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Chapter 3
Strategic Choices
Contents Page
Introduction 58
A. The Life Cycle Concept 58
B. The Nature of Strategic Management 59

The Strategic Planning Format 60
C. Analysis of the Business Environment 64

SWOT Analysis Strengths and Weaknesses 66
GAP Analysis 68
Value Chain Analysis 69
SWOT Analysis Opportunities and Threats 70
PEST, PESTLE or STEEPLE Analysis 71
Competitor and Market Analysis 75
Benchmarking 78
D. Organisational Growth 80
Advantages and Disadvantages of Small and Large Businesses 80
Growing the Business 83
Financing Growth 84
Summary 88
Answers to Activities 89
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58 Strategic Choices
INTRODUCTION
This chapter is concerned with the decisions organisations make and how these change
during the firms life cycle.
When an organisation starts in business it will usually have values that it wishes to operate
by and these will very much influence its strategic choices. The values will not be the same
for every organisation and neither will its goals. We examine profit and not-for-profit
organisations to establish what the difference in their values and hence their strategic
choices may be.
We look at the influence of internal factors the strengths, weaknesses, competences and
capabilities and how these affect what an organisation does and how it operates. The
external environment will also affect the firms choices and in many ways, these will be out of
its control. We examine the opportunities provided by the external environment as well as
the threats to its continued survival.
Not many companies will be able to ignore competitors and what they are doing. Examining
the competition, to assess how to reach organisational goals, is a vital step to take in the
strategic plan and helps to enhance business performance. Michael Porter is the leading
guru in this area, but we also look at the merits of benchmarking as a strategy.
As small firms become more successful they make the choice of whether to grow bigger or
remain as a small business. There are pros and cons to both alternatives and if growth is the
chosen route, the firm needs to determine how best to structure and finance it. At the end of
the chapter, we evaluate growth options and the financing methods which underpin them.
A. THE LIFE CYCLE CONCEPT

The concept of a product life cycle used in marketing is familiar to many students and
practitioners. There are commonly four phases used to describe the way in which a product
is developed and sold within a market launch, growth, maturity and decline.
Organisations also have a similar life cycle, but with five phases:
Figure 3.1: The Business Life Cycle
Market
size Maturity
Slow growth Decline
Growth
Development
Time
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Strategic Choices 59
This life cycle represents the progress of the company slow development with low market
share, followed by rapid growth, then growth slows as the organisation matures and
eventually declines.
We can illustrate this process by considering the case of Xerox.
Xeroxs history from 1947 - 1980 demonstrates the phases of the industry life cycle well. It
was originally formed in 1908 and produced photographic paper, but it was not until it
became the market leader in plain paper copying in 1960s that is growth became
outstanding. It reached the mature state probably in early 1970s. In 1977 its patents ran out
and competition became fierce so that by the 1980s its market share had declined
significantly.
However, some large companies which have moved into decline, have managed to regain
their industry position, at least in part, after some years. This was the case with Xerox which
revived its fortunes by becoming The Document Company in the 1990s and later adapted its
model to become an outsourcing business. In early 2000, the company went into
administration in the US and was in danger of bankruptcy. Once again it managed to
reinvent itself into what is again a thriving company.
At each stage in its life cycle, a company will make different choices about how it drives its
business forward, as we can again illustrate with Xerox:
In the early development stage, a new company will be innovative and seek to
differentiate itself from the competition in its market sector. In this stage, Xerox
developed its patents which gave it a competitive advantage and allowed it to start its
growth.
During its growth it was able to demand its own price as competitors were unable
compete owing to patent protection (high barrier to entry) and customers were forced to
pay the high price demanded. It thus underwent massive growth in the 1960s and
early 1970s, and by the late 1970s it was in the mature stage.
However, with its patents running out, competition entered the market. Barriers to entry
fell significantly, prices reduced and competitors were now able to produce plain paper
copiers with superior features. Xerox did not foresee this change in the environment in
time and it passed its decline stage without realising it was happening.
A new set of strategic choices was required, as its purpose turned to finding a way to
survive in a different market environment.
B. THE NATURE OF STRATEGIC MANAGEMENT

The Xerox example demonstrates the constant need to monitor the external environment and
make changes to its strategic direction to survive. It also reinforces the need to make
different choices about how to manage business success over the life of the business,
involving different types of decisions at different periods.
As you will have already noticed, every organisations decisions are influenced by a number
of factors:
Its purpose
The external environment
The internal environment
The stage in its life cycle.
Strategic management is concerned with deciding on the organisations long term goal and
making choices about how to achieve that goal within the parameters in which it is working
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that is, deciding what strategy to pursue. Each firm will have a different set of parameters as
the factors listed above will all vary considerably in every case. So, for example, as we
discussed in Chapter 1, the business aims could be maximising:
profit
market share
revenue share
product development
growth
social, environmental or ethical outcomes.
The Strategic Planning Format

This involves a number of steps:
Mission Statement
Vision Statement
Values
Objectives
Implementation
Monitoring/Control/Review
(a) Mission, Vision and Values

We shall consider the first three steps together as they are closely interrelated.
The mission statement expresses the organisations overall business purpose.
This is the starting point in the planning process.
The vision statement sets down what the organisation's aspirations are in other
words, what it wants to achieve in the foreseeable future.
The values are the principles the company and its employees must work within,
as it attempts to achieve its vision.
These tend to be fixed for a number of years before the organisation may want to
reconsider them in the light of the parameters within which it is now operating.
Most organisations will spend some time formalising their mission, vision and values
and will often write them out as documented statements for all their stakeholders to
see. However, some organisations find these difficult to express and it is only by their
actions that we can try to establish the purpose, aims and values.
We can illustrate these key elements in the strategic planning process by considering
three examples:
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Xerox
Mission and vision statement:
"Through the world's leading technology and services in business process and
document management, we're at the heart of enterprises small to large, giving our
clients the freedom to focus on what matters most: their real business."
Core values:
"One thing that never changes is our core values:
We succeed through satisfied customers
We deliver quality and excellence in all we do
We require premium return on assets
We use technology to develop market leadership
We value our employees
We behave responsibly as a corporate citizen."
Lambeth National Health Service (London)

Mission and vision:
"Our mission is to improve health throughout the diverse communities we serve
and ensure access to consistently safe and effective services which provide an
excellent experience for users."
"Our vision reflects our commitments to improve health and well-being and to
reduce health inequalities."
"Lambeth NHS, as a non-profit organisation, is focused on doing good in the
community."
Google
Mission:
"To organise the worlds information and make it universally accessible and
useful."
Think Point
What differences do you notice in the mission, vision and values of these three
organisations?
Xerox has a "for profit" type of mission and vision, focused on revenue generation and
business to business activity. It publishes these statements given on its website and,
from these, you could relatively easily evaluate Xeroxs business actions and determine
whether it meets its own written standards.
Lambeth NHS does not state what its core values are in its strategy document, but
relies on a generalised "doing good" approach. Do you notice the differences in
emphasis of this public sector organisation compared with a large private sector
corporation? It is often more difficult for not-for-profit to make precise statements since
they serve a variety of stakeholders.
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Google gives little information except that it appears to have a more philanthropic
mission than the standard for profit firm. Its mission is published on the investor area
of its website, but there is no vision statement or list of values. It states values
occasionally in other text (where one of these is "teamwork"), but does not make a
conventional statement.
For profit organisations' missions and visions are likely to be based on shareholder
value or revenue generation, although some commercial companies in Asia Pacific, for
example, have purposes which are nearer to that of not-for-profit organisations in the
West such as the NHS.
Activity 1
Find out what the mission, vision and core values of your own organisation are (or those of
an organisation you have worked for or studied with)? Are they stated explicitly in documents
and, if so, how widely available are they? Are the organisation's stakeholders aware of
them?
What are the main differences between the mission, vision and core values of your
organisation and those of Xerox and of Lambeth NHS? Can you explain why they should be
different?
(b) Setting Objectives

Following on from the establishment of the mission, vision and values for the
organisation, the next stage is to set objectives. These are very specific statements of
what the organisation wants to achieve in a stated period of time, in order to realise its
mission and in accordance with its vision and values.
Objectives mean very little if they are not SMART objectives:
Specific stating exactly what is to be accomplished
Measurable how progress will be quantified
Achievable realistic, it is possible to achieve the goal
Results orientated it is focused toward getting the result stated
Time bound within what time scale.
Activity 2
A company might state that it wishes to improve sales of product X by 10% by the end of the
quarter.
Is this a SMART objective?
See the suggested answer at the end of this chapter.
When a company is planning its objectives it cannot do this in isolation. It must take
into account a number of factors such as:
its resources and competences
its weaknesses
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the external environment

competitors.
We will examine these factors in more detail in the next section of this chapter.
In setting objectives, there are two important aspects to consider:
(i) Ensuring that the whole organisation understands and is geared towards
achievement of the objectives.
One problem can be that employees at lower levels of the firms hierarchy may
not understand the contribution they can make to the accomplishing the firms
objectives, and not be fully committed to them. This may be overcome by
involving employees in the planning process seeking their contribution in
actually structuring the strategic plan. This approach bottom-up planning as
opposed to top-down (imposed from above) often results in generating new and
more practicable solutions.
(ii) Building in flexibility objectives should be flexible enough to be modified.
To allow innovation to occur. If the objectives and/or their implementation
are too rigid there will be no opportunity to take advantage of innovative
ideas that might occur, owing to changes in the internal or external
environment. For example, a new manager is recruited and has some
useful new ideas or an existing member of staff contributes an idea to save
resources.
To respond to the business environment. Organisations operate in a very
turbulent environment and changes in interest rates, regulations,
government policy, etc. can impact on the original objectives in a positive or
negative way. The organisation needs to be able to adapt its objectives to
minimise the potential damage of negative changes in the environment or
to maximise opportunities.
(c) Implementing the Strategy
Once the objectives have been agreed, resources will need to be allocated to achieve
them. Thus, financial objectives will be set and resource levels agreed.
All employees will need to be briefed on what the organisations objectives are and
what their part will be in accomplishing the stated outcomes. In some organisations,
there is an Annual Conference where employees are able to share the strategic goals
for the year, discuss in groups how they will be achieved and celebrate success of the
previous years plan. This type of approach helps in communicating and implementing
the firms targets.
Ensuring appropriate resource levels for the of the objectives may also involve some
training and development of staff, in order to ensure there is the necessary skills and
knowledge profile required to enable specified goals to be met.
(d) Monitoring and Control
Progress towards achievement of objectives needs to be constantly monitored, with the
extent of progress, against set goals, measured at regular intervals.
The firm should have a monitoring mechanism with specified measurement tools and
time periods. There are many different types of monitoring mechanisms that can be
used, separately or together. Examples include:
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Budgets
Quality control
Balanced scorecard
Customer feedback
Change in market share
Employee feedback.
Monitoring systems are vital to the achievement of goals. The organisation needs to
measure progress and either address problems in implementation which are preventing
the achievement, or amend the objectives themselves if the set goals do not appear to
be feasible and/or to take advantages of new opportunities to exceed the stated
outcomes.
However, before the firm can get to this stage, it needs to carry out an analysis of its
environment to enable it to set appropriate, SMART objectives.
C. ANALYSIS OF THE BUSINESS ENVIRONMENT

For all organisations, setting objectives is a significant task. They provide a framework for
achieving goals within the core values they commit to, whether these are expressed or
intuitive.
Large companies and public sector bodies very often use an annual planning cycle, which
begins with trying to make sense of the multitude of factors that could positively and
negatively affect their potential to be successful.
There are a variety of standard techniques for carrying out the process.
SWOT Analysis
PEST/PESTEL or STEEPLE Analysis
Competitor Analysis
Benchmarking.
Note that many organisations, particularly smaller ones, do not always do these consciously
or in a formal manner, but carry out certain parts of the process in an informal way.
In this section we will look at each of these techniques in turn. One or more of these usually
forms the basis of the choices made by organisations.
We shall start by visualising the organisation as being at the centre of a layered structure
such as an onion, as shown in Figure 3.2.
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Figure 3.2: The Business Environment
Macro-environment:
broad environmental factors
Industry or sector influences
Competitor
competences and activities
The
Organisation
The individual firm is a very small part of a much larger sphere of influence which impacts on
the way it manages its internal resources and reacts to changes that occur in that external
environment. In many cases the organisation has little control over its environment but must
adapt and make choices about how to adapt so that it can survive and prosper, as discussed
in Chapter 2.
The environment may be divided into the internal and external environments, and different
types of types are appropriate to each. Here we shall examine the following:
The Internal Environment:
SWOT analysis
Gap analysis
Value chain analysis
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The External Environment:

SWOT analysis (again! we shall consider the differences between internal and
external SWOT below)
PEST, PESTLE or STEEPLE analysis
Competitor and market analysis
Benchmarking
SWOT Analysis Strengths and Weaknesses

SWOT stands for Strengths, Weaknesses, Opportunities and Threats.
Strengths and Weakness refer to the internal environment whereas Opportunities and
Threats focus on the external environment. This difference in focus is often forgotten and
this is one reason why, in this chapter, we will separate the analysis into the two
environments to which the factors relate.
If we think of our own situation for a moment, we can acknowledge our own internal
strengths and weaknesses which impact on our lives, but we need to set these in the context
of the external environment events and situations outside of ourselves before we can see
opportunities for improving our well-being or threats which are present. The same is true of
any organisation.
When we reflect on our own strengths and weaknesses, it is usual to be able to think of lots
of strengths and few weaknesses! We also have to think really hard to find a list of
weaknesses that is as long as the strengths. For example:
Strength Weakness
Hard working Find it difficult to relax
Generous Impatient
Analytical Suspicious
Innovative
Good communicator
Ambitious
Sometimes our strengths can also be weaknesses and vice versa. A person who is
ambitious may not be patient with those who are happy with their life or job and so find it
difficult to build relationships with colleagues at work who do not share their attitude to life. A
suspicious person also may find it difficult to trust others but in some circumstances, this can
be a strength, such as when negotiating for a new apartment with someone you do not know.
A similar situation arises in companies. Imagine a company ABC with a list of strengths and
weaknesses compiled by its managers:
Strength Weakness
Cash rich Technology poor
Innovative Credit control
Sales skills Union strength
Loyal employees Cautious in expansion
Customer service Knowledge management
Market leader in product X
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While this company values "cash rich" as a strength, if the company was a plc this would be
seen as a weakness by financial experts since the cash could be working to improve the
companys performance. Poor credit control may also link with being cash rich and
demonstrates poor use of financial resources.
However, in times of economic downturn, having cash reserves can be vital to the survival of
the company. A cash rich company can be independent and its managers can innovate
without having to answer to shareholders or financial institutions. The Armani business, for
example, is cash rich and run without external loans, allowing Giorgio Armani to make the
business decisions he chooses without pressure from outside. Many Asia Pacific companies
are family run and independent of banks or other lending institutions and operate with a
similar philosophy.
Loyal employees can be a great strength, but they may also be unwilling to change and this
might account for technology being poor. So, is the company innovative or just thinks it is?
Will it lose its market leadership through the weaknesses?
The power and influence of trade unions varies from one organisation to another and from
one country to another. In the UK the role of unions has changed considerably in the past 30
years. Legislation has weakened their power to negotiate national wage rates and to strike.
However, many unions have become involved in assisting with employee development and
working with companies more closely, on health and safety issues for example. Unions also
offer their members access to legal services for issues inside and outside the workplace,
such as personal injuries like deafness from machine noise and road accidents. Hence trade
union presence may add a strength to the organisation rather than be perceived as a
weakness. On the other hand, in some countries, unions are more powerful, particularly
where employee working conditions are poor, and their power can be perceived as being a
weakness in terms of potential threat to the organisations business performance.
The level of technological competence and capability is an increasingly necessary strength
within the majority of organisations. It is not only important in production, but in sales and
marketing, value chain and general communication. The internal technological competence
that is a strength today can quickly transform into a weakness.
Thus, in carrying out the internal analysis, the group responsible for doing so must look at the
list they produce objectively some weaknesses can also be strengths and vice versa.
If the organisation is to produce an analysis of its internal environment that will help it to
plan for the future, being objective is crucial.
Organisations must seek to build on their strengths and reduce weaknesses to improve
future performance.
Competences and Capabilities
In the table of strengths and weaknesses, a few skills have been mentioned. These would
be termed as competences or capabilities which assist the organisation to be competitive.
When analysing organisations using case studies, we need to identify the capabilities so that
we can assess the potential for competitive advantage. Examples of organisational
competences/capabilities are:
Marketing
Customer service
Strength of value chain
Financial capability
Talent management
Innovation.
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In the Italian fashion industry, for example, design and marketing are two of its core
competences.
The sustainability of these competences must be monitored if the company is to continue to
thrive they may need to be updated. For example:
Companies that have talent management competence will be constantly appraising
employee development issues, to ensure that training and development initiatives
provide the staff with skills to make a difference to performance. Loss of key
employees may well cause a decline in a core competence such as technical expertise.
Organisations are constantly seeking to improve the value chain by cutting costs,
reducing the time between manufacture and delivery to the customer and so on.
Organisations that have patented products or services will have capability to
differentiate themselves from their competitors. On expiry of these patents, the
organisation can be vulnerable to the external competition, as was Xerox in 1977.
Capability through patents rights may not be sustainable and ultimately become a
weakness.
GAP Analysis
At its simplest, this planning activity is a case of establishing where the organisation is now
and where it would like to be in the future and examining how to close the gap. For example,
if an organisation manufactures 5,000 units and makes a profit of 50,000, what must it do to
manufacture the same number of units and make a profit of 55,000.
The gap is 5000 profit. How could the present operation be changed to meet this goal and
what is realistic? There are many alternatives to examine to close the gap for example:
Cut costs
Increase prices
Improve manufacturing techniques
Reduce waste
Reduce cost of materials by negotiating with suppliers
Reduce marketing/administrations costs.
The technique can be used in any area of the business to improve on the present situation.
It just needs the identification of the key gaps which are holding back the achievement of
objectives. Examples are:
In marketing increasing market share
In HR assessing employee skills now and those that will be needed in the future.
Activity 3
Imagine you want to start a business now offering web design to small companies and make
a profit of 6,000 by the end of your first year.
Make a list of what skills and physical resources you are likely to require.
What might be your strengths and weaknesses in terms of reaching this goal?
What activities and resources will you need to employ to allow you to reach your goal?
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Value Chain Analysis

The value chain is a term used to describe the way in which an organisation links together all
the activities that form part of producing a product or service and delivering it to the
customer. It is a capability (or a competitive strength) if the organisation can do this as
effectively as possible so that its product of service is of the highest quality, delivered in the
shortest and most effective manner. Therefore, organisations examine every aspect in their
process to try to find cost or efficiency savings or enhancements to improve the linkages.
Michael Porter developed this concept in regard to manufacturing systems. He used the
term 'value activities' to describe the different identifiable activities of which any business is a
collection, such as procurement, marketing, production, etc., and suggested that, by
examining effectiveness at each individual level, rather than at whole company level,
competitive advantage is achieved.
Porter classified these activities as either primary or secondary (support). These are shown
in the diagram below:
Figure 3.3: Michael Porter's Value Chain
Company infrastructure
Support activities
Human resource management
Technology development
Procurement
Margin
Primary activities
Inbound Outbound Marketing

Operations Service
logistics logistics & Sales
(a) Primary Activities

These are:
Inbound logistics receiving, storing and distributing inputs
Operators which turn these inputs into the final product or service
Outbound logistics storage and distribution to consumers
Marketing and sales which make consumers aware of the products or services
available
Service installation and after-sales servicing.
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(b) Secondary Activities

These provide the infrastructure that enables the primary activities to take place and
are:
Infrastructure systems vital to the organisation's strategic capability, which
usually support the whole chain, such as planning, finance, quality management
Human resource management recruitment, training, development, etc.
Resource and technology product or process development, etc.
Procurement acquisition of the necessary resource inputs to the primary
activities.
Few organisations will be able to complete all the value chain functions in house and
may be part of a larger value network.
In deciding how this will work most effectively, the firm must assess in which parts of
the value chain it has most expertise and then find other organisations to work with it to
set up an efficient and effective network.
Firms may outsource certain activities because it is cheaper to do so or the external
organisation has greater expertise.
Organisations often ultimately acquire companies that are originally part of their value
network in an attempt to improve the value chain. For example, Coca Cola acquired
bottling operations in North America in 2010, in an attempt to maintain its leadership
position in response to Pepsicos acquisition of its bottlers earlier. The value chain is
now considered one of the most important sources of competitive advantage.
SWOT Analysis Opportunities and Threats

We now turn our attention to the forms of analyses appropriate to the external environment
that are considered in strategic planning, starting with the second part of the SWOT analysis
opportunities and threats.
Our imaginary company, ABC, might evaluate its external environment as having
opportunities and threats such as those set out in the following table.
Opportunities Threats
New markets for product X owing Changes in employment law
to closure of major competitor increasing costs
Decrease in rate of value added Employees joining competitors
tax, more sales
Lack of skills in workforce
Initiate e-marketing to improve
Integration issues.
sales levels and margins
Acquire local supplier of
components
New packaging methodology to
reduce costs and improve image
New skills owing to acquisition.
Again some opportunities also pose threats. Acquiring a supplier may well increase the
efficiency in the value chain and reduce costs, but not if the newly acquired firms employees
cannot adapt to the organisations working practices and/or culture.
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PEST, PESTLE or STEEPLE Analysis

The forces in the external environment which are imposed on a organisation will greatly
affect the way it operates and the choices it makes to improve its business performance.
One way of assessing these is to examine them according to different headings. Initially, this
was known as PEST analysis, looking at the following types of factors:
Political
Economic
Socio-cultural
Technological.
PEST analysis has since evolved to several longer acronyms owing to changes in the nature
of the environmental factors that impact on organisations. It became PESTLE with the
addition of legal and environmental factors and then STEEPLE when ethical factors were
added ethics now have a major impact on strategic choices as organisations seek to adapt
to changing societal and consumer pressure.
Legal
Environmental
Ethical.
(a) Political Factors
This refers to the role of governments and affects all organisations to a certain extent.
Some governments work with a free market policy in which private companies can
thrive while others are under state control. The latter are called planned or command
economies which are state owned and controlled. There are now far fewer global
command economies than in the past, and even China has evolved from being purely
state owned towards a proportion of free market economy in the past two decades.
Since the early 1980s the UK has privatised many former state owned industries such
as electricity, gas, water and railways. However, while this has created more
competition in these fields, there has also been an increase in regulation.
Central and local government that are state owned and are large employers. Any
changes in their policies can have a significant effect on private business. Since the
Government is also a customer of the private firm, shrinking that sector has an impact
on the level of private business operation.
On a national basis, pressure groups exist to influence government and politicians;
their activities can also have a major impact on industries and individual firms.
Government departments frequently consult pressure groups about new regulations
and legislation.
Government policy also has substantial implications for companies wishing to globalise
their operations. Some will insist on very specific conditions for an overseas firm to
operate in their country.
Very often the organisation is faced with increased costs, to comply with new
regulations. For example, in recent years the UK, as a member of the European
Union, has been forced to apply EU Law to working hours and other employment terms
and conditions.
(b) Economic Factors
Economic factors include exchange rates, economic cycles and different growth rates
around the world. Organisations have to be prepared for the risk of exchange rate
changes which, if their currency weakens, makes importing supplies very expensive
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but makes exporting the goods or services offered more attractive to the countries
affected.
(c) Socio-cultural Factors
These influences concern different cultural and demographic factors.
Is the population ageing and how does this impact on the sales of the firms
product or service in that country?
Older age groups generally have the most disposable income. How can the firm
adjust its product or service to maximise revenue from this sector?
How will the demographic change affect employee recruitment? More women
have entered the workforce than in the past and demand for part time jobs has
risen. This has also meant less time being spent on domestic tasks such as
cooking and opened up opportunities for companies to provide larger ranges of
ready-made meals.
Is a change in taste/ingredients necessary in a foodstuff to make it attractive to
people of another culture?
If an organisation is planning to operate part of its business in a new country what
cultural aspects does it need to take into account?
(d) Technology Factors
This is a rapidly changing factor that influences the organisation in a number of ways:
Communication is faster
Operational costs can be reduced as fewer employees are required
New materials developed
Monitor and control of quality of all aspects of the business can be more effective
Technical skills may be needed in the workforce which are not currently available
Growth in e-commerce allows organisations to sell globally without having to set
up operations in all the countries that buy their products. The whole transaction
can be completed online
Virtual working is now normal practice for large numbers of employees and
entrepreneurs.
(e) Legal Factors
This refers to regulation which can be national or regional. An example is recent
Corporate Governance Regulations which governments have applied to organisations
wishing to float shares on the stock exchange.
Health and safety legislation and employment law have been developed in all EU
countries in the last 50 years, and are being continuously extended by the Parliament
in Belgium, resulting in sometimes quite drastic changes in operational costs.
Restrictions on mergers and acquisitions, to prevent the growth of monopolies, and
hence the national and international power of individual large firms, operate in many
developed countries, including the UK and USA.
Governments are increasingly collaborating to produce legislation to reduce global
emissions and regulate financial transactions and reporting.
(f) Environmental Factors
The earth has finite resources which are rapidly diminishing. Organisations are under
a lot of pressure from consumers and governments to conserve resources such as
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water, energy and raw materials. In addition, the manufacturing process can cause the
emission of harmful substances into the air, rivers and rubbish dumps.
Many large and small organisations have green corporate policies which state their
specific commitment to effective use of resources and responsibility in their interaction
with the environment. Such policies can have the effect of making their products more
attractive to some consumers, acting effectively as a strategic marketing tactic. In
many cases, these policies also allow the organisation to reduce costs, for example, by
recycling waste or pursuing research to reduce the proportion of raw materials required
to produce a product.
(g) Ethical Factors
These concerns have always been present internally and externally for example:
How does a company treat its employees?
Does the company deal with corrupt governments?
Is it considered ethical to use child labour?
Nations and regions of the world have different ethical principles, some of which are
based on their cultures.
Organisations planning their business strategy may have to take into account cultural
ethical differences, but may also have a policy which states what they stand for and so,
ethically, the types of business practice they will not engage in.
Large multinationals such as Coca Cola have published Corporate Governance and
Ethics Policies that their employees and suppliers must adhere to.
We now present an outline STEEPLE analysis for you to consider the range of factors
covered.
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Example - STEEPLE for Beverage Industry

Political
Does the government own a share in a national beverage organisation
Is the government a stable one?
Government support for overseas investment
Economic
Disposable income available
Economies of scale possible
National growth rate
Favourable interest or exchange rate
Social
What kind of products will appeal to the various age groups
Environmental
Use of water in process
Ingredients are a health hazard
Raw material wastage including packaging
Technological
Collecting data from drinks machines to measure popularity
Lean manufacturing to reduce costs
Quality monitoring and control
R&D advances for packaging, new drinks
Ethical
High sugar and calorie drinks offered to poor countries
Consumption of water that is needed for growing food
Using cheap labour in emerging countries
Legal
Level of undesirable contents in drinks
Quality controls standards
Restrictions on mergers/acquisitions
Activity 4
Think about the car industry and make a list of the STEEPLE factors that might affect the
strategic choices of a car manufacturer. What changes might you see in that list in 10 years
time?
ABE
Competitor and Market Analysis

The macro environment affects every organisation to differing degrees and they have little
control over many aspects of it. The factor of competition in their industry sector, and more
particularly their category within the industry sector, is perhaps the most influential on their
strategic plan.
Most for-profit organisations have a purpose which involves being more effective than the
competition in some way, whether that purpose is maximising shareholder value, sales
revenue, market share or having a technologically superior product. In addition, public sector
bodies are increasingly being tasked by their governments to adopt for-profit techniques and
are sometimes in competition with private firms for contracts. Thus, local colleges compete
for training business with private training companies, or hiring premises for conferences and
business meetings in competition with hotels or conference centres.
When planning, strategy managers will analyse what the competitors are doing and try to
make those choices which will give them the best chance of succeeding, despite the
activities of competitors.
A number of techniques, or tools, have been developed for this purpose and we shall look at
two here, developed by Porter, before moving on to examine the similar technique of
benchmarking.
Porters Five Forces
According to Porter, firms must decide the section of the market they wish to exploit. Initially
Porter built the model to assess profit potential within an industry but the model has
developed into a tool for examining the forces of competition in a specific industry. Doing this
enables managers to identify a firms opportunities and protect it against threats.
The five forces are:
(i) The power of buyers
(ii) The power of suppliers
(iii) Threat of substitutes
(iv) Threat of new entrants
(v) Extent of competitive rivalry.
Figure 3.4: Porter's Five Forces Model
Bargaining power of suppliers Threat from new entrants
Suppliers Potential Entrants

Industry
Competitors
Rivalry between
existing firms
Buyers Substitutes
Bargaining power of buyers Threat of substitutes
ABE
(a) The Power of Buyers

The power of buyers will be high when:
A few organisations, able to buy in large quantities, will be able to negotiate
heavily on price by promise of a secure contract, squeezing the firms profit
margin and demanding high quality
The cost of switching to another company is low i.e. it does not cost the buyer
to change its process or machinery
The buyer could produce the product or service themselves and result in closure
of the supplier
There are many other suppliers in the same business so finding alternative
suppliers is easy. If the purchase has specific qualities, then the buyer will be
less powerful.
Large organisations who buy products, services or components from a firm also have
the buying power to force down the price they pay, reducing the supplier organisations
profits.
(b) The Power of Suppliers
If your organisation is buying components or services from a supplier, supplier power
will be high and affect the cost structure of the organisation dramatically in the following
cases:
There are few suppliers in the market in which case, you will be forced to pay a
higher price than if there was a wide choice of suppliers for a component or
service since there is little ability to switch suppliers
Switching costs may be high
There are no alternative suppliers
Supplies are a large part of the firms product or service cost.
Looking back at our Xerox example earlier, prior to 1977 the company had immense
power as a supplier there were no other suppliers of plain paper copiers in the
market, alternatives (coated paper copiers) were both expensive and copies were of
low quality. Once the patent ran out, Xeroxs power as a supplier dwindled as there
were a lot of suppliers available. The power of buyers became stronger.
(c) Threat of Substitutes
If the firm produces a product or service that is unique and/or makes large profits, there
will be a huge threat from new entrants, attracted by profit margins, offering substitute
products.
The business needs to be aware of:
The ease and extent of cost for a customer to switch to a substitute product
The threat from competitors bringing out a more advanced or technically superior
product
The impact of substitutes on the price they can charge.
Xeroxs business came under immense threat from substitutes in 1977 because:
Most of its machines were rented, so the cost of switching was low
The majority of substitutes were technically superior
The pricing was cheaper so that the new suppliers could gain quick entry to the
plain paper copier market.
ABE
(d) Threat of New Entrants

This threat will be greatest to the existing firm if barriers to entry are low, such as:
Lack of patents required
Low set up costs
Product is not unique or technically sophisticated
Low brand identity.
Any one company trying to set up a plain paper copier company prior to 1977 would
have experienced impossible barriers to entry. Apart from having the patent, the brand
identity is so immense that Xeroxing is still the term used by many when discussing
taking a photocopy.
(e) Extent of Competitive Rivalry
The threat of a large number of competitors in a firms market will depend of the extent
of the factors listed above. If there is a low barrier to entry, this will encourage new
entrants to attempt to compete in the market with a substitute product. The result will
be more suppliers, so the power of buyers will be increased.
Competitive rivals have similar products and services and the same groups of
customers.
As well as the four factors listed above, rivalry will also be enhanced if:
There are many competitors of similar size operating in the same market
Products or services are similar then buyers can easily and cheaply switch
suppliers for example, supermarket rivals
There is low growth in a market and price competition is strong, this results in low
profits and companies leaving the market
The business has high fixed costs it will need to keep volumes high to make a
reasonable amount of profit and may therefore cut prices to make volume sales
Barriers to exit are high, companies will try to survive in a downturn by cutting
costs owing to excess capacity in the market.
This type of analysis should allow an organisation to assess:
(a) The type of industry it should target or leave when making its strategic choices.
The industries where the five forces tend to work for them.
(b) How the organisation can raise barriers to entry to prevent others gaining their market
share through:
Brand awareness and loyalty
Reducing the power of suppliers to reduce costs
Increasing R & D to improve products
Exceptional after sales service
Exceptional ethics and corporate responsibility to build customer loyalty.
(c) How badly its competitors are affected by the changes in the industry structure.
In economic downturn, some larger organisations could be hit badly because of
large fixed costs whereas a small one can be more flexible
Large organisations may be able to withstand increased buyer power compared
with smaller firms.
ABE
Porters Generic Strategies

When companies enter a market or reassess their competitive strategy, according to Porter
they have three choices.
This model claims that there are only three main strategies a business can follow:
Cost leadership
Differentiation
Niche/Focus.
A business which followed none of these strategies would become "stuck in the middle".
Figure 3.5: Porter's Generic Strategy Model
Differentiation
Stuck
Cost Leadership With No Focus
Clear
Strategy
(a) Strategy 1: Cost Leadership

The company aims to produce in large quantities, at the lowest cost possible and sell at
lower prices than the competition. By doing this it can capitalise on economies of scale
and defeat any competitor who has not got equal production capacity, or who can keep
prices to a minimum. This strategy will also attract price-sensitive buyers away from
the competition.
(b) Strategy 2: Differentiation
This strategy involves offering some unique selling (or service) proposition (USP) that
the competition do not have. Prices may not be too important to buyers of products
sold under this strategy and it often follows that customers become brand or product
loyal.
(c) Strategy 3: Focus/Niche
The company aims at very select market sectors and will be charging higher prices or
offer special USPs. The company can concentrate on its key products for specific
targets, acquire a reputation for being "specialist", or can simply attack sectors of the
market which are being ignored by the competition.
Porter's strategy model allows a company to decide which overall "type" of marketing they
want to adopt. If the firm is powerful and rich in resources they may well choose to follow a
Cost Leadership or Differentiated strategy. Smaller firms may be forced to adopt a Niche
strategy because their product offering has a very specific market.
Benchmarking
There are several approaches to benchmarking that allow strategic planners to make choices
about their future actions.
ABE
Historical benchmarking
This is reflecting on performance in previous years to identify any changes that need
making. The issue with this technique is that it is subjective and may leave an
organisation feeling complacent. It is not actively looking externally to judge what
changes competitors may be taking or how the external environment could impact on
the organisation in the future.
Comparing with others in the same industry or sector
This is also limited in so far as, if the whole industry is not performing well, then
complacency could set in. Other firms which are not currently active in that industry
sector may enter as they can meet customer needs more satisfactorily.
Benchmarking against best in class
This can be done irrespective of the industry. Xerox actually revived this kind of
benchmarking in the 1980s when its quality had declined. It chose best organisation in
class and went out to observe how they operated, as shown by the following example.
Case Study 1: Benchmarking at Xerox

The 'Leadership through Quality' programme introduced by the new CEO revitalised
the company. The programme encouraged Xerox to find ways to reduce their
manufacturing costs. Benchmarking against Japanese competitors, Xerox found out
that it took twice as long as its Japanese competitors to bring a product to market, five
times the number of engineers, four times the number of design changes, and three
times the design costs.
The company also found that the Japanese could produce, ship and sell units for about
the same amount that it cost Xerox just to manufacture them. In addition, Xerox's
products had over 30,000 defective parts per million about 30 times more than its
competitors. Benchmarking also revealed that Xerox would need an 18% annual
productivity growth rate for five consecutive years to catch up with the Japanese. After
an initial period of denial, Xerox managers accepted the reality.
Following this, Xerox defined benchmarking as 'the process of measuring its products,
services, and practices against its toughest competitors, identifying the gaps and
establishing goals. Our goal is always to achieve superiority in quality, product
reliability and cost.' Gradually, Xerox developed its own benchmarking model. This
model involved tens steps, categorised under five stages planning, analysis,
integration, action and maturity. Xerox collected data on key processes of best
practice companies. These critical processes were then analysed to identify and
define improvement opportunities. As a result of its benchmarking in Japan, Xerox
eventually developed a completely new copying process by creatively improving on the
concepts it had learned from its chief competitors. Xerox went on to become the only
company worldwide to win all the three prestigious quality awards: the Deming Award
(Japan) in 1980, the Malcolm Baldridge National Quality Award in 1989 and the
European Quality Award in 1992.
The success of benchmarking at Xerox motivated many companies to adopt
benchmarking. By the mid 1990s, hundreds of companies implemented benchmarking
practices at their divisions across the world. These included leading companies like
Ford, AT&T, IBM, GE, Motorola and Citicorp
Adapted from www.improvementandinnovation.com
ABE
Xeroxs benchmarking model is now taught in business schools and regularly used by
companies when making strategic choices.
The impact of benchmarking, as it was with Xerox, is often to change behaviours.
However, there are some potential negatives such as:
It may not be used to ascertain why the process benchmarked works so well if it does
not compare competences between organisations. For what reason is distribution
better in company X than company Y? What are the underlying competences of
employees in both firms?
It may change focus in an unintended manner. School league tables in UK were meant
to provide benchmarking comparisons between teaching quality, but have led to a
narrow focus on the questions that will be asked rather than improving thinking skills
and application of knowledge.
D. ORGANISATIONAL GROWTH
Most firms begin as small organisations and if successful, can grow into multinationals.
Hotel Chocolat began with two people making mints and has grown into a multimillion
business.
Case Study 2: Hotel Chocolat

Hotel Chocolat was founded by Angus Thirlwell and Peter Harris in 1993. Angus had
speciality food retailing in his genes. He had spent his childhood in the Caribbean
where he developed a love for cocoa and the region. A further influence on his taste
for real food was the two years spent living and working in France. In 1987 his first big
idea was the production of corporate mints.
He and Peter Harris each contributed 5,000 and started the Mint Marketing Company
from home. Most of their time was spent in Cambridge library with scissors and glue,
using the library's colour photocopier to print logos off companies' literature, which
were then shrunk and wrapped around packs of mints. A company in Holland was
employed to make the mints.
By 1990, the Mint Marketing Company had hit 1m in annual sales and had landed
contracts with British Airways and various hotels.
In this section we examine the advantages and disadvantages of large and small businesses,
and look at the methods by which businesses grow.
Advantages and Disadvantages of Small and Large Businesses

Statistics show that the number of small business far outweighs those that grow into
multinational companies. The figures below indicate the importance of small businesses to
the UK economy and their contribution to continuing innovation.
ABE
UK Small Business Sector

There are 4.8 million small businesses in the UK (up from 4 million in 2003) of
which 3.6 million businesses are sole proprietors and 444,000 are partnerships
(Small businesses are defined as those with 10-50 employees)
97 per cent of firms employ less than 20 people
95 per cent of firms employ less than 5 people
(Micro businesses are defined as those with 0-9 employees)
Over 500,000 people start up their own business every year
Small and medium-sized firms employ more than 59.8 per cent of the private
sector workforce
Small firms contribute more than 49 per cent of the UK turnover
64 per cent of commercial innovations come from small firms.
(a) Staying Small

Advantages of small companies
More control by owners
Flexible to changing conditions
Closer relationship with customers a more personal relationship is possible and
perceived quality of service is higher
Lower overhead costs potential to avoid diseconomies of scale experienced by
larger companies
Lower financial risk
Innovation and entrepreneurship are very strong many operate in niche
markets making substitutes less of a threat
Less bureaucracy.
Disadvantages of small companies
Limited scope for making profit
Lack of expertise in some areas such as management and Research and
Development
Competition may be too strong for example, production costs are likely to be
higher than in a larger business where economies of scale can result is offering
similar lower priced goods
Statistically small businesses have a substantially higher failure rate a
significant proportion of companies are in business for less than three years and
many fail before this point owing to cash flow problems (cash runs out or clients
do not pay promptly)
Customers may have less trust in a small business especially if it is selling goods
or services overseas
The ability to attract finance to improve areas of the business such as product
development is often limited.
ABE
Personality and entrepreneurial character

Small businesses are very much a reflection of the owners. They are often run by
entrepreneurs who generate new ideas or find gaps in the market, sometimes by
accident. Their contribution to innovation and invention is very important to the
economy of a country.
Entrepreneurship has become a global movement universities offer MBAs in
entrepreneurship whilst large companies try to re-create the environment within their
own larger corporate structures.
The Global Entrepreneurship Monitor (GEM) is a not-for-profit academic research
consortium that has as its goal, making high quality information on global
entrepreneurial activity readily available to as wide an audience as possible. GEM is
the largest single study of entrepreneurial activity in the world. It was initiated in 1999
with just 10 countries taking part.
(b) Grow Large
Organisations may be forced to grow to meet customer demand or may make a
conscious decision to expand the business. While there are many well known
multinationals such as Pepsico, Walmart, Kraft Foods and BP, there are numerous
large companies that are much smaller. Growth may start by exporting to some
overseas markets and eventually expanding into a global company which has become
considerably easier since the removal of trade barriers by many countries.
Conscious decisions to grow can be a result of spotting opportunities. For example,
many multinationals are exploiting opportunities in emerging markets where the
disposable income of consumers is forecast to show significant growth in the medium
term, and where resources, including cheaper labour, are available. Opportunities too
arise where governments support external companies in order to grow their economies
and increase business expertise, including the skills of their people.
Advantages of large companies
Exploit more opportunities for trade and new customers
Lower risk, as not all business is concentrated in one location and subject to
market conditions in that location; reduces reliance on home market
Potential economies of scale which reduces overall cost
Access to less expensive resources which impacts on prices and profit levels
Higher levels of expertise, as there are more employees with different
skills/knowledge
Potential for new ideas
Easier to gain financial support.
Disadvantages of large companies
Innovation and entrepreneurship are difficult to maintain
Loss of control by the owners
Risk can be high, particularly in emerging economies where there can be
political, cultural and financial risk
Environmental and ethical issues increase such as pollution, use of countrys
resources in production processes, corruption
Tendency to bureaucracy, meaning that decision making and change can be slow
ABE
Communication between employees can be more difficult as size increases,

particularly where employees work in different locations
Marketing may not be appropriate in new locations (if company becomes global).
Growing the Business

Businesses growth occurs in two ways
(a) Internal or Organic Growth
The company expands using its own resources by increasing its manufacturing or
office space, taking on new staff etc.
Internal growth can take place in three ways:
Horizontal expansion
The company continues to make the same product or provide the same service,
but increases sales (market share). It may produce additional versions of the
same product or service. For example, a chocolate manufacturer may move into
organic chocolate production.
Vertical integration
This is when the company extends its part in the whole production process for
example, the chocolate manufacturer decides to open a shop at the factory to sell
the chocolate (forward integration) and/or grows the cocoa to make the chocolate
(backward integration).
Hotel Chocolat now grows cocoa in St Lucia, produces the chocolates and has
many shops selling the chocolate all over the world.
Diversification
This is the third method of external expansion. A firm decides to offer a product
or service that is different from its core business. Hotel Chocolats Boutique
Chocolate Hotel opened in December 2010 offering guests luxury
accommodation on the cocoa plantation in St Lucia.
The disadvantage of this method of growth is that internal resources can become
stretched as the firm grows.
(b) External Growth
Here, the company accomplishes growth either by joining with another company
(strategic alliance) or acquires a company (merger or acquisition). The options are:
Joint venture
This usually occurs when organisations work together on a specific project, the
original organisations remain independent. This spreads the financial risk
between them and provides each with access to a wider variety of skills and
resources. The difficulty here may be in identifying a suitable partner and
agreeing terms.
Merger or acquisition
A merger takes place when two companies of approximately equal size form a
new company by joint agreement.
Acquisition is where a larger organisation buys a smaller one which becomes
integrated into the larger firm
ABE
In either a merger or acquisition, it is anticipated that competences and

capabilities are increased, but there is potential for cultural clash making
integration difficult and failure is high.
Franchising
Franchising occurs when the company (the franchiser) permits the franchisee to
carry out specific activities such as manufacturing, sales or distributions. The
franchiser remains responsible for marketing activities and protecting the brand.
Many of Coca Colas bottlers operate under franchise agreements.
Licensing
In this situation another organisation pays a fee to use the intellectual property
rights, such a trademarks, patents, or technology, under defined conditions. For
example when you buy a Microsoft Product such as the Student Version of Office,
you are the sole person licensed to use it and pay a special fee as a student.
If you are not a student or you allow others to make copies, then you are not
keeping to the terms of the licence.
The subject of growth will be discussed in some detail in a global context in a later chapter.
Financing Growth
There are a number of methods of financing growth, some of which are applicable to different
stages in the organisational life cycle.
Initial capital investment is required to begin a small firm. This is usually in the form of loan
from a bank or by using personal savings.
Working capital is then required for the day-to-day running of the business paying wages,
paying creditors, purchasing small items such as stationery, advertisements and so on. This
will either come from sales made and/or the support of a bank overdraft facility.
In the early stages of the business it is quite common for firms to have cash flow problems
where the amount of revenue earned is insufficient or not paid quickly enough by debtors,
and the business cannot pay its day-to-day bills. The owners will often rely on a bank
overdraft to relieve the problem. However, if this does not solve the issue in the short term,
the firm will probably close.
When larger amounts are required for purchasing large items or expansion of premises,
funding research and development projects and so on, the business will need to consider
longer term financing. There are several options available including bank loans and venture
capital. We consider four such options briefly here.
(a) Overdrafts
Advantages Disadvantages
Easy to arrange and relatively Security may be required

cheap
Can be withdrawn by the bank
Useful as a method of easing at any time or may not be
cash flow strains during peak renewed when it is required in
periods future
Interest charges are only Banks may require
incurred whilst the facility is management figures at regular
overdrawn and only the exact intervals, to monitor progress.
amount of funding required is
utilised.
ABE
(b) Long term loans
Can be structured so that Security will generally be

repayments can be met out of required which adds to the
future income deriving from the initial costs and puts the
expansion business at a degree of risk
Cannot technically be Management figures may be
withdrawn as long as the required at regular intervals
borrower honours all of the
An agreed sum of money is lent
terms of the facility
which may be more than is
Repayments can be structured actually needed for expansion
to meet the needs of the
Can be expensive for a small
business.
company.
(c) Leasing
Assets leased can be on- In an operating lease, the

balance sheet (a finance lease) benefit of any residual value in
or off-balance sheet (an the asset is lost to the lessor
operating lease) (owner)
The period can match the life of Costs may be higher than
the expansion assets those of a bank but this may be
outweighed by the absence of
There are usually no set-up
fees
costs and repayments can be
structured to suit the cash flow Capital allowances are lost to
of the business the lessor but the rentals will
usually be tax-deductible
In effect, only the required
amount is advanced and there Early settlement of the facility is
are no surpluses on which usually expensive.
charges accrue.
(d) Additional equity capital
Can be a cheaper form of A degree of control over the

raising capital and dividends enterprise will be lost
will only have to be paid when
Possibility of takeover is
the enterprise can afford it
increased when the shares are
Capital is raised in the long- widely held.
term
Increasing the equity capital
should increase the ability of
the enterprise to borrow in the
market.
ABE
Activity 5
Finally in this chapter, we present a further case study of the development of Xerox.
Consider the following summary of its development and then answer the questions that
follow.
Case Study 3: The Company with Nine Lives
Xerox can trace its roots to 1906, when a photography-paper business named
the Haloid Company was established in Rochester, New York. In 1958 Haloid
changed its name to Haloid Xerox, reflecting its belief that the company's future
lay with xerography, although photography products were still more profitable.
That balance quickly changed with the success of the Xerox 914 copier.
Introduced in 1960, it was the first automatic Xerox copier and the first
marketable plain-paper copier. Demand for the 650- 914 model exceeded
Haloid-Xerox's most optimistic projections and Fortune later called the copier "the
most successful product ever marketed in America". Sales and rental of
xerographic products doubled in 1961 and kept growing.
However, by 1985 Xerox's worldwide plain-paper copier share had dropped to 40
percent, from 85 percent in 1974.
In 1988, Xerox underwent a $275 million restructuring, cutting 2,000 jobs and
creating a new marketing organisation, to get new technologies into the
marketplace more effectively. Xerox's comeback was so impressive that in 1989
its Business Products and Systems Unit won Congress's Malcolm Baldridge
National Quality Award for regaining its lead in copier quality. Xerox had
demonstrated its ability to change.
In 1994, Xerox began calling itself The Document Company to emphasise the
wide range of document processing products it produced.
April 1998, Xerox announced yet another major restructuring, as its shift to the
digital world led it to spend more on overheads than its competitors. The
company eliminated 9,000 jobs over the next two years. The cuts came at a time
when Xerox was enjoying record sales and earnings as well as a surging stock
price, so the company was clearly proactive in maintaining the momentum it had
gained through its impressive 1990s resurgence.
This resurgence, however, came to a crashing halt during the later months of
1999. For both the third and fourth quarters, Xerox was forced to issue warnings
that its profits would be well below the expectations of Wall Street analysts,
sending its stock tumbling.
Sales and profits were hurt by a number of factors, several of which were out of
the company's control, including the strength of the dollar against European
currencies, heightened competition from Japanese rivals, particularly Canon,
which launched new lines of midrange and high-end copiers that ate into Xerox's
market share, a slump in the sales of high-end copiers and printing systems late
in the year because of Y2K fears, and a severe economic downturn in Brazil, a
long-time key market for Xerox that had been responsible for about 10 percent of
sales and an even-larger portion of profits.
In March 2001, Xerox sold half of its stake in Fuji Xerox to Fuji Photo Film for
more than $1.3 billion in cash, reducing its interest in the joint venture to 25%. In
another key move, Xerox outsourced about half of its worldwide manufacturing
operations to Flextronics International Ltd., at the same time selling to Flextronics
ABE
plants in Canada, Mexico, Malaysia, the Netherlands and Brazil. Several other
non core operations were also sold off as part of this overhaul, which in total
culled 11,200 positions from the payroll. During 2001, a separate restructuring,
which aimed to sharpen the company's focus, saw Xerox eliminate product lines
aimed at the small office/home office business segment. Approximately 1,200
more employees were laid off. Xerox eliminated its stock dividend that year to
conserve cash and in August, Mulcahy was named CEO. She replaced Allaire as
chairman in early 2002.
Late in 2000, the Securities and Exchange Commission (SEC) launched an
investigation into Xerox's accounting practices for the period from 1997 to 2000.
The SEC eventually found that the company had been improperly accounting for
revenues associated with office equipment it leased to customers, booking more
of the lease revenue up front than was proper and thereby artificially, if
temporarily, inflating revenue and according the SEC, misleading investors. In
April 2002, Xerox agreed to pay a record $10 million civil penalty to settle the
charges.
In addition to shedding unprofitable businesses and lines of business, and
eliminating tens of thousands of workers from the workforce (which was reduced
by one-third from the beginning of 2001 to the end of 2003, from 92,500 to
61,100), Xerox vastly improved its balance sheet. Total debt was reduced from
$18.64 billion in 2000 to $11.17 billion in 2003. Perhaps most importantly, Xerox
moved aggressively to regain lost market share by introducing 38 new products
during 2002 and 2003 as well as a wide range of new document-related services.
Through the CEOs able leadership and dogged pursuit of a turnaround, Xerox
was able to post strong results for 2003. Net income of $360 million was the
firm's highest profit level since 1999. Debt was reduced further during 2004 to
less than $10 billion and the now cash rich company was poised to begin
pursuing acquisitions again. From the real possibility of bankruptcy when she
took over, CEO Mulcahy had engineered at least the beginnings of a remarkable
comeback, though the competitive environment showed no sign of becoming less
brutal.
Questions
(a) Identify three separate and different examples that show Xerox changed its strategic
choices over the years.
(b) Describe how the external environment has impacted negatively on Xerox in a way that
was beyond its control.
(c) What actions did Xerox take as a result of the impact of the external environmental?
(d) What effect did these actions have on the business?
(e) From the limited information in the case study, describe the strategies Xerox used to
grow the business.
(f) Which of Michael Porters generic strategies has Xerox focused on? Provide
supporting evidence for your answer.
ABE
SUMMARY
Organisations exhibit life cycles in a similar way to that of products, with different
characteristics at each stage.
The strategic choices they will make will depend to some extent on the stage they have
reached in the business life cycle.
All organisations whatever their size have to make strategic choices about how the firm can
survive and prosper in the future.
The stage in the life cycle can be very important. An organisation in the development stage
may have few or no competitors. An example of this was the early days of online recruitment
when there was little competition.
A company in decline will have to examine every aspect of its business and decide what it
can do to either adapt its operation or change its products or services to regain momentum.
In either case, when making strategic choices, firms need to carry out a structured
examination of their internal and external environment so that they can make informed
choices:
Internal strengths and weaknesses identifying the competences and capabilities that
can be built on and the weak areas that need to be improved, and listing the actions
required to make improvements. Similar results could be obtained from a SWOT or
Gap Analysis.
The external environment conducting a STEEPLE analysis to identify factors that
provide opportunities and challenges, and analysing the competitive environment of the
business. The aim will, again, be to identify what competences and capabilities the
organisation has to maximise the opportunities and minimise the challenges that affect
it. Porters Five Forces and Benchmarking can be used to identify the forces that
provide its best advantage against rivals and consideration given to how could these be
enhanced. One of the strategies here could be to benchmark its business activities
against the best in class.
A company may choose to grow larger or not. This may be a personal preference of the
owner, but the situation may be forced owing to customer demand.
If the organisation chooses to grow it will either grow through use of its own resources or by
alliance with or acquisition of another company. Again the choice made will depend on the
stage in its life cycle and the STEEPLE factors surrounding the other organisation.
Growth will require financing whether this is short term working capital or a long term
financing vehicle. This is yet another choice for the firm to make.
Making the right strategic choices is vital for organisations of any size. A systematic
approach is more likely to result in appropriate decisions for an individual firm.
ABE
ANSWERS TO ACTIVITIES
Activity 2
In terms of SMART, we can say that:
S This objective is specifically about sales of product X.
M 10% is measurable
A we cannot state whether this is achievable without further information
R it is focused on results
T the time period is clearly stated as 3 months.
The objective does appear to fit the criteria as in a real situation we would be able to look at
past sales and the business environment to determine its achievability.
It is, therefore, not quite a SMART objective.
Activity 3
The skills and competences are likely to include innovation, entrepreneurship, marketing and
good communication. The physical resources should include hardware and software of
various types, working capital, work space and a business plan.
Strengths and weaknesses will depend on the circumstances. Appropriate strengths may be
knowledge of small business operations, experience in successful web design for small firms
and technical ability, while weaknesses could be lack of knowledge of running a business,
poor financial skills and so on.
The activities and resources that you will need to employ again depend on the
circumstances, but you may need financial backing to meet the forecast cash flow, a
colleague with business and/or financial skills, and a database of growing and successful
small companies.
Activity 4
The STEEPLE analysis for the car industry might be along the following lines
Political
Does the Government own a share in car manufacturers
Is the Government a stable one?
Government support for overseas investment.
Economic
Disposable income available
Economies of scale possible
National growth rate
Favourable interest or exchange rate.
Socio-cultural
What kind of products will appeal to the various age groups.
ABE
Environmental
Use of resources in the production process
Emissions are a health hazard
Raw material wastage
Alternative fuels available to appeal to conservationists.
Technological
Lean manufacturing to reduce costs
Quality monitoring and control
R&D advances for new fuels or engine improvement.
Ethical
Level of corruption in industry and location
Consumption of resources needed to provide essential energy requirements.
Legal
Emission level regulation
Other regulation relating to the industry specifically
Quality control standards
Restrictions on mergers/acquisitions.
Activity 5
(a) You could have identified any of the following:
Xerox changed the type of business it wished to be in when it switched emphasis
from producing photographic paper to photocopiers.
When it lost its patents Xerox could no longer ignore the competition and had to
create a new marketing organisation to get new technologies into the market
place quicker. (1988)
In March 2001 instead of growing in size it divested companies in order to go
back to core business.
It decided in 2001 to move out of the small office/home business market.
(b) In 1999 the negative impact included the strength of European currencies against the
dollar, a slump in sales of high end copiers, Year 2K fears and a severe economic
downturn in Brazil, one of Xeroxs key markets.
(c) It sold businesses, outsourced manufacturing, sold non-core operations and downsized
in number of employees. It also paid no dividend that year.
(d) This allowed it to recover its financial strength by 2003 and to recover market share by
introducing 38 new products in 2002-3.
(e) It used a joint venture with Fuji (which it subsequently sold). In 2004 "it was poised to
begin pursuing acquisitions again". It acquired many non-core businesses in 2001, so
had been involved in conglomerate operations previously.
(f) Initially Xerox could be said to have a differentiation strategy it offered a unique
selling (service) proposition (USP) that the competition did not have. Prices were not
important to buyers of the products and they became so brand loyal that Xeroxing is
still a word used globally for photocopying.
ABE

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57

A. The Life Cycle Concept 58

B. The Nature of Strategic Management 59

C. Analysis of the Business Environment 64

A. THE LIFE CYCLE CONCEPT

B. THE NATURE OF STRATEGIC MANAGEMENT

The Strategic Planning Format

(a) Mission, Vision and Values

Lambeth National Health Service (London)

(b) Setting Objectives

the external environment

Change in market share

C. ANALYSIS OF THE BUSINESS ENVIRONMENT

Figure 3.2: The Business Environment

Industry or sector influences

The External Environment:

SWOT Analysis Strengths and Weaknesses

Value Chain Analysis

Human resource management

Inbound Outbound Marketing

(a) Primary Activities

(b) Secondary Activities

SWOT Analysis Opportunities and Threats

PEST, PESTLE or STEEPLE Analysis

Example - STEEPLE for Beverage Industry

Competitor and Market Analysis

Bargaining power of suppliers Threat from new entrants

Suppliers Potential Entrants

Bargaining power of buyers Threat of substitutes

(a) The Power of Buyers

(d) Threat of New Entrants

Porters Generic Strategies

(a) Strategy 1: Cost Leadership

Case Study 1: Benchmarking at Xerox

Case Study 2: Hotel Chocolat

Advantages and Disadvantages of Small and Large Businesses

UK Small Business Sector

(a) Staying Small

Personality and entrepreneurial character

Communication between employees can be more difficult as size increases,

Growing the Business

In either a merger or acquisition, it is anticipated that competences and

Easy to arrange and relatively Security may be required

(b) Long term loans

Can be structured so that Security will generally be

Assets leased can be on- In an operating lease, the

(d) Additional equity capital

Can be a cheaper form of A degree of control over the

Case Study 3: The Company with Nine Lives

See the suggested answer at the end of this chapter.

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