Chapter 1

The Nature of Strategic Management

Strategic Management:
Concepts & Cases
13th Edition
Fred David

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Chapter outline (focus of the chapter)
Chapter 1: Overview of Strategic Management


1.1 What is Strategic Management?

1.2 Key terms in Strategic Management

1.3 The Strategic Management Model

1.4 Benefits of Strategic Management

1.5 Why some Firms Do No Strategic Planning

1.6 Pitfalls in Strategic Planning

1.7 Comparing Business and Military Strategy

 1.8 The Nature of Global Competition

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 Strategic Management –Defined

Art & science of formulating,

implementing, and evaluating,
cross-functional decisions that
enable an organization to achieve
its objectives

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Purpose of Strategic Management
To exploit and create new and different opportunities for tomorrow

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Strategic Management
In essence, the strategic plan is a company’s game plan

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3 Stages of the Strategic
Management Process

 Strategy formulation

 Strategy implementation

 Strategy evaluation
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Strategy Formulation

Vision & Mission

External Opportunities & Threats

Internal Strengths & Weaknesses

Long-Term Objectives

Alternative Strategies

Strategy Selection

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Issues in Strategy
Formulation

Businesses to enter
Businesses to abandon
Allocation of resources
Expansion or
diversification
International markets
Mergers or joint
ventures
Avoidance of hostile
takeover

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Strategy Implementation

Annual Objectives

Policies

Employee Motivation

Resource Allocation

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Strategy Implementation Steps

 Developing a strategy-supportive culture

 Creating an effective organizational structure
 Redirecting marketing efforts
 Preparing budgets
 Developing and utilizing information systems
 Linking employee compensation to
organizational performance

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Issues in Strategy
Implementation

Action Stage of Strategic

Management

Mobilization of
employees & managers

Most difficult stage

Interpersonal skills
critical

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Strategy Evaluation

Internal Review

External Review

Performance Measurement

Corrective Action

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Prime Task of
Strategic Management

Peter Drucker: Think through the

overall mission of a business. Ask
the key question:
“What is our Business?”

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Integrating Intuition & Analysis

The strategic management process

attempts to organize quantitative and
qualitative information under conditions of
uncertainty

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Integrating Intuition & Analysis

Intuition is based on:

 Past experiences

 Judgment

 Feelings

Intuition is useful for decision making in

conditions of:
 Great uncertainty

 Little precedent

 Highly interrelated variables

 Several plausible alternatives

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Integrating Intuition & Analysis

Intuition & Judgment

Involve management at all levels

Influence all analyses

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Adapting to Change

Organizations should continually

monitor internal and external
events and trends so that timely
changes can be made as needed

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Key Terms in Strategic Management

 Competitive advantage
 Strategists
 Vision and mission statements
 External opportunities and threats
 Internal strengths and weaknesses
 Long-term objectives
 Strategies
 Annual objectives
 Policies
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Strategic Management is
Gaining and Maintaining
Competitive Advantage

Anything that a firm does especially

well compared to rival firms

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Achieving Sustained Competitive
Advantage

1. Continually adapting to changes in

external trends and events and internal
capabilities, competencies, and resources

2. Effectively formulating, implementing, and

evaluating strategies that capitalize on those
factors

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Strategists

Gather Information

Analyze Information

Organize Information

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Vision and Mission Statements

Vision Statement –
What do we want to become?

Mission Statement –
What is our business?

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External Opportunities and Threats

Analysis of Trends
 Economic
 Social
 Cultural
 Demographic/Environmental
 Political, Legal, Governmental
 Technological
 Competitors

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External Opportunities and Threats

Basic Tenet of Strategic Management

Take advantage of
External Opportunities

Strategy Formulation

Avoid/minimize impact of
External Threats

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Internal Strengths and Weaknesses

 Controllable
activities performed
especially well or poorly

 Determined relative to competitors

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Internal Strengths and Weaknesses

 Typically located in functional areas of the firm

 Management
 Marketing

 Finance/Accounting

 Production/Operations

 Research & Development

 Management Information Systems

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Internal Strengths and Weaknesses

Assessing the Internal Environment

Ratios

Performance Measures
Internal Factors
Industry Averages

Survey Data

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Long-Term Objectives

 Specific results that an organization

seeks to achieve in pursuing its basic
mission

 Long-term means more than one year

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Long-Term Objectives

 Essential for ensuring the firm’s success

 Provide direction

 Aid in evaluation

 Create synergy

 Reveal priorities

 Focus coordination

 Provide basis for planning, organizing,

motivating, and controlling

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Strategies

Means by which long-term objectives

are achieved

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Strategies
 Examples
 Geographic expansion

 Diversification

 Acquisition

 Product development

 Market penetration

 Retrenchment

 Divestiture

 Liquidation

 Joint venture

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Sample Strategies
 Table 1-1

 Best Buy

 Levi Strauss

 New York Times Company

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Annual Objectives

Short-term milestones that firms must

achieve to reach long-term objectives

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Policies

Means by which annual objectives will

be achieved

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Strategic Management Model

 StrategicManagement Process
 Dynamic & continuous

 More formal in larger

organizations

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Benefits of Strategic Management

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Benefits of Strategic Management

 Nonfinancial Benefits
 Enhanced awareness of threats
 Improved understanding of competitors’ strategies
 Increased employee productivity
 Reduced resistance to change
 Clearer understanding of performance-reward
relationship
 Enhanced problem-prevention capabilities

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Why Some Firms Do No Strategic
Planning
 Lack of knowledge of strategic planning
 Poor reward structures
 Fire fighting
 Waste of time
 Too expensive
 Laziness
 Content with success

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Why Some Firms Do No Strategic
Planning (continued)
 Fear of failure
 Overconfidence
 Prior bad experience
 Self-interest
 Fear of the unknown
 Honest difference of opinion
 Suspicion

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Pitfalls in Strategic Planning

Strategic planning is an involved, intricate,

and complex process that takes an
organization into uncharted territory

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Effective Strategic Planning is:

 A people process more than a paper process

 A learning process
 Words supported by numbers
 Simple and nonroutine
 Varying assignments, team membership,
meeting formats, and planning calendars
 Challenging assumptions underlying
corporate strategy
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Effective Strategic Planning
continued
 Welcomes bad news
 Requires open-mindedness and a spirit of
inquiry
 Is not a bureaucratic mechanism
 Is not ritualistic or stilted
 Is not too formal, predictable, or rigid
 Does not contain jargon or arcane language

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Effective Strategic Planning
continued
 Is not a formal system for control
 Does not disregard qualitative information
 Is not controlled by “technicians”
 Does not pursue too many strategies at once
 Continually strengthens the “good ethics is
good business” policy

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Comparing Business and Military
Strategy
 Strategic planning started in the military
 Similarity
 Both business and military organizations must
adapt to change and constantly improve
 Difference
 Business strategy assumes competition
 Military strategy assumes conflict

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Chapter 2
The Business Vision & Mission

Strategic Management:
Concepts & Cases
13th Edition
Fred David

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Chapter outlines - Focused of the chapter
◼2.1 What is a Business Mission?
◼2.2 Vision and Mission Statement

◼2.3 Importance (Benefits) of Vision and Mission

Statement
◼2.4 Characteristics of a Mission Statement

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Vision

“The last thing IBM needs right now is a

vision.” (July 1993)

“What IBM needs most right now is a

vision.” (March 1996)

– Louis V. Gerstner, Jr., CEO, IBM Corporation

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Vision

Agreement on the basic vision for which the

firm strives to achieve in the long term is
especially important.

“What do we want to become?”

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Vision Statement Examples

Tyson Foods’ vision is to be the world’s first

choice for protein solutions while maximizing
shareholder value.

General Motors’ vision is to be the world

leader in transportation products and
related services.

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Vision Statement Examples

PepsiCo’s responsibility is to continually improve all

aspects of the world in which we operate –
environment, social, economic – creating a better
tomorrow than today.

Dell’s vision is to create a company culture

where environmental excellence is second
nature.

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Vision

Clear Business
Vision

Comprehensive
Mission Statement

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Mission Statement

◼ Answers the question:

❑ “What is our business?”
◼ Reveals:
❑ what the organization wants to be
❑ whom we want to serve

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Mission Statement

◼ An enduring statement of purpose

that distinguishes one organization
from other similar enterprises
◼ A declaration of an organization’s
“reason for being”

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Mission Statements are also called

◼ Creed statement
◼ Statement of purpose
◼ Statement of philosophy
◼ Statement of beliefs
◼ Statement of business principles
◼ A statement “defining our business”

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Mission Statement Examples
Fleetwood Enterprises will lead the recreational
vehicle and manufactured housing industries in
providing quality products with a passion for
customer-driven innovation. We will emphasize
training, embrace diversity and provide growth
opportunities for our associates and our dealers. We
will lead our industry in the application of appropriate
technologies. We will operate at the highest levels of
ethics and compliance with a focus on exemplary
corporate governance. We will deliver value to our
shareholders, positive operating results and industry-
leading earnings.

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Mission Statement Examples
We aspire to make PepsiCo the world’s
premier consumer products company, focused
on convenient foods and beverages. We seek
to produce healthy financial rewards for
investors as we provide opportunities for
growth and enrichment to our employees, our
business partners and the communities in
which we operate. And in everything we do, we
strive to act with honesty, openness, fairness
and integrity.

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Mission Statement Examples

Dell’s mission is to be the most successful

computer company in the world at delivering
the best customer experience in markets we
serve. In doing so, Dell will meet consumer
expectations of highest quality; leading
technology; competitive pricing; individual
and company accountability; best-in-class
service and support; flexible customization
capability; superior corporate citizenship;
financial stability.
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Mission Statement Examples

Proctor & Gamble will provide branded

products and services of superior quality
and value that improve the lives of the
world’s consumers. As a result, consumers
will reward us with industry leadership in
sales, profit, and value creation, allowing
our people, our shareholders, and the
communities in which we live and work to
prosper.

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Mission Statement Examples

At L’Oreal, we believe that lasting

business success is built upon ethical
standards which guide growth and on
a genuine sense of responsibility to
our employees, our consumers, our
environment and to the communities in
which we operate.

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Vision & Mission

◼ Great benefits can be achieved if

an organization
❑ Systematically revisits their vision and
mission statement
❑ Treats them as living documents

❑ Considers them to be an integral part

of the firm’s culture

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Vision & Mission
Profit & vision are necessary to
effectively motivate a workforce
Shared vision creates a community of
interests
A clear mission is needed before
alternative strategies can be
formulated and implemented
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Developing Vision & Mission

Participation by as many managers as

possible is important in developing the
mission because through involvement
people become committed to an
organization

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Steps to Developing Vision &
Mission Statements
1. Have managers read related articles
2. Have managers prepare a vision and
mission statement for the organization
3. Merge the documents into one and
distribute
4. Gather feedback from managers
5. Meet to revise the final document
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Benefits of Mission Statements

◼ Better financial results

◼ Unanimity of purpose
◼ Resource allocation
◼ Establishment of culture
◼ Focal point for individuals
◼ Establishment of work structure
◼ Basis of assessment and control
◼ Resolution of divergent views
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Copyright © 2011 Pearson Education, Inc. Ch 2 -24
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Resolution of Divergent Views

◼ A genuine decision must be based on

divergent views to have a chance to be
a right and effective decision

◼ Considerable disagreement over vision

and mission statements can cause
trouble if not resolved

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Vision & Mission Statements

◼ Provide unity of direction

◼ Promote shared expectations

◼ Consolidate values

◼ Project a sense of worth and intent

◼ Affirm the company’s commitment

to responsible action
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Declaration of
Attitude
✓Broad in scope

✓Generate strategic alternatives

✓Not overly specific

✓Reconciles interests among

diverse stakeholders

✓Finely balanced between

specificity & generality

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Declaration of
Attitude

✓Arouse positive feelings &

emotions

✓Motivate readers to action

✓Generate favorable impression

of the firm

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Declaration of
Attitude

✓Reflect future growth

✓Provide criteria for strategy

selection

✓Basis for generating &

evaluating strategic options

✓Dynamic in nature

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 Products or
Services Markets
Customers

Mission Technology
Employees Components

Survival,
Growth,
Public Profits
Image
Self-Concept Philosophy

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◼ 1) Customers - Who are the firm’s customers?

◼ 2) Products or services - What are the firm’s major products or services?

◼ 3) Markets - Geographically, where does the firm compete?

◼ 4) Technology - Is the firm technologically current?

◼ 5) Concern for Survival, Growth, and Profitability - Is the firm committed to

growth and financial soundness?

◼ 6) Philosophy - What are the basic beliefs, values, aspirations, and ethical
priorities of the firm?

◼ 7) Self-Concept - What is the firm’s distinctive competence or major competitive

advantage?

◼ 8) Concern for Public Image - Is the firm responsive to social, community, and
environmental concerns?

◼ 9) Concern for Employees - Are employees a valuable asset of the firm?

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Mission Statement of Pakcem Limited

◼ 1) Customers - We are committed to providing outstanding value to our customers"

◼ 2) Products or services -
◼ 3) Markets-
◼ 4) Technology -
◼ 5) Concern for Survival, Growth, and Profitability -
◼ 6) Philosophy -
◼ 7) Self-Concept -
◼ 8) Concern for Public Image -
◼ 9) Concern for Employees

Mission Statement of Facto Cement Limited

1) Customers - Consistently maintain a high standard of customer service"

2) Products or services -
3) Markets-
4) Technology -
5) Concern for Survival, Growth, and Profitability -
6) Philosophy -
7) Self-Concept -
8) Concern for Public Image -
9) Concern for Employees

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Copyright © 2011 Pearson Education, Inc. Ch 2 -33
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 Strategic Management Concepts: A
Competitive Advantage Approach,
Concepts and Cases
Seventeenth Edition, Global Edition

Chapter 3

The External Assessment

Copyright © 2023 Pearson Education, Ltd. All Rights Reserved

 Figure 3.1
A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1 (February 1989): 91.
See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama Wiguna, “Balance Scorecard of
David’s Strategic Modeling at Industrial Business for National Construction Contractor of Indonesia,” Journal of
Mathematics and Technology, no. 4 (October 2010): 20.
Chapter outline : Focus of the chapter

❖3.1 The Nature of external audit process

❖3.2 Key external factors
❖3.3 Sources of external information
❖3.4 Forecasting tools and techniques
❖3.5 Porter’s 5 Forces Model of Competition
❖3.6 EFE Matrix
❖3.7 Competitive Profile Matrix

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 External Audit
❖External audit
❖focuses on identifying and evaluating trends
and events beyond the control of a single firm
❖reveals key opportunities and threats
confronting an organization so that managers
can formulate strategies to take advantage of
the opportunities and avoid or reduce the
impact of threats

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The Nature of an External Audit
❖The external audit is aimed at identifying
key variables that offer actionable
responses
❖Firms should be able to respond either
offensively or defensively to the factors by
formulating strategies that take advantage of
external opportunities or that minimize the
impact of potential threats.

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 Key External Forces
External forces can be divided into five
broad categories:
1. economic forces
2. social, cultural, demographic, and natural
environment forces
3. political, governmental, and legal forces
4. technological forces
5. competitive forces

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 Figure 3.2
Relationships Between Key External Forces and an
Organization

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 The AQCD Test
❖ When identifying and
prioritizing key external
factors in strategic
planning, the following 4
factors are important:
❖ Actionable
❖ Quantitative
❖ Comparative
❖ Divisional
❖ The AQCD is a measure
of the quality of an
external factor.
 The Process of Performing an
External Audit
❖First, gather competitive intelligence and
information about economic, social,
cultural, demographic, environmental,
political, governmental, legal, and
technological trends.

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 The Process of Performing an
External Audit
❖Information should be assimilated and
evaluated
❖A final list of the most important key
external factors should be communicated

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 Economic Forces
❖ Shift to service economy ❖ Income differences by region
❖ Availability of credit and consumer group
❖ Level of disposable income ❖ Price fluctuations
❖ Propensity of people to spend ❖ Foreign countries’ economic
❖ Interest rates conditions
❖ Inflation rates ❖ Monetary and Fiscal policy
❖ GDP trends ❖ Stock market trends
❖ Consumption patterns ❖ Tax rate variation by country
and state
❖ Unemployment trends ❖ European Economic
❖ Value of the dollar Community (EEC) policies
❖ Import/Export factors ❖ Organization of Petroleum
❖ Demand shifts for different Exporting Countries (OPEC)
goods and services policies

7-11
 Economic Forces

❖GDP

❖Trends in the dollar’s value

❖Unemployment rates

Ch 3 -12
Key Social, Cultural, Demographic, and
Natural Environmental Variables
❖ Population changes by race, ❖ Attitudes toward retirement
age, and geographic area ❖ Energy conservation
❖ Regional changes in tastes and ❖ Attitudes toward product
preferences quality
❖ Number of marriages ❖ Attitudes toward customer
❖ Number of divorces service
❖ Number of births ❖ Pollution control
❖ Number of deaths ❖ Attitudes toward foreign
❖ Immigration and emigration peoples
rates ❖ Energy conservation
❖ Social Security programs ❖ Social programs
❖ Life expectancy rates ❖ Number of churches
❖ Per capita income ❖ Number of church members
❖ Social media pervasiveness ❖ Social responsibility issues

7-13
Social, Cultural, Demographic, and
Natural Environmental Forces

Major Impact –
•Products
•Services
•Markets
•Customers

Ch 3 -14
 Political, Governmental, and
Legal Forces
❖The increasing global interdependence
among economies, markets, governments,
and organizations makes it imperative that
firms consider the possible impact of
political variables on the formulation and
implementation of competitive strategies.

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 Political, Government, and
Legal Variables

❖ Environmental ❖ USA vs. other country

regulations relationships
❖ Political conditions in
❖ Number of patents foreign countries
❖ Changes in patent laws ❖ Global price of oil
❖ Equal employment laws changes
❖ Local, state, and federal
❖ Level of defense laws
expenditures ❖ Import–export regulations
❖ Unionization trends ❖ Tariffs
❖ Antitrust legislation ❖ Local, state, and national
elections

7-16
Political, Governmental, and
Legal Forces
Government Regulation

Key opportunities & threats

◼ Antitrust legislation
◼ Tax rates

◼ Lobbying activities

◼ Patent laws

Ch 3 -17
Political, Governmental, and Legal Forces

❖Protectionist policies

❖Governments taking equity stakes in

companies

Ch 3 -18
 Technological Forces
New technologies such as:
❖ the Internet of Things
❖ 3D printing
❖ the cloud
❖ mobile devices
❖ biotech
❖ analytics
❖ autotech
❖ robotics and
❖ artificial intelligence
are fueling innovation in many industries, and impacting
strategic-planning decisions.
7-19
 Technological Forces
❖Many firms now have a Chief Information
Officer (CIO) and a Chief Technology
Officer (CTO) who work together to
ensure that information needed to
formulate, implement, and evaluate
strategies is available where and when it is
needed

7-20
 Results of Technological Advances
1. Major opportunities and threats that must be considered in formulating
strategies.
2. Can affect organizations’ products, services, markets, suppliers,
distributors, competitors, customers, manufacturing processes,
marketing practices, and competitive position.
3. Can create new markets, result in new and improved products, change
the relative competitive cost positions, and render existing products and
services obsolete.
4. Can reduce or eliminate cost barriers between businesses, create shorter
production runs, create shortages in technical skills, and result in
changing values and expectations of employees, managers, and
customers.
5. Can create new competitive advantages that are more powerful than
existing advantages.
7-21
Technological Forces
Major Impact –
•Internet
•Essential for nearly every
strategic decision

Ch 3 -22
 Competitive Forces
❖An important part of an external audit is
identifying rival firms and determining their
strengths, weaknesses, capabilities,
opportunities, threats, objectives, and
strategies

Copyright ©2017 Pearson Education, Limited 7-23

 Competitive Forces
Characteristics of the most competitive
companies:
1. Strive to continually increase market share
2. Use the vision/mission as a guide for all decisions
3. Whether it's broke or not, fix it–make it better
4. Continually adapt, innovate, improve
5. Acquisition is essential to growth
6. Hire and retain the best employees and managers possible
7. Strive to stay cost-competitive on a global basis

7-24
 Key Questions About Competitors
1. What are the strengths of our major competitors?
2. What are the weaknesses of our major competitors?
3. What are the objectives and strategies of our major competitors?
4. How will our major competitors most likely respond to current economic, social,
cultural, demographic, environmental, political, governmental, legal, technological,
and competitive trends affecting our industry?
5. How vulnerable are the major competitors to our alternative company strategies?
6. How vulnerable are our alternative strategies to successful counterattack by our
major competitors?
7. How are our products or services positioned relative to major competitors?
8. To what extent are new firms entering and old firms leaving this industry?
9. What key factors have resulted in our present competitive position in this industry?
10.How have the sales and profit rankings of our major competitors in the industry
changed over recent years? Why have these rankings changed that way?
11.What is the nature of supplier and distributor relationships in this industry?
12.To what extent could substitute products or services be a threat to our competitors?

7-25
Competitive Intelligence Programs
❖Competitive intelligence (CI)
❖a systematic and ethical process for gathering
and analyzing information about the
competition's activities and general business
trends to further a business's own goals

7-26
 Competitive Intelligence Programs
The three basic objectives of a CI program are:

1. To provide a general understanding of an industry and

its competitors

2. To identify areas in which competitors are vulnerable

and to assess the impact strategic actions would have
on competitors

3. To identify potential moves that a competitor might make

that would endanger a firm's position in the market
7-27
Figure 3.3 The Five-Forces Model of
Competition (1 of 2)

Copyright © 2023 Pearson Education, Ltd. All Rights Reserved

https://www.business-to-you.com/porters-five-forces/

Ch 3 -29
 The Five-Forces Model of
Competition
1. Identify key aspects or elements of each
competitive force that impact the firm.

2. Evaluate how strong and important each

element is for the firm.

3. Decide whether the collective strength of

the elements is worth the firm entering or
staying in the industry.
7-30
 The Five-Forces Model
❖Rivalry among competing firms

❖Most powerful of the five forces

❖Focus on competitive advantage of

strategies over other firms

7-31
 The Five-Forces Model
TABLE 7-7 Conditions That Cause High Rivalry Among Competing Firms
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
1. When the number of competing firms is high
2. When competing firms are of similar size
3. When competing firms have similar capabilities
4. When the demand for an industry’s products is falling
5. When the product or service prices in the industry are falling
6. When consumers can switch brands easily
7. When barriers to leaving the market are high
8. When barriers to entering the market are low
9. When fixed costs are high among competing firms
10. When the product is perishable
11. When rivals have excess capacity
12. When consumer demand is falling
13. When rivals have excess inventory
14. When rivals sell similar products/services
15. When mergers are common in the industry
7-32
 The Five-Forces Model
❖Potential Entry of New
Competitors

❖Barriers to entry are important

❖Quality, pricing, and marketing can

overcome barriers

7-33
 Barriers to Entry
❖Need to gain economies of scale quickly
❖Need to gain technology and specialized know-
how
❖Lack of experience
❖Strong customer loyalty
❖Strong brand preferences
❖Large capital requirements
❖Lack of adequate distribution channels

7-34
 Barriers to Entry
❖Government regulatory policies
❖Tariffs
❖Lack of access to raw materials
❖Possession of patents
❖Undesirable locations
❖Counterattack by entrenched firms
❖Potential saturation of the market

7-35
 The Five-Forces Model
❖Potential development of
substitute products
❖Pressure increases when:

❖Prices of substitutes decrease

❖Consumers' switching costs decrease

7-36
 The Five-Forces Model
❖Bargaining Power of Suppliers is
increased when (there are):
❖Few suppliers
❖Few substitutes
❖Costs of switching raw materials is high
❖Backward integration is gaining control or
ownership of suppliers

7-37
 The Five-Forces Model
❖Bargaining power of consumers
❖Customers being concentrated or
buying in volume affects intensity of
competition
❖Consumer power is higher where
products are standard or
undifferentiated

7-38
 Conditions Where Consumers Gain
Bargaining Power
1. If buyers can inexpensively switch
2. If buyers are particularly important
3. If sellers are struggling in the face of falling
consumer demand
4. If buyers are informed about sellers' products,
prices, and costs
5. If buyers have discretion in whether and when
they purchase the product

7-39
Sources of External Information
❖Unpublished sources include customer
surveys, market research, speeches at
professional and shareholders' meetings,
television programs, interviews, and
conversations with stakeholders.
❖Published sources of strategic information
include periodicals, journals, reports,
government documents, abstracts, books,
directories, newspapers, and manuals.

7-40
Sources of External Information

❖http://finance.yahoo.com

❖ www.hoovers.com

❖ http://globaledge.msu.edu/industries/

7-41
Forecasting Tools and Techniques

❖Forecasts

❖educated assumptions about future

trends and events

❖no forecast is perfect

7-42
 Making Assumptions
❖Assumptions
❖Best present estimates of the impact of
major external factors, over which the
manager has little if any control, but
which may exert a significant impact on
performance or the ability to achieve
desired results.

7-43
 Business Analytics

❖Using software to mine huge

volumes of data

❖Helps executives make decisions

7-44
 Industry Analysis: The External Factor
Evaluation (EFE) Matrix

Summarize and evaluate these factors:

❖Economic ❖ Political
❖Social ❖ Governmental
❖Cultural ❖ Legal
❖Demographic ❖ Technological
❖Environmental ❖ Competitive

7-45
The EFE matrix is the strategic tool used to evaluate firm existing strategies, EFE matrix can be
defined as the strategic tool to evaluate external environment or macro environment of the firm
include economic, social, technological, government, political, legal and competitive information.
EFE Matrix is an analytical technique for evaluation of external position of the organization or its
strategic intents.

Opportunities

Opportunities are the chances exist in the external environment, it depends firm whether the firm is
willing to exploit the opportunities or may be they ignore the opportunities due to lack of resources.

Threats
Threats are always evil for the firm, minimum no of threats in the external environment open many
doors for the firm. Maximum number of threats for the firm reduce their power in the industry.

RATING
Rating in EFE matrix represent the response of firm toward the opportunities and threats. Highest
the rating better the response of the firm to exploit opportunities and defend the threats. Rating
range from 1.0 to 4.0 and can be applied to any factor whether it comes under opportunities or
threats.[sky]

Ch 3 -46
There are some important point related to rating in EFE matrix.

Rating is applied to each factor.

The response is poor represented by 1.0
The response is average is represented by 2.0
The response is above average represented by 3.0
The response is superior represented by 4.0

WEIGHT
Weight attribute in EFE matrix indicates the relative importance of factor to being successful in the
firm’s industry. The weight range from 0.0 means not important and 1.0 means important, sum of all
assigned weight to factors must be equal to 1.0 otherwise the calculation would not be consider
correct.

WEIGHTED SCORE
Weighted score value is the result achieved after multiplying each factor rating with the weight.

TOTAL WEIGHTED SCORE

The sum of all weighted score is equal to the total weighted score, final value of total weighted
score should be between range 1.0 (low) to 4.0(high). The average weighted score for EFE matrix
is 2.5 any company total weighted score fall below 2.5 consider as weak. The company total
weighted score higher then 2.5 is consider as strong in position.
Steps:
1. List key external factors as identified in the external-audit process. Include a total of from ten to twenty
factors, including both opportunities and threats affecting the firm and its industry. List the
opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and
comparative numbers whenever possible.

2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight
indicates the relative importance of that factor to being successful in the firm’s industry. Opportunities
often receive higher weights than threats, but threats too can receive high weights if they are especially
severe or threatening. Appropriate weights can be determined by comparing successful with
unsuccessful competitors or by discussing the factor and reaching a group consensus. The sum of all
weights assigned to the factors must equal 1.0.

3. Assign a 1 to 4 rating to each key external factor to indicate how effectively the firm’s current strategies
respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the
response is average, and 1 = the response is poor: Ratings are based on effectiveness of the firm’s
strategies. Ratings are thus company-based, whereas the weights in Step 2 are industry-based. It is
important to note that both threats and opportunities can receive a 1, 2, 3, or 4.

4. Multiply each factor’s weight by its rating to determine a weighted score.

5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

Ch 3 -48
Interpreting the score:

Regardless of the number of key opportunities and threats included in an External Factor
Evaluation (EFE) Matrix, the highest possible total weighted score for an organization is
4.0 and the lowest possible total weighted score is 1.0. The average total weighted score
is 2.5. A total weighted score of 4.0 indicates that an organization is responding in an
outstanding way to existing opportunities and threats in its industry. In other words, the
firm’s strategies effectively take advantage of existing opportunities and minimize the
potential adverse effect of external threats. A total score of 1.0 indicates that the firm’s
strategies are not capitalizing on opportunities or avoiding external threats.

The External Factor Evaluation (EFE) Matrix is similar to Internal Factor Evaluation (EFE)
Matrix. The major difference between the EFE matrix and the IFE matrix is the type of
factors that are included in the model. While the IFE matrix deals with internal factors, the
EFE matrix is concerned solely with external factors.

Ch 3 -49
Ch 3 -50
Copyright © 2011 Pearson Education, Inc.
Publishing
Ch 3as
-51Prentice Hall
EFE Matrix for a Local Ten-Theater
Cinema Complex

7-52
 Industry Analysis: Competitive
Profile Matrix (CPM)
❖Identifies firm's major competitors
and their strengths & weaknesses in
relation to a sample firm's strategic
positions

❖Critical success factors include

internal and external issues

7-53
 CPM
CPM, or the CPM Matrix, stands for Competitive Profile Matrix and is a powerful strategic
analysis tool. CPM allows business owners, stockholders and other interested parties to see
the strengths and weaknesses of all major competitors in an industry on a single page.

The Competitive Profile Matrix (CPM) is a tool that compares the firm and its rivals and
reveals their relative strengths and weaknesses.

In order to better understand the external environment and the competition in a particular
industry, firms often use CPM. The matrix identifies a firm’s key competitors and compares
them using industry’s critical success factors. The analysis also reveals company’s relative
strengths and weaknesses against its competitors, so a company would know, which areas it
should improve and, which areas to protect. An example of a matrix is demonstrated below.

Competitive profile matrix is an essential strategic management tool to compare the firm with
the major players of the industry. Competitive profile matrix show the clear picture to the firm
about their strong points and weak points relative to their competitors. The CPM score is
measured on basis of critical success factors, each factor is measured in same scale mean
the weight remain same for every firm only rating varies. The best thing about CPM that it
include your firm and also facilitate to add other competitors make easier the comparative
analysis.

Copyright © 2011 Pearson Education, Inc.

Ch 3 -54
Publishing as Prentice Hall
WEIGHT
Weight attribute in CPM indicates the relative importance of factor to being successful in
the firm’s industry. The weight range from 0.0 means not important and 1.0 means
important, sum of all assigned weight to factors must be equal to 1.0 otherwise the
calculation would not be consider correct.

WEIGHTED SCORE
Weighted score value is the result achieved after multiplying each factor rating with the
weight.

TOTAL WEIGHTED SCORE

The sum of all weighted score is equal to the total weighted score, final value of total
weighted score should be between range 1.0 (low) to 4.0(high). The average weighted
score for CPM matrix is 2.5 any company total weighted score fall below 2.5 consider as
weak. The company total weighted score higher then 2.5 is consider as strong in
position.The other dimension of CPM is the firm with higher total weighted score
considered as the winner among the competitors.

Ch 3 -55
Industry Analysis: Competitive Profile Matrix (CPM)
◼ Identifies firm’s major competitors and their strengths & weaknesses in relation
to a sample firm’s strategic positions

◼ Critical success factors include internal and external issues

◼ Rating in CPM represent the response of firm toward the critical success factors.
Highest the rating better the response of the firm towards the critical success
factor ,rating range from 1.0 to 4.0 and can be applied to any factor.

Rating is applied to each factor.

The response is poor represented by 1.0
The response is average is represented by 2.0
The response is above average represented by 3.0
The response is superior represented by 4.0

Ch 3 -56
 Industry Analysis: Competitive Profile
Matrix (CPM)
❖ Identifies firm's major competitors and their strengths &
weaknesses in relation to a sample firm's strategic
positions
❖ Critical success factors include internal and external
issues
 Table 3.10
An Example Competitive Profile Matrix

Note: The ratings values are as follows: 1 = response is poor, 2 = response is average, 3 = response is above
average, 4 = response is superior. As indicated by the total weighted score of 2.20, Company 3 is performing
worst. Only 8 critical success factors are included for simplicity; in actuality, however, this is too few. The
template asks that 12 factors be included and to tailor factors to a given industry.
Ch 3 -59
 An Example Competitive
Profile Matrix
TABLE 7-12 An Example Competitive Profile Matrix
▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬
Company 1 Company 2 Company 3____________
Critical Success
Factors_ ___ _ Weight Rating Score Rating Score Rating Score____ ____
Advertising 0.20 1 0.20 4 0.80 3 0.60
Product Quality 0.10 4 0.40 3 0.30 2 0.20
Price Competitiveness 0.10 3 0.30 2 0.20 1 0.10
Management 0.10 4 0.40 3 0.20 1 0.10
Financial Position 0.15 4 0.60 2 0.30 3 0.45
Customer Loyalty 0.10 4 0.40 3 0.30 2 0.20
Global Expansion 0.20 4 0.80 1 0.20 2 0.40
Market Share 0.05 1 0.05 4 0.20 3 0.15
Total 1.00 3.15 2.50 2.20

Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 =
major strength. As indicated by the total weighted score of 2.50, Competitor 2 is weakest. Only eight
critical success factors are included for simplicity; this is too few in actuality.

7-60
Ch 3 -61
Ch 3 -62
Industry Analysis CPM
Important –

Just because one firm receives a 3.2 rating

and another receives a 2.8 rating, it does not
follow that the first firm is 20 per cent better
than the second.

Ch 3 -63
Strategic Management Concepts: A
Competitive Advantage Approach,
Concepts and Cases
Seventeenth Edition, Global Edition

Chapter 4

The Internal Assessment

Copyright © 2023 Pearson Education, Ltd. All Rights Reserved

Ch 4 -2
Chapter outline: chapter focus

◼ 4.1 Nature of an Internal Audit Process

◼ 4.2 Key Internal Factors
◼ 4.3 Relationship among functional areas of
business
◼ 4.4 Internal Audit checklist of questions
◼ 4.5 IFE

Ch 4 -3
Ch 4 -4
 Internal of Organisation
◼ Management
◼ HRM
◼ Focusing on ◼ Marketing
the department ◼ OPM-manufacturing / production/
that running operation
the show
◼ MIS
◼ R&D
Organizational culture
◼ Finance / Accounting
◼ Kitchen department
◼ House keeping
Identify Strength and weakness ◼ Front Desk
◼ Back office
◼ Customer Service
◼ Operators
◼ etc.

Ch 4 -5
The Process of Performing an Internal
Audit
◼ The internal audit
❑ Requires gathering, assimilating, and prioritizing

information about the firm's management, marketing,

finance, accounting, production/operations, research
and development (R and D), and management
information systems operations
❑ Provides more opportunity for participants to

understand how their jobs, departments, and divisions

fit into the whole firm
Ch 4 -7
Internal Assessment

“Great spirits have always encountered

violent opposition from mediocre minds.”
– Albert Einstein

“Weak leadership can wreck the soundest

strategy.”
– Sun Tzu

Ch 4 -8
Key Internal Forces

Distinctive Competencies:
❑ A firm’s strengths that cannot be easily matched or
imitated by competitors
❑ Building competitive advantages involves taking
advantage of distinctive competencies

Ch 4 -9
Internal Audit

Involvement in performing an
internal strategic-management audit
provides a vehicle for understanding
the nature and effect of decisions in
other functional business areas of
the firm

Ch 4 -10
Internal Audit

◼Managers and employees from

all areas provide information
◼A team of managers then selects
10 to 15 key organizational
strengths and weaknesses to
focus on
Ch 4 -11
Internal Audit

Financial Ratio Analysis

Exemplifies complexity of
relationships among functional areas
of the business

Ch 4 -12
 Resource Based View (RBV)
Approach to Competitive Advantage
Internal resources are more important than external factors
• The resource-based view (RBV) is a managerial framework used to determine the
strategic resources a firm can exploit to achieve sustainable competitive
advantage. The RBV focuses managerial attention on the firm's internal resources
in an effort to identify those assets, capabilities and competencies with the
potential to deliver superior competitive advantages.

• RBV is an approach to achieving competitive advantage that emerged in 1980s

and 1990s, after the major works published by Wernerfelt, B. (“The Resource-
Based View of the Firm”), Prahalad and Hamel (“The Core Competence of The
Corporation”), Barney, J. (“Firm resources and sustained competitive advantage”)
and others.

• The supporters of this view argue that organizations should look inside the
company to find the sources of competitive advantage instead of looking at
competitive environment for it.

• Organizational performance will primarily be determined by internal

resources, grouped into 3 broad categories: Physical/ Human/ organization

Ch 4 -13
 RESOURCE BASED VIEW (RBV)
◼ Three All-Encompassing Categories
1. Physical resources – Plant (Place) & Equipment/ Location/
technology/ raw materials/ Machines
2. Human resources – Employees/ Training / Experience
3. Organizational resources – Firm Structure/ Planning Process/
Information Systems/ Patents / Copyrights
◼ Empirical Indicators
◼ Rare
◼ Hard to imitate
◼ Not easily substitutable
 Resource Based View (RBV)
◼ The Resource-Based View (RB V) Approach
❑ contends that internal resources are more important

for a firm than external factors in achieving and

sustaining competitive advantage
◼ Proponents of the RBV contend that organizational
performance will primarily be determined by internal
resources. These resources can be grouped into
❑ tangible

❑ intangible

◼ These enable a firm to implement strategies that improve

its efficiency and effectiveness and lead to a sustainable
competitive advantage.
Ch 4 -15
Integrating Strategy & Culture

Organizational Culture
Organizational culture is “a pattern of
behaviour that has been developed by an
organization as it learns to cope with its
problem of external adaptation and internal
integration and that has worked well enough to
be considered valid and to be taught to new
members as the correct way to perceive, think,
and feel.”

Ch 4 -16
Ch 4 -17
Ch 4 -18
Ch 4 -19
Table 4.4
Aspects of Organizational Culture
Dimension Low Degree Degree Degree High
1. Strong work ethic; arrive early and leave late 1 2 3 4 5
2. High ethical beliefs; clear code of business ethics followed 1 2 3 4 5
3. Formal dress; shirt and tie expected 1 2 3 4 5
4. Informal dress; many casual dress days 1 2 3 4 5
5. Socialize together outside of work 1 2 3 4 5
6. Do not question supervisor’s decision 1 2 3 4 5
7. Encourage whistle-blowing 1 2 3 4 5
8. Be health conscious; have a wellness program 1 2 3 4 5
9. Allow substantial “working from home” 1 2 3 4 5
10. Encourage creativity, innovation, and open-mindedness 1 2 3 4 5
11. Support women and minorities; no glass ceiling 1 2 3 4 5
12. Be highly socially responsible; be philanthropic 1 2 3 4 5
13. Have numerous meetings 1 2 3 4 5
14. Have a participative management style 1 2 3 4 5
15. Preserve the natural environment; have a sustainability 1 2 3 4 5
program

Fifteen Example (Possible) Aspects of an Organization’s Culture

Integrating Strategy & Culture

Organizational Culture

◼ Resistant to change
◼ May represent:
❑ Strength
❑ Weakness

Ch 4 -21
Integrating Strategy & Culture

Values

Legends Beliefs

Cultural
Heroes Rites
Products

Symbols Rituals
Myths

Ch 4 -22
Integrating Strategy & Culture

Organizational Culture Can Inhibit

Strategic Management

◼ Miss external changes due to

strongly held beliefs
◼ Natural tendency to “hold the
course” even during times of
strategic change
Ch 4 -23
Management

Functions of Management

1. Planning
2. Organizing
3. Motivating
4. Staffing
5. Controlling
Ch 4 -24
Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Ch 4 -25
Management

Planning

◼ Beginning of management process

◼ Bridge between present & future
◼ Improves likelihood of attaining desired
results

Ch 4 -26
Management

Developing a mission

Forecasting future events

and trends
Planning
Establishing objectives

Choosing strategies to
pursue

Ch 4 -27
Planning

◼ Synergy

❑ Can develop through planning

❑ Exists when everyone pulls
together as a team that knows
what it wants to achieve

Ch 4 -28
Management
Organizing

◼ Achieves coordinated effort

◼ Defines task & authority relationships
◼ Determines who does what
◼ Determines who reports to whom

Ch 4 -29
Management

◼ Organizing

❑ Breaking down tasks into jobs

❑ Combining jobs to form
departments
❑ Delegating authority

Ch 4 -30
Management
Motivating
◼ Influencing to accomplish specific objectives
◼ Four components include:
❑ Leadership
❑ Group dynamics
❑ Communication
❑ Organizational change
Ch 4 -31
Management

Staffing

◼ Personnel management
◼ Human resource management

Ch 4 -32
Management
Staffing
◼ Recruiting ◼ Evaluating
◼ Interviewing ◼ Rewarding
◼ Testing ◼ Disciplining
◼ Selecting ◼ Promoting
◼ Orienting ◼ Transferring
◼ Training ◼ Demoting
◼ Developing ◼ Dismissing
◼ Caring for
Ch 4 -33
Management

Controlling

◼ Establishing performance standards

◼ Ensure actual operations conform to
planned operations
◼ Taking corrective actions

Ch 4 -34
Management
Controlling

1. Establish performance standards

2. Measure individual and organizational

performance
3. Compare actual performance to
planned performance standards
4. Take corrective action
Ch 4 -35
Management Audit Checklist

◼ Does the firm use strategic

management concepts?
◼ Are objectives/goals measurable? Well
communicated?
◼ Do managers at all levels plan
effectively?

Ch 4 -36
Management Audit Checklist

◼ Do managers delegate well?

◼ Is the organization’s structure
appropriate?
◼ Are job descriptions clear?
◼ Are job specifications clear?
◼ Is employee morale high?

Ch 4 -37
Management Audit Checklist

◼ Is employee absenteeism low?

◼ Is employee turnover low?
◼ Are the reward mechanisms effective?
◼ Are the organization’s control
mechanisms effective?

Ch 4 -38
Marketing

Customer Needs or Wants for Products

and Services

1. Defining

2. Anticipating

3. Creating

4. Fulfilling

Ch 4 -39
Marketing
Marketing Functions

1. Customer analysis

2. Selling products/services

3. Product & service planning

4. Pricing

5. Distribution

6. Marketing research

7. Opportunity analysis

Ch 4 -40
Five Basic Activities in Marketing

1. Marketing research and target market analysis

2. Product planning
3. Pricing products
4. Promoting products
5. Placing or distributing products
Marketing Research and Target Market
Analysis
◼ Marketing Research
❑ the systematic gathering, recording, and analyzing of

data about problems relating to the marketing of

goods and services
❑ can uncover critical strengths and weaknesses

◼ Target Market Analysis

❑ The examination and evaluation of consumer needs

and wants
Marketing

Customer surveys

Consumer information

Market positioning
Customer
strategies
Analysis
Customer profiles

Market segmentation
strategies

Ch 4 -43
Marketing

Advertising
Sales Promotion
Publicity
Selling
Products/Services Personal Selling
Sales force management
Customer relations
Dealer relations

Ch 4 -44
Ch 4 -45
Marketing

Test marketing
Brand positioning
Devising warranties
Packaging
Product/Service Product features/options
Planning Product style
Quality
Deleting old products
Providing for customer
service

Ch 4 -46
Marketing

Consumers
Governments
Pricing
Suppliers
Major Stakeholders Distributors
Competitors

Ch 4 -47
Marketing

Warehousing
Distribution channels
Retail site locations
Distribution Sales territories
Inventory levels
Transportation
Wholesaling
Retailing

Ch 4 -48
Marketing

Gather data

Marketing Research Record data

Analyze data

Copyright © 2011 Pearson Education, Inc. Ch 4 -49

Publishing as Prentice Hall
Marketing

Assessing costs

Cost/Benefit Assessing benefits

Analysis

Assessing risks

Ch 4 -50
Marketing Audit
1. Are markets segmented effectively?

2. Is the organization positioned well among

competitors?
3. Has the firm’s market share been
increasing?
4. Are the distribution channels reliable &
cost effective?
5. Is the sales force effective?

Ch 4 -51
Marketing Audit

6. Does the firm conduct market research?

7. Are product quality & customer service

good?
8. Are the firm’s products and services
priced appropriately?
9. Does the firm have effective promotion,
advertising, and publicity strategies?

Ch 4 -52
Marketing Audit

10. Are the marketing, planning, and

budgeting effective?
11. Do the firm’s marketing managers have
adequate experience and training?
12. Is the firm’s Internet presence excellent
as compared to rivals?

Ch 4 -53
Finance/Accounting

1. Investment decision (Capital

budgeting)
2. Financing decision

3. Dividend decision

Ch 4 -54
Growth Ratios

Ratio Annual percentage

growth in
◼ Sales ◼ Total sales

◼ Net Income ◼ Profits

◼ Earnings per share ◼ EPS

◼ Dividends per share ◼ Dividends per share

Ch 4 -55
Table 4.9 A Summary of Key Financial
Ratios (1 of 4)
Ratio How Calculated What it measures

Liquidity Ratios Blank Blank

Current assets extent to which a firm can meet its

Current Ratio Current assets over current liabilities.

Current liabilities short-term obligations

Current assets minus inventory The extent to which a firm can meet its
Quick Ratio Start fraction current assets minus inventory over current liabilities end fraction.

short-term obligations without relying on

Current liabilities
the sale of its inventories
Leverage Ratios Blank Blank

Debt-to-Total- Total debt Total debt over total assets.

The percentage of total funds provided
Assets Ratio Total assets by creditors

Debt-to-Equity Total debt Total debt over total stockholdersequity.

The percentage of total funds provided
Ratio Total stockholders' equity by creditors versus by owners
Long-Term Debt- Long-term debt Long-term debt over total stockholders equity.
The balance between debt and equity
to-Equity Ratio Total stockholders' equity in a firm’s long-term capital structure
Profits before interest and taxes the extent to which earnings can
Times-Interest- Profits before interest and taxes over total interest charges.

decline without the firm becoming

Earned Ratio Total interest charges unable to meet its annual interest costs
A Summary of Key Financial Ratios (2
of 4)

Ratio How Calculated What it measures

Activity Ratios Blank Blank

Whether a firm holds excessive

Sales stocks of inventories and whether
Inventory
Inventory of finished goods
Sales over inventory of finished goods.

a firm is slowly selling its

turnover
inventories compared to the
industry average
Fixed Assets Sales Sales productivity and plant and
Sales over fixed assets.

turnover Fixed assets equipment utilization

Sales Whether a firm is generating a
Total Assets Sales over total assets.

sufficient volume of business for

turnover Total assets
the size of its asset investment
Accounts Annual credit sales The average length of time it takes
Receivable Annual credit sales over accounts receivable.

a firm to collect credit sales (in

Accounts receivable
turnover percentage terms)
Average Accounts receivable The average length of time it takes
Collection Accounts receivable over total credit sales per 365 days.

Total credit sales/365 days a firm to collect on credit sales (in

Period days)
A Summary of Key Financial Ratios (3
of 4)
Ratio How Calculated What it measures
Profitability Blank Blank

Ratios
Sales minus cost of goods sold the total margin available to cover
Gross Profit Start fraction sales minus cost of goods sold over sales end fraction.

operating expenses and yield a

Margin Sales
profit
Operating Profit Earnings before interest and taxes EBIT
Earnings before interest and taxes E B I T over sales.
Profitability without concern for
Margin Sales taxes and interest
Net income
Net Profit Margin Net income over sales.

After-tax profits per dollar of sales

Sales
Net income After-tax profits per dollar of assets;
Return on total Net income over total assets.

this ratio is also called return on

Assets (R O A) Total assets
investment (RO I)
Return on Net income After-tax profits per dollar of
Stockholders’ Net income over total stockholders equity.

Total stockholders' equity stockholders’ investment in the firm

Equity (R O E)
Earnings Per Net income Earnings available to the owners of
Net income over number of shares of common stock outstanding.

Share (EPS) Number of shares of common stock outstanding common stock

Price-Earnings Market price per share

Market price per share over earning per share.
Attractiveness of firm on equity
Ratio Earnings per share markets
A Summary of Key Financial Ratios (4
of 4)

Ratio How Calculated What it measures

Growth Ratios Blank Blank

Annual percentage growth in total

Sales Firm’s growth rate in sales
sales
Annual percentage growth in
Net Income Firm’s growth rate in profits
profits
Earnings Per
Annual percentage growth in E PS Firm’s growth rate in E PS
Share
Dividends Per Annual percentage growth in Firm’s growth rate in dividends per
Share dividends per share share
Ch 4 -60
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Finance/Accounting Audit

1. Where is the firm financially strong/weak as

indicated by financial ratio analysis?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital
through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?

Copyright © 2011 Pearson Education, Inc. Ch 4 -64

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Finance/Accounting Audit

6. Are dividend payout policies reasonable?

7. Does the firm have good relations with its
investors and stockholders?
8. Are the firm’s financial managers
experienced and well trained?
9. Is the firm’s debt situation excellent?

Ch 4 -65
Production/Operations

Production/Operations Functions

◼ Process
◼ Capacity
◼ Inventory
◼ Workforce
◼ Quality

Ch 4 -66
Ch 4 -67
Production/Operations Audit

•Are suppliers of materials, parts, etc.

reliable and reasonable?
•Are facilities, equipment, machinery, and
offices in good condition?
•Are inventory-control policies and
procedures effective?

Ch 4 -68
Production/Operations Audit

•Are quality-control policies & procedures

effective?
•Are facilities, resources, and markets
strategically located?
•Does the firm have technological
competencies?

Ch 4 -69
Research & Development

Research & Development Functions

◼ Development of new products before
competitors
◼ Improving product quality
◼ Improving manufacturing processes to
reduce costs
◼ These functions can be done internally or
externally
Ch 4 -70
Research & Development
Financing as many
projects as possible

Use percent-of-sales
method
R&D Budgets
Budgeting relative to
competitors

How many successful

new products are
needed

Ch 4 -71
Research & Development Audit

•Are the R&D facilities adequate?

•If R&D is outsourced, is it cost-effective?
•Are the R&D personnel well qualified?
•Are R&D resources allocated effectively?

Ch 4 -72
Research & Development Audit

•Are MIS and computer systems

adequate?
•Is communication between R&D and
other organizational units effective?
•Are present products technologically
competitive?

Ch 4 -73
Management Information Systems

Purpose

◼ Improve performance of an
enterprise by improving the quality
of managerial decisions

Ch 4 -74
Management Information Systems
Audit
◼ Do all managers use the information system
to make decisions?
◼ Is there a CIO or Director of Information
Systems position in the firm?
◼ Are data updated regularly?
◼ Do managers from all functional areas
contribute input to the information system?
◼ Are there effective passwords for entry into
the firm’s information system?
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Management Information Systems
Audit
◼ Are strategists of the firm familiar with the
information systems of rival firms?
◼ Is the information system user-friendly?
◼ Do all users understand the competitive
advantages that information can provide?
◼ Are computer training workshops provided for
users?
◼ Is the firm’s system being improved?

Ch 4 -76
Value Chain Analysis

◼ The process whereby a firm determines

the costs associated with:
❑ Purchasing raw materials
❑ Manufacturing products
❑ Marketing products
◼ And compares them to the value chain
of rival firms

Ch 4 -77
Value Chain Analysis

◼ Core competencies

◼ Distinctive competencies

◼ Benchmarking

Ch 4 -78
Transforming Value Chain Activities into Sustained
Competitive Advantage

Value Some
Chain Some Core Distinctive
Core
Activities Competencies Competencie
Competencies
Are Evolve into s Yield
Arise in Some
Identified Distinctive Sustained
Activities
and Competencies Competitive
Assessed Advantages

Ch 4 -79
Figure 4.3
How to Gain and Sustain Competitive Advantages
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Internal Factor Evaluation (IFE) Matrix is a strategy tool used to evaluate
firm’s internal environment and to reveal its strengths as well as
weaknesses.

IFE Matrix is an analytical technique related to the SWOT analysis. IFE is

an acronym of the Internal Factor Evaluation. IFE Matrix evaluates the
internal position of the organization or its strategic intent. The evaluation
process: Process the table of internal factors (such as key 5S and 5W of
SWOT)

IFE Matrix. Strengths and weaknesses are used as the key internal factors
in the evaluation. When looking for the strengths, ask what do you do
better or have more valuable than your competitors have? In case of the
weaknesses, ask which areas of your company you could improve and at
least catch up with your competitors?

The general rule is to identify 10-20 key external factors and additional 10-
20 key internal factors, but you should identify as many factors as
possible.

Copyright © 2011 Pearson Education, Inc. Ch 4 -82

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Weights
Each key factor should be assigned a weight ranging from 0.0 (low
importance) to 1.0 (high importance). The number indicates how
important the factor is if a company wants to succeed in an industry. If
there were no weights assigned, all the factors would be equally
important, which is an impossible scenario in the real world. The sum of
all the weights must equal 1.0. Separate factors should not be given too
much emphasis (assigning a weight of 0.30 or more) because the success
in an industry is rarely determined by one or few factors.

In our first example, the most significant factors are ‘Processed food
market growing by 15% next year in our largest market.’ (0.24 points), ‘The
contract with the main customer expires in 2 months.’ (0.17 points) and
‘New law, requiring decreasing the amount of sugar in the food by 20%,
could be passed next year.’ (0.14 points).

Ch 4 -83
Ratings

IFE Matrix. The ratings in internal matrix refer to how strong or weak
each factor is in a firm. The numbers range from 4 to 1, where 4 means
a major strength, 3 – minor strength, 2 – minor weakness and 1 – major
weakness. Strengths can only receive ratings 3 & 4, weaknesses – 2 &
1. The process of assigning ratings in IFE matrix can be done easier
using benchmarking tool.

Weighted Scores & Total Weighted Score

The score is the result of weight multiplied by rating. Each key factor
must receive a score. Total weighted score is simply the sum of all
individual weighted scores. The total score of 2.5 is an average score.
In internal evaluation a low score indicates that the company is weak
against its competitors.

Copyright © 2011 Pearson Education, Inc. Ch 4 -84

Publishing as Prentice Hall
Internal Factor Evaluation (IFE) Matrix

1. List key internal factors

2. Assign a weight ranging from 0.0 to 1.0
3. Assign a 1 to 4 rating to each factor
4. Multiply the weight times the rating
5. Sum the weighted scores

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Copyright © 2011 Pearson Education, Inc. Ch 4 -93
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 Strategic Management Concepts: A
Competitive Advantage Approach, Concepts
and Cases
Seventeenth Edition, Global Edition

Chapter 5

Strategies in Action

Copyright © 2023 Pearson Education, Ltd. All Rights Reserved

Figure 5.1
A Comprehensive Strategic-Management Model

Source: Fred R. David, “How Companies Define Their Mission,” Long Range Planning 22, no. 1
(February 1989): 91. See also Anik Ratnaningsih, Nadjadji Anwar, Patdono Suwignjo, and Putu Artama
Wiguna, “Balance Scorecard of David’s Strategic Modeling at Industrial Business for National
Construction Contractor of Indonesia,” Journal of Mathematics and Technology, no. 4 (October 2010):
20.
 Chapter outline: Focus of the chapter

◼ Chapter 5: Strategies in Action

◼ 5.1 Long term objectives
◼ 5.2 Types of strategies
◼ 5.3 Guidelines for pursuing strategies
◼ 5.4 Porter’s Five Generic Strategies
◼ 5.5 Means for Achieving Objectives
◼ 5.6 Strategic management in non-profit and
governmental organizations.
Ch 5 -3
Long Term Objectives
► Most strategic plans look about 2 to 5 years into the future. Planning farther ahead than five years
can be problematic. But the pressure on CEOs and boards of directors to achieve near-term results –
especially quarterly – can put long-term strategic management at risk, unless a strategic plan has
near- and mid-term benchmarks that verify progress.

► Long-term objectives represent the results expected from pursuing certain strategies. Strategies
represent the actions to be taken to accomplish long-term objectives.

► Objectives are essential for organizational success because they state direction, aid in evaluation,
create synergy, reveal priorities, focus coordination, and provide a basis for effective planning,
organizing, motivating and controlling activities.

Ch 5 -4
Varying Performance Measures by
Organizational Level

4-5
 The Nature of Long-Term
Objectives
❖Objectives
❖provide direction
❖allow synergy
❖assist in evaluation
❖establish priorities
❖reduce uncertainty
❖minimize conflicts
❖stimulate exertion
❖aid in both the allocation of resources and the
design of jobs

4-6
 Financial versus Strategic Objectives
❖ Financial objectives include growth in revenues,
growth in earnings, higher dividends, larger profit
margins, greater return on investment, higher earnings
per share, a rising stock price, improved cash flow, and
so on.
❖ Strategic objectives include a larger market share,
quicker on-time delivery than rivals, shorter design-to-
market times than rivals, lower costs than rivals, higher
product quality than rivals, wider geographic coverage
than rivals, achieving technological leadership,
consistently getting new or improved products to
market ahead of rivals, and so on.

4-7
Levels of Strategies with Persons
Most Responsible

4-8
❖Most organizations simultaneously pursue a
combination of two or more strategies, but a
combination strategy can be exceptionally risky
if carried too far.
❖No organization can afford to pursue all the
strategies that might benefit the firm.
❖Difficult decisions must be made and priorities
must be established.

Ch 5 -9
STRATEGIES SUB-STRATEGIES INFORMATION
1. Vertical Integration 1.1 Forward Integration Gaining ownership or increased control over
Strategies distributors or retailers
1.2 Backward Seeking ownership or increased control of a firm’s
Integration suppliers

1.3 Horizontal Seeking ownership or increased control over

Integration competitors

2. Intensive Strategies 2.1 Market Seeking increased market share for present products
Penetration or services in present markets through greater
marketing efforts
2.2 Market Development Introducing present products or services into new
geographic areas

2.3 Product Seeking increased sales by improving present

Development products or services or developing new ones

3. Diversification 3.1 Related Adding new but related products or services

Strategies Diversification

3.2 Unrelated Adding new, unrelated products or services

Diversification

4. Defensive 4.1 Retrenchment Regrouping through cost and asset reduction to

Strategies reverse declining sales and profit

4.2 Divestiture Selling a division or part of an organization

4.3 Liquidation Selling all of a company’s assets, in parts, for their

tangible worth 10
Types of Strategies

Forward
Integration

Vertical Backward
Integration Integration
Strategies

Horizontal
Integration

Ch 5 -11
Vertical Integration Strategies
Forward Gaining ownership or increased
Integration control over distributors or retailers

Backward Seeking ownership or increased

Integration control of a firm’s suppliers

Horizontal Seeking ownership or increased

Integration control over competitors

Ch 5 -12
Ch 6 -13
Ch 6 -14
Ch 6 -15
Types of Strategies

Market
Penetration

Intensive Market
Strategies Development

Product
Development

Ch 5 -16
Intensive Strategies
Seeking increased market share for
Market present products or services in
Penetration present markets through greater
marketing efforts

Market Introducing present products or

Development services into new geographic areas

Seeking increased sales by

Product
improving present products or
Development services or developing new ones

Ch 5 -17
Ch 6 -18
Ch 6 -19
Ch 6 -20
Ch 6 -21
Types of Strategies

Related
Diversification

Diversification
Strategies

Unrelated
Diversification

Ch 5 -22
 Diversification Strategies
Adding new but related products or services
Transferring competitively valuable expertise, technological know-
how, or other capabilities from one business to another
Combining the related activities of separate businesses into a single
Related Diversification operation to achieve lower costs
Exploiting common use of a known brand name
Using cross-business collaboration to create strengths

Ch 5 -23
Related Diversification Guidelines
◼ When an organization competes in a no-growth or a
slow-growth industry
◼ When adding new, but related, products would
significantly enhance the sales of current products
◼ When new, but related, products could be offered at
highly competitive prices
◼ When new, but related, products have seasonal sales
levels that counterbalance an organization’s existing
peaks and valleys
◼ When an organization’s products are currently in the
declining stage of the product’s life cycle
◼ When an organization has a strong management team
Diversification Strategies

Unrelated Diversification
Adding new, unrelated products or services

Ch 5 -25
Unrelated Diversification Guidelines (1
of 2)

◼ When revenues derived from an organization’s current

products would increase significantly by adding the new,
unrelated products
◼ When an organization competes in a highly competitive or a
no-growth industry, as indicated by low industry profit margins
and returns
◼ When an organization’s present channels of distribution can
be used to market the new products to current customers
◼ When the new products have countercyclical sales patterns
compared to present products
◼ When an organization’s basic industry is experiencing
declining annual sales and profits
Unrelated Diversification Guidelines (2
of 2)

◼ When an organization has the capital and managerial

talent needed to compete successfully in a new industry
◼ When an organization has the opportunity to purchase
an unrelated business that is an attractive investment
opportunity
◼ When there exists financial synergy
◼ When existing markets for an organization’s present
products are saturated
◼ When antitrust action could be charged against an
organization that historically has concentrated on a
single industry
Ch 6 -28
Ch 6 -29
Types of Strategies

Retrenchment

Defensive Divestiture
Strategies

Liquidation

Ch 5 -30
Defensive Strategies

Regrouping through cost and asset reduction to reverse declining

Retrenchment
sales and profit

Selling a division or part of an organization. Divestment is the

process of selling subsidiary assets, investments, or divisions of a
company in order to maximize the value of the parent company. In
Divestiture
finance, divestiture is the process of disposing of an asset through a
sale, exchange, or closure. Through divestiture, a company can
eliminate redundancies, improve operational efficiency, and reduce
costs
Selling all of a company’s assets, in parts, for their tangible worth.
Liquidation is the process a debt-laden company initiates to wind up
Liquidation its operations and sell its assets in order to repay said liabilities and
other obligations. A company is liquidated when it is ascertained that
the business is not in any state to continue.

Ch 5 -31
Ch 6 -32
Ch 6 -33
Table 5.3 (1 of 2)
Alternative Strategies Defined and Exemplified

Strategy Definition Example

Gaining ownership or increased control Amazon began rapid delivery
Forward Integration
over distributors or retailers services in some U.S. cities.
Seeking ownership or increased Starbucks purchased a coffee farm.
Backward Integration
control of a firm’s suppliers
Seeking ownership or increased &T acquired Susquehanna
Horizontal Integration
control over competitors Bancshares.
Seeking increased market share for Under Armour signed tennis
present products or services in present champion Andy Murray to a 4-year,
Market Penetration
markets through greater marketing $23 million marketing deal.
efforts
Introducing present products or Gap opened its first five stores in
Market Development
services into new geographic area China.
Seeking increased sales by improving Amazon just began offering its own
Product Development present products or services or line of baby diapers and wipes.
developing new ones

Alternative Strategies Defined and Recent Examples Given

Table 5.3 (2 of 2)
Alternative Strategies Defined and Exemplified

Strategy Definition Example

Adding new but related products Facebook acquired the text-
Related
or services messaging firm WhatsApp for
Diversification
$19 billion.
Adding new, unrelated products or Kroger and Whole Foods
Unrelated
services Market are cooking meals,
Diversification
becoming restaurants.
Regrouping through cost and Staples closed 250 stores and
Retrenchment asset reduction to reverse reduced by 50% the size of
declining sales and profit other stores.
Selling a division or part of an Sears Holdings divested its
Divestiture organization Lands’ End division to Sears’
shareholders.
Selling all of a company’s assets, The Trump Taj Mahal in Atlantic
Liquidation in parts, for their City, New Jersey, faces
tangible worth liquidation.
Porter's Five Generic Strategies

Copyright ©2017
4-36
Pearson Education,
Limited
 Competitive market focus

Low cost position Differentiation

Cost Leadership Differentiation strategy

Broad: • Produce at lowest cost • Products/services differentiate

Larger/ • Deliver goods/ services at • The firm has unique resources
Wide lowest cost • Target customer, not price sensitive
• Lowest cost is the • Customers have specific needs/loyalty
main strategy • Brand image/ services
Market

Focus Low cost Focus differentiation

Strategy Strategy
Narrow: • Niche and focus on differentiate
Smaller/ • Niche and focus on price
• Focus on brand and luxury/ quality
• Special target market
Particular • Can’t get any where else
segment • Design/ technology/ innovation
• Willing to pay for better services

Ch 5 -37
 - Product/ services
differentiate
- The firm has unique
-Produce at resources
lowest lost - Target customer not
- Deliver price sensitive
goods/services at - - Customers have
lowest cost (main specific needs/ loyalty
strategy) - Brand image / services

- Niche and focus n

- High quality and low differentiate
price of a product - Focus on brand and
- Best lowest cost relative luxury/ quality
to competitors - Can’t get any where
- Niche and else
focus on price - Design / technology/
- Special target innovation
Ch 5 -38
market - Willing to pay for
better services
 Cost Leadership emphasizes producing standardized
products at a very low per-unit cost for consumers who are
price-sensitive
❖ Type 1
❖ low-cost strategy that offers products or services to a wide range of customers
at the lowest price available on the market
❖ Type 2
❖ best-value strategy that offers products or services to a wide range of
customers at the best price-value available on the market
❖ Type 3
❖ Differentiation is a strategy aimed at producing products and services
considered unique industry-wide and directed at consumers who are relatively
price-insensitive
❖ Type 4
❖ low-cost focus strategy that offers products or services to a niche group of
customers at the lowest price available on the market
❖ Type 5
❖ best-value focus strategy that offers products or services to a small range of
customers at the best price-value available on the market

Ch 5 -39
Copyright © 2011 Pearson Education, Inc. Ch 5 -40
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Type 1 or 2 Cost Leadership Strategy
Conditions
◼ Vigorous price competition
◼ Plentiful supply of identical products
◼ Little product differentiation
◼ Products used in same ways
◼ Low cost to switch
◼ Large buyers with power
◼ Industry newcomers use low prices to attract
buyers
Ch 5 -41
Type 3 Differentiation Strategy
Conditions
◼ Many ways to differentiate and buyers
perceive the differences as having value
◼ Diverse buyer needs and uses
◼ Few rival firms following similar
differentiation approach
◼ Fast paced technological change and
evolving product features

Ch 5 -42
Type 4 or 5 Focus Strategy
Conditions
◼ Large, profitable, and growing target market
niche
◼ Industry leaders do not consider the niche
crucial to their success
◼ Industry leaders consider it costly or difficult
to meet the needs of this niche
◼ Industry has many niches and segments
◼ Few rivals are specializing on this target
segment

Ch 5 -43
Means for Achieving Strategies

◼ Cooperation among competitors

◼ Joint venture / partnering

◼ Merger / acquisition

◼ First mover advantages

◼ Outsourcing

Ch 5 -44
Cooperation among competitors = Coopetition (looking +ve on comp)
- Bringing out the best of each competitors
- Saving company resources
- Using win-win strategy
- Building good relationship
- Helping economic grow
- etc

Copyright © 2011 Pearson Education, Inc. Ch 5 -45

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A joint venture (JV) is a business arrangement in which two or more parties
agree to pool their resources for the purpose of accomplishing a specific task.
This task can be a new project or any other business activity.
Partnering - associate or work together as partners.

Example:
• Proton Holdings and Zhejiang Geely Holding Group today signed a Heads of Agreement to set up a joint venture (JV)
that will pave the way for Malaysian automaker Proton to assemble and market its cars in China.

• Google parent company and the pharma company Glaxo and Smith decided to enter into a joint venture agreement to
produce bioelectric medicines the ratio of the ownership was 45%-55%. The joint venture lasted and was committed for
7 years with a capital of Euro 540 million.

• Another example of a joint venture is the joint venture between the taxi giant UBER and the heavy vehicle
manufacturer Volvo. The joint venture goal was to produce driverless cars The ratio of the ownership is 50%-50%. The
business worth was $350 million as per the agreement in the joint venture.

• Sony and Ericson’s example is also a good example of Joint Venture as they joined hands to manufacture
smartphones and gadgets. After several operating years, Sony eventually acquired Ericson mobile manufacturing
division.

• McDonald and Cola

• Apple and IBM
• Starbucks and Barnes & Nobles bookstores

Ch 5 -46
 Merger & Acquisitions - Mergers and acquisitions (M&A) is a general term used
to describe the consolidation of companies or assets through various types of
financial transactions. The terms "mergers" and "acquisitions" are often used
interchangeably, although in actuality, they hold slightly different meanings.

Acquisitions - When one company takes over another entity, and establishes itself as the new
owner, the purchase is called an acquisition.
• Disney and Pixar / Marvel Acquisition.
• Verizon and Vodafone Acquisition. ...

Merger - a merger describes two firms of approximately the same size, who join forces to move
forward as a single new entity, rather than remain separately owned and operated. A merger is the
combination of two firms, which subsequently form a new legal entity under the banner of one
corporate name.
• Exxon and Mobile Merger.
• Vodafone and Mannesmann Merger.
• Kencana Petroleum Bhd and SapuraCrest Petroleum Bhd known as SapuraKencana Pertroleum
Bhd

Copyright © 2011 Pearson Education, Inc. Ch 5 -47

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Anchor Finance Company Merger Partner

1. Mayban Finance Berhad Amanah Finance Malaysia Berhad

2. Public Finance Berhad Kewangan lndustri Berhad

Boon Siew Finance Berhad

3. Hong Leong Finance Berhad Bolton Finance Berhad

Kewangan Bersatu Berhad

4. Arab-Malaysian Finance Berhad Abrar Finance Berhad

SimeFinance Berhad
Advance Finance Berhad

5. EON Finance Berhad and Credit City Finance Berhad

Corporation (Malaysia) Berhad Cempaka Finance Berhad
Perkasa Finance Berhad

Ch 5 -48
 1st mover advantage - A first mover is a service or product that gains a
competitive advantage by being the first to market with a product or service.
- customer loyalty, strong brand, recognition

There is a common myth I hear from entrepreneurs.

“I need a unique business idea that no one has done before.”
Here’s the truth:

1.You do not need a new idea to have a successful business.

2.You do not need to be first to market to be first to someone’s mind.
3.And you do not need a new business model.

Facebook wasn’t the first social media network. MySpace, LinkedIn, and hi5 all came before Facebook.
Google wasn’t the first search engine. Remember Ask Jeeves, Lycos, and Dogpile?
Apple wasn’t the first computer company. IBM and Hewlett-Packard came decades before.

Even a company like Uber borrowed its idea from taxis.

How have these companies become so successful in competing in saturated markets?

In a word: positioning.

Yes, some companies which were first-to-market are now quite successful.
1.The founder of Mercedes-Benz invented the first gas-powered car.
2.Thomas Edison founded many electric products. He began as the Edison Company, which later became General Electric (GE).
3.Intel created the first commercially available microprocessor in 1971.

Copyright © 2011 Pearson Education, Inc. Ch 5 -49

But though these companies were first-to-market, they made sure to be first-to-mind by positioning themselves well.
Publishing as Prentice Hall
Outsourcing - The term “outsourcing” refers to a strategy whereby corporate tasks and
structures are given to an external contractor. These can be individual tasks, specific
areas, or entire business processes. With outsourcing, one or more tasks or processes
are usually given to an external partner.

◼ Telekom
◼ TNB
◼ Maxis

Ch 5 -50
Strategic Management in Nonprofit and
Governmental Organizations

◼Educational Institutions
◼Medical Organizations
◼Governmental Agencies and
Departments

Ch 5 -51