STRATEGIC MANAGEMENT

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Chapter 1: THE NATURE OF STRATEGIC MANAGEMENT

STRATEGY

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

Strategy is an action that managers take to attain one or more of the organization’s goals.
Strategy can also be defined as “a general direction set for the company and its various
components to achieve a desired state in the future. Strategy results from the detailed strategic
planning process”.

A strategy is all about integrating organizational activities and utilizing and allocating the
scarce resources within the organizational environment so as to meet the present objectives.
While planning a strategy it is essential to consider that decisions are not taken in a vacuum and
that any act taken by a firm is likely to be met by a reaction from those affected, competitors,
customers, employees or suppliers.

Strategy can also be defined as knowledge of the goals, the uncertainty of events and the
need to take into consideration the likely or actual behavior of others. Strategy is the blueprint of
decisions in an organization that shows its objectives and goals, reduces the key policies, and
plans for achieving these goals, and defines the business the company is to carry on, the type of
economic and human organization it wants to be, and the contribution it plans to make to its
shareholders, customers and society at large.

Strategy is a Comprehensive long term plan. It tries to answer three main questions:
 What is the present position of the firm?
 What should be the future position of the firm?
 What should be done to attain the future position?

Features of Strategy
1. Strategy is Significant because it is not possible to foresee the future. Without a perfect
foresight, the firms must be ready to deal with the uncertain events which constitute the
business environment.

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 2. Strategy deals with long term developments rather than routine operations, i.e. it deals
with probability of innovations or new products, new methods of productions, or new
markets to be developed in future.
3. Strategy is created to take into account the probable behavior of customers and
competitors. Strategies dealing with employees will predict the employee behavior.

Nature & Characteristics of Strategies

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

2. Future Oriented. Strategy is a future oriented plan. It is designed to attain future position of
the organization. Through Strategy, management studies the present position of the organization
& their aims at attaining the future position of the organization. The strategy provides answer to
certain questions relating to
 Profitability of the present business
 Continuity of the present business
 Entry into difference businesses in future
 Effectiveness of the present policies of the organization.
 Growth & expansion of the business in the long run.

3. Unified, Comprehensive and Integrated. A Strategy is not Just plan. It is a unified,

Comprehensive & integrated plan. It is unified as it unifies all the parts of sections of the
organization together. It is comprehensive as it covers all the major aspects or areas of the
organization. It is integrated as all the parts of the plan are compatible with each other and fit
together well.

4. Strategy Alternatives. Organizations need to frame alternative strategies. It is not sufficient

to frame one or two strategies. Small organizations survive with one or two strategies due to
fewer complexities in their business. However, large organizations need to frame alternative
strategies in respect of growth & survival of the organization. It can be into fours broad groups:
 Stable Growth Strategy
 Growth Strategy
 Retrenchment Strategy
 Combination Strategy

5. Relates to the Environment. The internal and external environment affects the strategy
formulation and implementation. The internal environment relates to mission& objectives of the
firm, the labor management relations, and the technology used, the physical, financial & human

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resources. The external environment relates Competition Customer, Channel, intermediaries,
Government policies & other social, economic & political factors.

6. Allocation of Resources. For effective implementation of Strategy, there is a need for proper
allocation of the resources. Proper allocation of resources is required to undertake the various
activities so as to attain objectives. The resources can be broadly divided into 3 groups:
I. Physical resources such as plant & machine
II. Financial resources i.e. Capital
III. Human resources i.e. Man Power

7. Universal Applicability. Strategy is universally applicable. It is applicable to business

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

8. Periodic Review. Strategies need to be reviewed periodically. Such review is required to

revise the strategies depending upon the changing needs of the business. Periodic review of
strategies is required to gain competitive advantage in the market.
9. Applicable to all functional areas. Strategies are applicable to all functional areas. The
functional areas include production, marketing, finance, human resources management, etc.
Strategies aid in planning, organizing, directing & controlling activities in all functional areas.

STRATEGIC MANAGEMENT
Strategic Management is all about identification and description of the strategies that
managers can carry so as to achieve better performance and a competitive advantage for their
organization. An organization is said to have competitive advantage if its profitability is higher
than the average profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a
manager undertakes and which decides the result of the firm’s performance. The manager must
have a thorough knowledge and analysis of the general and competitive organizational
environment so as to take right decisions. They should conduct a SWOT Analysis (Strengths,
Weaknesses, Opportunities, and Threats), i.e., they should make best possible utilization of
strengths, minimize the organizational weaknesses, make use of arising opportunities from the
business environment and shouldn’t ignore the threats.

Strategic management is nothing but planning for both predictable as well as unfeasible
contingencies. It is applicable to both small as well as large organizations as even the smallest
organization face competition and, by formulating and implementing appropriate strategies, they
can attain sustainable competitive advantage.

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 It is a way in which strategists set the objectives and proceed about attaining them. It
deals with making and implementing decisions about future direction of an organization. It helps
us to identify the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls the business
and the industries in which an organization is involved; evaluates its competitors and sets goals
and strategies to meet all existing and potential competitors; and then reevaluates strategies on a
regular basis to determine how it has been implemented and whether it was successful or does it
needs replacement.

Strategic Management gives a broader perspective to the employees of an organization

and they can better understand how their job fits into the entire organizational plan and how it is
co-related to other organizational members. It is nothing but the art of managing employees in a
manner which maximizes the ability of achieving business objectives. The employees become
more trustworthy, more committed and more satisfied as they can co-relate themselves very well
with each organizational task. They can understand the reaction of environmental changes on the
organization and the probable response of the organization with the help of strategic
management. Thus the employees can judge the impact of such changes on their own job and can
effectively face the changes. The managers and employees must do appropriate things in
appropriate manner. They need to be both effective as well as efficient.

One of the major role of strategic management is to incorporate various functional areas
of the organization completely, as well as, to ensure these functional areas harmonize and get
together well. Another role of strategic management is to keep a continuous eye on the goals and
objectives of the organization.

Strategic management is a continuous process that appraises the business and industries
in which the organization is involved; appraises it’s competitors; and fixes goals to meet all the
present and future competitor’s and then reassesses each strategy.

STRATEGIC MANAGEMENT PROCESS

Strategic management is an interactive process. In other words, in trying to operationalize

the strategic management model, managers or strategists have to make sure that they must begin
the process by determining the vision of the organization. The mission of the organization must
also be clarified. Then, the organizational goals are defined and set by the managers or
strategists. Operationalizing the strategic management model involves a series of steps that are
continuous and ever changing with the dynamics of the environment. A change in one of the
elements can affect the other elements in the strategic management model. Thus, the strategy

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formulation, implementation, evaluation and control must be done on a continual basis and not a
one-time approach.
There are three major components in strategic management, namely:
1. Strategy Formulation- Strategy formulation is the process of deciding best course of
action for accomplishing organizational objectives and hence achieving organizational
purpose. After conducting environment scanning, managers formulate corporate, business
and functional strategies.

2. Strategy Implementation- Strategy implementation implies making the strategy work as

intended or putting the organization’s chosen strategy into action. Strategy
implementation includes designing the organization’s structure, distributing resources,
developing decision making process, and managing human resources.

3. Strategy Evaluation- Strategy evaluation is the final step of strategy management

process. The key strategy evaluation activities are: appraising internal and external
factors that are the root of present strategies, measuring performance, and taking remedial
/corrective actions. Evaluation makes sure that the organizational strategy as well as it’s
implementation meets the organizational objectives.

I. Strategy formulation

Strategy formulation can also be referred as strategic planning. The strategy formulation
involves the following steps:

1) Framing Mission & Objectives

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

2) Analysis of the Internal Environment

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

3) Analysis of the External Environment.

The management must conduct an analysis of the external environment. The external
environment refers to government, competition, consumers, technological development & other

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environment factors that affect the organization. A proper analysis of the external environment
reveals opportunities & threats

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

5) Framing Alternative Strategies

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

6) Choice of strategies
The organization cannot implement all the alternative strategies. Therefore the firm has to
be selective. The organization must select the best strategy depending upon the situation. Before
selecting the best strategy, the organization needs to conduct a cost-benefit analysis of the
alternative strategies. The strategy, which gives the maximum benefits at minimum cost, would
be selected.

II. Strategy Implementation

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

1) Formulation of plans, programmes and projects

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

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

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

4) Resource Allocation
It deals with the arrangement & commitment of physical, financial and human resources
to various activities so as to achieve the organization goals. The strategies need to allocate
resources to the various division, department etc. The resources need to be allocated depending
upon the importance of activities in each of the departments or divisions. It includes allocation of
manpower, machines, tools, money and other resources for each and every activity.

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

6) Functional Implementation
It deals with the implementation of the functional plans and policies. For effective
implementation of strategy, strategies have to provide direction to functional managers regarding

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the plans and policies to be adopted. Plans and policies need to be formulated and implemented
in all the functional areas such as production, marketing, finance and personnel.
7) Behavioral Implementation
It deals with those aspects of strategy implementation that have an impact on the behavior
of strategists in implementing the strategies. It deals with issues of leadership, corporate culture,
corporate politics and use of power, personal value, business ethics and social responsibility.

III. Strategy Evaluation

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

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

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

3) Comparison of actual performance with standards

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

4) Finding out deviations

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

5) Analyzing deviations
The deviation must be reported to the higher authorities. The higher authorities analyze
the causes of deviations. For this purpose, the higher authorities may hold necessary discussions
with functional staff. For instance, the deviation of 1000 units may be due to poor promotion,
faulty pricing, poor distribution and so on. The exact cause or causes of deviation must be
identified.

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

BENEFITS OF STRATEGIC MANAGEMENT

There are many benefits of strategic management and they include identification,
prioritization, and exploration of opportunities. For instance, newer products, newer markets, and
newer forays into business lines are only possible if firms indulge in strategic planning. Next,
strategic management allows firms to take an objective view of the activities being done by it
and do a cost benefit analysis as to whether the firm is profitable.

The key point to be noted here is that strategic management allows a firm to orient itself
to its market and consumers and ensure that it is actualizing the right strategy.

A. Financial Benefits
It has been shown in many studies that firms that engage in strategic management are
more profitable and successful than those that do not have the benefit of strategic planning and
strategic management.

When firms engage in forward looking planning and careful evaluation of their priorities,
they have control over the future, which is necessary in the fast changing business landscape of
the 21st century.

High performing firms tend to make more informed decisions because they have
considered both the short term and long-term consequences and hence, have oriented their
strategies accordingly. In contrast, firms that do not engage themselves in meaningful strategic
planning are often bogged down by internal problems and lack of focus that leads to failure.

B. Non-Financial Benefits
Apart from financial benefits, firms that engage in strategic management are more aware
of the external threats, an improved understanding of competitor strengths and weaknesses and
increased employee productivity. They also have lesser resistance to change and a clear
understanding of the link between performance and rewards.

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 The key aspect of strategic management is that the problem solving and problem
preventing capabilities of the firms are enhanced through strategic management. Strategic
management is essential as it helps firms to rationalize change and actualize change and
communicate the need to change better to its employees. Finally, strategic management helps in
bringing order and discipline to the activities of the firm in its both internal processes and
external activities.

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Chapter 2: STRATEGY FORMULATION: DEVELOPING BUSINESS MISSION

VISION: What Do We Want to Become?

If you were to take a photo of your future business now, what would it look like? What
do you want your business to be recognized for one day? You need to have a crystal clear vision
when you start out, otherwise you can get easily lost in deciding the best way forward. When you
are making strategic decisions for your business and even daily operation decisions, your vision
statement will give you the inspiration and targeted direction you need.

A vision statement is like a photograph of your future business, which gives your
business shape and direction. A vision statement provides the direction and describes what the
founder wants the organization to achieve in the future; it’s more about the “what” of a business.
It is different from a mission statement, which describes the purpose of an organization and more
about the “how” of a business.

A vision statement should answer the basic question, “What do we want to become?” A
clear vision provides the foundation for developing a comprehensive mission statement. Many
organizations have both a vision and mission statement, but the vision statement should be
established first and foremost. The vision statement should be short, preferably one sentence, and
as many managers as possible should have input into developing the statement.

Vision Statement Examples

 IKEA “To create better everyday life for the many people.”
 Bench- to be a recognized world brand among the best world brands
 McDonald’s corporate vision is “to move with velocity to drive profitable growth and
become an even better McDonald’s serving more customers delicious food each day around
the world.”
 Procter & Gamble’s vision is to be, and be recognized as, the best consumer products
company in the world.
 Google’s corporate mission is “to organize the world’s information and make it universally
accessible and useful.” Ever since its beginnings, the company has focused on developing
its proprietary algorithms to maximize effectiveness in organizing online information.
Google continues to focus on ensuring people’s access to the information they need. The
company’s mission statement adheres to a utilitarian benefit that the business provides to its
users.

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MISSION: What Is Our Business?

Current thought on mission statements is based largely on guidelines set forth in the mid-
1970s by Peter Drucker, who is often called “the father of modern management” for his
pioneering studies at General Motors Corporation and for his 22 books and hundreds of articles.

Drucker says that asking the question “What is our business?” is synonymous with asking
the question “What is our mission?” An enduring statement of purpose that distinguishes one
organization from other similar enterprises, the mission statement is a declaration of an
organization’s “reason for being.” It answers the pivotal question “What is our business?”

Sometimes called a creed statement, a statement of purpose, a statement of philosophy, a

statement of beliefs, a statement of business principles, or a statement “defining our business,” a
mission statement reveals what an organization wants to be and whom it wants to serve.

A mission statement is a short statement of why an organization exists, what its overall

goal is, identifying the goal of its operations: what kind of product or service it provides, its
primary customers or market, and its geographical region of operation.

As an entrepreneur, your company's mission statement should be concise and specific

so your customers understand your purpose and how you provide value to them. The mission
statement is focused on what the company does for its customers and keeps my employees
focused on our objectives.

A business mission is the foundation for priorities, strategies, plans and work
assignments. It is the starting point for the design managerial jobs and above all, for the design of
managerial structures. Northing may seem simpler or more obvious than to know what a
company’s business is. Some company’s develop mission statements simply because they feel it
is fashionable, rather than out of any real commitment

Mission Statement Examples

 Nike Inc.'s corporate mission is “to bring inspiration and innovation to every athlete in the
world.” The company further states that everybody is an athlete, based on Nike founder Bill
Bowerman's statement, “If you have a body, you are an athlete.”.

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 GUESS- we are committed to being a worldwide leader in the fashion industry. We will
deliver products and services of uncompromising quality and integrity consistent with our
brand and our image.
 McDonald's corporate mission is “to be our customers' favorite place and way to eat and
drink.” This mission statement highlights the significance of customers as the business
focus, while maintaining the company as a major influence on their food and beverage
purchase decisions
 Google's corporate mission is “to organize the world's information and make it universally
accessible and useful.” Ever since its beginnings, the company has focused on developing its
proprietary algorithms to maximize effectiveness in organizing online information
 Walmart Inc.'s corporate mission is “to save people money so they can live better.”
This statement reflects the ideals of the company's founder, Sam Walton. Strategic
decisions in the business are a direct manifestation of this mission statement, which is
synonymous to the company's slogan, “Save money. Live better.

VISION VERSUS MISSION

Organizations summarize their goals and objectives in mission and vision statements.

Both of these serve different purposes for a company but are often confused with each other.
While a mission statement describes what a company wants to do now, a vision
statement outlines what a company wants to be in the future.

Many organizations develop both a mission statement and a vision statement. Whereas
the mission statement answers the question “What is our business?” the vision statement answers
the question “What do we want to become?” Many organizations have both a mission and vision
statement. It can be argued that profit, not mission or vision, is the primary corporate motivator.
But profit alone is not enough to motivate people. Profit is perceived negatively by some
employees in companies. Employees may see profit as something that they earn and management
then uses and even gives away to shareholders. Although this perception is undesired and
disturbing to management, it clearly indicates that both profit and vision are needed to motivate a
workforce effectively. When employees and managers together shape or fashion the vision and
mission statements for a firm, the resultant documents can reflect the personal visions that
managers and employees have in their hearts and minds about their own futures. Shared vision
creates a commonality of interests that can lift workers out of the monotony of daily work and
put them into a new world of opportunity and challenge.

The Difference Between Vision and Mission

The primary difference between a vision and mission statement is the timeline, although
there can be an overlap between the two. In general, a mission statement defines what an

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organization is currently doing, while a vision statement is basically the ultimate goal of what
they'd like to accomplish. The mission is what people do in order to achieve the vision. It is
the how (mission) versus the why (vision).

The mission statement can also be used as a cohesive management tool. It is mutable and
changes when circumstances or the needs of the company change. Employees' duties, actions,
and behaviors should all fall under the mission of the organization. Because the vision statement
is a goal that may or may not be elusive, it's not an effective way to direct individual employee
behavior and expectations regarding day to day activities. However, it does give an employee an
idea of what the organization hopes to accomplish as a team. The vision is always forward-
thinking and because of this, it cannot be used for the daily operations of a company.

At times, different language is used by companies to describe vision and mission

statements based on the type of organization. For instance, in the non-profit sector, organizations
will often use the term action plans instead of "mission statement." The term core values is
sometimes used instead of "vision statement" as well. No matter what term is used, it is meant to
describe overall goals (mission) and broad strategy (vision).

How Mission and Vision Statements work:

Typically, senior managers will write the company’s overall Mission and Vision
Statements. Other managers at different levels may write statements for their particular divisions
or business units. The development process requires managers to:
 Clearly identify the corporate culture, values, strategy and view of the future by
interviewing employees, suppliers and customers
 Address the commitment the firm has to its key stakeholders, including customers,
employees, shareholders and communities
 Ensure that the objectives are measurable, the approach is actionable and the vision is
achievable
 Communicate the message in clear, simple and precise language
 Develop buy-in and support throughout the organization

Companies use Mission and Vision Statements to:

A. Internally
a. Guide management’s thinking on strategic issues, especially during times of significant
change
b. Help define performance standards
c. Inspire employees to work more productively by providing focus and common goals
d. Guide employee decision making

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 e. Help establish a framework for ethical behavior

B. Externally
a. Enlist external support
b. Create closer linkages and better communication with customers, suppliers and alliance
partners
c. Serve as a public relations tool

A mission statement defines a company’s goals in three important ways:

1. It defines what the company does for its customers
2. It defines what the company does for its employees
3. It defines what the company does for its owners

THE PROCESS OF DEVELOPING VISION AND MISSION STATEMENTS

What is a Process?

Process is a Procedure, Actions or Steps in order to achieved particular goal in end.

According to Fred David, clear vision and mission statements are needed before
alternative strategies can be formulated and implemented. As many managers as possible should
be involved in the process of developing these statements because through involvement, people
become committed to an organization.

A widely used approach to developing a vision and mission statement is first to select
several articles about these statements and ask all managers to read these as background
information. Then ask managers themselves to prepare a vision and mission statement for the
organization. A facilitator, or committee of top managers, should then merge these statements
into a single document and distribute the draft statements to all managers. A request for
modifications, additions, and deletions is needed next, along with a meeting to revise the
document. To the extent that all managers have input into and support the final documents,
organizations can more easily obtain managers’ support for other strategy formulation,
implementation, and evaluation activities. Thus, the process of developing a vision and mission
statement represents a great opportunity for strategists to obtain needed support from all
managers in the firm.

During the process of developing vision and mission statements, some organizations use
discussion groups of managers to develop and modify existing statements. Some organizations
hire an outside consultant or facilitator to manage the process and help draft the language.
Sometimes an outside person with expertise in developing such statements, who has unbiased

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views, can manage the process more effectively than an internal group or committee of
managers. Decisions on how best to communicate the vision and mission to all managers,
employees, and external constituencies of an organization are needed when the documents are in
final form. Some organizations even develop a videotape to explain the statements, and how they
were developed.

An article by Campbell and Yeung emphasizes that the process of developing a mission
statement should create an “emotional bond” and “sense of mission” between the organization
and its employees. Commitment to a company’s strategy and intellectual agreement on the
strategies to be pursued do not necessarily translate into an emotional bond; hence, strategies that
have been formulated may not be implemented. These researchers stress that an emotional bond
comes when an individual personally identifies with the underlying values and behavior of a
firm, thus turning intellectual agreement and commitment to strategy into a sense of mission.
Campbell and Yeung also differentiate between the terms vision and mission, saying that vision
is “a possible and desirable future state of an organization” that includes specific goals,
whereas mission is more associated with behavior and the present.
Example 1 of 3
Mission VS Vision Statement

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Example 2 of 3

Sample of vision statement of Hospitality Innovators Inc.

Innovation + Vision = Innovision
“To become a world-class Filipino hotel & property management company that
specializes in creating unique personalities for properties and enhancing their
economic returns. HII has continuously re-imagined and transformed the
management and operation of hotels, resorts, serviced apartments and other
properties in the Philippines”

Example 3 of 3
Sample of Mission statement of Hospitality Innovators Inc.
For the guests: “Our commitment to delighting our guests by constantly surpassing
their expectations.”

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For the Investors/Partners: “Our commitment to delivering results for our partners
by maximizing their financial returns and enhancing the value of their assets”
For their Employees: “Our commitment to developing our employees by nurturing
their talents and cultivating their hearts.”
It is by upholding these core principles that we constantly earn the trust of our
clients and receive awards that speak well of our strengths.

IMPORTANCE (BENEFITS) OF VISION AND MISSION STATEMENTS

1. To ensure unanimity of purpose within the organization
2. To provide a basis, or standard, for allocating organizational resources.
3. To establish a general tone or organizational climate.
4. To serve as a focal point for individuals to identify with the organization’s purpose and
direction, and to deter those who cannot from participating further in the organization’s
activities.
5. To facilitate the translation of objectives into a work structure involving the assignment of
tasks to responsible elements within the organization.
6. To specify organizational purposes and then to translate these purposes into objectives in such
a way that cost, time, and performance parameters can be assessed and controlled.

CHARACTERISTICS OF A MISSION STATEMENT

A. A Declaration of Attitude

A mission statement is more than a statement of specific details; it is a declaration of

attitude and outlook. It is usually broad in scope for at least two major reasons.
1. A good mission statement allows for the generation and consideration of a range of
feasible alternative objectives and strategies without unduly stifling management creativity.
Excess specificity would limit the potential of creative growth for the organization. However,
an overly general statement that does not exclude any strategy alternatives could be
dysfunctional.

Apple Computer’s mission statement, for example, should not open the possibility for
diversification into pesticides—or Ford Motor Company’s into food processing.

2. Mission statement needs to be broad to reconcile differences effectively among, and

appeal to, an organization’s diverse stakeholders, the individuals and groups of individuals
who have a special stake or claim on the company. Thus a mission statement should be
reconcilatory. Stakeholders include employees, managers, stockholders, boards of
directors, customers, suppliers, distributors, creditors, governments (local, state, federal, and
foreign), unions, competitors, environmental groups, and the general public. Stakeholders

19
 affect and are affected by an organization’s strategies, yet the claims and concerns of diverse
constituencies vary and often conflict.

For example, the general public is especially interested in social responsibility, whereas
stockholders are more interested in profitability. Claims on any business literally may
number in the thousands, and they often include clean air, jobs, taxes, investment
opportunities, career opportunities, equal employment opportunities, employee benefits,
salaries, wages, clean water, and community services. All stakeholders’ claims on an
organization cannot be pursued with equal emphasis. A good mission statement indicates the
relative attention that an organization will devote to meeting the claims of various
stakeholders.

In addition to being broad in scope, an effective mission statement should not be too
lengthy; recommended length is less than 250 words. An effective mission statement should
arouse positive feelings and emotions about an organization; it should be inspiring in the sense
that it motivates readers to action. A mission statement should be enduring. All of these are
desired characteristics of a statement. An effective mission statement generates the impression
that a firm is successful, has direction, and is worthy of time, support, and investment—from all
socioeconomic groups of people. It reflects judgments about future growth directions and
strategies that are based on forward-looking external and internal analyses. A business mission
should provide useful criteria for selecting among alternative strategies. A clear mission
statement provides a basis for generating and screening strategic options. The statement of
mission should be dynamic in orientation, allowing judgments about the most promising growth
directions and those considered less promising.

B. A Customer Orientation

A good mission statement describes an organization’s purpose, customers, products or

services, markets, philosophy, and basic technology.

According to Vern McGinnis, a mission statement should:

(1) define what the organization is and what the organization aspires to be,
(2) be limited enough to exclude some ventures and broad enough to allow for creative
growth
(3) distinguish a given organization from all others
(4) serve as a framework for evaluating both current and prospective activities, and
(5) be stated in terms sufficiently clear to be widely understood throughout the organization.

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 A good mission statement reflects the anticipations of customers. Rather than developing
a product and then trying to find a market, the operating philosophy of organizations should be to
identify customers’ needs and then provide a product or service to fulfill those needs.

TEN BENEFITS OF HAVING A CLEAR MISSION AND VISION

1. Achieve clarity of purpose among all managers and employees.
2. Provide a basis for all other strategic planning activities, including the internal and external
assessment, establishing objectives, developing strategies, choosing among alternative strategies,
devising policies, establishing organizational structure, allocating resources, and evaluating
performance.
3. Provide direction.
4. Provide a focal point for all stakeholders of the firm.
5. Resolve divergent views among managers.
6. Promote a sense of shared expectations among all managers and employees.
7. Project a sense of worth and intent to all stakeholders.
8. Project an organized, motivated organization worthy of support.
9. Achieve higher organizational performance.
10. Achieve synergy among all managers and employees.

MISSION STATEMENT COMPONENTS

Mission statements can and do vary in length, content, format, and specificity. Most
practitioners and academicians of strategic management feel that an effective statement should
include nine components. Because a mission statement is often the most visible and public part
of the strategic-management process, it is important that it includes the nine components:

1. Customers—Who are the firm’s customers?

2. Products or services—What are the firm’s major products or services?
3. Markets—Geographically, where does the firm compete?
4. Technology—Is the firm technologically current?
5. Concern for survival, growth, and profitability—Is the firm committed to growth and financial
soundness?
6. Philosophy—What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
7. Self-concept—What is the firm’s distinctive competence or major competitive advantage?
8. Concern for public image—Is the firm responsive to social, community, and environmental
concerns?
9. Concern for employees—Are employees a valuable asset of the firm?

Examples of the Nine Essential Components of a Mission Statement

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1. Customers
We believe our first responsibility is to the doctors, nurses, patients, mothers, and all
others who use our products and services. (Johnson & Johnson) To earn our customers’ loyalty,
we listen to them, anticipate their needs, and act to create value in their eyes. (Lexmark
International)

2. Products or Services
AMAX’s principal products are molybdenum, coal, iron ore, copper, lead, zinc,
petroleum and natural gas, potash, phosphates, nickel, tungsten, silver, gold, and magnesium.
(AMAX Engineering Company) Standard Oil Company (Indiana) is in business to find and
produce crude oil, natural gas, and natural gas liquids; to manufacture high-quality products
useful to society from these raw materials; and to distribute and market those products and to
provide dependable related services to the consuming public at reasonable prices. (Standard Oil
Company)

3. Markets
We are dedicated to the total success of Corning Glass Works as a worldwide competitor.
(Corning Glass Works) Our emphasis is on North American markets, although global
opportunities will be explored. (Blockway)

4. Technology
Control Data is in the business of applying micro-electronics and computer technology
in two general areas: computer-related hardware; and computing-enhancing services, which
include computation, information, education, and finance. (Control Data) We will continually
strive to meet the preferences of adult smokers by developing technologies that have the
potential to reduce the health risks associated with smoking. (RJ Reynolds)
5. Concern for Survival, Growth, and Profitability

In this respect, the company will conduct its operations prudently and will provide the
profits and growth which will assure Hoover’s ultimate success. (Hoover Universal) To serve the
worldwide need for knowledge at a fair profit by adhering, evaluating, producing, and
distributing valuable information in a way that benefits our customers, employees, other
investors, and our society. (McGraw-Hill)

6. Philosophy
Our world-class leadership is dedicated to a management philosophy that holds people
above profits. (Kellogg) It’s all part of the Mary Kay philosophy—a philosophy based on the
golden rule. A spirit of sharing and caring where people give cheerfully of their time, knowledge,
and experience. (Mary Kay Cosmetics)

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7. Self-Concept
Crown Zellerbach is committed to leapfrogging ongoing competition within 1,000 days
by unleashing the constructive and creative abilities and energies of each of its employees.
(Crown Zellerbach)

8. Concern for Public Image

To share the world’s obligation for the protection of the environment. (Dow Chemical)
To contribute to the economic strength of society and function as a good corporate citizen on a
local, state, and national basis in all countries in which we do business. (Pfizer)

9. Concern for Employees

To recruit, develop, motivate, reward, and retain personnel of exceptional ability,
character, and dedication by providing good working conditions, superior leadership,
compensation on the basis of performance, an attractive benefit program, opportunity for growth,
and a high degree of employment security. (The Wachovia Corporation) To compensate its
employees with remuneration and fringe benefits competitive with other employment
opportunities in its geographical area and commensurate with their contributions toward efficient
corporate operations. (Public Service Electric & Gas Company)

Chapter 3: STRATEGY FORMULATION: THE EXTERNAL ASSESSMENT

OVERVIEW TO EXTERNAL ASSESSMENT

External strategic management audit is sometimes called environmental scanning or

industry analysis).

The External Assessment is an inventory of the political, economic, social, and

technological forces that influence the mission and goals of an organization, and how it
functions. It involves analysis of the current environment and the trends that may affect it. It also
includes an analysis of competitive and collaborative forces and agents.

An external audit focuses on identifying and evaluating trends and events beyond the
control of a single firm, such as increased foreign competition, population shifts to coastal areas

23
of the United States, an aging society, and taxing Internet sales. An external audit reveals key
opportunities and threats confronting an organization, so managers can formulate strategies to
take advantage of the opportunities and avoid or reduce the impact of threats.

Types of Stakeholders
You may wish to consult both internal and external stakeholders when conducting a
SWOT analysis. Internal stakeholders are individuals working directly within the organization,
and external stakeholders are individuals who do not work directly within the organization but
may be affected in some way by the organization. Stakeholders include:

A. Stakeholders:
1. Staff
2. Board members
3. Volunteers

B. External Stakeholders:
1. Clients
2. Donors
3. Partner organizations
4. Community leaders

Below is an example of an exemplary strategic management:

Michelin (MGDDF)
Headquartered in Clemont-Ferrand in the Auvergne region of France,
Michelin is a huge tire manufacturer rivaling Bridgestone, and is a leader in
aircraft and earthmover tires. Michelin owns BFGoodrich, Kleber, Riken,
Komoran, and the Uniroyal tire brands, as well as the Warrior brand in China.
Over 175 million tires are produced by Michelin annually for various vehicles,
while new and replacement tires are supplied to the passenger car and truck
markets. Additionally, Michelin is also known in the culinary world for its Red
Guide reference books and restaurant star awards, and about 10 million travel
guides and maps are published by it every year.

Michelin introduced two new Enduro bicycle tires, reentering the bike
racing business. To provide mountain bike riders withhigh- performance tires,
Michelin has partnered with two famous bikers: Fabien Barel, three-time world
downhill champion, and Pierre Edouard Ferry, free ride champion. The new
Michelin bike tires were developed by the Michelin Group engineers, aided by the
two bikers, after working on it for two and a half years. Michelin’s new Pilot

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 Sport Cup 2 is the only tire certified for two new high-powered sports cars the
Ferrari 458 Speciale and the Porsche 918 Spyder. Michelin’s Pilot Sport 3 tires
equip the new Peugeot 308, making the car more energy efficient while delivering
outstanding safety, handling, and longevity. For the Peugeot 208 HYbrid FE,
Michelin developed a range of tall and narrow tires with a longer rim diameter
and better performance.

Michelin produces tires throughout Europe but also has manufacturing

facilities in the USA, Canada, Brazil, Thailand, Japan, Italy, and several other
countries. Michelin has more than 65,000 people and has 40 production sites in
Europe, which accounts for 40 percent of the company’s operations. In Europe,
Michelin is consolidating its position on high added valueproduction by
reorganizing its activities in the United Kingdom and Italy. In these two countries,
Michelin, under its reorganization, will be spending 265 million euros to
modernize manufacturing plants and facilities along with the logistics network.
With more than 4,000 employees, 80 percent of whom work on production sites,
the Italian branch oversees over 10 percent of the European processes. By 2020,
Michelin will have invested around 180 million euros in its Italian manufacturing
lines, strengthening the sites at Cuneo and Alessandria, to extensively develop the
country’s automobile tire volumes.

THE NATURE OF AN EXTERNAL AUDIT

The purpose of an external audit is to develop a finite list of opportunities that could
benefit a firm and threats that should be avoided. As the term finite suggests, the external audit is
not aimed at developing an exhaustive list of every possible factor that could influence the
business; rather, it is aimed at identifying key variables that offer actionable responses. Firms
should be able to respond either offensively or defensively to the factors by formulating
strategies that take advantage of external opportunities or that minimize the impact of potential
threats.

Changes in external forces translate into changes in consumer demand for both industrial
and consumer products and services. External forces affect the types of products developed, the
nature of positioning and market segmentation strategies, the type of services offered, and the
choice of businesses to acquire or sell. External forces directly affect both suppliers and
distributors. Identifying and evaluating external opportunities and threats enables organizations
to develop a clear mission, to design strategies to achieve long-term objectives, and to develop
policies to achieve annual objectives.

Key External Forces

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 External forces can be divided into five broad categories: (1) economic forces; (2) social,
cultural,demographic, and natural environment forces; (3) political, governmental, and legal
forces; (4) technological forces; and (5) competitive forces. Relationships among these forces are
depicted below:

Competitors
Suppliers
Economic Forces Distributors
Creditors
Social, cultural, demographic, and Customers
natural environment forces Employees AN ORGANIZATION’S
Communities OPPORTUNITIES AND THREATS
Political, legal, and governmental
Managers
forces
Stockholders
Technological Forces Labor Unions
Governments
Competitive Forces Trade associations
Special interest groups
Products
Services
Markets
Natural environment

The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and
employees as possible. Involvement in the strategic-management process can lead to
understanding and commitment from organizational members. Individuals appreciate having the
opportunity to contribute ideas and to gain a better understanding of their firms’ industry,
competitors, and markets. To perform an external audit, a company first must:

1. Gather competitive intelligence and information about economic, social, cultural,

demographic, environmental, political, governmental, legal, and technological trends.
Individuals can be asked to monitor various sources of information, such as key
magazines, trade journals, and newspapers. These persons can submit periodic
scanning reports to a committee of managers charged with performing the external
audit. This approach provides a continuous stream of timely strategic information and
involves many individuals in the external-audit process. The Internet provides
another source for gathering strategic information, as do corporate, university, and
public libraries. Suppliers, distributors, salespersons, customers, and competitors
represent other sources of vital information.

26
 2. Once information is gathered, it should be assimilated and evaluated. A meeting or
series of meetings of managers is needed to collectively identify the most important
opportunities and threats facing the firm. These key external factors should be listed
on flip charts or a chalkboard. A prioritized list of these factors could be obtained by
requesting that all managers rank the factors identified, from 1 for the most important
opportunity/threat to 20 for the least important opportunity/threat. These key external
factors can vary over time and by industry.

3. A final list of the most important key external factors should be communicated and
distributed widely in the organization. Both opportunities and threats can be key
external factors.

The Industrial Organization (I/O) View

The Industrial Organization (I/O) approach to competitive advantage advocates that
external (industry) factors are more important than internal factors in a firm achieving
competitive advantage. Proponents of the I/O view, such as Michael Porter, contend that
organizational performance will be primarily determined by industry forces.

KEY EXTERNAL FACTORS

1. Economic Forces
Factors which determine the state of competitive environment in which a firm operates. 
These forces affect the outcome of the firm's marketing activities, by determining the volume
and strength of demand for the its products.

Economic factors have a direct impact on the potential attractiveness of various

strategies. For example:
a. When interest rates rise, funds needed for capital expansion become costlier or
unavailable
b. When interest rates rise, discretionary income declines, and the demand for
discretionary goods falls
c. When the market rises, consumer and business wealth expands.

The investor needs to be prepared for a change in economic factor and its consequences,
by knowing the impact of economic factors investor can take the right decision in terms of
investment.

These factors also help management in decision making and to be prepared for any
positive or negative changes in the economy.

27
Table 1. Some Economic Forces are:
Shift to a service economy in the US Availability of credit
Level of disposable income Propensity of people to spend
Interest rates Inflation rates
Money market rates Federal government budget deficits
Gross domestic product trend Consumption patterns
Unemployment trends Worker productivity levels
Value of the dollar in world markets Stock market trends
Foreign countries’ economic conditions Import/export factors
Demand shifts for different categories of Income differences by region and
goods and services consumer groups
Price fluctuations Export of labor and capital from the US
Monetary policies Fiscal policies
Tax rates European Economic Community (EEC)
policies
Organization of Petroleum Exporting Coalitions of Lesser Developed
Countries (OPEC) policies Countries (LDC) policies

2. Social, Cultural, Demographic, and Natural Environment Forces

Social, cultural, demographic, and environmental changes have a major impact on
virtually all products, services, markets, and customers. Small, large, for-profit, and nonprofit
organizations in all industries are being staggered and challenged by the opportunities and threats
arising from changes in social, cultural, demographic, and environmental variables.
Social, cultural, demographic, and environmental trends are shaping the way people live,
work, produce, and consume. New trends are creating a different type of consumer and,
consequently, a need for different products, different services, and different strategies.

Significant trends for the future include consumers becoming more educated, the
population aging, minorities becoming more influential, people looking for local rather than
federal solutions to problems and fixation on youth decreasing

Table 2. Key Social, Cultural, Demographic, and Natural Environment

Variables
Childbearing rates
Number of marriages
Number of births
Immigration and emigration rates
Number of special-interest groups
Number of divorces
Number of deaths
Social Security programs

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 Life expectancy rates Per capita income
Location of retailing, manufacturing, and service businesses
Attitudes toward business Lifestyles
Traffic congestion Inner-city environments
Average disposable income Trust in government
Attitudes toward government Attitudes toward work
Buying habits Ethical concerns
Attitudes toward saving Sex roles
Attitudes toward investing Racial equality
Use of birth control Average level of education
Government regulation Attitudes toward retirement
Attitudes toward leisure time Attitudes toward product quality
Attitudes toward customer service Pollution control
Attitudes toward foreign peoples Energy conservation
Social programs Number of churches
Number of church members Social responsibility

3. Political, Governmental, and Legal Forces

Federal, state, local, and foreign governments are major regulators, deregulators,
subsidizers, employers, and customers of organizations. Political, governmental, and legal
factors, therefore, can represent key opportunities or threats for both small and large
organizations.
For industries and firms that depend heavily on government contracts or subsidies,
political forecasts can be the most important part of an external audit. Changes in patent laws,
antitrust legislation, tax rates, and lobbying activities can affect firms significantly.

The increasing global interdependence among economies, markets, governments, and

organizations makes it imperative that firms consider the possible impact of political variables on
the formulation and implementation of competitive strategies.

In the face of a deepening global recession, countries worldwide are resorting to

protectionism to safeguard their own industries. European Union (EU) nations, for example,
have tightened their own trade rules and resumed subsidies for various of their own industries
while barring imports from certain other countries.

Local, state, and federal laws; regulatory agencies; and special-interest groups can have a
major impact on the strategies of small, large, for-profit, and nonprofit organizations. Many
companies have altered or abandoned strategies in the past because of political or governmental
actions.

29
Table 3. Some Political, Governmental, and Legal Variables
Government regulations
deregulations
Special tariffs
Voter participation rates
Number of patents
Environmental protection laws
Legislation on equal employment
Antitrust legislation
Russian-American relationships
African-American relationships
Government fiscal and monetary policy
changes
Special local, state, and federal laws
Size of government budgets
Location and severity of terrorist
activities
or Changes in tax laws
Political action committees
Number, severity, and location of
government protests
Changes in patent laws
Level of defense expenditures
Level of government subsidies
Sino-American relationships
European-American relationships
Import–export regulations
Political conditions in foreign countries
Lobbying activities
World oil, currency, and labor markets
Local, state, and national elections

4. Technological Forces
Revolutionary technological changes and discoveries are having a dramatic impact on
organizations.

The Internet has changed the very nature of opportunities and threats by altering the life
cycles of products, increasing the speed of distribution, creating new products and services,
erasing limitations of traditional geographic markets, and changing the historical trade-off
between production standardization and flexibility. The Internet is altering economies of scale,
changing entry barriers, and redefining the relationship between industries and various suppliers,
creditors, customers, and competitors.
Technological advances can:
a. dramatically affect organizations’ products, services, markets, suppliers, distributors,
competitors, customers, manufacturing processes, marketing practices, and
competitive position.
b. create new markets, result in a proliferation of new and improved products, change
the relative competitive cost positions in an industry, and render existing products and
services obsolete.
c. reduce or eliminate cost barriers between businesses, create shorter production runs,
create shortages in technical skills, and result in changing values and expectations of
employees, managers, and customers.

30
 d. can create new competitive advantages that are more powerful than existing
advantages.

Table 4. Examples of the Impact of Wireless Technology

Airlines—Many airlines now offer wireless technology in flight.
Automotive—Vehicles are becoming wireless.
Banking—Visa sends text message alerts after unusual transactions.
Education—Many secondary (and even college) students may use smart phones for math
because research shows this to be greatly helpful.
Energy—Smart meters now provide power on demand in your home or business.
Health Care—Patients use mobile devices to monitor their own health, such as calories
consumed.
Hotels—Days Inn sends daily specials and coupons to hotel guests via text messages.
Market Research—Cell phone respondents provide more honest answers, perhaps because they
are away from eavesdropping ears.
Politics—President Obama won the election partly by mobilizing Facebook and MySpace users,
revolutionizing political campaigns. Obama announced his vice presidential selection of Joe
Biden by a text message.
Publishing—eBooks are increasingly available.

4. Competitive Forces
An important part of an external audit is identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies. Collecting
and evaluating information on competitors is essential for successful strategy formulation.

Collecting and evaluating information on competitors is essential for successful strategy

formulation. Identifying major competitors is not always easy because many firms have divisions
that compete in different industries. Many multidivisional firms do not provide sales and profit
information on a divisional basis for competitive reasons. Also, privately held firms do not
publish any financial or marketing information.

Sources of External Information

A wealth of strategic information is available to organizations from both published and

unpublished sources. Unpublished sources include customer surveys, market research, speeches
at professional and shareholders’ meetings, television programs, interviews, and conversations
with stakeholders. Published sources of strategic information include periodicals, journals,
reports, government documents, abstracts, books, directories, newspapers, and manuals. The
Internet has made it easier for firms to gather, assimilate, and evaluate information.

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 Below is a previous version of SWOT analysis of Cabanatuan City Water District
Strengths Opportunities

Strong Leadership Support Increased Social media usage

Team Work
Willingness to learn and flexibility of
employees
Younger employees have more fresh ideas
Customer oriented organization resulting to
high customer satisfaction rating
Financial stability due to efficient spending
Weaknesses
Population increase (organic and migration)
– potential customers
Booming Economy of Cabanatuan City
Availability of relevant technologies
Threats

Loss of senior and more experienced Climate Change

officers Environmental Pollution
Deterioration of water production facilities Regulatory Bodies
Uncertain political climate
Commercial promotion of purified and
bottled water
Non-compliance of JV partner with
agreement
Delayed implementation of JV partner on
proposed projects

INDUSTRY ANALYSIS: GLOBAL CHALLENGE

What is Industry Analysis?

• A market assessment tool designed to provide a business with an idea of the complexity
of a particular industry.
• Industry analysis involves reviewing the economic, political and market factors that
influence the way the industry develops.
• Understanding the forces at work in the overall industry is an important component of
effective strategic planning.
• An industry analysis is a business function completed by business owners and other
individuals to assess the current business environment. This analysis helps businesses
understand various economic pieces of the marketplace and how these various pieces
may be used to gain a competitive advantage. Although business owners may conduct an

32
 industry analysis according to their specific needs, a few basic standards exist for
conducting this important business function.

Small business owners often conduct industry analysis before starting their business. This
analysis is included in the entrepreneur’s business plan that outlines specific elements of the
economic marketplace. Elements may include the number of competitors, availability of
substitute goods, target markets and demographic groups or various other pieces of essential
business information. This information is commonly used to secure external financing from
banks or lenders for starting a new business venture.

Industry analysis features include a review of the economic and political underpinnings
of the business environment. Economic reviews often include an examination of the industry’s
business cycle. The business cycle helps individuals understand if the industry is growing,
reaching a plateau or in decline. A political review helps individuals understand the amount of
government regulation and taxation present in the business industry. Industries with heavy
government involvement may have fewer profits for companies operating in these environments.

Industry analysis may be conducted using Michael Porter’s five forces model. Porter is a
Harvard professor renowned for his work in creating a specialized industry analysis model. The
five forces model reviews an industries supplier power, threat of substitutes, buyer power,
barriers to entry and the rivalry that is created when companies compete for the previous four
forces. This standard industry analysis tool helps individuals use a time-tested management
procedure for generating intelligent business analysis.

Business owners may need to conduct several industry analyses throughout their
company’s lifetime. Economic markets are in a constant state of flux and may incur significant
changes from shifts in political policy. Although smaller businesses may struggle to conduct an
industry analysis in a timely manner, larger or publicly held companies often conduct an analysis
each quarter. The results of their analysis are often included in forward-looking statements in
quarterly or annual reports.

Small business owners may need to seek outside help for conducting an industry analysis.
Management consultants, public accounting firms or the Small Business Administration (SBA)
may provide small businesses with copious amounts of resources regarding various industry
analyses. This information can save the business owner valuable time from attempting to
reinvent the wheel and create a new analysis when one may already exist from a professional
organization.

Why do firms need to do an Industry Analysis?

33
 • It enables a company to develop a Competitive Strategy to Survive in a market and using
the forces in its favour
• Emphasize on its strengths, weaknesses, opportunities and threats (SWOT).
• Elevate its position in the industry.
• Clarify areas where strategic changes will result in the greatest payoffs.
• Emphasize areas where industry trends indicate the greatest significance as either
opportunities or threats.
• Trim down weaknesses and threats by using competitive advantages.

Opportunities
Opportunities are the chances exist in the external environment, it depends firm whether
the firm is willing to exploit the opportunities or maybe they ignore the opportunities due to lack
of resources.

Threats
Threats are always evil for the firm, minimum no of threats in the external environment
open many doors for the firm. Maximum number of threats for the firm reduce their power in the
industry.

External Factor Evaluation (EFE) Matrix

• is a strategic-management tool often used for assessment of current business conditions.
The EFE matrix is a good tool to visualize and prioritize the opportunities and
threats that a business is facing.
• External factors assessed in the EFE matrix are the ones that are subjected to the will of
social, economic, political, legal, and other external forces.

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How to do an EFE Matrix?
1. List key external factors as identified in the external-audit process. Include a total of
15 to 20 factors, including both opportunities and threats, that affect the firm and its
industry. List the opportunities first and then the threats. Be as specific as possible,
using percentages, ratios, and comparative numbers whenever possible.

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very
important). The weight indicates the relative importance of that factor to being
successful in the firm’s industry. Opportunities often receive higher weights than
threats, but threats can receive high weights if they are especially severe or
threatening. Appropriate weights can be determined by comparing successful with
unsuccessful competitors or by discussing the factor and reaching a group consensus.
The sum of all weights assigned to the factors must equal 1.0
3. Assign a rating between 1 and 4 to each key external factor to indicate how
effectively the firm’s current strategies respond to the factor, where 4 = the response
is superior, 3 = the response is above average, 2 = the response is average, and 1 = the
response is poor. Ratings are based on effectiveness of the firm’s strategies. Ratings
are thus company-based, whereas the weights in Step 2 are industry-based. It is
important to note that both threats and opportunities can receive a 1, 2, 3, or 4.

4. Multiply each factor’s weight by its rating to determine a weighted score.

5. Sum the weighted scores for each variable to determine the total weighted score for the
organization. Regardless of the number of key opportunities and threats included in an EFE
Matrix, the highest possible total weighted score for an organization is 4.0 and the lowest
possible

Regardless of the number of key opportunities and threats included in an EFE Matrix, the
highest possible total weighted score for an organization is 4.0 and the lowest possible total
weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0
indicates that an organization is responding in an outstanding way to existing opportunities and
threats in its industry. In other words, the firm’s strategies effectively take advantage of existing
opportunities and minimize the potential adverse effects of external threats. A total score of 1.0
indicates that the firm’s strategies are not capitalizing on opportunities or avoiding external
threats.

Table 5. Example of EFE Matrix of a Shopping Center in Nueva Ecija

EFE of a Shopping Center Weight Rating Weighted Score

35
 Key External Factors
Opportunities
Ease of Shopping 0.20 3 0.60
Wide Expansion 0.05 2 0.10
Population Growth 0.05 3 0.15

Internet Advertising 0.10 3 0.30

Rizal/ Pantabangan (untapped Market) 0.05 2 0.1

EFE of a Shopping Center Weight Rating Weighted

Score
Key External Factors

Threats

Government Regulation 0.04 1 0.04

Political Situation 0.08 1 0.08

Competition from other Low Cost 0.20 2 0.40

Retailers
Climate Change/Global Warming 0.13 2 0.26

Online Shopping 0.10 4 0.40

TOTAL 1.00 2.43

For the above example, listed are opportunities such as ease of shopping, wide expansion,
population growth, internet advertising, and Rizal/Pantabangan Nueva Ecija as untapped market.
Ease of Shopping- Waltermart (WM) is popularly known as a one stop shop where you
can dine and shop in all your basic needs such as food, medicine, clothes,etc. WMalso provides
entertainment like a movie theatre or arcade. Unlike other malls WM have a good number of
tenants that can provide what customers want to buy or what they need to buy.
Wide Expansion- part of WM vision is to have 50 standing and serving malls by 2022,
for this year 2019, they already opened another 3 new malls namely, WM Subic, WM Balanga
and WM Batangas City. It is WM’s commitment of really to be part and serve the community
Population Growth- In San Jose population growth is at 1.67% with 38 barangays. With
these data, WM are expecting that through the year are aiming to serve at least 30,000 customers
per day from the 139k population of San Jose City(2017)

36
 Internet advertising is also an opportunity because it is a free media that we can take
advantage to promote and create awareness and most of the customers now can be connected
through social media
Rizal/Pantabangan Untapped Market- Aside from San Jose we also listed other towns as
WM’s secondary market and one of these is the Rizal and Pantabangan where WM can generate
at least 2000 customers and shoppers. There is only need to increase the awareness campaign
from the area and the means of transportation direct to the mall.
For the threats, listed are government regulation, political situation,competition from low
cost retailers, climate change and global warming,and online shopping.
From the threats listed, you can see that these are uncontrollable factors. What you can
only do is how you respond from these factors because you can control them. The way you
respond to these threat can have an advantage or a disadvantage in your business.
In the example, the company has received total score 2.43, which indicates that
company’s strategies are neither effective nor ineffective in exploiting opportunities or defending
against threats. The company should improve its strategy and focus more on how take advantage
of the opportunities.

COMPETITIVE PROFILE MATRIX

The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its
particular strengths and weaknesses in relation to a sample firm’s strategic position. It identifies
a firm’s major competitors and its particular strengths and weaknesses in relation to a sample
firm’s strategic position.
It is a strategic analysis that allows you to compare your company to your competitors, in
such way as to reveals your relative strengths and weaknesses. It uncovers potential opportunities
in the marketplace.

Four Key Components to a Competitive Profile Matrix

1. Critical Success Factors- it is often call key success factors wherein it is the key attributes
that matter or determine success within your industry.They vary between different
industries or even strategic groups and include both internal and external factors. Such
examples are;

37
Market Share
Product Quality
Clear strategic direction
Customer service
Customer loyalty
Brand reputation
Customer satisfaction
Financial position
Cash reserves
Profit margin
Inventory turnover
Employee retention
Income per employee
Innovations per employee
Cost per employee
R&D spending
Strong patent portfolio
New patents per year
Revenue per new product
Successful new introductions
Union relations Power over suppliers
Skilled workforce Access to key suppliers
Location of facilities Efficient supply chain
Production capacity Supply chain integration
Added product features On time delivery
Price competitiveness Strong online presence
Low cost structure Effective social media
management
Variety of products Experience and skills in e-
commerce
Complementary products Management qualification
and experience
Level of product integration Innovation in products and
services
Successful product Innovative culture
promotions
Superior marketing Efficient production
capabilities
Superior advertising Lean production system
capabilities
Superior IT capabilities Strong supplier network
Size of advertising budget Strong distribution network
Effectiveness of sales Product design
distribution
Employee satisfaction Level of vertical integration
Effective planning and Effective corporate social
budgeting responsibility programs
Variety of distribution Sales per outlet
channels
Power over distributors Parent company support

2. Weighting – it is the level of importance of the key attributes. Each critical success factor
should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high importance).
The number indicates how important the factor is in succeeding in the industry. If there
were no weights assigned, all factors would be equally important, which is an impossible
scenario in the real world. The sum of all the weights must equal 1.0. Separate factors
should not be given too much emphasis (assigning a weight of 0.3 or more) because the
success in an industry is rarely determined by one or few factors.

38
 3. Score – its shows how well a company for each critical success factors. Score or ratings,
as well as weights, are assigned subjectively to each company, but the process can be
done easier through benchmarking. Benchmarking reveals how well companies are doing
compared to each other or industry’s average. 
 4 – major strength/industry leader
 3 – minor strength
 2 – minor weakness
 1 – major weakness/industry inquired

4. Total Score – the company with the highest total score is the company that is strongest in
the marketplace.The bigger the score differential between one company and another, the
biggest competitive edge.

Competitive Profile Matrix Advantages

1. CPM allows you to analyze the relative strengths and weaknesses of your competitors
which enable you to create an effective competitive strategy.
2. To create a CPM you must first identify the critical success factors. Identifying these
factors is a crucial component of developing an effective strategy
3. By putting all competitors in a simple one-page matrix it makes it easy to compare the
different companies visually.
4. The total score enables you to easily see which company has the best total offering in the
marketplace.

Competitive Profile Matrix Disadvantages

1. The scores that are assigned to critical success factors are subjectively assigned. This
means they are likely to suffer some degree of inaccuracy.
2. It can be difficult to measure determine the scores of competitors’ critical success factors,
simply because this may not be public knowledge.
3. When using a CPM a weakness in one area can affect your total score, however, it may
be advantageous to deliberately have a low score in one area because of the advantages
that low score gives to another area.

COMPETITIVE PROFILE MATRIX (CPM)

39
Critical Success Factor Weigh Google's Apple's IOS Microsoft's
t Android OS Windows
Phone

Ratin Scor Ratin Scor Ratin Scor

g e g e g e
Market share 0.13 4 0.52 2 0.26 2 0.26
Number of application in store 0.1 4 0.4 4 0.4 2 0.2

Frequency of updates 0.05 3 0.15 3 0.15 2 0.1

Design 0.06 3 0.18 3 0.18 3 0.18

Product reputation 0.05 3 0.15 3 0.15 2 0.1
Distribution channel 0.11 4 0.44 4 0.44 3 0.33
Usability 0.11 3 0.33 3 0.33 3 0.33
Customization features 0.04 4 0.16 4 0.16 2 0.08

Marketing capabilities 0.04 2 0.08 2 0.08 2 0.08

Company brand reputation 0.1 4 0.4 4 0.4 3 0.3

Openness 0.02 4 0.08 4 0.08 2 0.04

Cloud Integration 0.12 4 0.48 4 0.48 2 0.24
Rate of O.S. crashes 0.07 1 0.07 1 0.07 3 0.21
TOTAL SCORE 1.00 - 3.44 - 3.18 - 2.45

40
Chapter 4: STRATEGY FORMULATION: THE INTERNAL ASSESSMENT

THE NATURE OF INTERNAL AUDIT

All organizations have strengths and weaknesses in the functional areas of business. No
enterprise is equally strong or weak in all areas. Internal strengths/weaknesses, coupled with
external opportunities/threats and a clear statement of mission, provide the basis for establishing
objectives and strategies. Objectives and strategies are established with the intention of
capitalizing upon internal strengths and overcoming weaknesses.
Management, marketing, finance/accounting, production/operations, research and
development, and management information systems represent the core operations of most
businesses. A strategic-management audit of a firm’s internal operations is vital to organizational
health. Many companies still prefer to be judged solely on their bottom line performance.
However, an increasing number of successful organizations are using the internal audit to gain
competitive advantages over rival firms.

The Process of Performing an Internal Audit

Representative managers and employees from throughout the firm need to be involved in
determining a firm’s strengths and weaknesses. The internal audit requires gathering and
assimilating information about the firm’s management, marketing, finance/accounting,
production/operations, research and development (R&D), and management information systems
operations.

The Process of Gaining Competitive Advantage in a Firm

The figure illustrates that all firms should continually strive to improve on their
weaknesses, turning them into strengths, and ultimately developing distinctive competencies that
can provide the firm with competitive advantages over rival firms. A firm’s strengths that cannot
be easily matched or imitated by competitors are called distinctive competencies. Building
competitive advantages involves taking advantage of distinctive competencies.

Resource-Based View (RBV)

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 According to RBV proponents, it is much more feasible to exploit external opportunities
using existing resources in a new way rather than trying to acquire new skills for each different
opportunity. In RBV model, resources are given the major role in helping companies to achieve
higher organizational performance. There are two types of resources: tangible and intangible.
Tangible assets are physical things. Land, buildings, machinery, equipment and capital –
all these assets are tangible. Physical resources can easily be bought in the market so they confer
little advantage to the companies in the long run because rivals can soon acquire the identical
assets.
Intangible assets are everything else that has no physical presence but can still be owned
by the company. Brand reputation, trademarks, intellectual property are all intangible assets.
Unlike physical resources, brand reputation is built over a long time and is something that other
companies cannot buy from the market. Intangible resources usually stay within a company and
are the main source of sustainable competitive advantage.

Production/Operation
The production/operations function of a business consists of all those activities that
transform inputs into goods and services

The Basic Functions (Decisions) Within Production/Operations

1.Process- decisions on this category determine the physical process or facility used to produce
the product or service and the associated workplace practices – type of equipment, process flows,
layout of the facility, job design & workforce policies.

2. Capacity- must be aimed at providing the right amount of capacity at the right place at the
right time – scheduling of people, equipment & facilities.

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3. Inventory- determine what to order, how much to order & when to order; management of the
flow of materials within the firm

4. Workforce- workforce productivity is a complex equation that can be impacted by any number
of factors, from the amount and difficulty of work, to personal and professional relationships, to
seasonal concerns like holidays and colds.

5. Quality- quality decisions must ensure that quality is designed & built into the product in all
stages of operations – standards must be set, people trained & the product or service inspected.
Production/operations activities often represent the largest part of an organization’s
human and capital assets. In most industries, the major costs of producing a product or service
are incurred within operations, so production/operations can have great value as a competitive
weapon in a company’s overall strategy. Strengths and weaknesses in the five functions of
production can mean the success or failure of an enterprise.

Checklist
1. Are supplies of raw materials, parts, and subassemblies reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in good condition?
3. Are inventory-control policies and procedures effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically located?
6. Does the firm have technological competencies?

Research and Development

Organizations invest in R&D because they believe that such an investment will lead to a
superior product or service and will give them competitive advantages. But research and
development does not guarantee success.
New Coke
New Coke, reformulated soft drink that the Coca-Cola Company introduced on April 23,
1985, to replace its flagship drink in the hope of revitalizing the brand and gaining market share
in the beverage industry. The announcement sparked a furour, and within a few days the decision
to discontinue the prior version of Coke was called “the biggest marketing blunder of all time.”

Checklist
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization’s R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems adequate?
6. Is communication between R&D and other organizational units effective?

43
7. Are present products technologically competitive?

Management Information System

Information represents a major source of competitive management advantage or
disadvantage. A management information system’s purpose is to improve the performance of an
enterprise by improving the quality of managerial decisions. An effective information system
thus collects, codes, stores, synthesizes, and presents information in such a manner that it
answers important operating and strategic questions. The heart of an information system is a
database containing the kinds of records and data important to managers.
A management information system receives raw material from both the external and
internal evaluation of an organization. It gathers data about marketing, finance, production, and
personnel matters internally, and social, cultural, demographic, environmental, economic,
political, governmental, legal, technological, and competitive factors externally. Data are
integrated in ways needed to support managerial decision making. There is a logical flow of
material in a computer information system, whereby data are input to the system and transformed
into output. Outputs include computer printouts, written reports, tables, charts, graphs, checks,
purchase orders, invoices, inventory records, payroll accounts, and a variety of other documents.
Payoffs from alternative strategies can be calculated and estimated. Data become information
only when they are evaluated, filtered, condensed, analyzed, and organized for a specific
purpose, problem, individual, or time.

Checklist
1. Do all managers in the firm use the information system to make decisions?
2. Is there a chief information officer or director of information systems position in the firm?
3. Are data in the information system updated regularly?
4. Do managers from all functional areas of the firm contribute input to the information system?
5. Are there effective passwords for entry into the firm’s information system?
6. Are strategists of the firm familiar with the information systems of rival firms?
7. Is the information system user-friendly?
8. Do all users of the information system understand the competitive advantages that information
can provide firms?
9. Are computer training workshops provided for users of the information system?
10. Is the firm’s information system continually being improved in content and user-friendliness?

Value Chain Analysis

VCA refers to the process whereby a firm determines the costs associated with
organizational activities from purchasing raw materials to manufacturing product(s) to marketing
those products.
According to Porter, the business of a firm can best be described as a value chain, in
which total revenues minus total costs of all activities undertaken to develop and market a

44
product or service yields value. All firms in a given industry have a similar value chain, which
includes activities such as obtaining raw materials, designing products, building manufacturing
facilities, developing cooperative agreements, and providing customer service. A firm will be
profitable as long as total revenues exceed the total costs incurred in creating and delivering the
product or service. Firms should strive to understand not only their own value chain operations
but also their competitors’, suppliers’, and distributors’ value chains.

Benchmarking
Benchmarking is an analytical tool used to determine whether a firm’s value chain
activities are competitive compared to rivals and thus conducive to winning in the market place.
Benchmarking entails measuring costs of value chain activities across an industry to determine
“best practices” among competing firms for the purpose of duplicating or improving upon those
best practices. Benchmarking enables a firm to take action to improve its competitiveness by
identifying (and improving upon) value chain activities where rival firms have comparative
advantages in cost, service, reputation, or operation. The hardest part of benchmarking can be
gaining access to other firms’ value chain activities with associated costs. Typical sources of
benchmarking information, however, include published reports, trade publications, suppliers,
distributors, customers, partners, creditors, shareholders, lobbyists, and willing rival firms.

The Internal Factor Evaluation Matrix

This strategy-formulation tool summarizes and evaluates the major strengths and
weaknesses in the functional areas of a business, and it also provides a basis for identifying and
evaluating relationships among those areas.

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CORE OPERATIONS OF MOST BUSINESSES

Management
The functions of management consist of five basic activities: planning, organizing,
motivating, staffing, and controlling. An overview of these activities is provided below:

46
Planning
The only thing certain about the future of any organization is change, and planning is the
essential bridge between the present and the future that increases the likelihood of achieving
desired results. Planning is the start of the process by which an individual or business may turn
empty dreams into achievements. Planning enables one to avoid the trap of working extremely
hard but achieving little. Planning enables a firm to identify precisely what is to be achieved and
to detail precisely the who, what, when, where, why, and how needed to achieve desired
objectives. Planning enables a firm to assess whether the effort, costs, and implications
associated with achieving desired objectives are warranted. Planning is essential for successful
strategy implementation and strategy evaluation, largely because organizing, motivating,
staffing, and controlling activities depend upon good planning. The process of planning must
involve managers and employees throughout an organization. It also includes developing a
mission, forecasting future events and trends, establishing objectives, and choosing strategies to
pursue. By establishing and communicating clear objectives, employees and managers can work
together toward desired results. Planning allows a firm to adapt to changing markets and thus to
shape its own destiny. Strategic management can be viewed as a formal planning process that
allows an organization to pursue proactive rather than reactive strategies. Successful
organizations strive to control their own futures rather than merely react to.

Organizing

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 The purpose of organizing is to achieve coordinated effort by defining task and authority
relationships. Organizing means determining who does what and who reports to whom. There
are countless examples in history of well-organized enterprises successfully competing against—
and in some cases defeating—much stronger but less-organized firms. A well-organized firm
generally has motivated managers and employees who are committed to seeing the organization
succeed. Resources are allocated more effectively and used more efficiently in a well-organized
firm than in a disorganized firm.The organizing function of management can be viewed as
consisting of three sequential activities: breaking down tasks into jobs (work specialization),
combining jobs to form departments (departmentalization), and delegating authority. Breaking
down tasks into jobs requires the development of job descriptions and job specifications. These
tools clarify for both managers and employees what particular jobs entail. The most common
forms of departmentalization are functional, divisional, strategic business unit, and matrix.
Delegating authority is an important organizing activity, as evidenced in the old saying “You can
tell how good a manager is by observing how his or her department functions when he or she
isn’t there.” Employees today are more educated and more capable of participating in
organizational decision making than ever before. In most cases, they expect to be delegated
authority and responsibility and to be held accountable for results.

Three sequential activities:

1. breaking down tasks into jobs (work specialization)
2. combining jobs to form departments (departmentalization)
3. delegating authority

Motivating
Motivating can be defined as the process of influencing people to accomplish specific
objectives. It sometimes refers to shaping human behaviour in an organization. Motivation
explains why some people work hard and others do not. Objectives, strategies, and policies have
little chance of succeeding if employees and managers are not motivated to implement strategies
once they are formulated. The motivating function of management includes at least four major
components: leadership, group dynamics, communication, and organizational change. Research
suggests that democratic behavior on the part of leaders results in more positive attitudes toward
change and higher productivity than does autocratic behaviour. Communication, perhaps the
most important word in management, is a major component in motivation. The manager of
tomorrow must be able to get his people to commit themselves to the business, whether they are
machine operators or junior vice-presidents.
Staffing
The management function of staffing, also called personnel management or human
resource management, includes activities such as recruiting, interviewing, testing, selecting,
orienting, training, developing, caring for, evaluating, rewarding, disciplining, promoting,
transferring, demoting, and dismissing employees, as well as managing union relations. Staffing

48
activities play a major role in strategy-implementation efforts, and for this reason, human
resource managers are becoming more actively involved in the
strategicmanagementprocess.Itisimportanttoidentifystrengthsandweaknessesinthestaffingarea.
The human resources department coordinates staffing decisions in the firm so that an
organization as a whole meets legal requirements. This department also provides needed
consistency in administering company rules, wages, policies, and employee benefits as well as
collective bargaining with unions.

Controlling
The controlling function of management includes all of those activities undertaken to
ensure that actual operations conform to planned operations or consistent with the palled results.
All managers in an organization have controlling responsibilities, such as conducting
performance evaluations and taking necessary action to minimize inefficiencies. The controlling
function of management is particularly important for effective strategy evaluation.

Controlling consists of four basic steps:

1. Establishing performance standards
2. Measuring individual and organizational performance
3. Comparing actual performance to planned performance standards
4. Taking corrective actions

Measuring individual performance is often conducted ineffectively or not at all in

organizations. No single approach to measuring individual performance is without limitations.
For this reason, an organization should examine various methods, such as the graphic rating
scale, the behaviourally anchored rating scale, and the critical incident method, and then develop
or select a performance-appraisal approach that best suits the firm’s needs.

Marketing
Marketing can be described as the process of defining, anticipating, creating, and
fulfilling customers’ needs and wants for products and services. There are seven basic functions
of marketing: (1) customer analysis, (2) selling products/services, (3) product and service
planning, (4) pricing, (5) distribution, (6) marketing research, and (7) opportunity analysis.
Understanding these functions helps strategists identify and evaluate marketing strengths and
weaknesses.

1. Customer Analysis
Customer analysis—the examination and evaluation of consumer needs, desires, and
wants—involves administering customer surveys, analyzing consumer information, evaluating
market positioning strategies, developing customer profiles, and determining optimal market
segmentation strategies. The information generated by customer analysis can be essential in

49
developing an effective mission statement. Customer profiles can reveal the demographic
characteristics of an organization’s customers. Buyers, sellers, distributors, salespeople,
managers, wholesalers, retailers, suppliers, and creditors can all participate in gathering
information to successfully identify customers’ needs and wants. Successful organizations
continually monitor present and potential customers’ buying patterns.

2. Selling Products/Services

Successful strategy implementation generally rests upon the ability of an organization to

sell some product or service. Selling includes many marketing activities, such as advertising,
sales promotion, publicity, personal selling, sales force management, customer relations, and
dealer relations. These activities are especially critical when a firm pursues a market penetration
strategy. The effectiveness of various selling tools for consumer and industrial products varies.
Personal selling is most important for industrial goods companies, and advertising is most
important. Determining organizational strengths and weaknesses in the selling function of
marketing is an important part of performing an internal strategic-management audit. With
regard to advertising products and services on the Internet, a new trend is to base advertising
rates exclusively on sales rates.

3. Product and Service Planning

Product and service planning includes activities such as test marketing; product and brand
positioning; devising warranties; packaging; determining product options, features, style, and
quality; deleting old products; and providing for customer service. Product and service planning
is particularly important when a company is pursuing product development or diversification.
One of the most effective product and service planning techniques is test marketing. Test
markets allow an organization to test alternative marketing plans and to forecast future sales of
new products. In conducting a test market project, an organization must decide how many cities
to include, which cities to include, how long to run the test, what information to collect during
the test, and what action to take after the test has been completed. Test marketing is used more
frequently by consumer goods companies than by industrial goods companies. Test marketing
can allow an organization to avoid substantial losses by revealing weak products and ineffective
marketing approaches before large-scale production begins.

4. Pricing
Five major stakeholders affect pricing decisions: consumers, governments, suppliers,
distributors, and competitors. Sometimes an organization will pursue a forward integration
strategy primarily to gain better control over prices charged to consumers. Governments can
impose constraints on price fixing, price discrimination, minimum prices, unit pricing, price
advertising, and price controls. Strategists should view price from both a short-run and a long-

50
run perspective, because competitors can copy price changes with relative ease. Often a
dominant firm will aggressively match all price cuts by competitors. Intense price competition,
created by the global economic recession, coupled with Internet price-comparative shopping has
reduced profit margins to bare minimum levels for most companies. For example, airline tickets,
rental car prices, hotel room rates, and computer prices are lower today than they have been in
many years.

5. Distribution

Distribution includes warehousing, distribution channels, distribution coverage, retail site

locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and
retailing. Most producers today do not sell their goods directly to consumers. Various marketing
entities act as intermediaries; they bear a variety of names such as wholesalers, retailers, brokers,
facilitators, agents, vendors—or simply distributors. Distribution becomes especially important
when a firm is striving to implement a market development or forward integration strategy.
Intermediaries flourish in our economy because many producers lack the financial resources and
expertise to carry out direct marketing. Manufacturers who could afford to sell directly to the
public often can gain greater returns by expanding and improving their manufacturing
operations.

6. Marketing Research
Marketing research is the systematic gathering, recording, and analyzing of data about
problems relating to the marketing of goods and services. Marketing research can uncover
critical strengths and weaknesses, and marketing researchers employ numerous scales,
instruments, procedures, concepts, and techniques to gather information. Marketing research
activities support all of the major business functions of an organization. Organizations that
possess excellent marketing research skills have a definite strength in pursuing generic strategies.

7. Cost/Benefit Analysis
The seventh function of marketing is cost/benefit analysis, which involves assessing the
costs, benefits, and risks associated with marketing decisions. Three steps are required to
perform a cost/benefit analysis: (1) compute the total costs associated with a decision, (2)
estimate the total benefits from the decision, and (3) compare the total costs with the total
benefits. When expected benefits exceed total costs, an opportunity becomes more attractive.
Sometimes the variables included in a cost/benefit analysis cannot be quantified or even
measured, but usually reasonable estimates can be made to allow the analysis to be performed.
Cost/benefit analysis should also be performed when a company is evaluating alternative ways to
be socially responsible.

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Finance/Accounting

Financial condition is often considered the single best measure of a firm’s competitive
position and overall attractiveness to investors. Determining an organization’s financial strengths
and weaknesses is essential to formulate strategies effectively.
A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow,
and equity can eliminate some strategies as being feasible alternatives.
According to James Van Horne, the functions of finance/accounting comprise three
decisions: the investment decision, the financing decision, and the dividend decision. Financial
ratio analysis is the most widely used method for determining an organization’s strengths and
weaknesses in the investment, financing, and dividend areas. Because the functional areas of
business are so closely related, financial ratios can signal strengths or weaknesses in
management, marketing, production, research and development, and management information
systems activities. It is important to note here that financial ratios are equally applicable in for-
profit and nonprofit organizations. Even though nonprofit organizations obviously would not
have return-on-investment or earnings-per-share ratios, they would routinely monitor many other
special ratios.
The investment decision, also called capital budgeting, is the allocation and reallocation
of capital and resources to projects, products, assets, and divisions of an organization. Once
strategies are formulated, capital budgeting decisions are required to successfully implement
strategies. The financing decision determines the best capital structure for the firm and includes
examining various methods by which the firm can raise capital (for example, by issuing stock,
increasing debt, selling assets, or using a combination of these approaches). The financing
decision must consider both short-term and long-term needs for working capital. Two key
financial ratios that indicate whether a firm’s financing decisions have been effective are the
debt-to-equity ratio and the debt-to-total-assets ratio. Dividend decisions concern issues such as
the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the
repurchase or issuance of stock. Dividend decisions determine the amount of funds that are
retained in a firm compared to the amount paid out to stockholders. Three financial ratios that are
helpful in evaluating a firm’s dividend decisions are the earnings-per-share ratio, the dividends-
per-share ratio, and the price-earnings ratio. The benefits of paying dividends to investors must
be balanced against the benefits of internally retaining funds, and there is no set formula on how
to balance this trade-off.

Financial Ratio Analysis

Financial ratios are computed from an organization’s income statement and balance
sheet. Computing financial ratios is like taking a picture because the results reflect a situation at
just one point in time. Comparing ratios over time and to industry averages is more likely to
result in meaningful statistics that can be used to identify and evaluate strengths and weaknesses.

52
 The firm needs to make an in depth review and evaluation of its financial statements
through the use of its financial statements through the use of financial tools called ratios.
The basic inputs here are the income statement and the balance sheet for the period to be
examined.
Ratios involve the methods of calculating and interpreting financial statements to assess
the firm’s performance and status.
Ratio Analysis Assess the firm’s past, present and future financial conditions.it is also
done to find firm’s financial strengths and weaknesses. The primary tools are Financial
Statements and the comparison of financial ratios to past, industry, sector and all firms.

Basic Types of Financial Ratios

The key financial ratios can be classified into the following five types:
1.Liquidity ratios measure a firm’s ability to meet maturing short-term obligations.
Current ratio
Quick (or acid-test) ratio
2. Leverage ratios measure the extent to which a firm has been financed by debt.
Debt-to-total-assets ratio
Debt-to-equity ratio
Long-term debt-to-equity ratio
Times-interest-earned (or coverage) ratio
3. Activity ratios measure how effectively a firm is using its resources.
Inventory turnover
Fixed assets turnover
Total assets turnover
Accounts receivable turnover
Average collection period
4. Profitability ratios measure management’s overall effectiveness as shown by the returns
generated on sales and investment.
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)
Return on stockholders’ equity (ROE)
Earnings per share (EPS)
Price-earnings ratio
5. Growth ratios measure the firm’s ability to maintain its economic position in the growth of the
economy and industry.
Sales
Net Income

53
 Earnings per share
Dividends per share

Financial Ratio Summary

Ratio How Calculated What It Measures
Liquidity Ratios
Current Ratio Current assets The extent to which a firm
Current liabilities can meet its short-term
obligations
Quick Ratio Current assets minus inventory The extent to which a firm
Current liabilities can meet its short-term
obligations without relying
upon the sale of its
inventories
Leverage Ratios
Debt-to-Total-Assets Total debt The percentage of total funds
Ratio Total assets that are provided by creditors
Debt-to-Equity Ratio Total debt The percentage of total funds
Total Shareholder’s Equity provided by creditors versus
by owners
Long-Term Debt-to- Long-term debt The balance between debt
Equity Ratio Total Shareholder’s Equity and equity in a firm’s long-
term capital structure
Times-Interest-Earned Profits before interest and taxes The extent to which earnings
Ratio Total interest charges can decline without the firm
becoming unable to meet its
annual interest costs
Activity Ratios
Inventory Turnover Sales Whether a firm holds
Inventory of finished goods excessive stocks of
inventories and whether a
firm is slowly selling its
inventories compared to the
industry average
Fixed Assets Turnover Sales Sales productivity and plant
Fixed assets and equipment utilization
Total Assets Turnover Sales Whether a firm is generating
Total assets a sufficient volume of
business for the size of its
asset investment
Accounts Receivable Annual credit sales The average length of time it
Turnover Accounts receivable takes a firm to collect credit
sales (in percentage terms)
Average Collection Accounts receivable The average length of time it
Period Total credit sales/365 days takes a firm to collect on

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 credit sales (in days)
Profitability Ratios
Gross Profit Margin Sales minus cost of goods sold The total margin available to
Sales cover operating expenses and
yield a profit
Operating Profit Earnings before interest and taxes Profitability without concern
Margin Sales for taxes and interest

Net Profit Margin Net income After-tax profits per dollar of

Sales sales
Return on Total Assets Net income After-tax profits per dollar of
(ROA) Total assets assets; this ratio is also called
return on investment (ROI
Return on Net income After-tax profits per dollar of
Stockholders’ Equity Total Shareholder’s Equity stockholders’ investment in
(ROE) the firm
Earnings Per Share Net income Earnings available to the
(EPS) # of shares of common stock owners of common stock
outstanding
Price-Earnings Ratio Market price per share Attractiveness of firm on
Earnings per share equity markets
Growth Ratios
Sales Annual percentage growth in total Firm’s growth rate in sales
sales
Net Income Annual percentage growth in Firm’s growth rate in profits
profits
Earnings Per Share Annual percentage growth in EPS Firm’s growth rate in EPS
Dividends Per Share Annual percentage growth in Firm’s growth rate in
dividends per share dividends per share

Financial ratio analysis is not without some limitations. First of all, financial ratios are
based on accounting data, and firms differ in their treatment of such items as depreciation,
inventory valuation, research and development expenditures, pension plan costs, mergers, and
taxes. Also, seasonal factors can influence comparative ratios. Therefore, conformity to
industrycompositeratiosdoesnotestablishwithcertaintythatafirmisperformingnormally or that it is
well managed. Likewise, departures from industry averages do not always indicate that a firm is
doing especially well or badly. For example, a high inventory turn-over ratio could indicate
efficient inventory management and a strong working capital position, but it also could indicate a
serious inventory shortage and a weak working capital position.

It is important to recognize that a firm’s financial condition depends not only on the
functions of finance, but also on many other factors that include first are the management,
marketing, management production/operations, research and development, and management
information systems decisions; secondly, the actions by competitors, suppliers, distributors,
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creditors, customers, and shareholders; and lastly the economic, social, cultural, demographic,
environmental, political, governmental, legal, and technological trends.

Financial Statements

Financial statements are a structured representation with the objective of providing

information about the financial position, financial performance and cash flows of an entity that is
useful to a wide range of users in making economic decisions. Financial statements also show the
results of the management’s stewardship of the resources entrusted to it. To meet the objective,
financial statements provide information about an entity’s assets, liabilities, equity, income and
expenses, other changes inequity and cash flows.The basic financial statements are the Income
Statement, Balanced Sheet, and the Cash Flow Statement.

Finance/Accounting Audit Checklist

The following finance/accounting questions, like the similar questions about marketing
and management earlier, should be examined:
1. Where is the firm financially strong and weak as indicated by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
6. Are dividend payout policies reasonable?
7. Does the firm have good relations with its investors and stockholders?
8. Are the firm’s financial managers experienced and well trained?
9. Is the firm’s debt situation excellent?

Profile Planning and Budgeting

Profit Planning is the set of actions taken to achieve a targeted  profit level. These
actions involve the development of an interlocking set of budgets that roll up into a master
budget. The management team adjusts the information in this set of budgets to arrive at the
combination of actions needed to arrive at the targeted profit level. The planning process
may involve a significant amount of what-if analysis, to see what happens to projected
profits in different scenarios.
Profit is a financial benefit that is realized when the amount of revenue gained from a
business activity exceeds the expenses, costs, and taxes needed to sustain the activity. Any profit
that is gained goes to the business's owners, who may or may not decide to spend it on the
business. Profit is calculated as total revenue less total expenses.

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 Budget is an estimation of revenue and expenses over a specified future period of time
and is usually compiled and re-evaluated on a periodic basis.  At companies and organizations, a
budget is an internal tool used by management and is often not required for reporting by external
parties.
Budget has two distinct purposes:
 Planning which is developing goals and preparing various budgets to achieve those goals
 Control which involves steps taken by management to increase the likelihood that all
parts of the organization are working together to achieve the goals set down at the
planning stage

Budget Master Process:

1. Sales and Collections Budget

Sales and collections budget represents one of the first steps in the budgeting process, as
items such as inventory levels and operating expenses are driven off of the Sales and Collections
Budget. Effective sales budgeting is a key factor in building a useful and representative financial
model for a business. Regardless of the nature of your business

2 Production Budget
A production budget is a quantity budget which lays down the quantity of units to be
produced during the budget period. The main purpose of this budget is to maintain an optimum
balance between sales, production and inventory position of the firm. It is also known as output
budget because it depicts the quantitative estimates of output for the budget period as well as also
the estimates at different control period within the budget period.

3. Budgeted Cost Per Unit

For finished goods produced has three components: direct materials, direct labor and
variable and fixed overhead. Each type of cost requires a separate budget in the master budget.
The cost per unit is commonly derived when a company produces a large number of
identical products. This information is then compared to budgeted or standard cost
information to see if the organization is producing goods in a cost-effective manner.
The cost per unit is derived from the variable costs and fixed costs incurred by a production
process, divided by the number of units produced.
A variable cost is a cost that varies in relation to either production volume or
services provided. If there is no production or no services are provided, then there should be
no variable costs. 
A fixed cost is a cost that does not increase or decrease in conjunction with any
activities. It must be paid by an organization on a recurring basis, even if there is no
business activity. The concept is used in financial analysis to find the breakeven point of a
business, as well as to determine product pricing.

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4. Direct Materials Budget
The direct materials budget calculates the materials that must be purchased, by time
period, in order to fulfill the requirements of the production budget. It is typically presented
in either a monthly or quarterly format in the annual budget. In a business that sells
products, this budget may contain a majority of all costs incurred by the company, and so
should be compiled with considerable care. Otherwise, the result may erroneously indicate
excessively high or low cash requirements to fund materials purchases.

5. Cash Budgeting
The cash budget is management’s approximation of cash on hand at the beginning of a
budget period and the estimated cash inflows and outflows. The cash inflows may include those
that result from cash sales, the sale of assets, the collection of accounts receivable, borrowing
cash or stock issuance. The cash outflows may include disbursements for material purchases,
debt repayment, asset acquisition, taxes, manufacturing costs and dividends.
The cash budget highlights a company’s probable income or deficit for a period, the latter
of which the company must address by increasing sales or decreasing expenditures. The
advantages of a cash budget lie in its ability to identify a company’s future financing needs,
highlight the need for corrective actions and evaluate a company’s performance.

6. Direct Labor Budget

Direct labor budget is a budget of planned expenditures for direct labor. The direct labor
budget indicates the rate per hour and the number of hours necessary to meet production
requirements. The direct labor budget is used to calculate the number of labor hours that will
be needed to produce the units itemized in the production budget. A more complex direct
labor budget will calculate not only the total number of hours needed, but will also break
down this information by labor category. The direct labor budget is useful for anticipating
the number of employees who will be needed to staff the manufacturing area throughout the
budget period. This allows management to anticipate hiring needs, as well as when to
schedule overtime, and when layoffs are likely. The budget provides information at an
aggregate level, and so is not typically used for specific hiring and layoff requirements.

7.Manufacturing Overhead Budget

A manufacturing overhead budget is a collection of costs that aren’t directly assignable to
a product. They’re often shared across different departments or products, which makes them
difficult to assign to one specific thing. During the production process, these costs are essential
to the development and creation of goods, and you must allocate these expenses to products so
that they properly reflect the full cost of producing the good

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8. Selling and Administrative Expense Budget
Selling and Administrative Expense Budget This portion of the budget includes the
planned operating expenses for the business, excluding its direct costs of manufacturing.

9. Cash Budget
Cash budget is a budget or plan of expected cash receipts and disbursements during the
period. These cash inflows and outflows include revenues collected, expenses paid, and loans
receipts and payments. In other words, a cash budget is an estimated projection of the company’s
cash position in the future

10.Budgeted Income Statement

A budgeted income statement is a financial report that compares the budgeted revenue
and expense figures with the actual performance numbers achieved during the period. In other
words, it’s a report that lists the predicted numbers side-by-side with the actual numbers to show
the company performance compared with the expected performance.

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Chapter 5: STRATEGY FORMULATION FRAMEWORK

STRATEGY GENERATION AND SELECTION

Important strategy-formulation techniques can be integrated into a three-stage decision-

making framework, as shown in Figure 1. The tools presented in this framework are applicable
to all sizes and types of organizations and can help strategists identify, evaluate, and select
strategies. The three stages are:
1. The Input Stage summarizes the basic input information need to formulate strategies.
Making small decisions in the input matrices regarding the relative importance of
external and internal factors allows strategists to more effectively generate, prioritize,
evaluate, and select among alternative strategies.
2. The Matching Stage focuses on generating feasible alternative strategies by aligning key
external and internal factors. Matching external and internal key factors is the essential
for effectively generating feasible alternative strategies.
3. The Decision Stage involves a single technique, the Quantitative Strategic Planning
Matrix (QSPM). It reveals the relative attractiveness of alternative strategies and thus
provides an objective basis for selecting specific strategies.

Figure 1. The Strategy Formulation Framework

The TOWS Matrix

A SWOT analysis helps assessing a company’s current internal and external situation, but
does not provide concrete strategic actions to take. One way to map out the strategic options a
company has, is by using the so called TOWS matrix. By combining the external environment’s
opportunities and threats with the internal organization’s strengths and weaknesses, management
can come up with four basic strategies to follow based on the situation it is in:
1. Strengths-Opportunities (SO) strategies use a firm’s internal strengths to take
advantage of external opportunities. All managers would like their organization to be in a

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 position in which internal strengths can be used to take advantage of external trends and
events. Organizations generally will pursue WO, ST, or WT strategies to get into a
situation in which they can apply SO strategies.
2. Weaknesses-Opportunities (WO) strategies aim at improving internal weaknesses by
taking advantage of external opportunities. Sometimes key external opportunities exist,
but a firm has internal weaknesses that prevent it from exploiting those opportunities.
3. Strengths-Threats (ST) strategies use a firm’s strengths to avoid or reduce the impact
of external threats. This does not mean that a strong organization should always meet
threats in the external environment head-on.
4. Weaknesses-Threats (WT) strategies are defensive tactics directed at reducing internal
weakness and avoiding external threats. An organization faced with numerous external
threats and internal weaknesses may indeed be in a precarious position. In fact, such a
firm may have to fight for its survival, merge, retrench, declare bankruptcy, or choose
liquidation.

Figure 2. A TOWS Matrix for a Retail Computer Store

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 A schematic representation of the TOWS Matrix is provided in Figure 2. Note that
TOWS Matrix is composed of nine cells. As shown, there are four key factor cells, four strategy
cells, and one cell that is always left blank (the upper-left cell). The process of constructing a
TOWS Matrix can be summarized in eight steps, as follows:
1. List the firm’s key external opportunities.
2. List the firm’s key external threats.
3. List the firm’s key internal strengths.
4. List the firm’s key internal weaknesses.
5. Match internal strengths with external opportunities, and record the resultant SO
strategies in the appropriate cell.
6. Match internal weaknesses with external opportunities, and record the resultant WO
strategies
7. Match internal strengths with external threats, and record the resultant ST strategies.
8. Match internal weaknesses with external threats, and record the resultant WT strategies.

SPACE Analysis – Strategic Position and Action Evaluation Matrix

The Strategic Position and Action Evaluation (SPACE) matrix is a very useful but not
well known tool to develop and review a company’s strategy. It is a super technique for
evaluating the sense and wisdom in a particular strategic plan. It was developed by strategy
academics Alan Rowe, Richard Mason, Karl Dickel, Richard Mann and Robert Mockler.
SPACE Matrix consists of four quadrants and axes. Its four-quadrant framework
indicates whether aggressive, conservative, defensive, or competitive strategies are most
appropriate for a given organization. The axes of the SPACE Matrix represent two internal
dimensions; Financial Position (FP) and Competitive Position (CP) and two external dimensions;
Stability Position (SP) and Industry Position (IP). These four factors are perhaps the most
important determinants of an organization’s overall strategic position.

Internal Dimension
a. Financial Position – This simply means how much money/assets the company has.
The following items should be considered when assessing Financial Strength:
 Return on investment (low to high)
 Leverage (debt to equity ratio) (unbalanced to balanced)
 Liquidity (access to quick money when needed) (unbalanced to solid)
 Capital required versus capital available) (high to low)
 Cash flow (low to high)
 Ease of exit from market (difficult to easy)
 Risk involved in the business (much to little)
 Inventory turnover (slow to fast)
 Use of economies of scale and experience (low to high)

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 A strong score on financial strength backed up with reasonable environmental stability
suggests that either an aggressive strategy or conservative strategy is appropriate depending on
the position for competitive advantage and industry attractiveness. A poor score without
remarkable environmental stability indicates that either a competitive strategy or defensive
strategy is required.

b. Competitive Position- This dimension talks about how good your product or service and how
your position in the industry can affect you.
The following items should be considered when assessing Competitive Advantage:
 Market share (small to large).
 Product quality (inferior to superior)
 Product life cycle (late to early)
 Product replacement cycle (variable to fixed)
 Customer loyalty (low to high)
 Competition’s capacity utilization (low to high)
 Technological know-how (low to high)
 Vertical integration (low to high)
 Speed of new product introductions (slow to fast)

A strong rating on the Industry Attractiveness / Competitive Advantage axis points to

an aggressive strategy or a competitive strategy. A weak rating indicates that a Conservative
strategy or defensive strategy is appropriate.

External Dimension
External Dimensions consists of Stability Position (SP) and Industry Position (IP). Both
are made up of factors that are subject to the will of social, economic, political, legal, and other
external forces.

a. Stability Position- These are external factors that may affect the industry. If things are
changing fast and the company can’t keep up, it will surely be at high disadvantage compared to
the rest of the market.
The following items should be considered when assessing Environmental Stability:
 Technological changes
 Rate of inflation
 Demand variability
 Price range of competing products
 Barriers to entry into market
 Competitive pressure/rivalry
 Price elasticity of demand

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  Pressure from substitutes

A strong score backed up with reasonable financial strength suggests that either
an aggressive strategy or conservative strategy is appropriate. A poor score without remarkable
financial strength indicates that either a competitive strategy or defensive strategy is required.

b. Industry Position- It has to do with everything that affects your industry.

The following items should be considered when assessing Industry Attractiveness or Industry
Strength:
 Growth potential (low to high)
 Profit potential (low to high)
 Financial stability (low to high)
 Technological know-how (simple to complex)
 Resource utilization (inefficient to efficient)
 Capital intensity (low to high)
 Ease of entry into the market (easy to difficult)
 Productivity; capacity utilization (low to high)
 Manufacturer’s bargaining power (low to high)

A strong rating on the Industry Attractiveness / Competitive Advantage axis points to

an aggressive strategy or a competitive strategy. A weak rating indicates that a Conservative
strategy or defensive strategy is appropriate.
Figure 3. The SPACE Matrix

Four Types of Strategies in the SPACE Matrix

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  Aggressive Strategy
 Competitive Strategy
 Conservative Strategy
 Defensive Strategy

1. Aggressive Strategy
This occurs when all the dimensions are positive. An organization is in an excellent
position to use its internal strengths to (1) take advantage of external opportunities, (2) overcome
internal weaknesses, and (3) avoid external threats. Therefore, market penetration, market
development, product development, backward integration, forward integration, horizontal
integration, or diversification, can be feasible, depending on the specific circumstances that face
the firm.

2. Competitive Strategy
Indicates competitive strategies. Competitive strategies include backward, forward, and
horizontal integration; market penetration; market development; and product development. This
arises when a firm has a strong advantages in an attractive industry but its financial strength is
insufficient to compensate for environmental instability. The immediate strategy is to improve its
financial strength by raising capital, improving profitability etc.

3. Conservative Strategy
Implies staying close to the firm’s basic competencies and not taking excessive risks.
This arises when the firm is financially strong but is unlikely to make significant returns from the
business. Conservative strategies most often include market penetration, market development,
product development, and related diversification.

4. Defensive Strategy
This occurs when all the dimensions are negative. This suggests that the firm should
focus on improving internal weakness and avoid external threats. Firms in this position are very
weak and heading for failure unless the external environment becomes more favorable.
Defensive strategies include retrenchment, divestiture, liquidation, and related diversification.

The steps required to develop a SPACE Matrix are as follows:

1. Select a set of variables to define financial position (FP), competitive position (CP),
stability position (SP), and industry position (IP).
2. Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables
that make up the financial position and industry position dimensions.

65
 Assign a numerical value ranging from -1 (best) to -7 (worst) to each of the variables
that make up the stability position and competitive position dimensions.
On the FP and CP axes, make comparison to competitors.
On the IP and SP axes, make comparison to other industries.
3. Compute an average score for FP, IP, SP, and CP by summing the values given to the
variables of each dimension and then by dividing by the number of variables included in
the respective dimension.
4. Plot the average scores for FP, IP, SP and CP on the appropriate axis in the SPACE
Matrix.
5. Add the two scores on the x-axis and plot the resultant point on X.
Add the two scores on the y-axis and plot the resultant point on Y.
Plot the intersection of the new xy point.
6. Draw a directional vector form the origin of the SPACE Matrix through the new
intersection point. This vector reveals the type of strategies recommended for the
organization: aggressive, competitive, defensive, or conservative.

*Note: When a firm’s directional vector is located in the aggressive quadrant (upper-right
quadrant) of the SPACE Matrix, an organization is an excellent position to use its internal
strengths to (1) take advantage of external opportunities, (2) overcome internal weaknesses, and
(3) avoid external threats.

Figure/Table 4. The SPACE Matrix

CONSERVATIVE AGGRESSIVE
(upper left) (upper right)
 Market penetration  Backward, forward, horizontal
 Market development integration
 Product development  Market penetration
 Related diversification  Market development
 Product development
 Diversification (related or unrelated)
DEFENSIVE COMPETITIVE
(lower left) (lower right)
 Retrenchment  Backward, forward, horizontal
 Divestiture integration
 Liquidation  Market penetration
 Market development
 Product development

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 Factors Axis Comparison Strategic
Position
Financial Position (FP) y-upper to competitors Internal
Industry Position (IP) x-right to other industries External
Stability Position (SP) y-lower to other industries External
Competitive Position (CP) x-left to competitors Internal

Figure/Table 5. A SPACE Matrix for a Bank

FINANCIAL POSITION (FP) Ratings
The bank’s primary capital ratio is 7.23 percent, which is 1.23 percentage points 1.0
over the generally required ratio of 6 percent.
The bank’s return on assets is negative 0.77, compared to a bank industry average 1.0
ratio of positive 0.70.
The bank’s net income was 183 million, down 9 percent from a year earlier. 3.0
The bank’s revenues increased 7 percent to 3.46 billion. 4.0
9.0
INDUSTRY POSITION (IP) Ratings
Deregulation provides geographic and product freedom. 4.0
Deregulation increases competition in the banking industry. 2.0
Pennsylvania’s interstate banking law allows the bank to acquire other banks in 4.0
New Jersey, Ohio, Kentucky, the District of Columbia, and West Virginia.
10.0
STABILITY POSITION (SP) Ratings
Less-developed countries are experiencing high inflation and political stability. -4.0
Headquartered in Pittsburgh, the bank historically has been heavily dependent on -5.0
the steel, oil, and gas industries. These industries are depressed.
Banking deregulation has created instability throughout the industry. -4.0
-13.0
COMPETITIVE POSITION (CP) Ratings
The bank provides data processing services for more than 450 institutions in 38 -2.0
states.
Suppergional banks, international banks, and nonbanks are becoming -5.0
increasingly competitive.
The bank has a large customer base -2.0
-9.0
Conclusion:
SP average is -13.0 ÷ 3 = -4.33
CP average is -9.0 ÷ 3 = -3.00
IP average is +10.0 ÷ 3 = 3.33

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FP average is +9.0 ÷ 4 = 2.25
Directional Vector Coordinates: x-axis: -3.00 + (+3.33) = +0.33
y-axis: -4.33 + (+2.25) = -2.08
The bank should pursue Competitive Strategies.

BCG Matrix

BCG is a firm by the name Boston Consulting Group which provides consulting services
to various businesses. They have devised the matrix which helps to carry out a portfolio analysis.

Now portfolio means a portfolio of products by plotting them on a matrix. You can take
decision as to whether we should invest more money into it or whether we should stop producing
that product. All those inferences can be drawn using a BCG matrix. The BCG matrix uses
Relative Market Share of a firm in an industry and the Market Growth. We can prepare this
BCG matrix using two parameters

1. Market Growth Rate is the increase in size or sales observed within a given consumer
group over a specified time frame.

2. Relative market share is the market share in relation to the largest competition.

Figure/Table 6. Four Product Categories in BCG Matrix

Product Categories Issues

1. STAR a product in a market which has a high growth. It
means the market shows a very high growth rate at the
same time the product also has a relatively high market
share meaning the market is booming, the market is
growing very fast in the growing market, it's like a
win-win situation. Because the product has a high
market share, it will generate a lot of cash but we
understood earlier in a product life cycle that when the
market is growing very fast, more and more
competition will come into the market. Many
competitors would find it more attractive once they
come into the business. The firm will have to spend
more money to keep its position intact, so there'll be a

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 lot of spending around marketing. Also to meet the
increasing demand. There must be higher investments
to create new facilities, to increase the capacity. On
one side there is a high revenue or a high cash inflow
and on the other side there is a high cash outflow.

2. CASH COW exists in a market which has a lower growth rate so

again if you go back to the product life cycle there is a
high growth phase and then there is a low growth since
at that phase, the market growth is low but the relative
market share of the product is still high that is called a
cash cow. The reason why it is called a cash cow is
because the market has already saturated, there is a
lower growth, newer competition is not expected, so
the higher spins that you see in the category of star, in
terms of marketing, creating new facilities, new
infrastructure, that is not seen in the cash cow.

3. QUESTION MARK where the market growth is high but the products
relative market share is very low. It's a combination of
a high-growth market and a relatively low market share
because the market is growing very high or at a very
fast pace, it becomes a good opportunity but because
the product itself has a low market, there is a doubt as
to what is to be done with this product If you are
unable to increase your market share or if you're
unable to improve your relative market share then this
product may not generate sufficient profits. The thing
to do with the question mark is if the opportunity is
very attractive, invest some more money increase its
market share and try to move it towards star category.
That is one thing that can be done with the question
mark but if you cannot increase the market share
eventually when the market growth rate also declines
and your share itself is low it falls down into the
category called dog.

4. DOG the relative market share is also low, the market growth
is also low and in the product life cycle we have seen
after the product growth rate subsides, after it becomes

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 mature, eventually it will die down and similar feat
will happen with the dog category unless you can
increase the market share which is very less likely.
Dogs are something which do not provide anything to
the business, they are just lying idle investments.

Examples of BCG Matrix

Let us take some examples of products which are offered by Google and see how they fit into
this matrix.

Today the online video market is growing at a very fast rate because of easily available
internet, because of smart devices. The consumption of videos online is very high, now in a high-
growth market Google's product which is the YouTube has a very high market share. Because it
has a relatively high market share and it is a high growing market, we can categorize it as star as
and when the market becomes more mature, when the growth rate starts falling, this can convert
into a cash cow. As we can see in today's time, search engine is one thing which generates a
significant amount of cash for Google.

Now products such as Google Drive & Google Docs, they are also in a high-growth
market means the market the demand for cloud storage is ever increasing is growing at a very
high rate but the shade of Google in that segment is not that high because companies like
Amazon Web service they have a much larger share in the cloud business. Microsoft still has a
larger market share, so here the product has a lower market share relatively but it's in a high
market and this becomes a question mark. Because it is a question mark Google can either
increase the market share convert it into a star, otherwise gradually it will become a dog and if it
will die down.

If you look at the fourth category, some products of Google like Google Groups which is
not much of relevance today or Orkut which was promoted by Google a social media platform.
From question mark it also became a dog and it was eventually moved out or it was eventually
divested. Once the product moves into this dog category, the only choice available to most of the
businesses is to divest it, to sell it off, collect whatever amount you can collect and put it into
other business rather than continuing a business which is in the dog category.

In this way we can see how different strategies can be used for product which fall in
different categories.

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Strategies based on Matrix

A business can choose one of the four strategies depending on where the product lies.

This strategy is:

Build
Hold
Harvest and
Divest

These are the four actions that a firm can take depending on where the product lies.

The product is lying in this category which is the question mark category, the company
should see whether it can build this product, it can add more investment into the product so that
this product becomes a star. So, build means the converting the question mark into a star
category put on more money increase the market share so that this can be converted to a Star and
because the growth rate already is high and the market share can be improved by investing more
money into marketing, by investing more money into facilities, so if you build the question mark
it can become a star.

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 If you are in the star category, if the product lies in the star category, the objective is to
hold the product. To hold the market, you have to keep it intact or to preserve the market share.
Don't lose out the market share to your competition because if you can maintain the market
share, if you can remain the leader in the market, when the market transfer from a high growth to
a low growth market at that point of time if you have hold the Stars they can become cash cows.

If your product is a cash cow the strategy is to harvest. Harvest meaning taking the
benefits out of the cash cows so you have invested a lot of money converting the question mark
into a star you have waited for a long time, now then it becomes a cash cow. The thing is to
generate more money out of it.

And if your product lies in the dog category, the choice is to divest. Divest meaning sell
off that product or discontinue the product because it is of no use, it will just burn up more cash
for the business rather than creating any further cash.
Depending on the four different categories either if you can build, hole, harvest or divest so
wherever the product lies accordingly the strategies can change.

The BCG matrix is very useful for a portfolio analysis. The management can exactly
identify where the products lie and what is to be done with those products. If it is in a dog
category, you know it has to be divested. If it is in a cash cow category, you know you have to
yield the maximum benefit. If it's in a star category, you know you have to preserve it so such
decisions can be taken easily when you plot the products on a matrix and this is a simple tool to
understand where the different products lie and what the different prospects of those products
are.

Limitations of BCG Matrix

1. Difficult to obtain accurate data

2. Difficult to implement data on the Matrix
3. Higher market shares don’t necessarily mean high profits.
4. Lower market shares don’t mean low profits.
5. Lack of insights for future
6. Assumptions are simplistic and not in line with the dynamic nature of modern businesses.

The first limitation being it's very difficult to get accurate data on the market growth and
also sometimes on the market share and these numbers keep on changing the data is quite
dynamic and given today's business environment, it may not be easy to get those data accurately.
The second thing is it's also very costly to gather the data and also to implement this kind of a
matrix because you will need to put on resources who will carefully analyze the data, who will
carefully analyze your product and put them on to different matrices.

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 The other problem with this matrix is just having a high market share does not mean that
you'll have higher profits. It may be possible that for some companies despite having the largest
market share, they are not able to generate the maximum profit possible because there could be
other operational problems. There could be other financial problems which would result in lesser
profits as a high market share does not necessarily mean high profit.
It also does not mean that a lower market share will definitely have lower profitability, in
some cases even with a lower market share companies can do better and earn higher profits and
this is another limitation of using this matrix alone.

One more limitation of this matrix is it only talks about the current scenario. It does not
really give great insights into what all can be done to improve the future. It just says you can take
certain strategies to improve the future prospects but specifics of what can be done in the future
is not prescribed by this particular matrix.

And also just to use a market share model, it is very simplistic. It's making all
assumptions very simple, it's ignoring the profits part, it's ignoring the cost part, it's ignoring the
past how industries change quickly with the changes in technologies, things may not be really
long-lived so certain assumptions and they may not hold good especially in today's scenario
when we talk about startup companies, we talk about technology firms but things change very
fast. So, such kind of analysis by the time you'd arrive at the result, it may really not be useful
nonetheless it can give you an initial indication of what can be done with different categories of
products.

Grand Strategy Matrix

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How to Develop a Grand Strategy Matrix

A grand strategy matrix can help you plan a strategy for your small business. This
matrix has become the standard for businesses small and large. Develop a grand strategy matrix
by examining your ability to grow rapidly or slowly while evaluating your competitive strengths
and weaknesses.

Setting up Quadrants
You will have four quadrants for your grand strategy matrix. The first represents
strategies for maintaining rapid growth when you have a strong competitive position. The second
offers rapid-growth strategies when you have a weak competitive position. The third provides
strategies that relate to a weak competitive position and slow growth. The final quadrant lists
strategies appropriate to strong competitive attributes with slow market growth.

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Purpose of Your Strategies
The strategies you list in the first quadrant should be those that will maintain your
competitive edge and help you continue to create rapid growth. The strategies in the other three
quadrants represent the actions you would take to get yourself into the best position, which is
quadrant No. 1. You may list the same strategy in several quadrants, but some may appear in
only a single quadrant.

Suggestions for Strategies

Your strategies will be unique to your business, but some suggestions include “increasing
market share, finding new markets, developing new products, selling assets” and “selling the
business.” For example, if your analysis of your business shows you that you are in a weak
competitive position and are experiencing slow growth, you might list “selling assets” and
“liquidation” as ways to get out of your situation. If you find yourself in the quadrant with rapid
growth combined with a weak competitive position, you would list strategies to improve your
competitive abilities, such as “creating new products” and “finding new markets.” Strategies that
might appear in several quadrants can include items such as “forming joint ventures” and
“reducing costs.”

Utilizing Strategies
Your business may move through the four quadrants throughout its life. If you take the
time to develop your grand strategy matrix early in the formation of your business, you will be
ready if you find yourself losing your competitive edge or see growth slowing. Having a list of
possible strategies for each of the four conditions represented by the matrix will help you act
quickly to keep your business growing.

Quadrant 1 – Strong competitive position & Fast market growth

Companies that are located in this first quadrant of the Grand Strategy Matrix usually
have an excellent strategic position. Apart from active and fast growth in the market, they also
have a strong position relative to the competition.
Compared to Ansoff’s growth matrix, such companies would do very well to proceed to
market penetration, market development, and product development. Market penetration is about
using expansion to position oneself even better on the market. For example, by opening new
subsidiaries with the same assortment. Using market development, these companies will be able
to aim at other markets and/or target audiences, increasing their reach. Product development
should not be left out either; a new assortment provides more customers and more returns.
In addition, strategies such as forward, backward, or related integration fit into this
quadrant. Forward integration involves a company taking over the activities of a customer;
backward integration involves taking over the activities of a supplier from the production chain,
and related integration is about taking over the activities from a fellow company from the same

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industry. Even diversification is an option, which involves taking over the activities from a
fellow company from a different industry. Think, for example, of a cotton importer taking over
the tasks of a coffee importer.
The idea behind all the strategies listed above is that companies will focus more on their
own business operations, as well as strengthen their competitive basis. The integration strategies,
however, should never come at the expense of the company’s own core business. It’s wise to
keep thinking about the current competitive advantage, which is why companies should prevent
losing focus of the competitive advantage they have built painstakingly over time.

Quadrant 2 – Weak competitive position & Fast market growth

For companies in this second Grand Strategy Matrix quadrant, it’s a good idea to
seriously evaluate the current approach. Although their growth may be strong and large, their
competitive position is weakening and they are under threat of being pushed out of the market by
other companies. They are not able to compete effectively.
Apart from the market development, market penetration, and product development
mentioned in the previous quadrant, horizontal integration is also highly suitable as a useful
strategy in the second quadrant. Because the market is growing fast, an intensive horizontal
integration strategy helps, in which companies concentrate on attracting activities that form a
nice addition to their current core business. In such a case, a service station may consider
opening a small supermarket in addition to their petrol business, with which they can offer extra
service to their customers.
If horizontal integration is not a possibility, it would be wise to sell off part of the
organisation (or divisions). Decentralisation may be another possibility. In that case, the focus no
longer lies on the whole organisation, but is divided over smaller segments. If the chance of the
competition winning is high, a company may decide to be bought in an acquisition. Otherwise,
the only remaining options will be folding or insolvency.

Quadrant 3 – Weak competitive position & Slow market growth

This is the least favourite quadrant of the Grand Strategy Matrix. For companies, after all,
it means that are faced with vicious competition on the one hand and with a market growth that’s
faltering on the other hand. Only drastic measures, adjustments, and changes will be able to save
such companies and prevent further demise or impending liquidation.
First of all, a wise strategy would be to move to wholesale cost reduction, which in most
cases will result in enormous austerity measures, reorganisation, discontinuation of product
groups, and employees being laid off. Should austerity measures fail to achieve an effect, forms
of diversification may offer a last hope. Despite requiring some investment, spreading the
product range can lead to increased returns. For example, a chemist may consider generating
some additional income by moving into dry cleaning as well. Such cases are referred to as
unrelated diversification. If the chemist decides to sell specific medications, in cooperation with
the pharmacy next door, we are talking about related diversification.

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Should all of the above strategies fail to have an effect, selling or bankruptcy are the only
remaining options.

Quadrant 4 – Strong competitive position & Slow market growth

A strong competitive position is very enjoyable to companies. The slow market growth
offers options for finding creative solutions and creating a new market for products and services.
Diversification, such as mentioned in Ansoff’s growth matrix, is a good option. Offering new
products and/or services on a new market leads to an increase in market growth. For example, a
supermarket will suffer when many consumers choose to have fresh meal boxes delivered and no
longer get their groceries from the shop as a result. To the supermarket, such a product is new.
Offering products online also allows them to reach a new target audience. When the supermarket
chooses to sell fresh meal boxes online, that would be an example of diversification.
Nonetheless, this comes at the cost of a considerable investment. Companies in this Grand
Strategy Matrix quadrant usually have the capacity and the means for this.
Engaging in partnerships in the form of a joint venture is another possible strategy that
fits this Grand Strategy Matrix quadrant. A characteristic feature of such partnerships is that both
companies continue to exist and each of them profits from the other’s strength. The partnership
between KLM and North West Airlines is a good example of this. Their joint venture gives them
an advantage in the form of sharing landing rights, purchasing catering, and sharing overhead
costs.

Market Share
In the first quadrant of the Grand Strategy Matrix, it’s mostly about stimulating
companies to grow fast and maintain their competitive position. In the other three quadrants of
the Grand Strategy Matrix, it’s about achieving the best position and increasing their market
share. On the one hand, this can be done by researching new markets; on the other hand, by
offering new products. It’s up to the board and management to decide on such drastic strategic
choices. The Grand Strategy Matrix gives a good and clear image of both the health and the
future prospects of a company. Nonetheless, one should always take unforeseen factors and
complications in the business world into consideration.

Quantitative Strategic Planning Matrix (QSPM)

Quantitative Strategic Planning Matrix (QSPM) is a high-level strategic management

approach for evaluating possible strategies. Quantitative Strategic Planning Matrix or a QSPM
provides an analytical method for comparing feasible alternative actions. The QSPM
method falls within so-called stage 3 of the strategy formulation analytical framework.
The Quantitative Strategic Planning Matrix or a QSPM approach attempts to objectively
select the best strategy using input from other management techniques and some easy
computations. In other words, the QSPM method uses inputs from stage 1 analyses, matches

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them with results from stage 2 analyses, and then decides objectively among alternative
strategies.

Stage 1 strategic management tools...

The first step in the overall strategic management analysis is used to identify key strategic
factors. This can be done using, for example, the EFE matrix and IFE matrix.

Stage 2 strategic management tools...

After we identify and analyze key strategic factors as inputs for QSPM, we can
formulate the type of the strategy we would like to pursue. This can be done using the stage 2
strategic management tools, for example the SWOT analysis (or
TOWS), SPACE matrix analysis, BCG matrix model, or the IE matrix model.

Stage 3 strategic management tools...

The stage 1 strategic management methods provided us with key strategic factors. Based
on their analysis, we formulated possible strategies in stage 2. Now, the task is to compare in
QSPM alternative strategies and decide which one is the most suitable for our goals.
The stage 2 strategic tools provide the needed information for setting up the Quantitative
Strategic Planning Matrix - QSPM. The QSPM method allows us to evaluate alternative
strategies objectively.
Conceptually, the QSPM in stage 3 determines the relative attractiveness of various
strategies based on the extent to which key external and internal critical success factors are
capitalized upon or improved. The relative attractiveness of each strategy is computed by
determining the cumulative impact of each external and internal critical success factor.

What does a QSPM look like and what does it tell me?
First, let us take a look at a sample Quantitative Strategic Planning Matrix QSPM, see the
picture below. This QSPM compares two alternatives. Based on strategies in the stage 1 (IFE,
EFE) and stage 2 (BCG, SPACE, IE), company executives determined that this company XYZ
needs to pursue an aggressive strategy aimed at development of new products and further
penetration of the market.
They also identified that this strategy can be executed in two ways. One strategy
is acquiring a competing company. The other strategy is to expand internally. They are now
asking which option is the better one.

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(Attractiveness Score: 1 = not acceptable; 2 = possibly acceptable; 3 = probably acceptable; 4 =
most acceptable; 0 = not relevant)
Doing some easy calculations in the Quantitative Strategic Planning Matrix QSPM, we
came to a conclusion that acquiring a competing company is a better option. This is given by
the Sum Total Attractiveness Score figure. The acquisition strategy yields higher score than the
internal expansion strategy. The acquisition strategy has a score of 4.04 in the QSPM shown
above whereas the internal expansion strategy has a smaller score of 2.70.

How to construct a QSPM?

You can see a sample Quantitative Strategic Planning Matrix QSPM above. The left
column of a QSPM consists of key external and internal factors (identified in stage 1). The left
column of a QSPM lists factors obtained directly from the EFE matrix and IFE matrix. The top
row consists of feasible alternative strategies (provided in stage 2) derived from the SWOT
analysis, SPACE matrix, BCG matrix, and IE matrix. The first column with numbers includes
weights assigned to factors. Now let us take a look at detailed steps needed to construct a QSPM.

STEP 1...
Provide a list of internal factors -- strengths and weaknesses. Then generate a list of the
firm's key external factors -- opportunities and threats. These will be included in the left column
of the QSPM. You can take these factors from the EFE matrix and the IFE matrix.

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Step 2...
Having the factors ready, identify strategy alternatives that will be further evaluated.
These strategies are displayed at the top of the table. Strategies evaluated in the QSPM should be
mutually exclusive if possible.

Step 3...
Each key external and internal factor should have some weight in the overall scheme.
You can take these weights from the IFE and EFE matrices again. You can find these numbers in
our example in the column following the column with factors.

Step 4...
Attractiveness Scores (AS) in the QSPM indicate how each factor is important or
attractive to each alternative strategy. Attractiveness Scores are determined by examining each
key external and internal factor separately, one at a time, and asking the following question:
Does this factor make a difference in our decision about which strategy to pursue?
If the answer to this question is yes, then the strategies should be compared relative to
that key factor. The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive,
3 = reasonably attractive, and 4 = highly attractive. If the answer to the above question is no,
then the respective key factor has no effect on our decision. If the key factor does not affect the
choice being made at all, then the Attractiveness Score would be 0.

Step 5...
Calculate the Total Attractiveness Scores (TAS) in the QSPM. Total Attractiveness
Scores are defined as the product of multiplying the weights (step 3) by the Attractiveness Scores
(step 4) in each row.
The Total Attractiveness Scores indicate the relative attractiveness of each key factor and
related individual strategy. The higher the Total Attractiveness Score, the more attractive the
strategic alternative or critical factor.

Step 6...
Calculate the Sum Total Attractiveness Score by adding all Total Attractiveness Scores in
each strategy column of the QSPM.
The QSPM Sum Total Attractiveness Scores reveal which strategy is most attractive.
Higher scores point at a more attractive strategy, considering all the relevant external and
internal critical factors that could affect the strategic decision.

Linking Strategy with Ethics and Social Responsibility

Ethics and social responsibility occupy an important place in our personal value system.
Customer confidence in how business operates has been severely shaken by recent corporate

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scandals and collapses, such as bank failures. Hence it is important for companies to consider
incorporating ethics and social responsibility into their strategic planning. This applies whether a
company is involved with customers one-on-one, or their involvement is indirect, through their
relationship with their clients, like the wholesale food seller, Del Monte.

THE ROLE OF ETHICS IN STRATEGIC PLANNING

Reflecting critically and actively on ethical issues is an obligation of every professional.

Reflecting such ethical content or implications in one’s decisions and actions must be salient in
every aspect of how companies operate.

Ethics ensure that a company achieves its mission, vision, goals, and objectives in such a
manner that they give a company a sense of direction and framework. Ethics ensure guidelines
are created that bind the entire organization into one common thread, govern the action of the
organizational employees, and avoid deviation from the desired strategic path. Ethics ensure that
strategic plan is prepared as per the best interest of all a company’s stakeholders, whether
employees, vendors, customers or even the society in which the organization operates.

According to authors Andre and Velasquez, ethics has two parts. First, it refers to well
based standards of right and wrong behavior. What individuals ought to do, usually in terms of
rights, obligations, and benefits to society, fairness, or specific virtues. Second, it refers to
continually examining our moral beliefs and moral conduct, and striving to live up to these well
based standards (Andre, C, Velesquez, M., 1987).

Recent corporate scandals such as Boeing faces claims that it sold 737 max planes with
dangerous software. It says it is “taking actions to fully ensure the safety of the 737 max”.
Criminal charges have been filed against Goldman Sachs in Malaysia for its role in arranging
$6.5bn of debt for a state-run fund that engaged in fraud. Goldman says it is co-operating with
investigators. (The Economist, April 2019), and the collapse of Wells Fargo (NPR, 2019), have
scarred the business industry. Everyday poor customer service, such as from Dell, Inc. has
brought high levels of frustration to customers (Gizmodo, 2010). All have left customers with
levels of distrust in our businesses, resulting in more scrutiny from regulatory authorities,
government and the public.

Adhering to the highest possible ethical standards, and integrating these ethics into their
strategic planning, can build a good corporate image in front of all the stakeholders of the
organization. Integrating and planning must go beyond compliance issues and reactive
disciplinary policies to actually manage integrity.

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Five Ways a Company can Ensure Ethics is Included in their Strategic Planning:
1. Establish explicit ethical goals and criteria,
2. Demonstrate commitment to ethical goals and criteria,
3. Communicate ethical expectations and train workforce to enact ethical goals and criteria,
4. Assess and monitor employee behavior and decisions, and
5. Maintain on-going proactive integrity continuity management (Valentino, 2007)

Such a strong focus on ethics will ensure that each set of stakeholders will be happy and
assured that strategic plan will address their needs and wants and the organization will act in the
best interest of each stakeholder.

Ethical perspectives can be broadened via understanding the connection between the
corporate strategies with ethics and social responsibility, as well as its implications on the
organization from strategic perspective. It is clear that there is a strategic importance of ethics in
terms of benefiting all the stakeholders of an organization and its importance in the
organization’s day to day operations. Further, the relationship between ethics and the different
components of the strategic plan of the organization, the future of our organizations, the people
they represent, and the wider community can only be strengthened by embedding ethics into the
strategic planning process. Ethics should be central, not peripheral, to the overall management of
the firm.

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Chapter 6: STRATEGY IMPLEMENTATION

THE NATURE OF STRATEGY IMPLEMENTATION

Strategy Implementation is the translation of chosen strategy into organizational action so

as to achieve strategic goals and objectives. Strategy implementation generally impacts the lives
of everyone in an organization. In some situation individuals may not have participated in the
strategy-formulation process at all and may not appreciate or understand the thought that went
into strategy formulation, nor accept the work required for strategy implementation. There may
even be foot dragging or resistance on their part.

Managers and employees who do not understand the business and are not committed to
the business may attempt to sabotage strategy-implementation efforts in hopes that the
organization will return to old ways. That’s may be the reason why less than 10% of strategies
formulated are successfully implemented.

 Successful strategy formulation does not guarantee successful results implementation.

 Strategy implementation varies substantially among different types and sizes of
organizations.

Strategy implementation is the second stage of strategic management after the strategy
formulation. Obviously, this is where the real action takes place in the strategic management
process. This stage is the most demanding part that will require the most input of the
organization’s resources. Participation of the entire organization is essential for the achievement
of objectives and its success as a whole.

Strategy Formulation vs. Strategy Implementation

Strategy Formulation Strategy Implementation

1.Positioning forces before
the action
2.Focus on effectiveness
3.Primarily intellectual
4.Requires good intuitive and
analytical skills
5.Requires coordination
among few people
Managing forces during the
action
Focus on efficiency
Primarily operational
Requires special motivation
and leadership skills
Requires coordination among
many people

Factors that Support Strategy Implementation

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  People- “Do you have enough people to implement the strategies?” and “Do you have the
right people in the organization to implement the strategies?” The commitment of the
people is something that must be secured by the management since they are the
implementers, they have to be fully involved and committed in the tasks that will
implement the strategy. Conduct necessary trainings, seminars, and workshops so that
they will be better equipped and competent.

 Resources- Allocation of resources is one of the basic activities in strategy

implementation. These refer to both financial and non-financial resources that are
available to the organization.

 Structure- The organizational structure must be clear-cut, with the lines of authority and
responsibility defined and underlined in the hierarchy or “chain of command”. Clear
communication is very important among the members of the organization. Those
employees on the lowest tier of the organizational hierarchy must be able to communicate
with their supervisors and top management, and vice versa. They must also know who is
accountable to, and who he is responsible for.

 Systems- What systems, tools, and capabilities are in place to facilitate the
implementation of strategies? Knowledge and understanding of the specific functions of
these systems is needed for the implementation process.

 Culture- Refers to the organizational culture, or the overall atmosphere within the
company. If the organization ensured that the employees are involved in the strategic
management process, definitely the employees feel important and comfortable in their
respective roles.

MANAGEMENT PERSPECTIVES

Almost in all organizations, transition from strategy formulation to strategy

implementation, responsibility shift is a must. Shift in responsibility must be done seamlessly for
the strategy to be executed; if not, problems may arise.

Strategists Division/
(Strategy Formulation) Functional Managers
(Strategy Implementation)

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 In order to avoid the possible problems, as much as possible, strategists must be involved
in strategy implementation. This is same with division and functional managers, they must also
be involved in strategy formulation.
It is a must that managers and employees are involved in the strategy making process as
they are the ones who will be on the field. They will also have the first-hand experience of the
effectiveness or inefficiency of the strategy. Their involvement on the strategy making process
must be unbiased and free from personal interest.
This also goes with the strategists who developed the plan. Strategists must have sincere
personal commitment on implementation. If the strategists lack interest in implementation of
plan, it may be unfavourable to the company as a whole.
The passing of responsibility must be clear and concise. Communicating the new
process, product, technology, and performance, must be clear all throughout the organization,
especially to the managers and employees that will be implementing the plan. This type of top-
down flow of communication is important for creating a bottom-up support.
Management Issues Central to Strategy Implementation

Indicated below are some of the common issues that arise in strategy implementation.
These issues will be further explained throughout the chapter.
 Establishing annual objectives
 Devising policies
 Allocating resources
 Altering existing organizational structure
 Restructuring and Reengineering
 Revising reward and incentive plans
 Minimizing resistance to change
 Matching managers with strategy
 Developing a strategy-supportive culture
 Adapting production/operation processes
 Developing an effective human resource function
 Downsizing and furloughing as needed
 Linking performance and pay to strategies

Example of Strategy Implementation: Starbucks

From the year 2009 to 2010, Starbucks shifted from its old operation process to “Lean
Production/Operations”. Lean Production/Operation is a strategy that Delivers value from
costumer’s perspective. It also eliminates waste and continuously improves processes by
eliminating idle employee time and unnecessary employee motions, such as walking, reaching,
and bending.

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ANNUAL OBJECTIVES
Annual objectives plays critical role in strategy implementation. These should be specific
and measurable statement of what an organization subunit are expected to achieve in
contributing to the accomplishment of the business grand’s strategy. Similar to a long term
objectives, annual objectives should be SMART; Specific, Measurable, Attainable, Realistic and
Timely.

Annual objectives are essential for strategy implementation

 It represents the basis for allocating resources.

 It is a primary mechanism for evaluating managers
 It is a major instrument for monitoring progress towards achieving long-term objectives
 It Establish organizational, divisional, and departmental priorities

Purpose of Annual Objectives

 Guidelines for action, directing, and channeling effects and activities of organization
members
 Source of legitimacy in an enterprise by justifying activities to stakeholders
 Standards of performance
 Important source of employee motivation and identification

Most of the time objectives arestated in generalities, with little operational usefulness.
Annual objectives, such as “toimprove communication” or “to improve performance,” are not
clear, specific, or measurable. Objectives should state quantity, quality, cost, and time and also
be verifiable.Terms and phrases such as maximize, minimize, as soon as possible, and adequate
shouldbe avoided.

Annual objectives should be similar in temperament with employees’ and managers’

values and should be supported by clearly stated policies. It is also important to bind rewards and
sanctions to annual objectives so that employees and managers understand that achieving
objectives is critical to successful strategy implementation. Overemphasis on achieving
objectives can result in undesirable conduct, such as faking the numbers, distorting the records,
and letting objectives become ends in themselves. Managers must be alert to these potential
problems.

Example: How the Annual Objectives plays a vital role in an organization in achieving its
long term objectives

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.

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 Stamus Company will slightly exceed its long-term objective of doubling
companyrevenues between 2010 and 2012.
POLICIES
Policies are designed to guide the behaviour of managers in relation to the pursuit and
achievement of strategies and objectives. Policies are instrument for strategy implementation.
Policy refers "to specific guidelines, methods, procedures, rules, forms, and
administrative practices established to support and encourage work towards stated goals." Most
authors consider procedures and rules to be policies. Procedures can be defined as chronological
steps that must be followed to complete a particular action; rules can be defined as actions that
can or cannot be taken. Neither a procedure nor a rule provides much latitude in decision
making, so some writers do not consider either to be a policy.
Policies and procedures help enforce strategy implementation in several ways:
1. Policy institutionalizes strategy-supportive practices and operating procedures throughout
the organization.
2. Policy reduces uncertainty in repetitive and day-to-day activities in the direction of
efficient strategy execution.
3. Policy limits independent action and discretionary decision and behaviour. Procedures
establish steps how things are to be handled.
4. Policy helps align actions and behaviours with strategy. This minimizes zigzag decisions
and conflicting practices and establishes consistent patterns of action in terms of how the
organization is attempting to make the strategy work.
5. Policy helps to shape the character of the working environment and to translate the
corporate philosophy into how things are done, how people are treated, and what
corporate beliefs and attitudes mean in terms of everyday activities.
6. Policy helps establish a fit between corporate culture and strategy.
Koontz and O'Donnell suggest that the following principles determine the potential
effectiveness of policies in relation to strategy implementation:
 Policies should reflect objectives
The existence of a policy can only be justified if it leads to the achievement of the
organization's objectives.
 Policies should be consistent
Policies which conflict with each other should be avoided.
 Policies should be flexible
In general policies should neither be ignored nor departed from indiscriminately.
The extent to which a policy is mandatory, as opposed to advisory, should be clear.
 Policies should be communicated, taught and understood
It is important to ensure that employees understand the existence and meaning of policies,
and appreciate why they exist.
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  Policies should be controlled
Stated policies can be assessed and controlled as part of any formal planning system and
strategic review.
Policies may be written and formal or unwritten and informal. There are at least seven
advantages to formal written policies:
1. Managers are required to think through the policy's meaning, content, and intended use.
2. The policy is explicit so misunderstandings are reduced.
3. Equitable and consistent treatment of problems is more likely.
4. Unalterable transmission of policies is ensured.
5. Authorization or sanction of the policy is more clearly communicated, which can be
helpful in many cases.
6. A convenient and authoritative reference can be supplied to all concerned with the policy.
7. Indirect control and organizational coordination, key purposes of policies, are
systematically enhanced.
Policies can exist for any functional tasks undertaken by the organization. Moreover,
effective decisions cannot be made without regard to their impact on other areas of the business.
For example, policy of minimizing the inventory may come at the expense of satisfying
customers. Trade-offs are generally required in this process.
Changes in a firm’s strategic direction do not occur automatically. On a day-to-day basis,
policies are needed to make a strategy work. Policies facilitate solving recurring problems and
guide the implementation of strategy.

Broadly defined, policy refers to specific guidelines, methods, procedures, rules, forms,
and administrative practices established to support and encourage work toward stated goals.
Policies are instruments for strategy implementation. Policies set boundaries, constraints, and
limits on the kinds of administrative actions that can be taken to reward and sanction behaviour;
they clarify what can and cannot be done in pursuit of an organization’s objectives.

Examples of Policy Implementation

Carnival’s Paradise

Carnival’s Paradise ship has a no smoking policy anywhere, anytime aboard ship. It is
the first cruiseship to ban smoking comprehensively. Another example of corporate policy
relates to surfing the Web while at work. About 40 percent of companies today do not have a
formal policy preventing employees from surfing the Internet, but software is being marketed
now that allows firms to monitor how, when, where, and how long various employees use the
Internet at work.

Policies let both employees and managers know what is expected of them, thereby
increasing the likelihood that strategies will be implemented successfully. They provide a basis
for management control, allow coordination across organizational units, and reduce the amount
of time managers spend making decisions. Policies also clarify what work is to be done and by
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whom. They promote delegation of decision making to appropriate managerial levels where
various problems usually arise. Many organizations have a policy manual that serves to guide
and direct behaviour.

Wal-Mart

Wal-Mart has a policy that it calls the “10 Foot” Rule, whereby customers can find
assistance within 10 feet of anywhere in the store. This is a welcomed policy in Japan, where
Wal-Mart is trying to gain a foothold; 58 percent of all retailers in Japan are mom-and-pop stores
and consumers historically have had to pay “top yen” rather than “discounted prices” for
merchandise.

Policies can apply to all divisions and departments (for example, “We are an equal
opportunity employer”). Some policies apply to a single department (“Employees in this
department must take at least one training and development course each year”). Whatever their
scope and form, policies serve as a mechanism for implementing strategies and obtaining
objectives. Policies should be stated in writing whenever possible. They represent the means for
carrying out strategic decisions.

Examples of policies that support a company strategy, a divisional objective, and a departmental
objective are presented below.

HIERARCHY OF POLICIES

Company Strategy
Acquire a chain of retail stores to meet our sales growth and profitability objectives.

Supporting Policies
1. “All stores will be open from 8 A.M. to 8 P.M. Monday through Saturday.”
(This policy could increase retail sales if stores currently are open only 40 hours a week.)
2. “All stores must submit a Monthly Control Data Report.”
(This policy could reduce expense-to-sales ratios.)
3. “All stores must support company advertising by contributing 5 percent of their total
monthly revenues for this purpose.”
(This policy could allow the company to establish a national reputation.)
4. “All stores must adhere to the uniform pricing guidelines set forth in the Company
Handbook.”
(This policy could help assure customers that the company offers a consistent product in
terms of price and quality in all its stores.)

Divisional Objective
Increase the division’s revenues from $10 million in 2009 to $15 million in 2010.

Supporting Policies

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 1. “Beginning in January 2010, each one of this division’s salespersons must file a
weekly activity report that includes the number of calls made, the number of miles
travelled, the number of units sold, the dollar volume sold, and the number of new
accounts opened.”
(This policy could ensure that salespersons do not place too great an emphasis in certain
areas.)
2. “Beginning in January 2010, this division will return to its employees 5 percent of its
gross revenues in the form of a Christmas bonus.”
(This policy could increase employee productivity.)
3. “Beginning in January 2010, inventory levels carried in warehouses will be decreased
by 30 percent in accordance with a just-in-time (JIT) manufacturing approach.”
(This policy could reduce production expenses and thus free funds for increased
marketing efforts.)

Production Department Objective

Increase production from 20,000 units in 2009 to 30,000 units in 2010.

Supporting Policies
1. “Beginning in January 2010, employees will have the option of working up to 20 hours
of overtime per week.”
(This policy could minimize the need to hire additional employees.)
2. “Beginning in January 2010, perfect attendance awards in the amount of $100 will be
given to all employees who do not miss a workday in a given year.”
(This policy could decrease absenteeism and increase productivity.)
3. “Beginning in January 2010, new equipment must be leased rather than purchased.”
(This policy could reduce tax liabilities and thus allow more funds to be invested in
modernizing production processes.)

Examples of issues that may require a management policy are presented below.

Issues That May Require a Management Policy

 To offer extensive or limited management development workshops and seminars

 To centralize or decentralize employee-training activities
 To recruit through employment agencies, college campuses, and/or newspapers
 To promote from within or to hire from the outside
 To promote on the basis of merit or on the basis of seniority
 To tie executive compensation to long-term and/or annual objectives
 To offer numerous or few employee benefits
 To negotiate directly or indirectly with labor unions
 To delegate authority for large expenditures or to centrally retain this authority
 To allow much, some, or no overtime work
 To establish a high- or low-safety stock of inventory
 To use one or more suppliers
 To buy, lease, or rent new production equipment
 To greatly or somewhat stress quality control

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  To establish many or only a few production standards
 To operate one, two, or three shifts
 To discourage using insider information for personal gain
 To discourage sexual harassment
 To discourage smoking at work
 To discourage insider trading
 To discourage moonlighting
MANAGING CONFLICT

This can be defined as the disagreement between two parties. Establishing Objectives,
plans and strategies can lead to conflict because of different perceptions and opinions. This is
unavoidable in any organization. It is important that conflict is managed before it leads to
dysfunction, however, conflict is not bad all the time. Lack of conflict on an organization means
that there is irrelevance and boredom on the job the employee have.

Having conflict often helps managers to find the problem, and definitely look for a
solution. There are several approaches in solving conflicts, they are classified in three categories:
avoidance, defusion, and confrontation.

Avoidance includes actions that ignores the problem and hopes that the problem solves
itself or physically separating the conflicting individuals. Defusion can include playing down
differences between conflicting parties while accentuating the similarities to arrive to a
compromise. Confrontation is the exchange of views of both parties so that each can have a view
of one’s opinion.

OTHER MANAGEMENT ISSUES

Allocating Resources

Allocation of resources sets the plan based on the annual objectives of the company.
Resource allocation allows the company to allocate its assets to priorities indicated on the annual
objectives of the company.

There are four different types of resources; financial, physical, human, and technological.
Due to personal agendas inside the company, some resources are inefficiently allocated.
Overprotection of resources, great emphasis on short-run financial criteria, organizational
politics, vague strategy targets, reluctance to take risks, and lack of sufficient knowledge are
some of the specific hindrances that prohibit the effective allocation of resources.
Altering of Existing Organizational Structure

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 Some strategies, require new organizational structures. These changes mainly has two
reasons. First, it decides how an objective or policy will be established. Second, structure
decides, how a resource will be allocated. With this, Alfred Chandler found a particular structure
sequence that organizations can base their strategies.
Alfred Chandler’s Strategy Structure Relationship

This cycle shows that if there are new strategies that are formulated, new administrative
problems will definitely arise, as a result, organizational performance declines. To answer this
dilemma, a company must establish a new organizational structure and organizational
performance improves. This sequence definitely continues.
There’s no perfect neither optimal organizational structure. Below are some of the
symptoms of an ineffective organizational structure.
Symptoms of an Ineffective Organizational Structure
1. Too many levels of management
2. Too many meetings attended by too many people
3. Too much attention being directed toward solving interdepartmental conflicts
4. Too large span of control
5. Too many unachieved objectives
6. Declining corporate or business performance
7. Losing ground to rival firms
8. Revenue and/or earnings divided by number of employees and/or number of
managers is low compared to rival firms
In examining a company’s structural change, we can look into it by focusing on the basic
types of organizational structure: functional, divisional by geographic area, divisional by
product, divisional by customer, divisional process, strategic business unit (SBU), and matrix.
 Functional Structure
A company, divided its structures depending on the function of a specific
department. An example of this a university. A university may divide its departments
like: student relations department, alumni relations, accounting department, finance
department and such. This type of structure is commonly used due to its
inexpensiveness, specialization of labour, utilization of talent, less elaborate control
systems, and rapid decision making.
This organizational structure have its flaws as well, accountability is forced to the
top management, delegation is not encouraged, minimizes career development, low
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 employee/ manager morale, inadequate planning for products and markets, narrow
thinking, and communication problems.
 The Divisional Structure
This structure is divided by four types, divisional by geographic area, divisional
by product, divisional by customer, and divisional by process. This is also called the
decentralized structure.
In this structure, functional activities are done separately and centrally and in each
separate divisions. This is the common set-up in banks. A bank may have one central
office but has separate managements in different divisions.
Accountability on this type of structure is clear. It also allows local control on
situations, creates more career development chances, promotes delegation of authority,
leads to competitive environment between the employees, and allows niche markets per
division.
However, this structure also has its disadvantages. Compared to the functional
structure, divisional is costlier. It has duplication of functional activities, requires skilled
management force and elaborate control system, competition among divisions can
become intense, limited idea sharing, and unfair treatment among divisions.

 Strategic Business Unit

The SBU structure groups similar divisions into strategic business units that
directly reports to a senior executive who then reports to the chief executive officer.
This structure improves the communication of same level managements that help in
implementing different strategies.
Two disadvantages of this type of structure is that it’s often more costly due to the
salaries of more managers and the role of the group vice president is often vague.
 Matrix
This type of structure is the most complex of all designs. It depends on both the
vertical and horizontal management for the flows of authority and command. Advantages
of this structures include clear project objectives, clear work results, project shutdown is
easy, use of special resources can be easily facilitated, and functional resources are
shared instead of being duplicated.
Disadvantages of this model is that it requires an excellent floe of communication.
It’s costly due to the fact that it has more manager compared to other structures. It also
doesn’t have unity of command, has more lines for budget authority and punishment.
And most important, it requires mutual trust.
Restructuring and Reengineering

Restructuring

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 Restructuring deals with the reduction of the size of the firm. It can be done by
reducing the number of employees, number of division or units, or hierarchical levels of
the company. This happens when a company starts to benchmark itself to the industry
leaders. Its primary benefit is of course, cost reduction; however, the downside of this
one is reduced employee commitment, creativity, and trauma due to employee layoffs.
Reengineering
In this process, a company uses information technology to break down functional
barriers and create work systems based on its business processes, products, or outputs
rather than on functions and inputs.

Revising Rewards and Incentive Programs

Rewards that serve as a source of motivation to employees must also be provided. This
enables them to comply with the needed change and minimize resistance. The company may
either provide pay-for-performance plans, flexibility in compensation, dual bonus systems and
profit sharing.
Managing Resistance to Change

This is the greatest threat to successful strategy implementation. Most of the time,
changes starts to raise anxiety and fear to employees. And, as a result, employees may start
sabotaging production machines, absenteeism, and unwillingness to cooperate.
To answer this, there are three strategies that a manager can use: force change strategy
(giving orders and enforcing them in a fast manner), educative change strategy (presents
information and convinces people that change is needed), and rational/ self-interest strategy
(convinces people that change is for their personal advantage, most effective).
Creating Strategy-Supportive Culture

In creating new strategies, strategists, must strive to preserve, emphasize, and build upon
aspects of an existing culture that support the new strategies. Weak linkages between strategic
management and organizational culture can jeopardize over-all performance and success. Below
are ways and means for altering an organization’s culture.

1. Recruitment
2. Training
3. Transfer
4. Promotion
5. Restructuring
6. Reengineering
7. Role modelling
8. Positive reinforcement

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 9. Mentoring
10. Revising mission and/or vision
11. Redesigning physical space/facades
12. Altering reward system
13. Altering organizational policies/procedures/practices
Production/Operation Concerns

Production processes typically constitute more than seventy percent of the firm’s total
assets. Some of the issues that may arise on this field are decisions on plant size, inventory and
inventory control, quality control, cost control, and technological control. On way to answer this
issue is employee cross-training. In this way, manpower can be utilized and can yield in less cost
with higher efficiency. This can also help employees understand the business as a whole.

Human Resources Concern

As changes happen, human resources concern will also arise. Manpower is the
companies’ best asset, that’s why providing them with incentives and plans is a must for every
company undergoing change.To answer these, human resources must develop performance
incentives that clearly link performance and pay to strategies. Some of these are Employee Stock
Ownership Plans (ESOPs, an employee plan wherein employees purchase stocks from the
company), child care policies, and work-life balance.

OTHER FUNCTIONAL ISSUES

Marketing Issues

Countless marketing variables affect the success or failure of strategy implementation,

and the scope of this text does not allow us to address all those issues. Some examples of
marketing decisions that may require policies are as follows:

1. To use exclusive dealerships or multiple channels of distribution

2. To use heavy, light, or no TV advertising
3. To limit (or not) the share of business done with a single customer
4. To be a price leader or a price follower
5. To offer a complete or limited warranty
6. To reward salespeople based on straight salary, straight commission, or a
combinationsalary/commission
7. To advertise online or not

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 A marketing issue of increasing concern to consumers today is the extent to which
companies can track individuals’ movements on the Internet—and even be able to identify an
individual by name and e-mail address. Individuals’ wanderings on the Internet are no longer
anonymous, as many persons still believe.

Advertising Media

Recent research by Forrester Research reveals that people ages 18 to 27 spend more time
weekly on the Internet than watching television, listening to the radio, or watching DVDs or
VHS tapes.The larger your audience grows, the broader their preferences, needs, and opinions
become, which can put your marketing message at risk for being irrelevant to a large group of
people. This is why segmenting your target market is crucial.

The companies are rapidly coming to the realization that social networking sites and
video sites are better means to reaching their costumers than spending so many marketing
expenses on traditional yellow pages or television, magazine, radio or newspaper ads. Television
viewer are passive viewers of ads whereas internet user take an active role in choosing what to
look at.

Market Segmentation

Two variables are of central importance to strategy implementation: market segmentation

and product positioning. Market segmentation and product positioning rank as marketing’s most
important contributions to strategic management. Market segmentation is widely used in
implementing strategies, especially for small and specialized firms. Market segmentation can be
defined as the subdividing of a market into distinct subsets of customers according to needs and
buying habits

Important of Market Segmentation

 It is required to successfully implement market development, product
development, market penetration, and diversification strategies
 It allows a firm to operate with limited resources
 It enables small firms to compete with large firm

The importance of market segmentation is that it allows a business to precisely reach a

consumer with specific needs and wants. In the long run, this benefits the company because they
are able to use their corporate resources more effectively and make better strategic marketing
decision.

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 Market Segmentation decisions
Directly affect marketing mix variables

Product Positioning

After markets have been segmented so that the firm can target particular customer
groups, the next step is to find out what customers want and expect. This takes analysis and
research. A severe mistake is to assume the firm knows what customers want and expect.
Countless research studies reveal large differences between how customers define service and
rank the importance of different service activities and how producers view services. Many firms
have become successful by filling the gap between what customers and producers see as good
service. What the customer believes is good service is paramount, not what the producer believes
service should be.

Identifying target customers to focus marketing efforts on sets the stage for deciding how
to meet the needs and wants of particular consumer groups. Product positioning is widely used
for this purpose. Positioning entails developing schematic representations that reflect how your
products or services compare to competitors’ on dimensions most important to success in the
industry. The following steps are required in product positioning:

1. Select key criteria that effectively differentiate products or services in the industry.
2. Diagram a two-dimensional product-positioning map with specified criteria on each
axis.
3. Plot major competitors’ products or services in the resultant four-quadrant matrix.
4. Identify areas in the positioning map where the company’s products or services could
be most competitive in the given target market.
5. Develop a marketing plan to position the company’s products or services
appropriately.

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Examples of Product-Positioning Maps

Finance/Accounting Issues

In this section, we examine several finance/accounting concepts considered to be central

to strategy implementation: acquiring needed capital, developing projected financial statements,
preparing financial budgets, and evaluating the worth of a business. Some examples of decisions
that may require finance/accounting policies are these:

1. To raise capital with short-term debt, long-term debt, preferred stock, or common stock
2. To lease or buy fixed assets
3. To determine an appropriate dividend pay-out ratio
4. To use LIFO (Last-in, First-out), FIFO (First-in, First-out), or a market-value
accounting approach
5. To extend the time of accounts receivable
6. To establish a certain percentage discount on accounts within a specified period of
time
7. To determine the amount of cash that should be kept on hand

Acquiring Capital to Implement Strategies

Successful strategy implementation often requires additional capital. Besides net profit
from operations and the sale of assets, two basic sources of capital for an organization are debt
and equity. Determining an appropriate mix of debt and equity in a firm’s capital structure can
be vital to successful strategy implementation.

Debt vs. Equity DecisionsEPS/EBIT analysis

An Earnings Per Share/Earnings Before Interest and Taxes (EPS/EBIT) analysis is the
most widely used technique for determining whether debt, stock, or a combination of debt and
stock is the best alternative for raising capital to implement strategies. This technique involves an

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examination of the impact that debt versus stock financing has on earnings per share under
various assumptions as to EBIT.

XYZ Company
Capital needed 100 million
EBIT Range 20 to 50 million
Interest Rate 5%
Tax Rate 30%
Stock Price 50.00
Shares Outstanding 500 million

EPS-EBIT Analysis
XYZ Company
100% Debt 100% Stock 50/50 Debt/Stock Combo
EBIT 20,000,000.00 40,000,000.00 20,000,000.00 40,000,000.00 20,000,000.00 40,000,000.00
Interest 5,000,000.00 5,000,000.00 0 0 2,500,000.00 2,500,000.00
EBT 15,000,000.00 35,000,000.00 20,000,000.00 40,000,000.00 17,500,000.00 37,500,000.00
Taxes 4,500,000.00 10,500,000.00 6,000,000.00 12,000,000.00 5,250,000.00 11,250,000.00
EAT 10,500,000.00 24,500,000.00 14,000,000.00 28,000,000.00 12,250,000.00 26,250,000.00
Shares 500,000,000.00 500,000,000.00 502,000,000.00 502,000,000.00 501,000,000.00 501,000,000.00
EPS 0.0210 0.049 0.0279 0.056 0.0245 0.0523

Conclusion: The best financing alternative is 100% stock because the EPS values are largest; the
worst financing alternative is 100% debt because the EPS values are lowest.

Projected Financial Statements

Projected financial statement analysis is a central strategy- implementation technique

because it allows an organization to examine the expected results of various actions and
approaches.This type of analysis can be used to forecast the impact of various implementation
decisions

Steps in Preparing Projected Financial Statements:

1. Prepare income statement before balance sheet (forecast sales)
2. Use percentage of sales method to project CGS & expenses
3. Calculate projected net income
4. Subtract dividends to be paid from net income and add remaining to retained
earnings
5. Project balance sheet items beginning with retained earnings
6. List comments (remarks) on projected statements

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 X
Financial Budget Projecte

PROJECTED
A financial budget is a document that details how funds will be obtained and spent for a
specified period of time. Annual budgets are most common, although the period of time for a
budget can range from one day to more than 10 years. Fundamentally, financial budget ing is a
method for specifying what must be done to complete strategy implementation successfully.
Financial budgeting should not be thought of as a tool for limiting expenditures but rather as a
method for obtaining the most productive and profitable use of an organization’s resources.
Financial budgets can be viewed as the planned allocation of a firm’s resources based on
forecasts of the future.

Types of Budgets

 Cash Budget
Cash budget is a budget or plan of expected cash receipts and disbursements
during the period. These cash inflow and outflows include revenue collected, expenses
paid, and loans receipts and payments. In other words, a cash budget is an estimated
projection of the company’s cash position in the future.

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  Operating Budget
Operating Budgetan estimate of the income and expenditure of a company or
organization over asset period. It helps in keeping a track of the income and expenses. It
also controls the expenses while it also encourage working hard and achieving the
ambitious target of sales.

 Sales Budget
Sales Budgetis management’s estimate of sales for a future financial period. A
business uses sales budgets to set department goals, estimate earnings and forecast
production requirements.

 Profit Budget
Profit Budget a planned financial forecast for the net income of a business. A
manager in charge of projecting the future financial performance of a company might
produce a profit budget in order to provide a reasonable estimate of projected net revenue
that will permit the company and its shareholders to assess how well it is attaining its
profitability goals.

 Factory Budget/ Manufacturing Budget

Factory Budget/ Manufacturing Budget is a set of three budgets that estimate the
cost of direct materials, direct labour, and overhead for the number of units predicted to
be produced in the production budget. In other word, manufacturing budget estimates
how much it will cast the company to produce the number of products included the
production budget.

 Capital Budget
Capital Budget a budget allocating money for the acquisition or maintenance of
fixed asset such as land, building and equipment.

 Expenses Budget
Expenses Budget or expenditure budget helps businesses track purchases and
limit operating costs to the lowest possible amount.

Evaluating the Worth of a Business

All the various methods for determining a business’s worth can be grouped into three
main approaches:

What a firm owns, What a firm earns, or What a firm will bring in the market.

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 Business evaluations are becoming routine in many situations. Businesses have many
strategy-implementation reasons for determining their worth in addition to preparing to be sold
or to buy other companies.

A business evaluation is an analysis and review of the entire business as a whole. It is

conducted to determine the overall standing and operation of a business before it is sold by the
owner to a potential interested buyer

Approach in Evaluating the Worth of a Business

1. Determining its net worth or stockholders’ equity

Net worth represents the sum of common stock, additional paid-in capital, and
retained earnings. After calculating net worth, add or subtract an appropriate amount for
goodwill, overvalued or undervalued assets, and intangibles. Whereas intangibles include
copyrights, patents, and trademarks, goodwill arises only if a firm acquires another firm
and pays more than the book value for that firm.

2. To measuring the value of a firm grows out of the belief that the worth of any
business should be based largely on the future benefits its owners may derive
through net profits.
A conservative rule of thumb is to establish a business’s worth as five times the
firm’s current annual profit.

3. Price-earnings ratio method.

To use this method, divide the market price of the firm’s common stock by the
annual earnings per share and multiply this number by the firm’s average net income for
the past five years.

4. Outstanding shares method.

To use this method, simply multiply the number of shares outstanding by the
market price per share and add a premium. The premium is simply a per-share dollar
amount that a person or firm is willing to pay to control (acquire) the other company.

Research and Development (R&D) Issues

Research and development (R&D) personnel can play an integral part in strategy
implementation. These individuals are generally charged with developing new products and
improving old products in a way that will allow effective strategy implementation.

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 R&D policies can enhance strategy implementation efforts to:
1. Emphasize product or process improvements.
2. Stress basic or applied research.
3. Be leaders or followers in R&D.
4. Develop robotics or manual-type processes.
5. Spend a high, average, or low amount of money on R&D.
6. Perform R&D within the firm or to contract R&D to outside firms.
7. Use university researchers or private-sector researchers.

Three major R&D approaches for implementing strategies.

1. To be the first firm to market new technological products.
2. To be an innovative imitator of successful products, thus minimizing the risks and
costs of start-up.
3. To be a low-cost producer by mass-producing products similar to but less expensive
than products recently introduced.

Management Information Systems (MIS) Issues

Having an effective management information system (MIS) may be the most important
factor in differentiating successful from unsuccessful firms.

A good information system can allow a firm to reduce costs. For example, online orders
from salespersons to production facilities can shorten materials ordering time and reduce
inventory costs. Direct communications between suppliers, manufacturers, marketers, and
customers can link together elements of the value chain as though they were one organization.
Improved quality and service often result from an improved information system.

Management Information Systems (MIS) Function

 Information collection, retrieval, and storage

 Keeping the managers informed
 Coordination of activities among divisions
 Allows firm to reduce costs

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Chapter 7: STRATEGY EVALUATION

OVERVIEW TO STRATEGY REVIEW, EVALUATION AND CONTROL

Strategy Evaluation (sometimes called differently like Review, Monitoring and Control)
is the final phase of Strategic management. It consists of analysing all the factors (internal and
external) that affect the organization’s overall performance. It is also done to identify the needed
corrective actions and adjustments to ensure the organization’s future. It is also said that this is
the organization’s trigger point for deciding whether to continue or change the organization’s
vision, objectives, strategy, and its way of executing the strategy.

Why do we need strategy evaluation in an organization?

Strategy evaluation is important because organizations face dynamic environments in

which key external and internal factors often change quickly and dramatically.

Maintaining a competitive advantage is much easier years in the past where product life
cycles were longer, product development cycles were longer, technological advancement was
slower, change occurred less frequently, there were fewer competitors, foreign companies were
weak, and there were more regulated industries in other words the internal and external key
factors are less dynamic.

An organization’s performance need to be measured so that the management can

understand if the firm’s strategic plans are working. Every plan and actions that was made by the
organization needs to be monitored whether or not the action is accomplishing what it was
designed to.

For example, students are given standardized tests to see if they have learned what they
were supposed to learn and the results are used to assess the effectiveness of education at all
levels. In business, measurement is also a fact of life and that is the reason why firms make
strategic plans in order to guide them to be successful.

The Process of Strategy Evaluation

There are three activities included in strategy evaluation they are:

 Examine the underlying bases of a firm’s strategy.

This activity requires re-examining internal and external factors like how our competitors
reacted to our strategy, what moves they do as preventive action, are they threatened, alarmed, or
they have no reactions at all. As for internal factor does the strategy added strengths and

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corrected weaknesses or not. It is very important to monitor everything that has impact in the
organization.

 Compare expected to actual results.

It is important to meet the plan’s expected outcome to consider if the plan is successfully
served its purpose or not. By comparing the actual results of a plan to the expected results will
show where the plan’s weakness is or where does it go wrong to make corrective actions.

 Identify corrective actions to ensure that performance conforms to plans.

The final activity of strategy evaluation process is determining the need for corrective
actions. In this phase of evaluation the managers must decide what to do when there were errors
found in the plan or the main purpose of the plan doesn’t meet, managers must carefully asses
the reasons why and take corrective actions. Moreover, checking the standards periodically is
needed to ensure that the standards and the associated performance measures are still relevant for
the future.

MEASURING ORGANIZATIONAL PERFORMANCE

This activity includes
 Comparing expected results to actual results (Criteria that predict results may be more
important than those that reveal what already has happened)
 Investigating deviations from plans
 Evaluating individual performance (Criteria for evaluating strategies should be
measurable and easily verifiable)
 Examining progress being made toward meeting stated objectives. (Both long-term &
annual objectives are commonly used in this process)

What is Organizational Performance?

 Performance – the end result of an activity
 Organizational Performance – accumulated end results of all organization’s work
processes and activities.

A company’s actions need to be measured so that managers can understand if the firm’s
strategic plans are working. Any action in a plan should be designed so that the people
performing the action and the manager who is supervising employees can understand whether or
not the action is accomplishing what it was designed to. You have been living in this sort of
framework all of your life. For many life goals, standards exist to measure achievements.
For example, students are given standardized tests to see if they are learning what they
are expected to and the results are used to assess the effectiveness of education at all levels.In
business, MEASUREMENT is also a fact of life. Investors decide whether or not to invest in a
particular company based on its performance, and publicly held companies are required to

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disclose their financial performance so investors can make informed decisions.So the overall
performance of a business is often defined by its financial measures, but how do they make sure
their financial performance will make investors happy? Strategy. Firms make strategic plans in
order to be successful.

Steps to effectively measure organizational performance:

1.  Be clear on the direction

There are many ways to measure organizational performance and determining the
appropriate tool to use for your organization or department comes from first understanding
“why” your department or organization exists. An organization’s vision, mission, values, and
strategic plan can be helpful in understanding the purpose of the organization. Ask yourself:
What is the purpose of our organization or department? What are we really trying to accomplish?
Drill it down to a few words. The key to organizational performance is to first be crystal clear on
where you are trying to go.

2. Set SMART goals

Once you know where you are going, it’s time to set some goals to strive to achieve in
order to meet the purpose of the organization. At some point in your career, you probably learned
about SMART goals, so this is a quick reminder.  Goals should be set to assure they meet these
five basic criteria:

The “M” in SMART goals

is also about measurement.

3.  Determine what is critical to measure.

For each of these SMART goals, be clear you have a measure available to assess
performance or create a meaningful measure for this purpose.  Without these critical measures,
you will have no idea if you are better off this year than you were last year or whether those
“improvements” you made actually improved performance. Also, don’t make the big mistake to
over-measure. Many organizations spend loads of time measuring everything possible. All the
employee’s efforts and leadership’s time is spent trying to understand all the measurement

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instead of working on improving the baseline performance. Measure the critical determinants to
get to the desired destination and nothing else.

4. Implement changes and measure outcomes.

Once you know where you are going, have SMART goals to get you there, and clearly
know how to measure this performance, it is time to determine what you need to do to achieve
these goals. What are the changes you can make (measuring as you go) to improve performance
in the organization – to achieve that ultimate organizational purpose and direction? When the
appropriate measurement components are in place, you can move quickly with finding changes
that work because you can assess the performance each step of the way (via the measurement
tools) and make rapid adjustments to the changes to improve performance.

5. Ensure everything that is measured ties back to the overarching organizational goals. 
Adjust measures as needed.
Just because a measure worked for you last year, does not mean it is the right measure or
goal this year. Measures should be looked at regularly and adjusted as appropriate. As the
direction of the organization and the goals change, the measures should also. As the
organizational performance improves, some measures may become obsolete and others become
important. Continue to use a critical eye to ensure that the goals, and therefore measures, tie to
the overall purpose of the organization.  When they don’t, throw them out and start fresh.

Why Is Measuring Organizational Performance Important?

Managers need to understand the factors that contribute to high organizational

performance.

1. BETTER ASSET MANAGEMENT

Asset Management - process of acquiring, managing, renewing and disposing of assets
Design business models to take advantage of assets

2. INCREASED ABILITY TO PROVIDE CUSTOMER VALUE - must monitor value

obtained by customers. Customers will seek other sources of supply if value is not
obtained.

3. IMPACT ON ORGANIZATIONAL REPUTATION – strong reputation leads to

greater consumer trust and ability to command premium pricing.

4. IMPROVED MEASURES OF ORGANIZATIONAL KNOWLEDGE

Organizational knowledge – knowledge created by collaborative information sharing and
social interaction leading to appropriate action.

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THE BALANCED SCORECARD
To develop a more predictive set of organization performance measures, Professor Robert
Kaplan and Professor David Norton of Harvard University developed a tool called the “balanced
scorecard.” Using the scorecard helps managers resist the temptation to fixate on financial
measures and instead monitor a diverse set of important measures. Indeed, the idea behind the
framework is to provide a “balance” between financial measures and other measures that are
important for understanding organizational activities that lead to sustained, long-term
performance. The balanced scorecard recommends that managers gain an overview of the
organization’s performance by tracking a small number of key measures that collectively reflect
four dimensions:
 FINANCIAL FOCUS
Financial measures of performance relate to organizational effectiveness and
profits. Examples include financial ratios such as return on assets, return on equity, and
return on investment. Other common financial measures include profits and stock price.
Such measures help answer the key question “How do we look to shareholders?” Such
measures have long been of interest to senior management and investors.
Financial performance measures are commonly articulated and emphasized within
an organization’s annual report to shareholders. To provide context, such measures
should be objective and be coupled with meaningful referents, such as the firm’s past
performance. For example, Starbucks’s 2009 annual report highlights the firm’s
performance in terms of net revenue, operating income, and cash flow over a five-year
period.

 CUSTOMER FOCUS
Customer measures of performance relate to customer attraction, satisfaction, and
retention. These measures provide insight to the key question “How do customers see
us?” Examples might include the number of new customers and the percentage of repeat
customers.
Starbucks realizes the importance of repeat customers and has taken a number of
steps to satisfy and to attract regular visitors to their stores. For example, Starbucks
rewards regular customers with free drinks and offers all customers free Wi-Fi
access. Starbucks also encourages repeat visits by providing cards with codes for free
iTunes downloads. The featured songs change regularly, encouraging frequent repeat
visits.

 INTERNAL BUSINESS PROCESS FOCUS

Internal business process measures of performance relate to organizational
efficiency. These measures help answer the key question “What must we excel at?”
Examples include the time it takes to manufacture the organization’s good or deliver a

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 service. The time it takes to create a new product and bring it to market is another
example of this type of measure.
Organizations such as Starbucks realize the importance of such efficiency
measures for the long-term success of its organization, and Starbucks carefully examines
its processes with the goal of decreasing order fulfillment time. In one recent example,
Starbucks efficiency experts challenged their employees to assemble a Mr. Potato Head
to understand how work could be done more quickly. The aim of this exercise was to
help Starbucks employees in general match the speed of the firm’s high performers, who
boast an average time per order of twenty-five seconds.

 LEARNING AND GROWTH FOCUS.

Learning and growth measures of performance relate to the future. Such measures
provide insight to tell the organization, “Can we continue to improve and create value?”
Learning and growth measures focus on innovation and proceed with an understanding
that strategies change over time. Consequently, developing new ways to add value will be
needed as the organization continues to adapt to an evolving environment. An example of
a learning and growth measure is the number of new skills learned by employees every
year.
One way Starbucks encourages its employees to learn skills that may benefit both
the firm and individuals in the future are through its tuition reimbursement program.
Employees who have worked with Starbucks for more than a year are eligible. Starbucks
hopes that the knowledge acquired while earning a college degree might provide
employees with the skills needed to develop innovations that will benefit the company in
the future. Another benefit of this program is that it helps Starbucks reward and retain
high-achieving employees.

TAKING CORRECTIVE ACTIONS

The final step in the control process is determining the need for corrective action.
Managers can choose among three courses of action:
1. They can do nothing
2. They can correct the actual performance; or
3. They can revise the standard

Maintaining the status quo if preferable when performance essentially matches the
standards. When standards are not met, managers must carefully assess the reasons why and take
corrective action. Moreover, the need to check standards periodically to ensure that the standards
and the associated performance measures are still relevant for the future.
The final phase of controlling process occurs when managers must decide action to take
to correct performance when deviations occur. Corrective action depends on the discovery of
deviations and the ability to take necessary action. Often the real cause of deviation must be

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found before corrective action can be taken. Causes of deviations can range from unrealistic
objectives to the wrong strategy being selected achieve organizational objectives. Each cause
requires a different corrective action. Not all deviations from external environmental threats or
opportunities have progressed to the point a particular outcome is likely, corrective action may
be necessary.

Three Choices of Corrective Actions:

1. Normal mode Follow a routine, no crisis approach; this take more time.
2. As hoc crash mode Saves time by speeding up the response process, geared to the
problem ad hand.
3.Preplanned crisis mode Specifies a planned response in advance; this approach lowers the
response time and increases the capacity for handling strategic surprises.

Five General Areas for Corrective Actions:

1. Revise the Standards. It is entirely possible that the standards are not in line with
objectives and strategies selected. Changing an established standard usually is necessary
if the standards were set too high or to low are the outset. In such cases it's the standard
that needs corrective attention not the performance.

2. Revise the Objective Some deviations from the standard may by justified because of
changes in environmental conditions, or other reasons. In these circumstances, adjusting
the objectives can y much more logical and sensible then adjusting performance.

3. Revise the Strategies Deciding on internal changes and taking corrective action may
involve changes in strategy. A strategy that was originally appropriate can become
inappropriate during a period because of environmental shifts.

4. Revise the Structure, System or Support The performance deviation may by caused by
an inadequate organizational structure, systems, or resource support. Each of these factors
is discussed elsewhere in this chapter, or other part of this thesis.

5. Revise Activity The most common adjustment involves additional coaching by

management, additional training, more positive incentives, more negative incentives,
improved scheduling, compensation practices, training programs, the redesign of jobs or
the replacement of personnel.

Managers can also attempt to influence events or trends external to itself through
advertising or other public awareness programs. In such case, the changes should be made only
after the most intense scrutiny.

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 Management must remember that adjustments in any of the above areas may require
adjustments in one or more of the other factors. For example, adjusting the objectives is likely to
require different strategies, standards, resources, activities, and perhaps organizational structure
and systems.

CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM

A good evaluation system must possess various qualities. It must meet several basic
requirements to be effective. First strategy evaluation activities must be economical; too much
information can be just bad as too little information; too many controls can do more harm than
good.
1. Strategy valuation activities also should be meaningful; they should
specifically relate to a firm’s objectives. They should provide managers with
useful information about tasks over which they have control and influence.

2. Strategy evaluation activities should provide timely information; on occasion

and in some areas, managers my need information daily. For example, when a
firm has diversified by acquiring another firm, evaluative information may needed
frequently. Approximate information that is timely is generally more desirable as
a basis for strategy evaluation than accurate information that does not depict the
present. Frequent measurement and rapid reporting may frustrate control rather
than giving better control. The time dimension of control must coincide with the
time span of the event being measured.

3. Strategy evaluation should be designed to provide a true picture of what is

happening. For example, in a severe economic downturn, productivity and
profitability ratios may drop alarmingly, although employees and managers are
working harder. Strategy evaluations should portray this type of situation fairly.
Information derived from the strategy evaluation process should facilitate action
and should be directed to those individuals in the organization who need take
action based on it. Managers commonly ignore evaluative reports that are
provided for informational purposes only; not all managers need to receive all
reports. Control need to be action – oriented rather than information – oriented.

The strategy evaluation process should not dominate decisions; it should foster mutual
understanding, trust, and common sense. No department should fail to cooperate with another
evaluating strategy.

Strategy evaluations should be simple, not too cumbersome, and not too restrictive.
Complex strategy evaluation system may confuse people and accomplish little. The test of an

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effective evaluation system is its usefulness not its complexity. Large organizations require a
more elaborate and detailed strategy-evaluation system because it is more difficult to coordinate
efforts among different divisions and functional areas. Managers in small companies often
communicate with their employees daily and do not need extensive evaluative reporting system.

Familiarity with local environments usually makes gathering and evaluating information
much easier for small organizations than for large businesses. But the key to an effective strategy
evaluation system maybe the ability to convince participants that failure to accomplish certain
objectives within a prescribed time is not necessarily a reflection of their performance.

There is no one ideal strategy evaluation system. The unique characteristics of an

organization, including its size, management style, purpose, problems, and strengths, can
determine a strategy evaluation and control system’s final design. Successful companies have
voracious hunger for facts. They see information where other see only data. They love
comparisons, rankings, and anything that removes decision making from the realm of mere
opinion. Successful companies maintain tight, accurate financial controls. Their people don’t
regard controls as an imposition of autocracy, but as the benign checks and balances that allow
them to be creative and free.

CONTINGENCY PLANNING
A basic premise of good strategic management is that firms plan ways to deal with
unfavourable and favourable events before they occur. Too many organizations prepare
contingency plans just for unfavourable events; this is a mistake because both minimizing threats
and capitalizing on opportunities can improve a firm’s competitive position. Regardless of how
carefully strategies are formulated, implemented, and evaluated, unforeseen events such as
strikes, boycotts, natural disaster, arrival of foreign competitors, and government actions can
make strategy obsolete. To minimize the impact of potential threats, organization should develop
contingency plans as part of the strategy evaluation process.

Contingency plan can be defined as alternative plans that can be put effect if certain key
events do not occur as expected. Only high priority areas require the insurance of contingency
plans. Strategist cannot and should not try to cover all bases by planning for all possible
contingencies. But in any case, contingency plans should be as simple as possible.

Contingency plan is a plan to recover from a risk should it occur. A risk that has occurred
is known as an issue, or in case of a severe risk, a disaster. Historically, contingency plans were
mostly developed for high impact risks with potential to completely disrupt the normal operation
of a nation, city or organization. Modern risk management practices also plan contingencies for
relatively minor risk.

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The following are illustrative examples of a contingency plan.
Event
The organizers of an industry conference identify major risks that could derail the event
with a contingency plan that includes a risk response and preparation step

OPERATIONS
A manufacturing team identifies risk to their monthly production targets with a
contingency plan for each risk. The contingency plan includes an estimate of risk probability.

BUSINESS CONTINUITY

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 Business continuity is the process of continuing business operation in the event of
disasters and other high impact issue. In this case a continuity plan may be structured by scenario
as opposed to the risks that can trigger such scenarios. It is also common to include an analysis
of impact for each risk.

Effective contingency planning involves a seven step process as follows;

1. Identify both beneficial and unfavourable events that could possibly derail the strategy.
2. Specify trigger points. Calculate about when contingent events are likely to occur.
3. Assess the impact of each contingent event. Estimate the potential benefit or harm of
each contingent event.
4. Develop contingency plans. Be sure that the contingency plans are compatible with
current strategy and are economically feasible.
5. Assess the counter impact of each contingency plan. That is, estimate how much each
contingency plan will capitalize on or cancel out its associated contingent event. Doing
this will quantify the potential value of each contingency plan.
6. Determine early warning signs for key contingent events. Monitor the early warning
signals.
7. For contingent events with reliable early warning signals, develop advance action plan to
take advantage of the available lead time.

RISK MANAGEMENT vs. CONTINGENCY PLANNING

Risk management is primarily focused on steps taken before a risk occurs. This can
include techniques of reducing risks such as risk avoidance and mitigation. Risk management is
also a process of formally accepting risks that are worth taking.

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 Contingency planning is planning steps to be taken when risks occurs. A risk that actually
occurs is generally referred to as an issue. It is common for issues to be managed as they occur
without any pre – planning. Contingency planning is most often used for risks that are low
probability but high impact such as a disaster.
The primary value of risk management is finding ways to prevent losses before they
occur while the contingency planning is improving the chances of surviving high impact risks.

STRATEGY AUDITS
In order to better understand what strategic control performance measures are and how a
manager can take such measurements, we need to introduce two important topics: (1) strategic
audits and (2) strategic audit measurement methods.

A strategic audit is an examination and evaluation of areas affected by the operation of a

strategic management process within an organization. A strategy audit may be needed under the
following conditions:
 Performance indicators show that a strategy is not working or is producing negative side
effects.
 High-priority items in the strategic plan are not being accomplished.
 A shift or change occurs in the external environment.
 Management wishes: (1) to fine-tune a successful strategy and (2) to ensure that a
strategy that has worked in the past continues to be in tune with subtle internal or external
changes that may have occurred.

Assessing the Firm's Operational and Strategic Health

To aid in control, firms will occasionally perform audits to ensure that certain aspects of
their operations are in order. Such audit may include operational audits (assessing the firm's
operating health) and strategic audits (assessing the firm's strategic health).

Measures of Organizational Health

To assess a firm's current operating health, short-term financial, market, technological,
and production position are used, while current strategic health is based on strategic market
position, technological position, production capabilities, and financial health.

Strategic Audit Measurement Methods

There are several generally accepted methods for measuring organizational performance.
 Qualitative Organizational Measurements
 The Evaluation Of Corporate Strategy
 Quantitative Organizational Measurements

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The Evaluation of Corporate Strategy

Each organization has its own approach to evaluation. There are not absolute answers as
to the proper evaluation standards. However, there are three basic questions to ask in strategy
evaluation:
1. Is the existing strategy any good?
2. Will the existing strategy be good in the future?
3. Is there a need to change a strategy?

Seymour Tilles has written a classic article on the qualitative assessment of

organizational performance. This article serves several particular questions to be asked for
evaluation. These questions are:
1. Is the strategy internally consistent? Internal consistency refers to the cumulative impact
of various strategies on the organizations. According to Tilles, a strategy must be judged
not only in relationships to other strategies.
2. Is organizations strategy consistent with its environment? An important test of strategy is
whether the chosen strategy in consistent with environment (constituent demands,
competition, economy, product / industry life cycle, suppliers, customers) - whether the
really make sense with respect to what is going on outside.
3. Is the strategy appropriate in view of available resources? Resources are those things that
company is or has and that help it to achieve its corporate objectives. Included are
money, competence, facilities and other. Without appropriate resources, organization
simply cannot make strategic work.
4. Does the strategy involve an acceptable degree of risk? Strategy and resources, taken
together, determine the degree of risk which the company is undertaken. Each company
must determine the amount of risk it wishes to incur. This is a critical managerial choice.
In attempting to assess the degree of risk associated with a particular strategy,
management must assess such issues as the total amount of resources a strategy requires,
the proportion of the organization's resources that a strategy will consume, and the
amount of time that must be committed.
5. Does the strategy have an appropriate time horizon? A significant part of every strategy is
the time horizon on which it is based. For example, a new product developed, a plant put
on stream, a degree of market penetration, become significant strategic objectives only if
accomplished by a certain time. Management must ensure that the time necessary to
implement the strategy is consistent. Inconsistency between these two variables can make
it impossible to reach goals in a satisfactory way.
6. Is the strategy workable?
E. P. Learned and others, building on the Tilles model, suggest that the following are also
proper evaluative questions:

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 a. Is the strategy identifiable? Has it been clearly and consistently identified and are
people aware of it?
b. Is the strategy appropriate to the personal values and aspirations of key managers?
c. Does strategy constitute a clear stimulus to organizational effort and
commitment?
d. Is the strategy socially responsible?
e. Are there early indications of the responsiveness of markets and market segments
to the strategy?

J. Argenti adds:
1. Does the strategy rely on weakness or do anything to reduce them?
2. Does the strategy exploit major opportunities?
3. Does it avoid, reduce, or mitigate the major threats? If not, are there adequate
contingency plans?

All these questions can by applied as the strategy progresses through its various stages,
including implementation. The answers can provide guidelines as to how the strategy should be
altered or changed.
The second basic question "Will the existing strategy be good in the future?" seeks to
ascertain if the strategy would continue to satisfy the firm's objective in the future. The answer to
this is based upon unforeseeable changes in the organization's environment or resources, or
changes in its mission, goals, or objectives.

Quantitative Organizational Measurements

Quantitative measurements provide information and insight as to how well an

organization is accomplishing its goods and objectives. In attempting to evaluate the
effectiveness of corporate strategy quantitatively, we can see how the firm has done compared
with its own history, or compared with its competitors. Many quantitative measures may be
developed to determine performance results. These standards expressed in quantitative terms
include:
1. Sales (growth of sales)
2. Net profit
3. Dividend returns
4. Return on equity
5. Return on investment
6. Return on capital
7. Marker share
8. Earnings per share

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 The list is long and many other factors could be included. The objective of all of these
endeavors is financial control.

But financial control is only part of the total strategic management control process. Much
of the activity affects financial performance in non financial nature. This include consideration of
labor efficiency and productivity; production quantity turnover, and tardiness; on a very limited
basis, human resources accounting and personnel satisfaction measures; more commonly,
management by objectives systems; social analysis; operational audits of any functional,
divisional, or staff component, distribution cost and efficiency; management audits modeling;
and so forth.

A strategic audit is conducted in three phases: diagnosis to identify how, where, and in
what priority in-depth analyses need to be made; focused analysis; and generation and testing
recommendation. Objectivity and the ability to ask critical, probing questions are key
requirements for conducting a strategic audit.

Phase one: Diagnosis

The diagnostic phase includes the flowing tasks:
1. Review key document such as:
o Strategic plan
o Business or operational plans
o Organizational arrangements
o Major policies governing matters such as resource allocation and performance
measurement.
2. Review financial, market, and operational performance against benchmarks and industry
norms to identify jet variances and emerging trends.
3. Gain an understanding of:
o Principal roles, responsibilities, and reporting relationships.
o Decision - making processes and major decisions made.
o Resources, including physical facilities, capital, management, technology.
o Interrelationships between functional staffs and business or operating units.
4. Identify strategic implications of strategy for organization structure, behavior patterns,
systems, and processes.
o Define interrelationships and linkages to strategy.
5. Determine internal and external perspectives.
o Survey the attitudes and perceptions of senior and middle managers and other key
employees to assess the extent to which these are consistent with the strategic
direction of the firm. One way to accomplish this task is through carefully focused
interviews and / or questionnaires, wherein employees are asked to identify and
make trade-offs among the objectives and variables they consider most important.

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 o Interview a carefully selected sample of customers and prospective customers and
other key external sources to gain understanding of how the company is viewed.
6. Identify aspects of the strategy that are working well. Formulate hypotheses regarding
problems and opportunities for improvement based on the findings above. Define how
and in what order each should be pursued.

Phase two: Focused analysis

1. Test the hypotheses concerning problems and opportunities for improvement through
analysis of specific issues.
o Identify interrelationships and dependencies among components of the strategic
system.
2. Formulate conclusions as to weaknesses in strategy formulation, implementation
deficiencies, or interactions between the two.

Phase three: Recommendations

1. Develop alternative solutions to problems and ways of capitalizing on opportunities.
o Test [these alternatives] in light of their resource requirements, risk, rewards,
priorities, and other applicable measures.
2. Develop specific recommendations.
o Develop an integrated, measurable, and time - phased action plan to improve
strategic results.

Qualitative Organizational Measurements

There is no universally endorsed list of critical questions designed to reflect important
facets of organizational operations. However, several that might be useful to the practicing
managers are presented below.

Sample Questions to be asked for Qualitative Organizational Measurement

 Are the financial policies with respect to investment… dividends and financing consistent
with opportunities likely to be available?
 Has the company defined the market segments in which it intends to operate sufficiently
specifically with respect to both product lines and market segments? Has it clearly
defined the key capabilities needed for success?
 Does the company have a viable plan for developing a significant and defensible
superiority over competition with respect to these capabilities?
 Will the business segments in which the company operates provide adequate
opportunities for achieving corporate objectives? Do they appear as attractive as to make
it likely that an excessive amount of investment will be drawn to the market from other
companies? Is adequate provision being made to develop attractive new investment
opportunities?

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  Are the management, financial, technical and other resources of the company really
adequate to justify an expectation of maintaining superiority over competition in the key
areas of capability?
 Does the company have operations in which it is not reasonable to expect to be more
capable than competition? If so, can the board expect them to generate adequate returns
on invested capital? Is there any justification for investing further in such operations,
even just to maintain them?
 Has the company selected business that can reinforce each other by contributing jointly to
the development of key capabilities? Or are there competitors that have combinations of
operations which provide them with an opportunity to gain superiority in the key resource
areas? Can the company's scope of operations be revised so as to improve its position vis-
à-vis competition?
 To the extent that operations are diversified, has the company recognized and provided
for the special management and control systems required?

USING COMPUTERS TO EVALUATE STRATEGIES

When properly designed, installed, and operate, a computer network can efficiently
acquire information promptly and accurately. Networks can allow diverse strategy-evaluation
reports to be generated for, and responded by different levels and types of mangers.

Effective evaluation is best when backed up by data especially in our current time where
there is a large focus on data-driven decisions through different analytical tools.

Upon presentation of the result of the strategies that the business had taken up, computer
presentations and analytical tools help the management decides easily and interpret results.

Business Presentation Tools

MS ExcelUsed for data analysis.Microsoft Excel is a spreadsheet program

included in the Microsoft Office suite of applications. Spreadsheets present
tables of values arranged in rows and columns that can be manipulated
mathematically using both basic and complex arithmetic operations and
functions. Basic tool usually used for computations.

ChartUsed in interpreting results based on the analysis of data. A chart is a

graphical representation of data, in which "the data is represented by symbols,
such as bars in a bar chart, lines in a line chart, or slices in a pie chart". ... A
data chart is a type of diagram or graph, that organizes and represents a set of
numerical or qualitative data.

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PowerPoint This is basically use for presentation purposes in meetings, town halls in evaluating
the strategies that the business have taken up.Microsoft PowerPoint is a powerful presentation
software developed by Microsoft. It is a standard component of the company's Microsoft Office
suite software, and is bundled together with Word, Excel and other Office productivity tools. The
program uses slides to convey information rich in multimedia.

Data Analysis Software

Business data need not be static information with plenty of affordable business
intelligence solutions at your disposal. Now you can collate data, model visualizations, and
generate insights that can improve business efficiency and, ultimately, profitability. Some top
data analysis software should allow you to slice and dice information in a way meaningful to
your business. It’s no longer about the steady growth of business intelligence software sales,
as DresnerAdvisort Services reported. Rather, we now have more advanced technologies to
analyze data. Now is the advent of modern BI and analytics [BI&A] platforms.

What are Business Intelligence (BI) tools?

BI tools are types of software used to gather, process, analyze, and visualize large
volumes of past, current, and future data in order to generate actionable business insights, create
interactive reports, and simplify the decision-making processes. These tools include key features
such as data visualization, visual analytics, interactive dashboarding and KPI scorecards.
Additionally, they enable users to utilize automated reporting and predictive analytics features
based on self-service. But what are the exact benefits of these tools and what do they offer that
traditional means of data management cannot? It all starts with technology.

The Benefits of Business Intelligence Tools

Professional software and tools offer various prominent benefits, here we will focus on
the most invaluable ones:

1. They bring together all relevant data: Whether you work in a small company or large
enterprise, you probably collect data from various portals, ERPs, CRMs, flat files, databases,
APIs, and much more. You need to obtain a high level of data intelligence to be able to manage
all these sources and develop a better understanding of the collected information. That’s why
utilizing modern data connectors will help you in centralizing the disparate sources and provide
you with a single point of view on all your business processes. That way, identifying issues,
trends, and taking action are closely connected and based solely on data.

2. Their true self-service analytics approaches unlock data access: When each person in the
company is equipped with modern business intelligence software that will enable him/her to

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explore the data on their own, the need to request reports from the IT department is significantly
reduced. This self-service approach gives organizations a competitive advantage because each
employee will be equipped with the right amount of data analytics skills that will, ultimately,
save the company’s time and resources while unburdening the IT department, hence, enabling
them to focus on other critical tasks.

3. Users can take advantage of predictions: Predictive analytics doesn’t need to be a specialty

of data scientists or analysts. With the integration of forecast engines business users can generate
insights for future scenarios that will help them in adjusting current strategies to deliver the best
possible results. On the other hand, if a business condition changes, intelligent data
alerts safeguard the anomalies that can occur while you manage huge amounts of data, and
discover new trends and patterns that will enable you to react immediately.

4. They eliminate manual tasks: While traditional means of business management encourage

the use of spreadsheets and static presentations, modern software eliminates endless amounts of
rows and columns and facilitates the automation of processes. Need a report? The tool updates
your KPI dashboard itself with real-time data. Besides, you can automate the reporting process
with specified time intervals and purely look at the results. Need a presentation? Simply drag-
and-drop your values and see how you can easily create a powerful interactive dashboard that
enables you to directly interact with your screen.

5. They reduce business costs: From sales planning and customer behavior analysis to real-time
process monitoring and offer optimization, BI platforms enable faster planning, analysis, and
reporting processes. In fact, according to a survey conducted by the BI survey, more than 50% of
business intelligence users reported that these are the most prominent benefits that helped them
reducing costs, and increasing revenues. If you can work fast and accurate, you can achieve far
better business results and make profitable adjustments.
6. They’re constantly at your service, 24/7/365: Various organizations require various needs
and the Software-as-a-Service model offered by these tools will provide a full SaaS BI
experience, with all the data hosted in a secure online environment. According to your needs, the
software can scale or de-scale, thus, adjusting to the specific needs of a company. Since the data
is stored on a cloud, you have non-stop access to the software, where you can fully explore
various self-service analytics features no matter if you’re a manager, data scientist, analyst or
consultant. These business intelligence benefits are focused both on small companies and large
enterprises. If you need to control your data and know what’s going on in your company, BI is
the way to do so. To help you on the way, we have created a business intelligence tools list that
not only will ensure your data management and discovery become intuitive and easy to use, but
also stay secured and guarantee a higher level of productivity, and, consequently, increased
profits.

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Example of Business Intelligence Soft wares

1. SAP Business Objects Lumira Built on the solid SAP architecture, SAP Business
Objects Lumira offers self-service data visualization to large enterprise. You can create
with it interactive graphs, maps, and infographics, among others. It is mainly an on-
premise solution.
You can combine different but related visualizations as storyboard to tell a story. You can
also share the reports via email attachment or PDF. Similarly, SAP Business Objects
Lumira can export from Excel and other standard sources. Its dashboards are intuitive and
secure.

The business intelligence solution is built on SAP HANA Data Discovery with secure
sharing and has reliable web and mobile support.
It is available as an all-in Standard Plan ($185), which includes XLSX, CSV files, SAP
HANA, databases, charts, maps, and cloud storage for up to 1GB per user.

2. Microsoft Power BI It’s a suite of business analytics tools that transforms your datasets
into rich visuals. You can share and collaborate with these visual insights with teams
across the organization for more informed decisions.Microsoft Power BI is deployed as a
cloud or on-premise solution for medium and large enterprise.You can build interactive
reports and place them on one location accessible to users on any device. This makes it
easy to share and collaborate even with remote teams (cloud) and ensure consistency of
insights. Furthermore, built on the Microsoft architecture, this business intelligence
solution works natively with SQL Server Analysis Services and Azure Analysis Services.
You can also embed it in your app.Among others, key features to note are customizable
dashboards, help and feedback buttons, ad hoc analysis, Q&A box, and online analytical
processing or OLAP.

3. Phocas Phocas is targeted at manufacturing, wholesale distribution, and retail for both

small and medium companies. It’s available in cloud or on-premise platforms.

The software features good visualizations and data analytics that help you to discover
sales opportunities or identify growth areas. You can also use Phocas to see patterns that
make your business work, then focus your resources on these to spur further growth.

The data analysis software has good dashboards, mobile, and collaboration tools. It also
has standard reporting and integration capabilities

Presentation for Strategy Evaluation: Virtual Conference

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 The Virtual Conference is a hybrid conference that allows remote attendees to access
live onsite sessions and events from their computers. The conference is hosted entirely over the
Internet. Attendees participate through a conference website designed specifically for
the virtual experience.

Some of the most popular Virtual Conference Platforms

• Cisco's WebEx.
• Adobe Connect.
• Citrix GoToMeeting.
• InterCall.
• Communique.
• INXPO

GUIDELINES FOR AN EFFECTIVE STRATEGIC MANAGEMENT

Failing to follow certain guidelines in conducting strategic management can foster

criticisms of the process and create problems for the organization. Issues such as “Is the strategic
management in our firm a people process or a paper process?” should be addressed.
An important guideline for effective strategic management is open-mindedness. A
willingness and eagerness to consider new information, new viewpoints, new ideas and new
possibilities is essential; all organizational members must be share a spirit of inquiry and
learning. Strategist such as chief executive officers, presidents, owners of small businesses and
heads of government agencies must commit themselves to listen to and understand managers’
satisfaction.
Strategic decisions require trade-off such as long range versus short range considerations
or maximizing profits versus increasing shareholder’s wealth.

Important Guidelines for the Strategic Planning to be Effective

1. I should be people process more than a paper process.
2. It should be a learning process for all managers and employees.
3. It should be words supported by numbers rather than number supported by words.
4. It should be simple and non-routine.
5. It should vary assignments, team memberships, meeting formats and even the planning
calendar.
6. It should challenge the assumptions underlying the currently corporate strategy.
7. It should welcome bad news.
8. It should welcome open0mindedness and a spirit of inquiry and learning.
9. It should not be a bureaucratic mechanism.
10. It should not become ritualistic, stilled, or orchestrated.
11. It should not be too formal, predictable, or rigid.

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 12. It should not contain jargon or arcane planning language.
13. It should not be formal system of control.
14. It should not disregard qualitative information.
15. It should be controlled by “technicians”.
16. Do not pursue too many strategies at once.
17. Continually strengthen the “good ethics is good business” policy

Even the most technically perfect strategic plan will serve little purpose if it is not
implemented. Many organizations tend to spend an inordinate amount of time, money, and effort
on developing the strategic plan, treating the means and circumstances under which it will be
implemented as afterthoughts. Change comes through the implementation and evaluation, not
through the plan. A technically imperfect plan that is implemented well will achieve more than
the perfect plan that never gets off the paper on which it is type.

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Mulder, P. (2019). Grand Strategy Matrix. Date of access: 11/10/2019.

https://www.toolshero.com/strategy/grand-strategy-matrix/

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Annual Objectives, Accessed: 11/24/2019

https://pdfs.semanticscholar.org/0d59/435acc2792e0a9bf8df4ad0954af38d2cf2d.pdf

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