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Strategic Management and Decision Making Analysis (Dec 2014)
Strategic Management and Decision Making Analysis (Dec 2014)
Study Material
Strategic Management
and
Decision Making Analysis
Education Department
The Institute of Chartered Accountants of Nepal
Publisher : The Institute of Chartered Accountats of Nepal
Babar Mahal, P.O.B. No.: 5289, Kathmandu
Tel: 977-1-4269130, 4258569; Fax : 977-1-4258568
Email : ican@ntc.net.np, Website:www.ican.org.np
Students are requested to accustom with the syllabus of the subject and read each topic
thoroughly for understanding on the chapter. We believe this material will be of great help
to the students of CAP-III. However, they are advised not to rely solely on this material. They
should update themselves and refer recommended text-books given in the CA Education
Scheme and Syllabus along with other relevant materials in the subject.
Last but the most, we acknowledge the efforts of Prof. Dr. Govind Ram Agrawal, who has
meticulously assisted for preparation and updating this study material. Likewise, we also
acknowledge Dr. Mahananda Chalise, who has reviewed this study material for building in
comprehensive shape.
Due care has been taken to make every chapter simple, comprehensive and relevant for the
students. In case students need any clarification, creative feedbacks or suggestions for further
improvement on the material, they may be forwarded to the Education Department.
December 2014
Education Department
The Institute of Chartered Accountants of Nepal
Contents
1. CONCEPT OF STRATEGY 1
1.1 Concept and Characteristics of Strategy 2
1.1.1 Characteristics of Strategy 2
1.2 Levels of Strategy 4
1.2.1 Corporate Level Strategy 4
1.2.2 Business Level Strategy 5
1.2.3 Functional Level Strategy 6
1.3 Strategic Planning 8
1.3.1 Steps in Strategic Planning 10
1.4 Relevance of Strategic Thinking for Professional Accountant 14
Self Examination Questions 14
2. STRATEGIC MANAGEMENT 15
2.1 Concept of Strategic Management 16
2.2 Characteristics of Strategic Management 16
2.3 Importance of Strategic Management 17
2.4 Process of Strategic Management 19
2.4.1 Strategy Formulation 19
2.4.2 Strategy Implementation 20
2.4.3 Strategic Evaluation 21
2.4.4 Feedback 21
2.5 Elements of Strategic Management 21
2.5.1 Strategy Formulation 22
2.5.2 Strategy Implementation Element 23
2.5.3 Strategic Evaluation Element 24
Self Examination Questions 24
3. ENVIRONMENTAL ANALYSIS 25
3.1 Meaning of Environment 25
3.2 Nature of Environment 25
3.3 Elements of Environment 26
3.3.1 Elements of Political Environment 27
3.3.2 Elements of Economic Environment 30
3.3.3 Elements of Socio-cultural Environment 33
3.3.4 Elements of Technological Environment 35
3.4 Objective Setting 37
3.4.1 Levels of Objective Setting 38
3.5 SWOT Analysis 41
3.6 Environmental Analysis Process 42
3.6.1 Scanning 43
3.6.3 Forecasting 44
3.6.2 Monitoring 45
3.6.3 Forecasting 45
3.6.4 Assessment 46
Self-Examination Questions 46
4. INTERNAL ANALYSIS 48
4.1 Concept of Internal Analysis 48
4.2 Process of Internal Analysis 49
4.3 Areas of Internal Analysis 53
4.4 Methods of Internal Analysis 55
4.4.1 Value Chain Analysis 56
4.4.2 Cost Efficiency Analysis 58
4.4.3 Effectiveness Analysis 61
4.4.4 Comparative Analysis 62
4.5 Assessment of Internal Resources and Core Competencies 65
4.5.1 Available Resources 66
4.5.2 Threshold Resources 67
4.5.3 Unique Resources 67
4.5.4 Core Competencies 68
4.6 Strategic Advantage 68
Self-Examination Questions 70
5. STRATEGIC OPTIONS 71
5.1 Concept of Strategic Options 71
5.2 Strategic Alternatives at Corporate Level 72
5.2.1 Stability Strategy 73
5.2.2 Growth Strategy (Expansion Strategy) 74
5.2.3 Retrenchment Strategy 87
5.2.4 Combination Strategy 78
5.3 Strategic Alterntives at Business Level 78
5.3.1 Porter’s Competitive Strategies 79
5.3.2 Strategic Clock-oriented Market-based Generic Strategies 85
5.4 Directions for Strategy Development 89
5.4.1 Consolidation 90
5.4.2 Market Penetration 90
5.4.3 Product Development 91
5.4.4 Market Development 91
5.4.5 Diversification 92
5.5 Methods of Strategy Development 94
5.5.1 Internal Development Method 94
5.5.2 Acquisition and Mergers Method 95
5.5.3 Joint Development and Strategic Alliances Method 96
Self Examination Questions 99
Means to
How do we Broad
Strategy achieve
get there ? Action Plan
objectives
Definitions
According to Jauch and Glueck
A strategy is a unified, comprehensive and integrated plan that relates the strategic
advantages of the firm to the challenges of environment.
According to Johnson and Scholes
Strategy is the direction and scope of an organization over the long term, which achieves
advantage for the organization.
According to Fred David
Strategies are the means by which long term objectives will be achieved.
Strategic decisions are big decision and affect an entire organization or a large part of it, such as whole
division or a major function.Strategy provides a sense of dynamic direction, focus and cohesiveness
to the organization. It represents integrated framework to exploit advantageous opportunities,
meet potential threats, make full use of resource strengths and minimize weaknesses. It unravels
complexity and reduces uncertainty of the environment.
The fundamental outcomes of strategy are as follows:
Gaining competitive advantage and strategic advantage
Efficiency in Resource Utilization
Improved Productivity
1. Long-term Horizon: Strategy is long term action plan to direct the company. Strategy is concerned
with the long-term direction and scope of the organization. It is not concerned with day-to-day
operations. It is forward looking for 5 to 20 years. It translates objectives into reality. It is formulated
by top management.
2. Action Oriented: Strategy means making clear cut choices about how to compete. Strategy believs
the action of the firms to be implemented. Strategy is concerned with broad action plans. The action
plans aim at objectives achievement. It is more specific than objectives. It is multi-pronged and
integrated.
3. Value-addition: Strategy is the mechanism to enhance the value of the firms. Strategy aims at adding
value. It provides advantage for the organization over competitors. It seeks customer satisfaction.
It is the bridge that matches the resources and capabilities of organization with opportunities. It is
formulated to win.
4. Strategic Decisions: Strategy is based on strategic decisions. Such decisions define the scope of the
organization’s activities. They define products and markets. They allocate resources. They pinpoint
organizational capabilities.
5. Environmental Adaptation: Today, company faces the different environmental issues and adjusts
accordingly. Strategy matches the resources and activities of the organization to the changing forces
in the environment. It aims for strategic fit by matching resources with opportunities. It facilitates
adaptation to changing environment. It is dynamic and flexible.
6. Stakeholder Expectations: Stakeholders are related parties and agencies to otrganizations. Strategy
fulfills the values and expectations of the stakeholders of the organization. They have interest in the
performance of the organization. They can be owners, employees, suppliers, customers, government,
labour unions, and financial institutions.
7. The Development of Resources: Resources are fundamentally necessary to the organization. It is also the job
of strategy to develop the resources in the organizations. Strategy is related for the development of resources. The
knowledge and other resources that the organization acquires over time are vital elements in its strategy.
c) Diversification: It can be of products, services, and business units from current markets.
d) Growth and Stability: It can be through merger, acquisition, reengineering, downsizing,
rightsizing, strategic alliances etc.
A SBU is a part of the organization for which there is a distinct market. SBUs represent basket of
businesses of an organization. Each SBU should have the following characteristics:
a) Separate Market Segment: Each SBU has different products and marketing strategies. ach
SBU deals with distinct market segments. It has its own products, customer groups and
market areas. They are different from another SBU.
b) Separate Competitors: Each SBU has its own set of competitors. They are separate from
another SBU.
c) Separate Manager: Each SBU has its own manager responsible for planning, management
and control.
d) Separate Plan: Each SBU has its own strategic plan. It is separate from another SBU.
Contemporary theory places a lot of emphasize on business level strategies, since they determne how
well an organization competes in its chosen markets.
b) Resource Allocation: For subfunctions of a function, such as product, price, place, promotion
of marketing function.Without resource, no strstegy will be implemented in the firms.Thus,
6 | The Institute of Chartered Accountants of Nepal
Concept of Strategy
there should be proper allocation of resource for the effective implementation of strategies.
The functional level strategies add value to a product by lowering costs or differentiating products.
They aim to attain superior efficiency, quality, innovation and responsiveness to customer needs.
Functional strategies can be as follows:
Production Strategies: They focus on improving efficiency and controlling costs. They deal with
plant technology, plant capacity, plant layout and location, production systems and processes,
maintenance, inventory, and quality.
Marketing Strategies: They focus on customer need satisfaction. They deal with target markets,
marketing mix, product positioning and management of product life cycle.
Finance Strategies: They focus on increasing shareholder’s wealth. They deal with financial planning,
financing decisions, investment decisions, dividend decisions, and financial control. Profit potential
of various strategic alternatives are assessed.
Human Resource Management (HRM) Strategies: They focus on quality, competence, productivity
and welfare of employees. They deal with acquisition, development, utilization and maintenance of
employees.
Research and Development (R & D) Strategies: They focus on new product development. They deal
with product innovation, modifications and imitations.
6. Education and Health SBU: School, Academy, Newspaper and Norvic Health center businesses
7. Financial SBU: Insurance, Finance company and Bank businesses
A company's strategy consists of the competitive moves and bisiness approaches that managers are
employing to compete successfully, improve performance, and grow the business.The crafting of a
strategy reprsents a managerial commitment to pursuing a particular set of actions.
Strategic plan is a road map for the future direction of the organization. It is a long range plan for
five years and more. It is organizationwide. It is prepared by top management. It is the means for
formulating corporate strategy. It provides broad direction to take the organization where it wants to
be in the long run. Its thrust is to search sustainable competitive advantage for the organization.
Strategic plan establishes mission, objectives and strategies for an organization. It makes strategic
choice about future courses of action from among the strategic options. Policies for acquisition and
deployment of resources are specified.
Mission is the reason for the existence of an organization. It defines the scope in terms of
product, customer and competitive advantage. It projects the image of the organization.
Objectives are desired outcomes in terms of results to be achieved.
Strategies are broad action plans to achieve objectives.
Definition:
The search for sustainable competitive advantage through strategic plan can be based on:
Distinctive competencies of people in the organization
and produces a competitive edge.A company's strategy provides direction and guidance, in term of
not only what the company should do but also what it should not do.The heart and soul of strategy
is the actions and moves in the market place that managers are taking to gain competitive edge over
rivals.
1. Future Oriented: The fundamental feature of strategic planning is future oriented approach.
Strategic planning is the long-term future direction and scope, not day-to-day tasks; road
map for future. Strategy can be successful through strategic planning formulated by the
organization. It is targeted to future course of action in the firms.
8. Vision, Mission, Objectives Strategies: The strategic planning incorporates the vision,
mission, objectives and strategies of the firms. They are the outputs of strategic planning.The
strategic planning entails the vision, mission and objectives of the organizations.
Objectives: Objectives are the ends that state specifically how the goals shall be achieved.
The managerial purpose of setting objectives is to convert the vision and mission into specific
performance targets.They are desired outcomes. They are end results to be achieved in the
long-term.
Strategies: They are broad action plans for achieving objectives. They identify sustainable
competitive advantages. They provide direction and scope to the organization.
2. SWOT Analysis:
It is the process of analyses of internal and external forces to identify the strengths, weakness,
opportunities and threats of the company. SWOT analysis provides the comprehensive
information to the compant. A SWOT analysis (Strengths, weaknesses, opportunities, threats)
is done to identify external opportunities and internal strengths of the organization. It is
analysis of strengths, weaknesses, opportunities and threats. It is based on assessment of
internal and external environmental forces.
Strengths and weaknesses (SW) are identified. Assessment is done to identify core
competencies. Core competencies are strengths that provide competitive edge to the
organization. Stakeholder’s expectations are considered.
In today's complex and rapidly changing business environment, members of all professions should
posses and use strategic thinking skills, which reported in the literature as a crucial aspect of
success. Nowadays, professional accountants are confronted with changes take place in standards
and legislations. Accounting environment faces great changes in Nepal during the adoption process
of IFRS, ISA, and the new Commercial Code. To respond adequately to these changes, the accounting
profession should have and use strategic thinking skills. The research showed the usage level of
strategic thinking skills (reframing, reflecting, and systems thinking) of CPAs and CPA trainees and
tested the effects of several variables on the usage level of those skills. Strategic management develops
the level of strategic thinking in the mind set of professional accountants. It allows professional
12 | The Institute of Chartered Accountants of Nepal
Concept of Strategy
accountants to anticipate changing conditions and plan accordingly.Strategic thinking provides road
map for future in terms of long term direction and scope to achieve objectives. It represents broad
action plans.
Professional accountant are generally engaged in multifarious nature of work, such as auditing,
consultancy and gainful employment. They hold top management position in public as well as
private sector organizations. Globalization, liberalization and revolution in information technology
are having for reaching impact on the accounting profession. The nature and scope of the work of
professional accountant is changing.
Strategic thinking is relevant for professional accountants because of the following reasons:
1. Long term Horizon: Professional accountants need to look forward for 5 to 20 years in future.
This is essential for their survival and growth in the age of growing competition. Strategic
thinking is must to look forward. Professional accountant in the corporate world cannot
succeed without strategic thinking.they should design the accounting strategies in long term
perspectives.
2. Strategic Decisions: Professional accountants are required to make strategic decisions. They
are needed to define the scope of their activities, products and markets. They are needed to
forge strategic alliances with national and international accounting firms. Strategic thinking
is needed to make strategic decisions. They need to strategically manage their business.
3. Environmental Adaptation: External environment is fast changing. Professional accountants
need to adapt their resources and activities to the changing forces in the environment.
Strategic thinking is needed to match resources with opportunities of advantage in the
changing environment. This is also needed to prevent problems.
4. Consultancy Services: Professional accountants are providing a variety of consultancy
services that are related to long term future. Some examples are:
Profit planning programmes
Investment proposals
Feasibility studies
Tax planning for future years
5. Competitive Advantage: Strategic thiniking creates competitive advantage for the professional
accountants. They can outperform their compeitors. Their market share increases. Client
satisfaction increases. Resources are effectively utilized.
Strategic is something that is important, critical, central and long-term for future direction. It is not a
quick fix. Management gets the jobs done by working with and through people to achieve objectives
efficiently and effectively. It strives for enhancing organizational performance.
Strategic management refers to strategic decisions and actions of top management. It is concerned
with formulation, implementation and evaluation of strategy to achieve long-term objectives. It
involves decisions about allocation of significant resources consisting of people, money, technology,
time and information. It turns strategies into action.
4. Motivation: Firms formulate the strategies how to motivate the employees as the issue
of strategic human resource manangement. there are other different type of functional
strategies in the firms. Employees are motivated by performance-reward relationship. This
improves productivity and goal-directed behavior. Efforts are channelled towards goals.
Communication improves. Employees remain informed. So, the company has to formulate the
strategies relating to the different human resource practices
5. Reduced Gaps and Overlaps: Resource is very necessary thing in the company. Without
resources, the company can not make the strategies.Strategic management takes an
integrated approach to resource allocation. This reduces gaps and overlaps in activities.
Roles and responsibilities are clearly specified. Resources are effectively utilized. Discipline is
promoted.
6. Change Management: This is the age of change or dies strategy. Employes resist the changes.
Strategic management reduces resistance to change. The participative approach promotes
participation and communication. Uncertainty is reduced. Strategic change is facilitated. It
alerts management to respond to change. It guides the organization successfully through
all changes in the environment. Therefore, strategy can be considered as a tool of change
management.
7. Financial Benefits: Organizations using strategic management tend to be more successful.
Efficiency and effectiveness is promoted. Resources are better allocated and utilized.
Profitability improves.So, effective strategy can provide financial and other benefits to the
organization.
Feedback
This step also involves making strategic choices from among strategic alternatives. They serve as the
basis for formulating the following strategies:
a) Corporate-level Strategy: It is organization-wide. It provides overall direction and scope to
the organization. It is concerned with adding value to the organization.
b) Business-level Strategy: It is about how to compete successfully in a particular market. It
aims to achieve advantage over competitors. It is concerned with identifying competitive
advantage for strategic business units.
c) Functional Strategy: It is function-specific, such as for marketing, finance, research and
development. It is concerned with resources, processes and people. Its aim is effective
delivery of corporate and business level strategies.
Strategic choices are based on strategic options. Strategic options are strategic alternatives. They
should be suitable, feasible and acceptable. The options can be:
Internal development of the organization
Mergers and acquisitions
Joint development and strategic alliances
The strategies that are formulated are implemented through a series of administrative and managerial
actions.This step involves turning strategies into action. It is concerned about implementation of
strategies. It ensures that strategies are operationalised in practice. It involves:
a) Structure Design: Proper structure is needed to implement the strategy in the organization.
The structure for strategic management is determined. It establishes reporting relationships,
span of control and chain of command. Authority and responsibility relationships are clearly
defined.
b) Resource Planning: Strategies can not be implemented effectively without planning of
2.4.4 Feedback
It provides information for revision of strategies as needed. Evaluation serves as the source of
performance information. Environmental changes necessitate revision of strategies.
The sum of a company's strategic vision and mission, objectives, and strategy constitutes a strategic
plan for coping with industry conditions, outcompeting rivals, meeting objectives, and making
progress towards the strategic vision.
a) Environmental Analysis:
b) Strategy Formulation
This is the formulation element of strategic management. Assessment of external and
internal environment through SWOT analysis enables to identify attractive strategic options.
Opportunities of strategic advantage are identified. They are matched with resource strengths.
This provides strategic options. The selected strategic options become strategies. They are
suitable, feasible and acceptable.
Strategic options serve as the basis for formulating strategies. The sub elements consist of:
i) Corporate Level Strategy: It is organization-wide and provides future direction and scope to
the organization. It is concerned with adding value to the organization.
ii) Business Level Strategy: It deals with strategic business units. It deals with how to compete
successfully in a particular market. It is concerned with identifying competitive advantages
for SBUs.
iii) Functional Level Strategy: It deals with specific functions, such as marketing. It is concerned
with objectives, resources, processes and people for each function.
Definition
External environmental forces are located outside the organization. They consist of political-
legal, economic, socio-cultural and technological forces. They are dynamic, diverse, complex,
uncertain and uncontrollable. Strategic management must adapt to changing forces in the
external environment. It is environment-specific.
Every company operates in a larger environment that goes well beyond just the industry in which it
operates. Managers need to gather required information to cope the environmental uncertaintities.
The Institute of Chartered Accountants of Nepal | 25
Strategic Management & Decision Making Analysis
Organizations exist in a complex and dynamic environment. External environment is located outside
the organization. It consists of political-legal, economic, socio-cultural and technological forces. It
provides opportunities and threats to the organization. Internal environment of the organization
consists of people, structure, resources and processes. It provides strengths and weaknesses. It is
located within the organization. Core competencies and unique resources are identified by analysing
internal environment.Opportunities of benefits are identified by analysis of external environment.
The nature of external environment consists of the following characteristics:
1. Political Environment
The political environment of business is dynamic in Nepal. It has the most observable impact
on business activities.Forces in the political environment are related to management of
public affairs. They define legal and regulatory boundaries. Their direction and stability are
important for strategic management. The elements of political environment are: (Figure 3–2)
a) Political System: It consists of ideological forces, political parties, election procedures,
and power centres. A stable, efficient and honest political system is essential for the growth
of strategic management. Political instability resulting from civil war, emergencies and
terrorist activities adversely affects strategic management. Government itself has become a
big customer of products in modern time. There are different possible political systems. An
open system of government is democratically elected by the population of a country.
It is important for organisations to monitor their political environment, because change in this
environment can impact on business strategy and operations in a number of ways:
The stability of the political system affects the attractiveness of a particular national market.
Governments pass legislation that directly affects the relationship between the firm and its
customers, its suppliers and other firms.
Governments see business organisations as an important vehicle for social reform.
The government is additionally responsible for protecting the public interest at large.
The economic environment is influenced by the actions of government.
Government is itself a major consumer of goods and services.
Nepal is a democratic country having unstable political syatem, where the government plays an
active role as planner, promoter, and regulator of the economic activity. Businessmen, therefore, are
conscious of the political environment that their organizations face. Most governmental decisions
related to business are based on political considerations in line with the political philosophy followed
by the ruling party at the centre. Government policies can influence the dominant social and cultural
values of a country. Therefore, organisations have to not only monitor the political environment –
they also contribute to it.
2. Legal Environment
Laws and regulations are enforced to govern the conduct of individuals and institutions in
a society.The legislative framework creates both opportunities and threats for business.
Succesful managers carefully monitor changes in laws and regulations in order to
take advantage of the opportunity they create and counter the threats they pose in an
organization's task environment. Legal environment refers to all the legal surroundings that
affect management activities. It consists of an array of acts, rules, regulations, precedent,
institutions and processes. It defines what strategic management can and cannot do.
Legal environment is concerned with
a. Protecting the rights and interests of organization, consumers, employees, and the society.
c. Regulating activities through legal provisions. They are relating to licencing, wages, labour
relations, monopoly, foreign investment, foreign exchange, environment protection, consumer
protection, industrial location, imports, exports, pricing, and taxation.
a) Law: It consists of an array of laws enacted by the Parliament. It protects the rights and
interests of consumers, labour, business and society.
b) Courts of Law: Courts are institutions established to solve legal disputes. Nepal has a three-
tier court system. The Supreme Court is at the national level. It is the highest level of judiciary.
The Courts of Appeal are at the middle level. The 75 district courts are at district level.
c) Law Administrators: Various law enforcement agencies ensure implementation of laws and
the judgements of the courts of law. Government agencies, lawyers, police and jails play an
important role in law administration.
c. Economic policies
d. Economic planning
e. Economic indices like national income, distribution of income, rate and growth of GNP, per
capita income, rate of savings and investments etc.
f. Infrastructural factors such as financial institutions, banks, modes of transportation,
communication etc.
Economic environment refers to all the economic surroundings that influence strategic management
activities. It is concerned with nature and direction of economy. Important elements of economic
environment are: (Figure 3–4)
1. Economic System
The economic systems around the world can be classified as capitalist, socialist, and mixed.
The classification is based on the method of resource allocation in the system.Economic
system determines the scope of private sector participation and market forces. The models of
economic system are:
a) Free Market Economy: This system is based on private sector ownership of the factors of
production. Profit serves as the driver of economic engine. The competitive market mechanism
guides business decisions. There is freedom of choice. Individual initiative is encouraged.
b) Centrally Planned Economy: This system is based on public ownership of the factors of
production. The economy is centrally planned, controlled and regulated by the government.
There is no consumer sovereignty. Public enterprises play a dominant role.
c) Mixed Economy: This system is a mix of free market and centrally planned economies. Both public
and private sectors coexist. The public sector has ownership and control of basic industries including
utilities. The private sector owns agriculture and other industries. It is regulated by the state.
2. Economic Policies
Policies are guidelines for action. Economic policies significantly influence and guide strategic
management actions.
3. Economic Conditions
The important componenets of the economic dimension of an economy are: gross national
product, per capita income, personal consumption, and expenditure, inflation rates, private
investment, labour costs, level of employement etc. Economic conditions indicate the health
of the economy in which strategic management operates. The factors of economic conditions
are:
a) Income: The level and distribution of income affect expenditure, saving and investment. They
together influence the economic conditions.
b) Business Cycles: The stages of business cycle can be prosperity, recession and recovery. They
affect the health of strategic management.
c) Inflation: It is rise in price level. It influences costs, price and profits of organization.
d) Stage of Economic Development: An economy can be least developed, developing and
developed. Stratetic management activities are influenced by the stage of economic
development. Nepal is a least developed country.
These are the key economic variables thst are considered by managers to understand and
assess the general economic forces at work.
4. Globalization
It is making the whole world as one single market. It promotes multi-country operations
through free trade and by removing tariff and other restrictions. It brings competition
everywhere. There is free flow of capital, labour, technology and management across borders.
The World Trade Organization (WTO) has been engaged in the promotion of multilateral
open trade without discrimination.
The socio-cultural environment consists of factors related to human relationships within the society,
the development, forms, and functions of such a relationship and learned and shared behavior of
groups of human beings having a bearing on the business of an organization. The socio-cultural
environment primarily affects the strategic manangement process within the organization in the
areas of mission and objectives-setting and decision related to products and markets.
1. Social Environment
It refers to all the social surroundings that influence strategic management. It consists of
factors related to human relationships.Socio-cultural environment is made up of the social
institutions, class structure,beliefs, values, behaviour, customs of the people, and their
expectations. Organizations operate within the society. They primarily exist to satisfy societal
needs. Social factors influence strategic management policies, practices and activities of
organizations.The social environment imposes severe pressures on the management of a
business firm. A business firm must keep a close watch on the changing patterns of the soci-
cultural make-up of a society in which it operates.
Important elements in the social environment consist of: demographics, social institutions,
pressure groups, and social change (Figure 3–5)
b) Social Institutions: They consist of family, reference groups and social class.
Family: Two or more persons related by blood, marriage or adoption who reside together
constitute a family.
Reference Groups: They consist of groups that have a direct or indirect influence on
the attitudes and behavior of consumers. They can be sports, musical and cinema
personalities. They can be professionally successful people. They influence product and
brand choices. They:
- expose to new behavior and life style;
- influence values and attitudes;
- provide norms for behavior.
Social Class: It is the rank within a society determined by its members. It can be
classified into upper, middle and lower. Members of a class share similar values,
interests and behavior.
Strategic management activities are influenced by the behavior of various classes in the
society.
c) Social Change: Change is making things different. Social change implies modification in
relationships and behavior patterns in a society. Life style and social values promote social
change. They have profound impact on strategic management.
Life style is a person's pattern of living reflected in his activities, interests and opinions. It affects
product choice.
The socio-cultural changes take place very slowly and do not seem to have an immediate and direct
impact on short-term strategic decisions. Neverthless, some socio-cultural changes are too prominent
to be ignored. One such change in the Nepalese context is the emergence of the mass media as a
powerful socio-economic force.
2. Cultural Factors
Culture is the human made part of the environment. There are multiple dimensions of culture
which influence to the management of business.They refers to cultural surroundings that
influence strategic management. Culture is the complex whole which includes values, norms,
beliefs, customs, symbols and works of arts and architecture. It is created by society. It is
handed down from generation to generation.
Culture is learned behavior. It changes over time. It is made up of attitudes, values, beliefs,
religion, language, caste and ethnicity.
a) Attitudes: Culture creates attitudes towards work, leisure and business. Work motivation,
profit motivation, attitudes toward gift giving, meaning of body gestures and attitudes toward
time vary from culture to culture.
b) Values and Beliefs: Culture influences values and beliefs. Values are basic convictions. Beliefs
are descriptive thoughts held about something based on knowledge, opinion or faith.
c) Religion: It influences the products business should produce. The type of food people eat,
beverages they drink, clothes they wear, and materials they use for construction of houses
vary from religion to religion,.
d) Language: It creates subcultures based on caste and ethnicity. Multiplicity of languages
influences strategic management.
Cultural factors influence:
a) Type of Products: The type of food people eat, beverages they drink, and clothes they wear,
and the building materials they use for construction of houses vary from culture to culture.
b) Attitudes towards Work and Leisure: Work motivation, profit motivation, meaning of body
gestures, and attitudes toward time vary from culture to culture.
c) Values and Beliefs: Values are basic convictions. Beliefs are descriptive thoughts held about
something based on knowledge, opinion or faith. Culture influences values and beliefs.
Strategic management should be culturally sensitive. Cross-cultural changes brought about
by globalisation and information technology significantly influence it.
Technology influences strategic management by bringing about changes in jobs, skills, life styles,
products, production methods and processes. Automation, computerization, robotics, informatics,
nano technology, biotechnology, new materials and artificial intelligence have all influenced strategic
management. Information technology has greatly affected it.
Elements in the technological environment consist of: (Figure 3–6)
b) Projects: Turn-key projects based on global bidding serve as a source of technology transfer.
Objectives set direction, reveal priorities and focus on coordination. They are the basis for planning,
Business organizations pursue multiple objectives at the same time. They can be:
a) Profitability: Profit is excess of income over expenditure. It is return on investment or earning
per share. Organizations set target profit.
b) Measurable: They should be quantifiable. They should clearly state what will be achieved
and when will it be achieved.
c) Acceptable: Persons responsible for achieving objectives should agree to them. They should
be acceptable and understandable.
d) Realistic: They should be reasonable and achievable. They should be flexible to changing
environment. They should be challenging. They should follow from mission.
They are strategic objectives set by top management. They define long-term desired outcomes. They
consist of vision, mission and strategy. They are stated broadly.
Vision: It states what the organization aspires to become in future from a long-term
perspective. It is the strategic intent of the organization. It is the desired future state. It is the
aspiration of the organization. It answers the question "what we want to become?"
Mission: It states the reason for the existence of the organization. It defines the scope and
boundaries of the present business in terms of product, market and competitive advantage. It
answers the questions: “Why do we exist” and “What is our business ?” Mission follows from
vision. It should be in line with the values and expectations of stakeholders. It projects image
of organization to public.
Strategy: It is a broad action plan for achieving objectives. It provides long-term direction
and scope to an organization. It aims to achieve competitive advantage for the organization.
It fulfills stakeholders' expectations. Strategy follows from mission. It is a road map for future
direction.
Fund generation
Programmes for human resource development
Objectives at various levels form a “means-end chain”. The achievements of lower level
objectives lead to the achievement of higher level objectives.
Organization should capitalize on the opportunities through the use of strengths. They should
neutralize the threats by minimizing the impact of weaknesses.
SWOT analysis serves the following purposes:
It provides a logical framework for understanding strategic issues.
It provides information about external opportunities and threats as well as internal strengths
and weaknesses. Opportunities of competitive advantage can be matched with resource
strengths.
It guides the strategist in strategy identification and formulation.
3. Forecasting 4. Assessment
3.6.1 Scanning
Environment scanning can be defined as the process by which organizations monitor their relevant
environment to identify opportunities and threats affecting their business for the purpose of taking
strategic decisions.Scanning involve acquiring information from the environment. It detects trends
already underway. It detects emerging trends that have potential impact on business.
The variables considered for scanning are:
Changes in macro-environment: It consists of political, legal, economic, social, cultural and
technological factors.
Changes in Market: Changes in the structure of market and speed of globalization.
Nature of Competition: Strengths and weaknesses of competitors including their position as
leader, follower and nicher.
Customer Needs: Changes in needs and preferences of target customers and their buying
behavior.
Product Offerings: Product differentiation, positioning and product portfolios. Threat from
substitute products.
Types of Scanning
Environmental scanning can be of two types:
a) Identify relevant forces in the environment: They can be external forces, consisting of
political-legal, economic, socio-cultural, technological factors (PEST forces).
b) Determine sources of observation: They are determined by top management and can be:
i) Personal experiences of management.
ii) Managers, employees and competitors
iii) Experts, consultants, researchers
iv) Meetings, conferences, committees
v) Newspapers, journals, reports, books
vi) other sources
c) Select Scanning Methods: They are selected carefully and can be:
i) Extrapolation methods: Information from past is used to explore the future. Techniques
can be: forecasting, trend analysis, regression analysis.
ii) Historical analogy: Trend is studied by establishing historical parallels with other
trends.
iii) Intuitive reasoning: Rational intuition by scanner for free thinking, unconstrained by
past experiences and personal biases.
iv) Scenario building: Constructing a time-order sequence of events that have logical
cause and effect relationships. The scenario is based on analysis of interrelationship
among events.
v) Model building: Mathematical and econometric models of the environment are simulated.
vii) Delphi technique: Systematic pooling of expert opinions in varying stages. Feedback
is used to develop new forecasts.
viii) Surveys: Gathering of opinions of experts, customers and others about future
environment.
ix) Morphological Analysis: All possible ways are identified to achieve objectives.
d) Scan and Respond to Data: The collected data is studied, analysed, assessed, interpreted,
correlated and understood. Crucial developments in the environment are pin-pointed. They
can be:
Events: Important and specific occurances
Trends: Direction or sequence of events that have some momentum and durability.
Issues: Current concerns arising from events and trends
Expectations: Stakeholders demands arising from issues
Environmental scanning serves as a basis for SWOT analysis (strengths, weaknesses, opportunities
and threats).
3.6.2 Monitoring
It involves tracking environmental trends and events. It is auditing of environmental influences. The
likely effects of environmental influences on business performance are identified. This step provides:
a) Specific description of environmental trends and events.
b) Identification of trends and events for further monitoring.
c) Identification of areas for forecasting.
3.6.3 Forecasting
Forecasts are predictions, projections, or estimates of future situations.The basis of any planning are
a future estimate. This step is estimate of future situation. Forecasting is used to predict exactly how
some variables will change in the future. Forecasting is primarily concerned with trying to reduce the
uncertainty that exists about some part of the future.It focuses on what is likely to happen. It lays out
a path for anticipated changes. This step provides:
a) Key forces at work in the environment. They can be political-legal, economic, socio-cultural,
and technological.
b) Understanding of the nature of key influences and drivers of change.
c) Projection of future alternative paths available to reduce uncertainty.
Scenario building, Delphi technique, extrapolation can be useful tools for forecasting.
3.6.4 Assessment
This step identifies key opportunities and threats. The competitive position of business is analysed. It
indicates how the organizations stand in relation to other organization competing for same resources
or customers.
Self-Examination Questions
1. What is the concept of environment in strategic management? Describe its nature.
2. Explain the PEST elements of external environment.
3. What is environment analysis? Why is it done?
4. Describe the elements of political environment.
5. Explain the elements of economic environment.
6. "Socio-cultural factors are important for strategic management." Justify this statement.
7. "Technological factor greatly affect strategic management." Give your views.
8. What is objective setting? Describe multiple objectives of business.
9. Discuss various levels of objective setting.
10. What is SWOT analysis? Why is it done?
11. What is business environment? What are its objectives? Explain the steps in environmental analysis
process.
12. Prepare a SWOT analysis report for Institute of Chartered Accountants of Nepal.
13. Write the differences between vision and mission.
14. How can a decision maker identify strategic factors in the corporations' external environment?
15. Explain SWOT analysis. How does it help an organization in the context of strategic management?
16. What do you mean by micro and macro environment?
17. Discuss the elements of micro and macro environment?
18. Describe demographic environment of business.
19. Managers view the impact of their environment in different ways. Explain, with some examples, how
some managers may consider a change to be a threat and some as an opportunity.
20. Differentiate between environmental analysis and environmental diagnosis. Which is of direct
relevance to choice of strategy and why?
21. Enumerate the pitfalls of using the SWOT analysis indiscriminately.
22. Which sectors of environment are currently relatively more important, in general, in the Nepalese
context? What sectors are likely to gain importance in the near future?
23. Describe some of the important characterstics of environment and demonastrate how a strategist can
24. Choose any industry and outline the factors that could either create opportunities or threats for
companies within that industry in the near future.Is it possible that the same factor could be an
opportunity for one company and a threat for another?How?
4. Internal Analysis
Internal analysis describes the process which involves determining the strength and weakness
that the firm has at present or might develop.These are diagnosed in order to develop competitive
advantage and to minimize weaknesses or to consider how they will limit the strategy or can be
corrected. Strength is something a company possesses and that puts it at an advantage compared
with its competitors. Similarly, a weakness is something a company lacks or does poorly at and or
becomes a comparative handicap while fulfilling the objectives of the organization.
a) Organizational goals and policies: Goals are desired outcomes. They state end results. They
can be multiple as well as conflicting. They form a hierarchy. Strategic management activities
must be conducted within the framework of goals. Policies are guidelines for managerial
Internal analysis is based on the scanning of internal environment. It is done to find out strengths
in order to exploit opportunities in the external environment. It is also done to find out weaknesses
in order to face threats in the external environment. It analyses resources and competencies. It
identifies unique resources and core competencies to locate strategic advantage for the organization.
The process of internal analysis consists of the following steps: (Figure 4–2)
a) Unique Resources: They are valuable and rare resources. They are costly to imitate. They are
non-substitutable. They are critical factors in providing strategic advantage.
b) Core Competencies: They are skills in coordinating resources for productive use. They reside
in functional resources. The organization does them well compared to competitors. They are
central to strategic advantage.
c) Superior Efficiency: It implies low cost leadership. The inputs are converted into outputs at
lower cost compared to competitors costs. The productivity is higher than that of competitors.
b) Causal Ambiguity: This occurs when competitors are unable to understand the
foundation of strategic advantage for an organization. They cannot figure out how
resources are combined.
c) Social Complexity: Complex social factors, such as interpersonal relationships, trust,
friendships and reputation make imitation costly.
d) Economic Deterrence: Sensitive products that involve large capital investments and
limited market size make imitation costly.
Factors making imitation easy are:
a) Transparency: It is the speed with which competitors can understand the foundation
of strategic advantage. Reverse engineering facilitates imitation. Reverse Engineering
1. Marketing Resources
Markeitng is the management of 7Ps. Marketing encompasses all activities aimed at
identifying and satisfying customer needs through exchange relationships and analyzing
marketing strengths and weaknesses, the following factors should be considered:
2. Human Resources
It is the management of people which refers utilizing the human energies and competencies.
Human resources are managerial and operative employees with energy and competencies.
They are ready, willing and able to contribute to goals achievement. In analyzing human
resource strengths and weaknesses the following factors should be considered:
i) Corporate image of the organization in the minds of employees and public as a fair and
model employer.
ii) Organizational climate and its health. Safe working conditions.
iii) Effectiveness of human resource management system consisting of acquisition,
development, utilization and maintenance aspects.
iv) Effectiveness of human resource management policies.
v) Specialized knowledge and skills of employees.
3. Production/Operations Resources
Production/Operations encompass all activities related to production of products and
services. They process inputs into outputs. In analyzing strengths and weaknesses of
production/operations the following factors should be considered:
Internal analysis identifies strengths and weaknesses in the internal environment of an organization.
It analyses resources and competencies. It combines unique resources with core competencies to
locate strategic advantage for the organization.
Value chain analysis is helpful in understanding how value is created or lost. It examines the
organization in the context of a chain of value creating activities. It describes activities within
and around an organization which together create a product or service. It identifies separate
activities performed to produce, market, deliver and support a product. It is a tool to analyse cost
competitiveness and value creation.
Prof. Michael porter developed the value chain concept. It identifies two types of activities for an
organization: (Figure 4–5)
Primary activities
Support activities
1. Primary Activities
They are directly related to the creation or delivery of the product to the customer. They
consist of five sub-activities:
a) Inbound Logistics: Receiving and storing raw materials; material handling, stock control,
material transport.
2. Support Activities
They are provided to sustain the primary activities. They consist of four sub-activities:
a) Procurement: Activities related to processes for purchasing inputs.
b) Technology Development: Activities related to acquiring new technologies and
research and development (R&D) for innovation.
c) Human Resource Management: Activities related to acquisition, development,
utilization and maintenance of human resources.
d) Firm Infrastructure: Activities related to infrastructure building, such as strategic
planning, quality control, accounting, finance, information management, and
organization design.
Organizations should ensure efficient and effective operation of primary value chain
activities to earn profit. They should establish linkages among value-creating activities. Costs and
performance in each value creating activity should be examined. The aim should be to perform
activities better than competitors. Activities of strengths provide strategic advantage.
a) Supplier Value Chain: This chain is concerned with activities, costs and margins of suppliers.
Suppliers provide inputs. The costs, quality and performance of such inputs influence an
organization’s performance.
b) Organization Value Chain: This chain is concerned with internally performed activities,
costs, and margins of the organization. It processes inputs to convert them into products.
c) Channel Value Chain: This chain is concerned with activities, costs and margins of channel
members. It markets and delivers product. The costs and margins of channel members are
part of price paid by the buyer. Their activities affect buyer satisfaction.
d) Buyer Value Chain: This chain is concerned with value and satisfaction of ultimate buyer who
pays price for the product. Organizations must satisfy buyer needs. They must find a way to
become a part of buyer’s value chain.
The organization is only a part in the overall value chain. Assessing cost competitiveness
involves comparing costs in all the links of value chain relative to competitors.
4.4.2 Cost Efficiency Analysis
Cost can be production costs for raw materials, labour and direct expenses. It can be distribution cost
related to middlemen and transportation. It can be office cost to run an office. All products involve
costs. Organization should aim for cost efficiency.
Efficiency is using resources wisely to minimize their costs. It is getting things right to achieve greater
output from a given input. Cost efficiency is essential for effective resource utilization.
Organizations must deliver value to customers. They must be competent in managing cost efficiency
to gain strategic advantage.
Cost efficiency provides lower prices or added product features for the same price. Cost efficiency can be a
core competency to gain strategic advantage.
a) Economies of Scale
It is reduction in the product cost resulting from expanded level of output. Modern plants
involve high capital costs. Such costs need high volume of output to get recovered. Economies
of scale become their core competency. Economies of scale can result from:
i) High volume of output.
ii) High capacity utilization.
iii) Ability to secure funding for large scale investments.
iv) Competence in mass consumer promotion.
v) Ability to develop global networks of strategic alliances for distribution.
vi) Better production planning systems.
b) Supply Costs
They are costs of inputs consisting of raw materials, semi-finished components, energy and inbound
logistics. Logistics consist of handling, receiving, storing, controlling and transporting
materials. Supply costs influence overall cost position.
viii) Just–in–time: Supplies are received just in time to be used up for production. This reduces
inventory and handling costs. Vendors can also manage inventory.
c) Product Features
Simplified product features can provide cost efficiency. It can be during manufacturing stage
or for after sales service. High cost features can be reengineered. Some cost producting
features can be eliminated.
Product features are size, style, functions. They provide cost efficiency through:
i) Improvement in Capacity Fill: Special offers in service industries facilitate capacity fill.
For example, seats in an aeroplane at special low rates.
ii) Labour Productivity: Improvements in process design can improve labour productivity
and achieve cost efficiency.
iii) Yield: Improved input/output ratio can lead to higher cost efficiency.
iv) Working Capital Utilization: It can be through improved process design to achieve cost
efficiency.
d) Experience
It is a key source of cost efficiency. Experience helps organizations to conduct activities more
efficiently over time. Experience becomes a core competency. It provides cost advantage.
Experience lies in managers and employees.
e) Outsourcing
It involves purchasing activities from external suppliers who can perform than efficiently.
Outsourcing provides cost efficiency. Investment requirements are also reduced.
Outsourcing has the following benefits: (Box 3–1)
i) Access to World-class Capabilities: The specialized resources of external providers
facilitate availability of world-class capabilities.
ii) Resource Availability: Resources are freed from non-core activities to be used for core
activities.
iii) Risk Sharing: Reduced investment requirements make the organization flexible to
adapt to environment. The risk is shared with the external provider.
Effectiveness analysis assesses how well an organization is matching its products and services to the
requirements of target customers. (Figure 4–8)
1. Customer Requirements
They consist of:
a) Product Attributes: Organizations must be clear about the product attributes that are valued
by customers. Attributes can be in terms of size, colour, taste, look, etc.
3. Matching
The higher the degree of matching between customer requirements and value added by
organization, the greater is the effectiveness of the organization. Effectiveness is a core
competency that provides strategic advantage through customer satisfaction.
1. Historical Comparison
It looks at performance of an organization in relation to previous years to identify significant
Areas having consistently good performance represent strengths. Areas of consistently bad
performance represent weaknesses.
Weaknesses of Historical Analysis are:
iii) It can lead to complacency. Measurement of performance based on a small base can
show dramatic improvements.
2. Industry Standards
Industry standards are agreed norms of performance in a given industry. The performance of
an organization is compared with industry norms. A set of agreed performance indicators are
used.
Industry norms help organizations to locate their strengths and weaknesses. They can
identify areas where they excel and areas where they need improvements.
The weaknesses of industry norms for comparative analysis are:
i) Industry norms are based on averages. They could lead to erroneous conclusions
about capability.
ii) Not all organizations in an industry are of similar nature. Aggregated figures of diverse
nature of organizations may not be meaningful for comparison.
iii) The overall performance of an industry can be bad in comparison to other industries.
This makes industry norms inappropriate for comparison.
iv) The boundaries of industries are changing. This poses difficulties in setting industry
norms.
3. Benchmarking
It is comparing performance with the best practices wherever it may be found. It serves as a
reference point for comparing performance. Its purpose is to meet and beat the performance
of the best in class.It is to undstand the best practices in performing og the organizations.
Objectives of Benchmarking
ii) Process Benchmarking: It compares organization’s process and practices with that of
best processes and practices.
iii) Strategic Benchmarking: It compares organization’s strategic decisions and actions
with the best strategic decisions and actions of other organizations.
Benchmarking shows where an organization excels or lags behind. Best practices
are identified and adopted. It is helpful in assessing strengths and weaknesses of an
organization.
4. Robustness Analysis
Robustness is difficulty in imitating by competitors. Resources that provide core competency
must be robust. The sources of robustness are: (Figure 4–10)
1. Rarity: The resources that provide core competency should be rare. Competitors do not
possess them. They are scarce and in short supply. Rarity is provided by:
a) Unique Resources: Such resources are valuable, costly to imitate and are non-substitutable.
b) Preferred Access: The organization has preferred access to resources through brand and
trademark ownership, licencising, and winning the bid. Competitors cannot imitate them.
c) Situational Dependence: The core competency has situational dependence. It is of value
only to a particular organization. The transfer costs are too high. For example, use of specific
machines.
d) Sunk Costs: The operations involve heavy set-up costs. They have been written off. The
organization is able to operate at low cost.
2. Complexity: Complexity makes imitation of the knowledge base difficult. Such knowledge is
gained over time and cannot be computerized. Complexity results from:
b) External Linkages: Strong relationships and linkages are built with a wider external
network. For example, through e-commerce.
c) Linked Technologies: Separate technologies are linked together to create new
products. This makes imitation difficult.
3. Causal Ambiguity: This results from high degree of uncertainty. Competitors find it difficult
to diagnose and imitate. They are unclear about bases of success. They waste resources in
imitating.
4. Culture: Competencies may be embedded in culture. They are indicated by organizational
knowledge. Competitors find them difficult to understand. Moreover, competencies may be
difficult to get identified by competitors.
Resources have strategic importance. They provide strengths and weaknesses to an organization.
Opportunities of advantage in the external environment are matched with resource strengths in the
internal environment to formulate strategies.
The following resources are assessed: (Figure 4–11)
1. Available resources
2. Threshold resources
3. Unique resources
d) Intellectual Resources: They consist of intellectual capital. They are knowledge based. They
provide image to the organization. They are represented by:
Brands, brand equity, brand loyalty, brand licencing
The activities of competitors necessitate increase in threshold resources over time. This resource
base needs to be changed continuously to stay in business. It is easy to imitate by competitors.
Unique resources are Critical Success Factors (CSF) for the organization. They provide strengths to
take advantage of opportunities and avoid threats.
Unique resources have the following characteristics:
a) Valuable: They provide value to sustain strategic advantage. They fulfill customer’s needs
better than competitors. They provide value to the customers.
b) Rare: Competitors do not possess them. They are scarce and in short supply. They are better
than competitor’s resources.
c) Costly to Imitate: They are difficult and costly to imitate. Competitors cannot easily copy or
acquire them. Patents, unique location, brand loyalty make resources inimitable.
d) Non-substitutable: The unique resources have no substitutes. The organization possessing
them is able to exploit them for its advantage.
1. Step one
Identify key strategic factors: All key internal factors that provide competitive advantage are
identified. They are crucial to the success of organization.
The factors that provide competitive advantage can be:
2. Step Two
Identify importance of key strategic factors: The importance of relevant strategic factors is
identified. It is in terms of their contribution in achieving objectives.
3. Step Three
Assess strengths and weaknesses of relevant key strategic factors: It is done by comparing
with competitors’ accomplishments and own past results. The overall contribution of each
key factor in key results areas is assessed.
4. Step Four
Prepare strategic advantage profile (SAP): A profile is prepared showing the strengths and
weaknesses of each strategic factor. Strengths in key strategic factors are used to formulate
strategy.
Strategic Advantages may relate to technology, products, your operations, your capabilities and/or
your people that lead to the potential for a sustainable competitive advantage. Strategic Advantage
works with top management teams in entrepreneurial companies to help them develop and
implement strategic plans that achieve the company's long-term vision. This includes: (i) Facilitating
strategic and operational planning sessions, (ii) Helping companies design, evaluate and implement
new growth strategies, (iii) Conducting industry, competitor, and customer analysis to identify
new growth/market opportunities, and (iv) Evaluating internal operations and helping companies
develop core competencies.
Self-Examination Questions
1. What is internal analysis? Describe forces in internal environment.
2. Explain the process of internal analysis.
3. Make a distinction between mission, goals and strategies.
4. What do you understand by core competencies?
5. What is strategic advantage? Describe its building blocks.
6. Explain sustainable strategic advantage.
7. Describe areas of intenal analysis.
8. Explain methods of internal analysis.
9. Describe value chain analysis.How does it help in winning a competitive advantage?
10. Distinguish between cost efficiency analysis and effectiveness analysis.
The Institute of Chartered Accountants of Nepal | 69
Strategic Management & Decision Making Analysis
11. Write short note on comparative analysis.
12. What is resource? Describe unique resources.
13. Distinguish between available resources and threshold resources.
14. Describe the steps in preparing strategic advantage profile.
15. Explain the concept and process of internal analysis. What are the strategic advantages of internal
analysis?
16. How can a corporation identify its core competencies and distinctive competencies?
17. How are core competencies analysed.
18. Explain sources of competitive advantage.
19. What is strategic advantage profile (SAP)? How and why is it prepared?
20. "Weakness must be compared with strengths for internal assessment". Justify with suitable examples.
21. Explain the different aspects of the internal environment, emphasizing the nature of their impact on
the capability of an organization and ultimately on its strategic advantage.
22. Consider any organization in Nepalse industry of your choice. Prepare an organizational capability
profile and summarize the results in the form of a strategic advantage profile, clearly indicating the
nature of the impact of the different capability factors.
Strategic options can be identified after an institutional assessment, keeping in mind the aspirations
(basic question) of an organisation. The tool ‘Strategic options’ helps to identify and make a
preliminary screening of alternative strategic options or perspectives. Developing and formulating
the strategic options include the following issues.
¾ Respond to one or more opportunities and/or threats
¾ Are actions (or results) related to output, input, mission, vision and/or relations?
¾ Are straightforward (clearly relate to opportunities and/or threats)
¾ Are also creative (there may be more than the most obvious response. And you may consider
new solutions that respond to new trends, opportunities, and threats)
¾ You may develop several options relating to the same opportunity or threat
¾ For each threat or opportunity try to formulate at least one strategic option
a) Alternative strategies
b) Directions for strategy development
c) Methods for strategy development
Strategic options are identified at corporate level, business level and functional level. The role of Chief
Executive Officer (CEO) and SBU level managers is important in generating and analyzing strategic
options.Strategic options help to select the strategic issue implemented in the organizations.
3. Retrenchment
4. Combination
1. Pause and Then Proceed: This stability strategy alternative (essentially a timeout) may be
appropriate in either of two situations: (a) the need for an opportunity to rest, digest, and consolidate
after growth or some turbulent events - before continuing a growth strategy, or (b) an uncertain or
hostile environment in which it is prudent to stay in a "holding pattern" until there is change in or
more clarity about the future in the environment.
ii) It is easy to pursue. Routines are not disrupted. Incremental performance is pursued.
iii) The organization is doing well and stays successful. Consolidation is achieved through
stability. Profitability is sustained.
1. Vertical Integration: This type of strategy can be a good one if the company has a strong competitive
position in a growing, attractive industry. A company can grow by taking over functions earlier
in the value chain that were previously provided by suppliers or other organizations ("backward
integration"). This strategy can have advantages, e.g., in cost, stability and quality of components,
and making operations more difficult for competitors. However, it also reduces flexibility, raises exit
barriers for the company to leave that industry, and prevents the company from seeking the best and
latest components from suppliers competing for their business.
A company also can grow by taking over functions forward in the value chain previously provided
by final manufacturers, distributors, or retailers ("forward integration"). This strategy provides more
control over such things as final products/services and distribution, but may involve new critical success
factors that the parent company may not be able to master and deliver. For example, being a world-class
manufacturer does not make a company an effective retailer.
Some writers claim that backward integration is usually more profitable than forward integration,
although this does not have general support. In any case, many companies have moved toward less vertical
integration (especially backward, but also forward) during the last decade or so, replacing significant
amounts of previous vertical integration with outsourcing and various forms of strategic alliances.
4. Unrelated Diversification: This fourth major category of corporate strategy alternatives for
growth involves diversifying into a line of business unrelated to the current ones. The reasons to
consider this alternative are primarily seeking more attractive opportunities for growth in which to
invest available funds (in contrast to rather unattractive opportunities in existing industries), risk
reduction, and/or preparing to exit an existing line of business (for example, one in the decline stage
of the product life cycle). Further, this may be an appropriate strategy when, not only the present
industry is unattractive, but the company lacks outstanding competencies that it could transfer to
related products or industries. However, because it is difficult to manage and excel in unrelated
business units, it can be difficult to realize the hoped-for value added.
Mergers, Acquisitions, and Strategic Alliances: Each of the four growth strategy categories just
discussed can be carried out internally or externally, through mergers, acquisitions, and/or strategic
alliances. Of course, there also can be a mixture of internal and external actions.
Various forms of strategic alliances, mergers, and acquisitions have emerged and are used extensively
in many industries today. They are used particularly to bridge resource and technology gaps,
and to obtain expertise and market positions more quickly than could be done through internal
development. They are particularly necessary and potentially useful when a company wishes to
enter a new industry, new markets, and/or new parts of the world.
Despite their extensive use, a large share of alliances, mergers, and acquisitions fall far short of
expected benefits or are outright failures. For example, one study published in Business Week in
1999 found that 61 percent of alliances were either outright failures or "limping along." Research
on mergers and acquisitions includes a Mercer Management Consulting study of all mergers from
1990 to 1996 which found that nearly half "destroyed" shareholder value; an A. T. Kearney study of
115 multibillion-dollar, global mergers between 1993 and 1996 where 58 percent failed to create
Many reasons for the problematic record have been cited, including paying too much, unrealistic
expectations, inadequate due diligence, and conflicting corporate cultures; however, the most
powerful contributor to success or failure is inadequate attention to the merger integration process.
Although the lawyers and investment bankers may consider a deal done when the papers are signed
and they receive their fees, this should be merely an incident in a multi-year process of integration
that began before the signing and continues far beyond.
Growth strategy is pursued in highly competitive and changing environment. New products, markets
and functions are added. The pace of activities increases. The product is in the growth stage of
product life cycle. Growth is through increased market share and production capacity. The aim is
high growth through diversification, integration, cooperation and globalization.
Growth through concentration: Specialization in one activity. The example is fast food chains.
Growth through integration: Combining activities, vertical or horizontal.
Growth through diversification: Change in products, markets and functions. New business is
started.
Diversification can be:
Related Diversification: It is growth within the industry. It is through acquisition of firms
that are related in terms fo technology, products and markets for the acquiring firm. New but
related roducts are added. Existing skills and facilities are shared. For example, acquisition
of software firm by a computer manufacturing firm. Related diversification can be through
vertical and horizontal integration.
Unrelated Diversification: It is growth through acquisition of firms that are unrelated n terms
of technology, products and markets for the acquiring firm. It is moving outside the industry.
New unrelated products are added. For example, acquisition of computer manufacturing firm
by a cement manufacturing firm. Unrelated diversification builds a portfolio of unrelated
business.
Growth through cooperation: Competition through cooperation among rival firms, e.g.
mergers, acquisitions, joint venture, strategic alliances.
Growth through Globalization: Borderless world seen as one market; international expansion.
Benefits:
iii) High risk produces high reward. Managers remain motivated by growth. Risk spread can also
be done.
iv) Monopoly power can be gained by growth. Control can be gained through increased size.
Captive Company Strategy: This strategy involves giving up independence in exchange for some
security by becoming another company's sole supplier, distributor, or a dependent subsidiary.
Sell Out: If a company in a weak position is unable or unlikely to succeed with a turnaround or
captive company strategy, it has few choices other than to try to find a buyer and sell itself (or divest,
if part of a diversified corporation).
Liquidation: When a company has been unsuccessful in or has none of the previous three strategic
alternatives available, the only remaining alternative is liquidation, often involving a bankruptcy.
There is a modest advantage of a voluntary liquidation over bankruptcy in that the board and top
management make the decisions rather than turning them over to a court, which often ignores
stockholders' interests.
i) The organization is currently not doing well. Greater returns can be gained in other
opportunities.
The environment is threatening. Retrenchment strategy is the hardest to pursue. It implies failure.
Even though these determinants influence the existence of competitive advantage of an entire nation,
their nature suggests that they are more specific of a particular industry rather than typical of a
country. The reason for this is that in Porter’s theory the basic unit of analysis for understanding
competition is the industry. “The industry is the arena in which the competitive advantage is won or
lost.” So, seeking to isolate the competitive advantage of a nation means to explain the role played by
national attributes such as a nation’s economic environment, institutions, and policies for promoting
firms’ ability to compete in a particular industry
Michael Porter advocated competitive strategies to gain competitive advantage. they are based on
cost, differentiation and focus. They can be: (Figure 5–4)
Competitive strategies provide strategic options. They are based on strategic advantage sought and
market target. Strategic advantage can be linked to lower costs or product differentiation. Market
target can be broad or narrow.
ii) Experience Curve: Experience helps reduce the cost of performing activities over time.
iii) Cost of Key Resources: Costs of key resources are reduced through strong bargaining power
of buyer.
iv) Resource Sharing: Combining of like activities and sharing of resources is done across sister
units to reduce costs.
v) Outsourcing: It involves purchasing some activities from outside specialists who can perform
them cheaply. Vertical integration is also done to reduce costs.
vi) Capacity Utilization: Higher rate of capacity utilization is done to reduce costs.
vii) First Mover Advantage: Being first in the market in introducing a new product provides cost
advantage.
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Strategic Management & Decision Making Analysis
viii) Integration: Forward, backward and horizontal integration is used to control costs.
Costs can be driven down by revamping value chain through: (Figure 5–5)
i) Shifting to E-business: Use of internet for doing business is done to reduce costs.
ii) Direct Marketing: Marketing of products directly from producer to buyers reduce is done to
costs. Channel costs are saved.
iii) Simplify Product Design: Simplified product design reduces costs by simplifying the value
chain. For example, using standardized parts and components.
iv) No-frills Offers: Offering only basic product to cut costs. There are no multiple features and
options.
v) By-pass High Cost Materials: New low cost materials are used to reduce costs. High cost
materials are by-passed.
vi) Relocate Facilities: Plants are moved closer to supplier or customer or both.
vii) Reengineering: Core business processes are reengineered to cut out low value-added
activities.
Bases of Differentiation
Differentiation can be based on:
Drivers of Differentiation
Differentiation possibilities can exist all along the value chain. The drivers of differentiation are:
a) Unique Product Performance: Strict specifications for quality inputs and procurement to
raise product performance.
b) Unique Product Features: R & D activities that improve design, applications, variety, safety,
recycling capacity, and environment protection. Creativity in product engineering.
c) New Technologies: Improved production methods and processes through new technologies.
They reduce manufacturing defects and lower product costs.
d) Unique Services: Better services through unique capabilities for delivering customer value. It
is through personnel with exceptional skill or experience and improved outbound logistics.
e) Detailed Information: More and better product information to customers including
e-commerce facilities.
f) Pursuing production R&D activities.
g) Striving innovation and technological innovation
j) Input quality
b) Diverse Needs and Uses: Customer needs are diverse. So are uses for the product.
c) Few Rivals: Few rivals follow similar differentiation approach. There is no head-to-head
rivalry. Brand loyalty is high.
d) Fast Technological Change: Technological change has a fast pace. Competition is focused on
evolving product features.
e) Buyers are less sensitive to price: They are willing to pay higher prices.
4. Focused Strategies
A focused strategy delivers competitive advantage either by achieving lower costs than rivals in
serving buyers constituting the target market niche or by developing a specialized ability to offer
niche buyers an appealing differentiated offering that meets their needs better than rival brands
do. It is also known as market niche strategy. The focused strategies concentrate on a niche of the
market. Niche is a narrow piece of the total market. It is identified by dividing a market segment into
subsegments. It consists of fairly small groups of customers whose needs have not been well served.
They require special attention. The market is narrow but well-defined.A focused strategy aimed
at securing a competitive edge based either on low cost or differentitation becomes increasingly
attractive.
The niche can be defined by:
Demographic characteristics: Particular group of customers based on age, income, occupation.
Geographical uniqueness: Geographic market, for example, Sherpas of Himalayas.
Specialized requirements: For example, for oversized people
Special product attributes: Product line, for example, Cotton clothes.
Focused strategies aim to serve buyers better than the competitors. Such strategies can be of two
types:
a) Focused Low Cost: Lower costs than competitors in serving the market niche. Cost advantage is
sought.
c) The customers are unique in terms of specialized requirements and unique preferences.
d) The niche should be suited to the resources and competencies of the focuser.
5. Focused Differentiation Strategy: It combines high price with high perceived added
value It focuses on a selected market segment. Customers are willing to pay premium
price.
7. ncreased Price with Low Value Strategy: This strategy combines high price with low
perceived added value. This is also possible in monopoly situations. It is destined to
fail.
8 . Standard Price with Low Value Strategy: This strategy combines standard price
with low perceived value added. It leads to loss of market share. It is also destined to
fail.
The strategic Clock-based Generic Strategies focus on perceived added value as the
basis of competitive advantage.
4. Market Development
5. Diversification
5.4.1 Consolidation
In this direction, organizations protect their market share and position in existing markets with
existing products. They adapt and develop their resources and competencies to maintain their
competitive position.
a) Nature of Market: It is easy to gain market share in growing markets. It is not possible in highly
competitive saturated markets. It should be possible to increase the usage rate of customers.
c) Leader Complacency: Leaders become careless and complacent. This allows market
penetration to gain share.
New segments
New uses
New territories
New competencies
a) New Segments: Existing products are offered to new market segments not currently served.
b) New Uses: New uses are developed for existing products. For example, nylon is used for
clothing, tyres, carpets and many other uses.
c) New Territories: Geographical spread is done, either nationally or internationally.
Globalisation has increased pressures for geographical spread. Nes channels of distribution
are used.
d) New Competencies: New competencies are developed for market development. Market
development usually requires product development plus competency development.
5.4.5 Diversification
This direction aims for better returns at high risk. A new product is produced. It takes the organization
away from its existing markets and products. It exploits core competencies in new businesses. It can
be of two types:
a) Related Diversification: It is within the industry. Existing skills and facilities are shared. For
example, Unilver is diversified in consumer goods industry. Related diversification can be:
(Figure 5–9)
The organization produces its own inputs through backward integration. It distributes its
outputs through forward integration. For example, McDonald grows its potatoes and owns
restaurants.
Horizontal Integration: Integration into activities which are competitive or complementary
with present activities.
b) Unrelated Diversification: It is moving beyond the industry in new business areas. It can be in
new markets or already existing markets. It builds a portfolio of unrelated businesses. It is also
known as lateral diversification.
d) Cost spread: Internal development helps spread cost to other activities. It can be favourable
for small companies.
e) Environmental Issues: To address environmental issues where:
The organization may be the only one in the field of developing specific new products.
It has the choice of internal development only.
The organization is unable to find suitable target for acquisition.
The organization wants to avoid political and cultural problems associated with acquisition.
ii) Market Power: They build market power. Market share increases. Competition decreases.
Excessive competition can be avoided by shut down of capacity. New products can be added.
Synergistic benefits are gained.
iii) Overcome Entry Barrier: Market entry barrier can be overcome by acquiring an existing
organization. The risk of competitive reaction decreases.
iv) Financial Gain: Organizations with low share value or low price/earnings ratio can be
acquired to take short-term gains through asset stripping (Selling assets piecemeal). This
seems to be the main motive for acquisition of Harisiddhi Brick and Tile Factory in Kathmandu.
Tax advantages can also be gained by acquiring organizations with accumulated losses.
Cost efficiency can also be gained through economies of scale.
v) Resources and Competencies: Resources and competencies not available in-house can be
acquired. R & D expertise and technological capabilities can be availed.
vi) Stakeholder Expectations: Stakeholders may expect growth through acquisitions.
Business environment is getting complex due to globalistion, diversity, and information technology.
Internal resources and competencies alone of an organization may not be sufficient to cope with
complex environmental forces. Cooperation with other organizations can provide access to materials,
skills, finance, technology and markets. This becomes the core element of business strategy to close
the competitive gap.
b) Contract-based
iii) Licensing arrangements
iv) Franchising
v) Subcontracting
c) Market-based
vi) Networks
vii) Opportunistic Alliances
iv) Franchising: It is a contract which grants the right to use a brand name for specific activities
in return for a royalty. The franchiser provides quality assurance and training. Coca-cola is an
example.
vii) Opportunistic Alliances: They are based on loose arrangements. They focus on particular
projects. They indicate market relationships.
i) Vision: Top management's views and conclusions about the company's long term direction
and what product-customer-market-technology mix seems optimal for the road ahead
constitute a strategic vision for the company.Vision is what the organization aspires to
become. It is desired future state. It is reexamined in the context of likely future changes
in the environment. It is restated, if necessary. A strategic vision delineates management's
aspirations for business, providing a panoramic view of "where we are going" and a convincing
rationale for why this makes good business sense for the company.
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ii) Mission: A mission statement describes the entreprise's current business and purpose – "who
we are, what we do, and why we are here." A well conceived mission statement conveys a
company's purpose in language specific enough to give the company its own identity. Mission
is the reason for the existence of the organization. It follows from the vision. It is reexamined
to ensure that it serves as a unifying theme. It is restated, if necessary. Ideally, a company
mission statement is sufficiently descriptive to :
¾ Identify the company's product or services
Business strategies: They are low-cost leadership, product differentiation, focused and
strategy clock.
Strategic options are carefully reviewed. Attractive options of strategic advantage are earmarked for
evaluation.
ii) Acceptability: The option should be acceptable in terms of risk, return and stakeholder
expectations.
iii) Feasibility: The option should be feasible in terms of resources and competencies of the
organization.
The evaluated strategic options are ranked in terms of their potential strategic advantage for
objective achievement.
a) Suitability b) Acceptability
c) Feasibility
6.2.1 Suitability
Suitability is concerned with environmental fit of the strategic option. An organization is environment
specific. The strategic option should address the circumstances in which the organization is operating.
It should fit with the future trends and changes in the environment.
Suitability provides the rationale to a strategy. It indicates whether the strategic option makes
sense in relation to environmental circumstances. The strategic option should be suitable from the
following points of view:
Exploiting opportunities and avoiding threats
Capitalizing on strengths and avoiding weaknesses
Addressing stakeholder expectations
It is a systematic way of assessing strategic options against a set of key factors in the environment,
resources and stakeholder’s expectations. It compares strategic options against the key strategic
factors identified by SWOT analysis. A rank is established by assigning weights for each option to
indicate its suitability (Table 6-1)
Table 6-1: Ranking of Strategic Options
Key Strategic Factors
Invest-
Stake- Market- Techno- Total
Strategic options ment Quality Ranking
holder ing Skills logy Points
Funds
1. Do nothing 3 1 1 2 1 8 C
2. Consolidation 3 2 3 2 1 11 B
3. Penetration 1 1 1 1 1 5 C
4. New product development 3 3 2 2 3 13 A
5. Diversification 3 3 2 2 2 12 B
6. Strategic alliances 2 2 1 1 1 7 C
2. Decision Tree
They eliminate options by progressively introducing further requirements to be met. Preferred
option emerges by eliminating other options. Such requirements must be met. They can be in terms
of growth, investment, or diversity. Outcomes are weighed in probabilistic terms. (Figure 6–3)
3. Scenarios
They match strategic options to different possible future scenarios. They are useful where a high
degree of uncertainty exists. They generate forecasts of future environmental conditions to assess
suitability of strategic options.
Scenarios prepare organizations for future surprises. Contingency plans are prepared to respond
to them. Likely future environmental changes are carefully monitored to adjust strategic options
accordingly.
6.2.2 Acceptability
It is concerned with the expected performance outcome of a strategic option. The criteria for
acceptability of a strategic option are: (Figure 6–4) and (Box 6–1)
2. Risk: Level of risk in terms of financial ratio projections and sensitivity analysis.
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3. Stakeholder Reactions: Likely reaction of stakeholders.
1. Analyzing Return:
It involves profitability analysis. Expected return from specific strategic options are assessed. The
approaches used for analyzing returns are:
a) Profitability Analysis:
It assesses financial return on investments. The tools used for profitability analysis are:
i) Return on Capital Employed (ROCE): It examines the relationship between net profit after tax and
capital employed. Total assets minus current liabilities is defined as capital employed.
It is easy to calculate. But it ignores time value of money. Defining satisfactory rate of return
is difficult.
ii) Pay Back Period: It is used for options related to capital projects. It indicates how many years will
be needed for cash benefits to pay for the original investment. It is the time at which the cumulative
net cash flow becomes zero.
Short pay pack period helps acceptability. But time value of money and cash flows after pay
back period are not considered.
iii) Discounted Cash Flow (DCF): It considers time value of money. Forecasted net cash flows from
an option are discounted at a specified rate. Net present value over the life of the project is calculated.
The cost of capital serves as the standard for discounting rate. The methods can be:
Internal Rate of Return: It uses trial and error method to find out the rate of discounting.
Discounted Cash Flow (DCF): It considers time value of cash flow for total life of project.
However, the discount rate used in terms of cost of capital may not be realistic.
It assesses the overall economic impact of the strategic option. All the costs and benefits of a specific
option are forecasted. Cost/Benefit ratio is calculated. Strategic options are compared on the basis of
cost/benefit ratio.
For business projects, CBA analyses profitability. It is ability of the strategic option to earn
profit to investors.
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Strategy Formulation and Strategic Choice
For public projects, CBA analyses social profitability. Money value is put on all social costs and
benefits of a strategic option. Shadow pricing is used for this purpose.
The strategic option should maximize the value to the owners through increased TSR.
2. Risk Analysis
The success of a business impact analysis and risk assessment depends on management involvement
and their commitment – especially the support for conducting the analysis/assessment and
reporting the results. Even though management may not be directly involved during the process,
their endorsement is very important. Some specific charges for management are:
Select the business impact analysis and risk assessment team from departmental
personnel
Formally delegate authority and responsibility for the task
Review and support the team’s findings
Make final decision on any specific recommendations or plans
It involves probability estimates about robustness of a strategic option. The level of risk is important
for acceptability of a strategic option. New product development carries high level of risk.
The approaches for analyzing risk are:
Financial Ratios Projection
Sensitivity analysis
Simulation modeling
Heuristic models
Decision matrices
It projects changes in key financial ratios resulting from a strategic option. Such changes indicate
level of risk. The ratios can be related to capital structure and liquidity.
Capital structure is indicated by debt to equity ratio
Total debt
Capital structure =
Total equity
Increased gearing increases the level of risk. Addition of long-term loans increases gearing.
Decrease in liquidity increases the level of risk. It may even threaten survival of the organization.
b) Sensitivity Analysis
Simulation is abstraction of reality. It is used to analyze a strategic option when several uncertain
variables affect its outcomes. Computers are used to simulate outcomes over time by changing
certain variables for a strategic option.
Simulation builds model to represent reality of a system. It conducts a series of trial and error
experiments to predict the behaviour of the system over a period of time by changing certain
variables.
d) Heuristic Models:
Heuristics are rules of thumb. They are based on managerial memory and judgement. Risk assessment
of strategic options is based on past experience, memory, intuition, hunch, and abstract reasoning.
These models do not consider logical facts. They are judgemental shortcuts. Risk analysis is affected
by:
i) Availability: The events that are readily available in memory are assumed to be more likely to
occur in future.
ii) Representativeness: The likelihood of future occurrence is assessed by matching it with a
preexisting category.
e) Decision Matrices
For 100,000 units sales, the lowest total cost is Rs. 500,000 for personal selling. The personal
selling option is optimistic for 100,000 unit sales.
For 200,000 units sales, advertising option has the lowest total cost of Rs. 600,000. Advertising
option is optimistic for 200,000 units sales.
3. Stakeholder Reactions
Stakeholders have a stake in the outcomes of the organization. They depend on the organization to
fulfill their objectives. The organization also depends on them to fulfill its objectives. They can be
shareholders, suppliers, customers, competitors, government, labour unions, financial institutions
and pressure groups. They provide political dimension to the organization’s acceptability of a
strategic option.
The acceptability of a strategic option depends on:
understanding the likely reaction of stakeholders.
ability to manage stakeholders reactions
a) Stakeholder Mapping: The power/interest Matrix is used to map stakeholders. (Figure 6–7)
Level of interest is the degree of interest in strategic option. Power is ability to influence a strategic
option. The acceptability of strategic option to key players is important for strategic choice.
b) Game Theory: It is concerned with anticipating how competitors are likely to react to
organization’s moves. It quantifies the costs and benefits of competitor reactions to assess
acceptability of strategic options.
The organization anticipates the reactions of competitors in game theory. This theory assumes:
The competitor will behave rationally to win for their own benefit.
The competitor is in an interdependent relationship with other competitors.
Properties of Games
All the competitive situations having the following properties are regarded as games:
a) There are finite number of competitors.
b) Each competitor has a finite number of possible courses of action.
c) Interests of competitors are conflicting.
d) Rules governing the choices are known to all competitors. No one knows opponent’s choice
until he has selected his own course of action.
e) The outcome of the game can be positive, negative or zero.
The organization puts itself in the position of competitors to assess the acceptability
of a strategic option.
Strategies in Game Theory
The strategies in game theory can be:
i) Two person, zero sum game
ii) Minimax and maximin strategies
iii) Mixed strategies
XYZ Company
Fund Flow Statement
2006 Rs. 2005 Rs.
Sources of Funds
Cash from Operations 10,00,000 8,00,000
Use of Funds
New Fixed Assets 8,00,000 6,50,000
Working Capital 1,00,000 80,000
Tax 60,000 50,000
Dividends 40,000 20,000
Total 10,00,000 8,00,000
Break even analysis helps to assess whether the strategic option is feasible in meeting profit targets.
It also provides an assessment of risk of strategic options having different cost structures. (Figure
ii) Need for unique resources and competencies to sustain strategic advantage. This is necessary
to compete successfully.
Some important considerations for conducting resource deployment analysis relate to:
It was developed by Boston Consulting Group. It focuses on balance of the portfolio. It uses
relationship between market share and market growth to balance the portfolio. Market share is the
share in relation to the largest competitor. Market growth is the annual market growth rate.
The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities
should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should
have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth
products that generate a lot of cash. It has 2 dimensions: market share and market growth. The basic idea behind
it is that the bigger the market share a product has or the faster the product's market grows, the better it is for the
company.
BCG Matrix is divided into four cells. (Figure 6–12)
A Star is a business unit (SBU) which has a high market share and high market growth rate.
Large amount of spending is needed to protect market share. It achieves cost reduction over
time.
A Question Mark (Problem Child) is a business unit with high market growth rate but low
market share. Heavy spending is needed to increase market share. It is not achieving cost
reduction. It has uncertain future.
A Cash Cow is a business unit with high market share but low market growth rate. Heavy
investment is not needed. It generates high cash flow. It has low costs relative to competitors.
Organizations use market share and market growth rate to build-up portfolio. The aim is to achieve
balance.
The strategic options for building portfolio of SBUs can be:
Build: Allocate more resources to Stars and Question Marks to gain and sustain market share.
Hold: Allocate present level of resources to Cash Cows to defend market share and generate
cash flows.
Harvest: Allocate less resources to weak cash cows. Eventually withdraw them from business.
Divest: Do not allocate resources to Dogs. Liquidate them.
ii) Market growth rate and market share may not be the sole determinants of profitability. It
varies across industries and market segments.
Successful SBUs in GE matrix require high market attractiveness and strong competitive position.
The matrix can be divided in three zones for strategic alternatives.
i) Cell 1, 2, 4 Invest Grow: SBUs in these cells are overall successful. They should be given
priority in portfolio. More investment should be allocated.
ii) Cell 3, 5, 7 Grow or Let Go: SBUs in these cells have medium success and attractiveness. They
should be included in the portfolio on a selective basis for investment.
iii) Cell 6, 8, 9 Harvest/Divest: SBU in these cells have low success and attractiveness. They
should be divested or closed down.
GE matrix forces managers to give attention to the design of appropriate portfolio. But the positioning
of SBUs in the cells is judgemental. Moreover, unattractive SBUs may not necessarily be unprofitable.
GE matrix provides broad strategy guidelines only.
The stage of the product life cycle describes the market situation. The competitive position can be
strong, average and weak. The position of SBU within the life cycle determines investment.
The strategic guidelines can be:
Push: Invest aggressively
For cells: 1, 2, 4, 5, 7
Caution: Invest selectively
For cells: 3, 6, 8, 10, 11
Danger: Harvest
For cells: 9, 12, 13, 14, 15
(For risk analysis see pages 112)
In order to qualify for strategic choice, the evaluated strategic option should meet the following
criteria:
a) Mutually Exclusive: The strategic option should be mutually exclusive. It must stand on its
own.
b) Success: The strategic option should have a good probability of success. It should be
implementable. It should have sustainable competitive advantage.
c) Completeness: The strategic option should take into account all the key strategic issues. It
should be complete.
d) Internal Consistency: The strategic option should not contradict vision, mission and
objectives of the organization.
e) Strategic Gap: Strategic gap is the gap between current and future desired performance. The
strategic option should help fulfill this gap.
f) Flexible: The strategic option should provide flexibility.
d) Command Approach: The strategic choice is based on the command of top management. It is
top-down approach.
e) Entrepreneurial Approach: The strategic choice is based on search for new opportunities.
The risk is high. The judgement is subjective. It is suitable for business ventures.
1. Rank feasible Strategic Options: Attractive strategic options, evaluated in terms of suitability,
acceptability and feasibility are ranked. The ranking is done on the basis of their potential for
objective achievement.
2. Make strategic choice: The best options are selected as strategies. Good judgement of the
strategist managers is the essence of strategic choice.
Cultural and political factors of the organization influence strategic choice.
Strategic choice should be consistent with or build on past strategies that have worked
well.
Strategic choice results in selection of corporate, business and functional level strategies. (Figure
6–16) (See Box 6–2)
Marketing mix
Market segmentation
Market positioning
Market development
Diversification
Cost of capital
d) Operations and Research and Development Strategies related to product manufacture and
innovation:
Quality control
Inventory management
Computerization
e-commerce
Virtual office
5. Explain portfolio analysis. Describe the tools used for this purpose.
10. How should a corporation attempt to achieve synergy among functions and business units?
11. Why do organizations undertake portfolio analysis? Discuss any two models of portfolio analysis.
12. In what ways GE matrix is superior to BCG matrix? How far are these useful in strategy formulation?
13. Why organizations undertake portfolio analysis? Describe any one model of portfolio analysis.
(See Box 7–1 for differences between strategy formulaton and strategy implementation).
Preparing
Resource
Plans
Establishing
Designing
Management
Structure
Systems
Operational- Exercising
ising Strategic
Strategy Control
Develop
Set Formulate Formulate
Programme,
Annual Functional Business
Budget,
Objectives Strategies Policies
Procedures
2. Annual objectves facilitate coordination. They is harmony of efforts. Potental conflicts are
avoided among various functions.
3. Annual objectives identfy measurable outcomes for functional activities. They are used as
standards to evaluate performance for control purposes.
4. Annual objectives serve as a basis for allocating resoruces to functional activities. They are set
in a sequence of importance.
technologcal resources.
a) Programme integrates action plans for a large set of activities. It is an integrated package of
projects and functional activities. It contributes to the acheivement of annual goals.
b) Budget is a financial plan for a set of functional activities. It allocates resources to various
activities. It is prepared annually. It is based on programe. It serves as a standard for financal
control. Resource plans are prepared.
c) Procedures are steps for handling activities systematically. They are also known as standing
operating procedures (SOP). They are steps to guide actions relating to programme and
budget.
b) Grouping of Jobs: Jobs are grouped in departments. Various bases for grouping can be:
function, division, territory, customer, matrix. Jobs are assigned to people and positions. It
involves differentiation.
Types of Structure
Structure in the context of strategic management is the way in which tasks and sub-tasks required
to implement a strategy are arranged. The relationship of structure and strategy creates its own
special requirements that should be satisfied by the structure.There are several types of structures
that are found in organizatios.Structure should be strategy-friendly. Organization structures for
implementation of strategy can be: (Figure 7–3)
a) Simple Structure
b) Functional Structure
c) Multi-divisional structure
d) Holding company structure
e) Matrix structure
f) Team-based structure
g) Networked Structure
1. Simple Structure
In simple structure, the organization is run by the personal control of an individual. The owner takes
most of the responsibilities of management. He is assisted by assistants. Individual relationships are
important. Newly created small businesses operate under this structure. (Figure 7–4)
Advantages
1. The owner exercises direct control. Hierarchy is minimal.
2. Decision making is speedy. It is flexible and dynamic.
3. Motivation of the owner is high.
4. Personal relationships are developed with suppliers, employees, and customers through
direct communication.
Disadvantages
1. This structure operates effectively only upto a certain size. It s not suitable for complex
situations.
2. There is no division of work. Professionalism is lacking.
3. Authority and responsibility is not clear among subordinates.
4. There is poor motivation in subordinates.
2. Functional Structure
Generally speaking- organizing by functional specialties promotes full utilization of the most up-to-
date technical skills and helps a business capitalize on the efficiency gains resulting from use of those
technical skills; it also helps a business capitalize an the efficiency gains resulting from the use of
specialized manpower, faculties, and equipment. These are strategically important considerations
for single-business organizations, dominant-product enterprises, and vertically integrated firms,
and account for why they usually have some kind of centralized, functionally specialized structure.
It is built around business functions of an organization. Functions are primary activities, such as
production, marketing, finance, and human resource. The chief executive has line managers under
him. This structure is suitable for smaller companies with narrow product range and single dominant
business. (Figure 7–5)
Advantages
1. There is clear definition of authority, responsibility, roles and tasks. Functional expertise is
developed.
2. Efficiency is achieved through specialization. Specialists manage senior and middle levels.
Professionalism develops.
Disadvantages
1. Mangers are overburdend with routine matters. They neglect strategic issues. Narrow
specialization is promoted. Functional goals are emphasized.
2. Coordination is poor between functions. Accountability is not clear. Conflict arise.
3. It is difficult to cope with diviersity due to functional focus of managers.
4. It does not adapt with environmental changes.
3. Multi-Divisional Structure
It is composed of self-contained divisions based on products, customers, technology, and geographical
area. Each product line is regarded as a division. It allows customised product market strategies for
each division. It is suitable for multi-product organizations. (Figure 7–6)
Advantages
1. It allows effective management of diversity. It tailors structure to needs of markets, customers,
products and areas. It is decentralized.
2. There is high product/market visibility through concentration.
3. It facilitates attention to strategy by senior management. Strategic control is easy.
4. It facilitates performance measurement of divisions. Accountability for performance is clear.
5. Management development is encouraged by specialization within a division.
6. It is flexible. Related products, customers and areas can be easily added.
Disadvantages
a) Distinct Market Segment: Each SBU serves a distinct market segment. It has its own product
lines, customer groups and market areas.
c) Separate Manager: Each SBU has its own manager responsible for its strategic plan.
2. Competition for resoruces among SBUs may increase. Conflicts may also arise.
3. Cooperation can be low among SBUs. Confusion can arise over locus of responsibility. Control
can be complex.
Advantages
1. There is spread of risk for holding company. Subsidaries operate flexibly and independently.
2. There are low central-level overheads
3. There is ease of divestment for holding company
4. Cheap finance is available to subsidaries from local sources.
5. Financial control can be focused.
6. Subsidares can quickly respond to local problems.
Disadvantages
1. It lacks synergistic effects. There is duplication of efforts and resoruces.
6. Project-based Structure
A project is a planned investment undertaken to deliver an output. It is temporary with one-time-
The project-based structure consists of a series of projects. Every project has its own functional
departments. (Figure 7–9).
Advantages
1. This structure focuses on project objectives.
2. There is clearity of authority and responsibility.
3. There is flexibility in operatons. Resources can be availed as and when necessary.
4. Communicaton s effective within the project.
Disadvantages
1. There is duplication of resoruces and efforts.
2. There is lac of job security for employees. Commitment of employees to project can be poor.
Advantages
1. It facilitates quick environmental adaptation.
2. There is flexibility organization wide. It accomodates wide variety of projects with clear
objectives.
3. Efficiency in utilization of resources is realised.
4. Effective use of specialised human resources is done.
5. There is increased motivation, commitment, and communication.
6. Employee development takes place through involvement in decisions. It is training ground for
managers.
7. Quality decisions are possible. It fosters creativity.
Diadvantages
1. Decision making is slower. There is confusion and contradiction in policies
2. There are two bosses for one employee—functional manager and project manager. Dual
channels of authority and control is present.
3. Power struggle for allocation of resources takes place.
4. There is duplication of efforts, dilution of priorities and loss of accountability.
5. It is costly and difficult to implement. It is complex.
6. Coflicts arise due to unclear roles and responsibilities.
8. Team-Based Structure
A team is a group whose individual efforts result in positive synergy through coordinated efforts.
Its characteristics are:
Cross functional teams are used to implement strategy. They consist of members from different
departments and work areas. They are of the same level. They come together to accomplish specific
tasks. Members are experts in various specialities. They are carefully selected.
9. Networked Structure
Network structure is a series of independent business units linked together by computers in an
information system that desgns, produces and markets products. It is composed of a series of project
groups or collaborations linked by networks. Most activities are outsourced. The business functions
are not located in a single building. The headquarter acts as “broker” electronicaly connected to
completely owned divisions, subsidiaries and independent companies. (Figure 7–12)
Advantages
1. Provides flexibility to adapt to changing environment.
2. Takes advantage of efficienty of expert firms through outsourcing.
3. Allows concentration in distinctive competencies.
Disadvantages
Resources can be human, physical, financial and intellectual resources. They have a strategic
importance in strategy implementation. Resources enable the success of strategy implementation.
They provide strategic capability to an organization.
A resource plan predetermines future resource needs and sources of acquisition to implement
strategy. It serves as a framework for mobilizing and allocating resources to activities related to
strategy implementation.
Annual objectives serve as the basis for resource planning for divisions and functions. They provide
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guidelines for action. They establish priorities for allocating resources.
Action plans are prepared to achieve annual objectives and to allocate resources. They identify:
a) Activities: They are functional activities to be undertaken to achieve annual objectives. The
activities are specific, short-term and action-oriented.
b) Time Frame: A clear time table is laid down for completion of activities. It is in terms of week,
month, quarter.
c) Accountability: Responsibility for carrying out each activity is identified.
1. Assess Available Resources: Available resources are deployed resources into the activities
and operations of an organization. They are currently owned by the organization. The strating
point of a resoruce plan is to assess the available resources of an organization.
2. Forcecast Future Resource Needs: Forecasts are made for the resources needed in future
to implement the selected strategy. Various statistical techniques are available for resource
forecasting. The judgement and experience of managers can also be useful. Critical success
factors are important to forcecast future resource needs. Planning priorities also determine
resource needs.
3. Identify Resource Gap: Resource gap is the difference between needed resources and
available resources to implement strategy. It is carefully identified.
4. Determine and Evaluate Future Sources: Future sources are determined to mobilise
resources. Sources can be external and internal. Internal sources consist of retained earnings,
reserves and provisions. External sources can be capital market for equity, long-term loan
The most attractive sources are identified for evaluation purposes. Evaluation is done in terms of
risks, returns, and costs of resources.
For financial resources, the mix of equity and loan is considered. Time value of money is also
considered for capital expenditure projects.
5. Select Future Sources: Based on risks, returns, cost and judgement, the best mix of sources is
selected for mobilizing resources. This is the choice phase for resource planning.
6. Formulate Resource Action Plans: Action plans for various activities needed to implement
strategy are formulated. Action plans set targets.
Network Analysis Technique is used to identify component activities to prepare action plans.
It develops a schedule to show interrelationships among all the activities of a strategy.
7. Prepare Budget: Budget is prepared to allocate resources to various activities related to
strategy implementation. It specifies detailed ways about how the resources will be used. It
pulls a range of resources together for integration purposes. Budget also serves as a standard
for control of performance.
3. Mixed Approach: It is a mix of top-down and bottom-up approaches. The resources are
allocated on the basis of strategic budgeting. It involves an interactive form of decision
making. A series of negotiations take place between corporate managers and SBU managers
about allocating resources to SBU.
1. Strategic budgeting
2. Capital Budgeting
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3. Programme budgeting
4. Zero-based budgeting
5. BCG matrix
Action plans are based on short term objectives. Such plans identify:
Specific activities to be undertaken for each function.
4. External Influences: The demands of stakeholders also affect resource allocation. They
can be owners, suppliers, customers, employees, bankers and community. Legal provisions
may require additional resource allocation, for example pollution control, safety and labour
welfare requirements.
The link should be strengthened between strategy, budget and resource allocation.
a) Putting together a Strong Management Team: Team members come from within the
organization or they can be outsiders. The team should have the right personal chemistry
and mix of skills with potential to develop.
The management team should establish strategy supportive policies and procedures.
b) Acquiring Competent Employees: Talented, experienced and competent employees are
acquired for the organization.
c) Development of Employees: Training and management development should be a continuous
process to develop employees. This is essential to develop their knowledge base and build
human capital.
d) Utilization of Employees: Motivation should be the key factor for effectively utilizing people.
They should be given challenging, interesting and creative job assignments. The work
environment should be performance-friendly.
e) Retention of Employees: The salary, benefits, services and incentives should help retain high-
potential and high performance employees. Retention of quality employees is a challenging
task.
Information technology is advancing rapidly. The ability of organizations to access and process
information is crucial to strategy implementation. E-commerce is a vital tool for strategy
implementation. (Figure 7–17)
7.4.3 Leadership
Leadership is guiding and influencing people. It establishes direction, manages change and builds a
team. It makes decisions. It is essential to drive strategy implementation forward. Effective leaders
carry out the following tasks to put strategy into action:
a) Benchmarking: Instituting best practices and pushing for continuous improvements.
h) Leading: Guiding, influencing and motivating people for effective implementation. Staying on
top of what is happening. Pushing corrective actions. Exercising leadership style that fits the
situation. (Figure 7–18)
Institutionalizing systems, procedures and practices that reinforce desired values and beliefs.
Use of criteria for reward systems and structures that allow open communication.
7.4.5 Reengineering
It is a management tool for strategy implementation. It is radical redesign of jobs and work processes.
It aims to achieve gains in cost, quality, service and speed. It involves change in structure, technology
and people. Old policies, rules and procedures are changed. Decentralization and information
sharing is done. The focus is changing the ways the work is carried out. The work is designed around
products and outputs. It asks: “What is needed if start is made from the scratch.” It is concerned with
employee and customer well-being.
Managers also use E-engineering for reengineering implementation. The way of doing business is
reinvented to take full advantage of internet. It can be in tems of attracting and serving customers,
dealing with suppliers and distributing and promoting products.
Steps in Reengineering
1. Develop objectives and strategy for reengineering.
2. Ensure strong leadership and commitment by top management for directing reegineering
efforts.
3. Ensure employee participation by creating a sense of urgency for reengineering.
4. Start with a clean slate to:
Recreate organization structure by organizing around outcomes.
Reassess work processes; change old policies, rules, procedures.
Link parallel activities.
Build cross-functional and self-managed teams.
Identify competitive advantage
Develop information networks.
8. Strategy Evaluation
c) Appropriate Corrective Measures: Appropriate measures are taken to adjust the strategy to
new requirements. This is done to steer the strategy to the right direction. Due consideration
is given to the changing assumptions and implementation gaps. Corrective actions adjust the
strategy to keep it on track to achieve objectives.
1. Premise evaluation
Every strategy is based on certain assumptions about environmental and organizational factors.
Some of these factors are highly significant and any change in them can affect the strategy to a large
extent. Premise evaluation is necessary to identify the key assumptions and keeo track of any change
in them so as to assess their impact on strategy and implementation.
Premises are assumptions about anticipated environment. A strategy is expected to be implemented
on the basis of these assumptions. Premises are forecasts of future expectations about political-
legal, economic, socio-cultural and technological forces in the external environment. Any change in
premises affects the strategy.
Premise evaluation involves:
a) Identification of key premises made while formulating a strategy.
b) Keeping track of changes in premises and assessing their impact on strategy implementation.
c) Reexamination of the validity of premises to make necessary changes at the right time.
2. Implementation evaluation
The implementation of a strategy results in a series of plans, programmes and projects. Resources
allocation is done for implementating these. Implementation evaluation evaluates whether the plans,
programmes, projects and budget are guiding the organization towards objectives achievement.
Resources allocated to them are withdrawn or revised to ensure envisaged benefits to the
organization. It involves strategic rethinking.
b) Milestone Review: Critical milestones in strategy implementation are identified. They can
be in terms of events, resource allocation or end-time. They are reviewed to reassess the
continued relevance of implementation to objectives achievement.
Standard costs, sales goals, quality standards, and standard operating time are examples of
standards. They serve as benchmarks.
The evaluation process operates at the performance level as action takes place.Standards of
performance act as the benchmark against hich the actual performance is to be compared.It is
important, however, to understand how the measurement of performance can take place. Actual
performance is measured at predetermined times. It provides feedback about performance.A variety
of evaluatin techniques are used for measurement
Internal reports relating to performance outputs provide information about actual
performance. Personal observation can supplement the reports. Timeliness of information is
important. Computers can be used to get information.
3. Evaluate Performance
While measuring the actual performance and comparing it with standard performance there may
be variances which must be analyzed. The strategists must mention the degree of tolerance limits
between which the variance between actual and standard performance may be accepted. The
positive deviation indicates a better performance but it is quite unusual exceeding the target always.
The negative deviation is an issue of concern because it indicates a shortfall in performance. Thus
in this case the strategists must discover the causes of deviation and must take corrective action
to overcome itActual performance is compared against performance standards. It can be equal to,
be higher, or be lower than standards. Deviations, their magnitude, their causes and incidence are
analysed. They can be positive or negative. The responsibility for deviation is located.
The tools can be Variance Analysis for standard costs, Statistical Quality Control, ROI (Return
on Investment), Profitability Ratios.
Evaluation criteria can be both quantitative and qualitative.
i) Quantitative Criteria: They can be: profit, sales, market share, costs, dividends, share value,
investment, earning per share, ratios, budget.
4. Corrective Actions
Once the deviation in performance is identified, it is essential to plan for a corrective action. If
the performance is consistently less than the desired performance, the strategists must carry a
detailed analysis of the factors responsible for such performance. If the strategists discover that the
organizational potential does not match with the performance requirements, then the standards must
be lowered. Another rare and drastic corrective action is reformulating the strategy which requires
going back to the process of strategic management, reframing of plans according to new resource
allocation trend and consequent means going to the beginning point of strategic management
process.Corrective actions are taken to bring performance in line with the standards. The actions can
be:
Do Nothing: The deviations are within the allowable tolerance. The deviation is a chance
fluctuation.
Correct Deviations: It is through design improvements, better raw materials, greter employee
motivation, more training etc.
Change Standards: It is to make them appropriate and realistic. Strategies, action plans and
budgets are reformulated.
Contingency plans can be useful to deal with the threats and capitalize on opportunities before they
occur. They are alternative plans to deal with non-occurence of key events as expected.(Also see Box
8–1)
a. Adaptation – can be accommodated within current culture and occurs incrementally. It is the
most common form of change.
b. Reconstruction – change needed may be rapid but does not change the culture i.e. as in
turnaround situations where there is need for major cost cutting programs to deal with
changing market conditions or poor financial performance.
c. Revolution – rapid and major change but also change within the culture even environmental
Economic forces are related to economic parameters. They are reflected by:
Economic system, policies and conditions.
Economic health of the country indicated by per capita income and growth rate.
Inflation and exchange rate changes.
Income distribution and poverty incidence.
Resource availability in terms of physical, human, financial.
Regional economic groupings such as SAARC, ASEAN, EU.
Economic shocks, such as changes in world oil prices, Asian economic crisis, world recession.
Liberalization and privatization.
Increasing globalization that brings ompetition everywhere. Corporate restructuring takes
place through mergers, takeovers, downsizing, reengineering. The world becomes one
market.
Growth of e-commerce. It is growing fast.
Workforce diversity in terms of culture, gender, age, skills, and professionalism, etc.
Information technology has been a key force of change. It is represented by faster and cheaper
computer processing power, internet, e-commerce.
a) Adaptation
b) Reconstruction
c) Evolution
d) Revolution
a) Adaptation: This change in strategy occurs incrementally. It can be accommodated within the
current paradigm. Paradigm refers to current beliefs and assumptions about the way of doing
things. It involves realignment. This is the most common form of change in strategy.
b) Reconstruction: This change is strategy occurs rapidly. But it does not lead to fundamental
change in paradigm. For example, structural change or cost-cutting program to deal with
changing market situations.
c) Evolution: This change in strategy is incremental. It requires paradigm change. It is
transformational change. Learning organizations continually change their strategies to
environmental changes.
d) Revolution: This change in strategy occurs with a big bang. It requires fundamental change
in paradigm. For example, significant decline in profit may require revolutionary change in
strategy.
b) Scope: What degree of change is needed? The scope of change can be adoptation,
reconstruction, evolution, revolution.
c) Preservation: What aspects of organizational resoruces and capabilities need to be
preserved? Change should be based on organzational competencies.
d) Diversity: What is the extent of diversity in the organization? Diversity in experience, views
and opinions of staff facilitates change. Homogeneity hampers change.
e) Capability: What is the capability to implement change in the organization? Managers and
workforce should have experience of managing change in the past.
f) Capacity: What is the capacity in terms of resoruce availability? Change needs money plus
management time.
g) Readiness: How ready is the workforce for change? There should be readiness for change
throughout the organization. Resistance to change should be absent.
h) Power: Who has the power to effect change? The chief executive as change leader should have
power to impose change.
The organization shold have capacity, capability, readiness and power to achieve the
scope of strategic change.
Results-orientation.
Human focus and faith in employees.
b) People-based approaches
c) Technology based approaches
ii) Change in Processes and Methods: Production processes and methods of doing work are
changed. For example, assembly lines can be changed to teams. Manual processes can be
automated.
iii) Change in Tactics: Tactics facilitate the execution of strategic change process. They can be:
Timing: The right timing should be chosen to promote change.
The cultural web and force-field analysis are useful as mean of identifying blockages and facilitators
to change. Change agents may need to adopt different styles of managing strategic change according
to different contexts and in relation to the involvement and interest of different groups. Levers for
managing strategic change need to be considered in terms of the type of change and context of change.
Such levers include surfacing and challenging the taken for granted, the need to change operational
processes, routines and symbols and the importance of political processes and other change tactics.
Chief executive officer is the most important figure in strategic management process. She/he
plays many roles in an organization. Planning, organizing, leading, and controlling are the major
parts of management activities that a manager performs. Actually, strategic management is the
top-level management. It covers all the management functions because it starts from planning
such as environmental analysis and strategic choice, associated with organizing and leading in
implementation phase, and lastly also evaluates and controls the results. Similarly, CEO also uses his
or her conceptual, human relation and technical skills in strategic management process.
CEO is the head of employees and major executives representative of board of directors. He/she
plays vital role to make amicable relationship with customers, competitors, suppliers, and other
stakeholders on behalf of organization. Generally, chief executives perform general management
functions. Chief executive requires various types of skills. The Chief Executive Officer (CEO) is
responsible for leading the development and execution of the Company’s long term strategy with a
view to creating shareholder value. The CEO’s leadership role also entails being ultimately responsible
for all day-to-day management decisions and for implementing the Company’s long and short term
plans. The CEO acts as a direct liaison between the Board and management of the Company and
communicates to the Board on behalf of management. The CEO also communicates on behalf of the
Company to shareholders, employees, government authorities, other stakeholders and the public.
More specifically, the Roles and responsibilities of the CEO include the following:
1. To lead, in conjunction with the Board, the development of the
Company’s strategy
2. To lead and oversee the implementation of the Company’s long and short term plans in
accordance with its strategy
3. To ensure the Company is appropriately organized and staffed and to have the authority to
hire and terminate staff as necessary to enable it
4. To ensure that expenditures of the Company are within the authorized annual budget of the
Company;
5. To assess the principal risks of the Company and to ensure that these risks are being monitored
and managed;
6. To ensure effective internal controls and management information systems are in place;
7. To ensure that the Company has appropriate systems to enable it to conduct its activities
170 | The Institute of Chartered Accountants of Nepal
Role of Chief Executive in Strategic Management
8. To ensure that the Company maintains high standards of corporate citizenship and social
responsibility wherever it does business;
9. To act as a liaison between management and the Board;
i) Formulation of Strategies;
ii) Implementation of Strategies.
iii) Evaluation of Strategies
b) Decision Making Role: CEO analysis and organises information and makes strategic decisions
related to strategy formulation. He makes strategic choice from among strategic options. This
role involves risk-taking.
c) Resource Planning Role: This role of CEO involves coordinated allocation of significant
resources through action plans. Such plans can be organization-wide or related to strategic
business unit or function. Resources can be people, money, technology, time and information.
In the role of resource planning, the CEO aims for strategic fit. He carries out
environmental scanning. Identifies opportunities of competitive advantage.
Organizational resources of strengths are matched with such opportunities. Resources
are committed for long-term period.
Standards of performance are also set.
d) Negotiator Role: Strategy must fulfill the expectations of various stakeholders of the organization.
The CEO balances their conflicting interests by negotiating disputes. The stakeholders can be owners,
customers, employees, suppliers, government, labour unions, financial institutions, and pressure
groups. The CEO ensures the acceptability of strategy by stakeholders.
Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into
place.The strategic plan devised by the organization proposes the manner in which the strategies could
be put into action.Strategy implementation is very important componenet of strategic management
of the organizations. It requires the various types of resources to the firms. Implementation is putting
strategy into action.Strategies, therefore, have to be activiated through implementation. The CEO
ensures that strategies are operationalised in practice. The roles of CEO in strategy implementation
are as follows: (Figure 10–2)
a) Informational Role: The CEO disseminates information about strategy to the implementors
within the organization. He also transmits information about strategy outside the organization.
He also serves as a spokesperson for strategy implementation.
Effective communication serves as the key to effective implementation of strategy. It
should be supported by an effective management information system.
b) Leadership Role: The CEO in the role of Chief Administrator assumes overall leadership for
the implementation of strategy. He inspires trust and self-confidence among implementors
of strategy. He ensures their participation. He motivates them for higher productivity. He
provides direction for implementation of strategy.
The CEO creates congenial organizational climate for strategy implementation. He also
manages change and conflicts. He links the reward to implementation performance.
c) Organiser Role: The CEO is an organization builder. He determines the structure for strategy
implementation. He establishes reporting relationships and span of control. He assigns
authority and responsibility for positions and people in the organization for key result areas.
Tasks are assigned to various positions and people of the organization to ensure
effective internal functioning of the organization.
d) Resource Manager Role: This role of CEO ensures efficient and effective mobilization,
allocation and utilization of resources for implementing strategies. Budgets are prepared for
management and control of resources.
The CEO ensures adequate and timely availability of resources.
a) Srategic Control Role: Strategic control continually assesses the changing environment to
uncover events that significantly impact the course of strategy. The CEO performs the strategic
control role by:
i) Reexamination of Assumptions: There is time log between strategy formulation and
implementation. Assumptions made during strategy formulation may no longer be
valid. The CEO reexamines such assumptions during implementation of strategy. This
is also known as premise control.
iii) Corrective Actions: The CEO takes necessary steps to adjust the strategy to the right
direction. It is kept on track to achieve objectives.
b) Strategic Surveillance Role: The CEO monitors a broad range of events both inside and
outside the organizations that threaten the course of strategy.
c) Special Alert Control Role: The CEO also monitors sudden and unexpected events that create
crisis for strategy. Rapid response is provided to handle crisis situations.
Decision making is number one job of managers. All levels of managers must make decisions.
All functions of management involve decision making. All decisions influence organizational
performance.
Decision making is the act of choosing one alternative from among a set of alternatives. Rational
decision making process consists of: (Figure 11–1)
a) Recognize and define the problem
b) Identifying appropriate alternatives
c) Evaluate selected alternatives
d) Choose the best alternatives
e) Implement decision
f) Evaluate and follow-up
c. Opinions of experts
g. Free association
h. Attribute listening: Ideal characterstics of a given object are collected and then screened for
useful insights.
I. Creative leap: This technique involves thinking up idealistic solutions to a problem and then
substantial information in order for them to make a sound business decisions. Although, the
managers had substantial information prior to make decisions, they may not come up with the right
or perfect strategic decision making for the organizations. Thus, these poor business operations
will be reflected in the company’s profit and loss account. Nevertheless, managers made decisions
affecting the organization daily and communicate those decisions to other organization members
(Zaleznik, 1989 and Main & Lambert, 1998 in Certo, 2003).
Decision making is the most important function of any manager.Strategic decision making is the
primary task of the senior management.The decision which provides the long term impact in the
organization is called the strategic decision making. A decision is a choice from among alternatives. It
is a course of action chosen from acceptable alternatives to achieve objectives. Strategy formulation
requires strategic decision making.Strategic decision has significant influence in the organization.
Strategic decision making makes a choice regarding the course of action for the long-term future of the
organization. It is based on the consideration of strategic alternatives. Strategic decisions are made
by top management. They are unique and non-programmed decisions. They are made in the context
of uncertain decision making environment. Decision makers are unaware about the consequences of
decisions.
Strategic decisions are related to the choice of mission, objectives, strategies and policies. Mission
states the reason for the existence of the organization. Objectives are desired outcomes which the
organization wants to achieve. Strategies deal with broad action plans to achieve objectives. Policies
provide guidelines for decision making.
Strategic decisions aim for competitive advantage in the long-term. They are concerned with matching
organization’s internal resources and activities with opportunities in the environment. They define
the scope of business activities. They identify markets to be served, products to be offered, resources
to be committed, and capabilities to be enhanced. Capabilities are what an organization can do
exceedingly well.
Strategic decisions search for strategic positioning in relation to competitors. Positioning describes
how an organization’s products differ in relation to its competitors in the minds of target customers.
Strategic decisions are concerned with the future scope of activities. They affect operational
decisions in organizations. The basic thrust of strategic decision making, in the process of strategic
management, is to make choice regarding the course of action to adopt. They aim for strategic
advantage at the operational level (Box 11–1).
For a Student
Traditional approaches to strategy focus on the first question. They involve selecting an attractive
market, choosing a defensible strategic position, or building core competencies. Only later, if at all,
do executives address the second question. Yet in today's high velocity, hotly competitive markets,
these approaches are incomplete. They overemphasize executives' ability to analyze and predict
which industries, competencies, or strategic positions will be viable and for how long, and they
underemphasize the challenge of actually creating effective strategies.
The process of strategic decision making consists of: (Figure 11–2)
a) Awareness of strategic issues
b) Formulation of strategic issues
c) Solution development
d) Solution selection
Budget variances.
Customer reaction on quality, price and service.
c) Solution Development
Alternative solutions for strategic issues are developed. They can be based on:
Known and tried solutions in the past. They serve as precedents.
Drawing on judgement and experience of the decision maker.
Collective wisdom of management and key employees.
Strategic workshops to develop alternative solutions.
d) Solution Selection
Solution selection is made from among the alternative solutions. It can be based on:
1. Non-programmed: Strategic decisions are unique and rare. They deal with complex, novel
and non-routine problem situations. There are no standard operating procedures for decision
making.
2. Future-oriented: Strategic decisions are future-oriented. They are concerned with long-
term scope of the organization. The decision environment is uncertain. The consequences of
strategic decisions are not known. Their impact is long-term.
3. Dynamic: Strategic decisions take place within a changing external environment. Changing
political, economic, socio-cultural and technological forces increase dynamism in strategic
decision making.
4. Top management-oriented: Strategic decisions are made by top management. The values,
philosophy, and expectations of top management affect strategic decisions.
5. Competitive Advantage: Strategic decisions search for unique resources and core
competencies that result in competitive advantage. They aim for strategic positioning in
relation to competitors.
6. Strategic Fit: Strategic decisions are concerned with strategic fit. They match activities and
resources of the organization with the opportunities in the environment.
8. Choice: Strategic decisions involve choice from among strategic alternatives. The judgement
of the decision maker is important in making the choice. The conflicting interests of
stakeholders are carefully balanced.
a) The focus is on opportunities. Problems are secondary. The decision maker constantly
searches for opportunities. He exploits them for the benefit of the organization.
b) Decision making is guided by the decision maker’s own vision of direction. He has
brilliant insight. He is quickly able to convince others to adopt his idea.
c) Large and bold decisions are made by the decision maker.
b) Decisions are not made at one go. It is based on small incremental choices. A series of partial
commitments are made.
1. Defining the organization’s business and developing a strategic mission as a basis for
establishing what the organization does an doesn’t do and where it is headed;
2. Establishing strategic objectives and performance targets;
3. Formulating a strategy to achieve the strategic objectives and targeted results;
4. Implementing and executing the chosen strategic plan;
5. Implementing strategic performance and making corrective adjustments in strategy and/
or how it is being implemented in light of actual experience, changing conditions, and new
ideas and opportunities.
The Nepalese scenario presents an encouraging picture of the development of strategic
management and business policy. We find that all management education programmes
have component in the curriculum deveoted to strategic management. Research in strategic
management, though perfunctory, is slowly picking up in Nepalse context.Practice in organization
is fast imbibing the tenets of strategic management. Managers in Nepal have developed some
shared understanding of key aspects of strategic management and practice some important
aspects of strategic management, much remains to be done in order for them to develop a clear
strategic focus so that they could develop their abilities to compete with global players and to
create competitive advantages (Shrestha, 2012). Nepalese organizations do not give much
attention to developing their managers to assume greater responsibilities in the future.
There are five levels of Strategic Orientation. Each one builds on the previous one, providing you
with a road map and a measure of progress towards Strategic Orientation. The five levels are:
i) Engaging in Strategic Dialogue
ii) Strategic Planning
iii) Strategic Measurement
iv) Developing a Strategic Calendar
v) Integrating Strategic Dialogue
The major issues of strategic orientation in Nepalese organization can be highlighted as follows:
1.1 Nepalese organizations generally lack long-term strategic orientation. Most of them lack
vision, mission and strategy statements.
They lack a long term vision of what they aspire to become.
They are unclear about why do they exist in terms of mission.
They are confused about their future strategic direction and scope.
They survive with annual budgeting exercises.
They manage by crisis. They react to pressing problems of the day. Events dictate their
decisions.
1.2 Nepalese organizations state their objectives in terms of desired outputs.
Most organizations have profit as their objective. However the profit objective is
generally not measurable. They aim at “Maximizing profits” in short term.
The growing competition from globalization, together with the growth of big business
houses, have made market share an important objective in recent years. The race to
capture greater market share among noodles, liquor, soap and soft drinks industries
provide examples.
The growing presence of global enterprises has made survival an important objective
for Nepalese organizations.
Most organizations lack strategic perspective in decision making. This has led to
suboptimization and lack of synergistic effects. Strategic decision making process is
not based on careful development of strategic issues and solution alternatives.
1.3 Most Nepalese organizations lack strategy formulation at corporate and business unit
levels.
1.4 The growing presence of global enterprises has been gradually bringing consciousness about
the importance of strategy in Nepalese organizations.
3.3 The Nepalese environment is undergoing a sea change. This is clear from the following points.
3.6 Nepalese managers face more threats than opportunities from the environment. Very
little emphasis is given to environmental scanning to identify opportunities of competitive
advantage. It is unsystematic and fragmented.
4.3 Nepalese organizations have not been able to gain strategic advantage over competitors.
The cheap imports form China, India and overseas have adversely affected Nepal’s industrial
growth and survival.
4.4 Nepalese organizations do not carry out resource audits to assess internal strengths and
weaknesses. Intellectual property rights are not well protected.
4.5 Most Nepalese organizations are unaware about value chain analysis. They have remained
inefficient in revamping and managing their value chain.
4.6 Nepalese organizations suffer from inefficient and ineffective utilization of resources. Cost
efficiency is neglected. Functions that can be outsourced are being performed by armies of
employees. Benchmarking is hardly done
4.7 SWOT analysis is lacking in most Nepalese organizations. This means that they have poor
knowledge about their opportunities, threats strengths and Weaknesses.
7.2 The organization structure for strategy implementation is not strategy-friendly. Mostly,
outdated tall hierarchical functional structures are used to implement strategies. They do not
support strategy. Authority-responsibility relationships tend to be distorted. Accountability
is generally missing.
The resource allocation is also not based on proper plans and budgets. Programme
budget has been a failure and zero-based budget is not used.
7.3 The management systems for strategy implementation is weak in Nepalese organizations.
Frequent changes in top management distort strategy implementation. Human resource
management is not performance-based. Motivation is lacking. So is decentralization.
Leadership does not give proper consideration to participative approach. Conflicts and
personality clashes constrain effective implementation.
Organization culture inhibits self-expression and initiative.
7.4 Strategic evaluation is ineffective in Nepal. Most things are not done in right manner and at the
right time. Project implementation delays tend to be high. Corrective actions stay postponed.
9.3 Nepal has become a member of WTO. It has to face global competition. The South Asian Free
Trade Area (SAFTA) is also a reality. Nepalese organizations must become strategy-oriented
to reduce threats and reap benefits of opportunities. This is the essence of survival and
growth for Nepalese organizations and their managers in the long run.
1. Feudocratic Tradition
The fusion and interaction of bureaucracy with feudalism has led to a unique "Feudocratic model"
in Nepal. This model sets the climate for decision making. It stifles initiative and retards creativity in
decision making. It discourages concern for better performance through results.
■ Managers of public enterprise suffer from instability of tenure and political interference in
decision making. Traditional management practices perpetuate centralized decision making.
■ Private sector enterprises are mostly family owned and managed. They do not believe in
participative decision making.
3. Lack of Rationality
Rational decision making in Nepal is not effective. The reasons are:
■ Efforts are not made to clearly identify and understand the problem. Symptoms are taken as
problems. Information collection about the problem is inadequate.
Nepalese managers tend to decide before properly understanding the problem. They lack
listening skills and well-ordered sense of priorities.
■ Nepalese managers identify few alternatives for problem solving. File search is the main
source. The tradition of discussing alternatives with subordinates is non-existent. Creative
methods like Brainstorming and Delphi Technique are missing. Participative decision making
is lacking.
■ The evaluation of alternatives is generally based on judgment of the superiors. Quantitative
techniques are not effectively used for evaluation purposes.
■ The choice of the course of action is based on the manager's experience, hunch and intuition.
The best alternatives are not chosen in terms of feasibility, satisfactoriness and affordability
to organization.
■ Decisions in Nepal are not effectively implemented unless the parties benefiting from decisions
put pressures for implementation. Employees remain unwilling partners in implementation
of decisions.
■ Decisions in Nepal generally lack effective monitoring, evaluation and follow-up. Feedback is
poor.
4. Decision Avoiding
The decision making scenario in the public sector of Nepal is as follows:
■ Decisions are postponed for "Bholi" (Tomorrow). And tomorrow never seems to come for
Nepalese decision makers. This is the great art of decision avoiding.
■ Committees are formed to make decisions. Managers spend a lot of their time in committees.
But committees tend to delay decision making.
■ Memo-based decision making involves too many levels. Problems tend do get lost in upward
and downward movements of memos.
■ There is little tolerance for risk and ambiguity. Managers "look up" to their superiors even for
repetitive decisions. Subordinates are afraid to voice their disagreements.
■ "Source-force-and pressures" from informal power centres greatly influence the decision
choice.
■ Corruption has infested the process of decision making. It is widespread.
■ Nepalese management is expert in decision avoiding. There is lack of linkage between
performance and rewards. Non-performance bags rewards in Nepal.
5. Lack of Delegation
Mnagares should delegate the authority as per requirements. He/she empowers his/her subordinates
by giving the certain authority under the span of management. Managers are unwilling to delegate
authority. They lack trust in the capability of subordinates. They fear misuse of delegated authority
by subordinates. Above all, they are afraid of being thrown out of their positions by the subordinates.
6. Management by Crisis
Management by crisis" characterizes decision making in Nepal. Managers keep on postponing the
problems and do not want to seek the responsibilities. Unsolved problems become crisis. Then leads
to chaos and disaster. Crisis endangers the survival of managers. They find temporary solutions
to deal with crisis situations. This strengthens their power positions. However, this has retarded
strategic decision making.
7. Professionalism
Professionalism is lacking in Nepalese managers. However, it is on the rise in the middle level
managers. The advent of global enterprises has brought awareness about the need for effective
decision making.Professionalism is necessary to Nepalse managers while taking the decisions in the
organizations.
5. Recommend Strategies: Select a course of action in terms of strategy. There is no one best
solution to a case. It varies according to situation, time, place and people. Give justification for
your recommendation, reasons for selecting, and their implications. Be realistic.
Most cases are handled by groups in the classroom situation. Be a team player.
Work hard. Be a good listener and contributor.
HBL accepts deposits and grants loans to the customers. Tele-banking, All Branch Banking, Automatic
Teller Machine (ATM), 24 Hour Banking, Credit Card, Foreign Exchange and Letter of Credit etc. are
the other services offered by the Bank. An innovative feature is accidental death insurance (maximum
cover Rs. 500,000) for individual saving account holders. The Premium Saving Account (PSA) scheme
provides incentives for account with balance over Rs. 50,000. Those maintaining average balance
over Rs. 1,00,000 are eligible to participate in lucky draw prizes.
The Bank has established the credit card department and issued HBL Gold Card and HBL Regular
Card. Presently, Himalayan Bank Ltd. also deals with VISA International and Master Card. It has 30
percent share of credit card business in Nepal. However, the competition is getting tougher.
HBL faces a number of problems in its credit card business. Most Nepalese people lack awareness
about credit card. They feel that having a credit card involves extra costs in subscription and service
charges. Moreover, not all the shops accept credit cards. The use of credit cards is generally limited
to city centers. Customers do not report loss of credit cards promptly. Fraudulent activities are
increasing, especially in e-commerce transactions. Risks are getting higher. Support from other
departments of the Bank are also lukewarm.
The top management of the Bank feels that its credit card business needs streamlining and
strengthening.
Questions
1. What are the strengths and weaknesses of Himalayan Bank Ltd.?
2. Identify the opportunities and threats of HBL.
3. What are the problems faced by HBL related to credit card business?
4. What strategy would you suggest for effective management of credit card business?
While enjoying the growing success of the business of the cafe for about three years, he identified
Questions:
1. Conduct SWOT analysis for Nanglo and bakery cafes.
2. Formulate Corporate level strategies for bakery cafes.
Bindu was not happy remaining a mere housewife within the four walls of the house. She often
thought that her skills were not properly being utilised. She hit upon an idea to undertake production
of traditional Nepalese food products on a commercial basis. She established a factory “Shital Agro
Products”. The brand name of products is “Gunilo” which means nutritious and beneficial to health.
The processing and packing is done hygienically in polythene bags.
The raw materials of best quality is collected from farmers all over the country that do not use
chemical fertilisers. A total of 50 products are processed, packed and marketed. Some popular
products are:
1. Gundruk (Rayo, Kauli, Tori) 11. Jimbu
2. Mashyora 12. Timbur
3. Sinki (Mula) 13. Shilam
Bindu has given employment to 10 women. She started with a capital of Rs. 50,000 in 1998. Today,
her sales exceed Rs. 1,000,000. The business is growing.
About two dozen department stores of Pokhara carry Gunilo products. Foreigners buy these products
to send as gifts to their friends. Nepalese buy them for high quality. They also send these products
to their friends and relatives in foreign countries. Chau-chau is manufactured from “Phapar flour”.
Restaurants sell cookies, bread and other delicacies made out of Gunilo products.
The participation in a one-week marketing management training organised by Pokhara Chamber
of Commerce opened the eyes of Bindu Karki. She now has a specialty shop called “Green House” in
Shree Complex Vegetable Market of Pokhara to directly market her products. She is also marketing
her products through various department stores of Kathmandu. She also has plans for export to
Nepalese living in foreign countries through e-commerce.
Questions:
Conduct SWOT analysis for Gunilo Nepali Products.
Prepare functional level strategies for Gunilo Nepali products.
After the success of the rice and saw mills there was no looking back for the Panchakanya Group. The
trust, fame and recognition the brand has gained today have led the company to diversify its product
under the same brand name.
Fulfilling the nation’s vital needs, manufacturing essential goods and development materials such as
power generators, heavy equipments and cement for economic growth, the brand has come a long
way.
Thirty-five years ago, there was no such thing as launching a brand. The brand name thrived on the
quality of its product. The quality sold the product.
That was more than 30 years back. Now the company is seriously taking the brand image into
consideration and has been taking help of the media to introduce new and better products under the
brand name.
The brand name sells but there are certain strategies needed to remain at the top. Choosing to lead,
the company has come up with various strategies. Panchakanya’s product comes along with an
awareness package. Dealers are considered important and they too are provided training as how they
can express themselves to the customers. The brand name sells not only in Nepal but in neighbouring
countries like India and Bangladesh and Tibet too.
When it comes to big brand all are same, promising best quality, customer satisfaction and value for
money. But Panchakanya is the first industry to help stop pollution. It is contributing to schools in
some way or other. Since Nepal is the earthquake zone it is spreading awareness about disaster.
Question:
1. Discuss the above case from strategic view point.
u
208 | The Institute of Chartered Accountants of Nepal
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