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Kultur Dokumente
STRATEGIC
MANAGEMENT
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Table of Contents
Course Guide
Topic 1
ixxiv
4
7
10
13
13
Topic 2
14
15
16
19
20
23
23
Topic 3
24
25
28
30
34
36
36
Topic 4
Strategy Formulation
4.1 Setting Organisational Vision and Mission
4.2 Organisational Goals and Objectives
Summary
Key Terms
37
38
42
45
45
Topic 5
Environment Analysis
5.1 External Environmental Factors
5.1.1 Economic Forces
5.1.2 Social Forces
5.1.3 Political Forces
46
47
48
49
52
1
2
2
iv
TABLE OF CONTENTS
53
54
55
58
61
63
63
Topic 6
Industry Analysis
6.1 Nature and Structure of Industry
6.2 Five Forces Model
6.2.1 Threats of New Entrants
6.2.2 Threats of Substitute Product or Services
6.2.3 Bargaining Power of Suppliers
6.2.4 Bargaining Power of Buyers
6.2.5 Rivalry among Existing Firms
Caselet
Summary
Key Terms
64
65
66
67
68
69
69
70
72
73
73
Topic 7
Internal Analysis
7.1 Internal Organisational Factors
7.1.1 Management
7.1.2 Marketing
7.1.3 Finance and Accounting
7.1.4 Production and Operations
7.1.5 Research and Development
7.2 Identifying Strengths and Weaknesses
7.3 Tools for Internal Organisational Analysis
7.3.1 Internal Value Chain Analysis (IVCA)
7.3.2 Internal Organisational Factor Matrix (IOFM)
Summary
Key Terms
74
75
76
78
80
83
84
85
87
87
90
92
93
Topic 8
94
95
96
97
98
98
101
102
105
TABLE OF CONTENTS
106
108
111
112
Topic 9
Strategic Alternatives
9.1 Generating Strategic Alternatives
9.2 Corporate Strategies
9.2.1 Integration Strategies
9.2.2 Intensive Strategies
9.2.3 Diversification Strategies
9.2.4 Defensive Strategies
9.3 Business Strategies
9.3.1 Cost Leadership Strategy
9.3.2 Differentiation Strategy
9.3.3 Focus Strategy
9.4 Selecting Alternative Strategies
9.4.1 Strategic Analysis Framework
9.4.2 Attitude Towards Risks
9.4.3 Pressures from the External Environment
9.4.4 Pressures from the Internal Environment
Caselet
Summary
Key Terms
113
114
114
114
116
117
119
121
122
122
123
124
124
127
128
128
130
131
131
Topic 10
Strategy Implementation
10.1 Integrating Objectives, Policies and Strategies
10.2 Organisational Structure
10.2.1 Simple Structure
10.2.2 Functional Structure
10.3 Divisional Structure
10.3.1 Strategic Business Units (SBU)
10.3.2 Matrix Structure
10.4 The Strategy and Structure Relationship
10.5 Leadership and Human Resources
10.6 Organisational Systems and Functional Process
10.6.1 Resource Allocation Systems
10.6.2 Information Systems
10.6.3 Human Resource System
10.6.4 Monitoring System
Summary
Key Terms
132
134
137
138
138
139
140
141
143
144
146
147
148
149
150
151
151
vi
TABLE OF CONTENTS
Topic 11
References
152
153
153
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COURSE GUIDE
COURSE GUIDE
ix
INTRODUCTION
BBPS4103 Strategic Management is one of the courses offered by the Faculty of
Business and Management at Open University Malaysia (OUM). This course is
worth three credit hours and should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This is a compulsory course for all learners undergoing the Bachelor of
Management and Bachelor of Business Administration programmes. It is a
basic major course for learners pursuing a bachelor's degree in Human
Resource Management, Tourism Management and Hospitality Management.
The course is conducted fully online.
As an open and distance learner, you should be able to learn independently and
optimise the learning modes and environment available to you. Before you begin
this course, please confirm the course material, the course requirements and how
the course is conducted.
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours can be
accumulated.
COURSE GUIDE
Study
Hours
60
10
Online participation
12
Revision
15
20
120
COURSE OUTCOMES
By the end of this course, you should be able to:
1.
2.
3.
4.
5.
6.
7.
COURSE GUIDE
xi
COURSE SYNOPSIS
This course is divided into 11 topics. The synopsis for each topic is presented
below:
Topic 1 describes the evolution and development of strategic management. It
identifies the major factors contributing to changes in the current business
scenarios. The topic ends with a discussion on the benefits and pitfalls of
strategic management.
Topic 2 distinguishes the key components of strategic management and
elaborates on the strategic management model. The process of strategic
formulation, implementation, evaluation and control are outlined. The
interrelationships of the strategic management process are also discussed.
Topic 3 discusses the roles of corporate planners in strategic management. The
roles played by the board of directors and the chief executive officer are
explained. The roles played by middle management in the strategic management
process are outlined in the last section of the topic.
Topic 4 outlines the concept of strategy formulation with emphasis on the key
elements of the strategy formulation process. A comparison is made between
organisational vision and mission. This leads to a discussion of organisational
goals and objectives and the characteristics of high quality objectives.
Topic 5 elaborates on the external environmental forces that have an impact of
organisational performance. Learners are exposed to the opportunities and
threats existing in the business environment. This is followed by a discussion of
tools that can be used for conducting environmental analysis.
Topic 6 differentiates between the nature and structure of industry. It also
elaborates on Porters five forces model, which is used for analysing industry
situations.
Topic 7 discusses the key internal organisational factors that affect the operations
of organisations. Organisational strengths and weaknesses are examined and the
tools for analysing the internal organisational situation of an organisation are
described.
Topic 8 describes the experience curve and its strategic implications. The three
business portfolio matrices are differentiated and the steps to developing the
Competitive Profile Matrix are discussed. The Strategic Position Action and
Evaluation Matrix and its applications are also outlined.
Copyright Open University Malaysia (OUM)
xii X
COURSE GUIDE
Topic 9 outlines how corporate and business strategies are generated. The
different types of corporate and business strategies are discussed along with the
importance of these strategies to the business organisation.
Topic 10 discusses the issues affecting strategy implementation. The topic also
illustrates the need for integrating objectives, policies and strategies in the
organisation. The main features of different organisational structures are
described. The topic also describes the relationship between strategy and culture
and outlines the various organisational systems and functional processes.
Topic 11 identifies the key elements for assessing the strategy of an organisation.
The topic also discusses the criteria for strategy evaluation and ends with an
explanation of how the strategy evaluation process and control mechanism can
match the strategy and direction of the organisation.
COURSE GUIDE
xiii
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful
textbooks, journals, articles, electronic contents or sources can be found. The list
can appear in a few locations such as in the Course Guide (at the References
section), at the end of every topic or at the back of the module. You are
encouraged to read or refer to the suggested sources to obtain the additional
information needed and to enhance your overall understanding of the course.
PRIOR KNOWLEDGE
Learners should only attempt this course once you have completed BBPP1103
Principles of Management, BBPM2103 Marketing Management I, BBPB2103
Human Resource Management and BBPW3103 Financial Management I.
ASSESSMENT METHOD
Please refer to myVLE.
REFERENCES
Certo, S. C., & Peter, J. P.(1993). Strategic management: A focus on process .
(2nd ed.). Singapore: McGraw-Hill.
Chandler, A. D. (1969). Strategy and structure. Cambridge: MIT Press.
David, F. R. (2008). Strategic management: Concepts and cases (12th ed.).
New Jersey, NJ: Pearson Education.
Gluck, F. W., Kaufaman, S. P., & Walleck, A. S. (1982). The four phases of
strategic management. Journal of Business Strategy, 921.
xiv X
COURSE GUIDE
Topic
Introduction
to Strategic
Management
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
X INTRODUCTION
Strategic management was first introduced as a body of knowledge in the early
1980s. As a course, it was originally introduced by Harvard University in the
1920s but it was then known as Business Policy. The focus of the course was on
integrating 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
incremental and structural changes to cope with the rapid dynamics of the
business environment. Consequently, the field of strategic management evolved
as it stands today. Managers and chief executive officers of large corporations
adopted some or part of the body of knowledge in strategic management and
found potential benefits to their organisations. Therefore, it is the purpose of this
topic to provide you with an understanding of strategic management, the
historical perspective, changing business dynamics and benefits of strategic
management to organisations.
Copyright Open University Malaysia (OUM)
X TOPIC 1
1.1
ACTIVITY 1.1
Why is the business policy course made a core course in the business
administration curricula? Discuss.
1.1.1
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
other is the management planning perspective.
(a)
TOPIC 1
(i)
(ii)
ACTIVITY 1.2
Why do you think the top management perspective is necessary to
ensure superior performance in an organisation?
The rapid changes in the business and non-business environment resulted
in the change in emphasis and contents of the business policy course.
External factors such as economic, social, political and technological factors
had 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, and which will be discussed in subtopic 1.2. In addition, the
increasing concerns for social responsibility, ethics and the environment
(such as, concerns over pollution, poorly managed health system and social
discrimination) contributed to the changing expectations of society towards
organisational performance. 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 the business and non-business environment.
X TOPIC 1
ACTIVITY 1.3
Trace the evolution of the strategic management course.
(b)
1.1.2
The previous subtopic 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 is a difference between
business policy and strategic management.
Copyright Open University Malaysia (OUM)
TOPIC 1
SELF-CHECK 1.1
What is the difference between business policy and strategic
management?
In this subtopic, you will be provided with another view of the development of
strategic management, that is, from the management planning perspective. This
is important as this perspective has 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 illustrated in Figure 1.1.
X TOPIC 1
(a)
Phase 1
Phase 1 in the evolution of strategic management refers to the traditional
formal business planning mode which focused on functional areas.
Organisations were more concerned about annual budgets and sought
operational control through meeting the annual budgets. The business
environment during this phase was stable and not many changes occurred.
(b)
Phase 2
In phase 2, as the business environment began to change due to increasing
demands for goods and services, new concern emerged forcing
organisations to prepare 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. An annual
forecast was not sufficient, so multi-year forecasts became necessary. In this
phase too, environmental analyses became more evident and important to
organisations.
As business dynamics grew, 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).
(c)
Phase 3
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 in reaping part of the potential profits. In this phase,
organisations had to make a thorough analysis of the environment and
competition. The resource allocation process required managers to be more
dynamic as managers had to make quick decisions 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 organisation.
Phase 3 also showed the emphasis for managerial planning with concerns
to 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 1970s in the United States and Europe. In Malaysia, it became an
important phenomenon in the late 1980s and early 1990s. Many public
listed organisations and state-owned corporations in Malaysia became
interested in this concept in the mid-1990s.
Copyright Open University Malaysia (OUM)
TOPIC 1
(d)
Phase 4
Phase 4 is known as the strategic management era. In the United States and
Europe, this phase gained prominence in the late 1980s. In this phase, the
environmental change was more rapid and the level of turbulence was
greater with more uncertainties in 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 to 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 has increasingly become important in today's business
environment.
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 providing experience in solving real-life
problems which have a multifunctional impact on the organisation. Strategic
management, however, is concerned with all that was discussed in the
business policy course but also incorporates the external factors that have a
major impact on the organisation, and consequently determines 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. Furthermore, the strategic management area involves strategic
issues, which have a long-term impact on the organisation.
1.2
The Industrial Renaissance of the 1980s had affected the management of business
and non-business organisations in several ways. As mentioned in subtopic 1.1.1,
the information technology revolution, increasing concerns for social
responsibility, ethics and the environment, the change in expectations of society
towards organisational performance and the changing micro-management
Copyright Open University Malaysia (OUM)
X TOPIC 1
SELF-CHECK 1.2
Why does business environment change?
ACTIVITY 1.4
In terms of IT literacy and use, how is your life different from that of
your parents or grandparents?
TOPIC 1
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 has gained more importance today and
the ways businesses are conducted today are changing fast.
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)
(b)
(c)
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 allocating 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 like Petronas, Malaysia Airlines and Malayan Banking
Berhad which contribute to social causes by making monetary and non-monetary
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.
1.3
TOPIC 1
W 11
Although there are many potential benefits of strategic management, 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
ACTIVITY 1.5
In your opinion, do the benefits of strategic management outweigh
the pitfalls? Justify your answer.
ACTIVITY 1.6
1. Answer True (T) or False (F) to the following statements:
No
Question
is
(a)
Devising policies
implementation.
necessary
part
of
(b)
(c)
(d)
(e)
(f)
strategy
2.
3.
Describe Glucks
management.
4.
5.
phases
of
development
in
strategic
(a) F
(b) F
(c) T
(d) F
(e) T
(f) F
TOPIC 1
W 13
Business policy
Strategic management
Management planning
Topic X Strategic
Management
Model
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
X 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 lead to the formulation of an effective strategy to
achieve the objectives of the organisation.
TOPIC 2
15
2.1
From the 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 strategy, implementing the strategy, 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, strategy formulation, strategy implementation and
strategy evaluation and control as shown in Figure 2.1.
In subtopic 2.2, you will be exposed to the fundamental elements and components of
strategic management. Subtopic 2.3 discusses the strategic management model and
subtopic 2.4 discusses the strategic management process.
Copyright Open University Malaysia (OUM)
16 X TOPIC 2
2.2
TOPIC 2
17
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, Yahoos
strategy is to offer services like personalised Web pages, audio subscriptions and
music videos 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, vice-chancellor, president, executive director, managing
director, dean, chairman of the board and business owner or entrepreneur.
Another familiar term in strategic management is policy. Policies include
guidelines, rules and procedures that were established or created to support the
efforts in achieving 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 10 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 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 receive the four months bonus. The
procedure is outlined in the annual performance appraisal evaluation form as set
out by the human resource department.
18 X TOPIC 2
TOPIC 2
19
ACTIVITY 2.1
What is the difference between a procedure and a rule?
2.3
20 X TOPIC 2
In implementing 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 put in place. Then, specific programmes
or plans of action should be prepared to ensure effective implementation of the
organisational strategy. Strategy implementation would not be complete without
ensuring that the fundamental elements in strategy implementation are all 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, implementation also requires managers or strategists to
coordinate and integrate the various functional areas in the organisation so that
the systems and processes 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 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 put in place so that organisations can
assure that the desired objectives set can 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.
2.4
Based on Figure 2.2, it can be concluded 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
Copyright Open University Malaysia (OUM)
TOPIC 2
21
ACTIVITY 2.2
How do changes in the business environment affect strategic
management?
22 X TOPIC 2
ACTIVITY 2.3
1.
Tick the answer True (T) or False (F) for each statement below:
No.
Question
(a)
(b)
(c)
(d)
and
strategy
Establish objectives;
2.
3.
4.
5.
(b) T
(c) F
(d) F
TOPIC 2
23
In the strategy formulation stage, the organisational vision, mission and goals
are set.
Policy
Procedure
Strategy formulation
Rule
Strategy implementation
Topic
Roles of Top
Management
in Strategic
Management
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
X INTRODUCTION
Why are some companies successful and others less successful? How is it that
some companies have a clear set of directions 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 one with 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 person at 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 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
Copyright Open University Malaysia (OUM)
TOPIC 3
25
entire organisation to where it will be in the future. However, the CEO cannot 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 management activities are handled by one person known as the
corporate 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
knowledgeable people, the ones who handle the various activities and functions
of management in an organisation.
In this topic, learners will be exposed to the roles of the corporate planner, Board
of Directors, Chief Executive Officer (CEO) and the roles of middle management
in the strategic management of an organisation.
3.1
TOPIC 3
27
(b)
(c)
(d)
(e)
(f)
The roles and functions of corporate planners mentioned here are neither
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.
ACTIVITY 3.1
Describe other possible roles of a corporate planner.
3.2
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 gives 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. However in the case of
public listed companies (known as berhad), the number of members on the board
will depend on the amount of paid-up capital and composition of shareholders.
This means that some companies can have up to 10 to 15 members on the board
of directors. The members of the board are also known as non-executive
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 on the board of directors of
the company is to represent the other shareholders.
TOPIC 3
29
(a)
(b)
(c)
(d)
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 proposals, decisions or actions that need to be taken; and
(c)
Initiate and determine the strategic mission and options of the company to
the management. An active member may take this task in hand.
3.3
The chief executive officer (CEO) of an organisation performs the top management
function and coordinates 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 company.
According to Henry Mintzberg (1973), the job of top managers comprised of 10
managerial roles that can be categorised into three groups, i.e. interpersonal
roles, informational roles and decisional roles, as shown in Figure 3.3.
Copyright Open University Malaysia (OUM)
TOPIC 3
31
(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 to perform his
duties well in the job.
(b)
Informational Roles
The informational role suggests 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,
public talks, and participation in social and community affairs.
Copyright Open University Malaysia (OUM)
(c)
Decisional Roles
As a CEO, he has to make decisions. In the decisional role, the CEO
plays the role of an entrepreneur. In this role, the CEO seeks projects or
businesses that can help improve the performance of the organisation,
including initiating new product or services development, improvements in
processes, and also seeks 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 prioritise the allocation of resources like personnel
and budgets. Finally, the negotiator role suggests that the CEO represents
the organisation in negotiating important agreements, resolves disputes
between organisational divisions, negotiates with key customers, suppliers,
creditors and reviews 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 categorised into
three 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.
TOPIC 3
33
The CEO articulates a transcend goal for the organisation, thus avoiding
petty complaints and grievances of the average work day;
(b)
The CEO presents a role for others to identify with and follow; and
(c)
ACTIVITY 3.2
In your own words, describe the strategic role of the CEO.
3.4
The middle-level management refers to people between the CEO and the lowerlevel employees. They are mainly divisional heads or functional managers.
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 business 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 activities must be determined. In Petronas, business plans for the
Copyright Open University Malaysia (OUM)
TOPIC 3
35
ACTIVITY 3.3
1.
2.
3.
4.
5.
6.
Board of directors
Corporate governance
Corporate planner
Topic
Strategy
Formulation
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
X INTRODUCTION
It is known that strategy formulation has 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 topic, you
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.
4.1
TOPIC 4
STRATEGY FORMULATION W
39
ACTIVITY 4.1
What is the vision of your organisation? What is your opinion of the
vision?
The vision of an organisation sets out 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 a 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, some organisations can have a
vision statement that is short (as shown in Figure 4.1) and others can be slightly
more elaborate. For example, John Deere Inc has an elaborate vision statement as
follows: "John Deere is committed 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:
(a)
(b)
(c)
ACTIVITY 4.2
Why should a vision statement be realistic?
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 firms products, market and technology in a way that reflects the
values and priorities of the strategic decision makers. Figure 4.2 shows an
example of mission statement.
Other organisations may have mission statements that are short and precise like
Tenaga Nasional Berhad, We are committed to excellence in our products and
services (TNB Annual Report, 2003).
According to Abell (1980), one way of conceptualising the business definition is
in terms of customer groups, customer functions and technology.
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.
TOPIC 4
STRATEGY FORMULATION W
41
(b)
(c)
(d)
(e)
Serve as a focal point for those who can identify with the organisation's
purpose and direction, and to deter those who cannot from participating
further in the organisation's activities;
(f)
(g)
ACTIVITY 4.3
Answer True (T) or False (F) to the following statements:
No.
(a)
Question
A clear vision provides the foundation for development of
a comprehensive mission statement.
(b)
(c)
(d)
than vision
4.2
(b)
(c)
(d)
Like the corporate vision and mission which set 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.
TOPIC 4
STRATEGY FORMULATION W
43
Goals are broad guidelines and more specific than the mission of the
organisation. They are developed to help organisations translate what to achieve
towards attaining 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 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, and being measurable and
quantifiable.
For example, from the previously mentioned transport company example, if the
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
2012, to reduce unnecessary transport delays by 10% in 2012 and to increase
provision of contingent transport services by 20% in 2012.
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 terms goals and objectives have
been used interchangeably. In other words, some authors refer to goals as
objectives and vice versa. Glueck and Jauch (1984) used the term
interchangeably. Other authors may also differentiate goals and objectives by
introducing the terms 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 within the time dimension. In this particular case,
there is no 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.
(b)
(c)
(d)
Objectives should be set so that they would be flexible when there is a need
to change with respect to changes in the environment;
(e)
(f)
Objectives should be set so that they will be consistent in the long run and
short run.
The process of setting organisational goals and objectives 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. Furthermore, the past goals and
objectives may have an influence on the future goals and objectives. Managers
may prefer to set goals that they are familiar with and therefore are reluctant to
change due to uncertainty. The values of top management can also influence the
process of developing the goals and objectives (Glueck & Jauch, 1984). Thus, the
ultimate goals and objectives set for the organisation present the final one agreed
Copyright Open University Malaysia (OUM)
TOPIC 4
STRATEGY FORMULATION W
45
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.
ACTIVITY 4.4
1.
Why are clear goals and objectives crucial for the success of an
organisation?
2.
3.
4.
5.
Ideally, objectives are more specific compared to goals, i.e. they must be
specific, precise, achievable, attainable, realistic, feasible, measurable and
consistent.
Goals
Objectives
Mission
Vision
Mission statement
Vision statement
Topic X Environment
Analysis
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
X INTRODUCTION
As soon as the organisation has set its vision, mission and goals, the next stage in
strategy formulation is 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 them accordingly after
the analyses to fit them with the implementation plans.
In this topic, 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.
TOPIC 5
5.1
ENVIRONMENT ANALYSIS
47
The external or environmental factors are those forces outside the control of a
single organisation.
These forces can be seen 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
either a favourable or unfavourable 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 newborn babies. Coupled
with this trend, one may observe that their mothers are working people. As such,
there will be a demand for new baby products like fast baby food and baby
toiletries that can help working mothers in managing their newborn babies. For
some organisations, this trend may be favourable, while for other organisations,
it may not be favourable. Thus, it is important at this point to know the external
forces that can have an effect on the organisation.
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
Price fluctuations
Price controls
Fiscal policies
Foreign exchange
Consumption patterns
Government budgets
Investment incentives
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. 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 such as during the Asian financial crisis in 199798, Malaysian trade organisations have difficulty coping with the exchange rates,
and greater risks are perceived all the time. As such, many organisations which
do not have cash reserves and skills will wind up their businesses during this
time.
TOPIC 5
ENVIRONMENT ANALYSIS
49
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 the ASEAN Free Trade Area
(AFTA) policy on the automobile industry is believed to have an impact on the
Malaysian automobile industry. Economic forces that originate from outside the
country are more challenging and complex for business organisations to handle
as many are not familiar with the new rules of the business game. As such,
organisations have to take a more proactive approach 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 product 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
shortcut solution by doing inappropriate and unethical business deals or
focusing on short-term interests or returns.
The major challenge in identifying and evaluating economic forces, therefore,
becomes critical to managers in the strategic management exercise, thus affecting
the survival of the organisation.
5.1.2
Social Forces
In a country where there are many ethnic groups like Malaysia, which comprises
ethnic groups such as 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 trying to cope with the diverse cultures can be a challenging
exercise. For example, the Malays are mainly Muslims, while the Chinese can be
Buddhists, Taoists, Christians or even Muslims. Similarly, the Indians can be
Hindus, 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 all hotels in the country. Even imported meat have the halal sign shown on
the menu like the one served at the Victoria Station restaurant. That is why in
Malaysia, we see that fast food chains like McDonald's, Kentucky Fried Chicken
and Pizza Hut have standard halal signs (authenticated by the Malaysian
Muslim Religious Department or JAKIM) to show that their food can be
consumed by all Muslims. The demand for halal food is made by consumers
and not pressured by laws of the country. Today, halal signs are commonly
displayed on the processed food products too. Thus, a Western fast food would
have to take into account the local values and consumption preferences in order
to fit with the consumer's taste and demand.
Language can also have an impact on the business organisation, for example, in
terms of advertising. In the past, most advertisements on billboards in Malaysia
must be written in Malay. However, this trend is quickly changing as more and
more advertisements are written in English. Similarly, advertisements in the local
media can also be done in Mandarin or Tamil. The changing policy on this and
acceptance by the Malaysian society indicate the changing trends as compared to
20 years ago where most advertisements were in Malay.
As the country prospers and the society becomes more sophisticated, the demand
for more products and services are increasing. For example, in the situation
where many women are working, the demand for processed food is created. For
instance, there are now instant roti canai and instant curry puffs. Food
manufacturers are introducing newer fast food products for the new generation
of consumers. Canned food and processed packed food have become a trend
today among the Malaysian consumers as their tastes and preferences change
fast. As the society becomes more affluent, consumer spending patterns also
change. Thus, we see thriving mega malls and shopping complexes today in
major Malaysian cities in states like Penang, Johor, Melaka and others.
Social values and preferences also affect consumer attitudes towards products
and services. This can also be related to their level of education and social
exposure. For example, attitude towards work and spending habits change fast
among the new generation. Similarly, their perceptions towards leisure and
holidays also differ today compared to a few decades ago. Changes in fashion
and designs also affect the demand for new kinds of products and services.
TOPIC 5
ENVIRONMENT ANALYSIS
51
Life expectancy
Lifestyles
Sex roles
Environmental concerns
Consumer activism
Buying habits
Social tolerance
5.1.3
Political Forces
Political forces are those factors involving the government, whether it is at the
federal level, state level or the local government level. Political forces can refer to
the laws and legislation or policies adopted by the government in power. These
are factors that can provide favourable or unfavourable impact on the
organisation.
One of the main concerns in political forces is political stability. This refers to the extent
in which the government 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 a multi-cultural 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 in 2003
was 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 reduce the level of investment
attractiveness to businessmen in the region or country. The Malaysian
governments foreign policy of non-interference of foreign countries problems is
one example that can reduce political instability in the country.
Federal government policies can also affect business organisations. These include
environmental protection laws, tax laws, investment incentives policies, labour
laws, government subsidies and other trade policies. Attitudes towards foreign
labour 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 organisations. For example, when the PAS state government was
controlling the State of Terengganu from 1999 to 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.
Another area of concern is government regulations and deregulation policies.
This is reflected by new laws and legislations introduced to curtail unhealthy
activities in the business community. The introduction of special tariffs and bylaws also has an impact on business operations, for example the service tax
reforms introduced to all service organisations with a minimum sales volume.
TOPIC 5
ENVIRONMENT ANALYSIS
53
Finally, national policies like the New Development Policy, National Service and
National Integrity Plan can provide a favourable impact on 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.
The advent of the Internet has changed the way businesses manage their operations as
well as the way of doing business. The Internet has created demands for e-business or
e-commerce. It has also led to the revolution in 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 research and development activities in the
electronics, computer and telecommunication industry, it has also led to the massive
growth in the mobile telecommunication industry. The Internet has thus
revolutionised the business model of the 20th century from manufacturing to the
information age. The financial services sector is also changing fast to cope with the ebanking 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 have become more important today than ever
before. Biotechnology, bio-medical and medical engineering are new fields that
create new products and services. The automobile industry is changing fast from
the automated system to the electronic system. Even business offices are now
incorporating electronic management systems. Thus, the technological revolution
is changing the lifestyles and face of businesses and competition. Table 5.3 shows
the key technological forces.
Biodiversity
Rate of innovation
Patent productions
Multimedia development
5.2
ENVIRONMENTAL SCANNING
TOPIC 5
ENVIRONMENT ANALYSIS
55
This can be a difficult task for managers even in group sessions. A strategic issue
matrix can help managers to prioritise the issues to be considered as shown in
Table 5.4.
Probable Impact on Organisation Probability of Occurrence
Table 5.4: Strategic Issue Matrix
High
Medium
Low
High
High Priority
High Priority
Medium Priority
Medium
High Priority
Medium Priority
Low Priority
Low
Medium Priority
Low Priority
Low Priority
Based on the matrix, managers can determine the external factors that require
greater attention than others. Issues that have high and medium probability of
occurrence and high and medium impact on the organisation must be addressed
before other issues.
5.2.1
Social
Political
Technological
Threats
Low productivity
Changing lifestyles
Negative attitude
towards ethics
Intercultural variations
Threats are those factors or forces that can provide an unfavourable response or
negative impact to the organisation. These forces could impair the 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
organisations activities and react negatively to 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 can be
avoided and thus minimise the impact on the organisation. In other cases, the
undesirable threats cannot be avoided and organisations have to be creative in
reducing the potential threats of these forces to the organisation. Managers can
only minimise the risks of external forces but cannot eliminate the potential risks
involved.
In trying to identify 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
the latest information about the business in which the organisation operates. One
Copyright Open University Malaysia (OUM)
TOPIC 5
ENVIRONMENT ANALYSIS
57
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. Furthermore, 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 knowledge or information about the
industry. People who are doing this type of analysis do not require precise
knowledge about the industry in question, but must have the latest information
that would have an impact on the business. 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 birds eye view of
the situation.
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 favourable to the lenders or
financial institution. Thus, in organisations with multi-businesses, the assessment
of opportunities and threats can be a challenging task.
ACTIVITY 5.1
Answer True (T) or False (F) to each of the following statements:
No.
(a)
Question
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.
(b)
(c)
5.2.2
Impact of Factor of
Factor
Importance
ETOP Score
Economic
+4
+32
Social
+2
+8
Political
-3
-18
Technological
-1
-7
Total Score
+15
From the above example, one can see that the total score is (+15), whicht 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 is relatively weak. The political factor is the weakest, showing a high
level of threat similar to the technological factor. Therefore, the organisation
needs to address these two external factors.
TOPIC 5
(b)
ENVIRONMENT ANALYSIS
59
(ii)
(iii) 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 responds less favourably to the firm's strategy;
(iv) Multiply each of the assigned weights with the rating score to
determine the weighted score; and
(v)
Sum the weighted scores for each factor to determine the overall
weighted score for the organisation.
Weights
Rating
Weighted
Score
Opportunities
1.
0.15
0.6
2.
0.05
0.1
3.
Strong demand
0.20
0.6
4.
0.10
0.2
5.
0.10
0.2
Threats
1.
0.05
0.15
2.
0.10
0.4
3.
0.15
0.3
4.
Political instability
0.10
0.2
Total
1.00
2.75
The results show 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. Consequently, the company has to
resort to more creative solutions in handling the external threats.
TOPIC 5
ENVIRONMENT ANALYSIS
61
ACTIVITY 5.2
1.
2.
3.
Discuss several factors under the social factors that could affect the
organisation.
4.
5.
What are the external environment factors affecting the telephone industry?
2.
3.
TOPIC 5
ENVIRONMENT ANALYSIS
63
External or environmental factors are those forces outside the control of the
organisation.
Among the tools used for environmental analysis are Environmental Threats
and Opportunities Profile (ETOP) or External Environmental Factor Matrix
(EEFM), also known as the External Factor Evaluation Matrix (EFEM).
Economic forces
Environmental scanning
Environmental Treats and Opportunities Profile (ETOP)
External Environmental Factor Matrix (EEFM)
External Factor Evaluation Matrix (EFEM)
Political forces
Social forces
Technological forces
Topic X Industry
Analysis
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
X 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 and Standard Chartered Bank 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 are generally beyond the
control of the organisation or the industry.
In this topic, 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.
Copyright Open University Malaysia (OUM)
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INDUSTRY ANALYSIS W
65
ACTIVITY 6.1
Compile a list of organisations in the industry in which you are
currently working.
6.1
The basic premise of 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 represent 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 exists. 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 the real world, industries
fall between the range of these two spectrums. 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 can 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 Structure
Characteristics
of Industry
Structure
Perfect
Competition
Number
of Firms
Many
Barriers
to Entry
or Exit
Product
Differentiation
Examples
in Malaysia
None
None
Banking,
Insurance
Oligopoly
Few
Moderate/High
High
Petroleum, Oil
and Gas
Duopoly
Two
Moderate/High
Moderate/High
Airline
Monopoly
One
Varies
Railway
Transport
Based on the industrial economic theory, Porter (1980) suggests 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 threat of new entrants, the threat of substitute products
or services, the bargaining power of suppliers, the bargaining power of buyers
and the rivalry among existing competitors.
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 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 distinctive
structure. For example, in the pharmaceutical industry, 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 licences for the industry. On the other hand, the barriers to entry
for the hotel and tourism industry are relatively low. The structure of an industry
is relatively stable but can change over time as the industry evolves. For example,
the rapid development of the electronic and computer systems and services 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
Porter (1980) suggests a framework for analysing competition in the industry. The five
forces affecting the nature of competition and profitability in the industry are:
(a)
(b)
(c)
(d)
(e)
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67
The relationship between these five forces is illustrated in Figure 6.1 below.
6.2.1
Economies of Scale
Firms cannot enter the industry due to the high economies of scale such as
high production costs per unit enterprises.
(b)
Product Differentiation
Brand identification creates a barrier to entry, forcing new entrants to
compete with established brands. For instance, local brands versus
international brands for tea products.
(c)
Capital Requirements
The need for high capital or set-up costs can deter firms from entering the
industry, such as the airline industry.
Copyright Open University Malaysia (OUM)
(d)
(e)
(f)
(g)
Government Policy
Government policy can also deter entry of new firms as the government
wants to control the number of players in the industry.
Despite these threats to new entrants, new firms might 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.
6.2.2
Firms in an industry may also 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 profit potential in an industry by
placing ceiling prices that other firms can charge (Porter, 1980). For example, tea
can be considered as 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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6.2.4
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. A buyer or group of buyers in an industry can be powerful if some of the
following conditions hold:
(a)
(b)
The buyer has the potential to integrate backward by producing the product
itself;
(c)
(d)
(e)
(f)
The buyer earns low profits, and therefore is sensitive to cost and service
differences; and
(g)
The purchased product is not important to the final quality, and thus can be
easily substituted without adversely affecting the quality of the final
product.
For example, if Proton purchased a large percentage of Sime Tires total tyre
production, Proton could easily make all sorts of demand on Sime Tires
marketing people. This would also be the case if Proton gets its tyres from
Goodyear or Dunlop. The bargaining power of Proton is high here, 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
a 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
(b)
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 low, this may force firms to take aggressive action to increase their sales.
For example, when there is a decrease in passenger traffic, airlines may
resort to price war tactics.
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(c)
(d)
When the fixed costs of the firm are high, or the product is perishable, firms
may cut prices to reduce the potential losses in 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.
(e)
(f)
When exit barriers are high and firms find it difficult to get out of the
industry, the intensity of competition increases. Exit barriers may be high as
the fixed assets of the business cannot be sold easily or there are no takers
in other businesses. Furthermore, when investment costs are high, firms are
reluctant to exit without getting reasonable returns on their investment
costs.
(g)
The intensity of competition among firms can be high when 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 foundation
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 not. The five forces model only provides the basic framework, but
strategic managers must have the information and knowledge to analyse the
industry situation.
ACTIVITY 6.2
1.
No.
Question
(a)
(b)
(c)
2.
3.
(b)
(c)
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73
2. Using Porters five forces model, analyse the nature of competition and
profitability in the automotive industry.
The five key forces affecting the structure of an industry are threats of new
entrants, threats of substitute products or services, bargaining power of
suppliers, bargaining power of buyers and rivalry among existing competition.
Theory of monopoly
Nature of industry
Structure of industry
Topic X Internal
Analysis
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
X INTRODUCTION
In the strategic analysis stage, after analysing the external environment and the
industry, it is then appropriate to analyse the organisational situation. The
purpose of the internal analysis is to evaluate the organisational strengths and
weaknesses. This can 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 topic, an analysis of the internal environment will be analysed 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.
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7.1
INTERNAL ANALYSIS
75
There are several key internal factors that can affect the operations of an
organisation. 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 determine is whether we
have the capital (money and other resources) to start the business. Once the
source of financing is settled, we have to start the business by recruiting people,
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 be used in making the special nasi
lemak, the production operation begins. When the output is ready, i.e. speciallypacked nasi lemak, the marketing team will take over the subsequent activities.
Once the product is sold, the organisation receives money from the buyers and
this is sent to the accounts section for record. Similarly, 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.
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
operations. For example, if the workers who are supposed to start the production
are not on time or absent, 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, 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 or 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 not easily controlled by the CEO
or functional managers. Thus, in trying to achieve superior performance, the
organisation needs to make an internal audit of the situation. The best way
would be to analyse each of the key functional areas in a typical business
organisation.
ACTIVITY 7.1
Describe efficient and efficiency in your own words.
7.1.1
Management
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77
Controlling refers to those activities aimed at ensuring the actual results are
consistent with the planned results of the organisation. Various methods of
controls may be needed to ensure that 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 to controlling. While the organisational structure
may be appropriate or relevant, the major problem could be with the people in
the organisation. In other words, human resources may be a constraint to the
efficient management of an organisation. Human resources can cause problems
due to the work culture on attitude of employees. When the organisation is small,
the culture may be close knitted, but as the organisation grows bigger, the culture
may change. People have difficulties in accepting new ways, and are therefore,
more resistant to changes. Thus, organisational change can create problems in
managing the human resources in the organisation.
In some cases, the problem of human resources may be due to internal office
politics. Organisational politics can affect job satisfaction, motivation and
commitment of employees. Although organisational politics cannot be avoided,
undesirable office politics should be controlled before it gets out of hand.
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.
ACTIVITY 7.2
Suggest ways to manage organisational politics.
7.1.2
Marketing
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79
and therefore, affect the consumers decision to purchase or not, especially if the
product is perceived to have substitutes. Organisations need to consider offering
trade discounts, quantity discounts, credit policy terms, payment periods and
other creative modes of payments to suppliers, wholesalers or retailers. For
example, when a product has a maximum price, fixed by the government,
organisations may consider using the lowest price strategy in selected fastmoving consumer products. This is one strategy adopted by many hypermarkets
like Giant in Malaysia when competing with local retail outlets.
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).
Key promotional tools include advertising, personal selling, publicity and sales
promotion. The media selected to communicate with your audience are 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 needs to know whom they wish to communicate
to, the English speaking consumers or Malay speaking consumers. Organisations
also need to know how to conduct sales promotions. for example 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 retailers or wholesalers.
7.1.3
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81
ACTIVITY 7.3
Why is the financial position of an organisation an important
indicator of its performance?
To assess the financial health of the organisation, we need to have financial
information. This can be obtained from the organisations accountant who is
responsible for keeping the financial and accounting information. As an
accountant in the organisation, he must have information on the balance sheet,
profit and loss statement, the sources and use of funds (cash flow statement)
together with the financial notes and annual report. From this information, one
can then ascertain the financial health of the organisation and start the process of
financial planning and budgeting.
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):
(a)
Liquidity Ratios
This ratio shows the organisations ability to meet its short-term obligations.
There are two types of liquidity ratios: current ratio and quick (acid test) ratio.
Activity Ratios
These ratios show 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.
assets, return on equity, net profit margin, earning per share and priceearning (P-E) ratio.
(e)
Growth Ratios
These ratios show the organisations 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 can we assess whether the organisation has
performed 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, products, assets or divisions 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 of the organisation. For example,
should an organisation increase its capital requirement by increasing its shortterm 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 for making profit. Rather it is 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.
TOPIC 7
7.1.4
INTERNAL ANALYSIS
83
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 final area is quality, which is concerned with assuring quality control
for the finished product, sampling, testing and cost control measures.
The production and operation activities generally represent a large part of the
organisations 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
Copyright Open University Malaysia (OUM)
make huge 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 a service
organisation, the issue is slanted more towards the efficient management of its
operations, which is equivalent to the production stage. Service quality becomes
the key issue in this type of business. For example, in telephone services,
education, accommodation and tourism services, the service providers provide
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 out 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
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 strong R&D to
survive in this 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 how these R&D activities could help
enhance the profitability and growth of the organisations 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
Copyright Open University Malaysia (OUM)
TOPIC 7
INTERNAL ANALYSIS
85
services introduced in the market and to what extent the product or service
contributes to the profit margin of the organisation. For example, how successful
is Maxis' newly introduced services compared to other telecommunication
providers in Malaysia. Similarly, to what extent is the response for ICI paint
division's newly introduced colours and type of paints in the market.
ACTIVITY 7.4
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 might face problems in terms of cost efficiency, particularly in
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
uneconomical. 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
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--vis other organisations.
Marketing
Strengths
Weaknesses
Lack of communication
Low commitment
Resistance to change
Good promotions
Good advertising
TOPIC 7
Finance and
Accounting
Production and
Operations
Research and
Development
7.3
INTERNAL ANALYSIS
87
Well-kept accounting
information
Poor leverage
Skilled manpower
Economies of scale
Inefficiencies in product
Good layout
processes
Inefficient resource
allocation
Technological competence is
adequate
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 (IVCA) and
the other is the Internal Organisational Factor Matrix (IOFM) or generally known
as Internal Factor Evaluation Matrix (IFEM).
7.3.1
Michael Porter (1980) proposed the value chain analysis as a way to examine the
nature and extent of synergies 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 available to an organisation.
The series of activities in the value chain differ by industry and type of activities
in the organisation. Some organisations have more complicated value chains like
the petroleum industry where the value chain can be divided into two segments,
upstream and downstream activities. Upstream refers to activities like oil
exploration, drilling and converting crude oil to the refinery. Downstream refers
to the logistics, marketing and distribution of petrol to distributors and retailers.
In Petronas Malaysia, such activities are done by Petronas Carigali and Petronas
Dagang, two separate entities, but in other countries it could be done by one
large organisation. While the series of activities might 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 (1980), 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 products), marketing and sales (such as
advertising, promotion and 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 organisation infrastructure (such as general management, administration,
accounting, finance and strategic planning). See Figure 7.3.
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INTERNAL ANALYSIS
89
There are three steps under the value chain analysis as shown in Figure 7.4.
(a)
(b)
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
100% quality control of inputs instead of the normal 10% check at random.
This activity would therefore reduce wastage and poor quality at the output
stage and reduce the number of product defects.
(c)
It should be noted that the value chain analysis requires 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 cannot 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 used to identify 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
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).
TOPIC 7
INTERNAL ANALYSIS
91
In order to develop the Internal Organisational Factor Matrix (IOFM), the steps
below should be followed:
(a)
List the key internal organisational factors. Identify first the strengths and
weaknesses.
(b)
(c)
(d)
Multiply each of the assigned weights with the rating score to determine
the weighted score.
(e)
Sum the weighted scores for each factor to determine the overall weighted
score for the organisation.
Weights
Rating
Weighted Score
Strength
1.
0.15
0.45
2.
0.05
0.1
3.
Team management
0.10
0.3
4.
Corporate culture
0.10
0.2
5.
0.10
0.5
6.
High profitability
0.10
0.5
Weakness
1.
0.05
0.15
2.
0.10
0.4
3.
0.15
0.3
0.10
0.2
Total
1.00
3.10
The results show that the company has major strengths in profitability and
product quality. This is due to the 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 a favourable position.
ACTIVITY 7.5
1.
List some of the financial and accounting ratios that can be used
in internal analysis.
2.
3.
4.
organisational performance.
Evaluation of organisational strengths and weaknesses can be done using the
Internal Value Chain Analysis and the Internal Organisation Factor Matrix
(IOFM) also known as Internal Factor Evaluation Matrix (IFEM)
TOPIC 7
INTERNAL ANALYSIS
Controlling
Organisational politics
Leading
Planning
Promotion
Strengths
Value chain
Marketing mix
Weaknesses
Organising
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Topic X Competitive
and Portfolio
Analysis
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
X 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. 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, internal organisational analysis may
be sufficient, but in today's multi-business organisation, such as food business
and beverage business, a portfolio analysis could provide a more accurate
perspective of the business activities of the organisation.
This topic, focuses 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 topic. Several competitive tools like the Competitive
Profile Matrix and the Strategic Position Action and Evaluation (SPACE)
technique will also be discussed.
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TOPIC 8
8.1
95
EXPERIENCE CURVE
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8.1.1
What are the reasons behind the reduction in the total manufacturing costs?
(a)
Learning Experience
When one conducts a task which is repetitive in nature, one can develop
skills in performing the task, and therefore be able to increase one's
performance. The learning effect provides greater performance and
productivity of the production worker.
(b)
(c)
(d)
Economies of Scale
Economies of scale means the unit costs would decline as the volume or
output increases. This can be attributed to the 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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TOPIC 8
(e)
97
Know How
Know-how refers to an understanding of the managerial, technical and
operational factors that contributes 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 which is different
from others. Thus, know-how is a unique expertise of an organisation.
8.1.2
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 sets a low
price. Company W would 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 would survive as long as the
price is not lowered. They enjoy lower profit margins than Company Z.
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8.2
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
The Boston Consulting Group (BCG) Matrix is also generally known as the
Growth-Share Matrix or the 2 by 2 Matrix. It was proposed by the internationally
renowned consulting group, Boston Consulting Group in the late 1960s (Hax &
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
to 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.
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Figure 8.3 shows the BCG matrix of an organisation with several portfolios of
businesses.
Market share
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 of market share a
particular business portfolio has relative to the leading competitor. The relative
market share is defined as:
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 the 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 year 2 can be defined as:
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 a 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 shows the proportion of profit
generated by that product portfolio.
In the BCG matrix, 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 this 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 keep this business portfolio, the dog should be divested.
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Some organisations like to keep their dogs because of tax purposes or do not
want others to take over their share position. The dog is similar to the
declining or ageing stage in the product life cycle.
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 fail in the market
and do not exist after some time. When an organisation does not have a strong
cash position, they would find great difficulty to cope with this type of portfolio
position. This cell is similar to the embryonic stage of the product life cycle.
Meanwhile, the cell known as the Star is when the relative market share is large,
and the market 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 can maintain their position long enough
to be a cash cow, or might slip into the 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 provides large
cash inflows to the organisation, and therefore, the net cash flow is largely positive. It
is also similar to the maturity stage in the product life cycle. This is due to the fact that
the large market share provides much revenue while the low market growth suggests
that the organisation needs 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 move the new product portfolio into the question mark position.
8.2.2
Although the BCG Matrix is simple and widely used by many organisations, it has
also received some criticisms. Some argue that the use of low-high market share or
market growth rate is too simplistic. In the real world, there are also medium
situations. The world does not consist of black and white; instead it has 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 in Malaysia, the market share
of BMW cars is smaller compared to Proton cars, yet BMW is also profitable.
It is 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
The criticisms of the BCG Matrix led General Electric (GE) to engage the services
of McKinsey and Company to develop a 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.
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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 should be followed:
(a)
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.
(b) Identify and select the key factors determining the business strength of each
product portfolio. Assess the business strength for each product portfolio on
a scale of 1(very weak) to 5 (very strong) competitive position.
(c)
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 could be in the range of 3.35 and above.
(d) 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 scores and Figure 8.6 shows the
business strength scores.
Based on the above score, the product portfolio is in the middle cell. In this cell,
the organisations need to identify growth segments; they may also have to
specialise or invest selectively. The strategic implications of each cell in the GE
matrix are shown in Figure 8.7.
From Figure 8.7, it should be noted that those in cells 1 and 2 are good positions
and known as winners. Those in cell 3 are in average positions. They have
average businesses, produce high profits or sometimes are in the question
mark positions. Finally, those in cell 4 are losers and they have to prepare to
turn around, 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.
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8.2.4
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 previous
matrices, that is the BCG and GE matrices. In the ADL matrix, the horizontal axis
shows the stages of development of a 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 entry and technology
development (Hax & 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. An example would be the
biotechnology industry. The growth industry has rapid growth but customers,
market shares and technology are more known to others and entry into the
industry is more difficult, for example the computer market. A mature market
has stable customers and market shares; and technology does not change much.
An example is the automobile industry. The ageing market is characterised by
falling demand like the bicycle and shipbuilding industries.
On the vertical axis is the competitive position which ranges from dominant,
strong, favourable, tenable and weak. The dominant competitive position means
that only one or two players have leading roles in the industry. This is quite rare
and happens 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, e.g. Proton in the automobile industry in Malaysia with
almost 75% market share. Not many organisations have such a 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, McDonald's, 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 position can be
improved 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.
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The areas in light grey show that the position is quite good, and has several
alternatives. When the position is in the areas with diagonally lined pattern, then
a selective strategy is required. The dark grey sections show that the organisation
needs to prepare for exit or divest or liquidate. The strategic implication of firms
in each cell is similar to the GE matrix cell.
Although the product portfolio matrix provides a better view of the product
portfolio performance in an organisation, it also has its limitations. One of the
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 products may have its own unique position.
Furthermore, some element of subjectivity is required in the analysis and if one
does not have enough experience and adequate information, the results may not
be accurate. Thus, the portfolio analysis must be used with caution. Nevertheless,
the product portfolio provides a method to analyse the product performance in
an organisation.
8.3
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In order to develop the competitive profile matrix, the following steps are
recommended:
(a)
(b)
(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 be equal to 1.00.
(d)
(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 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 than 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 its
advertising strategy so that the branding of Avon would be improved, and also
increase its market share. Avon should also increase its global marketing.
The example of the competitive profile matrix showed the usefulness of the
matrix in making a competitive analysis of the organisation vis--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 realised 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
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 Strength (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 8.10 shows the SPACE matrix and Table 8.1
shows factors determining the SPACE dimensions.
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(b)
(c)
(d)
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.
(e)
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 resultant
for Y. Plot the intersection of the XY resultant scores.
(f)
Draw the directional vector from the origin of the SPACE matrix. The
vector will determine the type of strategies recommended for the
organisation.
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The four strategic thrusts suggested are similar to the four strategic postures of
Miles and Snow (1978), namely, prospectors (aggressive), defenders (defensive),
analysers (conservative) and reactors (competitive).
ACTIVITY 8.1
1.
2.
Construct a BCG Matrix for the organisation that you work for.
3.
4.
5.
matrices.
Another
ADL Matrix
Experience curve
BCG Matrix
GE Matrix
Topic X Strategic
Alternatives
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
X 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 be 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 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 to organisations with multi-products or portfolios and also more specific
for the business level strategies as opposed to the corporate level strategies,
which are strategies of interest to the organisation as a whole. Business level
strategies are those proposed plans of action 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.
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9.1
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STRATEGIC ALTERNATIVES
9.2
CORPORATE STRATEGIES
Corporate strategies are those potential plans of action that can specify the
organisations orientation or ability to handle businesses in various
environments with a common set of strategic capabilities.
Corporate strategy covers the broad and overall organisational plan of action that
can assist an organisation to achieving 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 the 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
Forward Integration
Forward integration means that the organisation is gaining control or
ownership of the distributors or retailers.
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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.
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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, Citroens objective is to increase its sales of vehicles in China
from 104,000 units in 2009 to 124,000 units in 2010. The promotions by BMW
on its cars in the month of June 2009 also represent an intensive marketing
strategic 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 favourable. 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.
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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.
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 production capacity. This strategy can also be
adopted when the strategy has financial and human capital to support the
new market needs.
(c)
Product Development
Market development refers to the strategy of introducing the current
product or services to a new market.
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. The computer
industry, is fast changing to 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
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(a)
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STRATEGIC ALTERNATIVES
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. This means that the Mutiara Hotel is involved in a new type
of business, time sharing, but which is related to the lodging industry,
offering rooms to occupants. In the education industry, INSEAD, the
leading business school in Europe and Asia, besides offering MBA
programmes, also provides executive development programmes 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 programmes which are related to education and training
industry.
This strategy is selected when the 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 organisation is involved in
new and unrelated products or services.
For example, Malayan Banking Berhad, 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. Organisations can also adopt this strategy by pursuing 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 or services today.
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(c)
Conglomerate Diversification
Conglomerate diversification refers to business activities
diversification in new, but unrelated products or services.
of
For example, if Petronas starts a KFC outlet in its petrol kiosks, then this is
known as an unrelated diversification or conglomerate diversification.
Another example is when AmBank Group gets involved in the construction
of houses, 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
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.
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STRATEGIC ALTERNATIVES
In the years 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, the organisation might want to sell off the
chemical business in an effort to gain cash reserves for the food and
beverages businesses.
This strategy is adopted when an organisation 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 avenues to raise or salvage the
business is not possible. Thus, shareholders may prefer this than pay the large
amount of liabilities incurred by the organisation. In Malaysia, many
organisations resorted to Section 176 of the Companies Act, 1963 to prevent
being liquidated temporarily in the years 2000 and 2001. Thus, organisations
remain solvent until they failed all avenues to pay up their debts.
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9.3
BUSINESS STRATEGIES
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9.3.1
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STRATEGIC ALTERNATIVES
The cost leadership strategy is used when the business targets to be the lowest
cost producer in the market.
This strategy requires 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 and
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 include 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 low costs
operations they could charge consumers at lower prices, and therefore gain a larger
market share than their competitors. The low price strategy also serves as a barrier of
entry to other new entrants. This strategy is also suitable for organisations producing
products on a large scale. 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 production. It is also possible to adopt this strategy when consumers are price
sensitive to 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
sales is important in this strategy.
ACTIVITY 9.1
What are some rationales for adopting the cost leadership strategy?
9.3.2
Differentiation Strategy
TOPIC 9
This is an effective strategy to pursue in businesses where the profits are above
average because of brand loyalty or when customers are insensitive to price
changes. 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 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.
However, this strategy would not be viable when consumers find that the unique
product characteristics do not justify 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 unique or differentiated characteristics of its products or services. Thus,
understanding consumer's buying behaviour, trends, tastes and preferences are
critical in the differentiation strategy.
9.3.3
Focus Strategy
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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 offered low cost
insurance to active and retired military personnel (Hunger & Wheelen, 1996).
In pursuing business strategies, it should be noted that there are also risks
involved due to imitation from competing firms. This can arise when competing
firms have the technological know-how or customers are less loyal due to pricecost 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.
9.4
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 organisation. The factors that can influence the
selection of alternative strategies are as follows:
(a)
9.4.1
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 show 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
TOPIC 9
From the grand strategy matrix, organisations should select strategies when their
analysis shows 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 up-to-date information can the organisation determine the most
appropriate strategic choice for the organisation.
On the other hand, when one is using the strengths, weaknesses, opportunities and
threats (SWOT) method of assessment, the TOWS matrix (see Figure 9.3) 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
facing the organisation. Then, match the strengths with the opportunities (SO) and
strengths with 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.
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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 users.
One of the problems in using the TOWS matrix and the grand strategy matrix
is the generalisability of the prescriptions. For those with little experience and
knowledge about the industry, organisation and external environment, this can
be a potential shortcoming 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 a more concrete approach to make
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 expansion 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.
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ACTIVITY 9.2
Discuss some shortcomings of the TOWS matrix.
9.4.2
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 risk provided it is a calculated risk.
The attitude towards risks can also be due to past experiences on risks taking and
attitude towards organisational change. Whatever the attitude may be, the strategic
choice depends highly on the managements philosophy and expectations in
managing organisational performance.
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9.4.3
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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. They may be from the
political or governmental arena 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, the strategic choice to
select the venture capitalist from an institution that may not be to the liking of the
national government in a country might pose a problem. 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 a whole. This may not be an easy task but it has to be made.
9.4.4
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 organisations, the culture
would be to discuss with senior members in the organisation first before
implementing a strategic decision. In some other organisations, the CEO makes
the decision, and then inform the other members of 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.
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TOPIC 9
In such cases, the process of making a 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 members of the Board. 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.
ACTIVITY 9.3
Why does corporate culture affect the selection of strategic choice?
ACTIVITY 9.4
1.
2.
3.
4.
5.
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Enjoy some Malay snacks as you hunt for your favourite novels
By NG MIN XI
LA CUCUR has opened a new concept outlet at the MPH bookstore in Mid
Valley Megamall, Kuala Lumpur.
The outlet is a Malay-themed cafe, reminiscent of a mamak joint that appeals
more to locals, encouraging bookstore patrons to take a break from their bookhunting.
The brand is known for its tasty and colourful selection of Malay kuih as well as
a variety of traditional Malay dishes.
Complementing the array of Malay favourites are local favourites like Roti Jala,
Nasi Lemak and Laksa Utara, which are popular daily staples here.
Quick bites: The concept outlet in MPH doubles as a kiosk for those on the go
Source: http://thestar.com.my
Questions:
1.
2.
Do you think that this strategy will be successful? Explain the reasons
behind your answer.
TOPIC 9
Backward integration
Focus strategies
Business strategies
Forward integration
Concentric diversification
Horizontal diversification
Conglomerate diversification
Horizontal integration
Corporate strategies
Integration strategies
Intensive strategies
Defensive strategies
Market development
Differentiate strategies
Market penetration
Diversification strategies
Topic X Strategy
10
Implementation
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
4.
5.
X INTRODUCTION
Strategy implementation refers to the phase in which the organisation plans to
transform 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 is set forth into action. Strategy implementation is 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. 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 whether it would fall short of the targets. This is generally the
case of why policies of the organisation do not work or the policy of the
government is not effective on the ground level. In the United States, Universal
Studios had planned to launch a theme park in 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 launch the project well before it
was ready. Consequently, many customers were dissatisfied and demanded
refunds (Hunger & Wheelen, 1996). This is an example of a well-planned but
poorly implemented project with major unfavourable consequences. Similarly, in
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Malaysia, we have observed that projects like Rakan Muda (recreational activities
for the teenagers and youth) were successfully implemented for a while but
gradually lost popularity.
A survey of 93 Fortune 500 firms in the United States showed that more than 50%
of corporations have experienced problems in implementing a strategic change
(Hunger & Wheelen, 1996). The 10 problems are as follows:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(b)
(c)
These issues should also be addressed before selecting the alternative strategies
of the organisation as they may have an effect on the choice of strategies to be
considered. This would be true for newly established organisations but for
existing organisations, the process can be done simultaneously or after selecting
the appropriate strategic choice.
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(b)
(c)
The prescribed objectives set must be consistent with the goals set at the business
level as mentioned in subtopic 4.2 of this module. One of the major problems
faced by organisations is to make sure that the objectives are consistent, and can
be operational and achievable within the time frame allotted.
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Once the objectives have been set and agreed to by the functional managers and
top managers, the policy must be reviewed so that it is consistent with its actual
operation. For example, if 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, it provides 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 than 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 a 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 &
Robinson 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, they are translated into standard operating
procedures (SOPs).
The SOPs provide a description of the necessary steps to be taken in a sequential
manner on how a particular task or job is to be done. The SOPs 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
know how to get things done so that they do not go astray. In large and complex
organisations like the public sector, SOPs provide better management and
administration as the people involved in the project or activity often change
without leaving a guideline to the successor on how to get things done. 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
there is a change in the policy decision, halfway 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.
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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 is found to be reasonably consistent with the goals and mission of the
organisation and matches with the external environment, industry situation as
well as corporate strengths and 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 the organisation to achieve the set objectives 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 in problems, 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 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 in many managers leaving
the organisation as their suggestions were not given due consideration. The matter is
even less motivating when the top managers do not have enough information but do
not like to show their ignorance. On the other hand, the matter is easily handled
when the top managers are more hands-on and have more experience and a 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
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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 in reality the chief executive officer is managing to
cope with the changes in the environment.
ACTIVITY 10.1
Why is the integration of objectives, policies and strategies of the
organisation important?
10.2
ORGANISATIONAL STRUCTURE
In implementing strategy, the question of what are the activities to be done can
best be viewed from the organisational structure. The organisational 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
organisational structure will explain in brief who is suppose to do what activities,
and to whom the person should report in the organisational hierarchy. In
implementing the strategy, the manager should make sure that all employees
follow the lines of authority and communication.
There are at least five major types of organisational structure (Pearce II &
Robinson Jr., 1985):
(a)
Simple;
(b)
Functional;
(c)
Divisional;
(d)
(e)
Matrix.
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Simple Structure
10.2.2
Functional Structure
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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 products offered, markets
served or customer groups. Because each of these business operations is large
and needs 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
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10.3.1
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 a canned food division, a dry food division, a wet
food division and a fast-food division. These divisions would be under the food
strategic business unit. One advantage of this structure is that it helps to improve
the coordination 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.
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141
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 to the bureaucracy level in the organisation.
Dysfunctional competition may be enhanced with limited resources, and can
create conflict if not properly managed. The extent of authority and autonomy of
the heads of the strategic business units can be difficult to define and
consequently cause confusion among the strategic business units. This may also
enhance the lobbying behaviour of managers in the division and strategic
business units with the chief executive officer of the organisation. The job of the
chief executive officer becomes even more challenging, and requires people with
wide experience and wisdom.
10.3.2
Matrix Structure
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matters 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 supposed 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 and 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
do well in the university management but do not do well in academic
performance. Consequently, some people feel dissatisfied and disheartened as
the performance measures are not evaluated properly. 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 an 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 are interviewed
by a committee appointed by the university or policy makers. This would not solve
the entire problem but generally can reduce the negative consequences.
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Chandler found that in Du Pont, during the early years, the organisation had a
functional structure that is well suited to the production and selling of a limited
range of products. As Du Pont added new product lines, and purchased their
own sources of supply, and created their own distribution networks, they
became too complex for highly centralised structures. In order to remain
successful, the organisation needed to shift to a decentralised structure with
semi-autonomous divisions. Similar development was also observed in 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. A small
business needs to change its 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.
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The key areas in implementing strategy are organisational leadership and the
availability of human resources to implement the strategies formulated.
Organisational leadership is important as it can influence the behaviour and
actions of the subordinates or peers towards accomplishing the organisational
goals and objectives. With effective leaders, the organisation can ensure action
and motivate others to work towards the 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 and motivating others to work towards the common
goals of the organisation. One of the reasons why strategic plans fail is the CEO
does not recognise the importance of his role in strategy implementation. For
example, as a strategist, the role of the CEO is to monitor the progress and
development of the strategic implementation plans. This activity is often given to
other managers who may lack leadership drive and skills to motivate 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 the reward system and compensation and human
resources policy to motivate 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, nonmonetary incentives can be given in the form of awarding state or federal titles
for their contribution in the state or country. For example, in the United States,
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 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.
The late Tun Abdul Razak, the second Prime Minister of Malaysia, was an
outstanding leader. He was known to have close relations with the industry and
public service, gaining respect and support for his implementation of the New
Economic Policy and other national reforms in the country.
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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 identify specific actions such as 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.
10.6
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STRATEGY IMPLEMENTATION
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10.6.2
Information Systems
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10.6.3
STRATEGY IMPLEMENTATION
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10.6.4
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Monitoring System
ACTIVITY 10.2
1.
2.
3.
4.
Draw
an
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strategy.
Divisional structure
Objectives
Functional structure
Policies strategies
Information systems
Simple structure
Matrix structure
Monitoring system
Topic X Strategy
11
Evaluation
and Control
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.
2.
3.
X INTRODUCTION
The strategic management process results in making strategic decisions that have
significant effects and consequences on the organisation. The strategic decisions
made can have a favourable or unfavourable impact on the overall performance
of the organisation. While formulating the strategy is important in setting the
direction and plans for the organisation, strategy implementation puts 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 strategy evaluation and
control. In this stage, the implemented plans of action are assessed and reviewed
and appropriate actions will be taken to improve the situation.
TOPIC 11
11.1
153
(b) Will the strategy be good for the organisation in the future?
(c)
With respect to the first element, which is whether the existing strategy is good
for the organisation, it is important for the manager of an organisation to review
the internal and external situations and assess the fit with the environment. 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.
Further, it should be realised that the purpose of reviewing the implemented
strategy is to make the organisation fit for the changing business environment.
The business environment changes very rapidly. Therefore, the organisation
needs to make adjustments and realign certain activities so that the implemented
strategy will not deter the organisation from achieving the organisational goals
and objectives that had been set earlier under different assumptions and
conditions. As socio-economic and geopolitical scenario changes rapidly,
organisations need to reassess the strategies implemented so that they can fit well
with the highly uncertain business environment.
11.2
154
11.2.1
TOPIC 11
Consistency
Consistency refers to the extent the selected strategy does not pose a threat to,
or conflict with, the organisational goals and policies.
When conflicts among departments or divisions occur, it means that the selected
strategy is not consistent with the organisation. For example, if the organisational
strategy is to expand its international operations, conflicts can arise between the
marketing and finance divisions, when the former wants to spend the money
while the latter wants to control expenditure. Such strategies must be made clear
and consistent with the financial and marketing policies of the organisation.
11.2.2
Consonance
11.2.3
Feasibility
TOPIC 11
11.2.4
155
Advantage
11.2.5
11.2.6
Time Horizon
156
11.3
TOPIC 11
The strategy evaluation process involves the steps as shown in Figure 11.1.
11.3.1
TOPIC 11
11.3.2
157
After having identified the areas to be reviewed, the managers would know what
aspects to focus on in the review process. For example, the major area of concern
is the financial or marketing functional strategy, which poses an obstacle to the
organisational plans and implementation. This can be related to the functional
policies and processes that need to be revised accordingly.
11.3.3
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 its competitors are doing and to what
extent the benchmark is achievable or comparable. For example, there is no point
comparing the non-computerised banking service provider with the automated
computerised banking provider.
11.3.4
Once the standards have been set, the organisation can assess the performance
achieved and compare it with the benchmark selected.
11.3.5
As soon as the performance assessment has been completed and compared with
the set standards, the organisation will identify the gaps. The organisation needs
to review why these gaps occurred and how they 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, it has to 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-month 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
Copyright Open University Malaysia (OUM)
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TOPIC 11
11.4
STRATEGIC CONTROL
TOPIC 11
159
priorities. This situation can arise due to rapid unforeseen changes in the
environment, say a war erupted in the identified area for growth. The situation
can also arise as the organisation experienced an unexpected drop in 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 is 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 implement
effective control. In other words, having a thorough understanding of the
interrelated systems and processes in the organisation provides a sound
foundation 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 revising the budgets (resource allocation)
and making 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, such as a change in the values,
attitudes, behaviours, 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 having effective
control in the organisation. For example, in order to have effective strategic
control, it may entail having the organisation change its 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 communication on those areas to be controlled so that they can be
effectively enforced in the organisation.
ACTIVITY 11.1
1.
2.
3.
How would
organisation?
you
implement
strategic
control
for
your
160
TOPIC 11
The key elements for assessing strategy must answer the following questions:
(a)
(b)
(c)
Advantage
Feasibility
Consistency
Strategic control
Consonance
Time horizon
Degree of risk
REFERENCES
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References
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REFERENCES
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