STRATEGIC MANAGEMENT

Definition:

1. Scholes (2000) defines strategic management as a process of

understanding the strategic position of an organization, strategic
choices for the future, and turning strategy into action.

2. Strategic Management is the process of manipulating strategic

decisions through the stages of strategy analysis, choice and
implementation.

3. Pearce and Robinson (2003), define strategic management as a

set of decisions and actions that results in the formulation and
implementation of plans designed to achieve a company’s
objectives.

The word strategy traces its origin to the Greek word “strategea”
meaning the art and science of becoming a general. A strategy is
hence a tactic that looks at the entire business organisation and
matches its resource capabilities with the existing business
environment to achieve the expectation of the stakeholders.

A strategy is defined by Etzel et al (2007) as a braod plan of action by

which an organization intends to reach a particular goal.

Henry Mintzberg viewed strategy as a plan, ploy, pattern, a position

and a perspective. As a plan strategy specifies consciously defined
course of action of a business. As a ploy, strategy is seen as a
maneuver intended to outwit a competitor. As a pattern strategy is
seen as a means of locating a business in its environment. As a
perspective, strategy consists of a position and an ingrained way of
perceiving the world.

Strategic plans are designed and developed by top management in

consultation with the board of directors and middle management. They
typically cover a longer period of time horizon often extending from 3-
5 years or more. Comprehensive statement of strategic plans in an
organization often includes the mission and goals because they form
the basis of strategic action steps.

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A business strategy is a broad road map showing where the
organization is where the organization is where it intends to go and
how it intends to get there.

Business Strategy is an answer to the great Question asked by St

Peter’s when he visited Rome, and asked “Quo Vadis?” in Italics
meaning;
i) Where are we?
ii) Where do we want to go?
iii) How do we get there?
Characteristics of a Strategic Decision

Strategic decisions are decisions that cover the total scope of a

business in terms of direction, policy and operations in the long term.
The characteristics usually associated with the words strategy and
strategic decisions include:

(i) Strategic decisions are concerned with the long term direction
of the organization.

(ii) Decisions about how to gain advantage for the organization

over competition. Strategic decisions are conceived therefore as
the search for effective positioning relative to others so as to
achieve advantage.
(iii) Strategic decisions are likely to be concerned with the
scope of organizations activities i.e. the primary reason for the
existence of the organization.

(iv) Strategy matches the resources and activities of a firm to

the environment. This is also known as the search for a strategic
fit. Strategic fit refers to the development of strategy by
identifying opportunities in the business environment and
adapting resources and competence so as to take advantage of
these opportunities.

(v) Strategy can be seen as building on or stretching an

organization’s resources and competence to create opportunities
or to capitalize on them. Strategic Stretch is the leverage of the
resources and competence of an organization to provide
competitive advantage and yield new opportunities.

(vi) Strategic changes require substantive resource changes

for an organization. For instance a decision to open a foreign

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subsidiary may require a substantial human and non human
resource input.

(vii) Strategic decisions are likely to affect operational

decisions. A strategic change involves high degree of
organizational changes that may require a change in production
methods, adoption of new technology, a change in the human
resource policy, a change in the marketing approaches among
others.

(viii) The strategy of an organization is affected not only by the

environment but also by the values and expectations of
stakeholders who have power in and around the organization.

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Consequences of Strategic Decisions

(i) Strategic decisions are complex in nature. This is especially

so for an organization with a wider geographical coverage such
as multinational companies with a wide range of products and
services.

(ii) Strategic decisions are made in situations of uncertainty.

They may involve taking decisions about the future, which
managers might not be very sure of.

(iii) Strategic decisions may demand for an integrated

approach to managing the organization. It may call for break of
functional and operational boundaries to resolve a strategic
problem.

(iv) Requires effective management of relationships and

networks outside the organization for example suppliers,
distributors and customers.

(v) Strategic decisions often require significant change in

organizations that may constrain its resources heritage and
require cultural change. Cultural issues are heightened following
mergers as two different cultures are brought closer together.

Comprehensive definition of Strategy

Strategy is the direction and scope of an organization over the long

term, which achieves the advantages for the organization through its
configuration of resources within a changing environment and to fulfill
stakeholders’ expectations.

The differences between strategic decision and operational decision:

Strategic Operational
decisions/management decisions/management
1. Long term in nature 1. Short term in nature
2. Addresses total business 2. Specific to operational
activities
3. Non-routine 3. Routines
4. Significant change 4. Small scale change
5. Environment and 5. Resource driven
expectation driven
6. Complex, ambiguous and 6. Simple accurate and
uncertain predictable.

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Levels of Strategy

Strategies exist at different levels in an organization. There are three

basic levels:
1. Corporate level strategy
2. Business level strategy
3. Functional level strategy
Corporate Level Strategy

- Corporate level strategy is concerned with the overall

purpose and scope of an organization and how value will be
added to the different parts (business units) of the organization.
- Strategy at this level is executed by the CEO, the Board
and other senior staff.
- At this level, strategy defines the organizational
missions and goals.
- Corporate strategy allocates resources to each business
unit and further defines the organization structure.
- This level of strategy concerns itself with appreciating
how it can add value to the separate business units of the
company.
- Corporate level strategy also aims at meeting
expectations of owners or shareholders and stock market.

Business or Competition Level

A business can be defined as an operating unit or planning focus to sell

a distinct set of products or services to identifiable group of customers
in competition with a well defined set of competitors.

Business unit strategy is a set of well coordinated action programmes

aimed at securing a long term sustainable competitive advantage in
particular markets.

A Strategic Business Unit (SBU) is part of an organization for which

there is distinct external market for goods or for services that is
different from another SBU. Rothschild (1980) considers the following
criteria essential for an organizational component to be classified as an
SBU:

i) An SBU must serve an external rather than internal market

ii) It should have a clear set of external competitors
iii) It should have control over its destiny i.e. must be able to
decide what products to offer.
iv) Its performance must be measurable in terms of profits
and losses i.e. it must be a true profit-centre.

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At this level, management concerns itself with how to gain advantage
over competitors, what new opportunities can be created in the market
and the extent to which these meet customer needs in such a way as
to achieve the objectives of the organization.

Competitive level strategy lays emphasis on the SBU and the head of
the SBU is largely involved in its formulation and execution.

For a business organization, an SBU is often defined in terms of

different organizational structures (departments) who target different
markets e.g retail department, wholesale department, export
department, institutions department etc.

Generally the business level strategy translates corporate definitions

into individual businesses.

Strategic questions at the business level

1. What product or service do we offer based on competition?

2. How should we finance proposed SBU?
3. How do we modernize our plant and processes?
4. Should we be technology leaders?
5. Should we re-invest profit or share out to shareholders?

NB: These are called business strategies. An SBU is therefore a unit of

an organization for strategy making purposes.

Operational or Functional Level

Operational strategies are concerned with how the component parts of

the organization deliver effectively the corporate and business level
strategies in terms of resources, processes and people.

They specify how functional activities at the shop floor contribute to

the business and corporate strategies.

For example the financial function provides information above some of

funds to strategy formulation and evaluation

The Importance of Strategic Management of Business

Enterprises

(i) Provide analysis of entire scope of a business

(ii) Makes a business look ahead to increase chances of survival

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(iii) Involvement of employees in strategy formulation
enhances performance
(iv) Provides better utilization of scarce resources
(v) Long term span can facilitate development of new complex
creations
(vi) Strategic control facilitate measurement of targets
(vii) Reduces resistance to change

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 THE STRATEGIC MANAGEMENT PROCESS
The process of strategic management highly varies from one company
to another. Smaller companies have a narrow process while bigger
companies like General Electric, Procter & Gamble have a more
detailed process.

(Refer to Model in Page 12: Strategic Management by Pearce and

Robertson, 2003)

Company Mission
and
Social Responsibility

External Environment Internal Analysis

• Remote 1) Strategic capability analysis
2) SWOT Analysis
• Operating 3) The Value Chain Analysis
• Industry 4) Stakeholders Analysis
5) Corporate Social Responsibility
6) Business Portfolio Analysis

Strategic Analysis and Choice

Long term objectives Generic and Grand Strategies

Short term objectives Functional Tactics Policies and

Empower Action

Restructuring, reengineering, and refocusing the organization

Strategic control and continuous improvement

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Components of Strategic Management Model

The strategic management processes calls for a proper understanding

of the following elements within an organization:
1. The company mission – is a unique purpose that sets the
company apart from other companies of its type and identifies
the scope of its operation.
2. Internal analysis – Is the processes of evaluating a company’s
quality and quantity of financial, human and physical resources.
3. External analysis – Consist of all the conditions that affect a
company’s strategic options and define its competitive situation.
Involves industry analysis and operating environmental analysis.
4. Strategic Analysis and Choice – is the simultaneous assessment
of a company’s external environment and the company
capabilities. The assessment is meant to provide the company
with the ability of making the correct choice in terms of long
term objectives, generic and grand strategies that optimally
positions a firm in its external environment to achieve outs
mission.
5. Long-term objectives - Are the results that a company seeks to
attain in the future e.g. profitability, return on investment,
competitive position, technological leadership employee
development and productivity.
6. Generic and Grand Strategies – the three fundamental generic
strategies include; Low cost leadership, Differentiation and Focus
Strategies.
7. Action Plans and Short term objectives – Action plans translates
generic and grand strategies into “action”. They specify what
should be done, by who , using what and by what time.
8. Functional Tactics – Managers in each functional area develop
functional tactics that delineate the functional activities
undertaken in their part of the business. Functional tactics are
detailed statements of the means that will be used to achieve a
short-term objective and establish a competitive advantage.
9. Policies that Empower Action - Policies are broad precedent
setting decisions that guide managers in repetitive decision
making. Policies improve managerial decision making
effectiveness by standardizing routine decisions and empowering
a manager’s subordinates in implementing strategy.

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10. Restructuring, Reengineering and Refocusing the organization –
These are terms that reflect the critical stage in strategy
implementation where managers attempt to recast their
organization.
11. Strategic Control and Continuous Improvement - Strategic
control is concerned with tracking changes as it is being
implemented, detecting problems and making necessary
adjustments. Continues improvement provides a way for
managers to react promptly to rapid developments in areas that
affect business success.

CLASSIFICATION OF STRATEGY ANAYLSIS PROCESS

(a) Traditional Process

1. Corporate definition via mission
2. Assessment of business environment
3. Formulation of policy and philosophy
4. Determination of broad objectives
5. Implementation of strategy
6. Controlling and evaluating strategy.

(b) Modern Strategic Management Process

1. Strategy analysis
2. Strategy choice
3. Strategy implementation

STRATEGY ANALYSIS (STRATEGIC POSITION)

Strategy analysis refers to the review of the external and internal

business environment and resources to assess the key influences to
the present and future position of the organization with reference to
choice of corporate strategy. It entails:

(a) The Environment – The organization exists in the context of

complex commercial, political, economic, social, technological,
environmental and legal world. Many of these forces give rise to
opportunities and others exert threats on the organization. The
questions arising in relation to future strategy include: what
changes are going on in the environment? And how will they
affect the organization and its activities?

(b) Strategic capabilities – The strategic capabilities of the

organization are best measured by considering its strengths and
weakness. A resource like the particular location of an

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 organization could provide it with a competitive advantage.
However the core competences of organization that provides real
advantage are often enshrined in their technical know how and
skills e.g Coca-Cola, Microsoft, Steers and others. The questions
that arise include: what are the resources and competences of
the organization and can these provide advantages or yield new
opportunities?

(c) The stakeholders’ expectations – What do managers,

employees and shareholders or owners of the organization aspire
to and how does this affect the future development of the
organization.

(d) The organizational culture – an understanding of the

general assumptions that are acceptable to people in an
organisation.

Summary of the process of strategy analysis

(a) Define corporate mission, goals, and expectations.

(b) Analyse the organization’s external operating environment.
(c) Assess the internal resources, strengths and weaknesses along
the value chain.

STRATEGIC CHOICE

Strategic choice process is defined as the generation of strategic

options resulting from strategy analysis and selecting suitable options
that fit in the general definitions of the business.

It therefore involves an understanding of the underlying bases for

future strategy at both the corporate and business unit levels and the
options for developing strategy in terms of both the directions and
methods of development.

Strategic choice process involves the following:

(a) At corporate strategy level – Concerned with the

scope of an organizations strategies, the relationship between
the separate parts of the business and how the corporate center
adds value to these various parts e.g the corporate center could
add value by looking for synergies between the different SBU, by
channeling financial resources appropriately.

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 (b) Business level – At this level the organization
must chose and identify the bases of competitive advantage
arising from a proper understanding of the market, customers
and core competencies of the organization.

(c) Method of strategy development – The methods

of strategy development that can be used by an organization
may include:

i) Choosing the generic strategy to use i.e. cost leadership,

differentiation or Focus strategies
ii) Establishing the strategic direction i.e. no change,
internal growth strategies (product development, market
development, market penetration and product innovation) or
external growth strategies (like strategic alliances, mergers,
takeovers, name franchising etc.)
iii) Internationalization – Selling beyond the national
boundaries (exporting, licensing, franchising, joint ventures)

The choice of a strategic method largely depends on its:

(i) Suitability –Will the strategy get us where we want to go?
(ii) Feasibility – Do we have the resources to undertake the strategy?
(iii) Acceptability to stakeholders - Is the strategy acceptable to all
parties?

STRATEGY IMPLEMENTATION PROCESS

Strategy implementation is concerned with ensuring that strategies are

working in practice. A good strategy is one that is workable. How this
occurs is typically thought of in terms of:

a) Organisation structure - Structuring an organization to support

successful performance. This involves departmentalization,
designing organization processes well, defining the boundaries and
encouraging a mutual work relationship.

b) Leadership – Choice of an organizational leader and leadership

styles

c) Change management - Strategy involves change. A strategy can

be successfully implemented if resistance to change well managed

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d) Organization culture – refers to employee’s presumptions which
are assumed to be correct i.e. the way things are done around here.

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 THE STRATEGIC POSITION ANALYSIS
Strategic position analysis calls for an understanding of the following:

1. Mission and Vision

2. Positioning Statements
3. Goals of the organisation
4. Environment of a business
i) Internal Analysis
ii) External Analysis
5. Strategic resource capability

1. ORGANISATIONAL MISSION

A mission is defined as the long term vision that defines the broadest,
most general objectives, all inclusive purpose and goals that an
organization would like to pursue.

A mission statement is a message designed to be inclusive of the

expectations of all stakeholders for the company’s’ performance over
the long run.

A mission differentiates one company from others in terms of product

and service ideas, employee relations, market focus, and technology.
When put in writing it is then referred to as a mission statement.

Questions answered by a mission statement

1. Raison d’etre: Reason to be – for what purpose do we

exist?
2. What is unique and distinctive about the organization?
3. What is likely to be different in 3 – 5 years?
4. Who are the principal customers?
5. What is the a principal product or service now and in the
future?
6. Economic concern to company and community.
7. Basic beliefs, values, aspirations and philosophy.

Objectives of a Mission Statement

1. Establish boundaries for objectives and strategy

formulation.
2. Establish standard for performance along multiple
dimensions.
3. Suggest standard for individual ethical behaviour.

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4. To build standards for the distribution of resources.
5. To provide a unique insight into the organizations values
and future directions to external parties.

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Components of a Good Mission Statement

A good statement must encompass:

1. Basic Product or service
2. Primary Market areas
3. Customers
4. Principal Technology
5. Concern for survival, growth and profitability
6. Philosophy
7. Self concepts on strengths and competitive advantages
8. Public image
9. Employee concerns

Example of Mission Statement of Audio Animation, Inc.

We will develop solution-oriented digital signal processing technologies

for the benefit of our customers, and deliver the finest products and
services to our industries. We will build a profitable company known
for its integrity, based on the goals of long-term growth and
profitability for the benefit of our customers, stockholders, employees
and community. We will create a positive environment for our
employees, and an opportunity to share in the prosperity of the
company.

Example of Mission Statement of National Bank of Kenya

To consistently and continuously provide excellent financial solutions,

meet the changing need of our customers, be responsible corporate
citizens, provide growing opportunities to our employees and maximize
shareholders value.

Example of Mission Statement of Safari Park Hotel & Casino

To exceed the expectations of our guests, inspire and reward our

associates and provide superior financial results to those who assign us
with managing their assets.

Example of Mission Statement National Cereals and Produce

Board (NCPB)

To cost and effectively maximize the use of our resources in order to

achieve the highest level of commercial performance for the benefit of
our customers, employees and stakeholders, by providing high quality
products and services at competitive prices in a socially responsible
manner.

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Example of Mission Statement JKUAT

To produce leaders in training, research and innovation in the field of

Agriculture, engineering, health, sciences, other applied sciences,
technology and entrepreneurship development, to suit the needs of a
dynamic world.
Example of Mission Statement KCA University

To offer market driven academic, professional and capacity building

programmes at various levels in various disciplines through quality
integrated teaching, research and extension services, so that our
graduates can confidently and professionally serve the local, regional
and global community.

Example of Mission Statement of Strathmore University

To provide all round quality education in an atmosphere of freedom
and responsibility; excellence in teaching, research and scholarship;
ethical and social development; and service to Society

VISION STATEMENT

A vision is a strategic intent. Whereas the mission statement expresses

an answer to the question “What business are we in?” a company
vision statement is developed to express the aspiration of the
executive leadership.

A vision statement expresses the firms’ strategic intent that focuses

the energies and resources of a company in achieving a desired future.

Example of Vision Statement of National Cereals and Produce

Board (NCPB)

We aim to be the leader in procurement, management and marketing

of grains and related enterprises.

Example of Vision Statement of JKUAT

To be a world class institution of excellence for development.

Example of Vision Statement of Microsoft

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A Computer on every desk and in every home, running on Microsoft
software.

Example of Vision KCA University

To be a World Class Business University of Choice

Example of Vision Strathmore University

To become a leading out-come driven entrepreneurial university in the

region by translating our excellence into a major contribution to
culture, economic well-being, and quality of life
2. POSITIONING STATEMENT

Company positioning means the way the company is defined by

consumers on important attributes i.e. the place the company occupies
in the mind of the consumers relative to competitors. Most companies
use a slogan to express their positioning statement as follows:

(a) Safaricom: The better option

(b)Nakumatt: You need it we’ve got it
(c) Blue Shield: Your Shield, Your Assurance
(d)NCPB: Leaders In Grain Marketing and Management
(e) Nation newspaper: The Truth
(f) National Bank: The Bank where you Belong…
(g)Mash : We lead the leaders
(h)Kenya Airways: The pride of Africa
(i) Bank of Baroda: State of the art straight from the heart.
(j) KCA University: Advancing Knowledge Driving Change

3. ORGANISATION GOALS

There are several benefits of having goals in an organization including

the following:

(i) Defines expectations

(ii) Facilitate the controlling function
(iii) Increases performance and motivation amongst
employees.

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There are three levels of goals in an organization i.e. strategic goals,
tactical goals, and operational goals.

Strategic goals are formulated by senior members of the board, CEO

or chairman. They express the expectation of the shareholders and
other stakeholders in financial terms or otherwise.

Tactical goals are targets or future end results usually set by the
middle management for specific strategic business units (SBU). Hence
the alternative name business units strategies.

Operations goals are targets often implemented by lower

management. It addresses specific measurable outcomes.
Characteristic of Effective Goals

Effective goals must be SMART

(1)Specific
(2)Measurable
(3)Attainable
(4)Relevant
(5)Time limited

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STRATEGIC MANAGEMENT
ASSIGNMENT I

a) Identify an organization of your choice.

Undertake a brief strategic position analysis of the organisation

guided by the following headings:

1. Mission Statement [3MKS]

2. Vision Statement [2MKS]
3. Positioning Statements [2MKS]
4. Goals of the organization [4MKS]
[10 MKS]

b) Critique the current status quo of the mission, vision, mantra,

and goals or core values
[10 MKS]
c) Suggest improved version of the of the firms strategic position
[10
MKS]

REQUIREMENTS
• To be done in Groups of Five
• Typed using Times New Roman font 12
• Cover page
• One report written and Submitted Two weeks from Today

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 THE BUSINESS ENVIRONMENTAL ANALYSIS

An organization is surrounded by forces emanating from within or

outside the business. These forces are largely referred to as the
business environment. The business environment is divided into two;
The Internal environment Analysis and The External environment
Analysis

THE EXTERNAL ENVIRONMENT ANALYSIS

The external environmental forces refer to a host of forces outside the

organization that have the potential to significantly influence the likely
success of product or services. The factors which constitute the
external environment can be divided into:

1. Factors in the remote environment

2. Factors in the industry environment
3. Factors in the operating environment

Remote Environment
• Political
• Economic
• Social
• Technological
• Legal
• Environmental

Industry Environment
• Threats of entry
• The supplier power
• Buyer power
• Substitute products
• Rivalry (jockeying for positions)

Operating Environment

• Competitors
• Creditors
• Customers
• Labor
• Suppliers
THE FIRM

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 I FACTORS IN THE REMOTE ENVIRONMENT

The remote environment comprises factors that originate beyond and

usually irrespective of any single firms operating situation i.e. they are
factors outside the control of the business.

The PESTLE framework is often used to analyze the remote

environment of an organisation. PESTEL framework categorizes
environmental influences into six main types: political, economic,
social, technological, environmental and legal.

P - Political
E - Economic
S - Social
T - Technology
E - Environmetal
L - Legal

Political influence
Composed of the legislature, the judiciary and the executive and poses
the following implications:

• Government stability
• Taxation policy
• Foreign trade regulation
• The company law
• The labour law

Economic influences
Forces emanating from the economic performance in a country which
include:

• Business cycles
• GNP trends
• Interest rates
• Money supply
• Inflation
• Employment level
• General fiscal and monetary policies
• General infrastructure
• Per capita income
• Disposable income

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• Terms of trade
• Foreign exchange rates

Social cultural influences

• Population demographics
• Income distribution
• Spending pattern
• Social values and religion
• Attitude to work and leisure
• Educational and skill levels
• Consumerism

Technological influences

• New discoveries/development
• Speed of technology adoption
• Developments in information technology
• Rates of obsolescence.

Legal influences

• Employment law
• Health and safety
• Product safety
• Monopolies legislation

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II THE COMPETITIVE ENVIRONMENT (INDUSTRY ANALYSIS)

It is important that a business organization defines clearly its industry,

which is an OUTPUT concept and its markets, which is a DEMAND
concept. An industry is a group of firms producing the same principal
product. A market is a group of customers with similar interest and
whose expectation the organization can satisfy profitably.

It is imperative that a business organization identifies its competitors

within the competitive environment. It is within this context that
analysis of competitor becomes a phenomenon of great importance.

MICHAEL PORTER AND THE COMPETITIVE FORCES MODEL

The competitive forces model was developed by Michael Porter of

Harvard University in 1980.

He argues that the intensity of competition in an industry is neither a

matter of coincidence or bad luck, but rather the way the industry is
structured.

He therefore identifies FIVE forces that he says influence the nature of

competition in an industry. These include:
(1)Threats of entry
(2)The supplier power
(3)Buyer power
(4)Substitute products
(5) Rivalry (Jockeying for Position)

Potential
entrants

Threat of entrants

Suppliers COMPETITIVE RIVALRY Buyers

Threat of substitutes

Substitutes

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 The five forces framework
1. The Threat of Entry

New entrants to an industry bring new capacity, a desire to gain

market share and position and very often new approaches to
serving customers needs.

The threat of entry depends on the extent to which there are

barriers to entry. Barriers to entry are factors that need to be
overcome by new entrants if they are to compete successfully.
The typical barriers are:

(i) Economies of scale – Firms already enjoying

economies of scale may make it difficult for new firms to
penetrate the market e.g Coca-Cola.

(ii) The capital requirements of entry – The capital cost

of entry will vary according to technology and scale.
Technology driven industries e.g mobile phone service
provision, often require high capital base.

(iii) Access to distribution channels – Established

companies normally finance distribution outlets making it
difficult for new companies to distribute their products e.g
EABL.

(iv) Experience – Early entrants into the market gain

experience sooner than others. This gives them an
advantage in terms of cost, customers and suppliers.

(v) Expected retaliation – If an organization considering

entering a market believes that the retaliation of an
existing firm will be so great as to prevent entry, or would
be too costly, this becomes a barrier e.g EABL Vs Castle
Larger.

(vi) Legislation or government action – Legal restraints

on competition vary from patent protection to regulation of
markets e.g pharmaceuticals and sugar industry in Kenya.

(vii) Differentiation – This means the provision of a

product or service regarded by the user as unique from
and of higher perceived value than the competition. The
lower the degree of differentiation the higher the barrier to
market entry.

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2. The Threat of Substitutes

The availability of substitute products places limits on the market

prices market leaders can charge in an industry. This implies
substitution reduces demand for a particular class of products as
customers switch to the alternatives especially when they
perceive the substitute to be higher value or benefit.
Substitution may take the following forms:

(i) Product for product substitution – Technological

advancement may render a product superfluous (obsolete)
e.g. e-mail substitution for postal service.
(ii) Indirect substitution – Occurs when a need is
substituted for by a new product e.g. instead of hiring
home guards, install surveillance camera, use a fax
machine instead of a telephone etc.
(iii) Direct substitution – Occurs when one product is
substituted for by another product that serves the same
purpose e.g tea substituting coffee, a Dell computer is
substituted by a compact computer.
(iv) Generic substitution – occurs where products or
services compete for the disposable income e.g your
income being hotly pursued by an electronic seller and a
furniture dealer.

Key questions

• Does the substitute pose the threat of obsolescence of the

company’s products?
• Can buyers switch to substitutes easily in terms of cost?
• How can you reduce risk of substitutes?

3. Buyer Power

The ultimate aim of industrial customers is to pay the lowest

possible price for products or services that it uses as inputs.
Buyer power is likely to be high when some of the following
conditions prevail:

(i) There is a concentration of buyers and purchase in

volumes e.g. wholesalers or distributors.
(ii) The supplying industry comprises a large number of small
operators.
(iii) There are alternative sources of supply perhaps because
the product required is undifferentiated between suppliers.
(iv) The cost of switching a supplier is low or involves little risk.

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 (v) There is a threat of backward integration by the buyers
e.g. by acquiring a supplier.

4. Supplier Power

Supplier power is likely to be high when:

(i) There is a concentration of suppliers rather than a

fragmented source of supply e.g a group of banks in one
street, or industries producing similar products
concentrated in industrial area.
(ii) The switching cost from one supplier to another is high.
Common with chemical products suppliers.
(iii) The brand of the supplier is powerful – for example a
retailer in Kenya might not be able to do without Coca-
Cola, blue band etc.
(iv) There is the possibility of the supplier integrating forwards
if it does not obtain a good price and hence the profit
margin it seeks.
(v) The supplier’s customers are highly fragmented.
(vi) Many manufacturers faced with competitive demands for
lower prices and hence the need to reduce costs forcing
the number of suppliers to reduce.

5. Competitive Rivalry (Jockeying for Position)

Competitive rivals are organizations with similar products and

services aimed at the same customer group.

Jockeying for positions is a phrase which Porter uses to describe

the tactical moves employed by firms to seek an advantage over
their competitors.

Rivalry is greatest in highly competitive markets where:

(a) Entry is likely
(b) There are threats of substitute products
(c) Buyer or supplier power exist.

Michael Porter outlines the interacting structural factors which

makes rivalry more intense to include:

i) The extent to which competitors are in balance. Where

competitors are of roughly equal size, there is the danger of

27
 intense competition as each attempts to gain dominance over
another e.g Stanchart Bank and Barclays in Kenya.
ii) High fixed cost resulting in price wars. High capital intensity
may result to price wars and very low margin operations as
capacity fill becomes a prerogative e.g Celtel and Safaricom.
iii) Differentiation – Similarity in product or service makes rivalry
more intense e.g Kimbo, Kasuku, Fry Mate etc.
iv) High exit barriers to an industry – Exit barriers might be high
where the companies have to incur high investment in non-
transferable fixed assets or high redundancy costs, where
they have an emotional attachment (pride), high legal or
financial costs.
v) Acquisition of weaker companies by large ones hence
introducing more funds for competition.

Critical questions arising from the 5 forces framework

1. What are the key forces at work in the competitive environment?

2. What are the underlying forces in the macro-environment that
are driving the competitive forces?
III THE IMMEDIATE ENVIRONMENTAL INFLUENCES

The operating environment is also called the task environment and

comprises of factors in the competitive situation that affect a firms
success in acquiring needed resources or profitably marketing its
goods and services. Amongst the most important of these factors are:
1. Firms competitive position
2. Customers Profile
3. Reputation amongst suppliers and creditors
4. Ability to attract capable employees
5. Shareholders

1. Firms Competitive Position

An understanding of a firm’s competitive position improves a firm’s

chance of designing strategies that optimize its environmental
opportunities.

Development of a competitor profiles enables a firm to more

accurately forecast both its short and long term growth and
profitability.

28
Firms consider the following factors when evaluating their competitive
position:

(a) Market share (h)R & D advantages

(b)Breadth of product line
(c) Effectiveness of
distribution
(d)Price competitiveness
(e) Advertising and promotion
effectiveness
(f) Financial position
(g)Raw material cost
(i) Relative product quality
(j) Customer Profile
(k) Patents and Copyrights
(l) Union relations
(m) Technological
position
(n) Community relations
(o) Caliber of Personnel

Once these factors have been identified, an appropriate criterion is

used to select the most critical of the factors for the success of the
organization. These factors are rated in a given scale e.g. 1-5

Then the competitor being evaluated is rated on the same criteria and
using the same rating scale. The outcome of this procedure is used to
used to evaluate the firms competitive position.

2. Customers Profile
Developing a profile of a firm’s present and prospective customers
improves the managers the ability of its manager to plan strategic
operations, to anticipates changes in the size of markets and to
reallocate resources so as to support forecast shifts in demand
patterns. The main strategies used in segmenting consumer markets
are;
a. Geographic
b. Demographic
c. Behavioral
d. Economic factors

3. Suppliers

The firm ought to cultivate a close working relation with its suppliers
because the firm might heavily depend on suppliers for financial
support, services, materials and equipment.

29
To gain a competitive position, the firm should address the following
questions:

a. Are the supplier’s prices competitive?

b. Do the suppliers offer attractive quantity discount?
c. Are the suppliers’ reputable and service competitive?

4. Human Resources: Nature of the Labor Market

A firm’s ability to attract and retain capable employees is essential to

its success. A firm’s access to needed personnel is affected primarily
by three factors:

a. Firms reputations as an employer

b. Local employment rates
c. Availability of people with needed skills

5. Shareholders

Shareholders are people who hold a stake in the business by virtue of

having contributed capital to the business by buying its shares.

Shareholders are interested in profitability of the organization. They

earn dividends if the business is profitable and earn nothing if it makes
losses.

30
ENVIRONMENTAL UNCERTAINTY

Because strategic management deals with a wide variety of

environmental issues, there is a great likelihood of decisional
uncertainty. Environmental uncertainty is classified using three
variables:

1. Simple or complex
2. Stable or unstable
3. Dynamic

Simple Environment
a) A business environment that is relatively straight forward to
understand and is not undergoing significant change.
b) Example: raw material supplies and mass manufacturing
companies.

Dynamic Environment
Is one characterized by a high degree of uncertainty thus encouraging
active sensing of environmental changes?
Example: Technology driven organizations like Microsoft, internet
service providers etc.

Complex Environment
a) If an organization faces complex environment where it finds itself
in a situation difficult to comprehend. An environment that is
both highly uncertain and dynamic.
b) Common amongst firms in the electronic industry. A
multinational company faced with diversity can equally find itself
in a complex environment.

Stable Environment
The business environment is stable where there is little change
emanating from environmental forces. The degree of uncertainty is
low and it is easy to comprehend the environmental charges.

Other Dimensions of Evaluating Certainty

1. Stable and Certain

2. Stable and Uncertain
3. Unstable but Certain
4. Unstable but Uncertain etc.

31
 INTERNAL ANALYSIS

Internal analysis enables a firm understands its ability to function

successfully in its business environment will revolve around an
understanding of the following factors:

A. Strategic capability analysis

B. SWOT Analysis
C. The Value Chain Analysis
D. Stakeholders Analysis
E. Corporate Social Responsibility
F. Business Portfolio Analysis

A. STRATEGIC CAPABILITY ANALYSIS

Successful strategies heavily depend on the organizations strategic

capability to perform at the level that is required for success i.e. ability
of the organizational strategies to fit the environment in which the
organization operates in.

Strategic capability analysis will include the following:

1. Product features
2. Critical success factors
3. Strategic importance of resources
4. Competence and core competences
5. Robustness

1. PRODUCT FEATURES

The success of an organization is related to how well it is able to

provide product features that are valued at a given price.

If organizations are to be profitable, they must be capable of operating

effectively. Where effectiveness means the ability to meet customer
requirements on product features at a given cost.

Effectiveness can be achieved by managers who undertake the

following:

32
 i) They must know the product features most valued by
customers (threshold product features) in the advance.
ii) They must undertake the drivers of uniqueness and how they
can create and sustain this uniqueness.
iii) They must be capable of evaluating customer’s willingness to
pay for the added uniqueness.
iv) They must communicate the product features properly to
create a positive perception among buyers.
v) The added unique product features must provide more value
in the new market than already existing market offer from
competitors.

2. CRITICAL SUCCESS FACTORS (CSFs)

CSFs are those product features that are particularly valued

by a group of customers and therefore where the organization
must excel to outperform competition.

Customers are likely to value certain features above others

and this may vary from one segment to another as follows:-

Some customers may particularly be interested in price,

others in reliability, others on delivery time, others on
convenience of shopping for the product etc.

For example supermarkets are in bitter rivalry with small

shops in retailing. Supermarkets provide one stop shopping
services and lower prices through their resources (store
location, product range) and competence (knowledge of
merchandising, securing low supply cost, and computerized
logistic systems). This gives supermarkets competitive
advantage particularly with customers who want one stop
shopping experience.

The major critical success factors sought by customers

include; brand reputation, excellence of service, delivery,
product range and innovation.

3. THE STRATEGIC IMPORTANCE OF RESOURCES

Resources are what the organization needs to successfully

implement strategic decisions of an organization and create
competence.

33
 An organization’s resources include those that are owned by the
organization and those that are leased or accessed occasionally
to support strategies.

Typically resources can be grouped as:

(a) Physical resources – machines, buildings and production

capacity.
(b)Human resources – include knowledge, skills of people
and adaptability of human resource.
(c) Financial resources – include capital, cash, debtors and
creditors (shareholders, bankers etc)
(d)Intellectual property – knowledge captured in patents,
brands, business systems and customer databases.

Every business organization needs a set of threshold resources

to exist in a given business e.g. physical resources.

Organizations also need unique resources. Unique resources are

those that give a competitive advantage to an organization over
its competitors and which competitors find difficult to imitate.

4. COMPETENCE AND CORE COMPETENCE

Competences are activities that give an organization an

advantage over its competitors.

Core competence gives an organization the ability to create or

meet the critical success factors of particular customer groups
better than other providers in ways that are difficult to imitate.

In order to achieve this advantage, core competence must fulfill

the following characteristics:

i) The core competence must relate to an activity or process in

the product or service feature which adds value in the
customers’ eyes.
ii) It must lead to a level of performance that is slightly better
than that of competitors. (A position which can be tested
through benchmarking).
iii) The core competence must help in building a profitable value
chain relationship.

6. ROBUSTNESS

34
A further consideration about core competence is the extent to
which they are robust i.e. difficulty for competitors to imitate.

The four main sources of robustness include:

i) Rarity – The resource or competence is rare.

ii) Complexity – The competence is concerned with managing
complex activities or process hence difficult to imitate.
iii) Causal ambiguity – competitors are not sure which resources
or competences have underpinned the success of their better
performing rivals.
iv) Culture – The competence might be embedded in the
organizational culture resulting in causal ambiguity.

35
 B. SWOT ANALYSIS

SWOT is an acronym which stands for strengths, weaknesses,

opportunities and threats.

A SWOT analysis summarizes the key issues from the business

environment and the strategic capability of an organization that are
most likely to impact on strategy development.

The aim of SWOT analysis is to identify the extent to which the current
strengths and weaknesses are relevant to and capable of dealing with
changes taking place in the micro business environment.

It can also be used to exploit further the unique resources or core

competences of the organization and further reveal possible threats
emanating from macro environmental dynamism.

(a) Strength

Something a company is good at doing or characteristics that give it

enhanced competitiveness these may include:

i) Physical assets
ii) Original intellectual property rights
iii) High level of mechanization
iv) High employee loyalty
v) Healthy cash flow
vi) Clear mission and objectives
vii) Highly developed information and control system

A company is poised to succeed if it has a good complement of

strengths (resources)

(b) Weakness

Shortcomings in an organization that decelerates it from accomplishing

its objectives.

Something a company lacks or does poorly or a condition that puts it at

a disadvantage.

Companies resource strengths represents competitive assets, its

resource weakness represents competitive liabilities.

36
(c) Opportunity

These are external environmental phenomena that enable a company

to excel or exceed achievement of objectives.

Opportunities are sources of growth, profitability, competitive

advantage etc, and may include;

i) Exit from the industry by a major competitor

ii) Loyal Customers
iii) Loyal and fair suppliers
iv) Good government support of business community
v) Good relation with trade union movement
vi) Relocation to a better location
vii) Existence of a skilled labour force
viii) Technological innovation etc.

(d) Threat

Is that which inhibits a company’s ability to achieve its objective. It

may result in any of the following:

i) It may erode competitive advantage

ii) It may weaken a company market standing.
iii) It may inhibit growth and reduce profitability.
NB:

Strengths and weaknesses are internal to a company while

opportunities and threats are external.

37
 C. THE VALUE CHAIN ANALYSIS

The value chain describes the activities within and around an

organization which together creates a product or service.

The primary analytical tool of strategic tool of strategic cost analysis is

a value chain that identifies the separate activities, functions, and
business processes that are performed in designing and producing a
product or service.

The diagram below summarizes the value chain.

Value Chain Analysis According to Porter (1985)

Secondary Firm infrastructure

activities Human Resource Management
Technology development
Procurement

In bound
logistics Operations Outbound Marketing Service
logistics and sales

Primary activities

Representative Value Chain Thompson and Strickland (2001)

Primary Purchases
Activities Supplies & Distribution &
Sales and Profit
Inbound Outbound
And Costs Operations Marketing Services Margin
Logistics Logistics

Support Product R&D Technology and Systems Development

Activities
And Costs Human Resource Management

General Administration

38
According to Michael Porter the value chain is divided into two broad
activities i.e primary activities and secondary activities.

Primary activities are those directly concerned with the creation and
delivery of product or service. They are grouped into five as follows:

i) Inbound logistics – Are the activities concerned with receiving,

storing and distributing the inputs to the operation
department. They include material handling, stock control,
transport, etc.
ii) Operations – Transforms the various inputs into the final
product or service. They include machinery, packaging,
assembly, testing, etc.
iii) Outbound logistics – Collect, store and distribute the final
product to customers. For tangible products these would be
warehousing, materials handling, transport etc. In case of
services they may be concerned with arranging to bring
customers to the service if it is in a fixed position e.g sports
events, church service, etc.
iv) Marketing and sales – Provide the means whereby
consumers/users are made aware of the product or service
and are able to purchase it. It includes advertising, sales
promotions, personal selling, etc.
v) Service – Includes all activities will enhance or maintain the
value of a product or service, such as installations, repairs,
training and spares.

Each of the groups of primary activities above is linked to support

activities. Support activities help to improve the effectiveness or
efficiency of primary activities. They may be divided into four areas:

i) Procurement – Refers to the process of acquiring the various

resource inputs for the primary activities.
ii) Technology development – Technology refers to the know how
of undertaking an activity. The key technology may be
concerned with product (R & D, product design) or with
processes (e.g process development) or with a particular
resource (e.g raw material improvement).
iii) Human resource management – Is concerned with those
activities involved in recruiting, managing, training,
developing and rewarding people within the organization.
iv) Infrastructure – Refers to the structures and routines of the
organization which sustain its culture includes systems of
planning, finance, quality control, information management
etc.

39
In the second diagram, Thompson and Strickland (2001) note that a
complete value chain includes a profit margin because a markup over
the cost of performing a firms value creating activities is customarily
part of the price (total cost) borne by the buyer. They note that
creating value that exceeds the cost of doing so is the fundamental
objective of the business.

40
 D. ANALYSING STAKEHOLDERS AND COALITIONS
EXPECTATION

Who is a stakeholder?

ii) Stakeholders are those individuals or groups who depend on the

organization to fulfill their own goals and on whom in turn the
organization depends.
iii) Stakeholders are also defined as a group of individuals who can
affect or be affected by the performance of the organization

Classifications of stakeholders

- Shareholders who finance the business

- Managers who manage it
- Employees who work for it
- The suppliers, customers, government etc.

What is a Coalition?

A group consciously established to comprise parties who can be

affected or can affect the performance of the firm. Can be divided into
two:

External Coalition:
(a) Consumer association,
(b) Trade unions.

Internal Coalition:
(a) Top management
(b) Operators
(c) Line managers
(d) The planners
(e) Support staff
(f) The ideology: shared belief.

Areas of stakeholders conflict of interest

i) In order to grow profitability in the short run, cash

flow and pay levels may need to be sacrificed.
ii) Production related: Customers seek to maximize
satisfaction while organization seeks to minimize cost and
maximize revenue.
iii) Profit oriented: Shareholders seek to maximize
profits while customers want to pay minimum prices.

41
 iv) Market share: The organization seeks to maximize
market share, competitors seek to capture organizations market
share.
v) Cost efficiency: Efficiency through capital investment
might mean job losses.

Analyzing Internal and External Stakeholders

(a) Shareholders
- Interested in growth and profitability of company.
- Can increase or decrease level of investment depending on
dividend returns.
- Are worried of fluctuations in share price.

(b) Institutional investors

- Worried about high risk investments
- Demand high returns
- Concerned with balancing their portfolio.

(c) Managers
- Seek high salaries and
- Have power in the organization emanating from their
status.
- Are responsible for strategic levels in the organization
- Are attracted by job security
- Have to counter challenges of the business environment.

(d) Employees
- Seek job security
- Are keen on the take home pay
- Motivated by good conditions of employment
- Are watchful for promotion opportunities
- Seek job satisfaction

(e) Consumers
- Very keen on quality of products
- Want value for money
- Interested in safety of products
- Thirst for new products
- Attracted to a variety to choose from

(f) Distributors
- Have to deliver on time
- Have to maintain the quality of product under transit
- Are attracted by regularity of payment.

42
(g) Distributors
- Get attracted to consistent orders
- Require sufficient lead time
- Payment must be made as agreed
- Like developing a dependency relationship.

(h) Financiers
- Keen on ability to pay loans
- Watchful on interest repayment
- Monitors management of cash flow

(i) Government
- Keen on tax payment
- Ensures legal responsibilities are met
- Watch out on the contribution of the company to economic
growth and provisions of employment.

(j) Social groups and societies

- Monitor concern for environment and pollution
- Watch companies willingness to listen to pressure groups
- Are interested in companies contribution to local activities.

43
 E. CORPROATE SOCIAL RESPONSIBILITY

Corporate social responsibility is concerned with ways in which an

organization exceeds the minimum obligations to stakeholders
specified in its regulation and corporate governance.

Strategy ought to be ethical. It should involve rightful actions and not

wrong ones. Ethics concern human duty and the principles on which
this duty rests. Each business has a duty to the stakeholders including;
owners/shareholders, employees, customers, suppliers and community
at large.

Organizations are faced with four types of CSR:

1. Economic Responsibilities - Organizations have a responsibility of

improving the economic welfare of the society within which they
operate.

2. Legal Responsibility - Corporate are there to maximize profit

making. In the process of doing so, they are expected to conduct
their business activity within the context of the law.

3. Ethical Responsibilities - Ethical responsibilities include behaviors

and activities that are strongly expected of business by society’s
members.

4. Discretionary Responsibility - This include voluntary beneficial

activities that are strongly expected of business by society’s
members

Significance of Corporate Social Responsibility

i) Employment creation – The community fill rewarded by getting

job opportunities.
ii) Products – The company’s products perform better in the market
and customers recognized with them.
iii) Working conditions – Enables the organization to address the
employees working conditions.
iv) Publicity – Gives the organization positive publicity hence
enhancing sales performance.
v) Community relationship – Fosters a good core relationship
between organization and community.

44
vi) Green accounting – Compels the organization to account for their
environmental pollution and hence care for it
vii) Maximizing shareholders wealth - The best way to
maximize shareholders wealth is to act in a socially responsible
manner.

45
 F. BUSINESS PORTFOLIO ANALYSIS

A business portfolio is a collection of businesses and products that

make up the company. The business portfolio is guided by the
company’s mission statement and objectives. The best business
portfolio is one that fits the company’s strengths and weaknesses to
opportunities in the environment.

ANALYSING THE CURRENT BUSINESS PORTFOLIO

Portfolio analysis is a tool by which management identifies and

evaluates the various businesses making up the company.

The company will want to put additional resources into its more
profitable businesses and phase down or drop its weaker ones.

The following steps guide a business in analyzing its current business

portfolio:

1. Identify the key businesses making up the company.

These can be called the strategic business unit (SBU). An
SBU can be a company division, a product line within or
sometimes a single product or brand.
2. Assess the attractiveness of the various SBUs and decide
how much support each deserves.

Most organizations succeed with one or few portfolios while others

thrive with a diversified portfolio base e.g KCA Univesity has a limited
portfolio as compared to UoN.

Example:

KCAU Business Portfolio:

Faculty of Science
Faculty of Commerce
School of Professional Studies
ICAD

University of Nairobi
School of Business
School of Law
School of Medical Studies
School of Engineering
School of Economics
School of Arts

46
Nation Media Group Portfolio
Nation Newspapers
Nation Television
Easy FM
The Drum
True Love
Business Daily
The Metro
Business Weekly

Strategies of Portfolio Analysis

There are a number of strategies of portfolio analysis a few of which

include:

1. The BCG approach (growth share matrix)

2. The General Electric Model (Business Strength Matrix)
3. Public Sector Portfolio matrix
4. The directional policy matrix
5. The parentix matrix

The first two are analyzed below:

1. The Boston Consulting Group Approach

The BCG matrix display

RELATIVE MARKET SHARE
MA
RK
ET HOLD BUILD
GR High Question mark
Stars
OW
TH
RA
TE

HARVEST DIVEST
Dog
Low
Cash cow

High Low

47
The best known portfolio analysis approach is the Boston
Consulting Group Approach developed under Senior Consultant
Hunderson.

Using this approach, a company classifies all its SBU according to

the growth share matrix.

On the vertical axis, market growth rate provides a measure of

market attractiveness i.e. sales relative to those of other
competitors in the market. On the horizontal axis, relative
market share serves as a measure of company strength in the
market in comparison to other firms.

The growth share matrix defines four types of SBUs:

i) Question marks
ii) Stars
iii) Cash cows
iv) Dogs

(a) Question marks (Problem child)

Question marks are businesses whose high growth rate

gives them considerable appeal but whose low market
share makes their profit potential uncertain.

Question marks are cash guzzlers because their high

growth rate results in high cash needs while their low
market share results in low cash generation. Management
has to think hard about which question mark it should build
into stars and which ones divest from.

(b) Stars

A star is a business unit which has a high market share in a

rapidly growing market. These businesses represent the
best long run opportunities (for growth and profitability) in
the firms’ portfolio.

They need heavy investment to finance their rapid growth.

In the long run, their growth slows down and they turn to
cash cows. Management must hold on them for as long as
possible.

(b) Cash Cows

A cash cow is a business unit with a high market share in a
mature market. Because of their strong position, and their

48
 minimal reinvestment requirements, these businesses
often generate cash in excess of their needs.

The SBU operates in a stable market environment which is

certain and predictable, hence need less investment to
hold their market share.

The cash cows are selectively “milked “or harvested as a

source of corporate resources which the company uses to
finance other SBU (question marks and dogs) while
offsetting its operational costs.

(d) Dogs
Are low growth low share business units and products.
They are facing mature markets with intense competition
and low profit margins.

They may be a cash drain that use up enormous amount of

company time and resources. They may generate enough
money to maintain themselves but do not promise to be a
large source of cash.

Hence, a decision should be made to divest or liquidate

them as soon as the short term harvesting has been done.

Weaknesses of the BCG model

1. Its application is more relevant to SBUs and not to

products.
2. Definition of what is high or low (growth and share)
may be cumbersome because both factors are relative not
independent.
3. In many organizations the critical resource to be
planned and balanced is not cash only.
4. The position of dogs is often misunderstood. Some
dogs may not generate income yet play a useful role in
completing the product range.
5. This strategy does not explore behavioral
implications of managers of a cash cow, who see their
entire hard earned surplus being invested in other SBUs.

2. The Industry Attractiveness (Business Strength Matrix) –

The GE Model

49
 Corporate strategist found the growth share matrix’s singular
axes and limiting in its ability to reflect the complexity of a
business situation.

A matrix with a broader focus was developed by McKinsey and

Company at the General Electric (GE) and they called it the
industry attractiveness or business strength matrix.

This matrix uses multiple factors to assess industry

attractiveness and business strengths rather than the single
measures (market share and market growth respectively).

It has nine cells as shown below:

Industry Attractiveness

High Selective
Business Strength

Invest Growth Grow or let

go

Medium Selective
Growth Grow or let Harvest
go

Low Grow or let

go Harvest Divest

The matrix above shows that when the industry attractiveness is

high and the business strength is also high, then an organization
can decide to invest further on the SBU while if the two are low,
the organization divests from such a business.

Some of the factors analyzed under industry attractiveness

include:
(i) Nature of competitive rivalry (No. of competitors, size,
prize wars)
(ii) Bargaining power of suppliers and buyers (customers)

50
(iii) Threat of substitute products
(iv) Threat of new entrants
(v) Economic forces

Some of the factors analyzed under business strength include:

(i) Cost position (economies of scale, experienced effects, …)
(ii) Level of differentiation
(iii) Financial strength
(iv) Human assets (skill, turnover, morale …)

The industry attractiveness dimension is therefore a subjective

assessment based on broadest possible range of external
opportunities and threats beyond the strict control of
management.

Business strength dimension is a subjective assessment of how

strong a competitive advantage is created by a broad range of
the firms internal strengths and weaknesses.

General Limitations of Portfolio Approaches

i) A key problem with portfolio matrix is that it does not address

how value is being created across business units; the only
relationship between them is cash.
ii) The true and accurate measurement of matrix classification is
not as easy as the matrices portray them. Identifying
individual businesses or distinct markets is not easy.
iii) The underlying assumption about the relationship between
market share and profitability (the experience curve) varies
across different industries and market segments. Some find
firms with low market share generating high profits.
iv) The portfolio approach portrays the notion that firms need to
be self sufficient in capital. This ignores capital raised in
capital markets.
v) The portfolio approach typically failed to compare the
competitive advantage a business received from being owned
by a particular company with the costs of owning it i.e. failed
to analyze the effect of acquisition.

51
 PRODUCT LIFE CYCLE
Management of every organization knows that each product has a life
cycle that starts at conception of product idea and ends at the death of
a product. The company therefore aims at maximizing its profits before
the products useful life ends.

Stages in the Life Cycle

1. Product development CONCEPTION

2. Introduction BORN
3. Growth GROWTH
4. Maturity MATURITY
5. Decline DEATH

Profits & Losses

STRATEGY BUILT HOLD HARVEST DIVEST

PLC curve

Time
STAGE Product
Development Growth Maturity Decline
Introduction
stage

The diagram above shows the sales and profits over the products life
from inception to demise.

NB: The PLC shape presented above is a general shape but different
products will have different shapes.

52
 MARKETING STRATEGIES AT THE VARIOUS STAGES OF THE PLC

1. INTRODUCTION STAGE

In this stage, profits are negative or low because of low sales and high
distribution and promotional expenses. A company that is pioneering a
market must choose a launch strategy that is consistent with the
intended production positioning.

Strategies at the Introductory Stage

There are four possible strategies at this stage and these are displayed
in the table below. The four are meant to BUILD the new product and
establish it in the market.
HIGH LOW

PROMOTION
RAPID SKIMMING SLOW SKIMMING
HIGH
High Profile Strategy Selective Penetration Strategy

RAPID PENETRATION SLOW PENETRATION

LOW
Pre-emptive Penetration Strategy Low Profile Strategy

2. GROWTH STAGE

In the growth stage, sales climb quickly. The early adopters start to
buy the product especially after hearing favourable word of mouth
about the product. The increasing profits soon attract new competitors
who join the market in the hope of gaining from this opportunity.

53
The increase in competitors leads to an increase in the number of
distribution outlets and sales jump up. The form must HOLD the sales
up using aggressive marketing campaigns.
3. MATURITY STAGE

This is the stage in the PLC in which sales growth slows or levels off.
This stage usually lasts longer than the growth stage.

The product is established in the market and as a result of which

marketing campaigns do not have a significant effect of drawing in
new customers. The best strategy to adopt is to HARVEST the profits
while keeping cost down.

4. DECLINE STAGE

This is the PLC stage in which a products sales decline. Sales may
plunge to zero or they may drop to low levels where they continue for
many years.

A weak product can be costly to maintain. It takes a lot of

management time, it requires advertising and sales force attention.

Management therefore needs to identify the aging products and decide

whether to maintain, harvest or drop each of them.

Strategies here include:

i) Management may decide to maintain the product in the hope

that competitors will exit the industry, leaving the company with an
advantage.

54
ii) Harvest the declining product - which means reducing various
costs (e.g advertising sales force, research and development etc.)
and hope that sales hold up. If successful, harvesting increases the
company’s profits in the short run.
iii) Management may decide to drop the product. It can sell it to
another firm or simply liquidate it at salvage value.
iv) Management may decide to divest. Divesting strategies enables
management to do away with a product whose performance is
below expectation. Two approaches can be used;
a) Concentric diversification - Diversification is the
creation of products similar to the one existing or creating
products completely different from existing ones but which
may appeal to existing and new customers e.g. Coca cola
deciding to produce and sell Dasani water and Novida

b) Conglomerate diversification - Conglomerate

diversification is the involvement in production of products or
provision of services that are not related with the current
products and services e.g. EABL deciding to produce Alvaro.

55
 STRATEGY CHOICE

LONG TERM OBJECTIVES AND GRAND

STRATEGIES

This is the analysis of the strategic options available to the

organization, establishing criteria against which strategy judgment is
to be based and making a strategic choice on the basis of the general
strategy analysis.

There are three stages in strategy choice:

(i) Development of long-term objectives

(ii) Establishing the generic strategy
(iii) Choosing the grand strategies to use

LONG TERM OBJECTIVES

Strategic managers recognize that short run profit maximization is

rarely the best approach to achieving corporate growth and
profitability. To achieve long term prosperity, strategic planners
commonly establish long-term objectives in six areas:

1. Profitability – The ability of a firm to operate

in the long run depends on its ability to attain an acceptable
level of profits.
2. Productivity – Strategic managers constantly
try to increase the productivity of their systems.
3. Competitive position – Larger firms often
establish an objective of market share dominance as a measure
of their competitive position.
4. Employee development – Employees value
education and training because they lead to increased
compensation and job security. Strategic planners hence
normally include employee development in their long term goals.
5. Technological leadership – Firms must decide
whether they want to be market leaders or market followers.
Many firms seek technological leadership in the market as their
key objective.
6. Public responsibility – Managers recognize
their responsibility to their customers and to the society at large.
Many strategic managers strive to exceed public expectation.

56
Qualities of Long Term Objectives

1. Acceptable – Objectives must be consistent to managers

preferred.
2. Flexible – Objectives must be adaptable to environmental
uncertainty.
3. Measurable – Objectives must be clearly and concretely
stated so that it is known when they have been achieved or not.
4. Motivating – People are most productive when given
attainable objectives. They are motivated by goal attainment.
5. Relevant – Objectives must be suited to the broad aims of the
firm.
6. Achievable – Objectives should be challenging but achievable.
Employees work best with achievable than impossible objectives.

The Balanced Score Card

The balanced score card is a set of measures that are directly linked to
the company’s strategy. It was developed by Robert S. Kaplan and
David P. Norton to enable managers to evaluate the corporate
performance from four perspectives;

(i) Financial performance

(ii) Customer knowledge
(iii) Internal business processes
(iv) Learning and growth

57
The financial performance box answers the question “to succeed
financially how should we appear to our shareholders?”

The internal business process box addresses the question “to satisfy
our shareholders and customers what business processes must we
excel at?”

The learning and growth box answer the question “to achieve our
vision how will we sustain our ability to change and improve?”

The customer perspective box answers the question “to achieve our
vision, how should we appear to our customers?”

All of the boxes are connected by arrows to illustrate that the

objectives and measures of the four perspectives are linked by cause
and effect relationships that lead to successful implementation of the
strategy.

A properly constructed scorecard is balanced between short and long

term measures, financial and non financial measures and internal and
external performance perspectives.

The Pros of Using the Balanced Score Card

(i) Basis of evaluation of performance

(ii) Provides a comprehensive picture of business goals
(iii) Attainment of objectives helps motivate the stakeholders

The Cons of Using the Balanced Score Card

(i) May lead to overemphasis of goal attainment

(ii) Results in rigidity
(iii) Requires trained planners for successful implementation

58
 GENERIC STRATEGIES
A mission statement defines an organization’s reasons for existence,
its long term objective and grand strategy.

According to Michael Porter, all firms have long term strategies that it
derives from an attempt by the firm to seek a competitive
advantage over others in the market.

The long term strategy is based on a core idea of how a firm can best
compete in the market place. The popular term for this core idea is
generic strategy.

Firms can choose between minimizing cost, differentiating their

products and the competitive scope.

The competitive scope tells the range of products varieties, the

distribution it will use, the type of buyers it will serve, the geographic
area it will sell to and an array of related industries it will compete
with.

Porter (1980) originated two generic strategies i.e. low cost and
differentiation. Based on the competitive scope that the organization
seeks to serve, the two have since been improved on to encompass
the following four:

Cost leadership
Differentiation
Cost Focus
Focus Differentiation

Competitive Advantage

Lower Cost Differentiation

Broad Target
COST LEADERSHIP DIFFERENTIATION

Competitive Scope
COST FOCUS FOCUS
Narrow Target DIFFERENTIATION

59
1. Overall Cost Leadership Strategies

Low cost producers usually excel at cost reduction and efficiencies.

They maximize economies of scale, implement cost cutting
technologies and stress reduction in overhead and administrative
expenses.

A low cost producer employs intense supervision of labour force and

seeks low cost distribution systems. They have tight cost controls,
frequent audits and detailed control reports.

Under cost leadership, incentives are based on meeting strict broad

quantitative targets. A low cost leader is able to use its cost advantage
to charge lower prices or to enjoy higher profit margins.

Low cost leadership enables a firm to effectively defend itself in price

wars, attach competitors on price, gain market share if already
dominant in the industry and benefits from supernormal profits.

2. Differentiation Strategies

Differentiation strategies require that a firm strives to create and

market unique product features.

Differentiation strategies are designed to appeal to customers with a

special sensitivity for a particular product attribute.

By stressing product attributes above other product qualities, the firm

attempts to build strong customer loyalty. Often such loyalty
translates into a firm’s ability to charge a premium price for its product
e.g True Worths , General Motors, Standard Chartered Bank, etc.

The product attribute can also be a marketing channel through which it

is delivered, its image of excellence, etc.

As a result of the importance of these attributes, competitors often

face perceptual barriers to entry when customers of a successfully
differentiated firm fail to see any product identical to the ones they
currently buy e.g General Motors hopes its customers will accept
nothing less of the genuine GM replacement parts.

60
Differentiation strategies are often supported by long traditions
(cultures) in the organization that are difficult to change.

3. Cost Focus Strategies

A focus strategy, whether anchored in a low cost base or a

differentiation base, attempts to attend to the needs of a particular
market segment. Likely segments are those ignored by other leading
firms. A firm pursuing a cost focus strategy will employ niche
marketing approaches, to:

(a) Service isolated geographic areas.

(b) Satisfy needs of a particular customer segment
(c) Tailor products to somehow unique demands
The cost focus firms profit from their willingness to serve otherwise
ignored or underappreciated customer segments and the minimal cost
possible. e.g I & M Bank.

4. Focused Differentiation Strategies

This strategy allows a firm to identifying a unique market segment that

is willing to purchase its market offer at whatever price.

The firms’ effort is directed at selling items that are either of premium
price, but appeals to a particular (narrow) market segment only. E.g.
Sir Henry’s suite, Mercedes Benz, Safari Park Hotel etc.

Limitations of Generic Strategies

1. Porter focused on cutting down production cost to the lowest

in the industry or lower than any other competitor. But there are
other strategies of cutting cost such as economies of scale,
buying power, and experience effect which he does not explore.

2. Porter thinks that cost leadership will result into lower prices
than competitors but in the long run, firms may need larger
margins to be able to sustain its marketing and research and
development efforts.

3. With differentiation, Porter thinks that a unique product can

be sold at a higher price than any competing offer. But
differentiated products can be offered at a lower price to
increase market share.

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4. Cost leadership is not sustainable, in the long run,
competitors imitate the product, technology or any other core
competence of the organization.

5. Differentiation is also unsustainable in the long run as

competing firms produce very similar products to those of the
firm and the basis of competition becomes unclear to the buyer.

62
 GRAND STRATEGIES
Grand strategies are also called business strategies and they provide
basic direction for strategic actions. They are the basis of coordinated
and sustained efforts directed toward achieving long-term business
objectives.

They are broadly divided into three:

(a) Internal growth methods

(b) External growth methods
(c) Internationalization

INTERNAL GROWTH STRATEGIES (The Ansoff’s Matrix)

1. Market penetration and concentration

2. Market development
3. Product development
4. Innovation

The table below illustrates the Igor Ansoff’s model of product market
strategy combination.

Existing Products New products

MARKET PENETRATION PRODUCT
OR CONCENTRATION DEVELOPMENT OR
 Relay on a single INNOVATION
Existing product or a single
Markets market  Offer new products
 Aim to increase to existing markets
market share  Extending or
prolonging the PLC
MARKET INTERNAL RELATED
DEVELOPMENT DIVERSIFICATION
New Markets
 Take existing  Unrelated
products to new diversification
markets  Unconnected to
 Build on existing present products or
strength and markets
capabilities
 Change distribution
and advertising

1. Market Penetration (Concentrated Growth)

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 Concentrated growth is the strategy of the firm that requires the
firm to concentrate on what it is doing currently but better.

Concentrated growth requires that the firm directs its resources

to the profitable growth of a single product, in a single market,
with a single dominance technology.
The main rationale for this approach also called market
penetration or concentration strategy is that the firm thoroughly
develops and exploits its expertise in a limited market e.g.
Mercedes Benz concentrates on manufacture and sale of a
specific brand of cars only.

Situations that warrant the adoption of market

penetration
i) When current markets are not saturated with your products.
ii) Low usage rate per customer
iii) When firm enjoys increased economies of scale
iv) When competitor’s sales are declining while firm is doing well.

Advantages of concentrated growth

(i) It is based on known skills and capabilities of the
organization.
(ii) A highly focused strategy, hence good for competitive
advantage development
(iii) It is a low risk strategy
(iv) Facilitates easier monitoring of growth

Disadvantages
(i) There are limits within which growth can take place in a
single market, beyond which no growth is registered.
(ii) The dynamism of consumer preference may pose a
considerable challenge to a firm pursuing this strategy.
(iii) Puts enormous onus on the company to monitor the
activities of the competitor.
(iv) Requires considerable financial expenditure on advertising
and promotion.

2. Market Development Strategy

This is the modification of the minor attributes of a product to

facilitate entry into new market segments.

It consists the marketing of present products often with only

cosmetic modifications to customers in a new market segment
by adding channels of distribution or changing the content of
advertising or promotion.

64
 Some of the market development approaches include:

(i) Opening additional regional markets

(ii) Operating additional national markets
(iii) Opening additional international markets
(iv) Developing the product to appeal to other segments
e.g KCB’s Sharia account, Barclays countrywide
opening of branches.

Conditions that favour market development

i) When an organization is very successful in what it does
now.
ii) When the firm identifies an opportunity in a new untapped
or unsaturated market.
iii) When a firm has excess production capacity.
iv) When a firm’s products are target markets are not product
saturated.

Advantages of market development

i) Is also a relatively low risk strategy
ii) Generates considerable revenue from a relatively small
outlay
iii) It builds on existing strengths, skills and capabilities

Disadvantages
i) Usually suitable only where the product is in the early
stage of the life cycle.
ii) Requires considerable market share
iii) Certain unique segments may be difficult to identify
iv) Requires heavy expenditure on advertising and opening
new distribution channels.

3. Product Development Strategy

Product development involves the substantial modification of

existing products or the creation of new but related products that
can be marketed to current customer through established
channels.

Reasons for this strategy

i) To improve competitive position of the company by

attracting new customers e.g. Colgate Palmolive Company
has introduce colgate herbal to counter competition.

65
 ii) Prolongs the product life cycle
iii) To capitalize upon particular competence in such areas like
research and development.
iv) To facilitate survival
v) For differentiation

Conditions that favour product development

i) When an organization has successful products that are at
the maturity stage of the PLC.

ii) When an organization operates in an industry that is

characterized by rapid technological developments e.g.
motor vehicle industry.

Advantages of product development

(i) May introduce profitability at later stages of the product
life cycle.
(ii) It creates a spin-off effect in terms of the manufacturing
process i.e. quality and process improves.
(iii) It facilitates continued growth in products with short life
cycle e.g. Omo.

Disadvantages
(i) Relatively high risk strategy
(ii) There is generally a high rate of new product failure
(iii) New products may eat into the market share of existing
products.
(iv) Requires heavy investment in research and development.

4. Innovation Strategy
In many industries it has become increasingly risky not to
innovate. As a result, some firms find it profitable to make
innovation their grand strategy e.g. Microsoft are leaders in
technological innovation.

Such firms seek to reap the initially high profits associated with
customer acceptance of a new or greatly improved product.

Then rather than face stiffening competition as a basis of

profitability, they swiftly move on in search of other original or
novel ideas.

66
The underlying rationale of the innovation strategy is to create a
new product life cycle and thereby make similar existing
products obsolete.

Advantages
(i) Enables a firm to be well ahead of competition.
(ii) Allows firms to enjoy supernormal profits in the short run.

Disadvantages
(i) Very costly to sustain
(ii) A high risk strategy especially when product fails.
(iii) Requires massive investment in R & D
(iv) Only a few of the innovative ideas prove profitable as
shown below.

67
 No. of ideas

30 Screening

25
Business Analysis
20
Product Development
15
Market testing
10
Commercialization
5 One successful new product

Cumulative time

5. Diversification Strategies

A strategy focusing on selling new products to new markets. Can take

the following forms:
i) Concentric diversification – This result in new product line or
services that have technological and marketing synergies to
existing product lines though the product might appeal to a new
market segment.
ii) Conglomerate diversification – This occurs when there is the firm
produces a product that is unrelated to current product lines.

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 EXTERNAL GROWTH STRATEGIES
External growth is commonly achieved by any of the following strategy
development methods.

1) Acquisition – This is a combination of two or more firms in which one

buys up the assets and liabilities of the other in exchange for stock
or cash.
2) Mergers – A situation in which two or more companies dissolve and
use their assets and liabilities to form another company with new
stocks.
3) Joint Ventures – Occasionally two or more capable firms lack a
necessary component for success in a particular competitive
environment. The two or more firms can come together to form a
joint company for the benefit of co-owners or parent companies.
4) Integration – Purchasing arrangement that enables a company to
acquire a company or unit behind or ahead of its value chain.

Reasons for Pursuing External Growth

i) To help reduce competition by purchasing a competitor.

ii) To acquire needed resources quickly
iii) To fill a company’s product line.
iv) To improve stability of a firm’s earnings.
v) To develop synergy for efficiency and profitability.
vi) To replace declining products and to renew life cycle of declining
products.

STRATEGIES FOR EXTERNAL GROWTH

1. Horizontal integration
2. Vertical integration
3. Concentric diversification
4. Conglomerate diversification

1. Horizontal Integration

Horizontal integration refers to a situation where a firms long-term

strategy is based on growth through the acquisition of one or more
similar firms operating at the same stage of production and marketing
chain.

Such acquisition or mergers eliminate competitors and provide the

acquiring firm with access to new markets e.g Oil Libya acquiring the

69
stake in Mobil (K) Ltd., Smithklime and Beecham Kenya Ltd, Nike’s
acquisition of companies in the dress and shoes industries.

Reasons for horizontal integration

i) To increase economies of scale

ii) To eliminate close substitutes
iii) To jump start a financially defiant but promising star or question
mark.
iv) To utilize excess resources i.e. funds and skills
v) To take advantage of the growth characteristics of the industry –
high or slow.

Situations that warrant the adoption of horizontal integration

i) When a firm’s present distributors are expensive, unreliable or

incapable of meeting a firms growing needs
ii) When a firm has excess capacity of capital and human resources
iii) When the present distributions or retailers have a high profit
margin i.e a company can profit more by distributing its
products. E.g oil companies like Shell, Mobil, etc.

2. Vertical Integration

Vertical integration refers to a situation where a firms grand

strategy is to acquire firms that supply it with inputs or are
customers for its outputs.

If the firm acquired operated at an earlier stage of the value chain

of the acquiring firm i.e supplier, it is to a case of backward vertical
integration e.g EABL and Barley farmers, Mumias and Sugarcane
farmers.

If the firm merges with firms ahead of it in the value chain i.e firms
that offer marketing and services to ultimate consumer then it is a
case of forward vertical integration e.g Safaricom buying
distribution outlets, Firestone acquiring a distribution outlet.

Situations that warrant vertical integration

i) When a firm present suppliers are especially expensive,

unreliable or incapable of meeting firm’s needs.

70
 ii) When an organisation competes in an industry that is growing
rapidly.
iii) When a firm seeks to stabilize the selling price or the costs of
raw materials.

Strategic benefits of vertical integration

i) Assured supply of raw materials in low or high seasons.

ii) It is a way of reducing supplier and buyer powers.
iii) Increases overall return on investment
iv) Results in economies such as reduced handling and transport
costs, better co-ordination and control, fewer transaction costs,
etc.

Strategic costs of vertical integration

i) Results in increased fixed cost. A consequence of this increased

operating leverage is that the business is exposed to higher
risks.
ii) Firm may not be able to establish a competitive advantage as
that of an exclusive supplier or distributor who have expertise
knowledge.
iii) The new parts of the organization may require a change in
management, culture, skill orientation, etc. which may be costly
to implement.

Illustration

Hides and Skins supplier Hides and Skins suppliers

Bata Shoe (K) Ltd. Shoe Manufacturer - Umoja

Retailers of shoes Retailers of shoes

Acquisition or mergers of suppliers or customers

businesses are vertical integration

Acquisition or mergers of competing businesses are

horizontal integration

71
DIVERSIFICATION

Diversification is the creation of products similar to the one existing or

creating products completely different from existing ones but which
may appeal to existing and new customers.

Reasons for Diversification

i) Diversification is necessary where a firm is competing in a highly

competitive or no growth industry.
ii) Necessary where addition of new unrelated products results in
additional revenue.
iii) Where an advantage or unforeseen opportunity emerges in the
market.
iv) Where current products and market is unable to meet firm’s
profit objectives.
v) Where the present distribution channels can support or be used
to market the new products to current customers.

Advantages of Diversification

1. Reduces dependency on single product and market.

2. Increases product line profitability.
3. Puts excess capacity into use.
4. A profit driven strategy.
5. Develops synergies and economies of scale.
6. May provide a route out of an industry on decline.

Disadvantages of Diversification

1. New business and markets may require heavy capital

investment.
2. More suitable for very large companies.
3. Brings a wide range of challenges.
4. Returns realized in the long term and a high risk strategy.
5. May develop a tendency to switch effort from current business
to the new one.

Types of Diversification Strategies

A. Concentric diversification
B. Conglomerate diversification.

Concentric diversification

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Concentric diversification is the involvement in production or provision
of services that are related to the current products and services to
achieve synergy e.g. KCA to KCAU, e.g. Coca cola deciding to produce
and sell Dasani

Concentric diversification might involve the acquisition of businesses

that are related to the acquiring firm in terms of technology, markets
or products e.g The Sarova-Stanley Hotels, KLM and KQ.

With this grand strategy, the selected new businesses possess a high
degree of compatibility with the firm’s current business.

A concentric diversification is said to be a success story if the

combined company:
(i) Registers higher profits
(ii) Uses its strengths and opportunities to optimize
performance
(iii) Faces reduced weaknesses and exposure to risk.

Conglomerate Diversification

Conglomerate diversification is the involvement in production of

products or provision of services that are not related with the current
products and services e.g. EABL deciding to produce Alvaro.

Conglomerate diversification is often practiced particularly by very

large firms that decide to acquire a smaller business because more
profitable business venture. Thus the driving force behind
conglomerate diversification is increased profitability e.g in Kenya The
Scan Group practises acquisition of small profitable firms as a
conglomerate diversification strategy.

OTHER EXTERNAL GROWTH

Firms can also use either of the following as external growth strategies:

Mergers and Acquisition

Strategic Alliances

Mergers and acquisitions can take either of the following form:

73
a) Concentric
b) Conglomerate
c) Vertical
d) Horizontal

Reasons for Mergers and Acquisition

i) To improve the competitive position of the firm: absorb

competitors and purchase strengths and competencies that is
missing currently
ii) To broaden the product lines for growth
iii) When it is the best way to increase market share
iv) To minimize fluctuations in sales and earnings ration
v) To acquire necessary resources: cashflow, skills, physical assets,
patents, raw materials and market access
vi) To increase efficiency from the synergy effects
vii) To avoid over-dependence on one line
viii) To secure survival in times of difficulties
ix) To increase the value of the firm’s stocks

Considerations for successful merging and acquisitions

• Must be properly planned

• Must have human as well as financial considerations
• Must be legal: reducing competitions may be illegal in some
countries
• Must provide synergy
• Provide priority to internal development

Technical Difference between Mergers and Acquisitions

1. Activities in both mergers and acquisitions look the same

because in both cases the assets and liabilities are merged.

2. Otherwise when one company come up in the forefront to have

its name retained at a fee or by acquiring over 50% of the other

74
 it becomes an ACQUISITION. It is like the company has been
bought out.

3. When both companies merge at 50 to 50 or to a fairly balanced

stock holding like 45 to 55, there can be an agreement to retain
both names of the merging companies and this still qualifies as a
MERGER and not acquisition.

4. When all the companies merging agree to loose all their names
and form a company with a totally different name, it becomes a
CONSOLIDATION

75
GENERAL QUESTIONS FOR DISCUSSION

1) What is Core/Distinctive Competencies?

These are Internal Strategic advantages in the analysis of the value

chain that
may determine where the firm has major strategic strengths to pursue
specific strategies.

A firm should define its competencies and what make them unique in
the competitive arena

Questions to ask on competencies

a) What are the competencies: layout, display, control, financial,

marketing etc
b) Who owns the competence: Individual or the firm
c) How durable?
d) How robust: Immitatable, replicable

2) What are some of the general considerations corporate

managers make when defining strategic directions?

a) What is the Mission

a. What is our business now
b. What should our business be
c. Where should we be in 5 or 10 years
b) Should we stay in the same business at the same effort and
strategies
c) Should we retrench
d) Should we expand
e) Do we turnaround the business
f) Can we do them all

76
 INTERNATIONAL STRATEGIES

These are strategies that send a firm into doing business overseas or
off-shore. A firm may go overseas due to two factors:

d) Push Factor - When a firm globalises because domestic business

is inadequate
e) Pull Factors - When a firm globalises because there is a
tremendous opportunity overseas
Push Factors

(i) A firm may globalize because domestic business is

inadequate.
(ii) To fight a major competitor at home and reduce its ability to
fight by reducing its margins.
(iii) Declining home market
(iv) Adverse economic conditions in a country
(v) Better tax management policies by certain foreign countries
(vi) The need to diversify business risk

Pull Factors

(i) Ready market opportunities availability beyond the home

boundaries
(ii) Reduced barriers of trade outside ones country
(iii) Better laws and regulations internationally which encourage
trade
(iv) Prestige of a company acquiring an international status
(v) Incentives offered by the government to encourage business
competitiveness i.e. reduced taxation, subsidies etc.

Factors that discourage Internationalization

(i) Risk of technological pirating

(ii) At times extension of PLC may not be cost effective.
(iii) Slow adoption in a foreign market may diminish economies
of scale.
(iv) Tariffs and other trade barriers.
(v) Cultural complexities.
(vi) Instability of the foreign political environment.

The Strategic Options for Internationalization

1. Exporting

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 2. Licensing
3. Franchising
4. Joint venture
5. Off-shore production
6. Wholly owned subsidiaries
7. Alliances

1. Exporting
Exporting is the selling of a company’s products in a foreign
market. It is the primary means of penetrating a foreign market.

Before exporting, a company needs to modify the product

performance or attributes to meet special foreign demands.

Exporting requires minimal capital investment

The company maintains its quality control standards over

finished goods for export market.

2. Licensing (Contract Manufacturing)

Licensing is an arrangement whereby a company is allowed to

manufacture a product or service which has been designed by
someone else and protected by a patent in a foreign destination.
It is not only confined to international areas.

Licensing involves the transfer of industrial property right trade

marks, or technical know-how from the licence holder to a
licensee for an agreed pay over a contract period e.g Toshiba,
Sony etc. have licenses in Kenya who assemble the various parts
of these companies products to produce a final product.

The key merit of licensing is that it reduces the cost of producing

off-shore and minimizes the risk of entry into a foreign market.

The major problems include:

(i) The foreign partner may gain the technical
knowledge and experience and evolve into a major
competitor, after the contract expires e.g USA
electronics and Japanese companies.
(ii) The licensor forfeits control on production,
marketing and general distribution of its products.

3. Franchising

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 Is a special form of licensing, which allows the franchisee to sell a
highly published product or services using the parent’s brand
name on trademark, carefully developed procedures and
marketing strategies.

In exchange, the franchisee pays a fee to the parent company,

typically based on the volume of sales of the franchiser in its
defined market area.

The franchisee bears most of the costs and risks of establishing

foreign locations. The franchiser only spends resources to recruit,
train and support franchisees.

The big problem a franchiser faces is maintaining quality control;

many foreign franchisees do not always exhibit strong
commitment to standardization perhaps because they are
supported by a local culture that does not value quality

The franchise is operated by the local investor who must adhere

to the strict policies of the parent. Examples of franchising
arrangements in Kenya, Kentucky Fried Chicken (Kenchick),
McDonalds, Coca-Cola, Bata, Trueworths, Hilton Hotel, and
Identity.

4. Joint Venture

Arrangement between a company and another to undertake in

another country a common venture to enable them share
technology and expenditure e.g many companies have moved to
China to operate joint ventures due to the low costs of
production in China.

Because joint ventures begin with a mutually agreeable pooling

of capital, production marketing equipment, patents,
trademarks, and management expertise, they offer a more
permanent cooperative relationships than export or contract
manufacturing.

The key merits of this approach include:

(i) Financial advantage – As two or more firms team up, the JV

tends to enjoy an increased capital base. The firm also
pays lower taxes relative to a purely foreign investment.
(ii) Has little legal barriers as compared to other international
entry strategies.

79
 (iii) Ease of market access - The local partner already has vast
knowledge of the market making it easy for the JV to
access it.
(iv) Better distribution system – A foreign firm quick uses the
distribution network of a local firm to distribute its products
or services.

The key demerit of this approach include:

(i) Different objectives – the foreign firm might have the

objective of maximizing profits in the short run while the
objectives of the local firm could be to be profitable in the
long run resulting in a conflict of interest.
(ii) Fear of nationalization – Foreign firms that enter a joint
venture with local firms may fear that eventually they may
be nationalized.

5. Off-shore Production (Foreign Branching)

A foreign branch is an extension of the company in its foreign

market.

A foreign branch is a separately located SBU directly responsible

for customer service, actual selling, and physical distribution of
the product or service e.g Barclays, Standard Chartered, BAT.

Most host countries require that the branch be “domesticated”

i.e have some local managers.

6. Wholly Owned Subsidiaries

This is the form of operation portrayed by many multi national

companies.
Wholly owned subsidiaries are companies formed in foreign
destinations but fully owned by a parent company whose
headquarters is out of the country of operation.

There are two methods of achieving wholly owned subsidiaries:

(i) Setting up a new business premises abroad

also called Greenfield venture.
(ii) Take over of an existing business
Examples: The Sarova Group took over the Stanly
Hotel

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7. Strategic Alliances

A Strategic alliance is a project or organizational undertaking in which

two companies come together to launch and accomplish strategic
pursuits without the parent companies losing their identity and
independence.

Forms of Strategic Alliance

i) Joint Venture
ii) Referral Licenses
iii) Franchising
iv) Subcontracting

NB: A Joint Venture is a case in which two companies come together

to accomplish a specific project after which the alliance may cease if
not renewed

Strategic Issues of Strategic Alliances

1. Assets management: which one to be managed jointly and which

ones will be independently handled
2. Separability of assets
3. The risk of one company appropriating assets for themselves i.e.
know-how for their own internal development.

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 COMPLEXITY OF GLOBAL ENVIRONMENT

1) Global firms face multiple political, economic, legal, social and

cultural environments as well as various changes in these factors.
2) Interaction between the national and foreign environments are
complex, because of national sovereignty issues and widely
differing economic and social conditions.
3) Global firms face extreme competition, because of differences in
industry structure
4) Global firms are restricted to their selection of competitive
strategies by various regional blocs and economic integrations.
5) Geographic separation, national differences, and variation in
business practices all tend to make communication and control
efforts from the headquarters difficult.
International Risks Relative to Strategy

Wholly
Owned
Level of Subsidiary
Investment at
Risk Off-Shore
Production

Joint
Venture
Franchising

Licensing

Exporting

Ownership and control of Foreign Operation

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DECLINING INDUSTRIES

A decline is a situation where demand for a company’s product/service

is at a lower point than maximum output.

There are two possible reasons for decline:

External
(i) Technological change
(ii) Change in social values or fashions
(iii) Competitive forces
(iv) Changes in industry structure.

Internal
(i) Poor management
(ii) Inadequate marketing effort
(iii) Inadequate financial control
(iv) Poor acquisition
(v) Overtrading

Symptoms of Company in Decline

(i) A decline in sales volume in comparison with industry trends

(ii) An increase in the level of gearing due to increased
indebtedness.
(iii) Liquidity problems as measured by current and acid test
ratio.
(iv) Accounting practices including delays in publishing them
(v) A significant staff turnover at management level.
(vi) Declining profitability reflected in a decline in profits before
tax or a reduction of ROI.

Strategic Options for Declining Industries

1. Retrenchment strategies
This is a short term solution to corporate unprofitability through
cost cutting and revenue generation.

2. Turnaround strategies
This is the adopting of a long term strategic position for a
product or a service that changes it from registering declining
profits and sales to reflecting growth in the same often achieved
through cost reduction and asset reduction.

3. Divestment strategy

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 Involves selling off part of the company to provide the much
needed resources. It includes a management buy-out e.g.
employed by Unilever to sell Kimbo and Cowboy to Bidco.

4. Liquidation strategies
This is the sale of the complete business either as a single going
concern or in part to different buyers e.g defunct KBS.

5. Bankruptcy strategies
Firms that do not have enough money to pay their creditors are
said to be bankrupt. Such firms often file for a liquidation
bankruptcy i.e they agree to a complete distribution of their
assets to creditors, most of whom receive a small fraction of the
amount they are owed.

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 STRATEGY IMPLEMENTATION
This is the stage at which the chosen strategy is put into action. For
successful implementation of strategy, the following factors must be
considered:

(i) Organisation structure

(ii) Leadership
(iii) Change management
(iv) Organization culture

Organisation Structure

This is the formal pattern of interactions and coordination designed by

management to link the tasks of individuals and groups in achieving
organizational goals.

One aid of visualizing the organizational structure is the organization

chart. An organization chart is a line diagram that depicts the broad
outlines of an organisation’s structure.

When planning the implementation of strategy, an organization

structure that fits the strategy choice should be designed and put in
place.

Major segments of the organization structure

Professor Henry Mintzberg classified the organization structure into 5

segments:

(i) The strategic Apex – Composed of the board, CEO and top
management.
(ii) Middle line – Functional managers or departmental heads.
(iii) Operating core – Operational managers, directly involved
in processing and supplying the firm’s goods or services.
(iv) Techno-structure – These are functions specialists and
advisors like industrial engineers, planners etc.
(v) Support staff – Provide basic services at the work place like
sweeping, messengers, cleaning etc.

Common forms of organization structure

A. Functional organization structure

- This is the grouping of employees into specific areas of
specialization e.g production, finance, marketing etc. The

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 functions then become the basis of decision making and
assignment of responsibility.
- Dividing tasks into functional areas enables the personnel
to specialize in only one aspect of the necessary work.

C.E.O

Finance Marketing Production Human Resource

Strategic Advantage

(i) Achieves efficiency through specialization.

(ii) Retains centralized control of strategic decisions
(iii) Tightly links structure to strategy by designating key
activities to separate units.

Strategic Disadvantages

(i) Promotes narrow specialization and functional rivalry.

(ii) Creates difficulties in functional coordination and inter-
functions decision making.
(iii) Takes a lot of general managers time hence limiting his/her
development.

B. Geographic organization structure

These are structures set around appropriate geographical
definitions e.g region, nations, continents, etc.

C.E.O

General manager General Manager General Manager General Manager

Western Region Eastern Region Southern Region Northern Region

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 Production Marketing Finance
Manager Manager Manager

Strategic Advantages

1. Allows tailoring of strategy to needs of each geographic

market.
2. Delegates profit/loss responsibility to the lowest
strategic level.
3. Improves functional coordination within the target
market.

Disadvantages

1. Can result in duplication of staff duties between

headquarters and the regional offices.
2. Adds a layer of manager to run the geographical
areas which may be costly.
3. Poses a challenge of whether to impose geographic
uniformity or geographic diversity.

C. Divisional or SBU structure

When a firm diversifies its product/service lines, utilizes new market

channels or begins to serve heterogeneous customer groups, the
functional structure breaks down and is often replaced with the
divisional or strategic business unit (SBU) organization structure.

A divisional/SBU structure allows corporate management to delegate

authority for the strategic management of distinct business entities.
This expedites decision making in the face of environmental dynamics.
This approach has been adopted by Ford and the GM.

C.E.O

GM Division A GM Division B GM Division C

Africa Asia Europe

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 HRM

C.F.O

Marketing mgr

Production mgr

Strategic Advantages
(i) Frees CEO allowing him/her move time for strategic
decision making.
(ii) Sharply puts into focus accountability and performance.
(iii) Retail functions specialization within the SBU.

Strategic disadvantages
(i) Presents the challenge of determining how much authority
should be given to the SBU Manager.
(ii) Creates a potential for policy inconsistency among the
divisions/SBUs.
(iii) Increases costs incurred through duplication of functions.

Conclusions

The following major conclusions have been drawn as regards matching

structures to strategies:

1. A single product firm or single dominant business firm should

employ a functional structure.
2. A firm in several lines of business that are somehow related
should employ a geographic structure.
3. A firm with several unrelated lines of business should be
organized into strategic business units.
4. An early achievement into strategic-structure fit can be a
competitive advantage.

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 LEADERSHIP AND CHANGE MANAGEMENT

The success of organizations in the modern business environment

strongly hinges on strong managerial leadership of the CEO. Strategic
leadership requires that the CEO embraces and implements change.

Leaders galvanize commitment to embrace change through three

interrelated activities:

(a) Clarifying strategic intent – Setting out a clear vision.

(b) Building a strong organization – Ensuring common understanding
of organization priorities, empowering managers and correcting
problems
(c) Shaping organizational culture – Leaders must build values and
beliefs that shape the organization positively.

ORGANIZATIONAL CHANGE

This is the modification of an organization’s process and activities to fit

into adjustments in the organizational environment.

The forces behind organizational change can be broadly classified into

two:

External Influences

(i) Change in customers’ needs and demands

(ii) Threatening strategies of a competitor
(iii) New market entrants i.e. a new competitor
(iv) Business take-over/Acquisition
(v) Mergers and joint ventures
(vi) Changes in terms of trade i.e. new currency like the EURO,
rates and tariff
(vii) Relocation of business
(viii) Development of new technologies
(ix) New laws
(x) Change in Government
(xi) Change in the fiscal policy of the state and other economic
factors

Internal Influences

(i) Revision of goals and Mission

(ii) Cultural changes in management style etc

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(iii) Change in organizational design
(iv) Business relocation
(v) Need to improve production efficiency
(vi) Need to re-deploy people in places where they may be more
effective
(vii) Change in top executive
(viii) Inability to attract skilled staff
(ix) Change in personnel policy
(x) Change in production method and processes
(xi) Financial decisions i.e. need to improve cashflow management
(xii) Obsolescence of machines and systems
(xiii) Psycho-social needs of the employees i.e. motivation and moral
obligations

Types of Organizational Change

The following elements are often the subject of change in an

organization

1. Strategy
2. Technology
3. Structure
4. People

Change Agents and the Client System

Many forms of organizational change require emotional and technical

adjustment of organizational members which may not be something
easy. People tend to stick to the status Quo. Due to this many
companies have always used change consultants to effect
organizational change.

Who is a Change Agent

This is an individual leading and guiding the process of organizational
change: he is an external personnel invite to help the managers in
managing the change process

The Client System

These are organizational members who are the targets of change and
are most likely to be affected by the changed situation

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How do change agents ensure that dynamic equilibrium is
achieved in the course of change?

(i) Enough stability to facilitate the achievement of current goals

(ii) Enough stability to ensure orderly change
(iii) Enough adaptability to react adequately to external demands as
well as the changing internal conditions
(iv) Enough innovativeness to allow the organization to be proactive:
Initiate change when conditions warrants.
Why Do People Resist Change?

i) Uncertainty on the aftermath of the change.

ii) Unwillingness to give up the existing beliefs.
iii) Awareness of the weaknesses of this change
iv) Employees fear of loss of jobs or transfers or demotions
v) Fear of obsolescence of skills acquire over the years
vi) Cohesive social groups may be broken
vii) Individual may recent not having been consulted
viii) Individuals may be unwilling to learn new skills or new
procedures i.e technology

Overcoming Resistance to Change

(i) Change requires a high level of participation by employees

when such decisions affect their daily work.
(ii) Reduce fear of insecurity by telling employees in advance
what their new jobs in the new organization structure what their
new jobs in the new organization structure would be.
(iii) Define precisely the details of the proposed charge to the
employees and the effects it will have on them.
(iv) Evaluate employee qualification and experience for
appropriate rearrangement.
(v) Retrain employees to face out the fear that they may be
incompetent to work in the new organization.
(vi) Present the existing work group instead of dispersing them
in the process of implementing change.
(vii) Promise to compensate those who may suffer financial
losses in the change process.
(viii) Use a systematic approach to implement change.

Systematic Approach to Change Management

(a) Problem diagnosis – What are the issues raised?

(b) Data gathering and analysis – Where are the problems

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(c) Group feedback – Facilitating ownership of the problem through
group contribution
(d) Action – Solutions are tested and implementation is undertaken
(e) Evaluation – Check achievement and learning

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 THE ORGANISATIONAL CULTURE

Definition

Organizational culture is a system of a shared values assumptions,

believes and norms that unite the members of an organization. Culture
has also been defined as “the way things are done around here”

Corporate culture can to a great extent affect the effectiveness of a

business. Culture is positive if it impact on a business effectiveness by
supporting the goals and objectiveness of the business and is deeply
internalized by the workforce.

Culture is negative if it impacts on the employee behavior in a

direction that does not support organizational goals

Cultural Frame of Reference

There are three cultural frames of reference:

(a) National/Regional cultures

i) The national cultural context influences the expectations of

stakeholders directly. For instance attitudes to work, authority,
equality, consumerism etc. It is important to understand that
national culture is dynamic. Values and society change over
time and therefore strategies that worked 20 years ago may not
work today.

ii) Subnational (usually regional) culture will differ significantly at

regional level

iii) Supranational culture (beyond a single nation) also differ across

regions e.g. the Euro-consumer have a strong appeal for football
whereas the Asian consumers have a strong culture or liking for
crickets.

(b) The organizational culture (paradigm)

An organizational paradigm is a belief which managers have including

assumptions which are never expressed or realized but considered
only unconsciously e.g.:

i) The general feeling of providing quality service

ii) The concern for environment.
iii) The need to serve customers promptly

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94
It is useful to conceive of the culture of an organization as consisting of
three layers:

i) Values – Are easy to identify and are often written down

as statements about the organisation’s mission, objectives
or strategies e.g. service to the community, equal
employment opportunities etc. Values tend to be vague.
ii) Beliefs – Are more specific. They are issues that people in
the organization can surface and talk about e.g. a belief
that the customer is always right.
iii) Assumptions – They are aspects of organizational life
which people find difficult to identify and explain. Also
called the organizational paradigm as discussed above.

(c) Functional and Divisional cultures

The organizational culture is a summation of the individual subcultures

that pervade the whole organization.

The subcultures may relate to the different functions within the

organization i.e different subcultures are evident in different
departments like finance, marketing and production.

Such subcultures can be very powerful depending on the extent to

which they are self perpetuating.

Leadership and Culture

Leaders typically attempt to implement a cultural change in many

ways including:

(i) Emphasize key themes or dominant values

(ii) Encourage dissemination of stories and legends about core
value
(iii) Institutionalize practices that systematically reinforce
desired beliefs and values
(iv) Managing the strategy-culture relationship
(v) Link culture to organizational mission
(vi) Re-formulate the strategy or culture.

Types of Organizational Culture

(i) Power culture – Entrepreneurial structure

(ii) Role Culture – Bureaucratic structure
(iii) Task Culture- Matrix structure

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(iv) Person Culture – Independent structure

THE CULTURAL WEB

Stories

Rituals and Symbols

routines

The Paradigm

Control Power
systems structure

Organizational
structures

The cultural web is a representation of the taken for granted

assumptions or paradigm of an organization and the physical
manifestation of organizational culture.

The culture of an organization is not a straightforward concept and to

help in understanding it, the elements of a cultural web or factors that
shape up culture are discussed below:

1. Routines

Are ways that members of the organization behave towards each other
and toward outsiders i.e “the way we do things around here”.

It may lubricate the working of the organization and provide it with a

core competence. It is often very difficult to change.

2. Rituals

Rituals of organizational life are the special events through which the
organization emphasizes what is particularly important and reinforces
“the way we do things around here”.

Examples of rituals may include relatively formal organizational

processes e.g training programmes, interview panels, promotion and
assessment procedures, sales strategies etc

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However rituals could also be considered to include informal processes
such as gossiping or politicking around the workplace.

3. The Stories

Are stories told by members of the organization to each other, to

outsiders, to new recruits and so on. The stories are often embedded
on the present organizational status, organizational history and may
also flag up important events and personalities.

They typically have to do with successes, disasters, heroes, villains and

mavericks who deviate from the norm.

They distil the essence of organizations past, legitimize types of

behaviour and are devices for telling people what is important in the
organization.

4. Symbols

Include logos, offices, cars, titles, the type of language and

terminology commonly used, which all have become a shorthand
representation of the nature of the organization.

For example long established or conservative organizations have

symbols of hierarchy or difference in the norm of office layout, the way
in which people address each other etc.

5. Power Structures

Power structures are likely to be associated with the key assumptions

and beliefs of who or what is important within the paradigm.

The most powerful groupings within the organization are likely to be

closely associated with a set of core assumptions and beliefs which
have grown over the years.

Power may not only be based on seniority, it could also be based on

the level of technical experts in the firm.

6. The Control Systems

Measurements and reward systems emphasize what is important to

monitor in the organization and to focus attention and activity upon.

Often organizations put a lot of controls in critical functions such as

financial expenses and quality of work.

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7. Organizational Structure

Is likely to reflect important relationships and emphasize who is

important in the organization.

Centralized structures shows that strategy is the province of top

managers and everyone else is an order taker whereas devolved
structures show high levels of collaboration.

WHY ARE FIRMS INTERESTED IN STRATEGIC MANAGEMENT?

Business has interest in strategic management because it enables

them:

1) Understand the changes in market structure

2) Monitor and counter react to competitors moves
3) Understand their micro and macro environments
4) Appreciate the impact of technological advancement
5) Understand and satisfy customer heterogeneity
6) Understand buyer’s behaviour.

A Quote to Remember

“Those organizations which are not applying strategic

management are destined to FAIL. The question is not whether
they will fail or not just WHEN they are going to fail” (Prof.
Elisante Gabriel).

THE END

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