Strategic Planning

…is the managerial process of developing and maintaining a strategic fit

between the organization's objectives and resources and its changing market
opportunities.
Systematic process of determining goals to be achieved in the foreseeable future. It consists of:
(1) Management's fundamental assumptions about the future economic, technological, and
competitive environments. (2) Setting of goals to be achieved within a specified timeframe. (3)
Performance of SWOT analysis. (4) Selecting main and alternative strategies to achieve the
goals. (5) Formulating, implementing, and monitoring the operational or tactical plans to achieve
interim objectives.

Concept of Strategic Planning:

Planning is related with future. A planning process involves
different degrees of futurity.

Some parts of the organisation require planning for many years into
the future while others require planning over a short period only.

For instance, capital expenditure is related to long- term period

while budget for a year is of short-term nature. The former is called
strategic planning or long-range planning.

‘Strategic planning’ may be defined as the process of determining

the objectives of the organisation and the resources to be used to
attain these objectives, as also the policies to govern the acquisition,
utilisation and disposition of these resources.

Examples of strategic planning in an organisation are—

diversification of business into new lines, planned growth rate in
sales, type of products to be offered, etc. Strategic planning
encompasses all the functional areas of business and is affected
within the existing and long- term framework of economic,
technological, social and political factors.
It also involves the analysis of various environmental factors—
particularly with regard to how an organisation relates to its
environment. Generally, for most of the organisations, strategic
planning period ranges between three to five years.

Process of Strategic Planning:

The process of strategic planning consists of the following
steps:
1. Determination of Mission and Objectives:
Strategic planning starts with the determination of the mission for
the organisation. The principal objectives for which the organisation
has been set up should be clearly defined. Strategic planning is
concerned with an organisation’s long-term relationship to its
external environment. So, the business mission should be fixed in
terms of social impact of the organisation.

2. Environmental Analysis:
In order to identify the opportunities and threats, the external
environment of the organisation is analysed. A list of important
factors likely to affect the organisation’s activities is prepared.

3. Self-appraisal:
In the next step, the strengths and weaknesses of the organisation
are analysed. Such an analysis will enable the enterprise to
capitalize on its strengths and to minimise its weaknesses. The
enterprise can utilise the external opportunities by concentrating on
its internal capacity. By matching its strengths with the
environmental opportunities, an enterprise can face competition
and achieve growth.
4. Strategic Decision-making:
Strategic alternatives are then generated and evaluated. After that, a
strategic choice is made to reduce the performance gap. The
organisation must select the alternative that is best suited to its
capabilities. For instance, in order to grow, an enterprise may enter
into new markets or develop new products or sell more in the
present markets.

Choice of strategy depends upon external environment, managerial

perception, the managers’ attitude towards risk, past strategies and
managerial power and efficiency.

5. Strategy Implementation and Control:

Once the strategy is determined, it must be translated into tactical
operational plans. Programmes and budgets are developed for each
function. Short term operational plans are prepared to use the
resources. Control should be developed to evaluate performance as
the strategy is put into use.

Wherever actual results are below the expectation, the strategy

should be reviewed or reappraised. It must be modified and adapted
to the changes in the external environment.

Mission and vision of the firm…

A Mission Statement defines the company’s business, its

objectives and its approach to reach those objectives. A Vision
Statement describes the desired future position of the company.
Elements of Mission and Vision Statements are often combined
to provide a statement of the company’s purposes, goals and
values. However, sometimes the two terms are used
interchangeably.

Vision

A Vision provides strong foundation for developing a comprehensive mission statement.

Strategic vision addresses the ‘where are we going questions and explains the course and
direction chartered by management.
A strategic vision should provide a clear understanding of what the business should look like
and provide help to take strategic decisions.
Strategic intent should lead to an end.
That end is the vision of an organization or an individual. ‘lt is what the firm or a person
would ultimately like to become..
Should be short and specific.
‘It should be based on overall purpose of organization

Characteristics
1.lts a blue print of the kind of business organization the management is trying to create and
the market position it would occupy.
2.lt should be forward looking a_ provide strategic course the management will adopt to
help the company prepare the future
3.Specific and provide guidelines to managers for making decisions and allocating resources
4.Flexible to changing environment

1. BSNL Vision Statement : “To become the largest telecom service provider in Asia.”

2. Walt Disney vision Statement : “Make people happy”

3. Stokes Eye Clinic, Florence, South Carolina :

“.” Example vision statement

Infosys
Vision “To be a globally respected corporation that provides best-of- breed business
solutions, leveraging technology, delivered by _ best-in- class people."
Vodafone..
Our Vision is to be the world’s mobile communication leader -—_ enriching customers’ lives,
late) teyuere individuals, businesses and communities be more connected in a mobile world.

Mission
Organizations relate their existence to satisfying a particular need of the society. They do it
in terms of their mission.
“Mission is a statement which defines the
role that an organization plays in a society.
“lt refers to the particular need of that society for
instance, its information needs.
the organization, concerning particularly why it is in existence, the nature of the business it
is in, and the customers it seeks to serve and Satisfy.”
“purpose or reason for the organization's
‘mission is an enduring statement of purpose that distinguishes one firm from od tats meyer
rcla tg
e Different from vision by it is more focused on ‘what is our business’ as compared to the
‘where are we headed or ‘ what we wand to become nature of vision.
Mission Statement
“A mission statement is an_ enduring statement of purpose that distinguishes one business
from other similar firms. A mission statement identifies the scope of a firms
operations in product and market terms.”
BSNL mission
“To provide world class state of art technology telecom services to its customers on demand
at competitive prices.
“ To provide world class telecom infrastructure in its area of operation and to contribute to
the growth of country’s economy.” » The mission statement of an organization is normally
short, to the point, and contains the following elements: LIProvides a concise statement of
why the organization exists, and what it is to achieve; UiStates the purpose and identity of
the organization;
Vodafone - is primarily a user of technology rather than a developer of it, and this fact is
reflected in the emphasis of our work programme on enabling new applications of mobile
communications, using new technology for new services, research for improving operational
efficiency and quality of our networks, and providing technology vision and leadership that
can contribute directly to business (eae) Ike
Infosys
Mission “To achieve our objectives in an environment of fairness, honesty, and courtesy
towards oll clients, employees, vendors and society at large.”
A Vision statement describes what the organization would like to become.
A Mission statement describes what the organization is now.
“What the company is providing to society?”
Example Mission Statements
4. Wal-Mart "To give ordinary folk the chance to buy the same thing as rich people."

5. Mary Kay Cosmetics "To give unlimited opportunity to women."

6. 3M "To solve unsolved problems innovatively"

7. Google's mission is “to organize the world's information and make it universally accessible

and useful

Benefits/Importance Of Vision & Mission Statement

A good mission statement is like a born of success for the organization. It is very for
the companies to find out the ways and also do the regular confirmation whether
company or organization is on the right way or not.

A purpose of a clear mission statement to an organization to align the people as well

as merge all the individual’s activities in to the group. It also tells to the organization
employee whether they are doing work is important or worthwhile. A clear statement
describes the importance of work to the organization. It can change the thinking for
the improvement of the organization and give the ancillary customer services to their
customers. Mission has the value that it gives the change in any organization from
time to time.

Normally mission statement of any organization describes the primary objectives as

well as purposes. The primary function of this statement in the company is internal to
evaluate the business key and company success as well as stockholders and team of
leader.

The purpose of vision statement to define the company purpose, this statement do
not measure the bottom line of the company but vision statement measures the
values of the company as well as values tells to the company leaders how things
should be done. This statement is also communicates the aims and values of the
company. Vision statement gives direction to the employees that how they can
provide their best and ancillary the customers Qualified writers in the subject of
business are ready and waiting to help you with your studies.

Vision and mission statement helps to the company where company wants to go,
these statement very helpful to focus that what is done and what should be done.
Mission and vision statement gives high energy to the company for attain or set the
goals, these statements requires a lot of time to write, through mission and vision
statement you can easily achieve the values.

A mission statement without vision statement is like nothing. Basically a mission

statement defines the proper aim and activities of the company which is very
important for its vision. The aims of both statements are to address and achieve the
important and major goals of the company or organization. It is very hard without
vision and mission statement for any company to achieve their goals or aims. So
these statements are the born of the companies.

Another important benefit of the mission and vision statement also helpful to visible
companies strategic plans, these statement have all the vital mechanism for the
future propel of any company. Both statements are very helpful for guiding and
communicate in the company or organization.

2. STRTEGY PLANNING

Strategic planning is a key function of an organization’s management that helps to set

priorities, allocate resources, and ensure that everyone is working towards common goals and
objectives. However, for strategic planning to be effective, there are two important tools that
are needed – a vision and a mission statements. These serve as a guide for creating objectives
and goals in the organization, thus providing a road-map that is to be followed by everyone.

Unfortunately, despite the importance of vision and mission statements, many organizations
do not have them. In other cases, the two statements are lumped together as one or used
interchangeably despite their distinctive differences. This creates a confusion in the
organization that makes it harder to achieve the set objectives and goals.

In this article, we will take a look at both of these statements, the differences between each
one of them, and the important roles they play in an organization.

What is a vision statement

A vision statement is used to describe the future state of the organization, i.e., what the
organization hopes to become in the future. It is, therefore, a long-term goal provides
direction for the organization. It also communicates the purpose of the organization to the
employees and other stakeholders and provides them with the inspiration to achieve that
purpose.
What is a mission statement

A mission statement describes the current state of an organization and its primary goals
or objectives. It provides detailed information about what the organization does, how it does
it, and who it does it for. Unlike the vision statement, it is short-term in nature. However, it is
related to the vision statement in that it outlines the primary goals that will help to achieve the
future the organization desires (i.e, the vision).

Importance of vision and mission statement in an organization

Both the vision and mission statements play an important role in the organization.
Below is a look at these roles:

1. The vision and mission statements define the purpose of the

organization and instill a sense of belonging and identity to the
employees. This motivates them to work harder in order to achieve
success.
2. The mission statement acts as a “North Star”, where it provides the
direction that is to be followed by the organization while the vision
statement provides the goal (or the destination) to be reached by
following this direction.
3. The vision and mission statements help to properly align the
resources of an organization towards achieving a successful future.
4. The mission statement provides the organization with a clear and
effective guide for making decisions, while the vision statement
ensures that all the decision made are properly aligned with what
the organization hopes to achieve.
5. The vision and mission statements provide a focal point that helps
to align everyone with the organization, thus ensuring that
everyone is working towards a single purpose. This helps
to increase efficiency and productivity in the organization.

The vision and mission statements are important tools of strategic planning, and thus
they help to shape the strategy that will be used by an organization to achieve the desired
future.

Conclusion

The mission and vision statements are very important and they can best be described as a
compass and destination of the organization respectively. Therefore, every organization
should develop clear vision and mission statements, as not doing so would be
like going on a journey without knowing the direction you are to follow or the destination.
 Hierarchal Levels Of Planning Strategy

Strategy is at the heart of business. All businesses have competition, and it is

strategy that allows one business to rise above the others to become successful.
Even if you have a great idea for a business, and you have a great product, you are
unlikely to go anywhere without strategy.

Many of the most successful business men and women throughout history have
been great strategic thinkers, and that is no accident. If you wish to take your
business to the top of the market as quickly as possible, it is going to be strategy that
leads the way.

Of course, before you can get into the process of determining your own business
strategies, you need to understand what the word ‘strategy’ really means in a
business context. Does it involve long-term planning as to the general course of the
business? Or is it related to the day-to-day operations and how they are designed in
order to achieve success? Well, in practical application, strategy can refer to both of
those things and more.

To help you understand strategy in business, this article is going to look at the three
levels of strategy that are typically used by organizations. Only when all three of
these levels are carefully considered will your business be able to get on the right
path toward a prosperous future.
Corporate Strategy
The first level of strategy in the business world is corporate strategy, which sits at the
‘top of the heap’. Before you dive into deeper, more specific strategy, you need to
outline a general strategy that is going to oversee everything else that you do. At a
most basic level, corporate strategy will outline exactly what businesses you are
going to engage in, and how you plan to enter and win in those markets.

It is easy to overlook this planning stage when getting started with a new business,
but you will pay the price in the long run for skipping this step. It is crucially important
that you have an overall corporate strategy in place, as that strategy is going to
direct all of the smaller decisions that you make.

For some companies, outlining a corporate strategy will be a quick and easy
process. For example, smaller businesses who are only going to enter one or two
specific markets with their products or services are going to have an easy time
identifying what it is that makes up the overall corporate strategy. If you are running
an organization that bakes and sells cookies, for instance, you already know exactly
what the corporate strategy is going to look like – you are going to sell as many
cookies as possible.

However, for a larger business, things quickly become more complicated. Carrying
that example forward to a larger company, imagine you run an organization that is
going to sell cookies but is also going to sell equipment that is used while making
cookies. Entering into the kitchen equipment market is a completely different
challenge from selling the cookies themselves, so the complexity of your corporate
strategy will need to rapidly increase. Before you get any farther into the strategic
planning of your business, be sure you have your corporate strategy clearly defined.
Business Strategy
It is best to think of this level of strategy as a ‘step down’ from the corporate strategy
level. In other words, the strategies that you outline at this level are slightly more
specific and they usually relate to the smaller businesses within the larger
organization.

Carrying over our previous example, you would be outlining separate strategies for
selling cookies and selling cookie-making equipment at this level. You may be going
after convenience stores and grocery stores to sell your cookies, while you may be
looking at department stores and the internet to sell your equipment. Those are
dramatically different strategies, so they will be broken out at this level.

Even in smaller businesses, it is a good idea to pay attention to the business

strategy level so you can decide on how you are going to handle each various part of
your operation. The strategy that you highlighted at the corporate level should be
broad in scope, so now is the time to boil it down into smaller parts which will enable
you to take action.

Functional Strategy
This is the day-to-day strategy that is going to keep your organization moving in the
right direction. Just as some businesses fail to plan from a top-level perspective,
other businesses fail to plan at this bottom-level. This level of strategy is perhaps the
most important of all, as without a daily plan you are going to be stuck in neutral
while your competition continues to drive forward. As you work on putting together
your functional strategies, remember to keep in mind your higher level goals so that
everything is coordinated and working toward the same end.
It is at this bottom-level of strategy where you should start to think about the various
departments within your business and how they will work together to reach goals.
Your marketing, finance, operations, IT and other departments will all have
responsibilities to handle, and it is your job as an owner or manager to oversee them
all to ensure satisfactory results in the end. Again, the success or failure of the entire
organization will likely rest on the ability of your business to hit on its functional
strategy goals regularly. As the saying goes, a journey of a million miles starts with a
single step – take small steps in strategy on a daily basis and your overall corporate
strategy will quickly become successful.

Good strategy alone isn’t going to automatically lead you to success in business, but
it certainly is a good place to start. Once you have sound strategies in place, the
focus of the organization will shift toward executing those strategies properly day
after day. Of course, your strategies will need to be continually monitored and
adjusted as you move forward to ensure you are staying on a path that is consistent
with the goals of the business, so always keep the three levels of strategy near the
front of your mind as your guide your company.

STRETIGIC MANAGEMENT PRACTICE IN INDIA …….

Strategic management is the development and implementation of all the goals and
objectives of an organization. It involves the details of the method that a company will
employ to achieve its goals. It represents the initiatives that a company plans to take
on behalf of its board of directors, its employees, its owners and other relevant
stakeholders. A strategic manager is involved in the team that accomplishes the
goals set out in the strategic plan. A strategic manager is professionally trained in
strategy formulation by getting certified from a strategic management
course commonly available in business schools or online educational portals.
 Strategic management provides direction to the company and its employees. It helps
lay out the strategic objectives of the organization in an easy to understand way. The
strategic goals of an organization are long term in nature and may take years.
However, a company keeps itself on track by ensuring that all their plans are in
accordance with its strategic plan.

According to marketing guru Michael Porter, there are three principles of strategy.
The organization’s strategy should help in creating a valuable and unique positioning
of the company in the market. It should help the company in choosing what it should
not do and; it should help the company in aligning its various activities with each
other.

Because of the obvious benefits that strategic management possesses, it is gaining

relevance among Indian corporates. These benefits are as follows –

1. Strategic management is helping Indian corporates in giving their businesses a

direction
India’s booming economy is home to a variety of start-ups. These start-ups are new
and need to stay focused. A good strategy allows them to keep their eyes on the
goal. It helps them set clear goals on what business they want to be in and what kind
of customers they want to serve. With the plethora of market segments available in a
vibrant economy, it is easy to get confused. A clear-cut strategy helps organizations
stay out of the confused state.

2. Strategic management allows situational analysis through management tools

One of the management styles in strategic management is called situational analysis.
It helps a business evaluate itself in its current market. By doing this they can define
where they want to be, their future course of action and the time frame that they want
to define for reaching their goals. They can clearly fine tune their working to achieve
their goals by knowing how far they need to go from where they currently are. It helps
them know how much resources they need to direct to achieve the desired result in
the stipulated time frame.

3. Strategic management helps look around for strategic alliances

Once a company has a set of goals and a time frame to achieve those goals, they
can find out means that can help them speed up their process of achievement of the
decided goals. One of those means is a strategic alliance. A strategic alliance can
happen between two organizations which have similar or complementing strategic
objectives. They can have a partnership, or a bigger firm can acquire a smaller one.
This provides both the sides access to each other’s resources and customer base.
They can place each other’s products in their stores. In this manner, by tying the
growth of the organization with the strategic alliances, one can fasten the goal
completion.
4. Strategic management encourages innovation
Innovation is one of the key criteria for keeping a business relevant in the eyes of the
customers. It keeps the company on its toes and encourages employees to create
new products and processes which are better than the previous ones.

However, a recent study by the IBM institute for Business Value and Oxford
Economics claims that 90% of Indian start-ups fail due to lack of innovation. 77% of
the venture capitalists who were interviewed for this study said that Indian start-ups
lacked new technologies and fresh business models. In 2016, Asian Paints was the
only Indian company in Forbes magazine’s list of 25 most innovative companies.
Most Indian start-ups in fact are known to emulate western business models. Lack of
innovation is evident in the way they fail to sustain themselves. Since 2015, more
than 1500 Indian start-ups have closed down in India.

This shows that a very critical aspect that Indian companies need to look at is
innovation. Strategic management allows a company to innovate and sustain itself in
the long run.

While India is home to the third largest number of start-ups globally, it does not have
meta-level start-ups like Amazon, Alibaba or Google. Strategic management is highly
relevant in this case as a well-thought strategic plan will help these company find out
loopholes and fix them ahead of time.

These nine roles of the top strategic leadership are:

1.Navigator— In this role, the leader works quickly and clearly to deal with difficulties, solves
problems and takes advantage of various opportunities to influence existing work and people. The
Navigator role of the leader makes the leader to analyze a large amount of conflicting information,
understand the root cause of the problems and identify the feasible and optimal solutions.
2. Strategist— The strategist role of the leader enables the leader to develop a long-term strategy
and set targets to match the vision of an organization. The strategy is focused on creation of future
plans and required actions immediately. The strategist role enables the leader to provide a direction to
the organization to achieve the desired vision.
3. Entrepreneur— In this role, the leader acts an entrepreneur. He/she identifies and takes
advantage of opportunities and expands business by creating innovative products, services or
markets. Thinking like an entrepreneur and owner of the organization, the leader generates new
ideas, takes advantage of opportunities or proposals and transforms them into a new path. The leader
develops the ability to solve problems easily through his acumen and shrewdness and creates a new
style of leadership.
4. Mobilizer— Playing the role of mobilizer, the strategic leader mobilizes all kinds of resources and
develops teams and partners to work with them by leveraging the synergy of wide variety of talent.
Also, he / she builds a capacity that allows rapid implementation of work in order to achieve complex
objectives.
 5. Talent advocate - In this role, the strategic leader identifies talented and skillful employees,
internally and externally and stays in touch with them to tap their talent as and when required. He /
she creates a culture of talent development by encouraging innovative ideas, by providing training, by
empowering the talented employees to reach their highest possible abilities.
6. Captivator— Playing the role of a captivator, the strategic leader continues to build confidence
among employees, and creates positive feelings and a culture of belongingness. In this role, the
leader converts the talent of employees into a useful outcome for the organization. Also, he convinces
employees to accept his leadership style, synchronizes it with the vision of the organization and
empowers them achieve the vision.
7. Global thinker— The other important role played by the strategic leader is as a global thinker. The
leader understands and respects all types of diversity in the organization and designs the strategies
and action keeping the diversity factor in mind. He thinks from a very high macro level perspective
and keeps identifying global opportunities.
8. Change driver— Organizations need to adapt to the dynamic business environment by making
changes on a continuous basis. The strategic leader plays an important role as a change driver. The
leader creates and develops change management strategies and evolves techniques to make the
employees accept the changes from time to time. The leader convinces the employees by projecting
the fruitful outcomes of the changes.
9. Enterprise guardian - In this role, the strategic leader acts as an enterprise guardian. He / She
keeps a constant check on the status of the organization by keenly observing the business
environment and guards the enterprise from any disturbances. The leader refuses to negotiate over
long-term gains. He / She takes bold and wise decisions with courage and risk taking attitude for a
long-term benefit to the organization. The leader takes the onus of failure and shares the success with
all the employees. Keeps away from emotions and personal relationships when it comes to the
achievement of results. He / She becomes popular in the organization and outside by taking bold,
useful but unpopular decisions. It is essential to develop the leaders with the above abilities in every
organization. Management institutions like Skyline University, an accredited university in UAE
offering MBA courses, BBA courses and diploma courses in Sharjah have a key role in inculcating
such leadership traits right from the college days among the management students to enable them to
grow and become strategic leaders in future.

Environmental Analysis and Internal Analysis

Strategic analysis of any Commercial enterprise has two stages that include Internal and
External analysis.
Environmental analysis: An environmental analysis in strategic management has vital role in
businesses by indicating current and potential opportunities or threats outside the company in
its external environment. The external environment includes political, environmental,
technological and sociological events or trends that can affect the business directly or
indirectly. An environmental analysis is usually conducted as part of an analysis of strengths,
weaknesses, opportunities, and threats (SWOT) when a strategic plan is being developed.
Managers practicing strategic management must conduct an environmental analysis three-
monthly, semi-annually, or annually, depending on the nature of the industry. Managers who
identify events or conditions in the external environments can achieve competitive advantage
and decrease its risk of not being ready when faced with threats (Alok Goyal, Mridula Goyal,
2009).
In management studies, it has been shown that the intent of an environmental analysis is to
help in strategy development by keeping decision-makers within an organization informed on
the external environment. This may include changing of political parties, increasing regulations
to decrease pollution, technological expansions, and shifting demographics. If a new
technology is developed and is being used in a different industry, a strategic manager would
understand how this technology could also be used to improve processes within his business.
An analysis allows businesses to gain an outline of their environment to discover opportunities
or intimidations. Environmental analysis facilitates strategic thinking in organization. It
provides input for strategic decision. The analysis should provide an understanding of changes
that occurs in environment.
Link between environmental scanning and strategic management (Source: Alok Goyal,
Mridula Goyal, 2009).)

There are many strategic analysis mechanisms that company can use. The most used
comprehensive analysis of the environment is the PESTLE analysis. Company managers and
strategy formulators use this analysis to find where their market currently. It also helps predict
the future of the organization. PESTLE analysis comprises of numerous factors that affect the
business environment. These factors can affect every industry directly or indirectly.
PESTEL denote the following factors:
Political factors
Economic factors
Social factors
Technological factors
Legal factors
Environmental factor
PEST analysis
It is documented in studies that the company conduct an environmental analysis to identify the
potential influence of particular aspects of the general and operating environments on business
operations. This analysis recognizes the opportunities and threats in a business environment in
terms of a company's strengths and flaws. Environmental analysis consists of three-step process
in which a company first categorises environmental factors that affect its business. In second
step, the company gathers information about the selected set of environmental factors that are
most likely to impact business operations. This information serves as input to a forecast of the
impact of each environmental factor on the business.
Studies indicated that environmental analysis give strength to organizations to anticipate
opportunities and help strategists to plan warning system to prevent threat (Alok Goyal,
Mridula Goyal, 2009).
There are some drawbacks of environmental analysis:

o Environmental analysis does not predict the future, nor does it eliminate uncertainty for
any organisation.
o Environmental analysis is not a sufficient guarantor of organizational effectiveness.
o The potential of environmental analysis is often not realised because of how it is
practised.

Internal analysis: Internal analysis is the methodical evaluation of the key internal features of
an organization. Internal Analysis recognises and assesses resources, capabilities, and core
competencies. Internal analysis has four elements such as the organization's Current vision,
Mission, Strategic objectives and Strategies. Resources are the assets that an organization has
for carrying out whatever work activities and processes relative to its business definition,
business mission, and goals and objectives. These resources include financial resources,
Physical assets, Human resources, Intangible resources and Structural-cultural resources. Core
competencies are the organization's major value-creating skills and abilities that are shared
across multiple product lines or multiple businesses. This internal sharing process is what
differentiates core competencies from typical capabilities. Competitive advantage is The
collection of factors that sets a company apart from its competitors and gives it a unique
position in the market.
Internal Analysis is performed because it is the only way to identify an organization's strengths
and weaknesses it's needed for making good strategic decisions. In order to start the strategic
management process, managers are required to conduct an internal analysis. This involves
ascertaining the business' strengths and weaknesses, by analysing its competencies. It also
involves managers emphasising competitive advantage of the business. For effective strategies,
the organisation must exploit and expand on its strengths, as well as reduce its weaknesses;
thus promoting its competitive advantage to gain cost-effectiveness.
There are four major areas which needs to be considered for internal analysis:

1. The organization's resources, capabilities.

2. The way in which the organization configures and co-ordinates its key value-adding
activities.
3. The structure of the organization and the features of its culture.
4. The performance of the organization as measured by the strength of its products.

Internal analysis

To summarize, environmental analysis is strategic device to distinguish external and internal

elements, which can affect the performance of firms. The analysis include appraising threat
level or opportunity the factors might present. These assessments are translated into the
decision-making process. The analysis helps align strategies with the firm's environment.
Internal analysis is the process of identifying and assessing an organization's particular features
that include Resources, Capabilities, and Core competencies

Environmental Scanning
Every organization has an internal and external environment. In order
for the organization to be successful, it is important that it scans its
environment regularly to assess its developments and understand
factors that can contribute to its success. Environmental scanning is a
process used by organizations to monitor their external and internal
environments

Environmental Scanning
The purpose of the scan is the identification of opportunities and
threats affecting the business for making strategic business
decisions. As a part of the environmental scanning process, the
organization collects information regarding its environment and
analyzes it to forecast the impact of changes in the environment. This
eventually helps the management team to make informed decisions.
As seen from the figure above, environmental scanning should
primarily identify opportunities and threats in the organization’s
environment. Once these are identified, the organization can create a
strategy which helps in maximizing the opportunities and minimizing
the threats. Before looking at the important factors for environmental
scanning, let’s take a quick peek at the components of an
organization’s environment.

Components of a Business Environment

As you can see above, the internal environment of an organization

consists of various elements like the value system, mission/objectives
of the organization, structure, culture, quality of employees, labor
unions, technological capabilities, etc. These elements lie within the
organization and any changes to them can affect the overall success
of the business.

On the other hand, an organization cannot operate in a vacuum. Also,

there are many factors outside the walls of an organization which
affects the functions of the business. These factors constitute the
external environment of an organization.
The internal environment offers strengths and weaknesses to business
while the external environment brings opportunities and threats. The
four influencing environmental factors known as SWOT
Analysis are:

1. Strength – an inherent capacity of an organization which helps it

gain a strategic advantage over its competitors.
2. Weakness – an inherent constraint or limitation which creates a
strategic disadvantage for a business.
3. Opportunity – a favorable condition in the organization’s
environment enabling it to strengthen its position.
4. Threat – an unfavorable condition in the organization’s
environment causing damage to the organization.
Important Factors for Environmental Scanning
Before scanning the environment, an organization must take the
following actors into consideration:

 Events – These are specific occurrences which take place in

different environmental sectors of a business. These are
important for the functioning and/or success of the business.
Events can occur either in the internal or the external
environment. Organizations can observe and track them.
 Trends – As the name suggests, trends are general courses of
action or tendencies along which the events occur. They are
groups of similar or related events which tend to move in a
specific direction. Further, trends can be positive or negative. By
observing trends, an organization can identify any change in the
strength or frequency of the events suggesting a change in the
respective area.
 Issues – In wake of the events and trends, some concerns can
arise. These are Issues. Organizations try to identify emerging
 issues so that they can take corrective measures to nip them in
the bud. However, identifying emerging issues is a difficult task.
Usually, emerging issues start with a shift in values or change in
which the concern is viewed.
 Expectations – Some interested groups have demands based on
their concern for issues. These demands are Expectations.

 Q1. Explain the important factors for environmental scanning.

Answer: The four important factors of environmental scanning are
events, trends, issues, and expectations.

Events are occurrences which takes place in different environmental

sectors of a business. Sometimes these events follow a pattern and
tend to move in a specific direction. By analyzing these patterns, the
organization can identify trends. Further, there are times when events
and trends cause concerns or issues. Also, the interested groups
expect the organization to take care of the issues. Hence, in
environmental scanning, the organization must ensure that all these
aspects are covered.

Analysis On Competition Environment

2.1 Overview of competitive strategy

2.1.1 Competition

Competition is the basic characteristic of nature happing in all living field. It is "when
the immediate supply of a single necessary factor fall below the combined demand
of the plants, competition begins" (Frederic Clements, 1929, p.317). The definition
here was not covered the economic prospective only, but the whole system of the
nature interface cycle. However, there are key words that make any economist or
businessman concern as "supply" and "demand". They are the essential ingredients in
need of analysis to gain the success in any market. As the basis of nature,
competition concept is extremely also foundational in economy.

So, what is the competition in respect of economy and business field? The answer
here would be given by Michaël E. Porter: "… managers define competition too
narrowly, as if it occurred only among today’s direct competitors. Yet competition for
profits goes beyond established industry rivals to include four other competitive
forces as well… The extended rivalry that results from all five forces defines an
industry’s structure and shapes the nature of competitive interaction within an
industry". (Michaël E. Porter ,, 3)So the competition definition in general is not quite
specific but must rely on the industry. It can be conducted from the number of
customer, the level of productivity, the brand recognition among competitors… But,
when there are five competitive forces –customers, suppliers, potential entrants,
substitute product and rivalry- so would competition appear.

2.1.2 Competitive strategy

Concept of competition is just the navigation to achieve the value creation that
allows them to gain as much profit as possible. It is only achievable when companies
can establish a difference that it can preserve. The arithmetic of superior profitability
then comes by: delivering greater value that give a company allowance to charge
higher average unit prices; better efficiency results in lower average cost. And
competitive strategy is about being different.

"Strategy is the direction and scope of an organization over the long-term: which
achieves advantage for the organization through its configuration of resources within
a challenging environment, to meet the needs of markets and to fulfill stakeholder
expectations" said Johnson and Scholes (Johnson and Scholes, 2002, 15). In other
words, Strategy is simply an outline of how a business intends to achieve its goals
and objections and constrained by the company’s capabilities.

An effective strategy gives a firm three benefits. First, it is a source of economic gain.
Second, it provides a frame work for resource allocation. And third, it guides the
firm’s decisions regarding management and organization. (Gordon Walker, ,3) In
general it is the guide for companies’ decision regarding their management and
organization. And it is more practical when the company need to draw a competitive
strategy that focus to overcome its competitors. "Competitive strategy is the search
for a favorable competitive position in an industry, the fundamental arena in which
competition occurs. Competitive strategy aims to establish a profitable and
sustainable position against the forces that determine industry competition."
(Michael E. Porter, 1, 1998)

Because of the limitation of topic, competitive strategy here would be analyzed at

the corporation level rather than other lower level. After defining five forces of
competition as mentioned above, the next step here is to formulate the competitive
strategy to become different in the industry.

2.2 Analysis on competition environment

Competition as above is very abstract definition that we cannot point it out but only
describe it through five competitive forces as customers, suppliers, potential entrants,
substitute product and rivalry. However, five of them are just not enough to fulfill the
blank page of competitive strategy. In consideration of effective strategy, any
company need to understand both internal and external factor but in different level
respect to kind of strategy it currently focuses on. This involves an analysis of the
general environment and the competitive environment. Undertaking of strategy
analysis by the organization is useful starting points to not only evaluate the current
situation of firms’ strategic management process but also to plan a further strategy.
The organization is face with a constantly changing external environment and
needed to ensure that its own internal and capabilities are more than sufficient to
meet the needs of the external environment. Any of them do not exist simply to
survive in the market place but want to grow and prosper in a competitive
environment. In order to make sense of what is going on around them, the strategy
analysis is very crucial.

For analysis on competitive strategy of Trung Nguyen Corporation, there are many
way to encounter the results. Here we only concentrate on 3 analysis tools: Value
chain, PESTEL analysis and Porter’s Five Force analysis.

2.2.1 Value chain

A firm is a collection of activities that are performed to design, produce, and market,
deliver and support its product. All these activities can be represented using a value
chain. Firms’ value chain and the way it performs individual activities are reflection of
its history, its strategy, its approach to implementing its strategy, and the underlying
economics of the activities themselves.

Value chain analysis was devised by Porter (1985) is a technique which helps us
assess an organization’s resource and in so doing determine its strengths and
possible weakness. Value chain analysis looks at the activities that go to make up a
product or service with a view to ascertaining how much value each activity adds. If
we desire to increase the value an organization adds for the consumers of its
products, be they the end consumer or an intermediate such as distributor, we need
to know where and how much value each activities set, and, importantly, how we
might enhance this value added further by reconfiguring parts (or all) of the value-
added process. This process is referred to as the value chain system and recognizes
that an organization‘s own value chain will interact with the value chain prevalent in
other organizations.

The relevant level for constructing value chain is a firm’s activities in a particular
industry (the business unit). An industry- or sector-wide value chain is too broad,
because it may obscure important sources of competitive advantage. Though firms in
the same industry may have similar chains the value chains of competitors often
differ. Trung Nguyen and Starbuck can be considered in the coffee beverage
industry, for example, but they have absolutely different value chains embodying
significant differences in boarding gate operations, crew policies, and aircraft
operations. Differences among competitor value chain in an industry may avry
somewhat for different items in its product line, or different buyers, geographic
areas, or distribution channels. The value chains for such subsets of a firm are closely
related, however, and can only be understood in a context of the business unit chain.

An analysis of the value chain rather than value added is the appropriate way to
examine competitive advantage. Value added (selling price less the cost of purchased
raw materials) has sometimes been used as the focal point for cost analysis because
it was viewed as the area in which a firm can control costs. Value added is not a
sound basis for cost analysis, however, because it incorrectly distinguishes raw
materials from the many other purchased inputs used in a firm’s activities. Also, the
cost behavior of activities cannot be understood without simultaneously examining
the costs of the inputs used to perform them. Moreover, value added fails to
highlight the linkages between a firm and its suppliers that can reduce cost or
enhance differentiation.

Identifying value activities requires the isolation of activities that are technologically
and strategically distinct. Value activities and accounting classification are rarely the
same. Accounting classifications group together activities with disparate
technologies, and separate costs that are all part the same activity. The activities
contained within the value chain are classified by Porters as primary activities and
support activities, Figure . These primary and support activities provide the link
between an organization’s strategy and its implementation. This is because once the
organization is seen as a collection of activities, and every employee is involved in an
activity, it becomes apparent that everyone has a role to play in strategy
implementation. Therefore it becomes crucial that an organization’s strategy is
clearly communicated throughout the organization so that individuals understand
why they are involved in particular activities, and how this is related to other
activities.

Identify opportunity and threats

How to define your company’s opportunities

Opportunities, as you might guess, are factors that can contribute to your growing
success. These factors are typically outside of your control, which is why they are
consider external factors.
 Here are a few categories to consider when looking for business
opportunities:

 Economic trends. Look at the economy in your area.

 Market trends. Your target market could be driving new trends that could open
doors for your business.

 Funding changes. Think of donations, grants, or other sifting revenue streams

that aren’t within your control.

 Political support. Consider changes in political ties.

 Government regulations. Think of regulations that are changing that might

afford you new opportunities.

 Changing relationships. Consider shifting relationships with vendors, partners,

or suppliers.

 Target audience shift. Your target market might be expanding, aging, or

shifting.

Questions to ask to find opportunities

To help you brainstorm possibly opportunities, we’ve created a list of questions to

help. The questions are broken up by the categories that we just went over. If a
question doesn’t apply to your business, simply move on to the next.

Economic trends:

 Is the economy in your area looking up?

 Will the economy enable your audience to make more purchases?

 Are economic shifts happening that impact your target audience?

 Market trends:

 How is your market changing?

 What new trends could your company take advantage of?

 What kind of timeframe surrounds these new trends? Could it be a long-term

opportunity?

Funding changes:

 Do you expect an increase in grant funding or donations this year?

 How will funding changes help your business?

Political support:

 Do you anticipate a shift in political support this year?

 What opportunities could be created with new political partnerships?

Government regulations

 Are any regulations shifting that could lead to a positive change?

Changing relationships:

 Are there positive changes happening within any of your outside business
relationships?

 Are vendors changing or expanding?

 Has your partner decided to move on, creating an opportunity to work with
someone new?

Target audience shift:

 How is your demographic shifting?

 What opportunities can you think of that can move with these changing
demographics?

 Is your audience expanding? If so, how can you capitalize on this increase?

Tips to list your opportunities

1. Do your research. Finding answers to some of these questions might require

some digging. Don’t be afraid to make some calls, set up meetings, and do
some market research to gauge upcoming changes.

2. Be creative. To find an opportunity where your competitors cannot will take

skill and creativity. Don’t be afraid to think outside the box when you’re listing
possible opportunities.

3. Keep your list of opportunities handy. We’ll add to your SWOT

analysistomorrow, so keep your list of opportunities in a safe spot.

Threats..

How to define your company’s threats

A threat to your company is an external factor, something that you can’t control,
that could negatively impact your business.

You may be thinking, if threats are outside of my control, why should I spend time
identifying them? By knowing your threats, you might be able to find a strategy to
minimize them, or at least, come up with a plan to handle them in a way that won’t
shut down your business. Identifying threats is all about being prepared and taking
proactive steps to minimize the hurt.

Coming up with a list of threats can be difficult. These issues don’t spring to mind
as easily as your strengths, but there are certain categories that most external
threats fall into.
 You can use these categories to brainstorm possible threats to your
business:

 Economic trends. Examine the economic conditions that impact your business.

 Market trends. Think about changing or shrinking market trends.

 Funding changes. Think of donations, grants, or other shifting revenue streams

that aren’t within your control.

 Political support. If political support is shifting, you’ll want to analyze its impact.

 Government regulations. Think of regulations that are changing that might hurt
your business.

 Changing relationships. Consider shifting relationships with vendors, partners,

or suppliers.

 Target audience shift. Your target market might be shrinking, aging, or shifting.

Questions to ask to find threats

These categories should get your wheels turning. By thinking through each
category, outside threats should come to mind.

We’ve also created a list of questions that coincide with the categories above to
help you think critically about the threats that could be out there.

Economic trends

 Is the economy in your area in a recession?

 Will the economy negatively impact your customers’ ability to make purchases?

 Are economic shifts happening that impact your target audience?

Market trends
 How is your market changing?

 What new trends could hurt your company?

 Is there more competition in your market that’s pushing you out?

Funding changes

 Do you expect a decrease in grant funding or donations this year?

 Will funding changes hurt your business? If so, how?

Political support

 Do you anticipate a shift in political support this year?

 Is there reason to be concerned over political shifts?

 What does your business stand to lose because of political changes?

Government regulations

 Are any regulations shifting that could cost more money or hurt production?

 What kind of damage could new regulations have?

Changing relationships

 Are any outside business relationships changing?

 Is there any turmoil with partners or vendors?

Target audience shift

 How is your demographic shifting?

 What threats accompany these changing demographics?

 Is your audience changing in a way that you can’t accommodate?

 Tips to find threats

1. Do market research. As you’re looking into possible threats, you’ll want to

conduct market research to see how your target audience is shifting.

2. List every threat you can think of. If you think of a threat, list it. Even if that
threat has consequences that won’t be felt immediately, it’s still better to have
it on your radar.

3. Threats exists, don’t panic. Listing threats may cause some anxiety, but
remember that all businesses have threats. It’s better to know about threats
than it is to turn a blind eye to them. Plus, we’ll give you some strategies
tomorrow to help you minimize these threats.

Functional Approach to
Internal Analysis
FUNCTIONAL APPROACH TO INTERNAL ANALYSIS INTRODUCTION
The purpose of the internal analysis is to evaluate how the company is doing, so that its efforts can
be directed in the most effective and efficient way. It s a Decision making approach in which a
problem is broken down into its component functions (accounting, marketing, manufacturing, etc. ).
These functions are further divided into sub-functions and sub-sub functions … until the function
level suitable for solving the problem is reached.
Every organization of a given type must perform certain jobs in order do its work. For example, key
functions of a manufacturing company include production, purchasing, marketing, accounting, and
personnel. The functions of a hospital include surgery, psychiatry, nursing, housekeeping, and
billing. Using such functions as the basis for structuring the organization may, in some instances,
have the advantage of efficiency. Grouping jobs that require the same knowledge, skills, and
resources allows them to be done efficiently and promotes the development of greater expertise.
Functional analysis is a tool used to express the needs of a client/user in terms of functions and
performances expected, instead of focusing on a solution. In other words, the problem is presented
without thinking about the solution. To accomplish this, the buyer must identify, sort, characterize
and prioritize the needs of a client (internal customer). Functional analysis is the basic tool for Value
Management. Value is the ratio between the level of client satisfaction and the relative cost of a
product or service.
Value Management is a method to increase value to clients. Functional analysis is a support to better
identify clients needs in order to increase their satisfaction at the lowest cost. The Functional
Specification of Requirements is the end product of the Functional Analysis. It is the document that
formalizes the client’s needs. It is a technique used to identify the labour competencies inherent in a
productive function. Such function may be defined at the level of an occupational sector, an
enterprise, a group of enterprises or a whole sector of production or services.
Functional analysis may be developed with different initial levels: an occupational sector (hotel);
mainstream occupations at various sectors (occupational safety and health); or an occupation (PC
repairman). It is thus evident the flexibility of functional analysis. Although it was designed as a
wide-scale analysis tool, it may also be useful to analyse occupations in certain subsectors or even at
specific organisations. (1) Functional analysis is not an exact method whatsoever.
It is a working approach to the required competencies by means of a deductive strategy. It begins by
establishing the main purpose of the productive function or service under study and then questions
are asked to find out what functions need to be performed in order for the previous function to be
achieved. Ideally, this is carried out on a group of workers who are familiar with the function object
of the analysis. Its worth as a tool comes directly from its representative quality. Certain rules are
followed during its preparation in order to keep uniform criteria.
The main purpose, key purpose or key function of the enterprise is usually described by following
this structure: [pic] DEVELOPMENT OF FUNCTIONAL APPROACH TO MANAGEMENT Henri Fayol
was the first person to identify elements or functions of management in his classic 1916 book
Administration Industrielle et Generale. Fayol was the managing director of a large French coal-
mining firm and based his book largely on his experiences as a practitioner of management. Fayol
defined five functions, or elements of management: planning, organizing, commanding, coordinating,
and controlling.
Fayol argued that these functions were universal, in the sense that all managers performed them in
the course of their jobs, whether the managers worked in business, military, government, religious,
or philanthropic undertakings. Fayol defined planning in terms of forecasting future conditions,
setting objectives, and developing means to attain objectives. Fayol recognized that effective
planning must also take into account unexpected contingencies that might arise and did not
advocate rigid and inflexible plans. Fayol defined rganizing as making provision for the structuring
of activities and relationships within the firm and also the recruiting, evaluation, and training of
personnel. According to Fayol, commanding as a managerial function concerned the personal
supervision of subordinates and involved inspiring them to put forth unified effort to achieve
objectives. Fayol emphasized the importance of managers understanding the people who worked for
them, setting a good example, treating subordinates in a manner consistent with firm policy,
delegating, and communicating through meetings and conferences.
Fayol saw the function of coordination as harmonizing all of the various activities of the firm. Most
later experts did not retain Fayol’s coordination function as a separate function of management but
regarded it as a necessary component of all the other management functions. Fayol defined the
control function in terms of ensuring that everything occurs within the parameters of the plan and
accompanying principles. The purpose of control was to identify deviations from objectives and
plans and to take corrective action.
Fayol’s work was not widely known outside Europe until 1949, when a translation of his work
appeared in the United States. Nevertheless, his discussion of the practice of management as a
process consisting of specific functions had a tremendous influence on early management texts that
appeared in the 1950s. Management pioneers such as George Terry, Harold Koontz, Cyril O’Donnell,
and Ralph Davis all published management texts in the 1950s that defined management as a process
consisting of a set of interdependent functions.
Collectively, these and several other management experts became identified with what came to be
known as the process school of management. According to the process school, management is a
distinct intellectual activity consisting of several functions. The process theorists believe that all
managers, regardless of their industry, organization, or level of management, engage in the functions
of management. The process school of management became a dominant paradigm for studying
management and the functions of management became the most common way of describing the
nature of managerial work.
 Value chain internal analysis…
Value chain analysis (VCA)

is a process where a firm identifies its primary and support activities that add value to
its final product and then analyze these activities to reduce costs or increase
differentiation.
Value chain

represents the internal activities a firm engages in when transforming inputs into
outputs.

Understanding the tool

Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal
is to recognize, which activities are the most valuable (i.e. are the source of cost or
differentiation advantage) to the firm and which ones could be improved to
provide competitive advantage. In other words, by looking into internal activities, the
analysis reveals where a firm’s competitive advantages or disadvantages are. The
firm that competes through differentiation advantage will try to perform its activities
better than competitors would do. If it competes through cost advantage, it will try to
perform internal activities at lower costs than competitors would do. When a
company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.

M. Porter introduced the generic value chain model in 1985. Value chain represents
all the internal activities a firm engages in to produce goods and services. VC is
formed of primary activities that add value to the final product directly and support
activities that add value indirectly.

Although, primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive
advantage mainly derives from technological improvements or innovations in
business models or processes. Therefore, such support activities as ‘information
systems’, ‘R&D’ or ‘general management’ are usually the most important source of
differentiation advantage. On the other hand, primary activities are usually the
source of cost advantage, where costs can be easily identified for each activity and
properly managed.
Firm’s VC is a part of a larger industry's VC. The more activities a company
undertakes compared to industry's VC, the more vertically integrated it is. Below you
can find an industry's value chain and its relation to a firm level VC.

Using the tool

There are two different approaches on how to perform the analysis, which depend on
what type of competitive advantage a company wants to create (cost or
differentiation advantage). The table below lists all the steps needed to achieve cost
or differentiation advantage using VCA.
Cost advantage

To gain cost advantage a firm has to go through 5 analysis steps:

Step 1. Identify the firm’s primary and support activities. All the activities (from
receiving and storing materials to marketing, selling and after sales support) that are
undertaken to produce goods or services have to be clearly identified and separated
from each other. This requires an adequate knowledge of company’s operations
because value chain activities are not organized in the same way as the company
itself. The managers who identify value chain activities have to look into how work is
done to deliver customer value.

Step 2. Establish the relative importance of each activity in the total cost of the
product.The total costs of producing a product or service must be broken down and
assigned to each activity. Activity based costing is used to calculate costs for each
process. Activities that are the major sources of cost or done inefficiently (when
benchmarked against competitors) must be addressed first.

Step 3. Identify cost drivers for each activity. Only by understanding what factors
drive the costs, managers can focus on improving them. Costs for labor-intensive
activities will be driven by work hours, work speed, wage rate, etc. Different activities
will have different cost drivers.

Step 4. Identify links between activities. Reduction of costs in one activity may
lead to further cost reductions in subsequent activities. For example, fewer
components in the product design may lead to less faulty parts and lower service
costs. Therefore identifying the links between activities will lead to better
understanding how cost improvements would affect he whole value chain.
Sometimes, cost reductions in one activity lead to higher costs for other activities.

Step 5. Identify opportunities for reducing costs. When the company knows its
inefficient activities and cost drivers, it can plan on how to improve them. Too high
wage rates can be dealt with by increasing production speed, outsourcing jobs to low
wage countries or installing more automated processes.

Differentiation advantage

VCA is done differently when a firm competes on differentiation rather than costs.
This is because the source of differentiation advantage comes from creating superior
products, adding more features and satisfying varying customer needs, which results
in higher cost structure.

Step 1. Identify the customers’ value-creating activities. After identifying all value
chain activities, managers have to focus on those activities that contribute the most
to creating customer value. For example, Apple products’ success mainly comes not
from great product features (other companies have high-quality offerings too) but
from successful marketing activities.
Step 2. Evaluate the differentiation strategies for improving customer
value. Managers can use the following strategies to increase product differentiation
and customer value:

 Add more product features;

 Focus on customer service and responsiveness;
 Increase customization;
 Offer complementary products.

Step 3. Identify the best sustainable differentiation. Usually, superior

differentiation and customer value will be the result of many interrelated activities
and strategies used. The best combination of them should be used to pursue
sustainable differentiation advantage.

Critical Success Factors

Identifying the Things That Really Matter for
Success
Make sure you're focusing on the right factors for success.

So many important matters can compete for

your attention in business that it's often
difficult to see the "wood for the trees."
What's more, it can be extremely difficult to get everyone in the
team pulling in the same direction and focusing on the true
essentials. That's where Critical Success Factors (CSFs) can help.

CSFs, also known as Key Results Areas (KRAs), are the essential
areas of activity that must be performed well if you are to achieve
the mission, objectives or goals for your business or project. By
identifying your Critical Success Factors, you can create a common
point of reference to help you direct and measure the success of
your business or project.

As a common point of reference, CSFs help everyone in the team to

know exactly what's most important. And this helps people perform
their own work in the right context and so pull together towards the
same overall aims.

About CSFs
The idea of CSFs was first presented by D. Ronald Daniel in the
1960s. It was then built on and popularized a decade later by John
F. Rockart, of MIT's Sloan School of Management, and has since
been used extensively to help businesses implement their strategies
and projects.
Inevitably, the CSF concept has evolved, and you may have seen it
implemented in different ways. This article provides a simple
definition and approach based on Rockart's original ideas.

Rockart defined CSFs as: "The limited number of areas in which

results, if they are satisfactory, will ensure successful
competitive performance for the organization. They are the
few key areas where things must go right for the business to
flourish. If results in these areas are not adequate, the
organization's efforts for the period will be less than desired."
He also concluded that CSFs are "areas of activity that should
receive constant and careful attention from management."
Critical Success Factors are strongly related to the mission and
strategic goals of your business or project. Whereas the mission and
goals focus on the aims and what is to be achieved, Critical Success
Factors focus on the most important areas and get to the very heart
of both what is to be achieved and how you will achieve it.

Using the Tool: An Example

CSFs are best understood by example. Consider a produce store
"Farm Fresh Produce", whose mission is:

"To become the number one produce store in Main Street by selling
the highest quality, freshest farm produce, from farm to customer in
under 24 hours on 75% of our range and with 98% customer
satisfaction."
(For more on this example, and how to develop your mission
statement, see our article on Vision Statements and Mission
Statements .)
The strategic objectives of Farm Fresh are to:

 Gain market share locally of 25%.

 Achieve fresh supplies of "farm to customer" in 24 hours for 75%
of products.
 Sustain a customer satisfaction rate of 98%.
 Expand product range to attract more customers.
 Have sufficient store space to accommodate the range of products
that customers want.
In order to identify possible CSFs, we must examine the mission and
objectives and see which areas of the business need attention so
that they can be achieved. We can start by brainstorming what the
Critical Success Factors might be (these are the "Candidate" CSFs.)

Objective Candidate Critical Success Factors

Increase competitiveness versus

other local stores

Gain market share locally of 25%

Attract new customers

Achieve fresh supplies of “farm to customer” Sustain successful relationships with

in 24 hours for 75% of products local suppliers

Retain staff and keep up customer-

Sustain a customer satisfaction rate of 98% focused training

Expand product range to attract more

customers Source new products locally
 Objective Candidate Critical Success Factors

Secure financing for expansion

Extend store space to accommodate new Manage building work and any
products and customers
disruption to the business

Once you have a list of Candidate CSFs, it's time to consider what is
absolutely essential and so identify the truly Critical Success
Factors.

And this is certainly the case for Farm Fresh Produce. The first CSF
that we identify from the candidate list is "relationships with local
suppliers." This is absolutely essential to ensure freshness and to
source new products.

Another CSF is to attract new customers. Without new customers,

the store will be unable to expand to increase market share.

A third CSF is financing for expansion. The store's objectives cannot

be met without the funds to invest in expanding the store space.

Figure 1: Critical Success Factors, Missions and Goals

for "Farm Fresh Produce"
Tip: How Many CSFs?
Whilst there is no hard and fast rule, it's useful to limit the number
of CSFs to five or fewer absolute essentials. This helps your CSFs
have maximum impact, and so give good direction and prioritization
to other elements of your business or project strategy.

Using the Tool: Summary Steps

In reality, identifying your CSFs is a very iterative process. Your
mission, strategic goals and CSFs are intrinsically linked and each
will be refined as you develop them.

Here are the summary steps that, used iteratively, will help you
identify the CSFs for your business or project:

Step One: Establish your business's or project's mission and

strategic goals (click here for help doing this.)
Step Two: For each strategic goal, ask yourself "what area of
business or project activity is essential to achieve this goal?" The
answers to the question are your candidate CSFs.
Tip:
To make sure you consider all types of possible CSFs, you can use
Rockart's CSF types as a checklist.
 Industry – these factors result from specific industry
characteristics. These are the things that the organization must
do to remain competitive.
 Environmental – these factors result from macro-environmental
influences on an organization. Things like the business climate,
the economy, competitors, and technological advancements are
included in this category.
 Strategic – these factors result from the specific competitive
strategy chosen by the organization. The way in which the
company chooses to position themselves, market themselves,
whether they are high volume low cost or low volume high-cost
producers, etc.
 Temporal – these factors result from the organization's internal
forces. Specific barriers, challenges, directions, and influences
will determine these CSFs.
Step Three: Evaluate the list of candidate CSFs to find the absolute
essential elements for achieving success – these are your Criticial
Success Factors.
As you identify and evaluate candidate CSFs, you may uncover some
new strategic objectives or more detailed objectives. So you may
need to define your mission, objectives and CSFs iteratively.

Step Four: Identify how you will monitor and measure each of the
CSFs
Step Five: Communicate your CSFs along with the other important
elements of your business or project's strategy.
Step Six: Keep monitoring and reevaluating your CSFs to ensure
that you keep progressing towards your aims. Indeed, whilst CSFs
are sometimes less tangible than measurable goals, it is useful to
identify as specifically as possible how you can measure or monitor
each one.
Key Points
Critical Success Factors, also known as Key Results Areas, are the
areas of your business or project that are absolutely essential to its
success. By identifying and communicating these CSFs, you can help
ensure that your business or project is well-focused and avoid
wasting effort and resources on less important areas. By making
CSFs explicit and communicating them with everyone involved, you
can help keep the business and project on track towards common
aims and goals.

Core Competencies Analysis

Building Sustainable Competitive Advantage

What makes you stand out from the crowd?

The idea of "core competencies" is one of the

most important business ideas currently
shaping our world. This is one of the key
ideas that lies behind the current wave of
outsourcing, as businesses concentrate their
efforts on things they do well and outsource
as much as they can of everything else.
In this article we explain the idea and help you use it, on
both corporate and personal levels. And by doing so, we show you
how you can get ahead of your competition – and stay ahead.
By using the idea, you'll make the very most of the opportunities
open to you:

 You'll focus your efforts so that you develop a unique level of

expertise in areas that really matter to your customers. Because
of this, you'll command the rewards that come with this
expertise.
 You'll learn to develop your own skills in a way that complements
your company's core competencies. By building the skills and
abilities that your company most values, you'll win respect and
get the career advancement that you want.

Explaining Core Competencies: The Value

of Uniqueness
The starting point for understanding core competencies is
understanding that businesses need to have something that
customers uniquely value if they're to make good profits.

"Me too" businesses (with nothing unique to distinguish them from

their competition) are doomed to compete on price: the only thing
they can do to make themselves the customer's top choice is drop
price. And as other "me too" businesses do the same, profit margins
become thinner and thinner.

This is why there's such an emphasis on building and selling USPs

(Unique Selling Points ) in business.
If you're able to offer something uniquely good, customers will want
to choose your products and will be willing to pay more for them.

The question, though, is where this uniqueness comes from, and

how it can be sustained.

In their key 1990 paper "The Core Competence of the

Corporation," C.K.Prahalad and Gary Hamel argue that "Core
Competences" are some of the most important sources of
uniqueness: these are the things that a company can do uniquely
well, and that no-one else can copy quickly enough to affect
competition.
Prahalad and Hamel used examples of slow-growing and now-
forgotten mega corporations that failed to recognize and capitalize
on their strengths. They compared them with star performers of the
1980s (such as NEC, Canon and Honda), which had a very clear idea
of what they were good at, and which grew very fast.

Because these companies were focused on their core competencies,

and continually worked to build and reinforce them, their products
were more advanced than those of their competitors, and customers
were prepared to pay more for them. And as they switched effort
away from areas where they were weak, and further focused on
areas of strength, their products built up more and more of a
market lead.

Now you'll probably find this an attractive idea, and it's often easy
to think about a whole range of things that a company does that it
can do well. However, Hamel and Prahalad give three tests to see
whether they are true core competencies:

1. Relevance – The competence must give your customer

something that strongly influences him or her to choose your
product or service. If it does not, then it has no effect on your
competitive position and is not a core competence.
2. Difficulty of imitation – The core competence should be difficult
to imitate. This allows you to provide products that are better
than those of your competition. And because you're continually
working to improve these skills, means that you can sustain its
competitive position.
3. Breadth of application – It should be something that opens up a
good number of potential markets. If it only opens up a few small,
niche markets, then success in these markets will not be enough
to sustain significant growth.
For example, you might consider strong industry knowledge and
expertise to be a core competence in serving your industry.
However, if your competitors have equivalent expertise, then this is
not a core competence. All it does is make it more difficult for new
competitors to enter the market. More than this, it's unlikely to help
you much in moving into new markets, which will have established
experts already. (Test 1: Yes. Test 2: No. Test 3: Probably not.)
Reproduced with permission from "The Core Competence of the
Corporation" first published in Harvard Business Review, May-June, 1990.

Using This in Your Business and Career

To identify your core competencies, use the following steps:

1. Brainstorm the factors that are important to your clients.

If you're doing this on behalf of your company, identify the
factors that influence people's purchase decisions when they're
buying products or services like yours. (Make sure that you move
beyond just product or service features and include all decision-
making points.)

If you're doing this for yourself, brainstorm the factors (for

example) that people use in assessing you for annual
performance reviews or promotion, or for new roles you want.

Then dig into these factors, and identify the competencies that lie
behind them. As a corporate example, if customers value small
products (for instance, cell phones), then the competence they
value may be "component integration and miniaturization."

2. Brainstorm your existing competencies and the things you do

well.
3. For the list of your own competencies, screen them against the
tests of relevance, difficulty of imitation, and breadth of
application, and see if any of the competencies you've listed are
core competencies.
4. For the list of factors that are important to clients, screen them
using these tests to see if you could develop these as core
competencies.
5. Review the two screened lists, and think about them:
  If you've identified core competencies that you already have,
then great! Work on them and make sure that you build them
as far as sensibly possible.
 If you have no core competencies, then look at ones that you
could develop, and work to build them.
 If you have no core competencies and it doesn't look as if you
can build any that customers would value, then either there's
something else that you can use to create uniqueness in the
market (see our USP Analysis article), or think about
finding a new environment that suits your competencies.
6. Think of the most time-consuming and costly things that you do
either as an individual or a company.

If any of these things do not contribute to a core competence, ask

yourself if you can outsource them effectively, clearing down time
so that you can focus on core competencies.

For example, as an individual, are you still doing your own

cleaning, ironing and decorating? As a small business, are you
doing you own accounts, HR and payroll? As a bigger business,
are you manufacturing non-core product components, or
performing non-core activities?

Tip 1:
As with all brainstorming, you'll get better results if you involve
other (carefully-chosen) people.

Tip 2:
On a personal basis and in the short term, it might be difficult to
come up with truly unique core competencies. However, keep this
idea in mind and work to develop unique core competencies.

Tip 3:
You may find it quite difficult to find any true core competencies in
your business. If you've got a successful business that's sustainably
 outperforming rivals, then maybe something else is fuelling your
success (our article on USP Analysis may help you spot this).
However, if you're working very hard, and you're still finding it
difficult to make a profit, then you need to think carefully about
crafting a unique competitive position.

This may involve developing core competencies that are relevant,

real and sustainable.

Tip 4:
As ever, if you're going to put more effort into some areas, you're
going to have to put less effort into others. You only have a finite
amount of time, and if you try to do too much, you'll do little really
well.

THE CRITERIA FOR DETERMINING STRENGTHS AND

WEAKNESSES - STRATEGIC MANAGEMENT
A major problem which must be resolved prior to any analysis of corporate capabilities is
the criteria that would determine whether an element under examination is a strength or
a weakness. Four types of criteria have been suggested to classify an element into
strength or weakness. These are:
i. Historical;
ii. Normative;
iii. Competitive parity; and
iv. Critical Factors for Success.

1. THE HISTORICAL CRITERION

Here, the analyst compares the characteristics under examination with past
performances. An improvement over the past performance may be seen as strength,
and a decline a weakness. Before, arriving at such conclusion, it is always advisable to
check the reliability of the ‘past' in future. In a large number of situations ‘past' may not
be valid for future and this would certainly invalidate our assessment or judgment.
2. THE NORMATIVE CRITERION
Here, the basis of judgment is ‘what ought to be' the level of performance to classify a
particular element into a strength or a weakness. Thus, based on theory, expert opinion,
industry practices or personal opinions, one can develop ‘norms' for evaluation.
3. THE COMPETITIVE PARITY CRITERION
As its basis for judgment, this criterion utilizes the action successful direct competitors or
potential competitors. It is based on the premise that a firm must, at the minimum, meet
the actions of the competitors. Thus, if the industry practice of providing 60 days credit to
the trade is not followed, it may be considered a weakness.
4. THE CRITICAL FACTORS FOR SUCCESS CRITERION
Each business, in some sense, is unique. It requires a set of minimum performance
standards and hence capabilities. This criterion helps to examine the strengths and
weakness in the context of meeting the minimum requirements for success.
One criterion is seldom sufficient for a complete evaluation of a firm. Some elements like
‘financial strengths' may be evaluated better on ‘historical' and ‘competition' criteria; and
‘marketing' may be best evaluated on the basis of ‘competition' and ‘critical factors for
success criterion.

SWOT AUDIT

SWOT Analysis - Definition,

Advantages and Limitations
SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. By definition,
Strengths (S) and Weaknesses (W) are considered to be internal factors over which you have some
measure of control. Also, by definition, Opportunities (O) and Threats (T) are considered to be external
factors over which you have essentially no control.

SWOT Analysis is the most renowned tool for audit and analysis of the overall strategic position of
the business and its environment. Its key purpose is to identify the strategies that will create a firm
specific business model that will best align an organization’s resources and capabilities to the
requirements of the environment in which the firm operates.

In other words, it is the foundation for evaluating the internal potential and limitations and the
probable/likely opportunities and threats from the external environment. It views all positive and
negative factors inside and outside the firm that affect the success. A consistent study of the
environment in which the firm operates helps in forecasting/predicting the changing trends and also
helps in including them in the decision-making process of the organization.

An overview of the four factors (Strengths, Weaknesses, Opportunities and Threats) is given below-
 1. Strengths - Strengths are the qualities that enable us to accomplish the organization’s
mission. These are the basis on which continued success can be made and
continued/sustained.

Strengths can be either tangible or intangible. These are what you are well-versed in or what
you have expertise in, the traits and qualities your employees possess (individually and as a
team) and the distinct features that give your organization its consistency.

Strengths are the beneficial aspects of the organization or the capabilities of an organization,
which includes human competencies, process capabilities, financial resources, products and
services, customer goodwill and brand loyalty. Examples of organizational strengths are huge
financial resources, broad product line, no debt, committed employees, etc.

2. Weaknesses - Weaknesses are the qualities that prevent us from accomplishing our mission
and achieving our full potential. These weaknesses deteriorate influences on the
organizational success and growth. Weaknesses are the factors which do not meet the
standards we feel they should meet.

Weaknesses in an organization may be depreciating machinery, insufficient research and

development facilities, narrow product range, poor decision-making, etc. Weaknesses are
controllable. They must be minimized and eliminated. For instance - to overcome obsolete
machinery, new machinery can be purchased. Other examples of organizational weaknesses
are huge debts, high employee turnover, complex decision making process, narrow product
range, large wastage of raw materials, etc.

3. Opportunities - Opportunities are presented by the environment within which our

organization operates. These arise when an organization can take benefit of conditions in its
environment to plan and execute strategies that enable it to become more profitable.
Organizations can gain competitive advantage by making use of opportunities.

Organization should be careful and recognize the opportunities and grasp them whenever
they arise. Selecting the targets that will best serve the clients while getting desired results is a
difficult task. Opportunities may arise from market, competition, industry/government and
technology. Increasing demand for telecommunications accompanied by deregulation is a
great opportunity for new firms to enter telecom sector and compete with existing firms for
revenue.

4. Threats - Threats arise when conditions in external environment jeopardize the reliability and
profitability of the organization’s business. They compound the vulnerability when they relate
to the weaknesses. Threats are uncontrollable. When a threat comes, the stability and survival
can be at stake. Examples of threats are - unrest among employees; ever changing
technology; increasing competition leading to excess capacity, price wars and reducing
industry profits; etc.

Advantages of SWOT Analysis

SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves
a great subjective element. It is best when used as a guide, and not as a prescription. Successful
businesses build on their strengths, correct their weakness and protect against internal weaknesses
and external threats. They also keep a watch on their overall business environment and recognize and
exploit new opportunities faster than its competitors.
SWOT Analysis helps in strategic planning in following manner-

a. It is a source of information for strategic planning.

b. Builds organization’s strengths.
c. Reverse its weaknesses.
d. Maximize its response to opportunities.
e. Overcome organization’s threats.
f. It helps in identifying core competencies of the firm.
g. It helps in setting of objectives for strategic planning.
h. It helps in knowing past, present and future so that by using past and current data, future
plans can be chalked out.

SWOT Analysis provide information that helps in synchronizing the firm’s resources and capabilities
with the competitive environment in which the firm operates.

SWOT ANALYSIS FRAMEWORK

Expectations of Stakeholders
A person, group or organization that has interest or concern in an organization.
Stakeholders can affect or be affected by the organization's actions, objectives and policies. Some
examples of key stakeholders are creditors, directors, employees, government (and its agencies),
owners (shareholders), suppliers, unions, and the community from which the business draws its
resources.

Not all stakeholders are equal. A company's customers are entitled to fair trading practices but they
are not entitled to the same consideration as the company's employees.

An example of a negative impact on stakeholders is when a company needs to cut costs and plans a
round of layoffs.
This negatively affects the community of workers in the area and therefore the local economy.
Someone owning shares in a business such as Microsoft is positively affected, for example, when the
company releases a new device and sees their profit and therefore stock price rise.
See also corporate governance.

Expectation of Employees:
It is very natural that employees expect more and more monetary
and nonmonetary benefits to be provided to them with increasing
profits. This expectation is reasonable towards a limit of industry
levels and beyond that surplus profits have to utilised for social
concern.

Expectation of Directors/Owners:
In India the tendency of 90% of owners is to grab as much as
possible for them. This is the tradition and this will continue for
years. They normally try and follow the compulsory requirement of
environmental care.

ADVERTISEMENTS:

The voluntary and extra work, contribution or service to society

only about 10% owners are doing. There is a desperate need for our
employers to open up and be socially more conscious than they are.
They have to learn to be broad-minded to give back to society
something after earning so much from the same society.

Expectation of Government:
The central and state governments should be satisfied if taxes are
paid promptly and the rules related to pollution and environment
care are attended. However, sometimes efforts are made to vary the
tax to collect more from affordable category. Instead they could
persuade corporate to take up some social tasks on voluntary basis
in the interest of nation building.

Expectation of Community:
The community living and the industries expect pollution free
environment.

The consumer public expects quality goods at reasonable prices.

They also expect jobs to locals so that they too get the benefits of
economic growth and them.

ADVERTISEMENTS:

In employment matters corporate can balance the social

responsibility by following the employment grid narrated
here under:

By following the selection process suggested in the employment grid

(Fig. 7.1) ethical values, quality care and business concern are well
taken care. This grid is based on Maslow’s need hierarchy theory
where in the minimum needs of the lowest group has to be satisfied
first.
Expectation of Suppliers:
The usual expectation of suppliers and sub-contractor is prompt
payments or payments as per the terms agreed upon. Avoiding
delay in due payments effect can be considered a service to society.
In addition to this, if SSI units can get advance to by raw- materials
that will be considered excellent assistance for them. Suppliers feel
de-motivated mainly on low margins and delayed payments. The
bigger companies must avoid squeezing them too much on price
factor.

Expectation of Dealers/Traders:
ADVERTISEMENTS:

From their point of view dealers expect more commission and

incentives of exceeding the target. This group is very important and
promotion activities became simpler if dealers take more and more
interest. Corporate who are able to keep their dealers happy are able
to improve their sales.

Expectation of Customers:
Customers are the focus of a company. Corporate will have to attend
all possible comments of the customers about product and related
aspects. Customer’s safety, value for the money, satisfactory product
performance to be ensured. This is both social and business
responsibility of corporate.

The Purpose of Scenario Planning

Scenario planning provides a means for ordering perceptions about how the future
may play out and determining what strategic decisions today offer the best chance
of success tomorrow.
Scenario planning challenges management to revisit its assumptions about its
industry and consider a wider range of possibilities about where its industry may
head in the future. This exploration results in a broader, more innovative view
about future growth opportunities and risks.

Importantly, the point of scenario planning is not to predict the most probable
future. Rather, the objective is to develop and test strategic choices under a variety
of plausible futures. Doing this exercise proactively—essentially, rehearsing for
multiple futures—strengthens an organization’s ability to recognize, adapt to, and
take advantage of, changes in the industry over time.

From a process standpoint, scenario planning has the additional benefit of

promoting high levels of organizational learning and collaboration which are not as
deeply embedded in other strategic practices.

The Reinforcing Benefits of Scenario Planning

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 The Role of Scenario Planning Within Business Strategy
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People are confronted with various events on a daily basis. These events
include predictable as well as unpredictable matters. Organizations have
to contend with these events too. Some events may dramatically affect
the short-term as well as the long-term day-to-day management of an
organization. Therefore it is a good thing that organizations are somewhat
prepared for future events.
What is Scenario Planning?
Scenario planning focuses on an outlook for the future. It is a method
with which organizations can form an idea of possible future scenarios
and how these may affect their strategic objectives. However, making
predictions about the future is very difficult and this is why organizations
create a variety of possible future scenarios. This is exactly what Scenario
Planning focuses on. It enables organizations to develop their strategies,
products and services and adapt these where necessary in an ever
changing world. Scenario Planning is about making different scenarios for
different future landscapes. Using these scenarios, an organization will be
able to make better decisions when problems or changes occur. An
organization knows what it needs to be aware of and which decisions will
work to its advantage.

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Causes
There are different causes underlying (unpredictable) future changes.
Most of these causes are external and need to be captured in the so-
called PESTLE or DESTEPfactors: changing demographics, economic,
social environmental factors, technology, ecology and political influences.

There are many factors that cause an organization to change its strategic
plans and direction. Organizations are surrounded by a complex and
dynamic market with many external environmental changes.
Organizations do not control these factors, but they can take them into
account. In principle, internal developments do not affect the scenarios
and therefore they are not factored in.

Structural
Scenario Planning is not about making accurate forecasts. It is about
exploring what could happen in the future. This gives organizations time
to think about how they can be successful in different scenarios. Scenario
Planning obliges organizations to consider their future in an effective and
structured manner. Scenario Planning is increasingly used by small and
medium-sized companies that are engaged in vision
development, strategic management and important decision making.

Added value
Multiple future scenarios are used. Each scenario gives a rich description
for possible future developments and their consequences for the
organization. Directors need to consider the possibilities, opportunities,
risks and threats in each of the scenarios. What are the factors that need
to be taken into consideration? It is the only way an organization can be
better prepared for unforeseen circumstances and changes in society and
therefore it will not be faced with surprises further down the line. This is
the added value of Scenario Planning.

Scenario Planning in 8 steps

For a structured Scenario Planning, organizations would do well to
consider the 8 step plan. In the preparatory phase the focus is on themes
and their corresponding time frames. The analysis phase involves the
following steps:

 Step 1 – brainstorm visions of the future.

 Step 2 – investigate trends (use a trend watcher if necessary).
 Step 3 – choose driving forces.

In the second phase the scenarios are developed which produces the
following three steps:

 Step 4 – make a scenario template.

 Step 5 – develop the scenarios.
 Step 6 – present the scenarios.

The last phase concerns reflection and this produces the last two steps:

 Step 7 – evaluation of the scenarios.

 Step 8 – formulation of policy recommendations based on the different
scenarios.
Practical example
For a commercial business that exports flower bulbs all over the world, it
is important to have a look at what could happen within the next five
years.

 Scenario 1: In 5 years time they will have an opportunity to expand

their business empire with five offices in Asia.
 Scenario 2: The market remains unchanged and the organization
continues its business and continues to mainly focus on exports to the
USA.
 Scenario 3: Exports to the USA are discontinued and the organization
has to find new outlets.

Industry Analysis

.Industry analysis is a tool that facilitates a company's understanding of its

position relative to other companies that produce similar products or
services. Understanding the forces at work in the overall industry is an
important component of effective strategic planning. Industry analysis
enables small business owners to identify the threats and opportunities
facing their businesses, and to focus their resources on developing unique
capabilities that could lead to a competitive advantage.

"Many small business owners and executives consider themselves at worst

victims, and at best observers of what goes on in their industry. They
sometimes fail to perceive that understanding your industry directly impacts
your ability to succeed. Understanding your industry and anticipating its
future trends and directions gives you the knowledge you need to react and
control your portion of that industry," Kenneth J. Cook wrote in his
book The AMA Complete Guide to Strategic Planning for Small Business.
"However, your analysis of this is significant only in a relative sense. Since
both you and your competitors are in the same industry, the key is in
finding the differing abilities between you and the competition in dealing
with the industry forces that impact you. If you can identify abilities you
have that are superior to competitors, you can use that ability to establish a
competitive advantage."
An industry analysis consists of three major elements: the underlying forces
at work in the industry; the overall attractiveness of the industry; and the
critical factors that determine a company's success within the industry.

One way in which to compare a particular business with the average of all
participants in the industry is through the use of ratio analysis and
comparisons. Ratios are calculated by dividing one measurable business
factor by another, total sales divided by number of employees, for example.
Many of these ratios may be calculated for an entire industry with data
available from many reports and papers published by the U.S. Departments
of Commerce and Labor.

By comparing a particular ratio for one company with that of the industry as
a whole, a business owner can learn much about where her business
stands in comparison with the industry average. For example, a small
nursing home business can compare its "payroll per employee" ratio with
the average for all residential care operators in the U.S. in order to
determine if it is within a competitive range. If her business's "payroll per
employee" figure is higher than the industry average, she may wish to
investigate further. Checking the "employees per establishment" ratio
would be a logical place to look next. If this ratio is lower than the industry
average it may justifying the higher per-employee payroll figure. This sort of
comparative analysis is one important way in which to assess how one's
business compares with all others involved in the same line of work. There
are various sources for the industry average ratios, among them is the
industry analysis series published by Thomson Gale as the USA series.

Another premier model for analyzing the structure of industries was

developed by Michael E. Porter in his classic 1980 book Competitive
Strategy: Techniques for Analyzing Industries and Competitors. Porter's
model shows that rivalry among firms in industry depends upon five forces:
1) the potential for new competitors to enter the market; 2) the bargaining
power of buyers; 3) the bargaining power of suppliers; 4) the availability of
substitute goods; and 5) the competitors and nature of competition.
Porter's Five Forces Analysis
The primary model to assess the structure of industries was developed by famous management
theorist, Michael E. Porter in his 1980 book Competitive Strategy: Techniques for Analyzing
Industries and Competitors. Porter's model demonstrations that rivalry among firms in industry
depends upon five forces: the potential for new competitors to enter the market; the bargaining
power of buyers and suppliers; the availability of substitute goods; and the competitors and
nature of competition. Main purpose of Five Forces is to determine the attractiveness of an
industry. However, the analysis also provides basis for articulating strategy and understanding
the competitive scene in which a company operates.
Porter�s Five Forces for industry analysis:

The framework for the Five Forces Analysis consists of these competitive forces:
1. Industry rivalry (degree of competition among existing firms): Tough competition leads to
reduced profit potential for companies in the same industry. In competitive industry, firms have
to compete fiercely for a market share, which results in low profits. Rivalry among competitors
is tough when:
1. There are many competitors;
2. Exit barriers are high;
3. Industry of growth is slow or negative;
4. Products are not differentiated and can be easily substituted;
5. Competitors are of equal size;
6. Low customer loyalty.
2. Threat of substitutes (products or services): Availability of substitute products will limit
company�s ability to increase prices. This force in Porter�s model is especially threatening
when buyers can easily find substitute products with attractive prices or better quality and when
buyers can switch from one product or service to another with low price.
3. Bargaining power of buyers: Powerful consumers have a substantial impact on prices.
Consumers have power to demand high quality or low priced products. If the price of the
product is low, it directly impact in the revenue of producers. While higher quality products
usually raise production costs. In both situations, there is less profit for producers. Buyers exert
strong bargaining power when:
1. Buying in large quantities or control many access points to the final customer;
2. Only few buyers exist
3. Switching costs to other supplier are low
4. They threaten to backward integrate
5. There are many substitutes
6. Buyers are price sensitive
4. Bargaining power of suppliers: powerful suppliers can demand premium prices and limit
profit of company. Porter stated that strong bargaining power permits suppliers to sell higher
priced or low quality raw materials to their consumers. This directly affects profit of the buying
firms because it has to invest more for materials. Suppliers have strong bargaining power in
following conditions: There are few suppliers but many buyers;
1. Suppliers are large and threaten to forward integrate;
2. Few substitute raw materials exist;
3. Suppliers hold scarce resources;
4. Cost of switching raw materials is especially high.
5. Barriers to entry (threat of new entrants): It acts as a deterrent against new competitors. This
force decides how easy (or not) it is to enter a particular industry. If an industry is lucrative and
there are few barriers to enter, rivalry soon deepens. When more organizations compete for the
same market share, there is less profit. It is crucial for existing organizations to generate high
barriers to enter to prevent new entrants. Threat of new entrants is high when:
1. Low amount of capital is required to enter a market;
2. Existing companies can do little to retaliate;
3. Existing firms do not possess patents, trademarks or do not have established brand
reputation;
4. There is no government regulation;
5. Customer switching costs are low (it doesn�t cost a lot of money for a firm to switch to
other industries);
6. There is low customer loyalty;
7. Products are nearly identical;
8. Economies of scale can be easily achieved.
Steps in Industry analysis:
1: Identify industry and provide a brief overview. Management team may need to explore
industry from a variety of geographical considerations: locally, regionally, provincially,
nationally, and globally. It is necessary to define relevant industry codes. Provide statistics and
historical data about the nature of the industry and growth potential for business, based on
economic factors and conditions.
2: Secondly, evaluators must summarize the nature of the industry. This process include
specific information and statistics about growth patterns, fluctuations related to the economy,
and income projections made about the industry. It is important to document recent
developments, news, and innovations. Evaluators must discuss the marketing strategies, and
the operational and management trends that are predominant within the industry.
3: Third step is to provide a forecast for industry. Managers must compile economic data and
industry predictions at different time intervals. It is necessary to cite all of sources. Note: the
type and size of the industry will determine how much information company will be able to
find about a particular industry.
4: Industry analysts needs to identify government regulations that affect the industry. They
must include any recent laws pertaining to industry, and any licenses or authorizations
company would need to conduct business in target market.
5: Industry analysts have to explain unique position within the industry. After completing
competitive Analysis, analysts can list the leading companies in the industry, and compile an
overview of data of direct and indirect competition. This will support them communicate
unique value plan.
6: Industry analysts must list potential limitations and risks. They should write about factors
that might negatively impact their business and they predict in the short-term and long-term
future. They must outline what they know about the driving forces such as new regulations,
technology, globalization, competitors, changing customer needs.

Strategy Formulation
Definition: Strategy Formulation is an analytical process of selection of the best suitable
course of action to meet the organizational objectives and vision. It is one of the steps of
the strategic management process. The strategic plan allows an organization to examine its
resources, provides a financial plan and establishes the most appropriate action plan for
increasing profits.

It is examined through SWOT analysis. SWOT is an acronym for strength, weakness,

opportunity and threat. The strategic plan should be informed to all the employees so that
they know the company’s objectives, mission and vision. It provides direction and focus to
the employees.

Steps of Strategy Formulation

The steps of strategy formulation include the following:
1. Establishing Organizational Objectives: This involves establishing long-term goals of an organization.
Strategic decisions can be taken once the organizational objectives are determined.
2. Analysis of Organizational Environment: This involves SWOT analysis, meaning identifying the
company’s strengths and weaknesses and keeping vigilance over competitors’ actions to understand
opportunities and threats.

Strengths and weaknesses are internal factors which the company has control over.
Opportunities and threats, on the other hand, are external factors over which the company has
no control. A successful organization builds on its strengths, overcomes its weakness,
identifies new opportunities and protects against external threats.

3. Forming quantitative goals: Defining targets so as to meet the company’s short-term and long-term
objectives. Example, 30% increase in revenue this year of a company.
4. Objectives in context with divisional plans: This involves setting up targets for every department so
that they work in coherence with the organization as a whole.
5. Performance Analysis: This is done to estimate the degree of variation between the actual and the
standard performance of an organization.
6. Selection of Strategy: This is the final step of strategy formulation. It involves evaluation of the
alternatives and selection of the best strategy amongst them to be the strategy of the organization.

Strategy formulation process is an integral part of strategic management, as it helps in

framing effective strategies for the organization, to survive and grow in the dynamic business
environment.
What are Porter’s Generic Strategies?
The Generic Strategies can be used to determine the direction (strategy)
of your organisation. Michael Porter uses 4 strategies that an organisation
can choose from. He believes that a company must choose a clear course
in order to be able to beat the competition.

The four strategies to choose from are:

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1. Cost Leadership
2. Differentiation
3. Cost Focus
4. Differentiation Focus

Michael Porter described the theory in his 1985 book ‘Competitive

Advantage: Creating and Sustaining Superior Performance’. The basis was
formed by three strategies, namely cost
leadership, differentiation and focus. He divided the latter into cost
focus and differentiation focus.
How to apply the Porter’s Generic Strategies?
According to Michael Porter there are four Generic strategies:

1. Cost Leadership

You target a broad market (large demand) and offer the lowest possible
price. There are 2 options within this course. You can opt to keep costs as
low as possible; or ensure that you have a larger market share with
average prices. In both cases, the point is to keep the company costs as
low as possible. The consumer price is a different story.
Organisations that apply this strategy successfully usually have
substantial investment capital at their disposal, efficient logistics and low
costs when it comes to materials and labour. The organisation is generally
focused on internal processes.
2. Differentiation

You target a broad market (high demand), but your product or service
has unique features. With this strategy, you make your product as
exclusive as possible, making it more attractive than comparable products
offered by the competition. Succeeding using this strategy requires good
research & development, innovation and the ability to deliver high quality.
Effective marketing is important, so that the market understands the
benefits of your unique product. It’s important to be flexible and to be
able to adapt quickly in a changing market, or you risk the competition
beating you at it. Such an organisation is focused on the outside world
and has a creative approach.

3. Cost Focus

You target a niche market (little competition, ‘focused market’) and offer
the lowest possible price. In this strategy, you choose to target a clear
niche market and through understanding the dynamics of the market and
the wishes of the consumers, you can ensure that the costs remain low.

4. Differentiation Focus

You target a niche market (little competition, ‘focused market’) and your
product or service has unique features. This strategy often involves strong
brand loyalty among consumers. It’s very important to ensure that your
product remains unique, in order to stay ahead of possible competition.

In order to choose the right strategy for your organisation, it’s important
be aware of the competencies and strengths of your company.

Choose the right strategy

You can follow these steps to choose the right strategy:
Step 1: Do a SWOT analysis for your business. This will clarify your
strengths and weaknesses as well as the highlight opportunities and
threats.
Step 2: Try to truly grasp the market of your industry. This can be done,
for example, through the Five Forces Analysis – a model also developed
by Porter – designed to determine profit potential. The 5 forces that
influence this are:

 the (power of) suppliers;

 the (power of) the customers;
 the availability of comparable products;
 the threat of new entrants;
 and internal competition.

Step 3: Compare your SWOT analysis with the outcomes of step 2. For
each of Porter’s strategies, ask yourself how you might use that strategy
to influence the previously mentioned five forces. On that basis,
determine which strategy offers you the best starting point (and profit
potential).

Critical comments
Porter’s Generic Strategies model in which you opt for one
single strategy certainly also raises criticism. For example, the model isn’t
particularly flexible. There are plenty of companies that opt for a more
‘hybrid’ strategy, i.e. making use of different (components) of Porter’s 4
general strategies. In a rapidly changing market, this flexibility, the ability
to switch quickly and respond to the market and the demand, seems to
be an important element to running a successful business.

To summarise
Porter’s Generic strategies can be used to determine the direction
(strategy) of your organisation. There are four strategies an organisation
can choose from.

The four strategies to choose from are:

1. Cost Leadership
2. Differentiation
3. Cost Focus
4. Differentiation Focus
An understanding of the market, your industry and your own organisation
are paramount in choosing the right strategy.

Grand strategies

Grand strategies are a means to get to your ends – growth, profitability, etc. The
more time that you spend researching and learning about your environment, your
market and your business, the more clearly these come into focus for you. While
there is always some uncertainty and some risk with any business decision, a
strategic decision with the proper homework done is a pretty clear cut one.

According to Glueck there are basically four grand strategies alternatives:

Stability

Growth /expansion

Retrenchment

Combination

Stability
Stability strategy implies continuing the current activities of the firm without any
significant change in direction. If the environment is unstable and the firm is doing
well, then it may believe that it is better to make no changes. A firm is said to be
following a stability strategy if it is satisfied with the same market share, satisfied with
the improvements of functional performance and the management does not want to
take any risks that might be associated with expansion growth.

Two examples of stability strategy are:

EMTEL have been a stable company during the recent years, despite competition
from orange. EMTEL has remain stable and have been on a going concern method

Phoenix beverages have also been using stability strategy the recent years because
of good profit and good performance

In general, stability strategic can be very useful in the short run, but can be
dangerous if followed for too long.

Growth/expansion
Growth strategies are the most widely pursued corporate strategies. Companies that
do business in expanding industries must grow to survive. A company can grow
internally by expanding its operations or it can grow externally through mergers,
acquisitions, joint ventures or strategic alliances.

Growth strategies can be divided into three broad categories:

Intensive strategies

Integration strategies

Diversification strategies

A. Intensive strategies
Without moving outside the organization’s current range of product and services it
may be possible to attract customers by intensive advertising, and by realigning the
product and the market options available to the organization.

There are three important intensive strategies:

Market penetration-seeks to increase market share for existing products in the

existing markets through greater marketing efforts.

Market development-seeks to increase market share by selling the present products

in the new market.

Product development-seeks to increase market share by developing new or

improved products for present markets.

B. Integration
Integration basically means combining activities relating to the present activity of a
firm. A company performs a number of activities to transform an input to output.
These activities include right from the procurement of raw materials to the
production of finished goods and their marketing and distribution to the ultimate
customers.

Two types of integration:

Vertical integration- it involves gaining ownership or increased control over suppliers

or distributors. Vertical integration is of two types:

Backward integration-involves gaining ownership of firm’s suppliers for example, a

manufacturer of finished goods may take over the business of a supplier who
manufactures raw materials, component parts and other inputs.
Forward integration-it involves gaining ownership or increased control
over distributors or retailers.
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Horizontal integration- this is a strategy seeking ownership or increase control over a

firm competitor’s.

C. Diversification strategies
It is the process of adding new business to existing business of the company. In other
words, diversification adds new products or markets in the existing ones. The
diversification strategy is concerned with achieving a greater market from a greater
range of products in order to maximize profits.

Types of diversifications:

Concentric diversification- adding to new but related business is called concentric

diversification. It involves acquisition of businesses that are related to the acquiring
firm in terms of technology, markets or product.

Conglomerate diversification- adding to new, but unrelated is called conglomerate

diversification. The new will have no relationship to the company’s technology,
products or markets.

Two examples of growth strategy are:

Merging of Mauritius telecom
Mauritius Telecom is a telecommunications and Internet service provider in
Mauritius. Mauritius Telecom was founded in July 1992 by a merger between the
former Overseas Telecommunications Services Ltd and Mauritius Telecommunication
Services Ltd. As from that date, Mauritius Telecom became the major provider of
voice, mobile, Internet and data communication services in Mauritius.

In November 2000, France Telecom became the strategic partner of Mauritius

Telecom by acquiring 40 percent of its shares. Following the partnership with France
Telecom, Telecom Plus Ltd launched in 2002 broadband internet access which is
branded under Wanadoo ADSL. By combining the technological and global strength
of France Telecom, and the local and regional experience of Mauritius Telecom, the
two companies have been able to offer innovative and useful technologies and
launched in June 2006 the Multiplay IPTV services branded as My.T which enabled
Mauritius to become among the first countries in the world to launch IPTV services.
SBM Corporate
True to its philosophy of being close to its customers, SBM was the first bank to
establish branches in the rural areas, thereby establishing a national branch network.
SBM is also rightly recognized for its lead in technology. It was the first bank in
Mauritius to introduce the Europay-MasterCard-Visa (EMV) chip card technology,
TopUp (mobile phone recharge) and Mobile Banking as well as the first eCommerce
portal. The Bank has also introduced, under its brand name «SBM eSecure»,
enhanced security standards for internet transactions through the implementation of
«Verified by Visa» and MasterCard «SecureCode» services. Besides, SBM is the
preferred Visa partner in Mauritius. Using market insights and critical thinking, the
Bank aims to continuously offer innovative products and services to meet the needs
of its growing customer base.

Retrenchment / defensive strategies

A company may pursue retrenchment strategies when it has a weak competitive
position in some or all of the products lines resulting in a poor performance.

In an attempt to eliminate the weaknesses that are dragging the company down,
management may follow one or more of the following retrenchment strategies:

Turn around- a firm is said to be sick when it faces a severe cash crunch or a
consistent downtrend in its operating profits. Such a firm becomes insolvent unless
appropriate internal or external actions are taken to change financial picture of the
firm.

Bankruptcy- this is a form of defensive strategy. It allows organization to file a

petition in the court for legal protection to the firm in case the firm is not in a
position to pay its debt.

Liquidation- it occurs when an entire company dissolves and its assets are sold. It is a
strategy of last resort when there are no buyers for a business which want to be sold,
the company may be wound up and its assets may be sold to satisfy debt
obligations.

Divesture- selling a division or part of an organization is called divesture.

Examples of retrenchment/defensive strategies:

Infinity BPO

The Infinity Business Process Outsourcing (BPO) owes a sum of Rs 100 million to its
creditors. This company has been bankrupt and did not pay his employees their
salary due to a hunger protestation they finally got their right.
A firm may divest (sell) businesses that are not part of its core operations so that it
can focus on what it does best. Eastman Kodak, Ford Motor Company, and many
other firms have sold various businesses that were not closely related to their core
businesses.

Combination strategy
A company pursues a combination of two or more corporate strategies
simultaneously. But a combination strategy can be exceptionally risky if carried out
too far. No organization can afford to pursue all strategies that might benefit the
firm. Difficult decision must be made. Priorities must be established. Organization like
individuals have limited resources, so organizations must choose among alternative
strategies.

Examples of combination strategy are:

Texas-based textile producer Cotton Incorporated uses a push/pull promotional

strategy. They push to create customer demand through constantly developing new
products and offering these products in stores; and pull customers towards these
products through advertising and promotion deals.

Candico’s, the domestic confectionery company’s international expansion plan

include a combination of organic and inorganic strategies, through strategic
acquisitions and mergers, joint ventures or setting up independent manufacturing
facilities in individual market.

strategies of indian leading companies

Indian IT companies’ revenues are increasing every year after the US economic slowdown in 2000.
Every year Indian IT industry is reaching the software export targets projected by the NASSCOM.
Many IT companies are growing in terms of sales, man power, and skills. Indian companies are
becoming part of the world reputed IT projects. What are the growth strategies of successful Indian IT
companies? How are they getting more business every year in spite of the tough competition from
China? How are they becoming profitable? How are they able to retain their employees for long term?
How they are able to deliver good quality turn key solutions?
I think people are first assets to any company. It is the human capital which is giving maximum returns
to any company. The skilled man power and the education system India is having are the greatest
assets. The young engineers in India are very flexible in learning new technologies and they are
hunger for technology and technical developments. Indian software engineers welcome new
technologies and they accept change, which is an advantage to IT companies. Indian IT companies
are heavily investing in training young engineers. As we know technologies change fast. To catch the
new technical projects, these companies should be ready with the latest skilled technical man power.
Quick learning capabilities of these engineers is also an advantage to these software services firms.
Once you have the man power available in the latest technologies, it is easy to bid the projects in
those technologies.
One of the growth strategies of Indian IT services firms is acquisitions. In the recent past many Indian
IT companies acquired companies in US and Europe which are having the good customer base so
that they can get more business from US and Europe. For example, US based NerveWire was
acquired by Wipro Technologies. If you look at the global player Cisco, It is best example for Mergers
& Acquisitions. It has acquired hundred of companies having related products.
Another growth strategy they are following is diversification strategy. Some IT companies are having
plans to enter into biotechnology area. Companies like Satyam, TCS and Wipro are already into
Bioinformatics. And many IT companies are following the chain.
One more growth strategy these IT companies are following is geographical diversification. Satyam
started their development centre in China and Dubai. Majority of Indian software houses are
becoming MNCs by starting their development centers abroad. They are recruiting diversified
workforce. Infosys is going to global business schools to recruit their management graduate.
Companies like Infosys and i-Flex are entering into IT products segments with their banking products
to the global markets. These IT companies are diversifying their customer base. They are not
dependent on single customer.
Also these IT companies are diversifying their services offering to the customer. Earlier they were into
maintenance and manpower supply to the western IT customers. These days Indian IT companies
are providing offshore facilities, project management, program management, design, and architecture
services also. In fact, Infosys is providing complete business solutions to the customer by providing
management consulting services through their business consulting venture and IT services through
their traditional software business.
According to NASSCOM President, Kiran Karnik’s article titled Dreaming of a new India published in
The Times of India, now every global company is having “India Strategy”. The boards of these global
players are having the India specific strategies.
Now let us see other side of the spectrum. According to the article published in recent BusinessWeek,
16 Jan 2006 Issue, SUBCONTINENTAL DRIFT written by Nandini Lakshman, there are around
30,000 foreign workers in Indian IT and ITES companies working in India. This number is triple the
number of foreigners in India which is two years ago. People from European countries are coming
and working in Indian IT enabled services companies in Metro areas. Majority of them are language
experts in Spanish, Finish, French, and German. Many foreign program and business managers of
global IT companies like IBM are working in India. Indian IT industry is attracting many foreigners to
come and work here.
Mumbai based Mastek, is part of the biggest IT program of UK, which is NHS computerization in UK.
Mastek is taking care of providing offshore facilities for NHS. It is working along with British Telecom
for NHS in UK.
Roger L. Martin, Dean of Rotman School of Management at the University of Toronto expressed his
views in his BusineesWeek articleWhat Innovation Advantage?, India and China are going to get
competitive advantage over North America in design and Innovation in the coming years. He has
visited TCS, Satyam and ICICI and said “Chinese and Indian companies are not leaving design to the
North Americans”.
***
About the Author:
The author has 10 years experience in IT industry. He works as freelance consultant in IT industry.
He has Bachelor of Science, Master of Computer Applications, Master of Technology and Executive
MBA from India. He worked in USA, UK, Ireland, Finland and India as Software Consultant. He
worked as employee or Consultant to companies such as IBM, SIEMENS, Interwoven, Wipro
Technologies, Citicorp, Nokia, Salomon Smith Barney, SIAC, DSET Corporation, IONA Technologies,
Birla-Horizons International, and PCL Mindware. He has few publications in Management. His articles
were published in The Hindu, Indian Management, Businessgyan, Business & Management, The
Global Educator, Computers Today and CSI Communications. He has interests in both technology
and management.

The role of diversification and limitations

free lunch an investor will ever get, as this risk-reduction strategy doesn’t need to lead to
subsequent reduction in return. Or does it?

Warren Buffett disagrees: "Diversification is a protection against ignorance. It makes little sense
for those who know what they are doing."
For individual investors managing their own portfolio of individual stocks, both statements are
correct.

About the author

Vitaliy Katsenelson , CFA, is a portfolio manager with Investment Management Associates, based in Denver,

Colorado. He is also author of “Active Value Investing: Making Money in Range-Bound Markets” and he

maintains a Web site at www.activevalueinvesting.com.

• Vitaliy N. Katsenelson

• All Articles by Vitaliy N. Katsenelson

In one extreme, stock investors often fail to diversify, holding just a handful of companies and
subjecting themselves to unnecessary risk.

However, what a finance book will not tell you is that a portfolio consisting of just a handful of
stocks also enormously impairs your ability to make rational decisions at the time when that
ability is needed the most—under pressure. Managing this emotional reality is one of the more
subjective aspects of risk management through diversification.

This article takes a short look at diversification and its role when managing a portfolio of
individual stocks.

Don’t Bet the Farm!

The following happened to a good friend of mine—let’s call him Jack. He and his wife both
worked for the largest insurance broker in the world, Marsh & McLennan. Over the years, Jack
and his wife accumulated a large position of Marsh’s stock, which they were reluctant to sell.

Sometime in 2000 he asked me what I thought of their financial situation, having all this wealth in
Marsh’s stock. I commented that although I didn’t see Marsh going out of business anytime soon,
I would not recommend having all their net worth in one company. Although the probability of
Marsh disappearing was very, very small, this couple’s lack of diversification was just not worth
the risk, especially considering that both their personal income streams (paychecks) also came
from Marsh.

Jack listened to my advice and agreed with it, but did not feel the urgency to do anything about it.

However, several years later, a major lawsuit was filed against Marsh by Eliot Spitzer (the then-
state attorney general of New York) accusing the company of bid rigging and other
malfeasances. Marsh’s stock was almost halved on the news, and talks about bankruptcy were
in the air.
To my surprise Jack was very calm (considering that Marsh stock was his entire net worth at the
time) when he called me to ask my thoughts on what he and his wife should do about their Marsh
stock.

In this type of situation, you need to weigh the probabilities of possible outcomes. Bankruptcy,
which was an improbable outcome for Marsh a day before the lawsuit was filed, suddenly
became a lot more probable—or, at least the odds went from one in a gazillion to a remote but
imaginable outcome.

If Marsh was just another stock (one of 15 or 20) in a diversified portfolio, the remote risk of its
bankruptcy—the worst-case scenario—would be considered as one of the risks with appropriate
attribution of probabilities to each outcome coming to fruition. But this is what theory doesn’t tell
you: In the situation in which one cannot afford a low-probability outcome (and Jack could not
afford it), one starts treating that outcome as having a much increased probability.

Jack was not diversified, and he did not have the luxury of looking at the worst-case Marsh
scenario as just one of the low-probability outcomes, as it was a possible outcome whose
consequences he could not afford.

After our conversation, Jack sold a good portion of his Marsh stock at a significant loss. I bet he’ll
never look at diversification with the same indifference again.

The limits of diversification

Leave a reply

Diversification is always good. It’s just limited in how much good it can do.

Diversification is achieved by adding assets into a portfolio which have correlations less than 1
with the portfolio. At its purest level, it reduce risk because not all assets will have the same gain
or loss at the same time. By investing in different assets (which all have the same risk and return),
we reduce the extreme movements of the portfolio, often in a way which doesn’t reduce the
overall return quite as much.

To highlight how this works, let’s take an investment with an expected return of 6, and volatility
of 12 (all example assets have these values in this post). We’ll mix the this asset equally with a
clone of it, which is completely uncorrelated with the first asset. This reduces the volatility to 8.6
from 11 – a reduction in risk of 22%. The graph below illustrates what happens when we continue
to add in more uncorrelated assets exactly like the first. The return stays constant, but the
volatility continues to go down. But each time it goes down, it goes down a bit less.
We can look at this directly, and note how the decrease in volatility per increase in assets
behaves. The ability to reduce risk falls off quickly, and we appear to hit a limit at a volatility of
about 2.7.

The examples above give a very simple example of how diversification works, but they are
unrealistic in a few ways. First, the assets are completely uncorrelated. It is almost impossible to
find assets which are completely uncorrelated in the real world. Let’s run the same analysis again,
but this time with a correlation of 0.5 across the assets.
Now we see that the benefits of diversification are strongly related to the (lack of) correlation
between assets. If we run this analysis across all levels of correlation, and approximate the
minimum level of volatility we can achieve, we get a graph like the one below. From a set of
assets which all have an individual volatility of 12, we can reduce portfolio level volatility down to
2.7, but only if we have 20 uncorrelated assets. If the correlations rises to 0.5, our minimum
volatility is much higher, at about 8.
 So pure diversification – including uncorrelated assets with the same volatility level- always does
help reduce volatility, but it the degree to which it helps depends on the correlations. And even
completely uncorrelated assets have their limits.

Given that the correlations amongst equity markets worldwide tend to be quite high – about 0.7
– 0.8 – we need to set our expectations about what diversification can achieve realistically.

ADVANTAGES OF DIVERSIFICATION
The following are the advantages of diversification:

 As the economy changes, the spending patterns of the people change. Diversification into a
number of industries or product line can help create a balance for the entity during these ups
and downs.
 There will always be unpleasant surprises within a single investment. Being diversified can
help in balancing such surprises.
 Diversification helps to maximize the use of potentially underutilized resources.
 Certain industries may fall down for a specific time frame owing to economic factors.
Diversification provides movement away from activities which may be declining.
 DISADVANTAGES OF DIVERSIFICATION
The following are the disadvantages of diversification:
 Entities entirely involved in profit-making segments will enjoy profit maximization. However, a
diversified entity will lose out due to having limited investment in the specific segment.
Therefore, diversification limits the growth opportunities for an entity.
 Diversifying into a new market segment will demand new skill sets. Lack of expertise in the
new field can prove to be a setback for the entity.
 A mismanaged diversification or excessive ambition can lead to a company over expanding
into too many new directions at the same time. In such a case, all old and new sectors of the
entity will suffer due to insufficient resources and lack of attention.
 A widely diversified company will not be able to respond quickly to market changes. The
focus on the operations will be limited, thereby limiting the innovation within the entity.
On understanding the advantages and disadvantages of diversification, we’ll see the
types of diversification strategies.

TYPES OF DIVERSIFICATION STRATEGIES

The following are the types of diversification strategies:

HORIZONTAL DIVERSIFICATION
This strategy of diversification refers to an entity offering new services or developing new products
that appeal to the firm’s current customer base. For example, a dairy company producing cheese
adds a new variety of cheese to its product line.

VERTICAL DIVERSIFICATION
This form of diversification takes place when a company goes back to a previous or
next stage of its production cycle. For example, a company involved in the
reconstruction of houses starts selling construction materials and paints. It may be
forward integration or backward integration.
CONCENTRIC DIVERSIFICATION
In this form of a diversification strategy, the entity introduces new products with an
aim to fully utilize the potential of the prevailing technologies and marketing system.
For example, a bakery making bread starts producing biscuits.

CONGLOMERATE DIVERSIFICATION
In this form of diversification, an entity launches new products or services that have
no relation to the current products or distribution channels. A firm may adopt this
strategy to appeal to an all-new group of customers. The high growth scope
and return on investment in a new market segment may prompt a company to take
this option.
DECISION MAKING: WHETHER TO DIVERSIFY OR NOT.
For the purpose of decision making, we can adopt the technique of capital
budgeting along with CAPM (Capital Asset Pricing Model). For that, first of all, we
should project the cash flows for the new line of business. These cash flows should
be discounted with the risk-adjusted discounting rate. In order to find risk-adjusted
discounting rate, we have to take help of proxy firm. Proxy firm means a company
already dealing in that new line of business.
Conclusion
A diversification must be a well thought out step for an entity. It can boost the growth
of the firm thereby leading it towards wealth maximization. However, it can also
prove to be a costly failure for certain entities. A detailed analysis of the potential
market must be conducted before opting for diversification.

Strategic Management in Small Businesses….

A small business has a choice of two goals: Increase profits but stay small, or grow into a larger
business. You can devote time and effort creating a strategic plan that will help you achieve the goal
you want, but the way you implement it is what makes the strategy work. A small business owner is
pulled in so many directions that just creating the plan is a responsibility that takes time away from
the business, let alone implementing it. The solution might be to manage your company using the
elements of strategic planning in a longer-term, day-to-day effort.
Assessment

Take a week or two to scrutinize your industry, competition and the general state of business in the
local economy. Think about how trends have changed over the last couple of years, and where they
might be headed, as you go through your daily tasks. Take notes as ideas arise. After that, take time
to consider your target customer, what she values, and how you can meet her needs. Last, spend
time looking at each sector of your enterprise: how it operates, whether it is efficient, and how it
fulfills the needs of your customers. You will immediately see problems that can be fixed with little
effort. And you will already have some ideas about adapting to the competitive environment and
satisfying your target customer.
Positioning

Positioning is just another way of asking yourself what you want to accomplish in your business. The
most important aspect of positioning is that it sets a specific direction for your business. For
example, if a bakery owner positions her business to increase profits but remain a small local
establishment, her operations, inventory, marketing and customer service will align with creating
more varieties of baked goods more cost-efficiently, and perhaps opening a coffee shop by
expanding into the space next door. If her positioning is to grow into a much bigger regional or
national company, then her operations, inventory and marketing will align with developing
distribution channels throughout the state and, eventually, the entire nation. If you know the
direction you want your company to take, align the various elements of your enterprise with that
directional goal. This avoids wasting time and effort on activities that don't add to your bottom line.
With alignment of your total enterprise in mind, delay making any changes until you have positioned
your company and set a direction.
Write it Down

It is important to write down your plan, even if it's no more than a few pages based on the notes you
made. Start with your positioning statement, detailing your directional goal. Then list benchmarks
toward that goal, such as leasing the space next door, hiring additional staff and buying new
equipment. Include estimates of the cost. The rest of your strategic plan is an action plan for your
operations, inventory, marketing and customer service, designed to meet those benchmarks. The
value of a written strategic plan is that it serves as a touchstone. You can review your initial ideas
when the pressure of running your business causes them to get foggy. It is also a good reference
document that can be consulted in future years when searching for new ideas or reviewing ideas
that worked well or didn't work at all. Update your written strategic plan so it serves as a business
management diary. This way it can be a useful resource for you and your managers.
Implementation

Ensure the success of your strategic plan by taking steps to properly implement it. While you are
scrutinizing your industry and your own enterprise, hold brainstorming sessions with your key
employees. Including suppliers and customers in your sessions may also be beneficial. The
cooperation of your managers, staff and suppliers is vital to the success of your plan. Keep your plan
on target by holding regular meetings with managers and employees to discuss how business is
progressing and how to deal with problems. Communication with your employees is the best way to
ensure the successful implementation and execution of your strategic plan. It's also a good way to
elicit helpful ideas for improving its effectiveness. No plan should be set in stone. If during
implementation you see a better way, change the plan accordingly.
NON-PROFIT ORGANIZATIONS (NPOS)

Strategic management in nonprofit organizations is the process of selecting an organization's

goals, determining the strategic programs necessary to achieve specific objectives in route to the
goals, and establishing the methods necessary to assure that the policies and strategic programs
are implemented. Strategic management is the formalized long-range planning process used to
define and achieve organizational goals. Because strategic-planning techniques have developed
out of the experiences and situations of large business organizations, they have not been easy to
apply in nonprofit organizations. At the same time, the diversity among nonprofits makes it
difficult to determine which formal planning experiences and problems of one type of nonprofit
might prove relevant to others. The analysed method of strategic management, that the article
deals with, is a universal strategic method. However its realisation in particular conditions of in a
particular organisation will depend on the workers' skills, on the length of the planning period,
values of the organisation, its organisational structure, financial power, etc. In spite of this
difficulty to classify the nonprofit organizations, we proposes a generic framework which includes
the following steps in the nonprofit organizations: Steps in the formulation and implementation of
strategy in the nonprofit organizations: Goal formulation: value of managers, define the
organization's mission and establish the organization's objectives; Identification of current
objectives and strategy; Environmental analysis: identification of strategic opportunities, threats,
strengths and weaknesses; Strategic decision making: develop alternatives, evaluate
alternatives, select alternatives; Implementation of strategy; Measurement and control of
progress. The first step to creating a successful strategic plan is defining the vision. The vision
represents the final point, a picture of the final status, and a vision of fulfilment of the values
which are respected by the organisation. The vision creates the frame for mission forming. The
mission of the organisation differences it from others with the same vision. The mission answers
the question: What is the sense of the company's existence and what should the company deal
with? Principal values are reflected by the vision of the organisation and its mission. These are
also the fundamental pillars of its work and it is the part of the strategy. Creating the vision and
its mission in non-profit organisations is transformed into its goals. These goals have
characteristics with certain particularities: absence of top goal (in a form of profit), taking interests
of many cliques into consideration, etc. Analysis of the environment is the next step of the
strategic management, which is the synthesis of analysis' information from inner and outer
surroundings. The result of the analysis gains information about opportunities, threats, and
organisational strengths and weaknesses. The information will be used by the organisation in the
creation of the strategy itself. The goal of strategy creation is to look for possibilities, identify key
problems, and re-evaluate strategic options based on their riskiness and utility. This is based on
available resources of the organisation. Based on the creation of a strategy, the organisation can
use various methods. For example: scenario determination, critical points determination, goal
designation, etc. Strategic plans of nonprofit organisations should be in form of written document.
For the realisation of the strategy, all employees must be familiar with it, including volunteers,
management board, donors and of course the public. The organisation must find the appropriate
tools to implement and check the strategy. Strategic-management efforts appear to be increasing
in nonprofit organizations. The presence of business persons on the boards of trustees of
nonprofit s is one factor which has encouraged many of these organizations to develop more
formal strategies. The major advantage of strategic management is that is provides consistent
guidelines for the organization's activities. Managers give their organizations clearly defined
objectives and methods for achieving these objectives. Thus, their organizations have a clear
purpose and direction. Strategic management helps managers make decisions. Strategic
management minimizes the chance of mistakes and unpleasant surprises, because goals,
objectives, and strategies are subjected to careful scrutiny. The major disadvantage of strategic
management is that it requires a considerable investment in time, money and people. In some
organizations it may take years for the strategic-planning process to function smoothly.
Sometimes organizations defer important decisions until newly established review and evaluation
procedures are completed. This can result in lost opportunities.

The nonprofit organization was introduce by brain w Barry as he was the first person
to give idea about strategic planning in nonprofit organization as every organization
has to carry the strategic planning do for NPO it is also the most mainly the NPO are
small scale and they have some services or aid giving or providing objective . the
NPO have narrow focus into the market and seeing others strategy mostly in NPO
the representative are top level that its stakeholder which take all decision and their
decision are been considered as final as they have only authority. This mainly
constitute in homogenous NPO but the situation are little bit different in
heterogeneous NPO as model is modified with having to accommodate multiple
mission this kind of heterogeneous NPO are more complex and complicated they
provide various services so it lacks attention on soliciting feedback and developing.

NPO Strategic Planning includes:

• selecting stakeholders, supremacy brokers, and headship

• analyzing the organization’s past with future and present situation.

• Analyzing and interpreting (or developing) the organization’s mission statement.

• Opportunities and threats of organization should be identified.

• Strengths and weaknesses of organization should be over view

Strategic Management Planning Tools

Strategic management planning tools, or simply s_trategic management tools_, include such
instruments as a SWOT analysis and a PESTEL explain below must analysis. Businesses
use strategic management planning tools to determine exactly where their organization is going
during the next few years and beyond and how to get there. Sometimes strategic management
planning tools are just called strategy tools. For any business, large, medium or small, it's helpful
to create a list of planning toolsavailable for this purpose.
To truly become proficient in using strategic management toolsit's important to learn what they
can do for a business so that you can pick the best strategy for your business as you look to the
future.
 Strategic Planning and Evaluation
First, despite their seemingly esoteric nature, strategic planning and evaluation are
simply tools for optimizing performance. Used properly, they establish clarity around
critical, basic questions that every nonprofit or foundation seeking impact should be highly
motivated to confront:
 What social impact are we trying to achieve?
 What activities should we pursue to achieve our intended impact?
 How will we know if we’re succeeding?

I would argue that any nonprofit or foundation that can’t provide well-reasoned answers to
these questions—however they determine those answers—has very dim prospects for
accomplishing anything of real value to society, unless by chance.
Second, formal strategic planning and evaluation are not necessarily for
everybody. Although all nonprofits and philanthropies should have solid answers to the
questions above, there is no compelling reason for why they all should rely on systematic
planning and evaluation processes to arrive at the answers. Those processes can be costly,
though they’re not inherently so. Both encompass a wide range of approaches, from informal
and intuitive assessments performed by internal staff to formal, rigorous analyses led by
outside consultants. Whatever their degree of formality, their objective is the same: to enable
nonprofits and philanthropies to develop increased confidence that their efforts are making a
difference in the world.

So given their extraordinary diversity, when does it make most sense for nonprofits and
foundations to undertake more formal, analytically rigorous, and, yes, costly strategic
planning and evaluation processes? While there are many reasons for why impact-seeking
organizations might desire greater confidence around resource-allocation decisions, the most
compelling is simply scale. Put simply, the more money a nonprofit aspires to raise or a
foundation contemplates providing for a particular program or intervention, the higher the
opportunity cost—to the organizations involved and society overall—of being wrong about
what approaches actually drive results. Plus, as scale grows, the real cost of systematic
planning and evaluation, at least on a per-beneficiary basis, may become quite low.

The scale factor is particularly compelling, I believe, when the decision-maker is not actually
the donor. It’s one thing for individuals to dedicate their own hard-earned money to support a
given charitable pursuit. It’s another thing altogether when the people making funding
decisions are using other people’s money. That, of course, is the case at many large private
foundations (and all government agencies, for that matter). In such situations, fiduciaries and
other stakeholders (and taxpayers) have a right to demand a high level of confidence that the
organization’s decision-makers are deploying money wisely and to good effect.

Ultimately, nonprofits and foundations must decide based on their own circumstances what
degree of formality their evaluation requires—or whether they value these processes at all.
Following the logic laid out above, for example, where organizations are focused on pursuing
more subtle or multifaceted changes in small-scale settings like neighborhoods and using the
money of the people actively engaged in driving that change, the case for formal, rigorous
strategic planning and evaluation simply doesn’t seem compelling.
Third, effective strategic planning and evaluation processes should yield robust,
quantitative goals and metrics. Because the core purpose of these processes is to enable
organizations to take productive actions, the goals and metrics that frame those actions must
capture their most important elements and make it possible to monitor and measure them.
And by definition, the metrics should be clear, precise, and quantitative whenever possible.
That’s not always an easy task, but there can be no doubt that ambiguity is an enemy of
focus, accountability, and learning.
Fortunately, a wide array of the most common social programs and interventions that
philanthropies support at significant scale—job training, education, health services, home
visitation, and teen pregnancy prevention, to name a few—are relatively straightforward
and can be accurately assessed using discrete, quantifiable goals and metrics. Even where
they are not—as might be the case with more complex or conceptual outcomes such as
individual well-being, civic engagement, or social justice—skilled planners and evaluators
can and must directly confront this complexity, possibly disaggregating concepts into
elements that they can specify, track and measure in ways that still enable successful action
while also respecting the organization’s true intent.

All that said, it’s inevitable that some strategic planning and evaluation processes will yield
goals and metrics that may seem superficial or non-productive, and those interested in
improving social sector effectiveness need to call them out and improve them. But
organizations can’t abandon altogether the search for reliable metrics simply because the
challenge of getting it right is arduous.
Still, the question remains: Are foundations and nonprofits overinvesting in strategic
planning and evaluation? It’s possible that the pendulum has swung too far in some
circumstances. But if so, this would still be a welcome change from prior decades
when information about philanthropic aims and outcomes was scarce and rigorous
strategic planning and evaluation hard to come by. Indeed, it’s sobering to
contemplate how much money the social sector has wasted over the years because
foundations or nonprofits unknowingly funded ineffective programs and
interventions. When all is said and done, it is that specter that should inspire us to
help our very diverse community of nonprofits and philanthropies find their best
paths forward…
Competitive Cost Dynamics: The Experience Curve
Abstract

This is the first of three articles about some popular tools that have been widely used
since the early 1970's to support strategic decision-making. The article below deals
with the experience curve; subsequent articles will deal with the growth-share matrix
and the industry attractiveness-business strength matrix. These tools have inspired a
degree of controversy about their uses and limitations, issues that will be explored in
this and the subsequent articles.
This is the first of the tutorial articles we will be publishing in Interfaces. The objective
of a tutorial article is to describe an important technique or an application area
for Interfaces readers who are nonexperts in the field. Please write and let me know
what area(s) you would like to see covered in tutorial articles (and who you would
like to see write them) and what area(s) you would be prepared to cover in a tutorial
of your own.

What Is a BCG Matrix?

Business models are based on providing products or services that are profitable
now, but they also attempt to identify changes in offerings that will keep the company
profitable in the future. The current moneymakers are easy to identify now, but what
about the future?

Created by the Boston Consulting Group, the BCG matrix – also known as the
Boston or growth share matrix – provides a framework for analyzing products
according to growth and market share. The matrix has been used since 1968 to help
companies gain insights on what products best help them capitalize on market share
growth opportunities.

Reeves Martin, senior partner and managing director of the Boston Consulting
Group, said that nearly 50 years after its inception, the BCG matrix remains a
valuable tool for helping companies understand their potential.

Creating your matrix

First, you'll need data on the market share and growth rate of your products or
services. When examining market growth, you need to objectively compare yourself
to your largest competitor and think in terms of growth over the next three years. If
your market is extremely fragmented, however, you can use absolute market share
instead, according to the Strategic Thinker blog.
Next, you can either draw a matrix or find a BCG chart program online. (There are
several that are free, available for subscription or part of another charting program,
such as this free one by Realtimeboard.)

In this four-quadrant chart, market share is shown on the horizontal line (low left,
high right) and growth rate along the vertical line (low bottom, high top). The four
quadrants are designated Stars (upper left), Question Marks (upper right), Cash
Cows (lower left) and Dogs (lower right).
Credit: DeiMosz/Shutterstock

Place each of your products in the appropriate box based on where they rank in
market share and growth. Where you choose to set the dividing line between each
quadrant depends in part on how your company compares to the competition. Here
is a breakdown of each quadrant:

Stars: The business units or products that have the best market share and
generate the most cash are considered stars. Monopolies and first-to-market
products are frequently termed stars. However, because of their high growth rate,
stars consume large amounts of cash. This generally results in the same amount of
money coming in that is going out. Stars can eventually become cash cows if they
sustain their success until a time when the market growth rate declines. Companies
are advised to invest in stars.
Cash Cows: Cash cows are the leaders in the marketplace and generate more
cash than they consume. These are business units or products that have a high
market share but low growth prospects. According to NetMBA, cash cows provide
the cash required to turn question marks into market leaders, cover the
administrative costs of the company, fund research and development, service the
corporate debt, and pay dividends to shareholders. Companies are advised to invest
in cash cows to maintain the current level of productivity, or to "milk" the gains
passively.
Dogs: Dogs, or pets as they are sometimes referred to, are units or products that
have both a low market share and a low growth rate. They frequently break even,
neither earning nor consuming a great deal of cash. Dogs are generally considered
cash traps because businesses have money tied up in them, even though they are
bringing back basically nothing in return. These business units are prime candidates
for divestiture.
Question Marks: These parts of a business have high growth prospects but a
low market share. They consume a lot of cash but bring little in return. In the end,
question marks, also known as problem children, lose money. However, since these
business units are growing rapidly, they have the potential to turn into stars.
Companies are advised to invest in question marks if the product has the potential
for growth, or to sell if it does not.

Using the BCG matrix to strategize

Now that you know where each business unit or product stands, you can evaluate
them objectively. In an article on Marketing 91, author Hitesh Bhasin outlines
four potential strategies you can follow based on the results of your BCG matrix
analysis:
1. Build. Increase investment in a product to increase its market share. For example, you can
push a question mark into a star and, finally, a cash cow.
2. Hold. If you can't invest more into a product, hold it in the same quadrant and leave it be.
3. Harvest. Reduce your investment and try to take out the maximum cash flow from the
product, which increases its overall profitability (best for cash cows).
4. Divest. Release the amount of money already stuck in the business (best for dogs).

You need products in every quadrant in order to keep a healthy cash flow and have
products that can secure your future.

The role of cash flow in the matrix

Understanding cash flow is key to making the most of the BCG matrix. In 1968, BCG
founder Bruce Henderson noted that four rules are responsible for product cash
flow:
1. Margins and cash generated are a function of market share. High margins and high market
share go together.

2. To grow, you need to invest in your assets. The added cash required to hold share is a
function of growth rates.
3. High market share must be earned or bought. Buying market share requires an additional
increment or investment.

4. No product market can grow indefinitely. You need to get your payoff from growth when
the growth slows; you lose your opportunity if you hesitate. The payoff is cash that cannot
be reinvested in that product.

That last point is even more important now than ever. The market moves more
quickly now than it did 40 years ago, and BCG has since published recommended
revisions to analyzing and acting on the matrix information.

Maintaining a healthy supply of question marks readies you to act on the next trend,
while cash cows need to be milked efficiently because they may fall out of favor –
and profitability – more quickly. You can find more strategies on BCG's website.

"With a few tweaks, the matrix can be adapted to help companies drive the strategic
experimentation required for success, even in unpredictable markets," Martin said.
"The matrix needs to be applied with accelerated speed while balancing the
investments between exploration in new segments and exploitation of established
segments. In addition, the investments and divestments need to be managed
rigorously while carefully measuring and monitoring the portfolio economics of
experimentation."

An alternative for another perspective

While a great tool, the BCG matrix isn't for every business. Some companies find
they don't have products in each quadrant, nor do they have steady movement of
products among the quadrants as they progress in their life cycles.

Some consultants advocate the use of the GE/McKinsey matrix instead, which
offers more categorization options and measures products according to business
unit strength and industry attractiveness rather than market share, the complexity of
which may be outside an individual company's control. Comparing the two models
can reveal hidden insights that fuel increased growth for your company.

Introducing Business Portfolio Management

Many people are familiar with the term "portfolio management" in the financial sense. The term

implies that you manage your money in a way that maximizes your return and minimizes your

risk. This includes understanding the different investment alternatives available and picking the

ones that best achieve your overall financial goals and strategy. One size does not fit all. The

investment decisions you make when you are 30 are different from the ones you make when you
are 55. You don't look at each investment in isolation, but in the context of the entire portfolio.
Example: You may have a bond fund that is not doing as well as your stock

funds. However, you may decide to keep it because it provides balance to

your entire portfolio and helps reduce your overall risk. Depending on market

conditions, you may find that your stock funds are suddenly down, but your

bond fund is now providing the counterbalancing strength. Likewise, you may

turn down buying a "hot tip" stock because the risk is too high and the purchase would not fit
within your portfolio strategy.

Example: You may prefer stocks and shares for their greater potential, but you still wish to

diversify in such a way as to reduce risk. You have shares in an airline but the problem is that as

the price of oil goes up the airline profits go down and so do their share values. In this case it

would not make sense to buy shares in a second airline; it would make more sense to buy shares

in an oil company. This way when oil is in short supply, the price goes up and so do the value of oil

company shares – offsetting the fall in value of the airline shares. The point is that you need to
identify the underlying drivers affecting your goals, in this case, the price of oil.

In more recent times, this same "portfolio management" concept has become popular as a way to

manage business investments. At a high-level, many of the same concepts are involved. You have

a limited amount of money to apply to your business. You want to manage this money as a

portfolio to maximize the overall value and to allow you to reach your goals. A portfolio

management process provides a way to select, prioritize, authorize and manage the totality of

work in the organization or individual department. This includes work that has been completed,

work in-progress and work that has been approved for the future. Further, it helps you come up

with the baseline that you can subsequently use to measure how well you are managing the
portfolio to meet the department's needs.

Financial portfolio management does not focus on costs, since the assumption is that expenditures

will result in the purchase of an asset (stocks, bonds, etc.) or a service (trading fee, investment

advice, etc.). Likewise, when you manage your work as a portfolio, you change the emphasis from

the costs of each portfolio component to the value provided. If the value (and alignment) is right,

the work will get authorized. If the value is not there, the work should be eliminated, cut or
backlogged.

On some websites, you will find links to order books. On others, you find a professor's notes from

a college class. Many others will offer consulting help. On this PortfolioStep website, you will find

most of what you need to successfully establish and manage portfolios of work. Organizations of

all sizes can use PortfolioStep. Smaller business units and departments will not use all of the

processes and features offered. Larger organizations will be able to use much more. The larger and

more sophisticated your unit or department is, the more material from PortfolioStep you can

leverage. After reviewing the PortfolioStep processes and templates, you will agree that the
content is unique and provides a more comprehensive picture that is not found anywhere else.
Portfolio Balancing

Step 6 Balance and Optimize the Portfolio

At this point, you have your prioritized list of work for the portfolio, as well as guidance on your

available funding. If the available funding will cover all of the proposed work, you will be in the

enviable position of moving forward without further portfolio adjustment. However, this is rarely

the case. On the other hand, if you did not need to balance the portfolio, the process would be as

simple as cutting back the work based on priorities until the remaining work fits within the
available budget.

Portfolio balancing is the process of organizing the prioritized components into a component mix

that, when implemented, is best aligned with, and best supports the organization's strategic plan.

PortfolioStep makes a major assumption that the required balance points are usually set by the

Executive for allocating resources, financial or otherwise, between the competing demands within

a portfolio. These are the demands raised by the various business units such as Operations,

Projects, Other Work, and so on. The balance points may be set in terms of actual dollar amounts,
but more usually are set in terms of percentages. The latter approach provides more flexibility.

Optimizing the portfolio means making some final cuts and/or adjustments such that the

combination of projects and other work gives rise to the maximum benefits to the organization

given the resources and funds available. So, the combination of cutting the proposed work

requests and balancing and optimizing the portfolio will take more time. It may also take a few

iterations, as cutting back in one area may free up funding that will allow you to re-authorize work
that was previously cut elsewhere.

strategic funds programming

Strategic Funds Programming is designed to help managers bridge the gap between strategy
and action. The process has been implemented successfully in companies in the United States
and Europe, and has the potential to help corporations deal with the frustrations of getting a
formulated strategy moving.
For example, in climate mitigation planning, cities are expected to conduct analyses of trends
which then determine projections for greenhouse gases (GHG), to deliberate and agree upon
targets for GHG reduction, and then to match particular actions and coali- tions of actors to
achieve these targets ( Tang et al., 2010). Analogies to this planning within an organisation
 include assigning responsibility to managers, addressing cogni- tive biases, streamlining
resource allocation procedures and aligning incentive structures (Schwenk, 1986;Stonich, 1980).
In a study of hundreds of nascent firms, the existence or lack thereof of a business plan was
shown to have no discernible impact on the survival or profitability of the firm (Honig and
Samuelsson, 2012) …

Various approaches to implementation of strategy

STRATEGY IMPLEMENTATION
The second stage of strategic management, after strategy formulation, is “strategy
implementation” or, what is more familiar to some as “strategy execution”. This is where
the real action takes place in the strategic management process, since this is where the
tactics in the strategic plan will be transformed into actions or actual performance.

Needless to say, it is the most rigorous and demanding part of the entire strategic
management process, and the one that will require the most input of the organization’s
resources. However, if done right, it will ensure the achievement of objectives, and the
success of the organization.

If strategy formulation tackles the “what” and “why” of the activities of the organization,
strategy implementation is all about “how” the activities will be carried out, “who” will
perform them, “when” and how often will they be performed, and “where” will the
activities be conducted.

And it does not refer only to the installation or application of new strategies. The
company may have existing strategies that have always worked well in the past years,
and are still expected to yield excellent results in the coming periods. Reinforcing these
strategies is also a part of strategy implementation.

The basic activities in strategy implementation involve the following:

 Establishment of annual objectives

 Formulation of policies for execution of strategies

 Allocation of resources

 Actual performance of tasks and activities

 Leading and controlling the performance of activities or tactics in various levels of the
organization
Incidentally, businesses may also find that they have to perform further planning even
during the implementation stage, especially in the discovery of issues that must be
addressed.

Strategy implementation is the stage that demands participation of the entire

organization. Formulation of the strategies are mostly in the hands of the strategic
management team, with the aid of senior management and key employees. When it
comes to implementation, however, it is the workforce that will execute the strategic
plan, with top or senior management taking the lead.
 STEPS IN STRATEGY
IMPLEMENTATION
To ensure an effective and successful implementation of strategies, it’s a good idea to
have a system to go about it. Take a look at the steps to ensure that happens.

Step #1: Evaluation

Strategic Plan and communication of the
The strategic plan, which was developed during the Strategy Formulation stage, will be
distributed for implementation. However, there is still a need to evaluate the plan,
especially with respect to the initiatives, budgets and performance. After all, it is possible
that there are still inputs that will crop up during evaluation but were missed during
strategy formulation.

There are several sub-steps to be undertaken in this step.

1. Align the strategies with the initiatives. First things first, check that the strategies on
the plan are following the same path leading to the mission and strategic goals of the
organization.

2. Align budget to the annual goals and objectives. Financial assessments conducted
prior will provide an insight on budgetary issues. You have to evaluate how these
budgetary issues will impact the attainment of objectives, and see to it that the budget
provides sufficient support for it. In the event that there are budgetary constraints or
limitations, they must first be addressed before launching fully into implementation
mode.

3. Communicate and clarify the goals, objectives and strategies to all members of
the organization. Regardless of their position in the organization’s hierarchy, everyone
must know and understand the goals and objectives of the organization, and the
strategies that will be employed to achieve them.

Step #2: Development of an implementation

structure
The next step is to create a vision, or a structure, that will serve as a guide or framework
for the implementation of strategies.

1. Establish a linking or coordination mechanism between and among the various

departments and their respective divisions and units. This is mainly for purposes of
facilitating the delegation of authority and responsibility.

2. Formulate the work plans and procedures to be followed in the implementation of the
tactics in the strategies.

3. Determine the key managerial tasks and responsibilities to be performed, and the
qualifications required of the person who will perform them.

4. Determine the key operational tasks and responsibilities to be performed, and the
qualifications required of the person who will perform them.

5. Assign the tasks to the appropriate departments of the organization.

6. Evaluate the current staffing structure, checking if you have enough manpower, and if
they have the necessary competencies to carry out the tasks. This may result to some
reorganization or reshuffling of people. In some cases, it may also require additional
training for current staff members, or even hiring new employees with the required skills
and competencies. This is also where the organization will decide if it will outsource
some activities instead.

7. Communicate the details to the members of the organization. This may be in the form of
models, manuals or guidebooks.

Step #3:and
policies Development
programs of implementation-support
Some call them “strategy-encouraging policies” while others refer to them as “constant
improvement programs”. Nonetheless, these are policies and programs that will be
employed in aid of implementation.

1. Establish a performance tracking and monitoring system. This will be the basis of
evaluating the progress of the implementation of strategies, and monitoring the rate of
accomplishment of results, or if they were accomplished at all. Define the indicators for
measuring the performance of every employee, of every unit or section, of every
division, and of every department.

2. Establish a performance management system. Quite possibly, the aspect of

performance management that will encourage employee involvement is a recognition
and reward structure. When creating the reward structure, make sure that it has a clear
and direct link to the accomplishment of results, which will be indicated in the
performance tracking and monitoring system.

3. Establish an information and feedback system that will gather feedback and results
data, to be used for strategy evaluation later on.

4. Again, communicate these policies and programs to the members of the organization.

Step #4: Budgeting and allocation of resources

It is now time to equip the implementors with the tools and other capabilities to perform
their tasks and functions.

1. Allocate the resources to the various departments, depending on the results of financial
assessments as to their budgetary requirements.

2. Disburse the necessary resources to the departments, and make sure everything is
properly and accurately documented.

3. Maintain a system of checks and balances to monitor whether the departments are
operating within their budgetary limits, or they have gone above and beyond their
allocation.

Step #5: Discharge of functions and activities

It is time to operationalize the tactics and put the strategies into action, aided by
strategic leadership, utilizing participatory management and leadership styles.

Throughout this step, the organization should also ensure the following:

 Continuous engagement of personnel by providing trainings and reorientations.

 Enforce the applicable control measures in the performance of the tasks.

 Evaluate performance at every level and identify performance gaps, if any, to enable
adjusting and corrective actions. It is possible that the corrective actions may entail
changes in the policies, programs and structures established and set in earlier steps.
That’s all right. Make the changes when necessary.
Basically, the results or accomplishments in Step #5 will be the input in the next step,
which is the third stage of Strategic Management: “strategy evaluation”.

Matching Organization Structure To Strategy

Some argue that implementation of strategies is more important than the strategies
themselves. But this is not about taking sides or weighing and making comparisons,
especially considering how these two are important stages in Strategic Management.
Thus, it is safe to say that formulating winning strategies is just half the battle, and the
other half is their implementation. Matching Organization Structure To
Strategy
All of the basic organizational form have their strategyrelated strengths and
weaknesses, thus the best organizational arrangement is the one that best
fits the firm's situation at the moment.

The following fivesequence procedure is a useful guide for fitting structure

to strategy:

1. Pinpoint the key functions and tasks necessary for successful

strategy execution.
2. Reflect on how strategycritical functions and organizational units
relate to those that are routine and to those that provide staff support.
3. Make strategycritical business units and functions the main
organizational building blocks.
4. Determine the degrees of authority needed to manage each
organizational unit bearing in mind both the benefits and costs of
decentralized decision making.
5. Provide for coordination among the various organizational units.

Pinpointing The Strategy Critical Activities

Two questions help identify what an organization's strategycritical activities

are:

"What functions have to be performed extra well and in timely fashion for
the strategy to succeed?" and "In what areas of the organization would
malperformance seriously endanger strategic success?"
(Peter Drucker).
The answers generally show what activities and areas are crucial and
where to concentrate organizationbuilding efforts.

Quick navigation

 Matching Strategy And Structure

 Understanding The Relationship Among Activities

Table of contents
Strategy Implementation: Organizational Structure

 Basic Elements Of Organizational Structure

 What Is Structure?
 The Organization Chart
 The Chain Of Command
 Elements That Determine Organizational Structure
 Job Design
o Approaches To Job Design
 Job Enrichment
o Alternative Work Schedules
 Departmentalization
o Methods Of Vertical Coordination
o The Role Of Formalization
o Span Of Management
o Levels Of Hierarchy
 Centralization Versus Decentralization
o Positive Aspects Of Centralization
o Major Advantages Of Decentralization
o Conclusion
 Delegation Authority
 Line And Staff Positions
 Methods Of Horizontal Coordination
 Organizational Forms
o Functional Structure
o Geographic Structure
 Decentralized Business Units
 Strategic Business Units
 Matrix Structure
 Hybrid Organization And Supplemental Methods
 Factors That Influence Organizational Structure
o Strategy And Structure
o Size And Complexity Of Organization
  Stage I
 Stage Ii
 Stage Iii
 Stage Iv
o Technology
o Technological Complexity
o Three Types Of Technological Interdependence
o Environmental Turbulence
 Configurational Approach To Organizational Analysis
 Mintzberg's Model
o Miles And Snow's Typology
 Prospector
 Defender
 Analyzer
 Reactor
 Assessment Of Organizational Structure
 Is The Structure Compatible With The Corporate Profile
And The Corporate Strategy?
 At The Corporate Level, Is The Structure Compatible
With The Firm's Business Units?
 Are There Too Few Or Too Many Hierarchical Levels At
Either The Corporate Or Business Units Level Of
Analysis?
 Does The Structure Promote Coordination Among Its
Parts?
 Does The Structure Allow For Appropriate Centralization
Or Decentralization Of Authority?
 Does The Structure Permit The Appropriate Grouping Of
Activities?
 Matching Strategy And Structure
o Matching Organization Structure To Strategy
o Pinpointing The Strategy Critical Activities
 Understanding The Relationship Among Activities
 Grouping Activities Into Organization Units
 Determining The Degree Of Authority And Independence
To Give Each Unit
 Providing For Coordination Among The Units
o Matches Of Structure And Strategy
o Miller's Matches Of Structure And Strategy
 Organizational Structure - Summary
7s model

McKinsey 7s Model
Ovidijus Jurevicius | December 20, 2013 Print

Arrows illustrating poor alignment of organizational elements.

Definition
McKinsey 7s model

is a tool that analyzes firm’s organizational design by looking at 7 key internal elements:
strategy, structure, systems, shared values, style, staff and skills, in order to identify if they
are effectively aligned and allow organization to achieve its objectives.

Understanding the tool

McKinsey 7s model was developed in 1980s by McKinsey consultants Tom Peters, Robert
Waterman and Julien Philips with a help from Richard Pascale and Anthony G. Athos. Since
the introduction, the model has been widely used by academics and practitioners and remains
one of the most popular strategic planning tools. It sought to present an emphasis on human
resources (Soft S), rather than the traditional mass production tangibles of capital,
infrastructure and equipment, as a key to higher organizational performance. The goal of the
model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style,
Systems, and Shared values, can be aligned together to achieve effectiveness in a company.
The key point of the model is that all the seven areas are interconnected and a change in one
area requires change in the rest of a firm for it to function effectively.

Below you can find the McKinsey model, which represents the connections between seven
areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes
interconnectedness of the elements.
The model can be applied to many situations and is a valuable tool when organizational
design is at question. The most common uses of the framework are:

 To facilitate organizational change.

 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.

7s factors

In McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’
areas. Strategy, structure and systems are hard elements that are much easier to identify and
manage when compared to soft elements. On the other hand, soft areas, although harder to
manage, are the foundation of the organization and are more likely to create the sustained
competitive advantage.
 7s factors

Hard S Soft S

Strategy Style

Structure Staff

Systems Skills

Shared Values

Strategy is a plan developed by a firm to achieve sustained competitive advantage and

successfully compete in the market. What does a well-aligned strategy mean in 7s McKinsey
model? In general, a sound strategy is the one that’s clearly articulated, is long-term, helps to
achieve competitive advantage and is reinforced by strong vision, mission and values. But it’s
hard to tell if such strategy is well-aligned with other elements when analyzed alone. So the
key in 7s model is not to look at your company to find the great strategy, structure, systems
and etc. but to look if its aligned with other elements. For example, short-term strategy is
usually a poor choice for a company but if its aligned with other 6 elements, then it may
provide strong results.

Structure represents the way business divisions and units are organized and includes the
information of who is accountable to whom. In other words, structure is the organizational
chart of the firm. It is also one of the most visible and easy to change elements of the
framework.
 Systems are the processes and procedures of the company, which reveal business’ daily
activities and how decisions are made. Systems are the area of the firm that determines how
business is done and it should be the main focus for managers during organizational change.

Skills are the abilities that firm’s employees perform very well. They also include capabilities
and competences. During organizational change, the question often arises of what skills the
company will really need to reinforce its new strategy or new structure.

Staff element is concerned with what type and how many employees an organization will
need and how they will be recruited, trained, motivated and rewarded.

Style represents the way the company is managed by top-level managers, how they interact,
what actions do they take and their symbolic value. In other words, it is the management style
of company’s leaders.

Shared Values are at the core of McKinsey 7s model. They are the norms and standards that
guide employee behavior and company actions and thus, are the foundation of every
organization.

Strategic Control
“ It is the process by which managers monitor the ongoing activities of an organization and its
members to evaluate whether activities are being performed efficiently and effectively and to take
corrective action to improve performance if they are not” -Sam Walton

Managers exercise strategic control when they work with the part of the organisation they have
influence over to ensure that it achieves the strategic aims that have been set for it. To do this
effectively, the managers need some decision making freedom: either to decide what needs to be
achieved or how best to go about achieving the strategic aims. Such decision making freedom is
one of the characteristics that differentiate strategic control from other forms of control exercised
by managers (e.g. Operational control – the management of operational processes).

Strategic controls take into account the changing assumptions that determine a strategy,
continually evaluate the strategy as it is being implemented, and take the necessary steps to adjust
the strategy to the new requirements. In this manner, strategic controls are early warning systems
and differ from post-action controls which evaluate only after the implementation has been
completed.

Important types of strategic controls used in organizations are:

1. Premise Control: Premise control is necessary to identify the key assumptions, and keep track of
any change in them so as to assess their impact on strategy and its implementation. Premise
control serves the purpose of continually testing the assumptions to find out whether they are still
valid or not. This enables the strategists to take corrective action at the right time rather than
continuing with a strategy which is based on erroneous assumptions. The responsibility for premise
control can be assigned to the corporate planning staff who can identify key asumptions and keep
a regular check on their validity.
2. Implementation Control: Implementation control may be put into practice through the
identification and monitoring of strategic thrusts such as an assessment of the marketing success
of a new product after pre-testing, or checking the feasibility of a diversification programme after
making initial attempts at seeking technological collaboration.
3. Strategic Surveillance: Strategic surveillance can be done through a broad-based, general
monitoring on the basis of selected information sources to uncover events that are likely to affect
the strategy of an organisation.
4. Special Alert Control: Special alert control is based on trigger mechanism for rapid response and
immediate reassessment of strategy in the light of sudden and unexpected events called
crises. Crises are critical situations that occur unexpectedly and threaten the course of a strategy.
Organisations that hope for the best and prepare for the worst are in a vantage position to handle
any crisis.

Recommended reading: Strategic Control and Operational Control

Process of Strategic Control

Strategic control processes ensure that the actions required to achieve strategic goals are carried
out, and checks to ensure that these actions are having the required impact on the organisation.
An effective strategic control process should by implication help an organisation ensure that is
setting out to achieve the right things, and that the methods being used to achieve these things
are working.

Regardless of the type or levels of strategic control systems an organization needs, control may
be depicted as a six-step feedback model:

1. Determine What to Control: The first step in the strategic control process is determining the
major areas to control. Managers usually base their major controls on the organizational mission,
goals and objectives developed during the planning process. Managers must make choices
because it is expensive and virtually impossible to control every aspect of the organization’s

2. Set Control Standards: The second step in the strategic control process is establishing
standards. A control standard is a target against which subsequent performance will be compared.
Standards are the criteria that enable managers to evaluate future, current, or past actions. They
are measured in a variety of ways, including physical, quantitative, and qualitative terms. Five
aspects of the performance can be managed and controlled: quantity, quality, time
cost, and behavior.

Standards reflect specific activities or behaviors that are necessary to achieve organizational
goals. Goals are translated into performance standards by making them measurable. An
organizational goal to increase market share, for example, may be translated into a top-
management performance standard to increase market share by 10 percent within a twelve-month
period. Helpful measures of strategic performance include: sales (total, and by division, product
category, and region), sales growth, net profits, return on sales, assets, equity, and investment
cost of sales, cash flow, market share, product quality, valued added, and employees productivity.

Quantification of the objective standard is sometimes difficult. For example, consider the goal of
product leadership. An organization compares its product with those of competitors and determines
the extent to which it pioneers in the introduction of basis product and product improvements. Such
standards may exist even though they are not formally and explicitly stated.

Setting the timing associated with the standards is also a problem for many organizations. It is not
unusual for short-term objectives to be met at the expense of long-term objectives. Management
must develop standards in all performance areas touched on by established organizational goals.
The various forms standards are depend on what is being measured and on the managerial level
responsible for taking corrective action.

3. Measure Performance: Once standards are determined, the next step is measuring
performance. The actual performance must be compared to the standards. Many types of
measurements taken for control purposes are based on some form of historical standard. These
standards can be based on data derived from the PIMS (profit impact of market
 strategy)program, published information that is publicly available, ratings of product / service
quality, innovation rates, and relative market shares standings.

Strategic control standards are based on the practice of competitive benchmarking – the process
of measuring a firm’s performance against that of the top performance in its industry. The
proliferation of computers tied into networks has made it possible for managers to obtain up-to-
minute status reports on a variety of quantitative performance measures. Managers should be
careful to observe and measure in accurately before taking corrective action.

4. Compare Performance to Standards: The comparing step determines the degree of variation
between actual performance and standard. If the first two phases have been done well, the third
phase of the controlling process – comparing performance with standards – should be
straightforward. However, sometimes it is difficult to make the required comparisons (e.g.,
behavioral standards). Some deviations from the standard may be justified because of changes in
environmental conditions, or other reasons.

5. Determine the Reasons for the Deviations: The fifth step of the strategic control process
involves finding out: “why performance has deviated from the standards?” Causes of deviation can
range from selected achieve organizational objectives. Particularly, the organization needs to ask
if the deviations are due to internal shortcomings or external changes beyond the control of the
organization. A general checklist such as following can be helpful:

 Are the standards appropriate for the stated objective and strategies?
 Are the objectives and corresponding still appropriate in light of the current environmental
situation?
 Are the strategies for achieving the objectives still appropriate in light of the current environmental
situation?
 Are the firm’s organizational structure, systems (e.g., information), and resource support adequate
for successfully implementing the strategies and therefore achieving the objectives?
 Are the activities being executed appropriate for achieving standard?

6. Take Corrective Action: The final step in the strategic control process is determining the need
for corrective action. Managers can choose among three courses of action: (1) they can do nothing
(2) they can correct the actual performance (3) they can revise the standard.

When standards are not met, managers must carefully assess the reasons why and take corrective
action. Moreover, the need to check standards periodically to ensure that the standards and the
associated performance measures are still relevant for the future.

The final phase of controlling process occurs when managers must decide action to take to correct
performance when deviations occur. Corrective action depends on the discovery of deviations and
the ability to take necessary action. Often the real cause of deviation must be found before
corrective action can be taken. Causes of deviations can range from unrealistic objectives to the
wrong strategy being selected achieve organizational objectives. Each cause requires a different
corrective action. Not all deviations from external environmental threats or opportunities have
progressed to the point a particular outcome is likely, corrective action may be necessary.

To conclude, strategic control is an integral part of strategy. Without properly placed controls the
strategy of the company is bound to fail. Strategic control is a tool by which companies check their
internal business process and environment and ascertain their progress towards their goal.