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newagepublishers. com Preface Strategic management is a stream of decisions and actions with view to develop effective long term and short term planning and policies with technological business forecasting that would help the organization achieve its superior goal. Strategic management includes strategic analysis, strategy formulation, strategic choice, strategy implementation and control strategic decision for an organization to deploy resources into new opportunities.
Strategic management is important for Chartered Accountants, CEO, Directors, Managing Directors, Strategy Planners, Students and Faculty Members of BBM, MBA, M.
Com, PGDM, PGDBM, PGDHRM, ICFAI and competitive examinations in India and abroad. I invite suggestions from one and all for improvements in next edition of this book. Many individuals have rendered their helping hand to me. I take this opportunity to thank all of them. I thank Dr. D. M. Basvaraja, my teacher, guide and supervisor and professor from Kuvempur University for this constant inspiration and support.
I also thank Dr. C. M. Thagaraju, Dr. G. T. Govindappa, my teachers, and professors of Kuvempur University. I am immensely indebted to them. I also thank T. N. Suresh, Director of Padmashree group of institutions, Bangalore, Dr. C. N. Aswathnarayan, Chairman of Padmashree group of institutions, Bangalore, Dr. Bakkappa, Coordinator, Shiva Gangothri PG Centre, Davanagere, Dr. A. Venktaraju, Professor, ATNCC, Shimoga, Prof. Sheshchalla, KKECS, Bangalore, Chairman, Principal, HOD and staff of TIMS, Bangalore, and Prof. Shekappa and my friend Nagaraja A. P.
In writing this book I have drawn on a vast amount of literature in strategic management. Naturally, I owe an intellectual debt to numerous authors who have enriched the stream of literature in strategic management by their contributions. My prefounded debt is to American scholars, George Stenier, Ansoff, Newman, Warren, Peter Drucker, Akcoff, Christenson, Kenneth, Bower and Vacil, Acherman, Robinson, Piere, Wheeler and Hunger, Charles W. L. Hill and Gareth R. Jones. In the UK I owe a great debt to Argeni, Hussey, and Barnard Taylor, Thomson and other scholars. Shri Saumya Guptha, MD, Shri Sudarshan S. P. Marketing manager, the New Age International Publisher, these persons are the main initiators and monitors of this project. I express my sincere gratitude to all of them. It is my prime responsibility to thank my parents, brother, sisters and friends for put with inconveniences caused during writing of this book. Dr. B. HIRIYAPPA. Ph. D. Bangalore This page intentionally left blank Contents Preface 1. BUSINESS ENVIRONMENT 1. 1 Introduction 1. 2 Definition of Business 1. 3 Characteristics of Business 1. 4 Components of Business 1. 5 Objectives of a Business 1. 6 Characteristics of Business Environment 1. Environmental Influences on Business 1. 8 Environmental Analysis 1. 9 Components of Business Environment 1. 10 Relationship Between Organisation and its Environment 1. 11 Internal Analysis of the Organisation/Company 1. 12 The Value of Systematic Internal Assessment 1. 13 Identificaion of Strategic Factors 1. 14 Evalution of Strategic Internal Factors 1. 15 External Environment 1. 16 Economic Environment 1. 17 Political-Legal Environment 1. 18 Socio–Cultural Environment 1. 19 Demographic Environment 1. 20 Natural Environment 1. 21 Technological Environment 1. 22 Global Environment 1. 3 Strategic Response to the Environment 1. 24 Competitive Environment 1. 25 Competitive Advantage (v) 1 2 3 5 5 7 11 12 15 17 17 19 20 20 26 29 35 37 38 39 41 42 44 49 50 52 viii Contents 2. BUSINESS POLICY AND STRATEGIC MANAGEMENT 2. 1 Introduction 2. 2 Business Policy as a Discipline 2. 3 Importance of Business Policy 2. 4 Classification of Business Policy 2. 5 Definition of Strategy 2. 6 Generic Strategic Alternatives 2. 7 The Dynamics of Competitive Strategy 2. 8 Meaning of Strategic Management 2. 9 Dimensions of Strategic Decisions 2. 10 Tasks in Strategic Management 2. 1 Strategic Management Model 2. 12 Vision, Mission and Objectives 2. 13 The Need for explicit Mission of Organization 2. 14 Defining Organisation Mission 3. STRATEGIC ANALYSIS 3. 1 Introduction 3. 2 Strategic Analysis 3. 3 Issues to Consider For Strategic Analysis 3. 4 Situational Analysis 3. 5 The Methods of Industry and Competitive Analysis 3. 6 Strategic Groups 3. 7 Key Factors for Competitive Success 3. 8 Swot Analysis 3. 9 Tows Matrix Analysis 3. 10 Portfolio Analyses 3. 11 Strategic Business Units 3. 12 Stages in Product/Market Evolution or Product Life Cycle 3. 3 BCG Matrix 3. 14 ADL Matrix 3. 15 The General Elective Model 4. STRATEGIC PLANNING 4. 1 Corporate Strategy 4. 2 The Stages of Corporate Strategy Formulation–Implementation Process 64 64 64 65 66 73 81 85 86 90 91 92 93 96 97 106 106 106 107 109 112 116 117 120 126 127 128 129 130 136 137 142 142 145 Contents ix 4. 3 4. 4 4. 5 4. 6 4. 7 4. 8 4. 9 4. 10 4. 11 4. 12 Strategic Alternatives Cost Leadership Strategies Differentiation Strategy Focus Strategy Characteristics and Scope of various Grand Strategies Diversification Retrenchment, Divestment and Liquadation Stralegy Turnaround
Strategy The Causes of Corporate Decline Divestment/Cutback Strategy 156 158 159 161 167 172 180 180 181 185 189 190 191 193 196 197 200 206 207 208 211 219 221 221 227 230 232 236 238 244 245 249 252 5. FORMULATION OF FUNCTIONAL STRATEGY 5. 1 Introduction 5. 2 Marketing Strategy Formualation 5. 3 Developing the Marketing Mix 5. 4 Dealing with the Marketing Environment 5. 5 Marketing Strategy Techniques 5. 6 Financial Strategy Formulation 5. 7 Production Strategy Formulation 5. 8 Logistics Strategy 5. 9 Research and Development Strategy 5. 10 Human Resource Strategy 6.
FORMULATION OF FUNCTIONAL STRATEGY 6. 1 Introduction 6. 2 Interrelationships between Strategy Formulation and Implementation 6. 3 Issues in Strategy Implementation 6. 4 Organization and Strategy Implementation 6. 5 Implementing Strategic Change: Steps in the Changing Process 6. 6 Vertical Differentiation 6. 7 Horizontal Differentiation 6. 8 Strategic Business Units 6. 9 Matrix Organizational Structure 6. 10 Integration and Integrating Mechanisms 6. 11 Multidomestic Strategy and Structure x Contents 6. 12 6. 13 6. 14 6. 15 6. 16 6. 17 6. 18
Global Organizational Structure Strategic Business Units and Core Competence The Value Chain Matching Structure and Control at the Corporate Level Strategic Leaders Operational Control Systems Strategic Reward System 253 259 262 267 279 293 295 297 297 297 309 312 319 324 329 329 329 330 332 7. REACHING THE STRATEGIC EDGE 7. 1 Introdution 7. 2 Business Process Reengineering 7. 3 Benchmarking 7. 4 Total Quality Management 7. 5 Six Sigma and Management 7. 6 Importance of Six Sigma in Organization 8. CONTEMPORARY STRATEGIC ISSUES 8. 1 Introduction 8. 2 Strategies for Internet Economy 8. Strategy Shaping Characteristics of the E-commerce Environment 8. 4 Strategic Management in Non-Profit and Government Organization CHAPTER 1 Business Environment Contents • Introduction • Business • Objectives of business • Environmental influences on business • Environmental analysis • Characteristics of business environment • Components of business environment • The micro and macro environment • Competitive environment • Porter’s five forces model–competitive analysis Learning Objectives The present chapter aims at: • Definitions and objective of business • Examine environment analysis, characteristics components of the organisation.
Let us know the microenvironment and macro environment • Understand the competitive environment • Describe the Porter’s five-force model and its limitations. 2 Strategic Management for Chartered Accountants “Environment factors of constraints are largely if not totally external and beyond the control of individual industrial enterprises and their arrangements. These are essentially the ‘givers’ within which firms and their managements must operate in a specific country and they vary, often greatly from country to country”. Barry M.
Richman and Melvyn Copen “ The environment includes outside the firm which can lead to opportunities for or threats to the firm. Although, there are many factors, the most important of the sectors are socio – economic, technical, supplier, competitors, and government”. Glueck and Jauch “Analysis is the critical starting point of strategic thinking” Kenichi Ohmae “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change”. Charles Darwin “Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it”. D.
Bruce D. Henderson “Awareness of the environment is not special project to be undertaken only when warning of change becomes deafening”. Clifton Garvin, Kenneth R. Andrews 1. 1 INTRODUCTION The concept of strategy has been borrowed from the military and adapted for use in business. This book has reviews of strategy formulation, implementation, controlling and monitoring strategic events, which have to suggest that adopting the concept is easy to business and industry. In business, as in the military, strategy bridges the gap between policy and tactics. Together, strategy and tactics bridge the gap between ends and means.
Also this book reviews various issue like business environment and components of business environment, competitive environment, Porter’s five forces model, business policy and strategic management, major tasks in strategic management, vision and mission and objectives of the strategic enterprise, strategic analysis in terms of swot analysis, tows matrix, portfolio analysis, strategic planning, marketing, financial production, logistics, research and development and human resources strategy formulation, implementation and control and achieved the strategic edge for the purpose of clarifying the concept and placing it in this context.
In this chapter, we shall discuss about the business, major objectives of business like survival, stability, growth, efficiency and profitability, environmental influence to business, environment analysis, characteristics of business environment, components of business environment, to know the relationship between the organisation and its environment, the micro and macro environment and its Business Environment 3 elements like customers, competitors, organisation, market, suppliers, intermediaries, demographic, economic, government, legal, political, cultural, technological and global environment impact on business.
Companies how to enter into global market, its manifestation trends, strategic response to business, Porter’s competitive and five forces model analysis for business enterprises in industry, commerce and services sector. 1. 2 DEFINITION OF BUSINESS The term ‘typically’ refers to the development and processing of economic values in society. Normally, the term is applied to portion of economic activities whose primary purpose is to provide goods and services for society in an effective manner.
It is also applied to economics and commercial activities of institutions which having other purposes. Business principally comprises of an all profit seeking activities of the organisation which provide goods and services that are necessary to economic system. It is the major economic pulse of a nation, striving to increase society’s standard of living. Finally, profits are a primary mechanism for motivating these activities. Business is in any organisation which makes distribution or provides any article or service to the customers, who are belonging to members of the society.
Business may be satisfied customers needs for these purpose customers are able and willing to pay for it. Business may be defined as “the organised effort by individuals to produce goods and services to sell these goods and services in a market place and to reap some reward for this effort. ” Functionally, we may define business as “those human activities which involves production or purchase of goods with the object of selling them at a profit margin”. • The term business refers to the state of being busy for an individual, group, organisation or society. It is also interpreted as one’s regular occupation or profession or economic activities. • It deals with particular entity, company, organisation, enterprise, firms or corporation. • It also interpreted as particular market segment sector like computer business and it included under term business. • It is wide and willing to use different activities • It consists of purchase, sale, manufacture, processing, marketing of products, services like manufacturing, trading, transportation, warehousing, banking and finance, insurance and advertising etc. It is clearly stated that all business activities main purpose is to earn profit. Profit as a surplus of business and It accrues and distributed to the owners 4 Strategic Management for Chartered Accountants of the business. Business has to pay wages to workers who works in the business. People invests money in business due to getting a retain. Retain is profit from the business. This is awarded to investor due to be taking the risk. • Profit is the motive for the investor who serves, runs business and it is the stimulation effort of the business for growth, survival of business.
Profit Is A Main Motive Of Business • For every kind of business organisation, profit is often regarded as motive for the entrepreneurs and it measure the overall performance of the business. • Profit is the tool for measuring and evaluation of the business efficiency and productivity at the managerial competence. • It is helpful to strategic managers how to take well decisions and actions which are turn into effective in the form of able to combine and utilize the available resource and able to sustain the organisation with growth and survival of the business entity. Business managers who will take higher efficiency and risk and certainly expect greater volume of the profit from the business entity. • Business efficiency expressed in terms of percentage of profit to sales volume, to capital employed, to market value of corporate shares. • Outside investors eager to know the profit of the firm and to make assessment about their commit funds and effective utilization of funds will be in the business entity. Business According to Prof. R. N. Owens “Business is an enterprise engaged in the production and distribution of goods for sale in a market or rendering of services for a price”.
Business According to L. R. Dicksee “Business is a form of activity pursued primarily with the object of earning profits for the benefit of those on whose behalf the activity is conducted”. Business According to Urwick and Hunt “Business is any enterprise which makes, distributes or provides any article or service which other members of the community need and are willing to pay for” Business According to Haney “Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods”.
Peter F Drucker has drawn some conclusions about what is a business and what are useful from the business and how to understand the term business. His conclusions are listed below: Business Environment 5 • Business is created and managed by the people. A group of people who will be taken decisions that will be determined either an organisation is going to prosper or decline, whether it will survive or will eventually perish in market. This conclusion is true in the business. • Business cannot be explained in terms of profit. 1. CHARACTERISTICS OF BUSINESS • Business is to provide goods and service to the people. It provides the public with the things it needs and wants in order to survive, enjoy life and improve in a material sense. From the point of view of consumer, business is the satisfier of needs and desire of the customer demands which should be provided by business in order to meet people requirements in society. • Goods that have been produced or procured for sale in retail for price enter the realm of business. This activity of selling results is the creation of the wealth for the society.
In satisfying demand, business uses the resources of land, labor and capital. These resources when taken separately have little value; but business combines structures and refines the resources to produce to the value of the society. Further, business employees’ people who exchange their talents for wages and salaries. Therefore, these people exchange their compensation for the desired goods and service. • Business is profit seeking activity firm. It supplies goods and services to customers who are satisfy their demand and desire. It adds to society’s value by earning of a profit.
Profit is the biggest stimulus for maintains the survival of the business and its future development. Society has permits business to earn profit as a reward for assuming the risks of operating a business. • Business is also an essential participant in society. For satisfying society demand which supplying goods and services and earning profits. Business involves the most fundamental activities of the society. As a result, Society has looks to business for something more than products, services and profits. It looks to business for leadership and direction in helping to achieve society’s objectives.
It expects business to assist in the establishment of a better service to the society. 1. 4 COMPONENTS OF BUSINESS Business includes the total enterprise of the country. Business activity has two branches. They are as follows: • Industry • Commerce Industry In broad sense, industry is the branch of business activity which concerned with raising production, fabrication or possessing of goods and services. In other words, industry 6 Strategic Management for Chartered Accountants is an activity concerned with conversion of raw materials or semi finished goods into finished goods.
Industry provides two types of goods namely consumer goods and Industrial goods. Consumer goods are those goods manufactured by industry for ultimate use of a customer. For instance brush, paste, cloth and food products etc. , IndustrialCapital goods are those goods produced and used for further production. For instance machineries, tools and raw material etc. , Types of Industry Industry is further classified into five broad types. They are as listed below: 1. Extractive industries 2. Genetic industries 3. Manufacturing industries 4. Construction industries 5.
TerritoryService industries Extractive industry Extractive industry are those industries concerned with extraction of wealth from surface of the earth, soil, forest, water, air etc. , for instance agriculture, mining etc. , Figure 1. 1: Components of Business Business Industry Commerce Primary Extractive Fishing Hunting Mining Secondary Service Domestic trade Trade Aids to trads Genetic Agriculture Horticultre Dairying Fish culture International trade Banking Insurance Discount Commision Manufacturing Production Transformation Assembly Construction Buildings Roads Railway Tracks Bridges dams, flyovers Canals
Genetic industries Genetic industries are those industries concerned with reproduction and multiplication of plants animals for making profit on their sale. For example, Nurseries, cattle building and poultry farming. Business Environment 7 Manufacturing industries Manufacturing industries are engaged in the conversation and process of raw material through separation, combination and transformation into finished goods. Such as machinery and plants of all types, iron and steel, sugar, paper, cotton clothe, electrical appliances, zinc ore, paper pulp water power, etc. Construction industries Construction industries are concerned with the construction of roads, railways, dams, canals, buildings, bridges etc. There are mainly concerned with the manufacture of non-moveable items. Territory or Service industries Service industry which produce intangible goods those which cannot be seen or touched included in this category are banking, transport, insurance, communication and services of a professional nature such as lawyers, doctors, dentists, management consultants, advertisers, chartered accountants and engineers, etc. Commerce Commerce has been defined as “the sum total of those processes which are engaged in the removal of the hindrance of persons (trade), Place (transport and insurance), and time (warehousing) in the exchange (banking) of commodities”. Trade Trade means sale, transfer, or exchange of goods and services, through certain ancillary functions like packing, warehousing, banking, transportation, Insurance, and advertising. Trade may be • Domestic Trade • International Trade 1. 5 OBJECTIVES OF A BUSINESS Business Purpose Business have some purpose. These purpose are listed below: • It is to create customers clients in market. It is create customers for selling of their products and services. • It is to create market for redling and buying of product and services. • Customers determine the main purpose of the business. • Customers is the basic foundation of the business and keeps its in existence in the market. • It is due to be catering to material needs and requirement of the society, individual persons, government institutions, company, firms and enterprise. • Business is running with in the purview of the legal and general public interest. • It is ultimate result of an economic expansion, growth and change of firm. Strategic Management for Chartered Accountants In general sense, enterprise pursue multiple objectives rather than a one objective. Strategic manager will be identified a set of main business objectives. These will be pursued by a large cross-section of enterprises. Profitability, productivity, efficiency, growth, technological, dynamism, stability, self reliance, survival, competitive strength, customer services, financial solvency, product quality, diversification, employee satisfaction and welfare and so on are the major objectives of enterprise.
Enterprise look for balance of these objectives in appropriate and suitable manner. An important business objectives are listed below: Figure 1. 2: Important Objectives of Business Stability Survival Objectives of a business Efficiency Profitability Growth Figure 1. 2 has identified the important objectives of business as outlined: • Survival • Stability • Growth • Profitability • Efficiency Survival • An organisation mission statement reveals the organisation’s intention to secure its survival through development growth and profitability of the business. It is will and continue the business concern into the future as long as possible perpetuate anxiety strategic managers take more responsibility for survival of the organisation business. • Therefore, survival is an assumed as goal of the business, if strategic managers often neglected survival, its impact on strategic decisions making for long term. • It is basic and implied objectives of the most organisations. • It will be gained more value and important during the stage of the beginning of the business enterprise and during the general economic adversity of business in market. The survival refers to the function of the nature of ownership, nature of business competence of management, general and industry conditions, financial strength of the business enterprise or any type of business concern. • All types of enterprises will be interested in more than mere survival in market. Business Environment 9 Stability • Stability is one of the important objectives of the business enterprise. • It will be cautious, conservative objective of firm. • It is a least expensive and risky objectives in form of managerial time and talent and other resources in enterprise. A good and steady enterprise always minimizes its managerial tensions and reduces its dynamic nature decisions which are taken from managers for managing business. • It is least resistance compare to other objectives and hostile to external environment. Growth • An organisation growth is closely associated with its survival and profitability and equated with dynamism, vigour, promise, and success of a business. • Growth refers to overall development of the organisation activities in terms of increase in assets, manufacturing facilities, increase in sales volume in existing or through new product to improve profits and market share. Growth may be proactive change and is a necessity for dynamic business environment. • Growth refers to in terms of expansion business, increase manpower employment, diversification and acquisition of business and create unknown risky paths in this way organisation looks for survival, profitability and growth of the business activities. Profitability • Profitability is the vital goals of a business organisation. • Profit is the sole motive of the business enterprise. • Private business enterprises are operated on behalf of the owners and its benefits also goes to owners of the enterprise. Strategic managers should know how to measure profitability or how to define profitability over the long term or short term of the organisation. • Profitability clearly indicates of an organisation’s ability to satisfy the principal; claims and desires of employees and stakeholder of the organisation. • Strategic managers analyse interpretations of profit of the organisation, how it impact on survival of the organisation in the future perspective. Efficiency • Efficiency is one of objectives of the business. It helps to business to achieve goals and success of the business. • Efficiency refers to best utilization of available and scarce resources and brings the highest productivity in business activities. 10 Strategic Management for Chartered Accountants • It is useful operation objectives due to effective utilization of economic version of the technical objective which for achieving productivity and designing suitable input and convert into output for effective utilizing of funds, resources, physical facilities and so on in enterprise.
LONG TERM OBJECTIVES OF A BUSINESS Short run profit maximization is rarely based on the best approach to be achieving the sustained corporate growth and profitability of the firm. It is recognized by the strategic managers of the firm. Therefore, to achieve long term prosperity purpose strategic managers designed long term objectives. Long term objectives of the firm or company or organisation as listed below: • Profitability • Productivity • Competitive position • Employees development • Employee relationships • Public responsibility • Technological leadership Profitability Profitability s an important functional area of the long-term objectives of the firm. The ability of any business to operate in the long run that depends on attaining on acceptable level of profits. Strategically managed firms characteristically have a profit objective usually expressed in terms to return on equity. Productivity Productivity is essential need for each strategist in the corporation. Strategic managers try to improve the productivity of their companies. Companies can improve the input–output relationship that results normally increase profitability.
Productivity objectives are some times stated in terms of desired to achieve by company. This is an equally effective way to increase profitability. Competitive Position Competitive position can increases profitability and productivity of the company. Companies or firms or organisation’s competitive position reduces the cost of production of the output. The corporate success depends on the firm’s competitive position. It is strongly dominated in the market. Employee Development It refers to be experienced employees who are the asset of the organisation.
For longterm purposes, the company’s employees will be needed training for further course of action that effectively and efficiently managed to produce productivity in the competitive position and market. Therefore, it is one of the major long-term objectives of the organisation. Business Environment 11 Employee Relationships All companies actively seek good employees who have committed relations with organisational environment. Strategic manger should know the employee needs and expectations. Strategic managers take a decision to welfare programme for the employees of the companies.
It can be improved the employee’s relationship in the organisation. Technological Leadership Technological leadership gives clear picture of the organisation goals and objectives for the long term changes in the business scenario. Many companies state their objectives in terms of their technological leadership. Public Responsibility Business recognizes their social responsibilities towards to customer and society. Public responsibility is to be buildup long-term images in the society by through providing social work to public. 1. CHARACTERISTICS OF BUSINESS ENVIRONMENT Business environment characteristics will be indicated that major challenges, opportunities, threat and weakness of the business. Figure 1. 3 : Characteristics of Business Environment Complex Multi-faceted Objectives of a Business Dynamic Reaching impact Figure 1. 3 indicates the major characteristics business environment as listed below: Environment is Complex Business environment principally consists of a number of factors, events conditions. These are influenced to different departmental source in the organisation.
These conditions are not exited in isolation and create entirely new set of influences which are interact with each other. If bring comprehensive influence to business environment. This is difficult to influence to organisation. All these factors have to be considered as environment analysis is complex and rigid and totally very difficult to grasp by the functional manager and top level employees in the organisation Environment is Dynamic Business and company environment is constantly changing in different nature.
Micro and macro environment factors are influenced to business. It impact to change on the business conditions. Dynamic environment is flexible and dynamic nature in company. 12 Strategic Management for Chartered Accountants This is causing due to change, strategic manager can shape strategy and formulate short term and long term objectives. Environment is Multi–faceted Strategic observer can shape and observe different character of environment. Strategic observer to observe a particular change or latest development in the business .
It is may be viewed different opinion from different observes in the organisation. These things are frequently seen when the development happens. All are happy to welcome it and think as an opportunity for the company even also as threat to company. Environment has a far reaching impact Environment impact is essential ingredients for strategist to study changes and take appropriate decisions at appropriate time. If strategist neglect to take appropriate decisions at the right time which create impact to organisation.
Survival, growth, profitability and development of organisation which depends critically in terms of micro and macro factors of the business environment. Environment impact have to be bring new dimensions to business. ENVIRONMENTAL 1. 7 ENVIRONMENTAL INFLUENCES ON BUSINESS The term Environmental analysis is defined as “the process by which strategists monitor the economic, governmental, legal, market, competitive, supplier, technological, geographic, and social cultural settings to determine opportunities and threats to their firms/company/organisation”. According to Barry M.
Richman and Melvyn Copen “Environment factors of constraints are largely if not totally external and beyond the control of individual industrial enterprises and their arrangements. These are essentially the ‘givers’ within which firms and their managements must operate in a specific country and they vary, often greatly from country to country. ” According to Glueck and Jauch “ The environment includes outside the firm which can lead to opportunities for or threats to the firm. Although, there are many factors, the most important of the sectors are soci–economic, technical, supplier, competitors, and government. These definitions clearly reveals the following important factors: • Strategist looks on the environment changes while to analyse the threats of the business alongwith searching and offering immense opportunities to business enterprises in the market. • A successful business enterprise has to identify, appraise and respond to the new dimensions of various opportunities and threats in its internal and external environment. • Successful business not only recognise business activities even recognise the different elements in the environment.
Business Environment 13 • These factors are recognised and adopt to their business • It continuously monitor and adapt to the new environment • Environment analysis helpful to survival and prosper the business activities. Environment diagnosis principally consists of managerial decisions which made by strategist for analysing the significance of the data like strengths, weakness, opportunities and threats of the organisation in thin way to design their own strategy for formulation, implementation and controlling the internal environmental factors to firm.
Environmental analysis helps to strategic executive and manager to diagnosis of strategic competitive force and components of strategic management. However, internal environment of the organisation is a quite essential and important from the point of view of the environment analysis. It is the cornerstone of the new and exiting business opportunity analysis too. Figure 1. 4: Environment Forces (Influences) on Business Inputs • Human • Physical • Finance •Technology •Organization Processing Transformation of inputs to outputs Outputs Products Services Environmental forces Figure 1. indicates the environmental forces on business. For instance, the individual life success depends on his innate capabilities like psychological factors, traits and skills. These are to the cope with the environment then will be got success otherwise failure. The survival is the basic elements and success of the business organisation, it depends on its own strengths in terms of resources like money, men, machinery, materials, market and methods as its command. Organisation success depends on effective utilization of physical resource, financial resources and human resource skills.
These are adaptability to the business environment. Environment is the total of several external and internal forces that affects the functions of business. Every business organisation principally consists of internal environment factors and set of external environmental factors. Environment factors influence to business directly and indirectly that control, manage and administration of business activities in the organisation. Environment is the basic tool for living all human beings and all living creatures. Human environment consists of family, friends, peers, and neighbors except to natural 4 Strategic Management for Chartered Accountants environment. In additionally includes man–made structures like as buildings, furniture, roads and other physical infrastructure. These are continuously interact with their business environment. Problem in Understanding the Environment Influences In strategic business environment, strategic managers have face different problems in different circumstance in their business and have to understand the different environmental influence of business as outlined: • The environment problems bring different dimensions to strategic managers.
Strategic managers are very difficult to make decisions regarding the different diversity of the business. Strategist will list all conceivable environment influences and very difficult to get overall picture of business environment task. These are emerging problems to strategist and influence to business. • Uncertainty is the second problems encountered by strategic managers. Strategic managers typically claim know the pace of the technological changes and the speed the global network communication.
These are more and more faster change now than ever before in business environment. Some of the changes either predictable or unpredictable by the mangers. Mangers can be trying to understand future external influences on business enterprises and this task is very difficult to do so. • Strategic managers are not different from individuals in form, they are coping with complex and rigid. They tend to be simplify complex and rigid problems which are focusing on aspects of the environment. These problems are historically important and confirm prior views of the business.
Strategic managers are trying to take risk and simplify the complex and rigid problems in this way to find to breakout bias in the understanding of their environment. It will be still achieving a useful and usable level of analysis in business environment. Framework to Understand the Environmental Influences While understanding of the problems in business environment, strategic managers cannot be ignored the real problems of the business. It will be on opportunity to identify a framework for understanding the business environment of the organisations.
Environmental factors influence to identify key issues, find the ways for coping with complex and rigid issues and consider as challenging managerial thinking by mangers. • First stage is strategic managers is to know the initial structure and nature of the business organisations in terms of uncertainty. This is relatively either static or shows sign of change. Strategic managers should aware of the simple and complex problems and also know the decision skills for focus the rest of the analysis will be taken in the business environment. Business Environment 15 Second stage is the auditing of the environmental that influence to business. During this stage, strategic managers aim to identify different environmental influences are likely to affect the organisation’s development or performance. It is done through assessment of external environmental factors like political, economic, social and technological influences. These are factors bearing at the time of audit of the business. It helpful to strategic managers to develop overall pictures or scenario of possible futures and extent to ascertain to change in the business. Strategic managers is to move to focus more towards an explicit considerations of the immediate environment of the organisations, it is the last stage of assessment of the strategic managers. It involves competitive environment and its five forces analysis of competitive environment and identify the key forces at work environment. It is also required to analyze the organisation competitive position in form of resources and customers. ENVIRONMENTAL ANALYSIS 1. 8 ENVIRONMENTAL ANALYSIS Strategist should aware of the resource capabilities and how to effective utilization of scarce resource capabilities in the company.
Environment analysis is to analysis changes pattern and impact of business for decisions. It will considers to an opportunity to use and time to anticipated the corporate objectives through proper planning and make optional utilization of available resource in the company. These things helps to strategist to form and develop and give warning early system to prevent threats or to develop strategies which can be turn threat into advantages . It clearly indicates future of the company and assessment of the anticipated future. According to Clifton Garvin, environment analysis as “Positive trends in the environment breed complacency.
That underscores a basic point : in change there is both opportunity and challenge”. And it is impact on business. Business environment analysis involves the analysis, diagnosis, and take managerial decisions which are likely to better to company. It reduces to length process and time pressure to manages, board of directors in the company. In the case, strategic manager neglect the environment analysis it impact on business changes and ready to face anticipated problems in future . Therefore, the strategic managers can concentrate environmental influence to organisation or enterprise.
In general sense, Environmental analysis has three basic goals as outlined . • Environmental analysis must be provided the current and potential changes which are understanding by strategist and bring suitable place in the business environment. Strategist should aware of the existing environment this is must important to company. At the same time, strategist must have to take and consider a long tern perspective about the future. • Environment analysis basically provide strategic inputs for strategic decision making, It is not mere collection of data and it is not enough to analysis of 16
Strategic Management for Chartered Accountants the environment. Whatever information collected by the strategist which should be useful to company for making strategic decisions. • Environment analysis is the basic tool and it should make facilitate and foster strategic thinking in the organisation. It is typically a rich resource capabilities and ideas which are understanding in the context and purview of the business organisation. It should be current challenges, growth, development and opportunities. These wisdoms are bringing by the strategist from the fresh point view of the organisation.
Environment influence On SWOT Environment influence is a part of SWOT analysis. SWOT is acronym of strengths, weakness, opportunity and threats. Threats and opportunities come under the purview of the external environment of the business. Strengths and weakness come under the purview of the internal environment of the business.. These factors are outlined: • Opportunity • Threats • Strengths • Weakness Opportunity An opportunity is a favourable condition in the business organisation’s environment which enables it consolidate to resource and strengthen its position.
Increased company’s product and services due to demand from the customer. It is the best an opportunity to company to serve products and services to customers Threat A threat is an unfavorable condition in the business organisation’s environment which causes a risk for, or damage to, the organisation. Emerging the strong and competitors in the market who are likely to offer stiff competition to the existing companies in the industry, trade and business. This is one of the threats to the organisation..
Strength Strength is an inherent resource capability of the organisation or company which can be use and gain to strategic advantages from their competitors in the market. For example strength is the superior research and innovation which help to development of advance skills which can be used for getting new product, new material, new customer in this way achieved to gain competitive strengths in the business. Weakness A weakness is an inherent limitations or constraint or problems of the organisation. It has to create strategic disadvantages to company or organisation.
For example a manufacturing company over dependency to single supplier in the market which is potentially risky for company at the time of crisis. Business Environment 17 1. 9 COMPONENTS OF BUSINESS ENVIRONMENT Exited Business environment of the firms/company or organisation can be classified into two broad categories • Internal Environment • External Environment Exhibit 1. 1: Component of Business Environment Component business environment of firm Internal environment External environment Micro environment Macro environment
RELATIONSHIP ORGANISATION 1. 10 RELATIONSHIP BETWEEN ORGANISATION AND ITS ENVIRONMENT Relation of business organisation and its environment is obvious from the point of analysis of strengths, weakness, opportunity and threats of business. Organisation environment consists of internal environment and external environment. Internal environment factors are easily controllable and manage in the organisation. External environment factors are uncontrollable factors due to changes in the legal, social, economic, technical in business enterprise.
External environment offers wide range of opportunities, problems, threats and pressures and thereby influence the structure of the business enterprise and its functions. Business enterprise can be treated as subsystem for drawing certain inputs of resource, information and values extracting from the external environmental system. These things transforms into outputs in the form of products and services, goals and satisfactions and exchange of proper ideas and it transmits to business enterprise. Figure 1. : Relationship Between Organisation And Its Environment RELATIONSHIP BETWEEN ORGANISATION AND ITS ENVIRONMENT Exchange of information Exchange of resource Exchange of influence and power 18 Strategic Management for Chartered Accountants Figure 1. 5 indicates the relation between organisation and its environment as listed below: • Exchange of Information • Exchange of Resource • Exchange of Influence and Power Exchange of Information It refers to data or information is exchanged with business enterprise and its internal and external environment .
Exchange of information occurs in the following ways are listed below: • Business organisation scans the external environment and internal environment components and their behavior, changes and thereby generates important information and valuable uses for business and make proper planning, decision making and control of environment variables in the organisation. • Business organisation structure and functions are adjusted towards the external environment information. Generation of external environment information is complex and it is one of the major problem and it involves uncertainty to business organisation. • A business project look for current information and future information which are relating to demography, competition, technical, legal, political and government policies and procedures. Apart from the collecting information, a business organisation itself transfer information in the following ways: • Organisation transfer its own information to several external agencies either voluntarily, inadvertently or legally. Other organisations and interest individuals are also approached to business organisation to obtain valuable information which relating with functions, products and services and social responsibility towards stakeholders of the company. • An organisation collect its own information in form of annual reports, occasional advertisements and media reports etc.. • An business organisation is legally or otherwise bind to supply valuable information to government, society, financial institution, shareholders, creditors, debtors, investors, employees, trade unions, business bodies and the like.
Exchange of Resource Exchange resource is the second and dominate relationship with the business enterprise and its environment, exchange of resources involves in the following ways in the business: • Business enterprise receives inputs like finance, materials, manpower, equipment and labor force from the external and internal environment via contractual and other arrangements. Business Environment 19 Organisation employees is very important due to conversion of these inputs (raw materials) into outputs like products and services • Organisation interacts with supplier for purposefully of getting of inputs. For this purpose, an organisation does not depend on single supplier and collaborates sometimes with other organisation in the process of ensuring a consistent supply of quality inputs. • An organisation is also dependent on the external environment factors for disposal of its products and services to wide range of clients and customers. Disposal of products and services are involved to interaction process to external environment for perceiving the needs of the external environment and catering to them, in this way satisfying the expectations and demands of clients, customers, employees, shareholders, creditors, suppliers, local community, general public and so on. • These above mentioned groups are tended to press on the organisation due to be meeting their expectations, needs and demands and for upholding their value and interests in organisation resources. ANALYSIS ORGANISATION/COMP TION/COMPANY 1. 1 INTERNAL ANALYSIS OF THE ORGANISATION/COMPANY Formulation of an effective and efficient strategy has based on a clear definition of organisation mission, an accurate assessment of the external environment and through internal analysis of the organisation. Organisation requires success it needs at least three ingredients. They are as listed: • Strategy must be consistent with conditions in the competitive environment • Strategy must place realistic requirements on the organisation/company’s internal resources and capabilities. • Strategy must be carefully formulated, implemented, controllable and executed.
Internal analysis of the organisation is to difficult and challenging one to strategist. An internal analysis has leads to design a realistic organisation profile. It frequently involves tradeoff, value system judgments, educated and skilled guess as well as objective and standardized analysis. A systematic internal analysis leads to main objective of the organisation profile. It is essential to develop strategy and design a realistic mission for achievement of the strategy. Internal analysis of the organisation must identify the strategically strengths, opportunities, weakness and threats that are based on organisation strategy.
Organisational analysis identifies suitable strategy that based on the SWOT analysis. Internal analysis can be achieved by first identifying key internal factors like value system, mission objectives, management structure and nature, integrated power relationship, human resource, company/organisation image and brand equity, physical assets, R&D, technological capabilities, marketing resource and financial resource factors and secondly by evaluating these factors. 20 Strategic Management for Chartered Accountants VALUE SYSTEMATIC 1. 2 THE VALUE OF SYSTEMATIC INTERNAL ASSESSMENT The value system of internal assessment is essential from the point of view of strategy formulation by the experienced strategist of the organisation/company. The value system applies to either large or small business concern. It is critical in developing a successful business strategy. Regardless of the favorable opportunities in the environment, a strategy must be considered the essential internal strengths, weaknesses, opportunities and threats of the organisation if such opportunities are to be maximized for accomplishment of goals.
The value systematic internal analysis is particularly essential in small business organisations. Small business organisations are faced lot of problems like limited resource and markets. These organisations are flexible and capable to capture selected markets and effectively channel their limited resource and maximize these limited market opportunities. Internal analysis is the basis objectives of the organisation. Steps/Process in the Development of a Organisational / Company Profile Company/organisation profile focus on determination of strengths and weakness of the strategic environment of the business.
Identifying and evaluating strategic internal factors are based to accomplish to organisation future strategy. The major steps are important to development of an organisation / company profile. They are listed below: Stage one —————————————- Identification of Strategic Factors Stage two —————————————- Using Value Chain Analysis Stage three ————————————– Evaluations of strategic internal factors IDENTIFICATION STRATEGIC FACTORS 1. 13 IDENTIFICATION OF STRATEGIC FACTORS An important identification of strategic factors approach as listed below: 1.
Functional approach 2. The value chain approach Approach Functional Approach Functional approach refers to organisation basic capabilities; characteristics, swot analysis and limitation are the key strategic factors. Functional approach key strategic factors are as follows: • Marketing • Finance and accounting • Production /operation/ technical • Human resource development • Organisation of general management Marketing Marketing deals with the following issues: Business Environment 21 • • • • • • • • • • • • • Organisation’s products/service; product life cycle and marketing strategy.
Concentration of sales in few products or little customer segmentation. Ability to be gathered information about the market. To know the market share or sub market share. Product/service mix and expansion potential: to know the life cycle of key products; to know the profit or loss of the product/service. To clearly know the channel of distribution; number, coverage, and control. To maintain effective sales organisation: to find out knowledge about the customer needs. To improve product/service quality with image and reputation of brand name.
Efficient and effective utilization of available resource for effective sales promotion and advertising. To aware of the pricing strategy and pricing flexibility. To effective monitoring and feedback of the marketing functions and expansion of product. Effective implementation of after sales service and follow up. To keep standards, goodwill and brand loyalty. Finance and Accounting Finance and accounting functions are as follows: • Ability to raise short term and long-term capital: either debt or equity. • • • • • • • • • • • To maintain good corporate level resource.
To know the cost of capital relative to industry and competitors Tax consideration. To build up effective relationship with owners, investors, financial institution and stock holders. To know the leverage position: capacity to utilization financial strategies, like lease or sale and lease back. To aware of the cost of entry and barriers of the entry. To know the price earning ratio. Present working capital position of the organisation. Effective cost control and ability to minimize cost of expenditure for production of goods and service.
Financial size of the organisation. Efficient and effective accounting system for cost, budget, and profit planning of the organisation. 22 Strategic Management for Chartered Accountants Production/Operation/Technical Production/Operation/Technical Production or operation or technical are as follows: • To know the present raw material cost and availability. • Inventory control system of the organisation. • Location facilities; layout and utilization facilities. • Technical efficiency and effective utilization of technical resource in the organisation. Effective use and implementation of subcontracting. • Degree of vertical integration in terms of value added and profit margin of the product. • To know the efficient and cost benefit of production techniques. • Effective utilization and implementation of operation control procedure: design, scheduling, purchasing, quality control and efficiency. • To know the costs and technological competencies relative to industry and competitors. • Research development, innovative, advance ethnological development. • Patents, rademarks and similar legal protection for their organisation products/ service. Human Resource Development Human resource development functions are as outlined: • Effective management of the human resource in the organisation. • Improvement of employee skill and morale. • Labor relations costs compared to industry and competition from present industry scenario. • Efficient and effective formulation and implementation and controlling of the policies. • Effective utilization of incentive to motivate employees’ performance. To know the ability to level peaks and valleys of employment. • To regulate employee turnover and absenteeism. • Specialized skills and experience. Organisation of General Management Organisation of general management functions are listed below: • To know the organisation structure. • Organisation image and prestige to public world. • Organisation record for achieving goals and objectives. • Effective utilization of resource and overall organisation control system. Business Environment 23 • To effective monitoring organisation cultural climate. Effective utilization of systematic procedure and tools and techniques in decision-making. • To know the top management skills, capabilities and interest. • Effective implementation strategic planning system. • To keep and maintain intra organisation synergy (multibusiness) Some of which would be the focus of internal analysis in most business organisation. Organisation is not likely to consider all of the factors which are potential strengths or weakness. Strategist has develop or review the factors which are important for successful of the organisation.
For the analysis of the organisation, firstly, a strategist has to analyze the past trends like sales, costs and profitability. These trends are the major importance in identification of the internal factors of the organisation. Further this identification should be based on a clear picture of the nature of the organisation’s sales trends. An anatomy of past trends has broken down by product lines channels of distribution of goods and service into different segmentation of key customers, geographical region and sales approach should be developed in detail.
A similar anatomy of past trends should focus on costs and profitability. Strategist has to conduct detailed investigation of the organisation’s performance history that helps to isolate internal factors influencing to sales, costs and profitability or their interrelationships. The above factors are important in future strategy decisions. Identification of strategic factors also requires an external focus of the organisation. Strategist isolates key internal factors through analysis of past and present performance like industry conditions/trends and comparisons with competitors.
In addition, strategic internal factors are often selected for in depth evaluation due to organisations are contemplating expansion of products or markets, diversification. Strategist carefully scrutinizes the industry under consideration of current competitors. This is a key for identifying strategic factors, if an organisation is evaluating its capabilities more into unfamiliar markets. Value The Value Chain Approach Value chain approach developed by Michael Porter, he wrote a book “Competitive Advantage” which identified the value chain approach of the organisation.
A value chain approach is a systematic way of viewing the serious activities of the organisation that performs to provide a product to its customers. Figure 1. 6 highlights the typical value chain approach of the organisation. The value chain disaggregate an organisation into its strategically relevant activities in order to understand the behavior of the organisation’s cost and its existing or potential source of differentiation. An organisation gains competitive advantage by performing primary and support activities, these activities are more important strategically. 24 Strategic Management for Chartered Accountants
Every organisation can be viewed as value chain approach. Value chain approach as a collection of value activities that are performed to design, produce, market, deliver and support its product. The basic categories of value activities can be grouped into two broad types. They are as listed below: • Primary activities • Support activities Primary Activities Primary activities are those involved in the physical creation of the product and service in the organisation. Its delivery of goods and service and marketing to ultimate buyer and it’s providing after sales support to buyer.
These activities are supporting to organisation that provide inputs or infrastructure to the business. Figure 1. 6: Identifying the Primary Activities of the Value Chain Inbound logistics Operations Primary activities Outbound logistics Marketing and sales Identifying Primary Activities Primary activities principally compose of five activities. They are as outlined: • Inbound logistics • Operations • Outbound logistics • Marketing and sales • Service Identifying of the primary value activities requires the isolation of activities that are technologically and strategically distinct in the organisation.
They are five basic categories of the primary activities as listed below: Inbound Logistics Inbound logistic activities are associated with receiving, storing and dissemination inputs to the product like material handling, warehousing, inventory control, vehicle scheduling and returns to suppliers. Operations Operations activities are associated with transforming inputs into the product form, like machining, packaging, assembly, equipment maintenance, testing printing and facility operations in the organisation. Business Environment 25
Outbound Logistics Outbound activities are associated with collecting, storing and physically distributing the product to buyers like finished products warehousing, material handling, delivery vehicle operation, order processing and scheduling. Marketing and Sales Marketing and sales activities are associate with providing goods and services to customer can purchase the product and inducting them to do so. Marketing and sales activities are advertising, promotion, sales force, quoting, channel selection, channel relations and pricing strategy of the organisation.
Service Service activities are associated with providing service to enhance or maintain the value of the product. Service activities are like installation, repair, training, and parts supply and product assessment. The primary activities most deserving of further analysis depend on the particular Industry. Identifying Support Activities Support value activities arise in any one of four activities like procurement, technology development, and human resource management and organisation infrastructure. These categories can be identified or disaggregated by isolating technologically or strategically distinct activities.
Identifying support activities often overlooked as sources of competitive advantage. Support activities are listed below: Figure 1. 7: Support Activities Of The Value Chain Organisation infrastructure Human Resource Management Support activities Technology development Procurement • • • • Procurement Technology development Human resource management Organisation infrastructure Procurement Procurement activities are involved in obtaining purchased inputs like raw materials, purchased services and machinery or so on. Procurement stretches across the entire 6 Strategic Management for Chartered Accountants value chain; therefore, it supports every activity-closely relating to be purchased inputs of some kind. Different people typically perform with many discrete procurement activities in an organisation. Technology Development Technology development activities are involved in desiring the product like creating and improving quality of the products and service. Technological development is closely relating to innovation of new products and service of the organisation.
We shall tend to think of technology in terms of the product or manufacturing process. However, every activity of the organisation performs and involves a technology. Organisation has developed own research and development department for performing to innovation of new product and s
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