Strategic Management Essentials with Mr. Mulusa Victor

Strategic Management

Summary of lecture



Introduction



Whose responsibility is it



Why it matters



Definitions



Business mission



Strategic Objectives



What is Strategy?



Formulating Strategy



Primary Determinants of Strategy

Introduction



Investors stake there money into a firm in order to earn

a return on their investments.



Returns are often measured in terms of accounting

figures 

i.e. return on assets, return on equity, or return

on sales.



In smaller, new venture firms, returns are sometimes

measured in terms of the 

amount and speed of

growth

.



Firms without a competitive advantage earn, at best,

average returns.

Whose responsibility is it?

And why it matters



The investors give the responsibility to the directors

and subsequently managers (CEO) of a firm to earn a

return on their investment.



Inability to earn at least average returns results first in

decline and, eventually, failure. 

Failure occurs

because investors withdraw their investments

from those firms earning less-than-average

returns.



Firms with a competitive advantage will aim to earn

Above – Average Returns.

What is strategic management?



Most firms use the strategic management process as the

foundation for the 

commitments, decisions

, and 

actions

they will take when pursuing Strategic Competitiveness and

Above-Average Returns.



Strategic competitiveness is achieved when a firm

successfully formulates and implements a value-

creating Strategy.



A Strategy is an integrated and coordinated set of commitments

and actions designed to gain a Competitive Advantage.



When choosing a strategy, firms make choices among

competing alternatives as the pathway for deciding how they

will pursue Strategic Competitiveness.



The chosen strategy indicates what the firm will do as well as

what the firm will not do.

STRATEGIC MANAGEMENT DEFINED



Strategic management 

is that set of managerial

decisions

 and 

actions

 that determines the 

long-

run performance of a corporation.



The study of strategic management, therefore,

emphasizes the 

monitoring

 and 

evaluating of

external opportunities and threats

 in light of

a corporation’s 

strengths

 and 

weaknesses.



Strategic management, as a field of study,

incorporates the integrative concerns of business

policy with a heavier environmental and strategic

emphasis.

STRATEGIC MANAGEMENT DEFINED

Cont’d



The term strategic management underlines the importance

of managers with regard to strategy to formulate them as

strategies do not happen just by themselves.



Strategy involves people especially managers who 

decide

and implement strategy.



Therefore, Strategic Management includes understanding

the 

Strategic

Position

of an organization, 

Strategic

Choices

for the future and managing 

Strategy in Action

.



Strategy is the 

direction 

and

scope

of an organization

over the 

long-term

, which 

achieves advantage 

in a

changing environment

 through its 

configuration of

resources 

and

 competences

 with the aim of fulfilling

stakeholder expectations

. 

(Scholes- Exploring Corporate

Strategy)

Strategic management process



The 

Strategic Management Process 

is the full set of

commitments, decisions, and actions required for a firm to

achieve strategic competitiveness and earn above-average

returns.



The firm’s first step in the process is to analyze its 

External

Environment

 and 

Internal Organization

to determine its

resources, capabilities, and core competencies - the sources of

its 

“strategic inputs.”



With this information, the firm develops its 

Vision

and 

Mission

and formulates one or more 

strategies.

Strategic

Management process

Inputs

Actions

Outcomes

Feedback

vision



A vision or strategic intent is 

the desired future state of the

organization

.



It is an aspiration around which a strategist, perhaps CEO,

might seek to focus the attention and energies of members of

the organization.



A vision is a picture of what 

the firm wants to be

and, in

broad terms, 

what it wants to ultimately achieve

.



A vision statement tends to be relatively short and concise,

making it easily remembered.



Examples of vision statements include the following:



To be the leading supplier of mining equipment in Zambia

.



To be a world class provider of tuition to under graduate and

post graduate students

.

Mission



A mission is a 

general expression of the overall purpose 

of the

organization, which is in line with the values and expectations of major

stake-holders.



It answers the challenging question: 

What Business Are We In?



A mission should establish a firm’s individuality and should be inspiring

and relevant to all stakeholders.



Together, 

vision and mission 

provide the foundation the firm needs to

choose and implement one or more strategies.



Even though the final responsibility for forming the firm’s mission rests

with the CEO, the CEO and other top-level managers tend to involve a

larger number of people in forming the mission.



Example of mission statement:



To provide cost effective mining solutions, products, and services that

exceed the expectations of our customers.

Strategy terms

The Benefits of Strategic

Management



Research has revealed that organizations that engage in strategic

management generally outperform those that do not.



A survey of nearly 50 corporations in a variety of countries and

industries found the 3 most highly rated benefits of strategic

management to be:

  

Clearer sense of strategic vision for the firm

    

Sharper focus on what is strategically important

    

Improved understanding of a rapidly changing

environment

Three questions which characterize

strategic management

To be effective, however, strategic management need not always be a

formal process. It can begin with three (3) basic questions:

1. 

Where is the organization now? 

(Not where do we hope it is!)

2. If no changes are made, 

where will the organization be 

in 1

year? 2 years? 5 years? 10 years? Are the answers acceptable?

3. If the answers are not acceptable, 

what specific actions should

management undertake?

What are the risks and benefits

involved?

MAJOR ELEMENTS OF

STRATEGIC MANAGEMENT

Strategic management includes the following elements:

   Environmental scanning (both external and internal)

   Strategy formulation (strategic or long-range planning)

   Strategy implementation

   Evaluation and control

ANALYZING A CASE STUDY



The purpose of the case study is to let the student apply the

concepts of strategic management to a real or hypothesized

situation facing a specific company.



To analyse a case study, therefore, you must examine closely

the issues with which the company is confronted.



Most often you will need to read the case several times –

once to grasp the overall picture of what is happening to the

company and then several times more to discover and grasp

the specific problems

.

Eight (8) steps in Conducting a

detailed case study analysis

1.

The history, development, and growth of the company over

time.

2.

The identification of the company’s internal strengths and

weaknesses.

3.

The nature of the external environment surrounding the

company.

4.

A SWOT analysis.

case study analysis  Cont’d

5.

The kind of corporate-level strategy pursued by

the company.

6. The nature of the company’s business-level

strategy.

7.

The company’s structure and control systems and

how they match its strategy.

8.

Recommendations.

ENVIRONMENTAL SCANNING



This is the monitoring, evaluating and disseminating of

information from the external and internal environments

to key people within the corporation.



Its purpose is to identify 

strategic factors 

– those

external and internal elements that will determine the

future of the corporation.



The simplest way to conduct environmental scanning is

through 

SWOT analysis

.



SWOT is an acronym used to describe those particular

S

trengths, 

W

eaknesses, 

O

pportunities and 

T

hreats that

are strategic factors for a specific company.

The external environment

This 

environment 

consists of variables (

O

pportunities and 

T

hreats) that

are outside the organization.

These variables form the 

context within which the organization

exists

.

The key environmental variables may be:

   

general forces 

and trends within the overall societal environment

(economic,  technological, political-legal, socio-cultural forces) or

   

specific factors 

that operate within an organization’s task environment

– often called its industry (shareholders, suppliers, employees/labour

unions, competitors, trade associations, communities, creditors, customers,

special interest groups, governments).

The internal environment



The 

internal environment 

of a corporation consists of

variables (

S

trengths and 

W

eaknesses) that are within the

organization itself and are usually within the short-run control

of top management.



These variables form the 

context in which work is done

.



They include the corporation’s structure, culture and

resources.



Key strengths form a set of core competencies that the

corporation can use to gain competitive advantage

.

STRATEGY FORMULATION



This is the development of long-range plans for the effective

management of environmental opportunities and threats, in

light of corporate strengths and weaknesses.



It includes defining the 

corporate mission, specifying

achievable objectives, developing strategies

, and

setting policy guidelines

Mission



An organization’s 

mission

is the 

purpose

or 

reason 

for the

organization’s existence.



It tells what the company is providing to society, either a service

or a product.



A well-conceived mission statement:

   defines the fundamental, unique purpose that sets a

company apart from other firms of its type and

   identifies the scope of the company’s operations in terms

of products and services offered and markets served.

Objectives



These are the end results of planned activity.



They state what is to be accomplished by when and should

be quantified if possible.



The achievement of corporate objectives should result in

the fulfilment of a corporation’s mission.



In effect, this is what society gives back to the corporation

when the corporation does a good job of fulfilling its

mission

.

Objectives Cont’d

Some of the areas in which a corporation might establish its

goals and objectives are:

   Profitability (e.g. net profits)

   Efficiency (e.g. low costs, etc.)

   Growth (e.g. increase in total assets, sales, etc.)

   Shareholder wealth (dividends plus stock price appreciation)

   Utilization of resources ( e.g. return on investment or equity)

   Reputation (being considered a “top” firm)

   Contributions to employees (employment security, wages, diversity)

   Contributions to society (taxes paid, participation in charities etc)

Strategies



A strategy of a corporation forms a comprehensive master

plan stating how the corporation will achieve its objectives

and fulfil its mission.



It maximizes competitive advantage and minimizes

competitive disadvantage.



The typical business firm usually considers 3 types of

strategy: 

Corporate, Business 

and

 Functional

.

1. Corporate Strategy



This describes a company’s 

overall direction 

in

terms of its general attitude toward growth and

the management of its various businesses and

product lines.



Corporate strategies typically fit within the 3 main

categories of 

stability, growth 

and

retrenchment

.

Corporate-Level Strategy.



Corporate-level strategy is senior management's

game plan for directing and running the

organization as a whole.



It cuts across all of an' organization's activities-its

different businesses, divisions, product lines, and

technologies.



The task of developing a corporate strategy has

three elements:

ELEMENT 1

: Managing The Scope &

  Mix of The Firm’s Activities



Developing plans for managing the scope and mix of the firms' various

activities in order to 

improve corporate performance.



Managing the business portfolio requires decisions' and actions

regarding when and how the enterprise should get into new businesses.



which existing businesses the company should get out of (and whether

it should do so quickly or gradually),



The portfolio management plan may, in addition, involve designating a

common strategic theme to be pursued by all of the company's lines of

business.

Providing for coordination among

different businesses in the portfolio.

Coordination of interrelated activities allows a

diversified firm to;



 enhance the competitive strength of its business

units and



 makes overall corporate strategy more than just a

collection of the action plans of independent

subunits.

Establishing Investment Priorities & Allocating Corporate

Resources Across The Company's Different SBUs

.



Decisions about how much of the corporate investment budget each

organizational unit will get and actions to control the 

pattern 

of

corporate resource allocation.



These decisions and actions serve to channel resources out of areas

where earnings potentials are lower into areas where they are higher.



The portfolio management actions of corporate officers in entering or

exiting certain markets.

2. Business Strategy



This usually occurs at the business unit or product level, and it

emphasizes improvement of the 

competitive position 

of a

corporation’s products or services in the specific industry or

market segment served by that business unit.



Business strategies may fit within the 2 overall categories of

competitive or cooperative strategies.



Competitive strategies include 

differentiation, cost

leadership 

and

 focus

.

3. Functional Strategy



This is the approach taken by a functional area to achieve corporate and

business unit objectives and strategies by 

maximizing resource

productivity

.



It is concerned with developing and nurturing a distinctive competence to

provide a company or business unit with a competitive advantage.



Examples of R&D functional strategies are

    Technological followership (imitate the products of other companies)

  and

    Technological leadership (pioneer an innovation).



Business firms use all 3 types of strategy simultaneously.

HIERARCHY OF STRATEGY



A hierarchy of strategy is the grouping of strategy types by level in the

organization.



This hierarchy of strategy is a nesting of one strategy within another so

that they complement and support one another.



Functional strategies support business strategies, which in turn, support

corporate strategy(ies).



Just as many firms often have no formally stated objectives, many firms

have unstated, incremental or intuitive strategies that have never been

articulated or analyzed.

Policies



These are broad guidelines for decision making that

links the formulation of strategy with its

implementation.



Companies use policies to make sure that employees

throughout the firm make decisions and take actions

that support the firm’s mission, objectives and

strategies

.



A  company may develop policies in areas like

Recruitment, disbursement of funds, a policy

on procurement of materials, a policies on

Health and safety, a policy on CSR etc.

INTERNAL ENVIRONMENT

ANALYSIS

Introduction



Strategic analysis of any  Business

enterprise involves two stages:

Internal 

and 

External

 analysis.



Internal analysis is the systematic

evaluation of the 

key internal features

of an organization.

Four broad areas need to be

considered for internal analysis



The organization’s 

resources, capabilities.



The way in which the organization 

configures

and

co-ordinates

 its key value-adding activities.



The 

structure

 of the organization and the

characteristics

 of its culture.



The 

performance 

of the organization as

measured by the strength of its products.

Resources



Resources are assets employed in the activities and processes

of the organization.



They can be

tangible

 or 

intangible

.



They can be obtained

externally

(organization-addressable)

or 

internally

 generated (organization-specific).



They can be 

specific

and 

non-specific

:



Specific resources

can only be used for highly 

specialized

purposes and are very important to the organization in 

adding value

to goods and services.



Assets that are 

less specific

are less important in adding value, but

are 

more flexible

.



Resources fall within several categories:



Human



Financial



Physical



Technological



Informational



A resource audit would include an evaluation of

resources in terms of 

availability, quantity

 and

quality, extent of employment, sources, control

systems 

and

 performance

.

General Competences/capabilities



They are assets like 

industry-specific

 skills, relationships

and organizational knowledge which are largely 

intangible

and 

invisible

 assets.



Competences and capabilities will often be 

internally

generated

, but may be obtained by 

collaboration

with

other organizations.



Certain competences are likely to be 

common

to

competing businesses

within a global industry or strategic

group.

Core Competences/Distinctive Capabilities



Core competences

or 

distinctive capabilities

are combinations of resources and capabilities

which are 

unique

 to a specific organization and

which are responsible for generating its

competitive advantage

.



Kay (1993) identified four 

potential sources

of

Core competences:



Reputation



Architecture

 (i.e., internal and external relationship)



Innovation



Strategic assets

Criteria to evaluate Core Competences



Complexity

:  How elaborate is the bundle of resources and

capabilities which comprise the core competence?



Identifiability

:  How difficult is it to identify?



Imitability

: How difficult is it to imitate?



Durability

:  How long does it to be replaced by an alternative

competence?



Superiority

: Is it clearly superior to the competences of other

organizations?



Adaptability

: How easily can the competence be leveraged or

adapted?



Customer orientation

:  How is the competence perceived by

customers and how far is it linked to their needs?

Core competence

Distinctive and superior

skills, technology

relationships,

knowledge and

reputation of the firm

Unique, and

difficult to copy

Resources:

human, financial,

physical,

technological,

legal, informational

Tangible and

visible assets

Capabilities:

Industry-specific

skills, relationships,

organizational

knowledge

Intangible

and invisible

assets

Perceived

customer

benefits/value

 added

+

=

Inputs to

the firm’s

processes

Integration of

resources into

value-adding

activities

Not all capabilities are core

competences – only those

that add greater value than

those of competitors

               Denotes feedback

               loop

               denotes core competence

               development

The relationships between resources, capabilities and core

competence

Global Value Chain Analysis



Competitive advantage depends on the ability of the

organization to organize its 

resources

and 

value-

adding activities

 in a way that is 

superior

 to its

competitors.



Value chain analysis is a technique developed by

Porter (1985) for understanding an organization’s

value-adding activities

and 

relationship

 between

them.

Value can be added in two ways

:



By producing products at a 

lower cost

than

competitors



By producing products of 

greater perceived value

than those of competitors.



Porter extended value chain analysis to the 

value

system

,

 analysis of the relationship between the

organization, its suppliers, distribution channels

and customers.

The Value Chain



The value chain is the 

chain of activities

which

results in the final value of a business’s products.



Value added, or margin is indicated by 

sales

revenue

 minus 

costs

.



Porter divided internal parts of organization into

primary

 and 

support

 activities



Primary activities

are those that 

directly

contribute to production of good or services

and organization’s provision to customer.



Support activities

are those that aid

primary activities, but do

not

themselves

add value.

Primary Activities

Support Activities

The Firm as a Value Chain



Certain activities or combinations of activities are likely to

relate closely to the organization’s core competences,

termed 

core activities

.  They

:



Add the greatest value.



Add more value than the same activities in competitors’

value chains.



Relate to and reinforce core competences.



Other value chain activities relate to capabilities, but do not

add greater value than competitors and therefore do not

relate to core competence.

     The Value System



The value chain of an individual organization provide

an 

incomplete

 picture of its ability to add value.



Many value-adding activities are shared between

organizations often in the form of a 

collaborative

network

.



As organizations identify and concentrate on their core

competences and core activities, they increasingly

outsource activities

to other business for whom such

activities are core.



The 

value system

is the chain of activities from supply

of resources through to final consumption of a product.



The total value system, in addition to the organization’s

own value chain, can consists of 

upstream

 linkages with

suppliers and 

downstream

 linkages with distributions

and customers.



The value system is a similar concept to that of the

supply chain

 and illustrates the interactions between an

organization, its suppliers, distribution channels and

customers.

The Value System

   The “Global” Value Chain



The 

configuration

of an organization’s activities relates

to where and in how many nations each activities in the

value chain is performed.



Co-ordination

 is concerned with the management of

dispersed international activities and the linkages

between them.



Managers must examine the current 

configuration of

value-adding activities

and the extent and 

methods

of co-ordination

as part of their strategic analysis,

which may determine possibilities for reconfiguration or

improving co-ordination.



A 

global business

has two broad choices of

1

. 

configuration

:



Concentration

 of the activity in a limited number of

locations to take advantage of benefits offered by those

locations.



Dispersion

 of the activity to a large number of locations.



Change

 in the 

business environment

(e.g.,

technological change) may well lead to changes over

time in the configuration that gives greatest

competitive advantage.

2. CO-ORDINATION

:



Co-ordination is essentially about overseeing the complexity of

the organization’s configuration such that all value-adding

parts of the business act 

in concert

with each other to

facilitate an effective overall synergy.



Those business that overcome the potential difficulties of co-

ordination are those that sustain the greatest competitive

advantage.



Analysis of 

configuration

 and methods of 

co-ordination

assists in the process of understanding current competences

and identifying the potential for strengthening and adding to

them.

Managing the value system

THE

COMPETITIVE

ENVIRONMENT



Introduction

Competition is yet another factor in a company’s environment

that can present an opportunity or a threat to a firm.

Competition is an opportunity when a company has a

competitive advantage over its rivals.

A company is said to have a competitive edge over its rivals

when its profitability is greater than the average profitability

of all companies in its industry.

Competition is a threat to a firm when its rivals have the

ability to erode a firm’s profitability base.

      Competitive Advantage

Competitive advantage leads to superior profitability.

Profitability in turn depends on three factors:



The value customers place on a product or service.



The price that a company charges for its product,

and



The costs of creating the product.

Competitive Environment Cont’d



Competition is viewed in the narrower sense as the

existence of economic rivalry among firms.



Michael Porter identified five forces that constitute

competitive forces to the extent that they can

potentially or actually reduce a company’s

profitability.



These have become to be known as Porter’s Five

Competitive Forces.

Porter’s Competitive Model

Porter’s Competitive Model

Industry

Rivalry

Bargaining

Power

of  Buyers

Bargaining

 Power

 of Suppliers

Substitute

Products

 and Services

Potential

New Entrants

Figure 3-1

Source: Michael E. Porter

“Forces Governing Competition in Industry

Harvard Business Review, 

Mar.-Apr. 1979

1. The Threat of New Entrants



The threat of new entrants refers to the risk of

entry posed by companies that are not currently in

the industry but have the capability to enter the

industry if they should choose to do so.



Potential entrants to an industry pose a threat by

seeking to gain market share, or by bringing into

the industry better valued or lower priced

products.



 This has the effect of shifting customers and

profitability away from firms in the industry to the

new comer.

Possible Barriers to Entry

Some of these barriers include:



Economies of scale: 

They refer to unit costs of a firm falling as

volume increases.



The capital requirements of entry

: These refer to investment

needed to set up the requisite plants, machinery or distribution

outlets.



Access to distribution channels: 

This refers to the ease or

difficulty of establishing customer contacts, either directly or through

intermediaries.



 Expected retaliation from existing firms 

through e.g. price cuts



Government policy

: Policies enacted by govt that may inhibit entry

into the industry e.g. licensing requirements, work permits etc.

2. The Bargaining Power of

Suppliers



Suppliers refer to providers of inputs to an industry. Inputs include raw

materials, components, services or labour.



Suppliers may become powerful under the following circumstances:

1.

When the product is unique and switching costs to the buyer are high.

2.

When profitability of suppliers is not significantly affected by the purchases

of buyers in the industry e.g. the buyers are not important customers to

the supplier.

3.

When buyers are likely to incur significant switching costs because they

depend on the supplier’s product.

4.

When suppliers can threaten to enter the buyers’ industry and use their

inputs to produce products that would compete with products of their

buyers.

5.

When buyers cannot threaten to enter their supplier’s industry and make

their own inputs.

6.

When the supplier’s customers are highly fragmented

3. Bargaining Power of Buyers



Buyers consist of consumers, users or distributors of a

product.



Bargaining power of buyers refers to the ability of buyers to

bargain down prices or to raise the costs of suppliers by

demanding better quality and service.



This has the effect of squeezing the profits of the supplier.



The power of buyers manifests itself when:



The buyers are few, concentrated and buy in large

volumes.



The products bought are standard or undifferentiated.



The industry’s product is unimportant to the quality of

the buyer’s products or services

4. The Threat of Substitutes

Substitutes are products of different industries or businesses

that can potentially satisfy similar customer needs.

Product substitution can take the following forms:



Product-for-product substitution

 e.g. postal service,

fax and email,



Substitution of a need by a new product 

e.g. maize

meal, cassava, rice and potatoes.



Doing without 

as might be the case with drinking,

smoking or dieting.

5. Industry Rivalry



Rivalry among existing firms in the same industry

refers to the competitive struggle for market share

through



  price competition



  after sales service



  product design



  product differentiation, innovation



  advertising and sales promotion

Strategic Implications of

Competition

In coping with competition, a firm must search out a

market position and a competitive approach that will:



Insulate it as much as possible from forces of

competition;



Influence the industry’s competition rules in its

favour; and



Give it a strong position from which to “play the

game” of competition.

Alternative Strategic Responses

1. Strategic Cost Analysis

An assessment of the relative cost position of

a firm.

It involves showing the make-up of costs all

the way from purchase of raw materials to the

end product paid for by the customer (activity

cost analysis).

Strategic Cost Analysis

2. 

Competitor Analysis

This involves

a careful assessment of a company’s

relative competitive standing and an understanding

of the firm’s relative strengths and weaknesses in

say, the following areas:



product design – convenience, comfort



product innovation



pricing strategies



distribution network



advertising/sales promotion



customer service

Objective of the Competitor Analysis



The objective of this analysis is to explore ways in which the

firm might retain or improve its standing on the competitive

ladder. The rungs on the ladder can be broadly categorized by

:



Dominant leader

-who usually has the largest

market share and is therefore the acknowledged

leader in innovation and sales.



One of the industry’s top leaders

-this is

characterized by a few firms dominating the

industry.



Middle-of-the-pack-

 this category comprises a

large group of firms who are basically followers.



Firms on the fringe

-these are firms whose

individual market share is small and insignificant.

  3. 

Product differentiation

This involves creating a difference from rivals and the

difference being valued by customers. The difference

could be in:



Procurement of materials; for instance, firms place a

value on whether or not an input is original or from

a secondary source.



Production process and product design.



Marketing process, e.g. product branding, product

appearance and packaging.



Improved quality.

Perceived Value

Perceived value will entail any of the following:



Greater convenience and ease in use of product



More economy



The design and availability of extras to meet occasional

needs, e.g. packaging for picnics and outdoor recreation



Non-economic wants



status



prestige



image



comfort

Pitfalls of differentiation

Pitfalls (caveats) of differentiation include the following:



Buyers must quickly see the intended value implicit in

the difference.



The danger of competitors copying new

features/innovation, including pricing.



The risk of over-differentiation, that is, the resultant

quality being needlessly superfluous or the investment

being too high for the perceived value.

4. 

Market Focus

This entails concentrating on catering to a narrower and

limited segment (or niche) of the market rather than going

after the whole market with a “something-for-everyone”

approach.

Segmentation of the market may be based on:



Demographic/socioeconomic characteristics (age, gender,

education etc.)



Purchase (Size, application i.e. industrial, consumer,

government etc.)



Geographic (territories, cities, regions etc.)

Risks of using a focus

approach



Buyers may shift their  preferences away from the

focuser’s special product attributes.



The possibility that broad-range competitors will

find effective ways of serving the narrow target

markets.



The risk that competitors will find smaller

segments within the target segment and thus

“outfocus” the focuser. This often happens in the

electronics industry.

THE COMPANY AND ITS

EXTERNAL ENVIRONMENT

The Nature of the Company’s Environment

The major purpose of an environmental analysis is to

identify opportunities and threats which obtain in the

environment

.

Whatever factors or events exist in the environment

are regarded as external influences on the firm.

Globalization

A market typically evolves from submarket within a

national market, to a national market, to a regional

market, to a continental market and to a global

market, viz.

Globalization Cont’d



The concept of globalization lies in looking at the

whole world (globe) as constituting a firm’s sphere

of operations rather than any part of it. The key

influences toward globalisation include:



Convergence of needs and preferences across

nations

. The functional utility of most goods tend to be

universal. Such goods and services include:

Electric/electronic gadgets, e.g.

Globalization Cont’d

It is generally accepted that the most obvious and

direct route to growth is to operate beyond one’s

immediate border. Among the many reasons why

firms seek external growth are:



To find a new market for a product in the maturity

or decline stage.



To spread the risk of operating in one country.



To seek tax relief abroad.

Strategic Impact Of

Globalization

The strategic impact of globalization is two-fold;



One is that it creates opportunities of doing

business in new markets.



Secondly, in as much as opportunities for new

markets overseas are created through

economic liberalization, national economies

also become exposed to foreign competition

by way of imports and entry of foreign

investment.

PEST ANALYSIS (EXTERNAL AUDIT)



Technological developments are not only the fastest unfolding but the

most far-reaching in extending or contracting opportunity for an

established company.  They include:



the discoveries of science



the impact of related product development, and



the progress of automation



We see a continually accelerating rate of change with new

developments piling up before the implications of yesterday’s changes

can be assimilated.



Besides, science gives the impetus to change not only in technology

but also in all other aspects of business activity.

The Technological Environment

Cont’d

Areas where we have noticed emerging technological advancements

include;



   New Processes

New ways of doing things are constantly emerging i.e. satellite

broadcasting involves consumers purchasing satellite dishes; EFTPOS-

Electronic Funds Transfer at The Point of sale- has been developed for

retailers.



   New Materials

New materials have become available; optic fibres and carbon fibres are

examples. The laser compact disc (CD) has replaced vinyl records.



  The Internet

There are a lot of E-Commerce activities like, selling online, Online

Banking and using the internet to research and gather information, are a

normal part of life in the developed world. The internet is more widely

available through mobile telephones and wireless networks

The Political Environment



Politics is a dominant and pervasive feature of our lives:



The most powerful and influential office in a nation, that of a Head of

State, is controlled/occupied by a politician



Politicians control the most important organs of governance, namely,

the 

legislature

, the 

executive

 and the 

judiciary



Politicians

usually have some influence on institutions and organs

that affect every day lives, such as, educational, health, religion or

even recreational activities.



Major national and international events are initiated, presided over or

controlled by politicians, such as



a nation’s stability



national disasters



war/peace



sports events



major contracts: airports, roads, telecommunications,

bridges, infrastructure of towns, cities, buildings

The Political Environment Cont’d

The political environment can be influenced by three factors;

Ideology, the Law and Ethics

The Governments Ideology towards Business Activity



  Governments may have an ideology of participating in the

business environment through participation by establishing state

owned enterprises.



 The other way is through playing a role as regulator of sensitive

sectors of the economy.



  Government ideology is also manifested through the economic

systems that the government of the day may adopt i.e. command

economy, free-market economy and mixed economy.

THE ECONOMIC ENVIRONMENT

The following are some the economic factors of direct influence on business;



   Income Levels

Income levels have a strong bearing, for the amount of disposable income

individuals receive determines the amount of goods and services that

consumers get.

A better description of a country’s wealth can be found in its “per capita”

income, which is the total national income divided by its population.



   Inflation

Inflation erodes the purchasing power of money and causes other problems

for organizations in areas such as pricing and the accurate estimation of

demand. Governments all over the world try to reduce inflation rates in order

to stabilize the economy and make easier for international trade to take

place.

The rate of inflation is often an indicator of how stable the economy of a

country is.



   Distribution of Income

The way income is distributed is important to most organizations and this is

reflected in the segmentation (dividing the market into specific groups of

consumers) as part of the marketing strategy.

THE SOCIAL ENVIRONMENT

The social environment can be divided into two categories;

demographic and behavioural.



Demographic aspects 

include; population size ( which

determines the size of the market), Age distribution(which

affects changing tastes and needs and therefore marketing

activities need to adapt overtime.



Behavioural aspects 

include; cultural values, people

grow up in societies which shape their beliefs i.e. alcohol is

forbidden in most Moslem countries, which may consequently

affect the marketing of alcoholic beverages.

Aesthetic Values: 

What one society rates as attractive,

another may find unattractive or distasteful. This applies

particularly to colour, design, styling and fashion.