Topic 2 - Analytical Tools in Strategic Management

2.
0 ANALYTICAL TOOLS IN STRATEGIC MANAGEMENT

• Strategic analysis
• Strategic choice
• Strategic implementation
© Sy. Ruzaini S. A., UiTM

 Define the three basic elements of strategic management : strategic
analysis, strategic choice and strategic implementation.
 Understand the process and tools for strategic analysis
 Understand the process and tools for strategic choice
 Understand the process and tools for strategic implementation

Understanding the strategic
situation
Strategic
Analysis
Strategy
Strategic Implemen-
Choice tation
Formulation of strategy itself Often referred to as tactics

Planning Plan Key question
element component
Mission What should we be doing?

Strategic
analysis
Goals Where are we going?
Strategic
Strategies What routes have we selected?
choice
How do we guide our collective
Policies
decisions to get there?
Strategic
Decisions What choices do we have?
implementation
Actions Shall we do it?

Strategic management in about reaching an understanding of the organizations
and its situation in order to make choices about its future direction
Therefore, tools are needed to help reach that

understanding, to help make the choices and to put in
place those choices

An attempt to understand the strategic position of the organization, to consider
what is happening in the environment in order to judge how those happenings
may affect the organization, to consider the organization’s strengths and
weaknesses with respect to those happenings and to assess how the
organization’s groups of stakeholders feel.
Aims to form a picture of the influences playing upon the organization in order to
be informed for the strategic choice element of the overall strategic
management process.

Expectations,
objectives and
power : culture
The environment
Resources
Strategic
Analysis
Strategy
Strategic Implemen-
Choice tation

An analysis of the environment is important because it increases the quality of
the strategic decision making by considering a range of the relevant features
well before the need to make an irrevocable decision
Porter’s concept of “Environment fit” allow the organization to maximise its

competitive position – a strategy of exploiting the environmental opportunities
and to block environmental threats in a way that is consistent with internal
capabilities
The success of an environmental analysis is largely dependant upon the

characteristics of that environment: the complexity of it, that is how many
variables are in the environment, the rate of change and the amount (and
cost) of available information about it

The process of environmental analysis :
1. Audit the environmental influences

2. Assess the nature of the environment to judge whether
it is simple or complex
3. Identify the key environmental forces using Porter’s
five-forces model
4. Identify the competitive position using a life cycle
analysis
5. Identify the key opportunities and threats using SWOT
analysis

Societal Environment
Socio- Economic
cultural Task Environment forces
forces
Internal Government
Demand
Environment
Structure
Cultural
Technology Resources Market
structure
Political- Technologic
legal forces alforces
The Organizational Development

The key dimensions of the societal environment
Socio-cultural Economic Life Technological Political-legal
expectancies
Life-styles changes GNP trends Total organizational Antitrust regulations
spending on R&D
Career expectations Interest rate Total industry spending on Environmental
R&D protection laws
Consumer activism Money supply Focus of technological Tax laws
efforts
Rate of family Inflation rates Patent protection Special incentives
formation
Growth rate of Unemployment levels New products Foreign trade
population regulations
Age distribution of Wage/Price controls New developments in Attitudes towards
population technology transfer from foreign companies
lab to marketplace
Regional shifts in Devaluation/ Productivity improvements Laws on hiring and
population revaluation through automation promotion
Birth rates Energy availability and Stability of government
cost
The key dimensions of the task environment
Demand Market structure Technology Government
Size and growth of Number/Size Level of technology and Impact of particular

existing market distribution of likely change legislation on the
competitors and industry relating to
suppliers product or consumption
Number/size Barriers to entry or exit Cost structure including Role of government as
distribution of to market economies of scale suplier, competitor or
customers customer
Physical distribution Product characteristics Dependence upon
channels particular raw materials or
labour
Nature of
competition in
market, eg
importance of price
and non-price
competition

Threat of new
entrants
Bargaining power Rivalry amongst Bargaining power

of suppliers existing of buyers
competitors
Threat of
substitute
products or
services
Porter’s Five Forces Model

 This rivalry can range from intense in a cut-throat industry
to mild in an affluent and affable one. When rivalry is
high, profits will tend to be low.
 Contributory factors :
 Industry growth
 High fixed costs or high storage costs
 Intermittent over-capacity
 Product differences, brand identity and switching costs for
customers
 The number of organizations and their size
 Diversity of competitors
 Corporate stakes
 High exit barriers
 The intensity of rivalry between competitors in an industry will depend on:
 The structure of competition - for example, rivalry is more intense

where there are many small or equally sized competitors; rivalry is less
when an industry has a clear market leader
 The structure of industry costs - for example, industries with high
fixed costs encourage competitors to fill unused capacity by price
cutting
 Degree of differentiation - industries where products are commodities
(e.g. steel, coal) have greater rivalry; industries where competitors can
differentiate their products have less rivalry
 Switching costs - rivalry is reduced where buyers have high switching
costs - i.e. there is a significant cost associated with the decision to buy a
product from an alternative supplier
 Strategic objectives - when competitors are pursuing aggressive growth
strategies, rivalry is more intense. Where competitors are "milking" profits
in a mature industry, the degree of rivalry is less
 Exit barriers - when barriers to leaving an industry are high (e.g. the cost
of closing down factories) - then competitors tend to exhibit greater
rivalry.
 The height of the barriers against this threat and the
determination to get over them defines the industry’s
profitability.
 Government policy
 Expected retaliation
 Absolute cost advantage
 Access to distribution channels
 Switching costs for buyers
 Economies of scale
 Product differentiation and brand loyalty
 Capital requirements

 The extent to which barriers to entry exist. The more difficult it is for other firms to
enter a market the more likely it is that existing firms can make relatively high
profits.
 The likelihood of entering a market would be lower if:

 the entry costs are high e.g. if heavy investment is required in marketing or
equipment
 there are major advantages to firms that have been operating in the industry
already in terms of their experience and understanding of how the market
works (this is known as the "learning effect")
 government policy prevents entry or makes it more difficult; for example,
protectionist measures may mean a tax is placed on foreign products or
there is a limit to the number of overseas goods that can be sold. This would
make it difficult for a foreign firm to enter a market
 the existing brands have a high level of loyalty
 the existing firms may react aggressively to any new entrant e.g. with a price
war
 the existing firms have control of the supplies .e.g. entering the diamond
industry might be difficult because the majority of known sources of
diamonds are controlled by companies such as De Beers.

 When this threat is high the “safe” profit margin is low as
customers more readily change when proces are high.
 The relative price and performance of substitutes
 Switching costs for customers
 Buyers’ propensity to substitutes

 This measures the ease with which buyers can switch to another
product that does the same thing e.g. aluminum cans rather than glass
or plastic bottles.
 Threat of substitutes depends on:

 Quality – is a substitutes better?
 Buyer’s willingness to substitute
 The relative price and performance of substitutes
 The cost of switching to substitutes. Is it easy to change to
another product?

 This primarily depends upon their price sensitivity and
their bargaining leverage.
 Price sensitivity
 Bargaining leverage

 This is how much pressure customers can place on a business. If
one customer has a large enough impact to affect a company's margins
and volumes, then the customer hold substantial power.
 Here are a few reasons that customers might have power:
 There are few dominant buyers and many sellers in the industry
 Products are standardized
 Switching to another (competitive) product is simple
 The product is not extremely important to buyers; they can do
without the product for a period of time
 Customers are price sensitive

 This is the differentiation of the inputs, and matters when
the organization’s process needs a rare commodity.
 Switching costs of changing to an alternative supplier
 Availability of substitute supplies
 Supplier concentration
 The importance of volume to suppliers
 Cost relative to the purchasing industry’s total cost
 The impact of product to cost differentiation
 The threat of forward integration by suppliers

 The stronger the power of suppliers in an industry the more difficult
it is for firms within that sector to make a profit because suppliers
can determine the terms and conditions on which business is
conducted.
 Suppliers will be more powerful if:

 There are relatively few of them (so the buyer has few
alternatives)
 Switching to another supplier is difficult and/or expensive
 The supplier can threaten to buy the existing firms so is in a
strong negotiating position

Development Growth Maturity Decline
Users/ Few Growing adopters Saturation of users Drop-off in usage

buyers Trial of early Trial of product service Repeat purchase
adopters reliance
Competitiv Few competitors Entry of competitors Fight to maintain Exit of come

e Attempts to achieve trial share competitors
conditions Fight for share Difficulties in Selective
Undifferentiated gaining/ taking distribution
products/ services share
Emphasis on
efficiency/ low cost
Demand unknown Demand > supply Demand ≥ supply Demand < supply
Strengths Weaknesses
Opportunities Threats

Strategy and Culture
The corporate culture can be defined as the pattern of basic assumption that
given group has invented, discovered, or developed in learning to cope with its
problems of external adaptations and internal integration, and that worked well
enough to be considered valid and, therefore, to be taught to new members as
the correct way to perceive, think, and feel in relation to those problems.
The culture of the organizations determines how they measure success.
An organization has a strong culture when the visible and the underlying levels
are consistent with each other and shared by all. A weak organizational culture
results when the cultural levels are inconsistent with each other and/or in
pockets.
Many elements aggregate to make up that culture: the power, stories, history,
language and dress codes, status symbols, reward structures, logos, organization
charts, etc.

Strategy and Objectives
The business’ objectives can be :

1. Corporate open
2. Corporate closed
3. Unit open
4. Unit closed

Objective : to understand the organization’s strategic capability
Value Chain
Analysis
Drawing Assessing
comparisons balance
Identification of
key issues
Understanding
strategic
capability
Resource Analysis Process

Tools to analyze organization’s resources:
1. Value Chain Analysis
2. Performance Assessment
3. Product Portfolio Analysis
4. Analysis of Core Competencies

Support Activities
Administration and infrastructure

Human resource management Value
Product/ technology/ development added –
cost =
Procurement
MARGIN
Inbound Operations Outbound Sales and Services
logistics logistics marketing
Primary Activities
Porter’s Value Chain Model

Formulation of strategy itself
Strategic
Analysis
Generation
of option
Strategy
Strategic Implemen-
Choice tation
Evaluation
of option
Selection
of strategy

Aims:
To generate an edequate flow of strategic options for subsequent evaluation.
Strategic option formulation

What basis? Which direction? How?
Generic strategies Alternate directions Alternate methods
Low cost Do nothing Internal development
Differentiation Withdrawal External development
(merger & acquisition)
Focus/ Niche Consolidation Joint development
Market penetration
Market development
Diversification
-Related
-Unrelated
Uniqueness perceived by customer Low cost position
Product differentiation Overall cost leadership
By following this strategy the By following this strategy, the
organization hopes to win organization seeks to win customers
Industry customers by offering ‘better’ upon the basis of cost, for a given
wide products or services than its level of quality and service. The Strategic
competitors. The organization organization must focus on ‘good’ target
adopting this strategy must cost control, seeking cost
focus upon building unique reductions wherever possible. This
products and services and cost leadership can be achieved
publishing their existence throught the value chain, from low
unit cost raw materials to low unit
cost distribution process.
Focus/ Niche
Segment
By following this strategy, the organization is targeting particular
only parts of the market, such as certain customer groups or regional
areas. This basis for competition is selective but, within the niche
market, competition is either on a low cost or a differentiation basis.

Generic strategies:
• Useful as a device to force explicit consideration of the way of

competing by showing the alternatives as by lowest cost
(giving strength from margin and ability to sustain price
competition) or by most differentiation (giving strength from
strong loyalties) and where competing, showing the
alternatives as everywhere or in a segment.
• However, complexity of reality tends to limit the usefulness of

this model.

• Do nothing • Product development
On existing
• Withdrawal
Market focus
• Consolidation
• market penetration
• Market development • Diversification

• related
On new
• unrelated
On existing On new
Product focus
Alternative strategic directions

Strategic options  The evaluation process seeks
to judge the appropriateness
of the options as a screening
mechanism to ensure that
only options that have a
strategic fit with the
organization’s environment,
Strategic evaluation culture, and capabilities are
process considered further for testing
of feasibility and desirability.
 Best fit
 Most feasible
 Most desirable
Strategic strategies Rejected strategies
Strategic evaluation process

 The degree to which the options being reviewed fit the situation
identified during the strategic analysis.
 A ‘good’ fit is logical, maximises available strengths and opportunities

and minimise weaknesses and threats.
 It suits the nature of the organization including its behavioural nature.
 Tools that can be used :

 SWOT analysis
 Product portfolio analysis
 Life cycle analysis
 Cultural web analysis
 All these approaches allow the options to be matched against the

organization’s relative competitive position.

 The assessment of the extent to which the option will work in practise.
 Can be judged in terms of both the returns that can be anticipated and
the demands it will make.

 The extent to which the option is acceptable to the stakeholders of the
organization.
 The option may be assessed in terms of:

 Profitability
 Risk profile
 Social cost/ benefit appraisal
 Shareholder expectations

Often referred to as tactics
Strategic
Analysis Organizatio
n structure
and design
Strategy
Strategic Implemen-
Choice tation Resources
allocation
and control
Managing
strategic
change

 Implementation of a chosen strategy is by making any necessary
adaptations to structure, the systems and people of the
organization and managing the required acquisition and
deployment of resources.
 Aim -> To turn the selected strategy into action.

 The nature of resource allocation process will be shaped by two key
variables:
 The degree of change : in unstable, fast-changing times more

judgement processes are required than under more static
conditions when incremental changes can be made based on
historically determined formulae.
 The extent of central direction : central authority may expect to

adjudicate on claims or it may leave units in an autonomous
position and the resources allocation process would clearly differ.

 The structure of an organization is the way it is arranged (in both the
formal and the informal sence), who holds what authority and
responsibility and what communication links there are.
 These can be classified as :
 Entrepreneurial/ simple structures

 Functional structures
 Divisional structures
 Federal, or holding, structure
 Matrix structure.

Large
Growth Growth Growth
through through through Crisis
creativity direction delegation of ?
Crisis of
red tape
Size of
Organization Crisis of
control
Crisis of
autonomy
Crisis of Growth Growth

leadership through through
coordination collaboration
Small
Young Mature
Age of
Organization

Strategy Structure
The appropriate organizational structure depends on the

context of the firm’s strategy, in particular on the critical
success factors.
Alfred chandler concluded that changes in organization

structure were driven by changes in strategy which in turn
were associated with changes in the business environment.

 In order to deal successfully with the people and systems aspects of
any strategic implementation it is necessary to achieve a cultural
change for the organizational acceptance of the ‘new’ information,
control, regulatory and political systems.
 Control and feedback systems allow the organization to detect that

the strategy is succeeding or failing and to take corrective actions in
order to implement that strategy more successfully, or to modify the
strategy itself.
 These control systems are often quantitative in nature but, in

general, need to provide:
 Effective monitoring or performance

 Devolution of responsibilities to the appropriate level of the
organization
 Agreed performance metrics
 Highlights of both successful and unsuccessful outcomes
 Regulatory systems are those that assist in bringing about strategic
change since they promote changes in individuals’ behaviour. Whilst
behaviour modifying systems are often associated with ethical
concerns, they encompass issues of:
 The incentive and reward system of:

 Monetary rewards, such as bonuses
 Non-monetory rewards, such as status enhancements
 Training schemes to ensure that the organization is able to

implement the chosen strategy

 The successful implementation of strategy is going to depend
fundamentally upon the successful gaining of acceptance of the
required behavior changes. In other words, the successful
management of change. The commonest model of this process is
the three stages of :
 Unfreeze Create a climate ready for change

 Change
 Re-freeze Institutionalize the new state
 Change may be achieved directly, by altering the attitudes, beliefs

and values of individuals, or indirectly, by changing the structure,
goals or technology of the organizations.

 Choose one organization.
 Conduct situational analysis using ONE (1) of
the following technique:
 SWOT analysis
 Porter Five Forces Model

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2.

0 ANALYTICAL TOOLS IN STRATEGIC MANAGEMENT

© Sy. Ruzaini S. A., UiTM

analysis, strategic choice and strategic implementation.

 Understand the process and tools for strategic analysis

 Understand the process and tools for strategic choice

 Understand the process and tools for strategic implementation

© Sy. Ruzaini S. A., UiTM

Formulation of strategy itself Often referred to as tactics

© Sy. Ruzaini S. A., UiTM

Mission What should we be doing?

Actions Shall we do it?

© Sy. Ruzaini S. A., UiTM

Therefore, tools are needed to help reach that

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

Porter’s concept of “Environment fit” allow the organization to maximise its

The success of an environmental analysis is largely dependant upon the

© Sy. Ruzaini S. A., UiTM

1. Audit the environmental influences

© Sy. Ruzaini S. A., UiTM

The Organizational Development

Demand Market structure Technology Government

Size and growth of Number/Size Level of technology and Impact of particular

© Sy. Ruzaini S. A., UiTM

Bargaining power Rivalry amongst Bargaining power

Porter’s Five Forces Model

 The structure of competition - for example, rivalry is more intense

© Sy. Ruzaini S. A., UiTM

 The likelihood of entering a market would be lower if:

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

 Threat of substitutes depends on:

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

 Here are a few reasons that customers might have power:

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

 Suppliers will be more powerful if:

© Sy. Ruzaini S. A., UiTM

Users/ Few Growing adopters Saturation of users Drop-off in usage

Competitiv Few competitors Entry of competitors Fight to maintain Exit of come

© Sy. Ruzaini S. A., UiTM

The culture of the organizations determines how they measure success.

© Sy. Ruzaini S. A., UiTM

The business’ objectives can be :

© Sy. Ruzaini S. A., UiTM

Resource Analysis Process

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

Administration and infrastructure

Porter’s Value Chain Model

© Sy. Ruzaini S. A., UiTM

© Sy. Ruzaini S. A., UiTM

Strategic option formulation

© Sy. Ruzaini S. A., UiTM

• Useful as a device to force explicit consideration of the way of

• However, complexity of reality tends to limit the usefulness of

© Sy. Ruzaini S. A., UiTM

• Market development • Diversification

Alternative strategic directions

© Sy. Ruzaini S. A., UiTM

Strategic evaluation process