Strategic Management

CHAPTER 1

FUNDAMENTALS OF STRATEGIC MANAGEMENT

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INTROD RODUCTIO TION TO STRATEG TEGIC MANAGEMENT

INTRODUCTION Strategic management was first introduced as a body of knowledge in the early 1980s. This course was originally introduced by Harvard University in USA in the 1920s and it was then known as business policy. policy. The focus of the course was then to integrate the functional areas of business management like accounting, human resource management, finance, production, accounting and marketing so that learners could understand the interrelationship and linkages of each of the functional areas with the operations and management of the entire organisation. However, changes in the business environment had forced organisations to make necessary incremental and structural changes to cope with the rapid dynamics of the business environment. Consequently,, the field of strategy management evolved as it stands today. Managers Consequently and Chief Executive Officers (CEO) of l arge corporations adopted some or part of the body of knowledge in strategic management and found potential benefits to their organisation. Therefore, it is the purpose of this chapter to provide learners an understanding of the field of strategic management, the historical perspective, changing business dynamics and the potential advantages and benefits of strategic management to organisation organisations. s.

OBJECTIVES At the end of this chapter, you would be able to: 1. unde understan rstand d the evolut evolution ion and develo developmen pmentt of strategi strategic c manageme management; nt; 2. understand the major factors contributing contributing towards changes changes in the current current business business scenario; and 3. unde understan rstand d the benefits benefits and and pitfalls pitfalls of strategic strategic manage management ment..

1.1 1. 1

EVOL EV OLUT UTIO ION N OF STRA STRATE TEGI GIC C MANAG MANAGEM EMEN ENT T

In 1920s, Harvard University introduced a course known as ‘Business Policy’ as a capstone course for the business administration programme. The course focused on integrating the functional areas of business administration like accounting, management, marketing, human resource, finance and production. Originally, this course aimed to provide learners the ability to apply the knowledge learned in previous courses to solve problems in business organisations. As such the business policy course provided formal training and experience in handling issues affecting the business environment and systematic and analytical thinking in r esolving problems affecting the performance of organisations.

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Following the advantages and benefits derived from the business policy course, the Gordon and Howell Report recommended that the business policy course be made as a core course in the business administration curricula to all the universities in the American Association of Colleges of School of Business Administration (AACSB). Since then, the business policy course has been the major thrust of the business administration programmes at the undergradua undergraduate te and postgradua postgraduate te level. Why is the business policy course made a core course in the business administration curricula?

1.1.1 Develop Development ment from from Business Business Policy to Strategic Strategic Managem Management ent The development in the business policy course can be traced from two perspectives. One is the changing emphasis in the contents of the course, and the second one is from the management planning perspective. (a) Changing Emphasis in Business Policy Contents Since the introduction of the business policy course, the contents of the course had changed to cope with the changes in the dynamics of the business environment. The emphasis in the course is attributed to the varying needs of the business and nonbusiness organisations in coping with the changing environmental environmental concerns. There are four major factors contributing to the changing emphasis in the business policy course: (i)

chang ch anging ing man manag ageri erial al role roles s in the org organi anisat sation ion;;

(ii)

rapid chan changes ges in busine business ss and and non-b non-busine usiness ss enviro environmen nment; t;

(iii)) emph (iii emphasis asis on on the case study study meth method od in learn learning; ing; and (iv) othe otherr concerns concerns affecting affecting organ organisati isationa onall performanc performance. e.

When the business policy course was introduced at Harvard University, the perspective adopted was that of the top management view of the organisation. In other words, in trying to understand various issues in the organisation, participants in the course were asked to take the role of the Chief Executive Officer/ General Manager of an organisation, and see how they would react to the varying issues affecting the organisation. While this perspective was required to have an overall and ‘helicopter’ view of things in an organisation, the perspective would also provide learners to relate various functional areas in an organization and how it could affect the overall organisation. Further, this perspective would provide learners the interrelationship of external factors and its effects and impact on the management and performance of the organisation. Getting the top management perspective of an organisation was found to be necessary but not sufficient condition towards superior performance in an organisation. The participative management concepts and empowerment in management was found to be also important in ensuring superior organisational success and performance. Subsequently, the roles of middle management and first level management (that is top

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Following the advantages and benefits derived from the business policy course, the Gordon and Howell Report recommended that the business policy course be made as a core course in the business administration curricula to all the universities in the American Association of Colleges of School of Business Administration (AACSB). Since then, the business policy course has been the major thrust of the business administration programmes at the undergradua undergraduate te and postgradua postgraduate te level. Why is the business policy course made a core course in the business administration curricula?

1.1.1 Develop Development ment from from Business Business Policy to Strategic Strategic Managem Management ent The development in the business policy course can be traced from two perspectives. One is the changing emphasis in the contents of the course, and the second one is from the management planning perspective. (a) Changing Emphasis in Business Policy Contents Since the introduction of the business policy course, the contents of the course had changed to cope with the changes in the dynamics of the business environment. The emphasis in the course is attributed to the varying needs of the business and nonbusiness organisations in coping with the changing environmental environmental concerns. There are four major factors contributing to the changing emphasis in the business policy course: (i)

chang ch anging ing man manag ageri erial al role roles s in the org organi anisat sation ion;;

(ii)

rapid chan changes ges in busine business ss and and non-b non-busine usiness ss enviro environmen nment; t;

(iii)) emph (iii emphasis asis on on the case study study meth method od in learn learning; ing; and (iv) othe otherr concerns concerns affecting affecting organ organisati isationa onall performanc performance. e.

When the business policy course was introduced at Harvard University, the perspective adopted was that of the top management view of the organisation. In other words, in trying to understand various issues in the organisation, participants in the course were asked to take the role of the Chief Executive Officer/ General Manager of an organisation, and see how they would react to the varying issues affecting the organisation. While this perspective was required to have an overall and ‘helicopter’ view of things in an organisation, the perspective would also provide learners to relate various functional areas in an organization and how it could affect the overall organisation. Further, this perspective would provide learners the interrelationship of external factors and its effects and impact on the management and performance of the organisation. Getting the top management perspective of an organisation was found to be necessary but not sufficient condition towards superior performance in an organisation. The participative management concepts and empowerment in management was found to be also important in ensuring superior organisational success and performance. Subsequently, the roles of middle management and first level management (that is top

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down and bottoms-up) in handling various managerial issues was becoming more important. Thus, vertical and lateral managerial perspective became increasing important in trying to resolve managerial concerns in an organisation. Thus, the managerial roles and expectations were changing to cope with the impending needs of the environment. Why do you think top management perspective is necessary but insufficient to ensure superior performance in an organisation?

The rapid changes in the business and non-business environment resulted in the change in emphases and contents of the business policy course. External factors, such as economic, social, political and technologic technological al factors, seemed to have evolved much in the last two decades. The industrial renaissance of the 1980s affected the management of business and non-business organisations in several ways. One major change was the information technology revolution which promoted the development of new ways of doing business which is discussed in part 1.2. The increasing concerns for social responsibility, ethics, and the environment, for example concerns over pollution,, poorly managed health system and social discrimination, also contributed to pollution the changing expectations of society towards organisational performance. Finally, Finally, the changing micro-management expectations of the stakeholders like corporate governance, transparency and social equity in organisational management also contributed to the change in business and non-business environment. In recent years, learning about organisations had changed much with the new developments in pedagogy and the interrelated tools. Case studies of organisations had been found to be effective in learning better about organisations and it was the major approach used in Harvard University, INSEAD and leading business schools throughout the world. The case study approach was found to be most effective in trying to reach the learners understanding of real business world problems and provide practical solutions. Consequently, this approach had been widely used in business policy courses world wide. The impending globalisation trends and liberalisation of trade barriers also had an effect on the curriculum of business policy, that is from an inward looking of one country to that of an international and global perspective. This had led to the concern for a more proactive or ‘strategic’ approach in handling complex business and non-business issues affecting organisations. Consequently, the name of the course had to be changed to ‘strategic management’ to reflect these changes in the environment. Trace the evolution of the strategic management course.

(b) Changing Management Planning Perspective In the field of organisational management, one of the major functions of management process is planning. The management literature lit erature has often focused on the importance of planning in managing organisations more effectively and efficiently. Traditional 4

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CHAPTER 1

INTRODUCTION TO STRATEGIC MANAGEMENT

management planning emphasises on the need to have a clear goal and objectives and preparing the necessary budgets for resource allocation. The rapid changes in the business environment has forced managers to make the necessary adjustments in management planning and thus raised the development of a ‘strategic’ approach in management planning. This will be further discussed in 1.1.2. In other words, the changing managerial planning perspective has also contributed to the development in the field of business policy to ‘strategic management’.

1.1.2 From Business Policy to Strategic Management The previous sections discussed the dynamics of the environment and how it has changed the field of business policy to ‘strategic management’. From the above development, it can be understood that there i s a difference between business policy and strategic management. What is the difference between business policy and strategic management?

In this section, learners will be provided with another view of the development of strategic management, but from the management planning perspective. This is important as this perspective has also contributed to the development of this field of study in recent years. According to Gluck et al. (1982), strategic management evolved through four phases of development as follows:

Figure 1.1: Gluck’s four phases of development in stategic management

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Phase 1 in the evolution of strategic management refers to the traditional formal business planning mode which focused on functional areas. Organisations were more concern about annual budgets and seek operational control through meeting the annual budgets. The business environment during this phase was stable and there were not many changes occurred in this phase. In phase 2, as the business environment began to make some changes due to increasing demand for good and services, there was a concern for organisations to do a forecast to plan ahead. Growth was the major concern in this phase and more effective planning was required to ensure that organisations take the opportunities in the environment. Annual forecast was not sufficient, and multiyear forecasts became necessary. In this phase too, environmental analysis became more evident and important to organisations. As the business dynamic grew faster, managers realised that it was not adequate to do planning by making business forecasts. Changes in the business environment became more rapid and the level of turbulence became more intense relative to the earlier periods (phase 1 and 2). Thus, in phase 3, businesses had to make immediate response to market changes and competition. This period became intense as business performance showed impressive results (profits) and many players (investors) became more interested to reap part of the potential profits. In this phase, organisations had to make thorough analysis of the environment and competition. The resource allocation process required managers to be more dynamic as managers had to make quick decision to take the opportunities available at that time. In other words, managers had to make fast changes in financial, human and other resources of the organisation to cope with the changing needs of the business organisation. Phase 3 also showed the emphasis for managerial planning with concerns for the external environment, and the need to react in anticipation of the impending changes in the business environment. Managers also had to behave or think more ‘strategically’ at this phase in order to remain competitive. This phase is also known as the ‘strategic planning era’ in the early 1970’s in the USA and Europe. In Malaysia, it became an important phenomenon in the late 1980’s and early 1990s. Many public listed organisations and state-owned corporations in Malaysia became interested in this concept in the mid 1990s. Phase 4 is known as the ‘strategic management’ era. In USA and Europe, this phase gained prominence in the late 1980’s. In this phase, the environmental change was more rapid and the level of turbulence was greater with more uncertainties of the future. Organisations realised that in order to remain competitive and sustain their competitive edge, there was a need to develop specialised strategic plans relevant for the particular organisation. There was also the need to use the best of all the available resources the organisations had to have a competitive advantage over others in the industry. Consequently, organisations needed to develop flexible organisational processes and systems that could cope with the uncertain business environment. Organisations also had to be more creative and develop supportive cultures and values that can ensure organisational success and superior performance. As such, the focus in management planning had changed from the ‘strategic’ perspective to that of ‘creating the future’. This is the major challenge for managers today as the mode of achieving superior organisational performance becomes more demanding and complex. As such, the role of creativity, innovation, research and development (R & D) became increasing important today’s business environment.

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The evolvement in strategic management has prompted the business policy course to evolve from phase 1 to phase 4 which is more complex and dynamic, and gradually to the present day strategic management course. To summarise, the business policy course was concerned with integrating all the functional areas of business and provides experience in solving real life problems which have multifunctional impact on the organisation. Strategic management, however, was concerned with all that was discussed in the business policy course but also incorporated the external factors that have a major impact on the organisation, and consequently determine the long term direction of the organisation by formulating plans, implementing the plans and making evaluation and control of the plans that were set for the organisation. Further, the strategic management area was also concern about strategic issues, which have long term impact on the organisation.

1.2

CHANGING BUSINESS ENVIRONMENT

Why does business environment change?

The industrial renaissance of the 1980s had affected the management of business and non-business organisations in several ways. As mentioned in 1.1.1 the information technology revolution, increasing concerns for social responsibility, ethics, and environment, the change in expectations of society towards organisational performance, and the changing micro-management expectations of the stakeholders like corporate governance, transparency and social equity in organisational management affected the management of business and non-business organisations.

In terms of IT literacy and use, how is your life different from that of your parents or grandparents?

One of the most revolutionary changes in the business environment is the rapid development of technology. This has led to the many changes in the business environment and has an impact on the social, economic, and political situation in the world environment. One technological factor that has created much impact was the rapid development of the information, communication and technology (ICT) sectors. The rapid research and development (R & D) activities in the computers industry has led to the wide demand and application of the computer software and information systems in organisations. In business, this has led to the development of e-business or e-commerce today. The widespread use of the Internet has led to the development of new businesses through this technological media. This is an alternative to the traditional ‘face-to-face’ business deals. E-businesses are conducted among businesses, known as business-to-business (or B2B), and among business to consumers, known as business-to-consumers (B2C). The Internet has also led to the increasing demand for direct business dealings instead of going through business intermediaries. Direct marketing and multilevel marketing seemed to have a

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buoyant growth with the Internet. The telecommunication industry also experienced much changes with the Internet as wireless communication (like mobile phones) became more prevalent today. The education industry also introduced many changes with the distance learning mode becoming more sophisticated today than in the early periods. Thus, the education industry faced impending changes with more usage and application of technological mode of learning today than in the past. Getting education through the Internet became more important today than it was a decade ago. The proliferation of information in the Internet has also led to the demands for new businesses in the present era like e-retailing, e-education, computer security and web development and applications. In Malaysia, we can see the many computer services businesses created in the last five years with the advent of the Internet and ICT. The services industry seemed to gain more importance today than before and the ways businesses are conducted today is changing fast for firms to remain competitive like e-services, e-banking and e-trade. The issue of environmentalism, ethics and social responsibility is an increasing concern for businesses today. This is due to the changing expectations of society towards business. Business decisions have an impact on society. Social issues arise out of the operations of the business entity, and therefore the society demands that business entities be held responsible for the consequences of their business operations. For example, (a) In Malaysia, the government is concerned about palm oil millers polluting the environment with the palm oil sludge and air pollution. (b) In recent months, landslides had led the local authorities in Malaysia to review development on hilly areas. Environmental Impact Assessment (EIA) reports are made compulsory to all developers before constructing new development project. (c) The Federation of Malaysian Consumers Association (FOMCA) has voiced its concerns on consumerism. This has increased the Malaysian government’s effort in the surveillance and monitoring of piracy, control of price for essential items, provisi on of more non-smoking zones, and others. Social issues affect business organisations and there is a need to manage within the parameters of the constraints and opportunities brought about by these issues more effectively and efficiently. Employing a certain number of Bumiputras in an organisation or allocation a certain proportion of capital equity is not only an affirmative action policy of the government but also a social responsibility in redressing social inequalities among ethnic groups in Malaysia. The social responsibility issue in Malaysia also focuses on employees’ safety like the NIOSH (National Institute of Occupational Safety and Health) by-laws. There are many organisations in Malaysia l ike Petronas, Malaysia Airlines, and Malayan Banking which contribute to social causes by making monetary and nonmonetary contributions to social and non-governmental institutions and socially related activities. Social concerns have led organisations to review their positions and values and make appropriate adjustments consistent with the external stakeholders’ expectations and needs. Another important development is the issue of ethics in business and non-business organisations. Ethics refers to the concerns for right and wrong conduct of an action or behaviour. What is considered wrong or inappropriate becomes fuzzy today as managers were pressured to meet organisational goals and pursuits. Businesses were 8

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soliciting for more ‘creative ways’ to do business while from a moral stand point, the issue is unethical. Thus, organisations are required to develop a code of ethics and also training and education on ethics in organizations and business. As such, the strategic management of these organisations posed an interesting challenge to their managers and stakeholders. In other words, how to manage organisations efficiently and effectively in a profitable manner and at the same time ensure that the ethical values are not compromised. With the impending globalisation trends and liberalisation of trade and service, meeting international standards and expectation is an important yardstick for many organisations today. This means the issues of transparency and corporate governance became more critical today than ever before. For example in Malaysia, the MICG (Malaysian Institute of Corporate Governance) was created to promote corporate governance in the country. Institutions like the KLSE and or Securities Commission are set up to regulate and develop the capital market in Malaysia. They are entrusted to protect investors and do this by requiring public corporations to be more transparent. They report publicly corporate governance activities and performance. This is also consistent with the issue of ethics in the top management of an organisation. Even today, the Malaysian government advocates the concern for higher level of corporate ethics in the business and non-business sectors. These issues are of concern at the local and international levels, as they have an impact on the perception of foreign investors towards a particular country or business practice. The greater the transparency and higher level of corporate governance standards, the lower the risks perceived by investors, and the more attractive it is to invest in such type of business. Consequently, ethics has an effect to managers in the strategic management of organisation as it has long term effect on the performance of the organisation.

1.3

BENEFITS OF STRATEGIC MANAGEMENT

The development of strategic management has attracted the attention of practicing top managers in large and small corporations. In USA and Europe, the adoption of strategic management in organisational practices is widespread. In Asia, particularly in Malaysia, strategic management is also practised in a number of large corporations in the country. These organisations have found that strategic management has been beneficial to their organisations. Table 1.1 illustrates the benefits of strategic management.

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Table 1.1: Benefits of Strategic Management

Although there are many potential benefits of strategic management, however, there are also pitfalls or problems in strategic management. Some of the pitfalls or problems in adopting strategic management are shown in Table 1.2. Table 1.2: Pitfalls of Strategic Management

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In your opinion, do the benefits of strategic management outweigh the pitfalls? Justify your answer.

Exercise 1.1 Tick the answer True (T) or False (F) for each statement below. No.

Question

1.

Devising policies is a necessary part of strategy implementation.

2.

Strategic management is a cross-functional discipline that lends itself to a one-two-three type approach.

3.

Strategic management allows an organisation to be more proactive than reactive in shaping its own future.

4.

Only top-level managers in small businesses need to actively involved in strategic management.

5.

One pitfall managers should avoid in strategic planning is top managers making many intuitive decisions that conflict with the formal plan.

6.

Good business ethics does not include whistle-blowing.

7.

T

F

All of these are pitfalls that an organisation should avoid in strategic planning EXCEPT: A. using plans as a standard for measuring performance. B. using strategic planning to gain control over decisions and resources. C. tailing to involve key employees in all phases of planning. D. too hastily moving from mission development to strategy formulation.

8.

Which of these is NOT a pitfall an organisation should avoid in strategic planning? A. B. C. D.

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Failing to communication the plan to employees. Involving all managers rather than delegating planning to a “planner”. Top managers not actively supporting the strategic planning process. Doing strategic planning only to satisfy accreditation or regulatory requirements.

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Which of following is NOT a reason for poor or no strategic planning in organisations? A. B. C. D.

Waste of time. Content with success. Poor reward structure. Inexpensive.

10. Which of the following business action always considered to be unethical? A. B. C. D.

Poor product or service safety. Dumping flawed products in a foreign market. Insider trading. All of the above.

SUMMARY This chapter has described the evolution and development of strategic management, from business policy to strategic management. The impending development of the information, communication and technology (ICT), environmentalism, social responsibility and ethics, and globalisation and liberalisation of trade and services has changed the business scene. The benefits and pitfalls of strategic management are also discussed.

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CHAPTER 2

STRATEGIC MANAGEMENT MODEL

CHAPTER 2


INTRODUCTION Since the development of strategic management, there have been many definitions of strategic management as there are many books written in this area. According to Gluck and Jaunch (1984), strategic management refers to a set of decisions and actions that leads to the formulation of an effective s trategy to achieve the objectives of the organisation. Pearce and Robinson (1985) define strategic management as a set of decisions and actions that leads to the formulation and implementation of strategy so as to achieve the objectives of the organisation. These definitions suggest the importance of decisions and actions to ensure organisational objectives are achieved. Hunger and Wheelen (1996) define strategic management as a set of managerial decisions and actions which determines the long run performance of an organisation. It also includes environmental scanning, strategy formulation, strategy implementation, and evaluation and control. David (2003) defines strategic management as the art and science of formulating, implementing and evaluating cross-functional decisions t hat enable an organisation to achieve its objectives. The later definitions by Hunger and Wheelen (1996) and David (2003) are consistent with the early definitions of strategic management, but added the elements of strategy formulation, strategy implementation, evaluation and control in the strategic management concept. From these definitions, it is clear that strategic management involves making decisions and taking actions that can help organisations achieve their objectives by adopting a systematic way of formulating the s trategy, implementing the s trategy, and evaluating and controlling the strategy implemented. Strategic management, therefore, integrates various functional areas like marketing, management, finance, accounting, human resources, production and information systems in a formal and systematic manner consistent with the objectives of the organisation and superior performance. This definition also suggests that strategic management comprises three key components, namely the strategy formulation, strategy implementation, and strategy evaluation and control as shown in figure 2.1.

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CHAPTER 2

Figure 2.1: Strategic management model

In part 2.1, learners will be exposed to the fundamental elements and components of strategic management. Part 2.2 discusses the strategic management model, and part 2.3 discusses the strategic management process.

OBJECTIVES By the end of this chapter, you should be able to: 1. understand better the key elements and components of strategic management; 2. understand the strategic management model; and 3. understand the interrelationships of the strategic management process.

2.1

COMPONENTS AND ELEMENTS OF STRATEGIC MANAGEMENT

There are three major components in strategic management, namely strategy formulation, strategy implementation, and strategy evaluation and c ontrol as shown in Figure 2 above. In each component, there are several elements that make up the component. In the strategy formulation component, the key elements are vision, mission, goals, and objectives of the organisation. The other elements are the external analysis, internal analysis, industry analysis and competitive analysis. Identifying strategic alternatives and selection of the strategic choices also form part of the strategy formulation component.

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In the strategy implementation component, there are at least three key elements that affect strategy implementation. These are organisational structure, people and leadership, and organisational systems and processes. It is in this component where action begins for the organisation and presents a major challenge to many organisations. In the strategy evaluation and control component, the key elements are the evaluation model and processes, evaluation criteria, and control methods and mechanisms for better organisational performance and meeting the organisational objectives. In order to better understand these elements and components (see Table 2.1 and Figure 2.2), it might be important to know some basic concepts in strategic management which will provide an understanding of the subject matter. Table 2.1: Components and Elements in Strategic Management

The term strategy refers to the means by which organisations try to achieve their long terms objectives (David, 2003). It also refers to the actions that managers have to take or do in order to ensure that what has been set in the objective can be achieved. For example, Yahoo’s strategy is to obtain 80% of its revenue from advertising to obtain more revenue from customers who pay for services. As such Yahoo’s strategy is to offer services like personalised webpages, audio subscriptions and music video for a fee (David, 2003). Strategists are, therefore, people in the organisation who are responsible for the success or failure of the organisation (David, 2003). They are also people who can make key decisions affecting the survival of the organisation. These are people with job titles like the Chief Executive Officer (CEO), Vice Chancellor, President, Executive Director, Managing Director, Dean, Chairman of the Board and business owner or entrepreneur.

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Figure 2.2 : Strategy management model

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Figure 2.2 (continued): Strategy management model

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Another familiar term in strategic management is policy. As such, policies include guidelines, rules and procedures that were established or created to support the efforts in achieving the organisational objectives. Policies provide broad guidelines for managers to operate their business activities without indicating the specific approaches or ways of doing things. In order to know how to do things, procedures and rules are developed so as to ensure consistency in the way things are done. For example, the policy of an organisation is to give a performance bonus of four months basic salary to employees with excellent performance.The organisation has found that ten of its 100 employees deserve this performance bonus, and to implement this policy, the human resource department is required to determine the criteria for excellent performance (which is the generally defined in the performance appraisal process), and then apply the rule to the affected employees. Procedures will explain how things should be done while rules will explain what would be done within the parameters set by the organisation. So the rule is that only excellent employees will get four months bonus. The procedure is outlined in the annual performance appraisal evaluation form as set out by the human resources department. What is the difference between a procedure and a rule?

2.2


As mentioned in the earlier section, the strategic management model comprises three parts, namely the strategy formulation, strategy implementation, and strategy evaluation and control. Figure 2.1 showed the generic model of strategic management, which is at the macro level concept. However, at the micro level of the organisation, the strategic management model comprises the several elements in the components of the strategic management model. Figure 2.2 shows the details of the strategic management model. Developing the strategic management model is important as it provides the basic framework in understanding how strategic management can be operationalised at the firm level. Furthermore, the strategic management model provides managers and strategists a greater comprehension of the iterative approach in conducting real strategic management in the organisational setting. Based on Figure 2.2, it can be discerned that the strategic management model begins with the development of the organisational vision and mission. The organisational vision and mission would then be translated into the organizational goals. Definitions of these terms are explained in chapter 4. These elements show the direction and t he areas of concern to be achieved by an organisation. Once these elements have been determined, the role of the manager or strategist is to perform an analysis of the organisation. This involves the three major types of analysis, namely the external analysis of the environment, the internal analysis of the organisation, and then the industry analysis. Each of these analyses will provide the immediate opportunities and threats, strengths and weaknesses and help the organisation to position itself vis-àvis the other competing organisations in the industry. The results of these analyses would, therefore, help managers and strategists to match the niche areas to be focused, distinctive competence of the organisation, and the competitive position the organisation should take in order to sustain its competitive edge in the industry. 18

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The results of the strategic analysis will then help managers or strategists to determine the potential alternatives available to the organisation. A selection of the appropriate strategic choices will t hen be made ready for implementation. In implementing the strategy, the organisation has to make sure that the elements in implementation are in place. This means that the organisational goals have to be defined at the operational level, and translated into objectives, which are more specific and precise than the goals set by the organisation. Policies in the organisation need to be developed and set in place. Then, specific programmes or plans of action should be set in place to ensure effective implementation of the organisational strategy. Strategy implementation would not be complete without ensuring that the fundamental elements in strategy implementation are set in place. This includes ensuring that the organisation has the appropriate structure, people and leadership required to manage the implementation of the selected plan of action. Finally, the implementation also requires managers or strategists to coordinate and integrate the various functional areas in the organisation so that the systems and process of managing the various multifunctional areas are synchronised with the organisational objectives that have been set earlier. The final part of the strategic management model comprises the strategy evaluation and control. In this component, managers or strategists have to ensure that the implemented strategy is evaluated accordingly and reviewed periodically, say every half yearly or quarterly. The evaluation criteria and expected performance are benchmarked with the standards of the industry or firm. Comparisons are made with other competitors or firms or in time dimension (against the previous year). Control mechanisms should be set in place so that organisations can assure that the desired objectives set could be met in the next phase of implementation. Once the strategic management model is clearly defined and set, the next phase involves understanding the processes of strategic management.

2.3

STRATEGIC MANAGEMENT PROCESS

Based on Figure 2.2, it can be discerned that the strategic management model is an interactive process. In other words, in trying to operationalise the strategic management model, managers or strategists have to make sure that they must begin the process by determining the vision of the organisation. The mission of the organisation must also be clarified. Then, the organisational goals are defined and set by the managers or strategists. Operationalising the strategic management model involves a series of steps that are continuous and ever changing with the dynamics of the environment. A change in one of the elements can affect the other elements in the strategic management model. Thus, the strategy formulation, implementation, evaluation and control must be done on a continual basis and not a one time approach. For example, in a situation where the organisation has already set its vision, mission, and goals to be achieved, the process of strategy formulation begins by analysing the strategic situation of the organisation. In other words, analysing the external environment, organisational strengths and weaknesses, and industry analysis (and or competitive analysis) should be the first stage in the strategic management process.

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Of course, organisations can also review their goals consistent with the ever changing business environment so that the organisation would not remain less competitive. For example, in an airline industry, the organisation may set its mission to be the leader in the airline services industry. However, the airline industry landscape is changing fast and not only provides airline services but also other related services like hotel, tourism, holiday packages and even car rentals. As the industry becomes more intense in terms of competition, redefining the organisational mission becomes inevitable and a necessity to ensure that the organisation continues to survive in the hostile environment. At the implementation phase, the strategic management process may begin by reviewing the organisational structure and people available in the organisation first before setting the policies and programmes or plans of action. The organisational systems and processes may also have to be revised accordingly. Consequently, the strategy implementation process may differ under different circumstances and situations. Finally, at the strategy evaluation and control phase, the process may require organisations to review the control mechanisms more than the strategy evaluation processes. Since strategic management model is a dynamic process and requires constant updating and reviews, the process of strategic management practice can be as fluid as the rapid changes in the business dynamics. At this stage, it should be realised that there are, however, several key aspects which do not change despite being fluid in the practice of strategic management. One is the key elements in the strategic management component, and the second is the three major components of strategic management. These two aspects do not change as long as the concept of strategic management is defined in a manner mentioned earlier in this chapter. How do changes in the business environment affect strategic management?

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Question

1.

The terms strategic management and strategy implementation are synonymous.

2.

Taking corrective actions is part of strategy evaluation.

3.

The action stage of the strategic management process is strategy evaluation.

4.

Strategy implementation consists of three basic activities: (1) establish objectives, (2) devise policies, and (3) measure performance.

5.

T

F

can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organisation to achiever its objectives. A. B. C. D.

6.

Strategy formulation Strategy evaluation Strategy implementation Strategic management

Which of these means mobilising employees and managers to put strategies into action? A. B. C. D.

7.

Formulating strategy Strategy evaluation Implementing strategy Strategic advantage

The strategic management process A. B. C. D.

8.

is a system of independent actions. follows a strick swquence of activities. requires long periods of time to be effective. is a system of interrelated functions.

The three stages of the strategic management process are A. B. C. D.

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conflict, resolution, and implementation. formulation, implementation, and evaluation. formulation, execution, and reward. formulation, implementation, and resolution.

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STRA ST RATE TEGI GIC C MA MANA NAGE GEME MENT NT MO MODE DEL L

CHAP CH APTE TER R2

Which Whi ch of the the follwi follwing ng can can best best be descr describe ibed d as shortshort-ter term m in natur nature? e? A. A. B. C. D.

Mission Missi on stat statem emen ents ts Tenure Annu An nual al obje objecti ctive ves s Str trat ateg egie ies s

10.. The strat 10 strategi egic c managem management ent proce process ss A. A. B. C. D.

is a seq sequen uentia tiall proce process. ss. is a con contin tinuou uous s proc process ess.. applies appli es mostly to companies companies with with sales greater greater that RM100mil RM100million. lion. occu oc curs rs onc once e a year year..

SUMMARY In this chapter, we have discussed the key elements and components of strategic management, strategic management model, and the processes in strategic management. Fundamentally, the strategic management model comprises three components: strategic planning or strategy formulation, strategy implementation, and strategy evaluation and control. In the strategy formulation stage, the organisational vision, mission and goals are set. Then the strategic analysis in terms of internal environment, external environment, and industry situation are assessed. Subsequently, several strategic alternatives are generated and selected. At this stage, organizations may want to review their programmes (action plans), objectives and policies prior to implementing the strategy. At the implementation stage, issues related to structure, people and systems and processes are examined and reviewed. Finally, an evaluation of the strategy implemented will be made and control measures are adopted to ensure that the original strategic targets of the organisation are met.

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FUNDAMENTALS OF OF ST STRATEGIC MA MANAGEMENT

CHAP CH APTE TER R3

ROLES ROL ES OF TO TOP P MAN MANAGE AGEMEN MENT T IN STR STRA ATEG TEGIC IC MA MANAG NAGEME EMENT NT

CHAPTER 3

ROLES OF OF TOP MA MANAGEMENT IN STRATEGIC MANAGEMENT

INTRODUCTION Why are some companies successful and others less successful? How is it that some companies have a clear set of direction and others do not have one? Why are some companies able to take the opportunities available in the environment while others observe and let it go by? What makes an organisation more successful than others? What differentiates between an organisation with good management and poor management? The answer to all these questions would depend on the managers handling the various activities and functions of management in the organisation. In any organisation, the pinnacle of the organisation is the Chief Executive Officer (CEO). In some organisations, they are known as the Managing Director, Executive Director, President, Vice-Chancellor, Vice-Chancellor, or General Manager in some cases. The CEO is the one responsible for the performance of the entire organisation, and therefore, plays a critical role in developing and building the entire organisation to where it will be in the future. However, the CEO could not do the job alone. He would depend on his subordinates and superior support. The immediate superior of the CEO is the Board of Directors, as the CEO is directly responsible to the Board. As such, in the strategic management of an organisation, it is important firstly to know the role of the CEO and the related personnel in an organisation to better understand how strategic management can be made effective and efficient. In large companies like the conglomerates or companies with multi-businesses, for example,, Sime Darby, Permodalan Nasional Berhad or DRB Hicom Berhad , strategic example management activities are handled by one person known as the corporate planner. planner. The corporate planner will work directly with the CEO and facilitate the processes involved in strategic management of the organisation. As such, as learners of strategic management it is important to understand the roles and responsibilities of the key personnel in an organisation as it can affect the success or failure of strategic management and ultimately the performance of the organisation. Organisations cannot achieve what is set for them without people who who has the knowledge on how to handle handle the various activities and functions of management in an organisation. In this chapter, learners will be exposed to the roles of corporate planner, Board of Directors, Chief Executive Officer (CEO) and the roles of middle management in the strategic management of an organisation.

OBJECTIVES By the end of this chapter, you should be able to: 1. unde understan rstand d the role role of corporate corporate planne planners rs in strategic strategic manageme management; nt; 2. unde understand rstand bette betterr the roles roles of of the board board of director directors; s; 3. unde understan rstand d the roles of Chief Chief Executive Executive Officer Officer (CEO) (CEO);; and 4. unde understan rstand d the roles of the middle middle managemen managementt in the strategic strategic managemen management. t.

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ROLES ROL ES OF TO TOP P MANA MANAGEM GEMENT ENT IN STR STRA ATEG TEGIC IC MAN MANAGE AGEMEN MENT T

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ROLE RO LES S OF TH THE E COR CORPO PORA RATE TE PLA PLANN NNER ERS S

What do you think is the functionof the corporate planner in an organisation?

Corporate planners generally generally exist in large organisations. In that type of organisation, there is a corporate planning unit, division or department that takes care of the entire planning activities activ ities in the organisation. A corporate planner is anyone who has extensive experience in organisational planning in an organisation or those who have varied experiences in many types of organisational management. Corporate planners can be specialists trained in planning techniques, and they could have had experiences as an economist, statistician, computer modelling experts or futurists. They provide direction and planning support for the whole organisation. As planners, they play an active role in assessing the organisation’s capabilities, analysing external environmental trends, and generating strategic alternatives. In small organisations, the role of corporate planner does not change, except that the person appointed to the task of corporate planning may not be assigned to one person but to a group of people in t he organisation, under the CEO’s purview. External experts may be invited to help in facilitating the planning sessions in small organisations. According to Harvey (1982), corporate planners have important roles and functions to perform, as shown in Figure 3.1. The f ollowing are descriptions of some of their major roles. (a)

Develop a framework for strategic planning and provide database The corporate planner or planning group generally develops the general framework to start strategic planning in the organisation. This would involve making preparations for the database required to do strategic planning in the organization. Corporate planners also have to prepare the processes and procedures required requi red to do the planning in the organisation, and recommend to the CEO the people likely to be involved in the planning discussion of the organisation.

(b)

Identify and evaluate new products/ services and market opportunities The corporate planner needs to help in identifying the development of new products and services available in the market. He also needs to identify potential new markets and opportunities available for the organisation. Information on market trends and product life cycle stages should s hould also be provided by the corporate planner.

(c)

Monitor, review and revise strategic plans When strategic plans are made, they need to be revised and reviewed consistent with the changes in the business environment. The corporate planner needs to monitor the changes in the business environment and provide feedback to top management on the new and impending changes in the business environment. Consequently, Consequently, the corporate planner may suggest a quarterly review or bi-annual review of the strategic plans of the organisation.

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ROLES OF TOP MANAGEMENT IN STRATEGIC MANAGEMENT

(d)

Forecast new trends and situations The corporate planner must provide forecasting information to the organisation. This information can be acquired from various sources in Malaysia, like t he yearly Economic Report, and Bank Negara Report. Economic and social information and trends must also be acquired and taken into account in making the forecasts of the socio-econom ic scenario in the country. The corporate planner may obtain this information from the lower management group, but the corporate planner must have a good grasp of the information obtained. The corporate planner should not be a facilitator but must assume a proactive role in obtaining information from sources in Malaysia and abroad.

(e)

Develop contingency plans and alternative scenarios Corporate planners should not focus on only one strategic plan of the organisation. They should also prepare a contingency plan for the organisat ion, and possibly identify alternative scenarios to cater to changes. This is unavoidable as the change in environment is rapid due to unforeseen circumstances. This will also reduce the risks in the strategic plan of the organisation.

(f)

Predict the uncertain future In large companies, they have a group of intuitive thinkers or futuri sts who try to predict long range socio-economic and political forces that may have an impact on the current business of the organisation. As such, the corporate planner is expected to contribute in facilitating this role in the strategic plan in the organisation.

Figure 3.1: Some major roles of a corporate planner

The roles and functions of corporate planners previously mentioned above are not exhaustive nor suggest that all corporate planners perform such roles and functions. Depending on the organisation, there may be variations in the roles and functions of corporate planners to suit the needs of the organisation at any particular point of time.

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List and describe other possible roles of a corporate planner.

3.2

ROLES OF THE BOARD OF DIRECTORS

In recent years, demands and expectations of the roles and functions of the board of directors of an organisation have changed in relation to corporate governance. Corporate governance refers to the overall control of an organisation’s actions (Post et al, 2002). The board of directors is one of the key stakeholders in the organisational governance, which exercises formal legal authority over the organisation’s policy. This means that the business laws of the country gave legal responsibility to the members of the board of directors for the affairs of the organisation (in this case the company). In Malaysia, under the Malaysian Companies Act, 1963, all private and public listed companies registered in the country must have a board of directors with at least two people before it can be accepted for registration. For private limited companies (known as ‘sendirian berhad’ ), there must be at least two members in the board of directors to represent the shareholders. In the public listed companies (known as ‘berhad’ ), the number of members in the board will depend on the amount of paid-up capital and composition of shareholders. This means some companies can have up to 10-15 members on the board of directors. The members of the board are also known as ‘nonexecutive directors’ which means that they are non-salaried employees of the company. They are appointed on the board for a period of at least one year. This appointment is renewable each year. Their presence in the board of directors of the company is to represent the shareholders interest for which they represent. As a member of the board of directors of a company, they are expected to perform many types of roles and functions. According to David (2003) and Hunger and Wheelen (1996), board of directors have the following duties and responsibilities: (a)

Control and oversight over management This means that the board is responsible for hiring and firing the CEO, assessing management performance, setting management salary levels and compensation, assuring corporate integrity and continuous audit, reviewing and revising management policy decisions.

(b)

Adherence to legal prescription The board must make sure that the company is aware of new laws affecting the business, appointment of directors, approval of capital budgets and authorisation of borrowings, new issues and other related matters.

(c)

Consideration of stakeholders’ interests The board is expected to monitor product quality, facilitate better quality of work life for employees, review employment policies, improve customer relations, foster better relations with community and society, assume roles in non-governmental organisations, and maintain good public image.

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(d)

Advancement of shareholders rights The board is also expected to preserve shareholders’ equity, stimulate growth for the company, assure equitable shareholder representation, declare dividends, and inform shareholders of company’s performance.

Figure 3.2: Duties and responsibilities of the Board of Directors

In relations to the strategic management activity, the roles of the board of directors are listed below. (a)

Monitor the development of both internal and external issues affecting the company, which management might have overlooked.

(b)

Evaluate proposals and influence the members of the board and top management on proposal, decision or actions that need to be taken. Active members of the board would ask the management of these matters to the CEO.

(c)

Initiate and determine the strategic mission and options of the company to the management. An active member may take this task at hand.

Since many of the strategic management activities involve top management , it is inevitable that members of the board of directors need to know what is going on in t he company and the implications of their approval and decisions made. In large companies, many issues are raised in a management committee, and presented to the board for consideration and approval. In its 2003 Annual Report, Gold Bridge Engineering and Construction Berhad (a civil engineering and construction company listed in the Kuala Lumpur Stock Exchange) outlined that the board takes full responsibility for the overall performance of the Company and the Group. This responsibility includes reviewing and adopting strategic business plans for the Group, identifying principal risks and ensuring the implementation of appropriate systems to manage these risks, managing and overseeing the operations of the Group’s business, and reviewing the adequacy and integrity of the Group’s system of internal controls and management system including systems for compliance with applicable laws, regulations, rules, directives and guidelines.

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In small companies, this is generally done in a more informal way. Nonetheless, what is important is that the board of directors has a role to play in the strategic management process and decisions, and therefore, understanding their roles and functions would help us enhance the strategic management activity in the organisation.

3.3

ROLES OF THE CHIEF EXECUTIVE OFFICER

The Chief Executive Officer (CEO) of an organisation performs the top management function and coordinate with the other members of the organisation. The CEO is appointed by the board of directors, and therefore, responsible directly to the board for the overall management and performance of the c ompany. According to Henry Mintzberg (1973), the job of top managers comprised of ten managerial roles that can be categorised into three groups i.e. interpersonal roles, informational roles and decisional roles, as shown in Figure 3.3.

Figure 3.3: Roles of top managers

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(a)

Interpersonal Roles The figurehead role implies that the manager has to perform duties related to ceremonial functions like attending social events to represent the organisation, signing contracts for the company and hosting dinners for the clients. As a leader, the manager motivates, develops and guides subordinates to perform their duties and responsibilities well. The leader also provides the role model and vision for the organisation. As a liaison agent of the organisation, the manager maintains a network and information sources with key people in the business environment including playing golf with other CEOs. These three roles will provide the CEO the interpersonal contact and networking that will allow him/ her to perform his/her duties well in the job.

(b)

Informational Roles The informational roles suggest that the CEO will monitor, obtain and disseminate information about the organisation. As a monitor, the CEO seeks and obtains information needed to better understand the business environment and these could be obtained through reviews and periodical reports. As a disseminator, the CEO transmits the information obtained to all the other managers in the organisation, for example in the staff meeting or strategic planning sessions. As a spokesperson, the CEO transmits information to people outside the organisation through press conferences, talks to the public, and participation in social and community affairs.

(c)

Decisional Roles As a CEO, he/ she has to make decisions. In the decisional roles, the CEO has a role as an entrepreneur. In this role, the CEO seeks for projects or businesses that can help to improve the performance of the organization, including initiating new product/ services development, improvements in processes, and also seeking new business ventures and opportunities for the organisation. In the disturbance handling role, the CEO makes decisions on troubles or crises inside the organisation, like handling employees’ grievances, unethical behaviours, and discussions with clients or customers. In the resource-allocator role, the CEO will have to make decisions on how to allocate resources and prioritize the allocation of resources like personnel and budgets. Finally, the negotiator role suggests that the CEO represents the organisation in negotiating important agreements, resolve disputes between organisational divisions, and negotiate with key customers, suppliers, creditors and review contracts. These roles are performed by many managers in the organisation including the CEO and middle level managers. However, there are variations in the roles performed by the managers and CEO depending on the size of the organisation, type of industry, and nature of the job involved. In other words, some managerial roles are more important than others in certain types of organisations and businesses. In the Malaysian setting, Zabid (1987) found that CEOs in state-owned enterprises performed 15 managerial work roles that were categorized into 3 groups namely the internal roles, external roles and internal and external roles as shown in Figure 3.4. The internal roles of the CEO include that of an entrepreneur, leader, administrator, custodian, liaison, and resource allocator. The external roles include assuming the role of a lobbyist, disturbance handler, spokesperson, and figurehead. Finally, the CEO’s internal and external roles include being a negotiator, technical expert, strategist and disseminator.

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Figure 3.4: Roles of CEOs in state-owned enterprises in Malaysia

The differences in the classification of managerial roles could be attributed to the differences in the managerial work of managers in state-owned enterprises as compared to private enterprise. Furthermore, the method of analysis was different as compared to Mintzberg’s which used an inductive approach while Zabid used the quantitative method of analysis. Nonetheless, it cannot be denied that top managers and CEO performed these work roles but with different emphasis, depending on the organizational context and situations. In a study of 23 companies in Europe, Goldsmith and Clutterbuck (1998) found that high performing companies have great leaders instead of managers. The companies have ‘value-based leadership’ which uses values rather than systems to influence other people’s behaviour. These companies also take the role of their managers as ‘chief coach’ seriously. Harvey and Wheelen (1996) also found that successful corporations in the USA had leaders with three basic characteristics:

30

(i)

The CEO articulates a transcend goal for the organisation, thus avoiding petty complaints and grievances of the average work day.

(ii)

The CEO presents a role for others to identify with and follow.

(iii)

The CEO communicates high performance standards but also shows confidence in the followers’ abilities to meet these st andards.

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In relation to strategic management, the job of the CEO is like a strategist. As a strategist, the CEO will be responsible for determining the vision, mission and goals of the organisation. The CEO must set the direction and what the organisation will become in the future. As a strategist, the CEO must also decide on allocation of personnel, financial and marketing resources effectively and efficiently so as to achieve the goals of the organisation. Coordinating and integrating the various functional activities consistent with the strategic plan is also another important job of the CEO. This is to ensure that the plans are being implemented according to the subscribed plan. The strategist would also have to monitor and control the performance of the organisation, and develop policies that can improve the management systems and processes in the organisation. The strategist has an important role in the strategic management process in terms of influencing an appropriate style of management in the organisation. In other words, the CEO as a strategist must ensure that the tone of management style is conducive to the environment and acceptable in the organisational setting. Finally, as a strategist, the job of the CEO is to ensure that the board of directors and himself/ herself are committed to the strategic management activity, instead of just giving lip service. This presents a major challenge to the CEO.

3.4

ROLES OF MIDDLE MANAGEMENT

In your own word, describe the strategic role of the CEO.

The middle level management refers to people between the CEO and the lower level employees. They are mainly divisional head or functional managers. Who do you think make up t he middle management of an organisation?

They are the ones who will ensure the success or failure of strategic planning and implementation. In large organisations, they are involved in preparing the business plans while the top managers, and a selected few, are involved in the corporate plans. The busi ness plans are important in implementing the corporate plans. For example, in a large company with multi-businesses, like Sime Darby Berhad , the business plan for the plantation division, trading division, and other major business activit ies must be determined. In Petronas, business plans for the gas business, education business, petroleum products, and petrochemical businesses must be made. The role of middle level managers, therefore, is to ensure that the business plans are developed in synchrony wit h the corporate and functional plans. Middle level managers also have to work well with the functional level managers to ensure that the business plans and functional plans are implemented effectively and efficiently. As such, middle level managers are critical in the strategy implementation activit ies in the strategic management process. Thus, middle level managers have a strategic role to play in the strategic management activity in an organisation. According to Goldsmith and Clutterbuck (1998), high performing companies generally have the best people possible for each job, and they nurture creativity and proactive behaviour. They also provide training and development to

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achieve great things. These organisations use communication as an engine of commitment, and recognise and reward achievements. Why is it important to recognise and reward achievements?

Exercise 3.1 1.

Today, board of directors are composed mostly of A. B. C. D.

2.

monitor, review and revised strategic plans. identify and evaluate new products and market opportunities. predict the uncertain future. adherence to legal prescription.

The roles suggest that the CEO will monitor, obtain and disseminate information about the organisation. A. B. C. D.

32

Interpersonal roles. Informational roles Decisional roles. Internal roles

A good corporate planners should perform all the following roles and functions EXCEPT: A. B. C. D.

5.

Control and oversight over management. Adhering to legal prescriptions. Consideration of stakeholder’s interests; Expansion of management stock options.

A Chief Executive Officer should perform all the following broad categories of roles EXCEPT: A. B. C. D.

4.

Outsiders. Management Union Employees

The roles and duties of a board of directors include all of these broad categories EXCEPT: A. B. C. D.

3.

.

Figurehead Informational Decisional Internal

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6.

CEO is appointed by A. B. C. D.

7.

Which of the following role that can be categorised as internal roles, according to Zabid (1987)? A. B. C. D.

8.

Liaison. Lobbyist. Figurehead. Spokesperson.

Which of the following managerial roles that can NOT be categorised as interpersonal roles? A. B. C. D.

9.

board of director. top management. corporate planner. CEO himself.

Figurehead. Leader. Liaison Disseminator.

Who is the pinnacle of a typical public listed company? A. B. C. D.

CEO. Line manager. Senior project manager. Board of director.

10. According to Malaysian Companies Act, 1963, what is the minimum number of board of director for a public l isted company in Malaysia? A. B. C. D.

2 3 4 5

SUMMARY This chapter discussed the roles of top management in strategic management. The roles of the board of directors and chief executive officers (CEOs) although different, complement each other in strategic management. The corporate planners assist the CEO in developing the organisational strategy, and monitor the implementation of the organisational strategy. The middle management plays an important role in ensuring the implementation of the selected organisational strategy, and coordinates with all the necessary units or divisions in the organisation, so as to minimise variations in the outcome or performance results. Thus, throughout the organisation, all levels of management play an important role to ensure the success of strategic management in the organisation.

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CHAPTER 4


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STRATEGY FORMULATION

CHAPTER 4


INTRODUCTION It is known that strategy formulation has also been equated with strategic planning. Strategic planning has also been known as strategic management. However, in general many people accept the fact that strategic planning is part of strategic management, and therefore, refers to the strategy formulation part of the strategic management activity and processes. In the strategy formulation component, the key elements are vision, mission, goals, and objectives of the organisation. This presents the beginning phase of the process in developing a corporate strategy of an organisation. In this chapter, learners will be exposed to the concepts and definitions of the organisational vision, mission, goals and objectives. These concepts will provide the basic foundation for organisations to develop and select the appropriate strategy which fits the current environment.

OBJECTIVES By the end of this chapter, you should be able to: 1. understand the concept of strategy formulation; 2. understand the key elements in strategy formulation; 3. understand the organisational vision and mission; and 4. understand the organisational goals and objectives.

4.1 SETTING ORGANISATIONAL VISION AND MISSION In order for an organisation to thrive in the future, managers and executives in an organisation must know the basic vision of the organisation - what it strives to become (David, 2003). The vision will define where the organisation wishes to go, which is vital for identifying successful strategies for the organisation. Vision is also a big picture that will show who we are, what we do, and where we are heading . As such, developing a vision of an organisation would rely on the creativity and intuition of the leaders in the organisation. The vision is also an act of translating imagination into terms that describes possible future courses of action for t he organisation. Trying to develop a vision for an organisation can be a daunting task as not many would have the possible imagination and creativity to know where the organisation should be going. It also requires some commitment, motivation and aspiration of the leaders and managers in the organisation. Figure 4.1 shows the visions of some organisations.

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Figure 4.1: Examples of vision statements

What is the vision of your organisation? What is your opinion of the vision?

The vision of an organisation provides a dream that the employees and management need to seek and work for. This will provide a sense of pride, sense of belonging, and also clear direction to steer the organisation in the future. The vision is a statement that would help the organisation to focus on what it does best and how to do the right things. As such, organisations can have a vision statement that is short and others slightly more elaborate. For example, John Deere Inc . has a vision statement as follows: “John Deere is c ommitted to providing Genuine Value to the company’s stakeholders’ including our customers, dealers, shareholders, employees, and communities. In support of that commitment, Deere aspires to:

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• Grow and pursue leadership positions in each of our business • Extend our preeminent leadership position in the agricultural equipment market worldwide • Create new opportunities to leverage the John Deere brand globally” (David, 2003) There are no clear ways to write or develop the vision of an organisation. Nonetheless, it is important to take note that the vision statement must be simple, clear and easily understood by people. The vision statement is not s tatic but can change over time. As such the vision statement must be realistic, credible and able to withstand extreme situations, and can create a sense of urgency. Finally, the vision statement must be spelled out by top management to gain sound consensus that is desirable and achievable. It should also motivate the employees to work together towards the set direction. Why should a vision statement be realistic?

While the vision of an organisation shows what the organisation plans to become, the mission of an organisation defines the business of the organisation. The mission statement of an organisation translates the vision of the organisation closer to reality. It also defines the basic reason for the purpose of setting up the business and legitimises its existence in society. As such, the mission statement is more elaborate than the vision. The mission statement of an organisation should also describe the firm’s products, market and technology in a way that reflects the values and priorities of the strategic decision makers.

Figure 4.2 : Some examples of mission statements.

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For example, the mission of OUM is ‘to be the leading contributor in democratising education; to develop quality education through multi-mode learning technologies; to develop and enhance learning experiences towards the development of knowledge based society .’ The mission of MIA is as follows: • To promote and monitor professional standards and integrity • To provide education and training to meet the challenges of the ever changing global economy • To conduct and promote research and development for the enhancement of the profession. Other organisations may have mission statements that are short and precise like the Tenaga Nasional Berhad,’We are committed to excellence in our products and services’ (Tenaga Nasional Berhad Annual Report, 2003) According to Abell (1980), one way of conceptualising the business definition is in terms of the customer groups, customer functions and technology. The customer groups refer to categories of customers based on geography, socioeconomic class, lifestyle, personality characteristics, user industry and size of industry. Customer functions refer to the products and or services performed for the customers. Customer functions can be separated by the way the function is performed (technology), and the attributes or benefits that a customer may perceive as important criteria for choice. For example, transportation is a function. Taxi transportation is a way of performing the function. The taxi fare, comfort, speed, and safety are attributes associated with the choices. Technology refers to how the product or services will be provided or how customer’s needs are satisfied. Thus, from this one can define ‘what our business is’ in terms of ‘what is being satisfied’, ‘who is being satisfied’, and ‘how customers’ needs are satisfied’. Figure 4.3 shows how to define what our business is.

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CHA CH APT PTER ER 4

Figure 4.3 : How to define a business

Nonetheless, in trying to develop corporate mission statements, there are no specific rules or criteria set. King and Cleland (1979) suggested that when a company mission is developed, it should: • ensur ensure e unanimit unanimity y of purpose purpose within within organi organisatio sation; n; • provi provide de a basis for motivat motivating ing the use of of organisatio organisation’s n’s resources; resources; • devel develop op a basis or standar standard d for allocating allocating organisa organisationa tionall resources; resources; • establ establish ish a gener general al tone tone or organi organisation sational al climate; climate; • serve as a focal focal point for for those who can can identify identify with the organis organisation ation’s ’s purpose purpose and direction, and to deter those who cannot from participating further in the organisation’ s activities; • facilitate facilitate the translatio translation n of objectives objectives and goals goals into a work structure structure involving involving the assignment of tasks to responsible elements within the organisation; and • specify specify organisation organisational al purposes purposes and the translati translation on of these purposes purposes into into goals in such a way that cost, time and performance parameters can be assessed and controlled. Corporate mission statements should also incorporate the company’s view in terms of social responsibility and ethics in business. This statement would also include the company’s attitude towards social, community and environmental concerns. Concern for employees may also be included in company mission statements. As such, company mission statements can be more elaborate than the vision and more precise and specific than the corporate vision statement.

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STRA ST RAT TEG EGY Y FO FORM RMU ULA LATI TION ON

Exercise 4.1 1. Tick the answer True answer True (T) or or False False (F) for each statement below. N o.

Question

1.

A clear clear vision vision provi provides des the the foundat foundation ion for for develop developmen mentt of a comprehensive mission statement.

2.

If an org organi anisat sation ion cho choose oses s to have have bot both h a missi mission on and and a vision, the mission statement should be established first, as mission identifies where we are and vision would indicate where we want to go.

3.

Strategic Strate gic obje objective ctives s are mor more e specific specific than visio vision n statements.

4.

Strategic Strateg ic obje objectives ctives shou should ld be meas measurab urable, le, specif specific, ic, appropriate, and realistic, but not constrained by time deadlines.

4.2

T

F

ORGA OR GANI NISA SATI TION ONAL AL GOAL GOALS S AND AND OBJEC OBJECTI TIVE VES S

Like the corporate vision and mission which sets the direction in which the company is going, the organisational goals and objectives show the results which an organisation seeks to achieve. Goals are desired future states which the organisation seeks to achieve. They are broad guidelines and more specific than the mission of the organisation. Goals are developed to help organisations translate what to achieve in striving for the corporate mission. As such, goals of an organisation would indicate the aspects of survival, efficiency, effectiveness and profitability. For example, the mission of a transport company is to provide excellent transport services in the Klang valley area and make customers happy. Then, the goal of the company should translate what needs to be achieved to get the mission accomplished. Thus, the goals of the company might be: to provide on time services to Klang valley travellers, to provide greater frequency of transport services to Klang valley travellers, and to provide high customer’s satisfaction. These statements are more precise than the mission but not as specific as the objectives of an organisation. The objectives of an organisation are specific statements of what to achieve with precise characteristics like timeliness, measurable, and quantifiable. For example, from the previously mentioned transport company example, if t he goal is to provide on time services to Klang valley travellers, the objective set should be: to provide transport services that depart and arrive as per schedule in 2004, to reduce unnecessary transport delays by 10% in 2004, and to increase provision of contingent transport services by 20% in 2004.

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STRA ST RATE TEGY GY FO FORM RMUL ULA ATI TION ON

CHA CH APT PTER ER 4

The organisational objectives are generally defined by the managers at the functional level while the organisational goals are generally set at the business levels. As such, goals and objectives are differentiated in terms of the specificity and timeliness of what to achieve in the organisation. It should be noted that in some books, the term goals and objectives have been used interchangeably.. In other words, interchangeably words, some authors refer to goals as objectives and vice versa. Glueck and Jauch (1984) used the term interchangeably. Other authors may also differentiate the term goals and objectives by introducing the term official objectives and operating objectives. Official objectives refer to what the company plans to achieve, more likely to refer it as goals, while operating objectives refer to the specific objectives that need to be attained by the organisation with the time dimension. In this particular case, there is not right or wrong but what is important is that the definition of the terms goals and objectives must be made known and clear to the reader or person spoken to. In trying to set the organisational objectives, there are several characteristics of high quality objectives in the organisation (Certo and Peter, Peter, 1990). They are as follows: • Objec Objectives tives shou should ld be specif specific ic and and precise. precise. • Objec Objectives tives should should be set set to be achieved achieved with a desirab desirable le level of of effort. • Objec Objectives tives should should be set set so that they they are attaina attainable ble and and realistic. realistic. • Objectives Objectives should should be set so that that it would be flexible flexible when when there is a need need to change change with respect to changes in the environment. • Objec Objectives tives should should be be set so that it is measurab measurable. le. • Objectives Objectives should should be set so that that it will be consisten consistentt in the long run run and short short run frame. These can be summarised graphically as shown in figure 4.4

Figure 4.4: Characteristics of high quality objectives

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In setting the organisational goals and objectives, the process may involve many people in the organisation. The changing business environment together with the interaction of the managers for resources may set managers to set different priorities in terms of goals and objectives. Further, the past goals and objectives may have an influence on the future goals and objectives. Managers may prefer to set the goals that they were familiar and therefore reluctant to change due to uncertainty. The values of top management can also influence the process of developing the goals and objectives (Glueck and Jauch, 1984). Thus, the ultimate goals and objectives set for the organisation presents the final one agreed by all parties in the process, but not necessarily pleasant to all in the group. There is no way to please everyone but a consensus should be reached to ensure goals and objectives are attainable. Why are clear goals and objectives crucial for the success of an organisation?

Exercise 4.2 1.

ACB Health Neworks states: “ACB will redefine our industry: through a new generation of consumer-friendly products that put individuals back in control of their future.” This is an example of a A. B. C. D.

2.

Strategic objective. Vision statement. Vague statement of direction. Line manager’s individual goal.

A vision statement should answer which of these basic questions? A. B. C. D.

3.

What is our business? Who are our employees? Why do we exist? What do we want to become?

Which of these should be established first and foremost? A. B. C. D.

4.

Strategies Vision Objectives Mission

The vision statement should be preferably A. B. C. D.

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Successful organisations are effective in motivating people. Employees work best when A. B. C. D.

6.


they are asked to “do their best.” work requirements are vague and unclear. they are striving towards specific goals. they are guided by an abstract mission statement.

The hierarchy of organisational goals is in this order (least specific to most specific): A. B. C. D.

Vision statements, strategic objectives, mission statements. Mission statements, strategic objectives, vision statements. Vision statements, mission statements, strategic objectives. Mission statements, vision statements, strategic objectives.

SUMMARY This chapter discussed the concept of strategy formulation and the key elements in the strategy formulation stage. Setting the organisational vision presents the first stage in the strategy formulation. Then, the organisational mission is set consistent with the vision of the organisation. Subsequently, the organisational goals and objectives are set to assist in realising the vision and achieve the mission of the organisation for which the organisation was set or established.

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FUNDAMENTALS OF STRATEGIC MANAGEMENT TUTORIAL QUESTIONS

TUTORIAL QUESTIONS 1 1.

Who are organisational strategists and for what are they responsible?

2.

Explain the strategic management process.

3.

Who are organisational strategists and for what are they responsible?

4.

What are the benefits and pitfalls of strategic management?

5.

How does the strategic management evolve in a corporation, according to Gluck et al.?


Briefly explain roles of the corporate planners.

2.

List the duties and responsibilities of the Board of Directors.

3.

Discuss the roles played by CEOs in state-owned enterprises in Malaysia.

4.

Differentiate between goals and objectives.

5.

Differentiate between mission and vision.

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ENVIRONMENT ANALYSIS

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INTRODUCTION As soon as the organisation has set its vision, mission and goals, the next stage in strategy formulation is the strategic analysis. This analysis encompasses the analysis of the external environment, organisational analysis, industry analysis and competitive portfolio analysis. Although the objectives may be set earlier prior to the results of these analyses, organisations can also revise it accordingly after the analyses to fit them with the implementation plans. In this chapter, an analysis of the external environment will be analysed together with the appropriate tools and methods of analysis. The external analysis focuses on identifying and evaluating the trends and events beyond the control of the organisation. These factors have direct and indirect impact on the organisation and thus affect the performance of the organisation. Inevitably, organisations have to make plans to adjust accordingly to these changes which can be unexpected or unforeseen.

OBJECTIVES By the end of this chapter, you should be able to: 1. understand the external environment factors that have an impact on performance of organisations. 2. identify the opportunities and threats existed in business environment. 3. understand the tools for environmental analysis.

5.1

EXTERNAL ENVIRONMENTAL FACTORS The external or environmental factors are those forces outside the control of a single organisation.

These forces can be shown in Figure 5.1 categorised into four broad areas: economic, social, political, and technological forces. Each of these forces has an impact on the key stakeholders of the organisation, and subsequently provides favorable impact or unfavorable impact to the organisation. For example, a change in the social trends like demographic patterns or baby boom may have implications to the existence of new consumers like new born babies. Coupled with this trend, one may observe that their mothers are working people. As such, there will a demand for new baby products like fast baby food and baby toiletries that can help working mothers in managing their new born babies requirements. For some organisations, this trend may be favourable, while for other organisations, it may not be favourable. Thus, it is important at this juncture to know the external forces that can have an effect on the organisation.

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Figure 5.1: Categories of external forces

5.1.1 Economic Forces Economic forces are those factors that are related to the economic development and growth of a particular country. These are factors like gross national product (GNP) or gross domestic product (GDP) trends and growth rates, interest rates, money supply, inflation rates, unemployment rates, wage and price controls, level of disposable income, stock market trends, import and export factors, worker productivity, government budgets and many others. See Table 5.1. Table 5.1: Key Economic Forces

• Monetary policy

• Tax rates

• Minimum lending rates

• Price fluctuations

• Price controls

• Fiscal policies

• Level of disposable income

• Foreign exchange

• GDP growth rates

• Consumption patterns

• Government budgets

• Per capita income

• Public investment patterns

• Private investment growth

• Investment incentives

• WTO, AFTA, EU policies

The economic forces can come from the country in which the organisation operates and it can also come from outside the geographical territory, which is outside the country in which the organisation operates. The economic forces which originate from the country in which the organisation operates are relatively easier to handle than those outside the country. For example, when the Malaysian government sets the interest rate, it has an impact on the minimum lending rate. Malaysian organisations can be more prepared to take necessary steps to manage higher or lower interest rates. However, when the foreign exchange of the Malaysian currency fluctuates as in the 1997-98 period, Malaysian trade organisations have difficulty to cope with the exchange rates, and greater risks is perceived all the time. As such, many organisations which

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do not have ‘cash reserves’ and ‘skills’ will wind up their businesses during this time. Similarly, the request by the World Trade Organisation (WTO) for countries to open up their boundaries for better trade flow can also have an impact on local business organisations. The implementation of ASEAN Free Trade Area (AFTA) policy on the automobile industry is believed to have an impact on the Malaysian automobile industry. The economic forces that originated from outside the country more challenging and complex to handle for business organisations today as many are not familiar with the ‘new rules’ of the business game. As such organisations have to take a proactive behaviour in observing the national and international trends globally so as to survive in the business. Although internal in nature, the economic forces which originate from within the country are not always easy for business organisations to respond to. For example, the policy on price controls for selected consumer products can pose a major challenge to producers of consumer products when the margin is low or not competitive. This can be stressful to consumer products manufacturers as they have to cope with the demands for higher returns on investment by the investors. Lack of creativity and innovation may force some of these organisations to take a short cut solution by doing inappropriate and unethical business deals or focusing on short term interests/ returns. The major challenge in identifying and evaluating the economic forces, therefore, becomes critical to managers in the strategic management exercise, thus affecting the survival of the organisation.

5.1.2

Social Forces

The social forces cover a broad spectrum of factors including cultural, demographic, and environmental factors. The social and cultural factors may refer to those forces like societal values, norms, culture, religion, language and attitudes that may change or show preferences of one type over another. In a country where there are many ethic groups for example Malaysia , which icomprises ethnic groups like Malays, Chinese, Indians, Iban, Bidayuh, Kadazan, Bajau, and many others, social factors can pose difficulty when trying to cope with the changes in the environment. The social values of these ethnic groups are different to the extent that in trying to cope with the diverse cultures can be a challenging exercise. For example, the Malays are mainly Muslims, while the Chinese can be a Buddhist, Taoist, Christian or even Muslims. Similarly the Indians can be Hindus or Muslims or Christians. In this respect, when there is a greater awareness among the Muslims for the need to consume ‘halal’ products, business organisations have to respond effectively to this trend. The hotel industry, for instance, have to make sure that the food served in the restaurants and banquet are ‘halal’ and consumable to Muslims. In fact, separate kitchens for ‘halal’ and ‘non-halal’ food can be found in the hotels in the country. Even the imported meat have ‘halal’ signs or shown on the menu like the one served at Victoria Station restaurants. That is why in Malaysia, we see that fast food chains like McDonalds and Kentucky Fried Chicken and Pizza Hut have standard ‘halal’ signs (authenticated by the Malaysian Muslim Religious Department, JAKIM) to show that their food are consumable to the Muslims. The demand for ‘halal’ food or products is made on demand by t he consumers and not pressured by laws in the country. Today, ‘halal’ signs are common in processed food products too. Thus, a western fast food would

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have to take into account the local values and consumption preferences in order to fit with the consumer’s taste and demand. In relation to language, this can have an impact on the business organisation. For example, what language to use for advertising. In Malaysia, most advertisements on the bill boards must be written in Malay. However, this trend is changing and advertisements can be written in English language. Similarly, advertisements in the local media can also be done in Mandarin or Tamil. The changing policy on this and acceptance of the Malaysian society indicates the changing trends as compared to twenty years ago where most advertisements were in Malay. It is also uncommon to find the contents/ ingredients of the processed food products are written in Malay and English. As the country prospers and the society becomes more sophisticated, the demand for more product and services are increased. For example, in the situation when many women are working, the demand for processed food would be created. For instance, there is now ‘instant roti canai or murtabak’ or ‘instant curry puff’. Food manufacturers are introducing newer fast food products for the new generation of consumers. Canned food and processed packed food has become a trend today among the Malaysian consumers as their tastes and preferences changes fast. As the society becomes more affluent, the consumer spending patterns also changed, and thus we see the thriving mega mall and shopping complexes today in major Malaysian cities like Penang, Johor Bahru, Melaka, and others. Social values and preferences also changed their attitudes towards products and services. This can also be related with their level of education and social exposure. For example, attitude towards work and spending habits changed fast among the new generation. Similarly, their perceptions towards leisure and holidays also differ today than a few decade ago. Changes in the fashion and designs also affect the demand for new kinds of products and services. While the society may change, the environment in which the society operates also experienced some changes. The rapid economic development in many areas has affected the ecological pattern and situation in those areas. For example, due to high production of various manufactured products, the level of environmental pollution has also increased, whether in terms of air pollution or noise pollution. In certain housing areas, we saw landslides occurring in certain parts of the hillsides due to heavy torrential rains and poor drainage or water management system. Environmental impact assessment (EIA) becomes more important today and therefore construction companies have to cope with this in their development projects. Another societal concern today is the rise of consumerism and work safety. The rise of consumerism has led to the concern for safer consumer food and non-food products being sold in the market. Also issues like dates of manufacturing and expiry consumption dates are becoming more important and demanded by consumers. Consumers want to know what they are consuming and whether it is safe or other wise. Pressures from consumer movements and other stakeholders also have an impact on the business organisation, and how the organisation should respond to these matters. Figure 5.2 show the key social forces.

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Table 5.1: Key Social Forces

• Life expectancy

• Population growth rates

• Life styles

• Social values and culture

• Attitudes towards work

• Migration and work mobility

• Sex roles

• Value towards leisure

• Level of education and training • Awareness towards religious values • Environmental concerns

• Consumer activism

• At titudes t owards ethic s

• Rate of family format ion

• Attitudes towards social

• Consumer tastes and preferences

responsibility • Buying habits

• Consumption versus saving trends

• Social tolerance

• Health conscious concerns

5.1.3 Political Forces Political forces are those factors have governmental relations or dealings, whether it is at the federal level, state level or the local government level. The political forces can refer to the laws and legislation or policies adopted by the government in power. These are factors that can provide favorable or unfavorable impact on the organisation. One of the main concerns in political forces is political stability. This refers to the extent in which the country has strong political support from the people or not. Political stability can provide strong foundations for business organisations to grow in the long run. One way of ensuring political stability is to get the voters mandate in the general elections, and reduce extreme political ideologies that can create instability. In Malaysia, considering the existence of multicultural and multi-religious community, the political leadership and their roles are important in maintaining political stability. For example, the succession of Datuk Seri Abdullah Ahmad Badawi as Prime Minister of Malaysia from Tun Dr Mahathir Mohamed is important in assuring political stability in the succession of the nation’s leadership. The increasing number of terrorists and related activities in a country can also cause political upheaval and thereby reduce attractiveness of businessmen to invest in the region or country. The Malaysian government foreign policy of non-interference of foreign countries problems is one example that can reduce political instability in the country and in the region like that in Indonesia, Thailand and the Philippines. The federal government policies can also affect business organisations like the environmental protection laws, tax laws, investment incentives policies, labor laws, government subsidies and other trade policies. Attitudes towards foreign labor and foreign companies can also affect the political climate in the country. Similarly, the laws of the state governments or local governments can also affect business organizations. For example, when the Pas state government was controlling the State of Terengganu in 1999-2004, many businesses related to leisure and recreation activities were controlled and not encouraged. Local government policies can also encourage or discourage new business growth.

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Another impact area of concern in the political factors is the government regulations and deregulation policies. This is reflected by the new laws and legislations introduced to curtail the unhealthy activities in the business community. The introduction of special tariffs and by-laws also has an impact on business operations, like the service tax reforms introduced to all service organisations with a minimum sales volume. Finally, national policies like the New Development Policy, National Service, and National Integrity Plan can provide favorable impact to foreign investment and business organisations in the country.

5.1.4

Technological Forces

In the last decade, the rate of technological changes has been rapid. This is attributed to the many innovations and inventions developed in an effort to improve the work and life of the community. Technological advancement has dramatically affected business organisations in terms of their products and services offered, and also their relations with other stakeholders and business practices. Technology has changed the manufacturing processes, introduced new products and services, and created new demands and marketing practices. One major revolution in technology is the development of the internet. Since the advent of the internet, it has changed the way business managed their operations and how to do business. The internet has created the demand for e-business or e-commerce. It has also led to the revolution on education through e-learning. The internet has also demonstrated the borderless way of doing business and created the development of the multimedia industry. This has enhanced the development of new e-service businesses and accelerated the growth of the media and creative arts and advertising industry. Coupled with the research and development activities in the electronics, computer and telecommunication industry, it has also led to the stupendous growth in the mobile telecommunication industry. The internet has, thus, revolutionised the business model of the 20 th century from ‘manufacturing’ to the ‘information’ age. The financial services sector is also changing fast to cope with the e-banking phenomena. Intensive developments in research and development activities in various sectors like pharmaceutical, medical, and engineering related activities are producing new products and services that became more important today than ever before. Biotechnology, biomedical and medical engineering are new fields that created new products and services. In the automobile industry, it is changing fast from the automated system to the electronic system. Even in business offices, it is changing from to the more electronic management system. Thus, the technological revolution is changing the lifestyles and the face of businesses and competition. Table 5.3 shows the key technological forces.

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Table 5.3: Key Technological Forces

• Research and Development expenses

• E-Commerce and internet

• New products development

• Cyber space technology

• New services development

Biodiversity

• Productivity improvements through

• Rate of innovation

electronic systems • Patent productions

• Information systems and management

• Multimedia development

• Computer technology and engineering

5.2

ENVIRONMENTAL SCANNING

Environmental scanning is the first step in assessing the external environment. Scanning involved monitoring, evaluating and disseminating information from the external environment to the strategic planning group. To do this, strategic managers must first become aware of the external forces that can affect the business organisation. After the managers are aware of the possible external forces that can affect the organisation, the managers have to identify the potential events and trends that could be pertinent to the organisation’s performance in the future. This can be done more effectively if the managers form a brain storming session with all the relevant personnel in the organisation to get their views and feedback. Group sessions like this can increase their awareness and insights of new external forces that were not known earlier. During the scanning group sessions, managers need to identify what environmental factors in the four areas: (a) economic forces related to the flow of money, good and services, information and energy, (b) social forces that show the way people live and their values and preferences, (c)

political forces that relate to allocation of power among people, including foreign policy and national policies, and

(d) technological forces that relate to the development of new technology, innovation and know-how. This can be a difficult task to managers even in the group sessions. A strategic issue matrix can help managers to prioritise the issues to be considered as shown in Figure 5.4. Figure 5.4: Strategic Issue Matrix

Probable Impact on Organisation Probability Of Occurence High

52

Medium

Low

High

High Priority

High Priority

Medium Priority

Medium

High Priority

Medium Priority

Low Priority

Low

Medium Priority

Low Priority

Low Priority

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Based on the matrix, managers can determine what are the external factors that needs greater attention than others. Issues that have high and medium probability of occurrence and high and medium impact on the organisation must be addressed first than the other issues. By focusing on these external issues, the managers may know the key areas to be addressed with urgency.

5.2.1 IDENTIFYING OPPORTUNITIES AND THREATS After conducting the environmental scanning, it is now easier for managers to determine the factors considered as opportunities and threats to the organisation. Opportunities are those factors or forces that provide a favorable response or impact to the organisation. In other words, those factors that can offer new businesses or areas for newer businesses either in terms of product or service and or markets to be served. It is those factors that appear to be in synchronisation with the current business activities, and also fits well with the vision and mission of t he organisation. Opportunities are also areas that can provide specific market niches, that focuses on particular areas in terms of products or services or markets. In doing an external analysis, one of the greatest challenge is to identify and determine these opportunities that can provide strategic advantage to the organisation. These forces generally have a direct impact on the organisational performance and outcomes, either in the short run or in the long run. In trying to determine the opportunities available for an organisation, the strategic managers need to make a list of all the external factors, and then identify those forces that can have major impact to the organisation as most critical. The process may commence with a long list, but ultimately, the managers may end up with a handful of strategic forces related directly to the organisation. Table 5.5: Identifying Opportunities and Threats

Opportunities

Threats

Economic

High economic growth rate Low inflation rate High consumer spending

High personal tax Low productivity

Social

Lifestyles changing High level of education Positive social values

Negative attitude towards ethics Air and water pollution Intercultural variations

Political

Government policy on subsidies High import duties Local government support

Fiscal and monetary policy not favorable

Technological

New technologically advanced products and services General widespread of internet

High rate of innovation High cost of R & D

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Threats are those factors or forces that can provide an unfavorable response or negative impact to the organisation. These forces could impair t he performance of the organisation or hinder the organisation from achieving the goals and objectives that have been set earlier. These factors do not fit with the organisation’s activities and reacts negatively to the organisational positioning. As such organisational threats need to be overcome or reduced so as to reduce the undesirable impact it could have on the existing operations of the organisation. In trying to overcome the threats, strategic managers may have to use available personnel with expertise and experience or hire external experts to help them in handling the uncontrollable forces. In some cases, the external threats could be avoided and thus minimise the impact on the organisation. In other cases, the undesirable threats could not be avoided and organisations have to be creative in reducing the potential threats of these forces to the organisation. Managers could only minimise the risks of external forces but not eliminate the potential risks involved. In trying to identify the opportunities and threats, strategic managers have to make sure that they have the necessary information to do so, particularly in the business in which they are making an assessment. Information related to the industry is also critical. As such, the environmental opportunities and threats identification could be done effectively by a group of strategic managers having an interchange of the latest information about the business in which the organisation operates. One of the major problems strategic managers face is the lack of latest information about the industry or key information that can affect the industry of organisational future. This could be due to lack of experience or poor competitive surveillance or intelligence. Further, lack of business experience and intuition could make the task more difficult. For example, it would not be easy for a strategic manager in a bank to assess the situation in a manufacturing concern, when the manager does not have wide knowledge or information about the industry. As such, people who are doing this type of analysis do not require precise knowledge about the industry in question, but must have latest information that they knew have an impact on the business of the organisation. This may be one reason why in many Malaysian organisations, the top management positions are filled by experienced professionals from the public and private sectors, who have a bird’s eye view of the situation. However, this would not be an easy task as only those professional managers who had sharpened their skills and competency levels could do that, not all even in high positions could do as there were inexperienced. Finally, in identifying the opportunities and threats, strategic managers need to realise that one factor can be an opportunity to the organisation, but it could also provide a threat to another organisation or industry. For example, the low interest rate may be good for borrowers, but not favorable to the lenders, financial institution. Thus, in organisations with multi-businesses, the assessment of opportunities and threats can be a real challenging task as the number of potential real opportunities may not be as much as the number of threats in the environment.

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Exercise 5.1 1. Tick the answer True (T) or False (F) for each statement below. No.

Question

T

1.

The internet is changing the very nature of many industries by altering product life cycles and changing the historical trade-off between production standardisation and flexibility.

2.

Technological decisions should be handled mainly by lower management because they have a better firsthand knowledge of what is needed.

3.

Economic factors do not have much impact on the attractiveness of strategies.

5.2.2

F

TOOLS FOR ENVIRONMENTAL ANALYSIS

There are at least two ways to do an environmental analysis. One is using the Environmental Threats and Opportunities Profile (ETOP) and the other is by using the External Environmental Factor Matrix (EEFM) or External Factor Evaluation Matrix (EFM) as it is generally known. Environmental Threats and Opportunities Profile (ETOP) One way of performing the Environmental Threats and Opportunities Profile (ETOP) analysis is to provide a list of external environmental factors that have an impact on the organisation. Then, the strategic manager need to assess the importance of each of the factors to the organisation on a scale of 1 to 10, where a score of 1 means that the factor is of low importance to the organisation and a score of 10 means that the factor is extremely important to the organisation. The assessment of the factors are not necessarily made arbitrarily but rather based on the actual facts and information obtained by the manager and its relevance to the organisation. The next stage is to evaluate the impact of each of the factors to the organisation on a scale of (-5) to (+5), where a score of (-5) means that the factor has very negative impact to the organisation, and a score of (+5) means that the factor has very strong positive impact on the organisation. Table 5.6 provides an example of ETOP. Table 5.6: Environmental Threats and Opportunities Profile (ETOP)

External Factors

Impact of Factor of Factor +4

Importance

ETOP S core

8

+32

Social

+2

4

+8

Political

-3

6

-18

Technological

-1

7

-7

Economic

Total Score

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From the above example, one can see that the total score is (+15), that is slightly above the average total score. This means that the organisation is in fairly good position, due to its strong economic factor. However the social factor was relatively weak. The political factor was the weakest showing much threats. Similarly, the technological factor was also showing signs of threats. Therefore, the organisation needs to address these issues to improve its response to the external issues. Thus, strategic managers need to review the situation in relation to these two external factors. External Environmental Factor Matrix (EEFM) After doing the environmental scanning, strategic managers may want to ass ess each of the external factors and see how those factors provide opportunities or threats to the organization. One way is to develop the External Environmental Factor Matrix (EEFM). David (2003) developed it as External Factor Evaluation Matrix (EFE Matrix) while Wheelen and Hunger (1996) developed the External Strategic Factor Analysis (EFFA). These matrices are similar undoubtedly. In order to develop the EEF Matrix, the steps involved are as follows: 1.

List the key external environmental factors. Identify first the opportunities and then the threats.

2.

Assign weights to each of the factors identified above. A score of 0.00 means that the factor is not important at all and does not have any st rategic impact on the organisation. A score of 1.00 means that the factor is extremely important and has much impact on the organisation. The total weights must sum to 1.00.

3.

Rate each factor on a scale of 1 to 5, where a rating of 5 means that the factor responds well to the strategy of the firm, whereas a scale of 1 means that the factor responded miserably to the firm’s strategy.

4.

Multiply each of the assigned weights with the rating score to determine the weighted score.

5.

Sum the weighted scores for each factor to determine the overall weighted score for the organisation.

Table 5.7 shows the External Environmental Factor Matrix (EEFM). The results showed that the organisation’s performance is below average (average score is 3.00). The company has major opportunities as the economic growth is good and the demand is strong. However, the threats are that the local government policies prohibit heavy advertising and media communication. This may pose difficulty to the organisation to gain a large market share as the product may not be known to the consumers. As such the company has to resort to more creative solutions in handling the external threats.

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Table 5.7: The External Environmental Factor Matrix (EEFM)

External Environmental Factors

Weights

Rating

Weighted Score

1. 2. 3. 4. 5.

Opportunities High economic growth Favorable population growth Strong demand Trendy fashion among youths High demand in China and Japan

0.15 0.05 0.20 0.10 0.10

4 2 3 2 2

0.6 0.1 0.6 0.2 0.2

1. 2. 3. 4.

Threats Increasing government regulations Local advertising and media control Government relations strained Political stability

0.05 0.10 0.15 0.10

3 4 2 2

0.15 0.4 0.3 0.2

Total

1.00

2.75

Exercise 5.2 1.

refers to the extent in which the country has strong or weak political support from the people. A. B. C. D.

2.

Political stability Political popularity Political party Political force

Which of the following is the first step in assessing the external environment? A. B. C. D.

3.

. A. B. C. D

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Environmental scanning. Identifying opportunities and threats. Identifying weaknesses and strengths. Setting vision statement. is not a part of an external audit. Analysing competitors Analysing financial ratios Analysing political environment Analysing technological development

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objective answers. recognition of environmental changes. identification of organisational opportunities. identification of organisational threats.

interest rates. trade deficits and surpluses. devaluation or appreciation of other countries’ currencies. ethnicity of the workforce.

Which of the following is not a tools for environmental analysis? A. B. C. D.

7.


An analysis of the economic environment would include all of the following except: A. B. C. D.

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A general environmental analysis can be expected to produce all of the following except: A. B. C. D.

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Environmental Threats and Opportunities Profile (ETOP). External Environmental Factor Matrix (EEFM). External Strategic Factor Analysis (ESFA). Five Forces Model

In an External Factor Evaluation Matrix, what is the range for a firm’s total weighted score? A. B. C. D.

0-5 0-4 1-5 1-4

SUMMARY This chapter discussed the external environment factors that have an important impact on performance of organisations. Then, it covered briefly on how to conduct environmental scanning that provide a well understanding for strategic managers to determine the external environment factors considered as opportunities and threats to their organisation. Furthermore, two ways or tools for carrying out environmental analysis are included, namely, Environmental Threats and Opportunities Profile (ETOP) and External Environmental Factor Matrix (EEFM) or External Factor Evaluation Matrix (EFEM) as it is generally known.

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INTRODUCTION An industry is a group of companies or organisations producing similar products or services. For example, Bumiputra Commerce Berhad, Malayan Banking Berhad, RHB Berhad, Alliance Bank, Citibank, Hongkong Shanghai Banking Corporation (HSBC) and Standard Chartered are in the banking industry. Proton, Perodua, Naza Motors and DRB Hicom are in the automobile industry. In trying to understand better the nature of competition and the external forces affecting the business in the industry, it is necessary to conduct an industry analysis. According to Michael Porter (1980), an industry analysis can provide a comprehensive understanding on the nature of industry, its structure and competitive forces affecting competition in the industry. It should be noted that in some strategic management textbooks, some authors consider industry analysis as part of the external environmental analysis, while others have taken it separately as in this module. It is argued in this module that industry analysis is considered separate from the external environmental analysis as the forces affecting competition in the industry can be controlled to some extent while the other external environmental forces were generally beyond the control of the organisation or the industry. In this chapter, we will identify the nature of the industry and the factors affecting the structure of the industry. Then, an analysis of the competitive forces will be conducted. Finally, the value chain analysis will be discussed.

OBJECTIVES By the end of this chapter, you should be able to: 1. understand better the nature and structure of industry; and 2. appreciate five forces model that provides a competitive strategy framework and foundations for analysing industry situation.

Which of the factors mentioned would affect order processing more than the other factors?

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NATURE AND STRUCTURE OF INDUSTRY

The basic premise of the industry analysis is that the level of industry profitability is determined by the characteristics of the industry structure. This is based on the underlying theory of the industry structure-conduct-performance approach in industrial economics. The two reference points are the theory of monopoly and the theory of perfect competition , which represents the two ends of the spectrum of the industry structure (Grant, 1994). When there is a single firm in an industry and new firms are unable to enter, then a monopoly exists. In this situation, competition is absent and the monopolist can fully exploit customers’ need for the product to earn maximum profit. However, when there are many firms in an industry, and all are producing identical products with no restrictions upon entry, then a perfect competition exist. In this situation, a price competition can cause profits to fall to a competitive level, which may just cover the firm’s cost of capital. These two extremes are rare, and in real world industries fall between the range of these two spectrum. It should also be noted that the specific categorisation of industry structure may not be an easy task nor can it provide a precise example, but it could provide an overview of the real world situation. The spectrum of industry structure is shown in Table 6.1. Table 6.1: Spectrum of Industry Structures Source: Revised and adapted from Grant, R.M. (1994), Contemporary Strategy Analysis, Cambridge, Massachusetts: Blackwell Publishers.

Characteristics of Industry Structure Perfect

Number of firms Many

Barriers to entry or exit None

Product differentiation None

Competition Oligopoly

Examples in Malaysia Banking, Insurance,

Few

Moderate/ High

High

Petroleum, oil and gas

Duopoly

Two

Moderate/ High

Moderate/High

Electricity and energy

Monopoly

One

Very High entry barrier

Varies

Railway stransport

Based on the industrial economic theory, Michael Porter suggested that the profitability of an industry can best be understood by understanding the dynamics of the five key forces affecting the structure of an industry. The five competitive forces are the threats of new entrants, the threats of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers, and the rivalry among existing competitors.

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The strength of the five forces varies from industry to industry, thus determining the long term profitability of an industry. These forces can determine the profitability of the industry because the firms can shape the prices they want to charge or the costs that they have to bear or the investment required to compete in the industry. Entry of new entrants into the industry can limit the potential profitability of existing firms in the industry, while strong bargaining power of buyers or suppliers can also reduce the firm’s profitability. Intense competition among existing firms can erode the profits of the industry. Finally, availability of product substitutes can also erode the firm’s profitability in the industry. It should be noted that every industry is unique and has its own unique structure. For example in the pharmaceutical industry, the entry barriers are high due to heavy investment costs for research and development activities and economies of scale in the longer term. In Malaysia, the barriers to entry in the insurance and banking industry are extremely high as the government does not issue any new licenses for the industry. On the other hand, the barriers to entry for the hotel and tourism industry is relatively low, unless constraint for capital for the five star service industry. Further, the structure of an industry is relatively stable but can change over time as the industry evolves. With the rapid development of the electronic and computer systems and services, t his has changed the nature of competition in the airline industry, both in terms of providing electronic services to potential buyers and sophisticated services in the airlines range of services. This has heightened the investment costs of competition in the airline industry.

6.2

FIVE FORCES MODEL

Porter (1980) suggested a framework for analysing competition in the industry. The five forces affecting the nature of competition and profitability in the industry are: (1) (2) (3) (4) (5)

threats of new entrants, threats of substitute products or services, bargaining power of suppliers, bargaining power of buyers, and rivalry among existing competitors.

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Diagrammatically, these five forces can be represented in Figure 6.1 below.

Figure 6.1: Five forces model

6.2.1 Threats of New Entrants Whenever new firms can easily enter a particular industry, the intensity of competition among firms increases. To reduce this threat, there must be sufficient barriers to entry in the industry. For example, in the financial services industry in Malaysia, barriers to entry are high due to unavailability of new business licenses as it is the Central Bank’s policy not to issue new licenses. Other forms of barriers to entry in the industry are: •

Economies of scale Other firms cannot enter the industry as the need large production units to have low costs, which may not be forthcoming for small and medium enterprises in certain businesses.

•

Product differentiation Brand identification creates a barrier to entry, thus forcing new entrants to compete with established brands. For example, local brands versus international brands for tea products.

•

Capital requirements The need for heavy financial requirements can deter other from entering the industry like the airline industry.

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•

High switching costs Switching costs refer to the cost for changing from one supplier to another. This can be difficult for certain firms in the industry as it may involve high c osts of retraining for the employees in the organisation.

•

Access to distribution channels Limited access to the channels of distribution can deter others from entering the market, particularly in competition with established firms.

•

Cost disadvantages independent of sizes Some firms may have cost advantages regardless of the s ize of the firm. In such cases, the cost advantages can be due to tax incentives or allowances given by the government for locating the premises in certain areas. This incentive could not be enjoyed by others in different locations.

•

Government policy The government policy can also deter entry of new firms as the government wants to control the number of players in the industry. This is also to protect the consumers/ buyers of unnecessary intense competition.

Despite these, new firms could also enter the industry with higher quality products, lower prices and substantial marketing resources. In such a case, strategic managers need to monitor the development of these competing firms and prepare for counterattack strategies later.

6.2.2 Threats of Substitute Product or Services Many firms in an industry compete with other firms in other industries which produce substitute products. Products are considered a substitute when they can satisfy the same consumer needs as another product. Product substitutes, therefore, can reduce the profitability potential in an industry by placing ceiling prices that other f irms can charge (Porter, 1980). For example, tea can be considered a substitute for coffee. If the price of coffee goes up high enough, coffee drinkers will slowly switch to tea. Thus, the competitive pressure arising from substitute products increase as the relative price of substitute products declines and the consumer’s switching costs decrease. As such product substitutes have an effect on an industry when the switching costs are low.

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Product substitutes, therefore, can reduce the profitability potential in an industry by placing ceiling prices that other fi rms can charge (Porter, 1980). For example, tea can be considered a substitute for coffee. If the price of coffee goes up high enough, coffee drinkers will slowly switch to tea. Thus, the competitive pressure arising from substitute products increase as the relative price of substitute products declines and the consumer’s switching costs decrease. As such product substitutes have an effect on an industry when the switching costs are low.

6.2.3 Bargaining Power of Suppliers The bargaining power of suppliers can affect the intensity of competition in an industry. Suppliers can do this by raising prices or reduce the quality of purchased goods or services. A supplier is considered powerful when the number of suppliers in the industry is dominated by a few companies. In the petroleum industry, as suppliers they are powerful as only a few dominates the industry, but their buyers are many. Suppliers can also enhance their profitability when they find that they offer products or services that is unique and or when they have built-up switching costs. For example, in the word processing software industry, it is not easy to change to other suppliers as it can be more costly to the buyer. The bargaining power of suppliers is also high when the product substitutes are not easily available, like the electricity supply. Thus, buyers have less bargaining power and the potential profitability of the industry can be sustained. Suppliers also have high bargaining power when they are able to make forward integration with their present customers, like the microprocessor manufacturer. Finally, when the purchasing industry buys a small portion of the supplier’s products and services, the bargaining power of suppliers would be high. This is because the buyer is unimportant to the supplier. For example, the sale of automobile tires is not so important to individual car owners as opposed to the buyer from the car rental company.

6.2.4 Bargaining Power of Buyers Buyers can affect the profit potential in an industry by forcing the product or service prices down. As such, their bargaining power would be high, and they can demand for higher quality products, and play competitors against each other. As such a buyer or group of buyers in an industry can be powerful if some of the following conditions hold. • • • • • • •

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Buyer purchases a large proportion of the seller’s product or service. Buyer has the potential to integrate backward by producing the product itself. Alternative suppliers are many because the product is undifferentiated. Changing supplier costs are low. The product purchased represent a high percentage of the buyer’s cost, thus providing an incentive to shop around for lower costs. Buyer earns low profits, and therefore sensitive to cost and service differences. The purchased product is not important to the final quality, and thus can be easily substituted without affecting t he final product quality adversely.

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For example, if Proton purchased a large percentage of Sime Tires of total tire production, Proton could easily make all sorts of demand on Sime Tires marketing people. This would also be the case if Proton get its’ tires from Goodyear or Dunlop. The bargaining power of Proton is high in the tire case, particularly when there are close substitutes. On the other hand, Proton may not have much bargaining power with glass manufacturers like Malaysia Sheet Glass, as they are the limited few who can produce high quality automobile glass sheets. Thus, a firm with a high bargaining power can command higher levels of profitability than those with lower levels of bargaining power.

6.2.5 Rivalry Among Existing Firms Rivalry among competing firms in an industry is not uncommon feature. This is because each firm in an industry is jockeying for a better position than the other competing firms. A strategic move by one competitor can only be successful to the extent that the moves provide competitive advantage over the rival firms. However, when the rival firms retaliate with counter strategic moves, like reducing the price, intense advertising, provide high quality, superior product warranty, and many others, this could dampen the earlier move of the firm in the industry. Thus, the nature of competition would be intense and could be heightened with the presence of one or some of these factors. •

When the number of competitors is high or many, the intensity of competition would also be high. For example, when one firm provides price discounts, others would follow suit.

•

When the rate of industry growth is high, there are many opportunities for other firms to grow within the industry. However, when the rate of growth is slow, this may require firms to take aggressive moves to increase its sales. For example, when there is a decrease in passenger traffic, airlines may use price war tactics.

•

When the product or service offered is undifferentiated, and the customer’s switching cost is low, customers will jump from one supplier to another supplier, thus generating intense rivalry among the firms. In Malaysia, this happened in the mid-1990s when BP started a campaign on its new image and corporate color. BP then introduced special offers to buyers of BP petrol, from free gifts to cash discounts. The other petroleum suppliers also made similar offers, thus ending up to giving a ‘house’ in a lucky draw. This was put to a stop by the government as it was destroying the petroleum industry.

•

When the fixed costs of the firm are high, or the product is perishable, firms may cut prices to reduce the potential losses in the fixed costs. As such, it is not uncommon to find airlines offering low prices on standby seats or limited duration travel seats. This is also true for agribusiness related products.

•

When the production capacity has to be increased to obtain economies of scale, firms may produce in large volume and then reduce its prices later, hoping to recoup its costs from a greater number of sales. This is particularly true for the production of computer microchips, and in the chlorine and vinyl chloride business.

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•

When the exit barriers are high, that is firms find it difficult to get out of the industry, the intensity of competition increased. Exit barriers may be high as the fixed assets of the business could not be sold easily or no takers in other businesses. Further, when the investment costs are high, firms are reluctant to exit without getting reasonable returns on their investment costs.

•

The intensity of competition among firms can be high as the rivals are diverse. Different firms have different strategies and cultures. Consequently, the way to compete may differ and vary.

The five forces model provides a competitive strategy framework and foundations for analysing a particular industry, whether in manufacturing or services. Strategic managers can use the framework to determine the profit potential and nature of competition in the industry, thus suggesting whether it is a lucrative industry or otherwise. The five forces model only provides the basic framework, but strategic managers must have the information and knowledge to analyse the industry situation.


Question

1.

External strategic management audit is also referred to as industry analysis.

2.

Technological innovations can create entirely new industries and alter the boundaries of industries

3.

The power of suppliers will be enhanced if they are able to maintain a credible threat of f orward integration.

4.

Threats of new entrants. Threats of substitute products Rivalry among existing competitors Political environment.

Firms would be most likely to face intense rivalry with competitors when they A. B. C. D.

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F

Which of the following is not a key force affecting the structure of an industry, according to Michael Porter’s five force model? A. B. C. D.

5.

T

Are in a high growth industry with low fixed costs. Are in a protected market. Have high fixed costs, in a slow growth industry with high exit barriers. Have low exit barriers for easy transition to another industry.

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6.

Buyer power will be greater when A. the products purchased are highly differentiated. B. there are high switching costs. C. the industry’s product is very important to the quality of the buyer’s end products or services. D. it is concentrated or purchases large volumes relative to seller sales.

7.

the bargaining power of the buyer is greater than that of the supplier when A. B. C. D.

8.

The threat of new entrants is high when there are A. B. C. D.

9.

volume of purchase is low. threat of backward integration by buyers is low. cost savings from the supplier’s product are minimal. the buyer’s profit margin is low.

low economies of scale. high capital requirements. high switching costs. high differentiation among competitors’ products and services.

In Porter’s Five Forces model, conditions under which a supplier group can be powerful include all the f ollowing EXCEPT : A. B. C. D.

lack of importance of the buyer to the supplier group . high differentiation by the supplier. dominance by a few suppliers. readily available substitute products.

10. Which of the following firms would likely pose the LEAST competitive threat? A. A firm in the same industry and in the same strategic group. B. A firm in the same industry and in the nearest strategic group looking to join your group. C. A firm that produces substitute goods to your product line. D. A competitor to your product where a high switching cost exists.

SUMMARY This chapter discussed the nature and characteristics of industry structure that will in turn determine the level of industry profitability. It further deliberated aboult the five forces model for analysing competition and profitability of an industry. The five forces that have been incorporated in the five forces model are (i) threats of new entrants, (ii) threats of substitute products or services, (iii) bargaining power of suppliers, (iv) bargaining power of buyers and (v) rivalry among existing competitors.

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INTRODUCTION In the strategic analysis stage, after analysing the external environment and the industry, it is then appropriate to analyse the organisational situation. In other words, the purpose of the internal analysis is to evaluate the organisational strengths and weaknesses. This can only be done by reviewing the functional areas in the business organisation in terms of its management, marketing, finance and accounting, production and operations, and research and development. In this chapter, an analysis of the internal environment will be analyzed together with the appropriate tools and methods of analysis. The internal analysis will assess how each of the functional areas can affect the operations of an organisation, either directly or indirectly. Thus, appropriate measures need to be taken to improve the performance of the organisation.

OBJECTIVES By the end of this chapter, you should be able to: 1. identify the internal organisational factors that affecting the operations of organisations. 2. identify the strengths and weaknesses of organisations; and 3. understand and appreciate the tools for internal organisational analysis for analysing the internal organisation situation of an organisation.

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7.1

INTERNAL ORGANISATIONAL FACTORS

In your opinion, what makes staff loyal to their company?

There are several key internal factors that can affect the operations of an organization. Let us take the case of a simple business operation, say the production of a fast food chain selling ‘Nasi Lemak Special’. When we want to start the business operation, the first thing we must have is to determine whether we have the capital (money and other resources) to start the business. Once the source of financing is settled, then, we have to start the business by recruiting people to start the business, determining the office and production space, purchasing the machinery and equipment, choosing the recipe and the raw materials to start the production. This is essentially the management of the business operation. After having acquired all the necessary raw materials, people (human resources) and technology (research and development) to use in making the special ‘nasi lemak’, the production operation begins. When the output is ready i.e. specially packed nasi lemak, then the marketing team will take over the subsequent activities. Once the product is sold, the organization receives money from the buyers and this is sent to t he accounts section for record. Similiarly, the invoices of purchases of materials needed for production will be sent to the finance section for payment purposes. Figure 7.1 shows the interrelationships of the internal factors in the business operation.

Figure 7.1: Key functional areas in a typical business organisation

It can be discerned that the internal factors are linked to one another, and therefore, changes in any of the internal factors can affect the entire business operation. For example, if the workers who are suppose to start the production are not on time or absent, then, the total output can be affected. Similarly, if the raw materials required for the ‘nasi lemak’ is delayed or inadequate, then the total production of ‘nasi lemak’ will also be reduced. Consequently, the marketing people have less to sell, and the revenue earned would be reduced. The situation can also be aggravated when there are inefficiencies or wastage in the production processes as these can result in low productivity. This will erode the net profits of the business operation, and consequently,

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it may result in losses for that operation. Thus, the role of the strategic manager is to manage, coordinate and integrate these functional areas so that they are efficient and effective for the organisation. It is efficient in the sense that the costs of production is at the lowest, and effective in the sense that the organisation could achieve the objectives/ targets set before the operation. The above example shows a simplified version of how important the internal factors are to the organisation. In the real business world, the situation is more complicated as there are many factors that are could not be easily controlled by the CEO or functional managers. Thus, in trying to achieve superior performance, the organisation needs to make an internal audit of t he situation. One best way w ould be analyze each of the key functional areas in a typical business organisation. Describe ‘efficient’ and ‘efficiency’ in your own words.

7. 1.1

Management

When we refer to management in an organization, we refer to the functions of management, namely planning, organising, leading and controlling activities. Planning refers to those activities related to preparing the future of the organisation which include setting goals, objectives, devising strategies, and policies for the organisation. Planning also includes setting priorities of resource allocations and budgets. Organising refers to the activities that result in a structure of tasks and authority relationships. This includes setting the organisation structure, job specialisation, job description, span of control, coordination, and job design. Leading refers to those activities related to motivation, staffing and leadership of the human resources in the organisation. This i ncludes setting the right organisation climate, culture, work group behaviors, communication, and human resources management. Controlling refers to those activities aimed at ensuring the actual results are consistent with the planned results of the organisa tion. Various methods of controls may be needed to ensure the variation between the actual and planned performance is not wide. In assessing the management of an organisation, strategic managers need to review the whole spectrum of key activities related to management, from planning, organising, leading and controlling. While the organisational structure may be appropriate or relevant, the major problem could be with the people in the organisation. In other words, the human resources may be a constraint to the efficient management of an organisation. Human resources can cause problems due to the work culture, attitude of employees, and also culture developed in the organisation. When the organisation is small, the culture may be close knitted, but as the organisation grows bigger, the culture may change. People have difficulties to accept new ways, and are therefore, 70

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more resistant to changes. Thus, organisational change can create problems in managing the bulk of human resources in the organisation. In some cases, the problem of human resources may be due to the internal office politics. Organisational politics can affect job satisfaction, motivation and commitment of employees. Although organisational politics could not be avoided, undesirable office politics should be controlled before it gets off hand. As such, continuous communication with all employees at all times is important to negate perceptions that are incorrect about the organisation or policies introduced by the organisation. The issue can be more complicated when there are different ethnic groups in the organisation, having different views of things. Suggest ways to manage organisational politics.

Another important area is the human resources development or training of the employees. In many organisations, training of employees is not well planned. There are not many organisations that prepare a career path or plan for their employees. As such employees may leave when they find that their level of motivation and satisfaction reaches a plateau in an organisation. Why do people leave their organisations? Although rewards and compensation are common explanations, there are other reasons for leaving. Staff may leave when they cannot see where they are heading in the organisation. This is particularly true at the executive and managerial level. At the production or non-executive level, the intention to leave may be due to poor compensation and rewards or recognition in the organisation. Nurturing employees to the level where they would be satisfied and give their undivided attention and commitment presents a challenge to many managers today. While it is important to ensure that the people in the organisation are taken care of, the systems and processes in the organisation also need to be reviewed. Many organisations have problems when systems and processes do not change in tandem with changes in the environment, the situation and people involved in the organisation. Consequently, it stifles the organisation and retards the efficient management of the business operation. This does not mean that the organisation need to be restructured or reengineered, but rather continuous improvements must be made in the organisation to cope with the changing situations. For example, some organisations may use a manual system in managing their human resources. This may seem reasonable when the organisation is small, but when the number of human resources in the organisation grew in multi-folds, the way to manage human resources need to be reviewed and automated. Some feel that it is a waste of corporate funds but the managers forget that their attitude reduces efficiency and productivity in the organisation. An old adage says pound foolish and penny wise. This is not uncommon today. Thus, it is important to remember that the management of an organisation is constantly changing and require continuous change every day of the year.

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Marketing

According to Kotler (1994), marketing is a social and managerial process by which individuals and groups obtain what they need and want through creating, offering, and exchanging products of value with others. This means that the function of marketing is to provide what is needed and wanted in terms of products or services to the customers, at a value and costs that can satisfy the customer. This will result to the exchange of goods and services in a transaction, and a relationship is entered between the buyer and seller. In marketing the products and services of an organisation, the marketing manager is concerned with the organisation’s market position and marketing mix, namely the product, price, promotion and place. The market positioning of an organisation focuses on how best to compete within an identified market segment. This refers to selecting specific areas in marketing an organisation’s products or services in terms of the market, product or geographic location. Market segmentation, therefore, provides an avenue for the organisation to concentrate in certain areas in marketing their products or services. For example, cars like Mercedes and BMW focuses on the prestigious car owners, but differentiated. The Mercedes owners are generally more elderly than the BMW, who fancy sportier outlook and attracts younger drivers than the Mercedes drivers (owners). Thus, in positioning one’s product, organisations’ generally focus on identified market segments which help them to know the market niche, type of product or service to offer or develop, and how to differentiate one product from another competing one. Information like customer analysis, customer profiles, and consumer behaviour are critical information in understanding better the market segmentation and determining the market position of the organisation’s products or services. Marketing mix refers to the combination of the key variables like product, price, promotion and place which can affect the demand and marketing of the product or services. A product or service is offered to fulfill and satisf y the needs and wants of the consumer. In marketing the product or service, organisations need to ensure that it has the right quality, features, options, style, brand name, packaging and size required by the consumer. Decisions to change the characteristics of the product may depend on the product life cycle. For example, when the product reaches the maturity stage, the product needs to be reviewed. The bicycle is one example when the function of the product changes from a mode of transportation to a recreational product. Different products have different stages of life cycle, and market considerations can determine the life cycle of a product. Thus, some products have shorter life cycles while others have longer life cycles. Besides reviewing the product, the marketing manager also need to review the price offered to the consumers. With regards to the pricing strategy, the organisation need to review in accordance wit h the government’s policy on price control (if any, particularly in Malaysia where the price of many products is controlled), competitor’s pricing, and supplier’s pricing (costs to the firm). Any changes in these could affect the final price to the consumer, and therefore, affect the consumers’ decision to purchase or not, especially if the product is perceived to have substitutes. Organisations need to consider 72

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offering trade discounts, quantity discounts, credit policy terms, payment periods, and other creative modes of payments to suppliers or wholesalers or retailers. For example, when a product has a maximum price, fixed by the government, organisations may consider giving lowest price strategy in selected fast moving consumer products. This is one strategy adopted by many hypermarkets like Carrefour or Giant in Malaysia when competing with local retail outlets, besides ensuring better product quality. Promotion is informing and persuading your target consumers of the value of the product or service your organisation is offering. It involves communicating what you have to offer to your target audience (consumers). The key promotional tools are advertising, personal selling, publicity and sales promotion. The media selected to communication to your audience is also important. For example, in Malaysia, ‘The Star’ has the largest readership in the country in the English news daily, while the ‘Utusan Malaysia’ newspaper has the largest readership among the Malay readers. Therefore, in trying to advertise their product, an organisation need to know to whom they wish to communicate their information, the English speaking consumers or Malay speaking consumers. Organisations also need to know how to conduct the sales promotion that is whether to conduct it on a quarterly basis or half yearly basis. These are among the promotional issues that need to be addressed in marketing the product. Placing the product or service means that the organisation is providing it at the right place at the right time. Distribution strategies involve decisions on such things as store location, distribution coverage, logistics, inventory levels, shelf location and sales territories. The distribution strategy is important for organisations that plan to implement a market development strategy or forward integration strategy. The situation in the distribution channels may provide strengths or weaknesses that need to be reviewed in an expanding market situation. Organisations may also consider expanding the wholesale or retail outlets or use direct marketing with limited marketing channels. With the use of internets, E-Commerce seems to play an important role today thereby removing the intermediary role of the retailers or wholesalers.

7.1.3

Finance and Accounting

The financial position of an organisation is an important indicator of its performance. This is because the financial factor will show the strengths and weaknesses of the organisation in terms of its profitability, liquidity, leverage and many others. The finance of the organisation is also critical as it will determine the amount of funds required to use in managing the activities of the organisation, sources of fund required for the organisation, and the cash flow position of the organisation. Assessing the financial health of the organisation becomes critical as it can affect the organisation in selecting the appropriate strategies for implementation. Why is the financial position an important indicator of its performance?

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To assess the financial health of t he organisation, we need to have financial information. This can be obtained from the organisation’s accountant who is responsible in keeping the financial and accounting information. As an accountant in the organisation, he/ she must have the information on the balance sheet, profit and loss statement, the sources and use of fund statement (cash flow statement) together with the financial notes and annual report. From this information, one could then ascertain the financial health of the organisation suggesting the need for financial planning and budget and financial leverage of the organisation. One way of assessing the financial health of the organisation is by comparing the financial ratios of the organisation from the balance sheet and income statement. The financial ratios that are generally used to assess the financial performance of an organisation are as follows (David, 2003): (1)

Liquidity ratios This ratio shows the organisation’s ability to meet its short term obligations. There are two types of assessing the liquidity: current ratio and quick (acid test) ratio.

(2)

Leverage ratios This ratio measures the extent to which the organisation has been financed by debt. The ratios are debt to total assets ratio, debt to equity ratio, long tem to equity ratio, and Times-interest-earned ratio.

(3)

Activity ratios This ratio shows how effective an organisation is using its resources. The ratios are inventory turnover, fixed asset turnover, total assets turnover, accounts receivable turnover, and average collection period.

(4)

Profitability ratios This ratio shows the management’s overall effectiveness as indicated by the return generated from the sales and investment. The ratios are return on assets, return on equity, net profit margin, earning per share, and price-earning (P-E) ratio.

(5)

Growth ratios This ratio shows the organisation’s ability to maintain its economic position in an expanding industry or economic situation. The ratios are sales, net income, earnings per share, and dividends per share.

The financial ratios obtained would provide meaningful information if the ratios are compared with other organisations in the same industry, or compared with the ratios of the organisation in the previous year, or the financial ratio of the industry average. Only then, one would know whether the organisation has performed well or did not do well during the assessed period. This would certainly show the strengths or weaknesses of the organisation in a more objective way. Besides assessing the financial health of an organisation by using the financial ratios, it is also important to know about capital budgeting, which involves allocating capital and resources to projects or products or assets or division of an organisation. Capital budgeting involves making decisions on the financial situation in the organisation like capital requirements (acquiring fixed assets, issue of new shares, increasing loans, or selling assets). Before a financial decision can be made, an assessment of the best financial outcome needs to be done and matched with the current financial situation 74

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of the organisation. For example, should an organisation increase its capital requirement by increasing its short term debt or long term debt or issue new shares or sell some assets? Alternatively, should an organisation purchase or lease a fixed asset in view of the potential tax advantages in the lease than in the purchase method? These types of decisions can only be made after having analysed the rate of return or payback period and the risks to the organisation. In the real business world, sometimes financial decisions are made not solely based on the financial outcomes but also the non-financial outcomes. For example, the reason why Malaysia Airlines operates its domestic flights in certain towns in the country is not because of its profit but because of its social responsibility and obligation to society. However, the high returns obtained in other domestic routes could offset the loss or low returns obtained in certain domestic routes in the country. Thus, a cross-subsidy of the routes could offset the overall financial loss. Alternatively, in certain cases, financial decisions only provide a guide in making the final decision. For example, in certain strategic businesses, organisations may have to maintain its presence or its operations because of its pride, prestige or name rather than financial returns. Although the purpose of a business enterprise is t o make profit, the ultimate aim should not solely to make profit. Profit is a result of how one manages a business enterprise.

7.1.4

Production and Operations

In a business operation, the production and operation function consists of those activities that transform the raw materials or inputs into products or services. In a manufacturing organisation, the production and operation function transforms the raw materials, labor, capital, machines and facilities used into final products. According to Schroeder (1981), the production and operations function involved five areas: process, capacity, inventory, workforce, and quality. The process stage involves the design and production of the physical output/ product thus comprising decisions on technology choice, production mode and processes, process flow, process control, facility location, and many others required to produce a final product. The capacity stage refers to the determination of optimal output levels including forecasting, facilities planning, scheduling, capac ity planning and queuing analysis. The inventory stage involves managing the levels of raw materials, work-inprocess, and finished products. It also includes deciding what to order, when to order, how much to order, and materials handling. The workforce involves managing the skilled, unskilled, clerical and production employees. This requires decisions on job design, work measurement, job enrichment, job standards, and motivation to employees. The final area is quality, which is concerned with assuring quality control for the finished product, sampling, testing, and cost control measures.

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The production and operation activities generally represent a large part of the organisation’s human and financial capital asset. In many businesses, a large part of the costs of production are incurred at the production stage, and therefore, the management of the production and operations activities is critical in setting a competitive edge to the organisation. In other words, a production company can make huge losses or profits if it can manage this part of the business operation well. As such, there are many production operators in the automobile industry like Honda, Toyota and General Motors which adopt ‘just-in-time’ (JIT) inventory method to save the holding costs of the finished products. In the non-manufacturing concern, the issue is slanted more towards the efficient management of its operations, which is equivalent to the production stage. Thus, service quality becomes the key issue in this type of business like the telephone services, education, accommodation and tourism services. For example, to what extent could these service providers provide such services that can make their customers happy and satisfied. Thus, in trying to assess the production and operations of an organisation, it is important to understand the type of business activity managed by the organisation. It is also important to understand the processes involved in the production or operations stage, and to find what the key critical areas in the production or operation of the business are. Thus issues like the quality of the raw materials, labour, capital and production machinery available are important in the production of goods and operation of the organisation. Furthermore, one has to assess the relevance of technology used, and economies of scale in the production of products. Finally, inventory management is also a major manufacturing concern.

7.1.5

Research and Development

Another important area in the internal operation that has to be assessed is the research and development (R & D) function. Today, not many organisations have R & D activities. However, there are also many organisations particularly those in the manufacturing area which depend on R & D for their survival. For example, an organisation pursuing a product development strategy would need a strong R & D to survive in the hypercompetitive world. For example, in the automobile industry in Malaysia, Proton has a strong R & D department focusing on areas that can enhance the competitiveness of proton cars in the market. In the telecommunication industry, firms have to conduct R & D in terms of providing superior customer services like providing extra services and facilities to their customers. In organisations that have R & D activities, assessing the strengths and weaknesses can be viewed in terms of the how these R & D activities could help enhance the profitability and growth of the organisation’s business. Thus, issues like to what extent the R& D used was cost effective, resource allocation of R& D, R& D management of the personnel and facilities, innovation rate and competence level of personnel in technology, level of technology advancement, and percentage of R & D budget must be assessed. In certain cases, an assessment of the R & D level of the organisation should be viewed from the perspective of new product or service developments. That is in terms of new products or services introduced in the market and to what extent does the product or service contribute to the profit margin of the organisation. For example, how successful is Maxis’ newly introduced services compared to other telecommunication providers in Malaysia. Similiarly, to what extent is the response for ICI paint division’s newly introduced colors and type of paints in the market. 76

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Think of a newly introduced product you purchased recently. Why did you buy it?

While organisations can be successful in developing new products or services, they could face problems in terms of cost efficiency, particularly in the manufacturing costs. One classic example is the successful advanced technology of the supersonic airplane, Concord, developed jointly by the British and French aeronautical engineers. The plane is excellent in terms of technology but a commercial failure as the costs of operating the plane is too high and therefore becomes uneconomical in trying to encourage more usage of that type of plane by other airlines. Therefore, it becomes a major challenge to organisations with R & D to develop new products or services that could be marketed successfully or accepted by the potential consumers in the market. Thus, assessing the R & D capability of an organisation involves the risks of inaccurate assessment due to continuous and rapid changes in the field of technology.

7.2

IDENTIFYING STRENGTHS AND WEAKNESSES

Once we have identified the key internal organisational factors critical in an organisation, we can then identify the strengths and weaknesses of the organisation. Strengths are those factors that are available in the organisation i.e. a skill or competence or capability available in the organisation. It is also a positive factor that has given the organisation an edge or advantage in managing its business over others. Weaknesses are those factors that are lacking in the organisation i.e. those that need to be improved and addressed in order to enhance the competitiveness of the organisation vis-à-vis other organisations. The strengths and weaknesses show the distinctive competence of an organisation. In trying to identify the strengths and weaknesses of an organisation, the first step is to make a list of all the internal organisational factors that can be a strength or weakness to the organisation, depending on the business activity of the organisation. The process may begin with a long list of all the internal organisational factors, but the strategic manager may end up with only a limited number of these factors related directly to the organisation. Table 7.2 shows a sample list of the internal organisational factors. As a strategic manager, one must have the necessary information about the organisation and the type of business involved. Only then can one decide how to overcome the weaknesses by using the strengths available in the organisation. Strategic managers also need to realise that they must identify the weaknesses and not just the strengths of the organisation. This could be a difficult task as one might not feel at ease about one’s weaknesses. Nonetheless, this is critical to improve organisational performance.

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Table 7.2 : List of Strengths and Weaknesses

Functional Areas

Strengths

Weaknesses

Management

• Clear organisational goals and objectives • Distinct corporate culture and style • Clear organisation structure • High employee motivation and morale • Low staff turnover and absenteeism • Good reward and compensation

• Poor management control • Not clear job description & specification • Lacks communication • Low commitment • Lacks attitudes towards changeInformal strategic planning

Marketing

• • • •

Clear market segments Good market share Effective sales personnel Good serviceWell priced products • Good promotions • Good advertising • Marketing managers well trained

• • • • • •

Lacks market research Poor product quality Poor distribution network Limited number of retailers Low quantity discounts Market budget limitedLocal market limited

Finance & Accounting

• Accounting information well kept • Profit ratios improved • Growth ratios improved • Budgeting procedures effective • Dividend policies reasonable

• • • •

Liquidity ratio poor Leverage poor Cashflow management poor Too much short term debt

Production and Operations

• • • •

Raw material reliable Skilled manpower Economies of scale Good machines in running condition • Plan layout good • Plant facilities reasonable

• Inventory control poor • Quality control lacking • High wastage of raw materials • Inefficiencies in product processes

Research and Development

• R& D facilities adequate • Cost effectiveness of R& D • High rate of new product developed • Technological competence is adequate

• Low rate of commercial success of new products • Inefficient resource allocation • Information and computer systems lacking

7.3

TOOLS FOR INTERNAL ORGANISATIONAL ANALYSIS

In trying to analyse the internal organisational situation, there are two types of analysis that can be done. One is the internal value chain analysis, and the other is the Internal Organisational Factor Matrix (IOFM) or generally known as Internal Factor Evaluation Matrix (IFEM).

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7.3.1

Internal Value Chain Analysis

Michael Porter (1980) proposed the value chain analysis as a way t o examine the nature and extent of synergies of that could be obtained from the internal activities of an organisation. According to him, every organisation has a series of activities that are related to a chain of activities, and this chain would indicate the sources of competitive advantage an organisation could obtain in competing with other organisations. A value chain is a link set of value creating activities commencing with the basic raw materials coming from the suppliers, and then moving into a series of value added activities involving production and marketing, and ending with the distributors getting the final product into the hands of the final consumer as shown in figure 7.2.

Figure 7.2: Value chain for a manufactured product

The series of activities in the value chain differ by industry and type of activities of the organisation. Some organisations have more complication value chain like the petroleum industry where the value chain can be divided into two segments, the upstream and downstream activities. The upstream refer to activities like oil exploration, drilling and converting the crude oil to the refinery. The downstream refers to the oil and the logistics and marketing of the petrol and distributing the petrol to t he distributors and retailers. In Malaysia, such activites are done by Petronas Carigali and Petronas Dagang , two separate entities, but in other countries it could be done by one large organisation. Nonetheless, it should be realised that the series of activities will differ in terms of the business and concentration of the organisation, but it does not make the value chain concept less relevant. According to Porter, to do the value chain analysis, one must understand the key or primary activities of the organisation. The primary activities comprise of the inbound logistics (such as raw materials handling and warehousing), operations (which includes machining, assembling, and testing), outbound logistics (such as warehousing and distribution of finished product), marketing and sales (such as advertising, promotion, pricing, channel), and service (includes installation, repairs, and parts). The primary activities are affected by support activities, such as procurement (covering purchasing of raw materials, machines and supplies), technology development (such as R & D product processing improvement), human resource management (such as recruiting, training and manpower development), and th e organisation infrastructure (such as general management, administration, accounting, finance and strategic planning). See Figure 7.3.

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Figure 7.3: An organisation’s value chain Source: Michael Parter, (1980), Competitive Advantage Creating and Sustaining Superior Performance, London; The Free Press

To do the value chain analysis, there are three steps: 1. Identify the value chain activities of the organisation . Identify the key or primary activities in producing a product of the organisation. What are the strengths or weaknesses? Does any of the strengths provide competitive advantage to the organisation? 2. Examine the linkages for each product with the primary and supporting activities. For example, one value activity is raw materials (inbound logistics). This activity is performed and related with another activity (say, quality control). To seek competitive advantage, the organisation may perform an 100% quality control of the inputs instead of the normal 10% check at random. This activity would therefore, reduce the wastages and poor quality at the output stage in the final product, and reduce the costs of product defects.

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3. Examine the synergies among the value chains of different product lines or business units. Each element in the value chain like advertising and manufacturing activities can provide economies of scale as it is shared with other products. Therefore, if economies of scale are not obtained, specific action can be taken to reduce the costs per unit in the manufacturing or advertising.

Figure 7.4: Three steps in valur chain analysis

It should be noted that the value chain analysis require some form of subjective assessment in the value chain activities. Such assessment must be made with information provided by various units in the organisation. This can only be done if the organisation has a detailed analysis of the cost structures in the business operations, and has also adopted the proportionate costing measures in computing the costs of the unit or operation. It cannot be denied that the process of doing the value chain analysis can be useful if accounting and financial information is readily available. In the event the organisation does not provide or does not have such information, the value chain analysis could not be done effectively. Rather an arbitrary analysis would provide an indicative situation of the costs structures in the organisation. The value chain analysis is an important tool to the organisation so as to know what are the major costs and how these costs could be reduced to increase the profit margin of the organisation. Without such detailed analysis, the organisation may not have a clear idea on how to increase its efficiency and performance in the long run.

7.3.2 Internal Organisational Factor Matrix (IOFM) After scanning the internal organisational environment and identifying the key factors for the organisation, one can summarise the analysis in the form of an Internal Organisational Factor Matrix (IOFM). This matrix is also known as the Internal Factor Evaluation Matrix by David (2003) or the Internal Strategic Factor Analysis (IFAS) by Wheelen and Hunger (1996). In order to develop the Internal Organisational Factor Matrix (IOFM), the steps involved are as follows: 1.

List the key internal organisational factors. Identify first the strengths and weaknesses.

2.

Assign weights to each of the factors identified above. A score of 0.00 means that the factor is not important at all and does not have any st rategic impact on the organisation. A score of 1.00 means that the factor is extremely important and has much impact on the organisation. The total weights must sum to 1.00.

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3.

Rate each factor on a scale of 1 to 5, where a rating of 5 means that the factor responds well to the strategy of the firm, whereas a scale of 1 means that the factor responded poorly to the firm’s strategy.

4.

Multiply each of the assigned weights with the rating score to determine the weighted score.

5.

Sum the weighted scores for each factor to determine the overall weighted score for the organisation.

An example of calculation of an internal organisational factor matrix is shown in Table 7.3. Table 7.3: The Internal Organisational Factor Matrix (IOFM)

Internal Organisational Factors 1. 2. 3. 4. 5. 6.

1. 2. 3. 4.

Strengths Large market share Experienced top management Team management Corporate culture High product quality High profitability Weaknesses Employer-employee relations slack Limited advertising budget Government relations strained Management information system poor Total

Weights

Rating

Weighted Score

0.15 0.05 0.10 0.10 0.10 0.10

3 2 3 2 5 5

0.45 0.1 0.3 0.2 0.5 0.5

0.05 0.10 0.15 0.10

3 4 2 2

0.15 0.4 0.3 0.2

1.00

3.10

The results show that the company has major strengths in profitability and product quality. This is due to large market share obtained by the organisation. However, in terms of weaknesses, the organisation needs to improve its advertising budget and government relations as they can affect future activities. Employer-employee relations also need to be addressed. Nonetheless, the organisation is in favorable position.

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Question

T

F

1. Good strategic decisions, which ensure doing the right things (efficiency), and the combination of design, technology, and automation, which ensures doing things right (effectiveness), bring the best long-run results.

2.

Which of the following is not a key functional area in a typical business organisation? A. B. C. D.

3.

Management Marketing Research and development Purchasing

An interal audit is performed at which stage in the strategic management process? A. B. C. D.

4.

Strategy formulation Strategy implementation Strategy evaluation Strategy analysis

Which of the following activities identifies and evaluates a firm’s management, marketing, finance, production, and research & development strengths and weaknesses? A. B. C. D.

5.

Environmental scanning. Internal analysis. External analysis. Development of a mission statement.

The A. B. C. D.

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Marketing Production/operation Management Finance/accounting

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Planning Organising Leading Controlling

Planning Organizing Controlling Directing

Selling is a part of which business function? A. B. C. D.

9.

INTERNAL ANALYSIS

Span of control and job analysis are two area of concern under the function of management. A. B. C. D.

8.

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. refers to the activities that result in a structure of tasks and authority relationships. A. B. C. D.

7.

STRATEGIC ANALYSIS

Management. Marketing. Finance/accounting. Research and development.

Which of the following is not a basic function of production management? A. B. C. D.

Capacity Inventory Workforce Transportation

10. What should a strategies do if it is determined that a key internal factor is both a strength and a weakness? A. Include that factor in the Internal Organisation Factor Matrix twice. B. Decide whether the factor is more a strength or a weakness and include it only once in the Internal Organisation Factor Matrix. C. Do not include it in the Internal Organisation Factor Matrik. D. Revise the way that key factor is stated, and then include it in the Internal Organisation Factor Evaluation Matrix.

SUMMARY This chapter examined the internal organisational factors that will affect operations of organisations. Then, internal analysis is discussed to comprehend strategic managers in evaluating organisational strengths and weaknesses of their organisations. To further enhance learners’ understanding on how the evaluation of organisational strengths and weaknesses, two types of analysis are put forwarded, namely, Internal Value Chain Analysis and internal Organisational Factor Matix (IOFM) or generally known as Internal Factor Evaluation Matrix (IFEM). 84

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CHAP CH APTE TER R8

COMP CO MPET ETIT ITIV IVE E AND AND PORT PORTFO FOLI LIO O ANAL ANALYS YSIS IS

CHAP CHAPTE TER R8

COMP COMPET ETIT ITVE VE AND AND POR PORTF TFOL OLIO IO ANALYSIS

INTRODUCTION After analysing the internal environment, further analysis may need to be done in order to get a more comprehensive view of the competitive nature of the organisation. This is particularly true in an organisation which has many business activities or products, known as business portfolios. The reason is because in an organisation that has many business portfolios, the internal organisational analysis may only provide a general view of the situation, without indicating specifically the real issues facing a particular business portfolio. Thus, in an organisation that focuses on single business, say food activities only, the internal organisational analysis may be sufficient, but in today’s multibusinesses organisation, say food business and beverage business, a portfolio analysis could provide a more accurate perspective of the business activities of the organisation. In this chapter, the focus is on competitive and portfolio analysis. The competitive analysis will explain the experience curve concept and the implications in strategic analysis. Several business portfolio analyses are presented in subsequent sections of this chapter. Several competitive tools like the competitive profile matrix and the strategic position action and evaluation (SPACE) technique will also be discussed.

LEARNING OBJECTIVES By the end of this chapter, you should be able to: 1. unde understan rstand d the experie experience nce curve curve and its its strategic strategic implicat implication; ion; 2. understand understand business business portfolio portfolio matrices matrices like BCG Matrx, Matrx, GE Matrik Matrik and ADL Matrix Matrix and the applications and limitations of each matrix; and 3. understa understand nd the Strategic Strategic Position Position Action Action and Evaluation Evaluation (SPACE) (SPACE) and its applications. applications.

Which of the factors mentioned would affect order processing more than the other factors?

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CHAP CH APTE TER R8

EXP EX PER ERIE IEN NCE CURVE

In a competitive environment, the long term profitability of an organisation depends on the efficient management of the t otal costs of manufacturing in a production orientated organisation. Thus, one of the major strengths of a manufacturer in an industrial or consumer product is the ability of the organisation to deliver the products at a cost lower than the other competitors in the market. In order to gain such advantages, it is not only concerned with efficient management of the direct costs, but also the indirect benefits that could be obtained by assuring higher productivity in the production operation. According According to the Boston Consulting Group (1972), manufacturing organisation could gain competitive advantages positions by managing efficiently its manufacturing operations. They believe that in a manufacturing operation, the production costs per unit would decline by some fixed percentage (say 10% up to 30%) each time the total accumulated volume of production (in units) doubles. For example, in a manufacturing concern, say the total cost for producing 10 units is RM100. If the costs reduction is 15%, then the costs would be RM85 for producing 20 units of a product. And the cost would reduce further to RM 72.25 when the total accumulated volume of production is 40 units. In such a case, we say that the manufacturing concern has an 85% experience curve. See Figure 8.1 on the experience curve.

Figure 8.1: The experience curve

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The reduction in cost in the manufacturing concern may vary by industry. For example, in integrated circuits manufacturing, the experience curve is 70% or 30% reduction in costs. In air-conditioning manufacturing, the experience curve is 80%, and in the primary magnesium, the experience curve is 90%. In other industries, the experience curve may be 70% for cement manufacturing, 80% for power tools, and 90% for industrial trucks (Hax and Majluf, 1984). Such reduction in costs is not only attributed to slope of the experience curve but also on the experience accumulated, measured by the growth rate in the market by the growth rate in the market. Thus, in industries with high growth rates like the computer industry, the experience curve could be high as with the semi-conductor and computer industries.

8.1.1 8.1 .1 Re Reaso asons ns for Costs Costs Redu Reducti ction on What are the reasons for the reduction in the total costs of manufacturing? There are several factors which contribute to this: (a)

Learning experience When one conducts a task which is repetitive in nature, one could develop some skills in doing the task, and therefore able to increase one’s performance in doing the task. This is because the skill obtained could enhance one’s ability to do faster and thereby increase the productivity of the person in doing the task. The learning effect provides greater performance and productivity of the production worker.

(b)

Specialisation and division of labour In a manufacturing production, there is a possibility that one employee may specialise in certain type of tasks. Thus division of labor is important in assigning a task to an employee. Because of the specialisation of the task of the employee, he/ she could enhance his/ her performance as the work involved may be standardised. This would enhance the productivity of the employee.

(c)

Product and process improvements In a manufacturing operation, the organisation may introduce new ways of doing things to improve its performance. This may involve introducing new improvements in the process of production as a result of new technologies, ideas or changes in the methods of production so as to be more efficient. Such improvements in the processes could reduce the costs of production of a product.

(d)

Economies of scale ‘Economies of scale’ means the unit costs would decline as the volume or output increases. This could be attributed t o availability of improved technological processes, sharing of resources, using resources profitability in large scale operations, and backward or forward integration of manufacturing processes and business activities in large manufacturing concerns.

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Know how Know how may refer to an understanding of the managerial, technical and operational factors that contributed to the efficiency of a manufacturing organisation. Know how is difficult to transfer as it represents an accumulated experience that has been gained over the years. For example, one may have the know-how on making ‘Nasi Lemak’ t hat is peculiar, as our way of making the ‘Nasi Lemak’ is different from others even if others may have the recipe but it cannot match with our own way of making the ‘Nasi Lemak’. Thus, know-how is a unique expertise of an organisation.

8.1.2

Strategic Implication of the Experience Curve

The experience curve concept has important strategic implications to manufacturing concerns. This is because the concept is based on the principle that if an organisation has a large market share, then t he accumulated volume of production could also large enough to have an experience curve effect. Then experience curve effect would then imply that the organisation has a lower unit cost of production. Consequently, the profit margin would be larger than those without such volume of production and large market share. This principle is illustrated in Figure 8.2.

Figure 8.2: Strategic implementation of experience curve

From figure 8.2, it is clear that the market leader is Company Z. This company has an advantage over other organisations like Company W, X and Y. In this situation, Company W is struggling for its survival, since Company Z is setting a low price. Company W could only survive if it has enough resources to sustain its position in the market. If Company W cannot increase its market share, then it has to quit from the industry. Company X and Y could survive as long as the price is not lowered. They enjoyed lower profit margins than Company Z.

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According to Bruce Henderson (1979), the founder of the Boston Consulting Group, ‘any competitor with less than one quarter the share of the largest competitor cannot be an effective competitor.’ This means that a competitor cannot match with the dominant player in an industry if it i s relatively very small as it may not have the strength to compete with the large industry players. This is not unreasonable as the large players may have more experience and resources to face competition and outrun the others in the industry. It should be noted that the experience curve concept is generally applicable in a manufacturing concern. Furthermore, the experience curve provided a competitive perspective on how to compete with other players in the industry, based on the accumulated experience and volume of production.

8.2

BUSINESS PORTFOLIO MATRICES

There are several types of business portfolio matrices. In this section, we will discuss briefly the main business portfolio matrices commonly used or known in the industry. They are the Boston Consulting Group (BCG) Matrix, General Electric (GE) Matrix, and the Arthur D. Little (ADL) Matrix.

8.2.1 Boston Consulting Group (BCG) Matrix The Boston Consulting Group (BCG) Matrix is also generally known as the GrowthShare Matrix or the 2 by 2 Matrix. It was proposed by the internationally renowned consulting group, Boston Consulting Group in the late 1960s (Hax and Majluf, 1984). They believed that to have a better perspective of the different businesses of an organisation, one should know the contribution of each business in the total business of the organisation. This can be looked at in terms of portfolio of businesses, which can show the unique contribution of each business in terms of growth and profitability. Figure 8.3 shows the BCG matrix of an organisation with several portfolios of businesses.

Figure 8.3: BCG matrix

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In the matrix, the horizontal axis shows the relative market share position of a particular business portfolio. The relative market share will also show the strengths of the business portfolio as it will indicate the extent a particular business portfolio has relative to the leading competitor. The relative market share is defined as: Relative Market Share (RMS) In Year 2

= (Business Sales in Year 2) (Leading Competitor’s Sales in Year 2)

The relative market share is an indicator of an organisation’s business strength because the relative market share indicates that the organisation has high accumulated volume of production, thereby having lower unit costs of production, and therefore giving higher profitability. This is also observed in the experience c urve concept discussed earlier. For example, if an organisation has a relative market share of 2.0, this means that the organisation has total sales twice a large as the largest competitor. If the relative market share is 0.50, this means that the organisation has half the total sales as compared to the largest competitor. Thus an organisation with a large relative market share has more competitive strength than one with a smaller relative market share. The demarcation between high and low relative market shares is based on the principle that a relative market share position of greater than 1.0 means that the organisation is in a leadership position, and therefore has significant business strength. Therefore, BCG recommends that the demarcation is made between 1.0 for low and high relative market share. One can change the demarcation to 1.2 or 1.5 if one believes that it makes more sense to do that in t he business in which one operates. The vertical axis of the matrix shows the market growth rate or in some cases known as the business growth rate. This growth rate shows the extent of the attractiveness of the business environment to the organisation. The market growth rate for the year 2 can be defined as: Market Growth Rate In Year 2

= (Total Market Year 2) – (Total Market Year 1) X 100 Total Market Year 1

The market growth rate shows the attractiveness of the total industry regardless of the position a given organisation might be in. This idea was selected based on the product life cycle concept which suggests that when the business is in the growth stage, there is a great potential in attracting other people to join in the business, particularly when the growth rate is increasing at an increasing rate. The demarcation between low and high market growth rate can be based on the average growth rate in the industry, or GNP growth rate, or a weighted average of all the growth rates in multi-businesses in a particular country. A 10% rate of growth was recommended by BCG because that was the growth rate of the American economy at that time. In Malaysia, one may choose 7% to 9% as reasonable growth rates as the Malaysian GNP growth rate was in that range in the last decade. In the matrix, the area within each circle is proportional to the total sales generated by that particular business. The pie slice showed the proportion of profit generated by that product portfolio.

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In the BCG matix, there are four cells in the grid. When the product portfolio has a small relative market share (rms) and low market growth rate (mgr), then it is in the ‘Dog’ cell. In the ‘Dog’ cell, businesses are generally unattractive and weak. ‘Dogs’ are regarded as cash traps because their cash is used to maintain their operation in the market. Generally ‘dogs’ have negative net cash flow, but could also have a slight positive net cash flow in some cases. If there is no strong reason to turn around and or keep this business portfolio, the ‘dog’ should be divested. Some organisations like to keep their ‘dogs’ because of tax purposes or does not want others to take over their share position. In the product life cycle, it is similar as the declining or ageing stage. When the relative market share is low but the market growth rate is high, the cell is known as ‘Question Mark’ or ‘Problem Child’. This is generally the position of new products introduced in the market. At the beginning, the product portfolio may have large negative net cash flow, but when the relative market share increases, the net cash flow may become positive. In this cell, the organisation must decide whether they have the resources to put in more investment to let the business grow or if the prospect is limited, they may decide to divest from the business. This is one reason why we see many new products failed in the market and do no exist after some time. When an organization does not have enough cash position, they would be in great difficulty to cope with this type of portfolio position. In the product life cycle, this is similar to the embroynic stage of the product life cycle. The cell is known as the ‘Star’ when the relative market share is large, and the marget growth rate is high. In terms of cash flow position, the ‘stars’ may generate a lot of cash inflows, but at the same time have to spend some cash to maintain their position in the industry. Consequently, their net cash flow could be a small positive or slightly negative. The profit potential is high but the investment required is also high. In the product life cycle, the position of the star is similar to the growth stage. When a product portfolio is in this cell, the organisation must decide whether they could maintain their position so long enough to be cash cow, or it could slip to be in a ‘Question Mark’ position. When the product portfolio has high relative market share but low market growth rate, it is known as the ‘Cash cow’. In this position, the product portfolio provided much cash inflow to the organisation, and therefore, the net cash flow is largely positive. It is also similar as the maturity stage in the product life cycle. This is due to the fact that the large market share provided much revenue while the low market growth suggests that the organisation needed to spend less money as the external market environment is less attractive. Top management must therefore, look for new investment potentials so that they can use the cash resources from the cash cow to expand their businesses, which will give the new product portfolio into the ‘Question mark’ position.

8.2.2 Criticisms of BCG Matrix Although the BCG matrix is simple and widely used by many organisations, it has also received some criticisms. Some argued that the use of low-high market share or market growth rate was too simplistic. In the real work, there are also situations known to be as ‘middle’ or ‘medium’. The world does not consist of black and whites, but many ‘grey’ areas.

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It was also argued that the link between profitability and market share is not strong or convincing. This is because there are businesses with small market share yet having profitable business. For example, the market share of BMW car is smaller compared to Proton cars, yet BMW is also profitable like Proton, although BMW may not have a large market share of the automobile market. It was also suggested that the use of market growth rate as an indicator of industry attractiveness is not appropriate. This is because the overall industry may not be that attractive to one industry but could be attractive to another industry. For example, when the base lending rate is high, it is good for the financial industry but not attractive to the manufacturing industry. The use of market share as an indicator of one organisation’s business strength is also not adequate. The business strength of an organisation may comprise many other factors including the size of market. Thus, using one indicator may not be sufficient to know the overall strength of the organisation.

8.2.3 General Electric (GE) Matrix The criticisms of the BCG matrix led General Electric (GE) to engage the services of McKinsey and Company to develop more appropriate portfolio tool. This led to the development of the nine by nine cell grid. GE believed that the internal business strength (similar to the horizontal axis) should include other factors like market share, technological position, profitability, size, product quality, customer service, product image, breadth of product line and many others. The industry attractiveness (similar to the vertical axis) which measures the external factors should also include the market growth rate, market size, industry profitability, competitive structure, business cycles, manpower availability, social issues, environmental issues and also political and government regulations.

Figure 8.4: GE matrix

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Figure 8.4 shows the GE matrix. The area of each circle is in proportion to the size of the industry in terms of sales. The pie slices within the circle shows the market share of each product portfolio. To develop the GE matrix, the following steps are recommended. 1.

Select the criteria to evaluate the industry attractiveness for each product portfolio. Assess the overall industry attractiveness for each product portfolio on a scale of 1(very unattractive) to 5 (very attractive) to the organisation.

2.

Identify and select the key factors determining the business strengths of each product portfolio. Assess the business strengths for each product portfolio on a scale of 1(very weak) to 5 (very strong) competitive position.

3.

Plot the product portfolio’s current position on the nine cell matrix. The low score can range from 1.00 to 1.67, while the medium position could range from 1.68 to 3.34, and the high position is in the range of 3.35 and above.

4.

Plot the organisation’s future portfolio position assuming that the business strategies remained similar. If there is a gap, appropriate actions need to be taken to reduce the gap at the implementation stage.

Figure 8.5 shows the industry attractiveness score and figure 8.6 shows the business strengths score. Industry Attractiveness Factors Market size Market growth rate Industry profitability Competitive structure Business cycles R & D development Social issues Market diversity Governmental policy Total

Weights

Rating

0.20 0.15 0.15 0.10 0.05 0.10 0.10 0.05 0.10 1.00

5 4 3 2 2 3 2 2 1

Weighted Score 1.0 0.6 0.45 0.2 0.10 0.30 0.20 0.10 0.10 3.05

Figure 8.5 : Industry attractiveness score

Business Strengths Factors

Weights

Rating

Market share SBU growth rate Breadth of product line Price competitiveness Advertising effectiveness Capacity & productivity R & D strengths Cash flow Top managerial talents Total

0.20 0.15 0.15 0.10

4 3 3 3 0.05

0.05 0.05 0.15 0.10 1.00

2 2 3 4

Weighted Score 0.80 0.45 0.45 0.30 4 0.10 0.10 0.45 0.40 3.25

0.20

Figure 8.6 : Business strengths score

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Based on the above score, the product portfolio is in the middle cell. In this cell, the organisation need to identify growth segments, they may also have to specialise or invest selectively. The strategic implications of each cells in the GE matrix is shown in figure 8.7. Industry Attractiveness High

Business Strengths

Medium

Low

Grow Maximize investment Cell 1 Identify weakness Build strengths Cell 2

Identify growth segments Invest strongly Cell 2 Identify growth Invest selectively Cell 3

Seek niches Consider acquisitions Cell 3

Seek niches Ready to exit Cell 4

Maintain position Seek cash flow Cell 3 Minimize investment Ready to divest Cell 3 Prepare to exit and divest Cell 4

Figure 8.7 : Strategic Implication of GE Matrix

From figure 8.7, it should be noted that those in cell 1 and 2 are good positions and known as winners. Those in cell 3 are in average positions. They have average businesses or sometime produce high profits or sometimes in ‘question mark’ positions. Those in cell 4 are losers as they have to prepare to turn around, or harvest or divest. Harvesting a business means that the organisation may have to take as much profit or cash as possible and if the business does not improve, then sell it off or close the business. Although the GE matrix attempted to improve the weaknesses of the BCG matrix, it also has its own limitations. The GE matrix makes a relatively subjective assessment of the industry assessment and business strengths which may vary from person to person. Furthermore, the process could be tedious when an organisation has many product portfolios, and take a long time t o know the outcome.

8.2.4

Arthur D. Little Matrix

The Arthur D. Little (ADL) matrix is also known as the product life cycle matrix. This matrix was suggested to overcome the weaknesses found in pervious matrices, that is the BCG and GE matrices. In the ADL matrix, the horizontal axis shows the stages of development of product portfolio. This ranges from embryonic, growth, maturity and ageing. To determine how product portfolios would be in a particular stage of the product life cycle, ADL suggested several factors like growth rate, industry potential, product line, number of competitors, market share stability, purchasing patterns, ease of enry and technology development (Hax and Majluf, 1984). For example, an embryonic industry would have high rapid growth, changes in technology great pursuit of new customers, fragmented and changing shares of market like the biotechnology industry. The growth industry has rapid growth but customers, market shares and technology are more known to others and entry into industry is more difficult like the computer market. A mature market has stable customers, market shares and technology does not change much as in the automobile industry. The ageing market is characterized by falling demand like the bicycle and shipbuilding industry. 94

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On the vertical axis is the competitive position which ranges from dominant, strong, favorable, tenable and weak. The dominant competitive position means that only one or two players have leading roles in the industry. This is quite rare except in selected industries like energy in Malaysia, where Tenaga Nasional is the dominant provider of energy in the country. A strong competitive position means that the organisation has substantial market share position compared to others like Proton in the automobile industry in Malaysia with almost 75% market share. Not many organisations have such position. A favourable competitive position means that the organisation has an advantage over other competitors due to product differentiation. For example, in the fast food business, McDonalds, KFC and Pizza Hut have favourable positions compared to A&W or Burger King . A tenable position means that the organisation is slipping in its business performance. This can be done by seeking new markets or introducing new and improved products. A weak competitive position means that the organisation has limited capability to survive in the competition. The ADL matrix is shown in figure 8.8.

Figure 8.8 : ADL matrix

The areas in grey show that the position is quite good, and has several alternatives. When the position is in thin diagonal shape, then a selective strategy is required. The black section shows that the organisation need to prepare for exit or divest or liquidation. The strategic implication of firms in each cell is similar to the GE matrix cell. Although product portfolio matrix provides a better view of the product portfolio performance in an organisation, it also has its limitations. One of t he limitations is that some of the factors or indicators are not easily analysed due to limited information in the market. Furthermore, the generic strategies prescribed may not be true as some product may have its own peculiarities. Furthermore, some element of subjectivity is required in the analysis and if one does not have enough experience and adequate information, it may mislead one in the results and interpretation of the results. Thus, the portfolio analysis must be used with caution. Nevertheless, the product portfolio provides one a method to analyse the product performance in an organisation.

8.3

COMPETITIVE PROFILE MATRIX

The competitive profile matrix (CPM) shows the organisation’s major competitors and specific strengths and weaknesses in relation to the organisation’s strategic position (David, 2003). The purpose of the CPM is to assess the competitive position of the organisation in an industry. This is quite similar to the external factor evaluation matrix and or the industry analysis, except that the profile provides more information on the strategic position of the organisation in relation to the other competitors in an industry.

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In order to develop the competitive profile matrix, the following steps are recommended: (a) Identify the critical success factors in an industry. The critical success factors can be an external issue, internal organisation or industry related issue. These are factors considered important to be successful for any organization in the industry. Such factors must be based on factual information and experience in the industry. (b) Identify the key competitors in the industry. The key competitors are those who played an important role in the industry. They have similar or large market shares or position in the industry. (c)

Assign each critical success factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The sum of all weights must equal to 1.00.

(d) Assign a rating of 1(major weakness), 2 (minor weakness), 3 (minor strengths) and 4 (major strengths) of the organisation. A low rating means that t he organisation is weak in that factor and a high rating means that the organisation has strengths in t hat factor. (e) Multiply each critical success factor with the weight and rating to determine the weighted score. (f)

Sum the weighted scores for each critical success factor to determine the total weighted score for the organisation or competitor.

Figure 8.9 shows the competitive profile matrix. Avon

LíOreal

Critical Weights Rating Score success factors Advertising 0.15 2 0.30

Proctor and Gamble Score Rating

Rating

Score

4

0.60

3

0.45

Product quality Price

0.20

4

0.80

4

0.80

3

0.60

0.15

4

0.60

4

0.60

3

0.45

Branding

0.10

3

0.30

4

0.40

2

0.20

Image

0.15

3

0.45

3

0.45

2

0.30

Market share Global market Customer loyalty TOTAL

0.10

2

0.20

3

0.30

2

0.20

0.05

3

0.15

4

0.20

3

0.15

0.10

4

0.40

4

0.40

3

0.30

1.00

3.20

3.75

2.65

Figure 8.9 Competitive profile matrix

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From the above hypothetical results of the competitive profile matrix, we can observe that the organisation, say Avon, is in a better position than its competitor Proctor and Gamble, but weaker t han L’Oreal. More specifically, L’Oreal is better than Avon because of advertising, branding, market share and global market. Thus, one of the key moves of Avon would be to enhance the advertising strategy so t hat the branding of Avon would be improved, and also increase its market share. Also Avon has to market it more on a global basis. The example of the competitive profile matrix showed the usefulness of the matrix in making a competitive analysis of the organisation vis-à-vis its competitors. This seems to be an easy task but the real challenge is getting the critical success factor correct, and making an assessment of those factors. Thus information about the industry and competing firms are important before the matrix can be meaningful. It should also be realized that the matrix would only be useful at a certain point in time, when the information was obtained and would change as the information changes. Thus, the profile matrix would change as often as the dynamics of competition in the industry changes.

8.4

STRATEGIC POSITION ACTION AND EVALUATION (SPACE)

The Strategic Position Action and Evaluation (SPACE) was developed by Rowe et al., (1982) to determine the appropriate strategic position of the organisation and each of its individual businesses. SPACE was introduced to overcome the weaknesses of the portfolio business models developed by BCG, GE and others. SPACE has a four quadrant framework indicating whether the organisation is aggressive, conservative, defensive or competitive. On the horizontal axis, there are two ends of the pole. On the positive end is the Industry Strengths (IS), and the negative end is the Competitive Advantage (CA). On the vertical axis, at the positive end is the organisation’s Financial Strength (FS), and the other end is the Environmental Stability (ES). Figure 9.0 shows SPACE matrix.

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Financial Strenght (FS)

6 5 4 CONSERVATIVE

AGGRESSIVE

3 2

-6

-5

-4

-3

(+2, +1)

1

Competitive Advantage (CA) -2

-1

Resultant Vector

Industry Strenght (IS) 0

1

2

3

4

5

6

-1 -2 DEFENSIVE

-3

COMPETITIVE

-4 -5 -6 Environmental Stability (ES)

Figure 9.0: Strategic position action and ev aluation (SPACE) matrix

The steps required to develop the SPACE matrix are as follows: 1.

Select a set of variables to define the financial strengths (FS), industry strengths (IS), competitive advantage (CA), and environmental stability (ES).

2.

Assign a value ranging from +1 (worst) to +6 (best) to each of the variables that made up the FS and IS dimensions.

3.

Assign a value ranging from -1 (best) to -6 (worst) to each of the variables that made up the CA and ES dimensions.

4.

Compute the average scores of the FS, IS, CA and ES dimensions. For the dimensions like ES and CA, you have to take the average score and then minus 6 as the score is reversed.

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5.

Plot the average scores on the SPACE matrix. Add the scores on the X axis to get the resultant for X, and add the scores for Y axis to get the resul tant for Y. Plot the intersection of the XY resultant scores.

6.

Draw the directional vector from the origin of the SPACE matrix. The vector will determine the type of strategies recommended for the organisation. Table 9.1: Factors determining the SPACE dimensions

Financial Strengths (FS) Return on investment Leverage Liquidity Capital required/ available Cash Flow Risk involved in business Ease of exit from market

Competitive Advantage (CA) Market share Product quality Product life cycle Product replacement cycle Customer loyalty Technological know how Vertical integration

Environmental Stability (ES) Technological changes Rate of inflation Demand variability Price range Barriers to entry Competitive pressure Price elasticity of demand

Industry Strengths (IS) Growth potential Profit potential Financial stability Technological know how Resource utilisation Capacity intensity Ease of entry into market Productivity, capacity utilisation

According to Rowe et al. (1982), when an organisation is in the aggressive position, the industry is attractive and has little environmental turbulence. The organisation enjoys a definite competitive advantage, which it can protect with its financial strengths. The critical factor is entry of new competition. In this situation, the organisation should take full advantage of the opportunities, look for acquisitions, increase market share and concentrate on products with competitive edge. In the competitive position, the industry is attractive, and the organisation enjoys a competitive advantage in a relatively unstable environment. The critical factor is financial strengths. In this position, the organisation should acquire financial resources to increase marketing thrusts, add new sales force, extend or improve product line, invest in productivity, reduce costs, protect competitive advantage in declining markets, and merge with cash rich organisation. When an organisation is in the conservative position, the market is stable and low growth rate. Here the organisation focuses on financial stability. The critical factor is product competitiveness. Therefore, the organisation should consider to reduce product lines, reduce costs, focus on improving cash flow, protect competitive product, develop new products, and gain entry into more attractive markets.

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In the defensive position, the industry is unattractive and the organisation lacks competitive product and financial strength. The critical factor is competitiveness. Organisations in this position must prepare for exit of the industry, discontinue marginally profitable products, reduce costs aggressively, cut capacity, and defer or minimise investments. The four strategic thrusts suggested are similar to the four strategic postures of Miles and Snow (1978), namely prospectors (aggressive), defenders (defensive), analyzers (conservative), and reactors (competitive).

Exercise 8.1 1.

A “cash cow”, referred to in the Boston Consulting Group Portfolio management techniques, refers to a business that has A. B. C. D.

2.

low market growth and relatively high market share. relatively low market share and low market growth. relatively low market share and high market growth. high market growth and relatively high market share.

All of the following are limitations of the BCG matrix EXCEPT: A. Every business cannot be accurately measured and compared on the two dimensions. B. It views each business as a stand-alone entity and ignores the potential for synergies across businesses. C. It takes a dynamic view of competition which can lead to overly complex analyses. D. While easy to comprehend, the BCG matrix can lead to some troublesome and overly simplistic prescriptions.

3.

In BCG’s Growth Share Matrix, the suggested strategy for “stars” is to A. B. C. D.

4.

Which of the following is NOT a reason for costs reduction? A. B. C. D.

100

Milk them to finance other businesses. Invest large sums to gain a good market share. Not invest in them and to shift cash flow to other businesses. Maintain position and after the market growth slows use the business to provide cash flow.

Learning experience. Specialisation and division of labour. Economies of scale. Increasing number of skilled workers.

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5.

. shows the organisation’s major competitors and specific strengths and weaknesses in relation to the organisation’s strategic position. A. B. C. D.

6.

Competitive Profile Matrix Boston Consulting Group (BCG) Matrix Arthur D. Little (ADL) matrix General Electric (GE) Matrix

Which of the following matrices reveals whether aggressive, conservative, defensive, or competitive type strategies are most appropriate? A. B. C. D.

7.

Grand Strategy Matrix SPACE Matrix Competitive Profile Matrix QSPM

Two external dimensions of SPACE Matrix are A. B. C. D.

8.

Environmental stability and industry strength. Environmental stability and competitive advantage. Industry strength and competitive advantage. Financial strength and industry strength.

The BCG Matrix is ideal for analysing A. B. C. D.

9.

companies with more than one division. all companies. companies with annual sales greater than RM1 million. large companies.

In managing a firm’s portfolio, the BCG matrix would suggest that A. ‘dogs’ should be invested in to increase market share and become cash cows. B. ‘stars’ are in low growth markets and can provide excess cash to fund other opportunities. C. ‘question marks’ can represent future ‘stars’ if their market share is increased. D. ‘cash cows’ require substantial cash outlays to maintain market share.

10. The Arthur D. Little (ADL) Matrix is also known as: A. B. C. D.

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SUMMARY In this chapter, we have introduced several types of competitive and portfolio analysis. The experience curve presented an important tool in understanding strategic options in a manufacturing concern. The BCG, GE and ADL matrices showed the potential usefulness and limitations of the portfolios models. The competitive profile matrix showed an alternative way of assessing the competitiveness of the organisation compared to other firms in the industry. SPACE is another strategic tool to assess the competitive position of the organisation, and the potential options to be considered in such situations. It should be realised that these tools only provide a guide for strategic managers prior to making the final decision in analysing the situation.

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Explain why it is important to study and understand the external environment.

2.

Describe and discuss the four activities of the external environmental analysis process.

3.

Describe the factors that raise the competitive nature of an industry’s rivalry.

4.

What are high exit barriers and how do they affect the competition within an industry?

5.

Identify the five competitive forces and explain how they determine an industry’s profit potential.


Describe the importance of internal analysis to the strategic success of the firm.

2.

Describe a value chain analysis.

3.

Briefly explain what is meant by Environmental Scanning.

4.

List the steps involved in developing External Environment Factor Matrix.

5.

Briefly discuss internal organisational factors affecting the operations of organisations.

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STRATEGIC SELECTION, IMPLEMENTATION, EVALUATION AND CONTROL

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INTRODUCTION Once the strategic analysis has been done, the next stage is to determine what strategies to choose from a range of potential strategies, both at the corporate and business level in the organisation. This can be a challenging task as the strategic choices may not be many or limited, and the strategic options available for selection can be difficult. Nonetheless, to simplify the process of determining what strategic choices are available, it is suggested that we look from two perspectives, one is the corporate level, and the other is at the business level. In this case, we also assume that the organisation does not use the competitive portfolio models as it may not be relevant to the organisation. The competitive portfolio models are relevant for organisations with multi-products/ portfolios and also more specific for the business level strategies as opposed to the corporate level strategies, that is strategies that is of interest to the organisation as a whole. Business level strategies are those proposed plan of actions for specific businesses or activities or portfolios of the organisation. For example, the business strategy of the food division or business unit in Nestle Malaysia could be a low cost strategy, but the overall corporate strategy could be growth and expansion. These two types of strategies are different but consistent or logical for Nestle to pursue to maintain its profitability and competitive edge.

OBJECTIVES By the end of this chapter, you should be able to: 1. comprehend how corporate and business strategies are generated; 2. explain the process of selecting relevant corporate and business strategies; and 3. understand the importance of implementing appropriate strategies for the organisation.

9.1

GENERATING STRATEGIC ALTERNATIVES

In generating strategic alternatives, there are two perspectives to be considered, one is the corporate level strategy, and the other is the business level strategy.

9.2 CORPORATE STRATEGIES Corporate strategies are those potential plans of action that can specify the organisation’s orientation or ability to handle businesses in various environments with a common set of strategic capabilities.

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Corporate strategy covers the broad and overall organisational plan of action that can assist an organisation to achieve the goals and objectives set. In determining the corporate strategy, the strategic manager may need to make decisions on whether to increase, maintain or reduce our overall business activities. Such decisions are very important before any strategic choice can be made or selected. According to David (2003) there are at least four types of corporate strategies. They are integration strategies, intensive strategies, diversification strategies, and defensive strategies.

9.2.1 Integration Strategies Integration strategies are those activities that are involved in forward, horizontal or backward control of the operations of the competing organisation. It is also known as vertical integration strategies. There are three types of integration strategies: forward integration, backward integration, and horizontal integration. (a)

Forward Integration Forward integration means that the organisation is gaining c ontrol or ownership of the distributors or retailers.

For example, Proton as owner and controller of the distributorship of Proton cars can increase its control over its distributor, Edaran Otomobil Nasional (EON) by increasing its shares in EON. By doing this, Proton will have more say in the business of EON. This strategy should be adopted when the organisation feels that the distributors are not reliable or charge high prices to gain excessive profits or want to have more control on their business, or when the future prospects of integration would provide strategic advantages to the organisation in the long run. This can only be done if the organisation has the financial and human capital to make such moves. (b)

Backward Integration Backward integration means that the organisation is gaining control or ownership of the organisation’s suppliers.

For example, Proton can have a backward integration, if it purchases substantial shares in one of its suppliers e.g. Goodyear Tyres. By doing so, Proton can have more say in the supply of tyres by Goodyear Tyres to build Proton cars. This strategy can be considered when the suppliers appear to be unreliable or expensive, the number of suppliers is limited and future prospects in the industry is good or favorable. This strategy should also be considered to maintain stable prices of resources, and the organisation has the financial and human capital to make such integration. This strategy should be considered when the raw material is considered an important component in the final product of the organisation.

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(c ) Horizontal Integration Horizontal integration means that the organisation is seeking ownership or control over the competing organisations in the industry. For example, the dealer for BMW in Malaysia is Cartrade and Auto Bavaria. Then, if Cartrade takes over the dealership from Auto Bavaria Malaysia to have more control over dealership of BMW cars Malaysia, this is known as horizontal integration. Another example is the integration of the Celcom (019) and Telekom (013) mobile services in Malaysia. This strategy should be considered when the organisation can gain monopolistic characteristic and has strategic advantages. This is an important strategy when the organisation operates in an expanding or growing market, and economies of scale can be obtained with a larger operation. Finally, this strategy requires fi nancial and human capital resources on the part of the acquirer.

9.2.2

Intensive Strategies

Intensive strategies refer to those strategies that require intensive efforts on the part of the organisation to improve its competitive position in the industry. There are three types of intensive strategies: market penetration, market development, and product development. (a)

Market Penetration Market Penetration refers to the strategy in which the organisation seeks to increase the market share of the current product or services offered in the market through greater marketing efforts. For example, Citroen objective is to increase its sales of vehicles in China from 104,000 units in 2003 to 124,000 units in 2004. The recent promotions by BMW on its cars in the month of June 2004 also represents an intensive marketing st rategic move to increase its share of the niche luxury car market. This strategy should be selected when an organisation realises that the current market size is not saturated, and has growth potential. This is also a good strategy when the market shares of competitors are lagging behind, and when the increase in the number of new customers is favorable. Finally, market penetration should be considered when there is a relationship between marketing expenses and sales revenue growth, and the organisation can gain economies of scale and competitive advantage position.

(b)

Market Development Market development refers to the strategy of introducing the current product or services to a new market. For example, because the market for local canned drink health beverage, Power Root, is saturated in Malaysia, the producer might want to sell the beverage to consumers in Thailand or Indonesia in order to increase the sales of that product.

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This strategy can be selected by the organisation when the organisation has readily available channels of distribution in the new market areas. It would be better if the new market is unsaturated or untapped, and the organisation has excess product ion capacity. This strategy can also be adopted when the strategy has financial and human capital so support for the new market needs. (c ) Product Development In this strategy, the organisation seeks to expand its sales by introducing new product or services or provide improved products or services. This would require some research and development activities on the part of the organisation. For example, in trying to be competitive, Proton cars introduced the CamPro engine and the 1.6 Gen-2 model, to replace the other models. In the computer industry, it is fast changing with the centrino technology from the Pentium IV. This strategy should be adopted when an organisation realises that the existing product has reached the maturity stage, and a renewed product is necessary to sustain the organisations position in the industry. This is also important in technology driven industries and the competitors are offering better product quality over time. This is an important strategy in high growth industry, provided the organisation has capabilities in research and development.

9.2.3

Diversification Strategies

Diversification strategies refer to those activities in which an organisation gets involved in areas of businesses which are related or unrelated to the original (core) business activities of the organisation. For example, if a company is involved in the construction of homes, and then decided to invest or start its new business in furniture, then it is known as unrelated diversification. The purpose is to reduce the potential risks of spending too much in one particular area of business, in the event there is a downturn in t hat business. There are three types of diversification strategies: concentric diversification, horizontal diversification, and conglomerate diversification. (a)

Concentric Diversification Concentric diversification refers to business activities of diversification in new but related product or service areas. For example, if Mutiara Hotel in Malaysia offers time sharing to its range of selected hotel rooms in Malaysia, then it is said to be involved in concentric diversification. That means the Mutiara Hotel are involved in a new time of business, time sharing, but related to the lodging industry, offering rooms to occupants. In the education industry, INSEAD, the leading business school in Europe and Asia, besides offering the MBA programs, also provides executive development programs to high level executives in the corporate sectors throughout the world. While the core business is postgraduate education, INSEAD is also involved in high level training programs which are related to education and trai ning industry.

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This strategy is selected when t he organisation is involved in a slow growth industry. By adding a new product or services, it could enhance the sales of the existing products (say rooms). As such, the organisation could offer competitive prices especially when the product or service is in the declining stage. This strategy could be selected if the organisation has a strong team of management to support such moves. (b)

Horizontal Diversification Horizontal diversification means that the organization is involved in new and unrelated products or services. For example, Malayan Banking, a commercial bank, is now involved in insurance services, like Maybank Assurance. This strategy should be adopted by organisations when they find that it would be easier to increase sales by adding into new products or services, especially when the organisation competes in highly competitive environment or slow growth. Organisations can also adopt this strategy by suing the same channels of distribution as it does not add new costs to the organisation, which is why many commercial banks are involved in insurance related products and or services today.

(c ) Conglomerate Diversification Conglomerate diversification refers to business activities of diversification in new, but unrelated products or services. For example, if Petronas starts a KFC outlet in its petrol kiosks, then this is known as unrelated diversification or conglomerate diversification. Another example is when AmBank Group gets involved in the construction of houses industry, then, this is known as conglomerate diversification. In other words, the organisation is involved in activities totally unknown or alien to its original core business in its effort to reduce business risks. Conglomerate diversification should be adopted by the organisation when the organisation is facing a declining trend in certain of its core activities, or has financial and capital resources to make such a move. This strategy should also be considered when the strategic options available to the organisation are limited by virtue of its skills and competence. This strategy should be considered when the financial strategy persists and the opportunity arises to take hold of the situation.

9.2.4 Defensive Strategies Defensive strategies refer to those activities that the organisation will try to defend its position against slipping down. There are three types of defensive strategies: retrenchment strategies, divestiture and liquidation.

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(a)

Retrenchment This is the first strategic action taken by an organisation when it tries to sustain its position or consolidate its position in view of the unfavourable situation. Retrenchment strategies involved cutting costs of its operations and or assets owned, thereby making a turnaround of the organisation. Retrenchment may involve selling off assets to raise the needed cash, cut product lines, closing unprofitable or low margin businesses, institute costs control system, and possibly reducing the number of employees in the organisation. In the year 2001 and 2002 when the financial industry in Malaysia exercised its restructuring in the banking sector, many employees were retrenched or laid off. Similarly, when the demand for electronic chips declined, many production workers in the electronics organisations were retrenched. This strategy is adopted by organisations when an organisation realises that it is in a weaker position in the industry. This strategy is also adopted when an organisation is plagued by inefficiencies, low productivity, low morale and low profitability or losses. Thus, to improve the situation, the organisation may resort to several cost cutting measures before the situation worsen. In other words, the organisation will use all the available strengths it could gain to improve the weaknesses and take any potential opportunities available in the market.

(b)

Divestiture This strategy involves selling off a division or a part of the organisation. This strategy is adopted to raise capital required for other potential businesses in the organisation. For example, if a large organisation has many businesses like food, chemical, and beverages industry, the organisation might want to sell of the chemical business in an effort to gain cash reserves for the food and beverages businesses. This strategy is adopted when an organization realises that the retrenchment strategy is not sufficient to save the organisation from difficulties. This strategy is adopted as the business or division is found to have contributed little profit or losses to the entire organisational performance. Furthermore, when a lot of cash is needed to save the other businesses, this strategic option is important.

(c ) Liquidation This strategy means that the organisation plans to close down its operations entirely. It is similar to going for bankruptcy. This strategy is adopted when all the possible avenue to raise or salvage the business is not possible. Thus, shareholders may prefer to this than to pay the large amount of liabilities to be incurred by t he organisation. In Malaysia, many organizations resorted to the section 176 of the Companies Act, 1963 to prevent being liqui dated temporarily in the year 2000 and 2001. Thus the organisation remains solvent until they failed all avenues to pay up their debts.

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9.3 BUSINESS STRATEGIES The business strategy focuses on the specific business activities of an organisation. It is also known as ‘competitive strategy’ which emphasizes improving the competitive position of an organisation’s products or services within an industry or market segment that the business unit s erves (Hunger & Wheelen, 1996). The business strategy helps the organisation to determine how it could effectively compete in its businesses. For example, how should the business unit compete with other competing businesses or products or services? What is the basis for such competition? Is it based on costs or some distinguishing characteristics of the products or services or based on the market segments? Responses from such questions can help one to determine the appropriate strategic choice or selection for the business unit in the organisation, consistent with its organisational corporate strategies. According to Porter (1980), there are three types of business strategies that organisations can select from. One is the cost leadership strategy, the second is the differentiation strategy, and the third type is the focus strategy. See Figure 9.6

Figure 9.6: Porter’s generic business strategy matrix

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9.3.1 Cost Leadership Strategy The cost leadership strategy is a low cost strategy focusing on broad mass market. This strategy required good efficient scale facilities, rigorous pursuit of cost reductions from the experience curve, tight cost and overheads control, and costs minimisations in selected functional areas like marketing, service, research & development, and advertising. An organisation which can control its operational costs can charge lower prices as the costs of production are lower than its competitors. As such the organisation can make reasonable profits in its business activities. Organisations that have successfully adopted this strategy includes Wal-Mart (retailing), Times (watches), and Gateway 2000 (personal computers) (Hunger & Wheelen, 1996). In Malaysia, Giant (hypermarket), and Air Asia (airline) evidently are successful in their adoption of this strategy. This strategy is suitable to these organisations because with its low costs operations it could charge consumers at lower prices, and therefore gain a larger market share than its competitors. The low price strategy also serves as a barrier of entry to other new entrants and organisations are therefore able to sustain the leadership cost position. This strategy is also suitable for organisations producing products on a large scale operation and gain economies of scale like producing computer chips in millions of units. This strategy, however, is not suitable for businesses or products that are not perceived as a ‘commodity’ item and does not require a large scale of production. It is also possible to adopt this strategy when the consumers are price sensitive over the products. In this strategy, the fundamental idea is to compete on price and costs in its operations, and to gain a larger market share with lower prices, and thereby gain a large profit in the long run or on a large scale. Thus, volume in the sales is important in this strategy.

What are some rationales for adopting the cost leadership strategy?

9.3.2 Differentiation Strategy The differentiation strategy is pursued when the organisation observed that t he business activities can be differentiated in many ways. The differentiation can be in terms of product or service characteristics like brand, product design, technology features, network dealership or customer service. This is a reasonable strategy to pursue in businesses where the profits are above average because of brand loyalty or insensitivity on price by customers. Customers’ loyalty can be a barrier to entry for new entrants as the new businesses or products need to do extensive marketing to show its distinctive competence to the potential customers. Business organisations pursuing this strategy are like Walt Disney Productions (entertainment), Maytag (appliances) and Mercedes Benz (automobile) (Hunger & Wheelen, 1996). Many fast-food outlets and fast moving consumer products use their brand name as the key differentiating strategy in attracting new clients.

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However, this strategy would not be viable when consumers find that the unique product characteristics are not convincing to justify for a higher price, and thus a low cost price leadership strategy can defeat the differentiation strategy. As such, the differentiation strategy works as long as the organisation or business can show the major unique or differentiated characteristics of its products or services. Thus, understanding consumer’s buying behaviour, trends, tastes and preferences are critical in the differentiating strategy.

9.3.3 Focus Strategy Focus strategy suggests that the organisation focuses on certain segments of the market in selling its products or services. This can be due to costs effectiveness or differentiated in terms of its products or services. When the focus strategy emphases on the buyer behaviour, product line segments, or geographical location, then, the strength in adopting such strategy lies on the extent to which the organisation can serve its target market segments more effectively based on its key distinctive features as perceived by the consumers. For example, in selling the BMW 318 series cars in Malaysia, one strategy is to focus on the younger age group with high income as opposed to Mercedes Benz which attracts an older age group. In the retail market, Carrefour focuses on costs differentiation. The consumers in Carrefour hypermarket can different from those in the Giant hypermarkets. In the United States, Johnson Products, for example, successfully used the differentiated focus strategy by manufacturing and selling hair care and cosmetics products to ethnic African American consumers. Their products like Ultra Wave and Ultra Sheen gave African American more flexibility in hair styling (Hunger & Wheelen, 1996). In using the cost focus strategy, the business unit seeks to achieve cost advantage in its market segments. This is adopted when an organisation believes that it could focus its efforts on specific target market segments more efficiently than its competitors due to its lower costs in product design and superior product performance. One example is the Fadal Engineering in the United States that focuses on cost focus strategy (Hunger & Wheelen, 1996). Fadal Engineering made machine tools that were functional, durable and far cheaper than its competitors by producing machine tools that had fewer parts and simpler electronic controls compared to the large manufacturers of machine tools. Another example is the United Services Automobile Association (USAA) which offers low cost insurance to active and retired military personnel (Hunger & Wheelen, 1996). In pursuing the business strategies, it should be noted that there are also risks involved due to imitation strategies of the competing firms. This could only be done when competing firms have the technological know-how or customers are less loyal due to price-cost sensitivities. This could also be attributed to changing social structure like lower income or high rate of temporary unemployment (due to retrenchment of employees or voluntary retirement by employees) which force consumers to change their lifestyles and buying behaviour. Selecting an appropriate business strategy would depend on the current business situation and its relevance to the selected product or services in the organisation.

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9.4

SELECTING ALTERNATIVE STRATEGIES

In trying to select an appropriate strategy for the organisation, there are several factors to be considered. These factors will influence the selection and choice of strategies to be selected by the organization. The factors that can influence the selection of alternative strategies are as follows: (a) strategic analysis framework (b)

attitude towards risks

(c)

pressures from external environment

(d) pressures from internal environment

9.4.1 Strategic Analysis Framework The strategic analysis framework can provide the basis for selecting the alternative strategies of an organisation. For example, when an organisation embarks on using the competitive portfolio analysis, the choices and alternative strategies available are generally available based on the options prescribed by the various portfolio models. For example, when one is using the BCG matrix, the obvious choice for a product portfolio in the ‘question mark’ position is whether to continue to push the product to be a ‘star’ or to let it go to be in a ‘dog’ position. If the potential efforts showed that there is no potential to be a ‘star’, then, let it be in a ‘dog’ position or divest it immediately if the situation persists unfavourably. Prescriptions are also generally known for the internal factor evaluation matrix, external factor evaluation matrix, and the internalexternal matrix. For more information please refer to David (2003). Another alternative method would be to choose the strategy based on the ‘grand strategy’ matrix. According to Christensen et al (1976), there are four grand strategy matrix available for organizations: quadrant I, quadrant II, quadrant III, and quadrant IV.

Figure 9.7: Grand strategy matrix

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From the grand strategy matrix, organisation should select strategies when their analysis showed that the organisation is in quadrant I, II, III or IV. The grand strategic matrix provides a logical guideline on what kind of strategic actions to be taken but does not provide the specific actions to be taken. For example, in selecting quadrant I, the strategic choice ranges from market development to concentric diversification. Strategic analysts must know which of these options are reasonable for the organisation based on the hard facts and figures obtained. Only with the available information can the organisation determine the most appropriate strategic choice for t he organisation. On the other hand, when one is using the strengths, weaknesses, opportunities, and threats (SWOT) method of assessment, the TOWS matrix (see figure 9.8) can be a potential guide in selecting the appropriate strategic choices. In the TOWS matrix, the first stage is to list all the potential strengths, weaknesses, opportunities, and threats. Then, match the strengths with the opportunities (SO), and strengths and threats (ST) to determine the most logical and appropriate action to be taken. As such, this process may lead to the identification of several SO and ST strategies available to the organisation. This process will be continued with the weaknesses and opportunities (WO), and the weaknesses and threats (WT) options.

Figure 9.8: TOWS matrix

For organisations in the SO option, they should try to use the strengths and take advantage of the opportunities available as soon as possible. For the ST option, they should try to use the strengths and avoid the threats. For the WO option, they should try to overcome the weaknesses, and take advantage of the opportunities available. For the WT option, the organisation should minimise the weaknesses and avoid the threats. Once again, it should be realised that the TOWS matrix provides a general guideline and does not offer specific prescriptions to the users. One of the problems in using the TOWS matrix and the ‘grand strategy’ matrix is the generalisability of t he prescriptions. For those with little experience and knowledge about the industry, organisation, and external environment, this can be a potential shortcoming

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to the user. As such, one needs adequate experience to use the matrices. In business schools, this can be done through case study analysis and discussion with colleagues. In the real business world, this can only be done by people with experience and knowledge in the area, like the chief executive officer or corporate planner. In some cases, strategic decision makers need more concrete approach in making decisions. Therefore, the TOWS matrix and ‘grand strategy’ matrix is not sufficient to make a strategic decision. For example, one may be confronted with the choice of ‘either planning for a global expsansion in business in Indonesia or expand the business in Thailand’. In such a situation, one may use the ‘Quantitative Strategic Planning Matrix’ (QSPM) to help in making the strategic decision. Discuss some shortcomings of the TOWS Matrix.

The QSPM was developed by David (2003) in 1986 to assist managers/ strategists in making specific decisions based on the potential alternatives available. In the QSPM, the first stage is to identify the organisation’s key external opportunities and threats, and the internal strengths and weaknesses. Then list, the potential strategic alternative choices to be made, say strategy 1 (expand to Indonesia) or strategy 2 (expand to Thailand). The third stage is to assign weights to each of the factors identified in the first stage. The weights of each factor can range from 0.01 to 0.9, and the total weight of the key factors must be equal to 1.00. The fourth stage, is to assess the attractiveness score (AS) of each key factors identified, on a scale of 1 (not attractive), 2 (somewhat attractive), 3 (reasonably attractive), and 4 (very attractive). The assessment of the factor must be made in relation to the other factors identified. A high score indicates that the factor is highly an attractive option. The fifth stage is to compute the Total Attractiveness Score (TAS), which is the product of the weights and the attractiveness score, for each of the key factors identified. The final stage is to compute the TAS for the entire strategic option (that is to expand to Thailand or Indonesia), and select the strategy with the highest TAS. It should be realised that when the analysis is not done properly and with appropriate information, the total output of the QSPM might not be relevant. As such, in using the QSPM, the strategist must understand the need for relevant information to make the appropriate strategic decision. Thus, to some extend some intuitive judgment is necessary in developing the QSPM.

9.4.2 Attitude Towards Risks The management’s attitude towards risks will affect the selection of strategic choices. This will also depend on the commitment of top management in the strategy selection process. In some organisations, the top management prefers to take low risks or no risks at all in some cases. As such, the analysis of the potential strategic choices may be more rigorous and cumbersome. In the Asian context, it is known that risks are to be avoided, and the attitude towards uncertainty avoidance can be high, that is to avoid any potential risks of uncertainty. However, some Asian organisations may be willing to take higher risks provided it is ‘calculated risks’. The attitude towards risks can also

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be due to past experiences on risks taking and attitude towards organisational change. Whatever, the attitude may be, the strategic depends highly on the management’s philosophy and expectations in managing organisational performance.

9.4.3 Pressures from External Environment Pressures from the external environment may come from various stakeholders. There are external stakeholders that may have direct influence on the organisational setting and therefore, affect the potential selection of strategic choices. The may be from the political perspective or governmental or non-governmental stakeholders who have an important stake in the organisation. For example, one of the strategic choices may be to seek venture capitalists to invest in the organisation. However, one of the strategic choices is to select the venture capitalists from an institution that may not be to the ‘liking’ of the national government in a country. As such, this option has to be reconsidered seriously. In trying to make a decision related to this type of factor, strategic managers need to address the issue of the importance of the choice to the organisation, potential impact to the organisation, and consequences in selecting the strategic choices. In such cases, it may be necessary to review other strategic options and create a wider choice so that the potential consequences may not be detrimental to the organisation as whole. This may not be an easy one but it has to be made.

9.4.4 Pressures from Internal Environment In making strategic choices, pressures from the internal environment can come due to corporate culture and politics in the organisation. The corporate culture presents the set of values, beliefs, attitudes, customs, norms and personality of the organisation. It also shows the ‘dos’ and ‘don’ts’ in the organisation. It is the way the organisation want things to be done. The corporate culture can affect the selection of strategic choices. This is attributed to the preferences and policy of top management which is related to the culture of the organisation. For example, in some organisation, the culture would be to discuss with senior members in the organisation first before implementing a st rategic decision. In some other organisations, the CEO makes the decision, and then informed the other members of the senior management. Thus, the style of the CEO can also affect the strategic choices and selection of the choice. Consequently, the corporate culture can affect the performance of the organisation based on the selection of appropriate strategies for the organisation. In an organisation where the interaction among the members can be political, the influence of organisational members on selection of strategic choices can be critical. For example, when there is a democracy in making decisions, senior members of the organisation may lobby among their own members to support or reject the strategic choices based on their personal preferences as opposed to organisational preferences. In such cases, the process of making strategic selection can be tedious and laborious due to the political intricacies in the organisation. For example, in selecting a new CEO, the Chairman of the Board of Directors may have a candidate different from the other

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members of the Board. Then, the Chairman may lobby for the candidate of his choice and seek support from other members. The nominated candidates may also be doing their own lobbying to achieve their goal – getting the job of the CEO. Situations like this, when not handled properly can create instability in the organisation, when the strategic choice is selected. In making such decisions, it is important to see the potential consequences of such situations before making the ultimate decision. Why does corporate culture affect the selection of strategic choice?

Selecting alternative strategies can be a difficult exercise when potential choices are many and constraint by many factors, either internally or externally. There is no one best way to make a decision on the strategic choices, but what ever way one selects, there must be based on sound judgment, after considering the potential consequences and impact of the choice selected. In some case, after selecting a particular choice, one may view that the choice was not appropriate, then, a corrective measure can be done. In many cases, this may not be true. As such, before making the final decision, it may be a better guide to review the assumptions made in making the decision before implementing the selected strategic choice. No one can know the best option, except when the decision selected is implemented and performance reviewed. Thus, the attitude of not making a decision is not a good choice as it retards the effective implementation of the organisational strategy and achieve the goals set forth.

Exercise 9.1 1.

What type of strategy in the Grand Strategy Matrix is recommended for a firm that has rapid market growth and a strong competitive position? A. B. C. D.

2.

Market penetration Conglomerate diversification Joint venture Retrenchment

A reveals the relative attractiveness of alternative strategies and thus provides an objective basis for selecting s pecific strategies. A. B. C. D.

3.

TOWS SPACE QSPM CPM

The TOWS matrix’s purpose is to A. Identify the strengths, weaknesses, opportunities, and threats of the firm. B. Generate the feasible alternative strategies for the firm. C. Pick the best strategy for the firm to carry out. D. Decide who the company’s major competitors are.

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The has four quadrants based on two dimensions: competitive position and market growth. A. B. C. D.

5.

If an organisation were to match high employee turnover with increased local competition, what type of strategies would be appropriate? A. B. C. D.

6.

Have market power in their industry and are market leaders. Have control of tactical and strategic competitive actions. Are market flowers and have a secure niche. Have excess resources and core competencies with multiple uses.

Backward integration occurs when: A. B. C. D.

9.

SO WO SW ST

The essence of the prevailing theory of diversification is that firms diversity when they: A. B. C. D.

8.

SO strategies WO strategies ST strategies WT strategies

strategies aim at improving internal weaknesses by taking advantage of external opportunities. A. B. C. D.

7.

Competitive Profile Matrix TOWS Matrix SPACE Matrix Grand Strategy Matrix

A company produces its own inputs. A company owns its own source of distribution of outputs. A company is concentrated in a single industry. There are no linkages among the businesses.

Which of the following is NOT a question which should be considered when a firm is trying to decide if it should diversify? A. What core competencies are necessary to succeed in a new product or geographic market? B. Will diversification break up capabilities and competencies that should remain together? C. Will we emerge as a winner in the new market? D. Does management have the knowledge and expertise necessary to analyse the firms available for acquisition?

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10.

refers to the strategy of introducing the current product or services to a new market. A. B. C. D.

Market development Market penetration Product development Concentric diversification

SUMMARY This chapter discussed how to generate strategic alternatives. Basically two perspectives are to be considered; corporate level strategy and business level strategy. Under the corporate level strategy, integration strategies, intensive strategies, diversification strategies and defensive strategies were explained in detail. In business level strategy , cost leadership strategy, differentiation strategy and focus strategy were discussed. Finally, four factors affecting the selection of alternative strategies were outlined. They are strategic analysis framework, attitude towards risks, pressures from external environment and pressures from internal environment.

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STRATEGY IMPLEMENTATION

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INTRODUCTION Strategy implementation refers to the phase in which the organisation plans to make the formulation of the strategic plan into action. It is the phase in which the organisation needs to make sure that what was planned in the organisation are set forth into action. Strategy implementation is also the stage where the organisation is deciding ‘how to get the organisation from where it is today to where it should be tomorrow’. It is also the stage in which various aspects of the organisation need to be harnessed and integrated with the activities required to get things done accordingly. This is the stage which is most critical in strategic management as it would indicate the extent to which the organisation could achieve the goals that it had set or falls short of the targets. This is generally the case of why policies of the organisation do not work or the policy of the government was not effective on the ground level. In U.S.A., Universal Studios had planned to launch a theme park at Orlando, Florida, similar to Walt Disney World. It was planned in 1969 but was finally implemented in 1989. In implementing it, the management had rushed to open the project well before it was ready. Consequently, many customers were dissatisfied and demanded for a refund (Hunger & Wheelen, 1996). This is an example of a well planned project but poorly implemented with major unfavourable consequences. Similarly, in Malaysia, we have observed that projects like ‘Rakan Muda’ (recreational activities for the teenagers and youth) were successfully implemented for a while but later ceased its operation. A survey of 93 Fortune 500 firms in the U.S. showed that more than 50% of the corporations have experienced problems in implementing a strategic change (Hunger & Wheelen, 1996). The ten problems are as follows: • • • • • •· •· • • •

Implementation slower than originally planned, Unanticipated major problems, Ineffective coordination of activities, Competing activities and crises that distracted implementation, Insufficient capabilities of the involved personnel, Inadequate training and instruction to lower level employees, Uncontrollable external environmental factors, Inadequate leadership and direction by departmental managers, Poor definition of key implementation tasks and activities, and Inadequate monitoring of activities by the information system

These are some examples of problems arising in the implementation of projects or activities of organisations. Why did these problems arise? What factors contributed to these problems? What can be done to remedy the situation? What are the pitfalls to be avoided? These are issues that need to be addressed in the implementation of organisational strategy. In trying to implement strategies, there are three key issues to be addressed: (i)

What are the activities that need to be done?

(ii)

Who should be doing these activities?

(iii) How should the activities be done?

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These issues should be also be addressed before selecting the alternative strategies of the organisation as it may have an effect on the choice of strategies to be considered. This would be true for newly established organisation but for existing organisations, the process can be done simultaneously or after selecting the appropriate strategic choice.

OBJECTIVES By the end of this chapter, you should be able to: 1. understand the key issues affecting strategy implementation; 2. appreciate the need to integrate the objectives, policies and strategies of the organisation; 3. identify the main features of the various types of organisational structures; 4. understand strategy and structure relationship; and 5. describe organisational systems and functional processes.

10.1

INTEGRATING OBJECTIVES, POLICIES AND STRATEGIES

Why is it important to integrate objectives, policies and s trategies?

The strategy formulation is generally done at the top management level. The formulated strategy is then implemented at the business level and functional level in the organisational hierarchy. At the business level, the implementation of strategy focuses on the key policy areas related to the core businesses of the organisation. For example in the conglomerate organisation, the business level will focus on the type of businesses involved like food business, chemical business, beverage business, and others. For example, in setting the objectives, the business level will focus on the ‘goals’ of the business unit. The business level will also set the policy direction on the areas of business activities to be involved or developed in the future. In terms of strategy, the business level will identify the grand strategic direction, like growth, diversification or low cost or niche or differentiation strategies to be followed by the business. At this level, the is sue of implementation is not critical as the number of people involved is not many, and can be monitored easily. However, at the functional level, the issue is more complex. At this operational level, the implementation of strategy becomes more challenging and involved risks of failure in strategy implementation. At the functional level, setting the organisational objectives is important as it can determine the extent to which the goals and mission of the organisation can be achieved. For example, at the business level, the goal is to ‘ to improve the profitability of the food division.’ At the functional level, the objective to be set could be as follows:

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To achieve a return on investment of 8% in 2005 To increase the sales growth from 8% to 12% in 2005 To reduce operating costs from 56% to 48% in 2005

The prescribed objectives set must be consistent with the goals set at the business level as mentioned in part 4.2 of this module. One of major problems faced by organisations is to make sure that the objectives are consistent, can be operational, and achievable within the time frame allotted . Once the objectives, have been set and agreed to by the functional managers and top managers, then, the policy set must be reviewed so that it is consistent. For example, in the above example, the policy set for the food business division is to’ improve the profit margins of the domestic market ’, ‘ enhance the market share of the international market , particularly in the Middle East’ , and ‘ ‘focus on canned food related businesses’ . These policy statements of the food division provide the direction to be used as a guide by the functional manager. So if the functional manager received a proposal to start a ‘non-canned food business in China’, then it is clear that such a proposal should not be considered as it is not consistent with the business policy of the food division. The above proposal may not be acceptable if the potential return on investment is less 8% or the sales growth may not be able to increase the sales of the food division. Thus, policy statements are very important in the implementation stage of the organisation as it can set the clear direction or make the organisation move in haphazard ways. Policies are, therefore, directives designed to guide the thinking, decisions, and actions of the managers in implementing an organisation’s strategy (Pearce II & R obinson Jr., 1985). Policies also provide guidelines for establishing and controlling the operations of the organisation in a manner consistent with the organisational goals and objectives. While policies provide these guidelines in a broad manner, at the functional level, it is translated into ‘standard operating procedures’ (SOPs). The SOPs provides a description of the necessary steps to be done in a sequential manner in detail on how a particular task or job is to be done. The SOPs also will list out the activities necessary to get the job or task done, the people involved, the timelines, financial implications (if any), and the processes (steps) involved in getting the task done. SOPs are important to organisations when they are new or involved in activities considered alien as compared to previous activities done in an organisation. SOPs are also important to ensure that people in the organisation knows how to get things done so that they do not go astray. In large and complex organisations like the public sector, the SOPs provides better management and administration of the organisation as the people involved in the project or activity often changes without leaving a trace to the successor on how to get things done in the organisation. This is generally, one of the common reasons why strategy formulation fails in many organisations. There is no follow through in the implementation of the project or a change in the policy decision, half way through the implementation process. Such situations can affect the implementation of the strategy and the ability of the organisation to achieve the strategic planning targets. It also explains why certain strategy implementation fails. Having set the objectives and policies of the organisation, the next stage is to integrate these with the chosen strategy. The chosen strategy may be selected because it was found to be reasonably consistent with the goals and mission of the organisation and matches with the external environment, industry situation, corporate strengths and

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weaknesses. As such a practical strategy is inevitable and in the implementation stage, the organisation needs to review the consonance of the strategy with the selected objectives and policies set in the organisation. In other words, the issue is to establish to what extent the selected strategy can help to achieve the objectives set forth, and to ensure the policies do not hinder the implementation of the strategy. This process is not generally implemented by managers, as they often resort to ‘fire fighting’ when managing the affairs of the business. Consequently, the implementation of the strategic action resulted to problems in implementation, and if not resolved accordingly, it will cause the project to fail. For example, the chosen marketing strategy is ‘to expand the food business in the international market’. One potential opportunity that arises is the ‘expansion for the food business in China’ . Alternatively, the selected financial strategy may be to control costs of the operation, and this means that international operations have to be managed astutely. This opportunity is not consistent with the policy set at the food business unit or not consistent with the marketing strategy or financial strategy of the organisation. So if the food business manager is convinced of the potential impact of such opportunities in China, he/ she should get the top management to review the business policy to include China. Similarly, if the financial controller feels that this strategy can enhance the revenue for the organisation, the financial strategy should be reviewed. This kind of situation is generally difficult and many managers get ‘tired’ as the top managers have a ‘fixed mind’ set in their policy decisions. The situation can result to many managers leaving the organisation as their suggestions were not given due consideration and with great confidence. The matter is even less motivating when the top managers do not have enough information but does not like to show their ‘ignorance’ for reasons known to them. On the other hand, the matter is easily handled when the top managers are more ‘hands-on’ and have more experience and wide information network, which is not easy to find. As such the dynamism of the business environment makes implementation of the organisational strategy a ‘living challenge’ to managers on the ground (at the functional or operational level). The process of integrating the objectives, policies and strategies of the organisation should be done with astuteness, and reviewed more frequently after the strategic plans are formulated. This should be done by the corporate planner or chief executive officer. It should be noted that this prescription may be ‘easier said than done’, but many chief executive officers do this in a more informal way due to hassles in the formal processes. This may explain why many people think that in practical strategic planning, the formal processes hinder the process of getting things done faster. Nonetheless, we often see how chief executive officers change their views on certain organisational policies as they know that the change is inevitable. At the lower level, they may view this action as someone who is ‘fickle’ minded, and difficult to cope with, whereas the matter is that the chief executive officer is managing to cope with the changes in the environment. Why must the integration of objectives, policies and strategies of the organisation be done with astuteness?

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10.2

ORGANISATIONAL STRUCTURE

In implementing strategy, the ‘what are the activities to be done’ can best be viewed from the organisation structure. The organisation structure defines the division of tasks for efficiency and clarity of purpose and coordination between the interdependent parts of the organisation to ensure organisational effectiveness (Pearce II & Robinson Jr., 1985). Structure is, therefore, the design, whether formally or informally, the lines of authority and communication between different administrative offices/ units/ divisions/ business units, and the information and data that flow through these lines of communication and authority (Chandler, 1962). As such, structure provides the means to centralise or decentralise the activities consistent with the organisational and control needs of the strategy. The organisation structure will explain in brief ‘ who is suppose to do what activities ’, and to whom the person should report to in the organisational hierarchy. In implementing the strategy, the manager should make sure that all employees follow the lines of authority and communication, and not ‘short circuit’ it as it can have negative impact on the organisational members and performance in the long run. People who are making implementation difficult will be short circuited and the message is ‘to get others’ to do it. Unfortunately, many people don’t get the message that such circumstances means that the person is not performing well in his/ her job. Nonetheless, defining the organisational structure is important in strategy implementation. There are at least five major types of organisational structure (Pearce II & Robinson Jr., 1985): 1.

Simple

2.

Functional

3.

Divisional

4.

Strategic Business Unit

5.

Matrix

10.2.1

Simple Structure

A simple organisational structure is shown in Figure 10.1. In this structure, there is a direct relationship between the manager and the employee. This is the common case of small business enterprises, where there is a direct and personal relationship between the manager, who is usually the owner of the business, and the employees. In this case, all matters have to be referred to the manager/ owner. The manager has direct control of all the operations and activities of the business. Decision making in this situation is also rapid, and can cope with changes in the business faster. Relationship with employees and manager/ owner is generally closer and has the ‘personal touch’ between employer-employee relations.

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This structure is not relevant when the business activities of the organisation expanded. The direct relationship between manager-employee is not going to make the job of the manager easier when there are many activities to cope with. In this type of structure, owner/ manager generally focuses on operational matters and may not have the time to think of business strategy issues.

Figure 10.1: Simple structure

10.2.2 Functional Structure In many organisations, the functional structure is adopted as it is related to the activities or functions required in the management of the organisation. See Figure 10.2. In the functional structure, the tasks and activities are grouped in functional areas like marketing, human resource, finance, accounting, production, and research and development. In this type of operation, In many organisations, the production, marketing and operations are the line functions (that is a function that has the authority and responsibility of a particular area), whereas the finance and human resources are the staff function (that is providing a specialised service or assistance to the line positions). Each of the functional area will focus on their areas of specialisation or concentration. This will improve efficiency in the organisation, and differentiates the role and responsibility of people in the daily operations. Strategic control of the organisation, however, is centralised at the top (chief executive officer). While the functional structure may encourage specialisation, it also can cause problems in coordination and rivalry among the functional units. For example, this is not uncommon when the marketing area wants to spend the money, the finance/ accounting section may want to control the spending. Similarly, the production area may want to give more incentives to their outstanding employees, but the human resources may disagree as it is not consistent with the human resource policy of the organisation. Thus conflicts between the line and staff employees are inevitable from time to time. This type of situation can hinder the motivation and development of the organisation in the long run.

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Figure 10.2: Functional structure

10.3 DIVISIONAL STRUCTURE A divisional structure is shown in figure 10.3. This structure is adopted when the organisation has diversified its business in many areas that can be related or unrelated to the existing business. For example, one may start the business by focusing on the food business. Then, one realises that there is potential in the beverages area, and start the beverages operations. Later, when the business is successful and expanded, one may start the canned food business, or restaurant business. Business divisions can be defined in terms of product offered, markets served or customer groups. Because each of these business operations is large and need specific attention, the divisional structure is found to be suitable. In this way, the chief executive officer can monitor the operations of each business division more efficiently and effectively. The divisional structure is appropriate when the organisation finds that the activities need to be coordinated well in a rapid way. This will also help managers of the division to monitor the progress of their operations more efficiently. In this type of structure, the CEO has more time to think of other strategic issues in the organisation rather than focusing on operational matters. In this structure, divisional managers have greater authority and responsibility in managing their operations, thus giving them more experience in handling strategic issues in the future. In the divisional structure, there are also problems in managing this type of structure. One of problems relate to allocation for resources in the organisation. Consequently, there may be dysfunctional competition, and can create conflicts in some cases. Problems may also arise in relation to the extent of authority of the divisional managers, and policy of the division, which can be inconsistent with the overall organisational policy.

Figure 10.3: Divisional structure

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10.2.4 Strategic Business Units (SBU) When the organisation expands into many areas and has several divisions to manage, the more effective way is to reorganise the divisions into strategic business units. See Figure 10.4. Each strategic business unit is comprised of several divisions. Each division may focus on certain activities of the business operation. For example, in an organisation, there may be canned food division, dry food division, wet food division, and fast food division. Then these divisions would be under the food strategic business unit. One advantage of this structure is t hat it helps to improve the coordinating and integration activities of the food business. This structure also assists in facilitating the management of the food business unit in a more efficient way especially where there are resources to be shared. In this structure, it is easier to monitor the accountability and performance of the business units and divisions within the strategic business unit. The management of the strategic business unit, however, can also provide several setbacks in terms of increasing the number of layers in the organisational hierarchy. This will add the bureaucracy level in the organisation. Dysfunctional competititon may be enhanced with limited resources, and can enhance conflict is not properly managed. The extent of authority and autonomy of the heads of the strategic business units can be difficult to define and consequently create confusion among the strategic business units. This may also enhance the lobbying behavior of managers in the division and strategic business units with the chief executive officer of the organisation. The job of the chief executive officer become more challenging, and requires people with wide experience and wisdom to manage the situation.

Figure 10.4: Strategic business unit structure

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10.2.5 Matrix Structure In large organisations with many multi-products, multi markets and projects involved in various customer groups, the strategic business unit is unable to cope with such structure. The matrix structure provides an alternative solution. See Figure 10.5. The matrix structure provides for dual lines of authority, performance responsibility, and strategic control of the entire business activities of the organisation. Large organisations like Citicorp and Matsushita and universities used this type of structure in their operations. In this structure, a manager will have two superiors to report to. For example, because the key activity is project based the marketing executive may report to the marketing manager on the project development, and at the same time the marketing executive will report to the project manager on the progress of the marketing function in the project. Similarly, in a university setting, the person appointed to the administrative position of a Dean will report directly to the Vice-Chancellor/ Deputy Vice Chancellor on all administrative matters of the Faculty the Dean is managing, and report to the Head of Department (if there is one) on the academic performance of the Dean, who is suppose to do some academic work like teaching and research in the university. The matrix structure can accommodate a wide area of project oriented activity in the organisation. It is also a good training ground to develop strategic managers in the organisation, minimise the inefficiencies in the organisation. This structure can also foster creativity and diversity in generation of ideas. However, the dual accountability can create problems in terms of work performance expectations and evaluation. For example, there are people in ‘Deanship’ who does well in the university management but does not do well in the academic performance. Consequently, some people felt dissatisfied and disheartened as the performance measures were not evaluated with equity. This type of structure can also cause confusion to many others outside the typical organisational system. For example, one would expect that a Deputy Vice Chancellor to be someone with outstanding academic and management expertise, but in some cases the situation is not true. Since some people view the jobs as ‘temporary’ and not ‘permanent’, endorsement of the appointments of relevant personnel in the job by the authorities is considered sufficient. Consequently, a person with less academic achievement (say associate professor instead of full professorship) when appointed to this position may feel dissatisfied when he/ she is removed. Thus, the intensity of organisational politics is enhanced. On the other hand, the situation would not become critical if the appointment is made with greater transparency, like that in many developed countries. For example, the positions of the Vice Chancellor and Deputy Vice Chancellors are advertised in the press, and interested parties are invited to apply to such positions and interviewed by a committee search appointed by the university or policy makers. In this way, those without academic and administrative capability may not apply and are thus put in a difficult situation. This would not solve the entire problem but generally can reduce the inevitable consequences.

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Figure 10.5: Matrix organisation structure

10.3 STRATEGY AND STRUCTURE RELATIONSHIP The choice of organisation structure is important in assuring successful implementation of the organisational strategy. This relationship emphasises the link between strategy and structure and how it affects organisational performance. According to Chandler (1962), the link between strategy and structure is important to the extent that it can affect the overall organisational growth and development. Chandler studies 70 large corporations in the US over an extended period of time and found a common strategystructure relationship in the following sequence:

Figure 10.6: Strategy-structure relationship

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Chandler found that in Du Pont, at the early years the organisation has a functional structure that is well suited to the producing and selling of a limited range of products. As Du Pont adds new product lines, and purchase their own sources of supply, and create their own distribution networks, they become too complex for highly centralised structures. In order to remain successful, the organisation needs to shift to a decentralised structure with semiautonomous divisions. Similar development was also observed in the other American corporations like General Motors, Sears, and Standard Oil. Thus, Chandler concluded that changes in the corporate strategy lead to changes in the organisational structure. In other words, organisations need to change their structure when they are implementing a new strategy. If this is not done, the organisation will face problems at the implementation stage, and this consequently affects the overall performance of the organisation. This example is not impractical as we can see that a small business needs to change the structure from a simple structure to a functional or divisional structure when the business expands consistent with the strategy selected by the organisation. Structural changes in the organisation are only necessary when there is intense competition which necessitates the organisation to react fast in response to the rapid changes in the business environment.

10.4

LEADERSHIP AND HUMAN RESOURCES

In implementing strategy, the key areas are organisational leadership and availability of human resources to implement the strategies formulated. Organisational leadership is important as it can influence the behavior and actions of the subordinates or peers towards accomplishing the organisational goals and objectives. With effective leaders, the organisation can assure action, and motivate others to work towards the set organisational targets. While it is important to recognise the role of the chief executive officer in the strategic management process, the role of the CEO in strategy implementation is also critical in influencing others and motivating the others to work towards the common goals of the organisation. One of the reasons why strategic plans fail is because the CEO does not recognise the importance his role is in strategy implementation. For example, as a strategist, the role of the CEO is to monitor the progress and development of the strategic plans implementation. This activity is often given to the other managers who may lack leadership drive and skills to motivate the others to do the assigned tasks efficiently and effectively. The role of the CEO in setting the tone and style of leadership in the organisation also enhances the organisational climate which induces others to work together. CEOs also need to review reward system and compensation and human resources policy to motivate the employees and assure successful implementation of the strategy. While monetary incentives are necessary, the non-monetary incentives are also important. The non-monetary incentives can be given in the form of corporate certificates, plagues, and time off. In the public sector, non-monetary incentives can be given in the form of awarding state or federal titles for their contribution in the state or country. For example, in USA, Southwest Airlines under the leadership of Herb Kellerher gained much support and respect from the employees and consequently made Southwest one of most profitable airlines in the US today. Similarly, the leadership of Tun Ismail Ali in managing Perbadanan Nasional Berhad and other large Malaysian conglomerates gained much respect and confidence among business leaders in the country and in the region.

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The leadership style of the late Tun Abdul Razak, the second Prime Minister of Malaysia, in implementing the New Economic Policy and other national economic reforms was an outstanding leader in managing the country. He was known to have close relations with the industry and public service, thus gaining the respect and command in managing the national economy. Another important factor is the extent of available manpower to implement the strategy. The supply of human resources is important to ensure limited barriers in implementation. While this is important, it is also important to ensure that the supply of human resources have the necessary skills, experience and competence in managing the implementation activities. Often, the implementation activities are hindered because the people in the processes do not know how to do it due to lack of experience or knowledge. This can be related to the issue of human resources competences and abilities of the organisational personnel. If the organisational leadership is not aware, then, chaos can only be expected in the organisation. As such, before implementing the strategy, it is important to identify potential personnel required to implement the strategy. If no inside personnel are available, the job can be outsourced (if available), or else the organisation needs to develop internal personnel and get him/ her trained in a short time. In cases where the human resource services could be outsourced, this is generally a common way out in resolving the situation. Some organisations hire consultants to handle these matters. While getting the right people to be placed in the right position can be difficult, it is also difficult to recruit new people to fit into the organisation as the hired personnel may not be familiar with the culture of the new organisation. As such, matching the right person to fit with the organisational culture can be a challenging task. The task is also difficult as the role of the new personnel is to fit into the new organisational culture, which can be quite different from his/ her past experiences. Besides these, in implementing the organisational strategy, the management has to see the fit between the new strategy and the culture of the organisation. Is the selected strategy compatible with the organisation’s existing culture? If the strategy is not compatible, can t he existing culture be modified to fit with the new strategy? If the strategy and culture could not be changed, to what extent is management committed to implement the strategy, thus causing the culture or strategy be modified? These issues need to be addressed before the organisation implements the new strategy that has been set forth. If these issues are not resolved, there may be resistances to implementing the new strategy of the organisation. These resistances may be due to reluctance in accepting new ideas or lack of understanding of the new approaches or poor communication between the top management and the employees at the ground level. One way to resolve these resistances is to continuously communicate with the employees on the organisational mission and strategic plan of the organisation. Some organisations invite the employees to participate in the strategic planning process, and provide information and seek for their feedback. In small organisations, this process could be done but in large organisations, the process is too cumbersome and could retard the strategic planning process. Furthermore, it may be too late for it to react to the changing business environment. Consequently, some organizations make it as an annual organisational policy address session in trying to build the commitment and support of all the employees in the organisation.

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In trying to gain better support from the employees, many organisations revise their rewards and compensation system, and provide incentives to employees who perform and meet the targets set by the organisation. Special performance related bonuses are given to those who exceeded the targets set forth and showed superior performance of their business units or divisions. Finally, to make the organisational implementation of strategy successful, it is necessary to specific actions in terms of human resources management like identifying specific personnel to take charge of the project implementation, monitor the progress, and provide financial and moral support to the personnel in implementing the tasks. The organisation may also need to make provisions in terms of contingency plans for implementation, in the event there is a fall out in the implementation plan.

10.5 ORGANISATIONAL SYSTEMS AND FUNCTIONAL PROCESSES In implementing the organisational strategy, after we have defined the appropriate organisation structure, and the right leadership and human resources to manage the implementation of the strategic plan project, the next stage is to ensure that the organisational systems and processes are set in place so that the plans can be implemented efficiently and effectively. This means that the organisation must make sure that the various functional areas in the organisation are ready to accept the plan of action. The key organisational systems and processes that have to be ready are the resource allocation systems, information systems, human resource system, and the monitoring system as shown in Figure 10.7.

Figure 10.7: Organisational systems and functional process

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10.5.1

Resource Allocation Systems

The allocation of resources in the organisation involves the areas of budgeting, planning and control systems. The processes are important in ensuring superior performance of organisations. In budgeting, the process involved many people in the organisation, both at the low and middle or high level executives. This is due to the fact that in preparing the budget, the people in the unit or division need some information on the performance or data of the unit. This is, t hen, compared with the proposed plan of the unit or division as outlined in the strategic plan. To make the strategic plan a reality, the unit or divisional manager needed resources to implement those plans. As such, issues related to finance, people and physical resources are outlined in the budget plan of t he organisation. The manager needs to request the amount of funds required to implement the plan or operational some specific activities, and seek human resources to get it done. In some cases, the budget would include requests for physical space or facilities like the office rooms, computer hardware and soft wares, or Internet. The requirements of the unit or division are made through the budget exercise in the organisation, generally done on an annual basis. The requested budget is then forwarded to the top management for approval. Once approved, the unit or divisional manager can implement the plans as indicated in the plan. While this may seem simple and clear, in reality the process is complicated by certain tasks like defending the budget. This can happen when the amount of human and financial resources in the organisation is limited. In such cases, the budget debate can be a daunting process for unit or divisional managers. In general, the budget exercise may be 3-4 months before the actual plans are implemented. In such cases, things may change and this can affect the budget requested. Nonetheless, the revisions of budgets are done in organisations on a quarterly or semi-annually to make review of the budgets of the unit or division in the organisation. Once the budgets have been approved, the unit or divisional manager needs to integrate the budget in the planning and control system in the organisation. This can be done by storing the budget information in the manager’s database and reviewing the planning information from time to time (say monthly or bi-monthly basis). This acts as the control mechanism to ensure that the budget planned does not exceed the required amount that was planned earlier. The resource allocation process is the most critical process that can ensure successful implementation of the strategic plan. One of the major weaknesses found in the shortfalls in strategic planning is that the budgets approved did not take into account seriously the required amount by the unit or divisional manager. As such, unit or divisional managers have difficulties in implementing the strategic plans of the organisation, which often creates conflicts in the organisation. The CEO or financial controller need to strategise in terms of priorities in making decisions on resource allocations when the resources are limited. This will the, mitigate the conflicts in the resource allocation process.

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10.5.2 Information Systems To ensure effective implementation of the organisational strategy, information system plays an important role in assisting managers to make the appropriate decisions in the implementation process. In many organisations, developing an effective information system is critical to ensure that managers have access to the most up to date information in the unit or division or the organisation. This can be developed in the form of the management information system (MIS), accounting information system (AIS), financial information system (FIS), marketing information system (MktIS) and the general information system. Many organisations do not have specific types of information system in a formal way but more in the informal way, that is in the hands of the manager responsible for each of the functional areas in the organisation. The traditional mode of storing such information in the informal way needs to be changed so that other people also have access to such information in the organisation. For example, it would be easier for the marketing manager to think of alternative strategic plans to market the products/ services of the organisation if he/ she has information on the extent of organisation inefficiencies or ineffectiveness. In implementing organisational strategies, such information is generally not accessible to the unit or divisional managers, thus creating inconsistencies in the strategic plan implementation. Similarly, information on the organisational aspects like human resources systems and processes must be made more transparent. For example, if the employees knew the kind of skills and training their subordinates had been exposed to earlier, the superior could propose alternative training programmes for the subordinates. In many cases, the information was left in isolation and their immediate superior is not aware of the training given to his subordinates over a period of time. Developing an effective information system in the organisation can ensure greater efficiencies and effectiveness. This is because the many activities of the organisation are more integrated and coordinated. More important, the information needed to manage the strategic plans are communicated, and managers could take a proactive role in making contingency plans or alternatives in implementing the strategic plan of the organisation. Developing such types of information system is not difficult and costly as there are many simple software for specific types of information system. Nevertheless, it should be noted that having an effective information system can enhance the implementation of organisational strategies.

10.5.3

Human Resource System

Human resource system refers to the way human resources of organisations are managed. In implementing the organisational strategy, ensuring that an organization has an appropriate human resource system is essential. It is the human resources that can assure the implementation of organisational plans and strategies. As such, the human resources needs attention in the sense the people in the organisation must be communicated on the rewards and performance system used in the organisation. In some organisations, information on the human resource management system is considered private and confidential to the extent that it discouraged others in trying to do better in the organisation. Information on the human resources management system 136

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and processes are not confidential. What is confidential is the personal data on the employees. Policy issues on human resources like payroll schemes and grades should be made known to the employees as it can enhance their understanding on the human resource management system practiced in the organisation. For example, an executive in an organisation would like to know what is the range of the executive salary, is it between RM2,000 – RM3000 or more. If someone is already at the end of the band, then he/she expects a promotion. If this is not done due to poor performance, the employee would know that he needs to look for an alternative job if he/ she needs higher salary. Another important aspect related to the human resource system is the performance appraisal methods and approaches. In some organisations, performance appraisal is done in a more transparent way while in some other organisations, the performance appraisal was done in secrecy (that is not discussing with the employee or s ubordinate). This happens as the relationship between superior and subordinate is culturally inhibiting. In other words, in some culture, trying to be more open and discuss performance of an employee appears to be a taboo. Consequently, some managers kept it to themselves. This kind of performance appraisals has consequences in terms of ensuring that employees are motivated to perform whereas the system was not conducive to such situation. Whatever system the organisation adopts, it is important that the rewards and compensation system are put in place consistent with the expectations of the employees in the organisation.

10.5.4

Monitoring System

In implementing the organisation strategy and plans, the organisation must ensure it has developed a monitoring system. This is to oversee the implementation of several plans of action that was put in place. The monitoring system could be in the form of providing feedback on a weekly or bi-weekly basis on the development or progress of the organisation. Such monitoring system could be set in place either in management meetings or in the information system database that has been set in place. In large organisations, monitoring could best be done in the information system and in the form of disseminating information in the organisation’s communication newsletter. In small organisations, monitoring could be done in weekly meetings or informal meetings. The presence of the monitoring system would ensure that the managers at the implementation level respond to the various challenges facing them in the changing business environment. One of the common reasons for failures in strategic plans is that the monitoring mechanisms in organisations are generally poorly managed. In some organisations, the CEO would invite all managers in the organisation to meet him, say once a month, for about 1-2 hours to raise any problems in implementing the organisational strategy and plans. By doing so, the CEO is aware of the many problems that may not reach him/ her as it may not be to his/ her liking. Last but not least, the monitoring mechanism is important to successful implementation of the organisational strategy. How it is done would depend on the ingenuity of the CEO and the organisational preferences and style.

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Exercise 10.1 1.

The major disadvantage of a functional structure is that A. B. C. D.

2.

A major disadvantage of a group CEO being ambiguous. A. B. C. D.

3.

A A. B. C. D.

6.

Dual lines of budget authority Violation of the unity-of-command principle Extensive delegation of authority Shared authority

By geographic area. By product or service. By customer. By cost. structure is most simple and inexpensive. Departmental Strategic business unit Functional Process

Which of the following is NOT a possible problem that firms encounter in implementing a strategic change, according to the survey of Hunger and Wheelen? A. B. C. D.

138

Functional Divisional Strategic business unit (SBU) Matrix

Which of the following is NOT a basic way a divisional structure can be organised? A. B. C. D.

5.

structure is the role of the

Which of the following characteristics does not contribute to the overall complexity of a matrix structure? A. B. C. D.

4.

It forces accountability to the top. It enhances career development opportunities. It is often characterised by high employee morale. All of the above.

Unanticipated major problems. Ineffective coordination of activities. Poor definition of key implementation tasks and activities. Implementation faster than originally planned.

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7.

Which of the following is NOT a key issue in implementing strategies? A. B. C. D.

8.

What are the activities that need to be done? Who should be doing these activities? When should the activities be done? How should the activities be done?

Which of the following is NOT a major type of organisational structure, according to Pearce II and Robinson Jr.? A. B. C. D.

9.

Simple structure. Solid structure. Matrix structure. Functional structure.

Which of the following is NOT a key organisational systems? A. B. C. D.

Resource allocation system. Payroll system. Information system. Human resource system.

10. . refers to the way human resources of organisations are managed. A. B. C. D.

Resource allocation system. Payroll system. Information system. Human resource system.

SUMMARY This chapter discusses five main issues in strategy implementation. Firstly, the process of integrating objectives, policies and strategies is outlined. Then the various organisational structures are described. Next strategy and structure relationship is briefly elaborated. Then the role leadership and human resources in strategy implementat ion is analysed. Finally, organisational systems and functional processes are explained in detail. These include resource allocation system,information systems, human resources systems and monitoring system.

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STRATEGY EVALUATION AND CONTROL

CHAPTER 11

CHAPTER 11 STRATEGY EVALUATION AND CONTROL INTRODUCTION The strategic management process results in making strategic decisions that have significant effects and consequences to the organisation. The strategic decisions made can have favorable or unfavorable impact on the overall performance of the organisation. While formulating the strategy is important in setting the direction and plans for the organization, the strategy implementation gets the plan into action. The strategic management process is not complete unless the performance of the organisation is assessed and reviewed. In other words, the final stage in the strategic management process is the strategy evaluation and control. In this stage, the implemented plans of action are assessed and reviewed and appropriate action will be taken to improve the situation.

OBJECTIVES By the end of this chapter, you should be able to: 1. identify the key elements for assessing the strategy of an organisation; 2. list down the criteria for strategy evaluation; and 3. understand how the strategy evaluation process and control mechanism can match the set strategy and direction of the organisation.

11.1

ELEMENTS OF STRATEGY EVALUATION

In trying to assess the implemented strategy of an organisation, we must understand why strategy has to be assessed and evaluated. This is important as it will provide us the foundations for such actions. If this is not clear to the managers in the organisation, the purpose of doing the strategy evaluation may not have much impact to the organisational performance in the long run. As such, before assessing the strategy, one must understand that there are three key elements which form the basis for evaluating the strategy. The key elements are: (i)

Is the existing strategy good for the organisation?

(ii)

Will the strategy be good for the organisation in the future?

(iii) Is there a need to change the strategy? With respect to the first element, that is whether the existing strategy is good for the organisation, it important for the manager of an organisation to review the internal and external situation and assess the fit with the environment. Then, the outcome or response from this will provide the foundation in determining whether the strategy implemented would be good for the organisation in the future or otherwise. Subsequently, the need to revise the strategy may come into effect.

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Further, it should be realised that the purpose of reviewing the implemented strategy is to make the organisation fit with the changing business environment. The business environment changes very rapidly, and therefore, the organisation needs to make further adjustments and realign certain activities so that the implemented strategy will not deter the organisation from achieving the organisational goals and objectives that have been set earlier under different assumptions and conditions perceived at that time. As socioeconomic and geopolitical scenario changes fast with high vulnerability and degree of turbulence, organisations need to reassess the strategies implemented so that it can fit well with the highly uncertain business environment.

11.2

CRITERIA FOR STRATEGY EVALUATION

In trying to evaluate an organisation’s strategy, there are at least six criteria to be considered (Tilles, 1963; Rumelt, 1980): consistency, consonance, feasibility, advantage, acceptable degree of risks, and appropriate time horizon.

11.2.1

Consistency

Consistency refers to the extent in which the selected strategy is does not pose a threat or in conflict with the organisational goals and policies. When conflicts and bickering among departments or divis ions occur, it means that t he selected strategy is not consistent with the organisation. For example, the organisational strategy is to expand its international operations. However, conflicts can arise between the marketing and finance division, as the former is interested to spend the money while the latter is interested to control expenditure. Such strategy must be made clear and consistent with the financial and marketing policies of the organisation. The strategy may be expansion, but the functional policy on finance is to maintain f inancial prudence, which may not be practiced by the marketing department.

11.2.2

Consonance

Consonance refers to the extent the strategy conforms with the environmental trends. In other words, to what extent the output of the organisational internal and external analysis was consistent with the environmental trends. For example, the selected strategy of an organisation is to go for market penetration strategy. This strategy may be appropriate if the potential demand for the product or services is increasing as the disposable income of the consumers is increasing and the consumption is increasing. On the other hand, this strategy would not make sense in times of recession or depression in the national economy.

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11.2.3

Feasibility

Feasibility of a selected strategy is important as it can determine whether the strategy can be done without much barriers or obstacles. Once a strategy is selected, it must match with the available physical resources, financial resources, and human resources of the organisation. The selected strategy must also match with the organisational capabilities, competences and skills of the organisation. For example, it may not be a feasible strategy for an organisation to implement if the physical or financial resources pose a constraint to the organisation. Similarly, the strategy may not be feasible if the organisational capabilities are not available in the organisation.

11.2.4

Advantage

In evaluating a strategy, one must consider the potential competitive advantages to be created or sustained in the selected organisational strategy. Competitive advantage can be obtained through costs advantages or value creation like product positioning and differentiation. The selected strategy must provide such advantages to the organisation or the leading edge as compared to the other competitors in the industry. For example, by reducing the price of the product by 10%, to what extent t he organisation can be in a leading advantageous position compared to its competitors? If the price cut strategy could not provide greater advantage in terms of getting more than 10% increase in revenue, then, the strategy pose no advantage to the organisation.

11.2.5

Acceptable Degree of Risk

The acceptable degree of risks involved in selecting a strategy is also important in evaluating a strategy. Some strategies appear to be attractive but pose a higher degree of risks involved, due to uncertainties in the environment. Some degree of risks should be incurred but uncalculated risks or major risks should be avoided. For example, in a volatile capital market, mortgaging the organisational shares too highly can be risky in taking a financial loan when the potential values of organisational shares can be overvalued or undervalued in a short time.

11.2.6

Time Horizon

Finally, in evaluating a strategy, the time horizon is important as it would indicate the extent to which the project/selected strategy can be implemented effectively. If the time horizon is too long a gestation period, the degree of risks are high, and therefore, careful assessment should be made before implementing the strategy.

11.3

STRATEGY EVALUATION PROCESS

The strategy evaluation process involved the following steps:

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Figure 11.1: Strategy evaluation process

11.3.1 Determine What to Review The first step in strategy evaluation is to determine what to review in the strategic management process. This means the top managers and operational managers need to determine whether the strategy formulation or strategy implementation needs to be reviewed. This can be done by reviewing the internal audit and external audit of the organisation. Such organisational audits will show whether the organisation need to review the goals or objectives or the implementation processes. If this is not done accordingly, then the organisation may be reviewing the areas least concerned with the underperformance of the organisational unit or division.

11.3.2 Identify Aspects to be Measured After having identified areas to be reviewed, then the managers would know what aspects to focus in the review process. For example, the major area of concern is the financial or marketing functional strategy which poses an obstacle to the organizational plans and implementation. This can be related to the functional policies and processes that needs to be revised accordingly.

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11.3.3 Set the Standard to be Gauged In setting the standards to be assessed, the organisation can use the industry’s standards to benchmark its standards or use the long term set targets. This means the organisation needs to know how their competitors are doing and to what extent the benchmark is achievable or comparable. For example, there is no point of comparing the non-computerised banking service with the automated computerised banking provider.

11.3.4 Assess the Performance and Compare the Performance Once the standards have been set, the organisation can assess the performance achieved and compare it with the benchmark selected.

11.3.5 Identify Gaps and Take Corrective Action As soon as the performance assessment has been completed and compared with the set standards, the organisation will identify the ‘gaps’. The organisation need to review why these gaps occurred and how it could be rectified. Then, alternative corrective actions are analysed and selected to rectify the gaps. This aspect is not easy and may take some time before the corrective measures can be done. The corrective action to be taken must be identified precisely so that it will bridge the gaps identified earlier. Once the corrective action has been selected, the next stage is to implement it so that the situation can be improved. This does not mean that the organisation has to redo the strategic planning, rather redo the strategy implementation process until the next strategy evaluation and review process. The corrective action can be done in the first 6 months of the strategy implementation phase (say out of the 12 months implementation plan), and at the end of the next evaluation process, say in the next 6 months, the whole strategic plan and implementation process is reviewed for the subsequent strategic plan of the organisation. As such, this process of strategic planning and implementation would require the organisation to have specialised personnel and unit to handle the process so that it could be done in an efficient and effective way.

11.4

STRATEGIC CONTROL

Strategic control is concerned with tracking the implementation of the strategic plans that had been selected. In the strategy evaluation phase, the purpose is to determine the areas to be assessed in implementing the organisational strategy. Once this has been determined, the next stage is to manage strategic control of the organisational strategy. In the strategy evaluation process, it is concerned with the areas to be evaluated, while in the strategic control, it is concerned with t he extent to which the organisation is able to achieve the results it had intended. As such, the control process begins when the organization has found that there are gaps in the organisational performance in terms of the intended results against the budgets or targets set earlier. Strategic control focuses on how to improve the organisational performance based on the feedback received on the actual performance of the organisation at one point in time. 144

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In order to have a successful strategic control in the organisation, it is necessary to look at how the organisational structure, systems and processes fit with the implementation of the organisational strategy. Then, strategic control is made, either to maintain the current strategy selected by the organisation or to adopt new or revise the strategy selected earlier. If the control showed that the outcome is to select the earlier strategy, then, organisational adjustments are made with minor modifications in the organisational management processes. For example, an organisation may want to continue its growth or expansion strategy that it had set earlier. Then, from the analysis of the organisational situation, it was found that the changes to be made only required small or a few changes in terms of the organisational systems and processes so that it can improve the implementation of the organisational strategy. In other words, the purpose is to improve the performance of the organisation in its implementation process, say, changing the way things have been done or improves methods of doing things in the organisation. This is also known as continuous improvement methods in the organisation. If the control showed that the organisation has to change the original strategy selected to a different st rategy, for example from a growth st rategy to a c onsolidation strategy, then the adjustments to be made in the organisation can be substantial in terms of resource allocation, policy and decision making priorities. This situation can arise due to rapid unforeseen changes in the environment, say a war erupted in the identified are for growth. The situation can also arise as the organisation experienced unexpected poor financial performance. In this case, the purpose of strategic control is to steer the organisation so that it would not fall into further undue difficulties. In this case, the changes in the organisation can involve restructuring or reengineering in the organisational structure, systems and processes. This can also occur when the organisation are involved in mergers and acquisitions, which involve restructuring of the activities and focus of the organisation. To ensure successful strategic control in the organisation, it is essential that the top management and middle management personnel are involved and committed to the strategic control process. These top managers must also understand the areas to be concerned in strategic control, and how to make effective control. In other words, having a thorough understanding of the interrelated systems and processes in the organisation provides a sound f oundation in improving managerial and organisational control in the organisation. Further, the top management must make firm commitment in terms of setting the key priorities in making revision in the budgets (resource allocation) and changes to be implemented in the organisation. One of the areas of poor strategic control in organisations is that the top management may have difficulties in accepting new ways of doing things, that is a change in the values, attitudes, behavior, culture or norms in the organisation. Further, the changes in the strategic control mechanism may not provide incentives but disincentives to the employees, which is an obstacle in making new changes or effective control in the organisation. For example, in order to have effective strategic control, it may entail the organisation having to change the organisational procedures. This can cause delays in implementation as the policy may not be communicated effectively throughout the organisation. Thus, one of the key areas of concern in effective strategic control is transparency of the matters to be controlled and communications those area to be controlled so that it can effectively be enforced in the organisation.

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Exercise 11.1 1.

In stage, the implemented actions are assessed and reviewed and appropriate action will be taken to improve t he situation. A. B. C. D.

2.

Which of the following is NOT a key elements that form the basis for evaluating a strategy? A. B. C. D.

3.

continue on the present strategic course. immediately discontinue all aspects of the present strategic course. take corrective actions. add additional funds to the present strategic plan.

The purpose of strategy evaluation is to A. B. C. D.

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Strategic implementation Strategic control Strategy formulation Strategy evaluation

When you discover that major changes have occurred in the firm’s internal strategic position while conducting strategy evaluation, you should A. B. C. D.

6.

Consistency, Feasibility Acceptable degree of risks Efficiency

. is concerned with tracking the implementation of the strategic plans that have been selected. A. B. C. D.

5.

Is there a need to change the strategy? Will the strategy be good for the organisation in the future? Is the existing strategy good for the organisation? Is there any better strategy available for the organisation?

Which of the following is NOT a criterion to be considered in evaluating a strategy, according to Rumelt? A. B. C. D.

4.

strategy evaluation and control strategy formulation strategy implementation mission statement formulation

increase the budget annually. make budget changes. alert management to problems or potential problems evaluate employees’ performance.

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7.

. of a selected strategy is important as it can determine whether the strategy can be done without much barriers or obstacles. A. B. C. D.

8.

Feasibility Advantage Consonance Consistency

The first step of strategy evaluation process is A. B. C. D.

9.

identifying aspects to be measured. assessing the performance. setting the standards to be gauged. determining what to review.

In evaluating strategies, which of Rumelt’s criteria for evaluating strategies refers to the need for strategists to examine sets of trends? A. B. C. D.

Consistency Consonance Feasibility Advantage

10. As a result of strategy evaluation, corrective actions A. B. C. D.

are almost always needed. are definitely needed. are rarely needed. are none of the above.

SUMMARY In this chapter, the key elements for assessing the strategy of an organisation were described. The six criteria for strategy evaluation were then detailed. A thorough explanation of the strategy evaluation process was outlined systematically. This should be a useful guide for those who wish to embark on strategic planning. Finally, the section on control mechanism should help students learn how to ensure that each strategy adopted would match the vision and mission of an organisation.

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