TOPIC 5 ENVIRONMENT ANALYSIS

5.1 EXTERNAL ENVIRONMENTAL FACTORS

The external or environmental factors are those forces outside the control of
a single organisation.

• Each forces has an impact on key stakeholders of organization and provides favorable
impact or unfavorable impact to the organisation.

5.1.1 Economic Forces

Economic forces are those factors that are related to the economic
development and growth of a particular country.

• Key Economic Forces

Monetary policy Tax rates

Minimum lending rates Price fluctuations

Price controls Fiscal policies

Level of disposable income Foreign exchange

GDP growth rates Consumption patterns

Government budgets Per capita income

Public investment patterns Private investment growth

Investment incentives WTO, AFTA, EU policies

• Economic forces which originate from country in which organisation operates are easier
to handle
• Request by World Trade Organisation (WTO) for countries to open up their boundaries
for better trade flow can also have an impact on local business organisations.
• Economic forces originate from outside country are more challenging and complex
• Not familiar with 'new rules' of business game.
• Organisations have to take proactive behaviour in observing national and international
trends globally so as to survive in business.
• Internal economic forces not easy for business organisations to respond to.
• For example, policy on price controls for selected consumer products can pose a major
challenge to producers of consumer products

5.1.2 Social Forces

Social forces cover a broad spectrum of factors including cultural,

demographic, and environmental factors. The social and cultural factors may
refer to those forces like societal values, norms, culture, religion, language and
attitudes that may change or show preferences of one type over another.

• Social factors can pose difficulty when trying to cope with the changes in the environment.
• Social values of ethnic groups are different to the extent trying to cope with diverse cultures
can be a challenging exercise.
• For example, Malays can only eat halal food.
• Language - For example language used for advertising (different country different language
& must be understood.)
• As the country prospers and the society becomes more sophisticated, the demand for more
product and services are increased.
• For example, since more women working, demand for process food increases
• Social values and preferences also affect consumer attitudes towards products and
services.
• Youngster spend more and stay the trend while senior citizen spend less and are more old
fashioned
• Society changes cause environment in which society operates experience changes -
increase in pollution
• Environmental impact assessment (EIA) becomes more important today and therefore
construction companies have to cope with this in their development projects
• Rise of consumerism and work safety.
• Consumers want to know what they are consuming and whether it is safe or otherwise.
• Key Economic Forces

Life expectancy Population growth rates

Life styles Social values and culture

Attitudes towards work Migration and work mobility

Sex roles Value towards leisure

Level of education and training Awareness towards religious values

Environmental concerns Consumer activism

Attitudes towards ethics Rate of family formation

Attitudes towards social responsibility Consumer tastes and preferences

Buying habits Consumption versus saving trends

Social tolerance Health conscious concerns

5.1.3 Political Forces

• Political forces involving government, whether federal level, state level or local government
level.
• Refer to laws and legislation or policies adopted by government in power.
• Can provide favorable or unfavorable impact on organisation.
• Main concern is political stability - extent in which government has strong political support
from people or not.
• Political stability can provide strong foundations for business organisations to grow
• To ensure political stability get voters mandate in general elections, and reduce extreme
political ideologies that can create instability.
• Increasing number of terrorists and related activities in a country can also cause political
upheaval and reduce level of investment attractiveness to businessmen in region or country.
• Federal government policies can also affect business organisations.
• Include environmental protection laws, tax laws, investment incentives policies, labor laws,
government subsidies and other trade policies.
• Laws of state governments or local governments can also affect business organizations and
encourage or discourage new business growth.
• Government regulations and deregulation policies.
• Reflected by new laws and legislations introduced to curtail unhealthy activities in business
community.
• Introduction of special tariffs and by-laws also has an impact on business operations
• National policies like New Development Policy, National Service, and National Integrity Plan
can provide a favorable impact to foreign investment and business organisations in country.

5.1.4 Technological Forces

• Technological changes have been rapid.

• Attributed to many innovations and inventions developed in an effort to improve work and
life of community.
• Technology changed manufacturing processes, introduced new products and services, and
created new demands and marketing practices.
• Major revolution is development of Internet.
• Internet changed way businesses manage their operations and way of doing business.
• Internet created demand for e-business or e-commerce and e-learning.
• Demonstrated borderless way of doing business and created development of multimedia
industry.
• Technological revolution is changing the lifestyles and face of businesses and competition.
• Key Technological Forces

Research and Development expenses E-Commerce and Internet

New products development Cyber space technology

New services development Biodiversity

Productivity improvements through

electronic Rate of innovation
systems

Patent productions Information systems and management

Multimedia development Computer technology and engineering

5.2 ENVIRONMENTAL SCANNING

• First step in assessing external environment.

• Scanning involves monitoring, evaluating and disseminating information from external
environment to strategic planning group.
• To do this, strategic managers must first become aware of external forces that can affect
business organisation.
• After managers are aware of possible external forces that can affect organisation, they have
to identify potential events and trends that could be pertinent to organisation's performance
in future.
• Can be done more effectively if managers form brain storming session with all relevant
personnel
• Need to identify what environmental factors in the four areas:

a. Economic forces that relate to the flow of money, good and services, information and
energy,
b. Social forces that show the way people live and their values and preferences,
 c. Political forces that relate to allocation of power among people, including foreign policy
and national policies, and
d. Technological forces that relate to the development of new technology, innovation and
know-how.

Probable Impact on Organisation Probability of Occurrence

Strategic Issue Matrix

High Medium Low

High High Priority High Priority Medium Priority

Mediums High Priority Medium Priority Low Priority

Low Medium Priority Low Priority Low Priority

5.2.1 Identifying Opportunities and Threats

• Opportunities provide favorable response or impact to organisation.

• Offer new businesses or areas for newer businesses either in terms of product or service
and or markets to be served.
• Provide specific market niches,that focus on particular areas in terms of products, services
or markets.
• Identify and determine these opportunities that can provide strategic advantage to
organisation.
• Have direct impact on organisational performance and outcomes, either in short run or in
long run.
• To determine opportunities available strategic managers need to make a list of all external
factors, and then identify those forces that can have most critical impact on the organisation.
• Identifying Opportunities and Threats

Economic • High economic growth rate • High personal tax

• Low inflation rate • Low productivity
• High consumer spending

Social • Changing lifestyles • Negative attitude

• High level of education towards ethics
• Positive social values • Air and water pollution
• Intercultural variations

Political • Government policy on subsidies • Unfavourable fiscal and

• High import duties monetary policy
• Local government support

Technological • New technologically advanced • High rate of innovation

products and services • High cost of R&D
 • General widespread of interne

• Threats provide an unfavorable response or negative impact to the organisation.

• Could impair performance of organisation or hinder organisation from achieving goals
and objectives that have been set earlier.
• Do not fit with organisation’s activities and react negatively to organisational positioning.
• To overcome threats, strategic managers may have to use available personnel with
expertise and experience or hire external experts to help them in handling uncontrollable
forces.
• Managers can only minimise risks of external forces but cannot eliminate potential risks
involved.
• Disadvantages:
o Lack of latest information about industry or key information that can affect the
industry of organisational future.
 Due to lack of experience or poor competitive surveillance or
intelligence.
 Lack of business experience and intuition
 Realise that one factor can be opportunity but could also provide
threat
 For example, low interest rate may be good for borrowers, but not
favorable to lenders or financial institution.

5.2.2 Tools for Environmental Analysis

a. Environmental Threats and Opportunities Profile (ETOP)
• provides list of external environmental factors that have an impact on the
organisation.
• strategic manager needs to assess importance of each factors to organisation on
a scale of 1 to 10

• evaluate impact of each of factors to organisation on a scale of (-5) to (+5)

External Factors Impact of Factor of Factor Importance ETOP Score

Economic +4 8 +32

Social +2 4 +8

Political -3 6 -18

Technological -1 7 -7

Total Score +15

From the above example, one can see that the total score is (+15), that is slightly above
the average total score. This means that the organisation is in fairly good position, due to
its strong economic factor. However, the social factor is relatively weak. The political
factor is the weakest showing a high level of threat. Similar to the technological factor.
Therefore, the organization needs to address these two external factors.
b. External Environmental Factor Matrix (EEFM)
• David (2003) developed the External Factor Evaluation Matrix (EFE Matrix) while
Wheelen and Hunger (1996) developed the External Strategic Factor Analysis
(EFFA).
 • to develop the EEF Matrix, the strategic manager has to follow these steps:

1. List key external environmental factors. Identify opportunities and threats.

2. Assign weights to each of factors identified above. A score of 0.00 means that
factor is not important and does not have any strategic impact on organisation. A
score of 1.00 means factor is extremely important and has much impact on
organisation. The total weights must sum to 1.00.
3. Rate each factor on scale of 1 to 5, where rating of 5 means that factor responds
well to strategy of firm, whereas 1 means factor respons less favourably to firm's
strategy.
4. Multiply each of assigned weights with rating score to determine weighted score.

5. Sum weighted scores for each factor to determine overall weighted score for
organisation.
External Environmental Weighted
Weights Rating
Factors Score

Opportunities

1. High economic growth 0.15 4 0.6

Favorable population
2. 0.05 2 0.1
growth

3. Strong demand 0.20 3 0.6

Trendy fashion among

4. 0.10 2 0.2
youths

High demand in China and

5. 0.10 2 0.2
Japan

Threats

Increasing government
1. 0.05 3 0.15
regulations

Local advertising and

2. 0.10 4 0.4
media control

Government relations
3. 0.15 2 0.3
strained

4. Political stability 0.10 2 0.2

Total 1.00 2.75

The results show that the organisation's performance is below average (average score is
3.00). The company has major opportunities as the economic growth is good and the
demand is strong. However, the threats are that the local government policies prohibit
heavy advertising and media communication. This may pose difficulty to the organisation
to gain a large market share as the product may not be known to the consumers.
Consequently, the company has to resort to more creative solutions in handling the
external threats.
TOPIC 6 INDUSTRY ANALYSIS

6.1 NATURE AND STRUCTURE OF INDUSTRY

• two reference points are theory of monopoly and theory of perfect competition,
which represents two ends of spectrum of industry structure (Grant, 1994).
• competition is absent and monopolist can fully exploit customers' need for product to
earn maximum profit.
• when many firms in an industry, and all are producing identical products then perfect
competition exists.
• In this situation, price competition can cause profits to fall to competitive level

Characteristics Number Barriers

Product Examples
of Industry of to Entry
Differentiation in Malaysia
Structure Firms or Exit

Perfect Banking,
Many None None
Competition Insurance

Petroleum, oil
Oligopoly Few Moderate/High High
and gas

Duopoly Two Moderate/High Moderate/High Airline

Very High entry

Monopoly One Varies Railway transport
barrier
• Based on industrial economic theory, Michael Porter (1980) - profitability of an industry can
best be understood by understanding dynamics of five key forces affecting structure of an
industry.
• strength of five forces varies from industry to industry, thus determining the long–term
profitability of an industry.
• can determine profitability of industry because firms can shape prices they want to charge or
costs that they have to bear or investment required to compete in industry.
• Entry of new entrants can limit potential profitability of existing firms in industry, while strong
bargaining power of buyers or suppliers can also reduce firm's profitability.
• Intense competition can erode profits of industry.
• availability of product substitutes can also erode firm's profitability in industry.
• In Malaysia, the barriers to entry insurance and banking industry are extremely high as
government does not issue any new licenses for industry.

6.2 FIVE FORCES MODEL

Porter (1980) suggested a framework for analysing competition in the industry. The five forces
affecting the nature of competition and profitability in the industry are:

a. Threats of new entrants;

b. Threats of substitute products or services;
c. Bargaining power of suppliers;
d. Bargaining power of buyers; and
e. Rivalry among existing competitors.

Diagrammatically, these five forces can be represented in Figure 6.1 below.

6.2.1 Threats of New Entrants

• Whenever new firms easily enter particular industry, intensity of competition among firms
increases.
• To reduce threat, there must be sufficient barriers to entry in industry.
• Other forms of barriers to entry include:

a. Economies of Scale
Firms cannot enter the industry due to high economies of scale ie; high production costs
per unit enterprises.
b. Product Differentiation
Brand identification creates a barrier to entry, forcing new entrants to compete with
established brands. For example, local brands versus international brands for tea
products.
c. Capital Requirements
The need for high capital or set up costs can deter firms from entering the industry, for
example the airline industry.
d. High Switching Costs
Switching costs refer to the cost for changing from one supplier to another. This can be
difficult for certain firms in the industry as it may involve high costs.
e. Government Policy
Government policy can also deter entry of new firms as the government wants to control
the number of players in the industry.

• new firms enters industry with higher quality products, lower prices and substantial
marketing resources.
• strategic managers need to monitor development of these competing firms and prepare
for counterattack strategies.

6.2.2 Threats of Substitute Product or Services

• Products are considered a substitute when they can satisfy same consumer needs as
another product.
 • reduce profit potential in industry by placing ceiling prices that other firms can charge
(Porter, 1980).
• For example, tea can be considered as a substitute for coffee.
• If the price of coffee goes up high enough, coffee drinkers will slowly switch to tea.
• Thus, the competitive pressure arising from substitute products increase as relative price
of substitute products declines and the consumer's switching costs decrease.

6.2.3 Bargaining Power of Suppliers

• can affect intensity of competition in an industry.

• Suppliers do this by raising prices or reducing quality of purchased goods or services
• considered powerful when number of suppliers in industry is dominated by a few
companies.
• Suppliers can enhance profitability when they offer products or services that are unique
and when they have built-up switching costs.
• high when product substitutes are not easily available
• buyers have less bargaining power and potential profitability of industry can be
sustained.
• when suppliers have ability or opportunity to integrate forward into buyer’s business,
thus acting as competitor in buyer’s industry

6.2.4 Bargaining Power of Buyers

• forcing product or service prices down.

• bargaining power would be high, can demand for higher quality products, and play
competitors against each other.
• buyer or group of buyers in industry can be powerful if some of following conditions
hold:

a. Buyer purchases a large proportion of the seller's product or service.

b. Buyer has the potential to integrate backward by producing the product itself.
c. There are many alternative suppliers because the product is undifferentiated.
d. Changing supplier costs are low.

• example, if Proton purchased a large percentage of Sime Tires total tyre production,
Proton could easily make all sorts of demand on Sime Tires marketing people.

6.2.5 Rivalry Among Existing Firms

• each firm in an industry is jockeying for better position than other competing firms.
• strategic move by one competitor can be successful to extent moves provide competitive
advantage over rival firms.
• when rival firms retaliate with counter strategic moves this could dampen earlier move of
firm in industry.
o When number of competitors is high, intensity of competition would be high. For
example, when one firm provides price discounts, others would follow suit.
o When rate of industry growth is high, there are many opportunities for other firms
to grow within industry. However, when rate of growth is slow, this may require
firms to take aggressive moves to increase its sales. For example, when there is
a decrease in passenger traffic, airlines may use price war tactics.
o When the product or service offered is undifferentiated, and customer's switching
cost is low, customers will jump from one supplier to another supplier, thus
generating intense rivalry among the firms.
 o intensity of competition among firms can be high when rivals are diverse.
Different firms have different strategies and cultures. Consequently, the way to
compete may differ and vary.

9.2 CORPORATE STRATEGIES

• potential plans of action that can specify organisation’s orientation or ability to handle
businesses in various environments with common set of strategic capabilities

• covers broad and overall organisational plan of action that can assist organisation to
achieve goals and objectives set.
• determining corporate strategy, strategic manager may need to make decisions on
whether to increase, maintain or reduce overall business activities.
• According to David (2003) there are at least four types of corporate strategies
• Integration Strategies - activities involved in forward, horizontal or backward control of
operations of competing organisation. It is also known as vertical integration strategies.

o Forward integration - organisation is gaining control or ownership of the

distributors or retailers
o For example, Proton as owner and controller of the distributorship of Proton cars
can increase its control over its distributor, Edaran Otomobil Nasional (EON)
byincreasing its shares in EON. By doing this, Proton will have more say in the
business of EON.
o adopted when organisation feels that distributors are:
 not reliable
 charge high prices to gain excessive profits
 want to have more control on their business
 future prospects of integration would provide strategic advantages to the
organisation in long run.

o Backward integration - organisation is gaining control or ownership of the

organisation's suppliers.
o For example, Proton can have a backward integration, if it purchases substantial
shares in one of its suppliers e.g. Goodyear Tyres. By doing so, Proton can have
more say in the supply of tyres by Goodyear Tyres to build Proton cars.
o strategy can be considered when:
 suppliers appear to be unreliable or expensive
 number of suppliers is limited
 future prospects in industry is good or favorable.
 to maintain stable prices of resources
 raw material is considered an important component in final product of
organisation.

o Horizontal integration - organisation is seeking ownership or control over

competing organisations in industry.
o For example, the dealer for BMW in Malaysia is Cartrade and Auto Bavaria.
Then, if Cartrade takes over the dealership from Auto Bavaria Malaysia to have
more control over dealership of BMW cars Malaysia, this is known as horizontal
 integration. Another example is the integration of the Celcom (019) and Telekom
(013) mobile services in Malaysia.
o should be considered when
 organisation can gain monopolistic characteristic and has strategic
advantages.
 organisation operates in expanding or growing market, and economies of
scale can be obtained with larger operation.
 strategy requires financial and human capital resources on part of
acquirer.

• Intensive strategies - strategies that require intensive efforts on part of organisation to

improve its competitive position in industry.

o Market Penetration - organisation seeks to increase market share of current

product or services offered in market through greater marketing efforts
o The recent promotions by BMW on its cars in the month of June 2009 also
represent an intensive marketing strategic move to increase its share of the niche
luxury car market.
o selected when:
 organisation realises that current market size is not saturated, and has
growth potential.
 market shares of competitors are lagging behind
 increase in number of new customers is favorable.
 relationship between marketing expenses and sales revenue growth
 organisation can gain economies of scale and competitive advantage
position.

o Market development - introducing the current product or services to a new

market
o For example, because the market for local canned drink health beverage, Power
Root, is saturated in Malaysia, the producer might want to sell the beverage to
consumers in Thailand or Indonesia in order to increase the sales of that product.
o strategy can be selected by organisation when organisation has readily available
channels of distribution in new market areas.
o better if:
 new market is unsaturated or untapped
 organisation has excess production capacity
 strategy has financial and human capital to support new market needs.

o Product development – introducing new product to market with enhance value

o The computer industry, is fast changing to the centrino technology from the
Pentium IV.
o should be adopted when:
 organisation realises that existing product has reached maturity stag
 renewed product is necessary to sustain organisations position in
industry.
  technology driven industries and competitors are offering better product
quality over time.

• Diversification Strategies - activities organisation gets involved in areas of businesses

which are related or unrelated to original (core) business activities of the organisation.
• reduce the potential risks of spending too much in one particular area of business, in
event there is downturn in business.
o Concentric diversification refers to business activities of diversification in new
but related product or service areas.
o For example, if Mutiara Hotel in Malaysia offers time sharing to its range of
selected hotel rooms in Malaysia
o Concept like renting but follow value of house.
o Time Sharing – how long yu want to use a place in a year
o selected when
 organisation is involved in a slow growth industry.
 adding new product or services, it could enhance sales of the existing
products
 offer competitive prices especially when product or service is in declining
stage.
 organisation has a strong team of management to support such moves.

o Horizontal diversification - organisation is involved in new and unrelated

products or services
o adopted by organisations when
 easier to increase sales by adding into new products or services
 by pursuing same channels of distribution as it does not add new costs to
organization

o Conglomerate diversification - business activities of diversification in new, but

unrelated products or services.
o adopted when
 organisation is facing declining trend in certain core activities
 has financial and capital resources to make such move.
 strategic options available to organisation are limited by virtue of its skills
and competence.
 financial strategy persists and opportunity arises to take hold of situation.

• Defensive strategies - activities that the organisation engages in to defend its declining
position
o Retrenchment first strategic action taken by an organisation when it tries to
sustain its position or consolidate its position in view of the unfavourable
situation.
o Retrenchment strategies involves cutting costs of operations and/or assets
owned
o adopted by organisations when
 organisation realises that it is in weaker position in industry.
  organisation is plagued by inefficiencies, low productivity, low morale and
low profitability or losses.
 organisation may resort to several cost cutting measures before situation
worsen.

• Divestiture involves selling off a division or part of organisation.

o Adopted:
 to raise capital required for other potential businesses in organisation.
 when organisation realises that retrenchment strategy is not sufficient to
save organisation from difficulties.
 as business or division is found to have contributed little profit or losses to
entire organisational performance.
• Liquidation - organisation plans to close down its operations entirely.
o adopted when all possible avenues to raise or salvage the business is not
possible.
o organisation remains solvent until they failed all avenues to pay up their debts.

9.3 BUSINESS STRATEGIES

• helps organisation to determine how it can effectively compete in its businesses

• According to Porter (1980), there are three types of business strategies that
organisations can select from

9.3.1 Cost Leadership Strategy

• used when business targets to be lowest cost producer in the market.

• requires efficient scale facilities, rigorous pursuit of cost reductions from the experience
curve, tight cost and overheads control, and costs minimisations in selected functional
areas
• organisation which can control operational costs can charge lower prices as the costs of
production are lower than its competitors.
• low price strategy serves as barrier of entry to other new entrants.
• suitable for organisations producing products on large scale.
 • not suitable for businesses or products that are not perceived as a ‘commodity’ item and
does not require large scale of production.
• possible to adopt when consumers are price sensitive to products.

9.3.2 Differentiation Strategy

• organisation differentiates itself from its competitors.

• can be in terms of product or service characteristics like brand, product design,
technology features, network dealership or customer service.
• effective strategy to pursue in businesses where profits are above average because of
brand loyalty or when customers are insensitive to price changes.
• not be viable when consumers find that unique product characteristics do not justify a
higher price, and low cost price leadership strategy can defeat differentiation strategy.
• organisation or business can show unique or differentiated characteristics of its products
or services.

9.3.3 Focus Strategy

• organisation focuses on certain segments of the market in selling its products or

services.
• due to cost effectiveness or differentiation in terms of its products or services.
• When emphasizes on buyer behavior, product line segments, or geographical location.
• strength in adopting strategy lies on extent to which organisation can serve its target
market segments
• cost focus strategy business unit seeks to achieve cost advantage in its market
segments.
• adopted when organisation believes that it can focus its efforts on specific target market
segments more efficiently than its competitors due to its lower costs in product design
and superior product performance.

9.4 SELECTING ALTERNATIVE STRATEGIES

9.4.1 Strategic Analysis Framework

• provide basis for selecting the alternative strategies of an organisation.

• choices and alternative strategies available based on options prescribed by various
portfolio models.
• ‘ According to Christensen et al (1976), there are four grand strategy matrix available for
organisations: quadrant I, quadrant II, quadrant III, and quadrant IV
 • organisations should select strategies when their analysis show that the organisation is
in quadrant I, II, III or IV.
• provides logical guideline on what kind of strategic actions to be taken but does not
provide specific actions to be taken.
• Strategic analysts must know which options are reasonable for organisation based on
hard facts and figures obtained.
• Only with up to date information organisation determine most appropriate strategic
choice

TOWS matrix

• First list all SWOT elements

• Then list SO, WO, ST and WT elements
• problems using TOWS matrix and the 'grand strategy' matrix - generalisability of
prescriptions.
• those with little experience and knowledge this can be potential shortcoming
 • one needs adequate experience to use matrices.
• In real business world done by people with experience and knowledge in area

'Quantitative Strategic Planning Matrix' (QSPM)

• developed by David (2003) in 1986 to assist managers/ strategists in making specific

decisions based on potential alternatives available.
• first stage is to identify SWOT
• second stage - list potential strategic alternative choices to be made
• third stage - assign weights to each of factors identified
o weights of each factor can range from 0.01 to 0.9, and total weight must be equal
to 1.00.
• fourth stage - assess attractiveness score (AS) of each key factors identified, on a scale
of 1 (not attractive), 2 (somewhat attractive), 3 (reasonably attractive), and 4 (very
attractive).
• high score indicates highly attractive option.
• fifth stage - compute the Total Attractiveness Score (TAS), which is product weights and
the attractiveness score
• final stage - compute the TAS for entire strategic option with highest TAS.

It should be realised that when the analysis is not done properly and with appropriate
information, the total output of the QSPM might not be relevant. Therefore, in using the
QSPM, the strategist must understand the need for relevant information to make the
appropriate strategic decision. Thus, to some extend some intuitive judgment is
necessary in developing the QSPM.

9.4.2 Attitude Towards Risks

• management's attitude towards risks will affect selection of strategic choices.

• depend on commitment of top management in strategy selection process.
• some organisations top management prefers to take low risks or no risks at all
• attitude towards risks can also be due to past experiences on risks taking and attitude
towards organisational change.
• Whatever attitude may be, strategic choice depends on management’s philosophy and
expectations in managing organisational performance.

9.4.3 Pressures from the External Environment

• may come from various stakeholders.

• political or governmental arena or non-governmental stakeholders who have important
stake in organisation.
• strategic choice to select venture capitalist from an institution that may not be 'liking' of
national government in country might pose problem.
• strategic managers need to address issue of importance of choice to organisation,
potential impact to organisation, and consequences in selecting strategic choices.
• may be necessary to review other strategic options and create a wider choice so that
potential consequences may not be detrimental to organisation as a whole.

9.4.4 Pressures from the Internal Environment

• pressures from internal environment can come due to corporate culture and politics in
organisation.
 • corporate culture presents the set of values, beliefs, attitudes, customs, norms and
personality of the organisation.
• shows 'dos' and 'don'ts' in organisation.
• corporate culture can affect selection of strategic choices.
• attributed to preferences and policy of top management which is related to culture of
organisation.
• In an organisation where interaction among members can be political, influence of
organisational members on selection of strategic choices can be critical
o Creates lobbying effect

TOPIC 10 STRATEGY IMPLEMENTATION

INTRODUCTION

• organisation plans to transform formulation of strategic plan into action.

• organisation needs to make sure that what was planned in organisation are set forth into
action.
• various aspects of organisation need to be harnessed and integrated with activities
required to get things done accordingly.
• indicate extent to which organisation could achieve goals that it had set or falls short of
targets.
• problems are:
o Implementation slower than originally planned
o Unanticipated major problems
o Ineffective coordination of activities
o Insufficient capabilities of involved personnel
o Uncontrollable external environmental factors
• three key issues to be addressed:
o What are the activities that need to be done?
o Who should be doing these activities?
o How should the activities be done?
• should be addressed before selecting alternative strategies of organisation as it may
have an effect on choice of strategies to be considered.

10.1 INTEGRATING OBJECTIVES, POLICIES AND STRATEGIES

• strategy formulation done at top management level.

• formulated strategy then implemented at business level and functional level
• At business level implementation of strategy focuses on key policy areas related to core
businesses of organisation.
• In setting objectives business level will focus on the ‘goals’ of the business unit.
• business level will also set policy direction on areas of business activities to be involved
or developed in future.
• In terms of strategy, business level will identify grand strategic direction, like growth,
diversification or low cost or niche or differentiation strategies to be followed by
business.
• At this level, issue of implementation is not critical as few people are involved and can
be monitored easily.
• functional level issue is more complex.
• operational level implementation of strategy becomes more challenging and involves
risks of failure in strategy implementation.
• functional level, setting organisational objectives is important as it can determine extent
to which goals and mission of organisation can be achieved.
• objectives set must be consistent with goals set at business level
 • major problems faced by organisations is to make sure that objectives are consistent,
can be operational, and achievable within the time frame allotted.
• Once objectives have been set and agreed to by functional managers and top
managers, then, policy set must be reviewed so that it is consistent.
• Policies - directives designed to guide thinking, decisions, and actions of managers in
implementing an organisation's strategy (Pearce II & Robinson Jr., 1985).
• Policies provide guidelines for establishing and controlling operations of organisation in a
manner consistent with organisational goals and objectives.
• translated into ‘standard operating procedures’ (SOPs).
• SOPs provide:
o description of necessary steps to be taken in sequential manner on how a
particular task or job is done.
o list out activities necessary to get job or task done, people involved, timelines,
financial implications (if any), and processes (steps) involved
o important to organisations when they are new or involved in activities considered
alien
o important to ensure that people in organisation know how to get things done
• public sector SOPs provide better management and administration of organisation as
people involved in project or activity often changes without leaving guideline to
successor
• Disadvantages
o no follow through in implementation of project
o change in policy decision, half way through implementation process.
• chosen strategy may be selected because consistent with goals and mission of
organisation and matches with external environment, industry situation, corporate
strengths and weaknesses.
• process of integrating objectives, policies and strategies should be
o done with astuteness, and reviewed more frequently after strategic plans
formulated.
o done by corporate planner or chief executive officer.
o noted that this prescription may be 'easier said than done', but many chief
executive officers do this in informal way due to hassles in formal processes.

10.2 ORGANISATIONAL STRUCTURE

• the question of 'what are the activities to be done' can best be viewed from the
organisational structure.
• division of tasks for efficiency and clarity of purpose and coordination between
interdependent parts of organisation to ensure organisational effectiveness (Pearce II &
Robinson Jr., 1985).
• organisation structure will explain in brief 'who is suppose to do what activities', and to
whom person should report to in organisational hierarchy.
• There are at least five major types of organisational structure (Pearce II & Robinson Jr.,
1985):

10.2.1 Simple Structure

• direct relationship between manager and employee.

• common case of small business enterprises
• all matters have to be referred to manager/ owner.
• manager has direct control of all operations and activities of business.
• Decision easier and faster.
 • relationship between employees and manager/owner is generally closer and there is
'personal touch' between employer-employee relations.
• not relevant when business activities of organisation expands.
• owner/manager generally focuses on operational matters and may not have time to think
of business strategy issues.

10.2.2 Functional Structure

• adopted as it is related to activities or functions required in the management of the

organisation.
• tasks and activities are grouped in functional areas
• In this type of operation production, marketing and operations are line functions (that is a
function that has the authority and responsibility of a particular area)
• finance and human resources are staff function (that is providing a specialised service or
assistance to the line positions)
• focus on areas of specialisation or concentration to improve efficiency and differentiates
role and responsibility of people in daily operations.
• can cause problems in coordination and rivalry among functional units

10.3 DIVISIONAL STRUCTURE

• adopted when organisation has diversified its business in many areas that can be
related or unrelated to existing business. For example, one may start the business by
focusing on the food business.
• Business divisions - product offered, markets served or customer groups.
• Because each of these business operations is large and need specific attention
 • chief executive officer can monitor operations of each business division more efficiently
and effectively.
• divisional managers have greater authority and responsibility in managing operations
• may be problems in resource allocation
• dysfunctional competition and conflicts in some cases.
• extent of authority of divisional managers, and policy of division, which can be
inconsistent with overall organisational policy.

10.3.1 Strategic Business Units (SBU)

• Each strategic business unit:

o comprised of several divisions
o focus on certain activities of business operation.
• Advantage:
o helps to improve coordinating and integration activities
o assists in facilitating management in more efficient way especially resources
shared.
o easier to monitor accountability and performance of business units and divisions
within strategic business unit.
• management can provide several setbacks in terms of increasing number of layers in
organisational hierarchy - add to bureaucracy level
• Dysfunctional competititon may be enhanced with limited resources, and can enhance
conflict if not properly managed.
• extent of authority and autonomy of heads of strategic business units can be difficult to
define and consequently create confusion among strategic business units.
• enhance lobbying behavior of managers in division and strategic business units with
chief executive officer
10.3.2 Matrix Structure

• provides for dual lines of authority, performance responsibility, and strategic control of
entire business activities of organisation.
• manager will have two superiors to report to.
• can accommodate wide area of project oriented activity in the organisation.
• good training ground to develop strategic managers and minimise inefficiencies
• foster creativity and diversity in generation of ideas.
• dual accountability can create problems in terms of work performance expectations and
evaluation.
• cause confusion to many others outside typical organisational system.

10.4 THE STRATEGY AND STRUCTURE RELATIONSHIP

• link between strategy and structure is important that it can affect overall organisational
growth and development.
 • Du Pont early years had functional structure that is well suited to production and selling
of limited range of products.
• As Du Pont added new product lines, purchased own sources of supply and created own
distribution networks, they became too complex for highly centralised structures.
• In order to remain successful, organisation needed to shift to decentralised structure with
semiautonomous divisions.
• small business needs to change its structure from simple structure to functional or
divisional structure when business expands consistent with strategy selected by
organisation.
• Structural changes - necessary when there is intense competition which requires
organisation to react fast in response to rapid changes

10.5 LEADERSHIP AND HUMAN RESOURCES

• Organisational leadership important as it influences behavior and actions of

subordinates or peers towards accomplishing organisational goals and objectives.
• effective leaders help organisation ensure action and motivate others to work towards
organisational targets.
• important to recognise the role of chief executive officer in strategic management
process
• strategic plans fail because the CEO does not recognise importance of his role in
strategy implementation.
• role of CEO in setting tone and style of leadership enhances organisational climate
which induces others to work together.
• need to review reward system and compensation and human resources policy – give
monetary & non-monetry incentives.
• human resources is important to ensure limited barriers in implementation.
• important to ensure that supply of human resources have necessary skills, experience
and competence in managing implementation activities.
• implementation activities are hindered because people in processes do not know how to
do it due to lack of experience or knowledge.
• Human resource services can be outsourced.
• matching right person to fit with the organisational culture can be challenging task.
• continuously communicate with employees on organisational mission and strategic plan
of organisation.
 • invite employees to participate in strategic planning process and provide information and
seek feedback.
• Small organizations process can be done but in large organizations difficult
• revise rewards and compensation system, and provide incentives to employees who
perform and meet targets set

10.6 ORGANISATIONAL SYSTEMS AND FUNCTIONAL PROCESS

10.6.1 Resource Allocation Systems

• involves areas of budgeting, planning and control systems.

• Budgeting, involves many people in the organisation, both at the low and middle or high
level executives.
• To make strategic plan reality unit or divisional manager needs resources to implement
these plans.
• issues related to finance, people and physical resources are outlined in budget plan of
organisation.
• manager needs to request amount of funds required to implement the plan and seek
human resources to get it done.
• requested budget is forwarded to top management for approval.
• Once approved, unit or divisional manager can implement plans.
• budget debate can be daunting process for unit or divisional managers.
• budget exercise may be 3-4 months before actual plans are implemented.
• In such cases, things may change and this can affect budget requested.
• Usually revisions of budgets are done in organisations either quarterly or semi-annually.
• Once budgets have been approved unit or divisional manager needs to integrate budget
into the planning and control system in organisation.
• done by storing budget information in manager's database and reviewing planning
information from time to time (say monthly or bi-monthly basis).
• acts as control mechanism to ensure that budget does not exceed the required amount
that was planned earlier.
• major weaknesses - budgets approved did not take into account required amount by unit
or divisional manager.
10.6.2 Information Systems

• assisting managers to make appropriate decisions in implementation process.

• developing effective information system is critical to ensure managers have access to
most up to date information in unit, division or whole organisation.
• This can be developed in the form of a management information system (MIS),
accounting information system (AIS), financial information system (FIS), marketing
information system (MktIS) or general information system.
• Information is often stored according to departments
• such information is generally not accessible to unit or divisional managers, thus creating
inconsistencies in strategic plan implementation.
• information on organisational aspects like human resources systems and processes
must be made more transparent – for further development of subordinates
• Developing effective information system can ensure greater efficiencies and
effectiveness - not difficult and costly as there are many simple software for specific
types of information system.
• effective information system can enhance implementation of organisational strategies.

10.6.3 Human Resource System

• the way human resources of organisations are managed.

• People in the organisation must know rewards and performance system used in the
organisation.
• Policy issues on human resources should be made known to employees as it can
enhance their understanding on human resource management system practiced in
organisation.
• Another important is performance appraisal methods and approaches.
• Performance appraisal is done more transparent way while some other done in secrecy
• Whatever system organisation adopts, it is important that rewards and compensation
system are put in place consistent with expectations of employees in organisation.

10.6.4 Monitoring System

• oversee implementation of several plans of action that was put in place.

• could be in form of providing feedback on a weekly or bi-weekly basis on development or
progress of organisation.
• set in place either in management meetings or in information system database.
• In large organisations, monitoring could be done in information system and in form of
disseminating information in organisation’s communication newsletter.
• In small organisations, monitoring could be done in weekly meetings or informal
meetings.
• presence of monitoring system would ensure that managers at implementation level
respond to various challenges facing them in the changing business environment.
• common reasons for failures in strategic plans is that monitoring mechanisms in
organisations are generally poorly managed.
• important to ensure successful implementation of organisational strategy.

TOPIC 11 STRATEGY EVALUATION AND CONTROL

11.1 ELEMENTS OF STRATEGY EVALUATION

The key elements are:

 a. Is the existing strategy good for the organisation?
b. Will the strategy be good for the organisation in the future?
c. Is there a need to change the strategy?

• first element important for manager of organisation to review internal and external
situation and assess fit with environment.
• outcome or response will provide foundation in determining whether strategy
implemented would be good for organisation in future or otherwise.
• need to revise strategy may come into effect.
• purpose of reviewing implemented strategy is to make the organisation fit with changing
business environment.

11.2 CRITERIA FOR STRATEGY EVALUATION

• Consistency - extent selected strategy does not pose threat or conflict with
organisational goals and policies.

• Consonance - extent strategy (internal & external) conforms with environmental trends.
o appropriate if:
 potential demand for product or services is increasing
 disposable income of consumers increasing
 consumption is increasing.

• Feasibility - important as it can determine whether strategy can be implemented with

minimal barriers or obstacles
o must match with available physical resources, financial resources, and human
resources of organisation.
o selected strategy must also match organisational capabilities, competences and
skills of the organisation.

• Advantage
• Competitive advantage can be obtained through costs advantages or value creation like
product positioning and differentiation.
• selected strategy must provide such advantages to organisation or leading edge as
compared to other competitors in industry.

• Acceptable Degree of Risk

o Some strategies appear to be attractive but there is higher degree of risk
involved due to uncertainties in environment.
o Some degree of risks should be incurred but uncalculated risks or major risks
should be avoided.

• Time Horizon - indicate extent to which project/selected strategy can be implemented

effectively.
STRATEGY EVALUATION PROCESS

11.3.1 Determine What to Review

• top managers and operational managers need to determine whether strategy formulation
or strategy implementation needs to be reviewed.
• done by reviewing internal audit and external audit
• If not done accordingly, then organisation may be reviewing areas least related with
underperformance of organisational unit or division.

11.3.2 Identify Aspects to be Measured

11.3.3 Set the Standard to be Gauged

• organisation can use industry's standards to benchmark its standards or use long term
set targets.
• needs to know how their competitors are doing and to what extent benchmark is
achievable or comparable.

11.3.4 Assess the Performance and Compare the Performance

Once the standards have been set, the organisation can assess the performance achieved and
compare it with the benchmark selected.

11.3.5 Identify Gaps and Take Corrective Action

• organisation needs to review why these gaps occurred and how it could be rectified.
• alternative corrective actions are analysed and selected to rectify
• corrective action must be identified precisely so it will bridge gaps identified earlier.
• Once corrective action has been selected next stage is to implement it so that situation
can be improved.
• process of strategic planning and implementation would require organisation to have
specialised personnel and unit to handle process so it can be done efficiently and
effectively.

11.4 STRATEGIC CONTROL

• concerned with tracking the implementation of the strategic plans that had been
selected.
• control process begins when organisation find gaps
• focuses on how to improve organisational performance based on feedback received on
actual performance of organisation at one point in time.
• successful strategic control - necessary to look at how organisational structure, systems
and processes fit with implementation of organisational strategy.
• Then strategic control is made, either to maintain current strategy selected by
organisation or adopt new or revise strategy selected earlier.
• If control shows outcome is to select earlier strategy then organisational adjustments
made with minor modifications in organisational management processes.
• purpose is to improve the performance of the organisation in its implementation process,
say, changing the way things have been done or improve methods of doing things in
organisation.
• If control shows that organisation has to change original strategy selected to different
strategy then adjustments to be made in organisation can be substantial in terms of
resource allocation, policy and decision making priorities.
• This situation can arise due to
• rapid unforeseen changes in environment
• purpose to steer organisation so that it would not fall into further undue difficulties.
• Changes in organisation can involve restructuring or reengineering in organisational
structure, systems and processes.
• To ensure successful strategic control in organisation essential that top management
and middle management personnel are involved and committed
• top managers
• must understand areas to be concerned in strategic control, and how to implement
effective control.
• must make firm commitments in terms of setting key priorities in making revision in
budgets (resource allocation) and changes to be implemented in organisation.
• top management may have difficulties in accepting new ways of doing things
• provide incentives but disincentives to employees - cause delays in implementation as
policy may not be communicated effectively throughout organisation.