KENYATTA UNIVERSITYDEPARTMENT OF BUSINESS ADMINISTRATION

BBA 400: BUSINESS POLICY AND DECISIONS

COURSE OUTLINE

COURSE INSTRUCTOR: OWINO J.

COURSE OBJECTIVE

This course is designed to enable students understand the role of strategy in business planning and decision making. The course introduces learners to various tools used in analyzing the environment, formulating and implementing strategies and business policies in competitive markets.

METHODOLOGY

Lecture method involving full participation by all students, Presentations, Group discussions and assigned readings.

OUTLINE

1. Basic concepts of business

Goals

Objectives

Policies

Rules

Procedures

Budgets

Tactics

2. Strategies

Meaning of strategy

Levels of strategy

Types of strategies

3. Corporate and Business Functions

4. Strategy formulation

Environment scanning techniques

5. Strategy implementation

6. Strategy evaluation and control

7. Choice of strategy

8. Strategy & Social responsibility

REFERENCES

Michael E. Kraft and Sheldon Kamieniecki (2007). Business and Environmental Policy, MIT Press, Cambridge

Mintzberg, H., Lampel, J., Quinn, J.B. and Ghosan, S. (2002). The Strategy Process, 4th edition, Pearson Education

O’Brien, Frances, A. and Robert, G.D. (1999). Strategic Development Methods and Models. John Wiley & Sons

Pearce, A.J. and Robinson, B.R. (1997). Strategic Management: Formulation, Implementation and Control, Irwin McGraw-Hill

Thomson, A.A., Strickland, A.J., and Gamble, E.J. (2007). Crafting & Executing Strategy: Concepts and Cases, McGraw-Hill Irwin

Wheelen, L.T. and Hunger, D.J. (2008). Strategic Management and Business Policy, 11th edition, Pearson Prentice Hall

EVALUATION

Assignment /presentations 10%

CAT 20%

Final Examination 70%

BASIC CONCEPTS OF BUSINESS

Business PolicyPolicy can simply be understood as a course of action pursued by an organization to achieve a certain goal.

Christensen defines business policy as the study of the functions and responsibilities of senior management, crucial problems that affect the success of the organization and the decisions that determine the direction taken by the organization which shape its future.

Policies are written statements or sets of statements that describe principles, requirements, and limitations and are characterised by indicating “what” needs to be done rather than how to do it. Such statements have the force of establishing rights, requirements and responsibilities.

A policy is a broad guideline for decision making that links the formulation of a strategy with its implementation. Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporation’s mission, objectives and strategies.

The implementation of new polices and revision of existing policies have an important role to play in any organisation, as well constructed policies assist in channelling actions, behaviour, decisions and practices in directions that promote good strategy execution.

Institutional and other policies communicate the guiding and governing principles on which the activities of the particular organisation are based.

Any policy is intended to support the vision and mission of the business and should be applied with flexibility and judgment consistent with the goals, obligations and strategic priorities of the firm

Generally, policies assist in:i) Providing guidance with regard to the execution of actions and provide persons

working in the organisation with a framework as to the manner in which actions are to be executed

ii) Promoting efficiency within the organisation in that ideas do not continually have to be deliberated

iii) Ensuring consistency in the performance of activities especially in cases where operating units are geographically or strategically scattered

iv) Ensuring compliance with legal and other requirements of the organisation and it also serves as a tool for quality improvement within the organisation.

In business, policy deals with the following:1. Choice of business purpose2. The moulding of organizational identity and character3. The continuous definition of what the business needs to do, i.e. dynamic changes

in the environment4. The mobilization of resources for the attainment of goals in the face of

competition or adverse circumstances

Nature of business policyBusiness policy covers many aspects and deals with the functions and responsibilities of senior management related to those organizational problems which affect the success of the entire enterprise.Policy deals with the future course of action that the organization has to adopt. It involves choice of purpose and defining of what needs to be done in order to mould the character and identity of the organization.

Evolution of Business PolicyBusiness policy has evolved through four distinct phases:

Phase I: Mid 1930sIn this era, there existed ad hoc policy making; no formal planning existed. During this time, business firms dealing in a single product line especially in America expanded in many directions. This resulted in the need to integrate the functional areas. This was achieved through development of functional policies to guide management functions.

Phase II: Late 1930s – Late 1950sThis era was characterized by planned policy formulation. The emphasis was on integration of functional areas in a rapidly changing environment.

Phase III: 1960s –1970s: Strategy ParadigmIn this paradigm, there was a demand for a critical look at the basic concept of business and its relationship to the environment.

Phase IV: 1980s to date: Strategic Management ParadigmThis focuses on the intersection of two broad fields of inquiry i.e. the strategic process of business firms and the responsibilities of management.

DEFINITIONS

Company MissionAccording to Campell and Goold (1994) a Mission is a concise and memorable statement of the purpose of why the firm is in business and what business the firm enters into and how it is going to compete distinctively in the market.

A mission can also be defined as the unique purpose that sets an organization apart from others of its type and identifies the scope of its operations. It defines the company’s market, products and technology.

PurposeThis is anything that organization is established to achieve. The purpose of an organization influences its objectives, policies and plans.

Goals A goal is a general statement of aim. A goal can also understood as long term objectives.

Procedures A procedure refers to series of related steps or tasks expressed in a chronological order. Procedures are written documents providing specific “how to” information and will normally be developed by the office responsible for the administration of a policy. In cases where procedures establish rights, requirements and responsibilities, they will normally be developed through a process similar to the institutional policy approval process.

GuidelinesGuidelines are written documents that further explain policies/procedures and are characterised by narrative descriptions and examples that serve as aids in interpreting and applying them. Unless otherwise stated, guidelines normally do not have the force of establishing rights, requirements and responsibilities.

RuleThis is a prescribed course of action that explicitly states what is to be done under a given set of circumstances. E.g. a company may have a rule that anyone who performs below targets is reprimanded.

Strategy In general, a strategy id defined as an action a company takes to achieve one or more of its goals.

Alternatively, strategy has been characterized as being a plan, pattern, ploy, perspective or position that brings together an enterprises’ major objectives, policies and activities into a cohesive whole. It provides the direction necessary to allocate the resources of the enterprise in a unique and viable way, which takes account of internal strengths and weaknesses as well as external opportunities and threats.

Strategy is the approach selected to achieve defined goals in the future. According to Chandler (1962) it is: ‘The determination of the long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.’

Strategy has three fundamental characteristics. First, it is forward looking. It is about deciding where you want to go and how you mean to get there. It is concerned with both ends and means.

In this sense a strategy is a declaration of intent: ‘This is what we want to do and this is how we intend to do it.’ Strategies define longer-term goals but they also cover how those goals will be attained. They guide purposeful action to deliver the required result.

Strategic business unit (SBU)This is part of the organization which is focused specifically on serving a particular product market area and has the dedicated resources and structure to serve it.

Strategic fit

This is the extent to which a new strategy is consistent with, and adds value to overall objectives and intent and to other strategies

IMPORTANCE OF BUSINESS POLICY1. From the viewpoint of the course itself, business policy seeks to integrate knowledge and experience gained in various functional areas of management.

a. It enables the learner to understand the complex interaction that takes place between the functional area of the organization.

b. It deals with the constraints and complexities of real life situationc. It cuts across the narrow functional boundary and draws upon many disciplines

like economics, sociology, political science, finance etc.d. It makes study of management more meaningful.2. For understanding the business environment. Understanding of the environment enables managers to relate changes in the environment to policy changes within the organization.3. Business policy provides a framework for understanding strategic decision making in the organization.

STRATEGIC MANAGEMENTThe origin of the word strategy lies in the military science. As used in military, the term refers to the art of planning operations in war especially the movement of army and navy into favourable positions for fighting.

This meaning has been extended to the concept of strategy in business management. Formally, strategy is defined as an overall plan of action for achieving the organization’s objectives.

Igor Ansoff defines strategic management as a process for managing a firm’s relationship with its environment.

According to Pierce and Robinson, strategic management is defined as the set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives.

Formality in strategic managementThis refers to the degree to which participants’ responsibilities, authority and direction in decision making and planning are specified. Research findings indicate that greater formality is usually positively correlated with cost, comprehensiveness, accuracy and success of planning.

Companies vary widely in their formality of strategic management systems. The degree of formality usually depends on the following factors:

i) Size of the organization and method of evaluating strategic success. Some firms especially smaller ones may be under the control of a single individual. They may produce a limited number of products and services. Such firms can operate successfully even with less formality in their strategic management.

ii) Stage of the firm’s development. In the initial stages, firms tend to be less formal in their strategic management than in their mature stages of their development.

iii) The firm’s predominant management styles. Bureaucratic firms tend to be highly formal in their strategic management

iv) The complexity of the firm’s environment. The more complex the environment, the more formal the strategic management

v) The firm’s production processes. The more complex the processes, the more formal the strategic management

Values of strategic management

i) It enhances the firm’s ability to reduce or counter problemsii) It improves the quality of decisions madeiii) It improves employee motivation because of increased understanding of the

productivity-reward relationshipiv) Gaps and overlaps in activities among individuals and departments are

reducedv) Resistance to change is reduced due to participants greater awareness of the

parameters that limit the available options.

Disadvantages of strategic managementi) Top management spend more time on strategic management and ignore

operational responsibilitiesii) If the formulators of strategy are not intimately involved in its implementation,

then they may avoid doing their individual responsibility for the decisions reached

iii) Strategic managers must be trained to anticipate and respond to the disappointment of subordinates over unattained objectives

STRATEGIC DECISION MAKINGAny manager is faced with the important function of decision making. Strategic decision making relates to the responsibilities of senior management. Decision making is the process of selecting a course of action from among many alternatives.

Conventional Decision MakingThe process has the following steps:1. Problem identification2. Determination of objectives to be achieved3. Determination of alternative ways of achieving objects4. Evaluation of each alternative5. Choosing best alternative6. Implementing decision

Strategic Decision MakingThe fundamental strategic decision relates to the choice of a Mission. It follows the following steps:1. What is our business now and what will be in the future?2. Determination of environmental opportunities and threats3. Determination of company strengths and weaknesses4. Determination of strategic alternatives5. Evaluation of alternatives6. Choice of best alternative7. Implementation of best alternative

What makes Decisions strategic?Strategic decisions have three characteristics:1. RareStrategic decisions are unusual and typically have no precedent to follow

2. ConsequentialStrategic decisions commit substantial resources and demand a great deal of commitment from people at all levels.

3. DirectiveThey set precedents for lesser decisions and future actions throughout the organization.

Issues in strategic decision making

1. CriteriaThe following viewpoints are used for setting criteria for decision making:

a) Maximization concept: This considers objectives as those attributes which drive the firm towards maximization of returns. Remember, in economics, maximization point is attained where MC = MR

b) The concept of satisfying: Objectives are set in such a manner that the firm can achieve them realistically

c) The concept of incremental: The firm sets its objectives in small, logical and incremental steps

2. Rationality This means exercising a choice from among various alternative courses of action

3. CreativityA decision must be original, different and show innovative skills. This can be achieved through brainstorming

4. VariabilityEvery situation is unique and there are no set formulae that can be applied in strategic decision making. Decisions vary depending on prevailing environmental factors

5. Person related factorsThe age, education level, intelligence, personal values, risk taking ability and creativity play a role in strategic decision making

6. Industrial Vs Group decision makingIndividual differences among decision makers will have a bearing on the decision made

APPROACHES TO STRATEGIC DECISION MAKING

1. Formal / structural approachFollows a set of procedures to arrive at a decision

2. Intuitive/ anticipatory approach

This relies on the hunch/intuition of the CEO/ manager and also his experience. He anticipates the future and takes actions accordingly

3. Entrepreneurial or opportunistic approachIs characterized by constant search for opportunities and exploiting them for the benefit of the organization

4. Incremental approachLimits the focus of strategic decision to a few alternatives at a time that differ only marginally from one another

5. Adoptive approachThis approach views strategic decisions on the basis of how a change is perceived at a given point in time. Circumstances are defined in terms of the environment. Planners must therefore, have contingency plans to take care of environmental changes.

Characteristics of strategic decisions1. They require top management attention and support in all stages: this is because only top management has the perspective needed to understand the broad implications of such decisions and the power to authorize the allocation of necessary resources.

2. They require large amount of resources because they involve substantial allocation of labour, physical and financial resources.

3. Strategic decisions affect the firm’s long term prosperity. Their impact is felt over a long period of time. This is because strategic decisions commit the firm to certain markets, products and technologies.

4. Future oriented: In a competitive environment, firms can only succeed by being proactive

5. Multi-functional or multi-disciplinary consequences: these decisions have implications for many areas of the firm

6. They require considering the firm’s external environment.

STRATEGIC MANAGEMENT PROCESSStrategic management is a process rather than an event. This means that it is done in a number of stages that are interrelated and lead to the achievement of the organizational objectives.The process is made up of the following stages:1. Formulating, redefining and re-evaluating Company Mission2. External environmental analysis3. Internal environmental analysis4. Formulating long term objectives and grand strategies5. Evaluation and choice of business strategies6. Developing action plans and short term objectives7. Undertaking functional tactics that implement business strategies8. Adopting policies that empower the operating personnel to effectively discharge their duties

9. Restructuring, re-engineering and refocusing the organization to facilitate strategy implementation 10. Establishing and implementing strategic controls and ensuring continuous improvements to build customer value11. Utilising feedback from the process

1. THE COMPANY MISSIONThe company mission represents the company’s fundamental purpose that differentiates it from other firms of its type and identifies the scope of its operations in terms of products, markets and technology.

It encompasses the basic goals and philosophies of the company.

Need for Company MissionAlthough a company can do without a Mission Statement, a Mission Statement has the following advantages:1. It ensures unanimity of purpose within the organization2. It provides a basis for motivating the organization’s human resources because of

being aware of the company’s aim3. It helps to develop a basic standard for allocating organizational resources4. It provides a general tone or organizational climate e.g. it suggests the business

operations5. It serves as a focal point, for those who can identify with the organization’s

purpose and direction and to deter those who can not do so from participating further in its activities

6. It facilitates the translation of objectives and goals into a work structure involving the assignment of tasks to responsible individuals in the organization.

7. It specifies organizational purpose and translates it in such a way that cost, time and performance parameters can be assessed and controlled

Components of Company MissionThe mission of any company should reflect the company’s position regarding some or all of the following points:

i) Basic product/service; the primary markets and principle technology used (What, Where and How)

ii) The company goals especially those regarding survival, growth and profitability.

iii) The company philosophy or company creed: this reflects or specifies the basic beliefs, values, aspirations and philosophical priorities of the strategic decision makers who could be the owners or managers.

iv) Public image: reflects the public’s expectations. An image is important because it makes achievement of the firm’s goals more likely

v) The company’s self concept: this is important because the firm must know itself if it has to relate to the environment in which it operates.

Recent Trends in Mission ComponentsThe following issues have increasingly become integral parts in the development and revision of company mission statement.

1. Customers

A focus on customer satisfaction forces managers to realize the importance of providing quality customer service. Some key elements of customer driven organizations are as follows: Customer service goals are clearly defined Customer satisfaction with existing products and services is continuous measured

through surveys Putting in place an effective customer complaints system e.g. suggestion boxes,

complaints department, simplified online complaints, management by walking around

Corrective action procedures are put in place to remove barriers to serving customers in a timely and effective manner.

2. QualityQuality is the norm for many companies. This has led to adoption of concepts such as Total Quality Management, ISO certification etc.

3. Social responsibilityA mission statement should resolve the conflicting, competing and contradicting claims of all its stakeholders. These stakeholders include the following:

Customers Suppliers Investors Employees Competitors Government Trade unions Local communities Lobby groups Media General public

Although all claims by different stakeholders are important, they cannot be pursued with equal emphasis. The key question therefore is “How can a firm satisfy all its stakeholders while at the same time optimize its success in the market?” 2. ANALYSIS OF THE EXTERNAL ENVIRONMENTThe firm’s external environment is divided into two categories:

i) Remote/general environmentii) Industry/task environment

Remote or macro-environment includes external factors that usually affect all or most organizations. Factors in the remote environment are beyond the control of the firm. These factors include:

i) Political ii) Economic iii) Social iv) Technological and v) Legal vi) Environmental

Remembered as (PESTDEL) forces.

Task environment on the other hand includes external forces and groups that directly influence an organization’s growth, success and survival. These include:

i) Customers ii) Competitors iii) Suppliers iv) Shareholders v) Government regulators vi) Pressure groups vii)Employees and viii) Labour unions.

Trends in the above factors should be thoroughly analyzed and their relative importance summarized.

The outputs of external environmental analysis are the Opportunities and Threats facing the organization.

EXTERNAL ENVIRONMENT

REMOTE ENVIRONMENT Political Economic Social Technological Demographic Legal Environment/ecological factors

Industry Environment Competitors Creditors Customers Suppliers Shareholders Government regulators Pressure groups Employees and Labour unions

a) REMOTE ENVIRONMENT

1. Economic factorsThese concern the nature and direction of the economy in which a firm operates. Economic factors affect the consumption patterns and behaviour of consumers and firms must monitor economic trends in the environment. Some of the economic issues which firms must monitor and analyze include the following:

GNP trends Interest rates Money supply Inflation rates Availability of credit Unemployment levels Wage/price levels Devaluation/Revaluation Energy availability and cost Disposable and discretionary income

2. Sociocultural factorsSocial factors are developed from cultural, religious, education and ethnic conditions. A change in social environment influences changes in demand for certain products. Social forces are dynamic with constant change resulting from the efforts of individuals to satisfy their desires and needs by controlling and adapting to the environment. Some social issues worth paying attention to by firms include the following:

Life style changes Career expectations Consumer activism Rate of family formation Growth rate of the population Regional shifts in population Age distribution of population Life expectancies Birth rates Level of education

3. Political/Legal factorsThe direction and stability of this factor is a major consideration for managers formulating strategy. Political factors define the legal and regulatory parameters within which firms must operate. Legal environment define how firms are going to operate through regulation, taxation etc. Political environment influence a firm’s strategic choices in areas such as pricing, competition and waste disposal. Laws and regulations tend to limit profits made by firms. Some political actions may be designed to benefit and protect firms. These may include government subsidies, patents and copyright laws, product research grants, export compensation, tax relief, rural electrification programme etc. Political and legal issues which should be analyzed by firms are:

Political stability/risk Environment protection laws Tax laws Foreign trade regulations Attitudes toward foreign companies Laws on hiring and promotion of employees Stability of government Constitutional and legal reforms Legal structures Land ownership

Political activity may have a significant impact on three functions that influence the firm’s strategies in the remote environment. These functions include:

a) The Supplier functionGovernment decisions regarding accessibility of private businesses to government owned natural resources and agricultural products can profoundly affect the viability of a firm’s strategies.

b) The Customer functionGovernment demand for products and services can create, sustain, enhance or eliminate many market opportunities.

c) Competitor FunctionGovernment can operate as an unbeatable competitor in monopolized industries.

4. Technological factorsTechnological factors cause obsolescence of products and services. They also influence product development and innovations. New technologies can improve service delivery and improve firm’s efficiency through cost reductions. Some of the technological issues which should be analyzed by firms include the following:

Total Government spending for R & D Total industry spending for R & D Focus on technological efforts Patent protection New Products New Developments in technology transfer from laboratory to the market place Productivity improvements through automation Internet availability Telecommunication infrastructure

5. Environmental/Ecological factorsThis refers to the relationship between firms and its natural environment such as air, soil, water, forests and wildlife. These factors influence activities of the firm in areas such as pollution, deforestation and exhaustion of natural resources. Managers are required by the government and the public to incorporate environmental concerns in their decisions.

b) OPERATING ENVIRONMENTThis is also called the competitive or task environment. It comprises of factors that affect a firm’s success in acquiring needed resources that can be used to optimize profitability. Task environment constitute the following factors:

1. CompetitorsThis influences the strategic choices available to the firm in a given market structure (Monopoly, oligopoly, perfect competition etc.). Competition influences a firm’s pricing, promotion, distribution and product decisions. Firms must continuously analyze their competitive environment by answering the following questions: Who are our competitors? Where are they located? Who are their customers? What is their size? What are their strategies and objectives? What are their strengths and weaknesses?

2. CustomersFirms must monitor changes in customer needs and wants. Customers are dynamic in their behaviour and firms must profile and study them in order to gain an understanding of future needs and strategic options. Customers influence a firm’s resource allocation and strategy direction. The type of information used in constructing customer profiles includes the following: Geographic Psychographic Demographic Consumer Behaviour Information

3. Suppliers and creditorsThese are the sources of resources needed by the firm. A firm must maintain good relationship with its suppliers and creditors in order to survive. Firms rely on suppliers for credit trade, raw materials, equipment, machinery and information. Creditors on the other hand provide financial support and advice.

4. Human ResourcesA firm’s ability to attract and hold capable employees is essential to its success. The access of a firm to human resources is influenced by:

Its reputation as an employer Demand and supply conditions for labour Firm’s ability to pay expected salaries and wages

INDUSTRY ANALYSIS: ANALYZING THE TASK ENVIRONMENTAn industry is a group of firms that produce a similar product or service such as soft drinks or university education.

Michael Porter’s Approach to Industry AnalysisPorter argued that a firm is most concerned with the intensity of competition within its industry. The level of this intensity is determined by basic competitive forces as depicted in the figure below.

The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital.

In scanning its industry, a firm must assess the importance to its success of each of the six forces:i) Threat of new entrantsii) Rivalry among existing firmsiii) Threat of substitute productsiv) Bargaining power of buyersv) Bargaining power of suppliersvi) Relative power of other stakeholders

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Potential entrants

Buyers

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Other stakeholders

Suppliers

Industry competitors

Rivalry among existing firms

Fig 1: Forces Driving Industry Competition

The stronger each of the above forces, the more limited companies are in their ability to raise prices and earn greater profits.

In the short run, these forces act as constraints to the firm’s activities. In the long-run however, it may be possible for a company through its choice of strategy to change the strength of one or more of the forces to the company’s advantage.

1. Threat of new entrantsNew entrants into an industry brings with it new capacity, a desire to gain market share and substantial resources. They are therefore threats to established corporation. The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. Some of the possible barriers to entry are:

i) Economies of scaleii) Product differentiation iii) Capital requirements iv) Switching costsv) Access to distribution channels vi) Access to critical sources of raw materialvii)Government policy

2. Rivalry among existing competitorsIn most industries, firms are mutually dependent. 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.According to Porter, intense rivalry is related to the presence of several factors including:

i) Number of competitorsii) Rate of industry growthiii) Product or service characteristicsiv) Amount of fixed costsv) Capacity of the firmvi) Height of exit barriersvii)Diversity of rivals

3. Threat of substitute products or servicesA substitute product is one that appears to be different but can satisfy the same need as another product. Substitutes limit the potential return of an industry by placing a ceiling on the price firm in the industry can profitably charge.

When switching costs are low, substitutes can have strong effect on an industry.

4. Bargaining power of buyersBuyers affect an industry through their ability to force down prices, bargain for higher quality or more services and play competitors against each other. A buyer or group of buyers is powerful if some of the following factors hold true:

i) A buyer purchases a large portion/volume of seller’s product/serviceii) A buyer has the potential to integrate backwards by producing the product itself

iii) Alternative suppliers are many because the product is standard or undifferentiatediv) Switching costs are littlev) The purchased product represents a high percentage of a buyer’s costs, thus

providing an incentive to shop around for a lower pricevi) The purchased product is unimportant to the final quality or price of a buyer’s

products or services and thus can be easily substituted without affecting the final product adversely.

5. Bargaining power of suppliersSuppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods and services. A supplier is powerful if some of the following factors apply:

i) The supplier industry is dominated by a few companies, but it sells to many customers

ii) Its product or service is unique and it has built up switching costsiii) Substitutes are not readily availableiv) Suppliers are able to integrate forward and compete directly with their present

customersv) A purchasing industry buys only a small portion of the supplier’s group of goods

and services and is thus unimportant to the supplier

STATREGIC GROUPSA strategic group is a set of business units or firms that pursue similar strategies with similar resources. Categorizing firms in any one industry into a set of strategic groups is very useful as a way of better understanding the competitive environment.

INTERNAL ENVIRONMENTAL ANALYSIS

Success in strategy depends on the following three major factors:

1. The strategy must be consistent with the conditions in the environment2. The strategy must be realistic, i.e. based on the company’s strengths especially on

factors which give the firm a competitive advantage3. The execution/ implementation of strategy must be carefully done

Internal environmental analysis aims at diagnosing the firm’s internal capabilities upon which strategy can be based. The purpose of internal analysis is to identify the organizational assets, resources, skills and processes that represent either strengths or weaknesses.

Strengths are aspects of the organization’s operations that represent competitive advantages i.e. activities the organization does well or resources it controls. On the other hand, weaknesses are activities that the organization does not do well or resources that it lacks.

Analysis of internal environment yields Strengths and Weaknesses. Internal environment is under the control of the firm.

The analysis is done in the functional areas of management systems, staff, marketing, research and development, finance/accounting, operations, and information systems.

The manager should consider:i) Trends of previous resultsii) Surpluses/profits identified by products and servicesiii) Rationalization in procurement and use of resources such as facilities, equipment

and staffiv) Prudence in the use of financial resourcesv) Efficiency in the allocation of resourcesvi) Assessment of suitability of the organization structurevii)Efficiency of managerial systems and procedures

Internal environment can be analyzed using the following approaches/ models:

TECHNIQUES FOR ENVIRONMENT SCANNING

1. SWOT ANALYSISSWOT is the acronym for the internal Strengths and Weaknesses of a firm and the external environmental Opportunities and Threats facing the firm.

It is based on the assumption that effective strategy derives from a sound fit between a firm’s internal capabilities represented by the strength and weaknesses and its external situation represented by opportunities and threats.

It involves comparing external key opportunities and threats with internal strengths and weaknesses.

How the external environment compares to the firm’s internal capabilities determines the focus of the firm’s strategies. An opportunity is a major favourable situation in the external environment. A threat is a major unfavourable situation in the external environment.

2. FUNCTIONAL ANALYSISThis method of analysis is appropriate for firms that organize their operations along functional lines. Close scrutiny of each of these functions may provide useful guidelines for strategy focus. A firm tries to identify the functional areas and factors in each of these areas which are most likely to influence the firm’s success.

The important factors i.e. strategic factors that should be analyzed vary by: Industry Market segment Product life cycle Firm’s current position

Strategic factors can also vary among firms within the same industry. An anatomy of the past sales, costs and profitability trends should be developed in detail. Detailed investigation of the firm’s performance history helps to isolate the internal factors that influence sales, costs, and profitability.

The key strategic factors indentified deserve major attention in the formulation of future strategy.

Some the functional areas include the following:

1. Marketing Some of the competitive factors in marketing are brand loyalty, product/service quality and customer relations. Channels of distribution and price could also constitute competitive factors.

2. Finance and accountingA firm may have the ability to raise short term and long term loans. Financial size puts firms in better position. Relations with investors and firm’s effectiveness of accounting system could also influence competitive factors.

3. Production/operationsFactors giving competitive edge include raw material costs, availability of raw materials, supplier relations, inventory control system e.g. cost of warehousing, and location of facilities. Other important factors include economies of scale.

4. Personnel Skills, capabilities and experience of employees influence a firm’s competitive edge. The morale and motivation of workers influences their productivity. Other factors which influence competitive edge are labour relations costs, employee turnover, absenteeism etc.

5. General management

The effectiveness of organization structure influences competitive edge. Communication, command, organization culture, firm’s image, top management skills and abilities also influence a firm’s competitiveness.