KENYATTA UNIVERSITY

DEPARTMENT OF BUSINESS ADMINISTRATION

BBA 400: BUSINESS POLICY AND DECISIONS

COURSE OUTLINE

COURSE INSTRUCTOR: OWINO J.

COURSE OBJECTIVE
This course is designed to enable students understand the role of strategy in business
planning and decision making. The course introduces learners to various tools used in
analyzing the environment, formulating and implementing strategies and business
policies in competitive markets.

METHODOLOGY
Lecture method involving full participation by all students, Presentations, Group
discussions and assigned readings.

OUTLINE
1. Basic concepts of business
• Goals
• Objectives
• Policies
• Rules
• Procedures
• Budgets
• Tactics
2. Strategies
• Meaning of strategy
• Levels of strategy
• Types of strategies
3. Corporate and Business Functions
4. Strategy formulation
• Environment scanning techniques
5. Strategy implementation
6. Strategy evaluation and control
7. Choice of strategy
8. Strategy & Social responsibility

REFERENCES

Michael E. Kraft and Sheldon Kamieniecki (2007). Business and

Environmental Policy, MIT Press, Cambridge

Mintzberg, H., Lampel, J., Quinn, J.B. and Ghosan, S. (2002). The Strategy Process,
4th edition, Pearson Education

O’Brien, Frances, A. and Robert, G.D. (1999). Strategic Development Methods and
Models. John Wiley & Sons

Pearce, A.J. and Robinson, B.R. (1997). Strategic Management: Formulation,

Implementation and Control, Irwin McGraw-Hill

Thomson, A.A., Strickland, A.J., and Gamble, E.J. (2007). Crafting & Executing
Strategy: Concepts and Cases, McGraw-Hill Irwin

Wheelen, L.T. and Hunger, D.J. (2008). Strategic Management and

Business Policy, 11th edition, Pearson Prentice Hall

EVALUATION
Assignment /presentations 10%
CAT 20%
Final Examination 70%
BASIC CONCEPTS OF BUSINESS

Business Policy
Policy can simply be understood as a course of action pursued by an organization to
achieve a certain goal.

Christensen defines business policy as the study of the functions and responsibilities
of senior management, crucial problems that affect the success of the organization and
the decisions that determine the direction taken by the organization which shape its
future.

Policies are written statements or sets of statements that describe principles,

requirements, and limitations and are characterised by indicating “what” needs to be
done rather than how to do it. Such statements have the force of establishing rights,
requirements and responsibilities.

A policy is a broad guideline for decision making that links the formulation of a
strategy with its implementation. Companies use policies to make sure that employees
throughout the firm make decisions and take actions that support the corporation’s
mission, objectives and strategies.

The implementation of new polices and revision of existing policies have an

important role to play in any organisation, as well constructed policies assist in
channelling actions, behaviour, decisions and practices in directions that promote
good strategy execution.

 Institutional and other policies communicate the guiding and governing

principles on which the activities of the particular organisation are based.
 Any policy is intended to support the vision and mission of the
business and should be applied with flexibility and judgment consistent with the
goals, obligations and strategic priorities of the firm

Generally, policies assist in:

i) Providing guidance with regard to the execution of actions and provide persons
working in the organisation with a framework as to the manner in which actions
are to be executed
ii) Promoting efficiency within the organisation in that ideas do not continually have
to be deliberated
iii) Ensuring consistency in the performance of activities especially in cases where
operating units are geographically or strategically scattered
iv) Ensuring compliance with legal and other requirements of the organisation and it
also serves as a tool for quality improvement within the organisation.

In business, policy deals with the following:

1. Choice of business purpose
2. The moulding of organizational identity and character
3. The continuous definition of what the business needs to do, i.e. dynamic changes
in the environment
4. The mobilization of resources for the attainment of goals in the face of
competition or adverse circumstances
Nature of business policy
Business policy covers many aspects and deals with the functions and responsibilities
of senior management related to those organizational problems which affect the
success of the entire enterprise.
Policy deals with the future course of action that the organization has to adopt. It
involves choice of purpose and defining of what needs to be done in order to mould
the character and identity of the organization.

Evolution of Business Policy

Business policy has evolved through four distinct phases:

Phase I: Mid 1930s

In this era, there existed ad hoc policy making; no formal planning existed. During
this time, business firms dealing in a single product line especially in America
expanded in many directions. This resulted in the need to integrate the functional
areas. This was achieved through development of functional policies to guide
management functions.

Phase II: Late 1930s – Late 1950s

This era was characterized by planned policy formulation. The emphasis was on
integration of functional areas in a rapidly changing environment.

Phase III: 1960s –1970s: Strategy Paradigm

In this paradigm, there was a demand for a critical look at the basic concept of
business and its relationship to the environment.

Phase IV: 1980s to date: Strategic Management Paradigm

This focuses on the intersection of two broad fields of inquiry i.e. the strategic process
of business firms and the responsibilities of management.

DEFINITIONS

Company Mission
According to Campell and Goold (1994) a Mission is a concise and memorable
statement of the purpose of why the firm is in business and what business the firm
enters into and how it is going to compete distinctively in the market.

A mission can also be defined as the unique purpose that sets an organization apart
from others of its type and identifies the scope of its operations. It defines the
company’s market, products and technology.

Purpose
This is anything that organization is established to achieve. The purpose of an
organization influences its objectives, policies and plans.

Goals
A goal is a general statement of aim. A goal can also understood as long term
objectives.
Procedures
A procedure refers to series of related steps or tasks expressed in a chronological
order.
Procedures are written documents providing specific “how to” information and will
normally be developed by the office responsible for the administration of a policy. In
cases where procedures establish rights, requirements and responsibilities, they will
normally be developed through a process similar to the institutional policy approval
process.

Guidelines
Guidelines are written documents that further explain policies/procedures and are
characterised by narrative descriptions and examples that serve as aids in interpreting
and applying them.
Unless otherwise stated, guidelines normally do not have the force of establishing
rights, requirements and responsibilities.

Rule
This is a prescribed course of action that explicitly states what is to be done under a
given set of circumstances. E.g. a company may have a rule that anyone who
performs below targets is reprimanded.

Strategy
In general, a strategy id defined as an action a company takes to achieve one or more
of its goals.

Alternatively, strategy has been characterized as being a plan, pattern, ploy,

perspective or position that brings together an enterprises’ major objectives, policies
and activities into a cohesive whole. It provides the direction necessary to allocate the
resources of the enterprise in a unique and viable way, which takes account of internal
strengths and weaknesses as well as external opportunities and threats.

Strategy is the approach selected to achieve defined goals in the future. According to
Chandler (1962) it is: ‘The determination of the long-term goals and objectives of an
enterprise, and the adoption of courses of action and the allocation of resources
necessary for carrying out those goals.’

Strategy has three fundamental characteristics. First, it is forward looking. It is about

deciding where you want to go and how you mean to get there. It is concerned with
both ends and means.

In this sense a strategy is a declaration of intent: ‘This is what we want to do and this
is how we intend to do it.’ Strategies define longer-term goals but they also cover how
those goals will be attained. They guide purposeful action to deliver the required
result.

Strategic business unit (SBU)

This is part of the organization which is focused specifically on serving a particular
product market area and has the dedicated resources and structure to serve it.

Strategic fit
This is the extent to which a new strategy is consistent with, and adds value to overall
objectives and intent and to other strategies

IMPORTANCE OF BUSINESS POLICY

1. From the viewpoint of the course itself, business policy seeks to integrate
knowledge and experience gained in various functional areas of management.

a. It enables the learner to understand the complex interaction that takes place
between the functional area of the organization.
b. It deals with the constraints and complexities of real life situation
c. It cuts across the narrow functional boundary and draws upon many disciplines
like economics, sociology, political science, finance etc.
d. It makes study of management more meaningful.
2. For understanding the business environment. Understanding of the environment
enables managers to relate changes in the environment to policy changes within the
organization.
3. Business policy provides a framework for understanding strategic decision making
in the organization.

STRATEGIC MANAGEMENT
The origin of the word strategy lies in the military science. As used in military, the
term refers to the art of planning operations in war especially the movement of army
and navy into favourable positions for fighting.

This meaning has been extended to the concept of strategy in business management.
Formally, strategy is defined as an overall plan of action for achieving the
organization’s objectives.

Igor Ansoff defines strategic management as a process for managing a firm’s

relationship with its environment.

According to Pierce and Robinson, strategic management is defined as the set of

decisions and actions that result in the formulation and implementation of plans
designed to achieve a company’s objectives.

Formality in strategic management

This refers to the degree to which participants’ responsibilities, authority and direction
in decision making and planning are specified. Research findings indicate that greater
formality is usually positively correlated with cost, comprehensiveness, accuracy and
success of planning.

Companies vary widely in their formality of strategic management systems. The

degree of formality usually depends on the following factors:
i) Size of the organization and method of evaluating strategic success. Some
firms especially smaller ones may be under the control of a single individual.
They may produce a limited number of products and services. Such firms can
operate successfully even with less formality in their strategic management.
ii) Stage of the firm’s development. In the initial stages, firms tend to be less
formal in their strategic management than in their mature stages of their
development.
 iii) The firm’s predominant management styles. Bureaucratic firms tend to be
highly formal in their strategic management
iv) The complexity of the firm’s environment. The more complex the
environment, the more formal the strategic management
v) The firm’s production processes. The more complex the processes, the more
formal the strategic management

Values of strategic management

i) It enhances the firm’s ability to reduce or counter problems
ii) It improves the quality of decisions made
iii) It improves employee motivation because of increased understanding of the
productivity-reward relationship
iv) Gaps and overlaps in activities among individuals and departments are
reduced
v) Resistance to change is reduced due to participants greater awareness of the
parameters that limit the available options.

Disadvantages of strategic management

i) Top management spend more time on strategic management and ignore
operational responsibilities
ii) If the formulators of strategy are not intimately involved in its implementation,
then they may avoid doing their individual responsibility for the decisions
reached
iii) Strategic managers must be trained to anticipate and respond to the
disappointment of subordinates over unattained objectives

STRATEGIC DECISION MAKING

Any manager is faced with the important function of decision making. Strategic
decision making relates to the responsibilities of senior management. Decision
making is the process of selecting a course of action from among many alternatives.

Conventional Decision Making

The process has the following steps:
1. Problem identification
2. Determination of objectives to be achieved
3. Determination of alternative ways of achieving objects
4. Evaluation of each alternative
5. Choosing best alternative
6. Implementing decision

Strategic Decision Making

The fundamental strategic decision relates to the choice of a Mission. It follows the
following steps:
1. What is our business now and what will be in the future?
2. Determination of environmental opportunities and threats
3. Determination of company strengths and weaknesses
4. Determination of strategic alternatives
5. Evaluation of alternatives
6. Choice of best alternative
7. Implementation of best alternative
What makes Decisions strategic?
Strategic decisions have three characteristics:
1. Rare
Strategic decisions are unusual and typically have no precedent to follow

2. Consequential
Strategic decisions commit substantial resources and demand a great deal of
commitment from people at all levels.

3. Directive
They set precedents for lesser decisions and future actions throughout the
organization.

Issues in strategic decision making

1. Criteria
The following viewpoints are used for setting criteria for decision making:

a) Maximization concept: This considers objectives as those attributes which

drive the firm towards maximization of returns. Remember, in economics,
maximization point is attained where MC = MR
b) The concept of satisfying: Objectives are set in such a manner that the firm
can achieve them realistically
c) The concept of incremental: The firm sets its objectives in small, logical and
incremental steps
2. Rationality
This means exercising a choice from among various alternative courses of action

3. Creativity
A decision must be original, different and show innovative skills. This can be
achieved through brainstorming

4. Variability
Every situation is unique and there are no set formulae that can be applied in strategic
decision making. Decisions vary depending on prevailing environmental factors

5. Person related factors

The age, education level, intelligence, personal values, risk taking ability and
creativity play a role in strategic decision making

6. Industrial Vs Group decision making

Individual differences among decision makers will have a bearing on the decision
made

APPROACHES TO STRATEGIC DECISION MAKING

1. Formal / structural approach

Follows a set of procedures to arrive at a decision

2. Intuitive/ anticipatory approach

This relies on the hunch/intuition of the CEO/ manager and also his experience. He
anticipates the future and takes actions accordingly

3. Entrepreneurial or opportunistic approach

Is characterized by constant search for opportunities and exploiting them for the
benefit of the organization

4. Incremental approach
Limits the focus of strategic decision to a few alternatives at a time that differ only
marginally from one another

5. Adoptive approach
This approach views strategic decisions on the basis of how a change is perceived at a
given point in time. Circumstances are defined in terms of the environment. Planners
must therefore, have contingency plans to take care of environmental changes.

Characteristics of strategic decisions

1. They require top management attention and support in all stages: this is because
only top management has the perspective needed to understand the broad implications
of such decisions and the power to authorize the allocation of necessary resources.

2. They require large amount of resources because they involve substantial allocation
of labour, physical and financial resources.

3. Strategic decisions affect the firm’s long term prosperity. Their impact is felt over a
long period of time. This is because strategic decisions commit the firm to certain
markets, products and technologies.

4. Future oriented: In a competitive environment, firms can only succeed by being

proactive

5. Multi-functional or multi-disciplinary consequences: these decisions have

implications for many areas of the firm
6. They require considering the firm’s external environment.

STRATEGIC MANAGEMENT PROCESS

Strategic management is a process rather than an event. This means that it is done in a
number of stages that are interrelated and lead to the achievement of the
organizational objectives.
The process is made up of the following stages:
1. Formulating, redefining and re-evaluating Company Mission
2. External environmental analysis
3. Internal environmental analysis
4. Formulating long term objectives and grand strategies
5. Evaluation and choice of business strategies
6. Developing action plans and short term objectives
7. Undertaking functional tactics that implement business strategies
8. Adopting policies that empower the operating personnel to effectively discharge
their duties
9. Restructuring, re-engineering and refocusing the organization to facilitate strategy
implementation
10. Establishing and implementing strategic controls and ensuring continuous
improvements to build customer value
11. Utilising feedback from the process

1. THE COMPANY MISSION

The company mission represents the company’s fundamental purpose that
differentiates it from other firms of its type and identifies the scope of its operations in
terms of products, markets and technology.

It encompasses the basic goals and philosophies of the company.

Need for Company Mission

Although a company can do without a Mission Statement, a Mission Statement has
the following advantages:
1. It ensures unanimity of purpose within the organization
2. It provides a basis for motivating the organization’s human resources because of
being aware of the company’s aim
3. It helps to develop a basic standard for allocating organizational resources
4. It provides a general tone or organizational climate e.g. it suggests the business
operations
5. It serves as a focal point, for those who can identify with the organization’s
purpose and direction and to deter those who can not do so from participating
further in its activities
6. It facilitates the translation of objectives and goals into a work structure involving
the assignment of tasks to responsible individuals in the organization.
7. It specifies organizational purpose and translates it in such a way that cost, time
and performance parameters can be assessed and controlled

Components of Company Mission

The mission of any company should reflect the company’s position regarding some or
all of the following points:
i) Basic product/service; the primary markets and principle technology used
(What, Where and How)
ii) The company goals especially those regarding survival, growth and
profitability.
iii) The company philosophy or company creed: this reflects or specifies the basic
beliefs, values, aspirations and philosophical priorities of the strategic decision
makers who could be the owners or managers.
iv) Public image: reflects the public’s expectations. An image is important
because it makes achievement of the firm’s goals more likely
v) The company’s self concept: this is important because the firm must know
itself if it has to relate to the environment in which it operates.

Recent Trends in Mission Components

The following issues have increasingly become integral parts in the development and
revision of company mission statement.

1. Customers
A focus on customer satisfaction forces managers to realize the importance of
providing quality customer service. Some key elements of customer driven
organizations are as follows:
 Customer service goals are clearly defined
 Customer satisfaction with existing products and services is continuous measured
through surveys
 Putting in place an effective customer complaints system e.g. suggestion boxes,
complaints department, simplified online complaints, management by walking
around
 Corrective action procedures are put in place to remove barriers to serving
customers in a timely and effective manner.

2. Quality
Quality is the norm for many companies. This has led to adoption of concepts such as
Total Quality Management, ISO certification etc.

3. Social responsibility
A mission statement should resolve the conflicting, competing and contradicting
claims of all its stakeholders. These stakeholders include the following:

 Customers
 Suppliers
 Investors
 Employees
 Competitors
 Government
 Trade unions
 Local communities
 Lobby groups
 Media
 General public

Although all claims by different stakeholders are important, they cannot be pursued
with equal emphasis. The key question therefore is “How can a firm satisfy all its
stakeholders while at the same time optimize its success in the market?”

2. ANALYSIS OF THE EXTERNAL ENVIRONMENT

The firm’s external environment is divided into two categories:
i) Remote/general environment
ii) Industry/task environment

Remote or macro-environment includes external factors that usually affect all or most
organizations. Factors in the remote environment are beyond the control of the firm.
These factors include:
i) Political
ii) Economic
iii) Social
iv) Technological and
v) Legal
 vi) Environmental
Remembered as (PESTDEL) forces.

Task environment on the other hand includes external forces and groups that directly
influence an organization’s growth, success and survival. These include:
i) Customers
ii) Competitors
iii) Suppliers
iv) Shareholders
v) Government regulators
vi) Pressure groups
vii) Employees and
viii) Labour unions.

Trends in the above factors should be thoroughly analyzed and their relative
importance summarized.

The outputs of external environmental analysis are the Opportunities and Threats
facing the organization.

EXTERNAL ENVIRONMENT

REMOTE ENVIRONMENT
 Political
 Economic
 Social
 Technological
 Demographic
 Legal
 Environment/ecological factors
Industry Environment
• Competitors
• Creditors
• Customers
• Suppliers
• Shareholders
• Government regulators
• Pressure groups
• Employees and
• Labour unions
a) REMOTE ENVIRONMENT

1. Economic factors
These concern the nature and direction of the economy in which a firm operates.
Economic factors affect the consumption patterns and behaviour of consumers and
firms must monitor economic trends in the environment. Some of the economic issues
which firms must monitor and analyze include the following:

• GNP trends
• Interest rates
• Money supply
• Inflation rates
• Availability of credit
• Unemployment levels
• Wage/price levels
• Devaluation/Revaluation
• Energy availability and cost
• Disposable and discretionary income

2. Sociocultural factors
Social factors are developed from cultural, religious, education and ethnic conditions.
A change in social environment influences changes in demand for certain products.
Social forces are dynamic with constant change resulting from the efforts of
individuals to satisfy their desires and needs by controlling and adapting to the
environment. Some social issues worth paying attention to by firms include the
following:

• Life style changes

• Career expectations
• Consumer activism
• Rate of family formation
• Growth rate of the population
• Regional shifts in population
• Age distribution of population
• Life expectancies
• Birth rates
• Level of education

3. Political/Legal factors
The direction and stability of this factor is a major consideration for managers
formulating strategy. Political factors define the legal and regulatory parameters
within which firms must operate. Legal environment define how firms are going to
operate through regulation, taxation etc. Political environment influence a firm’s
strategic choices in areas such as pricing, competition and waste disposal. Laws and
regulations tend to limit profits made by firms. Some political actions may be
designed to benefit and protect firms. These may include government subsidies,
patents and copyright laws, product research grants, export compensation, tax relief,
rural electrification programme etc. Political and legal issues which should be
analyzed by firms are:

• Political stability/risk
• Environment protection laws
• Tax laws
• Foreign trade regulations
• Attitudes toward foreign companies
• Laws on hiring and promotion of employees
• Stability of government
• Constitutional and legal reforms
• Legal structures
• Land ownership

Political activity may have a significant impact on three functions that influence the
firm’s strategies in the remote environment. These functions include:

a) The Supplier function

Government decisions regarding accessibility of private businesses to government
owned natural resources and agricultural products can profoundly affect the viability
of a firm’s strategies.

b) The Customer function

Government demand for products and services can create, sustain, enhance or
eliminate many market opportunities.

c) Competitor Function
Government can operate as an unbeatable competitor in monopolized industries.

4. Technological factors
Technological factors cause obsolescence of products and services. They also
influence product development and innovations. New technologies can improve
service delivery and improve firm’s efficiency through cost reductions. Some of the
technological issues which should be analyzed by firms include the following:

• Total Government spending for R & D

• Total industry spending for R & D
• Focus on technological efforts
• Patent protection
• New Products
• New Developments in technology transfer from laboratory to the market
place
• Productivity improvements through automation
• Internet availability
• Telecommunication infrastructure

5. Environmental/Ecological factors
This refers to the relationship between firms and its natural environment such as air,
soil, water, forests and wildlife. These factors influence activities of the firm in areas
such as pollution, deforestation and exhaustion of natural resources. Managers are
required by the government and the public to incorporate environmental concerns in
their decisions.

b) OPERATING ENVIRONMENT
This is also called the competitive or task environment. It comprises of factors that
affect a firm’s success in acquiring needed resources that can be used to optimize
profitability. Task environment constitute the following factors:

1. Competitors
This influences the strategic choices available to the firm in a given market structure
(Monopoly, oligopoly, perfect competition etc.). Competition influences a firm’s
pricing, promotion, distribution and product decisions. Firms must continuously
analyze their competitive environment by answering the following questions:
 Who are our competitors?
 Where are they located?
 Who are their customers?
 What is their size?
 What are their strategies and objectives?
 What are their strengths and weaknesses?

2. Customers
Firms must monitor changes in customer needs and wants. Customers are dynamic in
their behaviour and firms must profile and study them in order to gain an
understanding of future needs and strategic options. Customers influence a firm’s
resource allocation and strategy direction. The type of information used in
constructing customer profiles includes the following:
 Geographic
 Psychographic
 Demographic
 Consumer Behaviour Information

3. Suppliers and creditors

These are the sources of resources needed by the firm. A firm must maintain good
relationship with its suppliers and creditors in order to survive. Firms rely on suppliers
for credit trade, raw materials, equipment, machinery and information. Creditors on
the other hand provide financial support and advice.

4. Human Resources
A firm’s ability to attract and hold capable employees is essential to its success. The
access of a firm to human resources is influenced by:
• Its reputation as an employer
• Demand and supply conditions for labour
• Firm’s ability to pay expected salaries and wages
INDUSTRY ANALYSIS: ANALYZING THE TASK ENVIRONMENT
An industry is a group of firms that produce a similar product or service such as soft
drinks or university education.

Michael Porter’s Approach to Industry Analysis

Porter argued that a firm is most concerned with the intensity of competition within its
industry. The level of this intensity is determined by basic competitive forces as
depicted in the figure below.

The collective strength of these forces determines the ultimate profit potential in the
industry, where profit potential is measured in terms of long-run return on invested
capital.

In scanning its industry, a firm must assess the importance to its success of each of the
six forces:
i) Threat of new entrants
ii) Rivalry among existing firms
iii) Threat of substitute products
iv) Bargaining power of buyers
v) Bargaining power of suppliers
vi) Relative power of other stakeholders

Potential Bargaining power

entrants of buyers

Other Industry Threat of new

entrants
stakeholders competitors Buyers
Rivalry
among
Suppliers existing firms
Bargaining

suppliers
power of

Threat of substitute
Substitutes
products

Fig 1: Forces Driving Industry Competition

The stronger each of the above forces, the more limited companies are in their ability
to raise prices and earn greater profits.

In the short run, these forces act as constraints to the firm’s activities. In the long-run
however, it may be possible for a company through its choice of strategy to change
the strength of one or more of the forces to the company’s advantage.

1. Threat of new entrants

New entrants into an industry brings with it new capacity, a desire to gain market
share and substantial resources. They are therefore threats to established corporation.
The threat of entry depends on the presence of entry barriers and the reaction that can
be expected from existing competitors. Some of the possible barriers to entry are:

i) Economies of scale
ii) Product differentiation
iii) Capital requirements
iv) Switching costs
v) Access to distribution channels
vi) Access to critical sources of raw material
vii) Government policy

2. Rivalry among existing competitors

In most industries, firms are mutually dependent. A competitive move by one firm
can be expected to have a noticeable effect on its competitors and thus may cause
retaliation or counter-efforts.
According to Porter, intense rivalry is related to the presence of several factors
including:

i) Number of competitors
ii) Rate of industry growth
iii) Product or service characteristics
iv) Amount of fixed costs
v) Capacity of the firm
vi) Height of exit barriers
vii) Diversity of rivals

3. Threat of substitute products or services

A substitute product is one that appears to be different but can satisfy the same need
as another product. Substitutes limit the potential return of an industry by placing a
ceiling on the price firm in the industry can profitably charge.

When switching costs are low, substitutes can have strong effect on an industry.

4. Bargaining power of buyers

Buyers affect an industry through their ability to force down prices, bargain for higher
quality or more services and play competitors against each other. A buyer or group of
buyers is powerful if some of the following factors hold true:

i) A buyer purchases a large portion/volume of seller’s product/service

ii) A buyer has the potential to integrate backwards by producing the product itself
iii) Alternative suppliers are many because the product is standard or undifferentiated
iv) Switching costs are little
v) The purchased product represents a high percentage of a buyer’s costs, thus
providing an incentive to shop around for a lower price
vi) The purchased product is unimportant to the final quality or price of a buyer’s
products or services and thus can be easily substituted without affecting the final
product adversely.

5. Bargaining power of suppliers

Suppliers can affect an industry through their ability to raise prices or reduce the
quality of purchased goods and services. A supplier is powerful if some of the
following factors apply:

i) The supplier industry is dominated by a few companies, but it sells to many

customers
ii) Its product or service is unique and it has built up switching costs
iii) Substitutes are not readily available
iv) Suppliers are able to integrate forward and compete directly with their present
customers
v) A purchasing industry buys only a small portion of the supplier’s group of goods
and services and is thus unimportant to the supplier

STATREGIC GROUPS
A strategic group is a set of business units or firms that pursue similar strategies with
similar resources. Categorizing firms in any one industry into a set of strategic groups
is very useful as a way of better understanding the competitive environment.
INTERNAL ENVIRONMENTAL ANALYSIS

Success in strategy depends on the following three major factors:

1. The strategy must be consistent with the conditions in the environment

2. The strategy must be realistic, i.e. based on the company’s strengths especially on
factors which give the firm a competitive advantage
3. The execution/ implementation of strategy must be carefully done

Internal environmental analysis aims at diagnosing the firm’s internal capabilities

upon which strategy can be based. The purpose of internal analysis is to identify the
organizational assets, resources, skills and processes that represent either strengths or
weaknesses.

Strengths are aspects of the organization’s operations that represent competitive

advantages i.e. activities the organization does well or resources it controls. On the
other hand, weaknesses are activities that the organization does not do well or
resources that it lacks.

Analysis of internal environment yields Strengths and Weaknesses. Internal

environment is under the control of the firm.

The analysis is done in the functional areas of management systems, staff, marketing,
research and development, finance/accounting, operations, and information systems.

The manager should consider:

i) Trends of previous results
ii) Surpluses/profits identified by products and services
iii) Rationalization in procurement and use of resources such as facilities, equipment
and staff
iv) Prudence in the use of financial resources
v) Efficiency in the allocation of resources
vi) Assessment of suitability of the organization structure
vii) Efficiency of managerial systems and procedures

Internal environment can be analyzed using the following approaches/ models:

TECHNIQUES FOR ENVIRONMENT SCANNING

1. SWOT ANALYSIS
SWOT is the acronym for the internal Strengths and Weaknesses of a firm and the
external environmental Opportunities and Threats facing the firm.

It is based on the assumption that effective strategy derives from a sound fit between a
firm’s internal capabilities represented by the strength and weaknesses and its external
situation represented by opportunities and threats.

It involves comparing external key opportunities and threats with internal strengths
and weaknesses.
How the external environment compares to the firm’s internal capabilities determines
the focus of the firm’s strategies.
An opportunity is a major favourable situation in the external environment. A threat is
a major unfavourable situation in the external environment.

2. FUNCTIONAL ANALYSIS
This method of analysis is appropriate for firms that organize their operations along
functional lines. Close scrutiny of each of these functions may provide useful
guidelines for strategy focus. A firm tries to identify the functional areas and factors
in each of these areas which are most likely to influence the firm’s success.

The important factors i.e. strategic factors that should be analyzed vary by:
• Industry
• Market segment
• Product life cycle
• Firm’s current position

Strategic factors can also vary among firms within the same industry. An anatomy of
the past sales, costs and profitability trends should be developed in detail. Detailed
investigation of the firm’s performance history helps to isolate the internal factors that
influence sales, costs, and profitability.

The key strategic factors indentified deserve major attention in the formulation of
future strategy.

Some the functional areas include the following:

1. Marketing
Some of the competitive factors in marketing are brand loyalty, product/service
quality and customer relations. Channels of distribution and price could also
constitute competitive factors.

2. Finance and accounting

A firm may have the ability to raise short term and long term loans. Financial size
puts firms in better position. Relations with investors and firm’s effectiveness of
accounting system could also influence competitive factors.

3. Production/operations
Factors giving competitive edge include raw material costs, availability of raw
materials, supplier relations, inventory control system e.g. cost of warehousing, and
location of facilities. Other important factors include economies of scale.

4. Personnel
Skills, capabilities and experience of employees influence a firm’s competitive edge.
The morale and motivation of workers influences their productivity. Other factors
which influence competitive edge are labour relations costs, employee turnover,
absenteeism etc.

5. General management
The effectiveness of organization structure influences competitive edge.
Communication, command, organization culture, firm’s image, top management skills
and abilities also influence a firm’s competitiveness.