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OUM Business School

BMST5103
Strategic Management

Copyright Open University Malaysia (OUM)


BMST5103
STRATEGIC
MANAGEMENT
Dr Nur Anisah Abdullah
Prof Dr Wardah Mohamad

Copyright Open University Malaysia (OUM)


Project Directors: Prof Dato Dr Mansor Fadzil
Prof Dr Wardah Mohamad
Open University Malaysia

Module Writers: Dr Nur Anisah Abdullah


International Islamic University Malaysia

Prof Dr Wardah Mohamad


Open University Malaysia

Developed by: Centre for Instructional Design and Technology


Open University Malaysia

First Edition, August 2016

Copyright Open University Malaysia (OUM), August 2016, BMST5103


All rights reserved. No part of this work may be reproduced in any form or by any means without
the written permission of the President, Open University Malaysia (OUM).

Copyright Open University Malaysia (OUM)


Table of Contents
Course Guide ixxiv

Topic 1 Overview of Strategic Management 1


1.1 Strategic Management Defined 2
1.2 The Strategic Management Process 3
1.3 Key Terms in Strategic Management 5
1.3.1 Objectives 5
1.3.2 Strategies 5
1.3.3 Annual Objectives 6
1.3.4 Competitive Advantage 6
1.3.5 Strategists 7
1.4 The Strategic Management Model 7
1.5 Advantages of Strategic Management 9
1.6 Disadvantages of Strategic Management 9
Summary 10
Key Terms 11
Reference 11

Topic 2 Mission and Vision Analysis 12


2.1 Mission Statement 13
2.2 Vision Statement 13
2.3 The Role of a Vision and Mission Statement in Strategic 14
Planning and Management
2.4 Characteristics of Mission and Vision Statement 17
2.4.1 Characteristics of a Mission Statement 17
2.4.2 Characteristics of a Vision Statement 19
Summary 22
Key Terms 22
References 22

Topic 3 The Internal Audit 24


3.1 Introduction to Internal Audit 25
3.1.1 The Evolving Role of Internal Audit 25
3.2 Management Function and Strategic Management 26
3.2.1 Management Audit Checklist 28
3.3 Functions of Marketing 29
3.3.1 Marketing Audit Checklist 29
3.4 Functions of Accounting and Finance 30
3.4.1 Accounting and Finance Audit Checklist 31

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3.5 Production and Operation 31


3.5.1 Production and Operations Strategies 32
3.5.2 Production and Operations Audit Checklist 33
3.6 Strategic Management Tools 33
3.6.1 Management Information Systems 35
3.6.2 Value Chain Analysis 35
3.6.3 Cost-benefit Analysis 36
3.6.4 Benchmarking 36
3.6.5 Break-even Analysis 36
3.7 Internal Factor Evaluation (IFE) Matrix 37
Summary 39
Key Terms 40
References 40

Topic 4 External Audit 41


4.1 The External Environment 42
4.2 The External Strategic Management Audit 43
4.2.1 Competitive Intelligence 44
4.3 Tools for External Analysis 45
4.3.1 Five Forces Analysis 46
4.3.2 Forecasting 47
4.3.3 External Factor Evaluation (EFE) Matrix 49
Summary 54
Key Terms 55
Reference 55

Topic 5 Business Level Strategies 56


5.1 Porters Generic Strategies 57
5.1.1 Cost Leadership Strategy 58
5.1.2 Differentiation Strategy 59
5.1.3 Focus Strategy 60
5.2 Means for Achieving Strategies 62
Summary 65
Key Terms 65
Reference 65

Topic 6 Corporate Level Strategies 66


6.1 Overview of Corporate Level Strategies 67
6.2 Integration Strategies 70
6.2.1 Forward Integration 70
6.2.2 Backward Integration 71
6.2.3 Horizontal Integration 71

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TABLE OF CONTENTS v

6.3 Types of Intensive Strategies 72


6.3.1 Market Penetration Strategy 72
6.3.2 Market Development Strategy 73
6.3.3 Product Development Strategy 73
6.4 Diversification Strategies 74
6.4.1 Related Diversification 74
6.4.2 Unrelated Diversification 75
6.5 Defensive Strategies 76
6.5.1 Retrenchment 76
6.5.2 Divestiture 77
6.5.3 Liquidation 77
Summary 78
Key Terms 79
Reference 79

Topic 7 Strategy Generation and Selection 80


7.1 The Strategic Formulation Analytical Framework 82
7.1.1 Input Stage 82
7.1.2 Matching Stage 84
7.2 Space Matrix 86
7.3 Intuition in Strategic Analysis and Choice 93
Summary 94
Key Terms 94
References 95

Topic 8 Strategy Implementation 96


8.1 Marketing Issues 98
8.1.1 Product Development and Pricing 98
8.1.2 Market Development and Segmentation 99
8.1.3 Promotion 100
8.1.4 Current Issues: Big Data 100
8.2 Financial Accounting Issues 101
8.2.1 Capital Investments 101
8.2.2 Financial Budgets 101
8.3 Research and Development Issues 102
8.4 Business Analytics 103
Summary 104
Key Terms 104
Reference 105

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Topic 9 Strategy Execution 106


9.1 Strategy Execution Defined 108
9.2 Cascading Strategic Objectives 109
9.2.1 Annual Objectives 110
9.2.2 Managing Conflicting Interests and Resource 112
Allocation
9.2.3 Cascading Longer Term Plans to Short-term 112
Operating Plans
9.3 Restructuring 114
9.4 Creating a Supportive Culture 116
9.5 Human Resource Issues 117
Summary 118
Key Terms 118
References 119

Topic 10 Strategy Monitoring 120


10.1 Strategy Evaluation 121
10.2 Rumelts Principles of Strategy Evaluation 122
10.3 Challenges in Strategy Evaluation 126
10.4 The Stages in Strategy Evaluation 127
10.5 Framework for Strategy Evaluation 128
10.6 Auditing 129
Summary 131
Key Terms 131
References 131

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COURSE GUIDE

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COURSE GUIDE ix

COURSE GUIDE DESCRIPTION


You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to this Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.

INTRODUCTION
BMST5103 Strategic Management is one of the courses offered by OUM Business
School at Open University Malaysia (OUM). This course is worth 3 credit hours
and should be covered over 15 weeks.

COURSE AUDIENCE
This course is offered to all learners taking OUM Business Schools MBA, Masters
in Management and Masters in Human Resource Management programmes.
This module aims to impart the fundamental theories and concepts of strategic
management and provide a good understanding of knowledge and analytical
skills for decision making.

This course focuses on formulating and implementing short and long-term


strategies. In most private and public organisations, policies and strategies are
formulated and implemented in a multi-faceted global environment of social,
political, economics, and legal entities. The main purpose of this course is to
develop a conceptual framework of general managements perspective on
strategic thinking and direction in formulating policies and strategies. Learners
will be introduced to the latest application managerial tools and techniques that
should be utilised in assisting their decision-making process. Focus would also
be made to evaluate the impact of situations and implications to the total
enterprise.

As an open and distance learner, you should be acquainted with learning


independently and being able to optimise the learning modes and environment
available to you. Before you begin this course, please confirm the course material,
the course requirements and how the course is conducted.

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x COURSE GUIDE

STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

Table 1: Estimation of Time Accumulation of Study Hours

Study
Study Activities
Hours
Briefly go through the course content and participate in initial discussions 5
Study the module 60
Attend 4 tutorial sessions 8
Online participation 12
Revision 15
Assignment(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120

COURSE OUTCOMES
By the end of this course, you should be able to:

1. Explain the five tasks of strategic management;

2. Discuss the role of directors and top management;

3. Explain environmental scanning, organisational analysis and business


strategy;

4. Discuss the issues related to strategic management; and

5. Apply the strategic management concepts, together with decision-making


skills for manager to deal in an ethical manner.

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COURSE GUIDE xi

COURSE SYNOPSIS
This course is divided into ten topics. The synopsis for each topic is listed as
follows:

Topic 1 gives an introduction to the course, starting with the definition of


strategic management. The key terms used in strategic management are then
discussed. The strategic management model is then explained starting from the
planning stage to implementation of strategies right up to evaluation and control.
The topic ends with a comparison between the advantages and disadvantages of
strategic management.

Topic 2 explores the vision and mission statements of firms and organisations.
The topic aims to provide a thorough understanding about vision and mission
statements of firms and organisations; and the role of the statements in strategic
planning and management. Finally, this topic provides guidelines to evaluate
some examples of vision and mission statements.

Topic 3 discusses the role of internal audit for strategic management with
emphasis of the conduct of an effective internal strategic management audit to
provide an excellent foundation for formulating strategies. This topic also
provides guidelines for the development of an Internal Factor Evaluation (IFE)
Matrix. The functions of marketing, accounting and finance, production and
operations are discussed further. Audit checklists for each of the functions are
also presented. The topic also introduces strategic analytical tools such as value
chain analysis, cost-benefits analysis, and benchmarking using an Internal Factor
Evaluation (IFE) Matrix.

Topic 4 discusses the need for external audit to assess the environment within
which an organisation, firm or business operates. External audit provides
valuable information in supporting strategic planning. This topic explores the
dimensions of the external environment. This is followed by the roles of an
external auditor in strategic management. Several tools and frameworks were
explored in their characteristics and its uses for external audit in providing
Competitive Intelligence (CI). This topic ends with the method to develop an
External Factor Evaluation Matrix.

Topic 5 discusses the different types of business level strategies cost-leadership,


focus and differentiation. It highlights when each strategy should be used and
under what circumstances. Learners are also given cases to be discussed and
evaluated critically. The topic ends with an overview of means to achieve
strategies and reasons why mergers and acquisitions fail.

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Topic 6 discusses the different corporate level strategies that businesses can use.
Integration strategies are first discussed followed by intensive strategies. The
different types of diversification strategies are then discussed followed by a
discussion on defensive strategies. The topic ends with a case for learners to
evaluate and discuss.

Topic 7 explores strategy generation as part of the strategy formulation stage.


The topic aims to introduce a framework to guide a systematic approach to
strategy generation. The elements of the framework are also discussed. In
addition, the crucial role of intuition in the strategic decision-making process is
presented later in this topic.

Topic 8 explores the issues relating to strategy implementation in the context in


which the organisation operates within. The cascading set of corporate strategy
to business unit level for implementation is crucial. At the business unit level,
another three key decisions have to be made by answering some crucial
questions. The answers to these questions drive the decisions a business units
management team and staff make every day, including product design,
pricing, markets, promotion, financial and research and development (R&D).
Implementing a strategy consists of all the decisions and activities required to
turn the corporate and business strategy into reality.

Topic 9 discusses the operational issues stemming from putting strategies in


action. Once the senior or top management have decided on the three key
decisions on: the target market, product or service differentiation and the level
capabilities and capacities required to deliver the level of value propositions as
promised; the responsibilities of putting those strategies in action is now shifted
to the division or functional managers. This topic also covers the series of issues
that the middle management must consider when executing those strategies.

Topic 10 discusses the monitoring achievements of strategies, which means


How much have we done? This topic begins with understanding the nature of
strategy evaluation. This understanding is extended with a discussion on the
principles of strategy evaluation based on Rumelts (1980) criteria. Next, the
challenges of strategy evaluation are presented, followed by a discussion on the
stages of strategy evaluation and then on the use of the balanced scorecard as a
framework for strategy evaluation. The topic concludes with an emphasis on the
need to audit a strategy evaluation process in any attempt of providing a set of
valid and reliable data for decision-making process.

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COURSE GUIDE xiii

TEXT ARRANGEMENT GUIDE


Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:

Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.

Self-Check: This component of the module is inserted at strategic locations


throughout the module. It may be inserted after one sub-section or a few sub-
sections. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the sub-section(s). Most of the time, the answers to the questions can
be found directly from the module itself.

Activity: Like Self-Check, the Activity component is also placed at various


locations or junctures throughout the module. This component may require you
to solve questions, explore short case studies, or conduct an observation or
research. It may even require you to evaluate a given scenario. When you come
across an Activity, you should try to reflect on what you have gathered from the
module and apply it to real situations. You should, at the same time, engage
yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of only having to recall and define.

Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.

Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.

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xiv COURSE GUIDE

References: The References section is where a list of relevant and useful


textbooks, journals, articles, electronic contents or sources can be found. The list
can appear in a few locations such as in the Course Guide (at the References
section), at the end of every topic or at the back of the module. You are
encouraged to read or refer to the suggested sources to obtain the additional
information needed and to enhance your overall understanding of the course.

PRIOR KNOWLEDGE
This is a capstone course. Pre-requisites for this course include: Accounting
for Business Decision Making; Managerial Finance; Organisation and Business
Management; Marketing Management.

ASSESSMENT METHOD
Please refer to myINSPIRE.

REFERENCES
David, F. R., & David, F. R. (2015). Strategic management: Concepts and cases
(15th ed.). Boston, MA: Pearson.

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (1999). Strategic management:


Competitiveness and globalization (3rd ed.). Cincinnati, OH: South-
Western.

Wheelen, T. L., & Hunger, J. D. (1998). Strategic management and business,


policy: Entering 21st century global society (6th ed.). Reading, MA:
Addison Wesley.

TAN SRI DR ABDULLAH SANUSI (TSDAS) DIGITAL


LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for
the use of its learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books247, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner,
you are encouraged to make full use of the resources available through this
library.
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Topic Overview of
1 Strategic
Management
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define strategic management;
2. Describe the key terms of strategic management in relation to an
organisation;
3. Explain the strategic management model; and
4. Discuss the advantages and disadvantages of strategic
management.

INTRODUCTION
Strategic management is the capstone course in any business degree programme,
whether it is an undergraduate programme or a postgraduate programme.
Strategic management is very important as it is the culmination of all other
business subjects such as finance, marketing, management, and human resource
management, tied together by the decisions made by the Chief Executive Officer
(CEO) and his or her management team. In essence, strategic management
teaches you how to be a CEO.

ACTIVITY 1.1

Describe the evolution of strategic management of the Internet. Draw


this on a timeline.

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2 TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT

1.1 STRATEGIC MANAGEMENT DEFINED


David and David (2015) defined strategic management as the art and science of
formulating, implementing and evaluating cross-functional decisions that
enables an organisation to achieve its objectives.

Strategic management is sometimes used interchangeably with the term strategic


planning and it is also used to refer to strategy formulation, implementation
and evaluation. In actual fact, strategic planning refers only to strategy
formulation while strategic management refers to all three (strategy formulation,
implementation and evaluation).

Basically, a strategic plan is a companys game plan and it is the outcome


of managerial choices among numerous good alternatives, and it signals
commitment to specific markets, policies, procedures and operations.

ACTIVITY 1.2

To learn more about what strategic management is, let us watch a video
from the following link: https://youtu.be/DR00Ja5CMnM

ACTIVITY 1.3

Look up some definitions of strategic management on the Internet. Can


you see any differences between them?

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TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT 3

1.2 THE STRATEGIC MANAGEMENT PROCESS


Figure 1.1 shows the three stages involved in the strategic management process.

Figure 1.1: The strategic management process


Source: David & David (2015)

Strategy formulation includes developing a vision and mission statement,


identification of an organisations external opportunities and threats,
determining internal strengths and weaknesses, establishing long-term
objectives, generating alternative strategies and choosing particular strategies to
pursue (David & David, 2015).

Basically, strategy formulation involves decisions on what new businesses the


organisation should embark on and which of its existing businesses it should
abandon. At this stage, the organisation also decides how to allocate its resources
across the various divisions and business units. It also decides whether to expand
its current operations or diversify into new markets. For local organisations, they
might also decide whether to enter the international market, enter into a merger
or form a joint venture with a new partner. For an organisation which is
relatively unstable, they should also plan on its strategies for surviving in the
market and avoiding a hostile takeover.

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4 TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT

Thus, under strategy formulation, these are the decisions that are faced by
organisations:

(a) What new businesses to enter?

(b) What businesses to abandon?

(c) How to allocate resources?

(d) Whether to expand operations or diversify?

(e) Whether to enter international markets?

(f) Whether to merge or form a joint venture?

(g) How to avoid a hostile takeover?

Strategy implementation is the stage where an organisation establishes its annual


objectives, devise new policies and reviews existing ones, motivate its employees,
and allocate resources so that formulated strategies can be executed. This is often
called the action stage as organisations start to implement all the plans that
were formulated under strategy formulation.

Strategy evaluation involves reviewing external and internal factors to the firm.

The external and internal factors can be described as follows:


(a) External factors refer to those outside the organisation and include
opportunities that the organisation might consider and threats that might
affect the organisation. These include factors such as government controls,
the current state of the economy and competitors.
(b) Internal factors refer to those inside the organisation such as human
resources, marketing activities, financial status and research.

At the strategy evaluation stage, the organisation also measures its performance
by comparing its goals and objectives set with the actual performance for the
year and then proceeds to take corrective action.

Most organisations can benefit from strategic management, which is based


upon integrating intuition and analysis in decision making. Intuition is mainly
valuable for making decisions in situations of uncertainty.

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TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT 5

SELF-CHECK 1.1

What are the stages in the strategic management process? What is


involved in each stage?

1.3 KEY TERMS IN STRATEGIC MANAGEMENT


We have looked at the definition of strategic management and the strategic
management process. Let us now look at the key terms in strategic management.

1.3.1 Objectives
Objectives are the exact results that an organisation wants to achieve in line with
its mission statement. Objectives can be set for short-term or less than a year or
long-term, which is more than a year.

All objectives should be:


(a) Specific;
(b) Measurable;
(c) Attainable; and
(d) Timely.

1.3.2 Strategies
Strategies are how the long-term objectives of an organisation will be achieved.
Strategies can be further divided into business level strategies and corporate level
strategies which will be explained in Topics 5 and 6.

Strategies might include the following:

(a) Geographic expansion;

(b) Diversification;

(c) Acquisition;

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6 TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT

(d) Product development;

(e) Market penetration;

(f) Retrenchment;

(g) Divestiture;

(h) Liquidation; and

(i) Joint ventures.

1.3.3 Annual Objectives


Annual objectives are short-term milestones that organisations must achieve to
attain its long-term objectives. These objectives should be:

(a) Measurable;

(b) Quantifiable;

(c) Challenging;

(d) Realistic;

(e) Consistent; and

(f) Segregated in terms of priority.

Annual objectives should be established at the corporate, divisional and


functional levels in a large organisation and are often known as KPIs or key
performance indicators.

1.3.4 Competitive Advantage


Competitive advantage is the basis of strategic management and refers to
anything that an organisation does especially well, compared to its rival firms. A
competitive advantage is basically what a particular organisation possesses,
which is not possessed by its competitors. This can include high quality products,
exceptional service and a renowned brand.

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TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT 7

1.3.5 Strategists
Strategists are the individuals who are most responsible for the success or failure
of an organisation and usually refer to the people involved in the strategic
management process such as CEOs, corporate planners and head of departments.

ACTIVITY 1.4

List some of the objectives, strategies and annual objectives that you
have in your work organisation. Do these objectives and strategies
change every year or remain the same?

1.4 THE STRATEGIC MANAGEMENT MODEL


The strategic management model basically answers the following questions as
shown in Figure 1.2.

Figure 1.2: The strategic management model


Source: David & David (2015)

The following are the descriptions of the strategic management model


components:

(a) Where are we now?


This can be answered by looking at the current situation of the organisation
using several strategic management tools. These are further elaborated in
the following topics.

(b) Where do we want to go?


This refers to the organisations mission and vision which are translated to
the organisations objectives. This is the direction in which the organisation
is taking.

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8 TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT

(c) How do we get there?


This refers to the strategies that the organisation will use to achieve its
mission and vision namely the business level and corporate level
strategies.

Thus, the strategic management model is a simplification of the different


stages in the strategic management process and covers strategy formulation,
implementation and evaluation as shown in Figure 1.3.

Figure 1.3: Comprehensive model of the strategic-management process


Source: David & David (2015)

SELF-CHECK 1.2

What are the three questions to be asked in the strategic management


model? Describe them briefly.

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TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT 9

1.5 ADVANTAGES OF STRATEGIC


MANAGEMENT
There are many benefits that could be gained from using strategic management.
Strategic management has been shown to help organisations formulate better
strategies through the use of a more systematic, logical and rational approach to
strategic choice (David & David, 2015).

The key to successful strategic management is effective communication.


Managers and employees will support the effort of the organisation to strategise
if they are actively involved in the process. This is done through constant
communication of information and participation from all parties.

With the use of strategic management, there are increased awareness of external
threats and opportunities as the organisation takes into account these factors in
making their decisions. There are also improved understanding of competitors
tactics and strategies through conscious monitoring. Employee productivity is
increased due to the set objectives and there is less resistance to change
as everything is communicated throughout the organisation. There is also
better performance due to a clearer understanding of performance-reward
relationships through the use of KPIs.

1.6 DISADVANTAGES OF STRATEGIC


MANAGEMENT
Despite the numerous advantages, there are also disadvantages in using strategic
management. Some organisations profess to use strategic management but the
implementation is not done according to the strategic management process.
These organisations, more often than not, engage in strategic planning only to
satisfy accreditation or regulatory requirements.

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10 TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT

Some organisations are not well-versed in strategic management and move too
fast through the various stages, resulting in numerous problems. Sometimes
there is also failure to communicate the strategic plans to employees, who are
thus oblivious to the organisations purpose and objectives. Top managers might
also rely too much on intuitive decisions that conflict with the formal plans.

Other disadvantages or pitfalls of strategic management include (David & David,


2015):

(a) Top managers not actively supporting the strategic-planning process;

(b) Failing to use plans as a standard for measuring performance;

(c) Delegating planning to a planner rather than involving all managers;

(d) Failing to involve key employees in all phases of strategic management; and

(e) Failing to foster a conducive climate for organisational change.

SELF-CHECK 1.3

What are the three questions to be asked in the strategic management


model? Describe them briefly.

This topic has discussed the strategic management process and described
the key concepts of strategic management. Key definitions in strategic
management were also defined.

Strategic management is defined as the art and science of formulating,


implementing, and evaluating cross-functional decisions that enable an
organisation to achieve its objectives.

The term strategic management is sometimes used interchangeably with the


term strategic planning.

There are three stages involved in the strategic management process, namely
the strategy formulation, strategy implementation and strategy evaluation.

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TOPIC 1 OVERVIEW OF STRATEGIC MANAGEMENT 11

An objective is the exact result that an organisation wants to achieve in line


with its mission statement. It has to be specific, measurable, attainable and
timely.

Strategies are how the long-term objectives of an organisation will be


achieved. It can be further divided into business level strategies and
corporate level strategies.

Annual objectives are short-term milestones that organisations must achieve


to attain its long-term objectives.

Annual objectives should be established at the corporate, divisional, and


functional levels in a large organisation and are often known as key
performance indicators (KPIs).

A competitive advantage refers to what a particular organisation possesses,


which is not possessed by its competitors. This can include high quality
products, exceptional service and a renowned brand.

Strategists refer to those who are most responsible for the success or failure of
an organisation. It usually refers to the people involved in the strategic
management process.

Annual objectives Strategy evaluation


Competitive advantage Strategy formulation
Strategic management Strategy implementation
Strategists

David, F. R., & David, F. R. (2015). Strategic management: A competitive


advantage approach, concepts and cases (15th ed.). Boston, MA: Pearson.

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Topic Mission and
2 Vision Analysis

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Understand the rationale and the importance of vision and mission
statements;
2. Describe the characteristics of vision and mission statements; and
3. Evaluate vision and mission statements of different organisations.

INTRODUCTION
Every organisation would have some sort of statements in declaring its reasons
for existence, its purpose and its destination. This topic explores vision and
mission statements of firms and organisations. This topic aims to provide a
thorough understanding about vision and mission statements of firms and
organisations; and the role the statements play in strategic planning and
management. At the end of this topic, you should be able to assess vision and
mission statements against good practice and possibly write a good mission and
vision statement for a particular business.

This topic defines mission and vision statements, provides a clear understanding
of the objectives of those statements as in the rational and the importance of
mission and vision statements to an organisation. This topic also emphasises on
the process of developing mission and vision statements. Lastly, we will discuss
the characteristics of mission and vision statements and highlight the main
components of mission and vision statements.

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TOPIC 2 MISSION AND VISION ANALYSIS 13

With an understanding of the main components, the last subtopic will guide you
in evaluating examples of vision and mission statements. You have an exercise
on reviewing and writing an improved version of a mission and vision
statement.

ACTIVITY 2.1
Exploring Vision and Mission Statements of Firms from Different
Industries
Select an organisation of your choice from each of these industries:
food, education, healthcare and transportation. Examine each of their
mission and vision statements. What were the commonalities shared
with those statements from across different industries?

2.1 MISSION STATEMENT


A mission statement is a declaration of an organisations reason for existence. It is
raison detre in French (literally reason to be) which means the claimed reason
for the existence of something or someone; the sole or ultimate purpose of
something or someone (Oxford English Dictionary, n.d.).

A mission statement is also known as a statement of purpose, a statement of


philosophy, a statement of belief and a statement of business principle; states the
business of a firm or an organisation. A mission statement intends to clarify the
what and who which serves as reference for establishing objectives and
formulating strategies.

2.2 VISION STATEMENT


A vision statement articulates the dreams and hopes of the business. It is a
statement of what the organisation or firm intends to become. In drafting a vision
statement, the founder or senior management asks where do we want to go? or
what do we want to become? It is essentially a destination statement that sets
the direction for business planning and strategising.

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14 TOPIC 2 MISSION AND VISION ANALYSIS

ACTIVITY 2.2

Is a vision statement the same as a roadmap? When Tun Mahathir


Mohamed envisioned Vision 2020 for Malaysia, he did not set out a
series of step-by-step guide for making it happen. Why?

2.3 THE ROLE OF A VISION AND MISSION


STATEMENT IN STRATEGIC PLANNING
AND MANAGEMENT
According to Eden, Ackermann and Page (2011) strategic planning and
management is a social process where the process of strategy making is focussed
on the way the key people in organisations both think and act. In the strategic
planning process, decision makers as a team must negotiate and agree on what
the business wants to become.

A set of clearly written vision and mission statements serve as a communiqu for
establishing and ensuring unanimity of purpose and direction within the
organisation that:

(a) Promote a sense of shared expectations among members; and

(b) Serve as a focal point to resolve divergent views.

As a result of agreeing on a selected strategy, there is a better chance of having


team commitment towards successful implementation of plans.

Mission and vision statements are crafted to inform stakeholders of the


organisations strategy making and assist in the setting of objectives and goal-
setting process as depicted in Figure 2.1. In any given period, actual performance
is measured against the goals and objectives; this is known as performance
review process. Performance review results are then used as feedback to
examine and better understand if strategies have been successfully implemented.
This performance review informs the next cycle of strategising and setting of
goals and objectives based on what the decision makers understand from the
mission and vision statements.

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TOPIC 2 MISSION AND VISION ANALYSIS 15

Figure 2.1: The role of mission and vision statements in strategic planning and
management

Figure 2.1 demonstrates the linkages between business activities (goals and
objectives) and mission and vision statements, further emphasising the influence
of mission and vision statements on what the firm does.

Referring to the Coca-Cola mission and vision statements in Figure 2.2, the
company establishes its purpose to refresh the world, to inspire moments of
optimism and happiness and to create value and make a difference. Coca-
Cola (2015) also clearly states that the vision serves as a framework, guiding
every aspect of business in what they need to accomplish. These statements are
the philosophies that underpin all decisions set to steer the direction and shape
the plans for the business. Hence, it is crucial that the vision and mission
statements are written clearly such that everyone within the organisation
interprets it as intended.

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16 TOPIC 2 MISSION AND VISION ANALYSIS

Figure 2.2: Mission and vision of the Coca-Cola Company


Source: The Coca-Cola Company (2015)

ACTIVITY 2.3

Read the article titled Building your companys vision by Collins and
Porras (1996). Relate it to what you have learnt so far. Download a copy
of the article from:

https://hbr.org/1996/09/building-your-companys-vision

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TOPIC 2 MISSION AND VISION ANALYSIS 17

2.4 CHARACTERISTICS OF MISSION AND


VISION STATEMENT
In this subtopic, we will explore the characteristics of good mission and vision
statements of an organisation or company.

2.4.1 Characteristics of a Mission Statement


A good mission statement must be broad enough to allow for the generation and
consideration of a range of feasible objectives and strategies without rigidly
stifling organisational responsiveness to innovate, change and/or grow.

Characteristics of good mission statements include:

(a) Broad in nature in defining the purpose of organisation and the values that
underpins organisational decisions;

(b) Reflects the anticipation of stakeholders;

(c) Reflects a positive stature;

(d) Inspire excellence;

(e) Consists of the following nine components:

(i) Customers;

(ii) Products and services;

(iii) Market;

(iv) Technology;

(v) Concern for survival;

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18 TOPIC 2 MISSION AND VISION ANALYSIS

(vi) Philosophy;

(vii) Self-concept (niche);

(viii) Concern for public image; and

(ix) Concern for employees.

ACTIVITY 2.4

To learn more about mission statement, let us watch a video from the
following link: https://youtu.be/LHeGKQfG7rQ

ACTIVITY 2.5

Try to evaluate the given mission statements for Dell and PepsiCo.

(a) Evaluating Mission Statement: Dell


Dells mission is to be (i) the most successful computer company
(ii) in the world and (iii) at delivering the best customer
experience in markets we serve. In doing so, Dell will meet
(iv) customer expectations of highest quality; (v) leading
technology; (vi) competitive pricing; (vii) individual and company
accountability; (viii) best-in-class service and support; (ix) flexible
customisation capability; (x) superior corporate citizenship;
(xi) financial stability (as cited in Burns, 2011).

(b) Evaluating Mission Statement: PepsiCo


We aspire to make PepsiCo the worlds (i) premier consumer
products company and (ii) focused on convenience foods and
beverages. We seek to (iii) produce healthy financial rewards for
investors as we (iv) provide opportunities for growth and
enrichment (v) to our employees, our business partners and the
communities in which we operate. In everything we do, (vi) we
strive to act with honesty, openness, fairness and integrity
(PepsiCo, 2016).

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TOPIC 2 MISSION AND VISION ANALYSIS 19

2.4.2 Characteristics of a Vision Statement


A good vision statement in contrast is a future-oriented declaration of the
organisations aspiration. Typically, vision statements are relatively brief. Some
organisations capture their vision in tag lines for example, Tesco, Every little
helps.

Let us look at the vision statements of the following organisations:

(a) Amazon.com (as cited in Abraham, 2012)


Our vision is to be earths most customer-centric company; to build a place
where people can come to find and discover anything they might want to
buy online.

(b) PepsiCo (as cited in Ross & Segal, 2016)


PepsiCos responsibility is to continually improve all aspects of the world in
which we operate environment, social, economic creating a better
tomorrow than today. Our vision is put into action through programs and a
focus on environmental stewardship, activities to benefit society, and a
commitment to build shareholder value by making PepsiCo a truly
sustainable company.

(c) CIMB Group Vision (CIMB, 2016)


To be the leading ASEAN company.

ACTIVITY 2.6

Let us watch a video about vision statement from the link as follows:
https://youtu.be/QSp7bB02ZAg

SELF-CHECK 2.1

1. Define mission statement and vision statement.

2. Compare and contrast between a mission and vision statement.

3. Why is it important that the senior management refers to mission


and vision statements when deciding on a strategy?

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20 TOPIC 2 MISSION AND VISION ANALYSIS

ACTIVITY 2.7

Evaluating and Writing Mission and Vision Statements


Assuming you are a member of the senior management of a large
supermarket chain in Klang Valley, Malaysia. You have been asked to
lead the review of the existing mission and vision statement of the
organisation, and to amend the statements where necessary. The CEO
strongly believes that the mission statement should reflect how the
organisation is passionate about health and cares for the environment.

You searched on Google and found the mission and vision statement of
three different supermarkets as tabulated in Error! Reference source not
found.. You read them carefully assessing its comprehensives against
the characteristics of good mission and vision statements.

You now have a better idea in reviewing and drafting an improved


version of mission and vision statement for your organisation.

J-Cool Supermarket

The Vision
To be the most successful Supermarket Chain in the Caribbean Region

The Mission
Operate supermarkets at internationally accepted standards. Maintain
the trust and loyalty of our customers. Train, motivate and reward our
team members. Foster mutually beneficial relationships with our
suppliers. Be socially conscious and ethically responsible and contribute
towards the economic development of our country. Provide attractive
returns on investment to our shareholders.

Values
Commitment
Competitive spirit
Good with people

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TOPIC 2 MISSION AND VISION ANALYSIS 21

Table 2.1: Comparison of Mission and Vision Statements of Three Supermarkets


Weis Market T & T Supermarket The Peoples Supermarket
To deliver an exceptional T & T Supermarkets Our vision is to create a
shopping experience by mission is to enrich the commercially sustainable,
offering the best service, lifestyle of our customers social enterprise that
value, quality and freshest by bringing Asian- achieves its growth and
products while being good Canadian families fresh targets whilst operating
stewards of our foods that they love and within values based on
environment and giving introducing to mainstream community development
back to the communities Canadian families the and cohesion. Our intent is
we serve. diversity of Asian food to offer an alternative food
culture at stores that offer buying network, by
Vision:
exceptional convenience, connecting an urban
Become the #1 service, and value. community with the local
supermarket in our farming community.
communities by offering Value
the most inviting buying 'Freshness' is our most At The Peoples
environment in the important operating Supermarket we like to do
industry while saving value, which is practised things a little differently.
our customers time and along with 'customer We are a sustainable
money and building our satisfaction' to enhance community interest
brand to premier status. our one-stop shopping company that believes in
convenience and the high quality and
Values: attainability of local
personable service
Teamwork meeting standards. produce, even in the heart
our challenges and of London!
opportunities as one We respect our
employees. We promote We seek to create a
team, focussed on
job equality, emphasise supermarket that
common goals.
career development and challenges the status quo
Respect treating our and champions the needs
share our success with
colleagues, customers, of the local community by
them. We believe that
suppliers and vendors offering high quality,
only through
with respect and healthy food at reasonable
continuous
dignity. prices. Most of all, we
improvements can we
Excellence striving for achieve high quality in believe in:
excellence and working our work. Sourcing our produce
to improve every day. responsibly
Accountability Vision
holding ourselves T & T Supermarkets Being kind to our
accountable for vision is to be the best environment
delivering results and Asian supermarket Taking care of our
always doing the right chain in Canada. community
thing.
Passion offering our
customers the best
shopping experience by
exceeding their
expectations.
Source: Weis Markets (2016); T & T Supermarket (2016); The Peoples
Supermarket (2016)

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22 TOPIC 2 MISSION AND VISION ANALYSIS

A mission statement defines the reasons for existence of an organisation. It is


a statement of purpose, a statement of philosophy that guides everything that
the organisation does.

A vision statement states the future orientation of the organisation. Based on


the reasons for existence mission statement, this is what we become a
vision. It is basically a destination statement.

Both statements communicate what the organisation is about, why the


organisation was set up in the first place, who does it intend to serve and
where does it intend to operate to both customers and employees.

Both statements are communiqu in informing strategy making process as


decision makers need to have a clear understanding of what the organisation
is about as the team negotiates on the strategies in driving to the expected
destination.

Communiqu Strategic management


Goals and objectives Strategic planning
Mission statement Vision statement

Abraham, S. C. (2012). Strategic planning: A practical guide for competitive


success (2nd ed.). London, England: Emerald Group Publishing.

Burns, P. (2011). Entrepreneurship and small business (3rd ed.). New York, NY:
Palgrave Macmillan.

CIMB. (2016). Vision, mission and values. Retrieved from


http://www.cimb.com/en/who-we-are/vision-mission-and-
values.html#read

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TOPIC 2 MISSION AND VISION ANALYSIS 23

Collins, J. C., & Porras, J. I. (1996). Building your companys vision. Harvard
Business Review, 74(5), 6577.

Eden, C., Ackermann, F., & Page, K. (2011). Strategic management is a social
process. In F. Ackermann, & C. Eden, Making strategy: Mapping out
strategic success (2nd ed.). London, England: Sage Publications.

PepsiCo. (2016). Our culture. Retrieved from http://www.pepsico.ie/about-


us/our_culture.aspx

Raison dtre. (n.d.). Oxford English dictionary. Retrieved from


http://www.oxforddictionaries.com/definition/english/raison-detre

Ross, B., & Segal, C. (2016). The strategy workout: The 10 tried-and-tested steps
that will build your strategic thinking skills. New York, NY: Pearson
Business.

T & T Supermarket. (2016). Mission statement: Best in Asian fresh. Retrieved


from http://www.tnt-supermarket.com/en/mission.php

The Coca-Cola Company. (2015). Mission, vision and values. Retrieved from
http://www.coca-colacompany.com/our-company/mission-vision-values

The Peoples Supermarket. (2016). About us. Retrieved from


http://thepeoplessupermarket.org/about-us/

Weis Markets. (2016). Mission, vision and values. Retrieved from


https://www.weismarkets.com/about-weis/corporate-
information/mission-vision-and-values/

Copyright Open University Malaysia (OUM)


Topic The Internal
3 Audit

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain and discuss the evolving and expanding functions and
roles of the internal audit for strategic management;
2. Explain the main functions of management and its role in strategic
planning; and
3. Discuss the functions of the marketing department and how it
relates to the internal audit.

INTRODUCTION
This topic discusses the role of internal audit for strategic management with
emphasis on the conduct of an effective internal strategic management audit to
provide an excellent foundation for formulating strategies. An internal audit
needs to cover the main aspects of the basic business functions (management,
marketing, finance, production or operations, research and development [R&D],
and management information systems [MIS]).

This topic also explores some of the decision making tools such as the value
chain analysis, benchmarking, break-even analysis and cost-benefit analysis. This
topic also provides guidelines for the development of an Internal Factor
Evaluation (IFE) Matrix, an important strategic planning tool.

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TOPIC 3 THE INTERNAL AUDIT 25

3.1 INTRODUCTION TO INTERNAL AUDIT


The internal audit has been developed as a control mechanism focusing on the
use of internal resources which are in line with the resource-based view of the
firm.

The internal audit is by design inward-looking where the audit process


requires gathering and assimilation of information from the firms management,
marketing, finance or accounting, production or operations, research and
development (R&D) and management information systems operations (David &
David, 2015).

An internal audit can add value to the organisation by taking a more active role
in advising, the setting of good practices for the development of corporate
governance and risk management processes. To be effective, an internal audit
should establish an audit cycle for the monitoring, evaluation and review of the
implementation of strategic actions rather than reacting and responding to
tactical needs of the organisation.

Did You Know?


The resource-based view contends that internal resources are more important for a
firm than external factors in achieving and sustaining competitive advantage. The
resource-based view further stresses that for resources to be valuable, it must be
either rare, difficult to imitate or not easily substituted. Internal factors such as
organisational culture and values could well be integrated into products or
services making them rare, difficult to imitate or not easily substituted.

3.1.1 The Evolving Role of Internal Audit


Statement 1: The Institute of Internal Auditors (IIA) defines internal auditing as
an independent, objective assurance and consulting activity designed to add
value and improve an organisation's operations. It helps an organisation
accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control and
governance processes (IIA, 2016).

Statement 2: The International Organisation of Supreme Audit Institutions


(INTOSAI) defines an internal audit function as the functional means by which
the managers of an entity receive an assurance from internal sources that the
processes for which they are accountable are operating in a manner which will
minimise the probability of the occurrence of error, inefficient and uneconomic
practices or fraud (INTOSAI GOV9100).

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26 TOPIC 3 THE INTERNAL AUDIT

The two statements indicate the wide scope of responsibilities of an internal


audit. Statement (1) highlights the internal audits role in risk management,
control and governance. While statement (2) stresses on minimising the
probability of the occurrence of error suggesting risk management as well.

The emphasis on risk management is not a surprise due the volatility of the
external business environment and the extensive regulatory expectations. There
is now a more urgent need for organisations to be more concerned about
identifying and managing risks that could undermine the successful
implementation of the organisations strategic plans.

The traditional role of an internal audit was mainly focused on compliance and
perceived to have no part in supporting and implementing strategic plans of the
organisation. That has now changed. The internal audit now has evolved from
compliance to encompass a broader scope in the operations of the organisation as
a whole and includes risk management and risk mitigation.

SELF-CHECK 3.1
What are the functions and roles of the internal audit for strategic
management?

3.2 MANAGEMENT FUNCTION AND


STRATEGIC MANAGEMENT
The functions of management consist of five basic activities:

(a) Planning;

(b) Organising;

(c) Motivating;

(d) Staffing; and

(e) Controlling.

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TOPIC 3 THE INTERNAL AUDIT 27

These activities are important in support of the assessment of strategic planning


activities (refer to Table 3.1).

Table 3.1: The Mapping of Functions of Management on Stages of Strategic Management

Stage of Strategic-
Function Description Management Process
when Most Important
Planning Planning consists of all those managerial Strategy Formulation
activities related to preparing for the future.
Specific tasks include forecasting, establishing
objectives, devising strategies, developing
policies and setting goals.
Organising Organising includes all those managerial Strategy Implementation
activities that result in a structure of task and
authority relationships. Specific areas include
organisational design, job specialisation, job
descriptions, job specifications, span of
control, unity of command, coordination, job
design and job analysis.
Motivating Motivating involves efforts directed toward Strategy Implementation
shaping human behaviour. Specific topics
include leadership, communications, work
groups, behaviour modification, delegation of
authority, job enrichment, job satisfaction,
needs fulfilment, organisational change,
employee morale and managerial morale.
Staffing Staffing activities are centred on personnel or Strategy Implementation
human resource management. Included are
wage and salary administration, employee
benefits, interviewing, hiring, firing, training,
management development, employee safety,
affirmative action, equal employment
opportunity, union relations, career
development, personnel research, discipline
policies, grievance procedures and public
relations.
Controlling Controlling refers to all those managerial Strategy Evaluation
activities directed toward ensuring that actual
results are consistent with planned results.
Key areas of concern include quality control,
financial control, sales control, inventory
control, expense control, analysis of variances,
rewards and sanctions.

Source: David & David (2015)


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28 TOPIC 3 THE INTERNAL AUDIT

3.2.1 Management Audit Checklist


One of the major areas which the internal audit review covers is the overall
management of the organisation. The senior management ought to have an
overview of how the organisation is performing in terms of the following:

(a) Allocation of resources;

(b) Cascading of strategic plans to tactical and operational teams;

(c) Work allocation, roles and responsibilities of each employee;

(d) Measuring and monitoring of performance; and

(e) Work conditions and employee morale.

The following is a management audit checklist suggested by David and David


(2015):

(a) Does the firm use strategic-management concepts?

(b) Are company objectives and goals measurable and well communicated?

(c) Do managers at all hierarchical levels plan effectively?

(d) Do managers delegate authority well?

(e) Is the organisations structure appropriate?

(f) Are job descriptions and job specifications clear?

(g) Is employee morale high?

(h) Are employee turnover and absenteeism low?

(i) Are organisational reward and control mechanisms effective?

SELF-CHECK 3.2

1. What are the four main functions of management?

2. Are those functions the same for each planning level? If yes, how?
If no, why?

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TOPIC 3 THE INTERNAL AUDIT 29

3.3 FUNCTIONS OF MARKETING


Marketing is defined as the process of defining, anticipating, creating and
fulfilling customers needs and wants for products and services.

Marketing as a functional department carries out roles that include:

(a) The conduct of customer analysis: This covers the following:

(i) The examination and evaluation of consumer needs, desires and


wants; and

(ii) The administering customer surveys, analysing consumer information,


evaluating market positioning strategies, developing customer
profiles, and determining optimal market segmentation strategies
essential in developing an effective mission statement.

(b) The planning of product and service (particularly in the stage of product
development): Includes activities such as test marketing; product and
brand positioning; devising warranties; packaging; determining product
options, features, style, and quality; deleting old products and providing
for customer service.

(c) Product pricing: Understanding the needs and wants of various stakeholder
groups including consumers, governments, suppliers, distributors and
competitors to avoid over or under pricing.

(d) Distribution: The management of warehousing, distribution channels,


distribution coverage, retail site locations, sales territories, inventory levels
and location, transportation carriers, wholesaling, and retailing. Marketing
plays a crucial role in market development or forward integration strategy.

(e) Marketing research: It is conducted to better understand needs and wants


of consumers and customers as well as problems relating to the marketing
of goods and services.

3.3.1 Marketing Audit Checklist


The following are aspects of marketing that an internal auditor scrutinises to
ensure efficiency and effectiveness:

(a) Are the markets segmented effectively?

(b) Is the organisation positioned well among competitors?


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30 TOPIC 3 THE INTERNAL AUDIT

(c) Has the firms market share been increasing?

(d) Are the present distribution channels reliable and cost effective?

(e) Does the firm have an effective sales organisation?

(f) Does the firm conduct market research?

(g) Are the product quality and customer service good?

(h) Are the firms products and services priced appropriately?

(i) Does the firm have an effective promotion, advertising and publicity strategy?

(j) Are the marketing, planning and budgeting effective?

(k) Do the firms marketing managers have adequate experience and training?

(l) Is the firms internet presence excellent as compared to rivals?

SELF-CHECK 3.3

What are some of the functions of the marketing department? How do


these relate to the internal audit?

3.4 FUNCTIONS OF ACCOUNTING AND


FINANCE
The functions of accounting and finance comprise three types of decisions
outlined in Table 3.2.

Table 3.2: Types of Decisions in relation to Accounting and Finance

Type of Decision Description


Investment decision The allocation and reallocation of capital and resources to
projects, products, assets and divisions of an organisation.
Financing decision Determines the best capital structure for the firm and includes
examining various methods by which the firm can raise capital.
Dividend decision Concerns issues such as the percentage of earnings paid to
stockholders, the stability of dividends paid over time, and the
repurchase or issuance of stock; and to determine the amount of
funds that are retained in a firm compared to the amount paid
out to stockholders.

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TOPIC 3 THE INTERNAL AUDIT 31

3.4.1 Accounting and Finance Audit Checklist


The following are key aspects of accounting and finance internal audit which
scrutinises to ensure effectiveness and efficiency:

(a) Which part of the firm is financially strong and weak as indicated by
financial ratio analyses?

(b) Can the firm raise needed short-term capital?

(c) Can the firm raise needed long-term capital through debt and/or equity?

(d) Does the firm have sufficient working capital?

(e) Are the capital budgeting procedures effective?

(f) Are the dividend payout policies reasonable?

(g) Does the firm have good relations with its investors and stockholders?

(h) Are the firms financial managers experienced and well trained?

(i) Is the firms debt situation excellent?

3.5 PRODUCTION AND OPERATION


The functions of production and operation consist of all those activities that
transform inputs into goods and services. Production/operations management
deals with inputs, transformations and outputs that vary across industries and
markets.

The system model (see Figure 3.1) for production and operation management
includes the following:

(a) Input: Materials, components, labour, research and development.

(b) Process: Production lines, assembly lines, management and skills.

(c) Output: End product, customer satisfaction and employee satisfaction.

(d) Feedback: Feedback provides information for reviewing and revising


existing work practices and expectations for the entire value chain from
input, process and output. Customer feedback on their experience with the
end product is an important measure of quality.

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32 TOPIC 3 THE INTERNAL AUDIT

Figure 3.1: System model for production and operation

Companies aim to improve efficiency through process improvement. Value


Chain analysis is commonly used to determine which processes need improving;
which processes need revising; or which processes need enhancing, as decisions
are depended on high quality or low cost strategy.

3.5.1 Production and Operations Strategies


The following are some of the main production and operations strategies:

(a) Low cost strategy: Deliver standardised product and services to capture the
mass market, thus creating barriers to entry through larger production
volume and longer production hours.

(b) High quality product: Deliver high quality products at premium prices
targeting a niche market through stricter quality assurance, more
sophisticated equipment and machinery operated by highly-skilled
employees.

(c) High quality services: Customer satisfaction and delight as a goal for
services through a team of highly-skilled employees; requiring more
resources to meet the changing demands and expectations of more
sophisticated customers.

(d) Innovator versus imitator: Some organisations lead in product and service
design with high investments in research and development and highly-
skilled employees. Others might gain competitive advantage when they are
able to deliver imitations of new product and services at a lower price as
they ride on the innovation ideas without incurring the cost of research and
development.

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TOPIC 3 THE INTERNAL AUDIT 33

(e) Highly automated production of goods and delivery of services:


Automated production line reduces dependency on labour, minimises
errors and the need for corrective actions and increases productivity by
cutting down time for every unit produced.

(f) Retaining talent: Globalisation gave rise to challenges in retaining highly


skilled workers and specialists. Organisations are doing more to ensure
minimal turnover due to dissatisfaction.

3.5.2 Production and Operations Audit Checklist


The following are key aspects of production and operations which the internal
audit scrutinises to ensure effectiveness and efficiency:

(a) Are the supplies of raw materials, parts and sub-assemblies reliable and
reasonable?

(b) Are the facilities, equipment, machinery and offices in good condition?

(c) Are the inventory-control policies and procedures effective?

(d) Are the quality-control policies and procedures effective?

(e) Are the facilities, resources and markets strategically located?

(f) Does the firm have technological competencies?

3.6 STRATEGIC MANAGEMENT TOOLS


Successful strategy making and implementation depends on information
obtained from strategic analysis. Strategic analysis is the conduct of research on
the business environment within which the organisation operates (external
analysis) as well as research within itself on its strengths and weaknesses
(internal analysis).

The common attributes of strategic analytical tools include:

(a) Identification and evaluation of data relevant to strategy formulation;

(b) Definition of the external and internal environment to be analysed; and

(c) A range of analytical methods that can be employed in the analysis.

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34 TOPIC 3 THE INTERNAL AUDIT

Figure 3.2 presents the linear rational prescriptive process of strategic planning
and implementation. Strategy analysis provides organisations with a better
understanding of the issues they have to address and based on those
information, alternatives or options can then be generated. A great deal of time
and effort are required to weigh alternatives and the trade-offs for each option
before selecting an appropriate strategy to be implemented.

Figure 3.2: The linear rational (prescriptive) strategy making process


Source: Campbell, Edgar, & Stonehouse (2011)

The organisations management information system collects and collates data


required for analysis such as value chain analysis, cost-benefit analysis,
benchmarking (the few examples covered in this topic) and many more.

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TOPIC 3 THE INTERNAL AUDIT 35

3.6.1 Management Information Systems


A management information systems purpose is to improve the performance of
an enterprise by improving the quality of managerial decisions. An effective
information system thus collects, codes, stores, synthesises and presents
information in such a manner that it answers important operating and strategic
questions.

The following are the elements of the management information audit checklist:

(a) Do all managers in the firm use the information system to make decisions?

(b) Is there a chief information officer or director of information systems


position in the firm?

(c) Are data in the information system updated regularly?

(d) Do managers from all functional areas of the firm contribute input to the
information system?

(e) Are there effective passwords for entry into the firms information system?

(f) Are strategists of the firm familiar with the information systems of rival
firms?

(g) Is the information system user-friendly?

(h) Do all users of the information system understand the competitive


advantages that information can provide firms?

(i) Are computer training workshops provided for users of the information
system?

(j) Is the firms information system continually being improved in content and
user-friendliness?

3.6.2 Value Chain Analysis


Value Chain Analysis refers to the process whereby a firm determines the costs
associated with organisational activities from purchasing raw materials to
manufacturing product(s) to marketing those products.

The analysis aims to identify where low-cost advantages or disadvantages exist


anywhere along the value chain from raw materials to customer service activities.

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36 TOPIC 3 THE INTERNAL AUDIT

ACTIVITY 3.1

The following link will show us a video, which explains more about this
subtopic: https://youtu.be/4q8pbfyOGtQ

3.6.3 Cost-benefit Analysis


The following three steps are required to perform a cost-benefit analysis:

(a) Compute the total costs associated with a decision;

(b) Estimate the total benefits from the decision; and

(c) Compare the total costs with the total benefits.

3.6.4 Benchmarking
Benchmarking is an analytical tool used to determine whether a firms value
chain activities are competitive compared to its rivals and thus conducive to
winning in the marketplace.

ACTIVITY 3.2

Look up the Internet. Discuss the relationship between benchmarking


and value chain analysis with your coursemates or in the forum.

3.6.5 Break-even Analysis


Break-even analysis is used to determine when an organisation will be able to
cover all its overheads and how much sales it needs to make a profit.

Break-even Analysis for Volkswagen Bugatti Veyron A working example:


Volkswagen manufactures the Bugatti Veyron, the fastest roadster in the world
with a base horsepower (bhp) of 1,200. This supercar is an ultra-exclusive
product that is reserve for the super-rich with only 50 units made per year.

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TOPIC 3 THE INTERNAL AUDIT 37

If the fixed costs (FC) associated with setting up the manufacturing line for this
technological marvel are $15,000,000 while the variable costs (VC) associated
with the manufacture of each unit are $1,000,000.

The quantity (Q) of the vehicle that must be sold in order for the business to
break-even (BE), even if the price (P) for each vehicle is $2,000,000 is as follows
where:

TR TC BE
FC $15, 000, 000
VC $1, 000, 000 per unit
P $2, 000, 000

TFC
BE Q
P VC
$15, 000, 000

$2, 000, 000 $1, 000, 000
Q 15

3.7 INTERNAL FACTOR EVALUATION (IFE)


MATRIX
The Internal Factor Evaluation (IFE) matrix is a useful strategic analysis tool and
it also provides a good baseline for benchmarking with external organisations.

An IFE matrix can be developed in the following five steps:


(a) List key internal factors as identified in the internal-audit process.
(b) Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important)
to each factor.
(c) Assign a 1-to-4 rating to each factor to indicate whether that factor
represents a strength or weakness.
(d) Multiply each factors weight by its rating to determine a weighted score
for each variable.
(e) Sum the weighted scores for each variable to determine the total weighted
score for the organisation.

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38 TOPIC 3 THE INTERNAL AUDIT

Table 3.3 illustrates the use of an Internal Factor Evaluation (IFE) Matrix to
support strategic decision making.

Table 3.3: Sample Internal Factor Evaluation Matrix for a Retail Computer Store

Key Internal Factors Weight Rating Weighted Score


Strengths
1. Inventory turnover increased from 5.8 to 6.7 0.05 3 0.15
2. Average customer purchase increased from 0.07 4 0.28
$97 to $128
3. Employee morale is excellent 0.10 3 0.30
4. In-store promotions resulted in 20 per cent 0.05 3 0.15
increase in sales
5. Newspaper advertising expenditures 0.02 3 0.06
increased 10 per cent
6. Revenues from repair/service segment of 0.15 3 0.45
store up 16 per cent
7. In-store technical support personnel have 0.05 4 0.20
MIS college degrees
8. Stores debt-to-total assets ratio declined to 0.03 3 0.09
34 per cent
9. Revenues per employee up 19 per cent 0.02 3 0.06
Weaknesses
1. Revenues from software segment of store 0.10 2 0.20
down 12 per cent
2. Location of store negatively impacted by new 0.15 2 0.30
Highway 34
3. Carpet and paint in store somewhat in 0.02 1 0.02
disrepair
4. Bathroom in store needs refurbishing 0.02 1 0.02
5. Revenues from businesses down 8 per cent 0.04 1 0.04
6. Store has no website 0.05 2 0.10
7. Supplier on-time delivery increased to 0.03 1 0.03
2.4 days
8. Often customers have to wait to check out 0.05 1 0.05
Total 1.00 2.50

Source: David & David (2015)

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TOPIC 3 THE INTERNAL AUDIT 39

This topic discusses the functions of an internal audit and its role in strategic
planning in organisations. One of the major areas of the internal audit
reviews is the overall management of the organisation.

Internal auditing is defined as an independent, objective assurance and


consulting activity designed to add value and improve an organisation's
operations by the Institute of Internal Auditors (IIA).

The functions of management involve five basic activities, namely, planning,


organising, motivating, staffing and controlling.

Marketing is defined as the process of defining, anticipating, creating, and


fulfilling customers needs and wants for products and services.

The functions of marketing include the conduct of customer analysis,


planning of product and service, product pricing, distribution and marketing
research.

The system model for production and operation management includes input,
process and output.

Strategic analysis is the conduct of research on the business environment


within which the organisation operates (external analysis) as well as research
within itself on its strengths and weaknesses (internal analysis).

Value-chain analysis is a process where a firm determines the costs associated


with organisational activities from purchasing raw materials to
manufacturing product(s) to marketing those products.

Benchmarking refers to an analytical tool used to determine whether a firms


value chain activities are competitive compared to rivals and thus conducive
to winning in the marketplace.

Break-even analysis determines when an organisation will be able to cover all


its overheads and how much sales it needs to make a profit.

The Internal Factor Evaluation (IFE) matrix strategic analysis tool and it also
provides a good baseline for benchmarking with external organisations.

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40 TOPIC 3 THE INTERNAL AUDIT

Benchmarking Marketing
Cost-benefit analysis Production and operations
Finance and accounting Strategic analysis tool
Implementation of strategy Strategic planning
Internal audit Value chain analysis
Management information systems Value-added processes

Campbell, D., Edgar, D., & Stonehouse, G. (2011). Business strategy: An


introduction (3rd ed.). London, England: Palgrave Macmillan.

David, F. R., & David, F. R. (2015). Strategic management: A competitive


advantage approach, concepts and cases (15th ed.). Boston, MA: Pearson

INTOSAI GOV 9100. Guidelines for Internal Control Standards for the Public
Sector. Retrieved from http://www.issai.org/media/13329/intosai_gov_
9100_e.pdf

The Institute of Internal Auditors (IIA). (2016). About internal auditing.


Retrieved from https://global.theiia.org/about/about-internal-auditing/
pages about-internal-auditing.aspx

Copyright Open University Malaysia (OUM)


Topic External Audit
4
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Discuss the role of external environmental factors on businesses;
2. Describe competitive intelligence;
3. State the objectives of competitive intelligence;
4. Describe the techniques of forecasting; and
5. Analyse the results of an External Factor Evaluation Matrix.

INTRODUCTION
This topic discusses the need for an external audit to assess the environment
within which an organisation, firm or business operates. An external audit
provides valuable information in supporting strategic planning.

The first subtopic explores the dimensions of the external environment. This is
followed by the roles of an external audit in strategic management. Several tools
and frameworks are explored in their characteristics and its uses for external
audit in providing Competitive Intelligence (CI). This topic ends with discussion
on the method to develop an External Factor Evaluation (EFE) Matrix.

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42 TOPIC 4 EXTERNAL AUDIT

ACTIVITY 4.1

1. Why is it important for an organisation to keep watch of what


other businesses are doing?

2. Should the management be concerned of the national economy?


Why yes? Why not?

3. Would it be an issue for the organisation if the government


implements new regulations on labour law or immigration
restrictions?

4.1 THE EXTERNAL ENVIRONMENT


Organisations and business establishments do not operate in isolation. Profit or
non-profit organisations compete with their rivals for resources. Competition
drives the behaviour of organisations as they strategise to move forward and to
steer clear from their competitors.

In doing that, they must act and react to external stimuli to be relevant to the
context within which they operate, which includes:

(a) Social: Refers to how consumers, households and communities behave and
their value systems. For instance, changes in attitude towards smoking, or
literacy rate in the country.

(b) Legal: Looks into the way in which legislation in society affects the
business. For example, changes in employment laws on retirement age or
minimum wage.

(c) Economic: Refers to how the economy affects a business in terms of


taxation, government spending, general demand, interest rates, exchange
rates and global financial crisis.

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TOPIC 4 EXTERNAL AUDIT 43

(d) Political: Looks into how changes in government policy might affect the
business. For example, a decision to increase the monthly payment for
housemaid or length on a work permit.

(e) Technological: Studies how the rapid pace of change in the adoption of
technology changes the way people work and the way product and services
are created.

(f) Ethical: Answers the following questions: What is regarded as morally right
or wrong for a business to do? Does the society have some kind of value
system? Does religion play a vital role in ethical conduct of the people?

SELF-CHECK 4.1
Describe the context of external environments in which organisations
operate.

4.2 THE EXTERNAL STRATEGIC


MANAGEMENT AUDIT
An external audit focusses on identifying and evaluating trends and events
beyond the control of a single firm. An external audit reveals key opportunities
and threats confronting an organisation, so that managers can formulate
strategies to take advantage of the opportunities in order to avoid or reduce the
impact of threats.

The Industrial Organisation (I/O) approach to competitive advantage advocates


that external (industry) factors are more important than internal factors in a firm
for achieving competitive advantage.

The external audit is aimed at identifying key variables that offer actionable
responses. Based on findings from the external audit, firms decide to respond
either offensively or defensively to the factors by formulating strategies that take
advantage of external opportunities or that minimise the impact of potential
threats.

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44 TOPIC 4 EXTERNAL AUDIT

The process of conducting an external audit is as follows:

(a) First, gather competitive intelligence and information about economic,


social, cultural, demographic, environmental, political, governmental, legal
and technological trends.

(b) Information should be assimilated and evaluated to arrive at a final list of


the most important key external factors that the firm needs to address.
These key factors are those that play an important role in achieving the
medium and longer term organisational objectives.

(c) Based on the Industrial Organisation (I/O) view, firm performance is


measured by economies of scale, barriers to entry, product differentiation,
the economy and the level of competitiveness.

The following subtopic discusses a framework that is commonly used for


structured external analysis.

4.2.1 Competitive Intelligence


An external audit support organisations with Competitive Intelligence (CI) a
systematic and ethical process for gathering and analysing information about the
competitions activities and general business trends to further a businesss own
goals.

Objectives of competitive intelligence include:


(a) To provide a general understanding of an industry and its competitors;
(b) To identify areas in which competitors are vulnerable and to assess the
impact strategic actions would have on competitors; and
(c) To identify potential moves that a competitor might make that would
endanger a firms position in the market.

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TOPIC 4 EXTERNAL AUDIT 45

In analysing the external market forces:


(a) Identify key aspects or elements of each competitive force that impact the
firm;
(b) Evaluate how strong and important each element is for the firm; and
(c) Decide whether the collective strength of the elements is worth the firm
entering or staying in the industry.

SELF-CHECK 4.2

1. What is competitive intelligence (CI)?

2. State the objectives of CI.

4.3 TOOLS FOR EXTERNAL ANALYSIS


There are various tools that have been developed by practitioners in guiding
comprehensive and systematic review of the external environment.

The following subtopics present the Porters five forces analysis, forecasting and
the external factor evaluation matrix as strategy tools for external environment
analysis.

ACTIVITY 4.2

Critical Thinking
How could a manager objectively defend a set of ideas and plan of
actions for the next 5 to 10 years?

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46 TOPIC 4 EXTERNAL AUDIT

4.3.1 Five Forces Analysis


Porters Five Forces Model is used to guide systematic review or audit of the
external environment within which the firm operates in. The dimensions of the
model consist of the five forces outlined in Table 4.1.

Table 4.1: Porters Five Forces

Force Description
Potential entry of Barriers to entry are important
new competitors Quality, pricing and marketing can overcome barriers
You can visit the following link to view a video about this:
https://youtu.be/LeF1_MyRKh0
Rivalry among Most powerful of the five forces
competing firms Focus on competitive advantage of strategies over other
firms
You can visit the following link to view a video about this:
https://youtu.be/yuSrG5-nXSc
Bargaining power of It is increased when there are:
suppliers Large numbers of suppliers
Few substitutes
Costs of switching raw materials is high
Backward integration is gaining control or ownership of
suppliers
You can visit the following link to view a video about this:
https://youtu.be/ns3WoUmIbIo
Bargaining power of Customers being concentrated or buying in volume affects
consumers intensity of competition
Consumer power is higher where products are standard or
undifferentiated
You can visit the following link to view a video about this:
https://youtu.be/W45zDlEAcZQ
Potential Pressure increases when:
development of Prices of substitutes decrease
substitute products
Consumers switching costs decrease
You can visit the following link to view a video about this:
https://youtu.be/ma6dsRtoFxs

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TOPIC 4 EXTERNAL AUDIT 47

4.3.2 Forecasting
Forecasting is a planning tool that supports management decision-making
process. Forecasting uses historical data to provide a sense of how the future
might look.

There are various techniques for forecasting. An example is to use time series,
which may include trend projection and moving averages; while causal
relationships is established using regression analysis.

Let us explore the two techniques further:

(a) Time Series


Analysis of trends using time series. For example, plotting monthly sales on
a line graph to establish trend of sales over time; or monthly timber
production 2001 to 2005 (see Figure 4.1).

Figure 4.1: An example of a time series graph

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48 TOPIC 4 EXTERNAL AUDIT

(b) Regression Analysis


Regression analysis looks at causal relationships that predicts cause and
effect relationships two or more variables. For example:

(i) Time spent on revising improves exam results: a positive correlation/


relationship (left scatter-plot diagram of Figure 4.2); and

(ii) Flu jobs prevent people getting flu: a negative correlation/


relationship (right scatter-plot diagram of Figure 4.2).

Figure 4.2: Examples of regression analysis

ACTIVITY 4.3

How would you convince the senior management about the usefulness
of historical information such as sales of the last 10 months?

SELF-CHECK 4.3

Describe the two techniques of forecasting.

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TOPIC 4 EXTERNAL AUDIT 49

4.3.3 External Factor Evaluation (EFE) Matrix


The external factor evaluation (EFE) matrix is a tool or framework which is used
to examine the external environment within which an organisation operations
identify the available opportunities and threats (David, 2009).

The EFE and internal factor evaluation (IFE) matrix are commonly used to assess
the organisations competitive position in the industry. The EFE matrix is similar
to the SWOT or PEST analysis and has been proven useful in identifying and
evaluating the key affecting factors.

The tool systematically examines the external environment; while the IFE
assesses the internal environment, on the following dimensions:

(a) Social;

(b) Legal;

(c) National and global economy;

(d) Political;

(e) Technological; and

(f) Ethical.

Steps in developing an EFE matrix are as follows:

(a) Identify and list external factors that essentially have strong impacts on the
organisations competitiveness on each of the dimensions: social, legal,
economic, political, technological and ethical.

(b) Assess and categorise identified factors under Opportunities and Threats.
This list is usually developed using SWOT or PEST analysis.

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50 TOPIC 4 EXTERNAL AUDIT

(c) Assign weights for each factor from 0 to 1. Each key factor should be
assigned a weight ranging from 0.0 (low importance) to 1.0 (high
importance). The number indicates the importance of each factor to the
organisations survival in the industry. If there were no weights assigned,
all the factors would be equally important, which is an impossible scenario
in the real world. The sum of all the weights must equal 1.0. Weights for
both Opportunities and Threats have the same meaning.

(d) Rate effectiveness of current strategies from one to four. The ratings in
external matrix refer to the effectiveness of the organisations current
strategy in response to the opportunities and threats. The numbers range
from four to one, where four means a superior response, three above
average response, two average response and one poor response.
Ratings, as well as weights, are assigned subjectively to each factor based
on senior management reviews.

(e) Multiply weight with rating.

(f) Sum weighted scores. The score is the result of weight multiplied by rating.
Each key factor must receive a score. Total weighted score is simply the
sum of all individual weighted scores. The organisation can receive the
same total score from one to four in both matrices. An average for total
score is 2.5. In external evaluation a low total score indicates that the
companys strategies arent well designed to meet the opportunities and
defend against threats.

Table 4.2 presents an example of the EFE matrix for a 10-theater cinema complex.
A total score of 2.58 is slightly better than average, which indicates that the
organisations strategies are addressing both the opportunities and threats but
not sufficiently taking a good competitive lead.

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TOPIC 4 EXTERNAL AUDIT 51

Table 4.2: EFE Matrix for a Local 10-theatre Cinema Complex

Weighted
Key External Factors Weight Rating
Score
Opportunities
1. Rowan County is growing 8 per cent annually in 0.05 3 0.15
population
2. TDB University is expanding 6 per cent annually 0.08 4 0.32
3. Major competitor across town recently ceased 0.08 3 0.24
operations
4. Demand for going to cinema growing 10 per cent 0.07 2 0.14
annually
5. Two new neighbourhoods being developed 0.09 1 0.09
within 3 miles
6. Disaposable income among citizens grew 0.06 3 0.18
5 per cent in prior year
7. Unemployment rate in county declined to 0.03 2 0.06
3.1 per cent
Threats
8. Trend toward healthy eating eroding concession 0.12 4 0.48
sales
9. Demand for online movies and DVDs growing 0.06 2 0.12
10 per cent annually
10. Commercial property adjacent to cinemas for sale 0.06 3 0.18
11. TDB University installing an on-campus movie 0.04 3 0.12
theatre
12. County and city property taxes increasing 0.08 2 0.16
25 per cent this year
13. Local religious groups object to R-rated movies 0.04 3 0.12
being shown
14. Movies rented from local Blockbuster store up 0.08 2 0.16
12 per cent
15. Movies rented last quarter from Time Warner up 0.06 1 0.06
15 per cent
Total 1.00 2.58

Source: David (2009)

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52 TOPIC 4 EXTERNAL AUDIT

The EFE matrices have little value on their own. Organisation should also
develop the internal factor evaluation (IFE) matrix and combine those findings to
inform the development of new strategies.

In addition, the organisation can conduct both the EFE and IFE on selected
competitors to develop a competitive profile matrix for benchmarking as shown
in Table 4.3.

Table 4.3: Example of Competitive Profile Matrix for Benchmarking

Company 1 Company 2 Company 3


Critical Success Factors Weight
Rating Score Rating Score Rating Score
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10
Management 0.10 4 0.40 3 0.20 1 0.10
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 2.50 2.20

Note: (1) The ratings values are as follows 1 = major weakness, 2 = minor weakness,
3 = minor strength, 4 = major strength. (2) As indicated by the total weighted score of
2.50, Competitor 2 is weakest. (3) Only eight critical success factors are included for
simplicity; this is too few in actuality.

Source: David (2009)

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TOPIC 4 EXTERNAL AUDIT 53

ACTIVITY 4.4

Suppose that the senior management has sat down to elaborately think
about the firms key factors and assess each of those factors using an
EFE Matrix. Explain to the senior management the results of the EFE
Matrix (see Table 4.4).

Table 4.4: External Factor Evaluation Matrix

Weighted
Key External Factors Weight Rating
Score
Opportunities
1. New immigration laws abolish the 0.02 1 0.02
restrictions for immigrants to live and
work freely in the country.
2. A government increases budget 0.17 4 0.68
spending for our products.
3. New product market, worth $1 billion a 0.05 4 0.20
year, could be introduced for the
consumers.
4. Consumers are 20% more likely to buy 0.12 4 0.48
the products that share the same
ecosystem.
5. We have patented the technology that 0.03 3 0.09
increases the quality of our products and
lowers the amount of the materials
needed to produce it.
6. Our largest competitor is selling their 0.14 2 0.28
subsidiary in TV market.

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54 TOPIC 4 EXTERNAL AUDIT

Threats
7. Tax rates will increase by 10% for the 0.06 2 0.12
polluting companies
8. Due to the fast economic growth credit 0.04 4 0.16
availability will tighten.
9. Credit rates are growing by 5% 0.02 2 0.04
10. Natural disasters disrupts our suppliers 0.08 3 0.24
or our operations.
11. Rivalry in the market is intensifying. 0.12 4 0.48
12. Competitor is pursuing horizontal 0.10 3 0.30
integration strategy.
13. Inflation has increased to 6%. 0.05 2 0.10
Total 1.00 3.19

Source: http://www.strategicmanagementinsight.com/tools/ife-efe-
matrix.html

The external environment of an organisation is defined by social, economy,


legal, political, technological and ethical dimensions.

Organisations need to keep a pulse on their position within the competitive


environment. An external audit is crucial in establishing key opportunities
and threats confronting an organisation so that managers can formulate
strategies to take advantage of the opportunities and avoid or reduce the
impact of threats.

The Industrial Organisation (I/O) approach to competitive advantage


advocates that external (industry) factors are more important than internal
factors in a firm for achieving competitive advantage.

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TOPIC 4 EXTERNAL AUDIT 55

External audit supports organisations with competitive intelligence (CI)


which is a systematic and ethical process for gathering and analysing
information about the competitions activities and general business trends to
further a business own goals.

The strategy tools for external environment analysis discussed in this topic
include Porters five forces analysis, forecasting and the external factor
evaluation matrix.

Competitive intelligence (CI) Internal factor evaluation (IFE) matrix


Competitive profile index Porters five forces
External audit Regression analysis
External environment Strategy tool
External factor evaluation (EFE) matrix Time series
Forecasting

David, F. R. (2009). Strategic management: Concepts and cases (12th ed.). Upper
Saddle River, NJ: Prentice Hall.

Copyright Open University Malaysia (OUM)


Topic Business Level
5 Strategies

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Discuss the different types of business level strategies;
2. Evaluate the business level strategies utilised by business
organisations; and
3. Evaluate the strategies used for turbulent markets.

INTRODUCTION
We have looked at the organisations mission and vision, their internal and
external environments. In this topic, we will look at the different business level
strategies that organisations can use to compete with their competitors.

Before we proceed, let us watch a video introducing what business level


strategies is from the following link: https://youtu.be/GV-lhFLnilQ

ACTIVITY 5.1

1. Watch an example of a business strategy used from the following


link: https://youtu.be/111W8YCB_-w

2. List down some of the businesses around your neighbourhood.


See if you can identify and describe the strategies that they use to
compete with their competitors. Share this with your coursemates.

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TOPIC 5 BUSINESS LEVEL STRATEGIES 57

5.1 PORTERS GENERIC STRATEGIES


Michael Porter used the following matrix to explain his generic strategies (David
& David, 2015). These generic strategies are also known as business level
strategies which are used by organisations to compete with their competitors.

There are basically three types of strategies which are as follows:

(a) Cost leadership strategy: It can be used in large markets.

(b) Differentiation strategy: It can be used in both large and small markets.

(c) Focus strategy: It can be used in small markets.

The following are Porters five generic strategies (see Figure 5.1):

(a) Type 1: Cost leadership Low cost.

(b) Type 2: Cost leadership Best value.

(c) Type 3: Differentiation.

(d) Type 4: Focus Low cost.

(e) Type 5: Focus Best value.

Figure 5.1: Porters five generic strategies

Now let us look into greater detail on the three types of strategies in the
following subtopics.

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58 TOPIC 5 BUSINESS LEVEL STRATEGIES

5.1.1 Cost Leadership Strategy


Cost leadership strategy is a strategy which focuses on producing standardised
products at a very low cost per-unit for consumers who are price-sensitive. It can
be divided into the following Type 1 and Type 2 strategies:

(a) Type 1 strategy


This strategy is utilised by organisations which offer products or services to
a wide range of customers at the lowest price available on the market.
Examples of business organisations utilising this strategy in Malaysia
include Mydin hypermarkets, Tesco and Giant. These businesses are known
for their low prices and are their products are available in all their
hypermarkets nationwide.

(b) Type 2 strategy


This strategy is also known as best-value strategy and organisations which
utilise this strategy offer products or services to a wide range of customers
at the best price-value available on the market. There are many businesses
utilising this strategy including AEON and many local businesses in the
country.

An organisation must make sure that its total costs across its overall value chain
are lower than its competitors total costs in order to be successful in
implementing a cost leadership strategy.

There are basically two ways that an organisation can achieve this:

(a) Perform value chain activities more efficiently than its competitors and
control the factors that might increase the costs of value chain activities;
and

(b) Restore the firms overall value chain to remove or avoid some cost-
producing activities.

So when should a business organisation use cost leadership strategies? Cost


leadership strategies should be used when:

(a) Price competition among rival sellers is especially vigorous.

(b) There are a few ways to achieve product differentiation that have value to
buyers.

(c) Most buyers use the product in the same ways.

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TOPIC 5 BUSINESS LEVEL STRATEGIES 59

(d) Buyers incur low costs in switching their purchases from one seller to
another.

(e) Large buyers can bargain down prices.

ACTIVITY 5.2

The following is a video related to this subtopic. Answer the question


asked at the end of this video.

https://youtu.be/mnw3D7rccg4

5.1.2 Differentiation Strategy


Differentiation strategy or also known as Porters Type 3 strategy is utilised by
organisations which offer products and services which are considered unique
industry-wide and directed at consumers who are relatively price-insensitive.
Differentiation strategy refers to strategies used by businesses to differentiate
themselves from its competitors and more often than not, higher priced products
are services are included in this category.

Well-known brands and organisations such as Gucci and Chanel, Ferrari


and Porsche and also Sheraton Hotels are examples of businesses using
differentiation strategy.

Differentiation strategy should be pursued only after a careful study of buyers


needs and preferences. It should be used when there are many ways to
differentiate the product, thus giving it an advantage over competitor products.
Differentiation strategy should also be used when the needs of buyers are
diverse, thus making it easier for an organisation to differentiate itself.

An organisation should also adopt the differentiation strategy when only a few
competitors are using similar approaches to differentiate itself and when
technology in the industry is constantly changing.

ACTIVITY 5.3

Let us watch a video about differentiation strategy. Answer the


question mentioned at the end of this video:

https://youtu.be/i-Mp3_jPOtY

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60 TOPIC 5 BUSINESS LEVEL STRATEGIES

5.1.3 Focus Strategy


Focus strategy can be divided into the following two types:

(a) Type 4 Focus Strategy


Type 4 focus strategy is a strategy in which businesses offer products or
services to a niche group of customers at the lowest price available on the
market. Examples of businesses utilising these strategies include small
grocers in a small town or restaurants offering cheap food for selected
customers such as in a hospital or university.

(b) Type 5 Focus Strategy


Type 5 focus strategy is a strategy in which businesses offer products or
services to a small range of customers at the best price-value available
on the market. The examples of businesses utilising this strategy include
wedding planners offering best value wedding packages and small resorts
offering value packages to its customers.

The success of focus strategy depends on an industry segment that is of sufficient


size, has good growth potential and is not crucial to the success of other major
competitors. Focus strategy is most effective when consumers have distinctive
preferences as its name implies.

When should we use focus strategies? The focus strategies should be used in the
following situations (David & David, 2015):

(a) When the target market niche is large, profitable and growing.

(b) When industry leaders do not consider the niche to be crucial to their own
success.

(c) When industry leaders consider it too costly or difficult to meet the
specialised needs of a niche market.

(d) When a particular industry has many different niches.

(e) When there are only a few players in the same target segment.

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TOPIC 5 BUSINESS LEVEL STRATEGIES 61

ACTIVITY 5.4

1. The following is a link of a video about focus strategy. Answer the


question mentioned at the end of this video:

https://youtu.be/5vePx4_vopc

2. Find three businesses which have successfully utilised cost


leadership strategy, focus strategy and differentiation strategy.

SELF-CHECK 5.1
What is differentiation strategy? How is it different from cost leadership
strategy?

CASE DISCUSSION ONE: SUNPOWER


Read the following case and discuss these questions in the class or in the e-forum
(refer to
https://mitsloan.mit.edu/LearningEdge/strategy/SunPower/
Pages/SunPower.aspx):
1. What is SunPowers core competency and competitive advantage?

2. What business level strategy should it use to compete in the market?


Justify your answer based on facts from the case.

3. Construct a Competitive Profile Matrix (refer to Topic 4).

CASE DISCUSSION TWO: PORSCHE


Read this case and discuss the following (refer to
https://mitsloan.mit.edu/LearningEdge/strategy/WhatsDrivingPorsche/
Pages/What-is-Driving-Porsche.aspx):

1. Porsches strategy before the takeover.

2. The problems that might occur as a result of the recent takeover of


Volkswagen.

3. Future possibilities for Porsche in terms of direction and business strategy.

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62 TOPIC 5 BUSINESS LEVEL STRATEGIES

5.2 MEANS FOR ACHIEVING STRATEGIES


How can the strategies be achieved? They can either be used on their own or
using the following methods:

(b) Cooperation among competitors;

(c) Joint venture/partnering;

(d) Merger/acquisition;

(e) Private-equity acquisitions;

(f) First mover advantages; and

(g) Outsourcing/reshoring.

There are various reasons why some mergers and acquisitions fail. These include
integration difficulties between the two companies in the case of mergers and
insufficient evaluation of the target in the case of an acquisition. Either or both
companies might suffer from large debts or the acquisition is too large.
Sometimes, both companies are unable to achieve synergy with each other or
there is too much diversification.

The managers might be overly focussed on acquisitions and not on solving the
day-to-day problems. In the case of different organisational cultures, there might
be problems in integrating the two companies. There might also be reduced
employee morale due to layoffs and relocations after the merger or acquisition.
These reasons are summarised in Figure 5.2.

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TOPIC 5 BUSINESS LEVEL STRATEGIES 63

Figure 5.2: Nine key reasons why many mergers and acquisitions fail
Source: David & David (2015)

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64 TOPIC 5 BUSINESS LEVEL STRATEGIES

Despite the difficulties outlined, there are inherent benefits from mergers and
acquisitions. Mergers and acquisition can be used to provide the following
benefits shown in Figure 5.3.

Figure 5.3: Eight potential benefits of merging with or acquiring another firm
Source: David & David (2015)

Do you know which strategy is the best? Let us watch the following video that
will answer this question: https://youtu.be/GpOkRv2edjM

ACTIVITY 5.5

Watch the following video and answer the questions mentioned at the
end of this video: https://youtu.be/WC5Vf59jD-c

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TOPIC 5 BUSINESS LEVEL STRATEGIES 65

This topic discusses the various business level strategies that an organisation
can utilise in the course of conducting its business.

Cost leadership strategy is used when the organisation or business produces


at the lowest cost in the market or offers the best value products.

Differentiation strategy is used when an organisation wants to differentiate


itself from others through premium or unique products.

Focus strategies are used when an organisation is focussed on a certain


segment of the market.

Business level strategies Differentiation strategy


Cost leadership strategy Focus strategy

David, F. R., & David, F. R. (2015). Strategic management: A competitive


advantage approach, concepts and cases (15th ed.). Upper Saddle River, NJ:
Pearson Education.

Copyright Open University Malaysia (OUM)


Topic Corporate Level
6 Strategies

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the corporate level strategies;
2. Differentiate between the different types of integration strategies;
3. Describe the different types of intensive strategies;
4. Identify the use of market penetration and market development
strategies; and
5. Explain when organisations utilise diversification strategies.

INTRODUCTION
Organisations generally pursue a combination of two or more strategies, often at
different levels in the organisation. However, caution must be taken that not too
many strategies are pursued at any one time, especially at the corporate level. At
this level, difficult decisions must be made by the top management of the
organisation and priorities must be set and established after careful assessment of
both the internal and external environment.

So what is corporate level strategy? Corporate level strategies deal with the
strategic decisions that organisations make which affect the whole organisation
and not just one or two units in the organisation. Financial performance, mergers
and acquisitions, human resource management and the allocation of resources
are considered part of corporate level strategy. Thus, corporate level strategies
cover the strategic scope of the organisation as a whole.

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TOPIC 6 CORPORATE LEVEL STRATEGIES 67

Corporate strategies address the long-term direction for the organisation. They
include the strategic plans for the entire organisation and change as the
capabilities of the organisation expands and as the environment around the
organisation changes.

Top management is responsible for all decisions regarding corporate strategies


and they are also directly responsible and answerable to the stakeholders of the
organisation including shareholders, employees, customers and suppliers. The
role of the governing board is to ensure that top managers actually act to address
the interests of the stakeholders especially the shareholders.

ACTIVITY 6.1

Look up the Internet for corporate level strategies and the different
explanations given for them.

6.1 OVERVIEW OF CORPORATE LEVEL


STRATEGIES
As stated in the introduction, corporate level strategies are under the jurisdiction
of top management in the organisation. The Chief Executive Officer is the person
primarily responsible for the decisions made pertaining to corporate level
strategies.

The corporate level strategies are cascaded down to the divisional level where
the Vice President of deputies is responsible. At the functional level, the
managers of each department, for example, human resource managers, IT
managers, marketing managers and other managers carry out the decisions that
have been made at the corporate level. These are then further cascaded down to
the operational level where the supervisors and employees carry out their tasks
as decided by top management.

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68 TOPIC 6 CORPORATE LEVEL STRATEGIES

Figure 6.1 shows the different levels of strategies with the person most
responsible in a large and small company.

Figure 6.1: Levels of strategies with a person most responsible

Table 6.1 shows the different types of corporate level strategies available and
some examples of the said strategies.

Table 6.1: Alternative Strategies Defined and Exemplified

Strategy Definition Examples


Forward Gaining ownership or increased PayPal is pushing its service off
Integration control over distributors or the Web and into stores via an
retailers agreement with Discover card.
Backward Seeking ownership or increased Fancy Motels Inc. acquiring a
Integration control of a firms suppliers furniture manufacturer.
Horizontal Seeking ownership or increased Britains GlaxoSmithKline PLC
Integration control over competitors acquired Human Genome
Sciences Inc. for $3 billion.

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TOPIC 6 CORPORATE LEVEL STRATEGIES 69

Market Seeking increased market share PepsiCo is heavily advertising its


Penetration for present products or services new Diet Pepsi special-edition
in present markets through silver cans featuring the blue-
greater marketing efforts and-red Pepsi logo in a heart
shape.
Market Introducing present products or China Petrochemical purchased
Development services into new geographic three Canadian oil companies,
area Daylight Energy, Tanganyika Oil
and Syncrude Canada.
Product Seeking increased sales by General Electric is building new
Development improving present products or composite material jet engines,
services or developing new ones whereas rival Pratt & Whitney is
developing newly designed jet
engines.
Related Adding new but related products The toy retailer, Toys R Us
Diversification or services developed a new Wi-Fi tablet
computer for children (the Tabeo
for $149.99).
Unrelated Adding new, unrelated products Retailer IKEA is opening a chain
Diversification or services of motels in Europe.
Retrenchment Regrouping through cost and Callaway Golf cut 12 per cent of
asset reduction to reverse its workforce; Deutsche Bank AG
declining sales and profit cut 1,000 jobs from its investment
bank segment.
Divestiture Selling a division or part of an Dean Foods sold off its
organisation WhiteWave-Alpro organic dairy
business.
Liquidation Selling all of a companys assets, Big Sky Farms, one of Canadas
in parts, for their tangible worth biggest hog-producing firms,
liquidated.

Source: David & David (2015)

ACTIVITY 6.2

To learn more about what corporate level strategies are, let us watch a
video from the following link: https://youtu.be/znAbitvMRiA

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70 TOPIC 6 CORPORATE LEVEL STRATEGIES

6.2 INTEGRATION STRATEGIES


There are three types of integration strategies:

(a) Forward integration;

(b) Backward integration; and

(c) Horizontal integration.

These three types of integration will be further described in the following


subtopics.

6.2.1 Forward Integration


Forward integration strategy involves acquiring ownership or increased control
over an organisations distributors or retailers (David & David, 2015).

Let us take the example of a clothing manufacturer. Generally, a clothing


manufacturer would sell its clothing line through other vendors like department
stores, boutiques and online stores. If the manufacturer decides to buy one of
these vendors, for example, a boutique, then the manufacturer is said to have
pursued a forward integration strategy.

There are several situations in which an organisation should pursue forward


integration strategy. The first instance is when an organisations current
distributors are very expensive and it is not really viable to use them as
distributors. Thus, it is better off for the organisation to set-up their own
distribution channel or buy out an existing one.

An organisation could also pursue the forward integration strategy when the
availability of quality distributors is so limited as to offer a competitive
advantage. In this case, the organisation is better off with its own distribution
channel.

The forward integration strategy could also be adopted when an organisation


competes in an industry that is growing and the advantages of stable production
are particularly high. The strategy could also be used when present distributors
or retailers have high profit margins, thus making it worth it for the organisation
to acquire their own distributorship.

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6.2.2 Backward Integration


Backward integration strategy involves acquiring ownership or increased control
of an organisations suppliers. Let us take the example of a chain of restaurants
selling chicken as its main dish. If the chain of restaurants wants to make sure
that it has a fixed supply of chicken at a reasonable price, it might purchase a
chicken farm. In this case, the backward integration strategy has been utilised.

When should this strategy be used?

Backward integration strategy should be used when an organisations current


suppliers are very expensive or unreliable. In this situation, the organisation is
incurring high costs to get supplies and thus its profit margins are lower. The
acquisition of a supplier would lower the cost of production and increase its
profit margins. Having its own supplies would also mean that it has access to
supplies at all times and would solve the problems of unreliable supplies.

Backward integration should also be used when the number of suppliers is small
and the number of competitors is large. In this case, the organisation would be
able to ensure that it has its own supplies and can easily compete with its
competitors. The adoption of the backward integration strategy is also feasible
when the organisation possesses both capital and human resources and when the
advantages of stable prices are particularly important to the survival of the
organisation. The strategy is particularly useful when an organisation needs to
quickly acquire a needed resource from its suppliers in the course of its
production.

6.2.3 Horizontal Integration


Horizontal integration strategy involves acquiring ownership of or increased
control over an organisations competitors. An example of this would be if a
Telco like Maxis takes over Digi or Celcom.

When should this strategy be adopted by an organisation? David and David


(2015) recommended that an organisation should use horizontal integration in
the following circumstances:

(a) When it could gain monopolistic characteristics in a particular area or


region without being challenged by the government;

(b) When it competes in a growing industry;

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72 TOPIC 6 CORPORATE LEVEL STRATEGIES

(c) When increased economies of scale provide major competitive advantages;


and

(d) When competitors are faltering due to a lack of managerial expertise.

SELF-CHECK 6.1
What are the different types of integration strategies available? Can you
differentiate between them?

ACTIVITY 6.3

Find an example of businesses using the different integration strategies


through an internet search. Share with your friends in class or in the
forum.

6.3 TYPES OF INTENSIVE STRATEGIES


There are three types of intensive strategies, namely market penetration strategy,
market development strategy and product development strategy. We will
explore more about these intensive strategies in the following subtopics.

6.3.1 Market Penetration Strategy


Market penetration strategy refers to an organisations strategy of seeking to
increase market share for its existing products or services in current markets but
through greater marketing efforts.

This strategy should be adopted when current markets are not saturated with a
particular product or service. Thus the organisation can increase its market share
by penetrating its current markets. It can also be adopted when the usage rate of
present customers could be increased considerably which includes customers
that are currently not using the products intensively.

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Market penetration strategy should also be used when the market shares of an
organisations main competitors have been declining but total industry sales
have been increasing. This means that the organisation will be able to compete in
the same market better than its competitors. The strategy should also be used
when an increase in economies of scale provide major competitive advantages to
the organisation.

6.3.2 Market Development Strategy


Market development strategy involves introducing current products or services
into new geographic areas (David & David, 2015).

This strategy should be adopted when new channels of distribution are available
and these channels are reliable, inexpensive, and of good quality. The strategy
should also be adopted when an organisation is very successful at what it does,
thus making it viable for it to develop new markets.

The market development strategy should also be used when new untapped or
unsaturated markets exist and when an organisation has excess production
capacity. This would ensure that the organisation is equipped to produce more
for the new markets it will develop.

6.3.3 Product Development Strategy


The product development strategy refers to the strategy when an organisation
seeks to increase sales by improving or modifying its current products or
services.

Organisations should adopt this strategy in the following circumstances (David


& David, 2015):
(a) When an organisation has successful products that are in the maturity stage
of the product life cycle;
(b) When an organisation competes in an industry characterised by rapid
technological developments;
(c) When major competitors offer better-quality products at comparable prices;
(d) When an organisation competes in a high-growth industry; and
(e) When an organisation has strong research and development capabilities.

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74 TOPIC 6 CORPORATE LEVEL STRATEGIES

SELF-CHECK 6.2
What are the different types of intensive strategies available? Discuss
each of them.

ACTIVITY 6.4

Find articles on the Internet which gives an example of market


penetration strategy and market development strategy. Identify the
reason for the organisation using these strategies.

6.4 DIVERSIFICATION STRATEGIES


Organisations have the option of using either related diversification or unrelated
diversification when they decide to diversify into other businesses. Let us look at
related diversification first.

ACTIVITY 6.5

Before we proceed, let us watch a video from the following link:


https://youtu.be/wwQBWJZkmnc

6.4.1 Related Diversification


Related diversification occurs when an organisation decides to venture a new
business which is related to its current business. For example, a restaurant
decides to venture into production of frozen food. In this case, it is engaging in a
new business but one which is related to its current business in the food industry.

So what would an organisation gain when it decides to engage in related


diversification? One of the main synergies would be the transferring of
competitively important expertise, technological know-how and other
capabilities from one business to another. This means that each business would
learn something new from the other and increase its own strengths and
capabilities. The organisations or businesses would also be able to join related

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TOPIC 6 CORPORATE LEVEL STRATEGIES 75

activities of their separate businesses into a single operation in order to achieve


lower costs. If one or the other of the combined businesses has a well-known
brand name, the other business would be able to exploit the brand name to its
advantage. Overall, the cross-business collaboration would be able to create new
strengths and opportunities.

When should we use related diversification strategies? Firstly, related


diversification strategies should be used when an organisation exists in a no-
growth or slow-growth industry. Expansion into a new business would be able to
boost its sales and performance. An organisation should also use related
diversification when adding new, but related, products would significantly
increase the sales of its existing products. Related diversification should also be
used when new, but related, products could be offered at highly competitive
prices, thus improving its sales and profitability. It should also be used when an
organisation has a strong management team.

6.4.2 Unrelated Diversification


Unrelated diversification refers to an organisation diversifying into an unrelated
business or products. Here, the value chains of the new business or product it
engages in are nothing similar to its existing business that there is no valuable
cross-business relationship whatsoever.

David and David (2015) recommended the use of unrelated diversification in the
following situations:

(a) When revenues gained from an organisations current products would


increase significantly by adding the new, unrelated products;

(b) When an organisations current channels of distribution can be utilised to


market the new products to existing customers;

(c) When the new products have countercyclical sales patterns when compared
to current products produced;

(d) When an organisations basic industry is going through declining annual


sales and profits;

(e) When there exists financial synergy;

(f) When an organisation has the opportunity to purchase an unrelated


business that is an attractive investment opportunity; and

(g) When current markets for an organisations present products are saturated.

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76 TOPIC 6 CORPORATE LEVEL STRATEGIES

SELF-CHECK 6.3

When and why would an organisation utilise diversification strategies?

6.5 DEFENSIVE STRATEGIES


Basically, there are three defensive strategies that an organisation can choose to
adopt:

(a) Retrenchment;

(b) Divestiture; and

(c) Liquidation.

6.5.1 Retrenchment
Retrenchment refers to the exercise of an organisation reorganising or
restructuring itself through cost and asset reduction to reverse declining sales
and profits. It is often called reorganisation strategy or turnaround strategy and
is utilised to strengthen an organisations basic competencies or competitive
advantage.

When an organisation has a distinctive competence but has failed to meet its
goals recurringly, it should start to think of retrenchment. An organisation
should also use retrenchment when it is one of the poor players in a given
industry and when is faced with inefficiency, low profitability and poor
employee morale.

Retrenchment should also be used as a strategy when an organisation fails to


capitalise on external opportunities and finds it difficult to defend itself against
external threats. It can also be used when an organisation has grown so large so
very quickly that major restructuring is required.

ACTIVITY 6.6

Let us learn more about retrenchment by visiting the following link:


https://youtu.be/-DYIAneP-qM

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TOPIC 6 CORPORATE LEVEL STRATEGIES 77

6.5.2 Divestiture
Divestiture is a strategy which involves the selling of a division or part of an
organisation. It is often used to raise capital for future strategic acquisitions or
investments.

An organisation might decide to engage in divestiture when it has already


pursued a retrenchment strategy but failed to bring about any improvements. It
might also engage in divestiture when a certain division needs more resources
than the company can provide in order to be competitive. Divestiture is also
advisable when a division is responsible for the organisations overall poor
performance and is actually a misfit within the organisation.

6.5.3 Liquidation
Liquidation refers to the selling of all of a companys assets, in parts, for their
tangible worth. This can be an emotionally difficult strategy for the stakeholders
involved.

Liquidation is often used as a last resort when an organisation has pursued


both the retrenchment strategy and divestiture strategy, and neither has been
successful. An organisation should also decide to liquidate when the only other
alternative is filing for bankruptcy. It is also used when the stockholders of a firm
decides to minimise their losses by selling the organisations assets.

ACTIVITY 6.7
Go to this link: http://www.thestar.com.my/business/business-
news/2016/06/28/airasia-buys-80-of-tco-coffee/ and read the article titled
Air Asia buys 80% of T&Co Coffee. Answer the following questions.

(a) What strategy is Air Asia utilising in this case?

(b) What would be the justification for the strategy? From Air Asias
perspective and from T&Cos perspective?

(c) What benefit would it bring to T&Co?

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78 TOPIC 6 CORPORATE LEVEL STRATEGIES

The different levels of strategies in a company include the corporate,


divisional, functional and operational levels of strategies.

There are three types of integration strategies, namely, forward, backward


and horizontal integration strategies.

Forward integration refers to acquiring ownership or increased control over


an organisations distributors or retailers.

Backward integration strategy involves acquiring ownership or increased


control of an organisations suppliers.

Horizontal integration strategy involves acquiring ownership of or increased


control over an organisations competitors.

There are three types of intensive strategies, namely market penetration


strategy, market development strategy and product development strategy.

Organisations have the option of using either related diversification or


unrelated diversification when they decide to diversify into other businesses

Related diversification happens when an organisation engages in a new


business but one which is related to its current business.

Unrelated diversification refers to an organisation diversifying into an


unrelated business or products.

The three defensive strategies that an organisation can choose to adopt are
retrenchment, divestiture and liquidation.

Retrenchment refers to the exercise of an organisation reorganising or


restructuring itself through cost and asset reduction to reverse declining sales
and profits.

Divestiture is a strategy which involves the selling of a division or part of an


organisation.

Liquidation refers to the selling of all of a companys assets, in parts, for their
tangible worth.

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TOPIC 6 CORPORATE LEVEL STRATEGIES 79

Backward integration strategy Market development


Corporate level strategy Market penetration
Divestiture Product development
Forward integration strategy Related diversification
Horizontal strategy Retrenchment
Liquidation Unrelated diversification

David, F. R., & David, F. R. (2015). Strategic management: A competitive


advantage approach, concepts and cases (15th ed.). Boston, MA: Pearson
Education.

Copyright Open University Malaysia (OUM)


Topic Strategy
7 Generation and
Selection
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify the strengths and weaknesses of an organisation;
2. Discuss the importance of addressing the weaknesses of an
organisation;
3. Assess the different SPACE matrix profiles; and
4. Appreciate the role of intuitive thinking in strategic decision
making.

INTRODUCTION
In shaping steps to move forward, organisations need to understand their
competitive positions at any point of time and the foreseeable future. This topic
explores strategy generation as part of the strategy formulation stage.

There are two main categories of strategy: corporate strategy and business
strategy as covered in Topics 5 and 6. This topic focuses on the generation of
corporate strategy which essentially gives the direction for which the
organisation has to take.

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TOPIC 7 STRATEGY GENERATION AND SELECTION 81

Corporate strategy consists of chief executive officers (CEOs) and top executives
making three basic choices:

(a) What can distinguish the firm in the industry?

(b) What should be the firms comparative advantage?

(c) What businesses can shape what the firm is all about?

These are the fundamental choices that a firm makes when deciding on its
corporate strategy; which essentially guides all the business and operational
decisions of the firm.

This topic aims to introduce a framework to guide a systematic approach to


strategy generation. The elements of the framework are discussed in the sections
that follow. In addition, the crucial role of intuition in strategic decision-making
process is presented in the later sections of the topic.

At the end of this topic, you should be able to generate alternative strategies
using the 3-stage framework; understand the use of tools for environmental
scanning, learn to match strategic profiles to an organisations strengths,
weaknesses, opportunities and threats; the use of SPACE Matrix in developing
strategic profiles; and finally, appreciate the importance of intuition or gut feel
of senior management when making strategy decisions.

ACTIVITY 7.1

1. How would an organisation know what it needs to do to beat the


competition?

2. How would the organisation know if it is in competition with


another business and with whom? How would they know who
their competitors are in the first place?

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82 TOPIC 7 STRATEGY GENERATION AND SELECTION

7.1 THE STRATEGIC FORMULATION


ANALYTICAL FRAMEWORK
The strategy formulation analytical framework involves three main stages as
shown in Figure 7.1. These three stages will be discussed further in the following
subtopics.

Figure 7.1: The strategy-formulation analytical framework


Source: David & David (2015)

ACTIVITY 7.2

Before we proceed, let us watch a video from the link as follows:


https://youtu.be/vMjotRt8qKQ

7.1.1 Input Stage


In Topic 3, we discussed the dimensions of the internal factor evaluation (IFE)
matrix and its use as a strategic analysis tool where the organisation lists its
strengths and weaknesses from a SWOT or PEST analysis, and assigned weights
of relative importance to each of the criterion. As the assessment is rather
subjective, key personnel from various levels of management ought to sit down
and work on scoring the ratings for each criterion. This rating system can also be
applied to the closest competitors for benchmarking purposes.

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TOPIC 7 STRATEGY GENERATION AND SELECTION 83

In Topic 4, we discussed the dimensions of the external factor evaluation (EFE)


matrix. Based on the listing of threats and opportunities of a SWOT or PEST
analysis, weights of relative importance were assigned to each criterion and
ratings can be assigned similar to the assessment process of the internal factor
evaluation (IFE) Matrix.

The last element of the input stage is developing a competitive profile matrix
(CPM). In addition, the organisation can conduct EFE and IFE matrices on
selected competitors to develop a competitive profile matrix (CPM) for
benchmarking (refer to Table 7.1). These three activities provide the organisation
with an understanding of the environment it operates in to better understand the
industry, the market and the competition in order to strategise their next step
forward. Table 7.1 was also presented in Topic 4 (refer to Table 4.3).

Table 7.1: A Competitive Profile Matrix for a Few Competitors as a Benchmark


Company 1 Company 2 Company 3
Critical Success Factors Weight
Rating Score Rating Score Rating Score
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10
Management 0.10 4 0.40 3 0.20 1 0.10
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 2.50 2.20
Note: (1) The ratings values are as follows 1 = major weakness, 2 = minor weakness,
3 = minor strength, 4 = major strength. (2) As indicated by the total weighted score of
2.50, Competitor 2 is weakest. (3) Only eight critical success factors are included for
simplicity; this is too few in actuality.
Source: David (2009)

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84 TOPIC 7 STRATEGY GENERATION AND SELECTION

7.1.2 Matching Stage


The matching stage is a brainstorming stage where the focus is on developing
alternative strategies ideas that use organisational strengths to leverage on
the opportunities (SO) known in the middle and longer term; and how the
organisation uses its strengths in addressing the market threats (ST).

In this matching stage, managers would also think about the strategies to address
the organisations weaknesses that could be detrimental in the exploitation
of market opportunities (WO); and realise the organisations weaknesses in
addressing the market threats (WT).

The SWOT template shown in Figure 7.2 summarises the SO, WO, ST and WT.

Figure 7.2: SWOT matrix template

The generation of strategic alternatives is best done in a workshop where


managers and executives can brainstorm ideas for each of the above. The
workshop does not just bring people together for ideas, it is also crucial for the
management in creating buy-in from different levels of managements on ideas
for how the organisation should move forward a process where all whom were
involved could better understand where the ideas came from and why each
strategy (when decided) were properly discussed from different perspectives and
aspects before adoption.

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TOPIC 7 STRATEGY GENERATION AND SELECTION 85

Figure 7.3 presents the quadrants of SO, WO, ST and WT for a computer retail
shop.

Figure 7.3: SWOT matrix for a retail computer store


Source: David & David (2015)

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86 TOPIC 7 STRATEGY GENERATION AND SELECTION

SELF-CHECK 7.1

1. What does strength of an organisation mean?

2. How can management best use these strengths?

3. What does weakness of an organisation mean?

4. Why does management need to address these weaknesses?

7.2 SPACE MATRIX


The Strategic Position Action Evaluation Matrix (SPACE) is a framework to guide
the systematic approach in matching what the organisation can do well with the
opportunities in the market with its known strengths (SO) and weaknesses (WO)
as well as how the organisation must address the threats with its strengths (ST)
and weaknesses (WT).

The four-quadrant framework (see Figure 7.4) indicates whether aggressive,


conservative, defensive or competitive strategies are most appropriate for a given
organisation.

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TOPIC 7 STRATEGY GENERATION AND SELECTION 87

Figure 7.4: SPACE matrix


Source: David & David (2015)

The SPACE matrix suggests that the most important determinants of an


organisations overall strategic position include:

(a) Two internal dimensions (financial position [FP] and competitive position
[CP]); and

(b) Two external dimensions (stability position [SP] and industry position [IP]).

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88 TOPIC 7 STRATEGY GENERATION AND SELECTION

Table 7.2 lists the examples of factors associated with each quadrant.

Table 7.2: Examples of Factors for Each Quadrant of SPACE Matrix

Internal Strategic Position External Strategic Position


Financial Position (FP) Stability Position (SP)
Return on investment Technological changes
Leverage Rate of inflation
Liquidity Demand variability
Working capital Price range of competing products
Cash flow Barriers to entry into market
Inventory turnover Competitive pressure
Earnings per share Ease of exit from market
Price earnings ratio Price elasticity of demand
Risk involved in business
Competitive Position (CP) Industry Position (IP)
Market share Growth potential
Product quality Profit potential
Product life cycle Financial stability
Customer loyalty Extent leveraged
Capacity utilisation Resource utilisation
Technological know-how Ease of entry into market
Control over suppliers and distributors Productivity, capacity utilisation

Source: David & David (2015)

Steps for developing a SPACE Matrix are as follows:


(a) Select a set of variables to define financial position (FP), competitive
position (CP), stability position (SP) and industry position (IP).
(b) Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the
variables that make up the FP and IP dimensions. Assign a numerical value
ranging from 1 (best) to 7 (worst) to each of the variables that make up
the SP and CP dimensions.
(c) Compute an average score for FP, CP, IP, and SP.
(d) Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the
SPACE matrix.
(e) Add the two scores on the x-axis and plot the resultant point on X. Add
the two scores on the y-axis and plot the resultant point on Y. Plot the
intersection of the new xy point. This vector reveals the type of strategies
recommended for an organisation: aggressive, competitive, defensive, or
conservative. This is the third stage of framework: Decision Stage.
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TOPIC 7 STRATEGY GENERATION AND SELECTION 89

Figures 7.7 and 7.8 illustrate the calculation of scores for SPACE matrix and the
creation of vectors for strategic profile in SPACE matrix.

Figure 7.7(a): SPACE matrix scores


Source: http://mba-lectures.com/management/strategic-management/1011/space-
matrix-of-harrahs-entertainment.html

Figure 7.7(b): Vector for a competitive profile in SPACE matrix (1.29, 0.24)
Source: http://mba-lectures.com/management/strategic-management/1011/space-
matrix-of-harrahs-entertainment.html

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90 TOPIC 7 STRATEGY GENERATION AND SELECTION

Figure 7.8(a): SPACE matrix scores


Source: http://www.maxi-
pedia.com/space+matrix+model+strategic+management+method

Figure 7.8(b): Vector for an aggressive profile in SPACE matrix (3.00, 2.75)
Source: http://www.differentiateyourbusiness.co.uk/space-analysis-strategic-position-
and-action-evaluation-matrix

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Examples of SPACE Matrix Profiles


Figure 7.9 shows the examples of aggressive profile and conservative profiles
with a focus on financial strength (FS) against industry position (IP) and
competitive position (CP).

Figure 7.9: Examples of aggressive and conservative profiles using SPACE matrix
Source: David & David (2015)

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92 TOPIC 7 STRATEGY GENERATION AND SELECTION

Figure 7.10: Examples of competitive and defensive profiles using SPACE matrix
Source: David & David (2015)

Figure 7.10 shows examples of competitive and defensive profiles using SPACE
matrix with a focus on stability position (SP) against industry position (IP) and
competitive position (CP).

Now let us learn more about space matrix by visiting the following link:
https://youtu.be/1grK19KwRjQ

ACTIVITY 7.3

1. When would it be appropriate for an organisation to be


aggressive?

2. When would it be appropriate for an organisation to take a


competitive stance?

3. Why would an organisation be defensive or conservative?

ACTIVITY 7.2
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TOPIC 7 STRATEGY GENERATION AND SELECTION 93

7.3 INTUITION IN STRATEGIC ANALYSIS AND


CHOICE
Many researchers have found that the intuitive process was used in
organisational decision, though it was difficult to pinpoint how exactly intuitive
thinking supports strategic decision making.

Intuition means being able to bring to bear on situation everything youve seen,
felt, tasted and experienced in an industry (Perot as cited in Rowan, 1990).

Use of intuitive synthesis was found to be positively associated with


organisational performance in an unstable environment, but negatively so in a
stable environment (Khatri & Ng, 2000). Mintzberg (1994) and Peters and
Waterman (1982) argue that rational thinking might be the cause of strategic
planning failure. Successful strategic decision making has to take into account
both rational and intuitive processes (Pondy, 1983; Simon, 1987).

A long history of research has explored the evolution of intuitive processes in


management decision making (see for example; Isenberg, 1984; Simon, 1987;
Prietula & Simon, 1989; Kleinmuntz, 1990; Harung, 1993; Seebo, 1993; Parikh,
1994). Intuitive processes consists the mass of facts, patterns, concepts,
techniques, abstractions, and generally what we call formal knowledge or beliefs,
which are impressed on our minds (Barnard, as cited in Simon, 1987; Khatri &
Ng, 2000). Hence, CEOs and senior managers were often those who had been in
the industry for many years, who have knowledge of the behaviour of the market
and the impacts of socio-economic factors surrounding the industry.

ACTIVITY 7.4

Experiential Learning Using Video


Listen to Tim Cook, the CEO of Apple on using his intuition in making
decisions: https://youtu.be/c6X9-br--jM

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94 TOPIC 7 STRATEGY GENERATION AND SELECTION

Strategy generation can be a structured process using a 3-stage framework


introduced in this topic.

Stage 1 of strategy generation involves environmental scanning, internal as


well as external.

Internal analysis can be conducted using the internal evaluation factor (IEF)
matrix while the external environment, external evaluation factor (EEF)
matrix. These two matrices combined a competitive profile matrix (CPM)
can be used to analyse the competition in the market- benchmarking.

In Stage 2, alternative strategies can now be generated with an understanding


of the strengths, weaknesses, opportunities and threats along with the factors
drawn from IEF and EEF matrices that were important for the organisation.

A SWOT Matrix can now be generated with thoughts on strengths and


opportunities (SO), strengths and threats (ST); and weaknesses and
opportunities (WO) and weaknesses and threats (WT).

Stage 2 generates alternatives for the possible strategic stance of either


aggressive or competitive; and conservative or defensive.

Based on the analytics gathered from Stage 1 and 2; Stage 3 focuses on


matching the alternatives with the strategic direction the organisation wishes
to steer towards aggressive, competitive, conservative or defensive using
SPACE matrix.

Competitive profile matrix (CPM) SPACE matrix


Corporate strategy Strategic planning
Environmental scanning Strategy making process
External evaluation factor (EEF) matrix SWOT analysis
Internal evaluation factor (IEF) matrix SWOT matrix
Intuition

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TOPIC 7 STRATEGY GENERATION AND SELECTION 95

David, F. R. (2009). Strategic management: Concepts and cases (12th ed.). Upper
Saddle River, NJ: Prentice Hall.

David, F. R., & David, F. R. (2015). Strategic management: A competitive advantage


approach, concepts and cases (15th ed.). Boston, MA: Pearson Education.

Harung, H. S. (1993). More effective decisions through synergy of objective and


subjective approaches. Management Decision, 31(7), 3845.

Isenberg, D. (1984). How senior managers think? Harvard Business Review,


62(6), 8190.

Khatri, N., & Ng, A. (2000). The role of intuition in strategic decision making.
Human Relations, 53(1), 5786.

Kleinmuntz, B. (1990). Why we still use our heads instead of formulas: Toward
an integrative approach. Psychological Bulletin, 107(3), 296310.

Mintzberg, H. (1994). The rise and fall of strategic planning. New York, NY: The
Free Press.

Parikh, J. (1994). Intuition: The new frontier of management. Oxford, England:


Blackwell Business.

Peters, T., & Waterman, R. (1982). In search of excellence. New York, NY: Harper
and Row.

Pondy, L. R. (1983). The union of rationality and intuition in management action.


Introduction: Common themes in executive thought and action. In S.
Srivastava, The executive mind: New insights on managerial thought and
action. San Francisco, CA: Jossey-Bass.

Prietula, M. J., & Simon, H. A. (1989). The experts in your midst. Harvard
Business Review, 67(1), 120124.

Rowan, R. (1990). Listen for those warning bells. In W. H. Agor (Ed.), Intuition in
organizations. Newbury Park, CA; Sage.

Seebo, T. C. (1993). The value of experience and intuition. Financial Management,


22(1), 2739.

Simon, H. A. (1987). Making management decisions: The role of intuition and


emotion. Academy of Management Executive, 1(1), 5764.

Copyright Open University Malaysia (OUM)


Topic Strategy
8 Implementation

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the term market place;
2. Discuss the current marketing issues;
3. Describe the funding methods to develop a new market for a firms
products; and
4. Explain the research and development issues to be considered
when a firm develops a new product.

INTRODUCTION
In Topic 7, we introduced the use of a 3-stage framework and several analytical
tools in support of the generation and selection of strategies to develop corporate
strategy, essentially the direction that steers the business of the firm.

This topic explores the issues relating to strategy implementation in the context
in which the organisation operates within. At this juncture, we need to cascade
the set of corporate strategy to business unit level strategies for implementation.

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TOPIC 8 STRATEGY IMPLEMENTATION 97

At the business unit level, another three key decisions have to be made. They
include:

(a) Who are the group of customers that define our target market?

(b) How can we add value that differentiates our products and services?

(c) What kind of capabilities and capacities do we need to make that value
proposition happen?

The answer to these questions drives the decisions a business units management
team, functions and staff make every day, including product design, pricing,
markets, promotion, financial and research and development (R&D).

Implementing a strategy consists of all the decisions and activities required to


turn the corporate and business strategies into reality.

This topic discusses the type of product and its pricing to suit a particular group
of prospective consumer; the market place the firm has to compete in and the
means to reach and grow its prospective customer base.

Having decided the type of product, the pricing, the market and the promotion
the firm is most likely to engage in, next the firm has to consider funding and
investment issues. Every strategic decision requires investments from small
amounts to very large amounts. How would that be funded?

For the new product, the firm needs to consider research and development
issues. Do they have the resources for in-house research or should they consider
outsourcing? What about trade secrets, patents and copyrights?

The advancement of technologies has changed how players win the games in the
market. The social media and virtual networks brought about big data that have
transformed business analytics that support business decisions.

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98 TOPIC 8 STRATEGY IMPLEMENTATION

8.1 MARKETING ISSUES


Other than being defensive when the organisation has decided to downsize or
retreat from the market, the other three strategic orientations, being Competitive,
Aggressive and Conservative; as specified in the SPACE Matrix requires some
kind of product or market development. It is crucial to decide what new
products or which new markets are to be developed. The 4-Ps in Figure 8.1
shows the four elements to market a product effectively.

Figure 8.1: The 4-Ps of marketing


Source: http://www.branddrivendigital.com/4-ps-of-marketing/

8.1.1 Product Development and Pricing


What do customers need? the product. Think about what the community
needs that the company can fulfil with existing capabilities. If existing capacities
and capabilities are not able deliver that requirement, should the firm consider
expanding those capabilities and capacities in-house or outsource?

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TOPIC 8 STRATEGY IMPLEMENTATION 99

After establishing what consumers need; now consider What do they want in
what they need? For example, if it was found that the people in this region need
to communicate with others all around the world for business dealings. The firm
can then think about the wants the need to communicate can be satisfied
with all types of gadgets from a basic mobile phone to a smart watch wrapped
with a designer wrist band, for example Apple iWatch by Hermes. Should the
firm have a range of new products with a range of prices to cater to different
groups of consumers? We are now considering the pricing part of marketing,
such as: How much does it cost a firm to produce? or How much margin is
required for a sustainable business operation?

8.1.2 Market Development and Segmentation


Now that we have the product and pricing, the question arises of where shall we
sell them the place. The advancement of technology has changed the rules of a
market place. The market place is no longer how far one can peddle his cart,
but at every corner of the world reachable by planes, ships or any automobiles. In
addition to geographical borders, the market place is also demarcated by
demography: age, gender, income, race and religion. Which particular group of
consumers do we target? This is market segmentation.

Should the firm decide to sell their new product in Region A, there must be
existing players in the market. How should the firm position its product to find a
niche; something that the other players are not offering perhaps due to
potentially a lack of technology, or capital investments? For example: Jeep and
Range Rover have long dominated the 4-wheeled drive automobiles. There is a
vacancy in the niche market for such vehicles, hence Porsche and BMW are
examples of the high-end players who have decided that they want a piece of the
cake when they recognise that high-end consumers want their SUVs or 4WDs to
look great with a certain class that gives them the status they think they deserve.

SELF-CHECK 8.1

How would you explain the term market place?

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100 TOPIC 8 STRATEGY IMPLEMENTATION

8.1.3 Promotion
This then takes us to promotion. How do we reach out to existing and, more
importantly, prospective customers? We now have the internet along with the
social networks Instagram, Twitter, Facebook, blogs, websites for online market
place such as Amazon.com or Alibaba; web-based advertisements; and the ever
growing mobile applications that allows for personalised lifestyle environments.

ACTIVITY 8.1

Suppose that a firm has decided to get a bigger share in the fashion
industry. It wants to build on its existing ladies fashion to reach out to
the teenagers. What are some of the issues they need to consider in
terms of marketing?

8.1.4 Current Issues: Big Data


The recent wave of technology advancements have changed the way things
work, changed the way we work and the way we live our lives. It changes the
market, the competition and how firms compete. Consumers now have more
access to information that was scarce. Producers have to do more than just
enough to cover the basics as consumers have become more sophisticated in their
needs and wants. Producers can use crowdsourcing for big data analytics
to better understand consumer behaviour useful information for product
development, pricing, segmentation and promotion tactics.

These issues are essentially decisions for strategy implementation and it is


related to the following questions. How do we go about developing a new
product for a new market? What product, which type, which group of
consumers, where and how to get there?

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8.2 FINANCIAL ACCOUNTING ISSUES


Let us say that the firm has made the decision of a specific new product or a
range of products to be developed and a new market or markets to be developed
or penetrated; now the money issues comes into the picture of decision making.

8.2.1 Capital Investments


How can the new product development and penetration of new markets be
funded? Should the firm decide to raise capital with short-term debt, long-term
debt, preferred shares, common shares (equity) or to borrow (debt)?

In times of high stock prices, stock may prove to be the best alternative.
However, when cost of capital (interest rates) is low, debt is more attractive.

8.2.2 Financial Budgets


Before making any investment decisions, senior executives would need to
consider how much is needed to fund the project of new product development;
new market penetration; or buying-off another business (backward and forward
integration strategy). They need to consider the length of investment before any
return-on-investments are achieved; how much the company owns, what it can
earn for the planned period and longer, and how much the company would be
worth in the market when the project goes well.

ACTIVITY 8.2

When a firm has decided to find and develop a new market for their
products and services, how might they fund the project? Discuss your
answer with your coursemates.

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102 TOPIC 8 STRATEGY IMPLEMENTATION

8.3 RESEARCH AND DEVELOPMENT ISSUES


When analysing which strategic orientation the firm wishes to take; be it
Competitive, Aggressive, Conservative or Defensive, it needs to consider
research and development issues (see Figure 8.2 also seen in Topic 7 [Figure 7.4]).

Figure 8.2: The SPACE matrix


Source: David & David (2015)

Assuming the firm has decided to develop a new water filter for rural areas
where electricity is scarce. The firm has to decide if they want to be the leader in
R&D for the product or strategise to imitate an existing popular filter that might
do the job but in a different setting not using electricity.

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The amount of money the firm decides to invest would determine the size of the
project and would impact the 4-Ps of marketing decisions too. Does the firm
intend to do R&D in-house to protect intellectual property and patenting rights,
or to outsource R&D?

ACTIVITY 8.3

What were some of the research and development (R&D) issues you
might need to consider should the firm decided to develop a new range
of body care products for mother and baby?

8.4 BUSINESS ANALYTICS


Businesses use information to guide their next steps. The internet is providing
streams of data for almost everything and from almost everywhere. Scientists
now use crowdsourcing to better understand the spread of diseases such as
malaria.

Business analytics provides crucial information for organisations to predict what


is likely to happen, the extent of an event and the reach of a phenomenon. There
is no guarantee for sure that things might happen as planned 100 per cent of the
time, but strategic planning is about designing for things to happen rather than
waiting for things to happen by luck.

As was mentioned earlier, business analytics help predict, for example, which
regions would have the largest university-going age group population in the next
five years, and what might this group of population need and how can the firm
cater to that need?

ACTIVITY 8.4

What kinds of information might you need to find a market for mother
and baby care products? Where can you find these information?

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104 TOPIC 8 STRATEGY IMPLEMENTATION

Strategy implementation requires a set of corporate decisions in terms of the


directions of the business as a whole the corporate strategy. To implement
the corporate strategy, business level strategy has to be developed.

Strategy implementation requires decisions that drive the operations and


functions of a firm.

To properly implement strategies, a firm needs to consider marketing issues


essentially the 4-Ps: product, pricing, place and promotion.

The firm has to decide on the specifics: the type of product to develop, the
price it sells, the place the product will be sold, the people whom the product
will be sold to; the channels on which the product will be introduced.

The next consideration would be funding. How should the new product and
market penetration be funded? There are some financial accounting issues
that require lengthy planning.

For new product development, for example, how should the research and
development be implemented? Does the firm conduct in-house research or
outsource the job? What could potential influence the decision?

Business analytics is regarded as a crucial element for strategy


implementation. Without relevant information, the firm would not be able to
predict what lies ahead in the next five to 10 years. The firm needs
information to plan for stages of development of a new product for example.

4-Ps of marketing Market segmentation


Big data analytics Product development
Crowdsourcing Promotion
Equity and debt Research and development
Market development Social network and media
Market place

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David, F. R., & David, F. R. (2015). Strategic management: A competitive


advantage approach, concepts and cases (15th ed.). Boston, MA: Pearson
Education.

Copyright Open University Malaysia (OUM)


Topic Strategy
9 Execution

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the strategic orientation and planning for a company;
2. Construct the annual objectives for a firms new business plan;
3. Differentiate the functions of marketing for different businesses of
a firm;
4. Assess the conflicting interests and resource allocation of a firm;
and
5. Analyse the human resource for strategy execution.

INTRODUCTION
In Topic 8, we explored the issues and challenges pertaining to strategy
implementation in the context in which the organisation operates within. This
topic discusses the operational issues stemming from putting strategies in action.

Once the senior or top management have decided on the three key decisions on:
the target market, product or service differentiation and the level capabilities and
capacities required to deliver the level of value propositions as promised; the
responsibilities of putting those strategies in action is now shifted to the division
or functional managers.

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TOPIC 9 STRATEGY EXECUTION 107

The middle management must now consider a series of issues related to


executing those strategies. These issues might include, the very least:

(a) Establishing annual objectives based on the strategic directions and plans;

(b) Devising policies to support those intended activities;

(c) Allocating resources necessary to put the business plans in action;

(d) Altering existing organisational structure (if the strategic orientation


requires);

(e) Restructuring and reengineering (if the strategic orientation requires);

(f) Revising reward and incentive plans according to the changes in work
performance expectations;

(g) Minimising resistance to change by engaging in all levels of staff at


different stages and communicating the necessary information as and when
required;

(h) Matching managers to strategy matching core competencies to the job


specifications;

(i) Developing a strategy-supportive culture where senior management


needs to understand the effects and impact of change which may have on
employees both physical and emotional demands by the change in work
practice.

(j) Adapting production or operations processes to be in-line with the strategic


direction. For example: if the organisation has decided to invest in product
innovation and development, the climate and practices within the
organisation must support that orientation. These processes must be those
that facilitate rather than stifle new ideas and creativity.

(k) Developing an effective human resources function again very similar to


the need for processes to be designed to support the new strategic direction,
human resource functions must also work towards recruiting and selecting
the candidates with the right attitude and competencies towards the type of
innovative work and culture.

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108 TOPIC 9 STRATEGY EXECUTION

(l) Linking performance and pay to strategies rewarding for performance is


crucial as evidence have shown rewards influence work performance
positively. Pay for performance is a useful tool to steer work behaviour and
performance.

(m) Reorganising or restructuring: depending on the new strategic orientation.

The following subtopics discuss each of the issues pertaining to strategy


execution.

9.1 STRATEGY EXECUTION DEFINED


Strategy execution can be defined as follows (Favaro, 2015):

Implementing a strategy consists of all the decisions and activities


required to turn the two sets of strategic choices Ive just described into
reality.

..What, then, is execution? I define the term as the decisions and activities
you undertake in order to turn your implemented strategy into commercial
success. To achieve execution excellence is to realize the best possible
results a strategy and its implementation will allow.

A more practical definition of strategy execution is as follows (Olsen, 2011):

Cascading action items and to-dos for each short-term goal in your
strategic plan is where the rubber meets the road literally. Moving from
big ideas to action (cascading) happens when strategy is translated from the
organizational level to the individual. This point is also when the planning
circle widens, and departments and individual contributors join in and
develop their short-term goals and actions to support the organizational
direction.

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TOPIC 9 STRATEGY EXECUTION 109

Once the senior management has decided on the strategic orientation of the
organisation, the middle management would now need to think of the game plan
or the business plans for specific departments to push those strategies forward.
This leads to cascading strategic objectives into operational objectives with time
frame: annual objectives.

The following subtopics will highlight some of the main aspects of strategy
execution and will be discussed and illustrated using this scenario:

SKANEYB INC.: Company Background

SkaneyB Inc. an apparel firm established since 1975, has a strong culture on
cost savings; and aims to maintain a regular customer based in the region they
operate. They offer a completed range of fashion from pyjamas to dinner suits
for the middle-aged, both men and women. The recent developments in the
market changed the competition in the industry. Customers were more
sophisticated in their demands; they want more value in the products and
services; recognising that they want more and were willing to pay more if they
believe in the product and services. Advancements in technology changed the
design of products and the delivery of services; and changed the way
organisations work and the way customers find what they want and need.
There are more players in the market physical and/or online businesses.
SkaneyB Inc. now realised that they will be out of business within the next
three years, if they were to operate the same way that they did with a
defensive strategic profile. The senior management has decided to take on a
more aggressive orientation with an aim to expand their market share to
survive this wave of socioeconomic change.

9.2 CASCADING STRATEGIC OBJECTIVES


In this subtopic, we will discuss the annual objectives, the ways of managing
conflicting interests and resource allocation, and ways of cascading longer term
plans to short-term operating plans.

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110 TOPIC 9 STRATEGY EXECUTION

9.2.1 Annual Objectives


One of the outputs of strategic planning is a set of strategic objectives, which are
generally longer term in nature and could stretch over ten or twenty years.
These strategic objectives need to be cascaded to each functional department and
division activities in order to turn your implemented strategy into a commercial
success.

The progress of these activities must be measured against targets associated with
each objective. To allow for more effective monitoring, the longer term strategic
objectives should be broken down into annual objectives with measures (key
performance indicators and targets). Let us now look into the following scenario.

SKANEYB INC.: Strategic Plans for BoardWalk

In taking a more aggressive strategic orientation, SkaneyB Inc. wants to


develop a new product line to capture a group of consumers the young
working adults. They recognised that their regular customers were becoming
senior citizens and many were not willing to spend any more than necessary
on clothing.

The senior management has decided to maintain what the relationship they
have built with the middle-aged and senior citizens to continue the range of
apparels and to develop a new label for the middle and upper income
working adults. The name of the new label is BoardWalk.

They have decided to put in the investment to first penetrate at least 10 per
cent of the local market by the third year of the launch and to develop new
markets in at least three countries in South East Asia; specifically South Korea,
Singapore and Hong Kong by the fifth year; and by the 10th, BroadWalk is
retailed in the Gulf countries.

They have decided to put in the investment to first penetrate at least 10 per
cent of the local market by the third year of the launch and to develop new
markets in at least three countries in South East Asia; specifically South Korea,
Singapore and Hong Kong by the fifth year; and by the 10th, BroadWalk is
retailed in the Gulf countries.

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TOPIC 9 STRATEGY EXECUTION 111

ACTIVITY 9.1

Based on the case information of SkaneyB Inc.:

(a) Discuss SkaneyBs strategic orientation and strategic plan. What


kind of analysis would the senior management have done for
them to arrive at the decision to launch BroadWalk? (Hint: refer
to Topic 7 and Topic 8).

(b) Draw the timeplan for BroadWalk.

(c) Develop the annual objectives for BroadWalk.

(d) Think of at least two relevant key performance indicators (KPIs)


with its associated targets to monitor annual achievements of
BroadWalk. Use SMART when designing KPIs.

(i) S = Specific: in what the organisation wants to achieve

(ii) M = Measurable: in terms of what has been done

(iii) A = Attainable: doable within the planned capacities

(iv) R = Relevant: the measures designed must be relevant to the


tasks or objectives not measuring the wrong things

(v) T = Time-bound: each objective must be framed by a specific


schedule in order for the achievements to be measurable.

Year
1 2 3 nth
Objectives Introduce new product range
Measure Launch label in retail
Target All branches in the country

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112 TOPIC 9 STRATEGY EXECUTION

9.2.2 Managing Conflicting Interests and Resource


Allocation
Establishing annual objectives also help management with the prioritisation of
resources allocation. It is common that every department wants more budget
allocation or more manpower. From a resource-based point of view, due to
scarcity of resources, organisations must optimise. Hence, with the annual
objectives and plan, management can justify and clearly communicate the
reasons for the decisions to channel resources for a project or projects for
a particular period. The following scenario described how an organisation
manages conflicting interests and resource allocation.

SKANEYB INC.: Managing Conflicting Interests and Resource Allocation

Based on the senior managements decision, a specific team will now be set up
to manage the BoardWalk project. The team will ensure they will get the
right people to work on product design, manufacturing, merchandising,
logistics, and marketing & promotion for the range of new clothes.

All these activities will take place in addition to the regular businesses
SkaneyB Inc. This special team is tasked to ensure that each of the functional
departments that were already very busy with business as usual, would put
time and resource to working on the new product range of BoardWalk.

9.2.3 Cascading Longer Term Plans to Short-term


Operating Plans
The organisation cannot be doing it all at once; there is a need to plan for
progressive development and execution of strategies over a period of time of
which it could be on an annual, bi-annual or a 3-year plan. These short terms
plans need to be further cascaded to each department and division to put those
plans in action. The following scenario describes how an organisation cascades
strategic plans to operational plans.

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TOPIC 9 STRATEGY EXECUTION 113

SKANEYB INC.: The BoardWalk Project

Cascading Strategic Plans to Operational Plans


The complete operational plan would cover all functions. The following are
some considerations the middle managers must discuss and get a consensus
from the senior management.

How long would it take to design the range of clothes for Fall?

How much would the company need to invest for this range?

Which designer(s) should be engaged?

Which superstar(s) should be the ambassador for BoardWalk?

For discussion purposes; the cascading of the strategic plan of launching a


new product focuses on the 4-Ps of marketing**. Each of the following clusters
of activities is time bound.

Product Development:

A whole range of clothes for Fall

Young middle and upper income group

To operationalise this, the product designer would consider the following:

The weather

Demographic group of targeted purchasers and consumers

Quality of fabric

Modern designs

Functionality of the clothes

Product Pricing

price range that would appeal to the target group; and

costs and profit margin

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114 TOPIC 9 STRATEGY EXECUTION

Product Promotion and Place

kinds of advertisements to reach out to the new market and new group of
What consumers?

Which channel of communication to use?

How much retail-floor space is allocated to BoardWalk?

Would BoardWalk get the main window display?

How much time is given to promote BoardWalk?

**Refer to Topic 8

9.3 RESTRUCTURING
In an attempt to turn an organisation around or to steer the organisation towards
a very different direction, based on the strategic alternatives generated from
SPACE Matrix, the senior management might make some drastic strategic
decisions to either expand or shrink the size of an organisation.

For example: A defensive strategic profile (SPACE Matrix) requires restructuring


reducing the size of an organisation; i.e. downsizing, rightsizing or delayering.

When a firm changes its strategy, the existing organisational structure may
become ineffective. For example, new strategies to reduce payroll costs may
require a change in span of control.

Changes in strategy often require changes in the way an organisation is


structured because:

(a) Structure largely dictates how objectives and policies will be established
(for example, objectives and policies established under a geographic
organisational structure are couched in geographic terms); and

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TOPIC 9 STRATEGY EXECUTION 115

(b) Structure dictates how resources will be allocated (for example, if an


organisations structure is based on customer groups, then resources will be
allocated in that manner).

SKANEYB INC.: The Launch of BoardWalk

Do we need to restructure or expand?

Under the existing organisational structure, SkaneyB Inc. has only one label
Skaney. The organisation structure was typically, functional-based.

With the new label, the senior management is considering in put in a new level
to differentiate the labels and clearly identifying the resources allocated for
each.

ACTIVITY 9.2

Based on the new organisational structure, how will marketing


functions now change? Create a table to compare and contrast the
functions of marketing for SkaneyB Inc.

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116 TOPIC 9 STRATEGY EXECUTION

9.4 CREATING A SUPPORTIVE CULTURE


Once the senior management has decided on the strategic direction of the
organisation, initiatives would be implemented to put those decisions into action,
which is strategy execution. In addition to operational decisions and actions, the
management also needs to set the appropriate strategic nuance as part of the
organisational climate. This is where a supportive culture towards the change in
direction is crucial for successful strategy execution.

The creation of a supportive culture for change is vital to ensure members of the
organisation should embrace the new direction by shifting mind sets, changing
work practices and expectations. Management needs to consciously make an
effort for successful strategy execution.

The management needs to address some change issues and put some of the
following in action, where relevant:
(a) Formal statements of organisational philosophy;
(b) Design of physical spaces;
(c) Deliberate role modelling, teaching and coaching;
(d) Explicit reward and status system on the desired and preferred work
practices and behaviour;
(e) Stories, legends, myths, and parables to reflect the values of the organisation;
(f) What leaders pay attention to reflect the values of the organisation;
(g) Leader reactions to critical incidents and crises;
(h) Organisational design and structure;
(i) Organisational systems and procedures; and
(j) Criteria for recruitment, selection, promotion, levelling off, retirement, and
excommunication of the right set of people with the right competencies
and right mindsets consistent with what the organisations believed in and
values.

ACTIVITY 9.3

Do you think the senior management ought to consider introducing a


new culture within SkaneyB Inc. for the launch of BroadWalk? Why?

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TOPIC 9 STRATEGY EXECUTION 117

9.5 HUMAN RESOURCE ISSUES


Human resource functions sometimes need reorientation to support the new set
of strategic plans or a new strategic direction of the organisation. Human
resource needs to consider the people they need to put the plans into action.

The following are some of the human resource concerns:

(a) Assessing Staffing Needs and Costs


If the organisation is strategising or automating its processes: Do we need
more IT people? What specific IT skills do we need to put those plans in
action? What talent pool do we already have with us?

(b) Employee Training


The human resource tends to ask Can we train our existing staff to fill
those skill gaps?

(c) Selection Methods


If we need to hire new talents; person specification and job description are
needed to fill the talent gaps.

(d) Motivating Employees


This includes developing performance incentives; work-life balance issues
and so on. Retraining and developing existing staff for new skills can be
motivating, as the opportunity provides employees new goals thereby
enriching their job.

(e) Selecting Appropriate Leadership Styles


There may be a need to reorientate middle management on how they view
being a good leader. Brainstorm on the approach to reach and engage staff
in their strive forward in achieving the new game plan for the organisation.

ACTIVITY 9.4

Using the same dimensions, discuss the human resource considerations


for the launch of BroadWalk.

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118 TOPIC 9 STRATEGY EXECUTION

Strategy execution means putting plans in action.

To put plans in action, broad strategic plans must be cascaded into


operational terms.

To operationalise strategic plans, annual objectives with measures and targets


must be established. This is to ensure that the plans were clearly
communicated and phased out. This, in turn facilitates resource allocation
and prioritisation.

To operationalise strategic plans, the human resource department must


consider the new talents that might be required for the new set for plans. Can
the talent gaps be addressed by re-training existing staff or bringing new
blood? Why would that be important?

If the organisation takes a whole new strategic orientation, for example,


product and market development; the senior management might need to
inculcate a whole new culture with new leadership approach to ensure the
organisation could support the new strategic direction and orientation.

Aggressive strategic profile Organisational culture


Annual objectives Restructure
Cascading plans Strategic orientation
Defensive strategic profile Strategic plan
Key performance indicators Strategy execution
Leadership styles Strategy implementation
Measures Targets
Operational plan

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TOPIC 9 STRATEGY EXECUTION 119

Favaro, K. (2015). Defining strategy, implementation, and execution. Retrieved


from https://hbr.org/2015/03/defining-strategy-implementation-and-
execution

Olsen, E. (2011). Strategic planning kit for dummies (2nd ed.). Hoboken, NJ: John
Wiley & Sons. Retrieved from http://media.wiley.com/product_data/
excerpt/76/11180777/1118077776-96.pdf

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Topic Strategy
10 Monitoring

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Discuss the nature of strategy evaluation;
2. Describe the criteria for strategy evaluation;
3. Explain the steps involved in the four stages of the strategy
evaluation process;
4. Describe the characteristics of an effective evaluation; and
5. Evaluate the strategy used by an organisation compared to its
competitors.

INTRODUCTION
In Topic 9, strategy execution was discussed extensively. Strategy execution is
essentially developing and implementing a set of actions that an organisation
takes to achieve strategic goals and objectives. Now, if the organisation has
already put plans in action, how would they know if strategic goals and
objectives were achieved? This topic discusses monitoring achievements of
strategy, which is How much have we done?

This topic begins with the understanding of the nature of strategy evaluation.
This understanding is extended with a discussion on the principles of strategy
evaluation based on Rumelts criteria. Next the challenges of strategy evaluation
are presented, followed by a discussion on the stages of strategy evaluation and
then on the use of the balanced scorecard as a framework for strategy evaluation.
The topic concludes with an emphasis on the need to audit the strategy
evaluation process in an attempt to provide a set of valid and reliable data for the
decision making process.

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TOPIC 10 STRATEGY MONITORING 121

10.1 STRATEGY EVALUATION


The final stage of strategic management is strategy evaluation and control.
Strategies require regular review as internal and external factors constantly
change. Strategy evaluation is as important as strategy formulation and
execution. Strategy evaluation and monitoring is a process where managers
assess whether the strategies implemented were working in terms of achieving
the intended organisational goals and objectives.

A valid strategy will yield results, for example, growth in sales and profit and
increased in international student enrolment in a college. While an inappropriate
strategy will not give any positive returns and might even cause damage to the
organisation.

According to Cross (2016), strategic evaluation is the assessment process that


provides executives and managers performance information about programmes,
projects and activities designed to meet business goals and objectives.

Glueck (1980) state that the evaluation of strategy is the phase in which the top
managers determine whether their strategic choice as implemented is meeting
the objective of the enterprise.

Strategy evaluation includes three basic activities:

(a) Examining the Underlying Bases of a Firms Strategy


Rumelts Criteria for more details about this, refer to David and David
(2015) and Glueck (1980).

(b) Comparing Expected Results with Actual Performance


Benchmarking of performance is a good guide to setting expected results. A
strategist would consider how to set benchmarks and how to express them.

The design of performance indicators and associated targets are highly


dependent on the goals what is it that the organisation wants to achieve,
how would they know if they have achieved them? What is the industrial
minimum? What is the best in the industry? Where do we position
ourselves in the game? Do we want to be leaders or just one of the players
in the industry?

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122 TOPIC 10 STRATEGY MONITORING

Once the benchmark performance indicator and targets are set,


performance are measured and reported. Variance from goals are then
analysed to assess how much more needs to be done, or what had gone
wrong, or what did not work too well and how things can be improved.

(c) Planning and Taking Corrective Actions to Ensure Performance Conforms


to Plans
Detailed variance analyses must be conducted to ensure cause and effects of
the level of performance is examined thoroughly. Once any deviation from
plans are realised, corrective plans of actions need to be developed and
implemented.

Questions may be asked if the organisation has the capabilities to achieve


those strategic goals. Was it the right strategy for the organisation in the
first place? Would reformulation of strategies be required?

SELF-CHECK 10.1

Describe the three basic activities involved in strategy evaluation.

10.2 RUMELTS PRINCIPLES OF STRATEGY


EVALUATION
According to Rumelt (1980), strategy evaluation is the product of the answers to
these questions:

(a) Are the objectives of the business appropriate?

(b) Are the major policies and plans appropriate?

(c) Do the results obtained to-date confirm or refute critical assumptions on


which the strategy rests?

Business strategy is a set of objectives, policies, and plans that, taken together,
define the scope of the enterprise and its approach to survival and success.

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TOPIC 10 STRATEGY MONITORING 123

Figure 10.1: Rumelts four criteria for strategy evaluation

The criteria for a set of business strategies are defined by the following:

(a) Consistency: The strategy must not present mutually inconsistent goals and
policies.

(b) Consonance: The strategy must represent an adaptive response to the


external environment and to the critical changes occurring within it.

(c) Advantage: The strategy must provide for the creation and/or maintenance
of a competitive advantage in the selected area of activity.

(d) Feasibility: The strategy must neither overtax available resources nor create
unsolvable sub problems.

Let us now explore the four criteria further:

(a) Consistency
A key function of strategy is to provide coherence to organisational action.
Hence, management must communicate the organisations strategy clearly
and explicitly to foster coordination. Many organisations use some kind of
framework such as the Balanced Scorecard, the EFQM or performance
measurement system, to support that communication and coordination of
effort.

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124 TOPIC 10 STRATEGY MONITORING

Interdepartmental bickering are often symptoms of a managerial disorder


which more than often are a result of strategic inconsistency. A strategy
must not present inconsistent goals and policies.

(b) Consonance
There is a need for strategists to examine set of trends and individual
trends: macro and micro economical. This is highlighted as follows:

The way in which a business relates to its environment has two aspects:
the business must both match and be adapted to its environment and it
must at the same time compete with other firms that are also trying to
adapt. This dual character of the relationship between the firm and its
environment has its analog in two different aspects of strategic choice
and two different methods of strategy evaluation.

The notion of consonance, or matching, therefore, invites a focus on


generic strategy (refer to Table 10.1). The role of the evaluator in this
case is to examine the basic pattern of economic relationships that
characterize the business and determine whether or not sufficient value
is being created to sustain the strategy. Most macro analysis of changing
economic conditions is oriented toward the formulation or evaluation of
generic strategies. For example, a planning department forecasts that
within 10 years home appliances will no longer use mechanical timers or
logic. Instead, microprocessors will do the job more reliably and less
expensively. The basic message here for the makers of mechanical timers
is that their generic strategies are becoming obsolete, especially if they
specialize in major home appliances. Note that the threat in this case is
not to a particular firm, competitive position, or individual approach to
the marketplace but to the basic generic mission.
Source: Rumelt (1980)

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TOPIC 10 STRATEGY MONITORING 125

Table 10.1: Generic versus Competitive Strategy

Generic Competitive
Measure of success Sales growth Market share
Return to firm Value added Return on investment
Function Provision of value to the Maintaining or obtaining
customer a defensible position
Basic strategic tasks Adapting to change and Creating barriers and
innovation deterring rivals
Method of expressing Product/market terms, Policies leading to
strategy functional terms defensible position
Basic approach to Study of group of Comparison across rivals
analysis businesses over time at a given time

Source: Rumelt (1980)

(c) Advantage
According to Rumelt (1980), competitive strategy is the art of creating or
exploiting those advantages that are most telling, enduring, and most
difficult to duplicate.

(d) Feasibility
The key is to ensure the business strategy does not over stretch resources or
create unsolvable problems for the organisation. This is highlighted as
follows:

Can the strategy be attempted within the physical, human, and


financial resources available? The financial resources of a business are
the easiest to quantify and are normally the first limitation against which
strategy is tested. It is sometimes forgotten, however, that innovative
approaches to financing expansion can both stretch the ultimate
limitations and provide a competitive advantage, even if it is only
temporary. Devices such as captive finance subsidiaries, sale-leaseback
arrangements, and tying plant mortgages to long-term contracts have all
been used effectively to help win key positions in suddenly expanding
industries.
Source: Rumelt (1980)

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126 TOPIC 10 STRATEGY MONITORING

SELF-CHECK 10.2

What are the Rumelts four criteria for strategy evaluation? Briefly
describe them.

10.3 CHALLENGES IN STRATEGY EVALUATION


Businesses today have to regularly review and evaluate their strategy to remain
relevant. A strategy evaluation should function in the following ways:

(a) Initiate managerial questioning of expectations and assumptions;

(b) Trigger a review of objectives and values; and

(c) Stimulate creativity in generating alternatives and formulating criteria for


evaluation.

Strategy evaluation is becoming more challenging as the socioeconomic


environment changes dramatically over time, especially with the pressure of a
globalised market with a more diverse and sophisticated group of consumers.

Businesses today can be described as follows:

(a) Businesses are operating within a more complex and changing environment
as they respond to domestic and global events.

(b) Volatility of the environment is making it more difficult to predict the


future accurately

(c) The globalised business world is changing the competitive equation where
the number of variables are ever changing and increasing.

(d) The changing competitive environment drives rate of obsolescence of plans.

(e) Businesses are operating in a more uncertain environment making planning


a challenge.

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TOPIC 10 STRATEGY MONITORING 127

10.4 THE STAGES IN STRATEGY EVALUATION


The strategy evaluation process goes through four stages of review (refer to
Table 10.2).

Table 10.2: Four Stages of Review in Strategy Evaluation Process

Stage Description
Stage 1: Review The following are to be done in this stage:
underlying bases of Develop revised IFE Matrix
strategy
Develop revised EFE Matrix
Stage 2: Review The following are to be reviewed:
effectiveness of Competitors reaction to strategy
strategy
Competitors change in strategy
Competitors changes in strengths and weaknesses
Reasons for competitors strategic change
Reasons for competitors successful strategies
Competitors satisfaction with present market positions and
profitability
Potential for competitor retaliation
Potential for cooperation with competitors
Stage 3: Monitor This is done by asking the following questions:
strengths, Are strengths still strengths?
weaknesses,
opportunities and Have we added additional strengths?
threats Are weaknesses still weaknesses?
Have we developed other weaknesses?
Are opportunities still opportunities?
Have other opportunities developed?
Are threats still threats?
Have other threats emerged?
Are we vulnerable to hostile takeover?
Stage 4: Measure This is done by doing the following:
organisational Compare expected to actual results
performance
Investigate deviations from plan
Evaluate individual performance
Examine progress toward stated objectives

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128 TOPIC 10 STRATEGY MONITORING

In measuring organisational performance, a business relies on financial ratios for


strategy evaluation. Some examples of the financial ratios include the following:

(a) Comparing performance over different periods;

(b) Comparing performance to competitors; and

(c) Comparing performance to industry averages.

In addition to financial ratios as indicators of business success, businesses also


rely on more insightful qualitative factors such as:

(a) Human resource in terms of talents and competencies;

(b) Marketing;

(c) Research and development (R&D); and

(d) The use of management information systems.

SELF-CHECK 10.3

State the four stages of review in strategy evaluation process. Discuss


the actions taken in each of these stages.

10.5 FRAMEWORK FOR STRATEGY


EVALUATION
The balanced scorecard is a framework businesses can use to structure a more
systematic review of their strategy. Organisations structure the focus of outputs
and outcomes of the business based on four perspectives:

(a) Financial performance;

(b) Customer knowledge;

(c) Internal business processes; and

(d) Learning and growth.

The performance of each strategic activity in each perspective is measured


against targets. These measures provide a gauge on whether the organisations
were achieving the level intended to reach.

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TOPIC 10 STRATEGY MONITORING 129

Characteristics of an effective evaluation system are as shown in Figure 10.2.

Figure 10.2: Characteristics of an effective evaluation system

SELF-CHECK 10.4

What are the characteristics of effective evaluation system?

10.6 AUDITING
Auditing is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria, and
communicating the results to interested users. The strategy evaluation process
needs to produce results that management can trust to based their decisions. The
strategy evaluation process and outcomes ought to be audited to ensure integrity
in providing a set of valid and reliable data.

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130 TOPIC 10 STRATEGY MONITORING

ACTIVITY 10.1

Do you know how to write a case study? Let us watch a


video about writing a case study from the following link:
https://youtu.be/Irrlotw_nw8

ACTIVITY 10.2

Case Study
Read the article titled Ryanair the low fares airline by OHiggins
(2007) and answer the following questions. You can access the
article from the link:

http://www.cit.ie/exampapers/PastExams/Accounting%20%26%20In
formation%20Systems/BBSIS4/2007%20Summer/Strategic%20%26%20
Business%20Management%20-%20Case%20Study-2.pdf

(a) Why has Ryanair been so successful thus far?

(b) Is Ryanairs strategy sustainable?

Hints: Porters Five Forces model to analyse industry structure


is a good starting point, as it easily incorporates the external
influences (PESTEL) and criteria for success that face airlines in
Europe, as well as specifically those in the budget sector. Next
stage in industry analysis is the evaluation of selected individual
competitors such as easyJet, Air Berlin, FlyBE and Aer Lingus. The
final step is to evaluate Ryanairs strengths and weaknesses. You
are now in a position to answer the question as to whether
Ryanairs strategy is sustainable. It can be addressed by
evaluating (i) how the strategy meets customer expectations
compared to competitors, and (ii) how efficiently Ryanair is
delivering the strategy in comparison with competitors.

(c) Would you recommend any changes to Ryanairs approach?

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TOPIC 10 STRATEGY MONITORING 131

Strategy evaluation and monitoring is a process where managers assess


whether the strategies implemented were working in terms achieving the
intended organisational goals and objectives.

Strategy ought to be evaluated based on four criteria: consistency,


consonance, feasibility and advantage.

Strategy evaluation comprises of four stages: review underlying bases of


strategy; review effectiveness of strategy; monitor strengths, weaknesses,
opportunities and threats; and measure organisational performance.

The balanced scorecard is a framework that businesses can use to guide a


more systematic approach to strategy evaluation.

Strategy evaluation process ought to be audited to ensure integrity in


providing a set of valid and reliable data that informs an organisations
decision making.

Advantage Consonance
Balanced scorecard Feasibility
Consistency Strategy evaluation

Cross, V. (2016). The importance of strategic evaluation. Retrieved from


http://smallbusiness.chron.com/importance-strategic-evaluation-13127.html

David, F. R., & David, F. R. (2015). Strategic management: A competitive


advantage approach, concepts and cases (15th ed.). Boston, MA: Pearson.

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132 TOPIC 10 STRATEGY MONITORING

Glueck, W. F. (1980). Business policy and strategic management (3rd ed.).


New York, NY: McGraw-Hill.

OHiggins, E. (2007). Ryanair the low fares airline. Retrieved from


http://www.cit.ie/exampapers/PastExams/Accounting%20%26%20Infor
mation%20Systems/BBSIS4/2007%20Summer/Strategic%20%26%20Busine
ss%20Management%20-%20Case%20Study-2.pdf.

Rumelt, R. (1980). The evaluation of business strategy. In W. F. Glueck, Business


policy and strategic management (3rd ed.). New York, NY: McGraw-Hill.

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