STRATEGIC MANAGEMENT MODULE.doc

8/14/2019 STRATEGIC MANAGEMENT MODULE.doc

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MODULE


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[BCM 461-STRATEGIC MANAGEMENT]

[MLUNGUSHI UNIVERSITY][SCHOOL OF BUSINESS]


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Copyright[COPYRIGHT 2012 MULUNGUSHI]

[MULUNGUSHI UNIVERSITY][SCHOOL OF BUSINESS]

[GREAT NORTH ROAD CAMPUS][Box 8041]

[!AB"E]

"#$%&'#( )))*+,*.*/+


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Ac!o"#$%g$&$!t'The Mulungushi University, school of business and the Institute of Distance Education

wishes to thank Mr. C. Mwaanga and all those who contributed to this strategic managementmodule.


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How this module is structured...........................................................................................1

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Welcome to Strategic Management...................................................................................3

Course outcomes................................................................................................................3Timeframe.........................................................................................................................4Study skills........................................................................................................................4

Need hel!........................................................................................................................."#ssignments......................................................................................................................."#ssessments......................................................................................................................."

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Margin icons......................................................................................................................$

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%NT&'()CT%'N T' STT*+%C M#N#+*M*NT..................................................,)nit summary..................................................................................................................1-#ssessment......................................................................................................................1-

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STT*+%C #N#/S%S..............................................................................................10#ssessment......................................................................................................................"1

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STT*+/ '&M)#T%'N......................................................................................"3#ssessment......................................................................................................................$"

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STT*+/ %M2*M*NT#T%'N................................................................................$$#ssessment......................................................................................................................-4

U!it 3(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((53

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U!it /(((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((((2-

%NT*&N#T%'N# STT+*/ #N( +'#%S#T%'N........................................03#ssessment....................................................................................................................151

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A)o*t thi' &o%*#$

trategic Management Module has been !roduced by Mulungushi University. "ll the modules!roduced by the University are structured in the same way, as outlined below.

Ho) '&% +o,# &% %'3,.',3#

T# .o,3%# o#3)

The course overview gives you a general introduction to thecourse. Information contained in the course overview will hel! youdetermine#

If the course is suitable for you.

$hat you will already need to know.

$hat you can e%!ect from the course.

&ow much time you will need to invest to com!lete the course.

The overview also !rovides guidance on#

tudy skills.

$here to get hel!.

Course assignments and assessments.

"ctivity icons.

Units.

$e strongly recommend that you read the overview carefullybefore starting your study.

T# .o,3%# .o5'#5'

The course is broken down into units. Each unit com!rises#

"n introduction to the unit content.

Unit outcomes.

Core content of the unit with a variety of learning activities.

" unit summary.

+


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"ssessments, as a!!licable.

R#%o,3.#%

'or those interested in learning more on this sub(ect, we !rovide you with a list of additionalresources at the end of this module) these may be books, articles or web sites.

Yo*r co&&$!t'

"fter com!leting trategic Management module we woulda!!reciate it if you would take a few moments to give us yourfeedback on any as!ect of this course. *our feedback mightinclude comments on#

Course content and structure.

Course reading materials and resources.

Course assignments.

Course assessments.

Course duration.

Course su!!ort +assigned tutors, technical hel!, etc.

*our constructive feedback will hel! us to im!rove and enhancethis course.

1

U!it - STRATEGY FORMULATION


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6$#co&$ to Str.t$gic M.!.g$&$!t

trategic Management as a ca!stone draws together various strands of business courses to!rovide a holistic view of the organisation and to develo! a strategic !ers!ective of businessmanagement. tudents will be introduced to a number of key strategic -uestions regardingthe future direction of the firm such as)

&ow to survive in a com!etitive globalenvironment

&ow to leverage an organisationscom!etences to gain com!etitive advantage

$hat strategy needs to be !ursued in order tosurvive and / or !ros!er

$hether there is a need for the firm to grow,ac-uire , merge, divest or downsi0e

&ow a firm should react to the eve 1 changingenvironment) and

&ow to im!lement strategy and managestrategic change

The course will also introduce students the conce!t of international strategy and globali0ationas well as the cor!orate governance issues.

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U!on com!letion of this module you will be able to#

-


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O,'.o+#%

+a "c-uire a better guidance to the entire organisation on thecrucial !oint of 2what is it we are trying to do3.

+b Describe a strategic management !rocess.

+c Evaluate the relationshi! between the general and thecom!etitive environment.

+d E%!lain the differential firm !erformance.+e E%!lain the !ossible growth strategies for organisations+f Discus the role of business strategy in achieving

com!etitive advantage.+g The motives for organi0ations to e%!and abroad.+h "ssess the different a!!roaches to strategic change.

+i E%!lain what is meant by cor!orate governance

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The e%!ected duration of this course is si% month and you will bere-uired to come for residential school for two weeks. The rest ofthe time you will be re-uired to study on your own.

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"s an adult learner your a!!roach to learning will be different tothat from your school days# you will choose what you want tostudy, you will have !rofessional and/or !ersonal motivation fordoing so and you will most likely be fitting your study activitiesaround other !rofessional or domestic res!onsibilities.

Essentially you will be taking control of your learning environment."s a conse-uence, you will need to consider !erformance issuesrelated to time management, goal setting, stress management, etc.4erha!s you will also need to reac-uaint yourself in areas such asessay !lanning, co!ing with e%ams and using the web as alearning resource.

*our most significant considerations will be timeand spacei.e. thetime you dedicate to your learning and the environment in whichyou engage in that learning.

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N$$% h$#p8

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'or hel!, !lease contact the course lecturer, through the!rogramme coordinator or the school of business administrativeofficer.

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A''ig!&$!t'

This course has two assignments which shall be distributed tostudents se!arately from this module together with otherassignments for other courses. Those assignments must becom!leted in the order in which they are set and submitted throughthe IDE registry.

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There are self5assessments at the end of each unit which shouldbe done by students after com!leting each unit.

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G$tti!g .ro*!% thi' &o%*#$

M.rgi! ico!'

$hile working through this module you will notice the fre-uent use of margin icons. Theseicons serve to 2sign!ost3 a !articular !iece of te%t, a new task or change in activity) they havebeen included to hel! you to find your way around this module.

" com!lete icon set is shown below. $e suggest that you familiari0e yourself with the iconsand their meaning before starting your study.

Acti,ity A''$''&$!t A''ig!&$!t C.'$ 't*%y

Di'c*''io! Gro*p .cti,ity H$#p Not$ it9

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U!it +

INTRODUCTION TO STRATEGIC MANAGEMENT

I!tro%*ctio!

This unit describes what a strategy is how its formulated and how it is im!lemented. It alsolooks at the im!ortant in determining which markets organi0ations seek to com!ete in. 'inally,the unit will also look at strategic management !rocess which includes a strategy analysis,formulation and im!lementation. The unit will end with the discussion of a strategicmanagement framework which will be useful for navigating subse-uent units.

U!on com!letion of this unit you will be able to#

O*tco&$'

E%!lain what is meant by strategy

Describe a strategic management !rocess

Understand the characteristics of strategicdecisions

*ou will understand that strategic managementactivities are undertaken at three levels# cor!orate,

business and functional. Discuss the role of values, vision and mission

statements

.

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INTRODUCTION

The word strategy has entered the field of management more recently dating back 67 years."t first, the word was used in terms of Military cience to mean what a manager does tooffset actual or !otential actions of com!etitors. The word is still being used in the samesense, though by few only. 8riginally, the word strategy has been derived from 9reek:trategos, which means general shi!. The word strategy, therefore, means the art of thegeneral. The word was born out of military conflict and the use of a su!erior strategy enabledone warring !arty to defeat another.

There is an agreement that the role of strategy is to achieve com!etitive advantage for anorgani0ation. Com!etitive advantage may usefully thought of as that which allows anorgani0ation to meet customers needs better than its rivals. The use of strategy in decisionmaking is the !rimary way in which managers take account of a constantly changing e%ternalenvironment. "n effective strategy allows them to use their organisations resources and

ca!abilities to e%!loit o!!ortunities and limits threats in the e%ternal environment.

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There are so many definitions of strategy. 8riginary the term was used to describe the!atterns of decisions that determined a com!anys goals !roduced the !rinci!le !olicies forachieving these goals and defined the range of businesses the com!any was to !ursue.

4orter +;


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trategies may be looked at as either a priori

statements to guide action or a posteriori

results of actual decision making.

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If a strategy allows an organi0ation to match its resources and ca!abilities to the needs of thee%ternal environment in order to achieve com!etitive advantage, the !rocess of bringingabout the strategy is what is called strategic management. trategic management isconcerned with making decisions about an organi0ations future direction and im!lementingthose decisions. It is about analy0ing the situation facing the firm, and on that basis of thisanalysis formulating a strategy, im!lementing that strategy and finally evaluation of strategies.

There are four essential !hases of strategic management !rocess. In different com!aniesthese !hases may have different, nomenclatures and the !hases may have different

se-uences, however, the basic content remains same. The four !hases can be listed asbelow.

These !hases are linked to each other in a se-uence as shown in figure ;.; below. It may notbe !ossible to draw a clear line of difference between each !hase, and the change over fromone !hase to another is gradual. The ne%t !hase in the se-uence may gradually evolve andmerge into the following !hase. "n im!ortant linkage between the !hases is establishedthrough a feedback mechanism or corrective action. The feedback mechanism results in acourse of action for revising, reformulating, and redefining the !ast !hase. The !rocess ishighly dynamic and com!artmentali0ation of the !rocess is difficult. The change over is notclear and boundaries of !hases overla!.

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The elements of strategic management are co5de!endent, i.e., in formulating a strategy anorgani0ation must also consider how the strategy will be im!lemented. "nalysis, formulationand im!lementation all needs to considered if the organisations strategy is to meet the needsof its environment. The diagram below shows strategic management model in detail.

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tudies have revealed that organi0ations following strategic management have out!erformedthose that do not. trategic !lanning ensures a rational allocation of resources and im!roves

co5ordination between divisions of the organi0ation. It hel!s managers to think ahead andantici!ate !roblems before they occur. The main benefit of the !lanning !rocess is acontinuous dialogue about the organi0ations future between the hierarchical levels in theorgani0ation. In short, the most highly rated benefits of strategic management are#

Clarity of strategic vision for the organi0ation

'ocus on what is strategically im!ortant to theorgani0ation

@etter understanding of the ra!idly changingbusiness environment.

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>&%&o5

"s!irations, e%!ressed as strategic intent, should lead to an end) otherwise they would (ustbe castles in the air. That end is the vision of an organi0ation or an individual. It is what thefirm

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or a !erson would ultimately like to become. 'or instance, some of you, say in ;7 years, ormay be even earlier, would like to become general managers managing an @U in a large,diversified multinational cor!oration. 8r some others among you would like to believe that you

will be an entre!reneur in A7A7, owning your own com!any dealing with IT services andem!loying cutting edge technology to serve global clientele. " firm thinks like that too. "vision, therefore, articulates the !osition that a firm would like to attain in the distant future.een from this !ers!ective, the vision enca!sulates the basic strategic intent.

" &%&o5is often associated with the founder of the organi0ation and re!resents a desiredstate that the organi0ation as!ires to achieve in the future.

In contrast with the goals and ob(ectives, a vision does not change over time. " vision mustta! into the !ersonal goals and values of the organisations em!loyees if it is to beinternali0ed by them. $hen it bears little resemblance to reality, disregards the ca!abilities ofthe organi0ation, and the !roblems of the organi0ation, it will be re(ected by em!loyees.

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4arikh and Beubauer +;


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8rgani0ations relate their e%istence to satisfying a !articular need of the society. They do thisin terms of their mission. Mission is a statement, which defines the role that an organi0ation!lays in a society. It refers to the !articular needs of that society, for instance, its information

needs. " book !ublisher and a maga0ine editor are both engaged in satisfying theinformation needs of society but they do it through different means. " book !ublisher may aimat !roducing e%cellent reading material while a maga0ine editor may strive to !resent newsanalysis in a balanced and unbiased manner. @oth have different ob(ectives but an identicalmission.

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8rgani0ations legitimi0e themselves by !erforming some function that is valued by society. "mission statement defines the basic reason for the e%istence of that organi0ation. uch a

statement reflects the cor!orate !hiloso!hy, identity, character, and image of an organi0ation.

It may be defined e%!licitly or could be deduced from the managements actions, decisions,or the chief e%ecutives !ress statements. $hen e%!licitly defined it !rovides enlightenment tothe insiders and outsiders on what the organi0ation stand for. In order to be effective, amission statement should !ossess the following seven characteristics.

It should be feasible. " mission should alwaysaim high but it should not be an im!ossiblestatement. It should be realistic and achievableits followers must find it to be credible. @utfeasibility de!ends on the resources availableto work towards a mission. In the si%ties, theU Bational "eronautics and !ace

"dministration +B"" had a mission to land onthe moon. It was a feasible mission that wasultimately reali0ed.

It should be !recise. " mission statementshould not be so narrow as to restrict theorgani0ations activities nor should it be toobroad to make itself meaningless. 'or instance,:Manufacturing bicycles is a narrow missionstatement since it severely limits theorgani0ations activities, while mobilitybusiness is too broad a term, as it does not

define the reasonable contour within which theorgani0ation could o!erate.

It should be clear. " mission should be clearenough to lead to action. It should not be a highsounding set of !latitudes meant for !ublicity!ur!oses. Many organi0ations do ado!t suchstatements but !robably they do so forem!hasi0ing their identity and character.

It should be motivating. " mission statementshould be motivating for members of the

organi0ation and of society, and they should

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feel it worthwhile working for such anorgani0ation or being its customers. " bank,which lays great em!hasis on customer

service, is likely to motivate its em!loyees toserve its customers well and to attract clients.Customer service therefore is an im!ortant!ur!ose for a banking institution.

It should be distinctive. " mission statement,which is indiscriminate, is likely to have littleim!act*

It should indicate ma(or com!onents ofstrategy. " mission statement along with theorgani0ational !ur!ose should indicate the

ma(or com!onents of the strategy to beado!ted*

It should indicate how ob(ectives are to beaccom!lished. @esides indicating the broadstrategies to be ado!ted a mission statementshould also !rovide clues regarding the mannerin which the ob(ectives are to be accom!lished.

Go% 5 O$?#.'%

The ne%t ste! for the com!any, after formulating the mission statement, is the establishment

of ma(or goals. The goals designate s!ecific results the businesses want to achieve. In thisconte%t, the !ur!ose of goals is to s!ecify, as accurately as !ossible, as to what is to bedone, if the com!any is to attain its mission. They refer to -ualitative intentions in the sametime frame. 9oals are more s!ecific than the mission but less s!ecific than ob(ectives.

O$?#.'%define and refine the goals further. The ob(ectives refer to short and medium-uantitative targets. trategic goals hel! managers to establish end results of activities ingeneral without getting bogged down in issues of measurement and timing.

>,#%

Collins and 4orras +;


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"ccording to Fohnson et al +A77G, strategic choices involve the o!tions for strategy in termsof both the directions in which strategy might move and the methods by which strategy mightbe !ursued. 'or e%am!le an organisation might have to choose between alternative

diversification moves +entering into new !roducts and markets. "s it diversifies, it can alsochoose the method of either develo!ing the !roduct itself or ac-uiring the organisation activein that area.$ithin the generic strategic o!tion identified for the organisation, there are !robably severaldirections, identified in the list at the beginning of this section, that are !ossible for theorganisation to take in order to develo! its com!etitive !osition. @y what criteria can anorganisation (udge the relative merits of strategic directions

Fohnson and choles +;


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has a distinct environment, a @U is created for each such segment. 'or e%am!le, Madsongrou! of com!anies o!erates in insurance, general services, investment, financial servicesetc. 'or each !roduct grou!, the nature of market in terms of customers, com!etition, and

marketing channel differs. There5fore, it re-uires different strategies for its different !roductgrou!s. Thus, where @U conce!t is a!!lied, each @U sets its own strategies to make thebest use of its resources +its strategic advantages given the environment it faces. "t such alevel, strategy is a com!rehensive !lan !roviding ob(ectives for @Us, allocation of re5sources among functional areas and coordination between them for making o!timalcontribution to the achievement of cor!orate5level ob(ectives. uch strategies o!erate withinthe overall strategies of the organi0ation. The cor!orate strategy sets the long5term ob(ectivesof the firm and the broad constraints and !olicies within which a @U o!erates. The cor!oratelevel will hel! the @U define its sco!e of o!erations and also limit or enhance the @Uso!erations by the resources the cor!orate level assigns to it. There is a difference betweencor!orate5level and business level strategies. In other words, business strategy relates to the:how and cor!orate strategy to the :what. Cor!orate strategy defines the business in which a

com!any will com!ete !referably in a way that focuses resources to convert distinctivecom!etence into com!etitive advantage. Cor!orate strategy is not the sum total of businessstrategies of the cor!oration but it deals with different sub(ect matter. $hile the cor!oration isconcerned with and has im!act on business strategy, the former is concerned with the sha!eand balancing of growth and renewal rather than in market e%ecution.

=,5.'&o5-L## S'3'#7 'unctional strategy, as is suggested by the title, relates to asingle functional o!eration and the activities involved therein. This deals with decisionsaccording to functional lines such as HD, marketing, !roduction, finance etc. Decisions atthis level within the organi0ation are often described as tactical. uch decisions are guidedand constrained by some overall strategic considerations. 'unctional strategy deals withrelatively restricted !lan !roviding ob(ectives for s!ecific function, allocation of resources

among different o!erations within that functional area and coordination between them foro!timal contribution to the achievement of the @U and cor!orate5level ob(ectives. @elow thefunctional level strategy, there may be o!erations5level strategies as each function may bedividend into several sub functions. 'or e%am!le, marketing strategy, a functional strategy,can be subdivided into !romotion, sales, distribution, !ricing strategies with each sub functionstrategy contributing to functional strategy. trategies at all the three levels are interlinked inwhich a higher level strategy generates a lower5level strategy and a lower5level strategycontributes to the achievement of the ob(ectives of higher5level strategy.

The diagram below shows the three ty!es or levels of strategy.

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STRATEGIC MANAGEMENT =RAME"OR!

This framework hel!s to structure our thoughts and navigates around the different as!ects ofstrategic management. 'or e%am!le, if the !ur!ose of strategy is to enable an organi0ation toachieve a sustainable com!etitive advantage, than any framework needs to address the

!rocess necessary for this. The framework will include the analysis of the organi0ationse%ternal environment and its internal resources and ca!abilities as shown in the figure below.

alues are im!ortant in strategy making !rocess because they determine the goals theorgani0ation sets, the resources and ca!abilities it re-uires and the structures and !rocessesnecessary to achieve those goals. 'rom the framework it can be seen that organi0ationsgoals will reflect its internal strength and weaknesses and the o!!ortunities and threats withinits internal environment. takeholders are those individuals and grou!s +in the internal ande%ternal environment who are im!acted by the behavior of the organi0ation and whose ownbehaviour can, in turn, have an im!act on the organisations strategy. The framework link thestrategy and the internal since each new strategy ado!ted should meet the organisationsgoals and values. There is also a link between an organi0ation and its e%ternal environment

since its values will determine the ty!es of markets it will and will not o!erate within +&enry,A77G.

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%nternal *n6ironment *7ternal *n6ironment

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alues

+oals

&esources 8Caa9ilities

Structure 82rocesses

takeholders

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+eneral*n6ironment

Cometiti6e*n6ironment

'ortunities and ThreatsStrengths 8 weaknesses


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U!it '*&&.ry

S*&&.ry

In this unit you learned that#

The word strategy was used in terms of Military cience tomean what a manager does to offset actual or !otentialactions of com!etitors.

trategy is sim!ly an outline of how the business intends toachieve its goals and that the strategy sets out the route toachieve the com!anys ob(ectives.

trategic management is concerned with making decisions

about an organi0ations future direction and im!lementingthose decisions

There are three basic levels of strategy that interestorgani0ations. These are cor!orate strategy, businessstrategy and functional strategy.

alues are im!ortant in strategy making !rocess becausethey determine the goals the organi0ation sets, theresources and ca!abilities it re-uires and the structuresand !rocesses necessary to achieve those goals

The framework of strategic management hel!s to structureour thoughts and navigates around the different as!ects ofstrategic management

A''$''&$!t

A''$''&$!t

elf5assessment

+; ision and mission statements are a !assing fad with noreal links with an organi0ations strategy. Discuss.

+A E%!lain the difference between the following#

" strategy and a !olicy

trategy and tactics

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U!it 1

STRATEGIC ANALYSIS

I!tro%*ctio!

The foundation for successful strategy is the clear understanding of where the firm is now, itscurrent !osition in its environment +most !articularly the com!etitive environmentenca!sulating its strengths and weaknesses, fully recognising the o!!ortunities and threatsthat face it. This unit will look at how managers can analyse the uncertain and increasinglycom!le% world around them by considering various layers of influence from macro5environmental issues to s!ecific forces affecting the com!etitive !osition.


O,'.o+#%

Define what constitutes the generalenvironment

Evaluate 4orters five forces framework as atool of com!etitor analysis

Undertake and discuss a $8T and alueChain analysis

E%!lain the role of resources, com!etenciesand ca!abilities in hel!ing an organisationachieve a sustainable com!etitive advantage.

Evaluate shareholder and stakeholder!ers!ectives for an organisation.

Evaluate the balanced scorecard a!!roach toan organisations !erformance.

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STRATEGIC ANALYSIS

Managers res!onsible for the success of the organi0ation are concerned about the effect thefactors in the e%ternal environment have u!on it. They can not control the e%ternalenvironment but they need to identify, evaluate and react to these forces outside theorgani0ation which may affect them.

T# G#5#3 E5&3o5+#5' @M.3o-#5&3o5+#5'

9eneral environment, also known as societal, remote, macro or indirect5action environmentconsists of those factors, which affect the business of a country, and, therefore, they havehomogeni0ing effect. This environment consists of both a general and com!etitiveenvironment. The com!etitive environment consists of the markets and the industry in whichan organi0ation com!etes. The changes that occur here have an effect that transcends firmsand s!ecific industries.

The figure ?.; below shows the relationshi! between the general environment, thecom!etitive environment, and the organi0ation. &enry +A77G suggests that, other thingsbeing e-ual the com!etitive environment has the most direct and immediate im!act on theorgani0ation.

Source: Hubbard (2008)

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In the general environment, we can include natural and ecological factors at the first level.

Batural factors are im!ortant to the economic activities of a country because either they!rovide o!!ortunities or threats to the economic system. 'or e%am!le, agriculture de!ends onnature +rainfall, climatic conditions, etc.) manufacturing de!ends on !hysical in!uts) miningand drilling de!end on natural de!osits) trans!ortation and communication de!end ongeogra!hical factors) and so on. In the same way, ecological factors like environmental!ollution, wildlife, greenery, and other factors are matters of concern for all organi0ations. "tthe second level, com!aratively, more influential factors come in the form of economic,!olitical5legal, technological, and social5cultural factors. Taken together, they set forth theframework for organi0ations o!erations and determine the in!uts which organi0ations cantake from the environment, !rocess these in!uts in the form of out!uts, and e%!ort theseout!uts back to the environment. arious characteristics of such factors may be favourable orunfavourable to the growth of organi0ations. @esides these factors, which e%ist within a

country, international factors also become im!ortant because of globali0ation of economy of acountry.

S.#53&o P55&5

"ccording to choemaker +;


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Identify basic trends which environmentalfactor+s will have the most im!act on issues inste! ;. This will look at the im!act on the

current strategy.

Identify key uncertainties. $hich events thathave an uncertain outcome will most affect theissues the organi0ation is concerned with

Construct initial scenario themes. 8nce trendsand uncertainties are develo!ed) theorgani0ation has the basic building blocks forscenario !lanning. It can then identify e%tremeworld views by !utting all !ositive elements inone scenario and the negative elements in

another broad scenario.

Check for consistency and !lausibility. Check tosee if the trends identified are com!atible withthe chosen time frame. If they are not, thenremove all the trends that do not fit the timeframe.

Develo! learning scenarios the role is todevelo! relevant themes for the organi0ationaround which !ossible outcomes and trendscan be organi0ed. The scenarios can be given

a name or title to reflect that they tell a story.

Identify research needs. "t this stage, furtherresearch +i.e. changes in technology may bere-uired to understand uncertainties and trendsmore fully.

Develo! -uantitative models. 8nce furtherresearch has been gained, the organi0ationmay wish to revisit the internal consistency ofthe scenario and decide whether it mightbenefit from formali0ing some interactions in a-uantitative model.

Evolve towards decision scenarios. Theultimate aim is to this !rocess is to movetowards scenarios that can be used to test itsstrategy formulation and hel! it generate newideas.

T# &3+ $#o) %o)% '# %,++37 o: %.#53&o ;55&5 ;3o.#%%*

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"ccording to &enry +A77G, if the scenarios are useful to the organi0ation, they have thefollowing characteristics#

They address the concerns of individuals in theorgani0ation)

The scenarios are internally consistent)

They describe fundamentally different futuresas o!!osed to being variations on a !articulartheme)

Each scenario describes an e-uilibrium statethat can e%ist for a considerable !eriod of timeas o!!osed to being merely short5lived.

'inally, choemaker +;


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se!arately, !referring to e%tend the acronym to 4ETJE. It is not im!ort whether we use4ET +or TE4 or 4ETJE, but to understand how this framework can be used and to beaware of its limitations.

4ET analysis hel!s an organi0ation to detect and monitor those weak signals in the ho!e ofrecogni0ing the discontinuities or fractures sha!ing the environment. It can also be used todetect the trend in the e%ternal environment that will ultimately find their way into thecom!etitive environment. Therefore, the managers should identify their relevant environmentso that they can analy0e the various elements in order to relate their organi0ations with theenvironment. "n analytical classification of various environmental factors may be#

Economic environment,

4olitical5legal environment,

Technological environment,

ocio5cultural environment, and

International environment.

Po&'&.- L# :.'o3%

4olitical5legal environment is an im!ortant factor !articularly in a mi%ed economy like Kambia,and affects the working of business organi0ations significantly. 4olitical5legal environment ofa country includes the following elements#

9overnment stability

Ta%ation !olicy

9overnment regulation

Defence and foreign !olicies etc.

tability of government in $estern countries is not a ma(or issue. &owever, whereMultinational cor!orations +MTC o!erate across international borders, the stability ofgovernments and !olitical systems in these countries needs to taken into consideration.These MTC needs to be assured that their investment will be safe including their !ersonnelo!erating in these countries. "lso the government !olicy of deregulation or !rivati0ation hasthe effect of o!ening u! the markets to com!letion. @ecause of com!etition localorgani0ations are forced to innovate and cut costs to remain com!etitive. This is becausenew entrants will enter the market with lower cost curves and more innovative !roducts andservices due to better technology and clear understanding of customer needs. To avoid beingsur!rised managers need to be scanning their environment for signs of change ingovernment !olicy.

9overnment regulation needs to be something for com!any to fear. Der Jinde +;


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Jegal rules of the game of business5their formulation, im!lementation, efficiency, andeffectiveness.

E.o5o+&. =.'o3%

Economic factors of a country determine the e%tent to which various organi0ations find theeconomic forces favourable or unfavourable. They include indicators like interest rates,dis!osable income, unem!loyment rate, retail !rice inde% or inflation, 9D4 and e%changerates. Economic indicators can not !rovide a true !icture of the changes in the macroenvironment but !rovides a sna!shot and sim!lification of what is ha!!ening. This makesscanning and monitoring the general environment for signs of economic changes which mayim!act on the organi0ation difficult.

8rganisations involved in e%!orting !roducts to other countries will be scanning theenvironment for the !ossible signs of the e%change rates fluctuation. If the e%change rates

a!!reciates, the effect of which will be to make it harder for these organi0ations to sell goodsabroad but relatively easier for im!orters to sell their goods in the domestic market. The wayforward is to make efficiency gains and innovate so that they can offset the unfavourablee%change rate with a reduction in !rice or increase in -uality.

So.& =.'o3%

ocial and cultural environment is -uite com!rehensive because it may include the totalsocial factors within which an organisation o!erates and that is why it is referred to as social5cultural factors. In fact, the !olitical and legal environment is closely intertwined with socialand cultural environment because laws are !assed as a result of social !ressures and!roblems. The socio5cultural environment of business can be defined as follows# ocial and

cultural environment consists of attitudes, beliefs, desires, e%!ectations) education andcustoms of the society at a

given !oint of time. Thus, social and cultural environment, in its broad sense, includes many 5as!ects of society and its various 5constituents. 'rom business organi0ations !oint of view, itmay include#

e%!ectations of the society from the business)

attitudes of society towards business and itsmanagement)

iews towards achievement of work)

views towards authority structure, res!onsibilityand organi0ational !ositions,

views towards customs, traditions, andconventions)

class structure and labour mobility) and

Jevel of education.

The various elements of social and cultural environment affect the working of the

organi0ations mainly in three ways# organi0ational ob(ective setting, organi0ational !rocesses

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and the !roducts to be offered by the organisation. Through these, they affect the totalfunctioning of the organisation. The social and cultural factors affect the basic ob(ectives ofthe organi0ation by !rescribing the norms within which the organi0ational ob(ectives are

formulated. 'or e%am!le, to what e%tent, social res!onsibility will be an organi0ationalob(ective is determined by the various social factors in which organisation functions. imilarlyorgani0ational !rocesses are also designed kee!ing in view the various social and culturalfactors otherwise they will not work. 'or e%am!le, the various control and decision !rocessesin our social organi0ations are based on the basic values of (oint family system and castesystem. imilar is the case with other organi0ational !rocesses. ocial and cultural factorsalso affect the goods and services that can be offered by the organisation. ince theorganisation works as mediator for converting in!uts into out!uts, and these out!uts aregiven to the society, it can !roduce only those things, which are acce!ted by the society.8ften the managers in formulating or im!lementing their strategies do not consider the socialand cultural factors ade-uately. The result is that their sound strategies in all other as!ectsmay fail.

T#.5oo&. =.'o3%

Technological factors include the rate of obsolescence, i.e. the s!eed with which newtechnological discoveries su!ersede established technology. The rate of change intechnology and innovation has the effect causing new industries to emerge and changes theway organi0ation com!ete. Techno local advances include the following#

the use of so!histicated software

genetic engineering and

Bano technology.

The ra!id change of technology has changed the dynamics of industries such as banking,financial services and insurance. This has allowed new entrants to enter the market at alower cost base than incumbents, there by offering more com!etitively !riced !roducts andservices and gaining market share in the !rocess +&enry, A77G.

I5'#35'&o5 =.'o3%

Todays economies have globali0ed the ways in which geogra!hical boundaries of a countryhave only !olitical relevance) the economic relevance has e%tended beyond these Today,market classification does not take into account only national !arameters but global!arameters. In this globali0ation, many multinationals like E%%on, Mobil 8il, Coca5Cola, etc.derive more than half of their revenues from their overseas o!erations.

Therefore, there is a need for scanning international environment. 'rom strategicmanagement !oint of view, the analysis is re-uired from two angles# to o!en o!erationsabroad and to understand the im!lications of entry of multinational cor!orations in the countryand the freedom of im!orting !roducts and services from abroad. 'or o!eration abroad, theanalysis of the following factors is im!ortant#

T# Co+;#'&' A57%&% @Po3'#3% : :o3.#% =3+# )o39

9iven the real difficulties of undertaking a com!rehensive analysis of the organisationsstrengths and weaknesses in relation to an enormously com!le% environment, the focus of

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the classical !ers!ective has settled on the position of the organisation in its competitiveenvironment.

8ne of the most e%tensive writers of this a!!roach, Michael 4orter, has modelled the keyfeatures of the com!etitive environment +4orter, ;


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E%!ected reactions from or the !otential forretaliation by, incumbent com!anies in theindustry.

@arriers to Entry

@arriers to entering an industry are !resent when entry is difficult or when it is too costly and!laces !otential entrants at a com!etitive disadvantage +relative to com!anies alreadycom!eting in the industry. There are seven factors that re!resent !otentially significant entrybarriers that can emerge as an industry evolves or might be e%!licitly 2erected3 by current!artici!ants in the industry to !rotect !rofitability by deterring new com!etitors from entry.

Economies of cale "ccording to &enry +A77Geconomies of scale refer to the relationshi!between -uantity !roduced and unit cost. "s

the -uantity of a !roduct !roduced during agiven time !eriod increases, the cost ofmanufacturing each unit declines. Economiesof scale can serve as an entry barrier whene%isting com!anies in the industry haveachieved these scale economies and a!otential new entrant is only able to enter theindustry on a small scale +and !roduce at ahigher cost !er unit. 'or e%am!le, entry for anew com!any in the banking or mining sectorin Kambia at a big scale is difficult because of!resence of the multi!le !layers who have

already achieved the economies of scale.Com!anies that !roduce multi!le customi0ed!roducts or that enter an industry on a largeenough scale can sometimes overcomeeconomies of scale as a !otential entry barrier.&owever, because large scale entry maygreatly increase industry ca!acity it may risk astrong reaction from established com!anies.

Ca!ital He-uirements if organi0ations need toinvest substantial financial resources tocom!ete in an industry, this creates a barrier to

entry. 'or e%am!le, organi0ations wishing toenter the oil industry would face huge ca!italcosts involved in e%!loration and in s!ecialist!lant and machinery. This barrier in furtherstrengthened because oil com!anies arevertically integrated. They com!ete in differentstages of !roduction and distribution

4roduct differentiation where an organi0ations!roduct are already established in an industry,!roviding it with high brand awareness andgenerating customer loyalty, new entrants mustoffer a !roduct that is greatly im!roved orcomes at a lower cost if the buyer is to witch.

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witching Costs "re the onetime costscustomers will incur when buying from adifferent su!!lier. These can include such

e%!licit costs as retraining of em!loyees orretooling of e-ui!ment as well as the!sychological cost of changing relationshi!s.Incumbent com!anies in the industry generallytry to establish switching costs to offset newentrants that try to win customers withsubstantially lower !rices or an im!roved +or, tosome e%tent, different !roduct. 'or e%am!le,switching costs have to be borne by com!aniesfor switching from Microsofts $indows to othero!erating systems creating entry barriers in themarket for o!erating systems.

"ccess to Distribution Channels. " new entrantwill need to have access to distribution for its!roduct in order to com!ete successfully in theindustry. ome big com!anies may !reventnew entrants from accessing distributionchannels by having sole agreements with them.'or e%am!le retailers +ho!rite, !ar and9ame are reticent to !rovide shelf s!ace tonew !roducts from small !roducers who maylack the resources to advertise their !roductseffectively.

Cost "dvantages Inde!endent of i0e E%istingcom!anies in an industry often are able toachieve cost advantages that cannot becostless du!licated by new entrants +other thanthose related to economies of scale and accessto distribution channels. These can include!ro!rietary !rocess +or !roduct technology,more favourable access to or control of rawmaterials, the best locations, or favourablegovernment subsidies. 'or e%am!le!harmaceuticals where new !roducts

discovered are under !atent !rotection for a!eriod of time. 4otential entrants must findways to overcome these disadvantages to beable to effectively com!ete in the industry. Thismay mean successfully ada!ting technologiesfrom other industries and/or noncom!eting!roducts for use in the target industry,develo!ing new sources of raw materials,making !roduct +or service enhancements toovercome location related disadvantages, orselling at a lower !rice to attract customers.

T# B3&5&5 Po)#3 o: B,7#3%

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$hile com!anies com!eting in an industry seek to ma%imi0e their return on invested ca!italand earn above average returns, buyers are interested in !urchasing !roducts at the lowest!ossible !rice +the !rice at which sellers will earn the lowest acce!table return. To reduce

cost or ma%imi0e value, customers bargain for higher -uality or greater levels of service at thelowest !ossible !rice by encouraging com!etition among com!anies in the industry. @uyergrou!s are !owerful relative to com!anies com!eting in the industry when#

There is a concentration of buyers and buyingvolumes are high.

The !roducts its !urchases are standard orundifferentiated because they can find analternative u!!lier

@uyers are able to switch to another su!!liers

!roduct at little, if any, cost

@uyers re!resent a credible threat to integratebackwards into the su!!liers industry becauseof resources or e%!ertise.

The buyer earns low !rofit which will motivatehim or her to lower !urchasing costs chargedby the su!!lier in an effort to secure his or hermargin.

The buyer has full information on demand and

cost they will be in a stronger !osition.

T# B3&5&5 ;o)#3 o: S,;;%

u!!liers can !ut !ressure on organi0ations in an industry by raising the !rice or lowering the-uality or -uantity of !urchased goods and services. u!!liers are !owerful when com!any!rofitability is reduced by su!!liers actions. u!!liers are !owerful under the followingcircumstances.

The su!!liers industry is dominated by fewcom!anies and is more concentrated than theindustry it sells to. The larger the su!!lier andthe more dominant it is, the more !ressure itcan !lace on firms in the industry it sell to.

atisfactory substitute !roducts are notavailable to buyers)

@uyers are not a significant customer grou! forthe su!!lier grou!)

u!!liers goods are critical to buyersmarket!lace success)

Effectiveness of su!!liers !roducts has

created high switching costs for buyers)

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u!!liers re!resent a credible threat tointegrate forward into the buyers industry,es!ecially when su!!liers have substantial

resources and !rovide highly differentiated!roducts.

T3#'% o: S,$%'&','# P3o,.'% 5 S#3&.#%

"ll com!anies must recogni0e that they com!ete against com!anies !roducing substitute!roducts and services, those !roducts and services that are ca!able of satisfying similarcustomer needs but come from outside the industry and thus have different characteristics.'or e%am!le bottled water +Man0i has develo!ed as a substitute for carbonated drinks."nother e%am!le is that of the fa% machines and emails for document delivery. In effect,!rices charged for substitute !roducts re!resent the u!!er limit on the !rices that su!!lierscan charge for their !roducts.

The Threat of ubstitute 4roducts is 9reatest when

@uyers or customers face few, if any switchingcosts)

4rices of the substitute !roducts are lower)

Luality and !erformance ca!abilities ofsubstitutes are e-ual to or greater than those ofthe industrys !roducts.

Com!anies can offset the attractiveness of substitute !roducts by differentiating their!roducts in ways that are !erceived by customers as relevant. iable strategies might include!rice, !roduct -uality, !roduct features, location, or service level.

R&37 +o5 Ex&%'&5 Co+;#'&'o3%

The intensity of rivalry in an industry de!ends u!on the e%tent to which com!anies in anindustry com!ete with one another to achieve strategic com!etitiveness and earn aboveaverage returns because success is measured relative to other com!anies in the industryCom!etition can be based on !rice, -uality, or innovation. @ecause of the interrelated natureof com!anys actions, action taken by one com!any generally will result in retaliation bycom!etitors +also known as com!etitive actions and reactions. The following factors affectcom!etitive rivalry#

Bumerous or E-ually @alanced Com!etitorsIndustries with a high number of com!aniescan be characteri0ed by intense rivalry whencom!anies feel that they can make com!etitivemoves that will go unnoticed by othercom!anies in the industry. &owever, othercom!anies will generally notice these movesand offer countermoves of their own inres!onse. 4atterns of fre-uent actions andreactions often result in intense rivalry, such asin local restaurant, retailing, or dry cleaningindustries. Hivalry also will be intense in an

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industry that has only a few com!anies ofe-uivalent resources and !ower. @attles formarket share in beverages between Coca Cola

and 4e!si is (ust one of the e%am!les ofintense rivalry between relatively e-uivalentcom!etitors.

low Industry 9rowth $hen a market isgrowing at a level where there seem to be2enough customers for everyone,3 com!etitiongenerally centres around effective use ofresources so that a com!any can effectivelyserve a larger, growing customer base

&igh 'i%ed Costs or &igh torage Costs $hen

an industry is characteri0ed by high fi%ed costsrelative to total costs, com!anies !roduce in-uantities that are sufficient to use a large!ercentage) if not all of their !roductionca!acity so that fi%ed costs can be s!read overthe ma%imum volume of out!ut. $hile this maylower !er unit costs, it also can result in e%cesssu!!ly if market growth is not sufficient toabsorb the e%cess inventory. The intensity ofcom!etitive rivalry increases as com!aniesutili0e !rice reductions, rebates, and otherdiscounts or s!ecial terms to reduce inventory.

&igh storage costs, es!ecially those related to!erishable or time sensitive !roducts +such asfruits and vegetables also can result in highlevels of com!etitive intensity as such !roductsra!idly lose their value if not sold within a giventime !eriod. 4ricing strategies often are used tosell such !roducts.

Jack of Differentiation or Jow witching Costs$here !roducts are undifferentiatedcom!etition will be more intense, driven bycustomer choice based on !rice and service.

witching costs im!lies that com!etitors areunable to !revent customers from going to theirrivals.

&igh e%it barriers. The e%istence of high e%istbarriers may hinder firms needing to e%it theindustry. 'or e%am!le, some !lants are sos!ecialists that they cannot easily be used to!roduce alternative goods and services. "sdemand conditions deteriorate, this createse%cess ca!acity in the industry and act toreduce !rofitability within the industry.

THE INTERNAL EN>IRONMENT @S"OT >ALUE CHAIN

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S"OT A57%&%

$8T analysis means analy0ing strengths, weaknesses, o!!ortunities and it is a useful

strategic !lanning tool and is based on the assum!tion that if managers carefully reviewinternal strengths and weaknesses and e%ternal threat and o!!ortunities, a useful strategy forensuring organi0ational success can be formulated +"ndrew ;


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4oor research and develo!mental !rograms

Jack of management vision, de!th and skills

Inability to raise ca!ital

$eaker distribution network

8bsolete technology

Jow em!loyee morale

4oor track record in im!lementing strategy

Too narrow a !roduct line

4oor market image

&igher overall unit costs relative to com!etition.

O;;o3',5&'% 5 T3#'%

8!!ortunities and threats refer to the organisations e%ternal environment, over which theorgani0ation has much less control. "n 2o!!ortunity3 is considered as a favourablecircumstance, which can be utili0ed for beneficial !ur!oses. It is offered by outsideenvironment and the management can decide as to how to make the best use of it. uch ano!!ortunity may be the result of a favourable change in any one or more of the elements thatconstitute the e%ternal environment. It may also be created by a !roactive a!!roach by themanagement in moulding the environment to its own benefit. ome of the o!!ortunities are#

trong economy

4ossible new markets

Emerging new technologies

Com!lacency among com!eting organi0ations

ertical or hori0ontal integration

E%!ansion of !roduct line to meet broaderrange of customer needs

'alling trade barriers in attractive foreignmarkets

" 2threat3 is a characteristic of the e%ternal environment, which is hostile to the organisation.Management should antici!ate such !ossible threats and !re!are its strategies in such amanner that any such threat is neutrali0ed. ome of the elements that can !ose a threat are#

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Entry of lower cost foreign com!etitors chea!ertechnology ado!ted by rivals

Hising sales of substitute !roducts

hortages of resources

Changing buyer needs and !references

Hecession in economy

"dverse shifts in trade !olicies of foreigngovernments

"dverse demogra!hic changes

$8T analysis involves evaluating a com!anys internal environment in terms 8f strengthsand weaknesses and the e%ternal environment in terms of o!!ortunities and threats andformulating strategies that take advantage of all these factors. uch analysis is an essentialcom!onent of thinking strategically about a com!anys situation.

>ALUE CHAIN A57%&%

The second framework that com!anies can use to identify and evaluate the ways in whichtheir resources and ca!abilities can add value is value chain analysis. Ca!abilities are!rocesses, systems or organisational routines which the organisation uses to coordinate itsresources for !roductive use. " value chain describes the activities within an organisation thatgo to make a !roduct or service. Therefore the value chain analysis allows an organisation toascertain the costs and value that emanate from each of its value activities.

alue or margin is the difference between the total value received by the firm from thecustomer for its !roduct or service and the total cost of creating the !roduct or service. Thevalue chain system refers to the relationshi! between the value chain activities of theorganisation and its su!!liers, distributors and customers. 'igure A.A below show the valuechain.

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So,3.#( H#537 @2008

The figure above illustrates how the value creating activities !erformed by the com!any canbe se!arated into !rimary and secondary activities. 4rimary activities, shown vertically,re!resent traditional line activities such as inbound logistics, o!erations, outbound logistics,marketing and sales, and service. These are activities which are directly involved in thecreation of a !roduct or a service +&enry, A77G. $hile the su!!ort activities, shown

hori0ontally, are re!resented by a com!anys staff activities and include its financialinfrastructure, human resource management !ractices, technological develo!ment, and!rocurement activities. They are activities which ensure that the !rimary activities are carriedout efficiently and effectively.

The first ste! in value chain analysis is to carefully e%amine each of the com!anys !rimaryactivities to determine the !otential for creating or adding value.

P3&+37 A.'&&'%

I5$o,5 Lo&%'&.% These are value chainactivities that cover receiving, storing, and

distributing in!uts to the !roduct. It includesmaterial handling, warehousing, inventorycontrol, vehicle scheduling and returns tosu!!liers.

O;#3'&o5% These activities deals withtransforming an organi0ations in!uts into final!roducts such as machining, !ackaging,assembly, testing, !rinting and facilityo!erations.

O,'$o,5 Lo&%'&.% These activities areassociated with collecting, storing anddistributing the !roduct or service to buyers.

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8utbound logistics include warehousing,material handling, delivery, order !rocessingand scheduling.

M39#'&5 5 S#% This includes activitiesthat make a !roduct available for buyers to!urchase and induces them to buy. It includesadvertising, !romotion, sales force, -uoting,channel selection, channel relations and!ricing.

S#3&.# These activities enhance or maintainthe value of !roducts, such as installation,re!air, training, !arts su!!ly, and !roductad(ustment*

De!ending on the industry within which the organi0ations com!ete, each of these !rimaryactivities can have an im!act on its com!etitive advantage. 'or e%am!le a manufacturingcom!any like Kambian @reweries will clearly be more concerned about its o!erations5 howthe in!uts are being transformed into beers and soft drinks and !ackaging of these !roducts.

S,;;o3' A.'&&'%

P3o.,3#+#5' This value chain activity dealswith the !rocess of !urchasing resource in!utsto su!!ort any of the !rimary activities. In!utsto the organisations !roductive !rocess include

such thing as raw materials, office su!!lies,and buildings.

T#.5oo7 ##o;+#5' This activity coversan organisations know5how, its !roceduresand any use of its technology that has anim!act u!on !roduct, !rocess and resourcedevelo!ment.

H,+5 R#%o,3.# M5#+#5' Theseactivities include selection, recruitment,training, develo!ment and remuneration ofem!loyees. They may su!!ort individual!rimary and su!!ort activities, as occurs whenan organi0ation hires !articular individuals suchas economics. They also su!!ort the entirevalue chain, as occurs when an organisationsinfrastructure is usually used to su!!ort theentire value chain.

Co+;57 &5:3%'3,.',3# These activitiessu!!ort the activities !erformed in thecom!anys value chain, including generalmanagement !ractices, !lanning, finance,accounting, legal, and government relations. @y!erforming its infrastructure related activities, a

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com!any identifies e%ternal o!!ortunities andthreats, and internal strengths and weaknessesrelated to com!any resources and ca!abilities,

and su!!orts or nurture its core com!etencies

Each category of !rimary and su!!ort activities includes a further three activities whichim!act on com!etitive advantage. These are direct and indirect activities and -ualityassurance. Direct activities involve creating value for the buyer, for e%am!le through !roductdesign. Indirect activities allow direct activities to take !lace, such as regular maintenance.Luality assurance ensures that the a!!ro!riate -uality of the other activities is maintained, fore%am!le through monitoring and testing.

Using the value chain framework enables managers to study the com!anys resources andca!abilities in relationshi! to the !rimary and su!!ort activities !erformed to design,manufacture, and distribute !roducts, and to assess them relative to com!etitors ca!abilities.

'or these activities to be sources of com!etitive advantage, a com!any must be able to!erform !rimary or su!!ort activities in a manner that is su!erior to the ways that com!etitors!erform them. "lso !erform a !rimary or su!!ort activity that no com!etitor is able to !erformto create su!erior value for customers and achieve a com!etitive advantage. This im!liesthat, given that individual com!anies are com!rised of uni-ue or heterogeneous bundles ofactivities, reconfiguring the value chain, or rebundling resources and ca!abilities, may enablea com!any to develo! uni-ue value creating activities. The managerial challenge is that thevalue creation !rocess is difficult and there is no one best way to assess a com!anys!rimary and su!!ort activities or to evaluate the value creating !otential of those activitieseither within the com!any or relative to com!etitors, because of incom!lete or ambiguousdata.

&owever, by being ob(ective, managers may be able to use the value chain framework toidentify new, uni-ue ways to combine resources and ca!abilities to create value that aredifficult for com!etitors to recogni0e, understand, or imitate. The longer a com!any is able tokee! com!etitors 2in the dark,3 as to how resources and ca!abilities have been combined tocreate value, the longer a com!any will be able to sustain a com!etitive advantage.Com!anies can use outsourcing as an alternative to identify !rimary or su!!ort activities forwhich its resources and ca!abilities are not core com!etencies and do not enable thecom!any to add su!erior value and achieve com!etitive advantage.

O,'%o,3.&5

8utsourcing describes a com!anys decision to !urchase a value creating activity from an

e%ternal su!!lier. 8utsourcing has become im!ortant, and may become more im!ortant in thefuture, for two reasons#

'irst, there are limits to the abilities ofcom!anies to !ossess all of the bundles ofresources and ca!abilities that are re-uired toachieve su!erior !erformance +relative tocom!etitors in its entire !rimary and su!!ortactivities.

econd, with limits to their resources andca!abilities, com!anies can increase theirability to develo! resources and ca!abilities todevelo! core com!etencies and achieve

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com!etitive advantage by nurturing only a fewcore com!etencies.

THE RESOURCE BASED VIE6 OF STRATEGY

The resource based view of strategy can be associated with the work 4enrose +;


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organisations technological resources. 'ore%am!le, an intangible resource of amanufacturer maybe its creative innovation of

its founder.

Co+;#'#5.%

"vailability of resources in an organi0ation does not offer any benefits but the efficientconfiguration of resources !rovides an organi0ation with the com!etencies. These areattributes that a firm re-uires in order to be able to com!ete in the market !lace. It maybeuseful to think of com!etencies as deriving from the bundle of resources that a firm has. 'ore%am!le, in order to com!ete in the automobile industry organi0ations must !ossessknowledge about design and engine and body manufacture. $ithout this knowledge theorgani0ation can not com!ete effectively irres!ectively of its resources.

Co3# Co+;#'#5.%

Hesources and ca!abilities serve as the foundation u!on which com!anies formulate andim!lement value creating strategies so that the com!any can achieve strategiccom!etitiveness and earn above average returns. &owever, not all of a com!anys resourcesand ca!abilities re!resent strategic assets, assets that have com!etitive value and the!otential to serve as a source of com!etitive advantage. If the com!any has a deficiency insome of its resources, it may not be able to achieve strategic com!etitiveness. 'or e%am!le,insufficient financial resources may !revent the com!any from im!lementing the !rocesses orintegrating the activities re-uired to add su!erior value by limiting the com!anys ability to hireworkers with the necessary skills or to invest in the ca!ital assets +facilities and e-ui!mentthat are needed. Thus, com!anies not only are challenged to scan the e%ternal environment

to identify o!!ortunities that can be e%!loited, but also to have an in de!th understanding ofcom!any resources and ca!abilities. This will enable the com!any not only to develo!strategies that enable it to e%!loit e%ternal o!!ortunities but also to avoid com!eting in areaswhere the com!anys resources and ca!abilities are inade-uate.

$hen the com!anys resources and ca!abilities result in a core com!etence, the com!anywill be able to !roduce goods or services with features and characteristics that are valued bycustomers. This im!lies that com!anies can im!lement value creating strategies only whenits ca!abilities and resources can be combined to form core com!etencies.

Therefore core com!etence can be thought of as a cluster of attributes that an organi0ation!ossesses which in turn allows it to achieve com!etitive advantage. It may sim!ly be that anorgani0ation has configured its collection of resources in such a way that allows it to com!etemore successfully. " core com!etence is enhanced as it is a!!lied and shared across theorgani0ation.

D&%'&5.' C;$&&'%

Distinctive ca!abilities of an organi0ations resources are im!ortant in !roviding it withcom!etitive advantage. 8rgani0ations ca!abilities are only distinctive when they emanatefrom a characteristic which other firms do not have. Distinctive ca!abilities need to !ersistover time +sustainable and must benefit !rimarily the organi0ation which holds it rather thanits em!loyees, its customers, or its com!etitors +a!!ro!riable. These in turn are linked torelationshi!s between an organi0ation and its stakeholders.

These distinctive ca!abilities must derive from the three areas#

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"rchitecture ystems of relational contractswhich e%ist inside and outside the organi0ation.

He!utation "s a source of e%!erience isim!ortant in those markets where consumerscan only ascertain the -uality of a !roduct fromtheir log5term e%!erience.

"nd innovation. "n organi0ations ability toinnovate successfully is also a source ofdistinctive ca!ability which is sustainable anda!!ro!riate. 'or e%am!le, innovative !roductslike "!!le with I5Tunes and I54od.

R#%o,3.#< C;$&&'% 5 >,# C3#'&o5

So,3.#( H,$$3 @2006

C3&'&. S,..#%% =.'o3% A;;3o.

In order to understand how critical success factors +C's a!!roach is a!!lied to generatingcom!etitive advantage and the conce!t of C's, let us take few e%am!les. " goodacademician can be successful in teaching and research and not necessarily, he succeedsas a business man. " !layer having high com!etence in a !articular game, say lawn tennis,and is successful is unlikely to succeed in cricket. Even in the same game, a !layer cannotsucceed in all !ositions, for e%am!le, a good) wicket kee!er cannot be a good bowler too.The -uestion is# why does this ha!!en The answer is# each activity has uni-ue re-uirement,and a single !erson cannot meet the re-uirement of all activities. &e can be successful onlyin that for which he has com!etence to meet its re-uirement. +uccess is defined in terms ofob(ective achievement. This social !henomenon can be re!licated in business situation

where the -uestion may be asked# why does a successful business organisation in oneindustry fails in another industry The answer of this -uestion lies in the o!ening !art of this

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cha!ter# an organisations core com!etence does not necessarily lead to com!etitiveadvantage because it may not have any relevance to the industry in which the organisationfails. It a!!ears, then, that re-uirement of an industry differs from those of other industries.

This re-uirement is e%!ressed in terms of critical success factors.

Co5.#;' o: C3&'&. S,..#%% =.'o3%

Critical success factors, also referred to as strategic factors or key factors for success, arethose characteristics, conditions, or variables which when maintained and sustained can havesignificant im!act on the success of an organisation com!eting in a !articular industry. " C'may be a characteristic such as !roduct features, a condition such as high ca!ital investment,or any other variable. " basic nature of C's is that they differ from Industry to industry#consumer goods versus industrial goods, differentiated versus undifferentiated industries,local versus global industries so on.

E%hibit of Critical uccess 'actors in Different Industries

Too';%'# &5,%'37

Luality in terms of form, flavour, foam and freshness, wide area distribution network, highlevel of !romotion, and brand loyalty.

=oo P3o.#%%&5 I5,%'37

&igh -uality !roduct, !ackaging, efficient distribution network, and sales !romotion.

So# I5,%'37

&igh -uality !roduct, cost efficiency so!histicated retailing, fle%ible !roduct mi%, and creationof !roduct image.

A,'o+o$ I5,%'37

tyling, strong dealer network, manufacturing cost control, and ability to meet environmentalstandards.

Co,3 S#3&.#

!eedy dis!atch, reliability, and !rice.

Managing these C's effectively generates com!etitive advantage. 'or e%am!le, 8hamestates that# 2>ey success factors +C's in an industry and business need to be identified toin(ect a concentration of resources into a !articular area where the com!any sees ano!!ortunity to gain significant strategic advantage +com!etitive advantage over itscom!etitors.

I#5'&:7&5 I5,%'37 CS=%

In order to generate com!etitive advantage along C's, it is necessary to identify these.@ased on a study related to identifying strategic factors, which are im!ortant to differentbusinesses, teiner views that 2there are indeed strategic factors needed for a business andthey can be identified. &owever, the -uestion is# if C's differ from industry to industry, how

can these be identified In order to find out the answer of this -uestion, managers can !ut

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another -uestion# what do we need to do in order to be successful in a !articular business Itis (ust like an individual !utting a -uestion# what does he/she need to do to be successful instudies, in career, etc. &owever, the answer of the -uestion :what needs to be done for

success in a business is not as sim!le as it !rima facie a!!ears. Therefore, managers needto generate as much information as !ossible by going through following ways#

C's can be identified based on logic,heuristics, or even a rule of thumb rather thanthrough any theoretical model. These arebased on long years of managerial e%!eriencewhich leads to the develo!ment of intuition,(udgment, and hunch.

C's can also be identified internally in theorganisation by using creative techni-ues like

brainstorming.

C's can be deduced from other com!aniesstatements, e%!ert o!inions, organisationalsuccess stories, etc.

U%&5 CS= A;;3o.

C' a!!roach can be used in a number of ways to generate com!etitive advantage. Hockarthas identified three ste!s in using C' a!!roach#

generate the critical success factors,

refine C's into ob(ectives,

"nd identify measures of !erformance.

$hile the first ste! is related to identification of C's, other two are related to using theseC's. " com!any can generate com!etitive advantage based on C's in the following ways:

The com!any can identify key result areasbased on C's. " key result area is an as!ectof an organisation or its unit that must functioneffectively for the entire organisation tosucceed. If a key result area has been definedin terms of C's, its focus is more relevant. "key result area may be any ty!e, for e%am!le,after sales service in automobile or e-ui!mentindustry.

The com!any can allocate its resources, both!hysical and human, on the basis of C's. 'ore%am!le, in fast moving consumer goods, thereare two critical success factors# !roductinnovation and efficient distribution system.&industan, Jever has focused on both by

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de!loying its critical resources in both theseareas.

" com!any can generate new C's, as theseare not static but dynamic. Thus, the new C'may be more im!ortant than the e%isting ones.This is based on the ma%im of doing thingsdifferently. 'or e%am!le, when Helianceentered te%tile fabrics, it introduced the conce!tof branding which was not a critical conce!t inte%tile at that time. In order to !romoteits brand,it went for huge advertising. $ith the result,Heliance became number one in te%tilebusiness very soon.

8n the basis of C's, a com!any can differentiate itself from others by doing the same thingdifferently or by doing different thing. &owever, C' a!!roach is not free from theirlimitations, which are in two forms. 'irst, e%isting or !otential com!etitors can emulate thestrategy through benchmarking and other tools and a com!any cannot remain as com!etitiveas it used to be. econd, if one com!any can generate a new C', others can also do. In thiscase also, the com!any may not remain highly com!etitive. Thus allocating huge resourcesbased on C's runs a risk. &owever, the risk is a !rime element of any strategy. It does notmean that C' a!!roach is not meaningful because of its limitations. In fact what anorganisation needs to do is that it takes continuous realigning of C's into its o!erations

O35&%'&o5 C3&'&. S,..#%% =.'o3%

The above discussion of C's is e%ternally focused in the sense that it concentrates on whatan organisation should do to be successful in a !articular industry. Hesearchers, bothacademicians and consultants, have made attem!t to find out the answer of the -uestion#what are the characteristics of an organisation, which make it successful in differentindustries or meeting the re-uirements of C's of these industries Though the answer ofthis -uestion is not, !recise because of inter!lay of different variables in determining successof an organisation, some clues can be derived from various !rescri!tions and researchstudies. Mc>insey Com!any, a U based consultant, has !rescribed seven factors whichlead to success as shown in 'igure A.6 below

S'3'#7. " means to achieve ob(ectives.

S'3,.',3#. @asic framework to designateres!onsibilities and functions.

S7%'#+%* Management tools for !lanning,decision making, communication, and control.

S'::%*&uman resources of the organisation.

S9&%* 8rganisational and individualca!abilities.

S'7#. &ow managers lead and motivate.

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6. 4roductivity through !eo!le

. &ands on, value driven

=. tick to knitting

. im!le form, lean staff, and

G. imultaneous loose tight control.

&owever, these characteristics should not be taken on static basis for generating com!etitiveadvantage.

ASSESSING ORGANISATIONAL PER=ORMANCE

There is an assum!tion that the main ob(ective of an organi0ation is !rofit ma%imi0ation tobenefit shareholders. &ow ever, many !eo!le cast doubt on !rofit ma%imi0ation theoriesbecause of the !rinci!le5agent !roblem. $hether the overriding ob(ective of shareholdersinterest can be subordinated to a multi!licity of other interest is an on going debate.

There are different models of assessing or measuring strategic !erformance or organi0ational!erformance but for the !ur!ose of this class we are going to focus on four models#shareholder value, financial analysis, balanced scorecard and benchmarking.

Mx&+&/&5 S3#o#3 >,#

There is an assum!tion that !rivate and !ublic com!anies are in business to create value andthat the !rofit they !roduce is distributed among shareholders. If the role of organi0ations is tocreate value and distribute !rofit to their shareholders, this brings us to how organi0ations!erformance will be measured. Heturns to shareholders are the only !erformance measure ofstrategy. This model uses the Bet 4resent alue +B4 or the Economic alue "dded +E"to measure the Heturn on Investment +H8I. The E" is an attem!t for organisation toinclude a more realistic !rofit figure. It is worked out by talking the difference between acom!anys o!erating !rofit after ta% and its annual cost of ca!ital, and discounting this to findout its !resent value. This model !rovides a single, unambiguous measure of !erformancebased on accounting measures that are !roblematic in measuring strategic !erformance.

S&+;# E.o5o+&. >,# A# +o#

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So,3.#( H,$$3 @2006

L&+&''&o5%

not an effective measure for unlistedcom!anies

Cannot be used for organisations without

shareholders

Does !ast !erformance !redict future!erformance

=&55.& A57%&%

Measuring an organi0ational !erformance is necessary to understand whether the strategiesbeing im!lemented actually add value to the organi0ation. If not, the -uestion is whether analternative strategy would be more a!!ro!riate +@u00ell and 9ale ;


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return on e-uity

sales growth

!rofit margin

debt to e-uity ratio

T# B5.# S.o3#.3

The balance scorecard wad develo!ed by >a!lan and Borton +;a!lan and Borton +;


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$hat must we e%cel at

Can we continue to im!rove and create value

Ex+;# o: $5.# %.o3#.3

So,3.#( H,$$3 @2006

This a!!roach also takes account of the different e%!ectations of stakeholders, recogni0ing!erha!s that ma%imi0ing shareholder value is not a !rime motivator for em!loyees orcustomers. The model !rovides a bridge between the needs of shareholders and the needsof stakeholders.

B#5.+39&5

@enchmarking is another tool, which can be used to generate com!etitive advantage. It is a!rocess of identifying in systematic way su!erior !roducts, services, and !rocesses !ractices that can be ado!ted in an organi0ation to reduce costs) decrease o!erations cycletime, and !rovide greater customer satisfaction. This is done by com!aring with thosecom!anies recogni0ed as industry leaders.

&enry +A77G defined benchmarking as a !rocess of measuring !roducts, services andbusiness !ractices against those com!anies recogni0ed as industry leaders.

'eatures of @enchmarking

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U!it -

STRATEGY FORMULATION

I!tro%*ctio!

This unit will look at the difference between business strategy and cor!orate) the role ofbusiness strategy in achieving com!etitive advantage) 4orters generic com!etitive strategiesand alternative a!!roach to strategy formulation. It will also look at the industry life5cycle andthe @oston Consulting 9rou! !ortfolio matri% analysis.


O,'.o+#%

Understand the various levels of business strategy Understand the nature of environment in which an

organisation o!erates and the role of its analysis in strategyformulation.

Understand that the com!etitive strategy of an organi0ationand the need to secure !articular com!etitive advantageover com!etitors are im!ortant.

Evaluate the industry life cycle "ssess the im!act of !ortfolio analysis "ssess the effectiveness of different growth strategies

BUSINESS LEVEL STRATEGY

"' &% $,%&5#%% ## %'3'#7

"ny given organi0ation may com!rise of a number of businesses, each o!erating in distinctmarket and serving different customers. @usiness level strategy is a means of se!arating outand formulating a com!etitive strategy at the level of the individual business unit. Com!etitivestrategy is concerned with the basis on which an organi0ation will com!ete in its chosenmarket. The role of business strategy is to devise a strategy which allows it to com!etesuccessfully in the market !lace and to contribute to the cor!orate strategy. The business unitmanagers must ultimately show that their business strategy contributes to the cor!oratestrategy.

In contrast, cor!orate strategy focuses u!on the fundamental -uestion# what business+businesses do we want to be in It is the task of the most senior e%ecutives to formulate acoherent cor!orate strategy.

G#5#3&. Co3;o3'# S'3'#%

Michael 4orter identified three generic

strategies#

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alue offered is less than the cost differential

LO" COST

" lower delivered cost structure than

com!etitors

8nly one firm can be the lowest cost !rovider in

an industry

Jow5cost strategy does not necessarily mean

low !rices

Can be achieved in many ways#

no frills !roduct

sim!le !roduct design

cost control

location advantage

!roduction innovation

!urchasing chea! assets

government subsidies

e%!erience curve

Hisks of a low5cost strategy

Barrow focus on cost control may limit

o!!ortunities

Cost leadershi! may not be sustainable

Com!etitors !ursuing a focus strategy may be

able to offer a lower !rice

LEADERSHIP STRATEGY

" combined strategy of differentiation and low cost

TLM enables com!anies to !roduce

differentiated goods/services at low cost

4rinci!les of TLM not easily a!!lied to an

organisation

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Easier to add a differentiation focus to a cost

focus

Jeader strategies increase com!etitive natureof an industry

Disadvantage of a leader strategy

Difficult to achieve both differentiation and low

cost

Can get :stuck in the middle

"lternative view to 4orters generic strategies. Three ways of com!eting that lead to e%cellent

!erformance# 8!erational e%cellence

Customer intimacy

4roduct leadershi!

Beed to e%cel on one of these and be at industry standard on other two

STUC! IN THE MIDDLE

To avoid being :stuck in the middle businesses should do at least one of these#

clearly define their business strategy in

!roduct5market terms

have a business strategy that delivers uni-ue

value to customers

communicate their business strategy to

o!erating staff

im!lement systems consistent with the definedbusiness strategy

THE INDUSTRY LI=E-CYCLE

The

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