Strategic

Management

Dr. S. Susendiran
Unit – II : Contents

●Strategy Formulation–Defining the Company Mission–Assessing the External

Environment–Remote and Industry Environment–Industry Analysis–How Competitive
Forces Shape Strategy–The Company profile: Internal Analysis of the firm.
Strategy formulation

● 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

● Establishing Organizational Objectives: This involves establishing long-term

goals of an organization. Strategic decisions can be taken once the organizational
objectives are determined.
● 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.
 Steps of Strategy Formulation

● 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.
● 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.
● Performance Analysis: This is done to estimate the degree of variation between the actual
and the standard performance of an organization.
● 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.
Levels of strategy formulation
Levels of strategy formulation

 Corporate level strategy: This level outlines what you want to achieve: growth, stability, acquisition
or retrenchment. It focuses on what business you are going to enter the market.
 Business level strategy: This level answers the question of how you are going to compete. It plays a
role in those organization which have smaller units of business and each is considered as the strategic
business unit (SBU).
 Functional level strategy: This level concentrates on how an organization is going to grow. It
defines daily actions including allocation of resources to deliver corporate and business level
strategies.
Hence, all organisations have competitors, and it is the strategy that enables one business to become more
successful and established than the other.
DEFINING THE COMPANY
MISSION
What is a Mission Statement?

●A mission statement is used by a company to explain, in simple and concise terms,

its purpose(s) for being. The statement is generally short, either a single sentence or a
short paragraph.
●These statements serve a dual purpose by helping employees remain focused on the
tasks at hand, as well as encouraging them to find innovative ways of moving toward an
increasingly productive achievement of company goals.
Definition

●Mission statement is the written declaration of an organization's core purpose and focus that
normally remains unchanged over time.
● It reveal important aspects of your company. People that want to become a client or consider to
work with your work might have the following questions:
 Question #1: Who is your company?
 Question #2: What do you do? What do you stand for? And why do you do it?
 Question #3: Do you want to make a profit, or is it enough to just make a living?
 Question #4: What markets are you serving, and what benefits do you offer them?
 Question #5: Do you solve a problem for your customers?
 Question #6: What kind of internal work environment do you want for your employees?
Mission Statements vs. Vision Statements

● A company’s mission statement differs from its vision statement.

● While the mission statement remains unchanged for the most part and represents who the
company is or aspires to be for the entirety of its existence, the vision statement can change.
● This statement outlines what the company needs to do to remain the way it has presented
itself to be.
● In effect, a company’s mission is its identity, and the vision is its journey to
accomplishing its mission.
Example of a Mission Statement

Microsoft’s mission is:

● The statement above is a good example of a mission statement because it provides
a broad enough scale of scope to explain what the company can do, and it is also
inspirational – it’s all about empowering people. It is the kind of statement that people can
get excited about and can rally behind. It also defines Microsoft’s strategy, which is
reaching out to the whole world and making an influence on all individuals and
organizations.
Why is a Mission Statement Important?

●It is important for:

 Motivating employees
 Inspiring customers
 Strategic planning
 Setting values
 Understanding why a business exists
How to write a Mission Statement?

●Here are five steps to help you write your own mission statement:
 Step #1: Explore or Define your identity as organization or company
 Step #2: Write a Story about how you see and define your market
 Step #3: Define why and how your clients or customer benefit directly and indirectly from
your company (services and products)
 Step #4: Define why and how your employees and suppliers benefit directly and indirectly
from your companies existence
 Step #5: Define why and how the owners and other stakeholders of the company benefit
directly and indirectly from the companies existence
Examples of Mission Statements

Example #1: Amazon
to be earth’s most customer centric company. To build a place where people can come to find & discover anything they
want to buy online
Example #2: Apple
committed to bringing the best personal computing experience to students, educators, creative professionals & consumers
around the world through innovative hardware, software & internet offerings
Example #3: Dell
to be the most successful computer company in the world at delivering the best customer experience in markets we serve
Example #4: Facebook
to give people the power to share and make the world more open and connected
Example #5: Google
to organize the world‘s information & make it universally accessible and useful
Examples of Mission Statements

Example #6: Microsoft
to enable people & businesses throughout the world to realize their full potential
Example #7: Skype
to be the fabric of real time communication on the web.
Example #8: Twitter
“a work in progress”
Example #9: Yahoo!
be the most essential global internet service for consumers & businesses
Example #10: YouTube
to provide fast & easy video access & the ability to share videos frequently
Assessing the External
Environment
Environmental Analysis : Definition

●Environmental Analysis is described as the process which examines all the

components, internal or external, that has an influence on the performance of the
organization. The internal components indicate the strengths and weakness of the business
entity whereas the external components represent the opportunities and threats outside the
organization.
Advantages of Environmental Analysis

● The internal insights provided by the environmental analysis are used to assess
employee’s performance, customer satisfaction, maintenance cost, etc. to take corrective
action wherever required.
● Further, the external metrics help in responding to the environment in a positive
manner and also aligning the strategies according to the objectives of the organization.
● Environmental analysis helps in the detection of threats at an early stage, that assist
the organization in developing strategies for its survival.
● Add to that, it identifies opportunities, such as prospective customers, new product,
segment and technology, to occupy a maximum share of the market than its competitors.
Steps Involved in Environmental Analysis

1. Identifying: First of all, the factors which influence the business entity are to be identified, to improve its
position in the market. The identification is performed at various levels, i.e. company level, market level,
national level and global level.
2. Scanning: Scanning implies the process of critically examining the factors that highly influence the
business, as all the factors identified in the previous step effects the entity with the same intensity. Once the
important factors are identified, strategies can be made for its improvement.
3. Analysing: In this step, a careful analysis of all the environmental factors is made to determine their effect
on different business levels and on the business as a whole. Different tools available for the analysis include
benchmarking, Delphi technique and scenario building.
4. Forecasting: After identification, examination and analysis, lastly the impact of the variables is to be
forecasted.
Tools of External Environment Analysis:

1. SWOT Analysis
2. PESTEL Analysis
3. Porter’s Five Forces Model
SWOT Analysis
Definition:

●SWOT Analysis is a strategic management tool that assists an enterprise in

discerning their internal Strengths, and Weaknesses, and external Opportunities, and
Threats, to determine its competitive position in the market.
●The SWOT Analysis helps in ascertaining the factors that influences the efficiency
and effectiveness of any product, project, or business entity. These are explained as under:
Strengths:

The strengths of a company are the core competencies, in which the business has an edge
over its competitors. It covers aspects such as:
o Strong financial condition
o A large customer base.
o Strong brand name or a unique product
o Latest technology or patents
o Influential advertising and promotion.
o Cost Advantage
o Quality in product and customer service.
Weaknesses
Weaknesses can be described as the areas of limitations of the business, that hinders the
growth of the company and even leads to a strategic disadvantage. These are the areas which
need improvement to perform competitively. It encompasses:
o Obsolete facilities and outdated technology.
o The unit cost of a product is higher than the competitors.
o No or less internal control.
o Less quality in products and services offered.
o Weak brand image.
o Financial condition is not very sound.
o Underutilization of plant capacity.
o Lack of major skills or competencies, and intellectual capital.
Opportunities

Opportunities can be understood as the condition, which is favourable or beneficial to the

organization in the business environment, that the business could exploit to gain an
advantage. These are:
o Looking for areas of development, by utilizing skills and technology to enter new markets
o Adding new products to the existing product line to increase customer base.
o Forward and backward integration.
o Acquiring rivals businesses.
o Joint ventures, mergers and alliances to increase market coverage.
Threats

Threat implies an adverse condition which can lead the business enterprise to losses, and
can also harm the overall position and reputation of the enterprise. It entails:
o A downtrend in market growth.
o A new entrant to the market.
o Substitute products that can decrease sales.
o Increasing the bargaining power of customers and suppliers.
o New regulatory requirements
o Changes in a demographic environment that will decrease demand for firm’s product.
Importance of SWOT Analysis

 Logical framework of analysis: SWOT Analysis equips the management with an insightful
framework for eliminating issues in a systematic manner, that can influence the condition of business,
formulation of various strategies and their selection.
 Presents a comparative report: The analysis facilitates in presenting systematic information about the
internal and external environment. This helps in making a comparison of external opportunities and
threats with internal strengths and weaknesses, as well as reconciling the internal and external business
environment, to help the managers in choosing the best strategy, by considering various patterns.
 Strategy Identification: Every organization has its strengths weakness, opportunities and threats. So,
the SWOT Analysis acts as a guide to the strategist to reckon the exact position, i.e. where the business
stands, so as to identify the primary objective of the strategy under consideration.
PESTLE Analysis / Analysing
Macro Environment
Meaning

●PESTEL or PESTLE  is an abbreviation for Political, Economic, Social,

Technological, Environmental and Legal.
●By analyzing these 5 categories, the data provided will offer an overview of the
external environment and will serve as a support for the strategic planning process.
The PESTLE

 Political & Legal Factors– With the change in political parties, several changes are seen in the market in
terms of trade, taxes, and duties, codes and practices, market regulations, etc. So the firm has to comply with
all these changes and the violation of which could penalize its business operations.
 Economic Factors– Every business operates in the economy and is affected by the different phases it is
undergoing. In the case of recession, the marketing practices should be different as what are followed during
the inflation period.
 Social Factors– since business operates in a society and has some responsibility towards it must follow the
marketing practices that do not harm the sentiments of people. Also, the companies are required to invest in
the welfare of general people by constructing public conveniences, parks, sponsoring education, etc.
 Technological Factors– As technology is advancing day by day, the firms have to keep themselves updated
so that customers needs can be met with more precision.
Advantages:

 It offers and overview of the current external environment;

 Analyzes what external forces can influence the company;
 Provides a useful input for SWOT analysis.
 REMOTE AND INDUSTRY
ENVIRONMENT
1. PESTLE  Discussed above
2. Porter’s 5 Forces Model
PORTER’S FIVE FORCES
MODEL
The Concept
● Porter’s Five Forces Model is used to analyze the opportunities and threats posed by an industry to a specific
business. As the name states, the model focuses on 5 different forces that can influence the direction of a business:
 The risk of entry by potential competitors;
 The bargaining power of the buyers;
 The bargaining power of suppliers;
 The intensity of rivalry among established companies within an industry;
 The substitutes to an industry’s products.
●Advantages:
 Analyzes what external factors can influence the profitability of the company;
 Shapes the competitive strategy of the company;
 Provides a useful input for SWOT analysis.
Porter’s Five Forces Model

Threat of new entrants: Potential entrant is the major source of competition in the industry. The product range, quality,
capacity, etc. brought by them, increases competition. The size of the new entrant plays a major role here, i.e. the bigger the
entrant, the more intense is the competition. Moreover, the prices are slashed, and the overall profitability of existing players
is also affected, by the new entry.
It analyses the ease of entry to the new market, i.e. if the entry is easy, then the level of competition in the industry is severe.
Bargaining power of suppliers: Suppliers, also exert substantial bargaining power over the firms, by threatening to increase
prices or degrade quality. They are likely to exercise power if:
The number of suppliers in the industry is limited in number.
They offer the specialised product.
The supplier’s product is an important input, to the buyer’s product.
The product has a few substitutes.

Thus, the factor analyses bargaining power of industry suppliers, which directly affects the profitability, i.e. the higher the
cost, the lesser is the profitability.
Porter’s Five Forces Model

Bargaining power of customers: The market of outputs, i.e. the customers have the ability to compete
with the supplying industry and put the companies under pressure, by forming groups or cartels. This force
not only affects the prices but also influences the producer’s cost and investments in certain circumstances,
as the powerful buyers influence producers to offer better quality which involves cost and investment.
Buyer groups are likely to exercise power if, they are concentrated, products are homogeneous, the
switching cost is low, and full information is available.
Threat from substitutes: It is the quiescent source of competition, present in the industry. They are the
key cause of competition in many industries. Substitute products are offered at reasonable prices along
with high quality, to the customers can radically change the competitive scenario of industry, especially,
when the introduction is sudden.
Porter’s Five Forces Model

Rivalry among current players: Last but not the least, is the rivalry among current players, which is
all that is known as competition. It can be shown in a number of ways such as:
○ Price competition
○ Advertising battles
○ New introductions
○ Improving quality
○ Increasing consumer warranties

So, this factor analyses, how ruthless the competition is, by identifying the existing player and
marketing down their moves and activities. The competition is said to be acute when, there are a few
sellers, offering similar products to the customers because it is easy for buyers to switch to the one
offering product at low prices.
INDUSTRY ANALYSIS
Meaning

●Industry analysis is a tool that gives investors an A to Z insight into any industry.
This encompasses insights about the level of competition in the industry, demand and
supply situation, how easily can new companies enter the industry etc. The analysis takes
into account external and internal factors that can impact an industry.
What Does this Analysis Entail?
Before placing big bucks on any company, understanding the industry is extremely important. Say you are
investing in a pharmaceutical company, there are a few things you will have to keep in mind.
For example drug regulations and patenting, demand situation of medicines, FDA regulations and more.
Such factors tell investors which are the threats that the pharma industry faces, which factors go in favour and the
competitive landscape of the industry. Thorough industry analysis will help you to understand such unique aspects
of any industry.
Who Can Benefit From an Industry Analysis?
Industry analysis is for anyone who is interested in investing in a company; large scale investors, institutional
investors and even retail investors.
Understanding the industry is a key component of understanding a company. So it helps investors and other
stakeholders to position a company against other peers from the same industry. It gives investors a picture of
roadblocks and opportunities that come in the way of the company and its industry
How to Conduct Industry Analysis?

There are many ways in which you can do this. However, we have zeroed down on two of
the best methods to help you analyse an industry:
 Porter’s Five Forces
 SWOT Analysis
 Already Discussed in above Points
 HOW COMPETITIVE
FORCES SHAPE STRATEGY
Refer Porter’s Five Forces
Model
Porter’s Five Forces Model

●Porter's Five Forces is a simple but powerful tool for understanding the
competitiveness of your business environment, and for identifying your strategy's potential
profitability.
●This is useful, because, when you understand the forces in your environment or
industry that can affect your profitability, you'll be able to adjust your strategy
accordingly. For example, you could take fair advantage of a strong position or improve a
weak one, and avoid taking wrong steps in future.
 THE COMPANY PROFILE:
INTERNAL ANALYSIS OF THE
FIRM
What is an Internal Analysis?

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

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

These include:
 Gap Analysis
 Strategy Evaluation
 SWOT Analysis
 VRIO Analysis
 OCAT
 McKinsey 7S Framework
 Core Competencies Analysis
1. GAP Analysis

●Definition: Gap Analysis can be understood as a strategic tool used for analyzing
the gap between the target and anticipated results, by assessing the extent of the task and
the ways, in which gap might be bridged. It involves making a comparison of the present
performance level of the entity or business unit with that of standard established
previously.
Gap Analysis

Gap Analysis is a process of diagnosing the gap between optimized distribution and integration of resources
and the current level of allocation. In this, the firm’s strengths, weakness, opportunities, and threats are
analyzed, and possible moves are examined. Alternative strategies are selected on the basis of:
 Width of the gap
 Importance
 Chances of reduction
If the gap is narrow, stability strategy is the best alternative. However, when the gap is wide, and the reason
is environment opportunities, expansion strategy is appropriate, and if it is due to the past and proposed bad
performance, retrenchment strategies are the perfect option.
Types of Gap

1. Performance Gap: The difference between expected

performance and the actual performance.
2. Product/Market Gap: The gap between budgeted sales and
actual sales is termed as product/market gap.
3. Profit Gap: The variance between a targeted and actual profit
of the company.
4. Manpower Gap: When there is a lag between required
number and quality of workforce and actual strength in the
organization, it is known as manpower gap.
Alternative Courses of Action

 Redefine the objectives: If there is any difference between objectives

and forecast, first and foremost the company’s top executives need to
check whether the objectives are realistic and achievable or not. If the
objectives are intentionally set at a high level, the company should
redefine them.
 Do nothing: This is the least employed action, but it can be considered.
 Change the strategy: Lastly, to bridge the gap between the company’s
objectives and forecast, the entity can go for changing strategy, if the
other two alternatives are considered and rejected.
Stages in Gap Analysis

1. Ascertain the present strategy: On what assumptions the existing strategy is based?
2. Predict the future environment: Is there any discrepancy in the assumption?
3. Determine the importance of gap between current and future environment: Are
changes in objectives or strategy required?
2. Strategy Evaluation

●A strategy evaluation analyses the results of the implementation of a strategic plan

in your organization.
● It is useful to undertake a strategy evaluation at certain intervals during your
implementation of strategies such as every 6 months, 1 year, or conclusion of your
strategy. 
●The strategy evaluation process involves looking back at the goals in your strategic
plan and assessing how well you've done against achieving them.
Process of Strategy Evaluation:

1. Fixing
Benchmark of 3. Analyzing
Performance Variance

2. 4. Taking
Measurement Corrective
of Performance Action
Process of Strategy Evaluation:

1. Fixing Benchmark of Performance:

● While fixing the benchmark, strategists encounter questions such as – what benchmarks to set, how to set them
and how to express them.
● In order to determine the benchmark performance to be set, it is essential to discover the special requirements
for performing the main task.
● The performance indicator that best identify and express the special requirements might then be determined to
be used for evaluation.
● The organization can use both quantitative and qualitative criteria for comprehensive assessment of
performance.
● A quantitative criterion includes determination of net profit, ROI, earning per share, cost of production, rate of
employee turnover etc. Among the Qualitative factors are subjective evaluation of factors such as – skills and
competencies, risk taking potential, flexibility etc.
Process of Strategy Evaluation:

2. Measurement of Performance:
● The standard performance is a bench mark with which the actual performance is to be compared.
● The reporting and communication system help in measuring the performance.
● If appropriate means are available for measuring the performance and if the standards are set in the right
manner, strategy evaluation becomes easier.
● But various factors such as managers’ contribution are difficult to measure.
● Similarly divisional performance is sometimes difficult to measure as compared to individual performance.
● Thus, variable objectives must be created against which measurement of performance can be done.
● The measurement must be done at right time else evaluation will not meet its purpose. For measuring the
performance, financial statements like – balance sheet, profit and loss account must be prepared on an annual
basis.
Process of Strategy Evaluation:

3. Analyzing Variance:
• While measuring the actual performance and comparing it with standard performance there may be
variances which must be analyzed.
• The strategists must mention the degree of tolerance limits between which the variance between actual
and standard performance may be accepted.
• The positive deviation indicates a better performance but it is quite unusual exceeding the target always.
• The negative deviation is an issue of concern because it indicates a shortfall in performance.
• Thus in this case the strategists must discover the causes of deviation and must take corrective action to
overcome it.
Process of Strategy Evaluation:

4. Taking Corrective Action:

● Once the deviation in performance is identified, it is essential to plan for a corrective action.
● If the performance is consistently less than the desired performance, the strategists must carry a detailed
analysis of the factors responsible for such performance.
● If the strategists discover that the organizational potential does not match with the performance
requirements, then the standards must be lowered.
● Another rare and drastic corrective action is reformulating the strategy which requires going back to the
process of strategic management, reframing of plans according to new resource allocation trend and
consequent means going to the beginning point of strategic management process
3. SWOT Analysis

● The SWOT analysis is one of the most well-known and used business analysis tools
around. It gained popularity due to its simplicity (covers both an internal and external analysis),
though equally for its effectiveness. The name SWOT is derived from the factors in its grid, -
Strengths, Weaknesses, Opportunities, and Threats.
● This tool can be used to create a sustainable niche in your market. The SWOT analysis
allows organizations to uncover the opportunities they have the strength to exploit and minimize
their weaknesses and the risk of impending threats. Using this tool, organizations are able to
distinguish themselves from competitors and successfully compete in their given marketplace.
VRIO Analysis

●The VRIO framework is a great tool for specifically assessing an organization's

internal environment. It looks at the different internal resources of an organization and
categorizes each based on overall value to the organization. VRIO is a framework that
allows organizations to identify their competitive advantages and promotes the
development of these competitive advantages to sustainable competitive advantages.
●If you're looking to develop a strategy that builds on your organization's competitive
advantage, but you've yet to define what that is - VRIO analysis is the tool you need. 
OCAT

The Organizational Capacity Assessment Tool was designed for non-profit organizations looking to assess their internal
environment. OCAT assesses how well your organization performs across 10 internal dimensions, including:
 Aspirations
 Strategy
 Leadership, Board & Staff
 Funding
 Marketing & Communications
 Advocacy
 Business Processes
 Infrastructure & Organizational Structure
 Culture and shared values
 Innovation and adaptation
The results of the assessment help non-profits evaluate and improve their organizational capacity. 
McKinsey 7S Framework

Another highly popular and battle-tested tool is the McKinsey 7S Framework. McKinsey 7S is ideal for organizations looking
to improve the alignment between departments and processes. The model can be used to assess an organization's current state,
as well as a proposed future state, and the gaps and inconsistencies between them. McKinsey 7S prompts you to analyze 7
internal aspects of your organization that need to ultimately be aligned for your organization to truly compete and be
successful. The model's 7 elements include:
 Strategy
 Structure
 Systems
 Shared Values
 Skills
 Style
 Staff
Core Competencies Analysis

●The core competency analysis is an internal analysis tool that helps organizations
create strategies that move them ahead of their competitors.
●The basic premise of the analysis is to identify the organization's core competencies
- the combined resources, knowledge, and skills of an organization that creates unique
value to their customer.
●Once organizations have identified their core competencies, strategies can be
created to focus on only what the organization does well and provides unique value to the
customer.
THE END OF UNIT -
II