Strategic Management

RIFT VALLY UNIVERSITY bole campus -\

By :SIYUM.M (MBA in management)
CHAPTER-ONE: Overview of Strategic Management
Basic Concepts
Vision: serves as a sign-post indicating the way for all who need to
understand
 what the organization is, and
 where it intends to go
It is also the view of an entity’s future direction and business course,
guiding concept for what an organization is trying to do and to become.
It is what the firm or a person would ultimately like to become.
In other words, it is a far-fetched expectation of an entity. That said, a vision
statement should not just be a statement of desired future image but also
of a compelling element that helps inspire, motivate, and engage people.
A good vision statement need to be:
 Realistic: within the bound of achievability
 Credible: must be believable to the employees.
 Attractive: people must want to be part of the future.
Cont’d.
Future: if one attains his/her vision, and is no longer in the future
then it won’t still be a vision. A vision statement is expressed in
the future.
Hence, such a vision
 Attracts commitment and motivation
 Creates meaning in workers’ lives
 Bridges the present and the future
Who develops it?
The responsibility of developing vision statements ultimately rest on
top management. However, participation of employees shall be
sought for better end.
Vision= Guiding Philosophy + Tangible Image
i] Guiding Philosophy: system of fundamental motivating
assumption, principles, values and tenets, and it stems from
organizational core values and beliefs.
ii] Tangible Image: the mission and its vivid descriptions
Mission: specifies the scope of the organization and thereby
Cont’d.
distinguishing the organization from other similar organizations.
a) Reason for existence - for business concern
- for mutual benefit
- for giving service
b) Distinguishing from other similar organization through customer,
product, location, technology, philosophy, concern for employees
and public.
Microsoft’s mission is to enable people and businesses throughout
the world to realize their full potential.
Facebook’s mission is to give people the power to share and make
the world more open and connected.
The process of vision development
1st. Understand the organization
Gather information as to: its mission, values, the character of the
industry, the degree of competition, the position it currently
maintains, the critical stakeholders[ inside & outside] along with
their expectation and interests.
Cont’d
2nd. Conduct a vision audit
Ask questions to verify
- whether the organization has a clearly stated vision;
- the current direction of the organization;
- familiarity of the leaders with the vision;
- the alignment of current structures, processes, and personnel
with the vision
3rd. Target the vision
Here, identify - boundaries or constraints to the vision;
- the desired accomplishments of the vision;
- critical issues to be addressed in it.
4th. Set the vision context
categorize future developments in the environment and determine
the most likely future states of beings.
5th. Identify alternative vision statements
6th. Select the best: select that which satisfies the aforementioned
Cont’d.
characteristics and which is appropriate to the organization.
Implementing the Vision
Having set the vision, top management shall be concerned with its
implementation.
As a strategic manger, one needs to: - formulate the vision
- communicate it
- implement it
Strategic implementation calls for the development of strategic plan.
Strategic planning must develop goals and specific courses of
actions to attain the vision. That said, the real implementation is
secured by executing the strategic plan.
Goal: is the general end towards which an organization directs its
efforts.
- Is broad and timeless and takes longer to complete.
Cont’d.
E.g. The goal of HIV prevention and control office may be;
“ To reduce the prevalence rate of HIV infections in a given region”
Thus, usually goals need to specify – who will be affected?
- what will change as a result of the program?
Objective : is more precise and represents smaller steps than goals.
- Is expressed in some measurable terms.
- It ought to be SMART- { S=specific,M=measurable,
A=attainable,R=realistic,T=time bound}
E.g. For the aforementioned organization;
Objectives: * “To increase the number of individuals who are having
their blood tested by 15% in the coming year.”
* “To raise the rate of condom distribution by 10% in the
coming year”
To better understand the stated concepts, let’s observe some of the
goals and objectives included in the UNDP’s Millennium
development Goals of Ethiopia.
Cont’d.
Goal 1. Eradicate extreme poverty and hunger
Objective 1. Halve, between 1990 and 2015, the proportion of
people whose income is less than one dollar a day
Objective 2. Halve, between 1990 and 2015, the proportion of
people who suffer from Hunger
Goal 2. Achieve universal primary education
Objective 1. Ensure that, by 2015, children everywhere, boys and
girls alike, will be able to complete a full course of primary
schooling
Goal 6. Combat HIV/AIDS, malaria and other diseases
Objective 1. Have halted by 2015 and begun to reverse the spread of
HIV/AIDS
Objective 2. Have halted by 2015 and begun to reverse the incidence
of malaria and other major diseases
Business Policy: represents broad guideline to ensure the
successful establishment of goals and objectives and the
Cont’d
Successful formulation, implementation and control of strategies.
- Provide managers with a framework for passing decisions.
E.g., Only products that promise at least a 15% return on investment
will be considered additions to the existing line of products.
Strategy: Historically, it was derived from a Greek term
‘Strategos’, which means generalship—the actual direction of
military force.
- It’s a direction, way that is intended to achieve organizational
expectations in the future.
Henry Mintzberg, a respected authority in the area of strategic
management, used 5P’s to define strategy:
Plan: a consciously intended course of action to deal with a situation.
Ploy: a maneuver to outwit an opponent.
Pattern: a sequence of actions, one leading to the other.
Cont’d.
Position: the way a firm orients itself to its competitive environment.
Perspective: the way that managers in the firm see themselves & the
world around them.
Strategic Management
It is a process of
1st. Environmental scanning[ Both internal and external]
2nd. Strategy formulation[Strategy planning]
3rd. Strategy implementation
4th. Strategy evaluation and control.
Previously it used to be called Business Policy, but this has rather an
inward concern but strategic management has in addition external
environment concern.
-Strategic management is a process by which top management determines
the long-term direction and performance of the organization by ensuring
that careful formulation, effective implementation and continued
evaluation of strategy takes place.
The Strategy Analysis—Choice—Implementation model
Cont’d.
Cont’d.
There is also another model called the Context-Content-Process
model that demonstrates strategic management through the lens
of the ‘Wh’ questions.
Levels of Strategy
Before discussing the different levels of strategy in organizations it
is wise to distinguish between different forms of organizations.
In regards to the structural assortment of organizations, there are
diversified organizations and single-business organizations.
Whereas diversified organizations operate two or more
businesses, single-business organizations focus on one strategic
business unit.
Such difference in organizations’ orientations gives rise to
differences in the number of levels of strategies the organizations
adopt. As such, while diversified entities develop strategies along
three levels, single-business organizations do so along only two
levels.
By and large, depending on the organizational hierarchical levels,
there are three broad levels of strategy.
Cont’d.
Cont’d.
I. Corporate-level strategy
- An over all plan covering the various functions performed by
different SBUs.
- It is also called portfolio level strategy and primarily concerned
with top management, chief executives, or board of directors
decision for acquisitions, mergers and major expansion that add or
reduce product lines.
II. Business-level strategy[ Competitive Strategy]
• It is found in the middle of the decision making hierarchy and
composed mainly of business and corporate managers. It is
concerned with a single strategic business unit (SBU) and how
each business attempts to achieve its mission within its chosen
area of activity.
Strategic Business Unit[ SBU]: a specialized unit in a corporate
organization treated as a separate unit for a strategic management
purpose as it has its own:
-goal -competitor - strategy
- Concerned with organizational position and the 5 forces of
competition.
Cont’d.
Michael Porter’s 5 forces of strategic competition.
A] The low-cost leadership strategy
A strategy of being a low cost provider of a product that appeals to a
broad range of customers.
Low average cost of product is a prerequisite.
B] A Differentiation Strategy.
Necessitates creating valuable differences in –quality –features –
durability- additional services –customer handling –warranty, etc.
- Usually accompanied by high price.
C] The Best-cost provider or Stuck in the middle
Giving more value to customers by combining low-cost and
differentiation. However, in the event that more than one
approach is followed, being oblivious to capacity, an
organization may get stuck in the middle without a competitive
advantage.
D] The Focused Low-cost Strategy
Concentrating on a narrow buyer segment & outcompeting rivals on
the basis of low cost.
Cont’d.
E] The focused Differentiation Strategy
Concentrating on a narrow segment and differentiating.
III. Functional[ Operational] level strategy
Linked to operating functions of an organization.
It is found at the bottom of the decision making hierarchy.
Strategic Decision Making
-Strategic decisions are those that affect the direction of the firm
-These major decisions concern areas such as new products and markets,
acquisitions and mergers, subsidiaries and affiliates, joint ventures and
strategic alliances, and other matters.
-Strategic decision making is usually conducted by the firm's top management,
led by the CEO or president of the company.
-Decisions are initiated when there is a Problem or an Opportunity.
* Programmed Decisions *Non-programmed Decisions
Decision Making Tools
* Quantitative tools: Break-even Analysis, Linear Programming, PERT,
Decision tree analysis, Payback analysis, computer simulation etc.
Cont’d.
*Qualitative tools: Intuition, Experience, Group discussions, etc.
Stakeholders and the Corporate Mission
Stakeholder: any party with an interest or concern in something, or
an group or individual who can affect, or be affected by the
achievement of organizational purpose.
Stakeholders include owners, stockholders or investors; banks,
creditors; partners, suppliers; customers, distributors and
prospects; management, employees, labor unions; competitors,
government( local, regional, national) and regulators; professional
associations and industry trade groups; media, non-governmental
organizations, the society; public, social, political ,environmental,
religious groups and communities, and so on.
Conducting stakeholder analysis is essential for – the identification
and description of the attributes of each, the interrelationships
among one another and their interest and expectations as they
relate to the organization.
Steps in Stakeholder analysis
1st. Identify the main purpose of the analysis
Cont’d.
2nd. Identify principal stakeholders
Based on *Power * Urgency * Legitimacy
The significance of stakeholders corresponds to the one shown in following
diagram.

3rd. Identify their interests, characteristics, and related circumstances.

4th. Identify the patterns of interactions between or among the stakeholders
5th. Develop management options.
In doing so, using the stakeholders grid may come in handy.
Cont’d.

Hence, stakeholders management is a task of strategic managers

concerned with allowing organizational primary stakeholders
achieve their objectives and that other stakeholders are dealt with
ethically and are also satisfied.
Exercise…….
Who Matters Most?
Customers,
Shareholders, or Employees.
 Importance of strategic management
Greenly stated that strategic management offers the following benefits;
• It allows for identification, prioritization and exploitation of opportunities
• It provides an objective view of management problems
• It represents a framework for improved coordination and control of
activities
• It minimizes the effects of adverse conditions and changes
• It allows major decisions to better support established objectives
• It allows more effective allocation of time and resources ot identified
opportunities
• It allows fewer resources and less time to be devoted to correcting
erroneous or ad hoc decisions
• It creates a frame work for internal communication among personnel
• It helps integrate the behavior of individuals into a total effort
• It provides a basis for clarifying individual responsibilities
• It encourages forward thinking
Cont’d.
• It provides a cooperative, integrated, and enthusiastic approach to tacking
problems and opportunities
• It encourages a favorable attitude toward change
• It gives a degree of discipline and formality to the management of a
business.

Parties Involved in Strategic Management

It is top management and/ or board of directors who are involved in
strategic management.
A] Board of Directors
is a body of elected or appointed members who jointly oversee the
activities of a corporation.
They may be:
Inside director : is a director who is also an employee, officer,
major shareholder, or someone similarly connected to the
organization.
Typical inside directors are:
• A Chief Executive Officer (CEO) who may also be Chairman of the
Board
Cont’d.
• Other executives of the organization, such as its Chief Financial
Officer (CFO) or Executive Vice President.
• Large shareholders (who may or may not also be employees or
officers)
• Representatives of other stakeholders such as labor unions, major
lenders, or members of the community in which the organization
is located.

outside director : is a member of the board who is not otherwise

employed by or engaged with the organization, and does not
represent any of its stakeholders.

Outside directors bring outside experience and perspective to the

board. Outside directors are often useful in handling disputes
between inside directors, or between shareholders and the board.
Cont’d.
Roles of BODs
• governing the organization by establishing broad policies and
objectives;
• selecting, appointing, supporting and reviewing the performance of
the chief executive;
• ensuring the availability of adequate financial resources;
• Taking part in strategic planning;
• approving annual budgets;
• accounting to the stakeholders for the organization's performance;
• Enhancing public image for the company, and so on.
B] Top Management
- Is represented by * The CEO[ Chief Executive Officer] or Managing
Director in British English. This is the senior manager who is
responsible for overseeing the activities of an entire company.
The CEO usually also holds a position on the board of directors
Cont’d.
* The COO[ Chief Operating Officer or president]
The senior manager who is responsible for managing the company's
day-to-day operations and reporting them to the chief executive
officer (CEO).
A company needs a chief operating officer (COO) because the CEO
is usually too busy to monitor production quotas and other
factors on a daily basis.
• Executive vice-presidents and vice-presidents of division
Roles of Top Management
 Take part in strategic planning
 Manage the strategic planning process.
 Provide executive leadership
 Provide information to the board about the organization, and so
on.
Corporate Social Responsibility
Organizations have responsibility not just to their owners but also to
the society and other constituents.
Cont’d.
Sometimes it is termed as corporate conscience, corporate
citizenship, social performance, or sustainable responsible
business.
The goal of CSR is to embrace responsibility for the company's
actions and encourage a positive impact through its activities on
the environment, consumers, employees, communities, and all
other members of the public sphere.
With regard to CSR, there are two seemingly conflicting viewpoints,
namely Milton Friedman’s Traditional View and Archie Carroll’s
View.
a) Milton Friedman’s Traditional View
A business which acts responsible by – cutting price to prevent
inflation
- Making cost to reduce pollution
- Incurring cost to build social facilities
is spending shareholders’ fortune for the general social interest.
This, according to Friedman, may in the long-run harm the same
society that the firm is trying to help for the business may
Cont’d.

-Increase price for increased cost or investment

-have its future investment discouraged.
Therefore, social responsibility of a business is to work to maximize
profit by engaging in open and free competition as well as by
doing away with deception and fraud.
b) Archie Carroll’s View.
Social responsibility is composed of four layers of responsibilities
arranged in order of importance. These are:
1st. Economic Responsibility: to produce goods and services so that
the firm repays creditors and shareholders. “MUST-DO’s”
2nd. Legal responsibility: obey government rules, regulations, and
laws. “ HAVE-TO’s”
3rd. Ethical Responsibility: follow the generally held beliefs about
proper behavior in the society. “ SHOULD-DO’s”
4th. Discretionary Responsibility: purely voluntary obligations such
as of philanthropic contribution and of public facility
construction. “MIGHT-DO’s”
Cont’d.
Cont’d.
In conclusion, the society requires a business to discharge its
economic and legal responsibilities. It also expects the business
to fulfill its ethical responsibilities and it desires that the business
meet its philanthropic responsibilities.
Strategy and Ethics
Why is that some businesses are considered acting unethically?
A] Individuals involved do not think that they are doing something
questionable. They may argue that a decision or action is
legitimate if everyone is doing it.
B] because of differences in values between business people and
principal stakeholders.
*Some social groups may argue that business people working in
tobacco, alcoholic beverages and in gambling industries are
acting unethically for they are subjecting their customers to
problems ranging from discomfort to terminal illnesses.
* Business people, however, respond saying that what is unethical is
to deny other individuals of their individual rights.
C] Because of the low level in the moral development of strategic
managers.
Cont’d.
Morality: is the guide to personal behavior based on religious or
philosophical grounds.
Ethics: the generally accepted standard of behavior for an
occupation, trade, or profession.
Simply stated, ethics refers to standards of behavior that tell us how
human beings ought to act in the many situations in which they
find themselves-as friends, parents, children, citizens,
businesspeople, teachers, professionals, and so on.
It is helpful to identify what ethics is NOT:
 Ethics is not the same as feelings. Feelings provide important
information for our ethical choices.
 Ethics is not religion. Many people are not religious, but ethics
applies to everyone.
 Ethics is not following the law. Law can become ethically
corrupt, as some totalitarian regimes have made it. Law can be a
function of power alone and designed to serve the interests of
narrow groups.
 Ethics is not following culturally accepted norms.
 Cont’d.
With regard to moral development, Lawrence Kohlberg proposed
that an individual can pass through three levels of moral
development.
1. The Preconventional Level
- characterized by a concern for self.
- characteristic of small children or individuals who have not
developed to a higher level.
- an individual behaves in such a way as to avoid punishment or
quid pro quo.

2. The Conventional Level

- characterized by consideration of societal norms and laws.
- actions are guided by external codes of conduct.
- the vast majority of people in the world belong to this category.
Cont’d.
3. The principled Level
- characterized by consideration to internal moral code.
- Highly unlikely to indulge in an unethical practice.
Unethical Business Practices
o Resorting to dishonesty, trickery or deception.
o Distortion of facts to mislead or confuse.
o Manipulating people emotionally by exploiting their
vulnerabilities.
o Greed to amass excessive profit.
o Creation of false documents to show increased/decreased
profits.
o Avoiding penalty or compensation for unlawful act.
o Lack of transparency and resistance to investigation.
o Harming the environment by exceeding the government
prescribed norms for pollution.
o Invasion of privacy used as leverage, for obtaining personal or
professional gains.
o Sexual discrimination, and so on.
Cont’d.
Basic Approaches for defining ethics.
1. The Utilitarian Approach
*Actions should be judged by their consequences.
* If an action has a good result for the majority, it can be considered
ethical.
Using animals as experimental units is justified ethical in this
approach.
The principle states: "Of any two actions, the more ethical one will
produce the greatest balance of benefits over harms."
So long as a course of action produces maximum benefits for
everyone, utilitarianism does not care whether the benefits are
produced by lies, manipulation, or coercion.
Problems with Utilitarianism
 it's often difficult, if not impossible, to measure and compare the
values of certain benefits and costs: how do we go about
comparing the value of money with, for example, the value of
life, the value of time, or the value of human dignity?
 Difficult to be certain about the consequences of our actions.
 Cont’d.
 it fails to take into account considerations of justice.
So, utilitarianism shouldn’t be the sole principle guiding our
decisions.
2. Individual rights approach
*Actions can be considered ethical so long as they don’t go against
certain fundamental human rights.
What’s ‘right’?
A right is a justified claim on others. For example, if I have a right to
freedom, then I have a justified claim to be left alone by others.
Turned around, I can say that others have a duty or
responsibility to leave me alone.
The "justification" of a claim is dependent on some standard
acknowledged and accepted not just by the claimant, but also by
society in general. The standard can be as concrete as the
Constitution, which guarantees the right of free speech and
assures that every Ethiopian accused of a crime "shall enjoy the
right to a speedy trial by an impartial jury," or a local law that
spells out the legal rights of landlords and tenants.
 Cont’d.
There are Positive and Negative rights
 Negative rights, such as the right to privacy, the right not to be
killed, or the right to do what one wants with one's property, the
right to truth etc.. They imposes a "negative" duty on all others—
the duty not to interfere with a person's activities.
 Positive rights, such as the right to health and education. They
are called positive b/c they claim for each person the positive
assistance of others in fulfilling basic constituents of human well-
being.
But what to do when there is Conflict of Rights. For eg. suppose a
private club has a policy that excludes women from joining. How
do we balance the right to freedom of association—which would
permit the club to decide for itself whom to admit—against the
right not to be discriminated against—which requires equal
treatment of women?
we need to examine the freedoms or interests at stake and decide
which of the two is the more crucial for securing human dignity.
3. The Justice Approach
 Cont’d.
Actions are treated ethical if they incorporate the ideas of equity,
fairness and impartiality.
Aristotle and other Greek philosophers have contributed the idea that
all equals should be treated equally. Today we use this idea to
say that ethical actions treat all human beings equally-or if
unequally, then fairly based on some standard that is defensible.
Other guidelines for ethics:
A] An individual’s action is ethical only if the person is willing for
that same action to be taken by everyone who is in a similar
situation
B] Ethical behavior is that when an individual doesn’t treat(use)
another person simply as a means, but always as an end.
[Immanuel Kant’s theory of ethics]
Organizations, for their own interest, need to act ethically for if not
the government may be forced to outlaw such actions.
A Framework for Ethical Decision Making
Recognize an unethical Issue
1st. Could this decision or situation be damaging to someone or to
some group? Does this decision involve a choice between a good
 Cont’d.
and bad alternative, or perhaps between two "goods" or between two
"bads"?
2nd. Is this issue about more than what is legal or what is most
efficient? If so, how?
Get the Facts
3rd. What are the relevant facts of the case? What facts are not
known? Can I learn more about the situation? Do I know
enough to make a decision?
4th. What individuals and groups have an important stake in the
outcome? Are some concerns more important? Why?
5th. What are the options for acting? Have all the relevant persons
and groups been consulted? Have I identified creative options?
Evaluate Alternative Actions
6th. Evaluate the options by asking the following questions:
• Which option will produce the most good and do the least harm?
(The Utilitarian Approach)
• Which option best respects the rights of all who have a stake?
(The Rights Approach)
• Which option treats people equally or proportionately? (The
 Cont’d.
Justice Approach)
Make a Decision and Test It
7th. Considering all these approaches, which option best addresses
the situation?
8th. If I told someone I respect-or told a television audience-which
option I have chosen, what would they say?
Act and Reflect on the Outcome
9th. How can my decision be implemented with the greatest care and
attention to the concerns of all stakeholders?
10th. How did my decision turn out and what have I learned from this
specific situation?
Cases: 1. A Job Search Dilemma
Samson, a gradate from AAUCC, is looking for a job. Anxious about finding work, he
sends out scores of resumes for a wide variety of positions. The first call he gets is
for a position that doesn't really interest him, but he figures he should be open to
every opportunity. He schedules an interview, which he aces. In fact, the recruiter
offers Samson the job on the spot. He would like Samson to start as soon as
possible.
Should Samson accept the offer? If he does, can he continue to pursue other jobs
actively?
 Cont’d.
Cases 2. The Reference Request
A former employee who was fired due to poor quality work,
absences, and lateness related to her drinking problem, informs
you that she has applied for a position at another company and
has already given your name as a reference. She desperately
needs a job (she is a single parent with three children), and she
asks you to give her a good recommendation and not mention her
drinking, which she assures you is now under control.
She also asks you to say that she voluntarily left the company to
address a family medical crisis, and that the company was
pleased with her work. You like this person and believe she is a
good worker when she is not drinking. You doubt that she really
has overcome her drinking problem, however, and you would not
recommend your own company hire her back.
What do you say to this woman? What do you say to an employer
who calls you for a reference? What if the prospective employer
was a friend? Suppose the problem was a theft? Suppose she had
asked you to be a reference prior to supplying your name to her
prospective employer?
CHAPTER- TWO: ENVIRONMENTAL SCANNING AND
INDUSTRY ANALYSIS
Environmental Scanning: is a research process, in which
businesses collect all types of relevant information that helps
these businesses in making decisions regarding surviving,
expanding or entering new markets.
-Its main purpose is to identify strategic factors-those external &
internal element that will determine the future of the corporation.
The external environment can be analyzed at two different levels.
These are: A] The General Environment[The Remote Environment[
The Macro Environment.]
B] The Task Environment[The Immediate Operating
Environment][The Micro Environment]
Organizations may scan their external environment in various ways,
but the most commonly used ones are:
I] The PEST Analysis
II] The Five Forces Model
I] The PEST Analysis
It is an acronym that stands for Political, Economic, Socio-cultural,
Cont’d.
Technological forces.
i. Political Environment
 Foreign trade regulations: related to import and export, how the
government promotes/discourages and legal liabilities related.
For eg., standard and quality inspection., tariffs(export or
import), duties
 Tax laws: a compulsory contribution to state revenue, levied by
the government on workers' income and business profits, or
added to the cost of some goods, services, and transactions.
 Environmental protection concerns and laws.
 Labor laws
 Political stability
 Government policies including those on investment,
liberalization etc.
 Pressure groups such as consumers association, trade unions.
 Antitrust regulations impeding the creation of monopoly
situation.
 Bilateral, Regional and Multilateral Trade Negotiation. Eg.,
COMESA[The Common Market of Eastern and Southern
 Cont’d.
 Africa]
Organizations should attend meetings with government officials,
attend important hearings and conferences, meet with trade
groups and industry associations to gather information on this
aspect.
ii. Economic Environment
*Interest rates– both depositing and borrowing- affect investment
and spending patterns.
For e.g., When borrowing interest rate increases, borrowers have
fewer incentives to borrow money due to the increased cost of
taking out a loan. Thus, banks lend less money, and in turn, less
money funnels through the economy. This contraction in the
money supply slows the rate of business expansion and
innovation. Firms spend less money developing new products
and opening new branches due to their disinterest in procuring
a business loan.
High interest rates, also, pose immediate problems for people
looking for a job or for those just laid off from work.
*Devaluation: a decrease in the relative value of a given currency as
 Cont’d.
For eg., devaluation affects the tourism industry positively as a weak
national currency tends to encourage outsiders to spend their money in
that country, and it forces nationals of the country to travel only within
the country.
On the other hand, lower value of national currency discourages imports
while encouraging exports.
Moreover, it encourages the growth of local enterprises.
*Disposable and Discretionary Income
Disposable Income: Gross Income - Tax
Discretionary Income= Disposable Income – Expenditure for
necessities
Discretionary Income is essentially the amount of income a person can save,
invest or spend on unnecessary goods and services such as entertainment,
travel and luxuries.
Discretionary spending is an important part of a healthy economy - people
will only spend money on things like travel, movies and consumer
electronics if they have the funds to do so.
*Unemployment
 Cont’d.
Some business implications of rising / high unemployment include:
• Lower consumer spending = lower demand for income-elastic
products.
• Demand for inferior goods (lower price, quality) may increase.
• Greater supply of labor – potentially lower wage/salary levels.
• Unemployment creates insecurity in the workforce; potentially a
cause of lower morale and de-motivation.
• Business may be impacted by social problems associated with high
unemployment (e.g. rising crime).
• Recruitment (in theory) becomes easier – there should be more
applicants for each vacancy.
• Lower staff turnover – employees less likely to be able to find
other jobs, or want to move in an uncertain economic climate.
*Money supply
More money circulating in the economy
the purchasing power of all four sectors--household, business,
government, and foreign--is enhanced. Everyone is willing and
able to buy more real production--at the existing price level.
Consumption expenditures, investment expenditures,
 Cont’d.
government purchases, even net exports, all increase, resulting in an
increase in aggregate demand.
Less money circulating in the economy
the purchasing power of all four sectors--household, business,
government, and foreign--is restricted. Everyone is willing and
able to buy less real production--at the existing price level.
Consumption expenditures, investment expenditures, government
purchases, even net exports, all decrease, resulting in a decrease
in aggregate demand.
However, a high money supply, as sometimes called Monetary
inflation, may trigger inflation.
*Inflation( Price Inflation)
Inflation is a general rise in prices, or a fall in the value of money.
Some effects:
 Inflation distorts prices between different time periods
If there is inflation, you’re better off spending the money now before
it loses its value, so consumption now rises at the expense of
consumption later; savings are money you plan to spend later.
So that discourages saving --- less money in the banks
 Cont’d.
 Instead of saving, consumers may start borrowing.
B/c, a 100 birr you borrowed today is worth more than a 100 birr
you pay later.
So consumers tend to borrow more and spend even more.
 Interest rates(borrowing) rise.
If a lender normally wants 5% to let someone else use the money for
a while, and inflation is also 5%., then the lender will want 10%.
This puts up business costs and makes borrowing less and therefore
investment less; less investment means less growth and
employment.
 Inflation causes uncertainty which increases risk
Higher risk means businesses are less likely to invest, with the
results mentioned above.
 Input prices (raw materials, wages and supplies) rise so business
costs rise.
May ignite a danger of a ‘wage-price’ spiral where rising costs leads
to higher prices, workers ask for a pay rise in compensation, so
costs rise again, so prices rise again, and so on.
 ‘Shoe-leather’ costs.
 Cont’d.
Because prices are always changing businesses and consumers spend
a lot of time looking for the best price.
 ‘Menu costs’
are the costs of constantly changing prices as in the literal example
of reprinting the menu. But it’s not just the price labels on the
goods, but the whole business system that has to be changed.
 Wage negotiation
If there is inflation, workers will want pay rises. The actual time and
cost of negotiating this, and making the necessary administrative
changes can be quite high. Whilst managers are negotiating, they
aren’t doing anything else.
 Asset-price inflation.
Houses, gold and other investments (even art & antiques) often rise
in price during inflation as investors look for a safe haven for
their money. These prices then rise due to strong demand, which
attracts further buying. This disrupts normal spending pattern on
normal goods and services.
 Causes mal-investment
In inflation times, the data given about an investment is often
 CONT’D.
deceptive and unreliable, therefore causing losses in investments.
In addition to the aforementioned variables, the economic
environment includes GDP trends, Energy availability and cost,
deflation, revaluation and so on.
iii. Socio-cultural environment
*Changes in the age structure
There are three phases of age transition, experts explain: during the
first phase, high fertility rates and declining infant and child
mortality rates increase the share of children in the population. In
the second phase, the proportion of the working age population
(those aged 15-64) increases, potentially providing a boost to
production and consumption, and in the third phase, the elderly
proportion increases due to lower fertility rates, decreasing
production and increasing consumptions on health care.
-The world is increasingly having more aged population now than
ever.
This is an opportunity to businesses in health care service provision,
restaurants, hotels, airlines, tour agencies, resorts, pharmaceutical
firms and so on.
 Cont’d.
Whereas, more young customers mean increased demand for
records, automobiles, cosmetics, clothes, jewelry, furniture,
coffee, beer and liquor, cigarettes, and so on.
*Regional shift in population:
Useful in passing strategic decisions as to where to locate new plants
and distribution centers.
*Life style changes
Individualism vs. Collectivism
Individualism in cultures implies loose ties; everyone is expected to
look after one’s self or immediate family but no one else.
Collectivism implies that people are integrated from birth into
strong, cohesive groups that protect them in exchange for
unquestioning loyalty.
individualistic cultures value personal time, freedom, challenge, and
such extrinsic motivators as material rewards at work. Their
societies and governments place individual social-economic
interests over the group, maintain strong rights to privacy,
nurture strong private opinions (expected from everyone),
restrain the power of the state in the economy,
 Cont’d.
emphasize the political power of voters, maintain strong freedom of
the press, and profess the ideologies of self-actualization, self-
realization, self-government, and freedom.
- Places emphasis on the informational aspect of communication.
At work, collectivist cultures value training, physical conditions,
skills, and the intrinsic rewards of mastery. Their societies and
governments place collective social-economic interests over the
individual, may invade private life and regulate opinions, favor
laws and rights for groups over individuals, dominate the
economy, control the press, and profess the ideologies of
harmony, consensus, and equality.
-Places emphasis on the relational aspect of communication
What business implications?.............
*Impacts of a two-working family.
*Birth rates and life expectancy
*Growth rate of population
The following factors are also included:
• What is the dominant religion?
• What are attitudes to foreign products and services?
 Cont’.d
• Does language impact upon the diffusion of products onto
markets?
• How much time do consumers have for leisure?
• What are the roles of men and women within society?
• How long are people living? Are the older generations wealthy?
• Do the population have a strong/weak opinion on green issues?
iv. Technological Environment
-It includes such factors as:
* Improvement in automation *Progresses in information and
communication technology
* access to technology instruments * Patent protections
*governmental and organizational spending on R&D, and so on.
-Technological advancements create demands for new products and
services. For e.g., the construction and housing industry is
increasing homeowners' sense of security by using more
technologically advanced building materials, and applying
sustainable design and integrated systems for users' particular
needs.
 Cont’d.
The ff. are some of the ways technological environment affects
businesses:
 Initiate organizational change
System changes
 Affect Business Processes
Webpage, e-mail, smart phones, videoconferencing, social media,
and so on.
 Provide competitive advantages
 Speed, accuracy, and efficiency
It can help streamline tasks through automation. This can help
reduce manual-labor hours, eliminate data redundancy, compile
data, streamline information and overall be cost effective because
it can simplify and speed up tasks.
For instance, with modern technology, departments can interact and
check the status of an order, a delivery or service order from any
given part of the value chain. No longer does information need to
be stored in separate databases and not updated in real time;
today everyone can have equal access to up to date information.
 Cont’d.
II] The Five Forces Model
- It is applicable to he task environment
- Refers to Michael Porter’s five forces of measuring analyzing an
industry.
Cont’d.
A. The threat of entrants
-is dependent on entry barriers.
- Barriers are obstructions making it difficult to enter industry.
- They arise from several sources:
 Economies of Scale: Economies of scale refer to the decline in
unit costs of a product or service (or an operation, or a function
that goes into producing a product or service). Economies of
scale act as barrier to entry by requiring the entrant to come on
large scale, risking strong reaction from existing competitors, or
alternatively to come in on a small scale accepting a cost
disadvantage.
If profitability requires economies of scale, then the threat will be
low.
 Capital Requirements: The capital costs of getting established in
an industry can be so large as to discourage all but the largest
companies.
 Access to Distribution Channels: A new entrant may have to
persuade the distribution channels to accept its product by
providing extra incentives which reduce profits.
CONT’D.
 Cost Advantages Independent of Scale: These advantages can
include access to the best and cheapest raw materials,
possession of patents and proprietary technological know-how,
the benefits of learning and experience curve effects, having
built and equipped plants years earlier at lower costs, favorable
locations, and lower borrowing costs.
 Expected Retaliation: Retaliation against a new entrant may take
the form of aggressive price-cutting, increased advertising, or a
variety of legal maneuvers.
 Switching costs. Switching costs refer to the one-time costs that
buyers of the industry's outputs incur if they switch from one
company's products to another's. To overcome the switching
cost barrier, new entrants may have to offer buyers a bigger
price cut or extra quality or service. All this can mean lower
profit margins for new entrants.
 Governmental and legal barriers. Government agencies can limit
or even bar entry by requiring licenses and permits. National
governments commonly use tariffs and trade restrictions
(antidumping rules, local content requirements, and quotas) to
raise entry barriers for foreign firms.
 Cont’d.
 Asset specificity
 Patents and proprietary knowledge, and so on.
B. The threat of segment rivalry
Rivalry refers to the degree to which firms respond to competitive
moves of the other firms in the industry.
Rivalry among existing firms may manifest itself in a number of
ways: price competition, new products, increased levels of
customer service, warranties and guarantees, advertising, better
networks of wholesale distributors, and so on.
The degree of rivalry in an industry is a function of a number of
interacting structural features:
 Rivalry tends to intensify as the number of competitors increases;
 as the firms become more equal in size and capability(balanced
competitors);
 Market rivalry is usually stronger when demand for the product
is growing slowly;
 Competition is more intense when rival firms are tempted to use
price cuts or other marketing tactics to boost unit volume;
Cont’.d
 Rivalry is stronger when the costs incurred by customers to
switch their purchases from one brand to another are low;
 Market rivalry tends to be more vigorous when it costs more to
get out of a business than to stay in and compete.( When there
are many exit barriers);
 When the market is undifferentiated, and so forth.
The following table illustrates assessment of industrial attractiveness
using entry and exit barriers.
Cont’d.
C. Threat of substitutes
A substitute product is a product from another industry that offers
similar benefits to the consumer as the product produced by the
firms within the industry.
The availability of close substitute products can make an industry more
competitive and decrease profit potential for the firms in the
industry.
On the other hand, the lack of close substitute products makes an
industry less competitive and increases profit potential for the firms
in the industry
Determining Factors
 If the consumer’s switching costs are low, meaning there is little if
anything stopping the consumer from purchasing the substitute
instead of the industry’s product, then the threat of substitute
products is high;
 If the substitute product is cheaper than the industry’s product –
thereby placing a ceiling on the price of the industry’s product –
then a threat of substitutes high risk is the case.
Cont’d.
 if the substitute product is of equal or superior quality compared to
the industry’s product, the threat of substitutes is high.
 if the functions, attributes, or performance of the substitute product
are equal or superior to the industry’s product, then he threat of
substitutes is high.
On the other hand, if the substitute is more expensive, of lower quality,
its functionality does not compare with the industry’s product, and
the consumer’s switching costs are high, then a low threat of
substitutes occurs. And of course, if there is no close substitute for
the industry’s product, then the threat of substitutes is low.
D) Bargaining power of buyers
Buyer power refers to the ability of customers of the industry to
influence the price and terms of purchase.
The buyers are powerful when:
 They buy in large volume.
 The buyer's purchases are a sizable percentage of the selling
industry's total sales.
Cont’d.
 The supplying industry is comprised of large numbers of relatively
small sellers.
 The item being purchased is sufficiently standardized among sellers
that not only can buyers find alternative sellers but also they can
switch suppliers at virtually zero cost.
 The buyers pose a threat of integrating backward to make the
industry's product.
 The products are unimportant to the quality of the customer's
product or service.
 It is economically feasible for buyers to follow the practice of
purchasing the input from several suppliers rather that one.
 Buyers switching costs are low
 If many substitute products are available on the market.
 If buyers are unionized
 If sellers are fragmented
 Buyers are well-educated regarding the product, and so forth.
E) Bargaining Power of Suppliers
Supplier power refers to the ability of providers of inputs to determine
the price and terms of supply
Cont’d.
Suppliers are more powerful, rendering the industry unattractive, if the
following apply:
† If there are few suppliers;
† When suppliers' products are differentiated to such an extent that it
is difficult or costly for buyers to switch from one suppliers to
another[ High switching cost];
† When the buying firms are not important customers of the suppliers
group or when if the buyer does not represent a large portion of the
supplier’s sales ;
† When the suppliers of an input do not have to compete with the
substitute inputs of suppliers in other industries[ Few substitute
input providers or suppliers];
† When the buying firms display no inclination toward backward
integration into the suppliers' business;
† When suppliers are unionized, such as OPEC;
† When there are many buyers;
† When buyers are fragmented, and so forth.
Cont’d.
Having observed the above aspects, it is wise to define your ‘Strategic
Group’.
Strategic Group: is a concept used in strategic management that groups
companies within an industry that have similar business models or
similar combinations of strategies.
Strategic Group Analysis (SGA) aims to identify organizations with
similar strategic characteristics, following similar strategies or
competing on similar bases.
Such groups can usually be identified using two or perhaps three sets of
characteristics as the bases of competition.
The group may be formed along the ff. dimensions.
Extent of product (or service) diversity, extent of geographic coverage,
number of market segments served, distribution channels used, extent
of branding, marketing effort, technology, product (or service)
quality, pricing policy etc.
INTERNAL ENVIRONMENT SCANNING [ ORGANIZATIONAL
ANALYSIS]
There are two commonly used techniques:
A] The Resource-based Approach B] The value-chain Analysis
.
Cont’d.
This approach is based on the definition of an organization as a
bundle of resources.
Resource: is a source or supply from which benefit is produced.
Typically resources are materials or other assets that are
transformed to produce benefit and in the process may be
consumed or made unavailable.
However, the resource-based approach includes capabilities and
competencies as well.
Resources, capabilities, and competencies should be evaluated with
respect to goals, strategy, and the vision statement of the
organization. Not every RC&C needs to be included in the
evaluation – only those that will eventually lead to a competitive
advantage.
For example, you have a top-notch janitorial staff, but unless you have
a cleaning service, it really does not help your competitive
position.
*Resources can be both tangible and intangible.
Tangible resources include: Physical resources, human resources,
financial resources.
 Cont’d.
Intangible resources include: Information, public image or reputation,
patent rights, copyrights, and so forth.
Intangible resources are classified into two: Legally protected and not
legally protected.
Legally protected intangible resources
Copyright: Copyright is a form of protection provided to the authors of
"original works of authorship" including literary, dramatic, musical,
artistic, and certain other intellectual works, both published and
unpublished.
A copyright protects a form of expression, but not the subject matter of
the work. For example, if someone wrote an article about a new car
on the market, the text would be copyrighted, preventing someone
else from using that particular material. A copyright does not prevent
others from writing their own original article about this new car,
however, or from using or making the car themselves.
Trademark: A trademark is a word, name, symbol or device which is
used in trade with goods to indicate the source of the goods and to
distinguish them from the goods of others. A service mark is the same
as a trademark except that it identifies and distinguishes the source of
a service rather than a product.
 Cont’d.
Trademark rights may be used to prevent others from using a
confusingly similar mark, but not to prevent others from making
the same goods or from selling the same goods or services under
a clearly different mark.
TM – Unregistered trademark. This is a mark used to promote or
brand products.
® - Registered Trademark
Patent: A patent is a right granted for any device, substance, method,
process which is new inventive and useful. Patents are legally
enforceable and gives the owner the exclusive right to
commercially exploit the invention for the life of the patent.
Registered Design: Registered Design refers to the configuration,
pattern, or ornamentation which when applied to a product gives
the product a unique appearance. You can register a design but it
must be new and distinctive.
Example: The Coca Cola bottle, even without any text or branding
was recently registered in Japan being the first of its kind.
 Cont’d.
*Capabilities
They are Integrated Resources / Skills in effectively coordinating and
managing resources for productive use.
– Normally Intangible (i.e. Customer Service Capability & R&D
Capability)
*Core competence
A competence that is central, not peripheral, to the company’s strategy,
competitiveness, and profitability.
*Distinctive Competence
These are Core Competencies that are superior of those of competitors.
What you do better then your competitors?
For a resource to be regarded distinctive competence, it has to pass the
VRIO framework test.
– Value: Does it provide customer value and competitive
advantage?
– Rareness: Do other competitor possess it?
– Imitability: Is it costly for other to imitate?
– Organization: Is the firm organized to exploit the
resource/capability?
 Cont’d.
The resource-based approach process to startegies.
1. Identify firms strengths and weakness by:
– Identify and classify resources
– Combine/Integrate resources into capabilities
2. Combine firm’s strengths into specific core competencies
3. Appraise profit potential of resources / capabilities
(Competencies) to sustain competitive
advantage[ Determine distinctive competencies]
4. Select strategy that best exploits your competencies
(Resources and Capabilities)
5. Identify resource gaps invest in weaknesses

B] The value-chain Analysis

It is based on the definition of an organization as an entity
performing on different activities to attain predefined objectives.
It’s an activity-based approach.
 Cont’d.

Value-chain: is a linked set of value-creating activities. For a

manufacturing firm, it begins with basic raw materials coming
from suppliers, moving on to a series of value-adding activities in
production and marketing a product or a service and ending with
distributors getting the final product into the hands of ultimate
customers.

The part of the chain that’s most important to the organization and
the point where its greatest expertise and capabilities lie is called
a company’s Center of Gravity.
 Cont’d.
SWOT Analysis
To carry out a SWOT Analysis, write down answers to the following
questions. Where appropriate, use similar questions:
Strengths:
• What advantages do you have?
• What do you do well?
• What relevant resources do you have access to?
• What do other people see as your strengths?

-May include highly skilled employees, cutting-edge technology, high

quality products, huge financial capacity, possession of invaluable
assets, location advantage, and so forth.

Weaknesses:
• What could you improve?
• What do you do badly?
• What should you avoid?
 Cont’d.
-may include conflicts between functional units, high production cost,
poor financial position, poor marketing research practice and so on.
Opportunities:
• Where are the good opportunities facing you?
• What are the interesting trends you are aware of?
Useful opportunities can come from such things as:
• Changes in technology and markets on both a broad and narrow scale
• Changes in government policy related to your field
• Changes in social patterns, population profiles, life style changes, etc.
-may also include population growth, decrease in the level and intensity
of competition, introduction of favorable legislation, decrease in raw
prices of resources, developments in the telecommunication and
information technology, developments in other infrastructures, and so
on.
Threats:
• What obstacles do you face?
• What is your competition doing?[ E.g., NPD efforts]
• Are the required specifications for your job, products or services
changing?
 Cont’d.
• Is changing technology threatening your position?
• Could any of your weaknesses seriously threaten your business?
Example:
A start-up small consultancy business might carry out the following
SWOT analysis:
Strengths:
• We are able to respond very quickly as we have no red tape, no need
for higher management approval, etc.
• We are able to give really good customer care, as the current small
amount of work means we have plenty of time to devote to
customers
• Our lead consultant has strong reputation within the market
• We can change direction quickly if we find that our marketing is not
working
• We have little overhead, so can offer good value to customers
Weaknesses:
 Cont’d.
• Our company has no market presence or reputation
• We have a small staff with a shallow skills base in many areas
• We are vulnerable to vital staff being sick, leaving, etc.
• Our cash flow will be unreliable in the early stages
Opportunities:
• Our business sector is expanding, with many future opportunities for
success
• Our local council wants to encourage local businesses with work
where possible
• Our competitors may be slow to adopt new technologies
Threats:
• Will developments in technology change this market beyond our
ability to adapt?
• A small change in focus of a large competitor might wipe out any
market position we achieve
The consultancy might therefore decide to specialize in rapid response,
good value services to local businesses. Marketing would be in
selected local publications, to get the greatest possible market
 Cont’d.
presence for a set advertising budget. The consultancy should keep
up-to-date with changes in technology where possible.
TOWS Analysis
The External Environment. Within the suggested framework, the
analysis starts with the external environment. Specifically, the
listing of external threats (T) may be of immediate importance to
the firm as some of these threats may seriously threaten the
operation of the firm. These threats should be listed in box 'T’.
Similarly, opportunities should be shown in box 'O'.
Threats and opportunities may be found in different areas, but it is
advisable to carefully look for the more common ones which
may be categorized as economic, social, political and
demographic factors, products and services, technology, markets
and, of course, competition. As mentioned above, the analysis of
these factors must not only pertain to the present but, even more
important, the future environment.
The Internal Environment. The firm's internal environment is
assessed for its strengths (S) and weaknesses (W), and then listed
in the respective spaces in Figure.
 CONT’D.
• Strengths and Opportunities (SO) – How can you use your
strengths to take advantage of these opportunities?
• Strengths and Threats (ST) – How can you take advantage of
your strengths to avoid real and potential threats?
• Weaknesses and Opportunities (WO) – How can you use your
opportunities to overcome the weaknesses you are experiencing?
• Weaknesses and Threats (WT) – How can you minimize your
weaknesses and avoid threats?
Cont’d.
 Cont’d.
Example for Whirlpool, the worlds top home appliance maker:
 Cont’d.
Forecasting
Forecasting is designed to help decision making and planning in the
present. Forecasts empower people because their use implies that
we can modify variables now to alter (or be prepared for) the
future.
The following are the most commonly used ones:
Genius forecasting - This method is based on a combination of
intuition, insight, and luck. Psychics and crystal ball readers are the
most extreme case of genius forecasting. Their forecasts are based
exclusively on intuition
Trend extrapolation - These methods examine trends and cycles in
historical data, and then use mathematical techniques to extrapolate
to the future. The assumption of all these techniques is that the
forces responsible for creating the past, will continue to operate in
the future. This is often a valid assumption when forecasting short
term horizons, but it falls short when creating medium and long
term forecasts. The further out we attempt to forecast, the less
certain we become of the forecast.
 Cont’d.
Consensus methods - Forecasting complex systems often involves
seeking expert opinions from more than one person. Each is an
expert in his own discipline, and it is through the synthesis of
these opinions that a final forecast is obtained.
One such method is known as the Delphi technique. This method
seeks to rectify the problems of face-to-face confrontation in the
group, so the responses and respondents remain anonymous.
Simulation Methods: Using indicators and relationships for
forecasting. Dependent and independent variables.
CHAPTER- 3 : STRATEGY FORMULATION

Corporate Strategy[Grand Strategy]

In this aspect of strategy, we are concerned with broad decisions about
the total organization's scope and direction.
Basically, we consider what changes should be made in our growth
objective and strategy for achieving it, the lines of business we are
in, and how these lines of business fit together.
Here the basic question facing top management is: ‘What particular
business or industries should we be operating?’
There are three components of corporate level strategy:
(a) Directional strategy (ranging from retrenchment through stability
to varying degrees of growth , and how do we accomplish this)
Cont’d.
(b) portfolio strategy (what should be our portfolio of lines of
business, which implicitly requires reconsidering how much
concentration or diversification we should have)
(c) parenting strategy (how we allocate resources and manage
capabilities and activities across the portfolio -- where do we put
special emphasis, and how much do we integrate our various lines
of business).
Directional strategies
As mentioned above, they take a form of growth strategies, stability
strategies, and retrenchment strategies.
I] Growth Strategies
Include:
a) Internal growth strategy[ Intensive growth strategy][ Organic
growth Strategy]
- taps into the existing product and/or market of the company.
- Should be applied by a company that has not fully exploited
existing in its products and/or markets.
 Cont’d.
- It is based on Igor Ansoff’s strategy matrix.

Market Penetration Strategy: it would mean that the firm aims to sell
more of its existing products in the markets that they are already in.
This would translate into allocating more resources and efforts to
build up sales and marketing activities to attain revenue growth.
[ Increasing rate of usage through aggressive marketing, increasing
rate of product obsolescence, attracting competitors’ customers,
attracting non-users etc.
Market Development Strategy: This happens when a firm decides to
sell its existing products into new geographical markets or new
market segments (another defined target market). For example, it
Cont’d.
could mean selling an existing computer model to a new market
overseas or alternatively, selling it to a new market segment (e.g.
second-hand market).
Product Development Strategy: This strategy on the other hand,
necessitates developing new products to be sold in existing
markets.
This can be seen as a quite common process because for a company
to sustain its presence and growth, it cannot rely on a single
product range.
For instance, in the retail industry of product consumables such as
shampoo, cosmetics and even apparels, companies are
competitively refreshing their product lines to keep in touch with
consumers as well as to keep up with certain trends, market
needs/tastes and etc.
b) Horizontal Integration Strategy
A strategy to increase your market share by taking over a similar
company.
- Involves acquiring other companies in the same line of business.
 Cont’d.
This is primarily to have increased market share through:
 Increased bargaining power
 Decreased average cost from economies of scale
 Increased revenue
c) Horizontal Related Diversification[Concentration Diversification]
- When a company expands into a related industry, one having synergy
with the company's existing lines of business, creating a situation in
which the existing and new lines of business share and gain special
advantages from commonalities such as technology, customers,
distribution, location, product or manufacturing similarities, and
government access.
- When a company acquires a business that is in an industry outside its
present scope but is related to the firms core competencies.
- Sharing of resource, capacity or activity is possible.
This offers an advantage of economies of scope because both firms
share purchasing, R&D, marketing or other functional activities.
This is often an appropriate corporate strategy when a company has a
strong competitive position and distinctive competencies, but its
existing industry is not very attractive.
Cont’d.
D) Unrelated Diversification[ Conglomerate Diversification]
-involves diversifying into a line of business unrelated to the current
ones. The reasons to consider this alternative are primarily seeking
more attractive opportunities for growth in which to invest
available funds, risk reduction, and/or preparing to exit an existing
line of business (for example, one in the decline stage of the
product life cycle).
- to become less dependent on the existing industry(s).
E) Vertical Integration Strategy
This type of strategy can be a good one if the company has a strong
competitive position in a growing, attractive industry.
A company can grow by taking over functions earlier in the value
chain that were previously provided by suppliers ("backward
integration").
This strategy can have advantages, e.g., in cost, stability and quality
of components, However, it also reduces flexibility, raises exit
barriers for the company to leave that industry, and prevents the
company from seeking the best and latest components from
suppliers competing for their business.
Cont’d.
A company also can grow by taking over functions forward in the
value chain previously provided by distributors ("forward
integration").
This strategy provides more control over such things as final
products/services and distribution, but may involve new critical
success factors that the parent company may not be able to master
and deliver.
*Outsourcing and various forms of strategic alliances may replace
vertical integration.
F) Merger
A merger refers to a combination of two or more companies, usually of
not greatly disparate size, into one company.
G) Strategic Alliance and Joint Venture
Both are partnership of two or more parties who contractually agree to
contribute to a specific task for specified time period.
Under JV two firms join and form a separate legal entity and operate
While Strategic Alliance involves mutual Coordination of strategic
planning and management in order to achieve long term objectives
of the organizations
Cont’d.
II] Stability Strategies
Maintaining the status quo.
Often, this may be used for a relatively short period, after which further
growth is planned.
Two alternatives are outlined below, in which the actual strategy actions
are similar, but differing primarily in the circumstances motivating
the choice of a stability strategy and in the intentions for future
strategic actions.
1. Pause and Then Proceed: This stability strategy alternative
(essentially a timeout) may be appropriate in either of two
situations:
(a) the need for an opportunity to rest, digest, and consolidate after
growth or some turbulent events - before continuing a growth
strategy, or
(b) an uncertain or hostile environment in which it is prudent to stay in a
"holding pattern" until there is change in or more clarity about the
future in the environment.
2. No Change: This alternative could be a cop-out, representing
indecision or timidity in making a choice for change.
 Cont’d.
Alternatively, it may be a comfortable, even long-term strategy in a
mature, rather stable environment, e.g., a small business in a
small town with few competitors.
III] Retrenchment Strategies
Used when the performance and prospects of a strategic business
unit is unacceptably low. It takes the following forms:
a) Turnaround Strategy: eliminating unprofitable outputs, pruning
assets, reducing the size of work force, cutting distribution costs,
and so on.
b) Divestment(Divestiture): Selling a business unit to another
company or to its managers or to its workers.
E.g. Management buyout, Employee Buyout etc.
c) Liquidation: When neither turnaround nor divestment seems
feasible, termination of business unit’s existence by sale of its
assets.
For the other two categories of corporate-level strategies, portfolio
planning tools such as the BCG analysis and The GE framework
can be used.
 Cont’d.
Portfolio and parenting strategies are appropriate to diversified
entities.
Portfolio represents a group of strategic business units.
A] The BCG Analysis[ The Growth-share Matrix]
The BCG matrix model is a portfolio planning model developed by
Bruce Henderson of the Boston Consulting Group in the early
1970's.
It’s based on – Market Growth rate[ %age increase in sales over the
last few years]
and - Relative market share = Business Market share/Industry
leader market
share
Cont’d.
 Cont’d.
Stars: are businesses in rapidly growing market + with high relative
market share
Hence the industry is attractive, luring outsiders into it. Increased
inflow of investors into the industry would put the existing high
market share at stake. Thus, the firm requires substantial
investment to maintain its dominant position.
‘Invest’ strategy is advisable.
Cash Cows: High market share + Low growth rate(maturing
business)
Low growth rate decreases entry of new competitors. Hence, the
business unit will likely be dominant in the market for times to
come.
The existing high market share is stable.
The appropriate strategy is the ‘Hold’ or ‘Maintain’ strategy.
High market share – Minimal reinvestment = High cash
Thus, this SBU is ‘milked’ for cash needed on the remaining other
SBUs.
Question Marks( Problem Children): High growth rate + low
market share.
Cont’d.
High growth rate supports the idea of staying in; whereas, low market
share urges the organization to leave.
Strategy: Build- to increase market share and move to stars
Harvest & Divest- take the most out of the business
and leave.
Dogs: Low growth rate + low market share[ In a saturate market or
mature market with low market share]
Strategy: Harvesting& Divesting
Harvesting: Through short-term cost cutting and
aggressive marketing maximize cash flow.
Divesting: leaving.
By and large, the goal of BCG Approach is to determine a portfolio
and parenting strategy.
B] The General Electric Planning Grid[ The McKinsey Matrix]
Introduced modifications to the BCG analysis in the following
respects:
Suggests considering broader aspects, namely Business strength and
Industry attractiveness.
 Cont’d.
It acknowledges the fact that there may be a medium state of being.
It suggests doing away with attaching such names as ‘dog’ ‘cow’,
‘star’ and ‘question mark’, as such names may have some
unintended negative connotations.
Business Strength: Market share, profit margin, customer and
market knowledge, technology, price competitiveness,
geographical advantage, and so forth.
Industry attractiveness: Market growth, market size, nature of
competition, seasonality of demand, economies of scale, and so
forth.
Cont’d.
Cont’d.
Cont’d .
Business Level Strategy[Competitive Strategy]
Strategies at this level take the form of generic strategies.
Generic strategies for Small Business Unit
*Niche[Focused] Low cost Strategy
-if low cost of product is maintained
-if the demand for the product is elastic
-if customers selected are highly price sensitive
*Niche[ Focused] Differentiation Strategy
- If the demand is inelastic
- If there is a segment of market with differentiated need
- If customers targeted are less price sensitive
*Niche[Focused] Low cost-Differentiation Strategy
Difficult to pursue.

Generic Strategies for large Business Units

Cont’d.
A] The low-cost leadership strategy
Companies that are successful in achieving Cost Leadership usually
have:
• High asset turnover: for example a restaurant that turns tables
around very quickly, or an airline that turns around flights very
fast. In manufacturing, it will involve production of high volumes
of output to secure economies of scale.
• Access to the capital needed to invest in technology that will
bring costs down.
• Very efficient logistics; bulk buying for discounts, working with
vendors to keep inventories low using methods such as Just-in-
Time purchasing and sometimes through backward integration.
• Achieved low direct and indirect operating costs. This may be
achieved by offering high volumes of standardized products and
limiting customization and personalization of service. Plus, low
wages, low rents, cost conscious culture.
few and standardized components
Key Criteria
Cont’d.
 Relatively standardized products
 Features acceptable to many customers
 Lowest competitive price
Requirements:
Constant effort to reduce costs through:
 Building efficient scale facilities
 Tight control of production costs and overhead
 Minimizing costs of sales, R&D and service
 State of the art manufacturing facilities
 Monitoring costs of activities provided by outsiders
 Simplification of processes
Effective Cost Leaders can remain profitable even when the
Five Forces appear unattractive.
How?.....
Major Risks of Cost Leadership Business Level Strategy
 Dramatic technological change could take away your cost
advantage
Cont’d.
 Competitors may learn how to imitate the strategy
 Focus on efficiency could cause Cost Leader to overlook changes
in customer preferences
B] Differentiation Strategy
Firms that succeed in a differentiation strategy have the following
internal strengths:
 Access to leading scientific research.
 Highly skilled and creative product development team.
 Strong sales team with the ability to successfully communicate
the perceived strengths of the product.
 Corporate reputation for quality and innovation.
And external opportunities:
 target customer segment is not price-sensitive,
 the market is competitive or saturated,
 customers have very specific needs which are possibly under-
served .
Cont’d.
Key Criteria:
 Value provided by unique features and value characteristics
 Command premium price
 High customer service
 Superior quality
 Prestige or exclusivity
 Rapid innovation
Requirements:
Constant effort to differentiate products through:
 Developing new systems and processes
 Shaping perceptions through advertising
 Quality focus
 Capability in R&D
 Maximize Human Resource contributions through low turnover
and high motivation
Effective Differentiators can remain profitable even when the
Five Forces appear unattractive. How?.....
Cont’d.
Major Risks of a Differentiation Business Level Strategy
 Customers may decide that the cost of “uniqueness” is too great.
 Competitors may learn how to imitate
 The means of uniqueness may no longer be valued by customers
C] Low cost-Differentiation Strategy
Is a relatively controversial and difficult strategy.
However, some firms pursued this strategy through the following:
1st. Differentiation Strategy
2nd. High market share
3rd. Economies of scale
4th. Low cost
D] Multiple Strategies
Entails using different strategies for different markets or products.
Differentiation for one segment and low cost for another.

Generic strategies are also dependent on the ‘Industry life cycle stages’
Cont’d.
Cont’d.
Introduction—Growth—Maturity—Decline stages
Functional level Strategies
These are derivative strategies. Derived from the business level
strategies.
-These are for the functional units in the company.
A] Purchasing and Materials Management
-Buying inputs with low cost---if the B-L-S is low-cost strategy
with best cost– if the B-L-S is low cost-differentiation
with high quality—if the B-L-S is differentiation
The same holds true form materials management strategies.
B] Production/Operation Management
In small business units—Low fixed and variable cost for low cost
strategy
- customized(Hand crafting process) for
differentiation startegy.
In large business units- economies of scale, capital-labor substitution,
experience curve effect for low cost strategy.
Cont’d.
c] Finance: Using source of financing with least credit cost for low
cost strategy.
D] R& D
- Emphasizing on research on reduction of cost, efficiency and so
forth for low cost strategy.
- Emphasizing on research on quality for differentiation.

In conclusion, organizations should select their strategies according

to the following criteria:
1. Suitability: It deals with the overall rationale of the strategy. The
key point to consider is whether the strategy would address the
key strategic issues underlined by the organization's strategic
position.
• Would it be suitable in terms of environment and capabilities?
• How likely is for the plan to accomplish the mission or task?
• How appropriate is the plan for accomplishing the given mission
or task?
 Cont’d.
2. Feasibility
Feasibility is concerned with whether the resources required to
implement the strategy are available, can be developed or obtained.
Resources include funding, people, time, and information. or cash
flow in the market.
Is it likely that the strategy can be accomplished with the resources
currently available and readily obtainable?
3. Acceptability
Acceptability is concerned with the expectations of the identified
stakeholders (mainly shareholders, employees and customers) with
the expected performance outcomes, which can be return, risk and
stakeholder reactions.
Acceptability determines whether a contemplated course of action is
worth the cost of manpower, materiel, and time involved; and is
consistent with legal constraints
• Return deals with the benefits expected by the stakeholders
(financial and non-financial). For example, shareholders would
expect the increase of their wealth, employees would expect
improvement in their careers and customers would expect better
value for money.
Cont’d.
• Risk deals with the probability and consequences of failure of a
strategy (financial and non-financial).
• Stakeholder reactions deals with anticipating the likely reaction
of stakeholders. Shareholders could oppose the issuing of new
shares, employees and unions could oppose outsourcing for fear
of losing their jobs, customers could have concerns over a merger
with regards to quality and support.
 Chapter-Four: Strategy Implementation and Control
Strategy Implementation: is a process by which strategies and policies
are put into action through the development of:
 Program - to achieve the strategy
 Budgets- financing
 Procedures- standard operating procedures detailing the steps of
various activities to be performed for carrying out programs.
Important Issues to be addressed:
Organizational Structure
Organizational structure refers to the way that an organization
arranges people and jobs so that its work can be performed and its
goals can be met
-A change in strategy---may bring about a change in organizational
structure
For example, Diversification strategy may call for changes in the
structure and HR requirements.
Questions of Centralization or Decentralization
Tall or flat organization
Stages/Levels of structural development
Cont’d.
1. Simple structure
- here, everybody does everything.
- Little formal structure thus the entrepreneur directly supervises
activities of every employee.
- Flexibility and dynamism.
2. Functional Structure
-the entrepreneur is replaced by a team of functional managers.
3. Divisional Structure
When, for example, an organization introduces a new product line.
4. SBU Structure
-Diversification
In addition, sometimes a new strategy may call for Reengineering
and Job design.
Reengineering: is a radical redesigning of business process to
achieve major gains in cost, service or time.
Job Design: to ensure efficiency.
Cont’d.
Includes, Job enlargement, job rotation and job enrichment.
Apart from the structure, staffing is another issue of concern.
Change in strategy ---change in human resource requirements.
For example, Horizontal Integration may initiate a management re-
arrangement. And sometimes some strategies may necesitate hiring
of new workforce, firing of inapproporiate ones, and /or training
existing employees.
-Reternchement, for instance, may cause firing or laying off certain
staffs.
Another issue of concern in the implementation of strategies is
organizational leadership.
Effective organizational leadership is indispensable for successful
strategy implementation and is characterized by:
☺ Determining strategic direction
☺ Exploiting and maintaining core competencies
☺ Developing human resource
☺ Sustaining effective organizational culture
Cont’d.
☺ Emphasizing ethical practices
☺ Establishing balanced organizational control, and so forth.

Evaluation and Control

-Comparing actual performance with desired results and providing
feedbacks for corrective actions.
1st. Determine what to measure
2nd.Establish standards
3rd. Measure actual performance
4th.Compare actual with standards
5th. Take corrective measures
If the causes of undesirable performance is from inappropriate
application of the process, then operational managers must know
about it so they can correct.
But if the cause is from the process itself, both operational managers
and top level management need to know and take corrective
actions.
Cont’d.
Measures of Corporate Performance
1. Return on Investment[ROI] = Net Income before taxes/Total
assets
2. Earning per share[EPS]= Net Income/Total # of stocks
3. Stakeholder Measures
-Customers ---Increase in sales(in volume and in birr), # of new
customers.
- Suppliers--- Cost of raw materials, delivery time
- Employees----Productivity, # of grievances
- Shareholders---increases in stock price
4. The Balanced Scorecard Approach
-Using Key performance measures.
It combines financial measures such as ROI with operational
measures such as customer satisfaction(or market share), internal
processes(unit cost and time), innovation and improvements.
It integrates operational measures with financial measures.
Cont’d.
Generally, organizational control should fit in to the following
guidelines:
a) Be focused only on critical success factors( Not too many
controls)
b) Be timely so that corrective actions can be taken before it is too
late.
Strategic Audit
-is to pinpoint serious problems facing an organization and to devise
solutions.
-it provides a mechanism for verifying if the strategies are still
relevant and for understanding changes that have gone beyond
previous expectations and consequently suggest strategic
modifications.
The Strategic Audit Process
1st. Evaluate current performance results.
2nd. Review corporate governance.
3rd. Scan and assess the external environment
 Cont’d.
4th. Scan and assess the internal environment
5th. Analyze strategic factors using SWOT
6th. Generalize and evaluate alternative strategic modifications
7th. Implement the modifications
8th. Evaluate and control.
Chapter 5: Strategy in the Global Environment
Going global with your products may set certain competitive
advantages at your disposal. The following are some of them:
Efficiency: --Through a possible economies of scale
--opportunities to exploit another country's resources
Strategic Advantage:--First mover advantage
Risk- Diversification of macroeconomic risks( for instance, business
life cycle risk)
-Diversification of operational risks( labor problems, natural
calamities)
Learning- opportunity to learn from other foreign companies about
strategies and techniques
Reputation- - May serve as a distinctive competence

While entering in to the global market, it is wise to consider:

*Cost * Customer *Competitors
*Government related issues
 Cont’d.
Strategies in the international market
1. Multi-domestic strategy
- Customized product
- Decentralized control
- When taste difference is significant
2. Global Strategy
- Standardized product
- Centralized control
- Taste difference is significant
Modes of Foreign Market Entry
• Exporting
• Licensing( including Franchising)
• Joint Venture
• Direct Investment---Acquisitions
--- Greenfield venture
Cont’d.
Exporting
- A traditional and commonly used method
- No investment is required in foreign country and the cost is
marketing expense
Requires coordination among different parties

Exporter ----Government in the exporting country---Government----

Transport providers---government in the importing country
- It is also essential to develop contractual relationship with firms the
host country to distribute and sell products.
Licensing - is the least costly and potentially the least risky
-allows a company in a target country to use the property of the licensor.
PROPERTY- Trademarks
-Patent and product
- Production techniques
 Cont’d.
- No need for investment
- But the licensor loses a potential return
Joint Venture( Strategic Alliance)
Objectives-- easy market entry
-- risk sharing
-- technology sharing
-- joint product develop
--conforming to government
-- access to distribution channels
-- political connection
A Foreign Partner Host Country partner
- New product and technology -knowledge of
competitive conditions
- legal and social norms
Foreign Direct Investment
- Direct ownership of facilities in the target country
- Requires high level of resources and commitment
- Greenfield venture - Acquisition
Thank you so much, and this is the end!!
Horizontal Integration:
Automobile company takeover of a sport utility vehicle
manufacturer.
A media company ownership of radio, television, newspaper,
books, and magazines.
Google’s takeover of You Tube.