Strategic Management & PA Handout, 2023 TLC

Strategic Management and Policy Analysis Handout
Chapter One
Introduction
1.1. Definition of Strategic Management
1.1.1. Definition of Strategy
The term strategy is derived from a Greek word “strategos” which means generalship-the actual
direction of military force, as distinct from policy governing its development. At first, the word
was used in terms of Military Science to mean what a manager does to offset actual or potential
actions of competitors.
Strategy is defined by different scholars differently even though they are similar. Let us see them
as follows:
 Strategy is the determination of the basic long-term goals and objectives of an enterprise
and the adoption of the courses of action and the allocation of resources necessary for
carrying out these goals.
 Strategy is the patterns of objectives, purpose, goals, and the major policies and plans for
achieving these goals stated in such a way so as to define what business the company is
in to be and the kind of the company it is or is to be.
 Strategy is a unified, comprehensive and integrated plan designed to assure that the basic
objectives of the enterprise are achieved.
 Strategy is a pattern in a stream of decisions and actions.
1.1.2. Definitions of Strategic Management
Strategic Management is a stream of decisions and actions which lead to the development of an
effective strategy or strategies to help achieve corporate objectives.
Strategic management is an on-going process that evaluates and controls the business and the
industries in which the company is involved; assesses its competitors and sets goals and
strategies to meet all existing and potential competitors; and then reassesses each strategy
annually or quarterly [i.e., regularly] to determine how it has been implemented and whether it
has succeeded or needs replacement by a new strategy to meet changed circumstances, new
Prepared by Anbessa Bekele TLC May, 2024 Page 1

technology, new competitors, a new economic environment, or a new social, financial, or

political environment.
Let us see some definitions of strategic management as follows:
 Strategic management is the management of an organization's resources in order to

achieve its goals and objectives. Strategic management involves setting objectives,
analyzing the competitive environment, analyzing the internal organization, evaluating
strategies, and making sure that the strategies are rolled out across the organization.
 Strategic management is the process of managing the pursuit of organizational mission
while managing the relationship of the organization to its environment.
 Strategic management is a continuous process that involves attempts to match or fit the
organization with its changing environment in the most advantageous way possible.
 Strategic management is the process of examining both present and future
environments, formulating the organization's objectives, and making, implementing, and
controlling decisions focused on achieving these objectives in the present and future
environments.
In the field of management, strategic management:
 involves the formulation and implementation of the major goals and initiatives taken by
an organization's top managers on behalf of owners, based on consideration of resources
and an assessment of the internal and external environments in which the organization
operates.
 provides overall direction to an enterprise and involves specifying the
organization's objectives, developing policies and plans to achieve those objectives, and
then allocating resources to implement the plans.

1.2. Stages of Strategic Management
The strategic-management process consists of three stages: strategy formulation, strategy

implementation, and strategy evaluation and control. The following are the main important
stages of strategic management.
Stage 1: Strategy Formulation
Strategy formulation is the process of establishing the organization’s mission, objectives, and
choosing among alternative strategies. Sometimes strategy formulation is called ‘strategic
planning’.
Strategy-formulation issues include: deciding what new businesses to enter, what businesses to
abandon, how to allocate resources, whether to expand operations or diversify, whether to enter
international markets, whether to merge or form a joint venture, and how to avoid a hostile
takeover.
Because no organization has unlimited resources, strategists must decide which alternative
strategies will benefit the firm most. Strategy-formulation decisions commit an organization to
specific products, markets, resources, and technologies over an extended period of time.
Strategies determine long-term competitive advantages. For better or worse, strategic decisions

have major multifunctional consequences and enduring effects on an organization. Top managers
have the best perspective to understand fully the ramifications of strategy-formulation decisions;
they have the authority to commit the resources necessary for implementation.
Stage 2: Strategy Implementation
Strategy implementation is the action stage of strategic management. It refers to decisions that
are made to install new strategy or reinforce existing strategy. The basic strategy –
implementation activities are establishing annual objectives, devising policies, and allocated
resources. Strategy implementation also includes the making of decisions with regard to
matching strategy and organizational structure; developing budgets, and motivational systems.
Strategy implementation includes: developing a strategy-supportive culture, creating an effective

organizational structure, redirecting marketing efforts, preparing budgets, developing and
utilizing information systems, and linking employee compensation to organizational
performance.
Implementing strategy means mobilizing employees and managers to put formulated strategies
into action. Often considered to be the most difficult stage in strategic management, strategy
implementation requires personal discipline, commitment, and sacrifice. Successful strategy
implementation hinges upon managers’ ability to motivate employees, which is more an art than
a science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy-
implementation activities affect all employees and managers in an organization.
Every division and department must decide on answers to questions such as: “What must we do
to implement our part of the organization’s strategy?” and “How best can we get the job done?”
The challenge of implementation is to stimulate managers and employees throughout an
organization to work with pride and enthusiasm toward achieving stated objectives.
Stage 3: Strategy Evaluation and Control
Strategy evaluation and control is the final stage in strategic management. Managers
desperately need to know when particular strategies are not working well; strategy evaluation is
the primary means for obtaining this information. All strategies are subject to future modification
because external and internal factors are constantly changing.
Three fundamental strategy-evaluation activities are:

1. Reviewing external and internal factors that are the bases for current strategies,
2. Measuring performance, and
3. Taking corrective actions.

Strategy evaluation is needed because success today is no guarantee of success tomorrow!

Success always creates new and different problems; complacent organizations experience
demise.
Strategy evaluation and control actions include performance measurements, consistent review
of internal and external issues and making corrective actions when necessary. Any successful
evaluation of the strategy begins with defining the parameters to be measured.
Monitoring internal and external issues will also enable you to react to any substantial change
in your business environment. If you determine that the strategy is not moving the company
toward its goal, take corrective actions. If those actions are not successful, then repeat the
strategic management process. Because internal and external issues are constantly evolving,
any data gained in this stage should be retained to help with any future strategies.
Strategy formulation, implementation, and evaluation and control activities occur at three
hierarchical levels in a large organization: corporate, divisional or strategic business unit, and
functional. By fostering communication and interaction among managers and employees across
hierarchical levels, strategic management helps a firm function as a competitive team. Most
small businesses and some large businesses do not have divisions or strategic business units; they
have only the corporate and functional levels. Nevertheless, managers and employees at these
two levels should be actively involved in strategic-management activities.
1.3. Key Terms in Strategic Management
The following are some of the key terms used in strategic management.
1. Strategists
Those people in the organization who are fully responsible for the failure or success of the
organization are referred to as strategists. Strategies are formed by strategists. Examples of
strategists include chief executive officer, chair of board, chief executive officer, president &
owner, entrepreneur or dean etc.

The information is gathered, analyzed and organized with the help of strategists. They identify
industry & competitive trends, establish scenario analysis & forecasting model, evaluate
corporate & divisional performance, and point out new marketing opportunities, highlight new
threats for the organization & preparation of potential action plans. They further assist in
supporting or staffing role. The decision making at the top level of management in the
organization is mostly taken by these strategists. The most crucial & visible strategic manager in
the organization is the CEO. Moreover every manager in the organization who has the
responsibility for profit or loss results, responsibility for division or unit, or having clear
authority over some element of organization is said to be strategist or strategic manager.
Different organizations have different kinds of strategists whose working alter in the phase of
formulation, implementation & evaluation of strategies. The personal philosophies of strategists
also affect the selection of certain strategies. There are some other foundations that differentiate
one strategist from other like attitudes, ethics, values, concern for social responsibility,
willingness to take risks, management style, concern for profitability, concern for long term
versus short term objectives etc.
2. Vision & Mission Statement
Vision Statement:
Vision statement is quite necessary for the operation of the organization as it provides answer to
the question that should be the organization wants to become? The first step in the strategic
planning is to develop the vision statement and after that mission statement is prepared. Mostly
the organizations develop single sentence vision statements.
Mission Statement:
Mission statement is long lasting statement that differentiates one organization from other similar
organization. The scope of the operations of the organization in terms of market & product is
identified through mission statement. The basic question faced that is related to the activities of
the business is cleared with the help of mission statement. It guides the nature & scope of current

operations of the business as well as the future aspects of the market conditions & opportunities.
The future direction of the organization is highlighted by the mission statement.
3. External Opportunities and Threats
External opportunities and threats are also one of the parts of strategic management key terms.
All those trends & events those are related to the social, economic, environmental, cultural,
demographic, political, legal, technology & technology & competitive that can harm or benefit
an organization constitute external opportunities & threats. One major fact about the
opportunities & threats is that they are out of control of the organization to much extent and
hence they are “external” for the organization. Following are some examples of external
opportunities & threats.
 Computer revolution
 Population shifts
 Changing work values & attitudes
 Space exploration
 Increased competition from foreign companies
 Space exploration
 Recycle able packages, etc
The external opportunities and threats are significant for the organization as opportunities need
to be availed while threats should be avoided. For this purpose there is strong need to identify,
monitor & evaluate external opportunities & threats so that the organization becomes successful
in the long run.
4. Internal Strengths and Weaknesses
Those activities of the organization that are under control of the organization, and may show
good and bad impact on the organization are known as internal strengths & weaknesses of
organization. These are present in the marketing, management, production/operation,
finance/accounting, and information technology & research & development activities of the
organization. It is quite essential strategic activity for an organization to identify & evaluate

organizational strengths & weaknesses. Organizations need to adopt those strategies that
capitalize their strengths while improve their weaknesses. Moreover strengths & weaknesses of
the organization can also be ascertained in relative to the competitors.
5. Long-Term Objectives
Long term objectives are also from one of the important strategic management key terms. Long
Term Objectives are referred to as particular results that organization wants to accomplish in
targeting the mission. Expected results by targeting certain strategies are represented by long
term objectives. Strategies include those actions that are executed for the accomplishment of the
long term objectives. There should be consistent time frame for strategies & objectives which
range from two to five years.
6. Strategies
The means through which allow us to achieve long term objectives. Following are included in
the business strategies.
 Geographic Expansion
 Diversification
 Product development
 Acquisition
 Retrenchment
 Market penetration
 Liquidation & Joint venture
Large amount of the resources of organization are required along with the decisions of top
management for the application of strategies in the form of actions. Strategies are future oriented
as these will affect the long term prosperity of the organization. Both internal as well as external
factors should be considered and therefore the strategies are multi-divisional consequences for
the organization.

7. Annual Objectives
Those short term targets that are helpful in achieving long term objectives of the organization are
called annual objectives. The annual objectives must be quantitative, measurable, realistic,
challenging, consistent & prioritized. These must be developed at functional, divisional &
corporate levels in large organizations. These objectives must be stated in terms of marketing,
management, production/operations, finance/accounting and research & development. Each long
term objective always demands a set of annual objectives for its successful accomplishment. The
allocation of resources is represented by annual objectives. Annual objectives are significant
for Strategy Implementation whereas Strategy Formulation phase contains long term
objectives.
8. Policies
Annual objectives are accomplished by the means of policies. Policies contain rules, guidelines
& procedures developed to assist efforts to accomplish stated objectives. Decision making is
guided through policies & recurring and repetitive situations are also addressed through policies.
Policies are usually mentioned in terms of marketing, finance/accounting, management, and

production/operation, activities related to information technology and Research and
Development. Policies may also establish at functional level for certain department or at
divisional level or at corporate level for entire organization. Policies play an important role in the
implementation phase because the expectations of organization about its managers & employees
are specified through policies. The coordination & consistency between different departments &
within the departments is ensured through policies.
Remember that for developing a successful strategic management plan, these all above strategic
management key terms are important to understand and you can’t develop a successful strategic
management plan without learning all these strategic management key terms.

1.4. Over View of Types of Strategy
The strategies at each level of the organization are known by the name of the level. Four levels
of strategy are:
1) Corporate level strategy
2) Business level strategy
3) Functional level strategy
4) Operational level strategy
1) Corporate Level Strategy

 Corporate strategy defines the markets and businesses in which a company will
operate.
 Corporate strategy is formulated at the top level by the top management of a
diversified company (in our country, a diversified company is popularly known, as
‘group of companies’, such as Alphabet Inc.). Such a strategy describes the
company’s overall direction in terms of its various businesses and product lines.
 Corporate strategy defines the long-term objectives and generally affects all the
business-units under its umbrella.
 The corporate-level strategy is the set of strategic alternatives from which an

organization chooses as it manages its operations simultaneously across several
industries and several markets.
2) Business Level Strategy
 It is a business-unit level strategy, formulated by the senior managers of the unit. This
strategy emphasizes the strengthening of a company’s competitive position of
products or services.
 Business strategy defines the basis on which firm wilt compete.
 Business strategies are composed of competitive and cooperative strategies.
 The business strategy encompasses all the actions and approaches for competing
against the competitors and the ways management addresses various strategic issues.
 The business strategy consists of plans of action that strategic managers adopt to use
a company’s resources and distinctive competencies to gain a competitive advantage
over its rivals in a market.
 Business strategy is usually formulated in line with the corporate strategy. The main
focus of the business strategy is on product development, innovation, integration
(vertical, horizontal), market development, diversification and the like.
 Business strategy is concerned with actions that managers undertake to improve the
market position of the company through satisfying the customers.
 A business-level strategy is the set of strategic alternatives from which an
organization chooses as it conducts business in a particular industry or market.
3) Functional Level Strategy
 A functional strategy is, in reality, the departmental/division strategy designed for

each organizational function.
 A functional strategy refers to a strategy that emphasizes a particular functional area
of an organization. It is formulated to achieve some objectives of a business unit by
maximizing resource productivity.

 Sometimes functional strategy is called departmental strategy since each business-

function is usually vested with a department.
 A functional strategy is concerned with developing a distinctive competence to
provide a business, unit with a competitive advantage.
4) Operating Level Strategy
 Operating strategy is formulated at the operating units of an organization. A

company may develop operating strategy, as an instance, for its factory, sates
territory or small sections within a department.
 Usually, the operating managers/field-level managers develop an operating strategy
to achieve immediate objectives. In large organizations, the operating managers
normally take assistance from the mid-level managers while developing the
operating strategy.
 In some companies; managers “develop an operating strategy for each set of annual
objectives in the departments or divisions.
1.5. The Strategic Management Approach

1.5.1. Resource-based
Resource-based approach suggests that resources that are valuable, rare, difficult to imitate,
and non-substitutable best position a firm for long-term success. These strategic resources can
provide the foundation to develop firm capabilities that can lead to superior performance over
time.
Resource-based View of strategy views the firm as a unique bundle of

heterogeneous resources and capabilities. Strategy is concerned with matching a
firm's resources and capabilities to the opportunities that arise in the external environment (or
creating opportunities).

The resource-based view (RBV) is a managerial framework used to determine the

strategic resources a firm can exploit to achieve sustainable competitive advantage. However,
some scholars argue that there was evidence for a fragmentary resource-based theory from the
1930s.
1.5.2. Industrial Organization
The Industrial/Organizational approach asserts that external factors are more important than
internal factors in achieving a competitive advantage within an industry.
This approach maintains that an organizations performance will rely on industry forces.
The industrial organization (I/O) view of strategy assumes that the external environment
determines the actions a firm can deploy. The main concerns of the I/O model are the
four industry structures of perfect competition, monopoly, monopolistic competition, and
oligopoly.
Industrial organization is a field of economics dealing with the strategic behavior of firms,
regulatory policy, antitrust policy and market competition. Industrial organization applies the
economic theory of price to industries. Industrial organization is also sometimes referred to as
"industrial economy."
1.6. Benefits of Strategic Management
Strategic management allows an organization to be more proactive than reactive in shaping its
own future; it allows an organization to initiate and influence (rather than just respond to)
activities - and thus to exert control over its own destiny.
Strategic management enhances the problem-prevention capabilities of organizations because it

promotes interaction among manager’s at all divisional and functional levels. Interaction can
enable firms to turn on their managers and employees by nurturing them, sharing organizational
objectives with them, empowering them to help improve the product or service, and recognizing
their contributions.

Historically, the principal benefit of strategic management has been to help organizations
formulate better strategies through the use of a more systematic, logical, and rational approach
to strategic choice. This certainly continues to be a major benefit of strategic management, but
research studies now indicate that the process, rather than the decision or document, is the more
important contribution of strategic management.
Communication is a key to successful strategic management. Through involvement in the

process, in other words, through dialogue and participation, managers and employees become
committed to supporting the organization.
Generally, stated that strategic management offers the following benefits:
 It allows for identification, prioritization, and exploitation of opportunities.

 It provides an objective view of management problems.
 It represents a framework for improved coordination and control of activities.
 It minimizes the effects of adverse conditions and changes.
 It allows major decisions to better support established objectives.
 It allows more effective allocation of time and resources to identified opportunities.
 It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc
decisions.
 It creates a framework for internal communication among personnel.
 It helps integrate the behavior of individuals into a total effort.
 It provides a basis for clarifying individual responsibilities.
 It encourages forward thinking.
 It provides a cooperative, integrated, and enthusiastic approach to tackling problems and
opportunities.
 It encourages a favorable attitude toward change.
 It gives a degree of discipline and formality to the management of a business.

1.7. Business Ethics and Strategic Management
Business Ethics refers to carrying business as per self-acknowledged moral standards. It is

actually a structure of moral principles and code of conduct applicable to a business. Business
ethics are applicable not only to the manner the business relates to a customer but also to the
society at large. It is the worth of right and wrong things from business point of view.
Business ethics not only talk about the code of conduct at workplace but also with the clients and
associates. Companies which present factual information respect everyone and thoroughly
adhere to the rules and regulations are renowned for high ethical standards. Business ethics
implies conducting business in a manner beneficial to the societal as well as business interests.
Every strategic decision has a moral consequence. The main aim of business ethics is to provide
people with the means for dealing with the moral complications. Ethical decisions in a business
have implications such as satisfied workforce, high sales, low regulation cost, more customers
and high goodwill.
Some of ethical issues for business are relation of employees and employers, interaction between
organization and customers, interaction between organization and shareholders, work
environment, environmental issues, bribes, employees’ rights protection, product safety etc.
Below is a list of some significant ethical principles to be followed for a successful business-
1. Protect the basic rights of the employees/workers.

2. Follow health, safety and environmental standards.
3. Continuously improvise the products, operations and production facilities to optimize the
resource consumption

4. Do not replicate the packaging style so as to mislead the consumers.

5. Indulge in truthful and reliable advertising.
6. Strictly adhere to the product safety standards.
7. Accept new ideas. Encourage feedback from both employees as well as customers.
8. Present factual information. Maintain accurate and true business records.
9. Treat everyone (employees, partners and customers) with respect and integrity.
10. The mission and vision of the company should be very clear to it.
11. Do not get engaged in business relationships that lead to conflicts of interest. Discourage
black marketing, corruption and hoarding.
12. Meet all the commitments and obligations timely.
13. Encourage free and open competition. Do not ruin competitors’ image by fraudulent
practices.
14. The policies and procedures of the Company should be updated regularly.
15. Maintain confidentiality of personal data and proprietary records held by the company.
16. Do not accept child labour, forced labour or any other human right abuses.
CHAPTER TWO
STRATEGY FORMULATION: THE BUSINESS MISSION, VISION AND VALUES
2.1. Vision Statement

A vision statement describes what a company desires to achieve in the long-run, generally in a
time frame of five to ten years, or sometimes even longer. It depicts a vision of what the
company will look like in the future and sets a defined direction for the planning and execution
of corporate-level strategies.
Key Elements of a Good Vision Statement
While companies should not be too ambitious in defining their long-term goals, it is critical to set
a bigger and further target in a vision statement that communicates a company’s aspirations and
motivates the audience. Below are the main elements of an effective vision statement:
 Forward-looking
 Motivating and inspirational
 Reflective of a company’s culture and core values
 Aimed at bringing benefits and improvements to the organization in the future
 Defines a company’s reason for existence and where it is heading
2.2. Mission Statement
A Mission Statement defines the company's business, its objectives and its approach to reach
those objectives.
A mission statement is used by a company to explain, in simple and concise terms, its purpose(s)
for being. The statement is generally short, either a single sentence or a short paragraph.
These statements serve a dual purpose by helping employees remain focused on the tasks at
hand, as well as encouraging them to find innovative ways of moving toward an increasingly
productive achievement of company goals.
2.3. Business Values
Business values can be the principles you stand for personally, for example, it include:
 Integrity,

 Perseverance,
 Determination,
 Innovation,
 Respect,
 Passion and
 Fair-mindedness.
In order to develop business values, the following activities should be done:
i. Map your personal principles, beliefs and values under categories.

ii. Reflect on the meaning of each value.
2.4. Strategic Issues
Strategic Issues can be defined as developments, events and trends having the potential to
impact an organizational strategy. Strategic Issues are typically somewhat unique
from company to company.
Some areas that typically produce Strategic Issues are:

 Strategic Focus.
 Strategic Competencies.
 Culture modification/Organizational change.
 Resource limitations.
 Strategic alliances/acquisitions/mergers/joint ventures.
 E-commerce products.
Strategic issues typically have the following characteristics:
 Require large amount of the firm’s resources

 They often affect the firm’s long-term prosperity
 They are future-oriented
 They usually have multi-functional consequences
 They require consideration of the firm’s external environment
 They require top management decisions

2.5. Setting Goals and Objectives
Goals are general statements of what it is we want to achieve. Goals derive directly from the
mission (the overall purpose and core values) of your unit. Goals must be relevant, realistic, and
achievable. You should develop 3-5 goals from your mission statement. For each goal, you will
need to develop a series of objectives.
Objectives state the specific actions you will take to achieve your goals. Objectives must be
specific, measurable, and time-bound. For each goal, you should develop 3-5 objectives.
Common ways of describing goals versus objectives:

S/N Goals Objectives
1 Goals are broad Objectives are narrow
2 Goals are more long-term Objectives are more short-term
3 Goals are general intentions Objectives are precise actions
4 Goals are often intangible Objectives are often tangible
5 Goals are abstract Objectives are concrete
6 Goals are difficult to measure Objectives are measurable
Objectives should be “SMART:
 Specific: Goals should be as clear as possible, leaving little room for confusion.
 Measurable: You need to be able to track your milestones and measure how far you are
from your goal and if you are on track to reach it on time.
 Achievable: Goals should be challenging and require you to work hard, but they also
need to be realistic to keep the team motivated and engaged.
 Relevant: Make sure your goals are pertinent. Do they align with your mission and
vision? Does the entire team agree they are important to the company?
 ‍ ime-Bound: If you don't have a deadline, it's hard to stay motivated. Put deadlines in
T
place for reaching the end goal and well as each milestone to help move the process
forward and create a sense of urgency.

Chapter Three
External Environmental Analysis/Scanning
Introduction
Environmental analysis is a strategic tool. It is a process to identify all the external and internal
elements, which can affect the organization’s performance. The analysis entails assessing the
level of threat or opportunity the factors might present. These evaluations are later translated

into the decision-making process. The analysis helps align strategies with the firm’s
environment.
An external analysis (or environmental analysis) is an objective assessment of the changing

world in which an enterprise operates, in order to have an ‘early warning system’ for identifying
potential threats and opportunities.
All businesses and organisations operate in a changing world and are subject to forces which are
more powerful than they are, and which are beyond their control. Just as a ship at sea is subject
to powerful natural forces of which it needs to be aware and deal with, organisations are
influenced by forces in their external business environment.
Purpose of environmental analysis:
 To characterize the environment that can influence the business.

 To identify threats and be prepared to handle them appropriately.
 To identify opportunities and be prepared to benefit from them in a timely manner.
 To identify competitive strengths and weaknesses.
 To recognize competition in the market and how to compete more effectively.
 To identify stakeholders and what they require from the organization.
Drawbacks of environmental analysis:
 New technology constantly changes the competitive environment by introducing new

products and their placement in the markets.
 A continuously weakening global economy has led to problems with the predictability of
demand.
 An increasing number of factors affect an organization as national borders blur.
 The emergence of high-growth economies (BRIC).
 Regular environmental analysis is necessary if it is to have any relevance to the
organization.
3.1. The Nature of External Audit

External Environment consists of all those forces of external that affect the working of a
business. It refers to the conditions, forces, events and situations within which business
enterprises have to operate.
Environmental Scanning means an examination and study of the environment of a business unit
in order to identify its survival and prosperity chances. It means observing the business
environment both external and internal and understanding its implications for business
opportunities. It also involves knowing beforehand the risks and uncertainties as well as threats
to the business unit.
The purpose of an external audit is to develop a finite list of opportunities that could benefit a
firm and threats that should be avoided. The external audit is not aimed at developing an
exhaustive list of every possible factor that could influence the business; rather, it is aimed
at identifying key variables that offer actionable responses. Firms should be able to respond
either offensively or defensively to the factors by formulating strategies that take advantage of
external opportunities or that minimize the impact of potential threats.
Need For Environmental Scanning
Environmental Scanning is essential because of following reasons:
1. Prime Influence - Environment is a prime influence on the effectiveness of business

strategies. If strategic planning is done without considering environment, it is likely to be
defective. Besides, the success of the implementation of the strategy depends on the
environmental factors.
2. A tool to Anticipate Changes - Environmental scanning is a very useful tool not only to
understand business surroundings, but also as a good instrument to anticipate the changes
and be prepared to face the challenges of such changes.
3. Time for Adjustment - A business unit cannot change the business activities overnight.
It needs time to adjust with the changing environment. If it has to face the changed
environment suddenly, it may be possible to make immediate changes according to the
demand of the changed environment. Environmental scanning gives time to the company
to get adjust to the changed environment.

4. Early Warning System - Environmental Scanning gives advance warning or danger

signals of the adverse changes in environment. It helps the company to design defense
mechanism to avoid future adverse effects of environment on the business activities e.g.
with the changing marketing environment, many companies are adopting on-line
marketing to survive in this competitive environment.
3.2. The Process of Performing an External Audit
The process of performing an external audit must involve as many managers and employees as
possible. Involvement in the strategic-management process can lead to understanding and
commitment from organizational members. Individuals appreciate having the opportunity to
contribute ideas and to gain a better understanding of their firms’ industry, competitors, and
markets.
1. To perform an external audit, a company first must gather competitive intelligence and
information about economic, social, cultural, demographic, environmental, political,
governmental, legal, and technological trends.
2. Information should be assimilated and evaluated.
3. Making series of meetings of managers is needed to collectively identify the most
important opportunities and threats facing the firm.
4. Prioritized factors identified, from 1 for the most important opportunity/threat to 20 for
the least important opportunity/threat.
5. Must involve as many managers and employees as possible.
3.3. Analysis of Key External Factors
Key external factors include:
3.3.1. General External Factors
External forces can be divided into four broad categories:

1. Economic forces
2. Social, cultural, demographic, and natural environment forces
3. Political, governmental, and legal forces
4. Technological forces
1. Economic Forces
Increasing numbers of two-income households is an economic trend in the world. Individuals

place a premium on time. Improved customer service, immediate availability, trouble-free
operation of products and dependable maintenance and repair services are becoming more
important. People today are more willing than ever to pay for good service if it limits
inconvenience.
E.g. unemployment rate, recession, Interest rate, Availability of credit, Level of disposable
income, Inflation rates, Gross domestic product, Monetary policies, Fiscal policies, Tax rates and
etc.
Economic factors have a direct impact on the potential attractiveness of various strategies.
For example, when interest rates rise, funds needed for capital expansion become hard to get so it
limits us our expansion strategy. When interest rates rise, discretionary income declines, and the
demand for discretionary goods falls. When the value of the birr falls, tourism-oriented firms
benefit because foreigners visit and vacation more in the Ethiopia.
2. Social, Cultural, Demographic, and Natural Environment Forces
Social, cultural, demographic, and environmental changes have a major impact on virtually all
products, services, markets, and customers. Small, large, for-profit, and nonprofit organizations
in all industries are being staggered and challenged by the opportunities and threats.
E.g. population changes by city, county, state, region, and country, waste management,
recycling, air pollution, ozone depletion, endangered species, value placed on leisure time, no. of
births/deaths, Life expectancy rates, Attitudes toward business, Lifestyles, Attitudes toward
government, Attitudes toward work, Buying habits, Ethical concerns, Attitudes toward saving,
Sex roles, Attitudes toward investing, Regional changes in tastes and preferences, Number of

women and minority workers, Attitudes toward product quality, Attitudes toward customer
service, Average level of education, Number of churches/mosques & their members size.
3. Political, Governmental, and Legal Forces
Changes in patent laws, antitrust legislation, tax laws, and lobbying activities can affect firms
significantly. The increasing global interdependence among economies, markets, governments,
and organizations makes it imperative that firms consider the possible impact of political
variables on the formulation and implementation of competitive strategies. For industries and
firms that depend heavily on government contracts or subsidies, political forecasts can be the
most important part of an external audit.
Forces are that should gathered information for best utilizing the opportunities and to best defend
the threats are Government regulations or deregulations, Changes in tax laws, Special tariffs,
Political instability, and location of government Protests, Number of patents, Changes in patent
laws, Environmental protection laws, Level of defense expenditures, Legislation on equal
employment, Level of government subsidies, Antitrust legislation.
4. Technological Forces
Technological advancements can dramatically affect organizations’ products, services, markets,

suppliers, distributors, competitors, customers, manufacturing processes, marketing practices,
and competitive position. Technological advancements can create new markets, result in a
proliferation/spread of new and improved products, change the relative competitive cost
positions in an industry, and render existing products and services obsolete. Technological
changes can reduce or eliminate cost barriers between businesses, create shorter production runs,
create shortages in technical skills, and result in changing values and expectations of employees,
managers, and customers.
Technological advancements can create new competitive advantages that are more powerful than
existing advantages. No company or industry today is insulated against emerging technological
developments. In high-tech industries, identification and evaluation of key technological
opportunities and threats can be the most important part of the external strategic-management
audit. Technological changes are rapid and to keep pace with it, businessmen need to be alert and

flexible in order to quickly incorporate them in their business organization so as to survive and
succeed in the competitive business world.
The Internet has changed the very nature of opportunities and threats by altering the life cycles
of products, increasing the speed of distribution, creating new products and services, erasing
limitations of traditional geographic markets, and changing the historical trade-off between
production standardization and flexibility. The Internet is altering economies of scale, changing
entry barriers, and redefining the relationship between industries and various suppliers, creditors,
customers, and competitors.
Technological forces represent major opportunities and threats that must be considered in
formulating strategies. Technological advancements can dramatically affect organizations’
products, services, markets, suppliers, distributors, competitors, customers, manufacturing
processes, marketing practices, and competitive position. Technological advancements can create
new markets, result in a proliferation of new and improved products, change the relative
competitive cost positions in an industry, and render existing products and services obsolete.
Technological changes can reduce or eliminate cost barriers between businesses, create shorter
production runs, create shortages in technical skills, and result in changing values and
expectations of employees, managers, and customers.
Technological advancements can create new competitive advantages that are more powerful than
existing advantages. In high-tech industries, identification and evaluation of key technological
opportunities and threats can be the most important part of the external strategic-management
audit.
Firms should pursue strategies that take advantage of technological opportunities to achieve
sustainable, competitive advantages in the marketplace.
3.3.2. Industry Analysis
Industry analysis is a tool that many businesses use to assess the market. It is used by market
analysts, as well as by business owners, to figure out how the industry dynamics work for the

specific industry studied. Industry analysis helps the analyst develop strong sense of what is
going on in the industry.
When it comes to business, industry analysis involves such things as assessing the competition
in the industry; the interplay of supply and demand in the industry; how the industry holds up
against other industries that are emerging and providing competitions; the likely future of the
industry, especially in light of technological developments; how credit works in the industry;
and the exact extent of the impact that external factors have on the industry.
What is the Purpose of Industry Analysis?

i. Industry Analysis Can Be Used to Predict Performance
ii. Industry Analysis Indicates the Positioning of a Business
iii. Industry Analysis to Identify Threats and Opportunities
What Types of Industry Analyses Are There?
i. PEST Analysis/ Broad Factors Analysis: Discussed above

ii. Porter’s 5 Forces/Competitive Forces Model: Discussed below
iii. SWOT Analysis
SWOT Analysis
The acronym SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. It is a
framework that pretty much supersedes others already mentioned, in the sense that it can be
used to evaluate those others. With SWOT analysis, you can figure out what your strengths are,
according to your PEST analysis, what your weaknesses are, what opportunities your
environment presents, and what threats you have to deal with.
1. Strengths: are the characteristics your business has that give it some kind of advantage
over competitors.
2. Weaknesses: are the characteristics your business has that give it some kind of
disadvantage, relative to its competitors.
3. Opportunities: are the elements in your business’ external environment that allow you
to form and implement strategies to make the business more profitable.

4. Threats: are the elements in your business’ external environment that could potentially
harm the integrity or profitability of your business.
What Are Some Effective Industry Analysis Tactics?

 Look at what has already been documented
 Be choosy about the industry you analyze
 Study the supply and demand of the industry
 Study your competitors
 Study recent developments in the industry
3.3.3. Competitive Analysis: Porter’s Five-Forces Model
The five forces framework developed by Michael Porter is the most widely known tool for
analyzing the competitive environment, which helps in explaining how forces in the competitive
environment shape strategies and affect performance. However, these five forces are not
independent of each other. Pressures from one direction can trigger off changes in another which
is capable of shifting sources of competition.
Porter’s Five-Forces of Competitive Analysis of the industry:
1. Rivalry among existing competitors

2. Threat of new entrants
3. Threat of substitute products
4. Bargaining power of suppliers
5. Bargaining power of buyers
Rivalry among existing competitors includes:
 Number of competitors
 Diversity of competitors
 Industry concentration
 Industry growth
 Quality differences
 Brand loyalty

 Barriers to exit
 Switching costs:
Note: Switching costs are the costs that a consumer incurs as a result of changing brands,
suppliers, or products.
Threat of new entrants includes:
 Barriers to entry
 Economies of scale
 Brand loyalty
 Capital requirements
 Cumulative experience
 Government policies
 Access to distribution channels
 Switching costs
Threat of substitute products includes:
 Number of substitute products available

 Buyer propensity to substitute
 Relative price performance of substitute
 Perceived level of product differentiation
 Switching costs
Bargaining power of suppliers includes:
 Number and size of suppliers

 Uniqueness of each supplier’s product
 Focal company’s ability to substitute
Bargaining power of buyers includes:
 Number of customers

 Size of each customer order

 Differences between competitors
 Price sensitivity
 Buyer’s ability to substitute
 Buyer’s information availability
 Switching costs
3.4. Sources of External Information
A wealth of strategic information is available to organizations from both published and

unpublished sources.
Unpublished sources include:
 Customer surveys,
 Market research,
 Speeches at professional and shareholders’ meetings,
 Television programs,
 Interviews, and
 Conversations with stakeholders.
Published sources of strategic information include:
 Periodicals,
 Journals,
 Reports,
 Government documents,
 Abstracts,
 Books,
 Directories,
 Newspapers, and
 Manuals.

A company website is usually an excellent place to start to find information about a firm,
particularly on the Investor Relations web pages.
3.5. Forecasting Tools and Techniques
Forecasting is the process of estimating the relevant events of future, based on the analysis of
their past and present behavior. The future cannot be probed unless one knows how the events
have occurred in the past and how they are occurring presently. The past and present analysis of
events provides the base helpful for collecting information about their future occurrence.
Tools and Techniques of Forecasting:

There are various methods of forecasting. However, no method can be suggested as universally
applicable. In fact, most of the forecasts are done by combining various methods.
1. Historical Analogy Method:

Under this method, forecast in regard to a particular situation is based on some analogous
conditions elsewhere in the past. The economic situation of a country can be predicted by
making comparison with the advanced countries at a particular stage through which the country
is presently passing.
2. Survey Method:
Surveys can be conducted to gather information on the intentions of the concerned people. For
example, information may be collected through surveys about the probable expenditure of
consumers on various items. Both quantitative and qualitative information may be collected by
this method.
On the basis of such surveys, demand for various products can be projected. Survey method is
suitable for forecasting demand - both of existing and new products. To limit the cost and time,
the survey may be restricted to a sample from the prospective consumers.
3. Opinion Poll:
Opinion poll is conducted to assess the opinion of the experienced persons and experts in the
particular field whose views carry a lot of weight. For example, opinion polls are very popular to

predict the outcome of elections in many countries including India. Similarly, an opinion poll of
the sales representatives, wholesalers or marketing experts may be helpful in formulating
demand projections.
If opinion polls give widely divergent views, the experts may be called for discussion and
explanation of why they are holding a particular view. They may be asked to comment on the
views of the others, to revise their views in the context of the opposite views, and consensus may
emerge. Then, it becomes the estimate of future events.
4. Business Barometers:
A barometer is used to measure the atmospheric pressure. In the same way, index numbers are
used to measure the state of an economy between two or more periods. These index numbers are
the device to study the trends, seasonal fluctuations, cyclical movements, and irregular
fluctuations.
These index numbers, when used in combination with one another, provide indications as to the
direction in which the economy is proceeding. Thus, with the business activity index numbers, it
becomes easy to forecast the future course of action.
However, it should be kept in mind that business barometers have their own limitations and they
are not sure road to success. All types of business do not follow the general trend but different
index numbers have to be prepared for different activities, etc.
5. Time Series Analysis:

Time series analysis involves decomposition of historical series into its various components, viz.
trend, seasonal variances, cyclical variations, and random variances. When the various
components of a time series are separated, the variation of a particular situation, the subject
under study, can be known over the period of time and projection can be made about the future.
A trend can be known over the period of time which may be true for the future also. However,
time series analysis should be used as a basis for forecasting when data are available for a long
period of time and tendencies disclosed by the trend and seasonal factors are fairly clear and
stable.

6. Regression Analysis:
Regression analysis is meant to disclose the relative movements of two or more inter-related
series. It is used to estimate the changes in one variable as a result of specified changes in other
variable or variables. In economic and business situations, a number of factors affect a business
activity simultaneously.
7. Input-Output Analysis:
According to this method, a forecast of output is based on given input if relationship between
input and output is known. Similarly, input requirement can be forecast on the basis of final
output with a given input-output relationship. The basis of this technique is that the various
sectors of economy are interrelated and such inter-relationships are well-established.
For example, coal requirement of the country can be predicted on the basis of its usage rate in
various sectors like industry, transport, household, etc. and how the various sectors behave in
future. This technique yields sector-wise forecasts and is extensively used in forecasting business
events as the data required for its application are easily obtained.
Chapter Four
Internal Environment Analysis
Definition of Internal Analysis:

An Internal Analysis examines your organization's internal environment in order to assess its
resources, competencies, and competitive advantages. Performing an internal analysis allows you
to identify the strengths and weaknesses of your organization.
An organization's internal environment is composed of the elements within the organization,

including current employees, management, and especially corporate culture, which defines
employee behavior. Changes in philosophy and/or leadership style are under the control of the
manager.
Although some elements affect the organization as a whole, others affect only the manager. A
manager's philosophical or leadership style directly impacts employees. Traditional managers
give explicit instructions to employees, while progressive managers empower employees to
make many of their own decisions. Changes in philosophy and/or leadership style are under the
control of the manager. The following sections describe some of the elements that make up the
internal environment.
4.1. The Nature of an Internal Audit
An internal audit is the examination, monitoring and analysis of activities related to a company's
operations, including its business structure, employee behavior and information systems. Internal
audit regulations, such as the Sarbanes-Oxley Act of 2002, have increased corporate
requirements for performing internal audits. Audits are important components of a company's
risk management as they help to identify issues before they become substantial problems, such as
attempts to steal intellectual property.
Internal Audit / Internal strategic management audit is process in which the information about
key internal factors is gathered & compiled in order to ascertain the strengths & weaknesses of
the organization in the functional areas of marketing, management, finance/accounting,
production/operations and research & development etc. This internal strategic management audit
is conducted for the assistance of the organization to positively utilize its strengths for the
success while improving its identified weaknesses.
Following points highlight the nature of internal strategic management audit.

 All the strategies & objectives of the organization are based on it.
 The internal strengths/weaknesses are assessed & clear statement of mission is also
established
 It may be different for different kinds of organizations.
 The same organization may have different divisions that require different type of internal
strategic management audit.
 It shapes the strengths of organization in such a way that cannot be easily imitated or
matched by competitors.
 Effective strategies are build that converts the weakness of the organization into its
strength.
In order to understand the nature & effects of decisions in other functional areas of the
organization, internal strategic management audit is quite helpful. There are certain strengths &
weaknesses in different functional areas of almost every organization. There is no single
organization that can be completely equal in its all functional areas. The internal weaknesses &
strengths of the organization are aligned with the external threats & opportunities and finally a
clear mission statement provides a ground on which objectives & strategies of the organization
are established. The foundational element of the objectives & strategies is to take advantage of
the strengths while improving the weaknesses of the organization.
The internal strategic management audit is essential for the success of the organization. The
understanding & coordination among managers from different functional areas is enhanced
through internal audit.
Key Internal Forces:
Business policy text is not sufficient enough to explain the functional areas of finance,
marketing, production, information system etc. Many subareas are included in these major
functional areas like warranties, customer services, packaging, advertising & pricing under
marketing etc. The functional business areas also differ for different kinds of organizations like
universities, hospitals, government agencies etc. For example in a hospital the functional areas
may include nursing, cardiology, physician support, hematology, and receivables. Another
example of university organization contains placement services, athletic programs, fund raising,

counseling, housing services, academic research & intramural programs. There are certain
strengths & weaknesses in each division of larger organization.
4.2. Process of Performing an Internal Audit:
The process of conducting internal Audit / internal strategic management audit is similar
to External Audit. The strengths & weaknesses of the organizations are ascertained through
involvement of a number of managers & employees of the organization. Certain information
from the functional areas of marketing, production, finance, Research and Development etc is
collected & arranged. The members of the organizations that participate in the process of internal
strategic management audit better understands the working of the jobs, department & divisions
as a component of the whole world. This understanding helps the managers & employees to
perform their duties & tasks more effectively because they knows that their works will influence
other functional areas of the organization. For example when the managers of finance &
production together take into account the issues related to the strengths & weaknesses of their
organization then this will help them to effectively face the issues & problems of all the
functional areas of their organization. The organization that does not perform Strategic
Management lacks the smooth interaction & understanding of its finance & production
managers on certain problems & issues of the organization. The process of communication
within the organization is made better through internal strategic management audit.
The information about the operation of the organization is gathered ad assimilated during the
process of internal strategic management audit. All the weaknesses & strengths are identified &
prioritized as critical success factor of the organization. There are different managers that are
involved in the internal audit process and hence the identification & selection of 10 to 20
important strengths & weaknesses is quite difficult task. For this purpose significant negotiation
& analysis is required. The internal strategic management audit is quite essential for the
formulation, implementation & evaluation of strategies.
A number of managers & employees provide different kinds of information & ideas about the
factors that serve as strengths & weaknesses for the organization through effective coordination.
Moreover all the participants should have understanding about the relationship between different
functional areas of the organization so that effective strategies & objectives can be established.

The size, geographic dispersion, number of products or services offered & diversity of the
organization makes the relationship among its functional areas more complex.
Steps to Performing an Internal Audit
There are 8 steps of performing an internal audit. They include the following:
1. Identify Areas that Need Auditing
Identify departments that operate by using policies and procedures written by the organization or
by regulatory agencies. This can include areas as complex as manufacturing processes or as
simplistic as accounting procedures.
2. Determine How Often Auditing Needs to be Done
Some areas may only need to be audited annually, while some departments may require more
frequent audits. For example, a manufacturing process may require daily audits for quality
control purposes, while the HR function may only require an annual audit of records and
processes.
3. Create an Audit Calendar
A structured and systematic approach to the auditing process can help ensure the function gets
completed. And, like any other business goal, audits should be integrated into corporate
objectives. Scheduling audits on the business calendar ensures that it is done consistently.
4. Alert Departments of Scheduled Audits
It is simply common courtesy to give departments notice of an audit so they can have the
necessary documents and materials ready and available for the reviewer. A surprise audit should
only be done if there is suspicion of unethical or illegal activity. Department managers should
not feel threatened by an auditor but view them as a valued resource to help them better manage
their area.

5. Be Prepared
The auditor should come prepared with an understanding of policies and procedures and a list of
items that will be reviewed. For example, an HR audit may focus on employee files and I-9
compliance. The more prepared the auditor is, the more efficient the process will be, and the less
downtime there will be for the area being reviewed.
6. Interview Users
The auditor should interview employees and ask them to explain their work process. This step is
to gain an understanding of employee competence and identify areas that need additional
training.
7. Document Results
Document the results and any differences in practice to how the policies are written, when
policies are complied with and when they are not. This may also include other information that is
gathered from the interview process. Again, the goal is to identify gaps in compliance and to
figure out a way to bridge that gap.
8. Report Findings
Create an easy to read audit report. These reports should be reviewed with senior management,
and an improvement plan should be developed for areas that have gaps in practice compliance.
4.3. Relationship among the Functional Areas of Business
Introduction
Just as different functions in the human body are performed and regulated by different organs,
different functions within a business are performed and controlled by different parts of the
business. One of the reasons for separating business operations into functional areas is to allow

each to operate within its area of expertise, thus building efficiency and effectiveness across the
business as a whole. The key functional areas of a business are the following:
 Management
 Operations
 Marketing
 Accounting
 Finance
1) Management
The primary role of managers in business is to supervise other people’s performance. Most
management activities fall into the following categories:
 Planning: Managers plan by setting long-term goals for the business, as well short-term
strategies needed to execute against those goals.
 Organizing: Managers are responsible for organizing the operations of a business in the
most efficient way, enabling the business to use its resources effectively.
 Controlling: A large percentage of a manager’s time is spent controlling the activities
within the business to ensure that it’s on track to achieve its goals. When people or
processes stray from the path, managers are often the first ones to notice and take
corrective action.
 Leading: Managers serve as leaders for the organization, in practical as well as symbolic
ways. The manager may lead work teams or groups through a new process or the
development of a new product. The manager may also be seen as the leader of the
organization when it interacts with the community, customers, and suppliers.
2) Operations
An operation is where inputs (factors of production) are converted to outputs (goods and
services). An operation is like the heart of a business, pumping out goods and services in a
quantity and of a quality that meets the needs of the customers. The operations manager is

responsible for overseeing the day-to-day business operations, which can encompass everything
from ordering raw materials to scheduling workers to produce tangible goods.
3) Marketing
Marketing consists of all that a company does to identify customers’ needs and design products
and services that meet those needs. The marketing function also includes promoting goods and
services, determining how the goods and services will be delivered, and developing a pricing
strategy to capture market share while remaining competitive. In day’s technology-driven
business environment, marketing is also responsible for building and overseeing a
company’s Internet presence (e.g., the company Web site, blogs, social media campaigns, etc.).
Today, social media marketing is one of the fastest growing sectors within the marketing
function.
4) Accounting
Accountants provide managers with information needed to make decisions about the allocation
of company resources. This area is ultimately responsible for accurately representing the
financial transactions of a business to internal and external parties, government agencies, and
owners/investors. Financial Accountants are primarily responsible for the preparation of
financial statements to help entities both inside and outside the organization assess the financial
strength of the company. Managerial accountants provide information regarding costs, budgets,
asset allocation, and performance appraisal for internal use by management for the purpose of
decision-making.
5) Finance
Although related to accounting, the finance function involves planning for, obtaining, and
managing a company’s funds. Finance managers plan for both short- and long-term financial
capital needs and analyze the impact that borrowing will have on the financial well-being of the
business. A company’s finance department answers questions about how funds should be raised
(loans vs. stocks), the long-term cost of borrowing funds, and the implications of financing
decisions for the long-term health of the business.

Financial management can be looked upon as the study of relationship between the raising of
funds and the deployment of funds. The subject matter of financial management is: capital
budgeting cost of capital, portfolio management, dividend policy, short and long term sources of
finance. Financial management involves mainly three decisions pertaining to:
1. Investment policies:
It dictates the process associated with capital budgeting and expenditures. All proposals to spend
money are ranked and investment decisions are taken whether to sanction money for these
proposed ventures or not.
2. Methods of financing:
A proper mix of short and long term financing is ensured in order to provide necessary funds for
proposed ventures at a minimum risk to the enterprise.
3. Dividend decisions:
This decision affects the amount paid to shareholders and distribution of additional shares of
stock.
4.4. The Value Chain Analysis
Value chain analysis is a process for understanding the systemic factors and conditions under
which a value chain and its firms can achieve higher levels of performance. When using value
chains as a means for fostering growth and reducing poverty, the analysis focuses on identifying
ways to contribute to two objectives: i) improving the competitiveness of value chains with large
numbers of small firms, and ii) expanding the depth and breadth of benefits generated.
Value chain analysis (VCA) is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs or
increase differentiation.
Value chain represents the internal activities a firm engages in when transforming inputs into
outputs.

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage. In
other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it competes through cost
advantage, it will try to perform internal activities at lower costs than competitors would do.
When a company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.
Value chain analysis is a way to visually analyze a company's business activities to see how
the company can create a competitive advantage for itself. Value chain analysis helps a
company understands how it adds value to something and subsequently how it can sell its
product or service for more than the cost of adding the value, thereby generating a profit
margin. In other words, if they are run efficiently the value obtained should exceed the costs of
running them i.e. customers should return to the organisation and transact freely and willingly.
Q. What is Competitive Advantage?
Value Chain Analysis is mentioned extensively in the first half of the book "Competitive
Advantage" in 1985 by Michael Porter. Porter suggested that activities within an organization
add value to the service and products that the organization produces, and all these activities
should be run at optimum level if the organization is to gain any real competitive advantage.
Competitive Advantage is the ability for a firm to put "generic strategy" into practice, generic
strategy includes:
1. Cost Leadership: offer the lowest price to customers
2. Differentiation: selecting the important attributes that buyers want so the company can
get a premium price
3. Focus: doing each strategy according to each market segment

Value and Value Chain
Value is the total amount (i.e. total revenue) that buyers are willing to pay for a firm's product.
The difference between the total value and the total cost performing all of the firm's activities
provides the margin.
Margin implies that organizations realize a profit margin that depends on their ability to manage
the linkages between all activities in the value chain. In other words, the organization is able to
deliver a product / service for which the customer is willing to pay more than the sum of the
costs of all activities in the value chain.
A value chain concentrates on the activities starting with raw materials till the conversion into
final goods or services. The sources of the competitive advantage of a firm can be seen from its
discrete activities and how they interact with one another. The ultimate goals in performing value
chain analysis are to maximize value creation while also monitoring and minimizing costs.
These discrete activities involve the acquisition and consumption of resources - money, labour,
materials, equipment, buildings, land, administration and management. How value chain
activities are carried out determines costs and affects profits.
Basic Concepts of Value Chain Analysis
Most organizations engage in hundreds, even thousands, of activities in the process of converting
inputs to outputs. These activities can be classified generally as either primary or support
activities that all businesses must undertake in some form.
Primary Activities
Primary activities are directly concerned with creating and delivering a product. They can be
grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and
sales, and service. Each of these primary activities is linked to support activities which help to

improve their effectiveness or efficiency; and According to Porter (1985), the primary activities
are:
Inbound logistics: Refers to goods being obtained from the organization’s suppliers and to be
used for producing the end product.
Operations: Raw materials and goods are manufactured into the final product. Value is added to
the product at this stage as it moves through the production line.
Outbound logistics: Once the products have been manufactured they are ready to be distributed
to distribution centers, wholesalers, retailers or customers. Distribution of finished goods is
known as outbound logistics.
Marketing and Sales: Marketing must make sure that the product is targeted towards the correct
customer group. The marketing mix is used to establish an effective strategy; any competitive
advantage is clearly communicated to the target group through the promotional mix.
Services: After the product/service has been sold what support services does the organization
offer customers? This may come in the form of after sales training, guarantees and warranties.
With the above activities, any or a combination of them are essential if the firm are to develop
the "competitive advantage" which Porter talks about in his book.
Support Activities
Support activities assist the primary activities in helping the organization achieve its competitive
advantage. There are four main areas of support activities: procurement, technology development
(including R&D), human resource management, and infrastructure (systems for planning,
finance, quality, information management etc.). They include:

Firm infrastructure: Every organization needs to ensure that their finances, legal structure and
management structure work efficiently and helps drive the organization forward. Inefficient
infrastructures waste resources, could affect the firm's reputation and even leave it open to fines
and sanctions.
Human resource management: The organization will have to recruit, train and develop the
correct people for the organization to be successful. Staff will have to be motivated and paid the
'market rate' if they are to stay with the organization and add value. Within the service sector
such as the airline industry, employees are the competitive advantage as customers are
purchasing a service, which is provided by employees; there isn't a product for the customer to
take away with them.
Technology development: The use of technology to obtain a competitive advantage is very
important in today's technological driven environment. Technology can be used in many ways
including production to reduce cost thus add value, research and development to develop new
products and the internet so customers have 24/7 access to the firm.
Procurement: This department must source raw materials for the business and obtain the best
price for doing so. The challenge for procurement is to obtain the best possible quality available
(on the market) for their budget.
4.5. Internal Factor Evaluation (IFE) Matrix
Internal Factor Evaluation (IFE) Matrix is a strategy tool used

to evaluate firm's internal environment and to reveal its strengths as well as weaknesses.
Strengths and weaknesses are used as the key internal factors in the evaluation.

Chapter Five
Strategy Formulation: Strategy Analysis and Choice
5.1. The Nature of Strategy Analysis
Strategy formulation is often referred to as strategic planning or long-range planning and is

concerned with developing an organization‘s mission, objectives, strategies, and policies. It
begins with situation analysis: the process of finding a strategic fit between external
opportunities and internal strengths while working around external threats and internal
weaknesses.
Strategy analysis and choice focuses on generating and evaluating alternative strategies, as well
as on selecting strategies to pursue. Strategy analysis and choice seeks to determine alternative
courses of action that could best enable the firm to achieve its mission and objectives.
Strategy Analysis and Choice is a process that reconciles strategic actions, market opportunities,
corporate strengths and resources, values of managers, and legal requirements and social
responsibilities to select a "best" mission, strategic thrust, and set of strategic actions.
Strategic choice refers to the decision which determines the future strategy of a firm. Based on
the analysis the firm selects a path among various other alternatives that will successfully
achieve the firm`s objectives.
The 5 Is strategic analysis stages include:

(1) issue identification;
(2) interested strategic stakeholders;
(3) incentive of stakeholders;
(4) information—objectives; and
(5) interaction strategies.

A strategy consists of an integrated set of choices. These choices relate to

five elements managers must consider when making decisions:
(1) arenas,
(2) differentiators,
(3) vehicles,
(4) staging and pacing, and
(5) economic logic.
5.2. Types of Strategy
There are three types of strategy: corporate, business and functional strategies. They are already
discussed in chapter one.
5.3. Long-Term Objectives
Performance goals of an organization, intended to be achieved over a period of five years or

more. Long-term objectives usually include specific improvements in the organizations:
 competitive position,
 technology leadership,
 profitability,
 return on investment,
 employee relations and productivity, and
 corporate image.
5.4. Comprehensive Strategy Formulation Framework
Important strategy-formulation techniques can be integrated into a three-stage decision-making

framework, as shown below. The tools presented in this framework are applicable to all sizes and
types of organizations and can help strategists identify, evaluate, and select strategies.
Stage-1 (Input Stage)
1. External Factor Evaluation

2. Competitive Matrix Profile
3. Internal Factor Evaluation

Stage-2 (Matching Stage)
1. TWOS Matrix (Threats-Opportunities-Weaknesses-Strengths)

2. SPACE Matrix (Strategic Position and Action Evaluation)
3. BCG Matrix (Boston Consulting Group)
4. IE Matrix (Internal and external)
5. GS Matrix (Grand Strategy)
Stage-3 (Decision Stage)

1. QSPM (Quantitative Strategic Planning Matrix)
5.5. BSC Model
A balanced scorecard is a strategic management performance metric used to identify and

improve various internal business functions and their resulting external outcomes. Balanced
scorecards are used to measure and provide feedback to organizations. Data collection is crucial
to providing quantitative results as managers and executives gather and interpret the information
and use it to make better decisions for the organization.
The balanced scorecard (BSC) is a strategic planning and management system. Organizations
use BSCs to: Align the day-to-day work that everyone is doing with strategy. Prioritize projects,
products, and services. Measure and monitor progress towards strategic targets.
The balanced scorecard (BSC) is a strategic planning and management system. Organizations
use BSCs to:
 Communicate what they are trying to accomplish

 Align the day-to-day work that everyone is doing with strategy
 Prioritize projects, products, and services
 Measure and monitor progress towards strategic targets
The BSC suggests that we examine an organization from four different perspectives to help
develop objectives, measures (KPIs), targets, and initiatives relative to those views.
 Financial (or Stewardship): views an organization’s financial performance and the
use of financial resources

 Customer/Stakeholder: views organizational performance from the perspective of

the customer or key stakeholders the organization is designed to serve
 Internal Process: views the quality and efficiency of an organization’s performance
related to the product, services, or other key business processes
 Organizational Capacity (or Learning & Growth): views human capital,
infrastructure, technology, culture, and other capacities that are key to breakthrough
performance
5.6. The 7’S Model
McKinsey 7s model is a tool that analyzes firm’s organizational design by looking at 7 key
internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to
identify if they are effectively aligned and allow organization to achieve its objectives.
McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert
Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since the
introduction, the model has been widely used by academics and practitioners and remains one of
the most popular strategic planning tools. It sought to present an emphasis on human resources
(Soft S), rather than the traditional mass production tangibles of capital, infrastructure and
equipment, as a key to higher organizational performance. The goal of the model was to show
how 7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and Shared
values, can be aligned together to achieve effectiveness in a company. The key point of the
model is that all the seven areas are interconnected and a change in one area requires change in
the rest of a firm for it to function effectively.
The model can be applied to many situations and is a valuable tool when organizational design is
at question. The most common uses of the framework are:
 To facilitate organizational change.

 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.

 Strategy is a plan developed by a firm to achieve sustained competitive advantage and

successfully compete in the market. What does a well-aligned strategy mean in 7s
McKinsey model? In general, a sound strategy is the one that’s clearly articulated, is
long-term, helps to achieve competitive advantage and is reinforced by strong vision,
mission and values. But it’s hard to tell if such strategy is well-aligned with other
elements when analyzed alone. So the key in 7s model is not to look at your company to
find the great strategy, structure, systems and etc. but to look if its aligned with other
elements. For example, short-term strategy is usually a poor choice for a company but if
its aligned with other 6 elements, then it may provide strong results.
 Structure represents the way business divisions and units are organized and includes the
information of who is accountable to whom. In other words, structure is the
organizational chart of the firm. It is also one of the most visible and easy to change
elements of the framework.
 Systems are the processes and procedures of the company, which reveal business’ daily
activities and how decisions are made. Systems are the area of the firm that determines
how business is done and it should be the main focus for managers during organizational
change.
 Skills are the abilities that firm’s employees perform very well. They also include
capabilities and competences. During organizational change, the question often arises of
what skills the company will really need to reinforce its new strategy or new structure.
 Staff element is concerned with what type and how many employees an organization will
need and how they will be recruited, trained, motivated and rewarded.
 Style represents the way the company is managed by top-level managers, how they
interact, what actions do they take and their symbolic value. In other words, it is the
management style of company’s leaders.

 Shared Values are at the core of McKinsey 7s model. They are the norms and standards
that guide employee behavior and company actions and thus, are the foundation of every
organization.

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Strategic Management and Policy Analysis Handout

1.1.2. Definitions of Strategic Management

Prepared by Anbessa Bekele TLC May, 2024 Page 1

technology, new competitors, a new economic environment, or a new social, financial, or

Let us see some definitions of strategic management as follows:

 Strategic management is the management of an organization's resources in order to

In the field of management, strategic management:

Prepared by Anbessa Bekele TLC May, 2024 Page 2

1.2. Stages of Strategic Management

The strategic-management process consists of three stages: strategy formulation, strategy

Stage 1: Strategy Formulation

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Stage 2: Strategy Implementation

Strategy implementation includes: developing a strategy-supportive culture, creating an effective

Prepared by Anbessa Bekele TLC May, 2024 Page 4

Stage 3: Strategy Evaluation and Control

Three fundamental strategy-evaluation activities are:

Prepared by Anbessa Bekele TLC May, 2024 Page 5

Strategy evaluation is needed because success today is no guarantee of success tomorrow!

1.3. Key Terms in Strategic Management

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2. Vision & Mission Statement

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3. External Opportunities and Threats

4. Internal Strengths and Weaknesses

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Policies are usually mentioned in terms of marketing, finance/accounting, management, and

Prepared by Anbessa Bekele TLC May, 2024 Page 10

1.4. Over View of Types of Strategy

1) Corporate Level Strategy

 The corporate-level strategy is the set of strategic alternatives from which an

2) Business Level Strategy

3) Functional Level Strategy

 A functional strategy is, in reality, the departmental/division strategy designed for

Prepared by Anbessa Bekele TLC May, 2024 Page 12

 Sometimes functional strategy is called departmental strategy since each business-

4) Operating Level Strategy

 Operating strategy is formulated at the operating units of an organization. A

1.5. The Strategic Management Approach

Resource-based View of strategy views the firm as a unique bundle of

Prepared by Anbessa Bekele TLC May, 2024 Page 13

The resource-based view (RBV) is a managerial framework used to determine the

1.5.2. Industrial Organization

1.6. Benefits of Strategic Management

Strategic management enhances the problem-prevention capabilities of organizations because it

Prepared by Anbessa Bekele TLC May, 2024 Page 14

Communication is a key to successful strategic management. Through involvement in the

Generally, stated that strategic management offers the following benefits:

 It allows for identification, prioritization, and exploitation of opportunities.

Prepared by Anbessa Bekele TLC May, 2024 Page 15

1.7. Business Ethics and Strategic Management

Business Ethics refers to carrying business as per self-acknowledged moral standards. It is

1. Protect the basic rights of the employees/workers.

Prepared by Anbessa Bekele TLC May, 2024 Page 16

4. Do not replicate the packaging style so as to mislead the consumers.

STRATEGY FORMULATION: THE BUSINESS MISSION, VISION AND VALUES

2.1. Vision Statement

Prepared by Anbessa Bekele TLC May, 2024 Page 17

Key Elements of a Good Vision Statement

2.2. Mission Statement

2.3. Business Values

Prepared by Anbessa Bekele TLC May, 2024 Page 18

In order to develop business values, the following activities should be done:

Strategic Management & PA Handout, 2023 TLC

Strategic Management & PA Handout, 2023 TLC