kuda-strategic management bm 405

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HAND OUT 1

Strategic Management:- A Historical Perspective

The view of strategic management today has its origins in the concept of planning budgeting. It thus

developed as a direct result of weaknesses in the planning system as well as practices before it. This as

a result of the need by organizations to better ways of developing strategies for the future, an also how

changes in the business environment have led to new problems, and new sub-concepts of strategy

making. Changes in the business environment can be categorized as continuous or discontinuous.

Discontinuous changes are the most difficult to deal with as they open up new strategic windows with

associated opportunities as well as threats.

Strategic making can be traced back to 320BC and is centred around the work of a Chinese strategist

Sun Tsus work, the art of war. To this end, strategic management, a modern concept, is thus not the

beginning of all thinking about business strategy. The start of serious thinking about strategic

management can be traced back to the work of Igor Ansoffs corporate strategy (1960).

Strategy making started as long-range planning. The intention was to give the organization more

control of the future and this went beyond annual budgeting. Long range planning tended to be more

extrapolative of the future from the present. Long range planning was however, replaced by corporate

planning still in the 1960s and Ansoffs corporate strategy became the focal point. It included both

long and short term plans. It enabled management to set strategies that would take the organization to

a different but predetermined future. This was later replaced by strategic planning. It was still centredon the process of planning. Establishment of corporate wide plans.

Strategic planning came about as a result of weaknesses in corporate planning as thinkers and

practitioners realized that strategy should be at the heart of the process. Strategic planning or not

operational planning should be centre stage. It called for more emphasis to be placed on the external

environment and to customers and markets. This gave rise to the need to regroup business in order to

focus more on the needs of the market. This view was driven mainly by the work by McKinsey and

Boston consulting group. Some of the assumptions of corporate planning such as incremental growth

were later abandoned as a result of oil price shock of 1973 as well as shortages of commodities that

followed thereafter. The phase put more emphasis on strategy in relation to the business environment,

markets and competitions with focus still on preparation of corporate wide plans.

Strategic management phase (1980s)

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It is concerned with managing strategically as well as planning. Planning is thus a component and not

the end. It focused on the hard ends of the management and was concerned with markets and products

to be supplied. It focused more on formulation rather than implementation. Strategic management is

concerned not only with the hard elements of the external management but soft elements as well as

internal management implementation. It is about management of the total organization in order to

create the future. According to Kinichi Ohmane business strategies result not from rigorous analysis

but rather insight and drive which themselves stimulate creativity and intention. Hussey is of the view

that it is concerned with strategic thinking, leadership of strategic change and as well as

implementation of strategy.

Contingent approach to strategic management

This is attributed to the work by Igor Ansoff. This was influenced by the fact that strategies responded

by authorities do not work in all situation. Quinns work and Tom Peters & Watermans researches are

a case in point Quinn carried out research on a firms with the view of establishing the source of their

success and concluded that they were successful because of the way they arrived at their decisions

about strategies. The question here is, can these ways be duplicated by other firms for success? The

view on contingent approach to strategic management is also shared by Coyne and Subramaniam

although their view was that different approaches to strategic thinking are shaped by the degree of

uncertainity about the future.

Strategic Management

According to Pearce and Robinson strategic management is defined as the set of decisions and actionsthat result in the formulation and implementation of plans designed to achieve a companys objectives.

From this we can conclude that strategy is part of strategic management.

Strategic management can thus be subdivided into the following components/elements:

Mission of organization (strategic intention)

Environmental Analysis

Internal environment External environment

Porters five forces model

SWOT ANALYSIS

Survival growth


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Generic strategies strategic objectives (long tem)

Igor Asoffs growth shutler objectives

Victor component

Generic strategies strategy formulation

Evaluation choice

Implementation 7s model

Review and Control

Gerry Johnson and Kevan Scholes argue that strategic management had three main elements and these

are:

The elements unlike in the earlier presentation, are not in a linear for simply because they are

overlapping. Analysis may be done concurrently with choice while choice may also be done together

with implementation. However as implementation takes place, analysis may also take place at the

same time. The earlier presentation only facilities learning but in reliability the Johnson and Scholes

model is far more relevament.

Strategic analysis: concerned with understanding the strategic position of an organization that is

changes taking place in the environment and their likely impact on organisations performance. The

aims of strategic analysis is to help form an opinion about the key influences on the present and future

well-being of the organization including opportunities and threats that are yielded by the environment

and it thus includes issues such as:-

1. The environment current and future


3

Strategic Analysis

Strategic

Choice

Strategy

Implementatio

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2. the resources and competences of the organization which make up its strategic capability

that its strengths and weaknesses and is derived from an analysis of physical plant, its management, its

financial structure, and its products.

3. The mission which tries to cover its purpose. The mission is influenced by

a. Corporate governance issue that is stakeholder gp to be served primarily and

management accountability.

b. Stakeholder expectations these determine the purpose and views of what is

acceptable interms of strategies advocated for by managers. The views that will carry the day will be

influenced also by the power distribution.

c. Cultural factors within the organization and outside.

Strategic choice

Covers the following issues:

a) covers the identification of the bases of strategic choice the fundamental issues which need

to be addressed in generating and considering strategic options.

b) Generation of strategic options divesture

Internal growth

Organic

Acquisition

- generic strategic

c) Evaluation they should be analysed covering the following issues:- suitability

- feasibility

- acceptability

While the above criteria is useful, it does not yield position however and choice will be a matter of

management judgement finally.

Strategy Implementation

Involved with the translation of strategy into action. It involve

- changes in organizational structure

- systems used to manage the organization

- resource planning

- management of strategic change in the way change process is managed and the mechanisms

they use for it.


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(ii) Stability/survival

(iii) Retrenchment

Corporate level strategy assumes that the organization is made up of more than one business. The

extend to which a business is to diversify is influenced by the existence of special expertise called core

competencies.

Business level strategy

These are either competitive or cooperative. They are thus designed to deal with competitors in the

process of achieving sales and customers. A business were is identified as a portion of an

organization that provides a cohesive bundle goods and/or services to an identifiable market. A

corporation can be made up of a number of businesses although the distinction between the two is

rather lazzy/not clear. Each business must therefore have its own strategic plans. These plans are

designed to generate competitive advantages which ultimately attracts customers away from

competitors advantages that yield success at business level are those that once attained are sustainable.

unctional level strategy

These are designed to realize distinctive competencies for an organisation. Competitive advantages

that cause a business to flourish depend on the value that the organization creates. Each function is

thus viewed as contributing towards value creation (value chain analysis). Functions that contribute

directly towards value creation are primary functions and those that contribute indirectly are secondary

functions.

Strategic AnalysisThis can be broken down into a 3 subgroups and these include:

1. Environmental Analysis external and internal

2. Competitive Analysis

3. Mission and vision

External Environmental Analysis

This involves scanning of the environment for changes that are likely to take place during their planned

period and an analysis of the extend to which these will affect the organization and industry. This may

also include sensitivity analysis wherein the organization tries to build possible scenarios and their

likely impact on the organization.

Environmental analysis is itself subdivided into two subgroups, external and internal environment.


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External environment analysis

The environment is subdivided into two that is task environment and the general environment. The

essence of such an analysis is to establish possible changes and trends that are likely and look at how

these are likely to affect the organization and industry in particular and the economy in general.

The General (social) environment

These are variables that do not directly affect the organization and industry in particular. These

variables may be unique to a particular country or similar with those obtaining in the region. Where

they are different, companies tends to shift from countries with unfavourable trends to those countries

of the region with favourable trend. Some of these variables include among others economic factors.

Political forces, legal social forces etc.

Economic forces trends/developments in the economic environment have an obvious impact on

business activity such developments include among others inflation rate, interest rates, taxation both

individual and company be it direct or indirect as well as the remittance thereof, foreign currency

management. An increase or decrease in the rate of inflation will affect the purchasing power of the

countrys currently as well as interest rates changed on borrowed funds. From a company point of

view, interest rates affect availability of funds for financing its different activities. Customer markets

are also affected in a similar manner and this eventually hit on their ability to buy with the knock-on

effect on company sales and eventually profitability.

2. Technological forces concerned with improvements in technological know-how in the country.

Xxx of change, management of changes, cost of replacement.3. Legal political forces this refers to laws and regulations that are out in place to regulate operations

of industry the NGO bill being a case in point, electoral act/SADC guidelines on conduct of elections,

pending elections etc.

4. Sociocultural this looks at social developments such as the Aids scarce, unemployment etc, birth

rate.

The task Environment/Competitive Environment

It includes those elements or groups that directly affect the company and in turn get affected by it also.

A companys task environment is usually the industry within which it operates. An analysis of the

industry therefore involves an in-depth examination of factors that are likely to impact on the

companys operations. The performance of a company is usually by the intensity and this is influenced

by six forces and these include; threat of new entrants, rivalry among existing firms, threat of substitute

products or services, bargaining power of buyers, bargaining power of suppliers and the relative power


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of stakeholders. The stronger the forces are, the more limited the company is in its ability to raise

prices and earn greater profits. While Porters model only includes five forces, stakeholders such as

the government are included here mainly because they exert so much pressure on companies limiting

their ability to charge higher prices and earn higher margins and profits. Other stakeholders include

labour unions, local communities and other groups. The essence of the six forces in strategy

formulation is coping with its underlying economics and competitive forces. Knowledge of these

underlying sources of competitive pressure provide the ground work for a strategic agenda of action.

As already alluded to, the strongest of competitive forces determine the profitability of an industry and

are of greater importance in the formulation of strategies. Different forces take prominence in shaping

competition. The forces model is as show below refer to model.

Threat of

Threat of Threat of

Threat of

New entrants/threats of new entrants

These represent new comers to an industry. They bring with them new capacity, a desire to gain

market share as well as substantial resources.

Entry Barriers

1. Economies of scale

2. Proprietary product differences

3. Brand identity/differentiation


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New Entrants

Other stakeholdersgovernment, trade

associations,

community

Suppliers Competitive Rivalry Buyers

Substitutes


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4. Capital requirements of entry

5. Access to distribution channels

6. Absolute cost advantage independent of size

7. Proprietary curve

8. Access to necessary inputs

9. Proprietary low cost product design

10. Government policy

11. Expected retardation

12. Legislation of government action

Rivalry among existing firms

Any move by one company will have an effect on its competitors and is usually accompanied by

retaliation or counter efforts. The intensity of rivalry is influenced by a number of forces.

Competitive Rivalry determinants

1. Industry growth

2. Intermittent over capacity

3. Product differences

4. Brand identity

5. Switching costs

6. Concentration and balance

7. Information complexity8. Diversity of competitors

9. Exit barriers

10. Market growth rates

Threat of substitute products or services

These are products that appear to be different but can however be used to satisfy the same need as

another product. These limit the potential returns of an industry by placing a ceiling on the price that a

company can charge. This is affected by a number of forces.

Determinants of Substitute threats

- Relative price

- Performance of substitutes

- Switching costs

- Buyer propensity to substitute


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Bargaining power of buyers

These may force down the price that is charged by a company, the quality as well as services that are

offered.

Determinants of buyer power

1. Buyer concentration vs concentration

2. Buyer volume

3. Buyer switching costs relative to firm

4. Buyer information

5. Ability to backward integrate

6. Substitute products

7. Products differences

8. Brand identity

9. Buyer Profits

10. Decision Markers Incentives

Bargaining power of suppliers

These affect the company through their ability to raise prices or reduce quality of purchased goods and

services. This is influenced by a number of forces.

Determinants of supplier power

1. Differentiation in inputs2. Switching costs

3. Availability of substitutes

4. Concentration of suppliers

5. Importance of volunteer to suppliers

6. Impact of inputs on cost or differentiation

7. Threat of forward integration relative to threat of backward integration

Relative Power of other stakeholders

As already noted, this is outside Porters model but still exert influence on the competitiveness of an

industry. They include government, creditors, the local community, environmentalists, shareholders,

trade associations etc. The importance of stakeholders varies from one industry to another depending

on the industry. Stakeholder demands have the effect of raising costs or placing a ceiling on the price

that can be charged effectively reducing the margins that can be enjoyed by a company.


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Probable Impact on Corporation

High Medium Low

High High Priority High Priority Medium Priority

Medium High Priority Medium Priority Low Priority

Low Medium Priority Low Priority Low Priority

Porters contribution can thus be summarized by way of priority matrix. The companys external

strategic factors are those key elements of the eternal trends that are judged to have both a medium tohigh probability of occurrence as well as a medium to high probability of impact on the company. The

issues priority matrix can thus be used to help managers decide on eternal elements that should be

merely scanned (low priority) and which should be monitored as strategic factors (high priority). Those

eternal elements/trends that are judged to be strategic factors are the categorized as opportunities and

threats and will from the basis of strategy formulation.

Competitive Analysis

This can be subdivided into 4 basic areas

(i) Industry environmental analysis

(ii) Industry analysis

(iii) Competitive analysis

(iv) Operating environment


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Probability

ofo

ccurrence


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Industry & Competitive analysis

This analysis requires strategist to be able to:

1. Define industry boundaries

2. Come up with industry structure

3. List of competitors

4. Determinants of competition

Industry Boundaries

Refers to a collection of companies that offer similar products or services. It is important to determine

boundaries cause a firm can then develop a realistic view of competitors and also help focus attention

on such competitors. It also helps the organization to be able to determine.

Key success factor

Boundaries also helps executives to evaluate their mission and goals.

Problems in defining industry boundaries.

1. Evolution over time create new opportunities and threats.

The financial services sector was in the past segmented into commercial banking, building societies,

insurance & hospitality industry

2. It creates industries within industries through the subdivision of industries e.g farming.

3. Industries are becoming global in scope this involves the redef of industries across boundaries,

continents - global

Developing a Realistic industryDefinition:- This require def in global terms that is considering international components as well as

local components.

The following five issues must be addressed:

a) Which part of the industry corresponds to our firms goals? Transport air, road freight, road

passenger, rail freight and passenger

b) What are the key ingredients of success in that part of the industry?

c) Does our firm have the skills needed to compete in that part of the industry? If not, can we

build those skills?

d) Will the skills enable us to seize emerging opportunities and deal with future threats.

e) Is our definition of industry flexible enough to allow necessary adjustments to our business

concept as the industry grow?


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Def of industry management to take a global outlook that is consider the industrys international

components as well as domestic components e.g. beverages. Next executives can then consider the

industrys current components e.g Alcohol or soft drinks. This is done by looking at product segments.

These segments must be related. Evolution of a product families can be looked at in trying the

marketing of L- industry. This can best be done by answering the following questions

a) Why did these product families arise?

b) How and why dud they change

c) An analysis of firms that offer different product families, the overlapping or

distinctiveness of customer segments and the rate of substitutability among product families.

Industry Structure

Structural attributes are the enduring characteristics that give an industry its distinctive character e.g

sweetened drinks and soft drinks.

In examining the structure the following factors can also be considered:

1. Concentration the member of players will determine intensity of competition.

Concentration can either be high or low. High concentration means that a few player dominate the

industry and competition is low.

2. Economies of scale This looks at cost savings due to increased volume. These once from

technological and non-technological sources. They help to determine the intensity of competition.

3. Product Differentiation

Refers to the extent to which customers perceive products or services offered by companies in theindustry as different. This difference can be real or perceived. This is particularly useful where

economies of scale are not available e.g hospitality sector.

4. Barriers to entry obstacles that a firm must overcome to enter an industry. These are tangible or

intangible. Tangible barriers include, capital requirements, technological know-how, resources & laws.

Intangibles include reputation consumer loyalty and access to managerial skills required for success.

Entry barriers increase and reflect the level of product differentiation, economies of scale and level of

concentration.

Other issues: Driving forces: change

COMPETITOR ANALYSIS

Identifying competitors:

This is done by considering the following variables:


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1. How do other firms define the scope of market? The more similar the definition the greater

the view of competition.

2. Product analysis

How similar are the benefits derived by customers from products or services that other firms offer?

The more similar the benefits the greater the likelihood of competition.

3. How committed are other firms to the industry? The greater the commitment the greater the

possibility of competition.

4. Sources of competitive advantage.

5. Scope of international or local operations common mistakes in identifying competitors.

1. Overemphasizing on current and know competitors ignoring potential entrance.

2. Overemphasizing large competitors while ignoring small competitors.

3. Overlooking of potential international competitors.

4. Assuming competitors will behave in the same way they have behaved in the past.

5. Misreading the signals that indicate a shift in the focus of competitors or a refinement of

their present strategies or tactics.

6. Overemphasizing competitors financial, market position, and strategies while ignoring their

intangible assets such as management team.

7. Assuming that all firms in the industry are subject to the same constraints or are open to the

same opportunities.8. Believing that the purpose of strategy is to outsmart the competition, rather than satisfy

customer need and expectations.

Competitor Grouping (Strategic groups)

A strategic group is the group of firms following the same or similar strategies. An industry can have

one strategic group or at the extreme each firm could be a different strategic group.

OPERATING ENVIRONMENT

Competitive or task environment is made up of factors that affect a company success in acquiring

needed resources or in profitably marketing its products and services. This exxxx although external is

within the organisations control.

1. Competitive position

This helps company to come up with strategies that optimize its environmental opportunities. A

company need to establish a profile of competitors and this may include factors such as:


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1. Market share,2 Breach of product line 3Effectiveness of sales distribution 4Proprietary and

key account advantaged

2. Price competitiveness

3. Advertising and Promotion effectiveness

4. Location and age of facility

5. Capacity and productivity

6. Experience

7. Raw material costs

8. Financial Position

9. Relative Product quality

10. xxxx advantages position

11. Calibre of personnel

12. Patents and copyrights

13. Union relations

14. Technology position

A score can then be attached to each of variables regarded as key determinant of success and xxxx

thereof would enable the creation of some position of the basis of weighted scores. This profiling of

competitors is limited by the subjectivity of its criteria selection, weighting and evaluation approaches.

2. Customer Profiles

This helps managers to plan strategic operations, to anticipate changes in the size of markets and re-allocate resources so as to support forecast shifts in demand palternal.

This can be done on the basis of:

- geographical factors

- demographic

- psychographic

- buyer behavior

This analysis is necessary in order to create a better understanding of customers.

3. Suppliers

- Dependability

- Strength of relationship

- Financial strength

- Equipment


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- Services

4. Creditors

- Willingness to give credit

- Assessment of payment reputation

- Views of use of a stock as collateral

- Requirements for collateral security

- Financial position

- Compatibility of finance lines with objectives

5. Human Resources

The firms ability to attract needed skills is affected by the following factors.

- Reputation as an employer life of operations, salary equity, care for welfare

- Employment rates level of employment

- Availability of skills

HAND OUT 2

Corporate Appraisal assessing strengths and weaknesses

It marks the beginning of or start of preparation of a strategic plan it represents the basis on which

objectives are set as well as establishment of realistic strategies and action plans. Ignoring of the stage

may result in the organization setting or adopting wrong strategies, failure to achieve full potential or

lead it to road to ruin.

The stage represents the most difficult stages that can be undertaken by management as in some casesit may represent a direct attack on practices and business areas of the company. You come face to face

with reality unpleasant facts. It represents criticism of management and is thus resented. For this

reason, the stage is sometimes omitted or lip service is paid to it. It does not end with the present but

should cover the future as well. External assistance is thus necessary.

The essence of corporate appraisal is the establishment of corporate identity. It is thus directly related

the guidance offered by a career counselor. A career counselor should look for individual aspirations,

education, ambitions, general intelligence, abilities, experience and personality and match these with

job opportunities mislead of just presenting available job opportunities to an individual. Understand

the individual first and then look for opportunities that are suitable to him/her.

An appraisal should be conducted with the future in mind. However, Drucker stresses that in as much

ask the identification of todays winners is important, identification of tomorrows is equally important


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if not more important. Several options are available on conduct of corporate appraisal some of these

include (Hussey).

1. Assessment by managers

2. Equilibrium analysis

3. An analytical method which assesses the key facts, from which strengths and weaknesses

can be determined.

4. The critical success factor concept

5. The core competence approach

Assessment by managers (self appraisal)

This can be viewed as SWOT analysis. The process because of involvement of an interested party

does not always yield desired results. The list of weaknesses tends to be superficial. Minoerones are

highlighted instead if management perceptions are not of a changing industry, such perceptions of

weaknesses tends to dwell in the past. What is included on the list of weaknesses and strengths may

ultimately have no relationship with reality. Self assessment should thus be approached with care.

Equilibrium Analysis

It helps management develop a realistic/balance view of strengths and weaknesses. It is made up of a

scale and line.

A line in this case represents the state of something. How far a scale will go down will depend on the

weight applied examples of such include market share, labour turnover, profitability etc.

Factors that keep the line how are identified and also those working to keep it high. Arrows are drawform each key factor and these do not necessarily have to be of the same length. Length will be varied

depending on impact (use of scale). The end result is an assessment of issues that can and should be

addressed to remove negative factors or strengthen positive ones.

Factors holding down

Current State of something

Factors holding up

Analytical Approach

Based on data rather than opinion. This can be done by consultants or individual with the organization

teams. The following basic concepts should be remembered when carrying out this process.


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1. There are better ways of doing something

2. A small amount of effort produces most of the return Pareto optimality

3. Of the knowledge of what is being done is not as perfect as managers within a company

believe.

4. Relevance of what is being done

5. The future is more important than the present

6. The appraisal should cover all aspects of the company

It thus should cover

- trends of results ratio analysis is of the essence

- sources of profit view of operations cost centres

profit centre

contribution value

- Risk

- Manufacturing activity

- Ratromchisation of resources

- Organization and management

- Financial resources

- Corporate capability

- Systems

- Use of resources etcCRITICAL SUCCESS FACTOR CONCEPT

There represent skills that are key or necessary for success in a given field. Skills differ in their

importance depending on the industry one is looking at. It represents a link backwards from the

market place to the organisations strengths and weaknesses. Success on the market place will depend

on the possession of critical success factors. Such an evaluation will take place at different levels

within the organization.

The core competence approach

A core competence is a bundle of skills and technologies that enable a company to provide a particular

benefit to customers. These differ from one industry to another (Henel and Prahaland)

1. Give access (or potential access) to a wide variety of markets

2. Deliver a clear benefit to the customer

3. Be hard for competitors to copy thus is not


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1. A single skill

2. Competence that all competitors have

3. A product

4. Something possessed I only ones small area of the organization.

Determination of competences of an organization involves a five-stage approach

1. Determine current competences

2. Assess the relative strength of the competencies

3. Identify those which deliver value to customers.

4. Establishing which are needed for the longer term

5. Examining the portfolio of competences

Internal analysis

Analysis of the external environment represents factors which the organization has very little influence

on as well as factors that are within its control. Factors beyond the firms control yield those within its

control yields constraints. These tend to affect the extend of success that will be enjoyed by an

organization, it also affects profitability of an industry or individual organization. The ability of an

organization to take advantage of opportunities and avoid throats generated by changes in the external

environment is determined by its resources. Ownership or control of strategic resources create

competitive advantages for any organization. An organization must therefore carryout a realistic

analysis of its internal environment in order to assess its capacity to take advantages of opportunities aswell as shield itself from threats.

Resource based analysis

These can be put into 2 basic categories which are:

1. tangible assets

2. intangible assets

3. organizational capabilities

an analysis of these factors generate or help in the identification of core competencies. This can either

be a skill or capability that run through the entire enterprise which once identified, nurtured and

deployed will form the basis for a lasting competitive advantage. Central to creation of this advantage

are the three resources alluded to above.


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Tangible assets

Easy to identify and found on the companys balance sheet. These include production facilities raw

materials, financial resources, real estate and computers. These represents the physical and financial

means used by a company to provide value to its customers.

Financial resources include borrowing capacity as well as internally generated funds as well as

capacity for investment. Possible indicators include debt/equity ratio, operating cashflow and credit

rating.

Physical resources These can act as a constraint to the organisations production possibilities and

also affect cost positions key characteristics include.

The size, location, technical sophistication and flexibility of plant and equipment.

Location and alternative uses for land and buildings,

Reserves of raw materials

Intangible assets

These include things such as brand names, reputation, organizational morale, technical knowledge,

patents and trade marks, and accumulated experience.

- Technological resources these include intellectual property such as partent portfolio, copyright,

trade secrets as well as resources for innovation such as research facilities, technical and scientific

employees. Important indicators of such include the number and significance of patents, revenue from

licencing patents and copyrights, R and D staff as a percentage of the total employment and number

and location of resource facilities.- reputation this includes reputation with customers through the ownership of

brands and trademarks, establishing relationships with customers the reputation of the firms products

as well as services for quality and reliability, suppliers, government agencies and community.

Organizational capabilities

These represent the ability and ways of combining assets, people and processes that a company uses

to transform inputs into output. Overall capability can be assessed at various levels of detail. This

overall capability is concerned with the overall balance of resources and mix of activities. An

assessment of strategic capability of an organization is an assessment of competencies which exist to

undertake the various activities of the business. Capability assessment thus involves among other

issues.

i. Resource audit

ii. Assessing competence


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iii. separation of competence into core through holg

iv. comparisons which can be historical, industry means as well as bench making

v. assessment of balance portfolio analysis

vi. swot analysis

Resource audit

This involves assessment as already indicated of resources both tangible and intangioble. The

resources to be audited include both current as well as those not currently owned but can be accessed

and key to success in future.

The audit must also identify those resources that are critical to the success to the success of the

organizations strategies in contrast to those which are necessary but not source of the organisations

competitive advantage:

Link to competitive advantage

Competitors Better than competitors

or easy to imitate and difficult to inmate

Resources

Competences

Analyzing competencies and core competences

Resources on their own do not fully account for the differences in performance of organisations innthe

same industry. The payment of such resources can also be a source of such differential performance.

Excellent performance derived from such deployments can be sustained by effectively linking the

activities to which resources are deployed. Organizations are required to achieve threshold

competencies. Activities in which the organization enjoy core competences explain the superior

performance of an organization over its competitors. These core competences chould be difficult to

imitate for long term advantage.

Core competences can be analysed from two angles


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Necessary Resources Unique resources

Threshold competencies Core competencies


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i. value chain analyse

ii. basis of competencies

Value chain analysis

This describes a way of looking at a business as a chain of activities that tourism inputs into outputs

that customers value.

Customer value is derived from three basic sources:

a. activities that differentiate the product

b. activities that lower its costs

c. activities that meet the customers needs quickly VCA looks at the contribution of the different

activities towards the value for customers. It then tries to examine those activities with a view to

establishing activities with low cost advantages as well as those with cost disadvantages. It also looks

at how each of the activities helps to differentiate the companys products services. To this end it thus

helps the organization to identify its strengths weaknesses.

VCA divides activities within the firm into 2 broad categories and these are the primary and support.


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The Value Chain

Firm Infrastructure

Support Human resource management margin

activities

Technology development

Procurement

margin

Inbond Operations Outbond Marketing & Service

Logistics Logistics Sales

Primary Activities

Conducting a value chain analysis

i. identifty activities into primary and support activities

ii. allocate costs this requires manager to assign costs and assets to each discrete activity.


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- activity based costing. This is more useful than the traditional costing systems and comparisons with

competition as well as bench marking will be more meaningful cost of an activity is not an end

however.

Recognize the difficulty in activity-based cost accounting. This is especially time given that traditional

financial management for accounting system set ups to not lend themselves to providing activity based

cost breakdowns. Allocation can never be objective but subjective. This is however useful in

identifying areas of differential performance.

Identify the activities that differentiate the firm.

Analysis does not only yield lot advantages or disadvantages, it may also help to reveal several sources

of differentiation advantages relative to competitors.

Examine value chain

This involves the identification of activities that are critical to buyer satisfaction and market success.

These activities deserve more focused scrutiny internal analysis. This decision is influenced by the

companys mission first if is on differentiation, those activities that create it should receive more

attention or if omission is to be leader in fashion, then activities that produce this leadership must

receive more management attention.

The nature of value chains and the redlative importance of activities vary by industry.

The relative importance of value activities can vary by a companys position in a broader value systemthat includes the value chains of its suppliers and customers or partners involved in providing a product

or service to end users.

Compare with competitors

Especially important in the identification of strengths and weaknesses. This compares value chains or

activities of competitors. The firms status is compared with meaningful ..identification of activities

that are strengths or weaknesses.

Bases which competences can be built

Analysis of cost efficiency


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Cost efficiency is one of pillars in the firms efforts deliver value for money to its customers. Cost

efficiency is influenced by a number of factors cost derives and it is important to understand the

competences associated with each of these factors and whether or not they are core competences.

1. Economies as of scale: an patent source of cost advantage in the manufacturing sector give the high

equipment costs to be recovered over a high volume of output. In other industries, such costs are

derived from distribution or marketing. Competitive advantages can be sustained through core

competences in activities in which maintain scale advantages.

2. Supply costs

these influence an organisations overall cost position especially intermediaries where value added by

the organizations themselves are low and input costs management is critical. Supplier relations

management is of the essence in sustaining this competitive advantage. In other sectors such as

commodity or currency trading, information is key and competitive advantages are gained through the

maintenance of high quality information than competitions.

3. Product/process design- this requires monitoring of capacity fill, labour productivity, yield or

working capital utilization in an effort to assess efficiency in production processes. It is therefore

important to establish the cost drivers that are the core competences of an organization. Product design

has largely been ignored and where is has been attended, attention tended to focus on production

process only although it has an influence on costs in other parts of the value system.

4. Experience this is usually discussed as the experience curve and it affect organizational costs in

such a big way. The experience curve suggests that an organization undertaking any activity learns todo if more efficiently over time and hence develops core competencies in this activity based on costs

advantage arising from its experience. Companies with bigger market share have naturally

.experience than those with a smaller market share.

Implications

Growth is not optional in many markets. If an organization elects to grow more slowly than

competition, it should expect competitors to gain cost advantage in the longer term i.e. through

experience. The core competencies which helped an organization to launch itself in the market will be

if little longer competitive value in growing markets. New core competencies will displace them

eventually e.g. retail sector. Hotel sector, mobile telephone market, banking sector.

2. Organisations should expect their real unit costs to decline while in high growth industries this

will happen quickly, but even in mature industries the decline will be realized gradually eventually.


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Organization which fail to realize and respond to this are likely to suffer fierce competition e.g.

passenger bus companies as well as the road freight industry.

Analyzing value added (effectiveness)

The assessment of effectiveness is essentially related to how well the organization is matching its

products/services to the identified needs of its chosen customers and the competencies which underpin

this effectiveness. The potential sources of value added are varied and many.

Customer requirements

Product attributes

Service expectations

Price sensitivity

Degree of malching

Value added deatures

Product featureService performance

Communication

The key question in analyzing value addition or effectiveness is, what are the critical key features and

the core competencies, which underpin these features?

Are customer requirements met by product or service features? Is it possible to recover the added costs

of providing unique features through the value which customers place on this feature. How easy is it

for competitors to copy these features?

Do services offered match, customer expectations and do they represent perceived value.


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Are the systems for communication with customers before, during and after purchase adding value to

the relationship

Views on value added should be based on customer or users of the products perspective. Difficulties

in doing this arise from -:

i. distance between manufacturers and users

ii. value added is often conceived by professionals and never get to be tested on the customer or client

iii. customers concept of value changes over time either because of experience or competitive

offerings become available.

Managing linkages

While core competencies in individual activities may provide competitiveness, these are however

copied by competitors in the long run. Core competencies are likely to be more robust and difficult to

imitate if they relate to the management of linkages within the organisations value chain and linkages

into supply and distribution chains. Management of such linkages provide a leverage and levels of

performance which are difficult to match. The following issues should receive attention

Ability to coordinate specialist teams or departments may create competitive advantage through

improving value for money in the product or service.

Competitive advantage can also be gained by the ability to complement/coordinate the organizations

operations with those suppliers, channels or intermediaries. While organization develop competencies

in various types of coordination, such should become part and parcel of an organizations culture.

When this happens, imitations will be reached. The implication of this is that a critically importantissue in sustaining value for money products and services is how the ..knowledge and routines within

the organization are maintained and developed in ways which match the intended strategies.

Robustness (How easy is it to loose competence)

The strategic importance of an organizations competencies relates to how easy or difficult they are to

imitate. Competencies in managing linkages between activities tend to be more robust than simply

competencies in separate activities. Robustness is also relate to the specific nature and ownership of

the organisations competencies. Individual or organizational or team

Internal or external. External dependence is risk consulting firm.

Comparative analyzing and bench marking

The organization strategic capability should ultimately be measured in relative terms. This can be done

through

Historical analysis


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Comparison with industry norms

Bench marking

Historical analysis

This looks at development of resources and performance measures of an organization by looking at

performance in past years. Financial ratio and marketing ratio analysis of the essence.

Variations in resources devoted to different activities should be identified. This will reveal trends

which might not otherwise be apparent. Historical comparisons should be made against realistic set of

expectations comparisons can be based on assumptions of continuous improvement or static.

Comparison with industry norms

This is made against similar factors analysed for the industry as a whole. This helps to put the

organisations resources and performance into perspective and reflects that it is the relative position of

the company which matters in accessing its strategic capability. The analysis should focus on specific

activities and not just overall product or market position. The approach could be that the whole

industry could be performing badly. Such comparison can also be based on what is happening in other

industries or countries.

Benchmarking

It seeks to assess the competences of the organization against the best in class wherever this is to be

found. This includes industry as well as players from other industries.

1. resources

2. competence in separate activities3. competence through managing linkages

It involves comprising the way our form performs a specific activity with a competitor or other firm

doing the same thing. Comparisons with key competitors can prove useful in ascertaining whether

their internal capabilities on these and other factors are strengths or weaknesses, significant favourable

differences existing or expected from competitors are potential cornerstones of a firms strategy.

SWOT Analysis

Very useful in summarizing many of the previous analyses and combining them with key issues from

internal analysis. The aim is to identify the extend to which the current strategy of an organization and

its more specific strengths and weaknesses are relevant to and capable of dealing with changes taking

place in the business environment. It can also be used to assess whether they are still opportunities


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which can be exploited using the unique resources or core competencies. The procedure can be

undertaken as follows:

1. Identify key changes taking place in the organisations environment. Ideally the number of

such issues should not exceed seven or eight key prints.

2. The same is repeated for resource profile and competencies of the organization. The

strategists must however avoid overgeneralizations which are meaningless e.g poor management.

SWOT analysis can be done using a card with key issues in the management on the horizontal axis

while strengths and weaknesses will be placed on the vertical axis as illustrated below.

HAND OUT 3

MISSION/VISION

According to Thompson and Strickland on mission is concerned with the organisations current

business whereas a vision is concerned with the future business or well being of the organization.

It is however important to point to the distinction between the two or even there being a distinction

between the two. It is therefore difficult to draw a line of distinction between the two and in a some

cases literature on a mission amounts to literature on a vision of an organization. In this confusion

Thomson and Stricklands distinction on management always applied. In Zimbabwe some

organizations do not separate between the two reflecting on lack of consensus of opinion by

authorities.

According to Johnson and Scholes, a mission is a general expression of the overriding purpose of theorganization which is in line with the values of expectations of major stakeholders and concerned with

the scope and boundaries of the organization. This definition is in line with the views expressed by

Thomson and Strickland. It answers the question, what business are we in?

Piece and Robinson argue that a mission represents the fundamental, unique purpose that sets a

business apart from other organizations of its type and underfies the scope of its operations, in product

and market. According to Scholes & Johnson for a mission statement to be useful it should address the

following issues

a) It should be visionary and remain relevant for a longer time to come as it is the backcloth

against which more detailed objectives and strategies can be developed, delivered and changed ever

time.

b) It should describe the organisations main activities and the position it wishes to attain within

the industry.


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MSU Mission

Devotion to quality research and training through flexible packaging and work related learning for the

immediate and ultimate benefit of humanity.

Perpetually seek to enhance the quality of peoples lives through new ideas and skills for sustainable

utilization of resources.

Vision/Strategic Intent

It represents the desired future state of the organization. It is an aspiration around which strategist (key

implementers) might focus the energies of members of the organization. It also represents the

organizations strategic intent as it tries to forms energies and resources of the company in achieving a

desirable future. While as already pointed out the vision and mission statements are often combined,

when separated a vision is usually presented as a single sentence designed to be memorable.

Truworths vision is to be a recognized trend selter of quality international fashion in Zimbabwe.

A vision

1. Represents the values of key implementers

2. An expression of future aspirations in terms of the markets you want to serve, products you

want to sale and the technology that you want to employ.

FACTORS INFLUENCING FORMULATION OF MISSION/VISION

There are various factors which influence the formulation of mission and vision and some of the

include:

1. Environmental factors2. Internal resources and power

3. Values of top management

4. Past developments of the form

At broadest level these factors can be analysed with the context of the following 4 factors:-

a. Corporate governance

b. Business Ethics

c. Stakeholders

d. Cultural Context

Environmental factors

These include PESTEL factors.


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Changes in the PESTEL factors can exert influence and force the organization to change its focus e.g

ZESAs current focus on rural electrification. Corporate strategists, when formulating the mission

statement must consider the demands, claims or expectations of stakeholders.

Resources and Power

Resource availability has a strong influence of an organisations mission statement. When these get

exhausted, the mission may also be altered to reflecting the new focus e.g. Zimsun now focuses on the

region and not just Zimbabwe. The xxxx can be said of company organizations in Zimbabwe.

The distribution of power within an organization may also change and do does the mission reflecting

on new balance. Internal political relationships also have a bearing on the mission.

Lower level participants/employees may have power to withhold important information and ideas and

this may affect evaluation of past achievements and also expectations about the future.

Values Beliefs

Changes that may occur in values of an organization may also lead to a change in the mission e.g.

when Vingirai took over intermarket, the mission had altered to reflect his Christian beliefs. The

mission statement represent the owners values.

Each enterprise has its own value systems and ideologies and the enterprise will attract and retain

employees with the same values. The values are essentially a set of attitudes of what is good or bad.

History of the firm

Because management does not start from scratch each year, it means that previous activities have a

strong bearing on new strategies. If the previous mission was set by a strong leader, then the newleader can only consider incremental changes to the present, culture of organization has thus a strong

bearing the mission.

Why a mission might change?

1. As a result of the normal life cycle

2. In times crisis

3. Due to changes in the 4 factors looked at above

Other issues

Corporate Governance

This looks at legislation, accountability and supervision of management as well as separation of

ownership and management of an enterprise.


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Cultural Context

Covers such issues as organization and culture, industry recipes, professional or institutional culture

national or regional culture etc changes to any of the above factors calls for a paradigm shift.

Objectives

They represent desired states or outcomes. They are statements of planning purpose developed within

any kind of business plan. They evolve from tentative and vague ideas to more specific declarations of

purpose, Ansolf sees objectives as decisions rules which enable management to guide and measure

the firms performance towards its purpose, Hussay co-lends that organisation may have different

objectives and he classifies then thus.

The primary or profit objective of the business, set in advance of strategy

The secondary and narrative objectives, again set in advance of strategy.

Goals which are time assigned targets from the strategy

Standards of performance assigned to particular individuals.

Profit or primary objectives

The basic duty of chief executive is to produce a profit for the shareholder. This also assures the

organizations of capacity to renew itself. The means by which these are achieved is the chief

executives responsibility subject to whatever constraints that may be placed by the shareholders. The

questions to ask however is whether chief executive can choose between making profit or gaining

turnover growth with little or no profit. The choice is unfortunately not available in the majority of

cases save for situation where the chief executive and shareholder are one and same. The penalty of not

making profit is elimination or dissolution through bankrupting. The only difference in such

circumstances is depends on the patience of creditors, the size of its liquid resources, and the demands

of its shareholders. To this end, one can c-..that a company that fails to make adequate profit will

eventually fail of dissatisfaction of shareholders or cause company can not generate funds for growth

and corporate renewal on which the future of every company depends. A feeling for managers in an

organizations if it is to be successful. A company whose management is not keen on profit is on sickcompany profit is a philosophy not only of shorter but of longer growth allowing for renewal. Focus on

short term profit sacrifices profit and survival in the longer term management must therefore create and

balance between the need for current profit and need for company to progress in the future. General

statements of profit such as profit maximization are however a acceptable. This because if the

difference in interpretation. The difference between company that practice effective strategic


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management and those been on traditional approach to management is that strategic companies are not

satisfied with words alone. A much more meaningful statement should be a specific quantitative

statement of what profit is required which is also specific in terms of time. Profit should have a

quantity and efficiency focus. Efficiency target looks at such factors relating to utilization of resources

and quantity such returns e.g. return on capital employed. A no of factors should be taken into

consideration when coming up with profit targets.

i. Trends over previous years.

ii. Progress by other company in a similar size or industry

iii. Performance of leading company on the stock exchange

iv. Opportunities for more profitable investments elsewhere.

The vision of the CEO and intensive to give shareholders more than they have had in the past.

The strategic need for growth to reach a size, which enables the company to at least maintain its

position of influence in its trade.

Future rates of inflation

Acceptable levels of risk

Once profit objectives have been set for the total company, similar objective should also be set for

divisions and subsidiaries. Such are however set by head office in consultation with the subsiding and

also after paying due co-ordination of the factors alluded to above.

Secondary objectives

Profit is an important objective but not the only objective of an organization. The term secondary isused here to describe the next group of objectives. These are subsidiary objectives are descriptive and

attempt to set out the key elements of the business of the future, while corporate appraisal is concerned

with current identity, secondary objectives give an organization its future identity. They define what

the company is determined to be in the future. They do not end with what business the company is in

now, but rather what business the company be in future. This type of objective (mission) should

examine the scope of the business, the geographical sphere of operation and some of the key factors

about the company, which the CEO feeds are important. Other authorities feel that these are not

objectives at all but statements of strategy that broadly define the .by which profit objective will be

attained. They are important in as far as they claimed creative thought to a desired end is thus justified

on the basis of expediency. Every CEO holds a mental vision of what the company can become,

regardless of the strategy chosen to reach it. A company operating in one sector may have initially a

vision for that sector done, but as they grow and become more experienced, that vision may shift. As


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Long term objectives

These are born out of the realization that short-term profits are rarely the best approach to achieving

corporate growth (sales and profitability). This in keeping with the adage that impoverished people

should never be given food but instead they should be given seeds and tools and shown how to grow

crops, strategist are often faced with this predicament.

1. Should they concentrate on short term. This can be achieved through cost-cutting measures such as

lay-offs, selling off inventories or cutting back on research.

2. Should they sacrifice short term profits and instead focus their attention on long term profitability.

This can be done by reinvesting profits in growth opportunities, committing resources towards

employee training or increasing expenditure on marketing activities.

For longterm profitability, objectives are often set covering important factors about the organization

1. Profitability the aim of an organization is to achieve profit and this characterizes all strategically

managed organization and is often expressed in ter3ms of required return on equity or earning per

share.

2. Productivity Productivity is defined as the input to output ratio. Improvement in productivity

means that for the same resources used yesterday the firm will be able to realize more output or the

ration of increase inputs is lower than the rate of increase in output. Productivity can be achieve in

terms of labour, machinery as well as office (worker). This naturally contribute towards profitability

through lowering of costs per unit of output.

3. Competitive position This looks at the relative position of an organization in the market place.

Organization can establish objectives either to maintain or increase their standing. This standing can be

measure in terms of sales (units) or revenues or market share.

4. Employee Development This is often done as a way of increasing commitment mainly because it

opens up promotional opportunities as well as earnings. It is also an assurance that organization will be

bale to obtain requisite skills in future in order to implement new strategies.

5. Employee Relations This helps to create an harmonious environment in which the firm can pursue

its objectives without having to fire fight. Strategists feel that productivity improvements is a result of

employee loyalty as well as appreciation of managers interests in employee welfare. Objectives are

thus put in place in order to ensure good relations.

6. Technological leadership Decisions must be made on whether the organization will be a leader or

follower Trust bank, whichever objective is selected, the organization must be able to formulate


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strategists that are consistent. Technologies have the effect of locking in suppliers and customers and

weighted competitive position through supply chain efficiency.

7. Public Responsibility looks at the organisations responsibility to customers as well as society at

large. This is often expressed in terms of contribututions to various public activities and demands.

Qualities of long-term objectives

1. Acceptable by both manager as well as external stake holders.

2. Flexible they should be adaptable to unforeseen or extraordinary changes in the organisations

competitive environmental forecasts adjustments to level of performance especially can provide for

this flexibility as they do not require changes to the objective itself (nature of objective.

3. Measurable they must state in specific terms what has to be achieved including the time frame

4. Motivating they should be challenging enough but at the same time should not discourage. For this

to happen, they should be tailored to specific groups or individuals. This however require a lot of time

and effort.

5. Suitable They must be set in line with aims containing the organisations mission and anything

outside of this is seen as subversive.

6. Understandable Every strategist regardless of level must understand what is to achieved. This also

includes the criteris against which their performance will be evaluated.

7. Achievable this is be possible. However the county has faced a tribulent environment since 2000

and this makes difficult for strategists to come up with realistic objectives.

HAND OUT 5

Strategy evaluation and selection

This involves an analysis of flaws and merits of each alternative strategies so that choice will represent

the best of the alternatives. Some criterion has thus to be set in order to guide action decision on which

option to follow. Each of the following criteria can thus be used in trying to arrive at a decision on

which of the alternative strategies is to be followed.

1. Suitability

2. Validity

3. Consistency

4. Feasibility

5. Vulnerability

6. Potential rewards


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Suitability ability of organization to cope with its ..or adapt to it.

The essence of a strategy is to be able to match the organizations capabilities core competencies with

opportunities in the business environment and also at the same time deal with threats arising from the

same environment. Strategies are designed not only to deal with current but unfolding environment as

well. It also represents a permit of competitive advantage. It therefore follows that if a strategy does

not yield competitive advantage in the future or adaptation to prices eroding current advantage, such

strategy is not relevant. When carrying out a suitability test, the following four steps are recommended.

a. Review the potential threats and opportunities to the business

This can be done in light of changes taking place in the environment, action of both prospective and

current competitors and changes in the availability of critical skills and resources.

b. Assess each option in light of its capacity to avoid or reduce threats, take advantage of opportunities

well as enhancement of current advantage or growth of new advantages. Its relevance in the various

types of environment can thus be assessed. Some strategies work under stable economic condition

while other do well under inflationary environments. Strategies must therefore be robist i.e. adaptable

to all types of environments the business may find itself in. a good example is that of increasing share

of market by a certain percentage. This percentage can thus be altered to reflect changes in the business

environment instead of the business coming up with a new strategy.

c. Anticipate the likely competitive responses to each strategic option. The business must therefore put

in place measures on how it will deal with such response.d. This deals with whether the strategy meets with the suitability test or not. Where it does not, it

should either be modified or dropped.

2. Validity Assumptions faulty or

This involves assessment of the assumptions on which the strategy is build. The problem here is that of

distinguishing faulty assumptions from those that are second. Manager must however guard against

conventional wisdom in this respect. All assumptions must be examined thoroughly for soundness

reflecting on the past as well as probable trends. Past behaviour in costs, revenues as well as demand

under similar conditions can be examined. Trends that are likely given the expected environmental

condition should also receive a closer investigation. In doing this, the first step involves the isolation of

the assumptions about the reason for the forecasts changes, share increases alluded to above may be

inrealistic given the inflationary environments where price are reviewed upwards frequently and also

the emergence of cheaper products from China. The next step is to examine the evidence used to


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support each assumption. Further assumptions are based on information which itself may be accurate,

inaccurate or simply out of date.

3. Consistency

Consistency refers to elimination of discord from both internal or external operations of the

organisaiton. A strategy must generate an acceptable degree of fit at all levels i.e. between the

functional strategic thrust. The strategic thrust can be building/rebuilding, holding, or harvesting, lack

of strategic fit always yield finger pointing as well as the defused and certain impressqion of the

business in the market.

First level external consistency this involves analyzing .of whether functional strategies are in line

with the investment strategy. It deals with whether the organization is putt4ing emphasis on the right

strategies to support a building holding or harvest thrust. It follows that certain of grand generic

management strategies are inappropriate building, holding and harvesting. Strategies should also be

assessed on their ability to enhance the basis of competitive strategy i.e. when implemented will they

yield superiority in the skills and resources needed to support the desired basis for differentiation or

low-cost position?

The second level (internal) considering. The fundamental strategies selected must create a fit

internally. A strategy to increase customer service calls for increases in investments in stock/inventory

and obvious financing for this requirement has to be made available otherwise customers will complain

of shortages. A considering test is seldom-pivotal for few strategies are rejected outright for

inconsistency. Generally the test is used helping refine and improve the strategy to ensure that allpoints of the strategy are pointing in the issue direction. In some cases however, the degree of change

necessary to bring the elements in line may not be feasible given the available resources.

Feasibility this involves as assessment of:

1. Skills and resource constraints financial and physical resource constraints are the first against which

the strategy option is tested. Where they cannot be overcome, the strategy itself may have to be

modified in order for the business to live with the constraint, innovation in both financial in both

financial terms as well as physical resources can be used as necessary modification e.g. Delta.

2. The next constraints to be tested are the markets, technology and servicing capabilities.

3. The third and most rigid constraint comes from less qualifiable limitations of individuals and

organizations. This requires an assessment of whether organization has shown it could ..the degree of

coordinative and intergrative skills necessary to carry out the change in strategy.

5. Capacity for commitment: A broad based commitment to successful implementation comes when:


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The premises and elements of the strategy are readily communicable.

The strategy challenged and motivates key personnel. Organizational commitment is essential and this

is dependent on the nature of strategy as a guiding force for the business.

Vulnerability

This requires an assessment of risks of a strategic option reflects the vulnerability of key results of

important assumptions are wrong or critical tasks are not accomplished e.g. increasing market share

calls for increasing in investment intensity which also means that the break even point will go up thus

making it vulnerable to shortfalls in sales forecasts. The risk factors can either be internal or external.

Environmental risks should reflect major in certainties about the economic environment, competitor

and market response, legislative and regulatory action and the pace of technological change. The risks

include price cutting by competitors, forward integration by suppliers or weak demand due to

recession.

Internal risks are uncertainties about the ability of the business to execute a critical element of the

strategy thus jeopadising performance. It is therefore important to isolate those risks that will cause

greatest impact and deal with the explicity. Their strategic importance is a combination of i. Sensitivity

analysis of consequences and ii. The likelihood that they will occur during the planned period. The

response will depend on the degree of control the organization has over the risk factors will be greater

that what would have been invested initially. Further the window of opotunity could have disappeared

altogether, and therefore no adaptation will be required.

Potential rewards

This represents the ultimate test for alternative evaluation. Three classes of measures can be used for

this purpose.

i. Economic value generation

ii. sales growth and profitability

iii. Relative competitive position

Sales growth and profitability measures

These include not earnings, R01 and cash flow. They are used to evaluate strategic options its terms of

their performance. They are seldom- inadequate for teaching meaningful signals to corporate or

business level decision markets. Arguments presented are that techniques used should assess economic

value of the business or to improve competitive position.


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Economic value measures

Accounting measures have serious shortcomings;

Earnings figures do not consider possible differences in the risk exposure of strategic option.

Estimates of accounting earnings are susceptible to distortion from differences arising from the way

cost of sales and depreciation are determined.

There is no consideration of the time value of the earnings streams.

A good measure is one that discounts the anticipated cashflows from strategy option. Higher discount

rates are used where there is greater variability of earnings or larger variances between planned and

actual results. Indicators of the risk are the rate of growth of the business relative to competition,

familiarity of the business with the product markets being entered and other specific risks.

For a strategy to create economic value, the discounted cashflow must be positive and exceed to cost of

financing that option. This is the minimum condition any option must satisfy if it is to be considered

further. As with limited resources, contribution per limited resource must be calculated and the option

generating the highest contribution can be pursued.

Competitive position measures. The above ratios cannot be taken as automatic indicators of the

acceptability of a strategic option. Tests of ability of strategic options to gain or sustain a positional

advantage are required . for this purpose what is needed is persuasive evidence that anticipated levels

or changes in the following measures can be achieved.

1. market shares

- served- market segments

2. relative cost position

3. relative quality level.

4. share of industry production capacity.

5. share of advertising expenditures and distribution coverage.

6. sales force coverage

7. awareness and attitude

the advantage of the measures is that the are closer to bases of competitive advantage and thus can be

need to assess the accomplishment of the strategy when it is implemented.

In conclusion one can say that an effective criteria is one that:

i. exploits environmental trends and creates a sustainable competitive advantage.

ii. is based on realistic assumptions and accurate information


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iii. Can be achieved with the available resources

iv. Is internally consistent

v. Is acceptable to operating managers who will be responsible for implementation

vi. will achieve the performance objectives of the stakeholders without requiring undue risks.

kuda-strategic management bm 405

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