Strategic Management

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 1

Chapter 1: Business Environment Each business organization operates in its unique environment. Environment influence businesses & also gets influenced by it. Q. 1)

Business

It refers to the state of being busy for an individual, group, organization or society. It also interpreted as one’s regular occupation or profession. It also refers to a particular entity, company or corporation. It is said that a business exists for profits. Profit, as a surplus of business, accrues to the owners. It is a reward for risk taking. As a motive, profit serves as a stimulant for business effort. Other things being equal, the higher the efficiency the greater is the level & volume of profit. Business efficiency is often expressed in terms of percentage of profit to sales volume, to capital employed, to market value of corporate shares & so on. Two conclusions drawn by Peter F. Drucker on what is a business : 1. Business is created & managed by people. There will be a group of people who will take decisions that will determine whether an organization is going to prosper or decline, whether it will survive or will eventually perish. This is true of every business. 2. Business cannot be explained in terms of profit. Profit maximization, in simple terms is selling at a higher price than the cost. It includes development of wealth, to include several non-financial factors such as goodwill, societal factors, relations & so on. Q. 2)

Objectives of a Business

Business has some purpose. A valid purpose of business is to create customers or market. It is the customer who determines what a business is. The customer is the foundation of business & keeps it in existence. (Key: Gross Profit Ensures Stability & Survival) 1.

Survival : It is the will & anxiety to perpetuate into the feature as long as possible. It is basic, implicit objective of most organizations.

2. Stability : It is one of the most important objectives of business

enterprises. It is a cautious, conservative objective. It is a least expensive & risky objective in terms of managerial time. 3. Growth : It is a promising & popular objective which is equated with

dynamism, vigour, promise & success. Enterprise growth may take one or more forms like, •

Increase in assets

•

Manufacturing facilities

•

Increase in sales volume

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 2

•

Improvement in profits & market share

•

Increase in manpower employment

•

Acquisition of other enterprises & so on.

4. Efficiency : It is doing things in the best possible manner & utilizing

resourses in a most suitable combination. It is very useful operational objective. 5. Profitability : Generally, private enterprises are motivated by the

objective of profit. All other objectives are facilitative & are meant to be subservient to profit motive. Q. 3)

2. 3. 4.

5. 6. 7. 8.

Environmental influences on Business

1. All living creatures including human beings live within an environment. Apart from natural environment, environment of humans include family, friends, peers & neighbours & also building, furniture, roads & other physical infrastructure. Business does not function in an isolated vacuum. To be successful, business has to not only recognize different elements of environment but also respect, adapt & manage them. Business must continuously monitor & adapt to the environment for success. Environment is sum of several external & internal forces/factors that affect the functioning of business. Most Important sectors are socio-economic, technological, supplier, competitors & government. Business converts environmental resources through various processes into outputs of products and/or services. These are then exchanged with external client group. Different organizations use different inputs, adopt different processes & produce different ouputs. E.g., an educational institution produces literate people. A hospital provides health & medical services.

Q. 4) understanding the environment influences

Problems in

1. The environment has many different influences; the difficulty is in making sense of this diversity in a way which can contribute to strategic decision-making.

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 3 2. The second difficulty is that of uncertainty. Managers typically claim that

the pace of technological change & the speed of global communication mean more & faster change now than ever before. It is very difficult to understand future external influences on an organization. 3. The third difficulty is to cope with complexity. One of the tasks of the strategic manger is to find ways & means to break out of oversimplification or bias in understanding of their environment. Q. 5)

Framework to understand the environmental influences

Firstly, it is useful to take an initial view of the nature of organizations environment in terms of how uncertain it is. This helps in deciding what focus the rest of analysis is to take. 2. Next step might be the auditing of environmental influences. The aim is to identify which of the many different environmental influences are likely to affect the organization’s development or performance. It is done by considering the way in which political, economic, social & technological influences have a bearing on organizations. 3. Final step is to focus more towards an explicit consideration of the immediate environment of the organization. It is also required to analyse the organization’s competitive position. Q. 6) Why Environmental Analysis ? • Through environmental analysis strategists get time to anticipate opportunities & to plan to take optional responses to these opportunities. • It also helps to develop an early warning system to prevent threats or to develop strategies which can turn a threat to the firm’s advantage. • Environmental analysis has three basic goals: I. The analysis should provide an understanding of current & potential changes taking place in the environment. It is important that one must be aware of the existing environment. II. Environmental analysis should provide inputs for strategic decision making. Mere collection of data is not enough. The information collected must be useful for & used in strategic decision making. III. Environmental analysis should facilitate & foster strategic thinking in organizations. It should challenge current wisdom by bringing fresh viewpoints into the organization. 1.

Q. 7) Characteristics (Key: Rahman Music C D)

of

Business

Environment

1. Environment is Complex : Environment consists of a number of factors

events, conditions & influences arising from different sources. All in all, environment is a complex that is somewhat easier to understand in parts but difficult to grasp in totality. 2. Environment is Dynamic : Environment is constantly changing in

nature. There is dynamism in the environment causing it to change continuously its shape as character.

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 4 3. Environment is Multi-faceted : The shape & character environment

assumes depends on the perception of the observer. 4. Environment has far Reaching impact : An organization’s growth &

profitability depends on the environment in which it exists. Q. 8)

Components of Business Environment

Internal (Micro Environment) : All the factors within an organization which impact strengths or cause weaknesses of a strategic nature. External (Macro Environment) : All the factors outside an organization which provides opportunity or pose threats to the organization. Four Environment Influences could be described as follows: 1. S : A strength is an inherent capacity which an organization can use to

gain strategic advantage over its competitors. E.g., superior R & D skills. 2. W : A weakness is an inherent limitation which creates a strategic disadvantage. E.g., over dependence on a single product line. 3. O : An opportunity is a favourable condition in the organization’s

environment which helps to strengthen its position. E.g., growing demand. : A threat is an unfavourable condition in the organization’s environment which creates a risk & causes damage to the organization. E.g., new strong competitors.

4. T

A systematic approach to understanding the environment is the SWOT analysis. Business firms undertake SWOT analysis to understand the external & internal environment. Q. 9)

Relation between Organization & its Environment

It is discussed in terms of interactions between them in major areas as below : 1. Exchange of Information : • The organization scans external environment variables, their behavior

& changes, generates information which it uses for planning, decisionmaking & control. Information generation is one way to get over the problems of uncertainty & complexity of external environment. • Information is to be generated on economic activity & market conditions, technological developments, social & demographic factors, political-governmental policies, activities of other organization & so on. Both CURRENT & PROJECTED information is important for the organization. • The organization also transmits information to several external agencies as the other organizations & individuals may be interested in organization & its functioning. • Also, sometimes the organization may be legally bound to supply information on its activities either to government, investors, employees, trade unions, professional bodies & the like. 2. Exchange of Resources : • The organization receives inputs like finance, materials, manpower, equipments, etc. from the external environment & is able to sustain by producing output or providing services.

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 5

It competes & collaborates with other organization to ensure consistent supply of input. • The organization is dependent on the external environment for disposal of its output of products & services by satisfying the needs of customers, employees, shareholders, creditors, suppliers, local community, general public & so on. 3. Exchange of Influence & Power : • External environment is more powerful than the organization as it has command over resources, information & other inputs. • External environment also dominates its will over the organization. E.g., government control over the organization. • Other organizations, markets, customers, shareholders, etc. also exercise considerable collective power & have an influence over the organizations on its planning & decision-marking processes of the organization. • In turn, sometime the organization is in a position to wield considerable power & influence over external environment. • Organization can dictate terms to the external forces & mould them to its will. •

Hence, all organizations do not behave in the same way in relation to their external environment.

Q. 10)

Environment of Business Q. 11) Environmental Scanning / Environmental Monitoring It is process of gathering information regarding company’s environment, analyzing it & forecasting the impact of all predictable environment changes. Successful marketing depends largely on synchronization of its marketing programmes with its environmental changes. Q. 12) Elements Environment

The following are elements of micro environment : E O) 1. Consumers / Customers :

of

Micro

(Key: I am MicroSoft C

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 6

• • •

• • •

According to Peter F. Drucker, the aim of business is to create & retain customer. They are people who pay money to acquire company’s products both in form of goods or services. Organization cannot survive without customers & will cease to exist. Customers may or may not be a consumer. Consumer is the one who ultimately consumes or uses the product or service. The marketer has to know the changes in consumers tastes, preferences & their buying habits & answer the following questions : o Who are customers / consumers? o What benefits they want? o What are their buying patterns?

2. Competitors : They are other business entities that compete for resources as well as markets. Competition shapes business. 3. Organization : It consists of group that are likely to influence an organization : • Owners – individuals, shareholders, groups or organization who have major stake. • Board of Directors – elected by shareholders, found in companies formed under the Companies Act, 1956. • Employees – workforce in an organization. 4. Markets : Markets are larger than customers. The following issues should be taken care of : • Cost structure of the market. • The price sensitivity of the market. • Technological structure of the market. • Distribution system of the market. • Is the market mature? 5. Suppliers : • Providers of raw materials, equipments, services & so on. • Large organizations rely on hundreds of suppliers to maintain in their production. 6. Intermediaries : • Major determining force in the business. • Consumers are not aware of the manufacturer of the products they buy. E.g., Big Bazaar. Q. 13)

Elements of Macro Environment

The following are elements of macro environment : (Key: Global Technology has Political Culture to Demograph Economy)

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 7 1. Demographic Environment :

It includes population race, age, income, educational attainment, asset ownership, home ownership, employment status & location. 2. Economic Environment : • It refers to the nature & direction of the economy in which a company

• •

competes or may compete. Economic Environment determines the strength & size of the market. It includes conditions in resources market, which influence supply of inputs to the enterprise, their costs, quality, availability & reliability of supplies. Key economic factors are as follows : o Interest rates. o Tax rates. o Government Budget Deficit. o Consumption pattern price fluctuations. o Import / export factors. o Stock market trends. o Money market rates. o Inflation rates. o Availability of credit. o GNP trend.

3. Political / Legal Environment : • Government : Business is highly controlled by government policies. Hence, a type of government running a country is a powerful influence on business. E.g., introduction of Fringe Benefit Tax (which is abolished from 2009 by Pranab Mukerjee). • Legal : Organization prefer to operate where there is a sound legal system. • Political : Political pressure groups influence & limit organization & force them to pay more attention towards consumer’s rights, minority rights & women rights. 4. Socio-Cultural Environment : It consists of factors related to human relationships & the impact of social attitudes & cultures influence the organization.

5. Technological Environment : The important factor, which is controlling & changing people’s life, is technology. It has created wonder. The following factors are to be considered for technological environment : • Opportunities arising out of technological development. • Role of R & D in a country. • Government’s R & D Budget. • Risk & uncertainty of technological development. 6. Global Environment :

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 8

Organization must analysis global environment as it is rapidly changing. The following factors are to be considered for global environment : • Potential Positive & negative impact of international events such as a sports meet or a terrorist attack. • Identification of emerging global markets & changing global markets. • Differences between cultural & institutional attributes of individual global markets. Q. 14)

Nature of Globalization

1. Globalization means several things for several people. 2. For developing countries, it means integration with the world economy. 3. In simple economic terms, it is process of integration of the world into one huge market. 4. At the company level, globalization means two things : i. The company commits itself heavily with several manufacturing locations & offers products in several diversified industries. ii. Ability to compete in domestic market with foreign competitors. 5. A company which has gone global is called a multinational (MNC) or a transnational (TNC). 6. An MNC, therefore, is the one that by operating in more than one country, gains R & D, production, marketing & financial advantages in its cost & also the reputation which is not available to domestic competitors. 7. An MNC views the world as one market. 8. A global company has three characteristics as follows : i. It is a single unit of multiple units but all linked by common ownership. ii. Multiple units draw a common pool (source) of resources, such as money, credit, information, patents, trade names & control systems. iii. All units respond to some common strategy. E.g., Nestle International. Q. 15)

Why do companies go global?

Reasons: 1. Rapid shrinking of time & distance across the globe due to faster

2. 3.

4. 5.

6. 7.

communication, speedier transport, growing financial flows & rapid technological changes. It is being realized that the domestic market are no longer adequate & rich. As foreign demand grows, economics of foreign products changes & eventually the foreign market becomes large enough, to good return in foreign market, to justify foreign investment. Another reason may also vary by industry. E.g., Petroleum & mining companies go global to get cheaper source of raw materials. To reduce high transportation costs. To generate higher sales & better cash flow. Due to rapidly changing technologies.

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 9

8. Due to globalization of firms & industries. Q. 16)

Manifestation of globalization

Globalization manifests itself in many ways, as follows : 1. Configuring anywhere in the world : An MNC locates its different

2. 3. 4. 5. 6.

7.

8.

9.

operation in different countries on raw material availability, consumer markets & low-cost labour. Interlinked & independent economies : Globalization means economically independent international environment. Lowering of trade & tariff barriers : Trade tariff & custom barriers are getting lowered, resulting in cheaper & abundant supply of goods. Increasing trend towards privatization : Private entrepreneurs are given greater access & freedom to run business units. Infrastructural resources & inputs : Infrastructural inputs must be ensured at competitive prices, if the companies want to compete globally. Entrepreneur & his unit have a central economic role : They are a central figure in economic growth & development of a nation. Only firms which are cost effective & quality oriented survive & prosper. Mobility of skilled resources : As skilled resources are now mobile they are transferable from any other part of the world to any other part of the globe due to which entire world has become a global village. Market side efficiency : Integration of global markets means that costs, quality processing time, & terms of business become dominant competition drivers. The customers can choose products or services on the basis of maximum value for money. Formation of regional blocks : It strives for social progress & cultural development in the region & accelerate economic growth. E.g., NAFTA North American Free Trade Area, SAARC – South Asian Association for Regional Co-operation.

Q. 17)

How to respond strategically to environment?

It is difficult to determine exactly what business should do in response to a particular situation in the environment. Strategically, the businesses should make efforts to exploit the opportunity through the threats. The following approaches may be noted : 1. Least resistance : Some businesses just manage to survive by way of

coping with their changing external environments. They are simple goalmaintaining units & least resistence in their goal-seeking. 2. Proceed with caution : Business here seek to monitor the changes in environment & analyse its impact on their own goals & activities & use it for survival, stability & strength. 3. Dynamic response : The feedback systems here are highly dynamic & powerful. They convert threats into opportunities & are highly confident of their own strengths & the weaknesses of their external environment. Q. 18) Competitive Environment

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 10

1. The essence of strategy is to cope with competition. 2. All organizations have competition. 3. MNCs & large organizations clash directly on every level of product & service. 4. Mid-sized & small businesses also chase same customers & find that the prices & product quality depend on the moves of competitors. 5. The nature & extent of competition that a business faces in the market is one major factor affecting growth, income distribution & consumer welfare. 6. Businesses have to consider their competitors’ strategies, profit levels, costs, products & services when preparing & implementing their business plans. 7. While formulating strategies, organizations have to separately identify & concentrate on the competitors who are significantly affecting the business. 8. Lesser attention may be given to small competitors who have a little impact or no impact on the business. 9. There can be several competitors trying to satisfy same needs of customers. 10. Competition is not necessarily restricted to same product or services. 11. An organization can understand the nature & extent of competition by answering the following questions : (Key: P C C F M Notes) i. Who are the competitors? ii. What are their product & services? iii. What are their market shares? iv. What are their financial positions? v. What gives them cost & price advantage? vi. What are they likely to do next? vii. Who are the potential competitors? Q. 19) Kieretsus 1. In Japan, large co-operative networks of businesses are known as kieretsus. 2. These are formed in order to enhance the abilities of individual member businesses to compete in their respective industries. 3. A kieretsus is a loosely-coupled group of companies, usually in related industries. 4. A kieretsus differs from an association, as the primary purpose of a kieretsus is not to share information or agree industry standards, but to share purchasing, distribution or any other functions. 5. In kieretsus members remain independent companies in their own right & theonly strategy they have in common is to prefer to do business with other kieretsu members, both when buying & selling.

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 11

Q. 20)

Porter’s Five Forces Model – Competitive Analysis

This model holds that the state of competition in an industry comprises of competitive pressures operating in five areas of the overall market. 1. Competitive pressures associated with the market changing for buyer that 2. 3. 4. 5.

goes on among rival sellers in the industry. Competitive pressures associated with the threats of new entrants into the market. Competitive pressures coming from the other industry companies to win buyers over to their own substitute products. Competitive pressures from supplier bargaining power & supplier-seller collaboration. Competitive pressures from buyer bargaining power & seller-buyer collaboration.

The above five points are explained in detail in five forces model of Competition. One should use the five forces model in three steps : Step 1 : Identify the specific competitive pressures associated with each of the five forces. Step 2 : Evaluate how strong the pressures comprising each of the five forces are, that is, fierce, strong, moderate to normal, or weak. Step 3 : Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits. The Five Forces Model of Competition consists of the following : 1. Rivalry among current players : • This is an idea that can be easily understood as competition. • For any player, the competitors influence prices as well as the costs, advertising, sales force, etc. 2. Threats from new entrants : • New entrants are always a powerful source of competition. • Bigger the new entrant, the more severe the competition. 3. Threats from substitutes : • Substitute products are latent source of competition in an industry. • Substitute products offering a price advantage and/or performance improvement to the consumer can alter the competition of an industry. • And they can bring it about all of a sudden. 4. Bargaining power of suppliers : • Quite often supplier exercise considerable bargaining power over companies.

STRATEGIC MANAGEMENT – IPCC – Pareeta Madam Notes 12

•

And if there are limited suppliers, there is a better chance to exhibit their bargaining power. 5. Bargaining power of customers / buyers : • This is another force that influences the competitive condition of the industry. • This force becomes heavier depending on the possibilities of the buyers forming groups or cartels. • This is mainly seen in industrial products. Thus, the Five Forces together determine industry attractiveness/profitability. The collective strength of these five competitive forces determines the scope to earn attractive profits. The strength of the forces may vary from industry to industry.