John B. Lacson Foundation Maritime University Arevalo), Inc.

GRADUATE SCHOOL
Iloilo City

Module 2

Components of Strategic Management Process

Lesson 1: Mission and Major Goals

Introduction

Many skills and abilities separate effective strategic leaders like Howard Schultz from
poor strategic leaders. One of them is the ability to inspire employees to work hard to improve
their organization’s performance. Effective strategic leaders are able to convince employees to
embrace lofty ambitions and move the organization forward. In contrast, poor strategic leaders
struggle to rally their people and channel their collective energy in a positive direction.

Organizations need support from their key stakeholders, such as employees, owners,
suppliers, and customers, if they are to prosper. A mission statement which engages stakeholders
will help develop an understanding of why they should support the organization and make clear
what important role or purpose the organization plays in society – also called a “social license to
operate.”

Learning Outcomes

At the end of the lesson, the students shall have been able to:

1. define vision and mission and distinguish between them.

2. know what the acronym SMART represents

Pretest

Multiple Choice: Select the correct answer from the choices given below each question. Write
the letter of your answer on the blank provided before each number.
__________1. The fundamental purpose of an organization’s mission statement is to:
a. create a good human relations climate in the organization;
b. define the organization’s purpose in society;
c. define the operational structure of the organization;
d. generate good public relations for the organization.

__________2. Of the following, which one would NOT be considered one of the components of
a mission statement?
a. the target market for XYZ is oil nad gas producers as well producers of
chemiclas;
b. XYZ shall hire only those individuals who have with sufficient educational
levels so as to be of benefit to our customers;

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Iloilo City

c. the customers of XYZ shall include global and local consumers of gas and oil
products and domestic users of nontoxic chemicals;
d. the technologies utilized by XYZ shall focus upon development of alternative
sources of gas and oil so as to remain competitive within the industry

__________3. The strategic management process is

a. a set of activities that will assure a temporary advantage and average returns
for the firm.
b. a decision-making activity concerned with a firm’s internal resources,
capabilities, and competencies, independent of the conditions in its external
environment.
c. process directed by top-management with input from other stakeholders that
seeks to achieve above-average returns for investors through effective use of
the organization’s resources.
d. the full set of commitments, decisions, and actions required for the firm to
achieve above-average returns and strategic competitiveness.

__________4. The goal of the organization’s is to capture the hearts and minds of
employees, challenge them, and evoke their emotions and dreams.
a. vision
b. mission
c. culture
d. strategy

__________5. A firm’s mission

a. is a statement of a firm’s business in which it intends to compete and the
customers which it intends to serve?
b. is an internally-focused affirmation of the organization’s financial, social, and
ethical goals.
c. is mainly intended to emotionally inspire employees and other stakeholders.
d. is developed by a firm before the firm develops its vision.

__________6. Which individuals are most responsible for the success and failure of an
organization?
a. strategists
b. financial planners
c. personnel directors
d. stakeholders

_________7. According to Greenley, strategic management offers all of these benefits except
that:
a. it provides an objective view of management problems.
b. it creates a framework for internal communication among personnel.
c. it encourages a favorable attitude toward change.

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d. it maximizes the effects of adverse conditions and changes.

__________8. The vision and mission statement can often be found:

a. in the SEC report.
b. in annual reports.
c. on customer receipts.
d. on supplier invoices.

__________9. Which group would be classified as a stakeholder?

a. banks
b. suppliers
c. employees
d. all of these

__________10. Strategic management involves the___, directing, ___ and controlling of a

company’s strategy-related decisions and actions.
a. financing; marketing
b. planning; financing
c. planning; organizing
d. marketing; planning

Reading

Pursuing the Vision and Mission through SMART Goals. An organization’s vision and
mission combined offer a broad, overall sense of the organization’s direction. To work toward
achieving these overall aspirations, organizations also need to create goals—narrower aims that
should provide clear and tangible guidance to employees as they perform their work on a daily
basis. The most effective goals are those that are:

Specific
Measurable
Achievable
Realistic, and
Time-bound

An easy way to remember these dimensions is to combine the first letter of each into one
word: (SMART) Employees are in a much better position to succeed to the extent that an
organization’s goals are SMART.A goal is specific if it is explicit rather than vague.

A goal is aggressive if achieving it presents a significant (as opposed to easy) challenge

to the organization. A series of research studies have demonstrated that performance is strongest
when goals are challenging but attainable. Such goals force people to test and extend the limits
of their abilities. This can result in reaching surprising heights.

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Iloilo City

Strategic management is all about identification and description of the strategies that
managers can carry so as to achieve better performance and a competitive advantage for their
organization. An organization is said to have competitive advantage if its profitability is higher
than the average profitability for all companies in its industry.

Strategic management can also be defined as a bundle of decisions and acts which a
manager undertakes and which decides the result of the firm’s performance. The manager must
have a thorough knowledge and analysis of the general and competitive organizational
environment so as to take right decisions.

They should conduct a SWOT analysis Strengths, Weaknesses, Opportunities, and

Threats), i.e., they should make best possible utilization of Strengths, minimize the organizational
Weaknesses, make use of arising Opportunities from the business environment and should not
ignore the Threats.

Strategic management is nothing but planning for both predictable as well as unfeasible
contingencies. It is applicable to both small as well as large organizations as even the smallest
organization faces competition and, by formulating and implementing appropriate strategies,
they can attain sustainable competitive advantage.

Strategic management is a way in which strategists set the objectives and proceed about
attaining them. It deals with making and implementing decisions about future direction of an
organization. It helps us to identify the direction in which an organization is moving.

Strategic management is a continuous process that evaluates and controls the business
and the industries in which an organization is involved; evaluates its competitors and sets goals
and strategies to meet all existing and potential competitors; and then re-evaluates strategies on
a regular basis to determine how these have been implemented and whether these were successful
or require replacement.

Strategic management gives a broader perspective to the employees of an organization

and they can better understand how their job fits into the entire organizational plan and how it is
correlated to other organizational members. It is nothing but the art of managing employees in a
manner which maximizes the ability of achieving business objectives.

The employees become more trustworthy, more committed and more satisfied as they can
correlate themselves well with each organizational task. They can understand the reaction of
environmental changes on the organization and the probable response of the organization with
the help of strategic management.

Thus, the employees can judge the impact of such changes on their own job and can
effectively face the changes. The managers and employees must do appropriate things in
appropriate manner. They need to be both effective as well as efficient.

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GRADUATE SCHOOL
Iloilo City

The strategic management process defines the organization’s strategy. It is also the
process which helps managers make a choice of a set of strategies for the organization that will
enable it to achieve better performance. Strategic management is a continuous process that
appraises the business and industries in which the organization is involved, its competitors; and
fixes goals to meet all the present and future potential competitors and then reassesses each
strategy.
Strategic management process has following five steps:

Step 1. -Mission and Goals:

The first step in the strategic management begins with senior managers evaluating their
position in relation to the organization’s current mission and goals. The mission describes the
organization’s values and aspirations; and indicates the direction in which senior management is
going. Goals are the desired ends sought through the actual operating procedures of the
organization. It typically describes short-term measurable outcomes.

Defining the Mission Statement:

Every organization should have a mission statement. A mission statement should be

viewed as the guiding principle for an entire business. It should tell a company, its employees,
vendors, customers, investors, the goal of the organization. Essentially, a mission statement
defines a company’s values and outlines its organizational purpose and reasons for existent.

A mission statement should require little or no explanation, and its length is less important
than its power. Mission statement is usually restricted to two lines, but it encompasses the basic
foundation of the existence of the organization. For example, the mission statement of Lucent
Technologies is, “to provide customers with the world’s best and most innovative communication
systems, products, technologies and customer support, and to deliver superior, sustained
shareowner value.” Thus, a company’s vision and mission provide guidelines for general
decision-making.

Establishing Goals and Objectives:

After an organization has assessed the internal and external environment, it has to set its
goals and objectives. These goals and objectives should be specific, flexible and measurable,
because of the changing business environments and the influences of the external environment.
Setting goals under strict regulations is impractical, especially when a business is operating in
highly volatile conditions.

Step 2. - Environmental Scanning:

Environmental scanning refers to a process of collecting, scrutinizing and providing
information for strategic purposes and helps in analyzing the internal and external factors
influencing an organization. After executing the process, management should evaluate it on a
continuous basis and strive to improve it.

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Iloilo City

Step 3. - Strategy Formulation:

Strategy formulation is the process of deciding best course of action for achieving
organizational objectives. After conducting environment scanning process, managers formulate
corporate, business and functional strategies.

Step 4. - Strategy Implementation:

Strategy implementation implies putting the organization’s chosen strategy in to action
and making it work as intended. Strategy implementation includes designing the organization’s
structure, distributing resources, developing decision making process, and effectively managing
human resources.

Step 5. - Strategy Evaluation:

Strategy evaluation which is the final step of strategy management process involves-
appraising internal and external factors, measuring performance, and taking remedial/corrective
actions. Evaluation assures the management that the organizational strategy as well as its
implementation meets the organizational objectives.

These steps are carried by the businesses, in chronological order, when creating a new
strategic management plan. Present businesses that have already created a strategic management
plan will revert to these steps as per the situation’s requirement, so as to make essential changes.

Summary

Strategic management process starts with the establishment of strategic intent, where- by
the firm clearly indicates the position, it wants to achieve in future. This is demonstrated by
defining its vision, mission goals and objectives.

Self-Assessment Questions.

Answer briefly the following questions:

1. Explain the difference between ‘strategy’ and ‘strategic management’.

2. Discuss what is the Mission and Major Goals
3. Enumerate the five steps of Strategic management process five steps:
4. Define the Mission and Goals
5. Discus the Mission Statement:

Suggested Enrichment Activity

What is the most important activity in the strategic management process? Give at least
three (3) key activities in the strategic management process? Briefly discuss the three key
activities in strategic management process. Why is it important for managers to recognize the
independent nature of these activities? What are the 7 steps of strategic management process and
discuss briefly each

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GRADUATE SCHOOL
Iloilo City

References:

[Link]
process/31761

[Link]
[Link]

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GRADUATE SCHOOL
Iloilo City

Lesson 2: External Analysis

Introduction

External analysis is the process of examining the industry environment of a company,

including factors such as competitive structure, competitive position, dynamics, and history. On
a macro scale, external analysis includes macroeconomic, global, political, social, demographic,
and technological analysis. The primary purpose of external analysis is to determine the
opportunities and threats in an industry or any segment that will drive profitability, growth,
and volatility.

Learning Outcomes

At the end of the lesson, the students shall have been able to:

1. understand the basics of general environment analysis.

2. identify the components of microenvironment analysis that support industry analysis.
3. discuss the features of Porter’s Five Forces industry analysis.

Pretest

Multiple Choices: Select the correct answer from the choices given below each question. Write
the letter of your answer on the blank provided before each number.

__________1. Which one of the following is NOT included in the Porter’s Five Forces model?
a. potential development of substitute products
b. bargaining power of suppliers
c. rivalry among stockholders
d. rivalry among competing firms

_________2. An analysis of the economic segment of the external environment would include
all of the following EXCEPT
a. interest rates.
b. international trade.
c. the strength of the U.S. dollar.
d. the move toward a contingent workforce.

__________3. An external analysis enables a firm to determine what the firm

a. can do.
b. should do.
c. will do.
d. might do.

__________4. Which of the following is an element of a firm’s remote external environment?

a. competition

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b. political agencies
c. suppliers
d. trade union

__________5. The process of performing an external audit needs to include:

a. only top-level managers, as it’s a planning function.
b. as many managers and employees as possible.
c. primarily front-line supervisors between 15 to 20 managers for it to be valid
d. stockholders and external government agencies

__________6. The immediate external environment includes:

a. divisions
b. S. B. U. s
c. competitors
d. management

__________7. is not part of an external audit.

a. analyzing competitors
b. analyzing financial ratios
c. analyzing available technologies
d. studying the political environment

__________8. Strategic Management handles:

a. external issues
b. management issues
c. internal issues
d. administration issues

__________9. The immediate external environment includes:

a. divisions
b. S. B. U. s
c. competitors
d. management

__________10. ST Strategies is an important strategy to

a. match weakness with opportunities of the firm
b. overcome external threats
c. obtain benefit from its resources
d. overcome its weakness and reducing threats

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Reading

The General Environment

When appraising the external environment of the organization you will typically start
with its general environment. But what does this mean? The general environment is composed
of dimensions in the broader society that influence an industry and the firms within it. (Fahey,
1999; Walters & Priem, 1999). We group these dimensions into six segments: political,
economic, social, technical or technological, environmental, and legal. You can use the simple
acronym, PESTEL, to help remind you of these six general environment segments. Examples of
elements analyzed in each of these segments are shown next.

Table 5.1 PESTEL Analysis

Political Economic

How stable is the political environment? What are current and forecast interest rates?

What is the level of inflation, what is it forecast to

What are local taxation policies, and how
be, and how does this affect the growth of your
do these affect your business?
market?

Is the government involved in trading

What are local employment levels per capita and
agreements such as EU, NAFTA,
how are they changing?
ASEAN, or others?

What are the long-term prospects for the economy

What are the foreign trade regulations? gross domestic product (GDP) per capita, and so
on?

What are exchange rates between critical markets

What are the social welfare policies? and how will they affect production and
distribution of your goods?

Social or Socio-cultural Technical or Technological

What is the level of research funding in

What are local lifestyle trends? government and the industry, and are
those levels changing?

What is the government and industry’s

What are the current demographics, and how are
level of interest and focus on
they changing?
technology?

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Social or Socio-cultural Technical or Technological

What is the level and distribution of education and

How mature is the technology?
income?

What are the dominant local religions and what

What is the status of intellectual property
influence do they have on consumer attitudes and
issues in the local environment?
opinions?

Are potentially disruptive technologies

What is the level of consumerism and popular
in adjacent industries creeping in at the
attitudes toward it?
edges of the focal industry?

What pending legislation is there that affects

corporate social policies (e.g., domestic partner How fast is technology changing?
benefits, maternity/paternity leave)?

What role does technology play in

What are the attitudes toward work and leisure?
competitive advantage?

Environmental Legal

What are the regulations regarding

What are local environmental issues?
monopolies and private property?

Are there any ecological or environmental issues Does intellectual property have legal
relevant to your industry that are pending? protections?

How do the activities of international pressure groups

affect your business (e.g., Greenpeace, Earth First, Are there relevant consumer laws?
PETA)?

Are there environmental protection laws? What are the What is the status of employment,
regulations regarding waste disposal and energy health and safety, and product safety
consumption? laws?

Firms cannot directly control the general environment’s segments and elements.
Accordingly, successful companies gather the information required to understand each segment
and its implications for the selection and implementation of the appropriate strategies. For
example, the terrorist attacks in the United States on September 11, 2001, surprised businesses
throughout the world. This single set of events had substantial effects on the U.S. economy.
Although individual firms were affected differently, none could control the U.S. economy.
Instead, companies around the globe were challenged to understand the effects of this economy’s
decline on their current and future strategies. A similar set of events and relationships was seen
around the world as financial markets began to struggle one after the other starting in late 2008.

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Although the degree of impact varies, these environmental segments affect each industry
and its firms. The challenge to the firm is to evaluate those elements in each segment that are of
the greatest importance. Resulting from these efforts should be recognition of environmental
changes, trends, opportunities, and threats.

Analyzing the Organization’s Microenvironment

When we say microenvironment, we are referring primarily to an organization’s industry,

and the upstream and downstream markets related to it. An industry is a group of firms producing
products that are close substitutes. In the course of competition, these firms influence one
another. Typically, industries include a rich mix of competitive strategies that companies use in
pursuing strategic competitiveness and above-average returns. In part, these strategies are chosen
because of the influence of an industry’s characteristics (Spanos & Lioukas,
2001). Upstream markets are the industries that provide the raw material or inputs for the focal
industry, while downstream markets are the industries (sometimes consumer segments) that
consume the industry outputs. For example, the oil production market is upstream of the oil-
refining market (and, conversely, the oil refiners are downstream of the oil producers), which in
turn is upstream of the gasoline sales market. Instead of upstream and downstream, the
terms wholesale and retail are often used. Accordingly, the industry microenvironment consists
of stakeholder groups that a firm has regular dealings with. The way these relationships develop
can affect the costs, quality, and overall success of a business.
Porter’s Five-Forces Analysis of Market Structure

You can distill down the results of PESTEL and microenvironment analysis to view the
competitive structure of an industry using Michael Porter’s five forces. Here you will find that
your understanding of the microenvironment is particularly helpful. Porter’s model attempts to
analyze the attractiveness of an industry by considering five forces within a market. According
to Porter, the likelihood of firms making profits in a given industry depends on five factors: (1)

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barriers to entry and new entry threats, (2) buyer power, (3) supplier power, (4) threat from
substitutes, and (5) rivalry (Porter, 1980).

Compared with the general environment, the industry environment has a more direct
effect on the firm’s strategic competitiveness and above-average returns, as exemplified in the
strategic focus. The intensity of industry competition and an industry’s profit potential (as
measured by the long-run return on invested capital) are a function of five forces of competition:
the threats posed by new entrants, the power of suppliers, the power of buyers, product
substitutes, and the intensity of rivalry among competitors.

Porter’s five-force model of competition expands the arena for competitive analysis.
Historically, when studying the competitive environment, firms concentrated on companies with
which they competed directly. However, firms must search more broadly to identify current and
potential competitors by identifying potential customers as well as the firms serving them.
Competing for the same customers and thus being influenced by how customers value location
and firm capabilities in their decisions is referred to as the market microstructure (Zaheer &
Zaheer, 2001). Understanding this area is particularly important because, in recent years, industry
boundaries have become blurred. For example, in the electrical utilities industry, co-generators
(firms that also produce power) are competing with regional utility companies. Moreover,
telecommunications companies now compete with broadcasters, software manufacturers provide
personal financial services, airlines sell mutual funds, and automakers sell insurance and provide
financing (Hitt, et. al., 1999). In addition to focusing on customers rather than specific industry
boundaries to define markets, geographic boundaries are also relevant. Research suggests that
different geographic markets for the same product can have considerably different competitive
conditions (Pan & Chi, 1999; Brooks, 1995).

The five-force model recognizes that suppliers can become a firm’s competitors (by
integrating forward), as can buyers (by integrating backward). Several firms have integrated
forward in the pharmaceutical industry by acquiring distributors or wholesalers. In addition,
firms choosing to enter a new market and those producing products that are adequate substitutes
for existing products can become competitors of a company.

Another way to think about industry market structure is that these five sets of stakeholders
are competing for profits in the given industry. For instance, if a supplier to an industry is
powerful, they can charge higher prices. If the industry member can’t pass those higher costs
onto their buyers in the form of higher prices, then the industry member makes less profit. For
example, if you have a jewelry store, but are dependent on a monopolist like De Beers for
diamonds, then De Beers actually is extracting more relative value from your industry (i.e., the
retail jewelry business).

Attractiveness and Profitability

Using Porter’s analysis firms are likely to generate higher profits if the industry:
Is difficult to enter.
There is limited rivalry.
Buyers are relatively weak.

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Suppliers are relatively weak.

There are few substitutes.
Profits are likely to be low if:
The industry is easy to enter.
There is a high degree of rivalry between firms within the industry.
Buyers are strong.
Suppliers are strong.
It is easy to switch to alternatives.

Effective industry analysis is products of careful study and interpretation of data and
information from multiple sources. A wealth of industry-specific data is available to be analyzed.
Because of globalization, international markets and rivalries must be included in the firm’s
analyses. In fact, research shows that in some industries, international variables are more
important than domestic ones as determinants of strategic competitiveness. Furthermore, because
of the development of global markets, a country’s borders no longer restrict industry structures.
In fact, movement into international markets enhances the chances of success for new ventures
as well as more established firms (Kuemmerle, 2001; Lorenzoni & Lipparini, 1991).

Following study of the five forces of competition, the firm can develop the insights
required to determine an industry’s attractiveness in terms of its potential to earn adequate or
superior returns on its invested capital. In general, the stronger competitive forces are, the lower
the profit potential for an industry’s firms. An unattractive industry has low entry barriers,
suppliers and buyers with strong bargaining positions, strong competitive threats from product
substitutes, and intense rivalry among competitors. These industry characteristics make it very
difficult for firms to achieve strategic competitiveness and earn above-average returns.
Alternatively, an attractive industry has high entry barriers, suppliers and buyers with little
bargaining power, few competitive threats from product substitutes, and relatively moderate
rivalry (Porter, 1980).

New Entrants

The likelihood of new entry is a function of the extent to which barriers to entry exist.
Evidence suggests that companies often find it difficult to identify new competitors (Geroski,
1999). Identifying new entrants is important because they can threaten the market share of
existing competitors. One reason new entrants pose such a threat is that they bring additional
production capacity. Unless the demand for a good or service is increasing, additional capacity
holds consumers’ costs down, resulting in less revenue and lower returns for competing firms.
Often, new entrants have a keen interest in gaining a large market share. As a result, new
competitors may force existing firms to be more effective and efficient and to learn how to
compete on new dimensions (for example, using an Internet-based distribution channel).

The more difficult it is for other firms to enter a market, the more likely it is that existing
firms can make relatively high profits. The likelihood that firms will enter an industry is a
function of two factors: barriers to entry and the retaliation expected from current industry
participants. Entry barriers make it difficult for new firms to enter an industry and often place

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them at a competitive disadvantage even when they are able to enter. As such, high-entry barriers
increase the returns for existing firms in the industry (Robinson & McDougall, 2001).
Buyer Power

The stronger the power of buyers in an industry, the more likely it is that they will be able
to force down prices and reduce the profits of firms that provide the product. Firms seek to
maximize the return on their invested capital. Alternatively, buyers (customers of an industry or
firm) want to buy products at the lowest possible price—the point at which the industry earns the
lowest acceptable rate of return on its invested capital. To reduce their costs, buyers bargain for
higher-quality, greater levels of service, and lower prices. These outcomes are achieved by
encouraging competitive battles among the industry’s firms.
Supplier Power

The stronger the power of suppliers in an industry, the more difficult it is for firms within
that sector to make a profit because suppliers can determine the terms and conditions on which
business is conducted. Increasing prices and reducing the quality of its products are potential
means used by suppliers to exert power over firms competing within an industry. If a firm is
unable to recover cost increases by its suppliers through its pricing structure, its profitability is
reduced by its suppliers’ actions.

Substitutes

This measures the ease with which buyers can switch to another product that does the
same thing, such as using aluminum cans rather than glass or plastic bottles to package a
beverage. The ease of switching depends on what costs would be involved (e.g., while it may be
easy to sell Coke or Pepsi in bottles or cans, transferring all your data to a new database system
and retraining staff could be expensive) and how similar customers perceive the alternatives to
be. Substitute products are goods or services from outside a given industry that perform similar
or the same functions as a product that the industry produces. For example, as a sugar substitute,
NutraSweet places an upper limit on sugar manufacturers’ prices—NutraSweet and sugar
perform the same function but with different characteristics.

Other product substitutes include fax machines instead of overnight deliveries, plastic
containers rather than glass jars, and tea substituted for coffee. Recently, firms have introduced
to the market several low-alcohol fruit-flavored drinks that many customers substitute for beer.
For example, Smirnoff’s Ice was introduced with substantial advertising of the type often used
for beer. Other firms have introduced lemonade with 5% alcohol (e.g., Doc Otis Hard Lemon)
and tea and lemon combinations with alcohol (e.g., BoDean’s Twisted Tea). These products are
increasing in popularity, especially among younger people, and, as product substitutes, have the
potential to reduce overall sales of beer (Khermouch, 2001).

In general, product substitutes present a strong threat to a firm when customers face few,
if any, switching costs and when the substitute product’s price is lower or its quality and
performance capabilities are equal to or greater than those of the competing product.

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Differentiating a product along dimensions that customer’s value (such as price, quality, service
after the sale, and location) reduces a substitute’s attractiveness.

Rivalry

This measures the degree of competition between existing firms. The higher the degree
of rivalry, the more difficult it is for existing firms to generate high profits. The most prominent
factors that experience shows to affect the intensity of firms’ rivalries are (1) numerous
competitors, (2) slow industry growth, (3) high fixed costs, (4) lack of differentiation, (5) high
strategic stakes and (6) high exit barriers.
Numerous or Equally Balanced Competitors

Intense rivalries are common in industries with many companies. With multiple
competitors, it is common for a few firms to believe that they can act without eliciting a response.
However, evidence suggests that other firms generally are aware of competitors’ actions, often
choosing to respond to them. At the other extreme, industries with only a few firms of equivalent
size and power also tend to have strong rivalries. The large and often similar-sized resource bases
of these firms permit vigorous actions and responses. The Fuji/Kodak and Airbus/Boeing
competitive battles exemplify intense rivalries between pairs of relatively equivalent competitors.
Slow Industry Growth

When a market is growing, firms try to use resources effectively to serve an expanding
customer base. Growing markets reduce the pressure to take customers from competitors.
However, rivalry in nongrowth or slow-growth markets becomes more intense as firms battle to
increase their market shares by attracting their competitors’ customers.

Typically, battles to protect market shares are fierce. Certainly, this has been the case
with Fuji and Kodak. The instability in the market that results from these competitive
engagements reduce profitability for firms throughout the industry, as is demonstrated by the
commercial aircraft industry. The market for large aircraft is expected to decline or grow only
slightly over the next few years. To expand market share, Boeing and Airbus will compete
aggressively in terms of the introduction of new products and product and service differentiation.
Both firms are likely to win some and lose other battles. Currently, however, Boeing is the leader.
High Fixed Costs or High Storage Costs

When fixed costs account for a large part of total costs, companies try to maximize the
use of their productive capacity. Doing so allows the firm to spread costs across a larger volume
of output. However, when many firms attempt to maximize their productive capacity, excess
capacity is created on an industry-wide basis. To then reduce inventories, individual companies
typically cut the price of their product and offer rebates and other special discounts to customers.
These practices, however, often intensify competition. The pattern of excess capacity at the
industry level followed by intense rivalry at the firm level is observed frequently in industries
with high storage costs. Perishable products, for example, lose their value rapidly with the
passage of time. As their inventories grow, producers of perishable goods often use pricing
strategies to sell products quickly.

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Iloilo City

Lack of Differentiation or Low Switching Costs

When buyers find a differentiated product that satisfies their needs, they frequently
purchase the product loyally over time. Industries with many companies that have successfully
differentiated their products have less rivalry, resulting in lower competition for individual firms
(Deephouse, 1999). However, when buyers view products as commodities (as products with few
differentiated features or capabilities), rivalry intensifies. In these instances, buyers’ purchasing
decisions are based primarily on price and, to a lesser degree, service. Film for cameras is an
example of a commodity. Thus, the competition between Fuji and Kodak is expected to be strong.

The effect of switching costs is identical to that described for differentiated products. The
lower the buyers’ switch costs, the easier it is for competitors to attract buyers through pricing
and service offerings. High switching costs, however, at least partially insulate the firm from
rivals’ efforts to attract customers. Interestingly, the switching costs—such as pilot and mechanic
training—are high in aircraft purchases, yet, the rivalry between Boeing and Airbus remains
intense because the stakes for both are extremely high.

High Strategic Stakes

Competitive rivalry is likely to be high when it is important for several of the competitors
to perform well in the market. For example, although it is diversified and is a market leader in
other businesses, Samsung has targeted market leadership in the consumer electronics market.
This market is quite important to Sony and other major competitors such as Hitachi, Matsushita,
NEC, and Mitsubishi. Thus, we can expect substantial rivalry in this market over the next few
years.

High strategic stakes can also exist in terms of geographic locations. For example,
Japanese automobile manufacturers are committed to a significant presence in the U.S.
marketplace. A key reason for this is that the United States is the world’s single largest market
for auto manufacturers’ products. Because of the stakes involved in this country for Japanese and
U.S. manufacturers, rivalry among firms in the U.S. and global automobile industry is highly
intense. While close proximity tends to promote greater rivalry, physically proximate
competition has potentially positive benefits as well. For example, when competitors are located
near one another, it is easier for suppliers to serve them and they can develop economies of scale
that lead to lower production costs. Additionally, communications with key industry stakeholders
such as suppliers are facilitated and more efficient when they are close to the firm (Chung &
Kalnins, 2001).
High Exit Barriers

Sometimes companies continue competing in an industry even though the returns on their
invested capital are low or negative. Firms making this choice likely face high exit barriers, which
include economic, strategic, and emotional factors, causing companies to remain in an industry
when the profitability of doing so is questionable.

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GRADUATE SCHOOL
Iloilo City

Summary

External environment analysis is a key input into strategy formulation. PESTEL is an

external environment analysis framework that helps guide your prospecting in the political,
economic, social, technological, environmental, and legal spheres of an organization’s external
environment. Working inward to the focal organization, we discussed the broad dimensions of
the stakeholders feeding into the firm. Porter’s five forces analysis considers (1) barriers to entry
and new entry threats, (2) buyer power, (3) supplier power, (4) threat from substitutes, and (5)
rivalry as key external environmental forces in developing strategy.

Self-Assessment Questions.

Answer briefly the following questions:

1. What are the six dimensions of the environment that are of broad concern when you
conduct a PESTEL analysis?
2. Which of the PESTEL dimensions do you believe to be most important, and why
3. What are the key dimensions of a firm’s microenvironment?
4. What are the five forces referred to in the Porter framework?
5. Is there a dimension of industry structure that Porter’s model appears to omit?

Suggested Enrichment Activity

What is external analysis? Define its key terms such as industry and market segment?
What is competitive analysis? Discuss thoroughly the six (6) factors that determine the
level of competitions in an industry. Discuss briefly the absolute advantage and comparable
company analysis.

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

References

Brooks, G. R. (1995). Defining market boundaries Strategic Management Journal, 16, 535–
[Link], W., & Kalnins, A. (2001). Agglomeration effects and performance: Test of
the Texas lodging industry Strategic Management Journal, 22, 969–988.

Deephouse, D. L. (1999). To be different, or to be the same? It’s a question (and theory) of

strategic balance. Strategic Management Journal, 20, 147–166.

Fahey, L. (1999). Competitors. New York: Wiley; Walters, B. A., &amp.

Geroski, P. A. (1999). Early warning of new rivals. Sloan Management Review, 40(3), 107–116.

Hitt, M. A., Ricart I Costa, J., & Nixon, R. D. (1999). New managerial mindsets. New York:
Wiley.

Khermouch, G. (2001, March 5). Grown-up drinks for tender taste buds. Business Week, p. 96.

Kuemmerle, W. (2001). Home base and knowledge management in international

ventures. Journal of Business Venturing, 17, 99–122.

[Link]
external

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

Lesson 3: Internal Analysis

Introduction

The internal operations of a firm determine the strengths and weaknesses of a firm.
Strengths allow the firm to take advantage of opportunities available in the environment, while
weaknesses represent potential threats to the organization and limit the strategies available to the
firm. The internal factors are generally regarded as controllable factors, because the company
generally has control over these factors; it can alter or modify such factors as its personnel,
physical facilities.

Learning Outcomes

At the end of the lesson, the students shall have been able to:

1. define Internal Analysis

2. discuss the difference between Internal and External Analysis

Pretest

Multiple Choice: Select the correct answer from the choices given below each question. Write
the letter of your answer on the blank provided before each number.

__________1. How many cells are in SWOT matrix?

a. 9
b. 6
c. 3
d. 2

__________2. Which strategies aim at improving internal weakness by taking advantage of

external opportunities?
a. SO
b. WO
c. SW
d. ST

___________3. Internal analysis enables a firm to determine what the firm

a. can do.
b. should do.
c. will do.
d. might do.

___________4. The slowest way to grow a business is likely to be through?

a. a merger
b. outsourcing

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Iloilo City

c. internal development
d. a strategic alliance

__________5. The acronym SWOT stands for

a. special Weapon for operations timeliness
b. services, Worldwide Optimization and transport
c. strengths, weakness, opportunities
d. none of the above

__________6. The two internal elements of SWOT analysis.

a. weakness and threats
b. opportunities and threats
c. strength and weaknesses
d. strengths and threats

__________7. What are the decisions and actions that determine long-run performance of an
organization?
a. strategies
b. missions
c. goals
d. opportunities

___________8. Is the collection of managerial decisions and actions that determine the long-run
performance of organization?
a. planning
b. goal-oriented management
c. strategic management
d. leadership

__________9. Why is strategic management important?

a. it has a little impact on organizational performance
b. it is involved in many of the decisions that managers make
c. most organizations do not change
d. organizations are composed of similar divisions and functions.

__________10. Which of the following is not an aspect of the MOST analysis?

a. mission
b. strategies
c. tactics
d. organization

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

Reading

An internal analysis examines your organization’s internal environment in order to assess

its resources, competencies, and competitive advantages. Performing an internal analysis allows
you to identify the strengths and weaknesses of your organization. This knowledge then aids the
strategic decision making of management while they carry out the strategy formulation and
execution process.

Here at Cascade, we're heavily focused on the strategic management process, and we've
already written extensively on such - from the starting point of strategic analysis all the way
through to implementing strategy and then tracking it. However, before you can properly
formulate your strategy, you need to undertake a strategic analysis to inform your strategic plan.

This article will look at why an internal analysis is a key component to creating an
effective strategy, and explore some of the tools you can make use of while conducting your
internal analysis. We only briefly touch on the external analysis in this article, though it is just as
critical to the process.

Internal and External Analysis

Accompanying an internal analysis should always be an external analysis - which scans

the external environment of the organization. The combination of both an internal & external
scan is key in gaining a holistic picture of the organization's environment and developing a
strategy that will allow your organization to succeed. The internal/external scan should always
be undertaken before the actual creation of your strategy begins. If you're in the process of
creating a new strategic plan and have skipped this step, we'd recommend pausing and
completing an internal/external scan first. You can then move back into the strategy creation
process with confidence.

If you're not sure where to begin, a great tool for conducting an external environmental
scan is Porter's 5 Forces or PESTEL. These frameworks will help you analyze your the
environment your organization operates in and the different factors that will affect your
profitability and growth prospects. You'll then be able to adjust your strategy accordingly.

Why Conduct an Internal Analysis?

As mentioned , an internal analysis will highlight an organization's strengths and

weaknesses in the areas of their competencies, resources, and competitive advantage. Once
complete, the organization should have a clear idea of where they're excelling, where they're
doing OK and where current deficits and gaps lie. The analysis will arm management with the
knowledge to exploit their strengths and opportunities. It also allows management to develop
strategies to mitigate any threats and compensate for identified weaknesses.

Beginning strategy formulation after this analysis will ensure your strategic plan has been
formulated to take advantage of strengths and opportunities, and offset or improve weaknesses

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GRADUATE SCHOOL
Iloilo City

& threats. Your organization can then be confident that you're funneling your resources, time,
and focus effectively and efficiently.

What tools should you use?

Before undertaking an internal analysis, you'll need to decide which tool(s) you'd like to
use to conduct the analysis. Many tools and frameworks exist and each is valuable for a certain
purpose. To help you choose the right tool, we've compiled a list of some popular and effective
internal analysis tools with a description of what each tool will help you achieve.
GAP Analysis

The Gap Analysis is an internal evaluation tool which allows organizations to identify
performance deficiencies. A Gap Analysis is the process of comparing your current state to your
desired future state, identifying and understanding the gaps that exist between the two states, and
then creating a series of actions that will bridge the identified gaps. This is important because it
helps management identify if they're organization is performing to its potential and if not, why it
is not performing to its potential. This helps to identify flaws in resource allocation, planning,
production etc.

While other internal analysis tools, such as SWOT analysis are a more comprehensive
study of the internal environment, GAP analysis can be very targeted towards fine-tuning one
process.

Strategy Evaluation

A strategy evaluation analyses the results of the implementation of a strategic plan in your
organization. It is useful to undertake a strategy evaluation at certain intervals during your
implementation of strategy such as every 6 months, 1 year, or conclusion of your strategy. The
strategy evaluation process involves looking back at the goals in your strategic plan and assessing
how well you've done against achieving them. If you're looking for a thorough guide on how to
undergo a strategy evaluation, look no further.

SWOT Analysis

The SWOT analysis is one of the most well-known and used business analysis tools
around. It gained popularity due to its simplicity (covers both an internal and external analysis),
though equally for its effectiveness. The name SWOT is derived from the factors in its grid,
namely - Strengths, Weaknesses, Opportunities, and Threats.

This tool can be used to create a sustainable niche in your market. The SWOT analysis
allows organizations to uncover the opportunities they have the strength to exploit, and minimize
their weaknesses and the risk of impending threats. Using this tool, organizations are able to
distinguish themselves from competitors and successfully compete in their given marketplace.

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Iloilo City

Summary

As the business environment frequently changes, a company should regularly analyze its
internal and external environments in order to further develop its business. As the world is getting
smaller and competition increases it is vital for a company’s survival to regularly reassess the
direction of its business. Companies cannot take its resources and capabilities for granted, as the
external environment changes companies have to change too.

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Iloilo City

Strategic management is currently a relevant topic for many company leaders and
managers in today’s business world as companies have to be prepared to act on conditions that
are evolving in a fast pace. The research problem was to identify the strengths, weaknesses,
opportunities and threats of the case company and to prepare strategic recommendations based
on these findings in company’s internal and external environments. The aim of this was to
identify the key factors that affect company’s performance and competitiveness now and in the
future and to provide recommendations for next steps.

Self-Assessment Questions.

Answer briefly the following questions:

1. What are the defining characteristics that determine the internal competitive
advantage of an organization?
2. How does Porter’s value chain facilitate the workings of the resource-based view in
achieving competitive advantage?
3. How and why strategic management scholars showed so much interest in the
development of the ‘dynamic capabilities?
4. Give practical examples of dynamic capabilities, and explain why each constitutes a
dynamic capability.
5. How can a SWOT analysis be useful for both internal and external organizational
environmental analysis?

Suggested Enrichment Activity

Discuss thoroughly the strength and weaknesses of your competitors. (Think competitive
advantage). What does it take to be successful in this market? (List the strength all the company
need to compete successfully in this market.)

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

References

[Link]
analysis-in-strategic-management-tools-importance-and-swot-analysis/18762

[Link]
analysis-in-strategic-management-tools-importance-and-swot-
analysis/18762#:~:text=It%20involves%20a%20systematic%20analysis,the%20actions
%20of%20the%20competitors.

[Link]
analysis#:~:text=An%20internal%20analysis%20examines%20your,and%20weaknesse
s%20of%20your%20organization.

[Link]

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

Lesson 4: Corporate Level Strategy

Introduction

There are many avenues a company can go down when developing a business.
A corporate-level strategy is when a business makes a decision that affects the whole company.
A corporate-level strategy affects a company's finances, management, human resources, and
where the products are sold. The purpose of a corporate-level strategy is to maximize its
profitability and maintain its financial success in the future. A corporate-level strategy is utilized
to help increase competitive advantage over its competitors and to continue to offer a unique
product or service to consumers.

Learning Outcomes

At the end of the lesson, the students shall have been able to:

1. define Corporate Level Strategy

2. discuss and the Components of Corporate Strategy

Pretest

Multiple Choice: Select the correct answer from the choices given below each question. Write
the letter of your answer on the blank provided before each number.

__________1. Corporate level strategy deals with:

a. objectives of specific functions
b. objective of single strategic business
c. objectives of the corporate
d. objectives of specific operations

__________2. Typically, how many strategic decision levels are in the corporate decision-
making hierarchy?
a. 3
b. 4
c. could be more than 5
d. 2

__________3. Which individuals are most responsible for the success and failure of an
organization?
a. strategists
b. financial planners
c. personnel directors
d. stakeholders

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GRADUATE SCHOOL
Iloilo City

__________4. The three organizational levels are:

a. corporate level, business level, functional level
b. corporate level, business unit level, functional level
c. corporate strategy level, business unit level, functional level
d. corporate strategy level, business level, specialist level

__________5. The corporate level is where top management directs:

a. all employees for orientation
b. its efforts to stabilize recruitment needs
c. overall strategy for the entire organization
d. overall sales projections

__________6. Which of the following focuses on supporting the corporate and business
strategies?
a. competitive strategy
b. corporate strategy
c. operational strategy
d. national strategy

__________7. Which of the following defines how each individual business unit will attempt to
achieve its mission?
a. business strategy
b. corporate strategy
c. functional strategy
d. national strategy

__________8. The primary focus of strategic management is:

a. strategic analysis
b. the total organization
c. strategy formulation
d. strategy implementation.

__________9. Corporate governance is concerned with Executive remuneration, disclosure of

information, auditing and accounting procedures, and organizations' management
a. structures
b. elections to the board of directors
c. relationships with national governments
d. corporate-level strategy

__________10. Which of the following is not a recognized element of corporate strategy?

a. competitive advantage
b. closure
c. acquisition
d. divestment

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

Reading

What is Corporate Strategy?

Corporate Strategy takes a portfolio approach to strategic decision making by looking

across all of a firm’s businesses to determine how to create the most value. In order to develop
a corporate strategy, firms must look at how the various business they own fit together, how they
impact each other, and how the parent company is structured, in order to optimize human capital,
processes, and governance. Corporate Strategy builds on top of business strategy, which is
concerned with the strategic decision making for an individual business.

What are the Components of Corporate Strategy?

There are several important components of corporate strategy that leaders of organizations focus
on. The main tasks of corporate strategy are:

Allocation of resources
Organizational design
Portfolio management
Strategic tradeoffs

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

1 Allocation of Resources

The allocation of resources at a firm focuses mostly on two resources: people and
capital. In an effort to maximize the value of the entire firm, leaders must determine how to
allocate these resources to the various businesses or business units to make the whole greater
than the sum of the parts.
Key factors related to the allocation of resources are:
People
Identifying core competencies and ensuring they are well distributed across the firm
Moving leaders to the places they are needed most and add the most value (changes over time,
based on priorities)
Ensuring an appropriate supply of talent is available to all businesses
Capital
Allocating capital across businesses so it earns the highest risk-adjusted return
Analyzing external opportunities (mergers and acquisitions) and allocating capital between
internal (projects) and external opportunities

2 Organizational Designs

Organizational design involves ensuring the firm has the necessary corporate structure
and related systems in place to create the maximum amount of value. Factors that leaders must
consider are the role of the corporate head office (centralized vs decentralized approach) and the
reporting structure of individuals and business units – vertical hierarchy, matrix reporting, etc.
Key factors related to organizational design are:

Head office (centralized vs decentralized)

Determining how much autonomy to give business units

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

Deciding whether decisions are made top-down or bottom-up

Influence on the strategy of business units
Organizational structure (reporting)

Determine how large initiatives and commitments will be divided into smaller projects
Integrating business units and business functions such that there are no redundancies Allowing
for the balance between risk and return to exist by separating responsibilities Developing centers
of excellence determining the appropriate delegation of authority setting governance structures
setting reporting structures (military / top-down, matrix reporting)

3 Portfolio Management

Portfolio management looks at the way business units complement each other, their
correlations, and decides where the firm will “play” (i.e. what businesses it will or won’t enter).
Corporate Strategy related to portfolio management includes:

Deciding what business to be in or to be out of determining the extent of vertical

integration the firm should have managing risk through diversification and reducing the
correlation of results across businesses creating strategic options by seeding new opportunities
that could be heavily invested in if appropriate monitoring the competitive landscape and
ensuring the portfolio is well balanced relative to trends in the market.

4 Strategic Tradeoffs

One of the most challenging aspects of corporate strategy is balancing the tradeoffs
between risk and return across the firm. It’s important to have a holistic view of all the businesses
combined and ensure that the desired levels of risk management and return generation are being
pursued.

Below are the main factors to consider for strategic tradeoffs:

Managing risk
Firm-wide risk is largely depending on the strategies it chooses to pursue
True product differentiation, for example, is a very high-risk strategy that could result in
a market leadership position or total ruin
Many companies adopt a copycat strategy by looking at what other risk-takers have
done and modifying it slightly
It’s important to be fully aware of strategies and associated risks across the firm
Some areas might require true differentiation (or cost leadership) but other areas might
be better suited to copycat strategies that rely on incremental improvements
The degree of autonomy business units have is important in managing this risk
Generating returns

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Iloilo City

Higher risk strategies create the possibility of higher rates of return. The examples above
of true product differentiation or cost leadership could provide the most return in the long run if
they are well executed.

Swinging for the fences will lead to more home runs and more strikeouts, so it’s important
to have the appropriate number of options in the portfolio. These options can later turn into big
bets as the strategy develops.

Incentives

Incentive structures will play a big role in how much risk and how much return managers
seek. It may be necessary to separate the responsibilities of risk management and return
generation so that each can be pursued to the desired level. It may further help to manage multiple
overlapping timelines, ranging from short-term risk/return to long-term risk/return and ensuring
there is appropriate dispersion

Summary

Corporate Strategy is different than business strategy, as it focuses on how to manage

resources, risk, and return across a firm, as opposed to looking at competitive advantages.
Leaders responsible for strategic decision making have to consider many factors, including
allocation of resources, organizational design, portfolio management, and strategic tradeoffs.

Self-Assessment Questions

Answer briefly the following questions:

1. Discuss the company’s resource strength, weaknesses and competitive capabilities.

2. Define and explain SWOT Analysis.
3. Explain where the competitive pressures on companies within an industry come from?
4. What is the most widely used tool for diagnosing the principle competitive pressures
in a market?
5. How should we compete in the industry level strategy?

Suggested Enrichment Activity

What is corporate strategy and how does it create shareholder value? How does a parent
company create value? Compare Porter’s, Good and colleagues’ generic strategy typologies.
Discuss the strength and weaknesses of such typologies.

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 John B. Lacson Foundation Maritime University Arevalo), Inc.
GRADUATE SCHOOL
Iloilo City

References

[Link]

[Link]
[Link]#:~:text=we've%20learned.-
,A%20corporate%2Dlevel%20strategy%20is%20when%20a%20business%20makes%2
0a,resources%20on%20just%20one%20business.

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