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Internal Environment
Evaluation
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation &Control
S-T strategies
W-T
Environmental Analysis
Analyse EXTERNAL Environment Conditions
SOCIETAL ENVIRONMENT TASK ENVIRONMENT
o
T
Identify Strategic Options for the Company Select the Best Strategy for the Company
S
Competencies, Capabilities, Resource strengths and weaknesses, Competitiveness
Environmental Variables
Suppliers
Substitutes
Rival Firms
Suppliers
Substitutes
Rival Firms
Suppliers
Strat. Group 2
Substitutes
Strat. Group 1
Strat. Group 3
Buyers
New Entrants
IMMEDIATE INDUSTRY AND COMPETITIVE ENVIRONMENT
Strategic
characteristics in common
(eg. Nokia, Motorola, Ericsson)
Groups
PEST Analysis
A scan of the external macro (societal) environment in which the firm operates reveals the business opportunities lying ahead and the threats the organization will have to face in future. Developments or trends in a corporation's societal environment typically do not affect the corporation directly but indirectly through their impact on one or more stakeholder groups in the corporation's task environment. This can be expressed in terms of the following factors: Political/Legal Economic Social Technological The acronym PEST (sometimes also labeled as SLEPT") is used to describe a framework for the analysis of these macro-environmental factors.
A PEST analysis fits into an overall environmental scan as shown in the following Political factors diagram:
include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include
Economic factors
economic growth
interest rates exchange rates inflation rate
affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macro-economy
tax policy employment laws environmental regulations trade restrictions and tariffs
political stability
PEST
Social factors
population growth rate age distribution career attitudes health consciousness
FACTORS
include the demographic and cultural aspects of the external macro-environment. These factors affect needs and the size of potential markets. Some social factors include:
Technological factors
Some technological factors include:
can lower barriers to entry, reduce minimum efficient production levels, and influence outsourcing decisions.
R&D activity
automation
technology incentives rate of technological change
environment of any company operating in the U.S or Canada. Socio-cultural forces linked to the changing role of women plus the trend toward single family households combined with the economic forces of high interest rates and inflation in the 1970s to send both men and women searching for full-time jobs in addition to their being parents. This development in the societal environment affected companies through its impact on employee/union groups (who asked for parental leave and/or company-sponsored day care centers), customers (employed parents who increasingly shop for convenience goods because of time constraints), and special interest groups and even governments (who asked business firms to help support local schools and deal with community social
4-16
Forecasting Techniques
- Trend Extrapolation Vs Scenario Writing
Extrapolation is simply the extension of present trends into the future. It relies on the assumption that the environment is reasonably consistent and changes slowly in the short run. As a result, extrapolation is fairly easy to do - as witnessed by its being the most widely used form of forecasting. Nevertheless, extrapolation is like driving a car without using a mirror or twisting one's head to look around and backward. Everything will be fine until a sudden new formation occurs! Like driving a car in this way, extrapolation is fine if the time frame to be predicted is short and one is lucky. Scenario-writing, in contrast, is based upon a series of historical data plus informed hunches from key people in the company who have access to environmental information or from a Delphi panel of outside experts. Like extrapolation, scenario-writing is a very popular forecasting technique, but unlike extrapolation, it can get very complicated and time consuming. It has at least one clear-cut advantage over extrapolation: It encourages forecasters to make their assumptions explicit. One is thus more likely to recognize the dangerousness of moving forward without information. Scenario writing, if done conscientiously, could thus be seen as an attempt to construct a mirror to use in hazardous driving!
What can a corporation do to ensure that information about strategic environmental factors gets to the attention of strategy makers?
This is a very real problem in most large corporations given the usual obstacles to good communication. The very people who are in the best positions to gather this data are often the ones who either fail to pass it on because it's too much of a chore or they fail to notice it because no one told them how important certain developments are to top management. Since proper information dissemination is an important part of environmental scanning, corporations attempt to schedule a series of analytical reports for top management's information. The purchasing department, for example, might be tasked with the job of compiling a quarterly analysis of the availability and reliability of present and future suppliers. The market research department might prepare analyses of present and future customers for certain products and services with special attention to demographic shifts. Each report would need to conclude with a list of strategic factors to monitor in the coming months or years. Other approaches are, of course, possible to get needed information to the attention of strategy makers.
The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure.
Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop a competitive edge over rival firms can use this model to better understand the industry context in which the firm
SUPPLIER POWER
Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry
THREAT OF SUBSTITUTES
-Switching
DEGREE OF RIVALRY
-Exit barriers
-Industry concentration -Fixed costs/Value added -Industry growth -Intermittent overcapacity
BUYER POWER
Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation
differentiation, capital requirements, switching costs, access to distribution channels, cost disadvantages independent of size, and government policy.
These six forces are not just constraints, but are, in effect, variables that can be partially controlled by industry participants
According to Miles and Snow, competing firms within a single industry can be classified as four basic strategic types.
Within each strategic group in which a company operates are key competitors. Many of these can be characterized as a strategic type: defender, prospector, analyzer, or reactor. Each of these types has its own combination of structure, culture, and processes to complement its dominant strategic orientation. If one can categorize a firm into one of these four types, then it will be easier to predict their likely reaction to future environmental changes. Defenders are companies with a limited product line that focus on improving the efficiency of existing operations. (Toyota, Microsoft) Prospectors are companies with fairly broad product lines that focus on product innovation and market opportunities (HP, SONY). Analyzers are companies that operate in at least two different product-markets, one stable and one variable, and are able to adjust their orientation based on the industry they are in (Panasonic). Reactors are companies that lack a consistent strategystructure-culture relationship and seem to switch strategies on a
Opportunities
O1 O2
O3
O4 O5
Threats
T1 T2 T3 T4
Comments
Opportunities
Economic integration of European Community (O1)
Demographics favor quality appliances(O2) Economic Development of Asia(O3) Emergence of Eastern Europe(O4) Trend to Super Stores (O5)
.20
.10 .05 .05 .10
4
5 1 2 2
.80
.50 .05 .10 .20
Acquisition of Hoover
Maytag quality Low Maytag presence New markets (Will take time) Maytag weak in this channel
Threats
Increasing Govt. regulations (T1) Strong US competition(T2) Whirlpool and Electrolux strong globally(T3) New product advances(T4) .10 .10 15 .05 4 4 3 1 .40 .40 .45 .05 Well positioned Well positioned Hoover weak globally Questionable
Internal Environment
Evaluation
Resources
-Assets that are the building blocks of an organization. These include: -Physical assets (plant, equipment, location, etc.) -Human assets (employees and their skills) -Organizational assets (structure, culture and reputation)
Capabilities
- A corporations ability to exploit the above resources: These comprise business processes and routines that manage the interaction among resources to turn inputs into outputs. E.g.. Marketing capability, R&D capability, production capability.
Competency
-It is the cross-functional integration and coordination of capabilities. Each division may have its own competencies. E.g.. One division may have competency in New product development while another division may have competency in recruiting human resources
Core competency
- Collection of competencies that crosses divisional boundaries, is widespread within the corporation, and something that the corporation can do exceedingly well. E.g. Fedex competency in its application of information technology to all its operations.
Distinctive competency
- When a core competency is superior to that of the competition it is called distinctive competency. E.g. General Electrics distinctive competency in management development
Prentice Hall, Inc. 2008
529
There are three tests useful for identifying a core competence. A core competence should:
1. provide access to a wide variety of markets, and 2. contribute significantly to the end-product benefits, and 3. be difficult for competitors to imitate Without core competencies, a large corporation is just a collection of discrete businesses. Core competencies serve as the glue that bonds the business units together into a coherent portfolio. Core competencies tend to be rooted in the ability to integrate and coordinate various groups in the organization. A firms distinctive competencies can also be identified using the VRIO framework in terms of a companys value, rareness, imitability, and organization .The two basic characteristics of a company's resources and capabilities that determine the sustainability of its distinctive competencies are durability and imitability
What is the relevance of the resource-based view of the firm to strategic management in a global environment?
The resource-based view of the firm is an attempt to bring attention to the importance of a corporation's resources in strategic management. For much of the 1980s, Porter's concepts of industry analysis and competitive strategy dominated the field of strategic management to such an extent that many felt that industry structure alone seemed to determine a firm's profit potential. Unfortunately, this emphasis on the industry tended to ignore a firm's core skills and competencies. What good is the knowledge that a niche in the market exists that can be reached through a focused differentiation competitive strategy if a corporation doesn't have the resources to implement such a strategy? Experts on the resource-based view suggest that differences in performance among companies may be explained best, not through differences in industry structure identified by industry analysis, but through differences in corporate assets and resources and their application. The resource-based view of the firm is compatible with the traditional concepts of S.W.O.T. and distinctive competence popular in the field since the 1960s. The only danger with the resource-based approach is that people may go overboard again and tend to put too much emphasis on internal factors and not enough on external factors. Nevertheless, the idea that the durability and imitability of corporate resources determine competitive advance is a very useful one. The movement toward a more global environment simply accentuates the need to assess and to build a firms competencies so that it can successfully compete worldwide. A competency may be distinctive in ones home country, but only be a core
The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin
Inbound logistics include the receiving, warehousing, and inventory control of input materials. Operations are the value-creating activities that transform the inputs into the final product. (Contd.)
Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc.
Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc.
Service activities are those that maintain and enhance the product's value including customer support, repair services, etc.
Support Activities
The primary value chain activities described above are facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific. Procurement - the function of purchasing the raw materials and other inputs used in the value-creating activities. Technology Development - includes research and development, process automation, and other technology development used to support the value-chain activities. Human Resource Management - the activities associated with recruiting, development, and compensation of employees. Firm Infrastructure - includes activities such as finance, legal, quality management, etc.
Organizational Structure
The specific ways in which the value-chain is organized and managed result in a specific organizational structure. The basic organizational structures are simple, functional, divisional, SBU, and conglomerate If a corporation's structure is compatible with present and potential strategies, it can be viewed as an internal corporate strength. If, however, the structure is not compatible with either present or potential strategies, it is a definite weakness and will act to constrain strategy formulation. For example, if a corporation is structured on the basis of function, this may be a weakness if the firm wishes to grow by acquiring other profitable corporations. In order to implement such a strategy, the strategy formulators may have to reorganize on a divisional basis. To the extent that top and middle managers have no experience with such a structure, a lot of unforeseen problems
Organizational Structures
542
Organizational Culture
Corporate culture is the collection of beliefs, expectations, and values learned and shared by a corporation's members and transmitted from one generation of employees to another Corporate culture, a collection of beliefs, expectations, and values shared by a corporation's members, acts to shape the behavior of people in a corporation. Since corporate culture has a powerful influence on the behavior of managers as well as other employees, it may strongly affect a corporation's ability to shift its strategic direction. Acting in a manner similar to structure, to the extent that a corporation's culture is compatible with present and potential strategies, it can be viewed as an internal corporate strength. To the extent that it is not compatible, it may spell disaster for a strategic change in the implementation stage. A strategy which contradicts an entrenched culture may find itself being quietly (or not so quietly) sabotaged by the corporation's most loyal and competent employees.
Strengths
Quality Maytag culture (S1)
Experienced top management(S2) Vertical integration(S3) Employee relations(S4) Hoovers international orientation(S5)
.15
.05 .10 .05 .15
5
4 4 3 3
.75
.20 .40 .15 .45
Weaknesses
Research & Development (W1)
Distribution channels(W2) Financial position(W3)
.05
.05 .15
2
2 2
.10
.10 .30
Global positioning(W4)
Manufacturing facilities(W5)
.20
.05
2
4
.40
.20
SFAS MATRIX
EFAS TABLE
Strengths
Quality Maytag culture (S1)
Experienced top management(S2) Vertical integration(S3)
.15
.05 .10
5
4 4
.75
.20 .40
Employee relations(S4)
Hoovers international orientation(S5)
.05
.15
3
3
.15
.45
Weaknesses
Research & Development (W1) Distribution channels(W2) Financial position(W3) Global positioning(W4) .05 .05 .15 .20 2 2 2 2 .10 .10 .30 .40 Slow on new products Superstores replacing small dealers High debt load Hoover weak outside UK and Australia
Opportunities
Economic integration of European Community (O1)
Demographics favor quality appliances(O2) Economic Development of Asia(O3) Emergence of Eastern Europe(O4) Trend to Super Stores (O5)
.20
.10 .05 .05 .10
4
5 1 2 2
.80
.50 .05 .10 .20
Acquisition of Hoover
Maytag quality Low Maytag presence New markets Maytag weak in this channel Well positioned Well positioned
Threats
Increasing Govt. regulations (T1) Strong US competition(T2) .10 .10 4 4 .40 .40
15
.45
Wei ght
.10
Rati ng
5
Weigh Short Interm Long ted Durati ediate Durati Score on Dration on
.50 X
Comments
.10
.10 .15
3
2 2
.30
.20 .30
X
X X
.10
.40
.10
.10
5
2
.50
.20 X
Maytag quality
Maytag weak in this channel
15
.45