The strategic management model is a basic model that consists of four basic elements: environmental scanning, strategy formulation, strategy implementation, and evaluation and control. In this basic model, the environmental scanning plays a pivotal role and affecting other elements. The strategic model provides guidelines to the strategic decision-making process which consists of eights steps that guide business people in making strategic decisions. Step 1 to step 6 of the process is the strategy formulation in which the internal and external environmental scanning of the strategic management model has been incorporated into the strategy formulation of the process. The process further elaborates each of the elements from the model, provides interrelated steps in using the model to make decision strategically.
The process suggests thorough scanning and analysis of internal strategic factors (evaluation of current performance, missions, current strategy and review corporate governance) and most importantly it suggests revision of mission and objectives should there be any major changes in the internal and external scanning and analysis steps earlier. Step 7 & 8 are similar to those of the model.
For example, the travel industry has recently undergone critical intervals. Starting from the 911 attack then the SARS outbreak and currently the economic crisis, the swine flu further attack the industry, companies realized that they need to diversify the market so that if one market, U.S. market for example, declines due to political, social instabilities, then they still have other markets to survive during the crisis.
The model and the process do complement each other because the process is developed based on the model and during the application of each step in the process; decision-makers need to follow relevant elements of the model
Globalization brings benefits for end customers but it also poses great threats and challenges for corporations plus the use of internet has given the bargaining power to customers. Globalization has created bigger markets, written-off the national protection and import & export taxation. The internet has created new ways of conducting business transactions. A new distribution channel via the internet has added to the traditional ways of distributing products through retail outlets. Customers can approach to the product though internet faster than before and they can have more choices making the products more competitive in the market.
Given such impacts of globalization and internet on corporation, corporations have to think beyond their existing national boundaries, eye on expansion worldwide in order to cater local customization products with competitive prices. Strategic planning must be conducted in view of the environmental changes in the competitive world. Corporations must have astute strategic planning in order to adapt to the changing worldwide business environment, the tendency of the market and to be proactive with the foreseeable challenges
As an example in Vietnam, the admission to the WTO has posed both threats and opportunities for Vietnamese corporations. There will be no national protection on Vietnamese companies, fair competition amongst foreign and Vietnamese companies have increased the numbers of foreign companies to establish in Vietnam. What do Vietnamese companies do to compete with those foreign ones is a question for the strategic planners. Some go joint-ventures with foreign companies to combine their strengths. Some have to improve their product quality in order to meet the international standard for exportation and most companies have internet sales channels in order to bring their products directly to the customers
Of the seven current world-wide trends most affected by the internet, I personally believe that the trend number 3 “the balance of power is shifting to the customer. Now having unlimited access to information on the Internet, customers are much more demanding than their “non-wired” predecessors” is the most threatening and challenging to the strategic management especially to our travel industry.
Before the internet was introduced in Vietnam in 1998, all business transactions were done through faxes, phone calls and walk-in. Once a proposal was sent, the chance to clinch a sale was very high because clients did not want to make overseas calls and faxes too many times to bargain. Little changes were made to the proposals because customers did not have lots of information on the sites. They placed their trust in the travel agents and assumed that travel agents had proposed a good standard itinerary. Things have been changing when the internet was introduced in Vietnam. Customers now can have access to load of information, wide variety of products posted in many travel agents’ websites.
Customers now ask for tailor-made itineraries to suit their desires and get quotations from several travel agents to compare and their choice can go either to the cheapest one or the best pre-sale service one. Some customers, with the help of internet, can even be able to estimate the package price before they receive quotation from travel agents. The internet can even pose a greater threat to travel agents in the ways that customers can easily book individual services such as air ticket, car rental, tour guide, hotels etc directly with the service suppliers without having to go through travel agents.
Strategic management needs to realize those threats and challenges, adjust the strategies to cope with those threats and challenges in order to bring the corporation forward.
Financial stability is only the current situation of a business organization. It is one of the strengths of the organization. In order to have a sound, consistent financial health and growth, a business needs to conduct long-term forecast and planning.
Forecast is one of the steps in the environmental scanning and it helps to predict the likely situations in the future. Basing on the forecasted future situations, a business can develop long-term strategic planning. The main point used to convince the board of directors is that the company has been stable in finance but we cannot afford to stay in such stable condition for long without any forecast and plan. The business environment is changing very fast, new entrants, substitutable products, fiercer competition within industry, and higher demand from clients are the threats and challenges for the future growth of the company. Long-term forecast would help company to create action plans.
Financial condition is internal factor which somehow we can control whereas the external factors are out of our control and we need to be prepared to face the changing situation. In the event that the company was struggling financially, long-term forecast would have to focus on boosting the revenues, on the cash inflows and outflows in order to get control of the situation. Financial stability is an advantage and business should make full use this advantage for the future growth of the company. As an example in Vietnam, our business is a travel agent and after Vietnam’s admission to the World Trade Association, foreign companies started to present in Vietnam which pose greater threats and competition for local company. The long-term forecast of business situation should include this factor regardless of the financial status.
In conclusion, long-term forecast and planning should always be the activity that a CEO has to pay attention to for the sustainable growth of a business.
The 7 years working overseas for a foreign travel agent had helped me gain experience in sales and operations. I also had experience in product development. We offered impeccable travel services to elite markets. Our customers are western expatriates and high-income locals. Because of the deluxe clientele we served, their expectations for our services were very high. We were all service-oriented people. We understand what our clients’ needs and expectation more than other competitors do.
Back to Vietnam as a CEO of a Vietnamese travel agent, realizing the recent high growth of Vietnam’s economy and the travel demands are increasing. Most travel companies are offering tour packages for the mass local Vietnamese and their itineraries are of standard value. Few steps I would like the top management to do:
* Given the recent increase in GDP, more people will travel abroad especially the small portion of the elite circle. We need to develop a set of itineraries which are different from what other companies cater to the mass market. These itineraries are designed specially for rich families because their spending style is not the same as that of the mass
* Conduct training for sales team focusing on the high-sides, the sales-pitch of the products. Training for operations team so that they can outsource and cater the services worth what customers pay for. Emphasis should be placed on high-quality services
* Marketing team to be in charge of adverting and distribution channels and monitor the reactions of the market
These steps are based on the scanning of strategic environmental factors such as economic forces (increase in GDP which leads to increase in travel demand-an opportunity), task environment (other competitors have not had such products for the niche market) and other internal factors such as human resources, marketing.
The decision of producing low-priced products versus high-priced products lies in the internal strength of the organization. Few internal strategic factors need to be scanned in order to come to the determination of choices.
Low-priced products, to a small extend, can be understood as products that can be produced on large scale with low price and cater to huge demand. On the contrary, high-priced products require more sophisticated technology, more skillful labor and can be produced on smaller scale because of the lower market demand. These high-priced products will be catered to the niche market. In order to determine which products to go for, we need to scan the organizational resources and other functional resources such as sales & marketing and operations. Of the organizational resources, the human assets play an important role in deciding what kind of production, products to go for. We need to answer the questions such as “Are our employees able to apply advanced technologies to produce unique products? Are they skillful enough?”
Other concerns about physical assets such as whether the production lines, facilities are modern enough for the production of high-priced products or just fit for large-scale of low-priced products. For functional resources of sales & marketing, do salespeople have the know-how of the unique products? Are we famous for our brand name? How to penetrate into the niche market with our unique products? Operational issues such as production cost, the existing manufacturing activities are suitable for mass production or customization. The above questions need to be answered to arrive at strength or weakness of the organization.
For organization whose products are services such as travel service, the important internal factors such as product development (unique itineraries for the small number of upmarket customers with premium profit versus standard itineraries for the mass with a minimal margin per head), the sales and marketing activities and office location are important for the strategic strategy.
In addition to the SWOT analysis which has some criticisms, TOWS matrix is introduced to assist the strategy formulation.
The approach of TOWS is to match external factors (opportunities and threats) to the internal ones (strengths and weaknesses) to arrive at 4 distinct sets of alternative strategies. They are SO, ST, WO, and WT strategies and each set of strategy is created by examining the two involved factors (for example, SO strategy is created in light of the strengths and opportunities) and strategies are generated based on the maximization or minimization of the two participating factors (obviously the strength and opportunities factors should be maximized while the other two minimized or avoided) thus losing core competencies. For example with the WT strategies, managers brainstorm to wrap up strategies so that when implemented, weaknesses are minimized and threats avoided. This TOWS matrix can be used in a corporation or in individual business units of the organization because the strategies are clearly written. It is also easier to pick up the most feasible strategies for implementation.
The TOWS matrix is easy to conduct because it systematically scans the two participating factors and degree of attention can be paid to either of the factors depending on what factors to focus on.
As for Vietnam and China, the WT is likely to be more feasible to apply because of many managerial weaknesses (less experienced in management than in the west) and unstable governmental regulations. In reality, many companies have been struggling to survive or to go joint-venture with foreign companies in order to improve their strengths. Another option is to hire foreign CEOs to lead and train the team.
Developed by Boston Consulting Group (BCG), the BCG growth-share matrix is based on the grow rate (the increase in sales of the business or product) and the market share (the competitive position of the business or product relative to that of the largest competitor).
There are two assumptions of the BCG matrix. One is that if a business or product gains a larger market share, it will generate more cash thus more profit. This is true because if the market share is increased to the point of market leader, the output of product or service will need to be produced more to cater to the market and from here, experience curve will help to reduce the production cost per unit thus the business gain a cost advantage more than other competitors. The second assumption is the relationship between cash generation and cash consumption. If a business or product wants to gain market-share, more cash needs to spend for production, marketing to bring that business or product to the Stars where both sales & market share are high.
These assumptions of the BCG are still valid for our product portfolio analysis. We often place our different products and their life-cycle in relation with the BCG matrix. For example, our tour itineraries to Indochina destinations used to be the hot products and accounted for the major revenue for the company. We were pioneer and market leader in the region. But Indochina has become easier to travel and travelers can easily backpack. Sales have dropped for these products and we need to invest in other more attractive products.
The question of outsourcing or in-house production has some controversies because some firms have experienced more disadvantages than the desired advantages over outsourcing.
Outsourcing give cost advantages to the firms. Instead of producing in-house the items that do not contribute a high fraction of total added value to the product, outsourcing is the alternative way to lower the total production cost. Outsourced items can be of higher quality and efficiency than internal production because of the specialization of the outside suppliers. The completion process of one product can be shortened due to small parts are outsourced thus gain a time advantage.
Some disadvantages can be seen in the outsourcing activities. First, the delay in delivery of the outsourced activities can result in the delayed completion of the whole product thus the end results may significantly be affected. Second, due to the long-term contract with the outside suppliers or distributors, they tend to be less competitive than other suppliers or distributors in the market because the deal has been clinched and their business has been secured for the whole length of contract. Third, outsourcing will refrain the firms from learning new skills thus losing core competencies.
The options of outsourcing or in-house producing lie in the analysis of the advantages and disadvantages above. If the items are key work, having high fraction of total value added to the whole product, they should be produced internally. Another useful way is to scale the activities in the matrix of total added value and the competitive advantage that represents the activities. For example, IT services are outsourced in our small travel agent because IT is a support activity which contributes a minor degree of added value into our products.
The strategic choice process is one of the very last processes in formulating strategies. It involves debating, evaluating, and selecting the best strategies. If a strategy gets the consensus of all people involved in the strategy formation, it means that the strategy is a perfect one and the strategy can be selected for implementation. It gains supports from all people across levels of organization but the downside of consensus is that it does not point out the weakness of the strategies thus consensus is not a perfect approach which leads to the two techniques to avoid consensus; they are devil’s advocate and dialectical inquiry
Devil’s advocate: weak points and problems are identified by individual or a group of people but no suggestions are provided.
Dialectical inquiry: debates are involved; pros and cons are synthesized from thesis and antithesis to arrive at synthesis. Suggestions and solutions to pitfalls and problems are compromised for the creation of a new possibly-implemented strategy. The disadvantage of this technique is that it involves lots of arguments, debates, time-consuming to prepare proposals.
During the valuation process, strategic managers would use “programmed conflict” to get people’s different point of views, to encourage criticism about the alternative strategies in order to make them more feasible.
Of the two techniques above, my preference would go for the dialectical inquiry because we often debate the pros and cons before we decide to cater our travel services to more clienteles groups (for example students, pensioners, low-income workers), we gather ideas from great thinkers of the company, debate on the weak points, and finally come to the selections of the best alternative strategies to be implemented.
Wheelen, T.L., & Hunger, J.D. (2008). Strategic Management and Business Policy (11th ed.). Pearson Education.