STRATEGIC MANAGEMENT

OVERVIEW
Strategic management is the process by which top management determines the long-run
direction and performance of the organization by ensuring careful environmental
scanning, strategic formulation (designing and selecting strategies), effective strategy
implementation and continuous evaluation and control. The study of strategic
management therefore emphasizes monitoring and evaluating environmental
opportunities and threats and formulation of strategy in light of the firm‟s strengths and
weaknesses to ensure the organization as a whole is appropriately matched to its
environment.

Strategic management is a part of a larger management activity, called general

management, which is responsible for the ultimate „bottom line‟ success of the firm. The
strategic management part is focused on developing (in the near term) the firm‟s profit
potential which will guarantee the long term success of the firm. General management
orientation tends to look inward with a concern for properly integrating the firm‟s many
functional activities. By focusing on the efficient utilization of a firm‟s assets, it thus
emphasizes the formulation of general guidelines that would better accomplish a firm‟s
mission and objective. Strategic management as a field of study incorporates the
integrative concerns of general management with a heavier environmental and strategic
(futuristic or forward thinking) emphasis. It is focuses on keeping an organization as a
whole appropriately matched to its environment to enhance long- term performance.

Strategic decisions have the following characteristics:

1. Strategic decisions deal with long term future of the entire organization
2. They are rare/novel i.e. they are unusual or have an element of novelty to the
organization
3. Are organization-wide in the consequences. Consequential in that they commit
substantial resources and demand a great deal of commitment
4. Are directive – strategic decisions set precedents which subsequent / future
decisions are likely to follow – throughout the organization
5. Strategic decisions are usually resource costly (time, money and people) – they
require substantial resources and commitment.
Key strategic questions that managers ask include:
 Where is the organization? Not where do we hope it is! This requires a
thorough situation analysis.
 If no changes are made, where will the organization be in 1 year, 2 years, 5
year, or 10 years? Are the answers acceptable?
 If the answers are not acceptable, what specific actions should management
undertake? What are the risks and pay-offs involved?

Therefore strategic management is the study of the functions and responsibilities of

senior management in a company, the crucial problems that affect the success of the firm
as a whole, and the decisions and actions that determine its direction, shapes it future and
produces the results desired.

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The strategy problems of a business have to do with the choice of purpose, and the
moulding of organization identity, the unending definition of what needs to be done and
the mobilization of resources for the attainment of organizational goals in the face of
aggressive competition or adverse circumstances. As a company chief executive or
strategist (strategy maker and implementer, you will be continuously expected to analyze
the state of your company to identify the principal problems in its situation and prescribe
a program of action.

Strategic management is an iterative process that involves a set of decisions and actions
that result in the formulation and implementation of plans designed to achieve a
company‟s objectives. The strategic management process relates to how strategies at all
organizational levels are formulated and implemented. It incorporates both planning
activities (strategy formulation) a well as managerial/administrative activities (strategy
implementation and control). The term iterative means that the strategic management is a
process that consists of a series of steps that are repeated or revisited in a cyclical manner
to enhance the process. At the center of the strategic management process is the concept
of strategy.

What is strategy?
The term strategy (which is derived from the Greek word „strategos‟, meaning general)
has been used in different ways. At that time (during World War II) strategy literary
meant the art and science of directing military forces to destroy an enemy. Today, the
term „strategy‟ is used in business to describe how an organization is going to achieve its
objectives and mission.

Authors differ in at least one aspect when defining strategy. Some such as Kenneth
Andrews and Alfred Chandler focus on both the end points (purpose, mission, goals and
objectives) and the means of achieving them (policies and plans). But other writers such
as Igor H. Ansoff and Charles W. Hofer and Dan Schendel emphasize the means to the
ends in the strategic process rather than the ends per se.

Andrews at its simplest defines strategy as a specific plan of action directed at a specified
result within a specified period of time. For example, a sales force may develop a plan to
take away an account from a competitor, in which the goal is to get its business by the
end of the year. What it plans to do to achieve the goal, is in this limited context a
strategy.

Chandler defines strategy as the determination of the basic goals and objectives of an
enterprise and the adoption of courses of action and allocation of resources necessary for
carrying out these goals. Ansoff defines strategy as a course of action that guides a firm‟s
adaptation to the external environment.
Hofer and Schendel view strategy as a description of the match a company achieves with
its environment. In this context, they define strategy as a fundamental pattern of present
and planned resource deployments and environmental interactions that indicates how the
organization will achieve its objectives.

Components of strategy
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A good strategy must have the following components:
1. Scope of an organizations activities
The strategy must indicate the product range i.e. the number of products it intends to sell,
and geographic coverage i.e. the number of markets in which the company intends to
compete. A firm may have a broad or narrow scope e.g. Microsoft sells operating systems
as well as many types of application software e.g. word and excel. Word perfect – has
essentially restricted itself to word processing software.

2. Distinctive competence/competencies
Refers to what a firm does well relative to competitors or those things that an
organization does particularly well relative to competitors. Distinctive competencies
occur when an organization‟s strengths can not be easily matched or imitated by a
competitor. A company focuses on these distinctive competencies when developing its
strategies. Those competencies/capabilities fundamental or key to a firm‟s strategy and
performance are referred to as core competencies.

3. Resource deployment
Should indicate resource deployment patterns in trying to match the firm to its
environment and achieve its objectives. Organizations may invest resources in a number
of ways, thus firms endowed with similar resources may perform differently.

4. Competitive advantage
This is the ability to do something that competitors cannot do nearly as well, and thus
being able to occupy a superior position in an industry and out perform rivals on the
primary performance goal – profitability. A company‟s superior competitive position
allows it to achieve higher profitability than the industry‟s average. Competitive
advantage results by taking advantage of distinctive competence to build strategic
superiority.

5. Synergy
Synergy refers to the cumulative enhanced effect of performing activities jointly. The
basic idea is that an organization‟s resources should be linked so that the combined
performance of its subunits is greater than if those units were operating alone or
independently. Thus a firm‟s strategy should strive for synergy – combine resources and
perform activities jointly for enhanced results. Synergy is also referred to as 2 + 2 = 5
aspect of strategic fit.

Formality of Strategy
The development of strategy can either be formal or informal.
In formal strategy, also referred to as deliberate or explicit strategy, specified managers
deliberately spend time to develop strategy through an explicit process, with
responsibility fixed and a time table, resulting to a written document called a strategic
plan; which spells out where the firm is headed to in terms of desired results (objectives)
and what methods or plan of action (strategy) will be sued to achieve the desired results.

An informal strategy also referred to as emergent or implicit strategy, is that strategy that
develops in the absence of intentions or deliberate efforts, time table and fixed
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responsibilities. Here the chief executive officer and a handful of top managers might get
together casually to resolve strategic issues and plan their next steps.
Note: We can also classify strategy as intended and realized strategy.
Intended strategy is an expression of desired strategic direction deliberately formulated or
planned by managers. Realised strategy is the strategy actually being followed by an
organization in practice arising from emergent strategy development process.

A number of factors determine the degree of formality. These include:

 The size of the organization
 Complexity of its environment
 Its predominant management style

Small organizations, in particular, may plan informally or irregularly, with no formal

elaborate planning system because the number of key executives is small that they can
meet relatively often to discuss the organization‟s future. However, as the firm grows,
becomes a large multi-product or multi-division firm, the planning of strategy can
become complex. Because of the relatively large number of people affected by a
strategic decision in such a firm, a formalized more sophisticated system is needed to
ensure that strategic planning leads to successful performance. Otherwise top
management may become isolated from developments in the divisions and lower level
managers losing sight of the corporate mission.

Formality is usually positively correlated with the cost, comprehensiveness, accuracy and
success of planning. Nevertheless, strategic management need not always be a formal
process to be (for a firm to be) effective. Studies (of planning practices in organizations)
suggest that the real value of strategic planning may be more in the future orientation of
the planning process and environmental fit.

Value of strategy
1. Provides direction
Strategy helps in providing direction to a company. There are numerous activities to be
performed by any company. Some are of short term nature, while others are of longer
term. It is important that all these activities reinforce each other. Strategy can help
achieve this, thereby enabling managers to focus on both short term and long term.

Further, many strategic decisions have long lead times. These are key decisions that are
resource costly, but yield profits and success in the future. There is a human tendency to
shy away from taking such decisions. This can result in managers sacrificing the future
for today. Strategy helps to prevent this from happening. The discipline that strategy
imposes makes managers be futuristic i.e. focus on both short term and long term. By
formulating vision, mission, short term and long term objectives, and strategies, the firm
determines where it is headed to and how to reach that destiny.

2. Competitive Advantage

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Companies operate in industries where there are other players and there is competition in
virtually all industries. This competition may be low or intense and one has to succeed in
such competition.
Just as the focus of a company‟s efforts is the customer, so is that of competitors. It is
therefore necessary to serve the customer as or better than competitors for survival and
success. Where a company is able to outdo or outperform competitors (able to do
something in ways that they can not do or at least cannot do nearly as well) the company
has a competitive advantage/edge or superior competitive position which allows the
company to achieve higher profits than the industry‟s average.

Strategy helps a company develop such advantage. It spells out how a company will alter
its strengths/ distinctive competencies in the most effective and efficient way to develop
strategic superiority. It is important to emphasize, however, that in trying to match or
outsmart competitors, the company‟s focus on customers should not change. A company
will earn a sustainable competitive advantage if it can consistently deliver superior value
to customers, relative to competitors. At no time should a company compromise its focus
on customer needs. Indeed successful company strategy always revolves around the
customer.

3. Focus in resources
As companies try to achieve their objectives, they only have limited resources to do so.
The use of these resources should be focused and strategy helps achieve such focus.

During the strategy development process, managers define the strategy agenda for the
company. The critical tasks to be performed are identified; resources are then allocated
focusing on these critical tasks. Without clearly though out strategy, resource allocation
might be random leading to resource misallocation and wastage.

4. Reduces Conflict
Harmony in company activities is critical for success. It is thus important that all
members of the company and all departments work as one unit and the different
departments understand their respective roles in the company. Strategy through the
formulation of corporate mission, goals or objectives and strategies helps clarify where
the company is going and the contribution of each of the departments and individuals
towards this destiny. This helps reduce conflicts within the company.

5. Response to change
The major task of managers is to assure continued survival and success of the companies
they manage. Such success is attained if the managers marshal the required resources and
deploys them effectively and efficiently to ensure a match/fit between the output of the
company and the demands of the market.

The external environment in which companies operate is dynamic- rapidly changing and
sometimes in unpredictable ways. It is necessary that a company adequately responds to
these changes for survival and success. Failure to do so will make a company experience
a big strategic problem. This is a problem that arises out of the maladjustment of any
company to its environment. It is characterized by a mismatch between the output of the
company and the demands of the market.
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Strategy is useful in helping managers tackle the potential strategic problem that faces
their companies. Strategy requires that managers have both an internal and external
focus. This means that the external environment is continuously monitored and managers
are futuristic in their thinking and actions. This external focus and futuristic orientation
can enable managers to understand the environment, anticipate possible environmental
changes, for example, changes in customer needs and competitors‟ strategies and develop
a proactive stance in responding to them.

Therefore, a company‟s strategy is an intimation of how the company will interact with
the environment and maintain the firm-environment or input-output cycle to achieve a
fit/match with its environment. The systems theory underscores the interrelationships and
the need for fit between the firm and environment.

A Company as a System
A system is a set of interrelated and interdependent parts/components arranged in a
manner that produces a unified goal or which relate in the accomplishment of some
objectives. These components are related and interact within a boundary. A system may
be closed or open. A closed system does not depend on its external environment for
survival. It can be sealed off from the outside world. An open system crucially depends
on its environment for survival. It continuously consumes resources from the
environment which it transforms into output of value and discharges/exports the output to
the environment.

Components of an open system

 Environment comprising of the general and operating environmental factors
 Inputs which include raw materials, labour and capital obtained from the
environment
 Conversion mechanism, also referred to a throughout or transformation process,
within the system (firm)
 Output in the form of goods and services discharged to the environment
Business organizations are open systems that are inescapably bound in a variety of
interrelationships with their environments. They get their inputs from their environment.
These are then transformed/processed within the firm and then exist a output to the
consumers in the environment for consumption in exchange for money, which is then
used by the firms to replenish inputs and meet operational costs. Success is attained if a
company is effective and efficient in maintaining the firm-environment cycle and
therefore produces products to society at a price enough to cover costs and earn
acceptable return (profits). Thus to survive and be successful companies should develop
and implement good strategies to enable them effectively and efficiently maintain the
cycle.
Note: Effectiveness means the extent to which a firm produces the output desired by
their consumers. It has also been defined as „doing the right things‟.
Efficiency refers to the level productivity or the ratio of inputs to outputs. The less the
inputs (costs) used (incurred) to gain a given output, the more the organization is
efficient. It has also been defined as “doing things right”. Hofer and Schendel argue that
both effectiveness and efficiency are important for success but effectiveness is more
critical if a company is to at least survive.
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 Thus as observed, the potential value of strategy to any company is high. Irrespective of
the level of intensity of competition in firm‟s industry, it is important to practice strategic
management for superior business performance in the increasingly turbulent
environment. The use of strategic management- the selection of alternative courses of
action based on an assessment of important external and internal factors are becoming
essential parts of a manager‟s job to enhance organizational performance. Managers
need to implant the discipline of strategic management in their companies.

Limitations of Strategy
It is important to note that although strategy is of great value, it has limitations.
 Strategy requires planning ahead and this is difficulty given environmental
turbulence.
 Strategy requires a harmony of goals among managers and owners (shareholders)
which is also difficult due to the agency problem. Managers who act as agents of
the owners may pursue selfish goals different from owners‟ goals. Thus the
managers‟ preferences and values may influence a strategy that may not be
economically justified.
 Strategy leads to inflexibility and rigidity. The outcome of formal strategy making
process is strategic plan that guides managers‟ actions. This may stifle creativity
needed to respond rapidly to environmental changes

Levels of Strategy
Strategies are developed at several levels in an organization depending on the size and
diversity of the company. Broadly we may distinguish between different levels of
strategy in organizations.
1. Corporate strategy
2. Business strategy
3. Functional strategy
The figure below depicts the three levels of strategy as structured in practice.
Corporate
Corporate Strategy
Level

Busines
Business Business Business
s Level
Strategy Strategy Strategy
SBU 1 SBU 2 SBU 3

Functional
Level
P/O or Financial / Marketi Risk & Human
R&D Accounting ng Insurance Resource
Strategie Strategies Strategi Strategies Strategies
s es

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The corporate structure depicted above comprises three fully operative levels- the
corporate level, business level and functional level. However, we have some firms
especially small businesses engaged in only one business and the corporate and business
level responsibilities are concentrated in a single group of directors, officers and
managers, an organizational format of most small businesses. The approach to be taken
in this course assumes the above organizational format, characteristic of large firms with
multiple businesses.
Note: The participants in strategy formulation and concerns or focus of strategy at each
level are different.
1. Corporate level strategy
This is the top most level in the strategy hierarchy. The participants are principally
composed of a board of directors and chief executive and administrative officers.
Corporate strategy is concerned with the overall purpose and scope of an organization. It
defines the business domain of a company, that is, the scope of the company‟s
business(es) in terms of product(s) and markets(s) to be served. The strategy also
specifies how total company resources will be allocated among the different parts of the
organization and the various businesses to convert distinctive competence to competitive
advantage and add value to the business. Therefore, the scope and resource deployments
among businesses are the primary components of corporate strategy.

2. Business level strategy

This is the middle level in strategy hierarchy. Participants in business level strategy
include business and other corporate managers. Business strategy focuses on how each
strategic business unit (SBU) will compete in the market and position itself among its
competitors.
Note: SBUs are operating units in an organization each of which sells a distinct set of
products or services to an identifiable group of customers in competition with well
defined set of competitors; and thus strategies formulated for one SBU are independent of
those formulated for the other SBUs. Different functional activities have to be integrated
within each single business. Synergy- sharing or resources, and cooperation and
integration among separate departments within the organization to increase productivity
is important.

3. Functional level strategy

This is the bottom level in the strategy hierarchy. Functional level is composed of
managers of product, geographic, and functional areas. Functional strategy is narrower in
scope and deals with activities of the functional areas. They focus on achieving maximum
resource productivity and how the component parts of an organization deliver effectively
the corporate and business level strategies in terms of resources, processes and people.
Managers here develop annual objectives and short term strategies in functional areas –
production, marketing and finance etc. Their principal responsibility is to design tactical
plans to implement or execute the firm‟s strategic plans while ensuring efficient
utilization of resources.

Therefore whereas corporate and business level managers centre their attention on
effectiveness, managers at the functional level centre attention on efficiency or
productivity. Thus they address such issues as the efficiency of production and
marketing systems.
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Note: All these strategy levels need to be consistent and integrated. Each level of
strategy acts a guide and a constraint on the next lower level, and lower level strategies
have to be integrated to higher level strategies.

ENVIRONMENTAL ANALYSIS
In the previous section, we learnt that business organizations are open systems that
operate within an environment and are inescapably bound in a variety of
interrelationships to the larger systems that comprise the external environment.
Therefore, before an organization can begin to formulate strategy, management must
analyze/scan the external environment. That is, monitor and evaluate trends in the
external environment to identify possible opportunities and threats. Also, there is need
for the company to undertake its own self appraisal (internal analysis). This is important
for the firm to understand its strengths and weakness. It is these internal strengths and
weaknesses that will determine how the firm will respond to its environmental
opportunities and threats. Environmental analysis is important to enable managers
establish realistic objectives, develop strategy alternatives and also be in a good position
to choose between competing strategy alternatives. This is so because in strategy
development and choice, you decide on the strategic option to take or what the company
can do given the opportunities and threats in the environment and its strengths and
weaknesses. To be successful over time, an organization must be in tune with its external
environment and adjust its strategies to adapt appropriately to any environmental
changes. That there must be a strategic fit between what the environment wants (goods
and services) and what the firm has to offer, as well as between what the firm needs
(inputs) and what the environment can provide.

EXTERNAL ANALYSIS
External environmental comprises all those factors that are outside or external to an
organization‟s boundary and directly or indirectly affect the operations of the
organization and its managers‟ actions. The environmental forces or factors can be
classified into two broad categories.
a) The general environment also referred to as the remote or societal environment,
comprising of the economic, political legal, socio-cultural and technological
factors. These factors may not directly touch the short run activities of the
organization but can and often do influence its long run decisions. Further, the
factors originate beyond and usually irrespective of any single firm‟s operating
situation and thus are not typical within the short run control of the firm.

These factors present opportunities and threats or constraints while the

organization rarely exerts any reciprocal influence over them; but can only adapt
to them. For example, when the economy slows or experiences a recession, firms
are likely to suffer a decline in business hence cannot influence these trends but
can only adapt to them, for example, by adjusting product strategies (e.g. product
sizes and features) and price strategies (e.g. using discounts and credit facilities)
to stimulate demand but will be unable to reverse the negative economic trends.
Also, trade agreements resulting from improved relations between two countries
(beyond the firm‟s control) provide individual manufacturers in these countries
with opportunities to and broaden their international operations. Thus since
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 changes in these factors may present opportunities and constraints, a company
should keep track of trends in these factors in so far as they are relevant to its
operations.

b) The operating environment also referred to as the specific or task environment,

that comprises of the industry characteristics, competitors, customers and
suppliers. The operating environment form the context within which the firm
operates. Therefore the firm interacts with the forces (elements or groups) in this
environment on a frequent basis. These forces therefore directly affect and are
affected by an organization‟s major operations. For example, an organization will
be trying to satisfy customer needs amongst its competitors. Thus actions of
competitors have a direct influence on a company‟s strategy. However, with a
good strategy, a firm can influence its customers and competitors.

As open systems, firms must interact with the environment to survive. To produce goods
and services, firms consume resources (inputs) such as raw materials, money and labour
from the external environment. The inputs go through the throughput or transformation
process in the firm and exist as outputs in form of goods or services. The outputs are
exported to the environment for consumption by customers in exchange for money. The
firm uses the money to replenish its inputs and run its operations. Thus the environment
is important to organizations because the key to organizational survival is the ability to
acquire and maintain resources. Given that no organization is self contained,
organizations to a lesser or greater extent depend on individuals and other organizations
in the environment for many of the resources they need. Also, a firm‟s survival and
success is determined to a larger extent by the way it manages or satisfies the demands of
customers and pressures from the environment. Indeed, Ansoff describes organizations as
being environment dependent and environment serving.

Characteristics of a firm’s external environment

It is important to note that:
a) Firms face different environments, that is, no two organizations face exactly the
same external environment with similar interrelationships.
b) The events and conditions, and interrelationships that make up the unique
environment of any organization are not static; they are dynamic and sometimes
unpredictable.
c) Organizations are not helpless in the face of environmental forces, but certainly
some aspects of the environmental changes are more amenable than others to
control or influence. Thus, for firms to survive and succeed, they need to
continuously monitor, interpret and adjust to relevant environmental changes and
strive to favourably influence the forces in both their general and operating
environments.

The process of conducting environmental analysis

When analyzing the external environment, the following steps need to be followed:
i) Defining or determining the relevant environmental forces, that is, identifying
what is changing in the environment that might affect the firm currently and in
future.

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 ii) Scanning and forecasting the environment. This involves monitoring and
evaluating the external environment. That is, understanding what is
happening in these factors currently and future position, how changes in these
factors impact or may impact the company, and how frequent the changes in
the factors occur. Managers also need to understand the response capability
of the company and what the company is doing about these changes.
Environmental scanning looks well beyond the next one to three years. In
trying to assess what is happening in the environment, it is good to have a
perspective of the trend of what has been happening in the past, what is the
situation now, and then on this basis figure out the future.
iii) Interpreting and packaging the information into a form that is useful for
strategy formulation and disseminating the information to relevant managers.
This analysis includes analyzing:
i) The general environmental factors, that is, economic, political/legal, socio
cultural and technological factors.
ii) The operating environmental factors
- Industry
- Competitors
- Market or customers

Economic factors
The economic dimensions of concern to a company include the nature and direction of
the economic variables both at national, regional and global level. The economic
variables include the overall economic activity as measured by the gross domestic
product (GPD), per capita income and distribution patterns, the levels of disposable
income, interest rates and inflation rates, exchange rates (the value of the local currency
against other currencies), labour costs and confidence index- the confidence that people
have about their economy.

These economic indicators are important to an organization because they affect the
consumption patterns of a firm‟s products in a given market. For example, if the size of
the market is large (there are many people in the firm‟s environment) with a high growth
rate, and the people are willing to buy the firm‟s output, and if the economic parameters
are favourable meaning the people have purchasing power, then there is market potential.
That is, there are sufficient people with the means or ability to buy a firm‟s products.

The economic conditions also affect the firm‟s ability to raise capital required for
investment and thus growth. For example, during times of high interest rates, the cost of
borrowing money (cost of capital) increases, making it difficult for the firm to raise
capital for expansion.

Most developing countries including Kenya are characterized by low GDP, per capita
income, subsistence system, and high inflation and interest rates. These conditions affect
business operations in a variety of ways. The environment in which firms operate in
Kenya and other less developed countries has changed due to the on going economic
reforms. The economic reforms are as a result of the structural adjustment programmes
(SAPs) sponsored by the World Bank and the IMF. The SAPs were introduced to stop
economic decline and result into economic growth. The SAPs were meant to eliminate
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distortions that prevent efficient allocation of resources in the country. These distortions
included over valued exchange rate, restrictions on domestic and foreign trade, distorted
pricing of tradable and inefficient public services.

The SAPs generally include reforms to:

 Establish a market determined exchange rate.
 Trade liberalization by abolishing quantitative restrictions and licences, and
moving towards a low and uniform tariff rates
 Price decontrol
 Improvement of the efficiency of public enterprises through restructuring,
privatization and designing of performance contracts.
The major outcome of the reforms is the liberalization of trade in the economy and firms
in Kenya are now operating in a competitive environment. Kenyan firms are threatened
by import liberalization and penetration of the Kenyan market by the multinational
corporations. Importation and multinationals have grabbed market share from the local
manufacturers thus reducing their profitability. Ineffective and inefficient firms are
surviving marginally or have closed down their business.

At the regional level, we have been witnessing regional economic integrations for
example the revival of the east African community and the formation of COMESA. At
the global level we have formations of common markets such as the European Union,
liberalization of trade among member countries through the formation of world trade
organization (WTO) and globalization of world markets, and establishment of trade
initiatives such as the American Trade and Opportunity Act (AGOA). These regional
and global developments have intensified competition and our organizations are now
vulnerable to increased local and foreign competition. They are therefore under pressure
to be effective and efficient in order to survive and succeed. However some of the
economic trends also highlight opportunities to local firms. Provisions such as AGOA
allow duty free and quota free access to American markets by Kenyan cotton and textile
firms meant to promote textile exports. Such initiatives highlight opportunities to local
firms to expand their operations and enhance performance.

Thus firms should monitor and evaluate the economic trends at national, regional and
global level, understand the opportunities and threats they pose and develop strategies
that will enable the firms appropriately respond to the trends so as to achieve their
objectives.

Political/Legal Factors
Political factors include the nature of government and stability of government, and
political actions and policies. The legal factors define the regulatory parameters within
which firms operate. Legal constraints are placed on firms through tax laws, laws on
hiring and wages through minimum wage legislation, environmental protection laws,
pricing policies, foreign trade regulation and many other actions aimed at protecting
employees, consumers, the general public and the environment. Since such laws and
regulations are most commonly restrictive, they tend to reduce the potential profits of
firms. However, some political actions and legislations such as stability of government,
patent laws, government subsidies and other special incentives such as tax incentives are
designed to benefit and protect firms. Also, trade agreement between countries as a result
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of improved relations present market opportunities that a firm can exploit in the foreign
country.

Business firms operating in Kenya are greatly influenced by political and legal forces.
The government licenses businesses, taxes them, overseas quality of their products
through the Kenya Bureau of standards and has also introduced a number of laws and
regulations which dictate how business organizations should and should not behave in the
market place. However, due to the economic reforms, the Kenyan government is moving
from being an active participator to facilitator of fair playing field for business to ensure
fair competition among firms.

Therefore, since firms are either favourably or unfavourably affected by the

political/legal conditions, continual assessment of government actions will help firms
adhere to the regulations and develop complementary plans that anticipate and optimize
environmental opportunities created by political/legal trends.

Socio-Cultural factors
Social factors include the social institutions such as family structures and social
characteristics such as population size and growth rates, population density and
distributions and age structures. Social parameters also include education levels, religion
and language used. These social factors are important to firms in that they determine the
size and growth of the market. They also influence the people‟s needs, and demand for
products varies with the social characteristics.

Cultural factors include the beliefs, values, attitudes, life styles, aesthetics and artifacts
that are common to the human populations or persons in the firm‟s external environment.
Culture therefore consists of patterns of behaviour that are learned, interrelated and
shared; and a society‟s culture is unique and defines the boundaries of a particular group
of people. Culture generally develops from ethnic, religious and educational
backgrounds. These cultural factors affect an organization in that as the cultural factors
change, this affects human behaviour and their consumption behaviours and thus the
demand for various types of products such as clothing, food and leisure activities. Like
other factors in the environment, socio- cultural factors are dynamic, with rapid and
unpredictable change. The impact of cultural changes is felt in changing needs, tastes
and preferences of consumers. Thus the changes in socio-cultural factors necessitate, in
spite of complexity of anticipating future changes, the need to:
 Understand that there are different cultures of the populations in the environment
 Learn the characteristics of those cultures, that is, be sensitive to cultural
differences
 Anticipate future changes in the socio-cultural factors
 Make informed estimates of the impact of the socio-cultural changes such as shift
in population growth rates, family and age structures, values and attitudes on the
consumption of the firm‟s products
 Use the anticipation as an essential element in strategy formulation to ensure the
firm responds appropriately to socio-cultural factors. For example, a firm may
adapt different marketing mix strategies, for example, in product features and
packaging design to the various groups in its environment.

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Technological factors
Technological environment refers to the state of scientific knowledge, skills and
techniques, production processes, tools and equipments (machines) and support systems
available in a country. Business operations such as production, research and
development (R & D), and marketing are all affected by the type and level of technology.
Creative technological adaptations can suggest possibilities for new products,
improvements in existing products or improvements in existing manufacturing and
marketing techniques. A technological breakthrough can have a sudden and dramatic
effect on a firm‟s environment. It may spawn sophisticated new markets and products
and shorten the anticipated life of a firm‟s product.

Technological developments in Kenya include increased use of information technology

(IT) in service and manufacturing industries, and information superhighway and
emergency of e-commerce. All firms and most particularly those in turbulent growth
industries- IT and service industry must strive for an understanding of both the existing
technological advances and the probable future advances that can affect their products
and services. Such understanding should not only be restricted to investment in R & D to
invent new products, but gradual improvements in method, material design and
application of technology to enhance efficiency, for example, automation of activities in
banking industry. This can enable a firm to develop counteractive strategies to respond
to technological changes and maximization of opportunities created by technological
changes.

INDUSTRY ANALYSIS
An industry is a group of firms that offer or produce similar products or services, that is,
products that satisfy similar customer needs and that customers perceive to be
substitutable for one another for example, financial services or soft drinks. Examination
of the characteristics and important stakeholder groups in a particular firm‟s industry may
thus be called industry analysis.

In order to enhance success, a company should operate in an attractive or good industry

in terms of market size and growth rate, industry profit margins, competitive intensity,
technological, social and legal impacts. Further, the company should be good in that
industry- should develop the necessary capabilities for example in managerial and
technological skills required to formulate and implement good strategies to enable the
firm occupy a good position in the industry in terms of relative market share, ability to
compete on price and quality.

Therefore designing of viable strategies for a firm requires a thorough understanding of

the firm‟s industry by asking the following questions:-
1) What are the boundaries of our industry?
2) What is the structure of the industry?
3) Which firms are our competitors?
4) What are the major determinants of competition or competitive forces in
the industry?
Answers to these questions provide a basis for setting realistic objective and appropriate
strategies to enhance the firm‟s competitiveness in the industry.

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Industry Boundary
As discussed earlier, an industry is a collection of firms that offer similar products or
services- products that customers perceive to be substitutable for one another.
Understanding of industry boundary is important because it helps strategic managers to
determine the arena in which the firm is competing, since it indicates the scope of the
industry and competitive make up. It also enables the firm to identify its competitors and
monitor competitors‟ activities which is important in developing strategies that will make
a firm occupy a superior position in the industry (relative to competitors).

Industry Structure
This refers to the structural attributes or enduring characteristics that give the industry its
distinctive character.
These include:
1) The requirements for success in the industry. For example, in the IT
industry technological innovation is a key determinant of success, and in
the financial services industry, extensive capital base and sound
management is key to success.
2) Industry concentration, that is, the degree to which industry sales are
dominated by only a few firms. In a highly concentrated industry, i.e. an
industry whose sales are dominated by a handful of companies, intensity
of competition declines overtime.
3) Product differentiation, i.e. the extent to which customers perceive
products or services offered by firms in the industry as different
intensifies competition and causes a competitive disadvantage for firms
that attempt to enter the industry.
4) Barriers to entry- the obstacles that a firm must overcome to enter an
industry. When high barriers exist, competition in that industry declines
over time.
5) Economies of scale- the cost savings that companies within an industry
achieve due to increased volume. High economies of scale often
discourage the entry of new companies into the industry.

It is important for managers to assess the present and future attractiveness of industries
which their firms are members. To enhance success of a firm, the firm should operate in
an attractive industry. That is, the outlook of the industry should be good in:
i) Market size and the larger the market the more attractive the market is
ii) Market growth i.e. high growth markets are more attractive than low growth
markets
iii) Profitability i.e. high profit margin industries are more attractive than low
profit margin industries
The attractiveness of an industry is mainly determined by the structure of the industry and
the state or degree of competition. Michael Porter (1980) in his industry analysis model
argues that the state or degree of competition in an industry and thus industry
attractiveness in terms of profit potential depends on five forces:
i) Rivalry among current competitors / Jockeying of current competitors for
positions
ii) Threat of new entrants
iii) Threat of substitutes
15
 iv) The bargaining power of suppliers
v) The bargaining power of buyers.

i) Threat of new entrants

Entry into the industry threatens to dilute the existing market by vying for market share,
increasing industry capacity destabilising price structure and therefore affecting
profitability.

The extent of this threat of entry depends on the existing barriers to entry and the
expected reaction of the companies in the industry. If barriers are high and / or the new
comer can expect sharp retaliation from the existing industry members, the threat of entry
is low.
An entry barrier exists if profits are abnormally high but it is not easy to enter the
industry.

Barriers to entry
Entry barrier costs are incremental costs of a new company entering business compared
to costs incurred by existing companies. Some of these barriers are:
a) Economies of scale
An entrant is forced to either come in on a very large scale at considerable risk or at small
scale but accept a cost disadvantage.
b) Product differentiation
Existing firms have identities and customer loyalties as a result of past marketing efforts
or being the first in the industry. Differentiation is a barrier if it forces new entrants to
spend heavily to get known and break existing loyalties.
c) Capital requirements
The need to invest large amounts of resources in order to compete can prevent entry.
Even if resources are available, the risk involved may be too high.
d) Switching costs
Moving out of a familiar activity to a new one entails costs. If substantial, such costs act
as a barrier to entry.
e) Access to distribution channels
There may be difficulty in obtaining desired outlets for the products of new comer. For
example, the coca cola company has entrenched into the market through mass
distribution and establishing the loyalty of distributors by assisting them. This may be a
barrier to a new comer.
f) Government policy
The government can limit or completely deter entry into an industry by using regulatory
authority, for example, through licensing requirements.
g) Miscellaneous cost disadvantages
Existing firms may enjoy certain cost advantages which the new entrant does not. These
may include favourable access to raw materials, enjoyment of government subsidies, and
learning curve and experience curve effects.

Learning curve refers to the efficiency achieved over a period of time by workers through
much repetition. Experience curve is a concept that unit costs in many manufacturing
industries as well in some service industries decline with experience or a particular
16
company‟s cumulative volume of production. Learning and experience curves create a
barrier to entry because new competitors with no „experience‟ face high cost than
established ones.

A new entrant can expect retaliation if:

 The industry reveals retaliations to new entrants
 The established firms have the resources to fight back
 The industry is characterized by slow growth which limits the ability of the
industry to absorb new firms without substantially depressing the financial
performance of existing firms
 The established firms have resources which may not easily be used anywhere and
thus may want to keep out entrants to allow the industry to remain attractive.
It is possible to erect barriers to entry by being very aggressive in reiterating on new
entrants – a new entrant comes into the industry and all the occupants gang up against the
new entrant.

ii) Rivalry among existing competitors/jockeying for position

Rivalry can occur in an industry if members of an industry simultaneously try to improve
their position. It is this escalating activity that tends to increase rivalry. Such rivalry may
take the form of:
 Price competition as is the case among supermarkets and petroleum dealers
 Competition in quality improvement
 New product introductions
 Improvement of customer services provided etc

Rivalry within the industry can be intense if:

 We have many equally balanced competitors
 The industry is characterized by slow growth
 There is lack of differentiation
 There is high exist barriers. Thus rather than leave the industry, firms resort the
extreme survival tactics such as price cuts.

iii) Threat of substitutes

All firms in an industry are competing with industries producing substitute products.
Such outside industries place a limit to the returns that can be earned since price increases
in an industry are limited by the price of substitutes.

iv) Bargaining Power of Suppliers

Suppliers can exert power on an industry by threatening to raise prices or reduce the
quality of the components and supplied. Such pressure reduces industry and hence firm‟s
profitability. A supplier may be powerful if:
 The suppliers are few relative to the industry buyers
 There are no logical substitutes for the materials supplied
 The industry is not an important customer for the supplier
 The supplier‟s product is an important input to the (industry) buyers‟ businesses

17
  There are switching costs if the industry tries to change sources. For example, if a
firm changes sources of computer package, it may have to retrain its staff on the
use of the new package, thus incur costs by switching to a new supplier.
 The supplier is able to integrate vertically; in this case, forward vertical
integration whereby a firm acquires another firm nearer to the ultimate consumer
hence distributes its output.

v) Bargaining power of buyers

Buyers compete with the industry by forcing down prices, bargaining for higher quality
and playing competitors against each other. This adversely affects industry profitability.
A buyer is powerful if:
 The buyer faces low switching costs
 The buyer is able to integrate vertically, in this case, backward vertical
integration, whereby the firm acquires firms that supplier it with inputs (e.g. raw
materials).

NEW
ENTRANTS

Threat of new Entrants

Bargaining
Bargaining power of
power of INDUSTRY Buyers
suppliers COMPETITORS BUYERS
SUPPLIERS

Intensity of Rivalry

Threat of Substitutes

SUBSTITUTES

Figure 2: Elements of industry structure

Porter contends that the collective strength of these forces determines the ultimate profit
potential and thus attractiveness of an industry, that the weaker the forces are collectively
the greater the opportunity for superior performance. That is, a weaker force is viewed as
an opportunity because it may allow a company to earn greater profits. Conversely, the
stronger the forces are, especially in a perfectly competitive industry, the poorer the
18
prospects of long run profitability i.e. a stronger force may be regarded as threat because
it is likely to reduce the company‟s profits. In the short run, strong forces will act as a
constraint on a company‟s activities. In the long run however, a company, through its
choice of strategy may be able to change the strength of one or more of the forces to its
advantage.

Porter argues that whatever, the forces‟ collective strength, the corporate strategist‟s role
is to find a position in the industry where his/her company can best defend itself against
the forces or can influence them in its favour. Therefore when establishing strategic
agenda for their companies, strategists must understand how the forces work in their
industry and how they affect their companies in their particular situations and assess the
importance of the forces to the firm‟s success.

In assessing the industry, the strategists must therefore understand the sources of these
forces, for example, by asking what makes the industry vulnerable to entry or what
determines the bargaining power of suppliers. Knowledge of these underlying sources of
pressure will provide a basis for highlighting the firm‟s strengths and weaknesses and
industry opportunities and threats, and this will indicate areas where strategic changes
may yield the highest returns.

Applicability of Porter’s Model in Developing Country Context

The logic of the model is that attractiveness of an industry (profitability) is determined by
the state of competition in that industry. That such competition is shaped by five forces
i.e. threat of new entrants, rivalry among existing competitors, threat of substitutes,
bargaining power of suppliers and bargaining power of buyers. Porter argues that the
purpose of strategy is to cope with competition. That strategy is meant to provide a
defence against these forces or influence them favourably.

Three writers, Palvia, Palvia and Zigli (1990) attempted to modify Porter‟s model to suit
developing country context. They started by arguing that Porter‟s five forces can be
grouped into three: - customers, suppliers, competitors (comprising of industry rivalry,
new entrants, and substitutes). They acknowledged Porter‟s propositions that the forces
influence industry competition; they however, argued that these forces were major
determinants of industry competition in free market competitive economies. They argued
that developing countries did not have such economies. Therefore in such countries,
Porter‟s model needed adaptation or modification in that new forces have to be added to
the model to reflect the unique environmental challenges present in these countries. They
therefore suggested addition of two other forces: - government and logistics. They
however, argued that the relative importance of these forces vary from country to
country.

i) Government
In a free market enterprise, the government does not take an active role. It only regulates
for fair competition to take place. The government plays the role of ensuring fair
competition and good governance for the system to work. In developing countries
however, governments play a very significant and often dominant role in influencing
resource allocation. This makes the government a strategic force in such countries.

19
In Kenya, we are still steps away from achieving free market. The government plays a
significant role through regulation and direct participation in business through state
enterprises. When it is in the interest of the government, it can revoke licences. Such
government related influence frequently act as constraining factors in strategy
development process of companies. Thu government influence needs to be recognized as
a strategic force in developing countries.

ii) Logistics
Logistics includes all the physical systems and infrastructure required to move raw
materials from suppliers to the firm and finished goods from the firm to the customers.
Therefore, logistics includes transportation systems, communication systems,
warehousing, distribution networks and information systems.

Logistics may not be particularly important in developed countries (are taken for granted
in these nations). But in developing countries, logistical systems are largely inadequate
and it is this inadequacy that makes logistics a critical force in developing economies.
This inadequacy affects costs of production because companies are forced to hold large
inventories thus incurring inventory costs and delay in deliveries. This makes a
company‟s product very expensive hence a competitive disadvantage. A firm may be in
a strategically strong position when it uses technology to develop a competitive
advantage.

Infrastructural inadequacies exist in Kenya. Roads, rail and water networks, power,
telephone and Port facilities are unreliable. This constrains business activities. There is
also lack of adequate information needed by business firms. Information from
government agencies comes late thus reducing its relevance for decision making.
Given this scenario, therefore, it appears that the model suggested by Palvias that
logistics needs to be considered as a factor, holds true in Kenya.

iii) Power play

Aosa (1992) found that companies operating in Kenya complained of external

interference and unfair treatment while carrying out their activities. There were reports
of obstruction and illegal competition. It was argued that some competition was
politically motivated and some companies predominantly served the public sector. Those
companies could be quickly set up and be awarded tenders to supply the public sector.
The managers interviewed claimed that these companies were politically connected and
treated preferentially. It was not easy to forecast when such companies could be
established or how long they would operate.

This could not be attributed to the government alone but individuals in high government
positions who could yield such power that they could flout government policies and
controls at will. They do this when they individually stand to gain. Restraining such
individuals was difficult since they were usually more powerful than the checks and
balances that were meant to restrain them. Aosa proposed that such individuals form a
formidable strategic force in these countries, and a company‟s strategic agenda could
change given the activities of such individuals. He called this „power play‟ and argued
that this factor should be added to the ones suggested by Palvias.
20
Therefore, the underlying forces of suppliers, customers and competitors are all present in
developing countries. But although the relative importance of government, logistics and
power play vary from country to country, the factors are important and need to be
considered in developing country context. Thus Porter‟s five forces discussed above
have to be taken into account when analyzing the attractiveness of an industry and in
formulating strategy in developing countries.

COMPTETITOR ANALYSIS
It is not prudent for a firm to compete with rivals whom it doesn‟t know. It is important
that the firm knows its competitors well before even it competes with them.
Competitor analysis is necessary because strategic moves of one company affects or
influences the actions of the rival companies. As a result, the actions of rivals have a
direct relevance in the choice of one‟s strategy.
In order to develop competitiveness, companies must start paying as much attention to
their competitors as to their target customers. Thus as a company endeavours to develop
a sustainable competitive edge in the market, it must use its competitive intelligence
systems to collect, analyse and interpret data about the key competitors in that market and
use this information as part of its input in strategy formulation. Indeed smart companies
should design and operate systems for gathering continuous intelligence about their
competitors. Knowing one‟s competitors is critical to effective strategy formulation and
a company must constantly compare its strategy with its close competitors. The company
can then develop precise attacks on its competitors as well as prepare stronger defences
against any competitor attack.

Diagnostic Approaches to Competitor Analysis

Companies need to know a number of things about competitors. The most important are:
1. Who the firm‟s competitors are i.e. identification of competitors
2. What their objectives are i.e. competitors goals and objectives
3. What their strategies are i.e. competitors current strategies
4. Their reaction patterns i.e. competitors future strategies
5. Competitor assumptions about themselves and the industry.
6. Competitor‟s strengths and weaknesses.
Information on these issues helps the company shape its strategy.

1. Identification of competitors
A company can identify its current and potential competitors by considering:
a) How the firms define the scope of their business.
Firms with similar definition of their scope in terms of product and markets
served are your competitors.
b) How similar the benefits customers derive from the products and services the
firms offer are. The more similar the benefits, hence the higher the level of
substitutability, then these are competitors. Therefore a company should
identify its strategic group- group of firms following the same strategy. Such
firms are the company‟s closest competitors pursuing the same target markets
with the same strategy. Firms from other industries offering substitute
products are also competitors. In identifying competitors a firm should avoid
competitor myopia by giving attention to both actual/current and
21
 potential/latent competitors – that is, look at the company‟s actual and
potential competitors.
Also emphasis should not be on large competitors only, but also on small ones.
2. Competitor goals
It is important to know what goal drives each competitor‟s behaviour i.e. What is
each competitor seeking to achieve in the market? Is it short-term or long-term
profit maximization, market share, cash flow, technological leadership, low cost
leadership or service leadership etc?
It is also important to know the relative weight assigned by each competitor on
each of these goals because this will help the firm know how the competitor will
react to different types of attacks when challenged on the goals it is pursuing. For
example, a firm pursuing low-cost leadership or technological leadership will
react more strongly to manufacturing process break through than on advertising
budget increase by the same competitor.

3. Competitor‟s current strategies

A firm should understand what the competitor is doing to achieve its goals; and
continuously review its competitors‟ strategies.
Thus a company needs detailed information about each competitor‟s current
strategies i.e. know each competitor‟s strategies- product quality, features,
customer service, pricing policy, distribution strategy, promotional mix strategy,
R & D strategy, financial strategy – acquisition and utilisation of financial
resources. It is with such information that the company will be able to develop
and choose strategies that will enable it develop a competitive edge and provide
superior value to the customer.

4. Competitor‟s future strategies

It is important to speculate/contemplate the strategies the firm‟s competitors are
likely to adopt in the future. Indeed companies must be alert to changes in what
customers want and how competitors are revising their strategy to meet these
emerging wants.
Don‟t assume that competitors will continue to behave in the same way they have
behaved in the past. Competitors may have to shift their focus or refine their
present strategies. Such speculation will help the company prepare effective
counteractive strategies.

5. Competitor assumptions
It is important to understand the assumptions that each competitor holds about
itself and the industry. Find out for example, whether the competitor beliefs to be
the best in the industry or not. And also the assumption the competitor holds
about the customer. For example competitor may assume that customers value
quality and/or service, for example Celtel than price. Such understanding will
help the company know whether the competitor is operating on a wrong
assumption which it can take advantage of. For example, Safaricom can
concentrate on taking advantage on economies of scale to compete on prices.

6. Competitor strengths and weaknesses

22
 You also need to understand the competitor‟s capabilities – strengths and
weaknesses. Also understand why some of your rivals are more capable than
others. In assessing competitor strengths and weaknesses, gather recent data on
each competitor‟s businesses, particularly market share, sales and profit margins,
cash flows, financial resources, its human resources – quantity and quality, calibre
of its top management team, good will, new investments, and response capability-
ability to improve its resources to be able to respond to environmental
changes/demands and avoid resource gaps.

Understanding of the competitor‟s strengths and weaknesses is important because

it
a) Determines whether the competitor will carry out its strategies and reach its
goals,
b) Helps predict the likely moves and reactions by the competitors to the
company‟s moves such as a price – cut, a promotion start – up and new
product introduction.
c) Enables a firm to choose its strategy to take advantage of the competitors‟
weaknesses/limitations while avoiding engagements where the competitor is
strong.
d) Enables anticipate response capability and this will help a firm make a product
and a market (niche) choice and also decide on which competitor the company
should spend resources to attack head-on and which ones to avoid.

Where you realise that the firm‟s capabilities do not allow you to face a competitor head-
on, identify and emphasise on your unique capabilities to defend your market; you can
also dodge and select a different market or can form a collaborative/arrangement e.g.
strategic alliances with a competitor so as to pool resources and exploit an opportunity.
Strategic alliances are opportunistic relationships which usually end-up in formal
coalitions such as joint ventures, mergers, acquisitions and take-overs. Cooperation
between Dutch national carrier – KLM and KQ – Kenyan National carrier is an example
of strategic alliance.
Collaborative arrangements are coming up more in the automobile e.g. Japanese Isuzu &
GM industry and the pharmaceutical industry e.g. GlaxoSmithkline, due to huge capital
needed for equipment and research. Strategic alliances have also become necessary as a
result of globalisation of competition. Though globalisation was felt in manufacturing
sector, it is now also common in service industry.

This is because manufacturing sector globalisation has put a lot of pressure on the service
industry to globalize so as to provide services to their clients at the global market e.g.
auditing firms and advertising agencies. Note: These are collaborative arrangements
among competitors with conflicting interests. Collaboration becomes and alternative
strategy with the objective of eliminating or significantly reducing confrontation among
competitors.
The business world is tough and competitive. To survive you have to be better than the
best and be prepared to destroy your opponent‟s power base. However, this conflicting
and antagonistic climate does not necessarily prove to be health to the competing firms.
Thus smart firms have learned a lesson that you need to know when and how to compete,
but also even more importantly, you need to know when and how to co-operate.
23
Certainly, the completion of these alliances is intended to create better conditions for all
partners involved through technology, acquisition and share scale economies, access to
new markets, raw materials and components, response to pressures by local government,
standardization of activities.
Sources of Competitor information include the following:
- Competitors‟ communications to their customers e.g. through advertisements and
trade shows. A firm can also use other companies e.g. Steadman Group which collect
information on companies‟ advertisements
- Competitors‟ publications e.g. company newsletters and annual reports in their
communication to the employees and share holders – These indicate the company‟s
achievements and strategies.
- Trade publications that cover the industry
- Published studies by trade associations e.g. KAM or researchers
- Can get your sales force collecting information on competitors as they interact with
customers and distributors
- Getting information from recruits – who are former employees of competitors and
who will be in house experts to monitor competitor activities
- Competitor employees – through job interviews or conversation with competitors‟
employees
- Observing competitors and analysing physical evidence e.g. buying and dismantling
and analysing competitor‟s products to analyse methods and costs- referred to as
reverse engineering.

Since information about competitors is a necessary input into development of a

competitive strategy, companies should design systems to gather, analyse and interpret
information about competitors. The analysis should be done on a continuous basis and
responsibility for competitor analysis should be fixed.
Managers should not shy away from conducting competitor analysis by citing
impossibility of the task. Also remember that the purpose of strategy is not only to
outsmart the competitors, but more importantly to satisfy customers‟ needs and
expectations. Thus a company should not become so competitive – centred (concentrate
on watching its competitors) that it loses its customer focus.

MARKET ANALYSIS
Business is about trying to identify and satisfy the customers in a profitability manner. It
is difficult to satisfy customers that the company does not know. It is therefore important
for company managers to develop profiles of their customers. That is, develop a
description of people who buy from them and predict developments that may affect their
purchase behaviour. Information about the market or customers is necessary to enable a
firm identify and focus on customer needs, develop effective strategies that will enable
the company earn profits through customer satisfaction.

The major types of information used in developing customer profiles are:

1. Demographic information
Such information as sex, age, geographic location, income, occupation, population size
and growth rates etc.
2. Psychographic information

24
Such factors as personality and lifestyles, perceptions, attitudes, and motives, that is, the
needs that customers have that they want to satisfy.

It is important to note that consumers‟ buying behaviours change with changes in the
above factors. This necessitates that managers predict changes in these factors and how
such changes will affect purchasing behaviours or decisions. With this understanding the
firm will develop strategies that will enable the firm appropriately respond to the changes
and hence customer satisfaction and higher profitability.

INTERNAL ANALYSIS OF THE FIRM

External analysis helps managers to identify developments that will impact their
company i.e. opportunities and threats. How the company will react to these
opportunities and threats will depend on its internal resources and capabilities. Thus the
objective of conducting internal analysis is to enable a firm identify its strengths and
weaknesses on which it should base its strategy to maximize the favourable opportunities
and minimize the impact of threats in the environment.
There is need to emphasize that in pursuit of market opportunities, a company should not
base its strategy on emotionally charged feelings among executives and founders, but on
realistically assessed strengths and weaknesses. Objective analysis of a firm‟s resources
and capabilities will enable the firm identify key internal strengths around which it would
build its competitive strategy; and also identify weaknesses which can enable the firm
avoid strategic commitments that it can not competitively support.
As pointed earlier, the essence of a well formulated strategy is that which achieves an
appropriate match between a firm‟s external opportunities and threats and its internal
strengths and weaknesses. It is such match/fit that ultimately enables a firm‟s managers
to chart the strategic course for the company.
The identification of the firm‟s strengths and weaknesses with environmental
opportunities and threats is often referred to/defined as SWOT analysis.

SWOT Analysis

SWOT is an acronym for the internal strengths and weaknesses of a firm and the
environmental opportunities and threats facing that firm. SWOT analysis is used as a tool
of strategy formulation. It involves systematic identification of these (internal strengths
and weaknesses, and external opportunities and threats) factors and the strategy that
represents the best match between them. It is based on the assumption that managers can
better formulate a successful strategy after they have carefully reviewed the
organization‟s strengths and weaknesses in light of the opportunities and threats
presented by the environment. A SWOT analysis emphasizes that organizational
strategies must result in a good fit between organizations‟ internal and external
environments. An effective strategy maximizes a firm‟s strengths and opportunities and
minimizes its weaknesses and threats. Environmental analysis provides the information
needed to identify opportunities and threats in a firm‟s environment and its internal
strengths and weaknesses. Thus the first step in SWOT analysis is to identify the firm‟s
opportunities and threats.

An opportunity is a major favourable situation in a firm‟s environment or a trend that has

positive implication to the firm- which the firm can exploit or maximize. Identification
25
of previously overlooked market segment or changes in competitive or regulatory
circumstances, technological changes etc can represent opportunities for the firm.

A threat is a major unfavourable situation in a firm‟s environment or a trend that has

negative implication to the firm. Threats are key impediments to the firm‟s current or
desired position. The entrance of new competitors, slow market growth, technological
changes, increased bargaining power of buyers and/or suppliers, and revised regulations
can represent threats to a firm‟s success.

Understanding of the key opportunities and threats facing a firm helps its managers
identify realistic options from which to choose an appropriate strategy and clarifies the
most effective niche for the firm.

The second focus of SWOT analysis is internal strengths and weaknesses.

Strength is a resource, skill or something that the firm does (or has the capacity to do)
particularly well relative to existing and potential competitors i.e. ability to do something
that competitors can not do or at least can not do nearly as well. Distinctive competence
occurs if an organization‟s strength can not be easily matched or imitated by competitors.
A distinctive competence is important because a firm‟s competitive advantage in the
market place results by taking advantage of distinctive competence to built strategic
superiority. Strengths may exist with regard to financial resources, image, technological
leadership etc.

Usefulness of SWOT Analysis

SWOT analysis can be used in many ways to aid strategy formulation.
1. It is commonly used as a logical framework guiding analysis of a firm‟s situation
and drawing conclusions about the attractiveness or unattractiveness of the
organization‟s current situation and the need for strategic action.
2. A SWOT analysis provides useful information for objective setting process and
development of strategy alternatives that the firm might consider.
3. SWOT analysis can be used to aid strategic choice by systematically comparing
the firm‟s key external opportunities and threats with internal strengths and
weaknesses.
The figure below indicates this comparison with the objective of identifying the best
strategy, given the four distinct patterns in the match between a firm‟s internal and
external situations. The patterns are represented by the four cells.

26
 Numerous
Environmental
Opportunities

Cell 3: Supports a Cell 1: Supports an

turnaround aggressive strategy/
Strategy growth oriented strategy

Critical Substantial
Internal Strengths Internal Weaknesses

Cell 4: Supports Cell 2: Support a

a defensive diversification strategy
Strategy

Major
Environmental
Treats

Cell 1:
This is the most favourable and impressive situation. Here, the firm faces several
environmental opportunities and has numerous strengths that encourage pursuit of those
opportunities. This situation suggests growth-oriented strategies to exploit the favourable
match, for example, product and market development.

Cell 4:
Is the least favourable, with the firm facing major environmental threats from a position
of critical weaknesses? This situation calls for strategies that reduce or redirect
involvement in the products and markets examined by the SWOT analysis.

Cell 2:
Here, a firm has substantial/key strengths but faces an unfavourable environment. In this
situation, there should be strategies that would use current strengths to build long-term
opportunities in other markets, for example, product and market development.

Cell 3:
Here a firm faces impressive market opportunity but is constrained by internal
weaknesses. The focus of strategy of such a firm is eliminating the internal weaknesses
so as to more pursue the market opportunity.

27
Thus SWOT analysis aids in the identification of effective strategies by matching of a
firm‟s opportunities and threats with its strengths and weaknesses which is basically the
essence of a sound strategy.

Process of Internal Analysis

Identification of internal strengths and weaknesses is a process that involves a number of
steps:
1. Identification of Key/strategic internal factors and value chain activities.
Key internal factors are those internal capabilities that are most critical for success
in a particular competitive area. These are factors on which a firm‟s success is
most likely to depend. Such factors could vary by industry and the firm‟s current
position.
Identification and analysis of key internal factors can be carried out using two
approaches: Function approach and value chain approach.
a) Functional approach
Here the assessment of key internal factors is done by examination of the firm
across distinct functional areas.
In this approach, you desegregate/break the organization into functional areas and
it is the functional areas that you assess. You also have to examine the past
performance of the functional areas or departments to isolate key internal
contributions to favourable (or unfavourable) results. Questions such as what did
we do well or poorly in marketing, operations and financial management that had
a major influence on our past results should be asked.
Detailed assessment of the performance history helps isolate the internal factors
that influence a firm‟s sales, costs and profitability- by understanding, for
example, what the firm did or changed that accounted for high percentage of
profitability. On the basis of such results, a strategist may determine that certain
key factors such as, experience in particular distribution channels, pricing
policies, technology, advertising deserve major attention in the formation of
future strategy.

b) Value chain approach

Every firm can be viewed as a collection of value activities that are performed to
design, produce, market, deliver and support its product. Within each category, a
firm typically performs a number of discrete activities that may represent key
strengths or weaknesses.
The value chain approach provides a way of systematically assessing the series of
activities a firm performs to provide its customers with a product or service. Thus
through this approach, a firm is desegregated into value chain activities in order to
understand the behaviour of the firm‟s existing or potential sources of
differentiation.
Through the systematic analysis of the costs and sources of differentiation for
each activity, the firm can then identify factors/activities that managers can target
as key internal factors. These may include:
 Production and operations i.e.
- raw material costs and supplier relations
- economics of scale
- technical efficiency of facilities and capacity utilization
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 - research and development, technical manufacturing skill and innovation
- effectiveness and ability to produce on time
 Marketing
- product quality
- product/service mix and expansion potential
- pricing strategy and price flexibility
- advertising imaginativeness and effectiveness
- market share, geographical coverage and distribution effectiveness
- customer service quality and sales force effectiveness
 Financial and accounting
- Ability to raise short-term and long-term capital
- Cost of capital relative to that of industry competitors
- Effective cost control- ability to control cost
- Efficiency and effectiveness of accounting system for cost, budget and profit
planning.
 Human Resources
- Employees‟ skills and morale
- Employee turnover and absenteeism
- Efficiency and effectiveness of personnel policies
- Effectiveness of incentives used to motivate performance

2. Evaluation of the strategic internal factors

An internal analysis must identify and evaluate a limited number (not a long list) of
strengths and weaknesses relative to opportunities and threats in the firm‟s current and
future competitive environment.
Remember a factor is strength if it is more than merely what the firm has the competence
to do. It is something that the firm has and/or does (or has the capacity to do) particularly
well relative to the abilities of existing or potential competitors.
A factor is considered a weakness if it is something the firm lacks and/or does poorly (or
lacks the capacity to do) although key competitors have that capacity.

In evaluating the company‟s key internal factors, managers seek to determine whether the
condition of a strategic internal factor represents a potential strength or a potential
weakness/constraint.

Managers evaluate their key internal factors from three major perspectives:
- comparison with the firm‟s past performance
- comparison with competitors
- comparison with key industry requirements or determinants of success in the
industry
The above comparisons should result in a determination of whether the strategic internal
factors are:
- Strengths i.e. factors that provide the firm with a competitive edge and
therefore factors around which the firm‟s strategy should be built.
- Basic business requirements- factors that are important capabilities of both the
firm and its competitors and therefore do not represent a potential source of
strategic advantage.

29
 - Weaknesses/key limitations- factors on which the firm currently lacks the
skill, knowledge and resources needed to compete effectively. Managers will
want to avoid strategies that depend on such factors and they will usually
target these factors as areas requiring remediation.

3. In the final step, the company profile that results from the earlier steps becomes
input or a basis into strategy formulation.

ESTABLISHING ORGANIZATIONAL DIRECTION

After a thorough and objective analysis of both the external and internal environments,
the firm is able to understand the opportunities and threats facing the firm and its internal
strengths and weaknesses. With this information, managers are now in a position to
establish organizational direction. This involves formulating the company mission and
determination of corporate objectives.

Company Mission
The mission of a company is a broad business statement that sets the unique purpose of a
company- sets a company apart from other firms of its type and therefore serves to give a
company an identity. It broadly outlines the company‟s activities/purpose or reason for
its existence and thus identifies the scope of its operations in product and market terms
and technological areas of emphasis.
Thus broadly, a company mission addresses the following issues:
- Principal products and services
- Target customers and markets
- Geographic domain
- Core technologies
- Statement of broad objectives of the company‟s expected performance e.g.
growth and profitability.
- Organisational self concept- self image
- Desired public image
- Statement of corporate values
- Relationship between the company and its primary stakeholders
- Basic corporate policies e.g. on technology, environmental issues, human
resource management and management style
A mission provides a unifying theme and a challenge to all organisational units. It
communicates a sense of what should be achieved and serves as a source of inspiration
for confronting daily activities.
The mission defines the vision of a company and sets out the values that direct and
influence corporate activity. It provides a framework for making decisions and setting
priorities and provides criteria for strategy selection by the managers. A company‟s
strategy has to be consistent with its mission because a company‟s strategy forms a
comprehensive plan stating how the corporation will achieve its objectives which results
in the fulfilment of the corporate mission. Good mission statements have staying power,
however, at times, it becomes necessary to change the mission of the company if changes
in the environment necessitate. Every time managers develop the strategic plan, they
revisit and confirm the validity of the mission statement- otherwise mission statements
need to be examined regularly and adjustments made when necessary.

30
It is important to emphasize that the company‟s mission should be communicated to and
internalized by managers and employees, it becomes a common framework for making
decisions and setting priorities and serves as a source of inspiration for confronting daily
activities. Thus a company‟s mission should be challenging but achievable. In
formulating a mission, managers are ideally trying to establish a business like tone or
organisational climate
A mission may be defined narrowly or broadly. An example of a narrowly defined
mission of a savings and loan bank might be:-
„To provide mortgage money to people within the local community.‟
This mission defines the organization‟s primary business but it also limits the scope of
the firm‟s activities in terms of the products or services offered, technology used and the
market served. It might even restrict opportunities for growth.
In contrast, a broad mission widens the scope of the organisation‟s activities to include
many types of products or services, markets and technologies; e.g. using the community
bank.
“To offer financial services to anyone regardless of location”
NOTE: The problem of such broad statement is that is does not clearly identify which
aspect of financial services the bank wants to emphasize and might confuse employees
and customers.
Thus a company‟s mission should be broad enough to enable it exploit opportunities but
not so broad as to make it lose focus of its business.
Below are examples of statement of mission in narrow and broad scope:

Narrow scope Broad scope

Railroad business Transportation business
Insurance Financial services
Computers Office equipment
Television Telecommunication
Cinema Entertainment

Examine whether the mission statements below have the components of a good mission
statement.

1. Telkom (K) Ltd – Provider of airtime and telecommunication services.

- Vision- “To be a leader in the provision of world class communication
solutions”.
- Mission – “We aim to be world class telecommunication operator providing
efficient, affordable, sustainable and cost effective modern services with the
highest level of quality and reliability.”

2. Intel Corporation – world‟s largest semi-conductor company.

“Our corporate mission is to be the pre-eminent supplier of building blocks to
the new computing community. If we develop the right building blocks, we will
win. If we are wrong, we will fail. There is no competitor around who can do as
much damage to us as we can do to ourselves”.
3. Dayton – Hudson corporation (USA)

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 -“Dayton – Hudson Corporation is a diversified retailing company whose business
is to serve the American consumer through the retailing of fashion- oriented
quality merchandise”.
4. OTIS ELEVATORS (K) Ltd
- “Our mission is to provide any customer a means of moving people and things
up, down and sideways over short distances with higher reliability than any
similar enterprise”.

Formulating Long-term Objectives

An accurate appraisal of the external environment and a thorough internal analysis of the
firm and a clear definition of the company mission provide a critical foundation for
setting objectives.

The company mission encompasses the broad aims of the firm. It appears like a
statement of goals that give a general sense of direction. Such broad aim (goals) provides
a general sense of direction but do not give specific targets or time frames for evaluating
the firm‟s progress in achieving its aims. Providing such benchmarks is the function of
objectives.

Definition:
Long-term objectives are statements of the results a firm seeks to achieve over a specified
period of time – long period of time – typically five years. The rationale for setting long-
term objectives is to enable a firm achieve sustained corporate growth and profitability.
That instead of focussing on short-run profitability, managers should distribute a small
amount of profit now but sow (reinvest) most of it to achieve the likelihood of a long-
term prosperity – supply. To achieve long-term prosperity, strategic planners commonly
establish long-term objectives, which they strive to achieve, in the following areas:
(i) Profitability
A firm‟s ability to operate in the long-term depends on attaining an acceptable
level of profits. Profits are normally expressed in earnings per share or return on
investment.
(ii) Productivity- in terms of input-output relationships i.e. the number of items to be
produced or the number of services rendered per unit of input or desired cost
decrease, for example, reducing defective items or customer complaints.
(iii) Competitive position- using total sales or market share.
(iv) Employee development- objective of developing highly skilled and flexible
employees for a firm that values growth and career opportunities – in terms of
training and development
(v) Technological leadership- whether to be leaders or followers in technological
innovation.
(vi) Public/social responsibility- desired recognition of responsibility to customers and
society at large. Firm can also have objectives on charitable and community
welfare contributions.

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Qualities of long-term objectives to improve chances of being attained, objectives should
have the following qualities.
i) Acceptable
Managers should not set strategies that are consistent with their preferences and
ignore or obstruct those which offend them, but should set objectives that are
acceptable to groups within and external to the organization.
ii) Flexible
Objectives should be adaptable to unforeseen changes in the environment. To
minimize lose of specificity and lose of employee confidence, allow adjustment in
the level rather than in the nature.
iii) Measurable
Objectives must clearly state what will be achieved and when it will be achieved,
for example, increase ROI by at least 2% a year, or 5 employees to go for training
per year. Thus objectives should be quantifiable as much as possible and where
objectives can not be quantified, use subjective measures.
iv) Realistic
Objectives should be high enough to challenge but possible to achieve i.e.
challenging but achievable.
v) Understandable
Objectives should be clear and meaningful so that everybody understands what is
to be achieved.
Members of the organization must also understand the major criteria by which their
performance will be evaluated. This means that there should be effective communication
channels i.e. top-down-up for cultivating commitment in the organization.

STRATEGY FORMULATION
In the previous section, it was emphasized that objectives are needed to prevent the firm‟s
direction and progress from being determined by random forces. This is true since
objectives spell out desired end results of planned activity, indicating what is to be
accomplished and by when. The achievement of corporate objectives should result in the
fulfilment of the corporate mission.

However, objectives indicate what strategic managers want but provide few insights as to
how this will be achieved. Thus, it is equally true that objectives can be achieved only if
effective strategies are formulated and implemented. A company‟s strategy is a
comprehensive plan of major actions through which a firm intends to achieve its
objectives and in turn its mission. Thus a company‟s strategy is a statement of means of
how objectives will be achieved. Indeed objectives and strategies are so interdependent
and some experts combine objectives and strategies and refer them as company strategy.

Identifying Strategic Alternatives

In trying to achieve their objectives, companies identify a number of strategic alternatives
which are then analysed (evaluated) to choose (select) the best strategy, given the firm‟s
environmental opportunities and threats, and internal strengths and weaknesses. The
following section discusses two broad classifications of strategy options that a firm may
consider: Porter‟s competitive strategies and grand strategies.

33
Porters Competitive Strategies
Michael Porter argues that long-term strategy must be based on a core idea about how a
firm can best compete in the market place. Porter proposes three generic competitive
strategies that a firm can adopt to out perform other firms in a particular industry. These
strategies are called generic because they can be pursued by any type or size of business,
even by not-for-profit organizations. These strategies are also referred to business
strategies since they focus on improving the competitive position of a company‟s or
business unit‟s products or services within specific industry or market segment that the
company or business unit serves. That these strategies provide basic direction for
strategic actions and a basis for coordinated and sustained efforts towards achieving
business objectives.
Porter argues that any long-term strategies should derive from a firm‟s attempt to seek
competitive advantage based on one or the three generic strategies:

i) Striving for overall low cost leadership in the industry

ii) Striving to create and market unique products for varied customer group through
differentiation.
iii) Striving to have special appeal to one or more groups of consumer or industrial
buyers, focussing on their cost or differentiation concerns- segment the market
and focus on the market segment(s)

1. Low cost leadership

This strategy is achieved by excelling at:

i) Cost reduction and efficiencies in designing, producing and marketing
comparable products than competitors.
ii) Maximizing economies of scale
iii) Implementing cost cutting technologies
iv) Stressing cost reduction especially through tight control of overheads and
administrative expenses; avoidance of marginal customer accounts and cost
minimization in areas like research and development, service and sales force.

Low cost leader is able to use its cost advantage to charge lower prices or enjoy higher
profit margins; and thus the firm can effectively defend itself in price wars and attack
competitors on price to gain market share. Firms seeking low cost leadership monitor any
low cost technology that may be developed by a competitor.

2. Differentiation
Differentiation involves the creation of a product or service by a firm that is perceived
throughout its industry as unique.

Through differentiation, a firm will stress on an attribute to appeal to customers with a

special sensitivity for that particular attribute. This will enable a firm‟s attempts to build
customer loyalty to the firm‟s product. Such loyalty lowers customers‟ sensitivity to
prices and translates into a firm‟s ability to charge higher prices (a premium) for its
product and increased costs can usually be passed on to buyers. Differentiation also
creates barriers to entry by competitors since new firms must develop their own

34
distinctive competences to differentiate their products in some way in order to compete
successfully.

To sustain differentiation, the firm must monitor other firms which may initiate and
continuously upgrade its resources and capability to further differentiate its products.

3. Focus
This is a firm‟s attempt to segment the market and focus or attend to the needs of a
particular market segment. Focus can be anchored in low cost or differentiation base, to
serve the narrow well defined market better than competitors who serve a broader market.
Firms pursuing focus strategy monitors any firm(s) which may also target the market
segment.
Porter argues that to be successfully a company or business unit must achieve at least one
of the preceding generic competitive strategies.

Grand Strategies

Grand strategies can be defined as a comprehensive general approach that guides a firm‟s
major actions. Grand strategies are also referred to as corporate strategies in that they are
established at the highest levels of the organization, affect the entire organization and
involve a long-range time horizon. Corporate (grand) strategies are concerned with
which businesses an organization will be in and how its resources will be distributed
among those businesses.

The following are grand strategies that strategic managers should consider. A firm can
adopt one or more of these strategies as a basis for achieving its long term objectives.
Note: Grand strategies discussed below are composed of the general orientations under
growth Strategies which seek to expand the company‟s activities i.e. concentration,
market development, product development, horizontal integration, vertical integration,
joint venture and diversification strategies; and defensive or retrenchment strategies
which seek to reduce the company‟s level of activities i.e. turnaround,
divestment/divestiture and liquidation strategies.

1. Concentration Growth Strategy

Here a company focuses on a specific product and market segment – i.e. the firm
directs its resources to the profitable growth of a single product, in a single
market, with a single dominant technology. Thus through this strategy, a firm
seeks to build on its competence and achieve a competitive edge by concentrating
in the product-market-segment it knows best and avoids situations that require
undeveloped skills.

The rationale for this strategy is that a firm should thoroughly develop and exploit
its expertise in a limited competitive arena; and ensure superior performance
through ability to assess market needs, knowledge of buyer behaviour and
customer price sensitivity. To enhance performance, a firm pursuing
concentration strategy strives to increase use of present product in present market
through advertising other uses of the product, price cuts and attracting non-users
to buy the product through price incentives and free samples.
35
 This strategy may be suitable in stable conditions but not in a changing
competitive environment.

2. Market Development
This strategy involves marketing present products, often with only cosmetic
modifications, to customers in related market areas by adding channels of
distribution or by changing the content of advertising or promotion.

Thus this strategy involves opening additional geographic markets- national,

regional and international expansion; attracting other market segments by
developing product versions to appeal to the segments; entering other channels of
distribution; changing or entering in other advertising media and identifying new
uses for existing products, for example, GlaxoSmithKline‟s campaign that aspirin
can lower heart attacks besides its use as a pain reliever.

3. Product Development
This strategy involves substantial modification of existing products or the creation
of new but related products that can be marketed to the current customers through
established channels. Thus this strategy involves penetration of existing markets
by incorporating product modifications into existing items or by developing new
products with clear connection to the existing product line.
The strategy is adopted when a company wants to take advantage of favourable
reputation or brand name to develop new product features, develop quality
variations and develop additional models and sizes in its product strategy.

4. Horizontal integration
This strategy is pursued when a company wants to grow through acquisition of
one or more similar firms operating at the same stage of the value chain i.e.
production-marketing chain. Horizontal integration is accomplished when a firm
buys another organization in the same business.
These are basically acquisitions or mergers of competing businesses aimed at
eliminating competitors and provide the acquiring firm with the access to new
markets, and as a result, the firm operates in multiple geographic locations at the
same point in the industry‟s value chain.

Horizontal integration has advantages of enabling the acquiring firm to expand its
operations, thereby achieving greater market share; improving economies of scale
and increasing the efficiency of the capital use. However, it is risky in that success
of the expansion will depend on proven abilities in managing the expanded
business.

5. Vertical integration
This a strategy in which a company acquires firms that supply it with inputs, such
as raw materials, or are customers for its outputs, such as warehouses for finished
products. If a firm acquired operates at the earlier stage of the production-
marketing process, this is backward integration i.e. going backward on an
36
 industry‟s value chain and in effect, the company makes its own supplies of
inputs, for example, a shirt manufacturer acquiring a textile producer. Acquisition
of a firm nearer to the ultimate consumer is forward vertical integration i.e. going
forward on an industry‟s value chain and in effect, the company distributes its
own products and obtains access to potential customers, for example, the shirt
manufacturer acquiring a clothe store.
Textile producer ← shirt manufacturer → clothing store

a) Backward vertical integration

Vertical integration is pursued when a firm has a desire to increase the
dependability or reliability of the supply and quality of raw materials used as
production inputs. This strategy is desired when the number of suppliers is small
and the number of competitors who need the inputs is large. Then a vertically
integrating firm can better control its costs through lower input prices and higher
input quality and thereby improve the profit margin. However, backward
integration is risky in that it leads to increased commitment to one type of
business.

b) Forward vertical integration

A firm can increase the predictability of demand for its output through ownership
of the next stage of production-marketing chain, i.e. control the distribution of its
output. If distributors have large mark-up margins, the organization may improve
profits by integrating forward. Forward vertical integration is also risky in that
expansion into new areas requires strategic managers to broaden the base of their
competence and to assume additional responsibilities. Thus success of the
expanded business will depend on these abilities.

6. Joint venture
These are cooperative arrangements to provide firms with strong capital base and
increased expertise to exploit an opportunity. A joint venture is a business activity
formed by two or more separate organizations for strategic purposes that creates
an independent business entity and allocates ownership, operational
responsibilities and financial risks and rewards to each member, while preserving
their separate identity or autonomy.

Joint ventures often occur because the companies involved do not want to or
cannot legally merge permanently. Joint ventures provide away to temporarily
combine the different strengths of partners to achieve outcome of value to both.
Apart from strategic reasons, certain countries mandate that foreign firms entering
their markets do so on a joint ownership basis so as to minimize the threat of
foreign domination and enhance the skills, employment growth and profits of
local firms.

Joint venture has a number of advantages: it presents new opportunities in that it

enables firms to obtain access to specific markets and reduces a firm‟s financial
risks as the risks can be shared. However, joint ventures also have disadvantages.
Joint ventures often limit the discretion, control and profit potential of partners
37
 while demanding managerial attention and other resources that might be directed
towards the firm‟s mainstream activity. Also, success of a joint venture depends
on harmonious relationship between the partners and how conflicts are resolved.

7. Diversification
When an industry becomes mature and most of the firms have reached the limits
of growth using vertical and horizontal growth strategies, unless competitors are
able to expand internationally into less mature markets, they may have no option
but to diversify into different industries if they want to continue growing.
A firm can diversify through acquisition of a separate business with no synergistic
possibilities to counterbalance the strengths and weaknesses of the two
businesses. However, diversifications are occasionally undertaken as unrelated
investments because of high profit potential and their otherwise minimal resource
demands. A firm may pursue diversification as means to increase the firm‟s stock
value, improve stability of earnings and sales by acquiring firms whose earnings
and sales complement the firm‟s peaks and valleys, i.e. to smoothen its cash flows
and to increase the growth rate of the firm.
The two basic diversification strategies are concentric and conglomerate
diversification.
a) concentric diversification
When a firm acquires businesses that are related to the firm‟s current business
in terms of technology, markets or products, this is concentric diversification-
here the new businesses selected possess a high degree of compatibility with
the firm‟s current businesses. Thus the firm adopting this strategy searches
for business with similar attributes or some commonality in markets, products
and technology, but not identical to the company‟s existing products, markets,
technology and resources requirements.
b) Conglomerate Diversification
When a firm, especially a large one plans to acquire an unrelated business
because it represents the most promising investment opportunity available,
this is conglomerate diversification. Conglomerate diversification is pursued
principally on profit considerations of the venture. The strategy is suitable
when a firm is seeking a balance between high cash/low opportunity and low
cash/high opportunity.

8. Turnaround/retrenchment
For a number of reasons, for example, recessions, production inefficiencies and
innovative breakthrough by competitors, a firm can find itself with declining
profits. Strategic managers believe that such a firm can survive and eventually
recover if concerted efforts are made over a period of years to fortify its
distinctive competence. Therefore the purpose of turnaround/retrenchment
strategy is to reverse current negative trends to profitability, thus referred to as a
turnaround strategy.

Turnaround strategy is usually achieved in two way singly or in combination:

a) Cost reduction- for example, decreasing the workforce through employee
attrition, leasing rather than purchasing, extending the life of machinery etc.

38
 b) Asset reduction- for example, sale of land, buildings and equipments not
essential to the basic activity of the firm, and elimination of perks such as
executive cars.

More drastic measures such as laying-off of employees, dropping items from

product line and elimination of low-margin customers may be adopted if
necessary.

9. Divestment/Divestiture
This strategy involves the sale of a firm or a major component of a firm which can
be a strategic business unit, a product line or division, for financial needs. When
turnaround fails to accomplish the desired turnaround, strategic managers decide
to sell the firm. However, the firm is sold as a going concern and managers get a
buyer willing to pay value of fixed assets and a premium. It is assumed that the
firm will be profitable given the buyer‟s skills and resources and synergistic effect
with their current business.
10. Liquidation
Here the firm is sold as a whole or dissolved by owners tired of business, by
choice or force. The firm is sold for its tangible asset value and not as a going
concern. Here, managers admit failure and try to minimize the losses of all the
firm‟s stakeholders, or managers are forced to sell because of deteriorated
financial condition of the firm.

STRATEGIC ANALYSIS AND CHOICE

Strategic analysis and choice involves evaluating strategy alternatives and selecting
viable strategies that would lead to the attainment of organizational objectives.

Approaches to Strategic Analysis & Choice

Strategic managers use a number of tools/approaches in strategic analysis and choice.
The widely used approaches/tools include:
- The Boston Consulting Group (BCG) Growth market-share matrix
- The General Electric (GE) planning grid/market attractiveness-business position
model/General Electric‟s multifactor portfolio matrix
Boston Consulting Group (BCG) Matrix
The BCG approach is based on a philosophy that a firm‟s strategic business unit‟s or
product‟s market growth rate and its relative market share are important considerations in
determining its best strategy.
The model can be used by large firms that have a range of businesses or products
characterised by different market growth rates (percentage growth in sales and thus
market attractiveness) and relative market share (relative competitive position).
To use the BCG matrix, each of the firm‟s businesses are plotted into a single overall
matrix according to their market growth rate and relative market share; and evaluated into
the likely generators and users of corporate resources to determine the appropriate
strategies for the individual strategic business units (SBUs).
NOTE: SBUs are operating (business) units in an organisation each of which sells a
distinct set of products or services to an identifiable group of customers in competition
with well defined set of competitors and strategies for a unit are made independent of the
other units.
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In constructing the matrix, market growth rate on the vertical axis is the projected rate of
sales growth for the market being served by the business or product, usually measured as
a percentage increase in the market‟s sales i.e. market growth rate (current year) =
Firm‟s sales in current year – Firm‟s sales in past year x 100
Firm‟s sales in past year

It is an indicator of relative attractiveness of the markets served. Market growth rate is

usually separated into high and low and a market growth rate of above 10% is arbitrary
considered high. On the horizontal axis, relative market share indicates relative
competitive position usually expressed as the market share of a product/business divided
by the market share of its largest competitor
i.e. Relative market share = Firm‟s market share
a Market share of largest competitor
Relative market share provides a basis for comparing the relative strengths of business
/products in terms of relative positions in their respective markets. The relative market
share is also divided into high and low. Any amount above 1.00 signifies a market share
greater than that of the largest competitor and hence the firm has a high relative market
share and is a market leader.
The positions of businesses on the BCG matrix are based on their market growth rates
and their relative competitive positions.
In the figure below, each circle represents a business. The size of the circle represents a
business. The size of the circle represents the proportion of corporate revenue generated
by that business/product. See figure below:

20%
Market High Stars Question marks

Growth rate

10%

(Mkt attractiveness) Cash cows Dogs

Low
0
1.5 High 1 Low 0
Relative market share
(Relative competitive position)

Figure 1. BCG Growth/Share Matrix

Question Marks
These are company businesses that operate in high growth markets but have low relative
market shares. Most businesses start off as question marks in that the company tries to
enter a high – growth market in which there is already a market leader.

Question marks are businesses whose high market growth rate gives them considerable
appeal but whose low market share makes their profit uncertain – so the company has to
question/think hard whether to keep pouring money into these businesses.

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Question marks are net cash users because the rapid growth results in high cash needs –
they require a lot of cash since the company has to add plants, equipment and personnel
to keep up with the fast growth markets and perhaps try to overtake the market leader.
But their small market share results in low cash generation. Thus, a company should
identify question marks that would increase their market share and more into stars if
resources are devoted to them. Question marks unable to obtain a dominant market share
(and thus become stars) by the time the industry growth rate inevitably slows become
dogs. Where long-run shift from question marks to stars is unlikely, divest the question
mark and reposition resources move effectively in the remainder of corporate portfolio.

Stars
These are businesses in rapidly growing markets with large market shares. If a question –
mark business is successful, it becomes a star. A star is therefore a market leader in a
high growth market.

This does not necessarily mean that the star produces a positive cash flow for the
company. The company must spend substantial funds to keep up with the high market
growth and to fight off competitors‟ attacks. This investment requirement is often in
excess of the funds that they can generate. Therefore these businesses are often short-
term net cash users.
The businesses represent the best long-run opportunities (growth and profitability) in the
firm‟s portfolio. Thus they require substantial investment to maintain and expand their
dominant position in a growing market. At least a company should have star business.

Cash Cows
These are businesses with high market share in low growth markets or industries. In our
matrix, when a market‟s annual growth rate falls to less than 10%, the star becomes a
cash cow if it still has the largest market share. A cash cow produces a lot of cash for the
company. The company does not have to finance a lot of capacity expansion because the
market‟s growth rate has slowed down.
Thus because of their strong positions and their minimal reinvestment requirements, these
businesses often generate cash in excess of their needs. Therefore they are selectively
milked as a source of corporate resources for deployment elsewhere e.g. to support stars
and question marks, and dogs which tend to be cash hungry.
A cash cow business should be well managed to maintain their strong market share while
generating excess resources for corporate wide use. In the event of a cash cow loosing
relative market share, the company has to pump enough money back into its cash cow to
maintain market leadership or else cash cows may transform into dog business.

Dogs
Dogs describe company businesses that have low market shares and are in low growth
markets. Therefore these are businesses in mature markets with intense competition.
They typically generate low profits or losses although they may throw-off some cash.
Because of their weak position, they are managed for short-term cash flow e.g. through
cost cutting and they are to be divested or liquidated once short-term harvesting has been
maximized. Some managers argue that if well managed, dogs can turn out to be positive
– highly reliable resource generators. This may be possible if a company maintains
narrow market focus, puts emphasis on high quality, moderate prices, cost control and
41
advertising. However, ineffective dogs – those which consume more management time
than they are worth, should be considered prime candidates for harvesting, divestiture or
liquidation

Once the company has plotted its businesses in the growth share-matrix, then it will be
able to determine whether its business portfolio is health. A health portfolio should have
a large number of stars and cash cows with only a few question marks and dogs.
As discussed above, once you have plotted the businesses in the matrix, then determine
what objectives and strategy to adopt to each product/business. Four alternative
objectives/strategies (as indicated above) can be pursued:
a) Build
Here the objective is to increase the SBU‟s market share even by fore-going
short-term earnings to achieve this objective.
Building is appropriate for question marks whose market shares have to grow if
they are to become stars.

b) Hold
Here the objective is to preserve the SBUs‟ market share. This objective is
appropriate for strong cash cows and stars if they are to continue to yield a large
positive share.

c) Harvest
Here the objective is to increase the SBUs‟ short-term cash flow regardless of the
long-term effect. This strategy is appropriate for weak cash cows whose future is
dim from whom more cash flow is needed. Harvesting can also be used with
question marks and dogs.

d) Divest
Here the objective is to sell or liquidate the business because resources can be
better used elsewhere. That is appropriate for dogs and question marks that are
acting as a drag on the company‟s profits.

Note
(1) SBUs change their positions (in the growth share matrix) over time. Successful
SBUs have a life-cycle. They start as question marks, become stars, then cash cows
and finally dogs towards the end of their life-cycle. Therefore companies should
examine not only the current positions of their businesses in the growth share matrix,
but also their moving position. Such that the growth/share matrix becomes a
planning tool for the companies strategic planners, by enabling assessment of each
business and assigning reasonable objectives and strategies.
(2) It is also important to note the following mistakes which may be committed by
strategic planners:
- leaving cash-cow business with too little retained funds in which case they grow
weak; or leaving them with too much in retained funds in which case the company
fails to invest enough in new growth businesses
- making major investments in dogs hoping to turn them around but failing each time

42
- maintaining too many question marks and under investing in each; question marks
should either receive enough support to achieve segment dominance/build market
share or be dropped

Although the BCG matrix is an important tool for business portfolio analysis and
strategic choice, strategic planners must recognise its limitations:
1. Clearly defining market share is often difficult and thus accurately measuring
market share and growth rate into high/low can be a problem. This creates a
potential for distortion and manipulation.
2. Dividing the matrix into four cells based on a high/low classification scheme is
somewhat simplistic. It does not recognise markets with average growth rates or
businesses with average market share.
3. Strategic evaluation of a set of businesses requires examination of more than
relative market share and market growth rate – The attractiveness of an industry
depends not only on its growth rate but also on other factors e.g. competitive,
technological capability etc.
Further, market share is also not the only determinant of competitive position of a
business – there are other factors including ability to compete on price and
quality, technological capability and managerial capabilities.

General Electric (GE) Planning Grid/General Electric Multifactor Matrix

General electric company popularised the Nine-cell planning grid. It is an adoption of
the BCG approach that attempts to over come some of the limitations of the BCG matrix
mentioned above.
GE grid uses multiple factors to assess industry attractiveness and relative business
position/strength rather than single measures (market share and market growth)
respectively employed by the BCG matrix. In the GE grid, market attractiveness is
determined by assessing market size and growth rate, industry profit margins,
competitive intensity, technology and social factors. Business position/strength is
determined by assessing the firm‟s relative market share, knowledge of customer/market,
and technological capability.
Further, the GE expanded the matrix from four (4) cells to nine (9) cells replacing the
high/low axes with high/medium/low axes to make finer distinctions among business
portfolio positions.

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 G.E. Planning Grid

Market Attractiveness High

- market size & growth rate
- Industry Profit margins Medium
- Competitive
- Intensity Low
- Technology & social factors

Strong Average weak

Business Strength
- Relative mkt share
Technological capability
- Knowledge of customer/mkt

Figure 2. G.E. Planning Grid

Behavioural Considerations Affecting Strategic Choice

After a comprehensive strategy analysis, strategic decision makers are usually confronted
with several feasible/viable alternatives rather than an obvious choice. In fact rarely does
evaluation of alternative strategies lead to identification of a clearly superior strategy.
Further, besides the economic justification of a strategy, there are other considerations for
example, social responsibility in strategy choice. Thus under these circumstances,
several factors influence strategic choice. These include:

1. Role of past strategy

If past strategy has been successful, managers will adopt the same strategy or choose a
strategy that is close to the current one or one that makes incremental alterations, that is,
moving towards a desired position incrementally by making small scale steps. Therefore
past strategy greatly influences current strategic choice.

2. Degree of firm‟s external dependence

If a firm is highly dependent on one or more environmental elements, its strategic choice
must accommodate that dependence. Therefore the greater the firm‟s external
dependence, the lower its range and flexibility in strategic choice. Otherwise the firm
might opt for political strategies such as lobbying, coalitions and advocacy. In a case
where the company depends on one single major buyer, strategic alternatives and
ultimate choice of strategy, for example, R & D, pricing, distribution and product design
are limited and strongly influenced by the buyers‟ demands. If dependence on an external
element is critical, firms may include representatives of those elements (for example,
government, unions, supplier, bank or donor) in strategic choice process, for example, co-
opting of government officials. The firm may also have to develop a political strategy to
influence stakeholders through lobbying and coalitions.

Thus due to pressures from the external environment such as government, interest groups,
shareholders who may want high dividends and creditors who want to be paid on time, a
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firm may opt for a strategy that is compatible with the principal stakeholders or one that
minimizes external pressures and maximizes probability of gaining stakeholder support.
All these must be given consideration in selection of the best strategy alternative.

3. Management‟s attitudes towards risk

Attractiveness of a particular strategy alternative is partially a function of the amount of
risks it entails. Risk is composed of probability that the strategy will be effective and
amount of assets the corporation must allocate to that strategy and the length of time the
assets will be unavailable for other uses. The greater the assets involved and the longer
they are committed, the more likely top management is to demand a high probability of
success.

Attitudes towards risk range from risk taking to risk indifferent and risk aversion. Where
attitudes favour risk, the range of strategic choices expands and high risk strategies such
as offensive opportunistic strategies are acceptable and desirable. Where management is
risk averse, the range of strategic choices is limited and risky alternatives are eliminated
before strategic choices are made, and risk averse managers would prefer defensive and
safe strategies. Do not expect managers with no ownership position in a company to
have much interest in putting their jobs in danger with a risky decision. Research does
indicate that managers who own a significant amount of stock in their firms are more
likely to engage in risk taking actions than are managers with no stock.

To quantify risks, that is, assess the probability of success or failure of strategic
alternative, managers use techniques such as capital asset pricing model (CAPM) and
Arbitrage Pricing Theory (APT) methods for linking the risks involved in a particular
alternative and expected returns on a company‟s Portfolio. Net Present Value (NPV)
technique is also used by adjusting for risk in case circumstances change; and real options
theory, an approach used to evaluate alternatives under conditions of high environmental
uncertainty. According to real options approach, when the future is highly uncertain, it
pays to have a broad range of options open. Thus managers use these techniques to
consider risk return trade offs of various strategy options.

4. Competitive Reactions
In weighing strategic choices, top management frequently or normally incorporate
perceptions of likely competitor reactions to those choices. They must consider the
probable impact of such reaction on the success of the chosen strategy.

5. Pressures from corporate culture

The shared values and beliefs, for example, are determinants of successful
implementation of a chosen strategy. Since corporate culture can be a hindrance in
strategy implementation, managers usually prefer choosing strategies that are compatible
with the corporate culture.

6. Personal preferences and values of key managers

We must acknowledge that there is no way we can divorce the decision determining the
most sensible economic strategy for a company from the personal needs, preferences and
values of those who make the choices. We must admit rather than resist the fact that
executives in charge of company destinies do not look exclusively at what a company
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might do and can do, but in apparent disregard of these considerations, they sometimes
seem heavily influenced by what they personally want to do. That is why companies
have plunged into business without the technical, financial and marketing resources
necessary to succeed in them. Thus in examining the alternatives available to a company,
we must take into consideration the preferences and values of the chief executive and
other key managers who must either contribute to or assent to the strategy.

Strategic managers should harmonize personal inclinations with optimum combination of

economic opportunity and company capability through logical appraisal. The strategist
must reconcile the divergence between the chief executive‟s preferences and values and
the strategic choice which seems most economically defensible. This can be achieved by
making friends rather than managers.

Internal Political Considerations

Power and political factors influence strategic choice. Indeed, the use of power to further
individual or group influences is common in organizational life. Studies have indicated
that strategic decisions in business organization were frequently settled by power rather
than maximization procedures.

A major source of power in most organizations is the chief executive officer (CEO). The
CEO is consistently the dominant force in strategic choice in that when the CEO begins
to support or favour a particular strategic choice, it is often selected unanimously.

Another power source that influence strategic choice particularly in large firms is called
the coalition phenomenon. Sub-units and individuals particularly key managers will
support some alternatives and oppose others. Mutual interest often draws certain groups
together in coalitions to enhance their position on major strategic issues. These
coalitions, particularly the powerful ones, often called dominant coalitions, exert
considerable influence on the strategic process.

Studies confirm the frequent use of power and coalitions in strategic decision making.
Infact, strategy formulation is often seen as a political process that involves bargaining
and negotiating. Each phase in the process of strategy formulation and choice presents an
opportunity for political action intended to influence the outcome.

For example, in identification and diagnosis of strategic issues, political activity will
include control of strategic agenda- strategic issues to be considered. The issues become
political since individuals have divergent and often selfish interests. In narrowing the
alternative strategies, for serious consideration, political activities are mobilization and
formation of coalitions. In examining and choosing the strategy, political activities
include control of choice, search and representation of information to defend and justify a
choice. Implementation of strategy phase involves interaction between winners and
losers. Political activity here include winners attempting to „sell‟ or co-opt losers and
losers attempting to thwart, that is, oppose, frustrate or obstruct decisions and trigger
fresh strategic issues.

Given that political factors can impact strategic decision making process the challenge
for strategists lies in recognizing and managing this political influence. If strategic choice
46
processes are not carefully overseen, managers can bias the content of strategic decisions
in the direction of their own interests. This possibility must be recognized and where
necessary managed to avoid dysfunctional political bias.

Accommodating formal and informal negotiating and bargaining between individuals,

sub-units and coalitions is an indispensable mechanism in the choice of strategy that will
result in greater commitment and incremental change. Also, the need for consensus in
strategy formulation is important. Consensus means agreement of issues to decision
making. It comes when all (not many or most members) agree on issues. Strategists need
to seek support or inspire rather than using force. This will enhance motivation and
commitment to the selected strategy‟s implementation.

STRATEGY IMPLEMENTATION
Both strategy formulation (planning) and implementation are critically important to the
success of an organisation. If you try to assess the reasons for failure of organisations,
one of the possible reasons is poor planning and another is poor implementation.
Therefore, in striving to achieve intended results, managers should:
1) Develop good strategies i.e. effective, realistic and understandable to enhance
commitment.
2) Ensure good implementation- by clearly identifying what needs to be done to put the
strategy into action, how and when to be done, assigning responsibility, allocating
resources and enlisting commitment of individuals in the firm to perform activities
required to implement the strategy.
Effective implementation of strategy is a difficult undertaking, because as noted, in the
implementation phase, you are enlisting commitment, but there might be resistance to
change because people want to maintain the status – quo as the human mind likes routine
things.
Some managers are good in formulation, but poor in implementing and would like to
procrastinate – delay action. In spite of the difficulty of effective implementation of
strategy, managers must avoid the problem of concentrating on strategy formulation but
shying from implementation- a situation referred to as “paralysis by analysis”.
Strategy formulation and implementation tend to overlap and thus managers should
ensure that there is no separation between strategy development and implementation. It
is a mistake to get expert managers/consultants to develop strategy and give it to line
managers to implement. It is the line managers who will implement the strategy and
therefore they should be involved in developing the strategy. Consultants who should be
knowledgeable should act as facilitators to provide direction and ensure that everybody
understands what is going on and participates in crafting the strategy.

Operationalizing Strategy
In implementing strategy, the strategy must be made operational (ready for action). This
involves breaking long-term corporate objectives to operational short-term objectives and
developing specific functional (unit/departmental) strategies and drawing action plans to
achieve the objectives. Thus the strategy must be made operational by recasting and
translating strategy into specific actions and shorter time frames – e.g. 5 year strategy has
to be broken to a year or half-year and turn it into programmes or working instructions –
statement of the activities needed to make the strategy action oriented and establish

47
procedures – a system of sequential steps or techniques that describe in detail how
particular activities or tasks are to be done.

Therefore in operationalizing strategy, the following need to be clear:

What is to how/means of what to be how to do when

be achieved achieving objectives done it

Objectives Strategy Programmes/ Procedures Timing

Action plans

Who Cost of activity

Responsibility Budget

Resource allocation

Note:
- Annual objectives translate long – range aspirations into the year‟s targets. This
provides clarity, motivation and effectiveness in strategy implementation.
- Functional strategies translate grand strategy at the level of the firm as a whole into
activities for the firm‟s units. Operating managers participate in the development of
these strategies and their participation in turn, helps clarify what their units are
expected to do in implementing the grand strategy.
- Managers should also establish and communicate concise policies to guide decisions
Policies are directives (specific guides) designed to guide thinking, decisions and actions
of managers and their subordinates in implementing a firm‟s strategy.
They provide guidelines for establishing and controlling on-going operations in a manner
consistent with the firm‟s strategic objectives.
Policies increase managerial effectiveness by standardizing many routine decisions and
controlling the discretion of managers and subordinates in implementing functional
strategies.
Policies control and reinforce the implementation of functional strategies and grand
strategies through several ways:
- Establishing indirect control over independent action by clearly stating how things are
to be done and thus limiting discretion and conduct of activities without direct
intervention by top management.

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- Promoting uniform handling of similar activities. This facilitates the co-ordination of
work tasks and helps reduce disparate handling of common activities.
- Ensure quick decisions by standardizing answers to preciously answered questions
that would otherwise recur.
- Clarifying what is expected when major strategic change is undertaken and thus
reducing uncertainty and thus counteracting resistance to or rejection of chosen
strategy.

Institutionalizing Strategy/Organising for Action

Operationalizing strategy (as noted) is a process of developing plans detailing how a
strategy is to be put into action- making it ready for eventual implementation. The
implementation phase also requires institutionalisation of strategy i.e. developing
organisational capability to a point where it is fully supportive of the new strategy. This
involves other types of action – oriented activities e.g. matching strategy with
organisational structure, selecting leadership and matching strategy with culture. This is
important because for strategy implementation to be successful, the strategy has to be
consistent or compatible with the firm‟s internal dimensions such as organisational
structure, leadership and culture.

Strategy-Structure Relationship
A number of studies have been conducted concentrating on the relationship between
organisational structure and the strategy adopted. Alfred Chandler (1962) analysed the
structure of organisations in the USA over time in order to see what factors affected
structure and in which causal sequence.
Chandler observed that the nature of the environment and the resources of the
organisation influence the strategy chosen at a particular time and this in turn determines
the organisational structure. He further observed that the evolution of the environment
and/or of the forces of the organisation brought about a new strategy and a new structure.
From his findings, Chandler generated the most widely – held view on the nature of the
relationship between strategy and structure – That “structure follows strategy”, that is,
changes in corporate strategy, leads to changes in organisational structure.
Chandler noted that a new strategy required a new or at least refashioned structure if the
enlarged enterprise was to be operated efficiently – That unless structure follows strategy,
inefficiency results. Chandler argued that since organisational structural design ties
together key positions, activities performed, flow of authority and lines of
communication, and resources of the firm, it must be closely aligned with the demands of
the firm‟s strategy.
It is on this basis that chandler found a common strategy – structure sequence:
(1) Change in the environment
(2) The choice of a new strategy
(3) Pressure on the organisation and hence administrative problems – ineffectiveness in
organising and co-ordinating activities required by the new strategy and hence
inefficiency and a decline in performance.
(4) A shift to an organisational structure more in line with the strategy‟s needs
(5) Improved efficiency and profitability.

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Research generally supports Chandler‟s proposition that structure follows strategy; as
well as the reverse proposition by other researchers, for example, Hall and Saias (1980) -
that structure influences strategy.
As observed by Chandler, changes in the environment tend to be reflected in changes in
organisation‟s strategy, thus leading to changes in an organisation‟s structure. Indeed
strategy, structure and the environment need to be closely aligned; otherwise
organisational performance will most likely suffer.
Although it is agreed that organisational structure must vary with different environmental
conditions, which, in turn, affect an organisation‟s strategy, there is no agreement about
an optimal organisational design. In fact, the best organisational structure depends on the
strategy being adopted by the firm.

Selecting Leadership
Research findings indicate that different strategies require different skills and leadership
styles for effective implementation. The Chief Executive Officer (CEO) in an
organisation should provide the required leadership in order to effectively implement a
chosen strategy. The CEO should cultivate team spirit, provide strategic vision –
(clarification of what the company could become and how to achieve the vision) and
motivate to enlist commitment and act as a catalyst in the whole implementation process.
Successful implementation of strategy will also require effective assignment of key
activities to managers with the required skills. This involves answering the following
questions:
- Which positions are critical to the execution of the strategy?
- Do the persons occupying these positions have the skills and characteristics needed to
ensure effective implementation of the strategy?
Management should ensure that the right managers are in the right positions whenever a
major strategic change is to implemented. It is also necessary to adopt your leadership to
changes in the environment. When managers overstay, there is a problem of in-breeding
and tunnel vision, and hence the need to bring new blood. Therefore another
consideration is whether to utilize current executives or bring in new executives.
Managers who are successful in a stable environment may not be successful in a
changing environment. Major changes in the environment may necessitate radical
changes in strategy. For example, a firm may opt for turnaround strategies, and this
should be preceded by a change in CEO to bring in outsiders with new perspectives,
necessary skills and commitment.

Matching Strategy with Culture

Organisational culture is a combination of the values and beliefs that organisational
members hold in common. The most typical beliefs that shape organisational culture
include:
- a belief in being the best
- a belief in supervisor quality and service
- a belief in customer supremacy
- a belief in informal communication
- a belief that growth and profits are essential to a company‟s wellbeing.

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Sources of organisational culture include
- Influence of the business environment in general and the industry in particular is a
major determinant of shared values e.g. firms in industries characterised by rapid
technological change such as computer and electronics normally have cultures that
strongly value innovation.
- Role of founders, managers and employees who bring a pattern of assumptions with
them when they join a firm.
- Actual experiences that people in the firm have had in working out solutions to the
basic problems the firm encounters.
The culture (shared beliefs and values) in an organisation influences behaviour in the
organisation and can strongly affect the company‟s ability to shift its strategic direction.
Therefore strategists should be concerned with organisational culture, because the shared
beliefs and values of an organisation‟s members can be a major strategic tool (help) or a
strategic constraint (hindrance) to strategy implementation. If corporate culture is strong
(there is consistency in the shared beliefs and values) and supports or is compatible with
the strategy, then the people‟s behaviour will be consistent with the strategy which is a
help to the strategy‟s implementation i.e. people will be motivated to enlist commitment.
Culture can be a hindrance/constraint/barrier to strategy implementation if the culture is
strong but incidentally the culture is not supportive of strategy. An optimal culture is
therefore, one that best supports the mission and strategy of the company.
Like structure and leadership, corporate culture should follow strategy. Unless it is in
complete agreement with culture, a significant change in strategy should lead to a
modification of the organisational culture e.g. through structural modifications, training
and development and/or hiring new managers whose cultures are compatible with the
new strategy.
If management is not willing to make the major organisational changes required to
change the culture, then mangers can manage strategy around the culture by establishing
a new structural unit e.g. task forces, teams, or subcontract an outsider to implement the
strategy and thus avoid confronting the incompatible cultural norms, and as cultural
resistance diminishes, the strategic change may be absorbed into the firm. If
management is unable to change culture, since it may be quite difficult to change a strong
culture, as this may take long time and require much effort, the strategists should
formulate a different strategy, if they are able to get alternative viable strategies which
may be compatible with the prevailing culture.
Thus, managing the strategy-culture relationship requires sensitivity to the interaction
between the changes necessary to implement the new strategy and the compatibility or
„fit‟ between those changes and the firm‟s culture. The table below considers the
possible scenarios and recommendations on how to manage the situations.

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 (1) Link changes (3) Reformulate
to basic mission strategy
Scenarios

(2) Synergistic (4) Many changes on

organization norms

High Low
Potential compatibility of change with existing culture

Note:
Cell 1: This situation requires many or several changes in key organizational factors, for
example, in structure, systems, managerial assignments and operating procedures to
implement the new strategy. Fortunately there is a high potential compatibility of the
changes with the existing culture.
Therefore, this is the most promising position and presents a major opportunity for the
firm to redirect its production and marketing operations consistent with proven
capabilities and link changes to basic mission and fundamental organizational norms. In
this situation, the firm should also use existing personnel who embody the shared values
and norms; and go for changes consistent to current culture.

Cell 2: In this situation, few changes in organizational factors are necessary to implement
the strategy, and there is high compatibility between the changes and the existing culture.
Thus, the strategist should take advantage of the situation to reinforce and solidify current
culture; and also use this time to remove organizational road blocks to the desired culture.

Cell 3: Here few changes in organizational factors are required, and there is low
compatibility of the changes with existing culture. Here you manage around the culture
by, for example, creating a separate firm or division, task forces, teams or subcontract-
bring in an outsider. That is, create a method of achieving the desired strategic changes,
which avoid the incompatible cultural norms, and as cultural resistance diminishes the
change may be absorbed into the firm.

Cell 4: Here, many changes in organizational factors are required and the changes have
low incompatibility with the existing culture. This is a situation where the desired
changes to implement a new strategy are many and are incompatible with the firm‟s
current or usually entrenched values and norms. Thus to make the changes more
consistent with existing culture is a difficulty challenge. In fact a challenge that borders
on impossibility given that it is difficult to change a strong culture. In such situation,
strategists need to ask themselves whether all the changes in organizational factors are
really necessary and whether the firm can make changes with reasonable chances of
success. Otherwise the strategist should develop a different strategy if it is able to get
alternative viable strategy consistent with prevailing culture.

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 STRATEGIC CONTROL
Strategic control is a special type of organizational control that focuses on monitoring
and evaluating the implemented strategy to ensure that it is functioning properly to
achieve the targeted performance. Strategies are forward looking plans of action
designed to be accomplished several years into the future and based on management
assumptions/premises about numerous events that have not yet occurred (about
anticipated environmental outlook). Many changes may occur to the events/environment
and may have major impact on the strategy‟s ultimate success. Thus there has to be
strategic control whereby managers track a strategy as it is being implemented to detect
problems or changes in its underlying assumptions and determine whether the strategy is
yielding the expected results, and make necessary adjustments.
Generally, managers responsible for the success of a strategy (strategy control) are
typically concerned with two sets of issues:
(1) Whether the strategy is moving into the right direction, whether assumptions about
major trends and changes are correct, whether the critical things are being done and
whether the company should adjust or abort the strategy.
(2) How the strategy is performing – whether objectives and schedules are being met,
whether costs, revenues and cash flows are matching projections and whether there is
need to make operational changes.
For effective monitoring of strategy there has to be a means designed to check
systematically and continuously whether the assumptions or predictions on which the
strategy is based are still valid – these assumption may be on environmental factors such
as inflation, interest rates, regulation, social and technological changes which may
exercise considerable influence over the success of strategy; and industry factors such as
competitors and suppliers which influence success in a particular industry.
Managers must design mechanism for tracking those premises whose change is likely and
would have major impact on the firm and its strategy. Responsibility for monitoring
those premises should be assigned to the persons or departments that are qualified
sources of information.
In monitoring strategy implementation, the managers must also asses the key operating
requirements necessary for successful implementation. This includes monitoring projects
that represent part of what needs to be done if the overall strategy is to be accomplished.
This helps managers determine whether the overall strategy is progressing as planned or
needs to be adjusted.
The firm must also identify and monitor critical events and major resource allocation in
the execution of a strategy.
In evaluating strategy, there should be operational control systems – this means that
performance standards or expected targets are established from the planning phase; actual
performance is measured and compared with targeted performance; and deviations from
the standards are identified for corrective action i.e. investigate and determine the causes
of the unfavourable deviations and make the needed adjustments in planning and
implementation to ensure the strategy achieves the intended performance.

Remember as discussed earlier, strategic management is an iterative process in which the

stages in the process are revisited (even when deviations are favourable) to determine the
needed adjustments in the stages to enhance performance.

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