skills and leadership skills
 Requires coordination  Requires coordination
among a few people among many people
 Management Issues Central to Strategy Implementation

 Establish annual objectives  Match managers to strategy

 Devise policies  Develop a strategy-
 Allocate resources supportive culture
 Alter existing organizational  Adapt production/operations
structure processes
 Restructure & reengineer  Develop an effective human
 Revise reward & incentive
resources function
plans  Downsize & furlough as
 Minimize resistance to
needed
change  Link performance & pay to
strategies
MANAGEMENT BY OBJECTIVES (MBO)
MBO is an organization-wide approach to help
ensure purposeful action toward desired objectives
MBO links organizational objectives and the
behavior of individuals
It is a system that links with performance and it is
a powerful implementation technique
MBO provides an opportunity for the corporation
to connect the objectives of people at each level to
those at the next higher level
The MBO Process involves:
 Establishing and communicating organizational objectives
 Setting individual objectives (through superior-
subordinate interaction) that help implement
organizational ones
 Developing an action plan of activities needed to achieve
the objectives
 Periodically (at least quarterly) reviewing performance as it
relates to the objectives and including the results in the
annual performance appraisal
 Therefore MBO, to tie together corporate, business, and
functional objectives, as well as the strategies developed to
achieve them
 TOTAL QUALITY MANAGEMENT (TQM)
TQM is an operational philosophy committed to
customer satisfaction and continuous improvement
TQM is committed to quality/excellence and to
being the best in all functions
TQM aims to reduce costs and improve quality
It can be used a program to implement both an
overall low cost or a differentiation business strategy
Successful TQM programs occur in those companies
in which “top managers move beyond defensive and
tactical orientations to embrace a developmental
orientation
TQM has four objectives:
1. Better quality of the product and service
2. Quicker response in processes to customer needs
3. Greater flexibility in adjusting to customer’s shifting
requirements
4. Lower cost through quality improvement and
elimination of non-value-adding work
 According to TQM, faulty processes, not poorly motivated
employees, are the cause of defects in quality
 The program involves a significant change in corporate culture,
requiring strong leadership from top management, employee
training, empowerment of lower level employees, and team
work for it to succeed in a company
 TQM emphasizes prevention, not correction
 Quality circles or quality improvement teams are formed to
identify problems and to suggest how to improve the process
that may be causing the problems
TQM’s essential ingredients are:
 An intense focus on customer satisfaction
 Accurate measurement of every critical variable in a
company’s operations
 Continuous improvement of products and services
 Network relationships based on trust and teamwork
END

16
 CHAPTER 7
EVALUATION & CONTROL
 EVALUATION AND CONTROL PROCESS
(FIVE STEP FEEDBACK MODEL)

Measure Does No
Establish
Determine what performance performance Take corrective
predetermined
to measure match action
standards
standards?

Yes

Stop
1. Determine what to measure:
 Everyone in the organization needs to be clear on what is to be
monitored and evaluated
 The processes and results must be capable of being measured in a
reasonably objective and consistent manner
 The management will focus only on the significant elements that
involve huge expense or pose a number of problems
2. Establishment of standards:
 Standards have to be established for each activity to facilitate
comparison
 The standards set must be reliable and achievable
 Standards must also fix tolerance limit for the acceptance of each
performance
3. Performance measurement:
 The actual results achieved must be measured periodically
 A suitable time frame should be fixed for the evaluation of
performance
4. Compare actual performance with the standard:
 The actual performance measured must be then compared
with the standards
 Deviations, if any should be noted
 If the actual performance is well within the acceptable
tolerance limits, the measurement process will stop and if it
is not within the tolerance limit, the measurement process
will go the next step.
5. Take corrective action:
 If actual performance is not within the acceptable limits,
corrective action needs to be taken
 Underperformance can take place due to any of the
following factors:
 Unrealistic standards
 Inappropriate resource allocation
 Faulty organization structure
 Inefficient leadership
 Lack of motivation
 Improper and inefficient communication system
 Strategic Control
 Control is taking measures that harmonize outcomes as closely
as possible with plans
 Traditionally, has been almost completely based on financial
performance
• Strategic Control Methods
– Integrates Quantitative & Qualitative Measures
– Uses Financial and Non-financial information
– Customer (External) focus
– Rewards based upon relative contributions to organization
success
– Encourages desired organizational behavior
 PRIMARY MEASURES OF CORPORATE PERFORMANCE

I. Financial control techniques

A. Budgetary control:
 It is the process of comparing the actual results with the
corresponding budget data in order to approve
accomplishments or to remedy differences by either
adjusting the budget estimates or correcting the cause of
difference
B. Financial ratio analysis:
 It identifies the relationship between two financial
variables in order to derive meaningful conclusion
 In the case of measurement of overall performance,
generally, four groups of ratios are considered:
a. Liquidity ratios:
 They indicate the organization’s ability to pay its short
term debts

 Two forms: i. Current ratio ii. Quick ratio

 Current ratio shows the relationship between current

assets and current liabilities, that indicates the extent to
which current assets are adequate to pay current
liabilities
 Quick ratio indicates the relationship between liquid
assets (cash and debtors) and current liabilities, that
helps in identifying the organizations ability to pay
current liabilities without considering inventory in hand
b. Activity ratios:
They show how funds of the organization are being used
Three forms: i. Inventory turnover ratio ii. Receivables
turnover ratio and iii. Assets turnover ratio
Inventory turnover indicates the number of times
inventory is replaced during the year
Receivables turnover ratio shows how promptly the
organization is able to collect dues from its debtors
Assets turnover ratio indicates how efficiently assets
have been used to generate sales
c. Leverage ratios:
They indicate the relative amount of funds in the
business by creditors / financiers and shareholders /
owners.
Three forms: i. Debt-Equity ratio ii. Debt-Total capital
ratio iii. Interest coverage ratio
Debt Equity ratio indicates the financial strength of
the organization
Debt total capital ratio shows the proportion of debt
to total capital employed
Interest coverage ratio indicates the interest burden
being borne by the organization in relation to its
profits
d. Profitability ratios:
 They indicate the ability of an organization to earn profit in
relation to its sales and/or investment
 These are expressed in terms of profit margin as well as
return to investment
 Profit margin ,either Net profit or Gross profit, is expressed as
the relationship between profit and sales and indicates the
degree of profitability of the business
Return on Investment (ROI):
 The efficiency of an organization is judged by the
amount of profit it earns in relation to the size of its
investment
 Important part of the control system of DuPont
company, USA, since 1919, though it was actually
devised by Donaldson Brown in 1914.
 The goal of a business, accordingly, is not to optimize
profit, but to optimize returns on capital invested for
business purposes
 Thus, capital is considered to be a critical factor in any
business and its scarcity limits progress
 The ROI is calculated by dividing the profit by total
investment
II. Operational control techniques
 Operational control includes authoritative direction over
all aspects of operations and joint training necessary to
accomplish missions assigned to the command
A. Value chain analysis:
 A company’s value chain identifies the primary activities
that create value for customers and the related support
activities
 It is a primary analytical tool of strategic cost analysis
 It is expected that each activity undertaken in an
organization should add some value to the overall
accomplishment
 Value chain helps the organization to improve its
capabilities to attain competitive advantage by using
resources for a better cause.

B. Benchmarking:
 The objectives of benchmarking are:
 To identify the best practices in performing an activity
 To learn how other companies have actually achieved
lower costs or better results in performing benchmarking
activities
 To take action to improve a company’s competitiveness
whenever benchmarking reveals that its costs and results
of performing an activity do not match those of other
companies
C. Balanced Score Card:

 Developed by Robert S. Koplan of the Harvard Business

School and David P. Norton
 Helps in evaluating strategies
 A set of measures that are directly linked to the company’s
strategy
 It directs a company to link its own long term strategy with
tangible goals and actions
 Assists in individual and term goal setting, compensation,
resource allocation, budgeting and planning, strategic
feedback and planning
 Users :Chemical Bank, Mobil Corporation’s US Marketing
and Refining Division, and Cigna Property and Casualty
Insurance
 C. Balanced Scorecard: Dimensions

Financial Perspective
Is company achieving
financial goals?

Customer Perspective Internal Process

Is company meeting Vision and Is company improving
customer expectations? Strategy critical internal processes?

Learning and Growth

Is company improving
its ability to innovate?
End!